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BERKSHIRE HATHAWAY INC.
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To the Shareholders of Berkshire Hathaway Inc.:
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First, a few words about accounting. The merger with
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Diversified Retailing Company, Inc. at yearend adds two new
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complications in the presentation of our financial results.
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After the merger, our ownership of Blue Chip Stamps increased to
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approximately 58% and, therefore, the accounts of that company
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must be fully consolidated in the Balance Sheet and Statement of
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Earnings presentation of Berkshire. In previous reports, our
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share of the net earnings only of Blue Chip had been included as
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a single item on Berkshire’s Statement of Earnings, and there had
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been a similar one-line inclusion on our Balance Sheet of our
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share of their net assets.
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This full consolidation of sales, expenses, receivables,
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inventories, debt, etc. produces an aggregation of figures from
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many diverse businesses - textiles, insurance, candy, newspapers,
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trading stamps - with dramatically different economic
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characteristics. In some of these your ownership is 100% but, in
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those businesses which are owned by Blue Chip but fully
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consolidated, your ownership as a Berkshire shareholder is only
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58%. (Ownership by others of the balance of these businesses is
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accounted for by the large minority interest item on the
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liability side of the Balance Sheet.) Such a grouping of Balance
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Sheet and Earnings items - some wholly owned, some partly owned -
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tends to obscure economic reality more than illuminate it. In
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fact, it represents a form of presentation that we never prepare
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for internal use during the year and which is of no value to us
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in any management activities.
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For that reason, throughout the report we provide much
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separate financial information and commentary on the various
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segments of the business to help you evaluate Berkshire’s
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performance and prospects. Much of this segmented information is
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mandated by SEC disclosure rules and covered in “Management’s
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Discussion” on pages 29 to 34. And in this letter we try to
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present to you a view of our various operating entities from the
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same perspective that we view them managerially.
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A second complication arising from the merger is that the
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1977 figures shown in this report are different from the 1977
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figures shown in the report we mailed to you last year.
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Accounting convention requires that when two entities such as
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Diversified and Berkshire are merged, all financial data
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subsequently must be presented as if the companies had been
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merged at the time they were formed rather than just recently.
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So the enclosed financial statements, in effect, pretend that in
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1977 (and earlier years) the Diversified-Berkshire merger already
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had taken place, even though the actual merger date was December
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30, 1978. This shifting base makes comparative commentary
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confusing and, from time to time in our narrative report, we will
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talk of figures and performance for Berkshire shareholders as
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historically reported to you rather than as restated after the
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Diversified merger.
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With that preamble it can be stated that, with or without
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restated figures, 1978 was a good year. Operating earnings,
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exclusive of capital gains, at 19.4% of beginning shareholders’
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investment were within a fraction of our 1972 record. While we
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believe it is improper to include capital gains or losses in
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evaluating the performance of a single year, they are an
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important component of the longer term record. Because of such
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gains, Berkshire’s long-term growth in equity per share has been
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greater than would be indicated by compounding the returns from
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operating earnings that we have reported annually.
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For example, over the last three years - generally a bonanza
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period for the insurance industry, our largest profit producer -
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Berkshire’s per share net worth virtually has doubled, thereby
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compounding at about 25% annually through a combination of good
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operating earnings and fairly substantial capital gains. Neither
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this 25% equity gain from all sources nor the 19.4% equity gain
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from operating earnings in 1978 is sustainable. The insurance
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cycle has turned downward in 1979, and it is almost certain that
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operating earnings measured by return on equity will fall this
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year. However, operating earnings measured in dollars are likely
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to increase on the much larger shareholders’ equity now employed
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in the business.
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In contrast to this cautious view about near term return
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from operations, we are optimistic about prospects for long term
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return from major equity investments held by our insurance
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companies. We make no attempt to predict how security markets
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will behave; successfully forecasting short term stock price
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movements is something we think neither we nor anyone else can
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do. In the longer run, however, we feel that many of our major
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equity holdings are going to be worth considerably more money
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than we paid, and that investment gains will add significantly to
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the operating returns of the insurance group.
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Sources of Earnings
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To give you a better picture of just where Berkshire’s
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earnings are produced, we show below a table which requires a
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little explanation. Berkshire owns close to 58% of Blue Chip
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which, in addition to 100% ownership of several businesses, owns
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80% of Wesco Financial Corporation. Thus, Berkshire’s equity in
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Wesco’s earnings is about 46%. In aggregate, businesses that we
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control have about 7,000 full-time employees and generate
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revenues of over $500 million.
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The table shows the overall earnings of each major operating
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category on a pre-tax basis (several of the businesses have low
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tax rates because of significant amounts of tax-exempt interest
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and dividend income), as well as the share of those earnings
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belonging to Berkshire both on a pre-tax and after-tax basis.
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Significant capital gains or losses attributable to any of the
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businesses are not shown in the operating earnings figure, but
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are aggregated on the “Realized Securities Gain” line at the
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bottom of the table. Because of various accounting and tax
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intricacies, the figures in the table should not be treated as
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holy writ, but rather viewed as close approximations of the 1977
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and 1978 earnings contributions of our constituent businesses.
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[SKIP]
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Net Earnings
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Earnings Before Income Taxes After Tax
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-------------------------------------- ------------------
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Total Berkshire Share Berkshire Share
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------------------ ------------------ ------------------
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(in thousands of dollars) 1978 1977 1978 1977 1978 1977
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-------- -------- -------- -------- -------- --------
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Total - all entities ......... $66,180 $57,089 $54,350 $42,234 $39,242 $30,393
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======== ======== ======== ======== ======== ========
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Earnings from operations:
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Insurance Group:
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Underwriting ............. $ 3,001 $ 5,802 $ 3,000 $ 5,802 $ 1,560 $ 3,017
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Net investment income .... 19,705 12,804 19,691 12,804 16,400 11,360
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Berkshire-Waumbec textiles 2,916 (620) 2,916 (620) 1,342 (322)
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Associated Retail
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Stores, Inc. ............ 2,757 2,775 2,757 2,775 1,176 1,429
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See’s Candies .............. 12,482 12,840 7,013 6,598 3,049 2,974
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Buffalo Evening News ....... (2,913) 751 (1,637) 389 (738) 158
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Blue Chip Stamps - Parent .. 2,133 1,091 1,198 566 1,382 892
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Illinois National Bank
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and Trust Company ....... 4,822 3,800 4,710 3,706 4,262 3,288
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Wesco Financial
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Corporation - Parent .... 1,771 2,006 777 813 665 419
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Mutual Savings and
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Loan Association ........ 10,556 6,779 4,638 2,747 3,042 1,946
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Interest on Debt ........... (5,566) (5,302) (4,546) (4,255) (2,349) (2,129)
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Other ...................... 720 165 438 102 261 48
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-------- -------- -------- -------- -------- --------
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Total Earnings from
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Operations ............ $52,384 $42,891 $40,955 $31,427 $30,052 $23,080
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Realized Securities Gain ..... 13,796 14,198 13,395 10,807 9,190 7,313
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-------- -------- -------- -------- -------- --------
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Total Earnings ........... $66,180 $57,089 $54,350 $42,234 $39,242 $30,393
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======== ======== ======== ======== ======== ========
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[/SKIP]
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Blue Chip and Wesco are public companies with reporting
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requirements of their own. Later in this report we are
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reproducing the narrative reports of the principal executives of
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both companies, describing their 1978 operations. Some of the
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figures they utilize will not match to the penny the ones we use
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in this report, again because of accounting and tax complexities.
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But their comments should be helpful to you in understanding the
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underlying economic characteristics of these important partly-
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owned businesses. A copy of the full annual report of either
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company will be mailed to any shareholder of Berkshire upon
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request to Mr. Robert H. Bird for Blue Chips Stamps, 5801 South
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Eastern Avenue, Los Angeles, California 90040, or to Mrs. Bette
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Deckard for Wesco Financial Corporation, 315 East Colorado
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Boulevard, Pasadena, California 91109.
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Textiles
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Earnings of $1.3 million in 1978, while much improved from
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1977, still represent a low return on the $17 million of capital
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employed in this business. Textile plant and equipment are on
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the books for a very small fraction of what it would cost to
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replace such equipment today. And, despite the age of the
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equipment, much of it is functionally similar to new equipment
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being installed by the industry. But despite this “bargain cost”
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of fixed assets, capital turnover is relatively low reflecting
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required high investment levels in receivables and inventory
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compared to sales. Slow capital turnover, coupled with low
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profit margins on sales, inevitably produces inadequate returns
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on capital. Obvious approaches to improved profit margins
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involve differentiation of product, lowered manufacturing costs
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through more efficient equipment or better utilization of people,
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redirection toward fabrics enjoying stronger market trends, etc.
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Our management is diligent in pursuing such objectives. The
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problem, of course, is that our competitors are just as
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diligently doing the same thing.
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The textile industry illustrates in textbook style how
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producers of relatively undifferentiated goods in capital
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intensive businesses must earn inadequate returns except under
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conditions of tight supply or real shortage. As long as excess
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productive capacity exists, prices tend to reflect direct
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operating costs rather than capital employed. Such a supply-
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excess condition appears likely to prevail most of the time in
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the textile industry, and our expectations are for profits of
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relatively modest amounts in relation to capital.
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We hope we don’t get into too many more businesses with such
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tough economic characteristics. But, as we have stated before:
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(1) our textile businesses are very important employers in their
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communities, (2) management has been straightforward in reporting
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on problems and energetic in attacking them, (3) labor has been
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cooperative and understanding in facing our common problems, and
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(4) the business should average modest cash returns relative to
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investment. As long as these conditions prevail - and we expect
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that they will - we intend to continue to support our textile
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business despite more attractive alternative uses for capital.
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Insurance Underwriting
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The number one contributor to Berkshire’s overall excellent
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results in 1978 was the segment of National Indemnity Company’s
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insurance operation run by Phil Liesche. On about $90 million of
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earned premiums, an underwriting profit of approximately $11
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million was realized, a truly extraordinary achievement even
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against the background of excellent industry conditions. Under
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Phil’s leadership, with outstanding assistance by Roland Miller
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in Underwriting and Bill Lyons in Claims, this segment of
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National Indemnity (including National Fire and Marine Insurance
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Company, which operates as a running mate) had one of its best
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years in a long history of performances which, in aggregate, far
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outshine those of the industry. Present successes reflect credit
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not only upon present managers, but equally upon the business
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talents of Jack Ringwalt, founder of National Indemnity, whose
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operating philosophy remains etched upon the company.
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Home and Automobile Insurance Company had its best year
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since John Seward stepped in and straightened things out in 1975.
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Its results are combined in this report with those of Phil
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Liesche’s operation under the insurance category entitled
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“Specialized Auto and General Liability”.
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Worker’s Compensation was a mixed bag in 1978. In its first
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year as a subsidiary, Cypress Insurance Company, managed by Milt
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Thornton, turned in outstanding results. The worker’s
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compensation line can cause large underwriting losses when rapid
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inflation interacts with changing social concepts, but Milt has a
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cautious and highly professional staff to cope with these
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problems. His performance in 1978 has reinforced our very good
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feelings about this purchase.
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Frank DeNardo came with us in the spring of 1978 to
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straighten out National Indemnity’s California Worker’s
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Compensation business which, up to that point, had been a
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disaster. Frank has the experience and intellect needed to
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correct the major problems of the Los Angeles office. Our volume
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in this department now is running only about 25% of what it was
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eighteen months ago, and early indications are that Frank is
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making good progress.
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George Young’s reinsurance department continues to produce
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very large sums for investment relative to premium volume, and
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thus gives us reasonably satisfactory overall results. However,
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underwriting results still are not what they should be and can
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be. It is very easy to fool yourself regarding underwriting
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results in reinsurance (particularly in casualty lines involving
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long delays in settlement), and we believe this situation
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prevails with many of our competitors. Unfortunately, self-
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delusion in company reserving almost always leads to inadequate
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industry rate levels. If major factors in the market don’t know
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their true costs, the competitive “fall-out” hits all - even
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those with adequate cost knowledge. George is quite willing to
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reduce volume significantly, if needed, to achieve satisfactory
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underwriting, and we have a great deal of confidence in the long
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term soundness of this business under his direction.
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The homestate operation was disappointing in 1978. Our
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unsatisfactory underwriting, even though partially explained by
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an unusual incidence of Midwestern storms, is particularly
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worrisome against the backdrop of very favorable industry results
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in the conventional lines written by our homestate group. We
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have confidence in John Ringwalt’s ability to correct this
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situation. The bright spot in the group was the performance of
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Kansas Fire and Casualty in its first full year of business.
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Under Floyd Taylor, this subsidiary got off to a truly remarkable
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start. Of course, it takes at least several years to evaluate
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underwriting results, but the early signs are encouraging and
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Floyd’s operation achieved the best loss ratio among the
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homestate companies in 1978.
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Although some segments were disappointing, overall our
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insurance operation had an excellent year. But of course we
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should expect a good year when the industry is flying high, as in
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1978. It is a virtual certainty that in 1979 the combined ratio
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(see definition on page 31) for the industry will move up at
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least a few points, perhaps enough to throw the industry as a
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whole into an underwriting loss position. For example, in the
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auto lines - by far the most important area for the industry and
|
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for us - CPI figures indicate rates overall were only 3% higher
|
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in January 1979 than a year ago. But the items that make up loss
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costs - auto repair and medical care costs - were up over 9%.
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How different than yearend 1976 when rates had advanced over 22%
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in the preceding twelve months, but costs were up 8%.
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Margins will remain steady only if rates rise as fast as
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costs. This assuredly will not be the case in 1979, and
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conditions probably will worsen in 1980. Our present thinking is
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that our underwriting performance relative to the industry will
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improve somewhat in 1979, but every other insurance management
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probably views its relative prospects with similar optimism -
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someone is going to be disappointed. Even if we do improve
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relative to others, we may well have a higher combined ratio and
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lower underwriting profits in 1979 than we achieved last year.
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We continue to look for ways to expand our insurance
|
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|
operation. But your reaction to this intent should not be
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unrestrained joy. Some of our expansion efforts - largely
|
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initiated by your Chairman have been lackluster, others have been
|
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expensive failures. We entered the business in 1967 through
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purchase of the segment which Phil Liesche now manages, and it
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still remains, by a large margin, the best portion of our
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insurance business. It is not easy to buy a good insurance
|
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business, but our experience has been that it is easier to buy
|
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one than create one. However, we will continue to try both
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approaches, since the rewards for success in this field can be
|
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exceptional.
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Insurance Investments
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We confess considerable optimism regarding our insurance
|
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|
equity investments. Of course, our enthusiasm for stocks is not
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unconditional. Under some circumstances, common stock
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investments by insurers make very little sense.
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We get excited enough to commit a big percentage of
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insurance company net worth to equities only when we find (1)
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businesses we can understand, (2) with favorable long-term
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prospects, (3) operated by honest and competent people, and (4)
|
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priced very attractively. We usually can identify a small number
|
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|
of potential investments meeting requirements (1), (2) and (3),
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|
but (4) often prevents action. For example, in 1971 our total
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|
|
common stock position at Berkshire’s insurance subsidiaries
|
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|
amounted to only $10.7 million at cost, and $11.7 million at
|
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|
market. There were equities of identifiably excellent companies
|
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|
available - but very few at interesting prices. (An irresistible
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|
|
footnote: in 1971, pension fund managers invested a record 122%
|
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|
|
of net funds available in equities - at full prices they couldn’t
|
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|
buy enough of them. In 1974, after the bottom had fallen out,
|
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|
they committed a then record low of 21% to stocks.)
|
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The past few years have been a different story for us. At
|
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|
the end of 1975 our insurance subsidiaries held common equities
|
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|
|
with a market value exactly equal to cost of $39.3 million. At
|
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|
|
the end of 1978 this position had been increased to equities
|
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|
|
(including a convertible preferred) with a cost of $129.1 million
|
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|
|
and a market value of $216.5 million. During the intervening
|
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|
|
three years we also had realized pre-tax gains from common
|
|
|
|
|
|
equities of approximately $24.7 million. Therefore, our overall
|
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|
|
|
|
unrealized and realized pre-tax gains in equities for the three
|
|
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|
|
|
year period came to approximately $112 million. During this same
|
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|
|
|
interval the Dow-Jones Industrial Average declined from 852 to
|
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|
|
|
805. It was a marvelous period for the value-oriented equity
|
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|
|
|
buyer.
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|
We continue to find for our insurance portfolios small
|
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|
|
portions of really outstanding businesses that are available,
|
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|
|
through the auction pricing mechanism of security markets, at
|
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|
|
prices dramatically cheaper than the valuations inferior
|
|
|
|
|
|
businesses command on negotiated sales.
|
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|
|
This program of acquisition of small fractions of businesses
|
|
|
|
|
|
(common stocks) at bargain prices, for which little enthusiasm
|
|
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|
|
|
exists, contrasts sharply with general corporate acquisition
|
|
|
|
|
|
activity, for which much enthusiasm exists. It seems quite clear
|
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|
|
to us that either corporations are making very significant
|
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|
|
|
mistakes in purchasing entire businesses at prices prevailing in
|
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|
|
negotiated transactions and takeover bids, or that we eventually
|
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|
|
are going to make considerable sums of money buying small
|
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|
|
|
portions of such businesses at the greatly discounted valuations
|
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|
|
|
prevailing in the stock market. (A second footnote: in 1978
|
|
|
|
|
|
pension managers, a group that logically should maintain the
|
|
|
|
|
|
longest of investment perspectives, put only 9% of net available
|
|
|
|
|
|
funds into equities - breaking the record low figure set in 1974
|
|
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|
|
and tied in 1977.)
|
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|
We are not concerned with whether the market quickly
|
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|
|
revalues upward securities that we believe are selling at bargain
|
|
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|
|
prices. In fact, we prefer just the opposite since, in most
|
|
|
|
|
|
years, we expect to have funds available to be a net buyer of
|
|
|
|
|
|
securities. And consistent attractive purchasing is likely to
|
|
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|
|
prove to be of more eventual benefit to us than any selling
|
|
|
|
|
|
opportunities provided by a short-term run up in stock prices to
|
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|
|
levels at which we are unwilling to continue buying.
|
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|
|
Our policy is to concentrate holdings. We try to avoid
|
|
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|
|
|
buying a little of this or that when we are only lukewarm about
|
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|
|
the business or its price. When we are convinced as to
|
|
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|
|
|
attractiveness, we believe in buying worthwhile amounts.
|
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|
|
|
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|
|
Equity holdings of our insurance companies with a market value of
|
|
|
|
|
|
over $8 million on December 31, 1978 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
No. of
|
|
|
|
|
|
Shares Company Cost Market
|
|
|
|
|
|
---------- ------- ---------- ----------
|
|
|
|
|
|
(000s omitted)
|
|
|
|
|
|
246,450 American Broadcasting Companies, Inc. ... $ 6,082 $ 8,626
|
|
|
|
|
|
1,294,308 Government Employees Insurance Company
|
|
|
|
|
|
Common Stock ......................... 4,116 9,060
|
|
|
|
|
|
1,986,953 Government Employees Insurance Company
|
|
|
|
|
|
Convertible Preferred ................ 19,417 28,314
|
|
|
|
|
|
592,650 Interpublic Group of Companies, Inc. .... 4,531 19,039
|
|
|
|
|
|
1,066,934 Kaiser Aluminum and Chemical Corporation 18,085 18,671
|
|
|
|
|
|
453,800 Knight-Ridder Newspapers, Inc. .......... 7,534 10,267
|
|
|
|
|
|
953,750 SAFECO Corporation ...................... 23,867 26,467
|
|
|
|
|
|
934,300 The Washington Post Company ............. 10,628 43,445
|
|
|
|
|
|
---------- ----------
|
|
|
|
|
|
Total ................................... $ 94,260 $163,889
|
|
|
|
|
|
All Other Holdings ...................... 39,506 57,040
|
|
|
|
|
|
---------- ----------
|
|
|
|
|
|
Total Equities .......................... $133,766 $220,929
|
|
|
|
|
|
========== ==========
|
|
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|
|
In some cases our indirect interest in earning power is
|
|
|
|
|
|
becoming quite substantial. For example, note our holdings of
|
|
|
|
|
|
953,750 shares of SAFECO Corp. SAFECO probably is the best run
|
|
|
|
|
|
large property and casualty insurance company in the United
|
|
|
|
|
|
States. Their underwriting abilities are simply superb, their
|
|
|
|
|
|
loss reserving is conservative, and their investment policies
|
|
|
|
|
|
make great sense.
|
|
|
|
|
|
|
|
|
|
|
|
SAFECO is a much better insurance operation than our own
|
|
|
|
|
|
(although we believe certain segments of ours are much better
|
|
|
|
|
|
than average), is better than one we could develop and,
|
|
|
|
|
|
similarly, is far better than any in which we might negotiate
|
|
|
|
|
|
purchase of a controlling interest. Yet our purchase of SAFECO
|
|
|
|
|
|
was made at substantially under book value. We paid less than
|
|
|
|
|
|
100 cents on the dollar for the best company in the business,
|
|
|
|
|
|
when far more than 100 cents on the dollar is being paid for
|
|
|
|
|
|
mediocre companies in corporate transactions. And there is no
|
|
|
|
|
|
way to start a new operation - with necessarily uncertain
|
|
|
|
|
|
prospects - at less than 100 cents on the dollar.
|
|
|
|
|
|
|
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|
|
Of course, with a minor interest we do not have the right to
|
|
|
|
|
|
direct or even influence management policies of SAFECO. But why
|
|
|
|
|
|
should we wish to do this? The record would indicate that they
|
|
|
|
|
|
do a better job of managing their operations than we could do
|
|
|
|
|
|
ourselves. While there may be less excitement and prestige in
|
|
|
|
|
|
sitting back and letting others do the work, we think that is all
|
|
|
|
|
|
one loses by accepting a passive participation in excellent
|
|
|
|
|
|
management. Because, quite clearly, if one controlled a company
|
|
|
|
|
|
run as well as SAFECO, the proper policy also would be to sit
|
|
|
|
|
|
back and let management do its job.
|
|
|
|
|
|
|
|
|
|
|
|
Earnings attributable to the shares of SAFECO owned by
|
|
|
|
|
|
Berkshire at yearend amounted to $6.1 million during 1978, but
|
|
|
|
|
|
only the dividends received (about 18% of earnings) are reflected
|
|
|
|
|
|
in our operating earnings. We believe the balance, although not
|
|
|
|
|
|
reportable, to be just as real in terms of eventual benefit to us
|
|
|
|
|
|
as the amount distributed. In fact, SAFECO’s retained earnings
|
|
|
|
|
|
(or those of other well-run companies if they have opportunities
|
|
|
|
|
|
to employ additional capital advantageously) may well eventually
|
|
|
|
|
|
have a value to shareholders greater than 100 cents on the
|
|
|
|
|
|
dollar.
|
|
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|
|
|
|
|
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|
|
We are not at all unhappy when our wholly-owned businesses
|
|
|
|
|
|
retain all of their earnings if they can utilize internally those
|
|
|
|
|
|
funds at attractive rates. Why should we feel differently about
|
|
|
|
|
|
retention of earnings by companies in which we hold small equity
|
|
|
|
|
|
interests, but where the record indicates even better prospects
|
|
|
|
|
|
for profitable employment of capital? (This proposition cuts the
|
|
|
|
|
|
other way, of course, in industries with low capital
|
|
|
|
|
|
requirements, or if management has a record of plowing capital
|
|
|
|
|
|
into projects of low profitability; then earnings should be paid
|
|
|
|
|
|
out or used to repurchase shares - often by far the most
|
|
|
|
|
|
attractive option for capital utilization.)
|
|
|
|
|
|
|
|
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|
|
The aggregate level of such retained earnings attributable
|
|
|
|
|
|
to our equity interests in fine companies is becoming quite
|
|
|
|
|
|
substantial. It does not enter into our reported operating
|
|
|
|
|
|
earnings, but we feel it well may have equal long-term
|
|
|
|
|
|
significance to our shareholders. Our hope is that conditions
|
|
|
|
|
|
continue to prevail in securities markets which allow our
|
|
|
|
|
|
insurance companies to buy large amounts of underlying earning
|
|
|
|
|
|
power for relatively modest outlays. At some point market
|
|
|
|
|
|
conditions undoubtedly will again preclude such bargain buying
|
|
|
|
|
|
but, in the meantime, we will try to make the most of
|
|
|
|
|
|
opportunities.
|
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|
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|
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|
|
Banking
|
|
|
|
|
|
|
|
|
|
|
|
Under Gene Abegg and Pete Jeffrey, the Illinois National
|
|
|
|
|
|
Bank and Trust Company in Rockford continues to establish new
|
|
|
|
|
|
records. Last year’s earnings amounted to approximately 2.1% of
|
|
|
|
|
|
average assets, about three times the level averaged by major
|
|
|
|
|
|
banks. In our opinion, this extraordinary level of earnings is
|
|
|
|
|
|
being achieved while maintaining significantly less asset risk
|
|
|
|
|
|
than prevails at most of the larger banks.
|
|
|
|
|
|
|
|
|
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|
|
We purchased the Illinois National Bank in March 1969. It
|
|
|
|
|
|
was a first-class operation then, just as it had been ever since
|
|
|
|
|
|
Gene Abegg opened the doors in 1931. Since 1968, consumer time
|
|
|
|
|
|
deposits have quadrupled, net income has tripled and trust
|
|
|
|
|
|
department income has more than doubled, while costs have been
|
|
|
|
|
|
closely controlled.
|
|
|
|
|
|
|
|
|
|
|
|
Our experience has been that the manager of an already high-
|
|
|
|
|
|
cost operation frequently is uncommonly resourceful in finding
|
|
|
|
|
|
new ways to add to overhead, while the manager of a tightly-run
|
|
|
|
|
|
operation usually continues to find additional methods to curtail
|
|
|
|
|
|
costs, even when his costs are already well below those of his
|
|
|
|
|
|
competitors. No one has demonstrated this latter ability better
|
|
|
|
|
|
than Gene Abegg.
|
|
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|
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|
|
We are required to divest our bank by December 31, 1980.
|
|
|
|
|
|
The most likely approach is to spin it off to Berkshire
|
|
|
|
|
|
shareholders some time in the second half of 1980.
|
|
|
|
|
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|
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|
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|
|
Retailing
|
|
|
|
|
|
|
|
|
|
|
|
Upon merging with Diversified, we acquired 100% ownership of
|
|
|
|
|
|
Associated Retail Stores, Inc., a chain of about 75 popular
|
|
|
|
|
|
priced women’s apparel stores. Associated was launched in
|
|
|
|
|
|
Chicago on March 7, 1931 with one store, $3200, and two
|
|
|
|
|
|
extraordinary partners, Ben Rosner and Leo Simon. After Mr.
|
|
|
|
|
|
Simon’s death, the business was offered to Diversified for cash
|
|
|
|
|
|
in 1967. Ben was to continue running the business - and run it,
|
|
|
|
|
|
he has.
|
|
|
|
|
|
|
|
|
|
|
|
Associated’s business has not grown, and it consistently has
|
|
|
|
|
|
faced adverse demographic and retailing trends. But Ben’s
|
|
|
|
|
|
combination of merchandising, real estate and cost-containment
|
|
|
|
|
|
skills has produced an outstanding record of profitability, with
|
|
|
|
|
|
returns on capital necessarily employed in the business often in
|
|
|
|
|
|
the 20% after-tax area.
|
|
|
|
|
|
|
|
|
|
|
|
Ben is now 75 and, like Gene Abegg, 81, at Illinois National
|
|
|
|
|
|
and Louie Vincenti, 73, at Wesco, continues daily to bring an
|
|
|
|
|
|
almost passionately proprietary attitude to the business. This
|
|
|
|
|
|
group of top managers must appear to an outsider to be an
|
|
|
|
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overreaction on our part to an OEO bulletin on age
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discrimination. While unorthodox, these relationships have been
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exceptionally rewarding, both financially and personally. It is
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a real pleasure to work with managers who enjoy coming to work
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each morning and, once there, instinctively and unerringly think
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like owners. We are associated with some of the very best.
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Warren E. Buffett, Chairman
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March 26, 1979
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