Coca-Cola

The collection is worth many hundreds of billions and includes a few rare gems, many good-but-far-from-fabulous businesses and some laggards that have been disappointments. We own nothing that is a major drag, but we have a number that I should not have purchased. In the other hand, we own a small percentage of a dozen or so very large and highly profitable businesses with household names such as Apple, American Express, Coca-Cola and Moody’s. Many of these companies earn very high returns on the net tangible equity required for their operations. At yearend, our partial-ownership holdings were valued at $272 billion. Understandably, really outstanding businesses are very seldom offered in their entirety, but small fractions of these gems can be purchased Monday through Friday on Wall Street and, very occasionally, they sell at bargain prices. We are impartial in our choice of equity vehicles, investing in either variety based upon where we can best deploy your (and my family’s) savings. Often, nothing looks compelling; very infrequently we find ourselves knee-deep in opportunities. Greg has vividly shown his ability to act at such times as did Charlie.

We didn't have Facebook, yada, yada. And yet, if you bought the Nasdaq in '99, it went down 80 percent before that all came to fruition. That's not going to happen with AI. But it could rhyme – AI could rhyme with the Internet as we go through all this capital spending we need to do, the payoff while it's incrementally coming in by the day, the big payoff might be four to five years from now. So AI might be a little overhyped now but under-hyped long term.QUICK: You said you're not like Warren Buffett, but what you just did with Nvidia sounds an awful lot like what he did with Apple. He pared his position in Apple by 13 percent, and they went on to say it's a better company than Coca-Cola or American Express or any of the other companies that they have in their portfolio, and he thinks Tim Cook is great.DRUCKENMILLER: Yeah. Well, I will be very surprised if I don't own Nvidia on and off next 10 years.KERNEN: You're so bullish on AI. Andrew, you did a great interview with Perplexity and I think that -- that's where you decided might be a place that you want to be.ANDREW ROSS SORKIN: Yeah.DRUCKENMILLER: I love perplexity. Again a funny story -- my young partner, the one who has basically been behind all our AI play with his -- with his staff. He told me, I don't know, in January, that all the kids on the West Coast weren't using ChatGPT or Google anymore. They were using this thing called Perplexity AI. So I, of course, tried it out and it was just unbelievable.

Chairman and CEO James Quincey opened the Q4 2023 review by reporting full-year organic revenue growth of twelve percent, with operating margin expanding roughly sixty basis points on a comparable basis and comparable EPS up thirteen percent. Management told the call that price/mix contributed nine percent of organic revenue growth for the year, an unusually large contribution that Quincey attributed both to the lagged catch-up of pricing in hyper-inflationary markets such as Argentina and to a richer revenue-management discipline in still and sparkling categories globally. CFO Lisa Yang walked through the 2024 guidance, which called for organic revenue growth of six to seven percent and comparable currency-neutral EPS growth of eight to ten percent. She flagged that the currency translation headwind would be larger than in 2023 and that the guidance reflected a normalisation of the cash hedging gain as the strong-dollar cycle matured. On the Q&A, analysts pressed on whether the nine-percent price/mix was a structural reset of pricing power or a one-off pass-through that would compress once inflation abated. Quincey and Yang responded that the Company had used revenue growth management to take pricing in categories where it had under-priced for years, and that the multi-year value share gain in sparkling beverages argued against the view that pricing had exhausted the consumer's elasticity. They also highlighted the success of the studio-powered marketing model in restoring Coca-Cola trademark volume growth in the United States. The call closed with management reiterating the long-term algorithm of four to six percent organic revenue growth and six to eight percent comparable EPS growth, anchored on a sustained expansion of price/mix toward the upper end of the range while volumes recovered into the mid-single digits as hyper-inflationary markets normalised.

Non-controlled Businesses That Leave Us Comfortable Last year I mentioned two of Berkshire’s long-duration partial-ownership positions – Coca-Cola and American Express. These are not huge commitments like our Apple position. Each only accounts for 4-5% of Berkshire’s GAAP net worth. But they are meaningful assets and also illustrate our thought processes. American Express began operations in 1850, and Coca-Cola was launched in an Atlanta drug store in 1886. (Berkshire is not big on newcomers.) Both companies tried expanding into unrelated areas over the years and both found little success in these attempts. In the past – but definitely not now – both were even mismanaged. But each was hugely successful in its base business, reshaped here and there as conditions called for. And, crucially, their products “traveled.” Both Coke and AMEX became recognizable names worldwide as did their core products, and the consumption of liquids and the need for unquestioned financial trust are timeless essentials of our world.

They sometimes command ridiculously higher prices than justified but are almost never available at bargain valuations. Unless under duress, the owner of a controlled business gives no thought to selling at a panic-type valuation. * * * * * * * * * * * * At this point, a report card from me is appropriate: In 58 years of Berkshire management, most of my capital-allocation decisions have been no better than so-so. In some cases, also, bad moves by me have been rescued by very large doses of luck. (Remember our escapes from near-disasters at USAir and Salomon? I certainly do.) Our satisfactory results have been the product of about a dozen truly good decisions – that would be about one every five years – and a sometimes-forgotten advantage that favors long-term investors such as Berkshire. Let’s take a peek behind the curtain. The Secret Sauce In August 1994 – yes, 1994 – Berkshire completed its seven-year purchase of the 400 million shares of Coca-Cola we now own. The total cost was $1.3 billion – then a very meaningful sum at Berkshire. The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million. Growth occurred every year, just as certain as birthdays. All Charlie and I were required to do was cash Coke’s quarterly dividend checks. We expect that those checks are highly likely to grow.

At yearend 2022, Berkshire was the largest owner of eight of these giants: American Express, Bank of America, Chevron, Coca-Cola, HP Inc., Moody’s, Occidental Petroleum and Paramount Global. In addition to those eight investees, Berkshire owns 100% of BNSF and 92% of BH Energy, each with earnings that exceed the $3 billion mark noted above ($5.9 billion at BNSF and $4.3 billion at BHE). Were these companies publicly-owned, they would replace two present members of the 500. All told, our ten controlled and non-controlled behemoths leave Berkshire more broadly aligned with the country’s economic future than is the case at any other U.S. company. (This calculation leaves aside “fiduciary” operations such as pension funds and investment companies.) In addition, Berkshire’s insurance operation, though conducted through many individually-managed subsidiaries, has a value comparable to BNSF or BHE. As for the future, Berkshire will always hold a boatload of cash and U.S. Treasury bills along with a wide array of businesses. We will also avoid behavior that could result in any uncomfortable cash needs at inconvenient times, including financial panics and unprecedented insurance losses. Our CEO will always be the Chief Risk Officer – a task it is irresponsible to delegate. Additionally, our future CEOs will have a significant part of their net worth in Berkshire shares, bought with their own money. And yes, our shareholders will continue to save and prosper by retaining earnings.

© 2021 Oaktree Capital Management, L.P. All Rights Reserved Follow us: One of the biggest changes that did take place in the 1960s was the emergence of “growth investing” via fast-growing companies, many of which were quite new. The “Nifty Fifty” I talk about so much ruled the stock market in the late 1960s: this group included office equipment manufacturers IBM and Xerox, photography titans Kodak and Polaroid, drug companies like Merck and Eli Lilly, tech companies including Hewlett Packard and Texas Instruments, and advanced marketing/consumer goods companies such as Coca-Cola and Avon. These companies’ stocks carried very high price/earnings ratios, reaching up to 80 and 90. Obviously, investors should only pay multiples like these (if ever) if they’re sure the companies will be preeminent for decades to come. And investors were sure. In fact, it was widely believed that nothing bad could happen to these companies and they could never be disrupted. This was one of post-war America’s first major brushes with newness and – in a good example of illogicality – investors embraced these companies, with their revolutionary newness, but somehow assumed that a newer and better new thing could never come along to displace them. Of course, those investors were riding for a fall. If you bought the stocks of “the greatest companies in America” when I started working in 1969, and held them steadfastly for five years, you lost almost all your money.

Buffett, the patron saint of value investors, also practiced cigar butt investing with great success in the first decades of his career, until his partner, Charlie Munger, convinced him to broaden his definition of “value” and shift his focus to “great businesses at fair prices,” in particular because doing so would enable him to deploy much more capital at high returns. This led Buffett to invest in growing companies – such as Coca-Cola, GEICO and the Washington Post – that he could purchase at valuations that were not particularly low in the absolute, but that he found attractive given his understanding of their competitive advantages and future earnings potential. While Buffett has long understood that a company’s prospects are an enormous component of its value, his general avoidance of technology stocks throughout his career may have unintentionally caused most value investors to boycott those stocks. Intriguingly, Buffett allows that his recent investment in Apple has been one of his most successful. © 2021 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

Periodically, as alternative paths become unattractive, repurchases make good sense for Berkshire’s owners. During the past two years, we therefore repurchased 9% of the shares that were outstanding at yearend 2019 for a total cost of $51.7 billion. That expenditure left our continuing shareholders owning about 10% more of all Berkshire businesses, whether these are wholly-owned (such as BNSF and GEICO) or partly-owned (such as Coca-Cola and Moody’s). I want to underscore that for Berkshire repurchases to make sense, our shares must offer appropriate value. We don’t want to overpay for the shares of other companies, and it would be value-destroying if we were to overpay when we are buying Berkshire. As of February 23, 2022, since yearend we repurchased additional shares at a cost of $1.2 billion. Our appetite remains large but will always remain price-dependent. It should be noted that Berkshire’s buyback opportunities are limited because of its high-class investor base. If our shares were heavily held by short-term speculators, both price volatility and transaction volumes would materially increase. That kind of reshaping would offer us far greater opportunities for creating value by making repurchases. Nevertheless, Charlie and I far prefer the owners we have, even though their admirable buy-and-keep attitudes limit the extent to which long-term shareholders can profit from opportunistic repurchases.

On the following day, I again got together with Matt and suggested that Berkshire would offer the railroad a better long-term home than it could expect as a public company. I also told him the maximum price that Berkshire would pay. Matt relayed the offer to his directors and advisors. Eleven busy days later, Berkshire and BNSF announced a firm deal. And here I’ll venture a rare prediction: BNSF will be a key asset for Berkshire and our country a century from now. The BNSF acquisition would never have happened if Paul Andrews hadn’t sized up Berkshire as the right home for TTI. Thanks I taught my first investing class 70 years ago. Since then, I have enjoyed working almost every year with students of all ages, finally “retiring” from that pursuit in 2018. Along the way, my toughest audience was my grandson’s fifth-grade class. The 11-year-olds were squirming in their seats and giving me blank stares until I mentioned Coca-Cola and its famous secret formula. Instantly, every hand went up, and I learned that “secrets” are catnip to kids. Teaching, like writing, has helped me develop and clarify my own thoughts. Charlie calls this phenomenon the orangutan effect: If you sit down with an orangutan and carefully explain to it one of your cherished ideas, you may leave behind a puzzled primate, but will yourself exit thinking more clearly. Talking to university students is far superior.

Coca-Cola reached 46x earnings at the height of the bubble in mid-1972 – 2.4x the p/e on the S&P 500. From there it fell 65% over the next year and a half. A: First, saying a high p/e alone shouldn’t stop you from owning something doesn’t mean there’s no price too high. It simply means that no single metric can hold the key to investment decisions, and the price of something should be weighed against its fundamental potential. Coke may have been overvalued in 1972 at its p/e of 46. In particular, since it dealt in a physical product and required incremental capital to grow, © 2021 OAKTREE CAPITAL MANAGEMENT, L.P.RESERVED

In 1999, Nongfu Spring stopped removing natural minerals from its water, a marketing move that helped differentiate it in a market where distilled water was the norm, and helped the company grow into China's largest bottled-water maker, surpassing Coca-Cola, Watsons, and Pepsi in packaged beverage sales in China.

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 team of 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 that viewers had emailed to her during the four hours Greg and I were on stage. See’s peanut brittle and fudge, along with Coca-Cola, provided us with nourishment. This year, on May 1st, 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 to https://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 what questions 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 . . . and Charlie will be on stage with me offering answers and observations throughout the 3 1⁄2-hour question period.

To make matters worse (from the standpoint of most investors), the passive, invisible hand of the market is putting to shame the returns earned by the active investment professionals who don’t “buy the market” (or so they say), but “buy stocks.” (They allege “it’s not a stock market; but a market of stocks,” as silly a statement as one could possibly imagine.) For example, while our passive Standard & Poor’s 500 Index fund is up 104% in 2 1/2 years, the average actively-managed mutual fund is up but 76%. (Given our global focus today, I should note that the average international fund is up just 37%). As an aside, given the stiff competition of the index funds, the average fund manager is, I think, making it even stiffer, by vigorously buying the giant index stocks in which mutual funds are underinvested. Mutual funds, which own nearly 20% of all stocks, own “only” 3% of Coca-Cola, 6% of Procter and Gamble, 7% of GE, 7% of Microsoft, and 8% of Merck, five of the very largest firms in the S&P 500 Index. These stocks are up 40% on average this year, far above the 25% gain in the index. (It’s not, it seems, that index funds are the problem, but that envious non-index funds, anxious less they fall still further back, are the problem.) In all, similarities with 1929 abound, and I don’t hesitate to haul up the warning flag. The worrisome signs include not only the high valuations I have described, but the similarity of the words we read today with those of that now-forgotten era.

earnings had more than doubled to 31 percent. That can’t surprise you. Nearly all large U.S. firms can be characterized as “global” in their reach. Think Coca-Cola, IBM, Microsoft, GE, General Motors, and Citigroup, and you’ll get the idea. And, in this “one world” of interconnection and competition, global stock markets continue to produce similar long-term returns. For example (this may surprise you), since 1980 the annual return on the S&P 500 has averaged 13.0 percent compared with the return of 11.6 percent for the non-U.S. EAFE Index (the Morgan Stanley Capital International Europe, Australia, and Far East Index). A percentage point of that return, in fairness, has resulted from the moderate weakness of the dollar over that long span; the EAFE annual return, measured in local currencies, was 10.6 percent. That is not to deny that there can be extended waves of superiority in one segment or the other. During the 1980s, international (i.e., non-U.S.) stocks substantially outpaced U.S. stocks (22 percent per year vs. 17 percent) and then fell far behind in the 1990s (U.S.per

, “S&P technology stocks, 14% of the value of the index, 21% of my portfolio; GE, 3.0% of the S&P, 1.2% of my portfolio,” and so on. All with this implicit question: “Is my ‘bet’ (as it is usually described) the right one? Or should I align my portfolio more closely to the index?” There’s a lot of casino capitalism by managers and clients alike going on in investing today, and I suppose “betting”— even betting not to lose—is as good as any word to characterize this over-reliance on the composition of an unmanaged and relatively unchanging market index. In recent years, it seems to me, this strategy has become almost tacitly accepted. Indeed, there is considerable anecdotal evidence that we have gone beyond mere measurement to action, as in “I think Coca-Cola is grotesquely overvalued.to

buy a 1.5% portfolio position for protection. Since that’s less than Coca-Cola’s 2.0% weight in the S&P 500 Index, I’ll have a good defensive position versus the Index when it takes the tumble it so richly deserves.” Whatever the case, isn’t that philosophy the antithesis of professional investment management? Hasn’t it become the formula followed by a nervous portfolio manager anxious to hold his or her job? Isn’t it the result of the marketing department’s holding sway over the investment department? In each case my finding would be: “Guilty as charged.” Such a “closet indexing” strategy is, in my view, more pervasive than most investors recognize (or have been led to recognize). But, whether it takes place at the margin of a portfolio or permeates it, I’ve never seen it disclosed in a fund’s prospectus. (A cynic might wonder whether fund independent directors and trustees have been fully informed on the subject.) To be sure, so far it largely applies, when it does, to the large-cap managers. Closet indexing is a relatively simple process when the ten largest stocks in the S&P 500 Index represent nearly 20% of the Index, the largest 50 stocks, 50%. Even if it creeps into the small cap side of the business, it seems unlikely to permeate it, since the largest ten stocks comprise just 1.7% of the Russell 2500 Small Cap Index, the largest 50 stocks just 8.2%. That said, the fact is that large-cap strategies dominate the financial markets.

7% 773 2,519 Bank of America 10.7% 682 2,167 Bank of New York Mellon 9.0% 101 288 Coca-Cola 9.3% 640 194 Delta Airlines 11.0% 114 416 J.P. Morgan Chase 1.9% 216 476 Moody’s 13.1% 55 137 U.S. Bancorp 9.7% 251 407 Wells Fargo 8.4% 705 730 Total $3,798 $8,332 (1) Based on current annual rate. (2) Based on 2019 earnings minus common and preferred dividends paid. Obviously, the realized gains we will eventually record from partially owning each of these companies will not neatly correspond to “our” share of their retained earnings. Sometimes, alas, retentions produce nothing. But both logic and our past experience indicate that from the group we will realize capital gains at least equal to – and probably better than – the earnings of ours that they retained. (When we sell shares and realize gains, we will pay income tax on the gain at whatever rate then prevails. Currently, the federal rate is 21%.) It is certain that Berkshire’s rewards from these 10 companies, as well as those from our many other equity holdings, will manifest themselves in a highly irregular manner. Periodically, there will be losses, sometimes company-specific, sometimes linked to stock-market swoons. At other times – last year was one of those – our gain will be outsized. Overall, the retained earnings of our investees are certain to be of major importance in the growth of Berkshire’s value. Mr. Smith got it right.

The powerful forces of efficient financial markets would likely repel any such challenge, and such a defeat for our hypothetical fund could be accomplished, over the long tenn, only against all odds. The surprising, if simple, fact is that broad diversification makes it just as difficult to achieve significant underperformance relative to the market as to achieve significant overperformance. In short, the risk-return equation appears highly favorable, thanks simply to the minimization of the fiscal drag of operating and tax costs. (That's the three dimensional view once again, as seen from this pair of eyes.) Perhaps a look at history might help to evaluate the risk that growth stocks, purchased at notably high valuations, might under perform the market over the long-run. Jeremy 1. Siegel, professor of finance at The Wharton School, has helped answer the question. He studied the performance of the famous Nifty 50 growth stocks of the halcyon Go-Go era of 1965-1972. In an article in The Journal of Portfolio Management [Summer 1995], Siegel shows that a frozen portfolio of these fifty high-priced stocks purchased at the start of 1971 in fact nicely outperformed the stock market over the next twenty-five years. Some of the fifty did well-Philip Morris was the champion, up 21%. With McDonald's (+18%), Coca-Cola, and Disney (each +16%) in close pursuit. Some did ill-MGlC Investment finished fiftieth, losing 4.3% per year, with Emery Air Freight (-0.

– and the reading of proxy material has become a mind-numbing experience. One very important improvement in corporate governance has been mandated: a regularly-scheduled “executive session” of directors at which the CEO is barred. Prior to that change, truly frank discussions of a CEO’s skills, acquisition decisions and compensation were rare. Acquisition proposals remain a particularly vexing problem for board members. The legal orchestration for making deals has been refined and expanded (a word aptly describing attendant costs as well). But I have yet to see a CEO who craves an acquisition bring in an informed and articulate critic to argue against it. And yes, include me among the guilty. Berkshire, Blue Chip Stamps, Cap Cities-ABC, Coca-Cola, Data Documents, Dempster, General Growth, Gillette, Kraft Heinz, Maracaibo Oil, Munsingwear, Omaha National Bank, Pinkerton’s, Portland Gas Light, Salomon, Sanborn Map, Tribune Oil, U.S.Financial

Berkshire’s runner-up grove by value is its collection of equities, typically involving a 5% to 10% ownership position in a very large company. As noted earlier, our equity investments were worth nearly $173 billion at yearend, an amount far above their cost. If the portfolio had been sold at its yearend valuation, federal income tax of about $14.7 billion would have been payable on the gain. In all likelihood, we will hold most of these stocks for a long time. Eventually, however, gains generate taxes at whatever rate prevails at the time of sale. Our investees paid us dividends of $3.8 billion last year, a sum that will increase in 2019. Far more important than the dividends, though, are the huge earnings that are annually retained by these companies. Consider, as an indicator, these figures that cover only our five largest holdings. Yearend Ownership Berkshire’s Share in $ millions of Company Dividends(1) Retained Earnings(2) American Express 17.9% $ 237 $ 997 Apple 5.4% 745 2,502 Bank of America 9.5% 551 2,096 Coca-Cola 9.4% 624 (21) Wells Fargo 9.8% 809 1,263 Total $2,966 $6,837 (1) Based on current annual rate. (2) Based on 2018 earnings minus common and preferred dividends paid. GAAP – which dictates the earnings we report – does not allow us to include the retained earnings of investees in our financial accounts.

We provide our own version of this total cost including dealing costs, which we have termed the Total Cost of Investment (‘TCI’). For the T Class Accumulation shares in 2018 this amounted to a TCI of 1.16%, including all costs of dealing for flows into and out of the Fund, not just our voluntary dealing. We did undertake some activity in 2018. In particular we sold our holdings in Dr Pepper Snapple, InterContinental Hotels and Nestlé during the year. We purchased holdings in Estée Lauder, the US based cosmetics business and Coloplast, the Danish medical devices company which specialises in the production of catheters, wound and skin care and a new position in a consumer staples business whose name will be revealed when we have accumulated our desired weighting across funds. Dr Pepper Snapple was a stock we have held since inception. We found the strategic rationale for the acquisition by Keurig Green Mountain difficult to comprehend and so took our leave of the situation. Commentators seem to forget that a similar combination was tried between Coca-Cola and Keurig which was unsuccessful and quietly abandoned. Last year we wrote in the Fundsmith Equity Fund Annual Letter about the attention which Nestlé, amongst other portfolio companies, had attracted from activist investors.

Muhtar Kent opened the Q4 2016 call by framing 2016 as the foundational year of the Company's transformation into a total beverage company and a leaner, more refranchised bottler system. Management reported that organic revenue grew five percent for the year with price/mix of three percent, and that the announced transactions to refranchise the Company's largest Company-owned bottling operations in North America, China and South Africa were on track to close during 2017. CFO Kathy Waller walked analysts through the impact of refranchising on the reported revenue and operating income lines, signalling that the transitions would mechanically lower both top-line and operating income from 2017 onward even though they would lift operating margins and return on invested capital. She emphasised that the Company's concentrate-economics business was being preserved and the new capital-light model would generate materially higher cash conversion once the bottling transitions were complete. On the Q&A, analysts probed whether the refranchising strategy reflected structural volume softness in sparkling beverages. Kent pushed back, noting that global sparkling volume had still grown two percent and that the strategy was about capital efficiency rather than category retreat. He pointed to the launch of Coca-Cola Zero Sugar and the doubling of investments in still brands such as Smartwater and AdeS as evidence the Company was following the consumer across categories rather than retreating. The call closed with management introducing a new long-term algorithm framed in terms of organic revenue and operating income growth, explicitly acknowledging that reported revenue would compress in the near term and asking investors to focus on cash generation and return on invested capital as the scorecards during the transition.

It’s just that you people have come so far… I feel obligated to tell you a few good stories and make comments about current affairs. [Laughter] Valeant was such an extreme example of misbehavior and crazy greed and what have you that I couldn’t resist calling attention to it. And it ended up with one of Valeant’s shareholders saying that Warren Buffett was a sinner because he owned Coca-Cola. [Laughter] I drew retaliation to Warren. By the way, that’s a good place. If anybody’s mad at me today, get mad at Warren. He can handle it. He’s a very philosophical man. It is true that these crazy false values and this crazy excess is bad morals and it’s bad policy. It’s bad for the nation. It’s just bad, bad, bad. And there’s a lot of it. Now of course a lot of it is in American finance. The truth of the matter is that . . . Elizabeth Warren doesn’t agree with me on many subjects, and I wouldn’t agree with her on many subjects, but she is basically right when she says that American finance is out of control and that it isn’t good for the rest of us. Both Elizabeth Warren and Bernie Sanders are not two of my favorite people on Earth, but they are absolutely right [about finance]. You all see what goes on in finance: the craziness, the promotions, the fuzzy accounting, the crazy trading cultures…. It’s very bad for all of us that we have this huge overdevelopment of finance. And yet it’s very hard to do anything about it.

-18- Questioner: Would you address the future of the beverage business [and Berkshire’s investment in Coca-Cola]? Charlie Munger: Well that’s an easy one. For many decades, the basic product, full-sugared Coke, grew every year. It was like an inevitable march of time. In recent years, full-sugared Coke is declining. Fortunately, the Coca-Cola Company has a vast distribution business infrastructure and a lot of other products, so while Coca-Cola as an individual product is declining some, instead of going up the way it always did before, the rest of the businesses are on average rising. So I think Coke is a pretty strong company and will be a respectable investment, but it’s not like it used to be when it was like shooting fish in a barrel. [End of recorded material]

‹ Berkshire increased its ownership interest last year in each of its “Big Four” investments – American Express, Coca-Cola, IBM and Wells Fargo. We purchased additional shares of IBM (increasing our ownership to 8.4% versus 7.8% at yearend 2014) and Wells Fargo (going to 9.8% from 9.4%). At the other two companies, Coca-Cola and American Express, stock repurchases raised our percentage ownership. Our equity in Coca-Cola grew from 9.2% to 9.3%, and our interest in American Express increased from 14.8% to 15.6%. In case you think these seemingly small changes aren’t important, consider this math: For the four companies in aggregate, each increase of one percentage point in our ownership raises Berkshire’s portion of their annual earnings by about $500 million. These four investees possess excellent businesses and are run by managers who are both talented and shareholder-oriented. Their returns on tangible equity range from excellent to staggering. At Berkshire, we much prefer owning a non-controlling but substantial portion of a wonderful company to owning 100% of a so-so business. It’s better to have a partial interest in the Hope Diamond than to own all of a rhinestone. If Berkshire’s yearend holdings are used as the marker, our portion of the “Big Four’s” 2015 earnings amounted to $4.7 billion. In the earnings we report to you, however, we include only the dividends they pay us – about $1.8 billion last year.

‹ Our subsidiaries spent a record $15 billion on plant and equipment during 2014, well over twice their depreciation charges. About 90% of that money was spent in the United States. Though we will always invest abroad as well, the mother lode of opportunities runs through America. The treasures that have been uncovered up to now are dwarfed by those still untapped. Through dumb luck, Charlie and I were born in the United States, and we are forever grateful for the staggering advantages this accident of birth has given us. ‹ Berkshire’s yearend employees – including those at Heinz – totaled a record 340,499, up 9,754 from last year. The increase, I am proud to say, included no gain at headquarters (where 25 people work). No sense going crazy. ‹ Berkshire increased its ownership interest last year in each of its “Big Four” investments – American Express, Coca-Cola, IBM and Wells Fargo. We purchased additional shares of IBM (increasing our ownership to 7.8% versus 6.3% at yearend 2013). Meanwhile, stock repurchases at Coca-Cola, American Express and Wells Fargo raised our percentage ownership of each. Our equity in Coca-Cola grew from 9.1% to 9.2%, our interest in American Express increased from 14.2% to 14.8% and our ownership of Wells Fargo grew from 9.2% to 9.4%.

This weird accounting, you should understand, instantly increased Berkshire’s excess of intrinsic value over book value by the same $1.8 billion. Š Our subsidiaries spent a record $11 billion on plant and equipment during 2013, roughly twice our depreciation charge. About 89% of that money was spent in the United States. Though we invest abroad as well, the mother lode of opportunity resides in America. Š In a year in which most equity managers found it impossible to outperform the S&P 500, both Todd Combs and Ted Weschler handily did so. Each now runs a portfolio exceeding $7 billion. They’ve earned it. I must again confess that their investments outperformed mine. (Charlie says I should add “by a lot.”) If such humiliating comparisons continue, I’ll have no choice but to cease talking about them. Todd and Ted have also created significant value for you in several matters unrelated to their portfolio activities. Their contributions are just beginning: Both men have Berkshire blood in their veins. Š Berkshire’s yearend employment – counting Heinz – totaled a record 330,745, up 42,283 from last year. The increase, I must admit, included one person at our Omaha home office. (Don’t panic: The headquarters gang still fits comfortably on one floor.) Š Berkshire increased its ownership interest last year in each of its “Big Four” investments – American Express, Coca-Cola, IBM and Wells Fargo. We purchased additional shares of Wells Fargo (increasing our ownership to 9.2% versus 8.

7% at yearend 2012) and IBM (6.3% versus 6.0%). Meanwhile, stock repurchases at Coca-Cola and American Express raised our percentage ownership. Our equity in Coca- Cola grew from 8.9% to 9.1% and our interest in American Express from 13.7% to 14.2%. And, if you think tenths of a percent aren’t important, ponder this math: For the four companies in aggregate, each increase of one-tenth of a percent in our share of their equity raises Berkshire’s share of their annual earnings by $50 million.

Š Todd Combs and Ted Weschler, our new investment managers, have proved to be smart, models of integrity, helpful to Berkshire in many ways beyond portfolio management, and a perfect cultural fit. We hit the jackpot with these two. In 2012 each outperformed the S&P 500 by double-digit margins. They left me in the dust as well. Consequently, we have increased the funds managed by each to almost $5 billion (some of this emanating from the pension funds of our subsidiaries). Todd and Ted are young and will be around to manage Berkshire’s massive portfolio long after Charlie and I have left the scene. You can rest easy when they take over. Š Berkshire’s yearend employment totaled a record 288,462 (see page 106 for details), up 17,604 from last year. Our headquarters crew, however, remained unchanged at 24. No sense going crazy. Š Berkshire’s “Big Four” investments – American Express, Coca-Cola, IBM and Wells Fargo – all had good years. Our ownership interest in each of these companies increased during the year. We purchased additional shares of Wells Fargo (our ownership now is 8.7% versus 7.6% at yearend 2011) and IBM (6.0% versus 5.5%). Meanwhile, stock repurchases at Coca-Cola and American Express raised our percentage ownership. Our equity in Coca-Cola grew from 8.8% to 8.9% and our interest at American Express from 13.0% to 13.7%. Berkshire’s ownership interest in all four companies is likely to increase in the future.

Counting IBM, we now have large ownership interests in four exceptional companies: 13.0% of American Express, 8.8% of Coca-Cola, 5.5% of IBM and 7.6% of Wells Fargo. (We also, of course, have many smaller, but important, positions.) We view these holdings as partnership interests in wonderful businesses, not as marketable securities to be bought or sold based on their near-term prospects. Our share of their earnings, however, are far from fully reflected in our earnings; only the dividends we receive from these businesses show up in our financial reports. Over time, though, the undistributed earnings of these companies that are attributable to our ownership are of huge importance to us. That’s because they will be used in a variety of ways to increase future earnings and dividends of the investee. They may also be devoted to stock repurchases, which will increase our share of the company’s future earnings. Had we owned our present positions throughout last year, our dividends from the “Big Four” would have been $862 million. That’s all that would have been reported in Berkshire’s income statement. Our share of this quartet’s earnings, however, would have been far greater: $3.3 billion. Charlie and I believe that the $2.4 billion that goes unreported on our books creates at least that amount of value for Berkshire as it fuels earnings gains in future years.

This is Marmon’s second venture with the family, following a successful wire and cable partnership instituted a few years ago. Of the eleven major sectors in which Marmon operates, ten delivered gains in earnings last year. You can be confident of higher earnings from Marmon in the years ahead. • “Buy commodities, sell brands” has long been a formula for business success. It has produced enormous and sustained profits for Coca-Cola since 1886 and Wrigley since 1891. On a smaller scale, we have enjoyed good fortune with this approach at See’s Candy since we purchased it 40 years ago. Last year See’s had record pre-tax earnings of $83 million, bringing its total since we bought it to $1.65 billion. Contrast that figure with our purchase price of $25 million and our yearend carrying-value (net of cash) of less than zero. (Yes, you read that right; capital employed at See’s fluctuates seasonally, hitting a low after Christmas.) Credit Brad Kinstler for taking the company to new heights since he became CEO in 2006. • Nebraska Furniture Mart (80% owned) set an earnings record in 2011, netting more than ten times what it did in 1983, when we acquired our stake. But that’s not the big news. More important was NFM’s acquisition of a 433-acre tract north of Dallas on which we will build what is almost certain to be the highest-volume home-furnishings store in the country.

In 2007, the bubble burst, just as all bubbles must. We are now in the fourth year of a cure that, though long and painful, is sure to succeed. Today, household formations are consistently exceeding housing starts. Clayton’s earnings should improve materially when the nation’s excess housing inventory is worked off. As I see things today, however, I believe the intrinsic value of the three businesses in this sector does not differ materially from their book value. Investments Below we show our common stock investments that at yearend had a market value of more than $1 billion. 12/31/11 Shares Company Percentage of Company Owned Cost* Market (in millions) 151,610,700 American Express Company . . . . . . . . . . . . . 13.0 $ 1,287 $ 7,151 200,000,000 The Coca-Cola Company . . . . . . . . . . . . . . . . 8.8 1,299 13,994 29,100,937 ConocoPhillips . . . . . . . . . . . . . . . . . . . . . . . . 2.3 2,027 2,121 63,905,931 International Business Machines Corp. . . . . . 5.5 10,856 11,751 31,416,127 Johnson & Johnson . . . . . . . . . . . . . . . . . . . . . 1.2 1,880 2,060 79,034,713 Kraft Foods Inc. . . . . . . . . . . . . . . . . . . . . . . . 4.5 2,589 2,953 20,060,390 Munich Re . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3 2,990 2,464 3,947,555 POSCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 768 1,301 72,391,036 The Procter & Gamble Company . . . . . . . . . . 2.6 464 4,829 25,848,838 Sanofi . . . . . . . . . . . . . . . . . . . . . . . . . .

As was the case with Coca-Cola in 1988 and the railroads in 2006, I was late to the IBM party. I have been reading the company’s annual report for more than 50 years, but it wasn’t until a Saturday in March last year that my thinking crystallized. As Thoreau said, “It’s not what you look at that matters, it’s what you see.” Todd Combs built a $1.75 billion portfolio (at cost) last year, and Ted Weschler will soon create one of similar size. Each of them receives 80% of his performance compensation from his own results and 20% from his partner’s. When our quarterly filings report relatively small holdings, these are not likely to be buys I made (though the media often overlook that point) but rather holdings denoting purchases by Todd or Ted.

Farms, real estate, and many businesses such as Coca-Cola, IBM and our own See’s Candy meet that double-barreled test. Certain other companies – think of our regulated utilities, for example – fail it because inflation places heavy capital requirements on them. To earn more, their owners must invest more. Even so, these investments will remain superior to nonproductive or currency-based assets. Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola or some See’s peanut brittle. In the future the U.S. population will move more goods, consume more food, and require more living space than it does now. People will forever exchange what they produce for what others produce. Our country’s businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial “cows” will live for centuries and give ever greater quantities of “milk” to boot. Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk. Proceeds from the sale of the milk will compound for the owners of the cows, just as they did during the 20th century when the Dow increased from 66 to 11,497 (and paid loads of dividends as well). Berkshire’s goal will be to increase its ownership of first-class businesses.

(We don’t fault the Fed: For various reasons, an across-the-board freeze made sense during the crisis and its immediate aftermath.) At some point, probably soon, the Fed’s restrictions will cease. Wells Fargo can then reinstate the rational dividend policy that its owners deserve. At that time, we would expect our annual dividends from just this one security to increase by several hundreds of millions of dollars annually. Other companies we hold are likely to increase their dividends as well. Coca-Cola paid us $88 million in 1995, the year after we finished purchasing the stock. Every year since, Coke has increased its dividend. In 2011, we will almost certainly receive $376 million from Coke, up $24 million from last year. Within ten years, I would expect that $376 million to double. By the end of that period, I wouldn’t be surprised to see our share of Coke’s annual earnings exceed 100% of what we paid for the investment. Time is the friend of the wonderful business. Overall, I believe our “normal” investment income will at least equal what we realized in 2010, though the redemptions I described will cut our take in 2011 and perhaps 2012 as well. * * * * * * * * * * * * Last summer, Lou Simpson told me he wished to retire. Since Lou was a mere 74 – an age Charlie and I regard as appropriate only for trainees at Berkshire – his call was a surprise. Lou joined GEICO as its investment manager in 1979, and his service to that company has been invaluable.

Chairman and CEO Muhtar Kent opened the Q4 2008 review by acknowledging that the Company was operating through the deepest global downturn in decades, with several developed markets entering the quarter in outright recession. Management reported that worldwide unit case volume grew four percent for the year despite the fourth quarter running flat in North America, with China and India still expanding at double-digit rates and the international business contributing the majority of operating income for the first time in the Company's history. CFO Gary Fayard walked analysts through the working-capital release achieved in the second half, which had helped lift full-year operating cash flow above $8 billion. He characterised the strong cash generation as a structural feature of the concentrate-and-bottler model, allowing the Company to keep investing behind the trademark in markets where consumer take-home pay was under pressure, rather than pulling back to defend a quarterly margin. Kent reaffirmed the long-term algorithm of high-single-digit real EPS growth and high-teens return on equity, and pushed back on analyst questions about whether the consumer recession would force a rethink of the Company's pricing architecture. He argued that pricing was always executed in the context of the local affordability equation, and that the global system's relative unit economics had widened, not narrowed, during prior downturns. On the Q&A, a question on the Coca-Cola Enterprises bottler's leverage drew a defence of the Company's preferred-partner bottling system, with Kent noting that marketing investment behind branded cola was being protected even as bottler capex was being throttled back. The call closed with management signalling that 2009 would be a year of investment rather than of margin optimisation.

In the 2007 Berkshire shareholder letter, Buffett - crediting Munger throughout - used the See's Candies acquisition as the textbook case for what a brand franchise actually does to a business. Berkshire had bought See's in 1972 for $25 million, against an asset value of about $8 million and pre-tax earnings of about $4 million. The price looked full to the traditional cigar-butt investor, and Buffett had initially hesitated. Munger had pushed him to pay it, arguing that the franchise was worth the premium because the brand could raise prices year after year without losing volume. The retrospective made the math visible. See's had generated pre-tax earnings cumulatively in the many hundreds of millions of dollars in the years since purchase, on the original $25 million base. The asset base had grown only modestly. The incremental capital required to grow the business had been tiny relative to the cash thrown off. The whole return had come from the brand's pricing power, not from reinvestment. That, Munger and Buffett were saying, is what a real moat looks like - the cash grows faster than the asset base because customers keep paying up for the name. Munger's investment lesson, distilled in the 2007 letter, was that See's taught Berkshire to look past the cigar-butt habit and toward the great franchise. The intangibles - brand, distribution, customer loyalty, pricing power - were not a speculative add-on to intrinsic value. They were the source of it. The companies that grew cash faster than assets were the companies that compounded intrinsic value per share, and the only way to find them was to look at the qualitative strengths that traditional accounting did not capture. See's was the school. Every later Berkshire acquisition - Coca-Cola, Gillette, GEICO in full - was a graduate of that school.

Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag. We like to buy the whole business or, if management is our partner, at least 80%. When control-type purchases of quality aren’t available, though, we are also happy to simply buy small portions of great businesses by way of stock- market purchases. It’s better to have a part interest in the Hope Diamond than to own all of a rhinestone. A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns. Therefore a formidable barrier such as a company’s being the low- cost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American Express) is essential for sustained success. Business history is filled with “Roman Candles,” companies whose moats proved illusory and were soon crossed. Our criterion of “enduring” causes us to rule out companies in industries prone to rapid and continuous change. Though capitalism’s “creative destruction” is highly beneficial for society, it precludes investment certainty. A moat that must be continuously rebuilt will eventually be no moat at all. Additionally, this criterion eliminates the business whose success depends on having a great manager.

Coca-Cola, Procter & Gamble and Wells Fargo, our largest holdings, increased per-share earnings by 18%, 9%, 8% and 11%. These are stellar results, and we thank their CEOs. * * * * * * * * * * * * We’ve come close to eliminating our direct foreign-exchange position, from which we realized about $186 million in pre-tax profits in 2006 (earnings that were included in the Finance and Financial Products table shown earlier). That brought our total gain since inception of this position in 2002 to $2.2 billion. Here’s a breakdown by currency: Total Gain (Loss) in Millions Australian dollar $247.1 Mexican peso $106.1 British pound 287.2 New Zealand dollar 102.6 Canadian dollar 398.3 Singapore dollar (2.6) Chinese yuan (12.7) South Korean won 261.3 Euro 839.2 Swiss franc 9.6 Hong Kong dollar (2.5) Taiwan dollar (45.3) Japanese yen 1.9 Miscellaneous options 22.9 We’ve made large indirect currency profits as well, though I’ve never tallied the precise amount. For example, in 2002-2003 we spent about $82 million buying – of all things – Enron bonds, some of which were denominated in Euros. Already we’ve received distributions of $179 million from these bonds, and our remaining stake is worth $173 million. That means our overall gain is $270 million, part of which came from the appreciation of the Euro that took place after our bond purchase. When we first began making foreign exchange purchases, interest-rate differentials between the U.S.

Investments We show below our common stock investments. Those that had a market value of more than $700 million at the end of 2005 are itemized. 12/31/05 Percentage of Shares Company Company Owned Cost* Market (in $ millions) 151,610,700 American Express Company ................... 12.2 $1,287 $ 7,802 30,322,137 Ameriprise Financial, Inc..................... 12.1 183 1,243 43,854,200 Anheuser-Busch Cos., Inc. ................... 5.6 2,133 1,884 200,000,000 The Coca-Cola Company ........................ 8.4 1,299 8,062 6,708,760 M&T Bank Corporation .......................... 6.0 103 732 48,000,000 Moody’s Corporation .............................. 16.2 499 2,948 2,338,961,000 PetroChina “H” shares (or equivalents)... 1.3 488 1,915 100,000,000 The Procter & Gamble Company .......... 3.0 940 5,788 19,944,300 Wal-Mart Stores, Inc. ......................... 0.5 944 933 1,727,765 The Washington Post Company .............. 18.0 11 1,322 95,092,200 Wells Fargo & Company......................... 5.7 2,754 5,975 1,724,200 White Mountains Insurance..................... 16.0 369 963 Others ...................................................... 4,937 7,154 Total Common Stocks ............................. $15,947 $46,721 *This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases because of write-ups or write-downs that have been required.

* * * * * * * * * * * * My views on America’s long-term problem in respect to trade imbalances, which I have laid out in previous reports, remain unchanged. My conviction, however, cost Berkshire $955 million pre-tax in 2005. That amount is included in our earnings statement, a fact that illustrates the differing ways in which GAAP treats gains and losses. When we have a long-term position in stocks or bonds, year-to-year changes in value are reflected in our balance sheet but, as long as the asset is not sold, are rarely reflected in earnings. For example, our Coca-Cola holdings went from $1 billion in value early on to $13.4 billion at yearend 1998 and have since declined to $8.1 billion – with none of these moves affecting our earnings statement. Long-term currency positions, however, are daily marked to market and therefore have an effect on earnings in every reporting period. From the date we first entered into currency contracts, we are $2.0 billion in the black. We reduced our direct position in currencies somewhat during 2005. We partially offset this change, however, by purchasing equities whose prices are denominated in a variety of foreign currencies and that earn a large part of their profits internationally. Charlie and I prefer this method of acquiring non- dollar exposure. That’s largely because of changes in interest rates: As U.S.

Investments We show below our common stock investments. Those that had a market value of more than $600 million at the end of 2004 are itemized. 12/31/04 Percentage of Shares Company Company Owned Cost* Market (in $ millions) 151,610,700 American Express Company ................... 12.1 $1,470 $ 8,546 200,000,000 The Coca-Cola Company ........................ 8.3 1,299 8,328 96,000,000 The Gillette Company ............................. 9.7 600 4,299 14,350,600 H&R Block, Inc....................................... 8.7 223 703 6,708,760 M&T Bank Corporation .......................... 5.8 103 723 24,000,000 Moody’s Corporation .............................. 16.2 499 2,084 2,338,961,000 PetroChina “H” shares (or equivalents)... 1.3 488 1,249 1,727,765 The Washington Post Company .............. 18.1 11 1,698 56,448,380 Wells Fargo & Company......................... 3.3 463 3,508 1,724,200 White Mountains Insurance..................... 16.0 369 1,114 Others ...................................................... 3,531 5,465 Total Common Stocks ............................. $9,056 $37,717 *This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases because of write-ups or write-downs that have been required. Some people may look at this table and view it as a list of stocks to be bought and sold based upon chart patterns, brokers’ opinions, or estimates of near-term earnings.

Charlie and I ignore such distractions and instead view our holdings as fractional ownerships in businesses. This is an important distinction. Indeed, this thinking has been the cornerstone of my investment behavior since I was 19. At that time I read Ben Graham’s The Intelligent Investor, and the scales fell from my eyes. (Previously, I had been entranced by the stock market, but didn’t have a clue about how to invest.) Let’s look at how the businesses of our “Big Four” – American Express, Coca-Cola, Gillette and Wells Fargo – have fared since we bought into these companies. As the table shows, we invested $3.83 billion in the four, by way of multiple transactions between May 1988 and October 2003. On a composite basis, our dollar-weighted purchase date is July 1992. By yearend 2004, therefore, we had held these “business interests,” on a weighted basis, about 12½ years. In 2004, Berkshire’s share of the group’s earnings amounted to $1.2 billion. These earnings might legitimately be considered “normal.” True, they were swelled because Gillette and Wells Fargo omitted option costs in their presentation of earnings; but on the other hand they were reduced because Coke had a non-recurring write-off. Our share of the earnings of these four companies has grown almost every year, and now amounts to about 31.3% of our cost. Their cash distributions to us have also grown consistently, totaling $434 million in 2004, or about 11.3% of cost.

On such questions, the interests of the CEO may well differ from those of the shareholders. Directors, moreover, sometimes lack the knowledge or gumption to overrule the CEO. Therefore, it’s vital that large owners focus on these three questions and speak up when necessary. Instead many simply follow a “checklist” approach to the issue du jour. Last year I was on the receiving end of a judgment reached in that manner. Several institutional shareholders and their advisors decided I lacked “independence” in my role as a director of Coca-Cola. One group wanted me removed from the board and another simply wanted me booted from the audit committee. My first impulse was to secretly fund the group behind the second idea. Why anyone would wish to be on an audit committee is beyond me. But since directors must be assigned to one committee or another, and since no CEO wants me on his compensation committee, it’s often been my lot to get an audit committee assignment. As it turned out, the institutions that opposed me failed and I was re-elected to the audit job. (I fought off the urge to ask for a recount.) Some institutions questioned my “independence” because, among other things, McLane and Dairy Queen buy lots of Coke products. (Do they want us to favor Pepsi?) But independence is defined in Webster’s as “not subject to control by others.

However, the interested reader could glean much of that by reading the following: 1. In the Appendix of Charlie Munger’s biography (entitled “Damn Right!”), is an essay by Munger on the thesis behind Berkshire’s investment in Coca Cola. Buffett and Munger almost never provide such a descriptive of the analytics behind their various brilliant investment decisions, so this writeup is a rare treat. It is a wonderful window into how Munger’s remarkable latticework mind works. 2. I’ve written three articles in the past that encapsulate most of the thesis of the talk. They are: Buffett Succeeds at Nothing (The Motley Fool, Oct.2003

from them in the 1950s and 60s Buffett Partnerships. Buffett continues to invest in workouts for his own account as well as Berkshire Hathaway. Another terms for workouts would be Arbitrage or simply “Special Situations” Buffett does two types of investing. One is buying great companies at compelling valuations and holding them for a long time (Coca Cola, American Express etc.) The other is workout investing. He has made a lot of money in his career for these workouts. Workouts typically offer modest returns, but virtually no risk. Let me give you some examples: Company A is publicly traded and its stock is at $30/share. Company A announces that it has reached an agreement to be sold to Company B in an all-cash transaction for $35/share. They announce that the both the boards have approved the transaction and recommended that shareholders approve it as well. A month later, the shareholders have approved the merger and the deal is expected to close in 30-45 days. Company A’s stock is trading in a range of $34-$34.50/share. The NASDAQ drops 10% a month before the merger and the stock drops to $33.50/share. If one bought the stock at $33.50 and got $35 a month later, it’s a 53.73% annualized rate of return with virtually no risk! This is known as “Merger Arbitrage”. Usually spreads on announced cash mergers are slim, but occasionally these spreads widen. They are sometimes quite wide if the companies are small cap as liquidity issues keep big players out.

Another type of Special Situation arises when there is a cloud hanging over a company that leads to a mass exodus of investors. A recent example is Buffett’s $150 Million investment in US Gypsum (USG). USG was trading at a P/E ratio of about 3 when Buffett bought about 15% of the company’s stock on the open market. It has asbestos liabilities and lawsuits which have historically cost the company $50+/million annually in recent years. Clearly Buffett does not view USG and Coca Cola in the same light. USG is a special situation play for him. He understands asbestos related liabilities probably better than most of Wall Street due to his extensive 40+ years in Property/Casualty Insurance etc. He probably thinks that the street has thrown the baby out with the bath water. Thus he must believe that future worst case asbestos when fully factored point to a far higher valuation for USG. He will exit USG when he feels its stock price reflects its intrinsic value including asbestos liabilities. We invested in a special situation in Q42000 and just sold the last of our position in March 2001. Let me share it with you. Stewart Enterprises, Inc. (STEI) About five or six years ago, I recall reading an interesting article in the Chicago Tribune. The article talked about business failure rates in various industries. Of particular interest was a table that listed rates of business failure by SIC code.

If the answer is no, the business is simply skipped over. 2. Is this a great and predictable business? The definition of a great business would mean a business that has some of the following characteristics: • Recurring Revenue Streams (e.g. GEICO) • Ability to raise prices ahead of inflation (e.g. The Washington Post) • Some sort of Monopoly or Oligopy type market positioning (e.g. American Express) • Strong franchise/brand that gives it insulation from most competitors (e.g. Coca Cola) Most businesses do not have ANY of the above characteristics and some may just have one of the above. A business that has more than one of the above characteristics is, by definition, rare. If I find a great business then I ask the third, and more difficult, question: 3. Is it on sale at a price well below its Intrinsic Value(IV)?3

The combination of a great business and it being on sale is, by definition, an anomaly. I look for these anomalies. When they occur, after rigorous analysis, I’ll either take a pass or backup the truck. There are two types of great business that are of interest to the fund: 1. Great, compelling companies trading at very low valuations relative to their expected value in a private sale. These companies may have little to no annual growth, but tend to have a solid cash flow engines that are highly predictable and are trading at very low multiples to earnings, cash flow and/or other metrics of value. 2. Growth at Reasonable Price (GARP) Companies. These companies, in high- growth markets, have shown a history of growing fast and are expected to continue to do so. I usually prefer GARP companies to straight value companies. I think the best returns will come from great, high growth companies that are available well below IV. I believe most of Buffett’s success has come from GARP-type businesses (Coca Cola, American Express, GEICO, The Washington Post etc.) So value businesses remain in the portfolio till either: 1. They reach IV and are sold. 2. A better value business comes along. 3. A better GARP business comes along. GARP businesses remain in the portfolio till: 1. They go well beyond IV. I hate to sell a good GARP business unless its well beyond IV. 2. A better GARP business comes along.

Incoming chairman and CEO Douglas Ivester's December 1999 commentary came amid a difficult year in which worldwide unit case volume growth had slowed into the low single digits and a contamination scare in Belgium and France had forced a costly recall. Management told the call that the Company expected reported earnings per share for the year to be roughly flat with 1998 after the impact of the European product withdrawals, even though underlying operating income had continued to grow in line with the long-term algorithm. Ivester and CFO Gary Fayard spent much of the prepared remarks walking analysts through the bottler-infrastructure investments being made in Germany, the Philippines and South Africa, framing them as the price of restoring the system's long-run margin per case. They defended the Company's reported return on equity in the high twenties as the durable outcome of owning the concentrate economics while letting the bottlers carry the capital intensity. On the Q&A, analysts pressed on whether the European crisis pointed to a broader quality-control or governance problem at the bottler level. Management responded that the response had demonstrated the value of a vertically coordinated system and that the trademark's resilience was evidenced by the speed with which European volumes had recovered to prior trends. They also reiterated a long-standing policy of refusing to provide quarterly earnings guidance, preferring to anchor investors to the multi-year algorithm of seven to eight percent real EPS growth. The call closed with the board confirming that the search for Ivester's successor was under way, with directors emphasising that whoever took the chair would inherit a strategy whose fundamentals had not changed.

Furthermore, through Berkshire you own major positions in companies that consistently repurchase their shares. The benefits that these programs supply us grow as prices fall: When stock prices are low, the funds that an investee spends on repurchases increase our ownership of that company by a greater amount than is the case when prices are higher. For example, the repurchases that Coca-Cola, The Washington Post and Wells Fargo made in past years at very low prices benefitted Berkshire far more than do today's repurchases, made at loftier prices.

American Express Company 10.7% $161 The Coca-Cola Company 8.1% 216 The Walt Disney Company 3.2% 65 Freddie Mac 8.6% 86 The Gillette Company 8.6% 82 The Washington Post Company 16.5% 30 Wells Fargo & Company 7.8% 103 ------ Berkshire's share of undistributed earnings of major investees 743 Hypothetical tax on these undistributed investee earnings(3) (105) Reported operating earnings of Berkshire 1,292 ------ Total look-through earnings of Berkshire $1,930 ======

Be clear about one thing: This cost has not occurred because we were misled in any way by sellers or because they thereafter failed to manage with diligence and skill. On the contrary, the sellers were completely candid when we were negotiating our deals and have been energetic and effective ever since. Instead, our problem has been that we own a truly marvelous collection of businesses, which means that trading away a portion of them for something new almost never makes sense. When we issue shares in a merger, we reduce your ownership in all of our businesses -- partly-owned companies such as Coca-Cola, Gillette and American Express, and all of our terrific operating companies as well. An example from sports will illustrate the difficulty we face: For a baseball team, acquiring a player who can be expected to bat .350 is almost always a wonderful event -- except when the team must trade a .380 hitter to make the deal.

In last year's annual report, I discussed Coca-Cola, our largest holding. Coke continues to increase its market dominance throughout the world, but, tragically, it has lost the leader responsible for its outstanding performance. Roberto Goizueta, Coke's CEO since 1981, died in October. After his death, I read every one of the more than 100 letters and notes he had written me during the past nine years. Those messages could well serve as a guidebook for success in both business and life.

Consistent with his concern for the company, Roberto prepared for a seamless succession long before it seemed necessary. Roberto knew that Doug Ivester was the right man to take over and worked with Doug over the years to ensure that no momentum would be lost when the time for change arrived. The Coca-Cola Company will be the same steamroller under Doug as it was under Roberto.

I emphasize this lugubrious point because I would not want you to panic and sell your Berkshire stock upon hearing that some large catastrophe had cost us a significant amount. If you would tend to react that way, you should not own Berkshire shares now, just as you should entirely avoid owning stocks if a crashing market would lead you to panic and sell. Selling fine businesses on "scary" news is usually a bad decision. (Robert Woodruff, the business genius who built Coca-Cola over many decades and who owned a huge position in the company, was once asked when it might be a good time to sell Coke stock. Woodruff had a simple answer: "I don't know. I've never sold any.")

We look for similar predictability in marketable securities. Take Coca-Cola: The zeal and imagination with which Coke products are sold has burgeoned under Roberto Goizueta, who has done an absolutely incredible job in creating value for his shareholders. Aided by Don Keough and Doug Ivester, Roberto has rethought and improved every aspect of the company. But the fundamentals of the business - the qualities that underlie Coke's competitive dominance and stunning economics - have remained constant through the years.

I was recently studying the 1896 report of Coke (and you think that you are behind in your reading!). At that time Coke, though it was already the leading soft drink, had been around for only a decade. But its blueprint for the next 100 years was already drawn. Reporting sales of $148,000 that year, Asa Candler, the company's president, said: "We have not lagged in our efforts to go into all the world teaching that Coca-Cola is the article, par excellence, for the health and good feeling of all people." Though "health" may have been a reach, I love the fact that Coke still relies on Candler's basic theme today - a century later. Candler went on to say, just as Roberto could now, "No article of like character has ever so firmly entrenched itself in public favor." Sales of syrup that year, incidentally, were 116,492 gallons versus about 3.2 billion in 1996.

I can't resist one more Candler quote: "Beginning this year about March 1st . . . we employed ten traveling salesmen by means of which, with systematic correspondence from the office, we covered almost the territory of the Union." That's my kind of sales force. Companies such as Coca-Cola and Gillette might well be labeled "The Inevitables." Forecasters may differ a bit in their predictions of exactly how much soft drink or shaving-equipment business these companies will be doing in ten or twenty years. Nor is our talk of inevitability meant to play down the vital work that these companies must continue to carry out, in such areas as manufacturing, distribution, packaging and product innovation. In the end, however, no sensible observer - not even these companies' most vigorous competitors, assuming they are assessing the matter honestly - questions that Coke and Gillette will dominate their fields worldwide for an investment lifetime. Indeed, their dominance will probably strengthen. Both companies have significantly expanded their already huge shares of market during the past ten years, and all signs point to their repeating that performance in the next decade.

Buffett wrote that he and Charlie Munger had never made an investment decision based on a forecast of the economy or of interest rates, and that such forecasts would not have helped them if they had tried. He argued that the work of investing is to judge the long-term economics of individual businesses, and that macro forecasting is a distraction that produces activity without judgment.

On the irrelevance of macro forecasting to business-quality investing.

[14:25] Coca-Cola. This is very magic. It’s a very magic number, easy to remember. Coca-Cola is earning 30 times per share what they did 32 years ago. The stock has gone up thirtyfold. Bethlehem Steel is earning less than they did 30 years ago; the stock is half its price of 30 years ago. Stocks are not lottery tickets. There’s a company behind every stock. If a company does well, the stock does well. It’s not that complicated.

The businesses in which we have partial interests are equally important to Berkshire's success. A few statistics will illustrate their significance: In 1994, Coca-Cola sold about 280 billion 8-ounce servings and earned a little less than a penny on each. But pennies add up. Through Berkshire's 7.8% ownership of Coke, we have an economic interest in 21 billion of its servings, which produce "soft-drink earnings" for us of nearly $200 million. Similarly, by way of its Gillette stock, Berkshire has a 7% share of the world's razor and blade market (measured by revenues, not by units), a proportion according us about $250 million of sales in 1994. And, at Wells Fargo, a $53 billion bank, our 13% ownership translates into a $7 billion "Berkshire Bank" that earned about $100 million during 1994.

Today, Berkshire's situation has reversed: Many of the businesses we control are worth far more than their carrying value. (Those we don't control, such as Coca-Cola or Gillette, are carried at current market values.) We continue to give you book value figures, however, because they serve as a rough, albeit significantly understated, tracking measure for Berkshire's intrinsic value. Last year, in fact, the two measures moved in concert: Book value gained 13.9%, and that was the approximate gain in intrinsic value also.

Before looking at new investments, we consider adding to old ones. If a business is attractive enough to buy once, it may well pay to repeat the process. We would love to increase our economic interest in See's or Scott Fetzer, but we haven't found a way to add to a 100% holding. In the stock market, however, an investor frequently gets the chance to increase his economic interest in businesses he knows and likes. Last year we went that direction by enlarging our holdings in Coca-Cola and American Express.

Our history with American Express goes way back and, in fact, fits the pattern of my pulling current investment decisions out of past associations. In 1951, for example, GEICO shares comprised 70% of my personal portfolio and GEICO was also the first stock I sold - I was then 20 - as a security salesman (the sale was 100 shares to my Aunt Alice who, bless her, would have bought anything I suggested). Twenty-five years later, Berkshire purchased a major stake in GEICO at the time it was threatened with insolvency. In another instance, that of the Washington Post, about half of my initial investment funds came from delivering the paper in the 1940's. Three decades later Berkshire purchased a large position in the company two years after it went public. As for Coca-Cola, my first business venture - this was in the 1930's - was buying a six-pack of Coke for 25 cents and selling each bottle for 5 cents. It took only fifty years before I finally got it: The real money was in the syrup.

Buffett argued that broad diversification is a strategy for the investor who does not understand businesses, and that the informed investor is better served by concentration. He wrote that if an investor genuinely understands a small number of companies, the risk-reward of owning those companies in size is superior to diluting conviction across many names whose economics are less clear.

On concentration as the corollary of genuine understanding.

These gains, however, were outstripped by a much larger gain - 39% - in Berkshire's market price. Over time, of course, market price and intrinsic value will arrive at about the same destination. But in the short run the two often diverge in a major way, a phenomenon I've discussed in the past. Two years ago, Coca-Cola and Gillette, both large holdings of ours, enjoyed market price increases that dramatically outpaced their earnings gains. In the 1991 Annual Report, I said that the stocks of these companies could not continuously overperform their businesses.

Earlier I mentioned the financial results that could have been achieved by investing $40 in The Coca-Cola Co. in 1919. In 1938, more than 50 years after the introduction of Coke, and long after the drink was firmly established as an American icon, Fortune did an excellent story on the company. In the second paragraph the writer reported: "Several times every year a weighty and serious investor looks long and with profound respect at Coca-Cola's record, but comes regretfully to the conclusion that he is looking too late. The specters of saturation and competition rise before him."

Yes, competition there was in 1938 and in 1993 as well. But it's worth noting that in 1938 The Coca-Cola Co. sold 207 million cases of soft drinks (if its gallonage then is converted into the 192-ounce cases used for measurement today) and in 1993 it sold about 10.7 billion cases, a 50-fold increase in physical volume from a company that in 1938 was already dominant in its very major industry. Nor was the party over in 1938 for an investor: Though the $40 invested in 1919 in one share had (with dividends reinvested) turned into $3,277 by the end of 1938, a fresh $40 then invested in Coca-Cola stock would have grown to $25,000 by yearend 1993.

I can't resist one more quote from that 1938 Fortune story: "It would be hard to name any company comparable in size to Coca- Cola and selling, as Coca-Cola does, an unchanged product that can point to a ten-year record anything like Coca-Cola's." In the 55 years that have since passed, Coke's product line has broadened somewhat, but it's remarkable how well that description still fits.

Is it really so difficult to conclude that Coca-Cola and Gillette possess far less business risk over the long term than, say, any computer company or retailer? Worldwide, Coke sells about 44% of all soft drinks, and Gillette has more than a 60% share (in value) of the blade market. Leaving aside chewing gum, in which Wrigley is dominant, I know of no other significant businesses in which the leading company has long enjoyed such global power.

All of our judgments about this investment have been validated by events. Kay's skills as a manager were underscored this past year when she was elected by Fortune's Board of Editors to the Business Hall of Fame. On behalf of our shareholders, Charlie and I had long ago put her in Berkshire's Hall of Fame. Another of last year's retirees was Don Keough of Coca-Cola, although, as he puts it, his retirement lasted "about 14 hours." Don is one of the most extraordinary human beings I've ever known - a man of enormous business talent, but, even more important, a man who brings out the absolute best in everyone lucky enough to associate with him. Coca-Cola wants its product to be present at the happy times of a person's life. Don Keough, as an individual, invariably increases the happiness of those around him. It's impossible to think about Don without feeling good.

The impressions I formed in those days about Don were a factor in my decision to have Berkshire make a record $1 billion investment in Coca-Cola in 1988-89. Roberto Goizueta had become CEO of Coke in 1981, with Don alongside as his partner. The two of them took hold of a company that had stagnated during the previous decade and moved it from $4.4 billion of market value to $58 billion in less than 13 years. What a difference a pair of managers like this makes, even when their product has been around for 100 years.

Charlie Munger, Berkshire's Vice Chairman, and I have set a goal of attaining a 15% average annual increase in Berkshire's intrinsic value. If our growth in book value is to keep up with a 15% pace, we must earn $22 billion during the next decade. Wish us luck - we'll need it. Our outsized gain in book value in 1991 resulted from a phenomenon not apt to be repeated: a dramatic rise in the price- earnings ratios of Coca-Cola and Gillette. These two stocks accounted for nearly $1.6 billion of our $2.1 billion growth in net worth last year. When we loaded up on Coke three years ago, Berkshire's net worth was $3.4 billion; now our Coke stock alone is worth more than that.

Coca-Cola and Gillette are two of the best companies in the world and we expect their earnings to grow at hefty rates in the years ahead. Over time, also, the value of our holdings in these stocks should grow in rough proportion. Last year, however, the valuations of these two companies rose far faster than their earnings. In effect, we got a double-dip benefit, delivered partly by the excellent earnings growth and even more so by the market's reappraisal of these stocks. We believe this reappraisal was warranted. But it can't recur annually: We'll have to settle for a single dip in the future.

Our Guinness holding represents Berkshire's first significant investment in a company domiciled outside the United States. Guinness, however, earns its money in much the same fashion as Coca-Cola and Gillette, U.S.-based companies that garner most of their profits from international operations. Indeed, in the sense of where they earn their profits - continent-by-continent - Coca- Cola and Guinness display strong similarities. (But you'll never get their drinks confused - and your Chairman remains unmovably in the Cherry Coke camp.)

After we bought about 7 million shares, the price began to climb. In frustration, I stopped buying (a mistake that, thankfully, I did not repeat when Coca-Cola stock rose similarly during our purchase program). In an even sillier move, I surrendered to my distaste for holding small positions and sold the 7 million shares we owned. I wish I could give you a halfway rational explanation for my amateurish behavior vis-a-vis Fannie Mae. But there isn't one. What I can give you is an estimate as of yearend 1991 of the approximate gain that Berkshire didn't make because of your Chairman's mistake: about $1.4 billion.

BERKSHIRE HATHAWAY INC. To the Shareholders of Berkshire Hathaway Inc.: Last year we made a prediction: "A reduction [in Berkshire's net worth] is almost certain in at least one of the next three years." During much of 1990's second half, we were on the road to quickly proving that forecast accurate. But some strengthening in stock prices late in the year enabled us to close 1990 with net worth up by $362 million, or 7.3%. Over the last 26 years (that is, since present management took over) our per-share book value has grown from $19.46 to $4,612.06, or at a rate of 23.2% compounded annually. Our growth rate was lackluster in 1990 because our four major common stock holdings, in aggregate, showed little change in market value. Last year I told you that though these companies - Capital Cities/ABC, Coca-Cola, GEICO, and Washington Post - had fine businesses and superb managements, widespread recognition of these attributes had pushed the stock prices of the four to lofty levels. The market prices of the two media companies have since fallen significantly - for good reasons relating to evolutionary industry developments that I will discuss later - and the price of Coca-Cola stock has increased significantly for what I also believe are good reasons. Overall, yearend 1990 prices of our "permanent four," though far from enticing, were a bit more appealing than they were a year earlier.

Our 17% share of the company's earnings amounted to more than $83 million last year. Yet only about $530,000 ($600,000 of dividends it paid us less some $70,000 of tax) is counted in Berkshire's GAAP earnings. The residual $82 million-plus stayed with Cap Cities as retained earnings, which work for our benefit but go unrecorded on our books. Our perspective on such "forgotten-but-not-gone" earnings is simple: The way they are accounted for is of no importance, but their ownership and subsequent utilization is all-important. We care not whether the auditors hear a tree fall in the forest; we do care who owns the tree and what's next done with it. When Coca-Cola uses retained earnings to repurchase its shares, the company increases our percentage ownership in what I regard to be the most valuable franchise in the world. (Coke also, of course, uses retained earnings in many other value-enhancing ways.) Instead of repurchasing stock, Coca-Cola could pay those funds to us in dividends, which we could then use to purchase more Coke shares. That would be a less efficient scenario: Because of taxes we would pay on dividend income, we would not be able to increase our proportionate ownership to the degree that Coke can, acting for us. If this less efficient procedure were followed, however, Berkshire would report far greater "earnings."

12/31/90 Shares Company Cost Market ------ ------- ---------- ---------- (000s omitted) 3,000,000 Capital Cities/ABC, Inc. ............ $ 517,500 $1,377,375 46,700,000 The Coca-Cola Co. ................... 1,023,920 2,171,550 2,400,000 Federal Home Loan Mortgage Corp. .... 71,729 117,000 6,850,000 GEICO Corp. ......................... 45,713 1,110,556 1,727,765 The Washington Post Company ......... 9,731 342,097 5,000,000 Wells Fargo & Company ............... 289,431 289,375 Lethargy bordering on sloth remains the cornerstone of our investment style: This year we neither bought nor sold a share of five of our six major holdings. The exception was Wells Fargo, a superbly-managed, high-return banking operation in which we increased our ownership to just under 10%, the most we can own without the approval of the Federal Reserve Board. About one-sixth of our position was bought in 1989, the rest in 1990. The banking business is no favorite of ours. When assets are twenty times equity - a common ratio in this industry - mistakes that involve only a small portion of assets can destroy a major portion of equity. And mistakes have been the rule rather than the exception at many major banks. Most have resulted from a managerial failing that we described last year when discussing the "institutional imperative:" the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so.

Coca-Cola's first-quarter 1989 review opened with chairman Roberto Goizueta framing the year as a continuation of the concentrate-and-bottling strategy that had lifted worldwide case volume to a new high. Management told analysts that international unit case volume had grown at a double-digit pace through the first four months, with the Pacific and Latin America regions leading the gains, while North American concentrate sales were tracking roughly in line with the prior year's level. CFO Douglas Ivester emphasised the widening gap between the volume growth of branded Coca-Cola trademark products and the slower growth of the broader soft drink category. He pointed to the bottler system's investment in cold-drink equipment and the dividend-aligned economics of Company-owned bottling operations as the structural driver of incremental margin per case over time. On the Q&A, an analyst asked whether the recent run-up in the share price, which had carried Coca-Cola's market capitalisation past $15 billion, implied management was contemplating stock splits or share repurchases. Goizueta replied that the board preferred to let the share price reflect intrinsic business value rather than manage the share count, and that excess cash would continue to be redeployed into the global system rather than returned through buybacks while returns on incremental invested capital exceeded the cost of equity. The call closed with management reiterating its long-term algorithm of real earnings per share growth of seven to eight percent annually and return on equity above twenty percent, anchored on the durability of the trademark and the discipline of the bottler network.

Buffett called See's Candies the 'headwaters' from which much of Berkshire's later success flowed. The business threw off cash that Berkshire redeployed into other opportunities, and the experience taught Buffett and Munger what a wonderful business felt like — light on capital, strong on brand, able to raise prices. Without that education, he wrote, Berkshire would not have bought Coca-Cola when it did.

On how one good business educated two decades of capital allocation.

Lynch sorted companies into six boxes — slow growers, stalwarts, fast growers, cyclicals, asset plays, and turnarounds — and treated each category with a different set of expectations. Slow growers, in his framing, are businesses whose earnings growth has settled into the low single digits; the only reason to own them is the dividend, so the question becomes whether the payout is safe and rising. Stalwarts are the ten-to-twelve percent growers — solid multinationals like Coca-Cola or Procter & Gamble that are rarely cheap but rarely mispriced by much; their role in a portfolio is to compound through boring years. Fast growers were Lynch's preferred habitat: small, aggressive companies growing earnings at twenty to twenty-five percent a year. The mathematics of compounding turns a twenty percent grower into a five-bagger in nine years and a ten-bagger in thirteen. Lynch's edge came from finding such growers while they still had years of runway left, often in industries the institutional consensus considered unfashionable. The risk is that growth decelerates — when a fast grower slips to a slow grower, the multiple collapses twice, once for the slower growth and once for the disappointment. The discipline is to sell the moment the story breaks, not the moment the price falls. Cyclicals, asset plays, and turnarounds each demand a different lens. Cyclical stocks — aluminium, autos, chemicals — rise and fall with the cycle, and timing matters more than quality. The classic mistake is buying a cyclical at peak earnings when the price looks 'cheap' on a trailing P/E. Asset plays are companies whose real value sits in land, timber, oil reserves, or a hidden subsidiary that the market is ignoring; the catalyst is a sale, a spin-off, or a buyout. Turnarounds are businesses in trouble that can be saved — the classic being Chrysler in the early eighties. Each requires a different sell discipline: cyclicals get sold when capacity is being added, asset plays get sold when the hidden value is realised, turnarounds get sold when the rescue is complete.

If you combine the earnings and net worths of these four segments, you will derive totals matching those shown on our GAAP statements. However, I want to emphasize that this four-category presentation does not fall within the purview of our auditors, who in no way bless it. In addition to our reported earnings, we also benefit from significant earnings of investees that standard accounting rules do not permit us to report. On page 15, we list five major investees from which we received dividends in 1989 of about $45 million, after taxes. However, our share of the retained earnings of these investees totaled about $212 million last year, not counting large capital gains realized by GEICO and Coca-Cola. If this $212 million had been distributed to us, our own operating earnings, after the payment of additional taxes, would have been close to $500 million rather than the $300 million shown in the table.

o Below we list our common stock holdings having a value of over $100 million. A small portion of these investments belongs to subsidiaries of which Berkshire owns less than 100%. This list of companies is the same as last year's and in only one case has the number of shares changed: Our holdings of Coca-Cola increased from 14,172,500 shares at the end of 1988 to 23,350,000.

This Coca-Cola investment provides yet another example of the incredible speed with which your Chairman responds to investment opportunities, no matter how obscure or well-disguised they may be. I believe I had my first Coca-Cola in either 1935 or 1936. Of a certainty, it was in 1936 that I started buying Cokes at the rate of six for 25 cents from Buffett & Son, the family grocery store, to sell around the neighborhood for 5 cents each. In this excursion into high-margin retailing, I duly observed the extraordinary consumer attractiveness and commercial possibilities of the product.

What I then perceived was both clear and fascinating. After drifting somewhat in the 1970's, Coca-Cola had in 1981 become a new company with the move of Roberto Goizueta to CEO. Roberto, along with Don Keough, once my across-the-street neighbor in Omaha, first rethought and focused the company's policies and then energetically carried them out. What was already the world's most ubiquitous product gained new momentum, with sales overseas virtually exploding.

Of course, we should have started buying Coke much earlier, soon after Roberto and Don began running things. In fact, if I had been thinking straight I would have persuaded my grandfather to sell the grocery store back in 1936 and put all of the proceeds into Coca-Cola stock. I've learned my lesson: My response time to the next glaringly attractive idea will be slashed to well under 50 years.

Buffett described the Coca-Cola purchase as the product of a long-held conviction about the business rather than a forecast of near-term results. He wrote that he preferred a wonderful business at a fair price to a fair business at a wonderful price, and that the Coca-Cola investment embodied that preference: a consumer franchise with global reach, durable consumer attachment, and the capacity to raise prices over time.

On the rationale for the Coca-Cola purchase.

Buffett wrote that an investor's goal is not to calculate a business's intrinsic value to many decimal places but to have enough conviction that the value is well above the price. He emphasized that a rough but correct estimate is more useful than a precise but wrong one, and that the chief error is not arithmetic imprecision but buying businesses one does not understand.

On the precision-vs-correctness point in intrinsic value.

o In 1988 we made major purchases of Federal Home Loan Mortgage Pfd. ('Freddie Mac') and Coca Cola. We expect to hold these securities for a long time. In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint. Peter Lynch aptly likens such behavior to cutting the flowers and watering the weeds. Our holdings of Freddie Mac are the maximum allowed by law, and are extensively described by Charlie in his letter. In our consolidated balance sheet these shares are carried at cost rather than market, since they are owned by Mutual Savings and Loan, a non-insurance subsidiary.

Buffett wrote that Berkshire's policy was to hold a small set of businesses it understood and admired, and that the test for inclusion was not whether a position had risen in price but whether the underlying business still met the original standard. He compared the portfolio to a group of permanent holdings — the kind of business one would be content to own if the stock market closed for a decade — and warned that the temptation to trade in and out of such businesses was the chief way owners harm themselves.

On the 'permanent holdings' framing and the futility of trading wonderful businesses.

Buffett argued that diversification, beyond a point, is a concession that the investor does not understand the businesses. He wrote that anyone who understands a handful of industries can do well by concentrating in them, and that broad diversification is primarily a defense against the consequences of ignorance — necessary for the uninformed, but a drag on the returns of those who genuinely know what they own.

The 'diversification is protection against ignorance' framing.

In 1937, after many years of selling used clothing, Mrs. Blumkin had saved $500 with which to realize her dream of opening a furniture store. Upon seeing the American Furniture Mart in Chicago - then the center of the nation's wholesale furniture activity - she decided to christen her dream Nebraska Furniture Mart. She met every obstacle you would expect (and a few you wouldn't) when a business endowed with only $500 and no locational or product advantage goes up against rich, long- entrenched competition. At one early point, when her tiny resources ran out, 'Mrs. B' (a personal trademark now as well recognized in Greater Omaha as Coca-Cola or Sanka) coped in a way not taught at business schools: she simply sold the furniture and appliances from her home in order to pay creditors precisely as promised.

Buffett wrote that the small number of businesses that can protect owners from inflation share an economic structure: they require little tangible capital to grow, can raise prices with inflation, and therefore convert inflation into higher returns on tangible equity rather than higher required reinvestment. A brand-led consumer franchise with low capital intensity, he argued, was the structural form most likely to deliver this protection; a capital-intensive commodity business was the form least likely to do so.

On which business structures can protect owners from inflation.