1997 Shareholder Letter

Date: February 27, 1998 Author: Warren Buffett Company: Berkshire Hathaway

Overview

1997 net worth increased $8.0 billion or 34.1% (S&P 33.4%), with per-share book value reaching $25,488 — a 24.1% compound annual return over 33 years.

Key Points

The Duck Rating

Buffett compared Berkshire's performance to a duck after a rainstorm:

"In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world."

1997 verdict: Berkshire paddled furiously but the S&P Index duck rose almost as fast — "Quack."

Berkshire's Tax Disadvantage

"Berkshire paid or accrued $4.2 billion for federal income tax, or about 18% of our beginning net worth."

Unlike index funds or mutual funds (which pass taxes through to shareholders), Berkshire pays corporate taxes, creating a structural drag.

GEICO's Blow-Out Performance

GEICO was a major contributor, with underwriting gains well above normal expectations.

The Fat Pitch Strategy

"The business 'pitches' we now see are just catching the lower outside corner. If we swing, we will be locked into low returns."

Buffett continues to wait for "fat pitches" — good businesses at reasonable prices.

High Market Prices

"Prices are high for both businesses and stocks. That does not mean that the prices of either will fall — we have absolutely no view on that matter — but it does mean that we get relatively little in prospective earnings when we commit fresh money."

Success = Decline

"For anyone deploying capital, nothing recedes like success."

In 1951, a $10,000 gain improved performance by 100 percentage points. At Berkshire's current scale, a $500 million pre-tax profit adds only one percentage point.

Famous Quotes

"Why get upset? Everyone has a bad century now and then." — Chicago Cubs fan (sarcastically)

Related

• letter-1996 — Previous year
• letter-1998 — Following year
• warren-buffett
• compounding