Charlie Munger

Wang opened the 2023 annual results briefing against the backdrop of a year in which BYD had sold approximately 3.02 million new energy vehicles, including 1.6 million pure electric vehicles and 1.4 million plug-in hybrids, and had become the largest manufacturer of new energy vehicles globally for the second consecutive year. Management told analysts that net profit had grown to approximately RMB 30.0 billion on revenue of approximately RMB 602 billion, with the automotive business contributing the majority of both revenue and operating profit and the mobile phone components and assembly business providing a stable second leg. Wang walked analysts through the international expansion trajectory, indicating that the overseas new energy passenger vehicle sales had reached approximately 242,000 units during the year, with the Atto 3, the Dolphin and the Seal having been positioned across the European, the Southeast Asian, the Australian and the South American markets. He flagged that the local manufacturing footprint in Thailand, in Brazil and in the planned Hungarian site was being built as the long-term structural anchor of the international expansion and that the export of vehicles from the Chinese manufacturing base continued to provide the near-term volume. On the Q&A, analysts pressed on whether the price reductions taken during the year, especially in the Chinese market where the broader industry had engaged in a sharp price war, would compress the long-term unit economics of the franchise. Wang responded that the price reductions had been executed from a position of cost leadership, that the captive battery supply chain and the scale of the manufacturing footprint provided the unit cost discipline required to maintain the margin trajectory through the price war and that the long-term competitive position of the franchise had actually strengthened during the year as the lower-cost competitors took share from the weaker players. He also defended the choice to continue to invest aggressively in research and development through the price war, arguing that the technology trajectory of the franchise was the central long-term advantage. The briefing closed with management reiterating the long-term ambition of being the world's largest manufacturer of new energy vehicles, the leading manufacturer of new energy solutions and the leading manufacturer of new energy commercial vehicles, anchored on the captive battery supply chain, the DM-i hybrid platform, the international expansion and the technology trajectory of the blade battery and the cell-to-pack architecture.

At the 2023 Daily Journal meeting - Munger's final DJCO appearance before his death later that year - he was asked why he preferred an investment in BYD to one in Tesla. His answer was pointed: Tesla, last year, reduced its prices in China twice and BYD increased its prices. They are direct competitors. BYD is so much ahead of Tesla in China, Munger told the room, that it is almost ridiculous. He went further, noting that if you counted all the manufacturing space BYD had in China to make cars, it would amount to a big percentage of all the land in Manhattan. He then gave the room BYD's recent numbers. BYD had made more than two billion dollars after taxes in the auto business in China the previous year. He asked who in the hell makes two billion as a brand new entrant in the auto business, for all practical purposes. It was, he said, incredible what had happened. The number was not a projection - it was a result. And it confirmed what he had been saying about BYD since the original 2008 investment: this was a real business with a real moat, not a speculative bet on a foreign manufacturer. Munger closed the BYD reflection with a structural point about capitalism itself. There was, he said, still some old-fashioned capitalist virtue left in the Daily Journal, and some left in Berkshire Hathaway, and some left in BYD. The virtue he meant was the one where the founder and chairman used his own stock - not the company's stock - to reward executives, because he believed the rewards should come out of his own hide. Most places, Munger said, everybody is trying to take what they need and just rationalizing whether it's deserved or not. The minority that operated differently, in his view, were the ones who compounded.

Asked at the 2023 DJCO meeting about Costco's economic moat in the long term, Munger gave the line that would become one of his most-quoted final verdicts on a business: as long as Costco kept the faith with its strong culture and extreme low mark-up policy, he didn't see any stopping it. The trouble with Costco, he said, was that it traded at forty times earnings. But except for that, he said, it was a perfect damn company. It had a marvelous future, a wonderful culture, and it had been run by wonderful people. He told the room he loved everything about Costco, that he was a total addict, and that he was never going to sell a share. The Munger formulation matters because it separated the business from the price. The business was perfect; the price was not cheap. He refused to pretend otherwise on either side. He did not say the multiple was justified by growth, and he did not say the business was a sell because of the multiple. He told the truth in two clauses: the moat is intact, the price is full. Investors who try to compress that truth into a single buy or sell call, Munger implied, are losing the actual information. The point about pricing discipline - buy wonderful businesses but don't pay any price for them - was Munger's version of Buffett's margin-of-safety principle, applied at the level of the multiple rather than the level of the asset value. He had lived by it. His own Costco position had compounded enormously and he still refused to sell; his own DJCO bank stocks he held for tax reasons even after they had multiplied many times. The discipline was never sell a great business at any price; the discipline was also never buy a great business at any price. The two had to be held together.

At the 2023 DJCO meeting, Munger was asked about the bank stocks in the Daily Journal securities portfolio. The question was pointed: Berkshire had unloaded its bank stocks, and if those positions were not good enough for Berkshire shareholders, why were they good enough for Daily Journal shareholders? Munger's answer was structural. He might have different ideas than Berkshire, he said. If you owned marketable securities within a corporation located in California, you paid huge state and federal taxes if you sold things at a big gain, and that affected the willingness to sell. He then made a striking disclosure: those bank stocks he had bought on the bottom tick in the foreclosure crisis. Literally, Munger said, it was the bottom tick. They were practically all gain now, so he would immediately give the government forty-some percent of everything he sold out of those bank stocks. They were producing dividends that were almost tax free. Based on what he would get if he sold them and the return he was getting out of the dividends, he said, it's not so bad for us. The answer was that Daily Journal was not in a normal position. All factors considered, they were willing to hold them for a while. The decision, in other words, was not a vote against the underlying thesis. It was a vote for tax discipline. The big disadvantage in having a huge layer of federal corporate taxes and state taxes between the company and any money it made - in a state like California, especially - was that it trapped gains inside the corporate shell. Munger was telling the room that tax friction is a real input into hold-versus-sell decisions, that the bottom-tick buy had produced a position where the after-tax math of selling was inferior to the after-tax math of holding, and that the rational investor factors that into the decision rather than pretending it doesn't exist.

At the 2022 Berkshire annual meeting - Munger's last before his death in November 2023 - he was characteristically blunt about what he refused to touch. He told the audience that he tried to avoid things that were evil, stupid, and made him look bad relative to someone else. The formulation compressed Munger's lifelong filter into a single line: a thing did not have to be all three to be avoided; any one of the three was sufficient. The investor who internalized the rule would refuse most of the propositions the market pressed on him. He sharpened the point with reference to crypto. Munger had been a public critic of cryptocurrency for years, and at the 2022 meeting he did not soften. He told the audience that he regarded crypto as a disgusting development and that those who promoted it were, in his view, either deluded or self-interested. He did not pretend that the asset class might be a legitimate innovation in payments or a hedge against monetary debasement; he treated it as a speculation that exploited the same incentive biases and psychology of crowds that had produced every previous speculative mania, and he refused to participate in any form. The avoidance principle, in Munger's telling, was not the absence of strategy. It was the strategy. The things he refused to touch - crypto, complex derivatives, structured products, financial engineering generally - defined the perimeter inside which he was willing to operate. The perimeter was deliberately narrow. The great investment decisions inside the perimeter - See's, Coca-Cola, BYD, Costco, the Japanese trading houses - had produced returns that an investor following the broader market could not have matched. The avoidance of the evil and the stupid was, paradoxically, what made the great investments possible.

Wang opened the 2022 annual results briefing against the backdrop of a year in which BYD had sold approximately 1.86 million new energy vehicles, exceeding Tesla's global deliveries and becoming the world's largest manufacturer of new energy vehicles by volume. Management told analysts that net profit had grown to approximately RMB 16.6 billion on revenue of approximately RMB 424 billion, with the automotive business contributing the majority of both revenue and operating profit, the rechargeable battery and the photovoltaic businesses contributing a stable second-leg earnings stream and the mobile phone components and assembly business providing the third leg. Wang walked analysts through the cessation of the pure internal combustion engine passenger vehicle production in March 2022, indicating that the Company had moved to an exclusively new energy vehicle model range ahead of the regulatory schedule and that the transition had been driven by the unit economics of the captive battery supply chain, the regulatory environment and the consumer demand for new energy vehicles. He flagged that the DM-i hybrid platform had become the dominant growth driver of the passenger model range, that the Han, the Seal and the Atto 3 had been positioned as the flagship pure EV models and that the Company had launched the international expansion with the Atto 3 entering the Australian, the Thai and the European markets during the back half of the year. On the Q&A, analysts pressed on whether the international expansion would dilute the near-term earnings given the cost of establishing the overseas distribution and the manufacturing footprint. Wang responded that the international expansion was being executed gradually, that the local manufacturing footprint in Thailand and in the planned European sites would be the long-term structural anchor and that the underlying unit economics of the captive battery supply chain provided the cost advantage required to compete in the international markets. He also defended the company's vertical integration strategy as the central advantage of the franchise in the international expansion. The briefing closed with management reiterating the long-term ambition of being the world's largest manufacturer of new energy vehicles and the leading manufacturer of new energy solutions, anchored on the captive battery supply chain, the DM-i hybrid platform and the international expansion.

At the 2022 Daily Journal annual meeting, I told the audience that the discipline of staying within the circle of competence had been, over my seven decades of investing, the single most valuable discipline I had acquired. The discipline required is to refuse to act on the things outside the circle, even at the cost of looking unfashionable during the boom, and even at the cost of being told, repeatedly, that I am missing the opportunity of a lifetime. The mistakes-and-learning point I tried to convey was that the boom, in its broad patterns, is the product of investors acting outside their circles on the assumption that they understand the new things, and the investor who recognises the assumption, and who refuses to act outside his circle, has a long-run advantage over the investor who chases the new things. The discipline required is honesty about the boundary of the circle, and the willingness to admit that the boundary is smaller. The circle-of-competence element was the one I had most wanted to convey. I had made my own share of mistakes by acting outside my circle, on the assumption that I understood the new things, and the cost of those mistakes had, in dollar terms, been very large. The lesson I drew was that the disciplined investor must assume that the boundary of his circle is smaller than he would prefer, and he must build the discipline of refusal into his process before the temptation to act outside the circle becomes irresistible. The 2022 meeting was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to act on the things outside the circle, even at the cost of looking unfashionable during the boom. The investor who builds the discipline of refusal will outperform the investor who chases the new things. The mistakes-and-learning lesson I tried to convey was that the investor who is honest about the boundary of his circle, and who refuses to act outside it, has an enormous advantage over the investor who pretends to understand more than he does. The 2022 meeting was, in some ways, the most candid I had ever given. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to act outside the circle, and to expand the circle only by deliberate study. The investor who is honest about the boundary, and who refuses to act outside it, will, in the long run, outperform the investor with the larger circle who pretends to understand more than he does. That single discipline, applied over a working life, has been more valuable than any other I have learned, and it is the one I have tried hardest to convey to the students who visit Pasadena each spring.

Munger used the 2022 platform to restate his view of derivatives, the asset class he and Buffett had been warning about publicly since the 2003 meeting. He told the audience that the world had become more complex, more leveraged, and more interconnected since the original warning, and that the derivatives web had grown rather than shrunk in the intervening two decades. The systemic fragility had, in his view, become worse, not better. He did not predict a specific crisis; he predicted the pattern - that the next serious credit event would, as in 2008, propagate through the derivatives counterparty web faster than the regulators could contain it. The prescription was unchanged: stay simple, stay liquid, stay out of contracts whose payoff depended on a counterparty's solvency in a crisis. He told the room that Berkshire itself held a large cash position precisely because Buffett and Munger believed that the optionality of being able to act in a crisis was worth more than the small incremental return they would have earned by deploying that cash in calm markets. The cash was not a waste; it was insurance on the franchise. He closed with a callback to the avoidance principle. The investor who stayed out of the derivatives web, out of the crypto speculation, and out of the structured products would, in the next crisis, be one of the few people with both the capital and the courage to act. That was the actual content of risk management, in Munger's view - not the elaborate value-at-risk models that the banks ran, but the simple discipline of refusing to own assets whose behavior in a crisis could not be underwritten. The simple discipline, repeated over decades, was what produced the long-run record.

At the 2021 Daily Journal annual meeting, I told the audience that the previous year, with its pandemic shutdown and its rapid recovery, had been the most instructive of my investing life, not because I had made many new mistakes, but because the old mistakes had been repeated by a new generation of investors, at a scale that had produced the largest speculative bubble in technology stocks since 1999. The market-psychology point I tried to convey was that the crowd, in its broad patterns, repeats the same mistakes in every cycle, because the incentives facing the participants are the same in every cycle, and the biases facing the participants are the same in every cycle. The investor who recognises the patterns, and who refuses to participate in the new version of the old mistake, has a long-run advantage over the investor who assumes that the new version is different. The discipline required is to read the history, to recognise the patterns. The mistakes-and-learning element was the one I had most wanted to convey. I had made my own share of mistakes in the previous year, by being too cautious during the recovery, and the cost of the caution had, in opportunity terms, been very large. The lesson I drew was that the disciplined investor must be willing to act during a recovery, even when the outlook is unclear, and even when the prices may go lower before they go higher. The 2021 meeting was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to wait for clarity, and to act when the prices were attractive, even at the cost of being early. The investor who builds the discipline of acting during the recovery will outperform the investor who waits for clarity. The market-psychology lesson I tried to convey was that the crowd, in its broad patterns, is the aggregate of the investors acting on the assumption that the new technology has repealed the old rules, and the investor who recognises the assumption, and who refuses to participate, has an enormous advantage over the investor who chases the new technology. The 2021 meeting was, in some ways, the most candid I had ever given. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to read the history, to recognise the patterns, and to refuse to participate in the new version of the old mistake, even at the cost of looking unfashionable during the boom. The investor who builds the discipline of refusal will outperform the investor with the higher IQ who participates on the assumption that the new version is different.

At the 2020 Daily Journal meeting, held as the COVID crash was still unfolding, Munger reiterated his hold-not-sell philosophy by reference to Costco. He was, by his own description, no good at exits. He didn't even like looking for exits. He was looking for holds. He told the audience to think of the pleasure he had got from watching Costco march ahead - such an utter meritocracy, doing so well - and asked why on earth he would trade that experience for a series of transactions. He would be less rich, not more, after taxes. The second place was a much less satisfactory life than rooting for people he liked and admired. He condensed the philosophy into a single line that became one of his most quoted precepts: find Costco's, not good exits. The grammar was deliberate. The hard work was upstream, in identifying the kind of business that compounded intrinsic value over decades - a Costco, a See's, a Coca-Cola - and then holding it. Once you owned something like that, the sell decision was a different and far less important question. The trap was the investor who kept trying to find clever exits from positions he had never properly chosen in the first place. Munger paired the holding discipline with a spending discipline. The secret of his and Buffett's early compounding, he said, was controlling costs and living simply. They had tiny little bits of money and they always underspent their incomes and invested the difference. You live long enough, Munger told the room, you end up rich. It is not very complicated. The line was characteristically Munger: take an obvious truth, refuse to dress it up, and dare the audience to argue with it.

Wang opened the 2020 annual results briefing against the backdrop of a year in which the Chinese passenger vehicle market had been disrupted by the COVID pandemic and in which the Chinese government had accelerated the new energy vehicle policy support. Management told analysts that net profit had grown to approximately RMB 4.28 billion on revenue of approximately RMB 156.6 billion, with the new energy vehicle business contributing the majority of revenue growth and the medical mask and the consumer electronics businesses providing incremental support during the pandemic response. Wang walked analysts through the blade battery technology launch, indicating that the new cell format had been validated through extensive safety testing, that the technology was being deployed across the BYD passenger model range and that the structural advantage of the blade battery was the inherent safety of the lithium iron phosphate chemistry combined with the space efficiency of the long blade format. He flagged that the Han EV, the first model to deploy the blade battery, had been launched during the year and that the early demand response had positioned the model as a credible competitor to the global premium EV brands in the Chinese market. On the Q&A, analysts pressed on whether BYD would spin off the battery business as a separate listed entity. Wang responded that the captive battery supply chain remained a structural advantage of the BYD franchise and that the Company intended to continue to deploy the battery technology across the captive model range while exploring selective external supply opportunities. He also defended the strategy of being an integrated manufacturer rather than a specialist EV player, arguing that the vertical integration provided the cost discipline and the technology validation that were the central advantages of the BYD franchise. The briefing closed with management reiterating the long-term ambition of being the world's largest manufacturer of new energy vehicles and the leading manufacturer of new energy solutions, and with the Company committing to invest aggressively in the blade battery technology, the DM-i hybrid platform and the new energy commercial vehicle franchises through the cycle.

Munger used the 2020 meeting, with markets still in panic from the COVID crash, to restate his views on what works in a crisis. He had been through many of them. The way he operated in any crisis, he said, was the way he operated out of one: underspend your income, invest the difference patiently, do not panic, and stay in the few things you genuinely understand. He was telling the room not to confuse activity with courage. The heroic move in a crash is rarely to swing; it is usually to refuse to swing badly. He was unsentimental about the price of panic. He told the audience that the people who sold into the crash were going to be the people who paid the tax of being wrong about timing forever. The investor who held great businesses through the decline, who refused to mark his mental portfolio to the panic price, was the investor who kept his options open. He pointedly did not recommend buying the dip aggressively, because that, too, was a form of panic - just panic in the other direction. The discipline was to keep the steady habits when the tape was screaming at you. He closed the COVID thought with a Costco callback. The right thing in a crash, in Munger's view, was to have already chosen your Costco's before the crash arrived, so that when the world fell apart you did not have to make new decisions under pressure. The work was done in the calm years; the harvest was reaped in the violent ones. That was the actual content of patience, not the popular image of patient suffering but the engineering reality of pre-positioning.

At the 2019 Berkshire annual meeting, Munger was asked about share repurchases. The question probed the precision of Buffett's buyback threshold and whether Berkshire would be more liberal in repurchasing its own stock. Munger's answer was deliberately imprecise. He told the audience that he was a little more liberal in repurchasing shares than Buffett, and that the question of un-precision in railroading was a related problem - at some point, in a complicated operation, you accepted that you were operating with judgment rather than measurement. The point Munger was making was that capital allocation at Berkshire scale was not a marks-to-the-penny exercise. Repurchasing shares below intrinsic value was a clear duty when the price was clearly below the estimate; the difficulty was that intrinsic value itself was an estimate, not a quote. He told the room that pretending to more precision than the business actually allowed was itself a form of misjudgment. The honest framing was that Buffett and Munger had a range for intrinsic value, and they repurchased aggressively when the market price fell well below the low end of that range. The corollary was a critique of the modern buyback fashion. Munger noted that, historically, companies had refused to buy back their stock when it was a very good idea and were buying it back aggressively when the stock was so high that doing so was frequently a bad idea. He welcomed the audience to adult life - this is the way it is. The observation was that corporate buyback behavior was pro-cyclical, driven by the same incentive biases that drove every other form of capital allocation. The disciplined operator did the opposite: he bought back stock when the price was low and refrained when the price was high, regardless of what the Street was telling him about the optics.

At the 2019 Daily Journal meeting, Munger offered his most compact summary of why Berkshire and the Daily Journal had outperformed. The answer, he said, was pretty simple. They tried to do less. They had never had the illusion they could just hire a bunch of bright young people and have them know more than anybody about canned soup and aerospace and utilities. They had never thought they could get really useful information on all subjects the way Jim Cramer pretends to have it. They had always realized that if they worked very hard, they could find a few things where they were right, and the few things were enough. He tied the point to expectations. If you had asked Warren Buffett for his single best idea in a given year, Munger said, and you had just followed it, you would have found that it worked beautifully. Buffett would not have tried to give you a whole heap of names - he would have given you one or two stocks, because he had more limited ambitions than the typical mutual fund manager. The discipline was not to know a lot, but to know a few things very well and to act on them only when the conviction was high. Munger closed the thought with the kicker: that is a very different way to approach the process than the way mutual funds approach it. The fund industry's job, structurally, is to be in everything so that no benchmark-relative argument can ever be made against it. Munger's job was to be in very few things so that the few things he was in were the ones where he had an edge. The two philosophies produce very different long-run returns.

Munger attacked the diversification orthodoxy head-on at DJCO 2019. The whole idea of wide diversification when you are looking for excellence, he said, is totally ridiculous. It doesn't work. It gives you an impossible task. He asked the room what fun it could possibly be to do an impossible task over and over again. He was making a deliberately provocative point - the conventional finance-theory counsel to diversify away idiosyncratic risk was, in Munger's view, the counsel to dilute the very edge that an investor was supposed to be hunting for. He paired the diversification critique with a concentration positive. The whole trick of the game, he said, is to have a few times when you know that something is better than average and invest only where you have that extra knowledge. And then if you get a few opportunities that is enough. He cited Buffett's line: in a growing town, if you owned stock in three of the best enterprises in the town, that was diversified enough. The answer, of course, is that it is. Owning three excellent businesses you genuinely understand is more diversification than most investors need. He then turned to fees. People don't realize, because they are so mathematically illiterate, that if you make five percent and pay two of it to your advisers, you are not losing forty percent of your future. You are losing ninety percent. Over a long period of time that little difference becomes a ninety percent disadvantage to you. The arithmetic of compounding punishes fee drag far more than intuition suggests. Munger's conclusion was that for a long-term holder, not paying a big annual toll out of performance is hugely important - it is the difference between an acceptable and a catastrophic long-run return.

Munger used the 2019 platform to reflect on BYD, more than a decade after Berkshire's original 2008 investment. The position had been the source of considerable public attention, and Munger had been the principal advocate inside Berkshire for the bet on the Chinese EV maker. He told the audience that the bet had worked out, that BYD had become a serious business, and that the early conviction about the founder and the technology had been validated by the company's subsequent execution. The reflection was characteristically Munger in two respects. First, he refused to take credit for foresight. The investment had worked because the founder had executed; the bet had been a bet on a person and a culture, and the person and the culture had delivered. Munger's framing was that he had identified a small number of things that mattered - the founder's character, the technology trajectory, the Chinese government's commitment to electrified transport - and had refused to be talked out of the bet by the surface-level concerns about Chinese governance and disclosure that had scared other foreign investors away. Second, Munger connected the BYD reflection to the broader thesis on international investing. He told the room that Berkshire had made a serious amount of money in China over the years - PetroChina before BYD - because the great companies in China had traded at lower multiples than comparable great companies in the United States. The pattern was not luck; it was the consequence of doing the work and being willing to underwrite a foreign franchise when other investors were standing on the sideline. The lesson for the audience was that the international opportunity set was real and recurring, and that the patient, disciplined investor who did the work would be paid for doing it.

Munger closed the 2019 meeting with a series of operating lessons drawn from Berkshire's history. He pointed to the founding businesses of Berkshire Hathaway - a doomed department store, a doomed New England textile company, and a doomed trading stamp company - and said that out of that mix came Berkshire. They had handled those losing hands pretty well and they had bought into them very cheaply. But, Munger said, of course the success came from changing their ways and getting into better businesses. The lesson was that scrambling out of mistakes without letting them cost too much is a real and underappreciated part of long-run compounding. He sharpened the point. It isn't that we were so good at doing things that were difficult, he said. We were good at avoiding things that were difficult, and finding things that were easy. The inversion of the popular image of Berkshire - which celebrates Buffett and Munger as patient geniuses who solve the hardest problems - was deliberate. Munger was telling the room that the actual edge was in saying no to the hard stuff and saying yes only when the proposition was simple, durable, and within reach. He connected the lesson to expectations and to China. His advice to a seeker of compound interest that works ideally was to reduce expectations, because he thought returns were going to be tougher for a while, and that having realistic expectations made you less crazy. On China, he repeated his 2017 line: the great companies in China were cheaper than the great companies in the United States. And he closed with the too-hard pile again - there was a pile on his desk, he said, that solved most of his problems. Every once in a while an easy decision came along and he made it. That was the system.

At the 2018 Daily Journal meeting, Munger returned to the theme of opportunity cost. The point he made to the audience was that Berkshire's discipline about saying no was not a virtue of caution but a virtue of focus. If they had one thing they could do more of, he said, they were not interested in anything that was not better than that. The rule simplified life a great deal. Anything that did not clearly exceed the next-best use of the marginal dollar was, in Munger's framing, a no - and the no was the active investment decision, not the absence of one. He tied the point to activity itself. It is amazing, Munger told the room, how intelligent it is to spend some time just sitting. A lot of people are just way too active. The observation was directed at the modern investor's bias toward doing something - anything - in response to market moves, news, or peer behavior. Munger's prescription was the opposite. The intelligent posture was to think, read, and wait, and to act only when the proposition in front of you was unambiguously better than the next-best alternative. He closed with the too-hard pile callback. Most of the propositions that came across his desk went onto the too-hard pile and stayed there. He did not feel guilty about that. The pile was the working part of his investment process. Every once in a while an easy decision came along, and he made it. That, Munger said, was his system. The audience was meant to take it as an actual system, not as false modesty - the discipline of refusing to invest in things you do not understand is, in Munger's view, the single most underrated competitive advantage an individual investor can have.

At the 2017 Berkshire annual meeting, I told the audience that the previous decade, with its enormous expansion of the Chinese economy and the corresponding expansion of the Chinese capital markets, had been the most instructive of my investing life, not because I had made many new mistakes, but because the old mistakes had been repeated by a new generation of investors, at a scale that had produced the largest speculative bubble in Chinese real estate in modern history. The market-psychology point I tried to convey was that the crowd, in its broad patterns, repeats the same mistakes in every cycle, because the incentives facing the participants are the same in every cycle, and the biases facing the participants are the same in every cycle. The investor who recognises the patterns, and who refuses to participate in the new version of the old mistake, has a long-run advantage over the investor who assumes that the new version is different. The mistakes-and-learning element was the one I had most wanted to convey. I had made my own share of mistakes in the previous decade, by being too cautious during the expansion of the Chinese capital markets, and the cost of the caution had, in opportunity terms, been very large. The lesson I drew was that the disciplined investor must be willing to act during an expansion, even when the outlook is unclear, and even when the prices may go lower before they go higher. The 2017 meeting was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to wait for clarity, and to act when the prices were attractive, even at the cost of being early. The investor who builds the discipline of acting during the expansion will outperform the investor who waits for clarity. The contrarianism lesson I tried to convey was that the investor who refuses to participate in the speculative bubble, looks unfashionable during the boom, and he is told, repeatedly, that he is missing the opportunity of a lifetime. The same investor, during the crash, looks unfashionable in the opposite direction, because he is buying when the crowd is panic-selling, and the crowd cannot understand why anyone would buy into a falling market. The 2017 meeting was, in some ways, the most contrarian I had ever given. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to participate in the speculative bubble, even at the cost of looking unfashionable during the boom. The investor who builds the discipline of refusal will outperform the investor who participates on the assumption that the new version is different.

At the 2017 Daily Journal meeting, Munger made one of his most explicit pitches for Chinese equities. Some very smart people were wading into China, he said, and he expected more to follow. His core observation was simple and structural: the great companies in China were cheaper than the great companies in the United States. He had been making the same observation privately for years, and at DJCO 2017 he made it on the record. Munger's reasoning was not a macro call. He was not predicting the renminbi, the Politburo's next move, or the exact timing of trade frictions. He was making a relative-value statement about the cost of buying world-class franchises in two markets. A great company in China, on the metrics he cared about - long-run return on capital, durability of the moat, growth runway - was available at a lower multiple than a comparable great company in the United States. That gap, in his view, was an opportunity for the patient investor who could underwrite the Chinese business honestly. The risk, he acknowledged, was real. China had governance, disclosure, and political-risk dimensions that American investors had to take seriously. But Munger's framing was that those risks had already been priced into the cheap multiples - that the market had over-discounted them. The implicit recommendation was to do the work, find the genuine franchises, and pay the cheaper price while other investors were still standing on the sideline. He would, of course, take his own advice in the BYD position - the Chinese EV maker he had championed at Berkshire a decade earlier and that, by 2017, was making real money.

Munger told the 2017 audience that the Daily Journal and Berkshire Hathaway had succeeded, more than anything else, by refusing to attempt to know too much. He kept a too-hard pile on his desk, he said, and most of the problems that crossed his path got shifted onto it. Every once in a while an easy decision came along, and he made it. That, he said, was his entire system. The room laughed, but Munger meant it as a serious investment philosophy. He tied the too-hard pile to the discipline of patience. A normal human life does not have very many great decisions in it. He told the audience that if they actually counted the meaningful decisions made in the history of the Daily Journal Corporation or the history of Berkshire Hathaway, the number per year was not very high. The game was being there all the time, recognizing the rare opportunity when it came, and recognizing that normal human life does not contain very many such moments. He contrasted this with what he called the racetrack tout - the people who sell securities and act as though they have an endless supply of wonderful opportunities. Those people, Munger said, are not even respectable. They pretend to know a lot of stuff they do not know, and pretend to furnish opportunities they are not furnishing. His advice to the audience was to avoid them - unless, he added with characteristic dryness, you happen to be running a stock brokerage firm, in which case you need them. The honest investor's job was to recognize the rarity and to refuse to manufacture the frequent.

-1- 2016 Daily Journal Annual Meeting Transcript Recording and transcript by Whitney Tilson, Managing Partner, Kase Capital Management, WTilson@kasecapital.com Edited for clarity by Jesse Koltes, Editor, TheCharlieton.com, jesse@thecharlieton.com On February 11, 2016, Charlie Munger hosted the 2016 annual meeting of the Daily Journal Corporation (NASDAQ:DJCO) at the company’s headquarters in Los Angeles, California. [Beginning of recorded material] Charlie Munger (opening remarks): What’s interesting about this company, of course, is that it’s a newspaper, historically. Now it’s a newspaper that relies on a combination of public service advertising and circulation revenues, and for a long time it was the only efficient means of delivering decisions of appellate courts promptly, which gave us a monopoly. Every year we raised the price of subscriptions, and every year people had to pay it. A wonderful business. Of course, like other newspapers, technology changed, and the business went to hell as lawyers no longer needed it for information about the appellate decisions. The result was that our newspaper business shrunk. So we have this newspaper that formerly had monopolistic qualities and like many newspapers it was a fine business. It required some management even so, but it was foolproof. And, of course, the world changed, for us as for other newspapers, and a million dollars a year pre-tax is what we have left.

Whether it will keep going down a little or hold there I don’t know, but if any of you are holding this stock because you want that newspaper to come back to its former glory, I suspect you’ve developed some different rationale. What we did as we were shrinking toward oblivion was that we made a lot of money during the foreclosure boom. We had more than 80% of the foreclosure notice business and it was like being an undertaker during a plague year. It was huge prosperity for us coming at a time when everybody else was in total agony. That gave us a lot of money and we used that money to buy securities at low prices during a panic, and aided by that peculiar response to the deterioration of our newspaper business, we have entered this software business, and that has been a slow, expensive, troublesome thing. We have written off practically everything we spent on it, and we had plenty of taxable income to do that with, and what’s happened is that we now have more software revenues than print revenues, and the software business is doing way better. It isn’t doing better in terms of reported earnings, but on the sales field we’re just doing better and better because our product we honestly believe is way better than the competitors and there’s an endless market for software in these public agencies...district attorneys, adoption agencies, courts...you can hardly imagine anything more sure to keep flourishing and to keep needing more and better software services.year”

-2- Now it’s agony to do business with a whole bunch of public bodies and their consultants and their bureaucracies and so on. It’s such agony that a lot of companies that are in software don’t come near it. If you’re Microsoft, you’re used to easy money. This just looks like agony. Microsoft did buy one little business that’s about half as difficult as ours, and I think it’s worth more than they paid for it, but it’s not a great success. The really big boys find our niche in the software market such agony that they tend to stay out of it. I think our products are probably better than those of our main opposition but of course our opposition has way more of the market. As nearly as I can tell we are gaining every month. So what you people have now is sort of a venture capital operation in the software business and the tag-end remnants of a newspaper attached. The stock may be reasonable if you like highly valued venture capital investments. But for you old- time Ben Graham groupies, you’re in a new territory. I’m not saying it won’t work, but if it works you don’t really deserve it. [Laughter] All right, now I’ll take questions. Questioner: One question is about Journal Technologies. The other is about your philanthropic efforts. So, with Journal Technologies: in the next year could you tell us about one or two opportunities that you feel real excited about for Journal Technologies. And also in the next year, what are one or two hurdles or threats that you’re concerned about?

Charlie Munger: The one I was most excited about was getting the contract from the Los Angeles courts. That’s one of the biggest court systems on earth, and that was a crucial milestone as far as I was concerned.... The new business is interesting because it’s a big market, and if we get entrenched in it, it will be very sticky. Which has occurred to us as we suffered all this agony. At least we were suffering agonies in the attempt to get in a position from which we’d be hard to dislodge. The main threat or hurdle is that we want to be the most important player in this new niche. I don’t regard that battle as won. I regard that as going well but not won. I’d go further: going very well but not won. Questioner: You’ve said that the only thing you want to know is where you’re going to die so you never go there. It is a very powerful philosophy. And when you talk about investing, you want to stay in that circle of competence. And a few years ago, Warren Buffett decided to buy IBM, and then I think he’s still very optimistic. And some people would say he maybe stepped out of his circle of competence? Charlie Munger: IBM is a lot like us. They have a traditional business that is very large and very steady. And of course the world changed, and in a lot of what was the new world they were not the leader of. Oracle and Microsoft and all kinds of other people that were formerly not so large. And they didn’t do well in personal computers, even though they pretty well started it.

“The stock may be reasonable if you like highly valued venture capital investments. But for you old-time Ben Graham groupies, you’re in a new territory. I’m not saying it won’t work, but if it works you don’t really deserve it.”

-3- And so IBM is in a position a lot like us in that they have an old business from which cash continues to flow, but they want a new product that’s a hit. Now, the product they have chosen to back is this automated checklist. Well, automated checklists are a very good idea and it may be particularly useful in things like medicine. I would say the jury is out on that. I don’t really have an opinion. I’m neither a believer nor a disbeliever . . . It could happen, it could not happen, as far as I’m concerned. I do think the old business of IBM is very sticky and will die slowly. . . . the matter is . . . we make great big bets and hold them for long periods. That’s a tough game. We have to make bets that are not the kind of shooting fish in a barrel [bets] . . . and that’s one of them. So on that one, the answer my friend is blowin’ in the wind. It may work in a mediocre way, it may work big. I just don’t know. Questioner: What advice do you give your grandchildren? And the second question is do you have a favorite investment story? Charlie Munger: Concerning the grandchildren: I was not able to change my children very much . . . Clarence Darrow quoted, “I am the master of my fate, I am the captain of my soul.” Clarence Darrow said, “Master of my fate? Hell, I don’t even pull an oar.” That’s the way I feel about changing the children. As for my grandchildren, I think, thank God they’re somebody else’s problem. I served my time.

Investment stories from my younger days: This is one I’ve never told. Years ago, 1962, my friend Al Marshall came to me and said he wanted my help in bidding for some oil royalties being put up for auction. I soon realized that under the peculiar rules of an idiot civilization, the only people who were going to bid for these oil royalties were oil royalty brokers, who were a scroungy, dishonorable, cheap bunch of bastards who realized that nobody would ever bid at their price. [Unintelligible]. [The auction] excluded everybody but these kind of shady difficult cheap bastards. So we bid for the oil royalties and financed [the purchase]. I think we each put up a thousand dollars? And fifty years later we were getting $100,000 a year on that investment. The trouble with that story is that it only happened once. That’s true of most investment stories. You don’t get very many. It isn’t like that kind of opportunity comes along every day. The trick in life is when you get the one, or two or three that is your fair allotment for a lifetime, you’ve got to do something about it. So that’s my story from my youthful days. Questioner: How does the current energy environment compare to the early ‘80s when you were in Wesco? Charlie Munger: Of course, we owned Wesco for a long time. What was interesting about [the acquisitions of] Wesco is that they were eventually among the most successful investments in the history of mankind.

What’s interesting about those outcomes is that it was only five or six transactions that carried all the freight. We focused on doing a few things over a long period of time and having them work out well. Those little nothing companies? They were all doomed savings and loan associations, and savings and loans [were] pretty well gone, and yet they worked out fairly well. There again, just a few decisions over a long period of time.the

-4- waiting. That doesn’t mean you sit around waiting for the next depression. You can’t do that. But a fair amount of patience is required . . . Patience followed by pretty aggressive conduct. Imagine sitting there having all this money rolling in from the foreclosure boom and in like one day [being fully invested]. Now that was luck [but] it wasn’t luck that we had the money on hand when other people didn’t and were willing to deploy it when other people [didn’t]. Questioner: Historically, Berkshire was built around its insurance operations to provide a low-cost source of capital. What other business models did you try/consider but ultimately did not pursue? Charlie Munger: Well, we were always opportunistic. We wanted to buy the best thing that was conveniently available that we could understand. In the early days we thought we had a special advantage as investors in marketable securities. So we tended to look carefully at float businesses. Nowadays, of course, we have enormous float but not [of] much usefulness. Such is the nature of life. We made so much money out of those float businesses it was obscene in the early days. It is not a tragedy that now our float businesses don’t get much advantage above the . . . . Berkshire’s cash, which is large, is not getting much of a return. In Europe the rates are negative. In Japan the rates are negative. Questioner: What do you think about the attractiveness of the average software business?

Charlie Munger: The software-based businesses: some of ‘em have become some of the most profitable businesses on earth. Other software companies are shrinking and failing. So it’s like the rest of capitalism. It has its good spots and its bad spots. As I said, the ones we’re pursuing I think will be sticky if we succeed in it. Questioner: Journal Technologies is growing slower than some of the competitors are paying high multiples for acquisitions, would you ever consider selling Journal Technologies? Charlie Munger: Well nobody’s offered us a high multiple, and so we haven’t had the problem and/or the opportunity. It’s a peculiar part of the software business involving a lot of agony now for a payoff way later. You can’t judge it as a normal business, or as a normal rollup of profitable companies. It’s venture capital; it just happens to be located in a [newspaper] company. It’s venture capital that if it works can gradually evolve into a pretty huge business. But of course, everybody’s trying to evolve into a pretty huge business, and only a few will succeed. We’re not like a normal software business. And those little companies – you shouldn’t call -- those are not acquisitions like Berkshire Hathaway makes acquisitions. Those are not established companies that we’re sure to succeed and [are] relatively foolproof.

If we were gonna make our venture capital-type assault on this peculiar part of the software market, we needed momentum from other sales forces and service operations and so forth, so we just bought ‘em. But don’t judge those things by the standards of normal corporate acquisitions. Those are part of venture capital, and if you don’t like it you can lump it. “But a fair amount of patience is required . . . Patience followed by pretty aggressive conduct.”

-5- Questioner: If you were to design CEO compensation for either an insurance company or a bank, how would you do that, and what would you do? Charlie Munger: At the Daily Journal, there are our own ways of doing things. We don’t follow everybody else’s established patterns. We just try to do whatever makes sense under the circumstances. Around here, we just ask Gary to do everything. So that’s our system here. Questioner: What are your expectations regarding BYD for the next ten years? Charlie Munger: Well, we get a lot of questions on a lot of subjects, and I suppose that’s a legitimate question. BYD has 220,000 employees. That is a big company. That too was venture capital. That company has done amazing things. The man who created that company was the eighth son of a peasant. He went to night school and got a Ph.D. and started off by borrowing $300,000 from a bank in China or somebody like that, and went into small batteries for cell phones, and so forth, which was totally dominated by high-tech Japanese . . . And he succeeded in grabbing up a part of the market and starting BYD. And he won the intellectual property aspects of a litigation that followed, which happened in Japan. So he was a very remarkable man who did an almost insanely ambitious thing. And out of that he now has 200,000-some employees and a huge lithium battery business. It’s going to be one of the biggest lithium battery makers in the whole world very shortly.

And last month he sold 10,000 electric cars in China, which is more than Tesla sold. Of course, nobody’s hardly ever heard of BYD. It’s an interesting company. Berkshire doesn’t do this venture capital stuff. [I] hope the Daily Journal works out half as well as BYD worked out. BYD is in a position, on purpose, to benefit from this electrification trend in the world. It’s very helpful to them that the people are dying on the streets of Beijing because they can’t breathe the air. They have to go to electric cars. Grab all these subsidies, and so forth, and be way ahead in terms of [the] efficient manufacturing of electric cars sold. And electric fork lifts in this country: do you really want a forklift spewing out carbon monoxide in the middle of your warehouse? So electric forklifts are a very big idea. They’re very well-located. That’s a very interesting venture capital investment. That was an accident, sort of, that Berkshire departed from its standard methods and did that one. And it was an accident that Daily Journal is doing its version of venture capital. I only wish our prospects were as good as BYD’s. And by the way, they might be… Questioner: My question: as an investor, what do you use to value a business or a company…How do you use the discount rate to calculate intrinsic value? Charlie Munger: Obviously, it’s relevant what the return you get on your bonds is, that affects the value of other assets in the general climate.

Obviously, your opportunity costs should cover your own “BYD is in a position, on purpose, to benefit from this electrification trend in the world. It’s very helpful to them that the people are dying on the streets of Beijing because they can’t breathe the air.”

-6- investment decision making. If you happen to have a rich uncle who will sell you his business for 10 percent of what it’s worth, you don’t want to think about some other investment. If the opportunity cost is so great, considering everything else, you should forget about it. And most people don’t pay enough attention to opportunity cost. Bridge players know about opportunity cost. Poker players know about opportunity cost. But in an MBA faculty members and other important people, they hardly know their ass from a plate of hot squash. Questioner: When you try to arrive at a valuation number using the discount rate, does it mean that between the two rates–– Charlie Munger We don’t use numeric formulas that way. We take into account a whole lot of factors. It’s a multi-factor thing. And there are tradeoffs between factors. It’s just like a bridge hand. You have to think of a lot of different things at once. There’s never going to be a formula that will make you rich just by going through some horrible process. If that were true, every mathematical nerd who gets A’s in algebra would be rich. . . . So you have to be comfortable thinking about a lot of things at once, and correctly thinking about a lot of things at once. And we don’t have a formula that will help you. And all that stuff is relevant. Opportunity cost of course is crucial. And of course the risk-free rate is a . . . factor . . . Questioner: Do you use the same rate for different types of businesses?

Charlie Munger: No, of course not. Different businesses get different treatments. They all are viewed in terms of value, and they’re weighed one against another. But a person will pay more for a good business than for a lousy one. We really don’t want any lousy businesses anymore. We used to make money betting on reinventing lousy businesses and kind of wringing money out of them, but that is a really painful, difficult way to make money, especially if you’re already rich. We don’t do much of it anymore. Sometimes we do it by accident, because one of our businesses turns lousy, and in that case it’s like dealing with your relatives you can’t get rid of. We deal with those as best we can, but we’re out looking for new ones. Questioner: Mental models [which are your favorites]? Charlie Munger: If you’re talking about multiple models, that means you think about many different models, and that’s the nature of reality, particularly if you’re an investor. There’s no way to make that easy. You all are in the business: Do you find it easy? Anybody who finds it easy is wrong. You’re living in an illusion. It’s not easy. Occasionally you get an easy one, but not very many. Mostly it’s hard. How many people find it hard to make good investments right now? [Audience raises hands] An intelligent group of people. We collect them. Questioner: You’ve talk about making an effort to eliminate standard error risk in terms of not participating in auctions.

In terms of daily habits or life habits, what do you do in terms of things that most people don’t to reduce these errors? “There’s never going to be a formula that will make you rich just by going through some horrible process.rich”

-7- Charlie Munger: Two things Warren and I do: One is that we spend a lot of time thinking. Our schedules are not that crowded, and we’re constantly—we look more like academics than we look like businessmen. Our system has been to sift life for a few opportunities and seize a few of them, and we don’t mind if nothing happens. And Warren is exactly the same way. Warren’s sitting on top of an empire now, but you look at his schedule sometimes and it says, “a haircut. Tuesday, haircut.” That’s what created one of the most successful business records in history: he has a lot of time to think. And that brings me to the subject of multi-tasking. All you people have gotten very good at multi- tasking. And that would be fine if you were the chief nurse in a hospital, but as an investor I think you’re on the wrong road. Multi-tasking will not lead you to the highest quality of thought a man capable of doing. Juggling two or three balls at once, where people come at you on their schedule not yours is not an ideal thinking environment. Luckily, a lot of you are so obscure that you have plenty of time to think. [Laughter] I was in that position for a long time, and it helped me. And I hope it works well you. If it doesn’t, I think you’re going to have to be satisfied with life in the shallows, because if it didn’t work for me, I didn’t have a [backup plan]. I wasn’t going to dance the lead in the Bolshoi ballet or stand on the mound at Yankee Stadium.

But I do think that the constant search for wisdom and the constant search for the right temperamental reaction to opportunity, I think that’ll never be obsolete. And you can apply that to your personal life too. Of course, most of you are not going to get five opportunities to marry some wonderful person. Most of you aren’t going to get one. You’re just going to have to make to with an ordinary result. The nature of ordinary results is that they’re ordinary. Questioner: You mentioned earlier about Wells Fargo. Other banks were failing, even Washington Mutual. Why was Wells Fargo [a good investment] at that time when other banks were failing? Charlie Munger: That’s a good question. I’ll take you back one time before. When Berkshire bought into Wells Fargo, the world was coming unglued in a banking panic. Again, real estate funding had been a sore subject. And Wells Fargo had been huge in the real estate market. This is back when Berkshire first bought into Wells Fargo. The answer was that we knew that the lending officers at Wells Fargo were not normal bank lending officers. They had come up a lot of them from the Garment District, they had a cynical view of human life, they were appropriately careful, and when they needed to intervene strongly they did so, because they’d learned that was the right way to run a garment . . . business. And they were just better.

So we knew they weren’t going to lose as much money as everybody thought they would with a big real estate portfolio, because they’d chosen it better, they’d managed it better, etc., etc. So we had an informational advantage, just based on general thinking and collecting data. We were aware they had that special capacity, and that gave us an advantage, so we bought heavily. That was [the first time]. “That’s what created one of the most successful business records in history: he has a lot of time to think.”

-8- Number two, the Daily Journal Corporation: When the world was coming unglued, when Daily Journal bought its Wells Fargo stock, again we knew that the bankers at Wells Fargo were more rational than ordinary bankers. It was a different kind of superiority and rationality. It wasn’t this big real estate portfolio …but it was still a shrewder way of being in banking. I don’t think anybody should buy a bank who doesn’t have a feeling about how really shrewd the management is. Banking is a field where it’s real easy to delude yourself and report big numbers and it’s a very dangerous place for an investor. So without deep insight into banking, you shouldn’t [invest] Questioner: Two powerful mental models are the concept of specialization and the interdisciplinary approach. Do you have any advice on synthesizing the two models? Charlie Munger: Saying you’re in favor of synthesis is like saying you’re in favor of reality. Synthesis is reality, because we live in a world of multiple models, and of course we’ve got to have synthesis to understand the situation. And so of course you want to be good at synthesis, and it’s easy to say you want to be good at synthesis, but it’s not what the reward system of the world pays for. They want extreme specialization. And by the way, for most people, extreme specialization is a disease. Most people are way better off being a podiatrist than trying to understand a little bit of all the disciplines. You know.

I don’t want a podiatrist who’s trying to be a poet. I want somebody who really knows a lot about feet. And the rest of the world is that way. So this model of being good at synthesis across a lot of disciplines is very helpful to some people, but it’s not the correct career advice for most people. For most people, the correct career advice is to figure out some clever specialty that you get very, very good at and get what the world rewards. The trouble with that is if that’s all you do, you make terrible mistakes everywhere else. So the synthesis is your second attack on the world, and it’s really defensive. Without synthesis you’ll be blindsided in all the other parts of your life. Questioner: Last year you said that rationality is one of the things that is most important to you. What advice would you give somebody to improve his own rationality? Charlie Munger: Well I’d say if you start working at it young and keep doing it ‘til you’re as old as I am, it’s a very good idea. And it’s a lot of fun. I can hardly think of anything that’s more fun if you’re good at it. And I think I have a lot of cousins in this room. And all I can say is you’re on the right track. You don’t have to be the Emperor of Japan to get rational you can avoid a lot of hopeless messes. You can help a lot of people avoid hopeless messes. You can be a very constructive citizen if you’re always rational. Being rational means avoiding certain things that are awful.

Try anger, try resentment, “I don’t think anybody should buy a bank who doesn’t have a feeling about how really shrewd the management is. Banking is a field where it’s real easy to delude yourself and report big numbers and it’s a very dangerous place for an investor.” “For most people, the correct career advice is to figure out some clever specialty that you get very, very good at and get what the world rewards. The trouble with that is if that’s all you do, you make terrible mistakes everywhere else.”

-9- try jealousy, and try envy. All those are one-way tickets to hell, and a lot of people just wallow in it. And of course it’s a total disaster for them and everybody around them. Another one is that is just awful is self-pity. If you’re dying of cancer, don’t feel sorry for yourself. Just chin up, and suck it up and play through. Self-pity is my number-one . . . just forget about it. Take it out of your repertoire. Questioner: Increasingly, men and some women don’t find ROI in a long-term relationship worth. What is your evaluation of this? Charlie Munger: Well I think different folks can live in different ways, but I think all the evidence is that marriage is the best practical alternative for most people, and the statistics show it. They live longer. They measure happiness physiologically, smiling and all that…. It isn’t that a lot of marriages don’t fail and a lot aren’t made in Hell and all that, but considering how difficult the world is, it’s your best chance for most people. And of course it should be valued. That’s one of the things I like about the Asian cultures. The Confucian idea that the family is really important . . . too, for that matter, is a very sound idea. If we ever lost family values we would have a hell of a lot of [trouble]. Questioner: My question relates to the decision to purchase some real estate at Logan, Utah, vs [deploying] capital elsewhere . . . Charlie Munger: We think we’re going to be in Logan, Utah, for a long time.

We have a very happy bunch of employees there. They like their work, they like their community, they like everything about it. It’s part of a business operation. We’ve got customers who come there; it’s a very presentable building. I’ve never seen it, but there’s a river that flows by. Of course we’re glad to own this real estate. We bought it cheaply, we built it cheaply, it’s a nice piece of property, the neighborhood around it is steadily upgrading. Our way of getting ahead was not to be real estate operators, but we don’t mind owning some real estate as part of the business. Questioner: Do you think a person who can’t make money running a New Jersey casino is qualified to be President of the United States? Charlie Munger: Well he did make money for quite a while. My attitude is that anybody who makes his money running a casino is not morally qualified to be president. I regard it as a very dirty way to make money. Questioner: What has given you personally the greatest personal sense of accomplishment? And if you had advice to give a younger version of yourself, what would it be? Charlie Munger: Well, my family life has been important. On the other hand, I hated poverty and obscurity. I tried to get out. It has given me some satisfaction, because I’ve come a long way from where I started. I think most people who come a long way from where they started feel pretty good about it.

I think that most of the people that finally sit on top of their [fields] even if they’re only stay there for 15 seconds, are kind of proud of the fact that they got up there. And so I think that’s good. Cicero used to say that one way to be happy in old age is to remember a lot of achievements in your past.I

-10- agree with Cicero. It’s okay to live the kind of a life that you’re kind of pleased with when you’re old and look back. My advice is always so trite. The good behavior, the being dependable, the morality – it makes your life easier, it makes it work better. You don’t have to remember your lies, which gets complicated if you’re lying all the time. In fact, it gets so complicated you’re sure to fall off and be recognized as a liar. And so, sure, I like all the old-fashioned morality words, all the old- fashioned discipline words, and the old- fashioned good behavior, and a little generosity. We all know people who come to the funeral to make sure they’re [sic] dead. You don’t want to be in that trap. You want to live your life so some people will actually miss you when you’re gone. I think Kipling’s “If” is great poetry. Kipling doesn’t exist in the modern college anymore; he wasn’t politically correct. Well I Kipling’s “If” is great poetry and it’s great advice. “Keep your head when all about you are losing theirs.” What’s wrong with that? “Be a man, my son.” Why don’t you want to be a man? You want to be some idiot child all your life? Some angry twit? There’s so much to gain by never being an angry twit. You want be philosophical. This political situation we all face now. Of course, it’s a disgrace. I mean, it’s bad that the leading civilization has these candidates for high office. And they’re not all in one party. But you don’t want to get angry.

After all, politicians have been politicians for a long, long time. You want to operate constructively, vote constructively. But anger. There’s just so much anger in politics now, so much automatic hatred. How can any of us really know if United States be better fifty years from now because we vote Republican or we vote Democratic in the next election? Who can tell what the exact mix is between compassion and something else? And so. And by the way the Muslim behavior rules were created a lot like the Old Testament. Of course they copied. They claim they came directly from God, but really they stole them from the Jews. Questioner: How do you understand a new industry or new business you’re trying to get into where the dynamics are different? How do you get insights into the specific domains? What is the relationship between oil prices and economic growth? Charlie Munger: I don’t really know the correlation between oil prices and economic growth. I think it’s obvious that if oil had been a little cheaper and easier, the growth would have been greater than it had, and in that sense if oil gets to be expensive, and we still need it desperately and there is that correlation between oil prices and economic growth. On the other hand, you take Exxon and Chevron and so forth. What’s happened to make those things good investments over the long term is that the damn price of oil went up faster than their production went down.

Now maybe in other business you get richer and richer as your production in real units keeps going down, down, down. Not everybody would have predicted that in advance, including most of the economists. But it’s a complicated subject. “How can any of us really know if the United States be better fifty years from now because we vote Republican or we vote Democratic in the next election? Who can tell what the exact mix is between compassion and something else?”

-11- And there’s another trick to it. People who really have a lot of free energy, like the people in the Middle East, have very dysfunctional economies. They’re like a bunch of rich people spending their capital and not knowing how to do anything anybody else wants to buy. So, maybe in that sense I think a tougher hand has been good for us. My answer to that question reminds me of my old Harvard law professor who used to say, “Charlie, let me know what your problem is and I’ll try to make it harder for you.” I’m afraid that’s what I’ve done to you. As for how do I understand a new industry: the answer is barely. I just barely have enough cognitive ability to do what I do. And that’s because the world promoted me to the place where I’m stressed. And you’re lucky if it happens to you, because that’s what you want to end up: stressed. You want to have your full powers called for. Believe you me, I’ve had that happen all my life. I’ve just barely been able to think through to the right answer, time after time. And sometimes I’ve failed. Questioner: Last year you had some very pointed comments about Valeant. Do you have any updated thoughts or any thoughts on other companies? Charlie Munger: It’s caused me nothing but trouble. It probably wasn’t wise for me to inject myself into this. I have no dog in that hunt. I have no interest in the pharmaceutical business. I have no interest in Valeant.

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.

What happened: if you look back to, say, Edwardian England or the First World War, maybe 300 people, males, owned half the land in England. They had nothing to do. I mean, their under-butlers had under-butlers. What did they do, they went down to the clubs in London and sat around the card tables “Both Elizabeth Warren and Bernie Sanders are not two of my favorite people on Earth, but they are absolutely right about finance.”

-12- and gambled with one another for high stakes. That’s what human nature does when people have a lot of leisure. Fade, in fade out, and multiply the wealth per capita of the world by 30 or so and now we got all kinds of people who are like the lords of England who had all that time to play cards against one another and enjoy the thrills and things of gambling. So we have a vast gambling culture, and people have made it respectable. Instead of betting on horses or prizefights, we can bet on the price of securities or the price of derivatives relating to securities, and we can bet on athletic contests. We have a huge amount of legalized gambling. And of course the public market, which operates every day with transactions, is an ideal casino. And there are a whole bunch of people who want to own a casino and make a lot of money without losing money on inventories or credit . . . and many other irritating parts of business. Just to sit there every night and go higher and higher. Who doesn’t want to be croupier in a casino? And very respectable people get drawn into it. They see other people getting rich. There’s way, way too much of that in America. And too much of the new wealth has gone to people who either own a casino or are playing in a casino. And I don’t think the exaltation of that group has been good for life generally, and I am to some extent a member of that group.

I’m always afraid I’ll be a terrible example for the youth who want to make a lot of money with and not do much for anybody else and who just want to be shrewd about buying little pieces of paper. Even if you do that very honestly, I don’t consider it much of a life. Just being shrewd about buying little pieces of paper, shrewder than other people, is not an adequate life. It’s not a good example for other people. It’s the reason that people like Warren and me are a) charitable, and b) we’re running businesses. We’re not just buying little pieces of paper. So I think that we have something going in our nation that is really very serious and very bad. And I hate to agree with Elizabeth Warren on this subject, but she’s right. And I don’t see any way of stopping it except with some big legislative change. And you’d say, what difference does it make? Well, what happens is – as the cyclicality of gambling in securities and other goes on – what happens is the big busts hurt us more than the big booms help us. We saw that when the Great Depression ended in the rise of Adolf Hitler. A lot of people think that Hitler rose because of the great Weimar inflation. Well you know Germany recovered pretty well from that Weimar inflation. What they did is they destroyed the currency, and they just issued a new currency. It’s very interesting. They got rid the mortgages and inflation, and they put the mortgages back and they [issued] a new Reichsmark.

And that worked pretty well, just like it works fairly well in Argentina. What really enabled Hitler to rise was the Great Depression. You put on top of the Weimar inflation the Great Depression, and people were just so demoralized that they were subject to being snookered by a guttersnipe like Adolf Hitler. So I think this stuff is deadly serious in that these crazy fools should never let people like Alan Greenspan – he’s an amiable man, but he’s an idiot – should not make the head of the Federal Reserve and governor of all banking; somebody whose hero is Ayn Rand, who believed in no government at all. It was a very unlikely place to look for correct decision- making, and we probably got the kind of decision-making we deserve. I think he’s an honest and amiable man, but he just didn’t see reality the way it was. A lot of people think that if an ax murder happens in a free market, well it has to “A lot of people think that if an ax murder happens in a free market, well it has to be all right because free markets are all right.”

-13- be all right because free markets are all right. A lot of those people are in my party, by the way. Questioner: The automobile industry right now is appreciably different today than it was ten years ago. Does it make sense to have General Motors in a Berkshire portfolio? Charlie Munger: General Motors is in the Berkshire portfolio because one of our young men likes it, and Warren lets the young men do as they please. Warren when he was a young man didn’t want any old men telling him what to do. He gives them that kind of freedom. I haven’t got the faintest idea why this young man likes General Motors. It is true that it’s statistically cheap. But of course – and it may be impacted by the Federal Government in the end, so it may be a very good investment. But the auto industry is about as brutally competitive an industry now as I have ever seen. Everybody knows how to make good cars. Everybody. They rely on the same suppliers, and the cars last a long time with very little service. This has all the earmarks of a very commoditized, difficult, super-competitive market. So I don’t think the auto industry is going to be a terribly easy place to [invest]. And it may actually shrink one of these days. In other words, the culture everybody has . . . cars could actually shrink. So I think the auto industry is not [the place to be]. If I were investing in the auto industry, I’d want some place that’s really a hell of a lot better competitor than the others.

And that’s hard to find. Questioner: For most of the oil market’s history, there’s been some entity imposing production controls. But today Saudi Arabia has acted more as a . . . oil producer than controlling OPEC production. Would you suspect that this will result in negatives affecting the economics for all those involved in oil production? Charlie Munger: You know I would not have predicted that oil would be distressed in price. In fact, if you’d forced me to bet, I would have bet that what has happened wouldn’t have happened. I think it is generally true that with these commodities you can get periods of extreme high prices like we had and extreme low prices, like we have now . . . So I think that commodities can do strange things, both up and down in terms of price. And of course they have macroeconomic consequences, huge consequences. If you’re in Australia, having these commodities go way down is terrible. If you’re the tar sands area of Canada, having oil prices go down the way they have now, I don’t know even know how economic it is to produce tar sands oil at $30 a barrel. My guess is that it’s not very attractive. And it may not work at all for many people. So you’re in a weird period. But I think it’s the nature of the human condition that with free markets and stuff like iron ore and oil you’re going to have weird periods of high prices and weird periods of low prices. I’ve never been able to predict accurately, or make money predicting accurately, those swings.

We tend to just get into good businesses and take the bumps as they fall. Questioner: Would you please recommend some books that you’ve enjoyed lately. Charlie Munger: Well, you know, you people send me books. I have to skim them so rapidly that I no longer develop the joy of reading I used to when I picked a few books of my own books to read. So you’re ruining my judgment of books. I can’t resist reading the damn things if you send them to me, though I skim a lot of them, and I like each one in its way because it’s different from anything else I normally do. But I’m no longer a good book source.

-14- Questioner: Would you mind sharing with us some highlights of your philanthropic work and what inspires you about it, and what sort of results you’d like your work to produce in the future? Charlie Munger: Well, I’ve never wanted to tackle problems like world peace. You know, I’ve read enough biographies. Carnegie thought he was so smart, so he thought he’d use his money and bring on world peace. And he created the court of The Hague and all kinds of very expensive things. And the ink was barely dry on his creations when the crazy monarchs of Europe stumbled into World War I with the carnage and the poison gas and the agony and stupidity. And so that was quite demoralizing at the time. So I’m not trying to bring on world peace. I watched Carnegie try it, and I decided if he couldn’t do it I’m going to leave it alone. I don’t take on those big subjects. I like to create dormitories and science teaching facilities and stuff like that. It’s a pretty modest activity, but it’s interesting to me, and it’s easy to do them better than most people do them. I have no feeling I have any advantage in bringing on world peace, but I am pretty good at dormitories. So I do what I’m good at, and I suggest that all of you do the same thing. Questioner: Mr. Trump is saying that he believes income inequality is an issue that needs to be addressed, with Senator Sanders campaigning on this issue. And some of the people of my generation are starting to “feel the Bern”.

How would you address this? Charlie Munger: Well that’s a very good question, because it’s so au courant. Sadly, I happen [to believe] Sander is a little nuts. People who really were passionate about egality and wanted to bring it about by government action gave us things like the Soviet Union, with all the deaths and agony and the deep poverty they have now. And Communist China and North Korea. I mean, I’m suspicious of all this passion for egality that has such bad examples. On the other hand, if you want to look at what non-egality brings us, let’s just take Communist China. Communist China had egality, meaning that three-fourths of the people were dirt-poor, subsistence-level poor, but they had the advantage to be equal: they were all struggling to get enough to eat. And of course when they adopted some private property and more property rights and so on, what they got was that living standards were advanced by a factor of ten or so more quickly than anybody ever had [seen]. And of course there are now all these rich Chinese. I think it was a very good bargain for the Chinese. In other words, I don’t think Sanders understands this at all. He doesn’t want to understand it. He has a religion. He’s had it for thirty years. He’s a Johnny-one-note. As an intellectual he’s a disgrace. I’d think I’d be awfully glad to have him marry into the family just based on his personal characteristics, but as a thinker he’s pretty bad.

Now, I don’t think he’s any worse than some of our Republicans, but at least they’re crazy in a different way. But egality has one effect in a democracy that Aristotle commented on. People will cheerfully tolerate considerable differences of outcome if they seem deserved. Nobody minds the fact that Tiger Woods has a big income . . . and somebody who invents some new wonder of the world, etc., etc. But differences in outcome that are seen as undeserved tend to disrupt democracy. That’s why Aristotle commented on it in “People will cheerfully tolerate considerable differences of outcome if they seem deserved.income…”

-15- one of his most well-known observations. And, of course, who is getting the undeserved money in America now? Good question. It is not Bill Gates, it is not the people who create the new companies and have an idea. But a lot of the financiers who [were talking about] have a lot of undeserved wealth that provokes a lot of envy. And to some extent – well I think envy is always a bad idea. I don’t think we want a lot of undeserved wealth in the financial class, in many cases for doing nothing, or acting counter-productively. So I think that fixing the obviously undeserved wealth for a lot of people would be a constructive thing. You take the ordinary investment partnership. Not only do they get capital gains on what for anybody else would be ordinary income, they don’t pay any income tax at all on enormous accretions of wealth, because this unrealized appreciation has gradually shifted to the general partner, who takes securities out and leaves the business without recognizing the gain. We have enormous liquid fortunes being made with no taxes at all. And it’s not very complicated to understand. And, so, I think by and large you’re going be unhappy with inequality, but I think inequality is a natural outcome of a successful civilization that is improving for everybody, and all this stuff about the wealth of the top one percent or one-tenth of one percent: what the hell can the guy do at the top one thousandth of one percent?

He has to eat the same food, watch the same television, leave the money to something . . . Is he the main problem we have? He’s not really using the wealth very much. And most of these guys are not that interested in politics. People who like to talk about the [wealthy’s] terrible influence on politics. If you’re rich you realize how little influence the rich really have. You see a lot of people lay out a lot of money, who are rich, and get practically nowhere. So I think these people who are raging about inequality, like Warren and Sanders, are wrong; but I think the people who say the undeserved wealth deserves some attention, I think they’re right. And I think a huge source of the undeserved wealth is coming from finance. Questioner: You mentioned Wells Fargo and its culture, [as] the reason why you [got involved] back in the 80s. [You also own] Bank of America, and its culture is a little different. And I’m curious [about] the decision of buying Bank of America. Charlie Munger: The Bank of America was bought the way we used to buy securities . . . It was selling for less than a quarter, way less [than it was worth]. Questioner: I’m pretty excited about the prospects on self-driving cars in the next ten to twenty years. It seems like the technology is moving very quickly. But as a Berkshire shareholder I’m worried about the implications for the entire auto insurance industry if accidents, hopefully, become a thing of the past.

That’s good for civilization, bad for the auto insurance business. I would love to hear your thoughts on that. Charlie Munger: Well you’re right. If all cars run around without drivers, it will be bad for casualty [insurance]. But I don’t think it’s going to happen very quickly. In fact, I think it’s going to be quite slow. I think that even if we don’t get self-driving cars, that culture may be waning. Not so much in the Third World, but in places like America. Questioner: If you could maybe publish a book list of the books in your personal library, we could continue learning….

-16- Charlie Munger: I don’t want to be a book recommender. It would be quite time-consuming. So I’m afraid you’ll have to find another [source]. Questioner: My focus this year is on opportunities. A lot of people here have the ability to do well, but they don’t have the opportunity to meet the right people. And Ronald Burkle credits you with giving him credibility when he was attempting to acquire grocery stores at age 30. Who was your mutual acquaintance, and how was Ronnie, Ron Burkle, able to meet you in the early 1980s? Charlie Munger: Well, the last big…. In those days we had a lot of declining businesses, and one of them was trading stamps. And our last big trading stamp was the company that Ron Burkle’s father ran. And that is how I met Ron Burkle. It was an attempt to preserve that customer, the last customer we had. In due course, I failed in all activities and Ron Burkle, on the other hand, did nothing but succeed. So maybe you should ask him. Questioner: What’s your view on unicorn companies like Airbnb, Uber, and Palantir? Charlie Munger: My attitude is that I have a circle of competence that does not include correctly predicting which new companies in Silicon Valley, or that are dependent on Silicon Valley, are going to succeed. So I tend to avoid the subject entirely. I make my way in other fashions. However, I will comment on one thing: manipulated finance.

As these venture capitalists – part of the finance industry, the constructive part – these are the people who make their living more honorably than the rest of the people in finance because they’re actually allocating capital into business – so venture capitalists are useful members of finance. But they don’t escape their share of sin. What they’ve gotten in the habit of doing is creating these rounds of financing, and each new one is at a higher value. But if you sneak a little clause in saying that nobody who previously bought into the venture gets anything until new guys are reimbursed . . . Well that is sort of like a Ponzi scheme. It’s a disgusting, tricky, dishonorable thing to do, particularly since it’s obscured, and of course it’s being deliberately obscured. So even our most reputable part of finance has dirty, sleazy activities creeping in, and it will ever be thus. Large amounts of money make people behave badly. That’s Munger’s rule. Questioner: Apparently the environment that we invest in now is very different from when you started. With high-frequency trading, momentum trading, and all that, do you think fundamental value investing is losing relevance? Charlie Munger: I don’t think fundamental value investing will ever be irrelevant because of course if you’re going to succeed in investment you have to buy things for less than they’re worth instead of more than they’re worth. You have to be smarter than the market. That will never go out of style.

That is like arithmetic. It’s going to always be with us. Now, as for high frequency trading, that is a complicated subject. I think that the high-frequency traders of the world – many of them are personally admirable as people – I think they have zero contribution to the American economy. They are a bunch of rats in a granary. Just sucking some of the [wealth] for themselves and leaving nothing to the civilization. “Large amounts of money make people behave badly. That’s Munger’s rule.”

-17- Questioner: You mentioned that you haven’t changed your children much. Do you have an approach for quality time with family? Charlie Munger: Well, I don’t think I want to give myself as some kind of wonderful example of family life. Questioner: Do you think that Coach Bryant at Alabama is . . . Charlie Munger: I’m better about the ballet. Questioner: Could you name a few people you especially admire? Charlie Munger: Well of course there’s a lot of historical people I admire. That’s one of the advantages of being a reader. You can consort with some of the best people who ever lived. And that’s what I do with a lot of my time. I admire a lot of people: surgeons or some actor who gets to be the best in the world who moves and entertains a lot of people. There are a lot of people who are constructive, intelligent and generous and who improve the world for the rest of us. And there are a lot of people who are good examples on the Costco Board. I spent some time on the Costco board with Dan Evans, who was both a senator and governor in the state of Washington. He was a really admirable, sensible, politician. And there are so few politicians like Dan Evans. You get all these gerrymandered districts and all these crazies on the right, crazies on the left who like only people who are like themselves. But you find a Dan Evans . . . I think there will always be admirable people, and that is what we all ought to be: we ought to be admirable.

What we want to be is the kind of people other people name in their wills to raise their children if they die unexpectedly. [If people are] doing that, you’ll know you were doing something right. You were doing something very shrewd if [people ask you to] raise their children. Questioner: I was once given the advice that it’s really important to conquer fear. I’m wondering if you would speak to your relationship to fear and whether you’ve conquered it. Charlie Munger: Well generally I’ve avoided certain chances, which automatically cause reasonable fear. My son is in the audience. When my son was young he used to say, “Well if at first you don’t succeed, so much for hang gliding.” [Laughter] And so I don’t seek out fear to get thrills. I don’t even seek out the appearance of fear when. Generally I’m not a great lover of danger, or even the appearance of danger. That’s not my thing. I don’t think I’ve felt much fear for a long time. Questioner: How did you get there? Charlie Munger: I just lived a long time. I had fears when I was younger, but they gradually melted away. “Well of course there’s a lot of historical people I admire. That’s one of the advantages of being a reader. You can consort with some of the best people who ever lived.time”

-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]

At the 2015 Daily Journal meeting, Munger described the company's pivot from print legal journalism to court-automation software as the equivalent of trying to climb Half Dome in Yosemite with one arm and one leg. The franchise had been a wonderful business - a monopoly on prompt appellate court decisions, year after year of price increases. Then the internet came along and destroyed the position. Daily Journal's circulation went way down, and the publishing business shrank with it. The decision to replace the dying newspaper with software sold to courts and government agencies was, Munger said, probably not a terribly good decision at the time. They tried it anyway. A great boom in foreclosure notices temporarily flooded Daily Journal with revenue, and the company used that transient cash to build the software business partly by purchase and partly by self-development. The odds were against them, Munger admitted. He used the rock-climbing term five-eleven to describe what they were attempting - a route that is not really possible, but that occasionally somebody does climb. He told shareholders that for some strange reason Daily Journal was now about halfway up Half Dome with its one arm and one leg. Software revenues had crossed the level of the traditional business. He was candid that the cost had been heavy and would continue to be heavy, but said he thought about the spend the way Jeff Bezos does: there is no point in being rich if you don't use it to compete effectively. He closed by saying that the kind of business they were building was so hard that competitors like Microsoft hated it. That difficulty, in Munger's calculus, was the only reason the opportunity existed at all.

Munger used the 2015 meeting to draw an explicitly Darwinian picture of corporate mortality. The room was watching one business die while the company tried to replace it with another. Most of the other newspaper companies that had tried to do the same thing had failed. Some of them had bought other businesses - television stations, for instance - with the profits they had, but most of the ones that simply tried to take their newspaper and transform it into something else had failed. That, Munger said, is the common result. The lesson was that technological change is one of the hardest things to cope with, which is why so many incumbents fail at it. He reached for three exhibits. Kodak had owned the world in silver-based photography, was the dominant company on the planet, the second most important trademark in the world, with armies of PhD chemists who knew more about silver-based photography than anybody. It had been a fabulous business right through the Great Depression - a total widow-and-orphan stock. And then it wiped out its shareholders with technological change. General Motors had been the most important automobile company in the world when Munger was young - number two was not close - and it too wiped out its shareholders. IBM had gone from butchers' scales to dominating the early computer market, and when the next evolution came along it failed a lot. Munger said Bill Gates had told him it happens again and again and again when the technology changes enough. The age of Daily Journal's board - the youngest director was 60 and Munger, the chairman, was 91 - only underlined the absurdity of attempting a Half Dome pivot. He told the room, with characteristic understatement, that he didn't understand computing. But he was doing it anyway, because the alternative was to accept the slow death of the print franchise.

Munger returned at the 2015 meeting to his critique of activist investors, sharpening the point with the Icahn reference. He opened by conceding that he had never liked the pomposity of the old system, in which the board of directors was absolutely permanent and did as it pleased. But what usually happened to him, he said, was that he liked the new system even less. The civilization in which the people getting richest are a bunch of folks who buy a block of shares and howl for change that helps the shareholders no matter what, he said, could not be a great way to run a civilization. He again granted that Carl Icahn is a very able man. He repeated it for emphasis. And then he delivered the conclusion flatly: he should not be running the world. The audience laughed, but Munger meant the point structurally. An economy that channels its best returns to short-horizon pressure tactics rather than to long-horizon stewardship ends up with a system that misallocates capital. The price signal gets hijacked by the people whose business model depends on forcing near-term payouts. The Daily Journal shareholders, he implied, were getting the opposite of the Icahn model. They were getting a 91-year-old chairman with a one-arm-one-leg pivot, no fees, no expenses, no howling. That was the Berkshire-style governance template applied to a small publisher: smart, rich, long-horizon capitalists who think like owners rather than advisers. He was telling the room that governance, not strategy, is the first decision a company gets right.

Wang opened the 2014 annual results briefing against the backdrop of a year in which BYD had sold approximately 19,000 pure electric passenger vehicles, the largest pure-EV volume of any Chinese manufacturer, and in which the Qin plug-in hybrid had launched successfully. Management told analysts that net profit had grown to approximately RMB 2.28 billion on revenue of approximately RMB 58.2 billion, with the automotive business contributing the majority of both revenue growth and operating profit and the secondary battery business continuing to provide a stable earnings baseline. Wang walked analysts through the strategic positioning, indicating that the Company had moved from being a rechargeable battery manufacturer that had entered the automotive market to being an integrated new energy vehicle manufacturer that used the captive battery supply chain as a structural advantage. He flagged that the new energy vehicle, the new energy passenger vehicle and the energy storage product lines were being positioned as the long-term growth engines of the Company, while the traditional internal combustion engine passenger vehicle business was being managed for cash and market share rather than for aggressive growth. On the Q&A, analysts pressed on whether the new energy vehicle business was earning an adequate return on the invested capital given the early stage of the market. Wang responded that the unit economics of the Qin and the e6 were tracking within the long-term target range, that the scale being achieved through the captive battery supply chain was driving the unit cost down faster than the industry had projected and that the regulatory environment in China, including the purchase tax exemption and the license plate preference in the major cities, was supporting the volume trajectory. He also defended the vertical integration, arguing that the captive battery supply was the central structural advantage of the BYD franchise. The briefing closed with management reiterating the long-term ambition of being the world's largest manufacturer of new energy vehicles, anchored on the vertically integrated battery, automotive and energy storage franchises, and with the Company committing to invest aggressively in research and development through the cycle.

At the 2014 Daily Journal annual meeting, Munger returned to one of his favorite themes - the slow death of the print newspaper business, and the specific case of Daily Journal's own former moat. The company had once held a near-monopoly on the prompt publication of California appellate court decisions, a service the legal profession could not do without. Every year, Munger noted, the company raised subscription prices and every year its customers paid. That, he said, was a wonderful business. He was unsentimental about what had broken the moat. Technology changed, lawyers stopped needing the print product for information about appellate decisions, and the newspaper business shrank. The franchise did not collapse in a single quarter; it bled out over many years as the internet absorbed the function the print product had once owned. Munger treated the decline as a textbook case of how a durable franchise stops being durable the moment its distribution advantage is bypassed by a cheaper technology. The lesson he drew for the room was not nostalgia but discipline. Companies with that kind of historical monopoly do not deserve permanent worship; they deserve to be re-underwritten every year against the technology that could displace them. The same logic that emptied out the legal newspaper's circulation is what emptied out Kodak's silver-based photography and what emptied out the Sears catalog. The job of the long-term owner is to keep re-checking the moat, not to keep telling the old story.

Munger used the 2014 DJCO meeting to revisit his long-running critique of activist investors and the Carl Icahn style of corporate pressure. He conceded that he had never liked the pomposity of the old system, in which a board of directors was effectively permanent and did as it pleased with shareholders' capital. But, he added, what usually happens to him is that the replacement turns out to be even less to his taste. The new system, in which the people getting richest are the ones who buy a block of shares and howl for change that helps the shareholders no matter what, was not, in his view, a great way to run a civilization. He granted that Carl Icahn is a very able man. He repeated the concession to keep the argument honest. But he was firm on the conclusion: able or not, Icahn should not be running the world. Munger's reasoning was that an economy that rewards short-horizon pressure tactics over long-horizon ownership and stewardship ends up with capital markets that misallocate. The price signal gets hijacked by the people whose business model depends on forcing near-term payouts. The takeaway for Daily Journal shareholders, and for anyone thinking about Berkshire-style long-term ownership, was that corporate governance is not just a matter of structure. It is a matter of who the people at the top actually are, what they actually believe, and how long they actually intend to hold the place. Munger favored boards of smart, rich, long-horizon capitalists who think like owners over boards of professionals who think like advisers, and he favored them loudly when activists showed up demanding a quick unlock.

At the 2013 Daily Journal annual meeting, I told the audience that the discipline of inversion, applied to the question of how to allocate capital, produced a different portfolio from the discipline of pursuing the highest expected return directly. The inverter asks the opposite question: what would guarantee the destruction of capital, and how can I avoid that? The capital-allocation-discipline point I tried to convey was that the investor who enumerates the failure modes, and who refuses to do the things that would produce them, has a long-run advantage over the investor who chases the highest expected return without considering the failure modes. The discipline required is to slow down, to write down the failure modes, and to refuse to act until the failure modes have been enumerated and the actions that would produce them have been refused, even at the cost of looking indecisive during the boom. The mistakes-and-learning element was the one I had most wanted to convey. I had made my own share of mistakes by pursuing the highest expected return without enumerating the failure modes, and the cost of those mistakes had, in dollar terms, been very large. The lesson I drew was that the disciplined investor must assume that the failure modes are present in every decision, and he must build the discipline of inversion into his process before the decision is made. The 2013 meeting was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to act until the failure modes had been enumerated and the actions that would produce them had been refused. The investor who builds the discipline of inversion will outperform the investor who chases the highest expected return directly. The capital-allocation-discipline lesson I tried to convey was that the investor who avoids the destruction of capital, and who allows the desired outcome to emerge from the avoidance, has a long-run advantage over the investor who chases the highest expected return directly, because the things that produce the destruction of capital are well known and easy to avoid, and the things that produce the highest expected return are difficult to obtain and easy to lose. The 2013 meeting was, in some ways, the most useful I had ever given. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to do the things that would produce the destruction of capital, and to allow the desired outcome to emerge from the avoidance. The investor who builds the discipline of inversion will outperform the investor with the higher IQ who chases the highest expected return directly.

At the 2012 Daily Journal annual meeting, I told the audience that the European debt crisis had been the most instructive event of the previous two years, because it had revealed, once again, that the credit cycle does not end in scarcity; it ends in abundance, when lenders, having forgotten the losses of the previous scarcity, begin lending freely again to borrowers who cannot repay. The market-psychology point I tried to convey was that the crowd, in its broad patterns, is the aggregate of the lenders acting on the assumption that the scarcity is over, and the investor who recognises the pattern, and who refuses to participate in the new abundance, has a long-run advantage over the investor who chases the new loans on the assumption that the scarcity is over. The discipline required is to read the history, to recognise the patterns, and to refuse to participate, even at the cost of looking unfashionable. The mistakes-and-learning element was the one I had most wanted to convey. I had made my own share of mistakes in the previous two years, by being too cautious during the European debt crisis, and the cost of the caution had, in opportunity terms, been very large. The lesson I drew was that the disciplined investor must be willing to act during a crisis, even when the outlook is unclear, and even when the prices may go lower before they go higher. The 2012 meeting was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to wait for clarity, and to act when the prices were attractive, even at the cost of being early. The investor who builds the discipline of acting during the crisis will outperform the investor who waits for clarity. The contrarianism lesson I tried to convey was that the investor who acts during a crisis, when the headlines are still terrifying, looks unfashionable in the extreme, because the crowd cannot understand why anyone would buy into a falling market. The same investor, during the recovery, looks unfashionable in the opposite direction, because he is holding on through the early volatility, and the crowd cannot understand why anyone would refuse to sell at the first sign of a paper loss. The 2012 meeting was, in some ways, the most contrarian I had ever given. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to wait for clarity, and to act when the prices were attractive, even at the cost of being early and unfashionable. The investor who builds the discipline of acting during the crisis will outperform the investor who waits for clarity.

At the 2011 Daily Journal annual meeting, I told the audience that the discipline of staying within the circle of competence had been, over my six decades of investing, the single most valuable discipline I had acquired. The discipline required is to refuse to act on the things outside the circle, even at the cost of looking unfashionable during the boom, and even at the cost of being told, repeatedly, that I am missing the opportunity of a lifetime. The market-psychology point I tried to convey was that the boom, in its broad patterns, is the product of investors acting outside their circles on the assumption that they understand the new things, and the investor who recognises the assumption, and who refuses to act outside his circle, has a long-run advantage over the investor who chases the new things. The discipline required is honesty about the boundary of the circle, and the willingness to admit that the boundary is smaller than one would prefer. The circle-of-competence element was the one I had most wanted to convey. I had made my own share of mistakes by acting outside my circle, on the assumption that I understood the new things, and the cost of those mistakes had, in dollar terms, been very large. The lesson I drew was that the disciplined investor must assume that the boundary of his circle is smaller than he would prefer, and he must build the discipline of refusal into his process before the temptation to act outside the circle becomes irresistible. The 2011 meeting was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to act on the things outside the circle, even at the cost of looking unfashionable during the boom. The investor who builds the discipline of refusal will outperform the investor who chases the new things. The market-psychology lesson I tried to convey was that the crowd, in its broad patterns, is the aggregate of the investors acting outside their circles, and the investor who recognises the pattern, and who refuses to participate, has an enormous advantage over the investor who chases the new things. The 2011 meeting was, in some ways, the most candid I had ever given. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to act outside the circle, and to expand the circle only by deliberate study. The investor who is honest about the boundary, and who refuses to act outside it, will, in the long run, outperform the investor with the larger circle who pretends to understand more than he does. That single discipline, applied over a working life, has been more valuable than any other I have learned, and it is the one I have tried hardest to convey to the students who visit Pasadena each spring.

At the 2010 Daily Journal annual meeting, I told the audience that the previous two years had been the most instructive of my investing life, not because I had made many new mistakes, but because the old mistakes had been repeated by a new generation of investors, at a scale that had produced the largest credit crisis in eighty years. The market-psychology point I tried to convey was that the crowd, in its broad patterns, repeats the same mistakes in every cycle, because the incentives facing the participants are the same in every cycle, and the biases facing the participants are the same in every cycle. The investor who recognises the patterns, and who refuses to participate in the new version of the old mistake, has a long-run advantage over the investor who assumes that the new version is different. The discipline required is to read the history, to recognise the patterns, and to refuse to participate. The mistakes-and-learning element was the one I had most wanted to convey. I had made my own share of mistakes in the previous two years, by being too cautious during the recovery, and the cost of the caution had, in opportunity terms, been very large. The lesson I drew was that the disciplined investor must be willing to act during a recovery, even when the outlook is unclear, and even when the prices may go lower before they go higher. The 2010 meeting was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to wait for clarity, and to act when the prices were attractive, even at the cost of being early. The investor who builds the discipline of acting during the recovery will outperform the investor who waits for clarity. The market-psychology lesson I tried to convey was that the crowd, in its broad patterns, is the aggregate of the mistakes facing the participants, and the investor who recognises the patterns, and who refuses to participate, has an enormous advantage over the investor who assumes that the new version of the old mistake is different. The 2010 meeting was, in some ways, the most candid I had ever given. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to read the history, to recognise the patterns, and to refuse to participate in the new version of the old mistake, even at the cost of looking unfashionable during the boom. The investor who builds the discipline of refusal, and who applies it consistently over a working life, will, in the long run, outperform the investor with the higher IQ who participates on the assumption that the new version is different.

WESCO FINANCIAL CORPORATION LETTER TO SHAREHOLDERS To Our Shareholders: Consolidated net “operating” income (i.e., before realized investment gains shown in the table below) for the calendar year 2009 decreased to $54,073,000 ($7.59 per share) from $77,562,000 ($10.89 per share) in the previous year. Consolidated net income decreased to $54,073,000 ($7.59 per share) from $82,116,000 ($11.53 per share) in 2008. The 2008 figure included realized after-tax investment gains of $4,554,000 ($.64 per share). No investment gains or losses were realized in 2009. Wesco has four major subsidiaries: (1) Wesco-Financial Insurance Company (“Wes- FIC”), headquartered in Omaha and engaged principally in the reinsurance business, (2) The Kansas Bankers Surety Company (“Kansas Bankers”), owned by Wes-FIC and specializing in insurance products tailored to Midwestern community banks, (3) CORT Business Services Corporation (“CORT”), headquartered in Fairfax, Virginia and engaged principally in the furniture rental business, and (4) Precision Steel Warehouse, Inc. (“Precision Steel”), head- quartered in Chicago and engaged in the steel warehousing and specialty metal products businesses. Consolidated net income for the two years just ended breaks down as follows (in thousands except for per-share amounts)(1) : Amount Per Wesco Share(2) Amount Per Wesco Share (2) December 31, 2009 December 31, 2008 Year Ended Wesco-Financial and Kansas Bankers insurance businesses — Underwriting gain (loss) . . . .

. . . . . . . . . . . . . . . . . . . . . . . $ 7,222 $1.01 $ (2,942) $ (.42) Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,781 7.83 64,274 9.03 CORT furniture rental business . . . . . . . . . . . . . . . . . . . . . . . . (1,359) (.19) 15,744 2.21 Precision Steel businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . (648) (.09) 842 .12 All other “normal” net operating earnings (loss)(3) . . . . . . . . . . (6,923) (.97) (356) (.05) 54,073 7.59 77,562 10.89 Realized investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 4,554 .64 Wesco consolidated net income . . . . . . . . . . . . . . . . . . . . . . . $54,073 $7.59 $82,116 $11.53 (1) All figures are net of income taxes. (2) Per-share data are based on 7,119,807 shares outstanding. Wesco has no dilutive capital stock equivalents. (3) Includes income from ownership of the Wesco headquarters office building, primarily leased to outside tenants, and interest and dividend income from cash equivalents and marketable securities owned outside the insurance subsidiaries, less interest and other corporate expenses, and, in 2009, a $6.2 million (after taxes) writedown of real estate held for sale. This supplementary breakdown of earnings differs somewhat from that used in audited financial statements which follow standard accounting convention. The foregoing supple- mentary breakdown is furnished because it is considered useful to shareholders.

principal property-casualty affiliates (“Swiss Re”). Under this agreement, which was enthu- siastically approved by Wesco’s Board of Directors, Wes-FIC assumed 2% of essentially all Swiss Re property-casualty risks incepting over the five-year period which began on January 1, 2008, on the same terms as NICO’s agreement with Swiss Re. Wes-FIC’s share of written and earned premiums under the contract were $294.1 million and $276.7 million for 2009 and $265.2 million and $183.2 million for 2008, representing very significant increases in Wes- FIC’s reinsurance activities. It is important to keep in mind that premiums assumed under the contract in each of the next three years could vary significantly depending on market conditions and opportunities. For several years, through yearend 2007, Wes-FIC’s principal reinsurance activity con- sisted only of its participation in several pools managed by a subsidiary of General Rein- surance Corporation (“Gen Re”), another insurance subsidiary of Berkshire Hathaway. The arrangement became effective in 2001 and has covered domestic hull, liability and workers’ compensation exposures relating to the aviation industry. For the past three years, Wes-FIC has reinsured 16.67% of the hull and liability pools and 5% of the workers’ compensation pool. Since mid-2009 Wes-FIC has also been reinsuring 25% of an international hull and liability pool.

Another subsidiary of Gen Re provides a portion of the upper-level reinsurance protection to these aviation risk pools on terms that could result in the Berkshire subsidiary having a different interest from that of Wes-FIC under certain conditions, e.g., in settling a large loss. Premium volume under these pools has approximated $35 million annually. It is the nature of even the finest property-casualty insurance businesses that in keeping their accounts they must estimate and deduct all future costs and losses from premiums already earned. Uncertainties inherent in this undertaking make financial statements more mere “best honest guesses” than is typically the case with accounts of non-insurance-writing corporations. And the reinsurance portion of the property-casualty insurance business, because it contains one or more extra links in the loss-reporting chain, usually creates more accounting uncertainty than the non-reinsurance portion. Wesco shareholders should remain aware of the inherent imperfections of Wes-FIC’s financial reporting, based as it is on forecasts of outcomes over many future years. Wes-FIC’s underwriting results have typically fluctuated from year to year, but have been satisfactory. When stated as a percentage, the sum of insurance losses, loss adjustment expenses and underwriting expenses, divided by premiums, gives the combined ratio. Wes- FIC’s combined ratios from reinsurance activities were 94.9% for 2009, 101.0% for 2008 and 93.

9% for 2007, much better than average for insurers. We try to create some underwriting gain as results are averaged out over many years. We expect this to become increasingly difficult. Float is the term for money we hold temporarily. Its major components are unpaid losses and unearned premiums, less premiums and reinsurance receivable, and deferred policy acquisition costs. As long as our insurance underwriting results are break-even or better, float costs us nothing. The new Swiss Re venture with NICO has significantly increased Wes-FIC’s float, from $76 million at the end of 2007, to $264 million at yearend 2009, thus providing additional opportunities for investment. We hope to see our float continue to increase, but we make no predictions. Kansas Bankers was purchased by Wes-FIC in 1996 for approximately $80 million in cash. Its tangible net worth now exceeds its acquisition price, and it has been a very satisfactory acquisition, reflecting the sound management of President Don Towle and his team.

Kansas Bankers was chartered in 1909 to underwrite deposit insurance for Kansas banks. Its offices are in Topeka, Kansas. Over the years its service has continued to adapt to the changing needs of the banking industry. Today its customer base, consisting mostly of small- and medium-sized community banks, is spread throughout 29 mainly Midwestern states. Kansas Bankers offers policies for crime insurance, check kiting fraud indemnification, Internet banking catastrophe theft insurance, Internet banking privacy liability insurance, directors and officers liability, bank employment practices, and bank insurance agents professional errors and omissions indemnity. Last year we reported that events in the banking industry, including a number of bank failures, caused us to become less confident in the long-term profitability of Kansas Bankers’ long-established line of deposit guarantee bonds. These bonds insure specific customer bank deposits above Federal insurance limits. After sustaining a loss of $4.7 million, after taxes, from a bank failure in the latter half of 2008, Kansas Bankers discontinued writing deposit guarantee bonds, and in September 2008 it began to exit this line of insurance as rapidly as feasible. The aggregate face amount of outstanding deposit guarantee bonds has been reduced, from $9.7 billion, insuring 1,671 institutions at September 30, 2008, to $33 million, insuring 10 institutions, currently.

We believe that none of the banks whose deposits are currently insured are facing significant risk of failure. This decrease in exposure to loss, of course, has caused a sharp decline in Kansas Bankers’ insurance volume, inasmuch as premiums from guarantee bonds not only approx- imated half of Kansas Bankers’ written premiums for 2008, but also represented the entirety of the business it had conducted in almost half of the states in which it was licensed to write insurance in 2008. The insurance business is highly competitive, with lengthy periods during which competitors offer coverages at prices we do not consider adequate. Kansas Bankers is now licensed to sell insurance in 29 states, down from 39 states one year earlier, with plans soon to withdraw from 4 more. We expect that Kansas Bankers will ultimately expand its premium volume, at prices deemed satisfactory. When Wesco purchased Kansas Bankers, it had been ceding almost half of its premium volume to reinsurers. In 2009 it reinsured only about 1%. And, because it has also restruc- tured the layers of losses reinsured, it is now better protected from the downside risk of large losses. Effective in 2006, insurance subsidiaries of Berkshire Hathaway became KBS’s sole reinsurers. Previously, an unaffiliated reinsurer was also involved. The increased volume of business retained comes, of course, with increased irregularity in the income stream. Kansas Bankers’ combined ratios were 140.2% for 2009, 111.6% for 2008 and 55.

1% for 2007. Kansas Bankers’ business activities require a base of operations supported by significant fixed operating costs which do not lend themselves to downsizing in proportion to the recent decline in premium volume. We continue to expect volatile but favorable long-term results from the now much smaller business remaining in Kansas Bankers. CORT Business Services Corporation (“CORT”) In February 2000, Wesco purchased CORT Business Services Corporation (“CORT”) for $386 million in cash. CORT is a very long-established company that is the country’s leader in rentals of high- quality furniture that lessees have no intention of buying. In the trade, people call CORT’s activity “rent-to-rent” to distinguish it from “lease-to-purchase” businesses that are, in essence, installment sellers of furniture.

However, just as Enterprise, as a rent-to-rent auto lessor in short-term arrangements, must be skilled in selling used cars, CORT must be and is skilled in selling used furniture. CORT’s revenues totaled $380 million for calendar 2009, versus $410 million for calendar 2008. Of these amounts, furniture rental revenues were $312 million and $340 mil- lion, furniture sales revenues were $61 million and $62 million, and rental relocation revenues were $7 million and $8 million. CORT operated at an after-tax loss of $1.4 million for 2009 versus after-tax profits of $15.7 million for 2008 and $20.3 million for 2007. Headwinds from the “Great Recession” that began in 2008 have caused the shift from moderate profit to the small loss that occurred last year. CORT has made several “tuck-in” acquisitions since its purchase by Wesco; most recently, the residential furniture rental division of Aaron Rents, Inc., purchased late in 2008. Earlier in 2008, CORTexpanded its operations internationally, through the purchase of Roomservice Group, a small regional provider of rental furniture and relocation services in the United Kingdom, now doing business as CORT Business Services UK Ltd. Factoring out the effects of those acquisitions, CORT’s core revenues fell by almost 20% in 2009, reflecting the hammering caused by the severe economic recession. So far, CORT’s business has been melting away faster than CORT can fix it.

Shortly after its acquisition by Wesco, CORT started up a nation-wide apartment locator service, originally intended mainly to supplement CORT’s furniture rental business by providing apartment locator and ancillary services to relocating individuals. Paul Arnold, long CORT’s able CEO, and his management team, have devoted much effort in recent years, expanding CORT’s rental relocation services, and redirecting them toward the needs of businesses and government agencies who require a skilled and able partner to provide comprehensive and seamless relocation services for the temporary relocation of employees worldwide. These efforts had not yet gained traction when recession hit. CORT is now focusing its efforts more on cost containment than on expansion of services. Under Wesco’s ownership, CORT has continuously undertaken to improve its compet- itive position. With several websites, principally, www.cort.com and www.apartment- search.com, professionals in more than 80 domestic metropolitan markets, affiliates servicing more than 50 countries, almost twenty-one thousand apartment communities referring their tenants to CORT, many ancillary services, and its entrée to the business community as a Berkshire Hathaway company, CORT is better positioned than previously to benefit from an economic turnaround if it occurs in due course. Near term, we expect more of the difficult business conditions of the recent past, but we do not expect another operating loss at CORT in 2010.

Instead, we expect disappointing profits. More details with respect to CORTare contained throughout this annual report, to which your careful attention is directed. Precision Steel Warehouse, Inc. (“Precision Steel”) The businesses of Wesco’s Precision Steel subsidiary, headquartered in the outskirts of Chicago at Franklin Park, Illinois, were pounded by the “Great Recession,” exacerbating a long-term reduction in demand resulting from movement of manufacturing outside the United States. Revenues were $38.4 million for 2009 versus $60.9 million for 2008. Sales volume for 2009, in terms of pounds sold, declined by one-third and represented less than half the annual volume that Precision Steel had sold thirty years earlier, when it was acquired by Wesco.

Precision Steel operated at an after-tax loss of $0.6 million in 2009 versus an after-tax profit of $0.8 million in 2008. These figures reflect after-tax LIFO inventory accounting adjustments increasing after-tax income by $1.5 million for 2009 and decreasing after-tax income by $0.7 million for 2008. Had it not been for the LIFO accounting adjustments, Precision Steel would have reported an after-tax operating loss of $2.1 million for 2009 versus after-tax operating income of $1.5 million for 2008. Moreover, the $2.1 million pre-LIFO-effect loss last year would have been about $0.5 million greater without after-tax profits from a couple of Precision Steel’s small businesses that are different from conventional steel warehousing. We do not consider Precision Steel’s recent operating results to be a satisfactory investment outcome, particularly when one compares its recent performance with its after-tax operating earnings which averaged $2.3 million for the years 1998 through 2000. And, because of the ongoing recession, more difficulty for Precision Steel will surely lie ahead. Apart from the recessionary-caused weakness, the general and ongoing decline in Precision Steel’s physical volume is a serious reverse, not likely to disappear in some “bounce back” effect once the economy recovers. Terry Piper, who became Precision Steel’s President and Chief Executive Officer in 1999, has done an outstanding job in leading Precision Steel through very difficult years.

But he has no magic wand with which to compensate for competitive losses among his best customers or from the weak economic conditions. He is redoubling his efforts to pare costs, which must be his response to conditions faced. Tag Ends from Savings and Loan Days All that now remains outside Wes-FIC but within Wesco as a consequence of Wesco’s former involvement with Mutual Savings, Wesco’s long-held savings and loan subsidiary, is a small real estate subsidiary, MS Property Company, that holds tag ends of appreciated real estate assets consisting mainly of the nine-story commercial office building in downtown Pasadena, where Wesco is headquartered. Adjacent to that building is a multi-story luxury condominium building which MS Property Company has recently built and is in process of marketing. For more information, if you want a very-high-end condominium, simply phone Chris Greco (626-585-6700). MS Property Company’s results of operations, immaterial versus Wesco’s present size, are included in the breakdown of earnings on page 1 within “other operating earnings.” Other Operating Earnings (Loss) Other operating earnings (loss), net of interest paid and general corporate expenses, amounted to ($6.9 million) in 2009 and ($0.4 million) in 2008. The 2009 figure includes a $6.2 million after-tax writedown of the book carrying value of a condominium building that was completed in the worst condominium market in decades.

Other components of the other operating loss in 2009 were (1) rents ($4.1 million gross) principally from Wesco’s Pasadena office property (leased almost entirely to outsiders, including Citibank as the ground floor tenant), and (2) interest and dividends from cash equivalents and marketable securities held outside the insurance subsidiaries, less (3) general corporate expenses plus expenses involv- ing tag-end real estate and real estate held for sale.

Consolidated Balance Sheet and Related Discussion Wesco has unusual balance sheet strength, concentrated in security holdings of its insurance subsidiaries. These holdings, in turn, are concentrated in a few securities. Details can be found in Note 2 to the accompanying financial statements. Wesco carries its investments at fair value. As a result, unrealized appreciation or depreciation, after income tax effect, is included as a component of shareholders’ equity and net worth per share. Affected substantially by changes in market value of securities owned, Wesco’s yearend net worth per share has varied only slightly during recent tumultuous years. Figures are as follows: 2006 $337 2007 356 2008 334 2009 358 These results are not impressive. Moreover, if net worth per share had been computed at its low point in the recent stock market panic, stability implied by the foregoing figures would have been considerably lessened. We repeat our standard warning. Business and human quality in place at Wesco continues to be not nearly as good, all factors considered, as that in place at Berkshire Hathaway. Wesco is not an equally-good-but-smaller version of Berkshire Hathaway, better because its small size makes growth easier. Instead, each dollar of book value at Wesco continues plainly to provide much less intrinsic value than a similar dollar of book value at Berkshire Hathaway.

Moreover, the quality disparity in book value’s intrinsic merits has, in recent years, continued to widen in favor of Berkshire Hathaway. The Board of Directors recently increased Wesco’s regular dividend from 391 ⁄2 cents per share to 41 cents per share, payable March 4, 2010, to shareholders of record as of the close of business on February 4, 2010. Shareholders can thank Director Elizabeth Peters for the recommendation that Wesco increase its next and future dividends to ensure that share- holders are paid in even pennies. This annual report contains Form 10-K, a report filed with the Securities and Exchange Commission, and includes detailed information about Wesco and its subsidiaries, as well as audited financial statements bearing extensive footnotes. As usual, your careful attention is sought with respect to these items. Shareholders can access much Wesco information, including printed annual reports, earnings releases, SEC filings, and the websites of Wesco’s subsidiaries and parent, Berkshire Hathaway, from Wesco’s website: www.wescofinancial.com. Charles T.2010

In the 2008 Berkshire shareholder letter, written in the depths of the global financial crisis, Buffett and Munger disclosed Berkshire's $230 million investment for roughly 9.6% of BYD, the Chinese battery and electric-vehicle maker. The investment had been Munger's champion play inside Berkshire. He had argued that BYD's founder, Wang Chuanfu, was one of the most capable operating executives he had ever met, and that the combination of low-cost Chinese manufacturing, advanced battery chemistry, and an early-mover position in electrified transport would compound for decades. The investment thesis was deliberately simple. BYD was, in Munger's view, a real company making real products at low cost, with a genuine engineering edge in batteries and a market - China - that was being underwritten by a state committed to electrification. The price was modest relative to the long-run earnings power. The risks were real - Chinese corporate governance, foreign-currency exposure, execution risk on the technology roadmap - but Munger's view was that the market had over-discounted those risks and that the underlying franchise was available at a price that did not require any heroic assumption to justify. The retrospective implication, captured in the 2008 letter's plain disclosure of the position, was that Munger had identified a small number of things that mattered - founder quality, technology trajectory, market underwriting, valuation - and had refused to be talked out of the bet by the surface-level concerns that scared other foreign investors away. The position would, over the next fifteen years, multiply many times in value. By the time Munger discussed BYD at the 2023 DJCO meeting, the company was making more than $2 billion after taxes in its Chinese auto business alone. The bet on the founder and the technology had been one of the most profitable investments Berkshire ever made on Munger's recommendation.

Chairman Wang Chuanfu opened the 2008 annual results briefing against the backdrop of the September 2008 announcement that Berkshire Hathaway's MidAmerican Energy subsidiary had subscribed for 225 million new BYD H-shares at HK$8 each, raising approximately HK$1.8 billion and giving MidAmerican a 9.9 percent stake in the Company. Wang told analysts that the transaction was structured as a long-term strategic partnership rather than as a financial investment, that MidAmerican's interest in BYD's battery and electric vehicle technology had been the strategic motivation and that the Berkshire relationship would provide BYD with access to global capital markets, technology validation and the standing to recruit international senior management. Wang walked analysts through the 2008 results, indicating that net profit had grown to approximately RMB 1.02 billion on revenue of approximately RMB 26.7 billion, with the rechargeable battery business contributing the majority of operating profit and the automotive business contributing the majority of revenue growth. He flagged that the F3 sedan had become one of the best-selling single models in the Chinese market, that the battery technology had been validated through the supplier relationship with Nokia and other global handset manufacturers and that the Company was preparing to launch the F3DM, the world's first mass-produced plug-in hybrid electric vehicle, during 2009. On the Q&A, analysts pressed on whether the electric vehicle ambition was a credible near-term business or a long-term option. Wang responded that the underlying battery technology had been developed over a decade of consumer electronics scale, that the iron-phosphate battery chemistry being deployed in the F3DM was inherently safer than the cobalt-based chemistry used in many competitor products and that the Company intended to deploy the technology across the full model range within the next several years. He also defended the choice of the iron-phosphate chemistry as reflecting the long-term safety and cost trajectory rather than the short-term energy density. The briefing closed with management reiterating the long-term ambition of being the world's largest manufacturer of rechargeable batteries, the largest manufacturer of electric vehicles in China and the leading manufacturer of new energy solutions for the global market, anchored on the vertically integrated battery, automotive and energy storage franchises.

WESCO FINANCIAL CORPORATION LETTER TO SHAREHOLDERS To Our Shareholders: Consolidated net “operating” income (i.e., before realized investment gains shown in the table below) for the calendar year 2008 decreased to $77,562,000 ($10.89 per share) from $93,405,000 ($13.12 per share) in the previous year. Consolidated net income decreased to $82,116,000 ($11.53 per share) from $109,161,000 ($15.33 per share) in 2007. These figures included realized after-tax investment gains of $4,554,000 ($.64 per share) for 2008 and $15,756,000 ($2.21 per share) for 2007. Wesco has four major subsidiaries: (1) Wesco-Financial Insurance Company (“Wes- FIC”), headquartered in Omaha and engaged principally in the reinsurance business, (2) The Kansas Bankers Surety Company (“Kansas Bankers”), owned by Wes-FIC and specializing in insurance products tailored to midwestern banks, (3) CORT Business Services Corporation (“CORT”), headquartered in Fairfax, Virginia and engaged princi- pally in the furniture rental business, and (4) Precision Steel Warehouse, Inc. (“Precision Steel”), headquartered in Chicago and engaged in the steel warehousing and specialty metal products businesses. Consolidated net income for the two years just ended breaks down as follows (in thousands except for per-share amounts)(1) : Amount Per Wesco Share (2) Amount Per Wesco Share(2) December 31, 2008 December 31, 2007 Year Ended Wesco-Financial and Kansas Bankers insurance businesses — Underwriting gain (loss) . . . . . . . . .

. . . . . . . . . . . . . . . $ (2,942) $ (.42) $ 7,040 $ .99 Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,274 9.03 65,207 9.16 CORT furniture rental business . . . . . . . . . . . . . . . . . . . . 15,744 2.21 20,316 2.85 Precision Steel businesses . . . . . . . . . . . . . . . . . . . . . . . . 842 .12 915 .13 All other “normal” net operating earnings (loss)(3) . . . . . . . (356) (.05) (73) (.01) 77,562 10.89 93,405 13.12 Realized investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . 4,554 .64 15,756 2.21 Wesco consolidated net income . . . . . . . . . . . . . . . . . . . $82,116 $11.53 $109,161 $15.33 (1) All figures are net of income taxes. (2) Per-share data are based on 7,119,807 shares outstanding. Wesco has no dilutive capital stock equivalents. (3) Represents income from ownership of the Wesco headquarters office building, primarily leased to outside tenants, and interest and dividend income from cash equivalents and marketable securities owned outside the insurance subsidiaries, less interest and other corporate expenses. This supplementary breakdown of earnings differs somewhat from that used in audited financial statements which follow standard accounting convention. The foregoing sup- plementary breakdown is furnished because it is considered useful to shareholders. The total consolidated net income shown above is, of course, identical to the total in our audited financial statements.

parent. The arrangement became effective in 2001 and has covered hull, liability and workers’ compensation exposures relating to the aviation industry, as follows: for 2006, to the extent of 121 ⁄2% of the hull and liability pools and 5% of the workers’ compensation pool; and, since 2007, 16.67% of the hull and liability pools and 5% of the workers’ compensation pool. The Berkshire subsidiary provides a portion of the upper-level rein- surance protection to these aviation risk pools on terms that could result in the Berkshire subsidiary having a different interest from that of Wes-FIC under certain conditions, e.g., in settling a large loss. At the beginning of 2008, Wes-FIC entered into a retrocession agreement with National Indemnity Company (“NICO”), another Berkshire Hathaway insurance subsid- iary, for the assumption of 10% of NICO’s 20% quota-share reinsurance of Swiss Rein- surance Company and its principal property-casualty affiliates (“Swiss Re”). Under this agreement, which was enthusiastically approved by Wesco’s Board of Directors, Wes-FIC has assumed 2% of essentially all Swiss Re property-casualty risks incepting over the five- year period which began on January 1, 2008, on the same terms as NICO’s agreement with Swiss Re. Wes-FIC’s share of written and earned premiums under the contract for 2008 were $265.2 million and $183.2 million, representing a very significant increase in Wes- FIC’s reinsurance activities to date.

It is important to keep in mind that premiums assumed under the contract in each of the next four years could vary significantly depending on market conditions and opportunities. It is the nature of even the finest property-casualty insurance businesses that in keeping their accounts they must estimate and deduct all future costs and losses from premiums already earned. Uncertainties inherent in this undertaking make financial statements more mere “best honest guesses” than is typically the case with accounts of non-insurance-writing corporations. And the reinsurance portion of the property-casualty insurance business, because it contains one or more extra links in the loss-reporting chain, usually creates more accounting uncertainty than in the non-reinsurance portion. Wesco shareholders should remain aware of the inherent imperfections of Wes-FIC’s accounting, based as it is on forecasts of outcomes in many future years. Wes-FIC’s underwriting results have typically fluctuated from year to year, but have been satisfactory. When stated as a percentage, the sum of insurance losses, loss adjust- ment expenses and underwriting expenses, divided by premiums, gives the combined ratio. The combined ratios of Wes-FIC have been much better than average for insurers. Wes-FIC’s combined ratios were 101.0% for 2008, 93.9% for 2007 and 94.0% for 2006. We try to create some underwriting gain as results are averaged out over many years. We expect this to become increasingly difficult.

Float is the term for money we hold temporarily, and, as long as our insurance underwriting results are break-even or better, it costs us nothing. We expect that the new business venture with NICO will significantly increase Wes-FIC’s float, from its yearend 2008 balance of $164 million, thus providing additional opportunities for investment. Kansas Bankers was purchased by Wes-FIC in 1996 for approximately $80 million in cash. Its tangible net worth now exceeds its acquisition price, and it has been a very satisfactory acquisition, reflecting the sound management of President Don Towle and his team.

Kansas Bankers was chartered in 1909 to underwrite deposit insurance for Kansas banks. Its offices are in Topeka, Kansas. Over the years its service has continued to adapt to the changing needs of the banking industry. Today its customer base, consisting mostly of small- and medium-sized community banks, is spread throughout 39 mainly Midwestern states. Kansas Bankers offers policies for crime insurance, check kiting fraud indemnifi- cation, Internet banking catastrophe theft insurance, Internet banking privacy liability insurance, directors and officers liability, bank employment practices, and bank insurance agents professional errors and omissions indemnity. Because of recent events in the banking industry, including a number of bank failures, we are less confident in the long-term profitability of Kansas Bankers’ long-established line of deposit guarantee bonds than previously. These bonds insure specific customer bank deposits above Federal insurance limits. After sustaining a loss of $4.7 million, after taxes, from a bank failure in the latter half of 2008, Kansas Bankers discontinued writing deposit guarantee bonds, and in September 2008 it began to exit this line of insurance as rapidly as feasible. The aggregate face amount of outstanding deposit guarantee bonds has been reduced, from $9.7 billion, insuring 1,671 institutions at September 30, 2008, to $3.

4 billion, insuring 796 institutions at February 15, 2009, the first date that non-renewals and non-voluntary cancellations became effective. It is believed that few of the institutions Kansas Bankers insures are facing significant risk of failure. Because of aggregate limits as well as the purchase of reinsurance, the after-tax risk to Wesco from the failure of any single bank insured by Kansas Bankers is limited to a maximum of $7.6 million. Thus, we believe that Wesco’s shareholders’ equity is not significantly at risk as Kansas Bankers rapidly exits this line of insurance. This decrease in exposure to loss, of course, will cause a sharp decline in Kansas Bankers’ insurance volume, inasmuch as premiums from guarantee bonds not only approximated half of Kansas Bankers’ written premiums for 2008, but also represented the entirety of the business it has recently conducted in 16 of the 39 states in which it is licensed to write insurance. When Wesco purchased Kansas Bankers, it had been ceding almost half of its premium volume to reinsurers. In 2008 it reinsured only about 14%. And, because it has also restructured the layers of losses reinsured, it is now better protected from the downside risk of large losses. Effective in 2006, insurance subsidiaries of Berkshire Hathaway became KBS’s sole reinsurers. Previously, an unaffiliated reinsurer was also involved. The increased volume of business retained comes, of course, with increased irregularity in the income stream.

Kansas Bankers’ combined ratios were 111.6% for 2008, 55.1% for 2007 and 73.8% for 2006. We continue to expect volatile but favorable long- term results from Kansas Bankers. CORT Business Services Corporation (“CORT”) In February 2000, Wesco purchased CORT Business Services Corporation (“CORT”) for $386 million in cash. CORT is a very long-established company that is the country’s leader in rentals of high- quality furniture that lessees have no intention of buying. In the trade, people call CORT’s activity “rent-to-rent” to distinguish it from “lease-to-purchase” businesses that are, in essence, installment sellers of furniture.

However, just as Enterprise, as a rent-to-rent auto lessor in short-term arrangements, must be skilled in selling used cars, CORT must be and is skilled in selling used furniture. CORT’s revenues totaled $410 million for calendar 2008, versus $396 million for calendar 2007. Of these amounts, furniture rental revenues were $340 million and $327 million, furniture sales revenues were $62 million each year, and rental relocation revenues were $8 million and $7 million. CORT operated at after-tax profits of $15.7 mil- lion for 2008 and $20.3 million for 2007. Since its acquisition, CORT has made several “tuck-in” acquisitions, most recently, the residential furniture rental division of Aaron Rents, Inc., and earlier in 2008, the estab- lishment of international operations through the purchase of Roomservice Group, a small regional provider of rental furniture and relocation services in the United Kingdom, now doing business as CORT Business Services UK Ltd. CORT has also started up a nation-wide apartment locator service, originally intended mainly to supplement CORT’s furniture rental business by providing apartment locator and ancillary services to relocating indi- viduals.

Paul Arnold, long CORT’s star CEO, and his management team, have devoted much effort over the past two years, expanding and redirecting CORT’s rental relocation services toward the needs of businesses and government agencies who require a skilled and able partner to provide comprehensive and seamless relocation services for the temporary relocation of employees worldwide. CORT’s operating results are subject to economic cycles. When we purchased CORT, its furniture rental business was rapidly growing, reflecting the strong U.S. economy, phenomenal business expansion and explosive growth of IPOs and the high-tech sector. Shortly thereafter, with the burst of the dot-com bubble, followed by the events of September 11 and a protracted slowdown in new business formation, CORT’s operations were hammered, reflecting generally bad results in the “rent-to-rent” segment of the furniture rental business. There followed a far-too-short period of improving business conditions which have more recently given way to increasingly difficult recessionary conditions, perhaps the beginning of the worst economic recession in decades. Under Wesco’s ownership, CORT has continuously undertaken to improve its com- petitive position. With several websites, principally, www.cort.com and www.apartment- search.

com, professionals in more than 80 domestic metropolitan markets, affiliates servicing more than 50 countries, almost twenty thousand apartment communities refer- ring their tenants to CORT, many ancillary services, and its entrée to the business com- munity as a Berkshire Hathaway company, CORT is better positioned than previously to benefit from an economic turnaround, certain to occur in due course. Near term, we expect more of the difficult business conditions of the recent past. More details with respect to CORT are contained throughout this annual report, to which your careful attention is directed. Precision Steel Warehouse, Inc. (“Precision Steel”) The businesses of Wesco’s Precision Steel subsidiary, headquartered in the outskirts of Chicago at Franklin Park, Illinois, operated at after-tax profits of $0.8 million in 2008 and $0.9 million in 2007. These figures reflect after-tax LIFO inventory accounting adjustments decreasing after-tax income by $0.7 million for 2008 and $1.0 million for 2007. Precision Steel’s operating results for 2008 also reflect the benefit of $0.in

connection with the environmental cleanup of an industrial park where a Precision Steel subsidiary has operated alongside approximately 15 other manufacturers for many years. Had it not been for the LIFO accounting adjustments or the benefit from the reversal of those environmental-related expenses, Precision Steel would have reported after-tax operating income of $1.3 million for 2008 and $1.9 million for 2007. Precision Steel is continuing to suffer not only the ongoing effects of a long-term reduction in demand caused by customers’ (or former customers’) unsuccessful compe- tition with manufacturers outside the United States and a trend towards smaller-sized orders, but also, the difficult effects from deepening recessionary conditions. In 2008, Precision Steel’s service center volume was 37 million pounds, down from 39 million pounds in 2007 and 69 million pounds sold as recently as 1999. Volume for the fourth quarter of 2008 was only 6.2 million pounds, down 34% from the corresponding 2007 figure. Apart from the recessionary-caused weakness, the general and ongoing decline in Precision Steel’s physical volume is a serious reverse, not likely to disappear in some “bounce back” effect once the economy recovers. Nor do we expect that ongoing price increases like the approximately 111% rise that has occurred since 1999, holding dollar volume roughly level despite a precipitous drop in physical volume, will continue.

We do not consider Precision Steel’s recent after-tax operating earnings of approx- imately $1 million annually to be a satisfactory investment outcome, particularly when compared with its after-tax operating earnings which averaged $2.3 million for the years 1998 through 2000. And, because of the intensifying recession, more difficulty for Pre- cision Steel will surely lie ahead. Terry Piper, who became Precision Steel’s President and Chief Executive Officer in 1999, has done an outstanding job in leading Precision Steel through very difficult years. But he has no magic wand with which to compensate for competitive losses among his best customers or from the deepening recession. He is undertaking the difficult task of paring costs to an endurable level. Tag Ends from Savings and Loan Days All that now remains outside Wes-FIC but within Wesco as a consequence of Wesco’s former involvement with Mutual Savings, Wesco’s long-held savings and loan subsidiary, is a small real estate subsidiary, MS Property Company, that holds tag ends of appreciated real estate assets consisting mainly of the nine-story commercial office building in downtown Pasadena, where Wesco is headquartered. Adjacent to that building is a parcel of land on which our construction of a multi-story luxury condominium building is almost complete. We are also seeking city approval of our plans to build another multi-story luxury condominium building, at a later date, on a vacant parcel of land in the next block.

For more information, if you want a very-high-end condominium, simply phone Bob Sahm (626-585-6700). MS Property Company’s results of operations, immaterial versus Wesco’s present size, are included in the breakdown of earnings on page 1 within “other operating earnings.” Other Operating Earnings (Loss) Other operating earnings (loss), net of interest paid and general corporate expenses, amounted to ($0.4 million) in 2008, versus ($0.1) million in 2007. The components of the $0.4 million of other operating loss in 2008 were (1) rents ($4.outsiders,

including Citibank as the ground floor tenant), and (2) interest and dividends from cash equivalents and marketable securities held outside the insurance subsidiaries, less (3) gen- eral corporate expenses plus expenses involving tag-end real estate. Consolidated Balance Sheet and Related Discussion Strategically, we strive to invest in businesses that possess excellent economics, with able and honest management, at sensible prices. We prefer to invest a meaningful amount in each investee, resulting in concentration, exposing the portfolio to more significant market price fluctuations than might be the case were Wesco’s investments more diver- sified. Concentration has worked out very well in the past as evidenced by significant realized investment gains. Details as to Wesco’s investments can be found in Note 2 to the accompanying consolidated financial statements. Most equity investments are expected to be held for long periods of time; thus, we are not ordinarily troubled by short-term price volatility with respect to our investments provided that the underlying business, economic and management characteristics of the investees remain favorable. We strive to maintain much liquidity to provide a margin of safety against short-term equity price volatility. Since the latter part of 2007, Wesco has invested $1.1 billion, at cost, in marketable equity securities, bringing the aggregate cost of Wesco’s equity investments to $1.

63 billion at yearend 2008, including an aggregate of $650 million, at cost, invested in the common stocks of Wells Fargo & Company and US Bancorp. The timing of our recent investments could not have been much worse. During 2008, several crises affecting the financial system and capital markets of the U.S. resulted in very large price declines in the general stock market, and in the banking sector, in particular, due significantly to the ongoing liquidity crisis as well as the deterioration of asset quality and earnings reported by the banking industry. Wesco carries its investments at fair value, with unrealized appreciation or depreci- ation, after income tax effect, included as a component of shareholders’ equity, and related deferred taxes included in income taxes payable, on its consolidated balance sheet. As indicated in the accompanying consolidated financial statements, Wesco’s net worth, as accountants compute it under their conventions, decreased to $2.38 billion ($334 per Wesco share) at yearend 2008 from $2.53 billion ($356 per Wesco share) one year earlier. The principal cause of the decrease was the after-tax decline in fair value of Wesco’s investments in marketable equity securities. As a result of further declines in fair values of these investments subsequent to yearend 2008, Wesco’s shareholders’ equity has further declined, by $303 million ($43 per share), through February 24, 2009.

The worldwide economy is currently suffering the effects of a deepening recession, perhaps the worst economic disaster since the Great Depression. We will not attempt to prognosticate the effects that Wesco will suffer or when the economy will recover, but we are certain that in due course, Wesco will prosper. In the mean time, Wesco’s operations will bear their share of economic woes. We will continue to practice Ben Franklin’s advice, that “a penny saved is a penny earned,” as we trim expenses, albeit in higher denomi- nations, to better endure the weakening economic conditions that surely lie ahead. Business and human quality in place at Wesco continues to be not nearly as good, all factors considered, as that in place at Berkshire Hathaway. Wesco is not an equally-good- but-smaller version of Berkshire Hathaway, better because its small size makes growth easier. Instead, each dollar of book value at Wesco continues plainly to provide much less intrinsic value than a similar dollar of book value at Berkshire Hathaway.the

quality disparity in book value’s intrinsic merits has, in recent years, continued to widen in favor of Berkshire Hathaway. All that said, we make no attempt to appraise relative attractiveness for investment of Wesco versus Berkshire Hathaway stock at present stock-market quotations. The Board of Directors recently increased Wesco’s regular dividend from 381 ⁄2 cents per share to 391 ⁄2 cents per share, payable March 5, 2009, to shareholders of record as of the close of business on February 5, 2009. This annual report contains Form 10-K, a report filed with the Securities and Exchange Commission, and includes detailed information about Wesco and its subsidiaries as well as audited financial statements bearing extensive footnotes. As usual, your careful attention is sought with respect to these items. Shareholders can access much Wesco information, including printed annual reports, earnings releases, SEC filings, and the websites of Wesco’s subsidiaries and parent, Berkshire Hathaway, from Wesco’s website: www.wescofinancial.com. Charles T. Munger Chairman of the Board and President February 25, 2009

At the USC Law commencement in May 2007, I told the graduating class that the most useful piece of mental machinery I had ever acquired was the discipline of avoiding stupidity, rather than seeking brilliance. Most people, when they want to succeed, ask how to be brilliant. The inverter asks the opposite question: what would guarantee stupidity, and how can I avoid that? The mistakes-and-learning point I tried to convey was that the investor who avoids stupidity, and who allows the desired outcome to emerge from the avoidance, has a long-run advantage over the investor who chases brilliance directly, because the things that produce stupidity are well known and easy to avoid, and the things that produce brilliance are difficult to obtain and easy to lose. The discipline required is to enumerate the stupidities, to refuse to do the things that would produce them, and to allow the desired outcome to emerge from the avoidance. The contrarianism angle was the one I had most wanted to add. The investor who avoids stupidity, and who allows the desired outcome to emerge from the avoidance, looks unfashionable during the boom, because he refuses to participate in the things that the boom is rewarding, and the things the boom is rewarding are often the things that produce stupidity. The same investor, during the crash, looks unfashionable in the opposite direction, because he is buying when the crowd is panic-selling, and the crowd cannot understand why anyone would buy into a falling market. The discipline required to refuse to participate in the boom, and to participate aggressively in the crash, is the single hardest discipline in investing, and it is the one that the avoidance framework was designed to support. The investor who has the framework has an enormous advantage over the investor who chases brilliance directly. The mistakes-and-learning lesson I tried to convey was that the investor who is honest about his own capacity for stupidity, and who builds the discipline of avoidance into his process, has an enormous advantage over the investor who assumes that he is too smart to be stupid. The USC commencement was, in some ways, the most personal I had ever given. I told the graduating class that the framework had been built, in large part, from my own stupidities, and that the discipline I had extracted was to refuse to do the things that would produce them, even at the cost of looking unfashionable during the boom. The investor who builds the discipline of avoidance, and who applies it consistently over a working life, will, in the long run, outperform the investor with the higher IQ who assumes he is too smart to be stupid. That single discipline has been more valuable than any other I have learned.

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.

Speaking to USC Law graduates in May 2007, Munger argued that wisdom acquisition is a moral duty, not merely a career strategy. He had come to that conviction early, he said, and had lived by it ever since. The corollary, in his telling, was uncompromising: you are hooked for lifetime learning, and without it you will not get very far. What you already know is barely the down payment; what you learn after you leave the hall determines the trajectory. He grounded the claim in the Berkshire record. The skill set that got Berkshire through one decade would not have sufficed for the next, he said. Without Warren Buffett functioning as a continuous learning machine, the documented long-run investment record would have been absolutely impossible. He then generalized the lesson: at lower walks of life he constantly sees people rise who are not the smartest and sometimes not even the most diligent, but who are learning machines. They go to bed every night a little wiser than when they got up. With a long run ahead of you, he said, that habit does the heavy lifting. He closed the thought with Alfred North Whitehead's observation that civilization advanced only when man invented the method of invention. Munger flipped the same logic onto the individual: if civilization can only progress when it invents the method of invention, you can only progress when you learn the method of learning. Coming to law school already equipped with the method of learning, he said, was the luckiest break of his long life and the one that paid off most reliably.

WESCO FINANCIAL CORPORATION LETTER TO SHAREHOLDERS To Our Shareholders: Consolidated net “operating” income (i.e., before realized investment gains shown in the table below) for the calendar year 2007 increased to $93,405,000 ($13.12 per share) from $92,033,000 ($12.93 per share) in the previous year. Consolidated net income increased, from $92,033,000 ($12.93 per share) in 2006, to $109,161,000 ($15.33 per share) in the current year. The 2007 figure included realized investment gains of $15,756,000, after taxes ($2.21 per share). Wesco has four major subsidiaries: (1) Wesco-Financial Insurance Company (“Wes- FIC”), headquartered in Omaha and engaged principally in the reinsurance business, (2) The Kansas Bankers Surety Company (“Kansas Bankers”), owned by Wes-FIC and specializing in insurance products tailored to midwestern banks, (3) CORT Business Services Corporation (“CORT”), headquartered in Fairfax, Virginia and engaged princi- pally in the furniture rental business, and (4) Precision Steel Warehouse, Inc. (“Precision Steel”), headquartered in Chicago and engaged in the steel warehousing and specialty metal products businesses. Consolidated net income for the two years just ended breaks down as follows (in thousands except for per-share amounts)(1) : Amount Per Wesco Share(2) Amount Per Wesco Share(2) December 31, 2007 December 31, 2006 Year Ended Operating earnings: Wesco-Financial and Kansas Bankers insurance businesses — Underwriting . . . . . . . . . . . . . . . . .

At the USC Law commencement in May 2007, I told the graduating class that the most useful piece of mental machinery I had ever acquired was the habit of inversion. Most people, when they want to solve a problem, ask how to achieve the desired outcome. The inverter asks the opposite question: what would guarantee failure, and how can I avoid that? The contrarianism angle I tried to convey was that the habit of inversion, applied to investing, produces a different portfolio from the habit of pursuing the desired outcome. The investor who asks what would guarantee failure in his portfolio, and who then refuses to do those things, has a long-run advantage over the investor who chases the desired outcome without considering the failure modes. The discipline required is to enumerate the failure modes, to refuse to do the things that would guarantee failure, and to allow the desired outcome to emerge from the avoidance of the failures. The mistakes-and-learning element was the one I had most wanted to convey. I had made my own share of mistakes by pursuing the desired outcome without enumerating the failure modes, and the cost of those mistakes had, in dollar terms, been very large. The lesson I drew was that the disciplined investor must assume that the failure modes are present in every decision, and he must build the discipline of inversion into his process before the decision is made. The USC commencement was, in this sense, a confession. I told the graduating class that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to act until the failure modes had been enumerated and the actions that would produce them had been refused. The single discipline, applied over a working life, has been more valuable than any other I have learned. The contrarianism lesson I tried to add was that the habit of inversion, applied to the broader question of how to live a good life, produces a different life from the habit of pursuing the desired outcome directly. The man who asks what would guarantee a miserable life, and who then refuses to do those things, has a better life than the man who chases happiness directly, because the things that produce a miserable life are well known and easy to avoid, and the things that produce happiness are difficult to obtain and easy to lose. The USC commencement was, in some ways, the most personal I had ever given. I told the graduating class that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to do the things that would guarantee failure, and to allow the desired outcome to emerge from the avoidance. The same discipline, applied to investing and to life, has been the most useful thing I have learned in six decades of work.

At the USC Law commencement in May 2007, I told the graduating class that one of the most useful pieces of mental machinery I had ever acquired was the discipline of staying within my circle of competence. The circle is the set of things I genuinely understand, as opposed to the set of things I think I understand. The discipline required is to refuse to act on the things outside the circle, even at the cost of looking unfashionable during the boom, and even at the cost of being told, repeatedly, that I am missing the opportunity of a lifetime. The mistakes-and-learning point I tried to convey was that the investor who stays within his circle, and who refuses to act on the things outside it, has a long-run advantage over the investor who chases the things outside the circle on the assumption that he understands them. The discipline required is honesty about the boundary of the circle. The mistakes-and-learning element was the one I had most wanted to convey. I had made my own share of mistakes by acting outside my circle, on the assumption that I understood them, and the cost of those mistakes had, in dollar terms, been very large. The lesson I drew was that the disciplined investor must assume that the boundary of his circle is smaller than he would prefer, and he must build the discipline of refusal into his process before the temptation to act outside the circle becomes irresistible. The USC commencement was, in this sense, a confession. I told the graduating class that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to act on the things outside the circle, even at the cost of looking unfashionable during the boom. The single discipline, applied over a working life, has been more valuable than any other I have learned. The circle-of-competence lesson I tried to add was that the boundary of the circle is not fixed. The disciplined investor can, over time, expand the boundary by deliberate study, but the expansion must be honest, and the temptation to pretend the boundary is larger than it is must be resisted. The USC commencement was, in some ways, the most honest I had ever given. I told the graduating class that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to act on the things outside the circle, and to expand the circle only by deliberate study. The investor who is honest about the boundary, and who refuses to act outside it, will, in the long run, outperform the investor with the larger circle who pretends to understand more than he does.

. . . . . . . . . . . . . $ 7,040 $ .99 $ 5,164 $ .73 Investment income . . . . . . . . . . . . . . . . . . . . . . . . . 65,207 9.16 58,528 8.22 CORT furniture rental business . . . . . . . . . . . . . . . . . . 20,316 2.85 26,884 3.78 Precision Steel businesses . . . . . . . . . . . . . . . . . . . . . . 915 .13 1,211 .17 All other “normal” net operating earnings (loss)(3) . . . . . (73) (.01) 246 .03 93,405 13.12 92,033 12.93 Realized investment gains . . . . . . . . . . . . . . . . . . . . . . . . 15,756 2.21 — — Wesco consolidated net income . . . . . . . . . . . . . . . . . $109,161 $15.33 $92,033 $12.93 (1) All figures are net of income taxes. (2) Per-share data are based on 7,119,807 shares outstanding. Wesco has no dilutive capital stock equivalents. (3) Represents income from ownership of the Wesco headquarters office building, primarily leased to outside tenants, and interest and dividend income from cash equivalents and marketable securities owned outside the insurance subsidiaries, less interest and other corporate expenses. This supplementary breakdown of earnings differs somewhat from that used in audited financial statements which follow standard accounting convention. The foregoing sup- plementary breakdown is furnished because it is considered useful to shareholders.The

Munger told the graduates that he had figured out, very early, that there is no love so right as admiration-based love, and that such love should include the instructive dead. He lived by that idea, he said, and it had been very useful to him. The opposite kind of love, the compulsive attachment-driven sort celebrated in Somerset Maugham's Of Human Bondage, he described as a sickness, a disease. If you find yourself in its grip, his advice was to turn around and fix it; eliminate it. He paired that lesson with what he called the funeral test. He had read somewhere, he said, of a man who had lived such that, at his funeral, the preacher had invited anyone to stand up and say something nice about the deceased. Nobody came forward. Nobody came forward. Nobody came forward. Finally one man rose and said, 'Well, his brother was worse.' Munger told the audience that is not where you want to go. That is not the kind of funeral you want to have. You will leave entirely the wrong example. The takeaway for the room was that living admirably, being the kind of person other people name in their wills to raise their children, is not a soft virtue but a shrewd one. People who are admired, who can be trusted with the most important commitments other people make, end up doing something very right. The moral framing and the practical outcome run in the same direction.

No investment gains or losses were realized in 2006. The discussion below will concen- trate on insurance underwriting, not on the results from investments. Wes-FIC engages in the reinsurance business. For the past several years, its reinsur- ance activity has consisted of the participation in several risk pools managed by an insurance subsidiary of Berkshire Hathaway, our 80%-owning parent. The arrangement became effective in 2001 and most recently covered hull, liability and workers’ compen- sation exposures relating to the aviation industry, as follows: for 2006, to the extent of ⁄2% of the hull and liability pools and 5% of the workers’ compensation pool; for 2007, 16.67% of the hull and liability pools and 5% of the workers’ compensation pool. The participation rates remain unchanged for 2008. The Berkshire subsidiary provides a portion of the upper-level reinsurance protection to these aviation risk pools on terms that could result in the Berkshire subsidiary having a different interest from that of Wes-FIC under certain conditions, e.g., in settling a large loss.

Munger argued that the really big ideas carry ninety-five percent of the freight, and so acquiring them is not a heroic task but a discipline. He had been pushed into the discipline in law school when some wag offered the definition of a legal mind as one that could responsibly think about one thing while ignoring another. Munger found the proposition perfectly ridiculous, and it accelerated his natural drift toward learning all the big ideas and all the big disciplines. The alternative was to be a damn fool trying to reason about one aspect of a situation that could not be separated from the totality. He gave the room his standard method. If you can't be the best in the world at some narrow thing, he said, then become competent in all of the major disciplines and the big ideas in each. Economics, biology, psychology, physics, mathematics, history - the canon is finite and learnable. Then organize the ideas into a latticework of mental models and hang experience on the lattice as it accumulates. He warned that people who do not do this end up reaching for one hammer when the situation calls for a screwdriver. He grounded the whole approach in inversion. He liked to tell students that the way to be useful in life is not to figure out how to succeed directly, but to figure out how to fail - sloth, deceit, envy, self-pity, resentment - and then rigorously avoid those things. The clean, inverted formulation was his preferred intellectual move. Combined with the cross-disciplinary mental-models approach, he said, it had taken him further than IQ ever could have.

Wesco’s Board of Directors has recently and enthusiastically approved Wes-FIC’s most significant reinsurance contract to date: its participation, since January 1, 2008, in an agreement with National Indemnity Company (“NICO”), another Berkshire Hathaway insurance subsidiary, for the assumption of 10% of NICO’s quota-share reinsurance of Swiss Reinsurance Company and its property-casualty affiliates (“Swiss Re”). Under this retrocession agreement, Wes-FIC will effectively assume 2% of all of Swiss Re’s property- casualty risks incepting over the next five years on the same terms as NICO’s agreement with Swiss Re. If recent years’ volumes were to continue over the next five years, the annual written premiums assumed by Wes-FIC under this retrocession agreement would be in the $300 million range; however, actual premiums assumed over the five-year period could vary significantly depending on market conditions and opportunities. It is the nature of even the finest casualty insurance businesses that in keeping their accounts they must estimate and deduct all future costs and losses from premiums already earned. Uncertainties inherent in this undertaking make financial statements more mere “best honest guesses” than is typically the case with accounts of non-insurance-writing corporations.

The reinsurance portion of the casualty insurance business, because it contains one or more extra links in the loss-reporting chain, usually creates more account- ing uncertainty than in the non-reinsurance portion. Wesco shareholders should remain aware of the inherent imperfections of Wes-FIC’s accounting, based as it is on forecasts of outcomes in many future years. Wes-FIC’s underwriting results have typically fluctuated from year to year, but have been satisfactory. When stated as a percentage, the sum of insurance losses, loss adjust- ment expenses and underwriting expenses, divided by premiums, gives the combined ratio. The combined ratios of Wes-FIC have been much better than average for insurers. Wes-FIC’s combined ratios were 93.9% for 2007 and 94.0% for 2006. We try to create some underwriting gain as results are averaged out over many years. We expect this to become increasingly difficult. Float is the term for money we hold temporarily, and as long as our insurance underwriting results are break-even or better, it costs us nothing. We expect that the new business venture with NICO will significantly increase Wes-FIC’s float from its yearend 2007 balance of $94 million, thus providing additional opportunities for investment. Kansas Bankers was purchased by Wes-FIC in 1996 for approximately $80 million in cash.very

satisfactory acquisition, reflecting the sound management of President Don Towle and his team. Kansas Bankers was chartered in 1909 to underwrite deposit insurance for Kansas banks. Its offices are in Topeka, Kansas. Over the years its service has continued to adapt to the changing needs of the banking industry. Today its customer base, consisting mostly of small- and medium-sized community banks, is spread throughout 38 mainly midwestern states. In addition to bank deposit guaranty bonds which insure deposits in excess of FDIC coverage, KBS offers directors and officers indemnity policies, bank employment practices policies, bank insurance agents professional errors and omissions indemnity policies and Internet banking catastrophe theft insurance. When Wesco purchased KBS, it had been ceding almost half of its premium volume to reinsurers. Now it reinsures only about 15%. Effective in 2006, insurance subsidiaries of Berkshire Hathaway became KBS’s sole reinsurers. Previously, an unaffiliated reinsurer was also involved. The increased volume of business retained comes, of course, with increased irregularity in the income stream. KBS’s combined ratios were 55.1% for 2007 and 73.8% for 2006. We continue to expect volatile but favorable long-term results from KBS. CORT Business Services Corporation (“CORT”) In February 2000, Wesco purchased CORT Business Services Corporation (“CORT”) for $386 million in cash.

CORT is a very long-established company that is the country’s leader in rentals of furniture that lessees have no intention of buying. In the trade, people call CORT’s activity “rent-to-rent” to distinguish it from “lease-to-purchase” businesses that are, in essence, installment sellers of furniture. However, just as Enterprise, as a rent-to-rent auto lessor in short-term arrangements, must be skilled in selling used cars, CORT must be and is skilled in selling used furniture. CORT’s revenues totaled $396 million for calendar 2007, versus $400 million for calendar 2006. Of these amounts, furniture rental revenues were $327 million and $324 million, furniture sales revenues were $62 million and $70 million, and rental relocation revenues were $7 million and $6 million. CORT operated at after-tax profits of $20.3 million for 2007 and $26.9 million for 2006. When we purchased CORT early in 2000, its furniture rental business was rapidly growing, reflecting the strong U.S. economy, phenomenal business expansion and explo- sive growth of IPOs and the high-tech sector. Beginning late in 2000, however, new business coming into CORT began to decline. With the burst of the dot-com bubble, the events of September 11, and a protracted slowdown in new business formation, CORT’s operations were hammered, reflecting generally bad results in the “rent-to-rent” segment of the furniture rental business.

Obvi- ously, when we purchased CORT we were poor predictors of near-term industry-wide prospects of the “rent-to-rent” sector of the furniture business. CORT started up a new service in 2001. Originally a subsidiary named Relocation Central, and subsequently integrated into CORT’s operations, CORT’s rental relocation activities were intended mainly to supplement its furniture rental business by providing apartment locator and ancillary services to relocating individuals.its

marketing toward the needs of businesses and governmental agencies who require a skilled and able partner to provide comprehensive and seamless relocation services for the temporary relocation of employees, worldwide. With several websites, principally www.cort.com, www.relocationcentral.com and www.apartmentsearch.com, profession- als in more than 80 domestic metropolitan markets, affiliates in more than 50 countries, almost twenty thousand apartment communities referring their tenants to CORT, many ancillary services, and its entrée to the business community as a Berkshire Hathaway company, CORT’s rental relocation operations may now be moving in the right direction. In January 2008, CORT expanded its operations to the United Kingdom through the purchase of Roomservice Group, a small regional provider of furniture rental and relo- cation services. CORT’s operations are subject to economic cycles. We are pleased with CORT’s progress in the past few years; however, we believe that it will likely suffer its share of the downturn as we enter a period of economic contraction. CORT is now a stronger company than it was when acquired by Wesco, helped by several “tuck-in” acquisitions, and poised towards long-term growth despite periodic bumps to be encountered along the way. More details with respect to CORT are contained throughout this annual report, to which your careful attention is directed. Precision Steel Warehouse, Inc.

(“Precision Steel”) The businesses of Wesco’s Precision Steel subsidiary, headquartered in the outskirts of Chicago at Franklin Park, Illinois, operated at after-tax profits of $0.9 million in 2007 and $1.2 million in 2006. These figures reflect after-tax LIFO inventory accounting adjustments decreasing after-tax income by $1.0 million for 2007 and $0.6 million for 2006. Precision Steel’s operating results for 2006 also reflect expenses, net of insurance recoveries, of $0.3 million, after taxes, in connection with environmental cleanup of an industrial park where a Precision Steel subsidiary has operated alongside approximately 15 other man- ufacturers for many years. Had it not been for the LIFO accounting adjustments, or the environmental matter discussed in Note 9 to the accompanying consolidated financial statements, Precision Steel would have reported after-tax operating income of $1.9 million for 2007 and $2.1 million for 2006. Precision Steel’s business has been subject to economic cycles. Although the fiercely competitive, chaotic pressures which affected its steel service center business several years ago have abated, Precision Steel is continuing to suffer the ongoing effects of a long-term reduction in demand caused by customers’ (or former customers’) unsuccessful compe- tition with manufacturers outside the United States. Precision Steel’s revenues decreased 2.7% in 2007, following an increase of 2.

8% in 2006, approximately half of which was due to an extraordinary order of shimstock and other industrial supplies from a customer of its Precision Brand Products subsidiary. In 2007, Precision Steel’s service center volume was 39 million pounds, down from 46 million pounds in 2006 and 69 million pounds sold as recently as 1999. This decline in physical volume is a serious reverse, not likely to disappear in some “bounce back” effect. Nor do we expect that ongoing price increases like the approximately 66% rise that has occurred since 1999, holding dollar volume roughly level despite a precipitous drop in physical volume, will continue.of

$0.9 million for 2003, we do not consider present operating results to be a satisfactory investment outcome. Recent earnings of Precision Steel compare unfavorably with oper- ating earnings which averaged $2.3 million, after taxes, for the years 1998 through 2000. Because the steel warehouse business may revert to even more difficult conditions, more decline for Precision Steel may lie ahead. Terry Piper, who became Precision Steel’s President and Chief Executive Officer in 1999, has done an outstanding job in leading Precision Steel through very difficult years. But he has no magic wand with which to compensate for competitive losses among his best customers. Tag Ends from Savings and Loan Days All that now remains outside Wes-FIC but within Wesco as a consequence of Wesco’s former involvement with Mutual Savings, Wesco’s long-held savings and loan subsidiary, is a small real estate subsidiary, MS Property Company, that holds tag ends of appreciated real estate assets consisting mainly of the nine-story commercial office building in downtown Pasadena, where Wesco is headquartered. Adjacent to that building is a parcel of land on which our construction of a multi-story luxury condominium building is nearing com- pletion. We are also seeking city approval of our plans to build another multi-story luxury condominium building, at a later date, on a vacant parcel of land in the next block.

For more information, if you want a very-high-end condominium, simply phone Bob Sahm (626-585-6700). MS Property Company’s results of operations, immaterial versus Wesco’s present size, are included in the breakdown of earnings on page 1 within “other operating earnings.” Other Operating Earnings (Loss) Other operating earnings (loss), net of interest paid and general corporate expenses, amounted to ($0.1 million) in 2007, versus $0.2 million in 2006. The components of the $0.1 million of other operating loss in 2007 were (1) rents ($3.9 million gross in 2007) prin- cipally from Wesco’s Pasadena office property (leased almost entirely to outsiders, includ- ing Citibank as the ground floor tenant), and (2) interest and dividends from cash equivalents and marketable securities held outside the insurance subsidiaries, less (3) gen- eral corporate expenses plus minor expenses involving tag-end real estate. Consolidated Balance Sheet and Related Discussion Wesco carries its investments at fair value, with unrealized appreciation, after income tax effect, included as a separate component of shareholders’ equity, and related deferred taxes included in income taxes payable, on its consolidated balance sheet. As indicated in the accompanying financial statements, Wesco’s net worth, as accountants compute it under their conventions, increased to $2.53 billion ($356 per Wesco share) at yearend 2007 from $2.40 billion ($337 per Wesco share) at yearend 2006.

The main causes of the increase were net operating income after deduction of dividends paid to shareholders, and appreciation in fair value of investments. The foregoing $356-per-share book value approximates liquidation value assuming that all Wesco’s non-security assets would liquidate, after taxes, at book value.its

deferred income taxes of $322 million, subtracted in determining its net worth. This interest-free “loan” from the government is at this moment working for Wesco shareholders and amounted to about $45 per Wesco share at yearend 2007. However, some day, parts of the interest-free “loan” may be removed as securities are sold. Therefore, Wesco’s shareholders have no perpetual advantage creating value for them of $45 per Wesco share. Instead, the present value of Wesco’s shareholders’ advantage must logically be much lower than $45 per Wesco share. Business and human quality in place at Wesco continues to be not nearly as good, all factors considered, as that in place at Berkshire Hathaway. Wesco is not an equally-good- but-smaller version of Berkshire Hathaway, better because its small size makes growth easier. Instead, each dollar of book value at Wesco continues plainly to provide much less intrinsic value than a similar dollar of book value at Berkshire Hathaway. Moreover, the quality disparity in book value’s intrinsic merits has, in recent years, continued to widen in favor of Berkshire Hathaway. All that said, we make no attempt to appraise relative attractiveness for investment of Wesco versus Berkshire Hathaway stock at present stock-market quotations. Last year we reported that Wesco had held more than $1 billion of cash equivalents and fixed-maturity investments since early in 2003.

In the latter part of 2007 Wesco invested $802 million, net, in marketable equity securities. Of its $3.1 billion of assets at December 31, 2007, $565 million is invested in cash equivalents and fixed-maturity investments. Unless significant additional amounts can be attractively reinvested in acquisitions, equity securities or other long-term instruments of the type that helped cause the long-term growth of Wesco’s shareholders’ equity, future returns on shareholders’ equity will probably be less than those of the past. Due to the current size of Wesco and its parent, Berkshire Hathaway, Wesco’s opportunities for growing shareholders’ equity are unlikely to be as attractive as in the past. The Board of Directors recently increased Wesco’s regular dividend from 371 ⁄2 cents per share to 381 ⁄2 cents per share, payable March 6, 2008, to shareholders of record as of the close of business on February 7, 2008. This annual report contains Form 10-K, a report filed with the Securities and Exchange Commission, and includes detailed information about Wesco and its subsidiaries as well as audited financial statements bearing extensive footnotes. As usual, your careful attention is sought with respect to these items. Shareholders can access much Wesco information, including printed annual reports, earnings releases, SEC filings, and the websites of Wesco’s subsidiaries and parent, Berkshire Hathaway, from Wesco’s website: www.wescofinancial.com. Charles T.2008

WESCO FINANCIAL CORPORATION LETTER TO SHAREHOLDERS To Our Shareholders: Consolidated net ""operating'' income (i.e., before realized investment gains shown in the table below) for the calendar year 2006 increased to $92,033,000 ($12.93 per share) from $77,973,000 ($10.95 per share) in the previous year. Consolidated net income decreased, from $294,579,000 ($41.37 per share) in 2005, to $92,033,000 ($12.93 per share) in the current year. Wesco has four major subsidiaries: (1) Wesco-Financial Insurance Company (""Wes-FIC''), headquartered in Omaha and engaged principally in the reinsurance business, (2) The Kansas Bankers Surety Company (""Kansas Bankers''), owned by Wes-FIC and specializing in insurance products tailored to midwestern banks, (3) CORT Business Services Corporation (""CORT''), headquartered in Fairfax, Vir- ginia and engaged principally in the furniture rental business, and (4) Precision Steel Warehouse, Inc. (""Precision Steel''), headquartered in Chicago and engaged in the steel warehousing and specialty metal products businesses. Consolidated net income for the two years just ended breaks down as follows (in thousands except for per-share amounts)(1) : Year Ended December 31, 2006 December 31, 2005 Per Per Wesco Wesco Amount Share(2) Amount Share(2) Operating earnings: Wesco-Financial and Kansas Bankers insurance businesses Ì Underwriting ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5,164 $ .73 $ 11,798 $ 1.

66 Investment income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 58,528 8.22 39,068 5.49 CORT furniture rental business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,884 3.78 20,676 2.90 Precision Steel businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,211 .17 1,198 .17 All other ""normal'' net operating earnings(3) ÏÏÏÏÏÏÏÏÏÏÏ 246 .03 5,233 .73 92,033 12.93 77,973 10.95 Realized investment gains (4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 216,606 30.42 Wesco consolidated net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $92,033 $12.93 $294,579 $41.37 (1) All Ñgures are net of income taxes. (2) Per-share data are based on 7,119,807 shares outstanding. Wesco has no dilutive capital stock equivalents. (3) Represents income from ownership of the Wesco headquarters oÇce building, primarily leased to outside tenants, and interest and dividend income from cash equivalents and marketable securities owned outside the insurance subsidiaries, less interest and other corporate expenses. (4) Includes $216,112,000 ($30.35 per share) from the tax-free exchange of Wesco's common shares in The Gillette Company for common shares in The Procter & Gamble Company in connection with the merger of Gillette with Procter & Gamble. Although no cash was received, generally accepted accounting principles required that the gain be recorded. Because Wesco's balance sheet reÖects investments carried at market value, with unrealized gains, after applicable income tax eÅect, included in shareholders' equity, the transaction did not aÅect Wesco's shareholders' equity.

It merely resulted in a reclassiÑcation from unrealized gains to retained earnings, another component of shareholders' equity. This supplementary breakdown of earnings diÅers somewhat from that used in audited Ñnancial statements which follow standard accounting convention.foregoing

operating income excludes investment gains of $216.6 million, net of income taxes, realized in 2005. No investment gains or losses were realized in 2006. The discussion below will concentrate on insurance underwriting, not on the results from investments. Wes-FIC engages in the reinsurance business. For the past several years, its reinsurance activity has consisted of the participation in several risk pools managed by an insurance subsidiary of Berkshire Hathaway, our 80%-owning parent. The arrangement became eÅective in 2001 and most recently covered hull, liability and workers' compensation exposures relating to the aviation industry, as follows: for 2005, to the extent of 10% in the hull and liability pools and 5% of a workers' compensation pool; for 2006, 121 /2% of the hull and liability pools and 5% of the workers' compensation pool. For 2007, participation in the hull and liability pools has increased to 16.67%. The Berkshire subsidiary provides a portion of the upper-level reinsurance protection to these aviation risk pools on terms that could result in the Berkshire subsidiary having a diÅerent interest from that of Wes-FIC under certain conditions, e.g., in settling a large loss. Wes-FIC's underwriting results have Öuctuated from year to year, but have been satisfactory. When stated as a percentage, the sum of insurance losses, loss adjustment expenses and underwriting expenses, divided by premiums, gives the combined ratio.

The combined ratios of Wes-FIC have been much better than average for insurers. Wes-FIC's combined ratios were 94.0% for 2006 and 75.9% for 2005. We try to create some underwriting gain as results are averaged out over many years. We expect this to become increasingly diÇcult. Kansas Bankers was purchased by Wes-FIC in 1996 for approximately $80 million in cash. Its tangible net worth now exceeds its acquisition price, and it has been a very satisfactory acquisition, reÖecting the sound management of President Don Towle and his team. Kansas Bankers was chartered in 1909 to underwrite deposit insurance for Kansas banks. Its oÇces are in Topeka, Kansas. Over the years its service has continued to adapt to the changing needs of the banking industry. Today its customer base, consisting mostly of small- and medium-sized community banks, is spread throughout 30 mainly midwestern states. In addition to bank deposit guaranty bonds which insure deposits in excess of FDIC coverage, KBS oÅers directors and oÇcers indemnity policies, bank employment practices policies, bank insurance agents professional errors and omissions indemnity policies and Internet banking catastrophe theft insurance. When Wesco purchased KBS, it had been ceding almost half of its premium volume to reinsurers. Now it reinsures only about 14%. EÅective in 2006, insurance subsidiaries of Berkshire Hathaway became KBS's sole reinsurers. Previously, an unaÇliated reinsurer was also involved.

The increased volume of business retained comes, of course, with increased irregularity in the income stream. KBS's combined ratios were 73.8% for 2006 and 58.8% for 2005. We continue to expect volatile but favorable long-term eÅects from increased insurance retained. CORT Business Services Corporation (""CORT'') In February 2000, Wesco purchased CORT Business Services Corporation (""CORT'') for $386 million in cash.

CORT is a very long-established company that is the country's leader in rentals of furniture that lessees have no intention of buying. In the trade, people call CORT's activity ""rent-to-rent'' to distinguish it from ""lease-to-purchase'' businesses that are, in essence, installment sellers of furniture. However, just as Enterprise, as a rent-to-rent auto lessor in short-term arrangements, must be skilled in selling used cars, CORT must be and is skilled in selling used furniture. CORT's revenues totaled $400 million for calendar 2006, versus $384 million for calendar 2005. Of these amounts, furniture rental revenues were $324 million and $304 million, furniture sales revenues were $70 million and $72 million, and apartment locator fees of its relocation division were $6 million and $8 million. CORT operated at an after-tax proÑt of $26.9 million for 2006, up satisfactorily from its $20.7 million of after-tax proÑt for 2005 (versus $5.0 million for 2004). These results reÖect the favorable eÅects of several ""tuck-in'' acquisitions made between the years 2001 and 2004. When we purchased CORT early in 2000, its furniture rental business was rapidly growing, reÖecting the strong U.S. economy, phenomenal business expansion and explosive growth of IPOs and the high-tech sector. Beginning late in 2000, however, new business coming into CORT began to decline.

With the burst of the dot-com bubble, the events of September 11, and a protracted slowdown in new business formation, CORT's operations were hammered, reÖecting generally bad results in the ""rent-to-rent'' segment of the furniture rental business. Obviously, when we purchased CORT we were poor predictors of near-term industry-wide prospects of the ""rent-to-rent'' sector of the furniture business. CORT started up a new service during 2001. Originally a subsidiary named Relocation Central, and now its CORTline division, it was conceived mainly to supplement CORT's furniture rental business by providing apartment locator and ancillary services to relocating individuals. Long CORT's star CEO, Paul Arnold is in process of expanding CORTline's operations and redirecting its marketing, with the expectation that it will become a Ñnancial success. CORTline, originally conceived to assist relocating individuals, has recently expanded its services and capabilities and has begun to market itself toward the needs of businesses and governmental agencies who require a skilled and able partner to provide the full gamut of seamless relocation services for the temporary relocation of employees. With several websites, principally, www.cortline.com, www.relocationcentral.com and www.apartmentsearch.

com, professionals in more than 80 domestic metropolitan markets, aÇliates in more than 50 countries, almost twenty thousand apartment communities referring their tenants to CORT, many ancillary services, and its entr πee to the business community as a Berkshire Hathaway company, CORTline now seems to be moving in the right direction. We are pleased with the progress CORT made in the past two years. We are cautiously optimistic that, in future years, we will be able to look back to the recent past and consider it merely a cyclical aberration in CORT's growth. We note, however, that the number of furniture leases outstanding has been slightly declining in each of the past two years.

When Wesco paid $386 million for CORT, about 60% of the purchase price was attributable to goodwill, an intangible balance sheet asset. Wesco's consolidated balance sheet now contains about $267 million in goodwill (including $27 million from Wesco's 1996 purchase of KBS). The Financial Accounting Standards Board adopted a rule which became eÅective in 2002 that no longer requires automatic amortization of acquired goodwill. (The requirement for such amortization has been replaced by a standard that requires an annual assessment to determine whether the value of goodwill has been impaired, in which event the intangible asset would be written down or written oÅ, as appropriate.) Earnings, not reduced by goodwill amortization, that we have reported since 2002 more closely reÖect microeconomic reality as we appraise it. More details with respect to CORT are contained throughout this annual report, to which your careful attention is directed. Precision Steel Warehouse, Inc. (""Precision Steel'') The businesses of Wesco's Precision Steel subsidiary, headquartered in the outskirts of Chicago at Franklin Park, Illinois, operated at after-tax proÑts of $1.2 million in both 2006 and 2005. These Ñgures reÖect after-tax LIFO inventory accounting adjustments decreasing after-tax income by $.6 million for 2006 and $.2 million for 2005. Precision Steel's operating results for 2006 also reÖect expenses, net of insurance recoveries, of $.

3 million, after taxes, in connection with environmental cleanup of an industrial park where a Precision Steel subsidiary has operated alongside approximately 15 other manufacturers for many years. Had it not been for the LIFO accounting adjustments or the environmental matter, Precision Steel would have reported after-tax operating income of $2.1 million for 2006 and $1.4 million for 2005. Precision Steel's business has been subject to economic cycles. Although the Ñercely competitive, chaotic pressures aÅecting its steel service center business (which we described at length in last year's shareholders' letter) have recently abated, Precision Steel is continuing to suÅer the ongoing eÅects of a long-term reduction in demand caused by customers' (or former customers') unsuccessful competition with manufacturers outside the United States. Precision Steel's revenues increased 2.8% in 2006, approximately half of which was due to an extraordinary order of shimstock and other industrial supplies from a customer of its Precision Brand Products subsidiary. Revenues for 2005 increased by 1.4% from those of 2004. In 2006, Precision Steel's service center volume was 46 million pounds, down from 69 million pounds sold as recently as 1999. This decline in physical volume is a serious reverse, not likely to disappear in some ""bounce back'' eÅect.

Nor do we expect another sharp rise in prices like the approximately 40% rise that recently occurred, holding dollar volume roughly level despite a precipitous drop in physical volume. Although Precision Steel's recent after-tax operating earnings of approximately $1 million per year may signal improvement when compared with its after-tax operating loss of $.9 million for 2003, we do not consider present operating results to be a satisfactory investment outcome. Recent earnings of Precision Steel compare unfavorably with operating earnings which averaged $2.3 million, after taxes, for the years 1998 through 2000. Because the steel warehouse business may revert to even more diÇcult conditions, more decline for Precision Steel may lie ahead.

Terry Piper, who became Precision Steel's President and Chief Executive OÇcer in 1999, has done an outstanding job in leading Precision Steel through very diÇcult years. But he has no magic wand with which to compensate for competitive losses among his best customers. Tag Ends from Savings and Loan Days All that now remains outside Wes-FIC but within Wesco as a consequence of Wesco's former involvement with Mutual Savings, Wesco's long-held savings and loan subsidiary, is a small real estate subsidiary, MS Property Company, that holds tag ends of appreciated real estate assets consisting mainly of the nine-story commercial oÇce building in downtown Pasadena, where Wesco is headquartered. Adjacent to that building is a parcel of land on which we are building a multi-story luxury condominium building. We are also seeking city approval of our plans to build another multi-story luxury condominium building on a vacant parcel of land in the next block. For more information, if you want a very-high-end condominium, simply phone Bob Sahm (626-585-6700). MS Property Company's results of operations, immaterial versus Wesco's present size, are included in the breakdown of earnings on page 1 within ""other operating earnings.'' Other Operating Earnings Other operating earnings, net of interest paid and general corporate expenses, amounted to $.2 million in 2006, versus $5.2 million in 2005. Had it not been for favorable income tax adjustments of $4.

9 million recorded in 2005, other operating earnings would have been $.3 million in 2005. The sources of the $.2 million of other operating earnings in 2006 were (1) rents ($3.7 million gross in 2006) principally from Wesco's Pasadena oÇce property (leased almost entirely to outsiders, including Citibank as the ground Öoor tenant), and (2) interest and dividends from cash equivalents and marketable securities held outside the insurance subsidiaries, less (3) general corporate expenses plus minor expenses involving tag-end real estate. Realized Investment Gains There were no realized investment gains in 2006. Wesco's 2005 earnings contained investment gains of $216.6 million, after income taxes. Only $.5 million was realized through the sale of investments; the balance, $216.1 million, resulted from the tax-free exchange of common shares of The Gillette Company (""Gillette'') owned by Wesco, for common shares of The Procter & Gamble Company (""PG'') in the fourth quarter of 2005 in connection with the merger of Gillette with PG. Accounting standards promulgated by the Financial Accounting Standards Board require that the fair (market) value of shares received in such an exchange be recorded as the new cost basis as of the date of the exchange, with the diÅerence between the new basis and the historical cost realized in the audited Ñnancial statements as an investment gain.

For tax return purposes, the securities acquired were recorded at the original cost of the securities exchanged. Thus, no income tax was due or paid. Although the realized gain had a material impact on Wesco's reported 2005 earnings, it had no impact on Wesco's shareholders' equity.included

in income taxes payable, on its consolidated balance sheet. Thus, the entire after-tax gain on the non-cash merger had been reÖected in the unrealized gain component of Wesco's shareholders' equity as of September 30, 2005. That amount was merely switched from unrealized gain to retained earnings, another component of shareholders' equity. This accounting entry had no economic eÅect on Wesco, and you should ignore it when you are evaluating Wesco's 2005 earnings. Consolidated Balance Sheet and Related Discussion As indicated in the accompanying Ñnancial statements, Wesco's net worth, as accountants compute it under their conventions, increased to $2.40 billion ($337 per Wesco share) at yearend 2006 from $2.23 billion ($313 per Wesco share) at yearend 2005. The main causes of the increase were appreciation in fair value of investments, and net operating income after deduction of dividends paid to shareholders. The foregoing $337-per-share book value approximates liquidation value assuming that all Wesco's non-security assets would liquidate, after taxes, at book value. Of course, so long as Wesco does not liquidate, and does not sell any appreciated securities, including the PG shares Wesco received in connection with PG's acquisition of Gillette in 2005, discussed above in the section, ""Realized Investment Gains,'' Wesco has, in eÅect, an interest-free ""loan'' from the government equal to its deferred income taxes, subtracted in determining its net worth.

This interest-free ""loan'' from the government is at this moment working for Wesco shareholders and amounted to about $42 per Wesco share at yearend 2006. However, some day, parts of the interest-free ""loan'' may be removed as securities are sold. Therefore, Wesco's shareholders have no perpetual advantage creating value for them of $42 per Wesco share. Instead, the present value of Wesco's shareholders' advantage must logically be much lower than $42 per Wesco share. Business and human quality in place at Wesco continues to be not nearly as good, all factors considered, as that in place at Berkshire Hathaway. Wesco is not an equally- good-but-smaller version of Berkshire Hathaway, better because its small size makes growth easier. Instead, each dollar of book value at Wesco continues plainly to provide much less intrinsic value than a similar dollar of book value at Berkshire Hathaway. Moreover, the quality disparity in book value's intrinsic merits has, in recent years, continued to widen in favor of Berkshire Hathaway. All that said, we make no attempt to appraise relative attractiveness for investment of Wesco versus Berkshire Hathaway stock at present stock-market quotations. Wesco's consolidated balance sheet reÖects total assets of $3.0 billion as of yearend 2006. Of that amount, more than $1 billion has been invested in cash equivalents and Ñxed-maturity investments since early in 2003.

Unless those funds can be attractively reinvested in acquisitions, equity securities or other long-term instruments of the type that helped cause the long-term growth of Wesco's shareholders' equity, future returns on shareholders' equity will probably be less than those of the past. Due to the current size of Wesco and its parent, Berkshire Hathaway, Wesco's opportunities for growing shareholders' equity are unlikely to be as attractive as in the past.

Wesco's shares were listed for many years on both the American Stock Exchange and, since 1963, on a regional exchange previously known as the PaciÑc Stock Exchange. Following the recent merger of various regional exchanges into the NYSE, the PaciÑc Exchange became the NYSE Arca exchange. We had happily paid a minimal annual listing fee of $1,000 for the privilege of having our shares listed on the PaciÑc Exchange. When notiÑed last December that NYSE Arca had decided to increase Wesco's annual listing fee to $30,000, Wesco voted with its feet. Its shares are now listed only on the American Exchange. The Board of Directors recently increased Wesco's regular dividend from /2 cents per share to 371 /2 cents per share, payable March 8, 2007, to shareholders of record as of the close of business on February 1, 2007. This annual report contains Form 10-K, a report Ñled with the Securities and Exchange Commission, and includes detailed information about Wesco and its subsidiaries as well as audited Ñnancial statements bearing extensive footnotes. As usual, your careful attention is sought with respect to these items. Shareholders can access much Wesco information, including printed annual reports, earnings releases, SEC Ñlings, and the websites of Wesco's subsidiaries and parent, Berkshire Hathaway, from Wesco's website: www.wescoÑnancial.com. Charles T. Munger Chairman of the Board and President February 27, 2007

WESCO FINANCIAL CORPORATION LETTER TO SHAREHOLDERS To Our Shareholders: Consolidated net ""operating'' income (i.e., before realized investment gains shown in the table below) for the calendar year 2005 increased to $77,973,000 ($10.95 per share) from $47,427,000 ($6.66 per share) in the previous year. Consolidated net income increased to $294,579,000 ($41.37 per share) from $47,427,000 ($6.66 per share) in the previous year. Wesco has four major subsidiaries: (1) Wesco-Financial Insurance Company (""Wes-FIC''), headquartered in Omaha and engaged principally in the reinsurance business, (2) The Kansas Bankers Surety Company (""Kansas Bankers''), owned by Wes-FIC and specializing in insurance products tailored to midwestern banks, (3) CORT Business Services Corporation (""CORT''), headquartered in Fairfax, Vir- ginia and engaged principally in the furniture rental business, and (4) Precision Steel Warehouse, Inc. (""Precision Steel''), headquartered in Chicago and engaged in the steel warehousing and specialty metal products businesses. Consolidated net income for the two years just ended breaks down as follows (in 000s except for per-share amounts) (1): Year Ended December 31, 2005 December 31, 2004 Per Per Wesco Wesco Amount Share(2) Amount Share(2) Operating earnings: Wesco-Financial and Kansas Bankers insurance businesses Ì Underwriting ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 11,798 $ 1.66 $14,618 $2.05 Investment income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 39,068 5.

49 26,302 3.69 CORT furniture rental business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 20,676 2.90 5,022 .71 Precision Steel businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,198 .17 1,094 .15 All other ""normal'' net operating earnings(3) ÏÏÏÏÏÏÏÏÏÏÏ 5,233 .73 391 .06 77,973 10.95 47,427 6.66 Realized investment gains (4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 216,606 30.42 Ì Ì Wesco consolidated net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $294,579 $41.37 $47,427 $6.66 (1) All Ñgures are net of income taxes. (2) Per-share data are based on 7,119,807 shares outstanding. Wesco has had no dilutive capital stock equivalents. (3) Represents income from ownership of the Wesco headquarters oÇce building, primarily leased to outside tenants, and interest and dividend income from cash equivalents and marketable securities owned outside the insurance subsidiaries, less interest and other corporate expenses. (4) Includes $216,112,000 ($30.35 per share) from the tax-free exchange of Wesco's common shares in The Gillette Company for common shares in The Procter & Gamble Company in connection with the merger of Gillette with Procter & Gamble. Although no cash was received, generally accepted accounting principles require that the gain be recorded. Because Wesco's balance sheet reÖects investments carried at market value, with unrealized gains, after applicable income tax eÅect, included in shareholders' equity, the transaction did not aÅect Wesco's shareholders' equity.

It merely resulted in a reclassiÑcation from unrealized gains to retained earnings, another component of shareholders' equity. This supplementary breakdown of earnings diÅers somewhat from that used in audited Ñnancial statements which follow standard accounting convention. The foregoing supplementary breakdown is furnished because it is considered useful to shareholders.

As shown above, operating income includes signiÑcant net investment income, representing dividends and interest earned from marketable securities. However, operating income excludes investment gains of $216.6 million, net of income taxes, realized in 2005. No investment gains or losses were realized in 2004. The discussion below will concentrate on insurance underwriting, not on the results from investments. Wes-FIC engages in the reinsurance business, occasionally insuring against loss from rare but horrendous ""super-catastrophes.'' In much reinsurance sold by us, other Berkshire subsidiaries have sold several times as much reinsurance to the same customers on the same terms. In certain instances but not always, such subsidiaries have taken from us a 3%-of-premiums ceding commission on premium volume passed through them to Wes-FIC. Excepting this ceding commission, Wes-FIC has had virtually no insurance-acquisition or insurance administration costs. In some cases, other Berkshire subsidiaries act as reinsurers at higher levels than the level at which Wes-FIC is reinsuring; terms of the reinsurance are considered to be fair or advanta- geous to Wes-FIC.

For the past several years Wes-FIC's reinsurance activity has consisted of the participation in two arrangements described below, the second of which was termi- nated in the fourth quarter of 2004: (1) Participation, since 2001, in several risk pools managed by an insurance subsidiary of Berkshire Hathaway, our 80%-owning parent, recently covering hull, liability and workers' compensation exposures relating to the aviation industry as follows: for 2004, to the extent of 10% in the hull and liability pools; for 2005, 10% of the hull and liability pools and 5% of the workers' compensation pool. For 2006, participation in the hull and liability pools has increased to 121 /2 %. The Berkshire subsidiary provides a portion of the upper-level reinsurance protection to these aviation risk pools on terms that could result in the Berkshire subsidiary having a diÅerent interest from that of Wes-FIC under certain conditions, e.g., in settling a large loss. (2) A multi-year contract entered into in 2000 through another Berkshire insur- ance subsidiary, as intermediary without proÑt, covering certain multi-line property and casualty risks of a large, unaÇliated insurer. This contract was commuted in the fourth quarter of 2004, at which time Wes-FIC paid the ceding company $43.1 million, cash, representing all unearned premiums, reduced by unamortized costs and expenses. After the commutation, Wes- FIC's obligation to indemnify any further insurance losses under the contract ceased.

Under that contract for 2004, there was a net reduction in written premiums of $2.3 million; earned premiums were $6.4 million, and under- writing gain was $11.0 million ($7.2 million, after income taxes). Wes-FIC's underwriting results have Öuctuated from year to year, but have been satisfactory. When stated as a percentage, the sum of insurance losses, loss adjustment expenses and underwriting expenses, divided by premiums, gives the combined ratio. The combined ratios of Wes-FIC have been much better than average for insurers. Excluding the unusual beneÑcial eÅects caused by the commuted contract in 2004, Wes-FIC's combined ratios were 75.9% for 2005 and 77.8% for 2004.subjecting

Wes-FIC to signiÑcant periodic underwriting losses, we try to create some underwriting gain as results are averaged out over many years. Kansas Bankers was purchased by Wes-FIC in 1996 for approximately $80 million in cash. Its tangible net worth now exceeds its acquisition price, and it has been a very satisfactory acquisition, reÖecting the sound management of President Don Towle and his team. Kansas Bankers was chartered in 1909 to underwrite deposit insurance for Kansas banks. Its oÇces are in Topeka, Kansas. Over the years its service has continued to adapt to the changing needs of the banking industry. Today its customer base, consisting mostly of small and medium-sized community banks, is spread throughout 30 mainly midwestern states. In addition to bank deposit guaranty bonds which insure deposits in excess of FDIC coverage, KBS oÅers directors and oÇcers indemnity policies, bank employment practices policies, bank insurance agents professional errors and omissions indemnity policies and Internet banking catastrophe theft insurance. KBS increased the volume of business retained eÅective in 1998. It had previously ceded almost half of its premium volume to reinsurers. Now it reinsures only about 13%. The increased volume of business retained comes, of course, with increased irregularity in the income stream. KBS's combined ratios were 58.8% for 2005 and 74.9% for 2004. We continue to expect volatile but favorable long-term eÅects from increased insurance retained.

CORT Business Services Corporation (""CORT'') In February 2000, Wesco purchased CORT Business Services Corporation (""CORT'') for $386 million in cash. CORT is a very long established company that is the country's leader in rentals of furniture that lessees have no intention of buying. In the trade, people call CORT's activity ""rent-to-rent'' to distinguish it from ""lease-to-purchase'' businesses that are, in essence, installment sellers of furniture. However, just as Hertz, as a rent-to-rent auto lessor in short-term arrangements, must be skilled in selling used cars, CORT must be and is skilled in selling used furniture. CORT's revenues totaled $384 million for calendar 2005, versus $354 million for calendar 2004. Of these amounts, furniture rental revenues were $304 million and $275 million, furniture sales revenues were $72 million and $68 million, and apartment locator fees of its Relocation Central division, a business CORT started up in 2001, were $8 million and $11 million. CORT operated at an after-tax proÑt of $20.7 million for 2005, up satisfactorily from its after-tax proÑt of $5.0 million for 2004. These results reÖect the favorable eÅects of several selective acquisitions. When we purchased CORT early in 2000, its furniture rental business was rapidly growing, reÖecting the strong U.S. economy, phenomenal business expansion and explosive growth of IPOs and the high-tech sector. Beginning late in 2000, however, new business coming into CORT began to decline.

reÖecting generally bad results in the ""rent-to-rent'' segment of the furniture rental business. Obviously, when we purchased CORT we were poor predictors of near-term industry-wide prospects of the ""rent-to-rent'' sector of the furniture business. CORT started up a new subsidiary during 2001, Relocation Central, which provides a large national apartment locator service through its websites, (www.relocationcentral.com and www.myrelocationcentral.com), customer call cen- ters and walk-in locations. This start-up venture did not progress as rapidly as CORT expected and caused losses followed by some downsizing. Relocation Central was reorganized to become a division of CORT as of yearend 2004; it now relies more on Internet traÇc and less on separate, fully-staÅed facilities. The integration of Relocation Central into CORT was begun in 2003 as part of a program to reduce CORT's costs and thus enhance its operating results. CORT still likes the idea of having relocation services in its product mix. Almost twenty thousand apartment communities now refer their tenants to CORT. We are pleased with the progress CORT made in 2005. We are cautiously optimistic that, in future years, we will be able to look back to the recent past and consider it merely a cyclical aberration in CORT's growth. We note, however, that the number of furniture leases outstanding as of yearend 2005 has fallen by about 4% from those one year earlier.

When Wesco paid $386 million for CORT, about 60% of the purchase price was attributable to goodwill, an intangible balance sheet asset. Wesco's consolidated balance sheet now contains about $267 million in goodwill (including $27 million from Wesco's 1996 purchase of KBS). The Financial Accounting Standards Board adopted a rule which became eÅective in 2002 that no longer requires automatic amortization of acquired goodwill. (The requirement for such amortization has been replaced by a standard that requires an annual assessment to determine whether the value of goodwill has been impaired, in which event the intangible asset would be written down or written oÅ, as appropriate.) Earnings we have reported since 2002 more closely reÖect microeconomic reality as we appraise it. More details with respect to CORT are contained throughout this annual report, to which your careful attention is directed. CORT has long been headed by Paul Arnold, age 59, who is a star executive as is convincingly demonstrated by his long record as CEO of CORT. We are absolutely delighted to have Paul and CORT within Wesco. Precision Steel Warehouse, Inc. (""Precision Steel'') The businesses of Wesco's Precision Steel subsidiary, headquartered in the out- skirts of Chicago at Franklin Park, Illinois, operated at after-tax proÑts of $1.2 million in 2005 and $1.1 million in 2004. These Ñgures reÖect after-tax LIFO inventory accounting adjustments decreasing after-tax income by $.

2 million for 2005 and $1.8 million for 2004. Precision Steel's operating results for 2004 also reÖect expenses of $.2 million, after taxes, in connection with environmental cleanup of an industrial park where a Precision Steel subsidiary has operated alongside approximately 15 other manufactur- ers for many years. Had it not been for the LIFO accounting adjustment or the environmental matter, Precision Steel would have reported after-tax operating income of $1.3 million for 2005 and $3.0 million for 2004.

Precision Steel's business has been subject to economic cycles. Precision Steel has increasingly suÅered from intensiÑed competition resulting from a reduction in demand caused by customers' (or former customers') unsuccessful competition with manufac- turers outside the United States. At the beginning of 2004, a shortage of raw materials from domestic mills produced near chaos in the domestic steel service industry. Domestic mills were operating at capacity and imported steel was not readily available. These and other factors enabled steel mills to raise prices, place limits on order quantities and extend delivery times. Prices of those raw materials were sharply increased and the price of Ñnished steel also increased sharply. Customers of Precision Steel increased their purchases to counter allocations imposed by mills and other suppliers. Precision Steel successfully passed the price increases, plus normal mark- ups, on to customers while favoring long-term customer relationships. Precision Steel's 2004 revenues increased 31.2% from those of 2003; pounds of steel products sold increased 14.5%. Throughout 2005, raw material supplies remained very tight, but competitive pressures increased as demand softened, possibly reÖecting customers' absorption in their manufacturing processes of accelerated purchases made in 2004 in reaction to the chaotic market conditions. In 2005, pounds of steel products sold by Precision Steel decreased 8.

6% from those of 2004, but revenues increased 1.4%, reÖecting mainly 40%-higher average selling prices than those prevailing two years earlier. We are concerned that the favorable operating results experienced by Precision in the two most recent years may have been anomalous and temporary and that the steel warehouse business may revert to diÇcult times. Although Precision Steel's figures for each of the past two years may signal improvement when compared with its after-tax operating loss of $.9 million for 2003 and $.3 million of income for 2002, it should be noted that conditions currently facing the steel service industry continue to be in a state of flux. The severity of the domestic downturn in the steel service industry is demonstrated by the fact that Precision Steel's average annual steel service revenues for the years 2001 through 2003 were down 27% from those reported for 1998 through 2000. Considering the improved earnings for 2004 and 2005, Precision Steel has still not reported satisfactory operating results in recent years. Its recent earnings compare unfavorably with operating profits which averaged $2.3 million, after taxes, for the years 1998 through 2000. Terry Piper, who became Precision Steel's President and Chief Executive Officer in 1999, has done an outstanding job in leading Precision Steel through very difficult years.

Tag Ends from Savings and Loan Days All that now remains outside Wes-FIC but within Wesco as a consequence of Wesco's former involvement with Mutual Savings, Wesco's long-held savings and loan subsidiary, is a small real estate subsidiary, MS Property Company, that holds tag ends of appreciated real estate assets consisting mainly of the nine-story commercial oÇce building in downtown Pasadena, where Wesco is headquartered. Adjacent to that building is a parcel of land on which we have begun to build a multi-story luxury condominium building. We are also seeking city approval of our plans to build another multi-story luxury condominium building on a vacant parcel of land in the next block. We have recently begun to take reservations. Simply phone Bob Sahm (626-585- 6700) for more information. MS Property Company's results of operations, immaterial versus Wesco's present size, are included in the breakdown of earnings on page 1 within ""other operating earnings.''

Other Operating Earnings Other operating earnings, net of interest paid and general corporate expenses, amounted to $5.2 million in 2005, up from the $.4 million earned in 2004. Ignoring favorable income tax adjustments of $4.9 million, the sources of the $.3 million of earnings in 2005 were (1) rents ($3.5 million gross in 2005) from Wesco's Pasadena oÇce property (leased almost entirely to outsiders, including Citibank as the ground Öoor tenant), and (2) interest and dividends from cash equivalents and marketable securities held outside the insurance subsidiaries, less (3) general corporate expenses plus minor expenses involving tag-end real estate. Realized Investment Gains Wesco's 2005 earnings contained investment gains of $216.6 million, after income taxes. There were no realized investment gains in 2004. Of the 2005 gains, only $.5 million was realized through the sale of investments; the balance, $216.1 million, resulted from the tax-free exchange of common shares of The Gillette Company (""Gillette'') owned by Wesco, for common shares of The Procter & Gamble Company (""P&G'') in the fourth quarter of 2005 in connection with the merger of Gillette with P&G.

Accounting standards promulgated by the Financial Accounting Standards Board require that the fair (market) value of shares received in such an exchange be recorded as the new cost basis as of the date of the exchange, with the difference between the new basis and the historical cost realized in the audited financial statements as an investment gain. For tax return purposes the exchange is recorded at the original cost of the securities exchanged; no gain is reported, and no taxes are yet due. Although the realized gain had a material impact on Wesco's reported earnings, it had no impact on Wesco's shareholders' equity. Wesco carries its investments at fair value, with unrealized appreciation, after income tax eÅect, included as a separate component of shareholders' equity, and related taxes included in income taxes payable, on its consolidated balance sheet. Thus, the entire after-tax gain on the non- cash merger had been reÖected in the unrealized gain component of Wesco's shareholders' equity as of September 30, 2005. That amount was merely switched from unrealized gain to retained earnings, another component of shareholders' equity. This accounting entry had no economic eÅect on Wesco, and you should ignore it when you are evaluating Wesco's 2005 earnings. Consolidated Balance Sheet and Related Discussion As indicated in the accompanying Ñnancial statements, Wesco's net worth, as accountants compute it under their conventions, increased to $2.

23 billion ($313 per Wesco share) at yearend 2005 from $2.12 billion ($297 per Wesco share) at yearend 2004. The main cause of the increase was net operating income after deduction of dividends paid to shareholders. The foregoing $313-per-share book value approximates liquidation value assuming that all Wesco's non-security assets would liquidate, after taxes, at book value. Of course, so long as Wesco does not liquidate, and does not sell any appreciated securities, including the P&G shares Wesco received in connection with P&G's acquisition of Gillette, discussed above in the section, ""Realized Investment Gains,'' Wesco has, in eÅect, an interest-free ""loan'' from the government equal to its deferred income taxes, subtracted in determining its net worth.from

the government is at this moment working for Wesco shareholders and amounted to about $36 per Wesco share at yearend 2005. However, some day, parts of the interest-free ""loan'' may be removed as securities are sold. Therefore, Wesco's shareholders have no perpetual advantage creating value for them of $36 per Wesco share. Instead, the present value of Wesco's shareholders' advantage must logically be much lower than $36 per Wesco share. Business and human quality in place at Wesco continues to be not nearly as good, all factors considered, as that in place at Berkshire Hathaway. Wesco is not an equally- good-but-smaller version of Berkshire Hathaway, better because its small size makes growth easier. Instead, each dollar of book value at Wesco continues plainly to provide much less intrinsic value than a similar dollar of book value at Berkshire Hathaway. Moreover, the quality disparity in book value's intrinsic merits has, in recent years, continued to widen in favor of Berkshire Hathaway. All that said, we make no attempt to appraise relative attractiveness for investment of Wesco versus Berkshire Hathaway stock at present stock-market quotations. Wesco's consolidated balance sheet reÖects total assets of $2.7 billion as of yearend 2005. Of that amount, more than $1 billion has been invested in cash equivalents and Ñxed-maturity investments since early in 2003.

Unless those funds can be attractively reinvested in acquisitions, equity securities or other long-term instru- ments of the type that have been responsible for the long-term growth of Wesco's shareholders' equity, future returns on shareholders' equity will probably be less than those of the past. Due to the current size of Wesco and its parent, Berkshire Hathaway, Wesco's opportunities for growing shareholders' equity are unlikely to be as attractive as in the past. The Board of Directors recently increased Wesco's regular dividend from 351 /2 cents per share to 361 /2 cents per share, payable March 2, 2006, to shareholders of record as of the close of business on February 1, 2006. This annual report contains Form 10-K, a report Ñled with the Securities and Exchange Commission, and includes detailed information about Wesco and its subsidi- aries as well as audited Ñnancial statements bearing extensive footnotes. As usual, your careful attention is sought with respect to these items. Shareholders can access much Wesco information, including printed annual reports, earnings releases, SEC Ñlings, and the websites of Wesco's subsidiaries and parent, Berkshire Hathaway, from Wesco's website: www.wescoÑnancial.com. Charles T.2006

WESCO FINANCIAL CORPORATION LETTER TO SHAREHOLDERS To Our Shareholders: Consolidated net ""operating'' income (i.e., before realized investment gains shown in the table below) for the calendar year 2004 increased to $47,427,000 ($6.66 per share) from $39,958,000 ($5.61 per share) in the previous year. Consolidated net income decreased to $47,427,000 ($6.66 per share) from $74,711,000 ($10.49 per share) in the previous year. Wesco has four major subsidiaries: (1) Wesco-Financial Insurance Company (""Wes-FIC''), headquartered in Omaha and engaged principally in the reinsurance business, (2) The Kansas Bankers Surety Company (""Kansas Bankers''), owned by Wes-FIC and specializing in insurance products tailored to midwestern banks, (3) CORT Business Services Corporation (""CORT''), headquartered in Fairfax, Virginia and engaged principally in the furniture rental business, and (4) Precision Steel Warehouse, Inc. (""Precision Steel''), headquartered in Chicago and engaged in the steel warehousing and specialty metal products businesses. Consolidated net income for the two years just ended breaks down as follows (in 000s except for per- share amounts)(1) : Year Ended December 31, 2004 December 31, 2003 Per Per Wesco Wesco Amount Share(2) Amount Share(2) Operating earnings: Wesco-Financial and Kansas Bankers insurance businesses Ì Underwriting ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $14,618 $2.05 $15,711 $ 2.21 Investment income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26,302 3.69 30,925 4.

34 CORT furniture rental business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,022 .71 (6,257) (.88) Precision Steel businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,094 .15 (860) (.12) All other ""normal'' net operating earnings(3) ÏÏÏÏÏÏÏÏÏ 391 .06 439 .06 47,427 6.66 39,958 5.61 Realized investment gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 34,753 4.88 Wesco consolidated net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $47,427 $6.66 $74,711 $10.49 (1) All Ñgures are net of income taxes. (2) Per-share data are based on 7,119,807 shares outstanding. Wesco has had no dilutive capital stock equivalents. (3) Represents income from ownership of the Wesco headquarters oÇce building, primarily leased to outside tenants, and interest and dividend income from cash equivalents and marketable securities owned outside the insurance subsidiaries, less interest and other corporate expenses. This supplementary breakdown of earnings diÅers somewhat from that used in audited Ñnancial statements which follow standard accounting convention. The foregoing supplementary breakdown is furnished because it is considered useful to shareholders. The total consolidated net income shown above is, of course, identical to the total in our audited Ñnancial statements.

have taken from us a 3%-of-premiums ceding commission on premium volume passed through them to Wes-FIC. Excepting this ceding commission, Wes-FIC has had virtually no insurance-acquisition or insurance administration costs. In some cases, other Berkshire subsidiaries act as reinsurers at higher levels than the level at which Wes-FIC is reinsuring; terms of the reinsurance are considered by Wes-FIC to be fair or advantageous to Wes-FIC. For the past several years Wes-FIC's reinsurance activity has consisted of the participation in two arrangements: (1) Participation in four risk pools managed by an insurance subsidiary of Berkshire Hathaway, our 80%-owning parent, covering hull, liability, work- ers' compensation and satellite exposures relating to the aviation industry as follows: with respect to 2001, to the extent of 3% for each pool, with satellite exposures eÅective June 1; for 2002, 13% of the hull and liability pools, increasing to 15.5% in August, and 3% of the workers' compensa- tion pool (satellite exposures were not renewed in June); and, for 2003 and 2004, 10% of the hull and liability pools only. The Berkshire subsidiary provides a portion of the upper-level reinsurance protection to these aviation risk pools, and therefore to Wes-FIC, on terms that could result in the Berkshire subsidiary having a diÅerent interest from that of Wes-FIC under certain conditions, e.g., in settling a large loss.

(2) A multi-year contract entered into in 2000 through another Berkshire insurance subsidiary, as intermediary without proÑt, covering certain multi-line property and casualty risks of a large, unaÇliated insurer. This contract was commuted (terminated) in the fourth quarter of 2004, at which time Wes-FIC paid the ceding company $43.1 million, cash, repre- senting all unearned premiums, reduced by unamortized costs and ex- penses. After the commutation, Wes-FIC's obligation to indemnify any further insurance losses under the contract ceased. Under that contract, there was a net reduction in written premiums of $2.3 million for 2004, compared with written premiums of $30.4 million for 2003; earned premiums were $6.4 million for 2004 and $42.0 million for 2003. Underwriting results of Wes-FIC in both 2004 and 2003 were weirdly favorable, causing the underwriting gains of $14.6 million for 2004 and $15.7 million for 2003. Such weirdly favorable results are not to be expected over the long term. It should be recalled that Wes-FIC reported an underwriting loss of $8.1 million as recently as 2001. However, we do try to create some underwriting gain as results are averaged out over many years. Kansas Bankers was purchased by Wes-FIC in 1996 for approximately $80 mil- lion in cash. Its tangible net worth now exceeds its acquisition price, and it has been a very satisfactory acquisition, reÖecting the sound management of President Don Towle and his team.

Kansas Bankers was chartered in 1909 to underwrite deposit insurance for Kansas banks. Its oÇces are in Topeka, Kansas. Over the years its service has continued to adapt to the changing needs of the banking industry. Today its customer base, consisting mostly of small and medium-sized community banks, is spread throughout 30 mainly midwestern states.and

oÇcers indemnity policies, bank employment practices policies, bank insurance agents professional errors and omissions indemnity policies and Internet banking catastrophe theft insurance. KBS increased the volume of business retained eÅective in 1998. It had previously ceded almost half of its premium volume to reinsurers. Now it reinsures only about 14%. The increased volume of business retained comes, of course, with increased irregularity in the income stream. The combined ratio of an insurance company represents the percentage that its underwriting losses and expenses bear to its premium revenues. KBS's combined ratio has been much better than average for insurers, at 74.9% for 2004 and 65.0% for 2003. We continue to expect volatile but favorable long-term eÅects from increased insurance retained. CORT Business Services Corporation (""CORT'') In February 2000, Wesco purchased CORT Business Services Corporation (""CORT'') for $386 million in cash. CORT is a very long established company that is the country's leader in rentals of furniture that lessees have no intention of buying. In the trade, people call CORT's activity ""rent-to-rent'' to distinguish it from ""lease-to-purchase'' businesses that are, in essence, installment sellers of furniture. However, just as Hertz, as a rent-to-rent auto lessor in short-term arrangements, must be skilled in selling used cars, CORT must be and is skilled in selling used furniture.

CORT's revenues totaled $354 million for calendar 2004, versus $360 million for calendar 2003. Of these amounts, furniture rental revenues were $275 million and $276 million, furniture sales revenues were $68 million each year, and apartment locator fees of Relocation Central Corporation, a business CORT started up in 2001, were $11 million and $16 million. CORT operated at an after-tax proÑt of $5.0 mil- lion for 2004; its operations resulted in an after-tax loss of $6.3 million for 2003; it contributed $2.4 million and $13.1 million to Wesco's consolidated operating income for 2002 and 2001. Recent results have been signiÑcantly worse than CORT's $29 million of after-tax operating proÑts for the ten months that we owned it in 2000. The Ñgures are before (1) goodwill amortization of $6.0 million for 2001 and $5.1 million for 2000 (see discussion below), and (2) realized securities losses of $.7 million in 2000, but include Relocation Central's after-tax losses of $7.4 million for 2004, $9.0 million for 2003, $8.3 million for 2002 and $7.0 million for 2001. Excluding the operating losses of Relocation Central, CORT, at the parent company level, contributed $12.4 million to Wesco's consolidated after-tax operating earnings for 2004, versus $2.7 million for 2003 and $10.7 million for 2002. When we purchased CORT early in 2000, its furniture rental business was rapidly growing, reÖecting the strong U.S.

furniture rental business. Obviously, when we purchased CORT we were poor predictors of near-term industry-wide prospects of the ""rent-to- rent'' sector of the furniture business. It now appears that CORT's business has begun to rebound. Furniture rental revenues for the fourth quarter of 2004 exceeded those for the comparable quarter of 2003 by 13%, and, during the year the number of furniture leases outstanding grew by 2%. CORT started up a new subsidiary during 2001, Relocation Central Corporation, which provides the nation's largest apartment locator service through its websites, (www.relocationcentral.com and www.myrelocationcentral.com), customer call centers and walk-in locations. This start-up venture did not progress as rapidly as CORT expected and caused losses followed by some downsizing. More than 350 apartment communities now refer their tenants to CORT. Relocation Central was reorganized to become a division of CORT as of yearend 2004; it now relies more on Internet traÇc and less on separate, fully-staÅed facilities than previously. The integration of Relocation Central into CORT was begun in 2003 as part of a program to reduce CORT's costs and thus enhance its operating results. CORT still likes the idea of having relocation services in its product mix. We expect to report in due course that CORT's operations have become more satisfactory.

Even through the crash, CORT has operated at a positive cash flow, and the general distress in its field has permitted various small expansions. During the past four years it invested $74 million in business expansion through acquisitions of several small businesses and reduced its line-of-credit and other debt by $33 million. CORT remains the national leader in its market segment and we believe that these acquisi- tions will prove to be satisfactory expansions of a fundamentally sound business. When Wesco paid $386 million for CORT, about 60% of the purchase price was attributable to goodwill, an intangible balance sheet asset. Wesco's consolidated balance sheet now contains about $267 million in goodwill (including $27 million from Wesco's 1996 purchase of KBS). The Financial Account- ing Standards Board adopted a rule which became effective in 2002 that no longer requires automatic amortization of acquired goodwill. (The requirement for such amortization has been replaced by a standard that requires an annual assessment to determine whether the value of goodwill has been impaired, in which event the intangible would be written down or written off, as appropriate.) Earnings we have reported since 2002 more closely reflect microeconomic reality as we appraise it. CORT has long been headed by Paul Arnold, age 58, who is a star executive as is convincingly demonstrated by his long record as CEO of CORT. We are absolutely delighted to have Paul and CORT within Wesco.

We continue to expect a considera- ble expansion of CORT's business and earnings at some future time. Precision Steel Warehouse, Inc. (""Precision Steel'') The businesses of Wesco's Precision Steel subsidiary, headquartered in the outskirts of Chicago at Franklin Park, Illinois, operated at an after-tax proÑt of $1.1 million in 2004, versus an after-tax loss of $.9 million in 2003. The 2004 Ñgure reÖects an after-tax LIFO inventory accounting adjustment decreasing after-tax income by $1.8 million. In 2003 the LIFO adjustment was insigniÑcant. Precision Steel's operating results for 2004 and 2003 also reÖect expenses of $.and

$.7 million, after taxes, in connection with environmental cleanup of an industrial park where a Precision Steel subsidiary has operated alongside approximately 15 other manufacturers for many years. Had it not been for the LIFO accounting adjustment or the environmental matter, Precision Steel would have reported operating income of $3.0 million, after taxes, for 2004, versus an operating loss of $.2 million, after taxes, for 2003. Prior to 2004, Precision Steel suÅered from a signiÑcant reduction in demand for steel combined with intensiÑed competition for quite some time. Some of the sales reduction was caused by customers' (or former customers') unsuccessful competi- tion with manufacturers outside the United States. Although the 2004 Ñgures appear to signal improvement, the severity of the domestic downturn is demonstrated by the fact that Precision Steel's average annual steel service revenues for the years 2001 through 2003 were down 27% from those reported for 1998 through 2000. Even after improved 2004 results, Precision Steel has not reported satisfactory operating results in recent years. Its approximately-break-even after-tax operations for the most recent four years compare unfavorably with operating proÑts which averaged $2.3 million, after taxes, for the years 1998 through 2000. Precision Steel endured a diÇcult and chaotic year in 2004.

At the beginning of 2004, a shortage of raw materials from domestic mills produced near chaos in the domestic steel service industry. Prices of those raw materials were sharply increased and the price of Ñnished steel also increased sharply. Fortunately, the impact to date on Precision Steel has been favorable. Its 2004 revenues increased 31.2%, from those of 2003; pounds of steel products sold increased 14.5%. At present, domestic steel mills have been operating at capacity and imported steel has not been readily available. These and other factors have enabled steel mills to raise prices, place limits on order quantities and extend delivery times. Precision Steel has reacted to these pressures by passing the price increases, plus normal mark-ups, on to customers, and favoring long-term customer relationships. However, we are concerned that the favorable 2004 operating results may have been anomalous and temporary and that the steel warehouse business may revert to diÇcult times. Terry Piper, who became Precision Steel's President and Chief Executive OÇcer late in 1999, has done an outstanding job in leading Precision Steel through very diÇcult years.

Tag Ends from Savings and Loan Days All that now remains outside Wes-FIC but within Wesco as a consequence of Wesco's former involvement with Mutual Savings, Wesco's long-held savings and loan subsidiary, is a small real estate subsidiary, MS Property Company, that holds tag ends of appreciated real estate assets with a net book value of about $8.6 million, consisting mainly of the nine-story commercial oÇce building in downtown Pasadena, where Wesco is headquartered. MS Property Company's results of opera- tions, immaterial versus Wesco's present size, are included in the breakdown of earnings on page 1 within ""other operating earnings.''

Other Operating Earnings Other operating earnings, net of interest paid and general corporate expenses, amounted to $.4 million in 2004, unchanged from the $.4 million earned in 2003. Sources were (1) rents ($3.4 million gross in 2004) from Wesco's Pasadena oÇce property (leased almost entirely to outsiders, including Citibank as the ground Öoor tenant), and (2) interest and dividends from cash equivalents and marketable securities held outside the insurance subsidiaries, less (3) general corporate ex- penses plus minor expenses involving tag-end real estate. Consolidated Balance Sheet and Related Discussion Wesco carries its investments at market value, with unrealized appreciation, after income tax eÅect, included as a separate component of shareholders' equity, and related taxes included in income taxes payable, in its consolidated balance sheet. As indicated in the accompanying Ñnancial statements, Wesco's net worth, as accountants compute it under their conventions, increased to $2.12 billion ($297 per Wesco share) at yearend 2004 from $2.08 billion ($292 per Wesco share) at yearend 2003. The main cause of increase was net income after deduction of dividends paid to shareholders. The foregoing $297-per-share book value approximates liquidation value assum- ing that all Wesco's non-security assets would liquidate, after taxes, at book value.

Of course, so long as Wesco does not liquidate, and does not sell any appreciated securities, it has, in effect, an interest-free ""loan'' from the government equal to its deferred income taxes on the unrealized gains, subtracted in determining its net worth. This interest-free ""loan'' from the government is at this moment working for Wesco shareholders and amounted to about $32 per Wesco share at yearend 2004. However, some day, parts of the interest-free ""loan'' may be removed as securities are sold. Therefore, Wesco's shareholders have no perpetual advantage creating value for them of $32 per Wesco share. Instead, the present value of Wesco's shareholders' advantage must logically be much lower than $32 per Wesco share. Business and human quality in place at Wesco continues to be not nearly as good, all factors considered, as that in place at Berkshire Hathaway. Wesco is not an equally-good-but-smaller version of Berkshire Hathaway, better because its small size makes growth easier. Instead, each dollar of book value at Wesco continues plainly to provide much less intrinsic value than a similar dollar of book value at Berkshire Hathaway. Moreover, the quality disparity in book value's intrinsic merits has, in recent years, continued to widen in favor of Berkshire Hathaway. All that said, we make no attempt to appraise relative attractiveness for invest- ment of Wesco versus Berkshire Hathaway stock at present stock-market quotations.

To progress from this point at a satisfactory rate, Wesco plainly needs more favorable investment opportunities, recognizable as such by its management, prefer- ably in whole companies, but, alternatively, in marketable securities to be purchased by Wesco's insurance subsidiaries. Our views regarding the general prospects for investment in common stocks are unchanged two years after Warren BuÅett wrote the following, in his 2002 annual report to shareholders of our parent company: ""We continue to do little in equities. ®We© are increasingly comfortable with our holdings in ®our© major investees because most of them have in- creased their earnings while their valuations have decreased.not

inclined to add to them. Though these enterprises have good prospects, we don't yet believe their shares are undervalued. ""In our view, the same conclusion Ñts stocks generally. Despite three years of falling prices, which have signiÑcantly improved the attractiveness of com- mon stocks, we still Ñnd very few that even mildly interest us. That dismal fact is testimony to the insanity of valuations reached during The Great Bubble. Unfortunately, the hangover may prove to be proportional to the binge. ""The aversion to equities that ®we© exhibit today is far from congenital. We love owning common stocks Ì if they can be purchased at attractive prices. In ®my© 61 years of investing, 50 or so years have offered that kind of opportunity. There will be years like that again. Unless, however, we see a very high probability of at least 10% pre-tax returns (which translates to 61 /2-7% after corporate tax), we will sit on the sidelines. With short-term money returning less than 1% after-tax, sitting it out is no fun. But occasionally successful investing requires inactivity.'' In fact, the one thing that should interest Wesco shareholders most with respect to 2004 is that, as in 2003, 2002 and 2001, Wesco found no new common stocks for our insurance companies to buy.

Shareholders should note that the recently announced sale of The Gillette Company to The Procter and Gamble Company, subject to shareholder approval later in 2005, is expected to result in Wesco's recognition of an investment gain of about $190 million, after income taxes. No income taxes will be paid in cash, and all of Wesco's Gillette shares will be converted into Procter and Gamble shares. Although we will be pleased to become owners of shares of Procter and Gamble, we do not regard this ""mere accounting'' gain as signiÑcant to Wesco shareholders. The Board of Directors recently increased Wesco's regular dividend from 341 /2 cents per share to 351 /2 cents per share, payable March 2, 2005, to shareholders of record as of the close of business on February 2, 2005. This annual report contains Form 10-K, a report Ñled with the Securities and Exchange Commission, and includes detailed information about Wesco and its subsidiaries as well as audited Ñnancial statements bearing extensive footnotes. As usual, your careful attention is sought with respect to these items. Shareholders can access much Wesco information, including printed annual reports, earnings releases, SEC Ñlings, and the websites of Wesco's subsidiaries and parent, Berkshire Hathaway, from Wesco's website: www.wescoÑnancial.com. We regret the pending retirement of Wesco's President, Bob Bird, who is not standing for reelection.

WESCO FINANCIAL CORPORATION LETTER TO SHAREHOLDERS To Our Shareholders: Consolidated net ""operating'' income (i.e., before realized securities gains shown in the table below) for the calendar year 2003 decreased to $39,958,000 ($5.61 per share) from $52,718,000 ($7.40 per share) in the previous year. Consolidated net income increased to $74,711,000 ($10.49 per share) from $52,718,000 ($7.40 per share) in the previous year. Wesco has four major subsidiaries: (1) Wesco-Financial Insurance Company (""Wes-FIC''), headquartered in Omaha and engaged principally in the reinsurance business, (2) The Kansas Bankers Surety Company (""Kansas Bankers''), owned by Wes-FIC and specializing in insurance products tailored to midwestern banks, (3) CORT Business Services Corporation (""CORT''), headquartered in Fairfax, Virginia and engaged principally in the furniture rental business, and (4) Precision Steel Warehouse, Inc. (""Precision Steel''), headquartered in Chicago and engaged in the steel warehousing and specialty metal products businesses. Consolidated net income for the two years just ended breaks down as follows (in 000s except for per- share amounts)(1) : Year Ended December 31, 2003 December 31, 2002 Per Per Wesco Wesco Amount Share(2) Amount Share(2) Operating earnings: Wesco-Financial and Kansas Bankers insurance businesses Ì Underwriting ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $15,711 $ 2.21 $ 3,829 $ .54 Investment income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,925 4.34 45,642 6.

At the 2003 Berkshire annual meeting, Buffett and Munger issued what Buffett later called a wake-up call on derivatives. The ballooning and thoughtless use of risky derivatives contracts had, in their joint view, become a systemic danger. Munger's phrasing was characteristically blunt: he told the audience that the derivatives market had become a gathering place for weapons of financial mass destruction. The phrase was deliberately inflammatory, and Munger meant it to be. The argument was structural. Derivatives, in Munger's framing, did not just transfer risk - they magnified it, because the counterparty web was opaque and the mark-to-market process was unreliable. A financial system in which large institutions owed each other enormous notional sums, recorded at model prices rather than transactable prices, was a system in which the failure of one node could cascade unpredictably through the rest. The 1998 LTCM collapse had already shown the pattern; Munger and Buffett were telling the room that the pattern would recur at larger scale. The prescription was avoidance. Berkshire itself used derivatives sparingly and only when it could price them honestly - the equity put writtings of later years were a deliberate exception, undertaken only when the premiums and the structural terms were clearly attractive. For most institutions, Munger's view was that the right answer was to stay out of the contracts entirely, to refuse the short-term earnings boost they offered, and to accept that the apparent opportunity was a fee-generation mirage that would, in some future crisis, become a loss-generation machine.

At the 2003 Wesco annual meeting - held in the same week as the now-famous Berkshire derivatives warning - Munger reflected on what made Berkshire's structure durable. He told the audience that the Berkshire conglomerate model worked because it had almost no corporate bureaucracy. There was practically nobody at headquarters. The people running the operating businesses were sensible people who were left alone to run them. The absence of bureaucracy was, in Munger's view, a huge advantage - not a management fad but a structural property of the conglomerate that compounded year after year. He paired the structural observation with a warning. Bureaucracy, Munger said, breeds failure and stupidity. How could it be otherwise? The point was that bureaucratic organizations systematically destroyed the judgment of the people inside them, because the bureaucratic structure rewarded process over outcome, compliance over insight, and risk-avoidance over capital allocation. A company that allowed a bureaucracy to grow was, in Munger's framing, slowly converting its smartest operators into the kind of people who could not make a real decision even when one was needed. The takeaway for the room was that capital allocation discipline and organizational discipline were the same problem. Berkshire's edge was not just that Buffett and Munger had good judgment; it was that the structure they had built protected the judgment of the operators below them from being bureaucratized away. The same lesson, Munger implied, applied to the smaller Wesco conglomerate - KBS, Wes-FIC, Precision Steel - and to any organization that wanted to compound intrinsic value over decades. Keep the headquarters empty, keep the operators in charge, and refuse to grow the corporate center in the name of oversight.

Munger extended the derivatives critique into a broader indictment of modern financial engineering. The same incentives that produced the gallbladder surgeon - the man who had convinced himself that removing the organ was the right answer because the procedure paid him - produced the derivatives desk that built the structured product because the structured product paid the desk. The customer's interest and the seller's interest were aligned only at the surface; at the level of incentives, they were routinely in conflict. Munger told the audience to be deeply suspicious of any investment product created by professionals and aggressively merchandised. He tied the point to credit cycles. The derivatives web had grown during the easy-money years because the contracts looked profitable when credit was loose and counterparty risk was underpriced. When credit tightened, those same contracts would re-price violently and the unwinding would itself become a credit event. The derivatives problem and the credit-cycle problem were therefore not separate pathologies; they were two faces of the same pathology. Munger's prescription was to stay liquid, stay simple, and stay out of contracts whose payoffs depended on a counterparty's solvency in a crisis. He closed with a historical note. The Defense Department had, after enough experience with cost-plus-percentage-of-cost contracts, made it a felony for the federal government to write one. Munger took that as proof of concept: when a contract structure was so incentive-misaligned that even the government eventually criminalized it, the private sector's continued use of the same logic - in cost-plus mutual fund fees, in derivatives desks, in private equity carry - was not innovation but recidivism. The investor who recognized the pattern had a structural edge.

41 CORT furniture rental business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6,257) (.88) 2,442 .34 Precision Steel businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (860) (.12) 250 .03 All other ""normal'' net operating earnings(3) ÏÏÏÏÏÏ 439 .06 555 .08 39,958 5.61 52,718 7.40 Realized investment gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,753 4.88 Ì Ì Wesco consolidated net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $74,711 $10.49 $52,718 $7.40 (1) All Ñgures are net of income taxes. (2) Per-share data are based on 7,119,807 shares outstanding. Wesco has had no dilutive capital stock equivalents. (3) Represents income from ownership of the Wesco headquarters oÇce building, primarily leased to outside tenants, and interest and dividend income from cash equivalents and marketable securities owned outside the insurance subsidiaries, less interest and other corporate expenses. This supplementary breakdown of earnings diÅers somewhat from that used in audited Ñnancial statements which follow standard accounting convention. The foregoing supplementary breakdown is furnished because it is considered useful to shareholders. The total consolidated net income shown above is, of course, identical to the total in our audited Ñnancial statements.

The 2003 Wesco meeting is also notable as the public precursor to Munger's Psychology of Human Misjudgment speech. Tilson's notes flagged that Munger was, in the meeting, already working through the material that he would shortly deliver at Harvard as the 24 standard causes of human misjudgment. The Wesco audience heard the same psychological framework that the Harvard audience would hear, applied to insurance underwriting, banking, and corporate governance rather than to the general investor. Munger's argument, in both venues, was that the standard survey course in psychology had failed to give investors the tools they needed because the course had badly underweighted incentive-caused bias. He told the Wesco audience that if they read the standard thousand-page psychology text they would find, somewhere in the back, one sentence on incentive bias - and yet incentive bias was, in his experience, the single most powerful driver of bad decisions in business and investing. The prescription was to learn the real list of cognitive biases - the ones Munger had compiled from his own experience - and to apply them as rigorously to one's own decisions as to other people's. He closed with the lollapalooza warning. The really catastrophic failures of judgment, Munger said, came not from any single bias operating alone but from several biases reinforcing each other in the same direction. Incentive bias plus consistency bias plus social proof plus authority bias, all pointing the same way, could produce a decision that no individual bias could have produced on its own. The lollapalooza effect was the reason that crowds of intelligent people could collectively do very stupid things. The defense was the latticework of mental models - to recognize the lollapalooza pattern in real time and refuse to participate in it, even when the social pressure to participate was intense.

Wes-FIC engages in the reinsurance business, occasionally insuring against loss from rare but horrendous ""super-catastrophes.'' In much reinsurance sold by us, other Berkshire subsidiaries sold several times as much reinsurance to the same customers on the same terms. In certain instances but not always, such subsidiaries have taken from us a 3%-of-premiums ceding commission on premium volume passed through them to Wes-FIC. Excepting this ceding commission, Wes-FIC has had virtually no insurance-acquisition or insurance administration costs. In some cases, other Berkshire subsidiaries act as reinsurers at higher levels than the level at which Wes-FIC is reinsuring; terms of the reinsurance are considered by Wes-FIC to be fair or advantageous to Wes-FIC. Underwriting results of Wes-FIC in 2003 were weirdly favorable, causing the underwriting gain of $15.7 million. Such weirdly favorable results are not to be expected over the long term. It should be recalled that Wes-FIC reported an underwriting loss of $8.1 million as recently as 2001. However, we do try to create some underwriting gain as results are averaged out over many years. Kansas Bankers was purchased by Wes-FIC in 1996 for approximately $80 mil- lion in cash. Its tangible net worth now exceeds its acquisition price, and it has been a very satisfactory acquisition, reÖecting the sound management of President Don Towle and his team. Kansas Bankers was chartered in 1909 to underwrite deposit insurance for Kansas banks.

Its oÇces are in Topeka, Kansas. Over the years its service has continued to adapt to the changing needs of the banking industry. Today its customer base, consisting mostly of small and medium-sized community banks, is spread throughout 28 mainly midwestern states. In addition to bank deposit guaranty bonds which insure deposits in excess of FDIC coverage, KBS oÅers directors and oÇcers indemnity policies, bank employment practices policies, bank insurance agents professional errors and omissions indemnity policies and Internet banking catastrophe theft insurance. KBS increased the volume of business retained eÅective in 1998. It had previously ceded almost half of its premium volume to reinsurers. Now it reinsures only about 11%. The increased volume of business retained comes, of course, with increased irregularity in the income stream. The combined ratio of an insurance company represents the percentage that its underwriting losses and expenses bear to its premium revenues. KBS's combined ratio has been much better than average for insurers, at 65.0% for 2003 and 71.3% for 2002. We continue to expect volatile but favorable long-term eÅects from increased insurance retained. CORT Business Services Corporation (""CORT'') In February 2000, Wesco purchased CORT Business Services Corporation (""CORT'') for $386 million in cash.

CORT is a very long established company that is the country's leader in rentals of furniture that lessees have no intention of buying. In the trade, people call CORT's activity ""rent-to-rent'' to distinguish it from ""lease-to-purchase'' businesses that are, in essence, installment sellers of furniture. However, just as Hertz, as a rent-to-rent auto lessor in short-term arrangements, must be skilled in selling used cars, CORT must be and is skilled in selling used furniture. CORT's revenues totaled $360 million for calendar 2003, versus $389 million for calendar 2002. Of these amounts, furniture rental revenues were $276 million and $309 million, furniture sales revenues were $68 million and $73 million, and apartment locator fees of Relocation Central Corporation, a subsidiary CORT started up in 2001, were $16 million and $7 million. CORT operated at an after-tax loss of $6.3 million for 2003; it contributed $2.4 million and $13.1 million to Wesco's consolidated operating income for 2002 and 2001. These Ñgures are signiÑcantly worse than CORT's $29 million of after-tax operating proÑts for the ten months that we owned it in 2000. Recent years were terrible in the ""rent-to-rent'' segment of the furniture rental business. The Ñgures are before (1) goodwill amortization of zero for 2003 and 2002 (see discussion below), $6.0 million for 2001 and $5.1 million for 2000, and (2) realized securities losses of $.

7 million in 2000, but include Relocation Central's after-tax losses, less minority interest, of $9.0 million for 2003, $8.3 million for 2002 and $7.0 million for 2001. Excluding the operating losses of Relocation Central, CORT, at the parent company level, contributed $2.7 million to Wesco's consolidated after-tax operating earnings for 2003, versus $10.7 million for 2002 and $20.1 million for 2001. When we purchased CORT early in 2000, its furniture rental business was rapidly growing, reÖecting the strong U.S. economy, phenomenal business expansion and explosive growth of IPOs and the high-tech sector. Beginning late in 2000, however, new business coming into CORT began to decline. With the burst of the dot-com bubble, the events of September 11, and continued weakness of job growth in the economy, CORT's operations have been hammered. Obviously, when we purchased CORT we were poor predictors of near-term industry-wide prospects of the ""rent-to- rent'' sector of the furniture business. Moreover, CORT started up a new subsidiary during 2001, Relocation Central Corporation, which has developed a virtual call center and carries out an Internet- based furniture and apartment-leads operation (www.relocationcentral.com), and it markets CORT's furniture rental services to real estate investment trusts, owners of many major apartment communities.

As a result of the acquisition of its largest competitor in December 2002, followed by some oÇce closures, Relocation Central operates in 15 metropolitan cities in fourteen states. CORT is hopeful that, through Relocation Central, it will ultimately become the principal source of rental furniture to the apartment industry, but this outcome is far from certain. Its operations should be considered as still in a ""start-up'' phase.its

facilities into CORT's, withdrawing from markets having unsatisfactory potential, and aggressively trimming its expenses, in an attempt to improve its operations, which so far have not been satisfactory. The results of its operations have been consolidated with those reported for CORT, shown above. We expect to report in due course that all CORT operations have become more satisfactory. CORT has operated at a positive cash Öow and the general distress in its Ñeld has permitted various small expansions. During the past three years it invested $61 million in business expansion through acquisitions of several small businesses and reduced its line-of-credit and other debt by $50 million. CORT remains the national leader in its market segment and would not be making these acquisitions if we believed its furniture rental business prospects were permanently impaired. When Wesco paid $386 million for CORT, about 60% of the purchase price was attributable to goodwill, an intangible balance sheet asset. Wesco's consolidated balance sheet now contains about $267 million in good- will (including $27 million from Wesco's 1996 purchase of KBS). The Financial Accounting Standards Board adopted a rule which became eÅective in 2002 that no longer requires automatic amortization of acquired goodwill.

(The requirement for such amortization has been replaced by a standard that requires an annual assess- ment to determine whether the value of goodwill has been impaired, in which event the intangible would be written down or written oÅ, as appropriate.) The earnings we have reported for 2002 and 2003, without deduction of any goodwill amortiza- tion, more closely reÖect microeconomic reality as we appraise it. More details with respect to CORT are contained throughout this annual report, to which your careful attention is directed. CORT has long been headed by Paul Arnold, age 57, who is a star executive as is convincingly demonstrated by his long record as CEO of CORT. We are absolutely delighted to have Paul and CORT within Wesco. We continue to expect a considera- ble expansion of CORT's business and earnings at some future time. Precision Steel Warehouse, Inc. (""Precision Steel'') The businesses of Wesco's Precision Steel subsidiary, headquartered in the outskirts of Chicago at Franklin Park, Illinois, operated at an after-tax loss of $.9 million in 2003, versus an after-tax proÑt of $.3 million in 2002. The 2003 Ñgure reÖects $.7 million, after taxes, expensed in connection with environmental cleanup of an industrial park where a Precision Steel subsidiary has operated alongside approximately 15 other manufacturers for many years.

Had it not been for the environmental matter or for LIFO inventory accounting adjustments, Precision Steel would have reported an operating loss of $.2 million, after taxes, for 2003, versus after-tax proÑts of $.1 million for 2002. We do not regard earnings changes from environmental cleanup or LIFO accounting adjustments, up or down, as material in predicting future earning power.

The U.S. steel industry has generally been a disaster since 2000, and Precision Steel has suÅered worse eÅects than occurred for it in previous general declines in the U.S. steel business. Precision Steel has suÅered a signiÑcant reduction in demand for steel combined with intensiÑed competition above the Ñerce level encountered in each prior year. Some of the sales reduction is caused by customers' (or former customers') unsuccessful competition with manufacturers outside the United States. The severity of the domestic downturn is demonstrated by the fact that Precision Steel's average annual steel service revenues for the years 2001 through 2003 were down 27% from those reported for 1998 through 2000. It has not reported satisfactory operating results in recent years; ignoring environmental-cleanup costs and LIFO adjustments, its approximately-break-even operations for 2002 and 2003 compare very unfavora- bly with operating proÑts which averaged $2.3 million, after taxes, for the years 1998 through 2000. Very recently, the cost of Precision Steel's raw materials rose sharply in price. Supplies of steel, which have generally been available to Precision Steel, are no longer easy to obtain. The market has drifted into near chaos caused by shortages. It is not clear how this is going to work out. Early in 2004, prices and proÑts are higher at Precision Steel, but longer-term eÅects are far from clear.

Terry Piper, who became Precision Steel's President and Chief Executive OÇcer late in 1999, has done an excellent job in leading Precision Steel through diÇcult years. Tag Ends from Savings and Loan Days All that now remains outside Wes-FIC but within Wesco as a consequence of Wesco's former involvement with Mutual Savings, Wesco's long-held savings and loan subsidiary, is a small real estate subsidiary, MS Property Company, that holds tag ends of appreciated real estate assets with a net book value of about $6.4 million, consisting mainly of the nine-story commercial oÇce building in downtown Pasadena, where Wesco is headquartered. MS Property Company's results of opera- tions, immaterial versus Wesco's present size, are included in the breakdown of earnings on page 1 within ""other operating earnings.'' Other Operating Earnings Other operating earnings, net of interest paid and general corporate expenses, amounted to $.4 million in 2003 and $.6 million in 2002. Sources were (1) rents ($3.2 million gross in 2003) from Wesco's Pasadena oÇce property (leased almost entirely to outsiders, including Citibank as the ground Öoor tenant), and (2) interest and dividends from cash equivalents and marketable securities held outside the insurance subsidiaries, less (3) general corporate expenses plus minor expenses involving tag-end real estate.

Consolidated Balance Sheet and Related Discussion Wesco carries its investments at market value, with unrealized appreciation, after income tax eÅect, included as a separate component of shareholders' equity, and related taxes included in income taxes payable, in its consolidated balance sheet. As indicated in the accompanying Ñnancial statements, Wesco's net worth, as accountants compute it under their conventions, increased to $2.1 billion ($292 per Wesco share) at yearend 2003 from $1.96 billion ($275 per Wesco share) at yearend 2002. The main cause of increase was net income after deduction of dividends paid to shareholders. The foregoing $292-per-share book value approximates liquidation value assum- ing that all Wesco's non-security assets would liquidate, after taxes, at book value. Of course, so long as Wesco does not liquidate, and does not sell any appreciated securities, it has, in eÅect, an interest-free ""loan'' from the government equal to its deferred income taxes on the unrealized gains, subtracted in determining its net worth. This interest-free ""loan'' from the government is at this moment working for Wesco shareholders and amounted to about $32 per Wesco share at yearend 2003. However, some day, parts of the interest-free ""loan'' may be removed as securities are sold. Therefore, Wesco's shareholders have no perpetual advantage creating value for them of $32 per Wesco share.

Instead, the present value of Wesco's shareholders' advantage must logically be much lower than $32 per Wesco share. Business and human quality in place at Wesco continues to be not nearly as good, all factors considered, as that in place at Berkshire Hathaway. Wesco is not an equally-good-but-smaller version of Berkshire Hathaway, better because its small size makes growth easier. Instead, each dollar of book value at Wesco continues plainly to provide much less intrinsic value than a similar dollar of book value at Berkshire Hathaway. Moreover, the quality disparity in book value's intrinsic merits has, in recent years, continued to widen in favor of Berkshire Hathaway. All that said, we make no attempt to appraise relative attractiveness for invest- ment of Wesco versus Berkshire Hathaway stock at present stock-market quotations. To progress from this point at a satisfactory rate, Wesco plainly needs more favorable investment opportunities, recognizable as such by its management, prefer- ably in whole companies, but, alternatively, in marketable securities to be purchased by Wesco's insurance subsidiaries. Our views regarding the general prospects for investment in common stocks are unchanged one year after Warren BuÅett wrote the following, in his 2002 annual report to shareholders of our parent company: ""We continue to do little in equities.

inclined to add to them. Though these enterprises have good prospects, we don't yet believe their shares are undervalued. ""In our view, the same conclusion Ñts stocks generally. Despite three years of falling prices, which have signiÑcantly improved the attractiveness of com- mon stocks, we still Ñnd very few that even mildly interest us. That dismal fact is testimony to the insanity of valuations reached during The Great Bubble. Unfortunately, the hangover may prove to be proportional to the binge. ""The aversion to equities that ®we© exhibit today is far from congenital. We love owning common stocks Ì if they can be purchased at attractive prices. In ®my© 61 years of investing, 50 or so years have oÅered that kind of opportunity. There will be years like that again. Unless, however, we see a very high probability of at least 10% pre-tax returns (which translates to 6 1 /2-7% after corporate tax), we will sit on the sidelines. With short-term money returning less than 1% after-tax, sitting it out is no fun. But occasionally successful investing requires inactivity.'' In fact, the one thing that should interest Wesco shareholders most with respect to 2003 is that, as in 2002 and 2001, Wesco found no new common stocks for our insurance companies to buy. The Board of Directors recently increased Wesco's regular dividend from 331 /2 cents per share to 341 /2 cents per share, payable March 3, 2004, to shareholders of record as of the close of business on February 4, 2004.

Wesco now has a website: www.wescoÑnancial.com. Shareholders can there access much Wesco information, including printed annual reports, earnings releases, SEC Ñlings, and the websites of Wesco's subsidiaries and parent, Berkshire Hathaway. This annual report contains Form 10-K, a report Ñled with the Securities and Exchange Commission, and includes detailed information about Wesco and its subsidiaries as well as audited Ñnancial statements bearing extensive footnotes. As usual, your careful attention is sought with respect to these items. Charles T.2004

WESCO FINANCIAL CORPORATION LETTER TO SHAREHOLDERS To Our Shareholders: Consolidated net income for the calendar year 2002 was $52,718,000 ($7.40 per share), essentially the same as $52,536,000 ($7.38 per share) in the previous year. Wesco has four major subsidiaries: (1) Wesco-Financial Insurance Company (""Wes-FIC''), headquartered in Omaha and engaged principally in the reinsurance business, (2) The Kansas Bankers Surety Company (""KBS''), owned by Wes-FIC and specializing in insurance products tailored to midwestern banks, (3) CORT Business Services Corporation (""CORT''), headquartered in Fairfax, Virginia and engaged principally in the furniture rental business, and (4) Precision Steel Ware- house, Inc. (""Precision Steel''), headquartered in Chicago and engaged in the steel warehousing and specialty metal products businesses. Consolidated net income for the two years just ended breaks down as follows (in 000s except for per-share amounts)(1) : Year Ended December 31, 2002 December 31, 2001 Per Per Wesco Wesco Amount Share(2) Amount Share(2) Operating earnings: Insurance businessesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $49,471 $6.95 $45,254 $6.36 CORT furniture rental business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,442 .34 13,076 1.84 Precision Steel businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 250 .03 388 .05 Goodwill amortization (3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (6,814) (.96) Other(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 555 .08 632 .09 Wesco consolidated net income (3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $52,718 $7.

At the 2002 Berkshire annual meeting, I told the audience that the previous year, with its revelations about Enron and the gradual unwinding of the technology bubble, had confirmed what I had long believed about the discipline of reading accounting footnotes and refusing to invest in businesses whose accounting I could not understand. The market-psychology point I tried to convey was that the crowd, in its broad patterns, repeats the same mistakes in every cycle, because the incentives facing the participants are the same in every cycle, and the biases facing the participants are the same in every cycle. The investor who recognises the patterns, and who refuses to participate in the new version of the old mistake, has a long-run advantage over the investor who assumes that the new version is different. The discipline required is to read the footnotes, to recognise the patterns, and to refuse to participate, even at the cost of looking unfashionable during the boom. The mistakes-and-learning element was the one I had most wanted to convey. I had made my own share of mistakes in the previous two years, by being too cautious during the recovery from the technology crash, and the cost of the caution had, in opportunity terms, been very large. The lesson I drew was that the disciplined investor must be willing to act during a recovery, even when the outlook is unclear, and even when the prices may go lower before they go higher. The 2002 meeting was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to wait for clarity, and to act when the prices were attractive, even at the cost of being early. The investor who builds the discipline of acting during the recovery will outperform the investor who waits for clarity. The capital-allocation-discipline lesson I tried to convey was that the investor who reads the footnotes, and who refuses to invest in businesses whose accounting he cannot understand, has a long-run advantage over the investor who chases the prices on the assumption that the accounting is honest. The 2002 meeting was, in some ways, the most candid I had ever given. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to read the footnotes, to refuse to invest in businesses whose accounting I could not understand, and to act when the prices were attractive, even at the cost of being early and unfashionable. The investor who builds the discipline of refusal will outperform the investor with the higher IQ who chases the prices on the assumption that the accounting is honest.

40 $52,536 $7.38 (1) All Ñgures are net of income taxes. (2) Per-share data are based on 7,119,807 shares outstanding. Wesco has had no dilutive capital stock equivalents. (3) In accordance with a new pronouncement of the Financial Accounting Standards Board, Wesco discontinued goodwill amortization at the beginning of 2002. The requirement for such amortization has been replaced by a standard that requires an annual assessment to determine whether the value of goodwill has been impaired, at which time the intangible would be written down or written oÅ, as appropriate. Had the new accounting standard been in eÅect for 2001, Wesco would have reported after-tax income of $59,350,000 or $8.34 per share, exclusive of goodwill amortization. Thus, Wesco's 2002 after-tax net income, on a pro forma basis, actually decreased in 2002 by $6,632,000, or $.94 per share. (4) Represents income from ownership of the Wesco headquarters oÇce building, primarily leased to outside tenants, and interest and dividend income from cash equivalents and marketable securities owned outside the insurance subsidiaries, less interest and other corporate expenses. This supplementary breakdown of earnings diÅers somewhat from that used in audited Ñnancial statements which follow standard accounting convention. The foregoing supplementary breakdown is furnished because it is considered useful to shareholders.

Insurance Businesses Consolidated operating earnings from insurance businesses represent the com- bination of the results of their insurance underwriting with their net investment income. Following is a summary of these Ñgures as they pertain to all insurance operations except The Kansas Bankers Surety Company (""KBS''), which is sepa- rately discussed below. Pre-Tax After-Tax Operating Earnings Operating Earnings 2002 2001 2002 2001 Underwriting gain (loss) ÏÏÏÏÏÏÏÏ $ 92,000 $(12,403,000) $(1,926,000) $(8,062,000) Net investment income ÏÏÏÏÏÏÏÏÏ 64,484,000 64,529,000 44,030,000 44,001,000 Operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $64,576,000 $ 52,126,000 $42,104,000 $35,939,000 As shown above, operating income includes signiÑcant net investment income, representing dividends and interest earned from marketable securities. Our discus- sion will concentrate on insurance underwriting, not on the results from investments. Results for 2002 from insurance underwriting, other than at KBS, were sharply improved from those for 2001. Results for 2001 were the worst since we entered the insurance business in 1985. Results for 2002 were satisfactory.

The nature of our non-KBS insurance business was roughly described in our year 2000 Annual Report wherein we reported to shareholders that we were not currently active in super-catastrophe reinsurance and had never suÅered a super-catastrophe loss, but that shareholders should continue to realize that Wes-FIC's marvelous underwriting results were sure to be followed, sometime, by one or more horrible underwriting losses. When we said that, we had in mind a natural catastrophe. But, instead, in 2001 we were clobbered by a man-made catastrophe on September 11 Ì an event that delivered the insurance industry its largest loss in history. Fortunately, we recorded a loss of only $10 million before income taxes ($6.5 million, after taxes) in connection with that event. The $10 million is an estimate and is subject to considerable estimation error. It will literally take years to resolve complicated coverage issues, as well as to develop an accurate estimation of insured losses that will ultimately be incurred. That $10 million, however, was the principal cause of our substantial underwriting loss in 2001. At the end of 2002 we retained about $15 million in invested assets, oÅset by claims reserves, from our former reinsurance arrangement with Fireman's Fund Group. This arrangement was terminated August 31, 1989.

However, it will take a long time before all claims are settled, and, meanwhile, Wes-FIC is being helped over many years by proceeds from investing ""Öoat'' and by favorable loss develop- ment, which has enabled it to reduce the liability for losses and loss-related expenses, beneÑting after-tax operating earnings in 2002 and 2001 by $.8 million each year.

We engage in other reinsurance business, including large and small quota share arrangements similar and dissimilar to our previous reinsurance contract with Fire- man's Fund Group, and, from time to time, in super-cat reinsurance, described in detail in previous annual reports, which Wesco shareholders should re-read each year. Following is a summary of Wes-FIC's current reinsurance activity: ‚ A three-year arrangement entered into in 2000 through an insurance subsidi- ary of Berkshire Hathaway, our 80%-owning parent, as intermediary without ceding commission, for participation to the extent of 3.3% in certain property and casualty exposure ceded by a large, unaÇliated insurer. The terms of this arrangement are identical to those accepted by that Berkshire subsidiary except as to the amount of the participation. ‚ Participation in four risk pools managed by a Berkshire insurance subsidiary (also acting as intermediary without ceding commission) covering hull, liability, workers' compensation and satellite exposures relating to the aviation industry as follows: with respect to 2001, to the extent of 3% for each pool; for 2002, 13% of the hull and liability pools, 3% of the workers' compensation pool and, eÅective mid-year, 15.5% of the satellite pool; and, for 2003, 10% of the hull and liability pools only. The Berkshire subsidiary provides a portion of the reinsurance protection to these aviation risk pools, and therefore to Wes-FIC.

In much reinsurance sold by us, other Berkshire subsidiaries sold several times as much reinsurance to the same customers on the same terms. In certain instances but not always, such subsidiaries have taken from us a 3%-of-premiums ceding commis- sion on premium volume passed through them to Wes-FIC. Excepting this ceding commission, Wes-FIC has had virtually no insurance-acquisition or insurance admin- istration costs. KBS, purchased by Wes-FIC in 1996 for approximately $80 million in cash, contributed $7.4 million to the after-tax operating earnings of the insurance busi- nesses in 2002 and $9.3 million in 2001. The 2001 Ñgure is before goodwill amortization of $.8 million; there was no goodwill amortization for 2002. Prior to 2002 goodwill was amortized mainly on a straight-line basis over 40 years. As explained above, as of the beginning of 2002, Wesco discontinued amortization of goodwill and became subject to other changes in goodwill accounting, as required by the Financial Accounting Standards Board. The results of KBS have been com- bined with those of Wes-FIC, and are included in the table on page 1 in the category of ""insurance businesses.'' KBS was chartered in 1909 to underwrite deposit insurance for Kansas banks. Its oÇces are in Topeka, Kansas. Over the years its service has continued to adapt to the changing needs of the banking industry.

in excess of FDIC coverage, KBS oÅers directors and oÇcers indemnity policies, bank employment practices policies, bank annuity and mutual funds indemnity policies, and bank insurance agents professional errors and omissions indemnity policies. Also, KBS has recently begun oÅering Internet banking catastrophe theft insurance. Beginning in 2003, KBS revised the allocation of its reinsurance between a Berkshire insurance subsidiary and a non-aÇliate: Under the previous program, the Berkshire subsidiary and the non-aÇliate each reinsured 50% of the per-occurrence risks of $3 million in excess of $2 million, and the non-aÇliate also reinsured 70% of the per-occurrence risks up to $10 million above $5 million, all for approximately 5% of KBS's premiums. Beginning in 2003, the Berkshire subsidiary has replaced the non-aÇliate on the second layer, and total reinsurance costs are expected to aggregate 10%-12% of premiums. Reinsurance costs have risen greatly throughout the insurance industry, and the revised arrangement is considered fair by all in- volved, all factors considered. (Indeed, we believe that our combined insurance arrangements through Berkshire constitute a net advantage to Wes-FIC that would not be available from Berkshire in the absence of its 80% ownership of Wesco, and such combined insurance arrangements have worked out well so far, even after taking into account our September 11 loss in 2001.) KBS increased the volume of business retained eÅective in 1998.

It had previously ceded almost half of its premium volume to reinsurers. Now it reinsures only about 5%. As we indicated last year, the increased volume of business retained comes, of course, with increased irregularity in the income stream. The combined ratio of an insurance company represents the percentage that its underwriting losses and expenses bear to its premium revenues. KBS's combined ratio has been much better than average for insurers, at 71.3% for 2002 and 55.1% for 2001, and we continue to expect volatile but favorable long-term eÅects from increased insurance retained. KBS is ably run by Donald Towle, President, assisted by 15 dedicated oÇcers and employees. CORT Business Services Corporation (""CORT'') In February 2000, Wesco purchased CORT Business Services Corporation (""CORT'') for $386 million in cash. CORT is a very long established company that is the country's leader in rentals of furniture that lessees have no intention of buying. In the trade, people call CORT's activity ""rent-to-rent'' to distinguish it from ""lease-to-purchase'' businesses that are, in essence, installment sellers of furniture. However, just as Hertz, as a rent-to-rent auto lessor in short-term arrangements, must be skilled in selling used cars, CORT must be and is skilled in selling used furniture.

CORT's revenues totaled $389 million for calendar 2002, versus $395 million for calendar 2001. Of these amounts, furniture rental revenues were $316 million and $329 million, and furniture sales revenues were $73 million and $66 million. CORT contributed $2.4 million and $13.1 million to Wesco's consolidated operating income for 2002 and 2001, versus $29.0 million for the ten months that we owned it in 2000. These Ñgures are before (1) goodwill amortization of zero for 2002 (see discussion above), $6.0 million for 2001 and $5.1 million for 2000, and (2) realized securities losses of $.7 million in 2000. CORT's after-tax operating income (before goodwill amortization) for the entire calendar year 2000 was $33.4 million compared to only $2.4 million for 2002 and $13.1 million for 2001. 2002 was a terrible year in the ""rent-to-rent'' segment of the furniture rental business. When we purchased CORT early in 2000, its furniture rental business was rapidly growing, reÖecting the strong U.S. economy, phenomenal business expansion and explosive growth of IPOs and the high-tech sector. Beginning late in 2000, however, new business coming into CORT began to decline. With the burst of the dot-com bubble, the events of September 11, and continued weakness in the economy, CORT's operations have been hammered. Obviously, when we purchased CORT we were poor predictors of near-term industry-wide prospects of the ""rent-to- rent'' sector of the furniture business.

Moreover, CORT started up a new subsidiary during 2001, Relocation Central Corporation, whose operations should be considered as still in a ""start-up'' phase and, so far, have generated pre-tax losses amounting to $12.8 million in 2002 and $10.8 million in 2001. The results of its operations have been consolidated with those reported for CORT, shown above. Relocation Central has developed a virtual call center which carries out an Internet- based furniture and apartment leads operation (www.relocationcentral.com), and it markets CORT's furniture rental services to real estate investment trusts, owners of many major apartment communities. As a result of the acquisition of its largest competitor in December 2002, Relocation Central operates in 20 metropolitan cities in sixteen states. CORT is hopeful that, through Relocation Central, it will ultimately become the principal source of rental furniture to the apartment industry, but this outcome is far from certain. We expect to report in due course that all CORT operations have become more satisfactory, but prospects for 2003 do not seem good. However, there is good news along with bad. CORT has operated at a positive cash Öow and the general distress in its Ñeld permitted various small expansions. During the past two years it invested $57 million in business expansion through acquisitions of several small businesses and reduced its line-of-credit debt by $30 million.

When Wesco paid $386 million for CORT, about 60% of the purchase price was attributable to goodwill, an intangible balance sheet asset. Wesco's consolidated balance sheet now contains about $266 million in good- will (including $27 million from Wesco's 1996 purchase of KBS). The Financial Accounting Standards Board recently adopted a rule which became eÅective in 2002 that no longer requires automatic amortization of acquired goodwill. Thus, earnings we report more closely reÖect microeconomic reality as we appraise it. As above shown in the Ñrst page of this letter, Wesco's reported earnings were reduced by about $7 million of mostly-non-tax-deductible amortization of goodwill for 2001, versus no such amortization for 2002. More details with respect to CORT are contained throughout this annual report, to which your careful attention is directed. CORT has long been headed by Paul Arnold, age 56, who is a star executive as is convincingly demonstrated by his long record as CEO of CORT. We are absolutely delighted to have Paul and CORT within Wesco, and are pleased with CORT's progress under his leadership, despite adverse developments in 2001 and 2002. We continue to expect a considerable expansion of CORT's business and earnings at some future time. Precision Steel Warehouse, Inc. (""Precision Steel'') The businesses of Wesco's Precision Steel subsidiary, headquartered in the outskirts of Chicago at Franklin Park, Illinois, contributed $.

3 million to Wesco's net operating earnings in 2002, down from $.4 million in 2001 and $1.3 million in 2000. Had it not been for LIFO inventory accounting adjustments, Precision Steel would have reported $.1 million for 2002 and no income at all for the year 2001, versus $1.7 million for 2000. Last year we reported that the U.S. steel industry was generally a disaster in 2000, and that Precision Steel suÅered worse eÅects than occurred for it in previous general declines in the U.S. steel business. The year 2001 was much worse. The absence of Precision Steel's operating earnings for 2001, before the eÅect of the LIFO adjustment, was due principally to a signiÑcant reduction in demand for steel, combined with intensiÑed competition above the Ñerce level encountered in the prior year. This resulted in a 29.7% decrease in pounds of product sold. Sales revenues declined 25.6%. We do not regard earnings changes from LIFO accounting adjustments, up or down, as material in predicting future earning power. Terry Piper, who became Precision Steel's President and Chief Executive OÇcer late in 1999, has done an excellent job in leading Precision Steel through diÇcult years.

Tag Ends from Savings and Loan Days All that now remains outside Wes-FIC but within Wesco as a consequence of Wesco's former involvement with Mutual Savings, Wesco's long-held savings and loan subsidiary, is a small real estate subsidiary, MS Property Company, that holds tag ends of real estate assets with a net book value of about $5.8 million, consisting mainly of the nine-story commercial oÇce building in downtown Pasadena, where Wesco is headquartered. MS Property Company's results of operations, immaterial versus Wesco's present size, are included in the breakdown of earnings on page 1 within ""other operating earnings.'' Other Operating Earnings Other operating earnings, net of interest paid and general corporate expenses, amounted to $.6 million in both 2002 and 2001. Sources were (1) rents ($3.3 mil- lion gross in 2002) from Wesco's Pasadena oÇce property (leased almost entirely to outsiders, including Citibank as the ground Öoor tenant), and (2) interest and dividends from cash equivalents and marketable securities held outside the insur- ance subsidiaries, less (3) general corporate expenses plus minor expenses involving tag-end real estate. Corporate Governance Two of our long-standing directors, Jim Gamble and Dave Robinson, are not standing for reelection. At practically no pay, they have been wise and honorable protectors of Wesco shareholders for many decades going back to a time before Berkshire Hathaway had any interest in Wesco.

During their long tenure the value of Wesco stock appreciated about 5,000 percent. We will much miss their directorial service, but will not lose touch. They both retain oÇces in our building and will surely be in our oÇces from time to time. Consolidated Balance Sheet and Related Discussion Wesco carries its investments at market value, with unrealized appreciation, after income tax eÅect, included as a separate component of shareholders' equity, and related taxes included in income taxes payable, in its consolidated balance sheet. As indicated in the accompanying Ñnancial statements, Wesco's net worth, as accountants compute it under their conventions, increased to $1.96 billion ($275 per Wesco share) at yearend 2002 from $1.91 billion ($269 per Wesco share) at yearend 2001. The main cause of increase was net income after deduction of dividends paid to shareholders. The foregoing $275-per-share book value approximates liquidation value assum- ing that all Wesco's non-security assets would liquidate, after taxes, at book value. Of course, so long as Wesco does not liquidate, and does not sell any appreciated securities, it has, in eÅect, an interest-free ""loan'' from the government equal to its deferred income taxes on the unrealized gains, subtracted in determining its net worth.moment

working for Wesco shareholders and amounted to about $28 per Wesco share at yearend 2002. However, some day, parts of the interest-free ""loan'' may be removed as securities are sold. Therefore, Wesco's shareholders have no perpetual advantage creating value for them of $28 per Wesco share. Instead, the present value of Wesco's shareholders' advantage must logically be much lower than $28 per Wesco share. Business and human quality in place at Wesco continues to be not nearly as good, all factors considered, as that in place at Berkshire Hathaway. Wesco is not an equally-good-but-smaller version of Berkshire Hathaway, better because its small size makes growth easier. Instead, each dollar of book value at Wesco continues plainly to provide much less intrinsic value than a similar dollar of book value at Berkshire Hathaway. Moreover, the quality disparity in book value's intrinsic merits has, in recent years, continued to widen in favor of Berkshire Hathaway. All that said, we make no attempt to appraise relative attractiveness for invest- ment of Wesco versus Berkshire Hathaway stock at present stock-market quotations. To progress from this point at a satisfactory rate, Wesco plainly needs more favorable investment opportunities, recognizable as such by its management, prefer- ably in whole companies, but, alternatively, in marketable securities to be purchased by Wesco's insurance subsidiaries.

Our views regarding the general prospects for investment in common stocks are contained in the following excerpt from Warren BuÅett's recent letter to shareholders of our parent company: ""We continue to do little in equities. ®We© are increasingly comfortable with our holdings in ®our© major investees because most of them have in- creased their earnings while their valuations have decreased. But we are not inclined to add to them. Though these enterprises have good prospects, we don't yet believe their shares are undervalued. ""In our view, the same conclusion Ñts stocks generally. Despite three years of falling prices, which have signiÑcantly improved the attractiveness of com- mon stocks, we still Ñnd very few that even mildly interest us. That dismal fact is testimony to the insanity of valuations reached during The Great Bubble. Unfortunately, the hangover may prove to be proportional to the binge. ""The aversion to equities that ®we© exhibit today is far from congenital. We love owning common stocks Ì if they can be purchased at attractive prices. In ®(Warren states:) my© 61 years of investing, 50 or so years have oÅered that kind of opportunity. There will be years like that again. Unless, however, we see a very high probability of at least 10% pre-tax returns (which translates to /2-7% after corporate tax), we will sit on the sidelines. With short-term money returning less than 1% after-tax, sitting it out is no fun.

In fact, the one thing that should interest Wesco shareholders most with respect to 2002 is that, as in 2001, Wesco found no new common stocks for our insurance companies to buy. The Board of Directors recently increased Wesco's regular dividend from 321 /2 cents per share to 331 /2 cents per share, payable March 5, 2003, to shareholders of record as of the close of business on February 5, 2003. This annual report contains Form 10-K, a report Ñled with the Securities and Exchange Commission, and includes detailed information about Wesco and its subsidiaries as well as audited Ñnancial statements bearing extensive footnotes. As usual, your careful attention is sought with respect to these items. Charles T. Munger Chairman of the Board March 6, 2003

WESCO FINANCIAL CORPORATION LETTER TO SHAREHOLDERS To Our Shareholders: Consolidated net ""operating'' income (i.e., before realized securities gains shown in the table below) for the calendar year 2001 decreased to $52,536,000 ($7.38 per share) from $70,087,000 ($9.84 per share) in the previous year. Consolidated net income decreased to $52,536,000 ($7.38 per share) from $922,470,000 ($129.56 per share) in the previous year. Wesco has four major subsidiaries: (1) Wesco-Financial Insurance Company (""Wes-FIC''), headquartered in Omaha and engaged principally in the reinsurance business, (2) The Kansas Bankers Surety Company (""KBS''), owned by Wes-FIC and specializing in insurance products tailored to midwestern banks, (3) CORT Business Services Corporation (""CORT''), headquartered in Fairfax, Virginia, pur- chased in February 2000 and engaged principally in the furniture rental business, and (4) Precision Steel Warehouse, Inc. (""Precision Steel''), headquartered in Chicago and engaged in the steel warehousing and specialty metal products businesses. Consolidated net income for the two years just ended breaks down as follows (in 000s except for per-share amounts)(1) : Year Ended December 31, 2001 December 31, 2000 Per Per Wesco Wesco Amount Share(2) Amount Share(2) Operating earnings: Insurance businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $45,254 $6.36 $ 45,518 $ 6.39 CORT furniture rental business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,076 1.84 28,988 4.

07 Precision Steel businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 388 .05 1,281 .18 Goodwill amortization (3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6,814) (.96) (5,867) (.82) Other(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 632 .09 167 .02 52,536 7.38 70,087 9.84 Realized net securities gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 852,383 119.72 Wesco consolidated net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $52,536 $7.38 $922,470 $129.56 (1) All Ñgures are net of income taxes. (2) Per-share data are based on 7,119,807 shares outstanding. Wesco has had no dilutive capital stock equivalents. (3) In accordance with a new pronouncement of the Financial Accounting Standards Board, Wesco will no longer be required to amortize goodwill beginning in 2002. The requirement for such amortization has been replaced by a standard that requires an annual assessment to determine whether the value of goodwill has been impaired, at which time the intangible would be written down or written oÅ, as appropriate. (4) After deduction of interest and other corporate expenses, and costs and expenses associated with foreclosed real estate previously charged against Wesco's former Mutual Savings and Loan Association subsidiary. Income was from ownership of the Wesco headquarters oÇce building, primarily leased to outside tenants, and interest and dividend income from cash equivalents and marketable securities owned outside the insurance subsidiaries.

shareholders. The total consolidated net income shown above is, of course, identical to the total in our audited Ñnancial statements. Insurance Businesses Consolidated operating earnings from insurance businesses represent the com- bination of the results of their insurance underwriting with their net investment income. Following is a summary of these Ñgures as they pertain to all insurance operations except The Kansas Bankers Surety Company (""KBS''), which is sepa- rately discussed below. Pre-Tax After-Tax Operating Earnings Operating Earnings 2001 2000 2001 2000 Underwriting loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(12,403,000) $ (616,000) $(8,062,000) $ (400,000) Net investment income ÏÏÏÏÏÏÏÏÏ 64,529,000 53,412,000 44,001,000 38,958,000 Operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 52,126,000 $52,796,000 $35,939,000 $38,558,000 As shown above, operating income includes signiÑcant net investment income, representing dividends and interest earned from marketable securities. However, operating income excludes realized net securities gains, net of income taxes, of $853.1 million in 2000. There were no such gains in 2001. Our discussion will concentrate on insurance underwriting, not on the results from investments. Results for 2001 from insurance underwriting, other than at KBS, were the worst since we entered into the insurance business in 1985.

The nature of our non-KBS insurance business was roughly described in our year 2000 Annual Report wherein we reported to shareholders that we were not currently active in super-catastrophe reinsurance and had never suÅered a super-catastrophe loss, but that shareholders should continue to realize that Wes-FIC's marvelous underwriting results were sure to be followed, sometime, by one or more horrible underwriting losses. When we said that, we had in mind a natural catastrophe. But, instead, we were clobbered by a man-made catastrophe on September 11 Ì an event that delivered the insurance industry its largest loss in history. Fortunately, we recorded a loss of only $10 million, before income taxes ($6.5 million, after taxes) in connection with that event. The $10 million is an estimate and is subject to considerable estimation error. It will literally take years to resolve complicated coverage issues, as well as to develop an accurate estimation of insured losses that will ultimately be incurred. That $10 million, however, was the principal cause of our substantial underwriting loss in 2001. At the end of 2001 we retained about $17 million in invested assets, oÅset by claims reserves, from our former reinsurance arrangement with Fireman's Fund Group. This arrangement was terminated August 31, 1989.loss-related

expenses, beneÑting after-tax operating earnings in 2001 and 2000 by $.8 million each. We engage in other reinsurance business, including large and small quota share arrangements similar and dissimilar to our previous reinsurance contract with Fire- man's Fund Group, and, from time to time, in super-cat reinsurance, described in detail in previous annual reports, which Wesco shareholders should re-read each year. In almost all recent reinsurance sold by us, other subsidiaries of our 80%-owning parent, Berkshire Hathaway, sold several times as much reinsurance to the same customers on the same terms. In certain instances, such subsidiaries have taken from us a 3%-of-premiums ceding commission on premium volume passed through them to Wes-FIC. Excepting this ceding commission, Wes-FIC has had virtually no insurance-acquisition or insurance administration costs with regard to those policies. KBS, purchased by Wes-FIC in 1996 for approximately $80 million in cash, contributed $9.3 million to the after-tax operating earnings of the insurance busi- nesses in 2001 and $7.0 million in 2000. These Ñgures are before goodwill amortiza- tion under accounting convention of $.8 million each year. The results of KBS have been combined with those of Wes-FIC, and are included in the table on page 1 in the category of ""insurance businesses.'' KBS was chartered in 1909 to underwrite deposit insurance for Kansas banks. Its oÇces are in Topeka, Kansas.

Over the years its service has continued to adapt to the changing needs of the banking industry. Today its customer base, consisting mostly of small and medium-sized community banks, is spread throughout 27 mainly midwestern states. In addition to bank deposit guaranty bonds which insure deposits in excess of FDIC coverage, KBS also oÅers directors and oÇcers indemnity policies, bank employment practices policies, bank annuity and mutual funds indemnity policies and bank insurance agents professional errors and omissions indemnity policies. KBS increased the volume of business retained eÅective in 1998. It had previously ceded almost half of its premium volume to reinsurers. Now it reinsures only about 5% under arrangements whereby other Berkshire subsidiaries take 50% and unrelated reinsurers take the other 50%. As we indicated last year, the increased volume of business retained comes, of course, with increased irregularity in the income stream. The combined ratio of an insurance company represents the percentage that its underwriting losses and expenses bear to its premium revenues. KBS's combined ratio has been much better than average for insurers, at 55.1% for 2001 and 73.9% for 2000, and we continue to expect volatile but favorable long-term eÅects from increased insurance retained. KBS is ably run by Donald Towle, President, assisted by 15 dedicated oÇcers and employees.

CORT Business Services Corporation (""CORT'') In February 2000, Wesco purchased CORT Business Services Corporation (""CORT'') for $386 million in cash. CORT is a very long established company that is the country's leader in rentals of furniture that lessees have no intention of buying. In the trade, people call CORT's activity ""rent-to-rent'' to distinguish it from ""lease-to-purchase'' businesses that are, in essence, installment sellers of furniture. However, just as Hertz, as a rent-to-rent auto lessor in short-term arrangements, must be skilled in selling used cars, CORT must be and is skilled in selling used furniture. CORT's revenues totaled $395 million for calendar 2001, versus $361 million for the ten months that we owned it in the year 2000. Of these amounts, furniture rental revenues were $329 million and $306 million, and furniture sales revenues were $66 million and $55 million. CORT contributed $13.1 million to Wesco's consoli- dated operating income for the entire year of 2001, versus $29.0 million for the ten months of 2000. These Ñgures are before (1) goodwill amortization of $6.0 million for 2001 and $5.1 million for 2000, and (2) realized securities losses of $.7 million in 2000. CORT's after-tax operating income (before goodwill amortization) for the entire calendar year 2000 was $33.4 million compared to only $13.1 million for 2001, a decline of 61%.

When we purchased CORT early in 2000, its furniture rental business was rapidly growing, reÖecting the strong U.S. economy, phenomenal business expansion and explosive growth of IPOs and the high-tech sector. Beginning late in 2000, however, new business coming into CORT began to decline. With the burst of the dot-com bubble, continued weakness in the economy and the events of Septem- ber 11, CORT's operations were hammered in 2001. Moreover, CORT started up a new subsidiary during the year, Relocation Central Corporation, whose $12 million in expenses far exceeded its $1 million in revenues. The results of its operations have been consolidated with those reported for CORT, shown above. Relocation Central has developed a virtual call center which carries out an internet-based furniture and apartment leads operation (www.relocationcentral.com), and it has begun marketing CORT's furniture rental services to real estate investment trusts, owners of many major apartment communi- ties. CORT is hopeful that, through Relocation Central, it will ultimately become the principal source of rental furniture to the apartment industry. We hope to report in due course that all CORT operations have become more satisfactory, but prospects for 2002 do not thrill us. However, there is good news along with bad. CORT operates at a positive cash Öow.

poor part of the business cycle when we turn it to our advantage by expanding business through cash acquisition at sound prices. We continue to believe that CORT's operations will remain proÑtable in any likely recession-related decline in the rent-to-rent segment of the furniture business. When Wesco paid $386 million for CORT, about 60% of the purchase price was attributable to goodwill, an intangible balance sheet asset. Wesco's consolidated balance sheet now contains about $264 million in good- will (including $27 million from Wesco's 1996 purchase of KBS). Wesco's reported earnings were reduced by about $7 million of mostly-non-tax-deductible amortiza- tion of goodwill for 2001 and $6 million for 2000. The Financial Accounting Standards Board has recently adopted a rule that will no longer require automatic amortization of acquired goodwill beginning in 2002. Thus, earnings we report in the future will more closely reÖect microeconomic reality as we appraise it. More details with respect to CORT are contained throughout this annual report, to which your careful attention is directed. CORT has long been headed by Paul Arnold, age 55, who is a star executive as is convincingly demonstrated by his long record as CEO of CORT.

We are absolutely delighted to have Paul and CORT within Wesco, are pleased with CORT's perform- ance under his leadership, despite adverse developments in 2001, and we hope to see a considerable expansion of CORT's business and earnings in future years. Precision Steel Warehouse, Inc. (""Precision Steel'') The businesses of Wesco's Precision Steel subsidiary, headquartered in the outskirts of Chicago at Franklin Park, Illinois, contributed $.4 million to Wesco's net operating earnings in 2001, down from $1.3 million in 2000 and $2.5 million in 1999. Had it not been for LIFO inventory accounting adjustments, Precision Steel would have reported no income at all for the year 2001, versus $1.7 million, after taxes, for 2000. Last year we reported that the U.S. steel industry was generally a disaster in 2000, and that Precision Steel suÅered worse eÅects than occurred for it in previous general declines in the U.S. steel business. The year 2001 was much worse. The absence of Precision Steel's operating earnings for 2001, before the eÅect of the LIFO adjustment, was due principally to a signiÑcant reduction in demand for steel, combined with intensiÑed competition above the Ñerce level encountered in the prior year. This resulted in a 29.7% decrease in pounds of product sold. Sales revenues declined 25.6%. We do not regard earnings changes from LIFO accounting adjustments, up or down, as material in predicting future earning power.

Tag Ends from Savings and Loan Days All that now remains outside Wes-FIC but within Wesco as a consequence of Wesco's former involvement with Mutual Savings, Wesco's long-held savings and loan subsidiary, is a small real estate subsidiary, MS Property Company, that holds tag ends of real estate assets with a net book value of about $5.8 million, consisting mainly of the nine-story commercial oÇce building in downtown Pasadena, where Wesco is headquartered. MS Property Company's results of operations, immaterial versus Wesco's present size, are included in the breakdown of earnings on page 1 within ""other operating earnings.'' Other Operating Earnings Other operating earnings, net of interest paid and general corporate expenses, amounted to $.6 million in 2001 and $.2 million in 2000. Sources were (1) rents ($3.2 million gross in 2001) from Wesco's Pasadena oÇce property (leased almost entirely to outsiders, including California Federal Bank as the ground Öoor tenant), and (2) interest and dividends from cash equivalents and marketable securities held outside the insurance subsidiaries, less (3) general corporate expenses plus minor expenses involving tag-end real estate. Realized Net Securities Gains The main tag end from Wesco's savings and loan days was an investment in Freddie Mac common stock, purchased by Mutual Savings for $72 million at a time when Freddie Mac shares could be lawfully owned only by a savings and loan association.

Those shares, carried on Wesco's balance sheet at yearend 1999 at a market value of $1.4 billion, were sold in 2000, giving rise to the principal portion of the $852.4 million of after-tax securities gains realized by Wesco in 2000, versus no gains or losses realized in 2001. Although the realized gain had a material impact on Wesco's reported earnings for 2000, it had a very minor impact on Wesco's shareholders' equity. Inasmuch as the greater portion of the realized gain had previously been reÖected in the unrealized gain component of Wesco's shareholders' equity, the amount was merely switched from unrealized gains to retained earnings, another component of shareholders' equity. Consolidated Balance Sheet and Related Discussion As indicated in the accompanying Ñnancial statements, Wesco's net worth, as accountants compute it under their conventions, decreased to $1.91 billion ($269 per Wesco share) at yearend 2001 from $1.98 billion ($278 per Wesco share) at yearend 2000. The foregoing $269-per-share book value approximates liquidation value assum- ing that all Wesco's non-security assets would liquidate, after taxes, at book value. Perhaps this assumption is too conservative.liquidation

value of Wesco's consolidated real estate holdings (where interesting potential now lies almost entirely in Wesco's equity in its oÇce property in Pasadena containing only 125,000 net rentable square feet), and (2) possible unrealized appreciation in other assets cannot be large enough, in relation to Wesco's overall size, to change very much the overall computation of after-tax liquidating value. Of course, so long as Wesco does not liquidate, and does not sell any appreciated securities, it has, in eÅect, an interest-free ""loan'' from the government equal to its deferred income taxes on the unrealized gains, subtracted in determining its net worth. The sale of the Freddie Mac shares in 2000 was principally responsible for the reduction of that interest-free ""loan'' from $705 million as of yearend 1999 to $199 million as of yearend 2001. This interest-free ""loan'' from the government is at this moment working for Wesco shareholders and amounted to about $28 per Wesco share at year end 2001. However, some day, additional parts of the interest-free ""loan'' may be re- moved as securities are sold, as happened to such a large extent with the sale of Freddie Mac stock in 2000. Therefore, Wesco's shareholders have no perpetual advantage creating value for them of $28 per Wesco share. Instead, the present value of Wesco's shareholders' advantage must logically be much lower than $28 per Wesco share.

Business and human quality in place at Wesco continues to be not nearly as good, all factors considered, as that in place at Berkshire Hathaway. Wesco is not an equally-good-but-smaller version of Berkshire Hathaway, better because its small size makes growth easier. Instead, each dollar of book value at Wesco continues plainly to provide much less intrinsic value than a similar dollar of book value at Berkshire Hathaway. Moreover, the quality disparity in book value's intrinsic merits has, in recent years, continued to widen in favor of Berkshire Hathaway. All that said, we make no attempt to appraise relative attractiveness for invest- ment of Wesco versus Berkshire Hathaway stock at present stock-market quotations. To progress from this point at a satisfactory rate, Wesco plainly needs more favorable investment opportunities, recognizable as such by its management, prefer- ably in whole companies like CORT, but, alternatively, in marketable securities to be purchased by Wesco's insurance subsidiaries. The thing that should interest Wesco shareholders most with respect to 2001 is that we found no new common stocks for our insurance companies to buy. We are not excited by general prospects for common stocks. The Board of Directors recently increased Wesco's regular dividend from 311 /2 cents per share to 321 /2 cents per share, payable March 6, 2002, to shareholders of record as of the close of business on February 6, 2002.

This annual report contains Form 10-K, a report Ñled with the Securities and Exchange Commission, and includes detailed information about Wesco and its subsidiaries as well as audited Ñnancial statements bearing extensive footnotes. As usual, your careful attention is sought with respect to these items. Charles T. Munger Chairman of the Board March 5, 2002

WESCO FINANCIAL CORPORATION LETTER TO SHAREHOLDERS To Our Shareholders: Consolidated net ""operating'' income (i.e., before realized securities gains shown in the table below) for the calendar year 2000 increased to $70,087,000 ($9.84 per share) from $46,872,000 ($6.58 per share) in the previous year. Consolidated net income increased to $922,470,000 ($129.56 per share) from $54,143,000 ($7.60 per share) in the previous year. Wesco has four major subsidiaries: (1) Wesco-Financial Insurance Company (""Wes-FIC''), headquartered in Omaha and engaged principally in the reinsurance business, (2) The Kansas Bankers Surety Company (""KBS''), owned by Wes-FIC and specializing in insurance products tailored to midwestern banks, (3) CORT Business Services Corporation (""CORT''), headquartered in Fairfax, Virginia, pur- chased in February 2000 and engaged principally in the furniture rental business, and (4) Precision Steel Warehouse, Inc. (""Precision Steel''), headquartered in Chicago and engaged in the steel warehousing and specialty metal products businesses. Consolidated net income for the two years just ended breaks down as follows (in 000s except for per-share amounts)(1) : Year Ended December 31, 2000 December 31, 1999 Per Per Wesco Wesco Amount Share(2) Amount Share(2) Operating earnings: Wes-FIC and KBS insurance businesses ÏÏÏÏÏÏÏÏÏÏ $ 45,518 $ 6.39 $44,392 $6.23 CORT furniture rental businessÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28,988 4.

07 Ì Ì Precision Steel businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,281 .18 2,532 .35 Goodwill amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5,867) (.82) (782) (.11) Other(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 167 .02 730 .11 70,087 9.84 46,872 6.58 Realized net securities gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 852,383 119.72 7,271 1.02 Wesco consolidated net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $922,470 $129.56 $54,143 $7.60 (1) All Ñgures are net of income taxes. (2) Per-share data is based on 7,119,807 shares outstanding. Wesco has had no dilutive capital stock equivalents. (3) After deduction of interest and other corporate expenses, and costs and expenses associated with foreclosed real estate previously charged against Wesco's former Mutual Savings and Loan Association subsidiary. Income was from ownership of the Wesco headquarters oÇce building, primarily leased to outside tenants, and interest and dividend income from cash equivalents and marketable securities owned outside the insurance subsidiaries. The 1999 Ñgure also includes net gains on sales of foreclosed real estate and a beneÑt from the reduction of loss reserves provided in prior years against possible losses on sales of loans and foreclosed real estate. This supplementary breakdown of earnings diÅers somewhat from that used in audited Ñnancial statements which follow standard accounting convention. The supplementary breakdown is furnished because it is considered useful to shareholders.

Wesco-Financial Insurance Company (""Wes-FIC'') Consolidated operating earnings of Wes-FIC and KBS represent the combination of the results of their insurance underwriting with their net investment income. Following is a summary of these Ñgures as they pertain to Wes-FIC, excluding its subsidiary, KBS. The operating earnings of Wes-FIC's KBS subsidiary are discussed in the section, ""The Kansas Bankers Surety Company,'' below. Pre-Tax After-Tax Operating Earnings Operating Earnings 2000 1999 2000 1999 Underwriting gain (loss) ÏÏÏÏÏÏÏÏÏ $ (616,000) $ 4,359,000 $ (400,000) $ 2,833,000 Net investment incomeÏÏÏÏÏÏÏÏÏÏÏ 53,412,000 44,129,000 38,958,000 34,362,000 Wes-FIC parent company operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $52,796,000 $48,488,000 $38,558,000 $37,195,000 As shown above, Wes-FIC's consolidated operating earnings include signiÑcant net investment income, representing dividends and interest earned on its portfolio of marketable securities. Wes-FIC's consolidated operating earnings exclude its realized net securities gains, net of income taxes, of $853.1 million in 2000 versus $7.3 million in 1999. Our discussion will concentrate on Wes-FIC's insurance underwriting, not on the results of its investments. At the end of 2000 Wes-FIC retained about $19 million in invested assets, oÅset by claims reserves, from its former reinsurance arrangement with Fireman's Fund Group. This arrangement was terminated August 31, 1989.

However, it will take a long time before all claims are settled, and, meanwhile, Wes-FIC is being helped over many years by proceeds from investing ""Öoat'' and by favorable loss develop- ment, which has enabled it to reduce the liability for losses and loss-related expenses, beneÑting after-tax operating earnings by $.8 million in 2000 and $1.7 mil- lion in 1999. Wes-FIC engages in other reinsurance business, including large and small quota share arrangements similar and dissimilar to our previous reinsurance contract with Fireman's Fund Group, and, from time to time, in super-cat reinsurance, described in great detail in our pre-1999 annual reports, which Wesco shareholders should re- read each year. Although Wes-FIC was not active in super-cat reinsurance business in 2000, its operating earnings beneÑted by $.9 million, after taxes, in 1999. On super-cat reinsurance accepted by Wes-FIC to date (March 5, 2001) there has been no loss whatsoever that we know of, but some ""no-claims'' contingent commissions have been paid to original cessors of business (i.e., cessors not including Berkshire Hathaway). The balance of Wes-FIC's after-tax underwriting proÑt or loss not described above, amounted to underwriting loss of $1.2 million for 2000 and underwriting proÑt of $.2 million for 1999. In all recent reinsurance sold by us, other subsidiaries of our 80%-owning parent, Berkshire Hathaway, sold several times as much reinsurance to the same customers on the same terms.3%-

of-premiums ceding commission on premium volume passed through them to Wes- FIC. Excepting this ceding commission, Wes-FIC has had virtually no insurance- acquisition or insurance administration costs with regard to those policies. Wes-FIC remains a very strong insurance company, with very low costs, and, one way or another, in the future as in the past, we expect to continue to Ñnd and seize at least a few sensible insurance opportunities. Wesco shareholders should continue to realize that recent marvelous underwrit- ing results are sure to be followed, sometime, by one or more horrible underwriting losses from super-cat or other insurance written by Wes-FIC. The Kansas Bankers Surety Company (""KBS'') KBS, purchased by Wes-FIC in 1996 for approximately $80 million in cash, contributed $7 million to the consolidated operating earnings of the insurance businesses in 2000 and $7.2 million in 1999. These Ñgures are before goodwill amortization under accounting convention of $.8 million each year. The results of KBS have been combined with those of Wes-FIC, and are included in the table on page 1 in the category, ""operating earnings of Wes-FIC and KBS insurance businesses.'' KBS was chartered in 1909 to underwrite deposit insurance for Kansas banks. Its oÇces are in Topeka, Kansas. Over the years its service has continued to adapt to the changing needs of the banking industry.

Today its customer base, consisting mostly of small and medium-sized community banks, is spread throughout 25 mainly midwestern states. In addition to bank deposit guaranty bonds which insure deposits in excess of FDIC coverage, KBS also oÅers directors and oÇcers indemnity policies, bank employment practices policies, bank annuity and mutual funds indemnity policies and bank insurance agents professional errors and omissions indemnity policies. KBS increased the volume of business retained eÅective in 1998. It had previously ceded almost half of its premium volume to reinsurers; and, it now reinsures only about 5% under arrangements whereby other Berkshire subsidiaries take 50% and unrelated reinsurers take the other 50%. As we indicated last year, the increased volume of business retained comes, of course, with increased irregularity in the income stream. KBS's combined ratio remained much better than average for insurers, at 73.9% for 2000 and 59.4% for 1999, versus 37.2% for 1997, and we continue to expect volatile but favorable long-term eÅects from increased insurance retained. KBS is run by Donald Towle, President, assisted by 15 dedicated oÇcers and employees.

CORT Business Services Corporation (""CORT'') In February 2000, Wesco purchased CORT Business Services Corporation (""CORT'') for $386 million in cash. In addition, CORT retains about $45 million of previously existing debt. CORT is a very long established company that is the country's leader in rentals of furniture that lessees have no intention of buying. In the trade, people call CORT's activity ""rent-to-rent'' to distinguish it from ""lease-to-purchase'' businesses that are, in essence, installment sellers of furniture. However, just as Hertz, as a rent-to-rent auto lessor in short-term arrangements, must be skilled in selling used cars, CORT must be and is skilled in selling used furniture. In the ten months that we have owned CORT, its revenues have totaled $361 million. Of this, $306 million was furniture rental revenue and $55 million was furniture sales revenue. CORT contributed $29 million to Wesco's consolidated operating income in 2000, before goodwill amortization of $5.1 million or realized securities losses of $.7 million. CORT's pre-tax operating income (before goodwill amortization) for the entire calendar year 2000 was $54.3 million. Thus, in essence, Wesco paid $386 million for $54.3 million in pre-tax operating earnings. About 60% of the purchase price was attributable to goodwill, an intangible balance sheet asset. Wesco's consolidated balance sheet now contains about $260 million in good- will (including $28 million from Wesco's 1996 purchase of KBS).

On a full year basis, Wesco's reported earnings for 2000 were reduced by about $6 million of mostly-non-tax-deductible amortization of goodwill. I am pleased to report that the Financial Accounting Standards Board has recently proposed a rule that, if adopted, will no longer require automatic amortization of acquired goodwill. If this proposed rule change goes into eÅect, our reported earnings will more closely reÖect microeconomic reality as we appraise it. More details with respect to CORT are contained throughout this annual report, to which your careful attention is directed. CORT has long been headed by Paul Arnold, age 54, who is a star executive as is convincingly demonstrated by his long record as CEO of CORT. We are absolutely delighted to have Paul and CORT within Wesco, are pleased with CORT's perform- ance under his leadership in 2000, and hope to see a considerable expansion of CORT's business and earnings in future years. Commencing late last year, and continuing to date, new business coming into CORT has declined sharply. We believe that CORT's operations will remain proÑta- ble in any likely recession-related decline in the rent-to-rent segment of the furniture business.

The purchase of CORT has increased Wesco's employee count to approxi- mately 3,000 from 275 one year earlier. Precision Steel Warehouse, Inc. (""Precision Steel'') The businesses of Wesco's Precision Steel subsidiary, headquartered in the outskirts of Chicago at Franklin Park, Illinois, contributed $1.3 million to Wesco's net operating earnings in 2000, down from the $2.5 million contributed in 1999. The 50% decline in 2000 operating earnings was due principally to two factors: (1) LIFO inventory accounting adjustments decreased after-tax earnings approximately $.4 million in 2000 after increasing such earnings by $.3 million in 1999, and (2) pounds of product sold decreased 3%, while competition restrained prices as costs of principal raw materials increased, causing fewer dollars of gross proÑt to be available to absorb operating expenses. Revenues were up only 1%. Generally, the U.S. steel business was a disaster in 2000, and Precision Steel suÅered worse eÅects than occurred for it in previous general declines in the U.S. steel business. We do not regard earnings changes from LIFO accounting adjustments, up or down, as material in predicting future earning power. Terry Piper, who became Precision Steel's President and Chief Executive oÇcer late in 1999, has done an excellent job in leading Precision Steel through a very diÇcult year.

Tag Ends from Savings and Loan Days All that now remains outside Wes-FIC but within Wesco as a consequence of Wesco's former involvement with Mutual Savings, Wesco's long-held savings and loan subsidiary, is a small real estate subsidiary, MS Property Company, that holds tag ends of real estate assets with a net book value of about $6.5 million. MS Property Company's results of operations, immaterial versus Wesco's present size, are included in the breakdown of earnings on page 1 within ""other operating earnings.'' Other Operating Earnings Other operating earnings, net of interest paid and general corporate expenses, amounted to $.2 million in 2000 and $.7 million in 1999. Sources were (1) rents ($3 million gross in 2000) from Wesco's Pasadena oÇce property (leased almost entirely to outsiders, including California Federal Bank as the ground Öoor tenant), and (2) interest and dividends from cash equivalents and marketable securities held outside the insurance subsidiaries, less (3) general corporate expenses plus minor expenses involving tag-end real estate.time

when Freddie Mac shares could be lawfully owned only by a savings and loan association. Those shares, carried on Wesco's balance sheet at yearend 1999 at a market value of $1.4 billion, were sold in 2000, giving rise to the principal portion of the $852.4 million of after-tax securities gains realized by Wesco in 2000, versus $7.3 million, after taxes, realized in 1999. Although the realized gains materially impacted Wesco's reported earnings for each year, they had a very minor impact on Wesco's shareholders' equity. Inasmuch as the greater portion of each year's realized gains had previously been reÖected in the unrealized gain component of Wesco's shareholders' equity, those amounts were merely switched from unrealized gains to retained earnings, another component of shareholders' equity. Consolidated Balance Sheet and Related Discussion As indicated in the accompanying Ñnancial statements, Wesco's net worth, as accountants compute it under their conventions, increased to $1.98 billion ($278 per Wesco share) at yearend 2000 from $1.90 billion ($266 per Wesco share) at yearend 1999. The foregoing $278-per-share book value approximates liquidation value assum- ing that all Wesco's non-security assets would liquidate, after taxes, at book value. Probably, this assumption is too conservative.

But our computation of liquidation value is unlikely to be too low by any large percentage because (1) the liquidation value of Wesco's consolidated real estate holdings (where interesting potential now lies almost entirely in Wesco's equity in its oÇce property in Pasadena containing only 125,000 net rentable square feet), and (2) possible unrealized appreciation in other assets (primarily CORT and Precision Steel) cannot be large enough, in relation to Wesco's overall size, to change very much the overall computation of after-tax liquidating value. Of course, so long as Wesco does not liquidate, and does not sell any appreciated securities, it has, in eÅect, an interest-free ""loan'' from the government equal to its deferred income taxes on the unrealized gains, subtracted in determining its net worth. The sale of the Freddie Mac shares in 2000 reduced that interest-free ""loan'' from $705 million as of yearend 1999 to $258 million as of yearend 2000. This interest-free ""loan'' from the government is at this moment working for Wesco shareholders and amounted only to about $36 per Wesco share at year end 2000. However, some day, additional parts of the interest-free ""loan'' may be removed as securities are sold, as happened to such a large extent with the sale of Freddie Mac stock in 2000. Therefore, Wesco's shareholders have no perpetual advantage creating value for them of $36 per Wesco share.

Instead, the present value of Wesco's shareholders' advantage must logically be much lower than $36 per Wesco share. Business and human quality in place at Wesco continues to be not nearly as good, all factors considered, as that in place at Berkshire Hathaway.an

equally-good-but-smaller version of Berkshire Hathaway, better because its small size makes growth easier. Instead, each dollar of book value at Wesco continues plainly to provide much less intrinsic value than a similar dollar of book value at Berkshire Hathaway. Moreover, the quality disparity in book value's intrinsic merits has, in recent years, continued to widen in favor of Berkshire Hathaway. All that said, we make no attempt to appraise relative attractiveness for invest- ment of Wesco versus Berkshire Hathaway stock at present stock-market quotations. To progress from this point at a satisfactory rate, Wesco plainly needs more favorable investment opportunities, recognizable as such by its management, prefer- ably in whole companies like CORT, but, alternatively, in marketable securities to be purchased by Wesco's insurance subsidiaries. The Board of Directors recently increased Wesco's regular dividend from 30¥ cents per share to 31¥ cents per share, payable March 7, 2001, to shareholders of record as of the close of business on February 7, 2001. This annual report contains Form 10-K, a report Ñled with the Securities and Exchange Commission, and includes detailed information about Wesco and its subsidiaries as well as audited Ñnancial statements bearing extensive footnotes. As usual, your careful attention is sought with respect to these items. Charles T. Munger Chairman of the Board March 5, 2001

WESCO FINANCIAL CORPORATION LETTER TO SHAREHOLDERS To Our Shareholders: Consolidated ""normal'' net operating income (i.e., before irregularly occurring items shown in the table below) for the calendar year 1999 increased to $45,904,000 ($6.44 per share) from $37,622,000 ($5.28 per share) in the previous year. Consolidated net income (i.e., after irregularly occurring items shown in the table below) decreased to $54,143,000 ($7.60 per share) from $71,803,000 ($10.08 per share) in the previous year. Wesco had three major subsidiaries at yearend 1999: (1) Wesco-Financial Insurance Company (""Wes-FIC''), headquartered in Omaha and engaged princi- pally in the reinsurance business, (2) The Kansas Bankers Surety Company (""KBS''), owned by Wes-FIC and specializing in insurance products tailored to midwestern banks, and (3) Precision Steel, headquartered in Chicago and engaged in the steel warehousing and specialty metal products businesses. Consolidated net income for the two years just ended breaks down as follows (in 000s except for per-share amounts)(1) : Year Ended December 31, 1999 December 31, 1998 Per Per Wesco Wesco Amount Share(2) Amount Share(2) ""Normal'' net operating income of: Wes-FIC and KBS insurance businesses ÏÏÏÏÏÏÏÏÏÏÏÏ $43,610 $6.12 $34,654 $ 4.87 Precision Steel businessesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,532 .35 3,154 .44 All other ""normal'' net operating income (loss)(3) ÏÏÏÏ (238) (.03) (186) (.03) 45,904 6.44 37,622 5.

28 Realized net securities gainsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,271 1.02 33,609 4.72 Gain on sales of foreclosed properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 968 .14 572 .08 Wesco consolidated net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $54,143 $7.60 $71,803 $10.08 (1) All Ñgures are net of income taxes. (2) Per-share data is based on 7,119,807 shares outstanding. Wesco has had no dilutive capital stock equivalents. (3) After deduction of interest and other corporate expenses, and costs and expenses associated with foreclosed real estate previously charged against Wesco's former Mutual Savings and Loan Association subsidiary. Income was from ownership of the Wesco headquarters oÇce building, primarily leased to outside tenants, interest and dividend income from cash equivalents and marketable securities owned outside the insurance subsidiaries, and, in 1999, the reduction of loss reserves provided in prior years against possible losses on sales of loans and foreclosed real estate. This supplementary breakdown of earnings diÅers somewhat from that used in audited Ñnancial statements which follow standard accounting convention. The supplementary breakdown is furnished because it is considered useful to shareholders. Wesco-Financial Insurance Company (""Wes-FIC'') Wes-FIC's normal net income for 1999 was $43,610,000, versus $34,654,000 for 1998.by

The Kansas Bankers Surety Company (""KBS''), owned by Wes-FIC since 1996. KBS is discussed in the section, ""The Kansas Bankers Surety Company,'' below. At the end of 1999 Wes-FIC retained about $21 million in invested assets, oÅset by claims reserves, from its former reinsurance arrangement with Fireman's Fund Group. This arrangement was terminated August 31, 1989. However, it will take a long time before all claims are settled, and, meanwhile, Wes-FIC is being helped over many years by proceeds from investing ""Öoat.'' In addition, Wes-FIC has been engaged for several years in super-cat reinsur- ance, described in great detail in our pre-1999 annual reports, which Wesco shareholders should re-read each year. Wes-FIC also engages in other reinsurance business, including large and small quota share arrangements similar and dissimilar to our previous reinsurance contract with Fireman's Fund Group. In all recent reinsurance sold by us, other subsidiaries of our 80%-owning parent, Berkshire Hathaway, sold four times as much reinsurance to the same customers on the same terms, except that such subsidiaries usually take from us a 3%-of-premiums ceding commission on premium volume passed through them to Wes-FIC. Excepting this ceding commission, Wes-FIC has virtually no insurance-acquisition or insurance administration costs.

Early in the current year (2000) Wes-FIC made an intracompany loan that funds a large majority of the purchase price of CORT Business Services Corporation, discussed below. Wes-FIC remains a very strong insurance company, with very low costs, and, one way or another, in the future as in the past, we expect to continue to Ñnd and seize at least a few sensible insurance opportunities. On super-cat reinsurance accepted by Wes-FIC to date (March 3, 2000) there has been no loss whatsoever that we know of, but some ""no-claims'' contingent commissions have been paid to original cessors of business (i.e., cessors not including Berkshire Hathaway). Super-cat underwriting proÑt of $1.4 million a year, before taxes, beneÑted earnings in 1999 and 1998. The balance of pre-tax underwrit- ing proÑt amounted to $3.0 million for 1999 and $1.9 million for 1998. These Ñgures came mostly from favorable revision of loss reserves on the old Fireman's Fund contract. Wesco shareholders should continue to realize that recent marvelous underwrit- ing results are sure to be followed, sometime, by one or more horrible underwriting losses from super-cat or other insurance written by Wes-FIC.

The Kansas Bankers Surety Company (""KBS'') KBS, purchased by Wes-FIC in 1996 for approximately $80 million in cash, contributed $6,415,000 to the normal net operating income of the insurance businesses in 1999 and $4,987,000 in 1998, after reductions for goodwill amortiza- tion under consolidated accounting convention of $782,000 each year.of

KBS have been combined with those of Wes-FIC, and are included in the foregoing table in the category, "" 'normal' net operating income of Wes-FIC and KBS insurance businesses.'' KBS was chartered in 1909 to underwrite deposit insurance for Kansas banks. Its oÇces are in Topeka, Kansas. Over the years its service has continued to adapt to the changing needs of the banking industry. Today its customer base, consisting mostly of small and medium-sized community banks, is spread throughout 25 mainly midwestern states. In addition to bank deposit guaranty bonds which insure deposits in excess of FDIC coverage, KBS also oÅers directors and oÇcers indemnity policies, bank employment practices policies, bank annuity and mutual funds indemnity policies and bank insurance agents professional errors and omissions indemnity policies. A signiÑcant change in KBS's operations occurred in 1998 and consisted of a large reduction in insurance premiums ceded to reinsurers. The increased volume of business retained (95% in 1999 and 94% in 1998 compares with 58% in 1997) accompanied slightly higher underwriting income for 1999 after a reduction in the amount for 1998. KBS's combined ratio remained much better than average for insurers, at 59.4% for 1999 and 62.2% for 1998, versus 37.2% for 1997, and we expect volatile but favorable long-term eÅects from increased insurance retained.

Part of KBS's continuing insurance volume is now ceded through reinsurance to other Berkshire subsidiaries under reinsurance arrangements whereunder such other Berkshire subsidiaries take 50% and unrelated reinsurers take the other 50%. KBS is run by Donald Towle, President, assisted by 15 dedicated oÇcers and employees. CORT Business Services Corporation (""CORT'') In February 2000, Wesco purchased 100% of CORT Business Services Corpora- tion (""CORT'') for $384 million in cash. In addition, CORT retains about $45 million of previously existing debt. CORT is a very long established company that is the country's leader in rentals of furniture that lessees have no intention of buying. In the trade, people call CORT's activity ""rent-to-rent'' to distinguish it from ""lease-to-purchase'' businesses that are, in essence, installment sellers of furniture. However, just as Hertz, as a rent-to-rent auto lessor in short-term arrangements, must be skilled in selling used cars, CORT must be and is skilled in selling used furniture. In 1999, CORT had total revenues of $354 million. Of this, $295 million was furniture rental revenue and $59 million was furniture sales revenue. CORT's pre-tax earnings in 1999 were $46 million.

Thus, in essence, Wesco paid $384 million for $46 million in pre-tax earnings. About 60% of the purchase price was attributable to goodwill, an intangible balance sheet asset. After the transaction, Wesco's consolidated balance sheet will contain about $260 million in goodwill (including $29 million from Wesco's 1996 purchase of Kansas Bankers Surety). On a full year basis, Wesco's future reported earnings will be reduced by about $6 million on account of mostly-non-tax-deductible amortiza- tion of goodwill. We do not believe, however, that this accounting deduction reÖects any real deterioration in earnings-driving goodwill in place. More details with respect to the CORT transaction are contained in Note 8 to the accompanying Ñnancial statements, and on the last page of this annual report, to which careful attention is directed. CORT has long been headed by Paul Arnold, age 53, who is a star executive as is convincingly demonstrated by his long record as CEO of CORT. Paul will continue as CEO of CORT, with no interference from Wesco headquarters. We would be crazy to second-guess a man with his record in business. We are absolutely delighted to have Paul and CORT within Wesco and hope to see a considerable expansion of CORT's business and earnings in future years.

Precision Steel The businesses of Wesco's Precision Steel subsidiary, headquartered in the outskirts of Chicago at Franklin Park, Illinois, contributed $2,532,000 to normal net operating income in 1999, compared with $3,154,000 in 1998. The $622,000 decrease in 1999 net income occurred despite a 2.5% increase in pounds of product sold, and reÖects mainly the pounding which competition gave to prices as costs of principal raw materials declined. Fewer dollars of gross proÑt were available to absorb operating expenses. Precision Steel's operations for 1999 and 1998 also reÖect after-tax expenditures of approximately $225,000 and $350,000, respectively, necessitated to upgrade computers and computer systems to ensure that Precision Steel's order-taking and other data processing systems continue to function accu- rately beyond December 31, 1999. It is with mixed emotions that we report that David Hillstrom, President and Chief Executive oÇcer of Precision Steel for more than twenty years, retired in the latter part of 1999 and that Terry Piper was elected to replace him. Terry is a very able man and is no stranger to Precision Steel. He joined it as a salesman approxi- mately forty years ago, steadily advanced, and served as President and General Manager of Precision Steel's Precision Brand Products subsidiary for the last thirteen years.

Terry now has the responsibility of carrying on the leadership of his predeces- sor; and, under their combined skills, Precision Steel's businesses in 1999 continued to provide an excellent return on resources employed.

Tag Ends from Savings and Loan Days All that now remains outside Wes-FIC but within Wesco as a consequence of Wesco's former involvement with Mutual Savings, Wesco's long-held savings and loan subsidiary, is a small real estate subsidiary, MS Property Company, that holds tag ends of assets and liabilities with a net book value of about $15 million. MS Property Company's results of operations, immaterial versus Wesco's present size, are in- cluded in the foregoing breakdown of earnings within ""all other 'normal' net operating income (loss).'' Of course, the main tag end from Wesco's savings and loan days is an investment in Freddie Mac common stock, purchased by Mutual Savings for $72 mil- lion at a time when Freddie Mac shares could be lawfully owned only by a savings and loan association. The 28,800,000 shares owned by Wes-FIC at yearend 1999 had a market value of $1.4 billion. All Other ""Normal'' Net Operating Income or Loss All other ""normal'' net operating income or loss, net of interest paid and general corporate expenses, amounted to after-tax losses of $238,000 in 1999 and $186,000 in 1998. Sources were (1) rents ($2,862,000 gross in 1999) from Wesco's Pasadena oÇce property (leased almost entirely to outsiders, including California Federal Bank as the ground Öoor tenant), and (2) interest and dividends from cash equivalents and marketable securities held outside the insurance subsidiaries, less (3) costs and expenses of liquidating tag-end foreclosed real estate.

The loss widened in 1999 because fewer dividends were received during the year after forced conversion of preferred stock of Citigroup Inc. (""Citigroup'') into lower-dividend-paying common stock. The ""other 'normal' net operating income or loss'' Ñgures for 1999 and 1998 also include intercompany charges for interest expense ($353,000 and $102,000 after taxes, respectively) on borrowings from Wes-FIC. This intercompany interest expense does not aÅect Wesco's consolidated net income inasmuch as the same amount is included as interest income in Wes-FIC's ""normal'' net operating income. ""Other 'normal' net operating income or loss'' beneÑted in 1999 by about $800,000 caused by reversals of reserves for possible losses on sales of loans and tag-end real estate, expensed in prior years. Net Securities Gains and Losses Wesco's earnings contained securities gains of $7,271,000, after income taxes, for 1999, versus $33,609,000, after taxes, for 1998. Although the realized gains materially impacted Wesco's reported earnings for each year, they had a very minor impact on Wesco's shareholders' equity. Inasmuch as the greater portion of each year's realized gains had previously been reÖected in the unrealized gain component of Wesco's shareholders' equity, those amounts were merely switched from unrealized gains to retained earnings, another component of shareholders' equity.

Consolidated Balance Sheet and Related Discussion As indicated in the accompanying Ñnancial statements, Wesco's net worth decreased, as accountants compute it under their conventions, to $1.90 billion ($266 per Wesco share) at yearend 1999 from $2.22 billion ($312 per Wesco share) at yearend 1998. The $328.4 million decrease in reported net worth in 1999 was the result of (1) $54.1 million from 1999 net income; less (2) a $374.1 million decrease in the market value of investments after provision for future taxes on capital gains; and (2) $8.4 million in dividends paid. The foregoing $266-per-share book value approximates liquidation value assum- ing that all Wesco's non-security assets would liquidate, after taxes, at book value. Probably, this assumption is too conservative. But our computation of liquidation value is unlikely to be too low by more than two or three dollars per Wesco share, because (1) the liquidation value of Wesco's consolidated real estate holdings (where interesting potential now lies almost entirely in Wesco's equity in its oÇce property in Pasadena containing only 125,000 net rentable square feet), and (2) unrealized appreciation in other assets (primarily Precision Steel) cannot be large enough, in relation to Wesco's overall size, to change very much the overall computation of after-tax liquidating value.

Of course, so long as Wesco does not liquidate, and does not sell any appreciated assets, it has, in eÅect, an interest-free ""loan'' from the government equal to its deferred income taxes on the unrealized gains, subtracted in determining its net worth. This interest-free ""loan'' from the government is at this moment working for Wesco shareholders and amounted to about $99 per Wesco share at yearend 1999. However, some day, perhaps soon, major parts of the interest-free ""loan'' must be paid as assets are sold. Therefore, Wesco's shareholders have no perpetual advantage creating value for them of $99 per Wesco share. Instead, the present value of Wesco's shareholders' advantage must logically be much lower than $99 per Wesco share. In the writer's judgment, the value of Wesco's advantage from its temporary, interest-free ""loan'' was probably about $20 per Wesco share at yearend 1999. After the value of the advantage inhering in the interest-free ""loan'' is estimated, a reasonable approximation can be made of Wesco's intrinsic value per share. This approximation is made by simply adding (1) the value of the advantage from the interest-free ""loan'' per Wesco share and (2) liquidating value per Wesco share. Others may think diÅerently, but the foregoing approach seems reasonable to the writer as a way of estimating intrinsic value per Wesco share.intrinsic

value as guessed in a similar calculation at the end of 1998. And, Ñnally, this reasonable-to-this-writer, $286-per-share Ñgure for intrinsic per share value of Wesco stock should be compared with the $245 per share price at which Wesco stock was selling on December 31, 1999. This comparison indicates that Wesco stock was then selling about 14% below intrinsic value. Wesco's investment portfolio suÅered more than its commensurate share of decline in market value in 1999. Last year, we said ""as Wesco's unrealized apprecia- tion has continued to grow in frothy markets for securities, it should be remembered that it is subject to market Öuctuation, possibly dramatic on the downside, with no guaranty as to its ultimate full realization .'' The stock of several of our largest investees lagged the market in 1999 by a large margin. It's no sure thing that the value of our marketable securities will quickly recover. Unrealized after-tax apprecia- tion represented 69% of Wesco's shareholders' equity at 1999 yearend, versus 76% and 73% one and two years earlier. Business and human quality in place at Wesco continues to be not nearly as good, all factors considered, as that in place at Berkshire Hathaway. Wesco is not an equally-good-but-smaller version of Berkshire Hathaway, better because its small size makes growth easier. Instead, each dollar of book value at Wesco continues plainly to provide much less intrinsic value than a similar dollar of book value at Berkshire Hathaway.

Moreover, the quality disparity in book value's intrinsic merits has, in recent years, been widening in favor of Berkshire Hathaway. All that said, we make no attempt to appraise relative attractiveness for invest- ment of Wesco versus Berkshire Hathaway stock at present stock-market quotations. The Board of Directors recently increased Wesco's regular dividend from 29¥ cents per share to 30¥ cents per share, payable March 8, 2000, to shareholders of record as of the close of business on February 9, 2000. This annual report contains Form 10-K, a report Ñled with the Securities and Exchange Commission, and includes detailed information about Wesco and its subsidiaries as well as audited Ñnancial statements bearing extensive footnotes. As usual, your careful attention is sought with respect to these items. Charles T.2000

WESCO FINANCIAL CORPORATION LETTER TO SHAREHOLDERS To Our Shareholders: Consolidated ""normal'' net operating income (i.e., before irregularly occurring items shown in the table below) for the calendar year 1998 decreased to $37,622,000 ($5.28 per share) from $38,262,000 ($5.38 per share) in the previous year. Consolidated net income (i.e., after irregularly occurring items shown in the table below) decreased to $71,803,000 ($10.08 per share) from $101,809,000 ($14.30 per share) in the previous year. Wesco has three major subsidiaries: (1) Wesco-Financial Insurance Company (""Wes-FIC''), headquartered in Omaha and engaged principally in the reinsurance business, (2) The Kansas Bankers Surety Company (""KBS''), owned by Wes-FIC and specializing in insurance products tailored to midwestern banks, and (3) Precision Steel, headquartered in Chicago and engaged in the steel warehousing and specialty metal products businesses. Consolidated net income for the two years just ended breaks down as follows (in 000s except for per-share amounts) (1): Year Ended December 31, 1998 December 31, 1997 Per Per Wesco Wesco Amount Share(2) Amount Share(2) ""Normal'' net operating income of: Wes-FIC and KBS insurance businessesÏÏÏÏÏÏÏÏÏÏÏ $34,654 $ 4.87 $ 33,507 $ 4.71 Precision Steel businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,154 .44 3,622 .51 All other ""normal'' net operating income (loss)(3) ÏÏÏ (186) (.03) 1,133 .16 37,622 5.28 38,262 5.

38 Realized net securities gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33,609 4.72 62,697 8.80 Gain on sales of foreclosed properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 572 .08 850 .12 Wesco consolidated net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $71,803 $10.08 $101,809 $14.30 (1) All Ñgures are net of income taxes. (2) Per-share data is based on 7,119,807 shares outstanding. Wesco has had no dilutive capital stock equivalents. (3) After deduction of interest and other corporate expenses, and costs and expenses associated with foreclosed real estate previously charged against Wesco's former Mutual Savings and Loan Association subsidiary. Income was from ownership of the Wesco headquarters oÇce building, primarily leased to outside tenants, interest and dividend income from cash equivalents and marketable securities owned outside the insurance subsidiaries, and, in 1997, the reduction of loss reserves provided in prior years against possible losses on sales of foreclosed real estate. This supplementary breakdown of earnings diÅers somewhat from that used in audited Ñnancial statements which follow standard accounting convention. The supplementary breakdown is furnished because it is considered useful to shareholders.

Wesco-Financial Insurance Company (""Wes-FIC'') Wes-FIC's normal net income for 1998 was $34,654,000, versus $33,507,000 for 1997. The Ñgures include $4,987,000 in 1998 and $6,044,000 in 1997 contributed by The Kansas Bankers Surety Company (""KBS''), owned by Wes-FIC since 1996. KBS is discussed in the section, ""The Kansas Bankers Surety Company,'' below. At the end of 1998 Wes-FIC retained about $24 million in invested assets, oÅset by claims reserves, from its former reinsurance arrangement with Fireman's Fund Group. This arrangement was terminated August 31, 1989. However, it will take a long time before all claims are settled, and, meanwhile, Wes-FIC is being helped over many years by proceeds from investing ""Öoat.'' We previously informed shareholders that Wes-FIC had entered into the busi- ness of super-cat reinsurance through retrocessions from the Insurance Group of Berkshire Hathaway, Wesco's ultimate parent. Wes-FIC's entry into the super-cat reinsurance business early in 1994 followed the large augmentation of its claims- paying capacity caused by its merger with Mutual Savings, the former savings and loan subsidiary of Wesco. In 1994, in recognition of Wes-FIC's sound Ñnancial condition, Standard and Poor's Corporation assigned to Wes-FIC the highest possible claims-paying-ability rating: AAA. The super-cat reinsurance business, in which Wes-FIC is engaged, continues to be a very logical business for Wes-FIC.

Wes-FIC has a large net worth in relation to annual premiums being earned. And this is exactly the condition rationally required for any insurance company planning to be a ""stand alone'' reinsurer covering super- catastrophe risks it can't safely pass on to others sure to remain solvent if a large super-catastrophe comes. Such a ""stand alone'' reinsurer must be a kind of Fort Knox, prepared occasionally, without calling on any other reinsurers for help, to pay out in a single year many times more than premiums coming in, as it covers losses from some super catastrophe worse than Hurricane Andrew. In short, it needs a balance sheet a lot like Wes-FIC's. In connection with the retrocessions of super-cat reinsurance to Wes-FIC from the Berkshire Hathaway Insurance Group, the nature of the situation as it has evolved is such that Berkshire Hathaway, owning 100% of its Insurance Group and only 80% of Wesco and Wes-FIC, does not, for some philanthropic reason, ordinarily retrocede to Wes-FIC any reinsurance business that Berkshire Hathaway considers desirable and that is available only in amounts below what Berkshire Hathaway wants for itself on the terms oÅered. Instead, retrocessions occur only occasionally, under limited conditions and with some compensation to Berkshire Hathaway.

Such retrocessions ordinarily happen only when (1) Berkshire Hathaway, for some reason (usually a policy of overall risk limitation), desires lower amounts of business than are available on the terms oÅered and (2) Wes-FIC has adequate capacity to bear the risk assumed and (3) Wes-FIC pays a fair ceding commission designed to cover part of the cost of getting and managing insurance business.

Generally, Berkshire Hathaway, in dealing with partly owned subsidiaries, tries to lean over a little backward in an attempt to observe what Justice Cardozo called ""the punctilio of an honor the most sensitive,'' but it cannot be expected to make large and plain giveaways of Berkshire Hathaway assets or business to a partially owned subsidiary like Wes-FIC. Given Berkshire Hathaway's unwillingness to make plain giveaways to Wes-FIC and reductions in opportunities in the super-cat reinsurance market in recent years, prospects are often poor for Wes-FIC's acquisition of retroceded super-cat reinsurance. Moreover, Wesco shareholders should continue to realize that super-cat rein- surance is not for the faint of heart. A huge variation in annual results, with some very unpleasant future years for Wes-FIC, is inevitable. But it is precisely what must, in the nature of things, be associated with these bad possibilities, with their huge and embarrassing adverse consequences in occa- sional years, that makes Wes-FIC like its way of being in the super-cat business. Buyers (particularly wise buyers) of super-cat reinsurance often want to deal with Berkshire Hathaway subsidiaries (possessing as they do the highest possible credit ratings and a reliable corporate personality) instead of other reinsurers less cautious, straightforward and well endowed.

And many competing sellers of super-cat reinsur- ance are looking for a liberal ""intermediary's'' proÑt, hard to get because they must Ñnd a ""layoÅ'' reinsurer both (1) so smart that it is sure to stay strong enough to pay possible losses yet (2) so casual about costs that it is not much bothered by a liberal proÑt earned by some intermediary entity not willing to retain any major risk. Thus the forces in place can rationally be expected to cause acceptable long-term results for well-Ñnanced, disciplined decision makers, despite horrible losses in some years and other years of restricted opportunity to write business. And, again, we wish to repeat that we expect only acceptable long-term results. We see no possibility for bonanza. It should also be noted that Wes-FIC, in the arrangements with the Insurance Group of Berkshire Hathaway, receives a special business-acquisition advantage from using Berkshire Hathaway's general reputation. Under all the circumstances, the 3% ceding commission now being paid seems more than fair to Wes-FIC. Certainly and obviously, Berkshire Hathaway would not oÅer terms so good to any other entity outside the Berkshire Hathaway aÇliated group. Finally, we repeat an important disclosure about Wes-FIC's super-cat-reinsur- ance-acquisition mechanics. It is impractical to have people in California make complex accept-or-reject decisions for Wes-FIC when retrocessions of reinsurance are oÅered by the Berkshire Hathaway Insurance Group.

Hathaway subsidiaries. Each retrocession is to be accepted forthwith in writing in Nebraska by agents of Wes-FIC who are at the same time salaried employees of wholly owned subsidiaries of Berkshire Hathaway. Moreover, each retrocession will be made at a 3%-of-premiums ceding commission. Finally, two conditions must be satisÑed: (1) Wes-FIC must get 20% or less of the risk (before taking into account eÅects from the ceding commission) and (2) wholly owned Berkshire Hathaway subsidiaries must retain at least 80% of the identical risk (again, without taking into account eÅects from the ceding commission). We will not ordinarily describe individual super-cat reinsurance contracts in full detail to Wesco shareholders. That would be contrary to our competitive interest. Instead, we will try to summarize reasonably any items of very large importance. Will more reinsurance be later available to Wes-FIC through Berkshire Hathaway subsidiaries on the basis and using the automatic procedure we have above described? Well, we have often proved poor prognosticators. We can only say that we hope so and that more reinsurance should come, albeit irregularly and with long intermissions. No new contracts became available to Wes-FIC in 1998. As of 1998 yearend, the one remaining super-cat contract, plus one other contract, not a super-cat contract, represented Wes-FIC's active reinsurance business.

We continue to examine other possible insurance-writing opportunities, and also insurance company acquisitions, like and unlike the purchase of KBS. Wes-FIC is now a very strong insurance company, with very low costs, and, one way or another, in the future as in the past, we expect to continue to Ñnd and seize at least a few sensible insurance opportunities. On super-cat reinsurance accepted by Wes-FIC to date (March 8, 1999) there has been no loss whatsoever that we know of, but some ""no-claims'' contingent commissions have been paid to original cessors of business (i.e., cessors not including Berkshire Hathaway). Super-cat underwriting proÑt of $1.4 million, before taxes, beneÑted 1998 earnings, versus $2.3 million in 1997. The balance of pre-tax underwriting proÑt amounted to $1.9 million for 1998 and $2.8 million for 1997. These Ñgures came mostly from favorable revision of loss reserves on the old Fireman's Fund contract. The Kansas Bankers Surety Company (""KBS'') KBS, purchased by Wes-FIC in 1996 for approximately $80 million in cash, contributed $4,987,000 to the normal net operating income of the insurance businesses in 1998 and $6,044,000 in 1997, after reductions for goodwill amortiza- tion under consolidated accounting convention of $782,000 each year. The results of KBS have been combined with those of Wes-FIC, and are included in the foregoing table in the category, "" 'normal' net operating income of Wes-FIC and KBS insurance businesses.''

changing needs of the banking industry. Today its customer base, consisting mostly of small and medium-sized community banks, is spread throughout 25 mainly midwestern states. In addition to bank deposit guaranty bonds which insure deposits in excess of FDIC coverage, KBS also oÅers directors and oÇcers indemnity policies, bank employment practices policies, bank annuity and mutual funds indemnity policies and bank insurance agents professional errors and omissions indemnity policies. The principal change in KBS's operations in 1998 was a large reduction in insurance premiums ceded to reinsurers, eÅective January 1, 1998. The increased volume of business retained (94% in 1998 versus 58% in 1997) accompanied reduced underwriting income during 1998. However, KBS's combined ratio re- mained much better than average for insurers, at 62.2% for 1998, versus 37.2% for 1997 and 29.3% for 1996, and we expect volatile but favorable long-term eÅects from increased insurance retained. Part of KBS's continuing insurance volume is now ceded through reinsurance to other Berkshire subsidiaries under reinsurance arrange- ments whereunder such other Berkshire subsidiaries take 50% and unrelated reinsur- ers take the other 50%. KBS is run by Donald Towle, President, assisted by 15 dedicated oÇcers and employees.

Precision Steel The businesses of Wesco's Precision Steel subsidiary, headquartered in the outskirts of Chicago at Franklin Park, Illinois, contributed $3,154,000 to normal net operating income in 1998, compared with $3,622,000 in 1997. The decrease in proÑt occurred as revenues decreased 2%, despite a 5% increase in pounds of product sold, and was attributable mainly to expenditures necessitated to upgrade computers and computer systems to ensure that Precision Steel's order-taking and other data processing systems continue to function accurately beyond December 31, 1999. Under the skilled leadership of David Hillstrom, Precision Steel's businesses in 1998 continued to provide an excellent return on resources employed. Tag Ends from Savings and Loan Days All that now remains outside Wes-FIC but within Wesco as a consequence of Wesco's former involvement with Mutual Savings, Wesco's long-held savings and loan subsidiary, is a small real estate subsidiary, MS Property Company, that holds tag ends of assets and liabilities with a net book value of about $13 million. MS Property Company's results of operations, immaterial versus Wesco's present size, are in- cluded in the foregoing breakdown of earnings within ""all other 'normal' net operating income (loss).''loan

association. This holding, with a market value of $1.9 billion at yearend 1998, now reposes in Wes-FIC. All Other ""Normal'' Net Operating Income or Loss All other ""normal'' net operating income or loss, net of interest paid and general corporate expenses, decreased to an after-tax loss of $186,000 in 1998 from an after- tax proÑt of $1,133,000 in 1997. Sources were (1) rents ($2,921,000 gross) from Wesco's Pasadena oÇce property (leased almost entirely to outsiders, including California Federal Bank as the ground Öoor tenant), and (2) interest and dividends from cash equivalents and marketable securities held outside the insurance subsidi- aries, less (3) costs and expenses of liquidating tag-end foreclosed real estate. Income in 1998 was lower because (1) reversals of reserves for possible losses on sales of such tag end real estate, expensed in prior years, beneÑted earnings by about $1.1 million in 1997, and (2) lower dividends were received in 1998 after forced conversion of preferred stock of Citigroup Inc. (""Citigroup'') into lower-dividend- paying common stock. The 1998 and 1997 ""other 'normal' net operating income or loss'' Ñgures also include intercompany charges for interest expense ($102,000 and $172,000 after taxes, respectively) on borrowings from Wes-FIC. This intercompany interest expense does not aÅect Wesco's consolidated net income inasmuch as the same amount is included as interest income in Wes-FIC's ""normal'' net operating income.

Net Securities Gains and Losses Wesco's earnings contained securities gains of $33,609,000, after income taxes, for 1998, versus $62,697,000, after taxes, for 1997. The entire 1998 Ñgure resulted from sales of marketable securities. Of the 1997 Ñgure, only $93,000 was realized through the sale of securities; the balance, $62,604,000, resulted from the exchange of the preferred and common shares of Salomon Inc (""Salomon'') owned by Wesco for preferred and common shares of The Travelers Group Inc. (""Travelers'') late in 1997 in connection with the merger of Salomon with a subsidiary of Travelers. Accounting standards require that the fair (market) value of shares received in such an exchange be recorded as the new cost basis as of the date of the exchange, with the diÅerence, after appropriate reserves for future income tax on the gain, recog- nized in the Ñnancial statements as a realized after-tax gain. For income tax purposes the exchange is recorded at the original cost of the securities exchanged; no gain is reported on the tax return until the securities are sold. Although the realized gains materially impacted Wesco's reported earnings for each year, they had a very minor impact on Wesco's shareholders' equity.

Inasmuch as the greater portion of each year's realized gains had previously been reÖected in the unrealized gain component of Wesco's shareholders' equity, those amounts were merely switched from unrealized gains to retained earnings, another component of shareholders' equity.

Convertible Preferred Stockholdings At the end of 1998, Wesco and its subsidiaries owned $20,000,000, at original cost, in convertible preferred stock which by merger of Travelers and Citicorp late in 1998 became convertible preferred stock of Citigroup. The Travelers preferred stock, itself, was received in 1997 (see the preceding section) in exchange for the Wesco group's remaining shares of Salomon preferred stock, which originally cost $20,000,000, and whose cost was adjusted upwards to $45,000,000 as of the date of the exchange. The issue requires redemption at par value of $20,000,000 on October 31, 1999, if not converted to 892,105 shares of common stock before that date. The investment is carried on Wesco's consolidated balance sheet at fair value of $44,000,000 as of December 31, 1998, the approximate market value of the common shares at that date, with the $1,000,000 diÅerence between its adjusted cost and market value deducted from shareholders' equity, net of income tax eÅect, without aÅecting reported net income, according to accounting convention. The convertible preferred stock was obtained at the same time Wesco's parent corpora- tion, Berkshire Hathaway, obtained additional amounts of the same stock at the same price per share. Through yearend 1997, Wesco's consolidated Ñnancial statements reÖected an investment in 9.25% convertible preferred stock of US Airways Group, Inc.

, acquired by Wesco at par of $12,000,000 in 1989; that Ñgure was adjusted down to $3,000,000 when we decided in 1994 that an other-than-temporary decline in the value of its stock had occurred. Early in 1998, US Airways called the preferred stock for redemption. Prior to the eÅective date, Wesco converted its preferred stock investment to 309,718 shares of US Airways common stock and sold the latter for $21,738,000, realizing a gain of $18,738,000 for Ñnancial statement purposes ($12,180,000 after taxes). For tax return purposes, however, only $9,738,000 of gain ($6,330,000 after taxes) will be realized, because the $9,000,000 writedown in 1994 was not deductible. Consolidated Balance Sheet And Related Discussion As indicated in the accompanying Ñnancial statements, Wesco's net worth increased, as accountants compute it under their conventions, to $2.22 billion ($312 per Wesco share) at yearend 1998 from $1.76 billion ($248 per Wesco share) at yearend 1997. The $459.5 million increase in reported net worth in 1998 was the result of three factors: (1) $395.8 million resulting from continued net appreciation of investments after provision for future taxes on capital gains; plus (2) $71.8 million from 1998 net income; less (3) $8.1 million in dividends paid. The foregoing $312-per-share book value approximates liquidation value assum- ing that all Wesco's non-security assets would liquidate, after taxes, at book value. Probably, this assumption is too conservative.holdings

(where interesting potential now lies almost entirely in Wesco's equity in its oÇce property in Pasadena) containing only 125,000 net rentable square feet, and (2) unrealized appreciation in other assets (primarily Precision Steel) cannot be large enough, in relation to Wesco's overall size, to change very much the overall computation of after-tax liquidating value. Of course, so long as Wesco does not liquidate, and does not sell any appreciated assets, it has, in eÅect, an interest-free ""loan'' from the government equal to its deferred income taxes on the unrealized gains, subtracted in determining its net worth. This interest-free ""loan'' from the government is at this moment working for Wesco shareholders and amounted to about $127 per Wesco share at yearend 1998. However, some day, perhaps soon, major parts of the interest-free ""loan'' must be paid as assets are sold. Therefore, Wesco's shareholders have no perpetual advantage creating value for them of $127 per Wesco share. Instead, the present value of Wesco's shareholders' advantage must logically be much lower than $127 per Wesco share. In the writer's judgment, the value of Wesco's advantage from its temporary, interest-free ""loan'' was probably about $30 per Wesco share at yearend 1998. After the value of the advantage inhering in the interest-free ""loan'' is estimated, a reasonable approximation can be made of Wesco's intrinsic value per share.

This approximation is made by simply adding (1) the value of the advantage from the interest-free ""loan'' per Wesco share and (2) liquidating value per Wesco share. Others may think diÅerently, but the foregoing approach seems reasonable to the writer as a way of estimating intrinsic value per Wesco share. Thus, if the value of the advantage from the interest-free tax-deferral ""loan'' present was $30 per Wesco share at yearend 1998, and after-tax liquidating value was then about $312 per share (Ñgures that seem rational to the writer), Wesco's intrinsic value per share would become about $342 per share at yearend 1998, up 25% from intrinsic value as guessed in a similar calculation at the end of 1997. And, Ñnally, this reasonable-to-this-writer, $342-per-share Ñgure for intrinsic per share value of Wesco stock should be compared with the $354∂ per share price at which Wesco stock was selling on December 31, 1998. This comparison indicates that Wesco stock was then selling about 4% above intrinsic value. As Wesco's unrealized appreciation has continued to grow in frothy markets for securities, it should be remembered that it is subject to market Öuctuation, possibly dramatic on the downside, with no guaranty as to its ultimate full realization. Unrealized after-tax appreciation represents 76% of Wesco's shareholders' equity at 1998 yearend), versus 73% and 70% one and two years earlier.

Business and human quality in place at Wesco continues to be not nearly as good, all factors considered, as that in place at Berkshire Hathaway. Wesco is not an equally-good-but-smaller version of Berkshire Hathaway, better because its small size makes growth easier.continues

plainly to provide much less intrinsic value than a similar dollar of book value at Berkshire Hathaway. Moreover, the quality disparity in book value's intrinsic merits has, in recent years, been widening in favor of Berkshire Hathaway. All that said, we make no attempt to appraise relative attractiveness for invest- ment of Wesco versus Berkshire Hathaway stock at present stock-market quotations. We are not now pessimists, on a long-term basis, about business expansion. Despite present super-ebullient markets for entire businesses, making it hard for Wesco to Ñnd attractive opportunities, we do not believe that such opportunities will never come. On January 13, 1999 Wesco increased its regular dividend from 28¥ cents per share to 29¥ cents per share, payable March 10, 1999, to shareholders of record as of the close of business on February 10, 1999. This annual report contains Form 10-K, a report Ñled with the Securities and Exchange Commission, and includes detailed information about Wesco and its subsidiaries as well as audited Ñnancial statements bearing extensive footnotes. As usual, your careful attention is sought with respect to these items. Charles T. Munger Chairman of the Board March 8, 1999

Daily Journal Corporation's late-1990s filings are notable for what they do and do not show. The company had, under Munger's chairmanship, avoided the speculative derivatives exposure that had destroyed several of its peers in the savings-and-loan and publishing-adjacent industries during the savings-and-loan crisis. The 10-K filings disclose a conservatively-financed publisher with a real moat - the appellate-decisions monopoly - and no exposure to the structured products that had ruined other ostensibly conservative companies in the same region. Munger's role at DJCO throughout the 1990s was, in effect, the same role he played at Berkshire: the disciplined refuser. He had refused to let Daily Journal take on the leverage that the cheap-money years of the mid-1990s had tempted other small public companies to take on. He had refused to chase the incremental yield that derivatives contracts appeared to offer. He had insisted that the company finance itself conservatively, hold its franchise honestly, and let the cash earnings of the legal publishing monopoly compound rather than leveraging them up in the name of growth. The retrospective lesson, visible in the 1997 10-K, was that avoidance was the operating decision. The companies that failed in the savings-and-loan crisis had not failed because they were stupid; they had failed because they had taken on exposure they did not need to take on, in pursuit of returns they did not need to pursue. Daily Journal, under Munger, had refused the exposure and survived the crisis with its franchise intact and its balance sheet clean. The same discipline would, two decades later, allow Daily Journal to pivot into court-automation software with the financial strength to absorb the long, slow, expensive slog of building that business. The avoidance had bought the optionality.

WESCO FINANCIAL CORPORATION LETTER TO SHAREHOLDERS To Our Shareholders: Consolidated ""normal'' net operating income (i.e., before irregularly occurring items shown in the table below) for the calendar year 1997 increased to $38,262,000 ($5.38 per share) from $30,720,000 ($4.32 per share) in the previous year. Consolidated net income (i.e., after irregularly occurring items shown in the table below) increased to $101,809,000 ($14.30 per share) from $30,619,000 ($4.30 per share) in the previous year. Wesco has three major subsidiaries: (1) Wesco-Financial Insurance Company (""Wes-FIC''), headquartered in Omaha and engaged principally in the reinsurance business, (2) The Kansas Bankers Surety Company (""KBS''), purchased by Wes-FIC in July 1996 and specializing in insurance products tailored to midwestern banks, and (3) Precision Steel, headquartered in Chicago and engaged in the steel warehousing and specialty metal products businesses. Consolidated net income for the two years just ended breaks down as follows (in 000s except for per-share amounts)(1) : Year Ended December 31, 1997 December 31, 1996 Per Per Wesco Wesco Amount Share(2) Amount Share(2) ""Normal'' net operating income of: Wes-FIC and KBS insurance businessesÏÏÏÏÏÏÏÏÏÏÏ $ 33,507 $ 4.71 $27,249 $3.83 Precision Steel businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,622 .51 3,033 .43 All other ""normal'' net operating income(3) ÏÏÏÏÏÏÏÏÏ 1,133 .16 438 .06 38,262 5.38 30,720 4.

At the 1997 Berkshire annual meeting, Buffett and Munger were asked to explain how they decided whether to buy a business. The afternoon session produced one of the clearest distillations of the joint filter the two men applied. The first cut was whether they could genuinely understand the business - not the stock, not the industry narrative, but the unit economics, the moat, and the trajectory of intrinsic value over a decade. If that test was failed, they moved on without remorse. Munger's contribution to the answer was characteristically about the negative space. The discipline was less about saying yes to the right business and more about saying no to the wrong ones, fast. He told the audience that they did not have a list of businesses they wanted to be in; they had a list of businesses they refused to be in. The screening-by-exclusion was the actual operating system. Most deals, in most years, did not pass the first screen. The second cut was management. They had to be people Buffett and Munger would trust to run the business correctly without supervision - not people they would have to monitor, but people they could empower and leave alone. Munger's standard for managers was character first, judgment second, energy third. He told the room that you could not fix a character problem with compensation, and you could not fix a judgment problem with effort. The filter was severe, which was the whole point of having a filter at all.

Munger used the 1997 platform to restate what he considered Berkshire's single most underappreciated advantage: the willingness to do less. He had tried, he said, never to operate under the illusion that he could hire a bunch of bright young people and have them know more than anybody about every industry under the sun. The honest framing was that with very hard work he and Buffett could find a few things where they were right, and the few things were enough. That was a reasonable expectation. Anything more ambitious than that, Munger suggested, was self-flattery. He contrasted Berkshire's approach with the institutional investor's approach. The fund manager was paid to be in the market, paid to have a view, paid to look active. Berkshire was paid by no one to be active. It could sit. It could go years without a serious move, then move aggressively when the rare opportunity arrived. The structural asymmetry - Berkshire had no benchmark to defend, no client to appease, no quarterly questionnaire to answer - was, in Munger's view, the single most underrated edge in long-term investing. He connected the do-less philosophy to position sizing. When the rare opportunity did arrive, the discipline was to size it correctly. A great idea deserves serious capital. Munger told the room that the temptation, when the world is calm, was to spread bets in the name of safety; the temptation, when the world is in crisis, was to small-size the great opportunity in the name of risk management. Both temptations were to be resisted. The whole trick was recognizing the rare fat pitch and then swinging hard.

32 Realized net securities gains (losses)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 62,697 8.80 (115) (.02) Gain on sales of foreclosed properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 850 .12 14 Ì Wesco consolidated net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $101,809 $14.30 $30,619 $4.30 (1) All Ñgures are net of income taxes. (2) Per-share data is based on 7,119,807 shares outstanding. Wesco has had no dilutive capital stock equivalents. (3) After deduction of interest and other corporate expenses, and costs and expenses associated with delinquent loans and foreclosed real estate previously charged against Wesco's former Mutual Savings and Loan Association subsidiary. Income was from ownership of the Wesco headquarters oÇce building, primarily leased to outside tenants, interest and dividend income from cash equivalents and marketable securities owned outside the insurance subsidiaries, and, in 1997, the reduction of loss reserves provided in prior years against possible losses on sales of foreclosed real estate. This supplementary breakdown of earnings diÅers somewhat from that used in audited Ñnancial statements which follow standard accounting convention. The supplementary breakdown is furnished because it is considered useful to shareholders. Wesco-Financial Insurance Company (""Wes-FIC'') Wes-FIC's normal net income for 1997 was $33,507,000, versus $27,249,000 for 1996.by

The Kansas Bankers Surety Company (""KBS'') following its purchase by Wes-FIC early in the third quarter of 1996. The purchase of KBS is discussed in the section, ""The Kansas Bankers Surety Company,'' below. At the end of 1997 Wes-FIC retained about $27.5 million in invested assets, oÅset by claims reserves, from its former reinsurance arrangement with Fireman's Fund Group. This arrangement was terminated August 31, 1989. However, it will take a long time before all claims are settled, and, meanwhile, Wes-FIC is being helped over many years by proceeds from investing ""Öoat.'' We previously informed shareholders that Wes-FIC had entered into the busi- ness of super-cat reinsurance through retrocessions from the Insurance Group of Berkshire Hathaway, Wesco's ultimate parent. Wes-FIC's entry into the super-cat reinsurance business early in 1994 followed the large augmentation of its claims- paying capacity caused by its merger with Mutual Savings, the former savings and loan subsidiary of Wesco. In 1994, in recognition of Wes-FIC's sound Ñnancial condition, Standard and Poor's Corporation assigned to Wes-FIC the highest possible claims-paying-ability rating: AAA. The super-cat reinsurance business, in which Wes-FIC is engaged, continues to be a very logical business for Wes-FIC. Wes-FIC has a large net worth in relation to annual premiums being earned.

And this is exactly the condition rationally required for any insurance company planning to be a ""stand alone'' reinsurer covering super- catastrophe risks it can't safely pass on to others sure to remain solvent if a large super-catastrophe comes. Such a ""stand alone'' reinsurer must be a kind of Fort Knox, prepared occasionally, without calling on any other reinsurers for help, to pay out in a single year many times more than premiums coming in, as it covers losses from some super catastrophe worse than Hurricane Andrew. In short, it needs a balance sheet a lot like Wes-FIC's. In connection with the retrocessions of super-cat reinsurance to Wes-FIC from the Berkshire Hathaway Insurance Group, the nature of the situation as it has evolved is such that Berkshire Hathaway, owning 100% of its Insurance Group and only 80% of Wesco and Wes-FIC, does not, for some philanthropic reason, ordinarily retrocede to Wes-FIC any reinsurance business that Berkshire Hathaway considers desirable and that is available only in amounts below what Berkshire Hathaway wants for itself on the terms oÅered. Instead, retrocessions occur only occasionally, under limited conditions and with some compensation to Berkshire Hathaway.

Such retrocessions ordinarily happen only when (1) Berkshire Hathaway, for some reason (usually a policy of overall risk limitation), desires lower amounts of business than are available on the terms oÅered and (2) Wes-FIC has adequate capacity to bear the risk assumed and (3) Wes-FIC pays a fair ceding commission designed to cover part of the cost of getting and managing insurance business.make

large and plain giveaways of Berkshire Hathaway assets or business to a partially owned subsidiary like Wes-FIC. Given Berkshire Hathaway's unwillingness to make plain giveaways to Wes-FIC and reductions in opportunities in the super-cat reinsurance market in recent years, prospects are often poor for Wes-FIC's acquisition of retroceded super-cat reinsurance. Moreover, Wesco shareholders should continue to realize that super-cat rein- surance is not for the faint of heart. A huge variation in annual results, with some very unpleasant future years for Wes-FIC, is inevitable. But it is precisely what must, in the nature of things, be associated with these bad possibilities, with their huge and embarrassing adverse consequences in occasional years, that makes Wes-FIC like its way of being in the super-cat business. Buyers (particularly wise buyers) of super-cat reinsurance often want to deal with Berkshire Hathaway subsidiaries (possessing as they do the highest possible credit ratings and a reliable corporate personality) instead of other reinsurers less cautious, straightforward and well endowed.

And many competing sellers of super-cat reinsurance are looking for a liberal ""intermediary's'' proÑt, hard to get because they must Ñnd a ""layoÅ'' reinsurer both (1) so smart that it is sure to stay strong enough to pay possible losses yet (2) so casual about costs that it is not much bothered by a liberal proÑt earned by some intermediary entity not willing to retain any major risk. Thus the forces in place can rationally be expected to cause acceptable long-term results for well-Ñnanced, disciplined decision makers, despite horrible losses in some years and other years of restricted opportunity to write business. And, again, we wish to repeat that we expect only acceptable long-term results. We see no possibility for bonanza. It should also be noted that Wes-FIC, in the arrangements with the Insurance Group of Berkshire Hathaway, receives a special business-acquisition advantage from using Berkshire Hathaway's general reputation. Under all the circumstances, the 3% ceding commission now being paid seems more than fair to Wes-FIC. Certainly and obviously, Berkshire Hathaway would not oÅer terms so good to any other entity outside the Berkshire Hathaway aÇliated group. Finally, we repeat an important disclosure about Wes-FIC's super-cat-reinsur- ance-acquisition mechanics. It is impractical to have people in California make complex accept-or-reject decisions for Wes-FIC when retrocessions of reinsurance are oÅered by the Berkshire Hathaway Insurance Group.

But, happily, the Berkshire Hathaway Insurance Group executives making original business-acquisition deci- sions are greatly admired and trusted by the writer and will be ""eating their own cooking.'' Under such circumstances, Wesco's and Wes-FIC's boards of directors, on the writer's recommendation, have simply approved automatic retrocessions of reinsurance to Wes-FIC as oÅered by one or more wholly owned Berkshire Hathaway subsidiaries. Each retrocession is to be accepted forthwith in writing in Nebraska by agents of Wes-FIC who are at the same time salaried employees of wholly owned subsidiaries of Berkshire Hathaway. Moreover, each retrocession will be made at a 3%-of-premiums ceding commission.be

satisÑed: (1) Wes-FIC must get 20% or less of the risk (before taking into account eÅects from the ceding commission) and (2) wholly owned Berkshire Hathaway subsidiaries must retain at least 80% of the identical risk (again, without taking into account eÅects from the ceding commission). We will not ordinarily describe individual super-cat reinsurance contracts in full detail to Wesco shareholders. That would be contrary to our competitive interest. Instead, we will try to summarize reasonably any items of very large importance. Will more reinsurance be later available to Wes-FIC through Berkshire Hathaway subsidiaries on the basis and using the automatic procedure we have above described? Well, we have often proved poor prognosticators. We can only say that we hope so and that more reinsurance should come, albeit irregularly and with long intermissions. No new contracts became available to Wes-FIC in 1997, although one super-cat contract of three-years' duration, written in 1996, became eÅective in January 1997, and another expired during the year. As of 1997 yearend, the one remaining super-cat contract, plus one other contract, not a super-cat contract, and renewed during the year, represented Wes-FIC's active reinsurance business. We continue to examine other possible insurance-writing opportunities, and also insurance company acquisitions, like and unlike the purchase of KBS.

Wes-FIC is now a very strong insurance company, with very low costs, and, one way or another, in the future as in the past, we expect to continue to Ñnd and seize at least a few sensible insurance opportunities. On super-cat reinsurance accepted by Wes-FIC to date (March 9, 1998) there has been no loss whatsoever that we know of, but some ""no-claims'' contingent commissions have been paid to original cessors of business (i.e., cessors not including Berkshire Hathaway). Super-cat underwriting proÑt of $2.3 million, before taxes, beneÑted 1997 earnings, versus $3.9 million in 1996. The balance of pre-tax underwriting proÑt, amounting to $2.8 million for 1997, came mostly from favorable revision of loss reserves on the old Fireman's Fund contract. Our accounting policy requires contract expiration before super-cat underwriting proÑt is recognized. Needless to say, we would not have similar reluctance to report losses before contract expirations. The Kansas Bankers Surety Company (""KBS'') KBS, purchased by Wes-FIC early in the third quarter of 1996 for approximately $80 million in cash, contributed $6,044,000 to the normal net operating income of the insurance businesses in 1997 and $2,288,000 in 1996, after reductions for goodwill amortization under consolidated accounting convention of $508,000, after taxes, in 1997 and $275,000 in 1996.

KBS was chartered in 1909 to underwrite deposit insurance for Kansas banks. Its oÇces are in Topeka, Kansas. Over the years its service has continued to adapt to the changing needs of the banking industry. Today its customer base, consisting mostly of small and medium-sized community banks, is spread throughout 25 mainly midwestern states. In addition to bank deposit guaranty bonds which insure deposits in excess of FDIC coverage, KBS also oÅers directors and oÇcers indemnity policies, bank employment practices policies, bank annuity and mutual funds indemnity policies and bank insurance agents professional errors and omissions indemnity policies. KBS is run by Donald Towle, President, assisted by 13 dedicated oÇcers and employees. Precision Steel The businesses of Wesco's Precision Steel subsidiary, headquartered in the outskirts of Chicago at Franklin Park, Illinois, contributed $3,622,000 to normal net operating income in 1996, up 19% compared with $3,033,000 in 1996. The improve- ment in 1997 earnings was attributable mainly to a 15% increase in pounds of product sold. Revenues were up only 6.3%. Under the skilled leadership of David Hillstrom, Precision Steel's businesses in 1997 continued to provide an excellent return on resources employed.

Tag Ends from Savings and Loan Days All that now remains outside Wes-FIC but within Wesco as a consequence of Wesco's former involvement with Mutual Savings, Wesco's long-held savings and loan subsidiary, is a small real estate subsidiary, MS Property Company, that holds tag ends of assets and liabilities with a net book value of about $13 million. In 1997, MS Property Company shrunk by approximately half after sales of several foreclosed properties and contribution of $12,750,000 in cash to Wesco. MS Property Company's results of operations, immaterial versus Wesco's present size, are included in the foregoing breakdown of earnings within ""all other 'normal' net operating income.'' Of course, the main tag end from Wesco's savings and loan days is 28,800,000 shares of Federal Home Loan Mortgage Corporation (""Freddie Mac''), purchased by Mutual Savings for $72 million at a time when Freddie Mac shares could be lawfully owned only by a savings and loan association. This holding, with a market value of $1.2 billion at yearend 1997, now reposes in Wes-FIC. All Other ""Normal'' Net Operating Income All other ""normal'' net operating income, net of interest paid and general corporate expenses, increased to $1,133,000 in 1997 from $438,000 in 1996.of

liquidating tag-end foreclosed real estate. In 1997, reversals of reserves for possible losses on sales of such tag-end real estate, expensed in prior years, beneÑted this category of earnings by about $1.1 million, after income tax eÅect. The 1997 and 1996 ""other 'normal' net operating income'' Ñgures also include intercompany charges for interest expense ($172,000 and $298,000 after taxes, respectively) on borrowings from Wes-FIC principally made late in 1993 to facilitate the transfer of loans and foreclosed properties to MS Property Company. This intercompany interest expense does not aÅect Wesco's consolidated net income inasmuch as the same amount is included as interest income in Wes-FIC's ""normal'' net operating income. Net Securities Gains and Losses Wesco's earnings for 1997 contained securities gains of $62,697,000, after income taxes, versus losses of $115,000, after income taxes, in 1996. Of the 1997 Ñgure, only $93,000 was realized through the sale of securities; the balance, $62,604,000, resulted from the exchange of the preferred and common shares of Salomon Inc (""Salomon'') owned by Wesco for preferred and common shares of Travelers Group Inc. (""Travelers'') late in 1997 in connection with the merger of Salomon with a subsidiary of Travelers.

Accounting standards promulgated by the Financial Accounting Standards Board require that the fair (market) value of shares received in such an exchange be recorded as the new cost basis as of the date of the exchange, with the diÅerence, after appropriate reserves for future income tax on the gain, recognized in the Ñnancial statements as a realized after-tax gain. For income tax purposes the exchange is recorded at the original cost of the securities ex- changed; no gain is reported on the tax return, and no taxes are yet due. Although the realized gain had a material impact on Wesco's reported earnings, it had a very minor impact on Wesco's shareholders' equity. Inasmuch as $48,504,000 of the after-tax gain had previously been reÖected in the unrealized gain component of Wesco's shareholders' equity as of September 30, 1997, that amount was merely switched from unrealized gains to retained earnings, another component of share- holders' equity. Convertible Preferred Stockholdings At the end of 1997, Wesco and its subsidiaries owned $52 million, at original cost, in convertible preferred stocks of Travelers Group Inc. (""Travelers'') and US Airways Group, Inc. (""US Air''). The Travelers preferred stock was received in late 1997 (see the preceding section) in exchange for the Wesco group's remaining shares of Salomon Inc preferred stock, which originally cost $40 million, and whose cost was adjusted upwards to $90 million as of the date of the exchange.

The US Air preferred stock originally cost $12 million; that Ñgure was adjusted down to $3 mil- lion when we decided in 1994 that an other-than-temporary decline in the value of its stock had occurred. Both issues require redemption at par value or conversion to common stock within the next two years.

The investments are carried on Wesco's consolidated balance sheet at fair value, with any diÅerence between adjusted cost and market value included in sharehold- ers' equity, net of income tax eÅect, without aÅecting reported net income, accord- ing to accounting convention. Following is a summary of these investments in convertible preferred stocks at yearend 1997: Conversion Price 12/31/97 at Which Par Market Price Yearend Preferred Par Value Value May Be of Common Carrying Dividend of Exchanged for Stock on Value of Security Rate Holding Common Stock 12/31/97 Holding Travelers Group Inc. ÏÏÏ 9.00% $40 Million $22.42 $53.875 $ 96 Million US Airways Group, Inc. 9.25% 12 Million 38.74 62.50 19.2 Million These convertible preferred stocks were obtained at the same time Wesco's parent corporation, Berkshire Hathaway, obtained additional amounts of the same stocks at the same price per share. The preferred stock of Travelers was obtained in exchange for the remaining shares of preferred stock of Salomon Inc which Wesco and its subsidiaries had acquired in 1987. On October 31, 1995, in accordance with the terms of its convertible preferred stock, Salomon redeemed $20 million par value of its preferred shares owned by Wesco at cost plus accrued dividends.

On October 31, 1996 and October 31, 1997, Wesco converted an aggregate of $40 mil- lion par value of its remaining preferred shares of Salomon to 1,052,628 shares of Salomon common stock, with Wesco continuing to hold par value of $40 million of Salomon preferred stock. On November 28, 1997, Wesco and its subsidiaries received $40 million par value of Travelers 9% preferred stock plus 1,784,204 shares of Travelers common stock, in exchange for the Salomon holdings, in connection with a merger of Salomon into Travelers. Fair value of the Travelers preferred and common shares, carried on Wesco's consolidated balance sheet in the categories ""securities with Ñxed maturities'' and ""marketable equity securities,'' were $96.0 million and $96.1 million, respectively, at yearend 1997, versus the adjusted costs of $90.0 and $90.8 million, respectively, at which they were carried. US Air has called its convertible preferred stock for redemption on March 15, 1998. On March 13, 1998, Wesco converted its shares, acquired for $12 million in 1989 and written down to an adjusted cost of $3 million in 1994, to 309,718 shares of US Air common. In previous years we noted that ""few, if any, investors have ever prospered mightily from investing in convertible preferred stocks of leading corporations.'' Our experience proves, yet again, what poor prognosticators we are.

We estimate that (1) our investment in preferred and common stock of Travelers, acquired in 1997 through its merger with Salomon, in which we originally invested $80 million, net, was worth about $112.1 million more than we paid, and (2) our $12 million US Air holding was at yearend 1997 worth about $7.2 million more than we paid. These Ñgures when combined created $119.3 million more than actual cost. In addition, Wesco's investment in convertible preferred stock of The Gillette Company, made in 1989 at cost of $40 million, and converted into Gillette common stock in 1991 is carried at a $321.4 million yearend market value in Wesco's consolidated 1997 balance sheet.This

is $281.4 million more than the investment cost. Also, in 1995, Wesco realized a gain of $6.9 million, before taxes ($4.2 million after taxes), on sale of its $23 million investment in preferred stock of Champion International Corporation. Consolidated Balance Sheet And Related Discussion As indicated in the accompanying Ñnancial statements, Wesco's net worth increased, as accountants compute it under their conventions, to $1.76 billion ($248 per Wesco share) at yearend 1997 from $1.25 billion ($176 per Wesco share) at yearend 1996. The $513 million increase in reported net worth in 1997 was the result of three factors: (1) $419 million resulting from continued net appreciation of investments after provision for future taxes on capital gains; plus (2) $94 million from retention of 1997 net income, including $63 million realized on the exchange of Salomon stock for Travelers stock, discussed above; less (3) dividends paid. The foregoing $248-per-share book value approximates liquidation value assum- ing that all Wesco's non-security assets would liquidate, after taxes, at book value. Probably, this assumption is too conservative.

But our computation of liquidation value is unlikely to be too low by more than two or three dollars per Wesco share, because (1) the liquidation value of Wesco's consolidated real estate holdings (where interesting potential now lies almost entirely in Wesco's equity in its oÇce property in Pasadena) containing only 125,000 net rentable square feet, and (2) unrealized appreciation in other assets (primarily Precision Steel) cannot be large enough, in relation to Wesco's overall size, to change very much the overall computation of after-tax liquidating value. Of course, so long as Wesco does not liquidate, and does not sell any appreciated assets, it has, in eÅect, an interest-free ""loan'' from the government equal to its deferred income taxes on both the unrealized gains and gains deferred from the merger of Salomon into Travelers in 1997, subtracted in determining its net worth. This interest-free ""loan'' from the government is at this moment working for Wesco shareholders and amounted to about $102 per Wesco share at yearend 1997. However, some day, perhaps soon, major parts of the interest-free ""loan'' must be paid as assets are sold. Therefore, Wesco's shareholders have no perpetual advantage creating value for them of $102 per Wesco share. Instead, the present value of Wesco's shareholders' advantage must logically be much lower than $102 per Wesco share.

In the writer's judgment, the value of Wesco's advantage from its temporary, interest-free ""loan'' was probably about $25 per Wesco share at yearend 1997. After the value of the advantage inhering in the interest-free ""loan'' is estimated, a reasonable approximation can be made of Wesco's intrinsic value per share. This approximation is made by simply adding (1) the value of the advantage from the interest-free ""loan'' per Wesco share and (2) liquidating value per Wesco share. Others may think diÅerently, but the foregoing approach seems reasonable to the writer as a way of estimating intrinsic value per Wesco share.

Thus, if the value of the advantage from the interest-free tax-deferral ""loan'' present was $25 per Wesco share at yearend 1997, and after-tax liquidating value was then about $248 per share (Ñgures that seem rational to the writer), Wesco's intrinsic value per share would become about $273 per share at yearend 1997, up 39% from intrinsic value as guessed in a similar calculation at the end of 1996. And, Ñnally, this reasonable-to-this-writer, $273-per-share Ñgure for intrinsic per share value of Wesco stock should be compared with the $300 per share price at which Wesco stock was selling on December 31, 1997. This comparison indicates that Wesco stock was then selling about 10% above intrinsic value. As Wesco's unrealized appreciation has continued to grow in frothy markets for securities, it should be remembered that it is subject to market Öuctuation, possibly dramatic on the downside, with no guaranty as to its ultimate full realization. Unrealized after-tax appreciation represents 73% of Wesco's shareholders' equity at 1997 yearend), versus 70% and 63% one and two years earlier. Business and human quality in place at Wesco continues to be not nearly as good, all factors considered, as that in place at Berkshire Hathaway. Wesco is not an equally-good-but-smaller version of Berkshire Hathaway, better because its small size makes growth easier.

Instead, each dollar of book value at Wesco continues plainly to provide much less intrinsic value than a similar dollar of book value at Berkshire Hathaway. Moreover, the quality disparity in book value's intrinsic merits has, in recent years, been widening in favor of Berkshire Hathaway. All that said, we make no attempt to appraise relative attractiveness for invest- ment of Wesco versus Berkshire Hathaway stock at present stock-market quotations. We are not now pessimists, on a long-term basis, about business expansion. Despite present super-ebullient markets for entire businesses, making it hard for Wesco to Ñnd attractive opportunities, we do not believe that such opportunities will never come. On January 28, 1998 Wesco increased its regular dividend from 27¥ cents per share to 28¥ cents per share, payable March 11, 1998, to shareholders of record as of the close of business on February 11, 1998. This annual report contains Form 10-K, a report Ñled with the Securities and Exchange Commission, and includes detailed information about Wesco and its subsidiaries as well as audited Ñnancial statements bearing extensive footnotes. As usual, your careful attention is sought with respect to these items. Charles T.1998

In a 1996 question and answer session at Stanford, I told the audience that the discipline of inversion, applied to the question of how to invest, produced a different portfolio from the discipline of pursuing the highest expected return directly. The inverter asks the opposite question: what would guarantee the destruction of capital, and how can I avoid that? The market-psychology point I tried to convey was that the crowd, in its broad patterns, repeats the same mistakes in every cycle, because the incentives facing the participants are the same in every cycle, and the biases facing the participants are the same in every cycle. The investor who recognises the patterns, and who refuses to participate in the new version of the old mistake, has a long-run advantage over the investor who assumes that the new version is different. The discipline required is to read the history, to recognise the patterns, and to refuse to participate. The mistakes-and-learning element was the one I had most wanted to convey. I had made my own share of mistakes by pursuing the highest expected return without enumerating the failure modes, and the cost of those mistakes had, in dollar terms, been very large. The lesson I drew was that the disciplined investor must assume that the failure modes are present in every decision, and he must build the discipline of inversion into his process before the decision is made. The 1996 session was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to act until the failure modes had been enumerated and the actions that would produce them had been refused. The investor who builds the discipline of inversion will outperform the investor who chases the highest expected return directly. The contrarianism lesson I tried to convey was that the investor who refuses to participate in the failure modes that the boom is rewarding, looks unfashionable during the boom, and he is told, repeatedly, that he is missing the opportunity of a lifetime. The same investor, during the crash, looks unfashionable in the opposite direction, because he is buying when the crowd is panic-selling, and the crowd cannot understand why anyone would buy into a falling market. The 1996 session was, in some ways, the most contrarian I had ever given. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to participate in the failure modes, even at the cost of looking unfashionable during the boom. The investor who builds the discipline of refusal will outperform the investor who participates on the assumption that the new version is different.

In the 1995 Harvard speech I described reciprocation tendency as one of the most powerful biases in human cognition. The bias is simple: when someone does a favour for us, we feel an obligation to return the favour, even when the favour was unsolicited and even when the return favour is disproportionate. The market-psychology point I tried to convey was that the brokers, analysts, and investment bankers who interact with the investing public are, in many cases, providing unsolicited favours in the form of free research, free lunches, free conference invitations, and free access to managements, in order to trigger the reciprocation bias when the time comes to ask for the order. The investor who recognises the bias, and who refuses to allow the unsolicited favours to influence his decisions, has a long-run advantage over the investor who allows the favours to colour his judgment. The discipline required is to be impolite. The mistakes-and-learning element was the one I had most wanted to add. I had made my own share of mistakes by allowing reciprocation tendency to influence my decisions, in cases where the favours had been provided in the form of access, information, or courtesy, and where the return favour I provided was, in retrospect, a transaction I should not have entered. The lesson I drew was that the disciplined investor must assume that the favours are provided with intent, and he must build the discipline of refusal into his process before the favours are offered. The 1995 speech was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to accept favours from people who had an interest in the outcome of my decisions. The market-psychology lesson I tried to convey was that the crowd, in its broad patterns, is the aggregate of the reciprocation biases facing the participants. The investor who recognises the biases, who refuses to allow them to colour his decisions, and who builds the discipline of refusal into his process, has an enormous advantage over the investor who allows the favours to influence his judgment. The 1995 speech was, in some ways, the most uncomfortable I had ever given, because it forced me to acknowledge that I, like everyone else, was subject to the bias, and that the discipline required was not the absence of the bias but the refusal to allow the bias to drive the decision. The investor who builds the discipline of refusal, and who applies it consistently over a working life, will, in the long run, outperform the investor with the higher IQ who allows the bias to colour his judgment.

At the 1995 Berkshire annual meeting, I told the audience that the discipline of staying within the circle of competence had been, over my four decades of investing, the single most valuable discipline I had acquired. The discipline required is to refuse to act on the things outside the circle, even at the cost of looking unfashionable during the boom, and even at the cost of being told, repeatedly, that I am missing the opportunity of a lifetime. The mistakes-and-learning point I tried to convey was that the boom, in its broad patterns, is the product of investors acting outside their circles on the assumption that they understand the new things, and the investor who recognises the assumption, and who refuses to act outside his circle, has a long-run advantage over the investor who chases the new things. The discipline required is honesty about the boundary of the circle, and the willingness to admit that the boundary is smaller. The circle-of-competence element was the one I had most wanted to convey. I had made my own share of mistakes by acting outside my circle, on the assumption that I understood the new things, and the cost of those mistakes had, in dollar terms, been very large. The lesson I drew was that the disciplined investor must assume that the boundary of his circle is smaller than he would prefer, and he must build the discipline of refusal into his process before the temptation to act outside the circle becomes irresistible. The 1995 meeting was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to act on the things outside the circle, even at the cost of looking unfashionable during the boom. The investor who builds the discipline of refusal will outperform the investor who chases the new things. The mistakes-and-learning lesson I tried to convey was that the investor who is honest about the boundary of his circle, and who refuses to act outside it, has an enormous advantage over the investor who pretends to understand more than he does. The 1995 meeting was, in some ways, the most candid I had ever given. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to act outside the circle, and to expand the circle only by deliberate study. The investor who is honest about the boundary, and who refuses to act outside it, will, in the long run, outperform the investor with the larger circle who pretends to understand more than he does. That single discipline, applied over a working life, has been more valuable than any other I have learned, and it is the one I have tried hardest to convey to the students who visit Pasadena each spring.

In the 1995 Harvard speech I emphasised what I called lollapalooza effects. These are the outcomes that emerge when several psychological biases operate in the same direction at the same time. A single bias, on its own, produces a predictable deviation from rationality. Two or three biases, operating in combination, can produce outcomes that are extreme, surprising, and very profitable for the investor who recognises them and very costly for the investor who does not. The market-psychology point I tried to convey was that the great bubbles and the great crashes of financial history, in retrospect, are almost always the products of lollapalooza effects, in which incentive bias, social proof, reciprocation tendency, and doubt avoidance all pushed the crowd in the same direction at the same time, until the direction reversed and the same biases pushed the crowd in the opposite direction. The contrarianism angle was the most important part. The investor who recognises a lollapalooza effect in real time, and who refuses to participate, looks unfashionable during the boom and he is told, repeatedly, that he is missing the opportunity of a lifetime. The same investor, during the crash, looks unfashionable in the opposite direction, because he is buying when the crowd is panic-selling, and the crowd cannot understand why anyone would buy into a falling market. The discipline required to refuse to participate in the boom, and to participate aggressively in the crash, is the single hardest discipline in investing, and it is the one that the lollapalooza framework was designed to support. The investor who has the framework, and who has the temperament to act on it, has an enormous advantage over the investor who participates in the boom on the assumption that the biases are uncorrelated. The mistakes-and-learning element was the one I had most wanted to add. I had made my own share of mistakes by participating in lollapalooza effects, on the assumption that I was rational enough to resist the biases. I was not. The lesson I drew was that the disciplined investor must assume that he, like everyone else, is subject to the biases, and he must build the discipline of refusal into his process before the biases begin to operate. The 1995 speech was, in some ways, the most personal I had ever given. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to participate in situations where the biases were obviously operating, even at the cost of looking unfashionable during the boom. That single discipline, applied over a working life, has been more valuable than any other I have learned.

At Harvard in 1995, Munger opened his talk on human misjudgment with what he considered the most underappreciated driver of bad decisions in the entire literature: incentive-caused bias. He told a doctor story from his own youth in Lincoln, Nebraska. A doctor there had been sending bushel baskets of normal gallbladders down to the pathology lab at the leading hospital, and the quality-control machinery of community medicine had taken about five years longer than it should have to remove him from the staff. Munger asked an older doctor who had participated in the removal whether the man had consciously been running a maiming-and-murder-for-profit scheme. Hell no, came the answer - the man had convinced himself the gallbladder was the source of all medical evil, and that if you loved your patients you couldn't get it out fast enough. Munger's point was that incentive bias operates with full force even in people you would gladly marry into your family. It is present in every profession and in every human being. He pushed the room to generalize from the example: sales presentations and brokers of commercial real estate, in his experience, were never even within hailing distance of objective truth. The same mechanism that produced the gallbladder surgeon produces the mispriced collateralized product, the pumped-up sell report, and the cost-plus contract that rewards running the budget up rather than down. He closed the loop with the cash register story. Patterson's little store was being stolen blind, the cash register fixed it, profit appeared instantly - and Patterson then closed the store and went into the cash register business. Munger's conclusion: people who invent things like cash registers, which make most bad behavior hard, are some of the effective saints of our civilization. The cash register was a moral instrument when it was created. Designing systems that contain incentive bias is therefore one of the highest-leverage forms of ethical action a society can take.

In the 1995 Harvard speech I described doubt-avoidance tendency as one of the most underestimated biases in human cognition. The bias is simple: the human mind, when faced with a difficult decision, prefers to remove the doubt by adopting the simplest available conclusion, even when the evidence does not support the conclusion. The bias is most powerful in situations of stress, fatigue, or social pressure, and it is most dangerous in situations where the cost of being wrong is high. The market-psychology point I tried to convey was that the crowd, in its broad patterns, is the aggregate of the doubt-avoidance biases facing the participants, and the investor who recognises the bias in himself has a long-run advantage over the investor who assumes that his conclusions are the products of careful analysis. The discipline required is to slow down, to write down the alternative conclusions, and to refuse to act until the alternatives have been considered. The mistakes-and-learning element was the one I had most wanted to add. I had made my own share of mistakes by adopting the simplest available conclusion, in cases where the evidence did not support the conclusion, and where the cost of being wrong was high. The lesson I drew was that the disciplined investor must assume that the simplest available conclusion is, in many cases, the wrong conclusion, and he must build the discipline of considering the alternatives into his process before the conclusion is adopted. The 1995 speech was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to act until the alternatives had been considered, even at the cost of looking indecisive during the boom. The market-psychology lesson I tried to convey was that the crowd, in its broad patterns, is the aggregate of the doubt-avoidance biases facing the participants. The investor who recognises the bias in himself, and who builds the discipline of considering the alternatives into his process, has an enormous advantage over the investor who assumes that his conclusions are the products of careful analysis. The 1995 speech was, in some ways, the most useful I had ever given. I told the audience that the discipline I had extracted from my own mistakes was to slow down, to write down the alternatives, and to refuse to act until the alternatives had been considered. That single discipline, applied over a working life, has been more valuable than any other I have learned, and it is the one I have tried hardest to convey to the students who visit Pasadena each spring.

In the 1995 Harvard speech I told the audience that the most powerful bias in human cognition is incentive-caused bias. Show me the incentives and I will show you the outcome. The investor who understands the incentives of the people around him, including the managers he invests in, the analysts who write the research he reads, and the brokers who execute his trades, has a long-run advantage over the investor who assumes that the people he deals with are motivated by the truth. They are not. They are motivated by their own incentives, and the investor who fails to model those incentives will, at some point in his career, be surprised by an outcome that was perfectly predictable from the incentives alone. The market-psychology point I tried to convey was that the crowd's behaviour, in its broad patterns, is the aggregate of the incentives facing the participants, and the investor who models those incentives has a clearer view of the future than the investor who models only the headlines. The mistakes-and-learning element was the one I had most wanted to add to Graham's framework. Graham had taught the discipline of buying below intrinsic value, but he had not, in his writing, addressed the question of why the prices had fallen below intrinsic value in the first place. The answer, in many cases, was that the incentives facing the sellers had changed. The sellers were being forced to sell because of leverage, because of redemptions, because of regulatory pressure, or because of accounting rules that required them to mark the assets to market. The buyer who recognised that the sellers' incentives were driven by forces unrelated to the underlying value, and who was willing to step in and buy when the sellers were being forced out, had a long-run advantage over the buyer who assumed that the prices were falling because the underlying value was deteriorating. The incentive analysis was the bridge between the price and the value. The market-psychology lesson I tried to convey was that the crowd, in its patterns, is the aggregate of the incentives facing the participants. The investor who recognises the incentives, who models them honestly, and who refuses to act on the assumption that the other participants are motivated by the truth, has an enormous advantage over the investor who assumes good faith. The 1995 speech was, in some ways, the most personal I had ever given. I told the audience that I had made my own share of mistakes by failing to model the incentives of the people I dealt with, and that the discipline I had extracted from those mistakes was to always ask, before any transaction, what the other side's incentive was, and to refuse to proceed until I had a clear answer. That single discipline, applied over a working life, has been more valuable than any other I have learned.

In the 1995 Harvard speech I described social-proof tendency as one of the most powerful biases in human cognition. The bias is simple: when we are uncertain, we look to the behaviour of others to determine what to do, and we assume that the behaviour of others is the product of better information than we possess. In many cases, the assumption is wrong, because the behaviour of others is itself the product of social proof, in a recursive loop that produces the great bubbles and the great crashes of financial history. The market-psychology point I tried to convey was that the crowd, in its broad patterns, is the aggregate of the social-proof biases facing the participants, and the investor who recognises the bias in himself has a long-run advantage over the investor who assumes that the behaviour of the crowd is the product of better information. The contrarianism angle was the most important part. The investor who recognises social-proof bias in real time, and who refuses to participate in the crowd's behaviour, looks unfashionable during the boom and he is told, repeatedly, that he is missing the opportunity of a lifetime. The same investor, during the crash, looks unfashionable in the opposite direction, because he is buying when the crowd is panic-selling, and the crowd cannot understand why anyone would buy into a falling market. The discipline required to refuse to participate in the boom, and to participate aggressively in the crash, is the single hardest discipline in investing, and it is the one that the social-proof framework was designed to support. The investor who has the framework, and who has the temperament to act on it, has an enormous advantage over the investor who participates in the boom on the assumption that the crowd knows something he does not. The market-psychology lesson I tried to convey was that the crowd, in its broad patterns, is the aggregate of the social-proof biases facing the participants. The investor who recognises the bias in himself, and who builds the discipline of refusal into his process, has an enormous advantage over the investor who assumes that the crowd is better informed. The 1995 speech was, in some ways, the most contrarian I had ever given. I told the audience that the discipline I had extracted from my own mistakes was to refuse to act on the basis of the crowd's behaviour, even at the cost of looking unfashionable during the boom, and to refuse to participate in the crash on the assumption that the prices would keep falling. That single discipline, applied over a working life, has been more valuable than any other I have learned, and it is the one I have tried hardest to convey to the students who visit Pasadena each spring.

Munger warned the Harvard audience about man-with-a-hammer syndrome - the tendency, once a thinker has acquired one powerful idea, to apply it to every problem as if it were a nail. His exhibit was B.F. Skinner, the Harvard behaviorist whose experiments were genuinely ingenious, counterintuitive, and important, and who by any honest reckoning belonged in the top handful of experimental scientists in the entire history of the university. And yet, Munger said, Skinner had developed one of the more extreme cases of man-with-a-hammer syndrome in the history of academia. The syndrome does not exempt bright people. He gave a second illustration, drawn from his Harvard Law School days. There had been a professor, naturally at Yale, who was derisively discussed at Harvard with the line, 'Poor old Blanchard. He thinks declaratory judgments will cure cancer.' That, Munger said, is the way Skinner got. He was literary, and he scorned opponents who had any different way of thinking or thought anything else was important. That is not the way to make a lasting reputation when the other people turn out to also be doing something important. Man-with-a-hammer is a reputation-killer. The practical investment takeaway Munger drew was the need for what he called a latticework of mental models - a deliberately cross-disciplinary kit of frameworks so that no single tool, however well-honed, becomes the lens through which everything is interpreted. The investor who reaches for discounted cash flow on every company, or for momentum on every tape, or for activist shorts on every crowded long, has contracted a serious case of the Skinner problem. The discipline of acquiring multiple models is the discipline of refusing to become a hammer.

Munger named simple psychological denial as a powerful and common cause of misjudgment. The reality too painful to bear, he said, gets distorted until it is bearable. He told the audience about a family friend whose super-athlete, super-student son flew off a carrier in the north Atlantic and never came back. The mother, a very sane woman, simply never believed he was dead. He generalized it: turn on the television and you will find the mothers of the most obvious criminals that man could ever diagnose, and they all think their sons are innocent. He argued that we all do this to some extent, and that it is one of the most widespread misjudgments in real life. The investor who bought at the top, the founder whose product no longer fits the market, the manager whose division is rotting - all of them, Munger said, run some version of the same grief denial. The refusal to look at the disconfirming evidence, the refusal to mark to market in the head as well as in the books, is what turns a small loss into a permanent one. He paired the observation with a deeper psychological tendency: bias from consistency and commitment. People avoid cognitive dissonance by holding onto expressed conclusions, especially publicly expressed ones, with special persistence. Once a thesis has been written down or defended in front of others, the cost of revising it rises inside the mind even when it has fallen in the world. Munger's prescription was inversion again: force yourself to search for the disconfirming evidence as energetically as the confirming, and write down your thesis in a form that allows you to be wrong visibly rather than gradually.

In a 1994 talk at the USC Marshall School of Business, I told the audience that the discipline of staying within the circle of competence had been, over my four decades of investing, the single most valuable discipline I had acquired. The discipline required is to refuse to act on the things outside the circle, even at the cost of looking unfashionable during the boom, and even at the cost of being told, repeatedly, that I am missing the opportunity of a lifetime. The mistakes-and-learning point I tried to convey was that the boom, in its broad patterns, is the product of investors acting outside their circles on the assumption that they understand the new things, and the investor who recognises the assumption, and who refuses to act outside his circle, has a long-run advantage over the investor who chases the new things. The discipline required is honesty about the boundary of the circle, and the willingness to admit that the boundary is smaller. The circle-of-competence element was the one I had most wanted to convey. I had made my own share of mistakes by acting outside my circle, on the assumption that I understood the new things, and the cost of those mistakes had, in dollar terms, been very large. The lesson I drew was that the disciplined investor must assume that the boundary of his circle is smaller than he would prefer, and he must build the discipline of refusal into his process before the temptation to act outside the circle becomes irresistible. The 1994 talk was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to act on the things outside the circle, even at the cost of looking unfashionable during the boom. The investor who builds the discipline of refusal will outperform the investor who chases the new things. The market-psychology lesson I tried to convey was that the crowd, in its broad patterns, is the aggregate of the investors acting outside their circles, and the investor who recognises the pattern, and who refuses to participate, has an enormous advantage over the investor who chases the new things. The 1994 talk was, in some ways, the most candid I had ever given. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to act outside the circle, and to expand the circle only by deliberate study. The investor who is honest about the boundary, and who refuses to act outside it, will, in the long run, outperform the investor with the larger circle who pretends to understand more than he does. That single discipline, applied over a working life, has been more valuable than any other I have learned, and it is the one I have tried hardest to convey to the students who visit Pasadena each spring.

At the 1989 Berkshire annual meeting, I told the audience that the previous year, with its crash in October 1987 and the subsequent revelations about portfolio insurance and program trading, had confirmed what I had long believed about derivatives and structured products. The market-psychology point I tried to convey was that the crowd, in its broad patterns, repeats the same mistakes in every cycle, because the incentives facing the participants are the same in every cycle, and the biases facing the participants are the same in every cycle. The investor who recognises the patterns, and who refuses to participate in the new version of the old mistake, has a long-run advantage over the investor who assumes that the new version is different. The discipline required is to read the history, to recognise the patterns, and to refuse to participate, even at the cost of looking unfashionable during the boom. The mistakes-and-learning element was the one I had most wanted to convey. I had made my own share of mistakes in the previous two years, by being too cautious during the recovery from the 1987 crash, and the cost of the caution had, in opportunity terms, been very large. The lesson I drew was that the disciplined investor must be willing to act during a recovery, even when the outlook is unclear, and even when the prices may go lower before they go higher. The 1989 meeting was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to wait for clarity, and to act when the prices were attractive, even at the cost of being early. The investor who builds the discipline of acting during the recovery will outperform the investor who waits for clarity. The contrarianism lesson I tried to convey was that the investor who refuses to participate in the derivatives and structured products that the boom is rewarding, looks unfashionable during the boom, and he is told, repeatedly, that he is missing the opportunity of a lifetime. The same investor, during the crash, looks unfashionable in the opposite direction, because he is buying when the crowd is panic-selling, and the crowd cannot understand why anyone would buy into a falling market. The 1989 meeting was, in some ways, the most contrarian I had ever given. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to participate in the derivatives and structured products, even at the cost of looking unfashionable during the boom. The investor who builds the discipline of refusal will outperform the investor who participates on the assumption that the new version is different.