Letter to Shareholders

# 1971 Letter to Shareholders ## To the Shareholders of Berkshire Hathaway Inc. We made an important acquisition in 1971: See's Candies. This purchase taught us more about business valuation than any textbook ever could. ## See's Candies See's is a West Coast candy retailer with a powerful brand. The company was founded in 1921 and had built an extraordinary reputation for quality. When we had the opportunity to buy the business, we jumped at it. The price was $25 million, which seemed steep. The business had only about $8 million of tangible book value. By traditional accounting measures, we paid more than three times book. > "See's Candies taught us that brand power can be worth far more than tangible assets." But See's earned about $2 million after tax on that $8 million of tangible capital—a 25% return. More importantly, the brand allowed See's to raise prices annually without losing customers. This pricing power meant that earnings would grow over time with minimal reinvestment. We have since learned that See's was worth far more than we paid. The business has generated hundreds of millions in earnings over the decades, while requiring almost no additional capital. The brand is the asset. ## The Lesson of Quality [[Charlie Munger]] had been telling me for years that quality matters more than price. The See's acquisition proved him right. We paid a "high" price for a wonderful business, and it turned out to be a bargain. The lesson is clear: When you buy a wonderful business, time is your friend. The economics work in your favor year after year. When you buy a mediocre business, time is your enemy. The problems compound. We will continue to seek wonderful businesses, even if we must pay what appears to be a full price. The compounding power of a great business justifies the premium. ## Insurance Operations Our insurance business had another strong year. Premium volume grew, and we maintained underwriting discipline. The float generated by insurance operations provides us with investable capital at no cost. We are becoming increasingly sophisticated in our understanding of insurance. The key is to price risk accurately and to avoid underwriting when prices are inadequate. We will never chase market share at the expense of underwriting profit. The combination of insurance float and investment returns is powerful. When we can invest float at attractive rates, the economics of insurance become exceptional. We are building a significant advantage in this business. ## Capital Allocation Our primary job is to allocate capital. We have three options: 1. **Reinvest in existing businesses** — Where returns are attractive 2. **Acquire new businesses** — Where we can buy quality at a reasonable price 3. **Return capital to shareholders** — When no attractive opportunities exist Currently, we are finding opportunities in both reinvestment and acquisitions. We will continue to allocate capital rationally, seeking the highest returns available. ## Looking Forward We have learned that: - Brand power can create enormous value - Quality businesses are worth paying for - Insurance float is a valuable source of capital - Rational capital allocation is the key to building value These lessons will guide us as we continue to build Berkshire. We are no longer just an investment company; we are a collection of operating businesses plus an investment portfolio. Our job is to allocate capital among these opportunities in the most intelligent way possible. Warren E. Buffett March 1972