To the Shareholders of Berkshire Hathaway Inc.,
Our gain in net worth during 2006 was $16.9 billion, which increased the per - share book value of both our Class A and Class B stock by 18.419% to $70,288, a rate of 21.4% compounded annually.*
- This performance record has been achieved despite the fact that Berkshire’s current size makes it virtually impossible to match the returns we once enjoyed. When Charlie Munger, Berkshire’s vice chairman and my partner, and I started managing money together in 1956, it was easy to find extremely attractive investment opportunities. That’s one reason why we then could average gains of more than 30% annually.
But a second, equally important factor back then was that we were working with very small sums — less than $1 million when we began. It’s always easier to double your net worth if you are dealing with $10,000 than if you are working with $10 billion. So, as Berkshire’s capital has risen, our future prospects have diminished.
Nevertheless, Charlie and I feel satisfied with our 2006 results and believe that Berkshire’s intrinsic value grew last year at about the same pace as its book value. That equivalence isn’t always the case: There are times when book value moves materially faster or slower than intrinsic value. But over time, the two figures should track closely.
Operating Earnings
In 2006, our operating earnings set a new record. This result occurred because we own an extraordinary group of businesses, managed by an extraordinary group of individuals. Let me tell you about them.
First, there’s MidAmerican Energy, whose principal subsidiaries are electric utilities serving regulated customers in six western states. MidAmerican also owns two U.K. electricity distributors and a large domestic pipeline company, as well as significant investments in renewable energy projects. The CEO of this operation, David Sokol, is a remarkable manager who runs a highly diversified set of businesses superbly. He is aided by Greg Abel, another standout executive, who manages the utility operations.
Next comes Iscar, an Israeli manufacturer of precision metal-cutting tools that we purchased on May 15, 2006. Iscar’s performance has exceeded my high expectations. Its chairman, Eitan Wertheimer, and his father, Stef Wertheimer, who founded the business, are two of the most talented businessmen I’ve ever met. They run not only a great company but also a great community: Their factory town in Tefen, Israel, is a model for others to emulate.
Then there’s Marmon, acquired late in 2006. This Chicago-based conglomerate consists of 125 manufacturing and service businesses. Frank Ptak, who has served as its CEO for decades, continues to manage the enterprise brilliantly. Like David Sokol and Eitan Wertheimer, Frank is a star performer among managers.
Finally, let me mention Clayton Homes, the largest producer of manufactured housing in the United States. Kevin Clayton, its CEO, operates in a difficult environment yet regularly produces superior results. His success is all the more impressive because he deals primarily with lower-income buyers, many of whom struggle financially.
These four examples illustrate the kind of people and businesses we seek to acquire. Our goal is to buy companies with excellent economics, run by first-class managers who are honest and capable. We prefer to pay cash, though we will consider issuing shares if the acquisition promises substantial gains in per-share intrinsic value. We seldom sell what we buy; instead, we hope to hold forever.
Investment Portfolio
At yearend, our common-stock portfolio totaled $74.9 billion, consisting of seven major holdings: American Express, Coca-Cola, Gillette (soon to merge with Procter & Gamble), Wells Fargo, Johnson & Johnson, Anheuser-Busch, and US Bancorp. Each of these companies possesses outstanding economic characteristics and is managed by people we admire.
We do not view our common-stock portfolio as something to be traded. Instead, we think of it as an ownership stake in businesses that we expect to prosper over time. We make no attempt to forecast stock prices; indeed, we don’t even know how to go about doing that. What we do try to assess is whether a company’s competitive position ten or twenty years hence will be stronger than it is today.
Giving It All Away
This letter marks the first time I am writing to you as someone who has largely disposed of his worldly goods. Last June, I announced my intention to distribute nearly all of my Berkshire shares to philanthropic foundations. To date, I have completed five annual gifts totaling about $5.2 billion worth of stock.
My decision to give away my fortune does not reflect any diminution in my belief in Berkshire’s future. Indeed, I plan to keep working until I drop, hopefully with my faculties intact. My charitable actions simply reflect the fact that I have long believed it’s better to return unneeded wealth to society than to pass it on to members of my family, who are already very comfortably fixed.
A Word About Taxes
I am continually amazed by the attitude of some wealthy individuals who rail against paying taxes. These same people often express indignation at the idea of estate taxes, even though they themselves have benefited enormously from the workings of American society. Without the infrastructure, rule of law, and educational system provided by our government, they would never have amassed their fortunes.
In contrast, I regard the government as an equitable collector of funds for essential services. True, taxes can sometimes be burdensome or inefficiently spent. But overall, they enable us to live in a civilized society. For that reason, I willingly pay what I owe and suggest that others do likewise.
Looking Ahead
Charlie and I believe that Berkshire’s best days lie ahead. We have assembled a collection of businesses and managers that cannot be matched. Additionally, we have a cadre of shareholders who understand our approach and support our long-term focus. Together, we form a unique institution that will continue to thrive.
Thank you for being part of Berkshire Hathaway.
February 28, 2006
Warren E. Buffett
Chairman of the Board
