To the Shareholders of Berkshire Hathaway Inc.

# 1975 Letter to Shareholders ## To the Shareholders of Berkshire Hathaway Inc. 1975 was a disappointing year. Operating earnings were $6.71 million, or $6.85 per share, representing a return on equity of just 7.6%—our worst performance since 1967. I must be candid: most of this profit came from federal income tax refunds, which will not recur in 1976. I told you last year that our textile operations would expand meaningfully. We followed through, acquiring two companies in the textile industry. These acquisitions were logical at the time, but they further diversified us into a business with structural challenges. ## Insurance Underwriting The insurance business suffered in 1975. Industry-wide catastrophe losses—particularly from hurricanes and other natural disasters—devastated underwriting results for most companies in the business. We were not immune. Our National Indemnity operations held up better than most, but the overall insurance environment remained extremely difficult. Premium rate increases were inadequate to cover rising claim costs, and the competitive dynamics of the industry made it nearly impossible to achieve adequate returns without disciplined underwriting. > "The insurance industry has a peculiar characteristic: it is easy to enter but very difficult to operate profitably over extended periods. Everyone wants to write more premium; few have the discipline to turn down business that does not meet their standards." The industry-wide pain of 1975 would eventually lead to higher rates in 1976 and beyond. Those companies that maintained financial strength during the difficult period would be best positioned to benefit from the improvement. ## The GEICO Investment We continued to build our position in [[GEICO]] throughout 1975. The company faced severe difficulties—rapid expansion had outrun its underwriting capabilities, and losses mounted. The stock price collapsed from its highs. But we saw something that others missed: GEICO's fundamental competitive advantage remained intact. Its direct-to-consumer model, serving primarily federal employees and their families, continued to provide a significant cost advantage over competitors. The company had made underwriting mistakes, but those were correctable. [[Charlie Munger]] had been particularly insistent that we pay close attention to GEICO. He recognized that the company's problems were managerial, not structural. When a company with a genuine competitive advantage has temporary difficulties, the opportunity is extraordinary. This lesson would prove valuable in 1976. ## Textile Operations Our textile business did expand in 1975—we acquired two additional companies. I want to be honest about this: I made these acquisitions because they appeared cheap on a per-share earnings basis. In retrospect, I should have remembered [[Benjamin Graham]]'s lesson that a cheap price on a bad business is rarely a good investment. The textile industry continues to face structural challenges: foreign competition, excess capacity, cyclical demand, and low margins. We have managed these businesses as best we can, extracting cash where possible and avoiding major capital investments that cannot earn adequate returns. ## Diversified Retailing In late 1975, we began exploring a merger with Diversified Retailing Company (DRC), a company controlled by [[Charlie Munger]]. This merger would combine DRC's retailing operations—including Sunbeam and other brands—with Berkshire's insurance and textile businesses. The merger made sense because it aligned our interests. [[Charlie Munger]] had been my closest collaborator for nearly two decades, and combining our businesses would create a stronger, more diversified entity with management that shared our philosophy of long-term value creation. ## Looking Forward to 1976 Overall trends suggest improvement in 1976. Insurance underwriting economics should improve as rates catch up with costs. Our [[GEICO]] investment should begin to contribute meaningfully as the company returns to profitability. And the Diversified Retailing merger, if completed, will add an exciting new dimension to our business. The path will not be straight. But the principles that guide us—buy businesses at significant discounts to intrinsic value, maintain financial strength, and think independently—remain as valid as ever. Warren E. Buffett March 1976