Berkshire Chairman's Letter ~ 1978

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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.
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Berkshire Chairman's Letter 1977

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.
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