Berkshire Hathaway 2009 Annual Report Download - page 89

Management’s Discussion (Continued)
Equity Price Risk
Historically, we have maintained large amounts of invested assets in exchange traded equity securities. Strategically, we strive
to invest in businesses that possess excellent economics, with able and honest management and at sensible prices and prefer to
invest a meaningful amount in each investee. Consequently, equity investments may be concentrated in relatively few investees. At
December 31, 2009, approximately 60% of the total fair value of equity investments was concentrated in five investees.
We prefer to hold equity investments for very long periods of time so we are not troubled by short-term equity price
volatility with respect to our investments provided that the underlying business, economic and management characteristics of
the investees remain favorable. We strive to maintain above average levels of shareholder capital to provide a margin of safety
against short-term equity price volatility.
Market prices for equity securities are subject to fluctuation and consequently the amount realized in the subsequent sale of
an investment may significantly differ from the reported market value. Fluctuation in the market price of a security may result
from perceived changes in the underlying economic characteristics of the investee, the relative price of alternative investments
and general market conditions.
We are also subject to equity price risk with respect to our equity index put option contracts. While our ultimate potential
loss with respect to these contracts is determined from the movement of the underlying stock index between contract inception
date and expiration, the change in fair value resulting from current changes in the index values are also affected by changes in
other factors such as interest rates, expected dividend rates and the remaining duration of the contract. These contracts generally
expire 15 to 20 years from inception and may not be settled before their respective expiration dates.
The following table summarizes our equity investments and derivative contract liabilities with equity price risk as of
December 31, 2009 and 2008. The effects of a hypothetical 30% increase and a 30% decrease in market prices as of those dates
is also shown. The selected 30% hypothetical change does not reflect what could be considered the best or worst case scenarios.
Indeed, results could be far worse due both to the nature of equity markets and the aforementioned concentrations existing in
our equity investment portfolio. Dollar amounts are in millions.
Fair Value
Hypothetical
Price Change
Estimated
Fair Value after
Hypothetical
Change in Prices
Hypothetical
Percentage
Increase (Decrease) in
Shareholders’ Equity
December 31, 2009
Equity securities ................................ $59,034 30% increase $ 76,744 8.7
30% decrease 41,324 (8.7)
Other investments (1) ............................. 8,011 30% increase 10,696 1.3
30% decrease 5,743 (1.1)
Equity index put option contracts ................... (7,309) 30% increase (5,291) 1.0
30% decrease (10,428) (1.5)
December 31, 2008
Equity securities ................................ $49,073 30% increase $ 63,795 8.8
30% decrease 34,351 (8.8)
Other investments (1) ............................. 2,627 30% increase 3,920 0.8
30% decrease 1,610 (0.6)
Equity index put option contracts ................... (10,022) 30% increase (7,952) 1.2
30% decrease (12,799) (1.7)
(1) Includes other investments that possess significant equity price risk. Excludes investments accounted for under the equity
method.
Foreign Currency Risk
We generally do not use derivative contracts to hedge foreign currency price changes primarily because of the natural
hedging that occurs between assets and liabilities denominated in foreign currencies in the consolidated financial statements.
Financial statements of subsidiaries that do not use the U.S. Dollar as their functional currency are translated into U.S. Dollars
using period-end exchange rates for assets and liabilities and weighted-average exchange rates for revenues and expenses.
Adjustments resulting from translating the financial statements of these subsidiaries are reported in accumulated other
comprehensive income. Foreign currency transaction gains or losses are included in earnings primarily as a result of the
translation of foreign currency denominated assets and liabilities held by our U.S. subsidiaries. In addition, we hold investments
in major multinational companies that have significant foreign business and foreign currency risk of their own, such as The
Coca-Cola Company.
87