Letter to Shareholders

# 1974 Letter to Shareholders ## To the Shareholders of Berkshire Hathaway Inc. 1974 was the worst year for the stock market since the 1930s. The Dow Jones Industrial Average fell from 850 to 616, a decline of 27.5%. For value investors, this was a time of opportunity. ## The Bear Market Severe bear markets test investors' resolve. When prices are falling and pessimism is rampant, it takes courage to buy. But this is precisely when the best opportunities appear. > "We simply attempt to be fearful when others are greedy and greedy when others are fearful." We continued purchasing Washington Post shares throughout the decline. The business became cheaper even as its intrinsic value grew. This is the ideal situation: a wonderful business becoming more affordable. We also found opportunities in other areas. When markets are distressed, mispricings become abundant. Our job is to identify the genuine bargains among the falling prices. ## The GEICO Situation [[GEICO]] faced a severe crisis in 1974. The company had expanded too aggressively, underwriting standards had deteriorated, and losses mounted. The stock price collapsed, and the company's survival was in question. We began studying GEICO carefully. The company had a fundamental advantage—its direct-to-consumer model eliminated agent commissions, giving it a significant cost advantage. If this advantage could be preserved while underwriting standards were restored, GEICO could recover. This situation illustrates an important principle: the best investments often come from companies with temporary problems but permanent advantages. GEICO had a permanent cost advantage but temporary underwriting problems. If we could distinguish the temporary from the permanent, we could make a fortune. ## Operating Businesses See's Candies continued to perform well. The business grows steadily with minimal capital requirements. The brand's pricing power remains our most valuable asset. Our insurance operations faced a challenging environment. Industry-wide, underwriting results deteriorated as companies chased market share. We maintained discipline, accepting slower growth rather than underwriting losses. This discipline is costly in the short term but valuable in the long term. When industry conditions improve, we will have maintained our financial strength and underwriting standards. This positions us to grow when others are retrenching. ## The Importance of Patience [[Charlie Munger]] and I are patient investors. We are willing to wait years for the right opportunity. This patience gives us an advantage over investors who feel pressure to be fully invested at all times. In 1974, our patience was rewarded. The severe market decline created opportunities that do not exist in normal times. We were able to buy wonderful businesses at prices that provide a significant margin of safety. ## Looking Forward We do not know when the bear market will end. We do not try to predict market movements. Instead, we focus on: - Identifying wonderful businesses - Waiting for attractive prices - Buying when the price is right - Holding indefinitely This approach has served us well through many market cycles. It will continue to guide us. The current market environment is challenging but also full of opportunity. We will continue to act rationally, buying when we find value and holding cash when we do not. Warren E. Buffett March 1975