Berkshire Hathaway Letters to Shareholders

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Business

Warren Buffett, Max Olson

1965–1970: Early Years and Strategic Shifts

Warren Buffett took control of Berkshire Hathaway in 1965, inheriting a struggling textile company with a book value of $19.46 per share. Despite initial textile losses, Buffett began diversifying into insurance (e.g., National Indemnity) and banking (Illinois National Bank), leveraging his “capital allocation” philosophy. By 1970, Berkshire’s focus shifted from textiles to insurance and acquisitions, with insurance underwriting and investment income emerging as key growth drivers. Notable moves included acquiring Sun Newspapers and expanding into reinsurance, laying the groundwork for future diversification.

1971–1975: Insurance Growth and Economic Challenges

The early 1970s saw insurance become Berkshire’s profit engine, with National Indemnity’s underwriting success and investments in bonds and stocks. However, the 1973–1974 stock market crash and rising inflation hit hard, causing Berkshire’s stock to drop 48.7% in 1974. Buffett emphasized long-term value, retaining stocks like The Washington Post despite short-term losses. The textile division struggled due to cheap imports and weak demand, but the bank and insurance units stabilized results, showcasing Buffett’s preference for businesses with “economic moats.”

1976–1979: Recovery and Portfolio Expansion

By 1976, Berkshire rebounded with insurance underwriting profits and strategic investments. The acquisition of See’s Candies and Blue Chip Stamps (increasing ownership to 58%) added steady income. Buffett’s “buy and hold” strategy shone as holdings like The Washington Post and Government Employees Insurance Company (GEICO) grew in value. Despite textile losses, insurance and banking returns pushed overall equity per share to $94.92 by 1979, up from $19.46 in 1964. The report highlighted the importance of “owner-managers” like Gene Abegg (bank) and Phil Liesche (insurance) in driving success.

1979: Navigating Accounting Changes and Insurance Challenges

In 1979, Berkshire faced accounting shifts as insurance companies were required to value equities at market, boosting reported net worth but complicating performance assessment. Despite this, operating earnings hit 18.6% of beginning equity, driven by insurance underwriting ($3.7M profit) and investments. The textile division continued to struggle, with Waumbec Mills showing losses, while the Illinois National Bank shone with a 2.3% return on assets—triple the industry average. Buffett emphasized “non-controlled ownership earnings,” noting that undistributed profits from holdings like GEICO and The Washington Post were more valuable than reported earnings. He warned that inflation and taxes could erode real returns, stating, “a business earning 20% on equity… can produce a negative real return” for shareholders in high tax brackets.

1980: The Value of Unreported Earnings and Insurance Industry Woes

In 1980, operating earnings rose to $41.9M, but return on equity dipped to 17.8%. Buffett highlighted “non-controlled ownership earnings”—undistributed profits from partial holdings like GEICO (33% stake), where Berkshire’s $20M share of earnings far exceeded reported dividends. The insurance industry faced deteriorating underwriting results (combined ratio rose to 103.5), with many companies trapped by long-term bond losses hidden by accounting rules. Berkshire’s strength allowed selectivity: Phil Liesche’s team at National Indemnity achieved exceptional underwriting margins, while the bank sale neared completion. Buffett critiqued conventional accounting, stating, “earnings reported in corporate financial statements are no longer the dominant variable” for real investor returns, emphasizing inflation’s hidden tax on capital.

1981: Divestitures and Shareholder-Driven Philanthropy

By 1981, Berkshire sold the Illinois National Bank, wrapping up a decade of stellar management by Gene Abegg. Operating earnings fell to 15.2% of equity, partly due to a new shareholder-designated charitable program, where 95.6% of shareholders directed $1.78M to charities, reflecting trust in Berkshire’s governance. The insurance industry worsened, with a combined ratio of 105.7, as insurers chased volume over profitability. Berkshire’s textile division was further downsized, while See’s Candies and GEICO remained bright spots. Buffett criticized “asset maintenance underwriting,” where companies write unprofitable policies to avoid realizing bond losses. He stressed the importance of businesses with “economic moats,” contrasting GEICO’s resilience with struggling competitors, and warned that “value-added” from equity investments had diminished in high-inflation era.

1982: Navigating Insurance Woes and Emphasizing Economic Earnings

In 1982, Berkshire’s operating earnings fell to 9.8% of equity, driven by insurance underwriting losses ($21.6M) and textile struggles. Buffett introduced the concept of “economic earnings”, stressing that undistributed profits from non-controlled holdings (e.g., GEICO’s $23M unreported earnings) are more valuable than reported figures. The insurance industry faced a combined ratio of 109.5, with insurers chasing volume over profitability. Berkshire’s disciplined approach—prioritizing businesses like See’s Candies (14.2M profits) and the Buffalo News—contrasted with industry recklessness. Buffett warned that inflation and taxes erode real returns, stating, “accounting earnings can seriously misrepresent economic reality.”

1983: Mergers, Goodwill, and Shareholder-Centric Philosophy

The 1983 merger with Blue Chip Stamps solidified Berkshire’s control over See’s Candies and the Buffalo News, boosting book value by 32% to $975.83/share. Buffett detailed the distinction between accounting goodwill (amortized over 40 years) and economic goodwill (enduring value from consumer franchises). For example, See’s $13M earnings on $20M tangible assets highlighted its intangible value. The acquisition of Nebraska Furniture Mart, run by 90-year-old Mrs. B, exemplified Buffett’s preference for “owners who think like managers.” He also rejected stock splits, arguing they attract short-term traders, stating, “a split would downgrade the quality of our shareholder group.”

1984: Navigating Insurance Headwinds and Emphasizing Economic Reality

In 1984, Berkshire’s net worth grew 13.6%, but operating earnings fell due to insurance underwriting losses ($25.9M after tax) and textile struggles. Buffett highlighted “economic earnings”, emphasizing undistributed profits from holdings like GEICO ($23M unreported) as more meaningful than accounting figures. The insurance industry faced a combined ratio of 117.7, with insurers chasing volume despite rising losses. Berkshire’s disciplined approach—focusing on businesses like See’s Candies ($13.4M profits) and the Buffalo News—contrasted with industry recklessness. Buffett warned that inflation and poor reserving distorted true earnings, stating, “accounting earnings can seriously misrepresent economic reality.”

1985: Transformative Acquisitions and a Textile Exit

1985 saw a historic 48.2% net worth gain, driven by major moves: acquiring 3 million shares of Capital Cities/ABC ($517.5M), buying Scott & Fetzer for $320M, and exiting textiles after 21 years of losses. The textile shutdown highlighted the folly of sunk costs: despite $13M in original equipment cost, assets sold for just $163K. Buffett praised managers like Mrs. B (Nebraska Furniture Mart) and Chuck Huggins (See’s), whose efficiency and integrity drove growth. GEICO, now 38%-owned, remained a star, though insurance industry gains were fleeting due to capacity surges. Buffett noted, “A horse that can count to ten is a remarkable horse—not a remarkable mathematician,” cautioning against overvaluing incremental gains in low-return businesses.

1986: Navigating Tax Changes and Managerial Excellence

In 1986, Berkshire’s net worth grew 26.1%, driven by acquisitions like Fechheimer Bros. ($55M valuation) and strong performances from existing units. The “Sainted Seven” businesses (e.g., Nebraska Furniture Mart, See’s Candies) achieved a staggering 57% pre-tax return on equity, highlighting their economic moats. Buffett emphasized owner earnings over GAAP figures, critiquing “cash flow” fallacies by noting that $11.6M in purchase-price adjustments (e.g., inventory write-ups) were non-cash costs. The insurance industry saw a combined ratio of 108.5, with Berkshire’s disciplined underwriting (combined ratio 103) outperforming peers. Buffett warned that the Tax Reform Act of 1986 would reduce future profitability, but praised managers like Mrs. B and Chuck Huggins for driving growth through customer focus and cost control.

1987: Market Turmoil and Permanent Holdings

Despite market volatility (the Dow rose 2.3% amid a crash), Berkshire’s net worth grew 19.5%. Key holdings like GEICO and Capital Cities/ABC continued to thrive, with GEICO’s combined ratio at 96.9 and Buffett lauding its “moat” of low costs. The insurance industry’s combined ratio improved to 104.7, but Buffett predicted a future downturn due to shrinking premium growth. He emphasized permanent holdings in businesses with “enduring economic characteristics,” avoiding short-term trading trends. The “Mr. Market” analogy highlighted the importance of ignoring market hysteria, while arbitrage and medium-term bonds provided stability. Buffett reiterated his preference for buying undervalued businesses over chasing market trends, even as tax changes squeezed returns.

1990: Navigating Market Volatility and Media Industry Shifts

In 1990, Berkshire’s net worth grew 7.3%, with stock market volatility and media industry challenges affecting results. The insurance sector faced a combined ratio of 109.6, but Berkshire’s “cost of float” remained below government bond rates, driven by disciplined underwriting. Key holdings like Coca-Cola and GEICO showed resilience, though media investments (e.g., Capital Cities/ABC, Washington Post) faced secular headwinds due to fragmented advertising markets. Buffett emphasized “look-through earnings,” combining reported earnings with retained profits from investees, and warned of tough times ahead for insurers relying on volatile super-catastrophe (super-cat) policies.

1991: Salomon Crisis and Strategic Acquisitions

Despite a 39.6% net worth gain, 1991 was marked by Buffett’s interim role as Salomon Inc. chairman amid a trading scandal, demonstrating his commitment to corporate responsibility. The insurance group reported an underwriting loss of $119.6 million, but super-cat operations and GEICO’s growth offset setbacks. Acquisitions included H.H. Brown Shoe, adding $13.6 million in earnings, while See’s Candies and Nebraska Furniture Mart continued to thrive. Buffett highlighted the importance of “economic moats” in businesses like Coca-Cola and Gillette, contrasting them with volatile industries like airlines.

1992: Insurance Strength and Shareholder-Centric Policies

In 1992, net worth grew 20.3%, with insurance float reaching $2.3 billion and a combined ratio of 104.8. Super-cat policies remained volatile but profitable, with Berkshire’s financial strength attracting major clients. The acquisition of Central States Indemnity and expansion of H.H. Brown into Lowell Shoe showcased Buffett’s preference for owner-managed businesses. Shareholder-designated contributions reached $7.6 million, reflecting Berkshire’s commitment to owner-driven philanthropy. Buffett criticized stock option accounting, urging transparency in corporate reporting.

1993: Dexter Shoe and Long-Term Vision

Berkshire’s 14.3% net worth growth in 1993 was driven by the acquisition of Dexter Shoe for $433 million, adding $44 million in pre-tax earnings. The insurance division posted an underwriting profit, with float costs near zero. Key investments in Coca-Cola and GEICO continued to compound, while Buffett emphasized the importance of long-term holding and avoiding short-term market noise. He warned against over-reliance on beta metrics for risk assessment, advocating instead for qualitative analysis of business fundamentals. The annual meeting highlighted Berkshire’s shareholder-friendly culture, with record attendance and a focus on transparency.

1994–1995: Strategic Acquisitions and Insurance Dominance

In 1994, Berkshire’s net worth grew 13.9%, driven by acquisitions like Helzberg’s Diamond Shops and R.C. Willey Home Furnishings, which exemplified Buffett’s preference for owner-managed businesses. GEICO’s growth accelerated, with voluntary policies increasing 10%, while the insurance division’s “float” (funds from premiums) reached $3.6 billion with negative cost, showcasing underwriting discipline. Buffett emphasized “look-through earnings,” combining reported earnings with retained profits from investees, and warned of challenges in deploying large capital efficiently.

1996–1997: GEICO’s Explosive Growth and Market Volatility

By 1996, GEICO’s policy count surged to 3.5 million, fueled by aggressive marketing and a focus on low-cost direct sales. Berkshire’s acquisition of Executive Jet (NetJets) added a high-growth aviation service, while General Re’s merger brought scale to reinsurance. Despite market volatility, Berkshire’s float grew to $6.7 billion, with super-cat insurance showing occasional large losses but long-term profitability. Buffett critiqued stock option accounting, advocating for transparency in corporate reporting.

1998–1999: Mega-Acquisitions and Market Corrections

The $22 billion purchase of General Re in 1998 marked a milestone, though its underwriting losses temporarily pressured results. GEICO’s market share rose to 4.1%, but advertising costs spiked, highlighting challenges in sustaining growth. Buffett’s “Ted Williams” analogy emphasized patience in capital allocation, avoiding overvalued markets. The dot-com bubble’s impact was evident in Berkshire’s underperformance relative to the S&P 500, though its focus on intrinsic value over short-term gains remained steadfast.

2000: Economic Shifts and Insurance Innovations

In 2000, Berkshire acquired eight companies, including MidAmerican Energy and Johns Manville, diversifying into utilities and industrial sectors. GEICO faced slower growth due to rising acquisition costs, but its low-cost model ensured long-term resilience. The insurance division’s float cost improved to 6%, with Ajit Jain’s retro-active reinsurance deals providing steady funds. Buffett warned of irrational exuberance in tech stocks, reiterating his preference for businesses with “economic moats,” such as See’s Candies and The Washington Post.

1994–1995: Strategic Acquisitions and Insurance Dominance

1996–1997: GEICO’s Explosive Growth and Market Volatility

1998–1999: Mega-Acquisitions and Market Corrections

2000: Economic Shifts and Insurance Innovations

2001: Turmoil and Lessons in Insurance Underwriting

In 2001, Berkshire faced a $3.77 billion net worth loss, its first since 1965, driven by a $2.5 billion hit from 9/11 and poor underwriting at General Re. Buffett admitted a critical mistake: failing to recognize flawed risk models at Gen Re, which had assumed massive unpriced terrorism exposure. The insurance industry’s “cost of float” spiked to 12.8%, but GEICO’s discipline (8% market share, $221M underwriting profit) and acquisitions like Shaw Industries ($2B purchase) provided bright spots. Buffett emphasized the importance of “economic moats” and vowed to prioritize underwriting discipline over volume, stating, “Insurance is a game of errors, and we must price to avoid the worst ones.”

2002: Rebuilding and Derivative Risks

Berkshire rebounded with a 10% net worth gain, driven by GEICO’s 12% policy growth and Ajit Jain’s reinsurance coups (e.g., $1B PepsiCo lottery policy). However, the $173M loss from winding down Gen Re’s derivatives highlighted the danger of these instruments: “Derivatives are financial weapons of mass destruction.” The company exited unprofitable sectors (textiles) and expanded in utilities (MidAmerican Energy) and real estate (HomeServices). Buffett critiqued “pro-forma” earnings hype, noting Berkshire’s results were inflated by temporary gains, urging shareholders to focus on “look-through earnings” and intrinsic value.

2003: Catastrophes and Cultural Resilience

A 21% net worth surge ($13.6B) was marked by Katrina’s $2.5B blow and GEICO’s stellar performance (5.0% market share, $8.1B premiums). Buffett praised managers like Tony Nicely (GEICO) and Kevin Clayton (Clayton Homes), who thrived amid industry downturns. The $1.7B acquisition of Clayton Homes showcased Berkshire’s preference for owner-managers: “We buy to keep, not to flip.” The company’s $21.4B foreign currency bets reflected concerns about U.S. trade deficits, though Buffett warned, “Macro predictions are dicey; we focus on durable businesses.”

2004: Steady Growth and Managerial Stars

With a 10.5% net worth gain, Berkshire leaned on GEICO (6.1% market share, $502M ad spend) and MidAmerican Energy’s utility acquisitions. The $4B purchase of ISCAR, an Israeli cutting-tool maker, highlighted Buffett’s global reach and focus on “managers who think like owners.” Despite market stagnation, businesses like Shaw Industries (25.6% ROE) and Fruit of the Loom (48.7% market share in men’s underwear) thrived under skilled leaders. Buffett critiqued CEO compensation abuses, urging boards to prioritize “owner-aligned” pay structures.

2005: Mega-Catastrophes and Managerial Depth

A 6.4% net worth gain masked challenges: Katrina/Rita/Wilma cost $3.4B, but GEICO’s 12.1% policy growth and cost-cutting (32% productivity gain) offset losses. Acquisitions like TTI ($1.3B electronics distributor) and Applied Underwriters emphasized Berkshire’s “buy-and-hold” ethos. Buffett highlighted the importance of succession planning, revealing three internal CEO candidates and praising managers like Rich Santulli (NetJets), who turned around European operations despite $212M cumulative losses.

2006: Record Gains and Global Expansion

A historic $16.9B net worth gain (18.4%) was fueled by a “no-catastrophe” year in insurance and blockbuster deals like ISCAR (80% stake, $4B) and TTI. GEICO’s $631M ad blitz drove 42% policy growth, while MidAmerican Energy’s $9B PacifiCorp acquisition solidified its utility dominance. Buffett’s $2.2B currency gains and $7B Equitas reinsurance deal demonstrated strategic boldness. He concluded, “We seek managers who treat businesses like family heirlooms,” citing successes at Forest River and Business Wire as proof of this philosophy.

2007: Turmoil and Strategic Acquisitions

In 2007, Berkshire’s net worth grew 11%, marked by the $44 billion acquisition of BNSF, a railroad Buffett deemed critical to America’s future. Despite housing-related losses in subsidiaries like Acme Brick, insurance float reached $66 billion, with GEICO’s market share climbing to 7.7%. Buffett critiqued Wall Street’s “weakened lending practices,” contrasting them with Berkshire’s focus on intrinsic value. The “Big Four” investments (Coca-Cola, American Express, etc.) began delivering steady dividends, while Buffett warned of an impending credit crisis, noting, “You only learn who’s swimming naked when the tide goes out.”

2008: Financial Crisis and Core Strengths

The 2008 financial crisis caused a 9.6% net worth decline, but Berkshire’s insurance and utility sectors remained resilient. GEICO’s float grew to $9.6 billion, and MidAmerican Energy’s wind investments expanded. Buffett invested $15.6 billion in distressed companies (Goldman Sachs, GE), leveraging Berkshire’s liquidity. He emphasized the importance of “financial Gibraltar” status, avoiding leverage and prioritizing cash reserves. The $22 billion BNSF acquisition, though dilutive, was justified as a “core infrastructure play.”

2009: Recovery and Managerial Shifts

With a 19.8% net worth gain, 2009 highlighted Berkshire’s post-crisis rebound. The $26 billion purchase of Lubrizol and the hiring of investment managers Todd Combs and Ted Weschler signaled strategic depth. Insurance float hit $70 billion, with ten consecutive years of underwriting profits. Buffett addressed his $3.5 billion Dexter shoe blunder, stressing “price is what you pay, value is what you get.” The “Big Four” investments began outperforming, with Coca-Cola’s dividends doubling since 1995.

2010: Cultural Continuity and Regulatory Challenges

Berkshire’s 13% net worth growth included the $9 billion acquisition of Burlington Northern, enhancing its transportation moat. The “goodwill” of insurance operations ($15.5 billion) reflected their understated intrinsic value. Buffett’s “memo to managers” emphasized ethical rigor and succession planning, stating, “We can afford to lose money, but not reputation.” GEICO’s market share rose to 8.8%, driven by Tony Nicely’s focus on cost efficiency and customer retention.

2011: Economic Uncertainty and Steady Growth

Despite a 4.6% net worth gain, 2011 faced headwinds: the $1 billion write-down of Energy Future Holdings and housing-sector struggles. BNSF and MidAmerican set earnings records, with rail freight volumes rebounding. Buffett critiqued the “cult of beta” in risk assessment, advocating for qualitative analysis. The $5 billion Bank of America preferred stock investment, with warrants, exemplified his contrarian strategy during market panic.

2012: Record Investments and Dividend Philosophy

A 14.4% net worth gain marked 2012, fueled by $9.8 billion in capital expenditures and bolt-on acquisitions. The $12 billion Heinz deal (with 3G Capital) showcased Berkshire’s preference for cash-flow-rich businesses. Buffett defended his no-dividend policy, arguing that share repurchases at 120% of book value better enhance per-share intrinsic value. GEICO’s market share hit 9.7%, and the “Big Four” investments generated $3.9 billion in retained earnings, underscoring the power of long-term compounding.

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