<script async src="https://www.googletagmanager.com/gtag/js?id=UA-136883390-1"></script>

window.dataLayer = window.dataLayer || [];

function gtag(){dataLayer.push(arguments);}

gtag('js', new Date());

gtag('config', 'UA-136883390-1');

<TITLE>Chairman's Letter - 1991</TITLE>

<P ALIGN=CENTER>

<B>BERKSHIRE HATHAWAY INC.</B>

<B>To the Shareholders of Berkshire Hathaway Inc.:</B>

Our gain in net worth during 1991 was $2.1 billion, or

39.6%. Over the last 27 years (that is, since present management

took over) our per-share book value has grown from $19 to $6,437,

or at a rate of 23.7% compounded annually.

The size of our equity capital - which now totals $7.4

billion - makes it certain that we cannot maintain our past rate

of gain or, for that matter, come close to doing so. As Berkshire

grows, the universe of opportunities that can significantly

influence the company's performance constantly shrinks. When we

were working with capital of $20 million, an idea or business

producing $1 million of profit added five percentage points to

our return for the year. Now we need a $370 million idea (i.e.,

one contributing over $550 million of pre-tax profit) to achieve

the same result. And there are many more ways to make $1 million

than to make $370 million.

Charlie Munger, Berkshire's Vice Chairman, and I have set a

goal of attaining a 15% average annual increase in Berkshire's

intrinsic value. If our growth in <I>book</I> value is to keep up with a

15% pace, we must earn $22 billion during the next decade. Wish

us luck - we'll need it.

Our outsized gain in book value in 1991 resulted from a

phenomenon not apt to be repeated: a dramatic rise in the price-

earnings ratios of Coca-Cola and Gillette. These two stocks

accounted for nearly $1.6 billion of our $2.1 billion growth in

net worth last year. When we loaded up on Coke three years ago,

Berkshire's net worth was $3.4 billion; now our Coke stock alone

is worth more than that.

Coca-Cola and Gillette are two of the best companies in the

world and we expect their earnings to grow at hefty rates in the

years ahead. Over time, also, the value of our holdings in these

stocks should grow in rough proportion. Last year, however, the

valuations of these two companies rose far faster than their

earnings. In effect, we got a double-dip benefit, delivered

partly by the excellent earnings growth and even more so by the

market's reappraisal of these stocks. We believe this reappraisal

was warranted. But it can't recur annually: We'll have to settle

for a single dip in the future.

<B>A Second Job</B>

In 1989 when I - a happy consumer of five cans of Cherry

Coke daily - announced our purchase of $1 billion worth of Coca-

Cola stock, I described the move as a rather extreme example of

putting our money where my mouth was. On August 18 of last year,

when I was elected Interim Chairman of Salomon Inc, it was a

different story: I put my mouth where our money was.

You've all read of the events that led to my appointment. My

decision to take the job carried with it an implicit but

important message: Berkshire's operating managers are so

outstanding that I knew I could materially reduce the time I was

spending at the company and yet remain confident that its

economic progress would not skip a beat. The Blumkins, the

Friedman family, Mike Goldberg, the Heldmans, Chuck Huggins, Stan

Lipsey, Ralph Schey and Frank Rooney (CEO of H.H. Brown, our

latest acquisition, which I will describe later) are all masters

of their operations and need no help from me. My job is merely to

treat them right and to allocate the capital they generate.

Neither function is impeded by my work at Salomon.

The role that Charlie and I play in the success of our

operating units can be illustrated by a story about George Mira,

the one-time quarterback of the University of Miami, and his

coach, Andy Gustafson. Playing Florida and near its goal line,

Mira dropped back to pass. He spotted an open receiver but found

his right shoulder in the unshakable grasp of a Florida

linebacker. The right-handed Mira thereupon switched the ball to

his other hand and threw the only left-handed pass of his life -

for a touchdown. As the crowd erupted, Gustafson calmly turned to

a reporter and declared: "Now that's what I call coaching."

Given the managerial stars we have at our operating units,

Berkshire's performance is not affected if Charlie or I slip away

from time to time. You should note, however, the "interim" in my

Salomon title. Berkshire is my first love and one that will never

fade: At the Harvard Business School last year, a student asked

me when I planned to retire and I replied, "About five to ten

years after I die."

<B>Sources of Reported Earnings</B>

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 generally

accepted accounting principles (GAAP), which require 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.

A large amount of additional information about these

businesses is given on pages 33-47, where you also will find

our segment earnings reported on a GAAP basis. However, we will

not in this letter discuss each of our non-insurance operations,

as we have in the past. Our businesses have grown in number - and

will continue to grow - so it now makes sense to rotate coverage,

discussing one or two in detail each year.

<I>

(000s omitted)

----------------------------------------------

Berkshire's Share

of Net Earnings

(after taxes and

Pre-Tax Earnings minority interests)

---------------------- ----------------------

1991 1990 1991 1990</I>

---------- ---------- ---------- ----------

Operating Earnings:

Insurance Group:

Underwriting ............ $(119,593) $ (26,647) $ (77,229) $ (14,936)

Net Investment Income ... 331,846 327,047 285,173 282,613

H. H. Brown (acquired 7/1/91) 13,616 --- 8,611 ---

Buffalo News .............. 37,113 43,954 21,841 25,981

Fechheimer ................ 12,947 12,450 6,843 6,605

Kirby ..................... 35,726 27,445 22,555 17,613

Nebraska Furniture Mart ... 14,384 17,248 6,993 8,485

Scott Fetzer

Manufacturing Group .... 26,123 30,378 15,901 18,458

See's Candies ............. 42,390 39,580 25,575 23,892

Wesco - other than Insurance 12,230 12,441 8,777 9,676

World Book ................ 22,483 31,896 15,487 20,420

Amortization of Goodwill .. (4,113) (3,476) (4,098) (3,461)

Other Purchase-Price

Accounting Charges ..... (6,021) (5,951) (7,019) (6,856)

Interest Expense* ......... (89,250) (76,374) (57,165) (49,726)

Shareholder-Designated

Contributions .......... (6,772) (5,824) (4,388) (3,801)

Other ..................... 77,399 58,310 47,896 35,782

---------- ---------- ---------- ----------

Operating Earnings 400,508 482,477 315,753 370,745

Sales of Securities 192,478 33,989 124,155 23,348

Total Earnings - All Entities $ 592,986 $ 516,466 $ 439,908 $ 394,093

<I>*Excludes interest expense of Scott Fetzer Financial Group and

Mutual Savings & Loan.</I>

<B>"Look-Through" Earnings</B>

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.

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. Indeed, since present management took over in

1965, our look-through earnings have grown at almost the identical

23% rate of gain recorded for book value.

Last year, however, our look-through earnings did not grow at

all but rather declined by 14%. To an extent, the decline was

precipitated by two forces that I discussed in last year's report

and that I warned you would have a negative effect on look-through

earnings.

First, I told you that our media earnings - both direct and

look-through - were "sure to decline" and they in fact did. The

second force came into play on April 1, when the call of our

Gillette preferred stock required us to convert it into common. The

after-tax earnings in 1990 from our preferred had been about $45

million, an amount somewhat higher than the combination in 1991 of

three months of dividends on our preferred plus nine months of

look-through earnings on the common.

Two other outcomes that I did not foresee also hurt look-

through earnings in 1991. First, we had a break-even result from

our interest in Wells Fargo (dividends we received from the company

were offset by negative retained earnings). Last year I said that

such a result at Wells was "a low-level possibility - not a

likelihood." Second, we recorded significantly lower - though still

excellent - insurance profits.

The following table shows you how we calculate look-through

earnings, although 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 6, 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)

--------------------------- ----------------------- ------------------

1991 1990 1991 1990

------ ------ -------- --------

Capital Cities/ABC Inc. ........ 18.1% 17.9% $ 61 $ 85

The Coca-Cola Company .......... 7.0% 7.0% 69 58

Federal Home Loan Mortgage Corp. 3.4%(1) 3.2%(1) 15 10

The Gillette Company ........... 11.0% --- 23(2) ---

GEICO Corp. .................... 48.2% 46.1% 69 76

The Washington Post Company .... 14.6% 14.6% 10 18

Wells Fargo & Company .......... 9.6% 9.7% (17) 19(3)

-------- --------

Berkshire's share of

undistributed earnings of major investees $230 $266

Hypothetical tax on these undistributed investee earnings (30) (35)

Reported operating earnings of Berkshire 316 371

-------- --------

Total look-through earnings of Berkshire $516 $602

======== ========

(1) Net of minority interest at Wesco

(2) For the nine months after Berkshire converted its

preferred on April 1

(3) Calculated on average ownership for the year

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

We also believe that investors can benefit by focusing on

their own look-through earnings. To calculate these, they should

determine the underlying earnings attributable to the shares they

hold in their portfolio and total these. The goal of each investor

should be to create a portfolio (in effect, a "company") that will

deliver him or her the highest possible look-through earnings a

decade or so from now.

An approach of this kind will force the investor to think

about long-term business prospects rather than short-term stock

market prospects, a perspective likely to improve results. It's

true, of course, that, in the long run, the scoreboard for

investment decisions is market price. But prices will be determined

by future earnings. In investing, just as in baseball, to put runs

on the scoreboard one must watch the playing field, not the

scoreboard.

<B>A Change in Media Economics and Some Valuation Math</B>

In last year's report, I stated my opinion that the decline in

the profitability of media companies reflected secular as well as

cyclical factors. The events of 1991 have fortified that case: The

economic strength of once-mighty media enterprises continues to

erode as retailing patterns change and advertising and

entertainment choices proliferate. In the business world,

unfortunately, the rear-view mirror is always clearer than the

windshield: A few years back no one linked to the media business -

neither lenders, owners nor financial analysts - saw the economic

deterioration that was in store for the industry. (But give me a

few years and I'll probably convince myself that I did.)

The fact is that newspaper, television, and magazine

properties have begun to resemble <I>businesses</I> more than <I>franchises</I>

in their economic behavior. Let's take a quick look at the

characteristics separating these two classes of enterprise, keeping

in mind, however, that many operations fall in some middle ground

and can best be described as weak franchises or strong businesses.

An economic franchise arises from a product or service that:

(1) is needed or desired; (2) is thought by its customers to have

no close substitute and; (3) is not subject to price regulation.

The existence of all three conditions will be demonstrated by a

company's ability to regularly price its product or service

aggressively and thereby to earn high rates of return on capital.

Moreover, franchises can tolerate mis-management. Inept managers

may diminish a franchise's profitability, but they cannot inflict

mortal damage.

In contrast, "a business" earns exceptional profits only if it

is the low-cost operator or if supply of its product or service is

tight. Tightness in supply usually does not last long. With

superior management, a company may maintain its status as a low-

cost operator for a much longer time, but even then unceasingly

faces the possibility of competitive attack. And a business, unlike

a franchise, can be killed by poor management.

Until recently, media properties possessed the three

characteristics of a franchise and consequently could both price

aggressively and be managed loosely. Now, however, consumers

looking for information and entertainment (their primary interest

being the latter) enjoy greatly broadened choices as to where to

find them. Unfortunately, demand can't expand in response to this

new supply: 500 million American eyeballs and a 24-hour day are all

that's available. The result is that competition has intensified,

markets have fragmented, and the media industry has lost some -

though far from all - of its franchise strength.

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

The industry's weakened franchise has an impact on its value

that goes far beyond the immediate effect on earnings. For an

understanding of this phenomenon, let's look at some much over-

simplified, but relevant, math.

A few years ago the conventional wisdom held that a newspaper,

television or magazine property would forever increase its earnings

at 6% or so annually and would do so <I>without the employment of

additional capital</I>, for the reason that depreciation charges would

roughly match capital expenditures and working capital requirements

would be minor. Therefore, reported earnings (before amortization

of intangibles) were also freely-distributable earnings, which

meant that ownership of a media property could be construed as akin

to owning a perpetual annuity set to grow at 6% a year. Say, next,

that a discount rate of 10% was used to determine the present value

of that earnings stream. One could then calculate that it was

appropriate to pay a whopping $25 million for a property with

current after-tax earnings of $1 million. (This after-tax multiplier

of 25 translates to a multiplier on pre-tax earnings of about 16.)

Now change the assumption and posit that the $1 million

represents "normal earning power" and that earnings will bob around

this figure cyclically. A "bob-around" pattern is indeed the lot of

most businesses, whose income stream grows only if their owners are

willing to commit more capital (usually in the form of retained

earnings). Under our revised assumption, $1 million of earnings,

discounted by the same 10%, translates to a $10 million valuation.

Thus a seemingly modest shift in assumptions reduces the property's

valuation to 10 times after-tax earnings (or about 6 1/2 times

pre-tax earnings).

Dollars are dollars whether they are derived from the

operation of media properties or of steel mills. What in the past

caused buyers to value a dollar of earnings from media far higher

than a dollar from steel was that the earnings of a media property

were expected to constantly grow (without the business requiring

much additional capital), whereas steel earnings clearly fell in

the bob-around category. Now, however, expectations for media have

moved toward the bob-around model. And, as our simplified example

illustrates, valuations must change dramatically when expectations

are revised.

We have a significant investment in media - both through our

direct ownership of Buffalo News and our shareholdings in The

Washington Post Company and Capital Cities/ABC - and the intrinsic

value of this investment has declined materially because of the

secular transformation that the industry is experiencing. (Cyclical

factors have also hurt our current look-through earnings, but these

factors do not reduce intrinsic value.) However, as our Business

Principles on page 2-3 note, one of the rules by which we run

Berkshire is that we do not sell businesses - or investee holdings

that we have classified as permanent - simply because we see ways

to use the money more advantageously elsewhere. (We did sell

certain other media holdings sometime back, but these were

relatively small.)

The intrinsic value losses that we have suffered have been

moderated because the Buffalo News, under Stan Lipsey's leadership,

has done far better than most newspapers and because both Cap

Cities and Washington Post are exceptionally well-managed. In

particular, these companies stayed on the sidelines during the late

1980's period in which purchasers of media properties regularly

paid irrational prices. Also, the debt of both Cap Cities and

Washington Post is small and roughly offset by cash that they hold.

As a result, the shrinkage in the value of their assets has not

been accentuated by the effects of leverage. Among publicly-owned

media companies, our two investees are about the only ones

essentially free of debt. Most of the other companies, through a

combination of the aggressive acquisition policies they pursued and

shrinking earnings, find themselves with debt equal to five or more

times their current net income.

The strong balance sheets and strong managements of Cap Cities

and Washington Post leave us more comfortable with these

investments than we would be with holdings in any other media

companies. Moreover, most media properties continue to have far

better economic characteristics than those possessed by the average

American business. But gone are the days of bullet-proof franchises

and cornucopian economics.

<B>Twenty Years in a Candy Store</B>

We've just passed a milestone: Twenty years ago, on January 3,

1972, Blue Chip Stamps (then an affiliate of Berkshire and later

merged into it) bought control of See's Candy Shops, a West Coast

manufacturer and retailer of boxed-chocolates. The nominal price

that the sellers were asking - calculated on the 100% ownership we

ultimately attained - was $40 million. But the company had $10

million of excess cash, and therefore the true offering price was

$30 million. Charlie and I, not yet fully appreciative of the value

of an economic franchise, looked at the company's mere $7 million

of tangible net worth and said $25 million was as high as we would

go (and we meant it). Fortunately, the sellers accepted our offer.

The sales of trading stamps by Blue Chip thereafter declined

from $102.5 million in 1972 to $1.2 million in 1991. But See's

candy sales in the same period increased from $29 million to $196

million. Moreover, profits at See's grew even faster than sales,

from $4.2 million pre-tax in 1972 to $42.4 million last year.

For an increase in profits to be evaluated properly, it must

be compared with the incremental capital investment required to

produce it. On this score, See's has been astounding: The company

now operates comfortably with only $25 million of net worth, which

means that our beginning base of $7 million has had to be

supplemented by only $18 million of reinvested earnings. Meanwhile,

See's remaining pre-tax profits of $410 million were distributed to

Blue Chip/Berkshire during the 20 years for these companies to

deploy (after payment of taxes) in whatever way made most sense.

In our See's purchase, Charlie and I had one important

insight: We saw that the business had untapped pricing power.

Otherwise, we were lucky twice over. First, the transaction was not

derailed by our dumb insistence on a $25 million price. Second, we

found Chuck Huggins, then See's executive vice-president, whom we

instantly put in charge. Both our business and personal experiences

with Chuck have been outstanding. One example: When the purchase

was made, we shook hands with Chuck on a compensation arrangement -

conceived in about five minutes and never reduced to a written

contract - that remains unchanged to this day.

In 1991, See's sales volume, measured in dollars, matched that

of 1990. In pounds, however, volume was down 4%. All of that

slippage took place in the last two months of the year, a period

that normally produces more than 80% of annual profits. Despite the

weakness in sales, profits last year grew 7%, and our pre-tax

profit margin was a record 21.6%.

Almost 80% of See's sales come from California and our

business clearly was hurt by the recession, which hit the state

with particular force late in the year. Another negative, however,

was the mid-year initiation in California of a sales tax of 7%-8«%

(depending on the county involved) on "snack food" that was deemed

applicable to our candy.

Shareholders who are students of epistemological shadings will

enjoy California's classifications of "snack" and "non-snack"

foods:

Taxable "Snack" Foods Non-Taxable "Non-Snack" Foods

--------------------- -----------------------------

Ritz Crackers Soda Crackers

Popped Popcorn Unpopped Popcorn

Granola Bars Granola Cereal

Slice of Pie (Wrapped) Whole Pie

Milky Way Candy Bar Milky Way Ice Cream Bar

What - you are sure to ask - is the tax status of a <I>melted</I>

Milky Way ice cream bar? In that androgynous form, does it more

resemble an ice cream bar or a candy bar that has been left in the

sun? It's no wonder that Brad Sherman, Chairman of California's

State Board of Equalization, who opposed the snack food bill but

must now administer it, has said: "I came to this job as a

specialist in tax law. Now I find my constituents should have

elected Julia Child."

Charlie and I have many reasons to be thankful for our

association with Chuck and See's. The obvious ones are that we've

earned exceptional returns and had a good time in the process.

Equally important, ownership of See's has taught us much about the

evaluation of franchises. We've made significant money in certain

common stocks because of the lessons we learned at See's.

<B>H. H. Brown</B>

We made a sizable acquisition in 1991 - the H. H. Brown

Company - and behind this business is an interesting history. In

1927 a 29-year-old businessman named Ray Heffernan purchased the

company, then located in North Brookfield, Massachusetts, for

$10,000 and began a 62-year career of running it. (He also found

time for other pursuits: At age 90 he was still joining new golf

clubs.) By Mr. Heffernan's retirement in early 1990 H. H. Brown had

three plants in the United States and one in Canada; employed close

to 2,000 people; and earned about $25 million annually before

taxes.

Along the way, Frances Heffernan, one of Ray's daughters,

married Frank Rooney, who was sternly advised by Mr. Heffernan

before the wedding that he had better forget any ideas he might

have about working for his father-in-law. That was one of Mr.

Heffernan's few mistakes: Frank went on to become CEO of Melville

Shoe (now Melville Corp.). During his 23 years as boss, from 1964

through 1986, Melville's earnings averaged more than 20% on equity

and its stock (adjusted for splits) rose from $16 to $960. And a

few years after Frank retired, Mr. Heffernan, who had fallen ill,

asked him to run Brown.

After Mr. Heffernan died late in 1990, his family decided to

sell the company - and here we got lucky. I had known Frank for a

few years but not well enough for him to think of Berkshire as a

possible buyer. He instead gave the assignment of selling Brown to

a major investment banker, which failed also to think of us. But

last spring Frank was playing golf in Florida with John Loomis, a

long-time friend of mine as well as a Berkshire shareholder, who is

always on the alert for something that might fit us. Hearing about

the impending sale of Brown, John told Frank that the company

should be right up Berkshire's alley, and Frank promptly gave me a

call. I thought right away that we would make a deal and before

long it was done.

Much of my enthusiasm for this purchase came from Frank's

willingness to continue as CEO. Like most of our managers, he has

no financial need to work but does so because he loves the game and

likes to excel. Managers of this stripe cannot be "hired" in the

normal sense of the word. What we must do is provide a concert hall

in which business artists of this class will wish to perform.

Brown (which, by the way, has no connection to Brown Shoe of

St. Louis) is the leading North American manufacturer of work shoes

and boots, and it has a history of earning unusually fine margins

on sales and assets. Shoes are a tough business - of the billion

pairs purchased in the United States each year, about 85% are

imported - and most manufacturers in the industry do poorly. The

wide range of styles and sizes that producers offer causes

inventories to be heavy; substantial capital is also tied up in

receivables. In this kind of environment, only outstanding managers

like Frank and the group developed by Mr. Heffernan can prosper.

A distinguishing characteristic of H. H. Brown is one of the

most unusual compensation systems I've encountered - but one that

warms my heart: A number of key managers are paid an annual salary

of $7,800, to which is added a designated percentage of the profits

of the company after these are reduced by a charge for capital

employed. These managers therefore truly stand in the shoes of

owners. In contrast, most managers talk the talk but don't walk the

walk, choosing instead to employ compensation systems that are long

on carrots but short on sticks (and that almost invariably treat

equity capital as if it were cost-free). The arrangement at Brown,

in any case, has served both the company and its managers

exceptionally well, which should be no surprise: Managers eager to

bet heavily on their abilities usually have plenty of ability to

bet on.

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

It's discouraging to note that though we have on four

occasions made major purchases of companies whose sellers were

represented by prominent investment banks, we were in only one of

these instances contacted by the investment bank. In the other

three cases, I myself or a friend initiated the transaction at some

point after the investment bank had solicited its own list of

prospects. We would love to see an intermediary earn its fee by

thinking of us - and therefore repeat here what we're looking for:

(1) Large purchases (at least $10 million of after-tax

earnings),

(2) Demonstrated consistent earning power (future projections

are of little interest to us, nor are "turnaround"

situations),

(3) Businesses earning good returns on equity while employing

little or no debt,

(4) Management in place (we can't supply it),

(5) Simple businesses (if there's lots of technology, we

won't understand it),

(6) An offering price (we don't want to waste our time or

that of the seller by talking, even preliminarily,

about a transaction when price is unknown).

We will not engage in unfriendly takeovers. We can promise

complete confidentiality and a very fast answer - customarily

within five minutes - as to whether we're interested. (With Brown,

we didn't even need to take five.) We prefer to buy for cash, but

will consider issuing stock when we receive as much in intrinsic

business value as we give.

Our favorite form of purchase is one fitting the pattern

through which we acquired Nebraska Furniture Mart, Fechheimer's and

Borsheim's. In cases like these, the company's owner-managers wish

to generate significant amounts of cash, sometimes for themselves,

but often for their families or inactive shareholders. At the same

time, these managers wish to remain significant owners who continue

to run their companies just as they have in the past. We think we

offer a particularly good fit for owners with such objectives and

we invite potential sellers to check us out by contacting people

with whom we have done business in the past.

Charlie and I frequently get approached about acquisitions

that don't come close to meeting our tests: We've found that if

you advertise an interest in buying collies, a lot of people will

call hoping to sell you their cocker spaniels. A line from a

country song expresses our feeling about new ventures, turnarounds,

or auction-like sales: "When the phone don't ring, you'll know it's

me."

Besides being interested in the purchase of businesses as

described above, we are also interested in the negotiated purchase

of large, but not controlling, blocks of stock comparable to those

we hold in Capital Cities, Salomon, Gillette, USAir, Champion, and

American Express. We are not interested, however, in receiving

suggestions about purchases we might make in the general stock

market.

<B>Insurance Operations</B>

Shown below is an updated version of our usual table

presenting key figures for the property-casualty insurance

industry:

Yearly Change Combined Ratio Yearly Change Inflation Rate

in Premiums After Policyholder in Incurred Measured by

Written (%) Dividends Losses (%) GDP Deflator (%)</I>

------------- ------------------ ------------- ----------------

1981 ..... 3.8 106.0 6.5 10.0

1982 ..... 3.7 109.6 8.4 6.2

1983 ..... 5.0 112.0 6.8 4.0

1984 ..... 8.5 118.0 16.9 4.5

1985 ..... 22.1 116.3 16.1 3.7

1986 ..... 22.2 108.0 13.5 2.7

1987 ..... 9.4 104.6 7.8 3.1

1988 ..... 4.4 105.4 5.5 3.9

1989 ..... 3.2 109.2 7.7 4.4

1990 (Revised) 4.4 109.6 4.8 4.1

1991 (Est.) 3.1 109.1 2.9 3.7

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 107 - 111 range typically produces an

overall break-even result, exclusive of earnings on the funds

provided by shareholders.

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.

<B>Marketable Common Stocks</B>

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</I>

------ ------- ---------- ----------

(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 <I>full</I> confidence."

<B>Mistake Du Jour</B>

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 <I>can</I> give you is an estimate as of yearend 1991 of the

approximate gain that Berkshire <I>didn't</I> make because of your

Chairman's mistake: about $1.4 billion.

<B>Fixed-Income Securities</B>

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,