BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Our gain in net worth during 2007 was $12.3 billion, which increased the per-share book value of both our Class A and Class B stock by 11%. Over the last 43 years (that is, since present management took over) book value has grown from $19 to $78,008, a rate of 21.1% compounded annually.*
Overall, our 76 operating businesses did well last year. The few that had problems were primarily those linked to housing, among them our brick, carpet and real estate brokerage operations. Their setbacks
are minor and temporary. Our competitive position in these businesses remains strong, and we have firstclass CEOs who run them right, in good times or bad.
Some major financial institutions have, however, experienced staggering problems because they engaged in the “weakened lending practices” I described in last year’s letter. John Stumpf, CEO of Wells Fargo, aptly dissected the recent behavior of many lenders: “It is interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine.”
You may recall a 2003 Silicon Valley bumper sticker that implored, “Please, God, Just One More Bubble.” Unfortunately, this wish was promptly granted, as just about all Americans came to believe that house prices would forever rise. That conviction made a borrower’s income and cash equity seem unimportant to lenders, who shoveled out money, confident that HPA – house price appreciation – would cure all problems. Today, our country is experiencing widespread pain because of that erroneous belief.
As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been
swimming naked when the tide goes out – and what we are witnessing at some of our largest financial
institutions is an ugly sight.
Turning to happier thoughts, we can report that Berkshire’s newest acquisitions of size, TTI and Iscar, led by their CEOs, Paul Andrews and Jacob Harpaz respectively, performed magnificently in 2007. Iscar is as impressive a manufacturing operation as I’ve seen, a view I reported last year and that was confirmed by a visit I made in the fall to its extraordinary plant in Korea.
Finally, our insurance business – the cornerstone of Berkshire – had an excellent year. Part of the reason is that we have the best collection of insurance managers in the business – more about them later. But we also were very lucky in 2007, the second year in a row free of major insured catastrophes.
That party is over. It’s a certainty that insurance-industry profit margins, including ours, will fall significantly in 2008. Prices are down, and exposures inexorably rise. Even if the U.S. has its third consecutive catastrophe-light year, industry profit margins will probably shrink by four percentage points
or so. If the winds roar or the earth trembles, results could be far worse. So be prepared for lower insurance earnings during the next few years.
Yardsticks
Berkshire has two major areas of value. The first is our investments: stocks, bonds and cash equivalents. At yearend these totaled $141 billion (not counting those in our finance or utility operations, which we assign to our second bucket of value).
Insurance float – money we temporarily hold in our insurance operations that does not belong to us – funds $59 billion of our investments. This float is “free” as long as insurance underwriting breaks even, meaning that the premiums we receive equal the losses and expenses we incur. Of course, insurance underwriting is volatile, swinging erratically between profits and losses. Over our entire history, however, we’ve been profitable, and I expect we will average breakeven results or better in the future. If we do that, our investments can be viewed as an unencumbered source of value for Berkshire shareholders.
Berkshire’s second component of value is earnings that come from sources other than investments and insurance. These earnings are delivered by our 66 non-insurance companies, itemized on page 76. In our early years, we focused on the investment side. During the past two decades, however, we have put ever more emphasis on the development of earnings from non-insurance businesses.
The following tables illustrate this shift. In the first we tabulate per-share investments at 14-year intervals. We exclude those applicable to minority interests.
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波克夏海瑟威 股份有限公司
致 波克夏海瑟威股東:
我們在2007年獲利的淨值達到123億美元，為我們A股和B股的每股淨值提升了11%。過去43年來(也就是自從今天的管理層接手以來)總淨值從19塊成長到78,008美元，這是21.1%的年複合成長率。
總括來說，控股公司旗下76個事業體去年表現不賴，少數有問題的主要是和房市有關聯的那些，在這其中有建材、地毯，及不動產經紀業務。他們差強人意的表現，我們認為是暫時性的小問題，因為我們在那些業務上的競爭能力依然強勁，而且我們擁有一流的企業領導人，不論景氣好壞都始終如一。
然而一些具規模的金融機構卻因為陷入了我在去年的致股東意見書提到的「借貸動作轉弱」情勢而經營困頓。John Stumpf，富國銀行的執行長，將許多融資機構近來的行為做了剖析：「整個產業自己開創了一種新的虧損模式，這種現象很有趣，尤其是在舊的獲利模式還很有用的時候。」
你或許會記得2003年在矽谷的汽車保險桿貼紙上的句子「老天爺，再來一個泡沫就好」。不幸地，這個希望終究只是希望，就在所有美國人都相信房價會永遠上漲的樂觀氛圍中被盼望著。發生這種狀況讓貸款人的收入和可變現資產等資料，在融資機構面前好像都不存在一樣，而那些機構持續超貸，只因為對房市的信心認為房價上漲趨勢可以蓋過授信缺失的一切問題。今天我們整個國家經歷這種痛苦就是因為以前那種信念而造成，當房價滑落時，許多財務問題都浮現出來。就好像海平面水位降低你才會看見哪裡有暗礁一樣 – 今天我們看到一些最大的金融機構就顯露出了這種不堪。
談些快樂的事，來看看波克夏最新收購的公司，TTI和Iscar。這兩家公司各自由Paul Andrews和Jacob Harpaz兩位執行長領導著，而且在2007年表現亮眼。Iscar是我看過在製造業營運中頂尖的人物，這我在去年的報告中提到過，也在我一次秋季到他們傑出韓國工廠的拜會中得到證明。
來談到我們的保險業 – 波克夏的根基事業 – 去年表現非常好，部分原因是因為我們在保險業界中找到了最好的專業經理人來掌舵 – 後面再來聊更多他們的事，但也是因為我們07年很幸運，連續第二年沒有承受任何巨災理賠。
但是別指望天天都在過年，因為確定的是保險業的毛利率，也包括我們的，在2008年會明顯變薄。保費降低，但是承受風險會明顯提高，即使美國連續第三年氣候風調雨順，整個產業的毛利率可能會下降大約四個百分點。如果颶風或地震發生，這個現象還會更糟，所以對未來更低的保險業獲利要有心理準備。
標竿
波克夏有兩個主要的價值區塊，第一個是我們的投資：股、債和現金。年終時這些資產總值1410億美元(尚未計入那些用來支應財務及公共事業營運的部分，這部分我們是用來算第二層價值的)。
保險浮動帳戶 – 在保險營運中我們暫時握在手中但不屬於我們的錢，提供我們投資590億美元的資金。只要核保的部分讓我們損益兩平，這個浮動帳戶對我們來說就是免費的，意思就是我們的保費收入等同於我們產生的損失及費用。核保標準當然是波動的，在獲利跟損失之間擺盪。然而過去歷史顯示，我們一直有在賺錢，而且我們在損失兩平的成果會扳回一城，未來情況也會進步。如果我們這樣做，我們的投資就會會是為是波克夏股東不受阻礙的價值來源。
波克夏第二個價值的組成是來自於投資及保險業之外的來源，這些營收來自於66家非保險業者，在76頁有逐家列出。早期我們專注在投資相關業務的表現，最近二十年來我們則是將重點放在非保險業務的營收成長上面。
