Warren E. Buffett letters

BERKSHIRE HATHAWAY INC.

Chairman's Letter

To the Shareholders of Berkshire Hathaway Inc.:

Our gain in net worth during 1996 was $6.2 billion, or 36.1%. Per-
share book value, however, grew by less, 31.8%, because the number of
Berkshire shares increased: We issued stock in acquiring FlightSafety
International and also sold new Class B shares.* Over the last 32 years
(that is, since present management took over) per-share book value has
grown from $19 to $19,011, or at a rate of 23.8% compounded annually.

* Each Class B share has an economic interest equal to 1/30th of
that possessed by a Class A share, which is the new designation for
the only stock that Berkshire had outstanding before May 1996.
Throughout this report, we state all per-share figures in terms of
"Class A equivalents," which are the sum of the Class A shares
outstanding and 1/30th of the Class B shares outstanding.

For technical reasons, we have restated our 1995 financial
statements, a matter that requires me to present one of my less-than-
thrilling explanations of accounting arcana. I'll make it brief.

The restatement was required because GEICO became a wholly-owned
subsidiary of Berkshire on January 2, 1996, whereas it was previously
classified as an investment. From an economic viewpoint - taking into
account major tax efficiencies and other benefits we gained - the value
of the 51% of GEICO we owned at year-end 1995 increased significantly
when we acquired the remaining 49% of the company two days later.
Accounting rules applicable to this type of "step acquisition," however,
required us to write down the value of our 51% at the time we moved to
100%. That writedown - which also, of course, reduced book value -
amounted to $478.4 million. As a result, we now carry our original 51%
of GEICO at a value that is both lower than its market value at the time
we purchased the remaining 49% of the company and lower than the value at
which we carry that 49% itself.

There is an offset, however, to the reduction in book value I have
just described: Twice during 1996 we issued Berkshire shares at a
premium to book value, first in May when we sold the B shares for cash
and again in December when we used both A and B shares as part-payment
for FlightSafety. In total, the three non-operational items affecting
book value contributed less than one percentage point to our 31.8% per-
share gain last year.

I dwell on this rise in per-share book value because it roughly
indicates our economic progress during the year. But, as Charlie Munger,
Berkshire's Vice Chairman, and I have repeatedly told you, what counts at
Berkshire is intrinsic value, not book value. The last time you got that
message from us was in the Owner's Manual, sent to you in June after we
issued the Class B shares. In that manual, we not only defined certain
key terms - such as intrinsic value - but also set forth our economic
principles.

For many years, we have listed these principles in the front of our
annual report, but in this report, on pages 58 to 67, we reproduce the
entire Owner's Manual. In this letter, we will occasionally refer to the
manual so that we can avoid repeating certain definitions and
explanations. For example, if you wish to brush up on "intrinsic value,"
see pages 64 and 65.

Last year, for the first time, we supplied you with a table that
Charlie and I believe will help anyone trying to estimate Berkshire's
intrinsic value. In the updated version of that table, which follows, we
trace two key indices of value. The first column lists our per-share
ownership of investments (including cash and equivalents) and the second
column shows our per-share earnings from Berkshire's operating businesses
before taxes and purchase-accounting adjustments but after all interest
and corporate overhead expenses. The operating-earnings column excludes
all dividends, interest and capital gains that we realized from the
investments presented in the first column. In effect, the two columns
show what Berkshire would have reported had it been broken into two parts.

Pre-tax Earnings Per Share
Investments Excluding All Income from
Year Per Share Investments
---- ----------- -------------------------
1965................................$ 4 $ 4.08
1975................................ 159 (6.48)
1985................................ 2,443 18.86
1995................................ 22,088 258.20
1996................................ 28,500 421.39

Annual Growth Rate, 1965-95......... 33.4% 14.7%
One-Year Growth Rate, 1995-96 ...... 29.0% 63.2%

As the table tells you, our investments per share increased in 1996
by 29.0% and our non-investment earnings grew by 63.2%. Our goal is to
keep the numbers in both columns moving ahead at a reasonable (or, better
yet, unreasonable) pace.

Our expectations, however, are tempered by two realities. First,
our past rates of growth cannot be matched nor even approached:
Berkshire's equity capital is now large - in fact, fewer than ten
businesses in America have capital larger - and an abundance of funds
tends to dampen returns. Second, whatever our rate of progress, it will
not be smooth: Year-to-year moves in the first column of the table above
will be influenced in a major way by fluctuations in securities markets;
the figures in the second column will be affected by wide swings in the
profitability of our catastrophe-reinsurance business.

In the table, the donations made pursuant to our shareholder-
designated contributions program are charged against the second column,
though we view them as a shareholder benefit rather than as an expense.
All other corporate expenses are also charged against the second column.
These costs may be lower than those of any other large American
corporation: Our after-tax headquarters expense amounts to less than two
basis points (1/50th of 1%) measured against net worth. Even so, Charlie
used to think this expense percentage outrageously high, blaming it on my
use of Berkshire's corporate jet, The Indefensible. But Charlie has
recently experienced a "counter-revelation": With our purchase of
FlightSafety, whose major activity is the training of corporate pilots,
he now rhapsodizes at the mere mention of jets.

Seriously, costs matter. For example, equity mutual funds incur
corporate expenses - largely payments to the funds' managers - that
average about 100 basis points, a levy likely to cut the returns their
investors earn by 10% or more over time. Charlie and I make no promises
about Berkshire's results. We do promise you, however, that virtually
all of the gains Berkshire makes will end up with shareholders. We are
here to make money with you, not off you.

The Relationship of Intrinsic Value to Market Price

In last year's letter, with Berkshire shares selling at $36,000, I
told you: (1) Berkshire's gain in market value in recent years had
outstripped its gain in intrinsic value, even though the latter gain had
been highly satisfactory; (2) that kind of overperformance could not
continue indefinitely; (3) Charlie and I did not at that moment consider
Berkshire to be undervalued.

Since I set down those cautions, Berkshire's intrinsic value has
increased very significantly - aided in a major way by a stunning
performance at GEICO that I will tell you more about later - while the
market price of our shares has changed little. This, of course, means
that in 1996 Berkshire's stock underperformed the business.
Consequently, today's price/value relationship is both much different
from what it was a year ago and, as Charlie and I see it, more
appropriate.

Over time, the aggregate gains made by Berkshire shareholders must
of necessity match the business gains of the company. When the stock
temporarily overperforms or underperforms the business, a limited number
of shareholders - either sellers or buyers - receive outsized benefits at
the expense of those they trade with. Generally, the sophisticated have
an edge over the innocents in this game.

Though our primary goal is to maximize the amount that our
shareholders, in total, reap from their ownership of Berkshire, we wish
also to minimize the benefits going to some shareholders at the expense
of others. These are goals we would have were we managing a family
partnership, and we believe they make equal sense for the manager of a
public company. In a partnership, fairness requires that partnership
interests be valued equitably when partners enter or exit; in a public
company, fairness prevails when market price and intrinsic value are in
sync. Obviously, they won't always meet that ideal, but a manager - by
his policies and communications - can do much to foster equity.

Of course, the longer a shareholder holds his shares, the more
bearing Berkshire's business results will have on his financial
experience - and the less it will matter what premium or discount to
intrinsic value prevails when he buys and sells his stock. That's one
reason we hope to attract owners with long-term horizons. Overall, I
think we have succeeded in that pursuit. Berkshire probably ranks number
one among large American corporations in the percentage of its shares
held by owners with a long-term view.

Acquisitions of 1996

We made two acquisitions in 1996, both possessing exactly the
qualities we seek - excellent business economics and an outstanding
manager.

The first acquisition was Kansas Bankers Surety (KBS), an insurance
company whose name describes its specialty. The company, which does
business in 22 states, has an extraordinary underwriting record, achieved
through the efforts of Don Towle, an extraordinary manager. Don has
developed first-hand relationships with hundreds of bankers and knows
every detail of his operation. He thinks of himself as running a company
that is "his," an attitude we treasure at Berkshire. Because of its
relatively small size, we placed KBS with Wesco, our 80%-owned
subsidiary, which has wanted to expand its insurance operations.

You might be interested in the carefully-crafted and sophisticated
acquisition strategy that allowed Berkshire to nab this deal. Early in
1996 I was invited to the 40th birthday party of my nephew's wife, Jane
Rogers. My taste for social events being low, I immediately, and in my
standard, gracious way, began to invent reasons for skipping the event.
The party planners then countered brilliantly by offering me a seat next
to a man I always enjoy, Jane's dad, Roy Dinsdale - so I went.

The party took place on January 26. Though the music was loud - Why
must bands play as if they will be paid by the decibel? - I just managed
to hear Roy say he'd come from a directors meeting at Kansas Bankers
Surety, a company I'd always admired. I shouted back that he should let
me know if it ever became available for purchase.

On February 12, I got the following letter from Roy: "Dear Warren:
Enclosed is the annual financial information on Kansas Bankers Surety.
This is the company that we talked about at Janie's party. If I can be
of any further help, please let me know." On February 13, I told Roy we
would pay $75 million for the company - and before long we had a deal.
I'm now scheming to get invited to Jane's next party.

Our other acquisition in 1996 - FlightSafety International, the
world's leader in the training of pilots - was far larger, at about $1.5
billion, but had an equally serendipitous origin. The heroes of this
story are first, Richard Sercer, a Tucson aviation consultant, and
second, his wife, Alma Murphy, an ophthalmology graduate of Harvard
Medical School, who in 1990 wore down her husband's reluctance and got
him to buy Berkshire stock. Since then, the two have attended all our
Annual Meetings, but I didn't get to know them personally.

Fortunately, Richard had also been a long-time shareholder of
FlightSafety, and it occurred to him last year that the two companies
would make a good fit. He knew our acquisition criteria, and he thought
that Al Ueltschi, FlightSafety's 79-year-old CEO, might want to make a
deal that would both give him a home for his company and a security in
payment that he would feel comfortable owning throughout his lifetime.
So in July, Richard wrote Bob Denham, CEO of Salomon Inc, suggesting that
he explore the possibility of a merger.

Bob took it from there, and on September 18, Al and I met in New
York. I had long been familiar with FlightSafety's business, and in
about 60 seconds I knew that Al was exactly our kind of manager. A month
later, we had a contract. Because Charlie and I wished to minimize the
issuance of Berkshire shares, the transaction we structured gave
FlightSafety shareholders a choice of cash or stock but carried terms
that encouraged those who were tax-indifferent to take cash. This nudge
led to about 51% of FlightSafety's shares being exchanged for cash, 41%
for Berkshire A and 8% for Berkshire B.

Al has had a lifelong love affair with aviation and actually piloted
Charles Lindbergh. After a barnstorming career in the 1930s, he began
working for Juan Trippe, Pan Am's legendary chief. In 1951, while still
at Pan Am, Al founded FlightSafety, subsequently building it into a
simulator manufacturer and a worldwide trainer of pilots (single-engine,
helicopter, jet and marine). The company operates in 41 locations,
outfitted with 175 simulators of planes ranging from the very small, such
as Cessna 210s, to Boeing 747s. Simulators are not cheap - they can cost
as much as $19 million - so this business, unlike many of our
operations, is capital intensive. About half of the company's revenues
are derived from the training of corporate pilots, with most of the
balance coming from airlines and the military.

Al may be 79, but he looks and acts about 55. He will run
operations just as he has in the past: We never fool with success. I
have told him that though we don't believe in splitting Berkshire stock,
we will split his age 2-for-1 when he hits 100.

An observer might conclude from our hiring practices that Charlie
and I were traumatized early in life by an EEOC bulletin on age
discrimination. The real explanation, however, is self-interest: It's
difficult to teach a new dog old tricks. The many Berkshire managers who
are past 70 hit home runs today at the same pace that long ago gave them
reputations as young slugging sensations. Therefore, to get a job with
us, just employ the tactic of the 76-year-old who persuaded a dazzling
beauty of 25 to marry him. "How did you ever get her to accept?" asked
his envious contemporaries. The comeback: "I told her I was 86."

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

And now we pause for our usual commercial: If you own a large
business with good economic characteristics and wish to become associated
with an exceptional collection of businesses having similar
characteristics, Berkshire may well be the home you seek. Our
requirements are set forth on page 21. If your company meets them - and
if I fail to make the next birthday party you attend - give me a call.

Insurance Operations - Overview

Our insurance business was terrific in 1996. In both primary
insurance, where GEICO is our main unit, and in our "super-cat"
reinsurance business, results were outstanding.

As we've explained in past reports, what counts in our insurance
business is, first, the amount of "float" we generate and, second, its
cost to us. These are matters that are important for you to understand
because float is a major component of Berkshire's intrinsic value that is
not reflected in book value.

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?)

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

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.

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.")

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%

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.

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 increase the value of the businesses
they run, and there are times when large owners should do their bit
as well.

Two New Accounting Rules and a Plea for One More

A new accounting rule having to do with deferred taxes becomes
effective in 1993. It undoes a dichotomy in our books that I have
described in previous annual reports and that relates to the
accrued taxes carried against the unrealized appreciation in our
investment portfolio. At yearend 1992, that appreciation amounted
to $7.6 billion. Against $6.4 billion of that, we carried taxes at
the current 34% rate. Against the remainder of $1.2 billion, we
carried an accrual of 28%, the tax rate in effect when that portion
of the appreciation occurred. The new accounting rule says we must
henceforth accrue all deferred tax at the current rate, which to us
seems sensible.

The new marching orders mean that in the first quarter of 1993
we will apply a 34% rate to all of our unrealized appreciation,
thereby increasing the tax liability and reducing net worth by $70
million. The new rule also will cause us to make other minor
changes in our calculation of deferred taxes.

Future changes in tax rates will be reflected immediately in
the liability for deferred taxes and, correspondingly, in net
worth. The impact could well be substantial. Nevertheless, what
is important in the end is the tax rate at the time we sell
securities, when unrealized appreciation becomes realized.

Another major accounting change, whose implementation is
required by January 1, 1993, mandates that businesses recognize
their present-value liability for post-retirement health benefits.
Though GAAP has previously required recognition of pensions to be
paid in the future, it has illogically ignored the costs that
companies will then have to bear for health benefits. The new rule
will force many companies to record a huge balance-sheet liability
(and a consequent reduction in net worth) and also henceforth to
recognize substantially higher costs when they are calculating
annual profits.

In making acquisitions, Charlie and I have tended to avoid
companies with significant post-retirement liabilities. As a
result, Berkshire's present liability and future costs for post-
retirement health benefits - though we now have 22,000 employees -
are inconsequential. I need to admit, though, that we had a near
miss: In 1982 I made a huge mistake in committing to buy a company
burdened by extraordinary post-retirement health obligations.
Luckily, though, the transaction fell through for reasons beyond
our control. Reporting on this episode in the 1982 annual report,
I said: "If we were to introduce graphics to this report,
illustrating favorable business developments of the past year, two
blank pages depicting this blown deal would be the appropriate
centerfold." Even so, I wasn't expecting things to get as bad as
they did. Another buyer appeared, the business soon went bankrupt
and was shut down, and thousands of workers found those bountiful
health-care promises to be largely worthless.

In recent decades, no CEO would have dreamed of going to his
board with the proposition that his company become an insurer of
uncapped post-retirement health benefits that other corporations
chose to install. A CEO didn't need to be a medical expert to know
that lengthening life expectancies and soaring health costs would
guarantee an insurer a financial battering from such a business.
Nevertheless, many a manager blithely committed his own company to
a self-insurance plan embodying precisely the same promises - and
thereby doomed his shareholders to suffer the inevitable
consequences. In health-care, open-ended promises have created
open-ended liabilities that in a few cases loom so large as to
threaten the global competitiveness of major American industries.

I believe part of the reason for this reckless behavior was
that accounting rules did not, for so long, require the booking of
post-retirement health costs as they were incurred. Instead, the
rules allowed cash-basis accounting, which vastly understated the
liabilities that were building up. In effect, the attitude of both
managements and their accountants toward these liabilities was
"out-of-sight, out-of-mind." Ironically, some of these same
managers would be quick to criticize Congress for employing "cash-
basis" thinking in respect to Social Security promises or other
programs creating future liabilities of size.

Managers thinking about accounting issues should never forget
one of Abraham Lincoln's favorite riddles: "How many legs does a
dog have if you call his tail a leg?" The answer: "Four, because
calling a tail a leg does not make it a leg." It behooves managers
to remember that Abe's right even if an auditor is willing to
certify that the tail is a leg.

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

The most egregious case of let's-not-face-up-to-reality
behavior by executives and accountants has occurred in the world of
stock options. In Berkshire's 1985 annual report, I laid out my
opinions about the use and misuse of options. But even when
options are structured properly, they are accounted for in ways
that make no sense. The lack of logic is not accidental: For
decades, much of the business world has waged war against
accounting rulemakers, trying to keep the costs of stock options
from being reflected in the profits of the corporations that issue
them.

Typically, executives have argued that options are hard to
value and that therefore their costs should be ignored. At other
times managers have said that assigning a cost to options would
injure small start-up businesses. Sometimes they have even
solemnly declared that "out-of-the-money" options (those with an
exercise price equal to or above the current market price) have no
value when they are issued.

Oddly, the Council of Institutional Investors has chimed in
with a variation on that theme, opining that options should not be
viewed as a cost because they "aren't dollars out of a company's
coffers." I see this line of reasoning as offering exciting
possibilities to American corporations for instantly improving
their reported profits. For example, they could eliminate the cost
of insurance by paying for it with options. So if you're a CEO and
subscribe to this "no cash-no cost" theory of accounting, I'll make
you an offer you can't refuse: Give us a call at Berkshire and we
will happily sell you insurance in exchange for a bundle of long-
term options on your company's stock.

Shareholders should understand that companies incur costs when
they deliver something of value to another party and not just when
cash changes hands. Moreover, it is both silly and cynical to say
that an important item of cost should not be recognized simply
because it can't be quantified with pinpoint precision. Right now,
accounting abounds with imprecision. After all, no manager or
auditor knows how long a 747 is going to last, which means he also
does not know what the yearly depreciation charge for the plane
should be. No one knows with any certainty what a bank's annual
loan loss charge ought to be. And the estimates of losses that
property-casualty companies make are notoriously inaccurate.

Does this mean that these important items of cost should be
ignored simply because they can't be quantified with absolute
accuracy? Of course not. Rather, these costs should be estimated
by honest and experienced people and then recorded. When you get
right down to it, what other item of major but hard-to-precisely-
calculate cost - other, that is, than stock options - does the
accounting profession say should be ignored in the calculation of
earnings?

Moreover, options are just not that difficult to value.
Admittedly, the difficulty is increased by the fact that the
options given to executives are restricted in various ways. These
restrictions affect value. They do not, however, eliminate it. In
fact, since I'm in the mood for offers, I'll make one to any
executive who is granted a restricted option, even though it may be
out of the money: On the day of issue, Berkshire will pay him or
her a substantial sum for the right to any future gain he or she
realizes on the option. So if you find a CEO who says his newly-
issued options have little or no value, tell him to try us out. In
truth, we have far more confidence in our ability to determine an
appropriate price to pay for an option than we have in our ability
to determine the proper depreciation rate for our corporate jet.

It seems to me that the realities of stock options can be
summarized quite simply: If options aren't a form of compensation,
what are they? If compensation isn't an expense, what is it? And,
if expenses shouldn't go into the calculation of earnings, where in
the world should they go?

The accounting profession and the SEC should be shamed by the
fact that they have long let themselves be muscled by business
executives on the option-accounting issue. Additionally, the
lobbying that executives engage in may have an unfortunate by-
product: In my opinion, the business elite risks losing its
credibility on issues of significance to society - about which it
may have much of value to say - when it advocates the incredible on
issues of significance to itself.

Miscellaneous

We have two pieces of regrettable news this year. First,
Gladys Kaiser, my friend and assistant for twenty-five years, will
give up the latter post after the 1993 annual meeting, though she
will certainly remain my friend forever. Gladys and I have been a
team, and though I knew her retirement was coming, it is still a
jolt.

Secondly, in September, Verne McKenzie relinquished his role
as Chief Financial Officer after a 30-year association with me that
began when he was the outside auditor of Buffett Partnership, Ltd.
Verne is staying on as a consultant, and though that job
description is often a euphemism, in this case it has real meaning.
I expect Verne to continue to fill an important role at Berkshire
but to do so at his own pace. Marc Hamburg, Verne's understudy for
five years, has succeeded him as Chief Financial Officer.

I recall that one woman, upon being asked to describe the
perfect spouse, specified an archeologist: "The older I get," she
said, "the more he'll be interested in me." She would have liked
my tastes: I treasure those extraordinary Berkshire managers who
are working well past normal retirement age and who concomitantly
are achieving results much superior to those of their younger
competitors. While I understand and empathize with the decision of
Verne and Gladys to retire when the calendar says it's time, theirs
is not a step I wish to encourage. It's hard to teach a new dog
old tricks.

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

I am a moderate in my views about retirement compared to Rose
Blumkin, better known as Mrs. B. At 99, she continues to work
seven days a week. And about her, I have some particularly good
news.

You will remember that after her family sold 80% of Nebraska
Furniture Mart (NFM) to Berkshire in 1983, Mrs. B continued to be
Chairman and run the carpet operation. In 1989, however, she left
because of a managerial disagreement and opened up her own
operation next door in a large building that she had owned for
several years. In her new business, she ran the carpet section but
leased out other home-furnishings departments.

At the end of last year, Mrs. B decided to sell her building
and land to NFM. She'll continue, however, to run her carpet
business at its current location (no sense slowing down just when
you're hitting full stride). NFM will set up shop alongside her,
in that same building, thereby making a major addition to its
furniture business.

I am delighted that Mrs. B has again linked up with us. Her
business story has no parallel and I have always been a fan of
hers, whether she was a partner or a competitor. But believe me,
partner is better.

This time around, Mrs. B graciously offered to sign a non-
compete agreement - and I, having been incautious on this point
when she was 89, snapped at the deal. Mrs. B belongs in the
Guinness Book of World Records on many counts. Signing a non-
compete at 99 merely adds one more.

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

Ralph Schey, CEO of Scott Fetzer and a manager who I hope is
with us at 99 also, hit a grand slam last year when that company
earned a record $110 million pre-tax. What's even more impressive
is that Scott Fetzer achieved such earnings while employing only
$116 million of equity capital. This extraordinary result is not
the product of leverage: The company uses only minor amounts of
borrowed money (except for the debt it employs - appropriately - in
its finance subsidiary).

Scott Fetzer now operates with a significantly smaller
investment in both inventory and fixed assets than it had when we
bought it in 1986. This means the company has been able to
distribute more than 100% of its earnings to Berkshire during our
seven years of ownership while concurrently increasing its earnings
stream - which was excellent to begin with - by a lot. Ralph just
keeps on outdoing himself, and Berkshire shareholders owe him a
great deal.

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

Those readers with particularly sharp eyes will note that our
corporate expense fell from $5.6 million in 1991 to $4.2 million in
1992. Perhaps you will think that I have sold our corporate jet,
The Indefensible. Forget it! I find the thought of retiring the
plane even more revolting than the thought of retiring the
Chairman. (In this matter I've demonstrated uncharacteristic
flexibility: For years I argued passionately against corporate
jets. But finally my dogma was run over by my karma.)

Our reduction in corporate overhead actually came about
because those expenses were especially high in 1991, when we
incurred a one-time environmental charge relating to alleged pre-
1970 actions of our textile operation. Now that things are back to
normal, our after-tax overhead costs are under 1% of our reported
operating earnings and less than 1/2 of 1% of our look-through
earnings. We have no legal, personnel, public relations, investor
relations, or strategic planning departments. In turn this means
we don't need support personnel such as guards, drivers,
messengers, etc. Finally, except for Verne, we employ no
consultants. Professor Parkinson would like our operation - though
Charlie, I must say, still finds it outrageously fat.

At some companies, corporate expense runs 10% or more of
operating earnings. The tithing that operations thus makes to
headquarters not only hurts earnings, but more importantly slashes
capital values. If the business that spends 10% on headquarters'
costs achieves earnings at its operating levels identical to those
achieved by the business that incurs costs of only 1%, shareholders
of the first enterprise suffer a 9% loss in the value of their
holdings simply because of corporate overhead. Charlie and I have
observed no correlation between high corporate costs and good
corporate performance. In fact, we see the simpler, low-cost
operation as more likely to operate effectively than its
bureaucratic brethren. We're admirers of the Wal-Mart, Nucor,
Dover, GEICO, Golden West Financial and Price Co. models.

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

Late last year Berkshire's stock price crossed $10,000.
Several shareholders have mentioned to me that the high price
causes them problems: They like to give shares away each year and
find themselves impeded by the tax rule that draws a distinction
between annual gifts of $10,000 or under to a single individual and
those above $10,000. That is, those gifts no greater than $10,000
are completely tax-free; those above $10,000 require the donor to
use up a portion of his or her lifetime exemption from gift and
estate taxes, or, if that exemption has been exhausted, to pay gift
taxes.

I can suggest three ways to address this problem. The first
would be useful to a married shareholder, who can give up to
$20,000 annually to a single recipient, as long as the donor files
a gift tax return containing his or her spouse's written consent to
gifts made during the year.

Secondly, a shareholder, married or not, can make a bargain
sale. Imagine, for example, that Berkshire is selling for $12,000
and that one wishes to make only a $10,000 gift. In that case,
sell the stock to the giftee for $2,000. (Caution: You will be
taxed on the amount, if any, by which the sales price to your
giftee exceeds your tax basis.)

Finally, you can establish a partnership with people to whom
you are making gifts, fund it with Berkshire shares, and simply
give percentage interests in the partnership away each year. These
interests can be for any value that you select. If the value is
$10,000 or less, the gift will be tax-free.

We issue the customary warning: Consult with your own tax
advisor before taking action on any of the more esoteric methods of
gift-making.

We hold to the view about stock splits that we set forth in
the 1983 Annual Report. Overall, we believe our owner-related
policies - including the no-split policy - have helped us assemble
a body of shareholders that is the best associated with any widely-
held American corporation. Our shareholders think and behave like
rational long-term owners and view the business much as Charlie and
I do. Consequently, our stock consistently trades in a price range
that is sensibly related to intrinsic value.

Additionally, we believe that our shares turn over far less
actively than do the shares of any other widely-held company. The
frictional costs of trading - which act as a major "tax" on the
owners of many companies - are virtually non-existent at Berkshire.
(The market-making skills of Jim Maguire, our New York Stock
Exchange specialist, definitely help to keep these costs low.)
Obviously a split would not change this situation dramatically.
Nonetheless, there is no way that our shareholder group would be
upgraded by the new shareholders enticed by a split. Instead we
believe that modest degradation would occur.

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

As I mentioned earlier, on December 16th we called our zero-
coupon, convertible debentures for payment on January 4, 1993.
These obligations bore interest at 5 1/2%, a low cost for funds
when they were issued in 1989, but an unattractive rate for us at
the time of call.

The debentures could have been redeemed at the option of the
holder in September 1994, and 5 1/2% money available for no longer
than that is not now of interest to us. Furthermore, Berkshire
shareholders are disadvantaged by having a conversion option
outstanding. At the time we issued the debentures, this
disadvantage was offset by the attractive interest rate they
carried; by late 1992, it was not.

In general, we continue to have an aversion to debt,
particularly the short-term kind. But we are willing to incur
modest amounts of debt when it is both properly structured and of
significant benefit to shareholders.

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

About 97% of all eligible shares participated in Berkshire's
1992 shareholder-designated contributions program. Contributions
made through the program were $7.6 million, and 2,810 charities
were recipients. I'm considering increasing these contributions in
the future at a rate greater than the increase in Berkshire's book
value, and I would be glad to hear from you as to your thinking
about this idea.

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, 1993 will be ineligible for the 1993
program.

In addition to the shareholder-designated contributions that
Berkshire distributes, managers of our operating businesses make
contributions, including merchandise, averaging about $2.0 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.

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

This year the Annual Meeting will be held at the Orpheum
Theater in downtown Omaha at 9:30 a.m. on Monday, April 26, 1993.
A record 1,700 people turned up for the meeting last year, but that
number 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, which is 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 Charlie and I are a good
bit wider than we were back in 1972 when we bought See's.

Borsheim's normally is closed on Sunday but will be open for
shareholders and their guests from noon to 6 p.m. on Sunday, April
25. Charlie and I will be in attendance, sporting our jeweler's
loupes, and ready to give advice about gems to anyone foolish
enough to listen. Also available will be plenty of Cherry Cokes,
See's candies, and other lesser goodies. I hope you will join us.

Warren E. Buffett
March 1, 1993 Chairman of the Board

To the Shareholders of Berkshire Hathaway Inc.:

Our per-share book value increased 14.3% during 1993. Over
the last 29 years (that is, since present management took over)
book value has grown from $19 to $8,854, or at a rate of 23.3%
compounded annually.

During the year, Berkshire's net worth increased by $1.5
billion, a figure affected by two negative and two positive non-
operating items. For the sake of completeness, I'll explain them
here. If you aren't thrilled by accounting, however, feel free
to fast-forward through this discussion:

1. The first negative was produced by a change in
Generally Accepted Accounting Principles (GAAP)
having to do with the taxes we accrue against
unrealized appreciation in the securities we
carry at market value. The old rule said that
the tax rate used should be the one in effect
when the appreciation took place. Therefore,
at the end of 1992, we were using a rate of 34%
on the $6.4 billion of gains generated after
1986 and 28% on the $1.2 billion of gains
generated before that. The new rule stipulates
that the current tax rate should be applied to
all gains. The rate in the first quarter of
1993, when this rule went into effect, was 34%.
Applying that rate to our pre-1987 gains
reduced net worth by $70 million.

2. The second negative, related to the first, came
about because the corporate tax rate was raised
in the third quarter of 1993 to 35%. This
change required us to make an additional charge
of 1% against all of our unrealized gains, and
that charge penalized net worth by $75 million.
Oddly, GAAP required both this charge and the
one described above to be deducted from the
earnings we report, even though the unrealized
appreciation that gave rise to the charges was
never included in earnings, but rather was
credited directly to net worth.

3. Another 1993 change in GAAP affects the value
at which we carry the securities that we own.
In recent years, both the common stocks and
certain common-equivalent securities held by
our insurance companies have been valued at
market, whereas equities held by our non-
insurance subsidiaries or by the parent company
were carried at their aggregate cost or market,
whichever was lower. Now GAAP says that all
common stocks should be carried at market, a
rule we began following in the fourth quarter
of 1993. This change produced a gain in
Berkshire's reported net worth of about $172
million.

4. Finally, we issued some stock last year. In a
transaction described in last year's Annual
Report, we issued 3,944 shares in early
January, 1993 upon the conversion of $46
million convertible debentures that we had
called for redemption. Additionally, we issued
25,203 shares when we acquired Dexter Shoe, a
purchase discussed later in this report. The
overall result was that our shares outstanding
increased by 29,147 and our net worth by about
$478 million. Per-share book value also grew,
because the shares issued in these transactions
carried a price above their book value.

Of course, it's per-share intrinsic value, not book value,
that counts. Book value is an accounting term that measures the
capital, including retained earnings, that has been put into a
business. Intrinsic value is a present-value estimate of the
cash that can be taken out of a business during its remaining
life. At most companies, the two values are unrelated.
Berkshire, however, is an exception: Our book value, though
significantly below our intrinsic value, serves as a useful
device for tracking that key figure. In 1993, each measure grew
by roughly 14%, advances that I would call satisfactory but
unexciting.

These gains, however, were outstripped by a much larger gain
- 39% - in Berkshire's market price. Over time, of course,
market price and intrinsic value will arrive at about the same
destination. But in the short run the two often diverge in a
major way, a phenomenon I've discussed in the past. Two years
ago, Coca-Cola and Gillette, both large holdings of ours, enjoyed
market price increases that dramatically outpaced their earnings
gains. In the 1991 Annual Report, I said that the stocks of
these companies could not continuously overperform their
businesses.

From 1991 to 1993, Coke and Gillette increased their annual
operating earnings per share by 38% and 37% respectively, but
their market prices moved up only 11% and 6%. In other words,
the companies overperformed their stocks, a result that no doubt
partly reflects Wall Street's new apprehension about brand names.
Whatever the reason, what will count over time is the earnings
performance of these companies. If they prosper, Berkshire will
also prosper, though not in a lock-step manner.

Let me add a lesson from history: Coke went public in 1919
at $40 per share. By the end of 1920 the market, coldly
reevaluating Coke's future prospects, had battered the stock down
by more than 50%, to $19.50. At yearend 1993, that single share,
with dividends reinvested, was worth more than $2.1 million. As
Ben Graham said: "In the short-run, the market is a voting
machine - reflecting a voter-registration test that requires only
money, not intelligence or emotional stability - but in the long-
run, the market is a weighing machine."

So how should Berkshire's over-performance in the market
last year be viewed? Clearly, Berkshire was selling at a higher
percentage of intrinsic value at the end of 1993 than was the
case at the beginning of the year. On the other hand, in a world
of 6% or 7% long-term interest rates, Berkshire's market price
was not inappropriate if - and you should understand that this is
a huge if - Charlie Munger, Berkshire's Vice Chairman, and I can
attain our long-standing goal of increasing Berkshire's per-share
intrinsic value at an average annual rate of 15%. We have not
retreated from this goal. But we again emphasize, as we have for
many years, that the growth in our capital base makes 15% an
ever-more difficult target to hit.

What we have going for us is a growing collection of good-
sized operating businesses that possess economic characteristics
ranging from good to terrific, run by managers whose performance
ranges from terrific to terrific. You need have no worries about
this group.

The capital-allocation work that Charlie and I do at the
parent company, using the funds that our managers deliver to us,
has a less certain outcome: It is not easy to find new
businesses and managers comparable to those we have. Despite
that difficulty, Charlie and I relish the search, and we are
happy to report an important success in 1993.

Dexter Shoe

What we did last year was build on our 1991 purchase of H.
H. Brown, a superbly-run manufacturer of work shoes, boots and
other footwear. Brown has been a real winner: Though we had
high hopes to begin with, these expectations have been
considerably exceeded thanks to Frank Rooney, Jim Issler and the
talented managers who work with them. Because of our confidence
in Frank's team, we next acquired Lowell Shoe, at the end of
1992. Lowell was a long-established manufacturer of women's and
nurses' shoes, but its business needed some fixing. Again,
results have surpassed our expectations. So we promptly jumped
at the chance last year to acquire Dexter Shoe of Dexter, Maine,
which manufactures popular-priced men's and women's shoes.
Dexter, I can assure you, needs no fixing: It is one of the
best-managed companies Charlie and I have seen in our business
lifetimes.

Harold Alfond, who started working in a shoe factory at 25
cents an hour when he was 20, founded Dexter in 1956 with $10,000
of capital. He was joined in 1958 by Peter Lunder, his nephew.
The two of them have since built a business that now produces over
7.5 million pairs of shoes annually, most of them made in Maine
and the balance in Puerto Rico. As you probably know, the
domestic shoe industry is generally thought to be unable to
compete with imports from low-wage countries. But someone forgot
to tell this to the ingenious managements of Dexter and H. H.
Brown and to their skilled labor forces, which together make the
U.S. plants of both companies highly competitive against all
comers.

Dexter's business includes 77 retail outlets, located
primarily in the Northeast. The company is also a major
manufacturer of golf shoes, producing about 15% of U.S. output.
Its bread and butter, though, is the manufacture of traditional
shoes for traditional retailers, a job at which it excels: Last
year both Nordstrom and J.C. Penney bestowed special awards upon
Dexter for its performance as a supplier during 1992.

Our 1993 results include Dexter only from our date of
merger, November 7th. In 1994, we expect Berkshire's shoe
operations to have more than $550 million in sales, and we would
not be surprised if the combined pre-tax earnings of these
businesses topped $85 million. Five years ago we had no thought
of getting into shoes. Now we have 7,200 employees in that
industry, and I sing "There's No Business Like Shoe Business" as
I drive to work. So much for strategic plans.

At Berkshire, we have no view of the future that dictates
what businesses or industries we will enter. Indeed, we think
it's usually poison for a corporate giant's shareholders if it
embarks upon new ventures pursuant to some grand vision. We
prefer instead to focus on the economic characteristics of
businesses that we wish to own and the personal characteristics
of managers with whom we wish to associate - and then to hope we
get lucky in finding the two in combination. At Dexter, we did.

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

And now we pause for a short commercial: Though they owned
a business jewel, we believe that Harold and Peter (who were not
interested in cash) made a sound decision in exchanging their
Dexter stock for shares of Berkshire. What they did, in effect,
was trade a 100% interest in a single terrific business for a
smaller interest in a large group of terrific businesses. They
incurred no tax on this exchange and now own a security that can
be easily used for charitable or personal gifts, or that can be
converted to cash in amounts, and at times, of their own
choosing. Should members of their families desire to, they can
pursue varying financial paths without running into the
complications that often arise when assets are concentrated in a
private business.

For tax and other reasons, private companies also often find
it difficult to diversify outside their industries. Berkshire,
in contrast, can diversify with ease. So in shifting their
ownership to Berkshire, Dexter's shareholders solved a
reinvestment problem. Moreover, though Harold and Peter now have
non-controlling shares in Berkshire, rather than controlling
shares in Dexter, they know they will be treated as partners and
that we will follow owner-oriented practices. If they elect to
retain their Berkshire shares, their investment result from the
merger date forward will exactly parallel my own result. Since I
have a huge percentage of my net worth committed for life to
Berkshire shares - and since the company will issue me neither
restricted shares nor stock options - my gain-loss equation will
always match that of all other owners.

Additionally, Harold and Peter know that at Berkshire we can
keep our promises: There will be no changes of control or
culture at Berkshire for many decades to come. Finally, and of
paramount importance, Harold and Peter can be sure that they will
get to run their business - an activity they dearly love -
exactly as they did before the merger. At Berkshire, we do not
tell .400 hitters how to swing.

What made sense for Harold and Peter probably makes sense
for a few other owners of large private businesses. So, if you
have a business that might fit, let me hear from you. Our
acquisition criteria are set forth in the appendix on page 22.

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)
---------------------- ------------------
1993 1992 1993 1992
---------- ---------- -------- --------

Operating Earnings:
Insurance Group:
Underwriting ............... $ 30,876 $(108,961) $ 20,156 $(71,141)
Net Investment Income ...... 375,946 355,067 321,321 305,763
H. H. Brown, Lowell,
and Dexter ............... 44,025* 27,883 28,829 17,340
Buffalo News ................. 50,962 47,863 29,696 28,163
Commercial & Consumer Finance 22,695 19,836 14,161 12,664
Fechheimer ................... 13,442 13,698 6,931 7,267
Kirby ........................ 39,147 35,653 25,056 22,795
Nebraska Furniture Mart ...... 21,540 17,110 10,398 8,072
Scott Fetzer Manufacturing Group 38,196 31,954 23,809 19,883
See's Candies ................ 41,150 42,357 24,367 25,501
World Book ................... 19,915 29,044 13,537 19,503
Purchase-Price Accounting &
Goodwill Charges ......... (17,033) (12,087) (13,996) (13,070)
Interest Expense** ........... (56,545) (98,643) (35,614) (62,899)
Shareholder-Designated
Contributions ............ (9,448) (7,634) (5,994) (4,913)
Other ........................ 28,428 67,540 15,094 32,798
---------- ---------- -------- --------
Operating Earnings ............. 643,296 460,680 477,751 347,726
Sales of Securities ............ 546,422 89,937 356,702 59,559
Tax Accruals Caused by
New Accounting Rules ........ --- --- (146,332) ---
---------- ---------- -------- --------
Total Earnings - All Entities .. $1,189,718 $ 550,617 $688,121 $407,285

* Includes Dexter's earnings only from the date it was acquired,
November 7, 1993.

**Excludes interest expense of Commercial and Consumer Finance
businesses. In 1992 includes $22.5 million of premiums paid on
the early redemption of debt.

A large amount of information about these businesses is given
on pages 38-49, where you will also find our segment earnings
reported on a GAAP basis. In addition, on pages 52-59, we have
rearranged Berkshire's financial data into four segments on a non-
GAAP basis, a presentation that corresponds to the way Charlie and
I think about the company. Our intent is to supply you with the
financial information that we would wish you to give us if our
positions were reversed.

"Look-Through" Earnings

We've previously discussed look-through earnings, which we
believe more accurately portray the earnings of Berkshire than does
our GAAP result. As we calculate them, look-through earnings
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. The "operating earnings" of which we speak here
exclude capital gains, special accounting items and major
restructuring charges.

Over time, our look-through earnings need to increase at about
15% annually if our intrinsic value is to grow at that rate. Last
year, I explained that we had to increase these earnings to about
$1.8 billion in the year 2000, were we to meet the 15% goal.
Because we issued additional shares in 1993, the amount needed has
risen to about $1.85 billion.

That is a tough goal, but one that we expect you to hold us
to. In the past, we've criticized the managerial practice of
shooting the arrow of performance and then painting the target,
centering it on whatever point the arrow happened to hit. We will
instead risk embarrassment by painting first and shooting later.

If we are to hit the bull's-eye, we will need markets that
allow the purchase of businesses and securities on sensible terms.
Right now, markets are difficult, but they can - and will - change
in unexpected ways and at unexpected times. In the meantime, we'll
try to resist the temptation to do something marginal simply
because we are long on cash. There's no use running if you're on
the wrong road.

The following table shows 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)
--------------------------- ----------------------- --------------------

1993 1992 1993 1992
------ ------ ------ ------
Capital Cities/ABC, Inc. ..... 13.0% 18.2% $ 83(2) $ 70
The Coca-Cola Company ........ 7.2% 7.1% 94 82
Federal Home Loan Mortgage Corp. 6.8%(1) 8.2%(1) 41(2) 29(2)
GEICO Corp. .................. 48.4% 48.1% 76(3) 34(3)
General Dynamics Corp. ....... 13.9% 14.1% 25 11(2)
The Gillette Company ......... 10.9% 10.9% 44 38
Guinness PLC ................. 1.9% 2.0% 8 7
The Washington Post Company .. 14.8% 14.6% 15 11
Wells Fargo & Company ........ 12.2% 11.5% 53(2) 16(2)

Berkshire's share of undistributed
earnings of major investees $439 $298
Hypothetical tax on these undistributed
investee earnings(4) (61) (42)
Reported operating earnings of Berkshire 478 348
Total look-through earnings of Berkshire $856 $604

(1) Does not include shares allocable to the minority interest
at Wesco
(2) Calculated on average ownership for the year
(3) Excludes realized capital gains, which have been both
recurring and significant
(4) The tax rate used is 14%, which is the rate Berkshire pays
on the dividends it receives

We have told you that we expect the undistributed,
hypothetically-taxed earnings of our investees to produce at least
equivalent gains in Berkshire's intrinsic value. To date, we have
far exceeded that expectation. For example, in 1986 we bought
three million shares of Capital Cities/ABC for $172.50 per share
and late last year sold one-third of that holding for $630 per
share. After paying 35% capital gains taxes, we realized a $297
million profit from the sale. In contrast, during the eight years
we held these shares, the retained earnings of Cap Cities
attributable to them - hypothetically taxed at a lower 14% in
accordance with our look-through method - were only $152 million.
In other words, we paid a much larger tax bill than our look-
through presentations to you have assumed and nonetheless realized
a gain that far exceeded the undistributed earnings allocable to
these shares.

We expect such pleasant outcomes to recur often in the future
and therefore believe our look-through earnings to be a
conservative representation of Berkshire's true economic earnings.

Taxes

As our Cap Cities sale emphasizes, Berkshire is a substantial
payer of federal income taxes. In aggregate, we will pay 1993
federal income taxes of $390 million, about $200 million of that
attributable to operating earnings and $190 million to realized
capital gains. Furthermore, our share of the 1993 federal and
foreign income taxes paid by our investees is well over $400
million, a figure you don't see on our financial statements but
that is nonetheless real. Directly and indirectly, Berkshire's
1993 federal income tax payments will be about 1/2 of 1% of the total
paid last year by all American corporations.

Speaking for our own shares, Charlie and I have absolutely no
complaint about these taxes. We know we work in a market-based
economy that rewards our efforts far more bountifully than it does
the efforts of others whose output is of equal or greater benefit
to society. Taxation should, and does, partially redress this
inequity. But we still remain extraordinarily well-treated.

Berkshire and its shareholders, in combination, would pay a
much smaller tax if Berkshire operated as a partnership or "S"
corporation, two structures often used for business activities.
For a variety of reasons, that's not feasible for Berkshire to do.
However, the penalty our corporate form imposes is mitigated -
though far from eliminated - by our strategy of investing for the
long term. Charlie and I would follow a buy-and-hold policy even
if we ran a tax-exempt institution. We think it the soundest way
to invest, and it also goes down the grain of our personalities. A
third reason to favor this policy, however, is the fact that taxes
are due only when gains are realized.

Through my favorite comic strip, Li'l Abner, I got a chance
during my youth to see the benefits of delayed taxes, though I
missed the lesson at the time. Making his readers feel superior,
Li'l Abner bungled happily, but moronically, through life in
Dogpatch. At one point he became infatuated with a New York
temptress, Appassionatta Van Climax, but despaired of marrying her
because he had only a single silver dollar and she was interested
solely in millionaires. Dejected, Abner took his problem to Old
Man Mose, the font of all knowledge in Dogpatch. Said the sage:
Double your money 20 times and Appassionatta will be yours (1, 2,
4, 8 . . . . 1,048,576).

My last memory of the strip is Abner entering a roadhouse,
dropping his dollar into a slot machine, and hitting a jackpot that
spilled money all over the floor. Meticulously following Mose's
advice, Abner picked up two dollars and went off to find his next
double. Whereupon I dumped Abner and began reading Ben Graham.

Mose clearly was overrated as a guru: Besides failing to
anticipate Abner's slavish obedience to instructions, he also
forgot about taxes. Had Abner been subject, say, to the 35%
federal tax rate that Berkshire pays, and had he managed one double
annually, he would after 20 years only have accumulated $22,370.
Indeed, had he kept on both getting his annual doubles and paying a
35% tax on each, he would have needed 7 1/2 years more to reach the
$1 million required to win Appassionatta.

But what if Abner had instead put his dollar in a single
investment and held it until it doubled the same 27 1/2 times? In
that case, he would have realized about $200 million pre-tax or,
after paying a $70 million tax in the final year, about $130
million after-tax. For that, Appassionatta would have crawled to
Dogpatch. Of course, with 27 1/2 years having passed, how
Appassionatta would have looked to a fellow sitting on $130 million
is another question.

What this little tale tells us is that tax-paying investors
will realize a far, far greater sum from a single investment that
compounds internally at a given rate than from a succession of
investments compounding at the same rate. But I suspect many
Berkshire shareholders figured that out long ago.

Insurance Operations

At this point in the report we've customarily provided you
with a table showing the annual "combined ratio" of the insurance
industry for the preceding decade. This ratio compares total
insurance costs (losses incurred plus expenses) to revenue from
premiums. For many years, the ratio has been above 100, a level
indicating an underwriting loss. That is, the industry has taken
in less money each year from its policyholders than it has had to
pay for operating expenses and for loss events that occurred during
the year.

Offsetting this grim equation is a happier fact: Insurers get
to hold on to their policyholders' money for a time before paying
it out. This happens because most policies require that premiums
be prepaid and, more importantly, because it often takes time to
resolve loss claims. Indeed, in the case of certain lines of
insurance, such as product liability or professional malpractice,
many years may elapse between the loss event and payment.

To oversimplify the matter somewhat, the total of the funds
prepaid by policyholders and the funds earmarked for incurred-but-
not-yet-paid claims is called "the float." In the past, the
industry was able to suffer a combined ratio of 107 to 111 and
still break even from its insurance writings because of the
earnings derived from investing this float.

As interest rates have fallen, however, the value of float has
substantially declined. Therefore, the data that we have provided
in the past are no longer useful for year-to-year comparisons of
industry profitability. A company writing at the same combined
ratio now as in the 1980's today has a far less attractive business
than it did then.

Only by making an analysis that incorporates both underwriting
results and the current risk-free earnings obtainable from float
can one evaluate the true economics of the business that a
property-casualty insurer writes. Of course, the actual investment
results that an insurer achieves from the use of both float and
stockholders' funds is also of major importance and should be
carefully examined when an investor is assessing managerial
performance. But that should be a separate analysis from the one
we are discussing here. The value of float funds - in effect,
their transfer price as they move from the insurance operation to
the investment operation - should be determined simply by the risk-
free, long-term rate of interest.

On the next page we show the numbers that count in an
evaluation of Berkshire's insurance business. We calculate our
float - which we generate in exceptional amounts relative to our
premium volume - by adding loss reserves, loss adjustment reserves
and unearned premium reserves and then subtracting agent's
balances, prepaid acquisition costs and deferred charges applicable
to assumed reinsurance. Our cost of float is determined by our
underwriting loss or profit. In those years when we have had an
underwriting profit, which includes 1993, our cost of float has
been negative, and we have determined our insurance earnings by
adding underwriting profit to float income.

(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%
1993 profit 2,624.7 less than zero 6.35%

As you can see, in our insurance operation last year we had
the use of $2.6 billion at no cost; in fact we were paid $31
million, our underwriting profit, to hold these funds. This sounds
good - is good - but is far from as good as it sounds.

We temper our enthusiasm because we write a large volume of
"super-cat" policies (which other insurance and reinsurance
companies buy to recover part of the losses they suffer from mega-
catastrophes) and because last year we had no losses of consequence
from this activity. As that suggests, the truly catastrophic
Midwestern floods of 1993 did not trigger super-cat losses, the
reason being that very few flood policies are purchased from
private insurers.

It would be fallacious, however, to conclude from this single-
year result that the super-cat business is a wonderful one, or even
a satisfactory one. A simple example will illustrate the fallacy:
Suppose there is an event that occurs 25 times in every century.
If you annually give 5-for-1 odds against its occurrence that year,
you will have many more winning years than losers. Indeed, you may
go a straight six, seven or more years without loss. You also will
eventually go broke.

At Berkshire, we naturally believe we are obtaining adequate
premiums and giving more like 3 1/2-for-1 odds. But there is no way
for us - or anyone else - to calculate the true odds on super-cat
coverages. In fact, it will take decades for us to find out
whether our underwriting judgment has been sound.

What we do know is that when a loss comes, it's likely to be a
lulu. There may well be years when Berkshire will suffer losses
from the super-cat business equal to three or four times what we
earned from it in 1993. When Hurricane Andrew blew in 1992, we
paid out about $125 million. Because we've since expanded our
super-cat business, a similar storm today could cost us $600
million.

So far, we have been lucky in 1994. As I write this letter,
we are estimating that our losses from the Los Angeles earthquake
will be nominal. But if the quake had been a 7.5 instead of a 6.8,
it would have been a different story.

Berkshire is ideally positioned to write super-cat policies.
In Ajit Jain, we have by far the best manager in this business.
Additionally, companies writing these policies need enormous
capital, and our net worth is ten to twenty times larger than that
of our main competitors. In most lines of insurance, huge
resources aren't that important: An insurer can diversify the
risks it writes and, if necessary, can lay off risks to reduce
concentration in its portfolio. That isn't possible in the super-
cat business. So these competitors are forced into offering far
smaller limits than those we can provide. Were they bolder, they
would run the risk that a mega-catastrophe - or a confluence of
smaller catastrophes - would wipe them out.

One indication of our premier strength and reputation is that
each of the four largest reinsurance companies in the world buys
very significant reinsurance coverage from Berkshire. Better than
anyone else, these giants understand that the test of a reinsurer
is its ability and willingness to pay losses under trying
circumstances, not its readiness to accept premiums when things
look rosy.

One caution: There has recently been a substantial increase
in reinsurance capacity. Close to $5 billion of equity capital has
been raised by reinsurers, almost all of them newly-formed
entities. Naturally these new entrants are hungry to write
business so that they can justify the projections they utilized in
attracting capital. This new competition won't affect our 1994
operations; we're filled up there, primarily with business written
in 1993. But we are now seeing signs of price deterioration. If
this trend continues, we will resign ourselves to much-reduced
volume, keeping ourselves available, though, for the large,
sophisticated buyer who requires a super-cat insurer with large
capacity and a sure ability to pay losses.

In other areas of our insurance business, our homestate
operation, led by Rod Eldred; our workers' compensation business,
headed by Brad Kinstler; our credit-card operation, managed by the
Kizer family; and National Indemnity's traditional auto and general
liability business, led by Don Wurster, all achieved excellent
results. In combination, these four units produced a significant
underwriting profit and substantial float.

All in all, we have a first-class insurance business. Though
its results will be highly volatile, this operation possesses an
intrinsic value that exceeds its book value by a large amount -
larger, in fact, than is the case at any other Berkshire business.

Common Stock Investments

Below we list our common stockholdings having a value of over
$250 million. A small portion of these investments belongs to
subsidiaries of which Berkshire owns less than 100%.

12/31/93
Shares Company Cost Market
------ ------- ---------- ----------
(000s omitted)
2,000,000 Capital Cities/ABC, Inc. ............. $ 345,000 $1,239,000
93,400,000 The Coca-Cola Company. ............... 1,023,920 4,167,975
13,654,600 Federal Home Loan Mortgage Corp.
("Freddie Mac") ................... 307,505 681,023
34,250,000 GEICO Corp. .......................... 45,713 1,759,594
4,350,000 General Dynamics Corp. ............... 94,938 401,287
24,000,000 The Gillette Company ................. 600,000 1,431,000
38,335,000 Guinness PLC ......................... 333,019 270,822
1,727,765 The Washington Post Company. ......... 9,731 440,148
6,791,218 Wells Fargo & Company ................ 423,680 878,614

Considering the similarity of this year's list and the last,
you may decide your management is hopelessly comatose. But we
continue to think that it is usually foolish to part with an
interest in a business that is both understandable and durably
wonderful. Business interests of that kind are simply too hard to
replace.

Interestingly, corporate managers have no trouble
understanding that point when they are focusing on a business they
operate: A parent company that owns a subsidiary with superb long-
term economics is not likely to sell that entity regardless of
price. "Why," the CEO would ask, "should I part with my crown
jewel?" Yet that same CEO, when it comes to running his personal
investment portfolio, will offhandedly - and even impetuously -
move from business to business when presented with no more than
superficial arguments by his broker for doing so. The worst of
these is perhaps, "You can't go broke taking a profit." Can you
imagine a CEO using this line to urge his board to sell a star
subsidiary? In our view, what makes sense in business also makes
sense in stocks: An investor should ordinarily hold a small piece
of an outstanding business with the same tenacity that an owner
would exhibit if he owned all of that business.

Earlier I mentioned the financial results that could have been
achieved by investing $40 in The Coca-Cola Co. in 1919. In 1938,
more than 50 years after the introduction of Coke, and long after
the drink was firmly established as an American icon, Fortune did
an excellent story on the company. In the second paragraph the
writer reported: "Several times every year a weighty and serious
investor looks long and with profound respect at Coca-Cola's
record, but comes regretfully to the conclusion that he is looking
too late. The specters of saturation and competition rise before
him."

Yes, competition there was in 1938 and in 1993 as well. But
it's worth noting that in 1938 The Coca-Cola Co. sold 207 million
cases of soft drinks (if its gallonage then is converted into the
192-ounce cases used for measurement today) and in 1993 it sold
about 10.7 billion cases, a 50-fold increase in physical volume
from a company that in 1938 was already dominant in its very major
industry. Nor was the party over in 1938 for an investor: Though
the $40 invested in 1919 in one share had (with dividends
reinvested) turned into $3,277 by the end of 1938, a fresh $40 then
invested in Coca-Cola stock would have grown to $25,000 by yearend
1993.

I can't resist one more quote from that 1938 Fortune story:
"It would be hard to name any company comparable in size to Coca-
Cola and selling, as Coca-Cola does, an unchanged product that can
point to a ten-year record anything like Coca-Cola's." In the 55
years that have since passed, Coke's product line has broadened
somewhat, but it's remarkable how well that description still fits.

Charlie and I decided long ago that in an investment lifetime
it's just too hard to make hundreds of smart decisions. That
judgment became ever more compelling as Berkshire's capital
mushroomed and the universe of investments that could significantly
affect our results shrank dramatically. Therefore, we adopted a
strategy that required our being smart - and not too smart at that
- only a very few times. Indeed, we'll now settle for one good
idea a year. (Charlie says it's my turn.)

The strategy we've adopted precludes our following standard
diversification dogma. Many pundits would therefore say the
strategy must be riskier than that employed by more conventional
investors. We disagree. We believe that a policy of portfolio
concentration may well decrease risk if it raises, as it should,
both the intensity with which an investor thinks about a business
and the comfort-level he must feel with its economic characteristics
before buying into it. In stating this opinion, we define risk,
using dictionary terms, as "the possibility of loss or injury."

Academics, however, like to define investment "risk"
differently, averring that it is the relative volatility of a stock
or portfolio of stocks - that is, their volatility as compared to
that of a large universe of stocks. Employing data bases and
statistical skills, these academics compute with precision the
"beta" of a stock - its relative volatility in the past - and then
build arcane investment and capital-allocation theories around this
calculation. In their hunger for a single statistic to measure
risk, however, they forget a fundamental principle: It is better
to be approximately right than precisely wrong.

For owners of a business - and that's the way we think of
shareholders - the academics' definition of risk is far off the
mark, so much so that it produces absurdities. For example, under
beta-based theory, a stock that has dropped very sharply compared
to the market - as had Washington Post when we bought it in 1973 -
becomes "riskier" at the lower price than it was at the higher
price. Would that description have then made any sense to someone
who was offered the entire company at a vastly-reduced price?

In fact, the true investor welcomes volatility. Ben Graham
explained why in Chapter 8 of The Intelligent Investor. There he
introduced "Mr. Market," an obliging fellow who shows up every day
to either buy from you or sell to you, whichever you wish. The
more manic-depressive this chap is, the greater the opportunities
available to the investor. That's true because a wildly
fluctuating market means that irrationally low prices will
periodically be attached to solid businesses. It is impossible to
see how the availability of such prices can be thought of as
increasing the hazards for an investor who is totally free to
either ignore the market or exploit its folly.

In assessing risk, a beta purist will disdain examining what a
company produces, what its competitors are doing, or how much
borrowed money the business employs. He may even prefer not to
know the company's name. What he treasures is the price history of
its stock. In contrast, we'll happily forgo knowing the price
history and instead will seek whatever information will further our
understanding of the company's business. After we buy a stock,
consequently, we would not be disturbed if markets closed for a
year or two. We don't need a daily quote on our 100% position in
See's or H. H. Brown to validate our well-being. Why, then, should
we need a quote on our 7% interest in Coke?

In our opinion, the real risk that an investor must assess is
whether his aggregate after-tax receipts from an investment
(including those he receives on sale) will, over his prospective
holding period, give him at least as much purchasing power as he
had to begin with, plus a modest rate of interest on that initial
stake. Though this risk cannot be calculated with engineering
precision, it can in some cases be judged with a degree of accuracy
that is useful. The primary factors bearing upon this evaluation
are:

1) The certainty with which the long-term economic
characteristics of the business can be evaluated;

2) The certainty with which management can be evaluated,
both as to its ability to realize the full potential of
the business and to wisely employ its cash flows;

3) The certainty with which management can be counted on
to channel the rewards from the business to the
shareholders rather than to itself;

4) The purchase price of the business;

5) The levels of taxation and inflation that will be
experienced and that will determine the degree by which
an investor's purchasing-power return is reduced from his
gross return.

These factors will probably strike many analysts as unbearably
fuzzy, since they cannot be extracted from a data base of any kind.
But the difficulty of precisely quantifying these matters does not
negate their importance nor is it insuperable. Just as Justice
Stewart found it impossible to formulate a test for obscenity but
nevertheless asserted, "I know it when I see it," so also can
investors - in an inexact but useful way - "see" the risks inherent
in certain investments without reference to complex equations or
price histories.

Is it really so difficult to conclude that Coca-Cola and
Gillette possess far less business risk over the long term than,
say, any computer company or retailer? Worldwide, Coke sells about
44% of all soft drinks, and Gillette has more than a 60% share (in
value) of the blade market. Leaving aside chewing gum, in which
Wrigley is dominant, I know of no other significant businesses in
which the leading company has long enjoyed such global power.

Moreover, both Coke and Gillette have actually increased their
worldwide shares of market in recent years. The might of their
brand names, the attributes of their products, and the strength of
their distribution systems give them an enormous competitive
advantage, setting up a protective moat around their economic
castles. The average company, in contrast, does battle daily
without any such means of protection. As Peter Lynch says, stocks
of companies selling commodity-like products should come with a
warning label: "Competition may prove hazardous to human wealth."

The competitive strengths of a Coke or Gillette are obvious to
even the casual observer of business. Yet the beta of their stocks
is similar to that of a great many run-of-the-mill companies who
possess little or no competitive advantage. Should we conclude
from this similarity that the competitive strength of Coke and
Gillette gains them nothing when business risk is being measured?
Or should we conclude that the risk in owning a piece of a company
- its stock - is somehow divorced from the long-term risk inherent
in its business operations? We believe neither conclusion makes
sense and that equating beta with investment risk also makes no
sense.

The theoretician bred on beta has no mechanism for
differentiating the risk inherent in, say, a single-product toy
company selling pet rocks or hula hoops from that of another toy
company whose sole product is Monopoly or Barbie. But it's quite
possible for ordinary investors to make such distinctions if they
have a reasonable understanding of consumer behavior and the
factors that create long-term competitive strength or weakness.
Obviously, every investor will make mistakes. But by confining
himself to a relatively few, easy-to-understand cases, a reasonably
intelligent, informed and diligent person can judge investment
risks with a useful degree of accuracy.

In many industries, of course, Charlie and I can't determine
whether we are dealing with a "pet rock" or a "Barbie." We
couldn't solve this problem, moreover, even if we were to spend
years intensely studying those industries. Sometimes our own
intellectual shortcomings would stand in the way of understanding,
and in other cases the nature of the industry would be the
roadblock. For example, a business that must deal with fast-moving
technology is not going to lend itself to reliable evaluations of
its long-term economics. Did we foresee thirty years ago what
would transpire in the television-manufacturing or computer
industries? Of course not. (Nor did most of the investors and
corporate managers who enthusiastically entered those industries.)
Why, then, should Charlie and I now think we can predict the
future of other rapidly-evolving businesses? We'll stick instead
with the easy cases. Why search for a needle buried in a haystack
when one is sitting in plain sight?

Of course, some investment strategies - for instance, our
efforts in arbitrage over the years - require wide diversification.
If significant risk exists in a single transaction, overall risk
should be reduced by making that purchase one of many mutually-
independent commitments. Thus, you may consciously purchase a
risky investment - one that indeed has a significant possibility of
causing loss or injury - if you believe that your gain, weighted
for probabilities, considerably exceeds your loss, comparably
weighted, and if you can commit to a number of similar, but
unrelated opportunities. Most venture capitalists employ this
strategy. Should you choose to pursue this course, you should
adopt the outlook of the casino that owns a roulette wheel, which
will want to see lots of action because it is favored by
probabilities, but will refuse to accept a single, huge bet.

Another situation requiring wide diversification occurs when
an investor who does not understand the economics of specific
businesses nevertheless believes it in his interest to be a long-
term owner of American industry. That investor should both own a
large number of equities and space out his purchases. By
periodically investing in an index fund, for example, the know-
nothing investor can actually out-perform most investment
professionals. Paradoxically, when "dumb" money acknowledges its
limitations, it ceases to be dumb.

On the other hand, if you are a know-something investor, able
to understand business economics and to find five to ten sensibly-
priced companies that possess important long-term competitive
advantages, conventional diversification makes no sense for you.
It is apt simply to hurt your results and increase your risk. I
cannot understand why an investor of that sort elects to put money
into a business that is his 20th favorite rather than simply adding
that money to his top choices - the businesses he understands best
and that present the least risk, along with the greatest profit
potential. In the words of the prophet Mae West: "Too much of a
good thing can be wonderful."

Corporate Governance

At our annual meetings, someone usually asks "What happens to
this place if you get hit by a truck?" I'm glad they are still
asking the question in this form. It won't be too long before the
query becomes: "What happens to this place if you don't get hit by
a truck?"

Such questions, in any event, raise a reason for me to discuss
corporate governance, a hot topic during the past year. In
general, I believe that directors have stiffened their spines
recently and that shareholders are now being treated somewhat more
like true owners than was the case not long ago. Commentators on
corporate governance, however, seldom make any distinction among
three fundamentally different manager/owner situations that exist
in publicly-held companies. Though the legal responsibility of
directors is identical throughout, their ability to effect change
differs in each of the cases. Attention usually falls on the first
case, because it prevails on the corporate scene. Since Berkshire
falls into the second category, however, and will someday fall into
the third, we will discuss all three variations.

The first, and by far most common, board situation is one in
which a corporation has no controlling shareholder. In that case,
I believe directors should behave as if there is a single absentee
owner, whose long-term interest they should try to further in all
proper ways. Unfortunately, "long-term" gives directors a lot of
wiggle room. If they lack either integrity or the ability to think
independently, directors can do great violence to shareholders
while still claiming to be acting in their long-term interest. But
assume the board is functioning well and must deal with a
management that is mediocre or worse. Directors then have the
responsibility for changing that management, just as an intelligent
owner would do if he were present. And if able but greedy managers
over-reach and try to dip too deeply into the shareholders'
pockets, directors must slap their hands.

In this plain-vanilla case, a director who sees something he
doesn't like should attempt to persuade the other directors of his
views. If he is successful, the board will have the muscle to make
the appropriate change. Suppose, though, that the unhappy director
can't get other directors to agree with him. He should then feel
free to make his views known to the absentee owners. Directors
seldom do that, of course. The temperament of many directors would
in fact be incompatible with critical behavior of that sort. But I
see nothing improper in such actions, assuming the issues are
serious. Naturally, the complaining director can expect a vigorous
rebuttal from the unpersuaded directors, a prospect that should
discourage the dissenter from pursuing trivial or non-rational
causes.

For the boards just discussed, I believe the directors ought
to be relatively few in number - say, ten or less - and ought to
come mostly from the outside. The outside board members should
establish standards for the CEO's performance and should also
periodically meet, without his being present, to evaluate his
performance against those standards.

The requisites for board membership should be business savvy,
interest in the job, and owner-orientation. Too often, directors
are selected simply because they are prominent or add diversity to
the board. That practice is a mistake. Furthermore, mistakes in
selecting directors are particularly serious because appointments
are so hard to undo: The pleasant but vacuous director need never
worry about job security.

The second case is that existing at Berkshire, where the
controlling owner is also the manager. At some companies, this
arrangement is facilitated by the existence of two classes of stock
endowed with disproportionate voting power. In these situations,
it's obvious that the board does not act as an agent between owners
and management and that the directors cannot effect change except
through persuasion. Therefore, if the owner/manager is mediocre or
worse - or is over-reaching - there is little a director can do
about it except object. If the directors having no connections to
the owner/manager make a unified argument, it may well have some
effect. More likely it will not.

If change does not come, and the matter is sufficiently
serious, the outside directors should resign. Their resignation
will signal their doubts about management, and it will emphasize
that no outsider is in a position to correct the owner/manager's
shortcomings.

The third governance case occurs when there is a controlling
owner who is not involved in management. This case, examples of
which are Hershey Foods and Dow Jones, puts the outside directors
in a potentially useful position. If they become unhappy with
either the competence or integrity of the manager, they can go
directly to the owner (who may also be on the board) and report
their dissatisfaction. This situation is ideal for an outside
director, since he need make his case only to a single, presumably
interested owner, who can forthwith effect change if the argument
is persuasive. Even so, the dissatisfied director has only that
single course of action. If he remains unsatisfied about a
critical matter, he has no choice but to resign.

Logically, the third case should be the most effective in
insuring first-class management. In the second case the owner is
not going to fire himself, and in the first case, directors often
find it very difficult to deal with mediocrity or mild over-
reaching. Unless the unhappy directors can win over a majority of
the board - an awkward social and logistical task, particularly if
management's behavior is merely odious, not egregious - their hands
are effectively tied. In practice, directors trapped in situations
of this kind usually convince themselves that by staying around
they can do at least some good. Meanwhile, management proceeds
unfettered.

In the third case, the owner is neither judging himself nor
burdened with the problem of garnering a majority. He can also
insure that outside directors are selected who will bring useful
qualities to the board. These directors, in turn, will know that
the good advice they give will reach the right ears, rather than
being stifled by a recalcitrant management. If the controlling
owner is intelligent and self-confident, he will make decisions in
respect to management that are meritocratic and pro-shareholder.
Moreover - and this is critically important - he can readily
correct any mistake he makes.

At Berkshire we operate in the second mode now and will for as
long as I remain functional. My health, let me add, is excellent.
For better or worse, you are likely to have me as an owner/manager
for some time.

After my death, all of my stock will go to my wife, Susie,
should she survive me, or to a foundation if she dies before I do.
In neither case will taxes and bequests require the sale of
consequential amounts of stock.

When my stock is transferred to either my wife or the
foundation, Berkshire will enter the third governance mode, going
forward with a vitally interested, but non-management, owner and
with a management that must perform for that owner. In preparation
for that time, Susie was elected to the board a few years ago, and
in 1993 our son, Howard, joined the board. These family members
will not be managers of the company in the future, but they will
represent the controlling interest should anything happen to me.
Most of our other directors are also significant owners of
Berkshire stock, and each has a strong owner-orientation. All in
all, we're prepared for "the truck."

Shareholder-Designated Contributions

About 97% of all eligible shares participated in Berkshire's
1993 shareholder-designated contributions program. Contributions
made through the program were $9.4 million and 3,110 charities were
recipients.

Berkshire's practice in respect to discretionary philanthropy
- as contrasted to its policies regarding contributions that are
clearly related to the company's business activities - differs
significantly from that of other publicly-held corporations.
There, most corporate contributions are made pursuant to the wishes
of the CEO (who often will be responding to social pressures),
employees (through matching gifts), or directors (through matching
gifts or requests they make of the CEO).

At Berkshire, we believe that the company's money is the
owners' money, just as it would be in a closely-held corporation,
partnership, or sole proprietorship. Therefore, if funds are to be
given to causes unrelated to Berkshire's business activities, it is
the charities favored by our owners that should receive them.
We've yet to find a CEO who believes he should personally fund the
charities favored by his shareholders. Why, then, should they foot
the bill for his picks?

Let me add that our program is easy to administer. Last fall,
for two months, we borrowed one person from National Indemnity to
help us implement the instructions that came from our 7,500
registered shareholders. I'd guess that the average corporate
program in which employee gifts are matched incurs far greater
administrative costs. Indeed, our entire corporate overhead is
less than half the size of our charitable contributions. (Charlie,
however, insists that I tell you that $1.4 million of our $4.9 million overhead is
attributable to our corporate jet, The Indefensible.)

Below is a list showing the largest categories to which our
shareholders have steered their contributions.

(a) 347 churches and synagogues received 569 gifts
(b) 283 colleges and universities received 670 gifts
(c) 244 K-12 schools (about two-thirds secular, one-
third religious) received 525 gifts
(d) 288 institutions dedicated to art, culture or the
humanities received 447 gifts
(e) 180 religious social-service organizations (split
about equally between Christian and Jewish) received
411 gifts
(f) 445 secular social-service organizations (about 40%
youth-related) received 759 gifts
(g) 153 hospitals received 261 gifts
(h) 186 health-related organizations (American Heart
Association, American Cancer Society, etc.) received
320 gifts

Three things about this list seem particularly interesting to
me. First, to some degree it indicates what people choose to give
money to when they are acting of their own accord, free of pressure
from solicitors or emotional appeals from charities. Second, the
contributions programs of publicly-held companies almost never
allow gifts to churches and synagogues, yet clearly these
institutions are what many shareholders would like to support.
Third, the gifts made by our shareholders display conflicting
philosophies: 130 gifts were directed to organizations that
believe in making abortions readily available for women and 30
gifts were directed to organizations (other than churches) that
discourage or are opposed to abortion.

Last year I told you that I was thinking of raising the amount
that Berkshire shareholders can give under our designated-
contributions program and asked for your comments. We received a
few well-written letters opposing the entire idea, on the grounds
that it was our job to run the business and not our job to force
shareholders into making charitable gifts. Most of the
shareholders responding, however, noted the tax efficiency of the
plan and urged us to increase the designated amount. Several
shareholders who have given stock to their children or
grandchildren told me that they consider the program a particularly
good way to get youngsters thinking at an early age about the
subject of giving. These people, in other words, perceive the
program to be an educational, as well as philanthropic, tool. The
bottom line is that we did raise the amount in 1993, from $8 per
share to $10.

In addition to the shareholder-designated contributions that
Berkshire distributes, our operating businesses make contributions,
including merchandise, averaging about $2.5 million annually.
These contributions support local charities, such as The United
Way, and produce roughly commensurate benefits for our businesses.

We suggest that new shareholders read the description of our
shareholder-designated contributions program that appears on pages
50-51. 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, 1994 will be ineligible for the 1994
program.

A Few Personal Items

Mrs. B - Rose Blumkin - had her 100th birthday on December 3,
1993. (The candles cost more than the cake.) That was a day on
which the store was scheduled to be open in the evening. Mrs. B,
who works seven days a week, for however many hours the store
operates, found the proper decision quite obvious: She simply
postponed her party until an evening when the store was closed.

Mrs. B's story is well-known but worth telling again. She
came to the United States 77 years ago, unable to speak English and
devoid of formal schooling. In 1937, she founded the Nebraska
Furniture Mart with $500. Last year the store had sales of $200
million, a larger amount by far than that recorded by any other
home furnishings store in the United States. Our part in all of
this began ten years ago when Mrs. B sold control of the business
to Berkshire Hathaway, a deal we completed without obtaining
audited financial statements, checking real estate records, or
getting any warranties. In short, her word was good enough for us.

Naturally, I was delighted to attend Mrs. B's birthday party.
After all, she's promised to attend my 100th.

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

Katharine Graham retired last year as the chairman of The
Washington Post Company, having relinquished the CEO title three
years ago. In 1973, we purchased our stock in her company for
about $10 million. Our holding now garners $7 million a year in
dividends and is worth over $400 million. At the time of our
purchase, we knew that the economic prospects of the company were
good. But equally important, Charlie and I concluded that Kay
would prove to be an outstanding manager and would treat all
shareholders honorably. That latter consideration was particularly
important because The Washington Post Company has two classes of
stock, a structure that we've seen some managers abuse.

All of our judgments about this investment have been validated
by events. Kay's skills as a manager were underscored this past
year when she was elected by Fortune's Board of Editors to the
Business Hall of Fame. On behalf of our shareholders, Charlie and
I had long ago put her in Berkshire's Hall of Fame.

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

Another of last year's retirees was Don Keough of Coca-Cola,
although, as he puts it, his retirement lasted "about 14 hours."
Don is one of the most extraordinary human beings I've ever known -
a man of enormous business talent, but, even more important, a man
who brings out the absolute best in everyone lucky enough to
associate with him. Coca-Cola wants its product to be present at
the happy times of a person's life. Don Keough, as an individual,
invariably increases the happiness of those around him. It's
impossible to think about Don without feeling good.

I will edge up to how I met Don by slipping in a plug for my
neighborhood in Omaha: Though Charlie has lived in California for
45 years, his home as a boy was about 200 feet away from the house
where I now live; my wife, Susie, grew up 1 1/2 blocks away; and we
have about 125 Berkshire shareholders in the zip code. As for Don,
in 1958 he bought the house directly across the street from mine.
He was then a coffee salesman with a big family and a small income.

The impressions I formed in those days about Don were a factor
in my decision to have Berkshire make a record $1 billion
investment in Coca-Cola in 1988-89. Roberto Goizueta had become
CEO of Coke in 1981, with Don alongside as his partner. The two of
them took hold of a company that had stagnated during the previous
decade and moved it from $4.4 billion of market value to $58
billion in less than 13 years. What a difference a pair of
managers like this makes, even when their product has been around
for 100 years.

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

Frank Rooney did double duty last year. In addition to
leading H. H. Brown to record profits - 35% above the 1992 high -
he also was key to our merger with Dexter.

Frank has known Harold Alfond and Peter Lunder for decades,
and shortly after our purchase of H. H. Brown, told me what a
wonderful operation they managed. He encouraged us to get together
and in due course we made a deal. Frank told Harold and Peter that
Berkshire would provide an ideal corporate "home" for Dexter, and
that assurance undoubtedly contributed to their decision to join
with us.

I've told you in the past of Frank's extraordinary record in
building Melville Corp. during his 23 year tenure as CEO. Now, at
72, he's setting an even faster pace at Berkshire. Frank has a
low-key, relaxed style, but don't let that fool you. When he
swings, the ball disappears far over the fence.

The Annual Meeting

This year the Annual Meeting will be held at the Orpheum
Theater in downtown Omaha at 9:30 a.m. on Monday, April 25, 1994.
A record 2,200 people turned up for the meeting last year, but the
theater can handle many more. We will have a display in the lobby
featuring many of our consumer products - candy, spray guns, shoes,
cutlery, encyclopedias, and the like. Among my favorites slated to
be there is a See's candy assortment that commemorates Mrs. B's
100th birthday and that features her picture, rather than Mrs.
See's, on the package.

We recommend that you promptly get hotel reservations 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, which is 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.

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. 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. Borsheim's normally is closed on Sunday but will be open
for shareholders and their guests from noon to 6 p.m. on Sunday,
April 24.

In past trips to Borsheim's, many of you have met Susan
Jacques. Early in 1994, Susan was made President and CEO of the
company, having risen in 11 years from a $4-an-hour job that she
took at the store when she was 23. Susan will be joined at
Borsheim's on Sunday by many of the managers of our other
businesses, and Charlie and I will be there as well.

On the previous evening, Saturday, April 23, there will be a
baseball game at Rosenblatt Stadium between the Omaha Royals and
the Nashville Sounds (which could turn out to be Michael Jordan's
team). As you may know, a few years ago I bought 25% of the Royals
(a capital-allocation decision for which I will not become famous)
and this year the league has cooperatively scheduled a home stand
at Annual Meeting time.

I will throw the first pitch on the 23rd, and it's a certainty
that I will improve on last year's humiliating performance. On
that occasion, the catcher inexplicably called for my "sinker" and
I dutifully delivered a pitch that barely missed my foot. This
year, I will go with my high hard one regardless of what the
catcher signals, so bring your speed-timing devices. The proxy
statement will include information about obtaining tickets to the
game. I regret to report that you won't have to buy them from
scalpers.

Warren E. Buffett
March 1, 1994 Chairman of the Board

To the Shareholders of Berkshire Hathaway Inc.:

Our gain in net worth during 1994 was $1.45 billion or 13.9%.
Over the last 30 years (that is, since present management took
over) our per-share book value has grown from $19 to $10,083, or
at a rate of 23% compounded annually.

Charlie Munger, Berkshire's Vice Chairman and my partner,
and I make few predictions. One we will confidently offer,
however, is that the future performance of Berkshire won't come
close to matching the performance of the past.

The problem is not that what has worked in the past will
cease to work in the future. To the contrary, we believe that
our formula - the purchase at sensible prices of businesses that
have good underlying economics and are run by honest and able
people - is certain to produce reasonable success. We expect,
therefore, to keep on doing well.

A fat wallet, however, is the enemy of superior investment
results. And Berkshire now has a net worth of $11.9 billion
compared to about $22 million when Charlie and I began to manage
the company. Though there are as many good businesses as ever,
it is useless for us to make purchases that are inconsequential
in relation to Berkshire's capital. (As Charlie regularly
reminds me, "If something is not worth doing at all, it's not
worth doing well.") We now consider a security for purchase only
if we believe we can deploy at least $100 million in it. Given
that minimum, Berkshire's investment universe has shrunk
dramatically.

Nevertheless, we will stick with the approach that got us
here and try not to relax our standards. Ted Williams, in
The Story of My Life, explains why: "My argument is, to be
a good hitter, you've got to get a good ball to hit. It's the
first rule in the book. If I have to bite at stuff that is out
of my happy zone, I'm not a .344 hitter. I might only be a .250
hitter." Charlie and I agree and will try to wait for
opportunities that are well within our own "happy zone."

We will continue to ignore political and economic forecasts,
which are an expensive distraction for many investors and
businessmen. Thirty years ago, no one could have foreseen the
huge expansion of the Vietnam War, wage and price controls, two
oil shocks, the resignation of a president, the dissolution of
the Soviet Union, a one-day drop in the Dow of 508 points, or
treasury bill yields fluctuating between 2.8% and 17.4%.

But, surprise - none of these blockbuster events made the
slightest dent in Ben Graham's investment principles. Nor did
they render unsound the negotiated purchases of fine businesses
at sensible prices. Imagine the cost to us, then, if we had let
a fear of unknowns cause us to defer or alter the deployment of
capital. Indeed, we have usually made our best purchases when
apprehensions about some macro event were at a peak. Fear is the
foe of the faddist, but the friend of the fundamentalist.

A different set of major shocks is sure to occur in the next
30 years. We will neither try to predict these nor to profit
from them. If we can identify businesses similar to those we
have purchased in the past, external surprises will have little
effect on our long-term results.

What we promise you - along with more modest gains - is that
during your ownership of Berkshire, you will fare just as Charlie
and I do. If you suffer, we will suffer; if we prosper, so will
you. And we will not break this bond by introducing compensation
arrangements that give us a greater participation in the upside
than the downside.

We further promise you that our personal fortunes will
remain overwhelmingly concentrated in Berkshire shares: We will
not ask you to invest with us and then put our own money
elsewhere. In addition, Berkshire dominates both the investment
portfolios of most members of our families and of a great many
friends who belonged to partnerships that Charlie and I ran in
the 1960's. We could not be more motivated to do our best.

Luckily, we have a good base from which to work. Ten years
ago, in 1984, Berkshire's insurance companies held securities
having a value of $1.7 billion, or about $1,500 per Berkshire
share. Leaving aside all income and capital gains from those
securities, Berkshire's pre-tax earnings that year were only
about $6 million. We had earnings, yes, from our various
manufacturing, retailing and service businesses, but they were
almost entirely offset by the combination of underwriting losses
in our insurance business, corporate overhead and interest
expense.

Now we hold securities worth $18 billion, or over $15,000
per Berkshire share. If you again exclude all income from these
securities, our pre-tax earnings in 1994 were about $384 million.
During the decade, employment has grown from 5,000 to 22,000
(including eleven people at World Headquarters).

We achieved our gains through the efforts of a superb corps
of operating managers who get extraordinary results from some
ordinary-appearing businesses. Casey Stengel described managing
a baseball team as "getting paid for home runs other fellows
hit." That's my formula at Berkshire, also.

The businesses in which we have partial interests are
equally important to Berkshire's success. A few statistics will
illustrate their significance: In 1994, Coca-Cola sold about 280
billion 8-ounce servings and earned a little less than a penny on
each. But pennies add up. Through Berkshire's 7.8% ownership of
Coke, we have an economic interest in 21 billion of its servings,
which produce "soft-drink earnings" for us of nearly $200
million. Similarly, by way of its Gillette stock, Berkshire has
a 7% share of the world's razor and blade market (measured by
revenues, not by units), a proportion according us about $250
million of sales in 1994. And, at Wells Fargo, a $53 billion
bank, our 13% ownership translates into a $7 billion "Berkshire
Bank" that earned about $100 million during 1994.

It's far better to own a significant portion of the Hope
diamond than 100% of a rhinestone, and the companies just
mentioned easily qualify as rare gems. Best of all, we aren't
limited to simply a few of this breed, but instead possess a
growing collection.

Stock prices will continue to fluctuate - sometimes sharply
- and the economy will have its ups and down. Over time,
however, we believe it highly probable that the sort of
businesses we own will continue to increase in value at a
satisfactory rate.

Book Value and Intrinsic Value

We regularly report our per-share book value, an easily
calculable number, though one of limited use. Just as regularly,
we tell you that what counts is intrinsic value, a number that is
impossible to pinpoint but essential to estimate.

For example, in 1964, we could state with certitude that
Berkshire's per-share book value was $19.46. However, that
figure considerably overstated the stock's intrinsic value since
all of the company's resources were tied up in a sub-profitable
textile business. Our textile assets had neither going-concern
nor liquidation values equal to their carrying values. In 1964,
then, anyone inquiring into the soundness of Berkshire's balance
sheet might well have deserved the answer once offered up by a
Hollywood mogul of dubious reputation: "Don't worry, the
liabilities are solid."

Today, Berkshire's situation has reversed: Many of the
businesses we control are worth far more than their carrying
value. (Those we don't control, such as Coca-Cola or Gillette,
are carried at current market values.) We continue to give you
book value figures, however, because they serve as a rough,
albeit significantly understated, tracking measure for Berkshire's
intrinsic value. Last year, in fact, the two measures moved in
concert: Book value gained 13.9%, and that was the approximate
gain in intrinsic value also.

We define intrinsic value as the discounted value of the
cash that can be taken out of a business during its remaining
life. Anyone calculating intrinsic value necessarily comes up
with a highly subjective figure that will change both as
estimates of future cash flows are revised and as interest rates
move. Despite its fuzziness, however, intrinsic value is all-
important and is the only logical way to evaluate the relative
attractiveness of investments and businesses.

To see how historical input (book value) and future output
(intrinsic value) can diverge, let's look at another form of
investment, a college education. Think of the education's cost
as its "book value." If it is to be accurate, the cost should
include the earnings that were foregone by the student because he
chose college rather than a job.

For this exercise, we will ignore the important non-economic
benefits of an education and focus strictly on its economic
value. First, we must estimate the earnings that the graduate
will receive over his lifetime and subtract from that figure an
estimate of what he would have earned had he lacked his
education. That gives us an excess earnings figure, which must
then be discounted, at an appropriate interest rate, back to
graduation day. The dollar result equals the intrinsic economic
value of the education.

Some graduates will find that the book value of their
education exceeds its intrinsic value, which means that whoever
paid for the education didn't get his money's worth. In other
cases, the intrinsic value of an education will far exceed its
book value, a result that proves capital was wisely deployed. In
all cases, what is clear is that book value is meaningless as an
indicator of intrinsic value.

Now let's get less academic and look at Scott Fetzer, an
example from Berkshire's own experience. This account will not
only illustrate how the relationship of book value and intrinsic
value can change but also will provide an accounting lesson that
I know you have been breathlessly awaiting. Naturally, I've
chosen here to talk about an acquisition that has turned out to
be a huge winner.

Berkshire purchased Scott Fetzer at the beginning of 1986.
At the time, the company was a collection of 22 businesses, and
today we have exactly the same line-up - no additions and no
disposals. Scott Fetzer's main operations are World Book, Kirby,
and Campbell Hausfeld, but many other units are important
contributors to earnings as well.

We paid $315.2 million for Scott Fetzer, which at the time
had $172.6 million of book value. The $142.6 million premium we
handed over indicated our belief that the company's intrinsic
value was close to double its book value.

In the table below we trace the book value of Scott Fetzer,
as well as its earnings and dividends, since our purchase.

(1) (4)
Beginning (2) (3) Ending
Year Book Value Earnings Dividends Book Value
---- ---------- -------- --------- ----------
(In $ Millions) (1)+(2)-(3)

1986 ............... $172.6 $ 40.3 $125.0 $ 87.9
1987 ............... 87.9 48.6 41.0 95.5
1988 ............... 95.5 58.0 35.0 118.6
1989 ............... 118.6 58.5 71.5 105.5
1990 ............... 105.5 61.3 33.5 133.3
1991 ............... 133.3 61.4 74.0 120.7
1992 ............... 120.7 70.5 80.0 111.2
1993 ............... 111.2 77.5 98.0 90.7
1994 ............... 90.7 79.3 76.0 94.0

Because it had excess cash when our deal was made, Scott
Fetzer was able to pay Berkshire dividends of $125 million in
1986, though it earned only $40.3 million. I should mention that
we have not introduced leverage into Scott Fetzer's balance
sheet. In fact, the company has gone from very modest debt when
we purchased it to virtually no debt at all (except for debt used
by its finance subsidiary). Similarly, we have not sold plants
and leased them back, nor sold receivables, nor the like.
Throughout our years of ownership, Scott Fetzer has operated as a
conservatively-financed and liquid enterprise.

As you can see, Scott Fetzer's earnings have increased
steadily since we bought it, but book value has not grown
commensurately. Consequently, return on equity, which was
exceptional at the time of our purchase, has now become truly
extraordinary. Just how extraordinary is illustrated by
comparing Scott Fetzer's performance to that of the Fortune 500,
a group it would qualify for if it were a stand-alone company.

Had Scott Fetzer been on the 1993 500 list - the latest
available for inspection - the company's return on equity would
have ranked 4th. But that is far from the whole story. The top
three companies in return on equity were Insilco, LTV and Gaylord
Container, each of which emerged from bankruptcy in 1993 and none
of which achieved meaningful earnings that year except for those
they realized when they were accorded debt forgiveness in
bankruptcy proceedings. Leaving aside such non-operating
windfalls, Scott Fetzer's return on equity would have ranked it
first on the Fortune 500, well ahead of number two. Indeed,
Scott Fetzer's return on equity was double that of the company
ranking tenth.

You might expect that Scott Fetzer's success could only be
explained by a cyclical peak in earnings, a monopolistic
position, or leverage. But no such circumstances apply. Rather,
the company's success comes from the managerial expertise of CEO
Ralph Schey, of whom I'll tell you more later.

First, however, the promised accounting lesson: When we
paid a $142.6 million premium over book value for Scott Fetzer,
that figure had to be recorded on Berkshire's balance sheet.
I'll spare you the details of how this worked (these were laid
out in an appendix to our 1986 Annual Report) and get to the
bottom line: After a premium is initially recorded, it must in
almost all cases be written off over time through annual charges
that are shown as costs in the acquiring company's earnings
statement.

The following table shows, first, the annual charges
Berkshire has made to gradually extinguish the Scott Fetzer
acquisition premium and, second, the premium that remains on our
books. These charges have no effect on cash or the taxes we pay,
and are not, in our view, an economic cost (though many
accountants would disagree with us). They are merely a way for
us to reduce the carrying value of Scott Fetzer on our books so
that the figure will eventually match the net worth that Scott
Fetzer actually employs in its business.

Beginning Purchase-Premium Ending
Purchase Charge to Purchase
Year Premium Berkshire Earnings Premium
---- --------- ------------------ --------
(In $ Millions)

1986 ................ $142.6 $ 11.6 $131.0
1987 ................ 131.0 7.1 123.9
1988 ................ 123.9 7.9 115.9
1989 ................ 115.9 7.0 108.9
1990 ................ 108.9 7.1 101.9
1991 ................ 101.9 6.9 95.0
1992 ................ 95.0 7.7 87.2
1993 ................ 87.2 28.1 59.1
1994 ................ 59.1 4.9 54.2

Note that by the end of 1994 the premium was reduced to
$54.2 million. When this figure is added to Scott Fetzer's year-
end book value of $94 million, the total is $148.2 million, which
is the current carrying value of Scott Fetzer on Berkshire's
books. That amount is less than half of our carrying value for
the company when it was acquired. Yet Scott Fetzer is now
earning about twice what it then did. Clearly, the intrinsic
value of the business has consistently grown, even though we have
just as consistently marked down its carrying value through
purchase-premium charges that reduced Berkshire's earnings and
net worth.

The difference between Scott Fetzer's intrinsic value and
its carrying value on Berkshire's books is now huge. As I
mentioned earlier - but am delighted to mention again - credit
for this agreeable mismatch goes to Ralph Schey, a focused, smart
and high-grade manager.

The reasons for Ralph's success are not complicated. Ben
Graham taught me 45 years ago that in investing it is not
necessary to do extraordinary things to get extraordinary
results. In later life, I have been surprised to find that this
statement holds true in business management as well. What a
manager must do is handle the basics well and not get diverted.
That's precisely Ralph's formula. He establishes the right goals
and never forgets what he set out to do. On the personal side,
Ralph is a joy to work with. He's forthright about problems and
is self-confident without being self-important.

He is also experienced. Though I don't know Ralph's age, I
do know that, like many of our managers, he is over 65. At
Berkshire, we look to performance, not to the calendar. Charlie
and I, at 71 and 64 respectively, now keep George Foreman's
picture on our desks. You can make book that our scorn for a
mandatory retirement age will grow stronger every year.

Intrinsic Value and Capital Allocation

Understanding intrinsic value is as important for managers
as it is for investors. When managers are making capital
allocation decisions - including decisions to repurchase shares -
it's vital that they act in ways that increase per-share
intrinsic value and avoid moves that decrease it. This principle
may seem obvious but we constantly see it violated. And, when
misallocations occur, shareholders are hurt.

For example, in contemplating business mergers and
acquisitions, many managers tend to focus on whether the
transaction is immediately dilutive or anti-dilutive to earnings
per share (or, at financial institutions, to per-share book
value). An emphasis of this sort carries great dangers. Going
back to our college-education example, imagine that a 25-year-old
first-year MBA student is considering merging his future economic
interests with those of a 25-year-old day laborer. The MBA
student, a non-earner, would find that a "share-for-share" merger
of his equity interest in himself with that of the day laborer
would enhance his near-term earnings (in a big way!). But what
could be sillier for the student than a deal of this kind?

In corporate transactions, it's equally silly for the would-
be purchaser to focus on current earnings when the prospective
acquiree has either different prospects, different amounts of
non-operating assets, or a different capital structure. At
Berkshire, we have rejected many merger and purchase
opportunities that would have boosted current and near-term
earnings but that would have reduced per-share intrinsic value.
Our approach, rather, has been to follow Wayne Gretzky's advice:
"Go to where the puck is going to be, not to where it is." As a
result, our shareholders are now many billions of dollars richer
than they would have been if we had used the standard catechism.

The sad fact is that most major acquisitions display an
egregious imbalance: They are a bonanza for the shareholders of
the acquiree; they increase the income and status of the
acquirer's management; and they are a honey pot for the
investment bankers and other professionals on both sides. But,
alas, they usually reduce the wealth of the acquirer's shareholders,
often to a substantial extent. That happens because the acquirer
typically gives up more intrinsic value than it receives. Do that
enough, says John Medlin, the retired head of Wachovia Corp., and
"you are running a chain letter in reverse."

Over time, the skill with which a company's managers
allocate capital has an enormous impact on the enterprise's
value. Almost by definition, a really good business generates
far more money (at least after its early years) than it can use
internally. The company could, of course, distribute the money
to shareholders by way of dividends or share repurchases. But
often the CEO asks a strategic planning staff, consultants or
investment bankers whether an acquisition or two might make
sense. That's like asking your interior decorator whether you
need a $50,000 rug.

The acquisition problem is often compounded by a biological
bias: Many CEO's attain their positions in part because they
possess an abundance of animal spirits and ego. If an executive
is heavily endowed with these qualities - which, it should be
acknowledged, sometimes have their advantages - they won't
disappear when he reaches the top. When such a CEO is encouraged
by his advisors to make deals, he responds much as would a
teenage boy who is encouraged by his father to have a normal sex
life. It's not a push he needs.

Some years back, a CEO friend of mine - in jest, it must be
said - unintentionally described the pathology of many big deals.
This friend, who ran a property-casualty insurer, was explaining
to his directors why he wanted to acquire a certain life
insurance company. After droning rather unpersuasively through
the economics and strategic rationale for the acquisition, he
abruptly abandoned the script. With an impish look, he simply
said: "Aw, fellas, all the other kids have one."

At Berkshire, our managers will continue to earn
extraordinary returns from what appear to be ordinary businesses.
As a first step, these managers will look for ways to deploy
their earnings advantageously in their businesses. What's left,
they will send to Charlie and me. We then will try to use those
funds in ways that build per-share intrinsic value. Our goal
will be to acquire either part or all of businesses that we
believe we understand, that have good, sustainable underlying
economics, and that are run by managers whom we like, admire and
trust.

Compensation

At Berkshire, we try to be as logical about compensation as
about capital allocation. For example, we compensate Ralph Schey
based upon the results of Scott Fetzer rather than those of
Berkshire. What could make more sense, since he's responsible
for one operation but not the other? A cash bonus or a stock
option tied to the fortunes of Berkshire would provide totally
capricious rewards to Ralph. He could, for example, be hitting
home runs at Scott Fetzer while Charlie and I rang up mistakes at
Berkshire, thereby negating his efforts many times over.
Conversely, why should option profits or bonuses be heaped upon
Ralph if good things are occurring in other parts of Berkshire
but Scott Fetzer is lagging?

In setting compensation, we like to hold out the promise of
large carrots, but make sure their delivery is tied directly to
results in the area that a manager controls. When capital
invested in an operation is significant, we also both charge
managers a high rate for incremental capital they employ and
credit them at an equally high rate for capital they release.

The product of this money's-not-free approach is definitely
visible at Scott Fetzer. If Ralph can employ incremental funds
at good returns, it pays him to do so: His bonus increases when
earnings on additional capital exceed a meaningful hurdle charge.
But our bonus calculation is symmetrical: If incremental
investment yields sub-standard returns, the shortfall is costly
to Ralph as well as to Berkshire. The consequence of this two-
way arrangement is that it pays Ralph - and pays him well - to
send to Omaha any cash he can't advantageously use in his
business.

It has become fashionable at public companies to describe
almost every compensation plan as aligning the interests of
management with those of shareholders. In our book, alignment
means being a partner in both directions, not just on the upside.
Many "alignment" plans flunk this basic test, being artful forms
of "heads I win, tails you lose."

A common form of misalignment occurs in the typical stock
option arrangement, which does not periodically increase the
option price to compensate for the fact that retained earnings
are building up the wealth of the company. Indeed, the
combination of a ten-year option, a low dividend payout, and
compound interest can provide lush gains to a manager who has
done no more than tread water in his job. A cynic might even
note that when payments to owners are held down, the profit to
the option-holding manager increases. I have yet to see this
vital point spelled out in a proxy statement asking shareholders
to approve an option plan.

I can't resist mentioning that our compensation arrangement
with Ralph Schey was worked out in about five minutes,
immediately upon our purchase of Scott Fetzer and without the
"help" of lawyers or compensation consultants. This arrangement
embodies a few very simple ideas - not the kind of terms favored
by consultants who cannot easily send a large bill unless they
have established that you have a large problem (and one, of
course, that requires an annual review). Our agreement with
Ralph has never been changed. It made sense to him and to me in
1986, and it makes sense now. Our compensation arrangements with
the managers of all our other units are similarly simple, though
the terms of each agreement vary to fit the economic
characteristics of the business at issue, the existence in some
cases of partial ownership of the unit by managers, etc.

In all instances, we pursue rationality. Arrangements that
pay off in capricious ways, unrelated to a manager's personal
accomplishments, may well be welcomed by certain managers. Who,
after all, refuses a free lottery ticket? But such arrangements
are wasteful to the company and cause the manager to lose focus
on what should be his real areas of concern. Additionally,
irrational behavior at the parent may well encourage imitative
behavior at subsidiaries.

At Berkshire, only Charlie and I have the managerial
responsibility for the entire business. Therefore, we are the
only parties who should logically be compensated on the basis of
what the enterprise does as a whole. Even so, that is not a
compensation arrangement we desire. We have carefully designed
both the company and our jobs so that we do things we enjoy with
people we like. Equally important, we are forced to do very few
boring or unpleasant tasks. We are the beneficiaries as well of
the abundant array of material and psychic perks that flow to the
heads of corporations. Under such idyllic conditions, we don't
expect shareholders to ante up loads of compensation for which we
have no possible need.

Indeed, if we were not paid at all, Charlie and I would be
delighted with the cushy jobs we hold. At bottom, we subscribe
to Ronald Reagan's creed: "It's probably true that hard work
never killed anyone, but I figure why take the chance."

Sources of Reported Earnings

The table on the next page shows the main sources of
Berkshire's reported earnings. In this presentation, purchase-
premium charges of the type we discussed in our earlier analysis
of Scott Fetzer are not assigned to 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. This form of presentation seems to us to be more useful to
investors and managers than one utilizing GAAP, which requires
purchase premiums to be charged off, business-by-business. The
total earnings we show in the table are, of course, identical to
the GAAP total in our audited financial statements.

Berkshire's Share
of Net Earnings
(after taxes and
Pre-Tax Earnings minority interests)
------------------- -------------------
1994 1993 1994 1993
-------- -------- -------- --------
(000s omitted)

Operating Earnings:
Insurance Group:
Underwriting ............... $129,926 $ 30,876 $ 80,860 $ 20,156
Net Investment Income ...... 419,422 375,946 350,453 321,321
Buffalo News ................. 54,238 50,962 31,685 29,696
Fechheimer ................... 14,260 13,442 7,107 6,931
Finance Businesses ........... 21,568 22,695 14,293 14,161
Kirby ........................ 42,349 39,147 27,719 25,056
Nebraska Furniture Mart ...... 17,356 21,540 8,652 10,398
Scott Fetzer Manufacturing Group 39,435 38,196 24,909 23,809
See's Candies ................ 47,539 41,150 28,247 24,367
Shoe Group ................... 85,503 44,025* 55,750 28,829
World Book ................... 24,662 19,915 17,275 13,537
Purchase-Price Premium Charges (22,595) (17,033) (19,355) (13,996)
Interest Expense** ........... (60,111) (56,545) (37,264) (35,614)
Shareholder-Designated
Contributions ............. (10,419) (9,448) (6,668) (5,994)
Other ........................ 36,232 28,428 22,576 15,094
-------- -------- -------- --------
Operating Earnings ............. 839,365 643,296 606,239 477,751
Sales of Securities ............ 91,332 546,422 61,138 356,702
Decline in Value of
USAir Preferred Stock ..... (268,500) --- (172,579) ---
Tax Accruals Caused by
New Accounting Rules ...... --- --- --- (146,332)
-------- --------- -------- --------
Total Earnings - All Entities .. $662,197 $1,189,718 $494,798 $688,121
======== ========= ======== ========

* Includes Dexter's earnings only from the date it was acquired,
November 7, 1993.

**Excludes interest expense of Finance Businesses.

A large amount of information about these businesses is given
on pages 37-48, where you will also find our segment earnings
reported on a GAAP basis. In addition, on pages 53-59, we have
rearranged Berkshire's financial data into four segments on a non-
GAAP basis, a presentation that corresponds to the way Charlie and
I think about the company. Our intent is to supply you with the
financial information that we would wish you to give us if our
positions were reversed.

"Look-Through" Earnings

In past reports, we've discussed look-through earnings, which
we believe more accurately portray the earnings of Berkshire than
does our GAAP result. As we calculate them, look-through earnings
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. The "operating earnings" of which we speak here
exclude capital gains, special accounting items and major
restructuring charges.

If our intrinsic value is to grow at our target rate of 15%,
our look-through earnings, over time, must also increase at about
that pace. When I first explained this concept a few years back, I
told you that meeting this 15% goal would require us to generate
look-through earnings of about $1.8 billion by 2000. Because we've
since issued about 3% more shares, that figure has grown to $1.85
billion.

We are now modestly ahead of schedule in meeting our goal, but
to a significant degree that is because our super-cat insurance
business has recently delivered earnings far above trend-line
expectancy (an outcome I will discuss in the next section). Giving
due weight to that abnormality, we still expect to hit our target
but that, of course, is no sure thing.

The following table shows 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 12, 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)
--------------------------- ----------------------- ------------------

1994 1993 1994 1993
------ ------ ------ ------
American Express Company ...... 5.5% 2.4% $ 25(2) $ 16
Capital Cities/ABC, Inc. ...... 13.0% 13.0% 85 83(2)
The Coca-Cola Company ......... 7.8% 7.2% 116(2) 94
Federal Home Loan Mortgage Corp. 6.3%(1) 6.8%(1) 47(2) 41(2)
Gannett Co., Inc. ............. 4.9% --- 4(2) ---
GEICO Corp. ................... 50.2% 48.4% 63(3) 76(3)
The Gillette Company .......... 10.8% 10.9% 51 44
PNC Bank Corp. ................ 8.3% --- 10(2) ---
The Washington Post Company ... 15.2% 14.8% 18 15
Wells Fargo & Company ......... 13.3% 12.2% 73 53(2)
------ ------
Berkshire's share of undistributed
earnings of major investees $ 492 $422
Hypothetical tax on these undistributed
investee earnings(4) (68) (59)
Reported operating earnings of Berkshire 606 478
------- ------
Total look-through earnings of Berkshire $1,030 $ 841

(1) Does not include shares allocable to the minority interest
at Wesco
(2) Calculated on average ownership for the year
(3) Excludes realized capital gains, which have been both
recurring and significant
(4) The tax rate used is 14%, which is the rate Berkshire pays
on the dividends it receives

Insurance Operations

As we've explained in past reports, what counts in our
insurance business is, first, the amount of "float" we develop and,
second, its cost to us. Float is money we hold but don't own. In
an insurance operation, float arises because most policies require
that premiums be prepaid and, more importantly, because it usually
takes time for an insurer to hear about and resolve loss claims.

Typically, the premiums that an insurer takes in do not cover
the losses and expenses it must pay. That leaves it running an
"underwriting loss" - and that loss is the cost of float.

An insurance business is profitable over time if its cost of
float is less than the cost the company would otherwise incur to
obtain funds. But the business has a negative value if the cost of
its float is higher than market rates for money.

As the numbers in the following table show, Berkshire's
insurance business has been an enormous winner. For the table, we
have compiled our float - which we generate in exceptional amounts
relative to our premium volume - by adding loss reserves, loss
adjustment reserves, funds held under reinsurance assumed and unearned
premium reserves and then subtracting agents' balances, prepaid
acquisition costs, prepaid taxes and deferred charges applicable to
assumed reinsurance. Our cost of float is determined by our
underwriting loss or profit. In those years when we have had an
underwriting profit, such as the last two, our cost of float has been
negative, and we have determined our insurance earnings by adding
underwriting profit to float income.

(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%
1993 .......... profit 2,624.7 less than zero 6.35%
1994 .......... profit 3,056.6 less than zero 7.88%

Charlie and I are delighted that our float grew in 1994 and
are even more pleased that it proved to be cost-free. But our
message this year echoes the one we delivered in 1993: Though we
have a fine insurance business, it is not as good as it currently
looks.

The reason we must repeat this caution is that our "super-cat"
business (which sells policies that insurance and reinsurance
companies buy to protect themselves from the effects of mega-
catastrophes) was again highly profitable. Since truly major
catastrophes occur infrequently, our super-cat business can be
expected to show large profits in most years but occasionally to
record a huge loss. In other words, the attractiveness of our
super-cat business will take many years to measure. Certainly 1994
should be regarded as close to a best-case. Our only significant
losses arose from the California earthquake in January. I will add
that we do not expect to suffer a major loss from the early-1995
Kobe earthquake.

Super-cat policies are small in number, large in size and non-
standardized. Therefore, the underwriting of this business
requires far more judgment than, say, the underwriting of auto
policies, for which a mass of data is available. Here Berkshire
has a major advantage: Ajit Jain, our super-cat manager, whose
underwriting skills are the finest. His value to us is simply
enormous.

In addition, Berkshire has a special advantage in the super-
cat business because of our towering financial strength, which
helps us in two ways. First, a prudent insurer will want its
protection against true mega-catastrophes - such as a $50 billion
windstorm loss on Long Island or an earthquake of similar cost in
California - to be absolutely certain. But that same insurer knows
that the disaster making it dependent on a large super-cat recovery
is also the disaster that could cause many reinsurers to default.
There's not much sense in paying premiums for coverage that will
evaporate precisely when it is needed. So the certainty that
Berkshire will be both solvent and liquid after a catastrophe of
unthinkable proportions is a major competitive advantage for us.

The second benefit of our capital strength is that we can
write policies for amounts that no one else can even consider. For
example, during 1994, a primary insurer wished to buy a short-term
policy for $400 million of California earthquake coverage and we
wrote the policy immediately. We know of no one else in the world
who would take a $400 million risk, or anything close to it, for
their own account.

Generally, brokers attempt to place coverage for large amounts
by spreading the burden over a number of small policies. But, at
best, coverage of that sort takes considerable time to arrange. In
the meantime, the company desiring reinsurance is left holding a
risk it doesn't want and that may seriously threaten its well-
being. At Berkshire, on the other hand, we will quote prices for
coverage as great as $500 million on the same day that we are asked
to bid. No one else in the industry will do the same.

By writing coverages in large lumps, we obviously expose
Berkshire to lumpy financial results. That's totally acceptable to
us: Too often, insurers (as well as other businesses) follow sub-
optimum strategies in order to "smooth" their reported earnings.
By accepting the prospect of volatility, we expect to earn higher
long-term returns than we would by pursuing predictability.

Given the risks we accept, Ajit and I constantly focus on our
"worst case," knowing, of course, that it is difficult to judge
what this is, since you could conceivably have a Long Island
hurricane, a California earthquake, and Super Cat X all in the same
year. Additionally, insurance losses could be accompanied by non-
insurance troubles. For example, were we to have super-cat losses
from a large Southern California earthquake, they might well be
accompanied by a major drop in the value of our holdings in See's,
Wells Fargo and Freddie Mac.

All things considered, we believe our worst-case insurance
loss from a super-cat is now about $600 million after-tax, an
amount that would slightly exceed Berkshire's annual earnings from
other sources. If you are not comfortable with this level of
exposure, the time to sell your Berkshire stock is now, not after
the inevitable mega-catastrophe.

Our super-cat volume will probably be down in 1995. Prices
for garden-variety policies have fallen somewhat, and the torrent
of capital that was committed to the reinsurance business a few
years ago will be inclined to chase premiums, irrespective of their
adequacy. Nevertheless, we have strong relations with an important
group of clients who will provide us with a substantial amount of
business in 1995.

Berkshire's other insurance operations had excellent results
in 1994. Our homestate operation, led by Rod Eldred; our workers'
compensation business, headed by Brad Kinstler; our credit card
operation, managed by the Kizer family; National Indemnity's
traditional auto and general liability business, led by Don Wurster
- all of these generated significant underwriting profits
accompanied by substantial float.

We can conclude this section as we did last year: All in all,
we have a first-class insurance business. Though its results will
be highly volatile, this operation possesses an intrinsic value
that exceeds its book value by a large amount - larger, in fact,
than is the case at any other Berkshire business.

Common Stock Investments

Below we list our common stockholdings having a value of over
$300 million. A small portion of these investments belongs to
subsidiaries of which Berkshire owns less than 100%.

12/31/94
Shares Company Cost Market
------ ------- ---------- ----------
(000s omitted)
27,759,941 American Express Company. .......... $ 723,919 $ 818,918
20,000,000 Capital Cities/ABC, Inc. ........... 345,000 1,705,000
100,000,000 The Coca-Cola Company. ............. 1,298,888 5,150,000
12,761,200 Federal Home Loan Mortgage Corp.
("Freddie Mac") ................. 270,468 644,441
6,854,500 Gannett Co., Inc. .................. 335,216 365,002
34,250,000 GEICO Corp. ........................ 45,713 1,678,250
24,000,000 The Gillette Company ............... 600,000 1,797,000
19,453,300 PNC Bank Corporation ............... 503,046 410,951
1,727,765 The Washington Post Company ........ 9,731 418,983
6,791,218 Wells Fargo & Company .............. 423,680 984,727

Our investments continue to be few in number and simple in
concept: The truly big investment idea can usually be explained in
a short paragraph. We like a business with enduring competitive
advantages that is run by able and owner-oriented people. When
these attributes exist, and when we can make purchases at sensible
prices, it is hard to go wrong (a challenge we periodically manage
to overcome).

Investors should remember that their scorecard is not computed
using Olympic-diving methods: Degree-of-difficulty doesn't count.
If you are right about a business whose value is largely dependent
on a single key factor that is both easy to understand and
enduring, the payoff is the same as if you had correctly analyzed
an investment alternative characterized by many constantly shifting
and complex variables.

We try to price, rather than time, purchases. In our view, it
is folly to forego buying shares in an outstanding business whose
long-term future is predictable, because of short-term worries
about an economy or a stock market that we know to be
unpredictable. Why scrap an informed decision because of an
uninformed guess?

We purchased National Indemnity in 1967, See's in 1972,
Buffalo News in 1977, Nebraska Furniture Mart in 1983, and Scott
Fetzer in 1986 because those are the years they became available
and because we thought the prices they carried were acceptable. In
each case, we pondered what the business was likely to do, not what
the Dow, the Fed, or the economy might do. If we see this approach
as making sense in the purchase of businesses in their entirety,
why should we change tack when we are purchasing small pieces of
wonderful businesses in the stock market?

Before looking at new investments, we consider adding to old
ones. If a business is attractive enough to buy once, it may well
pay to repeat the process. We would love to increase our economic
interest in See's or Scott Fetzer, but we haven't found a way to
add to a 100% holding. In the stock market, however, an investor
frequently gets the chance to increase his economic interest in
businesses he knows and likes. Last year we went that direction by
enlarging our holdings in Coca-Cola and American Express.

Our history with American Express goes way back and, in fact,
fits the pattern of my pulling current investment decisions out of
past associations. In 1951, for example, GEICO shares comprised
70% of my personal portfolio and GEICO was also the first stock I
sold - I was then 20 - as a security salesman (the sale was 100
shares to my Aunt Alice who, bless her, would have bought anything
I suggested). Twenty-five years later, Berkshire purchased a major
stake in GEICO at the time it was threatened with insolvency. In
another instance, that of the Washington Post, about half of my
initial investment funds came from delivering the paper in the
1940's. Three decades later Berkshire purchased a large position
in the company two years after it went public. As for Coca-Cola,
my first business venture - this was in the 1930's - was buying a
six-pack of Coke for 25 cents and selling each bottle for 5 cents.
It took only fifty years before I finally got it: The real money
was in the syrup.

My American Express history includes a couple of episodes: In
the mid-1960's, just after the stock was battered by the company's
infamous salad-oil scandal, we put about 40% of Buffett Partnership
Ltd.'s capital into the stock - the largest investment the
partnership had ever made. I should add that this commitment gave
us over 5% ownership in Amex at a cost of $13 million. As I write
this, we own just under 10%, which has cost us $1.36 billion.
(Amex earned $12.5 million in 1964 and $1.4 billion in 1994.)

My history with Amex's IDS unit, which today contributes about
a third of the earnings of the company, goes back even further. I
first purchased stock in IDS in 1953 when it was growing rapidly
and selling at a price-earnings ratio of only 3. (There was a lot
of low-hanging fruit in those days.) I even produced a long report
- do I ever write a short one? - on the company that I sold for $1
through an ad in the Wall Street Journal.

Obviously American Express and IDS (recently renamed American
Express Financial Advisors) are far different operations today from
what they were then. Nevertheless, I find that a long-term
familiarity with a company and its products is often helpful in
evaluating it.

Mistake Du Jour

Mistakes occur at the time of decision. We can only make our
mistake-du-jour award, however, when the foolishness of the
decision become obvious. By this measure, 1994 was a vintage year
with keen competition for the gold medal. Here, I would like to
tell you that the mistakes I will describe originated with Charlie.
But whenever I try to explain things that way, my nose begins to
grow.

And the nominees are . . .

Late in 1993 I sold 10 million shares of Cap Cities at $63; at
year-end 1994, the price was $85.25. (The difference is $222.5
million for those of you who wish to avoid the pain of calculating
the damage yourself.) When we purchased the stock at $17.25 in
1986, I told you that I had previously sold our Cap Cities holdings
at $4.30 per share during 1978-80, and added that I was at a loss
to explain my earlier behavior. Now I've become a repeat offender.
Maybe it's time to get a guardian appointed.

Egregious as it is, the Cap Cities decision earns only a
silver medal. Top honors go to a mistake I made five years ago
that fully ripened in 1994: Our $358 million purchase of USAir
preferred stock, on which the dividend was suspended in September.
In the 1990 Annual Report I correctly described this deal as an
"unforced error," meaning that I was neither pushed into the
investment nor misled by anyone when making it. Rather, this was a
case of sloppy analysis, a lapse that may have been caused by the
fact that we were buying a senior security or by hubris. Whatever
the reason, the mistake was large.
Before this purchase, I simply failed to focus on the problems
that would inevitably beset a carrier whose costs were both high
and extremely difficult to lower. In earlier years, these life-
threatening costs posed few problems. Airlines were then protected
from competition by regulation, and carriers could absorb high
costs because they could pass them along by way of fares that were
also high.

When deregulation came along, it did not immediately change
the picture: The capacity of low-cost carriers was so small that
the high-cost lines could, in large part, maintain their existing
fare structures. During this period, with the longer-term problems
largely invisible but slowly metastasizing, the costs that were
non-sustainable became further embedded.

As the seat capacity of the low-cost operators expanded, their
fares began to force the old-line, high-cost airlines to cut their
own. The day of reckoning for these airlines could be delayed by
infusions of capital (such as ours into USAir), but eventually a
fundamental rule of economics prevailed: In an unregulated
commodity business, a company must lower its costs to competitive
levels or face extinction. This principle should have been obvious
to your Chairman, but I missed it.

Seth Schofield, CEO of USAir, has worked diligently to correct
the company's historical cost problems but, to date, has not
managed to do so. In part, this is because he has had to deal with
a moving target, the result of certain major carriers having
obtained labor concessions and other carriers having benefitted
from "fresh-start" costs that came out of bankruptcy proceedings.
(As Herb Kelleher, CEO of Southwest Airlines, has said:
"Bankruptcy court for airlines has become a health spa.")
Additionally, it should be no surprise to anyone that those airline
employees who contractually receive above-market salaries will
resist any reduction in these as long as their checks continue to
clear.

Despite this difficult situation, USAir may yet achieve the
cost reductions it needs to maintain its viability long-term. But
it is far from sure that will happen.

Accordingly, we wrote our USAir investment down to $89.5
million, 25 cents on the dollar at yearend 1994. This valuation
reflects both a possibility that our preferred will have its value
fully or largely restored and an opposite possibility that the
stock will eventually become worthless. Whatever the outcome, we
will heed a prime rule of investing: You don't have to make it
back the way that you lost it.

The accounting effects of our USAir writedown are complicated.
Under GAAP accounting, insurance companies are required to carry
all stocks on their balance sheets at estimated market value.
Therefore, at the end of last year's third quarter, we were
carrying our USAir preferred at $89.5 million, or 25% of cost. In
other words, our net worth was at that time reflecting a value for
USAir that was far below our $358 million cost.

But in the fourth quarter, we concluded that the decline in
value was, in accounting terms, "other than temporary," and that
judgment required us to send the writedown of $269 million through
our income statement. The amount will have no other fourth-quarter
effect. That is, it will not reduce our net worth, because the
diminution of value had already been reflected.

Charlie and I will not stand for reelection to USAir's board
at the upcoming annual meeting. Should Seth wish to consult with
us, however, we will be pleased to be of any help that we can.

Miscellaneous

Two CEO's who have done great things for Berkshire
shareholders retired last year: Dan Burke of Capital Cities/ABC
and Carl Reichardt of Wells Fargo. Dan and Carl encountered very
tough industry conditions in recent years. But their skill as
managers allowed the businesses they ran to emerge from these
periods with record earnings, added luster, and bright prospects.
Additionally, Dan and Carl prepared well for their departure and
left their companies in outstanding hands. We owe them our
gratitude.

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

About 95.7% of all eligible shares participated in Berkshire's
1994 shareholder-designated contributions program. Contributions
made through the program were $10.4 million and 3,300 charities
were recipients.

Every year a few shareholders miss participating in the
program because they either do not have their shares registered in
their own names on the prescribed record date or because they fail
to get the designation form back to us within the 60-day period
allowed for its return. Since we don't make exceptions when
requirements aren't met, we urge that both new shareholders and old
read the description of our shareholder-designated contributions
program that appears on pages 50-51.

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, 1995 will be ineligible for the 1995
program.

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

We made only one minor acquisition during 1994 - a small
retail shoe chain - but our interest in finding good candidates
remains as keen as ever. The criteria we employ for purchases or
mergers is detailed in the appendix on page 21.

Last spring, we offered to merge with a large, family-
controlled business on terms that included a Berkshire convertible
preferred stock. Though we failed to reach an agreement, this
episode made me realize that we needed to ask our shareholders to
authorize preferred shares in case we wanted in the future to move
quickly if a similar acquisition opportunity were to appear.
Accordingly, our proxy presents a proposal that you authorize a
large amount of preferred stock, which will be issuable on terms
set by the Board of Directors. You can be sure that Charlie and I
will not use these shares without being completely satisfied that
we are receiving as much in intrinsic value as we are giving.

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

Charlie and I hope you can come to the Annual Meeting - at a
new site. Last year, we slightly overran the Orpheum Theater's
seating capacity of 2,750, and therefore we will assemble at 9:30
a.m. on Monday, May 1, 1995, at the Holiday Convention Centre. The
main ballroom at the Centre can handle 3,300, and if need be, we
will have audio and video equipment in an adjacent room capable of
handling another 1,000 people.

Last year we displayed some of Berkshire's products at the
meeting, and as a result sold about 800 pounds of candy, 507 pairs
of shoes, and over $12,000 of World Books and related publications.
All these goods will be available again this year. Though we like
to think of the meeting as a spiritual experience, we must remember
that even the least secular of religions includes the ritual of the
collection plate.

Of course, what you really should be purchasing is a video
tape of the 1995 Orange Bowl. Your Chairman views this classic
nightly, switching to slow motion for the fourth quarter. Our
cover color this year is a salute to Nebraska's football coach, Tom
Osborne, and his Cornhuskers, the country's top college team. I
urge you to wear Husker red to the annual meeting and promise you
that at least 50% of your managerial duo will be in appropriate
attire.

We recommend that you promptly get hotel reservations for the
meeting, as we expect a large crowd. Those of you who like to be
downtown (about six miles from the Centre) may wish to stay at the
Radisson Redick Tower, a small (88 rooms) but nice hotel or at the
much larger Red Lion Hotel a few blocks away. In the vicinity of
the Centre are the Holiday Inn (403 rooms), Homewood Suites (118
rooms) and Hampton Inn (136 rooms). Another recommended spot is
the Marriott, whose west Omaha location is about 100 yards from
Borsheim's and a ten-minute drive from the Centre. There will be
buses at the Marriott that will leave at 8:45 and 9:00 for the
meeting and return after it ends.

An attachment to our proxy material explains how you can
obtain the card you will need for admission to the meeting. A
good-sized parking area is available at the Centre, while those who
stay at the Holiday Inn, Homewood Suites and Hampton Inn will be
able to walk to the meeting.

As usual, we will have buses to take you to the Nebraska
Furniture Mart and Borsheim's after the meeting and to take you
from there to hotels or the airport later. I hope you make a
special effort to visit the Nebraska Furniture Mart because it has
opened the Mega Mart, a true retailing marvel that sells
electronics, appliances, computers, CD's, cameras and audio
equipment. Sales have been sensational since the opening, and you
will be amazed by both the variety of products available and their
display on the floor.

The Mega Mart, adjacent to NFM's main store, is on our 64-acre
site about two miles north of the Centre. The stores are open from
10 a.m. to 9 p.m. on Fridays, 10 a.m. to 6 p.m. on Saturdays and
noon to 6 p.m. on Sundays. When you're there be sure to say hello
to Mrs. B, who, at 101, will be hard at work in our Mrs. B's
Warehouse. She never misses a day at the store - or, for that
matter, an hour.

Borsheim's normally is closed on Sunday but will be open for
shareholders and their guests from noon to 6 p.m. on Sunday. This
is always a special day, and we will try to have a few surprises.
Usually this is the biggest sales day of the year, so for more
reasons than one Charlie and I hope to see you there.

On Saturday evening, April 29, there will be a baseball game
at Rosenblatt Stadium between the Omaha Royals and the Buffalo
Bisons. The Buffalo team is owned by my friends, Mindy and Bob
Rich, Jr., and I'm hoping they will attend. If so, I will try to
entice Bob into a one-pitch duel on the mound. Bob is a
capitalist's Randy Johnson - young, strong and athletic - and not
the sort of fellow you want to face early in the season. So I will
need plenty of vocal support.

The proxy statement will include information about obtaining
tickets to the game. About 1,400 shareholders attended the event
last year. Opening the game that night, I had my stuff and threw a
strike that the scoreboard reported at eight miles per hour. What
many fans missed was that I shook off the catcher's call for my
fast ball and instead delivered my change-up. This year it will be
all smoke.

Warren E. Buffett
March 7, 1995 Chairman of the Board

To the Shareholders of Berkshire Hathaway Inc.:

Our gain in net worth during 1995 was $5.3 billion, or
45.0%. Per-share book value grew by a little less, 43.1%,
because we paid stock for two acquisitions, increasing our shares
outstanding by 1.3%. Over the last 31 years (that is, since
present management took over) per-share book value has grown from
$19 to $14,426, or at a rate of 23.6% compounded annually.

There's no reason to do handsprings over 1995's gains. This
was a year in which any fool could make a bundle in the stock
market. And we did. To paraphrase President Kennedy, a rising
tide lifts all yachts.

Putting aside the financial results, there was plenty of
good news at Berkshire last year: We negotiated three
acquisitions of exactly the type we desire. Two of these,
Helzberg's Diamond Shops and R.C. Willey Home Furnishings, are
included in our 1995 financial statements, while our largest
transaction, the purchase of GEICO, closed immediately after the
end of the year. (I'll tell you more about all three
acquisitions later in the report.)

These new subsidiaries roughly double our revenues. Even
so, the acquisitions neither materially increased our shares
outstanding nor our debt. And, though these three operations
employ over 11,000 people, our headquarters staff grew only from
11 to 12. (No sense going crazy.)

Charlie Munger, Berkshire's Vice Chairman and my partner,
and I want to build a collection of companies - both wholly- and
partly-owned - that have excellent economic characteristics and
that are run by outstanding managers. Our favorite acquisition
is the negotiated transaction that allows us to purchase 100% of
such a business at a fair price. But we are almost as happy when
the stock market offers us the chance to buy a modest percentage
of an outstanding business at a pro-rata price well below what it
would take to buy 100%. This double-barrelled approach -
purchases of entire businesses through negotiation or purchases
of part-interests through the stock market - gives us an
important advantage over capital-allocators who stick to a single
course. Woody Allen once explained why eclecticism works: "The
real advantage of being bisexual is that it doubles your chances
for a date on Saturday night."

Over the years, we've been Woody-like in our thinking,
attempting to increase our marketable investments in wonderful
businesses, while simultaneously trying to buy similar businesses
in their entirety. The following table illustrates our progress
on both fronts. In the tabulation, we show the marketable
securities owned per share of Berkshire at ten-year intervals. A
second column lists our per-share operating earnings (before
taxes and purchase-price adjustments but after interest and
corporate overhead) from all other activities. In other words,
the second column shows what we earned excluding the dividends,
interest and capital gains that we realized from investments.
Purchase-price accounting adjustments are ignored for reasons we
have explained at length in previous reports and which, as an act
of mercy, we won't repeat. (We'll be glad to send masochists the
earlier explanations, however.)

Pre-tax Earnings Per Share
Marketable Securities Excluding All Income from
Year Per Share Investments
---- --------------------- --------------------------

1965 ................ $ 4 $ 4.08
1975 ................ 159 (6.48)
1985 ................ 2,443 18.86
1995 ................ 22,088 258.20

Yearly Growth Rate: 1965-95 33.4% 14.7%

These results have not sprung from some master plan that we
concocted in 1965. In a general way, we knew then what we hoped
to accomplish but had no idea what specific opportunities might
make it possible. Today we remain similarly unstructured: Over
time, we expect to improve the figures in both columns but have
no road map to tell us how that will come about.

We proceed with two advantages: First, our operating
managers are outstanding and, in most cases, have an unusually
strong attachment to Berkshire. Second, Charlie and I have had
considerable experience in allocating capital and try to go at
that job rationally and objectively. The giant disadvantage we
face is size: In the early years, we needed only good ideas, but
now we need good big ideas. Unfortunately, the difficulty of
finding these grows in direct proportion to our financial
success, a problem that increasingly erodes our strengths.

I will have more to say about Berkshire's prospects later in
this report, when I discuss our proposed recapitalization.

Acquisitions

It may seem strange that we exult over a year in which we
made three acquisitions, given that we have regularly used these
pages to question the acquisition activities of most managers.
Rest assured, Charlie and I haven't lost our skepticism: We
believe most deals do damage to the shareholders of the acquiring
company. Too often, the words from HMS Pinafore apply: "Things
are seldom what they seem, skim milk masquerades as cream."
Specifically, sellers and their representatives invariably
present financial projections having more entertainment value
than educational value. In the production of rosy scenarios,
Wall Street can hold its own against Washington.

In any case, why potential buyers even look at projections
prepared by sellers baffles me. Charlie and I never give them a
glance, but instead keep in mind the story of the man with an
ailing horse. Visiting the vet, he said: "Can you help me?
Sometimes my horse walks just fine and sometimes he limps." The
vet's reply was pointed: "No problem - when he's walking fine,
sell him." In the world of mergers and acquisitions, that horse
would be peddled as Secretariat.

At Berkshire, we have all the difficulties in perceiving the
future that other acquisition-minded companies do. Like they
also, we face the inherent problem that the seller of a business
practically always knows far more about it than the buyer and
also picks the time of sale - a time when the business is likely
to be walking "just fine."

Even so, we do have a few advantages, perhaps the greatest
being that we don't have a strategic plan. Thus we feel no need
to proceed in an ordained direction (a course leading almost
invariably to silly purchase prices) but can instead simply
decide what makes sense for our owners. In doing that, we always
mentally compare any move we are contemplating with dozens of
other opportunities open to us, including the purchase of small
pieces of the best businesses in the world via the stock market.
Our practice of making this comparison - acquisitions against
passive investments - is a discipline that managers focused
simply on expansion seldom use.

Talking to Time Magazine a few years back, Peter Drucker got
to the heart of things: "I will tell you a secret: Dealmaking
beats working. Dealmaking is exciting and fun, and working is
grubby. Running anything is primarily an enormous amount of
grubby detail work . . . dealmaking is romantic, sexy. That's
why you have deals that make no sense."

In making acquisitions, we have a further advantage: As
payment, we can offer sellers a stock backed by an extraordinary
collection of outstanding businesses. An individual or a family
wishing to dispose of a single fine business, but also wishing to
defer personal taxes indefinitely, is apt to find Berkshire stock
a particularly comfortable holding. I believe, in fact, that
this calculus played an important part in the two acquisitions
for which we paid shares in 1995.

Beyond that, sellers sometimes care about placing their
companies in a corporate home that will both endure and provide
pleasant, productive working conditions for their managers. Here
again, Berkshire offers something special. Our managers operate
with extraordinary autonomy. Additionally, our ownership
structure enables sellers to know that when I say we are buying
to keep, the promise means something. For our part, we like
dealing with owners who care what happens to their companies and
people. A buyer is likely to find fewer unpleasant surprises
dealing with that type of seller than with one simply auctioning
off his business.

In addition to the foregoing being an explanation of our
acquisition style, it is, of course, a not-so-subtle sales pitch.
If you own or represent a business earning $25 million or more
before tax, and it fits the criteria listed on page 23, just
give me a call. Our discussion will be confidential. And if you
aren't interested now, file our proposition in the back of your
mind: We are never going to lose our appetite for buying
companies with good economics and excellent management.

Concluding this little dissertation on acquisitions, I can't
resist repeating a tale told me last year by a corporate
executive. The business he grew up in was a fine one, with a
long-time record of leadership in its industry. Its main
product, however, was distressingly glamorless. So several
decades ago, the company hired a management consultant who -
naturally - advised diversification, the then-current fad.
("Focus" was not yet in style.) Before long, the company
acquired a number of businesses, each after the consulting firm
had gone through a long - and expensive - acquisition study. And
the outcome? Said the executive sadly, "When we started, we were
getting 100% of our earnings from the original business. After
ten years, we were getting 150%."

Helzberg's Diamond Shops

A few years back, management consultants popularized a
technique called "management by walking around" (MBWA). At
Berkshire, we've instituted ABWA (acquisitions by walking
around).

In May 1994, a week or so after the Annual Meeting, I was
crossing the street at 58th and Fifth Avenue in New York, when a
woman called out my name. I listened as she told me she'd been
to, and had enjoyed, the Annual Meeting. A few seconds later, a
man who'd heard the woman stop me did so as well. He turned out
to be Barnett Helzberg, Jr., who owned four shares of Berkshire
and had also been at our meeting.

In our few minutes of conversation, Barnett said he had a
business we might be interested in. When people say that, it
usually turns out they have a lemonade stand - with potential, of
course, to quickly grow into the next Microsoft. So I simply
asked Barnett to send me particulars. That, I thought to myself.
will be the end of that.

Not long after, Barnett sent me the financial statements of
Helzberg's Diamond Shops. The company had been started by his
grandfather in 1915 from a single store in Kansas City and had
developed by the time we met into a group with 134 stores in 23
states. Sales had grown from $10 million in 1974 to $53 million
in 1984 and $282 million in 1994. We weren't talking lemonade
stands.

Barnett, then 60, loved the business but also wanted to feel
free of it. In 1988, as a step in that direction, he had brought
in Jeff Comment, formerly President of Wanamaker's, to help him
run things. The hiring of Jeff turned out to be a homerun, but
Barnett still found that he couldn't shake a feeling of ultimate
responsibility. Additionally, he owned a valuable asset that was
subject to the vagaries of a single, very competitive industry,
and he thought it prudent to diversify his family's holdings.

Berkshire was made to order for him. It took us awhile to
get together on price, but there was never any question in my
mind that, first, Helzberg's was the kind of business that we
wanted to own and, second, Jeff was our kind of manager. In
fact, we would not have bought the business if Jeff had not been
there to run it. Buying a retailer without good management is
like buying the Eiffel Tower without an elevator.

We completed the Helzberg purchase in 1995 by means of a
tax-free exchange of stock, the only kind of transaction that
interested Barnett. Though he was certainly under no obligation
to do so, Barnett shared a meaningful part of his proceeds from
the sale with a large number of his associates. When someone
behaves that generously, you know you are going to be treated
right as a buyer.

The average Helzberg's store has annual sales of about $2
million, far more than competitors operating similarly-sized
stores achieve. This superior per-store productivity is the key
to Helzberg's excellent profits. If the company continues its
first-rate performance - and we believe it will - it could grow
rather quickly to several times its present size.

Helzberg's, it should be added, is an entirely different
sort of operation from Borsheim's, our Omaha jewelry business,
and the two companies will operate independently of each other.
Borsheim's had an excellent year in 1995, with sales up 11.7%.
Susan Jacques, its 36-year-old CEO, had an even better year,
giving birth to her second son at the start of the Christmas
season. Susan has proved to be a terrific leader in the two
years since her promotion.

R.C. Willey Home Furnishings

It was Nebraska Furniture Mart's Irv Blumkin who did the
walking around in the case of R.C. Willey, long the leading home
furnishings business in Utah. Over the years, Irv had told me
about the strengths of that company. And he had also told Bill
Child, CEO of R.C. Willey, how pleased the Blumkin family had
been with its Berkshire relationship. So in early 1995, Bill
mentioned to Irv that for estate tax and diversification reasons,
he and the other owners of R.C. Willey might be interested in
selling.

From that point forward, things could not have been simpler.
Bill sent me some figures, and I wrote him a letter indicating
my idea of value. We quickly agreed on a number, and found our
personal chemistry to be perfect. By mid-year, the merger was
completed.

R.C. Willey is an amazing story. Bill took over the
business from his father-in-law in 1954 when sales were about
$250,000. From this tiny base, Bill employed Mae West's
philosophy: "It's not what you've got - it's what you do with
what you've got." Aided by his brother, Sheldon, Bill has built
the company to its 1995 sales volume of $257 million, and it now
accounts for over 50% of the furniture business in Utah. Like
Nebraska Furniture Mart, R.C. Willey sells appliances,
electronics, computers and carpets in addition to furniture.
Both companies have about the same sales volume, but NFM gets all
of its business from one complex in Omaha, whereas R.C. Willey
will open its sixth major store in the next few months.

Retailing is a tough business. During my investment career,
I have watched a large number of retailers enjoy terrific growth
and superb returns on equity for a period, and then suddenly
nosedive, often all the way into bankruptcy. This shooting-star
phenomenon is far more common in retailing than it is in
manufacturing or service businesses. In part, this is because a
retailer must stay smart, day after day. Your competitor is
always copying and then topping whatever you do. Shoppers are
meanwhile beckoned in every conceivable way to try a stream of
new merchants. In retailing, to coast is to fail.

In contrast to this have-to-be-smart-every-day business,
there is what I call the have-to-be-smart-once business. For
example, if you were smart enough to buy a network TV station
very early in the game, you could put in a shiftless and backward
nephew to run things, and the business would still do well for
decades. You'd do far better, of course, if you put in Tom
Murphy, but you could stay comfortably in the black without him.
For a retailer, hiring that nephew would be an express ticket to
bankruptcy.

The two retailing businesses we purchased this year are
blessed with terrific managers who love to compete and have done
so successfully for decades. Like the CEOs of our other
operating units, they will operate autonomously: We want them to
feel that the businesses they run are theirs. This means no
second-guessing by Charlie and me. We avoid the attitude of the
alumnus whose message to the football coach is "I'm 100% with you
- win or tie." Our basic goal as an owner is to behave with our
managers as we like our owners to behave with us.

As we add more operations, I'm sometimes asked how many
people I can handle reporting to me. My answer to that is
simple: If I have one person reporting to me and he is a lemon,
that's one too many, and if I have managers like those we now
have, the number can be almost unlimited. We are lucky to have
Bill and Sheldon associated with us, and we hope that we can
acquire other businesses that bring with them managers of similar
caliber.

GEICO Corporation

Right after yearend, we completed the purchase of 100% of
GEICO, the seventh largest auto insurer in the United States,
with about 3.7 million cars insured. I've had a 45-year
association with GEICO, and though the story has been told
before, it's worth a short recap here.

I attended Columbia University's business school in 1950-51,
not because I cared about the degree it offered, but because I
wanted to study under Ben Graham, then teaching there. The time
I spent in Ben's classes was a personal high, and quickly induced
me to learn all I could about my hero. I turned first to Who's
Who in America, finding there, among other things, that Ben was
Chairman of Government Employees Insurance Company, to me an
unknown company in an unfamiliar industry.

A librarian next referred me to Best's Fire and Casualty
insurance manual, where I learned that GEICO was based in
Washington, DC. So on a Saturday in January, 1951, I took the
train to Washington and headed for GEICO's downtown headquarters.
To my dismay, the building was closed, but I pounded on the door
until a custodian appeared. I asked this puzzled fellow if there
was anyone in the office I could talk to, and he said he'd seen
one man working on the sixth floor.

And thus I met Lorimer Davidson, Assistant to the President,
who was later to become CEO. Though my only credentials were
that I was a student of Graham's, "Davy" graciously spent four
hours or so showering me with both kindness and instruction. No
one has ever received a better half-day course in how the
insurance industry functions nor in the factors that enable one
company to excel over others. As Davy made clear, GEICO's method
of selling - direct marketing - gave it an enormous cost
advantage over competitors that sold through agents, a form of
distribution so ingrained in the business of these insurers that
it was impossible for them to give it up. After my session with
Davy, I was more excited about GEICO than I have ever been about
a stock.

When I finished at Columbia some months later and returned
to Omaha to sell securities, I naturally focused almost
exclusively on GEICO. My first sales call - on my Aunt Alice,
who always supported me 100% - was successful. But I was then a
skinny, unpolished 20-year-old who looked about 17, and my pitch
usually failed. Undaunted, I wrote a short report late in 1951
about GEICO for "The Security I Like Best" column in The
Commercial and Financial Chronicle, a leading financial
publication of the time. More important, I bought stock for my
own account.

You may think this odd, but I have kept copies of every tax
return I filed, starting with the return for 1944. Checking
back, I find that I purchased GEICO shares on four occasions
during 1951, the last purchase being made on September 26. This
pattern of persistence suggests to me that my tendency toward
self-intoxication was developed early. I probably came back on
that September day from unsuccessfully trying to sell some
prospect and decided - despite my already having more than 50% of
my net worth in GEICO - to load up further. In any event, I
accumulated 350 shares of GEICO during the year, at a cost of
$10,282. At yearend, this holding was worth $13,125, more than
65% of my net worth.

You can see why GEICO was my first business love. Furthermore,
just to complete this stroll down memory lane, I should add
that I earned most of the funds I used to buy GEICO shares by
delivering The Washington Post, the chief product of a
company that much later made it possible for Berkshire to turn
$10 million into $500 million.

Alas, I sold my entire GEICO position in 1952 for $15,259,
primarily to switch into Western Insurance Securities. This act
of infidelity can partially be excused by the fact that Western
was selling for slightly more than one times its current earnings,
a p/e ratio that for some reason caught my eye. But in the next
20 years, the GEICO stock I sold grew in value to about $1.3
million, which taught me a lesson about the inadvisability of
selling a stake in an identifiably-wonderful company.

In the early 1970's, after Davy retired, the executives
running GEICO made some serious errors in estimating their claims
costs, a mistake that led the company to underprice its policies
- and that almost caused it to go bankrupt. The company was
saved only because Jack Byrne came in as CEO in 1976 and took
drastic remedial measures.

Because I believed both in Jack and in GEICO's fundamental
competitive strength, Berkshire purchased a large interest in the
company during the second half of 1976, and also made smaller
purchases later. By yearend 1980, we had put $45.7 million into
GEICO and owned 33.3% of its shares. During the next 15 years,
we did not make further purchases. Our interest in the company,
nonetheless, grew to about 50% because it was a big repurchaser
of its own shares.

Then, in 1995, we agreed to pay $2.3 billion for the half of
the company we didn't own. That is a steep price. But it gives
us full ownership of a growing enterprise whose business remains
exceptional for precisely the same reasons that prevailed in
1951. In addition, GEICO has two extraordinary managers: Tony
Nicely, who runs the insurance side of the operation, and Lou
Simpson, who runs investments.

Tony, 52, has been with GEICO for 34 years. There's no one
I would rather have managing GEICO's insurance operation. He has
brains, energy, integrity and focus. If we're lucky, he'll stay
another 34 years.

Lou runs investments just as ably. Between 1980 and 1995,
the equities under Lou's management returned an average of 22.8%
annually vs. 15.7% for the S&P. Lou takes the same conservative,
concentrated approach to investments that we do at Berkshire, and
it is an enormous plus for us to have him on board. One point
that goes beyond Lou's GEICO work: His presence on the scene
assures us that Berkshire would have an extraordinary
professional immediately available to handle its investments if
something were to happen to Charlie and me.

GEICO, of course, must continue both to attract good
policyholders and keep them happy. It must also reserve and
price properly. But the ultimate key to the company's success is
its rock-bottom operating costs, which virtually no competitor
can match. In 1995, moreover, Tony and his management team
pushed underwriting and loss adjustment expenses down further to
23.6% of premiums, nearly one percentage point below 1994's
ratio. In business, I look for economic castles protected by
unbreachable "moats." Thanks to Tony and his management team,
GEICO's moat widened in 1995.

Finally, let me bring you up to date on Davy. He's now 93
and remains my friend and teacher. He continues to pay close
attention to GEICO and has always been there when the company's
CEOs - Jack Byrne, Bill Snyder and Tony - have needed him. Our
acquisition of 100% of GEICO caused Davy to incur a large tax.
Characteristically, he still warmly supported the transaction.

Davy has been one of my heroes for the 45 years I've known
him, and he's never let me down. You should understand that
Berkshire would not be where it is today if Davy had not been so
generous with his time on a cold Saturday in 1951. I've often
thanked him privately, but it is fitting that I use this report
to thank him on behalf of Berkshire's shareholders.

Insurance Operations

In addition to acquiring GEICO, we enjoyed other favorable
developments in insurance during 1995.

As we've explained in past reports, what counts in our
insurance business is, first, the amount of "float" we generate
and, second, its cost to us. Float is money we hold but don't
own. In an insurance operation, float arises because most
policies require that premiums be prepaid and, more importantly,
because it usually takes time for an insurer to hear about and
resolve loss claims.

Typically, the premiums that an insurer takes in do not
cover the losses and expenses it must pay. That leaves it
running an "underwriting loss" - and that loss is the cost of
float. An insurance business is profitable over time if its cost
of float is less than the cost the company would otherwise incur
to obtain funds. But the business has a negative value if the
cost of its float is higher than market rates for money.

As the numbers in the following table show, Berkshire's
insurance business has been a huge winner. For the table, we
have calculated our float - which we generate in exceptional
amounts relative to our premium volume - by adding loss reserves,
loss adjustment reserves, funds held under reinsurance assumed
and unearned premium reserves, and then subtracting agents'
balances, prepaid acquisition costs, prepaid taxes and deferred
charges applicable to assumed reinsurance. Our cost of float is
determined by our underwriting loss or profit. In those years
when we have had an underwriting profit, such as the last three,
our cost of float has been negative, which means we have
calculated our insurance earnings by adding underwriting profit
to float income.

(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%
1993 ...... profit 2,624.7 less than zero 6.35%
1994 ...... profit 3,056.6 less than zero 7.88%
1995 ...... profit 3,607.2 less than zero 5.95%

Since 1967, when we entered the insurance business, our float
has grown at an annual compounded rate of 20.7%. In more years
than not, our cost of funds has been less than nothing. This
access to "free" money has boosted Berkshire's performance in a
major way.

Any company's level of profitability is determined by three
items: (1) what its assets earn; (2) what its liabilities cost;
and (3) its utilization of "leverage" - that is, the degree to
which its assets are funded by liabilities rather than by equity.
Over the years, we have done well on Point 1, having produced high
returns on our assets. But we have also benefitted greatly - to a
degree that is not generally well-understood - because our
liabilities have cost us very little. An important reason for this
low cost is that we have obtained float on very advantageous terms.
The same cannot be said by many other property and casualty
insurers, who may generate plenty of float, but at a cost that
exceeds what the funds are worth to them. In those circumstances,
leverage becomes a disadvantage.

Since our float has cost us virtually nothing over the years,
it has in effect served as equity. Of course, it differs from true
equity in that it doesn't belong to us. Nevertheless, let's assume
that instead of our having $3.4 billion of float at the end of
1994, we had replaced it with $3.4 billion of equity. Under this
scenario, we would have owned no more assets than we did during
1995. We would, however, have had somewhat lower earnings because
the cost of float was negative last year. That is, our float threw
off profits. And, of course, to obtain the replacement equity, we
would have needed to sell many new shares of Berkshire. The net
result - more shares, equal assets and lower earnings - would have
materially reduced the value of our stock. So you can understand
why float wonderfully benefits a business - if it is obtained at a
low cost.

Our acquisition of GEICO will immediately increase our float
by nearly $3 billion, with additional growth almost certain. We
also expect GEICO to operate at a decent underwriting profit in
most years, a fact that will increase the probability that our
total float will cost us nothing. Of course, we paid a very
substantial price for the GEICO float, whereas virtually all of the
gains in float depicted in the table were developed internally.

Our enthusiasm over 1995's insurance results must be tempered
once again because we had our third straight year of good fortune
in the super-cat business. In this operation, we sell policies
that insurance and reinsurance companies buy to protect themselves
from the effects of mega-catastrophes. Since truly major
catastrophes occur infrequently, our super-cat business can be
expected to show large profits in most years but occasionally to
record a huge loss. In other words, the attractiveness of our
super-cat business will take many years to measure. We know that
the results of years like the past three will be at least partially
offset by some truly terrible year in the future. We just hope
that "partially" turns out to be the proper adverb.

There were plenty of catastrophes last year, but no super-cats
of the insured variety. The Southeast had a close call when Opal,
sporting winds of 150 miles per hour, hovered off Florida.
However, the storm abated before hitting land, and so a second
Andrew was dodged. For insurers, the Kobe earthquake was another
close call: The economic damage was huge - perhaps even a record -
but only a tiny portion of it was insured. The insurance industry
won't always be that lucky.

Ajit Jain is the guiding genius of our super-cat business and
writes important non-cat business as well. In insurance, the term
"catastrophe" is applied to an event, such as a hurricane or
earthquake, that causes a great many insured losses. The other
deals Ajit enters into usually cover only a single large loss. A
simplified description of three transactions from last year will
illustrate both what I mean and Ajit's versatility. We insured: (1)
The life of Mike Tyson for a sum that is large initially and that,
fight-by-fight, gradually declines to zero over the next few years;
(2) Lloyd's against more than 225 of its "names" dying during the
year; and (3) The launch, and a year of orbit, of two Chinese
satellites. Happily, both satellites are orbiting, the Lloyd's folk
avoided abnormal mortality, and if Mike Tyson looked any healthier,
no one would get in the ring with him.

Berkshire is sought out for many kinds of insurance, both
super-cat and large single-risk, because: (1) our financial
strength is unmatched, and insureds know we can and will pay our
losses under the most adverse of circumstances; (2) we can supply a
quote faster than anyone in the business; and (3) we will issue
policies with limits larger than anyone else is prepared to write.
Most of our competitors have extensive reinsurance treaties and
lay off much of their business. While this helps them avoid shock
losses, it also hurts their flexibility and reaction time. As you
know, Berkshire moves quickly to seize investment and acquisition
opportunities; in insurance we respond with the same exceptional
speed. In another important point, large coverages don't frighten
us but, on the contrary, intensify our interest. We have offered a
policy under which we could have lost $1 billion; the largest
coverage that a client accepted was $400 million.

We will get hit from time to time with large losses. Charlie
and I, however, are quite willing to accept relatively volatile
results in exchange for better long-term earnings than we would
otherwise have had. In other words, we prefer a lumpy 15% to a
smooth 12%. Since most managers opt for smoothness, we are left
with a competitive advantage that we try to maximize. We do,
though, monitor our aggregate exposure in order to keep our "worst
case" at a level that leaves us comfortable.

Indeed, our worst case from a "once-in-a-century" super-cat is
far less severe - relative to net worth - than that faced by many
well-known primary companies writing great numbers of property
policies. These insurers don't issue single huge-limit policies as
we do, but their small policies, in aggregate, can create a risk of
staggering size. The "big one" would blow right through the
reinsurance covers of some of these insurers, exposing them to
uncapped losses that could threaten their survival. In our case,
losses would be large, but capped at levels we could easily handle.

Prices are weakening in the super-cat field. That is
understandable considering the influx of capital into the
reinsurance business a few years ago and the natural desire of
those holding the capital to employ it. No matter what others may
do, we will not knowingly write business at inadequate rates. We
unwittingly did this in the early 1970's and, after more than 20
years, regularly receive significant bills stemming from the
mistakes of that era. My guess is that we will still be getting
surprises from that business 20 years from now. A bad reinsurance
contract is like hell: easy to enter and impossible to exit.

I actively participated in those early reinsurance decisions,
and Berkshire paid a heavy tuition for my education in the
business. Unfortunately, reinsurance students can't attend school
on scholarship. GEICO, incidentally, suffered a similar,
disastrous experience in the early 1980's, when it plunged
enthusiastically into the writing of reinsurance and large risks.
GEICO's folly was brief, but it will be cleaning things up for at
least another decade. The well-publicized problems at Lloyd's
further illustrate the perils of reinsurance and also underscore
how vital it is that the interests of the people who write
insurance business be aligned - on the downside as well as the
upside - with those of the people putting up the capital. When
that kind of symmetry is missing, insurers almost invariably run
into trouble, though its existence may remain hidden for some time.

A small, apocryphal story about an insurance CEO who was
visited by an analyst tells a lot about this industry. To the
analyst's questions about his business, the CEO had nothing but
gloomy answers: Rates were ridiculously low; the reserves on his
balance sheet weren't adequate for ordinary claims, much less those
likely to arise from asbestos and environmental problems; most of
his reinsurers had long since gone broke, leaving him holding the
sack. But then the CEO brightened: "Still, things could be a lot
worse," he said. "It could be my money." At Berkshire, it's our
money.

Berkshire's other insurance operations, though relatively
small, performed magnificently in 1995. National Indemnity's
traditional business had a combined ratio of 84.2 and developed, as
usual, a large amount of float compared to premium volume. Over
the last three years, this segment of our business, run by Don
Wurster, has had an average combined ratio of 85.6. Our homestate
operation, managed by Rod Eldred, grew at a good rate in 1995 and
achieved a combined ratio of 81.4. Its three-year combined ratio
is an amazing 82.4. Berkshire's California workers' compensation
business, run by Brad Kinstler, faced fierce price-cutting in 1995
and lost a great many renewals when we refused to accept inadequate
rates. Though this operation's volume dropped materially, it
produced an excellent underwriting profit. Finally, John Kizer, at
Central States Indemnity, continues to do an extraordinary job.
His premium volume was up 23% in 1995, and underwriting profit grew
by 59%. Ajit, Don, Rod, Brad and John are all under 45, an
embarrassing fact demolishing my theory that managers only hit
their stride after they reach 70.

To sum up, we entered 1995 with an exceptional insurance
operation of moderate size. By adding GEICO, we entered 1996 with
a business still better in quality, much improved in its growth
prospects, and doubled in size. More than ever, insurance is our
core strength.

Sources of Reported Earnings

The table below shows the main sources of Berkshire's reported
earnings. In this presentation, purchase-premium charges are not
assigned to 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. This form of presentation
seems to us to be more useful to investors and managers than one
utilizing GAAP, which requires purchase-premiums to be charged off,
business-by-business. The total earnings we show in the table are,
of course, identical to the GAAP total in our audited financial
statements.

(in millions)
---------------------------------------
Berkshire's Share
of Net Earnings
(after taxes and
Pre-Tax Earnings minority interests)
------------------ ------------------
1995 1994 1995 1994
-------- -------- -------- --------
Operating Earnings:
Insurance Group:
Underwriting ............... $ 20.5 $129.9 $ 11.3 $ 80.9
Net Investment Income ...... 501.6 419.4 417.7 350.5
Buffalo News ................. 46.8 54.2 27.3 31.7
Fechheimer ................... 16.9 14.3 8.8 7.1
Finance Businesses ........... 20.8 22.1 12.6 14.6
Home Furnishings ............. 29.7(1) 17.4 16.7(1) 8.7
Jewelry ...................... 33.9(2) ---(3) 19.1(2) ---(3)
Kirby ........................ 50.2 42.3 32.1 27.7
Scott Fetzer Manufacturing Group 34.1 39.5 21.2 24.9
See's Candies ................ 50.2 47.5 29.8 28.2
Shoe Group ................... 58.4 85.5 37.5 55.8
World Book ................... 8.8 24.7 7.0 17.3
Purchase-Price Premium Charges (27.0) (22.6) (23.4) (19.4)
Interest Expense(4) .......... (56.0) (60.1) (34.9) (37.3)
Shareholder-Designated
Contributions ............ (11.6) (10.4) (7.0) (6.7)
Other ........................ 37.4 35.7 24.4 22.3
-------- -------- -------- --------
Operating Earnings ............. 814.7 839.4 600.2 606.2
Sales of Securities ............ 194.1 91.3 125.0 61.1
Decline in Value of
USAir Preferred Stock ...... --- (268.5) --- (172.6)
--------- -------- -------- --------
Total Earnings - All Entities $1,008.8 $662.2 $725.2 $494.8
========= ======== ======== ========

(1) Includes R.C. Willey from June 29, 1995.
(2) Includes Helzberg's from April 30, 1995.
(3) Jewelry earnings were included in "Other" in 1994.
(4) Excludes interest expense of Finance Businesses.
A large amount of information about these businesses is given
on pages 41-52, where you will also find our segment earnings
reported on a GAAP basis. In addition, on pages 57-63, we have
rearranged Berkshire's financial data into four segments on a non-
GAAP basis, a presentation that corresponds to the way Charlie and
I think about the company. Our intent is to supply you with the
financial information that we would wish you to give us if our
positions were reversed.

At Berkshire, we believe in Charlie's dictum - "Just tell me
the bad news; the good news will take care of itself" - and that is
the behavior we expect of our managers when they are reporting to
us. Consequently, I also owe you - Berkshire's owners - a report
on three operations that, though they continued to earn decent (or
better) returns on invested capital, experienced a decline in
earnings last year. Each encountered a different type of problem.

Our shoe business operated in an industry that suffered
depressed earnings throughout last year, and many of our
competitors made only marginal profits or worse. That means we at
least maintained, and in some instances widened, our competitive
superiority. So I have no doubt that our shoe operations will
climb back to top-grade earnings in the future. In other words,
though the turn has not yet occurred, we believe you should view
last year's figures as reflecting a cyclical problem, not a secular
one.

The Buffalo News, though still doing very well in comparison
to other newspapers, is another story. In this case, industry
trends are not good. In the 1991 Annual Report, I explained that
newspapers had lost a notch in their economic attractiveness from
the days when they appeared to have a bullet-proof franchise.
Today, the industry retains its excellent economics, but has lost
still another notch. Over time, we expect the competitive strength
of newspapers to gradually erode, though the industry should
nevertheless remain a fine business for many years to come.

Berkshire's most difficult problem is World Book, which
operates in an industry beset by increasingly tough competition
from CD-ROM and on-line offerings. True, we are still profitable,
a claim that perhaps no other print encyclopedia can make. But our
sales and earnings trends have gone in the wrong direction. At the
end of 1995, World Book made major changes in the way it
distributes its product, stepped up its efforts with electronic
products and sharply reduced its overhead costs. It will take time
for us to evaluate the effects of these initiatives, but we are
confident they will significantly improve our viability.

All of our operations, including those whose earnings fell
last year, benefit from exceptionally talented and dedicated
managers. Were we to have the choice of any other executives now
working in their industries, there is not one of our managers we
would replace.

Many of our managers don't have to work for a living, but
simply go out and perform every day for the same reason that
wealthy golfers stay on the tour: They love both doing what they
do and doing it well. To describe them as working may be a
misnomer - they simply prefer spending much of their time on a
productive activity at which they excel to spending it on leisure
activities. Our job is to provide an environment that will keep
them feeling this way, and so far we seem to have succeeded:
Thinking back over the 1965-95 period, I can't recall that a single
key manager has left Berkshire to join another employer.

Common Stock Investments

Below we present our common stock investments. Those with a
market value of more than $600 million are itemized.

12/31/95
Shares Company Cost Market
---------- ------- -------- --------
(dollars in millions)
49,456,900 American Express Company ............. $1,392.7 $2,046.3
20,000,000 Capital Cities/ABC, Inc. ............. 345.0 2,467.5
100,000,000 The Coca-Cola Company ................ 1,298.9 7,425.0
12,502,500 Federal Home Loan Mortgage Corp.
("Freddie Mac") ................... 260.1 1,044.0
34,250,000 GEICO Corp. .......................... 45.7 2,393.2
48,000,000 The Gillette Company ................. 600.0 2,502.0
6,791,218 Wells Fargo & Company ................ 423.7 1,466.9
Others ............................... 1,379.0 2,655.4
-------- ---------
Total Common Stocks .................. $5,745.1 $22,000.3
======== =========

We continue in our Rip Van Winkle mode: Five of our six top
positions at yearend 1994 were left untouched during 1995. The
sixth was American Express, in which we increased our ownership to
about 10%.

In early 1996, two major events affected our holdings: First,
our purchase of the GEICO stock we did not already own caused that
company to be converted into a wholly-owned subsidiary. Second, we
exchanged our Cap Cities shares for a combination of cash and
Disney stock.

In the Disney merger, Cap Cities shareholders had a choice of
actions. If they chose, they could exchange each of their Cap
Cities shares for one share of Disney stock plus $65. Or they
could ask for - though not necessarily get - all cash or all stock,
with their ultimate allotment of each depending on the choices made
by other shareholders and certain decisions made by Disney. For
our 20 million shares, we sought stock, but do not know, as this
report goes to press, how much we were allocated. We are certain,
however, to receive something over 20 million Disney shares. We
have also recently bought Disney stock in the market.

One more bit of history: I first became interested in Disney
in 1966, when its market valuation was less than $90 million, even
though the company had earned around $21 million pre-tax in 1965
and was sitting with more cash than debt. At Disneyland, the $17
million Pirates of the Caribbean ride would soon open. Imagine my
excitement - a company selling at only five times rides!

Duly impressed, Buffett Partnership Ltd. bought a significant
amount of Disney stock at a split-adjusted price of 31› per share.
That decision may appear brilliant, given that the stock now sells
for $66. But your Chairman was up to the task of nullifying it:
In 1967 I sold out at 48› per share.

Oh well - we're happy to be once again a large owner of a
business with both unique assets and outstanding management.

Convertible Preferred Stocks

As many of you will remember, Berkshire made five private
purchases of convertible preferred stocks during the 1987-91 period
and the time seems right to discuss their status. Here are the
particulars:

Dividend Year of Market
Company Rate Purchase Cost Value
------- -------- -------- ------ --------
(dollars in millions)

Champion International Corp. ... 9 1/4% 1989 $300 $388(1)
First Empire State Corp. ....... 9% 1991 40 110
The Gillette Company ........... 8 3/4% 1989 600 2,502(2)
Salomon Inc .................... 9% 1987 700 728(3)
USAir Group, Inc. .............. 9 1/4% 1989 358 215

(1) Proceeds from sale of common we received through conversion in 1995.
(2) 12/31/95 value of common we received through conversion in 1991.
(3) Includes $140 we received in 1995 from partial redemption.

In each case we had the option of sticking with these
preferreds as fixed-income securities or converting them into
common stock. Initially, their value to us came primarily from
their fixed-income characteristics. The option we had to convert
was a kicker.

Our $300 million private purchase of American Express "Percs"
- described in the 1991 Annual Report - is not included in the
table because that security was a modified form of common stock
whose fixed-income characteristics contributed only a minor portion
of its initial value. Three years after we bought them, the Percs
automatically were converted to common stock. In contrast, the
five securities in the table were set to become common stocks only
if we wished them to - a crucial difference.

When we purchased our convertible securities, I told you that
we expected to earn after-tax returns from them that "moderately"
exceeded what we could earn from the medium-term fixed-income
securities they replaced. We beat this expectation - but only
because of the performance of a single issue. I also told you that
these securities, as a group, would "not produce the returns we can
achieve when we find a business with wonderful economic prospects."
Unfortunately, that prediction was fulfilled. Finally, I said
that "under almost any conditions, we expect these preferreds to
return us our money plus dividends." That's one I would like to
have back. Winston Churchill once said that "eating my words has
never given me indigestion." My assertion, however, that it was
almost impossible for us to lose money on our preferreds has caused
me some well-deserved heartburn.

Our best holding has been Gillette, which we told you from the
start was a superior business. Ironically, though, this is also
the purchase in which I made my biggest mistake - of a kind,
however, never recognized on financial statements.

We paid $600 million in 1989 for Gillette preferred shares
that were convertible into 48 million (split-adjusted) common
shares. Taking an alternative route with the $600 million, I
probably could have purchased 60 million shares of common from the
company. The market on the common was then about $10.50, and given
that this would have been a huge private placement carrying
important restrictions, I probably could have bought the stock at a
discount of at least 5%. I can't be sure about this, but it's
likely that Gillette's management would have been just as happy to
have Berkshire opt for common.

But I was far too clever to do that. Instead, for less than
two years, we received some extra dividend income (the difference
between the preferred's yield and that of the common), at which
point the company - quite properly - called the issue, moving to do
that as quickly as was possible. If I had negotiated for common
rather than preferred, we would have been better off at yearend
1995 by $625 million, minus the "excess" dividends of about $70
million.

In the case of Champion, the ability of the company to call
our preferred at 115% of cost forced a move out of us last August
that we would rather have delayed. In this instance, we converted
our shares just prior to the pending call and offered them to the
company at a modest discount.

Charlie and I have never had a conviction about the paper
industry - actually, I can't remember ever owning the common stock
of a paper producer in my 54 years of investing - so our choice in
August was whether to sell in the market or to the company.
Champion's management had always been candid and honorable in
dealing with us and wished to repurchase common shares, so we
offered our stock to the company. Our Champion capital gain was
moderate - about 19% after tax from a six-year investment - but the
preferred delivered us a good after-tax dividend yield throughout
our holding period. (That said, many press accounts have
overstated the after-tax yields earned by property-casualty
insurance companies on dividends paid to them. What the press has
failed to take into account is a change in the tax law that took
effect in 1987 and that significantly reduced the dividends
received credit applicable to insurers. For details, see our 1986
Annual Report.)

Our First Empire preferred will be called on March 31, 1996,
the earliest date allowable. We are comfortable owning stock in
well-run banks, and we will convert and keep our First Empire
common shares. Bob Wilmers, CEO of the company, is an outstanding
banker, and we love being associated with him.

Our other two preferreds have been disappointing, though the
Salomon preferred has modestly outperformed the fixed-income
securities for which it was a substitute. However, the amount of
management time Charlie and I have devoted to this holding has been
vastly greater than its economic significance to Berkshire.
Certainly I never dreamed I would take a new job at age 60 -
Salomon interim chairman, that is - because of an earlier purchase
of a fixed-income security.

Soon after our purchase of the Salomon preferred in 1987, I
wrote that I had "no special insights regarding the direction or
future profitability of investment banking." Even the most
charitable commentator would conclude that I have since proved my
point.

To date, our option to convert into Salomon common has not
proven of value. Furthermore, the Dow Industrials have doubled
since I committed to buy the preferred, and the brokerage group has
performed equally as well. That means my decision to go with
Salomon because I saw value in the conversion option must be graded
as very poor. Even so, the preferred has continued under some
trying conditions to deliver as a fixed-income security, and the
9% dividend is currently quite attractive.

Unless the preferred is converted, its terms require
redemption of 20% of the issue on October 31 of each year, 1995-99,
and $140 million of our original $700 million was taken on schedule
last year. (Some press reports labeled this a sale, but a senior
security that matures is not "sold.") Though we did not elect to
convert the preferred that matured last year, we have four more
bites at the conversion apple, and I believe it quite likely that
we will yet find value in our right to convert.

I discussed the USAir investment at length in last year's
report. The company's results improved in 1995, but it still faces
significant problems. On the plus side for us is the fact that our
preferred is structurally well-designed: For example, though we
have not been paid dividends since June 1994, the amounts owed us
are compounding at 5% over the prime rate. On the minus side is
the fact that we are dealing with a weak credit.

We feel much better about our USAir preferred than we did a
year ago, but your guess is as good as mine as to its ultimate
value. (Indeed, considering my record with this investment, it's
fair to say that your guess may be better than mine.) At yearend
we carried our preferred (in which there is no public market) at
60% of par, though USAir also has outstanding a junior preferred
that is significantly inferior to ours in all respects except
conversion price and that was then trading at 82% of par. As I
write this, the junior issue has advanced to 97% of par. Let's
hope the market is right.

Overall, our preferreds have performed well, but that is true
only because of one huge winner, Gillette. Leaving aside Gillette,
our preferreds as a group have delivered us after-tax returns no
more than equal to those we could have earned from the medium-term
fixed-income issues that they replaced.

A Proposed Recapitalization

At the Annual Meeting you will be asked to approve a
recapitalization of Berkshire, creating two classes of stock. If
the plan is adopted, our existing common stock will be designated
as Class A Common Stock and a new Class B Common Stock will be
authorized.

Each share of the "B" will have the rights of 1/30th of an "A"
share with these exceptions: First, a B share will have 1/200th of
the vote of an A share (rather than 1/30th of the vote). Second,
the B will not be eligible to participate in Berkshire's
shareholder-designated charitable contributions program.

When the recapitalization is complete, each share of A will
become convertible, at the holder's option and at any time, into 30
shares of B. This conversion privilege will not extend in the
opposite direction. That is, holders of B shares will not be able
to convert them into A shares.

We expect to list the B shares on the New York Stock Exchange,
where they will trade alongside the A stock. To create the
shareholder base necessary for a listing - and to ensure a liquid
market in the B stock - Berkshire expects to make a public offering
for cash of at least $100 million of new B shares. The offering
will be made only by means of a prospectus.

The market will ultimately determine the price of the B
shares. Their price, though, should be in the neighborhood of
1/30th of the price of the A shares.

Class A shareholders who wish to give gifts may find it
convenient to convert a share or two of their stock into Class B
shares. Additionally, arbitrage-related conversions will occur if
demand for the B is strong enough to push its price to slightly
above 1/30th of the price of A.

However, because the Class A stock will entitle its holders to
full voting rights and access to Berkshire's contributions program,
these shares will be superior to the Class B shares and we would
expect most shareholders to remain holders of the Class A - which
is precisely what the Buffett and Munger families plan to do,
except in those instances when we ourselves might convert a few
shares to facilitate gifts. The prospect that most shareholders
will stick to the A stock suggests that it will enjoy a somewhat
more liquid market than the B.

There are tradeoffs for Berkshire in this recapitalization.
But they do not arise from the proceeds of the offering - we will
find constructive uses for the money - nor in any degree from the
price at which we will sell the B shares. As I write this - with
Berkshire stock at $36,000 - Charlie and I do not believe it
undervalued. Therefore, the offering we propose will not diminish
the per-share intrinsic value of our existing stock. Let me also
put our thoughts about valuation more baldly: Berkshire is selling
at a price at which Charlie and I would not consider buying it.

What Berkshire will incur by way of the B stock are certain
added costs, including those involving the mechanics of handling a
larger number of shareholders. On the other hand, the stock should
be a convenience for people wishing to make gifts. And those of
you who have hoped for a split have gained a do-it-yourself method
of bringing one about.

We are making this move, though, for other reasons - having to
do with the appearance of expense-laden unit trusts purporting to
be low-priced "clones" of Berkshire and sure to be aggressively
marketed. The idea behind these vehicles is not new: In recent
years, a number of people have told me about their wish to create
an "all-Berkshire" investment fund to be sold at a low dollar
price. But until recently, the promoters of these investments
heard out my objections and backed off.

I did not discourage these people because I prefer large
investors over small. Were it possible, Charlie and I would love
to turn $1,000 into $3,000 for multitudes of people who would find
that gain an important answer to their immediate problems.

In order to quickly triple small stakes, however, we would
have to just as quickly turn our present market capitalization of
$43 billion into $129 billion (roughly the market cap of General
Electric, America's most highly valued company). We can't come
close to doing that. The very best we hope for is - on average - to
double Berkshire's per-share intrinsic value every five years, and
we may well fall far short of that goal.

In the end, Charlie and I do not care whether our shareholders
own Berkshire in large or small amounts. What we wish for are
shareholders of any size who are knowledgeable about our
operations, share our objectives and long-term perspective, and are
aware of our limitations, most particularly those imposed by our
large capital base.

The unit trusts that have recently surfaced fly in the face of
these goals. They would be sold by brokers working for big
commissions, would impose other burdensome costs on their
shareholders, and would be marketed en masse to unsophisticated
buyers, apt to be seduced by our past record and beguiled by the
publicity Berkshire and I have received in recent years. The sure
outcome: a multitude of investors destined to be disappointed.

Through our creation of the B stock - a low-denomination
product far superior to Berkshire-only trusts - we hope to make the
clones unmerchandisable.

But both present and prospective Berkshire shareholders should
pay special attention to one point: Though the per-share intrinsic
value of our stock has grown at an excellent rate during the past
five years, its market price has grown still faster. The stock, in
other words, has outperformed the business.

That kind of market overperformance cannot persist indefinitely,
neither for Berkshire nor any other stock. Inevitably, there
will be periods of underperformance as well. The price
volatility that results, though endemic to public markets, is
not to our liking. What we would prefer instead is to have the
market price of Berkshire precisely track its intrinsic value.
Were the stock to do that, every shareholder would benefit during
his period of ownership in exact proportion to the progress
Berkshire itself made in the period.

Obviously, the market behavior of Berkshire's stock will never
conform to this ideal. But we will come closer to this goal than
we would otherwise if our present and prospective shareholders are
informed, business-oriented and not exposed to high-commission
salesmanship when making their investment decisions. To that end,
we are better off if we can blunt the merchandising efforts of the
unit trusts - and that is the reason we are creating the B stock.

We look forward to answering your questions about the
recapitalization at the Annual Meeting.

Miscellaneous

Berkshire isn't the only American corporation utilizing the
new, exciting ABWA strategy. At about 1:15 p.m. on July 14, 1995,
Michael Eisner, CEO of The Walt Disney Company, was walking up
Wildflower Lane in Sun Valley. At the same time, I was leaving a
lunch at Herbert Allen's home on that street to meet Tom Murphy,
CEO of Cap Cities/ABC, for a golf game.

That morning, speaking to a large group of executives and
money managers assembled by Allen's investment bank, Michael had
made a brilliant presentation about Disney, and upon seeing him, I
offered my congratulations. We chatted briefly - and the subject
of a possible combination of Disney and Cap Cities came up. This
wasn't the first time a merger had been discussed, but progress had
never before been made, in part because Disney wanted to buy with
cash and Cap Cities desired stock.

Michael and I waited a few minutes for Murph to arrive, and in
the short conversation that ensued, both Michael and Murph
indicated they might bend on the stock/cash question. Within a few
weeks, they both did, at which point a contract was put together in
three very busy days.

The Disney/Cap Cities deal makes so much sense that I'm sure
it would have occurred without that chance encounter in Sun Valley.
But when I ran into Michael that day on Wildflower Lane, he was
heading for his plane, so without that accidental meeting the deal
certainly wouldn't have happened in the time frame it did. I
believe both Disney and Cap Cities will benefit from the fact that
we all serendipitously met that day.

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

It's appropriate that I say a few words here about Murph. To
put it simply, he is as fine an executive as I have ever seen in my
long exposure to business. Equally important, he possesses human
qualities every bit the equal of his managerial qualities. He's an
extraordinary friend, parent, husband and citizen. In those rare
instances in which Murph's personal interests diverged from those
of shareholders, he unfailingly favored the owners. When I say
that I like to be associated with managers whom I would love to
have as a sibling, in-law, or trustee of my will, Murph is the
exemplar of what I mean.

If Murph should elect to run another business, don't bother to
study its value - just buy the stock. And don't later be as dumb
as I was two years ago when I sold one-third of our holdings in Cap
Cities for $635 million (versus the $1.27 billion those shares
would bring in the Disney merger).

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

About 96.3% of all eligible shares participated in Berkshire's
1995 shareholder-designated contributions program. Contributions
made were $11.6 million and 3,600 charities were recipients. A
full description of the shareholder-designated contributions
program appears on pages 54-55.

Every year a few shareholders miss out on the program because
they don't have their shares registered in their own names on the
prescribed record date or because they fail to get their
designation form back to us within the 60-day period allowed. That
second problem pained me especially this year because two good
friends with substantial holdings missed the deadline. We had to
deny their requests to be included because we can't make exceptions
for some shareholders while refusing to make them for others.

To participate in future programs, you must own Class A shares
that are registered in the name of the actual owner, not the
nominee name of a broker, bank or depository. Shares not so
registered on August 31, 1996, will be ineligible for the 1996
program. When you get the form, return it promptly so that it does
not get put aside or forgotten.

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

When it comes to our Annual Meetings, Charlie and I are
managerial oddballs: We thoroughly enjoy the event. So come join
us on Monday, May 6. At Berkshire, we have no investor relations
department and don't use financial analysts as a channel for
disseminating information, earnings "guidance," or the like.
Instead, we prefer direct manager-to-owner communication and
believe that the Annual Meeting is the ideal place for this
interchange of ideas. Talking to you there is efficient for us and
also democratic in that all present simultaneously hear what we
have to say.

Last year, for the first time, we had the Annual Meeting at
the Holiday Convention Centre and the logistics seemed to work.
The ballroom there was filled with about 3,200 people, and we had a
video feed into a second room holding another 800 people. Seating
in the main room was a little tight, so this year we will probably
configure it to hold 3,000. This year we will also have two rooms
for the overflow.

All in all, we will be able to handle 5,000 shareholders. The
meeting will start at 9:30 a.m., but be warned that last year the
main ballroom was filled shortly after 8:00 a.m.

Shareholders from 49 states attended our 1995 meeting - where
were you, Vermont? - and a number of foreign countries, including
Australia, Sweden and Germany, were represented. As always, the
meeting attracted shareholders who were interested in Berkshire's
business - as contrasted to shareholders who are primarily
interested in themselves - and the questions were all good.
Charlie and I ate lunch on stage and answered questions for about
five hours.

We feel that if owners come from all over the world, we should
try to make sure they have an opportunity to ask their questions.
Most shareholders leave about noon, but a thousand or so hardcore
types usually stay to see whether we will drop. Charlie and I are
in training to last at least five hours again this year.

We will have our usual array of Berkshire products at the
meeting and this year will add a sales representative from GEICO.
At the 1995 meeting, we sold 747 pounds of candy, 759 pairs of
shoes, and over $17,500 of World Books and related publications.
In a move that might have been dangerous had our stock been weak,
we added knives last year from our Quikut subsidiary and sold 400
sets of these. (We draw the line at soft fruit, however.) All of
these goods will again be available this year. We don't consider a
cultural event complete unless a little business is mixed in.

Because we expect a large crowd for the meeting, we recommend
that you promptly get both plane and hotel reservations. Those of
you who like to be downtown (about six miles from the Centre) may
wish to stay at the Radisson Redick Tower, a small (88 rooms) but
nice hotel, or at the much larger Red Lion Hotel a few blocks away.
In the vicinity of the Centre are the Holiday Inn (403 rooms),
Homewood Suites (118 rooms) and Hampton Inn (136 rooms). Another
recommended spot is the Marriott, whose west Omaha location is
about 100 yards from Borsheim's and a ten-minute drive from the
Centre. There will be buses at the Marriott that will leave at
7:30, 8:00 and 8:30 for the meeting and return after it ends.

An attachment to our proxy material explains how you can
obtain the card you will need for admission to the meeting. A
good-sized parking area is available at the Centre, while those who
stay at the Holiday Inn, Homewood Suites and Hampton Inn will be
able to walk to the meeting. As usual, we will have buses to take
you to the Nebraska Furniture Mart and Borsheim's after the meeting
and to take you from there to hotels or the airport later.

NFM's main store, on its 64-acre site about two miles north of
the Centre, is open from 10 a.m. to 9 p.m. on weekdays, 10 a.m. to
6 p.m. on Saturdays, and noon to 6 p.m. on Sundays. Rose Blumkin -
"Mrs. B" - is now 102, but will be hard at work in Mrs. B's
Warehouse. She was honored in November at the opening of The Rose,
a classic downtown theater of the 20's that has been magnificently
restored, but that would have been demolished had she not saved it.
Ask her to tell you the story.

Borsheim's normally is closed on Sunday but will be open for
shareholders and their guests from 10 a.m. to 6 p.m. on May 5th.
Additionally, we will have a special opening for shareholders on
Saturday, the 4th, from 6 p.m. to 9 p.m. Last year, on
Shareholders Day, we wrote 1,733 tickets in the six hours we were
open - which is a sale every 13 seconds. Remember, though, that
records are made to be broken.

At Borsheim's, we will also have the world's largest faceted
diamond on display. Two years in the cutting, this inconspicuous
bauble is 545 carats in size. Please inspect this stone and let it
guide you in determining what size gem is appropriate for the one
you love.

On Saturday evening, May 4, there will be a baseball game at
Rosenblatt Stadium between the Omaha Royals and the Louisville
Redbirds. I expect to make the opening pitch - owning a quarter of
the team assures me of one start per year - but our manager, Mike
Jirschele, will probably make his usual mistake and yank me
immediately after. About 1,700 shareholders attended last year's
game. Unfortunately, we had a rain-out, which greatly disappointed
the many scouts in the stands. But the smart ones will be back
this year, and I plan to show them my best stuff.

Our proxy statement will include information about obtaining
tickets to the game. We will also offer an information packet this
year listing restaurants that will be open on Sunday night and
describing various things that you can do in Omaha on the weekend.

For years, I've unsuccessfully tried to get my grade school
classmate, "Pal" Gorat, to open his steakhouse for business on the
Sunday evening preceding the meeting. But this year he's relented.
Gorat's is a family-owned enterprise that has thrived for 52
years, and if you like steaks, you'll love this place. I've told
Pal he will get a good crowd, so call Gorat's at 402-551-3733 for a
reservation. You'll spot me there - I'll be the one eating the
rare T-bone with a double order of hash browns.

Warren E. Buffett
March 1, 1996 Chairman of the Board

To the Shareholders of Berkshire Hathaway Inc.:

Our gain in net worth during 1996 was $6.2 billion, or 36.1%. Per-
share book value, however, grew by less, 31.8%, because the number of
Berkshire shares increased: We issued stock in acquiring FlightSafety
International and also sold new Class B shares.* Over the last 32 years
(that is, since present management took over) per-share book value has
grown from $19 to $19,011, or at a rate of 23.8% compounded annually.

* Each Class B share has an economic interest equal to 1/30th of
that possessed by a Class A share, which is the new designation for
the only stock that Berkshire had outstanding before May 1996.
Throughout this report, we state all per-share figures in terms of
"Class A equivalents," which are the sum of the Class A shares
outstanding and 1/30th of the Class B shares outstanding.

For technical reasons, we have restated our 1995 financial
statements, a matter that requires me to present one of my less-than-
thrilling explanations of accounting arcana. I'll make it brief.

The restatement was required because GEICO became a wholly-owned
subsidiary of Berkshire on January 2, 1996, whereas it was previously
classified as an investment. From an economic viewpoint - taking into
account major tax efficiencies and other benefits we gained - the value
of the 51% of GEICO we owned at year-end 1995 increased significantly
when we acquired the remaining 49% of the company two days later.
Accounting rules applicable to this type of "step acquisition," however,
required us to write down the value of our 51% at the time we moved to
100%. That writedown - which also, of course, reduced book value -
amounted to $478.4 million. As a result, we now carry our original 51%
of GEICO at a value that is both lower than its market value at the time
we purchased the remaining 49% of the company and lower than the value at
which we carry that 49% itself.

There is an offset, however, to the reduction in book value I have
just described: Twice during 1996 we issued Berkshire shares at a
premium to book value, first in May when we sold the B shares for cash
and again in December when we used both A and B shares as part-payment
for FlightSafety. In total, the three non-operational items affecting
book value contributed less than one percentage point to our 31.8% per-
share gain last year.

I dwell on this rise in per-share book value because it roughly
indicates our economic progress during the year. But, as Charlie Munger,
Berkshire's Vice Chairman, and I have repeatedly told you, what counts at
Berkshire is intrinsic value, not book value. The last time you got that
message from us was in the Owner's Manual, sent to you in June after we
issued the Class B shares. In that manual, we not only defined certain
key terms - such as intrinsic value - but also set forth our economic
principles.

For many years, we have listed these principles in the front of our
annual report, but in this report, on pages 58 to 67, we reproduce the
entire Owner's Manual. In this letter, we will occasionally refer to the
manual so that we can avoid repeating certain definitions and
explanations. For example, if you wish to brush up on "intrinsic value,"
see pages 64 and 65.

Last year, for the first time, we supplied you with a table that
Charlie and I believe will help anyone trying to estimate Berkshire's
intrinsic value. In the updated version of that table, which follows, we
trace two key indices of value. The first column lists our per-share
ownership of investments (including cash and equivalents) and the second
column shows our per-share earnings from Berkshire's operating businesses
before taxes and purchase-accounting adjustments but after all interest
and corporate overhead expenses. The operating-earnings column excludes
all dividends, interest and capital gains that we realized from the
investments presented in the first column. In effect, the two columns
show what Berkshire would have reported had it been broken into two parts.

Pre-tax Earnings Per Share
Investments Excluding All Income from
Year Per Share Investments
---- ----------- -------------------------
1965................................$ 4 $ 4.08
1975................................ 159 (6.48)
1985................................ 2,443 18.86
1995................................ 22,088 258.20
1996................................ 28,500 421.39

Annual Growth Rate, 1965-95......... 33.4% 14.7%
One-Year Growth Rate, 1995-96 ...... 29.0% 63.2%

As the table tells you, our investments per share increased in 1996
by 29.0% and our non-investment earnings grew by 63.2%. Our goal is to
keep the numbers in both columns moving ahead at a reasonable (or, better
yet, unreasonable) pace.

Our expectations, however, are tempered by two realities. First,
our past rates of growth cannot be matched nor even approached:
Berkshire's equity capital is now large - in fact, fewer than ten
businesses in America have capital larger - and an abundance of funds
tends to dampen returns. Second, whatever our rate of progress, it will
not be smooth: Year-to-year moves in the first column of the table above
will be influenced in a major way by fluctuations in securities markets;
the figures in the second column will be affected by wide swings in the
profitability of our catastrophe-reinsurance business.

In the table, the donations made pursuant to our shareholder-
designated contributions program are charged against the second column,
though we view them as a shareholder benefit rather than as an expense.
All other corporate expenses are also charged against the second column.
These costs may be lower than those of any other large American
corporation: Our after-tax headquarters expense amounts to less than two
basis points (1/50th of 1%) measured against net worth. Even so, Charlie
used to think this expense percentage outrageously high, blaming it on my
use of Berkshire's corporate jet, The Indefensible. But Charlie has
recently experienced a "counter-revelation": With our purchase of
FlightSafety, whose major activity is the training of corporate pilots,
he now rhapsodizes at the mere mention of jets.

Seriously, costs matter. For example, equity mutual funds incur
corporate expenses - largely payments to the funds' managers - that
average about 100 basis points, a levy likely to cut the returns their
investors earn by 10% or more over time. Charlie and I make no promises
about Berkshire's results. We do promise you, however, that virtually
all of the gains Berkshire makes will end up with shareholders. We are
here to make money with you, not off you.

The Relationship of Intrinsic Value to Market Price

In last year's letter, with Berkshire shares selling at $36,000, I
told you: (1) Berkshire's gain in market value in recent years had
outstripped its gain in intrinsic value, even though the latter gain had
been highly satisfactory; (2) that kind of overperformance could not
continue indefinitely; (3) Charlie and I did not at that moment consider
Berkshire to be undervalued.

Since I set down those cautions, Berkshire's intrinsic value has
increased very significantly - aided in a major way by a stunning
performance at GEICO that I will tell you more about later - while the
market price of our shares has changed little. This, of course, means
that in 1996 Berkshire's stock underperformed the business.
Consequently, today's price/value relationship is both much different
from what it was a year ago and, as Charlie and I see it, more
appropriate.

Over time, the aggregate gains made by Berkshire shareholders must
of necessity match the business gains of the company. When the stock
temporarily overperforms or underperforms the business, a limited number
of shareholders - either sellers or buyers - receive outsized benefits at
the expense of those they trade with. Generally, the sophisticated have
an edge over the innocents in this game.

Though our primary goal is to maximize the amount that our
shareholders, in total, reap from their ownership of Berkshire, we wish
also to minimize the benefits going to some shareholders at the expense
of others. These are goals we would have were we managing a family
partnership, and we believe they make equal sense for the manager of a
public company. In a partnership, fairness requires that partnership
interests be valued equitably when partners enter or exit; in a public
company, fairness prevails when market price and intrinsic value are in
sync. Obviously, they won't always meet that ideal, but a manager - by
his policies and communications - can do much to foster equity.

Of course, the longer a shareholder holds his shares, the more
bearing Berkshire's business results will have on his financial
experience - and the less it will matter what premium or discount to
intrinsic value prevails when he buys and sells his stock. That's one
reason we hope to attract owners with long-term horizons. Overall, I
think we have succeeded in that pursuit. Berkshire probably ranks number
one among large American corporations in the percentage of its shares
held by owners with a long-term view.

Acquisitions of 1996

We made two acquisitions in 1996, both possessing exactly the
qualities we seek - excellent business economics and an outstanding
manager.

The first acquisition was Kansas Bankers Surety (KBS), an insurance
company whose name describes its specialty. The company, which does
business in 22 states, has an extraordinary underwriting record, achieved
through the efforts of Don Towle, an extraordinary manager. Don has
developed first-hand relationships with hundreds of bankers and knows
every detail of his operation. He thinks of himself as running a company
that is "his," an attitude we treasure at Berkshire. Because of its
relatively small size, we placed KBS with Wesco, our 80%-owned
subsidiary, which has wanted to expand its insurance operations.

You might be interested in the carefully-crafted and sophisticated
acquisition strategy that allowed Berkshire to nab this deal. Early in
1996 I was invited to the 40th birthday party of my nephew's wife, Jane
Rogers. My taste for social events being low, I immediately, and in my
standard, gracious way, began to invent reasons for skipping the event.
The party planners then countered brilliantly by offering me a seat next
to a man I always enjoy, Jane's dad, Roy Dinsdale - so I went.

The party took place on January 26. Though the music was loud - Why
must bands play as if they will be paid by the decibel? - I just managed
to hear Roy say he'd come from a directors meeting at Kansas Bankers
Surety, a company I'd always admired. I shouted back that he should let
me know if it ever became available for purchase.

On February 12, I got the following letter from Roy: "Dear Warren:
Enclosed is the annual financial information on Kansas Bankers Surety.
This is the company that we talked about at Janie's party. If I can be
of any further help, please let me know." On February 13, I told Roy we
would pay $75 million for the company - and before long we had a deal.
I'm now scheming to get invited to Jane's next party.

Our other acquisition in 1996 - FlightSafety International, the
world's leader in the training of pilots - was far larger, at about $1.5
billion, but had an equally serendipitous origin. The heroes of this
story are first, Richard Sercer, a Tucson aviation consultant, and
second, his wife, Alma Murphy, an ophthalmology graduate of Harvard
Medical School, who in 1990 wore down her husband's reluctance and got
him to buy Berkshire stock. Since then, the two have attended all our
Annual Meetings, but I didn't get to know them personally.

Fortunately, Richard had also been a long-time shareholder of
FlightSafety, and it occurred to him last year that the two companies
would make a good fit. He knew our acquisition criteria, and he thought
that Al Ueltschi, FlightSafety's 79-year-old CEO, might want to make a
deal that would both give him a home for his company and a security in
payment that he would feel comfortable owning throughout his lifetime.
So in July, Richard wrote Bob Denham, CEO of Salomon Inc, suggesting that
he explore the possibility of a merger.

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Warren E. Buffett letters

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Warren E. Buffett letters

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