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1978 Shareholder Letter

Buffett's 1978 letter covers the Diversified Retailing merger, insurance excellence, and introduces the concept of concentrating holdings in businesses that can be understood and are priced attractively.

buffettberkshire1978annual-letter

1978 Shareholder Letter

Date: March 26, 1979 Author: Warren Buffett Company: Berkshire Hathaway

Overview

1978 was a good year with operating earnings of 19.4% of beginning shareholders' investment, close to the 1972 record. The merger with Diversified Retailing Company added complexity to financial reporting but expanded Berkshire's reach. Buffett continued to emphasize the importance of return on equity and discussed his growing optimism about insurance equity investments, particularly the holdings in Washington Post, SAFECO, and Government Employees Insurance (GEICO).

Key Points

The Diversified Retailing Merger

The merger created accounting complications requiring full consolidation of Blue Chip Stamps (58% owned), which Buffett admitted produced confusing presentations:

"Such a grouping of Balance Sheet and Earnings items - some wholly owned, some partly owned - tends to obscure economic reality more than illuminate it."

Textile Industry Reality

Buffett delivered a textbook analysis of why capital-intensive, undifferentiated businesses earn inadequate returns:

"The textile industry illustrates in textbook style how producers of relatively undifferentiated goods in capital intensive businesses must earn inadequate returns except under conditions of tight supply or real shortage."

Concentrated Investing Philosophy

Buffett outlined when he gets excited enough to commit large sums to equities:

  1. Businesses we can understand
  2. With favorable long-term prospects
  3. Operated by honest and competent people
  4. Priced very attractively

The Great Period for Value Investors

1975-1978 was described as a "marvelous period for the value-oriented equity buyer":

"At the end of 1975 our insurance subsidiaries held common equities with a market value exactly equal to cost of $39.3 million. At the end of 1978 this position had been increased to equities with a cost of $129.1 million and a market value of $216.5 million."

During this same period, the Dow declined from 852 to 805.

GEICO and SAFECO

Buffett highlighted SAFECO as "probably the best run large property and casualty insurance company in the United States" and noted GEICO's growing importance. He emphasized that partial ownership of excellent businesses at bargain prices beats full ownership of mediocre businesses:

"We paid less than 100 cents on the dollar for the best company in the business, when far more than 100 cents on the dollar is being paid for mediocre companies in corporate transactions."

Famous Quotes

"We are not concerned with whether the market quickly revalues upward securities that we believe are selling at bargain prices. In fact, we prefer just the opposite since, in most years, we expect to have funds available to be a net buyer of securities."

"Our policy is to concentrate holdings. We try to avoid buying a little of this or that when we are only lukewarm about the business or its price."

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