15 ตุลาคม 2559

Berkshire Hathaway Letters to Shareholders (1979)

To the Shareholders of Berkshire Hathaway Inc.:

     Again, we must lead off with a few words about accounting.  
Since our last annual report, the accounting profession has 
decided that equity securities owned by insurance companies must 
be carried on the balance sheet at market value.  We previously 
have carried such equity securities at the lower of aggregate 
cost or aggregate market value.  Because we have large unrealized 
gains in our insurance equity holdings, the result of this new 
policy is to increase substantially both the 1978 and 1979 
yearend net worth, even after the appropriate liability is 
established for taxes on capital gains that would be payable 
should equities be sold at such market valuations.

     As you know, Blue Chip Stamps, our 60% owned subsidiary, is 
fully consolidated in Berkshire Hathaway’s financial statements.  
However, Blue Chip still is required to carry its equity 
investments at the lower of aggregate cost or aggregate market 
value, just as Berkshire Hathaway’s insurance subsidiaries did 
prior to this year.  Should the same equities be purchased at an 
identical price by an insurance subsidiary of Berkshire Hathaway 
and by Blue Chip Stamps, present accounting principles often 
would require that they end up carried on our consolidated 
balance sheet at two different values. (That should keep you on 
your toes.) Market values of Blue Chip Stamps’ equity holdings 
are given in footnote 3 on page 18.

1979 Operating Results

     We continue to feel that the ratio of operating earnings 
(before securities gains or losses) to shareholders’ equity with 
all securities valued at cost is the most appropriate way to 
measure any single year’s operating performance.

     Measuring such results against shareholders’ equity with 
securities valued at market could significantly distort the 
operating performance percentage because of wide year-to-year 
market value changes in the net worth figure that serves as the 
denominator.  For example, a large decline in securities values 
could result in a very low “market value” net worth that, in 
turn, could cause mediocre operating earnings to look 
unrealistically good.  Alternatively, the more successful that 
equity investments have been, the larger the net worth base 
becomes and the poorer the operating performance figure appears.  
Therefore, we will continue to report operating performance 
measured against beginning net worth, with securities valued at 

     On this basis, we had a reasonably good operating 
performance in 1979 - but not quite as good as that of 1978 - 
with operating earnings amounting to 18.6% of beginning net 
worth.  Earnings per share, of course, increased somewhat (about 
20%) but we regard this as an improper figure upon which to 
focus.  We had substantially more capital to work with in 1979 
than in 1978, and our performance in utilizing that capital fell 
short of the earlier year, even though per-share earnings rose.  
“Earnings per share” will rise constantly on a dormant savings 
account or on a U.S. Savings Bond bearing a fixed rate of return 
simply because “earnings” (the stated interest rate) are 
continuously plowed back and added to the capital base.  Thus, 
even a “stopped clock” can look like a growth stock if the 
dividend payout ratio is low.

     The primary test of managerial economic performance is the 
achievement of a high earnings rate on equity capital employed 
(without undue leverage, accounting gimmickry, etc.) and not the 
achievement of consistent gains in earnings per share.  In our 
view, many businesses would be better understood by their 
shareholder owners, as well as the general public, if managements 
and financial analysts modified the primary emphasis they place 
upon earnings per share, and upon yearly changes in that figure.

Long Term Results

     In measuring long term economic performance - in contrast to 
yearly performance - we believe it is appropriate to recognize 
fully any realized capital gains or losses as well as 
extraordinary items, and also to utilize financial statements 
presenting equity securities at market value.  Such capital gains 
or losses, either realized or unrealized, are fully as important 
to shareholders over a period of years as earnings realized in a 
more routine manner through operations; it is just that their 
impact is often extremely capricious in the short run, a 
characteristic that makes them inappropriate as an indicator of 
single year managerial performance.

     The book value per share of Berkshire Hathaway on September 
30, 1964 (the fiscal yearend prior to the time that your present 
management assumed responsibility) was $19.46 per share.  At 
yearend 1979, book value with equity holdings carried at market 
value was $335.85 per share.  The gain in book value comes to 
20.5% compounded annually.  This figure, of course, is far higher 
than any average of our yearly operating earnings calculations, 
and reflects the importance of capital appreciation of insurance 
equity investments in determining the overall results for our 
shareholders.  It probably also is fair to say that the quoted 
book value in 1964 somewhat overstated the intrinsic value of the 
enterprise, since the assets owned at that time on either a going 
concern basis or a liquidating value basis were not worth 100 
cents on the dollar. (The liabilities were solid, however.)

     We have achieved this result while utilizing a low amount of 
leverage (both financial leverage measured by debt to equity, and 
operating leverage measured by premium volume to capital funds of 
our insurance business), and also without significant issuance or 
repurchase of shares.  Basically, we have worked with the capital 
with which we started.  From our textile base we, or our Blue 
Chip and Wesco subsidiaries, have acquired total ownership of 
thirteen businesses through negotiated purchases from private 
owners for cash, and have started six others. (It’s worth a 
mention that those who have sold to us have, almost without 
exception, treated us with exceptional honor and fairness, both 
at the time of sale and subsequently.)

     But before we drown in a sea of self-congratulation, a 
further - and crucial - observation must be made.  A few years 
ago, a business whose per-share net worth compounded at 20% 
annually would have guaranteed its owners a highly successful 
real investment return.  Now such an outcome seems less certain.  
For the inflation rate, coupled with individual tax rates, will 
be the ultimate determinant as to whether our internal operating 
performance produces successful investment results - i.e., a 
reasonable gain in purchasing power from funds committed - for 
you as shareholders.

     Just as the original 3% savings bond, a 5% passbook savings 
account or an 8% U.S. Treasury Note have, in turn, been 
transformed by inflation into financial instruments that chew up, 
rather than enhance, purchasing power over their investment 
lives, a business earning 20% on capital can produce a negative 
real return for its owners under inflationary conditions not much 
more severe than presently prevail.

     If we should continue to achieve a 20% compounded gain - not 
an easy or certain result by any means - and this gain is 
translated into a corresponding increase in the market value of 
Berkshire Hathaway stock as it has been over the last fifteen 
years, your after-tax purchasing power gain is likely to be very 
close to zero at a 14% inflation rate.  Most of the remaining six 
percentage points will go for income tax any time you wish to 
convert your twenty percentage points of nominal annual gain into 

     That combination - the inflation rate plus the percentage of 
capital that must be paid by the owner to transfer into his own 
pocket the annual earnings achieved by the business (i.e., 
ordinary income tax on dividends and capital gains tax on 
retained earnings) - can be thought of as an “investor’s misery 
index”.  When this index exceeds the rate of return earned on 
equity by the business, the investor’s purchasing power (real 
capital) shrinks even though he consumes nothing at all.  We have 
no corporate solution to this problem; high inflation rates will 
not help us earn higher rates of return on equity.

     One friendly but sharp-eyed commentator on Berkshire has 
pointed out that our book value at the end of 1964 would have 
bought about one-half ounce of gold and, fifteen years later, 
after we have plowed back all earnings along with much blood, 
sweat and tears, the book value produced will buy about the same 
half ounce.  A similar comparison could be drawn with Middle 
Eastern oil.  The rub has been that government has been 
exceptionally able in printing money and creating promises, but 
is unable to print gold or create oil.

     We intend to continue to do as well as we can in managing 
the internal affairs of the business.  But you should understand 
that external conditions affecting the stability of currency may 
very well be the most important factor in determining whether 
there are any real rewards from your investment in Berkshire 

Sources of Earnings

     We again present a table showing the sources of Berkshire’s 
earnings.  As explained last year, Berkshire owns about 60% of 
Blue Chip Stamps which, in turn, owns 80% of Wesco Financial 
Corporation.  The table shows both aggregate earnings of the 
various business entities, as well as Berkshire’s share.  All of 
the significant capital gains or losses attributable to any of 
the business entities are aggregated in the realized securities 
gain figure at 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
                              ------------------  ------------------  ------------------
(in thousands of dollars)       1979      1978      1979      1978      1979      1978
                              --------  --------  --------  --------  --------  --------
Total - all entities ......... $68,632   $66,180   $56,427   $54,350   $42,817   $39,242
                              ========  ========  ========  ========  ========  ========
Earnings from Operations:
  Insurance Group:
    Underwriting ............  $ 3,742   $ 3,001   $ 3,741   $ 3,000   $ 2,214   $ 1,560
    Net Investment Income ...   24,224    19,705    24,216    19,691    20,106    16,400
  Berkshire-Waumbec textiles     1,723     2,916     1,723     2,916       848     1,342
  Associated Retail 
     Stores, Inc. ...........    2,775     2,757     2,775     2,757     1,280     1,176
  See’s Candies .............   12,785    12,482     7,598     7,013     3,448     3,049
  Buffalo Evening News ......   (4,617)   (2,913)   (2,744)   (1,637)   (1,333)     (738)
  Blue Chip Stamps - Parent      2,397     2,133     1,425     1,198     1,624     1,382
  Illinois National Bank and
     Trust Company ..........    5,747     4,822     5,614     4,710     5,027     4,262
  Wesco Financial 
     Corporation - Parent ...    2,413     1,771     1,098       777       937       665
  Mutual Savings and Loan
     Association ............   10,447    10,556     4,751     4,638     3,261     3,042
  Precision Steel ...........    3,254      --       1,480      --         723      --
  Interest on Debt ..........   (8,248)   (5,566)   (5,860)   (4,546)   (2,900)   (2,349)
  Other .....................    1,342       720       996       438       753       261
                              --------  --------  --------  --------  --------  --------
     Total Earnings from
        Operations ..........  $57,984   $52,384   $46,813   $40,955   $35,988   $30,052
     Realized Securities Gain   10,648    13,796     9,614    13,395     6,829     9,190
                              --------  --------  --------  --------  --------  --------
     Total Earnings .........  $68,632   $66,180   $56,427   $54,350   $42,817   $39,242
                              ========  ========  ========  ========  ========  ========

     Blue Chip and Wesco are public companies with reporting 
requirements of their own.  On pages 37-43 of this report, we 
have reproduced the narrative reports of the principal executives 
of both companies, in which they describe 1979 operations.  Some 
of the numbers they mention in their reports are not precisely 
identical to those in the above table because of accounting and 
tax complexities. (The Yanomamo Indians employ only three 
numbers: one, two, and more than two.  Maybe their time will 
come.) However, the commentary in those reports should be helpful 
to you in understanding the underlying economic characteristics 
and future prospects of the important businesses that they 

     A copy of the full annual report of either company will be 
mailed to any shareholder of Berkshire upon request to Mr.  
Robert H. Bird for Blue Chip Stamps, 5801 South Eastern Avenue, 
Los Angeles, California 90040, or to Mrs. Bette Deckard for Wesco 
Financial Corporation, 315 East Colorado Boulevard, Pasadena, 
California 91109.

Textiles and Retailing

     The relative significance of these two areas has diminished 
somewhat over the years as our insurance business has grown 
dramatically in size and earnings.  Ben Rosner, at Associated 
Retail Stores, continues to pull rabbits out of the hat - big 
rabbits from a small hat.  Year after year, he produces very 
large earnings relative to capital employed - realized in cash 
and not in increased receivables and inventories as in many other 
retail businesses - in a segment of the market with little growth 
and unexciting demographics.  Ben is now 76 and, like our other 
“up-and-comers”, Gene Abegg, 82, at Illinois National and Louis 
Vincenti, 74, at Wesco, regularly achieves more each year.

     Our textile business also continues to produce some cash, 
but at a low rate compared to capital employed.  This is not a 
reflection on the managers, but rather on the industry in which 
they operate.  In some businesses - a network TV station, for 
example - it is virtually impossible to avoid earning 
extraordinary returns on tangible capital employed in the 
business.  And assets in such businesses sell at equally 
extraordinary prices, one thousand cents or more on the dollar, a 
valuation reflecting the splendid, almost unavoidable, economic 
results obtainable.  Despite a fancy price tag, the “easy” 
business may be the better route to go.

     We can speak from experience, having tried the other route.  
Your Chairman made the decision a few years ago to purchase 
Waumbec Mills in Manchester, New Hampshire, thereby expanding our 
textile commitment.  By any statistical test, the purchase price 
was an extraordinary bargain; we bought well below the working 
capital of the business and, in effect, got very substantial 
amounts of machinery and real estate for less than nothing.  But 
the purchase was a mistake.  While we labored mightily, new 
problems arose as fast as old problems were tamed.

     Both our operating and investment experience cause us to 
conclude that “turnarounds” seldom turn, and that the same 
energies and talent are much better employed in a good business 
purchased at a fair price than in a poor business purchased at a 
bargain price.  Although a mistake, the Waumbec acquisition has 
not been a disaster.  Certain portions of the operation are 
proving to be valuable additions to our decorator line (our 
strongest franchise) at New Bedford, and it’s possible that we 
may be able to run profitably on a considerably reduced scale at 
Manchester.  However, our original rationale did not prove out.

Insurance Underwriting

     We predicted last year that the combined underwriting ratio 
(see definition on page 36) for the insurance industry would 
“move up at least a few points, perhaps enough to throw the 
industry as a whole into an underwriting loss position”.  That is 
just about the way it worked out.  The industry underwriting 
ratio rose in 1979 over three points, from roughly 97.4% to 
100.7%. We also said that we thought our underwriting performance 
relative to the industry would improve somewhat in 1979 and, 
again, things worked out as expected.  Our own underwriting ratio 
actually decreased from 98.2% to 97.1%. Our forecast for 1980 is 
similar in one respect; again we feel that the industry’s 
performance will worsen by at least another few points.  However, 
this year we have no reason to think that our performance 
relative to the industry will further improve. (Don’t worry - we 
won’t hold back to try to validate that forecast.)

     Really extraordinary results were turned in by the portion 
of National Indemnity Company’s insurance operation run by Phil 
Liesche.  Aided by Roland Miller in Underwriting and Bill Lyons 
in Claims, this section of the business produced an underwriting 
profit of $8.4 million on about $82 million of earned premiums.  
Only a very few companies in the entire industry produced a 
result comparable to this.

     You will notice that earned premiums in this segment were 
down somewhat from those of 1978.  We hear a great many insurance 
managers talk about being willing to reduce volume in order to 
underwrite profitably, but we find that very few actually do so.  
Phil Liesche is an exception: if business makes sense, he writes 
it; if it doesn’t, he rejects it.  It is our policy not to lay 
off people because of the large fluctuations in work load 
produced by such voluntary volume changes.  We would rather have 
some slack in the organization from time to time than keep 
everyone terribly busy writing business on which we are going to 
lose money.  Jack Ringwalt, the founder of National Indemnity 
Company, instilled this underwriting discipline at the inception 
of the company, and Phil Liesche never has wavered in maintaining 
it.  We believe such strong-mindedness is as rare as it is sound 
- and absolutely essential to the running of a first-class 
casualty insurance operation.

     John Seward continues to make solid progress at Home and 
Automobile Insurance Company, in large part by significantly 
expanding the marketing scope of that company in general 
liability lines.  These lines can be dynamite, but the record to 
date is excellent and, in John McGowan and Paul Springman, we 
have two cautious liability managers extending our capabilities.

     Our reinsurance division, led by George Young, continues to 
give us reasonably satisfactory overall results after allowing 
for investment income, but underwriting performance remains 
unsatisfactory.  We think the reinsurance business is a very 
tough business that is likely to get much tougher.  In fact, the 
influx of capital into the business and the resulting softer 
price levels for continually increasing exposures may well 
produce disastrous results for many entrants (of which they may 
be blissfully unaware until they are in over their heads; much 
reinsurance business involves an exceptionally “long tail”, a 
characteristic that allows catastrophic current loss experience 
to fester undetected for many years).  It will be hard for us to 
be a whole lot smarter than the crowd and thus our reinsurance 
activity may decline substantially during the projected prolonged 
period of extraordinary competition.

     The Homestate operation was disappointing in 1979.  
Excellent results again were turned in by George Billings at 
Texas United Insurance Company, winner of the annual award for 
the low loss ratio among Homestate companies, and Floyd Taylor at 
Kansas Fire and Casualty Company.  But several of the other 
operations, particularly Cornhusker Casualty Company, our first 
and largest Homestate operation and historically a winner, had 
poor underwriting results which were accentuated by data 
processing, administrative and personnel problems.  We have made 
some major mistakes in reorganizing our data processing 
activities, and those mistakes will not be cured immediately or 
without cost.  However, John Ringwalt has thrown himself into the 
task of getting things straightened out and we have confidence 
that he, aided by several strong people who recently have been 
brought aboard, will succeed.

     Our performance in Worker’s Compensation was far, far better 
than we had any right to expect at the beginning of 1979.  We had 
a very favorable climate in California for the achievement of 
good results but, beyond this, Milt Thornton at Cypress Insurance 
Company and Frank DeNardo at National Indemnity’s California 
Worker’s Compensation operation both performed in a simply 
outstanding manner.  We have admitted - and with good reason - 
some mistakes on the acquisition front, but the Cypress purchase 
has turned out to be an absolute gem.  Milt Thornton, like Phil 
Liesche, follows the policy of sticking with business that he 
understands and wants, without giving consideration to the impact 
on volume.  As a result, he has an outstanding book of business 
and an exceptionally well functioning group of employees.  Frank 
DeNardo has straightened out the mess he inherited in Los Angeles 
in a manner far beyond our expectations, producing savings 
measured in seven figures.  He now can begin to build on a sound 

     At yearend we entered the specialized area of surety 
reinsurance under the management of Chet Noble.  At least 
initially, this operation will be relatively small since our 
policy will be to seek client companies who appreciate the need 
for a long term “partnership” relationship with their reinsurers.  
We are pleased by the quality of the insurers we have attracted, 
and hope to add several more of the best primary writers as our 
financial strength and stability become better known in the 
surety field.

     The conventional wisdom is that insurance underwriting 
overall will be poor in 1980, but that rates will start to firm 
in a year or so, leading to a turn in the cycle some time in 
1981.  We disagree with this view.  Present interest rates 
encourage the obtaining of business at underwriting loss levels 
formerly regarded as totally unacceptable.  Managers decry the 
folly of underwriting at a loss to obtain investment income, but 
we believe that many will.  Thus we expect that competition will 
create a new threshold of tolerance for underwriting losses, and 
that combined ratios will average higher in the future than in 
the past.

     To some extent, the day of reckoning has been postponed 
because of marked reduction in the frequency of auto accidents - 
probably brought on in major part by changes in driving habits 
induced by higher gas prices.  In our opinion, if the habits 
hadn’t changed, auto insurance rates would have been very little 
higher and underwriting results would have been much worse.  This 
dosage of serendipity won’t last indefinitely.

     Our forecast is for an average combined ratio for the 
industry in the 105 area over the next five years.  While we have 
a high degree of confidence that certain of our operations will 
do considerably better than average, it will be a challenge to us 
to operate below the industry figure.  You can get a lot of 
surprises in insurance.

     Nevertheless, we believe that insurance can be a very good 
business.  It tends to magnify, to an unusual degree, human 
managerial talent - or the lack of it.  We have a number of 
managers whose talent is both proven and growing. (And, in 
addition, we have a very large indirect interest in two truly 
outstanding management groups through our investments in SAFECO 
and GEICO.) Thus we expect to do well in insurance over a period 
of years.  However, the business has the potential for really 
terrible results in a single specific year.  If accident 
frequency should turn around quickly in the auto field, we, along 
with others, are likely to experience such a year.

Insurance Investments

     In recent years we have written at length in this section 
about our insurance equity investments.  In 1979 they continued 
to perform well, largely because the underlying companies in 
which we have invested, in practically all cases, turned in 
outstanding performances.  Retained earnings applicable to our 
insurance equity investments, not reported in our financial 
statements, continue to mount annually and, in aggregate, now 
come to a very substantial number.  We have faith that the 
managements of these companies will utilize those retained 
earnings effectively and will translate a dollar retained by them 
into a dollar or more of subsequent market value for us.  In 
part, our unrealized gains reflect this process.

     Below we show the equity investments which had a yearend 
market value of over $5 million:

No. of Sh.  Company                                     Cost       Market
----------  -------                                  ----------  ----------
                                                         (000s omitted)
  289,700   Affiliated Publications, Inc. ........... $  2,821    $  8,800
  112,545   Amerada Hess ............................    2,861       5,487
  246,450   American Broadcasting Companies, Inc. ...    6,082       9,673
5,730,114   GEICO Corp. (Common Stock) ..............   28,288      68,045
  328,700   General Foods, Inc. .....................   11,437      11,053
1,007,500   Handy & Harman ..........................   21,825      38,537
  711,180   Interpublic Group of Companies, Inc. ....    4,531      23,736
1,211,834   Kaiser Aluminum & Chemical Corp. ........   20,629      23,328
  282,500   Media General, Inc. .....................    4,545       7,345
  391,400   Ogilvy & Mather International ...........    3,709       7,828
  953,750   SAFECO Corporation ......................   23,867      35,527
1,868,000   The Washington Post Company .............   10,628      39,241
  771,900   F. W. Woolworth Company .................   15,515      19,394
                                                     ----------  ----------
            Total ................................... $156,738    $297,994
            All Other Holdings ......................   28,675      38,686
                                                     ----------  ----------
            Total Equities .......................... $185,413    $336,680
                                                     ==========  ==========

     We currently believe that equity markets in 1980 are likely 
to evolve in a manner that will result in an underperformance by 
our portfolio for the first time in recent years.  We very much 
like the companies in which we have major investments, and plan 
no changes to try to attune ourselves to the markets of a 
specific year.

     Since we have covered our philosophy regarding equities 
extensively in recent annual reports, a more extended discussion 
of bond investments may be appropriate for this one, particularly 
in light of what has happened since yearend.  An extraordinary 
amount of money has been lost by the insurance industry in the 
bond area - notwithstanding the accounting convention that allows 
insurance companies to carry their bond investments at amortized 
cost, regardless of impaired market value.  Actually, that very 
accounting convention may have contributed in a major way to the 
losses; had management been forced to recognize market values, 
its attention might have been focused much earlier on the dangers 
of a very long-term bond contract.

     Ironically, many insurance companies have decided that a 
one-year auto policy is inappropriate during a time of inflation, 
and six-month policies have been brought in as replacements.  
“How,” say many of the insurance managers, “can we be expected to 
look forward twelve months and estimate such imponderables as 
hospital costs, auto parts prices, etc.?” But, having decided 
that one year is too long a period for which to set a fixed price 
for insurance in an inflationary world, they then have turned 
around, taken the proceeds from the sale of that six-month 
policy, and sold the money at a fixed price for thirty or forty 

     The very long-term bond contract has been the last major 
fixed price contract of extended duration still regularly 
initiated in an inflation-ridden world.  The buyer of money to be 
used between 1980 and 2020 has been able to obtain a firm price 
now for each year of its use while the buyer of auto insurance, 
medical services, newsprint, office space - or just about any 
other product or service - would be greeted with laughter if he 
were to request a firm price now to apply through 1985.  For in 
virtually all other areas of commerce, parties to long-term 
contracts now either index prices in some manner, or insist on 
the right to review the situation every year or so.

     A cultural lag has prevailed in the bond area.  The buyers 
(borrowers) and middlemen (underwriters) of money hardly could be 
expected to raise the question of whether it all made sense, and 
the sellers (lenders) slept through an economic and contractual 

     For the last few years our insurance companies have not been 
a net purchaser of any straight long-term bonds (those without 
conversion rights or other attributes offering profit 
possibilities).  There have been some purchases in the straight 
bond area, of course, but they have been offset by sales or 
maturities.  Even prior to this period, we never would buy thirty 
or forty-year bonds; instead we tried to concentrate in the 
straight bond area on shorter issues with sinking funds and on 
issues that seemed relatively undervalued because of bond market 

     However, the mild degree of caution that we exercised was an 
improper response to the world unfolding about us.  You do not 
adequately protect yourself by being half awake while others are 
sleeping.  It was a mistake to buy fifteen-year bonds, and yet we 
did; we made an even more serious mistake in not selling them (at 
losses, if necessary) when our present views began to 
crystallize. (Naturally, those views are much clearer and 
definite in retrospect; it would be fair for you to ask why we 
weren’t writing about this subject last year.)

     Of course, we must hold significant amounts of bonds or 
other fixed dollar obligations in conjunction with our insurance 
operations.  In the last several years our net fixed dollar 
commitments have been limited to the purchase of convertible 
bonds.  We believe that the conversion options obtained, in 
effect, give that portion of the bond portfolio a far shorter 
average life than implied by the maturity terms of the issues 
(i.e., at an appropriate time of our choosing, we can terminate 
the bond contract by conversion into stock).

     This bond policy has given us significantly lower unrealized 
losses than those experienced by the great majority of property 
and casualty insurance companies.  We also have been helped by 
our strong preference for equities in recent years that has kept 
our overall bond segment relatively low.  Nevertheless, we are 
taking our lumps in bonds and feel that, in a sense, our mistakes 
should be viewed less charitably than the mistakes of those who 
went about their business unmindful of the developing problems.

     Harking back to our textile experience, we should have 
realized the futility of trying to be very clever (via sinking 
funds and other special type issues) in an area where the tide 
was running heavily against us.

     We have severe doubts as to whether a very long-term fixed-
interest bond, denominated in dollars, remains an appropriate 
business contract in a world where the value of dollars seems 
almost certain to shrink by the day.  Those dollars, as well as 
paper creations of other governments, simply may have too many 
structural weaknesses to appropriately serve as a unit of long 
term commercial reference.  If so, really long bonds may turn out 
to be obsolete instruments and insurers who have bought those 
maturities of 2010 or 2020 could have major and continuing 
problems on their hands.  We, likewise, will be unhappy with our 
fifteen-year bonds and will annually pay a price in terms of 
earning power that reflects that mistake.

     Some of our convertible bonds appear exceptionally 
attractive to us, and have the same sort of earnings retention 
factor (applicable to the stock into which they may be converted) 
that prevails in our conventional equity portfolio.  We expect to 
make money in these bonds (we already have, in a few cases) and 
have hopes that our profits in this area may offset losses in 
straight bonds.

     And, of course, there is the possibility that our present 
analysis is much too negative.  The chances for very low rates of 
inflation are not nil.  Inflation is man-made; perhaps it can be 
man-mastered.  The threat which alarms us may also alarm 
legislators and other powerful groups, prompting some appropriate 

     Furthermore, present interest rates incorporate much higher 
inflation projections than those of a year or two ago.  Such 
rates may prove adequate or more than adequate to protect bond 
buyers.  We even may miss large profits from a major rebound in 
bond prices.  However, our unwillingness to fix a price now for a 
pound of See’s candy or a yard of Berkshire cloth to be delivered 
in 2010 or 2020 makes us equally unwilling to buy bonds which set 
a price on money now for use in those years.  Overall, we opt for 
Polonius (slightly restated): “Neither a short-term borrower nor 
a long-term lender be.”


     This will be the last year that we can report on the 
Illinois National Bank and Trust Company as a subsidiary of 
Berkshire Hathaway.  Therefore, it is particularly pleasant to 
report that, under Gene Abegg’s and Pete Jeffrey’s management, 
the bank broke all previous records and earned approximately 2.3% 
on average assets last year, a level again over three times that 
achieved by the average major bank, and more than double that of 
banks regarded as outstanding.  The record is simply 
extraordinary, and the shareholders of Berkshire Hathaway owe a 
standing ovation to Gene Abegg for the performance this year and 
every year since our purchase in 1969.

     As you know, the Bank Holding Company Act of 1969 requires 
that we divest the bank by December 31, 1980.  For some years we 
have expected to comply by effecting a spin-off during 1980.  
However, the Federal Reserve Board has taken the firm position 
that if the bank is spun off, no officer or director of Berkshire 
Hathaway can be an officer or director of the spun-off bank or 
bank holding company, even in a case such as ours in which one 
individual would own over 40% of both companies.

     Under these conditions, we are investigating the possible 
sale of between 80% and 100% of the stock of the bank.  We will 
be most choosy about any purchaser, and our selection will not be 
based solely on price.  The bank and its management have treated 
us exceptionally well and, if we have to sell, we want to be sure 
that they are treated equally as well.  A spin-off still is a 
possibility if a fair price along with a proper purchaser cannot 
be obtained by early fall.

     However, you should be aware that we do not expect to be 
able to fully, or even in very large part, replace the earning 
power represented by the bank from the proceeds of the sale of 
the bank.  You simply can’t buy high quality businesses at the 
sort of price/earnings multiple likely to prevail on our bank 

Financial Reporting

     During 1979, NASDAQ trading was initiated in the stock of 
Berkshire Hathaway This means that the stock now is quoted on the 
Over-the-Counter page of the Wall Street journal under 
“Additional OTC Quotes”.  Prior to such listing, the Wall Street 
journal and the Dow-Jones news ticker would not report our 
earnings, even though such earnings were one hundred or more 
times the level of some companies whose reports they regularly 
picked up.

     Now, however, the Dow-Jones news ticker reports our 
quarterly earnings promptly after we release them and, in 
addition, both the ticker and the Wall Street journal report our 
annual earnings.  This solves a dissemination problem that had 
bothered us.

     In some ways, our shareholder group is a rather unusual one, 
and this affects our manner of reporting to you.  For example, at 
the end of each year about 98% of the shares outstanding are held 
by people who also were shareholders at the beginning of the 
year.  Therefore, in our annual report we build upon what we have 
told you in previous years instead of restating a lot of 
material.  You get more useful information this way, and we don’t 
get bored.

     Furthermore, perhaps 90% of our shares are owned by 
investors for whom Berkshire is their largest security holding, 
very often far and away the largest.  Many of these owners are 
willing to spend a significant amount of time with the annual 
report, and we attempt to provide them with the same information 
we would find useful if the roles were reversed.

     In contrast, we include no narrative with our quarterly 
reports.  Our owners and managers both have very long time-
horizons in regard to this business, and it is difficult to say 
anything new or meaningful each quarter about events of long-term 

     But when you do receive a communication from us, it will 
come from the fellow you are paying to run the business.  Your 
Chairman has a firm belief that owners are entitled to hear 
directly from the CEO as to what is going on and how he evaluates 
the business, currently and prospectively.  You would demand that 
in a private company; you should expect no less in a public 
company.  A once-a-year report of stewardship should not be 
turned over to a staff specialist or public relations consultant 
who is unlikely to be in a position to talk frankly on a manager-
to-owner basis.

     We feel that you, as owners, are entitled to the same sort 
of reporting by your manager as we feel is owed to us at 
Berkshire Hathaway by managers of our business units.  Obviously, 
the degree of detail must be different, particularly where 
information would be useful to a business competitor or the like.  
But the general scope, balance, and level of candor should be 
similar.  We don’t expect a public relations document when our 
operating managers tell us what is going on, and we don’t feel 
you should receive such a document.

     In large part, companies obtain the shareholder constituency 
that they seek and deserve.  If they focus their thinking and 
communications on short-term results or short-term stock market 
consequences they will, in large part, attract shareholders who 
focus on the same factors.  And if they are cynical in their 
treatment of investors, eventually that cynicism is highly likely 
to be returned by the investment community.

     Phil Fisher, a respected investor and author, once likened 
the policies of the corporation in attracting shareholders to 
those of a restaurant attracting potential customers.  A 
restaurant could seek a given clientele - patrons of fast foods, 
elegant dining, Oriental food, etc. - and eventually obtain an 
appropriate group of devotees.  If the job were expertly done, 
that clientele, pleased with the service, menu, and price level 
offered, would return consistently.  But the restaurant could not 
change its character constantly and end up with a happy and 
stable clientele.  If the business vacillated between French 
cuisine and take-out chicken, the result would be a revolving 
door of confused and dissatisfied customers.

     So it is with corporations and the shareholder constituency 
they seek.  You can’t be all things to all men, simultaneously 
seeking different owners whose primary interests run from high 
current yield to long-term capital growth to stock market 
pyrotechnics, etc.

     The reasoning of managements that seek large trading 
activity in their shares puzzles us.  In effect, such managements 
are saying that they want a good many of the existing clientele 
continually to desert them in favor of new ones - because you 
can’t add lots of new owners (with new expectations) without 
losing lots of former owners.

     We much prefer owners who like our service and menu and who 
return year after year.  It would be hard to find a better group 
to sit in the Berkshire Hathaway shareholder “seats” than those 
already occupying them.  So we hope to continue to have a very 
low turnover among our owners, reflecting a constituency that 
understands our operation, approves of our policies, and shares 
our expectations.  And we hope to deliver on those expectations.


     Last year we said that we expected operating earnings in 
dollars to improve but return on equity to decrease.  This turned 
out to be correct.  Our forecast for 1980 is the same.  If we are 
wrong, it will be on the downside.  In other words, we are 
virtually certain that our operating earnings expressed as a 
percentage of the new equity base of approximately $236 million, 
valuing securities at cost, will decline from the 18.6% attained 
in 1979.  There is also a fair chance that operating earnings in 
aggregate dollars will fall short of 1979; the outcome depends 
partly upon the date of disposition of the bank, partly upon the 
degree of slippage in insurance underwriting profitability, and 
partly upon the severity of earnings problems in the savings and 
loan industry.

     We continue to feel very good about our insurance equity 
investments.  Over a period of years, we expect to develop very 
large and growing amounts of underlying earning power 
attributable to our fractional ownership of these companies.  In 
most cases they are splendid businesses, splendidly managed, 
purchased at highly attractive prices.

     Your company is run on the principle of centralization of 
financial decisions at the top (the very top, it might be added), 
and rather extreme delegation of operating authority to a number 
of key managers at the individual company or business unit level.  
We could just field a basketball team with our corporate 
headquarters group (which utilizes only about 1500 square feet of 

     This approach produces an occasional major mistake that 
might have been eliminated or minimized through closer operating 
controls.  But it also eliminates large layers of costs and 
dramatically speeds decision-making.  Because everyone has a 
great deal to do, a very great deal gets done.  Most important of 
all, it enables us to attract and retain some extraordinarily 
talented individuals - people who simply can’t be hired in the 
normal course of events - who find working for Berkshire to be 
almost identical to running their own show.

     We have placed much trust in them - and their achievements 
have far exceeded that trust.

                                    Warren E. Buffett, Chairman
March 3, 1980



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