Warren Buffett's Letters
To Berkshire 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


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 cost.


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


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 cash.


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


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 Hathaway.


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 manage.


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.

若有需要Berkshire的股東可向Mr. Robert(地址:加州洛杉磯5801 South Eastern
Avenue)索取藍籌郵票的年報或向Mrs. Bette(地址:加州Pasadena 315 East
Colorado Boulevard)索取Wesco的年報。

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.

滑,然而儘管如此,聯合零售商店的Ben Rosner還是不斷地化腐朽為神奇,即使產
82歲的Gene Abegg、Wesco 74歲的Louis Vincenti一樣,其功力日益深厚。

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.

是本本人,在數年前曾買下位於Manchester的Waumbec 紡織廠,以擴大我們在紡

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.

釀成災難,部份的產業仍對位於New Bedford的室內裝飾品生產線(這是我們最強的

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.)

去年我們曾預估保險業的綜合核保比率(Combined Underwriting Ratio)會上昇幾個

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.

國家產險公司的Phil Liesche在核保部門Roland以及理賠部門Bill Lyons的協助

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

意,公司在Jack Ringwalt創辦時便立下此一理念,而Phil 從未放棄保持此一優良傳

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

負責家庭與汽車保險公司營運的John Seward持續有重大的進展,目前該公司大舉進
MaGowan及Paul Springman等兩位經理人來處理這類的新業務。

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

由George Young 領軍的再保險部門,在將投資收益併入考量後,持續地給予我們

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.

Homestate 1979的營運則令人感到失望,George Billings負責的德州聯合保險再
及時改進,然而目前John Ringwalt已經投入火線全力導正錯誤,而我們也相信在幾

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 base.

相當有利我們的營運,除此之外,賽普路斯的Milt Thornton以及國家產險加州勞工
退休金部門的Frank Denardo的表現也很好,我們確實在購併面犯了些錯誤,但賽
普路斯事後被證明是塊寶,而Milt Thornton就像Phil Liesche一樣,不以追求業務
良好的組織,另外Frank Denardo已經完全導正他在加州所接手的爛攤子,節省的

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.

去年年底在Chet Noble的管理下,我們正式進入保證再保險這類專門領域,初期這

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

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 years.

件價格會是多少? 然而荒謬的是,他們在收到保費之後,一轉身卻將剛收到的保費,

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 revolution.


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 inefficiencies.

long-term Bond)(即不含轉換權或可提供額外獲利可能性的債券),即使有買進也是

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.

券) 的結果肯定是徒勞無功。

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 response.


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

權,我們傾向莎士比亞筆下的Polonius 的看法(稍微經過改編): 「不要作一個短期的



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.

這將會是我們最後一次報告Illinois National Bank的狀況,而我們也很開心的向各
位宣佈在Gene Abegg及Pete Jeffrey優秀的領導下,這家銀行的獲利打破歷年來的
在值得所有Berkshire的股東再度給予Gene Abegg熱烈的掌聲,感謝他們自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.

何職務,即使依照我們這個個案,沒有任何一個人同時擁有兩家公司40% 以上的股

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.

在這種情況下,我們只能探詢出售該公司80%-100% 股權的可能性,但請相信,我

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

每年結束,約有98% 股份的股東會保留他們在Berkshire的持股,因此每年年報的

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.

此外,約有90% 股份的股東其最大的股票投資就是Berkshire,所以有許多股東願意

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 significance.


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.

費雪(Phil Fisher)一位令人尊敬的投資專家與作者,曾比喻一家公司吸引股東的方

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 space).


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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