Berkshire buys to keep
“Unlike LBO operators and private equity firms, we have no ‘exit’ strategy – we buy to keep.”
Investing
Warren Buffett's 2002 letter to Berkshire shareholders, one of the letters in Berkshire Hathaway Shareholder Letters, 1971–2025.
Pro-forma earnings flatter the CEO
“In [pro-forma statements], the CEO tells his owners ‘don’t count this, don’t count that – just count what makes earnings fat.’”
Rare catastrophes are still real costs
“‘Excep t for’ losses will forever be part of the insurance business, and they will forever be paid with shareholders’ money.”
Owner-minded CEOs and a hands-off chairman
“Berkshire’s operating CEOs are masters of their cr afts and run their businesses as if they were their own. My job is to stay out of their way and allocate whatever excess capital their businesses generate.”
The batboy's lesson in choosing teammates
“Eddie understood that how he lugged bats was unimportant; what counted instead was hooking up with the cream of those on the playing field.”
Three disciplines behind low-cost float
“If our insurance operations are to generate low-co st float over time, they must: (a) underwrite with unwavering discipline; (b) reserve conservatively; and (c) avoid an aggregation of exposures that would allow a supposedly ‘impossible’ incident to threaten their solvency.”
Accurate reserves reveal an insurer's true costs
“Finally, we are making every effort to get our reserving right. If we fail at [getting reserving right], we can’t know our true costs. And any insurer that has no idea what its costs are is heading for big trouble.”
Insurers' natural bias toward underreserving
“The natural tendency of most casualty-insurance managers is to underreserve, and they must have a particular mindset – which, it may surprise you, has nothing to do with actuarial expertise – if they are to overcome this devastating bias.”
Higher lumpy returns beat smooth ones
“[A major swing] bothers us not at all: As long as we are paid appropriately, we love taking on short-term volatility that others wish to shed. At Berkshire, we would rather earn a lumpy 15% over time than a smooth 12%.”
Derivatives as financial time bombs
“Derivatives Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system.”
Derivatives limited only by imagination
“The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen).”
Reinsurance and derivatives are hard to exit
“In fact, the reinsurance and derivatives businesses are similar: Like Hell, both are easy to enter and almost impossible to exit.”
Why reinsurance and derivatives earnings run high
“Another commonality of reinsurance and derivatives is that both generate reported earnings that are often wildly overstated. That’s tr ue because today’s earnings are in a significant way based on estimates whose inaccuracy may not be exposed for many years.”
Derivative marking errors favor insiders
“Almost invariably, [derivatives marking errors] have favored either the tr ader who was eyeing a multi-million dollar bonus or the CEO who wanted to report impressi ve ‘earnings’ (or both).”
Derivatives worsen unrelated corporate trouble
“Another problem about derivatives is that they can exacerbate trouble that a corporation has run into for completely unrelated reasons.”
Chain-reaction risk favors fewer links
“When a ‘chain reaction’ threat exists within an industry, it pays to minimize links of any kind.”
Credit risk concentrated in few dealers
“Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one other. The troubles of one could quickly infect the others.”
Bank derivatives footnotes hide the risk
“When Charlie and I finish reading the long footnotes detailing the derivatives activities of major banks, the only thing we understand is that we don’t understand how much risk the institution is running.”
The derivatives genie is out
“The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event make s their toxicity clear.”
Derivatives as financial weapons of mass destruction
“In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
Successful investing sometimes means inactivity
“With short-term money returning less than 1% after-tax, sitting it out is no fun. But occasionally successful investing requires inactivity.”
Sound businesses at sensible prices rarely lose
“In stocks, we expect every commitment to work out well because we concentrate on conservatively financed businesses with strong competitive strengths, run by able and honest people. If we buy into these companies at sensible prices, losses should be rare.”
Rising stock prices, falling manager norms
“As stock prices went up, the behavioral norms of managers went down.”
When collegiality trumped his independence
“My own behavior, I must ruefully add, frequently fell short as well: Too often I was silent when management made proposals that I judged to be counter to the interests of shareholders. In those cases, collegiality trumped independence.”
Fee cuts matter to managers, not directors
“Under the current system, though, reductions mean nothing to ‘independent’ directors while meaning everything to managers.”
Reining in CEOs takes big owners
“Getting rid of mediocre CEOs and eliminating overreaching by the able ones requires action by owners – big owners.”
Managers resist a hard look at pay
“Managers will cheerfully agree to board ‘diversity,’ attest to SEC filings and adopt meaningless proposals relating to process. What many will fight, however, is a hard look at their own pay and perks.”
Unclear loyalty means not on your side
“(If you can’t tell w hose side someone is on, they are not on yours.)”
Pay committees as negotiators for owners
“Directors should not serve on compensation committees unless they are themselves capable of negotiating on behalf of owners.”
High pay for exceptional performance only
“There’s nothing wrong with paying well for truly exceptional business performance. But, for anything short of that, it’s time for directors to shout ‘Less!’”
Directors driven by net worth, not fees
“Basically, we want the behavior of our directors to be driven by the effect their decision s will have on their family’s net worth, not by their compensation.”
Only outside auditors can judge earnings
“Only a company’s outside auditor can determine whether the earnings that a management purports to have made are suspect.”
Audit committees exist to make auditors talk
“The key job of the audit committee is simply to get the auditors to divulge what they know. To do this job, the committee must make sure that the auditors worry more about misleading its members than about offending management.”
Auditors treated the CEO as client
“[Auditors] have instead generally viewed the CEO, rather than the shareholders or directors, as their client.”
Auditors on the spot do their duty
“When auditors are put on the spot, they will do their duty.”
Haste is the enemy of accuracy
“Haste is the enemy of accuracy.”
Visible low roads suggest hidden ones
“When managements take the low road in aspects that are visible, it is likely they are following a similar path behind the scenes. There is seldom just one cockroach in the kitchen.”
Depreciation is cash paid up front
“In truth, depreciation is a particularly unattractive expense because the cash outlay it represents is paid up front, before the asset acquired has delivered any benefits to the business.”
Baffling footnotes are usually deliberate
“If you can’t understand a footnote or other managerial explanation, it’s usually because the CEO doesn’t want you to.”
Promising the numbers tempts making them up
“Managers that always promise to ‘make the numbers’ will at some point be tempted to make up the numbers.”