Letter to Shareholders

# 1972 Letter to Shareholders ## To the Shareholders of Berkshire Hathaway Inc. 1972 was an excellent year. Our operating businesses performed well, and our investment portfolio appreciated significantly. More importantly, we continued to learn valuable lessons about what makes a business truly wonderful. ## See's Candies See's Candies had an outstanding year. Sales and profits both grew, and we raised prices without any loss of volume. This pricing power is the hallmark of a great business. > "A business that can raise prices without losing customers has discovered something very valuable." See's requires almost no capital to grow. The brand does the work. Customers return year after year, and they bring their friends. The business compounds without requiring significant reinvestment. This is the ideal business model: high returns on capital, minimal reinvestment needs, and the ability to grow through pricing power rather than capital expenditure. We are learning to recognize and seek such businesses. ## Insurance Operations Our insurance operations continue to excel. We are generating substantial **float**—money that policyholders pay in advance for coverage they will receive later. This float can be invested while we wait for claims to be paid. The economics of insurance, when practiced with discipline, are remarkable: - We receive money upfront (premiums) - We invest that money for our benefit - We pay claims later, sometimes much later - If we underwrite profitably, the float is free This year, our underwriting profit plus investment income on float produced an excellent return. We are building a significant competitive advantage in insurance. ## The Power of Brands [[Charlie Munger]] has taught me to think deeply about competitive advantages. The most durable advantage is often a brand. A brand creates: 1. **Customer loyalty** — People prefer the brand even when alternatives exist 2. **Pricing power** — The brand can charge more than competitors 3. **Distribution advantage** — Retailers want to carry the brand 4. **New product leverage** — The brand can extend into new categories See's Candies has all of these advantages. The brand is the business. The tangible assets are almost irrelevant. This insight has transformed how I think about valuation. ## Investment Portfolio Our portfolio of marketable securities performed well. We focus on businesses with durable competitive advantages, and we seek to buy them at reasonable prices. We are patient. We would rather hold a wonderful business indefinitely than trade in and out. The tax advantages of long-term holding are significant, and the compounding power of a great business is best captured over many years. ## Capital Allocation We now have multiple uses for capital: - Reinvestment in See's and other operating businesses - Expansion of insurance operations - Investment in marketable securities - Acquisition of new businesses Our challenge is to allocate capital among these opportunities in the most intelligent way. We will direct capital to wherever we expect the highest returns over the long term. ## Looking Forward We are developing a clear philosophy: - Buy wonderful businesses with durable competitive advantages - Pay a fair price, not a bargain price - Hold indefinitely - Reinvest earnings where returns are attractive This approach differs from traditional value investing, which focuses on buying cheap assets. We have learned that quality is more important than price. A wonderful business at a fair price beats a fair business at a wonderful price. Warren E. Buffett March 1973