Uncertain futures make valuation unreliable
“The more uncertain the future of a business, the more possibility there is th at the calculation will b e wildly off-base.”
Business
What a holding company adds or subtracts
“The outcome depends on whether our many units function better or worse by being part of a larger enterprise and whether capital allocation improves or deteriorates when it is under the direction of a holding company.”
Chosen base years can distort growth rates
“When growth rates are under discussion, it will pay you to be suspicious as to why the beginning and terminal years have been selected. If eith er year was aberrational, any calculation of growth will be distorted.”
Buying with stock sells part of everything
“[Issuance of Berkshire shares] ’s a crucial, but often ignored, point: When a management proudly acquires another company for stock, the shareholders of the acquirer are concurrently selling part of their interest in everything they own.”
Utilities offer fair returns on large sums
“You can’t expect to earn outsized profits in regulated utilities, but the industry offers owners the opportunity to deploy large sums at fair returns – and therefore, it makes good sense for Berkshire.”
Float is other people's money held temporarily
“‘Floa t’ is money t hat do esn’t belo ng to us bu t th at we temporarily hold.”
Large underwriting losses make float expensive
“Fo r m ost insurers, ho wever, life has bee n far more difficult: In aggre gate, the property-casualty industry almost invariably operates at an underwriting loss. When that loss is large, float becomes expensive, sometimes devastatingly so.”
Insurance surprises are far from symmetrical
“One thing, though, we have learned – the hard way – after many years in the business: Surprises in insurance are far from symmetrical.”
Insurers meet looming losses with optimism
“Too often, however, insurers react to looming loss problems with optimism.”
Long contracts invite imaginative valuations
“Long contracts, or alternatively those with multiple variables, are the m ost difficult to mark to market (the standard procedure used in accounting for derivatives) and provide the most opportunity for ‘imagination’ when traders are estimatin g their value.”
Delighted customers strengthen, indifference withers
“If we a re del ighting customers, el iminating u nnecessary cost s and i mproving ou r products and services, we gain strength. B ut if we t reat customers with indifference or tolerate bloat, our businesses will wither.”
Widening the moat must take precedence
“We always, of course, hope to earn more money in the short-term. But when short-term and long-term conflict, widening the moat must take precedence.”
Short-term targets can inflict lasting damage
“If a management makes bad d ecisions i n order t o hit sho rt-term earni ngs t argets, an d co nsequently get s behind the eight-ball in terms of cost s, customer satisfaction or brand strength, no am ount of s ubsequent brilliance will overcome the damage that has b een inflicted.”