2010: Why aren't look-through earning in Berkshire's annual report?

BECKY QUICK: This question comes from a shareholder in Aiken, South Carolina who asks not to be identified, but he asks that Mr. Buffett or Mr. Munger discuss changes that have been made in the Berkshire annual report in the last several years, and the reasons for making some of these changes.

Two of the changes that he’s noticed are, number one , look-through earnings no longer seem to be discussed, and number two, the unaudited combined financial statements of the business groups no longer seem to be included, although at least some of the business groups material seem to be covered in other places in the report.

WARREN BUFFETT: Yeah, the second point I’m confused about, because we have broken them down into four groups and tried to give the relevant financial information for what we thought was a logical grouping, and will continue to do that. So I’m not sure I totally get that.

We really do have four fairly logical breakdowns. Now, you can break it down 70 ways and all that, but there’s a point at which adding 100 pages to an annual report obfuscates information rather than illuminates.

And that’s what — we’re trying to, in a reasonable number of words — Carol might say too many — but in a reasonable number of words, convey as much as we can about the information we’d want to have if we were in your place and you were writing to us.

And we think these four classifications — regulated industry is terribly capital intensive. You know, insurance: capital, really not a factor, but the amount of capital it gives us being a factor, and so on.

And so I don’t think we really changed on that. Now, when you get into look-through earnings or sometimes when we talk about the earnings per share and the investments per share, some of that I don’t repeat every year because we try to get — run at, maybe, 12,000 words or something like that in the annual report.

I really think if you extend it too much — I’ll say this, nobody’s told me it was too short, yet — (laughs) — including my editor, who is here today.

And every other year I may do that breakdown between operating earnings and the — but that takes 1,000 words or so to explain it to people.

The whole report is guided, as it has been ever since I really started taking it seriously in the mid ’70s, is guided by the idea that I’m — actually, I’m writing it to my two sisters who are here. And I have my audience in my mind — is two very intelligent, interested people but who are not around the place, been gone for a year, and they’re very capable of understanding anything but they’re not necessarily familiar with all the lingo.

If I get too esoteric on it, so I should explain that. And I really want them to understand how I’m thinking about the business, and by implication, how I think they should think about it, and to answer the questions that I think would be in their mind.

And they’ve got most of their net worth in it, so they’re going to read to the end. And I really haven’t changed that framework in my mind for how I’ve written it.

I start mentally off writing, “Dear Doris and Bertie,” and then I just cross them off and put, “To the shareholders of Berkshire Hathaway.” But that’s the way it’s done.

Charlie?

CHARLIE MUNGER: Yeah, but the details can change as the facts change. The undistributed earnings of corporations in which we hold shares, but do not control, used to be way more important than they are now. It’s perfectly natural that the emphasis would shift.

WARREN BUFFETT: Yeah, the undistributed earnings now, without me looking at it very carefully, you know, are probably — they’re not more than, probably, 15 percent of our reported earnings or something like that.

They used to be a much higher percentage. And they’re still important. But I don’t think they’re — I think the people that understand that Coca-Cola and American Express aren’t paying out all their earnings, and it’s not a big enough number that I would want to spend a lot of the report explaining it.