2006: How would Buffett read Berkshire's annual report?

AUDIENCE MEMBER: Hello. I’m Randall Bellows from Maryland. I would like to know how you would look at the Berkshire annual report.

What numbers in the balance sheet or the cash flows would tell you that Berkshire is underpriced? And what numbers would you look at to determine if Berkshire is overpriced? Thank you.

WARREN BUFFETT: We try to — and we take it very seriously — we try to put everything in that report that we would want to know if the positions were reversed.

If I were sitting with all of my net worth in Berkshire and had been on a desert island for a year and I — and the manager was reporting to me about the business, we’d try to have that same information that I would want from him. And we would try to present it to you in a way that’s understandable.

And we don’t leave out things that we think are important. We try not to put — I mean, there’s — it runs about 76, I think, or maybe even 80 pages this year. I mean, there’s — you can drown people in information that really doesn’t make much difference.

But we’ve tried to organize it in a way by talking about these different groups of businesses. We try to explain how we think about it, in terms of things like the amount of operating earnings we’ve generated and the investments we have.

It’s really as if it’s a report that I was making to Charlie or Charlie would be making to me if one of us were inactive in the business and the other was running it.

And so I think — I mean, it may take a few hours to do it, but I think if you regard yourself as a serious owner of Berkshire, it’s really worth reading the whole report.

Thinking about: what is there? What are these guys going to do with it? What are they trying to attempt? What are the odds they’re going to be successful in that attempt? What are they —?

You know, what is it worth if they don’t succeed very well in deploying additional capital? What might be the case if they were successful in deploying excess capital and incremental capital?

But I can tell you that, obviously, we think it’s very important.

What counts is the kind of businesses we have, the kind of managers we have running those businesses, what those businesses are likely to earn over time — and we’ve expressed ourselves a little on that —

And then what are the resources that are available to keep adding to that collection of businesses? What are the kind of businesses we are looking to add?

And I think — you know, I think you’ll find the information that you need to evaluate Berkshire, and it’s not a — you know, you don’t carry it out to four decimal places.

Charlie and I, if we had to stick a number down on a piece of paper right now as to some pinpoint number — we wouldn’t do it because we know that’s impossible. But if we had to stick a number down, it would be a different number between the two of us.

It would be a different number if I did it today from tomorrow, probably. But we’d be in the same ballpark, and we’d be looking at the same things. And the things we would be looking at we report to you in that report.

I would focus — you know, the real question of what Berkshire is going to be worth 10 years from now will depend on the — earnings that we have developed — annual earnings that we’ve developed by that time, the quality of those earnings, the possibilities going forward from that point of those businesses, and the liquid assets we have.

And we’ve worked on increasing both of those elements over the years, and we’ll keep working on it. And it’s a lot tougher, in terms of percentage gains, from this point forward than it was in the past.

There’s no way in the world that we can replicate what’s happened in the past. It just won’t happen. The question is whether we can do a reasonable job or not.

Charlie?

CHARLIE MUNGER: Yeah. I generally try and approach a complex task, like the one you presented, by quickly disposing of what I call the no-brainer decisions and — meaning the easy ones.

I think, if you go through all the operating insurance that don’t involve surplus cash, and the insurance operations, that that’s the easiest valuation process in Berkshire.

And the insurance operation is very interesting, and so is the process by which the huge amounts of excess cash are continually redeployed. But I would go at it in that sequence: taking the no-brainers first.