Berkshire Hathaway 2014 Annual Report Download - page 37

Next up is cash. At a healthy business, cash is sometimes thought of as something to be minimized – as an
unproductive asset that acts as a drag on such markers as return on equity. Cash, though, is to a business as
oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent.
American business provided a case study of that in 2008. In September of that year, many long-prosperous
companies suddenly wondered whether their checks would bounce in the days ahead. Overnight, their
financial oxygen disappeared.
At Berkshire, our “breathing” went uninterrupted. Indeed, in a three-week period spanning late September
and early October, we supplied $15.6 billion of fresh money to American businesses.
We could do that because we always maintain at least $20 billion – and usually far more – in cash
equivalents. And by that we mean U.S. Treasury bills, not other substitutes for cash that are claimed to
deliver liquidity and actually do so, except when it is truly needed. When bills come due, only cash is legal
tender. Don’t leave home without it.
Finally – getting to our third point – we will never engage in operating or investment practices that can
result in sudden demands for large sums. That means we will not expose Berkshire to short-term debt
maturities of size nor enter into derivative contracts or other business arrangements that could require large
collateral calls.
Some years ago, we became a party to certain derivative contracts that we believed were significantly
mispriced and that had only minor collateral requirements. These have proved to be quite profitable.
Recently, however, newly-written derivative contracts have required full collateralization. And that ended
our interest in derivatives, regardless of what profit potential they might offer. We have not, for some
years, written these contracts, except for a few needed for operational purposes at our utility businesses.
Moreover, we will not write insurance contracts that give policyholders the right to cash out at their option.
Many life insurance products contain redemption features that make them susceptible to a “run” in times of
extreme panic. Contracts of that sort, however, do not exist in the property-casualty world that we inhabit. If
our premium volume should shrink, our float would decline – but only at a very slow pace.
The reason for our conservatism, which may impress some people as extreme, is that it is entirely
predictable that people will occasionally panic, but not at all predictable when this will happen. Though
practically all days are relatively uneventful, tomorrow is always uncertain. (I felt no special apprehension
on December 6, 1941 or September 10, 2001.) And if you can’t predict what tomorrow will bring, you
must be prepared for whatever it does.
A CEO who is 64 and plans to retire at 65 may have his own special calculus in evaluating risks that have
only a tiny chance of happening in a given year. He may, in fact, be “right” 99% of the time. Those odds,
however, hold no appeal for us. We will never play financial Russian roulette with the funds you’ve
entrusted to us, even if the metaphorical gun has 100 chambers and only one bullet. In our view, it is
madness to risk losing what you need in pursuing what you simply desire.
‹Despite our conservatism, I think we will be able every year to build the underlying per-share earning
power of Berkshire. That does not mean operating earnings will increase each year – far from it. The U.S.
economy will ebb and flow – though mostly flow – and, when it weakens, so will our current earnings. But
we will continue to achieve organic gains, make bolt-on acquisitions and enter new fields. I believe,
therefore, that Berkshire will annually add to its underlying earning power.
In some years the gains will be substantial, and at other times they will be minor. Markets, competition,
and chance will determine when opportunities come our way. Through it all, Berkshire will keep moving
forward, powered by the array of solid businesses we now possess and the new companies we will
purchase. In most years, moreover, our country’s economy will provide a strong tailwind for business. We
are blessed to have the United States as our home field.
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