15 ตุลาคม 2559

Berkshire Hathaway Letters to Shareholders (1983)

To the Shareholders of Berkshire Hathaway Inc.:

     This past year our registered shareholders increased from 
about 1900 to about 2900.  Most of this growth resulted from our 
merger with Blue Chip Stamps, but there also was an acceleration 
in the pace of “natural” increase that has raised us from the 
1000 level a few years ago.

     With so many new shareholders, it’s appropriate to summarize 
the major business principles we follow that pertain to the 
manager-owner relationship:

   o Although our form is corporate, our attitude is 
partnership.  Charlie Munger and I think of our shareholders as 
owner-partners, and of ourselves as managing partners.  (Because 
of the size of our shareholdings we also are, for better or 
worse, controlling partners.) We do not view the company itself 
as the ultimate owner of our business assets but, instead, view 
the company as a conduit through which our shareholders own the 

   o In line with this owner-orientation, our directors are all 
major shareholders of Berkshire Hathaway.  In the case of at 
least four of the five, over 50% of family net worth is 
represented by holdings of Berkshire.  We eat our own cooking.

   o Our long-term economic goal (subject to some qualifications 
mentioned later) is to maximize the average annual rate of gain 
in intrinsic business value on a per-share basis.  We do not 
measure the economic significance or performance of Berkshire by 
its size; we measure by per-share progress.  We are certain that 
the rate of per-share progress will diminish in the future - a 
greatly enlarged capital base will see to that.  But we will be 
disappointed if our rate does not exceed that of the average 
large American corporation.

   o Our preference would be to reach this goal by directly 
owning a diversified group of businesses that generate cash and 
consistently earn above-average returns on capital.  Our second 
choice is to own parts of similar businesses, attained primarily 
through purchases of marketable common stocks by our insurance 
subsidiaries.  The price and availability of businesses and the 
need for insurance capital determine any given year’s capital 

   o Because of this two-pronged approach to business ownership 
and because of the limitations of conventional accounting, 
consolidated reported earnings may reveal relatively little about 
our true economic performance.  Charlie and I, both as owners and 
managers, virtually ignore such consolidated numbers.  However, 
we will also report to you the earnings of each major business we 
control, numbers we consider of great importance.  These figures, 
along with other information we will supply about the individual 
businesses, should generally aid you in making judgments about 

   o Accounting consequences do not influence our operating or 
capital-allocation decisions.  When acquisition costs are 
similar, we much prefer to purchase $2 of earnings that is not 
reportable by us under standard accounting principles than to 
purchase $1 of earnings that is reportable.  This is precisely 
the choice that often faces us since entire businesses (whose 
earnings will be fully reportable) frequently sell for double the 
pro-rata price of small portions (whose earnings will be largely 
unreportable).  In aggregate and over time, we expect the 
unreported earnings to be fully reflected in our intrinsic 
business value through capital gains.

   o We rarely use much debt and, when we do, we attempt to 
structure it on a long-term fixed rate basis.  We will reject 
interesting opportunities rather than over-leverage our balance 
sheet.  This conservatism has penalized our results but it is the 
only behavior that leaves us comfortable, considering our 
fiduciary obligations to policyholders, depositors, lenders and 
the many equity holders who have committed unusually large 
portions of their net worth to our care.

   o A managerial “wish list” will not be filled at shareholder 
expense.  We will not diversify by purchasing entire businesses 
at control prices that ignore long-term economic consequences to 
our shareholders.  We will only do with your money what we would 
do with our own, weighing fully the values you can obtain by 
diversifying your own portfolios through direct purchases in the 
stock market.

   o We feel noble intentions should be checked periodically 
against results.  We test the wisdom of retaining earnings by 
assessing whether retention, over time, delivers shareholders at 
least $1 of market value for each $1 retained.  To date, this 
test has been met.  We will continue to apply it on a five-year 
rolling basis.  As our net worth grows, it is more difficult to 
use retained earnings wisely.

   o We will issue common stock only when we receive as much in 
business value as we give.  This rule applies to all forms of 
issuance - not only mergers or public stock offerings, but stock 
for-debt swaps, stock options, and convertible securities as 
well.  We will not sell small portions of your company - and that 
is what the issuance of shares amounts to - on a basis 
inconsistent with the value of the entire enterprise.

   o You should be fully aware of one attitude Charlie and I 
share that hurts our financial performance: regardless of price, 
we have no interest at all in selling any good businesses that 
Berkshire owns, and are very reluctant to sell sub-par businesses 
as long as we expect them to generate at least some cash and as 
long as we feel good about their managers and labor relations.  
We hope not to repeat the capital-allocation mistakes that led us 
into such sub-par businesses.  And we react with great caution to 
suggestions that our poor businesses can be restored to 
satisfactory profitability by major capital expenditures.  (The 
projections will be dazzling - the advocates will be sincere - 
but, in the end, major additional investment in a terrible 
industry usually is about as rewarding as struggling in 
quicksand.) Nevertheless, gin rummy managerial behavior (discard 
your least promising business at each turn) is not our style.  We 
would rather have our overall results penalized a bit than engage 
in it.

   o We will be candid in our reporting to you, emphasizing the 
pluses and minuses important in appraising business value.  Our 
guideline is to tell you the business facts that we would want to 
know if our positions were reversed.  We owe you no less.  
Moreover, as a company with a major communications business, it 
would be inexcusable for us to apply lesser standards of 
accuracy, balance and incisiveness when reporting on ourselves 
than we would expect our news people to apply when reporting on 
others.  We also believe candor benefits us as managers: the CEO 
who misleads others in public may eventually mislead himself in 

   o Despite our policy of candor, we will discuss our 
activities in marketable securities only to the extent legally 
required.  Good investment ideas are rare, valuable and subject 
to competitive appropriation just as good product or business 
acquisition ideas are.  Therefore, we normally will not talk 
about our investment ideas.  This ban extends even to securities 
we have sold (because we may purchase them again) and to stocks 
we are incorrectly rumored to be buying.  If we deny those 
reports but say “no comment” on other occasions, the no-comments 
become confirmation.

     That completes the catechism, and we can now move on to the 
high point of 1983 - the acquisition of a majority interest in 
Nebraska Furniture Mart and our association with Rose Blumkin and 
her family.

Nebraska Furniture Mart

     Last year, in discussing how managers with bright, but 
adrenalin-soaked minds scramble after foolish acquisitions, I 
quoted Pascal: “It has struck me that all the misfortunes of men 
spring from the single cause that they are unable to stay quietly 
in one room.”

     Even Pascal would have left the room for Mrs. Blumkin.

     About 67 years ago Mrs. Blumkin, then 23, talked her way 
past a border guard to leave Russia for America.  She had no 
formal education, not even at the grammar school level, and knew 
no English.  After some years in this country, she learned the 
language when her older daughter taught her, every evening, the 
words she had learned in school during the day.

     In 1937, after many years of selling used clothing, Mrs.  
Blumkin had saved $500 with which to realize her dream of opening 
a furniture store.  Upon seeing the American Furniture Mart in 
Chicago - then the center of the nation’s wholesale furniture 
activity - she decided to christen her dream Nebraska Furniture 

     She met every obstacle you would expect (and a few you 
wouldn’t) when a business endowed with only $500 and no 
locational or product advantage goes up against rich, long-
entrenched competition.  At one early point, when her tiny 
resources ran out, “Mrs.  B” (a personal trademark now as well 
recognized in Greater Omaha as Coca-Cola or Sanka) coped in a way 
not taught at business schools: she simply sold the furniture and 
appliances from her home in order to pay creditors precisely as 

     Omaha retailers began to recognize that Mrs. B would offer 
customers far better deals than they had been giving, and they 
pressured furniture and carpet manufacturers not to sell to her.  
But by various strategies she obtained merchandise and cut prices 
sharply.  Mrs. B was then hauled into court for violation of Fair 
Trade laws.  She not only won all the cases, but received 
invaluable publicity.  At the end of one case, after 
demonstrating to the court that she could profitably sell carpet 
at a huge discount from the prevailing price, she sold the judge 
$1400 worth of carpet.

     Today Nebraska Furniture Mart generates over $100 million of 
sales annually out of one 200,000 square-foot store.  No other 
home furnishings store in the country comes close to that volume.  
That single store also sells more furniture, carpets, and 
appliances than do all Omaha competitors combined.

     One question I always ask myself in appraising a business is 
how I would like, assuming I had ample capital and skilled 
personnel, to compete with it.  I’d rather wrestle grizzlies than 
compete with Mrs. B and her progeny.  They buy brilliantly, they 
operate at expense ratios competitors don’t even dream about, and 
they then pass on to their customers much of the savings.  It’s 
the ideal business - one built upon exceptional value to the 
customer that in turn translates into exceptional economics for 
its owners.

     Mrs. B is wise as well as smart and, for far-sighted family 
reasons, was willing to sell the business last year.  I had 
admired both the family and the business for decades, and a deal 
was quickly made.  But Mrs. B, now 90, is not one to go home and 
risk, as she puts it, “losing her marbles”.  She remains Chairman 
and is on the sales floor seven days a week.  Carpet sales are 
her specialty.  She personally sells quantities that would be a 
good departmental total for other carpet retailers.

     We purchased 90% of the business - leaving 10% with members 
of the family who are involved in management - and have optioned 
10% to certain key young family managers.

     And what managers they are.  Geneticists should do 
handsprings over the Blumkin family.  Louie Blumkin, Mrs.  B’s 
son, has been President of Nebraska Furniture Mart for many years 
and is widely regarded as the shrewdest buyer of furniture and 
appliances in the country.  Louie says he had the best teacher, 
and Mrs. B says she had the best student.  They’re both right.  
Louie and his three sons all have the Blumkin business ability, 
work ethic, and, most important, character.  On top of that, they 
are really nice people.  We are delighted to be in partnership 
with them.

Corporate Performance

     During 1983 our book value increased from $737.43 per share 
to $975.83 per share, or by 32%.  We never take the one-year 
figure very seriously.  After all, why should the time required 
for a planet to circle the sun synchronize precisely with the 
time required for business actions to pay off?  Instead, we 
recommend not less than a five-year test as a rough yardstick of 
economic performance.  Red lights should start flashing if the 
five-year average annual gain falls much below the return on 
equity earned over the period by American industry in aggregate. 
(Watch out for our explanation if that occurs as Goethe observed, 
“When ideas fail, words come in very handy.”)

     During the 19-year tenure of present management, book value 
has grown from $19.46 per share to $975.83, or 22.6% compounded 
annually.  Considering our present size, nothing close to this 
rate of return can be sustained.  Those who believe otherwise 
should pursue a career in sales, but avoid one in mathematics.

     We report our progress in terms of book value because in our 
case (though not, by any means, in all cases) it is a 
conservative but reasonably adequate proxy for growth in 
intrinsic business value - the measurement that really counts.  
Book value’s virtue as a score-keeping measure is that it is easy 
to calculate and doesn’t involve the subjective (but important) 
judgments employed in calculation of intrinsic business value.  
It is important to understand, however, that the two terms - book 
value and intrinsic business value - have very different 

     Book value is an accounting concept, recording the 
accumulated financial input from both contributed capital and 
retained earnings.  Intrinsic business value is an economic 
concept, estimating future cash output discounted to present 
value.  Book value tells you what has been put in; intrinsic 
business value estimates what can be taken out.

     An analogy will suggest the difference.  Assume you spend 
identical amounts putting each of two children through college.  
The book value (measured by financial input) of each child’s 
education would be the same.  But the present value of the future 
payoff (the intrinsic business value) might vary enormously - 
from zero to many times the cost of the education.  So, also, do 
businesses having equal financial input end up with wide 
variations in value.

     At Berkshire, at the beginning of fiscal 1965 when the 
present management took over, the $19.46 per share book value 
considerably overstated intrinsic business value.  All of that 
book value consisted of textile assets that could not earn, on 
average, anything close to an appropriate rate of return.  In the 
terms of our analogy, the investment in textile assets resembled 
investment in a largely-wasted education.

     Now, however, our intrinsic business value considerably 
exceeds book value.  There are two major reasons:

     (1) Standard accounting principles require that common 
         stocks held by our insurance subsidiaries be stated on 
         our books at market value, but that other stocks we own 
         be carried at the lower of aggregate cost or market.  
         At the end of 1983, the market value of this latter 
         group exceeded carrying value by $70 million pre-tax, 
         or about $50 million after tax.  This excess belongs in 
         our intrinsic business value, but is not included in 
         the calculation of book value;

     (2) More important, we own several businesses that possess 
         economic Goodwill (which is properly includable in 
         intrinsic business value) far larger than the 
         accounting Goodwill that is carried on our balance 
         sheet and reflected in book value.

     Goodwill, both economic and accounting, is an arcane subject 
and requires more explanation than is appropriate here.  The 
appendix that follows this letter - “Goodwill and its 
Amortization: The Rules and The Realities” - explains why 
economic and accounting Goodwill can, and usually do, differ 

     You can live a full and rewarding life without ever thinking 
about Goodwill and its amortization.  But students of investment 
and management should understand the nuances of the subject.  My 
own thinking has changed drastically from 35 years ago when I was 
taught to favor tangible assets and to shun businesses whose 
value depended largely upon economic Goodwill.  This bias caused 
me to make many important business mistakes of omission, although 
relatively few of commission.

     Keynes identified my problem: “The difficulty lies not in 
the new ideas but in escaping from the old ones.” My escape was 
long delayed, in part because most of what I had been taught by 
the same teacher had been (and continues to be) so 
extraordinarily valuable.  Ultimately, business experience, 
direct and vicarious, produced my present strong preference for 
businesses that possess large amounts of enduring Goodwill and 
that utilize a minimum of tangible assets.

     I recommend the Appendix to those who are comfortable with 
accounting terminology and who have an interest in understanding 
the business aspects of Goodwill.  Whether or not you wish to 
tackle the Appendix, you should be aware that Charlie and I 
believe that Berkshire possesses very significant economic 
Goodwill value above that reflected in our book value.

Sources of Reported Earnings

     The table below shows the sources of Berkshire’s reported 
earnings.  In 1982, Berkshire owned about 60% of Blue Chip Stamps 
whereas, in 1983, our ownership was 60% throughout the first six 
months and 100% thereafter.  In turn, Berkshire’s net interest in 
Wesco was 48% during 1982 and the first six months of 1983, and 
80% for the balance of 1983.  Because of these changed ownership 
percentages, the first two columns of the table provide the best 
measure of underlying business performance.

     All of the significant gains and losses attributable to 
unusual sales of assets by any of the business entities are 
aggregated with securities transactions on the line near the 
bottom of the table, and are not included in operating earnings. 
(We regard any annual figure for realized capital gains or losses 
as meaningless, but we regard the aggregate realized and 
unrealized capital gains over a period of years as very 
important.) Furthermore, amortization of Goodwill is not charged 
against the specific businesses but, for reasons outlined in the 
Appendix, is set forth as a separate item.

                                                                         Net Earnings
                                   Earnings Before Income Taxes            After Tax
                              --------------------------------------  ------------------
                                    Total          Berkshire Share     Berkshire Share
                              ------------------  ------------------  ------------------
                                1983      1982      1983      1982      1983      1982
                              --------  --------  --------  --------  --------  --------
                                                    (000s omitted)
Operating Earnings:
  Insurance Group:
    Underwriting ............ $(33,872) $(21,558) $(33,872) $(21,558) $(18,400) $(11,345)
    Net Investment Income ...   43,810    41,620    43,810    41,620    39,114    35,270
  Berkshire-Waumbec Textiles      (100)   (1,545)     (100)   (1,545)      (63)     (862)
  Associated Retail Stores ..      697       914       697       914       355       446
  Nebraska Furniture Mart(1)     3,812      --       3,049      --       1,521      --
  See’s Candies .............   27,411    23,884    24,526    14,235    12,212     6,914
  Buffalo Evening News ......   19,352    (1,215)   16,547      (724)    8,832      (226)
  Blue Chip Stamps(2) .......   (1,422)    4,182    (1,876)    2,492      (353)    2,472
  Wesco Financial - Parent ..    7,493     6,156     4,844     2,937     3,448     2,210
  Mutual Savings and Loan ...     (798)       (6)     (467)       (2)    1,917     1,524
  Precision Steel ...........    3,241     1,035     2,102       493     1,136       265
  Interest on Debt ..........  (15,104)  (14,996)  (13,844)  (12,977)   (7,346)   (6,951)
  Special GEICO Distribution    21,000      --      21,000      --      19,551      --
     Contributions ..........   (3,066)     (891)   (3,066)     (891)   (1,656)     (481)
  Amortization of Goodwill ..     (532)      151      (563)       90      (563)       90
  Other .....................   10,121     3,371     9,623     2,658     8,490     2,171
                              --------  --------  --------  --------  --------  --------
Operating Earnings ..........   82,043    41,102    72,410    27,742    68,195    31,497
Sales of securities and
   unusual sales of assets ..   67,260    36,651    65,089    21,875    45,298    14,877
                              --------  --------  --------  --------  --------  --------
Total Earnings .............. $149,303  $ 77,753  $137,499  $ 49,617  $113,493  $ 46,374
                              ========  ========  ========  ========  ========  ========

(1) October through December
(2) 1982 and 1983 are not comparable; major assets were 
    transferred in the merger.

     For a discussion of the businesses owned by Wesco, please 
read Charlie Munger’s report on pages 46-51.  Charlie replaced 
Louie Vincenti as Chairman of Wesco late in 1983 when health 
forced Louie’s retirement at age 77.  In some instances, “health” 
is a euphemism, but in Louie’s case nothing but health would 
cause us to consider his retirement.  Louie is a marvelous man 
and has been a marvelous manager.

     The special GEICO distribution reported in the table arose 
when that company made a tender offer for a portion of its stock, 
buying both from us and other shareholders.  At GEICO’s request, 
we tendered a quantity of shares that kept our ownership 
percentage the same after the transaction as before.  The 
proportional nature of our sale permitted us to treat the 
proceeds as a dividend.  Unlike individuals, corporations net 
considerably more when earnings are derived from dividends rather 
than from capital gains, since the effective Federal income tax 
rate on dividends is 6.9% versus 28% on capital gains.

     Even with this special item added in, our total dividends 
from GEICO in 1983 were considerably less than our share of 
GEICO’s earnings.  Thus it is perfectly appropriate, from both an 
accounting and economic standpoint, to include the redemption 
proceeds in our reported earnings.  It is because the item is 
large and unusual that we call your attention to it.

     The table showing you our sources of earnings includes 
dividends from those non-controlled companies whose marketable 
equity securities we own.  But the table does not include 
earnings those companies have retained that are applicable to our 
ownership.  In aggregate and over time we expect those 
undistributed earnings to be reflected in market prices and to 
increase our intrinsic business value on a dollar-for-dollar 
basis, just as if those earnings had been under our control and 
reported as part of our profits.  That does not mean we expect 
all of our holdings to behave uniformly; some will disappoint us, 
others will deliver pleasant surprises.  To date our experience 
has been better than we originally anticipated, In aggregate, we 
have received far more than a dollar of market value gain for 
every dollar of earnings retained.

     The following table shows our 1983 yearend net holdings in 
marketable equities.  All numbers represent 100% of Berkshire’s 
holdings, and 80% of Wesco’s holdings.  The portion attributable 
to minority shareholders of Wesco has been excluded.

No. of Shares                                        Cost        Market
-------------                                     ----------   ----------
                                                      (000s omitted)
    690,975    Affiliated Publications, Inc. ....  $  3,516     $  26,603
  4,451,544    General Foods Corporation(a) .....   163,786       228,698
  6,850,000    GEICO Corporation ................    47,138       398,156
  2,379,200    Handy & Harman ...................    27,318        42,231
    636,310    Interpublic Group of Companies, Inc.   4,056        33,088
    197,200    Media General ....................     3,191        11,191
    250,400    Ogilvy & Mather International ....     2,580        12,833
  5,618,661    R. J. Reynolds Industries, Inc.(a)   268,918       341,334
    901,788    Time, Inc. .......................    27,732        56,860
  1,868,600    The Washington Post Company ......    10,628       136,875
                                                  ----------   ----------
                                                   $558,863    $1,287,869
               All Other Common Stockholdings ...     7,485        18,044
                                                  ----------   ----------
               Total Common Stocks ..............  $566,348    $1,305,913
                                                  ==========   ==========

(a) WESCO owns shares in these companies.

     Based upon present holdings and present dividend rates - 
excluding any special items such as the GEICO proportional 
redemption last year - we would expect reported dividends from 
this group to be approximately $39 million in 1984.  We can also 
make a very rough guess about the earnings this group will retain 
that will be attributable to our ownership: these may total about 
$65 million for the year.  These retained earnings could well 
have no immediate effect on market prices of the securities.  
Over time, however, we feel they will have real meaning.

     In addition to the figures already supplied, information 
regarding the businesses we control appears in Management’s 
Discussion on pages 40-44.  The most significant of these are 
Buffalo Evening News, See’s, and the Insurance Group, to which we 
will give some special attention here.

Buffalo Evening News

     First, a clarification: our corporate name is Buffalo 
Evening News, Inc. but the name of the newspaper, since we began 
a morning edition a little over a year ago, is Buffalo News.

     In 1983 the News somewhat exceeded its targeted profit 
margin of 10% after tax.  Two factors were responsible: (1) a 
state income tax cost that was subnormal because of a large loss 
carry-forward, now fully utilized, and (2) a large drop in the 
per-ton cost of newsprint (an unanticipated fluke that will be 
reversed in 1984).

     Although our profit margins in 1983 were about average for 
newspapers such as the News, the paper’s performance, 
nevertheless, was a significant achievement considering the 
economic and retailing environment in Buffalo.

     Buffalo has a concentration of heavy industry, a segment of 
the economy that was hit particularly hard by the recent 
recession and that has lagged the recovery.  As Buffalo consumers 
have suffered, so also have the paper’s retailing customers.  
Their numbers have shrunk over the past few years and many of 
those surviving have cut their linage.

     Within this environment the News has one exceptional 
strength: its acceptance by the public, a matter measured by the 
paper’s “penetration ratio” - the percentage of households within 
the community purchasing the paper each day.  Our ratio is 
superb: for the six months ended September 30, 1983 the News 
stood number one in weekday penetration among the 100 largest 
papers in the United States (the ranking is based on “city zone” 
numbers compiled by the Audit Bureau of Circulations).

     In interpreting the standings, it is important to note that 
many large cities have two papers, and that in such cases the 
penetration of either paper is necessarily lower than if there 
were a single paper, as in Buffalo.  Nevertheless, the list of 
the 100 largest papers includes many that have a city to 
themselves.  Among these, the News is at the top nationally, far 
ahead of many of the country’s best-known dailies.

     Among Sunday editions of these same large dailies, the News 
ranks number three in penetration - ten to twenty percentage 
points ahead of many well-known papers.  It was not always this 
way in Buffalo. Below we show Sunday circulation in Buffalo in 
the years prior to 1977 compared with the present period.  In 
that earlier period the Sunday paper was the Courier-Express (the 
News was not then publishing a Sunday paper).  Now, of course, it 
is the News.

                  Average Sunday Circulation
               Year                    Circulation
               ----                    -----------
               1970                      314,000
               1971                      306,000
               1972                      302,000
               1973                      290,000
               1974                      278,000
               1975                      269,000
               1976                      270,000

               1984 (Current)            376,000

     We believe a paper’s penetration ratio to be the best 
measure of the strength of its franchise.  Papers with unusually 
high penetration in the geographical area that is of prime 
interest to major local retailers, and with relatively little 
circulation elsewhere, are exceptionally efficient buys for those 
retailers.  Low-penetration papers have a far less compelling 
message to present to advertisers.

     In our opinion, three factors largely account for the 
unusual acceptance of the News in the community.  Among these, 
points 2 and 3 also may explain the popularity of the Sunday News 
compared to that of the Sunday Courier-Express when it was the 
sole Sunday paper:

     (1) The first point has nothing to do with merits of the 
         News.  Both emigration and immigration are relatively 
         low in Buffalo.  A stable population is more interested 
         and involved in the activities of its community than is 
         a shifting population - and, as a result, is more 
         interested in the content of the local daily paper.  
         Increase the movement in and out of a city and 
         penetration ratios will fall.

     (2) The News has a reputation for editorial quality and 
         integrity that was honed by our longtime editor, the 
         legendary Alfred Kirchhofer, and that has been preserved 
         and extended by Murray Light.  This reputation was 
         enormously important to our success in establishing a 
         Sunday paper against entrenched competition.  And without 
         a Sunday edition, the News would not have survived in the 
         long run.

     (3) The News lives up to its name - it delivers a very 
         unusual amount of news.  During 1983, our “news hole” 
         (editorial material - not ads) amounted to 50% of the 
         newspaper’s content (excluding preprinted inserts).  
         Among papers that dominate their markets and that are of 
         comparable or larger size, we know of only one whose news 
         hole percentage exceeds that of the News.  Comprehensive 
         figures are not available, but a sampling indicates an 
         average percentage in the high 30s.  In other words, page 
         for page, our mix gives readers over 25% more news than 
         the typical paper.  This news-rich mixture is by intent.  
         Some publishers, pushing for higher profit margins, have 
         cut their news holes during the past decade.  We have 
         maintained ours and will continue to do so.  Properly 
         written and edited, a full serving of news makes our 
         paper more valuable to the reader and contributes to our 
         unusual penetration ratio.

     Despite the strength of the News’ franchise, gains in ROP 
linage (advertising printed within the newspaper pages as 
contrasted to preprinted inserts) are going to be very difficult 
to achieve.  We had an enormous gain in preprints during 1983: 
lines rose from 9.3 million to 16.4 million, revenues from $3.6 
million to $8.1 million.  These gains are consistent with 
national trends, but exaggerated in our case by business we 
picked up when the Courier-Express closed.

     On balance, the shift from ROP to preprints has negative 
economic implications for us.  Profitability on preprints is less 
and the business is more subject to competition from alternative 
means of delivery.  Furthermore, a reduction in ROP linage means 
less absolute space devoted to news (since the news hole 
percentage remains constant), thereby reducing the utility of the 
paper to the reader.

     Stan Lipsey became Publisher of the Buffalo News at midyear 
upon the retirement of Henry Urban.  Henry never flinched during 
the dark days of litigation and losses following our introduction 
of the Sunday paper - an introduction whose wisdom was questioned 
by many in the newspaper business, including some within our own 
building.  Henry is admired by the Buffalo business community, 
he’s admired by all who worked for him, and he is admired by 
Charlie and me.  Stan worked with Henry for several years, and 
has worked for Berkshire Hathaway since 1969.  He has been 
personally involved in all nuts-and-bolts aspects of the 
newspaper business from editorial to circulation.  We couldn’t do 

See’s Candy Shops

     The financial results at See’s continue to be exceptional.  
The business possesses a valuable and solid consumer franchise 
and a manager equally valuable and solid.

     In recent years See’s has encountered two important 
problems, at least one of which is well on its way toward 
solution.  That problem concerns costs, except those for raw 
materials.  We have enjoyed a break on raw material costs in 
recent years though so, of course, have our competitors.  One of 
these days we will get a nasty surprise in the opposite 
direction.  In effect, raw material costs are largely beyond our 
control since we will, as a matter of course, buy the finest 
ingredients that we can, regardless of changes in their price 
levels.  We regard product quality as sacred.

     But other kinds of costs are more controllable, and it is in 
this area that we have had problems.  On a per-pound basis, our 
costs (not including those for raw materials) have increased in 
the last few years at a rate significantly greater than the 
increase in the general price level.  It is vital to our 
competitive position and profit potential that we reverse this 

     In recent months much better control over costs has been 
attained and we feel certain that our rate of growth in these 
costs in 1984 will be below the rate of inflation.  This 
confidence arises out of our long experience with the managerial 
talents of Chuck Huggins.  We put Chuck in charge the day we took 
over, and his record has been simply extraordinary, as shown by 
the following table:

  52-53 Week Year                     Operating     Number of    Number of
    Ended About           Sales        Profits      Pounds of   Stores Open
    December 31         Revenues     After Taxes   Candy Sold   at Year End
-------------------   ------------   -----------   ----------   -----------
1983 (53 weeks) ...   $133,531,000   $13,699,000   24,651,000       207
1982 ..............    123,662,000    11,875,000   24,216,000       202
1981 ..............    112,578,000    10,779,000   24,052,000       199
1980 ..............     97,715,000     7,547,000   24,065,000       191
1979 ..............     87,314,000     6,330,000   23,985,000       188
1978 ..............     73,653,000     6,178,000   22,407,000       182
1977 ..............     62,886,000     6,154,000   20,921,000       179
1976 (53 weeks) ...     56,333,000     5,569,000   20,553,000       173
1975 ..............     50,492,000     5,132,000   19,134,000       172
1974 ..............     41,248,000     3,021,000   17,883,000       170
1973 ..............     35,050,000     1,940,000   17,813,000       169
1972 ..............     31,337,000     2,083,000   16,954,000       167

     The other problem we face, as the table suggests, is our 
recent inability to achieve meaningful gains in pounds sold.  The 
industry has the same problem.  But for many years we 
outperformed the industry in this respect and now we are not.

     The poundage volume in our retail stores has been virtually 
unchanged each year for the past four, despite small increases 
every year in the number of shops (and in distribution expense as 
well).  Of course, dollar volume has increased because we have 
raised prices significantly.  But we regard the most important 
measure of retail trends to be units sold per store rather than 
dollar volume.  On a same-store basis (counting only shops open 
throughout both years) with all figures adjusted to a 52-week 
year, poundage was down .8 of 1% during 1983.  This small decline 
was our best same-store performance since 1979; the cumulative 
decline since then has been about 8%.  Quantity-order volume, 
about 25% of our total, has plateaued in recent years following 
very large poundage gains throughout the 1970s.

     We are not sure to what extent this flat volume - both in 
the retail shop area and the quantity order area - is due to our 
pricing policies and to what extent it is due to static industry 
volume, the recession, and the extraordinary share of market we 
already enjoy in our primary marketing area.  Our price increase 
for 1984 is much more modest than has been the case in the past 
few years, and we hope that next year we can report better volume 
figures to you.  But we have no basis to forecast these.

     Despite the volume problem, See’s strengths are many and 
important.  In our primary marketing area, the West, our candy is 
preferred by an enormous margin to that of any competitor.  In 
fact, we believe most lovers of chocolate prefer it to candy 
costing two or three times as much. (In candy, as in stocks, 
price and value can differ; price is what you give, value is what 
you get.) The quality of customer service in our shops - operated 
throughout the country by us and not by franchisees is every bit 
as good as the product.  Cheerful, helpful personnel are as much 
a trademark of See’s as is the logo on the box.  That’s no small 
achievement in a business that requires us to hire about 2000 
seasonal workers.  We know of no comparably-sized organization 
that betters the quality of customer service delivered by Chuck 
Huggins and his associates.

     Because we have raised prices so modestly in 1984, we expect 
See’s profits this year to be about the same as in 1983.  

Insurance - Controlled Operations

     We both operate insurance companies and have a large 
economic interest in an insurance business we don’t operate, 
GEICO.  The results for all can be summed up easily: in 
aggregate, the companies we operate and whose underwriting 
results reflect the consequences of decisions that were my 
responsibility a few years ago, had absolutely terrible results.  
Fortunately, GEICO, whose policies I do not influence, simply 
shot the lights out.  The inference you draw from this summary is 
the correct one.  I made some serious mistakes a few years ago 
that came home to roost.

     The industry had its worst underwriting year in a long time, 
as indicated by the table below:

                          Yearly Change      Combined Ratio
                           in Premiums        after Policy-
                           Written (%)      holder Dividends
                          -------------     ----------------
1972 ....................     10.2                96.2
1973 ....................      8.0                99.2
1974 ....................      6.2               105.4
1975 ....................     11.0               107.9
1976 ....................     21.9               102.4
1977 ....................     19.8                97.2
1978 ....................     12.8                97.5
1979 ....................     10.3               100.6
1980 ....................      6.0               103.1
1981 ....................      3.9               106.0
1982 (Revised) ..........      4.4               109.7
1983 (Estimated) ........      4.6               111.0

Source: Best’s Aggregates and Averages.

     Best’s data reflect the experience of practically the entire 
industry, including stock, mutual, and reciprocal companies.  The 
combined ratio represents total insurance costs (losses incurred 
plus expenses) compared to revenue from premiums; a ratio below 
100 indicates an underwriting profit and one above 100 indicates 
a loss.

     For the reasons outlined in last year’s report, we expect 
the poor industry experience of 1983 to be more or less typical 
for a good many years to come. (As Yogi Berra put it: “It will be 
deja vu all over again.”) That doesn’t mean we think the figures 
won’t bounce around a bit; they are certain to.  But we believe 
it highly unlikely that the combined ratio during the balance of 
the decade will average significantly below the 1981-1983 level.  
Based on our expectations regarding inflation - and we are as 
pessimistic as ever on that front - industry premium volume must 
grow about 10% annually merely to stabilize loss ratios at 
present levels.

     Our own combined ratio in 1983 was 121.  Since Mike Goldberg 
recently took over most of the responsibility for the insurance 
operation, it would be nice for me if our shortcomings could be 
placed at his doorstep rather than mine.  But unfortunately, as 
we have often pointed out, the insurance business has a long 
lead-time.  Though business policies may be changed and personnel 
improved, a significant period must pass before the effects are 
seen.  (This characteristic of the business enabled us to make a 
great deal of money in GEICO; we could picture what was likely to 
happen well before it actually occurred.) So the roots of the 
1983 results are operating and personnel decisions made two or 
more years back when I had direct managerial responsibility for 
the insurance group.

     Despite our poor results overall, several of our managers 
did truly outstanding jobs.  Roland Miller guided the auto and 
general liability business of National Indemnity Company and 
National Fire and Marine Insurance Company to improved results, 
while those of competitors deteriorated.  In addition, Tom Rowley 
at Continental Divide Insurance - our fledgling Colorado 
homestate company - seems certain to be a winner.  Mike found him 
a little over a year ago, and he was an important acquisition.

     We have become active recently - and hope to become much 
more active - in reinsurance transactions where the buyer’s 
overriding concern should be the seller’s long-term 
creditworthiness.  In such transactions our premier financial 
strength should make us the number one choice of both claimants 
and insurers who must rely on the reinsurer’s promises for a 
great many years to come.

     A major source of such business is structured settlements - 
a procedure for settling losses under which claimants receive 
periodic payments (almost always monthly, for life) rather than a 
single lump sum settlement.  This form of settlement has 
important tax advantages for the claimant and also prevents his 
squandering a large lump-sum payment.  Frequently, some inflation 
protection is built into the settlement.  Usually the claimant 
has been seriously injured, and thus the periodic payments must 
be unquestionably secure for decades to come.  We believe we 
offer unparalleled security.  No other insurer we know of - even 
those with much larger gross assets - has our financial strength.

     We also think our financial strength should recommend us to 
companies wishing to transfer loss reserves.  In such 
transactions, other insurance companies pay us lump sums to 
assume all (or a specified portion of) future loss payments 
applicable to large blocks of expired business.  Here also, the 
company transferring such claims needs to be certain of the 
transferee’s financial strength for many years to come.  Again, 
most of our competitors soliciting such business appear to us to 
have a financial condition that is materially inferior to ours.

     Potentially, structured settlements and the assumption of 
loss reserves could become very significant to us.  Because of 
their potential size and because these operations generate large 
amounts of investment income compared to premium volume, we will 
show underwriting results from those businesses on a separate 
line in our insurance segment data.  We also will exclude their 
effect in reporting our combined ratio to you.  We “front end” no 
profit on structured settlement or loss reserve transactions, and 
all attributable overhead is expensed currently.  Both businesses 
are run by Don Wurster at National Indemnity Company.

Insurance - GEICO

     Geico’s performance during 1983 was as good as our own 
insurance performance was poor.  Compared to the industry’s 
combined ratio of 111, GEICO wrote at 96 after a large voluntary 
accrual for policyholder dividends.  A few years ago I would not 
have thought GEICO could so greatly outperform the industry.  Its 
superiority reflects the combination of a truly exceptional 
business idea and an exceptional management.

     Jack Byrne and Bill Snyder have maintained extraordinary 
discipline in the underwriting area (including, crucially, 
provision for full and proper loss reserves), and their efforts 
are now being further rewarded by significant gains in new 
business.  Equally important, Lou Simpson is the class of the 
field among insurance investment managers.  The three of them are 
some team.

     We have approximately a one-third interest in GEICO.  That 
gives us a $270 million share in the company’s premium volume, an 
amount some 80% larger than our own volume.  Thus, the major 
portion of our total insurance business comes from the best 
insurance book in the country.  This fact does not moderate by an 
iota the need for us to improve our own operation.

Stock Splits and Stock Activity

     We often are asked why Berkshire does not split its stock.  
The assumption behind this question usually appears to be that a 
split would be a pro-shareholder action.  We disagree.  Let me 
tell you why.

     One of our goals is to have Berkshire Hathaway stock sell at 
a price rationally related to its intrinsic business value.  (But 
note “rationally related”, not “identical”: if well-regarded 
companies are generally selling in the market at large discounts 
from value, Berkshire might well be priced similarly.) The key to 
a rational stock price is rational shareholders, both current and 

     If the holders of a company’s stock and/or the prospective 
buyers attracted to it are prone to make irrational or emotion-
based decisions, some pretty silly stock prices are going to 
appear periodically.  Manic-depressive personalities produce 
manic-depressive valuations.  Such aberrations may help us in 
buying and selling the stocks of other companies.  But we think 
it is in both your interest and ours to minimize their occurrence 
in the market for Berkshire.

     To obtain only high quality shareholders is no cinch.  Mrs. 
Astor could select her 400, but anyone can buy any stock.  
Entering members of a shareholder “club” cannot be screened for 
intellectual capacity, emotional stability, moral sensitivity or 
acceptable dress.  Shareholder eugenics, therefore, might appear 
to be a hopeless undertaking.

     In large part, however, we feel that high quality ownership 
can be attracted and maintained if we consistently communicate 
our business and ownership philosophy - along with no other 
conflicting messages - and then let self selection follow its 
course.  For example, self selection will draw a far different 
crowd to a musical event advertised as an opera than one 
advertised as a rock concert even though anyone can buy a ticket 
to either.

     Through our policies and communications - our 
“advertisements” - we try to attract investors who will 
understand our operations, attitudes and expectations. (And, 
fully as important, we try to dissuade those who won’t.) We want 
those who think of themselves as business owners and invest in 
companies with the intention of staying a long time.  And, we 
want those who keep their eyes focused on business results, not 
market prices.

     Investors possessing those characteristics are in a small 
minority, but we have an exceptional collection of them.  I 
believe well over 90% - probably over 95% - of our shares are 
held by those who were shareholders of Berkshire or Blue Chip 
five years ago.  And I would guess that over 95% of our shares 
are held by investors for whom the holding is at least double the 
size of their next largest.  Among companies with at least 
several thousand public shareholders and more than $1 billion of 
market value, we are almost certainly the leader in the degree to 
which our shareholders think and act like owners.  Upgrading a 
shareholder group that possesses these characteristics is not 

     Were we to split the stock or take other actions focusing on 
stock price rather than business value, we would attract an 
entering class of buyers inferior to the exiting class of 
sellers.  At $1300, there are very few investors who can’t afford 
a Berkshire share.  Would a potential one-share purchaser be 
better off if we split 100 for 1 so he could buy 100 shares?  
Those who think so and who would buy the stock because of the 
split or in anticipation of one would definitely downgrade the 
quality of our present shareholder group. (Could we really 
improve our shareholder group by trading some of our present 
clear-thinking members for impressionable new ones who, 
preferring paper to value, feel wealthier with nine $10 bills 
than with one $100 bill?) People who buy for non-value reasons 
are likely to sell for non-value reasons.  Their presence in the 
picture will accentuate erratic price swings unrelated to 
underlying business developments.

     We will try to avoid policies that attract buyers with a 
short-term focus on our stock price and try to follow policies 
that attract informed long-term investors focusing on business 
values. just as you purchased your Berkshire shares in a market 
populated by rational informed investors, you deserve a chance to 
sell - should you ever want to - in the same kind of market.  We 
will work to keep it in existence.

     One of the ironies of the stock market is the emphasis on 
activity.  Brokers, using terms such as “marketability” and 
“liquidity”, sing the praises of companies with high share 
turnover (those who cannot fill your pocket will confidently fill 
your ear).  But investors should understand that what is good for 
the croupier is not good for the customer.  A hyperactive stock 
market is the pickpocket of enterprise.

     For example, consider a typical company earning, say, 12% on 
equity.  Assume a very high turnover rate in its shares of 100% 
per year.  If a purchase and sale of the stock each extract 
commissions of 1% (the rate may be much higher on low-priced 
stocks) and if the stock trades at book value, the owners of our 
hypothetical company will pay, in aggregate, 2% of the company’s 
net worth annually for the privilege of transferring ownership.  
This activity does nothing for the earnings of the business, and 
means that 1/6 of them are lost to the owners through the 
“frictional” cost of transfer. (And this calculation does not 
count option trading, which would increase frictional costs still 

     All that makes for a rather expensive game of musical 
chairs.  Can you imagine the agonized cry that would arise if a 
governmental unit were to impose a new 16 2/3% tax on earnings of 
corporations or investors?  By market activity, investors can 
impose upon themselves the equivalent of such a tax.

     Days when the market trades 100 million shares (and that 
kind of volume, when over-the-counter trading is included, is 
today abnormally low) are a curse for owners, not a blessing - 
for they mean that owners are paying twice as much to change 
chairs as they are on a 50-million-share day.  If 100 million-
share days persist for a year and the average cost on each 
purchase and sale is 15 cents a share, the chair-changing tax for 
investors in aggregate would total about $7.5 billion - an amount 
roughly equal to the combined 1982 profits of Exxon, General 
Motors, Mobil and Texaco, the four largest companies in the 
Fortune 500.

     These companies had a combined net worth of $75 billion at 
yearend 1982 and accounted for over 12% of both net worth and net 
income of the entire Fortune 500 list.  Under our assumption 
investors, in aggregate, every year forfeit all earnings from 
this staggering sum of capital merely to satisfy their penchant 
for “financial flip-flopping”.  In addition, investment 
management fees of over $2 billion annually - sums paid for 
chair-changing advice - require the forfeiture by investors of 
all earnings of the five largest banking organizations (Citicorp, 
Bank America, Chase Manhattan, Manufacturers Hanover and J. P. 
Morgan).  These expensive activities may decide who eats the pie, 
but they don’t enlarge it.

     (We are aware of the pie-expanding argument that says that 
such activities improve the rationality of the capital allocation 
process.  We think that this argument is specious and that, on 
balance, hyperactive equity markets subvert rational capital 
allocation and act as pie shrinkers.  Adam Smith felt that all 
noncollusive acts in a free market were guided by an invisible 
hand that led an economy to maximum progress; our view is that 
casino-type markets and hair-trigger investment management act as 
an invisible foot that trips up and slows down a forward-moving 

     Contrast the hyperactive stock with Berkshire.  The bid-and-
ask spread in our stock currently is about 30 points, or a little 
over 2%.  Depending on the size of the transaction, the 
difference between proceeds received by the seller of Berkshire 
and cost to the buyer may range downward from 4% (in trading 
involving only a few shares) to perhaps 1 1/2% (in large trades 
where negotiation can reduce both the market-maker’s spread and 
the broker’s commission).  Because most Berkshire shares are 
traded in fairly large transactions, the spread on all trading 
probably does not average more than 2%.

     Meanwhile, true turnover in Berkshire stock (excluding 
inter-dealer transactions, gifts and bequests) probably runs 3% 
per year.  Thus our owners, in aggregate, are paying perhaps 
6/100 of 1% of Berkshire’s market value annually for transfer 
privileges.  By this very rough estimate, that’s $900,000 - not a 
small cost, but far less than average.  Splitting the stock would 
increase that cost, downgrade the quality of our shareholder 
population, and encourage a market price less consistently 
related to intrinsic business value.  We see no offsetting 


     Last year in this section I ran a small ad to encourage 
acquisition candidates.  In our communications businesses we tell 
our advertisers that repetition is a key to results (which it 
is), so we will again repeat our acquisition criteria.

     We prefer:
        (1) large purchases (at least $5 million of after-tax 
        (2) demonstrated consistent earning power (future 
            projections are of little interest to us, nor are 
            “turn-around” situations),
        (3) businesses earning good returns on equity while 
            employing little or no debt,
        (4) management in place (we can’t supply it),
        (5) simple businesses (if there’s lots of technology, we 
            won’t understand it),
        (6) an offering price (we don’t want to waste our time or 
            that of the seller by talking, even preliminarily, 
            about a transaction when price is unknown).

     We will not engage in unfriendly takeovers.  We can promise 
complete confidentiality and a very fast answer - customarily 
within five minutes - as to whether we’re interested.  We prefer 
to buy for cash, but will consider issuance of stock when we 
receive as much in intrinsic business value as we give.  We 
invite potential sellers to check us out by contacting people 
with whom we have done business in the past.  For the right 
business - and the right people - we can provide a good home.

                         *  *  *  *  *

     About 96.4% of all eligible shares participated in our 1983 
shareholder-designated contributions program.  The total 
contributions made pursuant to this program - disbursed in the 
early days of 1984 but fully expensed in 1983 - were $3,066,501, 
and 1353 charities were recipients.  Although the response 
measured by the percentage of shares participating was 
extraordinarily good, the response measured by the percentage of 
holders participating was not as good.  The reason may well be 
the large number of new shareholders acquired through the merger 
and their lack of familiarity with the program.  We urge new 
shareholders to read the description of the program on pages 52-

     If you wish to participate in future programs, we strongly 
urge that you immediately make sure that your shares are 
registered in the actual owner’s name, not in “street” or nominee 
name.  Shares not so registered on September 28, 1984 will not be 
eligible for any 1984 program.

                         *  *  *  *  *

     The Blue Chip/Berkshire merger went off without a hitch.  
Less than one-tenth of 1% of the shares of each company voted 
against the merger, and no requests for appraisal were made.  In 
1983, we gained some tax efficiency from the merger and we expect 
to gain more in the future.

     One interesting sidelight to the merger: Berkshire now has 
1,146,909 shares outstanding compared to 1,137,778 shares at the 
beginning of fiscal 1965, the year present management assumed 
responsibility.  For every 1% of the company you owned at that 
time, you now would own .99%. Thus, all of today’s assets - the 
News, See’s, Nebraska Furniture Mart, the Insurance Group, $1.3 
billion in marketable stocks, etc. - have been added to the 
original textile assets with virtually no net dilution to the 
original owners.

     We are delighted to have the former Blue Chip shareholders 
join us.  To aid in your understanding of Berkshire Hathaway, we 
will be glad to send you the Compendium of Letters from the 
Annual Reports of 1977-1981, and/or the 1982 Annual report.  
Direct your request to the Company at 1440 Kiewit Plaza, Omaha, 
Nebraska 68131.

                                        Warren E. Buffett
March 14, 1984                          Chairman of the Board


Goodwill and its Amortization: The Rules and The Realities
This appendix deals only with economic and accounting Goodwill – not the goodwill of everyday usage. For example, a business may be well liked, even loved, by most of its customers but possess no economic goodwill. (AT&T, before the breakup, was generally well thought of, but possessed not a dime of economic Goodwill.) And, regrettably, a business may be disliked by its customers but possess substantial, and growing, economic Goodwill. So, just for the moment, forget emotions and focus only on economics and accounting.
When a business is purchased, accounting principles require that the purchase price first be assigned to the fair value of the identifiable assets that are acquired. Frequently the sum of the fair values put on the assets (after the deduction of liabilities) is less than the total purchase price of the business. In that case, the difference is assigned to an asset account entitled "excess of cost over equity in net assets acquired". To avoid constant repetition of this mouthful, we will substitute "Goodwill".
Accounting Goodwill arising from businesses purchased before November 1970 has a special standing. Except under rare circumstances, it can remain an asset on the balance sheet as long as the business bought is retained. That means no amortization charges to gradually extinguish that asset need be made against earnings.
The case is different, however, with purchases made from November 1970 on. When these create Goodwill, it must be amortized over not more than 40 years through charges – of equal amount in every year – to the earnings account. Since 40 years is the maximum period allowed, 40 years is what managements (including us) usually elect. This annual charge to earnings is not allowed as a tax deduction and, thus, has an effect on after-tax income that is roughly double that of most other expenses.
That’s how accounting Goodwill works. To see how it differs from economic reality, let’s look at an example close at hand. We’ll round some figures, and greatly oversimplify, to make the example easier to follow. We’ll also mention some implications for investors and managers.
Blue Chip Stamps bought See’s early in 1972 for $25 million, at which time See’s had about $8 million of net tangible assets. (Throughout this discussion, accounts receivable will be classified as tangible assets, a definition proper for business analysis.) This level of tangible assets was adequate to conduct the business without use of debt, except for short periods seasonally. See’s was earning about $2 million after tax at the time, and such earnings seemed conservatively representative of future earning power in constant 1972 dollars.
Thus our first lesson: businesses logically are worth far more than net tangible assets when they can be expected to produce earnings on such assets considerably in excess of market rates of return. The capitalized value of this excess return is economic Goodwill.
In 1972 (and now) relatively few businesses could be expected to consistently earn the 25% after tax on net tangible assets that was earned by See’s – doing it, furthermore, with conservative accounting and no financial leverage. It was not the fair market value of the inventories, receivables or fixed assets that produced the premium rates of return. Rather it was a combination of intangible assets, particularly a pervasive favorable reputation with consumers based upon countless pleasant experiences they have had with both product and personnel.
Such a reputation creates a consumer franchise that allows the value of the product to the purchaser, rather than its production cost, to be the major determinant of selling price. Consumer franchises are a prime source of economic Goodwill. Other sources include governmental franchises not subject to profit regulation, such as television stations, and an enduring position as the low cost producer in an industry.
Let’s return to the accounting in the See’s example. Blue Chip’s purchase of See’s at $17 million over net tangible assets required that a Goodwill account of this amount be established as an asset on Blue Chip’s books and that $425,000 be charged to income annually for 40 years to amortize that asset. By 1983, after 11 years of such charges, the $17 million had been reduced to about $12.5 million. Berkshire, meanwhile, owned 60% of Blue Chip and, therefore, also 60% of See’s. This ownership meant that Berkshire’s balance sheet reflected 60% of See’s Goodwill, or about $7.5 million.
In 1983 Berkshire acquired the rest of Blue Chip in a merger that required purchase accounting as contrasted to the "pooling" treatment allowed for some mergers. Under purchase accounting, the "fair value" of the shares we gave to (or "paid") Blue Chip holders had to be spread over the net assets acquired from Blue Chip. This "fair value" was measured, as it almost always is when public companies use their shares to make acquisitions, by the market value of the shares given up.
The assets "purchased" consisted of 40% of everything owned by Blue Chip (as noted, Berkshire already owned the other 60%). What Berkshire "paid" was more than the net identifiable assets we received by $51.7 million, and was assigned to two pieces of Goodwill: $28.4 million to See’s and $23.3 million to Buffalo Evening News.
After the merger, therefore, Berkshire was left with a Goodwill asset for See’s that had two components: the $7.5 million remaining from the 1971 purchase, and $28.4 million newly created by the 40% "purchased" in 1983. Our amortization charge now will be about $1.0 million for the next 28 years, and $.7 million for the following 12 years, 2002 through 2013.
In other words, different purchase dates and prices have given us vastly different asset values and amortization charges for two pieces of the same asset. (We repeat our usual disclaimer: we have no better accounting system to suggest. The problems to be dealt with are mind boggling and require arbitrary rules.)
But what are the economic realities? One reality is that the amortization charges that have been deducted as costs in the earnings statement each year since acquisition of See’s were not true economic costs. We know that because See’s last year earned $13 million after taxes on about $20 million of net tangible assets – a performance indicating the existence of economic Goodwill far larger than the total original cost of our accounting Goodwill. In other words, while accounting Goodwill regularly decreased from the moment of purchase, economic Goodwill increased in irregular but very substantial fashion.
Another reality is that annual amortization charges in the future will not correspond to economic costs. It is possible, of course, that See’s economic Goodwill will disappear. But it won’t shrink in even decrements or anything remotely resembling them. What is more likely is that the Goodwill will increase – in current, if not in constant, dollars – because of inflation.
That probability exists because true economic Goodwill tends to rise in nominal value proportionally with inflation. To illustrate how this works, let’s contrast a See’s kind of business with a more mundane business. When we purchased See’s in 1972, it will be recalled, it was earning about $2 million on $8 million of net tangible assets. Let us assume that our hypothetical mundane business then had $2 million of earnings also, but needed $18 million in net tangible assets for normal operations. Earning only 11% on required tangible assets, that mundane business would possess little or no economic Goodwill.
A business like that, therefore, might well have sold for the value of its net tangible assets, or for $18 million. In contrast, we paid $25 million for See’s, even though it had no more in earnings and less than half as much in "honest-to-God" assets. Could less really have been more, as our purchase price implied? The answer is "yes" – even if both businesses were expected to have flat unit volume – as long as you anticipated, as we did in 1972, a world of continuous inflation.
To understand why, imagine the effect that a doubling of the price level would subsequently have on the two businesses. Both would need to double their nominal earnings to $4 million to keep themselves even with inflation. This would seem to be no great trick: just sell the same number of units at double earlier prices and, assuming profit margins remain unchanged, profits also must double.
But, crucially, to bring that about, both businesses probably would have to double their nominal investment in net tangible assets, since that is the kind of economic requirement that inflation usually imposes on businesses, both good and bad. A doubling of dollar sales means correspondingly more dollars must be employed immediately in receivables and inventories. Dollars employed in fixed assets will respond more slowly to inflation, but probably just as surely. And all of this inflation-required investment will produce no improvement in rate of return. The motivation for this investment is the survival of the business, not the prosperity of the owner.
Remember, however, that See’s had net tangible assets of only $8 million. So it would only have had to commit an additional $8 million to finance the capital needs imposed by inflation. The mundane business, meanwhile, had a burden over twice as large – a need for $18 million of additional capital.
After the dust had settled, the mundane business, now earning $4 million annually, might still be worth the value of its tangible assets, or $36 million. That means its owners would have gained only a dollar of nominal value for every new dollar invested. (This is the same dollar-for-dollar result they would have achieved if they had added money to a savings account.)
See’s, however, also earning $4 million, might be worth $50 million if valued (as it logically would be) on the same basis as it was at the time of our purchase. So it would have gained $25 million in nominal value while the owners were putting up only $8 million in additional capital – over $3 of nominal value gained for each $1 invested.
Remember, even so, that the owners of the See’s kind of business were forced by inflation to ante up $8 million in additional capital just to stay even in real profits. Any unleveraged business that requires some net tangible assets to operate (and almost all do) is hurt by inflation. Businesses needing little in the way of tangible assets simply are hurt the least.
And that fact, of course, has been hard for many people to grasp. For years the traditional wisdom – long on tradition, short on wisdom – held that inflation protection was best provided by businesses laden with natural resources, plants and machinery, or other tangible assets ("In Goods We Trust"). It doesn’t work that way. Asset-heavy businesses generally earn low rates of return – rates that often barely provide enough capital to fund the inflationary needs of the existing business, with nothing left over for real growth, for distribution to owners, or for acquisition of new businesses.
In contrast, a disproportionate number of the great business fortunes built up during the inflationary years arose from ownership of operations that combined intangibles of lasting value with relatively minor requirements for tangible assets. In such cases earnings have bounded upward in nominal dollars, and these dollars have been largely available for the acquisition of additional businesses. This phenomenon has been particularly evident in the communications business. That business has required little in the way of tangible investment – yet its franchises have endured. During inflation, Goodwill is the gift that keeps giving.
But that statement applies, naturally, only to true economic Goodwill. Spurious accounting Goodwill – and there is plenty of it around – is another matter. When an overexcited management purchases a business at a silly price, the same accounting niceties described earlier are observed. Because it can’t go anywhere else, the silliness ends up in the Goodwill account. Considering the lack of managerial discipline that created the account, under such circumstances it might better be labeled "No-Will". Whatever the term, the 40-year ritual typically is observed and the adrenalin so capitalized remains on the books as an "asset" just as if the acquisition had been a sensible one.
* * * * *
If you cling to any belief that accounting treatment of Goodwill is the best measure of economic reality, I suggest one final item to ponder.
Assume a company with $20 per share of net worth, all tangible assets. Further assume the company has internally developed some magnificent consumer franchise, or that it was fortunate enough to obtain some important television stations by original FCC grant. Therefore, it earns a great deal on tangible assets, say $5 per share, or 25%.
With such economics, it might sell for $100 per share or more, and it might well also bring that price in a negotiated sale of the entire business.
Assume an investor buys the stock at $100 per share, paying in effect $80 per share for Goodwill (just as would a corporate purchaser buying the whole company). Should the investor impute a $2 per share amortization charge annually ($80 divided by 40 years) to calculate "true" earnings per share? And, if so, should the new "true" earnings of $3 per share cause him to rethink his purchase price?
* * * * *
We believe managers and investors alike should view intangible assets from two perspectives:
  1. In analysis of operating results – that is, in evaluating the underlying economics of a business unit – amortization charges should be ignored. What a business can be expected to earn on unleveraged net tangible assets, excluding any charges against earnings for amortization of Goodwill, is the best guide to the economic attractiveness of the operation. It is also the best guide to the current value of the operation’s economic Goodwill.
    1. In evaluating the wisdom of business acquisitions, amortization charges should be ignored also. They should be deducted neither from earnings nor from the cost of the business. This means forever viewing purchased Goodwill at its full cost, before any amortization. Furthermore, cost should be defined as including the full intrinsic business value – not just the recorded accounting value – of all consideration given, irrespective of market prices of the securities involved at the time of merger and irrespective of whether pooling treatment was allowed. For example, what we truly paid in the Blue Chip merger for 40% of the Goodwill of See’s and the News was considerably more than the $51.7 million entered on our books. This disparity exists because the market value of the Berkshire shares given up in the merger was less than their intrinsic business value, which is the value that defines the true cost to us.
Operations that appear to be winners based upon perspective (1) may pale when viewed from perspective (2). A good business is not always a good purchase – although it’s a good place to look for one.

We will try to acquire businesses that have excellent operating economics measured by (1) and that provide reasonable returns measured by (2). Accounting consequences will be totally ignored.
At yearend 1983, net Goodwill on our accounting books totaled $62 million, consisting of the $79 million you see stated on the asset side of our balance sheet, and $17 million of negative Goodwill that is offset against the carrying value of our interest in Mutual Savings and Loan.
We believe net economic Goodwill far exceeds the $62 million accounting number.


Berkshire Hathaway Letters to Shareholders (1982)

                                                  March 3, 1983

To the Stockholders of Berkshire Hathaway Inc.:

     Operating earnings of $31.5 million in 1982 amounted to only 
9.8% of beginning equity capital (valuing securities at cost), 
down from 15.2% in 1981 and far below our recent high of 19.4% in 
1978.  This decline largely resulted from:

     (1) a significant deterioration in insurance underwriting 

     (2) a considerable expansion of equity capital without a 
         corresponding growth in the businesses we operate 
         directly; and

     (3) a continually-enlarging commitment of our resources to 
         investment in partially-owned, nonoperated businesses; 
         accounting rules dictate that a major part of our 
         pro-rata share of earnings from such businesses must be 
         excluded from Berkshire’s reported earnings.

     It was only a few years ago that we told you that the 
operating earnings/equity capital percentage, with proper 
allowance for a few other variables, was the most important 
yardstick of single-year managerial performance.  While we still 
believe this to be the case with the vast majority of companies, 
we believe its utility in our own case has greatly diminished.  
You should be suspicious of such an assertion.  Yardsticks seldom 
are discarded while yielding favorable readings.  But when 
results deteriorate, most managers favor disposition of the 
yardstick rather than disposition of the manager.

     To managers faced with such deterioration, a more flexible 
measurement system often suggests itself: just shoot the arrow of 
business performance into a blank canvas and then carefully draw 
the bullseye around the implanted arrow.  We generally believe in 
pre-set, long-lived and small bullseyes.  However, because of the 
importance of item (3) above, further explained in the following 
section, we believe our abandonment of the operating 
earnings/equity capital bullseye to be warranted.

Non-Reported Ownership Earnings

     The appended financial statements reflect “accounting” 
earnings that generally include our proportionate share of 
earnings from any underlying business in which our ownership is 
at least 20%.  Below the 20% ownership figure, however, only our 
share of dividends paid by the underlying business units is 
included in our accounting numbers; undistributed earnings of 
such less-than-20%-owned businesses are totally ignored.

     There are a few exceptions to this rule; e.g., we own about 
35% of GEICO Corporation but, because we have assigned our voting 
rights, the company is treated for accounting purposes as a less-
than-20% holding.  Thus, dividends received from GEICO in 1982 of 
$3.5 million after tax are the only item included in our 
“accounting”earnings.  An additional $23 million that represents 
our share of GEICO’s undistributed operating earnings for 1982 is 
totally excluded from our reported operating earnings.  If GEICO 
had earned less money in 1982 but had paid an additional $1 
million in dividends, our reported earnings would have been 
larger despite the poorer business results.  Conversely, if GEICO 
had earned an additional $100 million - and retained it all - our 
reported earnings would have been unchanged.  Clearly 
“accounting” earnings can seriously misrepresent economic 

     We prefer a concept of “economic” earnings that includes all 
undistributed earnings, regardless of ownership percentage.  In 
our view, the value to all owners of the retained earnings of a 
business enterprise is determined by the effectiveness with which 
those earnings are used - and not by the size of one’s ownership 
percentage.  If you have owned .01 of 1% of Berkshire during the 
past decade, you have benefited economically in full measure from 
your share of our retained earnings, no matter what your 
accounting system.  Proportionately, you have done just as well 
as if you had owned the magic 20%.  But if you have owned 100% of 
a great many capital-intensive businesses during the decade, 
retained earnings that were credited fully and with painstaking 
precision to you under standard accounting methods have resulted 
in minor or zero economic value.  This is not a criticism of 
accounting procedures.  We would not like to have the job of 
designing a better system.  It’s simply to say that managers and 
investors alike must understand that accounting numbers are the 
beginning, not the end, of business valuation.

     In most corporations, less-than-20% ownership positions are 
unimportant (perhaps, in part, because they prevent maximization 
of cherished reported earnings) and the distinction between 
accounting and economic results we have just discussed matters 
little.  But in our own case, such positions are of very large 
and growing importance.  Their magnitude, we believe, is what 
makes our reported operating earnings figure of limited 

     In our 1981 annual report we predicted that our share of 
undistributed earnings from four of our major non-controlled 
holdings would aggregate over $35 million in 1982.  With no 
change in our holdings of three of these companies - GEICO, 
General Foods and The Washington Post - and a considerable 
increase in our ownership of the fourth, R. J. Reynolds 
Industries, our share of undistributed 1982 operating earnings of 
this group came to well over $40 million.  This number - not 
reflected at all in our earnings - is greater than our total 
reported earnings, which include only the $14 million in 
dividends received from these companies.  And, of course, we have 
a number of smaller ownership interests that, in aggregate, had 
substantial additional undistributed earnings.

      We attach real significance to the general magnitude of 
these numbers, but we don’t believe they should be carried to ten 
decimal places.  Realization by Berkshire of such retained 
earnings through improved market valuations is subject to very 
substantial, but indeterminate, taxation.  And while retained 
earnings over the years, and in the aggregate, have translated 
into at least equal market value for shareholders, the 
translation has been both extraordinarily uneven among companies 
and irregular and unpredictable in timing.

     However, this very unevenness and irregularity offers 
advantages to the value-oriented purchaser of fractional portions 
of businesses.  This investor may select from almost the entire 
array of major American corporations, including many far superior 
to virtually any of the businesses that could be bought in their 
entirety in a negotiated deal.  And fractional-interest purchases 
can be made in an auction market where prices are set by 
participants with behavior patterns that sometimes resemble those 
of an army of manic-depressive lemmings.

     Within this gigantic auction arena, it is our job to select 
businesses with economic characteristics allowing each dollar of 
retained earnings to be translated eventually into at least a 
dollar of market value.  Despite a lot of mistakes, we have so 
far achieved this goal.  In doing so, we have been greatly 
assisted by Arthur Okun’s patron saint for economists - St. 
Offset.  In some cases, that is, retained earnings attributable 
to our ownership position have had insignificant or even negative 
impact on market value, while in other major positions a dollar 
retained by an investee corporation has been translated into two 
or more dollars of market value.  To date, our corporate over-
achievers have more than offset the laggards.  If we can continue 
this record, it will validate our efforts to maximize “economic” 
earnings, regardless of the impact upon “accounting” earnings.

     Satisfactory as our partial-ownership approach has been, 
what really makes us dance is the purchase of 100% of good 
businesses at reasonable prices.  We’ve accomplished this feat a 
few times (and expect to do so again), but it is an 
extraordinarily difficult job - far more difficult than the 
purchase at attractive prices of fractional interests.

     As we look at the major acquisitions that others made during 
1982, our reaction is not envy, but relief that we were non-
participants.  For in many of these acquisitions, managerial 
intellect wilted in competition with managerial adrenaline The 
thrill of the chase blinded the pursuers to the consequences of 
the catch.  Pascal’s observation seems apt: “It has struck me 
that all men’s misfortunes spring from the single cause that they 
are unable to stay quietly in one room.”

     (Your Chairman left the room once too often last year and 
almost starred in the Acquisition Follies of 1982.  In 
retrospect, our major accomplishment of the year was that a very 
large purchase to which we had firmly committed was unable to be 
completed for reasons totally beyond our control.  Had it come 
off, this transaction would have consumed extraordinary amounts 
of time and energy, all for a most uncertain payoff.  If we were 
to introduce graphics to this report, illustrating favorable 
business developments of the past year, two blank pages depicting 
this blown deal would be the appropriate centerfold.)

     Our partial-ownership approach can be continued soundly only 
as long as portions of attractive businesses can be acquired at 
attractive prices.  We need a moderately-priced stock market to 
assist us in this endeavor.  The market, like the Lord, helps 
those who help themselves.  But, unlike the Lord, the market does 
not forgive those who know not what they do.  For the investor, a 
too-high purchase price for the stock of an excellent company can 
undo the effects of a subsequent decade of favorable business 

     Should the stock market advance to considerably higher 
levels, our ability to utilize capital effectively in partial-
ownership positions will be reduced or eliminated.  This will 
happen periodically: just ten years ago, at the height of the 
two-tier market mania (with high-return-on-equity businesses bid 
to the sky by institutional investors), Berkshire’s insurance 
subsidiaries owned only $18 million in market value of equities, 
excluding their interest in Blue Chip Stamps.  At that time, such 
equity holdings amounted to about 15% of our insurance company 
investments versus the present 80%.  There were as many good 
businesses around in 1972 as in 1982, but the prices the stock 
market placed upon those businesses in 1972 looked absurd.  While 
high stock prices in the future would make our performance look 
good temporarily, they would hurt our long-term business 
prospects rather than help them.  We currently are seeing early 
traces of this problem.

Long-Term Corporate Performance

     Our gain in net worth during 1982, valuing equities held by 
our insurance subsidiaries at market value (less capital gain 
taxes payable if unrealized gains were actually realized) 
amounted to $208 million.  On a beginning net worth base of $519 
million, the percentage gain was 40%.

     During the 18-year tenure of present management, book value 
has grown from $19.46 per share to $737.43 per share, or 22.0% 
compounded annually.  You can be certain that this percentage 
will diminish in the future.  Geometric progressions eventually 
forge their own anchors.

     Berkshire’s economic goal remains to produce a long-term 
rate of return well above the return achieved by the average 
large American corporation.  Our willingness to purchase either 
partial or total ownership positions in favorably-situated 
businesses, coupled with reasonable discipline about the prices 
we are willing to pay, should give us a good chance of achieving 
our goal.

     Again this year the gain in market valuation of partially-
owned businesses outpaced the gain in underlying economic value 
of those businesses.  For example, $79 million of our $208 
million gain is attributable to an increased market price for 
GEICO.  This company continues to do exceptionally well, and we 
are more impressed than ever by the strength of GEICO’s basic 
business idea and by the management skills of Jack Byrne. 
(Although not found in the catechism of the better business 
schools, “Let Jack Do It” works fine as a corporate creed for 

     However, GEICO’s increase in market value during the past 
two years has been considerably greater than the gain in its 
intrinsic business value, impressive as the latter has been.  We 
expected such a favorable variation at some point, as the 
perception of investors converged with business reality.  And we 
look forward to substantial future gains in underlying business 
value accompanied by irregular, but eventually full, market 
recognition of such gains.

     Year-to-year variances, however, cannot consistently be in 
our favor.  Even if our partially-owned businesses continue to 
perform well in an economic sense, there will be years when they 
perform poorly in the market.  At such times our net worth could 
shrink significantly.  We will not be distressed by such a 
shrinkage; if the businesses continue to look attractive and we 
have cash available, we simply will add to our holdings at even 
more favorable prices.

Sources of Reported Earnings

     The table below shows the sources of Berkshire’s reported 
earnings.  In 1981 and 1982 Berkshire owned about 60% of Blue 
Chip Stamps which, in turn, owned 80% of Wesco Financial 
Corporation.  The table displays aggregate operating earnings of 
the various business entities, as well as Berkshire’s share of 
those earnings.  All of the significant gains and losses 
attributable to unusual sales of assets by any of the business 
entities are aggregated with securities transactions in the line 
near the bottom of the table, and are not included in operating 

                                                                         Net Earnings
                                   Earnings Before Income Taxes            After Tax
                              --------------------------------------  ------------------
                                    Total          Berkshire Share     Berkshire Share
                              ------------------  ------------------  ------------------
                                1982      1981      1982      1981      1982      1981
                              --------  --------  --------  --------  --------  --------
                                                    (000s omitted)
Operating Earnings:
  Insurance Group:
    Underwriting ............ $(21,558)  $ 1,478  $(21,558)  $ 1,478  $(11,345)  $   798
    Net Investment Income ...   41,620    38,823    41,620    38,823    35,270    32,401
  Berkshire-Waumbec Textiles    (1,545)   (2,669)   (1,545)   (2,669)     (862)   (1,493)
  Associated Retail Stores ..      914     1,763       914     1,763       446       759
  See’s Candies .............   23,884    20,961    14,235    12,493     6,914     5,910
  Buffalo Evening News ......   (1,215)   (1,217)     (724)     (725)     (226)     (320)
  Blue Chip Stamps - Parent      4,182     3,642     2,492     2,171     2,472     2,134
  Wesco Financial - Parent ..    6,156     4,495     2,937     2,145     2,210     1,590
  Mutual Savings and Loan ...       (6)    1,605        (2)      766     1,524     1,536
  Precision Steel ...........    1,035     3,453       493     1,648       265       841
  Interest on Debt ..........  (14,996)  (14,656)  (12,977)  (12,649)   (6,951)   (6,671)
  Other* ....................    2,631     2,985     1,857     1,992     1,780     1,936
                              --------  --------  --------  --------  --------  --------
Operating Earnings ..........   41,102    60,663    27,742    47,236    31,497    39,421
Sales of securities and
   unusual sales of assets ..   36,651    37,801    21,875    33,150    14,877    23,183
                              --------  --------  --------  --------  --------  --------
Total Earnings - all entities $ 77,753  $ 98,464  $ 49,617  $ 80,386  $ 46,374  $ 62,604
                              ========  ========  ========  ========  ========  ========

* Amortization of intangibles arising in accounting for purchases 
  of businesses (i.e. See’s, Mutual and Buffalo Evening News) is 
  reflected in the category designated as “Other”.

     On pages 45-61 of this report we have reproduced the 
narrative reports of the principal executives of Blue Chip and 
Wesco, in which they describe 1982 operations.  A copy of the 
full annual report of either company will be mailed to any 
Berkshire shareholder upon request to Mr. Robert H. Bird for 
Blue Chip Stamps, 5801 South Eastern Avenue, Los Angeles, 
California 90040, or to Mrs. Jeanne Leach for Wesco Financial 
Corporation, 315 East Colorado Boulevard, Pasadena, California 

     I believe you will find the Blue Chip chronicle of 
developments in the Buffalo newspaper situation particularly 
interesting.  There are now only 14 cities in the United States 
with a daily newspaper whose weekday circulation exceeds that of 
the Buffalo News.  But the real story has been the growth in 
Sunday circulation.  Six years ago, prior to introduction of a 
Sunday edition of the News, the long-established Courier-Express, 
as the only Sunday newspaper published in Buffalo, had 
circulation of 272,000.  The News now has Sunday circulation of 
367,000, a 35% gain - even though the number of households within 
the primary circulation area has shown little change during the 
six years.  We know of no city in the United States with a long 
history of seven-day newspaper publication in which the 
percentage of households purchasing the Sunday newspaper has 
grown at anything like this rate.  To the contrary, in most 
cities household penetration figures have grown negligibly, or 
not at all.  Our key managers in Buffalo - Henry Urban, Stan 
Lipsey, Murray Light, Clyde Pinson, Dave Perona and Dick Feather 
- deserve great credit for this unmatched expansion in Sunday 

     As we indicated earlier, undistributed earnings in companies 
we do not control are now fully as important as the reported 
operating earnings detailed in the preceding table.  The 
distributed portion of non-controlled earnings, of course, finds 
its way into that table primarily through the net investment 
income segment of Insurance Group earnings.

     We show below Berkshire’s proportional holdings in those 
non-controlled businesses for which only distributed earnings 
(dividends) are included in our earnings.

No. of Shares
or Share Equiv.                                          Cost       Market  
---------------                                       ----------  ----------
                                                          (000s omitted)
   460,650 (a)   Affiliated Publications, Inc. ......  $  3,516    $ 16,929
   908,800 (c)   Crum & Forster .....................    47,144      48,962 
 2,101,244 (b)   General Foods, Inc. ................    66,277      83,680
 7,200,000 (a)   GEICO Corporation ..................    47,138     309,600
 2,379,200 (a)   Handy & Harman .....................    27,318      46,692
   711,180 (a)   Interpublic Group of Companies, Inc.     4,531      34,314
   282,500 (a)   Media General ......................     4,545      12,289
   391,400 (a)   Ogilvy & Mather Int’l. Inc. ........     3,709      17,319
 3,107,675 (b)   R. J. Reynolds Industries ..........   142,343     158,715
 1,531,391 (a)   Time, Inc. .........................    45,273      79,824
 1,868,600 (a)   The Washington Post Company ........    10,628     103,240
                                                      ----------  ----------
                                                       $402,422    $911,564
                 All Other Common Stockholdings .....    21,611      34,058
                                                      ----------  ----------                                                        
                 Total Common Stocks                   $424,033    $945,622
                                                      ==========  ==========

(a) All owned by Berkshire or its insurance subsidiaries.

(b) Blue Chip and/or Wesco own shares of these companies.  All 
    numbers represent Berkshire’s net interest in the larger 
    gross holdings of the group.

(c) Temporary holding as cash substitute.

     In case you haven’t noticed, there is an important 
investment lesson to be derived from this table: nostalgia should 
be weighted heavily in stock selection.  Our two largest 
unrealized gains are in Washington Post and GEICO, companies with 
which your Chairman formed his first commercial connections at 
the ages of 13 and 20, respectively After straying for roughly 25 
years, we returned as investors in the mid-1970s.  The table 
quantifies the rewards for even long-delayed corporate fidelity. 

     Our controlled and non-controlled businesses operate over 
such a wide spectrum that detailed commentary here would prove 
too lengthy.  Much financial and operational information 
regarding the controlled businesses is included in Management’s 
Discussion on pages 34-39, and in the narrative reports on pages 
45-61.  However, our largest area of business activity has been, 
and almost certainly will continue to be, the property-casualty 
insurance area.  So commentary on developments in that industry 
is appropriate.

Insurance Industry Conditions

     We show below an updated table of the industry statistics we 
utilized in last year’s annual report.  Its message is clear: 
underwriting results in 1983 will not be a sight for the 

                      Yearly Change     Yearly Change      Combined Ratio
                       in Premiums       in Premiums        after Policy-
                       Written (%)        Earned (%)      holder Dividends
                      -------------     -------------     ----------------
1972 ................     10.2              10.9                96.2
1973 ................      8.0               8.8                99.2
1974 ................      6.2               6.9               105.4
1975 ................     11.0               9.6               107.9
1976 ................     21.9              19.4               102.4
1977 ................     19.8              20.5                97.2
1978 ................     12.8              14.3                97.5
1979 ................     10.3              10.4               100.6
1980 ................      6.0               7.8               103.1
1981 (Rev.) .........      3.9               4.1               106.0
1982 (Est.) .........      5.1               4.6               109.5

Source:   Best’s Aggregates and Averages.

     The Best’s data reflect the experience of practically the 
entire industry, including stock, mutual and reciprocal 
companies.  The combined ratio represents total operating and 
loss costs as compared to revenue from premiums; a ratio below 
100 indicates an underwriting profit, and one above 100 indicates 
a loss.

     For reasons outlined in last year’s report, as long as the 
annual gain in industry premiums written falls well below 10%, 
you can expect the underwriting picture in the next year to 
deteriorate.  This will be true even at today’s lower general 
rate of inflation.  With the number of policies increasing 
annually, medical inflation far exceeding general inflation, and 
concepts of insured liability broadening, it is highly unlikely 
that yearly increases in insured losses will fall much below 10%.  

     You should be further aware that the 1982 combined ratio of 
109.5 represents a “best case” estimate.  In a given year, it is 
possible for an insurer to show almost any profit number it 
wishes, particularly if it (1) writes “long-tail” business 
(coverage where current costs can be only estimated, because 
claim payments are long delayed), (2) has been adequately 
reserved in the past, or (3) is growing very rapidly.  There are 
indications that several large insurers opted in 1982 for obscure 
accounting and reserving maneuvers that masked significant 
deterioration in their underlying businesses.  In insurance, as 
elsewhere, the reaction of weak managements to weak operations is 
often weak accounting. (“It’s difficult for an empty sack to 
stand upright.”)

     The great majority of managements, however, try to play it 
straight.  But even managements of integrity may subconsciously 
be less willing in poor profit years to fully recognize adverse 
loss trends.  Industry statistics indicate some deterioration in 
loss reserving practices during 1982 and the true combined ratio 
is likely to be modestly worse than indicated by our table.

     The conventional wisdom is that 1983 or 1984 will see the 
worst of underwriting experience and then, as in the past, the 
“cycle” will move, significantly and steadily, toward better 
results.  We disagree because of a pronounced change in the 
competitive environment, hard to see for many years but now quite 

     To understand the change, we need to look at some major 
factors that affect levels of corporate profitability generally.  
Businesses in industries with both substantial over-capacity and 
a “commodity” product (undifferentiated in any customer-important 
way by factors such as performance, appearance, service support, 
etc.) are prime candidates for profit troubles.  These may be 
escaped, true, if prices or costs are administered in some manner 
and thereby insulated at least partially from normal market 
forces.  This administration can be carried out (a) legally 
through government intervention (until recently, this category 
included pricing for truckers and deposit costs for financial 
institutions), (b) illegally through collusion, or (c) “extra-
legally” through OPEC-style foreign cartelization (with tag-along 
benefits for domestic non-cartel operators).

     If, however, costs and prices are determined by full-bore 
competition, there is more than ample capacity, and the buyer 
cares little about whose product or distribution services he 
uses, industry economics are almost certain to be unexciting.  
They may well be disastrous.

     Hence the constant struggle of every vendor to establish and 
emphasize special qualities of product or service.  This works 
with candy bars (customers buy by brand name, not by asking for a 
“two-ounce candy bar”) but doesn’t work with sugar (how often do 
you hear, “I’ll have a cup of coffee with cream and C & H sugar, 

     In many industries, differentiation simply can’t be made 
meaningful.  A few producers in such industries may consistently 
do well if they have a cost advantage that is both wide and 
sustainable.  By definition such exceptions are few, and, in many 
industries, are non-existent.  For the great majority of 
companies selling “commodity”products, a depressing equation of 
business economics prevails: persistent over-capacity without 
administered prices (or costs) equals poor profitability.

     Of course, over-capacity may eventually self-correct, either 
as capacity shrinks or demand expands.  Unfortunately for the 
participants, such corrections often are long delayed.  When they 
finally occur, the rebound to prosperity frequently produces a 
pervasive enthusiasm for expansion that, within a few years, 
again creates over-capacity and a new profitless environment.  In 
other words, nothing fails like success.

     What finally determines levels of long-term profitability in 
such industries is the ratio of supply-tight to supply-ample 
years.  Frequently that ratio is dismal. (It seems as if the most 
recent supply-tight period in our textile business - it occurred 
some years back - lasted the better part of a morning.)

     In some industries, however, capacity-tight conditions can 
last a long time.  Sometimes actual growth in demand will outrun 
forecasted growth for an extended period.  In other cases, adding 
capacity requires very long lead times because complicated 
manufacturing facilities must be planned and built.

     But in the insurance business, to return to that subject, 
capacity can be instantly created by capital plus an 
underwriter’s willingness to sign his name. (Even capital is less 
important in a world in which state-sponsored guaranty funds 
protect many policyholders against insurer insolvency.) Under 
almost all conditions except that of fear for survival - 
produced, perhaps, by a stock market debacle or a truly major 
natural disaster - the insurance industry operates under the 
competitive sword of substantial overcapacity.  Generally, also, 
despite heroic attempts to do otherwise, the industry sells a 
relatively undifferentiated commodity-type product. (Many 
insureds, including the managers of large businesses, do not even 
know the names of their insurers.) Insurance, therefore, would 
seem to be a textbook case of an industry usually faced with the 
deadly combination of excess capacity and a “commodity” product.

     Why, then, was underwriting, despite the existence of 
cycles, generally profitable over many decades? (From 1950 
through 1970, the industry combined ratio averaged 99.0.  
allowing all investment income plus 1% of premiums to flow 
through to profits.) The answer lies primarily in the historic 
methods of regulation and distribution.  For much of this 
century, a large portion of the industry worked, in effect, 
within a legal quasi-administered pricing system fostered by 
insurance regulators.  While price competition existed, it was 
not pervasive among the larger companies.  The main competition 
was for agents, who were courted via various non-price-related 

     For the giants of the industry, most rates were set through 
negotiations between industry “bureaus” (or through companies 
acting in accord with their recommendations) and state 
regulators.  Dignified haggling occurred, but it was between 
company and regulator rather than between company and customer.  
When the dust settled, Giant A charged the same price as Giant B 
- and both companies and agents were prohibited by law from 
cutting such filed rates.

     The company-state negotiated prices included specific profit 
allowances and, when loss data indicated that current prices were 
unprofitable, both company managements and state regulators 
expected that they would act together to correct the situation.  
Thus, most of the pricing actions of the giants of the industry 
were “gentlemanly”, predictable, and profit-producing.  Of prime 
importance - and in contrast to the way most of the business 
world operated - insurance companies could legally price their 
way to profitability even in the face of substantial over-

     That day is gone.  Although parts of the old structure 
remain, far more than enough new capacity exists outside of that 
structure to force all parties, old and new, to respond.  The new 
capacity uses various methods of distribution and is not 
reluctant to use price as a prime competitive weapon.  Indeed, it 
relishes that use.  In the process, customers have learned that 
insurance is no longer a one-price business.  They won’t forget.

     Future profitability of the industry will be determined by 
current competitive characteristics, not past ones.  Many 
managers have been slow to recognize this.  It’s not only 
generals that prefer to fight the last war.  Most business and 
investment analysis also comes from the rear-view mirror.  It 
seems clear to us, however, that only one condition will allow 
the insurance industry to achieve significantly improved 
underwriting results.  That is the same condition that will allow 
better results for the aluminum, copper, or corn producer - a 
major narrowing of the gap between demand and supply.

     Unfortunately, there can be no surge in demand for insurance 
policies comparable to one that might produce a market tightness 
in copper or aluminum.  Rather, the supply of available insurance 
coverage must be curtailed.  “Supply”, in this context, is mental 
rather than physical: plants or companies need not be shut; only 
the willingness of underwriters to sign their names need be 

     This contraction will not happen because of generally poor 
profit levels.  Bad profits produce much hand-wringing and 
finger-pointing.  But they do not lead major sources of insurance 
capacity to turn their backs on very large chunks of business, 
thereby sacrificing market share and industry significance.

     Instead, major capacity withdrawals require a shock factor 
such as a natural or financial “megadisaster”.  One might occur 
tomorrow - or many years from now.  The insurance business - even 
taking investment income into account - will not be particularly 
profitable in the meantime.

     When supply ultimately contracts, large amounts of business 
will be available for the few with large capital capacity, a 
willingness to commit it, and an in-place distribution system.  
We would expect great opportunities for our insurance 
subsidiaries at such a time.

     During 1982, our insurance underwriting deteriorated far 
more than did the industry’s.  From a profit position well above 
average, we, slipped to a performance modestly below average.  
The biggest swing was in National Indemnity’s traditional 
coverages.  Lines that have been highly profitable for us in the 
past are now priced at levels that guarantee underwriting losses.  
In 1983 we expect our insurance group to record an average 
performance in an industry in which average is very poor.

     Two of our stars, Milt Thornton at Cypress and Floyd Taylor 
at Kansas Fire and Casualty, continued their outstanding records 
of producing an underwriting profit every year since joining us.  
Both Milt and Floyd simply are incapable of being average.  They 
maintain a passionately proprietary attitude toward their 
operations and have developed a business culture centered upon 
unusual cost-consciousness and customer service.  It shows on 
their scorecards.

     During 1982, parent company responsibility for most of our 
insurance operations was given to Mike Goldberg.  Planning, 
recruitment, and monitoring all have shown significant 
improvement since Mike replaced me in this role.

     GEICO continues to be managed with a zeal for efficiency and 
value to the customer that virtually guarantees unusual success.  
Jack Byrne and Bill Snyder are achieving the most elusive of 
human goals - keeping things simple and remembering what you set 
out to do.  In Lou Simpson, additionally, GEICO has the best 
investment manager in the property-casualty business.  We are 
happy with every aspect of this operation.  GEICO is a 
magnificent illustration of the high-profit exception we 
described earlier in discussing commodity industries with over-
capacity - a company with a wide and sustainable cost advantage.  
Our 35% interest in GEICO represents about $250 million of 
premium volume, an amount considerably greater than all of the 
direct volume we produce.

Issuance of Equity

     Berkshire and Blue Chip are considering merger in 1983.  If 
it takes place, it will involve an exchange of stock based upon 
an identical valuation method applied to both companies.  The one 
other significant issuance of shares by Berkshire or its 
affiliated companies that occurred during present management’s 
tenure was in the 1978 merger of Berkshire with Diversified 
Retailing Company.

     Our share issuances follow a simple basic rule: we will not 
issue shares unless we receive as much intrinsic business value 
as we give.  Such a policy might seem axiomatic.  Why, you might 
ask, would anyone issue dollar bills in exchange for fifty-cent 
pieces?  Unfortunately, many corporate managers have been willing 
to do just that.

     The first choice of these managers in making acquisitions 
may be to use cash or debt.  But frequently the CEO’s cravings 
outpace cash and credit resources (certainly mine always have).  
Frequently, also, these cravings occur when his own stock is 
selling far below intrinsic business value.  This state of 
affairs produces a moment of truth.  At that point, as Yogi Berra 
has said, “You can observe a lot just by watching.” For 
shareholders then will find which objective the management truly 
prefers - expansion of domain or maintenance of owners’ wealth.

     The need to choose between these objectives occurs for some 
simple reasons.  Companies often sell in the stock market below 
their intrinsic business value.  But when a company wishes to 
sell out completely, in a negotiated transaction, it inevitably 
wants to - and usually can - receive full business value in 
whatever kind of currency the value is to be delivered.  If cash 
is to be used in payment, the seller’s calculation of value 
received couldn’t be easier.  If stock of the buyer is to be the 
currency, the seller’s calculation is still relatively easy: just 
figure the market value in cash of what is to be received in 

     Meanwhile, the buyer wishing to use his own stock as 
currency for the purchase has no problems if the stock is selling 
in the market at full intrinsic value.

     But suppose it is selling at only half intrinsic value.  In 
that case, the buyer is faced with the unhappy prospect of using 
a substantially undervalued currency to make its purchase.

     Ironically, were the buyer to instead be a seller of its 
entire business, it too could negotiate for, and probably get, 
full intrinsic business value.  But when the buyer makes a 
partial sale of itself - and that is what the issuance of shares 
to make an acquisition amounts to - it can customarily get no 
higher value set on its shares than the market chooses to grant 

     The acquirer who nevertheless barges ahead ends up using an 
undervalued (market value) currency to pay for a fully valued 
(negotiated value) property.  In effect, the acquirer must give 
up $2 of value to receive $1 of value.  Under such circumstances, 
a marvelous business purchased at a fair sales price becomes a 
terrible buy.  For gold valued as gold cannot be purchased 
intelligently through the utilization of gold - or even silver - 
valued as lead.

     If, however, the thirst for size and action is strong 
enough, the acquirer’s manager will find ample rationalizations 
for such a value-destroying issuance of stock.  Friendly 
investment bankers will reassure him as to the soundness of his 
actions. (Don’t ask the barber whether you need a haircut.)

     A few favorite rationalizations employed by stock-issuing 
managements follow:

     (a) “The company we’re buying is going to be worth a lot 
         more in the future.” (Presumably so is the interest in 
         the old business that is being traded away; future 
         prospects are implicit in the business valuation 
         process.  If 2X is issued for X, the imbalance still 
         exists when both parts double in business value.)

     (b) “We have to grow.” (Who, it might be asked, is the “we”?  
         For present shareholders, the reality is that all 
         existing businesses shrink when shares are issued.  Were 
         Berkshire to issue shares tomorrow for an acquisition, 
         Berkshire would own everything that it now owns plus the 
         new business, but your interest in such hard-to-match 
         businesses as See’s Candy Shops, National Indemnity, 
         etc. would automatically be reduced.  If (1) your family 
         owns a 120-acre farm and (2)  you invite a neighbor with 
         60 acres of comparable land to merge his farm into an 
         equal partnership - with you to be managing partner, 
         then (3) your managerial domain will have grown to 180 
         acres but you will have permanently shrunk by 25% your 
         family’s ownership interest in both acreage and crops.  
         Managers who want to expand their domain at the expense 
         of owners might better consider a career in government.)

     (c) “Our stock is undervalued and we’ve minimized its use in 
         this deal - but we need to give the selling shareholders 
         51% in stock and 49% in cash so that certain of those 
         shareholders can get the tax-free exchange they want.” 
         (This argument acknowledges that it is beneficial to the 
         acquirer to hold down the issuance of shares, and we like 
         that.  But if it hurts the old owners to utilize shares 
         on a 100% basis, it very likely hurts on a 51% basis.  
         After all, a man is not charmed if a spaniel defaces his 
         lawn, just because it’s a spaniel and not a St. Bernard.  
         And the wishes of sellers can’t be the determinant of the 
         best interests of the buyer - what would happen if, 
         heaven forbid, the seller insisted that as a condition of 
         merger the CEO of the acquirer be replaced?)

     There are three ways to avoid destruction of value for old 
owners when shares are issued for acquisitions.  One is to have a 
true business-value-for-business-value merger, such as the 
Berkshire-Blue Chip combination is intended to be.  Such a merger 
attempts to be fair to shareholders of both parties, with each 
receiving just as much as it gives in terms of intrinsic business 
value.  The Dart Industries-Kraft and Nabisco Standard Brands 
mergers appeared to be of this type, but they are the exceptions.  
It’s not that acquirers wish to avoid such deals; it’s just that 
they are very hard to do.

     The second route presents itself when the acquirer’s stock 
sells at or above its intrinsic business value.  In that 
situation, the use of stock as currency actually may enhance the 
wealth of the acquiring company’s owners.  Many mergers were 
accomplished on this basis in the 1965-69 period.  The results 
were the converse of most of the activity since 1970: the 
shareholders of the acquired company received very inflated 
currency (frequently pumped up by dubious accounting and 
promotional techniques) and were the losers of wealth through 
such transactions.

     During recent years the second solution has been available 
to very few large companies.  The exceptions have primarily been 
those companies in glamorous or promotional businesses to which 
the market temporarily attaches valuations at or above intrinsic 
business valuation.

     The third solution is for the acquirer to go ahead with the 
acquisition, but then subsequently repurchase a quantity of 
shares equal to the number issued in the merger.  In this manner, 
what originally was a stock-for-stock merger can be converted, 
effectively, into a cash-for-stock acquisition.  Repurchases of 
this kind are damage-repair moves.  Regular readers will 
correctly guess that we much prefer repurchases that directly 
enhance the wealth of owners instead of repurchases that merely 
repair previous damage.  Scoring touchdowns is more exhilarating 
than recovering one’s fumbles.  But, when a fumble has occurred, 
recovery is important and we heartily recommend damage-repair 
repurchases that turn a bad stock deal into a fair cash deal.

     The language utilized in mergers tends to confuse the issues 
and encourage irrational actions by managers.  For example, 
“dilution” is usually carefully calculated on a pro forma basis 
for both book value and current earnings per share.  Particular 
emphasis is given to the latter item.  When that calculation is 
negative (dilutive) from the acquiring company’s standpoint, a 
justifying explanation will be made (internally, if not 
elsewhere) that the lines will cross favorably at some point in 
the future. (While deals often fail in practice, they never fail 
in projections - if the CEO is visibly panting over a prospective 
acquisition, subordinates and consultants will supply the 
requisite projections to rationalize any price.) Should the 
calculation produce numbers that are immediately positive - that 
is, anti-dilutive - for the acquirer, no comment is thought to be 

     The attention given this form of dilution is overdone: 
current earnings per share (or even earnings per share of the 
next few years) are an important variable in most business 
valuations, but far from all powerful.

     There have been plenty of mergers, non-dilutive in this 
limited sense, that were instantly value destroying for the 
acquirer.  And some mergers that have diluted current and near-
term earnings per share have in fact been value-enhancing.  What 
really counts is whether a merger is dilutive or anti-dilutive in 
terms of intrinsic business value (a judgment involving 
consideration of many variables).  We believe calculation of 
dilution from this viewpoint to be all-important (and too seldom 

     A second language problem relates to the equation of 
exchange.  If Company A announces that it will issue shares to 
merge with Company B, the process is customarily described as 
“Company A to Acquire Company B”, or “B Sells to A”.  Clearer 
thinking about the matter would result if a more awkward but more 
accurate description were used: “Part of A sold to acquire B”, or 
“Owners of B to receive part of A in exchange for their 
properties”.  In a trade, what you are giving is just as 
important as what you are getting.  This remains true even when 
the final tally on what is being given is delayed.  Subsequent 
sales of common stock or convertible issues, either to complete 
the financing for a deal or to restore balance sheet strength, 
must be fully counted in evaluating the fundamental mathematics 
of the original acquisition. (If corporate pregnancy is going to 
be the consequence of corporate mating, the time to face that 
fact is before the moment of ecstasy.)

     Managers and directors might sharpen their thinking by 
asking themselves if they would sell 100% of their business on 
the same basis they are being asked to sell part of it.  And if 
it isn’t smart to sell all on such a basis, they should ask 
themselves why it is smart to sell a portion.  A cumulation of 
small managerial stupidities will produce a major stupidity - not 
a major triumph. (Las Vegas has been built upon the wealth 
transfers that occur when people engage in seemingly-small 
disadvantageous capital transactions.)

     The “giving versus getting” factor can most easily be 
calculated in the case of registered investment companies.  
Assume Investment Company X, selling at 50% of asset value, 
wishes to merge with Investment Company Y.  Assume, also, that 
Company X therefore decides to issue shares equal in market value 
to 100% of Y’s asset value.

     Such a share exchange would leave X trading $2 of its 
previous intrinsic value for $1 of Y’s intrinsic value.  Protests 
would promptly come forth from both X’s shareholders and the SEC, 
which rules on the fairness of registered investment company 
mergers.  Such a transaction simply would not be allowed.

     In the case of manufacturing, service, financial companies, 
etc., values are not normally as precisely calculable as in the 
case of investment companies.  But we have seen mergers in these 
industries that just as dramatically destroyed value for the 
owners of the acquiring company as was the case in the 
hypothetical illustration above.  This destruction could not 
happen if management and directors would assess the fairness of 
any transaction by using the same yardstick in the measurement of 
both businesses.

     Finally, a word should be said about the “double whammy” 
effect upon owners of the acquiring company when value-diluting 
stock issuances occur.  Under such circumstances, the first blow 
is the loss of intrinsic business value that occurs through the 
merger itself.  The second is the downward revision in market 
valuation that, quite rationally, is given to that now-diluted 
business value.  For current and prospective owners 
understandably will not pay as much for assets lodged in the 
hands of a management that has a record of wealth-destruction 
through unintelligent share issuances as they will pay for assets 
entrusted to a management with precisely equal operating talents, 
but a known distaste for anti-owner actions.  Once management 
shows itself insensitive to the interests of owners, shareholders 
will suffer a long time from the price/value ratio afforded their 
stock (relative to other stocks), no matter what assurances 
management gives that the value-diluting action taken was a one-
of-a-kind event.

     Those assurances are treated by the market much as one-bug-
in-the-salad explanations are treated at restaurants.  Such 
explanations, even when accompanied by a new waiter, do not 
eliminate a drop in the demand (and hence market value) for 
salads, both on the part of the offended customer and his 
neighbors pondering what to order.  Other things being equal, the 
highest stock market prices relative to intrinsic business value 
are given to companies whose managers have demonstrated their 
unwillingness to issue shares at any time on terms unfavorable to 
the owners of the business.

     At Berkshire, or any company whose policies we determine 
(including Blue Chip and Wesco), we will issue shares only if our 
owners receive in business value as much as we give.  We will not 
equate activity with progress or corporate size with owner-


     This annual report is read by a varied audience, and it is 
possible that some members of that audience may be helpful to us 
in our acquisition program.

     We prefer:

        (1) large purchases (at least $5 million of after-tax 

        (2) demonstrated consistent earning power (future 
            projections are of little interest to us, nor are 
            “turn-around” situations),

        (3) businesses earning good returns on equity while 
            employing little or no debt,

        (4) management in place (we can’t supply it),

        (5) simple businesses (if there’s lots of technology, we 
            won’t understand it),

        (6) an offering price (we don’t want to waste our time or 
            that of the seller by talking, even preliminarily, 
            about a transaction when price is unknown).

     We will not engage in unfriendly transactions.  We can 
promise complete confidentiality and a very fast answer as to 
possible interest - customarily within five minutes.  Cash 
purchases are preferred, but we will consider the use of stock 
when it can be done on the basis described in the previous 

                         *  *  *  *  *

     Our shareholder-designated contributions program met with 
enthusiasm again this year; 95.8% of eligible shares 
participated.  This response was particularly encouraging since 
only $1 per share was made available for designation, down from 
$2 in 1981.  If the merger with Blue Chip takes place, a probable 
by-product will be the attainment of a consolidated tax position 
that will significantly enlarge our contribution base and give us 
a potential for designating bigger per-share amounts in the 

     If you wish to participate in future programs, we strongly 
urge that you immediately make sure that your shares are 
registered in the actual owner’s name, not a “street” or nominee 
name.  For new shareholders, a more complete description of the 
program is on pages 62-63.

                         *  *  *  *  *

     In a characteristically rash move, we have expanded World 
Headquarters by 252 square feet (17%), coincidental with the 
signing of a new five-year lease at 1440 Kiewit Plaza.  The five 
people who work here with me - Joan Atherton, Mike Goldberg, 
Gladys Kaiser, Verne McKenzie and Bill Scott - outproduce 
corporate groups many times their number.  A compact organization 
lets all of us spend our time managing the business rather than 
managing each other.

     Charlie Munger, my partner in management, will continue to 
operate from Los Angeles whether or not the Blue Chip merger 
occurs.  Charlie and I are interchangeable in business decisions.  
Distance impedes us not at all: we’ve always found a telephone 
call to be more productive than a half-day committee meeting.

                         *  *  *  *  *

     Two of our managerial stars retired this year: Phil Liesche 
at 65 from National Indemnity Company, and Ben Rosner at 79 from 
Associated Retail Stores.  Both of these men made you, as 
shareholders of Berkshire, a good bit wealthier than you 
otherwise would have been.  National Indemnity has been the most 
important operation in Berkshire’s growth.  Phil and Jack 
Ringwalt, his predecessor, were the two prime movers in National 
Indemnity’s success.  Ben Rosner sold Associated Retail Stores to 
Diversified Retailing Company for cash in 1967, promised to stay 
on only until the end of the year, and then hit business home 
runs for us for the next fifteen years.

     Both Ben and Phil ran their businesses for Berkshire with 
every bit of the care and drive that they would have exhibited 
had they personally owned 100% of these businesses.  No rules 
were necessary to enforce or even encourage this attitude; it was 
embedded in the character of these men long before we came on the 
scene.  Their good character became our good fortune.  If we can 
continue to attract managers with the qualities of Ben and Phil, 
you need not worry about Berkshire’s future.

                                          Warren E. Buffett
                                          Chairman of the Board

from http://www.berkshirehathaway.com/letters/1982.html

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