1977年巴菲特致股东信英文原版

1977年巴菲特致股东信英文原版：

To the Stockholders of Berkshire Hathaway Inc.:

     Operating earnings in 1977 of $21,904,000, or $22.54 per 

share, were moderately better than anticipated a year ago.  Of 

these earnings, $1.43 per share resulted from substantial 

realized capital gains by Blue Chip Stamps which, to the extent 

of our proportional interest in that company, are included in our 

operating earnings figure.  Capital gains or losses realized 

directly by Berkshire Hathaway Inc. or its insurance subsidiaries 

are not included in our calculation of operating earnings.  While 

too much attention should not be paid to the figure for any 

single year, over the longer term the record regarding aggregate 

capital gains or losses obviously is of significance.

     Textile operations came in well below forecast, while the 

results of the Illinois National Bank as well as the operating 

earnings attributable to our equity interest in Blue Chip Stamps 

were about as anticipated.  However, insurance operations, led 

again by the truly outstanding results of Phil Liesche’s 

managerial group at National Indemnity Company, were even better 

than our optimistic expectations.

     Most companies define “record” earnings as a new high in 

earnings per share.  Since businesses customarily add from year 

to year to their equity base, we find nothing particularly 

noteworthy in a management performance combining, say, a 10% 

increase in equity capital and a 5% increase in earnings per 

share.  After all, even a totally dormant savings account will 

produce steadily rising interest earnings each year because of 

compounding.

     Except for special cases (for example, companies with 

unusual debt-equity ratios or those with important assets carried 

at unrealistic balance sheet values), we believe a more 

appropriate measure of managerial economic performance to be 

return on equity capital.  In 1977 our operating earnings on 

beginning equity capital amounted to 19%, slightly better than 

last year and above both our own long-term average and that of 

American industry in aggregate.  But, while our operating 

earnings per share were up 37% from the year before, our 

beginning capital was up 24%, making the gain in earnings per 

share considerably less impressive than it might appear at first 

glance.

     We expect difficulty in matching our 1977 rate of return 

during the forthcoming year.  Beginning equity capital is up 23% 

from a year ago, and we expect the trend of insurance 

underwriting profit margins to turn down well before the end of 

the year.  Nevertheless, we expect a reasonably good year and our 

present estimate, subject to the usual caveats regarding the 

frailties of forecasts, is that operating earnings will improve 

somewhat on a per share basis during 1978.

Textile Operations

     The textile business again had a very poor year in 1977.  We 

have mistakenly predicted better results in each of the last two 

years.  This may say something about our forecasting abilities, 

the nature of the textile industry, or both.  Despite strenuous 

efforts, problems in marketing and manufacturing have persisted.  

Many difficulties experienced in the marketing area are due 

primarily to industry conditions, but some of the problems have 

been of our own making.

     A few shareholders have questioned the wisdom of remaining 

in the textile business which, over the longer term, is unlikely 

to produce returns on capital comparable to those available in 

many other businesses.  Our reasons are several: (1) Our mills in 

both New Bedford and Manchester are among the largest employers 

in each town, utilizing a labor force of high average age 

possessing relatively non-transferable skills.  Our workers and 

unions have exhibited unusual understanding and effort in 

cooperating with management to achieve a cost structure and 

product mix which might allow us to maintain a viable operation. 

(2) Management also has been energetic and straightforward in its 

approach to our textile problems.  In particular, Ken Chace’s 

efforts after the change in corporate control took place in 1965 

generated capital from the textile division needed to finance the 

acquisition and expansion of our profitable insurance operation.  

(3) With hard work and some imagination regarding manufacturing 

and marketing configurations, it seems reasonable that at least 

modest profits in the textile division can be achieved in the 

future.

Insurance Underwriting

     Our insurance operation continued to grow significantly in 

1977.  It was early in 1967 that we made our entry into this 

industry through the purchase of National Indemnity Company and 

National Fire and Marine Insurance Company (sister companies) for 

approximately $8.6 million.  In that year their premium volume 

amounted to $22 million.  In 1977 our aggregate insurance premium 

volume was $151 million.  No additional shares of Berkshire 

Hathaway stock have been issued to achieve any of this growth.

     Rather, this almost 600% increase has been achieved through 

large gains in National Indemnity’s traditional liability areas 

plus the starting of new companies (Cornhusker Casualty Company 

in 1970, Lakeland Fire and Casualty Company in 1971, Texas United 

Insurance Company in 1972, The Insurance Company of Iowa in 1973, 

and Kansas Fire and Casualty Company in late 1977), the purchase 

for cash of other insurance companies (Home and Automobile 

Insurance Company in 1971, Kerkling Reinsurance Corporation, now 

named Central Fire and Casualty Company, in 1976, and Cypress 

Insurance Company at yearend 1977), and finally through the 

marketing of additional products, most significantly reinsurance, 

within the National Indemnity Company corporate structure.

     In aggregate, the insurance business has worked out very 

well.  But it hasn’t been a one-way street.  Some major mistakes 

have been made during the decade, both in products and personnel.  

We experienced significant problems from (1) a surety operation 

initiated in 1969, (2) the 1973 expansion of Home and 

Automobile’s urban auto marketing into the Miami, Florida area, 

(3) a still unresolved aviation “fronting” arrangement, and (4) 

our Worker’s Compensation operation in California, which we 

believe retains an interesting potential upon completion of a 

reorganization now in progress.  It is comforting to be in a 

business where some mistakes can be made and yet a quite 

satisfactory overall performance can be achieved.  In a sense, 

this is the opposite case from our textile business where even 

very good management probably can average only modest results.  

One of the lessons your management has learned - and, 

unfortunately, sometimes re-learned - is the importance of being 

in businesses where tailwinds prevail rather than headwinds.

     In 1977 the winds in insurance underwriting were squarely 

behind us.  Very large rate increases were effected throughout 

the industry in 1976 to offset the disastrous underwriting 

results of 1974 and 1975.  But, because insurance policies 

typically are written for one-year periods, with pricing mistakes 

capable of correction only upon renewal, it was 1977 before the 

full impact was felt upon earnings of those earlier rate 

increases.

     The pendulum now is beginning to swing the other way.  We 

estimate that costs involved in the insurance areas in which we 

operate rise at close to 1% per month.  This is due to continuous 

monetary inflation affecting the cost of repairing humans and 

property, as well as “social inflation”, a broadening definition 

by society and juries of what is covered by insurance policies.  

Unless rates rise at a comparable 1% per month, underwriting 

profits must shrink.  Recently the pace of rate increases has 

slowed dramatically, and it is our expectation that underwriting 

margins generally will be declining by the second half of the 

year.

     We must again give credit to Phil Liesche, greatly assisted 

by Roland Miller in Underwriting and Bill Lyons in Claims, for an 

extraordinary underwriting achievement in National Indemnity’s 

traditional auto and general liability business during 1977.  

Large volume gains have been accompanied by excellent 

underwriting margins following contraction or withdrawal by many 

competitors in the wake of the 1974-75 crisis period.  These 

conditions will reverse before long.  In the meantime, National 

Indemnity’s underwriting profitability has increased dramatically 

and, in addition, large sums have been made available for 

investment.  As markets loosen and rates become inadequate, we 

again will face the challenge of philosophically accepting 

reduced volume.  Unusual managerial discipline will be required, 

as it runs counter to normal institutional behavior to let the 

other fellow take away business - even at foolish prices.

     Our reinsurance department, managed by George Young, 

improved its underwriting performance during 1977.  Although the 

combined ratio (see definition on page 12) of 107.1 was 

unsatisfactory, its trend was downward throughout the year.  In 

addition, reinsurance generates unusually high funds for 

investment as a percentage of premium volume.

     At Home and Auto, John Seward continued to make progress on 

all fronts.  John was a battlefield promotion several years ago 

when Home and Auto’s underwriting was awash in red ink and the 

company faced possible extinction.  Under his management it 

currently is sound, profitable, and growing.

     John Ringwalt’s homestate operation now consists of five 

companies, with Kansas Fire and Casualty Company becoming 

operational late in 1977 under the direction of Floyd Taylor.  

The homestate companies had net premium volume of $23 million, up 

from $5.5 million just three years ago.  All four companies that 

operated throughout the year achieved combined ratios below 100, 

with Cornhusker Casualty Company, at 93.8, the leader.  In 

addition to actively supervising the other four homestate 

operations, John Ringwalt manages the operations of Cornhusker 

which has recorded combined ratios below 100 in six of its seven 

full years of existence and, from a standing start in 1970, has 

grown to be one of the leading insurance companies operating in 

Nebraska utilizing the conventional independent agency system.  

Lakeland Fire and Casualty Company, managed by Jim Stodolka, was 

the winner of the Chairman’s Cup in 1977 for achieving the lowest 

loss ratio among the homestate companies.  All in all, the 

homestate operation continues to make excellent progress.

     The newest addition to our insurance group is Cypress 

Insurance Company of South Pasadena, California.  This Worker’s 

Compensation insurer was purchased for cash in the final days of 

1977 and, therefore, its approximate $12.5 million of volume for 

that year was not included in our results.  Cypress and National 

Indemnity’s present California Worker’s Compensation operation 

will not be combined, but will operate independently utilizing 

somewhat different marketing strategies.  Milt Thornton, 

President of Cypress since 1968, runs a first-class operation for 

policyholders, agents, employees and owners alike.  We look 

forward to working with him.

     Insurance companies offer standardized policies which can be 

copied by anyone.  Their only products are promises.  It is not 

difficult to be licensed, and rates are an open book.  There are 

no important advantages from trademarks, patents, location, 

corporate longevity, raw material sources, etc., and very little 

consumer differentiation to produce insulation from competition.  

It is commonplace, in corporate annual reports, to stress the 

difference that people make.  Sometimes this is true and 

sometimes it isn’t.  But there is no question that the nature of 

the insurance business magnifies the effect which individual 

managers have on company performance.  We are very fortunate to 

have the group of managers that are associated with us.

Insurance Investments

     During the past two years insurance investments at cost 

(excluding the investment in our affiliate, Blue Chip Stamps) 

have grown from $134.6 million to $252.8 million.  Growth in 

insurance reserves, produced by our large gain in premium volume, 

plus retained earnings, have accounted for this increase in 

marketable securities.  In turn, net investment income of the 

Insurance Group has improved from $8.4 million pre-tax in 1975 to 

$12.3 million pre-tax in 1977.

     In addition to this income from dividends and interest, we 

realized capital gains of $6.9 million before tax, about one-

quarter from bonds and the balance from stocks.  Our unrealized 

gain in stocks at yearend 1977 was approximately $74 million but 

this figure, like any other figure of a single date (we had an 

unrealized loss of $17 million at the end of 1974), should not be 

taken too seriously.  Most of our large stock positions are going 

to be held for many years and the scorecard on our investment 

decisions will be provided by business results over that period, 

and not by prices on any given day.  Just as it would be foolish 

to focus unduly on short-term prospects when acquiring an entire 

company, we think it equally unsound to become mesmerized by 

prospective near term earnings or recent trends in earnings when 

purchasing small pieces of a company; i.e., marketable common 

stocks.

     A little digression illustrating this point may be 

interesting.  Berkshire Fine Spinning Associates and Hathaway 

Manufacturing were merged in 1955 to form Berkshire Hathaway Inc.  

In 1948, on a pro forma combined basis, they had earnings after 

tax of almost $18 million and employed 10,000 people at a dozen 

large mills throughout New England.  In the business world of 

that period they were an economic powerhouse.  For example, in 

that same year earnings of IBM were $28 million (now $2.7 

billion), Safeway Stores, $10 million, Minnesota Mining, $13 

million, and Time, Inc., $9 million.  But, in the decade 

following the 1955 merger aggregate sales of $595 million 

produced an aggregate loss for Berkshire Hathaway of $10 million.  

By 1964 the operation had been reduced to two mills and net worth 

had shrunk to $22 million, from $53 million at the time of the 

merger.  So much for single year snapshots as adequate portrayals 

of a business.

     Equity holdings of our insurance companies with a market 

value of over $5 million on December 31, 1977 were as follows:

No. of Shares  Company                                     Cost      Market

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

                                                           (000’s omitted)

    220,000    Capital Cities Communications, Inc. ..... $ 10,909   $ 13,228  

  1,986,953    Government Employees Insurance 

                  Company Convertible Preferred ........   19,417     33,033  

  1,294,308    Government Employees Insurance 

                  Company Common Stock .................    4,116     10,516

    592,650    The Interpublic Group of Companies, Inc.     4,531     17,187  

    324,580    Kaiser Aluminum& Chemical Corporation ...   11,218      9,981

  1,305,800    Kaiser Industries, Inc. .................      778      6,039

    226,900    Knight-Ridder Newspapers, Inc. ..........    7,534      8,736

    170,800    Ogilvy & Mather International, Inc. .....    2,762      6,960

    934,300    The Washington Post Company Class B .....   10,628     33,401

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

               Total ................................... $ 71,893   $139,081

               All Other Holdings ......................   34,996     41,992

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

               Total Equities .......................... $106,889   $181,073

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

     We select our marketable equity securities in much the same 

way we would evaluate a business for acquisition in its entirety.  

We want the business to be (1) one that we can understand, (2) 

with favorable long-term prospects, (3) operated by honest and 

competent people, and (4) available at a very attractive price.  

We ordinarily make no attempt to buy equities for anticipated 

favorable stock price behavior in the short term.  In fact, if 

their business experience continues to satisfy us, we welcome 

lower market prices of stocks we own as an opportunity to acquire 

even more of a good thing at a better price.

     Our experience has been that pro-rata portions of truly 

outstanding businesses sometimes sell in the securities markets 

at very large discounts from the prices they would command in 

negotiated transactions involving entire companies.  

Consequently, bargains in business ownership, which simply are 

not available directly through corporate acquisition, can be 

obtained indirectly through stock ownership.  When prices are 

appropriate, we are willing to take very large positions in 

selected companies, not with any intention of taking control and 

not foreseeing sell-out or merger, but with the expectation that 

excellent business results by corporations will translate over 

the long term into correspondingly excellent market value and 

dividend results for owners, minority as well as majority.

     Such investments initially may have negligible impact on our 

operating earnings.  For example, we invested $10.9 million in 

Capital Cities Communications during 1977.  Earnings attributable 

to the shares we purchased totaled about $1.3 million last year.  

But only the cash dividend, which currently provides $40,000 

annually, is reflected in our operating earnings figure.

     Capital Cities possesses both extraordinary properties and 

extraordinary management.  And these management skills extend 

equally to operations and employment of corporate capital.  To 

purchase, directly, properties such as Capital Cities owns would 

cost in the area of twice our cost of purchase via the stock 

market, and direct ownership would offer no important advantages 

to us.  While control would give us the opportunity - and the 

responsibility - to manage operations and corporate resources, we 

would not be able to provide management in either of those 

respects equal to that now in place.  In effect, we can obtain a 

better management result through non-control than control.  This 

is an unorthodox view, but one we believe to be sound.

Banking

     In 1977 the Illinois National Bank continued to achieve a 

rate of earnings on assets about three times that of most large 

banks.  As usual, this record was achieved while the bank paid 

maximum rates to savers and maintained an asset position 

combining low risk and exceptional liquidity.  Gene Abegg formed 

the bank in 1931 with $250,000.  In its first full year of 

operation, earnings amounted to $8,782.  Since that time, no new 

capital has been contributed to the bank; on the contrary, since 

our purchase in 1969, dividends of $20 million have been paid.  

Earnings in 1977 amounted to $3.6 million, more than achieved by 

many banks two or three times its size.

     Late last year Gene, now 80 and still running a banking 

operation without peer, asked that a successor be brought in.  

Accordingly, Peter Jeffrey, formerly President and Chief 

Executive Officer of American National Bank of Omaha, has joined 

the Illinois National Bank effective March 1st as President and 

Chief Executive Officer.

     Gene continues in good health as Chairman.  We expect a 

continued successful operation at Rockford’s leading bank.

Blue Chip Stamps

     We again increased our equity interest in Blue Chip Stamps, 

and owned approximately 36 1/2% at the end of 1977.  Blue Chip 

had a fine year, earning approximately $12.9 million from 

operations and, in addition, had realized securities gains of 

$4.1 million.

     Both Wesco Financial Corp., an 80% owned subsidiary of Blue 

Chip Stamps, managed by Louis Vincenti, and See’s Candies, a 99% 

owned subsidiary, managed by Chuck Huggins, made good progress in 

1977.  Since See’s was purchased by Blue Chip Stamps at the 

beginning of 1972, pre-tax operating earnings have grown from 

$4.2 million to $12.6 million with little additional capital 

investment.  See’s achieved this record while operating in an 

industry experiencing practically no unit growth.  Shareholders 

of Berkshire Hathaway Inc. may obtain the annual report of Blue 

Chip Stamps by requesting it from Mr. Robert H. Bird, Blue Chip 

Stamps, 5801 South Eastern Avenue, Los Angeles, California 90040.

                                    Warren E. Buffett, Chairman

March 14,1978