2020 Annual Letter

--- Page 1 --- Berkshire’s Performance vs. the S&P 500 Annual Percentage Change Yearin Per-Share Market Value of Berkshirein S&P 500 with Dividends Included 1965 ......................................................................... 49.5 10.0 1966 ......................................................................... (3.4) (11.7) 1967 ......................................................................... 13.3 30.9 1968 ......................................................................... 77.8 11.0 1969 ......................................................................... 19.4 (8.4) 1970 ......................................................................... (4.6) 3.9 1971 ......................................................................... 80.5 14.6 1972 ......................................................................... 8 . 1 18.9 1973 ......................................................................... (2.5) (14.8) 1974 ......................................................................... (48.7) (26.4) 1975 ......................................................................... 2 . 5 37.2 1976 ......................................................................... 129.3 23.6 1977 ......................................................................... 46.8 (7.4) 1978 ......................................................................... 14.5 6.4 1979 ......................................................................... 102.5 18.2 1980 ......................................................................... 32.8 32.3 1981 ......................................................................... 31.8 (5.0) 1982 ......................................................................... 38.4 21.4 1983 ......................................................................... 69.0 22.4 1984 ......................................................................... (2.7) 6.1 1985 ......................................................................... 93.7 31.6 1986 ......................................................................... 14.2 18.6 1987 ......................................................................... 4 . 6 5 . 1 1988 ......................................................................... 59.3 16.6 1989 ......................................................................... 84.6 31.7 1990 ......................................................................... (23.1) (3.1) 1991 ......................................................................... 35.6 30.5 1992 ......................................................................... 29.8 7.6 1993 ......................................................................... 38.9 10.1 1994 ......................................................................... 25.0 1.3 1995 ......................................................................... 57.4 37.6 1996 ......................................................................... 6 . 2 23.0 1997 ......................................................................... 34.9 33.4 1998 ......................................................................... 52.2 28.6 1999 ......................................................................... (19.9) 21.0 2000 ......................................................................... 26.6 (9.1) 2001 ......................................................................... 6 . 5 (11.9) 2002 ......................................................................... (3.8) (22.1) 2003 ......................................................................... 15.8 28.7 2004 ......................................................................... 4 . 3 10.9 2005 ......................................................................... 0 . 8 4 . 9 2006 ......................................................................... 24.1 15.8 2007 ......................................................................... 28.7 5.5 2008 ......................................................................... (31.8) (37.0) 2009 ......................................................................... 2 . 7 26.5 2010 ......................................................................... 21.4 15.1 2011 ......................................................................... (4.7) 2.1 2012 ......................................................................... 16.8 16.0 2013 ......................................................................... 32.7 32.4 2014 ......................................................................... 27.0 13.7 2015 ......................................................................... (12.5) 1.4 2016 ......................................................................... 23.4 12.0 2017 ......................................................................... 21.9 21.8 2018 ......................................................................... 2 . 8 (4.4) 2019 ......................................................................... 11.0 31.5 2020 ......................................................................... 2 . 4 18.4 Compounded Annual Gain – 1965-2020 ............................................ 20.0% 10.2% Overall Gain – 1964-2020 ........................................................ 2,810,526% 23,454% Note: Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended 12/31. 2 --- Page 2 --- BERKSHIRE HATHAWAY INC. To the Shareholders of Berkshire Hathaway Inc.: Berkshire earned $42.5 billion in 2020 according to generally accepted accounting principles (commonly called “GAAP”). The four components of that figure are $21.9 billion of operating earnings, $4.9 billion of realizedcapital gains, a $26.7 billion gain from an increase in the amount of net unrealized capital gains that exist in the stocks we hold and, finally, an $11 billion lossfrom a write-down in the value of a few subsidiary and affiliate businesses that we own. All items are stated on an after-tax basis. Operating earnings are what count most, even during periods when they are notthe largest item in our GAAP total. Our focus at Berkshire is both to increase this segment of our income and to acquire large and favorably-situatedbusinesses. Last year, however, we met neither goal: Berkshire made no sizable acquisitions and operating earningsfell9%. We did, though, increase Berkshire’s per-share intrinsic value by both retaining earnings and repurchasing about 5% of our shares. The two GAAP components pertaining to capital gains or losses (whether realized or unrealized) fluctuate capriciously from year to year, reflecting swings in the stock market. Whatever today’s figures, Charlie Munger, my long-time partner, and I firmly believe that, over time, Berkshire’s capital gains from its investment holdings will besubstantial. As I’ve emphasized many times, Charlie and I view Berkshire’s holdings of marketable stocks – at yearend worth $281 billion – as a collection of businesses . We don’t control the operations of those companies, but we do share proportionately in their long-term prosperity. From an accounting standpoint, however, our portion of theirearnings isnotincluded in Berkshire’s income. Instead, only what these investees pay us in dividends is recorded on our books. Under GAAP, the huge sums that investees retain on our behalf become invisible. What’s out of sight, however, should notbe out of mind: Those unrecorded retained earnings are usually building value – lotsof value – for Berkshire. Investees use the withheld funds to expand their business, make acquisitions, pay off debt and, often, to repurchase their stock (an act that increases our share of their future earnings).As we pointed out in these pages last year, retained earnings have propelled American business throughout ourcountry’s history. What worked for Carnegie and Rockefeller has, over the years, worked its magic for millions ofshareholders as well. Of course, some of our investees will disappoint, adding little, if anything, to the value of their company by retaining earnings. But others will over-deliver, a few spectacularly. In aggregate, we expect our share of the hugepile of earnings retained by Berkshire’s non-controlled businesses (what others would label our equity portfolio) toeventually deliver us an equal or greater amount of capital gains. Over our 56-year tenure, that expectation has beenmet. 3 --- Page 3 --- The final component in our GAAP figure – that ugly $11 billion write-down – is almost entirely the quantification of a mistake I made in 2016. That year, Berkshire purchased Precision Castparts (“PCC”), and I paidtoo much for the company. No one misled me in any way – I was simply too optimistic about PCC’s normalized profit potential. Last year, my miscalculation was laid bare by adverse developments throughout the aerospace industry, PCC’s mostimportant source of customers. In purchasing PCC, Berkshire bought a fine company – the best in its business. Mark Donegan, PCC’s CEO, is a passionate manager who consistently pours the same energy into the business that he did before we purchased it.We are lucky to have him running things. I believe I was right in concluding that PCC would, over time, earn good returns on the net tangible assets deployed in its operations. I was wrong, however, in judging the average amount of future earnings and, consequently, wrong in my calculation of the proper price to pay for the business. PCC is far from my first error of that sort. But it’s a big one. Two Strings to Our Bow Berkshire is often labeled a conglomerate, a negative term applied to holding companies that own a hodge-podge of unrelated businesses. And, yes, that describes Berkshire – but only in part. To understand how andwhy we differ from the prototype conglomerate, let’s review a little history. Over time, conglomerates have generally limited themselves to buying businesses in their entirety . That strategy, however, came with two major problems. One was unsolvable: Most of the truly great businesses had nointerest in having anyone take them over. Consequently, deal-hungry conglomerateurs had to focus on so-so companies that lacked important and durable competitive strengths. That was not a great pond in which to fish. Beyond that, as conglomerateurs dipped into this universe of mediocre businesses, they often found themselves required to pay staggering “control” premiums to snare their quarry. Aspiring conglomerateurs knew theanswer to this “overpayment” problem: They simply needed to manufacture a vastly overvalued stock of their ownthat could be used as a “currency” for pricey acquisitions. (“I’ll pay you $10,000 for your dog by giving you two ofmy $5,000 cats.”) Often, the tools for fostering the overvaluation of a conglomerate’s stock involved promotional techniques and “imaginative” accounting maneuvers that were, at best, deceptive and that sometimes crossed the line into fraud.When these tricks were “successful,” the conglomerate pushed its own stock to, say, 3x its business value in order tooffer the target 2x itsvalue. Investing illusions can continue for a surprisingly long time. Wall Street loves the fees that deal-making generates, and the press loves the stories that colorful promoters provide. At a point, also, the soaring price of apromoted stock can itself become the “proof” that an illusion is reality. 4 --- Page 4 --- Eventually, of course, the party ends, and many business “emperors” are found to have no clothes. Financial history is replete with the names of famous conglomerateurs who were initially lionized as business geniuses byjournalists, analysts and investment bankers, but whose creations ended up as business junkyards. Conglomerates earned their terrible reputation. ************ Charlie and I want our conglomerate to ownall or part of a diverse group of businesses with good economic characteristics and good managers. Whether Berkshire controls these businesses, however, is unimportant to us. It took me a while to wise up. But Charlie – and also my 20-year struggle with the textile operation I inherited at Berkshire – finally convinced me that owning a non-controlling portion of a wonderful business is more profitable,more enjoyable and farless work than struggling with 100% of a marginal enterprise. For those reasons, ourconglomerate will remain a collection of controlled andnon-controlled businesses. Charlie and I will simply deploy your capital into whatever we believe makes the most sense, based on a company’sdurable competitive strengths, the capabilities and character of its management, and price. If that strategy requires little or no effort on our part, so much the better. In contrast to the scoring system utilized in diving competitions, you are awarded nopoints in business endeavors for “degree of difficulty.” Furthermore, as Ronald Reagan cautioned: “It’s said that hard work never killed anyone, but Isay why take the chance?” The Family Jewels and How We Increase Your Share of These Gems On page A-1 we list Berkshire’s subsidiaries, a smorgasbord of businesses employing 360,000 at yearend. You can read much more about these controlled operations in the 10-K that fills the back part of this report. Our majorpositions in companies that we partly own and don’t control are listed on page 7 of this letter. That portfolio of businesses, too, is large and diverse. Most of Berkshire’s value, however, resides in four businesses, three controlled and one in which we have only a 5.4% interest. All four are jewels. The largest in value is our property/casualty insurance operation, which for 53 years has been the core of Berkshire. Our family of insurers is unique in the insurance field. So, too, is its manager, Ajit Jain, who joinedBerkshire in 1986. Overall, the insurance fleet operates with farmore capital than is deployed by any of its competitors worldwide. That financial strength, coupled with the huge flow of cash Berkshire annually receives from its non-insurance businesses, allows our insurance companies to safely follow an equity-heavy investment strategy not feasible for the overwhelming majority of insurers. Those competitors, for both regulatory and credit-rating reasons,must focus on bonds. And bonds are not the place to be these days. Can you believe that the income recently available from a 10-year U.S. Treasury bond – the yield was 0.93% at yearend – had fallen 94% from the 15.8% yield available in September 1981? In certain large and important countries, such as Germany and Japan, investors earn a negative return on trillions of dollars of sovereign debt. Fixed-income investors worldwide – whether pension funds, insurancecompanies or retirees – face a bleak future. 5 --- Page 5 --- Some insurers, as well as other bond investors, may try to juice the pathetic returns now available by shifting their purchases to obligations backed by shaky borrowers. Risky loans, however, are notthe answer to inadequate interest rates. Three decades ago, the once-mighty savings and loan industry destroyed itself, partly by ignoring thatmaxim. Berkshire now enjoys $138 billion of insurance “float” – funds that do not belong to us, but are nevertheless ours to deploy, whether in bonds, stocks or cash equivalents such as U.S. Treasury bills. Float has some similaritiesto bank deposits: cash flows in and out daily to insurers, with the total they hold changing very little. The massivesum held by Berkshire is likely to remain near its present level for many years and, on a cumulative basis, has beencostless to us. That happy result, of course, could change – but, over time, I like our odds. I have repetitiously – some might say endlessly – explained our insurance operation in my annual letters to you. Therefore, I will this year ask new shareholders who wish to learn more about our insurance business and “float”to read the pertinent section of the 2019 report, reprinted on page A-2. It’s important that you understand the risks,as well as the opportunities, existing in our insurance activities. Our second and third most valuable assets – it’s pretty much a toss-up at this point – are Berkshire’s 100% ownership of BNSF, America’s largest railroad measured by freight volume, and our 5.4% ownership of Apple. Andin the fourth spot is our 91% ownership of Berkshire Hathaway Energy (“BHE”). What we have here is a very unusualutility business, whose annual earnings have grown from $122 million to $3.4 billion during our 21 years of ownership. I’ll have more to say about BNSF and BHE later in this letter. For now, however, I would like to focus on a practice Berkshire will periodically use to enhance your interest in both its “Big Four” as well as the many other assets Berkshire owns. ************ Last year we demonstrated our enthusiasm for Berkshire’s spread of properties by repurchasing the equivalent of 80,998 “A” shares, spending $24.7 billion in the process. That action increased your ownership in allof Berkshire’s businesses by 5.2% without requiring you to so much as touch your wallet. Following criteria Charlie and I have long recommended, we made those purchases because we believed they would both enhance the intrinsic value per share for continuing shareholders andwould leave Berkshire with more than ample funds for any opportunities or problems it might encounter. In no way do we think that Berkshire shares should be repurchased at simply any price. I emphasize that point because American CEOs have an embarrassing record of devoting more company funds to repurchases whenprices have risen than when they have tanked. Our approach is exactly the reverse. Berkshire’s investment in Apple vividly illustrates the power of repurchases. We began buying Apple stock late in 2016 and by early July 2018, owned slightly more than one billion Apple shares (split-adjusted). Saying that,I’m referencing the investment held in Berkshire’s general account and am excluding a very small andseparately-managed holding of Apple shares that was subsequently sold. When we finished our purchases inmid-2018, Berkshire’s general account owned 5.2% of Apple. Our cost for that stake was $36 billion. Since then, we have both enjoyed regular dividends, averaging about $775 million annually, and have also – in 2020 – pocketed an additional $11 billion by selling a small portion of ourposition. Despite that sale – voila! – Berkshire now owns 5.4% of Apple. That increase was costless to us, coming about because Apple has continuously repurchased its shares, thereby substantially shrinking the number it now hasoutstanding. 6 --- Page 6 --- But that’s far from all of the good news. Because we also repurchased Berkshire shares during the 21⁄2years, younow indirectly own a full 10% more of Apple’s assets and future earnings than you did in July 2018. This agreeable dynamic continues. Berkshire has repurchased more shares since yearend and is likely to further reduce its share count in the future. Apple has publicly stated an intention to repurchase its shares as well. Asthese reductions occur, Berkshire shareholders will not only own a greater interest in our insurance group and in BNSFand BHE, but will also find their indirect ownership of Apple increasing as well. The math of repurchases grinds away slowly, but can be powerful over time. The process offers a simple way for investors to own an ever-expanding portion of exceptional businesses. And as a sultry Mae West assured us: “Too much of a good thing can be . . . wonderful.” Investments Below we list our fifteen common stock investments that at yearend were our largest in market value. We exclude our Kraft Heinz holding — 325,442,152 shares — because Berkshire is part of a control group and thereforemust account for that investment using the “equity” method. On its balance sheet, Berkshire carries the Kraft Heinzholding at a GAAP figure of $13.3 billion, an amount that represents Berkshire’s share of the audited net worth ofKraft Heinz on December 31, 2020. Please note, though, that the market value of our shares on that date was only$11.3 billion. 12/31/20 Shares* CompanyPercentage of Company Owned Cost** Market (in millions) 25,533,082 AbbVie Inc. ............................... 1 . 4 $ 2,333 $ 2,736 151,610,700 American Express Company .................. 18.8 1,287 18,331 907,559,761 Apple Inc. ................................. 5 . 4 31,089 120,424 1,032,852,006 Bank of America Corp. ...................... 11.9 14,631 31,306 66,835,615 The Bank of New York Mellon Corp. ........... 7 . 5 2,918 2,837 225,000,000 BYD Co. Ltd. .............................. 8 . 2 2 3 2 5,897 5,213,461 Charter Communications, Inc. ................. 2 . 7 9 0 4 3,449 48,498,965 Chevron Corporation ........................ 2 . 5 4,024 4,096 400,000,000 The Coca-Cola Company ..................... 9 . 3 1,299 21,936 52,975,000 General Motors Company .................... 3 . 7 1,616 2,206 81,304,200 Itochu Corporation .......................... 5 . 1 1,862 2,336 28,697,435 Merck & Co., Inc. ........................... 1 . 1 2,390 2,347 24,669,778 Moody’s Corporation ........................ 13.2 248 7,160 148,176,166 U.S. Bancorp .............................. 9 . 8 5,638 6,904 146,716,496 Verizon Communications Inc. ................. 3 . 5 8,691 8,620 Others*** ................................. 29,458 40,585 Total Equity Investments Carried at Market ...... $ 108,620 $ 281,170 * Excludes shares held by pension funds of Berkshire subsidiaries. ** This is our actual purchase price and also our tax basis.*** Includes a $10 billion investment in Occidental Petroleum, consisting of preferred stock and warrants to buy common stock, a combination now being valued at $9 billion. 7 --- Page 7 --- A Tale of Two Cities Success stories abound throughout America. Since our country’s birth, individuals with an idea, ambition and often just a pittance of capital have succeeded beyond their dreams by creating something new or by improvingthe customer’s experience with something old. Charlie and I journeyed throughout the nation to join with many of these individuals or their families. On the West Coast, we began the routine in 1972 with our purchase of See’s Candy. A full century ago, Mary See set out todeliver an age-old product that she had reinvented with special recipes. Added to her business plan were quaint storesstaffed by friendly salespeople. Her first small outlet in Los Angeles eventually led to several hundred shops, spreadthroughout the West. Today, Mrs. See’s creations continue to delight customers while providing life-long employment for thousands of women and men. Berkshire’s job is simply not to meddle with the company’s success. When a businessmanufactures and distributes a non-essential consumer product, the customer is the boss. And, after 100 years, the customer’s message to Berkshire remains clear: “Don’t mess with mycandy.” (The website is https://www.sees.com/; try the peanut brittle.) Let’s move across the continent to Washington, D.C. In 1936, Leo Goodwin, along with his wife, Lillian, became convinced that auto insurance – a standardized product customarily purchased from agents – could be solddirectly at a much lower price. Armed with $100,000, the pair took on giant insurers possessing 1,000 times or moretheir capital. Government Employees Insurance Company (later shortened to GEICO) was on its way. By luck, I was exposed to the company’s potential a full 70 years ago. It instantly became my first love (of an investment sort). You know the rest of the story: Berkshire eventually became the 100% owner of GEICO, whichat 84 years of age is constantly fine-tuning – but not changing – the vision of Leo and Lillian. There has been, however, a change in the company’s size. In 1937, its first full year of operation, GEICO did $238,288 of business. Last year the figure was $35 billion. ************ Today, with much of finance, media, government and tech located in coastal areas, it’s easy to overlook the many miracles occurring in middle America. Let’s focus on two communities that provide stunning illustrations ofthe talent and ambition existing throughout our country. You will not be surprised that I begin with Omaha.In 1940, Jack Ringwalt, a graduate of Omaha’s Central High School (the alma mater as well of Charlie, my dad, my first wife, our three children and two grandchildren), decided to start a property/casualty insurance companyfunded by $125,000 in capital. Jack’s dream was preposterous, requiring his pipsqueak operation – somewhat pompously christened as National Indemnity – to compete with giant insurers, all of which operated with abundant capital. Additionally, thosecompetitors were solidly entrenched with nationwide networks of well-funded and long-established local agents.Under Jack’s plan, National Indemnity, unlike GEICO, would itself use whatever agencies deigned to accept it andconsequently enjoy nocost advantage in its acquisition of business. To overcome those formidable handicaps, National Indemnity focused on “odd-ball” risks, which were deemed unimportant by the “big boys.” And, improbably,the strategy succeeded. Jack was honest, shrewd, likeable and a bit quirky. In particular, he disliked regulators. When he periodically became annoyed with their supervision, he would feel an urge to sell his company. 8 --- Page 8 --- Fortunately, I was nearby on one of those occasions. Jack liked the idea of joining Berkshire, and we made a deal in 1967, taking all of 15 minutes to reach a handshake. I never asked for an audit. Today National Indemnity is the onlycompany in the world prepared to insure certain giant risks. And, yes, it remains based in Omaha, a few miles from Berkshire’s home office. Over the years, we have purchased four additional businesses from Omaha families, the best known among them being Nebraska Furniture Mart (“NFM”). The company’s founder, Rose Blumkin (“Mrs. B”), arrived in Seattlein 1915 as a Russian emigrant, unable to read or speak English. She settled in Omaha several years later and by 1936had saved $2,500 with which to start a furniture store. Competitors and suppliers ignored her, and for a time their judgment seemed correct: World War II stalled her business, and at yearend 1946, the company’s net worth had grown to only $72,264. Cash, both in the till and ondeposit, totaled $50 (that’s not a typo). One invaluable asset, however, went unrecorded in the 1946 figures: Louie Blumkin, Mrs. B’s only son, had rejoined the store after four years in the U.S. Army. Louie fought at Normandy’s Omaha Beach following the D-Dayinvasion, earned a Purple Heart for injuries sustained in the Battle of the Bulge, and finally sailed home in November1945. Once Mrs. B and Louie were reunited, there was no stopping NFM. Driven by their dream, mother and son worked days, nights and weekends. The result was a retailing miracle. By 1983, the pair had created a business worth $60 million. That year, on my birthday, Berkshire purchased 80% of NFM, again without an audit. I counted on Blumkin family members to run the business; the third and fourthgeneration do so today. Mrs. B, it should be noted, worked daily until she was 103 – a ridiculously prematureretirement age as judged by Charlie and me. NFM now owns the three largest home-furnishings stores in the U.S. Each set a sales record in 2020, a feat achieved despite the closing of NFM’s stores for more than six weeks because of COVID-19. A post-script to this story says it all: When Mrs. B’s large family gathered for holiday meals, she always asked that they sing a song before eating. Her selection never varied: Irving Berlin’s “God Bless America.” ************ Let’s move somewhat east to Knoxville, the third largest city in Tennessee. There, Berkshire has ownership intworemarkable companies – Clayton Homes (100% owned) and Pilot Travel Centers (38% owned now, but headed for 80% in 2023). Each company was started by a young man who had graduated from the University of Tennessee and stayed put in Knoxville. Neither had a meaningful amount of capital nor wealthy parents. But, so what? Today, Clayton and Pilot each have annual pre-tax earnings of more than $1 billion . Together they employ about 47,000 men and women. Jim Clayton, after several other business ventures, founded Clayton Homes on a shoestring in 1956, and “Big Jim” Haslam started what became Pilot Travel Centers in 1958 by purchasing a service station for $6,000. Each of themen later brought into the business a son with the same passion, values and brains as his father. Sometimes there is amagic to genes. 9 --- Page 9 --- “Big Jim” Haslam, now 90, has recently authored an inspirational book in which he relates how Jim Clayton ’s son, Kevin, encouraged the Haslams to sell a large portion of Pilot to Berkshire. Every retailer knows that satisfiedcustomers are a store’s best salespeople. That’s true when businesses are changing hands as well. ************ When you next fly over Knoxville or Omaha, tip your hat to the Claytons, Haslams and Blumkins as well as to the army of successful entrepreneurs who populate every part of our country. These builders needed America’sframework for prosperity – a unique experiment when it was crafted in 1789 – to achieve their potential. In turn,America needed citizens like Jim C., Jim H., Mrs. B and Louie to accomplish the miracles our founding fathers sought. Today, many people forge similar miracles throughout the world, creating a spread of prosperity that benefits allof humanity. In its brief 232 years of existence, however, there has been noincubator for unleashing human potential like America. Despite some severe interruptions, our country’s economic progress has been breathtaking. Beyond that, we retain our constitutional aspiration of becoming “a more perfect union.” Progress on that front has been slow, uneven and often discouraging. We have, however, moved forward and will continue to do so. Our unwavering conclusion: Never bet against America. The Berkshire Partnership Berkshire is a Delaware corporation, and our directors must follow the state’s laws. Among them is a requirement that board members must act in the best interest of the corporation and its stockholders. Our directors embrace that doctrine. In addition, of course, Berkshire directors want the company to delight its customers, to develop and reward the talents of its 360,000 associates, to behave honorably with lenders and to be regarded as a good citizen of the manycities and states in which we operate. We value these four important constituencies. None of these groups, however, have a vote in determining such matters as dividends, strategic direction, CEO selection, or acquisitions and divestitures. Responsibilities like those fall solely on Berkshire’s directors, who must faithfully represent the long-term interests of the corporation and its owners . Beyond legal requirements, Charlie and I feel a special obligation to the many individual shareholders of Berkshire. A bit of personal history may help you to understand our unusual attachment and how it shapes ourbehavior. ************ Before my Berkshire years, I managed money for many individuals through a series of partnerships, the first three of those formed in 1956. As time passed, the use of multiple entities became unwieldy and, in 1962, weamalgamated 12 partnerships into a single unit, Buffett Partnership Ltd. (“BPL”). By that year, virtually all of my own money, and that of my wife as well, had become invested alongside the funds of my many limited partners. I received no salary or fees. Instead, as the general partner, I was compensated bymy limited partners only after they secured returns above an annual threshold of 6%. If returns failed to meet thatlevel, the shortfall was to be carried forward against my share of future profits. (Fortunately, that never happened:Partnership returns always exceeded the 6% “bogey.”) As the years went by, a large part of the resources of myparents, siblings, aunts, uncles, cousins and in-laws became invested in the partnership. 10 --- Page 10 --- Charlie formed his partnership in 1962 and operated much as I did. Neither of us had anyinstitutional investors, and very few of our partners were financially sophisticated. The people who joined our ventures simplytrusted us to treat their money as we treated our own. These individuals – either intuitively or by relying on the adviceof friends – correctly concluded that Charlie and I had an extreme aversion to permanent loss of capital and that wewould not have accepted their money unless we expected to do reasonably well with it. I stumbled into business management after BPL acquired control of Berkshire in 1965. Later still, in 1969, we decided to dissolve BPL. After yearend, the partnership distributed, pro-rata, all of its cash along with three stocks,the largest by value being BPL’s 70.5% interest in Berkshire. Charlie, meanwhile, wound up his operation in 1977. Among the assets he distributed to partners was a major interest in Blue Chip Stamps, a company his partnership, Berkshire and I jointly controlled. Blue Chip was also amongthe three stocks my partnership had distributed upon its dissolution. In 1983, Berkshire and Blue Chip merged, thereby expanding Berkshire’s base of registered shareholders from 1,900 to 2,900. Charlie and I wanted everyone – old, new and prospective shareholders – to be on the same page. Therefore, the 1983 annual report – up front – laid out Berkshire’s “major business principles.” The first principle began: “Although our form is corporate, our attitude is partnership.” That defined our relationship in 1983;it defines it today. Charlie and I – and our directors as well – believe this dictum will serve Berkshire well for manydecades to come. ************ Ownership of Berkshire now resides in five large “buckets,” one occupied by me as a “founder” of sorts. That bucket is certain to empty as the shares I own are annually distributed to various philanthropies. Two of the remaining four buckets are filled by institutional investors, each handling other people’s money . That, however, is where the similarity between those buckets ends: Their investing procedures could not be moredifferent. In one institutional bucket are index funds, a large and mushrooming segment of the investment world. These funds simply mimic the index that they track. The favorite of index investors is the S&P 500, of which Berkshire is acomponent. Index funds, it should be emphasized, own Berkshire shares simply because they are required to do so. They are on automatic pilot, buying and selling onlyfor “weighting” purposes. In the other institutional bucket are professionals who manage their clients’ money, whether those funds belong to wealthy individuals, universities, pensioners or whomever. These professional managers have a mandate tomove funds from one investment to another based on their judgment as to valuation and prospects. That is anhonorable, though difficult, occupation. We are happy to work for this “active” group, while they meanwhile search for a better place to deploy the funds of their clientele. Some managers, to be sure, have a long-term focus and trade very infrequently. Others usecomputers employing algorithms that may direct the purchase or sale of shares in a nano-second. Some professionalinvestors will come and go based upon their macro-economic judgments. Our fourth bucket consists of individual shareholders who operate in a manner similar to the active institutional managers I’ve just described. These owners, understandably, think of their Berkshire shares as a possiblesource of funds when they see another investment that excites them. We have no quarrel with that attitude, which issimilar to the way we look at some of the equities we own at Berkshire. 11 --- Page 11 --- All of that said, Charlie and I would be less than human if we did not feel a special kinship with our fifth bucket: the million-plus individual investors who simply trust us to represent their interests, whatever the future may bring. They have joined us with no intent to leave, adopting a mindset similar to that held by our original partners.Indeed, many investors from our partnership years, and/or their descendants, remain substantial owners of Berkshire. A prototype of those veterans is Stan Truhlsen, a cheerful and generous Omaha ophthalmologist as well as personal friend, who turned 100 on November 13, 2020. In 1959, Stan, along with 10 other young Omaha doctors,formed a partnership with me. The docs creatively labeled their venture Emdee, Ltd. Annually, they joined my wifeand me for a celebratory dinner at our home. When our partnership distributed its Berkshire shares in 1969, allof the doctors kept the stock they received. They may not have known the ins and outs of investing or accounting, but they didknow that at Berkshire they would be treated as partners. Two of Stan’s comrades from Emdee are now in their high-90s and continue to hold Berkshire shares. This group’s startling durability – along with the fact that Charlie and I are 97 and 90, respectively – serves up an interestingquestion: Could it be that Berkshire ownership fosters longevity? ************ Berkshire’s unusual and valued family of individual shareholders may add to your understanding of our reluctance to court Wall Street analysts and institutional investors. We already have the investors we want and don’t think that they, on balance, would be upgraded by replacements. There are only so many seats – that is, shares outstanding – available for Berkshire ownership. And we very much like the people already occupying them. Of course, some turnover in “partners” will occur. Charlie and I hope, however, that it will be minimal. Who, after all, seeks rapid turnover in friends, neighbors or marriage? In 1958, Phil Fisher wrote a superb book on investing. In it, he analogized running a public company to managing a restaurant. If you are seeking diners, he said, you can attract a clientele and prosper featuring either hamburgers served with a Coke ora French cuisine accompanied by exotic wines. But you must not, Fisher warned, capriciously switch from one to the other: Your message to potential customers must be consistent with what they willfind upon entering your premises. At Berkshire, we have been serving hamburgers and Coke for 56 years. We cherish the clientele this fare has attracted. The tens of millions of other investors and speculators in the United States and elsewhere have a wide variety of equity choices to fit their tastes. They will find CEOs and market gurus with enticing ideas. If they want price targets, managed earnings and “stories,” they will not lack suitors. “Technicians” will confidently instruct them as towhat some wiggles on a chart portend for a stock’s next move. The calls for action will never stop. Many of those investors, I should add, will do quite well. After all, ownership of stocks is very much a “positive-sum” game. Indeed, a patient and level-headed monkey, who constructs a portfolio by throwing 50 darts ata board listing all of the S&P 500, will – over time – enjoy dividends and capital gains, just as long as it never gets tempted to make changes in its original “selections.” 12 --- Page 12 --- Productive assets such as farms, real estate and, yes, business ownership produce wealth – lots of it. Most owners of such properties will be rewarded. All that’s required is the passage of time, an inner calm, amplediversification and a minimization of transactions and fees. Still, investors must never forget that their expenses are Wall Street’s income . And, unlike my monkey, Wall Streeters do not work for peanuts. When seats open up at Berkshire – and we hope they are few – we want them to be occupied by newcomers who understand and desire what we offer. After decades of management, Charlie and I remain unable to promiseresults. We cananddo, however, pledge to treat you as partners. And so, too, will our successors. A Berkshire Number that May Surprise You Recently, I learned a fact about our company that I had never suspected: Berkshire owns American-based property, plant and equipment – the sort of assets that make up the “business infrastructure” of our country – with aGAAP valuation exceeding the amount owned by anyother U.S. company. Berkshire’s depreciated cost of these domestic “fixed assets” is $154 billion. Next in line on this list is AT&T, with property, plant and equipment of $127 billion. Our leadership in fixed-asset ownership, I should add, does not, in itself, signal an investment triumph. The bestresults occur at companies that require minimal assets to conduct high-margin businesses – andoffer goods or services that will expand their sales volume with only minor needs for additional capital. We, in fact, own a few ofthese exceptional businesses, but they are relatively small and, at best, grow slowly. Asset-heavy companies, however, can be good investments. Indeed, we are delighted with our two giants – BNSF and BHE: In 2011, Berkshire’s first full year of BNSF ownership, the two companies had combinedearnings of $4.2 billion. In 2020, a tough year for many businesses, the pair earned $8.3 billion. BNSF and BHE will require major capital expenditures for decades to come. The good news is that both are likely to deliver appropriate returns on the incremental investment. Let’s look first at BNSF. Your railroad carries about 15% of all non-local ton-miles (a ton of freight moved one mile) of goods that move in the United States, whether by rail, truck, pipeline, barge or aircraft. By a significantmargin, BNSF’s loads top those of any other carrier. The history of American railroads is fascinating. After 150 years or so of frenzied construction, skullduggery, overbuilding, bankruptcies, reorganizations and mergers, the railroad industry finally emerged a few decades ago asmature and rationalized. BNSF began operations in 1850 with a 12-mile line in northeastern Illinois. Today, it has 390 antecedents whose railroads have been purchased or merged. The company’s extensive lineage is laid out athttp://www.bnsf.com/bnsf-resources/pdf/about-bnsf/History_and_Legacy.pdf. Berkshire acquired BNSF early in 2010. Since our purchase, the railroad has invested $41 billion in fixed assets, an outlay $20 billion in excess of its depreciation charges. Railroading is an outdoor sport, featuring mile-longtrains obliged to reliably operate in both extreme cold and heat, as they all the while encounter every form of terrainfrom deserts to mountains. Massive flooding periodically occurs. BNSF owns 23,000 miles of track, spread throughout28 states, and must spend whatever it takes to maximize safety and service throughout its vast system. 13 --- Page 13 --- Nevertheless, BNSF has paid substantial dividends to Berkshire – $41.8 billion in total. The railroad pays us, however, only what remains after it both fulfills the needs of its business and maintains a cash balance of about$2 billion. This conservative policy allows BNSF to borrow at low rates, independent of any guarantee of its debt byBerkshire. One further word about BNSF: Last year, Carl Ice, its CEO, and his number two, Katie Farmer, did an extraordinary job in controlling expenses while navigating a significant downturn in business. Despite a 7% declinein the volume of goods carried, the two actually increased BNSF’s profit margin by 2.9 percentage points. Carl, aslong planned, retired at yearend and Katie took over as CEO. Your railroad is in good hands. BHE, unlike BNSF, pays nodividends on its common stock, a highly-unusual practice in the electric-utility industry. That Spartan policy has been the case throughout our 21 years of ownership. Unlike railroads, our country’selectric utilities need a massive makeover in which the ultimate costs will be staggering. The effort will absorb all ofBHE’s earnings for decades to come. We welcome the challenge and believe the added investment will beappropriately rewarded. Let me tell you about one of BHE’s endeavors – its $18 billion commitment to rework and expand a substantial portion of the outdated grid that now transmits electricity throughout the West. BHE began this project in2006 and expects it to be completed by 2030 – yes, 2030. The advent of renewable energy made our project a societal necessity. Historically, the coal-based generation of electricity that long prevailed was located close to huge centers of population. The best sites for the new world ofwind and solar generation, however, are often in remote areas. When BHE assessed the situation in 2006, it was nosecret that a huge investment in western transmission lines had to be made. Very few companies or governmentalentities, however, were in a financial position to raise their hand after they tallied the project’s cost. BHE’s decision to proceed, it should be noted, was based upon its trust in America’s political, economic and judicial systems. Billions of dollars needed to be invested before meaningful revenue would flow. Transmission lineshad to cross the borders of states and other jurisdictions, each with its own rules and constituencies. BHE would alsoneed to deal with hundreds of landowners and execute complicated contracts with both the suppliers that generatedrenewable power and the far-away utilities that would distribute the electricity to their customers. Competing interestsand defenders of the old order, along with unrealistic visionaries desiring an instantly-new world, had to be brought onboard. Both surprises and delays were certain. Equally certain, however, was the fact that BHE had the managerial talent, the institutional commitment and the financial wherewithal to fulfill its promises. Though it will be many yearsbefore our western transmission project is completed, we are today searching for other projects of similar size to takeon. Whatever the obstacles, BHE will be a leader in delivering ever-cleaner energy. The Annual Meeting Last year, on February 22 nd, I wrote you about our plans for a gala annual meeting. Within a month, the schedule was junked. Our home office group, led by Melissa Shapiro and Marc Hamburg, Berkshire’s CFO, quickly regrouped. Miraculously, their improvisations worked. Greg Abel, one of Berkshire’s Vice Chairmen, joined me on stage facinga dark arena, 18,000 empty seats and a camera. There was no rehearsal: Greg and I arrived about 45 minutes before“showtime.” 14 --- Page 14 --- Debbie Bosanek, my incredible assistant who joined Berkshire 47 years ago at age 17, had put together about 25 slides displaying various facts and figures that I had assembled at home. An anonymous but highly-capable teamof computer and camera operators projected the slides onto the screen in proper order. Yahoo streamed the proceedings to a record-sized international audience. Becky Quick of CNBC, operating from her home in New Jersey, selected questions from thousands that shareholders had earlier submitted or thatviewers had emailed to her during the four hours Greg and I were on stage. See’s peanut brittle and fudge, along withCoca-Cola, provided us with nourishment. This year, on May 1 st, we are planning to go one better. Again, we will rely on Yahoo and CNBC to perform flawlessly. Yahoo will go live at 1 p.m. Eastern Daylight Time (“EDT”). Simply navigate tohttps://finance.yahoo.com/brklivestream. Our formal meeting will commence at 5:00 p.m. EDT and should finish by 5:30 p.m. Earlier, between 1:30-5:00, we will answer your questions as relayed by Becky. As always, we will have no foreknowledge as to whatquestions will be asked. Send your zingers to BerkshireQuestions@cnbc.com. Yahoo will wrap things up after 5:30. And now – drum roll, please – a surprise. This year our meeting will be held in Los Angeles ...a n d Charlie will be on stage with me offering answers and observations throughout the 31⁄2-hour question period. I missed him last year and, more important, youclearly missed him. Our other invaluable vice-chairmen, Ajit Jain and Greg Abel, will be with us to answer questions relating to their domains. Join us via Yahoo. Direct your really tough questions to Charlie! We will have fun, and we hope you will as well. Better yet, of course, will be the day when we see you face to face. I hope and expect that will be in 2022. The citizens of Omaha, our exhibiting subsidiaries and all of us at the home office can’t wait to get you back for anhonest-to-God annual meeting, Berkshire-style . February 27, 2021 Warren E. Buffett Chairman of the Board 15