How to Build Your Own BRK: Some

Lessons from Warren Buffett and

Charlie Munger

Rules
▪ Underspend your income, do not go into debt, do not buy a home with borrowed
money until you have financial freedom. Then buy it cash down or buy it with most
of it cash down and some of it with debt which you will pay off very quickly. Learn
to appreciate the benefits of a debt-free life.

▪ Default place to park your income is very high quality fixed income investments
which can be converted into cash in a very short time

▪ Do not chase yields in fixed income (unless you are buying distressed debt which is a
separate skill) with money which is kept aside to buy equities when they are really
cheap or to buy into a specific business which is really cheap even if the market is
not.

▪ “Temporary” in temporary parking place could last as much as 5 years. Do no fret

over poor nominal returns you get from fixed income investments and negative real
returns after counting inflation during those long years. The purpose of this money is
not to make money. The purpose of this money is to be available when a fantastic
opportunity arises.

▪ Fantastic opportunities will arise and when they do, act. The role of money parked in
fixed income investments is now over. Withdraw it and invest it in the compelling
opportunities you find. When they become too expensive, sell them and the money
goes back into fixed income investments.

▪ Over time, build a portfolio of wonderful businesses with diverse, high-quality

earning streams which either pay out large dividends or re-invest the earnings to
create even more earnings in a manner that ensures high incremental return on
incremental capital. The following advice from Buffett applies here:

⁃ Investors can benefit by focusing on their own look-through earnings. To

calculate these, they should determine the underlying earnings attributable to
the shares they hold in their portfolio and total these. The goal of each
investor should be to create a portfolio (in effect, a "company") that will
deliver him or her the highest possible look-through earnings a decade or so

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 from now.

⁃ An approach of this kind will force the investor to think about long-term
business prospects rather than short-term stock market prospects, a
perspective likely to improve results. It's true, of course, that, in the long run,
the scoreboard for investment decisions is market price. But prices will be
determined by future earnings. In investing, just as in baseball, to put runs on
the scoreboard one must watch the playing field, not the scoreboard.

▪ As the portfolio grows, your ability to take smart, calculated bets will also increase.
This will allow your portfolio to rise rapidly. Remember, money begets money.

▪ Continue to underspend your income. Once you have financial freedom, you are
entitled to indulge a bit, but never forget the importance of growing your nest-egg.

▪ Enjoy your financial freedom.

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“It is not given to human beings to have such talent that they can just know everything
about everything all the time. But it is given to human beings who work hard at it – who
look and sift the world for a mis-priced bet – that they can occasionally find one. And the
wise ones bet heavily when the world offers them that opportunity. They bet big when they
have odds. And the rest of the time, they don't. It's just that simple.” — Charlie Munger

How Charlie Munger Bets

https://youtu.be/UbpARgj6xk0

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1987 Annual Report

Shortly after yearend, Berkshire sold two issues of debentures, totaling $250 million. Both
issues mature in 2018 and will be retired at an even pace through sinking fund operations
that begin in 1999. Our overall interest cost, after allowing for expenses of issuance, is
slightly over 10%. Salomon was our investment banker, and its service was excellent.

Despite our pessimistic views about inflation, our taste for debt is quite limited. To be sure, it
is likely that Berkshire could improve its return on equity by moving to a much higher,
though still conventional, debt-to-business-value ratio. It's even more likely that we could
handle such a ratio, without problems, under economic conditions far worse than any that
have prevailed since the early 1930s.

But we do not wish it to be only likely that we can meet our obligations; we wish that to be
certain. Thus we adhere to policies - both in regard to debt and all other matters - that will
allow us to achieve acceptable long-term results under extraordinarily adverse conditions,
rather than optimal results under a normal range of conditions.

Good business or investment decisions will eventually produce quite satisfactory economic
results, with no aid from leverage. Therefore, it seems to us to be both foolish and improper
to risk what is important (including, necessarily, the welfare of innocent bystanders such as
policyholders and employees) for some extra returns that are relatively unimportant. This
view is not the product of either our advancing age or prosperity: Our opinions about debt
have remained constant.

However, we are not phobic about borrowing. (We're far from believing that there is no fate
worse than debt.) We are willing to borrow an amount that we believe - on a worst-case
basis - will pose no threat to Berkshire's well-being. Analyzing what that amount might be,
we can look to some important strengths that would serve us well if major problems should
engulf our economy: Berkshire's earnings come from many diverse and well- entrenched
businesses; these businesses seldom require much capital investment; what debt we have is
structured well; and we maintain major holdings of liquid assets. Clearly, we could be
comfortable with a higher debt-to-business-value ratio than we now have.

One further aspect of our debt policy deserves comment: Unlike many in the business
world, we prefer to finance in anticipation of need rather than in reaction to it. A business
obtains the best financial results possible by managing both sides of its balance sheet well.
This means obtaining the highest-possible return on assets and the lowest-possible cost on
liabilities. It would be convenient if opportunities for intelligent action on both fronts
coincided. However, reason tells us that just the opposite is likely to be the case: Tight
money conditions, which translate into high costs for liabilities, will create the best

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opportunities for acquisitions, and cheap money will cause assets to be bid to the sky. Our
conclusion: Action on the liability side should sometimes be taken independent of any
action on the asset side.

Alas, what is "tight" and "cheap" money is far from clear at any particular time. We have no
ability to forecast interest rates and - maintaining our usual open-minded spirit - believe that
no one else can. Therefore, we simply borrow when conditions seem non-oppressive and
hope that we will later find intelligent expansion or acquisition opportunities, which - as we
have said - are most likely to pop up when conditions in the debt market are clearly
oppressive.

Our basic principle is that if you want to shoot rare, fast-moving elephants, you should
always carry a loaded gun.

Our fund-first, buy-or-expand-later policy almost always penalizes near-term earnings. For
example, we are now earning about 6 1/2% on the $250 million we recently raised at 10%, a
disparity that is currently costing us about $160,000 per week. This negative spread is
unimportant to us and will not cause us to stretch for either acquisitions or higher-yielding
short-term instruments. If we find the right sort of business elephant within the next five
years or so, the wait will have been worthwhile.

2018 Annual Report

In our fourth grove, Berkshire held $112 billion at yearend in U.S. Treasury bills and other
cash equivalents, and another $20 billion in miscellaneous fixed-income instruments. We
consider a portion of that stash to be untouchable, having pledged to always hold at least
$20 billion in cash equivalents to guard against external calamities. We have also promised
to avoid any activities that could threaten our maintaining that buffer.

Berkshire will forever remain a financial fortress. In managing, I will make expensive
mistakes of commission and will also miss many opportunities, some of which should have
been obvious to me. At times, our stock will tumble as investors flee from equities. But I will
never risk getting caught short of cash.

In the years ahead, we hope to move much of our excess liquidity into businesses that
Berkshire will permanently own. The immediate prospects for that, however, are not good:
Prices are sky-high for businesses possessing decent long-term prospects.

That disappointing reality means that 2019 will likely see us again expanding our holdings
of marketable equities. We continue, nevertheless, to hope for an elephant-sized acquisition.
Even at our ages of 88 and 95 – I’m the young one – that prospect is what causes my heart

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and Charlie’s to beat faster. (Just writing about the possibility of a huge purchase has caused
my pulse rate to soar.)

2017 Annual Report

Charlie and I never will operate Berkshire in a manner that depends on the kindness of
strangers – or even that of friends who may be facing liquidity problems of their own.
During the 2008-2009 crisis, we liked having Treasury Bills – loads of Treasury Bills – that
protected us from having to rely on funding sources such as bank lines or commercial paper.
We have intentionally constructed Berkshire in a manner that will allow it to comfortably
withstand economic discontinuities, including such extremes as extended market closures.

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Berkshire’s goal is to substantially increase the earnings of its non-insurance group. For that
to happen, we will need to make one or more huge acquisitions. We certainly have the
resources to do so. At yearend Berkshire held $116.0 billion in cash and U.S. Treasury Bills
(whose average maturity was 88 days), up from $86.4 billion at yearend 2016. This
extraordinary liquidity earns only a pittance and is far beyond the level Charlie and I wish
Berkshire to have. Our smiles will broaden when we have redeployed Berkshire’s excess
funds into more productive assets.

2014 Annual Report

Today Berkshire possesses (1) an unmatched collection of businesses, most of them now
enjoying favorable economic prospects; (2) a cadre of outstanding managers who, with few
exceptions, are unusually devoted to both the subsidiary they operate and to Berkshire; (3)
an extraordinary diversity of earnings, premier financial strength and oceans of liquidity
that we will maintain under all circumstances; (4) a first-choice ranking among many
owners and managers who are contemplating sale of their businesses and (5) in a point
related to the preceding item, a culture, distinctive in many ways from that of most large
companies, that we have worked 50 years to develop and that is now rock-solid.

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I believe the chance of any event causing Berkshire to experience financial problems is
essentially zero. We will always be prepared for the thousand-year flood; in fact, if it occurs
we will be selling life jackets to the unprepared. Berkshire played an important role as a
“first responder” during the 2008-2009 meltdown, and we have since more than doubled the

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strength of our balance sheet and our earnings potential. Your company is the Gibraltar of
American business and will remain so.

Financial staying power requires a company to maintain three strengths under all
circumstances: (1) a large and reliable stream of earnings; (2) massive liquid assets and (3) no
significant near-term cash requirements. Ignoring that last necessity is what usually leads
companies to experience unexpected problems: Too often, CEOs of profitable companies feel
they will always be able to refund maturing obligations, however large these are. In
2008-2009, many managements learned how perilous that mindset can be.

Here’s how we will always stand on the three essentials. First, our earnings stream is huge
and comes from a vast array of businesses. Our shareholders now own many large
companies that have durable competitive advantages, and we will acquire more of those in
the future. Our diversification assures Berkshire’s continued profitability, even if a
catastrophe causes insurance losses that far exceed any previously experienced.

Next up is cash. At a healthy business, cash is sometimes thought of as something to be

minimized – as an unproductive asset that acts as a drag on such markers as return on
equity. Cash, though, is to a business as oxygen is to an individual: never thought about
when it is present, the only thing in mind when it is absent.

American business provided a case study of that in 2008. In September of that year, many
long-prosperous companies suddenly wondered whether their checks would bounce in the
days ahead. Overnight, their financial oxygen disappeared.

At Berkshire, our “breathing” went uninterrupted. Indeed, in a three-week period spanning

late September and early October, we supplied $15.6 billion of fresh money to American
businesses.
We could do that because we always maintain at least $20 billion – and usually far more – in
cash equivalents. And by that we mean U.S. Treasury bills, not other substitutes for cash that
are claimed to deliver liquidity and actually do so, except when it is truly needed. When
bills come due, only cash is legal tender. Don’t leave home without it.

Finally – getting to our third point – we will never engage in operating or investment
practices that can result in sudden demands for large sums. That means we will not expose
Berkshire to short-term debt maturities of size nor enter into derivative contracts or other
business arrangements that could require large collateral calls.

2012 Letter
Charlie and I believe in operating with many redundant layers of liquidity, and we avoid

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any sort of obligation that could drain our cash in a material way. That reduces our returns
in 99 years out of 100. But we will survive in the 100th while many others fail. And we will
sleep well in all 100.

2011 Letter
There is little new to report on our derivatives positions, which we have described in detail
in past reports. (Annual reports since 1977 are available at www.berkshirehathaway.com.)
One important industry change, however, must be noted: Though our existing contracts
have very minor collateral requirements, the rules have changed for new positions.
Consequently, we will not be initiating any major derivatives positions. We shun contracts of
any type that could require the instant posting of collateral. The possibility of some sudden
and huge posting requirement – arising from an out-of-the-blue event such as a worldwide
financial panic or massive terrorist attack – is inconsistent with our primary objectives of
redundant liquidity and unquestioned financial strength.

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Investment possibilities are both many and varied. There are three major categories,
however, and it’s important to understand the characteristics of each. So let’s survey the
field.

• Investments that are denominated in a given currency include money-market funds,

bonds, mortgages, bank deposits, and other instruments. Most of these currency-based
investments are thought of as “safe.” In truth they are among the most dangerous of assets.
Their beta may be zero, but their risk is huge.

Over the past century these instruments have destroyed the purchasing power of investors
in many countries, even as the holders continued to receive timely payments of interest and
principal. This ugly result, moreover, will forever recur. Governments determine the
ultimate value of money, and systemic forces will sometimes cause them to gravitate to
policies that produce inflation. From time to time such policies spin out of control.

Even in the U.S., where the wish for a stable currency is strong, the dollar has fallen a
staggering 86% in value since 1965, when I took over management of Berkshire. It takes no
less than $7 today to buy what $1 did at that time. Consequently, a tax-free institution would
have needed 4.3% interest annually from bond investments over that period to simply
maintain its purchasing power. Its managers would have been kidding themselves if they
thought of any portion of that interest as “income.”

For tax-paying investors like you and me, the picture has been far worse. During the same

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47-year period, continuous rolling of U.S. Treasury bills produced 5.7% annually. That
sounds satisfactory. But if an individual investor paid personal income taxes at a rate
averaging 25%, this 5.7% return would have yielded nothing in the way of real income. This
investor’s visible income tax would have stripped him of 1.4 points of the stated yield, and
the invisible inflation tax would have devoured the remaining 4.3 points. It’s noteworthy
that the implicit inflation “tax” was more than triple the explicit income tax that our investor
probably thought of as his main burden. “In God We Trust” may be imprinted on our
currency, but the hand that activates our government’s printing press has been all too
human.

High interest rates, of course, can compensate purchasers for the inflation risk they face with
currency-based investments – and indeed, rates in the early 1980s did that job nicely. Current
rates, however, do not come close to offsetting the purchasing-power risk that investors
assume. Right now bonds should come with a warning label.

Under today’s conditions, therefore, I do not like currency-based investments. Even so,
Berkshire holds significant amounts of them, primarily of the short-term variety. At
Berkshire the need for ample liquidity occupies center stage and will never be slighted,
however inadequate rates may be. Accommodating this need, we primarily hold U.S.
Treasury bills, the only investment that can be counted on for liquidity under the most
chaotic of economic conditions. Our working level for liquidity is $20 billion; $10 billion is
our absolute minimum.

Beyond the requirements that liquidity and regulators impose on us, we will purchase
currency-related securities only if they offer the possibility of unusual gain – either because a
particular credit is mispriced, as can occur in periodic junk-bond debacles, or because rates
rise to a level that offers the possibility of realizing substantial capital gains on high-grade
bonds when rates fall. Though we’ve exploited both opportunities in the past – and may do
so again – we are now 180 degrees removed from such prospects. Today, a wry comment
that Wall Streeter Shelby Cullom Davis made long ago seems apt: “Bonds promoted as
offering risk-free returns are now priced to deliver return-free risk.”

2010 Annual Report

Life and Debt

The fundamental principle of auto racing is that to finish first, you must first finish. That
dictum is equally applicable to business and guides our every action at Berkshire.

Unquestionably, some people have become very rich through the use of borrowed money.

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However, that’s also been a way to get very poor. When leverage works, it magnifies your
gains. Your spouse thinks you’re clever, and your neighbors get envious. But leverage is
addictive. Once having profited from its wonders, very few people retreat to more
conservative practices. And as we all learned in third grade – and some relearned in 2008 –
any series of positive numbers, however impressive the numbers may be, evaporates when
multiplied by a single zero. History tells us that leverage all too often produces zeroes, even
when it is employed by very smart people.

Leverage, of course, can be lethal to businesses as well. Companies with large debts often
assume that these obligations can be refinanced as they mature. That assumption is usually
valid. Occasionally, though, either because of company-specific problems or a worldwide
shortage of credit, maturities must actually be met by payment. For that, only cash will do
the job.

Borrowers then learn that credit is like oxygen. When either is abundant, its presence goes
unnoticed. When either is missing, that’s all that is noticed. Even a short absence of credit
can bring a company to its knees. In September 2008, in fact, its overnight disappearance in
many sectors of the economy came dangerously close to bringing our entire country to its
knees.

Charlie and I have no interest in any activity that could pose the slightest threat to
Berkshire’s well- being. (With our having a combined age of 167, starting over is not on our
bucket list.) We are forever conscious of the fact that you, our partners, have entrusted us
with what in many cases is a major portion of your savings. In addition, important
philanthropy is dependent on our prudence. Finally, many disabled victims of accidents
caused by our insureds are counting on us to deliver sums payable decades from now. It
would be irresponsible for us to risk what all these constituencies need just to pursue a few
points of extra return.

A little personal history may partially explain our extreme aversion to financial
adventurism. I didn’t meet Charlie until he was 35, though he grew up within 100 yards of
where I have lived for 52 years and also attended the same inner-city public high school in
Omaha from which my father, wife, children and two grandchildren graduated. Charlie and
I did, however, both work as young boys at my grandfather’s grocery store, though our
periods of employment were separated by about five years. My grandfather’s name was
Ernest, and perhaps no man was more aptly named. No one worked for Ernest, even as a
stock boy, without being shaped by the experience.

On the facing page you can read a letter sent in 1939 by Ernest to his youngest son, my
Uncle Fred. Similar letters went to his other four children. I still have the letter sent to my
Aunt Alice, which I found – along with $1,000 of cash – when, as executor of her estate, I
opened her safe deposit box in 1970.

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Ernest never went to business school – he never in fact finished high school – but he
understood the importance of liquidity as a condition for assured survival. At Berkshire, we
have taken his $1,000 solution a bit further and have pledged that we will hold at least $10
billion of cash, excluding that held at our regulated utility and railroad businesses. Because
of that commitment, we customarily keep at least $20 billion on hand so that we can both
withstand unprecedented insurance losses (our largest to date having been about $3 billion
from Katrina, the insurance industry’s most expensive catastrophe) and quickly seize
acquisition or investment opportunities, even during times of financial turmoil.

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We keep our cash largely in U.S. Treasury bills and avoid other short-term securities yielding
a few more basis points, a policy we adhered to long before the frailties of commercial paper
and money market funds became apparent in September 2008. We agree with investment

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writer Ray DeVoe’s observation, “More money has been lost reaching for yield than at the
point of a gun.” At Berkshire, we don’t rely on bank lines, and we don’t enter into contracts
that could require postings of collateral except for amounts that are tiny in relation to our
liquid assets.

Furthermore, not a dime of cash has left Berkshire for dividends or share repurchases during
the past 40 years. Instead, we have retained all of our earnings to strengthen our business, a
reinforcement now running about $1 billion per month. Our net worth has thus increased
from $48 million to $157 billion during those four decades and our intrinsic value has grown
far more. No other American corporation has come close to building up its financial strength
in this unrelenting way.

By being so cautious in respect to leverage, we penalize our returns by a minor amount.

Having loads of liquidity, though, lets us sleep well. Moreover, during the episodes of
financial chaos that occasionally erupt in our economy, we will be equipped both financially
and emotionally to play offense while others scramble for survival. That’s what allowed us
to invest $15.6 billion in 25 days of panic following the Lehman bankruptcy in 2008.

2009 Annual Report

We will never become dependent on the kindness of strangers. Too-big-to-fail is not a
fallback position at Berkshire. Instead, we will always arrange our affairs so that any
requirements for cash we may conceivably have will be dwarfed by our own liquidity.
Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many
and diverse businesses.

When the financial system went into cardiac arrest in September 2008, Berkshire was a
supplier of liquidity and capital to the system, not a supplicant. At the very peak of the
crisis, we poured $15.5 billion into a business world that could otherwise look only to the
federal government for help. Of that, $9 billion went to bolster capital at three highly-
regarded and previously-secure American businesses that needed – without delay – our
tangible vote of confidence. The remaining $6.5 billion satisfied our commitment to help
fund the purchase of Wrigley, a deal that was completed without pause while, elsewhere,
panic reigned.

We pay a steep price to maintain our premier financial strength. The $20 billion-plus of cash-
equivalent assets that we customarily hold is earning a pittance at present. But we sleep
well.

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2008 Annual Report
In good years and bad, Charlie and I simply focus on four goals:

1) maintaining Berkshire’s Gibraltar-like financial position, which features huge

amounts of excess liquidity, near-term obligations that are modest, and dozens of
sources of earnings and cash;
2) widening the “moats” around our operating businesses that give them durable
competitive advantages;
3) acquiring and developing new and varied streams of earnings;
4) expanding and nurturing the cadre of outstanding operating managers who, over the
years, have delivered Berkshire exceptional results.

1980 Annual Report

Under all circumstances we plan to operate with plenty of liquidity, with debt that is
moderate in size and properly structured, and with an abundance of capital strength. Our
return on equity is penalized somewhat by this conservative approach, but it is the only one
with which we feel comfortable.

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