BUFFETT PARTNERSHIP. LTD.610 KIEWIT PLAZAOMAHA, NEBRASKA 68131TELEPHONE 042-4110
February 25th, 1970
To My Partners:
This letter will attempt to provide a very elementary education regarding tax-exempt bonds with emphasis on the types and maturities of bonds which we expect to help partners in purchasing next month. If you expect to use our help in the purchase of bonds, it is important that you carefully read (and, if necessary , reread) this letter as it will serve as background for the specific purchases I suggest. If you disagree with me as to conclusions regarding types of bonds or maturities (and you would have been right and I would have been wrong if you had disagreed with me on the latter point either one or two years ago), you may well be correct, but we cannot be of assistance to you in the purchase of bonds outside our area. We will simply have our hands full concentrating in our recommended area, so will be unavailable to assist or advise in the purchase of convertible bonds, corporate bonds or short term issues.
I have tried to boil this letter down as much as possible. Some of it will be a little weighty - some a little oversimplified. I apologize for the shortcomings in advance. I have a feeling I am trying to put all the meat of a 100 page book in 10 pages - and have it read like the funny papers.
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I am sure you understand that our aid in the purchase of bonds will involve no future assistance regarding either these specific bonds or general investment decisions. I want to be available at this time to be of help because of the unusual amount of cash you have received in one distribution from us. I have no desire to be in the investment counseling business, directly or indirectly, and will not be available for discussion of financial matters after March 31st.
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The mechanics of Tax-Free Bonds.
For those who wish our help, we will arrange the purchase of bonds directly from municipal bond dealers throughout the country and have them confirm sale of the bonds directly to you. The confirmation should be saved as a basic document for tax purposes. You should not send a check to the bond dealer since he will deliver the bonds to your bank, along with a draft which the bank will pay by charging your account with them. In the case of bonds purchased in the secondary market (issues already outstanding), this settlement date will usually be about a week after confirmation date whereas, on new issues, the settlement date may be as much as a month later. The settlement date is shown plainly on the confirmation ticket (in the case of new issues this will be the second and final ticket rather than the preliminary "when issued" ticket), and you should have the funds at your bank ready to pay for the bonds on the settlement date. If you presently own Treasury Bills, they can be sold on a couple of days notice by your bank upon your instructions, so you should experience no problems in having the money available on time. Interest begins to accrue to you on the settlement date, even if the bond dealer is late in getting them delivered to your bank.
Bonds will be delivered in negotiable form (so-called "bearer" form which makes them like currency) with coupons attached. Usually the bonds are in \$5,000 denominations and frequently they can be exchanged for registered bonds (sometimes at considerable expense and sometimes free-it depends upon the terms). Bonds in registered form are nonnegotiable without assignment by you, since you are the registered owner on the Transfer Agent's books. Bonds trade almost exclusively on a bearer basis and it is virtually impossible to sell registered bonds without converting them back into bearer form. Thus, unless you are going to own great physical quantities of bonds. I recommend keeping bonds in bearer form. This means keeping them in a very safe place and clipping the coupons every six months. Such coupons, when clipped, can be deposited in your bank account just like checks. If you have \$250,000 in bonds, this probably means about fifty separate pieces of paper (\$5,000 denominations) and perhaps six or eight trips a year to the safe deposit section to cut and deposit coupons.
It is also possible to open a custody account with a bank where, for a fairly nominal cost, they will keep the bonds, collect the interest and preserve your records for you. For example, a bank will probably perform the custodial service for you for about \$200 a year on a \$250,000 portfolio. If you are interested in a custodial account, you should talk to a Trust Officer at your commercial bank as to the nature of their services and cost. Otherwise, you should have a safe deposit box.
Taxation
The interest received upon the deposit of coupons from tax-free bonds is, of course, free from Federal Income Taxes. This means if you are at a 30% top Federal Income Tax bracket, a 6% return from tax-free bonds is equivalent to about 8-1/2% from taxable bonds. Thus, for most of our partners, excluding minors or some retired people, tax-free bonds will be more attractive than taxable bonds. For people with little or no income from wages or dividends, but with substantial capital, it is possible that a combination of taxable bonds (to bring taxable income up to about the 25% or 30% bracket) plus tax-free bonds will bring the highest total after-tax income. Where appropriate, we will work with you to achieve such a balance.
The situation in respect to State Income Taxes is more complicated. In Nebraska. where the State Income Tax is computed as a percentage of the Federal Income Tax, the effect is that there is no state tax on interest from taxfree bonds. My understanding of both the New York and California law is that tax-free bonds of entities within the home state are not subject to State Income Tax, but tax-free bonds from other states are subject to the local State Income Tax. I also believe that the New York City Income Tax exempts tax-free bonds of entities based within the State of New York, but taxes those from other states. I am no expert on state income taxes and make no attempt to post myself on changes taking place within the various states or cities. Therefore, I defer to your local tax advisor, but simply mention these few general impressions so that you will be alert to the existence of a potential problem. In Nebraska there is no need to have any local considerations enter into the after-tax calculation. Where out-of-state issues are subject to local taxation, the effective cost of your State or Municipal Income Tax is reduced by the benefit received from deducting it on your Federal Income Tax return. This, of course, varies with the individual. Additionally, in some states there are various taxes on intangible property which may apply to all tax-free bonds or just those of out-of-state entities. There are none of these in Nebraska, but I cannot advise on the other states.
When bonds are bought at a discount from par and later are sold or mature (come due and get paid), the difference between the proceeds and cost is subject to capital gain or loss treatment. (There are minor exceptions to this statement as, unfortunately, there are to most general statements on investments and taxes but they will be pointed out to you should they affect any securities we recommend). This reduces the net after-tax yield by a factor involving the general rate of future capital gains taxes and the specific future tax position of the individual. Later on, we will discuss the impact of such capital gains taxes in calculating the relative attractiveness of discount bonds versus "full coupon" bonds.
Finally, one most important point. Although the law is not completely clear, you should probably not contemplate owning tax-free bonds if you have, or expect to have, general purpose bank or other indebtedness.
The law excludes the deductibility of interest on loans incurred or continued to purchase or carry tax-free bonds, and the interpretation of this statute will probably tend to be broadened as the years pass. For example, my impression is that you have no problem if you have a mortgage against real property (unless the debt was incurred in order to acquire municipal bonds) in deducting the mortgage interest on your Federal Tax return, even though you own tax-free bonds at the same time. However, I believe that if you have a general bank loan, even though the proceeds were directly used to purchase stocks, a handball court, etc. and the tax-free bonds are not used for security for the loan, you are asking for trouble if you deduct the interest and, at the same time, are the owner of tax-free bonds. Therefore, I would pay off bank loans before owning tax-free bonds, but I leave detailed examination of this question to you and your tax advisor. I merely mention it to make you aware of the potential problem.
Marketability
Tax-free bonds are materially different from common stocks or corporate bonds in that there are literally hundreds of thousands of issues, with the great majority having very few holders. This substantially inhibits the development of close, active markets. Whenever the City of New York or Philadelphia wants to raise money it sells perhaps twenty, thirty or forty non-identical securities, since it will offer an issue with that many different maturities. A 6% bond of New York coming due in 1980 is a different animal from a 6% bond of New York coming due in 1981. One cannot be exchanged for the other, and a seller has to find a buyer for the specific item he holds. When you consider that New York may offer bonds several times a year, it is easy to see why just this one city may have somewhere in the neighborhood of 1,000 issues outstanding. Grand Island, Nebraska may have 75 issues outstanding. The average amount of each issue might be \$100,000 and the average number of holders may be six or eight per issue. Thus, it is absolutely impossible to have quoted markets at all times for all issues and spreads between bids and offers may be very wide. You can't set forth in the morning to buy a specific Grand Island issue of your choosing. It may not be offered at any price, anywhere, and if you do find one seller, there is no reason why he has to be realistic compared to other offerings of similar quality. On the other hand, there are single issues such as those of the Ohio Turnpike, Illinois Turnpike, etc. that amount to \$200 million or more and have thousands of bondholders owning a single entirely homogeneous and interchangeable issue. Obviously, here you get a high degree of marketability.
My impression is that marketability is generally a function of the following three items, in descending order of importance: (1) the size of the particular issue; (2) the size of the issuer (a \$100,000 issue of the State of Ohio will be more marketable than a \$100,000 issue of Podunk, Ohio); and (3) the quality of the issuer. By far the most sales effort goes into the selling of new issues of bonds. An average of over \$200 million per week of new issues comes up for sale, and the machinery of bond distribution is geared to get them sold, large or small. In my opinion, there is frequently insufficient differential in yield at time of issue for the marketability differences that will exist once the initial sales push is terminated. We have frequently run into markets in bonds where the spread between bid and asked prices may get to 15%. There is no need to buy bonds with the potential for such grotesque markets (although the profit spread to the dealer who originally offers them is frequently wider than on more marketable bonds) and we will not be buying them for you. The bonds we expect to buy will usually tend to have spreads (reflecting the difference between what you would pay net for such bonds on purchase and receive net on sale at the same point in time) of from 2% to 5%. Such a spread would be devastating if you attempted to trade in such bonds, but I don't believe it should be a deterrent for a long-term investor. The real necessity is to stay away from bonds of very limited marketability - which frequently are the type local bond dealers have the greatest monetary incentive to push.
Specific Areas of Purchase
We will probably concentrate our purchases in the following general areas:
(1) Large revenue-producing public entities such as toll roads, electric power districts, water districts, etc.
Many of these issues possess high marketability, are subject to quantitative analysis, and sometimes have favorable sinking fund or other factors which tend not to receive full valuation in the market place.
(2) Industrial Development Authority bonds which arise when a public entity holds title to property leased to a private corporation. For example, Lorain, Ohio holds title to an \$80 million project for U.S. Steel Corp. The Development Authority Board issued bonds to pay for the project and has executed a net and absolute lease with U.S. Steel to cover the bond payments. The credit of the city or state is not behind the bonds and they are only as good as the company that is on the lease. Many top-grade corporations stand behind an aggregate of several billion dollars of these obligations, although new ones are being issued only in small amounts (\$5 million per project or less) because of changes in the tax laws. For a period of time there was a very substantial prejudice against such issues, causing them to sell at yields considerably higher than those commensurate with their inherent credit standing. This prejudice has tended to diminish, reducing the premium yields available, but I still consider it a most attractive field. Our insurance company owns a majority of its bonds in this category.
(3) Public Housing Authority Issues for those of you who wish the very highest grade of tax-free bonds. In effect, these bonds bear the guarantee of the U.S. Government, so they are all rated AAA. In states where local taxes put a premium on buying in-state issues, and I can’t fill your needs from (1) and (2) , my tendency would be to put you into Housing Authority issues rather than try to select from among credits that I don't understand. If you direct me to buy obligations of your home state, you should expect substantial quantities of Housing Authority issues. There is no need to diversify among such issues, as they all represent the top credit available.
(4) State obligations of a direct or indirect nature.
You will notice I am not buying issues of large cities. I don't have the faintest idea how to analyze a New York City, Chicago, Philadelphia, etc. (a friend mentioned the other day when Newark was trying to sell bonds at a very fancy rate that the Mafia was getting very upset because Newark was giving them a bad name). Your analysis of a New York City - and I admit it is hard to imagine them not paying their bills for any extended period of time - would be as good as mine. My approach to bonds is pretty much like my approach to stocks. If I can't understand something, I tend to forget it. Passing an opportunity which I don't understand - even if someone else is perceptive enough to analyze it and get paid well for doing it - doesn't bother me. All I want to be sure of is that I get paid well for the things I do feel capable of handling - and that I am right when I make affirmative decisions.
We will probably tend to purchase somewhere between five and ten issues for most of you. However, if you wish to limit me to your home state, it may be fewer issues - and perhaps those will only be Housing Authorities. We will try not to buy in smaller than \$25,000 pieces and will prefer larger amounts where appropriate. Smaller lots of bonds are usually penalized upon resale, sometimes substantially. The bond salesman doesn't usually explain this to you when you buy the \$10,000 of bonds from him, but it gets explained when you later try to sell the \$10,000 to him. We may make exceptions where we are buying secondary market issues in smaller pieces - but only if we are getting an especially good price on the buy side because of the small size of the offering.
Callable Bonds
We will not buy bonds where the issuer of the bonds has a right to call (retire) the bonds on a basis which substantially loads the contract in his favor. It is amazing to me to see people buy bonds which are due in forty years, but where the issuer has the right to call the bonds at a tiny premium in five or ten years. Such a contract essentially means that you have made a forty year deal if it is advantageous to the issuer (and disadvantageous to you) and a five year deal if the initial contract turns out to be advantageous to you (and disadvantageous to the issuer). Such contracts are really outrageous and exist because bond investors can't think through the implications of such a contract form and bond dealers don't insist on better terms for their customers. One extremely interesting fact is that bonds with very unattractive call features sell at virtually the same yield as otherwise identical bonds which are noncallable.
It should be pointed out that most Nebraska bonds carry highly unfair call provisions. Despite this severe contractual disadvantage, they do not offer higher yields than bonds with more equitable terms.
One way to avoid this problem is to buy bonds which are totally noncallable. Another way is to buy discount bonds where the right of the issuer to call the bond is at a price so far above your cost as to render the possible call inconsequential. If you buy a bond at 60 which is callable at 103, the effective cost to you of granting the issuer the right to prematurely terminate the contract (which is a right you never have) is insignificant. But to buy a bond of the Los Angeles Department of Water and Power at 100 to come due at 100 in 1999 or to come due at
104 in 1974, depending on which is to the advantage of the issuer and to your disadvantage, is the height of foolishness when comparable yields are available on similar credits without such an unfair contract. Nevertheless, just such a bond was issued in October, 1969 and similar bonds continue to be issued every day. only write at such length about an obvious point, since it is apparent from the continual sale of such bonds that many investors haven't the faintest notion how this loads the dice against them and many bond salesmen aren't about to tell them.
Maturity and the Mathematics of Bonds
Many people, in buying bonds, select maturities based on how long they think they are going to want to hold bonds, how long they are going to live, etc. While this is not a silly approach, it is not necessarily the most logical. The primary determinants in selection of maturity should probably be (1) the shape of the yield curve; (2) your expectations regarding future levels of interest rates and (3) the degree of quotational fluctuation you are willing to endure or hope to possibly profit from. Of course, (2) is the most important but by far the most difficult upon which to comment intelligently.
Let's tackle the yield curve first. When other aspects of quality are identical, there will be a difference in interest rates paid based upon the length of the bond being offered. For example, a top grade bond being offered now might have a yield of 4.75% if it came due in six or nine months, 5.00% in two years, 5.25% in five years, 5.50% in ten years and 6.25% in twenty years. When long rates are substantially higher than short rates, the curve is said to be strongly positive. In the U. S. Government bond market, rates recently have tended to produce a negative yield curve; that is, a long term Government bond over the last year or so has consistently yielded less than a short term one. Sometimes the yield curve has been very flat, and sometimes it is positive out to a given point, such as ten years, and then flattens out. What you should understand is that it varies, often very substantially, and that on an historical basis the present slope tends to be in the high positive range. This doesn't mean that long bonds are going to be worth more but it does mean that you are being paid more to extend maturity than in many periods. If yields remained constant for several years, you would do better with longer bonds than shorter bonds, regardless of how long you intended to hold them.
The second factor in determining maturity selection is expectations regarding future rate levels. Anyone who has done much predicting in this field has tended to look very foolish very fast. I did not regard rates as unattractive one year ago, and I was proved very wrong almost immediately. I believe present rates are not unattractive and I may look foolish again. Nevertheless, a decision has to be made and you can make just as great a mistake if you buy short term securities now and rates available on reinvestment in a few years are much lower.
The final factor involves your tolerance for quotational fluctuation. This involves the mathematics of bond investment and may be a little difficult for you to understand. Nevertheless, it is important that you get a general grasp of the principles. Let's assume for the moment a perfectly flat yield curve and a non-callable bond. Further assume present rates are 5% and that you buy two bonds, one due in two years and one due in twenty years. Now assume one year later that yields on new issues have gone to 3% and that you wish to sell your bonds. Forgetting about market spreads, commissions, etc. , you will receive \$1,019.60 for the original two year \$1,000 bond (now with one year to run) and \$1,288.10 for the nineteen year bond (originally twenty years). At these prices, a purchaser will get exactly 3% on his money after amortizing the premium he has paid and cashing the stream of 5% coupons attached to each bond. It is a matter of indifference to him whether to buy your nineteen year 5% bond at \$1,288.10 or a new 3% bond (which we have assumed is the rate current - one year later) at \$1,000.00. On the other hand, let's assume rates went to 7%. Again we will ignore commissions, capital gains taxes on the discount, etc. Now the buyer will only pay \$981.00 for the bond with one year remaining until maturity and \$791.60 for the bond with nineteen years left. Since he can get 7% on new issues, he is only willing to buy your bond at a discount sufficient so that accrual of this discount will give him the same economic benefits from your 5% coupon that a 7% coupon at \$1,000.00 would give him.
The principle is simple. The wider the swings in interest rates and the longer the bond, the more the value of a bond can go up or down on an interim basis before maturity. It should be pointed out in the first example where rates went to 3%, our long term bond would only have appreciated to about \$1,070.00 if it had been callable in five years at par, although it would have gone down just as much if 7% rates had occurred. This just illustrates the inherent unfairness of call provisions.
For over two decades, interest rates on tax-free bonds have almost continuously gone higher and buyers of long term bonds have continuously suffered. This does not mean it is bad now to buy long term bonds - it simply means that the illustration in the above paragraph has worked in only one direction for a long period of time and people are much more conscious of the downside risks from higher rates than the upside potential from lower ones.
If it is a 50-50 chance as to the future general level of interest rates and the yield curve is substantially positive, then the odds are better in buying long term non-callable bonds than shorter term ones. This reflects my current conclusion and, therefore, I intend to buy bonds within the ten to twenty-five year range. If you have any preferences within that range, we will try to select bonds reflecting such preferences, but if you are interested in shorter term bonds, we will not be able to help you as we are not searching out bonds in this area.
Before you decide to buy a twenty year bond, go back and read the paragraph showing how prices change based upon changes in interest rates. Of course, if you hold the bond straight through, you are going to get the contracted rate of interest, but if you sell earlier, you are going to be subject to the mathematical forces described in that paragraph, for better or for worse. Bond prices also change because of changes in quality over the years but, in the tax-free area, this has tended to be - and probably will continue to be - a relatively minor factor compared to the impact of changes in the general structure of interest rates.
Discount Versus Full Coupon Bonds
You will have noticed in the above discussion that if you now wanted to buy a 7% return on a nineteen year bond, you had a choice between buying a new nineteen year bond with a 7% coupon rate or buying a bond with a 5% coupon at \$791.60, which would pay you \$1,000.00 in nineteen years. Either purchase would have yielded exactly 7% compounded semi-annually to you. Mathematically, they are the same. In the case of tax-free bonds the equation is complicated, however, by the fact that the \$70.00 coupon is entirely tax-free to you, whereas the bond purchased at a discount gives you tax-free income of \$50.00 per year but a capital gain at the end of the nineteenth year of \$208.40. Under the present tax law, you would owe anything from a nominal tax, if the gain from realization of the discount was your only taxable income in the nineteenth year, up to a tax of over \$70.00 if it came on top of very large amounts of capital gain at that time (the new tax law provides for capital gain rates of 35%, and even slightly higher on an indirect basis in 1972 and thereafter for those realizing very large gains.) In addition to this, you might have some state taxes to pay on the capital gain.
Obviously, under these circumstances you are not going to pay the \$791.60 for the 5% coupon and feel you are equally as well off as with the 7% coupon at \$1,000.00. Neither is anyone else. Therefore, identical quality securities with identical maturities sell at considerably higher gross yields when they have low coupons and are priced at discounts than if they bear current high coupons.
Interestingly enough, for most taxpayers, such higher gross yields over-compensate for the probable tax to be paid. This is due to several factors. First, no one knows what the tax law will be when the bonds mature and it is both natural and probably correct to assume the tax rate will be stiffer at that time than now. Second, even though a 5% coupon on a \$1,000.00 bond purchased at \$791.60 due in nineteen years is the equivalent of a 7% coupon on a \$1,000.00 bond purchased at par with the same maturity, people prefer to get the higher current return in their pocket. The owner of the 5% coupon bond is only getting around 6.3% current yield on his \$791.60 with the balance necessary to get him up to 7% coming from the extra \$208.40 he picks up at the end. Finally, the most important factor affecting prices currently on discount bonds (and which will keep affecting them) is that banks have been taken out of the market as buyers of discount tax-free bonds by changes brought about in bank tax treatment through the 1969 Tax Reform Act. Banks have historically been the largest purchasers and owners of tax-free bonds and anything that precludes them from one segment of the market has dramatic effects on the supply-demand situation in that segment. This may tend to give some edge to individuals in the discount tax-free market, particularly those who are not likely to be in a high tax bracket when the bonds mature or are sold.
If I can get a significantly higher effective after-tax yield (allowing for sensible estimates of your particular future tax rate possibilities), I intend to purchase discount bonds for you. I know some partners prefer full coupon bonds, even though their effective yield is less, since they prefer to maximize the current cash yield and if they will so advise me, we will stick to full coupon issues (or very close thereto) in their cases.
Procedure
I intend to be in the office solidly through March (including every Saturday except March 7th) and will be glad to see any partner or talk with him by phone. To aid in scheduling, please make an appointment with Gladys (or me). The only request I make is that you absorb as much as possible of this letter before we talk. As you can see, it would be an enormous problem if I had to explain each item to all of you.
If you decide you want us to help you in buying bonds, you should let us know:
(1) Whether you want to restrict purchases to your home state for local tax reasons;
(2) Whether you want to restrict us to full coupon issues or let us use our judgment as to where you get the best value;
(3) Your preference as to maturity in the ten to twenty-five year range or if you prefer to let us use our judgment in that area;
(4) How much you want to invest - we may end up several per cent short of the figure you name, but we will never go over;
(5) On what bank the bonds should be drafted.
We will advise you by phone or letter as we buy bonds. Bill and John will be doing much of the mechanical work. Needless to say, none of us will have any financial interest in any transaction. Should you have any questions regarding the mechanics, please direct them to John or Bill as I will probably be swamped and they will be more familiar with specific transactions. After March 31st, I don't expect to be around the office for several months. Therefore, if you want to talk things over, come in by then. The completion of all purchases may go into April, but Bill will be taking care of this and the mechanics will all be set up.
You should realize that because of the enormous diversity of issues mentioned earlier, it is impossible to say just what will be bought. Sometimes the tax-free bond market has more similarities to real estate than to stocks. There are hundreds of thousands of items of varying comparability, some with no sellers, some with reluctant sellers and some with eager sellers. Which may be the best buy depends on the quality of what is being offered, how well it fits your needs and the eagerness of the seller. The standard of comparison is always new issues where an average of several hundred million dollars worth have to be sold each week - however, specific secondary market opportunities (issues already outstanding) may be more attractive than new issues and we can only find out how attractive they are when we are ready to make bids.
Although markets can change, it looks as if we will have no difficulty in getting in the area of 6-1/2% after tax (except from Housing Authority issues) on bonds in the twenty-year maturity range.
Cordially,
Warren E. Buffett
WEBI glk
April 3, 1970
To the Stockholders of Berkshire Hathaway Inc.:
Four years ago your management committed itself to the development of more substantial and more consistent earning power than appeared possible if capital continued to be invested exclusively in the textile industry. The funds for this program were temporarily utilized in marketable securities, pending the acquisition of operating businesses meeting our investment and management criteria.
This policy has proved reasonably successful—particularly when contrasted with results achieved by firms which have continued to commit large sums to textile expansion in the face of totally inadequate returns. We have been able to conclude two major purchases of operating businesses, and their successful operations enabled Berkshire Hathaway to achieve an over‐all return of more than 10% on average stockholders’ equity last year in the face of less than a 5% return from the portion of our capital employed in the textile business. We have liquidated our entire holdings of marketable securities over the last two years at a profit of more than \$5 million after taxes. These gains provided important funds to facilitate our major purchase of 1969, when borrowed money to finance acquisitions was generally most difficult to obtain.
We anticipate no further purchases of marketable securities, but our search for desirable acquisitions continues. Any acquisition will, of course, be dependent upon obtaining appropriate financing.
Textile Operations
Dollar sales volume in 1969 was approximately 12% below 1968. Net earnings were slightly higher despite substantial operating losses incurred in the termination of our Box Loom Division. Earnings on capital employed improved modestly but still remain unsatisfactory despite strenuous efforts toward improvement.
We are presently in the midst of a textile recession of greater intensity than we have seen for some years. There is an over‐all lack of demand for textile products in a great many end uses. This lack of demand has required curtailment of production to avoid inventory build‐up. Both our Menswear Lining Division and Home Fabrics Division have been forced to schedule twoweek shutdowns during the first quarter of 1970, but inventories remain on the high side. The slowdown in demand appears even greater than that normally occurring in the cyclical textile market. Recovery from this cycle will probably be dependent upon Federal Government action on economic factors they can control.
We have concentrated our textile operations in those areas that appear, from historical performance and from our market projections, to be potentially satisfactory businesses. Improvements have been made in our mill operations which, under better industry conditions, should produce substantial cost reductions. However, the present picture is for lower profits in this business during 1970.
Insurance Operations
Jack Ringwalt and his outstanding management group turned in new records in just about every department during 1969. During another year in which the fire and casualty insurance industry experienced substantial underwriting losses, our insurance subsidiaries achieved significant adjusted underwriting profits. Since establishment of the business in 1941, Mr. Ringwalt has held to the principle of underwriting for a profit—a policy which is frequently talked about within the industry but much less frequently achieved.
Our new surety department, although small, made good progress during the year. We are entering the workmen’s compensation market in California through the establishment of a branch office in Los Angeles. Our new reinsurance division seems to be off to a strong start, although the nature of this business is such that it takes at least several years to render an intelligent verdict as to operating results. We also have interesting plans for a new “home state” insurance operation.
Phil Liesche—over 20 years a major contributor to outstanding results in the production and underwriting departments—was elected Executive Vice President early this year.
Expectations are for continued growth in our insurance operations.
Banking Operations
The most significant event of 1969 for Berkshire Hathaway was the acquisition of 97.7% of the stock of The Illinois National Bank and Trust Co. of Rockford, Illinois. This bank had been built by Eugene Abegg, without addition of outside capital, from \$250,000 of net worth and \$400,000 of deposits in 1931 to \$17 million of net worth and \$100 million of deposits in 1969. Mr. Abegg has continued as Chairman and produced record operating earnings (before security losses) of approximately \$2 million in 1969. Such earnings, as a percentage of either deposits or total assets, are close to the top among larger commercial banks in the country which are not primarily trust department operations. It will not be easy to achieve greater earnings in 1970 because (1) our bank is already a highly efficient business, and (2) the unit banking law of Illinois makes more than modest deposit growth difficult for a major downtown bank.
After almost a year of ownership, we are delighted with our investment in Illinois National Bank, and our association with Mr. Abegg.
Kenneth V. Chace President
BUFFETT PARTNERSHIP. LTD.
610 KIEWIT PLAZA
OMAHA, NEBRASKA 68131
电话 042-4110
1970年2月25日
致各位合伙人：
这封信将尝试提供关于免税债券的基础知识，重点是我们预计下个月会协助合伙人购买的债券类型和期限。如果你希望我们在购买债券时提供帮助，请务必仔细阅读（如有必要，反复阅读）这封信，因为它将作为我后续具体购买建议的背景信息。如果你在债券类型或期限的结论上与我意见相左（如果你一两年之前在后一点上不同意我的看法，那你可能是对的，而我错了），那你的想法或许正确，但我们无法在你我意见不一致的领域为你提供债券购买协助。我们只会全力专注于我们推荐的领域，因此无法为可转换债券、公司债券或短期债券的购买提供协助或建议。
我已尽力将这封信浓缩到最短。有些部分会略显沉重——有些则可能过于简化。我提前为不足之处道歉。我感觉自己像是想把一本100页书的精华塞进10页纸——还要读起来像漫画一样轻松。
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我相信你明白，我们在债券购买方面的协助，不涉及未来对这些特定债券或整体投资决策的任何后续帮助。我在这个时间点愿意提供帮助，是因为你从我们这里一次性收到了大量现金。我无意直接或间接从事投资咨询业务，并且3月31日之后我将不再讨论财务事宜。
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免税债券的运作机制
对于希望获得我们帮助的人，我们将安排直接从全国各地的市政债券交易商处购买债券，并让他们直接向您确认出售债券。请保存此确认单作为税务基本文件。您不应向债券交易商寄送支票，因为他会将债券连同汇票一起交付给您的银行，银行将从您的账户中扣款支付。对于在二级市场（已发行在外的债券）购买的债券，结算日通常为确认日之后约一周；而对于新发行债券，结算日可能晚至一个月。结算日清楚地列在确认单上（对于新发行债券，这是第二张也是最终确认单，而非初期的"发行时"确认单），您应在结算日之前在银行准备好资金以支付债券款项。如果您目前持有国库券，可以提前几天通知银行出售，因此您应该不难及时准备好资金。利息从结算日开始对您累积，即使债券交易商延迟将债券交付给您的银行。
债券将以可转让形式（即所谓的"不记名"形式，像现金一样）交付，并附有息票。通常债券面额为5,000美元，通常可以转换为记名债券（有时费用高昂，有时免费——取决于条款）。记名债券未经您转让则不可流通，因为您是过户代理账簿上的登记所有者。债券几乎完全以不记名形式交易，如果不将其转换回不记名形式，几乎不可能出售记名债券。因此，除非您打算持有大量实物债券，我建议将债券保留为不记名形式。这意味着将它们存放在非常安全的地方，并每六个月剪一次息票。剪下的息票可以像支票一样存入您的银行账户。如果您持有25万美元的债券，这大约意味着50张独立的纸片（每张5,000美元），每年可能需要去保险箱存放处六到八次剪息票和存款。
您也可以与银行开设托管账户，以相当低廉的费用，让银行保管债券、收取利息并为您保存记录。例如，银行可能在25万美元的投资组合上每年收取约200美元的托管服务费。如果您对托管账户感兴趣，应咨询商业银行的信托官员，了解其服务内容和费用。否则，您应该有一个保险箱。
税务
从免税债券息票存款中收到的利息当然免征联邦所得税。这意味着，如果您处于30%的最高联邦所得税税率等级，6%的免税债券回报相当于大约8.5%的应税债券回报。因此，对于我们的多数合伙人，不包括未成年或一些退休人员，免税债券将比应税债券更具吸引力。对于工资或股息收入很少或没有、但拥有大量资本的人，可能将应税债券（使应税收入达到约25%或30%的税率等级）与免税债券组合起来，能带来最高的税后总收入。在适当的情况下，我们会与您合作实现这种平衡。
关于州所得税的情况更为复杂。在内布拉斯加州，州所得税按联邦所得税的一定百分比计算，其效果是免税债券的利息无需缴纳州税。我对纽约州和加利福尼亚州法律的了解是，本州实体的免税债券免征州所得税，但来自其他州的免税债券需缴纳当地州所得税。我还认为纽约市所得税豁免基于纽约州内实体的免税债券，但对外州债券征税。我不是州所得税专家，也不会试图随时了解各州或各市的变化。因此，我参考您的本地税务顾问，但只是提及这些一般印象，以便您意识到潜在问题的存在。在内布拉斯加州，税后计算中无需考虑本地因素。在外州债券需缴纳地方税的情况下，州或市所得税的有效成本会因在联邦所得税申报表中扣除该税款而降低。这当然因人而异。此外，在一些州，可能对无形财产征收各种税，可能适用于所有免税债券或仅外州实体发行的债券。内布拉斯加州没有这些税，但我无法对其他州提供建议。
当债券以低于面值的折扣价购买，后来出售或到期（到期兑付）时，所得款项与成本之间的差额需按资本利得或亏损处理。（这一说法存在少量例外，不幸的是，大多数关于投资和税务的一般性陈述都有例外，如果这些例外影响到我们推荐的任何证券，我们会向您指出。）这会降低净税后收益率，因素包括未来资本利得税的一般税率以及个人未来的具体税务状况。稍后，我们将讨论此类资本利得税在计算折价债券与"全额票息"债券相对吸引力时的影响。
最后，最重要的一点。虽然法律并不完全明确，但如果您目前有或预期会有一般性银行债务或其他债务，您可能不应考虑持有免税债券。
法律排除了为购买或持有免税债券而发生或维持的贷款利息的扣除性，并且该法规的解释可能会随着时间的推移而扩大。例如，我的印象是，如果您有不动产抵押贷款（除非该债务是为购买市政债券而发生的），您在联邦税申报表中扣除抵押贷款利息时没有问题，即使您同时拥有免税债券。然而，我相信如果您有一笔一般性银行贷款，即使借款直接用于购买股票、手球场等，且免税债券未用作贷款抵押，那么在扣除利息的同时拥有免税债券，您可能会遇到麻烦。因此，我会在持有免税债券之前先还清银行贷款，但我将这个问题的详细检查留给您和您的税务顾问。我仅仅提出来让您意识到潜在问题。
市场性
免税债券与普通股或公司债券有本质不同，因为实际上有成千上万个发行品种，绝大多数持有人很少。这严重阻碍了紧密活跃市场的发展。每当纽约市或费城想筹集资金时，它们可能会出售二十、三十或四十种不同的证券，因为一次发行会有这么多不同期限。一张1980年到期的6%纽约市债券与一张1981年到期的6%纽约市债券是截然不同的。两者不能互换，卖家必须找到持有其特定品种的买家。考虑到纽约市可能一年发行几次债券，很容易看出仅仅这一个城市就可能存在大约1000种未偿债券。内布拉斯加州格兰德岛可能有75种未偿债券。每种发行的平均金额可能为10万美元，每种发行的平均持有人可能为六到八人。因此，绝对不可能随时对所有品种都有报价，买卖价差可能非常大。您无法在早上出发购买您选择的特定格兰德岛债券。它可能在任何地方、任何价格都没有出售，而如果您确实找到一个卖家，他也没有理由必须相对于其他类似质量的债券报价保持现实。另一方面，也有单一发行，如俄亥俄收费公路、伊利诺伊收费公路等，金额达2亿美元或更多，有成千上万的债券持有人持有完全同质且可互换的单一发行。显然，这里您获得高度市场性。
我的印象是，市场性通常取决于以下三个因素，按重要性递减排列：(1) 特定发行的规模；(2) 发行人的规模（一笔10万美元的俄亥俄州债券会比一笔10万美元的俄亥俄州波敦克债券更具市场性）；以及 (3) 发行人的质量。迄今为止，大部分销售努力都花在了新发行债券的销售上。平均每周有超过2亿美元的新发行债券上市销售，债券分销机制旨在将其销售出去，无论规模大小。在我看来，在发行时，收益率差异往往不足以补偿一旦初始销售推动结束后会存在的市场性差异。我们经常遇到债券市场，买卖价差可能达到15%。没有必要购买具有此类巨大市场潜力的债券（尽管最初提供这些债券的交易商的利润差价通常比更具市场性的债券更宽），我们也不会为您购买这些债券。我们预计购买的债券通常会有2%到5%的价差（反映您购买时净支付的价格与同一时间点出售时净收到的价格之间的差异）。这样的价差如果您试图交易这些债券将是毁灭性的，但我认为对于长期投资者来说不应成为阻碍。真正必要的是远离市场性非常有限的债券——这些债券往往是本地债券交易商在金钱上最有动力推销的类型。
具体购买领域
我们可能将购买集中在以下一般领域：
(1) 大型创收公共实体，如收费公路、电力区、水务区等。
许多此类发行具有高市场性，可进行定量分析，有时具有有利的偿债基金或其他因素，这些因素往往未在市场上得到充分估值。
(2) 工业发展局债券，当公共实体持有租赁给私人公司的财产所有权时产生。例如，俄亥俄州洛雷恩持有一个为美国钢铁公司建造的8000万美元项目的所有权。发展局董事会发行债券以支付项目费用，并与美国钢铁公司签署了净额绝对租赁协议以覆盖债券付款。城市或州的信用不支撑这些债券，它们的好坏完全取决于租赁方的公司。许多顶级公司担保了总计数十亿美元的此类债务，尽管由于税法变化，新的发行仅以小额（每个项目500万美元或更少）发行。在一段时间内，对此类发行存在非常显著的偏见，导致它们以远高于其内在信用等级相应的收益率出售。这种偏见已趋于减弱，减少了可获得的溢价收益率，但我仍然认为这是一个最有吸引力的领域。我们的保险公司将其大部分债券持有在此类别中。
(3) 公共住房管理局债券，适用于希望获得最高等级免税债券的合伙人。实际上，这些债券由美国政府担保，因此全部评为AAA。在那些地方税鼓励购买本州发行债券的州，如果我无法从(1)和(2)满足您的需求，我倾向于将您安排到住房管理局债券，而不是试图从我不了解的信用中挑选。如果您指示我购买您所在州的债券，您应预期会有大量住房管理局债券。无需在这些债券之间进行分散投资，因为它们都代表了可获得的最高信用。
(4) 直接或间接的州债券。
您会注意到我不购买大城市发行的债券。我完全不知道如何分析纽约市、芝加哥、费城等（一位朋友前几天提到，当纽瓦克试图以非常高的利率出售债券时，黑手党非常沮丧，因为纽瓦克给他们带来了坏名声）。您对纽约市的分析——我承认很难想象它们会长时间不付账单——会和我的一样好。我对待债券的方法与对待股票非常相似。如果我无法理解某事，我倾向于忘记它。错过一个我不理解的机会——即使其他人足够敏锐地分析它并因此获得丰厚回报——不会困扰我。我唯一想确保的是，在我认为自己有能力处理的事情上我能获得良好的回报——并且在我做出肯定决策时我是正确的。
我们可能倾向于为大多数人购买五到十个品种。然而，如果您希望限制我只购买您所在州的债券，品种可能会更少——也许只有住房管理局债券。我们会尽量不购买低于25,000美元的小额债券，并在适当情况下偏好更大金额。小额债券在转售时通常会受到惩罚，有时是大幅度的。债券销售员通常不会在您向他购买10,000美元债券时解释这一点，但当您后来试图向他出售这10,000美元债券时，就会得到解释。我们可能会在购买二级市场小额债券时破例——但仅限于我们因为发行规模小而获得特别优惠的买入价格。
可赎回债券
我们不会购买发行人有权在条款上对合同设置重大偏袒的债券（即赎回债券）。看到人们购买四十年到期但发行人在五年或十年后有权利以微小溢价赎回的债券，我感到惊讶。这样的合同实质上意味着，如果对发行人有利（对您不利），您就做了四十年的交易；如果初始合同结果对您有利（对发行人不利），您就做了五年的交易。这样的合同真是离谱，之所以存在是因为债券投资者无法思考这种合同形式的含义，而债券交易商也不坚持为客户争取更好的条款。一个极其有趣的事实是，具有非常不利赎回特征的债券，收益率几乎与相同条件但不可赎回的债券相同。
应该指出，大多数内布拉斯加州债券带有非常不公平的赎回条款。尽管存在这种严重的合同劣势，它们并未提供比条款更公平的债券更高的收益率。
避免这个问题的一种方法是购买完全不可赎回的债券。另一种方法是购买折价债券，其中发行人的赎回价格远高于您的成本，以至于可能的赎回变得无关紧要。如果您以60的价格购买一张以103赎回的债券，那么授予发行人提前终止合同的权利（这是您从未拥有的权利）对您的有效成本微不足道。但是，以100的价格购买洛杉矶水电局的债券，该债券在1999年以100到期，或在1974年以104到期——取决于对发行人有利而对您不利的情况——当类似信用等级下的可比收益率可用且没有如此不公平的合同时，这是极其愚蠢的。然而，就在1969年10月发行了这样的债券，并且类似的债券每天都在继续发行。我之所以如此长篇大论地写这个显而易见的问题，是因为从这些债券的持续销售中可以明显看出，许多投资者完全不知道这如何对它们不利，而许多债券销售员也不会告诉他们。
期限与债券数学
许多人在购买债券时，根据他们认为自己将持有债券的时间、自己将活多久等来选择期限。虽然这不是一个愚蠢的方法，但不一定是最合乎逻辑的。选择期限的主要决定因素可能应该是：(1) 收益率曲线的形状；(2) 您对未来利率水平的预期；以及 (3) 您愿意忍受或希望从中获利的报价波动程度。当然，(2) 是最重要的，但也是最难做出明智评论的。
让我们先解决收益率曲线。当其他质量方面相同时，基于所提供债券的期限长短，利率会有所不同。例如，目前发行的顶级债券，如果六到九个月到期，收益率可能是4.75%；两年期5.00%；五年期5.25%；十年期5.50%；二十年期6.25%。当长期利率远高于短期利率时，曲线被称为强烈正斜率。在美国国债市场，近期利率倾向于产生负收益率曲线；也就是说，过去一年左右，长期国债的收益率一直持续低于短期国债。有时收益率曲线非常平坦，有时在某个点之前（如十年）为正斜率，然后变平。您应该理解的是，它会变化，而且常常变化很大，从历史角度看，目前的斜率处于高度正区间。这并不意味着长期债券会更有价值，但它确实意味着您为延长期限而获得的报酬比许多时期都要高。如果收益率几年保持不变，您持有长期债券会比短期债券表现更好，无论您打算持有它们多久。
决定期限选择的第二个因素是对未来利率水平的预期。在这个领域做过很多预测的人往往很快就会看起来非常愚蠢。一年前我并不认为利率不具有吸引力，结果很快就被证明大错特错。我相信目前的利率并非没有吸引力，我可能再次看起来愚蠢。尽管如此，必须做出决定，如果您现在购买短期证券，而几年后再投资的利率低得多，您可能犯同样大的错误。
最后一个因素涉及您对报价波动的容忍度。这涉及债券投资的数学，可能对您来说有些难以理解。尽管如此，掌握这些原则的大致理解很重要。让我们假设一个完全平坦的收益率曲线和一张不可赎回债券。进一步假设当前利率为5%，您购买两张债券，一张两年期，一张二十年期。现在假设一年后新发行债券的收益率降至3%，您希望出售您的债券。不考虑市场价差、佣金等，您将为最初的两年期1000美元债券（现在还剩一年）获得1019.60美元，而为十九年期债券（原为二十年）获得1288.10美元。在这些价格下，买家在摊销他支付的溢价并获得每张债券附带的5%票息流后，将恰好获得3%的回报。对他来说，是购买您的十九年期5%债券（1288.10美元）还是购买一张新的3%债券（假设一年后当前利率为3%，价格为1000美元）是无差异的。另一方面，假设利率升至7%。同样，我们忽略佣金、折扣上的资本利得税等。现在买家只愿为还剩一年到期的债券支付981美元，为还有十九年到期的债券支付791.60美元。因为他可以在新发行中获得7%，他只愿以足够大的折扣购买您的债券，使得该折扣的累积能让他从您的5%票息中获得与7%票息债券（价格1000美元）相同的经济利益。
原理很简单。利率波动幅度越大，债券期限越长，债券在到期前的中间价值波动就越大。应该指出，在第一个例子中，当利率降至3%时，我们的长期债券如果五年内可按面值赎回，其价值只会涨到约1070美元，但如果利率升至7%，它同样会下跌。这仅仅说明了赎回条款内在的不公平。
二十多年来，免税债券的利率几乎持续走高，长期债券的买家持续遭受损失。这并不意味着现在购买长期债券不好——它仅仅意味着上述段落中的示例已在很长一段时间内单向运作，人们更意识到利率上升的下行风险，而不是利率下降的上行潜力。
如果未来一般利率水平是五五开的机会，且收益率曲线显著正斜率，那么购买长期不可赎回债券的赔率优于短期债券。这反映了我目前的结论，因此我打算购买十年到二十五年期限范围内的债券。如果您在该范围内有任何偏好，我们将尝试选择反映这些偏好的债券，但如果您对短期债券感兴趣，我们无法帮助您，因为我们不在该领域寻找债券。
在您决定购买二十年期债券之前，请返回阅读显示价格如何随利率变化而变化的段落。当然，如果您持有债券直至到期，您将获得约定的利率，但如果您提前出售，您将受到该段落描述的数学力量的影响，无论好坏。债券价格也会因质量随时间变化而改变，但在免税领域，与一般利率结构变化的影响相比，这往往是一个相对次要的因素——并且可能将继续如此。
折价债券与全额票息债券
您会在上述讨论中注意到，如果您现在想购买一张收益率为7%的十九年期债券，您可以选择购买一张新的十九年期7%票息债券，或者以791.60美元购买一张5%票息债券，该债券将在十九年后支付给您1000美元。任一购买都将恰好产生7%的半年复利收益率。数学上，它们是一样的。然而，对于免税债券，等式因以下事实而复杂化：70美元的票息对您完全免税，而以折扣价购买的债券每年给您50美元的免税收入，但第十九年底有208.40美元的资本利得。根据现行税法，如果折扣实现的收益是您第十九年的唯一应税收入，您可能只需缴纳名义税；但如果该收益叠加在当年非常大的资本利得之上，则可能需缴纳超过70美元的税（新税法规定资本利得税率为35%，甚至在1972年及以后，对于实现非常大收益的人，间接税率略高）。此外，您可能还需缴纳一些州税。
显然，在这种情况下，您不会愿意支付791.60美元购买5%票息债券，并认为它与1000美元购买7%票息债券一样好。其他人也不会。因此，相同质量的证券，相同期限，如果票息低且定价折价，其总收益率会比当前高票息的债券高得多。
有趣的是，对于大多数纳税人来说，这种较高的总收益率过度补偿了可能的税款。这是由于几个因素。首先，没有人知道债券到期时的税法，自然而然且可能正确地假设那时的税率会比现在更高。其次，即使一张5%票息、面值1000美元、以791.60美元购买、十九年到期的债券等同于一张面值1000美元、以面值购买、相同期限的7%票息债券，人们还是喜欢将更高的当前收益揣进口袋。5%票息债券的所有者在其791.60美元上仅获得约6.3%的当前收益率，要使其达到7%，需要依靠最后获得的额外208.40美元。最后，目前影响折价债券价格的最重要因素（并将继续影响）是，1969年《税收改革法案》带来的银行税收待遇变化，使银行退出了折价免税债券的购买者市场。银行历来是免税债券的最大购买者和持有者，任何阻止它们进入市场某一部分的事情都会对该部分的供需状况产生巨大影响。这可能使个人在折价免税债券市场上获得一些优势，特别是那些在债券到期或出售时可能不处于高税率等级的人。
如果我能够获得显著更高的有效税后收益率（合理估计您个人未来的可能税率），我打算为您购买折价债券。我知道有些合伙人偏好的全额票息债券，尽管其有效收益率较低，因为他们想最大化当前现金收益；如果他们这样告诉我，我们将坚持为他们购买全额票息（或非常接近）的债券。
程序
我计划在整个三月份都在办公室（包括除3月7日以外的每个周六），并很高兴与任何合伙人会面或电话交谈。为方便时间安排，请与Gladys（或我）预约。我唯一的要求是，在我们交谈之前，您尽可能吸收这封信的内容。如您所见，如果我必须向所有人解释每一点，那将是一个巨大的问题。
如果您决定希望我们帮助购买债券，请告诉我们：
(1) 您是否希望因地方税原因将购买限制在您所在州；
(2) 您是否希望我们只购买全额票息债券，或者让我们自行判断哪里能获得最佳价值；
(3) 您对十年至二十五年范围内的期限偏好，或者您是否希望我们在此范围内自行判断；
(4) 您希望投资多少——我们最终可能会比您指定的金额少几个百分点，但我们永远不会超过；
(5) 债券应通过哪家银行提款。
我们将通过电话或信件通知您购买债券的情况。Bill和John将负责大部分具体工作。不用说，我们任何人在任何交易中都不会有财务利益。如果您对具体操作有任何疑问，请向John或Bill提出，因为我可能忙得不可开交，他们对具体交易会更熟悉。3月31日之后，我预计几个月内不会在办公室。因此，如果您想讨论事情，请在此之前来。所有购买的完成可能会持续到四月份，但Bill会负责处理，所有程序都会安排好。
您应该意识到，由于前面提到的发行的巨大多样性，无法确切说明将会购买什么。有时免税债券市场与股票市场相比，更像是房地产市场。有成千上万种不同可比性的品种，有些没有卖家，有些有勉强的卖家，有些有急切的卖家。哪个是最佳购买取决于所提供的证券的质量、它如何符合您的需求以及卖方的急切程度。比较标准始终是新发行债券，每周平均有数亿美元必须出售——然而，特定的二级市场机会（已发行的债券）可能比新发行更具吸引力，我们只有在准备出价时才能发现它们有多吸引人。
尽管市场可能会变化，但看起来我们在二十年期范围内的债券（住房管理局债券除外）上获得约6.5%的税后收益率应该没有问题。
此致，
Warren E. Buffett
WEBI glk
1970年4月3日
致伯克希尔·哈撒韦公司股东：
四年前，贵管理层承诺发展更可观且更持续的盈利能力，而非将资本持续独家投入纺织行业所能实现的结果。该计划的资金暂时投资于有价证券，等待收购符合我们投资和管理标准的运营企业。
这一政策已证明相当成功——尤其是与那些在回报完全不足的情况下继续向纺织扩张投入大量资金的公司所取得的结果相比。我们已完成了两项主要的运营企业收购，它们的成功运营使伯克希尔·哈撒韦在去年实现了超过10%的平均股东权益总回报，而我们在纺织业务中使用的资本部分回报率不到5%。过去两年，我们以超过500万美元的税后利润清算了全部有价证券持仓。这些收益提供了重要资金，促成了我们1969年的重大收购，当时为收购融资的借款普遍最难获得。
我们预计不会再购买有价证券，但我们将继续寻找理想的收购对象。当然，任何收购都将取决于获得适当的融资。
纺织业务
1969年的美元销售额比1968年下降了约12%。净利润略有上升，尽管因关闭织机部门而产生了巨额经营亏损。资本回报率略有改善，但在竭力改进之下仍然不令人满意。
我们目前正处于数年来最严重的纺织业衰退之中。纺织产品在大量最终用途中全面缺乏需求。这种需求不足迫使削减产量以避免库存积压。我们的男装衬里部和家用面料部不得不在1970年第一季度安排两周停产，但库存仍然偏高。需求放缓似乎比纺织市场周期性正常出现的程度更大。从本轮周期中复苏可能取决于联邦政府对它们可以控制的经济因素采取行动。
我们将纺织业务集中在那些从历史表现和市场预测看具有潜在满意前景的领域。工厂运营已进行了改进，在更好的行业条件下应能带来显著的成本降低。然而，目前的前景是1970年该业务利润将下降。
保险业务
Jack Ringwalt和他出色的管理团队在1969年几乎所有部门都创下了新纪录。在火险和意外险行业经历巨额承销亏损的又一年中，我们的保险子公司实现了显著调整后的承保利润。自1941年成立以来，Ringwalt先生一直坚持承保盈利的原则——这是行业内经常谈论但远未经常实现的政策。
我们新的保证业务部门虽然规模较小，但在年内取得了良好进展。我们通过在洛杉矶设立分公司，进入加利福尼亚州的工人赔偿险市场。我们的新再保险部门似乎开局强劲，尽管这类业务的性质决定了至少需要几年时间才能对经营结果做出明智判断。我们还有一项有趣的新"本州"保险业务计划。
Phil Liesche——在生产与承保部门中为卓越成果做出主要贡献超过20年——于今年年初当选为执行副总裁。
预计保险业务将持续增长。
银行业务
1969年伯克希尔·哈撒韦最重要的收购是获得了伊利诺伊州罗克福德市伊利诺伊国民银行与信托公司97.7%的股份。这家银行由Eugene Abegg在没有外部资本注入的情况下，从1931年的25万美元净资产和40万美元存款，发展到1969年的1700万美元净资产和1亿美元存款。Abegg先生继续担任董事长，并在1969年创造了约200万美元的创纪录经营收益（扣除证券亏损前）。此类收益，无论是占存款还是总资产的百分比，在全国非主要信托业务的大型商业银行中均名列前茅。1970年要实现更高的收益并不容易，因为(1) 我们的银行已经是效率极高的企业；(2) 伊利诺伊州的单一银行法使得一家大型市区银行难以实现超过适度规模的存款增长。
在拥有近一年后，我们对伊利诺伊国民银行的投资以及与Abegg先生的合作感到非常高兴。
Kenneth V. Chace
总裁