1970

Began re-allocating capital away from the textile industry in 1966 o Temporarily park the capital in marketable securities pending attractive acquisition targets o Liquidated positions in marketable securities in order to purchase 2 businesses o Any future acquisition will be dependent on access to future financing Textile operations o Earnings on capital employed remain unsatisfactory o When theres a lack of demand for products: slow down production to avoid inventory build-up Insurance operations o Jack Ringwalt (heads the fire and casualty insurance business) maintains the principle of underwriting for a profit o Surety department established o Entering workers compensation subsector o Established a reinsurance division Banking operations o 97.7% of The Illinois National Bank and Trust Co. of Rockford, Illinois o Buffett talks about the banks performance in terms of operating earnings as a percentage of either deposits or total assets o It will be hard to achieve greater earnings in 1970 because 1) the bank is already an efficient business and 2) unit banking law of Illinois makes more than modest deposit growth difficult for a major downtown bank Regulation is important in determining a banks future growth trajectory

1972
The managements objective is to improve return on total capitalization (long term debt + equity) and return on equity capital Textile operations o Struggle with inadequate gross margins o Company has been swimming against a strong industry tide Insurance operations o Good year for property and casualty insurance industry due to Reduced auto accident frequency (lowers outflows/payments/costs) Higher effective rates in large volume lines (hire revenue) Absence of major catastrophes (lowers outflows/payments/costs) o Traditional business is in specialized policy or non-standard insured (more niche, moat, competitive advantage) o Underwriting has turned profitable on an industry wide basis competitors are underwriting more (often with greater exposure) Berkshire will likely see volume decrease in order to maintain profitability Thoughts: Buffett approaches insurance underwriting in the same way that he approaches investing. Be fearful when others are greedy, and be greedy when others are fearful. Banking operations o Illinois National Bank & Trust Company Earned over 2% after tax on average deposits (an impressive achievement) o Mix of deposits has moved away from demand money to much more expensive time money

1973
Strong earnings growth in the context of share buybacks and no addition of equity capital Textile operations o Although the industry continues to decline, Berkshires relative position within the industry has improved Stronger position in a declining industry Insurance underwriting

1972 profits have been extraordinarily good, but this short term significant gain may come at the cost of medium term profits o There is a lag between deterioration of underwriting results and tempering of competition (recognition lag) o Underwriting exposures are greater than ever and rates are still declining; it is not smart to expan volume during this time o Understand loss and expense ratios Insurance investment results o Large premium volume at a time of record-high interest rates = strong investment income Banking operations o After-tax earnings of 2.2% on average deposits on a background of A mix of 50% time deposits Strong liquid position and avoidance of money-market borrowings

1974
Textile operations o Due to significant increase in raw material prices, the company has adopted the LIFO method of inventory pricing More nearly matches current costs against current revenues (and thus more conservative) Minimizes inventory profits included in reported earnings Blue Chip Stamps o Similar to Berkshires experience with reallocation of capital. The stamp trading business was declining and yielded poor return on capital employed. Blue Chip Stamps acquired Wesco and Sees in order to boost returns

1975
Insurance underwriting o Due to unusual profitability in insurance underwriting, many new entrants and established companies have been guilty of significant under-reserving of losses Produces faulty information as to the true cost of the insurance products sold o Cost of the policy (auto repair, medical payments, compensation benefits etc.) increases at around 1% per month If rates dont keep up, then you are underwriting at a loss o Pulled out of operations in Florida because the management doesnt have the underwriting information and pricing knowledge necessary to operate in that geography Insurance investment results o Having liquidity for an insurance company is good. It prevents you from having to write business at any price in order to maintain cash flow o On a 15-year bond, an increase of 10 basis points translates to about a 1% downward change in market value Banking operations o Tax loss of insurance operations used to offset the tax liability created by banking operations

1976