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  Title	[Week 11 - 1975] Discussing A Berkshire Hathaway Shareholder Letter Every Week
  ID	30665673
  External ID	1rcwcy6
  Author	FieryXJoe
  Published Date	Feb. 23, 2026, 4:36 p.m.
  Summary	**Full Letter:** https://theoraclesclassroom.com/wp-content/uploads/2019/09/1975-Berkshire-AR.pdf NOTE: Some pages are out of order / page 3 is double scanned, not my PDF but letting anyone know so
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  URL	https://www.reddit.com/r/ValueInvesting/comments/1rcwcy6/week_11_1975_discussing_a_berkshire_hathaway/
  Sentiment	Negative: 0.32798    Neutral: 0.20655    Positive: 0.46547
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  Content ID	37861680
  Key	a5d04439-3a7e-43b8-8300-d5e190ab699d
  Content	**Full Letter:** https://theoraclesclassroom.com/wp-content/uploads/2019/09/1975-Berkshire-AR.pdf NOTE: Some pages are out of order / page 3 is double scanned, not my PDF but letting anyone know so it doesn’t disorient them · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · **Key Passage 1** · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · **General Review** >Your present management assumed responsibility at Berkshire Hathaway in May, 1965. At the end of the prior fiscal year (September, 1964) the net worth of the Company was $22.1 million, and 1,137,778 common shares were outstanding, with a resulting book value of $19.46 per share. Ten years earlier Berkshire Hathaway's net worth had been $53.4 million. Dividends and stock repurchases accounted for over $21 million of the decline in company net worth, but aggregate net losses of $9.8 million had been incurred on sales of $595 million during the decade. >In 1965, two New England textile mills were the company's only sources of earning power and, before Ken Chace assumed responsibility for the operation, textile earnings had been erratic and cumulatively, something less than zero subsequent to the merger of Berkshire Fine Spinning and Hathaway Manufacturing. Since 1964, net worth has been built to $92.9 million, or $94.92 per share. We have have acquired total, or virtually total ownership of six businesses through negotiated purchases for cash (or cash and notes) from private owners, started four others, purchased a 31½% interest in a large affiliated enterprise and reduced the number of outstanding shares of Berkshire Hathaway to 979,569. Overall, equity per share has compounded at an annual rate of slightly over 15%. >While 1975 was a major disappointment, efforts will continue to develop growing and diversified sources of earnings. Our objective is a conservatively financed and highly liquid business - possessing extra margins of balance sheet strength consistent with the fiduciary obligations inherent in the banking and insurance industries - which will produce a long term rate of return on equity capital exceeding that of American industry as a whole. · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · This is basically Buffett’s 10 year review of their time running the company and what they have done with it since assuming control in 1965. While the current year was maybe the worst in the last decade, he is imploring the shareholders to consider that from 1955 to 1965 the company had net losses and ended up smaller, but from 1965 to 1975 they had market-beating returns and have transformed it into a much more stable asset, even if 1973-1975 was not a very fun ride, the company was losing money in 1963 and breaking even in 1964 so the lows are still not nearly as low as they used to be. He highlights the diversification, balance sheet improvement, quality of the industries they participate in, etc… · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · **Acquisition of the Week** **Waumbec Mills** · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · **Textile Operations** > During the first half of 1975 sales of textile products were extremely depressed, resulting in major production curtailments. Operations ran at a significant loss, with employment down as much as 53% from a year earlier. >In contrast with previous cyclical slumps, however, most textile producers quickly reduced production to match incoming orders, thus preventing massive industry-wide accumulation of inventories. Such cutbacks caused quite prompt reflection at the mill operating level when demand revived at retail. As a result, beginning about midyear business rebounded at a fairly rapid rate. This "V" shaped textile depression, while one of the sharpest on record, also became one of shortest ones in our experience. The fourth quarter produced an excellent profit for our textile division, bringing results for the year into the black. >On April 28, 1975 we acquired Waumbec Mills Incorporated and Waumbec Dyeing and Finishing Co., Inc. located in Manchester, New Hampshire. These companies have long sold woven goods into the drapery and apparel trade. Such drapery materials complement and extend the line already marketed through the Home Fabrics Division of Berkshire Hathaway. In the period prior to our acquisition, the company had run at a very substantial loss, with only about 55% of looms in operation and the finishing plant operating at about 50% of capacity. Losses continued a reduced basis for a few months after acquisition. Outstanding efforts by our manufacturing, administrative and sales people now have produced major improvements which, coupled with the general revival in textiles, have moved Waumbec into a significant profit position. movement >We expect a good level of profits from textiles in 1976. Continued progress is being made in the movement of Waumbec goods into areas of traditional marketing strength of Berkshire Hathaway, productivity should improve in both the weaving and finishing areas at Manchester, and textile demand continues firm at decent prices. >We have great confidence in the ability of Ken Chace and his team to maximize our strengths in textiles. Therefore, we continue to look for ways to increase further our scale of operation while avoiding major capital investment in new fixed assets which we consider unwise, considering the relatively low returns historically earned on large scale investment in new textile equipment. · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · The textile industry continues to be a disaster, they are losing money and laying off staff, yet an interesting decision has been made to double down and buy a second failing textile company. I am a bit biased because I know how often future Buffett jokes about this being an incomprehensibly stupid decision. The wording of the letter leads me to believe the logic was that this was just another cycle in an industry that would be around forever. That the low point in the industry is the time to buy up assets right before the cycle turns. They also believe they have some unique expertise at how to trim the fat and turn a textile mill around (while their own are currently failing). I also suspect that Buffet is so proud of the job Chace has done he wants to give him a new challenge to work on, maybe feeling that his talents are wasted just overseeing the slow death of the current operation, he can now oversee the slow death of a second one. The fundamental issue isn’t the textile market, it is the labor market and globalization. A US textile mill will never be able to compete in prices with say a Chinese textile mill and people don’t really care where their textiles come from. The US simply can’t compete on manufacturing basic goods, instead needing to move up the supply chain to make sense with the labor force and strong dollar of the US. With 50 years of hindsight this is clear but the idea of the US not being a manufacturing powerhouse one day may have seemed impossible to imagine at the time. · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · **Key Passage 2** · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · **Insurance Underwriting** >The property and casualty insurance industry had its worst year in history during 1975. We did our share - unfortunately, even somewhat more. Really disastrous results were concentrated lines. in auto and long-tail (contracts where settlement of loss usually occurs long after the loss event) lines. >Economic inflation, with the increase in cost of repairing humans and property far outstripping the general rate of inflation, produced ultimate loss costs which soared beyond premium levels established in a different cost environment. "Social" inflation caused the liability concept to be expanded continuously, far beyond limits contemplated when rates were established - in effect, adding coverage beyond what was paid for. Such social inflation increased significantly both previously the propensity to sue and the possibility of collecting mammoth jury awards for events not previously considered statistically significant in the establishment of rates. Furthermore, losses to policyholders which otherwise would result from mushrooming insolvencies of companies inadequately reacting to these problems are divided through Guaranty Funds among remaining solvent insurers. These trends will continue, and should moderate any optimism which otherwise might be justified by the sharply increased rates now taking effect. >Berkshire Hathaway's insurance subsidiaries have a disproportionate concentration of busi- ness in precisely the lines which produced the worst underwriting results in 1975. Such lines produce unusually high investment income and, therefore, have been particularly attractive to us under previous underwriting conditions. However, our "mix" has been very disadvantageous part during the past two years and it well may be that we will remain positioned in the more difficult of the insurance spectrum during the inflationary years ahead. >The only segment to show improved results for us during 1975 was the "home state" operation, which has made continuous progress under the leadership of John Ringwalt. Although still operating at a significant underwriting loss, the combined ratio improved from 1974. Adjusted for excess costs attributable to operations still in the start-up phase, underwriting results are satisfactory. Texas United Insurance Company, a major problem a few years ago, has made outstanding progress since George Billings has assumed command. With an almost totally new agency force, Texas United was the winner of the "Chairman's Cup" for achievement of the lowest loss ratio state among the home state companies. Cornhusker Casualty Company, oldest and largest of the home companies, continues its outstanding operation with major gains in premium volume and a combined ratio slightly under 100. Substantial premium growth is expected at the home state operation during 1976; the measurement of success, however, will continue to be the achievement of a low combined ratio. >Our traditional business at National Indemnity Company, representing well over half of our insurance volume, had an extraordinarily bad underwriting year in 1975. Although rates were increased frequently and significantly, they continually lagged loss experience throughout the year. Several special programs instituted in the early 1970s have caused significant losses, as well as a heavy drain on managerial time and energies. Present indications are that premium volume will show a major increase in 1976, and we hope that underwriting results will improve. >Reinsurance suffered the same problems as our direct business during 1975. The same remedial efforts were attempted. Because reinsurance contract settlements lag those of direct business, it well may be that any upturn in results from our direct insurance business will precede those of the reinsurance segment. >At our Home and Automobile Insurance Company subsidiary, now writing auto business only in the Cook County area of Illinois, experience continued very bad in 1975 resulting in a management change in October. John Seward was made President at that time, and has energetically and imaginatively implemented a completely revamped underwriting approach. >Overall, our insurance operation will produce a substantial gain in premium volume during 1976. Much of this will reflect increased rates rather than more policies. Under normal circumstances such a gain in volume would be welcome, but our emotions are mixed at present. Underwriting experience should improve - and we expect it to - but our confidence level is not high. While our efforts will be devoted to obtaining a combined ratio below 100, it is unlikely to be attained during 1976. · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · I decided to do a second key passage this week. I wanted to do the overview passage but thought leaving out either the Textiles or Insurance this year would be a disservice. Literally every insurance operation is in trouble. Even the one operation he is giving its flowers, the home state insurers… are still operating at an underwriting loss, but simply improved their losses over last year unlike the others. The biggest thing he notes here, and I don’t think has before but will continue to do so in the future, is “social” inflation, people are turning on insurance companies and juries are very anti-insurance company in their rulings. This is leading them to taking losses they hadn’t agreed to when they wrote the contracts, paying more than they believe they should or being made to cover events they don’t believe they should. This is separate from the underwriting cycle beyond some tangential relations (public opinion may change when insurers are going bankrupt in a bad cycle versus raking in cash in a good cycle), and it will be a continuing theme for a long time. Last year’s letter they saw this coming and claimed they were positioned well for the bad cycle, but this year they are saying they actually got hit worse than other insurers. The bright spot is that the more reckless competition will be out of the market, everyone is raising prices to make back their losses, so Berkshire expects a big boost in volume as profitable policies will be much easier to write soon. · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · |**Segment**|**1974 Earnings**|**1975 Earnings**|**% Change**| |:-|:-|:-|:-| |**Insurance**|$2.53M|$0.72M|-71.54%| |**Banking**|$4.09M|$3.45M|-15.65%| |**Blue Chip Stamps Equity**|$1.05M|$2.00M|+90.48%| |**Net Total**|**$7.04M**|**$4.69M**|**-33.38%**| · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · |**Metric**|**1974**|**1975**|**% Change**| |:-|:-|:-|:-| |**Net Earnings**|$7.04M|$4.69M|-33.38%| |**Return on Equity (RoE)**|10.3%|7.6%|-26.21%| |**Shareholders' Equity**|$88.20M|$92.89M|+5.32%| · · · · · · · · · · · · · · · · · · · · · · · · · · · · · · Another very bad year for the company, especially painful this year as the market recovered from the crash the prior years and thus the Dow had a +38% year while Berkshire had its worst year ever. Of course they didn’t have the pullback in the first place but last year’s results were more palatable when everyone else was going broke. This is the first time textiles and insurance are having truly awful years at the same time and perhaps shows that some more diversification may be in order. Blue Chip being the only highlight and frankly I don’t know how exactly they calculate that number while their equity in the company is steadily increasing.
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