Shareholder Letter - 1998

*All figures used in this report apply to Berkshire’s A shares, the successor to the only stock that the company had outstanding before 1996. The B shares have an economic interest equal to 1/30th that of the A.

To the Shareholders of Berkshire Hathaway Inc.:

Our gain in net worth during 1998 was $25.9 billion, which increased the per-share book value of both our Class A and Class B stock by 48.3%. Over the last 34 years (that is, since present management took over) per-share book value has grown from $19 to $37,801, a rate of 24.7% compounded annually. * Normally, a gain of 48.3% would call for handsprings — but not this year. Remember Wagner, whose music has been described as better than it sounds? Well, Berkshire’s progress in 1998 — though more than satisfactory — was not as good as it looks. That’s because most of that 48.3% gain came from our issuing shares in acquisitions. To explain: Our stock sells at a large premium over book value, which means that any issuing of shares we do — whether for cash or as consideration in a merger — instantly increases our per-share book-value figure, even though we’ve earned not a dime. What happens is that we get more per-share book value in such transactions than we give up. These t ransactions, however, do not deliver us any immediate gain in per-share intrinsic value , because in this respect what we give and what we get are roughly equal. And, as Charlie Munger, Berkshire’s Vice Chairman and my partner, and I can’t tell you too often (though you may feel that we try ), it’s the per-share gain in intrinsic value that counts rather than the per-share gain in book value. Though Berkshire’s intrinsic value grew very substantially in 1998, the gain fell well short of the 48.3% recorded for book value. Nevertheless, intrinsic value still far exceeds book value. (For a more extensive discussion of these terms, and other investment and accounting concepts, please refer to our Owner’s Manual, on pages 56-64, in which we set forth our owner-related business principles. Intrinsic value is discussed on pages 61 and 62.) We entered 1999 with the best collection of businesses and managers in our history. The two companies we acquired in 1998, General Re and Executive Jet, are first-class in every way — more about both later — and th e performance of our operating businesses last year exceeded my hopes. GEICO, once again, simply shot the lights out. On the minus side, several of the public companies in which we have major investments experienced significant operating shortfalls that neither they nor I anticipated early in the year. Consequently, our equity portfolio did not perform nearly as well as did the S&P 500. The problems of these companies are almost certainly temporary, and Charlie and I believe that their long-term prospects are excellent. In our last three annual reports, we furnished you a table that we regard as central to estimating Berkshire’s intrinsic value. In the updated version of th at table, which follows, we trace our two key components of value, including General Re on a pro-forma basis as if we had owned it throughout the year. The first column lists our per-shar e ownership of investments (including cash and equivalents but excluding securities held in our financial products operation) and the second column shows our per-share earnings from Berkshire’s operating businesses before taxes and purchase accounting adjustments (discussed on pages 62 and 63), but after all interest and corporate expenses. Th e second column excludes all dividends, interest and capital gains that we realized from the investments presented in the first column. In effect, the columns show how Berkshire would look if it were split into two parts, with one entity holding our investments and the other operating all of our businesses and bearing all corporate costs.

Here is a snapshot of Berkshire’s two key per-share components:

Year	Investments Per Share	Pre-tax Earnings Per Share with All Income from Investments Excluded
1968	$53	$2.87
1978	$465	$12.85
1988	$4,876	$145.77
1998	$47,647	$474.45

Here are the growth rates of the two segments by decade:

Decade Ending	Investments Per Share	Pre-tax Earnings Per Share with All Income from Investments Excluded
1978	24.2%	16.2%
1988	26.5%	27.5%
1998	25.6%	12.5%
Annual Growth Rate, 1968-1998	25.4%	18.6%

During 1998, our investments increased by $9,604 per share, or 25.2%, but per-share operating earnings fell by 33.9%. General Re, included on a pro-forma basis, explains both facts: it added very large investments, but it also posted an underwriting loss in 1998. Had we not acquired General Re, per-share operating earnings would have shown a modest gain.

Though certain acquisitions and operating strategies may from time to time affect one column more than the other, Berkshire continually works to increase both. What is certain, however, is that future rates of gain will fall far short of those achieved in the past. Berkshire’s capital base is now simply too large to allow truly outsized returns, even if Charlie and I continue hunting for elephants.

Our financial growth has been matched by employment growth: We now have 47,566 on our payroll, with th e acquisitions of 1998 bringing 7,074 employees to us and internal growth adding another 2,500. To balance this gain of 9,500 in hands-on employees, we have enlarged the staff at world headquarters from 12 to 12.8. (The .8 doesn’t refer to me or Charlie: We have a new person in accounting, working four days a week.) Despite this alarming trend toward corporate bloat, our after-tax overhead l ast year was about $3.5 million, or well under one basis point (.01 of 1%) of the value of the assets we manage. Taxes One beneficiary of our increased size has been the U. S. Treasury. The federal income taxes that Berkshire an d General Re have paid, or will soon pay, in respect to 1998 earnings total $2.7 billion. That means we shouldered all of the U. S. Government’s expenses for more than a half-day. Follow that thought a little further: If only 625 other U. S. taxpayers had paid the Treasury as much as we an d General Re did last year, no one else — neither corporations nor 270 million citizens — would have had to pay federal income taxes or any other kind of federal tax (for example, social security or estate taxes). Our shareholders can truly say that they “gave at the office.” Writing checks to the IRS tha t include strings of zeros does not bother Charlie or me. Berkshire as a corporation, and we as individuals, have prospered in America as we would have in no other country. Indeed, if we lived in some other part of the world and completely escaped taxes, I’m sure we would be worse off financially (and in many other ways as well). Overall, we feel extraordinarily lucky to have been dealt a hand in life that enables us to write large checks to the government rather than one requiring the government to regularly write checks to us — say, because we are disabled or unemployed. Berkshire’s tax situation is sometimes misunderstood. First, capital gains have no special attraction for us: A corporation pays a 35% rate on taxable income, whether it comes from capital gains or from ordinary operations. This means that Berkshire’s tax on a long-term capital gain is fully 75% higher than what an individual would pay on a n identical gain. Some people harbor another misconception, believing that we can exclude 70% of all dividends we receive from our taxable income . Indeed, the 70% rate applies to most corporations and also applies to Berkshire in cases where we hold stocks in non-insurance subsidiaries. However, almost all of our equity investments are owned by our insurance companies, and in that case the exclusion is 59 .5%. That still means a dollar of dividends is considerably more valuable to us than a dollar of ordinary income, but not to the degree often assumed.

Berkshire truly went all out for the Treasury last year. In connection with the General Re merger, we wrote a very large check to the government to pay an SEC fee tied to the new shares created by the deal. Charlie and I admire what the Commission has accomplished for American investors, though we would rather have found another way to show that admiration.

GEICO (1-800-847-7536)

Combine a great idea with a great manager and you are certain to get a great result. That mix was alive and well at GEICO in 1998. The idea is low-cost auto insurance made possible by direct-to-customer marketing, and the manager is Tony Nicely.

The direct-writing model requires a heavy front-end investment, so Berkshire excludes first-year new-business costs from GEICO’s compensation formulas. Instead, bonuses and profit sharing are tied to the earnings of seasoned business and to growth in policyholders.

Year	New Auto Policies	Auto Policies In Force
1993	1,354,882	2,011,055
1994	1,396,217	2,147,549
1995	1,461,608	2,310,037
1996	1,617,669	2,543,699
1997	1,913,176	2,949,439
1998	1,317,761	3,562,644

• “Voluntary” only; excludes assigned risks and the like.

In 1995, the year before Berkshire acquired GEICO, the company spent $33 million on marketing and had 652 telephone counselors. In 1998, marketing spend rose to $143 million and the counselor count reached 2,162. Berkshire planned to raise the marketing budget to at least $190 million in 1999, so long as each incremental dollar spent created more than a dollar of value and GEICO could maintain the service infrastructure needed to support growth.

GEICO’s 1998 profit margin of 6.7% was better than expected, helped by unusually favorable industry loss trends. Berkshire cut rates in 1998 and expected further cuts in 1999, aiming over time for margins closer to 4%. Even so, Buffett believed GEICO’s margins would remain better than those of the industry.

Customer service and employee performance were also exceptional. In New York, GEICO’s complaint ratio was less than half the average of the other four largest auto insurers, and profit sharing reached $103 million, or 32.3% of salary, for eligible associates.

You m ay think that one commercial in this section is enough. But I have another to present, this one directed at managers of publicly owned companies. At Berkshire we feel that telling outstanding CEOs, such as Tony, how to run their companies would be the height of foolishness. Most of ou r managers wouldn’t work for us if they got a lot of backseat driving. (Generally, they don’t have to work for anyone , since 75% or so are independently wealthy.) Besides, they are the Mark Mc Gwires of th e business world and need no advice from us as to how to hold the bat or when to swing. Never the le ss, Berkshire’s ownership may make even the best of managers more effective. First, we eliminate all of the ritualistic and nonproductive activities that normally go with the job of CEO. Our managers are totally in charge of their personal schedules. Second, we give each a simple mission: Just run your business as if: 1) you own 100% of it; 2) it is the only asset in the world that you and your family have or will ever have; and 3) you can’t sell or merge it for at least a cent ury. As a corollary, we tell them they should not let any of their decisions be affected even slightly by accounting considerations. We want our managers to think about what counts, not how it will be counted. Very few CEOs of public companies operate under a similar mandate, mainly because they have owners who focus on short-term prospects and reported earnings. Berkshire, however, has a shareholder base — which it will have fo r decades to come — that has the longest investment horizon to be found in the public company universe. Indeed, a majority of our shares are held by investors who expect to die still holding them. We can therefore ask our CEOs t o manage for maximum long-term value, rather than for next quarter’s earnings. We certainly don’t ignore the current results of our business es — in most cases, they are of great importance — but we never want them to be achieved at the expense of our building ever-greater competitive strengths. I believe t he GEICO story demonstrates the benefits of Berkshire’s approach. Charlie and I haven’t taught Tony a thing — and never will — but we have created an environment that allows him to apply all of his talents to what’s important. He does not have to devote his time or energy to board meetings, press interviews, presentations by investment bankers or talks with financial analysts. Furthermore, he need never spend a moment thinking about financing, credit ratings or “Street” expectations for earnings per-share. Because of our ownership structure, he also knows that thi s operational framework will endure for decades to come. In this environment of freedom, both Tony and his company can convert their almost limitless potential into matching achievements. If you are running a large, profitable business that will thrive in a GEICO-like environment, check our acquisition criteria on page 21 and give me a call. I promise a fast answer and will mention your inquiry to no one except Charlie. Executive Jet Aviation (1-800-848-6436) To understand the huge potential at Executive Jet Aviation (EJA), you need some understanding of its business, which is selling fractional shares of jets and operating the fleet for its many owners. Rich Santulli, CEO of EJA, created the fractional ownership industry in 1986, by visualizing an important new way of using planes. Then he combined guts and talent to turn his idea into a major business. In a fractional owner ship plan, you purchase a portion — say /8th — of any of a wide variety of jets that EJ A off ers. That purchase entitles you to 100 hours of flying time annually. (“Dead-head” hours don’t count against you r allotme nt, and you are also allowed to average your hours over five years.) In addition, you pay both a monthly management fee and a fee for hours actually flown. Then, on a few hours not ice, EJA makes your plane, or another at least as good, available to you at your choice of the 5500 airports in the U. S. In effect, calling up your plane is like phoning for a taxi. I first heard about the Net Jets® program, as it is called, about four years ago from Frank Rooney, our manager at H. H. Brown. Frank ha d used and been delighted with the service and suggested that I meet Rich to investigate signing up for my family’s use. It took Rich about 15 minutes to sell me a quarter (200 hours annually) of a Hawker 1000. Since then, my family has learned firsthand — through flying 900 hours on 300 trips — what a friendly, efficient, and safe operation EJA runs . Quite simply, they love this service. In fact, they quickly grew so enthusiastic that I did a testimonial ad for EJA l ong before I knew there was any possibility of our purchasing the business. I did, however, ask Rich to give me a call if he ever got interested in selling. Luckily, he phoned me last May, and we quickly made a $ million deal, paying equal amounts of cash and stock. EJA, which is by far the largest operator in its in dustry, has more than 1,000 customers and 163 aircraft (including 23 “cor e” aircraft that are owned or leased by EJA itself, so that it can make sure that service is first-class even during the times when demand i s heaviest). Safety, of course, is the paramount issue in any flight operation, and Rich’s pilots — now numbering about 650 — receive extensive training at least twice a year from Flight Safety International, another Berkshire subsidiary and the world leader in pilot training. The bottom line on our pilots: I’ve sold the Berkshire plane and will now do all of my business flying, as well as my personal flying, with Net Jets’ crews. Being the lead er in this industry is a major advantage for all concerned. Our customers gain because we have an armada of planes positioned throughout the country at all times, a blanket ing that allows us to provide unmatched service. Mean wh ile, we gain from the blanketing because it reduces dead-head costs. Another compelling attraction for ou r clients is t hat we offer products from Boeing, Gulfstream, Falcon, Cessna, and Raytheon, whereas our two competitors are owned by manufacturers that offer only their own planes. In effect, Net Jets is like a physician who can recommend whatever medicine best fits the needs of each patien t; our competitors, in contrast, are producers of a “house” brand that they must prescribe for one and all. In many cases our clients, both corporate and individual, o wn fractions of several different planes and can therefore match specific planes to specific missions. For example, a client might own /16th of three different jets (each giving it 50 hour s of flying time), which in total give it a virtual fleet, obtained for a small fraction of the cost of a single plane. Significantly, it is not only small businesses that can benefit from fractional ownership. Already, some of America’s largest companies use Net Jets as a supplement to their own fleet. This saves them big money in both meeting pea k requirements and in flying missions that would require their wholly-owned planes to log a disproportionate amount of dead-head hours. When a plane is slated for personal use, the clinching argument is t hat either the client signs up now or his children likely will later. That’s an equation I explained to my wonderful Aunt Alice 40 years ago when she asked me whether she could afford a fur coat. My reply settled the issue: “Alice, you aren’t buying it; your heirs are.” EJA’s growth ha s been explosive: In 1997, it accounted for 31% of all corporate jets ordered in the world . Nonetheless, Rich and I believe that the potential of fractional ownership has barely been scratched. If many thousands of owners find it sensible to own 100% of a plane — which must be used 350-400 hours annually if it’s to mak e economic sense — there must be a large multiple of that number for whom fractional ownership works. In addition to being a terrific executive, Rich is fun. Like most of our managers, he has no economic nee d whatsoever to work. Rich spends his time at EJA because it’s his baby — and he wants to see how far he can take it. We both already know the answer, both literally and figuratively: to the ends of the earth.

And now a small h int to Berkshire directors: Last year I spent more than nine times my salary at Borsheim’s and EJA. Just think how Berkshire’s business would boom if you’d only spring for a raise.

General Re

On December 21, we completed our $22 billion acquisition of General Re Corp. In addition to owning 100% of General Reinsurance Corp or ation, the largest U. S. property casualty re insurer the company also owns (including stock it has an arrangement to buy) 82% of the oldest reinsurance company in the world, Cologne Re. The two companies together re in sure all lines of insurance and operate in 124 countries. For many decades, General Re’s name has stood for quality, integrity and professionalism in reinsurance — and under R on Ferguson’s leadership, this reputation has been burnished still more. Berkshire can add absolutely nothing to the skills of General Re’s and Cologne Re’s managers. On the contrary, there is a lot that they can teach us. Nevertheless, we believe that Berkshire’s ownership will benefit General Re in important ways and that its earnings a decade from now will materially exceed those that would have been attainable absent the merger. We base thi s optimism on the fact that we can offer General Re’s management a freedom to operate in whatever manner will best allow the company to exploit its strengths. L e t’s look for a moment at the reinsurance business to understand why General Re could not on its own do what it can under Berkshire. Most of the demand for reinsurance comes from primary insurers who want to escape the wide swings in earnings that result f rom large and unusual losses. In effect, a re insurer gets paid for absorbing the volatility that the client insurer wants to shed. Ironically, though, a publicly-held re insurer ge ts graded by both its owners and those who evaluate its credit on the smoothness of i ts own results. Wide swings in earnings hurt both credit ratings and p/e ratios, even when the business that produces such swings has an expectancy of satisfactory profits over time. This market reality sometimes causes a re insurer to make costly moves, among them laying o ff a significant portion of the business it writes (in transactions that are called “retrocessions”) or rejecting good business simply because it threatens to bring on too much volatility. Berkshire, in contrast, happily accepts volatility, just as long as it carries with it the expectation of increased profits over time. Furthermore, we are a Fort Knox of capital, and that means volatile earnings can’t impair our premier credit ratings. Thus we have the perfect structure for writing — and retaining — reinsurance in virtually any amount. In fact, we’ve used this strength over the past decade to build a powerful super-cat business. What General Re gives us, however, is the distribution force, technical facilities and management that will allow us to employ our structural strength in every facet of the industry. In particular, General Re and Cologne Re can now accelerate their push into international markets, w here the preponderance of industry growth will almost certainly occur. As the merger proxy statement spelled out, Berkshire also brings tax and investment benefits to General Re. But the most compelling reason for the merger is simply that General Re’s outstanding management can now do what it does best, unfettered by the constraints that have limited its growth. Berkshire is assuming responsibility for General Re’s investment portfolio, though not for Cologne Re’s. We will not, howe ver, be involved in General Re’s underwriting. We will simply ask the company to exercise the discipline of the past while increasing the proportion of its business that is retained, expanding its product line, and widening it’s geographical coverage — making these moves in recognition of Berkshire’s financial strength and tolerance for wide swings in earnings. As we’ve long said, we prefer a lumpy 15% return to a smooth 12%. Ov er time, Ron and his team will maximize General Re’s new potential. He and I have known each other fo r many years, and each of our companies has initiated significant business that it has re insured with the other. Indeed, General Re played a key role in the resuscitation of GEICO from its near-death status in 1976. Both Ron and Rich Santulli plan to be at the annual meeting, and I hope you get a chance to say hello to them.

The Economics of Property Casualty Insurance

With the acquisition of General Re - and with GEICO’s business mushrooming - it becomes more important than ever to understand how to evaluate an insurance company. The key determinants are the amount of float the business generates, its cost, and the long-term outlook for both.

The table below shows the float generated by Berkshire’s insurance operations since we entered the business 32 years earlier.

Year	Average Float ($ millions)
1967	17
1972	44
1977	139
1982	190
1987	937
1992	1,632
1997	7,093
1998	22,762 (year-end)

Impressive as the growth in float has been - 25.4% compounded annually - what really counts is its cost. Berkshire’s average cost over those 32 years was well under zero, meaning the company was paid to hold a large and growing amount of money. Buffett noted that, as long as Berkshire continued to achieve an underwriting profit, float would remain more valuable than an equal amount of net worth.

Sources of Reported Earnings

The table below shows the main sources of Berkshire’s reported earnings. Purchase-accounting adjustments are aggregated rather than assigned to individual businesses so that readers can better see how the operating businesses performed apart from acquisition accounting.

Amounts below are shown in millions and separate pre-tax earnings from Berkshire’s share of net earnings.

Business	Pre-tax 1998	Pre-tax 1997	Net 1998	Net 1997
Underwriting - Super-Cat	$154	$283	$100	$183
Underwriting - Other Reinsurance	$(175)	$(155)	$(114)	$(100)
Underwriting - GEICO	$269	$281	$175	$181
Underwriting - Other Primary	$17	$53	$10	$34
Net Investment Income	$974	$882	$731	$704
Buffalo News	$53	$56	$32	$33
Finance and Financial Products Businesses	$205	$28	$133	$18
Flight Services (1)	$181	$140	$110	$84
Home Furnishings (2)	$72	$57	$41	$32
International Dairy Queen	$58	---	$35	---
Jewelry	$39	$32	$23	$18
Scott Fetzer (excluding finance operation)	$137	$119	$85	$77
See’s Candies	$62	$59	$40	$35
Shoe Group	$33	$49	$23	$32
General Re (3)	$26	---	$16	---
Purchase-Accounting Adjustments	$(123)	$(101)	$(118)	$(94)
Interest Expense (4)	$(100)	$(107)	$(63)	$(67)
Shareholder-Designated Contributions	$(17)	$(15)	$(11)	$(10)
Other	$34	$60	$29	$37
Operating Earnings	$1,899	$1,721	$1,277	$1,197
Capital Gains from Investments	$2,415	$1,106	$1,553	$704
Total Earnings - All Entities	$4,314	$2,827	$2,830	$1,901

(1) Includes Executive Jet from August 7, 1998. (2) Includes Star Furniture from July 1, 1997. (3) From date of acquisition, December 21, 1998. (4) Excludes interest expense of Finance Businesses.

You can be proud of our operating managers. They almost invariably deliver earnings that are at the very top of what conditions in their industries allow, meanwhile fortifying their businesses’ long-term competitive strengths. In aggregate, they have created many billions of dollars of value for you.

An example: In my 1994 letter, I reported on Ralph Schey’s extraordinary performance at Scott Fetzer. Little did I realize that he was just warming up. Last year Scott Fetzer, operating with no leverage (except for a conservative level of debt in its finance subsidiary), earned a record $96.5 million after-tax on its $112 million net worth.

Today, Berkshire has an unusually large number of individuals, such as Ralph, who are truly legends in their industries. Many of these joined us when we purchased their companies, but in recent years we have also identified a number of strong managers internally. We further expanded our corps of all-stars in an important way when we acquired General Re and EJA.

Charlie and I have the easy jobs at Berkshire: We do very little except allocate capital. And, even then, we are not all that energetic. We have one excuse, though: In allocating capital, activity does not correlate with achievement. Indeed, in the fields of investments and acquisitions, frenetic behavior is often counterproductive. Therefore, Charlie and I mainly just wait for the phone to ring.

Our managers, however, work very hard - and it shows. Naturally, they want to be paid fairly for their efforts, but pay alone can’t explain their extraordinary accomplishments. Instead, each is primarily motivated by a vision of just how far his or her business can go - and by a desire to be the one who gets it there. Charlie and I thank them on your behalf and ours.

Additional information about our various businesses is given on pages 39-53, where you will also find our segment earnings reported on a GAAP basis. In addition, on pages 65-71, we have rearranged Berkshire’s financial data into four segments on a non-GAAP basis, a presentation that corresponds to the way Charlie and I think about the company.

Normally, we follow this section with one on “Look-Through” Earnings. Because the General Re acquisition occurred near year-end, though, neither a historical nor a pro-forma calculation of a 1998 number seems relevant. We will resume the look-through calculation in next year’s report.

Investments

Below we present our common stock investments. Those with a market value of more than $750 million are itemized.

Amounts in millions of dollars.

Shares	Company	Cost*	Market
50,536,900	American Express Company	$1,470	$5,180
200,000,000	The Coca-Cola Company	$1,299	$13,400
51,202,242	The Walt Disney Company	$281	$1,536
60,298,000	Freddie Mac	$308	$3,885
96,000,000	The Gillette Company	$600	$4,590
1,727,765	The Washington Post Company	$11	$999
63,595,180	Wells Fargo & Company	$392	$2,540
Others	Others	$2,683	$5,135
Total	Total common stocks	$7,044	$37,265

* Represents tax-basis cost which, in aggregate, is $1.5 billion less than GAAP cost.

During the year, we slightly increased our holdings in American Express, one of our three largest commitments, and left the other two unchanged. However, we trimmed or substantially cut many of our smaller positions. Here, I need to make a confession (ugh): The portfolio actions I took in 1998 actually decreased our gain for the year. In particular, my decision to sell McDonald’s was a very big mistake. Overall, you would have been better off last year if I had regularly snuck off to the movies during market hours.