Berkshire’s Performance vs. the S&P 500
Annual Percentage Change
Year
in Per-Share
Book Value of
Berkshire
in Per-Share
Market Value of
Berkshire
in S&P 500
with Dividends
Included
1965 ………………………………………………. 23.8 49.5 10.0
1966 ………………………………………………. 20.3 (3.4) (11.7)
1967 ………………………………………………. 11.0 13.3 30.9
1968 ………………………………………………. 19.0 77.8 11.0
1969 ………………………………………………. 16.2 19.4 (8.4)
1970 ………………………………………………. 12.0 (4.6) 3.9
1971 ………………………………………………. 16.4 80.5 14.6
1972 ………………………………………………. 21.7 8.1 18.9
1973 ………………………………………………. 4.7 (2.5) (14.8)
1974 ………………………………………………. 5.5 (48.7) (26.4)
1975 ………………………………………………. 21.9 2.5 37.2
1976 ………………………………………………. 59.3 129.3 23.6
1977 ………………………………………………. 31.9 46.8 (7.4)
1978 ………………………………………………. 24.0 14.5 6.4
1979 ………………………………………………. 35.7 102.5 18.2
1980 ………………………………………………. 19.3 32.8 32.3
1981 ………………………………………………. 31.4 31.8 (5.0)
1982 ………………………………………………. 40.0 38.4 21.4
1983 ………………………………………………. 32.3 69.0 22.4
1984 ………………………………………………. 13.6 (2.7) 6.1
1985 ………………………………………………. 48.2 93.7 31.6
1986 ………………………………………………. 26.1 14.2 18.6
1987 ………………………………………………. 19.5 4.6 5.1
1988 ………………………………………………. 20.1 59.3 16.6
1989 ………………………………………………. 44.4 84.6 31.7
1990 ………………………………………………. 7.4 (23.1) (3.1)
1991 ………………………………………………. 39.6 35.6 30.5
1992 ………………………………………………. 20.3 29.8 7.6
1993 ………………………………………………. 14.3 38.9 10.1
1994 ………………………………………………. 13.9 25.0 1.3
1995 ………………………………………………. 43.1 57.4 37.6
1996 ………………………………………………. 31.8 6.2 23.0
1997 ………………………………………………. 34.1 34.9 33.4
1998 ………………………………………………. 48.3 52.2 28.6
1999 ………………………………………………. 0.5 (19.9) 21.0
2000 ………………………………………………. 6.5 26.6 (9.1)
2001 ………………………………………………. (6.2) 6.5 (11.9)
2002 ………………………………………………. 10.0 (3.8) (22.1)
2003 ………………………………………………. 21.0 15.8 28.7
2004 ………………………………………………. 10.5 4.3 10.9
2005 ………………………………………………. 6.4 0.8 4.9
2006 ………………………………………………. 18.4 24.1 15.8
2007 ………………………………………………. 11.0 28.7 5.5
2008 ………………………………………………. (9.6) (31.8) (37.0)
2009 ………………………………………………. 19.8 2.7 26.5
2010 ………………………………………………. 13.0 21.4 15.1
2011 ………………………………………………. 4.6 (4.7) 2.1
2012 ………………………………………………. 14.4 16.8 16.0
2013 ………………………………………………. 18.2 32.7 32.4
2014 ………………………………………………. 8.3 27.0 13.7
2015 ………………………………………………. 6.4 (12.5) 1.4
2016 ………………………………………………. 10.7 23.4 12.0
2017 ………………………………………………. 23.0 21.9 21.8
Compounded Annual Gain – 1965-2017 ……………………… 19.1% 20.9% 9.9%
Overall Gain – 1964-2017 ……………………………….. 1,088,029% 2,404,748% 15,508%
Note: 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 was previously
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 are pre-tax whereas the Berkshire numbers are after-tax. If a corporation
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 500 in 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. Over the years,
the tax costs would have caused the aggregate lag to be substantial.
2
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
Berkshire’s gain in net worth during 2017 was $65.3 billion, which increased the per-share book value of
both our Class A and Class B stock by 23%. Over the last 53 years (that is, since present management took over), per-
share book value has grown from $19 to $211,750, a rate of 19.1% compounded annually.*
The format of that opening paragraph has been standard for 30 years. But 2017 was far from standard: A
large portion of our gain did not come from anything we accomplished at Berkshire.
The $65 billion gain is nonetheless real – rest assured of that. But only $36 billion came from Berkshire’s
operations. The remaining $29 billion was delivered to us in December when Congress rewrote the U.S. Tax Code.
(Details of Berkshire’s tax-related gain appear on page K-32 and pages K-89 – K-90.)
After stating those fiscal facts, I would prefer to turn immediately to discussing Berkshire’s operations. But,
in still another interruption, I must first tell you about a new accounting rule – a generally accepted accounting
principle (GAAP) – that in future quarterly and annual reports will severely distort Berkshire’s net income figures and
very often mislead commentators and investors.
The new rule says that the net change in unrealized investment gains and losses in stocks we hold must be
included in all net income figures we report to you. That requirement will produce some truly wild and capricious
swings in our GAAP bottom-line. Berkshire owns $170 billion of marketable stocks (not including our shares of Kraft
Heinz), and the value of these holdings can easily swing by $10 billion or more within a quarterly reporting period.
Including gyrations of that magnitude in reported net income will swamp the truly important numbers that describe our
operating performance. For analytical purposes, Berkshire’s “bottom-line” will be useless.
The new rule compounds the communication problems we have long had in dealing with the realized gains
(or losses) that accounting rules compel us to include in our net income. In past quarterly and annual press releases,
we have regularly warned you not to pay attention to these realized gains, because they – just like our unrealized gains
– fluctuate randomly.
That’s largely because we sell securities when that seems the intelligent thing to do, not because we are trying
to influence earnings in any way. As a result, we sometimes have reported substantial realized gains for a period when
our portfolio, overall, performed poorly (or the converse).
*All per-share figures used in this report apply to Berkshire’s A shares. Figures for the B shares are 1/1500th of those
shown for the A shares.
3
With the new rule about unrealized gains exacerbating the distortion caused by the existing rules applying to
realized gains, we will take pains every quarter to explain the adjustments you need in order to make sense of our
numbers. But televised commentary on earnings releases is often instantaneous with their receipt, and newspaper
headlines almost always focus on the year-over-year change in GAAP net income. Consequently, media reports
sometimes highlight figures that unnecessarily frighten or encourage many readers or viewers.
We will attempt to alleviate this problem by continuing our practice of publishing financial reports late on
Friday, well after the markets close, or early on Saturday morning. That will allow you maximum time for analysis
and give investment professionals the opportunity to deliver informed commentary before markets open on Monday.
Nevertheless, I expect considerable confusion among shareholders for whom accounting is a foreign language.
At Berkshire what counts most are increases in our normalized per-share earning power. That metric is what
Charlie Munger, my long-time partner, and I focus on – and we hope that you do, too. Our scorecard for 2017 follows.
Acquisitions
There are four building blocks that add value to Berkshire: (1) sizable stand-alone acquisitions; (2) bolt-on
acquisitions that fit with businesses we already own; (3) internal sales growth and margin improvement at our many
and varied businesses; and (4) investment earnings from our huge portfolio of stocks and bonds. In this section, we
will review 2017 acquisition activity.
In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths;
able and high-grade management; good returns on the net tangible assets required to operate the business;
opportunities for internal growth at attractive returns; and, finally, a sensible purchase price.
That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far
from spectacular, businesses hit an all-time high. Indeed, price seemed almost irrelevant to an army of optimistic
purchasers.
Why the purchasing frenzy? In part, it’s because the CEO job self-selects for “can-do” types. If Wall Street
analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening
teenager to be sure to have a normal sex life.
Once a CEO hungers for a deal, he or she will never lack for forecasts that justify the purchase. Subordinates
will be cheering, envisioning enlarged domains and the compensation levels that typically increase with corporate
size. Investment bankers, smelling huge fees, will be applauding as well. (Don’t ask the barber whether you need a
haircut.) If the historical performance of the target falls short of validating its acquisition, large “synergies” will be
forecast. Spreadsheets never disappoint.
The ample availability of extraordinarily cheap debt in 2017 further fueled purchase activity. After all, even
a high-priced deal will usually boost per-share earnings if it is debt-financed. At Berkshire, in contrast, we evaluate
acquisitions on an all-equity basis, knowing that our taste for overall debt is very low and that to assign a large portion
of our debt to any individual business would generally be fallacious (leaving aside certain exceptions, such as debt
dedicated to Clayton’s lending portfolio or to the fixed-asset commitments at our regulated utilities). We also never
factor in, nor do we often find, synergies.
Our aversion to leverage has dampened our returns over the years. But Charlie and I sleep well. Both of us
believe it is insane to risk what you have and need in order to obtain what you don’t need. We held this view 50 years
ago when we each ran an investment partnership, funded by a few friends and relatives who trusted us. We also hold
it today after a million or so “partners” have joined us at Berkshire.
4
Despite our recent drought of acquisitions, Charlie and I believe that from time to time Berkshire will have
opportunities to make very large purchases. In the meantime, we will stick with our simple guideline: The less the
prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own.
************
We were able to make one sensible stand-alone purchase last year, a 38.6% partnership interest in Pilot Flying
J (“PFJ”). With about $20 billion in annual volume, the company is far and away the nation’s leading travel-center
operator.
PFJ has been run from the get-go by the remarkable Haslam family. “Big Jim” Haslam began with a dream
and a gas station 60 years ago. Now his son, Jimmy, manages 27,000 associates at about 750 locations throughout
North America. Berkshire has a contractual agreement to increase its partnership interest in PFJ to 80% in 2023;
Haslam family members will then own the remaining 20%. Berkshire is delighted to be their partner.
When driving on the Interstate, drop in. PFJ sells gasoline as well as diesel fuel, and the food is good. If it’s
been a long day, remember, too, that our properties have 5,200 showers.
************
Let’s move now to bolt-on acquisitions. Some of these were small transactions that I will not detail. Here is
an account, however, of a few larger purchases whose closings stretched between late 2016 and early 2018.
ŠClayton Homes acquired two builders of conventional homes during 2017, a move that more than doubled
our presence in a field we entered only three years ago. With these additions – Oakwood Homes in Colorado and
Harris Doyle in Birmingham – I expect our 2018 site built volume will exceed $1 billion.
Clayton’s emphasis, nonetheless, remains manufactured homes, both their construction and their financing.
In 2017 Clayton sold 19,168 units through its own retail operation and wholesaled another 26,706 units to independent
retailers. All told, Clayton accounted for 49% of the manufactured-home market last year. That industry-leading share
– about three times what our nearest competitor did – is a far cry from the 13% Clayton achieved in 2003, the year it
joined Berkshire.
Both Clayton Homes and PFJ are based in Knoxville, where the Clayton and Haslam families have long been
friends. Kevin Clayton’s comments to the Haslams about the advantages of a Berkshire affiliation, and his admiring
comments about the Haslam family to me, helped cement the PFJ deal.
ŠNear the end of 2016, Shaw Industries, our floor coverings business, acquired U.S. Floors (“USF”), a rapidly
growing distributor of luxury vinyl tile. USF’s managers, Piet Dossche and Philippe Erramuzpe, came out of the gate
fast, delivering a 40% increase in sales in 2017, during which their operation was integrated with Shaw’s. It’s clear
that we acquired both great human assets and business assets in making the USF purchase.
Vance Bell, Shaw’s CEO, originated, negotiated and completed this acquisition, which increased Shaw’s
sales to $5.7 billion in 2017 and its employment to 22,000. With the purchase of USF, Shaw has substantially
strengthened its position as an important and durable source of earnings for Berkshire.
ŠI have told you several times about HomeServices, our growing real estate brokerage operation. Berkshire
backed into this business in 2000 when we acquired a majority interest in MidAmerican Energy (now named Berkshire
Hathaway Energy). MidAmerican’s activities were then largely in the electric utility field, and I originally paid little
attention to HomeServices.
5
But, year-by-year, the company added brokers and, by the end of 2016, HomeServices was the second-largest
brokerage operation in the country – still ranking, though, far behind the leader, Realogy. In 2017, however,
HomeServices’ growth exploded. We acquired the industry’s third-largest operator, Long and Foster; number 12,
Houlihan Lawrence; and Gloria Nilson.
With those purchases we added 12,300 agents, raising our total to 40,950. HomeServices is now close to
leading the country in home sales, having participated (including our three acquisitions pro-forma) in $127 billion of
“sides” during 2017. To explain that term, there are two “sides” to every transaction; if we represent both buyer and
seller, the dollar value of the transaction is counted twice.
Despite its recent acquisitions, HomeServices is on track to do only about 3% of the country’s home-
brokerage business in 2018. That leaves 97% to go. Given sensible prices, we will keep adding brokers in this most
fundamental of businesses.
ŠFinally, Precision Castparts, a company built through acquisitions, bought Wilhelm Schulz GmbH, a
German maker of corrosion resistant fittings, piping systems and components. Please allow me to skip a further
explanation. I don’t understand manufacturing operations as well as I do the activities of real estate brokers, home
builders or truck stops.
Fortunately, I don’t need in this instance to bring knowledge to the table: Mark Donegan, CEO of Precision,
is an extraordinary manufacturing executive, and any business in his domain is slated to do well. Betting on people
can sometimes be more certain than betting on physical assets.
Let’s now move on to operations, beginning with property-casualty (“p/c”) insurance, a business I do
