Chapter 1: A Year of Transformation

The year 1968 was relatively subdued for Berkshire Hathaway, marked mainly by its acquisition of Sun Newspapers. Nevertheless, it unfolded against a backdrop of significant societal and political upheaval. As John Brooks articulates in The Go-Go Years: The Drama and Crashing Finale of Wall Street's Bullish 60s, it was a time when "the fabric of American life unraveled," reflecting a shift away from the democratic idealism that had characterized much of the previous decade.

In January, the U.S.S. Pueblo was captured by North Korean forces while on a covert mission, with 83 crew members taken hostage. The following months brought further turmoil: in March, American troops were implicated in the My Lai Massacre, and in April, civil rights leader Martin Luther King Jr. was assassinated, soon followed by the murder of Senator Robert Kennedy in June. The May protests at Columbia University symbolized a broader rebellion against authority, while August saw violent confrontations at the Democratic National Convention in Chicago. On a more hopeful note, December saw astronauts reach the far side of the moon for the first time.

The year was punctuated by a series of shocking events as various social and political movements reached their boiling point. The escalating Vietnam War faced mounting opposition, economic strife deepened class divides, and the civil rights movement intensified, giving rise to more militant voices. Additionally, the emergence of feminism, skepticism towards political leaders, and a generational rebellion against traditional values fueled a cultural war over issues such as abortion and freedom of speech. Popular culture and a vigilant media amplified these tensions.

To cap off this tumultuous year, Richard Nixon was elected as the 46th President of the United States. The Dow Jones Industrial Average began the year at 906.84 and closed at 943.75, yielding a modest gain of 4.27%. In the realm of entertainment, In the Heat of the Night edged out The Graduate for the Academy Award for Best Picture, while popular music flourished with top albums from The Rolling Stones, Jimi Hendrix, and Simon & Garfunkel. The Detroit Tigers clinched the World Series, the Green Bay Packers triumphed in Super Bowl II, and O.J. Simpson took home the Heisman Trophy.

Chapter 2: Wall Street's Back-Office Crisis

In the financial sector, 1968 witnessed a dramatic increase in trading volume on the New York Stock Exchange, surpassing 20 million shares as animal spirits drove new investors into the market. However, this surge exposed significant weaknesses in the back-office operations, where low-wage workers manually processed trades on paper.

A critical indicator of the back-office turmoil was the frequency of "fails," which occur when stock certificates are not delivered to buyers within the standard settlement period. By May, the crisis escalated to a staggering $3.47 billion in lost stock certificates. In response, the markets closed every Wednesday to allow back-office teams to catch up. It wasn't until early 1969 that trading volume began to decline, bringing an end to the crisis.

Chapter 3: Buffett’s Strategic Management

During this chaotic year, Warren Buffett focused on managing his partnership and several controlled companies, relying on the expertise of his managers. Despite signs of a weakening market, Buffett was increasingly concerned about rampant speculation, voicing his apprehensions about the long-term implications of such practices.

Buffett noted, “Currently, there are practices snowballing in the security markets and business world which, while devoid of short-term predictive value, bother me as to possible long-term consequences.” Although the Dow showed a modest return of 4.27%, Buffett's partnership achieved an impressive 45% return, amassing $40 million.

Interestingly, while younger investors enjoyed immediate gains, Buffett's disciplined approach and understanding of his investment philosophy ultimately proved more resilient. Some funds that had thrived in the previous years were now classified as "no-go" funds, with notable examples like Gerald Tsai’s Manhattan Fund posting a loss of 6.9% for the year.

Chapter 4: Missed Opportunities

Buffett remained committed to his investment principles, opting not to venture outside his areas of expertise. This included passing on investing in Intel, despite a proposal from Bob Noyce, a fellow trustee at Grinnell College, who sought capital for his new venture. Buffett’s reluctance stemmed from an inability to ascertain a satisfactory margin of safety.

Chapter 5: Annual Report Highlights

Textile Operations

The textile division reported a 14% increase in sales, largely driven by home fabrics and menswear linings. However, the Box Loom Division faced significant operational challenges and was set to be phased out by 1969.

Insurance Subsidiaries

National Indemnity performed well, showing slight growth in premium volume alongside an underwriting profit, with combined premiums earning just over $22.6 million and a favorable combined ratio of 97.5%. Buffett emphasized that growth should not come at the expense of profitability: “The emphasis continues, however, to be on underwriting at a profit rather than volume simply for the sake of size.”

Acquisitions: Sun Newspaper & Blacker Printing Company

Buffett’s passion for newspapers took root in his childhood when he delivered the Washington Post. At the end of 1968, Berkshire Hathaway made a notable investment, acquiring Sun Newspaper and Blacker Printing Company for $626,000 and $600,000, respectively.

Warren Buffett's interest in the Sun stemmed from its focus on local stories and investigative journalism that often put the spotlight on local political figures. While the economic prospects of the Sun were questionable, Buffett recognized its journalistic value and was willing to invest, indicating his appreciation for quality journalism over mere profitability.

With Stanford Lipsey agreeing to stay on to manage operations, Berkshire Hathaway transitioned from a textile manufacturer to a diversified company with interests in insurance and media within just two years.