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This is a short summary of Warren Buffet’s Berkshire Hathaway Summary Stockholders Report of 1977. I asked one of our writers to compose a shorter summary of the 1977 report . 1977 is the year that:

• Apple Computer Inc. and Oracle Corporation incorporated.
• Elvis Presley died at age 42.
• Egyptian President Anwar Sadat becomes the first Arab leader to officially visit Isreal when he meets with Israeli Prime Minister Menachem Begin, seeking a permanent peace settlement.

I decided to get this written after reading a quote from Whitney Tilson , manager of T2 Partners LLC. He said “Read all of Warren Buffett’s Berkshire-Hathaway shareholder letters . That’s all you need to know.” If you would like to see more summaries like this, let us know !

Long Term vs. Short Term Outlook

While operating earnings were “moderately better” than anticipated the report represents a mixed bag of financial information to stockholders. The actual numbers are not as important as the underlying messages contained within the report. More than once, a reference to keeping a long term outlook vs. short term is plied as a way to deflect possible criticism towards under-performing business units and numbers that are not as favorable.

Of note, textile operations are under-performing, banking is performing as expected and insurance is surging although there are signs of a slowdown in profitability.

Much is made of the way earnings per share and equity capital are viewed when addressing “record” earnings as a new high mark. Taking a more realistic approach in how it is compared to annual equity growth gives credibility to the report in not over-stating the equity position. But this is a double-edged sword. Because of this methodology, the point is made that the current fiscal year does not appear to be in a position to deliver as strong of a financial performance as 1977.

Textile Unit

As for the textile unit, an admission is made to the ineffectiveness of forecasting and with a lack of understanding of the nature of the industry as a whole. The problems appear to be both market driven as well as based on poor management overall. The report does not mince words and makes certain that shareholders know that while profitability is important, so too are the livelihoods of thousands of workers, and the apparently strong efforts by all to bring the division to a profitable position. While this is a nice gesture in keeping the business afloat during this time, it is not a good long term strategy. Sooner or later, the business will have to produce profits, or be faced with the prospect of being sold or dissolved. The problems of marketing and manufacturing are areas of focus in order to turn this unit towards a profitable state.

Insurance Unit

The insurance unit contains the greatest up and down trends among all of the units. While growth and profits are strong, an admission of specific failures over-shadows an otherwise stellar performance. These failures are apparent in certain products and personnel issues. Only one of these is given a possible solution, and that is the personnel issue which is being remedied through a re-organization. The others are not addressed as to their resolution. One is left to assume that a certain amount of ’sins’ are admissible since the P&L sheet is strong.

Tough Times?

The underwriting portion of the insurance unit will be experiencing rough waters because greater than expected costs of operations will impair future profits. This coupled with the fact that rate increases are not keeping abreast with cost increases of 1% per month, portends a foundering outlook. The two areas that are forcing upward pressure on cost are monetary inflation (”the cost of repairing humans and property”) and social inflation (the cost increases realized by an erosion of the boundaries which contain what is covered by insurance policies). These specific increases are a result of liberal societal views backed by jury decisions which affect the insurance industry as a whole.

Again, a stark contrast to good profit news is presented by the realization that a reduction in volume in underwriting will force pressure on the unit to compete in an area that it is not familiar with at this time - price. The goal of which is to keep competition at bay. The wisdom of such a move will play out on its own, but it is has always been very difficult to pull back from a price centric marketing model once a business begins to play in that field.

The homestate operations are well within tolerable limits by producing low loss ratios. The trend is strong and shows that it is a profitable and well-run unit.

A statement is made to the sameness of insurance operations at all companies, but with the difference being the positive effect of the individual managers on the business unit and how fortunate they are to have their current management team in place. This is a powerful testimony to the contributions that individuals make in a given organization.

Investment Principles.

Insurance investments are a large growth area that should be expanded upon. The admission of the stance of keeping long-term strategies when looking at investments will prove wise for overall positive performance in the future.

Then, the report digresses into a history of Berkshire years which illustrates that one financial year does not a company make (or break). Not lost on business savvy persons, this illustration is more an attempt to prevent knee-jerk reactions to short-term trends and to stay the course in order to ultimately get to the point of realizing a favorable return on investment.

Equity holdings are listed for 1977, and much is made of the selection process for marketable equity securities. The report stresses that desirable business are 1) ones which are understood, 2) have favorable long-term prospects, 3) are operated by honest and competent people, 4) are available at attractive prices. These points can and should be applied to the other business units as well. This should make up an overall strategy in obtaining successful businesses in the future.

A distinction is made between corporate acquisition and large stock positions in companies with the understanding that long-term outlook drives these decisions based on excellent market value and dividend returns. The report speaks to ownership of a corporation vs. allowing it to thrive under its present management and how, while somewhat unorthodox, this view results in a better return. It emphasizes up-side potential without the operational costs associated with ownership.

Banking Unit

The banking holdings perform strongly and the outlook is expected to remain so. Finally, equity interest in Blue Chip Stamps was increased. This unit showed solid growth.

The $22.54 earnings per share helps in keeping shareholders content. It is not a great report, but not bad either especially given the economic climate at the time.

About Berkshire Hathaway

Berkshire Hathaway (NYSE: BRK.A, NYSE: BRK.B) is a conglomerate holding company headquartered in Omaha, Nebraska, U.S., that oversees and manages a number of subsidiary companies. Berkshire Hathaway’s core business is insurance, including property and casualty insurance, reinsurance and specialty nonstandard insurance. The Company averaged an annual return in excess of 21% to its shareholders for the last 42 years while employing large amounts of capital and minimal debt.

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