15 ตุลาคม 2559

Berkshire Hathaway Letters to Shareholders (1981)

                                               February 26, 1982

To the Shareholders of Berkshire Hathaway Inc.:

     Operating earnings of $39.7 million in 1981 amounted to 
15.2% of beginning equity capital (valuing securities at cost) 
compared to 17.8% in 1980.  Our new plan that allows stockholders 
to designate corporate charitable contributions (detailed later) 
reduced earnings by about $900,000 in 1981.  This program, which 
we expect to continue subject to annual evaluation of our 
corporate tax position, had not been initiated in 1980.

Non-Controlled Ownership Earnings

     In the 1980 annual report we discussed extensively the 
concept of non-controlled ownership earnings, i.e., Berkshire’s 
share of the undistributed earnings of companies we don’t control 
or significantly influence but in which we, nevertheless, have 
important investments. (We will be glad to make available to new 
or prospective shareholders copies of that discussion or others 
from earlier reports to which we refer in this report.) No 
portion of those undistributed earnings is included in the 
operating earnings of Berkshire.

     However, our belief is that, in aggregate, those 
undistributed and, therefore, unrecorded earnings will be 
translated into tangible value for Berkshire shareholders just as 
surely as if subsidiaries we control had earned, retained - and 
reported - similar earnings.

     We know that this translation of non-controlled ownership 
earnings into corresponding realized and unrealized capital gains 
for Berkshire will be extremely irregular as to time of 
occurrence.  While market values track business values quite well 
over long periods, in any given year the relationship can gyrate 
capriciously.  Market recognition of retained earnings also will 
be unevenly realized among companies.  It will be disappointingly 
low or negative in cases where earnings are employed non-
productively, and far greater than dollar-for-dollar of retained 
earnings in cases of companies that achieve high returns with 
their augmented capital.  Overall, if a group of non-controlled 
companies is selected with reasonable skill, the group result 
should be quite satisfactory.

     In aggregate, our non-controlled business interests have 
more favorable underlying economic characteristics than our 
controlled businesses.  That’s understandable; the area of choice 
has been far wider.  Small portions of exceptionally good 
businesses are usually available in the securities markets at 
reasonable prices.  But such businesses are available for 
purchase in their entirety only rarely, and then almost always at 
high prices.

General Acquisition Behavior

     As our history indicates, we are comfortable both with total 
ownership of businesses and with marketable securities 
representing small portions of businesses.  We continually look 
for ways to employ large sums in each area. (But we try to avoid 
small commitments - “If something’s not worth doing at all, it’s 
not worth doing well”.) Indeed, the liquidity requirements of our 
insurance and trading stamp businesses mandate major investments 
in marketable securities.

     Our acquisition decisions will be aimed at maximizing real 
economic benefits, not at maximizing either managerial domain or 
reported numbers for accounting purposes. (In the long run, 
managements stressing accounting appearance over economic 
substance usually achieve little of either.)

     Regardless of the impact upon immediately reportable 
earnings, we would rather buy 10% of Wonderful Business T at X 
per share than 100% of T at 2X per share.  Most corporate 
managers prefer just the reverse, and have no shortage of stated 
rationales for their behavior.

     However, we suspect three motivations - usually unspoken - 
to be, singly or in combination, the important ones in most high-
premium takeovers:

     (1) Leaders, business or otherwise, seldom are deficient in 
         animal spirits and often relish increased activity and 
         challenge.  At Berkshire, the corporate pulse never 
         beats faster than when an acquisition is in prospect.

     (2) Most organizations, business or otherwise, measure 
         themselves, are measured by others, and compensate their 
         managers far more by the yardstick of size than by any 
         other yardstick. (Ask a Fortune 500 manager where his 
         corporation stands on that famous list and, invariably, 
         the number responded will be from the list ranked by 
         size of sales; he may well not even know where his 
         corporation places on the list Fortune just as 
         faithfully compiles ranking the same 500 corporations by 

     (3) Many managements apparently were overexposed in 
         impressionable childhood years to the story in which the 
         imprisoned handsome prince is released from a toad’s 
         body by a kiss from a beautiful princess.  Consequently, 
         they are certain their managerial kiss will do wonders 
         for the profitability of Company T(arget).

            Such optimism is essential.  Absent that rosy view, 
         why else should the shareholders of Company A(cquisitor) 
         want to own an interest in T at the 2X takeover cost 
         rather than at the X market price they would pay if they 
         made direct purchases on their own?

            In other words, investors can always buy toads at the 
         going price for toads.  If investors instead bankroll 
         princesses who wish to pay double for the right to kiss 
         the toad, those kisses had better pack some real 
         dynamite.  We’ve observed many kisses but very few 
         miracles.  Nevertheless, many managerial princesses 
         remain serenely confident about the future potency of 
         their kisses - even after their corporate backyards are 
         knee-deep in unresponsive toads.

     In fairness, we should acknowledge that some acquisition 
records have been dazzling.  Two major categories stand out.

     The first involves companies that, through design or 
accident, have purchased only businesses that are particularly 
well adapted to an inflationary environment.  Such favored 
business must have two characteristics: (1) an ability to 
increase prices rather easily (even when product demand is flat 
and capacity is not fully utilized) without fear of significant 
loss of either market share or unit volume, and (2) an ability to 
accommodate large dollar volume increases in business (often 
produced more by inflation than by real growth) with only minor 
additional investment of capital.  Managers of ordinary ability, 
focusing solely on acquisition possibilities meeting these tests, 
have achieved excellent results in recent decades.  However, very 
few enterprises possess both characteristics, and competition to 
buy those that do has now become fierce to the point of being 

     The second category involves the managerial superstars - men 
who can recognize that rare prince who is disguised as a toad, 
and who have managerial abilities that enable them to peel away 
the disguise.  We salute such managers as Ben Heineman at 
Northwest Industries, Henry Singleton at Teledyne, Erwin Zaban at 
National Service Industries, and especially Tom Murphy at Capital 
Cities Communications (a real managerial “twofer”, whose 
acquisition efforts have been properly focused in Category 1 and 
whose operating talents also make him a leader of Category 2).  
From both direct and vicarious experience, we recognize the 
difficulty and rarity of these executives’ achievements. (So do 
they; these champs have made very few deals in recent years, and 
often have found repurchase of their own shares to be the most 
sensible employment of corporate capital.)

     Your Chairman, unfortunately, does not qualify for Category 
2.  And, despite a reasonably good understanding of the economic 
factors compelling concentration in Category 1, our actual 
acquisition activity in that category has been sporadic and 
inadequate.  Our preaching was better than our performance. (We 
neglected the Noah principle: predicting rain doesn’t count, 
building arks does.)

     We have tried occasionally to buy toads at bargain prices 
with results that have been chronicled in past reports.  Clearly 
our kisses fell flat.  We have done well with a couple of princes 
- but they were princes when purchased.  At least our kisses 
didn’t turn them into toads.  And, finally, we have occasionally 
been quite successful in purchasing fractional interests in 
easily-identifiable princes at toad-like prices.

Berkshire Acquisition Objectives

     We will continue to seek the acquisition of businesses in 
their entirety at prices that will make sense, even should the 
future of the acquired enterprise develop much along the lines of 
its past.  We may very well pay a fairly fancy price for a 
Category 1 business if we are reasonably confident of what we are 
getting.  But we will not normally pay a lot in any purchase for 
what we are supposed to bring to the party - for we find that we 
ordinarily don’t bring a lot.

     During 1981 we came quite close to a major purchase 
involving both a business and a manager we liked very much.  
However, the price finally demanded, considering alternative uses 
for the funds involved, would have left our owners worse off than 
before the purchase.  The empire would have been larger, but the 
citizenry would have been poorer.

     Although we had no success in 1981, from time to time in the 
future we will be able to purchase 100% of businesses meeting our 
standards.  Additionally, we expect an occasional offering of a 
major “non-voting partnership” as discussed under the Pinkerton’s 
heading on page 47 of this report.  We welcome suggestions 
regarding such companies where we, as a substantial junior 
partner, can achieve good economic results while furthering the 
long-term objectives of present owners and managers.

     Currently, we find values most easily obtained through the 
open-market purchase of fractional positions in companies with 
excellent business franchises and competent, honest managements.  
We never expect to run these companies, but we do expect to 
profit from them.

     We expect that undistributed earnings from such companies 
will produce full value (subject to tax when realized) for 
Berkshire and its shareholders.  If they don’t, we have made 
mistakes as to either: (1) the management we have elected to 
join; (2) the future economics of the business; or (3) the price 
we have paid.

     We have made plenty of such mistakes - both in the purchase 
of non-controlling and controlling interests in businesses.  
Category (2) miscalculations are the most common.  Of course, it 
is necessary to dig deep into our history to find illustrations 
of such mistakes - sometimes as deep as two or three months back.  
For example, last year your Chairman volunteered his expert 
opinion on the rosy future of the aluminum business.  Several 
minor adjustments to that opinion - now aggregating approximately 
180 degrees - have since been required.

     For personal as well as more objective reasons, however, we 
generally have been able to correct such mistakes far more 
quickly in the case of non-controlled businesses (marketable 
securities) than in the case of controlled subsidiaries.  Lack of 
control, in effect, often has turned out to be an economic plus.

     As we mentioned last year, the magnitude of our non-recorded 
“ownership” earnings has grown to the point where their total is 
greater than our reported operating earnings.  We expect this 
situation will continue.  In just four ownership positions in 
this category - GEICO Corporation, General Foods Corporation, R. 
J. Reynolds Industries, Inc. and The Washington Post Company - 
our share of undistributed and therefore unrecorded earnings 
probably will total well over $35 million in 1982.  The 
accounting rules that entirely ignore these undistributed 
earnings diminish the utility of our annual return on equity 
calculation, or any other single year measure of economic 

Long-Term Corporate Performance

     In measuring long-term economic performance, equities held 
by our insurance subsidiaries are valued at market subject to a 
charge reflecting the amount of taxes that would have to be paid 
if unrealized gains were actually realized.  If we are correct in 
the premise stressed in the preceding section of this report, our 
unreported ownership earnings will find their way, irregularly 
but inevitably, into our net worth.  To date, this has been the 

     An even purer calculation of performance would involve a 
valuation of bonds and non-insurance held equities at market.  
However, GAAP accounting does not prescribe this procedure, and 
the added purity would change results only very slightly.  Should 
any valuation difference widen to significant proportions, as it 
has at most major insurance companies, we will report its effect 
to you.

     On a GAAP basis, during the present management’s term of 
seventeen years, book value has increased from $19.46 per share 
to $526.02 per share, or 21.1% compounded annually.  This rate of 
return number is highly likely to drift downward in future years.  
We hope, however, that it can be maintained significantly above 
the rate of return achieved by the average large American 

     Over half of the large gain in Berkshire’s net worth during 
1981 - it totaled $124 million, or about 31% - resulted from the 
market performance of a single investment, GEICO Corporation.  In 
aggregate, our market gain from securities during the year 
considerably outstripped the gain in underlying business values.  
Such market variations will not always be on the pleasant side.

     In past reports we have explained how inflation has caused 
our apparently satisfactory long-term corporate performance to be 
illusory as a measure of true investment results for our owners.  
We applaud the efforts of Federal Reserve Chairman Volcker and 
note the currently more moderate increases in various price 
indices.  Nevertheless, our views regarding long-term 
inflationary trends are as negative as ever.  Like virginity, a 
stable price level seems capable of maintenance, but not of 

     Despite the overriding importance of inflation in the 
investment equation, we will not punish you further with another 
full recital of our views; inflation itself will be punishment 
enough. (Copies of previous discussions are available for 
masochists.) But, because of the unrelenting destruction of 
currency values, our corporate efforts will continue to do a much 
better job of filling your wallet than of filling your stomach.

Equity Value-Added

     An additional factor should further subdue any residual 
enthusiasm you may retain regarding our long-term rate of return.  
The economic case justifying equity investment is that, in 
aggregate, additional earnings above passive investment returns - 
interest on fixed-income securities - will be derived through the 
employment of managerial and entrepreneurial skills in 
conjunction with that equity capital.  Furthermore, the case says 
that since the equity capital position is associated with greater 
risk than passive forms of investment, it is “entitled” to higher 
returns.  A “value-added” bonus from equity capital seems natural 
and certain.

     But is it?  Several decades back, a return on equity of as 
little as 10% enabled a corporation to be classified as a “good” 
business - i.e., one in which a dollar reinvested in the business 
logically could be expected to be valued by the market at more 
than one hundred cents.  For, with long-term taxable bonds 
yielding 5% and long-term tax-exempt bonds 3%, a business 
operation that could utilize equity capital at 10% clearly was 
worth some premium to investors over the equity capital employed.  
That was true even though a combination of taxes on dividends and 
on capital gains would reduce the 10% earned by the corporation 
to perhaps 6%-8% in the hands of the individual investor.

     Investment markets recognized this truth.  During that 
earlier period, American business earned an average of 11% or so 
on equity capital employed and stocks, in aggregate, sold at 
valuations far above that equity capital (book value), averaging 
over 150 cents on the dollar.  Most businesses were “good” 
businesses because they earned far more than their keep (the 
return on long-term passive money).  The value-added produced by 
equity investment, in aggregate, was substantial.

     That day is gone.  But the lessons learned during its 
existence are difficult to discard.  While investors and managers 
must place their feet in the future, their memories and nervous 
systems often remain plugged into the past.  It is much easier 
for investors to utilize historic p/e ratios or for managers to 
utilize historic business valuation yardsticks than it is for 
either group to rethink their premises daily.  When change is 
slow, constant rethinking is actually undesirable; it achieves 
little and slows response time.  But when change is great, 
yesterday’s assumptions can be retained only at great cost.  And 
the pace of economic change has become breathtaking.

     During the past year, long-term taxable bond yields exceeded 
16% and long-term tax-exempts 14%.  The total return achieved 
from such tax-exempts, of course, goes directly into the pocket 
of the individual owner.  Meanwhile, American business is 
producing earnings of only about 14% on equity.  And this 14% 
will be substantially reduced by taxation before it can be banked 
by the individual owner.  The extent of such shrinkage depends 
upon the dividend policy of the corporation and the tax rates 
applicable to the investor.

     Thus, with interest rates on passive investments at late 
1981 levels, a typical American business is no longer worth one 
hundred cents on the dollar to owners who are individuals. (If 
the business is owned by pension funds or other tax-exempt 
investors, the arithmetic, although still unenticing, changes 
substantially for the better.) Assume an investor in a 50% tax 
bracket; if our typical company pays out all earnings, the income 
return to the investor will be equivalent to that from a 7% tax-
exempt bond.  And, if conditions persist - if all earnings are 
paid out and return on equity stays at 14% - the 7% tax-exempt 
equivalent to the higher-bracket individual investor is just as 
frozen as is the coupon on a tax-exempt bond.  Such a perpetual 
7% tax-exempt bond might be worth fifty cents on the dollar as 
this is written.

     If, on the other hand, all earnings of our typical American 
business are retained and return on equity again remains 
constant, earnings will grow at 14% per year.  If the p/e ratio 
remains constant, the price of our typical stock will also grow 
at 14% per year.  But that 14% is not yet in the pocket of the 
shareholder.  Putting it there will require the payment of a 
capital gains tax, presently assessed at a maximum rate of 20%.  
This net return, of course, works out to a poorer rate of return 
than the currently available passive after-tax rate.

     Unless passive rates fall, companies achieving 14% per year 
gains in earnings per share while paying no cash dividend are an 
economic failure for their individual shareholders.  The returns 
from passive capital outstrip the returns from active capital.  
This is an unpleasant fact for both investors and corporate 
managers and, therefore, one they may wish to ignore.  But facts 
do not cease to exist, either because they are unpleasant or 
because they are ignored.

     Most American businesses pay out a significant portion of 
their earnings and thus fall between the two examples.  And most 
American businesses are currently “bad” businesses economically - 
producing less for their individual investors after-tax than the 
tax-exempt passive rate of return on money.  Of course, some 
high-return businesses still remain attractive, even under 
present conditions.  But American equity capital, in aggregate, 
produces no value-added for individual investors.

     It should be stressed that this depressing situation does 
not occur because corporations are jumping, economically, less 
high than previously.  In fact, they are jumping somewhat higher: 
return on equity has improved a few points in the past decade.  
But the crossbar of passive return has been elevated much faster.  
Unhappily, most companies can do little but hope that the bar 
will be lowered significantly; there are few industries in which 
the prospects seem bright for substantial gains in return on 

     Inflationary experience and expectations will be major (but 
not the only) factors affecting the height of the crossbar in 
future years.  If the causes of long-term inflation can be 
tempered, passive returns are likely to fall and the intrinsic 
position of American equity capital should significantly improve.  
Many businesses that now must be classified as economically “bad” 
would be restored to the “good” category under such 

     A further, particularly ironic, punishment is inflicted by 
an inflationary environment upon the owners of the “bad” 
business.  To continue operating in its present mode, such a low-
return business usually must retain much of its earnings - no 
matter what penalty such a policy produces for shareholders.

     Reason, of course, would prescribe just the opposite policy.  
An individual, stuck with a 5% bond with many years to run before 
maturity, does not take the coupons from that bond and pay one 
hundred cents on the dollar for more 5% bonds while similar bonds 
are available at, say, forty cents on the dollar.  Instead, he 
takes those coupons from his low-return bond and - if inclined to 
reinvest - looks for the highest return with safety currently 
available.  Good money is not thrown after bad.

     What makes sense for the bondholder makes sense for the 
shareholder.  Logically, a company with historic and prospective 
high returns on equity should retain much or all of its earnings 
so that shareholders can earn premium returns on enhanced 
capital.  Conversely, low returns on corporate equity would 
suggest a very high dividend payout so that owners could direct 
capital toward more attractive areas. (The Scriptures concur.  In 
the parable of the talents, the two high-earning servants are 
rewarded with 100% retention of earnings and encouraged to expand 
their operations.  However, the non-earning third servant is not 
only chastised - “wicked and slothful” - but also is required to 
redirect all of his capital to the top performer.  Matthew 25: 

     But inflation takes us through the looking glass into the 
upside-down world of Alice in Wonderland.  When prices 
continuously rise, the “bad” business must retain every nickel 
that it can.  Not because it is attractive as a repository for 
equity capital, but precisely because it is so unattractive, the 
low-return business must follow a high retention policy.  If it 
wishes to continue operating in the future as it has in the past 
- and most entities, including businesses, do - it simply has no 

     For inflation acts as a gigantic corporate tapeworm.  That 
tapeworm preemptively consumes its requisite daily diet of 
investment dollars regardless of the health of the host organism.  
Whatever the level of reported profits (even if nil), more 
dollars for receivables, inventory and fixed assets are 
continuously required by the business in order to merely match 
the unit volume of the previous year.  The less prosperous the 
enterprise, the greater the proportion of available sustenance 
claimed by the tapeworm.

     Under present conditions, a business earning 8% or 10% on 
equity often has no leftovers for expansion, debt reduction or 
“real” dividends.  The tapeworm of inflation simply cleans the 
plate. (The low-return company’s inability to pay dividends, 
understandably, is often disguised.  Corporate America 
increasingly is turning to dividend reinvestment plans, sometimes 
even embodying a discount arrangement that all but forces 
shareholders to reinvest.  Other companies sell newly issued 
shares to Peter in order to pay dividends to Paul.  Beware of 
“dividends” that can be paid out only if someone promises to 
replace the capital distributed.)

     Berkshire continues to retain its earnings for offensive, 
not defensive or obligatory, reasons.  But in no way are we 
immune from the pressures that escalating passive returns exert 
on equity capital.  We continue to clear the crossbar of after-
tax passive return - but barely.  Our historic 21% return - not 
at all assured for the future - still provides, after the current 
capital gain tax rate (which we expect to rise considerably in 
future years), a modest margin over current after-tax rates on 
passive money.  It would be a bit humiliating to have our 
corporate value-added turn negative.  But it can happen here as 
it has elsewhere, either from events outside anyone’s control or 
from poor relative adaptation on our part.

Sources of Reported Earnings

     The table below shows the sources of Berkshire’s reported 
earnings.  Berkshire owns about 60% of Blue Chip Stamps which, in 
turn, owns 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 earnings.

                                                                         Net Earnings
                                   Earnings Before Income Taxes            After Tax
                              --------------------------------------  ------------------
                                    Total          Berkshire Share     Berkshire Share
                              ------------------  ------------------  ------------------
                                1981      1980      1981      1980      1981      1980
                              --------  --------  --------  --------  --------  --------
                                                    (000s omitted)
Operating Earnings:
  Insurance Group:
    Underwriting ............ $  1,478  $  6,738  $  1,478  $  6,737   $   798   $ 3,637
    Net Investment Income ...   38,823    30,939    38,823    30,927    32,401    25,607
  Berkshire-Waumbec Textiles    (2,669)     (508)   (2,669)     (508)   (1,493)      202
  Associated Retail Stores ..    1,763     2,440     1,763     2,440       759     1,169
  See’s Candies .............   21,891    15,475    13,046     9,223     6,289     4,459
  Buffalo Evening News ......   (1,057)   (2,777)     (630)   (1,655)     (276)     (800)
  Blue Chip Stamps - Parent      3,642     7,699     2,171     4,588     2,134     3,060
  Wesco Financial - Parent ..    4,495     2,916     2,145     1,392     1,590     1,044
  Mutual Savings and Loan ...    1,605     5,814       766     2,775     1,536     1,974
  Precision Steel ...........    3,453     2,833     1,648     1,352       841       656
  Interest on Debt ..........  (14,656)  (12,230)  (12,649)   (9,390)   (6,671)   (4,809)
  Other* ....................    1,895     1,698     1,344     1,308     1,513       992
                              --------  --------  --------  --------  --------  --------
  Sub-total - Continuing
     Operations ............. $ 60,663  $ 61,037  $ 47,236  $ 49,189  $ 39,421  $ 37,191
  Illinois National Bank** ..     --       5,324      --       5,200      --       4,731
                              --------  --------  --------  --------  --------  --------
Operating Earnings ..........   60,663    66,361    47,236    54,389    39,421    41,922
Sales of securities and
   unusual sales of assets ..   37,801    19,584    33,150    15,757    23,183    11,200
                              --------  --------  --------  --------  --------  --------
Total Earnings - all entities $ 98,464  $ 85,945  $ 80,386  $ 70,146  $ 62,604  $ 53,122
                              ========  ========  ========  ========  ========  ========

 *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 

**Berkshire divested itself of its ownership of the Illinois 
  National Bank on December 31, 1980.

     Blue Chip Stamps and Wesco are public companies with 
reporting requirements of their own.  On pages 38-50 of this 
report we have reproduced the narrative reports of the principal 
executives of both companies, in which they describe 1981 
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 91109.

     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 earnings, of course, finds its way into 
the 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                                            Cost       Market
-------------                                         ----------  ----------
                                                          (000s omitted)
  451,650 (a)  Affiliated Publications, Inc. ........  $  3,297    $ 14,114
  703,634 (a)  Aluminum Company of America ..........    19,359      18,031
  420,441 (a)  Arcata Corporation 
                 (including common equivalents) .....    14,076      15,136
  475,217 (b)  Cleveland-Cliffs Iron Company ........    12,942      14,362 
  441,522 (a)  GATX Corporation .....................    17,147      13,466
2,101,244 (b)  General Foods, Inc. ..................    66,277      66,714
7,200,000 (a)  GEICO Corporation ....................    47,138     199,800
2,015,000 (a)  Handy & Harman .......................    21,825      36,270
  711,180 (a)  Interpublic Group of Companies, Inc.       4,531      23,202
  282,500 (a)  Media General ........................     4,545      11,088
  391,400 (a)  Ogilvy & Mather International Inc. ...     3,709      12,329
  370,088 (b)  Pinkerton’s, Inc. ....................    12,144      19,675
1,764,824 (b)  R. J. Reynolds Industries, Inc. ......    76,668      83,127
  785,225 (b)  SAFECO Corporation ...................    21,329      31,016
1,868,600 (a)  The Washington Post Company ..........    10,628      58,160
                                                      ----------  ----------
                                                       $335,615    $616,490
All Other Common Stockholdings ......................    16,131      22,739
                                                      ----------  ----------
Total Common Stocks .................................  $351,746    $639,229
                                                      ==========  ==========

(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.

     Our controlled and non-controlled businesses operate over 
such a wide spectrum of activities that detailed commentary here 
would prove too lengthy.  Much additional financial information 
is included in Management’s Discussion on pages 34-37 and in the 
narrative reports on pages 38-50.  However, our largest area of 
both controlled and non-controlled activity has been, and almost 
certainly will continue to be, the property-casualty insurance 
area, and commentary on important developments in that industry 
is appropriate.

Insurance Industry Conditions

     “Forecasts”, said Sam Goldwyn, “are dangerous, particularly 
those about the future.” (Berkshire shareholders may have reached 
a similar conclusion after rereading our past annual reports 
featuring your Chairman’s prescient analysis of textile 

     There is no danger, however, in forecasting that 1982 will 
be the worst year in recent history for insurance underwriting.  
That result already has been guaranteed by present pricing 
behavior, coupled with the term nature of the insurance contract.

     While many auto policies are priced and sold at six-month 
intervals - and many property policies are sold for a three-year 
term - a weighted average of the duration of all property-
casualty insurance policies probably runs a little under twelve 
months.  And prices for the insurance coverage, of course, are 
frozen for the life of the contract.  Thus, this year’s sales 
contracts (“premium written” in the parlance of the industry) 
determine about one-half of next year’s level of revenue 
(“premiums earned”).  The remaining half will be determined by 
sales contracts written next year that will be about 50% earned 
in that year.  The profitability consequences are automatic: if 
you make a mistake in pricing, you have to live with it for an 
uncomfortable period of time.

     Note in the table below the year-over-year gain in industry-
wide premiums written and the impact that it has on the current 
and following year’s level of underwriting profitability.  The 
result is exactly as you would expect in an inflationary world.  
When the volume gain is well up in double digits, it bodes well 
for profitability trends in the current and following year.  When 
the industry volume gain is small, underwriting experience very 
shortly will get worse, no matter how unsatisfactory the current 

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

                    Yearly Change     Yearly Change      Combined Ratio
                     in Premium         in Premium        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 ...............      3.6               4.1              105.7

Source:   Best’s Aggregates and Averages.

     As Pogo would say, “The future isn’t what it used to be.” 
Current pricing practices promise devastating results, 
particularly if the respite from major natural disasters that the 
industry has enjoyed in recent years should end.  For 
underwriting experience has been getting worse in spite of good 
luck, not because of bad luck.  In recent years hurricanes have 
stayed at sea and motorists have reduced their driving.  They 
won’t always be so obliging.

     And, of course the twin inflations, monetary and “social” 
(the tendency of courts and juries to stretch the coverage of 
policies beyond what insurers, relying upon contract terminology 
and precedent, had expected), are unstoppable.  Costs of 
repairing both property and people - and the extent to which 
these repairs are deemed to be the responsibility of the insurer 
- will advance relentlessly.

     Absent any bad luck (catastrophes, increased driving, etc.), 
an immediate industry volume gain of at least 10% per year 
probably is necessary to stabilize the record level of 
underwriting losses that will automatically prevail in mid-1982.  
(Most underwriters expect incurred losses in aggregate to rise at 
least 10% annually; each, of course, counts on getting less than 
his share.) Every percentage point of annual premium growth below 
the 10% equilibrium figure quickens the pace of deterioration.  
Quarterly data in 1981 underscore the conclusion that a terrible 
underwriting picture is worsening at an accelerating rate.

     In the 1980 annual report we discussed the investment 
policies that have destroyed the integrity of many insurers’ 
balance sheets, forcing them to abandon underwriting discipline 
and write business at any price in order to avoid negative cash 
flow.  It was clear that insurers with large holdings of bonds 
valued, for accounting purposes, at nonsensically high prices 
would have little choice but to keep the money revolving by 
selling large numbers of policies at nonsensically low prices.  
Such insurers necessarily fear a major decrease in volume more 
than they fear a major underwriting loss.

     But, unfortunately, all insurers are affected; it’s 
difficult to price much differently than your most threatened 
competitor.  This pressure continues unabated and adds a new 
motivation to the others that drive many insurance managers to 
push for business; worship of size over profitability, and the 
fear that market share surrendered never can be regained.

     Whatever the reasons, we believe it is true that virtually 
no major property-casualty insurer - despite protests by the 
entire industry that rates are inadequate and great selectivity 
should be exercised - has been willing to turn down business to 
the point where cash flow has turned significantly negative.  
Absent such a willingness, prices will remain under severe 

     Commentators continue to talk of the underwriting cycle, 
usually implying a regularity of rhythm and a relatively constant 
midpoint of profitability Our own view is different.  We believe 
that very large, although obviously varying, underwriting losses 
will be the norm for the industry, and that the best underwriting 
years in the future decade may appear substandard against the 
average year of the past decade.

     We have no magic formula to insulate our controlled 
insurance companies against this deteriorating future.  Our 
managers, particularly Phil Liesche, Bill Lyons, Roland Miller, 
Floyd Taylor and Milt Thornton, have done a magnificent job of 
swimming against the tide.  We have sacrificed much volume, but 
have maintained a substantial underwriting superiority in 
relation to industry-wide results.  The outlook at Berkshire is 
for continued low volume.  Our financial position offers us 
maximum flexibility, a very rare condition in the property-
casualty insurance industry.  And, at some point, should fear 
ever prevail throughout the industry, our financial strength 
could become an operational asset of immense value.

     We believe that GEICO Corporation, our major non-controlled 
business operating in this field, is, by virtue of its extreme 
and improving operating efficiency, in a considerably more 
protected position than almost any other major insurer.  GEICO is 
a brilliantly run implementation of a very important business 

Shareholder Designated Contributions

     Our new program enabling shareholders to designate the 
recipients of corporate charitable contributions was greeted with 
extraordinary enthusiasm.  A copy of the letter sent October 14, 
1981 describing this program appears on pages 51-53.  Of 932,206 
shares eligible for participation (shares where the name of the 
actual owner appeared on our stockholder record), 95.6% 
responded.  Even excluding Buffet-related shares, the response 
topped 90%.

     In addition, more than 3% of our shareholders voluntarily 
wrote letters or notes, all but one approving of the program.  
Both the level of participation and of commentary surpass any 
shareholder response we have witnessed, even when such response 
has been intensively solicited by corporate staff and highly paid 
professional proxy organizations.  In contrast, your 
extraordinary level of response occurred without even the nudge 
of a company-provided return envelope.  This self-propelled 
behavior speaks well for the program, and speaks well for our 

     Apparently the owners of our corporation like both 
possessing and exercising the ability to determine where gifts of 
their funds shall be made.  The “father-knows-best” school of 
corporate governance will be surprised to find that none of our 
shareholders sent in a designation sheet with instructions that 
the officers of Berkshire - in their superior wisdom, of course - 
make the decision on charitable funds applicable to his shares.  
Nor did anyone suggest that his share of our charitable funds be 
used to match contributions made by our corporate directors to 
charities of the directors’ choice (a popular, proliferating and 
non-publicized policy at many large corporations).

     All told, $1,783,655 of shareholder-designed contributions 
were distributed to about 675 charities.  In addition, Berkshire 
and subsidiaries continue to make certain contributions pursuant 
to local level decisions made by our operating managers.

     There will be some years, perhaps two or three out of ten, 
when contributions by Berkshire will produce substandard tax 
deductions - or none at all.  In those years we will not effect 
our shareholder designated charitable program.  In all other 
years we expect to inform you about October 10th of the amount 
per share that you may designate.  A reply form will accompany 
the notice, and you will be given about three weeks to respond 
with your designation.  To qualify, your shares must be 
registered in your own name or the name of an owning trust, 
corporation, partnership or estate, if applicable, on our 
stockholder list of September 30th, or the Friday preceding if 
such date falls on a Saturday or Sunday.

     Our only disappointment with this program in 1981 was that 
some of our shareholders, through no fault of their own, missed 
the opportunity to participate.  The Treasury Department ruling 
allowing us to proceed without tax uncertainty was received early 
in October.  The ruling did not cover participation by 
shareholders whose stock was registered in the name of nominees, 
such as brokers, and additionally required that the owners of all 
designating shares make certain assurances to Berkshire.  These 
assurances could not be given us in effective form by nominee 

     Under these circumstances, we attempted to communicate with 
all of our owners promptly (via the October 14th letter) so that, 
if they wished, they could prepare themselves to participate by 
the November 13th record date.  It was particularly important 
that this information be communicated promptly to stockholders 
whose holdings were in nominee name, since they would not be 
eligible unless they took action to re-register their shares 
before the record date.

     Unfortunately, communication to such non-record shareholders 
could take place only through the nominees.  We therefore 
strongly urged those nominees, mostly brokerage houses, to 
promptly transmit our letter to the real owners.  We explained 
that their failure to do so could deprive such owners of an 
important benefit.

     The results from our urgings would not strengthen the case 
for private ownership of the U.S. Postal Service.  Many of our 
shareholders never heard from their brokers (as some shareholders 
told us after reading news accounts of the program).  Others were 
forwarded our letter too late for action.

     One of the largest brokerage houses claiming to hold stock 
for sixty of its clients (about 4% of our shareholder 
population), apparently transmitted our letter about three weeks 
after receipt - too late for any of the sixty to participate. 
(Such lassitude did not pervade all departments of that firm; it 
billed Berkshire for mailing services within six days of that 
belated and ineffectual action.)

     We recite such horror stories for two reasons: (1) if you 
wish to participate in future designated contribution programs, 
be sure to have your stock registered in your name well before 
September 30th; and (2) even if you don’t care to participate and 
prefer to leave your stock in nominee form, it would be wise to 
have at least one share registered in your own name.  By so 
doing, you can be sure that you will be notified of any important 
corporate news at the same time as all other shareholders.

     The designated-contributions idea, along with many other 
ideas that have turned out well for us, was conceived by Charlie 
Munger, Vice Chairman of Berkshire and Chairman of Blue Chip.  
Irrespective of titles, Charlie and I work as partners in 
managing all controlled companies.  To almost a sinful degree, we 
enjoy our work as managing partners.  And we enjoy having you as 
our financial partners.

                                          Warren E. Buffett
                                          Chairman of the Board



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