In part two of our series, we investigate Warren Buffett's 1978 letter to the shareholders of Berkshire Hathaway:

In 1978, operating earnings were up 19.4%, although Buffett with candor says this is not sustainable, as the insurance business was already hitting a downturn in 1979.

As usual, Buffett offers up his basic investment philosophy:

"We make no attempt to predict how security markets will behave; successfully forecasting short term stock price movements is something we think neither we nor anyone else can do. In the longer run, however, we feel that many of our major equity holdings are going to be worth considerably more money than we paid, and that investment gains will add significantly to the operating returns of the insurance group.

Buffett shows support for Berkshire's textile businesses, which are a drag on earnings:

(1) our textile businesses are very important employers in their
communities, (2) management has been straightforward in reporting on problems and energetic in attacking them, (3) labor has been cooperative and understanding in facing our common problems, and (4) the business should average modest cash returns relative to investment. As long as these conditions prevail - and we expect that they will - we intend to continue to support our textile business despite more attractive alternative uses for capital.

While its insurance companies have contributed mightily to earnings, Buffett is honest in his assessment of expanding the business:

"We continue to look for ways to expand our insurance operation. But your reaction to this intent should not be unrestrained joy. Some of our expansion efforts - largely initiated by your Chairman have been lackluster, others have been expensive failures. We entered the business in 1967 through purchase of the segment which Phil Liesche now manages, and it still remains, by a large margin, the best portion of our insurance business.

Buffett on people's propensity to buy high and sell low:

(An irresistible footnote: in 1971, pension fund managers invested a record 122% of net funds available in equities - at full prices they couldn't buy enough of them. In 1974, after the bottom had fallen out, they committed a then record low of 21% to stocks.)

Buffett is known to wait a long time before jumping on a company or stock, but then going in with both feet, as he proves when he says:

Our policy is to concentrate holdings. We try to avoid buying a little of this or that when we are only lukewarm about the business or its price. When we are convinced as to attractiveness, we believe in buying worthwhile amounts.