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Buffett Shareholder Letters - 1984 Letter

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BERKSHIRE HATHAWAY INC. To the Shareholders of Berkshire Hathaway Inc.: Our gain in net worth during 1984 was $152.6 million, or $133 per share. This sounds pretty good but actually it ? s mediocre. Economic gains must be evaluated by comparison with the capital that produces them. Our twenty-year compounded annual gain in book value has been 22.1% (from $19.46 in 1964 to $1108.77 in 1984), but our gain in 1984 was only 13.6%. As we discussed last year, the gain in per-share intrinsic business value is the economic measurement that really counts. But calculations of intrinsic business value are subjective. In our case, book value serves as a useful, although somewhat understated, proxy. In my judgment, intrinsic business value and book value increased during 1984 at about the same rate. Using my academic voice, I have told you in the past of the drag that a mushrooming capital base exerts upon rates of return. Unfortunately, my academic voice is now giving way to a reportorial voice. Our historical 22% rate is just that history. To earn even 15% annually over the next decade (assuming we continue to follow our present dividend policy, about which more will be said later in this letter) we would need profits aggregating about $3.9 billion. Accomplishing this will require a few big ideas - small ones just won ? t do. Charlie Munger, my partner in general management, and I do not have any such ideas at present, but our experience has been that they pop up occasionally. (How ? s that for a strategic plan?) Sources of Reported Earnings The table on the following page shows the sources of Berkshire ? s reported earnings. Berkshire ? s net ownership interest in many of the constituent businesses changed at midyear 1983 when the Blue Chip merger took place. Because of these changes, the first two columns of the table provide the best measure of underlying business performance. All of the significant gains and losses attributable to unusual sales of assets by any of the business entities are aggregated with securities transactions on the line near the bottom of the table, and are not included in operating earnings. (We regard any annual figure for realized capital gains or losses as meaningless, but we regard the aggregate realized and unrealized capital gains over a period of years as very important.) Furthermore, amortization of Goodwill is not charged against the specific businesses but, for reasons outlined in the Appendix to my letter in the 1983 annual report, is set forth as a separate item. (000s omitted) ---------------------------------------------------------Earnings -----------------Share ------------------ Earnings Before Income Taxes -------------------------------------Total Berkshire Share ------------------ ------------------ Net After Tax Berkshire

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