Warren Buffett's Letters
To Berkshire Shareholders 1980



To the Shareholders of Berkshire Hathaway Inc.:


Operating earnings improved to $41.9 million in 1980 from $36.0 million in
1979, but return on beginning equity capital (with securities valued at cost)
fell to 17.8% from 18.6%. We believe the latter yardstick to be the most
appropriate measure of single-year managerial economic performance.
Informed use of that yardstick, however, requires an understanding of many
factors, including accounting policies, historical carrying values of assets,
financial leverage, and industry conditions.


In your evaluation of our economic performance, we suggest that two
factors should receive your special attention - one of a positive nature
peculiar, to a large extent, to our own operation, and one of a negative nature
applicable to corporate performance generally. Let’s look at the bright side


Non-Controlled Ownership Earnings


When one company owns part of another company, appropriate
accounting procedures pertaining to that ownership interest must be
selected from one of three major categories. The percentage of voting stock
that is owned, in large part, determines which category of accounting
principles should be utilized.


Generally accepted accounting principles require (subject to exceptions,
naturally, as with our former bank subsidiary) full consolidation of sales,
expenses, taxes, and earnings of business holdings more than 50% owned.
Blue Chip Stamps, 60% owned by Berkshire Hathaway Inc., falls into this
category. Therefore, all Blue Chip income and expense items are included in
full in Berkshire’s Consolidated Statement of Earnings, with the 40%
ownership interest of others in Blue Chip’s net earnings reflected in the
Statement as a deduction for “minority interest”.


Full inclusion of underlying earnings from another class of holdings,
companies owned 20% to 50% (usually called “investees”), also normally
occurs. Earnings from such companies - for example, Wesco Financial,
controlled by Berkshire but only 48% owned - are included via a one-line
entry in the owner’s Statement of Earnings. Unlike the over-50% category,
all items of revenue and expense are omitted; just the proportional share of
net income is included. Thus, if Corporation A owns one-third of
Corporation B, one-third of B’s earnings, whether or not distributed by B, will
end up in A’s earnings. There are some modifications, both in this and the
over-50% category, for intercorporate taxes and purchase price adjustments,
the explanation of which we will save for a later day. (We know you can hardly

而若是持有股權比例介於20%-50% 之間,像Wesco金融公司雖係由Berkshire所

Finally come holdings representing less than 20% ownership of another
corporation’s voting securities. In these cases, accounting rules dictate that
the owning companies include in their earnings only dividends received from
such holdings. Undistributed earnings are ignored. Thus, should we own
10% of Corporation X with earnings of $10 million in 1980, we would report
in our earnings (ignoring relatively minor taxes on intercorporate dividends)
either (a) $1 million if X declared the full $10 million in dividends; (b)
$500,000 if X paid out 50%, or $5 million, in dividends; or (c) zero if X
reinvested all earnings.

X 公司10%的股份,又假設X公司在1980 年共計賺了1,000萬美金,若X公司將

We impose this short - and over-simplified - course in accounting upon
you because Berkshire’s concentration of resources in the insurance field
produces a corresponding concentration of its assets in companies in that
third (less than 20% owned) category. Many of these companies pay out
relatively small proportions of their earnings in dividends. This means that
only a small proportion of their current earning power is recorded in our own
current operating earnings. But, while our reported operating earnings
reflect only the dividends received from such companies, our economic
well-being is determined by their earnings, not their dividends.


Our holdings in this third category of companies have increased
dramatically in recent years as our insurance business has prospered and as
securities markets have presented particularly attractive opportunities in the
common stock area. The large increase in such holdings, plus the growth of
earnings experienced by those partially-owned companies, has produced an
unusual result; the part of “our” earnings that these companies retained last
year (the part not paid to us in dividends) exceeded the total reported annual
operating earnings of Berkshire Hathaway. Thus, conventional accounting
only allows less than half of our earnings “iceberg” to appear above the
surface, in plain view. Within the corporate world such a result is quite rare;
in our case it is likely to be recurring.


Our own analysis of earnings reality differs somewhat from generally
accepted accounting principles, particularly when those principles must be
applied in a world of high and uncertain rates of inflation. (But it’s much
easier to criticize than to improve such accounting rules. The inherent
problems are monumental.) We have owned 100% of businesses whose
reported earnings were not worth close to 100 cents on the dollar to us even
though, in an accounting sense, we totally controlled their disposition. (The
“control” was theoretical. Unless we reinvested all earnings, massive
deterioration in the value of assets already in place would occur. But those
reinvested earnings had no prospect of earning anything close to a market
return on capital.) We have also owned small fractions of businesses with
extraordinary reinvestment possibilities whose retained earnings had an
economic value to us far in excess of 100 cents on the dollar.


The value to Berkshire Hathaway of retained earnings is not determined
by whether we own 100%, 50%, 20% or 1% of the businesses in which they
reside. Rather, the value of those retained earnings is determined by the
use to which they are put and the subsequent level of earnings produced by
that usage. This is true whether we determine the usage, or whether
managers we did not hire - but did elect to join - determine that usage. (It’s
the act that counts, not the actors.) And the value is in no way affected by the
inclusion or non-inclusion of those retained earnings in our own reported
operating earnings. If a tree grows in a forest partially owned by us, but we
don’t record the growth in our financial statements, we still own part of the

5% 或是1%,盈餘的真正價值在於其將來再投資所能產生的效益,這與是否由我們自

Our view, we warn you, is non-conventional. But we would rather have
earnings for which we did not get accounting credit put to good use in a
10%-owned company by a management we did not personally hire, than have
earnings for which we did get credit put into projects of more dubious
potential by another management - even if we are that management.


(We can’t resist pausing here for a short commercial. One usage of
retained earnings we often greet with special enthusiasm when practiced by
companies in which we have an investment interest is repurchase of their
own shares. The reasoning is simple: if a fine business is selling in the
market place for far less than intrinsic value, what more certain or more
profitable utilization of capital can there be than significant enlargement of
the interests of all owners at that bargain price? The competitive nature of
corporate acquisition activity almost guarantees the payment of a full -
frequently more than full price when a company buys the entire ownership of
another enterprise. But the auction nature of security markets often allows
finely-run companies the opportunity to purchase portions of their own
businesses at a price under 50% of that needed to acquire the same earning
power through the negotiated acquisition of another enterprise.)


Long-Term Corporate Results


As we have noted, we evaluate single-year corporate performance by
comparing operating earnings to shareholders’ equity with securities valued
at cost. Our long-term yardstick of performance, however, includes all
capital gains or losses, realized or unrealized. We continue to achieve a
long-term return on equity that considerably exceeds the average of our
yearly returns. The major factor causing this pleasant result is a simple one:
the retained earnings of those non-controlled holdings we discussed earlier
have been translated into gains in market value.


Of course, this translation of retained earnings into market price
appreciation is highly uneven (it goes in reverse some years), unpredictable
as to timing, and unlikely to materialize on a precise dollar-for-dollar basis.
And a silly purchase price for a block of stock in a corporation can negate the
effects of a decade of earnings retention by that corporation. But when
purchase prices are sensible, some long-term market recognition of the
accumulation of retained earnings almost certainly will occur. Periodically
you even will receive some frosting on the cake, with market appreciation far
exceeding post-purchase retained earnings.


In the sixteen years since present management assumed responsibility
for Berkshire, book value per share with insurance-held equities valued at
market has increased from $19.46 to $400.80, or 20.5% compounded
annually. (You’ve done better: the value of the mineral content in the human
body compounded at 22% annually during the past decade.) It is
encouraging, moreover, to realize that our record was achieved despite many
mistakes. The list is too painful and lengthy to detail here. But it clearly
shows that a reasonably competitive corporate batting average can be
achieved in spite of a lot of managerial strikeouts.

20.5% (事實上你「本身」作得也不錯,過去十年來人體內所含礦物質成份的價值以年

Our insurance companies will continue to make large investments in
well-run, favorably-situated, non-controlled companies that very often will
pay out in dividends only small proportions of their earnings. Following this
policy, we would expect our long-term returns to continue to exceed the
returns derived annually from reported operating earnings. Our confidence
in this belief can easily be quantified: if we were to sell the equities that we
hold and replace them with long-term tax-free bonds, our reported
operating earnings would rise immediately by over $30 million annually.
Such a shift tempts us not at all.


So much for the good news.


Results for Owners


Unfortunately, earnings reported in corporate financial statements are
no longer the dominant variable that determines whether there are any real
earnings for you, the owner. For only gains in purchasing power represent
real earnings on investment. If you (a) forego ten hamburgers to purchase
an investment; (b) receive dividends which, after tax, buy two hamburgers;
and (c) receive, upon sale of your holdings, after-tax proceeds that will buy
eight hamburgers, then (d) you have had no real income from your
investment, no matter how much it appreciated in dollars. You may feel
richer, but you won’t eat richer.


High rates of inflation create a tax on capital that makes much
corporate investment unwise - at least if measured by the criterion of a
positive real investment return to owners. This “hurdle rate” the return on
equity that must be achieved by a corporation in order to produce any real
return for its individual owners - has increased dramatically in recent years.
The average tax-paying investor is now running up a down escalator whose
pace has accelerated to the point where his upward progress is nil.


For example, in a world of 12% inflation a business earning 20% on
equity (which very few manage consistently to do) and distributing it all to
individuals in the 50% bracket is chewing up their real capital, not enhancing
it. (Half of the 20% will go for income tax; the remaining 10% leaves the
owners of the business with only 98% of the purchasing power they
possessed at the start of the year - even though they have not spent a penny
of their “earnings”). The investors in this bracket would actually be better
off with a combination of stable prices and corporate earnings on equity
capital of only a few per cent.

年度的通膨為12%,又若其不幸適用50% 高所得稅級距,則我們會發現該位投資人

Explicit income taxes alone, unaccompanied by any implicit inflation
tax, never can turn a positive corporate return into a negative owner return.
(Even if there were 90% personal income tax rates on both dividends and
capital gains, some real income would be left for the owner at a zero inflation
rate.) But the inflation tax is not limited by reported income. Inflation rates
not far from those recently experienced can turn the level of positive returns
achieved by a majority of corporations into negative returns for all owners,
including those not required to pay explicit taxes. (For example, if inflation
reached 16%, owners of the 60% plus of corporate America earning less than
this rate of return would be realizing a negative real return - even if income
taxes on dividends and capital gains were eliminated.)


Of course, the two forms of taxation co-exist and interact since explicit
taxes are levied on nominal, not real, income. Thus you pay income taxes
on what would be deficits if returns to stockholders were measured in
constant dollars.


At present inflation rates, we believe individual owners in medium or
high tax brackets (as distinguished from tax-free entities such as pension
funds, eleemosynary institutions, etc.) should expect no real long-term
return from the average American corporation, even though these individuals
reinvest the entire after-tax proceeds from all dividends they receive. The
average return on equity of corporations is fully offset by the combination of
the implicit tax on capital levied by inflation and the explicit taxes levied both
on dividends and gains in value produced by retained earnings.


As we said last year, Berkshire has no corporate solution to the problem.
(We’ll say it again next year, too.) Inflation does not improve our return on


Indexing is the insulation that all seek against inflation. But the great
bulk (although there are important exceptions) of corporate capital is not
even partially indexed. Of course, earnings and dividends per share usually
will rise if significant earnings are “saved” by a corporation; i.e., reinvested
instead of paid as dividends. But that would be true without inflation. A
thrifty wage earner, likewise, could achieve regular annual increases in his
total income without ever getting a pay increase - if he were willing to take
only half of his paycheck in cash (his wage “dividend”) and consistently add
the other half (his “retained earnings”) to a savings account. Neither this
high-saving wage earner nor the stockholder in a high-saving corporation
whose annual dividend rate increases while its rate of return on equity
remains flat is truly indexed.


For capital to be truly indexed, return on equity must rise, i.e., business
earnings consistently must increase in proportion to the increase in the price
level without any need for the business to add to capital - including working
capital - employed. (Increased earnings produced by increased investment
don’t count.) Only a few businesses come close to exhibiting this ability.
And Berkshire Hathaway isn’t one of them.


We, of course, have a corporate policy of reinvesting earnings for
growth, diversity and strength, which has the incidental effect of minimizing
the current imposition of explicit taxes on our owners. However, on a day-
by-day basis, you will be subjected to the implicit inflation tax, and when you
wish to transfer your investment in Berkshire into another form of
investment, or into consumption, you also will face explicit taxes.


Sources of Earnings


The table below shows the sources of Berkshire’s reported earnings.
Berkshire owns about 60% of Blue Chip Stamps, which in turn owns 80% of
Wesco Financial Corporation. The table shows aggregate earnings of the
various business entities, as well as Berkshire’s share of those earnings. All
of the significant capital gains and losses attributable to any of the business
entities are aggregated in the realized securities gains figure at the bottom of
the table, and are not included in operating earnings. Our calculation of
operating earnings also excludes the gain from sale of Mutual’s branch
offices. In this respect it differs from the presentation in our audited
financial statements that includes this item in the calculation of “Earnings
Before Realized Investment Gain”.

表列示的方式與一般公認會計原則不儘相同,但最後的損益數字卻是一致的: 其中
Berkshire擁有Blue Chips Stamps 60%的股權,而後者又擁有 Wesco 財務公司
80% 的股權。此外,本期的帳面盈餘並不包括聯合儲貸處份分公司辦公室的利得,也

Net Earnings

Earnings Before Income Taxes After Tax

------------------------------- ------------------

Total Berkshire Share Berkshire Share

----------------- --------------- ---------------

(in thousands of dollars) 1980 1979 1980 1979 1980 1979

------- ------- -------- -------- -------- --------

Total Earnings - all entities $ 85,945 $ 68,632 $ 70,146 $ 56,427 $ 53,122 $ 42,817

===== ====== ====== ====== ====== ======

Earnings from Operations:

Insurance Group:

Underwriting ............ $ 6,738 $ 3,742 $ 6,737 $ 3,741 $ 3,637 $ 2,214

Net Investment Income ..30,939 24,224 30,927 24,216 25,607 20,106

Berkshire-Waumbec Textiles (508) 1,723 (508) 1,723 202 848

Associated Retail Stores .. 2,440 2,775 2,440 2,775 1,169 1,280

See’s Candies ............. 15,031 12,785 8,958 7,598 4,212 3,448

Buffalo Evening News ...... (2,805) (4,617) (1,672) (2,744) (816) (1,333)

Blue Chip Stamps - Parent 7,699 2,397 4,588 1,425 3,060 1,624

Illinois National Bank .... 5,324 5,747 5,200 5,614 4,731 5,027

Wesco Financial - Parent .. 2,916 2,413 1,392 1,098 1,044 937

Mutual Savings and Loan ...5,814 10,447 2,775 4,751 1,974 3,261

Precision Steel ........... 2,833 3,254 1,352 1,480 656 723

Interest on Debt .......... (12,230) (8,248) (9,390) (5,860) (4,809) (2,900)

Other ..................... 2,170 1,342 1,590 996 1,255 753

-------- -------- -------- -------- -------- --------

Total Earnings from

Operations ........... $ 66,361 $ 57,984 $ 54,389 $ 46,813 $ 41,922 $ 35,988

Mutual Savings and Loan -

sale of branches ....... 5,873 -- 2,803 -- 1,293 --

Realized Securities Gain .... 13,711 10,648 12,954 9,614 9,907 6,829

-------- -------- -------- -------- -------- --------

Total Earnings - all entities$ 85,945 $ 68,632 $ 70,146 $ 56,427 $ 53,122 $ 42,817

====== ======= ====== ====== ====== ======

Blue Chip Stamps and Wesco are public companies with reporting
requirements of their own. On pages 40 to 53 of this report we have
reproduced the narrative reports of the principal executives of both
companies, in which they describe 1980 operations. We recommend a
careful reading, and suggest that you particularly note the superb job done
by Louie Vincenti and Charlie Munger in repositioning Mutual Savings and
Loan. A copy of the full annual report of either company will be mailed to
any Berkshire shareholder upon request to Mr. Robert H. Bird for Blue Chip
Stamps, 5801 South Eastern Avenue, Los Angeles, California 90040, or to
Mrs. Bette Deckard for Wesco Financial Corporation, 315 East Colorado
Boulevard, Pasadena, California 91109.

Blue Chip 及Wesco 兩家公司因為本身是公開發行公司以規定編有自己的年報,我
建議大家仔細閱讀,尤其是有關Louie Vincenti和Charlie Munger對聯合儲貸業務
所作的改造,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。

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


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


No. of Shares Cost Market

------------- ---------- ----------

(000s omitted)

434,550 (a) Affiliated Publications, Inc. ......... $ 2,821 $ 12,222

464,317 (a) Aluminum Company of America ........... 25,577 27,685

475,217 (b) Cleveland-Cliffs Iron Company ......... 12,942 15,894

1,983,812 (b) General Foods, Inc. ................... 62,507 59,889

7,200,000 (a) GEICO Corporation ..................... 47,138 105,300

2,015,000 (a) Handy & Harman ........................ 21,825 58,435

711,180 (a) Interpublic Group of Companies, Inc. .. 4,531 22,135

1,211,834 (a) Kaiser Aluminum & Chemical Corp. ...... 20,629 27,569

282,500 (a) Media General ......................... 4,545 8,334

247,039 (b) National Detroit Corporation .......... 5,930 6,299

881,500 (a) National Student Marketing ............ 5,128 5,895

391,400 (a) Ogilvy & Mather Int’l. Inc. ........... 3,709 9,981

370,088 (b) Pinkerton’s, Inc. ..................... 12,144 16,489

245,700 (b) R. J. Reynolds Industries ............. 8,702 11,228

1,250,525 (b) SAFECO Corporation .................... 32,062 45,177

151,104 (b) The Times Mirror Company .............. 4,447 6,271

1,868,600 (a) The Washington Post Company ........... 10,628 42,277

667,124 (b) E W Woolworth Company ................. 13,583 16,511

---------- ----------

$298,848 $497,591

All Other Common Stockholdings ........ 26,313 32,096

---------- ----------

Total Common Stocks ................... $325,161 $529,687

========= =========

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

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

(a) 代表全部股權由Berkshire及其子公司所持有
(b) 代表由Berkshire子公司Blue Chip與Wesco 所持有,依Berkshire持股比例換算得來

From this table, you can see that our sources of underlying earning
power are distributed far differently among industries than would
superficially seem the case. For example, our insurance subsidiaries own
approximately 3% of Kaiser Aluminum, and 1 1/4% of Alcoa. Our share of
the 1980 earnings of those companies amounts to about $13 million. (If
translated dollar for dollar into a combination of eventual market value gain
and dividends, this figure would have to be reduced by a significant, but not
precisely determinable, amount of tax; perhaps 25% would be a fair
assumption.) Thus, we have a much larger economic interest in the aluminum
business than in practically any of the operating businesses we control and
on which we report in more detail. If we maintain our holdings, our long-
term performance will be more affected by the future economics of the
aluminum industry than it will by direct operating decisions we make
concerning most companies over which we exercise managerial control.

地看個大概,譬如保險子公司約持有Kaiser Alumnium 3%和 Aloca 1.25%的股份,



Our largest non-controlled holding is 7.2 million shares of GEICO Corp.,
equal to about a 33% equity interest. Normally, an interest of this
magnitude (over 20%) would qualify as an “investee” holding and would
require us to reflect a proportionate share of GEICO’s earnings in our own.
However, we purchased our GEICO stock pursuant to special orders of the
District of Columbia and New York Insurance Departments, which required
that the right to vote the stock be placed with an independent party. Absent
the vote, our 33% interest does not qualify for investee treatment. (Pinkerton’s is a similar situation.)


Of course, whether or not the undistributed earnings of GEICO are
picked up annually in our operating earnings figure has nothing to do with
their economic value to us, or to you as owners of Berkshire. The value of
these retained earnings will be determined by the skill with which they are
put to use by GEICO management.


On this score, we simply couldn’t feel better. GEICO represents the
best of all investment worlds - the coupling of a very important and very hard
to duplicate business advantage with an extraordinary management whose
skills in operations are matched by skills in capital allocation.


As you can see, our holdings cost us $47 million, with about half of this
amount invested in 1976 and most of the remainder invested in 1980. At
the present dividend rate, our reported earnings from GEICO amount to a
little over $3 million annually. But we estimate our share of its earning
power is on the order of $20 million annually. Thus, undistributed earnings
applicable to this holding alone may amount to 40% of total reported
operating earnings of Berkshire.

次投入,依實際配息情況,我們每年約從GEIGO 認列300萬元的利益,但實際上每

We should emphasize that we feel as comfortable with GEICO
management retaining an estimated $17 million of earnings applicable to our
ownership as we would if that sum were in our own hands. In just the last
two years GEICO, through repurchases of its own stock, has reduced the
share equivalents it has outstanding from 34.2 million to 21.6 million,
dramatically enhancing the interests of shareholders in a business that
simply can’t be replicated. The owners could not have been better served.

留起來未予分配的作法,因為在此同時,GEIGO 於近兩年內陸續買回自家股票,使得

We have written in past reports about the disappointments that usually
result from purchase and operation of “turnaround” businesses. Literally
hundreds of turnaround possibilities in dozens of industries have been
described to us over the years and, either as participants or as observers, we
have tracked performance against expectations. Our conclusion is that,
with few exceptions, when a management with a reputation for brilliance
tackles a business with a reputation for poor fundamental economics, it is
the reputation of the business that remains intact.


GEICO may appear to be an exception, having been turned around from
the very edge of bankruptcy in 1976. It certainly is true that managerial
brilliance was needed for its resuscitation, and that Jack Byrne, upon arrival in
that year, supplied that ingredient in abundance.

GEIGO或許是一個例外,自1976年幾乎破產的邊緣東山再起,從經營階層Jack Byrne

But it also is true that the fundamental business advantage that GEICO
had enjoyed - an advantage that previously had produced staggering success
- was still intact within the company, although submerged in a sea of
financial and operating troubles.


GEICO was designed to be the low-cost operation in an enormous
marketplace (auto insurance) populated largely by companies whose
marketing structures restricted adaptation. Run as designed, it could offer
unusual value to its customers while earning unusual returns for itself. For
decades it had been run in just this manner. Its troubles in the mid-70s
were not produced by any diminution or disappearance of this essential
economic advantage.


GEICO’s problems at that time put it in a position analogous to that of
American Express in 1964 following the salad oil scandal. Both were one-
of-a-kind companies, temporarily reeling from the effects of a fiscal blow
that did not destroy their exceptional underlying economics. The GEICO
and American Express situations, extraordinary business franchises with a
localized excisable cancer (needing, to be sure, a skilled surgeon), should be
distinguished from the true “turnaround” situation in which the managers
expect - and need - to pull off a corporate Pygmalion.


Whatever the appellation, we are delighted with our GEICO holding
which, as noted, cost us $47 million. To buy a similar $20 million of earning
power in a business with first-class economic characteristics and bright
prospects would cost a minimum of $200 million (much more in some
industries) if it had to be accomplished through negotiated purchase of an
entire company. A 100% interest of that kind gives the owner the options of
leveraging the purchase, changing managements, directing cash flow, and
selling the business. It may also provide some excitement around corporate
headquarters (less frequently mentioned).


We find it perfectly satisfying that the nature of our insurance business
dictates we buy many minority portions of already well-run businesses (at
prices far below our share of the total value of the entire business) that do
not need management change, re-direction of cash flow, or sale. There
aren’t many Jack Byrnes in the managerial world, or GEICOs in the business
world. What could be better than buying into a partnership with both of

們從來就不會感到任何不妥,在企業經營的世界裡,Jack Byrnes或GEICO都算是少

Insurance Industry Conditions


The insurance industry’s underwriting picture continues to unfold about
as we anticipated, with the combined ratio (see definition on page 37) rising
from 100.6 in 1979 to an estimated 103.5 in 1980. It is virtually certain that
this trend will continue and that industry underwriting losses will mount,
significantly and progressively, in 1981 and 1982. To understand why, we
recommend that you read the excellent analysis of property-casualty
competitive dynamics done by Barbara Stewart of Chubb Corp. in an October
1980 paper. (Chubb’s annual report consistently presents the most
insightful, candid and well-written discussion of industry conditions; you
should get on the company’s mailing list.) Mrs. Stewart’s analysis may not be
cheerful, but we think it is very likely to be accurate.

1979年的100.6 升高到1980年估計的103.5,可預期的是1981到1982年這個

And, unfortunately, a largely unreported but particularly pernicious
problem may well prolong and intensify the coming industry agony. It is not
only likely to keep many insurers scrambling for business when underwriting
losses hit record levels - it is likely to cause them at such a time to redouble
their efforts.


This problem arises from the decline in bond prices and the insurance
accounting convention that allows companies to carry bonds at amortized
cost, regardless of market value. Many insurers own long-term bonds that,
at amortized cost, amount to two to three times net worth. If the level is
three times, of course, a one-third shrink from cost in bond prices - if it were
to be recognized on the books - would wipe out net worth. And shrink they
have. Some of the largest and best known property-casualty companies
currently find themselves with nominal, or even negative, net worth when
bond holdings are valued at market. Of course their bonds could rise in
price, thereby partially, or conceivably even fully, restoring the integrity of
stated net worth. Or they could fall further. (We believe that short-term
forecasts of stock or bond prices are useless. The forecasts may tell you a
great deal about the forecaster; they tell you nothing about the future.)


It might strike some as strange that an insurance company’s survival is
threatened when its stock portfolio falls sufficiently in price to reduce net
worth significantly, but that an even greater decline in bond prices produces
no reaction at all. The industry would respond by pointing out that, no
matter what the current price, the bonds will be paid in full at maturity,
thereby eventually eliminating any interim price decline. It may take twenty,
thirty, or even forty years, this argument says, but, as long as the bonds don’t
have to be sold, in the end they’ll all be worth face value. Of course, if they
are sold even if they are replaced with similar bonds offering better relative
value - the loss must be booked immediately. And, just as promptly,
published net worth must be adjusted downward by the amount of the loss.


Under such circumstances, a great many investment options disappear,
perhaps for decades. For example, when large underwriting losses are in
prospect, it may make excellent business logic for some insurers to shift
from tax-exempt bonds into taxable bonds. Unwillingness to recognize
major bond losses may be the sole factor that prevents such a sensible move.


But the full implications flowing from massive unrealized bond losses
are far more serious than just the immobilization of investment intellect.
For the source of funds to purchase and hold those bonds is a pool of money
derived from policyholders and claimants (with changing faces) - money
which, in effect, is temporarily on deposit with the insurer. As long as this
pool retains its size, no bonds must be sold. If the pool of funds shrinks -
which it will if the volume of business declines significantly - assets must be
sold to pay off the liabilities. And if those assets consist of bonds with big
unrealized losses, such losses will rapidly become realized, decimating net
worth in the process.


Thus, an insurance company with a bond market value shrinkage
approaching stated net worth (of which there are now many) and also faced
with inadequate rate levels that are sure to deteriorate further has two
options. One option for management is to tell the underwriters to keep
pricing according to the exposure involved - “be sure to get a dollar of
premium for every dollar of expense cost plus expectable loss cost”.

因此保險公司在面臨債券價格下跌,淨值大幅縮水 (目前確有許多業者是如此),同時

The consequences of this directive are predictable: (a) with most
business both price sensitive and renewable annually, many policies
presently on the books will be lost to competitors in rather short order; (b) as
premium volume shrinks significantly, there will be a lagged but
corresponding decrease in liabilities (unearned premiums and claims
payable); (c) assets (bonds) must be sold to match the decrease in liabilities;
and (d) the formerly unrecognized disappearance of net worth will become
partially recognized (depending upon the extent of such sales) in the
insurer’s published financial statements.

這種選擇的結果相當明確: (a)由於大部份的業務都是每年更新且對價格都相當敏感,

Variations of this depressing sequence involve a smaller penalty to
stated net worth. The reaction of some companies at (c) would be to sell
either stocks that are already carried at market values or recently purchased
bonds involving less severe losses. This ostrich-like behavior - selling the
better assets and keeping the biggest losers - while less painful in the short
term, is unlikely to be a winner in the long term.


The second option is much simpler: just keep writing business
regardless of rate levels and whopping prospective underwriting losses,
thereby maintaining the present levels of premiums, assets and liabilities -
and then pray for a better day, either for underwriting or for bond prices.
There is much criticism in the trade press of “cash flow” underwriting; i.e.,
writing business regardless of prospective underwriting losses in order to
obtain funds to invest at current high interest rates. This second option
might properly be termed “asset maintenance” underwriting - the acceptance
of terrible business just to keep the assets you now have.


Of course you know which option will be selected. And it also is clear
that as long as many large insurers feel compelled to choose that second
option, there will be no better day for underwriting. For if much of the
industry feels it must maintain premium volume levels regardless of price
adequacy, all insurers will have to come close to meeting those prices. Right
behind having financial problems yourself, the next worst plight is to have a
large group of competitors with financial problems that they can defer by a
“sell-at-any-price” policy.


We mentioned earlier that companies that were unwilling - for any of a
number of reasons, including public reaction, institutional pride, or
protection of stated net worth - to sell bonds at price levels forcing
recognition of major losses might find themselves frozen in investment
posture for a decade or longer. But, as noted, that’s only half of the
problem. Companies that have made extensive commitments to long-term
bonds may have lost, for a considerable period of time, not only many of their
investment options, but many of their underwriting options as well.


Our own position in this respect is satisfactory. We believe our net
worth, valuing bonds of all insurers at amortized cost, is the strongest
relative to premium volume among all large property-casualty stockholder-
owned groups. When bonds are valued at market, our relative strength
becomes far more dramatic. (But lest we get too puffed up, we remind
ourselves that our asset and liability maturities still are far more mismatched
than we would wish and that we, too, lost important sums in bonds because
your Chairman was talking when he should have been acting.)


Our abundant capital and investment flexibility will enable us to do
whatever we think makes the most sense during the prospective extended
period of inadequate pricing. But troubles for the industry mean troubles
for us. Our financial strength doesn’t remove us from the hostile pricing
environment now enveloping the entire property-casualty insurance
industry. It just gives us more staying power and more options.


Insurance Operations


The National Indemnity managers, led by Phil Liesche with the usual
able assistance of Roland Miller and Bill Lyons, outdid themselves in 1980.
While volume was flat, underwriting margins relative to the industry were at
an all-time high. We expect decreased volume from this operation in 1981.
But its managers will hear no complaints from corporate headquarters, nor
will employment or salaries suffer. We enormously admire the National
Indemnity underwriting discipline - embedded from origin by the founder,
Jack Ringwalt - and know that this discipline, if suspended, probably could
not be fully regained.

今年由Phil Liesche 所領導的國家產險公司在核保部門Roland以及理賠部門Bill

John Seward at Home and Auto continues to make good progress in
replacing a diminishing number of auto policies with volume from less
competitive lines, primarily small-premium general liability. Operations are
being slowly expanded, both geographically and by product line, as
warranted by underwriting results.

John Seward領導的家庭與汽車險公司則小有進展,我們將較不具競爭力的小額一般

The reinsurance business continues to reflect the excesses and
problems of the primary writers. Worse yet, it has the potential for
magnifying such excesses. Reinsurance is characterized by extreme ease of
entry, large premium payments in advance, and much-delayed loss reports
and loss payments. Initially, the morning mail brings lots of cash and few
claims. This state of affairs can produce a blissful, almost euphoric, feeling
akin to that experienced by an innocent upon receipt of his first credit card.


The magnetic lure of such cash-generating characteristics, currently
enhanced by the presence of high interest rates, is transforming the
reinsurance market into “amateur night”. Without a super catastrophe,
industry underwriting will be poor in the next few years. If we experience
such a catastrophe, there could be a bloodbath with some companies not
able to live up to contractual commitments. George Young continues to do
a first-class job for us in this business. Results, with investment income
included, have been reasonably profitable. We will retain an active
reinsurance presence but, for the foreseeable future, we expect no premium
growth from this activity.

行與客戶當初簽訂的合約,而我們George Young 在這一行的表現一向是一流的,

We continue to have serious problems in the Homestate operation.
Floyd Taylor in Kansas has done an outstanding job but our underwriting
record elsewhere is considerably below average. Our poorest performer has
been Insurance Company of Iowa, at which large losses have been sustained
annually since its founding in 1973. Late in the fall we abandoned
underwriting in that state, and have merged the company into Cornhusker
Casualty. There is potential in the homestate concept, but much work needs
to be done in order to realize it.

在Homestate家計保險業務方面,我們持續面臨重大的問題,除了Kansas 的Floyd
Taylor 外,其餘的核保表現均在同業水準之下,其中Iowa保險,自1973年成立以

Our Workers Compensation operation suffered a severe loss when Frank
DeNardo died last year at 37. Frank instinctively thought like an underwriter.
He was a superb technician and a fierce competitor; in short order he had
straightened out major problems at the California Workers Compensation
Division of National Indemnity. Dan Grossman, who originally brought
Frank to us, stepped in immediately after Frank’s death to continue that
operation, which now utilizes Redwood Fire and Casualty, another Berkshire
subsidiary, as the insuring vehicle.


Our major Workers Compensation operation, Cypress Insurance
Company, run by Milt Thornton, continues its outstanding record. Year
after year Milt, like Phil Liesche, runs an underwriting operation that far
outpaces his competition. In the industry he is admired and copied, but not

至於由Milt 所領導的Cypress 保險公司一直是我們在這項業務的主力,且表現一直
相當優異,與Phil Liesche一樣,廣為同業所仰慕與模仿,但其優秀的表現卻是同業

Overall, we look for a significant decline in insurance volume in 1981
along with a poorer underwriting result. We expect underwriting experience
somewhat superior to that of the industry but, of course, so does most of the
industry. There will be some disappointments.


Textile and Retail Operations


During the past year we have cut back the scope of our textile business.
Operations at Waumbec Mills have been terminated, reluctantly but
necessarily. Some equipment was transferred to New Bedford but most has
been sold, or will be, along with real estate. Your Chairman made a costly
mistake in not facing the realities of this situation sooner.

去年我們縮減在紡織業的營運規模,雖然不願意但卻不得不關閉Waumbec 工廠,除
了少數設備轉移至New Bedford外,其餘設備連同廠房都將處份掉,我本人由於無

At New Bedford we have reduced the number of looms operated by
about one-third, abandoning some high-volume lines in which product
differentiation was insignificant. Even assuming everything went right -
which it seldom did - these lines could not generate adequate returns related
to investment. And, over a full industry cycle, losses were the most likely

而在New Bedford 我們也淘汰了將近三分之一的織布機,保留適合少量多樣型的機

Our remaining textile operation, still sizable, has been divided into a
manufacturing and a sales division, each free to do business independent of
the other. Thus, distribution strengths and mill capabilities will not be
wedded to each other. We have more than doubled capacity in our most
profitable textile segment through a recent purchase of used 130-inch
Saurer looms. Current conditions indicate another tough year in textiles,
but with substantially less capital employed in the operation.


Ben Rosner’s record at Associated Retail Stores continues to amaze us.
In a poor retailing year, Associated’s earnings continued excellent - and
those earnings all were translated into cash. On March 7, 1981 Associated
will celebrate its 50th birthday. Ben has run the business (along with Leo
Simon, his partner from 1931 to 1966) in each of those fifty years.


Disposition of Illinois National Bank and Trust of Rockford


On December 31, 1980 we completed the exchange of 41,086 shares of
Rockford Bancorp Inc. (which owns 97.7% of Illinois National Bank) for a like
number of shares of Berkshire Hathaway Inc.

Bancorp(其持有97.7% 伊利諾國家銀行股份)的動作。

Our method of exchange allowed all Berkshire shareholders to maintain
their proportional interest in the Bank (except for me; I was permitted 80% of
my proportional share). They were thus guaranteed an ownership position
identical to that they would have attained had we followed a more
conventional spinoff approach. Twenty-four shareholders (of our
approximate 1300) chose this proportional exchange option.


We also allowed overexchanges, and thirty-nine additional
shareholders accepted this option, thereby increasing their ownership in the
Bank and decreasing their proportional ownership in Berkshire. All got the
full amount of Bancorp stock they requested, since the total shares desired
by these thirty-nine holders was just slightly less than the number left
available by the remaining 1200-plus holders of Berkshire who elected not to
part with any Berkshire shares at all. As the exchanger of last resort, I took
the small balance (3% of Bancorp’s stock). These shares, added to shares I
received from my basic exchange allotment (80% of normal), gave me a
slightly reduced proportional interest in the Bank and a slightly enlarged
proportional interest in Berkshire.

額則由本人承受(約佔Bancorp 3%的股份),在加計先前基本80%的分配額度後,最

Management of the Bank is pleased with the outcome. Bancorp will
operate as an inexpensive and uncomplicated holding company owned by 65
shareholders. And all of those shareholders will have become Bancorp
owners through a conscious affirmative decision.




In August we sold $60 million of 12 3/4% notes due August 1, 2005,
with a sinking fund to begin in 1991.


The managing underwriters, Donaldson, Lufkin & Jenrette Securities
Corporation, represented by Bill Fisher, and Chiles, Heider & Company, Inc.,
represented by Charlie Heider, did an absolutely first-class job from start to
finish of the financing.


Unlike most businesses, Berkshire did not finance because of any
specific immediate needs. Rather, we borrowed because we think that, over
a period far shorter than the life of the loan, we will have many opportunities
to put the money to good use. The most attractive opportunities may
present themselves at a time when credit is extremely expensive - or even
unavailable. At such a time we want to have plenty of financial firepower.


Our acquisition preferences run toward businesses that generate cash,
not those that consume it. As inflation intensifies, more and more
companies find that they must spend all funds they generate internally just to
maintain their existing physical volume of business. There is a certain
mirage-like quality to such operations. However attractive the earnings
numbers, we remain leery of businesses that never seem able to convert such
pretty numbers into no-strings-attached cash.


Businesses meeting our standards are not easy to find. (Each year we
read of hundreds of corporate acquisitions; only a handful would have been
of interest to us.) And logical expansion of our present operations is not easy
to implement. But we’ll continue to utilize both avenues in our attempts to
further Berkshire’s growth.


Under all circumstances we plan to operate with plenty of liquidity, with
debt that is moderate in size and properly structured, and with an abundance
of capital strength. Our return on equity is penalized somewhat by this
conservative approach, but it is the only one with which we feel comfortable.


* * * * * * * * * * * *

Gene Abegg, founder of our long-owned bank in Rockford, died on July
2, 1980 at the age of 82. As a friend, banker and citizen, he was

Gene Abegg 我們長期投資的Rockford銀行創辦人,於七月二日逝世,享年八十二

You learn a great deal about a person when you purchase a business
from him and he then stays on to run it as an employee rather than as an
owner. Before the purchase the seller knows the business intimately,
whereas you start from scratch. The seller has dozens of opportunities to
mislead the buyer - through omissions, ambiguities, and misdirection.
After the check has changed hands, subtle (and not so subtle) changes of
attitude can occur and implicit understandings can evaporate. As in the
courtship-marriage sequence, disappointments are not infrequent.


From the time we first met, Gene shot straight 100% of the time - the
only behavior pattern he had within him. At the outset of negotiations, he
laid all negative factors face up on the table; on the other hand, for years
after the transaction was completed he would tell me periodically of some
previously undiscussed items of value that had come with our purchase.

而當我們第一次碰面,Gene 百分之百坦誠,就像是其為人一般,談判的開始,他把

Though he was already 71 years of age when he sold us the Bank, Gene
subsequently worked harder for us than he had for himself. He never
delayed reporting a problem for a minute, but problems were few with Gene.
What else would you expect from a man who, at the time of the bank holiday
in 1933, had enough cash on the premises to pay all depositors in full?
Gene never forgot he was handling other people’s money. Though this
fiduciary attitude was always dominant, his superb managerial skills enabled
the Bank to regularly achieve the top position nationally in profitability.

而就算是當他把銀行賣給我們時已高齡71歲,Gene 仍然興勤工作更甚於以往,雖

Gene was in charge of the Illinois National for close to fifty years -
almost one-quarter of the lifetime of our country. George Mead, a wealthy
industrialist, brought him in from Chicago to open a new bank after a
number of other banks in Rockford had failed. Mr. Mead put up the money
and Gene ran the show. His talent for leadership soon put its stamp on
virtually every major civic activity in Rockford.

工業鉅子George Mead從芝加哥把他找來Rockford開設銀行,Mead先生負責出

Dozens of Rockford citizens have told me over the years of help Gene
extended to them. In some cases this help was financial; in all cases it
involved much wisdom, empathy and friendship. He always offered the
same to me. Because of our respective ages and positions I was sometimes
the junior partner, sometimes the senior. Whichever the relationship, it
always was a special one, and I miss it.

許多Rockford的居民告訴我這些年來Gene 給予他們很多幫助,有時是金錢上的,

Warren E. Buffett
Chairman of the Board
February 27, 1981



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