To the Shareholders of Berkshire Hathaway Inc.:

     Our gain in net worth during 1984 was $152.6 million, or 
$133 per share.  This sounds pretty good but actually it’s 
mediocre.  Economic gains must be evaluated by comparison with 
the capital that produces them.  Our twenty-year compounded 
annual gain in book value has been 22.1% (from $19.46 in 1964 to 
$1108.77 in 1984), but our gain in 1984 was only 13.6%.

     As we discussed last year, the gain in per-share intrinsic 
business value is the economic measurement that really counts.  
But calculations of intrinsic business value are subjective.  In 
our case, book value serves as a useful, although somewhat 
understated, proxy.  In my judgment, intrinsic business value and 
book value increased during 1984 at about the same rate.

     Using my academic voice, I have told you in the past of the 
drag that a mushrooming capital base exerts upon rates of return. 
Unfortunately, my academic voice is now giving way to a 
reportorial voice.  Our historical 22% rate is just that - 
history.  To earn even 15% annually over the next decade 
(assuming we continue to follow our present dividend policy, 
about which more will be said later in this letter) we would need 
profits aggregating about $3.9 billion.  Accomplishing this will 
require a few big ideas - small ones just won’t do.  Charlie 
Munger, my partner in general management, and I do not have any 
such ideas at present, but our experience has been that they pop 
up occasionally. (How’s that for a strategic plan?)

Sources of Reported Earnings

     The table on the following page shows the sources of 
Berkshire’s reported earnings.  Berkshire’s net ownership 
interest in many of the constituent businesses changed at midyear 
1983 when the Blue Chip merger took place.  Because of these 
changes, the first two columns of the table provide the best 
measure of underlying business performance.

     All of the significant gains and losses attributable to 
unusual sales of assets by any of the business entities are 
aggregated with securities transactions on the line near the 
bottom of the table, and are not included in operating earnings. 
(We regard any annual figure for realized capital gains or losses 
as meaningless, but we regard the aggregate realized and 
unrealized capital gains over a period of years as very 

     Furthermore, amortization of Goodwill is not charged against 
the specific businesses but, for reasons outlined in the Appendix 
to my letter in the 1983 annual report, is set forth as a 
separate item.

                                                    (000s omitted)
                                                                         Net Earnings
                                   Earnings Before Income Taxes            After Tax
                              --------------------------------------  ------------------
                                    Total          Berkshire Share     Berkshire Share
                              ------------------  ------------------  ------------------
                                1984      1983      1984      1983      1984      1983
                              --------  --------  --------  --------  --------  --------
Operating Earnings:
  Insurance Group:  
    Underwriting ............ $(48,060) $(33,872) $(48,060) $(33,872) $(25,955) $(18,400)
    Net Investment Income ...   68,903    43,810    68,903    43,810    62,059    39,114
  Buffalo News ..............   27,328    19,352    27,328    16,547    13,317     8,832
  Nebraska Furniture Mart(1)    14,511     3,812    11,609     3,049     5,917     1,521
  See’s Candies .............   26,644    27,411    26,644    24,526    13,380    12,212
  Associated Retail Stores ..   (1,072)      697    (1,072)      697      (579)      355
  Blue Chip Stamps(2)           (1,843)   (1,422)   (1,843)   (1,876)     (899)     (353)
  Mutual Savings and Loan ...    1,456      (798)    1,166      (467)    3,151     1,917
  Precision Steel ...........    4,092     3,241     3,278     2,102     1,696     1,136
  Textiles ..................      418      (100)      418      (100)      226       (63)
  Wesco Financial ...........    9,777     7,493     7,831     4,844     4,828     3,448
  Amortization of Goodwill ..   (1,434)     (532)   (1,434)     (563)   (1,434)     (563)
  Interest on Debt ..........  (14,734)  (15,104)  (14,097)  (13,844)   (7,452)   (7,346)
     Contributions ..........   (3,179)   (3,066)   (3,179)   (3,066)   (1,716)   (1,656)
  Other .....................    4,932    10,121     4,529     9,623     3,476     8,490
                              --------  --------  --------  --------  --------  --------
Operating Earnings ..........   87,739    61,043    82,021    51,410    70,015    48,644
Special GEICO Distribution ..     --      19,575      --      19,575      --      18,224
Special Gen. Foods Distribution  8,111      --       7,896      --       7,294      --
Sales of securities and
   unusual sales of assets ..  104,699    67,260   101,376    65,089    71,587    45,298
                              --------  --------  --------  --------  --------  --------
Total Earnings - all entities $200,549  $147,878  $191,293  $136,074  $148,896  $112,166
                              ========  ========  ========  ========  ========  ========

(1) 1983 figures are those for October through December.
(2) 1984 and 1983 are not comparable; major assets were                       
    transferred in the mid-year 1983 merger of Blue Chip Stamps.

     Sharp-eyed shareholders will notice that the amount of the 
special GEICO distribution and its location in the table have 
been changed from the presentation of last year.  Though they 
reclassify and reduce “accounting” earnings, the changes are 
entirely of form, not of substance.  The story behind the 
changes, however, is interesting.

     As reported last year: (1) in mid-1983 GEICO made a tender 
offer to buy its own shares; (2) at the same time, we agreed by 
written contract to sell GEICO an amount of its shares that would 
be proportionately related to the aggregate number of shares 
GEICO repurchased via the tender from all other shareholders; (3) 
at completion of the tender, we delivered 350,000 shares to 
GEICO, received $21 million cash, and were left owning exactly 
the same percentage of GEICO that we owned before the tender; (4) 
GEICO’s transaction with us amounted to a proportionate 
redemption, an opinion rendered us, without qualification, by a 
leading law firm; (5) the Tax Code logically regards such 
proportionate redemptions as substantially equivalent to 
dividends and, therefore, the $21 million we received was taxed 
at only the 6.9% inter-corporate dividend rate; (6) importantly, 
that $21 million was far less than the previously-undistributed 
earnings that had inured to our ownership in GEICO and, thus, 
from the standpoint of economic substance, was in our view 
equivalent to a dividend.

     Because it was material and unusual, we highlighted the 
GEICO distribution last year to you, both in the applicable 
quarterly report and in this section of the annual report.  
Additionally, we emphasized the transaction to our auditors, 
Peat, Marwick, Mitchell & Co. Both the Omaha office of Peat 
Marwick and the reviewing Chicago partner, without objection, 
concurred with our dividend presentation.

     In 1984, we had a virtually identical transaction with 
General Foods.  The only difference was that General Foods 
repurchased its stock over a period of time in the open market, 
whereas GEICO had made a “one-shot” tender offer.  In the General 
Foods case we sold to the company, on each day that it 
repurchased shares, a quantity of shares that left our ownership 
percentage precisely unchanged.  Again our transaction was 
pursuant to a written contract executed before repurchases began.  
And again the money we received was far less than the retained 
earnings that had inured to our ownership interest since our 
purchase.  Overall we received $21,843,601 in cash from General 
Foods, and our ownership remained at exactly 8.75%.

     At this point the New York office of Peat Marwick came into 
the picture.  Late in 1984 it indicated that it disagreed with 
the conclusions of the firm’s Omaha office and Chicago reviewing 
partner.  The New York view was that the GEICO and General Foods 
transactions should be treated as sales of stock by Berkshire 
rather than as the receipt of dividends.  Under this accounting 
approach, a portion of the cost of our investment in the stock of 
each company would be charged against the redemption payment and 
any gain would be shown as a capital gain, not as dividend 
income.  This is an accounting approach only, having no bearing 
on taxes: Peat Marwick agrees that the transactions were 
dividends for IRS purposes.

     We disagree with the New York position from both the 
viewpoint of economic substance and proper accounting.  But, to 
avoid a qualified auditor’s opinion, we have adopted herein Peat 
Marwick’s 1984 view and restated 1983 accordingly.  None of this, 
however, has any effect on intrinsic business value: our 
ownership interests in GEICO and General Foods, our cash, our 
taxes, and the market value and tax basis of our holdings all 
remain the same.

     This year we have again entered into a contract with General 
Foods whereby we will sell them shares concurrently with open 
market purchases that they make.  The arrangement provides that 
our ownership interest will remain unchanged at all times.  By 
keeping it so, we will insure ourselves dividend treatment for 
tax purposes.  In our view also, the economic substance of this 
transaction again is the creation of dividend income.  However, 
we will account for the redemptions as sales of stock rather than 
dividend income unless accounting rules are adopted that speak 
directly to this point.  We will continue to prominently identify 
any such special transactions in our reports to you.

     While we enjoy a low tax charge on these proportionate 
redemptions, and have participated in several of them, we view 
such repurchases as at least equally favorable for shareholders 
who do not sell.  When companies with outstanding businesses and 
comfortable financial positions find their shares selling far 
below intrinsic value in the marketplace, no alternative action 
can benefit shareholders as surely as repurchases.

     (Our endorsement of repurchases is limited to those dictated 
by price/value relationships and does not extend to the 
“greenmail” repurchase - a practice we find odious and repugnant.  
In these transactions, two parties achieve their personal ends by 
exploitation of an innocent and unconsulted third party.  The 
players are: (1) the “shareholder” extortionist who, even before 
the ink on his stock certificate dries, delivers his “your-
money-or-your-life” message to managers; (2) the corporate 
insiders who quickly seek peace at any price - as long as the 
price is paid by someone else; and (3) the shareholders whose 
money is used by (2) to make (1) go away.  As the dust settles, 
the mugging, transient shareholder gives his speech on “free 
enterprise”, the muggee management gives its speech on “the best 
interests of the company”, and the innocent shareholder standing 
by mutely funds the payoff.)

     The companies in which we have our largest investments have 
all engaged in significant stock repurhases at times when wide 
discrepancies existed between price and value.  As shareholders, 
we find this encouraging and rewarding for two important reasons 
- one that is obvious, and one that is subtle and not always 
understood.  The obvious point involves basic arithmetic: major 
repurchases at prices well below per-share intrinsic business 
value immediately increase, in a highly significant way, that 
value.  When companies purchase their own stock, they often find 
it easy to get $2 of present value for $1.  Corporate acquisition 
programs almost never do as well and, in a discouragingly large 
number of cases, fail to get anything close to $1 of value for 
each $1 expended.

     The other benefit of repurchases is less subject to precise 
measurement but can be fully as important over time.  By making 
repurchases when a company’s market value is well below its 
business value, management clearly demonstrates that it is given 
to actions that enhance the wealth of shareholders, rather than 
to actions that expand management’s domain but that do nothing 
for (or even harm) shareholders.  Seeing this, shareholders and 
potential shareholders increase their estimates of future returns 
from the business.  This upward revision, in turn, produces 
market prices more in line with intrinsic business value.  These 
prices are entirely rational.  Investors should pay more for a 
business that is lodged in the hands of a manager with 
demonstrated pro-shareholder leanings than for one in the hands 
of a self-interested manager marching to a different drummer. (To 
make the point extreme, how much would you pay to be a minority 
shareholder of a company controlled by Robert Wesco?)

     The key word is “demonstrated”.  A manager who consistently 
turns his back on repurchases, when these clearly are in the 
interests of owners, reveals more than he knows of his 
motivations.  No matter how often or how eloquently he mouths 
some public relations-inspired phrase such as “maximizing 
shareholder wealth” (this season’s favorite), the market 
correctly discounts assets lodged with him.  His heart is not 
listening to his mouth - and, after a while, neither will the 

     We have prospered in a very major way - as have other 
shareholders - by the large share repurchases of GEICO, 
Washington Post, and General Foods, our three largest holdings. 
(Exxon, in which we have our fourth largest holding, has also 
wisely and aggressively repurchased shares but, in this case, we 
have only recently established our position.) In each of these 
companies, shareholders have had their interests in outstanding 
businesses materially enhanced by repurchases made at bargain 
prices.  We feel very comfortable owning interests in businesses 
such as these that offer excellent economics combined with 
shareholder-conscious managements.

     The following table shows our 1984 yearend net holdings in 
marketable equities.  All numbers exclude the interests 
attributable to minority shareholders of Wesco and Nebraska 
Furniture Mart.

No. of Shares                                           Cost       Market
-------------                                        ----------  ----------
                                                         (000s omitted)
    690,975    Affiliated Publications, Inc. .......  $  3,516    $  32,908
    740,400    American Broadcasting Companies, Inc.    44,416       46,738
  3,895,710    Exxon Corporation ...................   173,401      175,307
  4,047,191    General Foods Corporation ...........   149,870      226,137
  6,850,000    GEICO Corporation ...................    45,713      397,300
  2,379,200    Handy & Harman ......................    27,318       38,662
    818,872    Interpublic Group of Companies, Inc.      2,570       28,149
    555,949    Northwest Industries                     26,581       27,242
  2,553,488    Time, Inc. ..........................    89,327      109,162
  1,868,600    The Washington Post Company .........    10,628      149,955
                                                     ----------  ----------
                                                      $573,340   $1,231,560
               All Other Common Stockholdings           11,634       37,326
                                                     ----------  ----------
               Total Common Stocks                    $584,974   $1,268,886
                                                     ==========  ==========

     It’s been over ten years since it has been as difficult as 
now to find equity investments that meet both our qualitative 
standards and our quantitative standards of value versus price.  
We try to avoid compromise of these standards, although we find 
doing nothing the most difficult task of all. (One English 
statesman attributed his country’s greatness in the nineteenth 
century to a policy of “masterly inactivity”.  This is a strategy 
that is far easier for historians to commend than for 
participants to follow.)

     In addition to the figures supplied at the beginning of this 
section, information regarding the businesses we own appears in 
Management’s Discussion on pages 42-47.  An amplified discussion 
of Wesco’s businesses appears in Charlie Munger’s report on pages 
50-59.  You will find particularly interesting his comments about 
conditions in the thrift industry.  Our other major controlled 
businesses are Nebraska Furniture Mart, See’s, Buffalo Evening 
News, and the Insurance Group, to which we will give some special 
attention here.

Nebraska Furniture Mart

     Last year I introduced you to Mrs. B (Rose Blumkin) and her 
family.  I told you they were terrific, and I understated the 
case.  After another year of observing their remarkable talents 
and character, I can honestly say that I never have seen a 
managerial group that either functions or behaves better than the 
Blumkin family.

     Mrs. B, Chairman of the Board, is now 91, and recently was 
quoted in the local newspaper as saying, “I come home to eat and 
sleep, and that’s about it.  I can’t wait until it gets daylight 
so I can get back to the business”.  Mrs. B is at the store seven 
days a week, from opening to close, and probably makes more 
decisions in a day than most CEOs do in a year (better ones, 

     In May Mrs. B was granted an Honorary Doctorate in 
Commercial Science by New York University. (She’s a “fast track” 
student: not one day in her life was spent in a school room prior 
to her receipt of the doctorate.) Previous recipients of honorary 
degrees in business from NYU include Clifton Garvin, Jr., CEO of 
Exxon Corp.; Walter Wriston, then CEO of Citicorp; Frank Cary, 
then CEO of IBM; Tom Murphy, then CEO of General Motors; and, 
most recently, Paul Volcker. (They are in good company.)

     The Blumkin blood did not run thin.  Louie, Mrs. B’s son, 
and his three boys, Ron, Irv, and Steve, all contribute in full 
measure to NFM’s amazing success.  The younger generation has 
attended the best business school of them all - that conducted by 
Mrs. B and Louie - and their training is evident in their 

     Last year NFM’s net sales increased by $14.3 million, 
bringing the total to $115 million, all from the one store in 
Omaha.  That is by far the largest volume produced by a single 
home furnishings store in the United States.  In fact, the gain 
in sales last year was itself greater than the annual volume of 
many good-sized successful stores.  The business achieves this 
success because it deserves this success.  A few figures will 
tell you why.

     In its fiscal 1984 10-K, the largest independent specialty 
retailer of home furnishings in the country, Levitz Furniture, 
described its prices as “generally lower than the prices charged 
by conventional furniture stores in its trading area”.  Levitz, 
in that year, operated at a gross margin of 44.4% (that is, on 
average, customers paid it $100 for merchandise that had cost it 
$55.60 to buy).  The gross margin at NFM is not much more than 
half of that.  NFM’s low mark-ups are possible because of its 
exceptional efficiency: operating expenses (payroll, occupancy, 
advertising, etc.) are about 16.5% of sales versus 35.6% at 

     None of this is in criticism of Levitz, which has a well-
managed operation.  But the NFM operation is simply extraordinary 
(and, remember, it all comes from a $500 investment by Mrs. B in 
1937).  By unparalleled efficiency and astute volume purchasing, 
NFM is able to earn excellent returns on capital while saving its 
customers at least $30 million annually from what, on average, it 
would cost them to buy the same merchandise at stores maintaining 
typical mark-ups.  Such savings enable NFM to constantly widen 
its geographical reach and thus to enjoy growth well beyond the 
natural growth of the Omaha market.

     I have been asked by a number of people just what secrets 
the Blumkins bring to their business.  These are not very 
esoteric.  All members of the family: (1) apply themselves with 
an enthusiasm and energy that would make Ben Franklin and Horatio 
Alger look like dropouts; (2) define with extraordinary realism 
their area of special competence and act decisively on all 
matters within it; (3) ignore even the most enticing propositions 
failing outside of that area of special competence; and, (4) 
unfailingly behave in a high-grade manner with everyone they deal 
with. (Mrs.  B boils it down to “sell cheap and tell the truth”.)

     Our evaluation of the integrity of Mrs. B and her family was 
demonstrated when we purchased 90% of the business: NFM had never 
had an audit and we did not request one; we did not take an 
inventory nor verify the receivables; we did not check property 
titles.  We gave Mrs. B a check for $55 million and she gave us 
her word.  That made for an even exchange.

     You and I are fortunate to be in partnership with the 
Blumkin family.

See’s Candy Shops, Inc.

     Below is our usual recap of See’s performance since the time 
of purchase by Blue Chip Stamps:

  52-53 Week Year                     Operating     Number of    Number of
    Ended About           Sales        Profits      Pounds of   Stores Open
    December 31         Revenues     After Taxes   Candy Sold   at Year End
-------------------   ------------   -----------   ----------   -----------
1984 ..............   $135,946,000   $13,380,000   24,759,000       214
1983 (53 weeks) ...    133,531,000    13,699,000   24,651,000       207
1982 ..............    123,662,000    11,875,000   24,216,000       202
1981 ..............    112,578,000    10,779,000   24,052,000       199
1980 ..............     97,715,000     7,547,000   24,065,000       191
1979 ..............     87,314,000     6,330,000   23,985,000       188
1978 ..............     73,653,000     6,178,000   22,407,000       182
1977 ..............     62,886,000     6,154,000   20,921,000       179
1976 (53 weeks) ...     56,333,000     5,569,000   20,553,000       173
1975 ..............     50,492,000     5,132,000   19,134,000       172
1974 ..............     41,248,000     3,021,000   17,883,000       170
1973 ..............     35,050,000     1,940,000   17,813,000       169
1972 ..............     31,337,000     2,083,000   16,954,000       167

     This performance has not been produced by a generally rising 
tide.  To the contrary, many well-known participants in the 
boxed-chocolate industry either have lost money in this same 
period or have been marginally profitable.  To our knowledge, 
only one good-sized competitor has achieved high profitability.  
The success of See’s reflects the combination of an exceptional 
product and an exceptional manager, Chuck Huggins.

     During 1984 we increased prices considerably less than has 
been our practice in recent years: per-pound realization was 
$5.49, up only 1.4% from 1983.  Fortunately, we made good 
progress on cost control, an area that has caused us problems in 
recent years.  Per-pound costs - other than those for raw 
materials, a segment of expense largely outside of our control - 
increased by only 2.2% last year.

     Our cost-control problem has been exacerbated by the problem 
of modestly declining volume (measured by pounds, not dollars) on 
a same-store basis.  Total pounds sold through shops in recent 
years has been maintained at a roughly constant level only by the 
net addition of a few shops annually.  This more-shops-to-get-
the-same-volume situation naturally puts heavy pressure on per-
pound selling costs.

     In 1984, same-store volume declined 1.1%. Total shop volume, 
however, grew 0.6% because of an increase in stores. (Both 
percentages are adjusted to compensate for a 53-week fiscal year 
in 1983.)

     See’s business tends to get a bit more seasonal each year.  
In the four weeks prior to Christmas, we do 40% of the year’s 
volume and earn about 75% of the year’s profits.  We also earn 
significant sums in the Easter and Valentine’s Day periods, but 
pretty much tread water the rest of the year.  In recent years, 
shop volume at Christmas has grown in relative importance, and so 
have quantity orders and mail orders.  The increased 
concentration of business in the Christmas period produces a 
multitude of managerial problems, all of which have been handled 
by Chuck and his associates with exceptional skill and grace.

     Their solutions have in no way involved compromises in 
either quality of service or quality of product.  Most of our 
larger competitors could not say the same.  Though faced with 
somewhat less extreme peaks and valleys in demand than we, they 
add preservatives or freeze the finished product in order to 
smooth the production cycle and thereby lower unit costs.  We 
reject such techniques, opting, in effect, for production 
headaches rather than product modification.

     Our mall stores face a host of new food and snack vendors 
that provide particularly strong competition at non-holiday 
periods.  We need new products to fight back and during 1984 we 
introduced six candy bars that, overall, met with a good 
reception.  Further product introductions are planned.

     In 1985 we will intensify our efforts to keep per-pound cost 
increases below the rate of inflation.  Continued success in 
these efforts, however, will require gains in same-store 
poundage.  Prices in 1985 should average 6% - 7% above those of 
1984.  Assuming no change in same-store volume, profits should 
show a moderate gain.

Buffalo Evening News

     Profits at the News in 1984 were considerably greater than 
we expected.  As at See’s, excellent progress was made in 
controlling costs.  Excluding hours worked in the newsroom, total 
hours worked decreased by about 2.8%. With this productivity 
improvement, overall costs increased only 4.9%. This performance 
by Stan Lipsey and his management team was one of the best in the 

     However, we now face an acceleration in costs.  In mid-1984 
we entered into new multi-year union contracts that provided for 
a large “catch-up” wage increase.  This catch-up is entirely 
appropriate: the cooperative spirit of our unions during the 
unprofitable 1977-1982 period was an important factor in our 
success in remaining cost competitive with The Courier-Express.  
Had we not kept costs down, the outcome of that struggle might 
well have been different.

     Because our new union contracts took effect at varying 
dates, little of the catch-up increase was reflected in our 1984 
costs.  But the increase will be almost totally effective in 1985 
and, therefore, our unit labor costs will rise this year at a 
rate considerably greater than that of the industry.  We expect 
to mitigate this increase by continued small gains in 
productivity, but we cannot avoid significantly higher wage costs 
this year.  Newsprint price trends also are less favorable now 
than they were in 1984.  Primarily because of these two factors, 
we expect at least a minor contraction in margins at the News.

     Working in our favor at the News are two factors of major 
economic importance:

     (1) Our circulation is concentrated to an unusual degree 
         in the area of maximum utility to our advertisers.  
         “Regional” newspapers with wide-ranging circulation, on 
         the other hand, have a significant portion of their 
         circulation in areas that are of negligible utility to 
         most advertisers.  A subscriber several hundred miles 
         away is not much of a prospect for the puppy you are 
         offering to sell via a classified ad - nor for the 
         grocer with stores only in the metropolitan area.  
         “Wasted” circulation - as the advertisers call it - 
         hurts profitability: expenses of a newspaper are 
         determined largely by gross circulation while 
         advertising revenues (usually 70% - 80% of total 
         revenues) are responsive only to useful circulation; 

     (2) Our penetration of the Buffalo retail market is 
         exceptional; advertisers can reach almost all of their 
         potential customers using only the News.

     Last year I told you about this unusual reader acceptance: 
among the 100 largest newspapers in the country, we were then 
number one, daily, and number three, Sunday, in penetration.  The 
most recent figures show us number one in penetration on weekdays 
and number two on Sunday.  (Even so, the number of households in 
Buffalo has declined, so our current weekday circulation is down 
slightly; on Sundays it is unchanged.)

     I told you also that one of the major reasons for this 
unusual acceptance by readers was the unusual quantity of news 
that we delivered to them: a greater percentage of our paper is 
devoted to news than is the case at any other dominant paper in 
our size range.  In 1984 our “news hole” ratio was 50.9%, (versus 
50.4% in 1983), a level far above the typical 35% - 40%.  We will 
continue to maintain this ratio in the 50% area.  Also, though we 
last year reduced total hours worked in other departments, we 
maintained the level of employment in the newsroom and, again, 
will continue to do so.  Newsroom costs advanced 9.1% in 1984, a 
rise far exceeding our overall cost increase of 4.9%.

     Our news hole policy costs us significant extra money for 
newsprint.  As a result, our news costs (newsprint for the news 
hole plus payroll and expenses of the newsroom) as a percentage 
of revenue run higher than those of most dominant papers of our 
size.  There is adequate room, however, for our paper or any 
other dominant paper to sustain these costs: the difference 
between “high” and “low” news costs at papers of comparable size 
runs perhaps three percentage points while pre-tax profit margins 
are often ten times that amount.

     The economics of a dominant newspaper are excellent, among 
the very best in the business world.  Owners, naturally, would 
like to believe that their wonderful profitability is achieved 
only because they unfailingly turn out a wonderful product.  That 
comfortable theory wilts before an uncomfortable fact.  While 
first-class newspapers make excellent profits, the profits of 
third-rate papers are as good or better - as long as either class 
of paper is dominant within its community.  Of course, product 
quality may have been crucial to the paper in achieving 
dominance.  We believe this was the case at the News, in very 
large part because of people such as Alfred Kirchhofer who 
preceded us.

     Once dominant, the newspaper itself, not the marketplace, 
determines just how good or how bad the paper will be.  Good or 
bad, it will prosper.  That is not true of most businesses: 
inferior quality generally produces inferior economics.  But even 
a poor newspaper is a bargain to most citizens simply because of 
its “bulletin board” value.  Other things being equal, a poor 
product will not achieve quite the level of readership achieved 
by a first-class product.  A poor product, however, will still 
remain essential to most citizens, and what commands their 
attention will command the attention of advertisers.

     Since high standards are not imposed by the marketplace, 
management must impose its own.  Our commitment to an above-
average expenditure for news represents an important quantitative 
standard.  We have confidence that Stan Lipsey and Murray Light 
will continue to apply the far-more important qualitative 
standards.  Charlie and I believe that newspapers are very 
special institutions in society.  We are proud of the News, and 
intend an even greater pride to be justified in the years ahead.

Insurance Operations

     Shown below is an updated version of our usual table listing 
two key figures for the insurance industry:

                                    Yearly Change       Combined Ratio
                                     in Premiums      after Policy-holder
                                     Written (%)           Dividends
                                    -------------     -------------------
1972 ..............................     10.2                  96.2
1973 ..............................      8.0                  99.2
1974 ..............................      6.2                 105.4
1975 ..............................     11.0                 107.9
1976 ..............................     21.9                 102.4
1977 ..............................     19.8                  97.2
1978 ..............................     12.8                  97.5
1979 ..............................     10.3                 100.6
1980 ..............................      6.0                 103.1
1981 ..............................      3.9                 106.0
1982 ..............................      4.4                 109.7
1983 (Revised) ....................      4.5                 111.9
1984 (Estimated) ..................      8.1                 117.7
Source: Best’s Aggregates and Averages

     Best’s data reflect the experience of practically the entire 
industry, including stock, mutual, and reciprocal companies.  The 
combined ratio represents total insurance costs (losses incurred 
plus expenses) compared to revenue from premiums; a ratio below 
100 indicates an underwriting profit, and one above 100 indicates 
a loss.

     For a number of years, we have told you that an annual 
increase by the industry of about 10% per year in premiums 
written is necessary for the combined ratio to remain roughly 
unchanged.  We assumed in making that assertion that expenses as 
a percentage of premium volume would stay relatively stable and 
that losses would grow at about 10% annually because of the 
combined influence of unit volume increases, inflation, and 
judicial rulings that expand what is covered by the insurance 

     Our opinion is proving dismayingly accurate: a premium 
increase of 10% per year since 1979 would have produced an 
aggregate increase through 1984 of 61% and a combined ratio in 
1984 almost identical to the 100.6 of 1979.  Instead, the 
industry had only a 30% increase in premiums and a 1984 combined 
ratio of 117.7. Today, we continue to believe that the key index 
to the trend of underwriting profitability is the year-to-year 
percentage change in industry premium volume.

     It now appears that premium volume in 1985 will grow well 
over 10%.  Therefore, assuming that catastrophes are at a 
“normal” level, we would expect the combined ratio to begin 
easing downward toward the end of the year.  However, under our 
industrywide loss assumptions (i.e., increases of 10% annually), 
five years of 15%-per-year increases in premiums would be 
required to get the combined ratio back to 100.  This would mean 
a doubling of industry volume by 1989, an outcome that seems 
highly unlikely to us.  Instead, we expect several years of 
premium gains somewhat above the 10% level, followed by highly-
competitive pricing that generally will produce combined ratios 
in the 108-113 range.

     Our own combined ratio in 1984 was a humbling 134. (Here, as 
throughout this report, we exclude structured settlements and the 
assumption of loss reserves in reporting this ratio.  Much 
additional detail, including the effect of discontinued 
operations on the ratio, appears on pages 42-43).  This is the 
third year in a row that our underwriting performance has been 
far poorer than that of the industry.  We expect an improvement 
in the combined ratio in 1985, and also expect our improvement to 
be substantially greater than that of the industry.  Mike 
Goldberg has corrected many of the mistakes I made before he took 
over insurance operations.  Moreover, our business is 
concentrated in lines that have experienced poorer-than-average 
results during the past several years, and that circumstance has 
begun to subdue many of our competitors and even eliminate some.  
With the competition shaken, we were able during the last half of 
1984 to raise prices significantly in certain important lines 
with little loss of business.

     For some years I have told you that there could be a day 
coming when our premier financial strength would make a real 
difference in the competitive position of our insurance 
operation.  That day may have arrived.  We are almost without 
question the strongest property/casualty insurance operation in 
the country, with a capital position far superior to that of 
well-known companies of much greater size.

     Equally important, our corporate policy is to retain that 
superiority.  The buyer of insurance receives only a promise in 
exchange for his cash.  The value of that promise should be 
appraised against the possibility of adversity, not prosperity.  
At a minimum, the promise should appear able to withstand a 
prolonged combination of depressed financial markets and 
exceptionally unfavorable underwriting results.  Our insurance 
subsidiaries are both willing and able to keep their promises in 
any such environment - and not too many other companies clearly 

     Our financial strength is a particular asset in the business 
of structured settlements and loss reserve assumptions that we 
reported on last year.  The claimant in a structured settlement 
and the insurance company that has reinsured loss reserves need 
to be completely confident that payments will be forthcoming for 
decades to come.  Very few companies in the property/casualty 
field can meet this test of unquestioned long-term strength. (In 
fact, only a handful of companies exists with which we will 
reinsure our own liabilities.)

     We have grown in these new lines of business: funds that we 
hold to offset assumed liabilities grew from $16.2 million to 
$30.6 million during the year.  We expect growth to continue and 
perhaps to greatly accelerate.  To support this projected growth 
we have added substantially to the capital of Columbia Insurance 
Company, our reinsurance unit specializing in structured 
settlements and loss reserve assumptions.  While these businesses 
are very competitive, returns should be satisfactory.

     At GEICO the news, as usual, is mostly good.  That company 
achieved excellent unit growth in its primary insurance business 
during 1984, and the performance of its investment portfolio 
continued to be extraordinary.  Though underwriting results 
deteriorated late in the year, they still remain far better than 
those of the industry.  Our ownership in GEICO at yearend 
amounted to 36% and thus our interest in their direct 
property/casualty volume of $885 million amounted to $320 
million, or well over double our own premium volume.

     I have reported to you in the past few years that the 
performance of GEICO’s stock has considerably exceeded that 
company’s business performance, brilliant as the latter has been.  
In those years, the carrying value of our GEICO investment on our 
balance sheet grew at a rate greater than the growth in GEICO’s 
intrinsic business value.  I warned you that over performance by 
the stock relative to the performance of the business obviously 
could not occur every year, and that in some years the stock must 
under perform the business.  In 1984 that occurred and the 
carrying value of our interest in GEICO changed hardly at all, 
while the intrinsic business value of that interest increased 
substantially.  Since 27% of Berkshire’s net worth at the 
beginning of 1984 was represented by GEICO, its static market 
value had a significant impact upon our rate of gain for the 
year.  We are not at all unhappy with such a result: we would far 
rather have the business value of GEICO increase by X during the 
year, while market value decreases, than have the intrinsic value 
increase by only 1/2 X with market value soaring.  In GEICO’s 
case, as in all of our investments, we look to business 
performance, not market performance.  If we are correct in 
expectations regarding the business, the market eventually will 
follow along.

     You, as shareholders of Berkshire, have benefited in 
enormous measure from the talents of GEICO’s Jack Byrne, Bill 
Snyder, and Lou Simpson.  In its core business - low-cost auto 
and homeowners insurance - GEICO has a major, sustainable 
competitive advantage.  That is a rare asset in business 
generally, and it’s almost non-existent in the field of financial 
services. (GEICO, itself, illustrates this point: despite the 
company’s excellent management, superior profitability has eluded 
GEICO in all endeavors other than its core business.) In a large 
industry, a competitive advantage such as GEICO’s provides the 
potential for unusual economic rewards, and Jack and Bill 
continue to exhibit great skill in realizing that potential.

     Most of the funds generated by GEICO’s core insurance 
operation are made available to Lou for investment.  Lou has the 
rare combination of temperamental and intellectual 
characteristics that produce outstanding long-term investment 
performance.  Operating with below-average risk, he has generated 
returns that have been by far the best in the insurance industry.  
I applaud and appreciate the efforts and talents of these three 
outstanding managers.

Errors in Loss Reserving

     Any shareholder in a company with important interests in the 
property/casualty insurance business should have some 
understanding of the weaknesses inherent in the reporting of 
current earnings in that industry.  Phil Graham, when publisher 
of the Washington Post, described the daily newspaper as “a first 
rough draft of history”.  Unfortunately, the financial statements 
of a property/casualty insurer provide, at best, only a first 
rough draft of earnings and financial condition.

     The determination of costs is the main problem.  Most of an 
insurer’s costs result from losses on claims, and many of the 
losses that should be charged against the current year’s revenue 
are exceptionally difficult to estimate.  Sometimes the extent of 
these losses, or even their existence, is not known for decades.

     The loss expense charged in a property/casualty company’s 
current income statement represents: (1) losses that occurred and 
were paid during the year; (2) estimates for losses that occurred 
and were reported to the insurer during the year, but which have 
yet to be settled; (3) estimates of ultimate dollar costs for 
losses that occurred during the year but of which the insurer is 
unaware (termed “IBNR”: incurred but not reported); and (4) the 
net effect of revisions this year of similar estimates for (2) 
and (3) made in past years.

     Such revisions may be long delayed, but eventually any 
estimate of losses that causes the income for year X to be 
misstated must be corrected, whether it is in year X + 1, or     
X + 10.  This, perforce, means that earnings in the year of 
correction also are misstated.  For example, assume a claimant 
was injured by one of our insureds in 1979 and we thought a 
settlement was likely to be made for $10,000.  That year we would 
have charged $10,000 to our earnings statement for the estimated 
cost of the loss and, correspondingly, set up a liability reserve 
on the balance sheet for that amount.  If we settled the claim in 
1984 for $100,000, we would charge earnings with a loss cost of 
$90,000 in 1984, although that cost was truly an expense of 1979.  
And if that piece of business was our only activity in 1979, we 
would have badly misled ourselves as to costs, and you as to 

     The necessarily-extensive use of estimates in assembling the 
figures that appear in such deceptively precise form in the 
income statement of property/casualty companies means that some 
error must seep in, no matter how proper the intentions of 
management.  In an attempt to minimize error, most insurers use 
various statistical techniques to adjust the thousands of 
individual loss evaluations (called case reserves) that comprise 
the raw data for estimation of aggregate liabilities.  The extra 
reserves created by these adjustments are variously labeled 
“bulk”, “development”, or “supplemental” reserves.  The goal of 
the adjustments should be a loss-reserve total that has a 50-50 
chance of being proved either slightly too high or slightly too 
low when all losses that occurred prior to the date of the 
financial statement are ultimately paid.

     At Berkshire, we have added what we thought were appropriate 
supplemental reserves but in recent years they have not been 
adequate.  It is important that you understand the magnitude of 
the errors that have been involved in our reserving.  You can 
thus see for yourselves just how imprecise the process is, and 
also judge whether we may have some systemic bias that should 
make you wary of our current and future figures.

     The following table shows the results from insurance 
underwriting as we have reported them to you in recent years, and 
also gives you calculations a year later on an “if-we-knew-then-
what-we think-we-know-now” basis.  I say “what we think we know 
now” because the adjusted figures still include a great many 
estimates for losses that occurred in the earlier years.  
However, many claims from the earlier years have been settled so 
that our one-year-later estimate contains less guess work than 
our earlier estimate:

                Underwriting Results       Corrected Figures
                    as Reported            After One Year’s
     Year              to You                 Experience
     ----       --------------------       -----------------
     1980           $  6,738,000             $ 14,887,000
     1981              1,478,000               (1,118,000)
     1982            (21,462,000)             (25,066,000)
     1983            (33,192,000)             (50,974,000)
     1984            (45,413,000)                  ?

     Our structured settlement and loss-reserve assumption 
     businesses are not included in this table.  Important 
     additional information on loss reserve experience appears 
     on pages 43-45.

     To help you understand this table, here is an explanation of 
the most recent figures: 1984’s reported pre-tax underwriting 
loss of $45.4 million consists of $27.6 million we estimate that 
we lost on 1984’s business, plus the increased loss of $17.8 
million reflected in the corrected figure for 1983.

     As you can see from reviewing the table, my errors in 
reporting to you have been substantial and recently have always 
presented a better underwriting picture than was truly the case.  
This is a source of particular chagrin to me because: (1) I like 
for you to be able to count on what I say; (2) our insurance 
managers and I undoubtedly acted with less urgency than we would 
have had we understood the full extent of our losses; and (3) we 
paid income taxes calculated on overstated earnings and thereby 
gave the government money that we didn’t need to.  (These 
overpayments eventually correct themselves, but the delay is long 
and we don’t receive interest on the amounts we overpaid.)

     Because our business is weighted toward casualty and 
reinsurance lines, we have more problems in estimating loss costs 
than companies that specialize in property insurance. (When a 
building that you have insured burns down, you get a much faster 
fix on your costs than you do when an employer you have insured 
finds out that one of his retirees has contracted a disease 
attributable to work he did decades earlier.) But I still find 
our errors embarrassing.  In our direct business, we have far 
underestimated the mushrooming tendency of juries and courts to 
make the “deep pocket” pay, regardless of the factual situation 
and the past precedents for establishment of liability.  We also 
have underestimated the contagious effect that publicity 
regarding giant awards has on juries.  In the reinsurance area, 
where we have had our worst experience in under reserving, our 
customer insurance companies have made the same mistakes.  Since 
we set reserves based on information they supply us, their 
mistakes have become our mistakes.

     I heard a story recently that is applicable to our insurance 
accounting problems: a man was traveling abroad when he received 
a call from his sister informing him that their father had died 
unexpectedly.  It was physically impossible for the brother to 
get back home for the funeral, but he told his sister to take 
care of the funeral arrangements and to send the bill to him.  
After returning home he received a bill for several thousand 
dollars, which he promptly paid.  The following month another 
bill came along for $15, and he paid that too.  Another month 
followed, with a similar bill.  When, in the next month, a third 
bill for $15 was presented, he called his sister to ask what was 
going on.  “Oh”, she said.  “I forgot to tell you.  We buried Dad 
in a rented suit.”

     If you’ve been in the insurance business in recent years - 
particularly the reinsurance business - this story hurts.  We 
have tried to include all of our “rented suit” liabilities in our 
current financial statement, but our record of past error should 
make us humble, and you suspicious.  I will continue to report to 
you the errors, plus or minus, that surface each year.

     Not all reserving errors in the industry have been of the 
innocent-but-dumb variety.  With underwriting results as bad as 
they have been in recent years - and with managements having as 
much discretion as they do in the presentation of financial 
statements - some unattractive aspects of human nature have 
manifested themselves.  Companies that would be out of business 
if they realistically appraised their loss costs have, in some 
cases, simply preferred to take an extraordinarily optimistic 
view about these yet-to-be-paid sums.  Others have engaged in 
various transactions to hide true current loss costs.

     Both of these approaches can “work” for a considerable time: 
external auditors cannot effectively police the financial 
statements of property/casualty insurers.  If liabilities of an 
insurer, correctly stated, would exceed assets, it falls to the 
insurer to volunteer this morbid information.  In other words, 
the corpse is supposed to file the death certificate.  Under this 
“honor system” of mortality, the corpse sometimes gives itself 
the benefit of the doubt.

     In most businesses, of course, insolvent companies run out 
of cash.  Insurance is different: you can be broke but flush.  
Since cash comes in at the inception of an insurance policy and 
losses are paid much later, insolvent insurers don’t run out of 
cash until long after they have run out of net worth.  In fact, 
these “walking dead” often redouble their efforts to write 
business, accepting almost any price or risk, simply to keep the 
cash flowing in.  With an attitude like that of an embezzler who 
has gambled away his purloined funds, these companies hope that 
somehow they can get lucky on the next batch of business and 
thereby cover up earlier shortfalls.  Even if they don’t get 
lucky, the penalty to managers is usually no greater for a $100 
million shortfall than one of $10 million; in the meantime, while 
the losses mount, the managers keep their jobs and perquisites.

     The loss-reserving errors of other property/casualty 
companies are of more than academic interest to Berkshire.  Not 
only does Berkshire suffer from sell-at-any-price competition by 
the “walking dead”, but we also suffer when their insolvency is 
finally acknowledged.  Through various state guarantee funds that 
levy assessments, Berkshire ends up paying a portion of the 
insolvent insurers’ asset deficiencies, swollen as they usually 
are by the delayed detection that results from wrong reporting.  
There is even some potential for cascading trouble.  The 
insolvency of a few large insurers and the assessments by state 
guarantee funds that would follow could imperil weak-but-
previously-solvent insurers.  Such dangers can be mitigated if 
state regulators become better at prompt identification and 
termination of insolvent insurers, but progress on that front has 
been slow.

Washington Public Power Supply System

     From October, 1983 through June, 1984 Berkshire’s insurance 
subsidiaries continuously purchased large quantities of bonds of 
Projects 1, 2, and 3 of Washington Public Power Supply System 
(“WPPSS”).  This is the same entity that, on July 1, 1983, 
defaulted on $2.2 billion of bonds issued to finance partial 
construction of the now-abandoned Projects 4 and 5. While there 
are material differences in the obligors, promises, and 
properties underlying the two categories of bonds, the problems 
of Projects 4 and 5 have cast a major cloud over Projects 1, 2, 
and 3, and might possibly cause serious problems for the latter 
issues.  In addition, there have been a multitude of problems 
related directly to Projects 1, 2, and 3 that could weaken or 
destroy an otherwise strong credit position arising from 
guarantees by Bonneville Power Administration.

     Despite these important negatives, Charlie and I judged the 
risks at the time we purchased the bonds and at the prices 
Berkshire paid (much lower than present prices) to be 
considerably more than compensated for by prospects of profit.

     As you know, we buy marketable stocks for our insurance 
companies based upon the criteria we would apply in the purchase 
of an entire business.  This business-valuation approach is not 
widespread among professional money managers and is scorned by 
many academics.  Nevertheless, it has served its followers well 
(to which the academics seem to say, “Well, it may be all right 
in practice, but it will never work in theory.”) Simply put, we 
feel that if we can buy small pieces of businesses with 
satisfactory underlying economics at a fraction of the per-share 
value of the entire business, something good is likely to happen 
to us - particularly if we own a group of such securities.

     We extend this business-valuation approach even to bond 
purchases such as WPPSS.  We compare the $139 million cost of our 
yearend investment in WPPSS to a similar $139 million investment 
in an operating business.  In the case of WPPSS, the “business” 
contractually earns $22.7 million after tax (via the interest 
paid on the bonds), and those earnings are available to us 
currently in cash.  We are unable to buy operating businesses 
with economics close to these.  Only a relatively few businesses 
earn the 16.3% after tax on unleveraged capital that our WPPSS 
investment does and those businesses, when available for 
purchase, sell at large premiums to that capital.  In the average 
negotiated business transaction, unleveraged corporate earnings 
of $22.7 million after-tax (equivalent to about $45 million pre-
tax) might command a price of $250 - $300 million (or sometimes 
far more).  For a business we understand well and strongly like, 
we will gladly pay that much.  But it is double the price we paid 
to realize the same earnings from WPPSS bonds.

     However, in the case of WPPSS, there is what we view to be a 
very slight risk that the “business” could be worth nothing 
within a year or two.  There also is the risk that interest 
payments might be interrupted for a considerable period of time.  
Furthermore, the most that the “business” could be worth is about 
the $205 million face value of the bonds that we own, an amount 
only 48% higher than the price we paid.

     This ceiling on upside potential is an important minus.  It 
should be realized, however, that the great majority of operating 
businesses have a limited upside potential also unless more 
capital is continuously invested in them.  That is so because 
most businesses are unable to significantly improve their average 
returns on equity - even under inflationary conditions, though 
these were once thought to automatically raise returns.

     (Let’s push our bond-as-a-business example one notch 
further: if you elect to “retain” the annual earnings of a 12% 
bond by using the proceeds from coupons to buy more bonds, 
earnings of that bond “business” will grow at a rate comparable 
to that of most operating businesses that similarly reinvest all 
earnings.  In the first instance, a 30-year, zero-coupon, 12% 
bond purchased today for $10 million will be worth $300 million 
in 2015.  In the second, a $10 million business that regularly 
earns 12% on equity and retains all earnings to grow, will also 
end up with $300 million of capital in 2015.  Both the business 
and the bond will earn over $32 million in the final year.)

     Our approach to bond investment - treating it as an unusual 
sort of “business” with special advantages and disadvantages - 
may strike you as a bit quirky.  However, we believe that many 
staggering errors by investors could have been avoided if they 
had viewed bond investment with a businessman’s perspective.  For 
example, in 1946, 20-year AAA tax-exempt bonds traded at slightly 
below a 1% yield.  In effect, the buyer of those bonds at that 
time bought a “business” that earned about 1% on “book value” 
(and that, moreover, could never earn a dime more than 1% on 
book), and paid 100 cents on the dollar for that abominable 

     If an investor had been business-minded enough to think in 
those terms - and that was the precise reality of the bargain 
struck - he would have laughed at the proposition and walked 
away.  For, at the same time, businesses with excellent future 
prospects could have been bought at, or close to, book value 
while earning 10%, 12%, or 15% after tax on book.  Probably no 
business in America changed hands in 1946 at book value that the 
buyer believed lacked the ability to earn more than 1% on book.  
But investors with bond-buying habits eagerly made economic 
commitments throughout the year on just that basis.  Similar, 
although less extreme, conditions prevailed for the next two 
decades as bond investors happily signed up for twenty or thirty 
years on terms outrageously inadequate by business standards. 
(In what I think is by far the best book on investing ever 
written - “The Intelligent Investor”, by Ben Graham - the last 
section of the last chapter begins with, “Investment is most 
intelligent when it is most businesslike.” This section is called 
“A Final Word”, and it is appropriately titled.)

     We will emphasize again that there is unquestionably some 
risk in the WPPSS commitment.  It is also the sort of risk that 
is difficult to evaluate.  Were Charlie and I to deal with 50 
similar evaluations over a lifetime, we would expect our judgment 
to prove reasonably satisfactory.  But we do not get the chance 
to make 50 or even 5 such decisions in a single year.  Even 
though our long-term results may turn out fine, in any given year 
we run a risk that we will look extraordinarily foolish. (That’s 
why all of these sentences say “Charlie and I”, or “we”.)

     Most managers have very little incentive to make the 
decision.  Their personal gain/loss ratio is all too obvious: if 
an unconventional decision works out well, they get a pat on the 
back and, if it works out poorly, they get a pink slip. (Failing 
conventionally is the route to go; as a group, lemmings may have 
a rotten image, but no individual lemming has ever received bad 

     Our equation is different.  With 47% of Berkshire’s stock, 
Charlie and I don’t worry about being fired, and we receive our 
rewards as owners, not managers.  Thus we behave with Berkshire’s 
money as we would with our own.  That frequently leads us to 
unconventional behavior both in investments and general business 

     We remain unconventional in the degree to which we 
concentrate the investments of our insurance companies, including 
those in WPPSS bonds.  This concentration makes sense only 
because our insurance business is conducted from a position of 
exceptional financial strength.  For almost all other insurers, a 
comparable degree of concentration (or anything close to it) 
would be totally inappropriate.  Their capital positions are not 
strong enough to withstand a big error, no matter how attractive 
an investment opportunity might appear when analyzed on the basis 
of probabilities.

     With our financial strength we can own large blocks of a few 
securities that we have thought hard about and bought at 
attractive prices. (Billy Rose described the problem of over-
diversification: “If you have a harem of forty women, you never 
get to know any of them very well.”) Over time our policy of 
concentration should produce superior results, though these will 
be tempered by our large size.  When this policy produces a 
really bad year, as it must, at least you will know that our 
money was committed on the same basis as yours.

     We made the major part of our WPPSS investment at different 
prices and under somewhat different factual circumstances than 
exist at present.  If we decide to change our position, we will 
not inform shareholders until long after the change has been 
completed. (We may be buying or selling as you read this.) The 
buying and selling of securities is a competitive business, and 
even a modest amount of added competition on either side can cost 
us a great deal of money.  Our WPPSS purchases illustrate this 
principle.  From October, 1983 through June, 1984, we attempted 
to buy almost all the bonds that we could of Projects 1, 2, and 
3. Yet we purchased less than 3% of the bonds outstanding.  Had 
we faced even a few additional well-heeled investors, stimulated 
to buy because they knew we were, we could have ended up with a 
materially smaller amount of bonds, purchased at a materially 
higher price. (A couple of coat-tail riders easily could have 
cost us $5 million.) For this reason, we will not comment about 
our activities in securities - neither to the press, nor 
shareholders, nor to anyone else - unless legally required to do 

     One final observation regarding our WPPSS purchases: we 
dislike the purchase of most long-term bonds under most 
circumstances and have bought very few in recent years.  That’s 
because bonds are as sound as a dollar - and we view the long-
term outlook for dollars as dismal.  We believe substantial 
inflation lies ahead, although we have no idea what the average 
rate will turn out to be.  Furthermore, we think there is a 
small, but not insignificant, chance of runaway inflation.

     Such a possibility may seem absurd, considering the rate to 
which inflation has dropped.  But we believe that present fiscal 
policy - featuring a huge deficit - is both extremely dangerous 
and difficult to reverse. (So far, most politicians in both 
parties have followed Charlie Brown’s advice: “No problem is so 
big that it can’t be run away from.”) Without a reversal, high 
rates of inflation may be delayed (perhaps for a long time), but 
will not be avoided.  If high rates materialize, they bring with 
them the potential for a runaway upward spiral.

     While there is not much to choose between bonds and stocks 
(as a class) when annual inflation is in the 5%-10% range, 
runaway inflation is a different story.  In that circumstance, a 
diversified stock portfolio would almost surely suffer an 
enormous loss in real value.  But bonds already outstanding would 
suffer far more.  Thus, we think an all-bond portfolio carries a 
small but unacceptable “wipe out” risk, and we require any 
purchase of long-term bonds to clear a special hurdle.  Only when 
bond purchases appear decidedly superior to other business 
opportunities will we engage in them.  Those occasions are likely 
to be few and far between.

Dividend Policy

     Dividend policy is often reported to shareholders, but 
seldom explained.  A company will say something like, “Our goal 
is to pay out 40% to 50% of earnings and to increase dividends at 
a rate at least equal to the rise in the CPI”.  And that’s it - 
no analysis will be supplied as to why that particular policy is 
best for the owners of the business.  Yet, allocation of capital 
is crucial to business and investment management.  Because it is, 
we believe managers and owners should think hard about the 
circumstances under which earnings should be retained and under 
which they should be distributed.

     The first point to understand is that all earnings are not 
created equal.  In many businesses particularly those that have 
high asset/profit ratios - inflation causes some or all of the 
reported earnings to become ersatz.  The ersatz portion - let’s 
call these earnings “restricted” - cannot, if the business is to 
retain its economic position, be distributed as dividends.  Were 
these earnings to be paid out, the business would lose ground in 
one or more of the following areas: its ability to maintain its 
unit volume of sales, its long-term competitive position, its 
financial strength.  No matter how conservative its payout ratio, 
a company that consistently distributes restricted earnings is 
destined for oblivion unless equity capital is otherwise infused.

     Restricted earnings are seldom valueless to owners, but they 
often must be discounted heavily.  In effect, they are 
conscripted by the business, no matter how poor its economic 
potential. (This retention-no-matter-how-unattractive-the-return 
situation was communicated unwittingly in a marvelously ironic 
way by Consolidated Edison a decade ago.  At the time, a punitive 
regulatory policy was a major factor causing the company’s stock 
to sell as low as one-fourth of book value; i.e., every time a 
dollar of earnings was retained for reinvestment in the business, 
that dollar was transformed into only 25 cents of market value.  
But, despite this gold-into-lead process, most earnings were 
reinvested in the business rather than paid to owners.  
Meanwhile, at construction and maintenance sites throughout New 
York, signs proudly proclaimed the corporate slogan, “Dig We 

     Restricted earnings need not concern us further in this 
dividend discussion.  Let’s turn to the much-more-valued 
unrestricted variety.  These earnings may, with equal 
feasibility, be retained or distributed.  In our opinion, 
management should choose whichever course makes greater sense for 
the owners of the business.

     This principle is not universally accepted.  For a number of 
reasons managers like to withhold unrestricted, readily 
distributable earnings from shareholders - to expand the 
corporate empire over which the managers rule, to operate from a 
position of exceptional financial comfort, etc.  But we believe 
there is only one valid reason for retention.  Unrestricted 
earnings should be retained only when there is a reasonable 
prospect - backed preferably by historical evidence or, when 
appropriate, by a thoughtful analysis of the future - that for 
every dollar retained by the corporation, at least one dollar of 
market value will be created for owners.  This will happen only 
if the capital retained produces incremental earnings equal to, 
or above, those generally available to investors.

     To illustrate, let’s assume that an investor owns a risk-
free 10% perpetual bond with one very unusual feature.  Each year 
the investor can elect either to take his 10% coupon in cash, or 
to reinvest the coupon in more 10% bonds with identical terms; 
i.e., a perpetual life and coupons offering the same cash-or-
reinvest option.  If, in any given year, the prevailing interest 
rate on long-term, risk-free bonds is 5%, it would be foolish for 
the investor to take his coupon in cash since the 10% bonds he 
could instead choose would be worth considerably more than 100 
cents on the dollar.  Under these circumstances, the investor 
wanting to get his hands on cash should take his coupon in 
additional bonds and then immediately sell them.  By doing that, 
he would realize more cash than if he had taken his coupon 
directly in cash.  Assuming all bonds were held by rational 
investors, no one would opt for cash in an era of 5% interest 
rates, not even those bondholders needing cash for living 

     If, however, interest rates were 15%, no rational investor 
would want his money invested for him at 10%.  Instead, the 
investor would choose to take his coupon in cash, even if his 
personal cash needs were nil.  The opposite course - reinvestment 
of the coupon - would give an investor additional bonds with 
market value far less than the cash he could have elected.  If he 
should want 10% bonds, he can simply take the cash received 
and buy them in the market, where they will be available at a 
large discount.

     An analysis similar to that made by our hypothetical 
bondholder is appropriate for owners in thinking about whether a 
company’s unrestricted earnings should be retained or paid out.  
Of course, the analysis is much more difficult and subject to 
error because the rate earned on reinvested earnings is not a 
contractual figure, as in our bond case, but rather a fluctuating 
figure.  Owners must guess as to what the rate will average over 
the intermediate future.  However, once an informed guess is 
made, the rest of the analysis is simple: you should wish your 
earnings to be reinvested if they can be expected to earn high 
returns, and you should wish them paid to you if low returns are 
the likely outcome of reinvestment.

     Many corporate managers reason very much along these lines 
in determining whether subsidiaries should distribute earnings to 
their parent company.  At that level,. the managers have no 
trouble thinking like intelligent owners.  But payout decisions 
at the parent company level often are a different story.  Here 
managers frequently have trouble putting themselves in the shoes 
of their shareholder-owners.

     With this schizoid approach, the CEO of a multi-divisional 
company will instruct Subsidiary A, whose earnings on incremental 
capital may be expected to average 5%, to distribute all 
available earnings in order that they may be invested in 
Subsidiary B, whose earnings on incremental capital are expected 
to be 15%.  The CEO’s business school oath will allow no lesser 
behavior.  But if his own long-term record with incremental 
capital is 5% - and market rates are 10% - he is likely to impose 
a dividend policy on shareholders of the parent company that 
merely follows some historical or industry-wide payout pattern.  
Furthermore, he will expect managers of subsidiaries to give him 
a full account as to why it makes sense for earnings to be 
retained in their operations rather than distributed to the 
parent-owner.  But seldom will he supply his owners with a 
similar analysis pertaining to the whole company.

     In judging whether managers should retain earnings, 
shareholders should not simply compare total incremental earnings 
in recent years to total incremental capital because that 
relationship may be distorted by what is going on in a core 
business.  During an inflationary period, companies with a core 
business characterized by extraordinary economics can use small 
amounts of incremental capital in that business at very high 
rates of return (as was discussed in last year’s section on 
Goodwill).  But, unless they are experiencing tremendous unit 
growth, outstanding businesses by definition generate large 
amounts of excess cash.  If a company sinks most of this money in 
other businesses that earn low returns, the company’s overall 
return on retained capital may nevertheless appear excellent 
because of the extraordinary returns being earned by the portion 
of earnings incrementally invested in the core business.  The 
situation is analogous to a Pro-Am golf event: even if all of the 
amateurs are hopeless duffers, the team’s best-ball score will be 
respectable because of the dominating skills of the professional.

     Many corporations that consistently show good returns both 
on equity and on overall incremental capital have, indeed, 
employed a large portion of their retained earnings on an 
economically unattractive, even disastrous, basis.  Their 
marvelous core businesses, however, whose earnings grow year 
after year, camouflage repeated failures in capital allocation 
elsewhere (usually involving high-priced acquisitions of 
businesses that have inherently mediocre economics).  The 
managers at fault periodically report on the lessons they have 
learned from the latest disappointment.  They then usually seek 
out future lessons. (Failure seems to go to their heads.)

     In such cases, shareholders would be far better off if 
earnings were retained only to expand the high-return business, 
with the balance paid in dividends or used to repurchase stock 
(an action that increases the owners’ interest in the exceptional 
business while sparing them participation in subpar businesses).  
Managers of high-return businesses who consistently employ much 
of the cash thrown off by those businesses in other ventures with 
low returns should be held to account for those allocation 
decisions, regardless of how profitable the overall enterprise 

     Nothing in this discussion is intended to argue for 
dividends that bounce around from quarter to quarter with each 
wiggle in earnings or in investment opportunities.  Shareholders 
of public corporations understandably prefer that dividends be 
consistent and predictable.  Payments, therefore, should reflect 
long-term expectations for both earnings and returns on 
incremental capital.  Since the long-term corporate outlook 
changes only infrequently, dividend patterns should change no 
more often.  But over time distributable earnings that have been 
withheld by managers should earn their keep.  If earnings have 
been unwisely retained, it is likely that managers, too, have 
been unwisely retained.

     Let’s now turn to Berkshire Hathaway and examine how these 
dividend principles apply to it.  Historically, Berkshire has 
earned well over market rates on retained earnings, thereby 
creating over one dollar of market value for every dollar 
retained.  Under such circumstances, any distribution would have 
been contrary to the financial interest of shareholders, large or 

     In fact, significant distributions in the early years might 
have been disastrous, as a review of our starting position will 
show you.  Charlie and I then controlled and managed three 
companies, Berkshire Hathaway Inc., Diversified Retailing 
Company, Inc., and Blue Chip Stamps (all now merged into our 
present operation).  Blue Chip paid only a small dividend, 
Berkshire and DRC paid nothing.  If, instead, the companies had 
paid out their entire earnings, we almost certainly would have no 
earnings at all now - and perhaps no capital as well.  The three 
companies each originally made their money from a single 
business: (1) textiles at Berkshire; (2) department stores at 
Diversified; and (3) trading stamps at Blue Chip.  These 
cornerstone businesses (carefully chosen, it should be noted, by 
your Chairman and Vice Chairman) have, respectively, (1) survived 
but earned almost nothing, (2) shriveled in size while incurring 
large losses, and (3) shrunk in sales volume to about 5% its size 
at the time of our entry.  (Who says “you can’t lose ‘em all”?) 
Only by committing available funds to much better businesses were 
we able to overcome these origins. (It’s been like overcoming a 
misspent youth.) Clearly, diversification has served us well.

     We expect to continue to diversify while also supporting the 
growth of current operations though, as we’ve pointed out, our 
returns from these efforts will surely be below our historical 
returns.  But as long as prospective returns are above the rate 
required to produce a dollar of market value per dollar retained, 
we will continue to retain all earnings.  Should our estimate of 
future returns fall below that point, we will distribute all 
unrestricted earnings that we believe can not be effectively 
used.  In making that judgment, we will look at both our 
historical record and our prospects.  Because our year-to-year 
results are inherently volatile, we believe a five-year rolling 
average to be appropriate for judging the historical record.

     Our present plan is to use our retained earnings to further 
build the capital of our insurance companies.  Most of our 
competitors are in weakened financial condition and reluctant to 
expand substantially.  Yet large premium-volume gains for the 
industry are imminent, amounting probably to well over $15 
billion in 1985 versus less than $5 billion in 1983.  These 
circumstances could produce major amounts of profitable business 
for us.  Of course, this result is no sure thing, but prospects 
for it are far better than they have been for many years.


     This is the spot where each year I run my small “business 
wanted” ad.  In 1984 John Loomis, one of our particularly 
knowledgeable and alert shareholders, came up with a company that 
met all of our tests.  We immediately pursued this idea, and only 
a chance complication prevented a deal.  Since our ad is pulling, 
we will repeat it in precisely last year’s form:

     We prefer:
     (1) large purchases (at least $5 million of after-tax 
     (2) demonstrated consistent earning power (future 
         projections are of little interest to us, nor are 
         “turn-around” situations),
     (3) businesses earning good returns on equity while 
         employing little or no debt,
     (4) management in place (we can’t supply it),
     (5) simple businesses (if there’s lots of technology, we 
         won’t understand it),
     (6) an offering price (we don’t want to waste our time or 
         that of the seller by talking, even preliminarily, 
         about a transaction when price is unknown).

     We will not engage in unfriendly takeovers.  We can promise 
complete confidentiality and a very fast answer - customarily 
within five minutes - as to whether we’re interested.  We prefer 
to buy for cash, but will consider issuance of stock when we 
receive as much in intrinsic business value as we give.  We 
invite potential sellers to check us out by contacting people 
with whom we have done business in the past.  For the right 
business - and the right people - we can provide a good home.

                           *  *  *

     A record 97.2% of all eligible shares participated in 
Berkshire’s 1984 shareholder-designated contributions program.  
Total contributions made through this program were $3,179,000, 
and 1,519 charities were recipients.  Our proxy material for the 
annual meeting will allow you to cast an advisory vote expressing 
your views about this program - whether you think we should 
continue it and, if so, at what per-share level. (You may be 
interested to learn that we were unable to find a precedent for 
an advisory vote in which management seeks the opinions of 
shareholders about owner-related corporate policies.  Managers 
who put their trust in capitalism seem in no hurry to put their 
trust in capitalists.)

     We urge new shareholders to read the description of our 
shareholder-designated contributions program that appears on 
pages 60 and 61.  If you wish to participate in future programs, 
we strongly urge that you immediately make sure that your shares 
are registered in the name of the actual owner, not in “street” 
name or nominee name.  Shares not so registered on September 30, 
1985 will be ineligible for the 1985 program.

                           *  *  *

     Our annual meeting will be on May 21, 1985 in Omaha, and I 
hope that you attend.  Many annual meetings are a waste of time, 
both for shareholders and for management.  Sometimes that is true 
because management is reluctant to open up on matters of business 
substance.  More often a nonproductive session is the fault of 
shareholder participants who are more concerned about their own 
moment on stage than they are about the affairs of the 
corporation.  What should be a forum for business discussion 
becomes a forum for theatrics, spleen-venting and advocacy of 
issues. (The deal is irresistible: for the price of one share you 
get to tell a captive audience your ideas as to how the world 
should be run.) Under such circumstances, the quality of the 
meeting often deteriorates from year to year as the antics of 
those interested in themselves discourage attendance by those 
interested in the business.

     Berkshire’s meetings are a different story.  The number of 
shareholders attending grows a bit each year and we have yet to 
experience a silly question or an ego-inspired commentary.  
Instead, we get a wide variety of thoughtful questions about the 
business.  Because the annual meeting is the time and place for 
these, Charlie and I are happy to answer them all, no matter how 
long it takes. (We cannot, however, respond to written or phoned 
questions at other times of the year; one-person-at-a time 
reporting is a poor use of management time in a company with 3000 
shareholders.) The only business matters that are off limits at 
the annual meeting are those about which candor might cost our 
company real money.  Our activities in securities would be the 
main example.

     We always have bragged a bit on these pages about the 
quality of our shareholder-partners.  Come to the annual meeting 
and you will see why.  Out-of-towners should schedule a stop at 
Nebraska Furniture Mart.  If you make some purchases, you’ll save 
far more than enough to pay for your trip, and you’ll enjoy the 

                                           Warren E. Buffett
February 25, 1985                          Chairman of the Board

     Subsequent Event: On March 18, a week after copy for this 
report went to the typographer but shortly before production, we 
agreed to purchase three million shares of Capital Cities 
Communications, Inc. at $172.50 per share.  Our purchase is 
contingent upon the acquisition of American Broadcasting 
Companies, Inc. by Capital Cities, and will close when that 
transaction closes.  At the earliest, that will be very late in 
1985.  Our admiration for the management of Capital Cities, led 
by Tom Murphy and Dan Burke, has been expressed several times in 
previous annual reports.  Quite simply, they are tops in both 
ability and integrity.  We will have more to say about this 
investment in next year’s report.