Berkshire Hathaway 1999 Annual Meeting Audience Question # 62

Warren and Charlie tend to think of the market value as being the representative of intrinsic value “under most circumstances”

Warren Buffett:

OK. Zone 3.

Audience Member:

Gentlemen, hi, I’m David Butler from here in Omaha. A comment and then two quick questions. Comment is regarding the annual reports.

I read a lot of annual reports for a living, and I sort of start off with the assumption that I’m going to have to spend 20 to 30 hours looking at 5 years of 10-Ks and 5 years of annuals, probably some 10-Qs and going through a lot of numbers to have any kind of idea how the company really is working.

And comparing that to Berkshire, which has basically crystal-clear clarity, it’s quite refreshing to read honesty, and it’s quite refreshing to see accounting that’s actually presented in a clear fashion and that doesn’t try to hide facts.

So as a shareholder and as an investor, I’m very grateful for the effort and for the high quality of your annual report. And I think we ought to give Mr. Buffett and Mr. Munger a hand… for that.

OK, now that I’ve brown-nosed a little bit.

Warren Buffett:

Here comes the zinger, huh?

Audience Member:

Yeah. I’m nervous about the derivative operations that General Re has. Now, right now the balance sheet figure says that there’s a $400 million net asset position, but there are also some really hairy derivatives, the swaps and the floors and caps.

And knowing that, in the past, you haven’t used those types of leveraged derivatives, I’m wondering if that’s going to change now.

And then secondly, in terms of going through an intrinsic value calculation, when you and Mr. Munger think about intrinsic value, obviously, a big part of that is the marketable securities portfolio.

Do you think of intrinsic value, in terms of the marketable securities, as what their market value is, in terms of their look-through earnings, or is there a separate intrinsic value calculation that you sort of roll into the overall Berkshire intrinsic calculation?

Warren Buffett:

Yeah. I’ll answer the second part first. On the intrinsic value, we tend to use the market prices in the way we think about things, although there are times when we feel that we own securities that are worth far more than they’re carried for.

And we’ve mentioned that once or twice. There was a time in the mid-1970s, if you’d look back at our 1975 annual report… I may be off by a year, one direction or other… probably 1974, because I… we valued the securities at market.

But I… in the body of the report, I said we really think these things are going to worth… be worth a hell of a lot more than they’re selling for currently. That was an unusual remark for somebody, if you knew me, that would be an unusual remark for me.

And at that time, I would have said that, in looking at the intrinsic value of Berkshire, I would have said that I was quite comfortable marking these things up in my mind. I wouldn’t have done it with the public, but I would have done it in my mind.

But under most circumstances, we tend to think of the market value as being representative of it, that that is the price at which we could buy or sell that day.

And if we thought they were ridiculously high in relation to intrinsic value, we’d probably do something about it. And they certainly haven’t been so low that we’ve ever felt like marking them up in recent… in our own minds… in recent years.

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