ENGLISH
BERKSHIRE HATHAWAY INC.
To the Shareholders of Berkshire Hathaway Inc.:
First, a few words about accounting. The merger with
Diversified Retailing Company, Inc. at yearend adds two new
complications in the presentation of our financial results.
After the merger, our ownership of Blue Chip Stamps increased to
approximately 58% and, therefore, the accounts of that company
must be fully consolidated in the Balance Sheet and Statement of
Earnings presentation of Berkshire. In previous reports, our
share of the net earnings only of Blue Chip had been included as
a single item on Berkshire’s Statement of Earnings, and there had
been a similar one-line inclusion on our Balance Sheet of our
share of their net assets.
This full consolidation of sales, expenses, receivables,
inventories, debt, etc. produces an aggregation of figures from
many diverse businesses - textiles, insurance, candy, newspapers,
trading stamps - with dramatically different economic
characteristics. In some of these your ownership is 100% but, in
those businesses which are owned by Blue Chip but fully
consolidated, your ownership as a Berkshire shareholder is only
58%. (Ownership by others of the balance of these businesses is
accounted for by the large minority interest item on the
liability side of the Balance Sheet.) Such a grouping of Balance
Sheet and Earnings items - some wholly owned, some partly owned -
tends to obscure economic reality more than illuminate it. In
fact, it represents a form of presentation that we never prepare
for internal use during the year and which is of no value to us
in any management activities.
For that reason, throughout the report we provide much
separate financial information and commentary on the various
segments of the business to help you evaluate Berkshire’s
performance and prospects. Much of this segmented information is
mandated by SEC disclosure rules and covered in “Management’s
Discussion” on pages 29 to 34. And in this letter we try to
present to you a view of our various operating entities from the
same perspective that we view them managerially.
A second complication arising from the merger is that the
1977 figures shown in this report are different from the 1977
figures shown in the report we mailed to you last year.
Accounting convention requires that when two entities such as
Diversified and Berkshire are merged, all financial data
subsequently must be presented as if the companies had been
merged at the time they were formed rather than just recently.
So the enclosed financial statements, in effect, pretend that in
1977 (and earlier years) the Diversified-Berkshire merger already
had taken place, even though the actual merger date was December
30, 1978. This shifting base makes comparative commentary
confusing and, from time to time in our narrative report, we will
talk of figures and performance for Berkshire shareholders as
historically reported to you rather than as restated after the
Diversified merger.
With that preamble it can be stated that, with or without
restated figures, 1978 was a good year. Operating earnings,
exclusive of capital gains, at 19.4% of beginning shareholders’
investment were within a fraction of our 1972 record. While we
believe it is improper to include capital gains or losses in
evaluating the performance of a single year, they are an
important component of the longer term record. Because of such
gains, Berkshire’s long-term growth in equity per share has been
greater than would be indicated by compounding the returns from
operating earnings that we have reported annually.
For example, over the last three years - generally a bonanza
period for the insurance industry, our largest profit producer -
Berkshire’s per share net worth virtually has doubled, thereby
compounding at about 25% annually through a combination of good
operating earnings and fairly substantial capital gains. Neither
this 25% equity gain from all sources nor the 19.4% equity gain
from operating earnings in 1978 is sustainable. The insurance
cycle has turned downward in 1979, and it is almost certain that
operating earnings measured by return on equity will fall this
year. However, operating earnings measured in dollars are likely
to increase on the much larger shareholders’ equity now employed
in the business.
In contrast to this cautious view about near term return
from operations, we are optimistic about prospects for long term
return from major equity investments held by our insurance
companies. We make no attempt to predict how security markets
will behave; successfully forecasting short term stock price
movements is something we think neither we nor anyone else can
do. In the longer run, however, we feel that many of our major
equity holdings are going to be worth considerably more money
than we paid, and that investment gains will add significantly to
the operating returns of the insurance group.
Sources of Earnings
To give you a better picture of just where Berkshire’s
earnings are produced, we show below a table which requires a
little explanation. Berkshire owns close to 58% of Blue Chip
which, in addition to 100% ownership of several businesses, owns
80% of Wesco Financial Corporation. Thus, Berkshire’s equity in
Wesco’s earnings is about 46%. In aggregate, businesses that we
control have about 7,000 full-time employees and generate
revenues of over $500 million.
The table shows the overall earnings of each major operating
category on a pre-tax basis (several of the businesses have low
tax rates because of significant amounts of tax-exempt interest
and dividend income), as well as the share of those earnings
belonging to Berkshire both on a pre-tax and after-tax basis.
Significant capital gains or losses attributable to any of the
businesses are not shown in the operating earnings figure, but
are aggregated on the “Realized Securities Gain” line at the
bottom of the table. Because of various accounting and tax
intricacies, the figures in the table should not be treated as
holy writ, but rather viewed as close approximations of the 1977
and 1978 earnings contributions of our constituent businesses.
Net Earnings
Earnings Before Income Taxes After Tax
-------------------------------------- ------------------
Total Berkshire Share Berkshire Share
------------------ ------------------ ------------------
(in thousands of dollars) 1978 1977 1978 1977 1978 1977
-------- -------- -------- -------- -------- --------
Total - all entities ......... $66,180 $57,089 $54,350 $42,234 $39,242 $30,393
======== ======== ======== ======== ======== ========
Earnings from operations:
Insurance Group:
Underwriting ............. $ 3,001 $ 5,802 $ 3,000 $ 5,802 $ 1,560 $ 3,017
Net investment income .... 19,705 12,804 19,691 12,804 16,400 11,360
Berkshire-Waumbec textiles 2,916 (620) 2,916 (620) 1,342 (322)
Associated Retail
Stores, Inc. ............ 2,757 2,775 2,757 2,775 1,176 1,429
See’s Candies .............. 12,482 12,840 7,013 6,598 3,049 2,974
Buffalo Evening News ....... (2,913) 751 (1,637) 389 (738) 158
Blue Chip Stamps - Parent .. 2,133 1,091 1,198 566 1,382 892
Illinois National Bank
and Trust Company ....... 4,822 3,800 4,710 3,706 4,262 3,288
Wesco Financial
Corporation - Parent .... 1,771 2,006 777 813 665 419
Mutual Savings and
Loan Association ........ 10,556 6,779 4,638 2,747 3,042 1,946
Interest on Debt ........... (5,566) (5,302) (4,546) (4,255) (2,349) (2,129)
Other ...................... 720 165 438 102 261 48
-------- -------- -------- -------- -------- --------
Total Earnings from
Operations ............ $52,384 $42,891 $40,955 $31,427 $30,052 $23,080
Realized Securities Gain ..... 13,796 14,198 13,395 10,807 9,190 7,313
-------- -------- -------- -------- -------- --------
Total Earnings ........... $66,180 $57,089 $54,350 $42,234 $39,242 $30,393
======== ======== ======== ======== ======== ========
Blue Chip and Wesco are public companies with reporting
requirements of their own. Later in this report we are
reproducing the narrative reports of the principal executives of
both companies, describing their 1978 operations. Some of the
figures they utilize will not match to the penny the ones we use
in this report, again because of accounting and tax complexities.
But their comments should be helpful to you in understanding the
underlying economic characteristics of these important partly-
owned businesses. A copy of the full annual report of either
company will be mailed to any shareholder of Berkshire upon
request to Mr. Robert H. Bird for Blue Chips 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.
Textiles
Earnings of $1.3 million in 1978, while much improved from
1977, still represent a low return on the $17 million of capital
employed in this business. Textile plant and equipment are on
the books for a very small fraction of what it would cost to
replace such equipment today. And, despite the age of the
equipment, much of it is functionally similar to new equipment
being installed by the industry. But despite this “bargain cost”
of fixed assets, capital turnover is relatively low reflecting
required high investment levels in receivables and inventory
compared to sales. Slow capital turnover, coupled with low
profit margins on sales, inevitably produces inadequate returns
on capital. Obvious approaches to improved profit margins
involve differentiation of product, lowered manufacturing costs
through more efficient equipment or better utilization of people,
redirection toward fabrics enjoying stronger market trends, etc.
Our management is diligent in pursuing such objectives. The
problem, of course, is that our competitors are just as
diligently doing the same thing.
The textile industry illustrates in textbook style how
producers of relatively undifferentiated goods in capital
intensive businesses must earn inadequate returns except under
conditions of tight supply or real shortage. As long as excess
productive capacity exists, prices tend to reflect direct
operating costs rather than capital employed. Such a supply-
excess condition appears likely to prevail most of the time in
the textile industry, and our expectations are for profits of
relatively modest amounts in relation to capital.
We hope we don’t get into too many more businesses with such
tough economic characteristics. But, as we have stated before:
(1) our textile businesses are very important employers in their
communities, (2) management has been straightforward in reporting
on problems and energetic in attacking them, (3) labor has been
cooperative and understanding in facing our common problems, and
(4) the business should average modest cash returns relative to
investment. As long as these conditions prevail - and we expect
that they will - we intend to continue to support our textile
business despite more attractive alternative uses for capital.
Insurance Underwriting
The number one contributor to Berkshire’s overall excellent
results in 1978 was the segment of National Indemnity Company’s
insurance operation run by Phil Liesche. On about $90 million of
earned premiums, an underwriting profit of approximately $11
million was realized, a truly extraordinary achievement even
against the background of excellent industry conditions. Under
Phil’s leadership, with outstanding assistance by Roland Miller
in Underwriting and Bill Lyons in Claims, this segment of
National Indemnity (including National Fire and Marine Insurance
Company, which operates as a running mate) had one of its best
years in a long history of performances which, in aggregate, far
outshine those of the industry. Present successes reflect credit
not only upon present managers, but equally upon the business
talents of Jack Ringwalt, founder of National Indemnity, whose
operating philosophy remains etched upon the company.
Home and Automobile Insurance Company had its best year
since John Seward stepped in and straightened things out in 1975.
Its results are combined in this report with those of Phil
Liesche’s operation under the insurance category entitled
“Specialized Auto and General Liability”.
Worker’s Compensation was a mixed bag in 1978. In its first
year as a subsidiary, Cypress Insurance Company, managed by Milt
Thornton, turned in outstanding results. The worker’s
compensation line can cause large underwriting losses when rapid
inflation interacts with changing social concepts, but Milt has a
cautious and highly professional staff to cope with these
problems. His performance in 1978 has reinforced our very good
feelings about this purchase.
Frank DeNardo came with us in the spring of 1978 to
straighten out National Indemnity’s California Worker’s
Compensation business which, up to that point, had been a
disaster. Frank has the experience and intellect needed to
correct the major problems of the Los Angeles office. Our volume
in this department now is running only about 25% of what it was
eighteen months ago, and early indications are that Frank is
making good progress.
George Young’s reinsurance department continues to produce
very large sums for investment relative to premium volume, and
thus gives us reasonably satisfactory overall results. However,
underwriting results still are not what they should be and can
be. It is very easy to fool yourself regarding underwriting
results in reinsurance (particularly in casualty lines involving
long delays in settlement), and we believe this situation
prevails with many of our competitors. Unfortunately, self-
delusion in company reserving almost always leads to inadequate
industry rate levels. If major factors in the market don’t know
their true costs, the competitive “fall-out” hits all - even
those with adequate cost knowledge. George is quite willing to
reduce volume significantly, if needed, to achieve satisfactory
underwriting, and we have a great deal of confidence in the long
term soundness of this business under his direction.
The homestate operation was disappointing in 1978. Our
unsatisfactory underwriting, even though partially explained by
an unusual incidence of Midwestern storms, is particularly
worrisome against the backdrop of very favorable industry results
in the conventional lines written by our homestate group. We
have confidence in John Ringwalt’s ability to correct this
situation. The bright spot in the group was the performance of
Kansas Fire and Casualty in its first full year of business.
Under Floyd Taylor, this subsidiary got off to a truly remarkable
start. Of course, it takes at least several years to evaluate
underwriting results, but the early signs are encouraging and
Floyd’s operation achieved the best loss ratio among the
homestate companies in 1978.
Although some segments were disappointing, overall our
insurance operation had an excellent year. But of course we
should expect a good year when the industry is flying high, as in
1978. It is a virtual certainty that in 1979 the combined ratio
(see definition on page 31) for the industry will move up at
least a few points, perhaps enough to throw the industry as a
whole into an underwriting loss position. For example, in the
auto lines - by far the most important area for the industry and
for us - CPI figures indicate rates overall were only 3% higher
in January 1979 than a year ago. But the items that make up loss
costs - auto repair and medical care costs - were up over 9%.
How different than yearend 1976 when rates had advanced over 22%
in the preceding twelve months, but costs were up 8%.
Margins will remain steady only if rates rise as fast as
costs. This assuredly will not be the case in 1979, and
conditions probably will worsen in 1980. Our present thinking is
that our underwriting performance relative to the industry will
improve somewhat in 1979, but every other insurance management
probably views its relative prospects with similar optimism -
someone is going to be disappointed. Even if we do improve
relative to others, we may well have a higher combined ratio and
lower underwriting profits in 1979 than we achieved last year.
We continue to look for ways to expand our insurance
operation. But your reaction to this intent should not be
unrestrained joy. Some of our expansion efforts - largely
initiated by your Chairman have been lackluster, others have been
expensive failures. We entered the business in 1967 through
purchase of the segment which Phil Liesche now manages, and it
still remains, by a large margin, the best portion of our
insurance business. It is not easy to buy a good insurance
business, but our experience has been that it is easier to buy
one than create one. However, we will continue to try both
approaches, since the rewards for success in this field can be
exceptional.
Insurance Investments
We confess considerable optimism regarding our insurance
equity investments. Of course, our enthusiasm for stocks is not
unconditional. Under some circumstances, common stock
investments by insurers make very little sense.
We get excited enough to commit a big percentage of
insurance company net worth to equities only when we find (1)
businesses we can understand, (2) with favorable long-term
prospects, (3) operated by honest and competent people, and (4)
priced very attractively. We usually can identify a small number
of potential investments meeting requirements (1), (2) and (3),
but (4) often prevents action. For example, in 1971 our total
common stock position at Berkshire’s insurance subsidiaries
amounted to only $10.7 million at cost, and $11.7 million at
market. There were equities of identifiably excellent companies
available - but very few at interesting prices. (An irresistible
footnote: in 1971, pension fund managers invested a record 122%
of net funds available in equities - at full prices they couldn’t
buy enough of them. In 1974, after the bottom had fallen out,
they committed a then record low of 21% to stocks.)
The past few years have been a different story for us. At
the end of 1975 our insurance subsidiaries held common equities
with a market value exactly equal to cost of $39.3 million. At
the end of 1978 this position had been increased to equities
(including a convertible preferred) with a cost of $129.1 million
and a market value of $216.5 million. During the intervening
three years we also had realized pre-tax gains from common
equities of approximately $24.7 million. Therefore, our overall
unrealized and realized pre-tax gains in equities for the three
year period came to approximately $112 million. During this same
interval the Dow-Jones Industrial Average declined from 852 to
805. It was a marvelous period for the value-oriented equity
buyer.
We continue to find for our insurance portfolios small
portions of really outstanding businesses that are available,
through the auction pricing mechanism of security markets, at
prices dramatically cheaper than the valuations inferior
businesses command on negotiated sales.
This program of acquisition of small fractions of businesses
(common stocks) at bargain prices, for which little enthusiasm
exists, contrasts sharply with general corporate acquisition
activity, for which much enthusiasm exists. It seems quite clear
to us that either corporations are making very significant
mistakes in purchasing entire businesses at prices prevailing in
negotiated transactions and takeover bids, or that we eventually
are going to make considerable sums of money buying small
portions of such businesses at the greatly discounted valuations
prevailing in the stock market. (A second footnote: in 1978
pension managers, a group that logically should maintain the
longest of investment perspectives, put only 9% of net available
funds into equities - breaking the record low figure set in 1974
and tied in 1977.)
We are not concerned with whether the market quickly
revalues upward securities that we believe are selling at bargain
prices. In fact, we prefer just the opposite since, in most
years, we expect to have funds available to be a net buyer of
securities. And consistent attractive purchasing is likely to
prove to be of more eventual benefit to us than any selling
opportunities provided by a short-term run up in stock prices to
levels at which we are unwilling to continue buying.
Our policy is to concentrate holdings. We try to avoid
buying a little of this or that when we are only lukewarm about
the business or its price. When we are convinced as to
attractiveness, we believe in buying worthwhile amounts.
Equity holdings of our insurance companies with a market value of
over $8 million on December 31, 1978 were as follows:
No. of
Shares Company Cost Market
---------- ------- ---------- ----------
(000s omitted)
246,450 American Broadcasting Companies, Inc. ... $ 6,082 $ 8,626
1,294,308 Government Employees Insurance Company
Common Stock ......................... 4,116 9,060
1,986,953 Government Employees Insurance Company
Convertible Preferred ................ 19,417 28,314
592,650 Interpublic Group of Companies, Inc. .... 4,531 19,039
1,066,934 Kaiser Aluminum and Chemical Corporation 18,085 18,671
453,800 Knight-Ridder Newspapers, Inc. .......... 7,534 10,267
953,750 SAFECO Corporation ...................... 23,867 26,467
934,300 The Washington Post Company ............. 10,628 43,445
---------- ----------
Total ................................... $ 94,260 $163,889
All Other Holdings ...................... 39,506 57,040
---------- ----------
Total Equities .......................... $133,766 $220,929
========== ==========
In some cases our indirect interest in earning power is
becoming quite substantial. For example, note our holdings of
953,750 shares of SAFECO Corp. SAFECO probably is the best run
large property and casualty insurance company in the United
States. Their underwriting abilities are simply superb, their
loss reserving is conservative, and their investment policies
make great sense.
SAFECO is a much better insurance operation than our own
(although we believe certain segments of ours are much better
than average), is better than one we could develop and,
similarly, is far better than any in which we might negotiate
purchase of a controlling interest. Yet our purchase of SAFECO
was made at substantially under book value. We paid less than
100 cents on the dollar for the best company in the business,
when far more than 100 cents on the dollar is being paid for
mediocre companies in corporate transactions. And there is no
way to start a new operation - with necessarily uncertain
prospects - at less than 100 cents on the dollar.
Of course, with a minor interest we do not have the right to
direct or even influence management policies of SAFECO. But why
should we wish to do this? The record would indicate that they
do a better job of managing their operations than we could do
ourselves. While there may be less excitement and prestige in
sitting back and letting others do the work, we think that is all
one loses by accepting a passive participation in excellent
management. Because, quite clearly, if one controlled a company
run as well as SAFECO, the proper policy also would be to sit
back and let management do its job.
Earnings attributable to the shares of SAFECO owned by
Berkshire at yearend amounted to $6.1 million during 1978, but
only the dividends received (about 18% of earnings) are reflected
in our operating earnings. We believe the balance, although not
reportable, to be just as real in terms of eventual benefit to us
as the amount distributed. In fact, SAFECO’s retained earnings
(or those of other well-run companies if they have opportunities
to employ additional capital advantageously) may well eventually
have a value to shareholders greater than 100 cents on the
dollar.
We are not at all unhappy when our wholly-owned businesses
retain all of their earnings if they can utilize internally those
funds at attractive rates. Why should we feel differently about
retention of earnings by companies in which we hold small equity
interests, but where the record indicates even better prospects
for profitable employment of capital? (This proposition cuts the
other way, of course, in industries with low capital
requirements, or if management has a record of plowing capital
into projects of low profitability; then earnings should be paid
out or used to repurchase shares - often by far the most
attractive option for capital utilization.)
The aggregate level of such retained earnings attributable
to our equity interests in fine companies is becoming quite
substantial. It does not enter into our reported operating
earnings, but we feel it well may have equal long-term
significance to our shareholders. Our hope is that conditions
continue to prevail in securities markets which allow our
insurance companies to buy large amounts of underlying earning
power for relatively modest outlays. At some point market
conditions undoubtedly will again preclude such bargain buying
but, in the meantime, we will try to make the most of
opportunities.
Banking
Under Gene Abegg and Pete Jeffrey, the Illinois National
Bank and Trust Company in Rockford continues to establish new
records. Last year’s earnings amounted to approximately 2.1% of
average assets, about three times the level averaged by major
banks. In our opinion, this extraordinary level of earnings is
being achieved while maintaining significantly less asset risk
than prevails at most of the larger banks.
We purchased the Illinois National Bank in March 1969. It
was a first-class operation then, just as it had been ever since
Gene Abegg opened the doors in 1931. Since 1968, consumer time
deposits have quadrupled, net income has tripled and trust
department income has more than doubled, while costs have been
closely controlled.
Our experience has been that the manager of an already high-
cost operation frequently is uncommonly resourceful in finding
new ways to add to overhead, while the manager of a tightly-run
operation usually continues to find additional methods to curtail
costs, even when his costs are already well below those of his
competitors. No one has demonstrated this latter ability better
than Gene Abegg.
We are required to divest our bank by December 31, 1980.
The most likely approach is to spin it off to Berkshire
shareholders some time in the second half of 1980.
Retailing
Upon merging with Diversified, we acquired 100% ownership of
Associated Retail Stores, Inc., a chain of about 75 popular
priced women’s apparel stores. Associated was launched in
Chicago on March 7, 1931 with one store, $3200, and two
extraordinary partners, Ben Rosner and Leo Simon. After Mr.
Simon’s death, the business was offered to Diversified for cash
in 1967. Ben was to continue running the business - and run it,
he has.
Associated’s business has not grown, and it consistently has
faced adverse demographic and retailing trends. But Ben’s
combination of merchandising, real estate and cost-containment
skills has produced an outstanding record of profitability, with
returns on capital necessarily employed in the business often in
the 20% after-tax area.
Ben is now 75 and, like Gene Abegg, 81, at Illinois National
and Louie Vincenti, 73, at Wesco, continues daily to bring an
almost passionately proprietary attitude to the business. This
group of top managers must appear to an outsider to be an
overreaction on our part to an OEO bulletin on age
discrimination. While unorthodox, these relationships have been
exceptionally rewarding, both financially and personally. It is
a real pleasure to work with managers who enjoy coming to work
each morning and, once there, instinctively and unerringly think
like owners. We are associated with some of the very best.
Warren E. Buffett, Chairman
March 26, 1979
中文译文
# 伯克希尔·哈撒韦公司
致伯克希尔·哈撒韦公司的股东们：
首先，先谈几句会计方面的问题。与多元零售公司（Diversified Retailing Company, Inc.）在年底的合并，给我们的财务业绩呈现带来了两个新的复杂情况。合并后，我们对蓝筹印花公司（Blue Chip Stamps）的持股比例增至约58%，因此，该公司的账目必须完全并入伯克希尔的资产负债表和损益表中。在以往的报告中，我们只将蓝筹公司净收益中属于我们的份额，作为伯克希尔损益表中的一个单独项目列示，同样，其净资产中我们的份额也仅在资产负债表上用一行来体现。
这种对销售额、费用、应收款、存货、债务等的全面合并，将来自众多不同行业——纺织、保险、糖果、报纸、 trading stamps ——且经济特征截然不同的业务的数据汇总到了一起。在其中的某些业务中，你们的持股比例为100%，但在那些由蓝筹公司拥有却又被全额合并的业务中，你们作为伯克希尔股东的持股比例仅为58%。（这些业务余额中由他人拥有的部分，在资产负债表负债方以庞大的“少数股东权益”项目体现。）这种对资产负债表和损益表项目的合并——部分全资拥有，部分部分拥有——往往反而模糊了经济现实，而不是将其阐明。事实上，这种呈现形式我们内部在一年中从未使用过，对于我们的任何管理活动也毫无价值。
因此，在整个报告中，我们提供了大量关于各业务板块的独立财务信息及评述，以帮助你们评估伯克希尔的业绩和前景。这些分块信息中有许多是SEC（美国证券交易委员会）披露规则所要求的，并在第29至34页的“管理层讨论”中有所涵盖。而在这封信中，我们力图从与管理相同的视角，向你们呈现我们对各运营实体的看法。
合并带来的第二个复杂问题是，本报告显示的1977年数据与去年我们寄给各位的报告中的1977年数据有所不同。会计准则要求，当多元零售公司和伯克希尔这样的两个实体合并后，之后所有的财务数据都必须呈现为仿佛这两家公司自成立之时起就已合并，而非仅仅在最近才合并。因此，所附的财务报表实际上假定在1977年（以及更早的年份）多元零售-伯克希尔合并已经发生，即使实际合并日期是1978年12月30日。这种不断变化的基准使得对比评述令人困惑，因此，在我们的叙述报告中，会不时地引用历史数据向你们报告的、伯克希尔股东的业绩数字及表现，而非在多元零售合并后重述的数字。
有了这番开场白，可以这样说：无论有没有重述后的数字，1978年都是个好年景。经营利润（不包括资本利得）为期初股东投资额的19.4%，与我们1972年的纪录相差无几。虽然我们认为在评估单一年份业绩时，不应将资本利得或损失计入，但它们是长期业绩记录的重要组成部分。由于这些利得，伯克希尔每股权益的长期增长，高于我们每年报告的经营利润回报率通过复利计算所能体现的水平。
例如，过去三年——通常是保险业（我们最大的利润来源）的丰收期——伯克希尔的每股净值几乎翻了一番，通过良好的经营利润和相当可观的资本利得的双重作用，年复利增长约25%。无论是全部来源带来的25%的权益增长，还是1978年经营利润带来的19.4%的权益增长，都是不可持续的。保险周期已在1979年掉头向下，几乎可以肯定的是，以净资产收益率衡量的经营利润今年将会下降。然而，以美元金额衡量的经营利润，则很可能因现今业务中所使用的股东权益规模要大得多而有所增加。
与这种对近期经营回报的谨慎看法形成对比的是，我们对保险公司持有的主要股权投资所能带来的长期回报前景持乐观态度。我们并不试图预测证券市场的表现；成功预测短期内股票价格的变动，是我们认为自己和其他任何人都无法做到的事情。然而，从长远来看，我们觉得许多主要股权投资的最终价值将远高于我们的买入成本，而这些投资收益将会显著增加保险板块的经营回报。
**利润来源**
为了让各位更清晰地了解伯克希尔利润的来源，我们在下面展示了一个表格，这需要稍作解释。伯克希尔持有蓝筹公司近58%的股份，而蓝筹公司除了全资拥有几家企业外，还持有威斯科金融公司（Wesco Financial Corporation）80%的股份。因此，伯克希尔在威斯科收益中的权益约为46%。总体而言，我们控制的企业拥有约7,000名全职员工，并创造超过5亿美元的收入。
该表格显示了每个主要经营类别在税前基础上的总体收益（由于有大量的免税利息和股息收入，部分业务的实际税率较低），以及这些收益中归属于伯克希尔的部分（分别以税前和税后基础列示）。任何业务中产生的重大资本利得或损失不包含在经营利润数字内，而是在表格底部的“已实现证券利得”一行中汇总。由于各种会计和税务上的复杂性，表格中的数字不应被视为金科玉律，而应看作是我们所属业务在1977年和1978年利润贡献的近似值。
| | 税前收益 | 净收益（税后） |
| :----------------------------------------------- | :---------------------------- | :-------------------------- |
| | **总计** | **伯克希尔份额** | **伯克希尔份额** |
| | 1978 | 1977 | 1978 | 1977 | 1978 | 1977 |
| :------------------------------------------------ | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- |
| | (千美元省略) | (千美元省略) | (千美元省略) | (千美元省略) | (千美元省略) | (千美元省略) |
| **总计 - 所有实体** | $66,180 | $57,089 | $54,350 | $42,234 | $39,242 | $30,393 |
| **来自经营的收益：** | | | | | | |
| 保险集团： | | | | | | |
| 承销 | $3,001 | $5,802 | $3,000 | $5,802 | $1,560 | $3,017 |
| 净投资收益 | 19,705 | 12,804 | 19,691 | 12,804 | 16,400 | 11,360 |
| 伯克希尔-旺贝克纺织业 | 2,916 | (620) | 2,916 | (620) | 1,342 | (322) |
| 关联零售百货公司 | 2,757 | 2,775 | 2,757 | 2,775 | 1,176 | 1,429 |
| 喜诗糖果 | 12,482 | 12,840 | 7,013 | 6,598 | 3,049 | 2,974 |
| 布法罗晚报 | (2,913) | 751 | (1,637) | 389 | (738) | 158 |
| 蓝筹印花公司 - 母公司 | 2,133 | 1,091 | 1,198 | 566 | 1,382 | 892 |
| 伊利诺伊国民银行及信托公司 | 4,822 | 3,800 | 4,710 | 3,706 | 4,262 | 3,288 |
| 威斯科金融公司 - 母公司 | 1,771 | 2,006 | 777 | 813 | 665 | 419 |
| 互惠储蓄与贷款协会 | 10,556 | 6,779 | 4,638 | 2,747 | 3,042 | 1,946 |
| 债务利息 | (5,566) | (5,302) | (4,546) | (4,255) | (2,349) | (2,129) |
| 其他 | 720 | 165 | 438 | 102 | 261 | 48 |
| **来自经营的收益总额** | **$52,384**| **$42,891**| **$40,955**| **$31,427**| **$30,052**| **$23,080**|
| **已实现证券利得** | 13,796 | 14,198 | 13,395 | 10,807 | 9,190 | 7,313 |
| **总收益** | **$66,180**| **$57,089**| **$54,350**| **$42,234**| **$39,242**| **$30,393**|
蓝筹印花和威斯科金融是上市公司，它们有自己的报告要求。在本报告后面部分，我们转载了两家公司主要管理层的叙述性报告，描述了它们1978年的运营情况。他们使用的一些数字可能与本报告中的不完全吻合，这再次归因于会计和税务上的复杂性。但他们的评论应该有助于你们理解这些重要的部分控股业务的基本经济特征。任何伯克希尔股东如需其中任何一家公司的完整年度报告副本，可致函Robert H. Bird先生索取蓝筹印花公司的报告（地址：5801 South Eastern Avenue, Los Angeles, California 90040），或致函Bette Deckard女士索取威斯科金融公司的报告（地址：315 East Colorado Boulevard, Pasadena, California 91109）。
**纺织业**
1978年实现利润130万美元，虽然比1977年好得多，但相对于这项业务投入的1700万美元资本而言，回报率仍然很低。纺织厂的厂房和设备在账面上的价值，远低于今天重置这些设备所需的成本。而且，尽管设备老旧，其中大部分在功能上与该行业正在安装的新设备相似。但是，尽管有这种固定资产的“廉价成本”，资本周转率却相对较低，这反映出与销售额相比，应收账款和存货方面所需的投资水平较高。缓慢的资本周转率，加上低销售利润率，不可避免地导致资本回报率不足。提高利润率的明显途径包括：产品差异化、通过更高效的设备或更好地利用人力来降低制造成本、将业务转向市场趋势更强的面料等等。我们的管理层正在勤奋地追求这些目标。当然，问题在于，我们的竞争对手也同样在勤奋地做着同样的事情。
纺织业以教科书般的方式展示了，在资本密集型产业中，生产相对同质化商品的生产者，除非在供应紧张或真正短缺的情况下，否则必定只能获得不足的回报。只要存在过剩产能，价格就会倾向于反映直接运营成本，而不是所用资本。这种供应过剩的状况在纺织业似乎大部分时间都会存在，而我们预期该业务的利润相对于其资本而言将处于相对微薄的水平。
我们希望不要再涉足太多具有如此严峻经济特征的业务。但是，正如我们之前所述：(1) 我们的纺织业务是其所在社区非常重要的雇主；(2) 管理层在报告问题方面一直坦诚，在解决问题方面充满干劲；(3) 工人们在面对我们共同的问题时一直合作且通情达理；(4) 该业务相对于投资而言，平均应能产生适度的现金回报。只要这些条件持续存在——我们预期它们会如此——尽管存在更具吸引力的资本替代用途，我们也打算继续支持我们的纺织业务。
**保险承销业务**
1978年，对伯克希尔整体优秀业绩贡献最大的，是Phil Liesche管理的国民赔偿公司（National Indemnity Company）保险业务板块。在约9000万美元的已赚保费基础上，实现了约1100万美元的承保利润，即使在行业条件极佳的背景下，这也是一项真正非凡的成就。在Phil的领导下，加上承保部的Roland Miller和理赔部的Bill Lyons的出色协助，国民赔偿公司的这一板块（包括作为姊妹公司运营的国民火险及海事保险公司（National Fire and Marine Insurance Company））在其长期总体上远优于行业水平的业绩历史中，迎来了最佳年份之一。目前的成功不仅归功于现任管理者，也同样归功于国民赔偿公司创始人Jack Ringwalt的商业才能，他的经营理念至今仍深深烙印在这家公司身上。
家庭与汽车保险公司（Home and Automobile Insurance Company）迎来了自1975年John Seward接手并整顿业务以来的最佳年份。其业绩在本报告中与Phil Liesche板块的业绩合并，列于保险类别下的“专业汽车及一般责任险”项下。
1978年的劳工补偿险业务表现好坏参半。由Milt Thornton管理的塞浦路斯保险公司（Cypress Insurance Company）在其作为子公司的第一年就交出了出色的成绩单。当快速通胀与社会观念变迁相互作用时，劳工补偿险这条线可能导致巨大的承保损失，但Milt拥有一支谨慎且高度专业的团队来应对这些问题。他1978年的表现，强化了我们对这项收购的非常良好的感觉。
Frank DeNardo于1978年春天加入我们，负责整顿国民赔偿公司在加州的劳工补偿险业务，该业务当时一直是一团糟。Frank拥有纠正洛杉矶办公室主要问题所需的经验和才智。目前，我们这个部门的业务量仅为18个月前的大约25%，初步迹象表明Frank正在取得良好进展。
George Young的再保险部门继续产生相对于保费规模而言非常可观的投资资金，从而为我们带来了还算令人满意的整体业绩。然而，承销结果仍未达到应有的、也是可以达到的水平。在再保险业务中（尤其是在涉及漫长结算周期的意外险领域），人们很容易在承销结果上欺骗自己，而我们相信这种情况普遍存在于我们许多竞争对手之中。不幸的是，公司在准备金计提上的自欺欺人几乎总是导致行业费率水平不足。如果市场的主要参与者不了解他们的真实成本，那么竞争的“恶果”就会波及所有人——即使是那些充分了解成本的人。如果需要，George很愿意大幅削减业务量以实现满意的承保业绩，我们对他领导下这项业务的长期稳健性充满信心。
1978年本州业务令人失望。在传统的、由我们本州集团承保的业务项目上，行业整体业绩极为有利，而我们的承保表现不佳——即便部分原因可归咎于中西部地区不寻常的暴风雨——尤其令人担忧。我们对John Ringwalt纠正这一局面的能力有信心。该集团的亮点是堪萨斯火险与意外险公司（Kansas Fire and Casualty）在其首个完整经营年度的表现。在Floyd Taylor的领导下，这家子公司确实取得了非凡的开端。当然，评估承保结果至少需要几年时间，但初步迹象令人鼓舞，Floyd的经营在1978年取得了本州公司中最佳的综合成本率。
尽管有些板块令人失望，但总体而言，我们的保险业务在1978年表现优异。当然，当像1978年这样整个行业高歌猛进时，我们本就应该期待一个好年景。几乎可以肯定的是，1979年行业的综合成本率（定义见第31页）将会上升至少几个百分点，甚至可能足以使整个行业陷入承保亏损的境地。例如，在汽车保险业务方面——这是行业也是我们的最重要的领域——CPI（消费者价格指数）数据显示，1979年1月的整体费率仅比一年前高出3%。但构成损失成本的项目——汽车修理费和医疗护理费用——却上涨了超过9%。这与1976年底的情况多么不同，当时费率在过去的十二个月里上涨了超过22%，而成本仅上涨了8%。
只有当费率与成本同步上升时，利润率才能保持稳定。1979年肯定不会出现这种情况，而1980年的情况可能会进一步恶化。我们目前的看法是，1979年我们的承保业绩相对于行业将有所改善，但恐怕其他每一家保险公司管理层可能都对自己的相对前景抱有类似的乐观态度——总有人会失望的。即使我们的相对表现确实优于同行，我们在1979年的综合成本率也可能更高，承保利润也可能低于去年。
我们继续寻找扩展保险业务的方法。但你们对此意图的反应不应是毫无保留的喜悦。我们的一些扩张努力——主要由我发起——表现平平，另一些则代价高昂地失败了。我们于1967年通过收购Phil Liesche目前管理的板块进入该行业，至今它仍然是我们保险业务中遥遥领先的最佳部分。收购一家好的保险公司并不容易，但我们的经验是，收购比创造一家要容易。然而，我们将继续尝试这两种方法，因为在这一领域成功的回报可能是非同寻常的。
**保险投资**
我们坦承，对保险公司的股权投资相当乐观。当然，我们对股票的热情并非是无条件的。在某些情况下，保险公司进行普通股投资意义甚微。
只有当符合以下条件时，我们才会足够兴奋地将保险公司净资产的很大比例投入到股票中：(1) 我们能理解的业务；(2) 具有有利的长期前景；(3) 由诚实能干的人经营；(4) 价格极具吸引力。我们通常能识别出少量满足要求(1)、(2)、(3)的潜在投资标的，但要求(4)常常阻止我们采取行动。例如，1971年，伯克希尔保险子公司的普通股持仓总成本仅为1070万美元，市值为1170万美元。当时有一些可识别出的优秀公司的股票——但价格诱人的非常少。（一个无法抗拒的脚注：1971年，养老金基金经理将其可用净资金的创纪录的122%投资于股票——在价格高企时，他们还是觉得买得不够。1974年，市场暴跌之后，他们投入到股票的比例降至当时创纪录的低点21%。）
过去的几年对我们来说则是另一番情景。1975年底，我们的保险子公司持有的普通股市值恰好等于其成本3930万美元。到1978年底，这一持仓已增至成本1.291亿美元、市值2.165亿美元的股票（包括一只可转换优先股）。在这中间的三年里，我们还实现了约2470万美元的普通股税前收益。因此，在这三年期间，我们普通股的未实现及已实现税前总收益约为1.12亿美元。与此同时，道琼斯工业平均指数从852点跌至805点。对于价值导向的股票买家来说，这是一个绝妙的时期。
我们继续为我们的保险投资组合发现少量真正杰出的业务，这些业务通过证券市场的拍卖定价机制，其价格远低于那些较差业务在协议收购中所能获得的估值。
这种以低价收购一小部分业务（普通股）的计划（市场对此鲜有热情），与普遍存在的企业收购活动（对此市场充满热情）形成了鲜明对比。我们非常清楚，要么是企业在通过协议交易和收购要约收购整个企业时犯下了非常重大的错误，要么就是我们最终将通过以股票市场上流行的、大打折扣的估值水平，购买这些业务的小部分股权而赚取可观的金钱。（第二个脚注：1978年，养老金经理们——这个群体按理应该保持最长的投资视野——仅将其可用净资金的9%投入股票——打破了1974年创下并在1977年平齐的历史最低记录。）
我们并不关心市场是否会迅速对那些我们认为正在以低价出售的证券进行重新估值。事实上，我们更喜欢相反的情况，因为在大多数年份，我们预计会有可用资金成为证券的净买家。持续有吸引力的购买，最终可能比股票价格短期飙升到我们不愿继续购买的水平所提供的任何卖出机会，对我们更有利。
我们的政策是集中持股。当我们对某项业务或其价格只是不冷不热时，我们会尽量避免买一点这个、买一点那个。当我们确信其吸引力时，我们相信就应该买入可观的量。
截至1978年12月31日，我们保险公司持有市值超过800万美元的股权投资如下：
| 持股数量 | 公司名称 | 成本 | 市值 |
| :------- | :---------------------------------------- | :---------- | :---------- |
| | | (千美元省略) | (千美元省略) |
| 246,450 | 美国广播公司 (American Broadcasting Companies, Inc.) | $6,082 | $8,626 |
| 1,294,308| 政府雇员保险公司 (Government Employees Insurance Company) | | |
| | 普通股 | 4,116 | 9,060 |
| 1,986,953| 政府雇员保险公司 (Government Employees Insurance Company) | | |
| | 可转换优先股 | 19,417 | 28,314 |
| 592,650 | 英特帕布利克集团 (Interpublic Group of Companies, Inc.) | 4,531 | 19,039 |
| 1,066,934| 凯撒铝业与化学公司 (Kaiser Aluminum and Chemical Corporation) | 18,085 | 18,671 |
| 453,800 | 奈特-里德报业公司 (Knight-Ridder Newspapers, Inc.) | 7,534 | 10,267 |
| 953,750 | SAFECO公司 | 23,867 | 26,467 |
| 934,300 | 华盛顿邮报公司 (The Washington Post Company) | 10,628 | 43,445 |
| | **总计** | **$94,260** | **$163,889**|
| | **所有其他持仓** | **39,506** | **57,040** |
| | **总股票投资** | **$133,766**| **$220,929**|
在某些情况下，我们对盈利能力的间接利益已变得相当可观。例如，请注意我们持有的953,750股SAFECO公司股票。SAFECO可能是美国运营得最好的大型财产和意外险保险公司。它们的承保能力简直是出类拔萃，它们的损失准备金计提很保守，它们的投资政策也很有道理。
SAFECO的保险业务比我们自己的要好得多（尽管我们认为我们某些板块远高于平均水平），比我们自己能发展出来的也要好，同样，也远远优于任何我们可能通过谈判取得控股权的公司。然而，我们购买SAFECO的价格远低于其账面价值。我们以低于1美元的价格买到了业界最好的公司，而在公司交易中，平庸的公司却要以远高于1美元的价格才能买到。而且，你根本无法以低于1美元的价格去建立一个新的业务——其前景还必然充满不确定性。
当然，作为小股东，我们无权指导甚至影响SAFECO的管理政策。但为什么我们想要这样做呢？记录表明，他们在管理自身运营方面做得比我们自己去做要更好。虽然袖手旁观、让别人干活可能缺乏兴奋感和威望，但我们认为，接受对优秀管理的被动参与，你所失去的不过是这些。因为，非常清楚的是，如果你掌控着一家像SAFECO这样运营良好的公司，正确的政策同样也是袖手旁观，让管理层做好他们的工作。
1978年，归属于伯克希尔所持SAFECO股份的收益为610万美元，但只有收到的股息（约占收益的18%）体现在我们的经营利润中。我们相信，剩余的留存收益，虽然在账面上不报告，但就其最终能给我们带来的利益而言，与已分配的部分一样真实。事实上，SAFECO的留存收益（或其他管理良好、有机会可以有利地使用额外资本的公司留存收益）对股东的价值，最终可能远高于1美元对1美元。
当我们全资拥有的企业能够以有吸引力的利率在内部利用这些资金时，我们对它们留存所有收益一点也不感到不高兴。为什么我们对那些仅持有少量股权、但记录显示其资本盈利前景甚至更好的公司的留存收益，要有不同的感觉呢？（当然，这个命题在资本需求低的行业，或者管理层有将资本投入到低利润项目坏记录的情况下，就得反向思考了；那时收益就应该被派发出去或用于回购股份——这通常是资本利用中最具吸引力的选择。）
归属于我们在优秀公司中股权利益的这种留存收益总额已变得相当可观。它没有计入我们报告的经营利润中，但我们认为它对我们的股东而言，很可能具有同等的长期意义。我们希望证券市场的条件能继续允许我们的保险公司以相对适中的支出，购买大量的潜在盈利能力。在某些时候，市场条件无疑会再次阻止这种廉价购买，但在此期间，我们将努力充分利用这些机会。
**银行业务**
在Gene Abegg和Pete Jeffrey的管理下，位于罗克福德的伊利诺伊国民银行及信托公司（Illinois National Bank and Trust Company）持续创造新的纪录。去年，其收益约为平均资产的2.1%，是主要银行平均水平的大约三倍。我们认为，在实现这种非凡盈利水平的同时，它们所承担的风险显著低于大多数大型银行。
我们于1969年3月收购了伊利诺伊国民银行。当时它就是一流的企业，就像自1931年Gene Abegg开业以来一直如此。自1968年以来，消费者定期存款翻了两番，净利润增长了两倍，信托部门收入增长了一倍多，而成本得到了严格控制。
我们的经验是，已经处于高成本运营状态的管理者，往往有异乎寻常的聪明才智去找到增加管理费用的新方法；而一个管理得井井有条的管理者，即使他的成本已经远低于竞争对手，也通常会继续寻找削减成本的新方法。在展示后一种能力方面，没有人比Gene Abegg做得更好。
我们被要求在1980年12月31日前剥离这家银行。最可能的方式是在1980年下半年将其分拆给伯克希尔股东。
**零售业务**
在与多元零售公司合并后，我们获得了关联零售百货公司（Associated Retail Stores, Inc.）的全部所有权，这是一家拥有约75家平价女装店的连锁企业。关联零售于1931年3月7日在芝加哥白手起家，当时只有一家店、3200美元和两位非凡的合伙人，Ben Rosner和Leo Simon。Simon先生去世后，该业务于1967年以现金形式出售给了多元零售公司。条件是Ben继续管理业务——而他确实一直管理至今。
关联零售的业务没有增长，并且一直面临着不利的人口结构和零售业趋势。但Ben在商品采购、房地产和成本控制方面的综合技能，创造了出色的盈利记录，业务所需资本的税后回报率经常在20%左右。
Ben现在75岁，就像伊利诺伊国民银行81岁的Gene Abegg和威斯科公司73岁的Louie Vincenti一样，每天都以一种近乎强烈的主人翁态度投入工作。在外人看来，我们对这帮顶级管理者的倚重，可能像是我们对OEO（经济机会局）关于年龄歧视公告的过度反应。虽然不合常规，但这些合作关系无论在经济上还是个人关系上，都给我们带来了丰厚的回报。与那些每天早晨乐意来上班，并且一旦到了公司，就能本能地、准确无误地像所有者一样思考的管理者共事，真是一种享受。我们与其中一些最优秀的人在一起。
沃伦·E·巴菲特，董事长
1979年3月26日