To the Shareholders of Berkshire Hathaway Inc.:

     First, a few words about accounting.  The merger with Diversified Retailing Company, Inc. at yearend adds two new 
complications in the presentation of our financial results. After the merger, our ownership of Blue Chip Stamps increased to 
approximately 58% and, therefore, the accounts of that company must be fully consolidated in the Balance Sheet and Statement of 
Earnings presentation of Berkshire.  In previous reports, our share of the net earnings only of Blue Chip had been included as 
a single item on Berkshire’s Statement of Earnings, and there had been a similar one-line inclusion on our Balance Sheet of our 
share of their net assets.

     This full consolidation of sales, expenses, receivables, inventories, debt, etc. produces an aggregation of figures from 
many diverse businesses - textiles, insurance, candy, newspapers, trading stamps - with dramatically different economic 
characteristics.  In some of these your ownership is 100% but, in those businesses which are owned by Blue Chip but fully 
consolidated, your ownership as a Berkshire shareholder is only 58%. (Ownership by others of the balance of these businesses is 
accounted for by the large minority interest item on the liability side of the Balance Sheet.) Such a grouping of Balance 
Sheet and Earnings items - some wholly owned, some partly owned - tends to obscure economic reality more than illuminate it.  In 
fact, it represents a form of presentation that we never prepare for internal use during the year and which is of no value to us 
in any management activities.

     For that reason, throughout the report we provide much separate financial information and commentary on the various 
segments of the business to help you evaluate Berkshire’s performance and prospects.  Much of this segmented information is 
mandated by SEC disclosure rules and covered in “Management’s Discussion” on pages 29 to 34.  And in this letter we try to 
present to you a view of our various operating entities from the same perspective that we view them managerially.

     A second complication arising from the merger is that the 1977 figures shown in this report are different from the 1977 
figures shown in the report we mailed to you last year. Accounting convention requires that when two entities such as 
Diversified and Berkshire are merged, all financial data subsequently must be presented as if the companies had been 
merged at the time they were formed rather than just recently. So the enclosed financial statements, in effect, pretend that in 
1977 (and earlier years) the Diversified-Berkshire merger already had taken place, even though the actual merger date was December 
30, 1978.  This shifting base makes comparative commentary confusing and, from time to time in our narrative report, we will 
talk of figures and performance for Berkshire shareholders as historically reported to you rather than as restated after the 
Diversified merger.

     With that preamble it can be stated that, with or without restated figures, 1978 was a good year.  Operating earnings, 
exclusive of capital gains, at 19.4% of beginning shareholders’ investment were within a fraction of our 1972 record.  While we 
believe it is improper to include capital gains or losses in evaluating the performance of a single year, they are an 
important component of the longer term record.  Because of such gains, Berkshire’s long-term growth in equity per share has been 
greater than would be indicated by compounding the returns from operating earnings that we have reported annually.

     For example, over the last three years - generally a bonanza 
period for the insurance industry, our largest profit producer - 
Berkshire’s per share net worth virtually has doubled, thereby 
compounding at about 25% annually through a combination of good 
operating earnings and fairly substantial capital gains.  Neither 
this 25% equity gain from all sources nor the 19.4% equity gain 
from operating earnings in 1978 is sustainable.  The insurance 
cycle has turned downward in 1979, and it is almost certain that 
operating earnings measured by return on equity will fall this 
year.  However, operating earnings measured in dollars are likely 
to increase on the much larger shareholders’ equity now employed 
in the business.

     In contrast to this cautious view about near term return 
from operations, we are optimistic about prospects for long term 
return from major equity investments held by our insurance 
companies.  We make no attempt to predict how security markets 
will behave; successfully forecasting short term stock price 
movements is something we think neither we nor anyone else can 
do.  In the longer run, however, we feel that many of our major 
equity holdings are going to be worth considerably more money 
than we paid, and that investment gains will add significantly to 
the operating returns of the insurance group.

Sources of Earnings

     To give you a better picture of just where Berkshire’s 
earnings are produced, we show below a table which requires a 
little explanation.  Berkshire owns close to 58% of Blue Chip 
which, in addition to 100% ownership of several businesses, owns 
80% of Wesco Financial Corporation.  Thus, Berkshire’s equity in 
Wesco’s earnings is about 46%.  In aggregate, businesses that we 
control have about 7,000 full-time employees and generate 
revenues of over $500 million.

     The table shows the overall earnings of each major operating 
category on a pre-tax basis (several of the businesses have low 
tax rates because of significant amounts of tax-exempt interest 
and dividend income), as well as the share of those earnings 
belonging to Berkshire both on a pre-tax and after-tax basis.  
Significant capital gains or losses attributable to any of the 
businesses are not shown in the operating earnings figure, but 
are aggregated on the “Realized Securities Gain” line at the 
bottom of the table.  Because of various accounting and tax 
intricacies, the figures in the table should not be treated as 
holy writ, but rather viewed as close approximations of the 1977 
and 1978 earnings contributions of our constituent businesses.

                                                                         Net Earnings
                                   Earnings Before Income Taxes            After Tax
                              --------------------------------------  ------------------
                                    Total          Berkshire Share     Berkshire Share
                              ------------------  ------------------  ------------------
(in thousands of dollars)       1978      1977      1978      1977      1978      1977
                              --------  --------  --------  --------  --------  --------
Total - all entities ......... $66,180   $57,089   $54,350   $42,234   $39,242   $30,393
                              ========  ========  ========  ========  ========  ========
Earnings from operations:
  Insurance Group:
    Underwriting ............. $ 3,001   $ 5,802   $ 3,000   $ 5,802   $ 1,560   $ 3,017
    Net investment income ....  19,705    12,804    19,691    12,804    16,400    11,360
  Berkshire-Waumbec textiles     2,916      (620)    2,916      (620)    1,342      (322)
  Associated Retail 
     Stores, Inc. ............   2,757     2,775     2,757     2,775     1,176     1,429
  See’s Candies ..............  12,482    12,840     7,013     6,598     3,049     2,974
  Buffalo Evening News .......  (2,913)      751    (1,637)      389      (738)      158
  Blue Chip Stamps - Parent ..   2,133     1,091     1,198       566     1,382       892
  Illinois National Bank
     and Trust Company .......   4,822     3,800     4,710     3,706     4,262     3,288
  Wesco Financial
     Corporation - Parent ....   1,771     2,006       777       813       665       419
  Mutual Savings and
     Loan Association ........  10,556     6,779     4,638     2,747     3,042     1,946
  Interest on Debt ...........  (5,566)   (5,302)   (4,546)   (4,255)   (2,349)   (2,129)
  Other ......................     720       165       438       102       261        48
                              --------  --------  --------  --------  --------  --------
    Total Earnings from
       Operations ............ $52,384   $42,891   $40,955   $31,427   $30,052   $23,080
Realized Securities Gain .....  13,796    14,198    13,395    10,807     9,190     7,313
                              --------  --------  --------  --------  --------  --------
    Total Earnings ........... $66,180   $57,089   $54,350   $42,234   $39,242   $30,393
                              ========  ========  ========  ========  ========  ========

     Blue Chip and Wesco are public companies with reporting 
requirements of their own.  Later in this report we are 
reproducing the narrative reports of the principal executives of 
both companies, describing their 1978 operations.  Some of the 
figures they utilize will not match to the penny the ones we use 
in this report, again because of accounting and tax complexities.  
But their comments should be helpful to you in understanding the 
underlying economic characteristics of these important partly-
owned businesses.  A copy of the full annual report of either 
company will be mailed to any shareholder of Berkshire upon 
request to Mr. Robert H. Bird for Blue Chips Stamps, 5801 South 
Eastern Avenue, Los Angeles, California 90040, or to Mrs. Bette 
Deckard for Wesco Financial Corporation, 315 East Colorado 
Boulevard, Pasadena, California 91109.


     Earnings of $1.3 million in 1978, while much improved from 
1977, still represent a low return on the $17 million of capital 
employed in this business.  Textile plant and equipment are on 
the books for a very small fraction of what it would cost to 
replace such equipment today.  And, despite the age of the 
equipment, much of it is functionally similar to new equipment 
being installed by the industry.  But despite this “bargain cost” 
of fixed assets, capital turnover is relatively low reflecting 
required high investment levels in receivables and inventory 
compared to sales.  Slow capital turnover, coupled with low 
profit margins on sales, inevitably produces inadequate returns 
on capital.  Obvious approaches to improved profit margins 
involve differentiation of product, lowered manufacturing costs 
through more efficient equipment or better utilization of people, 
redirection toward fabrics enjoying stronger market trends, etc.  
Our management is diligent in pursuing such objectives.  The 
problem, of course, is that our competitors are just as 
diligently doing the same thing.

     The textile industry illustrates in textbook style how 
producers of relatively undifferentiated goods in capital 
intensive businesses must earn inadequate returns except under 
conditions of tight supply or real shortage.  As long as excess 
productive capacity exists, prices tend to reflect direct 
operating costs rather than capital employed.  Such a supply-
excess condition appears likely to prevail most of the time in 
the textile industry, and our expectations are for profits of 
relatively modest amounts in relation to capital.

     We hope we don’t get into too many more businesses with such 
tough economic characteristics.  But, as we have stated before: 
(1) our textile businesses are very important employers in their 
communities, (2) management has been straightforward in reporting 
on problems and energetic in attacking them, (3) labor has been 
cooperative and understanding in facing our common problems, and 
(4) the business should average modest cash returns relative to 
investment.  As long as these conditions prevail - and we expect 
that they will - we intend to continue to support our textile 
business despite more attractive alternative uses for capital.

Insurance Underwriting

     The number one contributor to Berkshire’s overall excellent 
results in 1978 was the segment of National Indemnity Company’s 
insurance operation run by Phil Liesche.  On about $90 million of 
earned premiums, an underwriting profit of approximately $11 
million was realized, a truly extraordinary achievement even 
against the background of excellent industry conditions.  Under 
Phil’s leadership, with outstanding assistance by Roland Miller 
in Underwriting and Bill Lyons in Claims, this segment of 
National Indemnity (including National Fire and Marine Insurance 
Company, which operates as a running mate) had one of its best 
years in a long history of performances which, in aggregate, far 
outshine those of the industry.  Present successes reflect credit 
not only upon present managers, but equally upon the business 
talents of Jack Ringwalt, founder of National Indemnity, whose 
operating philosophy remains etched upon the company.

     Home and Automobile Insurance Company had its best year 
since John Seward stepped in and straightened things out in 1975.  
Its results are combined in this report with those of Phil 
Liesche’s operation under the insurance category entitled 
“Specialized Auto and General Liability”.

     Worker’s Compensation was a mixed bag in 1978.  In its first 
year as a subsidiary, Cypress Insurance Company, managed by Milt 
Thornton, turned in outstanding results.  The worker’s 
compensation line can cause large underwriting losses when rapid 
inflation interacts with changing social concepts, but Milt has a 
cautious and highly professional staff to cope with these 
problems.  His performance in 1978 has reinforced our very good 
feelings about this purchase.

     Frank DeNardo came with us in the spring of 1978 to 
straighten out National Indemnity’s California Worker’s 
Compensation business which, up to that point, had been a 
disaster.  Frank has the experience and intellect needed to 
correct the major problems of the Los Angeles office.  Our volume 
in this department now is running only about 25% of what it was 
eighteen months ago, and early indications are that Frank is 
making good progress.

     George Young’s reinsurance department continues to produce 
very large sums for investment relative to premium volume, and 
thus gives us reasonably satisfactory overall results.  However, 
underwriting results still are not what they should be and can 
be.  It is very easy to fool yourself regarding underwriting 
results in reinsurance (particularly in casualty lines involving 
long delays in settlement), and we believe this situation 
prevails with many of our competitors.  Unfortunately, self-
delusion in company reserving almost always leads to inadequate 
industry rate levels.  If major factors in the market don’t know 
their true costs, the competitive “fall-out” hits all - even 
those with adequate cost knowledge.  George is quite willing to 
reduce volume significantly, if needed, to achieve satisfactory 
underwriting, and we have a great deal of confidence in the long 
term soundness of this business under his direction.

     The homestate operation was disappointing in 1978.  Our 
unsatisfactory underwriting, even though partially explained by 
an unusual incidence of Midwestern storms, is particularly 
worrisome against the backdrop of very favorable industry results 
in the conventional lines written by our homestate group.  We 
have confidence in John Ringwalt’s ability to correct this 
situation.  The bright spot in the group was the performance of 
Kansas Fire and Casualty in its first full year of business.  
Under Floyd Taylor, this subsidiary got off to a truly remarkable 
start.  Of course, it takes at least several years to evaluate 
underwriting results, but the early signs are encouraging and 
Floyd’s operation achieved the best loss ratio among the 
homestate companies in 1978.

     Although some segments were disappointing, overall our 
insurance operation had an excellent year.  But of course we 
should expect a good year when the industry is flying high, as in 
1978.  It is a virtual certainty that in 1979 the combined ratio 
(see definition on page 31) for the industry will move up at 
least a few points, perhaps enough to throw the industry as a 
whole into an underwriting loss position.  For example, in the 
auto lines - by far the most important area for the industry and 
for us - CPI figures indicate rates overall were only 3% higher 
in January 1979 than a year ago.  But the items that make up loss 
costs - auto repair and medical care costs - were up over 9%.  
How different than yearend 1976 when rates had advanced over 22% 
in the preceding twelve months, but costs were up 8%.

     Margins will remain steady only if rates rise as fast as 
costs.  This assuredly will not be the case in 1979, and 
conditions probably will worsen in 1980.  Our present thinking is 
that our underwriting performance relative to the industry will 
improve somewhat in 1979, but every other insurance management 
probably views its relative prospects with similar optimism - 
someone is going to be disappointed.  Even if we do improve 
relative to others, we may well have a higher combined ratio and 
lower underwriting profits in 1979 than we achieved last year.

     We continue to look for ways to expand our insurance 
operation.  But your reaction to this intent should not be 
unrestrained joy.  Some of our expansion efforts - largely 
initiated by your Chairman have been lackluster, others have been 
expensive failures.  We entered the business in 1967 through 
purchase of the segment which Phil Liesche now manages, and it 
still remains, by a large margin, the best portion of our 
insurance business.  It is not easy to buy a good insurance 
business, but our experience has been that it is easier to buy 
one than create one.  However, we will continue to try both 
approaches, since the rewards for success in this field can be 

Insurance Investments

     We confess considerable optimism regarding our insurance 
equity investments.  Of course, our enthusiasm for stocks is not 
unconditional.  Under some circumstances, common stock 
investments by insurers make very little sense.

     We get excited enough to commit a big percentage of 
insurance company net worth to equities only when we find (1) 
businesses we can understand, (2) with favorable long-term 
prospects, (3) operated by honest and competent people, and (4) 
priced very attractively.  We usually can identify a small number 
of potential investments meeting requirements (1), (2) and (3), 
but (4) often prevents action.  For example, in 1971 our total 
common stock position at Berkshire’s insurance subsidiaries 
amounted to only $10.7 million at cost, and $11.7 million at 
market.  There were equities of identifiably excellent companies 
available - but very few at interesting prices. (An irresistible 
footnote: in 1971, pension fund managers invested a record 122% 
of net funds available in equities - at full prices they couldn’t 
buy enough of them.  In 1974, after the bottom had fallen out, 
they committed a then record low of 21% to stocks.)

     The past few years have been a different story for us.  At 
the end of 1975 our insurance subsidiaries held common equities 
with a market value exactly equal to cost of $39.3 million.  At 
the end of 1978 this position had been increased to equities 
(including a convertible preferred) with a cost of $129.1 million 
and a market value of $216.5 million.  During the intervening 
three years we also had realized pre-tax gains from common 
equities of approximately $24.7 million.  Therefore, our overall 
unrealized and realized pre-tax gains in equities for the three 
year period came to approximately $112 million.  During this same 
interval the Dow-Jones Industrial Average declined from 852 to 
805.  It was a marvelous period for the value-oriented equity 

     We continue to find for our insurance portfolios small 
portions of really outstanding businesses that are available, 
through the auction pricing mechanism of security markets, at 
prices dramatically cheaper than the valuations inferior 
businesses command on negotiated sales.

     This program of acquisition of small fractions of businesses 
(common stocks) at bargain prices, for which little enthusiasm 
exists, contrasts sharply with general corporate acquisition 
activity, for which much enthusiasm exists.  It seems quite clear 
to us that either corporations are making very significant 
mistakes in purchasing entire businesses at prices prevailing in 
negotiated transactions and takeover bids, or that we eventually 
are going to make considerable sums of money buying small 
portions of such businesses at the greatly discounted valuations 
prevailing in the stock market. (A second footnote: in 1978 
pension managers, a group that logically should maintain the 
longest of investment perspectives, put only 9% of net available 
funds into equities - breaking the record low figure set in 1974 
and tied in 1977.)

     We are not concerned with whether the market quickly 
revalues upward securities that we believe are selling at bargain 
prices.  In fact, we prefer just the opposite since, in most 
years, we expect to have funds available to be a net buyer of 
securities.  And consistent attractive purchasing is likely to 
prove to be of more eventual benefit to us than any selling 
opportunities provided by a short-term run up in stock prices to 
levels at which we are unwilling to continue buying.

     Our policy is to concentrate holdings.  We try to avoid 
buying a little of this or that when we are only lukewarm about 
the business or its price.  When we are convinced as to 
attractiveness, we believe in buying worthwhile amounts.

Equity holdings of our insurance companies with a market value of 
over $8 million on December 31, 1978 were as follows:

No. of
Shares      Company                                     Cost       Market
----------  -------                                  ----------  ----------
                                                         (000s omitted)
  246,450   American Broadcasting Companies, Inc. ... $  6,082    $  8,626
1,294,308   Government Employees Insurance Company
               Common Stock .........................    4,116       9,060
1,986,953   Government Employees Insurance Company 
               Convertible Preferred ................   19,417      28,314
  592,650   Interpublic Group of Companies, Inc. ....    4,531      19,039
1,066,934   Kaiser Aluminum and Chemical Corporation    18,085      18,671
  453,800   Knight-Ridder Newspapers, Inc. ..........    7,534      10,267
  953,750   SAFECO Corporation ......................   23,867      26,467
  934,300   The Washington Post Company .............   10,628      43,445
                                                     ----------  ----------
            Total ................................... $ 94,260    $163,889
            All Other Holdings ......................   39,506      57,040
                                                     ----------  ----------
            Total Equities .......................... $133,766    $220,929
                                                     ==========  ==========

     In some cases our indirect interest in earning power is 
becoming quite substantial.  For example, note our holdings of 
953,750 shares of SAFECO Corp. SAFECO probably is the best run 
large property and casualty insurance company in the United 
States.  Their underwriting abilities are simply superb, their 
loss reserving is conservative, and their investment policies 
make great sense.

     SAFECO is a much better insurance operation than our own 
(although we believe certain segments of ours are much better 
than average), is better than one we could develop and, 
similarly, is far better than any in which we might negotiate 
purchase of a controlling interest.  Yet our purchase of SAFECO 
was made at substantially under book value.  We paid less than 
100 cents on the dollar for the best company in the business, 
when far more than 100 cents on the dollar is being paid for 
mediocre companies in corporate transactions.  And there is no 
way to start a new operation - with necessarily uncertain 
prospects - at less than 100 cents on the dollar.

     Of course, with a minor interest we do not have the right to 
direct or even influence management policies of SAFECO.  But why 
should we wish to do this?  The record would indicate that they 
do a better job of managing their operations than we could do 
ourselves.  While there may be less excitement and prestige in 
sitting back and letting others do the work, we think that is all 
one loses by accepting a passive participation in excellent 
management.  Because, quite clearly, if one controlled a company 
run as well as SAFECO, the proper policy also would be to sit 
back and let management do its job.

     Earnings attributable to the shares of SAFECO owned by 
Berkshire at yearend amounted to $6.1 million during 1978, but 
only the dividends received (about 18% of earnings) are reflected 
in our operating earnings.  We believe the balance, although not 
reportable, to be just as real in terms of eventual benefit to us 
as the amount distributed.  In fact, SAFECO’s retained earnings 
(or those of other well-run companies if they have opportunities 
to employ additional capital advantageously) may well eventually 
have a value to shareholders greater than 100 cents on the 

     We are not at all unhappy when our wholly-owned businesses 
retain all of their earnings if they can utilize internally those 
funds at attractive rates.  Why should we feel differently about 
retention of earnings by companies in which we hold small equity 
interests, but where the record indicates even better prospects 
for profitable employment of capital? (This proposition cuts the 
other way, of course, in industries with low capital 
requirements, or if management has a record of plowing capital 
into projects of low profitability; then earnings should be paid 
out or used to repurchase shares - often by far the most 
attractive option for capital utilization.)

     The aggregate level of such retained earnings attributable 
to our equity interests in fine companies is becoming quite 
substantial.  It does not enter into our reported operating 
earnings, but we feel it well may have equal long-term 
significance to our shareholders.  Our hope is that conditions 
continue to prevail in securities markets which allow our 
insurance companies to buy large amounts of underlying earning 
power for relatively modest outlays.  At some point market 
conditions undoubtedly will again preclude such bargain buying 
but, in the meantime, we will try to make the most of 


     Under Gene Abegg and Pete Jeffrey, the Illinois National 
Bank and Trust Company in Rockford continues to establish new 
records.  Last year’s earnings amounted to approximately 2.1% of 
average assets, about three times the level averaged by major 
banks.  In our opinion, this extraordinary level of earnings is 
being achieved while maintaining significantly less asset risk 
than prevails at most of the larger banks.

     We purchased the Illinois National Bank in March 1969.  It 
was a first-class operation then, just as it had been ever since 
Gene Abegg opened the doors in 1931.  Since 1968, consumer time 
deposits have quadrupled, net income has tripled and trust 
department income has more than doubled, while costs have been 
closely controlled.

     Our experience has been that the manager of an already high-
cost operation frequently is uncommonly resourceful in finding 
new ways to add to overhead, while the manager of a tightly-run 
operation usually continues to find additional methods to curtail 
costs, even when his costs are already well below those of his 
competitors.  No one has demonstrated this latter ability better 
than Gene Abegg.

     We are required to divest our bank by December 31, 1980.  
The most likely approach is to spin it off to Berkshire 
shareholders some time in the second half of 1980.


     Upon merging with Diversified, we acquired 100% ownership of 
Associated Retail Stores, Inc., a chain of about 75 popular 
priced women’s apparel stores.  Associated was launched in 
Chicago on March 7, 1931 with one store, $3200, and two 
extraordinary partners, Ben Rosner and Leo Simon.  After Mr. 
Simon’s death, the business was offered to Diversified for cash 
in 1967.  Ben was to continue running the business - and run it, 
he has.

     Associated’s business has not grown, and it consistently has 
faced adverse demographic and retailing trends.  But Ben’s 
combination of merchandising, real estate and cost-containment 
skills has produced an outstanding record of profitability, with 
returns on capital necessarily employed in the business often in 
the 20% after-tax area.

     Ben is now 75 and, like Gene Abegg, 81, at Illinois National 
and Louie Vincenti, 73, at Wesco, continues daily to bring an 
almost passionately proprietary attitude to the business.  This 
group of top managers must appear to an outsider to be an 
overreaction on our part to an OEO bulletin on age 
discrimination.  While unorthodox, these relationships have been 
exceptionally rewarding, both financially and personally.  It is 
a real pleasure to work with managers who enjoy coming to work 
each morning and, once there, instinctively and unerringly think 
like owners.  We are associated with some of the very best.

                                    Warren E. Buffett, Chairman

March 26, 1979

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