To the Shareholders of Berkshire Hathaway

# 1977 Letter to Shareholders ## To the Shareholders of Berkshire Hathaway Inc.: Operating earnings in 1977, excluding capital gains, were $21,904,000, or $22.54 per share, up about 35% from the previous year. While this performance is satisfactory, it masks significant developments within our business units. ## The Concept of Intrinsic Value We believe that there is a fundamental concept that all investors should understand: **intrinsic value**. This is the true underlying value of a business, determined by the discounted value of the cash that can be taken out of the business during its remaining life. The calculation of intrinsic value is not simple. It requires estimating future cash flows and selecting an appropriate discount rate. However, it is the only logical approach to valuation. > "The value of any stock, bond or business today is determined by the cash inflows and outflows—discounted at an appropriate interest rate—that can be expected to occur during the remaining life of the asset." ## Owner Earnings vs. Reported Earnings We prefer to focus on **owner earnings** rather than reported accounting earnings. Owner earnings represent: 1. Reported earnings 2. Plus depreciation, depletion, amortization, and certain other non-cash charges 3. Less the average annual amount of capitalized expenditures for plant and equipment required to maintain the long-term competitive position and unit volume of the business This metric gives us a clearer picture of the actual cash-generating ability of a business. ## The Insurance Float Our insurance operations generated significant "float"—the premiums we hold before paying claims. This float is essentially cost-free capital that we can invest for our own benefit. [[GEICO]] continues to be our most important insurance operation. Its low-cost structure gives it a sustainable competitive advantage in the auto insurance market. ## Margin of Safety We continue to apply [[Benjamin Graham]]'s principle of **margin of safety**—buying securities only when their market price is significantly below our conservative calculation of intrinsic value. This approach protects us from errors in our analysis and from adverse market conditions. ## Conclusion We remain committed to building long-term value for our shareholders through disciplined capital allocation and patient investing. Warren E. Buffett Chairman of the Board