1995 Letter to Shareholders

To the Shareholders of Berkshire Hathaway Inc.

In 1995, Berkshire earned a record $1.8 billion. This record reflects the compounding of excellent businesses over decades. Every dollar we retained in 1970 has been transformed into hundreds of dollars today.

"The most important quality an investor can have is temperament. You need to have the right mindset: you must be fearful when others are greedy and greedy when others are fearful."

Wesco Financial Corporation

In 1995, we acquired Wesco Financial Corporation. Weso is a holding company with significant interests in insurance, furniture retailing, and manufacturing.

Charlie Munger has been Weso's chairman since 1978. Under his leadership, Weso has compounded shareholder value at rates that exceed even Berkshire's remarkable performance. Charlie's wisdom and integrity made Weso an ideal acquisition.

The Temperament Problem

Most investors have the intelligence to evaluate investments. Few have the temperament to act on their evaluations. This is the critical distinction between successful and unsuccessful investing.

When markets fall, investors feel anxious. When markets rise, investors feel euphoric. These emotions lead to buying at highs and selling at lows—the precise opposite of what intelligence would dictate.

The solution is not to suppress emotions but to understand them. Recognize that market prices reflect the emotional state of millions of participants. When prices fall, remember that this often represents opportunity, not danger. When prices rise, remember that this often represents danger, not opportunity.

Capital Allocation

In 1995, I continued to allocate capital across Berkshire's businesses. Some businesses received capital for growth; others returned capital through share repurchases or dividends.

The key to capital allocation is knowing when to invest and when to return capital to shareholders. Invest when returns exceed the cost of capital; return capital when they don't.

Looking Forward

Our approach is unchanged:

1. We will maintain our temperament — Fear and greed are the investor's enemies
2. We will invest in quality — The best businesses deserve the highest valuations
3. We will be patient — Compounding requires time
4. We will allocate capital intelligently — Every dollar matters

Warren E. Buffett February 1996