1975年巴菲特致股东的信
2012-04-15 23:37阅读：
To the Stockholders of Berkshire Hathaway Inc.:
Last year, when discussing the prospects for 1975, we stated “the
outlook for 1975 is not encouraging.” This forecast proved to be
distressingly accurate. Our operating earnings for 1975 were
$6,713,592, or $6.85 per share, producing a return on beginning
shareholders’ equity of 7.6%. This is the lowest return on equity
experienced since 1967. Furthermore, as explained later in this
letter, a large segment of these earnings resulted from Federal
income tax refunds which will not be available to assist
performance in 1976.
On balance, however, current trends indicate a somewhat brighter
1976. Operations and prospects will be discussed in greater detail
below, under specific industry titles. Our expectation is that
significantly better results in textiles, earnings added from
recent acquisitions, an increase in equity in earnings of Blue Chip
Stamps resulting from an enlarged ownership interest, and at least
a moderate improvement i
n insurance underwriting results will more than offset other
possible negatives to produce greater earnings in 1976. The major
variable—and by far the most difficult to predict with any feeling
of confidence—is the insurance underwriting result. Present very
tentative indications are that underwriting improvement is in
prospect. If such improvement is moderate, our overall gain in
earnings in 1976 likewise will prove moderate. More significant
underwriting improvement could give us a major gain in
earnings.
Textile Operations
During the first half of 1975 sales of textile products were
extremely depressed, resulting in major production curtailments.
Operations ran at a significant loss, with employment down as much
as 53% from a year earlier.
In contrast with previous cyclical slumps, however, most textile
producers quickly reduced production to match incoming orders, thus
preventing massive industry-wide accumulation of inventories. Such
cutbacks caused quite prompt reflection at the mill operating level
when demand revived at retail. As a result, beginning about midyear
business rebounded at a fairly rapid rate. This “V” shaped textile
depression, while one of the sharpest on record, also became one of
the shortest ones in our experience. The fourth quarter produced an
excellent profit for our textile division, bringing results for the
year into the black.
On April 28, 1975 we acquired Waumbec Mills Incorporated and
Waumbec Dyeing and Finishing Co., Inc. located in Manchester, New
Hampshire. These companies have long sold woven goods into the
drapery and apparel trade. Such drapery materials complement and
extend the line already marketed through the Home Fabrics Division
of Berkshire Hathaway. In the period prior to our acquisition, the
company had run at a very substantial loss, with only about 55% of
looms in operation and the finishing plant operating at about 50%
of capacity. Losses continued on a reduced basis for a few months
after acquisition. Outstanding efforts by our manufacturing,
administrative and sales people now have produced major
improvements, which, coupled with the general revival in textiles,
have moved Waumbec into a significant profit position.
We expect a good level of profits from textiles in 1976. Continued
progress is being made in the movement of Waumbec goods into areas
of traditional marketing strength of Berkshire Hathaway,
productivity should improve in both the weaving and finishing areas
at Manchester, and textile demand continues to firm at decent
prices.
We have great confidence in the ability of Ken Chace and his team
to maximize our strengths in textiles. Therefore, we continue to
look for ways to increase further our scale of operations while
avoiding major capital investment in new fixed assets which we
consider unwise, considering the relatively low returns
historically earned on large scale investment in new textile
equipment.
Insurance Underwriting
The property and casualty insurance industry had its worst year in
history during 1975. We did our share—unfortunately, even somewhat
more. Really disastrous results were concentrated in auto and
long-tail (contracts where settlement of loss usually occurs long
after the loss event) lines.
Economic inflation, with the increase in cost of repairing humans
and property far outstripping the general rate of inflation,
produced ultimate loss costs which soared beyond premium levels
established in a different cost environment. “Social” inflation
caused the liability concept to be expanded continuously, far
beyond limits contemplated when rates were established—in effect,
adding coverage beyond what was paid for. Such social inflation
increased significantly both the propensity to sue and the
possibility of collecting mammoth jury awards for events not
previously considered statistically significant in the
establishment of rates. Furthermore, losses to policyholders which
otherwise would result from mushrooming insolvencies of companies
inadequately reacting to these problems are divided through
Guaranty Funds among remaining solvent insurers. These trends will
continue, and should moderate any optimism which otherwise might be
justified by the sharply increased rates now taking effect.
Berkshire Hathaway’s insurance subsidiaries have a disproportionate
concentration of business in precisely the lines which produced the
worst underwriting results in 1975. Such lines produce unusually
high investment income and, therefore, have been particularly
attractive to us under previous underwriting conditions. However,
our “mix” has been very disadvantageous during the past two years
and it well may be that we will remain positioned in the more
difficult part of the insurance spectrum during the inflationary
years ahead.
The only segment to show improved results for us during 1975 was
the “home state” operation, which has made continuous progress
under the leadership of John Ringwalt. Although still operating at
a significant underwriting loss, the combined ratio improved from
1974. Adjusted for excess costs attributable to operations still in
the start-up phase, underwriting results are satisfactory. Texas
United Insurance Company, a major problem a few years ago, has made
outstanding progress since George Billing has assumed command. With
an almost totally new agency force, Texas United was the winner of
the “Chairman’s Cup” for achievement of the lowest loss ratio among
the home state companies. Cornhusker Casualty Company, oldest and
largest of the home state companies, continues its outstanding
operation with major gains in premium volume and a combined ratio
slightly under 100. Substantial premium growth is expected at the
home state operation during 1976; the measurement of success,
however, will continue to be the achievement of a low combined
ratio.
Our traditional business at National Indemnity Company,
representing well over half of our insurance volume, had an
extraordinarily bad underwriting year in 1975. Although rates were
increased frequently and significantly, they continually lagged
loss experience throughout the year. Several special programs
instituted in the early 1970s have caused significant losses, as
well as a heavy drain on managerial time and energies. Present
indications are that premium volume will show a major increase in
1976, and we hope that underwriting results will improve.
Reinsurance suffered the same problems as our direct business
during 1975. The same remedial efforts were attempted. Because
reinsurance contract settlements lag those of direct business, it
well may be that any upturn in results from our direct insurance
business will precede those of the reinsurance segment.
At our Home and Automobile Insurance Company subsidiary, now
writing auto business only in the Cook County area of Illinois,
experience continued very bad in 1975 resulting in a management
change in October. John Seward was made President at that time, and
has energetically and imaginatively implemented a completely
revamped underwriting approach. Overall, our insurance operation
will produce a substantial gain in premium volume during 1976. Much
of this will reflect increased rates rather than more policies.
Under normal circumstances such a gain in volume would be welcome,
but our emotions are mixed at present. Underwriting experience
should improve—and we expect it to—but our confidence level is not
high. While our efforts will be devoted to obtaining a combined
ratio below 100, it is unlikely to be attained during 1976.
Insurance Investments
Gains in investment income were moderate during 1975 because
premium volume remained flat and underwriting losses reduced funds
available for investment. Invested assets, measured at cost at
yearend, were close to identical with the level at the beginning of
the year.
At the end of 1974 the net unrealized loss in the stock section of
our portfolio amounted to about $17 million, but we expressed the
opinion, nevertheless, that this portfolio overall represented good
value at its carrying value of cost. During 1975 a net capital loss
of $2,888,000 before tax credits was realized, but our present
expectation is that 1976 will be a year of realized capital gain.
On March 31, 1976 our net unrealized gains applicable to equities
amounted to about $15 million. Our equity investments are heavily
concentrated in a few companies which are selected based on
favorable economic characteristics, competent and honest
management, and a purchase price attractive when measured against
the yardstick of value to a private owner.
When such criteria are maintained, our intention is to hold for a
long time; indeed, our largest equity investment is 467,150 shares
of Washington Post “B” stock with a cost of $10.6 million, which we
expect to hold permanently.
With this approach, stock market fluctuations are of little
importance to us—except as they may provide buying
opportunities—but business performance is of major importance. On
this score we have been delighted with progress made by practically
all of the companies in which we now have significant
investments.
We have continued to maintain a strong liquid position in our
insurance companies. In last year’s annual report we explained how
variations of 1/10 of 1% in interest rates result in million dollar
swings in market value of our bonds. We consider such market
fluctuation of minor importance as our liquidity and general
financial strength make it highly improbable that bonds will have
to be sold at times other than those of our choice.
Banking
It is difficult to find adjectives to describe the performance of
Eugene Abegg, Chief Executive of Illinois National Bank and Trust
of Rockford, Illinois, our banking subsidiary.
In a year when many banking operations experienced major troubles,
Illinois National continued its outstanding record. Against average
loans of about $65 million, net loan losses were $24,000, or .04%.
Unusually high liquidity is maintained with obligations of the U.
S. Government and its agencies, all due within one year, at yearend
amounting to about 75% of demand deposits.
Maximum rates of interest are paid on all consumer savings
instruments which make up more than $2 million, it consistently has
generated favorable earnings. Positioned as we now are with respect
to income taxes, the addition of a solid source of taxable income
is particularly welcome.
General Review
Your present management assumed responsibility at Berkshire
Hathaway in May, 1965. At the end of the prior fiscal year
(September, 1964) the net worth of the Company was $22.1 million,
and 1,137,778 common shares were outstanding, with a resulting book
value of $19.46 per share. Ten years earlier, Berkshire Hathaway’s
net worth had been $53.4 million. Dividends and stock repurchases
accounted for over $21 million of the decline in company net worth,
but aggregate net losses of $9.8 million had been incurred on sales
of $595 million during the decade.
In 1965, two New England textile mills were the company’s only
sources of earning power and, before Ken Chace assumed
responsibility for the operation, textile earnings had been erratic
and, cumulatively, something less than zero subsequent to the
merger of Berkshire Fine Spinning and Hathaway Manufacturing. Since
1964, net worth has been built to $92.9 million, or $94.92 per
share. We have acquired total, or virtually total ownership of six
businesses through negotiated purchases for cash (or cash and
notes) from private owners, started four others, purchased a 31.5%
interest in a large affiliate enterprise and reduced the number of
outstanding shares of Berkshire Hathaway to 979,569. Overall,
equity per share has compounded at an annual rate of slightly over
15%.
While 1975 was a major disappointment, efforts will continue to
develop growing and diversified sources of earnings. Our objective
is a conservatively financed and highly liquid business—possessing
extra margins of balance sheet strength consistent with the
fiduciary obligations inherent in the banking and insurance
industries—which will produce a long term rate of return on equity
capital exceeding that of American industry as a whole.
Warren E. Buffett,
Chairman
March 24, 1976
