Letter to Shareholders

# 1970 Letter to Shareholders ## To the Shareholders of Berkshire Hathaway Inc. This letter marks a transition in our reporting. For the first time, we are writing to shareholders of an operating company rather than partners in an investment fund. The partnership that I managed for so many years has been dissolved, and its assets have been distributed. ## The Textile Business Berkshire Hathaway's original business was textiles. We acquired the company in 1965, when its shares were trading at a deep discount to working capital. The business had been struggling for decades, and we hoped to turn it around. Five years later, the textile operation continues to face serious challenges. The industry suffers from chronic overcapacity, intense foreign competition, and razor-thin margins. Despite our best efforts, the textile business has been a disappointment. > "The textile business is a textbook example of an industry with poor economics. No matter how well you manage it, the returns are inadequate." We have learned an important lesson: When an industry has poor economics, brilliant management cannot overcome the structural problems. Conversely, when an industry has wonderful economics, even mediocre management can produce good results. We prefer to be in the second situation. ## Insurance Operations Our insurance subsidiary, National Indemnity Company, had an excellent year. Premium volume grew significantly, and we generated underwriting profit. The insurance business has much better economics than textiles. Insurance provides us with **float**—money that we hold but do not own. This float can be invested for our benefit. In a good year, we earn underwriting profit plus investment income on float. This is a powerful combination. We are learning that insurance may be a better use of our capital than textiles. The economics are superior, and the business generates investable float. We will continue to build our insurance operations. ## Investment Portfolio We maintain a portfolio of marketable securities that represents our largest asset. The portfolio is managed with the same principles that guided the partnership: 1. **Buy at a discount to intrinsic value** — We seek a margin of safety in every purchase 2. **Focus on quality** — We prefer wonderful businesses at fair prices 3. **Think long-term** — We are willing to hold indefinitely 4. **Stay within our circle of competence** — We only buy what we understand [[Charlie Munger]] has been influential in shaping these principles. He has taught me that it is better to buy a wonderful business at a fair price than a fair business at a wonderful price. This insight has transformed my approach. ## The Transition Moving from partnership to operating company changes my role. I am no longer just an investor allocating capital among securities. I am now a business operator responsible for running actual companies. This transition has been smooth because the principles are the same. Whether allocating capital among stocks or among businesses, the goal is to purchase the most value for the least price. The medium changes; the method does not. ## Looking Forward We will continue to operate Berkshire as a vehicle for rational capital allocation. Our goal is to increase intrinsic value per share over time. We will do this by: - Reinvesting earnings where returns are attractive - Acquiring businesses with durable competitive advantages - Maintaining a strong balance sheet - Avoiding actions that destroy value The textile business may never be a great business, but it generates cash that we can allocate elsewhere. We will not pour capital into a business with poor economics. We will instead direct resources toward our best opportunities. Warren E. Buffett March 1971