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Berkshire’s Performance vs. the S&P 500 - Berkshire …

Berkshire s Performance vs. the S&P 500 Annual Percentage ChangeYearin Per-ShareBook Value ofBerkshirein Per-ShareMarket Value ofBerkshirein S&P 500with ( )( ) ( ) ( ) ( )( ) ( )( ) ( ) ( ) ( ) ( )( ) ( ) ( ) ( ) ( ) ( )( ) ( )( )( ) ( ) ( ) Annual Gain Gain ,981%1,598,284%11,355%Notes:Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended 12/31. Starting in 1979,accounting rules required insurance companies to value the equity securities they hold at market rather than at the lower of cost or market, which waspreviously the requirement. In this table, Berkshire s results through 1978 have been restated to conform to the changed rules. In all other respects,the results are calculated using the numbers originally reported. The S&P 500 numbers arepre-taxwhereas the Berkshire numbers such as Berkshire were simply to have owned the S&P 500 and accrued the appropriate taxes, its results would have lagged the S&P 500in years when that index showed a positive return, but would have exceeded the S&P 500 in years when the index showed a negative return.

BERKSHIRE HATHAWAY INC. To the Shareholders of Berkshire Hathaway Inc.: Berkshire’s gain in net worth during 2015 was $15.4 …

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Transcription of Berkshire’s Performance vs. the S&P 500 - Berkshire …

1 Berkshire s Performance vs. the S&P 500 Annual Percentage ChangeYearin Per-ShareBook Value ofBerkshirein Per-ShareMarket Value ofBerkshirein S&P 500with ( )( ) ( ) ( ) ( )( ) ( )( ) ( ) ( ) ( ) ( )( ) ( ) ( ) ( ) ( ) ( )( ) ( )( )( ) ( ) ( ) Annual Gain Gain ,981%1,598,284%11,355%Notes:Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended 12/31. Starting in 1979,accounting rules required insurance companies to value the equity securities they hold at market rather than at the lower of cost or market, which waspreviously the requirement. In this table, Berkshire s results through 1978 have been restated to conform to the changed rules. In all other respects,the results are calculated using the numbers originally reported. The S&P 500 numbers arepre-taxwhereas the Berkshire numbers such as Berkshire were simply to have owned the S&P 500 and accrued the appropriate taxes, its results would have lagged the S&P 500in years when that index showed a positive return, but would have exceeded the S&P 500 in years when the index showed a negative return.

2 Over theyears, the tax costs would have caused the aggregate lag to be hathaway the Shareholders of Berkshire hathaway Inc.: Berkshire s gain in net worth during 2015 was $ billion, which increased the per-share book value ofboth our Class A and Class B stock by Over the last 51 years (that is, since present management took over),per-share book value has grown from $19 to $155,501, a rate of compounded annually.*During the first half of those years, Berkshire s net worth was roughly equal to the number that reallycounts: the intrinsic value of the business. The similarity of the two figures existed then because most of ourresources were deployed in marketable securities that were regularly revalued to their quoted prices (less the tax thatwould be incurred if they were to be sold). In Wall Street parlance, our balance sheet was then in very large part marked to market. By the early 1990s, however, our focus had changed to the outright ownership of businesses, a shift thatdiminished the relevance of balance-sheet figures.

3 That disconnect occurred because the accounting rules that applyto controlled companies are materially different from those used in valuing marketable securities. The carryingvalue of the losers we own is written down, but winners areneverrevalued ve had experience with both outcomes: I ve made some dumb purchases, and the amount I paid for theeconomic goodwill of those companies was later written off, a move that reduced Berkshire s book value. We vealso had some winners a few of them very big but have not written those up by a time, this asymmetrical accounting treatment (with which we agree) necessarily widens the gapbetween intrinsic value and book value. Today, the large and growing unrecorded gains at our winners make itclear that Berkshire s intrinsic valuefarexceeds its book value. That s why we would be delighted to repurchaseour shares should they sell as low as 120% of book value. At that level, purchases would instantly and meaningfullyincrease per-share intrinsic value for Berkshire s continuing unrecorded increase in the value of our owned businesses explains why Berkshire s aggregate market-value gain tabulated on the facing page materially exceeds our book-value gain.

4 The two indicators varyerratically over short periods. Last year, for example, book-value Performance was superior. Over time, however,market-value gains should continue their historical tendency to exceed gains in book value.* All per-share figures used in this report apply to Berkshire s A shares. Figures for the B shares are 1/1500thofthose shown for Year at BerkshireCharlie Munger, Berkshire Vice Chairman and my partner, and I expect Berkshire snormalizedearningpower to increase every year. (Actualyear-to-year earnings, of course, will sometimes decline because of weaknessin the economy or, possibly, because of insurance mega-catastrophes.) In some years the normalized gains willbe small; at other times they will be material. Last year was a good one. Here are the highlights: The most important development at Berkshire during 2015 was not financial, though it led to betterearnings. After a poor Performance in 2014, our BNSF railroad dramatically improved its service tocustomers last year.

5 To attain that result, we invested about $ billion during the year in capitalexpenditures, a sum far and away the record for any American railroad and nearly three times our annualdepreciation charge. It was money well moves about 17% of America s intercity freight (measured by revenue ton-miles), whethertransported by rail, truck, air, water or pipeline. In that respect, we are a strong number one among theseven large American railroads (two of which are Canadian-based), carrying 45% more ton-miles of freightthan our closest competitor. Consequently, our maintaining first-class service is not only vital to ourshippers welfare but also important to the smooth functioning of the most American railroads, 2015 was a disappointing year. Aggregate ton-miles fell, and earningsweakened as well. BNSF, however, maintained volume, and pre-tax income rose to a record $ billion*(a gain of $606 million from 2014). Matt Rose and Carl Ice, the managers of BNSF, have my thanks anddeserve yours.

6 BNSF is the largest of our Powerhouse Five, a group that also includes Berkshire hathaway Energy,Marmon, Lubrizol and IMC. Combined, these companies our five most profitable non-insurancebusinesses earned $ billion in 2015, an increase of $650 million over the five, only Berkshire hathaway Energy, then earning $393 million, was owned by us in , we purchased three of the other four on an all-cash basis. In acquiring BNSF, however, wepaid about 70% of the cost in cash and, for the remainder, issued Berkshire shares that increased thenumber outstanding by In other words, the $ billion gain in annual earnings delivered Berkshireby the five companies over the twelve-year span has been accompanied by only minor dilution. Thatsatisfies our goal of not simply increasing earnings, but making sure we also increaseper-shareresults. Next year, I will be discussing the Powerhouse Six. The newcomer will be Precision Castparts Corp.( PCC ), a business that we purchased a month ago for more than $32 billion of cash.

7 PCC fits perfectlyinto the Berkshire model and will substantially increase ournormalizedper-share earning CEO Mark Donegan, PCC has become the world s premier supplier of aerospace components (mostof them destined to be original equipment, though spares are important to the company as well). Mark saccomplishments remind me of the magic regularly performed by Jacob Harpaz at IMC, our remarkableIsraeli manufacturer of cutting tools. The two men transform very ordinary raw materials into extraordinaryproducts that are used by major manufacturers worldwide. Each is the da Vinci of his s products, often delivered under multi-year contracts, are key components in most large industries are served as well by the company s 30,466 employees, who work out of 162 plants in 13countries. In building his business, Mark has made many acquisitions and will make more. We lookforward to having him deploy Berkshire s capital.* Throughout this letter, all earnings are stated on a pre-tax basis unless otherwise personal thank-you: The PCC acquisition would not have happened without the input and assistance ofour own Todd Combs, who brought the company to my attention a few years ago and went on to educateme about both the business and Mark.

8 Though Todd and Ted Weschler are primarily investment managers they each handle about $9 billion for us both of them cheerfully and ably add major value to Berkshirein other ways as well. Hiring these two was one of my best moves. With the PCC acquisition, Berkshire will own 101 4companies that would populate the Fortune 500 if theywere stand-alone businesses. (Our 27% holding of Kraft Heinz is the1 4.) That leaves just under 98% ofAmerica s business giants that have yet to call us. Operators are standing by. Our many dozens of smaller non-insurance businesses earned $ billion last year, up from $ billion in2014. Within this group, we have one company that last year earned more than $700 million, two thatearned between $400 million and $700 million, seven that earned between $250 million and $400 million,six that earned between $100 million and $250 million, and eleven that earned between $50 million and$100 million. We love them all: This collection of businesses will expand both in number and earnings asthe years go by.

9 When you hear talk about America s crumbling infrastructure, rest assured that they re not talking aboutBerkshire. We invested $16 billion in property, plant and equipment last year, a full 86% of it deployed inthe United told you earlier about BNSF s record capital expenditures in 2015. At the end ofeveryyear, our railroad sphysical facilities will be improved from those existing twelve months hathaway Energy ( BHE ) is a similar story. That company has invested $16 billion inrenewables and now owns 7% of the country s wind generation and 6% of its solar generation. Indeed, the4,423 megawatts of wind generation owned and operated by our regulated utilities issixtimes thegeneration of the runner-up re not done. Last year, BHE made major commitments to the future development of renewables insupport of the Paris Climate Change Conference. Our fulfilling those promises will make great sense, bothfor the environment and for Berkshire s economics.

10 Berkshire s huge and growing insurance operation again operated at an underwriting profit in 2015 thatmakes 13 years in a row and increased its float. During those years, our float money that doesn t belongto us but that we can invest for Berkshire s benefit grew from $41 billion to $88 billion. Though neitherthat gain nor the size of our float is reflected in Berkshire s earnings, float generates significant investmentincome because of the assets it allows us to , our underwriting profit totaled $26 billion during the 13-year period, including $ billionearned in 2015. Without a doubt, Berkshire s largest unrecorded wealth lies in its insurance ve spent 48 years building this multi-faceted operation, and it can t be replicated. While Charlie and I search for new businesses to buy, our many subsidiaries are regularly making bolt-onacquisitions. Last year we contracted for 29 bolt-ons, scheduled to cost $634 million in aggregate.


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