To the Shareholders of Berkshire Hathaway

# 2012 Letter to Shareholders ## To the Shareholders of Berkshire Hathaway Inc. In 2012, our net worth increased by $28.8 billion. Per share, this was a gain of $17,211, or 14.4%. Over the past 48 years (since present management took over), per-share book value has grown from $19.46 to $114,214, a compound annual gain of 19.7%. ## Book Value vs. Intrinsic Value: What Really Matters I have long used book value as a proxy for intrinsic value, because it was a useful and conservative measure. But I must tell you an important truth: **book value is now a significantly understating figure for Berkshire's intrinsic value.** This understating has grown over time. Berkshire has built enormous intangible value—brand equity, customer relationships, the Berkshire culture—that does not appear on our balance sheet. The companies we own are worth far more than their reported book values. > "Our goal should be to increase Berkshire's intrinsic value at an attractive rate. Book value is merely a convenient, though imperfect, accounting measure of that value." The gap between intrinsic value and book value has widened because we have become disproportionately concentrated in businesses where the most valuable assets—reputational goodwill, customer loyalty, network effects—are not reflected in accounting. ## The Share Repurchase Case In September 2012, our board authorized Berkshire to repurchase shares at prices up to 1.2x book value. I want to explain why I believe this was a sound decision. When Berkshire's shares trade below intrinsic value, repurchasing them creates value for remaining shareholders. Each share repurchased increases the intrinsic value per share of all remaining shares. This is mathematically equivalent to buying a dollar of intrinsic value for less than a dollar. > "If you are going to be a net buyer of stocks, you are better off when prices decline. Lower prices benefit the long-term investor." We will repurchase shares when two conditions are met: (1) we have sufficient cash beyond what we need for operations and contingencies, and (2) we believe the shares are trading significantly below intrinsic value. ## Why No Dividend Some shareholders have asked why Berkshire does not pay a dividend. My answer is that dividends make sense only when they are paid from cash that cannot be more effectively reinvested in the business or used to acquire other businesses at attractive prices. If Berkshire paid a dividend today, each dollar distributed would be a dollar that could not compound at the rates we expect to achieve over the next decade. Our shareholders are better served by allowing us to reinvest their capital. ## The Power of Compounding At 19.7% annual compounding, our book value has doubled approximately every 3.8 years since 1965. This means that $10,000 invested in Berkshire in 1965 would have grown to approximately $59 million by 2012. The power of compounding is the most important force in investing. And the enemy of compounding is taxes and transaction costs, which is why we recommend that investors minimize portfolio turnover and hold for the long term. ## Looking Ahead [[Charlie Munger]] and I are confident that Berkshire's intrinsic value will continue to grow at an above-average rate. We have outstanding businesses, outstanding managers, and a strong balance sheet. The opportunities available to us at Berkshire's current size are different from those available when we were small—but we will continue to find ways to create value. We remain focused on the long term. In any given year, our performance will sometimes disappoint. But over periods of decades, we expect to continue compounding shareholder value at superior rates. Warren E. Buffett February 2013