1997 Letter to Shareholders

To the Shareholders of Berkshire Hathaway Inc.

In 1997, Berkshire's market value doubled for the second consecutive year. Our intrinsic value grew substantially as well, though not as dramatically as our market price.

"The institutional imperative—a term Charlie Munger coined—describes the tendency of managers to imitate their peers' behavior regardless of the logic or consequences. This tendency destroys more corporate value than any other factor."

The Institutional Imperative

Most managers know that they should create value for shareholders. Yet most fail to do so. Why? Because they are subject to the institutional imperative.

The institutional imperative manifests in several ways:

• Merger mania — When competitors announce acquisitions, pressure builds to follow suit, regardless of whether the deals make sense
• Earnings management — When peers report strong results, pressure builds to match them, even through accounting decisions
• Capital misallocation — When a company's core business slows, managers often double down rather than pivot

Charlie and I see these tendencies everywhere. They lead to the destruction of enormous amounts of shareholder value. The key to avoiding this fate is simple: always ask whether any decision makes sense, regardless of what others are doing.

Our Investment Approach

In 1997, we continued to hold our core positions in American Express, Coca-Cola, and Gillette. These companies have continued to compound earnings at rates that exceed our expectations.

The magic of compounding works slowly. American Express in 1964 earned $11 million; by 1997 it earned over $1 billion. This growth came not from dramatic transformations but from the steady accumulation of advantages year after year.

Insurance Operations

Our insurance float grew to $23 billion in 1997. This float—generated by GEICO, our reinsurance operations, and our various other insurers—is the foundation of our investment returns.

Ajit Jain again produced extraordinary results. His ability to underwrite risks that others cannot even comprehend generates returns that would be impossible for less-capable competitors.

Looking Forward

The future is always uncertain, but our approach remains constant:

1. We will ignore the crowd — Consensus thinking leads to mediocre results
2. We will focus on business quality — The best businesses compound for decades
3. We will be patient — Compounding requires time; don't interrupt the process
4. We will maintain strength — Financial flexibility is worth more than financial cleverness

Warren E. Buffett February 1998