October 25, 2000
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Berkshire Hathaway FAQ
WELCOME TO BERKSHIRE HATHAWAY'S MESSAGE BOARD FAQ (FREQUENTLY ASKED QUESTIONS)
In order to make your time on the Berkshire Hathaway message board as beneficial as possible, we have constructed this link to facilitate your search for Berkshire information, and understanding. We hope this FAQ page will give participants to this board a place to begin their research into one of the greatest investment vehicles of all time.... BERKSHIRE HATHAWAY.
BERKSHIRE HATHAWAY INC. - The Official Home Page
1. What is the difference between A shares and B shares of Berkshire Hathaway?
(NYSE: BRK.A, BRK.B)
"Berkshire Hathaway Inc. has two classes of common stock designated Class A and Class B. A share of Class B common stock has the rights of 1/30th of a share of Class A common stock with these exceptions: First, a Class B share has 1/200th of the voting rights of a Class A share (rather than 1/30th of the vote). Second, the Class B shares are not eligible to participate in the Berkshire Hathaway Inc. shareholder designated contributions program. Additionally, each share of a Class A common stock is convertible at any time, at the holder's option, into 30 shares of Class B common stock. This conversion privilege does not extend in the opposite direction. That is, holders of Class B shares are not able to convert them into Class A shares. Both Class A & B shareholders are entitled to attend the Berkshire Hathaway Annual Meeting which is held the first Monday in May."
In my opinion, most of the time, the demand for the B will be such that it will trade at about 1/30th of the price of the A. However, from time to time, a different supply-demand situation will prevail and the B will sell at some discount. In my opinion, again, when the B is at a discount of more than say, 2%, it offers a better buy than the A. When the two are at parity, however, anyone wishing to buy 30 or more B should consider buying A instead.
2. Is Berkshire Hathaway a mutual fund?
No. Berkshire Hathaway, Inc. is a holding company owning subsidiaries engaged in a number of diverse business activities. The most important of these is the property and casualty insurance business conducted on both a direct and reinsurance basis through a number of subsidiaries. Included in this group of subsidiaries is GEICO Corporation, the seventh largest auto insurer in the United States.
(Source: 1997 Berkshire Hathaway Annual Report, inside front cover)
3. Will Berkshire Hathaway ever pay a dividend?
"We feel noble intentions should be checked periodically against results. We test the wisdom of
retaining earnings by assessing whether retention, over time, delivers shareholders at least $1 of market value for each $1 retained. To date, this test has been met. We will continue to apply it on a five-year rolling basis. As our net worth grows, it is more difficult to use retained earnings wisely."
(Source: Berkshire Hathaway's Owner's Manual)
4. What does the term "Intrinsic Value" mean, and why doesn't Mr. Buffett give us his estimate?
"Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life. The calculation of intrinsic value, though, is not so simple. As our definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised. Two people looking at the same set of facts, moreover - and this would apply even to Charlie and me - will almost inevitably come up with at least slightly different intrinsic value figures. That is one reason we never give you our estimates of intrinsic value. What our annual reports do supply, though, are the facts that we ourselves use to calculate this value."
(Source: Berkshire Hathaway's Owner's Manual)
5. What is float?
"Let's discuss "float" and how to measure its cost. Unless you understand this subject, it will be impossible for you to make an informed judgment about Berkshire's intrinsic value.
To begin with, float is money we hold but don't own. In an insurance operation, float arises because premiums are received before losses are paid, an interval that sometimes extends over many years. During that time, the insurer invests the money. Typically, this pleasant activity carries with it a downside: The premiums that an insurer takes in usually do not cover the losses and expenses it eventually must pay. That leaves it running an "underwriting loss," which is the cost of float. An insurance business has value if its cost of float over time is less than the cost the company would otherwise incur to obtain funds. But the business is a lemon if its cost of float is higher than market rates for money.
A caution is appropriate here: Because loss costs must be estimated, insurers have enormous latitude in figuring their underwriting results, and that makes it very difficult for investors to calculate a company's true cost of float. Estimating errors, usually innocent but sometimes not, can be huge. The consequences of these miscalculations flow directly into earnings. An experienced observer can usually detect large-scale errors in reserving, but the general public can typically do no more than accept what's presented, and at times I have been amazed by the numbers that big-name auditors have implicitly blessed.
As for Berkshire, Charlie and I attempt to be conservative in presenting its underwriting results to you, because we have found that virtually all surprises in insurance are unpleasant ones."
(Source: 1997 Berkshire Hathaway Annual Report)
6. Does Berkshire have a policy concerning the issuing of common stock?
"We have a firm policy about issuing shares of Berkshire, doing so only when we receive as much value as we give. Equal value, however, has not been easy to obtain, since we have always valued our shares highly. So be it: We wish to increase Berkshire's size only when doing that also increases the wealth of its owners."(1992 Berkshire Hathaway Annual Report)
"We will issue common stock only when we receive as much in business value as we give. This rule applies to all forms of issuance not only mergers or public stock offerings, but stock-for-debt swaps, stock options, and convertible securities as well. We will not sell small portions of your company and that is what the issuance of shares amounts to on a basis inconsistent with the value of the entire enterprise."
(Source: Berkshire Hathaway's Owner's Manual)
7. What is Supercat Insurance?
"In this operation [super-cat insurance], we sell policies that insurance and reinsurance companies purchase in order to limit their losses when mega-catastrophes strike. Berkshire is the preferred market for sophisticated buyers: When the 'big one' hits, the financial strength of super-cat writers will be tested, and Berkshire has no peer in this respect."
(Source: 1997 Berkshire Hathaway Annual Report, p. 8)
8. When do you sell a stock?
"The best thing to do is buy a stock that you don't ever want to sell. That's what we're trying to do. And that's true when we buy an entire business. We bought all of GEICO, we bought all of See's Candies, Buffalo News. We're not buying those to resell. What we're trying to do is buy a business we'll be happy with if we own it for the rest of our lives, and we expect to with those. We would sell if we needed money for other things. We may sell if we believe the valuations in different markets are somewhat out of whack. But that can be a mistake. The real thing to do with a great business is just hang on for dear life."
Charlie Munger: The sales that do happen--the ideal way--is when you've found something you like immensely better.
9. What are "look-through earnings"?
"We attempt to offset the shortcomings of conventional accounting by regularly reporting "look-through" earnings (though, for special and nonrecurring reasons, we occasionally omit them). The look-through numbers include Berkshire's own reported operating earnings, excluding capital gains and purchase-accounting adjustments (an explanation of which occurs later in this message) plus Berkshire's share of the undistributed earnings of our major investees -- amounts that are not included in Berkshire's figures under conventional accounting. From these undistributed earnings of our investees we subtract the tax we would have owed had the earnings been paid to us as dividends. We also exclude capital gains, purchase-accounting adjustments and extraordinary charges or credits from the investee numbers.
We have found over time that the undistributed earnings of our investees, in aggregate, have been fully as beneficial to Berkshire as if they had been distributed to us (and therefore had been included in the earnings we officially report). This pleasant result has occurred because most of our investees are engaged in truly outstanding businesses that can often employ incremental capital to great advantage, either by putting it to work in their businesses or by repurchasing their shares. Obviously, every capital decision that our investees have made has not benefitted us as shareholders, but overall we have garnered far more than a dollar of value for each dollar they have retained. We consequently regard look-through earnings as realistically portraying our yearly
gain from operations." (Source: Berkshire Hathaway's Owner's Manual)
10. What would happen to Berkshire stock if Warren Buffett and Charlie Munger were not able to manage it?
"On my death, Berkshire's ownership picture will change but not in a disruptive way: First, only about 1% of my stock will have to be sold to take care of bequests and taxes; second, the balance of my stock will go to my wife, Susan, if she survives me, or to a family foundation if she doesn't. In either event, Berkshire will possess a controlling shareholder guided by the same philosophy and objectives that now set our course.
At that juncture, the Buffett family will not be involved in managing the business, only in picking and overseeing the managers who do. Just who those managers will be, of course, depends on the date of my death. But I can anticipate what the management structure will be: Essentially my job will be split into two parts, with one executive becoming responsible for investments and another for operations. If the acquisition of new businesses is in prospect, the two will cooperate in making the decisions needed. Both executives will report to a board of directors who will be responsive to the controlling shareholder, whose interests will in turn be aligned with yours.
Were we to need the management structure I have just described on an immediate basis, my family and a few key individuals know who I would pick to fill both posts. Both currently work for Berkshire and are people in whom I have total confidence.
I will continue to keep my family posted on the succession issue. Since Berkshire stock will make up virtually my entire estate and will account for a similar portion of the assets of either my wife or the foundation for a considerable period after my death, you can be sure that I have thought through the succession question carefully. You can be equally sure that the principles we have employed to date in running Berkshire will continue to guide the managers who succeed me.
Lest we end on a morbid note, I also want to assure you that I have never felt better. I love running Berkshire, and if enjoying life promotes longevity, Methuselah's record is in jeopardy."
(Source: Berkshire Hathaway's Owner's Manual)
11. When is the annual meeting?
The Annual Meeting information can be found here:
12: Why doesn't Warren Buffett split Berkshire's stock?
"We often are asked why Berkshire does not split its stock. The assumption behind this question usually appears to be that a split would be a pro-shareholder action. We disagree. Let me tell you why.
One of our goals is to have Berkshire Hathaway stock sell at a price rationally related to its intrinsic business value. (But note "rationally related", not "identical": if well-regarded companies are generally selling in the market at large discounts from value, Berkshire might well be priced similarly.) The key to a rational stock price is rational shareholders, both current and prospective.
If the holders of a company's stock and/or the prospective buyers attracted to it are prone to make irrational or emotion- based decisions, some pretty silly stock prices are going to appear periodically. Manic-depressive personalities produce manic-depressive valuations. Such aberrations may help us in buying and selling the stocks of other companies. But we think it is in both your interest and ours to minimize their occurrence in the market for Berkshire.
To obtain only high quality shareholders is no cinch. Mrs. Astor could select her 400, but anyone can buy any stock. Entering members of a shareholder "club" cannot be screened for intellectual capacity, emotional stability, moral sensitivity or acceptable dress. Shareholder eugenics, therefore, might appear to be a hopeless undertaking.
In large part, however, we feel that high quality ownership can be attracted and maintained if we consistently communicate our business and ownership philosophy - along with no other conflicting messages - and then let self selection follow its course. For example, self selection will draw a far different crowd to a musical event advertised as an opera than one advertised as a rock concert even though anyone can buy a ticket to either.
Through our policies and communications - our "advertisements" - we try to attract investors who will understand our operations, attitudes and expectations. (And, fully as important, we try to dissuade those who won't.) We want those who think of themselves as business owners and invest in companies with the intention of staying a long time. And, we want those who keep their eyes focused on business results, not market prices.
Were we to split the stock or take other actions focusing on stock price rather than business value, we would attract an entering class of buyers inferior to the exiting class of sellers. At $1300, there are very few investors who can't afford a Berkshire share. Would a potential one-share purchaser be better off if we split 100 for 1 so he could buy 100 shares? Those who think so and who would buy the stock because of the split or in anticipation of one would definitely downgrade the quality of our present shareholder group. (Could we really improve our shareholder group by trading some of our present clear-thinking members for impressionable new ones who, preferring paper to value, feel wealthier with nine $10 bills than with one $100 bill?) People who buy for non-value reasons are likely to sell for non-value reasons. Their presence in the picture will accentuate erratic price swings unrelated to underlying business developments.
Splitting the stock would increase that cost (transfer costs), downgrade the quality of our shareholder population, and encourage a market price less consistently related to intrinsic business value. We see no offsetting advantages."
(Source: 1983 Berkshire Hathaway Annual Report)
13. At what point would Berkshire initiate a share repurchase program?
"There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds -- cash plus sensible borrowing capacity -- beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively-calculated. To this we add a caveat: Shareholders should have been supplied all the information they need for estimating that value. Otherwise, insiders could take advantage of their uninformed partners and buy out their interests at a fraction of true worth. We have, on rare occasions, seen that happen. Usually, of course, chicanery is employed to drive stock prices up, not down.
We will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value, conservatively calculated. Nor will we attempt to talk the stock up or down. (Neither publicly or privately have I ever told anyone to buy or sell Berkshire shares.) Instead we will give all shareholders -- and potential shareholders -- the same valuation-related information we would wish to have if our positions were reversed."
(Source: 1999 Berkshire Hathaway Annual Report)
14. Can I expect Berkshire to display smooth earnings growth?
"We will continue to experience considerable volatility in our annual results. That's assured by the general volatility of the stock market, by the concentration of our equity holdings in just a few companies, and by certain business decisions we have made, most especially our move to commit large resources to super-catastrophe insurance. We not only accept this volatility but welcome it: A tolerance for short-term swings improves our long-term prospects. In baseball lingo, our performance yardstick is slugging percentage, not batting average.
(Source: 1992 Berkshire Annual Report)
15. Why does Berkshire have such a focused portfolio?
"The great personal fortunes in this country weren't built on a portfolio of 50 companies. They were built by someone who identified one wonderful business. Coca-Cola's a great example. A lot of fortunes have been built on that. And there aren't 50 Coca-Colas. There aren't 20. If there were, it'd be fine - you could own a lot, diversify like crazy among that group and get results that were the equal of owning the really wonderful ones. But you're not going to find [that many].
And the truth is you don't need to. A really wonderful business is very well protected against the vicissitudes of the economy and competition over time. And I'm talking about businesses that are resistant to effective competition. Three of those will be better than 100 average businesses. (Warren Buffett)
"All intelligent investing is value investing - to acquire more than you are paying for. Investing is where you find a few great companies and then sit on your ass." (Charlie Munger - 2000 Shareholder Meeting)
16. Was General RE a mistake?
"Gen Re has a terrific record over time. Even if you'd told me what Gen Re's figures would be [before we acquired it], we'd still have done the deal." (Warren Buffett - 2000 Shareholder Meeting)
"But the main attraction of the merger is synergy, a word that heretofore has never been used in listing the reasons for a Berkshire acquisition. In this transaction, however, there are at least four areas of powerful synergy, which Charles Munger, Berkshire's Vice Chairman, and I believe justify the premium price that Berkshire is paying. "
17. What is this "Combined Ratio" that you guys are always talking about?
The combined ratio represents total insurance costs (losses incurred plus expenses) compared to revenue from premiums: A ratio below 100 indicates an underwriting profit, and one above 100 indicates a loss. The higher the ratio, the worse the year. When the investment income that an insurer earns from holding policyholders' funds ("the float") is taken into account, a combined ratio in the 106 - 110 range typically produces an overall break-even result, exclusive of earnings on the funds provided by shareholders." (Source: 1992 Berkshire Annual Report)
18. What is Berkshire's investment strategy?
"Our equity-investing strategy remains little changed from what it was fifteen years ago, when we said in the 1977 annual report: "We select our marketable equity securities in much the way we would evaluate a business for acquisition in its entirety. We want the business to be one (a) that we can understand; (b) with favorable long-term prospects; (c) operated by honest and competent people; and (d) available at a very attractive price." We have seen cause to make only one change in this creed: Because of both market conditions and our size, we now substitute "an attractive price" for "a very attractive price." (Source: 1992 Berkshire Annual Report)
19. Does Lou Simpson have a similar investment strategy?
"In the selection of common stocks, we continue to be guided by the same five criteria that we detailed in our 1986 Annual Report:
* Think independently
* Invest in high-return businesses run for the shareholders
* Pay only a reasonable price, even for an excellent business
* Invest for the long term
* Do not diversify excessively"
(Source: GEICO's 1994 Annual Report)
20. What does Warren Buffett mean by "Margin of Safety"?
"Second, and equally important, we insist on a margin of safety in our purchase price. If we calculate the value of a common stock to be only slightly higher than its price, we're not interested in buying. We believe this margin-of-safety principle, so strongly emphasized by Ben Graham, to be the cornerstone of investment success." (Source: 1992 Berkshire Annual Report)
II Berkshire Hathaway Sites
1. Berkshire Hathaway's Owner's Manual
2. Berkshire Hathaway's shareholder letters
3. Links to Berkshire Subsidiary Companies
III Other Great Sites For Berkshire Information
1. Berkshire Hathaway Intrinsivaluator - by John Kish
2. The Toronto Investment Club - by Jim Chuong
3. Focus Investing - by Rich Rockwood
4. Value Investing - by Rich Rockwood
5. Warren Buffett News Links
6. BRK News - by FutileFrance
7. Warren Buffett Bibliography & News - by FutileFrance
8. Berkshire Hathaway Sept. 16, 1998 - Special (GEN RE) Meeting Notes
9. Omaha World-Herald
10. Rupp's Insurance & Risk Management Glossary
IV Berkshire Hathaway Financial Data
V Recommended Reading
1. Books Recommended By Warren Buffett And Charlie Munger
2. Focus Investor's Book Recommendations
3. The Toronto Investment Club Book Recommendations
5. Tilson Capital Partners Book Recommendations
* A great place to buy these books:
6. Outstanding Investor Digest:
"I'd advise you to subscribe. I read each issue religiously. Anyone interested in investing who doesn't subscribe is making a big mistake." WARREN BUFFETT
VI Noteworthy Posts on The Motley Fool's Berkshire Hathaway Message Board
1. This is a List Of Recommended Posts From The Motley Fool Berkshire Board
2. A Collection of Older Posts - Listed by Topic
3. SimpleInvestor's "101 Reasons to Own Berkshire Hathaway" http://boards.fool.com/message.asp?id=1070060001426000
(SimpleInvestor Has Published This Book: "The World's Greatest Investment: 101 Reasons To Own Berkshire Hathaway," by Robert P. Miles
4. An Informative Article on "Focus Investing" - by Rich Rockwood:
5. Warren Buffett & Charlie Munger Press Conference Notes - by TMFSelena
(Part 1) http://boards.fool.com/Message.asp?mid=12517974
(Part 2) http://boards.fool.com/Message.asp?mid=12518527
6. TMFSelena's Annual Meeting Travelogue http://boards.fool.com/Message.asp?id=1070060006352000
7. TMFSelena's Description Of The "Company Movie"
8. The Motley Fool's Example Of A Discounted Cash Flow (DCF) Analysis
VII ARTICLES OF INTEREST
1. Mr. Buffett on the Stock Market
2. Best's Review Of Berkshire
3. Nightly Business Report Interview With: Warren Buffett
4. Homespun Wisdom from the 'Oracle of Omaha'
5. Doubts Quickly Extinguished at Buffett Annual Meeting
6. Buffett defends his tech aversion
7. The Oracle Predicts the Market Party Is Over
8. Not one to be caught unprepared, Mr. Buffett makes his plans clear (Mr. Buffett's plan for
succession at Berkshire Hathaway)
9. The Warren Buffett You Don't Know
10. Buffett: Portrait of an Artist as a Young Man
11. Ben Graham: The Rediscovered Selected Writings Of The Wall Street Legend
12. Coin-Flipping & Graham-and-Doddsville
13. Three little words (Margin of Safety)
14. Kindred Spirits (The Class of '49)
15. The Best Investor You've Never Heard Of (Joseph Rosenfield - a longtime pal of Warren
16. 1997 Berkshire Annual Meeting Notes
17. 1998 Berkshire Annual Meeting Notes
18. The Bill & Warren Show
19. Gates On Buffett
20. Berkshire Hathaway: Capitalist Cult or Community
21. Do You Have the Guts to Let Warren Buffet Manage Your Investments?
22. The Value of Compounding
23. Why Underwriting Still Matters
24. Combined Ratio (A Description)
VIII Dale Wettlaufer (TMF Ralegh) Notes
1. Berkshire Hathaway - A Great 7 Part Series
The Benefits of Float (Part 2)
Specialty Insurance & Berkshire (Part 3)
Super Castostrophe Insurance (Part 4)
The GenRe Merger (Part 5)
The Berkshire Retailers (Part 6)
See's & FlightSafety (Part 7)
Bore to Buy Berkshire Hathaway -- 12/28/98
2. Return on Invested Capital (ROIC) - 6 Part Series
3. How ROIC Builds Value
4. Return on Equity(ROE) - 3 Part Series(Starts in Middle of Page)
5. Equities as Bonds
6. Adding to Berkshire
7. GenRe and the Cost of Float
8. Tough Year for P&C Insurers
9. Thoughts On Berkshire & The S&P500 index
10. Charlie Munger: Warren's Right-Hand Man
IX Whitney Tilson Notes
1. Notes From the Berkshire Hathaway Annual Meeting
2. Sustainable Competitive Advantage
3. Buffett's Prescient Market Calls
4. Charlie Munger Speaks - Notes from the Wesco Annual Meeting
5. The Last Bull on Berkshire?
6. Berkshire Hathaway's Improving Results
7. Explaining Berkshire's Losses
8. Great Quotes (Wise Words On Investing)
X ONE FINAL NOTE
This is The Motley Fool, Berkshire Hathaway, message board. You can find a lot of very high quality content delivered from exceptionally intelligent people who post to our board. You will also find a lot of other "stuff". Always remember to apply a strong filter to everything that you read here. If you find something of interest, consider it a good lead for your own investigation.... rather than a replacement for your own homework.
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If you ignore our advice to do independent research of industries, companies, and stocks, choosing instead to trade solely on information, "tips," or opinions found in our forum, you have made a conscious, willing, free, and personal decision to do so. You have also probably made a mistake.
The Official Berkshire Hathaway Message Board FAQ
Originally Written by: Douglas403 (02/12/99)
Last Revised by: TheSandman (10/22/00 )
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