Everything Warren Buffett

2015 Letter to Warren Buffett Shareholders

2016-02-28T22:02:00.000+13:00

Berkshire’s Performance vs. the S&P 500 Annual Percentage Change Year in Per-Share Book Value of Berkshire in Per-Share Market Value of Berkshire in S&P 500 with Dividends Included 1965.

Data are for calendar years with these exceptions: 1965 and 1966, year ended 9/30; 1967, 15 months ended 12/31. Starting in 1979, accounting rules required insurance companies to value the equity securities they hold at market rather than at the lower of cost or market, which was previously the requirement. In this table, Berkshire’s results through 1978 have been restated to conform to the changed rules. In all other respects, the results are calculated using the numbers originally reported. The S&P 500 numbers are pre-tax whereas the Berkshire numbers are after-tax. If a corporation such as Berkshire were simply to have owned the S&P 500 and accrued the appropriate taxes, its results would have lagged the S&P 500 in years when that index showed a positive return, but would have exceeded the S&P 500 in years when the index showed a negative return. Over the years, the tax costs would have caused the aggregate lag to be substantial.

2 BERKSHIRE HATHAWAY INC. To the Shareholders of Berkshire Hathaway Inc.: Berkshire’s gain in net worth during 2015 was $15.4 billion, which increased the per-share book value of both our Class A and Class B stock by 6.4%. Over the last 51 years (that is, since present management took over), per-share book value has grown from $19 to $155,501, a rate of 19.2% compounded annually.* During the first half of those years, Berkshire’s net worth was roughly equal to the number that really counts: the intrinsic value of the business. The similarity of the two figures existed then because most of our resources were deployed in marketable securities that were regularly revalued to their quoted prices (less the tax that would be incurred if they were to be sold). In Wall Street parlance, our balance sheet was then in very large part “marked to market.” By the early 1990s, however, our focus had changed to the outright ownership of businesses, a shift that diminished the relevance of balance-sheet figures. That disconnect occurred because the accounting rules that apply to controlled companies are materially different from those used in valuing marketable securities.

The carrying value of the “losers” we own is written down, but “winners” are never revalued upwards. We’ve had experience with both outcomes: I’ve made some dumb purchases, and the amount I paid for the economic goodwill of those companies was later written off, a move that reduced Berkshire’s book value. We’ve also had some winners – a few of them very big – but have not written those up by a penny. Over time, this asymmetrical accounting treatment (with which we agree) necessarily widens the gap between intrinsic value and book value. Today, the large – and growing – unrecorded gains at our “winners” make it clear that Berkshire’s intrinsic value far exceeds its book value. That’s why we would be delighted to repurchase our shares should they sell as low as 120% of book value. At that level, purchases would instantly and meaningfully increase per-share intrinsic value for Berkshire’s continuing shareholders. The unrecorded increase in the value of our owned businesses explains why Berkshire’s aggregate marketvalue gain – tabulated on the facing page – materially exceeds our book-value gain. The two indicators vary erratically over short periods. Last year, for example, book-value performance was superior.

Over time, however, market-value gains should continue their historical tendency to exceed gains in book value. * All per-share figures used in this report apply to Berkshire’s A shares. Figures for the B shares are 1/1500th of those shown for A. 3 The Year at Berkshire Charlie Munger, Berkshire Vice Chairman and my partner, and I expect Berkshire’s normalized earning power to increase every year. (Actual year-to-year earnings, of course, will sometimes decline because of weakness in the U.S. economy or, possibly, because of insurance mega-catastrophes.) In some years the normalized gains will be small; at other times they will be material. Last year was a good one. Here are the highlights: ‹ The most important development at Berkshire during 2015 was not financial, though it led to better earnings. After a poor performance in 2014, our BNSF railroad dramatically improved its service to customers last year. To attain that result, we invested about $5.8 billion during the year in capital expenditures, a sum far and away the record for any American railroad and nearly three times our annual depreciation charge. It was money well spent. BNSF moves about 17% of America’s intercity freight (measured by revenue ton-miles), whether transported by rail, truck, air, water or pipeline. In that respect, we are a strong number one among the seven large American railroads (two of which are Canadian-based), carrying 45% more ton-miles of freight than our closest competitor.

Consequently, our maintaining first-class service is not only vital to our shippers’ welfare but also important to the smooth functioning of the U.S. economy. For most American railroads, 2015 was a disappointing year. Aggregate ton-miles fell, and earnings weakened as well. BNSF, however, maintained volume, and pre-tax income rose to a record $6.8 billion* (a gain of $606 million from 2014). Matt Rose and Carl Ice, the managers of BNSF, have my thanks and deserve yours. ‹ BNSF is the largest of our “Powerhouse Five,” a group that also includes Berkshire Hathaway Energy, Marmon, Lubrizol and IMC. Combined, these companies – our five most profitable non-insurance businesses – earned $13.1 billion in 2015, an increase of $650 million over 2014. Of the five, only Berkshire Hathaway Energy, then earning $393 million, was owned by us in 2003. Subsequently, we purchased three of the other four on an all-cash basis. In acquiring BNSF, however, we paid about 70% of the cost in cash and, for the remainder, issued Berkshire shares that increased the number outstanding by 6.1%. In other words, the $12.7 billion gain in annual earnings delivered Berkshire by the five companies over the twelve-year span has been accompanied by only minor dilution. That satisfies our goal of not simply increasing earnings, but making sure we also increase per-share results. ‹ Next year, I will be discussing the “Powerhouse Six.” The newcomer will be Precision Castparts Corp. (“PCC”), a business that we purchased a month ago for more than $32 billion of cash. PCC fits perfectly into the Berkshire model and will substantially increase our normalized per-share earning power. Under CEO Mark Donegan,

PCC has become the world’s premier supplier of aerospace components (most of them destined to be original equipment, though spares are important to the company as well). Mark’s accomplishments remind me of the magic regularly performed by Jacob Harpaz at IMC, our remarkable Israeli manufacturer of cutting tools. The two men transform very ordinary raw materials into extraordinary products that are used by major manufacturers worldwide. Each is the da Vinci of his craft. PCC’s products, often delivered under multi-year contracts, are key components in most large aircraft. Other industries are served as well by the company’s 30,466 employees, who work out of 162 plants in 13 countries. In building his business, Mark has made many acquisitions and will make more. We look forward to having him deploy Berkshire’s capital. * Throughout this letter, all earnings are stated on a pre-tax basis unless otherwise designated. 4 A personal thank-you: The PCC acquisition would not have happened without the input and assistance of our own Todd Combs, who brought the company to my attention a few years ago and went on to educate me about both the business and Mark.

Though Todd and Ted Weschler are primarily investment managers – they each handle about $9 billion for us – both of them cheerfully and ably add major value to Berkshire in other ways as well. Hiring these two was one of my best moves. ‹ With the PCC acquisition, Berkshire will own 101⁄4 companies that would populate the Fortune 500 if they were stand-alone businesses. (Our 27% holding of Kraft Heinz is the 1⁄4.) That leaves just under 98% of America’s business giants that have yet to call us. Operators are standing by. ‹ Our many dozens of smaller non-insurance businesses earned $5.7 billion last year, up from $5.1 billion in 2014. Within this group, we have one company that last year earned more than $700 million, two that earned between $400 million and $700 million, seven that earned between $250 million and $400 million, six that earned between $100 million and $250 million, and eleven that earned between $50 million and $100 million. We love them all: This collection of businesses will expand both in number and earnings as the years go by. ‹ When you hear talk about America’s crumbling infrastructure, rest assured that they’re not talking about Berkshire. We invested $16 billion in property, plant and equipment last year, a full 86% of it deployed in the United States. I told you earlier about BNSF’s record capital expenditures in 2015. At the end of every year, our railroad’s physical facilities will be improved from those existing twelve months earlier. Berkshire Hathaway Energy (“BHE”) is a similar story. That company has invested $16 billion in renewables and now owns 7% of the country’s wind generation and 6% of its solar

generation. Indeed, the 4,423 megawatts of wind generation owned and operated by our regulated utilities is six times the generation of the runner-up utility. We’re not done. Last year, BHE made major commitments to the future development of renewables in support of the Paris Climate Change Conference. Our fulfilling those promises will make great sense, both for the environment and for Berkshire’s economics. ‹ Berkshire’s huge and growing insurance operation again operated at an underwriting profit in 2015 – that makes 13 years in a row – and increased its float. During those years, our float – money that doesn’t belong to us but that we can invest for Berkshire’s benefit – grew from $41 billion to $88 billion. Though neither that gain nor the size of our float is reflected in Berkshire’s earnings, float generates significant investment income because of the assets it allows us to hold. Meanwhile, our underwriting profit totaled $26 billion during the 13-year period, including $1.8 billion earned in 2015. Without a doubt, Berkshire’s largest unrecorded wealth lies in its insurance business. We’ve spent 48 years building this multi-faceted operation, and it can’t be replicated. ‹ While Charlie and I search for new businesses to buy, our many subsidiaries are regularly making bolt-on acquisitions. Last year we contracted for 29 bolt-ons, scheduled to cost $634 million in aggregate. The cost of these purchases ranged from $300,000 to $143 million.

Charlie and I encourage bolt-ons, if they are sensibly-priced. (Most deals offered us most definitely aren’t.) These purchases deploy capital in operations that fit with our existing businesses and that will be managed by our corps of expert managers. That means no additional work for us, yet more earnings for Berkshire, a combination we find highly appealing. We will make many dozens of bolt-on deals in future years. 5 ‹ Our Heinz partnership with Jorge Paulo Lemann, Alex Behring and Bernardo Hees more than doubled its size last year by merging with Kraft. Before this transaction, we owned about 53% of Heinz at a cost of $4.25 billion. Now we own 325.4 million shares of Kraft Heinz (about 27%) that cost us $9.8 billion. The new company has annual sales of $27 billion and can supply you Heinz ketchup or mustard to go with your Oscar Mayer hot dogs that come from the Kraft side. Add a Coke, and you will be enjoying my favorite meal. (We will have the Oscar Mayer Wienermobile at the annual meeting – bring your kids.) Though we sold no Kraft Heinz shares, “GAAP” (Generally Accepted Accounting Principles) required us to record a $6.8 billion write-up of our investment upon completion of the merger. That leaves us with our Kraft Heinz holding carried on our balance sheet at a value many billions above our cost and many billions below its market value, an outcome only an accountant could love. Berkshire also owns Kraft Heinz preferred shares that pay us $720 million annually and are carried at $7.7 billion on our balance sheet.

That holding will almost certainly be redeemed for $8.32 billion in June (the earliest date allowed under the preferred’s terms). That will be good news for Kraft Heinz and bad news for Berkshire. Jorge Paulo and his associates could not be better partners. We share with them a passion to buy, build and hold large businesses that satisfy basic needs and desires. We follow different paths, however, in pursuing this goal. Their method, at which they have been extraordinarily successful, is to buy companies that offer an opportunity for eliminating many unnecessary costs and then – very promptly – to make the moves that will get the job done. Their actions significantly boost productivity, the all-important factor in America’s economic growth over the past 240 years.

Without more output of desired goods and services per working hour – that’s the measure of productivity gains – an economy inevitably stagnates. At much of corporate America, truly major gains in productivity are possible, a fact offering opportunities to Jorge Paulo and his associates. At Berkshire, we, too, crave efficiency and detest bureaucracy. To achieve our goals, however, we follow an approach emphasizing avoidance of bloat, buying businesses such as PCC that have long been run by cost-conscious and efficient managers. After the purchase, our role is simply to create an environment in which these CEOs – and their eventual successors, who typically are like-minded – can maximize both their managerial effectiveness and the pleasure they derive from their jobs. (With this hands-off style, I am heeding a well-known Mungerism: “If you want to guarantee yourself a lifetime of misery, be sure to marry someone with the intent of changing their behavior.”) We will continue to operate with extreme – indeed, almost unheard of – decentralization at Berkshire. But we will also look for opportunities to partner with Jorge Paulo, either as a financing partner, as was the case when his group purchased Tim Horton’s, or as a combined equity-and-financing partner, as at Heinz. We also may occasionally partner with others, as we have successfully done at Berkadia. Berkshire, however, will join only with partners making friendly acquisitions.

To be sure, certain hostile offers are justified: Some CEOs forget that it is shareholders for whom they should be working, while other managers are woefully inept. In either case, directors may be blind to the problem or simply reluctant to make the change required. That’s when new faces are needed. We, though, will leave these “opportunities” for others. At Berkshire, we go only where we are welcome. 6 ‹ Berkshire increased its ownership interest last year in each of its “Big Four” investments – American Express, Coca-Cola, IBM and Wells Fargo. We purchased additional shares of IBM (increasing our ownership to 8.4% versus 7.8% at yearend 2014) and Wells Fargo (going to 9.8% from 9.4%). At the other two companies, Coca-Cola and American Express, stock repurchases raised our percentage ownership. Our equity in Coca-Cola grew from 9.2% to 9.3%, and our interest in American Express increased from 14.8% to 15.6%. In case you think these seemingly small changes aren’t important, consider this math: For the four companies in aggregate, each increase of one percentage point in our ownership raises Berkshire’s portion of their annual earnings by about $500 million. These four investees possess excellent businesses and are run by managers who are both talented and shareholder-oriented. Their returns on tangible equity range from excellent to staggering. At Berkshire, we much prefer owning a non-controlling but substantial portion of a wonderful company to owning 100% of a so-so business. It’s better to have a partial interest in the Hope Diamond than to own all of a rhinestone. If Berkshire’s yearend holdings are used as the marker, our portion of the “Big Four’s” 2015 earnings amounted to $4.7 billion. In the earnings we report to you, however, we include only the dividends they pay us – about $1.8 billion last year.

But make no mistake: The nearly $3 billion of these companies’ earnings we don’t report are every bit as valuable to us as the portion Berkshire records. The earnings our investees retain are often used for repurchases of their own stock – a move that increases Berkshire’s share of future earnings without requiring us to lay out a dime. The retained earnings of these companies also fund business opportunities that usually turn out to be advantageous. All that leads us to expect that the per-share earnings of these four investees, in aggregate, will grow substantially over time. If gains do indeed materialize, dividends to Berkshire will increase and so, too, will our unrealized capital gains. Our flexibility in capital allocation – our willingness to invest large sums passively in non-controlled businesses – gives us a significant edge over companies that limit themselves to acquisitions they will operate. Woody Allen once explained that the advantage of being bi-sexual is that it doubles your chance of finding a date on Saturday night. In like manner – well, not exactly like manner – our appetite for either operating businesses or passive investments doubles our chances of finding sensible uses for Berkshire’s endless gusher of cash. Beyond that, having a huge portfolio of marketable securities gives us a stockpile of funds that can be tapped when an elephant-sized acquisition is offered to us.

It’s an election year, and candidates can’t stop speaking about our country’s problems (which, of course, only they can solve). As a result of this negative drumbeat, many Americans now believe that their children will not live as well as they themselves do. That view is dead wrong: The babies being born in America today are the luckiest crop in history. American GDP per capita is now about $56,000. As I mentioned last year that – in real terms – is a staggering six times the amount in 1930, the year I was born, a leap far beyond the wildest dreams of my parents or their contemporaries. U.S. citizens are not intrinsically more intelligent today, nor do they work harder than did Americans in 1930. Rather, they work far more efficiently and thereby produce far more. This all-powerful trend is certain to continue: America’s economic magic remains alive and well. Some commentators bemoan our current 2% per year growth in real GDP – and, yes, we would all like to see a higher rate. But let’s do some simple math using the much-lamented 2% figure. That rate, we will see, delivers astounding gains. 7 America’s population is growing about .8% per year (.5% from births minus deaths and .3% from net migration). Thus 2% of overall growth produces about 1.2% of per capita growth. That may not sound impressive. But in a single generation of, say, 25 years, that rate of growth leads to a gain of 34.4% in real GDP per capita. (Compounding’s effects produce the excess over the percentage that would result by simply multiplying 25 x 1.2%.) In turn, that 34.4% gain will produce a staggering $19,000 increase in real GDP per capita for the next generation. Were that to be distributed equally, the gain would be $76,000 annually for a family of four. Today’s politicians need not shed tears for tomorrow’s children. Indeed, most of today’s children are doing well. All families in my upper middle-class neighborhood regularly enjoy a living standard better than that achieved by John D. Rockefeller Sr. at the time of my birth. His unparalleled fortune couldn’t buy what we now take for granted, whether the field is – to name just a few – transportation, entertainment, communication or medical services. Rockefeller certainly had power and fame; he could not,

however, live as well as my neighbors now do. Though the pie to be shared by the next generation will be far larger than today’s, how it will be divided will remain fiercely contentious. Just as is now the case, there will be struggles for the increased output of goods and services between those people in their productive years and retirees, between the healthy and the infirm, between the inheritors and the Horatio Algers, between investors and workers and, in particular, between those with talents that are valued highly by the marketplace and the equally decent hard-working Americans who lack the skills the market prizes. Clashes of that sort have forever been with us – and will forever continue. Congress will be the battlefield; money and votes will be the weapons. Lobbying will remain a growth industry. The good news, however, is that even members of the “losing” sides will almost certainly enjoy – as they should – far more goods and services in the future than they have in the past. The quality of their increased bounty will also dramatically improve. Nothing rivals the market system in producing what people want – nor, even more so, in delivering what people don’t yet know they want. My parents, when young, could not envision a television set, nor did I, in my 50s, think I needed a personal computer. Both products, once people saw what they could do, quickly revolutionized their lives. I now spend ten hours a week playing bridge online. And, as I write this letter, “search” is invaluable to me. (I’m not ready for Tinder, however.) For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs. America’s social security promises will be honored and perhaps made more generous. And, yes, America’s kids will live far better than their parents did.

Considering this favorable tailwind, Berkshire (and, to be sure, a great many other businesses) will almost certainly prosper. The managers who succeed Charlie and me will build Berkshire’s per-share intrinsic value by following our simple blueprint of: (1) constantly improving the basic earning power of our many subsidiaries; (2) further increasing their earnings through bolt-on acquisitions; (3) benefiting from the growth of our investees; (4) repurchasing Berkshire shares when they are available at a meaningful discount from intrinsic value; and (5) making an occasional large acquisition. Management will also try to maximize results for you by rarely, if ever, issuing Berkshire shares. 8 Intrinsic Business Value As much as Charlie and I talk about intrinsic business value, we cannot tell you precisely what that number is for Berkshire shares (nor, in fact, for any other stock). It is possible, however, to make a sensible estimate. In our 2010 annual report we laid out the three elements – one of them qualitative – that we believe are the keys to an estimation of Berkshire’s intrinsic value. That discussion is reproduced in full on pages 113-114. Here is an update of the two quantitative factors: In 2015 our per-share cash and investments increased 8.3% to $159,794 (with our Kraft Heinz shares stated at market value), and earnings from our many businesses – including insurance underwriting income – increased 2.1% to $12,304 per share. We exclude in the second factor the dividends and interest from the investments we hold because including them would produce a double-counting of value. In arriving at our earnings figure, we deduct all corporate overhead, interest, depreciation, amortization and minority interests. Income taxes, though, are not deducted. That is, the earnings are pre-tax. I used the italics in the paragraph above because we are for the first time including insurance underwriting income in business earnings. We did not do that when we initially introduced Berkshire’s two quantitative pillars of valuation because our insurance results were then heavily influenced by catastrophe coverages. If the wind didn’t blow and the earth didn’t shake, we made large profits. But a mega-catastrophe would produce red ink. In order to be conservative then in stating our business earnings, we consistently assumed that underwriting would break even over time and ignored any of its gains or losses in our annual calculation of the second factor of value. Today, our insurance results are likely to be more stable than was the case a decade or two ago because we have deemphasized catastrophe coverages and greatly expanded our bread-and-butter lines of business. Last year, our underwriting income contributed $1,118 per share to the $12,304 per share of earnings referenced in the second paragraph of this section. Over the past decade, annual underwriting income has averaged $1,434 per share, and we anticipate being profitable in most years. You should recognize, however, that underwriting in any given year could well be unprofitable, perhaps substantially so. Since 1970, our per-share investments have increased at a rate of 18.9% compounded annually, and our earnings (including the underwriting results in both the initial and terminal year) have grown at a 23.7% clip. It is no coincidence that the price of Berkshire stock over the ensuing 45 years has increased at a rate very similar to that of our two measures of value. Charlie and I like to see gains in both sectors, but our main goal is to build operating earnings.

Now, let’s examine the four major sectors of our operations. Each has vastly different balance sheet and income characteristics from the others. So we’ll present them as four separate businesses, which is how Charlie and I view them (though there are important and enduring economic advantages to having them all under one roof). Our intent is to provide you with the information we would wish to have if our positions were reversed, with you being the reporting manager and we the absentee shareholders. (Don’t get excited; this is not a switch we are considering.) Insurance Let’s look first at insurance. The property-casualty (“P/C”) branch of that industry has been the engine that has propelled our expansion since 1967, when we acquired National Indemnity and its sister company, National Fire & Marine, for $8.6 million. Today, National Indemnity is the largest property-casualty company in the world, as measured by net worth. Moreover, its intrinsic value is far in excess of the value at which it is carried on our books. 9 One reason we were attracted to the P/C business was its financial characteristics: P/C insurers receive premiums upfront and pay claims later. In extreme cases, such as those arising from certain workers’ compensation accidents, payments can stretch over many decades. This collect-now, pay-later model leaves P/C companies holding large sums – money we call “float” – that will eventually go to others. Meanwhile, insurers get to invest this float for their own benefit. Though individual policies and claims come and go, the amount of float an insurer holds usually remains fairly stable in relation to premium volume. Consequently, as our business grows, so does our float. And how we have grown, as the following table shows: Year Float (in millions) 1970 $ 39 1980 237 1990 1,632 2000 27,871 2010 65,832 2015 87,722 Further gains in float will be tough to achieve. On the plus side, GEICO and several of our specialized operations are almost certain to grow at a good clip. National Indemnity’s reinsurance division, however, is party to a number of run-off contracts whose float drifts downward. If we do in time experience a decline in float, it will be very gradual – at the outside no more than 3% in any year. The nature of our insurance contracts is such that we can never be subject to immediate or near-term demands for sums that are of significance to our cash resources. This structure is by design and is a key component in the strength of Berkshire’s economic fortress. It will never be compromised. If our premiums exceed the total of our expenses and eventual losses, we register an underwriting profit that adds to the investment income our float produces. When such a profit is earned, we enjoy the use of free money – and, better yet, get paid for holding it. Unfortunately, the wish of all insurers to achieve this happy result creates intense competition, so vigorous indeed that it sometimes causes the P/C industry as a whole to operate at a significant underwriting loss. This loss, in effect, is what the industry pays to hold its float. Competitive dynamics almost guarantee that the insurance industry, despite the float income all its companies enjoy, will continue its dismal record of earning subnormal returns on tangible net worth as compared to other American businesses. The prolonged period of low interest rates the world is now dealing with also virtually guarantees that earnings on float will steadily decrease for many years to come, thereby exacerbating the profit problems of insurers. It’s a good bet that industry results over the next ten years will fall short of those recorded in the past decade, particularly for those companies that specialize in reinsurance. As noted early in this report, Berkshire has now operated at an underwriting profit for 13 consecutive years, our pre-tax gain for the period having totaled $26.2 billion. That’s no accident: Disciplined risk evaluation is the daily focus of all of our insurance managers, who know that while float is valuable, its benefits can be drowned by poor underwriting results. All insurers give that message lip service. At Berkshire it is a religion, Old Testament style. So how does our float affect intrinsic value? When Berkshire’s book value is calculated, the full amount of our float is deducted as a liability, just as if we had to pay it out tomorrow and could not replenish it. But to think of float as strictly a liability is incorrect. It should instead be viewed as a revolving fund. Daily, we pay old claims and related expenses – a huge $24.5 billion to more than six million claimants in 2015 – and that reduces float. Just as surely, we each day write new business that will soon generate its own claims, adding to float. 10 If our revolving float is both costless and long-enduring, which I believe it will be, the true value of this liability is dramatically less than the accounting liability. Owing $1 that in effect will never leave the premises – because new business is almost certain to deliver a substitute – is worlds different from owing $1 that will go out the door tomorrow and not be replaced. The two types of liabilities, however, are treated as equals under GAAP. A partial offset to this overstated liability is a $15.5 billion “goodwill” asset that we incurred in buying our insurance companies and that increases book value. In very large part, this goodwill represents the price we paid for the float-generating capabilities of our insurance operations. The cost of the goodwill, however, has no bearing on its true value. For example, if an insurance company sustains large and prolonged underwriting losses, any goodwill asset carried on the books should be deemed valueless, whatever its original cost. Fortunately, that does not describe Berkshire. Charlie and I believe the true economic value of our insurance goodwill – what we would happily pay for float of similar quality were we to purchase an insurance operation possessing it – to be far in excess of its historic carrying value. Indeed, almost the entire $15.5 billion we carry for goodwill in our insurance business was already on our books in 2000. Yet we subsequently tripled our float. Its value today is one reason – a huge reason – why we believe Berkshire’s intrinsic business value substantially exceeds its book value.

Berkshire’s attractive insurance economics exist only because we have some terrific managers running disciplined operations that possess hard-to-replicate business models. Let me tell you about the major units. First by float size is the Berkshire Hathaway Reinsurance Group, managed by Ajit Jain. Ajit insures risks that no one else has the desire or the capital to take on. His operation combines capacity, speed, decisiveness and, most important, brains in a manner unique in the insurance business. Yet he never exposes Berkshire to risks that are inappropriate in relation to our resources. Indeed, Berkshire is far more conservative in avoiding risk than most large insurers. For example, if the insurance industry should experience a $250 billion loss from some mega-catastrophe – a loss about triple anything it has ever experienced – Berkshire as a whole would likely record a significant profit for the year because of its many streams of earnings. We would also remain awash in cash and be looking for large opportunities to write business in an insurance market that might well be in disarray. Meanwhile, other major insurers and reinsurers would be swimming in red ink, if not facing insolvency. When Ajit entered Berkshire’s office on a Saturday in 1986, he did not have a day’s experience in the insurance business. Nevertheless, Mike Goldberg, then our manager of insurance, handed him the keys to our reinsurance business. With that move, Mike achieved sainthood: Since then, Ajit has created tens of billions of value for Berkshire shareholders.

We have another reinsurance powerhouse in General Re, managed by Tad Montross. At bottom, a sound insurance operation needs to adhere to four disciplines. It must (1) understand all exposures that might cause a policy to incur losses; (2) conservatively assess the likelihood of any exposure actually causing a loss and the probable cost if it does; (3) set a premium that, on average, will deliver a profit after both prospective loss costs and operating expenses are covered; and (4) be willing to walk away if the appropriate premium can’t be obtained. 11 Many insurers pass the first three tests and flunk the fourth. They simply can’t turn their back on business that is being eagerly written by their competitors. That old line, “The other guy is doing it, so we must as well,” spells trouble in any business, but in none more so than insurance. Tad has observed all four of the insurance commandments, and it shows in his results. General Re’s huge float has been considerably better than cost-free under his leadership, and we expect that, on average, to continue. We are particularly enthusiastic about General Re’s international life reinsurance business, which has grown consistently and profitably since we acquired the company in 1998. It can be remembered that soon after we purchased General Re, it was beset by problems that caused commentators – and me as well, briefly – to believe I had made a huge mistake. That day is long gone. General Re is now a gem.

Finally, there is GEICO, the insurer on which I cut my teeth 65 years ago. GEICO is managed by Tony Nicely, who joined the company at 18 and completed 54 years of service in 2015. Tony became CEO in 1993, and since then the company has been flying. There is no better manager than Tony. In the 40 years that I’ve known him, his every action has made great sense. When I was first introduced to GEICO in January 1951, I was blown away by the huge cost advantage the company enjoyed compared to the expenses borne by the giants of the industry. It was clear to me that GEICO would succeed because it deserved to succeed. No one likes to buy auto insurance. Almost everyone, though, likes to drive. The insurance consequently needed is a major expenditure for most families. Savings matter to them – and only a low-cost operation can deliver these. Indeed, at least 40% of the people reading this letter can save money by insuring with GEICO. So stop reading – right now! – and go to geico.com or call 800-368-2734. GEICO’s cost advantage is the factor that has enabled the company to gobble up market share year after year. (We ended 2015 with 11.4% of the market compared to 2.5% in 1995, when Berkshire acquired control of GEICO.) The company’s low costs create a moat – an enduring one – that competitors are unable to cross. All the while, our gecko never tires of telling Americans how GEICO can save them important money. I love hearing the little guy deliver his message: “15 minutes could save you 15% or more on car insurance.” (Of course, there’s always a grouch in the crowd. One of my friends says he is glad that only a few animals can talk, since the ones that do speak seem unable to discuss any subject but insurance.)

In addition to our three major insurance operations, we own a group of smaller companies that primarily write commercial coverages. In aggregate, these companies are a large, growing and valuable operation that consistently delivers an underwriting profit, usually much better than that reported by their competitors. Indeed, over the past 13 years, this group has earned $4 billion from underwriting – about 13% of its premium volume – while increasing its float from $943 million to $9.9 billion. Less than three years ago, we formed Berkshire Hathaway Specialty Insurance (“BHSI”), which we include in this group. Our first decision was to put Peter Eastwood in charge. That move was a home run: BHSI has already developed $1 billion of annual premium volume and, under Peter’s direction, is destined to become one of the world’s leading P/C insurers. 12 Here’s a recap of underwriting earnings and float by division: Underwriting Profit Yearend Float (in millions)

Insurance Operations 2015 2014 2015 2014 BH Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 421 $ 606 $ 44,108 $ 42,454 General Re . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 277 18,560 19,280 GEICO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 460 1,159 15,148 13,569 Other Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 824 626 9,906 8,618 $ 1,837 $ 2,668 $ 87,722 $ 83,921

Berkshire’s great managers, premier financial strength and a variety of business models protected by wide moats amount to something unique in the insurance world. This assemblage of strengths is a huge asset for Berkshire shareholders that will only get more valuable with time. Regulated, Capital-Intensive Businesses We have two major operations, BNSF and BHE, that share important characteristics distinguishing them from our other businesses. Consequently, we assign them their own section in this letter and split out their combined financial statistics in our GAAP balance sheet and income statement. Together, they last year accounted for 37% of Berkshire’s after-tax operating earnings. A key characteristic of both companies is their huge investment in very long-lived, regulated assets, with these partially funded by large amounts of long-term debt that is not guaranteed by Berkshire. Our credit is in fact not needed because each company has earning power that even under terrible economic conditions would far exceed its interest requirements. Last year, for example, in a disappointing year for railroads, BNSF’s interest coverage was more than 8:1. (Our definition of coverage is the ratio of earnings before interest and taxes to interest, not EBITDA/ interest, a commonly used measure we view as seriously flawed.) At BHE, meanwhile, two factors ensure the company’s ability to service its debt under all circumstances. The first is common to all utilities: recession-resistant earnings, which result from these companies offering an essential service on an exclusive basis. The second is enjoyed by few other utilities: a great and ever-widening diversity of earnings streams, which shield BHE from being seriously harmed by any single regulatory body. These many sources of profit, supplemented by the inherent advantage of being owned by a strong parent, have allowed BHE and its utility subsidiaries to significantly lower their cost of debt. This economic fact benefits both us and our customers. All told, BHE and BNSF invested $11.6 billion in plant and equipment last year, a massive commitment to key components of America’s infrastructure. We relish making such investments as long as they promise reasonable returns – and, on that front, we put a large amount of trust in future regulation. Our confidence is justified both by our past experience and by the knowledge that society will forever need huge investments in both transportation and energy. It is in the self-interest of governments to treat capital providers in a manner that will ensure the continued flow of funds to essential projects. It is concomitantly in our self-interest to conduct our operations in a way that earns the approval of our regulators and the people they represent. Low prices are a powerful way to keep these constituencies happy. In Iowa, BHE’s average retail rate is 6.8¢ per KWH. Alliant, the other major electric utility in the state, averages 9.5¢. Here are the comparable industry figures for adjacent states: Nebraska 9.0¢, Missouri 9.3¢, Illinois 9.3¢, Minnesota 9.7¢. The national average is 10.4¢. Our rock-bottom prices add up to real money for paycheck-strapped customers. 13 At BNSF, price comparisons between major railroads are far more difficult to make because of significant differences in both their mix of cargo and the average distance it is carried. To supply a very crude measure, however, our revenue per ton-mile was just under 3¢ last year, while shipping costs for customers of the other four major U.S.-based railroads were at least 40% higher, ranging from 4.2¢ to 5.3¢. Both BHE and BNSF have been leaders in pursuing planet-friendly technology. In wind generation, no state comes close to Iowa, where last year megawatt-hours we generated from wind equaled 47% of all megawatt-hours sold to our retail customers. (Additional wind projects to which we are committed will take that figure to 58% in 2017.) BNSF, like other Class I railroads, uses only a single gallon of diesel fuel to move a ton of freight almost 500 miles. That makes the railroads four times as fuel-efficient as trucks! Furthermore, railroads alleviate highway congestion – and the taxpayer-funded maintenance expenditures that come with heavier traffic – in a major way. Here are the key figures for BHE and

BNSF: Berkshire Hathaway Energy (89.9% owned) Earnings (in millions) 2015 2014 2013 U.K. utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 460 $ 527 $ 362 Iowa utility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314 298 230 Nevada utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 586 549 (58) PacifiCorp (primarily Oregon and Utah) ............................... 1,026 1,010 982 Gas pipelines (Northern Natural and Kern River) . . . . . . . . . . . . . . . . . . . . . . . . 401 379 385 Canadian transmission utility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 16 — Renewable projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175 194 50 HomeServices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 139 139 Other (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 26 12 Operating earnings before corporate interest and taxes .................... 3,350 3,138 2,102 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 499 427 296 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 481 616 170 Net earnings ..................................................... $ 2,370 $ 2,095 $ 1,636 Earnings applicable to Berkshire ..................................... $ 2,132 $ 1,882 $ 1,470 BNSF Earnings (in millions) 2015 2014 2013 Revenues ....................................................... $ 21,967 $ 23,239 $ 22,014 Operating expenses ............................................... 14,264 16,237 15,357 Operating earnings before interest and taxes ............................ 7,703 7,002 6,657 Interest (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 928 833 729 Income taxes .................................................... 2,527 2,300 2,135 Net earnings ..................................................... $ 4,248 $ 3,869 $ 3,793 I currently expect increased after-tax earnings at BHE in 2016, but lower earnings at BNSF. 14 Manufacturing, Service and Retailing Operations Our activities in this part of Berkshire cover the waterfront. Let’s look, though, at a summary balance sheet and earnings statement for the entire group. Balance Sheet 12/31/15 (in millions) Assets Liabilities and Equity Cash and equivalents .................. $ 6,807 Notes payable ...................... $ 2,135 Accounts and notes receivable ........... 8,886 Other current liabilities ............... 10,565 Inventory ............................ 11,916 Total current liabilities ............... 12,700 Other current assets . . . . . . . . . . . . . . . . . . . 970 Total current assets .................... 28,579 Deferred taxes ...................... 3,649 Goodwill and other intangibles .......... 30,289 Term debt and other liabilities ......... 4,767 Fixed assets .......................... 15,161 Non-controlling interests . . . . . . . . . . . . . 521 Other assets .......................... 4,445 Berkshire equity .................... 56,837 $ 78,474 $ 78,474 Earnings Statement (in millions) 2015 2014 2013* Revenues ............................................... $107,825 $ 97,689 $ 93,472 Operating expenses ....................................... 100,607 90,788 87,208 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 109 104 Pre-tax earnings ......................................... 7,115 6,792 6,160 Income taxes and non-controlling interests .................... 2,432 2,324 2,283 Net earnings ............................................ $ 4,683 $ 4,468 $ 3,877

Earnings for 2013 have been restated to exclude Marmon’s leasing operations, which are now included in the Finance and Financial Products results. Our income and expense data conforming to GAAP is on page 38. In contrast, the operating expense figures above are non-GAAP because they exclude some purchase-accounting items (primarily the amortization of certain intangible assets). We present the data in this manner because Charlie and I believe the adjusted numbers more accurately reflect the true economic expenses and profits of the businesses aggregated in the table than do GAAP figures. I won’t explain all of the adjustments – some are tiny and arcane – but serious investors should understand the disparate nature of intangible assets. Some truly deplete in value over time, while others in no way lose value. For software, as a big example, amortization charges are very real expenses. Conversely, the concept of recording charges against other intangibles, such as customer relationships, arises from purchase-accounting rules and clearly does not reflect economic reality. GAAP accounting draws no distinction between the two types of charges. Both, that is, are recorded as expenses when earnings are calculated – even though, from an investor’s viewpoint, they could not differ more. 15 In the GAAP-compliant figures we show on page 38, amortization charges of $1.1 billion have been deducted as expenses. We would call about 20% of these “real,” the rest not. The “non-real” charges, once nonexistent at Berkshire, have become significant because of the many acquisitions we have made. Non-real amortization charges are likely to climb further as we acquire more companies. The table on page 55 gives you the current status of our intangible assets as calculated by GAAP. We now have $6.8 billion left of amortizable intangibles, of which $4.1 billion will be expensed over the next five years. Eventually, of course, every dollar of these “assets” will be charged off. When that happens, reported earnings increase even if true earnings are flat. (My gift to my successor.) I suggest that you ignore a portion of GAAP amortization costs. But it is with some trepidation that I do that, knowing that it has become common for managers to tell their owners to ignore certain expense items that are all too real. “Stock-based compensation” is the most egregious example. The very name says it all: “compensation.” If compensation isn’t an expense, what is it? And, if real and recurring expenses don’t belong in the calculation of earnings, where in the world do they belong? Wall Street analysts often play their part in this charade, too, parroting the phony, compensation-ignoring “earnings” figures fed them by managements. Maybe the offending analysts don’t know any better. Or maybe they fear losing “access” to management. Or maybe they are cynical, telling themselves that since everyone else is playing the game, why shouldn’t they go along with it. Whatever their reasoning, these analysts are guilty of propagating misleading numbers that can deceive investors. Depreciation charges are a more complicated subject but are almost always true costs. Certainly they are at Berkshire. I wish we could keep our businesses competitive while spending less than our depreciation charge, but in 51 years I’ve yet to figure out how to do so. Indeed, the depreciation charge we record in our railroad business falls far short of the capital outlays needed to merely keep the railroad running properly, a mismatch that leads to GAAP earnings that are higher than true economic earnings. (This overstatement of earnings exists at all railroads.) When CEOs or investment bankers tout pre-depreciation figures such as EBITDA as a valuation guide, watch their noses lengthen while they speak. Our public reports of earnings will, of course, continue to conform to GAAP. To embrace reality, however, you should remember to add back most of the amortization charges we report. You should also subtract something to reflect BNSF’s inadequate depreciation charge.

Let’s get back to our many manufacturing, service and retailing operations, which sell products ranging from lollipops to jet airplanes. Some of this sector’s businesses, measured by earnings on unleveraged net tangible assets, enjoy terrific economics, producing profits that run from 25% after-tax to far more than 100%. Others generate good returns in the area of 12% to 20%. A few, however – these are serious mistakes I made in my job of capital allocation – have very poor returns. In most of these cases, I was wrong in my evaluation of the economic dynamics of the company or the industry in which it operates, and we are now paying the price for my misjudgments. At other times, I stumbled in evaluating either the fidelity or the ability of incumbent managers or ones I later appointed. I will commit more errors; you can count on that. If we luck out, they will occur at our smaller operations. Viewed as a single entity, the companies in this group are an excellent business. They employed an average of $25.6 billion of net tangible assets during 2015 and, despite their holding large quantities of excess cash and using only token amounts of leverage, earned 18.4% after-tax on that capital. 16 Of course, a business with terrific economics can be a bad investment if it is bought at too high a price. We have paid substantial premiums to net tangible assets for most of our businesses, a cost that is reflected in the large figure we show for goodwill and other intangibles. Overall, however, we are getting a decent return on the capital we have deployed in this sector. Earnings from the group should grow substantially in 2016 as Duracell and Precision Castparts enter the fold.

We have far too many companies in this group to comment on them individually. Moreover, their competitors – both current and potential – read this report. In a few of our businesses we might be disadvantaged if others knew our numbers. In some of our operations that are not of a size material to an evaluation of Berkshire, therefore, we only disclose what is required. You can nevertheless find a good bit of detail about many of our operations on pages 88-91. Finance and Financial Products Our three leasing and rental operations are conducted by CORT (furniture), XTRA (semi-trailers), and Marmon (primarily tank cars but also freight cars, intermodal tank containers and cranes). These companies are industry leaders and have substantially increased their earnings as the American economy has gained strength. At each of the three, we have invested more money in new equipment than have many of our competitors, and that’s paid off. Dealing from strength is one of Berkshire’s enduring advantages. Kevin Clayton has again delivered an industry-leading performance at Clayton Homes, the second-largest home builder in America. Last year, the company sold 34,397 homes, about 45% of the manufactured homes bought by Americans. In contrast, the company was number three in the field, with a 14% share, when Berkshire purchased it in 2003. Manufactured homes allow the American dream of home ownership to be achieved by lower-income citizens: Around 70% of new homes costing $150,000 or less come from our industry. About 46% of Clayton’s homes are sold through the 331 stores we ourselves own and operate. Most of Clayton’s remaining sales are made to 1,395 independent retailers. Key to Clayton’s operation is its $12.8 billion mortgage portfolio. We originate about 35% of all mortgages on manufactured homes. About 37% of our mortgage portfolio emanates from our retail operation, with the balance primarily originated by independent retailers, some of which sell our homes while others market only the homes of our competitors. Lenders other than Clayton have come and gone. With Berkshire’s backing, however, Clayton steadfastly financed home buyers throughout the panic days of 2008-2009. Indeed, during that period, Clayton used precious capital to finance dealers who did not sell our homes. The funds we supplied to Goldman Sachs and General Electric at that time produced headlines; the funds Berkshire quietly delivered to Clayton both made home ownership possible for thousands of families and kept many non-Clayton dealers alive. Our retail outlets, employing simple language and large type, consistently inform home buyers of alternative sources for financing – most of it coming from local banks – and always secure acknowledgments from customers that this information has been received and read. (The form we use is reproduced in its actual size on page 119.) 17 Mortgage-origination practices are of great importance to both the borrower and to society. There is no question that reckless practices in home lending played a major role in bringing on the financial panic of 2008, which in turn led to the Great Recession. In the years preceding the meltdown, a destructive and often corrupt pattern of mortgage creation flourished whereby (1) an originator in, say, California would make loans and (2) promptly sell them to an investment or commercial bank in, say, New York, which would package many mortgages to serve as collateral for a dizzyingly complicated array of mortgage-backed securities to be (3) sold to unwitting institutions around the world. As if these sins weren’t sufficient to create an unholy mess, imaginative investment bankers sometimes concocted a second layer of sliced-up financing whose value depended on the junkier portions of primary offerings. (When Wall Street gets “innovative,” watch out!) While that was going on, I described this “doubling-up” practice as requiring an investor to read tens of thousands of pages of mind-numbing prose to evaluate a single security being offered. Both the originator and the packager of these financings had no skin in the game and were driven by volume and mark-ups. Many housing borrowers joined the party as well, blatantly lying on their loan applications while mortgage originators looked the other way. Naturally, the gamiest credits generated the most profits. Smooth Wall Street salesmen garnered millions annually by manufacturing products that their customers were unable to understand. (It’s also questionable as to whether the major rating agencies were capable of evaluating the more complex structures. But rate them they did.) Barney Frank, perhaps the most financially-savvy member of Congress during the panic, recently assessed the 2010 Dodd-Frank Act, saying, “The one major weakness that I’ve seen in the implementation was this decision by the regulators not to impose risk retention on all residential mortgages.” Today, some legislators and commentators continue to advocate a 1%-to-5% retention by the originator as a way to align its interests with that of the ultimate lender or mortgage guarantor. At Clayton, our risk retention was, and is, 100%. When we originate a mortgage we keep it (leaving aside the few that qualify for a government guarantee). When we make mistakes in granting credit, we therefore pay a price – a hefty price that dwarfs any profit we realized upon the original sale of the home. Last year we had to foreclose on 8,444 manufactured-housing mortgages at a cost to us of $157 million. The average loan we made in 2015 was only $59,942, small potatoes for traditional mortgage lenders, but a daunting commitment for our many lower-income borrowers. Our buyer acquires a decent home – take a look at the home we will have on display at our annual meeting – requiring monthly principal-and-interest payments that average $522. Some borrowers, of course, will lose their jobs, and there will be divorces and deaths. Others will get overextended on credit cards and mishandle their finances. We will lose money then, and our borrower will lose his down payment (though his mortgage payments during his time of occupancy may have been well under rental rates for comparable quarters). Nevertheless, despite the low FICO scores and income of our borrowers, their payment behavior during the Great Recession was far better than that prevailing in many mortgage pools populated by people earning multiples of our typical borrower’s income. The strong desire of our borrowers to have a home of their own is one reason we’ve done well with our mortgage portfolio. Equally important, we have financed much of the portfolio with floating-rate debt or with shortterm fixed-rate debt. Consequently, the incredibly low short-term rates of recent years have provided us a constantly-widening spread between our interest costs and the income we derive from our mortgage portfolio, which bears fixed rates. (Incidentally, we would have enjoyed similar margins had we simply bought long-term bonds and financed the position in some short-term manner.) 18 Normally, it is risky business to lend long at fixed rates and borrow short as we have been doing at Clayton. Over the years, some important financial institutions have gone broke doing that. At Berkshire, however, we possess a natural offset in that our businesses always maintain at least $20 billion in cash-equivalents that earn short-term rates. More often, our short-term investments are in the $40 billion to $60 billion range. If we have, say, $60 billion invested at 1⁄4% or less, a sharp move to higher short-term rates would bring benefits to us far exceeding the higher financing costs we would incur in funding Clayton’s $13 billion mortgage portfolio. In banking terms, Berkshire is – and always will be – heavily asset-sensitive and will consequently benefit from rising interest rates. Let me talk about one subject of which I am particularly proud, that having to do with regulation. The Great Recession caused mortgage originators, servicers and packagers to come under intense scrutiny and to be assessed many billions of dollars in fines and penalties. The scrutiny has certainly extended to Clayton, whose mortgage practices have been continuously reviewed and examined in respect to such items as originations, servicing, collections, advertising, compliance, and internal controls. At the federal level, we answer to the Federal Trade Commission, the Department of Housing and Urban Development and the Consumer Financial Protection Bureau. Dozens of states regulate us as well. During the past two years, indeed, various federal and state authorities (from 25 states) examined and reviewed Clayton and its mortgages on 65 occasions. The result? Our total fines during this period were $38,200 and our refunds to customers $704,678. Furthermore, though we had to foreclose on 2.64% of our manufactured-home mortgages last year, 95.4% of our borrowers were current on their payments at yearend, as they moved toward owning a debt-free home.

Marmon’s rail fleet expanded to 133,220 units by yearend, a number significantly increased by the company’s purchase of 25,085 cars from General Electric on September 30. If our fleet was connected to form a single train, the engine would be in Omaha and the caboose in Portland, Maine. At yearend, 97% of our railcars were leased, with about 15-17% of the fleet coming up for renewal each year. Though “tank cars” sound like vessels carrying crude oil, only about 7% of our fleet carries that product; chemicals and refined petroleum products are the lead items we transport. When trains roll by, look for the UTLX or Procor markings that identify our tank cars. When you spot the brand, puff out your chest; you own a portion of that car. Here’s the earnings recap for this sector: 2015 2014 2013 (in millions) Berkadia (our 50% share) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 74 $ 122 $ 80 Clayton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 706 558 416 CORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 49 42 Marmon – Containers and Cranes . . . . . . . . . . . . . . . . . . . . . . . 192 238 226 Marmon – Railcars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 546 442 353 XTRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 147 125 Net financial income* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341 283 322 $ 2,086 $ 1,839 $ 1,564 * Excludes capital gains or losses 19 Investments Below we list our fifteen common stock investments that at yearend had the largest market value. We exclude our Kraft Heinz holding because we are part of a control group and account for it on the “equity” method. 12/31/15 Shares** Company Percentage of Company Owned Cost* Market (in millions) 151,610,700 American Express Company ................. 15.6 $ 1,287 $ 10,545 46,577,138 AT&T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.8 1,283 1,603 7,463,157 Charter Communications, Inc. . . . . . . . . . . . . . . . . 6.6 1,202 1,367 400,000,000 The Coca-Cola Company . . . . . . . . . . . . . . . . . . . . 9.3 1,299 17,184 18,513,482 DaVita HealthCare Partners Inc. . . . . . . . . . . . . . . 8.8 843 1,291 22,164,450 Deere & Company . . . . . . . . . . . . . . . . . . . . . . . . . 7.0 1,773 1,690 11,390,582 The Goldman Sachs Group, Inc. . . . . . . . . . . . . . . . 2.7 654 2,053 81,033,450 International Business Machines Corp. . . . . . . . . . 8.4 13,791 11,152 24,669,778 Moody’s Corporation ....................... 12.6 248 2,475 55,384,926 Phillips 66 ................................ 10.5 4,357 4,530 52,477,678 The Procter & Gamble Company . . . . . . . . . . . . . . 1.9 336 4,683 *** 22,169,930 Sanofi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7 1,701 1,896 101,859,335 U.S. Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.8 3,239 4,346 63,507,544 Wal-Mart Stores, Inc. . . . . . . . . . . . . . . . . . . . . . . . 2.0 3,593 3,893 500,000,000 Wells Fargo & Company . . . . . . . . . . . . . . . . . . . . 9.8 12,730 27,180 Others ................................... 10,276 16,450 Total Common Stocks Carried at Market ........ $ 58,612 $ 112,338

This is our actual purchase price and also our tax basis; GAAP “cost” differs in a few cases because of writeups or write-downs that have been required under GAAP rules. ** Excludes shares held by pension funds of Berkshire subsidiaries. *** Held under contract of sale for this amount. Berkshire has one major equity position that is not included in the table: We can buy 700 million shares of Bank of America at any time prior to September 2021 for $5 billion. At yearend these shares were worth $11.8 billion. We are likely to purchase them just before expiration of our option and, if we wish, we can use our $5 billion of Bank of America 6% preferred to fund the purchase. In the meantime, it is important for you to realize that Bank of America is, in effect, our fourth largest equity investment – and one we value highly. 20 Productivity and Prosperity Earlier, I told you how our partners at Kraft Heinz root out inefficiencies, thereby increasing output per hour of employment. That kind of improvement has been the secret sauce of America’s remarkable gains in living standards since the nation’s founding in 1776. Unfortunately, the label of “secret” is appropriate: Too few Americans fully grasp the linkage between productivity and prosperity. To see that connection, let’s look first at the country’s most dramatic example – farming – and later examine three Berkshire-specific areas. In 1900, America’s civilian work force numbered 28 million. Of these, 11 million, a staggering 40% of the total, worked in farming. The leading crop then, as now, was corn. About 90 million acres were devoted to its production and the yield per acre was 30 bushels, for a total output of 2.7 billion bushels annually. Then came the tractor and one innovation after another that revolutionized such keys to farm productivity as planting, harvesting, irrigation, fertilization and seed quality. Today, we devote about 85 million acres to corn. Productivity, however, has improved yields to more than 150 bushels per acre, for an annual output of 13-14 billion bushels. Farmers have made similar gains with other products. Increased yields, though, are only half the story: The huge increases in physical output have been accompanied by a dramatic reduction in the number of farm laborers (“human input”). Today about three million people work on farms, a tiny 2% of our 158-million-person work force. Thus, improved farming methods have allowed tens of millions of present-day workers to utilize their time and talents in other endeavors, a reallocation of human resources that enables Americans of today to enjoy huge quantities of non-farm goods and services they would otherwise lack. It’s easy to look back over the 115-year span and realize how extraordinarily beneficial agricultural innovations have been – not just for farmers but, more broadly, for our entire society. We would not have anything close to the America we now know had we stifled those improvements in productivity. (It was fortunate that horses couldn’t vote.) On a day-to-day basis, however, talk of the “greater good” must have rung hollow to farm hands who lost their jobs to machines that performed routine tasks far more efficiently than humans ever could. We will examine this flip-side to productivity gains later in this section. For the moment, however, let’s move on to three stories of efficiencies that have had major consequences for Berkshire subsidiaries. Similar transformations have been commonplace throughout American business. ‹ In 1947, shortly after the end of World War II, the American workforce totaled 44 million. About 1.35 million workers were employed in the railroad industry. The revenue ton-miles of freight moved by Class I railroads that year totaled 655 billion. By 2014, Class I railroads carried 1.85 trillion ton-miles, an increase of 182%, while employing only 187,000 workers, a reduction of 86% since 1947. (Some of this change involved passenger-related employees, but most of the workforce reduction came on the freight side.) As a result of this staggering improvement in productivity, the inflation-adjusted price for moving a ton-mile of freight has fallen by 55% since 1947, a drop saving shippers about $90 billion annually in current dollars. Another startling statistic: If it took as many people now to move freight as it did in 1947, we would need well over three million railroad workers to handle present volumes. (Of course, that level of employment would raise freight charges by a lot; consequently, nothing close to today’s volume would actually move.) 21 Our own BNSF was formed in 1995 by a merger between Burlington Northern and Santa Fe. In 1996, the merged company’s first full year of operation, 411 million ton-miles of freight were transported by 45,000 employees. Last year the comparable figures were 702 million ton-miles (plus 71%) and 47,000 employees (plus only 4%). That dramatic gain in productivity benefits both owners and shippers. Safety at BNSF has improved as well: Reportable injuries were 2.04 per 200,000 man-hours in 1996 and have since fallen more than 50% to 0.95. ‹ A bit more than a century ago, the auto was invented, and around it formed an industry that insures cars and their drivers. Initially, this business was written through traditional insurance agencies – the kind dealing in fire insurance. This agency-centric approach included high commissions and other underwriting expenses that consumed about 40¢ of the premium dollar. Strong local agencies were then in the driver’s seat because they represented multiple insurers and could play one company off against another when commissions were being negotiated. Cartel-like pricing prevailed, and all involved were doing fine – except for the consumer. And then some American ingenuity came into play: G. J. Mecherle, a farmer from Merna, Illinois, came up with the idea of a captive sales force that would sell the insurance products of only a single company. His baby was christened State Farm Mutual. The company cut commissions and expenses – moves that permitted lower prices – and soon became a powerhouse. For many decades, State Farm has been the runaway volume leader in both auto and homeowner’s insurance. Allstate, which also operated with a direct distribution model, was long the runner-up. Both State Farm and Allstate have had underwriting expenses of about 25%. In the early 1930s, another contender, United Services Auto Association (“USAA”), a mutual-like company, was writing auto insurance for military officers on a direct-to-the-customer basis. This marketing innovation rose from a need that military personnel had to buy insurance that would stay with them as they moved from base to base. That was business of little interest to local insurance agencies, which wanted the steady renewals that came from permanent residents. The direct distribution method of USAA, as it happened, incurred lower costs than those enjoyed by State Farm and Allstate and therefore delivered an even greater bargain to customers. That made Leo and Lillian Goodwin, employees of USAA, dream of broadening the target market for its direct distribution model beyond military officers. In 1936, starting with $100,000 of capital, they incorporated Government Employees Insurance Co. (later compressing this mouthful to GEICO). Their fledgling did $238,000 of auto insurance business in 1937, its first full year. Last year GEICO did $22.6 billion, more than double the volume of USAA. (Though the early bird gets the worm, the second mouse gets the cheese.) GEICO’s underwriting expenses in 2015 were 14.7% of premiums, with USAA being the only large company to achieve a lower percentage. (GEICO is fully as efficient as USAA but spends considerably more on advertising aimed at promoting growth.) With the price advantage GEICO’s low costs allow, it’s not surprising that several years ago the company seized the number two spot in auto insurance from Allstate. GEICO is also gaining ground on State Farm, though it is still far ahead of us in volume. On August 30, 2030 – my 100th birthday – I plan to announce that GEICO has taken over the top spot. Mark your calendar. GEICO employs about 34,000 people to serve its 14 million policyholders. I can only guess at the workforce it would require to serve a similar number of policyholders under the agency system. I believe, however, that the number would be at least 60,000, a combination of what the insurer would need in direct employment and the personnel required at supporting agencies. 22 ‹ In its electric utility business, our Berkshire Hathaway Energy (“BHE”) operates within a changing economic model. Historically, the survival of a local electric company did not depend on its efficiency. In fact, a “sloppy” operation could do just fine financially. That’s because utilities were usually the sole supplier of a needed product and were allowed to price at a level that gave them a prescribed return upon the capital they employed. The joke in the industry was that a utility was the only business that would automatically earn more money by redecorating the boss’s office. And some CEOs ran things accordingly. That’s all changing. Today, society has decided that federally-subsidized wind and solar generation is in our country’s long-term interest. Federal tax credits are used to implement this policy, support that makes renewables price-competitive in certain geographies. Those tax credits, or other government-mandated help for renewables, may eventually erode the economics of the incumbent utility, particularly if it is a high-cost operator. BHE’s long-established emphasis on efficiency – even when the company didn’t need it to attain authorized earnings – leaves us particularly competitive in today’s market (and, more important, in tomorrow’s as well). BHE acquired its Iowa utility in 1999. In the year before, that utility employed 3,700 people and produced 19 million megawatt-hours of electricity. Now we employ 3,500 people and produce 29 million megawatthours. That major increase in efficiency allowed us to operate without a rate increase for 16 years, a period during which industry rates increased 44%. The safety record of our Iowa utility is also outstanding. It had .79 injuries per 100 employees in 2015 compared to the rate of 7.0 experienced by the previous owner in the year before we bought the operation. In 2006 BHE purchased PacifiCorp, which operated primarily in Oregon and Utah. The year before our purchase PacifiCorp employed 6,750 people and produced 52.6 million megawatt-hours. Last year the numbers were 5,700 employees and 56.3 million megawatt-hours. Here, too, safety improved dramatically, with the accident-rate-per-100-employees falling from 3.4 in 2005 to .85 in 2015. In safety, BHE now ranks in the industry’s top decile. Those outstanding performances explain why BHE is welcomed by regulators when it proposes to buy a utility in their jurisdiction. The regulators know the company will run an efficient, safe and reliable operation and also arrive with unlimited capital to fund whatever projects make sense. (BHE has never paid a dividend to Berkshire since we assumed ownership. No investor-owned utility in America comes close to matching BHE’s enthusiasm for reinvestment.)

The productivity gains that I’ve just spelled out – and countless others that have been achieved in America – have delivered awesome benefits to society. That’s the reason our citizens, as a whole, have enjoyed – and will continue to enjoy – major gains in the goods and services they receive. To this thought there are offsets. First, the productivity gains achieved in recent years have largely benefitted the wealthy. Second, productivity gains frequently cause upheaval: Both capital and labor can pay a terrible price when innovation or new efficiencies upend their worlds. We need shed no tears for the capitalists (whether they be private owners or an army of public shareholders). It’s their job to take care of themselves. When large rewards can flow to investors from good decisions, these parties should not be spared the losses produced by wrong choices. Moreover, investors who diversify widely and simply sit tight with their holdings are certain to prosper: In America, gains from winning investments have always far more than offset the losses from clunkers. (During the 20th Century, the Dow Jones Industrial Average – an index fund of sorts – soared from 66 to 11,497, with its component companies all the while paying ever-increasing dividends.) 23 A long-employed worker faces a different equation. When innovation and the market system interact to produce efficiencies, many workers may be rendered unnecessary, their talents obsolete. Some can find decent employment elsewhere; for others, that is not an option. When low-cost competition drove shoe production to Asia, our once-prosperous Dexter operation folded, putting 1,600 employees in a small Maine town out of work. Many were past the point in life at which they could learn another trade. We lost our entire investment, which we could afford, but many workers lost a livelihood they could not replace. The same scenario unfolded in slow-motion at our original New England textile operation, which struggled for 20 years before expiring. Many older workers at our New Bedford plant, as a poignant example, spoke Portuguese and knew little, if any, English. They had no Plan B. The answer in such disruptions is not the restraining or outlawing of actions that increase productivity. Americans would not be living nearly as well as we do if we had mandated that 11 million people should forever be employed in farming. The solution, rather, is a variety of safety nets aimed at providing a decent life for those who are willing to work but find their specific talents judged of small value because of market forces. (I personally favor a reformed and expanded Earned Income Tax Credit that would try to make sure America works for those willing to work.) The price of achieving ever-increasing prosperity for the great majority of Americans should not be penury for the unfortunate. Important Risks We, like all public companies, are required by the SEC to annually catalog “risk factors” in our 10-K. I can’t remember, however, an instance when reading a 10-K’s “risk” section has helped me in evaluating a business. That’s not because the identified risks aren’t real. The truly important risks, however, are usually well known. Beyond that, a 10-K’s catalog of risks is seldom of aid in assessing: (1) the probability of the threatening event actually occurring; (2) the range of costs if it does occur; and (3) the timing of the possible loss. A threat that will only surface 50 years from now may be a problem for society, but it is not a financial problem for today’s investor. Berkshire operates in more industries than any company I know of. Each of our pursuits has its own array of possible problems and opportunities. Those are easy to list but hard to evaluate: Charlie, I and our various CEOs often differ in a very major way in our calculation of the likelihood, the timing and the cost (or benefit) that may result from these possibilities. Let me mention just a few examples. To begin with an obvious threat, BNSF, along with other railroads, is certain to lose significant coal volume over the next decade. At some point in the future – though not, in my view, for a long time – GEICO’s premium volume may shrink because of driverless cars. This development could hurt our auto dealerships as well. Circulation of our print newspapers will continue to fall, a certainty we allowed for when purchasing them. To date, renewables have helped our utility operation but that could change, particularly if storage capabilities for electricity materially improve. Online retailing threatens the business model of our retailers and certain of our consumer brands. These potentialities are just a few of the negative possibilities facing us – but even the most casual follower of business news has long been aware of them. None of these problems, however, is crucial to Berkshire’s long-term well-being. When we took over the company in 1965, its risks could have been encapsulated in a single sentence: “The northern textile business in which all of our capital resides is destined for recurring losses and will eventually disappear.” That development, however, was no death knell. We simply adapted. And we will continue to do so. 24 Every day Berkshire managers are thinking about how they can better compete in an always-changing world. Just as vigorously, Charlie and I focus on where a steady stream of funds should be deployed. In that respect, we possess a major advantage over one-industry companies, whose options are far more limited. I firmly believe that Berkshire has the money, talent and culture to plow through the sort of adversities I’ve itemized above – and many more – and to emerge with ever-greater earning power. There is, however, one clear, present and enduring danger to Berkshire against which Charlie and I are powerless. That threat to Berkshire is also the major threat our citizenry faces: a “successful” (as defined by the aggressor) cyber, biological, nuclear or chemical attack on the United States. That is a risk Berkshire shares with all of American business. The probability of such mass destruction in any given year is likely very small. It’s been more than 70 years since I delivered a Washington Post newspaper headlining the fact that the United States had dropped the first atomic bomb. Subsequently, we’ve had a few close calls but avoided catastrophic destruction. We can thank our government – and luck! – for this result. Nevertheless, what’s a small probability in a short period approaches certainty in the longer run. (If there is only one chance in thirty of an event occurring in a given year, the likelihood of it occurring at least once in a century is 96.6%.) The added bad news is that there will forever be people and organizations and perhaps even nations that would like to inflict maximum damage on our country. Their means of doing so have increased exponentially during my lifetime. “Innovation” has its dark side. There is no way for American corporations or their investors to shed this risk. If an event occurs in the U.S. that leads to mass devastation, the value of all equity investments will almost certainly be decimated. No one knows what “the day after” will look like. I think, however, that Einstein’s 1949 appraisal remains apt: “I know not with what weapons World War III will be fought, but World War IV will be fought with sticks and stones.”

I am writing this section because we have a proxy proposal regarding climate change to consider at this year’s annual meeting. The sponsor would like us to provide a report on the dangers that this change might present to our insurance operation and explain how we are responding to these threats. It seems highly likely to me that climate change poses a major problem for the planet. I say “highly likely” rather than “certain” because I have no scientific aptitude and remember well the dire predictions of most “experts” about Y2K. It would be foolish, however, for me or anyone to demand 100% proof of huge forthcoming damage to the world if that outcome seemed at all possible and if prompt action had even a small chance of thwarting the danger. This issue bears a similarity to Pascal’s Wager on the Existence of God. Pascal, it may be recalled, argued that if there were only a tiny probability that God truly existed, it made sense to behave as if He did because the rewards could be infinite whereas the lack of belief risked eternal misery. Likewise, if there is only a 1% chance the planet is heading toward a truly major disaster and delay means passing a point of no return, inaction now is foolhardy. Call this Noah’s Law: If an ark may be essential for survival, begin building it today, no matter how cloudless the skies appear. It’s understandable that the sponsor of the proxy proposal believes Berkshire is especially threatened by climate change because we are a huge insurer, covering all sorts of risks. The sponsor may worry that property losses will skyrocket because of weather changes. And such worries might, in fact, be warranted if we wrote ten- or twenty-year policies at fixed prices. But insurance policies are customarily written for one year and repriced annually to reflect changing exposures. Increased possibilities of loss translate promptly into increased premiums. 25 Think back to 1951 when I first became enthused about GEICO. The company’s average loss-per-policy was then about $30 annually. Imagine your reaction if I had predicted then that in 2015 the loss costs would increase to about $1,000 per policy. Wouldn’t such skyrocketing losses prove disastrous, you might ask? Well, no. Over the years, inflation has caused a huge increase in the cost of repairing both the cars and the humans involved in accidents. But these increased costs have been promptly matched by increased premiums. So, paradoxically, the upward march in loss costs has made insurance companies far more valuable. If costs had remained unchanged, Berkshire would now own an auto insurer doing $600 million of business annually rather than one doing $23 billion. Up to now, climate change has not produced more frequent nor more costly hurricanes nor other weatherrelated events covered by insurance. As a consequence, U.S. super-cat rates have fallen steadily in recent years, which is why we have backed away from that business. If super-cats become costlier and more frequent, the likely – though far from certain – effect on Berkshire’s insurance business would be to make it larger and more profitable. As a citizen, you may understandably find climate change keeping you up nights. As a homeowner in a low-lying area, you may wish to consider moving. But when you are thinking only as a shareholder of a major insurer, climate change should not be on your list of worries. The Annual Meeting Charlie and I have finally decided to enter the 21st Century. Our annual meeting this year will be webcast worldwide in its entirety. To view the meeting, simply go to https://finance.yahoo.com/brklivestream at 9 a.m. Central Daylight Time on Saturday, April 30th. The Yahoo! webcast will begin with a half hour of interviews with managers, directors and shareholders. Then, at 9:30, Charlie and I will commence answering questions. This new arrangement will serve two purposes. First, it may level off or modestly decrease attendance at the meeting. Last year’s record of more than 40,000 attendees strained our capacity. In addition to quickly filling the CenturyLink Center’s main arena, we packed its overflow rooms and then spilled into two large meeting rooms at the adjoining Omaha Hilton. All major hotels were sold out notwithstanding Airbnb’s stepped-up presence. Airbnb was especially helpful for those visitors on limited budgets. Our second reason for initiating a webcast is more important. Charlie is 92, and I am 85. If we were partners with you in a small business, and were charged with running the place, you would want to look in occasionally to make sure we hadn’t drifted off into la-la land. Shareholders, in contrast, should not need to come to Omaha to monitor how we look and sound. (In making your evaluation, be kind: Allow for the fact that we didn’t look that impressive when we were at our best.) Viewers can also observe our life-prolonging diet. During the meeting, Charlie and I will each consume enough Coke, See’s fudge and See’s peanut brittle to satisfy the weekly caloric needs of an NFL lineman. Long ago we discovered a fundamental truth: There’s nothing like eating carrots and broccoli when you’re really hungry – and want to stay that way. Shareholders planning to attend the meeting should come at 7 a.m. when the doors open at CenturyLink Center and start shopping. Carrie Sova will again be in charge of the festivities. She had her second child late last month, but that did not slow her down. Carrie is unflappable, ingenious and expert at bringing out the best in those who work with her. She is aided by hundreds of Berkshire employees from around the country and by our entire home office crew as well, all of them pitching in to make the weekend fun and informative for our owners. 26 Last year we increased the number of hours available for shopping at the CenturyLink. Sales skyrocketed – so, naturally, we will stay with the new schedule. On Friday, April 29th you can shop between noon and 5 p.m., and on Saturday exhibits and stores will be open from 7 a.m. until 4:30 p.m. On Saturday morning, we will have our fifth International Newspaper Tossing Challenge. Our target will again be a Clayton Home porch, located precisely 35 feet from the throwing line. When I was a teenager – in my one brief flirtation with honest labor – I delivered about 500,000 papers. So I think I’m pretty good at this game. Challenge me! Humiliate me! Knock me down a peg! The papers will run 36 to 42 pages, and you must fold them yourself (no rubber bands allowed). The competition begins at 7:15, when contestants will make preliminary tosses. The eight throws judged most accurate – four made by contestants 12 or under, and four made by the older set – will compete against me at 7:45. The young challengers will each receive a prize. But the older ones will have to beat me to take anything home. And be sure to check out the Clayton home itself. It can be purchased for $78,900, fully installed on land you provide. In past years, we’ve made many sales on the meeting day. Kevin Clayton will be on hand with his order book. At 8:30 a.m., a new Berkshire movie will be shown. An hour later, we will start the question-and-answer period, which (including a break for lunch at CenturyLink’s stands) will last until 3:30 p.m. After a short recess, Charlie and I will convene the annual meeting at 3:45 p.m. This business session typically lasts only a half hour or so and can safely be skipped by those craving a little last-minute shopping. Your venue for shopping will be the 194,300-square-foot hall that adjoins the meeting and in which products from dozens of Berkshire subsidiaries will be for sale. Say hello to the many Berkshire managers who will be captaining their exhibits. And be sure to view the terrific BNSF railroad layout that salutes all of our subsidiaries. Your children (and you!) will be enchanted with it. We will have a new and very special exhibit in the hall this year: a full-size model of the world’s largest aircraft engine, for which Precision Castparts makes many key components. The real engines weigh about 20,000 pounds and are ten feet in diameter and 22 feet in length. The bisected model at the meeting will give you a good look at many PCC components that help power your flights. Brooks, our running-shoe company, will again have a special commemorative shoe to offer at the meeting. After you purchase a pair, wear them on Sunday at our fourth annual “Berkshire 5K,” an 8 a.m. race starting at the CenturyLink. Full details for participating will be included in the Visitor’s Guide that will be sent to you with your meeting credentials. Entrants in the race will find themselves running alongside many of Berkshire’s managers, directors and associates. (Charlie and I, however, will sleep in; the fudge and peanut brittle take their toll.) Participation in the 5K grows every year. Help us set another record. A GEICO booth in the shopping area will be staffed by a number of the company’s top counselors from around the country. Stop by for a quote. In most cases, GEICO will be able to give you a shareholder discount (usually 8%). This special offer is permitted by 44 of the 51 jurisdictions in which we operate. (One supplemental point: The discount is not additive if you qualify for another discount, such as that available to certain groups.) Bring the details of your existing insurance and check out our price. We can save many of you real money. Spend the savings on our other products. 27 Be sure to visit the Bookworm. It will carry about 35 books and DVDs, among them a couple of new titles. Andy Kilpatrick will introduce (and be glad to sign) the latest edition of his all-encompassing coverage of Berkshire. It’s 1,304 pages and weighs 9.8 pounds. (My blurb for the book: “Ridiculously skimpy.”) Check out Peter Bevelin’s new book as well. Peter has long been a keen observer of Berkshire. We will also have a new, 20-page-longer edition of Berkshire’s 50-year commemorative book that at last year’s meeting sold 12,000 copies. Since then, Carrie and I have uncovered additional material that we find fascinating, such as some very personal letters sent by Grover Cleveland to Edward Butler, his friend and the thenpublisher of The Buffalo News. Nothing from the original edition has been changed or eliminated, and the price remains $20. Charlie and I will jointly sign 100 copies that will be randomly placed among the 5,000 available for sale at the meeting. My friend, Phil Beuth, has written Limping on Water, an autobiography that chronicles his life at Capital Cities Communications and tells you a lot about its leaders, Tom Murphy and Dan Burke. These two were the best managerial duo – both in what they accomplished and how they did it – that Charlie and I ever witnessed. Much of what you become in life depends on whom you choose to admire and copy. Start with Tom Murphy, and you’ll never need a second exemplar. Finally, Jeremy Miller has written Warren Buffett’s Ground Rules, a book that will debut at the annual meeting. Mr. Miller has done a superb job of researching and dissecting the operation of Buffett Partnership Ltd. and of explaining how Berkshire’s culture has evolved from its BPL origin. If you are fascinated by investment theory and practice, you will enjoy this book. An attachment to the proxy material that is enclosed with this report explains how you can obtain the credential you will need for admission to both the meeting and other events. Airlines have sometimes jacked up prices for the Berkshire weekend. If you are coming from far away, compare the cost of flying to Kansas City vs. Omaha. The drive between the two cities is about 21⁄2 hours, and it may be that Kansas City can save you significant money, particularly if you had planned to rent a car in Omaha. The savings for a couple could run to $1,000 or more. Spend that money with us. At Nebraska Furniture Mart, located on a 77-acre site on 72nd Street between Dodge and Pacific, we will again be having “Berkshire Weekend” discount pricing. Last year in the week encompassing the meeting, the store did a record $44,239,493 of business. If you repeat that figure to a retailer, he is not going to believe you. (An average week for NFM’s Omaha store – the highest-volume home furnishings store in the United States except for our new Dallas store – is about $9 million.) To obtain the Berkshire discount at NFM, you must make your purchases between Tuesday, April 26th and Monday, May 2nd inclusive, and also present your meeting credential. The period’s special pricing will even apply to the products of several prestigious manufacturers that normally have ironclad rules against discounting but which, in the spirit of our shareholder weekend, have made an exception for you. We appreciate their cooperation. During “Berkshire Weekend” NFM will be open from 10 a.m. to 9 p.m. Monday through Friday, 10 a.m. to 9:30 p.m. on Saturday and 10 a.m. to 8 p.m. on Sunday. From 5:30 p.m. to 8 p.m. on Saturday, NFM is hosting a picnic to which you are all invited. At Borsheims, we will again have two shareholder-only events. The first will be a cocktail reception from 6 p.m. to 9 p.m. on Friday, April 29th. The second, the main gala, will be held on Sunday, May 1st, from 9 a.m. to 4 p.m. On Saturday, we will remain open until 6 p.m. During last year’s Friday-Sunday stretch, the store wrote a sales ticket every 15 seconds that it was open. 28 We will have huge crowds at Borsheims throughout the weekend. For your convenience, therefore, shareholder prices will be available from Monday, April 25th through Saturday, May 7th. During that period, please identify yourself as a shareholder either by presenting your meeting credential or a brokerage statement showing you own our stock. On Sunday, in the mall outside of Borsheims, Norman Beck, a remarkable magician from Dallas, will bewilder onlookers. On the upper level, we will have Bob Hamman and Sharon Osberg, two of the world’s top bridge experts, available to play bridge with our shareholders on Sunday afternoon. I will join them and hope to have Ajit and Charlie there also. My friend, Ariel Hsing, will be in the mall as well on Sunday, taking on challengers at table tennis. I met Ariel when she was nine and even then I was unable to score a point against her. Now, she’s a junior at Princeton, having already represented the United States in the 2012 Olympics. If you don’t mind embarrassing yourself, test your skills against her, beginning at 1 p.m. Bill Gates and I will lead off and try to soften her up. Gorat’s will again be open exclusively for Berkshire shareholders on Sunday, May 1st, serving from 1 p.m. until 10 p.m. To make a reservation at Gorat’s, call 402-551-3733 on April 1st (but not before). As for my other favorite restaurant, Piccolo’s, I’m sad to report it closed.

We will again have the same three financial journalists lead the question-and-answer period at the meeting, asking Charlie and me questions that shareholders have submitted to them by e-mail. The journalists and their email addresses are:

Carol Loomis, the preeminent business journalist of her time, who may be e-mailed at loomisbrk@gmail.com; Becky Quick, of CNBC, at BerkshireQuestions@cnbc.com; and Andrew Ross Sorkin, of The New York Times, at arsorkin@nytimes.com. From the questions submitted, each journalist will choose the six he or she decides are the most interesting and important. The journalists have told me your question has the best chance of being selected if you keep it concise, avoid sending it in at the last moment, make it Berkshire-related and include no more than two questions in any e-mail you send them. (In your e-mail, let the journalist know if you would like your name mentioned if your question is asked.) An accompanying set of questions will be asked by three analysts who follow Berkshire. This year the insurance specialist will be Cliff Gallant of Nomura Securities. Questions that deal with our non-insurance operations will come from Jonathan Brandt of Ruane, Cunniff & Goldfarb and Gregg Warren of Morningstar. Our hope is that the analysts and journalists will ask questions that add to our owners’ understanding and knowledge of their investment. Neither Charlie nor I will get so much as a clue about the questions headed our way. Some will be tough, for sure, and that’s the way we like it. Multi-part questions aren’t allowed; we want to give as many questioners as possible a shot at us. All told we expect at least 54 questions, which will allow for six from each analyst and journalist and for 18 from the audience. (Last year we had 64 in total.) The questioners from the audience will be chosen by means of 11 drawings that will take place at 8:15 a.m. on the morning of the annual meeting. Each of the 11 microphones installed in the arena and main overflow room will host, so to speak, a drawing. 29 While I’m on the subject of our owners’ gaining knowledge, let me remind you that Charlie and I believe all shareholders should simultaneously have access to new information that Berkshire releases and, if possible, should also have adequate time to digest and analyze it before any trading takes place. That’s why we try to issue financial data late on Fridays or early on Saturdays and why our annual meeting is always held on a Saturday. We do not follow the common practice of talking one-on-one with large institutional investors or analysts, treating them instead as we do all other shareholders. There is no one more important to us than the shareholder of limited means who trusts us with a substantial portion of his savings.

For good reason, I regularly extol the accomplishments of our operating managers. They are truly All-Stars who run their businesses as if they were the only asset owned by their families. I also believe the mindset of our managers to be as shareholder-oriented as can be found in the universe of large publicly-owned companies. Most of our managers have no financial need to work. The joy of hitting business “home runs” means as much to them as their paycheck. Equally important, however, are the 24 men and women who work with me at our corporate office. This group efficiently deals with a multitude of SEC and other regulatory requirements, files a 30,400-page Federal income tax return – that’s up 6,000 pages from the prior year! – oversees the filing of 3,530 state tax returns, responds to countless shareholder and media inquiries, gets out the annual report, prepares for the country’s largest annual meeting, coordinates the Board’s activities, fact-checks this letter – and the list goes on and on. They handle all of these business tasks cheerfully and with unbelievable efficiency, making my life easy and pleasant. Their efforts go beyond activities strictly related to Berkshire: Last year, for example, they dealt with the 40 universities (selected from 200 applicants) who sent students to Omaha for a Q&A day with me. They also handle all kinds of requests that I receive, arrange my travel, and even get me hamburgers and french fries (smothered in Heinz ketchup, of course) for lunch. No CEO has it better; I truly do feel like tap dancing to work every day. In fact, my job becomes more fun every year. In 2015, Berkshire’s revenues increased by $16 billion. Look carefully, however, at the two pictures on the facing page. The top one is from last year’s report and shows the entire Berkshire home-office crew at our Christmas lunch. Below that photo is this year’s Christmas photo portraying the same 25 people identically positioned. In 2015, no one joined us, no one left. And the odds are good that you will see a photo of the same 25 next year. Can you imagine another very large company – we employ 361,270 people worldwide – enjoying that kind of employment stability at headquarters? At Berkshire we have hired some wonderful people – and they have stayed with us. Moreover, no one is hired unless he or she is truly needed. That’s why you’ve never read about “restructuring” charges at Berkshire. On April 30th, come to Omaha – the cradle of capitalism – and meet my gang.

They are the best. February 27, 2016 Warren E. Buffett Chairman of the Board 30

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CNBC: Warren Buffett launches vigorous defense of private equity partner 3G

2016-02-28T21:49:00.001+13:00

Warren Buffett
Lacy O'Toole | CNBC

Warren Buffett on Saturday used his annual letter to Berkshire Hathaway shareholders to launch vigorous defenses of an aggressive private equity partner and a maligned mobile home unit, as his conglomerate recorded robust profits.

The world's third-richest person and a revered investor, Buffett also injected himself into the contentious 2016 U.S. presidential campaign, lambasting candidates who talk down the nation's economic future as "dead wrong" - an apparent jab at Republicans and frontrunner Donald Trump.

Buffett, who is backing Democratic candidate Hillary Clinton, also raised a political issue dear to Democrats in his widely-read letter by calling climate change a "major problem for the planet," although not one for Berkshire's future.

Buffett, 85, also made no mention of who might succeed him at Berkshire, which he has run for a half-century, and in passing said he expects to be around at age 100.

The Omaha, Nebraska-based company reported a record full-year profit of $24.08 billion, up 21 percent, while operating profit rose 5 percent to a record $17.36 billion.

Fourth quarter profit was up 32 percent, and operating profit rose a larger-than-expected 18 percent.

Berkshire owns roughly 90 businesses in areas as insurance, railroads, energy, food, apparel and real estate. Buffett himself is worth $62.1 billion, Forbes magazine reported.

But he has critics, and spent about 10 percent of his roughly 18,000-word letter defending 3G Capital, a Brazilian firm in which Berkshire owns 51 percent of Kraft Heinz, and Berkshire's Clayton Homes mobile home unit.

Many shareholders questioned Buffett's compatibility with 3G, an aggressive cost cutter led by Brazilian billionaire Jorge Paulo Lemann.

Berkshire and 3G teamed up in 2013 to buy H.J. Heinz and last year merged it with Kraft Foods. Buffett also helped finance 3G's merger of Burger King with Canadian donut chain Tim Hortons, creating Restaurant Brands International. Following these mergers, 3G slashed thousands of jobs.

Buffett acknowledged that while he and 3G "follow different paths" in running businesses, 3G has been "extraordinarily successful," and more ventures are possible.

"Jorge Paulo and his associates could not be better partners," Buffett wrote.

Clayton has been faulted in articles in the Seattle Times for predatory lending and discrimination against blacks and Latinos, which the large mobile home builder denies

But Buffett called Clayton a careful lender, and said it has escaped major regulatory fines despite 65 state and federal reviews in the last two years.

Management delivers "industry-leading performance," Buffett said.

Buffett praised Berkshire's earnings power, saying that only a catastrophic cyber, biological, nuclear or chemical attack on the United States posed a "clear, present and enduring danger" to the company.

Buffett also rejected the dour economic outlooks polluting the presidential campaign.

Trump has repeatedly said the U.S. economy is in a "bubble" that he hopes will pop before he takes office. "I don't want to inherit all this stuff," he has said.

Buffett said such concerns are overblown.

"For 240 years it's been a terrible mistake to bet against America, and now is no time to start," Buffett said. "The babies being born in America today are the luckiest crop in history."

Buffett urged shareholders to reject a proxy proposal that would require greater disclosures about how climate change might affect Berkshire's insurance businesses.

"It seems highly likely to me that climate change poses a major problem for the planet," Buffett wrote. "But when you are thinking only as a shareholder of a major insurer, climate change should not be on your list of worries."

Buffett touted the BNSF railroad and its leaders Matt Rose and Carl Ice, calling their $5.8 billion of capital spending to improve customer service after a poor 2014 "money well spent."

Though Buffett did not mention falling oil prices in his letter, Berkshire's annual report said low oil prices may reduce BNSF's profit in 2016 as industrial freight volumes decline.

The report also noted Buffett's $2.6 billion loss as of Dec. 31 in his investment in IBM, but said Berkshire has no intention of selling the stock.

Buffett also lauded the work of top insurance executives Ajit Jain and Tad Montross, and called the hiring of Todd Combs and Ted Weschler, who each handle $9 billion of investments, "one of my best moves."

Combs was a driver of Berkshire's $32 billion purchase last month of industrial parts maker Precision Castparts Corp.

As to succession, Buffett noted his advancing age and that of vice chairman Charlie Munger, 92.

But Buffett also said he plans to be around on Aug. 30, 2030, his 100th birthday, to announce that Berkshire's Geico unit has passed State Farm as the biggest U.S. auto insurer.

"Mark your calendar," he wrote.

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MARKETWATCH: Warren Buffett’s stock picks crush Carl Icahn’s so far in 2016

2016-02-25T13:01:00.000+13:00

Buffett’s conservative approach is better suited to a weak equity market

Bloomberg, Getty Images

Warren Buffett has seen shares of Berkshire Hathaway beat the S&P 500 so far this year, while Carl Icahn’s publicly traded investment partnership has had a dismal showing.

PHILIPVAN DOORN

INVESTING COLUMNIST

Published: Feb 24, 2016 3:58 p.m. ET

PHILIPVAN DOORN

INVESTING COLUMNIST

Here’s a fascinating Twitter post to start a conversation:

Warren Buffett’s Berkshire Hathaway BRK.B, +0.22% has greatly outperformed Icahn Enterprises LP IEP, +1.32% so far this year.

Here’s a more recent chart from FactSet, showing this year’s total returns for both companies compared with the benchmark S&P 500 Index:

FactSet

Is it fair to compare the performance of those two legendary investors over such a short period? Certainly not. Plus, the two octogenarians have totally different investment styles, with Buffett aiming to hold the stocks he selects “forever,” and using a light touch on the companies he gains majority control over. Icahn is more aggressive, shooting for quick profits by pushing the companies he invests in to make rapid changes.

But it isn’t always fun to be fair.

We thought it would be useful to compare the top 10 holdings of each company. For Berkshire that was easy, with FactSet providing data from the company’s quarterly13F filing with the Securities and Exchange Commission. For Icahn, we had to move to a higher level, and FactSet gave us a list of the top holdings of Icahn Associates LLC. Icahn’s investor-relations office also sent us this 13F report.

Here are the top 10 stock holdings of Berkshire Hathaway as of Dec. 31:

Company	Ticker	Industry	Total return - 2016, through Feb. 22	Total return - 2015
Kraft Heinz Co.	KHC,+0.23%	Food: Major Diversified	1%	47%
Wells Fargo & Co.	WFC,-1.02%	Major Banks	-9%	2%
Kellogg Co.	K,-0.28%	Food: Major Diversified	2%	14%
International Business Machines Corp.	IBM,+0.30%	Information Technology Services	-2%	-11%
American Express Co.	AXP,-0.85%	Financial Conglomerates	-20%	-24%
Phillips 66	PSX,+0.67%	Oil Refining/ Marketing	0%	17%
Procter & Gamble Co.	PG,-0.31%	Household/ Personal Care	4%	-10%
Wal-Mart Stores Inc.	WMT,+0.96%	Discount Stores	7%	-27%
U.S. Bancorp	USB,-1.11%	Major Banks	-6%	-3%
DaVita HealthCare Partners Inc.	DVA,-0.22%	Medical/ Nursing Services	-7%	-8%
Source: FactSet

Here are the top 11 holdings of Icahn Associates LLC as of Dec. 31. We are including one more because the LLC’s biggest holding is Icahn Enterprises LP, which has an otherwise similar portfolio:

Company	Ticker	Industry	Total return - 2016, through Feb. 22	Total return - 2015
Icahn Enterprises LLC	IEP,+1.32%	Industrial Conglomerates	-19%	-29%
Apple Inc.	AAPL,+1.49%	Computer/ Telecomm. Equipment	-7%	-3%
American International Group Inc.	AIG,-0.27%	Multi-line Insurance	-16%	12%
CVR Energy Inc.	CVI,+5.09%	Oil Refining/ Marketing	-39%	7%
PayPal Holdings Inc.	PYPL,+2.79%	Data Processing Services	-1%	N/A
Nuance Communications Inc.	NUAN,+0.47%	Packaged Software	-3%	39%
Cheniere Energy Inc.	LNG,+10.23%	Oil and Gas Pipelines	-19%	-47%
Hologic Inc.	H,-2.19%	Medical Specialties	-11%	45%
Xerox Corp.	XRX,+0.74%	Misc. Commercial Services	-10%	-21%
Freeport-McMoRan Inc.	FCX,-0.55%	Precious Metals	17%	-70%
Herbalife Ltd.	HLF,+0.22%	Food Distributors	-11%	42%
Source: FactSet

So among Berkshire Hathaway’s top 10 holdings, only one had a double-digit decline (through Monday), American Express Co. AXP, -0.85% which faces the expiration of its partnership with Costco Wholesale Corp. COST, +2.33% It provideddisappointing earnings guidance while announcing cost-cutting measures last month.

Icahn Associates had four of its top 11 holdings showing double-digit decreases for 2016, though Freeport-McMoRan Inc. FCX, -0.55% has rebounded 17% this year.

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SEEKING ALPHA: Warren Buffett Buys Kinder Morgan & 5 More New Picks

2016-02-24T07:59:00.000+13:00

Kinder Morgan (NYSE:KMI)

It was a tough quarter for the energy sector including KMI. This was a popular new position for a number of investors including Berkshire Hathaway (BRK.A/BRK.B), Pennant, and Appaloosa. For a background on the topic, please read Cutting The Dividend Now Will Increase Kinder Morgan's Value and listen to Will Cutting Kinder Morgan's Dividend Pay Dividends? For my favorite book on Buffett, check out The Snowball. Berkshire bought over twenty-six million shares, typical of the position size for either Berkshire's Ted Weschler or Todd Combs. Buffett prefers to size his positions over a billion dollars. Appaloosa bought nine million shares; Pennant bought seven million.

Warren Buffett

Another stock that Buffett may be interested in buying is… Berkshire Hathaway. Its share price recently hit a 52-week low, which could give Buffett a buyback opportunity. Buffett Berkshire Buyback Bound? and Buffett Likes Berkshire; Should You? go into this idea deeper.

What has happened with Buffett's bet against the hedge funds? After 2015, he remains well in the lead, but his advantage has shrunk somewhat. It is reasonable to expect that Girls Inc. of Omaha will be richer for this bet and that Protégé's Ted Seides will be poorer. Perhaps proceeds from his new book,So You Want to Start a Hedge Fund will help take away part of the sting. Meanwhile I am (increasingly) sorry that Buffett refused to repeat the bet's terms as I proposed last year.

EMC (NYSE:EMC)

Dell is buying EMC (EMC). Greenlight, Farallon, and Seth Klarman's Baupost are buying EMC shares. For a discussion of this deal, please listen to Dell, EMC and a Free Tracking Stock. For one of my favorite books on value investing, I recommend Klarman's Margin of Safety. StW members can learn more about the Dell-EMC deal in VMware For Free (NYSE:VMW).

Seth Klarman

Baupost bought twenty-nine million shares, making EMC their second largest long equity exposure. Farallon bought thirteen million; Greenlight bought two million.

Allergan (NYSE:AGN)

David Einhorn's Greenlight set up a number of merger arbitrage spreads such as Allergan. Others included Humana (NYSE:HUM), Cigna (NYSE:CI), and Sandisk (NASDAQ:SNDK). For more on this investor, I recommend Fooling Some of the People All of the Time.

David Einhorn

Greenlight bought about 410,000 AGN shares, taking its exposure to over $100 million. The $43.40 net arbitrage spread offers a 17% annual return if the deal closes by yearend. This merger arbitrage spread is likely to close, which would help Greenlight recover from a rough fourth quarter of 2015.

Akorn (NASDAQ:AKRX)

Paulson & Co bought over a hundred million dollars' worth of AKRX. It is currently awaiting resolution of accounting issues and could emerge as a takeover candidate later this year. There have been several good books written about Paulson; my favorite is The Greatest Trade Ever.

John Paulson

Iconix (NASDAQ:ICON)

Leon Cooperman's Omega Advisors opened a position in Iconix with a purchase of a million and a half shares. The company had a rough quarter but has been recovering this month. With progress on accounting issues, it could find itself a takeover candidate; details in Will Iconix Sell?

Leon Cooperman

Cooperman, formerly the CEO of Goldman Sachs (NYSE:GS) asset management business, has generated a net annual return of more than 12% since founding his hedge fund.

Time Warner Cable (NYSE:TWC)

Omega alumnus Larry Robbins bought over 850,000 shares of TWC for Glenview in the fourth quarter. The $6.51 net arbitrage spread offers a 9% annual return if the deal closes by midyear. The approval process has been going smoothly; a successful sale of the company to Charter (NASDAQ:CHTR) could help offset some pain elsewhere in Glenview's portfolio.

Larry Robbins

Tracking 13Fs

If you are interested in learning more about scavenging 13Fs for bargains, please listen to Warren Buffett Buys KMI... So What? We discuss the best way to make sense of these important SEC filings. It is worth knowing what top investors are up to. However, when it comes to investing my one recommendation remains the same: I recommend that you think for yourself.

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CNBC: Warren Buffett's Berkshire Hathaway has changed in S&P's eyes

2016-02-23T20:20:00.000+13:00

Alex Crippen | @alexcrippen

Friday, 19 Feb 2016 | 2:05 PM ET

Credit ratings agency Standard & Poor's is formally acknowledging what Warren Buffett watchers have known for years: Berkshire Hathaway has transformed itself from an insurance holding company to a full-fledged corporate conglomerate.

That's the framework S&P is now using to analyze the company's creditworthiness.

David A. Grogan | CNBC

Warren Buffett

In a news release, S&P's Laline Carvalho is quoted as saying, "This change reflects our view of the increasing importance of Berkshire Hathaway's noninsurance businesses relative to the group's consolidated operations."

After its substantial noninsurance purchases in recent years, including the freight rail carrier BNSF and food giant Heinz, three-quarters of Berkshire's cash flow comes from its noninsurance businesses, S&P notes.

Word of the shift accompanies S&P's announcement that it is no longer considering a possible one- or two-notch downgrade of Berkshire's credit rating.

It was placed on what S&P calls "CreditWatch Negative" in August due to uncertainty over how Berkshire would pay for its $37 billion Precision Castparts acquisition.

At the time, Buffett acknowledged to CNBC that the 21 percent premium in the deal was a "very high multiple for us to pay" that would require about $10 billion of borrowing.

S&P says, however, that it has concluded the purchase is "neutral" to its AA rating of Berkshire's debt. That analysis was done after S&P decided to reclassify the company as a conglomerate.

The new "stable" outlook reflects S&P's expectation that Berkshire "will continue to report solid profitability metrics, significant cash flow generation and strong EBITDA margins in the next two years."

Prompted by Berkshire's big BNSF acquisition, S&P downgradedBerkshire to "AA+" from its top "AAA" rating in 2010.

It went to its current "AA" rating in 2013.

After Fitch and Moody's stripped Berkshire of its "AAA" ratings in 2009, Buffett told shareholders ,"We're still triple-A in my mind."

S&P, however, indicates it won't be raising Berkshire's rating in the next two to three years due to "operating and execution risks" related to the acquisition strategy of the newly minted "conglomerate."

Berkshire has a long-standing stake in Moody's, currently holding about $2 billion of the S&P competitor's stock.

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CNBC: Deere preps for earnings as Buffett ups stake

2016-02-23T20:15:00.000+13:00

Getty Images

A man works on a customer's John Deere lawn tractor at the Buck Bros. dealership in Hampshire, Illinois.

Jeff Daniels | @jeffdanielsca

Friday, 19 Feb 2016 | 2:04 PM ET

Warren Buffett's Berkshire Hathaway is sowing more funds into farm machinery giant Deere, and defensive investors are taking notice. Analysts consider Deere's good cash flow and dividend yield as attractive and see the potential for new stock buybacks as another positive.

After sinking 14 percent last year, Deere stock is up about 7 percent this year through Wednesday — handily beating the S&P 500 index and outperforming another multinational industrial play, Caterpillar. The stock is even beating Apple, Facebook and Google parent Alphabet.

A regulatory filing late Tuesday revealed that Berkshire Hathawayboosted its stake in Deere by about 5.8 million shares to about 22.88 million shares, or a 7.2 percent stake. Berkshire Hathaway is now Deere's largest institutional shareholder with a stake worth nearly $2 billion.

"Deere is a pretty safe dividend in a world where income alternatives are relatively low and not that fantastic," said Morningstar analyst Kwame Webb. He also cites the "safety and sanctity of the free cash flow" at Deere and adds that "it looks like the bottom is finally in sight for ag."

Deere is set to report fiscal first quarter earnings before the bell on Friday. Investors will be waiting to see if management provides an update on current full fiscal year guidance.

Webb believes Deere will generally maintain fiscal 2016 guidance for now but could make "a minor adjustment for currency," reflecting the impact of the strong dollar that continued to provide headwinds since the company's last update in November.

"Investors will be focused on any update to management's expectations for FY'16, including its U.S. farm income assumptions and agriculture market outlook by region," JPMorgan analyst Ann Duignan said in research note to clients on Wednesday. She noted that the U.S. Department of Agriculture last week made a downward revision to its previous estimates for current year U.S. farm cash receipts.

Duignan said industry fundamentals have not improved since Deere's last earnings conference call.

Analysts polled by Thomson Reuters expect Deere to report earnings of 70 cents per share in its fiscal first quarter ended in January. That would represent a 37 percent decline from $1.12 per share from the same period a year ago. Revenue is projected by the Street to be down nearly 12 percent to $4.96 billion.

Deere's agriculture and turf segment, which is slightly more than three-fourths of the company's overall revenues, is forecast to show sales down as much as 20 percent in the quarter from the previous year. The construction and forestry segment is forecast to see sales decline roughly 15 percent to 18 percent compared with the year-ago period. The financial services segment also is seen posting lower results.

With low commodity prices and farm incomes falling, there's been a deterioration of ag credit conditions, according to a downbeat report last week from the Federal Reserve Bank of Chicago. The tougher conditions in the farm economy have resulted in excess new and used inventory of agrigulture machinery equipment.

The Moline, Illinois-based manufacturer has been undergoing production-line realignments as it attempts to reduce costs during the ag downturn. Deere currently has announced about 1,500 manufacturing layoffs and its headcount is down by about 10,000 since the ag peak, largely reflecting the sale of several businesses.

"In good years farmers took opportunities to upgrade their equipment, so now I think you're seeing the result of that," said Mark Watte, a dairyman who also farms cotton, nuts and other crops in California's San Joaquin Valley. "It's no surprise new stuff is slow to move and there's probably a fair amount of used stuff that's just sitting there."

Deere management indicated during the last earnings call that leasing "is becoming more attractive to many of our customers. That's because of an uncertain business environment coupled with the lack of confidence and clarity in tax incentives."

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FORBES: Canadian Warren Buffett' Increases Portfolio Hedges To Protect Against Market Drop

2016-02-23T20:10:00.000+13:00

Investor Prem Watsa (Trades, Portfolio), often called “Canada’s Warren Buffett,” has increased his portfolio hedges up to 100% of his equity investment portfolio since the start of the year to protect against volatility, he said Thursday.

WASHINGTON, DC – OCTOBER 13: Warren Buffett speaks onstage during Fortune’s Most Powerful Women Summit – Day 2 at the Mandarin Oriental Hotel on October 13, 2015 in Washington, DC. (Photo by Paul Morigi/Getty Images for Fortune/Time Inc)

The hedges represent an increase from an 88.1% equity hedge Watsa, the founder of insurance conglomerate Fairfax Financial Holdings (TSX:FFH) in Canada, had in place at year-end.

The increase consisted of $938 million in short positions in equity and equity index total return swaps. Watsa said he made the move “in response to the significant appreciation in equity market valuations and uncertainty in the economy.”

Fairfax reported a $259 million net investment loss for the full-year 2015, with realized gains of $1.2 billion and unrealized losses of $1.4 billion. Including hedging gains and mark-to-market fluctuations, it had after-tax income of $568 million for the year.

“We are maintaining our defensive equity hedges and deflation protection, as we remain concerned about the financial markets and the economic outlook in this global deflationary environment,” Watsa said in a fourth-quarter conference call.

In a third quarter letter, Watsa said the positions shorted the Russell 200 Index, S&P 500, TSX 60, other indexes and individual stocks, and he also held put options against the S&P 500.

“The company’s economic equity hedges are structured to provide a return which is inverse to changes in the fair values of the indexes and certain individual equities,” he said.

Watsa’s hedges date back to 2010. He increased the hedging on his common stock from 30% at the start of the year to roughly 100% by the end.

“Our view was twofold: our capital had benefitted greatly from our common stock portfolio and we wanted to protect our gains, and we worried about the unintended consequences of too much debt in the system – worldwide!” Watsa wrote in his 2010 annual letter.

“If the 2008/2009 recession was like any other recession that the U.S. has experienced in the past 50 years, we would not be hedging today. However, we worry, as we have mentioned to you many times in the past, that the North American economy may experience a time period like the U.S. in the 1930s and Japan since 1990, during which nominal GNP remains flat for 10 to 20 years with many bouts of deflation.”

The cost of buffering his portfolio against a market reversal has also weighed on his investing returns. In the three years preceding 2010, Watsa’s investment team earned gains averaging 14.3%. In 2010, they gained only 3.9%, with a 4.2% loss due to hedging.

Similarly, in 2014, Fairfax produced an 8.4% investment return, which would have been 9.8% without hedging.

“While our returns in 2014 were very good, we have some way to go to make up for the below average annual return of 3.6% over the past five years,” Watsa wrote in a letter. “Our cumulative net realized and unrealized gains since we began in 1985 have amounted to $11.7 billion.”

Some of Watsa’s long positions have also suffered recently, with his largest holding, smartphone maker BlackBerry Ltd. (NASDAQ:BBRY), down 23%; his second largest, Resolute Forest Products (NYSE:RFP) down 46%; and his third largest, Kennedy-Wilson Holdings (NYSE:KW), down 30% year to date, versus a 5.9% decline for the S&P 500.

As of 2014, Watsa has compounded book value at Fairfax by 21.1% annually since its founding in 1985.

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BUSINESS INSIDER; How a 1960s investment in American Express became a triumph for Warren Buffett

2016-02-10T10:44:00.001+13:00

In June 1960, an anonymous tipster called American Express to expose a massive fraud at Allied Crude Vegetable Oil Refining Corporation. At the time, Allied was the largest customer of American Express’s field warehousing subsidiary, which was in the unenviable position of having guaranteed millions of dollars’ worth of Allied’s soybean oil inventory.

The tipster, whom American Express employees called “the Voice,” said he worked the night shift at Allied’s facility in Bayonne, New Jersey. He challenged American Express employees to inspect Tank No. 6006, one of the largest tanks on the property. He explained that there was a narrow metal chamber filled with oil positioned directly under the measuring hatch. Everything else in the tank was seawater.

In this excerpt from Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism, hedge fund manager and Columbia Business School professor Jeff Gramm explains why a bet on American Express's recovery from the "Great Salad Oil Swindle" became one of the defining moments in Warren Buffett's career.

Warren Buffett makes investing sound easy. Part of his investment philosophy comes directly from Benjamin Graham: He views shares of stock as fractional ownerships of a business, and he buys them with a margin of safety. But unlike Graham, when Buffett finds a security trading at a large discount to its intrinsic value, he eschews diversification and buys a large position. To Buffett, with his superhuman gift for rational thinking, this value investing strategy is easy. For the rest of us mere mortals, it is a minefield littered with the corpses of its practitioners. It is very hard to avoid career-imploding mistakes with a hyperconcentrated value investing strategy. Buffett is the exception that proves the rule.

Every year, I make a pilgrimage to Omaha to hear Buffett and his partner, Charlie Munger, take questions for six hours at the Berkshire Hathaway shareholders’ meeting. I never tire of hearing them talk about business and industry. I don’t even mind listening to them discuss politics and macroeconomics. When they philosophize about value investing, however, it makes me a little uneasy.

Jeff Gramm

To be clear, Buffett and Munger don’t say anything about value investing that isn’t true. They are right that you don’t need a superhigh IQ to be a successful investor. They are right that it is relatively easy to evaluate the competitive dynamics of an industry and value companies. They are right that, if you are patient enough, the market will give you some fat pitches to swing at. And they are right that concentrating your portfolio into your very best ideas will give you the best outcome if you do good work.

Every tenet of Buffett’s value investing strategy holds true, but there’s a cruel irony to contend with: Buffett-style investing is tailor- made to magnify irrational thinking. Nothing is going to coax out the inherent irrationality of a portfolio manager—his or her weakness to the forces of greed and fear—like supersize positions. Munger once said he would be comfortable putting more than 100% of his net worth into one investment. Most of the earnest business school students attending the Berkshire Hathaway meeting wouldn’t stand a chance if they started investing like that. Investors need ice water in their veins to make concentrated value investing work.

Buffett’s biography, The Snowball, is not the story of an everyman from America’s heartland succeeding on just hard work and determination. Buffett is a singularity, and even his worst mistakes tell an interesting story. Berkshire Hathaway, for instance, was a bad investment. The company featured a lethal combination of high capital intensity and low returns on invested capital. In other words, you had to put a lot of money back into the business for little, if any, return. Yet Buffett somehow parlayed Berkshire into one of the most valuable companies in the world, with more than 340,000 employees.

Buffett's biggest triumph

Berkshire Hathaway is itself an anomaly, just like the man who built it. It is a huge, decentralized, global conglomerate that somehow retains a corporate culture of excellence. Berkshire’s business model is simple— find good businesses run by capable managers, let them do their jobs, and then harvest the cash flows. Like Buffett’s value investing strategy, it is intuitive, it generates incredible results, and nobody else does it nearly as well.

It’s hard to believe there was ever a time when Buffett’s aptitude for business was anything but superhuman. We think of him as a fully formed portfolio manager from the moment he launched his first investment partnership in 1956, when he was only twenty-five years old. He compounded wealth for himself and his investors at an astounding rate over the next twelve years and never suffered a losing year. Despite this stellar track record, the Buffett Partnerships were very much a work in progress. Buffett was constantly refining his investment style, even toying with short selling and pair trades at one point. As he told the New York Times in 1990, “I evolved. I didn’t go from ape to human or human to ape in a nice, even manner.”

Buffett learned lessons from his mistakes as well as his victories. His biggest triumph was American Express. It proved to be a major turning point in his career.

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The Great Salad Oil Swindle was an audacious fraud that nearly toppled American Express in the 1960s. It is a complicated story filled with valuable lessons about the fallibility of businessmen, and their capacity to ignore reality at critical junctures. While the saga exposes terrible behavior and a true villain, it features many more honest and capable people who unwittingly developed deadly blind spots. The fallout from the fraud also pitted Buffett against a handful of shareholders who wanted American Express to maximize its short-term profits by ignoring salad oil claimants.

When Buffett intervened at American Express as a large shareholder, he didn’t demand board representation or ask probing questions about the company’s operating performance. He didn’t call for a higher dividend or question the company’s capital spending. Instead, he wanted American Express to use its capital liberally to recompense parties who were defrauded in the swindle. Buffett had done enough research on American Express to understand that it was a phenomenal business. He would later refer to companies like this as “compounding machines,” because they generate huge returns on capital that can be reinvested at the same rate of return. Buffett knew that walking away from the salad oil claims would damage American Express’s reputation and its substantial long-term value. He wanted to prevent short-term-oriented shareholders from jamming the compounding machine’s gears just to save a few dollars. This was a new position for Buffett to be in. Before he bought American Express stock, Buffett was the kind of penny-pinching investor who sought to extract value from his stock holdings as quickly as possible.

The typhoon will pass

American Express lost $125 million in market value after the swindle became public. It eventually reached an agreement with salad oil claimants that would cost only $32 million net of taxes. But a funny thing happened on the way to resolution: American Express’s settlement was delayed by an unlikely group—the company’s own shareholders. A small group of shareholders filed suit to block any settlement, on the grounds that American Express had no legal obligation to pay the warehousing subsidiary’s liabilities. Howard Clark may have felt he had a moral obligation to creditors, but shareholders argued that American Express legally owed nothing. They believed paying a cash settlement was a “gift” and a negligent use of assets that would damage shareholder value. They were especially frustrated that holders of forged receipts would receive any cash at all.

statigr.am/claireefoleyAmerican Express Company, New York, NY

When public company shareholders don’t have opinions, or hold them tighter than they hold their stocks, the few who choose to speak up are afforded a tall soapbox. But if an empowered few assume the voice of all shareholders, how can we be sure they are looking out for committed, long-term owners? The outsize influence of active shareholders probably weighed on Buffett’s mind when American Express holders began agitating for the company to ignore the salad oil claims. Buffett knew the odds of this happening were slim, but why risk letting a handful of shareholders dominate the debate?

In Buffett’s early years, he occasionally clashed with management teams and boards of directors of underperforming, asset-rich companies. When he was forced to go active, it often meant seizing control and dismantling assets. At Dempster Mill, for example, he generated shareholder value by taking money out of the business as quickly as possible. American Express was a different situation altogether. Management was making the right moves to protect the franchise, yet other shareholders were agitating to block them. The swindle generated national news coverage and many of the claimants were large financial institutions that sold American Express travelers checks. Buffett worried that shareholders’ shortsighted attempt to avoid a settlement could permanently impair American Express’s valuable brand. With a quality business at stake, Buffett wanted to intervene to protect the company’s competitive advantage.

Republished with permission from Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism, by Jeff Gramm. Copyright © 2016 by HarperBusiness. All rights reserved.

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DAILY NEWS; Warren Buffett might be too attached to his portfolio

2016-02-09T15:06:00.000+13:00

Reuters/Rick WilkingWarren Buffett sipping a Cherry Coke.

Buffett’s Berkshire Hathaway has long considered American Express an integral part of its portfolio. He includes it in the list of so-called “big four” investments, which together dominate its holdings of public securities.

Berkshire Hathaway currently holds 151.6 million shares of the company, about as many split-adjusted shares as it held in 1995 (148.4 million). Thanks to share repurchases, Berkshire’s stake in the card company has only grown as a percentage of ownership, despite the fact that the number of shares owned by Berkshire has hardly grown at all over the past 20 years. (Buffett alluded to the fact that Berkshire cannot buy more American Express because it is a bank holding company at the 2013 annual meeting.)

What may be more interesting is the extent to which Buffett has defended American Express. ValueAct reportedly acquired more than $1 billion of American Express shares, but blew out of the position when Buffett wasn’t open to management changes at the card company. It’s rumored that ValueAct wanted to replace key insiders like Ken Chenault, Amex’s CEO, who has been with the company for decades. Buffett wanted nothing to do with it.

Cashing inIncreasingly, American Express appears to be a has-been company — a once-great company that has slowly lost its competitive position and is destined to generate lower returns for investors going forward. Even Charlie Munger, Warren Buffett’s right-hand man at Berkshire Hathaway has said just that.

Munger, who once said that “it would be easier to screw up American Express than Coca-Cola or Gillette, but it’s an immensely strong business” at the 2000 meeting of shareholders recently sang a different tune. Munger opined that “Amex had a long period of achievement and prosperity. It doesn’t look quite so easy going forward as it once did” at the 2015 meeting of Daily Journal shareholders.

Why doesn’t Berkshire sell its American Express stake? Taxes certainly play a role. Berkshire’s 151.6 million shares were acquired at an average cost basis of $8.49 per share. Selling at today’s depressed price would trigger a huge tax bill, something Buffett has preferred to defer for as long as “forever.”

IBM CEO Ginni Rometty

Of course, Buffett could minimize the tax consequence by pairing American Express with a loser. The company’s stake in IBM is both sizable and underwater. With an average cost basis of more than $171 per share at the end of 2014, Berkshire could take losses in IBM to offset gains in American Express.

The net result is that Berkshire would free up billions of dollars in cash, divest from a company that Munger (and many others) view as having a shrinking moat, and allocate the capital elsewhere. IBM shares, if truly a bargain, could be repurchased later.

Food for investing thought
While it’s sometimes seen as sacrilege to disparage the decisions of one of the world’s greatest investors, one has to wonder if, at times, a desire to defer taxes might lead to sub-optimal outcomes for Berkshire Hathaway’s public stock portfolio.

This has been debated for years. You can go all the way back to the late 1990s, when many debated the rationality of owning Coca-Cola stock at 50 times (low-quality) earnings. It’s become a classic case in earnings quality, as the soda company made numbers by tapping into gains by buying and selling its bottlers, a finite source of one-time earnings help. More recently, Buffett took a short-term round trip in Exxon shares, buying and later selling to fund an acquisition. There is some precedent for Buffett making active portfolio management decisions, albeit with smaller stakes.

That’s neither here nor there. Buffett isn’t much for change. Deep down, I think we all know it’s unlikely that he becomes more active in managing Berkshire’s biggest positions. But it’s good food for thought to ask yourself if maybe, just maybe, Berkshire’s shareholders might be better off from a little more activity.

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MOTLEY FOOL: 3 Warren Buffett Stocks to Buy in February

2016-02-09T14:59:00.000+13:00

The stock market's drop has created some pretty attractive bargains.

The first month of 2016 is in the books, and the markets didn't perform too well. If you're like me, you spent a lot of your time watching your portfolio decline in value.

However, one of the secrets to successful long-term investing is that you should love when stocks drop like this, as it creates an opportunity to set yourself up with great long-term investments at a discount. With that in mind, here are three of Warren Buffett's favorite stocks that are on sale right now.

The best of the "big four" banks
Wells Fargo (NYSE:WFC) has been a longtime Buffett favorite. Berkshire Hathaway(NYSE:BRK-A) (NYSE:BRK-B) owns an 8.6% stake in the bank, which is currently worth more than $22 billion, and it's not hard to see why.

Wells Fargo is consistently the most profitable of the big four, thanks to a history of smart risk management and efficiently run operations. You can see this when you compare Wells' return on assets (ROA) and return on equity (ROE) with the others (the blue line in the following chart).

The bank continues to grow at an impressive rate. The bank's loan portfolio has grown 7% year-over-year, and the deposits have grown by 6%. Plus, revenue continued to grow in 2015, despite the historically low interest margins across the banking sector.

Despite the strong numbers, Wells Fargo is trading at a price-to-book valuation not seen since 2013. The weakness in the stock market, and in the financial sector in particular, makes it an excellent time to get in to this long-term winner.

Big blue is on sale
International Business Machines (NYSE:IBM), or IBM is in the middle of a rather lengthy turnaround, and it appears that investors are growing impatient. Shares have lost more than 40% of their value since their 2013 highs, and got smacked down again after the company's 2016 guidance failed to impress.

In 2015, IBM's revenue fell by 9% and earnings dropped by 17%. Some of this was due to currency headwinds, which reduced 2015's sales by 8%, but the results were less than impressive nonetheless. And the company is projecting that earnings will decline further in 2016.

However, there are still some good reasons to own IBM. First, it trades at just nine times earnings and pays a 4.2% dividend yield, both of which should offer some degree of downside protection. Also, the company's "Strategic Imperatives" division, which focuses on products for cloud computing, data analytics, and user engagement. This division makes up 35% of IBM's revenue, and posted 16% year-over-year growth on a constant-currency basis.

Buffett believes in IBM long-term and so do I, thanks to its strong financial position and excellent management team. Berkshire now owns 8.2% of the company, and could see major profits if IBM's transition is a success.

A smart play on the auto industry (Hint: It's not Tesla)
General Motors (NYSE:GM) has been the worst performer of the three stocks discussed here, down by 16% year-to-date as of this writing. It is also Buffett's smallest holding of the three -- Berkshire's 3% stake represents an investment of "only" $1.4 billion.

GM produced record earnings and margins in 2015, thanks to strong sales in trucks and SUVs, two high-profit types of vehicles. And, while revenue was down slightly in 2015, it was better than it seems -- just like IBM, General Motors was a victim of currency fluctuations since a significant amount of its business is international. On a constant-currency basis, GM's revenue actually grew by 4%.

The company's financial position is typical of a Buffett stock -- lots of cash, not a lot of debt. GM ended 2015 with $20.3 billion in cash and just $8.8 billion in debt, which should give it the financial flexibility to get through any economic conditions that arise. Additionally, the stock trades for just 10.9 times earnings, its lowest valuation since mid-2013.

Just a samplingThese three stocks happen to be great deals right now, since they've been beaten down lately and are now on sale. However, keep in mind that all of the stocks in Berkshire Hathaway's portfolio were selected for their durable competitive advantages, strong financial position, and competent managers. The bottom line is that any Buffett stock at an attractive price could be a smart addition to your portfolio, so keep an eye out for more bargains, especially if the market declines even more.

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BUSINESS INSIDER: This is how Warren Buffett says you should seize an opportunity

2016-02-06T20:42:00.000+13:00

John, Vintage Value Investing

Feb. 4, 2016, 6:06

I’ve written several times (here,here, and here) about index funds and how investing in an S&P 500 index fund and using a dollar-cost averaging strategy is a great way to make money in the stock market over the long-run – and this point has been well documented by both research and results.

Part of the magic in this strategy is that an investor who doesn’t have much experience and who doesn’t know how to analyze or calculate the intrinsic value of a stock… doesn’t have to.

Instead, he or she can invest in all of the stocks in the stock market – thereby diversifying risk while earning the average return of the entire stock market (which has historically been ~9.5%over the long-run). And Warren evidently agrees with this.

However, Warren Buffett sings a very different song for investors who want to beat the average stock market return.

WARREN BUFFETT ON DIVERSIFICATION

Warren does not believe an investor who wants to generate an above-market return should diversify his or her holdings. Here are some of his quotes on this subject:

"Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing."

"Wide diversification is only required when investors do not understand what they are doing."

"The strategy we’ve adopted precludes our following standard diversification dogma. Many pundits would therefore say the strategy must be riskier than that employed by more conventional investors. We disagree. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it."

Warren’s saying that if you invest in too many stocks in pursuit of portfolio diversification, you (a) take yourself out of your circle of competence and (b) lose the intensity and concentration that you would have if you were only thinking about a few great businesses.

WARREN BUFFETT ON SEIZING BIG OPPORTUNITIES

Warren Buffett described the below analogy during a lecture he gave to University of Georgia business school students in 2001. This “20 slot punch card” approach to investing underscores just how focused Buffett is when it comes to investing and highlights how we should all seize and capitalize on big opportunities when they come our way.

Big opportunities in life have to be seized. We don’t do very many things, but when we get the chance to do something that’s right and big, we’ve got to do it. And even to do it in a small scale is just as big of a mistake almost as not doing it at all. I mean, you really got to grab them when they come. Because you’re not going to get 500 great opportunities.

You would be better off if… you got a punch card with 20 punches on it. And every financial decision you made you used up a punch. You’d get very rich, because you’d think through very hard each one. I mean if you went to a cocktail party and somebody talked about a company and they didn’t even understand what they did or couldn’t pronounce the name but they made some money last week in another one like it, you wouldn’t buy it if you only had 20 punches on that card.

There’s a temptation to dabble – particularly during bull markets – and in stocks it’s so easy. It’s easier now than ever because you can do it online. You know you just click it in and maybe it goes up a point and you get excited about that and you buy another one the next day and so on. You can’t make any money over time doing that.

But if you had a punch card with only 20 punches, and you weren’t going to get another one the rest of your life, you would think a long time before every investment decision– and you would make good ones and you’d make big ones. And you probably wouldn’t even use all 20 punches in your lifetime. But you wouldn’t need to.

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MARKETWATCH: Warren Buffett’s Berkshire Hathaway can’t stop buying shares of this big oil refiner

2016-02-01T08:58:00.000+13:00

BARBARAKOLLMEYER

MARKETS REPORTER

Warren Buffett appears to be sniffing for opportunity around oil, as crude prices have started the year on a sour note, logging the third straight monthly loss for January.

According to a regulatory filing on Friday, Buffett’s Berkshire Hathaway Inc.BRK.A, +3.22% bought 2.54 million shares of Phillips 66 PSX, +1.84% shares last week, spending about $198 million. Regulatory filings show Berkshire busied up its January buying shares of one of the world’s biggest independent refiners.

Berkshire announced in August that its ownership of Phillips 66 stock was up to 10%. As noted by ValueWalk, the purchases of the stock in January bring the Berkshire stake up to 13.6% of shares outstanding around $5.8 billion. The total purchase was just over $800 million in the month — $625 million in early January and $200 million late in the month, noted ValueWalk.

Phillips 66 two-year chart

The Berkshire filing came through Friday just hours after Phillips 66 reported a 43% drop in profit and 38% slide in revenue, as weak commodity prices weighed on the company.

Read: Alphabet, Exxon results mark midpoint of tough earnings season

But those earnings weren’t all bad news, according to analyst Justin Jenkins at Raymond James. Adjusted earnings per share of $1.31 came in higher than the $1.25 he and the rest of Wall Street (on average) was expecting, driven by stronger-than-expected refining results. That offset lower-than-expected results in other segments, such as midstream and chemicals, he said.

Refining operating income, coming in at $475 million, topped his estimate of $416 million, though across the company, margins of $9.41/Bbl were below his $9.59/Bbl estimate. And refining operating expenses were under control, said Jenkins, who added that the company repurchased $406 million worth of shares in the quarter, bringing the 2015 total to $1.5 billion.

The fact that Buffett made a move on Phillips 66 in January will no doubt draw more attention to the shares and maybe the sector as a whole, as the investing world seems to hang on his every word when it comes to how to make a buck in this stock market, especially one that has been so hard to read over the past year.

Read: Warren Buffett is better in person—skip webcast and schlep to Omaha

An initial guess could be that Buffett is making a play on oil, as many watch and wait to see if the bottom will truly come in for crude this year. But writing for Seeking Alpha, Albert Alfonso said that this stock is more of a fit when it comes to the value plays that Buffett likes.Philipps 66 had a price/earnings ratio of 9.3 times as of Friday’s close, compared with a 17 times PE ratio for the S&P 500.

Phillips 66, a downstream oil and gas giant, was created in 2012 when ConocoPhillips COP, +2.79% spun off its chemical and downstream units. The company earns money by refining oil, and selling chemical products made from oil. Alfonso points out that the company makes its money on the big price differentials between various sources of crude oil and demand for gasoline.

Whereas low oil prices are painful for ConocoPhillips, refiners like Phillips 66 are one segment of the oil industry that actually benefits from lower oil prices, because the process of refining oil into gas is made cheaper when crude prices are lower. And strong demand for gasoline doesn’t hurt refiners either.

Discussing his stake on CNBC last September, Buffett had this to say: “We’re not buying it as a refiner and we’re certainly not buying it as an integrated oil company. We’re buying it because we like the company and we like the management very much.”

Chairman and Chief Executive Officer Greg Garland has done a “terrific job” since taking over when the company was spun off, said Buffett.

He also said that Berkshire was not interested in trying to take over the company outright, noting that Phillips 66 “likes its independence.”

Phillips 66 rivals include Valero Energy Corp. VLO, +5.16% and Marathon Oil Corp.MRO, +6.11%

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FORTUNE: Warren Buffett Will Be on 'Celebrity Apprentice'

2016-01-31T09:15:00.000+13:00

Move over Donald Trump.
JANUARY 29, 2016, 8:14 AM EST
by

Chris Matthews

If you’re looking for business advice, you could do a lot worse than the third richest man in the world, Warren Buffett.

The CEO of Berkshire Hathaway BRK.A 3.22% will lend his considerable business acumen to the contestants in an upcoming episode of NBC’s Celebrity Apprentice, according to a press release. The 8th season of the show will be hosted by former California Governor Arnold Schwarzenegger as celebrity contestants like Mötley Crüe’s Vince Neil and football star Ricky Williams compete for the chance to win $250,000 for their favorite charity.

The new iteration of the show will be filmed in Silicon Beach, Los Angeles, which NBC calls “Southern California’s ever-growing technology hub.” The show will feature other big names in business, like former Microsoft MSFT 5.64% CEO Steve Ballmer and supermodel Tyra Banks, as they look to lend their business smarts to the celebrity contestants.

Though Buffett is best known for his investing skills, he did show off his comedy chops at Fortune’s Most Powerful Women Summit in October. Perhaps there’s a future in television for the 85-year-old after all.

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THE STAR: Billionaire Warren Buffett's Berkshire resumes buying Phillips 66 stock

2016-01-31T09:10:00.000+13:00

NEW YORK: Berkshire Hathaway Inc, the conglomerate run by Warren Buffett, has resumed its purchases of Phillips 66 stock, and spent roughly US$832 million in January to boost its stake even as the oil refiner's profit margins narrowed.

According to a regulatory filing on Friday night, Berkshire paid about $198 million this week for 2.54 million Phillips 66 shares, its first purchases of the stock since Jan. 14.

For all of January, Berkshire bought 10.81 million shares, giving it 72.29 million overall, or a roughly 13.7 percent stake in Houston-based Phillips 66. Those shares were worth $5.79 billion as of Friday's market close at $80.15.

Phillips 66 is Berkshire's sixth-largest stock holding, regulatory filings show.

On Friday, Phillips 66 said quarterly net income fell 43 percent from a year earlier to $650 million, or $1.20 per share.

The decline resulted in part from lower crack spreads, or the difference between the cost of oil and the price of refined products, and asset writedowns resulting from low commodity prices.

Excluding items, Phillips 66 reported profit of $1.31 per share, topping analyst forecasts.

Berkshire previously invested in ConocoPhillips , which spun off Phillips 66 in 2012.

In February 2014, Berkshire swapped much of its Phillips 66 stock back to the company for a chemicals business. It began rebuilding the stake early last year.

Berkshire announced the new Phillips 66 purchases a few hours after the Omaha, Nebraska-based company completed its largest acquisition, a roughly $31.7 billion purchase of industrial components maker Precision Castparts Corp.

Buffett has said Berkshire would spend about $23 billion of cash on that acquisition, and finance the rest.

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BLOOMBERG: Warren Buffett controls Nevada’s legacy utility. Elon Musk is behind the solar company that’s upending the market. Let the fun begin.

2016-01-29T09:08:00.001+13:00

By Noah Buhayar | January 28, 2016

From

Outside the Public Utilities Commission office, which is on the second floor of a modern, three-story building about 7 miles from the Strip in Las Vegas, a chorus of women are shouting to the tune of a Beastie Boys classic: “We’re gonna fight ... for our right ... to go soooolar!”

It’s Jan. 13, a crisp desert morning with high, wispy clouds. Cars zoom by on a nearby freeway. Across the street, construction workers are leveling ground in front of a subdivision. Local TV news crews close in on the women as several hundred other protesters wave signs that read “Don’t hog the sun” and “Save our solar jobs.” Another poster takes a jab directly at the local power company: “Don’t be shady NV Energy.”

Many of the protesters are employees or customers of SolarCity. Started a decade ago by Tesla Motors Chief Executive Officer Elon Musk and two of his cousins, Lyndon and Peter Rive, SolarCity has brought renewable energy to the masses in more than a dozen states, generating about $350 million in annual revenue. The company designs, installs, and leases rooftop solar systems at prices that allow homeowners to save on their monthly power bills—and fight climate change along the way. For a 20-year commitment, SolarCity will set customers up with panels for no money down. After starting in California and expanding to Arizona and Oregon, SolarCity began selling in Nevada in 2014 and quickly became the state’s leading installer of rooftop panels.

SolarCity’s success is partly because the government provides subsidies and enables an arrangement called net metering, which allows homeowners with panels to sell back to the grid any solar energy they don’t use. This helps offset their cost of power when the sun’s not shining. Like more than 40 other U.S. states, Nevada forces utilities to buy the excess energy at rates set by regulators—usually the same rate utilities charge (hence, the net in net metering). In Nevada, it’s worked well. So well, in fact, that NV Energy, the state’s largest utility, is fighting it with everything it’s got.

First, NV Energy deployed its lobbyists to limit the total amount of energy homeowners and small businesses were allowed to generate to 3 percent of peak capacity for all utilities. Then it expertly argued its case before regulators, who rewrote the rules for net-metering customers. In December it scored a major win: Nevada’s Public Utilities Commission (PUC) imposed rules that not only make it more expensive to go solar, but also make it uneconomical for those who’ve already signed up. Similar regulatory skirmishes are playing out in dozens of other states, but no other has gone as far as Nevada to undermine homeowners who’ve already installed solar arrays.

All this has enraged independent, free-market, and environmentally conscious Nevadans. All day on Jan. 13 people enter the hearing room to give the sole commissioner an earful. (Two more commissioners are piped in via video from Carson City, where the hearing is happening simultaneously.) The bureaucrats sit blankly behind their desks as employees from SolarCity and a competitor, Sunrun, explain that they’d been let go because the commission’s recent ruling killed their companies’ business in the state. Some of the roughly 18,000 customers who have already put solar panels on their roofs say the officials have rigged the game against the players. One homeowner threatens a $1 billion class-action lawsuit. Another compares NV Energy to King George III.

“Are you getting kickbacks?” demands one woman, who asks the commission for records proving it made its ruling in the public’s interest.

“Answer her,” shouts a man in the crowd.

“Resign!” yells another.

At one point, Mark Ruffalo shows up. The actor has flown in for the rally and makes his way into the commission office flanked by two SolarCity employees. A half-dozen camera crews follow him to the mic, and he receives a standing ovation after he calls the commission the “anti-Robin Hood” for taking from the people and giving to a monopoly. “The utility has the whole pie,” Ruffalo adds. The citizens, he says, “just want a tiny, little slice.” A local TV reporter, realizing she just got the Hulk on film for her segment, pumps her fist.

None of it sways the commissioners, and at around 4:30 p.m. they make a show of cross-examining each other before voting unanimously to deny requests to delay the new rules. It’s another victory for NV Energy and its owner, Berkshire Hathaway, the investment company controlled by Warren Buffett. He didn’t respond to requests for comment.

“The outcome was horrendous” in Nevada, says SolarCity CEO Lyndon Rive. Homeowners no longer have any financial incentive to put panels on their roofs, and those who already did may end up paying an additional $11,000 over the next two decades, he says. “We will fight this. We will fight it legally, and I’m highly confident we will win.Not that long ago, things were far more cordial between SolarCity and Nevada officials. “They sold themselves as being solar-friendly,” Rive says. “It was, ‘Hey, we are for solar. We want to make solar work.’ ” It probably didn’t hurt that SolarCity also had created scores of jobs wherever it went and that it was a no-brainer to tap the sun’s potential in a state that’s largely desert.

In 2004, Rive, his wife, and Musk were in an RV on their way to Burning Man. Rive was casting about for a business idea that could “have an impact on humanity,” and Musk suggested that his cousin look into solar power. “He didn’t say how or what, but just get into the industry,” Rive told the San Jose Mercury News in December. When Rive got back from the festival, he told his brother about the conversation. They founded SolarCity on July 4, 2006. The company’s mission: to help people leave fossil fuels behind. Musk, who had made a fortune on PayPal and was dreaming up rocket ships and electric cars, put up some capital and became chairman. Musk didn’t reply to an e-mail seeking comment.

SolarCity grew into one of the country’s largest solar operators in the years that followed. In the markets it entered, it hired hundreds of people to sell, maintain, and install its systems. But Rive didn’t enter Nevada. To make its contracts work, SolarCity needed the right policies in place. For years the state provided rebates for homeowners who wanted to go solar through a lottery system. The randomness turned potential customers off, he says.

Nevada’s legislature had been gradually changing incentives for solar customers for years and, in 2013, it did away with the lottery for rebates, so anyone could get one. The state also set a new cap on installations—3 percent of the utility’s peak demand. Such provisions usually appease utilities and give regulators a chance to study what it means to have more small solar systems on the grid.

SolarCity had begun a national search to figure out where to open a call center in late 2012 and considered Nevada. Governor Brian Sandoval’s office offered a sweetener, Rive says. Nevada had set up something called the Catalyst Fund to encourage companies to locate operations in the state. In the economic development trade, “it’s called ‘love money,’ ” says Ross Miller, a former secretary of state, who served on the board that doled out the funds. SolarCity’s grant was announced in March 2013. The company would get paid as much as $400,000 annually for three years if it met certain hiring targets. “You had me at Elon Musk,” Miller told Vegas Inc., a business news outlet, at the time.

In August of that year, SolarCity had an opening ceremony for its Vegas office, which was to serve as its main call center and handle sales and administrative functions nationally. Sandoval called the opening a “watershed moment” for the state and joined with Democratic U.S. Senator Harry Reid in cutting a green ribbon with a giant pair of scissors. “Nevada is going to be your home for a long time,” Reid said. “And we’re going to do everything we can to make it one that’s a happy, happy home.”

With the new net-metering and rebate policies in place, SolarCity began taking applications on May 1, 2014. Charlie Catania called that same day. Catania, who resembles Regis Philbin, came to Vegas in the 1970s and spent most of his career at Caesars Palace working in the baccarat pit. “I wanted to be a good steward of the environment,” but going solar was always too expensive, he says. By signing with SolarCity, he anticipated saving money over time, because his energy rates would be locked in for 20 years. That would help him minimize the impact of any increases NV Energy might make. “I’m 71,” he says. “If I live to 91, when my lease is up, hallelujah.”

Thousands more followed Catania, signing contracts with SolarCity, Sunrun, and other providers. They were retirees, computer programmers, bartenders, young, old, Democrat, Republican, Libertarian. Most were in southern Nevada. By and large, the homeowners who went solar cared about the environment. But the thought of saving a few bucks—and sticking it to NV Energy—didn’t bother some of them, either.

To meet the demand, Rive opened more operations centers in the state, where its crews of installers would grab panels and other supplies before going out on a job. The company had created something called the Chairman’s Cup—after Musk—to honor the most productive warehouse nationally. In 2015 its two locations in the Las Vegas area dominated the competition, winning almost every month.

The growth was good. But another problem was looming: Rive and his staff thought their industry was about to reach the 3 percent cap.

Buffett got into utilities in 1999. While many investors chased the latest Silicon Valley IPO, he bought a nice electric company in Des Moines. Building power plants and maintaining the grid offered almost endless opportunities to reinvest cash, which he had a lot of. And, as a monopoly providing an essential service, the local power company wasn’t going away anytime soon. Owning utilities isn’t “a way to get rich,” he later said. “It’s a way to stay rich.”

By 2013 the energy unit at Berkshire had expanded to include power companies serving parts of Oregon, Washington, Idaho, Wyoming, and Utah. It had also invested billions of dollars in wind farms in Iowa and giant solar arrays in California andArizona. Two months after SolarCity got its love money from Nevada, Buffett offered$5.6 billion to buy NV Energy. Soon after Berkshire completed the purchase, NV Energy accounted for about a fifth of the company’s energy revenue.

Because power companies operate in a highly regulated industry, they stay close to elected officials. NV Energy’s ties in Nevada were particularly strong. Two of its lobbyists—Pete Ernaut and Greg Ferraro—have been friends with Sandoval for decades. Sandoval told the Reno Gazette-Journal that the lobbyists had first suggested he run for governor in 2010. Both ended up serving as advisers to his successful campaign and have continued to lobby him in office.

The governor has tried to avoid favoritism—and, at times, has promoted policies that helped the solar industry and vetoed legislation that the utility wanted. Even Robert List, SolarCity’s lobbyist in the state, says Sandoval is “a man of total integrity.” Still, it’s difficult for the governor to get away from the perception that “he’s being influenced by them,” says Jon Ralston, the host of a political affairs show on Las Vegas’s PBS station.

As the 2015 legislative session opened in Carson City last February, the rooftop solar industry was focused on lifting the 3 percent cap. Buffett’s utility was set against it. “We had numerous conversations with the NV Energy lobbyists, and they were swarming all over the building constantly,” List recalls. “Nobody could seem to find a middle ground.”

On March 9, Ernaut sent a briefing document on net metering to two of Sandoval’s senior advisers, according to an e-mail that Sunrun obtained through a public records request. “Net metering is not about customer choice and competition,” it said. Rooftop solar customers, it went on, were already getting a subsidy, and it would only increase if the cap were lifted to 10 percent, as the solar industry wanted. All customers would have to pay higher rates if that were allowed, according to the document. Instead, the utility argued it would be more cost-effective to generate power from large-scale solar arrays.

A month later, Rive went to see the governor. Sandoval began the meeting by handing over a printout of his Wikipedia page, Rive recalls. Someone had just inserted information about NV Energy’s lobbying on net metering in the governor’s biography and wrote—erroneously—that he could lift the cap to prevent solar companies from cutting jobs.

“He was really upset, like fuming out of the ears,” Rive says. “He goes, ‘This is what you guys are doing. This is all you.’ … And I’m like, ‘Whoa. Hold on. Hold on. I’m here to talk about the solar future of the state. This is not us.’ ”

“The governor did not express frustration,” Mari St. Martin, a spokeswoman for Sandoval, says of the meeting. But he “did bring up the questionable, petty tactics of some members of the rooftop solar industry, which included misleading online postings about the governor’s authority on the issue.”

The debate dragged into May. SolarCity and the other installers needed a resolution. Only the state legislature could lift the cap, and the session was scheduled to end on June 1. After that, lawmakers wouldn’t convene for a regular session again until 2017. NV Energy, SolarCity, and other solar companies agreed to legislation that eliminated the cap. But it also required the utilities commission to study net-metering rates and eliminate any unreasonable shifting of costs to other customers. It set a Dec. 31 deadline for officials to review and approve new rates that the utility would submit. “We literally had a gun against our head to support it,” Rive says.

NV Energy made its case to the utilities commission in late July, kicking off a five-month process that culminated with the December decision. Staff spent hundreds of hours requesting data and reviewing information. There were four days of hearings. Nowhere in all this, Rive says, was there any hint of changing rates for people who had already gone solar.

Ultimately, the commission decided that everyone who put panels on their roofs should be treated the same. It also found that small commercial and residential net-metering customers were getting more than $16 million in subsidies a year from other people. To fix that, the commissioners agreed on New Year’s Eve to two rate increases and one decrease. A residential solar customer in southern Nevada, for instance, would see her monthly service charge gradually step up in annual increments from $12.75 to $38.51 in 2020. The amount she got paid for the electricity she produced would plunge by about 75 percent during the same period. She’d also get a slightly cheaper rate on the energy she drew from the grid.

NV Energy tried to explain the changes by posting sample bills on its website. A southern Nevada homeowner called Jane Doe residing at (the wishfully named) 1234 Happy Dr. in Las Vegas, for instance, would end up paying $94.64 for her January bill vs. $84.66 under the old rates. NV Energy’s sample bills also account for only the first year of changes the commission approved. SolarCity’s pricing undercut NV Energy by just a little bit in Nevada before the new rates, Rive says. So he knew immediately that he could no longer do business in the state.

A day after the ruling, Rive announced that SolarCity would cease sales in Nevada. Later, he said the company would have to dismiss 550 workers in the state. Sunrun and other solar companies followed suit. SolarCity still employs more than a thousand people in Las Vegas at its call center, but they mostly serve other states.

Throughout the process, says Kevin Geraghty, NV Energy’s vice president for energy supply, he’d been frustrated by how the solar industry has tried “to influence what is a technical, financial analysis with emotion.” If you go solar, he adds, “you have to pay your fair share” for the grid. He says rooftop solar customers will continue to enjoy “substantial” savings on their utility bills. A homeowner’s payback on a rooftop system ultimately depends on the trajectory for NV Energy’s rates, he says. Recently, the utility has managed to cut them several times.

Geraghty blames SolarCity for confusing customers. “That’s what they did in Nevada,” he says. “They’ve done it everywhere they’ve been.” The commission came out with a ruling that the solar companies didn’t like because “they didn’t challenge the facts and figures,” Geraghty says. “They rolled out the same tired, generic, rooftop solar arguments. And in the face of facts and information, they failed.”

“NVE is wrong—their data was flawed, and everyone except the commission recognized this,”

The power struggle in Nevada is hardly unique. Solar is booming in the U.S., in part because of a stunning drop in the price of panels. Adjusting for inflation, it cost $96 per watt for a solar module in the mid-1970s. Process improvements and a huge boost in production have brought that figure down 99 percent, to 68¢ per watt today, according to data from Bloomberg New Energy Finance. Leasing from companies such as SolarCity has only sped up adoption. And a multiyear extension of the 30 percent federal solar tax credit in December has also helped.

In just a decade, solar has gone from an enviro’s dream to a serious lobby that will be fighting these kinds of battles nationwide for years. More than half of U.S. states werestudying or changing their net-metering policies in the third quarter of 2015, according to the North Carolina Clean Energy Technology Center. Just about everywhere solar companies go, the industry has stirred up popular support, often with help from celebrities. On Jan. 24 a pro-solar group arranged for musicians Michael Franti, Bob Weir, and Sammy Hagar to play a free, acoustic concert in San Francisco.

Power companies may not be winning any popularity contests, but they’re developing their own renewable energy to keep up with changing attitudes and to meet state mandates. In North Carolina, Duke Energy is spending $900 million on solar. Buffett’s company had committed $15 billion across all its operations through 2014 to all types of renewable energy. Last year it pledged to double that as part of an Obama administration climate pledge. Much of this money has gone to its Iowa utility, MidAmerican Energy, which can generate about 30 percent of its power from wind turbines.

Buffett’s company has also bought renewable energy through long-term contracts. Last year, NV Energy signed up to purchase power from a giant First Solar installation outside

Las Vegas for $38.70 per megawatt-hour. Analysts said at the time that it was one of the cheapest rates on record. Commissioners cited projects like that for why it made no sense to continue encouraging net metering in Nevada. If the goal is to put more solar on the grid, it’d be far cheaper for NV Energy to procure it.

This, of course, is of little consolation for the Nevadans who’ve already blanketed their roofs with solar panels. The public outcry seems to have registered with NV Energy. On Jan. 25 it said it would ask the commission to allow existing net-metering customers to stick with the old system for two decades in some instances. “A fair, stable, and predictable

cost environment is important to all our customers,” Paul Caudill, the utility’s president, said in a statement. The commission will soon rehear that portion of the case.

Even if the utility’s proposal is accepted, it may not go far enough for the solar industry. The December decision could be challenged in court—or taken straight to voters. SolarCity and other groups are trying to get the issue on the November ballot.

Caught in limbo are people such as Dale Collier. The day after the commission hearing, he showed off a 56-panel system on his home in the Las Vegas suburb of Henderson. It cost him about $48,000 to install in 2011. SolarCity hadn’t yet set up shop in Nevada, so he paid for it by refinancing his house. The system took his NV Energy bill down to about $80 a month from the $330 it used to average, he says. One year, he got a $1,355 check from NV Energy because his solar power was helping the utility meet its renewable energy requirements. “It was the smartest thing I’d ever done,” he says. “Now, it’s the stupidest thing I’ve ever done.”

Collier had planned to retire from his job flying small cargo planes. But he doesn’t want to stop working until he has a better handle on his monthly bills from Buffett’s utility. “If it goes totally haywire, I’m going to look at batteries,” he says. “I’d love to just go off the grid totally, and tell them to f--- off.”

—With Mark Chediak and Chris Martin

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