The 2005 Buffett letter to shareholders ten interpretation (1) -- why read Buffett's letter -

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The 2005 Buffett letter to shareholders ten interpretation (1) -- why read Buffett's letter -
 
Liu Jianwei (translation and interpretationNfljw@sina.com)
 
In March 4, 2006, the world Buffett fans were waiting for the Wall Street investor Warren Buffett has finally released a letter to shareholders in Berkshire's website.
In order to facilitate the China investors read Buffett's letter, I all be translated into Chinese, and I think one of the most ten parts wonderful commented interpretation.
Buffett spent the letter to Berkshire shareholders for several days, over the more think Mr. Buffett English understandable that contains profound wisdom, I rack sth. did not find the Chinese words suitable to express his meaning. So more exclamatory Buffett writing concise and profound thought so beautifully together. I have tried my best, but improper translation errors can hardly be avoided, welcomed the letter.
Study of Buffett in a period of their own advertising:
Welcome to buy Liu Jianwei wrote four books about Buffett's investment strategy book:
1, "Buffett stock investment strategy", mechanical industry publishing house, 2005, published in June, fourth reprint.
2, how to select the super star "Buffett", mechanical industry publishing house, 2006, published in January, second reprint.
3, "with the masters, Graham, Buffett Fisher, investment, Peter" Lynch overcome the long-term market value investment wisdom ", democracy and Building Press, 2006 January.
4, "Buffett's 8 investment lesson", democracy and the construction of publishing house, 2005, published in January, third reprint.
Let us together to share Buffett's investment wisdom. I wish you all a successful investment!

 
Liu Jianwei.Nfljw@sina.com)
Chinese Jianyin Investment Securities Co. Ltd.
April 6, 2006
 
 
Why read Buffett's letter
 
Buffett in 1965 made the financial control and management control of berkshire. In 1970 he served as chairman and chief executive officer, and has chaired since. From the beginning of 1970 he began the year in the company's annual report to write a letter of the chairman's letter.
Buffett in Berkshire's annual letter to shareholders in summing up the success and failure, gain and loss in the past year, covering is very wide, involving corporate management, financial accounting and so on investment. Buffett is honest, humorous, explain profound theories in simple language. The letter is full of profound and witty repartee, seemingly ordinary common sense it contains the deep philosophy. He was once a year to shareholders by letter to the shareholders of the company, education, so that they can more in-depth understanding of his Berkshire's investment strategy.
Buffett in Berkshire's annual letter to shareholders has become a Buffett investment strategy guide. Over the past 30 years, the letters in style, content, ideas are increasingly mature. As the company's shareholders and investors love. Investment community to Buffett every year in Berkshire's annual report to shareholders in the letter as a "Bible", read the sermon text like reciting Buffett maxim.
Investment circles think, read 30 years of Berkshire's annual shareholder letter in Buffett, is equivalent to learning a book about investment authoritative textbook. This textbook is the only currently available is the best about the investment of the textbook.
Any one want to learn Buffett's investment strategy, must from Buffett every year to shareholders in the annual report letters began. For tens of thousands of shareholders, not not Berkshire Omaha in Berkshire's annual shareholder meeting investors, for more than 30 years, Buffett's annual letter to shareholders is the best textbook learning stock investment. You can get lessons than any school of business investment course.

The 2005 annual letter to shareholders of Buffett (2) interpretation of performance (2006-06-12 16:21:06)
  Classification: learning from Buffett
The 2005 annual letter to shareholders of Buffett (2) interpretation of performance
 
Liu Jianwei (translation and interpretationNfljw@sina.com)
 

To the shareholders of Berkshire Hathaway Inc. ":
In 2005 net profit of Berkshire's $5600000000 per share, A shares and B shares book value grew by 6.4%*. In the past 41 years, since that took over from the current management, the per share book value has grown from $19 to $59377, the annual compound growth rate of 21.5%.
* (all data used in this report apply to Berkshire's A shares, this is the company in issue only a shares, B shares in 1996 with 1/30 A shares economic interests. )
In 2005, Berkshire did a really good job. We launched the 5 merger, the 2 acquisition has been completed, and our most business is good. Although hurricane Katrina (Hurricane Katrina) for Berkshire and the insurance industry has suffered a great loss record. We estimate that hurricane Katrina caused us $2500000000, her two equally evil sister Rita (Rita ) and Wilma (Wilma) hurricanes and let us further losses of $900000000.
Our insurance business be able to achieve such a brilliant performance in 2005 this catastrophe year, thanks to GEICO and its chief executive Tony Nicely outstanding. Statistical data clearly show that: in just two years, the operating efficiency of GEICO is increased by 32%. Very attract sb.'s attention is, volume growth of 26%, earnings growth, while at the same time, reducing the number of staff members 4%. Because we are able to reduce unit costs so significantly, so we can create more value for customers. How such results? Last year GEICO to win more market share, the envy of the profit, and further enhance the brand influence. If you have a new son or grandson in 2006, name him Tony.
* * * * * * * * * * * *
My goal in writing this report is for shareholders to estimate Berkshire's intrinsic value to provide the corresponding information. The reason I say that 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 intrinsic value of calculation is more likely the fruit. (about the intrinsic value relevant explanation, please refer to the company's annual report on pages 77-78. ) but Berkshire has the following advantages: a wide variety of relatively stable income stream, also have substantial liquidity and little debt. These factors make the Berkshire's intrinsic value than most other companies make more accurate estimation.
Though Berkshire's financial characteristics is helpful to improve the accuracy of valuation, but the job of calculating intrinsic value because there are so many streams of income becomes more and more complex. Back in 1965, we have only a small textile factory, the valuation is just a piece of cake. Now we have 68 kinds of operating and financial characteristics vary greatly in 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 our business is reasonably divided into four categories, and in the following report detailed analysis of each kind of business. In 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 enterprise operation better worse, two is in the parent company under the management of capital allocation improves or deteriorates. In short, as the parent company's subordinate enterprise to bring what benefit, is the direct holding shareholders not Berkshire rather than through Berkshire indirect shareholding be better? This is a crucial issue, but the shareholders will have to answer for yourself.
Before we discuss the subordinate enterprises, let us have a look two groups that we start how and how data status. The first set of data is the share of investment (including cash and cash equivalents). In the calculation, we will be subordinate to a financial enterprise hold investment excluding, because most of these investments are offset by borrowing.
The annual                           Price per share (US $) *
1965 ... $4
1975 ... 159
1985 ... 2407
1995 ... 21817
2005 ... $74129
1965-2005 compound growth rate.......... 28%
1995-2005 compound growth rate....... 13%
* (excluding minority interests)
In addition to securities, in our insurance companies holding a few exceptions, we own a wide variety of non insurance businesses. The following is the enterprise in the goodwill amortization after pre tax profit per share.
The annual                              The share of profits
1965 ... $4
1975 ... 4
1985 ... 52
1995 ... 175
2005 ... $2441
1965-2005 compound growth rate of.......... 17.2%
1995-2005. compound growth rate of.......... 30.2%
* pre tax and net of minority interests
In the discussion of growth rate, it is necessary for you to notice period and final annual selection. The start and end of the year two as long as there is a poor choice, so 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 the table above, as the base of 1965 annual profit is unusual good, Berkshire's 1965 earnings over the previous 10 years of the 9 annual profit level.
From the two table you can see, the compound increase Berkshire's investment and earnings per share rate relatively in the last 10 years great changes have taken place, this result reflects our business has shifted into M & a tilt. Nevertheless, Berkshire's vice chairman, is my partner, Charlie Munger, "my goal is still to make the two table numbers can both achieve growth. We hope for this lofty ideals and high aspirations, we, for example, the elderly couple once in the romantic challenge fate. When the couple to celebrate the 50 anniversary of marriage after the dinner, 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. Her husband agony for quite a while before answering: "upstairs, love line, both up and I can't have sex."

Performance interpretation: two consecutive years lost to the market, Warren braved hurricane Katrina turn the tide
Buffett's Berkshire's 2003, 2004 earnings per share net assets income rate were 21% and 10.5%, respectively, behind the S & P 500 index 7.7% and 1.5%, for two consecutive years lost to the market is indeed let Wall Street investor mood.
And the bad mood this year Buffett has met the scourge, hurricane Katrina (Hurricane Katrina) for the insurance industry has suffered a great loss in Berkshire's record $2500000000, Rita (Rita) and Wilma ( Wilma) hurricanes and let the company lost $900000000.
However, in 2005 this catastrophe year because of GEICO's excellent management, together with other insurance companies also operate well, the insurance business brilliant achievements, let Buffett can put in the catastrophe years ago two years lost to the market trend, to beat the market, finally relaxed mood again.
Look at the 2005 annual Buffett scores, then have a look Buffett from 1965 to 2005 the total score 40 years: 40 standard & Poor's 500 index total return rate 55.83 times, and Berkshire for 3051.34 times, 40 years of Buffett's investment performance is 54.65 times of index returns, and the index of pre tax earnings after tax income, and Buffett. How fabulous performance is rare in the world, There was no parallel in history., no wonder Buffett called Wall Street legend.
Good mood this year's God in this letter to shareholders to discuss many interesting problems, also let us these Buffett fans rocks, benefit. The desire to know God what investment tips to teach, and listen to me slowly come.
 
The 2005 annual letter to shareholders of Buffett (3) - merger interpretation (2006-06-12 16:25:14)
  Classification: learning from Buffett
The 2005 annual letter to shareholders of Buffett (3) - merger interpretation
 
 
Liu Jianwei (translation and interpretationNfljw@sina.com)
 
Merger
The next few years, our business in general should show some growth in operating earnings. But only the business itself does not produce a really satisfactory returns. In order to achieve the ideal target of such, we must make some large-scale mergers and acquisitions. In the past 2005, large-scale mergers and acquisitions activity encouraging our. We reached the 5 merger agreement: 2 of them completed in 2005, the other 1 completed in early 2006, the other 2 are expected to be completed soon. None of the deals involve the issuance of Berkshire shares. This is very important, but often ignored: when a company management layer is proud to announce the acquisition of shares of another company, as the acquirer shareholders have to sacrifice some of their shareholders' equity. 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 acquired the medical protection insurance company (Medical Protective Company, MedPro), which is located in a Fort Wayne has 106 operating history of medical accident insurance company. Malpractice insurance is a very difficult to underwrite insurance, had become a graveyard for many insurers. However, MedPro is due to the following reasons will be well run. First of all, MedPro will like Berkshire other subordinate other insurance companies in the attitude of lead underwriting discipline, that is heavier than all other business objectives. Secondly, as an integral part of Berkshire, MedPro has far more than its rival's financial strength, the quality assuring doctors who need chronic litigation will not because their insurer failure to terminate. Finally, the company owns a smart chief executive Tim Kenesey, he instinctively and other Berkshire managers follow the same mode of thinking.
● we second M & A is the forest river (Forest River), was completed in August 31, 2005. Before 2 months of July 21st, I received a copy of only two pages of fax, the above listed Forest River meet our ever disclosed in the annual report on the acquisition of standard (see page twenty-fifth of this annual report). Before that I never heard of this year sales of $1600000000 over the weekend to travel car manufacturer and owner and general manager of Pete Liegl, but the fax made sense, I immediately asked each other to provide more data. My second day in the morning to get the data, in the afternoon I put forward to the Pete Liegl offer. In July 28th, the two of us shake. 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 and reclaim the company. You can rest assured, I will never interfere in any operation of Pete Liegl.
Forest river has 60 plants and 5400 employees, in the recreational vehicle (Recreation Vehiele, RV)) manufacturing industry continued to maintain a considerable market share, at the same time also to the ship manufacturing and other business development. Pete Liegl is now 61 years old, absolutely in acceleration mode. Please read the attached report published in an article on RV Business, you'll see why Pete and Berkshire's marriage.
● published an article about Berkshire merger and management out of the ordinary of the article in the Wall Street Journal on November 12, 2005. The Pete declared: "the My Company sold to Buffett is easier than to renew my driver's license. "
New York's Cathy Baron Tamraz to read this article, touched his heart. 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 in the Wall Street journal article illustrates in detail the characteristics of Berkshire subsidiary company."
The two page letter read Cathy, I felt Business Wire and Berkshire is a fit. I especially like the bottom second section of her letters: "we strictly control the cost, and keep unnecessary spending. 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."
I'll give Cathy a call soon, Berkshire and Business Wire's controlling shareholder, Lorry Lokey reached a purchase agreement. Lorry Lokey founded the company in 1961, has hired Cathy to CEO. I appreciate such as Lorry Lokey business success story is very. 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 same choice will Berkshire as final destination throughout their lives, to create enterprise entrepreneur, his business success story is the successful model combined with a good idea, a business genius, a diligent work attitude and perfect.
In 2005 December 81% equity we reached an agreement to acquire Applied Underwriters. This is a small and medium-sized enterprises to provide paid service and worker's compensation insurance company, most of its customers in California prefecture.
In 1998, the family has only 12 employees of the small company a base is located in Omaha's 24 employees and operates a 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 Ajit Jain reached a large reinsurance contract. Ajit Jain left a deep impression on the Sid Ferenc and Steve Menzies, and their two to Berkshire's business management also greatly. So we decided to joint. We are glad to Sid Ferenc and Steve Menzies continue to maintain the 19% after the acquisition of shares. 12 years ago they had just started only a few pens capital do such achievements, think they have enormous achievements now with Berkshire's strong capital support, it be overwhelmed with joy.
The spring of 2005, we are holding 80.5% of the MidAmerican Energy agreed to buy a 6 western states provides electric service company PacifiCorp. Acquisition of this sort requires many regulatory approval, at present we have approved, is expected to the transaction will be completed soon. Berkshire will then buy $3400000000 of common shares of MidAmerican MidAmerican, the fund with a $1700000000 loan to complete the purchase. In the utility of government supervision of the investment you cannot expect to get high profits, but the industry can provide a reasonable income for the huge capital profit opportunities, so the large-scale fund of Berkshire this investment are very favorable. As early as in a few years ago, I said that we hoped to make some very large purchases in the public utilities. Please note, I mean, we will find that more investment opportunities.
In addition to buying these new operations, we continue to make acquisitions ("bolt-on"). Some of these M & a scale not be underestimated: our carpet enterprise Shaw two acquisition in 2005 to invest $500000000 in business chain vertical integration, which will further enhance its gross margin. XTRA and Clayton Homes were also enhances the value of M & A.
Different with other acquisitions, Berkshire has no "exit strategy". We buy to keep. But we do have an entry strategy, we seek to meet 6 criteria we and the target enterprises at reasonable prices to provide a reasonable return on USA and international. 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.
Interpretation:
Part of the stock of Buffett's investment is not like buying a good company, but acquired control of the company. In M & A, Buffett is not the stock trading, but the enterprise.
In terms of mergers and acquisitions, Buffett has three features very out of the ordinary:
One is the acquisition of enterprise standard 20 years of constant.
Buffett 1982 in the Berkshire annual report has publicly stated that he wanted to buy the basic standard of enterprise:
(1) the larger firm size (at least $5 after tax profits);
(2) showed a steady profitability (us to forecast future earnings is not interested, we turn around loss "reversal" companies are not interested);
(3), small amounts of debt or debt situation not good return on equity level;
(4) the good management (we cannot provide management);
(5) simple business (we will not be able to understand if there is too much technology,);
(6) clear the sale price (we don't want to waste our time or the seller, the price negotiation, in case of uncertain even preliminary discuss).
20 years ago Buffett acquisition of enterprise standard has not any change, he will not buy to buy, do not meet the standards of the company he would never accept a second best, this point in order to ensure Buffett acquisition company has sustained profitability, the excellent enterprises purchase together, guarantee the Berkshire the overall long-term profitability. Only the direction, can guarantee that we always moving in the right direction.
Two is the completion of the acquisition in a very short time.
Buffett promised: "we are interested in buying, we can promise complete confidentiality and very quickly answer -- usually in 5 minutes."
Always linger in my mind the question is, why Buffett was up to tens of millions or even billions of dollars spent on the merger and acquisition time, even more than most of us choose to buy hundreds of pieces of money, clothes and even a few dollars toothpaste have much less?
So far I haven't come up with a perfect answer.
But I want to at least two key factors:
First Buffett trained business acumen, as well trained Olympic champion, can be shot in a very short period of time the bull's eye, can make difficult gymnastics operation in a matter of seconds, can run 100 meters in less than 10 seconds.
The second is ready Buffett moment. The Buffett administration of Berkshire's corporate debt is very low, there are plenty of cash, at any time to complete the transaction.
Well trained and have sufficient preparation, of course, can quickly seize the opportunity when it comes.
Opportunity favors only those who have the ability to have prepared.
Are you ready?
The 2005 annual letter to shareholders of Buffett (4) - insurance business interpretation (2006-06-12 16:29:52)
  Classification: learning from Buffett

The 2005 annual letter to shareholders of Buffett (4) - insurance business interpretation
 
 
Liu Jianwei (translation and interpretationNfljw@sina.com)
 
Insurance
Let me begin to discuss the four most of our business. We first from the core of our insurance started. Major in insurance amount and time cost of float significance.
Considering the new reader, I need to explain the float (Float). Float is the pen that doesn't belong to us all but can be temporarily used by us funds. Two main reasons we float the increase is: (1) in the insurance business, we first premium, but just insurance services usually after a certain period of 1 years; (2) the loss does not mean we are going to claim, the reason is that the damage from the discovery, mediation to the final solution 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. In twentieth Century 80's USA, nearly 200000 of workers filed a claim in this regard, the Texas most fierce. Translator's note): in 1967 our insurance for $20000000, through internal growth and acquisitions over the years, has grown to 49000000000 in today's dollars.
Float is a good thing, but the precondition is that the cost is not too high. The cost depends on the underwriting results, that is to say the results of our costs and ultimately to bear loss compared with the premiums we charge after. When an insurance company underwriting profit, as Berkshire over the past 38 years Laiduoban years in the 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 of the other insurance industry, life has been far more difficult: Generally speaking, the property casualty usually inevitably underwriting losses, when the loss is large, 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 had the huge disaster, the hurricane of Berkshire's $3400000000. Nevertheless we float still need not pay any costs, this is mainly due to our other insurance business especially created the outstanding management GEICO super performance.
* * * * * * * * * * * *
GEICO auto insurance business of large-scale growth of 12.1%, which in America private car insurance industry market share from 5.6% up to about 6.1%. Auto insurance is a huge market, the market share of each growth is equivalent to 1% of sales growth of 1600000000 dollars.
Although our brand strength is not quantitative, but I believe it also grew significantly. Berkshire acquired control of GEICO in 1996, its annual advertising expenditures of $31000000. In 2005 the advertising expenses increased to $502000000, and we are unable to hold oneself back to continue to increase advertising inputs.
Our advertising is effective, because we tell a very good story: compared with auto insurance service to all customers in any other national insurance company, people save more money in GEICO company for automobile insurance can. (some professional Motors Insurance Corporation really excels in its field to the applicant to provide a particularly good service; also, because our national competitors use classification system, different so it can provide better price. In 2004 we obtain) the highest conversion rate so far, namely the network and telephone orders into sales ratio. This is a strong evidence we price compared with the competition now than before more attractive. Please visit GEICO.com or call 800-847-7536 and you will see that I say not empty. Remember that you are the Berkshire shareholders, as shareholders tend to let you enjoy preferential treatment.
I and everybody said, 2004 August GEICO in New Jersey prefecture. Where motorists like GEICO very much. We reserve the rate of new households in the state of (a period of the customer is still retention rate, measure the next period when the percentage of - Translator's note) is higher than that of other states. Estimated to be around 2007 GEICO is likely to become the third largest auto insurer in New Jersey. In addition, our low costs allow remained stable in the low price sales and profits.
55 years ago when I first discovered GEICO this company is simple but efficient operation immediately impressed me. In fact, when I was 21 years old I also wrote articles about the company (the copy in the annual report of twenty-fourth pages), then the company worth only $7000000. As you can see, I called GEICO "I most like stock". Now I still call it.
* * * * * * * * * * * *
Our reinsurance business operated by the General Re and National Indemnity. The former is managed by Joe Brandon and Tad Montross, which is made up of Ajit Jain management. Consider 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, oceanic or other accidental factors have greatly changed the frequency and intensity of hurricanes occur, this is still an unanswered question. Recent experience is quite disturbing. For example, we know that in the 100 years to 2004, about 59 times the 3 level (Category 3) or some more hurricanes hit the southeastern and Gulf of Mexico (Gulf Coast) states, of which only 3 to 5 (Category 5) hurricane. We know that in 2004 there were three category 3 hurricane struck the area, in 2005 4 times, including 1 times of industrial history is 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 climate, water temperature or other variables we do not 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 happen in the future?
Joe, Ajit and I don't know these very important questions. What we do know is, 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, his personal gain / loss ratio decreed that he should choose a God must exist. (seventeenth Century French mathematical scientists, thinkers Pascale (Blaise Pascal, 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, it must make a choice, you 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)
According to the above principles, we have come to the conclusion, we will only be in the price is much higher than last year's level, and if the near future some important factors causing more severe storms, the overall level of risk we will not let our heart, will cover the super disaster insurance. After 2004 in weaker degree we are aware of this change, when prices did not improve the situation will reduce the underwriting. Now we will be more 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 smaller insurers, including the recently joined MedPro in 2005, has made outstanding achievement. But what you see in the table below does not reflect their performance. This is because we are in the acquisition of MedPro immediately after 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 insurance, which 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. Management in the insurance industry for many years we have paid a painful price to understand: in the insurance business was not half mixed, if the ten surprise nine sorrow a happy you are a lucky dog. But the insurance salesman problem of imminent loss are often too optimistic. They act like a switchblade fight (a switchblade fight) a guy's, when the opponent at his throat, stabbed a knife after 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 previous policy, MedPro made an underwriting profit in can only issue an insurance policy. Our other major insurance companies in general 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 Bankers Surety Don Towle, National Indemnity Don Wurster.
These are our under the main insurance companies underwriting and float the overall situation (unit: million dollar):
                  Underwriting profit (loss)     At the end of the float
Insurance            20052004     20052004
General Re... $(334) $ 3   $22920 $23120
B-H Reinsurance... (1069) 417    1623315278
GEICO... 1221 970.      66925960
Other major companies... 235* 161      34421736
A total of..... $53 $1551   $49287 $46094
* including MedPro since June 30, 2005
 
Insurance business interpretation: whether God exists and super disaster exists
The purpose of insurance is to make provision against a rainy day.
The insurance company to make reasonable premium standards, we must estimate the probability of accidents, exactly is how much, is that if the probability of 1/10000, 1/100000, or one in a million?
The insurance company to ensure a certain profit, would have to add a safety factor in the estimated probability, make provision against a rainy day probability estimation inaccurate accident loss.
Buffett is so smart brain, so rich in insurance business experience, so careful character, have not make provision against a rainy day but suffered heavy losses.
In 2001 911 event let Buffett's insurance business suffered heavy losses, but also let him from now on in case further caution against.
"In 2000 I told shareholders unless what super huge disaster, otherwise our cost of float may be from the 2000 level of 6% decline further. At that time, I thought is a natural disaster, but that happens unexpectedly is man-made 911 terrorist attacks like this, this man-made disaster caused by the insurance industry's worst ever loss, also let our cost of float up amazing 12.8%, this is since 1984 the highest operating cost of float is the performance of the worst year. , and most of the responsibility, to blame ourselves....... Perhaps some people will ask, why am I not before the 911 event, put forward this warning? ? My answer is, I did think of such an event might occur, but sadly I did not mind to. I violated the Noah's Ark principle: prediction be of no avail, to build an ark to make provision against a rainy day."
Buffett from the insurance business set a rule: but we don't know yet that Berkshire's exposure to we can not properly deal with the risk of loss. How regardless of insurance market competition situation, the overall level of risk are strict control.
It is this rule to the 2005 hurricane Katrina's such a huge disaster, Berkshire's insurance business still gets very high profit.
In the investment we should also make provision against a rainy day, always leave enough margin of safety.
For example, CITIC Securities, the scenery infinite, many investors optimistic about the good prospects for development. But if the stock market continued to fall, if the stock financing business to not open, investors how to prevent?
Such as Vanke Company business steady development, the recent stock prices continued to rise, but if the real estate market fell sharply, in case of pre-sale, investors how to prevent?
Why Wang Shi can climb the seven peaks on foot two poles, the key is that he can ready, to prevent any possible accident.
Even if the accident happens, it can take time for is a real success of the mountain.
If these if it happens, the company is still able to maintain a good profitability, the company is a good company and good management is worthy of our trust, at the same time, if the price is reasonable, it is worth the investment good stock.
Never too optimistic about you like company, always ready for the unexpected, because in reality only no accident is always there will be accidents, but we do not know what will happen when.
In seventeenth Century the French mathematical scientists, thinkers Pascale (Blaise Pascal, 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, it must make a choice, you 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.
Pascale told us: no matter whether God exists, you have to assume the existence of God, because it will make you happier.
Buffett told us: no matter whether you are accidental, that accidents happen and ready, because that will make you more safety.

The 2005 annual letter to shareholders of Buffett (5) - the government regulation of Public Utilities Service (2006-06-12 16:30:46)
  Classification: learning from Buffett
The 2005 annual letter to shareholders of Buffett (5) - the government regulation of public utilities business
 
Liu Jianwei (translation and interpretationNfljw@sina.com)
 
Government regulation of public utilities business
We have MidAmerican Energy Holdings80.5% (fully diluted shares), this is a company with many different kinds of public utilities enterprises holding company. The three subordinate enterprises biggest include: (1) Yorkshire Electricity and Northern Electric, have 3700000 electric customers, as Britain's third largest electricity supplier; (2 MidAmerican Energy), the main customers are the 706000 Iowa service; (3) Kern River and Northern Natural pipelines, provides USA consumption of natural gas. The acquisition of PacifiCorp is completed we will increase 1600000 of electricity users in the 6 western states, most of which operations in Oregon and utah. This transaction will enable MidAmerican to $33000000000 increase in income, assets have increased $14100000000.
In August 8, 2005, the public utility Holding Company Act (The Public Utility Holding Company Act, PUHCA) was abolished, the milepost incident makes Berkshire to in January 9, 2006 will be held MidAmerican preferred shares to be converted into voting common stock. This 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 the financial accounting and tax to consolidate the company's report. But our economic interests really is above 80.5%, because it has issued option 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 the only us all think wise circumstances we will take major action. Work together with Dave, Greg and Walter 5 years further strengthened my original belief: Berkshire no better than their partner.
You will notice in 2005, we provide two copies of a statement of assets and liabilities, according to GAAP regulations in our actual data in December 31, 2005 (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 America second real estate Broker's Firm, it is a pearl in the palm of a company. The parent company's name is USA home Service Corporation (HomeServices of America), but our 19200 agents through 18 being named after the local brand of subordinate enterprises management. Add three small acquisitions in 2005, we participated in $64000000000 of real estate transactions, grew 6.5% than 2004.
At present, due to the continuous frenzy of residential real estate market is gradually cooling, which will bring us more opportunities for mergers and acquisitions. CEO Ron Peltier company and I hope American home Service Corporation (HomeServices of America) over the next ten years further development.
The following are the main data for MidAmerican business:
                                           Income (US $million)
                                           20052004
U.K. utilities .....$ 308 $326
Iowa utility .... 288 268
Pipelines ....309288
HomeServices....148 130
Other net income....107 172
From stopped zinc smelting project income (or loss)... 8 (579)
Earnings before interest and taxes.... ....1168 605
Berkshire's outside pay debts... (200) (212)
Pay Boxill Gogh grade debt interest... (157) (170)
Income tax........ ... (248) (53)
The net profit........ ....$ 563 $170
Berkshire distributable profits........ $523 $237
To cope with the other corporate debt....10296 10528
To cope with the Berkshire debt... 1289 1478
* including 2005 and 2004 Berkshire earns interest 102000000 and $110000000 (after tax).
The 2005 annual letter to shareholders of Buffett (6) - Finance and financial products (2006-06-12 16:35:21)
  Classification: learning from Buffett
The 2005 annual letter to shareholders of Buffett (6) - Finance and financial products
 
 
Liu Jianwei (translation and interpretationNfljw@sina.com)
 
Finance and financial products
Our financial business star is composed of management skills perfection in one's studies. Kevin Mr Clayton runs Clayton Homes. But his outstanding performance records are not only due to the industry boom and rising: since 2003's acquisition of Clayton Homes prefabricated housing business (manufactured-housing, partially or completely in the factory prefabricated housing units. Translator's note) - has been very depressed. 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, the banks believe that such loans unprofitable and difficult to provide services. Clayton Homes expertise and Berkshire's financial resources have made this business for us is a very have good prospects of gain business, but in this business we are stand head and shoulders above others. We only buy loans provided $5400000000 prefabricated housing loans, and now we provide prefabricated housing loans up to $17000000000, while the. Not only that, Clayton Homes now holds the loan portfolio of $9600000000, almost all of these positions since Berkshire entered.
Clayton Homes money from Berkshire to set up the portfolio, Berkshire by corresponding to the public borrowing. Due to the use of Berkshire's credit, Berkshire to Clayton Homes plus 1% on its borrowing cost. In 2005 Clayton Homes for the arrangement of borrowing cost is $83000000. These data include other income in the report in Clayton Homes, a gain of $416000000 has been deducted from the payment.
In manufacturing business, Clayton Homes very active. 20 factories in the original basis, the first time in 2004 increased 12 factory, these factories are all from the several years ago or the industry leader Oakwood bankruptcy purchase. 2005 purchase of Karsten has 4 factories, which greatly strengthened the company's position on the West coast.
* * * * * * * * * * * *
Long ago, Mark Twain 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 Twain 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.
We had 23218 contracts outstanding. At the beginning of 2005 dropped 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 above $104000000.
Remember, Gen Re established in 1990 derivatives trading department is to meet the insurance needs of customers. But our 2005 open contract has a 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. Long term contracts, 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 "an excellent opportunity to imagine". So the 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 the two traders execute a pen has a variable and the settlement date several some abstruse (settlement date) very remote transactions, they represent enterprise must be valued their contracts in the calculation of earnings. 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, some of 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: one is the personal reasons made me feel quite uncomfortable. The harsh truth is because I did not take immediate action to end the Gen Re's trading have cost you a lot of money. In the acquisition of Gen Re I and Charlie "Munger all know this is a difficult problem, and tell the management of this company we want to get out of this business as soon as possible. Supervise the implementation of this plan is my responsibility, but do not emphasize as soon as possible to get out, but I wasted several years to sell the business. This was a doomed endeavor, because for those of us who will last decades of debt maze, there is no way out of the. We assume the responsibility for these contracts is especially troubling, because once the outbreak of the consequences be unbearable to contemplate. Moreover, if there is a serious problem, we know that will trigger a chain reaction in other financial markets.
I would not hurt at all to escape efforts ended in failure, at the same time, we are more transactions. I made the mistake of irresolute and hesitant. (Mr. 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, we have discussed 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 derivatives contracts continue to climb, and 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, could have been entirely respectable to get away, but due to delays again a loss and damage. Gen Re in the derivatives market was a relatively small game player. It has had the good fortune to lift its expected liquidity positions in a favorable market (liquid positions), which is not used in 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 we all think we 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) has several times in our position, want to open positions in a chaotic market, and facing great pressure and known, how will things. For such cases should be given now rather than later full attention. Consider the best time and improve safety and reliability of withdrawal of New Orleans should be before Hurricane Katrina.
When we eventually will be Gen Re of the securities exchange department put up the shutters, singing which I left feeling like a country song as: "my wife and my best friend ran, I miss more is my friend, not my wife."
* * * * * * * * * * * *
The following is our business different types of financial activities and financial products:
                                     Pre tax income  Debt 
                                     20052004  20052004
Transaction - - regular income......... $200 $ 264 $1061 $5751
Gen Re securities business (loss)... (104) (44    2617* 5437*
Life and annuity business.................11 (57)    24612467
Value Capital (loss)... (33) 30     N/A N/A
Leasing business..... 92... 173      370391
Prefabricated house financial services (Clayton)................ 416 192.   92993636
Other...... ... 159107    N/A N/A
Capital gains proceeds beyond the.......... 822584
Transaction - - capital gains (losses)....... (234) 1750
Together,..... ... $588 $2334
* includes all debt
The 2005 annual letter to shareholders of Buffett (7) - manufacturing, service and retail business (2006-06-12 16:37:51)
  Classification: learning from Buffett
The 2005 annual letter to shareholders of Buffett (7) - manufacturing, service and retail business
 
 
Liu Jianwei (translation and interpretationNfljw@sina.com)
 
This part of our business variety, let us have a look the overall balance sheet and income statement data:
A sheet of 12/31/05 (unit: million dollar)
Assets                              Liabilities and equity
Cash and cash equivalents... $1004Notes payable...... $1469
Notes receivable................. 3287....Other current liabilities.. ....... 5371
Inventory... 4143 All current liabilities. 6840...
Other current assets..... 342
All current assets..... 8776
Goodwill and other intangible assets..... 9260    Deferred tax... Sth...... 338
Fixed assets..... 7148 long term debt and other liabilities... .. 2188
Other assets... 1021 of the rights and interests .....16839
Total assets$26205                    Total liabilities and equity      $26205
The income statement (unit: million dollar)
2005 20042003
Income .....$46896 $44142 $32106
Business spending. A... a... a... a... a.... ... 441904160429885
(including depreciation).. uh.. uh.... ....$699$676$605
(net interest expense..................................................................83  57 64
Pre tax profit... ..... 2623 24812157
Income tax... ...977  941813
Net profit ... $ 1646$1540 $1344
The diverse business portfolio, sales of products from Dilly Bars ice cream to Boeing part 737 (fractional interests) have everything that one expects to find, the 2005 average net tangible assets yield reached admirable 22.2%. Worthy of note is achieved such a high rate of return but only use financial leverage is very small in this part of the business. Obviously, we have a very distinguished enterprise. 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 (carrying value, equal to the total assets, intangible assets and liabilities. --- translator's note) yields fell to 10.1%.
The following is the pre tax earnings for the larger categories or units:
                               Pre tax income (unit: million dollar)
                                    20052004
Building products... On... At... At....... $751 $ 643
Shaw carpet products. And... On... At... At... At....485 466
Clothing footwear... On... At... At... At... 348 325...
Jewelry, home decor and candy retail.....257 215
Aviation Services... 120191.... ..
McLane.....217 228
Other business... ....445 413
 Total                             $2623 $2481
(McLane is a subsidiary of Wal-Mart, is responsible for the distribution of food and general merchandise to convenience stores, drug stores, supermarkets, wholesale stores, fast food shops and cinemas, is the largest wholesale distributor of American. The 2002 annual accounting annual turnover of $22000000000 in 2003 February, WAL-MART announced its sell berkshire. --- translator's note)
● we building products companies and Shaw remains constrained by rising costs for raw materials and energy attack. Most of these enterprises is the oil (or more accurately, petrochemical products to consumers and natural gas). The prices of these commodities have been rising rapidly.
We also improve the product sales price, but the price to often a long interval between achieve growth. Nevertheless we building products companies and Shaw carpet company performance praise, which should be attributed to the management of their powerful commercial franchises and able.
● in the clothing business enterprise Fruit of the Loom our biggest profit and market share growth both again. Of course we are men and women underwear on the market lead everyone knows, according to Wal-Mart, Target and other large stores of our sales share is about 48.7% . We bought the company and in 2002 compared to 44.2% increase. 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.
● 2005 I told you Ben Bridge (Zhu Baoye) and R. C. Willey (family decoration industry) same store 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 to sales 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. Ben Bridge 2005 same store sales increase of 6.6%, the R. C. Willey rose 9.9%.
When we open a new store in the new market R. C. Willey continues to close on Saturday business across the business 7 days a week competitors. A few years ago I was very skeptical of Boise shop in 2005 has achieved 21% rate of return, refresh the record of 10% in 2004. 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 shop as I expected to succeed, so the next few years we will be opened in California R. C. Willey store.
● in aviation service business, the airline business and rebound in the FlightSafety's earnings improved. In order to support growth, we are simulating the large investment in new aircraft. Our recent expansion in 2005 September in the British Farnborough newly opened a major 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 very capable CEO Bruce Whitman sure that no competitor 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. (Buffett's NetJets is the world's largest business jet company, to provide the most safe and private in the global air travel solutions. Part of the property is part of the property company NetJets has a part of the plan to allow individuals or companies spend the entire aircraft purchase cost to buy official machine, just ahead of a few hours notice NetJets, can be available throughout the year are safe, reliable and high quality services in 2004, NetJets company has more than 260000 flights to more than 140 different countries. -- translator's note)
It should be noted that our European business achieved good growth at the same time cost is also reduced, customer contract rose 37%. We are the only company part ownership of business aircraft in europe. Our current situation in Europe Business blossom everywhere is NetJets become the key factor in the global industry leader.
But we American business although customer growth is in serious losses. The operational efficiency decline, a sharp rise in the cost of. We believe that our three largest competitors suffered similar problems. But they have their own belonging to the aircraft manufacturers, so they may not be as we who 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.
I know Rich Santulli the most active managers will solve the problem of company revenue cost. But he never to the detriment of the company the way to solve the problem of quality of service. Both he and I guarantee that our services, security, security level is certainly difficult opponent than any other.
● we retail business including See 's Candies the US as early as 1972 acquisition of the company, and this is our oldest non insurance businesses. At that time, we immediately decided by the 46 year old Chuck Huggins is responsible for. Although we were still new at the game of selecting managers, Charlie and I in this appointment has hit a home run. In his 34 year tenure, Chuck Huggins love for the customer and brand has penetrated to the entire organization, an increase of 10 times the company's earnings. But it is in a slow growth or even can be said to be made almost no growth industry in the. (the number of sales in this industry data is difficult to understand. )
We put 2005 See 'at the end of the management of s baton to Brad Kinstler, before 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 obviously he is the best choice for See 's'. I hope this meeting Chuck and his wife Donna to attend. If you can attend, all shareholders with Charlie and I are together for the American managers performance in the first place candy manufacturers a very well deserved applause.
* * * * * * * * * * * *
Every day, in countless ways, each of our businesses competitive position either stronger or weaker. If we are delighting 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, then our competitiveness will atrophy. On a daily basis. We conduct small imperceptible influence after a considerable period of time, but the accumulated the massive but difficult to estimate.
Because of these almost no conspicuous behavior leads 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, priority should be given to widening the moat. If a company management layer to make bad decisions in order to achieve short-term earnings targets, and therefore cost, customer satisfaction, brand appeal to disregard, then later well will overcome the resulting damage. Of be in a nice hobble situation facing today in automotive and aerospace industry executives trying to dispose of its predecessor's question, is the best proof. Charlie and I like this "quoted Franklin saying:" 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.
Our managers focus on widening the moat, and full of wit in this respect. 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 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 arrive 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."
 "What you want to be responsible for? Responsible for the sales?"
 "Forget it, I'm afraid I even sell water to a crawl in the Sahara Desert struggling people can not do."
 "Well, then in charge of interpersonal relationship?"
 "I really don't care for people."
 "Never mind, we still have a lot of other things to do in business. So are you willing to do what?"
 "In fact nothing appeals to me. Why don't you buy me out?"
Interpretation: into the moat widening widen again
In 2000 April in the Berkshire shareholders meeting, Buffett in response to a competition authority about the Harvard Business School professor Michael, "Potter's problem that, analyze and judge the sustainable competitive advantage of enterprises is the key link of investment:
"I had a good knowledge of Potter, I understand the idea is similar to. He writes in his book, the long-term sustainable competitive advantage is the core of any business, and to this we think exactly the same. This is the key to investment." .
"For investment, the key is not to determine a certain industry influence on society is much, or the industry will increase how much, but to determine any choice of an enterprise's competitive advantage, and more important is persistent to determine this advantage.".
Buffett will be a competitive advantage compared to the protection of enterprise economic barriers of the castle moat, a powerful competitive advantage as wide moat to protect their excess profitability:
"We like to hold such a castle: there is a wide moat, swimming in the river with many sharks and crocodiles, enough to resist foreign intruders -- there are tens of thousands of competitors to take our market. We think the moat is impossible to cross, and every year we let our managers to further widen their moat, even if do not increase the profit. We think we have the enterprise have a wide moat".
Buffett in Berkshire's annual report 1993, Coca-Cola and Gillette Company companies as a model has sustained competitive advantage of super enterprise Castle: "Coca-Cola and Gillette in recent years has continued to increase the share of their global market, strong brand appeal, great product the outstanding characteristics and sales channels, so they have very strong competitiveness, like around their economic Castle formed a moat. In contrast, the company every day in the absence of any such security situation fight a bloody battle".
Only the very wide moat to ensure long-term safe castle, only long-term sustainable competitive advantage to ensure the long-term development prospects of the company good, good companies can achieve everlasting, this is Buffett looking for lover: heavy "we is trying to find those normally the next 10 years, or 15 years, or 20 years after the business situation can be predicted."

The 2005 annual letter to shareholders of Buffett (8) - stock investment (2006-06-12 16:38:19)
  Classification: learning from Buffett
The 2005 annual letter to shareholders of Buffett (8) - stock investment
 
 
Liu Jianwei (translation and interpretationNfljw@sina.com)
 
The following is our common stock investments. By the end of 2005 the market value of more than $700000000 in stock investment details are as follows:
Ownership         Company                   The proportion of equityCost (millions) * value (million)
151610700American Express Company... ..12.2 $1287 7802
30322137 Ameriprise Financial, Inc... 12.1   183  1243
43854200 Anheuser-Busch Cos., Inc... 5.6  2133  1884
200000000The Coca-Cola Company..... .8.4  1299  8062
6708760  M&T Bank Corporation ... 6   103    732
48000000 Moody 's Corporation ... 16.2   499   2948
2338961000 PetroChina "H" shares (or equivalents)..1.3  488   1915
100000000The Procter & Gamble Company ... 3  940   5788
19944300 Wal-Mart Stores, Inc. ... 0.5 of them  944    933
1727765  The Washington Post Company ... 18  11    1322
95092200 Wells Fargo & Company... 5.72754   5975
1724200  White Mountains Insurance.....16.0  369    963
Other................ .....4937  7154
All ordinary shares....................... ... $15947 $46721
* this is our actual purchase price, also our tax base. According to the GAAP cost occasionally increase or decrease book value and different.
In 2005 our portfolio of two changes due to corporate events: Gillette into Procter & Gamble (Procter & Gamble), USA Express (American Express Ameriprise) will be listed on the stock market. In addition we significant holdings of Dick Kovacevich management very well Wells Fargo (Wells Fargo) stock, and established positions in Anheuser-Busch and Wal-Mart shares.
Don't expect our portfolio will appear what miracle. Although we are holding some powerful highly profitable businesses, but their share prices 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. )
 
Stock investment interpretation: do not sing five years set the Thames a great coup. Warren began Jiancang
Interpretation:
Just look at the 2005 Buffett stock investment this short passage, you probably don't realize, from the USA tech network bubble burst in 2000, has been 5 years do not sing God began to move.
1999 America network technology stock froth, high-tech company shares rose, Buffett held by Coca-Cola and other traditional industries company stock is not what happened, and even some of them fell a lot. Buffett managed 1999 Berkshire yield only 0.5%, but the year USA stock market rose 21%, Buffett is seriously lagging behind the market 20.5%, the worst performance in history.
Many investors began to suspect that Buffett's investment strategy has been out of date, but Buffett didn & unmoved, the bullish high-tech stocks disdain to Gu, continue to hold the stock of an excellent company.
But the stock market crash in 2000 America 9.1%, Buffett has a profit of 6.5%, more than 15.6% index. People had to vote on Warren admiringly.
2002 America Standard & Poor's 500 index fell 22%, Buffett had a profit of 10%, 32% beyond the index, people began to shout his name Buffett continue to prostrate oneself in worship.
2000 stock market crash USA continuously for 3 years, but Buffett is still on the market away, explained to him in the 2002 annual report to shareholders in the letter:
"Investment in shares, we still do not have what action. Charlie told me to Berkshire's current major holdings are more satisfied, because these companies in growth, but with time and the market valuation is further reduced to its. But now we have no stock holdings of these. Although these companies, the prospect is good, but we do not believe that the stock is undervalued."
"We think, the same conclusion applies to most of the stock. Although the stock market fell for 3 consecutive years, which greatly increased the stock attractive, but we still find only a few stocks to make us mildly interested. The unpleasant truth is that in the stock market bubble on the stock crazy over. Unfortunately, more wine drinking, drunken nights longer."
"Charlie told me on the stock off attitude now, not innate. We love our own stocks, of course, is that if you can buy at attractive prices. In my investment career of 61 years, of which about 50 years have this opportunity. Future also will have many good years similar."
From 1999 until 2004 five years, Buffett stock cost of investment has been maintained at around 90-100 billion dollars, the total market value of stock portfolio has been around 37000000000.
But in 2005 5 years in the stock market potential predators began to move, Buffett stock investment costs soared from $9000000000 at the end of 2004 to nearly $16000000000, the total market value of the stock portfolio by the end of 2004 from the $37700000000 soared to nearly $46700000000.
Why? God looks very attractive investment opportunities appear?
Three years is not sound, set the Thames a great coup.
Five years do not sing, Yiming how?

The 2005 annual letter to shareholders of Buffett (9) - executive equity incentive (2006-06-12 16:45:04)
  Classification: learning from Buffett
The 2005 annual letter to shareholders of Buffett (9) - executive equity incentive
 
 
Liu Jianwei (translation and interpretationNfljw@sina.com)
 
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 should ignore this huge amount of accounting earnings in 2005 when evaluating Berkshire's earnings. We're never going to sell Gillette stock prior to the merger, we do not intend to sell the stock at P & G after the merger, the merger took place not lead us to pay any taxes and fees.
In any case exaggerate the importance of a CEO company is not excessive. In 2001 before the Jim Kilts entered the Gillette, the company was struggling, especially the capital allocation blunders and pain. Gillette purchase Duracell (Duracell) to make the shareholders paid billions of dollars in costs, and this cost in the traditional financial accounting does not have 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 that this very simple measure in the discussion of management and investment banker is almost always ignored by M & A. )
After Jim Kilts entered the Gillette, immediately began to gradually strict financial discipline, tightened operations, to promote the marketing, a series of measures his greatly enhance the intrinsic value of the company. Gillette incorporated into the P & G two companies to further enhance the development potential. Because of its management achievement Jim Kilts was very lucrative compensation - but every penny he earns granted. (this is not an academic discussion: compensation Berkshire actually pay the corresponding proportion as the Gillette Company shareholders holding 9.7%. In fact, the ability) to a giant enterprise indeed extraordinary CEO pay high returns are not excessive. Unfortunately, this CEO is really rare.
Too many cases America executive compensation and corporate performance does not match the degree to the ridiculous. The future is not what too big change, because the CEO compensation as cheating way playing had been arranged beforehand, not exactly conducive to investors. The result is a mediocre or poor performance of CEO, in the interpersonal relationship supervisor that he carefully identify and very helpful consulting company consultant Ratchet and Bingo's help, eventually gain a lot of money from a malicious design executive compensation arrangements.
For example, ten year fixed price stock options (who do not want? ). 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 he gets personal interests will obviously: he will not pay any dividends, but retains the company all earnings to repurchase.
Let us suppose that in Fred's leadership stagnant as its not what growth. Net asset value based on the company to issue options after ten years every year in the $10000000000 to $1000000000. The equivalent of 100000000 shares of $10 per share. Fred eschews dividends to shareholders and in, with all proceeds to buy back shares. If the stock price has been 10 times earnings level, then the value of the option price of 158%. This is because repurchases would reduce the number of shares to 38700000, earnings per share will increase to $25.80. But the shareholder returns all the reservations should not be distributed, Fred gets huge wealth of $158000000, though the company did not have any growth. 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 individuals still have large sums 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 begin to doubt the 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 proceeds distribution of dividends, will naturally cause not so 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 are reduced 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 option plan) of the proxy materials (proxy materials) conflict. Although CEO is 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 CEO brings the capital is free.
It was not destined for the inevitable so: for a company's board of directors, implement an automatic adjustment calculating option value approach when it is a be an easy job to retained earnings. But to my surprise, surprise this option is almost never issued. In fact, the strike price (Strike Price) with adjustment for retained earnings management incentive stock option incentive plan for "experts" seems very strange, yet these experts have all appeared in favor of option plan management as well as the encyclopedia. (a man eating salt) ("Whose bread I eat, his song I sing."
Getting fired for one day will become a CEO income especially rich day. In fact, cleaning out his desk leave that day he "earn" money than a clean toilet American sanitation workers a year to earn money much more. Forget the old saying "a success success" (nothing succeeding like success) in the management of the company now, a law is "become fashionable for a time a failure success" (nothing succeeds like failure).
For management unremarkable mediocre performance pay huge additional subsidies severance, generous and exceed the standard salary has It is quite common for, because the Remuneration Committee of the company (compensation Committee, is in the board of directors of the enterprise internal generally set up, including CEO, to evaluate the other executive directors, executive performance, is responsible for the formulation and verification of a a specialized agency of the board of directors compensation package scheme members and senior executives. --- translator's note) has become the slave data comparison. It is very simple: the board of directors selected about three directors, of course not randomly selected, in the board meeting held a few hours ago, meal bombarded their statistics data and pay will gradually increase. So, the board will put a lot of strange and eccentric "candy" will spread 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, yesterday's most egregious excess but is today's bottom line.
The board of directors of the company should take my childhood idol team Detroit famous slugger (hit many home runs a batter) Hank Greenberg 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 nationalist pierce to the heart of the matter to ask: "how much is he hit last year?" Steve said: ".246." Hank Greenberg answers: "say without mincing words to a shirt."
 (let me pause for a brief confession: in the criticism of the Remuneration Committee of the company act and I'm as a true insider was broke. 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. Toot toot............ )
* * * * * * * * * * * *
I think the long-term problems American economy lies in the trade imbalance, I have been in the last annual report stated, 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 only if we did not sell the asset is rarely reflected in the income statement. For example, our Coca-Cola holding stock value by the end of 1998 from $13400000000 down to $8100000000 by the end of the market value of 2005, down 5300000000 of the giant did not affect our income statement. But the long-term foreign exchange position was based on the price daily valuation, so at each reporting date will affect earnings of our. From our first foray into foreign exchange transactions to date we earned a total of $2000000000.
In 2005, we have reduced the number of dollar spot position (direct position in currencies). But by buying in a variety of foreign exchange denominated securities we partially offset this change, and earn 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" (Exposure). --- translator's note). This is mainly because of changes in interest rates: when USA interest rates relative to the rest of the world rises, 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. Also is the financing cost is higher than the securities or futures investment rate of return. --- translator's note). We hold that the profit change dollar positions indeed cost us money, but 2006 will probably continue to do so. Instead the holdings of foreign securities after a period of time will 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) -- can be quite large.
Potential factors affecting the America current account deficit continue to worsen, and there didn't seem to stop deterioration. Not only ----2005 the most common project our trade deficit, the current account in the year a record, and we expect the second project investment budget - will soon be from positive to negative. Compared to the American overseas investment, foreign investors have America assets (or on America claim) increased more, so that foreign investors through their holdings of America 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, American 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 remind us to pay attention to the problem.
 
Executive incentive interpretation: why the company is seriously out of executive compensation and corporate performance
Buffett American listing Corporation executive compensation and company performance seriously decoupling of harsh criticism. This is a very worthwhile warning for a wave of full circulation of stock market gradually China have been a wave of executive incentive plan.
"Securities Times" in March 29, 2006, a report in Wednesday's "executive pay in 1 days of 1 years" disclosure, the 573 companies have disclosed in the annual report of the Executive Yuan, the 3680000 highest income, the lowest only 10000, high 1 day too busy for 1 years.
Another result shows that Chinese stock market there is a common drawback, and American stock market that is, Chinese listing Corporation executives income growth also and the performance of the company growth seriously decoupling.
Statistics show that 573 of this listing Corporation, top 3 of income and the average value in the last year of about 620000 yuan, while in 2005 it reached 870000 yuan, an increase of 40%, which is obviously more than the performance of the company growth. Often can see, some corporate profits in falling and executives are paid from a point to another point.
China stock market investors should read Buffett in this section to America listing Corporation executives exorbitant salary tough questions: executives, so much money performance your values?

The 2005 annual letter to shareholders of Buffett (10) - how to make the investment income minimization (2006-06-12 16:45:35)
  Classification: learning from Buffett
The 2005 annual letter to shareholders of Buffett (10) - how to make the investment income minimization
 
Liu Jianwei (translation and interpretationNfljw@sina.com)
 
How to make the investment income minimization
For Berkshire and other USA stock investors over the past few years, a lot of money could be an easy job to. 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? In the end of this section you will see a surprising answer. ) this huge rise a very simple reason: in twentieth Century USA business is very good, investors borrow enterprise prosperity Dongfeng earn basin full earthen bowl. At present USA enterprises continue to operate well. But investors now due to a series of self harm, 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 exceptions, such as a loss of enterprise bankrupt enterprises shall be borne by the obligee, in most cases, owners generally from now until the end of the world (Judgment Day) during the profits and they have company equivalent gains 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. At the same time when the stock market rise all investors will feel richer. But a shareholder to exit, the premise must be new shareholders to replace his position. If an investor sells high, corresponding to another investor must buy high. For 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, 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 yield level.
In order to make clear how fees are soaring up, you can imagine. USA all listing Corporation owned by a single America family, 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. Naturally this family have to spend some money for life. But the family savings part of the wealth will be stable by the interest to accumulate wealth. In the Gotrocks household all the people's wealth at the same rate of sustained growth, all is harmonious.
But let us imagine, some have the gift of the gab to help close to the family, to every member of the family to try various devices to buying a stock and sell some stocks 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 America all listing Corporation. These transactions are just rearrange who holds what companies. So the overall wealth gains the family's annual reduction in the. The more the number of these family members trade, they gained from the enterprise in the cake to share less and less, those who do for the brokers help to share 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") the game they do badly. 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. The solution is: "to hire a manager, is us, we will do a very professional." The second batch of helper and managers continue to use the first helpers to conduct transactions; the managers may even increase their activity that the brokers in Xinglong. In short, corporate earnings this piece of cake a bigger fall into the two batch of helper's pockets.
The family grow with each passing day. Everyone in the family hired professionals. But on the whole this family group financial situation is go from bad to worse? What am I gonna do? The answer obviously, looking for 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 this big family of Gotrocks. Have the family dizzy nature of their help is very welcome. Now these members know they can't 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, of course, the third batch of helper and adviser will 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 the help we called super helper (the hyper-Helpers) appeared. They are friendly to explain to this big family, they still can't get ideal results because the enthusiasm of existing three batch of helper agent, manager, consultant is not fully aroused, they just go as a mere formality. The fourth group of people said: "you can expect such a dead-alive person to do what?"
The fourth batch of new to help present 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 costs, in addition to fixed commissions for things to pay the temporary pay huge.
Sensitive of the family found fourth batches of hyper-Helpers actually is the second batch of helper and manager, but is wearing new clothes, embroidered with attractive hedge fund (HEDGE FUND) or Private Equity Firm (PRIVATE EQUITY). 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 interpretation, and 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, but now walk into the team an important helper pocket. The recent profit distribution mechanism is widely popular make this family costs more expensive. According to this mechanism, the helper's smart or lucky gains most of all to help, because the help of incompetence or to bad luck the losses are borne by the family member, also have to pay a fixed sum of commission.
Profit distribution arrangements like this a lot, are helping with big head; and Gotrocks the family to bear the loss, but also for such an arrangement and privileges of expensive, so maybe we should 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 America listing Corporation profit of 20%. That is to say pay to help the cost, make the USA stock investors in general can only get all the listing Corporation 80% of earnings, and if they sit and rest at home and didn't listen to anyone's advice can safely get 100%.
A long time ago, sir Newton discovered the three laws of motion, this is indeed a great discovery of genius. (Isaac Newton). But Sir Newton's genius didn't extend to investing. Newton in the South Sea bubble (the South Sea Bubble) suffered heavy 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, perhaps Sir Newton will find that the fourth law of motion: for investors as a whole, returns decrease as motion increases.
* * * * * * * * * * * *
Put forward at the beginning of this section answers are as follows: very precise, 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 points in December 31, 2099 to allow you to one's heart's content. And as long as I can reach 2000000 quite satisfied. In fact in twenty-first Century over the past 6 years, the Dow Jones index no rose.
 
Transaction cost explanation: the more trade, less profit
Buffett used a popular fable tells us, the investors from the company's operating income, the more the more transactions, payments to consultants to help them, investors will be less.
Buffett think the stock investment is investment decision, investment income is not the market but the business of the company: "in the investment, we view ourselves as analyst, rather than market analysts, nor the macroeconomic analysts, and not even the securities analysts....... Eventually, our economic fate will depend on what we have the company's economic destiny, regardless of our ownership is partial or total."
So Buffett is a firm hold good long-term investors shares in the company, he hated the short-term investments frequently traded:
"Considering our huge capital scale, Charlie and I weren't smart enough to buy and sell out through frequent extraordinary investment performance level. We don't think other people can like bees from flower to flower fly to achieve long-term investment success. I think that the frequent trading institutions called investors, called as the frequently experience a one night stand as romantic as absurd".
One night while the stimulus but feel alarmed psychological cost.
The frequent trading while the stimulus but the transaction cost Commission and stamp tax is also great.
Short hold frequent buying and selling, commissions and other trading costs are accumulated will account for a larger proportion in the total investment, will reduce the investment income. Investors are more, he needs to pay the Commission is also more. So if investors want to gain more than the market average excess returns, he each investment returns should be higher than the market average level a few percentage points, to compensate for the transaction costs. For example, if you want more than the average market rate of return of 8%, while the market is expected to yield an average of 10%, at the same time, because each investment commission and transaction costs accounted for an average of more than 2% of the transaction amount. Then you each investment return rate to reach more than 20%.
Research at the University of California in 1998 Davies kind of Professor Terrance Odean and Brad Barber further proved that the frequent trading will result in reducing the rate of investment return level. They analyzed 19901996 years in December 31st 6 years 78000 of the family records of stock transactions. The average family's annual revenue rate of 17.7%, slightly higher than the market average rate of return of 17.1%. However, after deducting commission, net investment income rate is 15.6%, 1.5% lower than the market average level. Their annual household portfolio turnover net income rate were compared, and found that with increasing the number of trades, the yield will be reduced further. Annual net profit of 20% of the most traded family of only 10%, while the number of transactions minimum average annual household income ratio is as high as 18.5%. If the calculation of compound interest, after 10 years, 20 years later, little difference in the rate of return will cause great differences on the investor's wealth. Their conclusion of the study is: Overconfidence leads to excessive trading. Portfolio does not explain the differences between the investment rate of return, only frequent transactions increase transaction costs caused by the family to explain the different investment rate of return.
"Charles Ellis's research shows that, the capital turnover rate of more than 200% of the investors, unless the transaction is higher than the average market rate of return a few percentage points above, otherwise he could not reach to the stock market averages. His research proves that a rule in the stock market: the number of transactions more frequently, the investment income is less.
This formula shows that: if you often frequent transactions, to be sure, most of the gains you flow to the securities business department and the Taxation Bureau pocket.
In life, exercise can lose weight. You must be willing to. But why don't you do that?
In the investment, exercise can cut. You certainly don't want to, but why are you doing this?
The 2005 annual letter to shareholders of Buffett (11) - debt and risk (2006-06-12 16:51:37)
  Classification: learning from Buffett
The 2005 annual letter to shareholders of Buffett (11) - debt and risk
 
Liu Jianwei (translation and interpretationNfljw@sina.com)
Debt and risk
With MidAmerican we new balance sheet may make you think Berkshire on debt tolerance has increased. But that is not the case. Besides the amount of symbolic significance, we avoid the debt, only to 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 DEB) t also has been greatly reduced and will soon be removed.
2) we will order we clearly understand the risk characteristics of interest bearing accounts receivable portfolio (portfolios of interest-bearing receivables) and borrowing. In 2001 we had this 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. Alternatively, we could these accounts receivable "securitization" ("securitize"), that is to say to sell it, but we will continue to maintain the corresponding. If we followed this is very common in the industry operating procedures, on the balance sheet does not reflect the debt that we do, and will accelerate our reported earnings on time. But in the end we profit less. If the market variables to change so as to favor Securitization (an unlikely event), we will be selling a portion of the portfolio, and eliminate the related debt. Before that happens, we'd better profits rather than better financial package (cosmetics).
3) MidAmerican have high debt, the debt is just the company's debt. Though it will appear on our consolidated balance sheet, but Berkshire does not guarantee it. In spite of this debt is no doubt very safe, because in order to pay the interest on the debt is highly stable MidAmerican diversified utilities income. If one of the assets of the public utilities appear what a bolt from the blue like an emergency MidAmerican is damaged, so the utility of its 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 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 and pay interest, the proportion of hypothesis two is 2:1, with a 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 cyclone ---- Katrina destroyed the New Orleans electric power industry is evidenced by the local. A geographical disaster, such as earthquake but not on MidAmerican produced a devastating blow similar in the western region USA. Even the worrier like Charlie can't think of an accident can reduce the company's utilities income in the system of the large amplitude. 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 us financially too conservative, if we add moderate leverage in the statement of assets and liabilities 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 people 15 years or even more years premium will cause irreparable harm to forever. For these and other customer, we have committed no matter what their investment will be absolutely safe: a financial panic, the stock market closed (1914 to delay for a long time the stock market closed), even America suffered nuclear, chemical or biological weapons attacks.
We are quite willing to accept huge risks. 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. But 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 to 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.
 
Risk control: Interpretation of multiplied by another big zero results can only be zero
Buffett is very simple but express volumes a word that I repeatedly aftertaste:
"A long string of impressive amount by the last zero, the result can only be zero."
See here, I want the most is a major event Chinese stock market this year: the trial of delong.
Let us begin to rethink the Delong Delong trial.
I want to know the very worship Buffett Delong leader Mr Tang Wanxin earlier read those words will be how to feel:
The dream he if successfully implemented, it will be quite amazing "string of impressive numbers".
It is to this "string of impressive numbers, Delong" with amazing price through debt amazing, not only did not dream, but dream in prison.
The risk to not Gu Hao gambling and West and not just Deron williams.
Peregrine, Hongkong was the most red brokerage, fixed rate bonds because of gambling, the bankruptcy liquidation.
Wanguo Securities, at that time the most powerful China brokerage, because the 327 event gambling debt, it put up the shutters.
South securities, China originally three large firms, the gamble double ha, the bankruptcy liquidation.
A heavy lesson, to repeat again and again Buffett of this sentence: "a long string of impressive amount by the last zero, the result can only be zero."
Buffett to the cautious, did he himself said: "I don't ever want to experience this equation influence has how old, I never wanted to be penalties upon others bear the blame."
But his experience this equation influence has how old, also because the penalties upon others bear the blame.
If only.
Buffett let us guard.
He let us wake up.
The 2005 annual letter to shareholders of Buffett (12) - management succession (2006-06-12 16:54:04)
  Classification: learning from Buffett
The 2005 annual letter to shareholders of Buffett (12) - management succession
 
Liu Jianwei (translation and interpretationNfljw@sina.com)
 
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 tonight I depart from the world for ever, will how?
The second question is easy to answer. Most of our many businesses have a strong market position, strong development momentum, very outstanding managers. Berkshire's unique corporate culture has been deeply rooted in the subordinate each enterprise, even if I died and these operations will not be the slightest error.
In addition, at Berkshire we have three very young and fully qualified for CEO manager. I have to be far better than any of the three a within my scope of work of a management, but the downside is, none has crossed my own experience (crossover experience), the experience that I can easily make the right decision in the business and investment data field. The solution to this problem is to organize the internal appoint another person responsible for securities investment. At Berkshire, this is a very interesting work, the new CEO will have no problem to choose a talented person to be in charge of 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 results simply marvelous.
Berkshire's board has fully discussed each of the three CEO candidates, but also on if we must replace the final candidates I have replaced a unanimous resolution at. 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 star is fading. The important point is the directors now fully know, but the future is always fully know, if necessary they should do what.
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 age of 80, Charlie himself is a 82 year old magic managers -- but other managers just 60 years of age and then declined obviously. When the recession of their ability, and their ability to self assess tend to corresponding decline. There are often also need warning on its 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 less motivated to do so. I know of no other board directors and shareholders of a company in the America financial interests so completely aligned 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 is particularly difficult.
If I start to be informed of 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 reap the maximum benefits. If our partners to evade responsibility not to tell me that 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 we talk about the matter, I feel good.
 
 
Interpretation:
In this section I sigh is two points:
One is Buffett Houjifaren, shows very rare investment genius.
Buffett was able to build up from $100 to $about 40000000000, become the property of the second richest man in the world, not because he is a great investor, not because he is a great entrepreneur, but because he is a great investor and entrepreneur.
As Buffett said: "I am a good investor, because I was an entrepreneur. I am a good entrepreneur, because I also is an investor."
Experience this intersection is the most important factor in the success of the Buffett: "none has crossed my own experience (crossover experience), the experience that I can easily make the right decision in the business and investment."
This interdisciplinary thinking he can be analyzed the investment analysis and enterprise perfectly together, with entrepreneurial vision to analyze the investment value of stocks from the business point of view, analysis of enterprise management of the investment value of the investment house view angle.
Only use a mode of thinking would be successful, but not very successful, only with a variety of patterns of thinking people can obtain the super success.
In 1994 April, Mr. Munger in southern California school Marshall College of speech. Mr. Munger's theme is "the stock is a branch of philosophy of art". He taught the students to study hard, learn more stock market, finance, economics. But also to learn how not to these different aspects of knowledge alone, but to treat them as contains psychology, engineering, mathematics, physics, a part of the Treasury of human knowledge. With these broad perspective will, between each subject cross each other, and so their strengthened. A loving thought to summarize its unique thinking mode from each subject, and will be associated with, so as to achieve mastery. Those who cultivate this thinking habit of the people who are successful in life, do not have such a strong psychological quality of success can only in the stock market or otherwise is a luck.
Mr. Munger to make his point of view is more likely to be students, he used a very vivid metaphor to illustrate the different disciplines in different way of thinking is how the interaction of: grid model. Munger says: "your mind has a lot of ways of thinking, you can according to their own experience of direct and indirect places it in the grid model."
In 1996 he made a speech in Stanford University again about his investment decision grid theory. The basic argument he put forward is: the true, eternal success belongs to those who first efforts to build up a mode of thinking grille, people then learned to think the good contact, multi discipline and the way. He reminded people to do is to work hard, especially for those professional education is only a single mode of thinking people. But once these thinking patterns grille is rooted in your mind, you have to solve any always Baibao capsule. "You will be able to master the methods to solve the whole problem. All you need to do is to understand it correctly, develop the habit of thinking."
Second she is, Buffett on his very objective. With Buffett so status, so talent like this objective look at yourself, and by all measures to prevent their heart and not retreat.
We can most executives have a little achievement, just feel oneself highly flattered, confidence to defeat a world without Each one has his good points., confidence will be read three hundred years, or even want to live for 500 years.
Alas, his old Chairman Mao that if someone like Buffett's partner that remind him.
People will be old, Chairman Mao, Buffett so, everyone of us would be so.
So I admire most Deng xiaoping. Can, could, and three over three, and the last high positions, but take the initiative.
Is not easy, especially, active, more not easy.

The 2005 annual letter to shareholders of Buffett (13) - the annual general meeting of shareholders (2006-06-12 16:55:47)
  Classification: learning from Buffett
The 2005 annual letter to shareholders of Buffett (13) - the annual general meeting of shareholders
The annual general meeting of shareholders
In 2006 our shareholders' meeting will be held on Saturday May 6th. As usual, Qwest center doors will open on time seven o'clock in the morning. 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. (after a brief interlude in the Qwest stands for lunch), after a short rest, Charlie and I are in the 3:15 will be officially called an annual general meeting of shareholders. The conference program last year very smoothly, because this makes those who want to participate in the formal meetings of the shareholders may wish to participate in, but also can not interested shareholder free to go shopping.
Last year you must also participate in the shopping activities. With 194300 square feet of meeting space connected to the hall filled with products of Berkshire subsidiaries, and the 21000 people who attended the meeting will let each booth to create new sales record. Kelly Broz (NE é Muchemore (Siegfried Art), Lorenz (1869-1932): America follies and theatre director, with its exaggerated revues Pzigfield is famous for his 1907 to 1931, from year to year staged a (except for 1926, 1928 and 1929), translator's note) is Berkshire's Flo Ziegfeld organization this ultra luxury shopping show the annual. The display all like her very much, I am the same. Kelly asked me if I wanted to appear in the wedding program, I replied "envious of the groom," this sentence should wholly intact on the news.
This year we will showcase two Clayton homes (arranged Acme brick, Shaw carpet, Johns Manville insulation, MiTek bolts, Carefree awning and NFM furniture). You'll find out the price of 7.9-8.9 million prefabricated house is very cheap. In fact in 2005 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 to Forest River recreational vehicle (Recreational Vehicle, RV) exhibition.
GEICO 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 give you a special shareholder discount (about 8%). This special offer 45 states in the 50 states we conduct business in the United States can provide. Please shareholders will own about details of insurance now, GEICO consultants will help you check whether you can save a sum of premium. I believe we could at least half the people you save a lot of premium. And while you're at it, sign up for the new GEICO credit card. I now use is.
Saturday in the Omaha Airport, we will show a series of NetJets@ models for your review. Please Qwest the NetJets booth to visit these planes. Omaha into the car, the new aircraft you when you sit back down.
In 2005 the bookworm (Bookworm) Bookstore broke all sales records in Qwest sales Berkshire related books. Surprisingly, has sold 3500 copies collected my partner Charlie Munger wisdom "good books' s Almanack Poor Charlie. This means that every 9 seconds will sell. And for good reason: you can't find the other than this book has more valuable ideas. Recommend a pass from mouth to mouth made Charlie the first printing of 20500 copies of the book have been sold out, so we at shareholder meetings this year to launch a revised and expanded edition. In 2005 Bookworm Bookstore also show the other 22 kinds of books and DVD, were also sold 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. On the ticket, accommodation, car reservation service, we are very pleased to express and American again (800-799-6634) contract to 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 (Nebraska Furniture Mart, NFM), we will once again host "Berkshire weekend" ("Berkshire Weekend") special sale. We first introduced the special sale activities in nine years ago, this "Berkshire weekend" turnover rose from $5300000 in 1997 to $27400000 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 will be blood expansion.
To obtain the discount, you must make purchases between Thursday May 4th to Monday May 8th, and present your meeting documents. In this period, preferential activities will include some of the usual never discount premium brand, but in the spirit of our shareholder weekend special exception, we are very grateful for their cooperation. NFM Business Hours Monday to Saturday from 10 a.m. to 9 p.m., Sunday from 10 a.m. to 6 p.m.. During this year the shareholders of the General Assembly on Saturday from five thirty PM to 8 pm, we will have a special event for shareholders only open. I'll be there, eating barbecue drinking coke, and counting sales.
Borsheim jewelry in the shareholders meeting period will again for shareholders held two activities, the first game is on Friday May 5th from 6 p.m. to 10 p.m. cocktail party at the time, second, is also a major exhibition ( gala) on Sunday May 7th from 9 a.m. to 4 p.m.. Saturday Business Hours until 6 p.m..
The whole weekend Borsheim jewelry stores are crowded. In order to facilitate the shareholders shopping, from Monday May 1st to Saturday May 13th during Borsheim jewelry shop will provide shareholders with preferential price. As long as the present meeting credential or trade show yourself as a shareholder enjoys preferential.
Borsheim jewelry store operating margins, even if it is not calculated to provide shareholders with discount, than its main rivals, lower than 20%. In 2005 the general assembly to convene the shareholders during turnover increased by 9% than in 2004, 2004 the general assembly to convene the shareholders during turnover than in 2003, a record increase of 73%. The shop sold 5000 pieces of Berkshire Monopoly game, but once out of stock. We have learned a lesson: there will be plenty of stock this year.
The ride in the Borsheim outside the tent, America 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, Sharon Osberg will compete with our shareholders on Sunday afternoon. Of course, they will not be blindfolded, but Bob never licensing, and even in the national bridge Championship contest.
Gorat's I love steak restaurant will be alone again for Berkshire shareholders open on Sunday May 7th, from 4 pm start is open till 10 at night. Please remember to come on Sunday in Gorat's, you must have. Make an appointment please after May 1st (before please don't this appointment) call 402-551-3733.
Come to Omaha to communicate with me in this school year there are about 35 class students. I took all of the students to the Gorat 's lunch, the number of the students in a total of about 2000 people in the. They all like this restaurant. 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 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 more than 400 from dozens of countries outside North America shareholders. Any USA and Canada from countries other than the 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 a long-term jobs that we love, in all its aspects has been vigorously help both bright and pleasant colleagues at work. Not surprisingly, every day we tap dance to work. Of course not what a year off than Berkshire's annual meeting and our shareholders and partners have a joyous gathering more happy. So please on May 6th at the Qwest for our capitalists (Capitalists) Woodstock Music Festival (Woodstock August, annual southeast in New York Woodstock rock music festival held - the translator's note.
The chairman: Warren "Buffett
February 28, 2006
Translation postscript:
Buffett spent the letter to Berkshire shareholders for several days, over the more think Mr. Buffett English understandable that contains profound wisdom, I rack sth. did not find the Chinese words suitable to express his meaning. So more exclamatory Buffett writing concise and profound thought so beautifully together. I have tried my best, but improper translation errors can hardly be avoided, welcomed the letter.
Study of Buffett in a period of their own advertising:
Welcome to buy Liu Jianwei wrote four books about Buffett's investment strategy book:
1, "Buffett stock investment strategy", mechanical industry publishing house, 2005, published in June, fourth reprint.
2, how to select the super star "Buffett", mechanical industry publishing house, 2006, published in January, second reprint.
3, "with the masters, Graham, Buffett Fisher, investment, Peter" Lynch overcome the long-term market value investment wisdom ", democracy and Building Press, 2006 January.
4, "Buffett's 8 investment lesson", democracy and the construction of publishing house, 2005, published in January, third reprint.
Let us together to share Buffett's investment wisdom. I wish you all a successful investment!
Liu Jianwei.Nfljw@sina.com)