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Warren Buffett's Letters to Berkshire Shareholders (巴菲特寫給股東的信,1977年 )

To the Shareholders of Berkshire Hathaway Inc.:

Operating earnings in 1977 of $21,904,000, or $22.54 per share, were moderately better than anticipated a year ago. Of these earnings, $1.43 per share resulted from substantial realized capital gains by Blue Chip Stamps which, to the extent of our proportional interest in that company, are included in our operating earnings figure. Capital gains or losses realized directly by Berkshire Hathaway Inc. or its insurance subsidiaries are not included in our calculation of operating earnings. While too much attention should not be paid to the figure for any single year, over the longer term the record regarding aggregate capital gains or losses obviously is of significance.


Textile operations came in well below forecast, while the results of the Illinois National Bank as well as the operating earnings attributable to our equity interest in Blue Chip Stamps were about as anticipated. However, insurance operations, led again by the truly outstanding results of Phil Liesche’s managerial group at National Indemnity Company, were even better than our optimistic expectations.

紡織事業的表現遠低於預估,至於伊利諾國家銀行的成績以及藍籌郵票貢獻給我們的投資利益則大致如預期,另外,由Phil Liesche領導的國家產險保險業務的表現甚至比我們當初最樂觀的期望還要好。

Most companies define “record” earnings as a new high in earnings per share. Since businesses customarily add from year to year to their equity base, we find nothing particularly noteworthy in a management performance combining, say, a 10% increase in equity capital and a 5% increase in earnings per share. After all, even a totally dormant savings account will produce steadily rising interest earnings each year because of compounding.


Except for special cases (for example, companies with unusual debt-equity ratios or those with important assets carried at unrealistic balance sheet values), we believe a more appropriate measure of managerial economic performance to be return on equity capital. In 1977 our operating earnings on beginning equity capital amounted to 19%, slightly better than last year and above both our own long-term average and that of American industry in aggregate. But, while our operating earnings per share were up 37% from the year before, our beginning capital was up 24%, making the gain in earnings per share considerably less impressive than it might appear at first glance.


We expect difficulty in matching our 1977 rate of return during the forthcoming year. Beginning equity capital is up 23% from a year ago, and we expect the trend of insurance underwriting profit margins to turn down well before the end of the year. Nevertheless, we expect a reasonably good year and our present estimate, subject to the usual caveats regarding the frailties of forecasts, is that operating earnings will improve somewhat on a per share basis during 1978.


Textile Operations

The textile business again had a very poor year in 1977. We have mistakenly predicted better results in each of the last two years. This may say something about our forecasting abilities, the nature of the textile industry, or both. Despite strenuous efforts, problems in marketing and manufacturing have persisted. Many difficulties experienced in the marketing area are due primarily to industry conditions, but some of the problems have been of our own making.


A few shareholders have questioned the wisdom of remaining in the textile business which, over the longer term, is unlikely to produce returns on capital comparable to those available in many other businesses. Our reasons are several: (1) Our mills in both New Bedford and Manchester are among the largest employers in each town, utilizing a labor force of high average age possessing relatively non-transferable skills. Our workers and unions have exhibited unusual understanding and effort in cooperating with management to achieve a cost structure and product mix which might allow us to maintain a viable operation. (2) Management also has been energetic and straightforward in its approach to our textile problems. In particular, Ken Chace’s efforts after the change in corporate control took place in 1965 generated capital from the textile division needed to finance the acquisition and expansion of our profitable insurance operation. (3) With hard work
and some imagination regarding manufacturing and marketing
configurations, it seems reasonable that at least modest profits in the textile division can be achieved in the future.

部份股東開始質疑我們是否應該繼續留在紡織產業,雖然就長期而言其投資報酬率明顯低於其他的投資,但我們的理由有以下幾個:(1)我們在紐貝福及Manchester的工廠都是當地最大的聘雇業者,員工的年齡偏高,缺乏轉換工作的能力,同時我們的員工及其公會也已經盡其所能地與經營階層配合努力改善成本結構及產品組合,以使我們的經營得以維持下去(2)管理階層也相當努力同時坦承面對產業的問題,尤其是在1965年經營權易主後,Ken Chace依然盡力盡力地協助我們把紡織部門產生穩定的資金流入轉到獲利更加的保險事業投資與購併之上(3)努力工作加上對製造與行銷組合的樂觀預期,我們的紡織事業在未來看起來應該可以維持一個起碼的利潤空間。

Insurance Underwriting

Our insurance operation continued to grow significantly in 1977. It was early in 1967 that we made our entry into this industry through the purchase of National Indemnity Company and National Fire and Marine Insurance Company (sister companies) for approximately $8.6 million. In that year their premium volume amounted to $22 million. In 1977 our aggregate insurance premium volume was $151 million. No additional shares of Berkshire Hathaway stock have been issued to achieve any of this growth.


Rather, this almost 600% increase has been achieved through large gains in National Indemnity’s traditional liability areas plus the starting of new companies (Cornhusker Casualty Company in 1970, Lakeland Fire and Casualty Company in 1971, Texas United Insurance Company in 1972, The Insurance Company of Iowa in 1973, and Kansas Fire and Casualty Company in late 1977), the purchase for cash of other insurance companies (Home and Automobile Insurance Company in 1971, Kerkling Reinsurance Corporation, now named Central Fire and Casualty Company, in 1976, and Cypress Insurance Company at yearend 1977), and finally through the marketing of additional products, most significantly reinsurance, within the National Indemnity Company corporate structure.


In aggregate, the insurance business has worked out very well. But it hasn’t been a one-way street. Some major mistakes have been made during the decade, both in products and personnel. We experienced significant problems from (1) a surety operation initiated in 1969, (2) the 1973 expansion of Home and Automobile’s urban auto marketing into the Miami , Florida area, (3) a still unresolved aviation “fronting” arrangement, and (4) our Worker’s Compensation operation in California , which we believe retains an interesting potential upon completion of a reorganization now in progress. It is comforting to be in a business where some mistakes can be made and yet a quite satisfactory overall performance can be achieved. In a sense, this is the opposite case from our textile business where even very good management probably can average only modest results. One of the lessons your management has learned - and, unfortunately, sometimes re-learned - is the importance of being in businesses where tailwinds prevail rather than headwinds.


In 1977 the winds in insurance underwriting were squarely behind us. Very large rate increases were effected throughout the industry in 1976 to offset the disastrous underwriting results of 1974 and 1975. But, because insurance policies typically are written for one-year periods, with pricing mistakes capable of correction only upon renewal, it was 1977 before the full impact was felt upon earnings of those earlier rate increases.


The pendulum now is beginning to swing the other way. We estimate that costs involved in the insurance areas in which we operate rise at close to 1% per month. This is due to continuous monetary inflation affecting the cost of repairing humans and property, as well as “social inflation”, a broadening definition by society and juries of what is covered by insurance policies. Unless rates rise at a comparable 1% per month, underwriting profits must shrink. Recently the pace of rate increases has slowed dramatically, and it is our expectation that underwriting margins generally will be declining by the second half of the year.


We must again give credit to Phil Liesche, greatly assisted by Roland Miller in Underwriting and Bill Lyons in Claims, for an extraordinary underwriting achievement in National Indemnity’s traditional auto and general liability business during 1977. Large volume gains have been accompanied by excellent underwriting margins following contraction or withdrawal by many competitors in the wake of the 1974-75 crisis period. These conditions will reverse before long. In the meantime, National Indemnity’s underwriting profitability has increased dramatically and, in addition, large sums have been made available for investment. As markets loosen and rates become inadequate, we again will face the challenge of philosophically accepting reduced volume. Unusual managerial discipline will be required, as it runs counter to normal institutional behavior to let the other fellow take away business - even at foolish prices.

講到這裡,我們必須再度將殊榮歸予Phil Liesche,在核保部門Roland Miller以及理賠部門Bill Lyons的大力協助下,國家產險1977年在傳統的汽車及責任險業務方面又大放異彩,保費收入不但大幅成長,相較於其他同業不堪1974-75年的危機陸續退出市場,其優異的核保利益更屬難得,國家產險的核保利益大幅地成長,此外可供投資的資金亦迅速累積,只可惜這樣的情況維持不了多久,這些業者又會再度捲土重來,隨著市場緊繃情勢轉為寬鬆,費率又將變得失控,屆時我們又必須回復過去冷靜地接受保費收入銳減的考驗,嚴格的核保紀律絕對必須維持,如此我們才能抗拒直覺,眼睜睜地看著其他業者以瘋狂的價格搶走生意。

Our reinsurance department, managed by George Young, improved its underwriting performance during 1977. Although the combined ratio (see definition on page 12) of 107.1 was unsatisfactory, its trend was downward throughout the year. In addition, reinsurance generates unusually high funds for investment as a percentage of premium volume.

1977年由George Young管理的再保險部門改善了其核保的績效,雖然高達107.1的綜合比率不算理想(相關定義請參閱第12頁),但至少趨勢是向下,此外再保險的保費收入依然貢獻大量的資金以供我們進行投資。

At Home and Auto, John Seward continued to make progress on all fronts. John was a battlefield promotion several years ago when Home and Auto’s underwriting was awash in red ink and the company faced possible extinction. Under his management it currently is sound, profitable, and growing.

至於John Seward領導的家庭與汽車保險在各個方面都有重大進展,幾年前當該公司因核保大幅虧損,面臨倒閉危機時,John跳上火線,在他的管理之下,公司的營運漸上軌道。

John Ringwalt’s homestate operation now consists of five companies, with Kansas Fire and Casualty Company becoming operational late in 1977 under the direction of Floyd Taylor. The homestate companies had net premium volume of $23 million, up from $5.5 million just three years ago. All four companies that operated throughout the year achieved combined ratios below 100, with Cornhusker Casualty Company, at 93.8, the leader. In addition to actively supervising the other four homestate operations, John Ringwalt manages the operations of Cornhusker which has recorded combined ratios below 100 in six of its seven full years of existence and, from a standing start in 1970, has grown to be one of the leading insurance companies operating in Nebraska utilizing the conventional independent agency system. Lakeland Fire and Casualty Company, managed by Jim Stodolka, was the winner of the Chairman’s Cup in 1977 for achieving the lowest loss ratio among the homestate companies. All in all, the homestate operation continues to make excellent progress.

John Ringwalt負責的Homestate業務旗下主要包含五家公司,其中堪薩斯火險在Floyd Taylor籌備下於1977年底正式營運,Homestate 1977年的保費淨收入達到2,300萬美元,三年前不過只有550萬美元,其餘四家的年度綜合比率都低於100,其中Cornhusker甚至只有93.8,John在努力管理其他四家公司的同時,更讓Cornhusker過去七年有六年的綜合比率低於100,從1970年正式營運以來,該公司已順利成為內布拉斯加州傳統獨立經紀系統的領導業者,至於由Jim Stodolka帶領的Lakeland火險則榮獲1977年主席杯的頭銜,因為去年該公司的綜合比率最低,總的來說,Homestate集團的營運在去年大有進展。

The newest addition to our insurance group is Cypress Insurance Company of South Pasadena , California . This Worker’s Compensation insurer was purchased for cash in the final days of 1977 and, therefore, its approximate $12.5 million of volume for that year was not included in our results. Cypress and National Indemnity’s present California Worker’s Compensation operation will not be combined, but will operate independently utilizing somewhat different marketing strategies. Milt Thornton, President of Cypress since 1968, runs a first-class operation for policyholders, agents, employees and owners alike. We look forward to working with him.

我們旗下保險事業最新加入的成員是位於加州的賽普路斯保險,至於勞工退休金保險則因為是在1977年底以現金買下,所以其1,250萬美元的保費收入並未列入我們當年的營運記錄,賽普路斯與國家產險現有的勞工退休金保險業務不會合併,而會採用不同的行銷策略各自獨立經營,賽普路斯現任總裁Milt Thornton,在保戶、業務員、員工及股東方面的營運管理皆屬一流,對於能與他一起共事,我們相當期待。

Insurance companies offer standardized policies which can be copied by anyone. Their only products are promises. It is not difficult to be licensed, and rates are an open book. There are no important advantages from trademarks, patents, location, corporate longevity, raw material sources, etc., and very little consumer differentiation to produce insulation from competition. It is commonplace, in corporate annual reports, to stress the difference that people make. Sometimes this is true and sometimes it isn’t. But there is no question that the nature of the insurance business magnifies the effect which individual managers have on company performance. We are very fortunate to have the group of managers that are associated with us.


Insurance Investments

During the past two years insurance investments at cost (excluding the investment in our affiliate, Blue Chip Stamps) have grown from $134.6 million to $252.8 million. Growth in insurance reserves, produced by our large gain in premium volume, plus retained earnings, have accounted for this increase in marketable securities. In turn, net investment income of the Insurance Group has improved from $8.4 million pre-tax in 1975 to $12.3 million pre-tax in 1977.


In addition to this income from dividends and interest, we realized capital gains of $6.9 million before tax, about one-quarter from bonds and the balance from stocks. Our unrealized gain in stocks at yearend 1977 was approximately $74 million but this figure, like any other figure of a single date (we had an unrealized loss of $17 million at the end of 1974), should not be taken too seriously. Most of our large stock positions are going to be held for many years and the scorecard on our investment decisions will be provided by business results over that period, and not by prices on any given day. Just as it would be foolish to focus unduly on short-term prospects when acquiring an entire company, we think it equally unsound to become mesmerized by prospective near term earnings or recent trends in earnings when purchasing small pieces of a company; i.e., marketable common stocks.


A little digression illustrating this point may be interesting. Berkshire Fine Spinning Associates and Hathaway Manufacturing were merged in 1955 to form Berkshire Hathaway Inc. In 1948, on a pro forma combined basis, they had earnings after tax of almost $18 million and employed 10,000 people at a dozen large mills throughout New England . In the business world of that period they were an economic powerhouse. For example, in that same year earnings of IBM were $28 million (now $2.7 billion), Safeway Stores, $10 million, Minnesota Mining, $13 million, and Time, Inc., $9 million. But, in the decade following the 1955 merger aggregate sales of $595 million produced an aggregate loss for Berkshire Hathaway of $10 million. By 1964 the operation had been reduced to two mills and net worth had shrunk to $22 million, from $53 million at the time of the merger. So much for single year snapshots as adequate portrayals of a business.

離題一下,有一點很有趣足以說明上述情況,Berkshire紡紗與Hathaway工業是在1955年合併成為Berkshire Hathaway公司的,再將時間往回推到1948年,在擬制合併的基礎下,當年他們合計稅前盈餘達到1,800萬美元,旗下擁有十個遍佈新英格蘭地區的工廠,員工人數一萬人,在當時的環境,他們算是經濟成長的重要動力之一,因為IBM在同一年度的盈餘也不過2,800萬美元(現在的年獲利達到27億美元),另外Safeway商店1,000萬、3M只有1,300萬而時代雜誌則為900萬,然而在雙方合併後的十年內,累計營收雖然有5.95億,但結算虧損卻達到1,000萬美元,時至1964年,公司的營運僅剩兩家工廠,淨值更從合併時的5,300萬美元大幅縮減至2,200萬美元,所以我們可以這樣說,單一年度所透露出公司營運的景況實在是極其有限。

Equity holdings of our insurance companies with a market value of over $5 million on December 31, 1977 were as follows:


No. of Shares Company Cost Market
------------- ------- -------- --------
( 000’ s omitted)

220,000 Capital Cities Communications, Inc. ..... $ 10,909 $ 13,228
1,986,953 Government Employees Insurance
Company Convertible Preferred ........ 19,417 33,033
1,294,308 Government Employees Insurance
Company Common Stock ................. 4,116 10,516
592,650 The Interpublic Group of Companies, Inc. 4,531 17,187
324,580 Kaiser Aluminum& Chemical Corporation ... 11,218 9,981
1,305,800 Kaiser Industries, Inc. ................. 778 6,039
226,900 Knight-Ridder Newspapers, Inc. .......... 7,534 8,736
170,800 Ogilvy & Mather International, Inc. ..... 2,762 6,960
934,300 The Washington Post Company Class B ..... 10,628 33,401
-------- --------
Total ................................... $ 71,893 $139,081
All Other Holdings ...................... 34,996 41,992
-------- --------
Total Equities .......................... $106,889 $181,073
======== ========

We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price. We ordinarily make no attempt to buy equities for anticipated favorable stock price behavior in the short term. In fact, if their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price.

Our experience has been that pro-rata portions of truly outstanding businesses sometimes sell in the securities markets at very large discounts from the prices they would command in negotiated transactions involving entire companies. Consequently, bargains in business ownership, which simply are not available directly through corporate acquisition, can be obtained indirectly through stock ownership. When prices are appropriate, we are willing to take very large positions in selected companies, not with any intention of taking control and not foreseeing sell-out or merger, but with the expectation that excellent business results by corporations will translate over the long term into correspondingly excellent market value and dividend results for owners, minority as well as majority.


Such investments initially may have negligible impact on our operating earnings. For example, we invested $10.9 million in Capital Cities Communications during 1977. Earnings attributable to the shares we purchased totaled about $1.3 million last year. But only the cash dividend, which currently provides $40,000 annually, is reflected in our operating earnings figure.


Capital Cities possesses both extraordinary properties and extraordinary management. And these management skills extend equally to operations and employment of corporate capital. To purchase, directly, properties such as Capital Cities owns would cost in the area of twice our cost of purchase via the stock market, and direct ownership would offer no important advantages to us. While control would give us the opportunity - and the responsibility - to manage operations and corporate resources, we would not be able to provide management in either of those respects equal to that now in place. In effect, we can obtain a better management result through non-control than control. This is an unorthodox view, but one we believe to be sound.



In 1977 the Illinois National Bank continued to achieve a rate of earnings on assets about three times that of most large banks. As usual, this record was achieved while the bank paid maximum rates to savers and maintained an asset position combining low risk and exceptional liquidity. Gene Abegg formed the bank in 1931 with $250,000. In its first full year of operation, earnings amounted to $8,782. Since that time, no new capital has been contributed to the bank; on the contrary, since our purchase in 1969, dividends of $20 million have been paid. Earnings in 1977 amounted to $3.6 million, more than achieved by many banks two or three times its size.

1977年伊利諾國家銀行的資產報酬率約為其他規模較大同業的三倍,一如往常,這樣的成績,還搭配給予存戶最優惠的利率,同時維持風險最低流動性最高的資產組合,Gene Abegg在1931年以25萬美元成立這家銀行,在第一個完整的營業年度,盈餘就達到8,782美元,從那時候開始,銀行就沒有再辦理任何一次增資,相反地,當我們在1969年買下該公司時,馬上就領到了2,000萬美元的現金股利,1977年的盈餘更達到360萬美元,甚至比規模大他兩三倍的銀行同業還多。

Late last year Gene, now 80 and still running a banking operation without peer, asked that a successor be brought in. Accordingly, Peter Jeffrey, formerly President and Chief Executive Officer of American National Bank of Omaha, has joined the Illinois National Bank effective March 1st as President and Chief Executive Officer.

去年現年80歲依然一馬當先專注於銀行營運的Gene,要求新的接任者接手,因此前奧瑪哈美國國家銀行的總裁Peter Jeffrey於3/1正式加入伊利諾國家銀行擔任新總裁。

Gene continues in good health as Chairman. We expect a continued successful operation at Rockford ’s leading bank.

老當益壯的Gene依然擔任董事長,我們預期該銀行仍將成為Rockford地區首區一指的銀行 (伊利諾州城市)。

Blue Chip Stamps

We again increased our equity interest in Blue Chip Stamps, and owned approximately 36 1/2% at the end of 1977. Blue Chip had a fine year, earning approximately $12.9 million from operations and, in addition, had realized securities gains of $4.1 million.


Both Wesco Financial Corp., an 80% owned subsidiary of Blue Chip Stamps, managed by Louis Vincenti, and See’s Candies, a 99% owned subsidiary, managed by Chuck Huggins, made good progress in 1977. Since See’s was purchased by Blue Chip Stamps at the beginning of 1972, pre-tax operating earnings have grown from $4.2 million to $12.6 million with little additional capital investment. See’s achieved this record while operating in an industry experiencing practically no unit growth. Shareholders of Berkshire Hathaway Inc. may obtain the annual report of Blue Chip Stamps by requesting it from Mr. Robert H. Bird, Blue Chip Stamps, 5801 South Eastern Avenue , Los Angeles , California 90040 .

藍籌郵票持有80%股權的Wesco金融公司(由Louis Vincenti所管理)及持有99%股權的子公司喜斯糖果(由Chuck Huggins所管理)在1977年都有重大進展,自從喜斯糖果在1972年被藍籌郵票所買下後,就沒有挹注任何額外的資本,其稅前盈餘從420萬美元成長到1,260萬美元,尤其難得的是喜斯所處的產業環境,幾乎沒有成長,若有需要Berkshire的股東可向Mr. Robert(地址加州洛杉磯5801 South Eastern Avenue)索取藍籌郵票的年報。

Warren E. Buffett, Chairman
March 14,1978
Warren E. Buffett



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