BERKSHIRE HATHAWAY INC.

To the Shareholders of Berkshire Hathaway Inc.

!"eratin# earnin#s i$"ro%ed to &'(.) $illion in ()*+ fro$ &,-.+ $illion in ().)/ 01t ret1rn on 0e#innin# e21ity ca"ital 3with
sec1rities %al1ed at cost4 fell to (..*5 fro$ (*.-5. We 0elie%e the latter yardstick to 0e the $ost a""ro"riate $eas1re of sin#le6year
$ana#erial econo$ic "erfor$ance. Infor$ed 1se of that yardstick/ howe%er/ re21ires an 1nderstandin# of $any factors/ incl1din#
acco1ntin# "olicies/ historical carryin# %al1es of assets/ financial le%era#e/ and ind1stry conditions.
In yo1r e%al1ation of o1r econo$ic "erfor$ance/ we s1##est that two factors sho1ld recei%e yo1r s"ecial attention 6 one of a "ositi%e
nat1re "ec1liar/ to a lar#e e7tent/ to o1r own o"eration/ and one of a ne#ati%e nat1re a""lica0le to cor"orate "erfor$ance #enerally.
8et9s look at the 0ri#ht side first.
Non6Controlled !wnershi" Earnin#s
When one co$"any owns "art of another co$"any/ a""ro"riate acco1ntin# "roced1res "ertainin# to that ownershi" interest $1st
0e selected fro$ one of three $a:or cate#ories. The "ercenta#e of %otin# stock that is owned/ in lar#e "art/ deter$ines which cate#ory
of acco1ntin# "rinci"les sho1ld 0e 1tili;ed.
<enerally acce"ted acco1ntin# "rinci"les re21ire 3s10:ect to e7ce"tions/ nat1rally/ as with o1r for$er 0ank s10sidiary4 f1ll
consolidation of sales/ e7"enses/ ta7es/ and earnin#s of 01siness holdin#s $ore than =+5 owned. Bl1e Chi" Sta$"s/ -+5 owned 0y
Berkshire Hathaway Inc./ falls into this cate#ory. Therefore/ all Bl1e Chi" inco$e and e7"ense ite$s are incl1ded in f1ll in Berkshire9s
Consolidated State$ent of Earnin#s/ with the '+5 ownershi" interest of others in Bl1e Chi"9s net earnin#s reflected in the State$ent as
a ded1ction for >$inority interest?.
@1ll incl1sion of 1nderlyin# earnin#s fro$ another class of holdin#s/ co$"anies owned A+5 to =+5 31s1ally called >in%estees?4/ also
nor$ally occ1rs. Earnin#s fro$ s1ch co$"anies 6 for e7a$"le/ Wesco @inancial/ controlled 0y Berkshire 01t only '*5 owned 6 are
incl1ded %ia a one6line entry in the owner9s State$ent of Earnin#s. Bnlike the o%er6=+5 cate#ory/ all ite$s of re%en1e and e7"ense are
o$ittedC :1st the "ro"ortional share of net inco$e is incl1ded. Th1s/ if Cor"oration A owns one6third of Cor"oration B/ one6third of B9s
earnin#s/ whether or not distri01ted 0y B/ will end 1" in A9s earnin#s. There are so$e $odifications/ 0oth in this and the o%er6=+5
cate#ory/ for intercor"orate ta7es and "1rchase "rice ad:1st$ents/ the e7"lanation of which we will sa%e for a later day. 3We know yo1
can hardly wait.4
@inally co$e holdin#s re"resentin# less than A+5 ownershi" of another cor"oration9s %otin# sec1rities. In these cases/ acco1ntin#
r1les dictate that the ownin# co$"anies incl1de in their earnin#s only di%idends recei%ed fro$ s1ch holdin#s. Bndistri01ted earnin#s
are i#nored. Th1s/ sho1ld we own (+5 of Cor"oration D with earnin#s of &(+ $illion in ()*+/ we wo1ld re"ort in o1r earnin#s 3i#norin#
relati%ely $inor ta7es on intercor"orate di%idends4 either 3a4 &( $illion if D declared the f1ll &(+ $illion in di%idendsC 304 &=++/+++ if D
"aid o1t =+5/ or &= $illion/ in di%idendsC or 3c4 ;ero if D rein%ested all earnin#s.
We i$"ose this short 6 and o%er6si$"lified 6 co1rse in acco1ntin# 1"on yo1 0eca1se Berkshire9s concentration of reso1rces in the
ins1rance field "rod1ces a corres"ondin# concentration of its assets in co$"anies in that third 3less than A+5 owned4 cate#ory. Eany
of these co$"anies "ay o1t relati%ely s$all "ro"ortions of their earnin#s in di%idends. This $eans that only a s$all "ro"ortion of their
c1rrent earnin# "ower is recorded in o1r own c1rrent o"eratin# earnin#s. B1t/ while o1r re"orted o"eratin# earnin#s reflect only the
di%idends recei%ed fro$ s1ch co$"anies/ o1r econo$ic well60ein# is deter$ined 0y their earnin#s/ not their di%idends.
!1r holdin#s in this third cate#ory of co$"anies ha%e increased dra$atically in recent years as o1r ins1rance 01siness has "ros"ered
and as sec1rities $arkets ha%e "resented "artic1larly attracti%e o""ort1nities in the co$$on stock area. The lar#e increase in s1ch
holdin#s/ "l1s the #rowth of earnin#s e7"erienced 0y those "artially6owned co$"anies/ has "rod1ced an 1n1s1al res1ltC the "art of
>o1r? earnin#s that these co$"anies retained last year 3the "art not "aid to 1s in di%idends4 e7ceeded the total re"orted ann1al
o"eratin# earnin#s of Berkshire Hathaway. Th1s/ con%entional acco1ntin# only allows less than half of o1r earnin#s >ice0er#? to a""ear
a0o%e the s1rface/ in "lain %iew. Within the cor"orate world s1ch a res1lt is 21ite rareC in o1r case it is likely to 0e rec1rrin#.
!1r own analysis of earnin#s reality differs so$ewhat fro$ #enerally acce"ted acco1ntin# "rinci"les/ "artic1larly when those
"rinci"les $1st 0e a""lied in a world of hi#h and 1ncertain rates of inflation. 3B1t it9s $1ch easier to critici;e than to i$"ro%e s1ch
acco1ntin# r1les. The inherent "ro0le$s are $on1$ental.4 We ha%e owned (++5 of 01sinesses whose re"orted earnin#s were not
worth close to (++ cents on the dollar to 1s e%en tho1#h/ in an acco1ntin# sense/ we totally controlled their dis"osition. 3The >control?
was theoretical. Bnless we rein%ested all earnin#s/ $assi%e deterioration in the %al1e of assets already in "lace wo1ld occ1r. B1t those
rein%ested earnin#s had no "ros"ect of earnin# anythin# close to a $arket ret1rn on ca"ital.4 We ha%e also owned s$all fractions of
01sinesses with e7traordinary rein%est$ent "ossi0ilities whose retained earnin#s had an econo$ic %al1e to 1s far in e7cess of (++ cents
on the dollar.
The %al1e to Berkshire Hathaway of retained earnin#s is not deter$ined 0y whether we own (++5/ =+5/ A+5 or (5 of the 01sinesses
in which they reside. Rather/ the %al1e of those retained earnin#s is deter$ined 0y the 1se to which they are "1t and the s10se21ent
le%el of earnin#s "rod1ced 0y that 1sa#e. This is tr1e whether we deter$ine the 1sa#e/ or whether $ana#ers we did not hire 6 01t did
elect to :oin 6 deter$ine that 1sa#e. 3It9s the act that co1nts/ not the actors.4 And the %al1e is in no way affected 0y the incl1sion or non6
incl1sion of those retained earnin#s in o1r own re"orted o"eratin# earnin#s. If a tree #rows in a forest "artially owned 0y 1s/ 01t we
don9t record the #rowth in o1r financial state$ents/ we still own "art of the tree.
!1r %iew/ we warn yo1/ is non6con%entional. B1t we wo1ld rather ha%e earnin#s for which we did not #et acco1ntin# credit "1t to
#ood 1se in a (+56owned co$"any 0y a $ana#e$ent we did not "ersonally hire/ than ha%e earnin#s for which we did #et credit "1t
into "ro:ects of $ore d10io1s "otential 0y another $ana#e$ent 6 e%en if we are that $ana#e$ent.
3We can9t resist "a1sin# here for a short co$$ercial. !ne 1sa#e of retained earnin#s we often #reet with s"ecial enth1sias$ when
"racticed 0y co$"anies in which we ha%e an in%est$ent interest is re"1rchase of their own shares. The reasonin# is si$"le if a fine
01siness is sellin# in the $arket "lace for far less than intrinsic %al1e/ what $ore certain or $ore "rofita0le 1tili;ation of ca"ital can
there 0e than si#nificant enlar#e$ent of the interests of all owners at that 0ar#ain "riceF The co$"etiti%e nat1re of cor"orate
ac21isition acti%ity al$ost #1arantees the "ay$ent of a f1ll 6 fre21ently $ore than f1ll "rice when a co$"any 01ys the entire ownershi"
of another enter"rise. B1t the a1ction nat1re of sec1rity $arkets often allows finely6r1n co$"anies the o""ort1nity to "1rchase
"ortions of their own 01sinesses at a "rice 1nder =+5 of that needed to ac21ire the sa$e earnin# "ower thro1#h the ne#otiated
ac21isition of another enter"rise.4
8on#6Ter$ Cor"orate Res1lts
As we ha%e noted/ we e%al1ate sin#le6year cor"orate "erfor$ance 0y co$"arin# o"eratin# earnin#s to shareholders9 e21ity with
sec1rities %al1ed at cost. !1r lon#6ter$ yardstick of "erfor$ance/ howe%er/ incl1des all ca"ital #ains or losses/ reali;ed or 1nreali;ed.
We contin1e to achie%e a lon#6ter$ ret1rn on e21ity that considera0ly e7ceeds the a%era#e of o1r yearly ret1rns. The $a:or factor
ca1sin# this "leasant res1lt is a si$"le one the retained earnin#s of those non6controlled holdin#s we disc1ssed earlier ha%e 0een
translated into #ains in $arket %al1e.
!f co1rse/ this translation of retained earnin#s into $arket "rice a""reciation is hi#hly 1ne%en 3it #oes in re%erse so$e years4/
1n"redicta0le as to ti$in#/ and 1nlikely to $ateriali;e on a "recise dollar6for6dollar 0asis. And a silly "1rchase "rice for a 0lock of stock
in a cor"oration can ne#ate the effects of a decade of earnin#s retention 0y that cor"oration. B1t when "1rchase "rices are sensi0le/
so$e lon#6ter$ $arket reco#nition of the acc1$1lation of retained earnin#s al$ost certainly will occ1r. Geriodically yo1 e%en will
recei%e so$e frostin# on the cake/ with $arket a""reciation far e7ceedin# "ost6"1rchase retained earnin#s.
In the si7teen years since "resent $ana#e$ent ass1$ed res"onsi0ility for Berkshire/ 0ook %al1e "er share with ins1rance6held
e21ities %al1ed at $arket has increased fro$ &().'- to &'++.*+/ or A+.=5 co$"o1nded ann1ally. 3Yo19%e done 0etter the %al1e of the
$ineral content in the h1$an 0ody co$"o1nded at AA5 ann1ally d1rin# the "ast decade.4 It is enco1ra#in#/ $oreo%er/ to reali;e that
o1r record was achie%ed des"ite $any $istakes. The list is too "ainf1l and len#thy to detail here. B1t it clearly shows that a reasona0ly
co$"etiti%e cor"orate 0attin# a%era#e can 0e achie%ed in s"ite of a lot of $ana#erial strikeo1ts.
!1r ins1rance co$"anies will contin1e to $ake lar#e in%est$ents in well6r1n/ fa%ora0ly6sit1ated/ non6controlled co$"anies that
%ery often will "ay o1t in di%idends only s$all "ro"ortions of their earnin#s. @ollowin# this "olicy/ we wo1ld e7"ect o1r lon#6ter$
ret1rns to contin1e to e7ceed the ret1rns deri%ed ann1ally fro$ re"orted o"eratin# earnin#s. !1r confidence in this 0elief can easily 0e
21antified if we were to sell the e21ities that we hold and re"lace the$ with lon#6ter$ ta76free 0onds/ o1r re"orted o"eratin# earnin#s
wo1ld rise i$$ediately 0y o%er &,+ $illion ann1ally. S1ch a shift te$"ts 1s not at all. So $1ch for the #ood news.
Res1lts for !wners
Bnfort1nately/ earnin#s re"orted in cor"orate financial state$ents are no lon#er the do$inant %aria0le that deter$ines whether
there are any real earnin#s for yo1/ the owner. @or only #ains in "1rchasin# "ower re"resent real earnin#s on in%est$ent. If yo1 3a4
fore#o ten ha$01r#ers to "1rchase an in%est$entC 304 recei%e di%idends which/ after ta7/ 01y two ha$01r#ersC and 3c4 recei%e/ 1"on
sale of yo1r holdin#s/ after6ta7 "roceeds that will 01y ei#ht ha$01r#ers/ then 3d4 yo1 ha%e had no real inco$e fro$ yo1r in%est$ent/ no
$atter how $1ch it a""reciated in dollars. Yo1 $ay feel richer/ 01t yo1 won9t eat richer.
Hi#h rates of inflation create a ta7 on ca"ital that $akes $1ch cor"orate in%est$ent 1nwise 6 at least if $eas1red 0y the criterion of
a "ositi%e real in%est$ent ret1rn to owners. This >h1rdle rate? the ret1rn on e21ity that $1st 0e achie%ed 0y a cor"oration in order to
"rod1ce any real ret1rn for its indi%id1al owners 6 has increased dra$atically in recent years. The a%era#e ta76"ayin# in%estor is now
r1nnin# 1" a down escalator whose "ace has accelerated to the "oint where his 1"ward "ro#ress is nil.
@or e7a$"le/ in a world of (A5 inflation a 01siness earnin# A+5 on e21ity 3which %ery few $ana#e consistently to do4 and
distri01tin# it all to indi%id1als in the =+5 0racket is chewin# 1" their real ca"ital/ not enhancin# it. 3Half of the A+5 will #o for inco$e
ta7C the re$ainin# (+5 lea%es the owners of the 01siness with only )*5 of the "1rchasin# "ower they "ossessed at the start of the year
6 e%en tho1#h they ha%e not s"ent a "enny of their >earnin#s?4. The in%estors in this 0racket wo1ld act1ally 0e 0etter off with a
co$0ination of sta0le "rices and cor"orate earnin#s on e21ity ca"ital of only a few "er cent.
E7"licit inco$e ta7es alone/ 1nacco$"anied 0y any i$"licit inflation ta7/ ne%er can t1rn a "ositi%e cor"orate ret1rn into a ne#ati%e
owner ret1rn. 3E%en if there were )+5 "ersonal inco$e ta7 rates on 0oth di%idends and ca"ital #ains/ so$e real inco$e wo1ld 0e left
for the owner at a ;ero inflation rate.4 B1t the inflation ta7 is not li$ited 0y re"orted inco$e. Inflation rates not far fro$ those recently
e7"erienced can t1rn the le%el of "ositi%e ret1rns achie%ed 0y a $a:ority of cor"orations into ne#ati%e ret1rns for all owners/ incl1din#
those not re21ired to "ay e7"licit ta7es. 3@or e7a$"le/ if inflation reached (-5/ owners of the -+5 "l1s of cor"orate A$erica earnin#
less than this rate of ret1rn wo1ld 0e reali;in# a ne#ati%e real ret1rn 6 e%en if inco$e ta7es on di%idends and ca"ital #ains were
eli$inated.4
!f co1rse/ the two for$s of ta7ation co6e7ist and interact since e7"licit ta7es are le%ied on no$inal/ not real/ inco$e. Th1s yo1 "ay
inco$e ta7es on what wo1ld 0e deficits if ret1rns to stockholders were $eas1red in constant dollars.
At "resent inflation rates/ we 0elie%e indi%id1al owners in $edi1$ or hi#h ta7 0rackets 3as distin#1ished fro$ ta76free entities s1ch
as "ension f1nds/ elee$osynary instit1tions/ etc.4 sho1ld e7"ect no real lon#6ter$ ret1rn fro$ the a%era#e A$erican cor"oration/ e%en
tho1#h these indi%id1als rein%est the entire after6ta7 "roceeds fro$ all di%idends they recei%e. The a%era#e ret1rn on e21ity of
cor"orations is f1lly offset 0y the co$0ination of the i$"licit ta7 on ca"ital le%ied 0y inflation and the e7"licit ta7es le%ied 0oth on
di%idends and #ains in %al1e "rod1ced 0y retained earnin#s.
As we said last year/ Berkshire has no cor"orate sol1tion to the "ro0le$. 3We9ll say it a#ain ne7t year/ too.4 Inflation does not
i$"ro%e o1r ret1rn on e21ity.
Inde7in# is the ins1lation that all seek a#ainst inflation. B1t the #reat 01lk 3altho1#h there are i$"ortant e7ce"tions4 of cor"orate
ca"ital is not e%en "artially inde7ed. !f co1rse/ earnin#s and di%idends "er share 1s1ally will rise if si#nificant earnin#s are >sa%ed? 0y a
cor"orationC i.e./ rein%ested instead of "aid as di%idends. B1t that wo1ld 0e tr1e witho1t inflation. A thrifty wa#e earner/ likewise/
co1ld achie%e re#1lar ann1al increases in his total inco$e witho1t e%er #ettin# a "ay increase 6 if he were willin# to take only half of his
"aycheck in cash 3his wa#e >di%idend?4 and consistently add the other half 3his >retained earnin#s?4 to a sa%in#s acco1nt. Neither this
hi#h6sa%in# wa#e earner nor the stockholder in a hi#h6sa%in# cor"oration whose ann1al di%idend rate increases while its rate of ret1rn
on e21ity re$ains flat is tr1ly inde7ed.
@or ca"ital to 0e tr1ly inde7ed/ ret1rn on e21ity $1st rise/ i.e./ 01siness earnin#s consistently $1st increase in "ro"ortion to the
increase in the "rice le%el witho1t any need for the 01siness to add to ca"ital 6 incl1din# workin# ca"ital 6 e$"loyed. 3Increased
earnin#s "rod1ced 0y increased in%est$ent don9t co1nt.4 !nly a few 01sinesses co$e close to e7hi0itin# this a0ility. And Berkshire
Hathaway isn9t one of the$.
We/ of co1rse/ ha%e a cor"orate "olicy of rein%estin# earnin#s for #rowth/ di%ersity and stren#th/ which has the incidental effect of
$ini$i;in# the c1rrent i$"osition of e7"licit ta7es on o1r owners. Howe%er/ on a day60y6day 0asis/ yo1 will 0e s10:ected to the i$"licit
inflation ta7/ and when yo1 wish to transfer yo1r in%est$ent in Berkshire into another for$ of in%est$ent/ or into cons1$"tion/ yo1
also will face e7"licit ta7es.
So1rces of Earnin#s
The ta0le 0elow shows the so1rces of Berkshire9s re"orted earnin#s. Berkshire owns a0o1t -+5 of Bl1e Chi" Sta$"s/ which in t1rn
owns *+5 of Wesco @inancial Cor"oration. The ta0le shows a##re#ate earnin#s of the %ario1s 01siness entities/ as well as Berkshire9s
share of those earnin#s. All of the si#nificant ca"ital #ains and losses attri01ta0le to any of the 01siness entities are a##re#ated in the
reali;ed sec1rities #ains fi#1re at the 0otto$ of the ta0le/ and are not incl1ded in o"eratin# earnin#s. !1r calc1lation of o"eratin#
earnin#s also e7cl1des the #ain fro$ sale of E1t1al9s 0ranch offices. In this res"ect it differs fro$ the "resentation in o1r a1dited
financial state$ents that incl1des this ite$ in the calc1lation of >Earnin#s Before Reali;ed In%est$ent <ain?.
Net Earnin#s
Earnin#s Before Inco$e Ta7es After Ta7
66666666666666666666666666666666666666 666666666666666666
Total Berkshire Share Berkshire Share
666666666666666666 666666666666666666 666666666666666666
3in tho1sands of dollars4 ()*+ ().) ()*+ ().) ()*+ ().)
66666666 66666666 66666666 66666666 66666666 66666666
Total Earnin#s 6 all entities & *=/)'= & -*/-,A & .+/('- & =-/'A. & =,/(AA & 'A/*(.
HHHHHHHH HHHHHHHH HHHHHHHH HHHHHHHH HHHHHHHH HHHHHHHH
Earnin#s fro$ !"erations
Ins1rance <ro1"
Bnderwritin# ............ & -/.,* & ,/.'A & -/.,. & ,/.'( & ,/-,. & A/A('
Net In%est$ent Inco$e ... ,+/),) A'/AA' ,+/)A. A'/A(- A=/-+. A+/(+-
Berkshire6Wa1$0ec Te7tiles 3=+*4 (/.A, 3=+*4 (/.A, A+A *'*
Associated Retail Stores .. A/''+ A/..= A/''+ A/..= (/(-) (/A*+
See9s Candies ............. (=/+,( (A/.*= */)=* ./=)* '/A(A ,/''*
B1ffalo E%enin# News ...... 3A/*+=4 3'/-(.4 3(/-.A4 3A/.''4 3*(-4 3(/,,,4
Bl1e Chi" Sta$"s 6 Garent ./-)) A/,). '/=** (/'A= ,/+-+ (/-A'
Illinois National Bank .... =/,A' =/.'. =/A++ =/-(' '/.,( =/+A.
Wesco @inancial 6 Garent .. A/)(- A/'(, (/,)A (/+)* (/+'' ),.
E1t1al Sa%in#s and 8oan ... =/*(' (+/''. A/..= '/.=( (/).' ,/A-(
Grecision Steel ........... A/*,, ,/A=' (/,=A (/'*+ -=- .A,
Interest on Ie0t .......... 3(A/A,+4 3*/A'*4 3)/,)+4 3=/*-+4 3'/*+)4 3A/)++4
!ther ..................... A/(.+ (/,'A (/=)+ ))- (/A== .=,
66666666 66666666 66666666 66666666 66666666 66666666
Total Earnin#s fro$
!"erations ........... & --/,-( & =./)*' & ='/,*) & '-/*(, & '(/)AA & ,=/)**
E1t1al Sa%in#s and 8oan 6
sale of 0ranches ....... =/*., 66 A/*+, 66 (/A), 66
Reali;ed Sec1rities <ain .... (,/.(( (+/-'* (A/)=' )/-(' )/)+. -/*A)
66666666 66666666 66666666 66666666 66666666 66666666
Total Earnin#s 6 all entities & *=/)'= & -*/-,A & .+/('- & =-/'A. & =,/(AA & 'A/*(.
HHHHHHHH HHHHHHHH HHHHHHHH HHHHHHHH HHHHHHHH HHHHHHHH

Bl1e Chi" Sta$"s and Wesco are "10lic co$"anies with re"ortin# re21ire$ents of their own. !n "a#es '+ to =, of this re"ort we
ha%e re"rod1ced the narrati%e re"orts of the "rinci"al e7ec1ti%es of 0oth co$"anies/ in which they descri0e ()*+ o"erations. We
reco$$end a caref1l readin#/ and s1##est that yo1 "artic1larly note the s1"er0 :o0 done 0y 8o1ie Jincenti and Charlie E1n#er in
re"ositionin# E1t1al Sa%in#s and 8oan. A co"y of the f1ll ann1al re"ort of either co$"any will 0e $ailed to any Berkshire shareholder
1"on re21est to Er. Ro0ert H. Bird for Bl1e Chi" Sta$"s/ =*+( So1th Eastern A%en1e/ 8os An#eles/ California )++'+/ or to Ers. Bette
Ieckard for Wesco @inancial Cor"oration/ ,(= East Colorado Bo1le%ard/ Gasadena/ California )((+).
As indicated earlier/ 1ndistri01ted earnin#s in co$"anies we do not control are now f1lly as i$"ortant as the re"orted o"eratin#
earnin#s detailed in the "recedin# ta0le. The distri01ted "ortion/ of co1rse/ finds its way into the ta0le "ri$arily thro1#h the net
in%est$ent inco$e section of Ins1rance <ro1" earnin#s.
We show 0elow Berkshire9s "ro"ortional holdin#s in those non6controlled 01sinesses for which only distri01ted earnin#s 3di%idends4
are incl1ded in o1r own earnin#s.
No. of Shares Cost Earket
6666666666666 6666666666 6666666666
3+++s o$itted4
','/==+ 3a4 Affiliated G10lications/ Inc. ......... & A/*A( & (A/AAA
'-'/,(. 3a4 Al1$in1$ Co$"any of A$erica ........... A=/=.. A./-*=
'.=/A(. 304 Cle%eland6Cliffs Iron Co$"any ......... (A/)'A (=/*)'
(/)*,/*(A 304 <eneral @oods/ Inc. ................... -A/=+. =)/**)
./A++/+++ 3a4 <EIC! Cor"oration ..................... './(,* (+=/,++
A/+(=/+++ 3a4 Handy K Har$an ........................ A(/*A= =*/',=
.((/(*+ 3a4 Inter"10lic <ro1" of Co$"anies/ Inc. .. '/=,( AA/(,=
(/A((/*,' 3a4 Kaiser Al1$in1$ K Che$ical Cor". ...... A+/-A) A./=-)
A*A/=++ 3a4 Eedia <eneral ......................... '/='= */,,'
A'./+,) 304 National Ietroit Cor"oration .......... =/),+ -/A))
**(/=++ 3a4 National St1dent Earketin# ............ =/(A* =/*)=
,)(/'++ 3a4 !#il%y K Eather Int9l. Inc. ........... ,/.+) )/)*(
,.+/+** 304 Ginkerton9s/ Inc. ..................... (A/('' (-/'*)
A'=/.++ 304 R. L. Reynolds Ind1stries ............. */.+A ((/AA*
(/A=+/=A= 304 SA@EC! Cor"oration .................... ,A/+-A '=/(..
(=(/(+' 304 The Ti$es Eirror Co$"any .............. '/''. -/A.(
(/*-*/-++ 3a4 The Washin#ton Gost Co$"any ........... (+/-A* 'A/A..
--./(A' 304 E W Woolworth Co$"any ................. (,/=*, (-/=((
6666666666 6666666666
&A)*/*'* &')./=)(
All !ther Co$$on Stockholdin#s ........ A-/,(, ,A/+)-
6666666666 6666666666
Total Co$$on Stocks ................... &,A=/(-( &=A)/-*.
HHHHHHHHHH HHHHHHHHHH

3a4 All owned 0y Berkshire or its ins1rance s10sidiaries.
304 Bl1e Chi" andMor Wesco own shares of these co$"anies. All n1$0ers re"resent Berkshire9s net interest in the lar#er #ross
holdin#s of the #ro1".
@ro$ this ta0le/ yo1 can see that o1r so1rces of 1nderlyin# earnin# "ower are distri01ted far differently a$on# ind1stries than wo1ld
s1"erficially see$ the case. @or e7a$"le/ o1r ins1rance s10sidiaries own a""ro7i$ately ,5 of Kaiser Al1$in1$/ and ( (M'5 of Alcoa.
!1r share of the ()*+ earnin#s of those co$"anies a$o1nts to a0o1t &(, $illion. 3If translated dollar for dollar into a co$0ination of
e%ent1al $arket %al1e #ain and di%idends/ this fi#1re wo1ld ha%e to 0e red1ced 0y a si#nificant/ 01t not "recisely deter$ina0le/ a$o1nt
of ta7C "erha"s A=5 wo1ld 0e a fair ass1$"tion.4 Th1s/ we ha%e a $1ch lar#er econo$ic interest in the al1$in1$ 01siness than in
"ractically any of the o"eratin# 01sinesses we control and on which we re"ort in $ore detail. If we $aintain o1r holdin#s/ o1r lon#6
ter$ "erfor$ance will 0e $ore affected 0y the f1t1re econo$ics of the al1$in1$ ind1stry than it will 0y direct o"eratin# decisions we
$ake concernin# $ost co$"anies o%er which we e7ercise $ana#erial control.
<EIC! Cor".
!1r lar#est non6controlled holdin# is ..A $illion shares of <EIC! Cor"./ e21al to a0o1t a ,,5 e21ity interest. Nor$ally/ an interest of
this $a#nit1de 3o%er A+54 wo1ld 21alify as an >in%estee? holdin# and wo1ld re21ire 1s to reflect a "ro"ortionate share of <EIC!9s
earnin#s in o1r own. Howe%er/ we "1rchased o1r <EIC! stock "1rs1ant to s"ecial orders of the Iistrict of Col1$0ia and New York
Ins1rance Ie"art$ents/ which re21ired that the ri#ht to %ote the stock 0e "laced with an inde"endent "arty. A0sent the %ote/ o1r ,,5
interest does not 21alify for in%estee treat$ent. 3Ginkerton9s is a si$ilar sit1ation.4
!f co1rse/ whether or not the 1ndistri01ted earnin#s of <EIC! are "icked 1" ann1ally in o1r o"eratin# earnin#s fi#1re has nothin# to
do with their econo$ic %al1e to 1s/ or to yo1 as owners of Berkshire. The %al1e of these retained earnin#s will 0e deter$ined 0y the
skill with which they are "1t to 1se 0y <EIC! $ana#e$ent.
!n this score/ we si$"ly co1ldn9t feel 0etter. <EIC! re"resents the 0est of all in%est$ent worlds 6 the co1"lin# of a %ery i$"ortant
and %ery hard to d1"licate 01siness ad%anta#e with an e7traordinary $ana#e$ent whose skills in o"erations are $atched 0y skills in
ca"ital allocation.
As yo1 can see/ o1r holdin#s cost 1s &'. $illion/ with a0o1t half of this a$o1nt in%ested in ().- and $ost of the re$ainder in%ested
in ()*+. At the "resent di%idend rate/ o1r re"orted earnin#s fro$ <EIC! a$o1nt to a little o%er &, $illion ann1ally. B1t we esti$ate
o1r share of its earnin# "ower is on the order of &A+ $illion ann1ally. Th1s/ 1ndistri01ted earnin#s a""lica0le to this holdin# alone $ay
a$o1nt to '+5 of total re"orted o"eratin# earnin#s of Berkshire.
We sho1ld e$"hasi;e that we feel as co$forta0le with <EIC! $ana#e$ent retainin# an esti$ated &(. $illion of earnin#s a""lica0le
to o1r ownershi" as we wo1ld if that s1$ were in o1r own hands. In :1st the last two years <EIC!/ thro1#h re"1rchases of its own
stock/ has red1ced the share e21i%alents it has o1tstandin# fro$ ,'.A $illion to A(.- $illion/ dra$atically enhancin# the interests of
shareholders in a 01siness that si$"ly can9t 0e re"licated. The owners co1ld not ha%e 0een 0etter ser%ed.
We ha%e written in "ast re"orts a0o1t the disa""oint$ents that 1s1ally res1lt fro$ "1rchase and o"eration of >t1rnaro1nd?
01sinesses. 8iterally h1ndreds of t1rnaro1nd "ossi0ilities in do;ens of ind1stries ha%e 0een descri0ed to 1s o%er the years and/ either as
"artici"ants or as o0ser%ers/ we ha%e tracked "erfor$ance a#ainst e7"ectations. !1r concl1sion is that/ with few e7ce"tions/ when a
$ana#e$ent with a re"1tation for 0rilliance tackles a 01siness with a re"1tation for "oor f1nda$ental econo$ics/ it is the re"1tation
of the 01siness that re$ains intact.
<EIC! $ay a""ear to 0e an e7ce"tion/ ha%in# 0een t1rned aro1nd fro$ the %ery ed#e of 0ankr1"tcy in ().-. It certainly is tr1e that
$ana#erial 0rilliance was needed for its res1scitation/ and that Lack Byrne/ 1"on arri%al in that year/ s1""lied that in#redient in
a01ndance.
B1t it also is tr1e that the f1nda$ental 01siness ad%anta#e that <EIC! had en:oyed 6 an ad%anta#e that "re%io1sly had "rod1ced
sta##erin# s1ccess 6 was still intact within the co$"any/ altho1#h s10$er#ed in a sea of financial and o"eratin# tro10les.
<EIC! was desi#ned to 0e the low6cost o"eration in an enor$o1s $arket"lace 3a1to ins1rance4 "o"1lated lar#ely 0y co$"anies
whose $arketin# str1ct1res restricted ada"tation. R1n as desi#ned/ it co1ld offer 1n1s1al %al1e to its c1sto$ers while earnin# 1n1s1al
ret1rns for itself. @or decades it had 0een r1n in :1st this $anner. Its tro10les in the $id6.+s were not "rod1ced 0y any di$in1tion or
disa""earance of this essential econo$ic ad%anta#e.
<EIC!9s "ro0le$s at that ti$e "1t it in a "osition analo#o1s to that of A$erican E7"ress in ()-' followin# the salad oil scandal. Both
were one6of6a6kind co$"anies/ te$"orarily reelin# fro$ the effects of a fiscal 0low that did not destroy their e7ce"tional 1nderlyin#
econo$ics. The <EIC! and A$erican E7"ress sit1ations/ e7traordinary 01siness franchises with a locali;ed e7cisa0le cancer 3needin#/ to
0e s1re/ a skilled s1r#eon4/ sho1ld 0e distin#1ished fro$ the tr1e >t1rnaro1nd? sit1ation in which the $ana#ers e7"ect 6 and need 6 to
"1ll off a cor"orate Gy#$alion.
Whate%er the a""ellation/ we are deli#hted with o1r <EIC! holdin# which/ as noted/ cost 1s &'. $illion. To 01y a si$ilar &A+ $illion
of earnin# "ower in a 01siness with first6class econo$ic characteristics and 0ri#ht "ros"ects wo1ld cost a $ini$1$ of &A++ $illion
3$1ch $ore in so$e ind1stries4 if it had to 0e acco$"lished thro1#h ne#otiated "1rchase of an entire co$"any. A (++5 interest of
that kind #i%es the owner the o"tions of le%era#in# the "1rchase/ chan#in# $ana#e$ents/ directin# cash flow/ and sellin# the 01siness.
It $ay also "ro%ide so$e e7cite$ent aro1nd cor"orate head21arters 3less fre21ently $entioned4.
We find it "erfectly satisfyin# that the nat1re of o1r ins1rance 01siness dictates we 01y $any $inority "ortions of already well6r1n
01sinesses 3at "rices far 0elow o1r share of the total %al1e of the entire 01siness4 that do not need $ana#e$ent chan#e/ re6direction of
cash flow/ or sale. There aren9t $any Lack Byrnes in the $ana#erial world/ or <EIC!s in the 01siness world. What co1ld 0e 0etter than
01yin# into a "artnershi" with 0oth of the$F
Ins1rance Ind1stry Conditions
The ins1rance ind1stry9s 1nderwritin# "ict1re contin1es to 1nfold a0o1t as we antici"ated/ with the co$0ined ratio 3see definition on
"a#e ,.4 risin# fro$ (++.- in ().) to an esti$ated (+,.= in ()*+. It is %irt1ally certain that this trend will contin1e and that ind1stry
1nderwritin# losses will $o1nt/ si#nificantly and "ro#ressi%ely/ in ()*( and ()*A. To 1nderstand why/ we reco$$end that yo1 read the
e7cellent analysis of "ro"erty6cas1alty co$"etiti%e dyna$ics done 0y Bar0ara Stewart of Ch100 Cor". in an !cto0er ()*+ "a"er.
3Ch1009s ann1al re"ort consistently "resents the $ost insi#htf1l/ candid and well6written disc1ssion of ind1stry conditionsC yo1 sho1ld
#et on the co$"any9s $ailin# list.4 Ers. Stewart9s analysis $ay not 0e cheerf1l/ 01t we think it is %ery likely to 0e acc1rate.
And/ 1nfort1nately/ a lar#ely 1nre"orted 01t "artic1larly "ernicio1s "ro0le$ $ay well "rolon# and intensify the co$in# ind1stry
a#ony. It is not only likely to kee" $any ins1rers scra$0lin# for 01siness when 1nderwritin# losses hit record le%els 6 it is likely to ca1se
the$ at s1ch a ti$e to redo10le their efforts.
This "ro0le$ arises fro$ the decline in 0ond "rices and the ins1rance acco1ntin# con%ention that allows co$"anies to carry 0onds at
a$orti;ed cost/ re#ardless of $arket %al1e. Eany ins1rers own lon#6ter$ 0onds that/ at a$orti;ed cost/ a$o1nt to two to three ti$es
net worth. If the le%el is three ti$es/ of co1rse/ a one6third shrink fro$ cost in 0ond "rices 6 if it were to 0e reco#ni;ed on the 0ooks 6
wo1ld wi"e o1t net worth. And shrink they ha%e. So$e of the lar#est and 0est known "ro"erty6cas1alty co$"anies c1rrently find
the$sel%es with no$inal/ or e%en ne#ati%e/ net worth when 0ond holdin#s are %al1ed at $arket. !f co1rse their 0onds co1ld rise in
"rice/ there0y "artially/ or concei%a0ly e%en f1lly/ restorin# the inte#rity of stated net worth. !r they co1ld fall f1rther. 3We 0elie%e that
short6ter$ forecasts of stock or 0ond "rices are 1seless. The forecasts $ay tell yo1 a #reat deal a0o1t the forecasterC they tell yo1
nothin# a0o1t the f1t1re.4
It $i#ht strike so$e as stran#e that an ins1rance co$"any9s s1r%i%al is threatened when its stock "ortfolio falls s1fficiently in "rice to
red1ce net worth si#nificantly/ 01t that an e%en #reater decline in 0ond "rices "rod1ces no reaction at all. The ind1stry wo1ld res"ond
0y "ointin# o1t that/ no $atter what the c1rrent "rice/ the 0onds will 0e "aid in f1ll at $at1rity/ there0y e%ent1ally eli$inatin# any
interi$ "rice decline. It $ay take twenty/ thirty/ or e%en forty years/ this ar#1$ent says/ 01t/ as lon# as the 0onds don9t ha%e to 0e sold/
in the end they9ll all 0e worth face %al1e. !f co1rse/ if they are sold e%en if they are re"laced with si$ilar 0onds offerin# 0etter relati%e
%al1e 6 the loss $1st 0e 0ooked i$$ediately. And/ :1st as "ro$"tly/ "10lished net worth $1st 0e ad:1sted downward 0y the a$o1nt of
the loss.
Bnder s1ch circ1$stances/ a #reat $any in%est$ent o"tions disa""ear/ "erha"s for decades. @or e7a$"le/ when lar#e 1nderwritin#
losses are in "ros"ect/ it $ay $ake e7cellent 01siness lo#ic for so$e ins1rers to shift fro$ ta76e7e$"t 0onds into ta7a0le 0onds.
Bnwillin#ness to reco#ni;e $a:or 0ond losses $ay 0e the sole factor that "re%ents s1ch a sensi0le $o%e.
B1t the f1ll i$"lications flowin# fro$ $assi%e 1nreali;ed 0ond losses are far $ore serio1s than :1st the i$$o0ili;ation of in%est$ent
intellect. @or the so1rce of f1nds to "1rchase and hold those 0onds is a "ool of $oney deri%ed fro$ "olicyholders and clai$ants 3with
chan#in# faces4 6 $oney which/ in effect/ is te$"orarily on de"osit with the ins1rer. As lon# as this "ool retains its si;e/ no 0onds $1st
0e sold. If the "ool of f1nds shrinks 6 which it will if the %ol1$e of 01siness declines si#nificantly 6 assets $1st 0e sold to "ay off the
lia0ilities. And if those assets consist of 0onds with 0i# 1nreali;ed losses/ s1ch losses will ra"idly 0eco$e reali;ed/ deci$atin# net worth
in the "rocess.
Th1s/ an ins1rance co$"any with a 0ond $arket %al1e shrinka#e a""roachin# stated net worth 3of which there are now $any4 and
also faced with inade21ate rate le%els that are s1re to deteriorate f1rther has two o"tions. !ne o"tion for $ana#e$ent is to tell the
1nderwriters to kee" "ricin# accordin# to the e7"os1re in%ol%ed 6 >0e s1re to #et a dollar of "re$i1$ for e%ery dollar of e7"ense cost
"l1s e7"ecta0le loss cost?.
The conse21ences of this directi%e are "redicta0le 3a4 with $ost 01siness 0oth "rice sensiti%e and renewa0le ann1ally/ $any "olicies
"resently on the 0ooks will 0e lost to co$"etitors in rather short orderC 304 as "re$i1$ %ol1$e shrinks si#nificantly/ there will 0e a
la##ed 01t corres"ondin# decrease in lia0ilities 31nearned "re$i1$s and clai$s "aya0le4C 3c4 assets 30onds4 $1st 0e sold to $atch the
decrease in lia0ilitiesC and 3d4 the for$erly 1nreco#ni;ed disa""earance of net worth will 0eco$e "artially reco#ni;ed 3de"endin# 1"on
the e7tent of s1ch sales4 in the ins1rer9s "10lished financial state$ents.
Jariations of this de"ressin# se21ence in%ol%e a s$aller "enalty to stated net worth. The reaction of so$e co$"anies at 3c4 wo1ld
0e to sell either stocks that are already carried at $arket %al1es or recently "1rchased 0onds in%ol%in# less se%ere losses. This ostrich6
like 0eha%ior 6 sellin# the 0etter assets and kee"in# the 0i##est losers 6 while less "ainf1l in the short ter$/ is 1nlikely to 0e a winner in
the lon# ter$.
The second o"tion is $1ch si$"ler :1st kee" writin# 01siness re#ardless of rate le%els and who""in# "ros"ecti%e 1nderwritin#
losses/ there0y $aintainin# the "resent le%els of "re$i1$s/ assets and lia0ilities 6 and then "ray for a 0etter day/ either for 1nderwritin#
or for 0ond "rices. There is $1ch criticis$ in the trade "ress of >cash flow? 1nderwritin#C i.e./ writin# 01siness re#ardless of "ros"ecti%e
1nderwritin# losses in order to o0tain f1nds to in%est at c1rrent hi#h interest rates. This second o"tion $i#ht "ro"erly 0e ter$ed >asset
$aintenance? 1nderwritin# 6 the acce"tance of terri0le 01siness :1st to kee" the assets yo1 now ha%e.
!f co1rse yo1 know which o"tion will 0e selected. And it also is clear that as lon# as $any lar#e ins1rers feel co$"elled to choose
that second o"tion/ there will 0e no 0etter day for 1nderwritin#. @or if $1ch of the ind1stry feels it $1st $aintain "re$i1$ %ol1$e
le%els re#ardless of "rice ade21acy/ all ins1rers will ha%e to co$e close to $eetin# those "rices. Ri#ht 0ehind ha%in# financial "ro0le$s
yo1rself/ the ne7t worst "li#ht is to ha%e a lar#e #ro1" of co$"etitors with financial "ro0le$s that they can defer 0y a >sell6at6any6
"rice? "olicy.
We $entioned earlier that co$"anies that were 1nwillin# 6 for any of a n1$0er of reasons/ incl1din# "10lic reaction/ instit1tional
"ride/ or "rotection of stated net worth 6 to sell 0onds at "rice le%els forcin# reco#nition of $a:or losses $i#ht find the$sel%es fro;en in
in%est$ent "ost1re for a decade or lon#er. B1t/ as noted/ that9s only half of the "ro0le$. Co$"anies that ha%e $ade e7tensi%e
co$$it$ents to lon#6ter$ 0onds $ay ha%e lost/ for a considera0le "eriod of ti$e/ not only $any of their in%est$ent o"tions/ 01t $any
of their 1nderwritin# o"tions as well.
!1r own "osition in this res"ect is satisfactory. We 0elie%e o1r net worth/ %al1in# 0onds of all ins1rers at a$orti;ed cost/ is the
stron#est relati%e to "re$i1$ %ol1$e a$on# all lar#e "ro"erty6cas1alty stockholder6owned #ro1"s. When 0onds are %al1ed at $arket/
o1r relati%e stren#th 0eco$es far $ore dra$atic. 3B1t lest we #et too "1ffed 1"/ we re$ind o1rsel%es that o1r asset and lia0ility
$at1rities still are far $ore $is$atched than we wo1ld wish and that we/ too/ lost i$"ortant s1$s in 0onds 0eca1se yo1r Chair$an
was talkin# when he sho1ld ha%e 0een actin#.4
!1r a01ndant ca"ital and in%est$ent fle7i0ility will ena0le 1s to do whate%er we think $akes the $ost sense d1rin# the "ros"ecti%e
e7tended "eriod of inade21ate "ricin#. B1t tro10les for the ind1stry $ean tro10les for 1s. !1r financial stren#th doesn9t re$o%e 1s
fro$ the hostile "ricin# en%iron$ent now en%elo"in# the entire "ro"erty6cas1alty ins1rance ind1stry. It :1st #i%es 1s $ore stayin#
"ower and $ore o"tions.
Ins1rance !"erations
The National Inde$nity $ana#ers/ led 0y Ghil 8iesche with the 1s1al a0le assistance of Roland Eiller and Bill 8yons/ o1tdid
the$sel%es in ()*+. While %ol1$e was flat/ 1nderwritin# $ar#ins relati%e to the ind1stry were at an all6ti$e hi#h. We e7"ect
decreased %ol1$e fro$ this o"eration in ()*(. B1t its $ana#ers will hear no co$"laints fro$ cor"orate head21arters/ nor will
e$"loy$ent or salaries s1ffer. We enor$o1sly ad$ire the National Inde$nity 1nderwritin# disci"line 6 e$0edded fro$ ori#in 0y the
fo1nder/ Lack Rin#walt 6 and know that this disci"line/ if s1s"ended/ "ro0a0ly co1ld not 0e f1lly re#ained.
Lohn Seward at Ho$e and A1to contin1es to $ake #ood "ro#ress in re"lacin# a di$inishin# n1$0er of a1to "olicies with %ol1$e
fro$ less co$"etiti%e lines/ "ri$arily s$all6"re$i1$ #eneral lia0ility. !"erations are 0ein# slowly e7"anded/ 0oth #eo#ra"hically and
0y "rod1ct line/ as warranted 0y 1nderwritin# res1lts.
The reins1rance 01siness contin1es to reflect the e7cesses and "ro0le$s of the "ri$ary writers. Worse yet/ it has the "otential for
$a#nifyin# s1ch e7cesses. Reins1rance is characteri;ed 0y e7tre$e ease of entry/ lar#e "re$i1$ "ay$ents in ad%ance/ and $1ch6
delayed loss re"orts and loss "ay$ents. Initially/ the $ornin# $ail 0rin#s lots of cash and few clai$s. This state of affairs can "rod1ce a
0lissf1l/ al$ost e1"horic/ feelin# akin to that e7"erienced 0y an innocent 1"on recei"t of his first credit card.
The $a#netic l1re of s1ch cash6#eneratin# characteristics/ c1rrently enhanced 0y the "resence of hi#h interest rates/ is transfor$in#
the reins1rance $arket into >a$ate1r ni#ht?. Witho1t a s1"er catastro"he/ ind1stry 1nderwritin# will 0e "oor in the ne7t few years. If
we e7"erience s1ch a catastro"he/ there co1ld 0e a 0lood0ath with so$e co$"anies not a0le to li%e 1" to contract1al co$$it$ents.
<eor#e Yo1n# contin1es to do a first6class :o0 for 1s in this 01siness. Res1lts/ with in%est$ent inco$e incl1ded/ ha%e 0een reasona0ly
"rofita0le. We will retain an acti%e reins1rance "resence 01t/ for the foreseea0le f1t1re/ we e7"ect no "re$i1$ #rowth fro$ this
acti%ity.
We contin1e to ha%e serio1s "ro0le$s in the Ho$estate o"eration. @loyd Taylor in Kansas has done an o1tstandin# :o0 01t o1r
1nderwritin# record elsewhere is considera0ly 0elow a%era#e. !1r "oorest "erfor$er has 0een Ins1rance Co$"any of Iowa/ at which
lar#e losses ha%e 0een s1stained ann1ally since its fo1ndin# in ().,. 8ate in the fall we a0andoned 1nderwritin# in that state/ and ha%e
$er#ed the co$"any into Cornh1sker Cas1alty. There is "otential in the ho$estate conce"t/ 01t $1ch work needs to 0e done in order
to reali;e it.
!1r Workers Co$"ensation o"eration s1ffered a se%ere loss when @rank IeNardo died last year at ,.. @rank instincti%ely tho1#ht
like an 1nderwriter. He was a s1"er0 technician and a fierce co$"etitorC in short order he had strai#htened o1t $a:or "ro0le$s at the
California Workers Co$"ensation Ii%ision of National Inde$nity. Ian <ross$an/ who ori#inally 0ro1#ht @rank to 1s/ ste""ed in
i$$ediately after @rank9s death to contin1e that o"eration/ which now 1tili;es Redwood @ire and Cas1alty/ another Berkshire
s10sidiary/ as the ins1rin# %ehicle.
!1r $a:or Workers Co$"ensation o"eration/ Cy"ress Ins1rance Co$"any/ r1n 0y Eilt Thornton/ contin1es its o1tstandin# record.
Year after year Eilt/ like Ghil 8iesche/ r1ns an 1nderwritin# o"eration that far o1t"aces his co$"etition. In the ind1stry he is ad$ired
and co"ied/ 01t not $atched.
!%erall/ we look for a si#nificant decline in ins1rance %ol1$e in ()*( alon# with a "oorer 1nderwritin# res1lt. We e7"ect
1nderwritin# e7"erience so$ewhat s1"erior to that of the ind1stry 01t/ of co1rse/ so does $ost of the ind1stry. There will 0e so$e
disa""oint$ents.
Te7tile and Retail !"erations
I1rin# the "ast year we ha%e c1t 0ack the sco"e of o1r te7tile 01siness. !"erations at Wa1$0ec Eills ha%e 0een ter$inated/
rel1ctantly 01t necessarily. So$e e21i"$ent was transferred to New Bedford 01t $ost has 0een sold/ or will 0e/ alon# with real estate.
Yo1r Chair$an $ade a costly $istake in not facin# the realities of this sit1ation sooner.
At New Bedford we ha%e red1ced the n1$0er of loo$s o"erated 0y a0o1t one6third/ a0andonin# so$e hi#h6%ol1$e lines in which
"rod1ct differentiation was insi#nificant. E%en ass1$in# e%erythin# went ri#ht 6 which it seldo$ did 6 these lines co1ld not #enerate
ade21ate ret1rns related to in%est$ent. And/ o%er a f1ll ind1stry cycle/ losses were the $ost likely res1lt.
!1r re$ainin# te7tile o"eration/ still si;a0le/ has 0een di%ided into a $an1fact1rin# and a sales di%ision/ each free to do 01siness
inde"endent of the other. Th1s/ distri01tion stren#ths and $ill ca"a0ilities will not 0e wedded to each other. We ha%e $ore than
do10led ca"acity in o1r $ost "rofita0le te7tile se#$ent thro1#h a recent "1rchase of 1sed (,+6inch Sa1rer loo$s. C1rrent conditions
indicate another to1#h year in te7tiles/ 01t with s10stantially less ca"ital e$"loyed in the o"eration.
Ben Rosner9s record at Associated Retail Stores contin1es to a$a;e 1s. In a "oor retailin# year/ Associated9s earnin#s contin1ed
e7cellent 6 and those earnin#s all were translated into cash. !n Earch ./ ()*( Associated will cele0rate its =+th 0irthday. Ben has r1n
the 01siness 3alon# with 8eo Si$on/ his "artner fro$ (),( to ()--4 in each of those fifty years.
Iis"osition of Illinois National Bank and Tr1st of Rockford
!n Iece$0er ,(/ ()*+ we co$"leted the e7chan#e of '(/+*- shares of Rockford Bancor" Inc. 3which owns )...5 of Illinois National
Bank4 for a like n1$0er of shares of Berkshire Hathaway Inc.
!1r $ethod of e7chan#e allowed all Berkshire shareholders to $aintain their "ro"ortional interest in the Bank 3e7ce"t for $eC I was
"er$itted *+5 of $y "ro"ortional share4. They were th1s #1aranteed an ownershi" "osition identical to that they wo1ld ha%e attained
had we followed a $ore con%entional s"inoff a""roach. Twenty6fo1r shareholders 3of o1r a""ro7i$ate (,++4 chose this "ro"ortional
e7chan#e o"tion.
We also allowed o%ere7chan#es/ and thirty6nine additional shareholders acce"ted this o"tion/ there0y increasin# their ownershi" in
the Bank and decreasin# their "ro"ortional ownershi" in Berkshire. All #ot the f1ll a$o1nt of Bancor" stock they re21ested/ since the
total shares desired 0y these thirty6nine holders was :1st sli#htly less than the n1$0er left a%aila0le 0y the re$ainin# (A++6"l1s holders
of Berkshire who elected not to "art with any Berkshire shares at all. As the e7chan#er of last resort/ I took the s$all 0alance 3,5 of
Bancor"9s stock4. These shares/ added to shares I recei%ed fro$ $y 0asic e7chan#e allot$ent 3*+5 of nor$al4/ #a%e $e a sli#htly
red1ced "ro"ortional interest in the Bank and a sli#htly enlar#ed "ro"ortional interest in Berkshire.
Eana#e$ent of the Bank is "leased with the o1tco$e. Bancor" will o"erate as an ine7"ensi%e and 1nco$"licated holdin# co$"any
owned 0y -= shareholders. And all of those shareholders will ha%e 0eco$e Bancor" owners thro1#h a conscio1s affir$ati%e decision.
@inancin#
In A1#1st we sold &-+ $illion of (A ,M'5 notes d1e A1#1st (/ A++=/ with a sinkin# f1nd to 0e#in in ())(. The $ana#in# 1nderwriters/
Ionaldson/ 81fkin K Lenrette Sec1rities Cor"oration/ re"resented 0y Bill @isher/ and Chiles/ Heider K Co$"any/ Inc./ re"resented 0y
Charlie Heider/ did an a0sol1tely first6class :o0 fro$ start to finish of the financin#.
Bnlike $ost 01sinesses/ Berkshire did not finance 0eca1se of any s"ecific i$$ediate needs. Rather/ we 0orrowed 0eca1se we think
that/ o%er a "eriod far shorter than the life of the loan/ we will ha%e $any o""ort1nities to "1t the $oney to #ood 1se. The $ost
attracti%e o""ort1nities $ay "resent the$sel%es at a ti$e when credit is e7tre$ely e7"ensi%e 6 or e%en 1na%aila0le. At s1ch a ti$e we
want to ha%e "lenty of financial fire"ower.
!1r ac21isition "references r1n toward 01sinesses that #enerate cash/ not those that cons1$e it. As inflation intensifies/ $ore and
$ore co$"anies find that they $1st s"end all f1nds they #enerate internally :1st to $aintain their e7istin# "hysical %ol1$e of 01siness.
There is a certain $ira#e6like 21ality to s1ch o"erations. Howe%er attracti%e the earnin#s n1$0ers/ we re$ain leery of 01sinesses that
ne%er see$ a0le to con%ert s1ch "retty n1$0ers into no6strin#s6attached cash.
B1sinesses $eetin# o1r standards are not easy to find. 3Each year we read of h1ndreds of cor"orate ac21isitionsC only a handf1l
wo1ld ha%e 0een of interest to 1s.4 And lo#ical e7"ansion of o1r "resent o"erations is not easy to i$"le$ent. B1t we9ll contin1e to
1tili;e 0oth a%en1es in o1r atte$"ts to f1rther Berkshire9s #rowth.
Bnder all circ1$stances we "lan to o"erate with "lenty of li21idity/ with de0t that is $oderate in si;e and "ro"erly str1ct1red/ and
with an a01ndance of ca"ital stren#th. !1r ret1rn on e21ity is "enali;ed so$ewhat 0y this conser%ati%e a""roach/ 01t it is the only one
with which we feel co$forta0le.
N N N N N N N N N N N N
<ene A0e##/ fo1nder of o1r lon#6owned 0ank in Rockford/ died on L1ly A/ ()*+ at the a#e of *A. As a friend/ 0anker and citi;en/ he
was 1ns1r"assed.
Yo1 learn a #reat deal a0o1t a "erson when yo1 "1rchase a 01siness fro$ hi$ and he then stays on to r1n it as an e$"loyee rather
than as an owner. Before the "1rchase the seller knows the 01siness inti$ately/ whereas yo1 start fro$ scratch. The seller has do;ens
of o""ort1nities to $islead the 01yer 6 thro1#h o$issions/ a$0i#1ities/ and $isdirection. After the check has chan#ed hands/ s10tle
3and not so s10tle4 chan#es of attit1de can occ1r and i$"licit 1nderstandin#s can e%a"orate. As in the co1rtshi"6$arria#e se21ence/
disa""oint$ents are not infre21ent.
@ro$ the ti$e we first $et/ <ene shot strai#ht (++5 of the ti$e 6 the only 0eha%ior "attern he had within hi$. At the o1tset of
ne#otiations/ he laid all ne#ati%e factors face 1" on the ta0leC on the other hand/ for years after the transaction was co$"leted he
wo1ld tell $e "eriodically of so$e "re%io1sly 1ndisc1ssed ite$s of %al1e that had co$e with o1r "1rchase.
Tho1#h he was already .( years of a#e when he sold 1s the Bank/ <ene s10se21ently worked harder for 1s than he had for hi$self.
He ne%er delayed re"ortin# a "ro0le$ for a $in1te/ 01t "ro0le$s were few with <ene. What else wo1ld yo1 e7"ect fro$ a $an who/
at the ti$e of the 0ank holiday in (),,/ had eno1#h cash on the "re$ises to "ay all de"ositors in f1llF <ene ne%er for#ot he was
handlin# other "eo"le9s $oney. Tho1#h this fid1ciary attit1de was always do$inant/ his s1"er0 $ana#erial skills ena0led the Bank to
re#1larly achie%e the to" "osition nationally in "rofita0ility.
<ene was in char#e of the Illinois National for close to fifty years 6 al$ost one621arter of the lifeti$e of o1r co1ntry. <eor#e Eead/ a
wealthy ind1strialist/ 0ro1#ht hi$ in fro$ Chica#o to o"en a new 0ank after a n1$0er of other 0anks in Rockford had failed. Er. Eead
"1t 1" the $oney and <ene ran the show. His talent for leadershi" soon "1t its sta$" on %irt1ally e%ery $a:or ci%ic acti%ity in Rockford.
Io;ens of Rockford citi;ens ha%e told $e o%er the years of hel" <ene e7tended to the$. In so$e cases this hel" was financialC in all
cases it in%ol%ed $1ch wisdo$/ e$"athy and friendshi". He always offered the sa$e to $e. Beca1se of o1r res"ecti%e a#es and
"ositions I was so$eti$es the :1nior "artner/ so$eti$es the senior. Whiche%er the relationshi"/ it always was a s"ecial one/ and I $iss
it.
Warren E. B1ffett @e0r1ary A./ ()*( Chair$an of the Board