Wesco金融董事长致股东信，1986财年（查理·芒格）

WESCO FINANCIAL CORPORATION LETTER TO SHAREHOLDERS To Our Shareholders: income and all net gains from sales of securities) for the calendar year 1986 increased tr Consolidated "normal" operating income (i.e., before ali unusual operating $11,934,000 ($1.68 per share) from $8,347,000 ($1.17 per share) in the previous vear. from sales of securities) decreased to $16,524,000 ($2.32 per share) from $51,541,000 Consolidated net income (i.e., after unusual operating income and all net gains ($7.24 per share) in the previous year. General Foods stock caused most of the net income in 1985. The table below give • highly unusual capital gain, of a not-likely-to-recur type, from disposition o particulars. Wesco has three major subsidiaries, Mutual Savings, in Pasadena, Precision Steel, headquartered in Chicago and engaged in the steel warehousing and specialty metal products businesses, and Wesco-Financial Insurance Company, headquartered in Omaha and currently engaged in the reinsurance business. Consolidated net income for the Iwo years just ended breaks down as follows (in 000s except for per-share amounts)"': Year December 31, 0986 Per December 21, 1985 Amount Wesco Per Share. Anorat Жеко Shame "Normal" net operating income (loss) of: Precision Sirel businesses Mutual Savings .. $ 2,159 $ $ 1,701 .30 ,24 : 3,342 2,010 .47 Wesco-financial Insurance business - .28 Investment activity Underwriting (1,469) 8,084 1.14 (.21) (1,584) 1,225 (.22) 6,615 .93 (359) -- .17 (.05) All other "normal" net operating income» .. 1,459 - .21 3,354 .47 Net pains on sales of securities'" Fluctuation in narket value of GNMA futures contract .. 11,934 1.68 8,347 4,590 .64 41,523 1,671 1.17 .. . .. 5.83 Wesco consolidated not income $16,524 $2.32 $51,541 $7.24 2 After shocker dear of engey are ashes , angressale payanse, lee emergeds from careership and it. Mutual havanas her stepawrter 15, Than 1'985 legure me Fudes, a 814, He 1.18N) 74.81 yer shared Kour sealert by Worse an en the welds of us Connural l ansch ( crudes This supplementary breakdown of earnings differs somewhat from that used in audited financial statements which follow standard accounting convention. The supple- menlary breakdown is furnished because it is considered useful to shareholders. 1

Mutual Savings Mutual Savings' "normal" net operating income of $2, 159,000 in 1986 represented a decrease of 35% from the $3,342,000 figure the previous year. Separate balance sheets of Mutual Savings at yearend 1985 and 1986 are set forth at the end of this annual port. They show (1) total savings accounts rising to $282 million from $269 million the year before, (2) a very high ratio of shareholders' equity to savings account liabilities (probably the highest for any mature U.S. savings and loan associa- tion), (3) a substantial portion of savings account liabilities nilset by cash equivalents and marketable securilies, (4) a loan portiolio (niostly reai estate mortgages) ol about 379 favorable effects of securities gains, which caused net worth to decline only $3 million million at the end of 1986, down 6%% from the $83 million at the end of 1985, and (2) in 1986 despite payment of a dividend of $75 million to the parent corporation. The loan portfolio at the end of 1986, although containing almost no risk of loss to cover operating costs. However, the unrealized depreciation in the loan portfolio is now more than offset by unrealized appreciation in Mutual Savings' interest-bearing securities and preferred stocks. Such unrealized appreciation at December 31, 1986 was about $17 million. As pointed out in footnote 14 to the accompanying financial statements, the book value of Wesco's equity in Mutual Savings ($54.8 million at December 31, 1986) over- states the amount realizable, after taxes, from sale or liquidation at book value, If all Mutual Savings assets, net of liabilities, were 1o be sold, even pursuant tu a plan of com- plete liquidation, for the $54.8 million in book value reported under applicable accounting convention, the parent corporation would receive much less than $54.B mil- lion after substantial ircome taxation imposed because about $47 million of what is designated shareholders' equity for accounting purposes is considered bad detr reserves for most tax purposes. appreciation of securities, but also a buried plus value in real estate. The foreclosed There is, however, in Mutual Savings, not only a buried plus value in unrealized property on hand (mosily 22 largely or eanfront acres in Santa Barbara) has become cost. Reasonable, ‹ ommunity-sensitive development of this property has been delayed worth over & long holding period much more than its $1.ó million balance sheet carrying over 11 years in the ‹ ourse of administration of land-use laws. But we are optimistic that the quality of its landscaping. The buried plus valur in real estate is limited by the small number of houses

Balancing all merits and demerits, Mutual Savings, as it has been managed under present conditions by the writer and others, continues to be a mediocre business from and sound balance sheet; (2) a maturity match of interest-bearing assets and liabilities the shareholders' point of view. Mutual Savings' good points are: (1) high asset quality which makes risk of insolvency near zero, whatever happens to interest rates; and (3) a deserved reputation for high quality service to account holders, achieved at below- average cost to the institution in an efficient one-large-office operation, as distinguished from a many-small-branch-offices operation. Mutual Savings' bad points are: (1) all loss business because interest and other costs incurred exceed income obtained by recent growth in savings accounts, considered on an incremental-effects basis, has been under ihe FSLIC account-insurance system causes payments of ever-higher amounts employing proceeds in short term interesi-bearing assets; (2) a burdensome position inio the system to help bail out more venturesome savings and loan associations which become insolvent, with ihe payments being required despite the fact that Mutual Sav- ings imposes alinost no risk on FSLIC; (3) "normal" net operaiing income is below an acceptable rate of return on present book value of shareholders' equity, with such return reaching an acceptable level over recent years only with help from securities gains and other unusual items; (4) it would not be easy to leave the savings and loan der of a type not applied to corporations other than savings and loan associations; (5) as business, should this course of action ever be desired, without a large income tax bur- explained in last year's annual report, the regulatory structure of the savings and loan business creates a competitive situation in which it is hard to make respectable profits throush careful operations; and (6) management has not yet found an acceptable rem- edy for any of the previously listed bad points, despite years of trying. Moreover, comparisons di posl-1984 financial results for Mutual Savings with results for many other and more typical savings and loan associations in California con- tinue to leave Mutual Sivings looking inferior, to put it mildly. As interest rates went down these other associations, which have greater financial leverage and operated less fearfully than Mulgai Savings during former high interest periods, came to have loan and investment portfolios which (1) now are worth more on average than book value and (2) now produce a high return on book value of shareholders' equity, after deduc- tion of operating expenses and interest lo account holders at present rates. Any Wesco irom interest rall changrs can kook at the 1985-1986 record and despair. sharcholder who thinks Mutual Savings has any experlise in predicting and profiting Despite the fact that some other savings and loan associations did much better after 1984 than Mulual Savings, and are now much better poised to report good figures for 1987, we plan to continur operating only in ways acceplable in our own judgment, anticipating as a consecurnce widely fluctuating and sometimes inadequate returns. In the lulure, however, Mutual Savings will make and purchase more loans. Now that value (the market value increase being caused both by a decline in generally prevailing Mulual Savings' ole mortgage loans have declined in amount and increased in market interest rates and by a shortening of remaining loan life), new loans will be added as seems wise, with a targel that at least 60% of assets be in housing-related loans. New direct loans aggregating $9 million were made in 1986, all adjustable rate mortgages with no cap on future interest rate changes but with an extremely low "spread" for the lender. In resent months the total of all Joans on hand has risen as new loans made exceeded prin ipal payofís on old loans. з

Vith assets not employed in direct real-estate iending, Mutual Savings continue lot onjy to make payments to FSLIC lar in excess of fair charges for risks imposed oi FSLIC but also to employ a large part of total assets in short-term loans to the Fuderal Home Loan Bank. These practices are pro-social but will continue to reduce profits. efforts to change the present rules of the savings and loan business to augment average Mutual Savings also continues to support the Federal Home Loan Bank Board in its soundness of FSLIC-insured associations and prevent recurrence of widespread insol- vencies like those now bedevilling the industry. Precision Steel Wesco's Piecision Steel subsidiary, located in the outskirts of Chicago at Franklin Park, I'anois, was acquired for appioximately $15 million on February 28, 1979. The vative LIFO accounting basis and which contained significant cash balances. More price was roughly book value for a company which carried its inventories on a conser- service center business and a subsidiary engaged in the manufacture and distribution of tool room supplies and other specialty metal products. Precision Steel's businesses contribuled $1,701,000 to "normal" net operating income in 1986, down 15% compared with $2,010,000 in 1985. The decrease in 1986 profit occurred in spite of increased revenues (up 2% to $52,304,000). Under the skilled leadership of David Hillstrom, Precision Steel's businesses are row quite salisfactory, taking into account the financial leverage put into Wesco's con- solidated picture incident to their acquisition. Shortly after Wesco's purchase of Precision Steel, a substantial physical expansion of steel warehousing facilities was authorized, involving a new building in Charlotte, North Carolina. The new building and the whole North Carolina operation are now very successful, contributing $10,172,000 to 1986 sales at a profit margin higher than has prevailed in ihe lons-established Chicago headquarters' facility. Precision Steel's businesses, despite their mundane nomenclature, are steps of Precision Steel, needing dependable supply on short notice of specialized grades of advanced on the quality scale from mere commodity-type businesses. Many customers order, and remembrance when supplies are short, rightly believe that they have no fully high-quality, cold-rolled strip steel, reasonable prices, technical excellence in cutting lo comparable alternative in Precision Steel's market area. Indeed, many customers ai locations remote from Chicago and Charlotte (for instance, Los Angeles) seek out Preci- sion Steel's service. available liquid assets. Wesco remains interested in logical expansion of Precision Steel's businesses, using

Wesco-Financial Insurance Company 80% owner and ultimate parent corporation, Berkshire Hathaway Inc. A new business was added to the wesco group in 1985, in co-venture with wesn's With the enthusiastic approval of all Wesco's directors, including substantial Wesco shareholders in the Peters and Caspers families, without whose approval such action would not have been taken, Wesco in 1985 invested $45 million in cash equivalents in a newly organized, wholly owned, Nebraska-chartered insurance company, Wesco- Financial Insurance Company ("Wes-FIC"). Another $36.2 million was invested in January 1986. The new subsidiary, Wes-FIC, has reinsured, through another Berkshire Hathaway insurance company subsidiary as intermediary-withoul-profit, 2% of the entire book of insurance business of the long-established Fireman's Fund Corp. (listed on the NYSE). Wes-FIC thereby assumed the benefits and burdens of Fireman's Fund's prices, costs and losses under a contract covering all insurance premiums earned by Fireman's Fund during a four-year period commencing September 1, 1985. The arrangement puts Wes- FIC in almost exactly the position it would have been in if it, instead of Fireman's Fund, had directly written 2% of the business. Differences in results should occur only from the investment side of insurance, as Wes-FIC, instead of Fireman's Fund, invests funds from "float" generated. Wes-FIC's share of premiums earned in 1986 exceeded $67 million. September 1, 1985, to December 31, 1986, are included on page 30 of this Annual Wes-FIC's separate financial statements, covering the brief period of its existence, Report, and show that Wes-FIC's net income for 1986 was $6,967,000 versus a small deficit ($359,000) for its first 4 months of operation in 1985. The 1986 net income figure included securities gains, net of income taxes, of $352,000. It is in the nature of even the finest casualty insurance businesses that in keeping their accounts they must estimate and deduct all future costs and losses from premiums already earned. Uncertainties inherent in this undertaking make financial statements mure mere "best honest guesses" than is typically the case with accounts of non- insurance-writing corporations. And the reinsurance portion of the casualty insurance business, because il contains one or more extra links in the loss-reporting chain, shareholders should remain aware, not unly of the inherent imperfections of Wes- usually creates more accounting uncertainty than the non-reinsurance portion. Wesco FIC's accounting, but also of the inherent cyclicality of its business. with Jack Byrne, its CEO, who displayed great integrity, intelligence and vigor in return- We very much like our association with Fireman's Fund, a real class operation, and ing GEICO Corporation to glory before he took his present position.

All Other "Normal" Net Operating Income ents ($2,229,000 gross, excluding rent from Mutual Savings) from Wesco's Pasaden office building block (predominantly leased to outsiders although Mutual Savings is th insurance income. Net Gains on Sales of Securities Wesco's aggregaie net gains on sales of securities, combined, after income taxes, decreased o $4,590,000 in 1986 from $41,523,000 in 1985. Bowery Savings Bank Wesco's directors in the same manner as the Wes-FIC co-venture, joined a group which in 1985 Wesco, in another co-venture with its parent corporation, approved by invested $100,000,000 cash in a newly organized, New York-chartered savings bank. The new bank then took over the name, assets and liabilities of the insolvent Bowery Savings Bank in the city of New York. The takeover received (1) muci, needed assistance from FDIC, the federal agency, akin to FSLIC, which insures deposits in banks, and (2) the blessing of New York bank regulators. Wesco invested $9,000,000, other Berkshire Hathaway subsidiaries invested $12,384,000, and other unrelated investors invested the balance of the $100,000,000. The terms of the FDIC assistance, which include income-assistance payments over marized as far irom adequate to assure that the investors wili make a profit. This is as it many years to the newly organized bank, are extremely complex but can be fairly sum- should be when $100 million buys a highly leveraged residual equity position in a $5 billion bank, albeit one with many sick assets. Any minority-position investment with such extreme financial leverage (in effect buying with a 2% down payment), involving a troubled company in a demanding environment, can fairly be called a venture-capital lype investment for Wesco. In our judgment, the prospect for gain justified the risk of loss. This investment continues to be carried at cost in Wesco's accompanying financial statements, and we continue in guarded optimism regarding our pusition. Consolidated Balance Sheet and Related Discussion Wesco's consolidated balance sheet (1) retains a strength befitting a company reflects a continuing slow pace of acquisition of additional businesses because few are whose consolidated nel worth supports large outstanding promises to others and (2 found available, despite constant search, at prices deenied rational from the standpoint 6

As indicated in Note 3 to the accompanying financial statements, the aggregate market value of Wesco's marketable equity securities was higher than their aggregate carrying value at December 31, 1986 by about $13 milliun, up modecty from about $9 million one year earlier. The consolidated aggregate market value of all marketable securities, including bonds and other fixed-income securities, exceeded aggregate car- rying value by about $23 million. As earlier noted, about $17 million of this unrealized appreciation lies within the savings and loan subsidiary. Wesco's Pasadena real estate, a full block (containing (1) about 125,000 first class net rentable square feet, including Mutual Savings' space, in a modern office building, plus (2) an additional net rentable 34,000 square feet of economically marginal space in old buildings requiring expensive improvement), has a market value substantially in fixed) against this real estate now exceeding its depreciated carrying value ($3,091,000) excess of carrying value, demonstrated by (1) mortgage debt ($4,940,000 at 9.25% in: Wesco's balance shret at December 31, 1986, and (2) substantial current net cash flow (about $1 million per year) to Wesco after debt service on the mortgage. The mod- ern office building is 96%%, rented, despite a glut of vacant office space in Pasadena. We charge just-below-standard rents and run the building as a sort of first-class club for ten- ants we admire. With these practic es, a prime location and superior parking facilities, we anticipate future increuses in cash flow, but at no better rate than the rate of inflation. Wesco remains in a prudent position when total debt is compared to total share- holders' equity and total liquid assets. Wesco's practice has been to do a certain amount of long-term borrowing in advance of specific need, in order to have maximum financial flexibility to face both hazards and opportunities. It is expected that the balance sheel strength of the consolidated enterprise will in dur course be used in one or more business extensions. The extension activity, how- ever, requires patience, as suitable opportunities are not always present. As indicated in Schedule I accompanying Wesco's financial statements, invest- ments, both ihose in the savings and loan and reinsurance subsidiaries and those heidi temporarily elsewhere pending sale to fund business extension, lend to be concen- trated in very few places. Through this practice of concentration of investments, better understanding is sought with respect to the few decisions made. The ratio of Wescro's annual reported consolidated net income to reported consoli- clated shareholders equity, about 19% in 1984-86, was dependent to a very large exten! on securities gains, irregular by nature. This recent ratio is almost certain to continue 1o businesses nor possible future securities gains appear likely to help much in the short decline, probably sharply, as it dir in 1986. Neither possible future acquisitions of other term. The business acquisition game continues to be crowded with optimistic players who usually lorce prices for low-leverage acquirers like Wesco to levels where return- harder do came by for very simple reasons. Bucause securities generally traded lower on-investment prospects «re modest. And luture securities gains are likely to prove several years ago than they do now, relative to the intrinsic values of the businesses rep- resented by the securitics, «roating more obviously sound investments then than now, and berduse prospeetsfor above-average returns tendto go down as assets managed go up, it is now, darly in 1987, over casier than it was darly in 1986, do prodict less desirable future results. Il is else casy for any sophisticated! Wesee sharehokler, reviewing either (i) this virtual reprint of last year's feller or fil Weseeis marketable securities disclosed ideas than they were year earner. herein, do diagnose leurre ily; that the dee ision makers are now even more dry of grood 7 cial position as this is written does not result from our forecast that business conditions The considerable, and higher than normal, liquidity of Wesco's consolidated finan- are about to fall. Wesco's condition results, instead, from our simply not finding oppor- are about to worsen, or that interest rates are about to rise, or that common stock prices tunities for more aggressive use of capital with which we are comfortable. Wesco continues to try more to profit from always remembering the obvious than theory"). Such an approach, while it has worked fairly well on average in the past and from grasping the esoteric (including much modern "strategic planning" and "portfolic will probably work fairly well over the long-term future, is bound to encounter periods ol dullness and jisadvantage as it limils action. Moreover, the approach is being ap- plied to no great base position. Wesco is sort of scrambling through the years without to pretty well assure high future returns on its capital. In contrast, Berkshire Hathaway, owning a single business, even a small one, with enough commercial advantage in place Wesco's parent corporation, owns a fair number of such high-return businesses. On January 22, 1987, Wesco increased its regular quarterly dividend from 16½ record as the dise of business on rebruary 20, 192ch 12, 1987, to shareholders of This annual report contains Form 10-K, a report filed with the Securities and Exchange Commission, and includes detailed information about Wesco and its subsidi- aries as well as audited financial statements bearing extensive footnotes. As usual, your careful attention is sought with respect to these items. Charkes T manger Charles T. Munger Chairman of the Board February 13, 1987