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Today, investors can purchase low-fee index funds, so a reasonable benchmark is the S&P 500. Each year, Berkshire Hathaway compares its performance with the S&P 500.Warren Buffett and Charlie Munger strive to increase intrinsic value, the true value including value that is obscured by accounting statements. They say that if they cannot beat the S&P that way, then they are not doing anything an investor cannot do on his or her own.

So far long-term Berkshire Hathaway investors, including me, have been delighted. No one can predict future performance, but long-term investors continue to hold their stock. Not only does Berkshire Hathaway invest in stocks and pieces of companies, many of the companies owned by Berkshire Hathaway also invest. If Berkshire Hathaway owns less than 20 percent (accounting rules are subject to change, so this percentage is just an example) of a company, it does not have to include (consolidate) the company’s earnings on Berkshire Hathaway’s balance sheet, even when this represents a huge wealth increase.

In 1990,Berkshire Hathaway owned 17 percent of Capital Cities/ABC, Inc. (Capital Cities). Berkshire Hathaway’s share of Capital Cities earnings was $83 million, but Capital Cities retained more than $82 million (of Berkshire Hathaway’s earnings) for future growth. Berkshire Hathaway only got about $530,000 net after-tax dividends. According to generally accepted accounting principle (GAAP), Berkshire Hathaway only had to record the dividends as earnings, so it recorded $530,000 (not $83 million). If Capital Cities/ABC, Inc. sounds unfamiliar to you that may be because Disney bought it in 199554 Berkshire Hathaway sold its holdings in Disney a few years after the takeover. Warren’s favorite holding period may be forever, but that does not mean he will hold something he no longer favors forever.

Berkshire Hathaway prefers to purchase companies that generate earnings that do not have to be reported. If Berkshire Hathaway buys an entire business, Berkshire Hathaway must report the earnings. Sometimes, however, Berkshire Hathaway can acquire a minority interest in a company more cheaply (on a pro rata basis) than it would have paid for the entire company. Furthermore, Berkshire Hathaway does not have to report the earnings for the minority interest. The price is a relative bargain, and the unreported earnings should eventually become capital gains. In turn, the capital gains will increase Berkshire Hathaway’s intrinsic value.

When Berkshire Hathaway acquires a company or part of a company, it looks for good managers. If the stock price falls below the value of the business the managers should buy back the stock. If the price is above the business value, however, managers will either (1) retain earnings if they can increase market value by a dollar for every dollar of earnings they retain; or (2) if they cannot do that, they should pay dividends. Good managers know these finance basics and follow them.

Accounting also misleads when it comes to the stock price that is recorded on the books (the carrying price). Berkshire Hathaway’s subsidiaries may carry value at one price, while Berkshire Hathaway itself carries the same stock on its book at another price. Again, that is legal and proper accounting.

Highly leveraged investment banks stuff tens of billions of dollars worth of assets into black boxes (Level 3 accounting) and use other method to avoid showing market prices for assets (hold-to-maturity portfolios).The investment banks may have hidden problems. Investment banks may be worth less than their accounting reports suggest. In contrast, Berkshire Hathaway has hidden value. Berkshire Hathaway does not report retained earnings or capital gains on long-term investments unless the investments are sold.

Berkshire Hathaway reports fluctuations in market prices of its derivatives, however. Berkshire Hathaway took a loss on derivatives in 2007 and in first quarter 2008. Berkshire Hathaway’s invested $4.88 billion