eChe .I sour During 2014.Tesco's problem ed hy the month The n's market share fell.its margins contracted and accounting problems surfaced.In the world of business,bad news often surfaces serially:You see a cockroach in your kitchen;as the days go by,you meet his relatives We sold Tesco shares throughout the year and are now out of the position.(The company,we should em wel ur anter. loss that at the time of sale cost us%of our net worth.Twice. ienced 1%losses All three of these losse h-17perod.whensod stcks thatee vry cheap inr to buyotherbelievd to 率串率市率市率中率中率中 Our in errific tailwind During the 1964-2014 nd the s&p 500 and dollars now with the reasoned expectation of receiving more purchasing power- after taxes have been paid on gains-in the future.' The unconventional,but inescapable,conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collec on of American busine than to invest i ecurities Ireasuries,to and two world wars Inves another it is almost certain to be repeated during the next century. Stock prices will always be far more volatile than cash-equivalent holdings.Over the long term,however than widely-dive esson has not customarily been taught in business schools.where asa y fo risk.Though this pedag synonymous with risk.Popular formulas that equate the two terms le students,investorsand CEOsastray. a weck or a year ris far riskier (in both nominal and ent banks d to ty that might have meaningful near-term needs for funds For the great majority of investors,however,whcn and should invest with a multi-decade horizon quotationa ain fixed ning signific div risky than dollar-based securities.In 2013, I soured somewhat on the company’s then-management and sold 114 million shares, realizing a profit of $43 million. My leisurely pace in making sales would prove expensive. Charlie calls this sort of behavior “thumb-sucking.” (Considering what my delay cost us, he is being kind.) During 2014, Tesco’s problems worsened by the month. The company’s market share fell, its margins contracted and accounting problems surfaced. In the world of business, bad news often surfaces serially: You see a cockroach in your kitchen; as the days go by, you meet his relatives. We sold Tesco shares throughout the year and are now out of the position. (The company, we should mention, has hired new management, and we wish them well.) Our after-tax loss from this investment was $444 million, about 1/5 of 1% of Berkshire’s net worth. In the past 50 years, we have only once realized an investment loss that at the time of sale cost us 2% of our net worth. Twice, we experienced 1% losses. All three of these losses occurred in the 1974-1975 period, when we sold stocks that were very cheap in order to buy others we believed to be even cheaper. ************ Our investment results have been helped by a terrific tailwind. During the 1964-2014 period, the S&P 500 rose from 84 to 2,059, which, with reinvested dividends, generated the overall return of 11,196% shown on page 2. Concurrently, the purchasing power of the dollar declined a staggering 87%. That decrease means that it now takes $1 to buy what could be bought for 13¢ in 1965 (as measured by the Consumer Price Index). There is an important message for investors in that disparate performance between stocks and dollars. Think back to our 2011 annual report, in which we defined investing as “the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains – in the future.” The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities – Treasuries, for example – whose values have been tied to American currency. That was also true in the preceding half-century, a period including the Great Depression and two world wars. Investors should heed this history. To one degree or another it is almost certain to be repeated during the next century. Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray. It is true, of course, that owning equities for a day or a week or a year is far riskier (in both nominal and purchasing-power terms) than leaving funds in cash-equivalents. That is relevant to certain investors – say, investment banks – whose viability can be threatened by declines in asset prices and which might be forced to sell securities during depressed markets. Additionally, any party that might have meaningful near-term needs for funds should keep appropriate sums in Treasuries or insured bank deposits. For the great majority of investors, however, who can – and should – invest with a multi-decade horizon, quotational declines are unimportant. Their focus should remain fixed on attaining significant gains in purchasing power over their investing lifetime. For them, a diversified equity portfolio, bought over time, will prove far less risky than dollar-based securities. 18