In one of his most enlightening essays in years, here is an exclusive excerpt from his upcoming shareholder letter, Warren Buffett looks back at a pair of real estate purchases and the lessons they offer for equity investors.

“Investment is most intelligent when it is most businesslike.” –Benjamin Graham, The Intelligent Investor

It is fitting to have a Ben Graham quote open this essay because I owe so much of what I know about investing to him. I will talk more about Ben a bit later, and I will even sooner talk about common stocks. But let me first tell you about two small nonstock investments that I made long ago. Though neither changed my net worth by much, they are instructive.

This tale begins in Nebraska. From 1973 to 1981, the Midwest experienced an explosion in farm prices, caused by a widespread belief that runaway inflation was coming and fueled by the lending policies of small rural banks. Then the bubble burst, bringing price declines of 50% or more that devastated both leveraged farmers and their lenders. Five times as many Iowa and Nebraska banks failed in that bubble’s aftermath as in our recent Great Recession.

In 1986, I purchased a 400-acre farm, located 50 miles north of Omaha, from the FDIC. It cost me $280,000, considerably less than what a failed bank had lent against the farm a few years earlier. I knew nothing about operating a farm. But I have a son who loves farming, and I learned from him both how many bushels of corn and soybeans the farm would produce and what the operating expenses would be. From these estimates, I calculated the normalized return from the farm to then be about 10%. I also thought it was likely that productivity would improve over time and that crop prices would move higher as well. Both expectations proved out.

I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside. There would, of course, be the occasional bad crop, and prices would sometimes disappoint. But so what? There would be some unusually good years as well, and I would never be under any pressure to sell the property. Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid. I still know nothing about farming and recently made just my second visit to the farm.

In 1993, I made another small investment. Larry Silverstein, Salomon’s landlord when I was the company’s CEO, told me about a New York retail property adjacent to New York University that the Resolution Trust Corp. was selling. Again, a bubble had popped — this one involving commercial real estate — and the RTC had been created to dispose of the assets of failed savings institutions whose optimistic lending practices had fueled the folly.

Here, too, the analysis was simple. As had been the case with the farm, the unleveraged current yield from the property was about 10%. But the property had been undermanaged by the RTC, and its income would increase when several vacant stores were leased. Even more important, the largest tenant — who occupied around 20% of the project’s space — was paying rent of about $5 per foot, whereas other tenants averaged $70. The expiration of this bargain lease in nine years was certain to provide a major boost to earnings. The property’s location was also superb: NYU wasn’t going anywhere.

I joined a small group — including Larry and my friend Fred Rose — in purchasing the building. Fred was an experienced, high-grade real estate investor who, with his family, would manage the property. And manage it they did. As old leases expired, earnings tripled. Annual distributions now exceed 35% of our initial equity investment. Moreover, our original mortgage was refinanced in 1996 and again in 1999, moves that allowed several special distributions totaling more than 150% of what we had invested. I’ve yet to view the property.

Income from both the farm and the NYU real estate will probably increase in decades to come. Though the gains won’t be dramatic, the two investments will be solid and satisfactory holdings for my lifetime and, subsequently, for my children and grandchildren.

I tell these tales to illustrate certain fundamentals of investing:

• You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”
• Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn’t necessary; you only need to understand the actions you undertake.
• If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.
• With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.
• Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)

My two purchases were made in 1986 and 1993. What the economy, interest rates, or the stock market might do in the years immediately following — 1987 and 1994 — was of no importance to me in determining the success of those investments. I can’t remember what the headlines or pundits were saying at the time. Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU.

There is one major difference between my two small investments and an investment in stocks. Stocks provide you minute-to-minute valuations for your holdings, whereas I have yet to see a quotation for either my farm or the New York real estate.

It should be an enormous advantage for investors in stocks to have those wildly fluctuating valuations placed on their holdings — and for some investors, it is. After all, if a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his — and those prices varied widely over short periods of time depending on his mental state — how in the world could I be other than benefited by his erratic behavior? If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming.

Owners of stocks, however, too often let the capricious and irrational behavior of their fellow owners cause them to behave irrationally as well. Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits — and, worse yet, important to consider acting upon their comments.

Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations and accompanying commentators delivering an implied message of “Don’t just sit there — do something.” For these investors, liquidity is transformed from the unqualified benefit it should be to a curse.

A “flash crash” or some other extreme market fluctuation can’t hurt an investor any more than an erratic and mouthy neighbor can hurt my farm investment. Indeed, tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values. A climate of fear is your friend when investing; a euphoric world is your enemy.

During the extraordinary financial panic that occurred late in 2008, I never gave a thought to selling my farm or New York real estate, even though a severe recession was clearly brewing. And if I had owned 100% of a solid business with good long-term prospects, it would have been foolish for me to even consider dumping it. So why would I have sold my stocks that were small participations in wonderful businesses? True, any one of them might eventually disappoint, but as a group they were certain to do well. Could anyone really believe the earth was going to swallow up the incredible productive assets and unlimited human ingenuity existing in America?

When Charlie Munger and I buy stocks — which we think of as small portions of businesses — our analysis is very similar to that which we use in buying entire businesses. We first have to decide whether we can sensibly estimate an earnings range for five years out or more. If the answer is yes, we will buy the stock (or business) if it sells at a reasonable price in relation to the bottom boundary of our estimate. If, however, we lack the ability to estimate future earnings — which is usually the case — we simply move on to other prospects. In the 54 years we have worked together, we have never forgone an attractive purchase because of the macro or political environment, or the views of other people. In fact, these subjects never come up when we make decisions.

It’s vital, however, that we recognize the perimeter of our “circle of competence” and stay well inside of it. Even then, we will make some mistakes, both with stocks and businesses. But they will not be the disasters that occur, for example, when a long-rising market induces purchases that are based on anticipated price behavior and a desire to be where the action is.

Most investors, of course, have not made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power.

I have good news for these nonprofessionals: The typical investor doesn’t need this skill. In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts). In the 20th century, the Dow Jones industrial index advanced from 66 to 11,497, paying a rising stream of dividends to boot. The 21st century will witness further gains, almost certain to be substantial. The goal of the nonprofessional should not be to pick winners — neither he nor his “helpers” can do that — but should rather be to own a cross section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.

That’s the “what” of investing for the nonprofessional. The “when” is also important. The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur. (Remember the late Barton Biggs’s observation: “A bull market is like sex. It feels best just before it ends.”) The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never sell when the news is bad and stocks are well off their highs. Following those rules, the “know-nothing” investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better long-term results than the knowledgeable professional who is blind to even a single weakness.

If “investors” frenetically bought and sold farmland to one another, neither the yields nor the prices of their crops would be increased. The only consequence of such behavior would be decreases in the overall earnings realized by the farm-owning population because of the substantial costs it would incur as it sought advice and switched properties.

Nevertheless, both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.

My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire Hathaway (BRKA) shares will be fully distributed to certain philanthropic organizations over the 10 years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s. (VFINX)) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions, or individuals — who employ high-fee managers.

And now back to Ben Graham. I learned most of the thoughts in this investment discussion from Ben’s book The Intelligent Investor, which I bought in 1949. My financial life changed with that purchase.

Before reading Ben’s book, I had wandered around the investing landscape, devouring everything written on the subject. Much of what I read fascinated me: I tried my hand at charting and at using market indicia to predict stock movements. I sat in brokerage offices watching the tape roll by, and I listened to commentators. All of this was fun, but I couldn’t shake the feeling that I wasn’t getting anywhere.

In contrast, Ben’s ideas were explained logically in elegant, easy-to-understand prose (without Greek letters or complicated formulas). For me, the key points were laid out in what later editions labeled Chapters 8 and 20. These points guide my investing decisions today.

A couple of interesting sidelights about the book: Later editions included a postscript describing an unnamed investment that was a bonanza for Ben. Ben made the purchase in 1948 when he was writing the first edition and — brace yourself — the mystery company was Geico. If Ben had not recognized the special qualities of Geico when it was still in its infancy, my future and Berkshire’s would have been far different.

The 1949 edition of the book also recommended a railroad stock that was then selling for $17 and earning about $10 per share. (One of the reasons I admired Ben was that he had the guts to use current examples, leaving himself open to sneers if he stumbled.) In part, that low valuation resulted from an accounting rule of the time that required the railroad to exclude from its reported earnings the substantial retained earnings of affiliates.

The recommended stock was Northern Pacific, and its most important affiliate was Chicago, Burlington & Quincy. These railroads are now important parts of BNSF (Burlington Northern Santa Fe), which is today fully owned by Berkshire. When I read the book, Northern Pacific had a market value of about $40 million. Now its successor (having added a great many properties, to be sure) earns that amount every four days.

I can’t remember what I paid for that first copy of The Intelligent Investor. Whatever the cost, it would underscore the truth of Ben’s adage: Price is what you pay; value is what you get. Of all the investments I ever made, buying Ben’s book was the best (except for my purchase of two marriage licenses).

Warren Buffett is the CEO of Berkshire Hathaway. This essay is an edited excerpt from his annual letter to shareholders.

Warren Buffet on Book Value vs Intrinsic Value, from Berkshire Hathaway
1994 Letter to Shareholders:


     We regularly report our per-share book value, an easily 
calculable number, though one of limited use.  Just as regularly, 
we tell you that what counts is intrinsic value, a number that is 
impossible to pinpoint but essential to estimate.

     For example, in 1964, we could state with certitude that 
Berkshire's per-share book value was $19.46.  However, that 
figure considerably overstated the stock's intrinsic value since 
all of the company's resources were tied up in a sub-profitable 
textile business.  Our textile assets had neither going-concern 
nor liquidation values equal to their carrying values.  In 1964, 
then, anyone inquiring into the soundness of Berkshire's balance 
sheet might well have deserved the answer once offered up by a 
Hollywood mogul of dubious reputation:  "Don't worry, the 
liabilities are solid."

     Today, Berkshire's situation has reversed:  Many of the 
businesses we control are worth far more than their carrying 
value.  (Those we don't control, such as Coca-Cola or Gillette, 
are carried at current market values.)  We continue to give you 
book value figures, however, because they serve as a rough, 
albeit significantly understated, tracking measure for Berkshire's 
intrinsic value.  Last year, in fact, the two measures moved in 
concert:  Book value gained 13.9%, and that was the approximate 
gain in intrinsic value also.

     We define intrinsic value as the discounted value of the 
cash that can be taken out of a business during its remaining 
life.  Anyone calculating intrinsic value necessarily comes up 
with a highly subjective figure that will change both as 
estimates of future cash flows are revised and as interest rates 
move.  Despite its fuzziness, however, intrinsic value is all-
important and is the only logical way to evaluate the relative 
attractiveness of investments and businesses.

     To see how historical input (book value) and future output 
(intrinsic value) can diverge, let's look at another form of 
investment, a college education.  Think of the education's cost 
as its "book value."  If it is to be accurate, the cost should 
include the earnings that were foregone by the student because he 
chose college rather than a job.

     For this exercise, we will ignore the important non-economic 
benefits of an education and focus strictly on its economic 
value.  First, we must estimate the earnings that the graduate 
will receive over his lifetime and subtract from that figure an 
estimate of what he would have earned had he lacked his 
education.  That gives us an excess earnings figure, which must 
then be discounted, at an appropriate interest rate, back to 
graduation day.  The dollar result equals the intrinsic economic 
value of the education.

     Some graduates will find that the book value of their 
education exceeds its intrinsic value, which means that whoever 
paid for the education didn't get his money's worth.  In other 
cases, the intrinsic value of an education will far exceed its 
book value, a result that proves capital was wisely deployed.  In 
all cases, what is clear is that book value is meaningless as an 
indicator of intrinsic value.

     Now let's get less academic and look at Scott Fetzer, an 
example from Berkshire's own experience.  This account will not 
only illustrate how the relationship of book value and intrinsic 
value can change but also will provide an accounting lesson that 
I know you have been breathlessly awaiting.  Naturally, I've 
chosen here to talk about an acquisition that has turned out to 
be a huge winner.

     Berkshire purchased Scott Fetzer at the beginning of 1986.  
At the time, the company was a collection of 22 businesses, and 
today we have exactly the same line-up - no additions and no 
disposals.  Scott Fetzer's main operations are World Book, Kirby, 
and Campbell Hausfeld, but many other units are important 
contributors to earnings as well.

     We paid $315.2 million for Scott Fetzer, which at the time 
had $172.6 million of book value.  The $142.6 million premium we 
handed over indicated our belief that the company's intrinsic 
value was close to double its book value.

     In the table below we trace the book value of Scott Fetzer, 
as well as its earnings and dividends, since our purchase.
  
                       (1)                                 (4)
                    Beginning      (2)         (3)        Ending
Year                Book Value   Earnings   Dividends   Book Value
----                ----------   --------   ---------   ----------
                                   (In $ Millions)      (1)+(2)-(3)

1986 ...............  $172.6      $ 40.3     $125.0       $ 87.9
1987 ...............    87.9        48.6       41.0         95.5
1988 ...............    95.5        58.0       35.0        118.6
1989 ...............   118.6        58.5       71.5        105.5
1990 ...............   105.5        61.3       33.5        133.3
1991 ...............   133.3        61.4       74.0        120.7
1992 ...............   120.7        70.5       80.0        111.2
1993 ...............   111.2        77.5       98.0         90.7
1994 ...............    90.7        79.3       76.0         94.0


     Because it had excess cash when our deal was made, Scott 
Fetzer was able to pay Berkshire dividends of $125 million in 
1986, though it earned only $40.3 million.  I should mention that 
we have not introduced leverage into Scott Fetzer's balance 
sheet.  In fact, the company has gone from very modest debt when 
we purchased it to virtually no debt at all (except for debt used 
by its finance subsidiary).  Similarly, we have not sold plants 
and leased them back, nor sold receivables, nor the like.  
Throughout our years of ownership, Scott Fetzer has operated as a 
conservatively-financed and liquid enterprise.

     As you can see, Scott Fetzer's earnings have increased 
steadily since we bought it, but book value has not grown 
commensurately.  Consequently, return on equity, which was 
exceptional at the time of our purchase, has now become truly 
extraordinary.  Just how extraordinary is illustrated by 
comparing Scott Fetzer's performance to that of the Fortune 500, 
a group it would qualify for if it were a stand-alone company.

     Had Scott Fetzer been on the 1993 500 list - the latest 
available for inspection - the company's return on equity would 
have ranked 4th.  But that is far from the whole story.  The top 
three companies in return on equity were Insilco, LTV and Gaylord 
Container, each of which emerged from bankruptcy in 1993 and none 
of which achieved meaningful earnings that year except for those 
they realized when they were accorded debt forgiveness in 
bankruptcy proceedings.  Leaving aside such non-operating 
windfalls, Scott Fetzer's return on equity would have ranked it 
first on the Fortune 500, well ahead of number two.  Indeed, 
Scott Fetzer's return on equity was double that of the company 
ranking tenth.

     You might expect that Scott Fetzer's success could only be 
explained by a cyclical peak in earnings, a monopolistic 
position, or leverage.  But no such circumstances apply.  Rather, 
the company's success comes from the managerial expertise of CEO 
Ralph Schey, of whom I'll tell you more later.

     First, however, the promised accounting lesson:  When we 
paid a $142.6 million premium over book value for Scott Fetzer, 
that figure had to be recorded on Berkshire's balance sheet.  
I'll spare you the details of how this worked (these were laid 
out in an appendix to our 1986 Annual Report) and get to the 
bottom line:  After a premium is initially recorded, it must in 
almost all cases be written off over time through annual charges 
that are shown as costs in the acquiring company's earnings 
statement.

     The following table shows, first, the annual charges 
Berkshire has made to gradually extinguish the Scott Fetzer 
acquisition premium and, second, the premium that remains on our 
books.  These charges have no effect on cash or the taxes we pay, 
and are not, in our view, an economic cost (though many 
accountants would disagree with us).  They are merely a way for 
us to reduce the carrying value of Scott Fetzer on our books so 
that the figure will eventually match the net worth that Scott 
Fetzer actually employs in its business.

                      Beginning     Purchase-Premium      Ending
                       Purchase         Charge to        Purchase
Year                   Premium     Berkshire Earnings    Premium
----                  ---------    ------------------    --------
                                     (In $ Millions)

1986 ................  $142.6            $ 11.6           $131.0
1987 ................   131.0               7.1            123.9
1988 ................   123.9               7.9            115.9
1989 ................   115.9               7.0            108.9
1990 ................   108.9               7.1            101.9
1991 ................   101.9               6.9             95.0
1992 ................    95.0               7.7             87.2
1993 ................    87.2              28.1             59.1
1994 ................    59.1               4.9             54.2

     Note that by the end of 1994 the premium was reduced to 
$54.2 million.  When this figure is added to Scott Fetzer's year-
end book value of $94 million, the total is $148.2 million, which 
is the current carrying value of Scott Fetzer on Berkshire's 
books.  That amount is less than half of our carrying value for 
the company when it was acquired.  Yet Scott Fetzer is now 
earning about twice what it then did.  Clearly, the intrinsic 
value of the business has consistently grown, even though we have 
just as consistently marked down its carrying value through 
purchase-premium charges that reduced Berkshire's earnings and 
net worth.

     The difference between Scott Fetzer's intrinsic value and 
its carrying value on Berkshire's books is now huge.  As I 
mentioned earlier - but am delighted to mention again - credit 
for this agreeable mismatch goes to Ralph Schey, a focused, smart 
and high-grade manager.

     The reasons for Ralph's success are not complicated.  Ben 
Graham taught me 45 years ago that in investing it is not 
necessary to do extraordinary things to get extraordinary 
results.  In later life, I have been surprised to find that this 
statement holds true in business management as well.  What a 
manager must do is handle the basics well and not get diverted.  
That's precisely Ralph's formula.  He establishes the right goals 
and never forgets what he set out to do.  On the personal side, 
Ralph is a joy to work with.  He's forthright about problems and 
is self-confident without being self-important.

     He is also experienced.  Though I don't know Ralph's age, I 
do know that, like many of our managers, he is over 65.  At 
Berkshire, we look to performance, not to the calendar.  Charlie 
and I, at 71 and 64 respectively, now keep George Foreman's 
picture on our desks.  You can make book that our scorn for a 
mandatory retirement age will grow stronger every year.


Intrinsic Value and Capital Allocation

     Understanding intrinsic value is as important for managers 
as it is for investors.  When managers are making capital 
allocation decisions - including decisions to repurchase shares - 
it's vital that they act in ways that increase per-share 
intrinsic value and avoid moves that decrease it.  This principle 
may seem obvious but we constantly see it violated.  And, when 
misallocations occur, shareholders are hurt.

     For example, in contemplating business mergers and 
acquisitions, many managers tend to focus on whether the 
transaction is immediately dilutive or anti-dilutive to earnings 
per share (or, at financial institutions, to per-share book 
value).  An emphasis of this sort carries great dangers.  Going 
back to our college-education example, imagine that a 25-year-old 
first-year MBA student is considering merging his future economic 
interests with those of a 25-year-old day laborer.  The MBA 
student, a non-earner, would find that a "share-for-share" merger 
of his equity interest in himself with that of the day laborer 
would enhance his near-term earnings (in a big way!).  But what 
could be sillier for the student than a deal of this kind?

     In corporate transactions, it's equally silly for the would-
be purchaser to focus on current earnings when the prospective 
acquiree has either different prospects, different amounts of 
non-operating assets, or a different capital structure.  At 
Berkshire, we have rejected many merger and purchase 
opportunities that would have boosted current and near-term 
earnings but that would have reduced per-share intrinsic value.  
Our approach, rather, has been to follow Wayne Gretzky's advice: 
"Go to where the puck is going to be, not to where it is."  As a 
result, our shareholders are now many billions of dollars richer 
than they would have been if we had used the standard catechism.

     The sad fact is that most major acquisitions display an 
egregious imbalance:  They are a bonanza for the shareholders of 
the acquiree; they increase the income and status of the 
acquirer's management; and they are a honey pot for the 
investment bankers and other professionals on both sides.  But, 
alas, they usually reduce the wealth of the acquirer's shareholders, 
often to a substantial extent.  That happens because the acquirer 
typically gives up more intrinsic value than it receives.  Do that 
enough, says John Medlin, the retired head of Wachovia Corp., and 
"you are running a chain letter in reverse."

     Over time, the skill with which a company's managers 
allocate capital has an enormous impact on the enterprise's 
value.  Almost by definition, a really good business generates 
far more money (at least after its early years) than it can use 
internally.  The company could, of course, distribute the money 
to shareholders by way of dividends or share repurchases.  But 
often the CEO asks a strategic planning staff, consultants or 
investment bankers whether an acquisition or two might make 
sense.  That's like asking your interior decorator whether you 
need a $50,000 rug.

     The acquisition problem is often compounded by a biological 
bias:  Many CEO's attain their positions in part because they 
possess an abundance of animal spirits and ego.  If an executive 
is heavily endowed with these qualities - which, it should be 
acknowledged, sometimes have their advantages - they won't 
disappear when he reaches the top.  When such a CEO is encouraged 
by his advisors to make deals, he responds much as would a 
teenage boy who is encouraged by his father to have a normal sex 
life.  It's not a push he needs.

     Some years back, a CEO friend of mine - in jest, it must be 
said - unintentionally described the pathology of many big deals. 
This friend, who ran a property-casualty insurer, was explaining 
to his directors why he wanted to acquire a certain life 
insurance company.  After droning rather unpersuasively through 
the economics and strategic rationale for the acquisition, he 
abruptly abandoned the script.  With an impish look, he simply 
said:  "Aw, fellas, all the other kids have one."

     At Berkshire, our managers will continue to earn 
extraordinary returns from what appear to be ordinary businesses. 
As a first step, these managers will look for ways to deploy 
their earnings advantageously in their businesses.  What's left, 
they will send to Charlie and me.  We then will try to use those 
funds in ways that build per-share intrinsic value.  Our goal 
will be to acquire either part or all of businesses that we 
believe we understand, that have good, sustainable underlying 
economics, and that are run by managers whom we like, admire and 
trust.