Lessons from Buffett's annual letter: Part 1

The magic of retained earnings Charlie and I view Berkshire's holdings of marketable stocks - at yearend worth $281 billion - as a collection of businesses. We don't control the operations of those companies, but we do share proportionately in their long-term prosperity. From an accounting standpoint, however, our portion of their earnings is not included in Berkshire's income. Instead, only what these investees pay us in dividends is recorded on our books. Under GAAP, the huge sums that investees retain on our behalf become invisible. What's out of sight, however, should not be out of mind: Those unrecorded retained earnings are usually building value - lots of value - for Berkshire. Investees use the withheld funds to expand their business, make acquisitions, pay off debt and, often, to repurchase their stock (an act that increases our share of their future earnings). ...retained earnings have propelled American business throughout our country's history. What worked for Carnegie and Rockefeller has, over the years, worked its magic for millions of shareholders as well. Of course, some of our investees will disappoint, adding little, if anything, to the value of their company by retaining earnings. But others will over-deliver, a few spectacularly. In aggreg