2002 Shareholder Letter

Date: February 21, 2003 Author: Warren Buffett Company: Berkshire Hathaway

Overview

2002 net worth increased $6.1 billion or 10.0% (S&P fell 22.1%), beating the S&P by 32.1 percentage points. Per-share book value reached $41,727 — a 22.2% compound annual return over 38 years.

Key Points

Banner Year

"In all respects 2002 was a banner year."

• Non-insurance operations: earned $272 million monthly (vs. $272 million annually a decade ago)
• Insurance float increased to $41.2 billion, up $5.7 billion, at only 1% cost
• GEICO and Reinsurance Division "shot the lights out"
• General Re underwriting discipline restored

Against Pro-Forma Earnings

Buffett criticized "pro-forma" earnings presentations where CEOs exclude "bad stuff":

"We've yet to see a pro-forma presentation disclosing that audited earnings were somewhat high. So let's make a little history: Last year, on a pro-forma basis, Berkshire had lower earnings than those we actually reported."

Two favorable factors boosted reported figures:

1. No mega-catastrophe in 2002 (insurers earned more than normal)
2. These "favorable" items were included in reported earnings, not excluded

Stock vs. Business Ownership

"When valuations are similar, we strongly prefer owning businesses to owning stocks. During most of our years of operation, however, stocks were much the cheaper choice."

Famous Quotes

"'Except for' losses will forever be part of the insurance business, and they will forever be paid with shareholders' money."

Related

• letter-2001 — Previous year
• letter-2003 — Following year
• warren-buffett
• compounding