Berkshire Hathaway 1998 Annual Report Download - page 59

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Overall, Berkshire and its long-term shareholders benefit from a sinking stock market much as a
regular purchaser of food benefits from declining food prices. So when the market plummets — as
it will from time to time — neither panic nor mourn. It's good news for Berkshire.
5. Because of our two-pronged approach to business ownership and because of the limitations of
conventional accounting, consolidated reported earnings may reveal relatively little about our true
economic performance. Charlie and I, both as owners and managers, virtually ignore such
consolidated numbers. However, we will also report to you the earnings of each major business we
control, numbers we consider of great importance. These figures, along with other information we
will supply about the individual businesses, should generally aid you in making judgments about
them.
To state things simply, we try to give you in the annual report the numbers and other information
that really matter. Charlie and I pay a great deal of attention to how well our businesses are doing,
and we also work to understand the environment in which each business is operating. For example,
is one of our businesses enjoying an industry tailwind or is it facing a headwind? Charlie and I need
to know exactly which situation prevails and to adjust our expectations accordingly. We will also
pass along our conclusions to you.
Over time, practically all of our businesses have exceeded our expectations. But occasionally we
have disappointments, and we will try to be as candid in informing you about those as we are in
describing the happier experiences. When we use unconventional measures to chart our progress
— for instance, you will be reading in our annual reports about insurance "float" — we will try to
explain these concepts and why we regard them as important. In other words, we believe in telling
you how we think so that you can evaluate not only Berkshire's businesses but also assess our
approach to management and capital allocation.
6. Accounting consequences do not influence our operating or capital-allocation decisions. When
acquisition costs are similar, we much prefer to purchase $2 of earnings that is not reportable by
us under standard accounting principles than to purchase $1 of earnings that is reportable. This is
precisely the choice that often faces us since entire businesses (whose earnings will be fully
reportable) frequently sell for double the pro-rata price of small portions (whose earnings will be
largely unreportable). In aggregate and over time, we expect the unreported earnings to be fully
reflected in our intrinsic business value through capital gains.
We attempt to offset the shortcomings of conventional accounting by regularly reporting "look-
through" earnings (though, for special and nonrecurring reasons, we occasionally omit them). The
look-through numbers include Berkshire's own reported operating earnings, excluding capital gains
and purchase-accounting adjustments (an explanation of which occurs later in this message) plus
Berkshire's share of the undistributed earnings of our major investees — amounts that are not
included in Berkshire's figures under conventional accounting. From these undistributed earnings
of our investees we subtract the tax we would have owed had the earnings been paid to us as
dividends. We also exclude capital gains, purchase-accounting adjustments and extraordinary
charges or credits from the investee numbers.
We have found over time that the undistributed earnings of our investees, in aggregate, have been
fully as beneficial to Berkshire as if they had been distributed to us (and therefore had been included
in the earnings we officially report). This pleasant result has occurred because most of our investees
are engaged in truly outstanding businesses that can often employ incremental capital to great
advantage, either by putting it to work in their businesses or by repurchasing their shares.
Obviously, every capital decision that our investees have made has not benefitted us as shareholders,
but overall we have garnered far more than a dollar of value for each dollar they have retained. We
consequently regard look-through earnings as realistically portraying our yearly gain from
operations.