To the Shareholders of Berkshire Hathaway Inc.:
Operating earnings of $39.7 million in 1981 amounted to 15.2% of beginning equity capital (valuing securities at cost) compared to 17.8% in 1980. Our new plan that allows stockholders to designate corporate charitable contributions (detailed later) reduced earnings by about $900,000 in 1981. This program, which we expect to continue subject to annual evaluation of our corporate tax position, had not been initiated in 1980.
Our retained earnings statement on page 15 shows that our stockholders' equity increased from $236.3 million at the beginning of 1980 to $304.8 million at the end of 1981. This increase of $68.5 million has two primary components: (1) reported earnings of $49 million (clothing, furniture, etc., as distinguished from gains from capital transactions); and (2) capital gains from our investment portfolio, which we estimate at approximately $50 million.
Our reported earnings in 1981 trailed 1980's by $13.6 million. This is a bit misleading since one of our investment holdings, Coca-Cola, contributed $13 million to our 1981 earnings versus $30 million in 1980. Excluding this factor, our operating earnings last year would have been $2.5 million higher than in 1980. However, in addition to the earnings decline in our share of Coca-Cola's results, our textile operations continued to lose money (the only silver lining being that losses were smaller than in prior years) and our banking business was less profitable.
We will continue to seek the acquisition of businesses in their entirety at prices that will make sense, even should the future of the acquired enterprise develop much along the lines of its past. We may very well pay a fairly fancy price for a Category 1 business if we are reasonably confident of what we are getting. But we will not normally pay a lot in any purchase for what we are supposed to bring to the party—for we find that we ordinarily don't bring a lot.
During 1981 we came quite close to a major purchase involving both a business and a manager we liked very much. However, the price finally demanded, considering alternative uses for the funds involved, would have left our owners worse off than before the purchase. The empire would have been larger, but the citizenry would have been poorer.
Although we had no success in 1981, from time to time in the future we will be able to purchase 100% of businesses meeting our standards. Additionally, we expect an occasional offering of a major "non-voting partnership" as discussed under the Pinkerton's heading on page 47 of this report. We welcome suggestions regarding such companies where we, as a substantial junior partner, can achieve good economic results while furthering the long-term objectives of present owners and managers.
Currently, we find values easiest obtained through the open-market purchase of fractional positions in companies with excellent business franchises and competent, honest managements. We never expect to run these companies, but we do expect to profit from them.
We expect that undistributed earnings from such companies will produce full value (subject to tax when realized) for Berkshire and its shareholders. If they don't, we have made mistakes as to either: (1) the management we have elected to join; (2) the future economics of the business; or (3) the price we have paid.
We have made plenty of such mistakes - both in the purchase of non-controlling and controlling interests in businesses. Category (2) miscalculations are the most common. Of course, it is necessary to dig deep into our history to find illustrations of such mistakes—sometimes as deep as two or three months back. For example, last year your Chairman volunteered his expert opinion on the rosy future of the aluminum business. Several minor adjustments to that opinion—now aggregating approximately 180 degrees—have since been required.
In past reports we have explained how inflation has caused our apparently satisfactory long-term corporate performance to be illusory as a measure of true investment results for our owners. We applaud the efforts of Federal Reserve Chairman Volcker and note the currently more moderate increases in various price indices. Nevertheless, our views regarding long-term inflationary trends are as negative as ever. Like virginity, a stable price level seems capable of maintenance, but not of restoration.
Despite the overriding importance of inflation in the investment equation, we will not punish you further with another full recital of our views. Inflation itself will be punishment enough. But, because of the unrelenting destruction of currency values, our corporate efforts will continue to do a much better job of filling your wallet than of filling your stomach.
The designated-contributions idea, along with many other ideas that have turned out well for us, was conceived by Charlie Munger, Vice Chairman of Berkshire and Chairman of Blue Chip. Irrespective of titles, Charlie and I work as partners in managing all controlled companies. To almost a sinful degree, we enjoy our work as managing partners. And we enjoy having you as our financial partners.
Warren E. Buffett
Chairman
February 26, 1982
