Warren E. Buffett letters

For the reasons laid out in previous reports, we expect the
industry's incurred losses to grow at close to 10% annually, even
in periods when general inflation runs considerably lower. (Over
the last 25 years, incurred losses have in reality grown at a
still faster rate, 11%.) If premium growth meanwhile materially
lags that 10% rate, underwriting losses will mount.

However, the industry's tendency to under-reserve when
business turns bad may obscure the picture for a time - and that
could well describe the situation last year. Though premiums did
not come close to growing 10%, the combined ratio failed to
deteriorate as I had expected but instead slightly improved.
Loss-reserve data for the industry indicate that there is reason
to be skeptical of that outcome, and it may turn out that 1991's
ratio should have been worse than was reported. In the long run,
of course, trouble awaits managements that paper over operating
problems with accounting maneuvers. Eventually, managements of
this kind achieve the same result as the seriously-ill patient
who tells his doctor: "I can't afford the operation, but would
you accept a small payment to touch up the x-rays?"

Berkshire's insurance business has changed in ways that make
combined ratios, our own or the industry's, largely irrelevant
to our performance. What counts with us is the "cost of funds
developed from insurance," or in the vernacular, "the cost of
float."

Float - which we generate in exceptional amounts - is the
total of loss reserves, loss adjustment expense reserves and
unearned premium reserves minus agents balances, prepaid
acquisition costs and deferred charges applicable to assumed
reinsurance. And the cost of float is measured by our
underwriting loss.

The table below shows our cost of float since we entered the
business in 1967.

(1) (2) Yearend Yield
Underwriting Approximate on Long-Term
Loss Average Float Cost of Funds Govt. Bonds
------------ ------------- --------------- -------------
(In $ Millions) (Ratio of 1 to 2)

1967 ........ profit $17.3 less than zero 5.50%
1968 ........ profit 19.9 less than zero 5.90%
1969 ........ profit 23.4 less than zero 6.79%
1970 ........ $0.37 32.4 1.14% 6.25%
1971 ........ profit 52.5 less than zero 5.81%
1972 ........ profit 69.5 less than zero 5.82%
1973 ........ profit 73.3 less than zero 7.27%
1974 ........ 7.36 79.1 9.30% 8.13%
1975 ........ 11.35 87.6 12.96% 8.03%
1976 ........ profit 102.6 less than zero 7.30%
1977 ........ profit 139.0 less than zero 7.97%
1978 ........ profit 190.4 less than zero 8.93%
1979 ........ profit 227.3 less than zero 10.08%
1980 ........ profit 237.0 less than zero 11.94%
1981 ........ profit 228.4 less than zero 13.61%
1982 ........ 21.56 220.6 9.77% 10.64%
1983 ........ 33.87 231.3 14.64% 11.84%
1984 ........ 48.06 253.2 18.98% 11.58%
1985 ........ 44.23 390.2 11.34% 9.34%
1986 ........ 55.84 797.5 7.00% 7.60%
1987 ........ 55.43 1,266.7 4.38% 8.95%
1988 ........ 11.08 1,497.7 0.74% 9.00%
1989 ........ 24.40 1,541.3 1.58% 7.97%
1990 ........ 26.65 1,637.3 1.63% 8.24%
1991 ........ 119.6 1,895.0 6.31% 7.40%

As you can see, our cost of funds in 1991 was well below the
U. S. Government's cost on newly-issued long-term bonds. We have in
fact beat the government's rate in 20 of the 25 years we have been
in the insurance business, often by a wide margin. We have over
that time also substantially increased the amount of funds we hold,
which counts as a favorable development but only because the cost
of funds has been satisfactory. Our float should continue to grow;
the challenge will be to garner these funds at a reasonable cost.

Berkshire continues to be a very large writer - perhaps the
largest in the world - of "super-cat" insurance, which is coverage
that other insurance companies buy to protect themselves against
major catastrophic losses. Profits in this business are enormously
volatile. As I mentioned last year, $100 million in super-cat
premiums, which is roughly our annual expectation, could deliver us
anything from a $100 million profit (in a year with no big
catastrophe) to a $200 million loss (in a year in which a couple of
major hurricanes and/or earthquakes come along).

We price this business expecting to pay out, over the long
term, about 90% of the premiums we receive. In any given year,
however, we are likely to appear either enormously profitable or
enormously unprofitable. That is true in part because GAAP
accounting does not allow us to set up reserves in the catastrophe-
free years for losses that are certain to be experienced in other
years. In effect, a one-year accounting cycle is ill-suited to the
nature of this business - and that is a reality you should be aware
of when you assess our annual results.

Last year there appears to have been, by our definition, one
super-cat, but it will trigger payments from only about 25% of our
policies. Therefore, we currently estimate the 1991 underwriting
profit from our catastrophe business to have been about $11
million. (You may be surprised to learn the identity of the biggest
catastrophe in 1991: It was neither the Oakland fire nor Hurricane
Bob, but rather a September typhoon in Japan that caused the
industry an insured loss now estimated at about $4-$5 billion. At
the higher figure, the loss from the typhoon would surpass that
from Hurricane Hugo, the previous record-holder.)

Insurers will always need huge amounts of reinsurance
protection for marine and aviation disasters as well as for natural
catastrophes. In the 1980's much of this reinsurance was supplied
by "innocents" - that is, by insurers that did not understand the
risks of the business - but they have now been financially burned
beyond recognition. (Berkshire itself was an innocent all too often
when I was personally running the insurance operation.) Insurers,
though, like investors, eventually repeat their mistakes. At some
point - probably after a few catastrophe-scarce years - innocents
will reappear and prices for super-cat policies will plunge to
silly levels.

As long as apparently-adequate rates prevail, however, we will
be a major participant in super-cat coverages. In marketing this
product, we enjoy a significant competitive advantage because of
our premier financial strength. Thinking insurers know that when
"the big one" comes, many reinsurers who found it easy to write
policies will find it difficult to write checks. (Some reinsurers
can say what Jackie Mason does: "I'm fixed for life - as long as I
don't buy anything.") Berkshire's ability to fulfill all its
commitments under conditions of even extreme adversity is
unquestioned.

Overall, insurance offers Berkshire its greatest
opportunities. Mike Goldberg has accomplished wonders with this
operation since he took charge and it has become a very valuable
asset, albeit one that can't be appraised with any precision.

Marketable Common Stocks

On the next page we list our common stock holdings having a
value of over $100 million. A small portion of these investments
belongs to subsidiaries of which Berkshire owns less than 100%.

12/31/91
Shares Company Cost Market
------ ------- ---------- ----------
(000s omitted)
3,000,000 Capital Cities/ABC, Inc. ............ $ 517,500 $1,300,500
46,700,000 The Coca-Cola Company. .............. 1,023,920 3,747,675
2,495,200 Federal Home Loan Mortgage Corp. .... 77,245 343,090
6,850,000 GEICO Corp. ......................... 45,713 1,363,150
24,000,000 The Gillette Company ................ 600,000 1,347,000
31,247,000 Guinness PLC ........................ 264,782 296,755
1,727,765 The Washington Post Company ......... 9,731 336,050
5,000,000 Wells Fargo & Company 289,431 290,000

As usual the list reflects our Rip Van Winkle approach to
investing. Guinness is a new position. But we held the other seven
stocks a year ago (making allowance for the conversion of our
Gillette position from preferred to common) and in six of those we
hold an unchanged number of shares. The exception is Federal Home
Loan Mortgage ("Freddie Mac"), in which our shareholdings increased
slightly. Our stay-put behavior reflects our view that the stock
market serves as a relocation center at which money is moved from
the active to the patient. (With tongue only partly in check, I
suggest that recent events indicate that the much-maligned "idle
rich" have received a bad rap: They have maintained or increased
their wealth while many of the "energetic rich" - aggressive real
estate operators, corporate acquirers, oil drillers, etc. - have
seen their fortunes disappear.)
Our Guinness holding represents Berkshire's first significant
investment in a company domiciled outside the United States.
Guinness, however, earns its money in much the same fashion as
Coca-Cola and Gillette, U.S.-based companies that garner most of
their profits from international operations. Indeed, in the sense
of where they earn their profits - continent-by-continent - Coca-
Cola and Guinness display strong similarities. (But you'll never
get their drinks confused - and your Chairman remains unmovably in
the Cherry Coke camp.)

We continually search for large businesses with
understandable, enduring and mouth-watering economics that are run
by able and shareholder-oriented managements. This focus doesn't
guarantee results: We both have to buy at a sensible price and get
business performance from our companies that validates our
assessment. But this investment approach - searching for the
superstars - offers us our only chance for real success. Charlie
and I are simply not smart enough, considering the large sums we
work with, to get great results by adroitly buying and selling
portions of far-from-great businesses. Nor do we think many others
can achieve long-term investment success by flitting from flower to
flower. Indeed, we believe that according the name "investors" to
institutions that trade actively is like calling someone who
repeatedly engages in one-night stands a romantic.

If my universe of business possibilities was limited, say, to
private companies in Omaha, I would, first, try to assess the long-
term economic characteristics of each business; second, assess the
quality of the people in charge of running it; and, third, try to
buy into a few of the best operations at a sensible price. I
certainly would not wish to own an equal part of every business in
town. Why, then, should Berkshire take a different tack when
dealing with the larger universe of public companies? And since
finding great businesses and outstanding managers is so difficult,
why should we discard proven products? (I was tempted to say "the
real thing.") Our motto is: "If at first you do succeed, quit
trying."

John Maynard Keynes, whose brilliance as a practicing investor
matched his brilliance in thought, wrote a letter to a business
associate, F. C. Scott, on August 15, 1934 that says it all: "As
time goes on, I get more and more convinced that the right method
in investment is to put fairly large sums into enterprises which
one thinks one knows something about and in the management of which
one thoroughly believes. It is a mistake to think that one limits
one's risk by spreading too much between enterprises about which
one knows little and has no reason for special confidence. . . .
One's knowledge and experience are definitely limited and there are
seldom more than two or three enterprises at any given time in
which I personally feel myself entitled to put full confidence."

Mistake Du Jour

In the 1989 annual report I wrote about "Mistakes of the First
25 Years" and promised you an update in 2015. My experiences in the
first few years of this second "semester" indicate that my backlog
of matters to be discussed will become unmanageable if I stick to
my original plan. Therefore, I will occasionally unburden myself in
these pages in the hope that public confession may deter further
bumblings. (Post-mortems prove useful for hospitals and football
teams; why not for businesses and investors?)
_________________
Le Mensonge peut courir un an, la vérité le rattrape en un jour, dit le sage Haoussa
Ma devise:
se SURPASSER ,ne JAMAIS ABDIQUER,TOUJOURS RESTER HUMBLE

Typically, our most egregious mistakes fall in the omission,
rather than the commission, category. That may spare Charlie and me
some embarrassment, since you don't see these errors; but their
invisibility does not reduce their cost. In this mea culpa, I am
not talking about missing out on some company that depends upon an
esoteric invention (such as Xerox), high-technology (Apple), or
even brilliant merchandising (Wal-Mart). We will never develop the
competence to spot such businesses early. Instead I refer to
business situations that Charlie and I can understand and that seem
clearly attractive - but in which we nevertheless end up sucking
our thumbs rather than buying.

Every writer knows it helps to use striking examples, but I
wish the one I now present wasn't quite so dramatic: In early 1988,
we decided to buy 30 million shares (adjusted for a subsequent
split) of Federal National Mortgage Association (Fannie Mae), which
would have been a $350-$400 million investment. We had owned the
stock some years earlier and understood the company's business.
Furthermore, it was clear to us that David Maxwell, Fannie Mae's
CEO, had dealt superbly with some problems that he had inherited
and had established the company as a financial powerhouse - with
the best yet to come. I visited David in Washington and confirmed
that he would not be uncomfortable if we were to take a large
position.

After we bought about 7 million shares, the price began to
climb. In frustration, I stopped buying (a mistake that,
thankfully, I did not repeat when Coca-Cola stock rose similarly
during our purchase program). In an even sillier move, I
surrendered to my distaste for holding small positions and sold the
7 million shares we owned.

I wish I could give you a halfway rational explanation for my
amateurish behavior vis-a-vis Fannie Mae. But there isn't one.
What I can give you is an estimate as of yearend 1991 of the
approximate gain that Berkshire didn't make because of your
Chairman's mistake: about $1.4 billion.

Fixed-Income Securities

We made several significant changes in our fixed-income
portfolio during 1991. As I noted earlier, our Gillette preferred
was called for redemption, which forced us to convert to common
stock; we eliminated our holdings of an RJR Nabisco issue that was
subject to an exchange offer and subsequent call; and we purchased
fixed-income securities of American Express and First Empire State
Corp., a Buffalo-based bank holding company. We also added to a
small position in ACF Industries that we had established in late
1990. Our largest holdings at yearend were:

(000s omitted)
---------------------------------------
Cost of Preferreds and
Issuer Amortized Value of Bonds Market
------ ------------------------ ------------
ACF Industries ................ $ 93,918(2) $118,683
American Express .............. 300,000 263,265(1)(2)
Champion International ........ 300,000(2) 300,000(1)
First Empire State 40,000 50,000(1)(2)
RJR Nabisco 222,148(2) 285,683
Salomon 700,000(2) 714,000(1)
USAir 358,000(2) 232,700(1)
Washington Public Power Systems 158,553(2) 203,071

(1) Fair value as determined by Charlie and me
(2) Carrying value in our financial statements

Our $40 million of First Empire State preferred carries a 9%
coupon, is non-callable until 1996 and is convertible at $78.91 per
share. Normally I would think a purchase of this size too small for
Berkshire, but I have enormous respect for Bob Wilmers, CEO of
First Empire, and like being his partner on any scale.

Our American Express preferred is not a normal fixed-income
security. Rather it is a "Perc," which carries a fixed dividend of
8.85% on our $300 million cost. Absent one exception mentioned
later, our preferred must be converted three years after issuance,
into a maximum of 12,244,898 shares. If necessary, a downward
adjustment in the conversion ratio will be made in order to limit
to $414 million the total value of the common we receive. Though
there is thus a ceiling on the value of the common stock that we
will receive upon conversion, there is no floor. The terms of the
preferred, however, include a provision allowing us to extend the
conversion date by one year if the common stock is below $24.50 on
the third anniversary of our purchase.

Overall, our fixed-income investments have treated us well,
both over the long term and recently. We have realized large
capital gains from these holdings, including about $152 million in
1991. Additionally, our after-tax yields have considerably exceeded
those earned by most fixed-income portfolios.

Nevertheless, we have had some surprises, none greater than
the need for me to involve myself personally and intensely in the
Salomon situation. As I write this letter, I am also writing a
letter for inclusion in Salomon's annual report and I refer you to
that report for an update on the company. (Write to: Corporate
Secretary, Salomon Inc, Seven World Trade Center, New York, NY
10048) Despite the company's travails, Charlie and I believe our
Salomon preferred stock increased slightly in value during 1991.
Lower interest rates and a higher price for Salomon's common
produced this result.

Last year I told you that our USAir investment "should work
out all right unless the industry is decimated during the next few
years." Unfortunately 1991 was a decimating period for the
industry, as Midway, Pan Am and America West all entered
bankruptcy. (Stretch the period to 14 months and you can add
Continental and TWA.)

The low valuation that we have given USAir in our table
reflects the risk that the industry will remain unprofitable for
virtually all participants in it, a risk that is far from
negligible. The risk is heightened by the fact that the courts have
been encouraging bankrupt carriers to continue operating. These
carriers can temporarily charge fares that are below the industry's
costs because the bankrupts don't incur the capital costs faced by
their solvent brethren and because they can fund their losses - and
thereby stave off shutdown - by selling off assets. This burn-the-
furniture-to-provide-firewood approach to fare-setting by bankrupt
carriers contributes to the toppling of previously-marginal
carriers, creating a domino effect that is perfectly designed to
bring the industry to its knees.

Seth Schofield, who became CEO of USAir in 1991, is making
major adjustments in the airline's operations in order to improve
its chances of being one of the few industry survivors. There is no
tougher job in corporate America than running an airline: Despite
the huge amounts of equity capital that have been injected into it,
the industry, in aggregate, has posted a net loss since its birth
after Kitty Hawk. Airline managers need brains, guts, and
experience - and Seth possesses all three of these attributes.

Miscellaneous

About 97.7% of all eligible shares participated in Berkshire's
1991 shareholder-designated contributions program. Contributions
made through the program were $6.8 million, and 2,630 charities
were recipients.

We suggest that new shareholders read the description of our
shareholder-designated contributions program that appears on pages
48-49. To participate in future programs, you must make sure your
shares are registered in the name of the actual owner, not in the
nominee name of a broker, bank or depository. Shares not so
registered on August 31, 1992 will be ineligible for the 1992
program.

In addition to the shareholder-designated contributions that
Berkshire distributes, managers of our operating businesses make
contributions, including merchandise, averaging about $1.5 million
annually. These contributions support local charities, such as The
United Way, and produce roughly commensurate benefits for our
businesses.

However, neither our operating managers nor officers of the
parent company use Berkshire funds to make contributions to broad
national programs or charitable activities of special personal
interest to them, except to the extent they do so as shareholders.
If your employees, including your CEO, wish to give to their alma
maters or other institutions to which they feel a personal
attachment, we believe they should use their own money, not yours.

* * * * * * * * * * * *

The faithful will notice that, for the first time in some
years, Charlie's annual letter to Wesco shareholders is not
reprinted in this report. Since his letter is relatively barebones
this year, Charlie said he saw no point in including it in these
pages; my own recommendation, however, is that you get a copy of
the Wesco report. Simply write: Corporate Secretary, Wesco
Financial Corporation, 315 East Colorado Boulevard, Pasadena, CA
91101.

* * * * * * * * * * * *

Malcolm G. Chace, Jr., now 88, has decided not to stand for
election as a director this year. But the association of the Chace
family with Berkshire will not end: Malcolm III (Kim), Malcolm's
son, will be nominated to replace him.

In 1931, Malcolm went to work for Berkshire Fine Spinning
Associates, which merged with Hathaway Manufacturing Co. in 1955 to
form our present company. Two years later, Malcolm became Berkshire
Hathaway's Chairman, a position he held as well in early 1965 when
he made it possible for Buffett Partnership, Ltd. to buy a key
block of Berkshire stock owned by some of his relatives. This
purchase gave our partnership effective control of the company.
Malcolm's immediate family meanwhile kept its Berkshire stock and
for the last 27 years has had the second-largest holding in the
company, trailing only the Buffett family. Malcolm has been a joy
to work with and we are delighted that the long-running
relationship between the Chace family and Berkshire is continuing
to a new generation.

* * * * * * * * * * * *

The annual meeting this year will be held at the Orpheum
Theater in downtown Omaha at 9:30 a.m. on Monday, April 27, 1992.
Attendance last year grew to a record 1,550, but that still leaves
plenty of room at the Orpheum.

We recommend that you get your hotel reservations early at one
of these hotels: (1) The Radisson-Redick Tower, a small (88 rooms)
but nice hotel across the street from the Orpheum; (2) the much
larger Red Lion Hotel, located about a five-minute walk from the
Orpheum; or (3) the Marriott, located in West Omaha about 100 yards
from Borsheim's and a twenty minute drive from downtown. We will
have buses at the Marriott that will leave at 8:30 and 8:45 for the
meeting and return after it ends.

Charlie and I always enjoy the meeting, and we hope you can
make it. The quality of our shareholders is reflected in the
quality of the questions we get: We have never attended an annual
meeting anywhere that features such a consistently high level of
intelligent, owner-related questions.

An attachment to our proxy material explains how you can
obtain the card you will need for admission to the meeting. With
the admission card, we will enclose information about parking
facilities located near the Orpheum. If you are driving, come a
little early. Nearby lots fill up quickly and you may have to
walk a few blocks.

As usual, we will have buses to take you to Nebraska Furniture
Mart and Borsheim's after the meeting and to take you from there to
downtown hotels or the airport later. I hope that you will allow
plenty of time to fully explore the attractions of both stores.
Those of you arriving early can visit the Furniture Mart any day of
the week; it is open from 10 a.m. to 5:30 p.m. on Saturdays and
from noon to 5:30 p.m. on Sundays. While there, stop at the See's
Candy Cart and find out for yourself why Americans ate 26 million
pounds of See's products last year.

Borsheim's normally is closed on Sunday, but we will be open
for shareholders and their guests from noon to 6 p.m. on Sunday,
April 26. Borsheim's will also have a special party the previous
evening at which shareholders are welcome. (You must, however,
write Mrs. Gladys Kaiser at our office for an invitation.) On
display that evening will be a 150-year retrospective of the most
exceptional timepieces made by Patek Philippe, including watches
once owned by Queen Victoria, Pope Pius IX, Rudyard Kipling, Madame
Curie and Albert Einstein. The centerpiece of the exhibition will
be a $5 million watch whose design and manufacture required nine
years of labor by Patek Philippe craftsmen. Along with the rest of
the collection, this watch will be on display at the store on
Sunday - unless Charlie has by then impulsively bought it.

Nicholas Kenner nailed me - again - at last year's meeting,
pointing out that I had said in the 1990 annual report that he was
11 in May 1990, when actually he was 9. So, asked Nicholas rather
caustically: "If you can't get that straight, how do I know the
numbers in the back [the financials] are correct?" I'm still
searching for a snappy response. Nicholas will be at this year's
meeting - he spurned my offer of a trip to Disney World on that
day - so join us to watch a continuation of this lop-sided battle
of wits.

Warren E. Buffett
February 28, 1992 Chairman of the Board
_________________
Le Mensonge peut courir un an, la vérité le rattrape en un jour, dit le sage Haoussa
Ma devise:
se SURPASSER ,ne JAMAIS ABDIQUER,TOUJOURS RESTER HUMBLE

To the Shareholders of Berkshire Hathaway Inc.:

Our per-share book value increased 20.3% during 1992. Over
the last 28 years (that is, since present management took over)
book value has grown from $19 to $7,745, or at a rate of 23.6%
compounded annually.

During the year, Berkshire's net worth increased by $1.52
billion. More than 98% of this gain came from earnings and
appreciation of portfolio securities, with the remainder coming
from the issuance of new stock. These shares were issued as a
result of our calling our convertible debentures for redemption
on January 4, 1993, and of some holders electing to receive
common shares rather than the cash that was their alternative.
Most holders of the debentures who converted into common waited
until January to do it, but a few made the move in December and
therefore received shares in 1992. To sum up what happened to
the $476 million of bonds we had outstanding: $25 million were
converted into shares before yearend; $46 million were converted
in January; and $405 million were redeemed for cash. The
conversions were made at $11,719 per share, so altogether we
issued 6,106 shares.

Berkshire now has 1,152,547 shares outstanding. That
compares, you will be interested to know, to 1,137,778 shares
outstanding on October 1, 1964, the beginning of the fiscal year
during which Buffett Partnership, Ltd. acquired control of the
company.

We have a firm policy about issuing shares of Berkshire,
doing so only when we receive as much value as we give. Equal
value, however, has not been easy to obtain, since we have always
valued our shares highly. So be it: We wish to increase
Berkshire's size only when doing that also increases the wealth
of its owners.

Those two objectives do not necessarily go hand-in-hand as an
amusing but value-destroying experience in our past illustrates.
On that occasion, we had a significant investment in a bank
whose management was hell-bent on expansion. (Aren't they all?)
When our bank wooed a smaller bank, its owner demanded a stock
swap on a basis that valued the acquiree's net worth and earning
power at over twice that of the acquirer's. Our management -
visibly in heat - quickly capitulated. The owner of the acquiree
then insisted on one other condition: "You must promise me," he
said in effect, "that once our merger is done and I have become a
major shareholder, you'll never again make a deal this dumb."

You will remember that our goal is to increase our per-share
intrinsic value - for which our book value is a conservative, but
useful, proxy - at a 15% annual rate. This objective, however,
cannot be attained in a smooth manner. Smoothness is
particularly elusive because of the accounting rules that apply
to the common stocks owned by our insurance companies, whose
portfolios represent a high proportion of Berkshire's net worth.
Since 1979, generally accepted accounting principles (GAAP) have
required that these securities be valued at their market prices
(less an adjustment for tax on any net unrealized appreciation)
rather than at the lower of cost or market. Run-of-the-mill
fluctuations in equity prices therefore cause our annual results
to gyrate, especially in comparison to those of the typical
industrial company.

To illustrate just how volatile our progress has been - and
to indicate the impact that market movements have on short-term
results - we show on the facing page our annual change in per-
share net worth and compare it with the annual results (including
dividends) of the S&P 500.

You should keep at least three points in mind as you
evaluate this data. The first point concerns the many businesses
we operate whose annual earnings are unaffected by changes in
stock market valuations. The impact of these businesses on both
our absolute and relative performance has changed over the years.
Early on, returns from our textile operation, which then
represented a significant portion of our net worth, were a major
drag on performance, averaging far less than would have been the
case if the money invested in that business had instead been
invested in the S&P 500. In more recent years, as we assembled
our collection of exceptional businesses run by equally
exceptional managers, the returns from our operating businesses
have been high - usually well in excess of the returns achieved
by the S&P.

A second important factor to consider - and one that
significantly hurts our relative performance - is that both the
income and capital gains from our securities are burdened by a
substantial corporate tax liability whereas the S&P returns are
pre-tax. To comprehend the damage, imagine that Berkshire had
owned nothing other than the S&P index during the 28-year period
covered. In that case, the tax bite would have caused our
corporate performance to be appreciably below the record shown in
the table for the S&P. Under present tax laws, a gain for the
S&P of 18% delivers a corporate holder of that index a return
well short of 13%. And this problem would be intensified if
corporate tax rates were to rise. This is a structural
disadvantage we simply have to live with; there is no antidote
for it.

The third point incorporates two predictions: Charlie
Munger, Berkshire's Vice Chairman and my partner, and I are
virtually certain that the return over the next decade from an
investment in the S&P index will be far less than that of the
past decade, and we are dead certain that the drag exerted by
Berkshire's expanding capital base will substantially reduce our
historical advantage relative to the index.

Making the first prediction goes somewhat against our grain:
We've long felt that the only value of stock forecasters is to
make fortune tellers look good. Even now, Charlie and I continue
to believe that short-term market forecasts are poison and should
be kept locked up in a safe place, away from children and also
from grown-ups who behave in the market like children. However,
it is clear that stocks cannot forever overperform their
underlying businesses, as they have so dramatically done for some
time, and that fact makes us quite confident of our forecast that
the rewards from investing in stocks over the next decade will be
significantly smaller than they were in the last. Our second
conclusion - that an increased capital base will act as an anchor
on our relative performance - seems incontestable. The only open
question is whether we can drag the anchor along at some
tolerable, though slowed, pace.

We will continue to experience considerable volatility in
our annual results. That's assured by the general volatility of
the stock market, by the concentration of our equity holdings in
just a few companies, and by certain business decisions we have
made, most especially our move to commit large resources to
super-catastrophe insurance. We not only accept this volatility
but welcome it: A tolerance for short-term swings improves our
long-term prospects. In baseball lingo, our performance
yardstick is slugging percentage, not batting average.

The Salomon Interlude

Last June, I stepped down as Interim Chairman of Salomon Inc
after ten months in the job. You can tell from Berkshire's 1991-
92 results that the company didn't miss me while I was gone. But
the reverse isn't true: I missed Berkshire and am delighted to
be back full-time. There is no job in the world that is more fun
than running Berkshire and I count myself lucky to be where I am.

The Salomon post, though far from fun, was interesting and
worthwhile: In Fortune's annual survey of America's Most Admired
Corporations, conducted last September, Salomon ranked second
among 311 companies in the degree to which it improved its
reputation. Additionally, Salomon Brothers, the securities
subsidiary of Salomon Inc, reported record pre-tax earnings last
year - 34% above the previous high.

Many people helped in the resolution of Salomon's problems
and the righting of the firm, but a few clearly deserve special
mention. It is no exaggeration to say that without the combined
efforts of Salomon executives Deryck Maughan, Bob Denham, Don
Howard, and John Macfarlane, the firm very probably would not
have survived. In their work, these men were tireless,
effective, supportive and selfless, and I will forever be
grateful to them.

Salomon's lead lawyer in its Government matters, Ron Olson
of Munger, Tolles & Olson, was also key to our success in getting
through this trouble. The firm's problems were not only severe,
but complex. At least five authorities - the SEC, the Federal
Reserve Bank of New York, the U.S. Treasury, the U.S. Attorney
for the Southern District of New York, and the Antitrust Division
of the Department of Justice - had important concerns about
Salomon. If we were to resolve our problems in a coordinated and
prompt manner, we needed a lawyer with exceptional legal,
business and human skills. Ron had them all.
_________________
Le Mensonge peut courir un an, la vérité le rattrape en un jour, dit le sage Haoussa
Ma devise:
se SURPASSER ,ne JAMAIS ABDIQUER,TOUJOURS RESTER HUMBLE

Acquisitions

Of all our activities at Berkshire, the most exhilarating
for Charlie and me is the acquisition of a business with
excellent economic characteristics and a management that we like,
trust and admire. Such acquisitions are not easy to make but we
look for them constantly. In the search, we adopt the same
attitude one might find appropriate in looking for a spouse: It
pays to be active, interested and open-minded, but it does not
pay to be in a hurry.

In the past, I've observed that many acquisition-hungry
managers were apparently mesmerized by their childhood reading of
the story about the frog-kissing princess. Remembering her
success, they pay dearly for the right to kiss corporate toads,
expecting wondrous transfigurations. Initially, disappointing
results only deepen their desire to round up new toads.
("Fanaticism," said Santyana, "consists of redoubling your effort
when you've forgotten your aim.") Ultimately, even the most
optimistic manager must face reality. Standing knee-deep in
unresponsive toads, he then announces an enormous "restructuring"
charge. In this corporate equivalent of a Head Start program,
the CEO receives the education but the stockholders pay the
tuition.

In my early days as a manager I, too, dated a few toads.
They were cheap dates - I've never been much of a sport - but my
results matched those of acquirers who courted higher-priced
toads. I kissed and they croaked.

After several failures of this type, I finally remembered
some useful advice I once got from a golf pro (who, like all pros
who have had anything to do with my game, wishes to remain
anonymous). Said the pro: "Practice doesn't make perfect;
practice makes permanent." And thereafter I revised my strategy
and tried to buy good businesses at fair prices rather than fair
businesses at good prices.

Last year, in December, we made an acquisition that is a
prototype of what we now look for. The purchase was 82% of
Central States Indemnity, an insurer that makes monthly payments
for credit-card holders who are unable themselves to pay because
they have become disabled or unemployed. Currently the company's
annual premiums are about $90 million and profits about $10
million. Central States is based in Omaha and managed by Bill
Kizer, a friend of mine for over 35 years. The Kizer family -
which includes sons Bill, Dick and John - retains 18% ownership
of the business and will continue to run things just as it has in
the past. We could not be associated with better people.

Coincidentally, this latest acquisition has much in common
with our first, made 26 years ago. At that time, we purchased
another Omaha insurer, National Indemnity Company (along with a
small sister company) from Jack Ringwalt, another long-time
friend. Jack had built the business from scratch and, as was the
case with Bill Kizer, thought of me when he wished to sell.
(Jack's comment at the time: "If I don't sell the company, my
executor will, and I'd rather pick the home for it.") National
Indemnity was an outstanding business when we bought it and
continued to be under Jack's management. Hollywood has had good
luck with sequels; I believe we, too, will.

Berkshire's acquisition criteria are described on page 23.
Beyond purchases made by the parent company, however, our
subsidiaries sometimes make small "add-on" acquisitions that
extend their product lines or distribution capabilities. In this
manner, we enlarge the domain of managers we already know to be
outstanding - and that's a low-risk and high-return proposition.
We made five acquisitions of this type in 1992, and one was not
so small: At yearend, H. H. Brown purchased Lowell Shoe Company,
a business with $90 million in sales that makes Nursemates, a
leading line of shoes for nurses, and other kinds of shoes as
well. Our operating managers will continue to look for add-on
opportunities, and we would expect these to contribute modestly
to Berkshire's value in the future.

Then again, a trend has emerged that may make further
acquisitions difficult. The parent company made one purchase in
1991, buying H. H. Brown, which is run by Frank Rooney, who has
eight children. In 1992 our only deal was with Bill Kizer,
father of nine. It won't be easy to keep this string going in
1993.

Sources of Reported Earnings

The table below shows the major sources of Berkshire's
reported earnings. In this presentation, amortization of
Goodwill and other major purchase-price accounting adjustments
are not charged against the specific businesses to which they
apply, but are instead aggregated and shown separately. This
procedure lets you view the earnings of our businesses as they
would have been reported had we not purchased them. I've
explained in past reports why this form of presentation seems to
us to be more useful to investors and managers than one utilizing
GAAP, which requires purchase-price adjustments to be made on a
business-by-business basis. The total net earnings we show in
the table are, of course, identical to the GAAP total in our
audited financial statements.

(000s omitted)
-----------------------------------------------
Berkshire's Share
of Net Earnings
(after taxes and
Pre-Tax Earnings minority interests)
---------------------- ----------------------
1992 1991 1992 1991
---------- ---------- ---------- ----------
Operating Earnings:
Insurance Group:
Underwriting ............ $(108,961) $(119,593) $ (71,141) $ (77,229)
Net Investment Income.... 355,067 331,846 305,763 285,173
H. H. Brown (acquired 7/1/91) 27,883 13,616 17,340 8,611
Buffalo News .............. 47,863 37,113 28,163 21,841
Fechheimer ................ 13,698 12,947 7,267 6,843
Kirby ..................... 35,653 35,726 22,795 22,555
Nebraska Furniture Mart ... 17,110 14,384 8,072 6,993
Scott Fetzer
Manufacturing Group .... 31,954 26,123 19,883 15,901
See's Candies ............. 42,357 42,390 25,501 25,575
Wesco - other than Insurance 15,153 12,230 9,195 8,777
World Book ................ 29,044 22,483 19,503 15,487
Amortization of Goodwill .. (4,702) (4,113) (4,687) (4,098)
Other Purchase-Price
Accounting Charges ..... (7,385) (6,021) (8,383) (7,019)
Interest Expense* ......... (98,643) (89,250) (62,899) (57,165)
Shareholder-Designated
Contributions .......... (7,634) (6,772) (4,913) (4,388)
Other ..................... 72,223 77,399 36,267 47,896
---------- ---------- ---------- ----------
Operating Earnings .......... 460,680 400,508 347,726 315,753
Sales of Securities ......... 89,937 192,478 59,559 124,155
---------- ---------- ---------- ----------
Total Earnings - All Entities $ 550,617 $ 592,986 $ 407,285 $ 439,908
========== ========== ========== ==========

*Excludes interest expense of Scott Fetzer Financial Group and Mutual
Savings & Loan. Includes $22.5 million in 1992 and $5.7 million in
1991 of premiums paid on the early redemption of debt.

A large amount of additional information about these
businesses is given on pages 37-47, where you will also find our
segment earnings reported on a GAAP basis. Our goal is to give you
all of the financial information that Charlie and I consider
significant in making our own evaluation of Berkshire.

"Look-Through" Earnings

We've previously discussed look-through earnings, which
consist of: (1) the operating earnings reported in the previous
section, plus; (2) the retained operating earnings of major
investees that, under GAAP accounting, are not reflected in our
profits, less; (3) an allowance for the tax that would be paid by
Berkshire if these retained earnings of investees had instead been
distributed to us. Though no single figure can be perfect, we
believe that the look-through number more accurately portrays the
earnings of Berkshire than does the GAAP number.

I've told you that over time look-through earnings must
increase at about 15% annually if our intrinsic business value is
to grow at that rate. Our look-through earnings in 1992 were $604
million, and they will need to grow to more than $1.8 billion by
the year 2000 if we are to meet that 15% goal. For us to get
there, our operating subsidiaries and investees must deliver
excellent performances, and we must exercise some skill in capital
allocation as well.

We cannot promise to achieve the $1.8 billion target. Indeed,
we may not even come close to it. But it does guide our decision-
making: When we allocate capital today, we are thinking about what
will maximize look-through earnings in 2000.

We do not, however, see this long-term focus as eliminating
the need for us to achieve decent short-term results as well.
After all, we were thinking long-range thoughts five or ten years
ago, and the moves we made then should now be paying off. If
plantings made confidently are repeatedly followed by disappointing
harvests, something is wrong with the farmer. (Or perhaps with the
farm: Investors should understand that for certain companies, and
even for some industries, there simply is no good long-term
strategy.) Just as you should be suspicious of managers who pump
up short-term earnings by accounting maneuvers, asset sales and the
like, so also should you be suspicious of those managers who fail
to deliver for extended periods and blame it on their long-term
focus. (Even Alice, after listening to the Queen lecture her about
"jam tomorrow," finally insisted, "It must come sometimes to jam
today.")
_________________
Le Mensonge peut courir un an, la vérité le rattrape en un jour, dit le sage Haoussa
Ma devise:
se SURPASSER ,ne JAMAIS ABDIQUER,TOUJOURS RESTER HUMBLE

The following table shows you how we calculate look-through
earnings, though I warn you that the figures are necessarily very
rough. (The dividends paid to us by these investees have been
included in the operating earnings itemized on page 8, mostly
under "Insurance Group: Net Investment Income.")

Berkshire's Share
of Undistributed
Berkshire's Approximate Operating Earnings
Berkshire's Major Investees Ownership at Yearend (in millions)
--------------------------- ----------------------- ------------------
1992 1991 1992 1991
-------- -------- -------- --------
Capital Cities/ABC Inc. ....... 18.2% 18.1% $ 70 $ 61
The Coca-Cola Company ......... 7.1% 7.0% 82 69
Federal Home Loan Mortgage Corp. 8.2%(1) 3.4%(1) 29(2) 15
GEICO Corp. ................... 48.1% 48.2% 34(3) 69(3)
General Dynamics Corp. ........ 14.1% -- 11(2) --
The Gillette Company .......... 10.9% 11.0% 38 23(2)
Guinness PLC .................. 2.0% 1.6% 7 --
The Washington Post Company ... 14.6% 14.6% 11 10
Wells Fargo & Company ......... 11.5% 9.6% 16(2) (17)(2)
-------- -------- -------- --------
Berkshire's share of
undistributed earnings of major investees $298 $230
Hypothetical tax on these
undistributed investee earnings (42) (30)
Reported operating earnings of Berkshire 348 316
-------- --------
Total look-through earnings of Berkshire $604 $516

(1) Net of minority interest at Wesco
(2) Calculated on average ownership for the year
(3) Excludes realized capital gains, which have been both
recurring and significant

Insurance Operations

Shown below is an updated version of our usual table
presenting key figures for the property-casualty insurance
industry:

Yearly Change Combined Ratio
in Premiums After Policyholder
Written (%) Dividends
------------- ------------------

1981 ........................... 3.8 106.0
1982 ........................... 3.7 109.6
1983 ........................... 5.0 112.0
1984 ........................... 8.5 118.0
1985 ........................... 22.1 116.3
1986 ........................... 22.2 108.0
1987 ........................... 9.4 104.6
1988 ........................... 4.5 105.4
1989 ........................... 3.2 109.2
1990 ........................... 4.5 109.6
1991 (Revised) ................. 2.4 108.8
1992 (Est.) .................... 2.7 114.8

The combined ratio represents total insurance costs (losses
incurred plus expenses) compared to revenue from premiums: A
ratio below 100 indicates an underwriting profit, and one above
100 indicates a loss. The higher the ratio, the worse the year.
When the investment income that an insurer earns from holding
policyholders' funds ("the float") is taken into account, a
combined ratio in the 106 - 110 range typically produces an
overall break-even result, exclusive of earnings on the funds
provided by shareholders.

About four points in the industry's 1992 combined ratio can
be attributed to Hurricane Andrew, which caused the largest
insured loss in history. Andrew destroyed a few small insurers.
Beyond that, it awakened some larger companies to the fact that
their reinsurance protection against catastrophes was far from
adequate. (It's only when the tide goes out that you learn who's
been swimming naked.) One major insurer escaped insolvency
solely because it had a wealthy parent that could promptly supply
a massive transfusion of capital.

Bad as it was, however, Andrew could easily have been far
more damaging if it had hit Florida 20 or 30 miles north of where
it actually did and had hit Louisiana further east than was the
case. All in all, many companies will rethink their reinsurance
programs in light of the Andrew experience.

As you know we are a large writer - perhaps the largest in
the world - of "super-cat" coverages, which are the policies that
other insurance companies buy to protect themselves against major
catastrophic losses. Consequently, we too took our lumps from
Andrew, suffering losses from it of about $125 million, an amount
roughly equal to our 1992 super-cat premium income. Our other
super-cat losses, though, were negligible. This line of business
therefore produced an overall loss of only $2 million for the
year. (In addition, our investee, GEICO, suffered a net loss
from Andrew, after reinsurance recoveries and tax savings, of
about $50 million, of which our share is roughly $25 million.
This loss did not affect our operating earnings, but did reduce
our look-through earnings.)

In last year's report I told you that I hoped that our
super-cat business would over time achieve a 10% profit margin.
But I also warned you that in any given year the line was likely
to be "either enormously profitable or enormously unprofitable."
Instead, both 1991 and 1992 have come in close to a break-even
level. Nonetheless, I see these results as aberrations and stick
with my prediction of huge annual swings in profitability from
this business.

Let me remind you of some characteristics of our super-cat
policies. Generally, they are activated only when two things
happen. First, the direct insurer or reinsurer we protect must
suffer losses of a given amount - that's the policyholder's
"retention" - from a catastrophe; and second, industry-wide
insured losses from the catastrophe must exceed some minimum
level, which usually is $3 billion or more. In most cases, the
policies we issue cover only a specific geographical area, such
as a portion of the U.S., the entire U.S., or everywhere other
than the U.S. Also, many policies are not activated by the first
super-cat that meets the policy terms, but instead cover only a
"second-event" or even a third- or fourth-event. Finally, some
policies are triggered only by a catastrophe of a specific type,
such as an earthquake. Our exposures are large: We have one
policy that calls for us to pay $100 million to the policyholder
if a specified catastrophe occurs. (Now you know why I suffer
eyestrain: from watching The Weather Channel.)

Currently, Berkshire is second in the U.S. property-casualty
industry in net worth (the leader being State Farm, which neither
buys nor sells reinsurance). Therefore, we have the capacity to
assume risk on a scale that interests virtually no other company.
We have the appetite as well: As Berkshire's net worth and
earnings grow, our willingness to write business increases also.
But let me add that means good business. The saying, "a fool
and his money are soon invited everywhere," applies in spades in
reinsurance, and we actually reject more than 98% of the business
we are offered. Our ability to choose between good and bad
proposals reflects a management strength that matches our
financial strength: Ajit Jain, who runs our reinsurance
operation, is simply the best in this business. In combination,
these strengths guarantee that we will stay a major factor in the
super-cat business so long as prices are appropriate.

What constitutes an appropriate price, of course, is
difficult to determine. Catastrophe insurers can't simply
extrapolate past experience. If there is truly "global warming,"
for example, the odds would shift, since tiny changes in
atmospheric conditions can produce momentous changes in weather
patterns. Furthermore, in recent years there has been a
mushrooming of population and insured values in U.S. coastal
areas that are particularly vulnerable to hurricanes, the number
one creator of super-cats. A hurricane that caused x dollars of
damage 20 years ago could easily cost 10x now.

Occasionally, also, the unthinkable happens. Who would have
guessed, for example, that a major earthquake could occur in
Charleston, S.C.? (It struck in 1886, registered an estimated 6.6
on the Richter scale, and caused 60 deaths.) And who could have
imagined that our country's most serious quake would occur at New
Madrid, Missouri, which suffered an estimated 8.7 shocker in
1812. By comparison, the 1989 San Francisco quake was a 7.1 -
and remember that each one-point Richter increase represents a
ten-fold increase in strength. Someday, a U.S. earthquake
occurring far from California will cause enormous losses for
insurers.

When viewing our quarterly figures, you should understand
that our accounting for super-cat premiums differs from our
accounting for other insurance premiums. Rather than recording
our super-cat premiums on a pro-rata basis over the life of a
given policy, we defer recognition of revenue until a loss occurs
or until the policy expires. We take this conservative approach
because the likelihood of super-cats causing us losses is
particularly great toward the end of the year. It is then that
weather tends to kick up: Of the ten largest insured losses in
U.S. history, nine occurred in the last half of the year. In
addition, policies that are not triggered by a first event are
unlikely, by their very terms, to cause us losses until late in
the year.

The bottom-line effect of our accounting procedure for
super-cats is this: Large losses may be reported in any quarter
of the year, but significant profits will only be reported in the
fourth quarter.

* * * * * * * * * * * *

As I've told you in each of the last few years, what counts
in our insurance business is "the cost of funds developed from
insurance," or in the vernacular, "the cost of float." Float -
which we generate in exceptional amounts - is the total of loss
reserves, loss adjustment expense reserves and unearned premium
reserves minus agents' balances, prepaid acquisition costs and
deferred charges applicable to assumed reinsurance. The cost of
float is measured by our underwriting loss.

The table below shows our cost of float since we entered the
business in 1967.

(1) (2) Yearend Yield
Underwriting Approximate on Long-Term
Loss Average Float Cost of Funds Govt. Bonds
------------ ------------- --------------- -------------
(In $ Millions) (Ratio of 1 to 2)

1967 ......... profit $17.3 less than zero 5.50%
1968 ......... profit 19.9 less than zero 5.90%
1969 ......... profit 23.4 less than zero 6.79%
1970 ......... $ 0.37 32.4 1.14% 6.25%
1971 ......... profit 52.5 less than zero 5.81%
1972 ......... profit 69.5 less than zero 5.82%
1973 ......... profit 73.3 less than zero 7.27%
1974 ......... 7.36 79.1 9.30% 8.13%
1975 ......... 11.35 87.6 12.96% 8.03%
1976 ......... profit 102.6 less than zero 7.30%
1977 ......... profit 139.0 less than zero 7.97%
1978 ......... profit 190.4 less than zero 8.93%
1979 ......... profit 227.3 less than zero 10.08%
1980 ......... profit 237.0 less than zero 11.94%
1981 ......... profit 228.4 less than zero 13.61%
1982 ......... 21.56 220.6 9.77% 10.64%
1983 ......... 33.87 231.3 14.64% 11.84%
1984 ......... 48.06 253.2 18.98% 11.58%
1985 ......... 44.23 390.2 11.34% 9.34%
1986 ......... 55.84 797.5 7.00% 7.60%
1987 ......... 55.43 1,266.7 4.38% 8.95%
1988 ......... 11.08 1,497.7 0.74% 9.00%
1989 ......... 24.40 1,541.3 1.58% 7.97%
1990 ......... 26.65 1,637.3 1.63% 8.24%
1991 ......... 119.59 1,895.0 6.31% 7.40%
1992 ......... 108.96 2,290.4 4.76% 7.39%
_________________
Le Mensonge peut courir un an, la vérité le rattrape en un jour, dit le sage Haoussa
Ma devise:
se SURPASSER ,ne JAMAIS ABDIQUER,TOUJOURS RESTER HUMBLE

Last year, our insurance operation again generated funds at a
cost below that incurred by the U.S. Government on its newly-issued
long-term bonds. This means that in 21 years out of the 26 years
we have been in the insurance business we have beaten the
Government's rate, and often we have done so by a wide margin.
(If, on average, we didn't beat the Government's rate, there would
be no economic reason for us to be in the business.)

In 1992, as in previous years, National Indemnity's commercial
auto and general liability business, led by Don Wurster, and our
homestate operation, led by Rod Eldred, made excellent
contributions to our low cost of float. Indeed, both of these
operations recorded an underwriting profit last year, thereby
generating float at a less-than-zero cost. The bulk of our float,
meanwhile, comes from large transactions developed by Ajit. His
efforts are likely to produce a further growth in float during
1993.

Charlie and I continue to like the insurance business, which
we expect to be our main source of earnings for decades to come.
The industry is huge; in certain sectors we can compete world-wide;
and Berkshire possesses an important competitive advantage. We
will look for ways to expand our participation in the business,
either indirectly as we have done through GEICO or directly as we
did by acquiring Central States Indemnity.

Common Stock Investments

Below we list our common stock holdings having a value of over
$100 million. A small portion of these investments belongs to
subsidiaries of which Berkshire owns less than 100%.

12/31/92
Shares Company Cost Market
------ ------- ---------- ----------
(000s omitted)
3,000,000 Capital Cities/ABC, Inc. ............. $ 517,500 $1,523,500
93,400,000 The Coca-Cola Company. ............... 1,023,920 3,911,125
16,196,700 Federal Home Loan Mortgage Corp.
("Freddie Mac") ................... 414,257 783,515
34,250,000 GEICO Corp. .......................... 45,713 2,226,250
4,350,000 General Dynamics Corp. ............... 312,438 450,769
24,000,000 The Gillette Company ................. 600,000 1,365,000
38,335,000 Guinness PLC ......................... 333,019 299,581
1,727,765 The Washington Post Company .......... 9,731 396,954
6,358,418 Wells Fargo & Company ................ 380,983 485,624

Leaving aside splits, the number of shares we held in these
companies changed during 1992 in only four cases: We added
moderately to our holdings in Guinness and Wells Fargo, we more
than doubled our position in Freddie Mac, and we established a new
holding in General Dynamics. We like to buy.

Selling, however, is a different story. There, our pace of
activity resembles that forced upon a traveler who found himself
stuck in tiny Podunk's only hotel. With no T.V. in his room, he
faced an evening of boredom. But his spirits soared when he spied
a book on the night table entitled "Things to do in Podunk."
Opening it, he found just a single sentence: "You're doing it."

We were lucky in our General Dynamics purchase. I had paid
little attention to the company until last summer, when it
announced it would repurchase about 30% of its shares by way of a
Dutch tender. Seeing an arbitrage opportunity, I began buying the
stock for Berkshire, expecting to tender our holdings for a small
profit. We've made the same sort of commitment perhaps a half-
dozen times in the last few years, reaping decent rates of return
for the short periods our money has been tied up.

But then I began studying the company and the accomplishments
of Bill Anders in the brief time he'd been CEO. And what I saw
made my eyes pop: Bill had a clearly articulated and rational
strategy; he had been focused and imbued with a sense of urgency in
carrying it out; and the results were truly remarkable.

In short order, I dumped my arbitrage thoughts and decided
that Berkshire should become a long-term investor with Bill. We
were helped in gaining a large position by the fact that a tender
greatly swells the volume of trading in a stock. In a one-month
period, we were able to purchase 14% of the General Dynamics shares
that remained outstanding after the tender was completed.

* * * * * * * * * * * *

Our equity-investing strategy remains little changed from what
it was fifteen years ago, when we said in the 1977 annual report:
"We select our marketable equity securities in much the way we
would evaluate a business for acquisition in its entirety. We want
the business to be one (a) that we can understand; (b) with
favorable long-term prospects; (c) operated by honest and competent
people; and (d) available at a very attractive price." We have
seen cause to make only one change in this creed: Because of both
market conditions and our size, we now substitute "an attractive
price" for "a very attractive price."

But how, you will ask, does one decide what's "attractive"?
In answering this question, most analysts feel they must choose
between two approaches customarily thought to be in opposition:
"value" and "growth." Indeed, many investment professionals see
any mixing of the two terms as a form of intellectual cross-
dressing.

We view that as fuzzy thinking (in which, it must be
confessed, I myself engaged some years ago). In our opinion, the
two approaches are joined at the hip: Growth is always a component
in the calculation of value, constituting a variable whose
importance can range from negligible to enormous and whose impact
can be negative as well as positive.

In addition, we think the very term "value investing" is
redundant. What is "investing" if it is not the act of seeking
value at least sufficient to justify the amount paid? Consciously
paying more for a stock than its calculated value - in the hope
that it can soon be sold for a still-higher price - should be
labeled speculation (which is neither illegal, immoral nor - in our
view - financially fattening).

Whether appropriate or not, the term "value investing" is
widely used. Typically, it connotes the purchase of stocks having
attributes such as a low ratio of price to book value, a low price-
earnings ratio, or a high dividend yield. Unfortunately, such
characteristics, even if they appear in combination, are far from
determinative as to whether an investor is indeed buying something
for what it is worth and is therefore truly operating on the
principle of obtaining value in his investments. Correspondingly,
opposite characteristics - a high ratio of price to book value, a
high price-earnings ratio, and a low dividend yield - are in no way
inconsistent with a "value" purchase.

Similarly, business growth, per se, tells us little about
value. It's true that growth often has a positive impact on value,
sometimes one of spectacular proportions. But such an effect is
far from certain. For example, investors have regularly poured
money into the domestic airline business to finance profitless (or
worse) growth. For these investors, it would have been far better
if Orville had failed to get off the ground at Kitty Hawk: The more
the industry has grown, the worse the disaster for owners.

Growth benefits investors only when the business in point can
invest at incremental returns that are enticing - in other words,
only when each dollar used to finance the growth creates over a
dollar of long-term market value. In the case of a low-return
business requiring incremental funds, growth hurts the investor.

In The Theory of Investment Value, written over 50 years ago,
John Burr Williams set forth the equation for value, which we
condense here: The value of any stock, bond or business today is
determined by the cash inflows and outflows - discounted at an
appropriate interest rate - that can be expected to occur during
the remaining life of the asset. Note that the formula is the same
for stocks as for bonds. Even so, there is an important, and
difficult to deal with, difference between the two: A bond has a
coupon and maturity date that define future cash flows; but in the
case of equities, the investment analyst must himself estimate the
future "coupons." Furthermore, the quality of management affects
the bond coupon only rarely - chiefly when management is so inept
or dishonest that payment of interest is suspended. In contrast,
the ability of management can dramatically affect the equity
"coupons."

The investment shown by the discounted-flows-of-cash
calculation to be the cheapest is the one that the investor should
purchase - irrespective of whether the business grows or doesn't,
displays volatility or smoothness in its earnings, or carries a
high price or low in relation to its current earnings and book
value. Moreover, though the value equation has usually shown
equities to be cheaper than bonds, that result is not inevitable:
When bonds are calculated to be the more attractive investment,
they should be bought.

Leaving the question of price aside, the best business to own
is one that over an extended period can employ large amounts of
incremental capital at very high rates of return. The worst
business to own is one that must, or will, do the opposite - that
is, consistently employ ever-greater amounts of capital at very low
rates of return. Unfortunately, the first type of business is very
hard to find: Most high-return businesses need relatively little
capital. Shareholders of such a business usually will benefit if
it pays out most of its earnings in dividends or makes significant
stock repurchases.
_________________
Le Mensonge peut courir un an, la vérité le rattrape en un jour, dit le sage Haoussa
Ma devise:
se SURPASSER ,ne JAMAIS ABDIQUER,TOUJOURS RESTER HUMBLE

Though the mathematical calculations required to evaluate
equities are not difficult, an analyst - even one who is
experienced and intelligent - can easily go wrong in estimating
future "coupons." At Berkshire, we attempt to deal with this
problem in two ways. First, we try to stick to businesses we
believe we understand. That means they must be relatively simple
and stable in character. If a business is complex or subject to
constant change, we're not smart enough to predict future cash
flows. Incidentally, that shortcoming doesn't bother us. What
counts for most people in investing is not how much they know, but
rather how realistically they define what they don't know. An
investor needs to do very few things right as long as he or she
avoids big mistakes.

Second, and equally important, we insist on a margin of safety
in our purchase price. If we calculate the value of a common stock
to be only slightly higher than its price, we're not interested in
buying. We believe this margin-of-safety principle, so strongly
emphasized by Ben Graham, to be the cornerstone of investment
success.

Fixed-Income Securities

Below we list our largest holdings of fixed-income securities:

(000s omitted)
------------------------------------
Cost of Preferreds and
Issuer Amortized Value of Bonds Market
------ ------------------------ ----------
ACF Industries Debentures ...... $133,065(1) $163,327
American Express "Percs" ....... 300,000 309,000(1)(2)
Champion International Conv. Pfd. 300,000(1) 309,000(2)
First Empire State Conv. Pfd. .. 40,000 68,000(1)(2)
Salomon Conv. Pfd. ............. 700,000(1) 756,000(2)
USAir Conv. Pfd. ............... 358,000(1) 268,500(2)
Washington Public Power Systems Bonds 58,768(1) 81,002

(1) Carrying value in our financial statements
(2) Fair value as determined by Charlie and me

During 1992 we added to our holdings of ACF debentures, had
some of our WPPSS bonds called, and sold our RJR Nabisco position.

Over the years, we've done well with fixed-income investments,
having realized from them both large capital gains (including $80
million in 1992) and exceptional current income. Chrysler
Financial, Texaco, Time-Warner, WPPSS and RJR Nabisco were
particularly good investments for us. Meanwhile, our fixed-income
losses have been negligible: We've had thrills but so far no
spills.

Despite the success we experienced with our Gillette
preferred, which converted to common stock in 1991, and despite our
reasonable results with other negotiated purchases of preferreds,
our overall performance with such purchases has been inferior to
that we have achieved with purchases made in the secondary market.
This is actually the result we expected. It corresponds with our
belief that an intelligent investor in common stocks will do better
in the secondary market than he will do buying new issues.

The reason has to do with the way prices are set in each
instance. The secondary market, which is periodically ruled by
mass folly, is constantly setting a "clearing" price. No matter
how foolish that price may be, it's what counts for the holder of a
stock or bond who needs or wishes to sell, of whom there are always
going to be a few at any moment. In many instances, shares worth x
in business value have sold in the market for 1/2x or less.

The new-issue market, on the other hand, is ruled by
controlling stockholders and corporations, who can usually select
the timing of offerings or, if the market looks unfavorable, can
avoid an offering altogether. Understandably, these sellers are
not going to offer any bargains, either by way of a public offering
or in a negotiated transaction: It's rare you'll find x for
1/2x here. Indeed, in the case of common-stock offerings, selling
shareholders are often motivated to unload only when they feel the
market is overpaying. (These sellers, of course, would state that
proposition somewhat differently, averring instead that they simply
resist selling when the market is underpaying for their goods.)

To date, our negotiated purchases, as a group, have fulfilled
but not exceeded the expectation we set forth in our 1989 Annual
Report: "Our preferred stock investments should produce returns
modestly above those achieved by most fixed-income portfolios." In
truth, we would have done better if we could have put the money
that went into our negotiated transactions into open-market
purchases of the type we like. But both our size and the general
strength of the markets made that difficult to do.

There was one other memorable line in the 1989 Annual Report:
"We have no ability to forecast the economics of the investment
banking business, the airline industry, or the paper industry." At
the time some of you may have doubted this confession of ignorance.
Now, however, even my mother acknowledges its truth.

In the case of our commitment to USAir, industry economics had
soured before the ink dried on our check. As I've previously
mentioned, it was I who happily jumped into the pool; no one pushed
me. Yes, I knew the industry would be ruggedly competitive, but I
did not expect its leaders to engage in prolonged kamikaze
behavior. In the last two years, airline companies have acted as
if they are members of a competitive tontine, which they wish to
bring to its conclusion as rapidly as possible.

Amidst this turmoil, Seth Schofield, CEO of USAir, has done a
truly extraordinary job in repositioning the airline. He was
particularly courageous in accepting a strike last fall that, had
it been lengthy, might well have bankrupted the company.
Capitulating to the striking union, however, would have been
equally disastrous: The company was burdened with wage costs and
work rules that were considerably more onerous than those
encumbering its major competitors, and it was clear that over time
any high-cost producer faced extinction. Happily for everyone, the
strike was settled in a few days.

A competitively-beset business such as USAir requires far more
managerial skill than does a business with fine economics.
Unfortunately, though, the near-term reward for skill in the
airline business is simply survival, not prosperity.

In early 1993, USAir took a major step toward assuring
survival - and eventual prosperity - by accepting British Airways'
offer to make a substantial, but minority, investment in the
company. In connection with this transaction, Charlie and I were
asked to join the USAir board. We agreed, though this makes five
outside board memberships for me, which is more than I believe
advisable for an active CEO. Even so, if an investee's management
and directors believe it particularly important that Charlie and I
join its board, we are glad to do so. We expect the managers of
our investees to work hard to incre