A review of Buffett 53 years of investment projects, feel the evolutionary process Buffett investment ideas, understand the ups and downs in the history of the stock market19572010. Read Buffett to shareholder letter. Flying - Crane

He flying: Gillette into Procter & Gamble, large holdings of Wells Fargo bank. Buying companies.
To the shareholders of Berkshire Hathaway:

   In 2005 net profit of Berkshire's $5600000000 per share, A shares and BBook value of capital stock growth of 6.4%. In the past 41 years, since that took over from the current management, per share book value has grown from $19 to $59377,Compound annual growth rate of 21.5%(all the data used in this report apply to Berkshire's A shares, which is the company's outstanding shares only a, in the 1996 years ago B stock has 1/30 A shares economic interests).

   In 2005, Berkshire's performance is quite good.We made 5 acquisitions2, the acquisition has been completed, and our most business is good. Although hurricane Katrina (Hurricane Katrina) for Berkshire and the insurance industry suffered a huge loss record. Estimation of Hurricane Katrina to usCaused by the loss of up to 25 billion dollarsTwo the same damn, her sister Rita (Rita) and Wilma (Wilma) hurricane,Let us further losses of $900000000.

   In 2005 thisThe years of catastropheOur insurance business be able to achieve such a brilliant performance, should be attributed to GEICO and its chief executive Tony Nicely outstanding. Statistical data clear,In just the last two years, the operating efficiency of GEICO is increased by 32%. Particularly attract sb.'s attention is,Volume growth of 26%,Income growth, at the same time,The number of employees has been reduced by 4%. Because we are able to reduce unit costs so significantly, so it can create more value for customers. How such results? GEICO gained market share last year, achieved enviable profit, and further enhance the brand influence.

   If you have 2006 years like dragon dragon Sun said, give him the name Tony.

   My goal in writing this report is for shareholders to estimate Berkshire's intrinsic value and provide relevant information, it is estimated, because although the calculation of intrinsic value is the priority among priorities, but often is not accurate, and the error is usually very serious. The company's business prospects are more uncertain, the calculation of intrinsic value is more likely to be wrong (explanations about the intrinsic value, see the company's annual report. PP. 77-78 .). But Berkshire has the following advantages: a wide variety of relatively stable income stream, and flow with great and small. These factors make the Berkshire than most other companies to more accurately estimate the intrinsic value.

   Though Berkshire's financial characteristics is helpful to improve the estimation accuracy, but the calculation of intrinsic value of work because there are so many streams of income becomes more and more complex. As early as 1965 , we only have a small textile factory, the valuation is just a piece of cake. Now we haveWith 68 Operating and financial characteristics difference is very big business, these are not related to business, we have a huge scale of investment plus, so that you may not our consolidated statements can be simple analysis make a reasonable estimate of the intrinsic value of the company.

   In order to solve this problem, we will own business reasonably divided into four categories and detailed analysis in the following report each kind of business, the discussion we will provide key data for each type of business and enterprise. Of course, the overall value of Berkshire may be higher or lower than the four kinds of business value and. The outcome depends on two factors,One is the many departments of our subsidiary as part of a larger enterprises, work better or worse? Two is the parent company's management, capital allocation improves or worsens?In short, Berkshire as the parent company to subordinate enterprise to bring what benefit? Is the direct holding shareholders not Berkshire rather than by Berkshire's indirect holding more beneficial? This is a crucial issue, shareholders will have to answer for yourself.(he flying: Berkshire subsidiary value for)

   Before discussing the subordinate enterprises, let us have a look two groups that our starting point and current data to. The first set of data (see Table 1) share investment (including cash and cash equivalents), used in calculations, we will not exclude subordinate hold investment in financial companies, because most of these investments are offset by borrowing.



  But there are a few exceptions to the securities and Insurance Holdings, we own a wide variety of non insurance businesses. Table 2 is the enterprise in the goodwill amortization after pre tax profit per share.



   In the discussion of growth rate, it is necessary for you to notice period and final annual selection. The beginning and the end of the year two in an inappropriate choice in any case, the calculated growth rate will be distorted, especially when the base year makes a small profit, calculated growth rate alarmingly high but no practical significance. In Table 2, as the base of 1965 annual profit is unusual good, Berkshire's 1965 profit levels higher than the previous 9 year in 10 years.

   It is seen from table 1, table 2 we can, in terms of Berkshire's investment relative compound growth in earnings per share rate,Great changes have taken place in the last 10 years, this result reflects our business has shifted into M & a tilt.Nevertheless, Berkshire's vice chairman, is also a partner I -- Charlie Munger, and my goal is to make the two table numbers can both achieve growth. For this our lofty ideals and high aspirations, we hope that (for example), the old couple once in the romantic challenge fate. When the couple to celebrate the 50 anniversary of wedding dinner is over, the wife in the music, the gentle champagne and candlelight stimulation, suddenly felt the impulse, so be coyly suggested her husband upstairs to the bedroom ML. Her husband agony for quite a while before answering: "upstairs, ML also, both upstairs and ML I can not."

Merger

   The next few years, our business in general should show some growth in operating earnings, but these alone business itself does not produce satisfactory returns, in order to achieve the ideal target of such, we must make some large-scale mergers and acquisitions. Already past 2005, large-scale mergers and acquisitions activity encouraging our,We reached the 5 merger agreement, 2 of them in 2005 years completed; 1 completed in early 2006; the remaining 2 is expected to be completed soon.These merger agreementNo one involved in the issuance of Berkshire sharesThis is a very crucial, but often ignored:When a company management layer is proud to announce the acquisition of shares of another company, as the acquirer shareholdersHad to sacrifice their own part of the interests of shareholders.I made several similar transactions, of course, pay the corresponding cost Berkshire shareholders as I move.

   The following we discuss our last year's merger and acquisition:

   In June 30, 2005, we acquiredHealth care insurance company(he flying: is an insurance company. )(Medical Protective Company, MedPro), which is a company located in Fort Wayne, a medical accident insurance company 106 years of operating history.Malpractice insurance is a very difficult to underwrite insurance, had become a graveyard for many insurers.However, MedPro is due to the following reasons: firstly, MedPro will manage good will and Berkshire subsidiaries of insurance companiesLead in the system, that isUnderwriting discipline in all other business objectives ; secondly, a composition as Berkshire's partHas far more than its rival's financial strength,This will be enough to guarantee to the doctors, who need very long time lawsuit will not because their insurer insolvency cannot be concluded ,The company has a smart and capable CEO Tim KeneseyInstinctively, he and other Berkshire managers follow the same mode of thinking.

   Our second merger is the forest river (Forest River), was completed in August 31, 2005. Prior to the July 21st, I received aOnly 2 page faxOne by one, above the forest river meet our ever disclosed in the annual report on the acquisition of standard (see the annual report. PP. 25 .). Before this, I never heard of thisAnnual sales of $1600000000 over the weekend tourist car manufacturersAnd all the people and general manager of Pete Liegl. But the fax made sense, I immediately asked each other to provide more data. The second day in the morning I got these data, in the morning I put forward to the Pete Liegl offer.

   July 28th.(he flying:7 days!)We shake hands. Pete Liegl is an outstanding entrepreneur, a few years ago, his company is far smaller than today, then he put the enterprise to a leveraged buyout (LBO) mechanism,They took to him immediately after the backseat driver, Pete Liegl left the company soon. Shortly thereafter, the company into bankruptcy, Pete Liegl to reclaim the company. You can rest assured, I will not any operation of interferometric Pete Liegl.(he flying: why sell?)

   Forest riverWith 60 factories and 5400 employees,In recreational vehicles (Recreation Vehiele, RV) continue to maintain a considerable market share in the manufacturing industryAt the same time, will alsoTo develop ship manufacturing and other business. Pete Liegl, 61 years old, absolutely in acceleration mode. Read the report of annual report published in the "RV Business" on the article, you will understand why Pete and Berkshire's marriage.

   In November 12, 2005, the Wall Street journal published an article about Berkshire merger and management and operation of the out of the ordinary. The Pete claims:"The My Company sold to Buffett is easier than to renew my driver's license."

   After the New York Cathy Baron Tamraz read this article, touched the heartstrings. In November 21st, she wrote me a letter at the beginning, wrote: "as president of Business Wire company, I want to introduce you to the My Company, because I think the My Company with a recent article published in the Wall Street journal article illustrates in detail the characteristics of Berkshire subsidiary company."

   Read Cathy 's letter, I felt Business Wire and Berkshire is a couple, I especially like the second letter in her: "we strictly control and limit the cost, all unnecessary expenses. Our company didn't have a secretary, also does not have the management layer. But we will invest heavily to lead and promote business development."He saved a little bit (flying:, tend to form a strong cost advantage of the moat. In some small things tend to reflect the culture and management of the company.)

   I'll give Cathy a call Business, Berkshire and controlling shareholder of Wire Lorry Lokey reached a deal soon. Lorry Lokey founded the company in 1961, has hired Cathy to CEO. I appreciate such as Lorry Lokey business success stories, 78 year old this year, he has put the company into a transmit the information to the excellent enterprise with 25000 customers in 150 countries,And many other options will Berkshire as the final destination throughout their lives, to create business entrepreneurs,(he flying: many entrepreneurs sell very good company.)His business success story isA good idea, a business genius, a diligent work attitudeA successful example of perfect combination of.

   In 2005 December we reached an agreement, the acquisition of Applied Underwriters 81% of the shares.This is a small and medium-sized enterprises to provide paid service and worker's compensation insurance company(he flying: is an insurance company, estimated no one Be Buffett understand the investment insurance company. This is his power ring)Most of its customers, in the state of California.

   In 1998, theOnly 12 employees of small company M & a base is located in Omaha's 24 employees, operating similar business. Applied Underwriters outstanding business founder Sid Ferenc and Steve Menzies after the conclusion of analysis, Omaha as a business base has many advantages -- I want to say that this is really have farsightedness -- now 479 employees in this company have 400 people settle down here.

   Less than a year ago, Applied Underwriters and National Indemnity reinsurance sector outstanding managers Jain reached a large reinsurance contract. Ajit Jain left a deep impression on the Sid Ferenc and Steve Menzies,And the two of them to Berkshire's business management also greatlyBoth sides decided to cooperate, we. We are very pleased to see, Sid Ferenc and Steve Menzies continue to maintain the 19% after the acquisition of shares, 12 years ago they had just started with only a small amount of capital, now get such achievement,Think of Berkshire's strong capital support, they will get so huge achievementI could be overwhelmed with joy.(he flying: Berkshire capital advantage of methods can be adopted by the original insurance business has done more to play, can also through the acquisition of other insurance companies to quickly take advantage of capital.)

   The spring of 2005, we are holding 80.5% of the MidAmerican Energy agreement, the acquisition of aProvide electricity services for the 6 Western States companyPacifiCorp. Acquisition of this sort requires many regulatory approval, at present we have already been approved, is expected soon to complete the transaction. Berkshire will then buy3400000000 dollarsOrdinary shares of MidAmerican MidAmerican, the fund with a $1700000000 loan to complete the purchase.Investment in public utilities of government regulation, you cannot expect to get high profits, but the industry can provide a reasonable income for the huge capital profit opportunitiesTherefore, the large-scale fund of Berkshire, this investment is very favorable. As early as in a few years ago, I said that we hoped to make some huge investment in public utilities. Please note that I say is some, we will find that more investment opportunities.

   In addition to the acquisition of new operations, we continue to link (bolt-on) merger, some M & A is not underestimate the business chain vertical integration -- our carpet enterprise Shaw 2005 investment of US $500000000 for two M & A, which will further enhance its gross profit rate. XTRA and Clayton Homes were also enhances the value of M & A.

   Unlike other M & a,Berkshire has no "exit strategy",We buy to keep(price and enterprise crane flying: acquisition of the cash flow to become the two final indexes. The moat is wide enough is a factor determining the cash flow certainty.). But we do have an entry strategy, seeking to meet 6 criteria and reasonable price, to provide a reasonable return target of our enterprises in the international America and, if you have the appropriate business, please call me. Like a hopeful teenage girl, I'll wait for the dream boy calls on the phone.

Insurance

   Let me begin to discuss the four most of our business. Begin from the core of our insurance, major in insurance amount and the time cost of float significance.

  Considering my new readers, let me explain (Float). Float is the pen that doesn't belong to us all but can be temporarily used by us funds. The two main reasons for our float is the increase of the:(1) in the insurance business, we first premium, is often the only insurance services provided in the 1 years later; (2) the loss does not mean we are going to claim, from the discovery of the damage, the mediation to solve, sometimes need after several years(such as asbestos litigation case is a good example. Due to asbestos containing carcinogenic substances, many engaged in relevant industry workers so sick. 20 century 80's America, nearly 200000 of the workers to claim compensation, the Texas most fierce -- translator's note).1967 years our insurance for $20000000, through internal growth and acquisitions over the years, has grown to now49000000000 dollarsThe giant.(he flying: too much float, and Buffett made their cost is not high!)

   Float is a good thing, but the precondition is that the cost is not too high. The cost depends on the underwriting results, also is the result of our costs and ultimately to bear the loss and the premium after the contrast. When an insurance company underwriting profit,As Berkshire over the past 38 years Laiduoban years of insurance business, the cost of float is even lower than zero cost.In these years, we are actually hold customer funds paid. However, for most insurers, life has been far more difficult -- overall, bearingThe property casualty usually will inevitably occur when large underwriting losses, losses, they must pay the price for the float,Sometimes even ruinous cost.

   Our cost of float in 2004 to below zero, or negative cost, I told you, unless there is huge disaster, in 2005 we will have the opportunity to make the cost of float zero. Unfortunately, as an expert in super huge disaster insurance underwriting, we really suffered a huge disaster,Because of the hurricane that Berkshire's $3400000000.In spite of this,We float still need not pay any costThis is the mainDue to our other insurance business in particular, created the outstanding management GEICO super performance.(he flying: to have such insurance company is really happy ah.)

   GEICO auto insurance business scaleGrowth of 12.1%, which in American private auto insurance marketShare increased from 5.6% to about 6.1%. Auto insurance is a huge market,The market share of each increase of 1%, equivalent to $1600000000 in sales growth.

   Although our brand can not be quantified, but I believe that as a significant increase in. In 1996, when Berkshire acquired control of GEICO,Its annual advertising expenditures of $31000000.2005 advertising spending to $502000000Unable to hold oneself back, and we will continue to increase advertising inputs.

   Our advertising is effective, because we tell a very good story: compared with any one auto insurance service to all customers of the national insurance company,In the GEICO company for automobile insurance can save more money(some professional Motors Insurance Corporation really excels in its field to the applicant to provide very good service; also, because our national competitors use classification system, different so it can provide better price). In 2004, we obtained the highest conversion rate so far, namely network and telephone orders into sales ratio, this is our price compared with the competition, a strong evidence now than before more attractive. Visit GEICO.com or call 800-847-7536, you will find that what I say is not false, you must remember that you are the Berkshire shareholders, as shareholders tend to let you enjoy preferential treatment.

   I said, in 2004 August GEICO in New Jersey, where drivers like GEICO very much. We reserve the rate of new households in the state is higher than that of other states, is estimated to be about 2007 years, GEICO is likely to become the third largest auto insurer in New Jersey. In addition,Our low costs can keep stable in the low price sales and profits.

   55 years ago, when I first discovered GEICO, this companyA simple but effective way of businessI'm impressed.

   In fact, when I was 21 years old I also wrote articles about the company, the company is worth only $7000000. As you can see, I called GEICO "I most like stock". Now I still call it.

   Our reinsurance business mainly by General Re and National Indemnity management, the former by Joe Brandon and Tad Montross management, which is managed by Ajit Jain. Taking into account the 2005 hurricane damage very serious for reinsurance industry suffered a serious blow, the performance of companies can be said to be very good.

   Atmospheric, marine or other casual factors have greatly changed the frequency and intensity of hurricanes occur, this is still a failed to unlock the mystery. Recent experience is quite disturbing. For example, we know, in the 100 years before 2004, there are about 59 of magnitude 3 or stronger hurricanes hit the southeastern and Gulf of Mexico (Gulf Coast) states, of which only 3 to 5. We know, in 2004 there were three category 3 hurricane struck the area, in 2005 4 times, including 1 times is the history of the most destructive hurricane Katrina. In addition, happened 3 times in 2005 5 hurricane coastal, fortunately weakened before landfall.

   The more frequent and more intense hurricanes is an anomaly? Or due to other factors of climate, water temperature or we don't fully understand the change? Whether these factors for the development of a model, leading to greater disaster. Hurricane Katrina also be inferior by comparison will occur in the future?

   Joe, Ajit and I don't know the answers to these questions, we know, we know nothing at all the answers to these questions, this means we must follow Pascale (Pascal) solutions proposed. As you know, in a famous debate about whether God exists in the bet, Pascal concluded that, since he does not know what the answer is, personal gain / loss ratio decreed that he should choose a God must exist.(seventeenth Century French mathematical scientists, thinkers Pascale (BlaisePascal, 1623-1662) put forward about the existence of God of gambling demonstration of faith. Mean, in the existence of God on this issue, people can choose the existence of God, can also choose God does not exist, but can not make a choice in life, must choose to this, must bet.On the existence of God, if there is a God, a man of God will be victory, has an infinite gain, will be happy. If God does not exist, nor how much loss.Reason cannot prove the existence of God, but it can tell us we should choose the existence of God -- translator's note).(he flying: choose more conservative answer, more safety marginal price.)

   According to the above principles, we have come to the conclusion,We present only in the price is much higher than last year's level and if the near future some important factors change causes a more serious harm of the storm, the overall level of risk we will not let our heart, will cover the super disaster insurance.(he flying: more cautious)After 2004, in relatively weak degree we are aware of this change, the price did not improve by reducing the underwriting. Now we willMore circumspect,But if the price is right, we will still have the ability and desire to become the world's biggest disaster insurance amount insurance business.

   Our subsidiary of smaller companies, including the recently joined MedPro in 2005, has made outstanding achievement. However, what you see in the table below does not reflect their performance, this is because we in the MedPro after the acquisitionImmediately the loss reserve (the loss reserves) increased by about $125000000.

   No one can know exactly how much money to pay the claims we inherited,Medical malpractice insurance (Medical malpractice Insurance) is a kind of long tail (long-tail) type of insuranceThis means that the claims, often take many years to settle. There are also other losses occur, but we may be in a period of time to know nothing at all. The insurance salesman problem of imminent loss are often too optimistic, they act like a guy a switchblade fight, when the opponent at his throat, stabbed a knife, he shouted: "you don't want to close to me." His opponent to answer: "you shook his head and then called to try."

   In addition we increase the loss reserve for the pre policy outside,MedPro has an underwriting profit only can only issue an insurance policy. Our other major insurance companyIn the 1270000000 dollar volume has made $324000000 in underwriting profit, this is a very outstanding performance, we should be grateful to Berkshire Hathaway Homestate Companies Rod Eldred, Central States Indemnity John Kizer, U. S. Liability Tom Nerney, Kansas BankersSurety Don Towle, National Indemnity Don Wurster.
Table 3 is the US under the main insurance companies underwriting and float the overall situation.


Government regulation of public utilities business

   We hold 80.5% stake in MidAmerican Energy Holdings (fully diluted), this is aWith many different kinds of utilitiesHolding company, of which three subordinate enterprises biggest include: (1) Yorkshire Electricity and Northern Electric,With 3700000 power usersForBritain's third largest electricity supplier;(2) MidAmerican Energy, mainly forProvide service 706000 users in Iowa; (3) Kern River and Northern Natural pipelines,Provides America consumption of natural gas 7.8%. The acquisition of PacifiCorp is completed, we will increase 1600000 of electricity users in the 6 western states,

   Most of these operations in Oregon and utah.This transaction will enable MidAmerican revenue increased 330 billion, an increase of $14100000000 of assets.

   2005 year in August 8th the public utility Holding Company Act (The Public Utility Holding Company Act, PUHCA) was abolished, the milepost event that Berkshire will in 2006 January 9 will hold its MidAmerican conversion of preferred shares into voting common stock, the conversion over the public utility holding company act on our perplexing. Company system arrangement (a convoluted corporate arrangement). Now we also hold MidAmerican of 83.4% common shares and voting rights, which makes us in financial accounting and tax to consolidate the company's report. But our economic interests really is above 80.5%, because the option already issued certainly in the next few years, this will dilute our ownership.

   Although our voting power has increased dramatically, but not ownership structure square jointly held by any change. We will MidAmerican as Berkshire, Walter Scott and its two terrific managers, Dave Sokol and Greg Abel partnership, how many votes each party has not important, important is,Only we all think wise circumstances, we will take major action.With Dave, Greg and Walter together for 5 years, further strengthened my original belief: no better than their partner.

   You will notice, 2005 years we provide two copies of a statement of assets and liabilities, according to GAAP rules in our actual data in 2005 December 31 day (not including MidAmerican), another reflects the MidAmerican conversion of preferred shares into common stock situation. Future Berkshire all financial statements incorporate MidAmerican.

   Perhaps looks and main business of the company are not coordinated,MidAmerican holds USA second real estate Broker's FirmIt is a heart, a pearl in the palm. The parent company's name is American home Service Corporation (HomeServices of America), butOur 19200 agents through 18 locally brandNamed subordinate enterprises management, because the three small acquisitions,In 2005, we participated in $64000000000 of real estate transactions, grew 6.5% than 2004.

   In recent years continued fever residential real estate market is gradually cooling down, this will bring us more opportunities for mergers and acquisitions. CEO Ron Peltier company and I hope America home Service Corporation (HomeServices of America) in the next ten years further development.(he flying: the company's moat where?)

* including 2005 and 2004 Berkshire earned $102000000 and $110000000 (after tax)

Finance and financial products

   Our financial business star is composed of management skills perfection in one's studies. Kevin Mr Clayton runs Clayton Homes, his performance record is not remarkable because of the industry boom and rising -- since 2003's acquisition of ClaytonHomes , prefabricated housing business (manufactured-housing, partially or completely in the factory prefabricated housing units -- translator's note) has been very poor, recently due to Hurricane Katrina destroyed the rising market demand will almost certainly be short-lived, in recent years the industry many enterprises are at a loss, only Clayton Homes profitable.

   In this brutal environment, Clayton Homes from several large banks to buy a large number of prefabricated housing loans,These banks argue that such loans unprofitable and difficult to provide services. Clayton HomesProfessional ability and Berkshire's financial strengthBut the business has become a very have good prospects of gain business,In this business we are stand head and shoulders above others. Buy the loans we only provide 54 billion dollars of prefabricated housing loans, and now we provide prefabricated housing loans up to $17000000000. Not only that, Clayton Homes now holds $9600000000 in loan servicing portfolio, which almost entirely since Berkshire entered.

   Clayton Homes money from Berkshire to set up these portfolio,Because of the use of Berkshire's credit, Berkshire to Clayton Homes 1% of the peak hour on its borrowing cost.In 2005 Clayton Homes to pay the cost of borrowing arrangements for 8300 million, the data included in other income in the report in Clayton Homes, $416000000 has been deducted from the payment.

   In manufacturing business, Clayton Homes very active. On the basis of the original 20 factory, in 2004 the first increase of 12 factory, these factories are all from the several years ago or the industry leader Oakwood bankruptcy purchase. 2005 also purchased the 4 factory Karsten, greatly strengthened the company's position on the West coast.

   Long ago, Mark Twin said: "a man who tries to the cat's tail to get people back home will be getting a he besides simply can not get lessons." If Mark Twin were alive today, he might try to stop a derivatives business. In a few days, he would opt for pulling the cat's tail is better.

   In 2005 continue to exit the Gen Re derivatives business, we pre tax loss of $104000000,Since we started this work, the cumulative loss of US $404000000.(he flying: this is really a big trouble! )

   We had 23218 contracts outstanding, at the beginning of 2005 decreased to 2890. You might think that we would lose so far,But in fact our loss is still bleeding,2005 will be reduced to 741 outstanding contracts let us pay the said $104000000.

   Please remember, Gen Re established in 1990 derivatives trading department is to meet customer needs, but we liquidated in 2005 contractThere is aThe term was 100 years.It is difficult to imagine such a contract could fulfill what demand, except perhaps one is concerned only about the compensation of the dealers have a long-term contracts to hedge demand in his trading registration book. The long-term contract or the multi variable contracts, mark to market (mark to market, a standard procedure in the application of derivative transactions in financial accounting) the greatest difficulty, it is valued dealers offer to "Imagine" opportunity, therefore, traders to recommend to customers of these contracts is not a bit strange.

   Based on a hypothetical data to calculate huge amounts of compensation flow business obviously will be threatened by growing crises, when two traders execute a pen has a variable and the settlement date several abstruse (settlement date) very distant capital, they represent the enterprise must be the valuation of their contracts in the calculation of income. For a given contract the same, A enterprise will get a valuation, but B enterprises will get another valuation. But you can bet valuation differences they are often the result of both companies to improve their own income direction estimation. Several times my personal experience shows that the difference in valuation and sent thousands of miles,Both implementation with a written contract should also report a profit, this kind of thing is really fantastic.

   I have every year to dwell on our experience in derivatives, mainly based on two reasons: a person is making me feel quite uncomfortable. The harsh truth is, because I did not take immediate action to end the Gen Re derivative transaction business, cause shareholders lost money. In the acquisition of Gen Re , Charlie Munger and I know this is a difficult problem, and tell the management of this company, we want to get away from this business as soon as possible. Supervise the implementation of this plan is my responsibility, but I not only stressed out as soon as possible, but also wasted several years to sell the business. This was a doomed endeavor, because for those of us who willTo continue for decades debt maze, there is no true liberation road.We assume the responsibility for these contracts especially disturbing,Because once the outbreak, the consequences will be unbearable to contemplate.Moreover, if there is a serious problem, we know that will lead to other chain reaction in financial markets.(flying: for investors with craneBad derivatives contractsIs a very terrible thing.)

    I would not hurt at all to escape efforts ended in failure, at the same time, we are more transactions. All blame me irresolute and hesitant big mistake (Munger called thumb sucking), when a problem occurs, whether in life or in business, the best time to action is immediate action.

   The second reason is, has repeatedly stated our problems in this area, is the hope that our experience can help managers, auditors, regulators. In a sense, we are only just escaped from this business coal mine lark, have the obligation to us sounded the alarm.The number and value of global derivative contracts to continue rising, is now the last financial crisis erupted in 1998 several times.

   Our experience in particular should let you more alert, because we are better than the average level of,Could be decent to get away, but due to delays because, again, a loss and damage.Gen Re in the derivatives market is just a small game player, it has had the good fortune to lift its expected liquidity positions in a favorable market (liquid positions), which do not have under the financial or other pressures may be forced to not effective way to open positions. Our accounting in the past is very traditional, in fact, everyone think we're quite conservative. In addition, to our knowledge, no one involved in improper trading practices.

   For others, may be the end of the story will be completely different. Imagine, if one or more of the enterprise (troubles often spread -- have several times in our position, want to open positions, in a chaotic market and facing great pressure and known, how will things. For this case, should be in after the full attention in advance but not the best time, safe evacuation of New Orleans should be before Hurricane Katrina.

   When we eventually will Gen Re of the securities exchange department put up the shutters, sung by my sense of it is like a country song in that way: "my wife and my best friend ran, I miss more of my friends but not my wife."

Table 5 is the operation of our different types of financial activities and financial products.


* includes all debt

Manufacturing, service and retail business

This part of our business variety, let us have a look the overall balance sheet and income statement data (see Table 6, table 7).




   The diverse business portfolio, some property sales of products from Dilly Bars ice cream to the Boeing 737 (fractionalinterests) have everything that one expects to find, in the 2005The average net return on tangible asset to an amazing 22.2%. That is, this part of the business management to obtain such a high rate of return, only use financial leverage is very small. Obviously, we have a good business, but we are significantly higher than the net purchase price most enterprises, the premium is reflected in the balance sheet of goodwill, this makes us the average book value return rate reduced to 10.1%.

Table 8 is the pre tax earnings for the larger categories or units.


   *McLaneUsed to beWal-MartSubsidiaryResponsible for the distribution, food and general merchandise to convenience stores, drug stores, supermarkets, wholesale shops, restaurants and cinemas,Is the largest wholesale distributor of American. 2002 annual accounting annual turnover of $22000000000 in 2003 February, WAL-MART announced its sell Berkshire -- translator's note

   We are building products companies and Shaw are still rising costs for raw materials and energy attacks, most of these enterprises is the oil (or more accurately, petrochemical products) consumer and natural gas, the prices of these commodities have been rising rapidly.(he flying: even so, profit and growth of 10%.)

   We also improve the product sales price, but the price to often have a long time interval between the growth performance, though, we are building products companies and Shaw carpet company performance is admirable, this should be attributed to the management of their powerful commercial franchises and able.

   In the clothing business, our biggest enterprise Fruit of the Loom revenue and market share growth both again. Of course, we in the men's and women's underwear market lead be known to all, according to the statistics of Wal-Mart, Target and other large shopping centers, our sales share is about 48.7% , and in 2002 we bought the company significantly increased compared to 44.2%. Starting from a smaller base, our sales in supermarkets in adult women and girls underwear market share rose from 13.7% in 2002 to 24.7% in 2005. To achieve such growth is not easy in a main product categories on the market, so we would like to thank the company CEO John Holland created this miracle.

   In 2005 I told you: Ben Bridge (Zhu Baoye) and R. C. Willey (family decoration industry) sales (same-store sales) far more than the industry peers. You might think that, the explosive growth in a year will result in second years of performance can be reached, but the Ben Bridge Ed and Jon Bridge, R. C. Willey Scott Hymas in the face of this challenge is still can continue to grow, the 2005 Ben Bridge same store sales growth of 6.6%, the R. C. Willey rose 9.9%.

   When we open a new store in new markets, R. C. Willey continues to close on Saturday business across the business 7 days a week for competitors, a few years ago I was very skeptical of Boise shop in 2005 has achieved 21% rate of return, refresh for the 2004 10% record. In 2005 November the new Reno store opened on the open the door, sales quickly exceeded Boise's early pace. In 2006 June we will begin business in Sacramento , if the store can be like what I expected to succeed, then, the next few years we will be opened in California R. C. Willey store.(he flying: and jewelry industry with profit growth of 20%.)

   In the aviation services business, the airline business rebound in the FlightSafety's earnings improved. In order to support growth, we invest a lot of money new simulators, our recent expansion in 2005 September in the UK Farnborough newly opened a major facility training base, with 42 training center. To be completed in 2007, we will invest a total of $100000000 for the building and 15 sets of simulated aircraft.

   FlightSafety CEO Bruce Whitman sure very capable,There is no rival services provided to match our breadth and depth of the.

   NetJets is operating results of an entirely different story.In 2004 I had said that the business will be profitable in 2005, but I was wrong in a complete mess.It should be noted that, our European business in achieving good growth at the same time,Cost is also reduced, customer contract rose 37%.We are the European areaBusiness aircraft fractional ownership businessOnlyAn enterpriseAt present, our situation in Europe Business blossom everywhere is NetJets become the key factor in the global industry leader.

   But ourAmerican business although customer growth, there was a serious loss, its operating efficiency decline, a sharp rise in the cost of. (America crane flying: had previously been profit contribution of local business losses occur.)We believe, our three largest competitors also suffered the same blow, but they all belong to the aircraft manufacturer, so may not be as we did is very concerned about the necessity to get enough profit. In any case, the comprehensive value of these three competitors, management of the fleets to far below the fleet that we operate value.

   The Rich Santulli I know the most vigorous managersWill solve the cost problem of company income, but heWill not be to the detriment of the company's service quality method to solve the problem.Both he and I guarantee that our services, security, security level is certainly difficult opponent than any other. (he flying: the two pieces of the profits decreased from 190000000 to 120000000.)

   Our retail business including See's Candies the US as early as 1972 acquisition of the company, which is the oldest non insurance businesses for our history, when we immediately decided by the 46 year old Chuck Huggins is responsible for the. Although we were still new at the game of selecting managers, Charlie and I in this appointment has played a "home run".In his 34 year tenureChuckHuggins, love for the customer and brand has penetrated the entire organization,An increase of 10 times the company's earnings.(he flying: a year also carry a large amount of dividends on profits.)It is worth pointing out, this achievement is in a slow growth or even can be said that almost no growth in the industry (in this industry, the number of sales data is very difficult to know).

   At the end of 2005, we put the management of See's baton to Brad Kinstler, before this, he served Berkshire management of Cypress Insurance and Fechheimer did well. For us, the managers adjusted is unusual, but good record of Brad Kinstler let us think, he obviously is the best choice for See's manager. I hope that Chuck and his wife Donna to be able to attend the meeting this year. If you attend if all shareholders, managers can and Charlie and I together to the American ranked first in the candy maker very well deserved applause.

   Every day, in countless ways, our subsidiaryEvery one of the enterprise's competitive position either stronger or weaker,If weDelighting customers, eliminating unnecessary costs, improve our products and services, we gain strength.But if we treat customers with indifference or tolerate unnecessary costs continue to rise, our competitiveness will atrophy. Every day, imperceptible influence our behavior, butAfter a considerable period of time the cumulative effect of the enormous consequences is difficult to estimate the.

   Because these barely visible consequences lead to long-term competitive position of our improved, we call this phenomenon"Widening the moat",We want to create these behaviors for 10 years or even 20 years after the business critical. Of course, we always want to earn more money in the short term,But when the short-term and long-term conflict, widening the moat priority should be taken into account.If a company management to make bad decisions in order to achieve short-term earnings targets and therefore cost, customer satisfaction, brand appeal to ignore, so, after the good will overcome the resulting damage. Of be in a nice hobble situation facing managers of automobile and aviation industry today, in efforts to dispose of its predecessor's problem is the best proof. Charlie and I love quotes Ben Franklin:"Giving priority to prevention, treatment of secondary"(An ounce of prevention is worth a pound of cure).But sometimes, in any case treatment cannot cure the mistakes of the past.(he flying: business "road"!)

   Our managers focus on widening the moat and full of wit in this regard, the reason is very simple,They are passionate about their business. At Berkshire acquired previously, they often had to manage the company for a long time, Berkshire after entering the only role is to stay out of the way. If you see these as shareholders by shareholders as an outstanding contribution to the heroes at the annual general meeting (including four in one of the boys), please say thanks to them.

   Our manager's attitude and a married business tycoon only daughter young men formed a sharp contrast, after the wedding, feel very comfort father put his son-in-law called, began to discuss their future:
   "Baby, you are my long-awaited has failed to find a handsome son-in-law, this is a My Company 50% shares that, from now on, you are on an equal footing with my partner."
   "Thank you, father."
   "So, what do you want to be responsible for? Responsible for the sales?"
   "I'm afraid I even sell water a crawling in the Sahara desert people can not do."
   "Well, then in charge of interpersonal relationship?"
   "I really don't care for people."
   "Never mind, we have many other things to do in business. And what do you hope to do.
   "In fact, I have no interest in anything. Why don't you buy me out?"

Investment

The following is our common stock investments. At the end of 2005, the market value of more than $700000000 in stock investment details are as follows:


   In 2005, our portfolio companies because of events and the emergence of the two change --Gillette incorporated into the P & G(Procter &Gamble), USA Express (American Express) Ameriprise is listed on the stock market. In addition, weAHoldingsThe DickKovacevich management very well Wells Fargo (Wells Fargo) stock,At the same time to take positions in the Anheuser-Busch and Wal-Mart shares.

   Don't expect our portfolio will appear what miracle, although we share some powerful highly profitable businesses,But its shares have no cheap.As a whole,They may double in value in 10 years, one possibility is that the next 6%-8% increase their earnings per share in general every ten years, the price of the stock will more or less and earnings per share growth similar(of course, these managers will think I expected too conservative, I hope they are right).

   Procter & Gamble and Gillette merger ended in the fourth quarter of 2005, which require Berkshire to record a $5000000000 pre tax income. From the economic point of view, American generally accepted accounting principles (GAAP) this accounting provisions of the entry does not have any meaning, you in the assessment of Berkshire's 2005 earnings, should ignore the huge accounting income. Before merging,We're never going to sell Gillette stock, after the merger, we do not intend to sell shares with Procter & Gamble, also won't cause us to pay any taxes and fees.

    In any case exaggerate the importance of a CEO company is not excessive,Before the 2001 Jim Kilts into the Gillette, the company is struggling, especially the capital allocation blunders and pain.Gillette purchase Duracell (Duracell) to make the shareholders paid billions of dollars in costs, and this kind of cost in the traditional financial accounting can't see any reflection. In short, Gillette acquired in mergers and acquisitions in the commercial value and pay the acquisition costs are not equal (it is very surprising is, this very simple measure in the discussion of management and investment banker mergers and acquisitions are almost always ignored).

   After Jim Kilts entered the Gillette,Start gradually strict financial discipline, tightened operations, to promote the marketing, a series of measures his greatly enhance the company's intrinsic value.Gillette incorporated into the P & G to further enhance the development potential of the two companies. Because of its management achievement, Jim Kilts won compensation very rich -- but every penny he earns granted (this is not an academic discussion: as in the Gillette Company shareholders holding 9.7%, Berkshire actually pay compensation proportional). In fact, to the ability of a giant enterprise indeed extraordinary CEO pay high returns are not excessive, but this CEO is really rare.

   Salary and performance of most America executives did not match, will not appear what too big changeOn the CEO, because the salary is deceived stack is already arranged beforehand, not exactly conducive to investors. As a result, a mediocre or poor performance of CEO, in the interpersonal relationship supervisor that he carefully identify and very helpful consulting company consultant with the assistance of Ratchet andBingo, eventually gain a lot of money from a malicious design executive compensation arrangements.

   For example ten years fixed price stock options (who would not be?). Assuming the stagnant (Stagnant) CEO (Fred Futile) Fred accepted such a number of options, such as to give him the equivalent of 1% of the company's stock option, then, will he get personal interests obviously -- he will not pay any dividends, but retaining all earnings to repurchase shares.

   Suppose in Fred's leadership, stagnant as its not what growth, in the issue of options after ten years, the net asset value of $10000000000 per year in the base of the company made a profit of $1000000000, equivalent to all the issued shares of $10 per share. Fred refused to pay out dividends to shareholders, with all the proceeds to buy back stock. If the stock price has been 10 times earnings level, then, of the option price will increase 158%. This is because repurchases to reduce the shares of 38700000 shares, earnings per share will be increased to $25.80 per share. The shareholders keep all not for distribution, Fred gets 1.58 wealth billion, despite the business without any increase in. More surprisingly, even stagnant earnings in these ten years declined 20%, Fred can still earn more than $100000000.

   With no dividends and retained earnings to invest in various disappointing projects and acquisitions, Fred will still get a great reward, even if the investment can only obtain not worth mentioning 5% return, Fred person can still have a large sum of money income. Specifically, in the stagnant earnings in ten years remain unchanged, Fred option will let him earn $6300000.

   At the same time, all shareholders will wonder: shareholders and management at the time that the alleged to Fred issuing options "alignment of interests" what is the matter?

   A "normal" dividend policy, for example, 1/3 of the proceeds will pay dividends, although does not lead to such an extreme outcome, but still can make those who don't have any achievement managers get rich reward.

   The CEO is very clear about the mathematical principles, they know that every penny paid to shareholders dividends will decrease accordingly issued option value, but I have never seen the management and shareholders for approval on the fixed price of stock option plan (a fixed-priced optionplan) of the proxy materials (proxy materials) conflict. Although CEO are immutable and frozen in the company that the cost of capital is, but I do not know why they always forget to tell shareholders, fixed price stock options to bring the CEO 's capital is free.

   It was not destined to so, for a company's board of directors, implement a when retained earnings automatically adjust the option value approach is simply be an easy job to. But to my surprise, surprise, this option is almost never issued. In fact, the strike price (Strike Price) incentive plan and adjust as the retained earnings management incentive options, the "experts" seems very strange, yet these experts on all appeared to option plan management as well as the Encyclopedia (eat zuiruan, "Whose bread I eat, his song I sing.").

   Getting fired that day will be a CEO income especially rich one day, in fact, in cleaning up the day leave his desk, he "earned" to more than one cleaning toilets America sanitation workers a year to earn much more. Forget the old saying: "a success success" (nothing succeeding like success). Now, in the management of the company, a become fashionable for a time law is: "one thing failed success" (nothing succeeds like failure).

   For management unremarkable mediocre performance pay huge additional subsidies severance, generous and exceed the standard salary, already It is quite common for, because the Remuneration Committee of the company (compensation Committee, is aimed at the evaluation including CEO, other executive directors, executive internal generally set up performance, will be responsible for the formulation and verification of a specialized agency director will a compensation scheme members and senior executives -- translator's note in the Anglo American corporate directors) have become a slave data comparison. Method is very simple. The board of directors, three directors, of course not randomly selected, in the board meeting held a few hours before, a big to statistics data and pay will gradually increase. So, the board will put a lot of strange and eccentric "candy" and to the CEO , but only because we all used when trick: "but, mom, all the other kids have a." When the Remuneration Committee of the company by logical reasoning similar, is the most egregious excess today is just the bottom line only yesterday.

   The board of directors of the company should take my childhood idol team Detroit famous slugger (hit many home runs a batter) HankGreenberg attitude. The son of Hank Greenberg Steve was a player agent, representing an outfielder in occupation and a Major League Baseball Clubs, Steve tentatively asked his dad, he should ask how much a signing bonus.

   Hank Greenberg the real performance linked pay activists asked pierce to the heart of the matter:"How much he hit last year?" Steve said: "the 0.246." Hank Greenberg answers: "say without mincing words to a shirt."(let me pause for a brief confession: in criticism of the Remuneration Committee of the company act, I am not as a true insider to bid, although I have served as the 20 director of the listing Corporation, but only CEO of a company put me into the company's remuneration committee. OOo...)(contribution crane flying: reward should be on the company and the corresponding.)

   I think the long-term problems American economy lies in the trade imbalance, in this regard, I have been in the past reports detailed statement, my point remains the same. My belief is that Berkshire's 2005 annual pre tax profits by $955000000, this data is included in our earnings statement, also reflects the USA generally accepted accounting principles (GAAP) in different ways to treat gains and losses. We hold a long position in the shares or bonds (long-term position), year to year changes in value will be reflected in the balance sheet, but as long as we don't sell, the asset is rarely reflected in the income statement. For example, ourCoca-Cola shares fell in value from the end of 1998 to $13400000000 in 2005 to $8100000000 by the end ofThe market value, fell to $5300000000, but will not affect our income statement. But the long-term foreign exchange position was based on the market valuation of the day, therefore, each report dateWill affect the earnings of our,Since we first set foot in the foreign exchange, we earned a total of $2000000000.

   In 2005, we have reduced the number of spot dollar bearish positions (direct position in currencies), but by buying in a variety of foreign exchange denominated securities, we partially offset this change, and earned a profit most international. Charlie and I love this way to obtain non dollar exposure (nondollar exposure, foreign exchange risk refers to the currency exchange rate movements due to trading losses or gains of any party may bring the two sides. The amount of foreign exchange will usually bear the foreign exchange risk is called "risk" or "exposure" -- translator's note). This is mainly because of changes in interest rates -- when American interest rates relative to other countries rise, holding most foreign currencies will form a significant (Negative Carry, negative earnings, hold the market positions of low interest rates and borrowing money to pay a higher interest rate leads to a negative cash flow, which is higher than the stock financing cost or trading futures investment rate of return -- translator's note).

   We hold that the profit change dollar positions indeed cost us money, 2006 will probably continue to do so. On the contrary, the holdings of foreign securities after a period of time, form a positive profit (in contrast, and negative profit is profit to hold the market positions higher interest rates and borrowing money to pay lower interest rates can lead to positive cash flow. Also is the securities or futures investment rate of return higher than the cost of financing transactions -- translator's note) will be the possibility of considerable.

   Potential factors affecting the America current account deficit continue to worsen, and there seems to be no stop signs, not only our trade deficit in the current account -- the most common project -- to record highs in 2005, and we expect the second projects, investment income will also soon from positive to negative. Compared to the America overseas investment, foreign holdings of America assets (or on USA claim) increased more, therefore, these foreign investors through their holdings of USA asset gains will be started more than USA holdings of US assets overseas revenue. Finally, the third component of the current account balance of payments in the unilateral transfer of funds is always negative.

    It should be stressed that, USA particularly rich, and will be more prosperous.The result is, USA current account huge imbalance if no harmful effect obviously the words to American economic or market, is likely to continue for a long time. But I don't believe that this situation will always be advantageous,Either the Americans as soon as possible to deal with the problem with the way we choose, or at some point, the problem will likely in an unpleasant way to our attention.

How to make the investment income minimization

   For Berkshire and other American stock investors over the past few years, a lot of money is simply a be an easy job to the. A real example is called long-term, from December 31, 1899 to December 31, 1999 100 years, the Dow Jones index rose from 66 points to 11497 points (guess how much the annual growth rate to produce this result? At the end of this part, you will see a surprising answer). This huge rise only a very simple reason: in twentieth Century America business very well, investors borrow enterprise prosperity Dongfeng earn basin full earthen bowl. At present USA business continue to good, but investors now due to a series of injuries, to a large extent reduce the they will realize from investment income.

   To explain what this is all about, we have to start from a basic fact: in addition to be of little exception (such as enterprise bankruptcy enterprise losses shall be borne by the obligee), in most cases,Owners from now until the end of the world (Judgment Day) during the profits and the companies they own equal benefits overall.Of course, the smart investors buy and sell, A can obtain more profits than investors B,But overall, A earn is equivalent to B loss, total income or so much.When the stock market rise, all investors will feel more rich, but a shareholder to exit, the premise must be new shareholders to replace his position. If an investor sells high, another investor must buy high. All the shareholders as a whole, if there is no rain drop from the clouds fairy money happens, simply can not get more than the company created by the gains more wealth from the company.

   In fact, because of the "friction" cost ("frictional" costs) exists, the shareholder benefits certainly less than the company's earnings. My personal view is: these costs are now being more and more high, will cause shareholders to income level is much lower than their historical return.
In order to make clear how fees are soaring up, you can imagine this. USA all listing Corporation is a American family owned, and always will be. We call it Gotrocks. After tax on bonuses, the family of the generation after generation rely on their own company profits will become richer. At present, all listing Corporation American year revenue of about $700000000000, the family nature also spend some money for life, but the family savings part of the wealth will be stable by the interest accumulated wealth. In the Gotrocks household, all people's wealth at the same rate of sustained growth, all is harmonious.

   But let us suppose that some have the gift of the gab, helping to close to the family, to every member of the family by buying a stock and sell another stock to better than other members of the family investment performance. These help very enthusiastic promised to deal with these transactions, of course they will charge a commission. This big family of Gotrocks still includes USA all listing Corporation, these transactions are just rearrange who holds what the company only, therefore, the annual family wealth gains in reducing overall. The more the number of these family members trade, they gained from the enterprise to share the cake in the less, the broker helpers to share has become more and more. These as a broker helpers and always keep in mind the fact is: activity is their friend, so they always try various devices to improve the active transaction.

   Soon after, most of the family members realize that, in this new "beat my brother" ("beat-my- brother") in the game, the agent is not doing well, and then another batch of help. The second batch of aid for each family member explained, only by members of their own efforts is difficult than other members of the family, they are given the solution is: "hire a manager, is us, we will do it." The second batch of helper and managers continue to use the first helpers to transactions, the managers may even increase the active transactions that the brokers in Xinglong. In short, corporate earnings this cake bigger together into the two batch of helper pockets.

   The family grow with each passing day. Everyone in the family hired professionals, but the whole family financial situation is go from bad to worse, how to do? The answer is obviously -- to seek more help.

   The third batch of the helper is the identity of the financial planning experts and institutions advisory expert, they are carefully selected to provide a manager to Gotrocks this big family, have the family dizzy for their assistance is naturally very welcome. Of course, these members know, they can not choose the right stock, nor the right stock pickers. Some people will doubt, why they want to successfully select the appropriate consultant? Unfortunately, this big family of Gotrocks did not have a similar question, the third batch of helper and adviser sure not to show them this question.

   This big family of Gotrocks now for the three batch of help are expensive, but they found the situation even more ominous, they fall into despair. But it is the last hope is about to burst, the fourth batch of aid -- which we call super helper (thehyper-Helpers) appeared. They are friendly to explain to this big family, they still cannot get satisfactory result is that the existing three batch of helper (agent, manager, consultant) is not fully aroused the enthusiasm, they are just as a mere formality. The fourth group of people said: "you can expect such a dead-alive person what to do"

   New to the fourth batch of help researchers proposed a surprisingly simple solution -- pay more money. Super helper confidently asserted that: children can't set the wolf, in order to truly beyond the other members of the family investment business, each family member must pay more price: Commission in a fixed, because the incident and the temporary pay huge.

   Find more astute members of this family,The fourth batch of hyper-Helpers is actually the second batch of helper and manager, but is wearing new clothes, embroidered with attractive hedge fund (hedge fund) or Private Equity Firm (privateequity).But the fourth batch of help to the family said, take an oath devoutly, change clothing is very important, will give the wearer a kind of magic, as was gentle Clark Kent for Superman (Superman) clothes after the powerful.

   The family took their explanation, decided to pay all of their remuneration.

   This is the situation we investors today:If investors just honestly lying to rest in the rocking chair, all listing Corporation returns a record proportion would have all put into their pockets, and now it falls into the team more help researchers pocket.The recent profit distribution mechanism is widely popular make this family costs more expensive, according to this distribution mechanism, due to the help of smart or lucky gains, most of all to help, because the help of incompetence or to bad luck loss all by family members to bear, while also to pay a fixed commission large.

   Profit distribution arrangements like this a lot, are helping with big head, and by Gotrocks the family to bear the loss, but also for such an arrangement and privileges of expensive, therefore, we may Gotrocks the family name changed to Hadrocks more appropriate. Today, virtually all of this family such as the friction cost about to account for all American listing Corporation earnings of 20%, that is to say, the burden of paying for help, the America stock investors in general can only get all the listing Corporation 80% of earnings, and if they sit at home and rest quietly and listen to anyone's advice it can be safely, 100%.

   Long ago, Newton discovered the three laws of motion, this is indeed a great discovery of genius (Isaac Newton). But the genius of Newton didn't extend to investing. Newton in the South Sea bubble (the South Sea Bubble) in losses, he later explained:"I can calculate the movement of the stars, but it can not calculate the madness of people."If not been traumatized by this loss, maybe Newton will findThe fourth laws of motion -- for investors as a whole, the movement will lead to the increase of yields.

   Put forward at the beginning of this section answers are as follows: very precisely, in twentieth Century, the Dow Jones index rose from 65.73 to 11497.12 , equivalent to 5.3% of annual compounded rate of return on the whole (of course, investors have received dividends). To get the same return in twenty-first Century, the Dow Jones index must rise to 2011011.23 in order for you to one's heart's content in December 31, 2099, and as long as I can to reach 2000000 points were quite satisfied. In fact, in twenty-first Century the past 6 years, the Dow Jones index no rose.

Debt and risk

   With MidAmerican , our new balance sheet may make you think, have Berkshire increased tolerance of debt, but the fact is not such, besides the amount of symbolic significance, we avoid the debt,Just for the following three objective will resort to debt:

   1, we occasionally use repurchase agreements (repurchase agreement, repo) as a part of a short-term investment strategy, including holding America government (or their agents) securities. Buy this type of stock is very opportunistic, involve only the most liquid of securities. A few years ago, we made several interesting deal unscathed or retreats. Debt (The offsetting debt) also has been greatly reduced and will soon be removed.

   2, we will order a clear understanding of the risk characteristics of interest bearing accounts receivable portfolio (portfolios of interest-bearingreceivables) and borrowing. In 2001 we have to do the operation, in order to partnering with Leucadia acquired the bankrupt Finova (the company there are many kinds of accounts receivable), US $5600000000 bank loan guarantees. We recently borrowing prefabricated housing to a widely diversified, Clayton can predict the performance management of accounts receivable in combination to provide financial support. As an alternative, we may see these accounts receivable "securitization" ("securitize"), that is to say to sell it, but we will continue to maintain the corresponding service. If we followed this is very common in the industry operating procedures, on the balance sheet is not reflected that the debt, and will speed up the report proceeds in time, but eventually we would earn less. If the market variables to change so as to favor Securitization (an unlikely event), we could sell part of our portfolio and eliminate the related debt. Before that happens, we would rather have better profit rather than better financial package (cosmetics).

   3, MidAmerican has a very high debt, the debt is just the company's debt, though it will appear on our consolidated balance sheet, Berkshire does not guarantee, for in spite of this, the debt is no doubt very safe, because in order to pay the interest on the debt is highly stable MidAmerican diversified utilities income. If there is a bolt from the blue like what the incident, one of the public assets including MidAmerican damage, so, the utility assets income will remain far higher than pay all the interest on the debt level. Not only that, MidAmerican retains all of its earnings, MidAmerican this kind of operation is very rare in the utilities industry.
From the point of view of risk, has ten kinds of different and unrelated utilities income sufficient to pay interest, the proportion of two to 2 ∶ 1 assumptions, and single source but the ability to pay more than income, the former is much more secure. No matter how conservative corporate debt policy, a catastrophic event will allow a single public service into bankruptcy -- Hurricane Katrina devastated New Orleans local is evidenced by the electric utilities. A geographical disaster, such as earthquake occurred in the western region American, but not on the MidAmerican have a devastating blow similar, even the worrier like Charlie, didn't think an accident can greatly reduce the company's utilities income. Because of the degree of diversification of MidAmerican government regulation of business income increased, the company can make full use of large amounts of debt.

   Our attitude toward debt basically is such.We for Berkshire any substantial debt for acquisitions or operating purposes are simply not interested in.Of course, according to the conventional business wisdom, we are too conservative in finance, if we add moderate leverage in the balance sheet, it can safely increase profitability.

   Maybe so. But tens of thousands of investors will be a large part of its net capital investment to Berkshire's stock one (should be emphasized, including most of our members of the board of directors and managers),A major disaster of enterprises will become a major disaster these investors personal.Not only that, for those we have to charge the people 15 years or even more years premium, will cause irreparable harm to forever.For these and other customers, we had promised, no matter what happens, their investment will be absolutely safe, whether it is a financial panic, the stock market closed (for example 1914 delay for a long time the stock market closed), even America suffered nuclear, chemical or biological weapons attacks.

   We are very glad to cover the huge risk, in fact, we as a single catastrophic event cover far more than the amount of high-limit insurance the insurance company, we also hold in some cases (such as the October 19, 1987 stock market crash) market could rapidly fell sharply investment portfolio. No matter what happens, Berkshire will have enough capital, net income flows and liquidity be an easy job to deal with these problems.

   In addition, any other way of solving problems is dangerous. Over the years, some very smart people have learned the hard way: a long string of impressive amount by the last zero, zero can only result. I don't ever want to experience this equation influence has how old, I never wanted to be penalties upon others bear the blame.

Management succession

   As owners, you are naturally concerned about, if I begin to fade will continue to adhere to a CEO, and if so, the board will be how to deal with this problem? Do you want to know if all of a sudden I depart from the world for ever tonight, will be how to operate?

   The second question is easy to answer, the vast majority of our company has a strong market position, strong development momentum, outstanding managers, Berkshire's unique corporate culture has been deeply rooted in the subordinate each enterprise, even if I died, these operations will not be the slightest error.

   In addition, at Berkshire, we have three very young and fully qualified for CEO manager, have to be far better than I that the three managers in any one within my scope of work of a management, but the downside is, none has crossed my unique experience (crossover experience), the experience that I can easily make the right decision in the business and investment. The solution to this problem is to organize the internal appoint another person responsible for securities investment, in Berkshire, this is a very interesting work, the new CEO will have no problem to choose a talented individual to be responsible for the investment work. In fact, and this is our last 26 years in GEICO company doing exactly as like as two peas, we do the result is simply wonderful.

   Berkshire's board has fully discussed each of the three CEO candidates, and has been unanimously decided to replace the final candidates I. The board of directors to continue to update the resolution according to the new situation, if the situation changes, may change their views, new management star may rise, the original management stars will fall. The important point is, the directors now fully know and the future will know, if need be, what they should do.

   Another problem is, if the replacement of CEO need not because of my death but because I decline, especially with the recession followed me in vain that I was in for a new peak of personal management talent, whether the board will be ready to make a change. At Berkshire's businesses, Charlie and I once again encountered such a situation. Different aging speed is very high, but sooner or later on their intelligence and energy will decay, some managers are still full of vigor and vitality after entering the 80 years old...... Charlie himself is a 82 year old magic manager. But other managers just 60 years of age will obviously decline, when the recession of their ability, and their ability to self assessment is often the corresponding attenuation, and some also need to often warned in his ear.

   When it comes to me, our board will have to come forward to take over my job. From the financial point of view, the members of the board of directors have the motivation to make such a move rarely. As far as I know, none of the directors and shareholders of any other Usa Inc's board of directors in the financial interests so completely closely together, a few directors even more closely to. But on a personal level, for most people, to tell someone, especially a friend, he (she) is no longer capable, it is a particularly difficult.

   If I start to be the information of the candidate, our board will in good faith the truth. Each of the shares I have already specified in advance to charity, I hope the whole society will from these gifts and bequests to reap the maximum benefits. If our partners to evade responsibility, don't tell me I should leave (I hope they said it mildly), it would be a tragedy. But don't worry about this, we have an outstanding group of directors, they can always make for shareholders the right thing.
When talking about the matter, I feel wonderful.

The annual general meeting of shareholders

   Our 2006 shareholder meeting will be held in May 6th (Saturday). As usual, Qwest center doors will open on time in the morning 7:00 , the new Berkshire movie will begin playing in the 8:30, 9:30 we will go directly to the question and answer time, and will continue at 3:00 p.m. (short break in the middle, Qwest stands for lunch). After a short rest, Charlie and I will be officially held an annual general meeting of shareholders in 3:15 , the procedure of the meeting last year very smoothly, because this makes those who want to participate in the formal meetings of the shareholders may wish to participate in, not of interest to the shareholders are free to go shopping.

   Last year you must also participate in the shopping activities, and 194300 square feet of meeting space connected to the hall filled with products of Berkshire subsidiaries, and 21000 the people attending the meeting will let each booth to create new sales record. Kelly Broz (NE é Muchemore Flo Ziegfeld (Berkshire) Florenz Ziegefield: (1869-1932), American theatre director, known for its theatrical revue the Ziegfeld Follies, to 1931 each year from 1907 staged a (except for 1926, 1928 and 1929 ) -- translator's note) organized the ultra luxury shopping show and the annual conference. The display all like her very much, I am the same. Kelly asked me, are willing to appear in the wedding program, my answer is "jealous of the groom," this sentence should wholly intact on the news.

   This year we will focus on the display of two Clayton homes (arranged Acme brick, Shaw carpet, JohnsManville insulation, MiTek bolts, Carefree awning and NFM furniture). You'll find out, the price of 7.9 million -8.9 million dollar prefabricated house is very cheap. In fact, 2005 years three shareholders of these houses are very popular price, so that they could buy us used to demonstrate the value of $119000 of the housing model. And Clayton prefabricated house is adjacent Forest River recreational vehicle (Recreational Vehicle, RV) exhibition.

   GEICO company will set up booths at the venue, to win the trust of the nation's most top insurance consultants, they will provide auto insurance quotes for you, in most cases, GEICO will be a special shareholder discount (about 8%) for you. This special offer in the 50 states we conduct business in the United States 45 states can provide. Please shareholders will own the detailed insurance data, GEICO consultants will help you check whether you can save a sum of premium. I believe, we can at least half for you save a lot of premium. When you arrive, please sign up for the new GEICO credit card, I use now is this card.

   Saturday in the Omaha Airport, we will show a series of NetJets@ models for your review. Please go to the Qwest Center Hall NetJets booth to see details of these aircraft. Come to Omaha is car, new aircraft you when you sit back down.

   In 2005 the bookworm (Bookworm) Bookstore broke all sales records in the Qwest sales Berkshire related books, surprisingly, has sold 3500 copies collected my partner Charlie Munger wisdom good books -- "PoorCharlie's Almanack", which means, every 9 seconds will sell a. So popular is quite simple -- you cannot find more valuable than the idea of the book. Recommend a pass from mouth to mouth made Charlie the first printing of 20500 copies of the book have been sold out, we revised and expanded edition launched at shareholder meetings this year. 2005 in the Bookworm bookshop also show the other 22 books and DVD, sold a total of 4597 copies, sales revenue of $84746 . Our shareholders are booksellers have dream of customers.

   The report followed by the general meeting of shareholders of relevant information, to explain how to obtain the required general meeting of shareholders and other activities in the papers. As for the ticket, accommodation, car reservation service, we are very pleased to express and American again (800-799-6634) contract, provide specific help for you. Responsible for handling these matters, every year the Carol Pedersen provide a very thoughtful service for us, thanks to him.

   Located between Dodge and Pacific covers an area of 77 acres of Nebraska furniture store on seventy-second Street (NebraskaFurniture Mart, NFM), we will once again host "Berkshire weekend" ("Berkshire Weekend") special sale. We first introduced the special sale activity 9 years ago, "Berkshire weekend" turnover rose from $5300000 in 1997 to 2740 million in 2005 (average annual growth of 9% last year), shareholders will be the weekend again hit a record high of $6100000 daily turnover. The thought of such a high sales, I can not help but One's blood boils with indignation.
To obtain the discount, you must be on May 4th (Thursday) to May (Monday) between 8 purchasing, and present your meeting documents. During this period the preferential activities will include some of the usual never discount premium brand, but in the spirit of our shareholder weekend special broken cases, we are very grateful for their cooperation. NFM Business Hours are Monday to Saturday morning from 10:00 to 9:00 pm, Sunday is from 10:00 am to 6:00 pm. During this meeting, Saturday from 5:30 PM to 8:00 pm, we will hold a special event for shareholders only open, I'll be there, eating barbecue drinking coke, and counting sales.

   The Borsheim jewelry will period will again have two special events in the shareholders for shareholders, the first is on May 5th (Friday) at 6:00 pm to 10:00 PM a cocktail event; second is also the main exhibition (Gala), on May 7th (Sunday) from 9:00 a.m. to 4:00 p.m., Saturday Business Hours until the afternoon 6:00.

   Over the weekend, Borsheim jewelry shop will be crowded. In order to facilitate the shareholders shopping, from May 1st (Monday) to May 13th (Saturday), Borsheim jewelry shop will provide preferential price for shareholders, as long as the present meeting credential or trade shows you the shareholder identity, you can enjoy the preferential treatment.

   Borsheim jewelry store operating margins, even if it is not calculated to provide shareholders with discount, than its main rivals, lower than 20%. During the 2005 General Meeting of shareholders turnover than the annual 2004 growth of 9% in 2004, during the general meeting of shareholders of turnover than in 2003 grew to a record 73%. The shop sold 5000 pieces of Berkshire Monopoly game, but once out of stock. We have learnt the lessons, there will be plenty of stock this year.

   The ride in the Borsheim outside the tent, USA two chess champion Patrick Wolff will be blindfolded and all challengers are a group of six to the yi. In addition, two of the world's top bridge master Bob Hamman and Sharon Osberg will compete with our shareholders on Sunday afternoon, they certainly will not blindfolded, but Bob never licensing, even participate in the national bridge Championship so.

   Gorat's I love steak restaurant will be alone again for Berkshire shareholders on May 7th (Sunday) to open, from 4:00 PM has been operating at 10:00. Please remember to come on Sunday in Gorat's, you must make an appointment in advance booking, reservation please after May 1 day (before please don't this appointment), please call 402-551-3733.

   In this year, there are about 35 classes of students to Omaha to communicate with me. I took all of the students to the Gorat's lunch, the number of students a total of about 2000 people, they all love this restaurant is very. If you want to know why, come join us on Sunday.

   4:00-5:30 Saturday afternoon, we will hold a special conference from North America for outside shareholders, the annual AGM has attracted people from all over the world to participate in, Charlie and I hope to be able to personally handle these come from afar, shareholders. Last year, we are very pleased to receive the 400 leaders from dozens of countries outside North America shareholders, any American and Canada from countries other than shareholders will get a special license to participate in this event and instructions.

    Charlie and I are very lucky. We were born in the American; we have good parents bring us and let us have a good education; we enjoy the happiness of family life and has a very healthy body; God gives us a "commercial" gene, so that we have achieved success in business is much higher than the other for our society to contribute to the same more and more people.Not only that, we can have long been engaged in our favorite work, work aspects has been vigorously help both bright and pleasant colleagues. Therefore, no wonder every day we tap dance to work. Of course, not what each year in Berkshire's annual shareholder meeting and our shareholders and partners more happy things have a joyous gathering, so please on 6 May Qwest center to participate in our capitalist (Capitalists) the annual Wood Stoker music festival.