Accounting writes down losers, not winners
“The carrying value of the ‘losers’ we own is written down, but ‘winners’ are never revalued upwards.”
Business
Buying efficiency instead of cutting bloat
“At Berkshire, we, too, crave efficiency and detest bureaucracy. To achieve our goals, however, we follow an approach emphasizing avoidance of bloat, buying businesses such as PCC that have long been run by cost-conscious and efficient managers.”
The owner's role is creating a good environment
“After the purchase, our role is simply to create an environment in which [cost-conscious and efficient managers] – and their eventual successors, who typically are like-minded – can maximize both their managerial effectiveness and the pleasure they derive from their jobs.”
When hostile offers are justified
“To be sure, certain hostile offers are justified: Some CEOs forget that it is shareholders for whom they should be working, while other managers are woefully inept.”
Flexible capital allocation as a competitive edge
“Our flexibility in capital allocation – our willingness to invest large sums passively in non-controlled businesses – gives us a significant edge over companies that limit themselves to acquisitions they will operate.”
Prosperity comes from efficiency, not harder work
“U.S. citizens are not intrinsically more intelligent today, nor do they work harder than did Americans in 1930. Rather, they work far more efficiently and thereby produce far more.”
Ordinary families now outlive Rockefeller's comforts
“All families in my upper middle-class neighborhood regularly enjoy a living standard better than that achieved by John D. Rockefeller Sr. at the time of my birth.”
A bigger pie, still fought over
“Though the pie to be shared by the next generation will be far larger than today’s, how it will be divided will remain fiercely contentious.”
Markets deliver what people don't yet want
“Nothing rivals the market system in producing what people want – nor, even more so, in delivering what people don’t yet know they want.”
Betting against America has been a mistake
“For 240 years it’s been a terrible mistake to bet against America, and now is no time to start.”
Insurers invest money owed to others
“[The P/C] collect-now, pay-later model leaves P/C companies holding large sums – money we call ‘float’ – that will eventually go to others. Meanwhile, insurers get to invest this float for their own benefit.”
Competition keeps insurance returns subnormal
“Competitive dynamics almost guarantee that the insurance industry, despite the float income all its companies enjoy, will continue its dismal record of earning subnormal returns on tangible net worth as compared to other American businesses.”
Underwriting discipline as Old Testament religion
“All insurers give [disciplined risk evaluation] lip service. At Berkshire it is a religion, Old Testament style.”
A liability that stays is worlds different
“Owing $1 that in effect will never leave the premises – because new business is almost certain to deliver a substitute – is worlds different from owing $1 that will go out the door tomorrow and not be replaced.”
Some intangibles lose value, others do not
“Some truly deplete in value over time, while others in no way lose value. For software, as a big example, amortization charges are very real expenses.”
Stock-based compensation is an expense
“‘Stock-based compensation’ is the most egregious example. The very name says it all: ‘compensation.’ If compensation isn’t an expense, what is it?”
Staying competitive costs at least depreciation
“I wish we could keep our businesses competitive while spending less than our depreciation charge, but in 51 years I’ve yet to figure out how to do so.”
EBITDA as a valuation guide stretches the truth
“When CEOs or investment bankers tout pre-depreciation figures such as EBITDA as a valuation guide, watch their noses lengthen while they speak.”
Too high a price spoils a terrific business
“Of course, a business with terrific economics can be a bad investment if it is bought at too high a price.”
Wall Street innovation as a warning sign
“(When Wall Street gets ‘innovative,’ watch out!)”
Lending long and borrowing short is risky
“Normally, it is risky business to lend long at fixed rates and borrow short as we have been doing at Clayton. Over the years, some important financial institutions have gone broke doing that.”