This is Kristen O'Brien, Managing Editor at NFX, and this is the founder list. Audible versions of essays from technology's most important leaders selected by the founder community. Berkshire Hathaway Inc, held its 2020 annual meeting of shareholders as a live stream only event originating from its headquarters city of Omaha, Nebraska on May 2nd. This is the report from 2020 sent to all shareholders, read by NFX.
To the shareholders of Berkshire Hathaway Inc, Berkshire earned $42,500,000,000 in 20.20, according to generally accepted accounting principles, commonly called gap.
The 4 components of that figure are $21,900,000,000 of operating earnings, $4,900,000,000 of realized capital James, a $26,700,000,000 gain from an increase in the amount of net unrealized capital gains that exist in the stocks we hold And finally, an $11,000,000,000 loss from a write down in the value of a few subsidiary and affiliate businesses that we own. All items are stated on an after tax basis.
Operating earnings are what count most, even during periods when they are not the largest item in our Pete total. Our focus at Berkshire is both to increase this segment of our income and to acquire large and favorably situated businesses. Last year, however, we met neither goal. Berkshire made no sizable acquisitions and operating earnings fell 9%. We did though increase Berkshire's per share intrinsic value by both retaining earnings and repurchasing about 5 percent of our shares.
The 2 GAAP components pertaining to capital gains or losses, whether realized or unrealized fluctuate capriciously from year to year, reflecting swings in the stock market. Whatever today's figures, Charlie Munger, my longtime partner and I, firmly believe that over time, Berkshire's capital gains from its investment holdings will be substantial.
As I've emphasized many times, Charlie and I view Berkshire's holdings of marketable stocks at year end worth $281,000,000,000 as a collection of businesses. We don't control the operations of those companies, but we do share proportionately in their long term prosperity. From an accounting standpoint, however, our portion of their earnings is not included in Berkshire's income. Instead, only what these investees pay us in dividends is recorded in our books.
Under gap, the huge sums that investees retain on our behalf become invisible. What's out of sight, however, should not be out of mind. Those unrecorded retained earnings are usually building value. Lots of value for Berkshire. Investes use the withheld funds to expand their business make acquisitions, pay off debt, and often to repurchase their stock, an act that increases our share of their future earnings.
As we pointed out in these pages last year, retained earnings have propelled American business throughout our country's history. What worked for Carnegie and Rockefeller has over the years worked its magic for millions of shareholders as well.
Of course, some of our investees will disappoint adding little, if anything, to the value of their company by retaining earnings, but others will over deliver a few spectacularly In aggregate, we expect our share of the huge pile of earnings retained by Berkshire's non controlled businesses what others would label our equity portfolio to eventually deliver us an equal or greater amount of capital gains. Over our 56 year tenure, that expectation has been met.
The final component in our gap figure that ugly $11,000,000,000 write down is almost entirely the quantification of a mistake I made in 2016. That year, Berkshire purchased Precision Cas Parts, PCC, and I paid too much for that company. No one misled me in any way. I was simply too optimistic about PCC's normalized profit potential. Last year, my miscalculation was laid bare by adverse developments throughout the aerospace industry, PCC's most important source of customers.
In purchasing PCC, Berkshire bought a fine company, the best in its business, Mark Morgan, PCC's CEO, is a passionate manager who consistently pours the same energy into the business that he did before we purchased it. We are lucky to have him running things. I believe I was right in concluding that PCC would over time earn good returns on the net tangible assets deployed in its operations.
I was wrong, however, in judging the average amount of future earnings and consequently, wrong in my calculation of the proper price to pay for the business. Pete is far from my first error of that sword, but it's a big one. 2 strings to our bow. Berkshire is often labeled a conglomerate, a negative term applied to holding companies that own a hodgepodge of unrelated businesses. And, yes, that describes Berkshire, but only in part.
To understand how and why we differ from the prototype conglomerate, let's review a little history. Over time, conglomerates have generally limited themselves to buying businesses in their entirety. That strategy, however, came with 2 major problems. One was unsolvable. Most of the truly great businesses had no interest in having anyone take them over. Consequently, deal hungry conglomerates had to focus on so so companies that lacked important and durable competitive strengths.
That was not a great pawn in which to fish. Beyond that, as conglomerates hers dipped into this universe of mediocre businesses, they often found themselves required to pay staggering control premiums to snare their quarry. Aspiring conglomerates knew the answer to this overpayment problem. They simply needed to manufacture a vastly overvalued stock of their own that could be used as a currency for pricey acquisitions. I'll pay you $100,000 for your dog by giving you 2 of my $5000 cats.
Morgan, the tools for fostering the overvaluation of conglomerate's stock involve promotional techniques and imaginative accounting maneuvers that were at best deceptive, and that sometimes crossed the line into fraud. When these tricks were successful, the conglomerate pushed its own stock to say three times its business value. In order to offer the target 2 times its value. Investing illusions can continue Morgan surprisingly long time.
Wall Street loves the fees that deal making generates and the press loves the stories that colorful promoters provide. At one point also, the soaring price of a promoted stock can itself become the proof that an illusion is reality. Eventually, of course, the party ends and many business emperors are found to have no close.
Financial history is replete with the names of famous conglomerators who were initially lionized as business geniuses by journalists, analysts, and investment bankers, but whose creations ended up as business junkyards. Conglomerates earned their terrible reputation. Charlie and I want our conglomerate to own all or part of a diverse group of businesses with good economic characteristics and good managers. Whether Berkshire controls these businesses, however, is unimportant to us.
It took me a while to wise up, but Charlie and also my 20 years struggle with the textile operation I inherited at Berkshire finally convinced me that owning a non controlling portion of a wonderful business is more profitable, more enjoyable, and far less work than struggling with 100% of a marginal enterprise. For those reasons, our conglomerate will remain a collection of controlled and non controlled businesses.
Charlie and I will simply deploy your capital into whatever we believe makes the most sense based on a company's durable competitive strengths, the capabilities and character of its management and price. If that strategy requires little or no effort on our part, so much the better. In contrast to the scoring system utilized in diving competitions, you are awarded no points in business endeavors for degree of difficulty.
Furthermore, as Ronald Reagan cautioned, it's said that hard work never killed anyone, but I say, why take the chance? The family jewels and how we increase your share of these gyms. Most of Berkshire's value resides in 4 businesses. 3 controlled, and 1 in which we have only a 5.4% interest. All four are jewels. The largest in value is our property casualty insurance operation, which for 53 years has been the core of Berkshire. Our family of insurers is unique in the insurance field.
So too is its manager, Aja James, who joined Berkshire in 1986. Overall, the insurance fleet operates with far more capital than is deployed by any of its competitors worldwide. That financial strength coupled with the huge flow of cash Berkshire annually receives from its non insurance businesses allows our insurance companies to safely follow an equity heavy investment strategy not feasible for the overwhelming majority of insurers.
Those competitors for both regulatory and credit rating reasons must focus on bonds. And bonds are not the place to be these days. Can you believe that the income recently available from a 10 year US treasury bond had fallen 94% from the 15.8 percent yield available in September of 1981. In certain large Morgan countries, such as Germany and Japan, investors earn a negative return on 1,000,000,000,000 of dollars of sovereign debt.
Fixed income investors worldwide whether pension funds, insurance companies, or retirees face a bleak future. Some insurers, as well as other bond investors may try to juice the pathetic returns now available by shifting interest rates. 3 decades ago, the once mighty savings and loan industry destroyed itself, partly by ignoring that Maxim. Berkshire now enjoys $138,000,000,000 of insurance float.
Funds that do not belong to us, but are nevertheless hours to deploy, whether in bonds, stocks, or cash equivalents such as US Treasury Beller, float has some similarities to bank deposits. Cash flows in and out daily to insurers with the total they hold changing very little. The massive sum held by Berkshire is likely to remain near its present level for many years, and on a cumulative basis have been costless to us. That happy result, of course, could change. But over time, I like our odds.
Our second and third most valuable assets, it's pretty much a toss-up at this point. Our Berkshire's 100% ownership of BNSF America's largest railroad measured by freight volume and our 5.4% ownership of Apple. And in the 4th spot, is our 91% ownership of Berkshire Hathaway Energy, BHE. What we have here is a very unusual utility business, whose annual earnings have grown from a $122,000,000 to 3,400,000,000 during our 21 years of ownership.
Last year, we demonstrated our enthusiasm for Berkshire's spread of properties by repurchasing the equivalent of 80,998 a shares. Spending $24,700,000,000 in the process. That action increased your ownership in all of Berkshire's businesses by 5.2%. Without requiring you to so much as touch your wallet.
Following criteria, Charlie and I have long recommended, we made those purchases because we believed they would both enhance the intrinsic value per share for continuing shareholders and would leave Berkshire with more than ample funds for any opportunities or problems it might encounter.
In no way do we think that Berkshire's shares should be repurchased at simply any price, I emphasize that point because American CEOs have an embarrassing record of devoting more company funds to repurchases when prices have risen than when they have tanked. Our approach is exactly the reverse. Berkshire's investment in Apple vividly illustrates the power of repurchases. We began buying Apple stock late in 2016, and by early 2018 owned slightly more than 1,000,000,000 Apple shares.
Saying that I'm referencing the investment held in Berkshire's general account, and I'm excluding a very small and separately managed hold of Apple shares that was subsequently sold. When we finished our purchases in mid 2018, Berkshire's general account owned 5.2 percent of Apple. Our cost for that stake was $36,000,000,000.
Since then, we've both enjoyed regular dividends averaging about $775,000,000 annually and have also in 2020 pocketed an additional $11,000,000,000 by selling a small portion of our position. Despite that sale, voila, Berkshire now owns 5.4 percent of Apple. That increase was costless to us, coming about because Apple has continuously repurchased their shares thereby substantially shrinking the number it now has outstanding.
But that's far from all of the good news because we also repurchased Berkshire shares during the two and a half years, you now indirectly own a full 10% more of Apple's assets and future earnings than you did in July 2018. This agreeable dynamic continues. Berkshire has repurchased more shares since year end and is likely to further reduce its share count in the future. Apple has publicly stated an intention to repurchase its shares as well.
As these reductions occur, Berkshire's shareholders will not only own a greater interest in our insurance group and in BNSF and BHE, but will also find their indirect ownership of Apple increasing as well. The math of repurchases grinds away slowly, but can be powerful over time. The process offers a simple way for investors to own an ever expanding portion And as a sultry may west assured us, too much of a good thing can be wonderful. A tale of two cities.
Success stories abound throughout America. Since our country's birth, individuals with an idea, ambition, and often just a pittance of capital have succeeded beyond their dreams by creating something new or by improving the customer's experience with something old. Charlie and I journeyed through the nation to join with many of these individuals or their families. On the West Coast, we began the routine in 1972 with our purchase of seize candy.
A full century ago, Mary C Pete out to deliver an age old product that she had reinvented with special recipes. Added to her business plan where quaint stores staffed by friendly salespeople Her first small Beller in Los Angeles eventually led to several 100 shops spread throughout the west. Today, Missus C's creations continued to the customers while providing lifelong employment for thousands of women and men. Berkshire's job is simply not to meddle with the company's success.
When a business manufactures and distributes a non essential consumer product, the customer is the boss. And after 100 years, the customer's message to Berkshire remains clear. Don't mess with my candy. Let's move across the continent to Washington, DC. In 1936, Leo Goodwin, along with his wife, Lillian, became convinced that auto insurance, a standardized product customarily purchased from agents could be sold directly at a much lower price.
Armed with a $100,000, the parent took on giant insurers possessing a thousand times or more their capital. Government employees insurance company later shortened to GEICO was on its way. By luck, I was exposed to the company's potential a full 70 years ago. It instantly became my first love of an investment sort. You know the rest of the story.
Berkshire eventually became the 100% owner of GEICO, Which at eighty four years of age is constantly fine tuning, but not changing the vision of Leo and Lillian. There has been, however, a change in the company's size. In 1937, its first full year of operation, GEICO did $238,288 of business. Last year, the figure was 35,000,000,000. Today, with much of finance, media, government, and tech located in coastal areas, It's easy to overlook the many miracles occurring in middle America.
Let's focus on 2 communities that provide sunny illustrations of the talent and ambition existing throughout our country. You won't be surprised that I begin with Omaha. In 1940, Jack ringwalt, a graduate of Omaha's central high school, the Alma mater as well of Charlie, my dad, my first wife, our 3 children and 2 grandchildren decided to start a property casualty insurance company funded by a 125 $1000 in capital. Jack's dream was preposterous.
Requiring his Pipsqueak operation, somewhat pompously christened as national indemnity to compete with giant insurers, all of which operated with abundant capital. Additionally, those competitors were solidly entrenched with nationwide networks of well funded and long established local agents. Under Jack's plan, National Indemnity, unlike GEICO, would itself use whatever agencies deem to accept it and consequently enjoy no cost advantage in its acquisition of business.
To overcome those formidable handicaps, national indemnity focused on odd Beller risk which were deemed unimportant by the big boys and, in probably, the strategy succeeded. Jack was honest, shrewd, likable, and a bit quirky. In particular, he disliked regulators. When he periodically became annoyed with their supervision, he would feel an urge to sell his company. Fortunately, I was nearby on one of those occasions.
Jack liked the idea of joining Berkshire, and we made a deal in 1967, taking all of 15 minutes to reach a handshake. I never asked for an audit. Today, National Indemnity is the only company in the world prepared to ensure certain giant risks. And, yes, it remains based in Omaha, a few miles from Berkshire's home office. Over the years, we've purchased 4 additional businesses from Omaha families, the best known among them being Nebraska Furniture Mart, NFM.
The company's founder, Rose Blumkin, Missus B, arrived in Seattle in 1915 as a Russian immigrant, unable to read or speak English. She settled in Omaha several years later, and by 1936, has saved $25100 with which to start a furniture store. Competitors and suppliers ignored her, and for a time, their judgment seemed Currier. World War 2 stalled her business. And at year end, 1946, the company's net worth had grown to only 72,264.
Cash, both in the till and on deposit, totaled $50, and no, I didn't misspeak. One invaluable asset, however, went unrecorded in the 1946 figures. Louis Blumkin, Mrs. B.'s only son had rejoined the store after 4 years in the US army. Louis fought at Normandy's Omaha Beach following the D Day invasion, earned a purple heart for injuries sustained in the battle of the bulge and finally sailed home in November of 1945. Once Missus B and her son were reunited, there was no stopping NFM.
Driven by their dream, mother and son worked days, nights, weekends. The result was a retailing miracle. By 1983, the pairing created a business worth $60,000,000. That year, on my birthday, Berkshire purchased 80% of NFM. Again without an audit. I counted on Missus B's family members to run the business. The 3rd and 4th generation do so today. Missus B, it should be noted, worked daily until she was a 103. A ridiculously premature retirement age is judged by Charlie and me.
NFM now owns the 3 largest home furnishing stores in the US. Each set a sales record in 2020 a Pete achieved despite the closing of NFM stores for more than 6 weeks because of COVID 19. When Missus B's large family gathered for holiday meals, She always asked that they sing a song before eating. Her selection never varied. Irving Berlin's god bless America. Let's move somewhat east to Knoxville, the 3rd largest city in Tennessee.
There, Berkshire has ownership in 2 remarkable companies, Clayton James, a 100% owned, and pilot travel centers, 38% owned now, but headed for 80% in 2023. Each company was started by a young man who had graduated from the University of Tennessee and stayed put in Knoxville. Neither had a meaningful amount of capital nor wealthy parents, But so what? Today, Clayton and pilot each have annual Pete tax earnings of more than $1,000,000,000. Together, they employ about 47,000 men and women.
Jim Clayton after several other business ventures founded Clayton James on a shoestring in 1956, and big Jim Haslam started what became pilot travel centers in 1958 by purchasing a service station for $6000. Each of the men later brought into the business a son with the same passion, values, and brains as his father. Sometimes there is a magic to genes.
Big James Haslam, now 90, has recently authored an inspirational book in which he relates how Jim Clayton's son, Kevin, encouraged the Haslams to sell a large portion of to Berkshire. Every retailer knows that satisfying customers are a store's best salespeople. That's true when businesses are changing hands as well.
When you next fly over Knoxville or Omaha, tip your hat to the Clayton's, Haslams, and Blumkins, as well as to the army of successful entrepreneurs who populate every part of our country. These builders needed America's framework for prosperity, a unique experiment when it was crafted in 17 89 to achieve their potential. In turn, America needed citizens like Jim C, Jim H, Mrs. B, and Louis to accomplish the miracles our founding fathers sought.
Today, many people forge similar miracles throughout the world, creating a spread of prosperity that benefits all of humanity. In its brief 2 132 years of existence, however, there has been no incubator for unleashing human potential like America. Pete some severe interruptions, our country's economic progress has been breathtaking. Beyond that, we retain our constitutional aspiration of becoming a more perfect union. Progress on that front has been slow, uneven, and often discouraging.
We have, however, moved forward and will continue to do so. Our unwavering conclusion never bet against America. The Berkshire Partnership. Berkshire is a Delaware corporation, and our directors must follow the state's laws. Among them is a requirement that board members must act in the best interest of the corporation and its stockholders. Our directors embrace that doctrine.
In addition, of course, Berkshire directors want the company to delight its customers, To develop and reward the talents of its 360,000 associates, to behave honorably with lenders, and to be regarded as a good citizen of the many cities and states in which we operate. We value these 4 important constituencies. None of these groups, however, have a vote in determining such matters as dividends strategic direction, CEO selection, or acquisitions, and divestitures.
Responsibilities like those fall solely on Berkshire's directors, who must faithfully represent the long term interest of the corporation and its owners. Beyond legal requirements, Charlie and I feel a special obligation to the many individual shareholders of Berkshire. A bit of personal history may help you to understand our unusual attachment and how it shapes our behavior. Before my Berkshire years, I managed money for many individuals through a series of partnerships.
The first three of those formed in 1956. As time passed, the use of multiple entities became unwieldy. And in 1962, we amalgamated 12 partnerships into a single unit. Buffett Partnership Limited, BPL. By that year, virtually all of my own money and that of my wife as well had become invested alongside the funds on my many limited partners. I received no salary or fees.
Instead, as the general partner, I was compensated by my limited partners only after they secured turns above an annual threshold of 6%. If returns failed to meet that level, the shortfall was to be carried forward against my share of future profits. Fortunately, that never happened. Partnership returns always exceeded the 6% bogey. As the years went by, a large part of the resources of my parents siblings, aunts, uncles, cousins, and in laws became invested in the partnership.
Charlie formed his partnership in 1962 and operated much as I did. Neither of us had any institutional investors, and very few of our partners were financially sophisticated. The people who joined our ventures simply trusted us to treat their money as we treated our own.
These individuals either intuitively or by relying on the advice of friends correctly concluded that Charlie and I had an extreme aversion to permanent loss of capital and that we would not have accepted their money unless we expected to do reasonably well with it. I stumbled into business management after BPL acquired control of Berkshire in 1965. Later still, in 1969, we decided to dissolve BPL.
After year end, the partnership distributed pro rata all of its cash along with 3 stocks the largest by value being BPL's 70.5 percent interest in Berkshire. Charlie, meanwhile, wound up his operation in 1977. Among the assets he distributed to partners was a major interest in blue chip stamps, accompany his partnership, Berkshire, and I jointly controlled. Blue Chip was also among the 3 stocks my Partnership had distributed upon its dissolution.
In 1983, Berkshire and Blue Chip merged, thereby expanding Berkshire's base of registered shareholders from 1900 to 29100. Charlie and I wanted everyone, old, new, and prospective shareholders to be on the same page. Therefore, the 1983 annual report Flint laid out Berkshire's major business principles. The first principle being, although our form is corporate, our attitude is partnership. That defined our relationship in 1983. It defines it today.
Charlie and I and our directors as well believe this dictum will serve Berkshire well for many decades to come. Ownership now resides in 5 large buckets. 1 occupied by me as a founder of sorts, That bucket is certain to empty as the shares I own are annually distributed to various philanthropies. 2 of the remaining 4 buckets are filled by institutional investors each handling other people's money. That, however, is where the similarity between those buckets ends.
Their investing procedures could not be more different. In one institutional bucket are index funds, a large and mushrooming segment of the investment world. These funds simply mimic the index that they track. The favorite of index investors is the S and P 500, of which Berkshire is a component. Index funds, it should be emphasized Own Berkshire shares simply because they're required to do so. They are on autopilot, buying and selling only for waiting purposes.
In the other institutional bucket are professionals who manage their clients' money, whether those funds belong to wealthy individuals, universities, pensioners, or whomever. These professional managers have a mandate to move funds from one investment to another based on their judgment as to valuation and prospects. That is an honorable, though difficult occupation. We are happy to work for this active group, while they meanwhile search for a better place to deploy the funds of their clientele.
Some managers, to be sure, have a long term focus and trade very infrequently. Others use computers, employing algorithms that may direct the purchase or sale of shares in a nanosecond. Some professional investors will come and go based on their macroeconomic judgments. Our 4th bucket consists of individual shareholders, who operate in a manner similar to the active institutional managers I just described.
These owners understandably think of their Berkshire shares as a possible source of funds when they see another investment that excites them. We have no quarrel with that attitude, which is similar to the way we look at some of the equities we own at Berkshire. All of that said, Charlie and I would be less than human if we did not feel a special kinship with our 5th bucket. The million plus individual investors who simply trust us to represent their interests, whatever the future may bring.
They have joined us with no intent to leave. Adopting a mindset similar to that held by our original partners. Indeed, many investors from our partnership years and or their descendants remains substantial owners of Berkshire. A prototype of those veterans is Stan Trollson, a cheerful and generous Omaha of thalmologist, as well as a personal friend who turned 100 on November 13 2020. In 1959, Stan, along with 10 other young Omaha doctors, formed a partnership with me.
The docs creatively labeled their venture, MD Limited. Annually, they joined my wife and me for a celebratory dinner at our home. When our partnership distributed its Berkshire shares in 1969, all of the doctors kept the stock they received. They may not have known the ins and outs of investing or accounting but they did know that at Berkshire, they would be treated as partners. 2 of Stan's comrades from MD are now in their high nineties and continue to hold Berkshire's shares.
This group's startling durability, along with the fact that Charlie and I are 97 and 90 respectfully, serves up an interesting question Could it be that Berkshire ownership fosters longevity? Berkshire's unusual and valued family of individual shareholders may add to your understanding of our reluctance Court Wall Street analysts and institutional investors. We already have the investors we want and don't think that they on balance would be upgraded by replacements.
There are only so many seats that is shares outstanding available for Berkshire ownership, and we very much like the people already occupying them. Of course, some turnover in partners will occur. Charlie and I hope, however, that it will be minimal. Who, after all, sinks rapid turnover in friends, neighbors, or marriage. In 1958, Phil Fisher wrote a superb book on investing. In it, he analogized running a public company to managing a restaurant.
If you were seeking diners, he said, you can attract a clientele and prosper featuring either hamburgers served with a coke or a French cuisine accompanied by exotic wines. But Fisher warned that you must not copriciously switch from one to the other. Your message to potential customers must be consistent with what they will find upon entering your premises. At Berkshire, we have been serving hamburgers in coke for 56 years. We cherish the clientele this fair has attracted.
The tens of millions of other investors and speculators in the United States and elsewhere have a wide variety of equity choices to fit their tastes. They will find CEOs and market gurus with enticing ideas. If they want price targets, managed earnings, and stories, they will not lack suitors. Technicians will confidently instruct them as to what some wiggles on a chart port 10 for a stock's next move. The calls for action will never stop. Many of those investors I should add will do quite well.
After all, ownership of stocks is very much a positive sum James. Indeed, a patient and level headed monkey who constructs a portfolio by throwing 50 darts at a board listing all of the S and P 500 will Over time, enjoy dividends and capital James, just as long as it never gets tempted to make changes in its original selections. Productive assets such as farms, real estate, and, yes, business ownership produce wealth. Lots of it. Most owners of such properties will be rewarded.
All that's required is the passage of time. An intercom, ample diversification, and aminimization of transactions and fees. Still, investors must never forget that their expenses are Wall Street's income. And unlike my monkey, Wall Streeters do not work for Peanuts. When seats open up at Berkshire and we hope they're few, We want them to be occupied by newcomers who understand and desire what we offer. After decades of management, Charlie and I remain unable to promise results.
We can and do, however, pledge to treat you as partners. And so too will our successors. Morgan E Buffet, chairman of the board. For more audio essays from the who've built companies like Instacart, Facebook, Trello, HubSpot, and Dropbox, visit the founder list at nfx.com, or subscribe to the n f x podcast at podcast dotnfx.com Omri wherever you get your podcasts. I'm Kristin O'Brien, and this is the founder list.