March 3, 1983

To the Stockholders of Berkshire Hathaway Inc.:

     Operating earnings of $31.5 million in 1982 amounted to only 
9.8% of beginning equity capital (valuing securities at cost), 
down from 15.2% in 1981 and far below our recent high of 19.4% in 
1978.  This decline largely resulted from:

     (1) a significant deterioration in insurance underwriting 

     (2) a considerable expansion of equity capital without a 
         corresponding growth in the businesses we operate 
         directly; and

     (3) a continually-enlarging commitment of our resources to 
         investment in partially-owned, nonoperated businesses; 
         accounting rules dictate that a major part of our 
         pro-rata share of earnings from such businesses must be 
         excluded from Berkshire’s reported earnings.

     It was only a few years ago that we told you that the 
operating earnings/equity capital percentage, with proper 
allowance for a few other variables, was the most important 
yardstick of single-year managerial performance.  While we still 
believe this to be the case with the vast majority of companies, 
we believe its utility in our own case has greatly diminished.  
You should be suspicious of such an assertion.  Yardsticks seldom 
are discarded while yielding favorable readings.  But when 
results deteriorate, most managers favor disposition of the 
yardstick rather than disposition of the manager.

     To managers faced with such deterioration, a more flexible 
measurement system often suggests itself: just shoot the arrow of 
business performance into a blank canvas and then carefully draw 
the bullseye around the implanted arrow.  We generally believe in 
pre-set, long-lived and small bullseyes.  However, because of the 
importance of item (3) above, further explained in the following 
section, we believe our abandonment of the operating 
earnings/equity capital bullseye to be warranted.

Non-Reported Ownership Earnings

     The appended financial statements reflect “accounting” 
earnings that generally include our proportionate share of 
earnings from any underlying business in which our ownership is 
at least 20%.  Below the 20% ownership figure, however, only our 
share of dividends paid by the underlying business units is 
included in our accounting numbers; undistributed earnings of 
such less-than-20%-owned businesses are totally ignored.

     There are a few exceptions to this rule; e.g., we own about 
35% of GEICO Corporation but, because we have assigned our voting 
rights, the company is treated for accounting purposes as a less-
than-20% holding.  Thus, dividends received from GEICO in 1982 of 
$3.5 million after tax are the only item included in our 
“accounting”earnings.  An additional $23 million that represents 
our share of GEICO’s undistributed operating earnings for 1982 is 
totally excluded from our reported operating earnings.  If GEICO 
had earned less money in 1982 but had paid an additional $1 
million in dividends, our reported earnings would have been 
larger despite the poorer business results.  Conversely, if GEICO 
had earned an additional $100 million - and retained it all - our 
reported earnings would have been unchanged.  Clearly 
“accounting” earnings can seriously misrepresent economic 

     We prefer a concept of “economic” earnings that includes all 
undistributed earnings, regardless of ownership percentage.  In 
our view, the value to all owners of the retained earnings of a 
business enterprise is determined by the effectiveness with which 
those earnings are used - and not by the size of one’s ownership 
percentage.  If you have owned .01 of 1% of Berkshire during the 
past decade, you have benefited economically in full measure from 
your share of our retained earnings, no matter what your 
accounting system.  Proportionately, you have done just as well 
as if you had owned the magic 20%.  But if you have owned 100% of 
a great many capital-intensive businesses during the decade, 
retained earnings that were credited fully and with painstaking 
precision to you under standard accounting methods have resulted 
in minor or zero economic value.  This is not a criticism of 
accounting procedures.  We would not like to have the job of 
designing a better system.  It’s simply to say that managers and 
investors alike must understand that accounting numbers are the 
beginning, not the end, of business valuation.

     In most corporations, less-than-20% ownership positions are 
unimportant (perhaps, in part, because they prevent maximization 
of cherished reported earnings) and the distinction between 
accounting and economic results we have just discussed matters 
little.  But in our own case, such positions are of very large 
and growing importance.  Their magnitude, we believe, is what 
makes our reported operating earnings figure of limited 

     In our 1981 annual report we predicted that our share of 
undistributed earnings from four of our major non-controlled 
holdings would aggregate over $35 million in 1982.  With no 
change in our holdings of three of these companies - GEICO, 
General Foods and The Washington Post - and a considerable 
increase in our ownership of the fourth, R. J. Reynolds 
Industries, our share of undistributed 1982 operating earnings of 
this group came to well over $40 million.  This number - not 
reflected at all in our earnings - is greater than our total 
reported earnings, which include only the $14 million in 
dividends received from these companies.  And, of course, we have 
a number of smaller ownership interests that, in aggregate, had 
substantial additional undistributed earnings.

      We attach real significance to the general magnitude of 
these numbers, but we don’t believe they should be carried to ten 
decimal places.  Realization by Berkshire of such retained 
earnings through improved market valuations is subject to very 
substantial, but indeterminate, taxation.  And while retained 
earnings over the years, and in the aggregate, have translated 
into at least equal market value for shareholders, the 
translation has been both extraordinarily uneven among companies 
and irregular and unpredictable in timing.

     However, this very unevenness and irregularity offers 
advantages to the value-oriented purchaser of fractional portions 
of businesses.  This investor may select from almost the entire 
array of major American corporations, including many far superior 
to virtually any of the businesses that could be bought in their 
entirety in a negotiated deal.  And fractional-interest purchases 
can be made in an auction market where prices are set by 
participants with behavior patterns that sometimes resemble those 
of an army of manic-depressive lemmings.

     Within this gigantic auction arena, it is our job to select 
businesses with economic characteristics allowing each dollar of 
retained earnings to be translated eventually into at least a 
dollar of market value.  Despite a lot of mistakes, we have so 
far achieved this goal.  In doing so, we have been greatly 
assisted by Arthur Okun’s patron saint for economists - St. 
Offset.  In some cases, that is, retained earnings attributable 
to our ownership position have had insignificant or even negative 
impact on market value, while in other major positions a dollar 
retained by an investee corporation has been translated into two 
or more dollars of market value.  To date, our corporate over-
achievers have more than offset the laggards.  If we can continue 
this record, it will validate our efforts to maximize “economic” 
earnings, regardless of the impact upon “accounting” earnings.

     Satisfactory as our partial-ownership approach has been, 
what really makes us dance is the purchase of 100% of good 
businesses at reasonable prices.  We’ve accomplished this feat a 
few times (and expect to do so again), but it is an 
extraordinarily difficult job - far more difficult than the 
purchase at attractive prices of fractional interests.

     As we look at the major acquisitions that others made during 
1982, our reaction is not envy, but relief that we were non-
participants.  For in many of these acquisitions, managerial 
intellect wilted in competition with managerial adrenaline The 
thrill of the chase blinded the pursuers to the consequences of 
the catch.  Pascal’s observation seems apt: “It has struck me 
that all men’s misfortunes spring from the single cause that they 
are unable to stay quietly in one room.”

     (Your Chairman left the room once too often last year and 
almost starred in the Acquisition Follies of 1982.  In 
retrospect, our major accomplishment of the year was that a very 
large purchase to which we had firmly committed was unable to be 
completed for reasons totally beyond our control.  Had it come 
off, this transaction would have consumed extraordinary amounts 
of time and energy, all for a most uncertain payoff.  If we were 
to introduce graphics to this report, illustrating favorable 
business developments of the past year, two blank pages depicting 
this blown deal would be the appropriate centerfold.)

     Our partial-ownership approach can be continued soundly only 
as long as portions of attractive businesses can be acquired at 
attractive prices.  We need a moderately-priced stock market to 
assist us in this endeavor.  The market, like the Lord, helps 
those who help themselves.  But, unlike the Lord, the market does 
not forgive those who know not what they do.  For the investor, a 
too-high purchase price for the stock of an excellent company can 
undo the effects of a subsequent decade of favorable business 

     Should the stock market advance to considerably higher 
levels, our ability to utilize capital effectively in partial-
ownership positions will be reduced or eliminated.  This will 
happen periodically: just ten years ago, at the height of the 
two-tier market mania (with high-return-on-equity businesses bid 
to the sky by institutional investors), Berkshire’s insurance 
subsidiaries owned only $18 million in market value of equities, 
excluding their interest in Blue Chip Stamps.  At that time, such 
equity holdings amounted to about 15% of our insurance company 
investments versus the present 80%.  There were as many good 
businesses around in 1972 as in 1982, but the prices the stock 
market placed upon those businesses in 1972 looked absurd.  While 
high stock prices in the future would make our performance look 
good temporarily, they would hurt our long-term business 
prospects rather than help them.  We currently are seeing early 
traces of this problem.

Long-Term Corporate Performance

     Our gain in net worth during 1982, valuing equities held by 
our insurance subsidiaries at market value (less capital gain 
taxes payable if unrealized gains were actually realized) 
amounted to $208 million.  On a beginning net worth base of $519 
million, the percentage gain was 40%.

     During the 18-year tenure of present management, book value 
has grown from $19.46 per share to $737.43 per share, or 22.0% 
compounded annually.  You can be certain that this percentage 
will diminish in the future.  Geometric progressions eventually 
forge their own anchors.

     Berkshire’s economic goal remains to produce a long-term 
rate of return well above the return achieved by the average 
large American corporation.  Our willingness to purchase either 
partial or total ownership positions in favorably-situated 
businesses, coupled with reasonable discipline about the prices 
we are willing to pay, should give us a good chance of achieving 
our goal.

     Again this year the gain in market valuation of partially-
owned businesses outpaced the gain in underlying economic value 
of those businesses.  For example, $79 million of our $208 
million gain is attributable to an increased market price for 
GEICO.  This company continues to do exceptionally well, and we 
are more impressed than ever by the strength of GEICO’s basic 
business idea and by the management skills of Jack Byrne. 
(Although not found in the catechism of the better business 
schools, “Let Jack Do It” works fine as a corporate creed for 

     However, GEICO’s increase in market value during the past 
two years has been considerably greater than the gain in its 
intrinsic business value, impressive as the latter has been.  We 
expected such a favorable variation at some point, as the 
perception of investors converged with business reality.  And we 
look forward to substantial future gains in underlying business 
value accompanied by irregular, but eventually full, market 
recognition of such gains.

     Year-to-year variances, however, cannot consistently be in 
our favor.  Even if our partially-owned businesses continue to 
perform well in an economic sense, there will be years when they 
perform poorly in the market.  At such times our net worth could 
shrink significantly.  We will not be distressed by such a 
shrinkage; if the businesses continue to look attractive and we 
have cash available, we simply will add to our holdings at even 
more favorable prices.

Sources of Reported Earnings

     The table below shows the sources of Berkshire’s reported 
earnings.  In 1981 and 1982 Berkshire owned about 60% of Blue 
Chip Stamps which, in turn, owned 80% of Wesco Financial 
Corporation.  The table displays aggregate operating earnings of 
the various business entities, as well as Berkshire’s share of 
those earnings.  All of the significant gains and losses 
attributable to unusual sales of assets by any of the business 
entities are aggregated with securities transactions in the line 
near the bottom of the table, and are not included in operating 

                                                                         Net Earnings
                                   Earnings Before Income Taxes            After Tax
                              --------------------------------------  ------------------
                                    Total          Berkshire Share     Berkshire Share
                              ------------------  ------------------  ------------------
                                1982      1981      1982      1981      1982      1981
                              --------  --------  --------  --------  --------  --------
                                                    (000s omitted)
Operating Earnings:
  Insurance Group:
    Underwriting ............ $(21,558)  $ 1,478  $(21,558)  $ 1,478  $(11,345)  $   798
    Net Investment Income ...   41,620    38,823    41,620    38,823    35,270    32,401
  Berkshire-Waumbec Textiles    (1,545)   (2,669)   (1,545)   (2,669)     (862)   (1,493)
  Associated Retail Stores ..      914     1,763       914     1,763       446       759
  See’s Candies .............   23,884    20,961    14,235    12,493     6,914     5,910
  Buffalo Evening News ......   (1,215)   (1,217)     (724)     (725)     (226)     (320)
  Blue Chip Stamps - Parent      4,182     3,642     2,492     2,171     2,472     2,134
  Wesco Financial - Parent ..    6,156     4,495     2,937     2,145     2,210     1,590
  Mutual Savings and Loan ...       (6)    1,605        (2)      766     1,524     1,536
  Precision Steel ...........    1,035     3,453       493     1,648       265       841
  Interest on Debt ..........  (14,996)  (14,656)  (12,977)  (12,649)   (6,951)   (6,671)
  Other* ....................    2,631     2,985     1,857     1,992     1,780     1,936
                              --------  --------  --------  --------  --------  --------
Operating Earnings ..........   41,102    60,663    27,742    47,236    31,497    39,421
Sales of securities and
   unusual sales of assets ..   36,651    37,801    21,875    33,150    14,877    23,183
                              --------  --------  --------  --------  --------  --------
Total Earnings - all entities $ 77,753  $ 98,464  $ 49,617  $ 80,386  $ 46,374  $ 62,604
                              ========  ========  ========  ========  ========  ========

* Amortization of intangibles arising in accounting for purchases 
  of businesses (i.e. See’s, Mutual and Buffalo Evening News) is 
  reflected in the category designated as “Other”.

     On pages 45-61 of this report we have reproduced the 
narrative reports of the principal executives of Blue Chip and 
Wesco, in which they describe 1982 operations.  A copy of the 
full annual report of either company will be mailed to any 
Berkshire shareholder upon request to Mr. Robert H. Bird for 
Blue Chip Stamps, 5801 South Eastern Avenue, Los Angeles, 
California 90040, or to Mrs. Jeanne Leach for Wesco Financial 
Corporation, 315 East Colorado Boulevard, Pasadena, California 

     I believe you will find the Blue Chip chronicle of 
developments in the Buffalo newspaper situation particularly 
interesting.  There are now only 14 cities in the United States 
with a daily newspaper whose weekday circulation exceeds that of 
the Buffalo News.  But the real story has been the growth in 
Sunday circulation.  Six years ago, prior to introduction of a 
Sunday edition of the News, the long-established Courier-Express, 
as the only Sunday newspaper published in Buffalo, had 
circulation of 272,000.  The News now has Sunday circulation of 
367,000, a 35% gain - even though the number of households within 
the primary circulation area has shown little change during the 
six years.  We know of no city in the United States with a long 
history of seven-day newspaper publication in which the 
percentage of households purchasing the Sunday newspaper has 
grown at anything like this rate.  To the contrary, in most 
cities household penetration figures have grown negligibly, or 
not at all.  Our key managers in Buffalo - Henry Urban, Stan 
Lipsey, Murray Light, Clyde Pinson, Dave Perona and Dick Feather 
- deserve great credit for this unmatched expansion in Sunday 

     As we indicated earlier, undistributed earnings in companies 
we do not control are now fully as important as the reported 
operating earnings detailed in the preceding table.  The 
distributed portion of non-controlled earnings, of course, finds 
its way into that table primarily through the net investment 
income segment of Insurance Group earnings.

     We show below Berkshire’s proportional holdings in those 
non-controlled businesses for which only distributed earnings 
(dividends) are included in our earnings.

No. of Shares
or Share Equiv.                                          Cost       Market  
---------------                                       ----------  ----------
                                                          (000s omitted)
   460,650 (a)   Affiliated Publications, Inc. ......  $  3,516    $ 16,929
   908,800 (c)   Crum & Forster .....................    47,144      48,962	
 2,101,244 (b)   General Foods, Inc. ................    66,277      83,680
 7,200,000 (a)   GEICO Corporation ..................    47,138     309,600
 2,379,200 (a)   Handy & Harman .....................    27,318      46,692
   711,180 (a)   Interpublic Group of Companies, Inc.     4,531      34,314
   282,500 (a)   Media General ......................     4,545      12,289
   391,400 (a)   Ogilvy & Mather Int’l. Inc. ........     3,709      17,319
 3,107,675 (b)   R. J. Reynolds Industries ..........   142,343     158,715
 1,531,391 (a)   Time, Inc. .........................    45,273      79,824
 1,868,600 (a)   The Washington Post Company ........    10,628     103,240
                                                      ----------  ----------
                                                       $402,422    $911,564
                 All Other Common Stockholdings .....    21,611      34,058
                                                      ----------  ----------                                                        
                 Total Common Stocks                   $424,033    $945,622
                                                      ==========  ==========

(a) All owned by Berkshire or its insurance subsidiaries.

(b) Blue Chip and/or Wesco own shares of these companies.  All 
    numbers represent Berkshire’s net interest in the larger 
    gross holdings of the group.

(c) Temporary holding as cash substitute.

     In case you haven’t noticed, there is an important 
investment lesson to be derived from this table: nostalgia should 
be weighted heavily in stock selection.  Our two largest 
unrealized gains are in Washington Post and GEICO, companies with 
which your Chairman formed his first commercial connections at 
the ages of 13 and 20, respectively After straying for roughly 25 
years, we returned as investors in the mid-1970s.  The table 
quantifies the rewards for even long-delayed corporate fidelity. 

     Our controlled and non-controlled businesses operate over 
such a wide spectrum that detailed commentary here would prove 
too lengthy.  Much financial and operational information 
regarding the controlled businesses is included in Management’s 
Discussion on pages 34-39, and in the narrative reports on pages 
45-61.  However, our largest area of business activity has been, 
and almost certainly will continue to be, the property-casualty 
insurance area.  So commentary on developments in that industry 
is appropriate.

Insurance Industry Conditions

     We show below an updated table of the industry statistics we 
utilized in last year’s annual report.  Its message is clear: 
underwriting results in 1983 will not be a sight for the 

                      Yearly Change     Yearly Change      Combined Ratio
                       in Premiums       in Premiums        after Policy-
                       Written (%)        Earned (%)      holder Dividends
                      -------------     -------------     ----------------
1972 ................     10.2              10.9                96.2
1973 ................      8.0               8.8                99.2
1974 ................      6.2               6.9               105.4
1975 ................     11.0               9.6               107.9
1976 ................     21.9              19.4               102.4
1977 ................     19.8              20.5                97.2
1978 ................     12.8              14.3                97.5
1979 ................     10.3              10.4               100.6
1980 ................      6.0               7.8               103.1
1981 (Rev.) .........      3.9               4.1               106.0
1982 (Est.) .........      5.1               4.6               109.5

Source:   Best’s Aggregates and Averages.

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

     For reasons outlined in last year’s report, as long as the 
annual gain in industry premiums written falls well below 10%, 
you can expect the underwriting picture in the next year to 
deteriorate.  This will be true even at today’s lower general 
rate of inflation.  With the number of policies increasing 
annually, medical inflation far exceeding general inflation, and 
concepts of insured liability broadening, it is highly unlikely 
that yearly increases in insured losses will fall much below 10%.  

     You should be further aware that the 1982 combined ratio of 
109.5 represents a “best case” estimate.  In a given year, it is 
possible for an insurer to show almost any profit number it 
wishes, particularly if it (1) writes “long-tail” business 
(coverage where current costs can be only estimated, because 
claim payments are long delayed), (2) has been adequately 
reserved in the past, or (3)	is growing very rapidly.  There are 
indications that several large insurers opted in 1982 for obscure 
accounting and reserving maneuvers that masked significant 
deterioration in their underlying businesses.  In insurance, as 
elsewhere, the reaction of weak managements to weak operations is 
often weak accounting. (“It’s difficult for an empty sack to 
stand upright.”)

     The great majority of managements, however, try to play it 
straight.  But even managements of integrity may subconsciously 
be less willing in poor profit years to fully recognize adverse 
loss trends.  Industry statistics indicate some deterioration in 
loss reserving practices during 1982 and the true combined ratio 
is likely to be modestly worse than indicated by our table.

     The conventional wisdom is that 1983 or 1984 will see the 
worst of underwriting experience and then, as in the past, the 
“cycle” will move, significantly and steadily, toward better 
results.  We disagree because of a pronounced change in the 
competitive environment, hard to see for many years but now quite 

     To understand the change, we need to look at some major 
factors that affect levels of corporate profitability generally.  
Businesses in industries with both substantial over-capacity and 
a “commodity” product (undifferentiated in any customer-important 
way by factors such as performance, appearance, service support, 
etc.) are prime candidates for profit troubles.  These may be 
escaped, true, if prices or costs are administered in some manner 
and thereby insulated at least partially from normal market 
forces.  This administration can be carried out (a) legally 
through government intervention (until recently, this category 
included pricing for truckers and deposit costs for financial 
institutions), (b) illegally through collusion, or (c) “extra-
legally” through OPEC-style foreign cartelization (with tag-along 
benefits for domestic non-cartel operators).

     If, however, costs and prices are determined by full-bore 
competition, there is more than ample capacity, and the buyer 
cares little about whose product or distribution services he 
uses, industry economics are almost certain to be unexciting.  
They may well be disastrous.

     Hence the constant struggle of every vendor to establish and 
emphasize special qualities of product or service.  This works 
with candy bars (customers buy by brand name, not by asking for a 
“two-ounce candy bar”) but doesn’t work with sugar (how often do 
you hear, “I’ll have a cup of coffee with cream and C & H sugar, 

     In many industries, differentiation simply can’t be made 
meaningful.  A few producers in such industries may consistently 
do well if they have a cost advantage that is both wide and 
sustainable.  By definition such exceptions are few, and, in many 
industries, are non-existent.  For the great majority of 
companies selling “commodity”products, a depressing equation of 
business economics prevails: persistent over-capacity without 
administered prices (or costs) equals poor profitability.

     Of course, over-capacity may eventually self-correct, either 
as capacity shrinks or demand expands.  Unfortunately for the 
participants, such corrections often are long delayed.  When they 
finally occur, the rebound to prosperity frequently produces a 
pervasive enthusiasm for expansion that, within a few years, 
again creates over-capacity and a new profitless environment.  In 
other words, nothing fails like success.

     What finally determines levels of long-term profitability in 
such industries is the ratio of supply-tight to supply-ample 
years.  Frequently that ratio is dismal. (It seems as if the most 
recent supply-tight period in our textile business - it occurred 
some years back - lasted the better part of a morning.)

     In some industries, however, capacity-tight conditions can 
last a long time.  Sometimes actual growth in demand will outrun 
forecasted growth for an extended period.  In other cases, adding 
capacity requires very long lead times because complicated 
manufacturing facilities must be planned and built.

     But in the insurance business, to return to that subject, 
capacity can be instantly created by capital plus an 
underwriter’s willingness to sign his name. (Even capital is less 
important in a world in which state-sponsored guaranty funds 
protect many policyholders against insurer insolvency.) Under 
almost all conditions except that of fear for survival - 
produced, perhaps, by a stock market debacle or a truly major 
natural disaster - the insurance industry operates under the 
competitive sword of substantial overcapacity.  Generally, also, 
despite heroic attempts to do otherwise, the industry sells a 
relatively undifferentiated commodity-type product. (Many 
insureds, including the managers of large businesses, do not even 
know the names of their insurers.) Insurance, therefore, would 
seem to be a textbook case of an industry usually faced with the 
deadly combination of excess capacity and a “commodity” product.

     Why, then, was underwriting, despite the existence of 
cycles, generally profitable over many decades? (From 1950 
through 1970, the industry combined ratio averaged 99.0.  
allowing all investment income plus 1% of premiums to flow 
through to profits.) The answer lies primarily in the historic 
methods of regulation and distribution.  For much of this 
century, a large portion of the industry worked, in effect, 
within a legal quasi-administered pricing system fostered by 
insurance regulators.  While price competition existed, it was 
not pervasive among the larger companies.  The main competition 
was for agents, who were courted via various non-price-related 

     For the giants of the industry, most rates were set through 
negotiations between industry “bureaus” (or through companies 
acting in accord with their recommendations) and state 
regulators.  Dignified haggling occurred, but it was between 
company and regulator rather than between company and customer.  
When the dust settled, Giant A charged the same price as Giant B 
- and both companies and agents were prohibited by law from 
cutting such filed rates.

     The company-state negotiated prices included specific profit 
allowances and, when loss data indicated that current prices were 
unprofitable, both company managements and state regulators 
expected that they would act together to correct the situation.  
Thus, most of the pricing actions of the giants of the industry 
were “gentlemanly”, predictable, and profit-producing.  Of prime 
importance - and in contrast to the way most of the business 
world operated - insurance companies could legally price their 
way to profitability even in the face of substantial over-

     That day is gone.  Although parts of the old structure 
remain, far more than enough new capacity exists outside of that 
structure to force all parties, old and new, to respond.  The new 
capacity uses various methods of distribution and is not 
reluctant to use price as a prime competitive weapon.  Indeed, it 
relishes that use.  In the process, customers have learned that 
insurance is no longer a one-price business.  They won’t forget.

     Future profitability of the industry will be determined by 
current competitive characteristics, not past ones.  Many 
managers have been slow to recognize this.  It’s not only 
generals that prefer to fight the last war.  Most business and 
investment analysis also comes from the rear-view mirror.  It 
seems clear to us, however, that only one condition will allow 
the insurance industry to achieve significantly improved 
underwriting results.  That is the same condition that will allow 
better results for the aluminum, copper, or corn producer - a 
major narrowing of the gap between demand and supply.

     Unfortunately, there can be no surge in demand for insurance 
policies comparable to one that might produce a market tightness 
in copper or aluminum.  Rather, the supply of available insurance 
coverage must be curtailed.  “Supply”, in this context, is mental 
rather than physical: plants or companies need not be shut; only 
the willingness of underwriters to sign their names need be 

     This contraction will not happen because of generally poor 
profit levels.  Bad profits produce much hand-wringing and 
finger-pointing.  But they do not lead major sources of insurance 
capacity to turn their backs on very large chunks of business, 
thereby sacrificing market share and industry significance.

     Instead, major capacity withdrawals require a shock factor 
such as a natural or financial “megadisaster”.  One might occur 
tomorrow - or many years from now.  The insurance business - even 
taking investment income into account - will not be particularly 
profitable in the meantime.

     When supply ultimately contracts, large amounts of business 
will be available for the few with large capital capacity, a 
willingness to commit it, and an in-place distribution system.  
We would expect great opportunities for our insurance 
subsidiaries at such a time.

     During 1982, our insurance underwriting deteriorated far 
more than did the industry’s.  From a profit position well above 
average, we, slipped to a performance modestly below average.  
The biggest swing was in National Indemnity’s traditional 
coverages.  Lines that have been highly profitable for us in the 
past are now priced at levels that guarantee underwriting losses.  
In 1983 we expect our insurance group to record an average 
performance in an industry in which average is very poor.

     Two of our stars, Milt Thornton at Cypress and Floyd Taylor 
at Kansas Fire and Casualty, continued their outstanding records 
of producing an underwriting profit every year since joining us.  
Both Milt and Floyd simply are incapable of being average.  They 
maintain a passionately proprietary attitude toward their 
operations and have developed a business culture centered upon 
unusual cost-consciousness and customer service.  It shows on 
their scorecards.

     During 1982, parent company responsibility for most of our 
insurance operations was given to Mike Goldberg.  Planning, 
recruitment, and monitoring all have shown significant 
improvement since Mike replaced me in this role.

     GEICO continues to be managed with a zeal for efficiency and 
value to the customer that virtually guarantees unusual success.  
Jack Byrne and Bill Snyder are achieving the most elusive of 
human goals - keeping things simple and remembering what you set 
out to do.  In Lou Simpson, additionally, GEICO has the best 
investment manager in the property-casualty business.  We are 
happy with every aspect of this operation.  GEICO is a 
magnificent illustration of the high-profit exception we 
described earlier in discussing commodity industries with over-
capacity - a company with a wide and sustainable cost advantage.  
Our 35% interest in GEICO represents about $250 million of 
premium volume, an amount considerably greater than all of the 
direct volume we produce.

Issuance of Equity

     Berkshire and Blue Chip are considering merger in 1983.  If 
it takes place, it will involve an exchange of stock based upon 
an identical valuation method applied to both companies.  The one 
other significant issuance of shares by Berkshire or its 
affiliated companies that occurred during present management’s 
tenure was in the 1978 merger of Berkshire with Diversified 
Retailing Company.

     Our share issuances follow a simple basic rule: we will not 
issue shares unless we receive as much intrinsic business value 
as we give.  Such a policy might seem axiomatic.  Why, you might 
ask, would anyone issue dollar bills in exchange for fifty-cent 
pieces?  Unfortunately, many corporate managers have been willing 
to do just that.

     The first choice of these managers in making acquisitions 
may be to use cash or debt.  But frequently the CEO’s cravings 
outpace cash and credit resources (certainly mine always have).  
Frequently, also, these cravings occur when his own stock is 
selling far below intrinsic business value.  This state of 
affairs produces a moment of truth.  At that point, as Yogi Berra 
has said, “You can observe a lot just by watching.” For 
shareholders then will find which objective the management truly 
prefers - expansion of domain or maintenance of owners’ wealth.

     The need to choose between these objectives occurs for some 
simple reasons.  Companies often sell in the stock market below 
their intrinsic business value.  But when a company wishes to 
sell out completely, in a negotiated transaction, it inevitably 
wants to - and usually can - receive full business value in 
whatever kind of currency the value is to be delivered.  If cash 
is to be used in payment, the seller’s calculation of value 
received couldn’t be easier.  If stock of the buyer is to be the 
currency, the seller’s calculation is still relatively easy: just 
figure the market value in cash of what is to be received in 

     Meanwhile, the buyer wishing to use his own stock as 
currency for the purchase has no problems if the stock is selling 
in the market at full intrinsic value.

     But suppose it is selling at only half intrinsic value.  In 
that case, the buyer is faced with the unhappy prospect of using 
a substantially undervalued currency to make its purchase.

     Ironically, were the buyer to instead be a seller of its 
entire business, it too could negotiate for, and probably get, 
full intrinsic business value.  But when the buyer makes a 
partial sale of itself - and that is what the issuance of shares 
to make an acquisition amounts to - it can customarily get no 
higher value set on its shares than the market chooses to grant 

     The acquirer who nevertheless barges ahead ends up using an 
undervalued (market value) currency to pay for a fully valued 
(negotiated value) property.  In effect, the acquirer must give 
up $2 of value to receive $1 of value.  Under such circumstances, 
a marvelous business purchased at a fair sales price becomes a 
terrible buy.  For gold valued as gold cannot be purchased 
intelligently through the utilization of gold - or even silver - 
valued as lead.

     If, however, the thirst for size and action is strong 
enough, the acquirer’s manager will find ample rationalizations 
for such a value-destroying issuance of stock.  Friendly 
investment bankers will reassure him as to the soundness of his 
actions. (Don’t ask the barber whether you need a haircut.)

     A few favorite rationalizations employed by stock-issuing 
managements follow:

     (a) “The company we’re buying is going to be worth a lot 
         more in the future.” (Presumably so is the interest in 
         the old business that is being traded away; future 
         prospects are implicit in the business valuation 
         process.  If 2X is issued for X, the imbalance still 
         exists when both parts double in business value.)

     (b) “We have to grow.” (Who, it might be asked, is the “we”?  
         For present shareholders, the reality is that all 
         existing businesses shrink when shares are issued.  Were 
         Berkshire to issue shares tomorrow for an acquisition, 
         Berkshire would own everything that it now owns plus the 
         new business, but your interest in such hard-to-match 
         businesses as See’s Candy Shops, National Indemnity, 
         etc. would automatically be reduced.  If (1) your family 
         owns a 120-acre farm and (2)  you invite a neighbor with 
         60 acres of comparable land to merge his farm into an 
         equal partnership - with you to be managing partner, 
         then (3) your managerial domain will have grown to 180 
         acres but you will have permanently shrunk by 25% your 
         family’s ownership interest in both acreage and crops.  
         Managers who want to expand their domain at the expense 
         of owners might better consider a career in government.)

     (c) “Our stock is undervalued and we’ve minimized its use in 
         this deal - but we need to give the selling shareholders 
         51% in stock and 49% in cash so that certain of those 
         shareholders can get the tax-free exchange they want.” 
         (This argument acknowledges that it is beneficial to the 
         acquirer to hold down the issuance of shares, and we like 
         that.  But if it hurts the old owners to utilize shares 
         on a 100% basis, it very likely hurts on a 51% basis.  
         After all, a man is not charmed if a spaniel defaces his 
         lawn, just because it’s a spaniel and not a St. Bernard.  
         And the wishes of sellers can’t be the determinant of the 
         best interests of the buyer - what would happen if, 
         heaven forbid, the seller insisted that as a condition of 
         merger the CEO of the acquirer be replaced?)

     There are three ways to avoid destruction of value for old 
owners when shares are issued for acquisitions.  One is to have a 
true business-value-for-business-value merger, such as the 
Berkshire-Blue Chip combination is intended to be.  Such a merger 
attempts to be fair to shareholders of both parties, with each 
receiving just as much as it gives in terms of intrinsic business 
value.  The Dart Industries-Kraft and Nabisco Standard Brands 
mergers appeared to be of this type, but they are the exceptions.  
It’s not that acquirers wish to avoid such deals; it’s just that 
they are very hard to do.

     The second route presents itself when the acquirer’s stock 
sells at or above its intrinsic business value.  In that 
situation, the use of stock as currency actually may enhance the 
wealth of the acquiring company’s owners.  Many mergers were 
accomplished on this basis in the 1965-69 period.  The results 
were the converse of most of the activity since 1970: the 
shareholders of the acquired company received very inflated 
currency (frequently pumped up by dubious accounting and 
promotional techniques) and were the losers of wealth through 
such transactions.

     During recent years the second solution has been available 
to very few large companies.  The exceptions have primarily been 
those companies in glamorous or promotional businesses to which 
the market temporarily attaches valuations at or above intrinsic 
business valuation.

     The third solution is for the acquirer to go ahead with the 
acquisition, but then subsequently repurchase a quantity of 
shares equal to the number issued in the merger.  In this manner, 
what originally was a stock-for-stock merger can be converted, 
effectively, into a cash-for-stock acquisition.  Repurchases of 
this kind are damage-repair moves.  Regular readers will 
correctly guess that we much prefer repurchases that directly 
enhance the wealth of owners instead of repurchases that merely 
repair previous damage.  Scoring touchdowns is more exhilarating 
than recovering one’s fumbles.  But, when a fumble has occurred, 
recovery is important and we heartily recommend damage-repair 
repurchases that turn a bad stock deal into a fair cash deal.

     The language utilized in mergers tends to confuse the issues 
and encourage irrational actions by managers.  For example, 
“dilution” is usually carefully calculated on a pro forma basis 
for both book value and current earnings per share.  Particular 
emphasis is given to the latter item.  When that calculation is 
negative (dilutive) from the acquiring company’s standpoint, a 
justifying explanation will be made (internally, if not 
elsewhere) that the lines will cross favorably at some point in 
the future. (While deals often fail in practice, they never fail 
in projections - if the CEO is visibly panting over a prospective 
acquisition, subordinates and consultants will supply the 
requisite projections to rationalize any price.) Should the 
calculation produce numbers that are immediately positive - that 
is, anti-dilutive - for the acquirer, no comment is thought to be 

     The attention given this form of dilution is overdone: 
current earnings per share (or even earnings per share of the 
next few years) are an important variable in most business 
valuations, but far from all powerful.

     There have been plenty of mergers, non-dilutive in this 
limited sense, that were instantly value destroying for the 
acquirer.  And some mergers that have diluted current and near-
term earnings per share have in fact been value-enhancing.  What 
really counts is whether a merger is dilutive or anti-dilutive in 
terms of intrinsic business value (a judgment involving 
consideration of many variables).  We believe calculation of 
dilution from this viewpoint to be all-important (and too seldom 

     A second language problem relates to the equation of 
exchange.  If Company A announces that it will issue shares to 
merge with Company B, the process is customarily described as 
“Company A to Acquire Company B”, or “B Sells to A”.  Clearer 
thinking about the matter would result if a more awkward but more 
accurate description were used: “Part of A sold to acquire B”, or 
“Owners of B to receive part of A in exchange for their 
properties”.  In a trade, what you are giving is just as 
important as what you are getting.  This remains true even when 
the final tally on what is being given is delayed.  Subsequent 
sales of common stock or convertible issues, either to complete 
the financing for a deal or to restore balance sheet strength, 
must be fully counted in evaluating the fundamental mathematics 
of the original acquisition. (If corporate pregnancy is going to 
be the consequence of corporate mating, the time to face that 
fact is before the moment of ecstasy.)

     Managers and directors might sharpen their thinking by 
asking themselves if they would sell 100% of their business on 
the same basis they are being asked to sell part of it.  And if 
it isn’t smart to sell all on such a basis, they should ask 
themselves why it is smart to sell a portion.  A cumulation of 
small managerial stupidities will produce a major stupidity - not 
a major triumph. (Las Vegas has been built upon the wealth 
transfers that occur when people engage in seemingly-small 
disadvantageous capital transactions.)

     The “giving versus getting” factor can most easily be 
calculated in the case of registered investment companies.  
Assume Investment Company X, selling at 50% of asset value, 
wishes to merge with Investment Company Y.  Assume, also, that 
Company X therefore decides to issue shares equal in market value 
to 100% of Y’s asset value.

     Such a share exchange would leave X trading $2 of its 
previous intrinsic value for $1 of Y’s intrinsic value.  Protests 
would promptly come forth from both X’s shareholders and the SEC, 
which rules on the fairness of registered investment company 
mergers.  Such a transaction simply would not be allowed.

     In the case of manufacturing, service, financial companies, 
etc., values are not normally as precisely calculable as in the 
case of investment companies.  But we have seen mergers in these 
industries that just as dramatically destroyed value for the 
owners of the acquiring company as was the case in the 
hypothetical illustration above.  This destruction could not 
happen if management and directors would assess the fairness of 
any transaction by using the same yardstick in the measurement of 
both businesses.

     Finally, a word should be said about the “double whammy” 
effect upon owners of the acquiring company when value-diluting 
stock issuances occur.  Under such circumstances, the first blow 
is the loss of intrinsic business value that occurs through the 
merger itself.  The second is the downward revision in market 
valuation that, quite rationally, is given to that now-diluted 
business value.  For current and prospective owners 
understandably will not pay as much for assets lodged in the 
hands of a management that has a record of wealth-destruction 
through unintelligent share issuances as they will pay for assets 
entrusted to a management with precisely equal operating talents, 
but a known distaste for anti-owner actions.  Once management 
shows itself insensitive to the interests of owners, shareholders 
will suffer a long time from the price/value ratio afforded their 
stock (relative to other stocks), no matter what assurances 
management gives that the value-diluting action taken was a one-
of-a-kind event.

     Those assurances are treated by the market much as one-bug-
in-the-salad explanations are treated at restaurants.  Such 
explanations, even when accompanied by a new waiter, do not 
eliminate a drop in the demand (and hence market value) for 
salads, both on the part of the offended customer and his 
neighbors pondering what to order.  Other things being equal, the 
highest stock market prices relative to intrinsic business value 
are given to companies whose managers have demonstrated their 
unwillingness to issue shares at any time on terms unfavorable to 
the owners of the business.

     At Berkshire, or any company whose policies we determine 
(including Blue Chip and Wesco), we will issue shares only if our 
owners receive in business value as much as we give.  We will not 
equate activity with progress or corporate size with owner-


     This annual report is read by a varied audience, and it is 
possible that some members of that audience may be helpful to us 
in our acquisition program.

     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 transactions.  We can 
promise complete confidentiality and a very fast answer as to 
possible interest - customarily within five minutes.  Cash 
purchases are preferred, but we will consider the use of stock 
when it can be done on the basis described in the previous 

                         *  *  *  *  *

     Our shareholder-designated contributions program met with 
enthusiasm again this year; 95.8% of eligible shares 
participated.  This response was particularly encouraging since 
only $1 per share was made available for designation, down from 
$2 in 1981.  If the merger with Blue Chip takes place, a probable 
by-product will be the attainment of a consolidated tax position 
that will significantly enlarge our contribution base and give us 
a potential for designating bigger per-share amounts in the 

     If you wish to participate in future programs, we strongly 
urge that you immediately make sure that your shares are 
registered in the actual owner’s name, not a “street” or nominee 
name.  For new shareholders, a more complete description of the 
program is on pages 62-63.

                         *  *  *  *  *

     In a characteristically rash move, we have expanded World 
Headquarters by 252 square feet (17%), coincidental with the 
signing of a new five-year lease at 1440 Kiewit Plaza.  The five 
people who work here with me - Joan Atherton, Mike Goldberg, 
Gladys Kaiser, Verne McKenzie and Bill Scott - outproduce 
corporate groups many times their number.  A compact organization 
lets all of us spend our time managing the business rather than 
managing each other.

     Charlie Munger, my partner in management, will continue to 
operate from Los Angeles whether or not the Blue Chip merger 
occurs.  Charlie and I are interchangeable in business decisions.  
Distance impedes us not at all: we’ve always found a telephone 
call to be more productive than a half-day committee meeting.

                         *  *  *  *  *

     Two of our managerial stars retired this year: Phil Liesche 
at 65 from National Indemnity Company, and Ben Rosner at 79 from 
Associated Retail Stores.  Both of these men made you, as 
shareholders of Berkshire, a good bit wealthier than you 
otherwise would have been.  National Indemnity has been the most 
important operation in Berkshire’s growth.  Phil and Jack 
Ringwalt, his predecessor, were the two prime movers in National 
Indemnity’s success.  Ben Rosner sold Associated Retail Stores to 
Diversified Retailing Company for cash in 1967, promised to stay 
on only until the end of the year, and then hit business home 
runs for us for the next fifteen years.

     Both Ben and Phil ran their businesses for Berkshire with 
every bit of the care and drive that they would have exhibited 
had they personally owned 100% of these businesses.  No rules 
were necessary to enforce or even encourage this attitude; it was 
embedded in the character of these men long before we came on the 
scene.  Their good character became our good fortune.  If we can 
continue to attract managers with the qualities of Ben and Phil, 
you need not worry about Berkshire’s future.

                                          Warren E. Buffett
                                          Chairman of the Board