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2019 Berkshire Hathaway Annual Meeting (Afternoon) Transcript

1. Union Pacific has higher profit margins than BNSF

WARREN BUFFETT: OK. If you’ll take your seats, we’ll proceed in a minute.

And it looks like we’re ready for Gregg.

GREGG WARREN: Good morning, Charlie. I have a follow up on the railroad business.

By nearly all measures, BNSF had a solid year in 2018, full-year revenue growth of 11 1/2 percent was better than the 7 1/2 percent topline growth at Union Pacific — which is BNSF’s largest direct competitor — came up with, with Burlington Northern seeing both larger increases in average revenue per car unit and total volumes than its closest peer.

Even so, Burlington Northern once again fell short of Union Pacific when it came to profitability, with its operating ratio declining 130 basis points to 66.9 percent, while Union Pacific’s ratio fell only 120 basis points to 62.7, further cementing the spread that exists between the two companies’ margins, at more than 400 basis points.

Can you explain what is driving the difference in profitability between Burlington Northern and Union Pacific, as theoretically we should not see that wide of a spread between two similar-sized companies that are basically competing for the same business, with the same customers in the western half of the United States?

And while you noted that Burlington Northern is in a wait and see mode with regards to precision-schedule railroading, we’ve kind of heard the same line historically with regards to GEICO’s approach to telematics.

And what worries me here is that the potential now exists for a much wider gap to emerge between profitability levels at Burlington Northern and Union Pacific, which has recently adopted a version of PSR some of which Union Pacific could eventually use to get more price competitive.

CHARLIE MUNGER: Well, Warren knows the answer to that a lot better than I do. My guess is that they work a little harder than we do at billing the rates. But Warren, you answer that one.

WARREN BUFFETT: Yeah. Well, it’s true that we receive the lowest ton mile revenue of any of the six big railroads in North America, and there’s some explanation for that — obviously, a significant explanation — in the particular types of hauls we have and that sort of thing. We have longer hauls, generally.

But the answer — Union Pacific’s profit margin, they talk about operating ratios, but that goes back to the Interstate Commerce Commission. It’s really profit margin, pre-tax, pre-interest profit margin. And Union Pacific, at one time, probably 15 or maybe a little more years ago, they really went off the tracks, so to speak. But they’ve done a very good job of getting — well, they got a lot of underpriced coal contracts that worked out, as did we.

But they’ve also — they’ve done a very good job on expenses. And there’s no fundamental reason why the BNSF franchise — I always like the western railroads better than the eastern — not by a dramatic margin — but I think the west will do better in terms of ton miles over time than the eastern roads.

And we’ve got some great routes, some of which were underwater in March for a while. (Laughs)

We pay a lot of attention to what’s going on at the Union Pacific, as we should.

And the future, it’s not like we’re losing business to anybody. But they have been operating more efficiently, in effect, than we have during the last few years. And like I said, we take notice of it.

They’ve cut a lot of people, right here in Omaha. And we’ll see what that does in terms of passengers — or in terms of shipper satisfaction.

But we are measuring ourselves very carefully against what they do. And if changes are needed, we’ll do that.

We’ve got a wonderful asset in that business. And when I bought it, I said it’s for a hundred years. It’s for a lot more than a hundred years. It is a very, very fundamental business. And we’ve got a wonderful franchise, and we should have margins comparable to other railroads. Charlie?

CHARLIE MUNGER: I don’t know much about it.

WARREN BUFFETT: You don’t? (Laughter)

2. Buffett: I’m lucky that I can “control my own time”

WARREN BUFFETT: Station 9.

AUDIENCE MEMBER: Hi, Warren and Charlie. My name is Rob Lee (PH) from Vancouver, Canada. Could you please share with us what you value the most in life now? Thank you.

WARREN BUFFETT: Well —

CHARLIE MUNGER: I’d like to have a little more of it. (Laughter and applause)

WARREN BUFFETT: It’s the two things you can’t buy, time and love. And that, I value those for a long time. And I’ve been very, very, very lucky in life, in being able to control my own time to an extreme degree. Charlie’s always valued that, too.

That’s why we really wanted to have money, was so we could do what we damn pleased, basically — (laughs) — in our life. It wasn’t six houses or boats or anything. Well, Charlie’s got a boat. But it doesn’t do us that much good.

But time is valuable. And we are very, very lucky to be in jobs where physical ability doesn’t make any difference.

And, you know, we’ve got the perfect job for a couple of guys with aging bodies. And we get to do what we love to do every day.

I mean, I literally could do anything that money could buy, pretty much. And I’m having more fun doing what I do than doing anything else, and Charlie is designing dormitories. And I mean, he’s got an interesting life, and he brings a lot to it.

He still reads, you know, more books in a week than I get done in a month, and he remembers what he reads. So, we’ve got it very good, but we don’t have unlimited time. And whatever we do to free up the time to do what we like to do — and we both maximize that in our lives — we do.

CHARLIE MUNGER: Anybody’s lucky if he so that what he spends his time at, he really likes doing. That’s a blessing.

WARREN BUFFETT: Yeah, we’ve had so much good luck in life. It sort of blows your mind. Starting with being born in the United States. And Canada would be fine too, incidentally. I don’t want to offend anybody. (Laughter)

3. “We’re not in the business of explaining why we own a stock”

WARREN BUFFETT: OK, Carol?

CAROL LOOMIS: This question is from Brian Neal (PH), who writes from the Mayo Clinic Education Site.

“Berkshire owns approximately 200 billion in publicly traded stocks. I appreciate the disclosure of Berkshire’s holdings, but I am disappointed by the lack of specific performance information.

“Since investing in publicly owned stocks is so much a part of Berkshire’s business, why do you not tell us every year how our portfolio performed?”

WARREN BUFFETT: Well, obviously it could be calculated fairly easily, and it’s about 40 percent of Berkshire’s value. But 60 percent is the businesses. And if you look at the top ten stocks I would guess, you know, you’re down to where beyond those ten stocks you’re talking about less than — probably less than 10 percent of Berkshire’s value.

So, I — again — we’re not in the business of explaining why we own a stock. We’re not looking for people to compete to buy it. We have a portfolio of companies where I would say that, of that 200 billion or so, at least 150 billion of them are buying in their stock and increasing our interest every year.

And why in the world should we want to tell a whole bunch of people to go out and buy those stocks so that we end up paying — or the company on our behalf — ends up paying more money for them?

I mean, people get very happy when their stocks go up. But if we’re going to own whatever, whether it’s Bank of America, whether it’s Apple, whether it’s any of the big holdings, we will do considerably better in the next ten years if their stocks do terribly during certain periods and that they buy lots of stock in.

It’s just exactly like buying it ourselves, except we’re using their — they’re using our money. But it’s so elementary.

And why in the world would we want to go out and tell the world that these stocks should go up so that maybe they can sell or something when it costs us money? And we’re not going to be able to move in and out of the stocks to our advantage.

So, our holdings are filed quarterly — our domestic holdings, as it was pointed out earlier — filed quarterly.

But we would rather not tell the world what we own, any more than we’d like to tell them what our strategy is at NetJets or what we’re going to do with Lubrizol and what we’re working on in the way of better advances in additives or whatever it may be, or where we plan to build a new store for the Furniture Mart or something.

That’s proprietary information. And we have to disclose a certain amount, but we’re certainly not going to be touting the stocks to other people.

In terms of calculating our performance, you can take the top ten or 12 stocks, and anybody could make the calculation. I mean, at the end of the year the Wall Street Journal runs — all the papers run something — where it says a year-to-date performance or something of the sort. So that’s a simple calculation. Charlie?

CHARLIE MUNGER: I’ve got nothing to add to that.

4. FlightSafety probably won’t get more demand for its simulators after Boeing MAX 737 crashes

WARREN BUFFETT: OK. Jonathan.

JONATHAN BRANDT: No one’s ever asked a question about FlightSafety, but perhaps this year it’s somewhat topical given the 737 MAX controversy. The New York Times spoke to engineers who said that Boeing explicitly designed the MAX in a manner that allowed airline customers to avoid paying for simulators to train their pilots.

Do you expect the worldwide regulatory and commercial response to the MAX’s problems to result in increased demand for FlightSafety simulators? And could you please more generally discuss FlightSafety’s competitive position and growth prospects?

WARREN BUFFETT: Yeah, well, FlightSafety is — their specialty would be with corporate pilots. They train our NetJets pilots, for example. They have a major facility with simulators for that.

I don’t think what’s happened with the 737 MAX will have any particular effect. I mean, we have — I don’t know how many of the Fortune 100 companies that we do business with, but it’s a very significant percentage.

And they train their pilots with FlightSafety because we’ve got the talent and the simulators like nobody else has for that business. And Charlie, didn’t you have that friend of yours that was trying to get Al Ueltschi to pass him when he shouldn’t?

CHARLIE MUNGER: What?

WARREN BUFFETT: You remember that story of your friend that wanted to have FlightSafety —

CHARLIE MUNGER: Oh yes.

WARREN BUFFETT: Yeah, why don’t you tell them? I mean, Al Ueltschi, who started FlightSafety with a few thousand dollars and a little visual simulator, or whatever it may have been at, LaGuardia, I mean, he really cared about saving lives. And he made a lot of money in the process, but he was dedicated throughout his lifetime to truly train better pilots and reduce the chance of accidents dramatically.

It was a mission with him. And that spirit still continues.

And as I say we’ve got a — I can’t tell you the percentages, I don’t know, but I know it’s very high — of certainly the corporate business. We have government business, we have some airline businesses and all of that.

But I don’t expect any great change in the flight training business. But tell them about your friend, Charlie.

CHARLIE MUNGER: Well, of course, people pass those tests with flying colors, and then some of them just barely pass. And one of my friends just barely passed and they called me and told me. It’s (inaudible) of the business.

WARREN BUFFETT: FlightSafety would not —

CHARLIE MUNGER: They care about everything.

WARREN BUFFETT: They care.

CHARLIE MUNGER: They watch the details.

WARREN BUFFETT: They care. And those simulators can cost over $10 million, I mean, just — and they’re dedicated, obviously, to a given model of plane.

You might find it interesting, at NetJets our pilots only fly one model. I mean — most charters and all those, I’m sure they — and incidentally, I think they could fly other models and all that, but we just want them to be flying one model. And we give them the maximum amount of training annually.

And it’s — when I bought the company for Berkshire in, I think it was 1998 or thereabouts, you know, the thought obviously bothered me that I would have a significant percentage of people who would be friends of mine that were using it, and you know, you’d hate to have anything happen.

I use it, my family uses it, our managers use it. And there’s nobody that cares more about safety. But I don’t see — other than at NetJets — it’s a first-class operation.

CHARLIE MUNGER: They’ve never killed a passenger. They had one pilot who hit a glider at 16,000 feet, and it was kind of a difficult landing.

WARREN BUFFETT: It was more than difficult landing —

CHARLIE MUNGER: They’ve never killed a — it was a woman pilot, yeah.

WARREN BUFFETT: And she was flying the next day. The copilot was kind of taken out of operation for a while. But this woman ended up almost with the control panel in her lap because this guy turned off his battery and hit one of our Hawkers. And she had one shot at the runway and she brought it in.

And we’ve had some remarkable training and pilots there. You should ask for her if you’re flying on NetJets. (Laugher)

5. Buffett on tech investing: “We won’t go into something because somebody else tells us it’s a good thing to do”

WARREN BUFFETT: Station 10.

AUDIENCE MEMBER: Mr. Buffett and Mr. Munger, hi. My name is Daphne. I’m from New York and I’m nine years old. And I’m excited to be at the Berkshire meeting, and this is my third year.

WARREN BUFFETT: Wow. (Applause)

You should be rich by now. (Laughter)

AUIENCE MEMBER: You have often said that investors are well-served by identifying businesses with a wide moat, where the castle behind the moat is run by a king or queen who can be trusted to make good decisions.

In the past, you have applied this advice by investing in businesses with world class strong brands, such as Coke, American Express, and See’s, as well as media companies that has helped these brands protect and widen their moats, such as Cap Cities, ABC, and the Washington Post.

In the past, you have also generally avoided investing in technology companies, pointing out how quickly technology changes and how hard it is to build a circle of competence in it.

Today, we seem to be in a world where some of the most dominant companies in the world are technology companies. And we have built powerful platforms, such as Amazon, Google, Facebook, and Microsoft in America, and Alibaba and Tencent in China.

These companies all have wide moats, strong brands, and are led by brilliant — entrepreneurs.

WARREN BUFFETT: That’s good. (Laughter)

AUDIENCE MEMBER: My question to you is this: if Berkshire is to honor its tradition of investing in wide moats and strong brands, and especially in companies that are also capital efficient, do you think that Berkshire needs to expand its investing lens to include more of these leading technology platforms?

In other words, do you believe that you need to adapt your model of wide moats and strong brands to embrace, not avoid, technology? (Applause)

CHARLIE MUNGER: I think the answer is maybe. (Laughter)

WARREN BUFFETT: I think the answer is to put her on the board and it’ll bring down the average age enormously. We won’t get criticized as much.

You’re exactly right, in that we do like moats, and we used to be able to identify them in a newspaper that was the only newspaper in town, or in TV stations where we felt the dominant position, we felt the product was underpriced in terms of advertising. We saw it in brands, sometimes.

And it is true that in the tech world, if you can build a moat, it can be incredibly valuable. I’ve not felt the confidence that I was the best one to judge that in many cases.

It wasn’t hard to figure out who was winning at any given time or what their business was about, but there were a huge number of people that knew more about the game than I did. And we don’t want to try and win at a game we don’t understand. We may hire people, such as Ted (Weschler) and Todd (Combs), that are better at understanding certain areas of investing than I am, or maybe even Charlie is.

But the principles haven’t changed. You’re right that some of the old ones have lost their moat and you’re right that there are going to be companies in the future that have them that will be enormously valuable.

And we hope we can identify one every now and then. But we won’t — we’ll still stay within where we think we know what we’re doing. And obviously, we’ll make mistakes even within that area.

But we won’t go into something because somebody else tells us it’s a good thing to do. I mean, we are not going to subcontract your money to somebody else’s judgment. You can take your money and follow somebody else’s judgment, but we’re not in the business of thinking that if we hire ten people with specialties in this area or that, that it will lead to superior investment results. And we do worry that we could blow a lot of money that way.

So, we’ll do our best to enlarge the circle of competence of the people at Berkshire so that we don’t miss so many. But we’ll miss a lot in the future. We missed a lot in the past.

The main thing to do is to find things where our batting average is going to be high. And if we miss the biggest ones, that really doesn’t bother us, as long as the things we do with money work out OK. Charlie?

CHARLIE MUNGER: Well, I think we’ve still got an awful lot of companies with big moats, and a lot of them are very — and some are industrial brands that are just incredibly strong in the niches we’re in.

So, Berkshire shareholders don’t need to worry about we’re just one big morass of unprofitability or anything like that. But we have not covered ourselves with glory in the new fields.

WARREN BUFFETT: Yeah. We won’t end up all in buggy whips, though, or anything. But it’s a very good question, and it’s what we focus on all the time. And I hope —

CHARLIE MUNGER: We’re trying to improve.

WARREN BUFFETT: And we hope we see you back here for your fourth next year.

6. “In the end, Berkshire should prove itself over time”

WARREN BUFFETT: Becky? (Applause)

BECKY QUICK: This question comes from Stuart Boyd (PH), who’s a chemical engineer from Australia.

He says, “Currently Berkshire would be incredibly difficult for an activist investor to target, because number one, Warren, your ownership stake is large. Number two, shareholders appreciate the business is more valuable operating under the Berkshire umbrella rather than being sold off in pieces.

“And number three, the sheer size or market capitalization of Berkshire is an entry barrier for most activist investors.

“Warren and Charlie, after your ownership has been completely distributed, will Berkshire be more vulnerable to activist investors? I’m guessing this isn’t something that keeps you up at night, but thought it was worth asking.”

CHARLIE MUNGER: No, it’s going to happen quite a few decades after my death.

WARREN BUFFETT: Yeah. It —

CHARLIE MUNGER: I don’t think I’ll be bothered much by it. (Laughter)

WARREN BUFFETT: No, anything could happen. It’s a low probability. It can’t happen for a lot of years, in terms of the way my stock gets distributed and in terms of the way other stock is held.

But in the end, Berkshire should prove itself over time. I mean, there are no perpetuities. And it deserves to be continued in its present form. It has a lot of attributes that are maximized by being in one entity, which people don’t fully understand.

I think if you spin off something that would command a high PE that therefore value has been unlocked, which is totally nonsense. I mean, it’s already built in.

One day out, you know, you might have an extra 3 percent or 5 percent in price, but over the years, we want to keep the wonderful businesses.

But eventually I think the culture will remain one of a kind. I think that we will be able to do things other people can’t do.

I think that the advantages of having them in one spot will likely be significant over time. And if that happens, then no activist is going to take it over.

And if the model doesn’t work for some reason over a long period of time, then something else should happen. Charlie?

CHARLIE MUNGER: Nothing more.

WARREN BUFFETT: OK.

7. GEICO trying to improve its loss ratio as it competes with Progressive

WARREN BUFFETT: Jay.

JAY GELB: This question is on GEICO. Progressive is gaining the most market share among the major auto insurers, based on its presence in the direct and independent agency channels, as well as now bundling its auto and homeowners insurance coverage.

How does GEICO plan on responding to competitive threats so that it can retain its place as the second-largest auto insurer? I was hoping we could also hear on this topic from Ajit (Jain) or GEICO’s management. Thank you.

WARREN BUFFETT: OK. Progressive is a very well-run business. GEICO is a very well-run business. And I think they will, for a long time, be the two companies that the rest of the auto insurance industry has trouble not losing share to. But there’s, you know, I think — I’ve always thought for a long, long time, Progressive has been very well run.

They have an appetite for growth. Sometimes they copy us a little, sometimes we copy them a little. And I think that’ll be true five years from now and 10 years from now.

And we sell substantial amounts of homeowners insurance. We have an agency arrangement with that. We were in the business of writing it ourselves, until Hurricane Andrew, when a decision was made — we didn’t control it then — but the decision was made that the homeowners, essentially, you could lose as much in one year as you made in the previous 25 years. And the float isn’t as large.

So, we became a company that placed our customers’ desire for homeowners with several other large and solid organizations.

The big thing is auto insurance. And we grew in the first quarter about 340,000 policies, net, which will look quite good compared to anybody but Progressive.

And that was quite a bit more than last year, but not as good as two years ago. And the profit margin was in the nine-point area. So, I feel extremely good about GEICO, I mean, what has been built there by Tony (Nicely) and his people is perfect, but I would feel fine —

We don’t own any Progressive, but I think that Progressive is an excellent company, and we will watch what they do, and they will watch what we do. And we will see, five years from now or 10 years from now, which one of us passes State Farm first. Charlie? Oh, and Ajit, would you like?

AJIT JAIN: Well, the underwriting profit is really a function of two major variables. One is the expense ratio and the other is the loss ratio, without getting too technical.

GEICO has a significant advantage over Progressive when it comes to the expense ratio, to the extent of about seven points or so.

On the loss ratio side, Progressive does a much better job than GEICO does. They have, I think, about a 12-point advantage over GEICO. So, net-net, Progressive is ahead by about five points.

GEICO is very aware of this disadvantage on the loss ratio that they are suffering, and they’re very focused on trying to bridge that gap as quickly as they can. They have a few projects in place, and, you know, sometimes GEICO is ahead of Progressive. Right now, Progressive is ahead of GEICO. But I’m hopeful they’ll catch up on the loss ratio side and maintain the expense ratio advantage as well. Thank you.

WARREN BUFFETT: GEICO has gained market share, essentially — I’d have to look at the figures for sure — but virtually every year since Tony took over. And I would bet significant money that GEICO increases its market share in the next five years. And I think it will, for sure, this year.

So, it is a terrific business. And — but Progressive is a terrific business. And we’ll — as Ajit says, we’ve got the advantage in expenses, and we will have an advantage in expenses. And then the question is, are we —

They have a very sophisticated way of pricing business. And the question is whether we give some of that five points back — or six points back — in terms of loss ratio. We are working very hard at that, but I’m sure they’re working very hard too to improve their system.

So, it’s a — to some extent it’s a two-horse race, and we’ve got a very good horse.

CHARLIE MUNGER: But Warren, in the nature of things, every once in a while, somebody’s a little better at something than we are.

WARREN BUFFETT: Ha. You’ve noticed. (Laughter)

CHARLIE MUNGER: Yeah. I noticed.

WARREN BUFFETT: Yeah. I’d settle for second place in a lot of the businesses.

8. Try to have a big circle of competence but be realistic about its perimeter

WARREN BUFFETT: OK, station 11.

AUDIENCE MEMBER: Mr. Buffett and Mr. Munger, thank you for taking my question. My name is Feroz Qayyum and I’m from Mississauga in Canada, and now live in New York.

My question is how to best emulate your success in building your circle of competence. Given the environment today in investing is a lot more competitive than when you started out, what would you do differently, if anything at all, when building your circle?

Would you still build a very broad, generalist framework? Or would you build a much deeper but narrower focus, say on industries, markets, or even a country? And if so, which ones would interest you? Thank you.

WARREN BUFFETT: Yeah, well, you’re right. It’s much more competitive now than when I started. And you would — when I started, I literally could take the Moody’s industrial manual and the Moody’s banks and financial manual and I could go through page by page, at least run my eyes over every company and think about which ones I might think more about.

It’s — it’s important — I would just do a whole lot of reading. I’d try and learn as much as I could about as many businesses, and I would try to figure out which ones I really had some important knowledge and understanding that was probably different than, overwhelmingly, most of my competitors.

And I would also try and figure out which ones I didn’t understand, and I would focus on having as big a circle as I could have, and also focus on being as realistic as I could about where the perimeters of my circle of competence were.

I knew when I met (GEICO executive) Lorimer Davidson in January of 1951, I could get insurance. I mean, what he said made so much sense to me in the three or four hours I spent with him on that Saturday.

So, I dug into it and I could understand it. My mind worked well in that respect.

I didn’t think I could understand retailing. All I’d done is work for the same grocery store that Charlie had, and neither one of us learned that much about retailing, except it was harder work than we liked.

And you’ve got to do the same thing, and you’ve got way more competition now. But if you get to know even about a relatively small area more than the other people do, and you don’t feel the compulsion to act too often, you just wait till the odds are strongly in your favor. It’s still a very interesting game. It’s harder than it used to be. Charlie?

CHARLIE MUNGER: Well, I think the great strategy, for the great mass of humanity, is to specialize. Nobody wants to go to a doctor that half-proctologist and half-dentist, you know? (Laughter)

And so, the ordinary way to succeed is to narrowly specialize. Warren and I really didn’t do that. And that — and we didn’t because we prefer the other type of activity. But I don’t think we could recommend it to other people.

WARREN BUFFETT: Yeah, a little more treasure hunting in our day, and it was easy to spot the treasures —

CHARLIE MUNGER: We made it work, but it was kind of a lucky thing.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: It’s not the standard way to go.

WARREN BUFFETT: The business, at least I best understood, actually was insurance. I mean — and I had very little competition. You know, I went to the insurance department in Harrisburg, Pennsylvania. I remember one time I drove there just to check on some Pennsylvania company. And this is when you couldn’t get all this information on the internet.

And I went in and I asked about some company, and the guy said, “You’re the first one that’s ever asked about that company.” And there wasn’t a lot.

I went over to the Standard and Poor’s library on Houston — Houston — Street, I guess they call it. And I would go up there and ask for all this obscure information. And there wasn’t anybody sitting around there. They had a whole bunch of tables that you could set and examine things through. So, there was less competition.

But if you know even one thing very well, it’ll give you an edge at some point. You know, it’s what Tom Watson Sr. said at IBM, you know. “I’m no genius, but I’m smart in spots and I stay around those spots.” And that’s basically what Charlie and I try and do. And I think that’s probably what you can do. But you’ll find those spots in —

CHARLIE MUNGER: Yeah, we did it in several fields. That’s hard.

WARREN BUFFETT: And we got our head handed to us a few times, too.

9. Berkshire is strong on the environment but won’t do expensive reports to prove it

WARREN BUFFETT: OK, Andrew?

ANDREW ROSS SORKIN: Thanks, Warren. Governance question from a shareholder.

Larry Fink of BlackRock has predicted that in the near future, all investors will be using ESG —environmental, social, governance — metrics to help determine the value of a company. I’m worried we don’t score well on everything from climate to diversity to inclusion. How well do you think Berkshire measures up on those metrics, and are they valuable metrics?

WARREN BUFFETT: I think in reality we measure up well, but we don’t participate in preparing reports for anybody that asks about it.

And we have this idea that even though all shareholders are equal, we sort of — we prefer individual shareholders. We actually prefer people we know as co-owners.

And we don’t want to be preparing a lot of reports and asking 60 subsidiaries each to do something, where they’ll set up a team, and they’ll mail things to headquarters, and then we’ll supply them to somebody who, if our stock goes up some, is probably going to sell it anyway.

We want our managers to do the right things. We give them enormous latitude to do that. And I think that our batting average really is quite good.

You saw that in the movie, we talked about having a hundred percent of the electricity we sell in Iowa come from, essentially, wind generation. Now that doesn’t mean that we get to do it 24 hours a day. We sell some and we buy it. But essentially, we will be creating as much wind energy as all of our customers use in electricity.

There’s one competitive — there’s one other utility — electric utility — that’s about our size — roughly our size — in Iowa, and they have practically no wind resources. And the wind blows where they exist, too. But we have — we will have that hundred percent — and as a matter of fact, it’s a moving target, because we do so well — partly — we do so well on wind generation that a number of the high-tech companies want to locate in Iowa and get clean energy from us at very low prices. And therefore, the moving target becomes our growth in customers in that area.

But we are not going to put out a — we’re not going to spend the time of the people at Berkshire Hathaway Energy responding to questionnaires or trying to score better with somebody that is working on that.

It’s just, we trust our managers and I think the performance is at least decent. And we keep expenses and needless reporting down to a minimum at Berkshire.

We do not get — and I mentioned this in the annual report — I can’t imagine another company like it — but here we are, with 500 billion of market capitalization — we do not have a consolidated P&L monthly. We don’t need it.

Now I can’t imagine any other organization doing that, but we don’t need it. And we’re not going to tie up resources — people resources — doing things we don’t need to do just because it’s the sort of standard procedure in corporate America.

And corporate America is very worried about, in general, they’re very worried about whether somebody’s going to upset their apple cart, you know, with activists and everything.

So, they want to be very sure that every shareholder is happy on issues like that. And in the end, fortunately, we don’t have to worry about that. So, we don’t have to run up a lot of expenses doing things that don’t actually let us run the business better. Charlie?

CHARLIE MUNGER: Well, I think at Berkshire the environmental stuff is done one level down from us. And I think Greg Abel is just terrific at it. And so, I think we score very well.

When it gets to so-called best corporate practices, I think the people that talk about them don’t really know what the best practices are. They just know what they think are the best practices. And they determine that based on what will sell, not what will work.

And so, I like our way of doing things better than theirs, and I hope to God we never follow their best practices. (Applause)

10. “Independent” board members aren’t really independent

WARREN BUFFETT: I’d like to point out one thing on independent directors. I mean, I have been on 20 public company corporate boards, not counting any Berkshire subsidiaries. So, I’ve seen a lot of corporate boards operate. And the independent directors, in many cases, are the least independent.

I mean, if the income you receive as a corporate director — which typically may be around $250,000 a year — now, if that’s an important part of your income, and you hope that some other corporation calls the CEO and says, “How’s so-and-so as a director?” and the current CEO — your CEO — says, “Oh, he’s fine and never raises any problems,” and then you get on another board at 250,000 and that’s an important part, how in the world is that independent? I mean, I really, just an observation. (Applause)

I can’t recall, particularly, any independent director — where their income from the board was important to them — I can’t recall them ever doing anything in board meetings or committee meetings that actually was counter to the interest — you know, they put them on the comp committee.

They’re just not going to upset the apple cart, because what they’re — and I’d probably behave the same way in the same position. I mean, if $250,000 a year is important to you, why in the hell would you behave in a way that’s going to cause your CEO to say to the next CEO, “This guy acts up a little bit too much. You really better get somebody else.” It’s the way it works. But they’ve —

CHARLIE MUNGER: I think it works a little worse than Warren’s telling you. (Laughter)

WARREN BUFFETT: Yeah, Charlie and I —

CHARLIE MUNGER: It’s really awful.

WARREN BUFFETT: It’s awful. I mean, we —

CHARLIE MUNGER: And not only that, Warren and I are — we occupy the niche for pomposity very well ourselves. We don’t need any more of it. (Laughter)

WARREN BUFFETT: Charlie and I were on one board. Well, I was on one board, actually, a long time ago where we owned a very significant percentage of the company. And the rest of the board was almost exclusively customers of the company. But not owners. They had absolutely token holdings. And at one point we were looking at something where a tax decision was being made in terms of the distribution of some securities.

And it was a lot of money that was involved. And one of the other directors said, “Well, let’s just swallow the tax.” Well, his swallowing amounted to about $15 or something — (Laughs)

I said, “Let’s parse this sentence out. Let’s swallow the tax. That’s let us swallow the tax. So, who wants to swallow an equal amount, you know, to me?”

It’s — you know, it’s — you don’t get invited to be on boards if you belch too often at the dinner table —

CHARLIE MUNGER: Well, at Blue Chip Stamps we had a director who said, “I don’t see why you guys get to be so important just because you own all the shares.”

WARREN BUFFETT: Yeah. (Laughter)

Charlie and I used to have to cool off after the Blue Chip Stamps meetings, because we and Rick Garrett owned what percent, probably?

CHARLIE MUNGER: Oh, 50 percent.

WARREN BUFFETT: Yeah, 50 percent, and they’d appointed all these —

CHARLIE MUNGER: They were all members of the Rotary Club.

WARREN BUFFETT: It came out of a government settlement or something. And it was not an ideal form of decision making. And they just had a different calculus in their mind than we did. And I can understand it, but I’m not going to replicate it. (Laughs)

11. “We will put a lot of money into energy” with capital spending at utilities

WARREN BUFFETT: OK, Gregg.

GREGG WARREN: Warren and Charlie, U.S. electricity demand has flatlined during the past decade, but could potentially pick up over the next decade with three emerging sources of demand — electric vehicle charging, datacenters, and cannabis cultivation — expected to account for more than 5 percent of total U.S. electricity demand.

Utilities will have to work hard to benefit from this new demand, though, much of which is likely to accrue to states in the South Atlantic, Central, West, and Mountain regions, with the greatest benefit going to firms that invest in grid expansion, smart networks, reliability, and renewable energy.

While Berkshire Energy has been aggressive with its capital investments, and already has some of the lowest electricity rates in the areas where it competes, it seems like the firm is winding down its annual spending at a time when more might actually be required.

With annual spending expected to fall from around 6 billion, on average, annually to around 4 billion in 2021, with two-thirds of that spending being more maintenance driven than growth.

Is there any one area where you feel Berkshire Energy might need to commit more capital over the next decade to ensure that it captures this future expected demand growth, much as it already has with wind power in western Iowa, which is now populated with a lot of data centers, and for territories where demand growth is expected to be the strongest but where Berkshire does not have a presence, are there any avenues aside from acquisitions for the company to put capital to work?

WARREN BUFFETT: I’m going to throw that over to Ajit in just a second. But I will tell you that we have three owners of Berkshire Hathaway Energy. We are the 91 percent owner. And there are no three owners that are more interested in pouring money into sensible deals within the utility industry or are better situated in terms of the people we have to maximize any opportunities. We have never had a penny of dividends in — whatever it is — close to 20 years of owning MidAmerican Energy.

And other utility companies pay high dividends. They really — they just don’t have the capital appetite, essentially, that we do. So, it’s just a question of finding sensible projects.

And I would say that there’s no group that is as smart about it, as motivated about it as our group. And with that I’ll turn it over to Greg.

CHARLIE MUNGER: In short, we’re about as good as you can get, and you should worry about something else.

WARREN BUFFETT: Yeah. (Laughter)

But Greg, could you stand up and talk about —? We really hope to spend a lot of money in energy.

GREG ABEL: Yeah, yeah. Afternoon. Yeah, Gregg, you touched on it. A couple critical areas we go forward is to look realistically in the ’21, 2022 timeframe. Because as you touched on, we’ve got a great portfolio as we finish out 2019, 2020. And it’s really been focused on building new renewable energy projects in Iowa, expanding the grid.

But equally, we do have those opportunities in our other utilities. The footprint in Iowa, realistically, is getting pretty full. As we hit a hundred percent renewables — Warren touched on it — every time we get a new data center, that means we can build another 300 megawatts of renewables. We’ll continue to do that.

But when you look at PacifiCorp, where we serve six states in the Northwest, we’ve really just embarked on an expansion program there.

The first part was to build significant transmission, so expand the grid, and then start to build renewables. But just to give you some perspective of the regulation that exists in place, we started that project in 2008. And we’re realistically building the first third of it. But we do have the planning in place for the second phase and the third phase, and that’s what you’ll see coming into place in 2021 and in ’23.

And the reality is we’ll continue to do that at NV Energy, with really, again, the focus being on both grid expansion, so we can move the resources, and then supplementing it with renewables. So, it’s exactly what you’ve touched on.

And we haven’t identified the specific projects yet, so we never put them in our capital forecast that we disclose to folks. But as they firm up and we know that they will go forward, clearly you’ll see some incremental capital. And that’s capital we clearly earn on behalf of the Berkshire shareholders as we deploy it. Thank you.

WARREN BUFFETT: We will put a lot of money into energy. (Laughs)

CHARLIE MUNGER: Yeah, we’re really in marvelous shape in this department.

WARREN BUFFETT: Incidentally, you know, Walter Scott, I mean, he gets excited looking at all these projects, and goes out and visits them. He knows way more about the business — and he’s forgotten more about it than I’ll ever know.

But we’ve got a great partnership. We’ve got unlimited capital. We’ll continue to have it. And there’s needs for huge capital in the industry.

So, I think 10 years from now or 20 years from now, our record will be looked at and there’ll be nothing like it in the energy business.

CHARLIE MUNGER: Well, Greg, is there anybody ahead of where we are in Iowa in terms of energy?

GREG ABEL: Charlie, there’s realistically no one ahead of us in the U.S., let alone in Iowa. When you look at the amount of energy we produce relative to what our customers consume, we really do lead the nation and Iowa.

CHARLIE MUNGER: And aren’t our rates about half that of our leading competitor in Iowa to boot?

WARREN BUFFETT: About half. Close.

GREG ABEL: Exactly. We’re right in that range.

CHARLIE MUNGER: If this isn’t good enough for you, we can’t help you. (Laughter)

WARREN BUFFETT: Incidentally, I mean, we sell electricity five miles from here. Greg, is that correct?

GREG ABEL: Right across the river.

WARREN BUFFETT: Yeah, right across the river. And, you know, the wind blows the same and all that sort of thing. And the public power district here, in Nebraska, going back to George Norris, has always been a public power state. There’s no — capitalism doesn’t exist in the electric utility field in Nebraska.

So, they have had the advantage of selling tax-exempt bonds. We have to sell taxable bonds, which raises cost to some degree. They have a big surplus, which they don’t have to pay dividends on or anything else. And our rates are cheaper than theirs, you know, basically.

I mean, we’re very proud of our utility operation.

12. Why Berkshire doesn’t put its unspent cash into a stock index fund

WARREN BUFFETT: Carol?

CAROL LOOMIS: “Warren, you are a big advocate of index investing, and of not trying to time the market. But by your having Berkshire hold such a large amount of cash in T-bills, it seems to me you don’t practice what you preach.

“I’m thinking that a good alternative would be for you to invest most of Berkshire’s excess cash in a well-diversified index fund until you find an attractive acquisition or buy back stocks.

“Had you done that over the past 15 years, all the time keeping the $20 billion cash cushion you want, I estimate that at the end of 2018, the company’s 112 billion balance in cash, cash equivalents, in short-term investments and T-bills, would’ve instead been worth about 155 billion.

The difference between the two figures is an opportunity cost equal to more than 12 percent of Berkshire’s current book value. What is your response to what I say?” And I forgot to say the question is from Mike Elzahr, who is with the Colony Group, located in Boca Raton, Florida.

WARREN BUFFETT: That’s a perfectly decent question, and I wouldn’t quarrel with the numbers. And I would say that that is an alternative, for example, that my successor may wish to employ. Because, on balance, I would rather own an index fund than carry Treasury bills.

I would say that if we’d instituted that policy in 2007 or ’08, we might have been in a different position in terms of our ability to move late in 2008 or 2009.

So, it has certain — it has certain execution problems with hundreds of billions of dollars than it does if you were having a similar policy with a billion or 2 billion or something of the sort.

But it’s a perfectly rational observation. And certainly, looking back on ten years of a bull market, it really jumps out at you.

But I would argue that if you were working with smaller numbers, it would make a lot of sense. And if you’re working with large numbers, it might well make sense in the future at Berkshire to operate that way.

You know, we committed 10 billion a week ago. And there are conditions under which— and they’re not remote, they’re not likely in any given week or month or year — but there are conditions under which we could spend a hundred billion dollars very, very quickly.

And if we did — if those conditions existed — it would be capital very well deployed, and much better than in an index fund.

So, we’ve been — we’re operating on the basis that we will get chances to deploy capital. They will come in clumps in all likelihood. And they will come when other people don’t want to allocate capital.

Charlie, what do you think about it?

CHARLIE MUNGER: Well, I plead guilty to being a little more conservative with the cash than other people. But I think that’s all right.

We could have put all the money into a lot of securities that would’ve done better than the S&P with 20/20 hindsight. Remember, we had all that extra cash all that period, if something had come along in the way of opportunities and so on.

I don’t think it’s a sin to be a little strong on cash when you’re as a big a company as we are. We don’t have to —

I watched Harvard use the last ounce of their cash, including all their prepaid tuition from the parents, and plunge it into the market at exactly the wrong moment and make a lot of forward commitments to private equity. And they suffered, like, two or three years of absolute agony. We don’t want to be like Harvard.

WARREN BUFFETT: Plus timber and a whole bunch of —

CHARLIE MUNGER: What?

WARREN BUFFETT: Plus timber. And I mean —

CHARLIE MUNGER: Yeah, yeah. We’re not going to change. (Laughter and applause)

WARREN BUFFETT: We do like having a lot of money to be able to operate very fast and very big. And we know — and maybe we won’t — we know we won’t get those opportunities frequently.

I don’t think — certainly, you know, in the next 20 or 30 years there’ll be two or three times when it’ll be raining gold and all you have to do is go outside. But we don’t know when they will happen. And we have a lot of money to commit.

And I would say that if you told me I had to either carry short-term Treasury bills or have index funds and just let that money be invested in America generally, I would take the index funds.

But we still have hopes. And the one thing you should very definitely understand about Berkshire is that we run the business in a way that we think is consistent with serving shareholders who have virtually all of their net worth in Berkshire. I happen to be in that position myself, but I would do it that way under any circumstances.

We have a lot of people who trust us, who really have disproportionate amounts of Berkshire compared to their net worth, if you were to follow standard investment procedures.

And we want to make money for everybody, but we want to make very, very sure that we don’t lose permanently money for anybody that buys our stock somewhere around intrinsic business value to begin with.

We just have an aversion to having a million-plus shareholders, maybe as many as two million, and having a lot of them ever really lose money, if they’re willing to stay with us for a while.

And we know how people behave when the world, generally, is upset. And they want to be with something — I think they want to be with something they feel is like the Rock of Gibraltar. And we have a real disposition toward that group.

13. Fannie Mae and Freddie Mac should do more loans for manufactured housing, even if it hurts Clayton’s profits

WARREN BUFFETT: Jonathan?

JONATHAN BRANDT: Freddie Mac and Fannie Mae have new financing programs for manufactured home loans that I’m guessing could finally put purchasers of those homes who need mortgages on a somewhat more level playing field with those buying site-built homes.

How positive an effect do you expect these new programs to have on manufactured home demand? And how might the programs affect Clayton’s sizable profits from lending? Will Clayton sell more loans to Freddie and Fannie, and does that help profits even if spreads compress?

WARREN BUFFETT: Well, it may not help profits, but it would — it definitely is good if the Freddie and Fannie are authorized to do more lending against manufactured homes.

Manufactured homes are a very reasonable for people to get decent housing and have a home. And they are hard to finance to some degree. The local banks frequently do it, but the big lenders haven’t wanted to do it. They are —

There is the possibility, or the likelihood, that Freddie and Fannie are going to expand. We already sell — I don’t know whether it’s 10 million a month of loans or something like that — to Freddie and Fannie.

But it would be very good for America, in my view, if Freddie and Fannie did more in that area. Obviously, we would sell some more homes, but we would lose financing, and we might come out behind, we might come out ahead. But I think it would a good thing to do. Charlie?

CHARLIE MUNGER: Well, I think Freddie and Fannie will finance more and more homes, and I think they’ll do it more and more of it through Clayton. And they’ll do it because Clayton is very trustworthy, and will do a very good job at making good housing at cheap prices for people.

And I think Clayton will get bigger and bigger and bigger as far ahead as you can see. And the guy’s young, he doesn’t look like Warren and me. Not at all.

WARREN BUFFETT: We’ve got a perfect managerial group at Clayton, and we’re expanding our site-built homes. We just closed on a builder a couple — a few days ago. And we now have nine different — I believe — nine different site-built home operations, and we didn’t have any a few years ago.

And we think extraordinarily well of Kevin Clayton and his group. Our directors met last year in Knoxville and viewed the Clayton operation for the second time. So, we like the idea of Clayton expanding, and we like the idea of more people having very affordable housing.

During the 2008 and ’09 recession, our borrowers — who had very low FICO scores on average, I mean compared to typical home buyers, and they — if they kept their jobs, they made the payments. I mean, they wanted that home, and the home was an enormously important item to them. And we had various programs that helped them as well.

But our loan experience was far better than people anticipated under the stress that existed then. But it was because a home really means something to people. And absent losing jobs or sickness — and, like I say, we have some programs to help people — they make the payments, and they have very decent living.

But they would get that even cheaper if Freddie and Fannie expanded their programs. And, like I say, I hope they do.

14. “Ingenious” capitalism will replace jobs lost to automation

WARREN BUFFETT: OK, station 2.

AUDIENCE MEMBER: Hi. Hi Warren, hi Charlie. My name is Carrie and this is my daughter, Chloe. She’s 11 weeks. It’s her very first Berkshire meeting. (Laughter)

We’re from San Francisco, and we have a question on employment for you. As both a major employer and a producer of consumer goods, what do you make of the uncertain outlook for good full-time jobs with the rise of automation and temporary employment?

WARREN BUFFETT: Well, if we’d asked that question 200 years ago, and somebody said, “With the outlook for development of farm machinery and tractors and combines and so on —” meaning that 90 percent of the people on farms were going to be — lose their job — it would look terrible, wouldn’t it?

But our economy and our people, our system, has been remarkably ingenious in achieving whatever we have now — 160 million jobs — when throughout the period ever since 1776, we’ve been figuring out ways to get rid of jobs. That’s what capitalism does, and it produces more and more goods per person.

And we never know exactly where they’re going to come from. I mean, it — I don’t know if you were whatever occupation — well, if you were in the passenger train business, I mean, you know, you were going to — that was going to change.

But we find ways, in this economy, to employ more and more people. And we’ve got now more people employed than ever in the history of the country, even though company after company in heavy industry and that sort of thing, has been trying to figure out, naturally, how to get more productive all the time, which means turning out the same number of goods with fewer people, or turning out more goods with the same number.

That is capitalism. I don’t think you need to worry about American ingenuity running out. I mean, if you look at people in all kind of businesses, and they like to make money, but they really like to be inventive, you know. They like to do things.

And this economy, it works. It will continue to work. And it will be very — it’s very tough in certain industries, and there will be dislocations. You know, we won’t be making as many horseshoes and that sort of thing when cars come along and all that.

But we do find ways now to employ whatever we’re employing — 155, whatever it is — million people, and supporting a population of 330 million people when we started with 4 million people, with 80 percent of the labor being employed on farms.

So, the system works and it will continue to work. And I don’t know what the next big thing will be. I do know there will be a next big thing. Charlie?

CHARLIE MUNGER: Well, we want to shift the scut work to the robots to the extent we can. That’s what we were doing, as Warren said, for 200 years.

Nobody wants to go back to being a blacksmith, or scooping along the street, picking up the horse manure, or whatever the hell people used to do. We’re glad to have that work eliminated.

And a lot of this worry about the future comes from leftists who worry terribly that the people at the bottom of the economic pyramid have had a little stretch when the people at the top got ahead faster.

That happened by accident because we were in so much trouble that we had to flood the world with money and drive interest rates down to zero. And, of course, that drove asset prices up and helped the rich.

Nobody did that because they suddenly loved the rich, it was just an accident, and it will soon pass.

We want to have all this productivity improvement, and we shouldn’t worry a little about the fact that one class or another is a little ahead at one stretch.

WARREN BUFFETT: Charlie and I — (applause) — we worked in a grocery store. And when people ordered a can of peas, we had ladders that we climbed up to reach the can of peas, and then we placed it in a folding box, and then we put it on a truck. And if you looked at the amount of food actually transferred between the producer and the person who consumed it, and the number of people involved in the transaction, you know, it was — I don’t know whether it was one-third or one-quarter or one-fifth as efficient as the best way now to get food delivered to you. And —

CHARLIE MUNGER: And the food was worse.

WARREN BUFFETT: (Laughs) And my grandfather, you know, was distressed about the fact that this particular credit and delivery kind of store would be eliminated. And it was eliminated, but society —

CHARLIE MUNGER: It’s coming back.

WARREN BUFFETT: —addressed the — pardon?

CHARLIE MUNGER: It’s coming back.

WARREN BUFFETT: It’s coming back, but more efficiently. (Laughter)

Anyway, we’ve seen a little creative destruction. And frankly, we’re glad that it freed us up to go into the investment business. Worked out better for us.

15. Regulations can be “irritating,” but they’re needed for banks and insurance

WARREN BUFFETT: Becky?

BECKY QUICK: This question comes from Brian Gust of Grafton, Wisconsin. He’s talking about regulators and politicians. It says, “The Berkshire Hathaway investment portfolio holds several large financial institutions that are heavily regulated and are politically charged.

“Do you feel that, in some cases, the regulators and/or politicians are running the big banks instead of the CEO and the board of directors?”

CHARLIE MUNGER: Sure. (Laughter) But not too much.

WARREN BUFFETT: No, insurance has been regulated — it happens to be regulated primarily on a state basis — but insurance has been regulated ever since we went into it, and it hasn’t — you know, when I looked at GEICO, it was doing 7 million of business. And, you know, it will do 30-odd billion of — billion — of business now. And it’s been regulated the whole time.

And regulation can be a pain in the neck, generally, but on the other hand, we don’t want a bunch of charlatans operating in the insurance business. And insurance actually lends itself to charlatans because you get handed money and you give the other guy a promise.

And I like the fact that there is regulation in the insurance business, or the banking business. It doesn’t mean it can’t drive you crazy sometimes or anything of the sort, but those businesses should be regulated. It — they’re too important.

And anytime you can take other people’s money, and they go home with a promise and you go home with the money, I don’t mind a certain amount of regulation in those businesses. Charlie?

CHARLIE MUNGER: Yeah. You’re using the government’s credit because you have deposit insurance, there’s an implicit bargain. You can’t be too crazy with what you do with the money. That’s a perfectly reasonable —

And I absolutely believe that we should have a regulation system that involves supervision of risk-taking by banks.

It got particularly bad in the investment banks at the peak of the real estate crisis, and the behavior was — there’s only word for the behavior — it was disgusting. And it was pretty much everybody.

Warren, you — it’s hard to think of anybody who stayed sane in that boom. They felt the other guy’s doing dumb things, I’ve got to do it, too, or I’ll be left out. What a crazy way to behave.

And so, sure, there’s some intervention, but there probably has to be.

WARREN BUFFETT: You want a Food and Drug Administration. Yeah. You’ll be unhappy with how they do it, if you’re in the business and all that, but — and, you know, I find any kind of regulation irritating. But nevertheless, it’s good for the system.

And actually, a number of regulators, you know, I would say that they’ve really been quite sensible about regulation. But you don’t feel that way when you’re being told how to run your business.

But as Charlie says, you wouldn’t want to be a bank that ran in an unregulated system where anybody could come in and do all kinds of things that would actually have consequences that drew you into the problems that they created themselves.

We had the Wild West in banking long ago, and it produced a lot of problems in the 19th century.

16. Shareholders don’t want or need very detailed information on the subsidiaries

WARREN BUFFETT: Jay?

JAY GELB: For the past several years, in Berkshire’s annual shareholder letter, there’s been increasingly less detail provided on its operating businesses and financial performance.

For example, the company is no longer providing details on the finance and financial product segment, or a balance sheet for the manufacturing, service, and retail segment, or a breakdown of float by unit in the insurance business.

For a company as large and diversified as Berkshire, why are investors being provided less information than previously?

WARREN BUFFETT: Well, I don’t think we actually provide less information. We may present it in a somewhat different form from year to year, just — and then this year, for example, you know, I started my letter, as usual, in my mind as saying, “Dear Doris and Birdie,” my sisters, to tell them what I would tell anybody that had a very significant proportion of their net worth in Berkshire, who is intelligent, did not know all the lingo of our various businesses, that would read a lot of words, because they did have a large investment. So, if I explained anything, and did a decent job, that they would understand what I was talking about.

And I tell them that in the language that I think will be understandable to a significant percentage of a million-plus people who have all kinds of different understanding of accounting and all that sort of thing. I tell them the information I would want to hear on the other side.

Now, if I was a competitor, and I wanted to know what one of our furniture stores was earning or something of the sort, you know, I might love it, but it doesn’t really make any difference.

If you’re talking about a $500 billion organization, if you understand our insurance business, in terms of giving you the picture, I think, in three or four or five pages — you know, actually we’ve got a whole bunch of stuff required by the SEC about loss reserve development.

I think you can write a 300-page report that gives a whole lot less information than a 50-page report. And you lose people.

So, I try to tell them — like I say, in my mind, it’s my sisters — I try to tell them what I would tell them if we had a private business and they owned a third of it each, and I owned a third, and once a year, they like to get filled in. And they don’t know what a combined ratio means because it’s a dumb term that everybody uses. And the important thing is to call it a profit margin.

They don’t know what the operating ratio is in the railroad business, and it’s an obsolete term. It’d be better to call that a profit margin. But the lingo — we’re not writing it for analysts. We’re writing it for shareholders, and we’re trying to tell them something so they can make a — they can not only get the picture as to what we own now, but how we think about the operation, what we’re trying to do over time. And we try to do the best job we can every year.

And I don’t think it — I think if somebody is terribly interested in the details, they really are missing the whole picture. Because you could have known every detail of our textile business in 1965, and we could give you the information as to how much we made from linings and how much we made from handkerchiefs, and you’d be in a different world. I mean, the important thing was how we looked at running money and what we would do about things over time.

And it just — you could have gotten very misled — if you’d read it in 1980 or ’85 and you looked for great detail on how See’s candy was doing because they moved eastward, you know, we’ll tell you that overall that failed, in terms of moving out the territory.

But going into a whole lot of detail that might be very interesting to an analyst, but really for the shareholder, they’ve got to make a decision as to who’s running their money, and how they’re running it, and what they’ve done over time, and what they hope to do in the future, and how to measure that. And again, we’re writing it for the individual. Charlie?

CHARLIE MUNGER: Well, I suppose I should be watching every tiny little business down to the last nickel, but I don’t. And I don’t want that much detail. And I think our competitors would like it, and it wouldn’t do our shareholders any good. So, we’ll probably just keep reporting the way we do.

WARREN BUFFETT: You can see how flexible we are here. (Laughter)

17. Munger: “Climate getting better” for U.S. investments in China

WARREN BUFFETT: Station 3.

AUDIENCE MEMBER: Hello, Mr. Buffett and Mr. Munger. I’m Sasha Xixi (PH) from China International Capital Corporation Limited.

Last week, China announced 12 new measures further opening up the financial industry. All these measures will allow more invested institutions to enter into Chinese financial market, and to insure the policies of foreign investment to be consistent with those of domestic investment.

What do you think about these new measures? Do you believe the foreign financial institutions will have more pricing power over the Chinese stock markets in the future? Do you have any plans to set up a company in China? If so, what time? Thank you.

CHARLIE MUNGER: Well, we’ve got one now. Dairy Queen is all over China. (Laughter)

And it’s working fine. And we didn’t wait for new laws. We did it under the old laws. But we’re not that big, net, in China, right, Warren?

WARREN BUFFETT: We’re not that big what?

CHARLIE MUNGER: In China.

WARREN BUFFETT: No, but we had something, you know, that could have happened that would have been quite sizable.

But China, it’s a big market, and we like big markets. I mean, we really can only deploy capital in a major way maybe in 15 or so countries just because of the size.

CHARLIE MUNGER: But generally, I think the climate is getting better. It really makes sense for the two countries to get along. Think of how stupid it would be if China and the United States didn’t get along. Stupid on both sides, I might add.

WARREN BUFFETT: Yeah. We’ve done well in China. We haven’t done enough, but — (Applause)

18. Buffett has “feeling” Brexit vote was a mistake, but he’s still anxious for a U.K. deal

WARREN BUFFETT: Andrew?

ANDREW ROSS SORKIN: Warren, this is a question from a member of the House of Lords in Westminster, who happens to be here today, who also is a shareholder of the company.

This is Lord (Jitesh) Gadhia who says, “You’ve written, ‘We hope to invest significant sums across borders. So, what’s your appetite to invest in the U.K. and Europe, and how will Brexit impact that? And while we’re at it, what’s your advice for solving U.K.’s Brexit dilemma?” (Laughter)

CHARLIE MUNGER: That’s yours, Warren. (Laughter)

WARREN BUFFETT: Well, I can — I will tell you this. I mean, I gave an interview to The Financial Times, and I don’t do that very often.

But one of the considerations I have is that I would like to see Berkshire Hathaway better known in both the U.K. and Europe. And the FT audience was an audience that I hoped would think of Berkshire more often in terms of when businesses are for sale.

Our name is familiar, I think, pretty much around the world in, at least, financial circles. But there is no question if anybody’s going to sell a large business in the United States, they’re going to think of Berkshire. They may decide, for other reasons, they’d rather do it differently. But they will think of Berkshire.

And I don’t think — I mean, obviously that is not as true around the world. We’ve had some very good luck with a few people that have thought of Berkshire, I mean, such as at ISCAR. And actually, Berkshire Hathaway Energy had one of its base holdings from way back was in the U.K.

But I was looking, in doing that interview, I was willing to spend three hours with the FT reporters in the hope that when they write about — when they write the story — that somebody, someplace thinks of Berkshire that wouldn’t otherwise think of it.

And we’d love to put more money into the U.K. I mean, if I get a call tomorrow and somebody says, you know, “I’ve got an X-billion-dollar — pound — company that I think might make sense for you to own,” and that I would like to actually have as part of Berkshire, you know, I’ll get on the plane and be over there.

But they’ll have to name — they’ll have to tell me what their price ideas are, and what its earnings — I’m not interested in going over and talking about it and pricing it for them and not making a deal. We like to make deals when we actually get into action. And we’re hoping for it.

And we’re hoping for a deal in the U.K., and/or in Europe, no matter how Brexit comes out.

I think it — I don’t — I’m not an Englishman, but I have the feeling it was a mistake to vote to leave. But I don’t think it’s — I don’t think it — it doesn’t destroy my appetite in the least for making a very large acquisition in the U.K. Charlie?

CHARLIE MUNGER: Well, all my ancestors came from northern Europe so I’m very partial to the place. On the other hand, if you asked me how I would vote on Brexit if I lived in Britain, I don’t even know. It just strikes me as a horrible problem. And I’m glad it’s theirs, not mine. (Laughter)

WARREN BUFFETT: But if I called you tomorrow and said we had a deal in U.K., you’d tell me —

CHARLIE MUNGER: Oh, I would go in, in a minute.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: Those are my kind of people. I understand them.

WARREN BUFFETT: Yeah. (Laughter)

19. We don’t need “boots on the ground” to find foreign acquisitions, we need lower prices

WARREN BUFFETT: OK, Gregg. (Laughter)

GREGG WARREN: Yeah, Warren, just wanted to kind of maybe follow up on those past two questions, because there is sort of a theme there.

It seems to me that there’s definitely more of a home country bias when we look at the acquisitions and investments that Berkshire’s done historically.

And while there’s definitely value in sticking with what you know and feel the most comfortable with, it seems like you’ve gone from a model that was originally focused on putting boots on the ground to find investment and acquisition opportunities to one where you’re seemingly more content to have sellers or their representatives call you or drop by the office, basically more of a pull model than a push model.

There’s nothing wrong with this, but I just wonder, if the opportunity cost that comes with this type of model is that Berkshire misses out on a lot of overseas business where owners are unaware of your willingness to step up and buy them outright and allow them to run their companies under the Berkshire umbrella, and missing stock investment opportunities because Berkshire if not necessarily familiar enough with the local market.

At this point, do you think Berkshire would benefit from putting more boots on the ground in these overseas markets?

WARREN BUFFETT: Yeah, we — actually, it must have been after we bought ISCAR, Eitan Wertheimer convinced me that we should get more exposure in Europe. And he helped out in doing that.

I went over, he arranged various meetings. We’ve had a lot of contact. It isn’t that they’re not aware, and we do hear about some.

But we do have the problem they’ve got to be sizable. I mean, if we do a billion-dollar acquisition, and it makes $100 million, or thereabouts, pretax, $80 million after tax, you know, it’s — if we really know the business and we’re sure we’re not going to have a problem with the people running it being motivated in the future, and doing a similar job as to when they had their money in and everything, it’s nice to add 80 million to 25 billion.

But you can’t afford to spend lots of time doing that. And we gain something by having Todd (Combs) and Ted (Weschler) do some looking at things, screening them and that sort of thing.

But in the end, you want somebody that — you want some family that’s held their business in Europe or in the U.K. for 50 or 100 years that can make a deal, and that wants to do it with Berkshire.

I mean, if they’re looking to get the most money, if they want to have an auction, we’re not going to win and we’re not going to participate because we’re not going to waste our time on it.

If we form an acquisition crew, they’ll acquire something. I mean, I’ve watched so many institutions in operation that, you know, if your job every day is to go to work and screen a bunch of things with the idea that you’re the strategic department or acquisition department, you’re going to want to do something. I want to do something, but I don’t want to do something unless — (laughs) — Berkshire benefits by it — truly benefits by it — and generally it’s of a size.

CHARLIE MUNGER: Warren, our problem is not a lack of boots on the ground, our problem is the people on the ground are paying prices that we don’t want to pay.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: That’s our problem. And that problem is not going to be cured by boots.

WARREN BUFFETT: We can spend $100 billion in the next year. That is not a problem.

CHARLIE MUNGER: No.

WARREN BUFFETT: Spending it intelligently is a huge problem. And the —

CHARLIE MUNGER: Our competitors are buying with somebody else’s money, and they get part of the upside and take none of the downside.

WARREN BUFFETT: And a lot of them —

CHARLIE MUNGER: It is hard to compete with people like that.

WARREN BUFFETT: Yeah. They’ll leverage it up, they’ll make a lot of money if it fails, and they’ll make even more money if it succeeds. And that’s not our equation.

CHARLIE MUNGER: No.

WARREN BUFFETT: And that isn’t always that way, but it’s certainly that way now. It’s probably —

CHARLIE MUNGER: And it’s not in the shareholders’ interest that we get to be like everybody else.

WARREN BUFFETT: Yeah. (Applause)

20. We feel good about Berkshire as a long-term “compounding machine”

WARREN BUFFETT: OK, station 4.

AUDIENCE MEMBER: Mr. Buffett and Mr. Munger, thank you so much for the wisdom you’ve shared with us over the years. This is Steven Wood from New York. And, Mr. Buffett, thank you very much for your feedback, your very generous feedback, last August on the book that I’m writing.

I just had one follow-up, if I may. In studying the most significant value creators of all time, it is very evident that the major compounding effect happened later — at the later stages of the careers. Or, in (Cornelius) Vanderbilt’s case, even beyond his own career.

So, your recent investments have suggested to me that you are designing Berkshire to being a steady compounding machine that should continue to create value for a very long time.

Would you both please elaborate on this compounding machine? And the machine’s ability to continue to adapt to keep this value creation durable. And then is this legacy one of your sort of primary motivations when you wake up every day?

WARREN BUFFETT: I would say it is the primary motivation, but it’s been that for a very, very, very long time.

No matter what was going right in my life, if things were going badly at Berkshire, I would not feel good, you know. I don’t need to be spending my time working on something — (laughs) — that makes me feel bad about the results when we get through.

And it’s something that’s doable. I mean, the culture is stronger now than it was 10 years ago, and it was stronger then than 10 years previously. It moves slowly, but it goes in the right direction.

And when we get chances to deploy the capital, we’ve always tried to make any entity, whether it was the partnership originally, or Berkshire now, or Blue Chip Stamps when we owned it, or even Diversified (inaudible), we wanted them all to be compounding, in effect, be compounding machines.

That’s why people gave us capital. That’s why we put our own capital in. And if we failed at it, we really felt like we’d failed. It didn’t make any difference how much money we made from fees or anything like that, we knew what our yardstick was.

And so that will continue. I think Berkshire is better situated than it’s ever been, except for the fact that size is a drag on performance, and I probably wrote that 40 years — well, I wrote it, actually, when I closed the partnership to new money when we had like $40 million in it.

I just said, really, that new — that additional capital would drag down returns from a $40 million base. So, you can imagine how I feel with a $368 billion — (laughs) — base of capital in Berkshire now.

But this culture is special. It can work. It won’t be the highest compounder, by a long shot, against many other businesses. I think it will be one of the safest ways to make decent money over time. But that will depend on the people that follow us. Charlie?

CHARLIE MUNGER: Well, we came a long way from very small beginnings. And the fact that it slows down a little when it becomes monstrous is not my idea of a huge tragedy. And I think we will continue to do very well in the future.

We had nothing like the energy operation, you know, 20 years ago, and it’s a powerhouse. We had nothing like Kevin’s (Clayton) operation in home building 30 years ago, and it will soon be the biggest — well, even now, it’s bigger than anybody else in the country, you know, both of types of housing. Isn’t it — houses? I think so.

And we have a lot going for us, and I’m satisfied. I think it’s going to continue reasonably.

WARREN BUFFETT: And it would ruin our life if we did terribly. (Laughs)

So, that’s what we wake up thinking about in the morning. But I wouldn’t want to be in a business where I was going to let down other people, and I think it would be crazy to do something like that, even if you weren’t rich and 88. (Laughs)

But we are motivated to have something that is regarded as something different than others, and we’re actually — in a world where so much money is institutionalized, you know, I like the idea of having something that’s actually owned by individuals in very significant part, who basically trust us and, you know, don’t worry about what the next quarter’s earnings are going to be. I think it’s different than much of capitalism, and I think it’s something that Charlie and I feel good about. Isn’t it, Charlie?

CHARLIE MUNGER: Yeah, absolutely. (Applause)

21. Berkshire vs the S&P, with taxes thrown in

WARREN BUFFETT: Carol?

CAROL LOOMIS: This question comes from Stephen De Bode of Danville, California, and it raises a question I’ve certainly never heard before.

“Mr. Buffett, in the past, you have recommended low-cost S&P — and again today — the S&P 500 Index funds as reliable, long-term investment vehicles. These funds have certain inherent structural advantages such as low costs, and automatic reshuffling of their holding.

“But Berkshire also has certain structural advantages, such as financial leverage from the float, and diverse capital allocation opportunities. I think of Berkshire as being ahead in this game.

“For example, it seems to me that if Berkshire’s overall operating business and investment performance were to exactly match the total return of the S&P Index over a 10-year period, Berkshire’s growth in intrinsic value would outperform the S&P 500.

“If you agree, could you estimate by how many percentage points?”

WARREN BUFFETT: (Laughs) Well, the answer is, I won’t estimate anything. But the — if we just owned stocks, and we owned the S&P, our performance would be significantly worse than the S&P because we would be incurring a corporate tax, which would now be 21 percent on capital gains, plus possibly some state income taxes. And effectively, our tax rate on dividends is — depends where they’re held — but somewhere between 10 1/2 or 11 and 13 percent.

So, Berkshire is a mistake — or it’s at a corporate disadvantage simply by the way the tax law runs, compared to owning an index fund, which has no tax at the corporate level, but just passes through to shareholders.

So, I wouldn’t — I don’t know whether we’ll outperform the S&P 500 or not. I know that we’ll behave with our shareholders’ money exactly as we would behave with our own money.

And we will have — we’ll basically tie our fortunes in life to this business, and we will be very cognizant of doing anything that can destroy value in any significant way. But we will probably —

If there were to be a very strong bull market from this point forward, we would probably underperform during that period. If the market five years from now or 10 years from now is at this level or below, we will probably overperform.

But I don’t think that I want to — I don’t quite understand the question in terms of when it said the total return of the S&P over a 10-year period and Berkshire’s growth in intrinsic value would outperform. I don’t know whether that will happen or not. Charlie?

CHARLIE MUNGER: Well, there would be one big advantage for the shareholders that pay taxes, and that is that the Berkshire shareholders, even if we just matched the S&P, we’d be way ahead after taxes. We all have a pretty decent role in life and a pretty good position. We shouldn’t be too disappointed.

WARREN BUFFETT: No. If we — we could have structured — going back to partnership days — we could have structured things so that actually, over a period of time, doing the same things we did, would have actually come out somewhat more favorably for shareholders if we had kept it to the original partnership group.

But the present form hasn’t worked badly, although we have had periods when our corporate capital gains tax, as opposed to the individual, I think it got up to 39 percent a couple of years or one year, and certainly was 35 percent for a long time. And then, on top of that, we had the state income taxes in some cases.

And they exceeded — well, I mean, if you owned a pass-through fund, you did not have that level of possible double taxation. Now, if you hold your stock forever, you don’t pay it. But if you actually sell your stock, you’ve had a double tax effect.

We’re not complaining in any way, shape, or form. This country has treated us incredibly well, and we’ve added this huge tailwind, which I wrote about in the annual report. And it wouldn’t have happened in any other country.

So, we’ve been very lucky that we’ve been operating in this country at this time. Charlie, anything?

CHARLIE MUNGER: No.

22. How NV Energy is working to recover from casino defections

WARREN BUFFETT: Jonathan?

JONATHAN BRANDT: In Nevada, several casinos have cut the cord with our NV Energy subsidiary and are seeking their electricity needs elsewhere, even though they had to pay huge exit fees. I have three questions about this phenomenon.

One: do you believe that these are rational choices, or were they made for non-economic reasons?

Two: what can NVD do, if anything, to stem the tide of defections?

And, three: is this something that could happen in other states where you operate regulated utilities? Or is the situation in Nevada somehow unique because of super-sized customers that have more leverage in the power market than smaller industrial customers in other states?

And I don’t know whether that’s a question for you or Greg, but I’d be happy to hear from either of you.

WARREN BUFFETT: It’s a question for Greg. (Laughter)

GREG ABEL: Thanks, Jonathan. So just for everybody, I think they heard the question from Jonathan, but we’ve owned the utility there for approximately five years.

When we inherited the utility, we knew it had some fundamental issues around its customers. The relationships were really strained from day one because they’d had a history of continuing to increase rates, and they really weren’t delivering renewable energy or meeting the customers’ needs or expectations. So, we knew we had some challenges there.

As we sit here today, we’ve had five customers leave our system. Those customers still use our distribution services. So, the only thing we do not provide them is the power. So, we have lost an opportunity to sell them power, and we’ve lost the associated margin on that. And we are disappointed with that. We do recover, you know, substantial fees, as you noted.

How the commission looked at it was, “Well, you lose this customer; we’ll give you effectively six years of profit on that. And by then, you should have grown back into your normal load.” And actually, it’s a fair outcome. Our load is higher than it was relative to when those customers have left. So, we’ve grown through that, and it’s consistent with their belief.

The fundamental issue, and you’ve touched on it, why are they leaving? There are economic reasons for them leaving. And the fundamental reason is, in year seven, they no longer bear sort of the societal costs that are being imposed by the state. They don’t have to bear the costs of renewable energy. They don’t bear the costs of energy efficiency. And they viewed it as sort of the time to exit out of that model.

We do have a variety of legislation that’s going to levelize the playing field. We’ve had a number of customers that announced they were leaving now who’ve entered into long-term agreements with NV Energy. And I really do believe our team has the right model, which is we’re much more focused on delivering a great value proposition to our customers. So, it has to include price.

But equally, we’re building substantial renewable energy there now. And long term, our team will deliver a great proposition to them, and I think NV Energy will prosper in the long term. We’re going to be happy with it as a long-term investment. Thank you.

WARREN BUFFETT: Greg, could you give them, give the audience a rough approximation of what, say, in the 10 years or whatever it may be before we bought Nevada Power, what had happened with rates; what had happened with rates under us; and what has happened with coal generation under us?

GREG: Right. Yeah. Yeah, that’s great. So, you know, Warren’s really expanding on what are — the focus we’ve brought to delivering something to the customer.

So, if you’d looked at the prior ten years, they pretty much had a rate strategy that, every second year, their rates would go up sort of by the cost of inflation. And that pretty much materialized year after year.

We came in immediately, just like we’ve done in Iowa — so we’ve built all that renewable in Iowa, and we’ve never increased rates since the date we acquired it, 1999. So, rates have been stable, and we don’t ever see raising rates in Iowa till probably 2030 or 2031.

Our team took a very similar approach in Nevada, which was to, you know, stabilize it. So, rates are down probably 5-7 percent since we’ve owned them. So, we haven’t had rate increases.

We’ve announced substantial rate increases (decreases) again that will take effect every two years. So just like we used to be able to have rate increases, we have a few of when we’ll decrease their rates. Their rates will go down again in 2002. We’ve — pardon me, in two years.

And then on top of that, there’s been an approach to eliminate coal, as Warren touched on. So fundamentally, when we acquired it, all their coal fleet was operating. We’ve retired a substantial portion of the coal fleet already. And by, I believe it’s within a year of this, 2023, we’ll have eliminated 100 percent of their use of coal in that state. And it was a substantial portion of their portfolio in the past. So — (applause) — team’s done a great job. Thank you.

WARREN BUFFETT: Charlie, have anything?

CHARLIE MUNGER: No.

23. Portfolio managers Weschler and Combs roughly matching the S&P but making other contributions

WARREN BUFFETT: Station 5.

AUIDIENCE MEMBER: Yes, hi. My name is Aaron Lanni. I’m a portfolio manager at a company called Medici out of Montreal, Quebec.

My question is actually for Todd (Combs) and Ted (Weschler), if possible.

So according to Warren, you lagged slightly behind the S&P 500 since joining Berkshire. So what recent changes, if any, have you implemented to increase your odds of beating the S&P in your respective stock portfolios over the next 10 years?

WARREN BUFFETT: Yeah, I’m not sure whether Todd or Ted are here, but they — I will tell you, but then — I’ll make this the final report on it.

But on March 31st, actually, one is modest ahead, one is modestly behind. But they are extraordinary managers. It has not been — it was a tough — it’s been a tough period to beat the S&P and, like I say, one of them is now ahead of the S&P over that period, one’s modestly behind.

They’ve also helped us in just all kinds of ways. What Todd has done in connection with the medical initiative, we have — with J.P. Morgan, Amazon, I mean, I don’t know how many hours a week he’s worked totally on that. The things they’ve brought to me, what Ted did in terms of the Home Capital Group where we have essentially, in a major way — well, we stabilized a financial institution that was under attack and experiencing runs in Canada. And he did the whole thing.

I heard about that on a Monday, and on Wednesday, we put an offer before the company. And previously to that, they probably had dozens and dozens of people combing over them and, meanwhile, they were struggling. And, you know, it was remarkable what he did and I think it’s appreciated in the Toronto area.

So, we are enormously better off because the two are with us. And while we have that measurement, like I say, I’ll just put it this way, they’re doing better than I am anyway. So, if you ask me to report on them all the time, I’ll have to report and myself all the time, and I’m not — (laughs) — that would be embarrassing compared to how they do. They do better.

They’re very, very smart. They’ve been smart with their own money over the years. They’ve been smart in running other people’s money over the years. And they’ve made us a lot of money, but they made it during a market where you’d have made a lot of money in S&P as well. Charlie?

CHARLIE MUNGER: No, I’m fine.

24. Power of American Express’s brand will help fend off heavy credit card competition

WARREN BUFFETT: OK. Becky?

BECKY QUICK: This question comes from Leiders Luff (PH), Yosis Luff (PH), and Dan Gorfung (PH) of Israel. And they write to both Mr. Buffett and Mr. Munger, “Do you think that AmEx’s share of mind is enough to win the credit cards race? How do you see AmEx’s competitive position now compared to the past? And who is the most threatening competitor now, compared to the past?

WARREN BUFFETT: Yeah, everybody’s a competitor, including now Apple. It has just instituted a card, I guess, in conjunction with Goldman Sachs.

Everybody — there will always be, in my view, many, many competitors in the business. Banks can’t afford to leave the field. It’s a growing field. They build up receivables on it.

But I wouldn’t think of the credit card business as a one-model business any more than I would think of the car business as essentially being one model. I mean, Ferrari is going to make a lot of money, but they’re going to have just a portion of the market.

Well, AmEx is growing around the world with individuals, it’s growing around the world with small businesses. You just saw the contract they made with Delta — which is probably the ideal partner— that runs, what, for eight or nine, whatever it may be, nine or 10 years, actually.

You know, the billings go up per capita, they go up — the coverage spreads. And they’re going to have loads of competition, and they always will. But they had — you know, that’s something — J.P. Morgan, you know, took on the Platinum Card. It was a competitor, and the Platinum Card had the highest renewal rates that they’ve had. And they increased the price I think from 450 to $550 during a competitive battle, and retention improved, and new business improved, and 68 percent or so of the new business was millennials.

I mean, it is a — it is not an identical product with anything else. And as a premium card, it has a clientele which is large. It may only be — it may be X percent of the market, it may be three-quarters of X percent, or whatever it may be. It isn’t for the person that likes to have five cards and look every day at which one provides the most rewards that day or in what gas stations or something of the sort.

But it’s got a very large constituency that has a renewal rate, a usage rate, that’s the envy of everybody else in the industry. So, I like our American Express position very well. Charlie?

Charlie, anything on American Express?

CHARLIE MUNGER: No. (Laughter) No, I think we own the world as long as the technology stays the same.

WARREN BUFFETT: No, we — it’s an interesting thing.

CHARLIE MUNGER: I have no opinion about technology.

WARREN BUFFETT: This year — (laughter) — the technology is not the whole thing. I mean, you know, fortunately. I mean, it —

If you look at credit card usage, there are a lot of different things motivating different people to use different various types of payment systems. And there’s a lot of them that are growing. There are some of them that are marginal. And American Express is an extraordinary operation.

And I think this year, our share of the earnings — well, by next year, our share of the earnings of American Express will be equal to the cost of our position. We’ll be earning a hundred percent on what that position cost us, and I think it will grow.

And I think the number of shares will go down and our interest will go up without us laying out a dime. So, it’s —

CHARLIE MUNGER: As you say, we own the world if it doesn’t change.

WARREN BUFFETT: Well, even if it changes some. The world has changed a lot. American Express was formed in 1850.

CHARLIE MUNGER: No, I’m talking about WeChat.

WARREN BUFFETT: You can talk about all kinds of competitors, but —

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: But the — American Express actually was an express company, formed in 1850, like I say, by Wells and Fargo, of all people. And, you know, for a while they carried these big trunks around of valuables. And then the railroads came along and that wasn’t going to work very well anymore, so they went into traveler’s checks.

And it’s a very interesting thing. In 1950, when I was living at 116th and Broadway, they were down at 65 Broadway, and they were the most important name in travel. They were synonymous with the integrity of their traveler’s checks. And the whole company, in a record year for travel, earned $3 million. $3 million. What a bond trader earns now in my lifetime, that’s what they’ve done with — and their hand going in was the traveler’s check, which has more or less disappeared.

But American Express, the power of that brand, intelligently used, going into the credit card business, where they entered much later than the Diners Club, later than Carte Blanche, but they came to dominate the luxury end of the credit card business.

It’s a fantastic story, and I’m glad we own 18 percent of it.

25. Occidental came to us for a $10B loan because we could do it quickly

WARREN BUFFETT: OK, Jay?

JAY GELB: Actually, I’m going to ask something about Occidental Petroleum. I’m surprised it hasn’t been asked yet.

So, Berkshire has committed to providing $10 billion in financing in the form of an 8 percent preferred share and attached warrants for Occidental’s proposed acquisition of Anadarko.

This is the first time Berkshire has committed to such a large preferred share investment since the acquisition of Heinz in 2013.

What did you find attractive about the Occidental deal, in terms of its business? And should we expect other large financing transactions in the future, as a way for Berkshire to deploy a portion of its excess cash?

WARREN BUFFETT: I don’t think the Occidental transaction will be the last one we do. (Laughs)

There may be one, you know, in a month. They may be one three or four years from now. It won’t be identical. I hope it’s larger.

But the point is, we’re very likely to get the call because we can do something that really I don’t think — no institution can do it. I mean, they’ve got committees that have to pass on it, and they want to have so-called MAC clauses, Material Adverse Changes. They want to do this and that.

And if somebody wants a lot of certain money for a deal, you know, they’ve seen that I can get a call on Friday afternoon, and they can make a date with me on Saturday, and on Sunday, it’s done. And they absolutely know that they have $10 billion and we’re not going to tell them how to structure their transaction or do anything else. They’ve got it.

And there will be times in the future when something, not identical, but similar, comes along, and we’re the one to call. And I hope its larger than 10 billion. But —

It could be — it could be we’ll do — you know, in the next five years. It could be we’ll do a lot of money, additional money in things similar to this, not identical. And it could be that nothing will happen.

But if there are any $10 billion, or $20 billion, or maybe even $50 billion two-day transactions, if there are any in the world, believe me, they’ll think of Berkshire Hathaway for sure in terms of what number to call. Charlie?

CHARLIE MUNGER: Well, I like it. (Laughter)

WARREN BUFFETT: I called Charlie as soon as we made the — I called Ron Olson first because I was worried that he might have a conflict. And in about ten minutes, he had — I told him we — it had to be done by Monday night. And Cravath was being told the same thing by Occidental.

And it was very late on Monday light, but all the papers were put in order. And Munger, Tolles was in Los Angeles, and Cravath was in New York, and I was in Omaha. And I didn’t do that much; Mark Hamburg did a lot of the work. He was at work on Sunday on other things when I went down (laughs) to meet with the Occidental people.

And it was the product of people who understood us, understood how we operate, and both with an incentive to put all the manpower necessary on the job.

And like I say, I think their board of directors met at 10 o’clock on Monday night to approve it. But they could announce it Tuesday morning, and that’s what they wanted to do. And with Berkshire, they could do it.

26. We have no formula for assessing risk

WARREN BUFFETT: OK, station 6.

AUDIENCE MEMBER: Good afternoon, my name’s Tony McCall and I’m from Montgomery, Alabama. And my question is about your disciplined risk evaluation approach and how you balance that with the fact that perseverance and determination and grit are often necessary for success.

WARREN BUFFETT: Well, I’m not — I certainly like determination and grit in the — with the people we work for.

But we don’t have any formula that evaluates risk, but we certainly make our own calculation of risk versus reward in every transaction we do.

And that’s true whether it’s marketable securities, that’s true whether it’s private investments, that’s true whether it’s making an investment in a business.

And sometimes we’re wrong, and we’re going to be wrong sometimes in the future. You can’t make a lot of decisions in this business without being wrong. But we don’t think the procedure — or the results — would be changed favorably by having lots of committees and lots of spreadsheets and that sort of thing. It just — you know —

If I had a group under me, they would try and figure out what I wanted the answer to be, and they would tell me what I wanted to hear.

And I’ve watched that approach at 20 public companies. And what the CEO wants to do, they may spend a lot of time getting there, but the investment banker gets there, and the internal committees get there, — or the internal operations — get there.

The calculations are — it’s the same as the insurance business with Ajit (Jain). Ajit gets calls on insurance deals, and you have to think through that deal.

The main thing is you have — are you reasonably sure that you know what you’re doing? And if it gets past that hurdle, then we go on to figure out the math of gain versus loss and how much loss we can afford to take in anything. And we’re willing to take what sounds like large losses if we think that the rewards are more likely and proportional. Charlie?

CHARLIE MUNGER: I’ve got nothing.

WARREN BUFFETT: It’s very disappointing — we have no formulas around Berkshire. We don’t sit down and write a bunch, you know — have people work till midnight calculating things and putting spreadsheets together.

And if the hurdle rate is 15 percent or something, having them all come out at 15.1 or 15.2, because that’s what’s going to happen. I mean, you’re going to get the numbers you want to hear and to an extreme degree.

27. Buffett describes some of the dishonest business propositions it gets

WARREN BUFFETT: The proposals we see from the investment world — I’ve got to tell you about one because it illustrates what goes on.

We received a proposition the other day — and I’ll disguise the numbers a little bit so somebody can pick it out — but it was a private company, and we’ll say it was earning a hundred million dollars a year. But the seller of the business and the investment banker suggested that we should look at the earnings as being 110 million dollars a year, because as a private company they had to pay their top people in cash, which was expensed.

But we could pay them in stock options and things like that, which weren’t expensed, or were explained as not really counting and therefore we could report 110 million dollars if we gave away something we didn’t want to give away.

But by essentially — by sort of lying about our accounting, we could add 10 million dollars in earnings, and they wanted us to pay them because they couldn’t do it and we could do it. And therefore — at this point, they’re losing me of course, totally.

But it — it’s just astounding the accounting games that are played. All the adjustments are why the place should really be — will be — earning more than before. It’s a business.

We also had one that came in from a private equity firm and by a mistake we got the email that was sent to the manager from the email from the private equity firm that owned it, to the manager, in terms of making projections for it.

And they told them to add 15 percent because they said Buffett will discount it by 15 percent or 20 percent anyway. (Laughs)

So just add 15 percent to offset his conservatism. You know, it’s not an elegant business, as Charlie will tell you. (Laughter)

You have any better stories, Charlie? (Laughter)

CHARLIE MUNGER: It’s bad enough.

WARREN BUFFETT: OK, Andrew —

CHARLIE MUNGER: It’s really very bad enough.

ANDREW ROSS SORKIN: Thank you, Warren. I think it’s —

CHARLIE MUNGER: Why do we want our leading citizens lying and cheating?

28. Buffett would bet against a car company like Tesla being able to compete on auto insurance

WARREN BUFFETT: Andrew?

ANDREW: I believe it’s my final question and admittedly it’s a two-parter, but it’s the same topic.

Elon Musk says that Tesla will start to offer insurance for its cars and can price it better than a typical insurance company because of the data it collects from all of the vehicles on the road.

You’ve talked about the threat of autonomous vehicles on the insurance business. But what about to GEICO of automobile themselves getting into the insurance business?

And on a very similar topic, Tesla recently announced that they are shifting to an online-only sales model. And several traditional auto dealerships are also reducing their property holdings as car buyers increasingly use smart phones and the internet to shop for cars. What does this portend for Berkshire Hathaway Automotive?

WARREN BUFFETT: Yeah. Actually, General Motors had a company for a long time called Motors Insurance Company and various companies have tried it.

I would say that the success of the auto companies getting insurance business are probably about as likely as the success of the insurance companies getting into the auto business. (Laughter)

I worry much more about Progressive than all of the auto company possibilities that I can see, in terms of getting insurance business. It’s not an easy business at all.

And I would bet against any company in the auto business being any kind of an unusual success.

The idea of using telematics, in terms of studying people’s drivers habits, that’s spreading quite widely. And it is important to have data on how people drive, how hard they break, how much they swerve, all kinds of things.

So, I don’t doubt the value of the data but I don’t think that the — the auto companies will have any advantage to that. I don’t think they’ll make money in the insurance business.

Using the internet to shop for cars is like, you know, using the internet for shopping for everything. It’s another competitor. And there’s no question that people will look for better ways.

The gross margin on new cars is about 6 percent or thereabouts. So, there’s not lots of room in the game. But that will be a method and that will sell some cars.

And if there are, you know — it’s another competitor. But I don’t think it destroys the auto dealer who takes good care of the customers and is there to service the customers.

It’s not an overwhelming threat, but it’s obviously something that’s going to be around and will sell some cars. Charlie?

CHARLIE MUNGER: Again, nothing. (Laughter)

29. Buffett: I’m betting all my wealth on the survival of Berkshire’s culture

WARREN BUFFETT: OK. Gregg?

GREGG WARREN: Warren, a lot of Berkshire’s success over the years has come from the fact that you and Charlie have had the luxury of being patient, waiting for the right opportunities to come along to put excess capital to work, even if it has led to a buildup of large amounts of cash on the balance sheet.

This has historically worked out well for shareholders, as you and Charlie have been able to take full advantage of the disruptions in equity and credit markets or special situations like we saw with the Oxy deal, to negotiate deals on terms that ultimately benefit Berkshire shareholders.

That said, there is an opportunity cost attached to your decision to hold onto so much cash, one that investors have been willing to bear, primarily by forgoing a return of excess capital, dividends, and share repurchases, as well as seeing lower returns on cash holdings.

As we look forward, how certain can we be that this will still be the case once you’re no longer running the show, especially if Berkshire’s returns are expected to be lower over time. And is it not more likely that the next managers at Berkshire will have to manage the eventual migration of Berkshire from an acquisition and investment platform to a returning capital to shareholders vehicle?

WARREN BUFFETT: Yeah. Well, that’s certainly a possibility. I mean, that’s a possibility under me. It’s a possibility under the successor. I mean, it’s a question of can you invest truly large sums reasonably well. You can’t do it as well as you can do small sums. There’s no question about that.

But we will have to see how that works out over many years because certain years lots of opportunities, huge opportunities, present themselves and other years there are totally dry holes.

So that’s not a judgment you can make in a one-year period or a three-year period. It’s certainly a judgment you can make over time though.

And I personally — my estate will have basically nothing but Berkshire in it for some time as it gets disbursed to philanthropies. And I have a section in there which says to the trustees, in effect, to manage it — I have a section in there that says — ignore the — your exempt, from my standpoint, from the law that trustees normally should diversify and do all that sort of thing.

And I want the entire amount that they have to be kept in Berkshire as they distribute it over time to the philanthropies. And I don’t worry at all about the fact — I would like to have a very large sum go to the philanthropies, and I don’t worry at about the fact that it essentially will all be in Berkshire. And I’m willing to make that decision while I’m alive, which will continue for some years after I die.

So, I have a lot of confidence in the ability of the Berkshire culture to endure and that we have the right people to make sure that that happens. I’m betting my entire net worth on that. And that doesn’t give me pause at all.

I rewrite my will every few years, and write it the same way in respect to the Berkshire holdings. Charlie?

CHARLIE MUNGER: I don’t own any indexes. And I have always been willing to own just two or three stocks. And I have not minded that everybody who teaches finance in law school and business school teaches that what I’m doing is wrong. It isn’t wrong. It’s worked beautifully.

I don’t think you need a portfolio of 50 stocks if you know what you’re doing. And I hope my heirs will just sit.

WARREN BUFFETT: My heirs hope that I’ll change my will. (Laughter)

30. “Having the right partners in life is enormously important”

WARREN BUFFETT: OK, station 7.

AUDIENCE MEMBER: Hi. Good afternoon, Mr. Buffett and Mr. Munger. My name is Bill He (PH), and I’m from Vancouver, Canada. You two make up an iconic duo. And growing up, I found your investment strategies very admirable. And so, my question is, how do you deal with conflicts when they arise between the two of you?

WARREN BUFFETT: Are you applying personal conflicts in terms of doing something ourselves versus having Berkshire, do it? Or — oh, between the two of you. I’m just in —

Charlie and I literally, and people find this hard to believe, but in 60 years we’ve never had an argument. We have disagreed about things and we’ll probably keep occasionally disagreeing about this or that.

But if you define an argument as something where emotion starts entering into it, or anger or anything of the sort, it just doesn’t happen.

I think that Charlie is smarter than I am, but I also think that there are certain things where I’ve spent more on them than he has. And sometimes we both think we’re right. And generally, I get my way because Charlie is willing to do it that way and he’s never second-guessed me when things have been wrong. And I wouldn’t dream of second-guessing him if he were doing something that was wrong — that turned out to be wrong. We will never have a conflict, basically. Charlie?

CHARLIE MUNGER: Well, the issue isn’t how long — how we get along, the issue is how is the company going to work when we’re gone? And the answer is fine. It’s going to work fine.

WARREN BUFFETT: We’re lucky that, you know, I ran into him when I was, what, 28 years old. And — we both worked in the same grocery store and he grew up less than a block away from where I now live and everything. But I did not know who Charlie Munger was — (laughs) — until I was 28.

But clearly, we’re in sync in how we see the world. And we’re in sync on business decisions, basically.

Charlie would do fewer things than I would, but that’s because I’m spending my time on this while he’s designing dormitories or something. (Laughter)

And we both keep busy in our own ways. And we have a lot of fun dividing the labor like we do.

But you really want to work — I mean, having the right partners in life, particularly the right spouse, but having the right partners in life is enormously important. I mean, it’s more fun with a partner, both in personal life and in business life. And you probably get more accomplished, too.

But you just have a better time. It would not be any fun to do work in a little room and make a ton of money trading around securities but never working with another human being.

So, I recommend finding — well, Charlie gave some advice in the movie, finding the best person that will have you or something like that. (Laughs) Sort of a limited objective.

CHARLIE MUNGER: But it’s not hard to be happy if you’re a collector and don’t run out of money.

Collecting is intrinsically fun. Just think who — how many people who you’ve known your whole life who were collectors who didn’t run out of money, who weren’t happy collecting? That’s why we’ve been collecting all our lives.

You know, it’s a very interesting thing. There’s always a new rock to be turned over. And it’s interesting.

WARREN BUFFETT: Yeah. And in a certain way we’ve collected friends that make our lives better and that we have a good time with. And it’s very important, you know, who you select as your heroes or friends. And I’ve been lucky in this. I mean, it was only because of the doctor named Eddie Davis and his wife that Charlie and I even met.

But if you keep doing enough things, some will work out very lucky. And the best ones are ones that involve lifelong involvement with other people.

We’ve got some in our directors, a number of our directors, that have had similar impacts on me.

So, I recommend that you look for somebody better than you are and then try to be like they are.

CHARLIE MUNGER: It’s funny, you know, we’ve lost people along the way. And when I lost Warren’s secretary I thought, “Oh, my God. She was so wonderful. Gladys (Kaiser). We’ll never get another one.” Becki (Amick) is better. (Laughter)

And then we had Verne McKenzie, who was a wonderful chief financial officer. He’s gone and the current incumbent (Marc Hamburg) is better. We’ve been very lucky. And maybe the shareholders will be lucky a few more times. (Laughter)

31. Expand you circle of competence if you can, but don’t force it

WARREN BUFFETT: OK. Station 8. (Laughter)

AUDIENCE MEMBER: Hi, Warren. Hi, Charlie. My name is Jacob (PH). I’m a shareholder from China and also a proud graduate of Columbia Business School. Thanks for having us here. (Cheers)

My question is, our world is changing at a faster pace today versus 40 years ago and even more so going forward. And in this context, for each of us individually, should we expand our circle of competence continuously over time? Or should we stick with the existing circle but risk having a shrinking investment universe? Thank you.

WARREN BUFFETT: Well, obviously you should, under any conditions, you should expand your circle of competence —

CHARLIE MUNGER: If you can.

WARREN BUFFETT: If you can. Yeah. (Laughter)

And I’ve expanded mine a little bit over time. But —

CHARLIE MUNGER: If you can’t — I’d be pretty cautious.

WARREN BUFFETT: Yeah. You can’t force it. You know. If you told me that I had to, you know, become an expert on physics or, you know —

CHARLIE MUNGER: Dance maybe the lead in a ballet, Warren. That would be a sight. (Laughter)

WARREN BUFFETT: Yeah, well. That’s one I hadn’t really —

CHARLIE MUNGER: (Inaudible) now.

WARREN BUFFETT: That’s one you may be thinking about, but I— (laughter) — it hadn’t even occurred to me. (Laughter)

But, you know, it’s ridiculous. That doesn’t mean you can’t expand it at all. I mean, I did learn about some things as I’ve gone along in a few businesses.

In some cases, I’ve learned that I’m incompetent, which is actually a plus, then you’ve discarded that one.

But it doesn’t really — the world is going to change. And it’s going to keep changing. It’s changing every day. And that makes it interesting. You know.

And as it changes, certainly within what you think is your present existing circle, you have to — you should be the master of figuring that one out or it really isn’t your circle of competence.

And if you get a chance to expand it somewhat as you go along —

I’ve learned some about the energy business from Walter (Scott) and Greg (Abel) as we’ve worked together, but I’m not close to their level of competence on it. But I do know more than I used to know. And so, you get a chance to expand it a bit.

Usually, I would think normally your core competence is probably something that sort of fits the way the mind has worked.

Some people have what I call a “money mind.” And they will work well in certain types of money situations.

It isn’t so much a question of IQ. The mind is a very strange thing. And people have specialties, whether in chess or bridge. I see it in different people that can do impossible — what seem to me — impossible things. And they’re really kind of, as Charlie would say, stupid in other areas — (laughs) — you know.

So just keep working on it. But don’t think you have to increase it and therefore start bending the rules. Anything further, Charlie?

CHARLIE MUNGER: No.

32. It’s easy to make 50% on a million, but much more difficult on larger amounts

WARREN BUFFETT: Station 9. We’re just about — yeah, we got time for a couple more.

AUDIENCE MEMBER: My name is John Dorso (PH), and I’m from New York.

Mr. Buffett, you’ve said that you could return 50 percent per annum, if you were managing a one-million-dollar portfolio. What type of strategy would you use? Would you invest in cigar butts, i.e., average businesses at very cheap prices? Or would it be some type of arbitrage strategy? Thank you.

WARREN BUFFETT: It might well be the arbitrage strategy, but in a very different, perhaps, way than customary arbitrages, a lot of it.

One way or another, I can assure you, if Charlie was working with a million, or I was working with a million, we would find a way to make that with essentially no risk, not using a lot of leverage or anything of the sort.

But you change the one million to a hundred million and that 50 goes down like a rock.

There are little fringe inefficiencies that people don’t spot. And you do get opportunities occasionally to do. But they don’t really have any applicability to Berkshire. Charlie?

CHARLIE MUNGER: Well, I agree totally. It’s just you used to say that large amounts of money, they develop their own anchors. You’re just — it gets harder and harder.

I’ve just seen genius after genius with a great record and pretty soon they got 30 billion and two floors of young men and away goes the good record. That’s just the way it works.

WARREN BUFFETT: When Charlie —

CHARLIE MUNGER: It’s hard as the money goes up.

WARREN BUFFETT: When Charlie was a lawyer, initially, I mean, you were developing a couple of real estate projects. I mean, if you really want to make a million dollars — or 50 percent on a million — and you’re willing to work at it — that’s doable. But it just has no applicability to managing huge sums. Wish it did, but it doesn’t.

CHARLIE MUNGER: Yeah. Lee Louley (PH), using nothing but the float on his student loads, had a million dollars, practically, shortly after he graduated as a total scholarship student. He found just a few things to do. And did them.

33. We’ve tried, but See’s Candies gets no traction outside California

WARREN BUFFETT: OK. Station 10.

AUDIENCE MEMBER: Hello, Warren and Charlie. I’m Luis Cobo (PH) from Panama. I’m a proud Berkshire Hathaway shareholder since 10 years ago.

I’ve been looking at See’s Candies, and I’m a pretty good fan of them. And I see Charlie is as well throughout our meeting.

And even with all our consumption — and you know, the company has given us generous profits over the past decades.

Why do you think the company has not grown to the scale of Mars or Hershey’s, and what do you think we could do to make this company grow and become a bigger part of our company, being such an amazing product?

WARREN BUFFETT: Well, we’ve probably had a dozen or so ideas over the years. And we used to really focus on it because it was a much more sizable part of our business. In fact, it was practically our only business aside from insurance.

And like I say, we’ve had 10 or 12 ideas. Some of them we tried more than once. And as we got a new manager they’ve tried them. And the truth is none of them really work.

And the business is extraordinarily good in a very small niche. Boxed chocolates are something that everybody likes to receive, or maybe give it as a gift, both sides of it.

And relatively few of the people go out and buy to consume themselves. If I leave a box of chocolates open at the office — we’ve only got 25 people — but it’s gone, you know, almost immediately.

If I take it as a gift to somebody, they’re happy to get it. And if you leave the box open at a dinner party again, they’re all gone. But those same people that so readily grab it when it’s right there in front of them, do not walk out to a candy store very often and buy it just to eat themselves. They’re not going to buy. It’s very much a gift product.

It does not grow worldwide. Very interesting thing. People in these — last time I checked, people in the west prefer milk chocolate, people in the east prefer dark chocolate. People in the west like big, chunky pieces. People in the east will take miniatures.

We’ve tried to move it geographically many, many, many, many times. Because it would be so wonderful if it — when it works it works wonderfully. But it doesn’t travel that well.

If we open a store in the east, we get enormous traffic for a while and everybody says, “We’ve been waiting for you to come.” And then it finally — we end up with a store that does X pounds per year when we need one and a half X in the same square footage to make terrific returns.

And we’ve tried everything because the math is so good when it works. And overall, we have a business that doesn’t — chocolate consumption generally doesn’t grow that much. But yeah, go ahead Charlie —

CHARLIE MUNGER: Yeah, well, we failed in turning our little candy company into Mars or Hershey’s for the same reason that you fail to get the Nobel Prize in physics and achieve immortality. (Laughter)

It’s too tough for us. (Laughter)

WARREN BUFFETT: But we put 25 million dollars into it. And it’s given us over two billion dollars of pre-tax income, well over two billion. And we’ve used it to buy other businesses. And if we were the typical company and had bought that business and tried desperately to use all the retained earnings within the candy business I think we’d have fallen on our face.

I think that it just illustrates that all these formulas, you know, you learn or that having a strategic plan to use all the capital or something — some businesses work in a fairly limited area. Others really play out over this —

Dr. Pepper, you know, has — I don’t know what the percentage is now, but it might be at 10 or 12 percent market share or something like that in Dallas or maybe it’s eight. And then you go to Detroit or Boston and it’s less than 1 percent. I’m not sure about the numbers currently.

But you’d think in a mobile society, you know, with Dr. Pepper having been around since the time that Coke was founded in 1886 — it’s amazing how certain things travel, certain things don’t travel.

You know, candy bars — you mentioned Hershey. I mean, Cadbury doesn’t do that well here and Hershey doesn’t do that well in the U.K. And here we are, we all look alike. But somehow, we eat different candy bars. It’s very interesting to observe.

And the idea that you have some formula for businesses that provide that each one should pursue the course they’re on because they made it in X, they should try to find other ways to make it in X. We’re quite willing to find it in A, B, C, D, E, or F — the money is fungible.

And I think, actually, it has worked very much to our advantage to have that philosophy. So, anything further, Charlie?

CHARLIE MUNGER: I once told a very great man at dinner after he’d written a very great book, I said, “You know, you’re never going to write another great book like that.” And he was deeply offended. And I’ve read his four subsequent books and I’m totally right. (Laughter)

To write one great book is a lot to do in one lifetime. And people aren’t holding back on you when they don’t do more. It’s hard.

WARREN BUFFETT: Yeah. But you ought to make the most of the first one you got. (Laughs)

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: Yeah, you’re lucky. You know.

CHARLIE MUNGER: Yes.

WARREN BUFFETT: And we were very fortunate. I would’ve blown the chance to buy See’s Candy, but Charlie said, “Don’t be so cheap,” basically. And we still got it at a pretty good price. And we learned a lot —

CHARLIE MUNGER: It’s amazing how much we’ve learned over the years.

WARREN BUFFETT: Yeah, we’ve learned —

CHARLIE MUNGER: And if we hadn’t, the record would be so much worse.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: At any given time, what we already knew was not going to be enough to take us to the next step. That’s what makes it difficult. Think of all the people you know that have tried to take one extra step and have fallen off a cliff.

WARREN BUFFETT: Well, on that happy note — (laughter) — we will conclude the meeting. (Applause and cheering)

Thank you. Thank you.

Thank you.

Thank you, but save of it for next year. We may need it then.

Just give us a carry-forward on the rest of it, and thank you.

We’ll come back at 3:45. We will conduct the business meeting, and it doesn’t — we have no — nothing on the proxy to vote on, but we will be back here in 15 minutes.

And if you enjoy a process, you can stick around and watch us reelect our board.

Thank you. Thanks for coming.

34. Formal business meeting and election of board members

WARREN BUFFETT: The meeting will now come to order.

I’m Warren Buffett, chairman of the company and I welcome you to this 2019 — 2019 annual meeting of shareholders.

This morning I introduced the Berkshire Hathaway directors who are present.

Also with us today are partners in the firm of Deloitte and Touche, our auditors.

Jennifer Tselentis is the assistant secretary of Berkshire Hathaway and she will make a written record of the proceedings.

Becki Amick has been appointed inspector of elections at this meeting, and she will certify to the count of votes cast in the election for directors and the motions to be voted upon at this meeting.

The named proxy holders for this meeting are Walter Scott and Marc Hamburg.

Does the assistant secretary have a report of the number of Berkshire shares outstanding entitled to vote and represented at the meeting?

Jennifer?

JENNIFER TSELENTIS: Yes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 6, 2019, the record date for this meeting, there were 724,765 shares of Class A Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at the meeting, and 1,371,697,551 shares of Class B Berkshire Hathaway common stock outstanding, with each vote entitled to 1/10,000th of one vote on motions considered at the meeting.

Of that number 503,181 Class A shares and 839,707,642 Class B shares are represented at this meeting by proxies returned through Thursday evening, May 2nd.

WARREN BUFFETT: Thank you. That number represents a quorum and we will therefore directly proceed with the meeting.

First order of business will be a reading of the minutes of the last meeting of shareholders, and I recognize Mr. Walter Scott, who will place a motion before the meeting.

WALTER SCOTT: I move that the reading of the minutes of the last meeting of shareholders be dispensed with and the minutes be approved.

WARREN BUFFETT: Do I hear a second?

RON OLSON: I second the motion.

WARREN BUFFETT: Motion has been moved and seconded. We will vote on the motion by voice vote. All those in favor say aye.

VOICES: Aye.

WARREN BUFFETT: Opposed? The motion’s carried.

Next item of business is to elect directors. If a shareholder is present who did not send in a proxy or wishes to withdraw a proxy previously sent in, you may vote in person for the election of directors and other matters to be considered in this meeting.

Please identify yourselves to one of the meeting officials in the aisles so that you can receive a ballot.

I recognize Mr. Walter Scott to place a motion before the meeting with respect to election of directors.

WALTER SCOTT: I move that Warren Buffett, Charles Munger, Greg Abel, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Ajit Jain, Thomas Murphy, Ronald Olson, Walter Scott, and Meryl Witmer be elected as directors.

WARREN BUFFETT: Is there a second?

RON OLSON: I second the motion.

WARREN BUFFETT: It’s been moved and seconded that Warren Buffett, Charles Munger, Greg Abel, Howard Buffett, Steve Burke, Susan Decker, Bill Gates, David Gottesman, Charlotte Guyman, Ajit Jain, Tom Murphy, Ron Olson, Walter Scott, and Meryl Witmer be elected as directors.

Are there any other nominations? Or any discussion? The nominations are ready to be acted upon. If there are any shareholders voting in person they should now mark the ballot on the election of directors and deliver that ballot to one of the meeting officials in the aisles.

Miss Amick, when you are ready you may give your report.

BECKI AMICK: My report is ready. The ballot of the proxy holders in response to proxies that were received through last Thursday evening, cast not less than 543,703 votes for each nominee. That number exceeds a majority of the number of the total votes of all Class A and Class B shares outstanding.

The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Thank you, Miss Amick. Warren Buffett, Charles Munger, Greg Abel, Howard Buffett, Steve Burke, Susan Decker, Bill Gates, David Gottesman, Charlotte Guyman, Ajit Jain, Tom Murphy, Ron Olson, Walter Scott, and Meryl Witmer have been elected as directors.

We now — we now have a motion from Walter Scott.

WALTER SCOTT: I move the meeting be adjourned.

WARREN BUFFETT: Is there a second?

RON OLSON: I second the motion.

WARREN BUFFETT: A motion to adjourn has been made and seconded. We will vote by voice. Is there any discussion? If not, all in favor say aye.

VOICES: Aye

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2019 Berkshire Hathaway Annual Meeting (Morning) Transcript

1. Welcome and Munger’s insurgency campaign

WARREN BUFFETT: Thank you.

Good morning and welcome to Berkshire Hathaway.

And for those of you who have come from out of state, welcome to Omaha. The city is delighted to have you here at this event.

And for those of you who came from outside of the country, welcome to the United States.

So, we’ve got people here from all over the world. We’ve got some overflow rooms that are taking care of people. And we will just have a few preliminaries and then we will move right into the Q&A period.

We’ll break about noon for about an hour. We’ll come back and do more Q&A until about 3:30. Then we’ll adjourn for a few minutes, and then we’ll conduct the meeting.

I understand that in the room adjacent, that Charlie has been conducting a little insurgency campaign.

I don’t know whether you’ve seen these, but these are the buttons that are available for those of you — you keep asking questions about succession. And Charlie wants to answer that question by getting your vote today. So, it says — this one says, “Maturity, experience, why accept second best? Vote for Charlie.” (Laughter)

I, however, have appointed the monitors who have — collect the votes, so I feel very secure. (Laughter)

2. Berkshire directors introduced

WARREN BUFFETT: The first thing I’d like to do — Charlie is my partner of 60 years, a director and vice chairman, and we make the big decisions jointly. It’s just that we haven’t had any big decisions. So, (laughter) we haven’t — we’re keeping him available for the next big one.

But now at the formal meeting today, we’ll elect 14 directors, and you’re looking at two of them. And I’d like to introduce the 12 that will be on the ballot at 3:45.

And I’m going to proceed alphabetically. And if they’ll stand. If you’ll withhold your applause because some of them get sensitive if certain people get more applause than others, and (Laughter) they’ll — and if you’ll withhold it till I’m finished, then you can applaud or not, as you see fit, having looked at these directors. (Laughter)

So, we’ll start on my left. Greg Abel, who’s both a chairman and a director. Greg? Yeah, oh, there we are. Right, OK. And going along alphabetically, Howard Buffett, Steve Burke, Sue Decker, Bill Gates, Sandy Gottesman— (applause) — Charlotte Guyman, Ajit Jain, who is also a vice chairman, Tom Murphy, Ron Olson, Walter Scott, and Meryl Witmer. Now you can applaud. (Applause)

3. Berkshire’s Q1: Pay attention to operating earnings

WARREN BUFFETT: Now, this morning we posted on our website the quarterly, the 10Q that’s required to be filed with the SEC. We published it at 7 o’clock Central Time. And we also published an accompanying press release.

And if we’ll put slide one up — these figures as usual require some explanation. As we’ve mentioned in the annual report, the new GAAP rule of Generally Accepted Accounting Principles require that we mark our securities to market and then report any unrealized gains in our earnings.

And you can see, I’ve warned you about the distortions from this sort of thing. And, you know, the first quarter of 2019 actually was much like the first quarter of 2018, and I hope very much that newspapers do not read headlines saying that we made $21.6 billion in the first quarter this year against a loss of last year.

These — the bottom line figures are going to be totally capricious, and what I worry about is that not everybody studied accounting in school, or they can be very smart people but that doesn’t mean that they’ve spent any real time on accounting.

And I really regard these bottom line figures, particularly if they’re emphasized in the press, as doing — as potentially being harmful to our shareholders, and really not being helpful. So, I encourage you now, and I encourage all the press that’s here, focus on what we call our operating earnings, which were up a bit. And forget about the capital gains or losses in any given period.

Now, they’re enormously important over time. We’ve had substantial capital gains in the future; we have substantial unrealized capital gains at the present time; we expect to have more capital gains in the future.

They are an important part of Berkshire, but they have absolutely no predictive value or analytical value on a quarterly basis or an annual basis. And I just hope that nobody gets misled in some quarter when stocks are down and people say, “Berkshire loses money,” or something of the sorts. It’s really a shame that the rules got changed in that way, but we will report.

But we will also explain, and we will do our best to have the press understand the importance of focusing on operating earnings, and that we do not attract shareholders who think that there’s some enormous gain because in the first quarter the stock market was up.

There’s one other footnote to these figures that I should point out. It’s already been picked up by the wires from our 7 o’clock filing.

We report on Kraft Heinz, of which we own about 27 percent or so. We report on what they call the equity method. Now, most stocks, when you get dividends, that goes into our earnings account, and their undistributed earnings don’t affect us. They affect us in a real way, but they don’t affect us in an accounting way.

We are part of a control group at Kraft Heinz, so instead of reporting dividends, we report what they call equity earnings.

Kraft Heinz has not filed their 10K for the 2018 year with the SEC. And therefore, they have not released the first quarter of 2019 earnings. Now, normally, we would include our percentage share of those earnings, and we’ve done that every quarter up till this quarter. But because we do not have those figures, we’ve just — we’ve not included anything.

We received 40 cents times — $130 million of dividends in the first quarter from our shares, but that reduces our carrying basis and it is not reflected in the earnings. So, that’s an unusual item which we have mentioned, specifically pointed out in our press release as well as included in our own.

But there is nothing in here, plus or minus, for Kraft earnings, Kraft Heinz earnings this year, whereas there was last year. And when we have the figures, obviously we will report them. Let’s see what beyond that I want to tell you.

4. Berkshire signs 20-year lease for its Omaha headquarters

WARREN BUFFETT: I think — oh yes, I’d wanted to mention to you, the Kiewit Company, which has been our landlord since 1962 — 57 years — has owned the building in which Berkshire is headquartered.

Kiewit Company is moving their headquarters and, in the process, will be doing something with the building. And they very generously, as they always have been, they came and said, “What kind of a lease would you like? Since we’re leaving, and we’ve always sort of worked these things out as we’ve gone along.” And so Bruce Grewcock, who runs Kiewit, said, “You just sort of — you name your terms and what you’d like. So, you — no matter with happens with the building, you’re all set.”

So, I was about to sign a ten-year lease for the present space, but Charlie said, “Ten years might be long enough for me but,” he said he would like me to sign one for 20 years, considering.

And — so we are entering a 20-year lease, and I confess to you that we now occupy one full floor, as we have for decades, and the new lease provides for two floors. So, I just want you to know that your management is loosening up just a little bit. (Laughter)

And whether or not we fill them is another question. But we will have that, and I would like to say to Omaha that I think the fact that Berkshire has signed up for 20 years is very good news for the city over time. It — (Applause) OK.

5. Berkshire employees pitch in for annual meeting

WARREN BUFFETT: And now I would like to tell you something about the people that make all of this possible. This is totally a — this is a homegrown operation.

We started with a few people, meeting in the lunchroom at National Indemnity many years ago. And I think we will probably set another record for attendance today. Yesterday afternoon, 16,200 people came in five hours, and that broke the previous record by a couple thousand.

On Tuesday, the Nebraska Furniture Mart did $9.3 million worth of business. And if any of you are in the retail business, you’ll know that that’s the yearly volume for some furniture stores, and here in Omaha, the 50th or so largest market in the country, maybe even a little less, $9.3 billion (million) I think probably exceeds anything any home furnishing store’s ever done in one day.

And we have people pitching, and we have all the people, virtually all of the people from the home office, some of them, you know, are — they’ll take on any task. We have a bunch of people from National Indemnity, for example, that come over, and they’ve been some of the monitors around.

And in terms of the exhibit hall, more than 600 people from our various subsidiaries give up a weekend to come to Omaha, work very hard, and tomorrow, 4:00 or 4:30, or I should say today at 4:00 or 4:30, they will start packing up things and heading back home. And they come in, and I saw them all yesterday, and they were a bunch of very, very happy, smiling faces. And, you know, they work hard all year, and then they come in and help us out on this meeting.

And then, finally, if we could get a spotlight, I think Melissa Shapiro is someplace here — she runs the whole show. I mean, we — Melissa, where are you? (Applause)

Melissa’s name was Melissa Shapiro before she got married, then she married a guy named Shapiro, so now she’s Melissa Shapiro Shapiro. So — (Laughter) but she can handle that sort of thing. She handles everything, and never — totally unflappable. Totally organized. Everything gets done. Everybody likes her when they get through. So, I — it’s marvelous to get a chance to work with people like this.

I think it’s a special quality that — at Berkshire. I think other people would hire some group to put on the meeting and all be very professional and all of that. But I don’t think you can get — I don’t think you can buy the enthusiasm and energy and help-the-next-guy feeling that you’ve seen out on that exhibition floor, and you’ll see as you meet people here at the hall, and as you meet the people around Omaha. They’re very, very happy that you’re here.

6. Q&A Begins

WARREN BUFFETT: And with that, I would like to start on the questions. We’ll do it just as we’ve done it in recent years. We’ll start with the press group. They’ve received emails from a great many people — perhaps they can tell you how many — and selected the questions they think would be most useful to the Berkshire shareholders.

Yahoo is webcasting this as they’ve done for several years now, they’ve done a terrific job for us.

So, this meeting is going out, both in English and in Mandarin, and I hope our results translate well, or our — (laughs) our comments translate well. Sometimes we have trouble with English. But we’re going to — we’ll start in with Carol Loomis, my friend of 50 years, but you’ll never know it by the questions she’s going to ask me. (Laughter)

CAROL LOOMIS: I’m going to start, very briefly — this is for the benefit of people who send us questions next year. There are kind of two things that you get wrong a lot of the time. You can’t send two-part questions or three-part, et cetera. We need a one-part question. And the other thing is the questions all need to have some relevance to Berkshire, because Warren said when he started it that his hope was that shareholders would come out of the questions with a further education about the company. So, keep those in mind for next year.

7. Munger: “I predict we’ll get a little more liberal in repurchasing shares”

CAROL LOOMIS (RETIRED FORTUNE MAGAZINE EDITOR): Many people — a number of people — wrote me about repurchases of stock. And, hence, the question I picked for my first one.

The question, this particular question comes from Ward Cookie (PH), who lives in Belgium and who was still emailing me this morning in reference to the first quarter report.

And he asked, “My question concerns your repurchase of Berkshire shares. In the third quarter of last year, you spent almost 1 billion buying Berkshire B stock at an average price of $207.

“But then you got to a period between December 26th and April 11th when the stock languished for almost four months under 207. And yet, you purchased what I think of as a very limited amount of stock, even as you were sitting on an enormous pile of 112 billion.

“My question is why you did not repurchase a lot more stock? Unless, of course, there was for a time an acquisition of, say, 80 billion to 90 billion on your radar.”

WARREN BUFFETT: Yeah, the question — whether we had 100 billion or 200 billion would not make a difference — or 50 billion — would not make a difference in our approach to repurchase of shares.

We repurchase shares — we used to have a policy of tying it to book value. But that became — really became obsolete. It did not —

The real thing is to buy stock — repurchase shares — only when you think you’re doing it at a price where the remaining shareholders have had — are worth more the moment after you repurchased it than they were the moment before.

It’s very much like if you were running a partnership and you had three partners in it and the business was worth 3 million, and one of the partners came and said, “I’d like you to buy back my share of the partnership for a billion” — I started out with millions, so I’ll stay with millions — “for $1.1 million?” And we said, “Forget it.” And if he said, “1 million?” we’d probably say, “Forget it,” unless — and if he said, “900,000,” we’d take it because, at that point, the remaining business would be worth 2-million-1, and we’d have two owners, and our interest in value would have gone from a million to a million and fifty-thousand.

So, it’s very simple arithmetic. Most companies adopt repurchase programs and they just say, “We’re going to spend so much.” That’s like saying, you know, “We’re going to buy XYZ stock, and we’re going to spend so much here.” “We’re going to buy a company.” “We’re going to spend whatever it takes.”

We will buy stock when we think it is selling below a conservative estimate of its intrinsic value. Now, the intrinsic value is not a specific point, it’s probably a range in my mind that might have a band maybe of 10 percent. Charlie would have a band in his mind, and it would probably be 10 percent. And ours would not be identical, but they’d be very close. And sometimes he might figure a bit higher than I do, a bit lower.

But we want to be sure, when we repurchase shares, that those people who have not sold shares are better off than they were before we repurchased them. And it’s very simple.

And in the first quarter of the year, they’ll find we bought something over a billion worth of stock, and that’s nothing like my ambitions. But it — what that means is that we feel that we’re OK buying it, but we don’t salivate over buying it.

We think that the shares we repurchased in the first quarter leave the shareholders better off than if we hadn’t — the remaining shareholders — better off than if we hadn’t bought it. But we don’t think the difference is dramatic.

And you will — you could easily see periods where we would spend very substantial sums if we thought the stock was selling at, say, 25 or 30 percent less than it was worth, and we didn’t have something else that was even better.

But we have no ambition in any given quarter to spend a dime unless we think you’re going to be better off for us having done so. Charlie?

CHARLIE MUNGER: Well, I predict that we’ll get a little more liberal in repurchasing shares. (Laughter)

WARREN BUFFETT: I was going to give you equal time, but then — (Laughter)

8. BNSF may adopt “precision-scheduled railroading”

WARREN BUFFETT: OK, Jon Brandt.

JONATHAN BRANDT (RESEARCH ANALYST, RUANE, CUNNIFF & GOLDFARB): Hi, Warren and Charlie. Thanks for having me, as always.

Every major North American railroad other than Burlington Northern has adopted at least some aspects of precision-scheduled railroading, generally to good effect to their bottom line.

Some believe that point-to-point schedule service and minimal in-transit switching is good for both returns on capital and customer service.

Others believe precision railroading has done little for on-time performance, and its rigidity has jeopardized the compact that railroads have had with both regulators and customers.

Do you and current BNSF management believe that it’s now a good idea for BNSF to adopt precision railroading playbook? Or do you agree with its critics?

WARREN BUFFETT: Yeah, precision railroading, as it’s labeled, was probably invented by a fellow named Hunter Harrison. I think maybe he was at the Illinois Central Railroad at the time; there’s a book that came out about Hunter, who died maybe a year ago or thereabouts. And it describes the — his procedure toward railroading. It’s an interesting read if you’re interested in railroading.

And he took that to Canadian National, CN. There are six big railroads in North America, and he took that to CN, and he was very successful.

And actually, Bill Gates is probably the largest holder of CN, and I think he’s done very well with that stock.

And then later, Canadian Pacific was the subject of an activist, and when they — as they proceeded, they got Hunter to join them and brought in an associate, Keith Creel, who — and they instituted a somewhat similar program. Now the same thing has happened at CSX.

And all of those companies dramatically improved their profit margins, and they had varying degrees of difficulty with customer service in the implementing of it.

But I would say that we watch very carefully — Union Pacific is doing a somewhat modified version. But the — we are not above copying anything that is successful. And I think that there’s been a good deal that’s been learned by watching these four railroads, and we will — if we think we can serve our customers well and get more efficient in the process, we will adopt whatever we observe.

But we don’t have to do it today or tomorrow, but we do have to find something that gets at least equal, and hopefully better, customer satisfaction and that makes our railroad more efficient. And there’s been growing evidence that — from the actions of these other four railroads — there’s been growing evidence that we can learn something from what they do. Charlie?

CHARLIE MUNGER: Well, I doubt that anybody is very interested in un-precision in railroading. (Laughter)

WARREN BUFFETT: Well, Jonny, has Charlie answered your question? (Laughter)

JONATHAN BRANDT: Yes, thank you.

9. BNSF trying to improve energy efficiency

WARREN BUFFETT: OK. Station number 1, from the shareholder group up on my far right.

AUDIENCE MEMBER: Good morning. My name is Bill Moyer and I’m from Vashon Island, Washington. And I’m part of a team called “The Solutionary Rail Project.”

Interestingly, only 3.5 percent of the value of freight in the U.S. moves on trains. Berkshire Hathaway is incredibly well positioned with its investments in the northern and southern trans-con through BNSF to grab far more of that freight traffic off of the roads and get diesel out of our communities, as well as harness transmission corridors for your Berkshire renewable energy assets, for which you’re obviously very proud.

Would you consider meeting with us to look at a proposal for utilizing your assets and leveraging a public/private partnership to electrify your railroads and open those corridors for a renewable energy future?

WARREN BUFFETT: No, I — we’ve examined a lot of things in terms of LNG. I mean, they’re — obviously, we want to become more energy efficient, as well as just generally efficient.

And I’m not sure about the value of freight. You mentioned 3 1/2 percent. I believe — I mean, I’m not sure what figure you’re using as the denominator there.

Because if you look at movement of traffic by ton miles, rails are around 40 percent of the U.S. — we’re not talking local deliveries or all kinds of things like that — but they’re 40 percent, roughly, by rail.

And BNSF moves more ton miles than any other entity. We move 15 percent-plus of all the ton miles moved in the United States.

But if you take trucking, for example, on intermodal freight, we’re extremely competitive on the longer hauls, but the shorter the haul, the more likely it is that the flexibility of freight, where a truck can go anyplace and we have rails. So, the equation changes depending on distance hauled and other factors, but distance hauled is a huge factor.

We can move a ton mile 500 — we can move 500-plus ton miles of freight for one gallon of diesel. And that is far more efficient than trucks.

So, the long-haul traffic, and the heavy traffic, is going to go to the rails, and we try to improve our part of the equation on that all the time.

But if you’re going to transport something ten or 20 or 30 miles between a shipper and a receiver, and they’re — you’re not going to move that by rail.

So, we look at things all the time, I can assure you.

Carl Ice is in — well, he’s probably here now, and he’ll be in the other room — and he’s running the railroad. You’re free to talk to him, but I don’t see any breakthrough like you’re talking about. I do see us getting more efficient year-by-year-by-year.

And obviously, if driverless trucks become part of the equation, that moves things toward trucking. But on long-haul, heavy stuff, and there’s a lot of it, you’re looking at the railroad that carries more than any other mode of transportation. And BNSF is the leader. Charlie?

CHARLIE MUNGER: Well, over the long term, our questioner is on the side of the angels. Sooner or later, we’ll have it more electrified. I think Greg (Abel) will decide when it happens.

WARREN BUFFETT: Yeah. But we’re all working on the technology but —

And we’re considerably more efficient than ten, 20, 30 years ago, if you look at the numbers. But it —

One interesting figure, I think right after World War II, when the country probably had about 140 million people against our 330 million now, so we had 40 percent of the population. We had over a million-and-a-half people employed in the railroad industry. Now there’s less than 200,000 and we’re carrying a whole lot more freight.

Now, obviously there’s some change in passengers. But the efficiency of the railroads compared to — and the safety — compared to what it was even immediately after World War II has improved dramatically. Charlie, anything more?

CHARLIE MUNGER: No.

10. Bank CEOS who make bad mistakes should lose all their net worth

WARREN BUFFETT: OK, Becky?

BECKY QUICK (CNBC): This is a question that comes from Mike Hebel. He says, “The Star Performers Investment Club has 30 partners, all of whom are active or retired San Francisco police officers. Several of our members have worked in the fraud detail, and have often commented after the years-long fraudulent behavior of Wells Fargo employees, should have warranted jail sentences for several dozen, yet Wells just pays civil penalties and changes management.

“As proud shareholders of Berkshire, we cannot understand Mr. Buffett’s relative silence compared to his vigorous public pronouncement many years ago on Salomon’s misbehavior. Why so quiet?”

WARREN BUFFETT: Yeah, I would say this. The — (applause) — problem, well, as I see it — although, you know, I have read no reports internally or anything like that — but it looks like to me like Wells made some big mistakes in what they incentivized. And as Charlie says, there’s nothing like incentives, but they can incentivize the wrong behavior. And I’ve seen that a lot of places. And that clearly existed at Wells.

The interesting thing is, to the extent that they set up fake accounts, a couple million of them, that had no balance in them, that could not possibly have been profitable to Wells. So, you can incentivize some crazy things.

The problem is — I’m sure is that — and I don’t really have any inside information on it at all — but when you find a problem, you have to do something about it. And I think that’s where they probably made a mistake at Wells Fargo.

They made it at Salomon. I mean, John Gutfreund would never have played around with the government. He was the CEO of Salomon in 1991. He never would have done what the bond trader did that played around with the rules that the federal government had about government bond bidding.

But when he heard about it, he didn’t immediately notify the Federal Reserve. And he heard about it in late April, and May 15th, the government bond auction came along. And Paul Mozer did the same thing he’d done before, and gamed the auction.

And at this point, John Gutfreund — you know, the destiny of Salomon was straight downhill from that point forward. Because, essentially, he heard about a pyromaniac, and he let him keep the box of matches.

And at Wells, my understanding, there was an article in The Los Angeles Times maybe a couple years before the whole thing was exposed, and, you know, somebody ignored that article.

And Charlie has beaten me over the head all the years at Berkshire because we have 390,000 employees, and I will guarantee you that some of them are doing things that are wrong right now. There’s no way to have a city of 390,000 people and not need a policeman or a court system. And some people don’t follow the rules. And you can incentivize the wrong behavior. You’ve got to do something about it when it happens.

Wells has become, you know, exhibit one in recent years. But if you go back a few years, you know, you can almost go down — there’s quite a list of banks where people behaved badly. And where they — I would not say — I don’t know the specifics at Wells — but I’ve actually written in the annual report that they talk about moral hazard if they pay a lot of people.

The shareholders of Wells have paid a price. The shareholders of Citicorp paid a price. The shareholders of Goldman Sachs, the shareholders of Bank of America, they paid billions and billions of dollars, and they didn’t commit the acts. And of course, nobody did go — there were no jail sentences. And that is infuriating.

But the lesson that was taught was not that the government bailed you out because the government got its money back, but the shareholders of the various banks paid many, many billions of dollars.

And I don’t have any advice for anybody running a business except, when you find out something is leading to bad results or bad behavior, you know, you — if you’re in the top job, you’ve got to take action fast.

And that’s why we have hotlines. That’s why we get — when we get certain anonymous letters, we turn them over to the audit committee or to outside investigators.

And we will have — I will guarantee you that we will have some people who do things that are wrong at Berkshire in the next year or five years, ten years, and 50 years. It’s — you cannot have 390,000 people — and it’s the one thing that always worries me about my job, but — because I’ve got to hear about those things, and I’ve got to do something about them when I do hear about them. Charlie?

CHARLIE MUNGER: Well, I don’t think people ought to go to jail for honest errors of judgment. It’s bad enough to lose your job. And I don’t think that any of those top officers was deliberately malevolent in any way. I just — we’re talking about honest errors in judgment.

And I don’t think (former Wells Fargo CEO) Tim Sloan even committed honest errors of his judgment, I just think he was an accidental casualty that deserve the trouble. I wish Tim Sloan was still there.

WARREN BUFFETT: Yeah, there’s no evidence that he did a thing. But he stepped up to take a job that — where he was going to be a piñata, basically, for all kinds of investigations.

And rightfully, Wells should be checked out on everything they do. All banks should. I mean, they get a government guarantee and they receive trillions of dollars in deposits. And they do that basically because of the FDIC. And if they abuse that, they should pay a price.

If anybody does anything like a Paul Mozier did, for example, with Salomon, they ought to go to jail. Paul Mozier only went to jail for four months. But if you’re breaking laws, you should be prosecuted on it.

If you do a lot of dumb things, I wish they wouldn’t go away — the CEOs wouldn’t go away — so rich under those circumstances. But people will do dumb things. (Applause)

I actually proposed — think it may have been in one of the annual reports even. I proposed that, if a bank gets to where it needs government assistance, that basically the responsible CEO should lose his net worth and his spouse’s net worth. If he doesn’t want the job under those circumstances, you know (Applause)

And I think that the directors — I think they should come after the directors for the last five years — I think I proposed — of everything they’d received.

But it’s the shareholders who pay. I mean, if we own 9 percent of Wells, whatever this has cost, 9 percent of it is being borne by us. And it’s very hard to tie it directly.

One thing you should know, incidentally though, is that the FDIC, which was started — I think it was started January 1st, 1934 — but it was a New Deal proposal.

And the FDIC has not cost the United States government a penny. It now has about $100 billion in it. And that money has all been put in there by the banks. And that’s covered all the losses of the hundreds and hundreds and hundreds of financial institutions.

And I think the impression is that the government guarantee saved the banks, but the government money did not save the banks. The banks’ money, as an industry, not only has paid every loss, but they’ve accumulated an extra $100 billion, and that’s the reason the FDIC. assessments now are going back down. They had them at a high level. And they had a higher level for the very big banks.

When you hear all the talk about — the political talk — about the banks, they had not cost the federal government a penny. There were a lot of actions that took place that should not have taken place. And there’s a lot fewer now, I think, than there were in the period leading up to 2008 and ’09. But some banks will make big mistakes in the future. Charlie?

CHARLIE MUNGER: I’ve got nothing to add to that.

11. “We will spend a lot of money” on buybacks if price is right

WARREN BUFFETT: OK. Jay Gelb from Barclays. Barclays just had a proxy contest of sorts, didn’t it?

JAY GELB (INSURANCE ANALYST, BARCLAYS): That’s right, Warren. (Laughs)

I also have a question on Berkshire Hathaway — I’m sorry — on share buybacks.

Warren, in a recent Financial Times article, you were quoted as saying that the time may come when the company buys back as much as $100 billion of its shares, which equates to around 20 percent of Berkshire’s current market cap. How did you arrive at that $100 billion figure? And over what time frame would you expect this to occur?

WARREN BUFFETT: Yeah. I probably arrived at that $100 billion figure in about three seconds when I got asked the question. (Laughter)

It was a nice round figure and we could do it. And we would like to do it if the stock was — we’ve got the money to buy in $100 billion worth of stock.

And bear in mind, if we’re buying in $100 billion stock, it probably would be that the company wasn’t selling at 500 billion. So, it might buy well over 20 percent.

We will spend a lot of money. We’ve been involved in companies where the number of shares has been reduced 70 or 80 percent over time. And we like the idea of buying shares at a discount.

We do feel, if shareholders — if we’re going to be repurchasing shares from shareholders who are partners, and we think it’s cheap, we ought to be very sure that they have the facts available to evaluate what they own.

I mean, just as if we had a partnership, it would not be good if there were three partners and two of them decided that they would sort of freeze out the third, maybe in terms of giving him material information that they knew that that third party didn’t know.

So, it’s very important that our disclosure be the same sort of disclosure that I would give to my sisters who are the imaginary — they’re not imaginary — but they’re the shareholders to whom I address the annual report every year.

Because I do feel that you, if you’re going to sell your stock, should have the same information that’s important, that’s available to me and to Charlie.

But we will — if our stock gets cheap, relative to intrinsic value, we would not hesitate.

We wouldn’t be able to buy that much in a very short period of time, in all likelihood. But we would certainly be willing to spend $100 billion. Charlie?

CHARLIE MUNGER: I think when it gets really obvious, we’ll be very good at it. (Laughter)

WARREN BUFFETT: Let me get that straight. What’d you say, exactly?

CHARLIE MUNGER: When it gets really obvious, we’ll be very good at it.

WARREN BUFFETT: Oh, yeah. I was hoping that’s what you said. (Laughter)

Yeah, we will be good at it. We don’t have any trouble being decisive. We don’t say yes very often. But if it’s something obvious — I mean, Jay, if you and I are partners, you know, and our business is worth a million dollars and you say you’ll sell your half to me for 300,000, you’ll have your 300,000 very quickly.

12. Buying one share in an oil-rich duck hunting club

WARREN BUFFETT: OK, station two.

AUDIENCE MEMBER: Good morning. My name is Patrick Donahue from Eden Prairie, Minnesota, and I’m with my ten-year-old daughter, Brooke Donahue.

AUDIENCE MEMBER: Hi, Warren. Hi, Charlie.

WARREN BUFFETT: Hi. It’s Brooke, is it?

AUDIENCE MEMBER: It is.

WARREN BUFFETT: Yeah.

AUDIENCE MEMBER: First, I’m a proud graduate of Creighton University. And I need to say a personal thank you for coming over the years to share your insights. And it’s been a tradition since I graduated in 1999 to come to the annual meeting, and thank you for a lifetime of memories.

WARREN BUFFETT: Thank you. (Applause)

AUDIENCE MEMBER: Brooke is a proud Berkshire shareholder and read the letter and had some questions regarding investments that have been made in the past. And she had made some interesting comments about what she thought was a lot of fun.

So, our question for both of you is: outside of Berkshire Hathaway, what is the most interesting or fun personal investment you have ever made? (Laughter)

WARREN BUFFETT: Well, they’re always more fun when you make a lot of money off of them. (Laughter)

Well, one time, I bought one share of stock in the Atled Corp. That’s spelled A-T-L-E-D. And Atled had 98 shares outstanding and I bought one. And not what you call a liquid security. (Laughter)

And Atled happened to be the word “delta” spelled backwards. And a hundred guys in St. Louis had each chipped in 50 or $100 or something to form a duck club in Louisiana and they bought some land down there.

Two guys didn’t come up with their — there were a hundred of them — two of them defaulted on their obligation to come up with a hundred dollars — so there were 98 shares out. And they went down to Louisiana and they shot some ducks.

But apparently somebody shot — fired a few shots into the ground and oil spurted out. And — (laughter) — those Delta duck club shares — and I think the Delta duck club field is still producing. I bought stock in it 40 years ago for $29,200 a share.

And it had that amount in cash and it was producing a lot, and they sold it. If they kept it, that stock might’ve been worth 2 or $3 million a share, but they sold out to another oil company.

That was certainly — that was the most interesting —

Actually, I didn’t have any cash at the time. And I went down and borrowed the money. I bought it for my wife. And I borrowed the money. And the loan officer said, “Would you like to borrow some money to buy a shotgun as well?” (Laughter)

Charlie, tell them about the one you missed. (Laughter)

CHARLIE MUNGER: Well, I got two investments that come to mind. When I was young and poor, I spent a thousand dollars once buying an oil royalty that paid me 100,000 a year for a great many years. But I only did that once in a lifetime.

On a later occasion, I bought a few shares of Belridge Oil, which went up 30 times rather quickly. But I turned down five times as much as I bought. It was the dumbest decision of my whole life. So, if any of you have made any dumb decisions, look up here and feel good about yourselves. (Laughter)

WARREN BUFFETT: I could add a few, but — Andrew?

13. Buffett speaks for himself on politics, not for Berkshire

ANDREW ROSS SORKIN (NEW YORK TIMES/CNBC): Warren and Charlie, this is a question — actually, we got a handful of questions on this topic. This is probably the best formulation of it.

Warren, you have been a long-time, outspoken Democrat. With all the talk about socialism versus capitalism taking place among Democratic presidential candidates, do you anticipate an impact on Berkshire in the form of more regulations, higher corporate taxes, or even calls for breakups among the many companies we own if they were to win?

And how do you think about your own politics as a fiduciary of our company, and at the same time, as someone who has said that simply being a business leader doesn’t mean you’ve put your citizenship in a blind trust?

WARREN BUFFETT: Yeah. I have said that you do not put your citizenship in a blind trust. But you also don’t speak on behalf of your company. You do speak as a citizen if you speak. And therefore, you have to be careful about when you do speak, because it’s going to be assumed you’re speaking on behalf of your company.

Berkshire Hathaway certainly, in 54 years, has never — and will never — made a contribution to a presidential candidate. I don’t think we’ve made a contribution to any political candidate. But I don’t want to say, for 54 years, that — (Applause)

We don’t do it now. We operate in several regulated industries. And our railroad and our utility, as a practical matter, they have to have a presence in Washington or in the state legislatures in which they operate.

So, we have some — a few — I don’t know how many — political action committees which existed when we bought it — when we bought the companies at subsidiaries.

And I think, unquestionably, they make some contributions simply to achieve the same access as their competitors. I mean, if the trucking industry is going to lobby, I’m sure the railroad industry’s going to lobby.

But — the general — well, the rule is, I mean, that people do not pursue their own political interests with your money here.

We’ve had one or two managers over the years, for example, that would do some fundraising where they were fundraising from people who were suppliers of them or something of the sort. And if I ever find out about it, that ends promptly.

My position, at Berkshire, is not to be used to further my own political beliefs. But my own political beliefs can be expressed as a person, not as a representative of Berkshire, when a campaign is important.

I try to minimize it. But it’s no secret that in the last election, for example, I raised money.

I won’t give money to PACs. I accidentally did it one time. I didn’t know it was a PAC. But I don’t do it.

But I’ve raised substantial sums. I don’t like the way money is used in politics. I’ve written op-ed pieces for the New York Times in the past on the influence of money in politics.

I spent some time with John McCain many years ago before McCain-Feingold, on ways to try to limit it. But the world has developed in a different way.

14. Buffett: “I’m a card-carrying capitalist” but some regulations are needed

WARREN BUFFETT: On your question about the — I will just say I’m a card-carrying capitalist. (Applause)

But I — and I believe we wouldn’t be sitting here except for the market system and the rule of law and some things that are embodied in this country. So, you don’t have to worry about me changing in that manner.

But I also think that capitalism does involve regulation. It involves taking care of people who are left behind, particularly when the country gets enormously prosperous. But beyond that, I have no Berkshire podium for pushing anything. Charlie?

CHARLIE MUNGER: Well, I think we’re all in favor of some kind of a government social safety net in a country as prosperous as ours.

What a lot of us don’t like is the vast stupidity with which parts of that social safety net are managed by the government. It’d be much better if — (applause) — we could do it more wisely. But I think it also might be better if we did it more liberally.

WARREN BUFFETT: Yeah, one of the reasons we’re involved in this effort along with J.P. Morgan and Amazon — with (J.P. Morgan CEO) Jamie Dimon and (Amazon CEO) Jeff Bezos — on the medical question, is we do have as much money going — 3.3 or 3.4 trillion — we have as much money going to medical care as we have funding the federal government.

And it’s gone from 5 to 17 percent — or 18 percent — while actually the amount going to the federal government has stayed about the same at 17 percent.

So, we hope there’s some major improvements from the private sector because I generally think the private sector does a better job than the public sector in most things.

But I also think that if the private sector doesn’t do something, you’ll get a different sort of answer. And I’d like to think that the private sector can come up with a better answer than the public sector in that respect.

I will probably — it depends who’s nominated — but I voted for plenty of Republicans over the years. I even ran for delegate to the Republican National Convention in 1960. But — we are not —

I don’t think the country will go into socialism in 2020 or in 2040 or 2060.

15. We don’t try to push Berkshire stock higher or lower

WARREN BUFFETT: OK, Gregg Warren.

GREGG WARREN (FINANCIAL SERVICES ANALYST, MORNINGSTAR RESEARCH SERVICES): Warren, my first question, not surprisingly, is on share repurchases.

Stock buybacks in the open market are a function of both willing buyers and sellers. With Berkshire having two shares of classes, you should have more flexibility when buying back stock. But given the liquidity difference that exists between the two share classes — with an average of 313 Class A shares exchanging hands daily the past five years, equivalent to around $77 million a day, and an average of 3.7 million Class B shares doing the same, equivalent to around 622 million — Berkshire’s likely to have more opportunities to buy back Class B shares than Class A, which is exactly what we saw during the back half of last year and the first quarter of 2019.

While it might be more ideal for Berkshire to buy back Class A shares, allowing you to retire shares with far greater voting rights, given that there’s relatively little arbitrage between the two share classes and the number of Class B shares increase every year as you gift your Class A shares to the Bill and Melinda Gates Foundation and your children’s foundations, can we assume that you’re likely to be a far greater repurchaser of Class B shares, going forward, especially given your recent comments to the Financial Times about preferring to have loyal individuals on your shareholder list, which a price tag of $328,000 of Class A shares seems to engender?

WARREN BUFFETT: Yeah, we will - when we’re repurchasing shares, if we’re purchasing substantial amounts, we’re going to spend a lot more on the Class B than the Class A, just because the trading volume is considerably higher.

We may, from time to time — well, we got offered a couple blocks in history, going back in history from the Yoshi (PH) estate and when we had a transaction exchanging our Washington Post stock for both a television station and shares held — A shares — held by the Washington Post.

So, we may see some blocks of A. We may see some blocks of B. But there’s no question. If we are able to spend 25, 50, or a hundred billion dollars in repurchasing shares, more of the money is almost certainly going to be spent on the B than the A.

There’s no master plan on that other than to buy aggressively when we like the price. And as I say, the trading volume in the B is just a lot higher than the A in dollar amounts. Charlie?

CHARLIE MUNGER: I don’t think we care much which class we buy.

WARREN BUFFETT: Yeah. (Laughter)

We would like — we really want the stock — ideally, if we could do it if we were small — once a year we’d have a price and, you know, we’d do it like a private company. And it would be a fair price and people who want to get out could get out. And if other people wanted to buy their interest, fine. And if they didn’t, and we thought the price was fair, we’d have the company repurchase it.

We can’t do that. But that’s — we don’t want the stock to be either significantly underpriced or significantly overpriced. And we’re probably unique on the overpriced part of it. But we don’t want it.

I do not want the stock selling at twice what’s it worth because I’m going to disappoint people, you know. I mean, we can’t make it — there’s no magic formula to make a stock worth what it’s selling for, if it sells for way too much.

From a commercial standpoint, if it’s selling very cheap, we have to like it when we repurchase it.

But ideally, we would hope the stock would sell in a range that more or less is its intrinsic business value. We have no desire to hype it in any way. And we have no desire to depress it so we can repurchase it cheap. But the nature of markets is that things get overpriced and they get underpriced. And we will — if it’s underpriced, we’ll take advantage of it.

16. We welcome change, but we won’t always adapt to it

WARREN BUFFETT: OK, station 3.

AUDIENCE MEMBER: Hello Charlie Munger and Warren Buffett, (unintelligible). I am Terry (PH) from Shanghai (unintelligible), which aims to catch the best investment opportunities in that era.

So, my question is, as we all know, 5G is coming. It is said that the mode of all industry will be challenged in 5G era. So, what is the core competence that we should master, if (unintelligible) wants to catch the best investment opportunities in this era? Thank you.

WARREN BUFFETT: Well, there’s no core competence at the very top of Berkshire. (Laughter)

The subsidiaries that will be involved in developments relating to 5G, or any one of all kinds of things that are going to happen in this world, you know, the utility of LNG in the railroad, or all those kinds of questions, we have people in those businesses that know a lot more about them than we do.

And we count on our managers to anticipate what is coming in their business. And sometimes they talk to us about it. But we do not run that on a centralized basis.

And Charlie, do you want to have anything to add to that?

Do you know anything about 5G I don’t know? Well, you probably know a lot about 5G.

CHARLIE MUNGER: No, I know very little about 5G.

But I do know a little about China. And we have bought things in China. And my guess is we’ll buy more. (Laughter)

WARREN BUFFETT: Yeah. But I mean, we basically want to have a group of managers, and we do have a group of managers, who are on top of their businesses.

I mean, you saw something that showed BNSF and Berkshire Hathaway Energy and Lubrizol all aware of that. Those people know their businesses. They know what changes are likely to be had.

Sometimes, they find things that they can cooperate on between their businesses. But we don’t try to run those from headquarters.

And that may mean — that may have certain weaknesses at certain times. I think, net, it’s been a terrific benefit for Berkshire.

Our managers, to a great degree, own their businesses. And we want them to feel a sense of ownership. We don’t want them to be lost in some massive conglomerate, where they get directions from this group, which is a subgroup of that group.

And I could tell you a few horror stories from companies we bought, when they tell us about their experience under such an operation.

The world is going to change in dramatic ways. Just think how much it’s changed in the 54 years that we’ve had Berkshire. And some of those changes hurt us.

They hurt us in textiles. They hurt us in shoes. They hurt us in the department store business. Hurt us in the trading stamp business. These were the founding businesses of this operation. But we do adjust. And we’ve got a group, overall, of very good businesses.

We’ve got some that will be, actually, destroyed by what happens in this world. But that’s — I still am the card-carrying capitalist. And I believe that that’s a good thing, but you have to make changes.

We had 80 percent of the people working on farms in 1800. And if there hadn’t been a lot of changes, and you needed 80 percent of the people in the country producing the food and cotton we needed, we would have a whole different society.

So, we welcome change. And we certainly want to have managers that can anticipate and adapt to it. But sometimes, we’ll be wrong. And those businesses will wither and die. And we’d better use the money someplace else. Charlie? OK, Carol.

Charlie, you haven’t had any peanut brittle lately, you know. (Laughs)

17. Kraft Heinz is a good business, but we paid too much

CAROL LOOMIS: This question comes from Vincent James of Munich, Germany. “There has been a lot written about the recent impairment charge at Kraft Heinz. You were quoted as stating that you recognize that Berkshire overpaid for Kraft Heinz. Clearly, major retail chains are being more aggressive in developing house brands.

“In addition, Amazon has announced intentions to launch grocery outlets, being that, as Mr. Bezos has often stated, ‘Your margin is my opportunity.’ The more-fundamental question related to Kraft Heinz may be whether the advantages of the large brands and zero-based budgeting that 3G has applied are appropriate and defensible at all in consumer foods.

“In other words, will traditional consumer good brands, in general, and Kraft Heinz, in particular, have any moat in their future? My question is, to what extent do the changing dynamics in the consumer food market change your view on the long-term potential for Kraft Heinz?”

WARREN BUFFETT: Yeah, actually, what I said was, we paid too much for Heinz — I mean Kraft — I’m sorry — the Heinz part of the transaction, when we originally owned about half of Heinz, we paid an appropriate price there. And we actually did well. We had some preferred redeemed and so on.

We paid too much money for Kraft. To some extent, our own actions had driven up the prices.

Now, Kraft Heinz, the profits of that business, 6 billion — we’ll say very, very, very roughly, I’m not making forecasts — but 6 billion pretax on 7 billion of tangible assets, is a wonderful business. But you can pay too much for a wonderful business.

We bought See’s Candy. And we made a great purchase, as it turned out. And we could’ve paid more. But there’s some price at which we could’ve bought even See’s Candy, and it wouldn’t have worked. So, the business does not know how much you paid for it.

I mean, it’s going to earn based on its fundamentals. And we paid too much for the Kraft side of Kraft Heinz.

Additionally, the profitability has basically been improved in those operations over the way they were operating before.

But you’re quite correct that Amazon itself has become a brand. Kirkland, at Costco, is a $39 billion brand. All of Kraft Heinz is $26 billion. And it’s been around for — on the Heinz side — it’s been around for 150 years. And it’s been advertised — billions and billions and billions of dollars, in terms of their products. And they go through tens of thousands of outlets.

And here’s somebody like Costco, establishes a brand called Kirkland. And it’s doing 39 billion, more than virtually any food company. And that brand moves from product to product, which is terrific, if a brand travels. I mean, Coca Cola moves it from Coke to Cherry Coke and Coke Zero and so on.

But to have a brand that can really move — and Kirkland does more business than Coca Cola does. And Kirkland operates through 775 or so stores. They call them warehouses at Costco. And Coca Cola is through millions of distribution outlets.

So, brands — the retailer and the brands have always struggled as to who gets the upper hand in moving a product to the consumers.

And there’s no question, in my mind, that the position of the retailer, relative to the brands, which varies enormously around the world. In different countries, you’ve had 35 percent, even, maybe 40 percent, be private-label brands in soft drinks. And it’s never gotten anywhere close to that in the United States. So, it varies a lot.

But basically, retailers — certain retailers — the retail system — has gained some power. And particularly in the case of Amazon and Walmart and their reaction to it, and Costco — and Aldi and some others I can name — has gained in power relative to brands.

Kraft Heinz is still doing very well, operationally. But we paid too much. If we paid 50 billion, you know, it would’ve been a different business. It’d still be earning the same amount.

You can turn any investment into a bad deal by paying too much. What you can’t do is turn any investment into a good deal by paying little, which is sort of how I started out in this world.

But the idea of buying the cigar butts that are declining or poor businesses for a bargain price is not something that we try to do anymore. We try to buy good businesses at a decent price. And we made a mistake on the Kraft part of Kraft Heinz. Charlie?

CHARLIE MUNGER: Well, it’s not a tragedy that, out of two transactions, one worked wonderfully, and the other didn’t work so well. That happens.

WARREN BUFFETT: The reduction of costs, you know — there can always be mistakes made, when you’ve got places, and you’re reorganizing them to do more business with the same number of people.

And we like buying businesses that are efficient to start with. But the management — the operations — of Kraft Heinz have been improved over the present management overall. But we paid a very high price, in terms of the Kraft part. We paid an appropriate price, in terms of Heinz.

18. Internet competition for Berkshire’s furniture retailers

WARREN BUFFETT: Jonathan?

JONATHAN BRANDT: Internet-based furniture retailers, like Wayfair, appear willing to stomach large current losses acquiring customers in the hope of converting them to loyal online shoppers.

I’ve been wondering what this disruptive competition might do to our earnings from home-furnishing retail operations like Nebraska Furniture Mart.

If we have to transition to more of an online model, might we have to spend more heavily to keep shoppers without a corresponding increase in sales? The sharp decline in first-quarter earnings from home furnishings suggest, perhaps, some widening impact from intensifying competition.

Do you believe Wayfair’s customers first, profits later model is unsustainable? Or do you think our furniture earnings will likely be permanently lower than they were in the past?

WARREN BUFFETT: I think furnishings — the jury’s still out on that, whether the operations which have grown very rapidly in size but still are incurring losses, how they will do over time.

It is true that in the present market, partly because of some successes, like, most dramatically, Amazon, in the past, that investors are willing to look at losses as long as sales are increasing, and hope that there will be better days ahead.

We do a quite significant percentage of our sales online in the furniture operation. That might surprise you. We do the highest percentage in Omaha.

And what’s interesting is that we — I won’t give you the exact numbers, but it’s large — we do a significant dollar volume, but a very significant portion of that volume, people come to the store to pick up, so that they will order something from us online, but they don’t seem to mind at all — and they don’t have to do it — but they get a pick up at the store.

So, you know, you learn what customers like, just like people learned in fast food, you know, that people would buy a lot of food by going through a drive-in, that they don’t want to stop and go into the place. We learn about customer behavior as it unfolds.

But we did do, now — on Tuesday, we did 9.2 million of — or 9.3 million of profitable volume at the Nebraska Furniture Mart. And I think that company had paid-in capital of $2,500. And I don’t think anything’s been added since. So, it’s working so far.

The first quarter — It’s interesting — the first quarter was weak at all four of our furniture operations.

But there are certain other parts of the economy — well, just home building, generally — it’s considerably below what you would’ve expected, considering the recovery we have had from the 2008-9 period. I mean, if you look at single-family home construction, the model has shifted more to people living in apartment rentals.

I think it’s gone from 69-and-a-fraction percent. It got down to 63 percent. It’s bounced up a little bit. But people are just not building — or moving to houses as rapidly as I would have guessed they would have, based on figures prior to 2008 and ’09, and considering the recovery we’ve had, and considering the fact that money is so cheap. And that has some effect on our furniture stores.

But I think we’ve got a very good furniture operation, not only with the Nebraska Furniture Mart, but at other furniture operations. And we will see whether the models work over the long run.

But I think, you know, they have a reasonable chance. Some things people — we’re learning that people will buy some things that they’ve always gone to the mall or to a retail outlet to buy, that they will do it online. And others don’t work so well. Charlie?

CHARLIE MUNGER: I think that we’ll do better than most furniture retailers.

WARREN BUFFETT: I think that’s a certainty overall, overall. But we’ve got some good operations there.

But we don’t want to become a showroom for the online operations and have people come and look around the place and then order someplace else. So, we have to have the right prices. And we’re good at that at the Furniture Mart.

19. Pension funds should avoid “alternative” investments

WARREN BUFFETT: Station 4.

AUDIENCE MEMBER: Warren and Charlie, my name is Brent Muio. I’m from Winnipeg, Canada.

First, thank you for devoting so much time and energy to education. I’m a better investor because of your efforts. But more important, I’m a better partner, friend, son, brother, and soon-to-be first-time father.

There’s nothing more important than these relationships. And my life is better, because you’re willing to pass on your experience and wisdom.

My path into finance was unconventional. I worked as an engineer for 12 years, while two years ago, I began a career in finance, working for the Civil Service Superannuation Board, a $7 billion public pension fund in Winnipeg.

I work on alternative investments, which include infrastructure, private equity, and private credit. I go to work every day knowing that I’m there to benefit the hardworking current and future beneficiaries of the fund.

Like most asset classes, alternative purchase multiples have increased. More of these assets are funded with borrowed money. And the terms and covenants on this debt are essentially nonexistent.

With this in mind and knowing the constraints of illiquid, closed-end funds, please give me your thoughts on private, alternative investments, the relevancy in public pension funds, and your view on long-term return expectations.

WARREN BUFFETT: Yeah, if you leveraged up investments in just common stocks, and you’d figured a way so that you would have staying power, if there were any market dip, I mean, you’d obviously retain extraordinary returns.

I pointed out, in my investing lifetime, you know, if an index fund would do 11 percent, well, imagine how well you would’ve done if you’d leveraged that up 50 percent whatever the prevailing rates were over time.

So, a leveraged investment in a business is going to beat an unleveraged investment in a good business a good bit of the time. But as you point out, the covenants to protect debtholders have really deteriorated in the business. And of course, you’ve been in an upmarket for businesses. And you’ve got a period of low interest rates. So, it’s been a very good time for it.

My personal opinion is, if you take unleveraged returns against unleveraged common stocks, I do not think what is being purchased today and marketed today would work well.

But if you can borrow money, if you can buy assets that will yield 7 or 8 percent, you can borrow enough money at 4 percent or 5 percent, and you don’t have any covenants to meet, you’re going to have some bankruptcies. But you’re going to also have better results in many cases.

It’s not something that interests us at all. We are not going to leverage up Berkshire. If we’d leveraged up Berkshire, we’d have made a whole lot more money, obviously, over the years.

But both Charlie and I, probably, have seen some more high-IQ people — really extraordinarily high-IQ people — destroyed by leverage. We saw Long-Term Capital Management, where we had people who could do in their sleep math that we couldn’t do, at least I couldn’t do, you know, working full time at it during the day and, I mean, really, really smart people working with their own money and with years and years of experience of what they were doing.

And you know, it all turned to pumpkins and mice in 1998. And actually, it was a source of national concern, just a few hundred people. And then we saw some of those same people, after that happened to them once, go on and do the same thing again.

So, I would not get excited about so-called alternative investments. You can get all kinds of different figures. But there may be — there’s probably at least a trillion dollars committed to buying, in effect, buying businesses. And if you figure they’re going to leverage them, you know, two for one on that, you may have 3 trillion of buying power trying to buy businesses in — well, the U.S. market may be something over 30 trillion now — but there’s all kinds of businesses that aren’t for sale and that thing.

So, the supply-demand situation for buying businesses privately and leveraging them up has changed dramatically from what it was ten or 20 years ago.

And I’m sure it doesn’t happen with your Winnipeg operation, but we have seen a number of proposals from private equity funds, where the returns are really not calculated in a manner than — well, they’re not calculated in a manner that I would regard as honest.

And so I — it’s not something — if I were running a pension fund, I would be very careful about what was being offered to me.

If you have a choice in Wall Street between being a great analyst or being a great salesperson, salesperson is the way to make it.

If you can raise $10 billion in a fund, and you get a 1 1/2 percent fee, and you lock people up for ten years, you know, you and your children and your grandchildren will never have to do a thing, if you are the dumbest investor in the world. But —

Charlie?

CHARLIE MUNGER: Well, I think what we’re doing will work more safely than what he’s doing. And — but I wish him well.

WARREN BUFFETT: Yeah, Brent, you sound — actually, you sound like a guy that I would hope would be working for a public pension fund. Because frankly, most of the institutional funds, you know — well, we had this terrible — right here in Omaha — you can get a story of what happened with our Omaha Public Schools’ retirement fund. And they were doing fine until the manager started going in a different direction. And the trustees here — perfectly decent people — and the manager had done OK to that point, and —

CHARLIE MUNGER: Yeah, but they are smarter in Winnipeg than they are here.

WARREN BUFFETT: Yeah. Well — (Laughter)

CHARLIE MUNGER: That was pretty bad here.

WARREN BUFFETT: It’s not a fair fight, actually, usually, when a bunch of public officials are listening to people who are motivated to really just get paid for raising the money. Everything else is gravy after that.

But if you run a fund, and you get even 1 percent of a billion, you’re getting $10 million a year coming in. And if you’ve got the money locked up for a long time, it’s a very one-sided deal.

And you know, I’ve told the story of asking the guy one time, in the past, “How in the world can you — why in the world can you ask for 2-and-20 when you really haven’t got any kind of evidence that you are going to do better with the money than you do in an index fund?” And he said, “Well, that’s because I can’t get 3-and-30,” you know. (Laughter)

CHARLIE MUNGER: What I don’t like about a lot of the pension fund investments is I think they like it because they don’t have to mark it down as much as it should be in the middle of the panics. I think that’s a silly reason to buy something. Because you’re given leniency in marking it down.

WARREN BUFFETT: Yeah. And when you commit the money — in the case of private equity often — you — they don’t take the money, but you pay a fee on the money that you’ve committed.

And of course, you really have to have that money to come up with at any time. And of course, it makes their return look better, if you sit there for a long time in Treasury bills, which you have to hold, because they can call you up and demand the money, and they don’t count that.

They count it in terms of getting a fee on it. But they don’t count it in terms of what the so-called internal rate of return is. It’s not as good as it looks. And I really do think that when you have a group sitting as a state pension fund —

CHARLIE MUNGER: Warren, all they’re doing is lying a little bit to make the money come in.

WARREN BUFFETT: Yeah. Yeah, well, that sums it up. (Laughter)

20. Amazon buy doesn’t mean portfolio managers aren’t “value” investors

WARREN BUFFETT: Becky?

BECKY QUICK: This question is from Ken Skarbeck in Indianapolis. He says, “With the full understanding that Warren had no input on the Amazon purchase, and that, relative to Berkshire, it’s likely a small stake, the investment still caught me off guard.

“I’m wondering if I should begin to think differently about Berkshire looking out, say, 20 years. Might we be seeing a shift in investment philosophy away from value-investing principles that the current management has practiced for 70 years?

“Amazon is a great company. Yet, it would seem its heady shares ten years into a bull market appear to conflict with being fearful when others are greedy. Considering this and other recent investments, like StoneCo, should we be preparing for change in the price-versus-value decisions that built Berkshire?”

WARREN BUFFETT: Yeah. It’s interesting that the term “value investing” came up. Because I can assure you that both managers who — and one of them bought some Amazon stock in the last quarter, which will get reported in another week or ten days — he is a value investor.

The idea that value is somehow connected to book value or low price/earnings ratios or anything — as Charlie has said, all investing is value investing. I mean, you’re putting out some money now to get more later on. And you’re making a calculation as to the probabilities of getting that money and when you’ll get it and what interest rates will be in between.

And all the same calculation goes into it, whether you’re buying some bank at 70 percent of book value, or you’re buying Amazon at some very high multiple of reported earnings.

Amazon — the people making the decision on Amazon are absolutely as much value investors as I was when I was looking around for all these things selling below working capital, years ago. So, that has not changed.

The two people — one of whom made the investment in Amazon — they are looking at many hundreds of securities. And they can look at more than I can, because they’re managing less money. And their universe — possible universes — is greater.

But they are looking for things that they feel they understand what will be developed by that business between now and Judgement Day, in cash.

And it’s not — current sales can make some difference. Current profit margins can make some difference. Tangible assets, excess cash, excess debt, all of those things go into making a calculation as to whether they should buy A versus B versus C.

And they are absolutely following value principles. They don’t necessarily agree with each other or agree with me. But they are very smart. They are totally committed to Berkshire. And they’re very good human beings, on top of it.

So, I don’t second guess them on anything. Charlie doesn’t second guess me. In 60 years, he’s never second guessed me on an investment.

And the considerations are identical when you buy Amazon versus some, say, bank stock that looks cheap, statistically, against book value or earnings or something of the sort.

In the end, it all goes back to Aesop, who, in 600 B.C., said, you know, that a bird in the hand is worth two in the bush.

And when we buy Amazon, we try and figure out whether the — the fellow that bought it — tries to figure out whether there’s three or four or five in the bush and how long it’ll take to get to the bush, how certain he is that he’s going to get to the bush, you know, and then who else is going to come and try and take the bush away and all of that sort of thing. And we do the same thing.

And it really, despite a lot of equations you learn in business school, the basic equation is that of Aesop. And your success in investing depends on how well you were able to figure out how certain that bush is, how far away it is, and what the worst case is, instead of two birds being there, and only one being there, and the possibilities of four or five or ten or 20 being there.

And that will guide me. That will guide my successors in investment management at Berkshire. And I think they’ll be right more often than they’re wrong. Charlie?

CHARLIE MUNGER: Well I — Warren and I are a little older than some people, and —

WARREN BUFFETT: Damn near everybody. (Laughs)

CHARLIE MUNGER: And we’re not the most flexible, probably, in the whole world. And of course, if something as extreme as this internet development happens, and you don’t catch it, why, other people are going to blow by you.

And I don’t mind not having caught Amazon early. The guy is kind of a miracle worker. It’s very peculiar. I give myself a pass on that.

But I feel like a horse’s ass for not identifying Google better. I think Warren feels the same way.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: We screwed up.

WARREN BUFFETT: He’s saying we blew it. (Laughter)

And we did have some insights into that, because we were using them at GEICO, and we were seeing the results produced. And we saw that we were paying $10 a click, or whatever it might’ve been, for something that had a marginal cost to them of exactly zero. And we saw it was working for us. So —

CHARLIE MUNGER: We could see in our own operations how well that Google advertising was working. And we just sat there sucking our thumbs. (Laughter)

So, we’re ashamed. We’re trying to atone. (Laughter)

Maybe Apple was atonement. (Laughter)

WARREN BUFFETT: When he says, “Sucking our thumbs,” I’m just glad he didn’t use some other example. (Laughter)

21. Buffett: Berkshire insurance businesses are worth more than you think

WARREN BUFFETT: OK, Jay?

JAY GELB: This question is on Berkshire’s intrinsic value. Warren, in your most-recent annual letter, you discussed a methodology to estimate Berkshire’s intrinsic value. However, a major component of Berkshire’s value that many investors find challenging to estimate is that of the company’s vast and unique insurance business.

Could you discuss how you value the company’s insurance unit, based on information Berkshire provides, especially since GAAP book value is not disclosed, of the insurance unit?

WARREN BUFFETT: Well, our insurance business gives us a float that’s other people’s money, which we’re temporarily holding, but which gets regenerated all the time, so as a practical matter, it has a very, very long life. And it’s probably a little more likely to grow than shrink.

So, we have $124 billion that people have given us. And that’s somewhat like having a bank that just consists of one guy. And people come in and deposit $124 billion and promise not to withdraw it forever.

And we’ve got a very good insurance business. It’s taken a very long time to develop it, very long time. In fact, I think we probably have the best property-casualty operation, all things considered, in the world, that I know of, of any size. So, it’s worth a lot of money.

It’s probably — we think it’s worth more to us, and we particularly think it’s worth more while lodged inside Berkshire. We’d have a very, very high value on that. I don’t want to give you an exact number, because I don’t know the exact number. And any number I would have given you in the past would’ve turned out to be wrong, on the low side.

We have managed to earn money on money that was given to us for nothing and have (inaudible) earnings from underwriting and then have these large earnings from investing. And it’s an integral part of Berkshire.

There’s a certain irony to insurance that most people don’t think about. But if you really are prepared, and you have a diversified property-casualty insurance business — a lot of property business in it — if you’re really prepared to pay your claims under any circumstances that come along in the next hundred years, you have to have so much capital in the business that it’s not a very good business.

And if you really think about a worst-case situation, the reinsurance — that’s insurance you buy from other people, as an insurance company, to protect you against the extreme losses, among other things — that reinsurance probably — could likely be — not good at all.

So, even though you’d think you’re laying off part of the risk, if you really take the worst-case examples, you may well not be laying off the risk. And if you keep the capital required to protect against that worst-case example, you’ll have so much capital in the business that it isn’t worthwhile.

Berkshire is really the ideal form for writing the business. Because we have this massive amount of assets that, in many cases, are largely uncorrelated with natural disasters. And we can — we don’t need to buy reinsurance from anybody else. And we can use the money in a more efficient way than most insurance companies.

It’s interesting. The three — In the last 30 years, the three largest reinsurance companies — and I’m counting Lloyd’s as one company — although it isn’t — it’s a group of brokers assembled in — underwriters assembled at a given location. But people think of Lloyd’s as a massive reinsurance market, which it is, not technically one entity. But if you take the three largest companies — and they’re all in fine shape now, they’re first-class operations — but all three of them came close to extinction sometime in the last 30 years, or reasonably close.

And we didn’t really have any truly extraordinary natural catastrophes. The worst we had was Katrina in, whatever it was, 2006 or thereabouts, 2005. But we didn’t have any worst-case situation. And all three of those companies, which everybody looks at as totally good on the asset side, if you show a recoverable from them, two of the three actually made some deals with us to help them in some way. And they’re all in fine shape now.

But it’s really not a good business if you keep your — as a standalone insurer — if you keep enough capital to really be sure you can pay anything that comes along, under any kind of conditions.

And Berkshire can do that. And it can use the money in ways that it likes to use.

So, it’s a very valuable asset. I don’t want to give you a figure on it. But we would not sell it. We certainly wouldn’t want to sell it for its float value. And that float is shown on the balance sheet as a liability. So, it’s extraordinary.

And it’s taken a long time to build. It’d be very, very, very hard for anybody to — I don’t think they could build anything like it. It just takes so long.

And we continue to plow new ground. If you went in the next room, you would’ve seen something called “THREE,” which is our movement toward small and medium business owners for commercial insurance. And there’s an online operation.

And it will take all kind — we’ll do all kinds of mid-course adjusting and that sort of thing — and we’ve only just started up in four states.

But we’ll, you know — ten or 20 years from now, that will be a significant asset of Berkshire, just like Geico has grown from two and a fraction billion of premium to, you know, who knows, but well into the mid-30 billion, just with Tony Nicely. And when I said, in the annual report, that Tony Nicely, who’s here today —

CHARLIE MUNGER: Warren, is there anybody in the world who has a big casualty insurance business that you’d trade our business for theirs?

WARREN BUFFETT: Yeah, oh, no, it’s taken a long time. And it’s taken some tremendous people. And Tony Nicely has created more than 50 billion — with his associates, and he’s got 39,000 of them, probably more now, because he’s growing this year — he’s created more than $50 billion at GEICO — of value — for Berkshire. (Applause)

CHARLIE MUNGER: It’s pretty much what you’d expect. It’s such an easy business, taking in money now in cash and just keeping the books and giving a little of it back.

There’s a lot of stupidity that gets into it. And if you’re not way better than average at it, you’re going to lose money in the end. It’s a mediocre business for most people. And it’s good at Berkshire only because we’re a lot better at it. And if we ever stop being a lot better at it, it wouldn’t be safe for us, either.

WARREN BUFFETT: And Ajit Jain has done a similar thing. He’s done it in a variety of ways within the insurance business. But I would not want to undo — somebody would have to give me more than $50 billion to undo everything he has produced for Berkshire.

And he walked into my office on a Saturday in the mid-1980s. He’d never been in the insurance business before. And I don’t think there’s anybody in the insurance world that doesn’t wish that he’d walked into their office instead of ours, at Berkshire. It’s been extraordinary. It’s truly been extraordinary.

But we have Tom Nerney. We have Tim Kenesey at MedPro. We have Tom Nerney at U.S. Lability.

We have — at GUARD Insurance — we only bought that a few years ago, and that’s a terrific operation. It’s based in Wilkes-Barre, Pennsylvania. Who would expect to find a great insurance operation in Wilkes-Barre?

But we’ve got a great insurance — really great — insurance operation right here in Omaha, about two miles from here. And it was bought by us in 1967. And you know, it changed Berkshire. We built on that base.

We’ve got a — we really got a great insurance business. And I won’t give you a number, but it’s probably a bigger number than you’ve got in your head for — and it’s worth more within Berkshire than it would be worth as an independent operation.

Somebody can say, “Well, this little gem, if it was put out there, would sell at a higher multiple,” or something of the sort. It works much better as being part of a whole, where we have had two tiny operations — two tiny insurance operations — many, many years ago. And they both went broke. The underwriting was bad. But we paid all the claims. We did not walk away. We paid every dime of claims.

And nobody worries about doing any kind of financial transaction with Berkshire. And you know that today — on Saturday — about 9 in the morning, I got a phone call. And we made a deal the next day committing Berkshire to pay out $10 billion, come hell or high water, no outs for, you know, material adverse change or anything like that. And people know we’ll be there with $10 billion.

And they know, in the insurance business, when we write a policy that may come — be payable during the worst catastrophe in history, or may be payable 50 years from now, they know Berkshire will pay. And that’s why we’ve got $124 billion of float.

22. “Don’t go overboard on delayed gratification”

WARREN BUFFETT: OK, station 5.

AUDIENCE MEMBER: Hey, Warren and Charlie. I’m Neel Noronha. I’m 13 years old and from San Francisco.

I feel like I see you in our living room a lot. My dad is constantly playing these videos of you at these meetings. And he teaches me a lot of lessons about you guys. But many of them require the delayed gratification skill. (Laughter)

I want to know, is there any way that kids can develop the delayed gratification skill? (Laughter and applause)

CHARLIE MUNGER: I’ll take it, if you want me to, Warren.

WARREN BUFFETT: Go to it.

CHARLIE MUNGER: I’ll take that, because I’m a specialist in delayed gratification. I’ve had a lot of time to delay it. (Laughter)

And my answer is that they sort of come out of the womb with the delayed gratification thing, or they come out of the womb where they have to have everything right now. And I’ve never been able to change them at all. So, we identify it. We don’t train it in.

WARREN BUFFETT: Charlie’s had eight children, so he’s become more and more of a believer in nature versus nurture. (Laughter)

CHARLIE MUNGER: You’ll probably see some nice, old woman of about 95 out there, in threadbare clothing. And she’s delaying gratification right to the end and probably has 4,000 A shares. (Laughter)

It’s just these second- and third-generation types that are buying all the jewelry.

WARREN BUFFETT: It’s interesting. If you think about — we’ll take it to a broader point. But if you think of a 30-year government bond paying 3 percent, and you allow for, as an individual, paying some taxes on the 3 percent you’ll receive, and you’ll have the Federal Reserve Board saying that their objective is to have 2 percent inflation, you’ll really see that delayed gratification, if you own a long government bond, is that, you know, you get to go to Disneyland and ride the same number of rides 30 years from now that you would if you did it now.

The low interest rates, for people who invest in fixed-dollar investments, really mean that you really aren’t going to eat steak later on if you eat hamburgers now, which is what I used to preach to my wife and children and anybody else that would listen, many years ago. (Laughs)

So, it’s — I don’t necessarily think that, for all families, in all circumstances, that saving money is necessarily the best thing to do in life. I mean, you know, if you really tell your kids they can —whatever it may be — they never go to the movies, or we’ll never go to Disneyland or something of the sort, because if I save this money, 30 years from now, you know, well, we’ll be able to stay a week instead of two days.

I think there’s a lot to be said for doing things that bring you and your family enjoyment, rather than trying to save every dime.

So, I — delayed gratification is not necessarily an unqualified course of action under all circumstances. I always believed in spending two or three cents out of every dollar I earn and saving the rest. (Laughter)

But I’ve always had everything I wanted. I mean, one thing you should understand, if you aren’t happy having $50,000 or a hundred-thousand dollars, you’re not going to be happy if you have 50 million or a hundred million.

I mean, a certain amount of money does make you feel — and those around you — feel better, just in terms of being more secure, in some cases.

But loads and loads of money — I probably know as many rich people as just about anybody. And I do not — I don’t think they’re happier because they get super rich. I think they are happier when they don’t have to worry about money.

But you don’t see a correlation between happiness and money, beyond a certain place. So, don’t go overboard on delayed gratification. (Applause)

23. Munger on succession: “You’re just going to have to endure us”

WARREN BUFFETT: Andrew?

ANDREW ROSS SORKIN: This question comes from a shareholder of yours for more than 20 years, who asked to remain anonymous, but wanted me to start by saying, “Warren and Charlie, I want to preface this question by saying it comes from a place of love for both of you and the beautiful painting you’ve drawn for us in the form of Berkshire.”

WARREN BUFFETT: But. (Laughter)

ANDREW ROSS SORKIN: “Now, please update us on succession planning. And as you think about succession, would you ever consider having Greg (Abel) and Ajit (Jain) join you onstage at future annual meetings and allow us to ask questions of them and Ted and Todd, as well, so we can get a better sense of their thinking?”

WARREN BUFFETT: That’s probably a pretty good idea. And we’ve talked about it. (Applause)

We have Greg and Ajit here. And any questions that anybody wants to direct to them, it’s very easy to move them over.

So, we thought about having four of us up here. And this format is not set in stone at all.

Because you — I can tell you that, actually, the truth is, Charlie and I are afraid of looking bad. Those guys are better than we are. (Laughs)

You could not have two better operating managers than Greg and Ajit. I mean, they are — it is just fantastic, what they accomplished.

They know the businesses better. They work harder, by far. And you are absolutely invited to ask questions to be directed over to them at this meeting. I don’t think —

Yeah, this format will not be around forever. And if it’s better to get them up on the stage, we’ll be happy to do it.

Ted (Weschler) and Todd (Combs), they’re basically not going to answer investment questions. We regard investment decisions as proprietary, basically. They belong to Berkshire. And we are not an investment advisory organization. So, that is counter to the interests of Berkshire for them to be talking about securities they own. It’s counter to the interests of Berkshire for Charlie or me to be doing it.

We’ve done better because we don’t publish every day what we’re buying and selling. I mean, if somebody’s working on a new product at Apple, or somebody’s working on a new drug or they’re assembling property or something of the sort, they do not go out and tell everybody in the world exactly what they’re doing every day.

And we’re trying to generate ideas in investment. And we do not believe in telling the world what we’re doing every day, except to the extent that we’re legally required. But it’s a good idea. Charlie?

CHARLIE MUNGER: Well, one of the reasons we have trouble with these questions is because Berkshire is so very peculiar. There’s only one thing like it.

We have a different kind of unbureaucratic way of making decisions. There aren’t any people in headquarters. We don’t have endless committees deliberating forever and making bad decisions. We just — we’re radically different. And it’s awkward being so different. But I don’t want to be like everybody else, because this has worked better. So, I think you’re just going to have to endure us. (Laughter and applause)

WARREN BUFFETT: We do think that it’s a huge corporate asset, which may only surface very occasionally and depending very much on how the world is around us. But to be the one place, I think, in the world, almost, where somebody can call on a Saturday morning and meet on Sunday morning and have a $10 billion commitment.

And nobody in the world doubts whether that commitment will be upheld. And it’s not subject to any kind of welching on the part of the company that’s doing it. It’s got nothing involved over than Berkshire’s word. And that’s an asset that, every now and then, will be worth a lot of money to Berkshire. And I don’t really think it will be subject to competition.

So — and Ted and Todd, in particular, are an additional pipeline, and have proven to be an additional pipeline, in terms of facilitating the exercise of that ability. I mean they — things come in through them that, for one reason or another, I might not hear about otherwise.

So, they have expanded our universe. In the markets we’ve had in recent years, that hasn’t been important. I can see periods where they would be enormously valuable. Just take the question that was raised by the fellow from Winnipeg about weak covenants and bonds.

I mean, we could have a situation — who knows when, who knows where, or who knows whether — but we could have a situation where there could be massive defaults in the junk-bond-type market. We’ve had those a couple times. And we made a fair amount of money off of them.

But Ted and Todd would multiply our effectiveness in a big way, if such a period comes along, or some other types of periods come along. They are very, very, very useful to Berkshire.

The call happened to come in on Friday from Brian Moynihan, CEO of Bank of America. And he’s done an incredible job. But we have a better chance of getting more calls and having them properly filtered and everything — appropriately filtered — the next time conditions get chaotic than we did last time. And that’s important.

Charlie?

CHARLIE MUNGER: Well, I do think it’s true that if the world goes to hell in a hand basket, that you people will be in the right company. We’ve got a lot of cash and we know how to behave well in a panic. And if the world doesn’t go to hell, are things so bad now?

24. Munger invited to happy hour by the bitcoin people

CHARLIE MUNGER: And I also want to report that your vice chairman is getting new social distinction.

I’ve been invited during this gathering to go to a happy hour put on by the bitcoin people. (Laughter)

And I’ve tried to figure out what the bitcoin people do in their happy hour, and I finally figured it out. They celebrate the life and work of Judas Iscariot. (Laughter)

CHARLIE MUNGER: Is your invitation still good? (Laughter)

WARREN BUFFETT: Bitcoin — actually — on my honeymoon in 1952, my bride, 19, and I, 21 — stopped in Las Vegas. We just got in — my aunt Alice gave me the car and said, “Have a good time,” and we went west.

So, we stopped in the Flamingo, and I looked around, and I saw all of these well-dressed — they dressed better in those days — well-dressed people who had come, in some cases, from thousands of miles away. And this was before jets, so transportation wasn’t as good.

And they came to do something that every damn one of them knew was mathematically dumb. And I told Susie, I said, “We are going to make a lot of money.” (Laughter)

I mean, imagine people going to stick money on some roulette number with a zero and a double-zero there and knowing the percent. They all could do it, and they — they just do it. And I have to say, bitcoin has rejuvenated that feeling in me. (Laughter)

25. Berkshire will probably increase stakes above 10% if regulations are eased

WARREN BUFFETT: OK, Gregg?

GREGG WARREN: Warren and Charlie. While I understand Berkshire’s need to trim its stake in Wells Fargo and any other banks you hold, each year, in order to bring Berkshire’s ownership stake below the 10 percent threshold required by the Federal Reserve for bank holdings, given the ongoing share repurchase activity that’s taking place in the industry.

I was kind of surprised, though, to see you move to trim all of your holdings, where possible, on a regular basis to eliminate the regulatory requirements that come with ownership levels above 10 percent, which in my view limits the investment universe that Berkshire, or at least Warren, can meaningfully invest in longer term, given that Warren manages a large chunk of Berkshire’s $200 billion equity portfolio.

Could you elaborate more on the regulatory impact for Berkshire of holding more than 10 percent of any company’s stock, as well as how you feel about the Fed’s recent proposal to allow investors like Berkshire to own up to 25 percent shares of a bank without triggering more restrictive rules and oversight?

Basically, if that proposal were to come to fruition, would you be willing to forego that 10 percent threshold self-imposed that you’ve done, and put money to work in names that you’re already fairly comfortable with?

WARREN BUFFETT: Yeah, the 10 percent, there’s a couple reasons —

CHARLIE MUNGER: That’s the right answer. Yeah. (Laughter)

WARREN BUFFETT: We will — there’s two factors beyond in the case of banks. There’s the Federal Reserve requirement there. But many people probably don’t even — might not know about this, but if you own over 10 percent of a security — common stock — and you sell it within six months at a profit, you give the money over to the company, the short-swing profit that you give them.

And you match your — any sale against your lowest purchase. And I think if you sell it and then buy it within six months — I’m not as positive about that, because I haven’t reread the rule for a lot of years. But I think if you sell and then buy within six months, and the purchase is below the price at which you made the sale, you owe the money to the company.

There used to be lawyers that would scan that monthly SEC report that I used to get 30 or 40 years ago. They would scan it to find people that inadvertently had broken that rule, and they would get paid a fee for recovering it for the company.

So, it restricts enormous — it restricts significantly your ability to reverse a position or change your mind or something of the sort.

Secondly, I think you have to report within two or three business days every purchase you make once you’re in that over 10 percent factor. So, you’re advertising to the world, but the world tends to follow us some, so it really — it has a huge execution cost attached to it.

Nevertheless — and those are both significant minuses, and they’re both things that people generally don’t think about.

We did go over recently, for example, in Delta Airlines, that was actually an accident, but I don’t mind the fact at all that we did.

And if the Federal Reserve changes its approach, we won’t have to trim down below that. We don’t want to become a bank holding company and we don’t want to —

We went in many years ago and got permission with Wells, but then our permission expired, and we went in again a few — a couple years ago. And we spent a year or so, and there were just a million questions that Wells got asked about us and so on.

So, it’s been a deterrent. It’ll be less of a deterrent in the future, but it does have those two —

The short-swing thing is less onerous to us than it would be to most people who buy and sell stocks, because we don’t really think in terms of doing much.

CHARLIE MUNGER: But if we didn’t have all these damn rules, we would cheerfully buy more, wouldn’t we?

WARREN BUFFETT: Sure, sure. Well, any time we buy we do it cheerfully, but —

Yeah. And we will — you’ll probably see us at more than 10 percent in more things. And if the Fed should change its rules, there will be companies where we drift up over 10 percent simply because they’re repurchasing their shares. That’s been the case with Wells, and it’s been the case with an airline or two in the last year or so.

So, if we like 9.5 percent of a company, we’d like 15 percent better, and you may see us behave a little differently on that in the future.

CHARLIE MUNGER: Well, one more awkward disadvantage of being extremely rich.

WARREN BUFFETT: Yeah. (Laughter)

And it really is. Yeah, and people following you. I mean, the followers problem can be a real problem.

26. Money managers need to set expectations for their investors

WARREN BUFFETT: OK, station 6.

AUDIENCE MEMBER: Hi. I’m Jeff Malloy (PH) from San Francisco. And this is my first shareholders meeting.

Mr. Buffett and Mr. Munger, I’m 27 years old and aspire to be a great money manager like you two one day.

I’m considering starting my own investment fund, but I also recognize that I am young and have a lot to learn. My question to both of you is, how did you know you were ready to manage other people’s money? And what general advice would you give to someone in my shoes? Thank you.

WARREN BUFFETT: Well, that’s a very interesting question, because I’ve faced that. And I sold securities for a while, but in May of 1956, I had a number of members of my family — I’d come back from New York, and they wanted me to help them out with stocks as I had earlier before I’d taken a job in New York. And I said, I did not want to get in the stock sales business, but I wanted to — I enjoyed investing. I was glad to figure out a way to do it, which I did through a partnership form.

But I would not have done that, if I thought there was any chance, really, that I would lose the money.

And what I was worried about was not how I would behave, but how they would behave, because I needed people who were in sync with me. So, when we sat down for dinner in May of 1956 with seven people who either were related to me, or one was a roommate in college and his mother.

And I showed them the partnership agreement, and I said, “You don’t need to read this.” You know, there’s no way that I’m doing anything in the agreement that is any way that — you know, you don’t need a lawyer to read it or anything of the sort.

But I said, “Here are the ground rules as to what I think I can do and how I want to be judged, and if you’re in sync with me, I want to manage your money, because I won’t worry about the fact that you will panic if the market goes down or somebody tells you to do something different. So, we have to be on the same page.”

“And if we’re on the same page, then I’m not worried about managing your money. And if we aren’t on the same page, I don’t want to manage your money, because you may be disappointed when I think that things are even better to be investing and so on.”

So, I don’t you want to manage other people’s money until you have a vehicle and can reach the kind of people that will be in sync with you. I think you ought to have your own ground rules as to what your expectations are, when they should you roses and when they should throw bricks at you.

And you want to be on the same — and that’s one reason I never — we didn’t have a single institution in the partnership, because institutions meant committees, and committees meant that —

CHARLIE MUNGER: You had some aunts that trusted you.

WARREN BUFFETT: What’s that?

CHARLIE MUNGER: You had some aunts who trusted you.

WARREN BUFFETT: Yeah, well, and a father-in-law who gave me everything he had in the world, you know. And I didn’t mind taking everything he had in the world, as long as he would stick with me and wouldn’t get panicked by headlines and that sort of thing.

And so, it’s enormously important that you don’t take people that have expectations of you that you can’t meet. And that means you turn down a lot of people. It means you probably start very small, and you get an audited record.

And when you’ve got the confidence, where if your own parents came to you and they were going to give you all their money, and you were going to invest for them, I think that’s the kind of confidence that you’ll say, “I may not get the best record, but I’ll be sure that you get a decent record over time,” that’s when you’re ready to go on the —

CHARLIE MUNGER: Let me tell you story that I tell young lawyers who frequently come to me and say, “How can I quit practicing law and become a billionaire instead?” (Laughter)

So, I say, well, it reminds me of a story they tell about Mozart. A young man came to him, and he said, “I want to compose symphonies. I want to talk to you about that.”

And Mozart said, “How old are you?” And the man said, “Twenty-two.” And Mozart said, “You’re too young to do symphonies.” And the guy says, “But you were writing symphonies when you were ten years old.” He says, “Yes, but I wasn’t running around asking other people how to do it.” (Laughter)

WARREN BUFFETT: Carol?

We wish you well. (Laughter)

And we, and actually, we really do, because the fact you asked that sort of a question is to some extent indicative of the fact you got the right attitude going in.

CHARLIE MUNGER: It isn’t that easy to be a great investor. I don’t think we’d have made it.

27. Berkshire doesn’t have to disclose most foreign stock holdings, so it doesn’t

CAROL LOOMIS: This question is from Franz Traumburger (PH) of Austria and his son, Leon, who are both Berkshire shareholders. And it’s interesting to me that in the years we’ve been doing this, nobody has ever asked this question, as far as I know.

Their question is, “Mr. Buffett, I believe it is correct that in its SEC filings — that is the Securities and Exchange Commission — Berkshire does not have to give information about foreign stocks it holds.

“Assuming we hold foreign stocks, could you please tell us what our five largest positions are?”

WARREN BUFFETT: No, the fellow wants investment information. We really aren’t in the investment information business. We disclose what we have to disclose, but we could set up an investment advisory firm and probably take in a lot of money, but we haven’t done it. And we aren’t giving away what belongs to our shareholders for nothing.

But he’s correct that — I’m 99 percent sure he’s correct, and Marc Hamburg can correct me from our office — but we do not have to report foreign stocks.

And we do have — in certain important countries, there’s lower thresholds at which we have to report our holdings, as a percentage of the company stock outstanding — there’s lower thresholds than there are in the United States.

So, in a sense — in certain stocks. I think when we bought Munich Re stock or bought Tesco stock, or there are certain stocks we’ve had to report at — before we would have had to report in the United States.

But we will never unnecessarily advise if we plan to buy some land some place, if we plan to develop a business — we are not about giving business information that’s proprietary to Berkshire. We don’t give it unless we’re required by law.

And he is correct that, I’m virtually certain that we do not have to report our foreign stocks on the SEC filings. And he’ll have to find his own holdings in Austria.

But I think this Mozart story may have encouraged that particular question from Austria, what stocks we’re going to own in Austria. OK, Charlie, do you have any comments on that?

CHARLIE MUNGER: No.

WARREN BUFFETT: No, I didn’t think you would. (Laughs)

28. Buffett expects Precision Castparts earnings will “improve fairly significantly”

WARREN BUFFETT: Jonny?

JONATHAN BRANDT: Precision Castparts’ pre-tax profit margins, while perfectly fine relative to American industry as a whole, continue to be almost 10 percentage points below where they were in the years preceding the acquisition. And I’m guessing they’re lower than contemplated when the purchase price was determined.

The annual report hints that unplanned shutdowns, the learning curve on new plane models, and a shift of oil and gas capacity to aerospace, might all be temporarily depressing margins. But it’s unclear what a reasonable, long-term margin expectation is for this unit.

Now, I know you won’t want to issue a specific margin target or forecast, but I do have a question that I hope you can answer.

Is the downward trend in earning since 2015 mostly due to these transitory items, or have the competitive structure of the industry and Precision’s relationship with its customers changed to the point that meaningful increases from current margin levels are probably unlikely?

WARREN BUFFETT: Yeah. Your prelude is quite correct. I mean, they are below what we projected a few years ago. And my expectation — but I would have told you this a year ago — and they have improved somewhat.

My expectation is, based on the contracts we have and the fact that the initial years in anything in the aircraft industry, for example, tend to be less profitable as you go further down the learning curve and the volume curve, tend to be lower in the near-term. My expectation is that the earnings of Precision will improve fairly significantly.

And I think I mentioned maybe to you last year, in those earnings, there is about $400 million a year of purchase amortization, which are economic earnings in my viewpoint.

So — but even including that 400 million a year, which they would be reporting if they were independent, and we don’t report, because we bought them and there’s a purchase amortization charge. Even without that, they are below what I would anticipate by a fair margin within a year or two. That’s the present expectation on my part. Charlie?

CHARLIE MUNGER: No, I don’t have anything.

WARREN BUFFETT: You’ll have that question for me next year, and I think I’ll be giving you a different answer.

29. The older you get, the better you understand human behavior

WARREN BUFFETT: OK, station 7.

AUDIENCE MEMBER: Good morning Mr. Buffett, Mr. Munger. My name is JC. (PH) I am 11 years old, and I came from China. This is my second year at the meeting.

Mr. Munger, it’s great to see you again after the Daily Journal meeting in February.

Mr. Buffett, you mentioned that the older you get, the more you understood about human nature. Could you elaborate more about what you’ve learned, and how can the differences of human nature help you make a better investment? I would also like Mr. Munger to comment on that, please. Thank you very much. (Applause)

WARREN BUFFETT: You should wait for Charlie’s answer, because he’s even older. (Laughter)

He can tell you more about being old than I can even.

It’s absolutely true that virtually any yardstick you use, I’m going downhill. And, you know, if I would take an SAT test now, and you could compare it to a score of what I was in my early 20s, I think it’d be quite embarrassing. (Laughs)

And Charlie and I can give you a lot of examples, and there’s others we won’t tell you about how things decline as you get older.

But I would say this. It’s absolutely true in my view that you can and should understand human behavior better as you do get older. You just have more experience with it. And I don’t think you can read — Charlie and I read every book we could on every subject we were interested in, you know, when we were very young. And we learned an enormous amount just from studying the lives of other people.

And — but I don’t think you can get to be an expert on human behavior at all by reading books, no matter what your I.Q. is, no matter who the teacher is. And I think that you really do learn a lot about human behavior. Sometimes you have to learn it by having multiple experiences.

I actually think I, despite all the other shortcomings — and I can’t do mental arithmetic as fast as I used to, and I can’t read as fast as I used to.

But I do think that I know a lot more about human behavior than I did when I was 25 or 30 —

CHARLIE MUNGER: I’ll give you — do you want one mantra? It comes from a Chinese gentleman who just died, Lee Kuan Yew, who was the greatest nation builder probably that ever lived in the history of the world.

And he said one thing over and over and over again all his life. “Figure out what works, and do it.” If you just go at life with that simple philosophy from your own national group, you will find it works wonderfully well. Figure out what works, and do it.

WARREN BUFFETT: And figuring out what works means figuring out how other people —

CHARLIE MUNGER: Of course.

WARREN BUFFETT: — behave.

CHARLIE MUNGER: Of course.

WARREN BUFFETT: And Charlie and I have seen the extremes in human behavior, in so many unexpected ways.

CHARLIE MUNGER: Now we get it every night, extremes in human behavior. All you got to do is turn on the television.

WARREN BUFFETT: Yeah. I’m glad he used that example. (Laughter)

30. Ajit Jain on pricing unconventional insurance contracts

WARREN BUFFETT: OK, Becky?

BECKY QUICK: Warren, you mentioned, in response to an earlier question, that Ajit (Jain) and Greg (Abel) are both here to answer questions, and so I thought I’d ask this question that comes from Will in Seattle. He says, his question is for Mr. Ajit Jain and Mr. Warren Buffett.

“You have said that you communicate regularly about unconventional insurance contracts that expose the company to extremely unlikely but highly costly events. I’m curious about how you think about and safely price these unconventional insurance contracts. What analyses and mental checks do you run through your head, to make sure that Berkshire Hathaway will profit without being unduly exposed to catastrophic risk?

“Furthermore, Mr. Buffett, would you want a future CEO to continue a similarly close collaboration with the chief underwriter?”

WARREN BUFFETT: We will get a microphone to Ajit and a spotlight in just a second. And there he is.

Ajit, why don’t you answer first, if you’d like to?

AJIT JAIN: Hi. Obviously, the starting point, I mean, these situations where there’s not enough data to hang your hat on, it’s more of an art than a science.

We start off with as much science as we can use, looking at historical data that relates to the risk in particular, or something that comes close to relating to the risk that we’re looking at.

And then beyond that, if there’s not enough historical data we can look at, then clearly, we have to make a judgment in terms of, what are the odds of something like that happening?

We try — we absolutely, in situations like that, we absolutely make sure we cap our exposure. So, that if something bad happens or we’ve got something wrong, we absolutely know that how much money we can lose and whether we can absorb that loss without much pain to the income statement or the balance sheet.

In terms of art, it’s a difficult situation. More often than not, it’s impossible to have a point of view, and we end up passing on it.

But every now and then, we think we can get a price where the subjective odds we have of something like that happening has a significant margin of safety in it. So, we feel it’s a risk that’s worth taking.

Then finally, the absolute acid test is, I pick up the phone and call Warren. “Warren, here’s a deal. What do you think?” (Laughter) OK. Your turn, Warren.

WARREN BUFFETT: OK. (Applause)

CHARLIE MUNGER: It’s not easy, and you wouldn’t want just anybody doing it for you.

WARREN BUFFETT: No, no. In fact, the only one I would want doing it for us on the kind of things we have sometimes received is Ajit. I mean, it’s that simple. There isn’t anybody like him.

And as Ajit said, we’ll look at a worst case, but we are willing, if we like the odds, and like you say, there’s no way to look these up.

We can tell you how many 6.0 or greater earthquakes have happened in the last hundred years in Alaska or California or so on. And there’s a lot of things you can look up figures on. Sometimes those are useful, and sometimes they aren’t. But there’s a lot where you can get a lot of data.

And then there’s others that — well, after 9/11, you know, was that going to be the first of several other attacks that were going to happen very quickly? There were planes flying that couldn’t — well they couldn’t land in Hong Kong, as I remember. I think it was Cathay Pacific couldn’t land in Hong Kong the following Monday unless they had a big liability coverage placed with somebody.

I mean, the world had to go on. The people that held mortgages on the Sears Tower all of a sudden wanted coverage. —I think that actually was one — but they were just pouring in, of people that hadn’t been worried about something a week earlier, and now they were worried about things involving huge sums.

And there were really only a couple people in the world that would even listen and had the capacity to take on a lot of the deals we were proposed. And there’s no book to look up. So, you do — there’s a big element of judgment.

Ajit and I — I mean, Ajit’s a hundred times better at this than I am, but we do tend to think alike on this sort of thing. You don’t want to think too much alike, but we think alike. I’ve got a willingness to lose a lot of money.

And most, well, virtually every insurance company if they get up to higher limits, they’ve got treaties in place, and they can only take this much. So, the world was paralyzed on that.

We don’t get those, but now obviously. But we do occasionally get inquiries about doing things that really nobody else in the world can do. It’s a little like our investment situation, only transferred over to insurance. We don’t build a business around it, but we are ready when the time comes.

And Ajit is an asset that no other company in the world has. And we work him. And we actually enjoy a lot talking to each other about these kind of risks, because he’ll ask me to think about what the price should be. And he’ll think about — we don’t tell each other ahead of time. And then I’ll name it, and then he’ll say, “Have you lost your mind, Warren?” (Laughs)

And then he’ll point something out to me that I’ve overlooked. And it’s a lot of fun, and it’s made us a lot of money.

And the shareholders of Berkshire Hathaway are extraordinarily lucky. You can’t hire people like Ajit. I mean, you get them once in a lifetime. Charlie?

CHARLIE MUNGER: I don’t think we helped him very much. It’s really difficult.

WARREN BUFFETT: There will be a time when — I mean, I probably won’t be around then — but there will be a time occasionally, just like in financial markets, when things are happening in the insurance world, and basically, Berkshire will be the only one — virtually the only one — people turn to.

CHARLIE MUNGER: But in the past, Ajit, talking to you, has added more than $50 billion to the balance sheet at Berkshire, by making these oddball calls.

WARREN BUFFETT: And if he hadn’t talked to me, it’d be probably 49.9 billion, you know? (Laughs)

But you don’t want to try — don’t try this at home.

CHARLIE MUNGER: Yeah, that doesn’t mean it’s easy.

WARREN BUFFETT: No. And it’s not very teachable.

CHARLIE MUNGER: No, it isn’t very teachable, you’re right.

WARREN BUFFETT: No, it is not something that Berkshire has some secret formula someplace for it. It basically is a very unusual talent with Ajit, and —

CHARLIE MUNGER: We’re not holding anything back. It’s hard.

31. Despite Kraft Heinz problems, Berkshire could partner with 3G again

WARREN BUFFETT: OK, Jay? (Applause)

JAY GELB: This question is on Berkshire’s relationship with 3G Capital. Kraft Heinz’s recent challenges have raised questions about whether Berkshire’s partnership with 3G has become a weakness for Berkshire.

Warren, what are your thoughts on this? And would Berkshire be open to partnering again with 3G in a major acquisition?

WARREN BUFFETT: Yeah, they are our partners, and we joined them. We had a one-page agreement, which I haven’t even actually ever reread. I mean, Jorge Paulo, I mean, is a good friend of mine. I think he’s a marvelous human being. And I’m pleased that we are partners. It’s conceivable that something would come up.

They have more of a taste for leverage than we do, and they probably have more of a taste for paying up, but they also are, in certain types of situations, they’d be way better operators than we would.

I mean, they go into situations that need improvement, and they have improved them. But I think both they and we, I know we did underestimate, not what the consumer is doing so much, but what the retailer is.

And at See’s Candy, we sell directly to the consumer, but at Kraft Heinz, they’re intermediaries. And those intermediaries are trying to make money. We’re trying to make money.

And the brand is our protection against the intermediaries making all the money.

Costco tried to drop Coca-Cola back in, I think 2008, and you can’t drop Coca-Cola, you know, and not disappoint a lot of customers.

Snickers bars are the number one candy that Mars makes. And they’ve been number one for 30 or 40 years. And if you walk into a drugstore, and the guy says, “The Snickers are 75 cents or whatever it might be, and I’ve got this special little bar my wife and I make in the back of the store, and it’s only 50 cents, and it’s just as good,” you don’t buy it, you know. When you’re at some other place the next time, you buy the Snickers bar.

So, brands can be enormously valuable, but many of the brands are dependent, most of them — Geico is not, Geico goes directly to the consumer. If we save the consumer money on insurance, they’re going to buy it from us.

And our brand, you know — and we’ll spend well over a billion and a half on advertising this year, and you think, my God, we started this in 1936, and we were saying the same thing then about saving 15 percent in 15 minutes or something of the sort — not exactly the same — but that brand is huge, and we have to come through on the promise we give, which is to save people significant money on insurance — a great many people. That brand is huge, and we’re dealing directly with the consumer.

And when you’re selling Kool-Aid or ketchup or, you know, Heinz 57 sauce or something, you are going through a channel, and they would — the phrase was used earlier today. You know, our gross margin is their opportunity, and we think that the ultimate consumer is going to force them to have our product, and that we will get the gross margin.

And that fight, that tension, has increased in the last five years and I think is likely to increase the next five or ten years. And Charlie is a director of a company that has caused me to think a lot about that subject. Charlie?

CHARLIE MUNGER: Well. What I think is interesting about the 3G situation, it was a long series of transactions that worked very well, and finally there was one transaction at the end that didn’t work so well.

That is a very normal outcome of success in a big place with a lot of young men who want to get rich quick. And it just happens again and again. And you do want to be careful.

It’s so much easier to take the good ideas and push them to wretched excess.

WARREN BUFFETT: Yeah, that is — no idea is good at any price, and the price settlement is probably something that we worry more about generally than our partners, but we are their partners in Kraft Heinz. And it’s not at all inconceivable that we could be partners in some other transaction in the future.

32. Buffett’s not worried about strength of Kraft Heinz’s brands

WARREN BUFFETT: OK. Station 8.

AUDIENCE MEMBER: Hello Warren and Charlie. Consumer tastes are changing. I think if we asked how many people here in the arena have eaten Velveeta cheese in the last year or so, there’d be only a small handful, maybe more for Jell-O.

3G’s playbook of cutting R&D looks to have stifled new product development amidst changing preferences.

So, here’s my question. Why continue to hold when the moat appears to be dry? Or do you think it is filling back up?

CHARLIE MUNGER: Well, I don’t think the problem was that they cut research or something. I think the problem was, they paid a little too much for the last acquisition.

WARREN BUFFETT: That Jell-O — I can’t give you the exact figures. There are certain brands that may be declining 2 percent a year or 3 percent a year in unit sales, and there’s others that are growing 1 or 2 percent. There’s not dramatic changes taking place at all. I mean, Kraft Heinz is earning more money than Kraft and Heinz were earning six or seven years ago.

I mean, and the products are being used in a huge way. Now it’s true that certain — that there are always trends going to some degree, but they have not fallen apart, remotely. And they have widened the margin somewhat.

But it is tougher, in terms of the margin and the price negotiations, probably to go through to the actual consumer. It’s become a somewhat tougher passageway for all food companies, than it was ten years ago. It’s still a terrific business.

I mean, you know, you mentioned Jell-O or Velveeta. Charlie worked at my grandfather’s grocery store in 1940, I worked there in ’41. And they were buying those products then, and they buy the products now. The margins are still very good. They earn terrific returns on invested capital. But we paid too much in the case of Kraft.

You can pay too much for a growing brand. I mean, you can pay way too much for a growing brand, probably be easier to be sucked into that. So, I basically don’t worry about the brands.

A certain number are very strong, and a certain number are declining a bit. But that was the case 10 years ago. It’ll be the case 10 years from now. There’s nothing dramatic happening in that.

33. Buffett’s biggest problem with Apple is the stock keeps going up

WARREN BUFFETT: OK, we’ll take one more, and then we’ll break for lunch. Andrew.

ANDREW ROSS SORKIN: Thank you, Warren. Question on technology and the company’s biggest holding now.

“Given that Apple is now our largest holding, tell us more about your thinking. What do you think about the regulatory challenges the company faces, for example? Spotify has filed a complaint against Apple in Europe on antitrust grounds. Elizabeth Warren has proposed ending Apple’s control over the App Store, which would impact the company’s strategy to increase its services businesses. Are these criticisms fair?”

WARREN BUFFETT: Well, again, I will tell you that all of the points you’ve made I’m aware of, and I like our Apple holdings very much. I mean, it is our largest holdings.

And actually, what hurts, in the case of Apple, is that the stock has gone up. You know, we’d much rather have the stock — and I’m not proposing anything be done about it — but we’d much rather have the stock at a lower price so we could buy more stock.

And importantly, if Apple — I mean, they authorized another 75 billion the other day — but let’s say they’re going to spend a hundred billion dollars in buying in their stock in the next three years. You know, it’s very simple. If they buy it at 200, they’re going to get 500 million shares. They’ve got 4 billion, 600 million out now. And so they’ll end up with 4.1 billion under that circumstance.

If they’re buying at 150, they buy in 667 million shares. And instead of owning what we would own in the first case, we’d now — the divisor would be less than 4 billion, and we’d own a greater percentage of it.

So, in effect, a major portion of earnings — at least possibly, it’s at least been authorized — will be spent in terms of increasing our ownership without us paying out a dime, which I love for a wonderful business.

And the recent development, when the stock has moved up substantially, actually hurts Berkshire over time. We’ll still do — In my opinion, we’ll do fine, but we’re not going to dissect our expectations about Apple, you know, for people who may be buying it against us tomorrow or something of the sort. We don’t give away investment advice on that for nothing.

But we have — all the things you’ve mentioned, obviously we know about, and we’ve got a whole bunch of other variables that we crank into it. And we like the fact that it’s our largest holding. Charlie?

CHARLIE MUNGER: Well, in my family, the people who have Apple phones, it’s the last thing they’ll give up. (Laughter)

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2018 Berkshire Hathaway Annual Meeting (Afternoon) Transcript

1. Thanks to meeting organizer Melissa Shapiro

WARREN BUFFETT: OK. Last year, for several years, we had a wonderful woman who carried this meeting off without a hitch, Carrie Sova. And she just had her third child here about a few weeks ago, and decided that - she decided right after the last meeting that that was going to be her full-time occupation.

And this year, again, we’ve had everything carried off without me having to do anything, without a hitch.

And I would just like to have Melissa Shapiro stand up. And we’ll get a spotlight on her. (Applause)

I can’t believe it, how she does it. It’s just been - it’s remarkable. I mean, we - I just tell her the date and then that’s all the help I am - (laughs) - and it goes on from there. So, Melissa, thank you.

OK, I think we next go to station ten, and we will continue until 3:30. Then we’ll take a 15-minute break, and at 3:45 we’ll convene the actual annual meeting.

2. Why Berkshire won’t be buying Microsoft stock

WARREN BUFFETT: Station 10?

AUDIENCE MEMBER: Hi, I’m Theresa Lukasinski (PH). I’m from Omaha, Nebraska. And I have a question about Microsoft.

You have gotten into the tech world with buying Apple. You have Mr. [Bill] Gates there. I’m just wondering why you’ve never bought Microsoft.

WARREN BUFFETT: Well - (laughter) - in the earlier years, it’s very clear it’s - the answer’s stupidity. But the - (Laughter)

Since Bill has - particularly since Bill has joined the board, but even earlier than that because of our friendship, it would be - it just would be a mistake for Berkshire to buy Microsoft.

Because if something happened a week later, a month later, in terms of them having better earnings than expected, or making an acquisition - anything - both Bill and I would - incorrectly, but - would be a target of suggestions and accusations, perhaps even, that somehow he had told me something or vice versa.

I stay away from - I try to stay away from a few things just totally because the inference would be drawn that we might have talked - that I might have talked to somebody about something.

So I’ve told the fellows, Ted [Weschler] and Todd [Combs] for example, that there are just a few things that are off the list because there would be a lot of people who wouldn’t believe us if something good immediately happened after we bought it.

And of course, we - to buy a lot of stock, it can take six months to buy it or something of the sort. We just don’t need it.

But both that and my stupidity have cost us a lot of money. (Laiughs)

It’s a very - it’s a good question, and I think the answer makes sense.

Charlie?

CHARLIE MUNGER: Well, it’s part of theology that a late conversion is better than never - (laughter) - and you’ve greatly improved yourself. (Laughter)

3. “Through it all … America really, really moves ahead”

WARREN BUFFETT: Becky. (Laughs)

BECKY QUICK: All right, this question comes from Dave Shane (PH). He says, “Warren, you are a big believer in the U.S. political system, the financial system, and in every American.

You’ve said that regardless of who is president, the economy and the U.S. consumer will continue to prosper over the long run. All that said, do you believe that people in this country are more divided today than 50 years ago?

Or is it just social media, and media in general, that blows this divide out of proportion? And if you do believe the divide has grown, what words of wisdom do you have to possibly help remedy it?”

WARREN BUFFETT: Yeah, I would say this. Multiple times in my life, people have felt the country was more divided than ever.

And I’ve gone through periods where people I knew and admired thought that, because the other party was in power, that there never would be another election. That the Constitution would -

I’ve heard everything. Now, the interesting thing is this paper from 1942. Since then, there have been 14 American presidents, just since my young venture into the stock market at 11, I’ve lived under 14 of the 44 presidents the United States has had.

Now, they call Trump 45, but they count Grover Cleveland twice, so there’s really only been 44 presidents of the United States. And 14 of the 44 have been during this period when that $10,000 became 51 million.

Seven have been Republicans, seven have been Democrats. One has been assassinated, one has resigned under pressure.

It works, you know. It - if you’d told me at the start, you know, that you’d have a Cuban Missile Crisis, and you’ve have nuclear weapons, and you’d have a panic in 200[8] - a financial panic - and you’d have many recessions, and you’d have war in the streets in the late ’60s from a divided country, you’d say, “Why the hell are you buying stocks?”

And through it all, you know, America - in fits and starts - but America really, really moves ahead.

And we are always - we survived the Civil War. I mean, it - I hate to think of having to do it that way. But this country, in only less than three of my lifetimes -

If you go back three of my lifetimes, you go back 263 years, I guess, and Thomas Jefferson is 12 years old. And that’s just three - and there was nothing here.

You know, you’ve flown in from all over to Omaha today, and you flew over a country with more than 75 million owner-occupied homes, and 260 million vehicles, and great universities, and medical systems, and everything. And it’s all a net gain in less than three of my lifetimes.

So - and we’ve had these events since I started buying my first stock. This country really, really works. And it always will have lots of disagreements, and after every election you’ll have people feeling the world is coming to an end and, you know, “How could this happen?”

And I remember my future father-in-law in 1952, he wanted to have a talk with me before his daughter and I got married. So kind of reluctantly I sat down with him, and he said, “Warren,” he said, “there’s just one thing I want to tell you.” He said, “You’re going to fail.”

He said - (laughter) - you know, “The Democrats are going to get in, you know, they’re going to take over the country. And you’re going to fail, but don’t feel responsible for it because it’s not your fault.”

And he wanted to absolve me from this feeling that, while his daughter was starving to death, it was my fault. And - (laughter) - I kept buying stocks and doing a little bit better all the time. And, but -

And if the Republicans were in, it was OK, and it was because of them that I was doing well. And if they were out, forget it, it was all going to disappear and stuff.

I mean, I’ve seen a lot of American public opinion over the years. I’ve seen a lot of media commentary. I’ve seen the headlines. And when you get all through with it, this country has six times the per capita GDP growth - the GDP per capita - that it had when I was born.

One person’s lifetime, six-for-one change. Everybody in this room, essentially, is living better in multiple ways, than John D. Rockefeller Sr. was, who was the richest person, you know, in the world at that - during my early years. And we’re all living better than he could live.

So this is a remarkable, remarkable country, and we found something - (applause) - very special.

CHARLIE MUNGER: (Inaudible)

WARREN BUFFETT: I would love to be a baby being born in the United States today. Charlie. OK, Charlie, you give the other side of this.

CHARLIE MUNGER: Well - (laughter) - there’s a tendency to think that our present politicians are much worse than any we had in the past. But we tend to forget how awful our politicians were in the past. I can - (Laughter)

I can remember a prominent senator [Roman Hruska] arguing with an absolute earnestness that mediocre people ought to have more representation on the United States Supreme Court.

WARREN BUFFETT: Yeah. He came from Nebraska, incidentally.

CHARLIE MUNGER: He did. He came from Nebraska. (Laughter) So we’re not quite as bad as that yet.

WARREN BUFFETT: Yeah. He succeeded my dad in the House of Representatives.

4. “We’ll have a somewhat larger operation at Gen Re”

WARREN BUFFETT: OK. Gary.

GARY RANSOM: Yes, on reinsurance. I know we’ve talked in the past about reinsurance not really being as attractive an industry in, say, the next ten years as the last ten. But I don’t think we’ve talked specifically about General Re.

And I looked this morning at the 10-Q and I see General Re has grown nicely. I know there’s been some changes in the management.

And I wondered if you could just give us a sense of what’s going on at the company to bring about some of that growth and what looks like improvement.

WARREN BUFFETT: Yeah. Well, the reinsurance business - I don’t think I’d say that it’s tougher than it was ten years ago. But you go to 40 or 50 years ago, it was not brutally competitive, I’ll put it that way.

And at Gen Re - Tad Montross, who did a fantastic job for us at Gen Re, retired. And we have under Ajit [Jain] - and then Kara [Raiguek] in addition - but under Ajit, the focus of the place has changed somewhat.

And it probably is more growth oriented than before. But I can assure you that anything associated with Ajit is - also has underwriting discipline attached to it.

But, I - there has, as you’ve correctly noticed, there’s been some pick-up. And I think you actually will see the property-casualty reinsurance business grow a fair amount.

And the life business - reinsurance business - and this is really the only place we do much in life - but that has grown very substantially ever since we took it over, particularly internationally. And so that part, I like.

And we will have a somewhat - I think we’ll have a somewhat larger operation at Gen Re.

But we have various methods, as you know, of being in reinsurance. We do these huge bulk deals. That’s why our net revenues are down this year. We did that $10 billion deal with AIG, which was the biggest deal in history, last year. And we don’t have a repeat of it this year.

We will be in the reinsurance business five years from now, 10 years from now, 20 years from now, and 50 years from now, in my view. And we will have some unusual advantages that stem both from our capital position, our attitude toward the business, and the talent that we have.

We have an - we have a way better than average insurance business, generally. We have some real gems that nobody really knows much about.

And we have a very, very good reinsurance business that will be subject to more ups and downs than something like GEICO will be, which just moves ahead every year. But it will be an important part of Berkshire.

Charlie?

CHARLIE MUNGER: Yeah. I would argue the part that any idiot financier can easily get into has gotten way tougher. And why wouldn’t it?

WARREN BUFFETT: Charlie is my substitute for my father-in-law that was - (Laughter)

5. “I can’t reduce that to a formula for you”

WARREN BUFFETT: OK, Station 11.

AUDIENCE MEMBER: Hey, Warren. Charlie. Thank you again for having us and having me. I just can’t thank you guys enough and appreciate you guys enough for the body of work that you guys have delivered to us and the exemplar example that you guys have set with your principles. Thank you. (Applause)

Charlie, you’ve mentioned that, if given the chance - or the same chance with a smaller capital base - you would still look for mispriced stock opportunities.

CHARLIE MUNGER: Of course.

AUDIENCE MEMBER: And that would be determined through, obviously, what we’ve called the intrinsic value of the organization - or the company in question - an aggregate of the discounted future cash flows.

Would you work the arithmetic using a fictional data set to illustrate the mathematical principia to determine an intrinsic value?

And I hope you include the comprehensive mental model of the key metrics considered, and quantitative assessments of the management, and any assumptions of its industry to determine the durability of its earning power.

And, Warren, same to that effect. Would you also demonstrate or illustrate an arithmetic problem set using, with a significant capital base, and provide the object lessons on how those have changed from a small to a large capital base?

CHARLIE MUNGER: Well, I can’t give you a formulaic approach because I don’t use one. (Laughter)

And I just mix all - (laughter) - I just mix all the factors and if the gap between value and price is not attractive, I go on to something else.

And sometimes it’s just quantitative. For instance, when Costco was selling at about 12 or 13 times earnings, I thought that was a ridiculously low value, just because the competitive strength of the business was so great and it was so likely to keep doing better and better.

Well, I can’t reduce that to a formula for you. I liked the cheap real estate. I liked the competitive position. I liked the way the personnel system worked. I liked everything about it.

And I thought, even though it’s three times book, or whatever it was then, that it’s worth more. But that’s not a formula that anybody -

If you want a formula, you should go back to graduate school. (Laughter)

They’ll give you lots of formulas that won’t work. (Applause)

WARREN BUFFETT: This is the longest we’ve ever gone in a Berkshire meeting without Charlie saying that - getting to the point where he prefers Costco to Berkshire. (Laughter)

6. Why Apple and thoughts on Apple’s buybacks

WARREN BUFFETT: OK, Andrew?

ANDREWROSS SORKIN: We got a handful of questions relating to Apple. This is a bit of a mash-up of a couple of them.

Warren, you have bought in and sold out of IBM. You have praised [Amazon CEO] Jeff Bezos but never bought Amazon. And you have doubled down on Apple. Can you tell us what it is about Apple?

And given your sometimes critical views on buybacks, do you think Apple would do better spending a hundred billion dollars on buybacks, or buying other productive businesses the way you have generally preferred? A hundred billion dollars is a lot of money.

WARREN BUFFETT: I used to think so. (Laughter) The -

Apple has a incredible consumer product which you understand a lot better than I do. Whether they should buy in their shares - they shouldn’t buy in their shares at all, unless they think that they’re selling for less than they’re worth.

And if they are selling for less then they’re worth, and they have the money, and they don’t see an acquisition that’s even more attractive, they should buy in their shares. And I think that that’s very -

Because I think it’s extremely hard to find acquisitions that would be accretive to Apple that would be in the 50 or 100 billion, or $200 billion range. They do a lot of small acquisitions.

And, you know, I’m delighted to see them repurchasing shares. We own - let’s say we own 250 million or so shares. They have, I think, 4 billion, 923 million or something like that. And mentally, you can say we own 5 percent of it.

But I figure with, you know, with the passage of a little time we may own 6 or 7 percent simply because they repurchase shares. And it -

I find that if you’ve got an extraordinary product, and ecosystem, and there’s lots to be done, I love the idea of having our 5 percent, or whatever it may be, grow to 6 or 7 percent without us laying out a dime. I mean, it’s worked for us in many other situations.

But you have to have some very, very, very special product, and - which has an enormous wide - enormously widespread ecosystem, and the product’s extremely sticky, and all of that sort of thing.

And they’re not going to find 50 or a hundred billion dollar acquisitions that they can make at remotely a sensible price that really become additive to that.

And they may find it, who knows? But there certainly, as I look around the horizon, I don’t see anything that would make a lot of sense for them in terms of what they’d have to pay and what they would get.

Whereas I do see a business that they know everything about, and where they may or may not be able to buy it at an attractive price when they repurchase their shares. That remains to be seen.

Incidentally, that’s one thing that I always enjoy. People say, “Well, you’re talking your book,” or something if you talk -

From our standpoint, we would love to see Apple go down in price. They’re going to - well, just put it this way. If Andrew and Charlie and I were partners in a business that was worth $3 million so each of us had a million dollar interest in it, if Andrew offered to sell out his one-third interest at 800,000 and we had the money around, we’d jump at the chance to buy him out. I mean, it’s so simple.

But people get all lost - and if he’d wanted a million-two for it, we wouldn’t pay it to him. (Laughs)

It’s very simple math, but it gets lost in all these discussions. And of course, like I say, Tim Cook could do simple math. And he could probably do very complicated math, too. So, we very much approve of them repurchasing shares.

Charlie?

CHARLIE MUNGER: I think, generally speaking in America, when companies go out hell-bent to buy other companies, they do - they’re worth less after the transaction is made than they were before.

So I don’t think you have a general way to wealth for American corporations to go out and buy other corporations. Averaged out, it’s a way down, not up.

And I think that a great many places have nothing better to do than to buy in their own stock, and nothing as advantageous to do as they can - as buying in their own stock.

So, I think we know pretty damn well what’s going to happen to Apple. They’d be very lucky to - if there was something available at a low price that they could buy. It’s -

I don’t think the world’s that easy. I think that the reason these companies are buying their stock is that they’re smart enough to know that it’s better for them than anything else.

WARREN BUFFETT: And that does not mean we approve of every buyback, at all, though. I mean, we’ve seen -

CHARLIE MUNGER: No, no, no. I think some people just buy it to keep the stock up. And that, of course, is insane. And immoral. But apart from that, it’s fine. (Laughter)

7. “I like very much our holdings of American Express”

WARREN BUFFETT: OK, Gregg?

GREGG WARREN: Warren, if we look at the performance of your equity investment portfolio the last three to five years, some of the strongest performances come from Visa and MasterCard, which put up returns that are three to four times greater than American Express.

Unfortunately, your holdings of the two names, which we assume were held by Todd [Combs] or Ted [Wechsler], have accounted for less than one percent of stock holdings on a combined basis the past five years, while American Express has tended to be a top-five holding, accounting for 10 percent of the portfolio, on average, and closer to 8 percent of late.

Given that all three firms benefit from powerful network effects along with valuable brands, were there any particular reasons Berkshire did not ramp up its stakes in Visa and MasterCard to more meaningful levels, especially during those years when American Express was struggling?

After all, you’ve shown a willingness to own several stocks from the same industry, holding shares in several competing banks, and buying stakes in all four domestic airlines in fairly equal amounts when you picked them up in late 2016.

WARREN BUFFETT: Yeah. When Ted and Todd, or either one of them - I won’t get into which specifically - which one of them specifically - bought, or for that matter they could both have bought - Visa and MasterCharge - they were significant portions of their portfolio.

And there was no embargo or anything on them owning those stocks because we had a big investment in American Express. And I could have bought them as well. And, looking back, I should have.

On the other hand, I think American Express has done a fabulous job, and now we own 17 and a large fraction percent of a company that not that long ago we may have owned 12 percent. We’ve done it without spending a dime and without - you know, it’s a company that has really done a fantastic job in a very competitive field where lots of people would love to take their customers away from them. But they have more customers than ever, and they’re spending more money than ever. The customers are.

And the international growth has accelerated. The small business penetration is terrific. It’s really quite a business. And, you know, we love the fact we own it.

Like I say, it didn’t preclude me from, in any way, from buying MasterCharge or Visa. And if I had been as smart as Ted or Todd, I would have. (Laughs)

Charlie?

CHARLIE MUNGER: Well, we would have been a little - a lot better with all of our stock picking if we could do it in retrospect.

But - (laughter) - at the time, we have a big position in American Express, and there is one tiny cloud on the horizon of the payments processors and that is the system of WeChat in China.

And so it isn’t as though there isn’t a little cloud somewhere off in the - and I don’t have the faintest idea how important that cloud is, and I don’t think Warren does either.

WARREN BUFFETT: No. No. Payments are a huge deal worldwide. And you’ve got all kinds of smart people working at various ways to change the payment arrangements. And -

CHARLIE MUNGER: To destroy what we have now.

WARREN BUFFETT: Sure, sure. And you’ve got some very smart people that, you know, I am - the - but there - building a company.

And American Express made a decision a few years ago not to bid as low as somebody else did to retain the Costco business. And I think - Charlie and I disagree on this - but I think it was a smart decision. He doesn’t think it was a smart decision. But one of us will be right. And - (laughter) - and one of us will remind you that they were right. (Laughter)

The - but if you look at American Express, it is - it’s a remarkable company. I mean, you know, they came after them with Sapphire last year. People want that business. And payments are changing.

And you can see in different countries different ways things are going on in that. And there are a lot of people that will play the game of gaming the system, and switch from one to another based on the rewards on this card or that, and all of that sort of thing.

But there also is a - I think there’s a very substantial group for which American Express does something very special, and they keep capitalizing on that premier position with that group.

And they’re doing it successfully around the country. And you’ll see in the first quarter - you’ve seen in the first quarter - you know, where in Britain, in Mexico, in Japan, you’re seeing gains of 15 percent or better in local currencies.

And the base is not tiny, but it’s not huge, so there’s a lot of room left to go in that. And the small business penetration is good. The loan portfolio has behaved sensationally compared to, really, just about anybody.

So, I like very much our holdings of American Express.

The first half, because of the accounting changes, they had to suspend their repurchase program for six months. But I - they’ve announced that they expect to renew it.

And someday we’ll even, you know, we’ll own a greater percentage of American Express and it will be a bigger company, in my opinion. And I think we’ll do very well.

But as Charlie says, nobody knows how payments is - for sure - comes out. And nobody knows how autos for sure come out. And there - that is true of a great many businesses we’re in, and we’ve faced it before.

We used to buy things that were certain failures, like textiles and second-rate department stores and trading stamps in California. Now we just face things that face real difficulty. So we’re actually moving up the ladder. (Laughter)

8. Capital-intensive businesses are “good enough”

WARREN BUFFETT: OK, Station 1.

AUDIENCE MEMBER: Mr. Buffett, my name is Daphne Collier Starr (PH). I’m eight years old and live in New York City. I’ve been a shareholder for two years and this is my second annual shareholders meeting.

Berkshire Hathaway’s best investments on which the company built its reputation have been in very capital-efficient businesses - (laughter) - such as Coke, See’s Candy, American Express, and GEICO.

But recently, Berkshire has made really big investments in a few businesses that require huge capital investments to maintain and that offer only a regulated low rate of return such as - (laughter) - Burlington Northern Railroad.

My question to you, Mr. Buffett, is could you please explain why Berkshire’s largest recent investments have been departed from your old capital-efficient philosophy?

And why specifically have you invested Burlington Northern instead of buying a capital-efficient company like American Express? (Applause)

WARREN BUFFETT: You’re killing me, Daphne. (Laughter) Yeah.

CHARLIE MUNGER: I’m certainly glad she’s not nine years old.

WARREN BUFEFTT: Yeah. (Laughter)

I’m just sitting here thinking which of the six panelists we’re going to bump next year and put you in. (Laughter)

Well, I thought I was doing well when I bought that City Service at 11. (Laughs)

The answer is that we have - we’d love - we always prefer the businesses that earn terrific returns on capital, like a See’s Candy when we bought it or a good many of the businesses.

And, we’ve - and, you know, American Express, you know, earns a terrific return on equity, and has for a very long time.

The fact that we buy a Burlington - BNSF, Burlington Northern - means that, essentially, we can’t get more money deployed in capital-light businesses at prices that make sense to us. And so we have gone into more capital-intensive businesses that are good businesses.

But wouldn’t it be wonderful if we could run the railroad without trains, and track, and tunnels, and bridges, and a few things?

We get a decent return on the capital-intensive businesses. We bought most of them at very decent prices, and they’ve been run very well since we bought them.

We still love a business that takes very little capital and earns high returns, and continues to grow, and requires very little incremental capital.

We can’t deploy as much money as we have in doing that. And so as the second-best choice, still a good choice, the answer is yes. It’s not as good as the best choice.

Charlie?

CHARLIE MUNGER: Yes, I like the aspiration of that young lady. She basically wants her royalty on the other fellow’s sales. And of course that’s a very good model, and if everybody could do that, why, nobody would do anything else.

The reason we’re satisfied with our utility returns and our railroad returns is they’re quite satisfactory. And we - and the - quite satisfactory. I wish we had two more just like them. Don’t you, Warren?

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: So -

WARREN BUFFETT: Definitely.

CHARLIE MUNGER: So the answer is they’re good enough, and you’re asking us to get perfection if you would want us to have all our money in Coke at, say five percent of what it’s now selling for.

WARREN BUFFETT: Yeah. And a business like Apple really doesn’t take much capital.

But - so, you’ve got to spend a lot of money to buy businesses like that. Very few are for sale.

And the answer is we have not foregone any opportunity to buy businesses that earn high returns - very high returns - on equity capital, when we could buy them at a sensible price, to buy these other businesses.

So they haven’t shoved anything else off the table. But you are - you definitely have a job in our capital allocation department. (Laughter)

9. Buffett “surprised” rate of decline for newspapers hasn’t moderated

WARREN BUFFETT: OK, Carol.

CAROL LOOMIS: This question is from Max Taylor (PH) of Chicago, and it concerns the newspapers that Berkshire owns.

In your 2012 letter to shareholders, Mr. Buffett, you had a section devoted to Berkshire’s buying 28 newspapers during the year just past. Since then, you have not come back to the newspaper subject.

But this year, at the end of the annual report, you published a list of the newspapers Berkshire owns today, along with their circulation. I compared that list with the one you published five years ago at the end of 2012.

As you no doubt know better than anyone, the circulation of the 26 newspapers that Berkshire still owns, of the 28 originally bought, fell sharply. In many cases, by big amounts like 30 percent to almost 50 percent.

I know that five years ago, you acknowledged the risk in owning newspapers, but you still said, ‘Charlie and I believe that papers delivering comprehensive and reliable information to tightly-bound communities, and having a sensible internet strategy, will remain viable for a long time.’

Skip to today, and imagine that you are writing about Berkshire’s experience with newspapers. What would you be saying?

WARREN BUFFETT: Yeah. I would say that - I forget the modifying word on internet strategy - but I could say (Inaudible).

The problem has been - about 1,300 daily newspapers in the United States - there were 1,700 not that long ago - is that no one except The Wall Street Journal, The New York Times, and now probably The Washington Post has come up with a digital product that, really in any really significant way, will replace the revenue that is being lost as print newspapers lose both circulation and advertising.

And if you look at the communities in which we operate, or the communities in which, you name it - other newspapers operate, the community could be prospering. We’re in a prosperous economy presently. And all are losing daily circulation, they’re losing Sunday circulation, they’re losing street - all street sales, they’re losing home-delivered.

And it is - I’ve been surprised that the rate of decline has not moderated in the last five years.

We bought all the papers at reasonable prices, so it is not of great economic consequence to Berkshire. But I would like to see daily newspapers, actually, you know, be economically viable, because of the importance to society.

But I would say that the trends which - I put those circulation figures in there because I think the shareholder’s entitled to look, year-to-year, at what is happening. And it’s not only -

It’s happening to 1,300 newspapers throughout the United States. And it happens in small towns, where you would think that the alternative sources of information would not be that good. It happens every place.

And The Journal, The Times, and probably The Post, have a viable economic model in the digital world, and probably will continue to shrink - I’m almost certain will continue to shrink - in the print world.

But the digital world will be big enough that - and they’ll be successful enough - so that they have, in my view, a sustainable business model.

But it is very difficult to see, with the lack of success, in terms of important dollars arising from digital, it’s difficult to see how the print product survives over time. And that’s - I’m afraid that’s true of 1,300 papers in this country.

And we’ll keep looking to see if there is a way to do it. But you’d have to look at our experience, and look at the experience of everyone else’s.

McClatchy newspapers came out the other day, you know, and I think that newspaper - which is very good - fine cities that they operate in - and advertising revenue is down something like 17 or 18 percent, and circulation. But it isn’t just them, it’s everybody in the business. And I wish I had a better answer for you, but I don’t.

I would say that the economic significance to Berkshire is almost negligible, but the significance to society, I think, actually is enormous.

And, you know, I hope that we find something. I hope others find something because we’ll copy it. But so far, we have not succeeded in that.

Charlie?

CHARLIE MUNGER: Well, the decline was faster than we thought it was going to be. So it was not our finest bit of economic prediction. And I think it’s even worse.

I think, to the extent we miscalculated, we may have done it because we both love newspapers and are - and have considered them so important in our country.

These little local newspaper monopolies tended to be owned by people who behaved well and tended to control the politicians. And we’re going to miss these newspapers if they disappear. We’re going to miss them terribly. And -

WARREN BUFFETT: I think you may continue -

CHARLIE MUNGER: - I hope to God it doesn’t happen, but the figures are not good, Warren.

WARREN BUFFETT: No. No, they aren’t. And it isn’t just - you know, it isn’t some town that has a particular problem with unemployment or anything of the sort. And it isn’t due to general economic conditions.

It’s due to the fact that a newspaper, if you wanted to know the baseball results from the present day, and the box scores, and everything else, they told you the following morning and it was still news to you.

And the financial material that I read from there, and in terms of looking at the stock prices and everything, they were news to you the following morning. And the -

What was developing in the Pacific in terms of the war was news to you when you read about it in the morning in The New York Times. And it’s - news is what you don’t know that you want to know. And the -

And those Help Wanted ads, you know, segregated as they may have been, still were the place to go to look to find a job. And you can go up and down the line and one element after another where the daily print newspaper was primary, they’re no longer primary.

And the business has changed in a very material way, and we haven’t been able to figure out any solutions to that, and we’ll keep trying.

Like I say, it’s not of economic consequence, but I think it is societal consequence. And we haven’t been able to solve it.

10. TTI has “improved dramatically in the past year”

WARREN BUFFETT: OK, Jonathan?

JONATHAN BRANDT: TTI has been a nice growth story since Berkshire acquired it 11 years ago, more than doubling its pre-tax earnings to about $400 million due to fine organic growth and at least two successful bolt-on acquisitions. Business momentum appeared to accelerate in the first quarter.

Can you please talk about the competitive landscape in the electronic components distribution industry and what TTI’s advantages are? Is it just a great industry to be in or is TTI’s business model and/or management team special?

WARREN BUFFETT: Well -

JONATHAN BRANDT: Do you expect it to continue to be one of Berkshire’s faster growing non-insurance subsidiaries?

WARREN BUFFETT: TTI is run by a fellow named Paul Andrews who’s done an absolutely sensational job with us. He’s a wonderful man. He’s a wonderful manager.

And in the last - he’s quadrupled the business, basically, but in the last year and accelerating right to this point.

They distribute little electronic components. They actually - their average - they’re a many-billion dollar business - and their average item is less than a nickel that they sell. So it’s kind of like being in the jellybean business or something like that. Except these things go into all kinds of fancy machines that I don’t understand.

And we have a worldwide operation based in the Dallas, Fort Worth area. And built by one man who left a division of General Dynamics 45 or 50 years ago. And step-by-step built up this business - like we just bought within the last two months, we bought an operation in South Korea that will be another substantial addition. We do business worldwide. And electronic components that have absolutely taken off in the last year.

And they use something called, you know, well, it’s essentially a measure of backlog. And book-to-build is the ratio they call it. But it’s just kind of a special term.

The - but, it’s grown - I mean, it’s just improved dramatically in the last year. And it continues month after month. So something is going on out there because nobody buys these things to store them in their basement or anything of the sort. I mean, these get used, these electronic components.

Some of them are on allocation. We have a great relationship with suppliers. We have a very good relationship with our customers because we carry more inventory than most of our competitors. So particularly when the business is tight we can deliver and do a very first-class job doing it.

So I give credit to Paul. He increased his physical facility, started on that a few years ago. And it’s a godsend that he did it because with the business going through there now we wouldn’t have been able to handle it.

But it’s a competitive business. I mean, if you look at Arrow Electronics, you know, on the New York Stock Exchange - we’ve got competitors. I think Paul is doing a better job, by a considerable margin, than they are. And I’m delighted as a part of the Berkshire family.

There will be times when that business slows down because their customers, you know, will have their own cycles. And what it does will go down. But over time that business is going to grow.

Charlie?

CHARLIE MUNGER: Yeah, it’s a wonderful business because it’s so difficult to do that competitors don’t want try it. When I lived in Omaha there was a man who lived in great prosperity and almost no work. And his business was gathering up and rendering dead horses. And he never had any competitors. (Laughter)

He used to come up to the Omaha Club and start drinking about 11 in the morning. It was not a difficult business. But nobody ever crowded him with new competition.

And very few people want to distribute zillions of electronic parts that are worth a nickel each. It’s very complicated.

And of course that business is terribly good at it. And it keeps getting more and more of the same. So you’re right. It’s a huge growth business which is sort of the electronic equivalent of gathering up and rendering dead horses. (Laughter)

WARREN BUFFETT: Imagine keeping track of close to a million different items, you know, with very small values attached to them and getting them out to your customer fast because they want them fast, all over the world. You know, and those things are not easy to manage. I mean, yeah.

CHARLIE MUNGER: And staying in stock on so many items. It’s very complicated. And that business is very good at it.

WARREN BUFFETT: Yeah, we’re luck -

CHARLIE MUNGER: And of course it’ll grow. The horses went away but these parts aren’t going to go away. (Laughter)

WARREN BUFFETT: Charlie made a profession of studying businesses where the owners could sit around and drink all day and have - (laughter) - he thought that was where we ought to be competing but - or buying.

CHARLIE MUNGER: My theory, Warren, is if it can’t stand a little mismanagement, it’s no business. (Laughter)

WARREN BUFFETT: Yeah and we’re testing that sometimes. (Laughter)

11. Phillips 66 and staying below 10 percent ownership

WARREN BUFFETT: OK, Station 2.

AUDIENCE MEMBER: Hi, Ben Sherber (PH), Topeka, Kansas. Just want to say, Warren and Charlie, thank you again for hosting us all. This is a great event.

WARREN BUFFETT: Thank you.

AUDIENCE MEMBER: My question is about the recent decision to sell shares back of Phillips 66. Not to put you on the hot seat. But right after that, share prices jumped up about $22 a share.

You mentioned at the time that there’s some regulatory requirements if you own over 10 percent of a company. Could you talk about the factors that go into how you decide whether to retain more than that or get under that threshold? And then what are your thoughts long-term on Phillips 66, like, their business mid-stream refining?

WARREN BUFFETT: Yeah, well, it was the City Service preferred of last year. (Laughter)

We sold the stock at around 93 or ’4. And it’s probably 115 now. But we own just under 10 percent of the company. And the more Ted [Weschler] and Todd [Combs] and I think about various problems connected with regulatory problems and trading problems and so on, overwhelmingly we will stick below 10 percent on marketable security holdings.

We’ve done it with the airlines. Now that does not mean we’re going to reduce our holdings in American Express or anything of the sort.

But - and Greg Garland has done a great job at Phillips 66. We’ve had very good relations with the company. They’re very - he’s a very, very, very experienced and sensible manager.

But I did decide that I wanted to be below 10 percent in that holding. And we, like I say, we’ll stay just slightly under 10 percent of Wells Fargo.

We’ve actually sold a few shares just to stay below 10 percent in the case, I think, of both American Airlines and United Continental.

Unless there’s something unusual we’re going to stay under ten. But we have nine and a significant fraction percent of Phillips. And I think they’ve been good at operations. I think they’ve been good at capital allocation.

We traded them a business - we traded them stock for a business some years ago, which has been a very nice business that we’ve retained in operation.

So we’ve got a lot of money still in Phillips. And I wish I’d made the deal at a higher price. But we made money on what we sold and we accomplished an objective.

Charlie?

CHARLIE MUNGER: Well, we like the subsidiary we traded the stock for. (Laughter)

WARREN BUFFETT: I missed that -

CHARLIE MUNGER: We traded the stock for a subsidiary.

WARREN BUFFETT: Yeah, well, yeah.

CHARLIE MUNGER: We like the subsidiary.

WARREN BUFFETT: Oh yeah. Well, it improved -

CHARLIE MUNGER: It isn’t like the stock went away for nothing.

WARREN BUFFETT: Yeah. Yeah, actually we’ve done pretty well with Phillips.

12. Cryptocurrency craze will “come to a bad ending”

WARREN BUFFETT: Becky?

BECKY QUICK: This question comes from Vlad Koptev (PH) in Ukraine. He says, “Capitalization of cryptocurrency has approached that of Berkshire and Apple last year. And clearly the idea behind crypto will affect conventional banking groups where Berkshire is a shareholder. You always say you didn’t go into too much detail to obtain an understanding on cryptocurrencies. So what factors caused you to say that it’s a bubble?”

WARREN BUFFETT: Well, generally non-productive assets remain not only - if you’d bought gold at the time of Christ and you figured the compound rate on it, you know, it may be a couple tenths of 1 percent.

It essentially is not going to deliver anything other than supposed scarcity, you know, because they’ll only - you can only mine so many. But so what? I mean, what does it produce itself?

You know, the check is a wonderful idea. Just imagine how the world would be without being able to write checks or have wire transfer of funds. But it doesn’t make the check intrinsically itself worth a lot of money.

And if you said you can’t use something called “check” with a little piece of paper you’d do something else to transfer money.

I think that anytime you buy a nonproductive asset you are counting on somebody else later on to buy a nonproductive asset because they think they can sell it to somebody for more money.

And it’s been tried with tulips and it’s been tried. It’s been tried with various things over time. And it does come to a bad ending.

I mean, having - you have a hard time. You can think of raw land. I mean, the Louisiana Purchase was, say, $15 million for 800,000 or so square miles of land. In fact, you’re sitting on land that came with the Louisiana Purchase.

And so what’d we pay? We paid 20 bucks a square mile. And, you know, 640 acres in a square mile. And you’re down to three cents or something. So that was a pretty good purchase of what was then a nonproductive property. But it’d depend - but it’s very hard. You can buy stamps. Bill Gross got, you know, collected a wonderful stamp collection. It sold for more money in the end.

But it’s dependent on somebody else wanting to buy, hoping they will sell it for more money and so on.

And in the end you make your money on productive assets. If you buy a farm, you try to estimate what the crops, what amount per acre of soybeans or corn or whatever may be raised, and how much you have to pay the farmer that farms it for you, and what your taxes will be, and various things. And you make a conclusion based on what the asset itself will produce over time. And that’s an investment.

When you buy something because you’re hoping tomorrow morning you’re going to wake up, you know, and the price will be higher, the only reason, you know, you need more people coming into it than are leaving.

And you can get that. And it will feed on itself for a while, and sometimes for a long while, and sometimes to extraordinary numbers. But in the end - but they come to bad endings. And cryptocurrencies will come to bad endings.

And along with the fact that there’s nothing being produced in the way of value from the asset that you also have the problem that it draws in a lot of charlatans and that sort of thing who are trying to create various sorts of exchanges or whatever it may be.

You know, it’s something where people who are of less than stellar character see an opportunity to clip people who are trying to get rich because their neighbor’s getting rich buying this stuff that neither one of them understands. It will come to a bad ending.

Charlie?

CHARLIE MUNGER: Well, I like cryptocurrencies a lot less than you do. (Laughter)

And so to me it’s just dementia. And I think the people who are professional traders that go into trading cryptocurrencies, it’s just disgusting. It’s like somebody else is trading turds and you decide, “I can’t be left out.” (Laughter and applause)

WARREN BUFFETT: To the extent that this - we are being webcast around the world, I hope some of our stuff doesn’t translate very well, actually. (Laughter)

13. Shareholders will get a lot of the corporate tax cut benefit

WARREN BUFFETT: OK, Gary.

GARY RANSOM: Yes, I had a question on the corporate tax rate. And we have a debate in my investment world about where the benefits of that cut fall. And I’d say the consensus is going to the consumer as it gets competed away over time. But perhaps some of it sticks to shareholders.

And my question is, do you think, over the long run, some of the benefits sticks to shareholders? And maybe it’s even beyond auto insurance? Maybe it’s other businesses you have as well.

WARREN BUFFETT: Well, what people do generally with that is they take what they want to be the answer for them and then they hire - or they just attach themselves to some economist that gives them a more complicated way of saying it’s all going to be wonderful because it’s happened.

But the answer is that in the case of our regulated public utilities, the benefits are all supposed to go, and will go, to the utility customer, because we’re entitled to a return on equity if we perform well. And we’re not entitled to get excess returns because our tax rates changed. And similarly, if tax rates would go back up, we would expect to get compensated for that. So in that area - and that was 5 or $6 billion for us.

But in that area, absolutely, it goes to the user, the consumer. And it should.

Then the question is, with the remainder, does it get competed away or not? And the answer is sometimes it does, sometimes it gets competed very quickly and substantially. Sometimes it may be slow. And other times it probably won’t.

The one thing to know is that the change in the corporate tax law was good for shareholders, generally, and Berkshire shareholders. I mean - and that’s what Congress passed. And the intent had to be that if you were going to cut taxes that shareholders would get a particularly large portion this time. And some of you will agree with that politically and some of you won’t agree with it politically. But you’ll all benefit equally. (Laughs)

And I think it’s human nature if you’re getting a break to say it’s going to work wonderfully for everybody else. And we’ll find out whether it will or not.

It’s very, very, very difficult in economics to measure the impact of single variables. You cannot just do one thing in economics. People kind of learn that in physics and talk about butterflies in China and all that sort of thing. But the - every question you get in economics the next, any statement, you should say “and then what?”

And when you get into the “and then whats” you get start favoring people who give an answer to that in political life that happens to usually help you in some way or another, including your pocketbook. And we’ve see that with this. And it’s helped the shareholders at Berkshire Hathaway.

I would say that some will be competed away. Some (inaudible) utilities and some will benefit Berkshire shareholders. Charlie?

CHARLIE MUNGER: I have nothing to add.

14. Utilizing multicultural backgrounds to improve international economies, and the benefits of multiculturality

WARREN BUFFETT: OK. Station 3.

AUDIENCE MEMBER: Hi, Mr. Buffett and Mr. Munger. My name’s Kevin and I’m from Shenzhen, China, currently studying finance and philosophy at Boston College.

I have a rather broad question. In this more and more globalized world, what do you think our younger generation can do to best leverage our background and experience of both China and U.S. to create values and for the benefit two countries’ economy and relationship? And what do you see valuable in a person with a multicultural background? Thank you.

WARREN BUFFETT: Well, I think in answer to the last question, I think it’s terrific to have a multicultural background. And I never was any good at languages. But if I were in college today, in either country, I’d be learning the language of the other country, because I think it would be a great advantage over time.

The first part of the question, I’d like to have that stated again to me. I want to make sure I’m answering your specific aspect there on the - I think it’s going to be good for your future. But can we have the microphone on up there again?

AUDIENCE MEMBER: So the first part of the question is, like, what do you think our younger generation can do to best leverage our background and experience of both China and U.S.?

WARREN BUFFETT: Well, I’d start with being multilingual, I mean, certainly, in terms of, you know, I mean, obviously you want to be able to express yourself in both. And the better you can understand, obviously, the culture of another society, obviously, that’s a benefit.

But I think the market system, modified as it may be, both in China and in the United States, in a way, it really does - there will be an invisible hand, to some extent, that does work to improve the lot of future generations by the fact that both China and the United States, and the rest of the world, is improving. I mean, it is much better, in my view, particularly in a nuclear world. But it’s much better to have people prospering throughout the world, partly through their own efforts but partly through their interactions with the rest of the world.

And we’ve made a lot of progress in that respect particularly since World War II. I mean, it was a terrific idea to have the Marshall Plan, you know, instead of behaving like we did after World War I and getting the result that we got. I think we behaved much more intelligently after World War II.

So I’m bullish on the future of United States. But I’m bullish on the future of China, and to a significant extent, you know, the rest of the world.

People are going to be living better 10, 20, 50 years from now. And I don’t think that’s something that can be stopped even. Charlie? Absent weapons of mass destruction.

CHARLIE MUNGER: Yeah, well, the multicultural stuff, it wouldn’t do you much good to be fluent in both English and Chinese if you were, say, a proctologist in China or a proctologist in Nebraska. (Laughter)

So if you’re going to use your multicultural background, you’ve got to work at some interface between the United States and China.

And you can raise money in the United States and invest it in China like Li Lu does or you can be some kind of an importer or a trade specialist. But you’ve got to get near that interface to benefit from being bilingual and so on.

WARREN BUFFETT: But you would bet that the interface will be substantially greater.

CHARLIE MUNGER: Huge.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: Huge.

WARREN BUFFETT: And that’s what you want to prepare for.

CHARLIE MUNGER: Yes. And I think that, generally speaking, that we get multicultural you can also be multidisciplinary. But generally I think people make more money if they’re very narrowly specialized, like the proctologist. (Laughter)

And it’s much harder to make a lot of money for most people if you try to imitate Warren and me.

WARREN BUFFETT: I’m glad I didn’t meet him earlier. I mean - (Laughter)

15. Subsidiaries encouraged to offer low-cost 401(k) options

WARREN BUFFETT: OK, Andrew.

ANDREW ROSS SORKIN: OK, this question comes from someone who says, “I am a Berkshire employee and shareholder.”

WARREN BUFFETT: Uh huh.

ANDREW ROSS SORKIN: “I read an investigative article from ProPublica and The Washington Post that many of Berkshire’s various units only offer 401(k) plans with high fees that are actively managed rather than the low-cost indexes you have advocated as the best path for savings for retirement.

“The article’s author said he contacted the company and nobody would comment.

“Will you do something to improve our 401(k) offerings to match your investment philosophy? And from an operational perspective, how did this happen, given your strong views on the topic?”

WARREN BUFFETT: Well, I’ve absolutely said what - many, many times through annual reports - and our managers know what I think about the attractiveness of having an index fund option. But they all have different plans, different histories. And they run their businesses.

And who knows, you know, which particular - if you go back to the older businesses, they have defined benefit pension plans, generally. Nobody puts them in anymore. And then the question is, you know, do you transition to something else.

In the end, we overwhelmingly thought our managers make those kind of decisions and others. And my guess is that a very high significant percentage of people who have - who work at a company that has a 401(k) plan will have an index fund option, but they may not, in some cases.

The only thing we - I think we have asked the companies to have a limit on the percentage, I think, that they might put in Berkshire’s stock through the 401(k). We don’t want people to lose jobs who are tied to Berkshire.

We certainly don’t want to be in the position of encouraging to put 100 percent or something of their savings in Berkshire itself. I don’t want to be in that position.

But I don’t think even there we’ve insisted on any company doing that. I think we’ve probably made that, when we’ve been asked about it once or twice, I think we’ve given that suggestion.

But the managers will run the companies. The employees, if they feel - and some of our companies have human relations departments - if they feel that they’d like different options or something like that, you know, they should make those views known to the managers. And in some cases the managers, I think, will pay attention to them and in others they probably won’t.

We’ve got a wide variety of managers that run our businesses. And we’re not going to start trying to run them from Omaha.

Charlie?

CHARLIE MUNGER: Well, you’re right. That has happened. That business of the high-fee choices, because we’ve delegated the whole subject to the managers of the subsidiaries. And so no attention at all is being given to the employee choices at headquarters.

And what you’re pointing out is that a lot of the employees in the subsidiaries would do better if they indexed instead of choosing what they did choose. My guess is you’re absolutely right about that. You know.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: And if there are any people, managers, in the business today, I hope we’ll do a little better at encouraging better choices.

WARREN BUFFETT: Yeah, although we don’t want them to interfere too much in -

CHARLIE MUNGER: No.

WARREN BUFFETT: - directing what they, you know, we can take over human relations.

CHARLIE MUNGER: No, it’s up to the managers. But we wouldn’t object to a little different viewpoint.

WARREN BUFFETT: And we have made it very clear what we think. I mean, some of them don’t listen to us. (Laughter)

16. Berkshire’s culture will continue because “it works”

WARREN BUFFETT: OK, Gregg.

GREGG WARREN: Warren, you’ve noted time and again that there is a strong common culture shared across Berkshire subsidiaries built on a commitment to honesty and integrity, a focus on the long-term, and an emphasis on customer care. And it’s also critical to find cultures that mesh well with Berkshire’s when acquiring operating companies.

In most cases, the managers that are currently running these subsidiaries are the same individuals who are members of the families that originally sold their firms to Berkshire, leaving them with a vested interest in the businesses they are running and a strong connection to the culture they tend to share in common with Berkshire.

It seems to me that the greater challenge is in ensuring that the large publicly-traded firms that have been acquired and account for a meaningful and growing amount of Berkshire’s overall value, stay the course. Could you comment on whether or not this is the case and what the greatest challenge is for you and Charlie when it comes to not only maintaining Berkshire’s culture but in finding firms that would fit in well with what you’ve built?

WARREN BUFFETT: Yeah, I think the culture is very, very strong. And I think it gets reinforced - frankly, I think it gets reinforced by the shareholders we have. I mean, we have a different body of shareholders and we look at those shareholders, I think, in a somewhat different way than a good many other companies do.

I mean, I think there are a fair number of public companies that wish they didn’t have, you know, public shareholders. We’re happy to have public shareholders. And we like having individual shareholders. And we don’t favor institutions. And we’re not going to, you know, give guidance and talk especially to them on investor calls and all that sort of thing. We want our - we want it to be directly with - we want shareholders who are partners, basically.

And it begins with that. It goes to the directors. We have directors who are not - well, I’ve been on 19 boards, and I’ve never seen another board like ours. And I think it’s terrific that we’ve got the people who represent, in many cases, lots of shares themselves. They didn’t gets special deals. It’s a group of owner-oriented, Berkshire-conscious, business-savvy owners.

And we don’t have anybody on the board because they’re a leading, you know, educator or whatever it may be. We want people who, basically, think about how to run a business well for themselves and for their partners. And we’ve got managers who fit into that culture, who have chosen that culture in coming with us.

And sometimes we have the second or the third or fourth generation, say at the Nebraska Furniture Mart, that share that. Is it perfect? No, it’s far from perfect. I mean, you don’t get everybody thinking the same way. We have people - we have people that are very independently minded running a lot of businesses. And some of them have different political beliefs, they have different - they see through different lenses than we do, to some degree.

But in terms of having a common, strong, positive culture, I don’t think there’s any big public company that has it any better than Berkshire. And I think that will continue because people opt into it to a great deal. Cultures get passed along. You do things that are consistent with the culture, so you do - what you talk about is what you do.

And you don’t find people saying, you know, “We’re a wonderful partnership,” and then voting themselves, you know, huge options. And then a whole bunch of other people will say options beneath them because they can’t look like they’re taking it all for themselves, and arranging - I read about some deal where it could pay off with many, many, many billions of dollars, the other day. We won’t name names.

But we’ve got as good a culture as you can get. And I would say, net, it grows stronger. We have a few people all of the time that really don’t buy into it entirely. I mean, it is not 100 percent. But it’s as close to it.

And I think it gets closer all the time as we go along. And we will keep - we will try to keep behaving in a way that reinforces it and doesn’t dilute it. And I think that will not only work for Charlie and me but it will work for our successors very well. It won’t be perfect.

Charlie?

CHARLIE MUNGER: Every time I come to one of these meetings and sit in the manager’s luncheon, I feel more strongly at the end of the luncheon that the culture and values of Berkshire Hathaway will go on and on for a long time after the present management is gone.

In fact, I think it’ll go on after all of the present managers are gone. I think we’ve started something here that will work well enough that it will last. And one of the reasons it will last is it’s not that damned easy to duplicate.

So the one that is present is likely to just keep going and going. Think of how little direct copying of the Berkshire system there’s been.

WARREN BUFFETT: But it won’t produce the returns it’s produced in the past even.

CHARLIE MUNGER: No, I think it’s going to last a long time for a very simple reason. It’s going to -

WARREN BUFFETT: It works.

CHARLIE MUNGER: - deserve to last a long time.

WARREN BUFFETT: It works.

CHARLIE MUNGER: And it’s going to work.

17. Cash needed to support Berkshire insurance operations

WARREN BUFFETT: OK. (Applause) Station 4.

CHRISTIAN MAX: My name is Christian Max (PH). I’m a proud shareholder from Cologne, Germany. It is my pleasure to be here.

My question relates to the Berkshire insurance operations. When I look at the quarterly billing sheets of the last two decades, I noticed a pattern that I kindly ask you to discuss.

The sum of cash plus fixed income always hovers around 100 percent of the amount of insurance float. Therefore, my question is, is it fair to say that from the 128 billion of consolidated cash plus fixed income as of March, 116 billion are actually needed to support the insurance operations?

WARREN BUFFETT: No, I appreciate -

CHARLIE MUNGER: The answer is no. Yes.

WARREN BUFFETT: The answer is no. But he deserves an explanation of how this - maybe I haven’t looked at it the way he’s looked at it.

We would much rather have a number closer to 20 than to have 116. And we do not correlate or, in effect, measure the float and then decide how much to put or leave in cash, in fixed income.

The fact -our float keeps growing. And lately our - which is by design and has been terrific for us - and our cash and cash equivalents have has grown because the competition for acquisitions has become much stronger as - both as money has piled up with the buyers of businesses and because debt has been so cheap and a variety of factors.

But I don’t think those are necessarily permanent. In fact, it would be reasonably true they aren’t permanent. It’s just a question of when they change.

We are not tying, as Charlie said, we’re not tying the cash and cash equivalents at all to float. The float is (inaudible).

The float went up $2 billion in the first quarter. And there is no way that that that float can shrink a lot in any short period. It just structurally has been set up in such a way that it will not - it cannot shrink. And actually, I think it’ll grow a little bit for a while.

I mean, I’ve always been amazed by how much it has grown. We’ve got so much more float than any property-causality company in the world. And it’s pretty amazing that it all came from that little building that Jack Ringwalt built and picked the location because it was near the tennis courts. (Laughs)

OK, Carol.

Oh, and Charlie.

CHARLIE MUNGER: There are encouraging recent developments. Some of the cash has gone out recently for securities we vastly prefer over the cash. And we have a lot of cash that could be - remaining - that could be deployed in securities we might like a lot better than Treasury notes. So stay tuned.

WARREN BUFFETT: Yeah, to make it very simple, in the first quarter we earned five and - from operations we earned a little over $5 billion. Now, we only spent about our depreciation. Normally we would spend somewhat more than that. But that’s 5-and-a-fraction billion. Two billion came, in net, from float. So that’s $7 billion that - basically in the first quarter - that would have been added to our cash if we hadn’t done something with it. And instead our cash and equivalents went down, because we, net, invested more in equities by some margin than the seven that came in.

But we do have this position where, even absent a change in float, about 400 million comes into Berkshire every week, which is very comfortable. (Laughs)

And we will - we want to get it so that more than 400 million is going out into productive assets. And we succeeded in doing that in the first quarter. And, net, net we improved our position in the first quarter.

18. “Amazing” earnings in the new “asset-light economy”

WARREN BUFFETT: Carol?

CAROL LOOMIS: In your 1999 article in Fortune magazine, you stated your belief that after-tax corporate profits were unlikely to hold much above 6 percent for any sustained period, due not only to competition but also to public policy.

You stated in the article, “If corporate investors, in aggregate, are going to eat an ever-growing portion of the economic pie, some other group will have to settle for a smaller portion. That would justifiably raise political problems.”

Since 2008, after-tax corporate profits have been 8 to 10 percent of GDP. Do you believe that is a permanent shift in the U.S. economy? And of course, we have to think about the latest tax bill. Or will corporate profits revert back to the 4 percent to 6 percent of GDP range that was normal in the 20th century?

WARREN BUFFETT: Well, it’s been an interesting development during that period. It goes back a little bit before that period. But you now have the four largest companies, by market value, in the United States - a $30 trillion market - you have four companies that essentially don’t need any net tangible assets.

And if you go back many years, I mean, if you looked to the largest companies - Carol used to put out the Fortune 500 list. And you know, it would be AT&T and General Motors, and it was companies that - Exxon Mobil - it was companies that just required lots of capital in order to produce earnings.

So American industry has gotten incredibly more profitable, in aggregate, in the last 20 or 30 years. You look at the return on the S&P 500, the earnings as a percent of net tangible assets, and the rest is just, you know, if you buy a company that has a million dollars’ worth of net worth and you pay a billion for it, it still only had the million dollars’ of net worth. I mean you just paid more for it. So the basic profitability of the company is huge, even though your investment may be at a significantly higher price.

So that what has happened is that, I think if you look at the earnings on tangible net worth of the S&P 500 and compare it to 20 years ago, it is amazing. And that is really due to the fact that this has become somewhat, you could call it an asset-light economy.

And you know, those four companies that earn 10 percent of the - they comprise close to 10 percent of the market value of the entire publicly-traded corporate America, they don’t - and they don’t take any money, basically. And that is a changing world. And they will earn even more money with the tax rate going down.

And I don’t think people have quite processed all that information in terms of what has gone on in the market.

You don’t - you know, [Andrew] Carnegie built a steel mill, and then he paid it off. Or he borrowed a little money, and then he built another steel mill, and all of that sort of thing. But it was enormously capital-intensive.

And one industry after another. AT&T was enormously capital-intensive. And now the money is in the asset-light - I mean, huge money is in the - not only asset-light business - but the negative asset.

You know, IBM even, you know, had - it has no tangible - it has a net - minus tangible net worth. There’s nothing wrong with that. It’s terrific. But it is not the world we lived in 30 years ago.

And in that sense, I didn’t see that coming in 1999 when I wrote whatever I wrote there. It hasn’t changed the profitability of the asset-heavy companies particularly. I mean, it isn’t like oil.

If you take the five most capital-intensive industries in the ’90s, I don’t think you’ll find that their earnings on tangible asset have increased a lot. But you will find that this group has moved in that really doesn’t - they don’t need any net tangible assets at all, or they need very minor amounts.

Charlie?

CHARLIE MUNGER: There’s also a lot of financial engineering that’s raised leverage, even in the capital-intense businesses. And you know, while Warren may have predicted a little wrong when he wrote that very scholarly article, he didn’t invest wrong. And so it just shows that it’s hard to make these economic predictions.

WARREN BUFFETT: OK, Jon -

CHARLIE MUNGER: We weren’t very right on that one, Warren.

WARREN BUFFETT: Yeah, actually, the performance of the stock market since then has been pretty accurate. (Laughs)

CHARLIE MUNGER: Yes. That’s true.

WARREN BUFFETT: Yeah. Being right for the wrong reason or something. (Laughs) Or wrong for the right reasons.

19. “We still feel OK” about AIG’s $10.2 retroactive premium

WARREN BUFFETT: Anyway, Jonathan? (Laughs)

JONATHAN BRANDT: Berkshire received a 10.2 billion retroactive premium from AIG early last year. If the upwardly revised estimate of 18.2 billion of ultimate claims proves to be correct, will the cost of float, adjusted for favorable tax attributes, likely be lower or higher than what Berkshire would have paid to borrow 10 billion for a similar duration?

WARREN BUFFETT: Well, we certainly go in with the idea that it will be - the cost will be lower. And it’s an interesting situation.

We - essentially, AIG, which is one of the largest property-casualty, particularly commercial property-casualty companies in the world, said, “We want to give you all of the losses that we incurred in a very big percentage of our domestic business before December 31st of 2015, and we will pay the first 25 billion. And then after we pay 25 billion and AIG pays $25 billion, then you pay 80 percent of the next 25 billion.” And they gave us $10 billion for doing that. And that’s -

If we are correct about our estimates of how much money will be paid and when it will be paid, we should come out being better off than if we had borrowed a similar amount.

We have a history of doing 10 or so - maybe 12 - big deals like that. We hold the record. We did it for Lloyd’s of London 10 or more years ago, and we did it now with AIG.

And sometimes we’ve been on the low side in our estimate, and sometimes we’ve been on the high side so far.

AIG just said that they - I think they paid 15-and-a-fraction billion on these pre-12/31/2015 losses. They paid 15-and-a-fraction billion. But the payments tend to trickle down over years as you get further away from when the losses occurred.

So I would say that we still feel OK about it, and we’ll be wrong one way or the other. Everybody is when you estimate losses that may not get settled for 20 or 30 years. But so far, on the group as a whole of these deals we’ve done, we’ve been OK. And I think on the AIG thing, we think we’ll be OK. And I think AIG thinks we’ll be OK. I mean, they entered into it for good reasons of their own. So it looks OK.

Sorry to get into this technical stuff, but Jonathan always asks me questions like that, so I have to be ready to - I want to answer them.

20. “We really want products where people feel like kissing you”

WARREN BUFFETT: OK. Station 5.

AUDIENCE MEMBER: Good afternoon. My name’s Adam Bergman with Sterling Capital in Virginia Beach, Virginia. I’m here with my daughter Michelle from Cape Henry Collegiate in Virginia Beach.

AUDIENCE MEMNBER: Hi Warren, hi Charlie.

AUDIENCE MEMBER: Our question for you is how you go about attempting to forecast the degree of future success of one specific product in a good business versus another, such that you invest in American Express and Coca-Cola rather than Diners Club or RC Cola, for example. Thanks.

WARREN BUFFETT: Well, with American Express - (laughs) - it was an interesting situation, because Diners Club got there first. I think American Express, in a certain sense - I mean, they did it for a lot of reasons - but they went into the credit card business because they were worried about what was going to happen to traveler’s checks. And - although traveler’s checks are - still exist in a significant way.

But the interesting thing when American Express went into competition with Diners Club, and with Carte Blanche, as I remember that - which also existed at the time - was that instead of charging less than Diners Club and going in figuring they were going against the established guy and they’d come in at a lower price, they went in it at a higher price, as I remember.

And the American Express centurion was on that card. I’ve got one that I got in 1964, but they were in it before that. It had more value in time. I mean, it got better representation. And frankly, if you were a salesperson out with somebody, and you could pull out that American Express card with that centurion, you looked you were JP Morgan. And if you pulled out the Diners Club, it had a whole bunch of flashy symbols, you looked like a guy that was kiting his checks from one month to the next, and - (Laughter)

A fellow named Ralph Schneider - Ralph Schneider and Al Bloomingdale developed the Diners Club. And they were very smart about getting there first, but they weren’t smart about how they merchandised it subsequently.

RC Cola, you know, it did - there are all kinds of colas that came after Coke. I mean, you know, you go back to 1886 and come up with something at Jacobs’ Pharmacy that’s incredibly successful, you know, fairly soon you’re going to get lots of imitators. But Coke really is the real thing. And you know, you offer me RC Cola and say, “I’ll give it to you at half the price of Coca-Cola,” in terms of drinking it,

I mean, just, this is a product that’s 6 1/2 ounces, sold for a nickel in 1900, you know. And now if you buy it on the weekend and buy it in large quantities and everything, you’re not paying that much more. This newspaper was three cents in 1942, you know. I mean, the amount of enjoyment per real - in terms of the real - of what you pay for this, has gone dramatically down in inflation-adjusted money. So it is a bargain product.

You know, you have to look at - See’s Candy, you know, if you live in California and you were a teenage boy, and you went to your girlfriend’s house and you gave the box of candy to her or to her mother or father and she kissed you, you know, you lose price sensitivity at that point. (Laughter)

So we really want products where people feel like kissing you, you know - (laughs) - rather than slapping you.

It’s an interesting thing. I mean, you know, in effect we’re betting on the ecosystem of Apple products, but - led by the iPhone. And I see characteristics in that that make me think that it’s extraordinary. But I may be wrong.

And you know, so far we’ve been - I would say we’ve been right on American Express and Coca-Cola.

American Express had this huge salad oil scandal in 1960 happen - in ’63, November, right around the time [President John] Kennedy was shot. And there was really worry about whether the company would survive.

But nobody quit using the card. Nobody quit using the traveler’s checks. And they charged a premium price for their traveler’s checks. So there are things you can see around consumer products that sometimes can give you a pretty good insight into the future. And then sometimes we make mistakes.

Charlie?

CHARLIE MUNGER: I’ve got nothing to add, except that if we’d been offered a chance to go into Coca-Cola right after it was invented, we probably would have said no.

WARREN BUFFETT: We’d have turned it down. Yeah.

CHARLIE MUNGER: It would’ve looked kind of silly to us.

WARREN BUFFETT: Well, unless we drank it, now, Charlie, listen. (Laughs)

No, he’s right. I mean, we don’t foresee things that we haven’t got a lot of evidence in on. And -

CHARLIE MUNGER: No.

WARREN BUFFETT: We want to see a lot of - if we’re talking about a consumer product - we want to see how a consumer product behaves under a lot of different circumstances, and then we want to use something - actually, there was a book by Phil Fisher written around 1960 called “Common Stocks and Uncommon Profits.” It’s one of the great books on investing.

And it talks about the “scuttlebutt method” of investing, which was quite a ways from what Ben Graham taught me in terms of figures. But it’s a very, very good book. And you can learn a lot, you know, just by going out and using some shoe leather.

Now they call them channel checks now or something like that. But it’s - you can get a feel for some products, and then there are others you can’t. And then sometimes you’re wrong. But it is a good technique. It’s an important investing technique, I would say that. And Ted [Weschler] and Todd [Combs] do a lot of that. And they have people - some people that help them out on doing it, too.

Charlie’s done it with Costco. I mean, he’s - (Laughs)

I mean, all the time he is finding new virtues in Costco, you know, and then it - and he’s right, incidentally. I mean, Costco has an enormous appeal to its constituency. They delight - they surprise and delight their customers. And there is nothing like that in business. You have delighted customers, you’re a long way home.

21. Hostile bids aren’t “evil” but Berkshire doesn’t do them

WARREN BUFFETT: OK, Becky.

BECKY QUICK: This comes from John Hegarty (PH) at Brightstar Capital Partners, who writes, “Warren, you’re stepping down from the Kraft Heinz board at a time when the company’s looking to do a large acquisition: Unilever, for example. Do you fundamentally disagree with the combative nature of hostile bids, activist investing, and competitive proxy contests?”

WARREN BUFFETT: Well, we will not make hostile tenders ourselves. I do not believe that there’s anything fundamentally wrong with the idea. I mean, if you take the Fortune 500 companies, I’m sure that all 500 are not managed by the best, or in some cases even the friendliest to investor managements in the world.

So I don’t think it’s evil or anything to conduct a hostile offer for a company. It’s just we won’t do it, and we don’t want to get into that. We like being liked by the managements that we join, because we’re counting on them to run the company, and we’re not bringing in a whole bunch of people that know how to change businesses.

We seldom take a position opposite the management - very seldom - on anything involving a proxy, but - contest of sorts. But we don’t rule it out. We don’t think every management is entitled to be - you know, they don’t have a lifetime hold on their business. But it’s not our style at all to - well, we won’t do it in terms of initiating it ourselves, and we’d be very, very, very unlikely to support a contest.

But we have voted against a couple of propositions over 50 years that managements have had - made - in relation to stocks options. We withheld a vote at Coca-Cola a few years ago to express our opinion.

But we don’t think it’s evil for the shareholders, in some cases, to have different opinions about who should run the company, or whether compensation’s appropriate, or matters of that sort. The stockholders still own the company.

Charlie?

CHARLIE MUNGER: I’ve got nothing to add to that. I don’t envy these people that are in these unfriendly uproars all the time. Imagine doing that after you’re already rich. It’s insane. (Laughter)

WARREN BUFFETT: Yeah. Yeah, we are definitely not looking for it. We don’t -

There are certainly companies that deserve challenge. And they propose things that deserve challenge occasionally. But again, it’s not our main activity.

And incidentally, this has - the question was asked in reference to Kraft Heinz.

The people at 3G are great, great managers. They’ve been wonderful partners. I had made a determination, before we got involved there, I was going to be on no more public boards. I’d been on 19 of them, and it takes a lot of time. And they asked me if I’d go on for a while, and I did.

But it really is, like, seven-and-a-half days or something. And if you’re on a bank board, it may be quite a bit more than that. I mean, there just -

Being on a public board usually means quarterly meetings plus maybe an extra one. And, you know, at 87, I think I’ve now learned what happens, and it’s fine, but I don’t want to spend seven-and-a-half days a year when I - maybe I can call up people that I trust and admire who are on the board in five minutes, you know, and find out what’s going on or whatever it may be, any questions that come up.

And so we are their partners, and delighted to be their partners. And now we have two people on the board of Kraft Heinz, and they can do the traveling and I can stay home.

Charlie, how many public - you’re on Costco, of course, over the - your lifetime, how many public boards?

CHARLIE MUNGER: Oh, I - Costco - except for something -

WARREN BUFFETT: Kansas City Power.

CHARLIE MUNGER: - like The Daily Journal where I own part of it, Costco’s the only public board -

WARREN BUFFETT: You were on Kansas City Power.

CHARLIE MUNGER: - if it wasn’t Berkshire or something I owned personally.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: I was on Kansas City Power and Light. Boy, that goes way back. But basically it hasn’t happened. I don’t envy people who float around to a lot of different board meetings.

WARREN BUFFETT: No, generally speaking you have very little influence and spend a lot of time. And the trouble is, if you’re going to a board meeting, particularly if you get to the international, and sometimes they feel they have to have one that’s international, you know, they feel they have to take up a fair amount of your time or it wouldn’t have been worth coming, you know, thousands of miles for.

So you get a lot of the show and tell stuff and - that - I find my mind drifting. OK. (Laughter)

22. Berkshire still not on radar screen of international business sellers

WARREN BUFFETT: Gary.

GARY RANSOM: Yes, you’ve said that you are looking for non-insurance large acquisitions to put that cash to work. And when you’ve said that, I’ve usually thought of the United States, because you’re a big fan of the U.S. business.

And I just was wondering whether you’re seeing more opportunities as the rest of the world opens up, grows, whether there’s opportunities for some of those mega-transactions in other parts of the world, say Asia or Europe.

WARREN BUFFETT: Yeah, Gary, I would say that I’ve been disappointed in that, because we do see some outside the United States, and thank heavens we saw the one we saw in Israel some years ago [ISCAR] when Eitan [Wertheimer] wrote me a letter. But - and you know, we bought a business which is a very important part of Berkshire now.

But we are still not - they’re certainly aware of Berkshire Hathaway outside the United States. But they don’t sort of pick up the phone automatically.

In the United States, I think any large - particularly private - company that thinks - is thinking about doing something, they at least think about Berkshire. But that - in Europe or Asia, that - we are not embedded in the minds the same way.

They know about us, they know we’ve got a lot of money and they know we like to buy things. But we really, we’re on the radar screen big-time in the United States, and we’re not as - we don’t - the immediate desire to be sure that they’ve thought about the Berkshire option does not occur the same way outside the United States. And we’ve tried to encourage it a few ways. But I would say that the results have not been great at all.

But I hope tomorrow, you know, I get a call from Germany or Britain or Italy or you name it, and Australia, wherever it may be. And I hope I get a call and we get an opportunity to do it.

There’s a good many countries we’d be quite happy to put substantial money into it. And like I say, our experience in Israel has been just terrific.

Charlie?

CHARLIE MUNGER: Yeah, but the corporate acquisition game now is so driven by the leveraged buyout and the so-called, whatever they call them, strategic, yes, strategic. I usually translate that into barnyard language. (Buffett laughs)

And we’re so - there’s so much craziness in price from our viewpoint. Of course, it’s very hard for us to do it.

The people in the leveraged buyout game, who love massive leverage and don’t mind high prices, even they are getting nosebleeds. It’s hard. And it’s not an environment that means that - that allows Berkshire just to go out and buy a whole lot of companies.

WARREN BUFFETT: Have you ever made a strategic deal that you -

CHARLIE MUNGER: We have to wait.

WARREN BUFFETT: We’ve made a strategic deal that you can remember?

CHARLIE MUNGER: Hmm?

WARREN BUFFETT: Have we ever made a deal that we would have regarded as strategic?

CHARLIE MUNGER: We’ve never had a strategic plan unless you’ve hidden it from me. (Laughter)

WARREN BUFFETT: OK. That answers that.

23. Investing “doesn’t require advanced learning”

WARREN BUFFETT: Station 6.

AUDIENCE MEMBER: Hi, I’m Brady Ritchie (PH) from St. Louis, Missouri. Shareholder since 1996.

WARREN BUFFETT: Terrific.

AUDIENCE MEMBER: Warren, you and Charlie have been critical of business schools in the past and what they teach. With respect to value investing, in “Superinvestors of Graham-and-Doddsville,” you featured the returns of many great investors with different backgrounds’ work in education, with the lesson being, “Following the philosophy is the key.”

To be successful today, does it still just fall back to chapter eight of “The Intelligent Investor?” And what do you think of programs and designations such as CFA, CFP, et cetera, which purport high standards yet root it heavily into academia? And I’d like to challenge you to a round of bridge tomorrow. (Laughter)

WARREN BUFFETT: And what was the last part?

CHARLIE MUNGER: Well, he was talk - what do we think about -

WARREN BUFFETT: Yeah, business schools and all that.

CHARLIE MUNGER: - business schools and all that.

WARREN BUFFETT: I didn’t catch the last -

CHARLIE MUNGER: They’re better -

WARREN BUFFETT: Oh, he’s challenged me to a round of bridge. OK. The - (Laughter)

I went to three business schools, and at each I found a teacher or two. I went to one specifically to get a given teacher. But at each one of them I found a teacher or two that I really got a lot out of. The - so we’re not anti-business school here at all.

We do think that the priesthood, say, 30 years ago, for example, in terms of - or 40 years ago - in terms of efficient market theory and everything. They strayed pretty far, in our view, from the reality of investing. And I would rather have a person - if I could hire somebody among the top five graduates of number one, two or three of the business schools, and my choice was somebody that had - was bright - but had chapter eight of “The Intelligent Investor” absolutely - it just was natural to them - they had it in their bones, basically - I’d take the person from chapter eight.

This is not - what we do is not a complicated business. It’s got to be a disciplined business, but it is - it does not require a super IQ or anything of the sort. And there are a few fundamentals that are incredibly important, and you do have to understand accounting. And it helps to get out and talk to consumers and start thinking like a consumer in many ways in certain - and all of that.

But it just doesn’t require advanced learning. And - I - I certainly - you know, I didn’t want to go to college, so I don’t know whether I would have done better or worse if I’d just quit after high school, you know, and read the books I read and all of that.

I think that if you run into a few great teachers, and they really change the way you see the world to some degree, you know, you’re lucky. And you can find them in - you can find them in academia and you can find them in ordinary life.

And I’ve been extraordinarily lucky in having great teachers, including Charlie. I mean, Charlie’s been a wonderful teacher. And, you know -

Anyplace you can find somebody that gives you insights into things you didn’t understand before, maybe makes you a better person than you would have been before, you know, you get - that’s very lucky, and you want to make the most of it. If you can find it in academia, make the most of it. And if you can find it in the rest of your life, make the most of it.

Charlie?

CHARLIE MUNGER: Well, when you found Ben Graham he was unconventional, and he was very smart. And of course, that was very attractive to you. And then when you found out it worked and you could make a lot of money while you’re sitting on your ass - (laughter) - of course you were an instant convert. And so -

WARREN BUFFETT: It still appeals to me, actually. I mean - (Laughter)

CHARLIE MUNGER: But the world changed. Before he died, Bill Graham - I mean, Ben Graham - recognized that the exact way he sought undervalued companies wouldn’t necessarily work for all times under all conditions. And that’s certainly the way it worked for us.

We gradually morphed into trying to buy the better companies when they were underpriced, instead of the lousy companies when they were underpriced. And of course, that worked pretty well for us.

And Ben Graham, he outlived the game that he played personally most of the time. He lived to see most of it fade away. I mean, just to find some company that’s selling for one third of its working capital, and figure out it could easily be liquidated and distribute $3 for every dollar of market price. Lots of luck if you can find those in the present market. And if you can find them, they’re so small that Berkshire wouldn’t find them of any use anyway.

So we’ve had to learn a different game. And that’s a lesson for all the young people in the room. If you’re going to live a long time, you have to keep learning.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: What you formerly knew is never enough. So if you don’t learn to constantly revise your earlier conclusions and get better (inaudible), you are - I always use the same metaphor. You’re like a one-legged man in an ass-kicking contest. (Laughter)

WARREN BUFFETT: If anybody has suggestions for another metaphor, send them to me. (Laughter)

Graham, incidentally, one point, important point. Graham was not scalable. I mean, you could not do with really big money. And when I worked for Graham-Newman Corp, here he was, the dean of all analysts. And you know, he was an intellect above all others around that time.

But our - the investment fund was $6 million, and the partnership that worked in tandem with the investment company also had about $6 million in it. So we had 12 million bucks we were working with. Now, you can make adjustments for inflation and everything. But it was just a tiny amount. It wasn’t really scalable.

And the truth is that Graham didn’t care, because he really wasn’t interested in making a lot of money for himself. So he had no reason to want to find something that could go on and on, become larger and larger.

And so the utility of chapter eight, in terms of looking at stocks as a business, is of enormous value. The utility of chapter 20 about a margin of safety is of enormous value. But that’s not complicated stuff.

CHARLIE MUNGER: I finally figured out why the teachers of corporate finance often teach a lot of stuff that’s wrong. When I had some eye troubles very early in life, I consulted a very famous eye doctor. And I realized that his place of business was doing a totally obsolete cataract operation. They were still cutting with a knife after better procedures had been invented.

I said, “Why are you in a great medical school performing absolute obsolete operations?” And he said, “Charlie, it’s such a wonderful operation to teach.” (Laughter)

Well, that’s what happens in corporate finance. They get these formulas, and it’s a fine teaching experience. (Laughter)

You give them a formula, you present the problem, they use the formula. You get a real feeling of worthwhile activity. (Laughter)

There’s only one there. It’s all balderdash.

WARREN BUFFETT: Yeah, whenever you hear a theory described as elegant, watch out, you know. (Laughter)

CHARLIE MUNGER: Right.

24. Buffett “bullish on human race” as women enter the workforce”

WARREN BUFFETT: OK, Andrew.

ANDREW ROSS SORKIN: This question - we got a couple like this one - comes from Lauren Taylor Wolfe. She’s a managing partner at Impactive Capital.

“Warren, you’ve recently said that one of the things that makes you optimistic about America is women entering the workforce and the quote ‘doubling of the talent that’s effectively employed in that workforce.’ When it comes to positions of leadership, however, women make up less than 21 percent of boards of S&P 500 companies, and an even smaller 5 percent of the CEOs.

“What can Berkshire do, and what is Berkshire specifically doing, as a major investor in many of these large companies, to advance gender equality, both at the board level and among senior leadership?”

WARREN BUFFETT: Yeah. Well, again - (applause) - you know, as I’ve pointed out in the past, one of my sisters is here. And I have two sisters that are absolutely as smart as I am. And they have better personalities, as anybody that knows both of us - or all of us - can attest. And they didn’t remotely have the same opportunities I had.

And you have this 1942, or - New York Times - and you know, women could be nurses or teachers or retail clerks or stenographers. And that actually worked enormously to my advantage when I was a kid in Omaha in the ’30s, because I had way better teachers, because they were - that was a job open to women, I didn’t have a single male teacher in grammar school, and Charlie didn’t when he went to Dundee, I don’t think, either.

And we had this huge talent pool that was being funneled into very few opportunities, and therefore we got better than we deserved in terms of a market system producing it. The -

Again, our managers run their companies. But I’ve probably named - before we made this management change - I probably named only six or seven CEOs in the last five or six years. We don’t change that much. But I would say that half of them that I’ve named have been women, which is about what you would - what should turn out to be the case in terms of ability.

Now, there is a certain pipeline problem, but that gets cured with time, and you can’t use that forever as an excuse.

And you know, I feel very good about the decisions we made for CEOs. I prefer all our CEOs to live forever. And one woman almost did that, that we hired. Mrs. B. [Nebraska Furniture Mart founder Rose Blumkin] lived to be 104. She retired at 103. And that’s a lesson to our other managers, that if you retire prematurely, you know - (laughter) - no telling what’ll happen.

But it is absolutely true. It does make me bullish. It makes me bullish on the human race. But it’s certainly on our country. Because if you look at what happened, you know, before the 19th Amendment, and then after the 19th Amendment for a long time, and continuing to this day, but it’s - that - there’s been significant improvement.

And I do feel more optimistic about the future, because I think there will be more selection by merit, rather than, you know, by gender or by race or by inheritance.

I think that if you had a system where all businesses got passed on to the eldest son or something, I think it - I think that society would make a lot less progress than one that’s merit-based.

Charlie?

CHARLIE MUNGER: Well, we did live in a different age. There’s an old saying that the past is a very strange country. People behave quite differently there. And it was just totally different. And it was ridiculous that - I cannot remember - I had one or two male teachers in my high school. But almost none. And the world has really changed.

And within Berkshire, I’ve never seen any overt discrimination anywhere on the grounds of gender.

WARREN BUFFETT: There probably has been some, though. I mean -

CHARLIE MUNGER: No, no, I’m sure that we have our -

WARREN BUFFETT: Oh, there has -

CHARLIE MUNGER: -share of all the peculiarities of human nature.

WARREN BUFFETT: Sure.

CHARLIE MUNGER: But it’s generally, it’s - everything has always improved, wouldn’t you agree with that?

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: And I think it’ll keep improving.

25. Berkshire buybacks not limited by state insurance rules

WARREN BUFFETT: OK. Gregg?

GREGG WARREN: Warren, in this year’s annual report it was noted, much as it is every year, that payments of dividends by the company’s insurance subsidiaries are restricted by insurance statutes and other regulations, with Berkshire’s insurance operations currently allowed to declare up to 16 billion as ordinary dividends during 2018.

My question here is, should we view this annual regulatory threshold for dividends as a benchmark for allowable share repurchases as well? And in the event that Berkshire wanted to buy back more stock than that, or pay out even more as dividends, would there be an issue with you using capital from operations that aren’t held by the insurance operations to return additional capital?

With the side question here being, would the annual cash distribution from BNSF, which is held on National Indemnity’s books, be excluded?

WARREN BUFFETT: Yeah. The - we will obviously follow the rules of the states in which we’re domiciled, and all the rules, of course. But basically it’s the state of domestication in the insurance companies, and they do restrict the amount of dividends in any given year. Although you could, if you wanted to, request some additional amount. But we don’t ever consider that.

But repurchases - if repurchases were really attractive, we would do it in a very big way. And, you know, I wouldn’t rule - there’s all kinds of ways that we could arrange things to do either a very large acquisition, which is what I would prefer, or a very large repurchase, would I don’t think is probably in the cards just because the way our stock trades, not because we wouldn’t like it at a large discount.

So Charlie and I, we’ve got the appetite. And we would have - we’ve got a lot of cash - but we could have a lot more cash. We can make any deal of - even one of a very large size. We can make anything that came along - we could work out how to get it done.

We would - we would have - we’re not going to be doing this, but we would have partners who would come in and give us a preferential part of a partnership. That’s not going to happen, in all probability. But there’s a lot of things that we could do. So don’t rule out anything based on statutory limitations of distributions from insurance companies -

CHARLIE MUNGER: And that - we could get special permissions to -

WARREN BUFFETT: Oh, we can get -

CHARLIE MUNGER: - declare bigger dividends. We are not - you should not assume that we’re constrained by the laws of nature to the amount that we can take out under the statutes now.

26. Munger: “I don’t think the world is going to be changed that much by machine intelligence”

WARREN BUFFETT: OK, station 7.

AUDIENCE MEMBER: Hi, Warren and Charlie. Thank you for everything. I’m David (inaudible), an investment manager in Shanghai. I’ve been here for eight years.

If investment is a sport in the Olympics, you are our champion team. So my question is, facing the fast-growing machine challenges, how do you see the new competition impact the capital allocation productivity in the future?

For Charlie, what is the first principle of capital allocation from a general economic interest point of view? Thank you.

CHARLIE MUNGER: Well, two questions. Machine intelligence. I’m afraid the only intelligence I have is - is being provided by something that’s not a machine. And I don’t think I’m going to learn machine intelligence. Yeah. If you ask me how to beat the game of Go with my own intelligence, I couldn’t do it. And I think it’s too old for me to learn computer science.

Generally I’m - I think that the machine intelligence has worked. After all, a machine now can beat the best human player of Go. But I think there’s more hype in that field than there is probable achievement.

So I don’t think the world is going to be changed that much by machine intelligence. Some, but not hugely.

And what was the other question?

WARREN BUFFETT: Well -

CHARLIE MUNGER: One of them was machine intelligence.

WARREN BUFFETT: I think he was getting at capital allocation -

CHARLIE MUNGER: Oh yeah. That’s such a general question. Generally speaking, we’re always trying to get the best - to get something that’s worth buying.

And the human mind rejects that if you’re in academia, because you could come in and make one declaratory sentence at the opening of the semester and you wouldn’t have anything to do for the rest of the - of your time. So people want to find some formula. It’s what I call “physics envy.” These people want the world to be like physics.

But the world isn’t like physics, outside of physics. And that false precision just does nothing but get you in trouble.

So I would say you’ve got to master the general ideas, and you’ve got to work to improve your judgment slowly, the way all the rest of us had. And I don’t think most individuals have much hope of individual gain from machine intelligence.

WARREN BUFFETT: No, I don’t - I don’t think that - I’m impressed when machines beat Go or something of the sort, or even win at chess or whatever it may be.

I don’t really think they bring much to the table in terms of capital allocation or investing. And then I may be missing something entirely, you know, maybe I’m just blind to what’s out there.

CHARLIE MUNGER: You’re missing a lot of very remunerative, fee-earning twaddle. (Laughter)

WARREN BUFFETT: Yeah, well. Well, that takes care of that. So we’ll go on to station 8. (Laughter)

27. Munger: “American investors are missing China”

AUDIENCE MEMBER: Dear Mr. Buffett and Mr. Munger, thank you very much for hosting the meeting. It’s truly been remarkable. Thank you.

My name is Yen (PH), and I’m a partner at Tiger Brokers, a leading electronic brokerage firm from China.

Let me rephrase that. So, I and my colleagues flew half a way from the globe with (inaudible) to be here, and it is honor, just like everyone else in the stadium, we’re honored to be here.

My question is, you mentioned earlier that investors don’t really have to be struggling in picking the right stocks. They would do well in picking, probably, the right market and the right country.

China is the second-largest economy, and probably has the biggest growth potential. Just by passively weighting a portfolio - by passively valuating a portfolio - U.S. investors are significantly underweighting China. So in your opinion, what are stopping the investors from investing in China? Thank you.

CHARLIE MUNGER: Well, I think the answer is that you’re absolutely right. That we are - American investors are missing China. And they’re missing it because it’s a long way away, it looks different, they’re not used to it, it’s complicated, the headlines confuse them.

In other words, it just looks too hard, sitting in Omaha, to outsmart the Chinese market. But I think you’re absolutely right. It’s where they should be looking.

WARREN BUFFETT: OK. (Laughter)

We’ve actually had a couple investments in China. We’ve done pretty well. But there were - well, if you go back a number of years, (inaudible).

In terms of getting a lot of money into something, you know, many billions, and we have to get billions into things in - to move any kind of a needle, that can be tougher in markets that you’ve got - you’re unfamiliar working in. And it’s difficult under any circumstances.

But accumulating a 6 or 8 or $10 billion position in investments outside the United States can be very difficult. For example, in U.K. and much of Europe we have to report when we own 3 percent of a company. In fact, we can be asked to report if we even have less than 3 percent. That really gets very tough when we get a bunch of followers and a lot of publicity that probably isn’t deserved in terms of what we’re doing in the markets and everything.

Some of the problems are, just by the nature of our size. It would be lot - it’d be a lot easier if we were running a smaller fund.

PetroChina, we managed to get a very big position. But the government owned 90 percent of it. So we bought 14 percent of what the government didn’t own, but it was still only 1.4 percent of the company.

But Charlie, Charlie actually keeps pushing me to do more in China. And we’ve tried a couple of times, actually. And there was one operation that we got involved in -

CHARLIE MUNGER: Well, you did so poorly the first time, you put in 200,000 and got about 2 billion, so.

WARREN BUFFETT: Yeah. Yeah. Well.

CHARLIE MUNGER: Wasn’t encouraging enough. (LAUGHTER)

28. “What Jeff Bezos has done is something close to a miracle”

WARREN BUFFETT: OK. Station 9.

AUDIENCE MEMBER: My name is Dr. Sherman Silber. I’m an infertility doctor from St. Louis. And I’ve been a shareholder and coming to this meeting for 23 years, and I want to thank you very much for making my grandchildren very rich. (Laughter and applause)

And they sometimes compare me in the medical world - infertility world - as the Berkshire Hathaway of infertility, because I’m so old and I come from a relatively small community.

But I’m wondering about your interests in not just Apple, but all of the tech stocks, like Amazon and Google. Because you’ve avoided them, you’ve stated in the past, because they’re complicated, you should stick with something you understand.

On the other hand, Amazon and Google have what you call a very durable competitive advantage. They really hardly have any competitor. And that’s true in China, too, of Alibaba and Tencent.

So it seems like it’s a conflict, and I’m wondering if you’re going to be turning the corner and going into these tech companies that seem to have no serious competition.

WARREN BUFFETT: Well, we certainly looked at them. And we don’t think of whether we should be in tech companies or not, or that sort of thing. We are looking for things when we do get into the durability of the competitive advantage, and whether we think that our opinion might be better than other people’s opinion in assessing the probability of the durability, so to speak.

But the truth is that I’ve watched Amazon from the start, and I think what Jeff Bezos has done is something close to a miracle. And the problem is, if I think something will be a miracle, I tend not to bet on it. (Laughs)

It would have been better - far better, obviously - if we - if I had some insights into certain businesses.

But you know, in fact, Bill told me early on - Bill Gates told me early on - you know, that I think I was on AltaVista and he suggested I turn to Google.

But the trouble is I saw that Google was skipping past AltaVista, and then I wondered if anybody could skip past Google. And I saw at GEICO that we were paying a lot of money for something that cost them nothing incrementally.

We’ve looked at it, and you know, I made a mistake in not being able to come to a conclusion where I really felt that at the present prices that the prospects were far better than the prices indicated.

And I didn’t go into Apple because it was a tech stock in the least. I mean, I went into Apple because I made certain - came to certain conclusions about both the intelligence with which the capital would be employed, but more important, about the value of an ecosystem and how permanent that ecosystem could be, and what the threats were to it, and a whole bunch of things.

And that didn’t - I don’t think that required me to, you know, take apart an iPhone or something and figure out what all the components were or anything. It’s much more the nature of consumer behavior. And some things strike me as having a lot more permanence than others.

But the answer is, we’ll miss a lot of things that - or I’ll miss a lot of things - that I don’t feel I understand well enough.

And there is no penalty in investing if you don’t swing at a ball that’s in the strike zone, as long as you swing at something at some point, then you know, eventually that you find the pitches you like. And that’s the way we’ll continue to do it. We’ll try to stay within our circle of competence.

And Charlie and I generally agree on sort of where that circle ends, and what kind of situations where we might have some kind of an edge in our reasoning or our experience or something that - where we might evaluate something differently than other people.

But the answer is, we’re going to miss a lot of things.

Charlie?

CHARLIE MUNGER: Yeah, we have a wonderful system. If one of us is stupid in some area, so is the other. (Laughter)

And of course, we were not ideally located to be high-tech wizards. How many people of our age quickly mastered Google? I’ve been to Google headquarters. They look to me like they’re - it looks like a kindergarten. (Laughter)

WARREN BUFFETT: A very rich kindergarten.

CHARLIE MUNGER: Yes. (Laughter)

WARREN BUFFETT: No, it’s extraordinarily impressive, what they’ve done. And like I say, at GEICO we were paying them a lot of money at the time they went public. And all three of the main characters - Eric [Schmidt] and Larry [Page] and Sergey [Brin] - they actually came and saw me. But they were more interested in talking about going public and the mechanics of it and various things along that line.

But it wasn’t like what they were doing was a mystery to me. The mystery was how much competition would come along, and how effective they would be, and whether it would be a game where four or five people were slugging it out without making as much money as they could if one company dominated.

Those are tough decisions to make. You can have industries where there’s only two people in it, and they still don’t (inaudible) very good because they beat each other’s brains out. And that’s one of the questions in the airline business. It’s a better business now than it used to be, but it used to be suicide, so - (Laughs)

And you know that the competitive factors are extraordinary in airlines, and how much better business is it with four people operating at 85 percent capacity than it was at - with seven or eight operating in the mid-70s, and with more planes run. Those are tough decisions.

But I made the wrong decision on Google. And Amazon, I just - I really consider that a miracle, that you could be doing Amazon web services and changing retail at the same time, with - you know, without enormous amounts of capital, and with the speed and effectiveness of what Amazon has done.

I just - I underestimated - I had a very, very, very high opinion of Jeff’s ability when I first met him. And I underestimated him. (Laughs)

Charlie?

CHARLIE MUNGER: Well, my comment would be that the shareholders have one thing to be thankful for.

Some of the age-related stupidity at headquarters has been ameliorated by Ted and Todd joining us. We are looking at the world with the aid of some younger eyes now. And they’ve had a contribution -

WARREN BUFFETT: Significant.

CHARLIE MUNGER: - beyond their own investments. And so you’re very lucky to have them be shareholders. Because there’s a lot of ignorance in the older generation that needs removal. (Applause)

29. “We already have a family office. It’s sitting right here”

WARREN BUFFETT: OK, station 10.

AUDIENCE MEMBER: Hi, good afternoon. Good afternoon, Warren. Good afternoon, Charlie. And my name is Ujean (PH). I come from China, and I work for (foreign language) family office. And we are serving high-worth individual clients in China. And you two would be my dream customer.

I know your shareholder Bill Gates has a family office, which, helping his wealth. So my question is, do you have a family office, and what - can we know what they do, some - anything for you? And if not, are you planning to have a family office in the future?

CHARLIE MUNGER: We already have a family office. It’s sitting right here. (Laughter)

WARREN BUFFETT: Yeah, we would be the last guys in the world to have a family office, actually. (Laughter)

There are a lot of them around, and - but it’s not something that fits the Munger family or the Buffett family. (Laughs)

Charlie, you have anything?

CHARLIE MUNGER: No.

WARREN BUFFETT: OK.

30. No “precise formulas” on Berkshire’s incentive plans

WARREN BUFFETT: Let’s - we’ll do one more. Station 11.

AUDIENCE MEMBER: Hi Warren, Charlie. My name is Adam Mead, Mead Capital Management from Derry, New Hampshire.

In the past you have touched on certain compensation arrangements with key executives. Could you please provide some specific examples of compensation arrangements within Berkshire that speak to incentivizing good behavior while not penalizing the manager for size or the relative ease or difficulty of the business or industry? Thank you.

WARREN BUFFETT: Well, that is a very, very good question, and a very, very tough question. Because some of our -

CHARLIE MUNGER: He really doesn’t want to answer.

WARREN BUFFETT: Well, some of our managers - (Laughter)

No, some of our managers are in businesses that are just much easier. I mean, we bought into a variety of businesses. People are obviously influenced by what pay arrangements are elsewhere. They wouldn’t be human if they weren’t.

And trying to come to the right answer when you have different degrees of capital intensity, different degree - very different degrees - of basic profitability, and how much you scale up based on size, because there is an incentive to grow businesses. Usually if businesses get much larger, everybody from the CEO down expects to earn more money for something that - where they really bring the same amount of intensity and work and (inaudible) to it.

It is really a tough question. I think that if you engage compensation consultants at public companies, which they all do, they’re going to recommend things that cause them to have CEOs recommend them to other companies. (Laughs)

It’s just, you’re working against human nature when you have an arrangement like that.

I would say that we have obviously kept a very, very, very high percentage of the managers that we hoped to have stay with us. In fact, just about a hundred percent. It’s -

And I think people do like - they do like to make their own decisions. They do like recognition. You know, they - most people respond - they like doing a good job, and they like the fact that we understand it. And compensation’s part of that. But it’s not the whole thing.

And I wish I could give you some precise formulas, but there aren’t any -

CHARLIE MUNGER: No, you really don’t, Warren.

WARREN BUFFETT: What?

CHARLIE MUNGER: It’s an advantage at Berkshire to keep our individual deals private. There would be no advantage to just publishing them all.

WARREN BUFFETT: No, we’re not going to do that.

CHARLIE MUNGER: No, of course not. So what we’re saying, he makes all those decisions personally. He’s got every formula in the book. And he keeps them all private. That’s our system. (Laughter)

WARREN BUFFETT: Well, we do - (Laughter)

We publish what the directors are paid.

CHARLIE MUNGER: We publish what we have to, yes.

WARREN BUFFETT: OK. It’s 3:30 now. We’re going to reconvene at 3:45.

Charlie and I, we love the fact that our partners basically turn out for this. So we thank you for coming. I hope you’ve had a good time, both at the meeting and in Omaha. And we look forward to seeing you again next year. Thanks. (Applause)

31. Formal business meeting

WARREN BUFFETT: We’re going to move it right along, with a little (inaudible) copy here.

If you’ll please take your seat, thank you.

This is the formal meeting, so the meeting will now come to order.

I’m Warren Buffett, chairman of the board of directors of the company, and I welcome you to this 2018 annual meeting of shareholders.

This morning, I introduced the Berkshire Hathaway directors that are present and also with today are partners in the firm of Deloitte & Touche, our auditors.

Jennifer Tselentis is the assistant secretary of Berkshire Hathaway. She will make a written record of the proceedings.

Becki Amick has been appointed inspector of elections at this meeting, and she will certify to the count of votes cast in the election for directors and the motions to be voted upon at the meeting.

The named proxy holders for this meeting are Walter Scott and Marc Hamburg. Does the assistant secretary have a report of the number of Berkshire shares outstanding entitled to vote and represented at the meeting?

VOICE: This is the important part.

VOICE: You sit there.

WARREN BUFFETT: We’re building the suspense here. (Laughs)

JENNIFER TSELENTIS: Yes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 7th, 2018, the record date for this meeting, there were 748,347 shares of Class A Berkshire Hathaway common stock outstanding with each share entitled to one vote on motions considered at the meeting, and 1,344,969,701 shares of Class B Berkshire Hathaway common stock outstanding with each share entitled to 1/10,000th of one vote on motions considered at the meeting.

Of that number, 537,524 Class A shares and 823,145,874 Class B shares are represented at this meeting by proxies returned through Thursday evening May 3rd.

WARREN BUFFETT: Thank you. That number represents a quorum. And we will therefore directly proceed with the meeting.

First order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott who will place a motion before the meeting.

WALTER SCOTT: I move that the reading of the minutes of the last meeting of shareholders be dispensed with and the minutes be approved.

WARREN BUFFETT: Do I hear a second?

RON OLSON: I second the motion.

WARREN BUFFETT: Motion has been moved and seconded. We will vote on this motion by voice vote. All those in favor say aye.

VOICES: Aye.

WARREN BUFFETT: Opposed. The motion is carried.

The next item of business is to elect directors. If a shareholder is present who did not send in a proxy or wishes to withdraw a proxy previously sent in, you may vote in person on the election of directors and other matters to be considered at this meeting. Please identify yourself to one of the meeting officials in the aisles so that you can receive a ballot.

I recognize Mr. Walter Scott to place a motion before the meeting with respect to the election of directors.

WALTER SCOTT: I move that Warren Buffett, Charles Munger, Greg Abel, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Ajit Jain, Thomas Murphy, Ron Olson, Walter Scott, and Meryl Witmer be elected as directors.

WARREN BUFFETT: Is there a second?

RON OLSON: I second the motion.

WARREN BUFFETT: It has been moved and seconded that Warren Buffett, Charles Munger, Gregory Abel, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Ajit Jain, Thomas Murphy, Ronald Olson, Walter Scott, and Meryl Witmer be elected as directors. Are there any other nominations or any discussion?

The nominations are ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the election of directors and deliver their ballots to one of the meeting officials in the aisles. Miss Amick, when you are ready you may give your report.

BECKI AMICK: My report is ready. The ballot of the proxy holders in response to proxies that were received through last Thursday evening cast not less than 605,906 votes for each nominee. That number exceeds a majority of the number of the total votes of all Class A and Class B shares outstanding. The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Thank you, Miss Amick. Warren Buffett, Charles Munger, Gregory Abel, Howard Buffett, Steve Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Ajit Jain, Thomas Murphy, Ron Olson, Walter Scott, and Meryl Witmer have been elected as directors.

32. Shareholder motion on methane emissions

WARREN BUFFETT: The next item of business is a motion put forth by Freeda Cathcart on behalf of shareholder Marcia Sage. The motion is set forth in the proxy statement. The motion requests that the company provide a report revealing the company’s policies, actions, plans, and reduction targets related to methane emissions from all operations.

The directors have recommended that the shareholders vote against the proposal.

I will now recognize Miss Cathcart to present the motion. To allow all interested shareholders their views, I ask that the representative of the Baldwin Brothers limit the presentation of the motion to five minutes.

FREEDA CATHCART: Good morning Chairman Buffett, Mr. Munger, members of the board and fellow shareholders. I am presenting this proposal on behalf of Baldwin Brothers on the issue of methane asset risk. This is the second year for this methane-focused proposal. Last year 10 percent of shareholders approved of it.

Methane asset risk is a serious financial safety and environmental issue across the entire natural gas supply chain. The failure of a gas injection well at Southern California Gas Aliso Canyon Storage facility in Los Angeles revealed major vulnerabilities in the maintenance and safety of natural gas facilities.

In that situation, cleanup and containment costs have soared to close to $1 billion. Governor Jerry Brown of California has threatened to shut down the facility.

Berkshire Hathaway owns the largest interstate natural gas pipeline system in the United States. It has natural gas storage distribution and transportation facilities that may face similar safety risks through the Northern Natural Gas Company, Kern River Gas, and Mid-American Energy Corporations.

On an environmental front, research indicates methane leaks could erase the climate benefits of reducing coal use to meet internationally agreed upon climate change targets. Methane emissions have an impact on global temperature of roughly 84 times that of CO2 over a 20-year period.

Berkshire is a voluntary member of the EPA’s Methane Challenge and ONE Future Emissions Intensity Commitment Framework and should be applauded for reducing its leakage rates to below the 1 percent target along its value chain.

Since this framework is a cost-effective versus prescriptive approach, shareholders would like to understand if this cost-effective approach employed at Berkshire is sufficient - maintenance and enhanced disclosure should help mitigate the potential for these financial and regulatory risks.

In closing, we think it prudent that Berkshire Hathaway issue a report revealing and disclosing the company’s specific best practices, policies, and safety standards for methane assets and required upgrade costs to facilities to mitigate potential business risks.

The report would make it easier for investors, customers, and regulators to understand Berkshire’s overall approach to managing methane emissions and risks. Thank you for your consideration.

WARREN BUFFETT: Miss Cathcart, could you help me out? Are there some other people that are there to speak? I can’t quite see from here.

VOICE: No, there are no other shareholders who wish to speak on this issue.

FREEDA CATHCART: There’s nobody behind me to speak.

WARREN BUFFETT: Did you get that, Charlie?

CHARLIE MUNGER: No.

WARREN BUFFETT: Greg - could we put up slide one and then if somebody will give Greg a microphone, that’d be helpful. He could elaborate some on this chart and knows what we’re doing.

GREG ABEL: OK. Thanks, Warren and appreciate the comments there. What we’ve prepared here is in response to the proposal. It demonstrates the ONE Future Initiative goal as it was highlighted. They’d like to see our pipelines operating by 2025 at a 1 percent throughput - or a loss of throughput at 1 percent.

I’m happy to report, as this slide shows, that in 2017 our throughput loss was 0.046 percent, 20 times better than the request in 2025. (Applause)

Thank you. It’s a great compliment to our operating team, obviously. They take the issue that has been highlighted very seriously. I would also add, as it was noted, we’re part of the EPA program where we report on a voluntary basis. Our practices are disclosed and reviewed by the EPA and additionally added on our website.

Accordingly, I strongly feel we’re getting the results and disclosing the appropriate information. Thank you.

WARREN BUFFETT: Yeah, and thanks Greg. And Miss Cathcart, we are on the same side you are on this basically. We just are not looking for ways to conduct more studies and prepare reports that may cost us money and generate more reports and all that. But I can tell you two things.

This is something that is reported to the board of directors of Berkshire Hathaway Energy quarterly. And I’m on that board. And we believe in achieving the same (inaudible) and we think Berkshire Hathaway Energy is both sensitive and effective - sensitive to and effective - in reducing methane emissions.

So if - I think we’re now ready. The motion is now ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the motion and deliver their ballot to one of the meeting officials in the aisles. Miss Amick, when you’re ready, you may give your report.

BECKI AMICK: My report is ready. The ballot of the proxy holders in response to proxies that were received through last Thursday evening cast 48,040 votes for the motion and 558,640 votes against the motion.

As the number of votes against the motion exceeds a majority of the number of votes of all Class A and Class B shares properly cast on the matter, as well as all votes outstanding, the motion has failed. The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Thank you, Miss Amick. The proposal fails.

33. Shareholder proposal on sustainability reports

WARREN BUFFETT: The next item of business is a motion put forth by shareholder Freeda Cathcart. The motion is set forth in the proxy statement. The motion requests that Berkshire adopt a policy to encourage more Berkshire subsidiary companies to issue annual sustainability reports.

I will now recognize Freeda Cathcart to present the motion, and to all interested shareholders to present their views I ask her to limit her remarks to five minutes. You have the floor, Miss Cathcart.

FREEDA CATHCART: Thank you so much. It is a privilege to be here and a privilege I can give thanks to my grandfather James Cathcart, who started out in the mailroom of Gen Re and worked himself up through the company to become the chair of Gen Re. During that time he accumulated a lot of Gen Re stock, which he bestowed generously upon his family.

And when he did so, he encouraged the members of his family to do good and to pay it forward, to do something that would make a difference in the world and in our communities. For my father, he did so by being philanthropic with educational institutions with the theory that if you give a person a fish you feed them for a day, but if you teach them to fish, you feed them for a lifetime.

My focus has been on the environment with the thought that when people fish, it would be nice if they were able to eat the fish.

I want to take this opportunity to clarify my proposal about the sustainability reports and put the emphasis on the word encourage. It is evident that Berkshire Hathaway’s management of allowing the subsidiaries to work without getting guidance - well, mandates from you is being very successful.

And I wouldn’t recommend changing it. You’re doing a great job. Please keep it up.

But I do think that there’s something to be said to encourage them and support them, and in many ways you already are.

There is a high level of interest from investors and the public in corporate social responsibility. One-fifth of investments are based on socially responsible investment strategies. And back in 2012, I found an article by Planet Earth Herald where they wrote, “When Warren Buffett talks, people listen. He is now talking about the environment. He believes that companies need to have a triple bottom line. And respecting the environment is absolutely critical to a company’s economic performance.”

In times - and this is a direct quote from you, Mr. Buffett, “In times such as these a company must invest in the key ingredients of profitability: its people, communities, and the environment.”

One-third of Berkshire Hathaway’s subsidiaries already have a sustainability presence on the web. And one of them is Berkshire Energy that has the acronym respect, R-E-S-P-E-C-T, which stands for Responsibility, Efficiency, Stewardship, Performance, Communication, and Training.

And Berkshire Hathaway provides an annual sustainability summit to help bring the subsidiaries together so they can learn how to be more sustainable, how to share tips, and how to be profitable. And that’s excellent.

But when I try to find a web presence about the sustainability summit, I wasn’t able to find it. And that’s where I think that we can do a better job in Berkshire Hathaway when it comes to communication with our shareholders and with the outside world about the good work that we’re doing.

A simple solution to that would just be to create a link on the Berkshire Hathaway website to sustainability that people could click on and go and find out about initiatives like the sustainability summit. And from there, perhaps, they could click on to go to the subsidiaries that have a web presence about sustainability to see what they’re doing.

In doing so, we give a window to the world where they can see what we’re doing to make a difference that might inspire other corporations to follow the example. Or perhaps a college student working on a paper would read about it and think that that is a good business model, that that’s something that he wants to bring forward when he goes into his career.

There is a Facebook page called “Berkshire Hathaway’s Sustainability” that will be available for shareholders and the outside world to look at to see research and to encourage each other to learn how we can support sustainability practices. And that is available now.

I greatly appreciate this opportunity to speak with you today and to clarify what my proposal is. And I do greatly applaud and appreciate all the work that you’re doing on behalf of our corporation and the world. Thank you so much.

WARREN BUFFETT: And thank you. (Applause)

Many of the managers - a great many of the managers - of Berkshire are here and are listening to you. And I suspect that a very high percentage of them agree with what you’re saying. Whether they - what they do in terms of web pages and so on, in our view, is basically up to them.

But I can tell you that one leading proponent, as you mentioned, was Greg Abel, who until recently was running Berkshire Hathaway Energy and now is vice chairman. And Greg may want to say a few words on this, too. But I can assure you that the managers are listening to you.

GREG ABEL: Thanks, Warren. Yeah, we do everything that was touched on. I’ll just maybe add a few points for our shareholders. Obviously, sustainability is a priority for Berkshire and each of our operating subsidiaries. It was highlighted that a number of them have sustainability reports. But I would go beyond that. If you go to our various companies’ websites, you’ll see specific actions they’re taking relative to sustainability. So it may not be summarized in a specific report, but that type of information is available.

I can also add that when you think of the Berkshire Hathaway Energy Corporation, we’re trying to lead by example with support from Warren, Charlie, Walter Scott. I’m happy to report, if you look at where our energy production is right now at the end of 2017, 50 percent of our energy that is produced and consumed by our customers comes from renewable energy.

That’s something we’re strongly communicating across the U.S. and globally as an example of what can be done in our industry. And I’m happy to report by the end of 2021, 100 percent of the energy utilized by our customers can be met through renewable energy in Iowa.

So I understand the concept of sustainability. We’re working across our organizations to share best practices. But as Warren highlighted, it really resides in each of our companies. But it will be encouraged and you’ll continue to see great results. Thank you.

WARREN BUFFETT: Thank you. (Applause)

The motion is now ready to be acted upon. If there are any shareholders voting in person they should now mark their ballot on the motion and deliver their ballot to one of the meeting officials in the aisles.

Miss Amick, when you’re ready you may give your report.

BECKI AMICK: My report is ready. The ballot of the proxy holders in response to proxies that were received through last Thursday evening cast 67,282 votes for the motion and 544,256 votes against the motion.

WARREN BUFFETT: Thank you, Miss Amick. And I would say Miss Cathcart, our managers heard you. I mean, you have had an impact and I appreciate what you have done.

Walter, I guess we’re now ready for a motion?

WALTER SCOTT: I move that this meeting be adjourned.

WARREN BUFFETT: Is there a second?

RON OLSON: I second the motion.

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2018 Berkshire Hathaway Annual Meeting (Morning) Transcript

1. Buffett opens a box of peanut brittle for Munger

WARREN BUFFETT: Good morning.

VOICE: Warren and Charlie, we love you! (Applause)

WARREN BUFFETT: I’m Warren. He’s Charlie. Charlie does most things better than I do, but - (laughter) - you know, this one’s a little tough. Charlie, maybe you can chew on that a while. OK. (Laughter)

At the formal meeting that will begin at 3:45, we will elect 14 directors. Charlie and I are two of them, and I would like to introduce the other 12. I’ll do it in alphabetical order.

If they will stand as I announce their name. Withhold your applause. May be hard to do, but give it your best. And when we get all through, then you can let loose, but -

We’ll do this alphabetically beginning with Greg Abel, if you’ll stand and stay standing. Howard Buffett, Steve Burke, Sue Decker, Bill Gates, Sandy Gottesman, Charlotte Guyman, Ajit Jain, Tom Murphy, Ron Olson, Walter Scott, and Meryl Witmer. (Applause)

2. Accounting-rule net loss “not representative” of the business

WARREN BUFFETT: Let’s see. This morning, we posted both our earnings and our 10-Q. And if we can put up slide one, you can take a look at what was reported.

And as I warned you in the annual report, a new accounting rule was introduced at the beginning of this year. And it provides that our equity securities, whether we sell them or not, are marked to market every day.

So we can have a gain or loss of a couple billion dollars in our equity securities portfolio, and that day, according to the accounting principles now in effect, which are a change, will be recorded as making a couple billion dollars that day or losing a couple billion.

And I told you that would produce some very unusual effects from quarter to quarter. And it further explains why I like to release our earnings early Saturday morning and - as well as the 10-Q - to give people a chance to read through the explanation.

Because if you just were handed this with a TV monitor, you know, at 3:30 in the afternoon or whatever it might be, you would report the net earnings figure, understandably, very quickly. And it really is not representative of what’s going on in the business at all.

So, if you look at the figure of operating earnings, which is what we look at, we actually earned a record amount for any quarter we’ve ever had.

And that includes no realized gains or losses on securities, or on the few remaining derivatives we have.

You might leave that slide up there just a little longer. Maybe it is up -

The insurance underwriting - GEICO had a quite a good-sized turnaround in profitability and a good gain, although not as big a gain as last year, which was a record in terms of policies in force and, really, throughout most of our businesses.

And the details are in the 10-Q, which is up on our website now.

And as you can see, the railroad was up significantly, and we had - most of our businesses tended to be up.

Now we were aided in that, in a material way, by the reduction in the federal income tax rate from 35 percent to 21 percent. Our businesses were up significantly on a pretax basis, but the gain was further enhanced by the change in the income tax rate.

So that pretty well sums up the first quarter. We’ll probably get some - may well get some questions on it when we get into the question and answer section.

3. Master class: How to think about investments

WARREN BUFFETT: The questions we’ll be getting, we’ve got the press over here, and then we have the analysts on my left. And of course, we have our partners out in front of me. And we will rotate among you.

And the questions we get, as we go through the next six hours or so, will understandably relate to a lot of current events. You know, you will -

We may get asked, and we don’t know the questions, but we may get asked, you know, about Fed policy, or whether we’re seeing any inflation, or whether business is speeding up or down, or the threats we may face competitively in our businesses as we go along.

And you - anything goes on the questions, except we won’t tell you what we’re buying or selling. But it really can be a question sometimes of confusing the forest with the trees.

And I would like to just spend just a couple of minutes giving you a little perspective on how you might think about investments, as opposed to the tendency to focus on what’s happening today, or even this minute, as you go through.

And to help me in doing that, I’d like to go back through a little personal history.

And we will start - I have here a New York Times of March 12th, 1942. I’m a little behind on my reading. (Laughter)

And if you go back to that time, that - it was about, what? Just about three months since we got involved in a war which we were losing at that point.

The newspaper headlines were filled with bad news from the Pacific. And I’ve taken just a couple of the headlines from the days preceding March 11th, which I’ll explain was kind of a momentous day for me.

And so you can see these headlines. We’ve got slide two up there, I believe. And we were in trouble, big trouble, in the Pacific. It was only going to be a couple months later that the Philippines fell, but we were getting bad news.

We might go to slide three for March 9th. Hope you can read the headlines, anyway. The price of the paper’s three cents, incidentally.

The - and let’s see, we’ve got March 10th up there, as slide - I - when I get to where there’s advanced technology of slides, I want to make sure I’m showing you the same thing that I’m seeing in front of me.

So anyway, on March 10th, when again, the news was bad: “Foe Clearing Path to Australia.” And it was like it - the stock market had been reflecting this.

And I’d been watching a stock called Cities Service preferred stock, which had sold at $84 the previous year. It had sold at $55 the year - early in January, two months earlier - and now it was down to $40 on March 10th.

So that night, despite these headlines, I said to my dad - I said, “I think I’d like to pull the trigger, and I’d like you to buy me three shares of Cities Service preferred” the next day.

And that was all I had. I mean, that was my capital accumulated over the previous five years or thereabouts. And so my dad, the next morning, bought three shares.

Well, let’s take a look at what happened the next day. Let’s go to the next slide, please. And it was not a good day. The stock market, the Dow Jones Industrials, broke 100 on the downside.

Now they were down 2.28 percent as you see, but that was the equivalent of about a 500-point drop now. So I’m in school wondering what is going on, of course.

Incidentally, you’ll see on the left side of the chart, the New York Times put the Dow Jones Industrial Average below all the averages they calculated. They - they had their own averages, which have since disappeared, but the Dow Jones has continued.

So the next day - we can go to the next slide - and you will see what happened. The stock that was at 39 - my dad bought my stock right away in the morning because I’d asked him to, my three shares. And so I paid the high for the day.

That 38 1/4 was my tick, which was the high for the day. And by the end of the day, it was down to 37, which was really kind of characteristic of my timing in stocks that was going to appear in future years. (Laughs)

But it was on the - what was then called the New York Curb Exchange, then became the American Stock Exchange.

But things, even though the war, until the Battle of Midway, looked very bad and - and if you’ll turn to the next slide, please - you’ll see that the stock did rather well. I mean, you can see where I bought at 38 1/4.

And then the stock went on, actually, to eventually be called by the Cities Service Company for over $200 a share. But this is not a happy story because, if you go to the next page, you will see that I - (Laughter)

Well, as they always say, “It seemed like a good idea at the time,” you know. (Laughter)

So I sold - I made $5 on it. It was, again, typical - (laughs) - of my behavior. But when you watch it go down to 27, you know, it looked pretty good to get that profit.

Well, what’s the point of all this? Well, we can leave behind the Cities Service story, and I would like you to, again, imagine yourself back on March 11th of 1942.

And as I say, things were looking bad in the European theater as well as what was going on in the Pacific. But everybody in this country knew America was going to win the war. I mean, it was, you know, we’d gotten blindsided, but we were going to win the war. And we knew that the American system had been working well since 1776.

So, if you’ll turn to the next slide, I’d like you to imagine that at that time you had invested $10,000. And you put that money in an index fund - we didn’t have index funds then - but you, in effect, bought the S&P 500.

Now I would like you to think a while, and don’t - do not change the slide here for a minute.

I’d like you to think about how much that $10,000 would now be worth, if you just had one basic premise, just like in buying a farm you buy it to hold throughout your lifetime and depend - and you look to the output of the farm to determine whether you made a wise investment.

You look to the output of the apartment house to decide whether you made a wise investment if you buy an apartment - small apartment house - to hold for your life.

And let’s say, instead, you decided to put the $10,000 in and hold a piece of American business, and never look another stock quote, never listen to another person give you advice or anything of this sort.

I want you to think how much money you might have now. And now that you’ve got a number in your head, let’s go to the next slide, and we’ll get the answer.

You’d have $51 million. And you wouldn’t have had to do anything. You wouldn’t have to understand accounting. You wouldn’t have to look at your quotations every day like I did that first day - (laughs) - when I’d already lost $3.75 by the time I came home from school.

All you had to do was figure that America was going to do well over time, that we would overcome the current difficulties, and that if America did well, American business would do well.

You didn’t have to pick out winning stocks. You didn’t have to pick out a winning time or anything of the sort. You basically just had to make one investment decision in your life.

And that wasn’t the only time to do it. I mean, I can go back and pick other times that would work out to even greater gains.

But as you listen to the questions and answers we give today, just remember that the overriding question is, “How is American business going to do over your investing lifetime?”

I would like to make one other comment because it’s a little bit interesting. Let’s say you’d taken that $10,000 and you’d listened to the prophets of doom and gloom around you, and you’ll get that constantly throughout your life. And instead, you’d used the $10,000 to buy gold.

Now for your $10,000 you would have been able to buy about 300 ounces of gold. And while the businesses were reinvesting in more plants, and new inventions came along, you would go down every year in your - look in your safe deposit box - and you’d have your 300 ounces of gold.

And you could look at it, and you could fondle it, and you could - I mean, whatever you wanted to do with it. (Laughter)

But it didn’t produce anything. It was never going to produce anything.

And what would you have today? You would have 300 ounces of gold just like you had in March of 1942, and it would be worth approximately $400,000.

So if you decided to go with a nonproductive asset - gold - instead of a productive asset, which actually was earning more money and reinvesting and paying dividends and maybe purchasing stock - whatever it might be - you would now have over 100 times the value of what you would have had with a nonproductive asset.

In other words, for every dollar you had made in American business, you’d have less than a penny by - of gain - by buying in this store of value, which people tell you to run to every time you get scared by the headlines or something of the sort.

It’s just remarkable to me that we have operated in this country with the greatest tailwind at our back that you can imagine. It’s an investor’s haven - I mean, you can’t really fail at it unless you buy the wrong stock or just get excited at the wrong time.

But if you’d - if you owned a cross-section of America and you put your money in consistently over the years, there’s just - there’s no comparison against owning something that’s going to produce nothing.

And there - frankly - there’s no comparison with trying to jump in and out of stocks and pay investment advisors.

If you’d followed my advice, incidentally - or this retrospective advice - which is always so easy to give - (Laughs)

If you’d follow that, of course you - there’s one problem. Your friendly stock broker would have starved to death.

I mean, you know, and you could have gone to the funeral to atone for their fate. But the truth is, you would have been better off doing this than a very, very, very high percentage of investment professionals have done, or people have done that are active that - it’s very hard to move around successfully and beat, really, what can be done with a very relaxed philosophy.

And you do not have to be - you do not have to know as much about accounting or stock market terminology or whatever else it may be, or what the Fed is going to do next time and whether it’s going to raise three times or four times or two times.

None of that counts at all, really, in a lifetime of investing. What counts is having a philosophy that you’ve - that you stick with, that you understand why you’re in it, and then you forget about doing things that you don’t know how to do.

4. Nothing’s changed - Buffett’s still “semi-retired”

WARREN BUFFETT: So with all those happy words, we will move on and start the questioning, and we’ll start with Carol.

CAROL LOOMIS: Good morning. In choosing a first question to ask each year, I look for a question that is definitely Berkshire-related and is timely. And this question seemed to fill the bill. The question came from William Anderson (PH) of Salem, Oregon.

And he said, “Mr. Buffett, you have previously said that there are two parts to your job, overseeing the managers and capital allocation. Mr. [Greg] Abel and Mr. [Ajit] Jain now oversee the managers, which leaves you with capital allocation.

“However, you share capital allocation with Ted Weschler and Todd Combs. Question. Does all that mean you are semi-retired? Or if not, please explain.” (Laughter)

WARREN BUFFETT: I’ve been semi-retired for decades. (Laughter)

The answer is that I was probably - well, it’s hard to break down the percentage of the time that I was involved in but now - the jobs that are now done by Ajit and Greg, and in the case of investing, the sub part of the job that is done by Ted and Todd.

Ted and Todd each manage 12- or $13 billion, so in total, that’s 25 billion. And we have in equities 170-some billion, probably now, and 20 billion in longer-term bonds, and another hundred billion in cash and short-term.

So they’re managing 20 - 25 and doing a very good job. And I still have the responsibility, basically, for the other 300 billion. So - (Laughter and applause)

I think Charlie will tell you - in fact, I’d like him to comment - nothing’s really changed that much. We’ve got - clearly we’ve got two people in Ajit and Greg that are smarter, more energetic, just bring more to the job every day.

But they don’t bring too much, because the culture is that our managers are running their business. But there’s a lot - there’s a good bit to oversee. So they do a superb job.

And Ted and Todd not only do a great job with the 12 or 13 billion each - they started with a couple billion each - not that it’s all been the growth of the 2 billion - but they also do - have done a number of things for Berkshire that they do it cheerfully, but more important, very skillfully.

So there’s just - there’s one thing after another that I will have them looking into or working on. And sometimes I steal their ideas and -

But I think, actually, semi-retired is probably - catches me at my most active point. I think if -(laughter) - your questioner’s got a good point.

OK, Charlie?

CHARLIE MUNGER: Well, I’ve watched Warren for a long time, and he sits around reading most of the time and thinking. And every once in a while he talks on the phone or talks to somebody. I can’t see any great difference. A lot of people - (Laughter)

Part of the Berkshire secret is that when there’s nothing to do, Warren is very good at doing nothing. (Laughter)

WARREN BUFFETT: I’m still looking forward to being a mattress tester. (Laughter)

5. Precision Castparts is “a very good business”

WARREN BUFFETT: OK, Jonathan Brandt.

JONATHAN BRANDT: Hi Warren. Hi Charlie. Given the growth in airplane build rates, it seems surprising that Precision Castparts isn’t doing better on the top or bottom line.

I understand the issue with a bumpy transition from old to new programs, but I’ve also heard from industry sources that Precision’s market position is not as strong as it used to be amid intensifying competition and some technological disruption.

What does Precision need to do to solidify and strengthen its preeminent position with its aerospace customers so that it can deliver the growth you expected when Berkshire acquired it?

WARREN BUFFETT: Yeah -

JONATHAN BRANDT: More generally, two years after the acquisition, what is your outlook for that business?

WARREN BUFFETT: Give me the last part again. The outlook.

JONATHAN BRANDT: More generally, two years after the acquisition, what is your updated outlook for that business longer term?

WARREN BUFFETT: Oh, longer term, I think - and in the reasonably shorter term - it’s a very good business. I mean, you were -

You mentioned aircraft, but we get into other industries. But certainly aircraft’s the most important. You have manufacturers that are very dependent on both the quality of the parts and the promptness of delivery.

You do not want to have an aircraft with 75- or 100- or maybe $200 million and be waiting for a part or something of the sort. So it’s -

Reliability is, both in terms of quality and delivery times and all of that sort of thing, is enormously important. And we get contracts that extend out many years. And sometimes we - I mean, we will get them well before the plane even starts in production. So there’s very long lead times.

And we have found in the last year - found it earlier, but I know of some specific cases in the last year - where other suppliers have failed in their deliveries and then the manufacturers come to us and say, “We would like you to help us out.”

And we say, “Well, we’d be glad to help you out, but we’d like about a five-year contract, if we’re going to do it because we’re just not going to make up for these other guys’ shortfalls periodically.” But that sort of thing has a very long lead time.

The business is a very good business. One thing you will see their earnings charged with is about $400 million - little over $400 million a year - of intangible - nondeductible in that case - amortization of goodwill, which is really - is not an economic cost in my view.

We have a significant amount of that through Berkshire, but by far, the largest amount is related to the Precision acquisition. So whatever you see, you can add about 400 million that in my view is not an economic expense, but the accountants would argue otherwise. But it’s our money, so we’ll take my view. The - (Laughter)

Mark Donegan, who runs that operation, is incredible, and he has been not only - he’s a fabulous manager. I wouldn’t have bought it without him in charge. He also has been very helpful to us in other areas, and he loves to do it. So you can’t beat him, both as a manager in his own operation, but with his devotion to really doing everything that will help Berkshire.

It was - it’s a very good acquisition with very long tails to the products that are being developed.

Charlie?

CHARLIE MUNGER: Well, yeah, I think we’d buy another one just like it tomorrow if we had the chance.

WARREN BUFFETT: Yeah, that’s the answer. (Laughter)

Man of few words, but he gets the point. (Laughter)

6. Trade benefits are huge, so U.S. and China won’t do something “foolish”

WARREN BUFFETT: OK, now we will go to the shareholder in Station 1. I believe that’s probably up here to my right.

AUDIENCE MEMBER: Hello. This is Chao (PH) from Wuxi, China, (Inaudible) Capital. I’ve been to the meeting for 12 years. Wish you and Charlie good health, so we could see you both from meeting for 12 more years.

WARREN BUFFETT: Thank you. (Applause)

AUDIENCE MEMBER: Quick question. We know both you and China delegations - U.S. and China delegations - are in China for intense discussion, also called a trade war.

Let’s go one step beyond the trade war. Do you think there’s a win-win situation for both countries or the world is just too small for both to win and we have to revisit your 1942 chart again? Thank you.

WARREN BUFFETT: Thank you. I’d like to just mention one thing. In August, I’m going to be 88, and that will be the eighth month of the year, and it’s a year that ends with an eight.

And as you and I both know, eight is a very lucky number in China. So if you find anything over there for me, this is the time we should be acquiring something. All those eights.

AUDIENCE MEMBER: Will do. (Buffett laughs)

WARREN BUFFETT: The United States and China are going to be the two superpowers of the world, economically and in other ways, for a long, long, long time.

We have a lot of common interests, and like any two big economic entities, there are times when there’ll be tensions.

But it is a win-win situation when the world trades, basically. And China and the U.S. are the two big factors in that, but there’s plenty of other citizens of the world that are involved in how this comes out. And there is no question -

The nice thing about in this country I think is that both Democrats and Republicans basically, on balance, believe in the benefits of free trade.

And we will have disagreements with each other. We’ll have disagreements with other countries on trade.

But it’s just too big and too obvious for - that the benefits are huge, and the world’s dependent on it in a major way for its progress, that two intelligent countries will do something extremely foolish.

We both may do things that are mildly foolish from time to time, and there is some give and take, obviously, involved.

But U.S. exports in 1970 and U.S. imports in 1970 were both about 5 percent of GDP. I mean, here we we were, selling 5 percent of our GDP and buying up 5 percent of our GDP, basically.

Now people think we don’t export a lot of things. Our exports are 11 and a fraction percent of GDP. They’ve more than doubled as a share of this rising GDP. But the imports are about 14 1/2 percent, so there’s a gap of three percent or thereabouts.

And I would not like that gap to get too wide. But when you think about it, it’s really not the worst thing in the world to have somebody send you a lot of goods that you want and hand them little pieces of paper.

I mean, because the balancing item is, if you have a surplus or deficit in your trade, you’re going to have a surplus in investment.

And so the world is getting more claim checks on the United States, and they - to some extent they buy our government securities, they can buy businesses.

And over time, you don’t want the gap to get to be too wide because the amount of claim checks you are giving out to the rest of the world could get a little unpleasant under some circumstances.

But we’ve done remarkably well with trade. China’s done remarkably well with trade. The countries of the world have done remarkably well with trade. So it is a win-win situation.

And the only problem gets to be when one side or the other may want to win a little bit too much, and then you have a certain amount of tension.

But we will not sacrifice - the world, I mean - will not sacrifice world prosperity based on differences that arise in trade.

Charlie?

CHARLIE MUNGER: Yeah, well I think that both countries have been advancing. And of course China is advancing faster economically, because it started from a lower base and they’ve had a little more virtue than practically anybody else in the world in having a high savings rate.

And of course, a country that was mired in poverty for a long, long time, and that assimilates the advanced technology of the world, and has a big savings rate, is going to advance faster than some very mature company like Britain or the United States. And that’s what’s happened.

But I think we’re getting along fine, and I’m very optimistic that both nations will be smart enough to realize that the last thing they should do is have any ill will for the other.

7. Deals don’t depend on Buffett: “The reputation belongs to Berkshire now”

WARREN BUFFETT: OK, Becky Quick. (Applause)

BECKY QUICK: This question comes from Kirk Thompson.

He says, “Warren, in this year’s annual letter to shareholders, you referenced both cheap debt and a willingness by other companies to leverage themselves as competitive examples as to why it’s hard to get more acquisition deals done.

“It seems like the trust in - and prestige of doing a deal with Warren Buffett and Charlie Munger allow Berkshire to get a hometown discount and beat out other firms that might pay a little more to a prospective seller.

“Have you given thought to having other Berkshire managers have more public exposure, so future generations of successful business owners continue to bring deal opportunities to Berkshire like they have in prior decades?”

WARREN BUFFETT: Yeah, that sort of reminds me of - who was it? Tony O’Reilly remarked one time about the responsibility of a CEO.

That the very first job of the CEO was to search through his organization and find that person who had the initiative and the brains, the determination, all of the qualities to be his logical successor, and then fire the guy. (Laughter)

The - there’s no question. I think the reputation of Berkshire as being a very good home for companies - particularly private companies - but a good home for companies, I don’t think that reputation is dependent on me or Charlie.

It may take a little, you know, there’ll be a little testing period for whoever takes over, in that respect. But, you know, basically we’ve got the money to do the deals. We’ll have the money to do the deals subsequently. People can see how our subsidiaries operate in the future.

And the truth is that, I think some of the other executives are going - are getting better known. But there will be a - you know, I’ll tell you this, if things get bad enough, you don’t have to worry. They’ll be calling us no matter what. (Laughs)

So I do not worry about the so-called “deal flow,” which is a term I hate. But I don’t think there’s - I think that’s dependent on Berkshire and not dependent on me.

And, you know, as I’ve mentioned, my phone isn’t ringing off the hook with good deals. So apparently this big winning personality or something is not delivering for you. (Laughter)

So it may be the next person will be even more - get even more calls.

Berkshire - the reputation belongs to Berkshire now. And we are, for somebody that cares about a business that they and their parents and maybe their grandparents lovingly built over decades - if they care about where that business ends up being after, for one reason or another, they don’t want to keep it or can’t keep it in the family, we absolutely are the first call.

And we will continue to be the first call, whether Charlie or I answer the phone or somebody else does.

Charlie?

CHARLIE MUNGER: Well, a lot of the subsidiaries have for a long time already been making all kinds of acquisitions with people they know and we don’t. So it’s already happening. And, in fact, it’s happening more there than it is at headquarters, so -

WARREN BUFFETT: Don’t tell them, Charlie.

CHARLIE MUNGER: You’re getting your wish. (Laughter)

And it is weird that about 99 percent of the public companies that change hands, in terms of control, change hands in a sort of auction presided over by an investment banker.

And the people that buy are usually just leverage it to the gills, and when it starts doing a little better, they re-leverage it.

And that money is coming out of the charitable endowments and pension plans who are making these highly-leveraged investments in all these companies changing hands at very high prices. Sooner or later, this is not going to work perfectly.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: And it’s going to have an unpleasant episode. And I think we’ll be around and in good shape at that time.

WARREN BUFFETT: There was one fellow who came to me many years ago. And he had a wonderful business. And he had been worried because he had seen a friend of his die.

And the problems that arose later when the managers, to some extent, tried to take advantage of the widow. And it became a disaster.

So he said he thought about it a lot the previous year. And he decided he didn’t want to sell the business to a competitor, who would be a logical buyer, because they would fire all of his people. And the CFO that would remain, and, you know, all up and down the line, they’d all be the acquirer’s people. He didn’t want to do that to his people.

And then he thought, and he didn’t want to sell it to a private equity firm, because he thought they’d leverage it up. He never liked to leverage that much, and then they’d just resell it later on to somebody, so it would be totally out of control of what he wanted to do.

And he wanted to keep running it himself. So he said, “Warren,” he said, “It isn’t that you’re such a great guy,” he says, “It’s you’re the only one left.” So - (Laughter) -

Berkshire will continue to be the only one left in many cases.

8. “We don’t know what we’re doing” in cyber insurance

WARREN BUFFETT: Gary Ransom.

GARY RANSOM: Good morning. Warren, in your annual letter, you wrote about a potential for a $400 billion natural catastrophe event, something out in the tail of the loss distribution. I can think of another risk that could have a similar order of magnitude, and that would be cyberrisk.

I’m sure all your managers have taken steps against that potential, but in - out in the tail of the cyberrisk distribution, it could hit a lot of industries, a lot of your companies. So how do you think about and prepare for the big one in cyber?

WARREN BUFFETT: Yeah. Well, I include, incidentally, in my - that part I wrote in the annual report where I said that roughly - nobody knows the answer on this. I mean, I could stick down two, and somebody else much smarter in insurance would stick down a different figure.

But I think it’s about a 2 percent risk of what I call a 400 billion super-cat of all time. And -

But cyber is in that equation. I mean, that’s not just earthquakes and that sort of thing. And frankly, I don’t think we, or anybody else, really knows what they’re doing when writing cyber. I mean, we - it is just very, very, very early in the game.

And we don’t know what the interpretations of the policies, necessarily, will be. We don’t know the degree to which they’ll be what - there’ll be correlated incidents, which we don’t really think are correlated now or haven’t had the imagination to come up with.

We know that every year when I go and hear these people from the CIA or wherever it may be, they tell me that the offense is ahead of the defense, and will continue that way.

And I can dream of a lot of cyber incidents, which I’m not going to spell out here, because people that have twisted minds may be - they’ve probably got more - way more - ideas than I’ve got, but I don’t believe in feeding them any.

But it’s a business where we don’t - we have a pretty good idea of the probabilities of a quake in California, or the probabilities of a three or a four hurricane hitting Florida, or whatever it may be.

We don’t know what we’re doing in cyber, and we try to keep - we don’t want to be a pioneer on this. We do some business in that arena in Berkshire Hathaway Specialty.

But if you’re doing something for competitive reasons - which I’m OK with - but when I’m doing something where I - that people tell me is a competitive necessity, we are going to try not to have - we don’t want to be number one or number two or number three in exposures on it. And I don’t - and I am sure we are not in cyber. But I don’t -

I think anybody that tells you now that they think they know in some actuarial way, either what general experience is likely to be in the future, or what the worst case would be, I think, is kidding themselves.

And that’s one of the reasons that I say that a $400 billion event has a - I think has roughly a 2 percent probability per year of happening.

Cyber’s uncharted territory, and it’s going to get worse, not better. And then the question is whether, if we have a whole bunch of $25 billion commercial limits out there, whether there’s some aggregation that we didn’t foresee or that the courts interpret those policies differently, then you know - they are generally going to give the benefit of the doubt to the insured.

So you’re right in pointing that out as a very material risk, which didn’t exist 10 or 15 years ago and that - and will be much more intense as the years go along.

And all I can tell you, Gary, is that, that’s part of my 400 billion and my 2 percent. But if you’ve got a different guess, it’s just as likely that yours is right than mine on that.

Charlie?

CHARLIE MUNGER: Yeah, well, something that’s very much like cyberrisk is, you’ve got computers programmed to do your security trading and your computer goes a little wild from some error.

And that’s already happened at least once where somebody just was fine one morning and by the afternoon they were broke because some computer went crazy. We don’t have any computers we allot - we allow to do big, automatically trading securities.

I think, generally, Berkshire is less likely than most other places to be careless in some really stupid way.

WARREN BUFFETT: I do think if there’s a mega-cat from cyber, and let’s say it hits 400 billion, I do not think we’ll have more than a 3 percent -

CHARLIE MUNGER: No, no -

WARREN BUFFETT: - exposure.

CHARLIE MUNGER: No, no, we’ll get our share.

WARREN BUFFETT: And but it, you know, it will destroy - what will destroy a lot of companies - that we will actually, if we had a $12 billion loss, I would think, except for the new accounting rule, but I believe from what I call operating earnings, we would probably still have a reasonable profit that year.

I mean, we are in a different position than any insurance company I know of in the world, in our ability to handle the really - really super, super-cat.

OK, shareholder from station 2.

CHARLIE MUNGER: May I point out that the main shareholder to my right here has almost all his net worth in one security. That’s likely to be more carefully managed than some public place with people just passing through.

WARREN BUFFETT: Yeah, you don’t want a guy that’s 64 and is going to retire at 65. And a lot of decisions you really don’t want him or her to be making. (Laughter)

9. Capital allocation in the public sector

WARREN BUFFETT: Station 2?

AUDIENCE MEMBER: Wally Obermeyer, Obermeyer Wood Investment Counsel, Aspen, Colorado.

Warren and Charlie, you two have demonstrated great talent in private sector capital allocation and shown the world the power of excellence in this area.

Do you think there is a similar opportunity for outstanding capital allocation in the public sector, at both the state and federal levels? And if so, what approach and/or changes would you suggest for society to achieve these benefits?

CHARLIE MUNGER: That’s too tough. Why don’t we go on to a new question? (Laughter)

WARREN BUFFETT: I’m afraid I have nothing to add. (Laughter and applause)

I don’t mean to be unfair to somebody asking a question, but it - you know, it is unfortunately an entirely different game. And the electorate - the motivations are different, the terms, the reward system is different.

I mean, everything is different. And if we knew how to solve that, we wouldn’t - we can’t add anything to what you had in your view. I’m sorry on that.

10. Wells Fargo will emerge stronger after its “big mistake”

WARREN BUFFETT: OK, Andrew?

ANDREW ROSS SORKIN: Hi Warren. This question comes from Paul Spieker (PH) of Chicago, Illinois. I believe he may be here today.

He writes, “One of your more famous and perhaps most insightful quotes goes as follows:

″‘Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.’

“In light of the unauthorized accounting scandal at Wells Fargo, of its admission that it charged customers for duplicate auto insurance, of its admissions that it wrongly fined mortgage holders in relation to missing deadlines caused by delays that were its own fault, of its admission that it charged some customers improper fees to lock in mortgage interest rates, of the sanction placed upon it by the Federal Reserve prohibiting it from growing its balance sheet, and of the more than recent $1 billion penalty leveled by federal regulators for the aforementioned misbehavior, if Wells Fargo company is a chronically leaking boat, at what magnitude of leakage would Berkshire consider changing vessels?”

WARREN BUFFETT: Yeah, well, Wells Fargo (Applause) -

Wells Fargo is a company that proved the efficacy of incentives, and it’s just that they had the wrong incentives. And that was bad.

But then they committed a much greater error - and I don’t know exactly how or who did it or when, but - ignoring the fact that they had a faulty incentive system which was incenting people to do things that were kind of crazy, like opening nonexistent accounts, et cetera.

And, you know, that is a cardinal sin at Berkshire. We know people are doing something wrong, right as we sit here, at Berkshire.

You can’t have 377,000 employees and expect that everyone is behaving like Ben Franklin or something out there. They - we - I don’t know whether there are ten things being done wrong as we speak, or 20, or 50.

The important thing is, we don’t want to incent any of that if we can avoid it, and if we find - when we find it’s going on, we have to do something about it. And that is absolutely the key to it.

And Wells Fargo didn’t do it, but Salomon didn’t do it. And the truth is, we’ve made a couple of our greatest investments where people have made similar errors.

We bought our American Express stock - that was the best investment I ever made in my partnership years - we bought our American Express stock in 1964 because somebody was incented to do the wrong thing in something called the American Express Field Warehousing Company. We bought -

A very substantial amount of GEICO we bought that became half the - half of GEICO, for $40 million because somebody was incented to meet Wall Street estimates of earnings and growth. And they didn’t focus on having the proper reserves.

And that caused a lot of pain at American Express in 1964. It caused a lot of pain at GEICO in 1976. It caused a layoff of a significant portion of the workforce, all kinds of things. But they cleaned it up.

They cleaned it up, and look where American Express has moved since that time. Look at where GEICO has moved since that time.

So the fact that you are going to have problems at some very large institutions is not unique. In fact, almost every bank has - all the big banks have had troubles of one sort or another.

And I see no reason why Wells Fargo as a company, from both an investment standpoint and a moral standpoint going forward, is in any way inferior to the other big banks with which it competes on -

It - they made a big mistake. It cost - I mean, we still got - I mean we have a large, unrealized gain in it, but that doesn’t have anything to do with our decision-making. But the -

I like it as an investment. I like Tim Sloan as a manager, you know, and he is correcting mistakes made by other people.

I tried to correct mistakes at Salomon, and I had terrific help from Deryck Maughan as well as a number of the people at Munger, Tolles. And I mean, that is going to happen. You try to minimize it.

Charlie says that, “An ounce of prevention isn’t worth a pound of cure, it’s worth about a ton of cure.” And we ought to jump on everything. He’s pushed me all my life to make sure that I attack unpleasant problems that surface. And that’s sometimes not easy to do when everything else is going fine.

And at Wells, they clearly - and I don’t know exactly what - but they did what people at every organization have sometimes done, but it got accentuated to an extreme point.

But I see no reason to think that Wells Fargo, going forward, is other than a very, very large, well-run bank that had an episode in its history it wished it didn’t have.

But GEICO came out stronger, American Express came out stronger. The question is what you do when you find the problems.

Charlie?

CHARLIE MUNGER: Well, I agree with that. I think Wells Fargo is going to be better going forward than it would have been if these leaks had never been discovered.

WARREN BUFFETT: Or happened.

CHARLIE MUNGER: Yeah, so I think it’s - it - but I think Harvey Weinstein has done a lot for improving behavior, too. (Laughter)

It was clearly an error, and they’re acutely aware of it and acutely embarrassed, and they don’t want to have it happen again.

You know, if I had to say which bank is more likely to behave the best in the future, it might be Wells Fargo, of all of them.

WARREN BUFFETT: This New York Times that I have here from March 12th, 1942, if you go toward the back of it, in the classified section, you have one big section that says, “Help Wanted Male,” and another one that says, “Help Wanted Female.”

You know, was the New York Times doing the right thing in those days? You know, I think the New York Times is a terrific paper. But people make mistakes.

And you know, the idea of classifying between - taking ads and saying, “Well, we’ll take them and divide them up between men and women, what jobs we think are appropriate,” or that the advertiser thinks is appropriate.

We do a lot of dumb things in this world. And GEICO, as I say, in the early 1970s, they just ignored - and you can do it in the setting of proper reserves, which mean they charged the wrong price to new customers because they thought their losses were less than they were.

And I’m sure some of that may have been a desire to please Wall Street or just because they didn’t want to face how things were going. But it came out incredibly stronger. You know, and now it’s got 13 percent of the households in the United States insured.

And it came out with an attention to reserves and that sort of thing that was heightened by the difficulties that they’d found themselves in where they almost went bankrupt. Forty-two -

CHARLIE MUNGER: It was a lot more stupid than Wells Fargo. It was really stupid what they did way back, right?

WARREN BUFFETT: Yeah. They had the world by the tail, and then they quit looking at the reserve development. But - and American Express was just picking up a few dollars by having the field warehousing company in 1963. And, you know, they were worried whether it was going to sink the company.

And when some guy named Tino De Angelis in, I think it was Bayonne, New Jersey -

In fact, I went to the annual meeting in 1964 of American Express after the scandal developed, and somebody asked if the auditor would step forward.

And the auditor from one of the big firms, which I won’t mention, came up to the microphone, and somebody said, “How much did we pay you last year?”

And the auditor gave his answer, and then the questioner said, “Well, how much extra would you have charged us to go over to Bayonne, which was ten miles away, and check whether there’s any oil in the tanks?” (Laughs)

So it - you know, here was something - a tiny little operation - some guy was calling him from a bar in Bayonne and telling him this phony stuff was going on, and they didn’t want to hear it. They shut their ears to it.

And then what emerged was one great company after this kind of, what they thought was a near-death experience. So it’s - we’re going to make mistakes.

I will guarantee you that we will get some unpleasant news at Berkshire. I don’t know what it’ll be, you know - the most important thing is we do something about it.

And there have been times when I procrastinated, and Charlie has been the one that jabs me into action. And so he’s performed a lot of services you don’t know about. (Laughter)

11. “I like to think I’ll be missed a little bit, but you won’t notice it”

WARREN BUFFETT: OK. Gregg, Gregg Warren.

GREGG WARREN: Good morning, Warren. I have a little bit of a follow-up on Becky’s question.

At the 2014 annual meeting, as well as this morning, you noted that the power of Berkshire brand and its reputation, as well as the strength of Berkshire’s balance sheet, would allow the company’s next managers to replicate many of the advantages that have come with your being the face of the organization, one of which has been an ability to extract high rents from firms in exchange for a capital infusion and the Buffett seal of approval during times of financial distress.

I buy the argument about the strength of the balance sheet and believe that deals will continue to be done with sellers still lining up to become part of the Berkshire family, especially if the company’s next managers are allowed to keep a ton of cash on hand.

But I’m not entirely convinced that they’ll be able to garner the same 8, 9, 10 percent coupons, as well as other add-ons, that you’ve been able to extract from firms like Goldman Sachs and Bank of America in times of distress.

I’d expect those rents to be at least a few percentage points lower once you’re no longer running the show. That is, until those managers build up a reputation to warrant higher returns. Am I right to think about it that way?

WARREN BUFFETT: I’m not sure. The - when we, in two - you mentioned Goldman Sachs, and we also did with General Electric, in September or early October of 2008. We probably could actually have extracted better terms.

You know, I think it might have been counterproductive in the end, but I was - we would have done better, incidentally, financially, if we’d really waited until the panic developed further - because I didn’t know how far it would develop - but we could have made a lot better purchases three or four or five months later than we did at that time.

And we also did not want to do something that looked to be so high as to in - make the transaction disadvantageous to Goldman or to GE.

They were going to take the terms we offered, but we actually didn’t push it to the limit, because there really wasn’t anybody else around.

I think - and we’re working on something right now that probably won’t happen. It’s not huge.

But actually, in this case, both Todd [Combs] and Ted [Weschler] have brought deals to me. One of them brought something to me, and, you know, he was thinking in the same terms that I got - was thinking about - and he’s the one that returned the call that he had received about a transaction.

And I do not think the party on the other side is going to care about the fact that they had him on the phone rather than me on the phone. I -

You know, there may - there could be just a little bit at certain times in history. But, you know, we will continue to have our standards of what we think money is worth at any given time. And Ted and Todd think just as well about that as I do.

And there will be times, very occasionally, when our phone will ring a lot. And I don’t think they’ll hang up because I don’t answer it, if they need the money.

Charlie?

CHARLIE MUNGER: Well. The times he’s referring to, a lot of them, were like the worst in 50 years. So that’s a really rare kind of an occurrence. And we didn’t make all that many deals. So I think he’s right that it’ll be harder for us to make similar deals in the future.

WARREN BUFFETT: Yeah, the problem is the sums involved now, more than the problem of deciding what the proper terms should be. And sometimes we can get what we think is appropriate and sometimes we - most of the time, today, we can’t.

But you may see a transaction or two that - not in terms of buying business but in terms of securities - that strike you as perfectly decent ways to invest Berkshire’s money.

And they may well have come through Todd or Ted instead of directly to me.

I like to think I’ll be missed a little bit, but I - you won’t notice it. (Laughter)

12. Buffett talks to Ajit Jain about insurance pricing because it’s fun

WARREN BUFFETT: OK, Station 3.

AUDIENCE MEMBER: I’m Todd Lichter (PH) from Boulder, Colorado.

Mr. Buffett, are you still involved in pricing decisions at See’s Candies and The Buffalo News? And with what other Berkshire subsidiaries do you take more than a hands-off approach?

WARREN BUFFETT: Yeah, you’re correct that at one time I, and for some - for quite a while - both Charlie and I took part in the pricing decisions at See’s Candy.

And certainly, for some years, particularly with the question of the survival of The Buffalo News was really in question, I definitely took part in those decisions.

In both cases, we had good managers, but still we wanted to - we thought those decisions were important. But it’s been a long, long time - very long time - since we’ve participated in anything like that.

I can’t tell you what the per pound price is for See’s Candy, which is because people, and you’re invited to join this group, send me free candy from time to time. (Laughter)

And I can’t - I really, I can’t tell you the prices at The Buffalo News. All I know is it’s very, very, very hard to move up prices on advertising, generally. So no, we -

The only thing is, Ajit [Jain] and I talk frequently. And if there’s some very big risk, if somebody wants a $5 billion cover on a chemical plant some way excessive loss of over 3 billion or something - we have a certain amount of fun with him deciding on the price in his head. And I decide in my head, and then we compare notes.

It’s the kind of risk that you really can’t look up in a book and see, actuarially, what it’s fairly - the parameters - are fairly likely to be.

I enjoy thinking through the pricing of that, and I particularly enjoy comparing it with Ajit. So the -

These are just oddball situations, but we do that sort of thing, and we’ve done it for three decades. And it’s part of the fun of my job.

The candy prices, if you got to complain about those, you have to go to Charlie. (Laughter)

CHARLIE MUNGER: Well, the answer is, Warren is still doing it and talking to Ajit, and - but that’s because Ajit likes it that way.

WARREN BUFFETT: Yep.

CHARLIE MUNGER: We have a very peculiar place where the - where Warren’s contact with the various people elsewhere in the organization largely depends on what they want, not what he wants.

WARREN BUFFETT: The CEO of one of our -

CHARLIE MUNGER: It’s very unusual, and it’s worked beautifully.

WARREN BUFFETT: The CEO of one of our most successful subsidiaries, I may have talked to - unless I saw him here and just said hello - I probably talked to him three times in the last ten years.

And he does remarkably well. (Laughs)

He might have done even better if I hadn’t talked to him those three times. (Laughter)

And on the other hand, Ajit and I talk very, very frequently. And he’s got the kind of business, A, I do know - I know more about the insurance business than I know about a good many of the other businesses.

And it’s interesting. And we are evaluating things that you don’t look up in a book, you know. I mean, actuarial talent is not what’s important in the things that Ajit talks to me about. It’s plenty important throughout our insurance operation.

But in these particular cases, you know, we’re making judgments, and his judgment’s better than mine. But I like to - I just like to hear about them. They’re interesting propositions.

13. Putting business values in income account is “enormously deceptive”

WARREN BUFFETT: OK, Carol.

CAROL LOOMIS: ... shareholder named Jack Ciesielski . He’s a well-known accounting expert, who for many years has written “The Accounting Observer.”

“Mr. Buffett, in this year’s shareholder letter you have harsh words for the new accounting rule that requires companies to use market value accounting for their investment holdings.

″‘For analytical purposes,’ you said, ‘Berkshire’s bottom-line will be useless.’

“I’d like to argue with you about that. Shouldn’t a company’s earnings report cite everything that happened to, and within, a company during an accounting period?

“Shouldn’t the income statement be like an objectively written newspaper informing shareholders of what happened under the management for that period, showing what management did to increase shareholder value and how outside forces may have affected the firm?

“If securities increased in value, surely the company and the shareholders are better off. And surely they’re worse off if securities decreased in value.

“Those changes are most certainly real. In my opinion, ignoring changes in the way that some companies ignore restructuring costs, is censoring the shareholders’ newspaper.

“So my question is, how would you answer what I say?” (Laughter)

WARREN BUFFETT: Well, my answer to the question that asks what my answer would be to what he said - the - I would ask Jack, if we’ve got $170 billion of partly-owned companies, which we intend to own for decades, and which we expect to become worth more money over time, and where we reflect the market value in our balance sheet, does it make sense to, every quarter, mark those up and down through the income account, when at the same time we own businesses that have become worth far more money, in most cases, and become, you know, since we bought - you name the company - take GEICO, an extreme case - we bought half the company for $50 million, roughly - do we want to be marking that up every quarter to the value - and having it run through the income account?

That becomes an appraisal process. There’s nothing wrong with doing that, in terms of evaluation. But in terms of - and you can call it gain in net asset value or loss in net asset value - that’s what a closed-end investment fund, or an open-investment fund would do.

But to run that through an income account - if I looked at our 60 or 70 businesses, or whatever number there might be, and every quarter we marked those to market, we would have, obviously, a great many, in certain cases, where over time we’d have them at 10 times what we paid, but how quarter-by-quarter we should mark those up and run it through the income account, where 99 percent of investors probably look at net income as being meaningful, in terms of what has been produced from operations during the year, I think would be - well, I can say it would be enormously deceptive.

I mean, in the first quarter of this year - you saw the figures earlier - where we had the best what I would call operating earnings in our history, and our securities went - were down six billion, or whatever it was, to keep running that through the income account every day you would say that we might have made on Friday, we probably made 2 1/2 billion dollars. Well, if you have investors and commentators and analysts and everybody else working off those net income numbers and trying to project earnings for quarters, and earnings for future years, to the penny, I think you’re doing a great disservice by running those through the income account.

I think it’s fine to have marketable securities on the balance sheet - the information available as to their market value - but we have businesses there - if we - we never would do it - but if we were to sell half, we’ll say, of the BNSF railroad, we would receive more than we carried - carried for them - we would turn - we could turn it into a marketable security and it would look like we made a ton of money overnight. Or if we were to appraise it, you know, appraise it every three months and write it up and down, A, it could lead to all kinds of manipulation, but B, and it would just lead to the average - to any investor- being totally confused.

I don’t want to receive data in that manner and therefore I don’t want to send it out in that manner.

Charlie?

CHARLIE MUNGER: Well, to me it’s obvious that the change in valuation should be noted, and it is and always has been - it goes right into the net worth figures.

So the questioner doesn’t understand his own profession. (Laughter and applause)

I’m not supposed to talk that way but it slips out once in a while. (Laughter)

WARREN BUFFETT: Sometimes he even gives it a push. (Laughter)

14. McLane profits hurt by severe competitive pressure

WARREN BUFFETT: OK. Jonathan.

JONATHAN BRANDT: McLane’s core operating margins have dropped about 50 percent from where they’ve generally been since acquisition [from Walmart].

Could you elaborate on the competitive pressures in the grocery and convenience store distribution business that have caused the deterioration in profits? And do you expect the margin structure of that business to eventually get back to where it was, or is this the new normal?

WARREN BUFFETT: Well, I don’t know the answer to the second part about the future, but there’s no question that the margins have been squeezed. They were very, very narrow, as you know, they were about one cent on the dollar pretax, and they have been squeezed from that. Payment terms get squeezed.

In some cases we have fairly long-term contracts on that, so it will go on for five years (inaudible).

It’s a very, very tight margin business. And the situation is even worse than you portray because within McLane we have a liquor distribution business in a few states and that business has actually increased its earnings moderately, and we’ve added to that business, so within McLane’s figures there are about 70 million or so pretax from the liquor part that have nothing to do with the massive parts you’re talking about, in terms of food distribution.

So it’s even - the decline is even greater in what you’re referring to than you’ve (inaudible).

That’s just become very much more competitive. We have to decide - if you’ll look at our competitors, they’re not making much money either. And that’s capitalism.

I think, you know, there comes a point where the customer says, you know, “I’ll only pay X,” and you have to walk away.

And there’s a great temptation when you’re employing - particularly employing thousands of people -and you’ve built distribution facilities, and all of that sort of thing - take care of them - to meet what you’d like to term as “irrational competition,” but that is capitalism.

And - you’re right. We took - the earnings went up quite a bit from the time we bought it. And we’re still earning more than then. And we’ve earned a lot of money over time.

But, as I say, a fair amount of that is actually coming from liquor distribution, activities in about four states that we purchased - very well-run.

And - we will do our best to get the margins up. But I would not - I could not tell you - give you a really - your guess is almost as good as mine, or better than mine, maybe, as to what margins will be in that distribution business five years from now.

It’s a very essential service. We do $40-some billion. And we move more of the product of all kinds of companies that names are known to you, than anybody else. But - when you get - when you get - Kraft Heinz for that matter, or Philip Morris, or whomever it may be, on one side of the deal, and you get Walmart and some other - 7/11 - on the other side of the deal, sometimes they don’t leave you very much room in between.

Charlie?

CHARLIE MUNGER: I think you’ve described it very well. (Buffett laughs)

15. Health care costs partnership with Amazon and JPMorgan

WARREN BUFFETT: OK. (Laughter) Station 4.

AUDIENCE MEMBER: Good morning, Charlie and Warren. I know that seems a little bit out of order, but I’m a huge fan of yours, Charlie, mostly for your 25 Cognitive Biases.

I’m from Seattle, Washington. I run a one-person digital marketing firm that specializes in Facebook ads and email marketing. I use these a lot. I - your breakdown of Coca-Cola was really, really solid.

And I use that as reference when looking to how to understand the mechanics of my clients’ products and how to promote them. So I’m fairly certain that your cognitive biases work for internet-related companies.

Now that you’re partnering with Amazon [and JPMorgan] on health care, I’m curious, have you started to understand how to apply these biases to internet-related companies? Or is there another set of tools you use to decide if you understand a business? Because you guys talk a lot about not investing in businesses that you don’t understand.

WARREN BUFFETT: Well, health care is a - we don’t plan to start health care companies or, necessarily, insurers or anything. We simply have three organizations with leaders that I admire and trust. And we - mutually goes around all three.

And we hope to do something which Charlie correctly would probably say is almost impossible to change in some way a system which is - was taking 5 percent of GDP in 1960, and now is taking close to 18 percent.

And we have a hugely noncompetitive medical cost in American business, relating to any country in the world. The countries that - there were some countries that were around our 5 percent when we were at 5 percent. But we’ve managed to get to 18 without them going beyond 11 or so.

Literally, in 1960, we were spending $170 per capita on medical costs in the United States. And now we’re spending over 10,000.

And, you know, every dollar only has a hundred cents. So there is a cost problem. It is a tapeworm, in terms of American business and its competitiveness.

We don’t - we have fewer doctors per capita. We have fewer hospital beds per capita, fewer nurses per capita, than some of the other countries that are well below us.

And you’ve got a system that is delivering $3.3 trillion - that’s almost as much as the federal government raises - it’s delivering 3.3 trillion, or some number like that, to millions and millions and millions of people who are involved in the system. And every dollar has a constituency. It’s just like politics.

And whether we can find the chief executive, which we’re working on now, and which I would expect we would - we would be able to announce before too long - that - but that’s a key part of it.

And whether that person will have the imagination and support of people that will enable us to make any kinds of significant improvements in a system which everybody agrees is sort of out of control on cost, but what - but - but they all think it’s the other guy’s fault, generally - we’ll find out. It won’t be - it won’t be easy.

But it is not a - the motivations are not primarily profit-making. They’re - we want to deliver - we want our employees to get better medical service at a lower cost. We’re not going to - we’re certainly not going to come up with something where we think the service that they receive is inferior to what they’re getting now.

But we do think that there may be ways to make a real - significant changes - that could have an effect. And we know that the resistance will be unbelievable.

And if we fail, we’ve at least tried. And - but they - the idea is not that I will be able to contribute anything to, you know, in some breakthrough moment, by reading a few medical journals or something - (laughs) - changing something that is as embedded as the medical system.

But the idea is that maybe the three organizations, which employ over a million people and which, after we announced it, we had a flood of calls from people that wanted to join in, but there isn’t anything to join into now. But they will if we have - come up with any ideas that are useful.

Whether we can - bring the resources, bring the person. And the CEO is terribly important. And then bring the person, support that person. And somehow, figure out a better way for people to continue to receive better medical care in the United States without that 8 percent - 18 percent - going to 20 or 22 percent, you know, in the lifetime of, you know, our children or something of the sort - because there are only a hundred cents in the dollar.

And we will see what happens. It’s - you know - if you were Ajit [Jain], actuarially figuring, it would not - you would not bet on us. But - I think there is some chance we will do something.

There’s a chance - nobody can quantify it - that we can do something significant. And we are positioned better than most people to try. And we’ve certainly got the right partners. So, we will give it a shot and see what happens.

Charlie? (Applause)

CHARLIE MUNGER: There is some precedent for success in this public service activity. If you go back many decades, John B. Rockefeller I, using his own money, made an enormous improvement in American medical care. Perfectly enormous. In fact, there’s never been any similar improvement done by any one man since that rivals it.

So Warren, having imitated Rockefeller in one way, is just trying another. And maybe it’ll work.

WARREN BUFFETT: Rockefeller, incidentally, lived a very long time. So I actually am trying to imitate him three ways there. (Laughter)

We’ll see what happens. But we are - we’re making a lot of progress. And I think we’ll probably have a CEO within a couple of months. But if we don’t have one, then we’re not going to pick somebody just because we want to meet any deadline or anything like that. We’ve got these wonderful partners.

We don’t have a partnership agreement among us. Somebody started drawing up one in a legal department and the CEO just put a stop to it.

They - you do have places that have a lot of resources. And while we all have our share of bureaucracy, we can cut through it if we’ve got something that we really think makes sense.

And we will get the support - we’ll get - we’ll get a lot of resistance, too. But we will get the support of a lot of American business, if we come up with something that makes sense.

But if it was easy, it would’ve already been done. There’s no question about that.

CHARLIE MUNGER: It’s not easy.

WARREN BUFFETT: No. (Laughs) But it should be tried.

16. Weschler and Combs “slightly ahead” of S&P

WARREN BUFFETT: OK. Becky?

BECKY QUICK: This question comes from David Rolfe, who is with Wedgewood Partners, and has been - the company - has been shareholders in Berkshire since 1989. The stock is currently the largest holding in their stocks - 18 stocks.

He asks this question: “Over the past two years, you have listed the individual fund-of-funds performance from Protégé Partners. When will you start showing the annual performance on 25 billion that Ted [Weschler] and Todd [Combs] manage? Can you state if either Ted or Todd has beaten the S&P 500 index over the last five years?

WARREN BUFFETT: Yeah. Both - A, we’ll probably never report their individual performance.

But you can be sure that I have an enormous interest in - as does Charlie - in how much we think they contribute to Berkshire. And they have - they’ve been terrific. They’ve - they not only have the intellect, and the record, but they are exceptional human beings. And they -

Todd has done a tremendous amount of work, for example, on the medical project.

And - Ted is - I’ve given him several things, and he’s done them better than I could do them.

So the record, since inception - and I’m measuring it - Ted came later than Todd, a year or so later - but the record, since inception, is almost identical - both for the two managers - from their different inception and matching the S&P.

And they’ve received some incentive compensation, which they only get if they beat the S&P. And as I say, they’re just slightly ahead. That really hasn’t -

It’s been better than I’ve done, so naturally, I can’t criticize it. (Laughs)

They - they were the - they were two very, very, very good choices.

Charlie?

CHARLIE MUNGER: You did report it in a previous year. You just didn’t do it this year. And - but now you have your report. (Laughter)

WARREN BUFFETT: I would - the problem that all of us has is size. It’s actually - it’s harder to run even 12 or $13 billion, frankly, than it is to run a billion. And if you’re running a million dollars or something of the sort, it’s a whole different game. You’d agree with that, wouldn’t you, Charlie?

CHARLIE MUNGER: Of course.

WARREN BUFFETT: Yeah, OK. (Laughter)

Just like any good lawyer, you never ask him a question unless you think you know the answer they’re going to give. (Laughter)

17. GEICO is on a good growth and profit track

WARREN BUFFETT: OK. Gary?

GARY RANSOM: My question’s on GEICO. Last year, you promised growth and delivered. But along the way, the combined ratio was moving up, and it was the first time it was over a hundred in about 15 years.

Granted, some of that was catastrophes. But even excluding catastrophes, there was something going on in the loss trends that caused you to slow down that growth, at least at the - as we got to the latter part of the year.

And I wondered if you could tell us what was going on. And I did look this morning, too, so it looked like the first quarter has settled down a little bit, but I’d still like to know about the fourth quarter.

WARREN BUFFETT: Yeah, sure. It - the only thing I differ with the question on slightly - when you say it caused us to slow down - we didn’t want to slow down the growth. I mean, you’re looking at a guy here that has never wanted to slow down the growth of GEICO. The growth did slow down, but it wasn’t because we wanted it to.

Our prices that led to the underwriting loss - we actually - we’d have been slightly in the black without the catastrophes.

But, you know, if we hadn’t have paid our light bills, we might have been in the black, too. I mean, this “except for” stuff doesn’t mean much in insurance as far as I’m concerned.

The - if you’ll look at the first quarter - our margins were around 7 percent, which is actually a little more than we aimed for. And I received the unaudited - I mean, the preliminary - figures for April, and they’re similar.

So, the underwriting gain is - or margins - are perfectly satisfactory now. And we’d love to get all the growth we can. And we will gain market share this year. And we gained market share - Tony - when Tony [Nicely] took over the place, it was - in 1993 - it was two and a very small fraction percent. And it’ll be 13 percent of the - you know - 13 percent of the households in the country now. And we will keep gaining share. We will keep writing profitably - most of the time.

And every now and then, our rates will be slightly - modestly inaccurate - inadequate, I should say. And/or we’ll have, maybe, some big losses on hurricanes or something of the sort, or we’ll have a [Hurricane] Sandy in New York.

The - but GEICO is a jewel. And it’s - you know, it’s really a - we’ve got some others we feel awfully close to similarly about, but it’s an incredible company. It has a culture all of its own. It’s saving its customers probably 4 or $5 billion a year against which they would - against what they would otherwise be paying, based on the average in auto insurance. And it will be profitable on underwriting a very high percentage of the year. It contributed another $2 billion to float last year.

It is a terrific company. And like I say, the first four months are dramatically better.

Now, there’s some seasonal in auto insurance. So, the first quarter is usually the best of the four quarters. But it’s not a dramatic seasonal. So, I think when you read the 10-Q - and you can take my word for April - I think GEICO is on a good profit track as well as a good growth track. And the more it grows, the better I like it.

Charlie?

CHARLIE MUNGER: Well, I think you’ve said it perfectly.

WARREN BUFFETT: Huh.

CHARLIE MUNGER: It was never very bad, and it’s better now. (Buffett laughs)

18. Munger on steel tariffs: “Even Donald Trump can be right”

WARREN BUFFETT: OK. Station five.

AUDIENCE MEMBER: Good morning, Warren Buffett and Charlie Munger. My name is Ethan Mupposa (PH), and I am from Omaha, Nebraska.

My question is, how will Donald Trump’s tariffs affect the manufacturing business of Berkshire Hathaway?

WARREN BUFFETT: Well, to date - (applause) - steel costs - we’ve seen steel costs increase somewhat. But as I said earlier, I don’t think the United States or China - there’ll be some jockeying back and forth, and there will be something that leaves some people unhappy and - but I don’t think - I don’t think either country will dig themselves into something that precipitates and continues any kind of real trade war in this country.

We - we’ve had that in the past a few times. And I think we’ve learned a general lesson on it.

But there will - there will be some things about our trade policies that irritate others. And there will be some from others that irritate us. And there will be some back and forth. But in the end, I don’t think we’ll come out with a terrible answer on it.

Charlie, I’ll let you -

CHARLIE MUNGER: Well, steel has - it reached - the conditions in steel were almost unbelievably adverse to the American steel industry.

You know, even Donald Trump can be right on some of this stuff. (Laughter and applause)

WARREN BUFFETT: The - the thing about trade - you know, I’ve always said that the president, whether it’s president - any president - needs to be an educator-in-chief, which [Franklin] Roosevelt was in the Depression. That’s why he had those Fireside Chats, and it was very important that he communicated to the people what needed to be done and what was happening around them, and -

Trade is particularly difficult, because the benefits of trade are basically not visible, you know. You don’t know what you would be paying for the clothes you’re wearing today if we’d had a rule they all had to be manufactured in the United States, or what you’d be paying for your television set, or whatever it may be.

No one thinks about the benefits day-by-day as they walk around buying things and carrying on their own business.

The negatives, and there are negatives, are very apparent and very painful. And if you’re laid off - like happened in our shoe business [Dexter Shoes] in Maine - and you know you are - been a very, very, very good worker, and you were proud of what you did, and maybe your parents did it before you, and all of a sudden you find out that American shoes - shoes manufactured in America - are not competitive with shoes made outside the United States.

You know, you can talk all you want about Adam Smith or David Ricardo or something and explain the benefits of free trade and comparative advantage and all that sort of thing, and that doesn’t make any difference.

And if you’re 55 or 60 years old, to talk about retraining or something like that, you know, so what?

So, I - it is tough in politics where you have a hidden benefit and a very visible cost to a certain percentage of a - of your constituency.

And you need to do two things under those circumstances, if you have that situation. You know what’s good for the country. So, you have to be very good at explaining how it does really hurt, in a real way, somebody that works in a textile mill, like we had in New Bedford, where you only spoke Portuguese - half our workers only spoke Portuguese. And suddenly, they have no job. And they’ve been doing their job well for years.

You’ve got to do two things. You can - you’ll have to - you have to understand that that’s the price individuals pay for what’s good for the collective good.

And secondly, you’ve got to take care of the people that are - that - where retraining is a joke because of their age, or whatever it may be. And you’ve got to take care of the people that become the roadkill in something that is collectively good for us as a country. And -

That takes society acting through its representatives to develop the policies that will get us the right collective result, and not kill too many people economically in the process. And you know, we’ve done that in various arenas over the years.

The people in their productive years do help take care of the people that are too old, and too young. I mean, every time a baby is born in the United States, you know, we take on an obligation of educating them for 12 years. It’ll cost $150,000 now, you know? It -

We have a system that has a bond between the people in their productive years and the ones in the young and old. And it gets better over time. It’s far from perfect now. But it has gotten better over time.

And I believe that trade, properly explained, and with policies that take care of the people that are roadkill, is good for our country and can be explained.

But I think it’s a tough - it’s been a tough, tough sell to a guy that made shoes in Dexter, Maine or worked on a loom in New Bedford, Mass, or works in the steel mill in Youngstown, Ohio. (Applause)

19. Buffett won’t impose his political opinions on Berkshire

WARREN BUFFETT: Andrew?

ANDREW ROSS SORKIN: OK, Warren. This question comes from a Berkshire shareholder who says they’ve been a shareholder for ten years. I should say this may be one of the most pointed questions I’ve ever received for you. So -

WARREN BUFFETT: But you elected to give it, though.

ANDREW ROSS SORKIN: But I did. (Laughter)

The shareholder writes, “I have watched the movie every year at this meeting, when you testify in front of Congress on behalf of Salomon, as the symbol of what it means to have a moral compass. Investors are increasingly looking to invest in companies that are socially and morally responsible.

“So I was disturbed when you were asked on CNBC about the role that business could play in sensible policies around the sales of guns.

“You said you didn’t think business should have a role at all, and you wouldn’t impose your values on others. I was even more surprised when you said you’d be OK with Berkshire owning shares in gun manufacturers.

“At this meeting years ago, you said you wouldn’t buy a tobacco company because of the social issues. The idea that Berkshire would associate with any company as long as it isn’t illegal seems at odds with everything I think you stand for. Please tell us you misspoke.”

WARREN BUFFETT: Well - (applause) - let’s explore that a little. (Laughter)

Should it be just my view, or should it be the view of the owners of the company? So, if I decide to poll the owners of the company on a variety of political issues, and one of them being whether, you know, Berkshire Hathaway should support the NRA, I don’t - if a majority of the shareholders voted to do it, or if a majority of the board of directors voted to do it, I would - I wouldn’t - I would accept that.

I don’t think that the - my political views - I don’t think I put them in a blind trust at all when I take the job. And I - in the elections of 2016, I raised a lot of money. In my case, I raised it for Hillary [Clinton]. And I spoke out in various ways that were quite frank, but - (applause) - I don’t think that I speak -

When I do that, I don’t think I’m speaking for Berkshire. I’m speaking as a private citizen. And I don’t think I have any business speaking for Berkshire. We have never - at the parent company level - we have never made a political contribution, you know -

And I don’t go to our suppliers. I don’t do anything of that sort where I raise money either for the school I went to, or for a political candidate I went to, or anything else.

And I don’t think that we should have a question on the GEICO policyholder form, “Are you an NRA member?” you know, and if you are, you just aren’t good enough for us, or something. That - I think -

I do not believe in imposing my political opinions on the activities of our businesses.

And if you get to what companies are pure and which ones aren’t pure - (applause) - I think it is very difficult to make that call. Thank you.

I think with that response, I’m almost afraid to call on Charlie. But go ahead, Charlie. (Laughter)

CHARLIE MUNGER: Well, obviously, you do draw a limit, Warren -

WARREN BUFFETT: Yeah, we did.

CHARLIE MUNGER: - in all kinds of thing -

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: - which are beneath us, even though they’re legal. But we don’t necessarily draw it perfectly because we’ve got some sort of supreme knowledge. We just do the best we can.

And certainly, we’re not going to ban all guns, surrounded by wild turkeys in Omaha. (Laughter)

20. “Very unlikely” Berkshire would pay a special dividend

WARREN BUFFETT: OK, Gregg. (Laughter)

GREGG WARREN: Warren, this question’s also based on something you said more recently, so I can’t guarantee it’s going to be any easier. (Buffett laughs)

You recently noted that you prefer share repurchases over dividends as a means for returning capital to shareholders should Berkshire’s cash balances continue to rise and hit the $150 billion threshold you noted as being difficult to defend to shareholders at last year’s annual meeting.

While I understand the rationale for not establishing a regular dividend, a one-time special dividend could be a useful option for returning a larger chunk of Berkshire’s excess capital to shareholders without the implied promise to keep paying a regular dividend forever.

The drawback with the special dividend, though, is that it would lead to an immediate decline in book value and book value per share. Whereas a larger share repurchase effort, while depressing book value, would reduce Berkshire’s share count, limiting the impact on book value per share.

If we do happen to get a few years out and Berkshire does hit that $150 billion threshold, because valuations continue to be too high, both for acquisitions and for the repurchase of company stock, would you consider a one-time special dividend as a means for returning capital to shareholders?

WARREN BUFFETT: Well, if we thought we couldn’t use capital effectively, we would figure - we would try to figure out the most effective way of returning capital to shareholders. And - you could - I would have probably - I think it’d be unlikely we’d do it by a special dividend.

I think it’d be more likely we’d do it by a repurchase, if the repurchase didn’t result in us paying a price above intrinsic value per share. We’re never going to do anything that we think is harmful to continuing shareholders.

So if we think the stock is intrinsically worth X, and we would have to pay some modest multiple even above that to repurchase shares, we wouldn’t do it because we would be hurting continuing shareholders to the benefit of the people who are getting out.

But we will try and do whatever makes the most sense, but not with the idea that we have to do something every day because we simply can’t find something that day.

We had a vote as you know - I don’t know, a few years back - on whether people wanted a dividend. And - the B shares - so I’m not talking my shares or Charlie’s or anything - but the B shares voted 47 to one against it.

So I think through self-selection of who become shareholders - I don’t think shareholders world - or countrywide - on all stocks would vote 47 to one at all.

But we get self-selection in terms of who joins us. And I think they expect us to do whatever we think makes sense for all shareholders. And obviously, if we really thought we never could use the money effectively in the business, we should get it out, one way or another. And -

You’ve got a bunch of directors who own significant - very significant - amounts of stock themselves. And you can expect them to think like owners. It’s the reason they’re on the board.

And you can expect the management to think like owners and - owners will return money to all of the owners if they think it makes more sense than continuing to look for things to do.

But we invested in the first quarter, maybe - have to look it up on the - well, certainly through April - probably close to 15 billion or something like that, net, so -

And we won’t always be in a world of very low interest rates - or high private market prices.

So we will do what makes the most sense. But I can’t see us ever making a special - almost - it’s very unlikely we would just pay out a big, special dividend. I think that if we put that to the vote of the shareholders, and Charlie and I did not vote, I think we would get a big negative vote. And I’d be willing to - be willing to make a bet on that one.

Charlie?

CHARLIE MUNGER: Well, as long as the existing system continues to work as well as it has, why would we change it? We’ve got a whole lot of people that are accustomed to it, have done well under it. And if conditions change, why, we’re capable of changing our minds, if the facts change.

WARREN BUFFETT: Yeah, and we’ve done that several times.

CHARLIE MUNGER: Yes.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: Although, I must say, it’s a little hard. (Laughter)

WARREN BUFFETT: He always brings me back to earth.

21. Munger is more interested than Buffett in Chinese stocks

WARREN BUFFETT: OK. Station 6?

STEPHANIE YU: Hi, good morning, Mr. Buffett and Mr. Munger. My name is Stephie Yu from Horizon Insights, a China-focused research firm based in Shanghai. So I have a lot of mutual fund clients in China, who are very young - relatively younger - and they manage a smaller portion of funds.

So my question is, if you only have $1 billion in your portfolio today, how would you change your investments? Would you consider more investment opportunities in emerging markets such as China? Thank you.

WARREN BUFFETT: Yeah. I would say, if I were working with a billion, I would probably find - within a $30 trillion market in the United States, where I understood things better, generally, than I do around the world - I’d probably find opportunities there that would be better, incidentally, by some margin, than what we can find for hundreds of billions.

But I wouldn’t - there’s no way I’d rule out emerging markets. There was a time, 15 years ago or so, when just because it was kind of interesting and it took me back to my youth, I - on the weekend, I went through a directory of Korean stocks. And I bought - and these were small stocks - well, they weren’t small by standards of either Korean or American business. They were big, big companies.

But I found 15 or 20 in - that were statistically cheap and bought some of each one myself.

And there are opportunities with smaller amounts of money to do things that we just can’t do. And - but I - my first inclination always would be to comb through things in the United States. And -

But I’ve combed through - in other countries. I probably wouldn’t get into very, very small markets because there can be a lot of difficulties even in market execution and taxation, (inaudible).

You can find - if you can’t find it, you know, in America and China and Britain and a few other places - (laughs) - you probably aren’t going to find it someplace else. You may think you’ve found it. But that may be - it may be a different game than you know. Our problem is size, not geography.

Charlie?

CHARLIE MUNGER: Well, I already have more stocks in China than you do, as a percentage, so I’m with the young lady. (Laughter)

WARREN BUFFETT: OK. Well, you can - you want to name names? Do these stocks have names? Or - (Laughs)

CHARLIE MUNGER: No, I don’t. (Buffett laughs)

WARREN BUFFETT: Carol?

CAROL LOOMIS: This question is -

WARREN BUFFETT: I should just add one thing. You will find plenty of opportunities in China. Charlie would say you’ve got a better hunting ground than even a person with similar capital in the United States. Would you agree with -?

CHARLIE MUNGER: Yes, I do.

WARREN BUFFETT: Yeah, yeah. So - and in the sense they’re - it’s logical that should be the case because it’s a younger market, but still a large market. So that -

Markets probably work toward efficiency as they age. Japan had this very strange situation with warrants being priced out of line and all of that 30 years ago. And people notice after a while and it disappears. But there can be - some very strange things happen in markets as they develop. I think you’d agree with that, Charlie, wouldn’t you?

CHARLIE MUNGER: Absolutely.

WARREN BUFFETT: Yeah.

22. Munger: Keep the faith and don’t sell your stock when we’re gone

WARREN BUFFETT: Jonathan?

JONATHAN BRANDT: Hello -

CAROL LOOMIS: You skipped me.

WARREN BUFFETT: Did I skip -? I skipped Carol?

CAROL LOOMIS: Yup.

WARREN BUFFETT: Oh. I’m sorry.

CAROL LOOMIS: OK.

WARREN BUFFETT: OK.

CAROL LOOMIS: This question, and I would concede it is not a small one, comes from Gideon Pollack of Montreal.

He says, “The world knows generally how the looks of Berkshire Hathaway have changed since you began to run the company in 1965. Berkshire was then a tiny northeastern, textile company. And now it is the number-four company on the Fortune 500.

“What about the next 50 years? Could you give us your view of what Berkshire looks like in 2068?”

WARREN BUFFETT: I think it’ll look a long way away. (Laughter)

No, the answer is I don’t know. And I didn’t know, 50 years ago, what it would like now, I mean -

It will be based on certain principles. But where that leads, you know, we will find out and we’ll have people that are thinking about different things than I am. And we’ll have a world that’s different. But -

We will be - I very much hope and believe that we will be - that we’ll be as shareholder-oriented as any large company in the world. We will look at our shareholders as partners and we will be trying to do with their money exactly what we’d do with our own, not seeking to get an edge on them. And who knows what else will be happening then?

Charlie?

CHARLIE MUNGER: Well, I want to talk to the younger shareholders in the group. Those of you who, after we are gone, sell your Berkshire stock and do something else with it, helped by your many friends, I think are going to do worse. (Laughter)

So I would advise you to keep the faith. (Applause)

By the way, some of that has already happened in many families.

WARREN BUFFETT: I’ll give his answer next time now that I see it get all of that applause. (Laughter)

23. “Duracell should be earning more money than it is now”

WARREN BUFFETT: Jonathan.

JONATHAN BRANDT: Duracell’s $82 million of pretax profits in 2017 were still well below what it earned as a subsidiary of P&G. Can you clarify or quantify to what extent transition costs or purchase price accounting impacts at the segment level were still temporarily burdened last year? Or is it possible that the gap in earnings contribution simply reflects a commoditization of the category given the entry of Amazon into the battery market?

I did see that Duracell’s earnings were up in the first quarter. Is that a sign of a more meaningful contribution in 2018 and beyond, as you finish right-sizing the manufacturing footprint and acquisition-related charges fall away?

WARREN BUFFETT: Yeah. Duracell should be earning more money than it is now, and will be. And as you mentioned, it’s well on its way there. But it is not earning an appropriate amount now, based on the history of the company.

I was around when - I was on the board of Gillette when Gillette bought Duracell. And I’ve seen what it does when it is managed to its full extent. And I saw what Jim Kilts did with it at Gillette when he ran it. And there were a lot more transition problems in the purchase. For one thing, there’s a lot of rules connected with our swap of our stock in P&G for Duracell. There are a lot of things which you cannot do that made sense to do in that period of transition from P&G’s management to ours. But Duracell - the brand is strong. Very strong.

The product line is very strong. And we are making more money. And we should, and I believe we will earn, really, what the property is capable of earning. We should be earning that relatively soon.

But you’re absolutely right that it is - from a profit standpoint - is underperforming.

We’re making a lot of changes. And some of those are involved in jurisdictions - countries - where it is really expensive to change in terms of employment - payments that have to be made if a plant is changed or something of the sort.

But I like the Duracell deal absolutely as well as when we made it.

Charlie?

CHARLIE MUNGER: I like it better than you do. (Laughter)

WARREN BUFFETT: No. Duracell is a very, very - is our kind of business.

CHARLIE MUNGER: It is.

24. Long-term bonds are “almost ridiculous” at current rates

WARREN BUFFETT: OK. Station 7.

AUDIENCE MEMBER: Good morning. And I have a question related to the bond market - U.S. Treasury bond market. And my name is Ola Larsson (PH). I live in the San Francisco bay area.

And I never worked in the financial industry. I started out buying penny mining stocks on the Vancouver Stock Exchange. And then decades later, I got married. And my wife convinced me to buy Berkshire shares. That was probably a good decision. (Laughter)

So my question is, I read the newspapers about the Federal Reserve and the inflation numbers. And there must be an increase supply of Treasury bonds that must go to auction. And my question is how would - what do you expect that to impact yield or interest rate?

WARREN BUFFETT: Yeah. The answer is, I don’t know. And the good news is, nobody else knows, including members of the Federal Reserve and everyone -

There are a lot of variables in the picture. And the one thing we know is we think that long-term bonds are a terrible investment, and we - at current rates or anything close to current rates.

So basically all of our money that is waiting to be placed is in Treasury bills that, I think, have an average maturity of four months, or something like that, at most.

The rates on those have gone up lately, so that in 2018, my guess is we’ll have at least $500 million more of pretax income than we would’ve had in the bills last year.

But they still - it’s not because we want to hold them. We’re waiting to do something else.

But long-term bonds - they’re basically, at these rates - it’s almost ridiculous when you think about it. Because here the Federal Reserve Board is telling you we want 2 percent a year inflation. And the very long bond is not much more than 3 percent. And of course, if you’re an individual, then you pay tax on it. You’re going to have some income taxes to pay.

And let’s say it brings your after-tax return down to 2 1/2 percent. So the Federal Reserve is telling you that they’re going to do whatever’s in their power to make sure that you don’t get more than a half a percent a year of inflation-adjusted income.

And that seems to me, a very - I wouldn’t go back to penny stocks - but I think I would stick with productive businesses, or productive - certain other productive assets - by far.

But what the bond market does in the next year, you know - you’ve got trillions of dollars in the hands of people that are trying to guess which maturity would be the best to own and all that sort of thing. And we do not bring anything to that game that would allow us to think that we’ve got an edge.

Charlie?

CHARLIE MUNGER: Well, it really wasn’t fair for our monetary authorities to reduce the savings rates, paid mostly to our old people with savings accounts, as much as they did. But they probably had to do it to fight the Great Recession, appropriately.

But it clearly wasn’t fair. And the conditions were weird. In my whole lifetime, it’s only happened once that interest rates went down so low and stayed low for a long time.

And it was quite unfair to a lot of people. And it benefited the people in this room enormously because it drove asset prices up, including the price of Berkshire Hathaway stock. So we’re all a bunch of undeserving people - (laughter) - and I hope that we continue to be so. (Laughter)

WARREN BUFFETT: At the time this newspaper came out in 1942, it was - the government was appealing to the patriotism of everybody. As kids, we went to school and we bought Savings Stamps to put in - well, they first called them U.S. War Bonds, then they called them U.S. Defense Bonds, then they called them U.S. Savings Bonds. (Laughs) But they were called war bonds then.

And you put up $18.75 and you got back $25 in ten years. And that’s when I learned that that $4 for three - in ten years - was 2.9 percent compounded. They had to put it in small print then.

And even an 11-year-old could understand that 2.9 percent compounded for ten years was not a good investment. But we all bought them. It was - you know, it was part of the war effort, basically.

And the government knew - I mean, you knew that significant inflation was coming from what was taking place in finance, in World War II.

We actually were on a massive Keynesian-type behavior, not because we elected to follow Keynes, but because war forced us to have this huge deficit in our finances, which took our debt up to 120 percent of GDP. And it was the great Keynesian experiment of all time, and we backed into it, and it sent us on a wave of prosperity like we’ve never seen. So you get some accidental benefits sometimes.

But the United States government (inaudible) every citizen to put their money into a fixed-dollar investment at 2.9 percent compounded for ten years. And I think Treasury bonds have been unattractive ever since - (laughs) - with the exception of the early ’80s. That was something at that time.

I mean, you really had a chance to buy - you had a chance to invest your money by buying zero-coupon Treasury bonds, and in effect, guarantee yourself that for 30 years you would get a compounded return, you know, something like 14 percent for 30 years of your lifetime.

So every now and then, something really strange happens in markets and the trick is to not only be prepared but to take action when it happens.

Charlie, did you ever buy any war bonds?

CHARLIE MUNGER: No. No. I never bought war bonds.

WARREN BUFFETT: No. Used to be like take me -

CHARLIE MUNGER: I didn’t have any money when I was in the war. (Laughter)

WARREN BUFFETT: That’s a good reason not to buy. (Laughs)

25. “A bureaucracy is sort of like a cancer”

WARREN BUFFETT: OK, Becky?

BECKY QUICK: This question comes from Angus Hanton (PH), who - he and his wife are based in London, and he says they’ve been shareholders in Berkshire Hathaway for over 30 years.

He says, “We have all read about the zero-based budgeting that has been so effective with Kraft Heinz and other investments that you’ve done with 3G Partners. Can we expect these cost-reduction techniques to be used by your managers in other parts of the Berkshire Hathaway enterprise?”

WARREN BUFFETT: Well, in general, we do not expect the managers, generally, to get in the position where there would be a lot of change in terms of zero-based budgeting. In other words, why in the world aren’t you thinking that way all of the time?

The 3G people have gone into certain situations where there were - probably primarily in personnel, but in other expenses as well - a lot of expenses that were not delivering a dollar of value per dollar expended.

And so, they made changes very fast that - to a situation that probably shouldn’t have existed in the first place.

Whereas, we hope that our managers - take a GEICO. GEICO’s gone from, I think, 8,000 to 39,000 people since we bought control. But they’re all very productive. I mean, you would not find a way for a 3G operation to take thousands of people out of there.

On the other hand, I can think of some organizations where you could take a whole lot of people out, where it isn’t being done because the businesses are very profitable to start with.

That’s what happened with the tobacco companies, actually. They were so profitable that they had all kinds of people around that didn’t - weren’t really needed. But they - the money just flowed in.

So I - our managers have different techniques of keeping track of - or of - trying to maximize customer satisfaction at the same time that they don’t incur other than necessary costs.

And I think, probably, some of our managers may well use something that’s either zero-based budgeting or something akin to it. They do not submit budgets - never have - to me. I mean, they’ve never been required to. We’ve never had a budget at Berkshire.

We don’t consolidate our figures monthly. I mean, I get individual reports on every company. But there’s no reason to have some extra time spent, for example, by having consolidated figures at the end of April, or consolidated figures at the end of May.

We know where we stand. And - you know, I’m sure we’re the only company that - probably in the whole Fortune 500 - that doesn’t do it. But we don’t do unnecessary things around Berkshire. And a lot of stuff that’s done at big companies is unnecessary. And that’s why a 3G finds opportunities from time to time.

Charlie?

CHARLIE MUNGER: Well, if you’ve got 30 people at headquarters and half of those are internal auditors, that is not the normal way of running a big company in America.

And what’s interesting about it is, obviously, we lose some advantages from big size. But we also lose certain disadvantages from having a big bureaucracy with endless meeting after meeting after meeting around headquarters.

And net, I think we’ve been way ahead with our low overhead, diversified method. And also, it makes our company attractive to very able, honorable people who have companies.

So generally speaking, the existing system has worked wonderfully for us. I don’t think we have the employment that could be cut effectively that a lot of other places have. And I think our methods have worked so well that we’d be very unlikely to change them.

WARREN BUFFETT: Yeah. I think if some - at headquarters, you could say we have kind of subzero-based budgeting. (Laughter)

And we hope that the example of headquarters is, to a great extent, emulated by our -

CHARLIE MUNGER: But it isn’t just the cost reduction. I think the decisions get made better if you eliminate the bureaucracy.

WARREN BUFFETT: Oh yeah.

CHARLIE MUNGER: I think a bureaucracy is sort of like a cancer. And it functions sort of like a cancer. (Applause)

And so, we’re very anti-bureaucracy. And I think it’s done us a lot of good. In that case, we’re quite different from, say, Anheuser-Busch at its peak.

26. We’re experimenting with lower-cost commercial insurance

WARREN BUFFETT: OK. Gary.

GARY RANSOM: My question is on small commercial, and specifically, direct small commercial.

You seem to have some websites that enable buyers to purchase small commercial insurance directly; biBERK is one of them.

It’s a very competitive, fragmented market. But what is your strategy for that market? And then, can you ultimately GEICO-ize the small commercial market?

WARREN BUFFETT: Well, we’ll find out. I mean, it’s a very good question because that’s exactly the question we ask ourselves.

And we have this incredible company at GEICO, which has gone direct in the personal auto field, and was, you know, first started it in 1936.

And there’s no question in my mind that over a lot of years - and maybe not so many years - something like small commercial - anything that takes cost out of the system, you know, makes it easier for the customer, is going to work over time, if you’ve got a system that was based on something that had more layers of agency costs and that sort of thing.

So we are experimenting, and we’ll continue to experiment, on something like small commercial, workers’ comp, whatever it may be. We’ll try and figure out ways to take cost out of the system, offer the customer an equivalent product or better at lesser price, and we’ll find out what can be done and what can’t be done.

And we’re not the only ones doing it, as you know. But we are not going - we’ve got some managers that are going to be quite, I’m sure, enterprising on that. And we back them. And we expect some to fail and some - and if a few succeed - we’ll have some very good businesses. And the world is going in that direction. So - you could expect us to try and go with it.

Charlie?

CHARLIE MUNGER: Well, if it were easy, I think it would’ve happened more fast -

WARREN BUFFETT: Yeah -

CHARLIE MUNGER: - than it has.

WARREN BUFFETT: It will happen as we go along. I mean, it wasn’t easy in auto, I mean, when you think about it.

CHARLIE MUNGER: No, it wasn’t.

WARREN BUFFETT: No. I mean, it was a system with all kinds of extra costs that go back to the turn of the 19th century into the 20th. I mean, it was built on fire insurance and strong general agencies. And that slopped over into auto when the auto came along in 1903 from Ford or whenever. And - so it grew within a system that really wasn’t very efficient compared to what was available.

But it took State Farm initially to go to a direct, or a captive agency system. And then it took USAA, and then later, GEICO, and then later, Progressive, to go to direct systems that are even more efficient and consumer-friendly.

And the same thing is going to happen, to some degree, in all kinds of industries, and certainly small commercial - somebody will -

CHARLIE MUNGER: It could happen, but it will be slow.

WARREN BUFFETT: It takes an amazingly long time. I mean, it - but you know, the battle doesn’t always go to the strong and the race to the swift. But that’s the way to bet, you know, as they say. So - (Laughs)

27. Health care partnership is attacking a huge “industry moat”

WARREN BUFFETT: OK, station eight?

AUDIENCE MEMBER: Austin Merriam, from Jacksonville, Florida.

Mr. Buffett, with the recent news of the partnership between you, Mr. [Jeff] Bezos, and Mr. [Jamie] Dimon, to challenge the health care industry and the self-admitted difficulties you are running across, this would lead me to believe the industry has higher barriers to entry than may have originally been hypothesized; a larger moat, if you will.

Would that justify a higher earnings multiple for established players in the industries, such as PBMs, for example?

WARREN BUFFETT: Well, just - though the system may have a moat against intruders, it doesn’t mean that everybody operating within the system has individual moats, for one thing.

Now, I - we are - if this new triumvirate succeeds at all, we are attacking an industry moat. And I’m defining industry very broadly; health care, not just, you know, health care insurers or this or that.

We’re trying to figure out a better way of doing it and making sure that we’re not sacrificing care. And the goal is to improve care.

And like I say, that is a - that’s a lot bigger than a single company’s moat. It’s bigger than a component of the industry’s moat. The moat held by the whole system, since it interacts in so many ways, is actually - that’s the moat that essentially has to be attacked, and that’s a huge moat.

And like I say, we’ll do our best. But - I hope if we fail, I hope somebody else succeeds.

Charlie?

CHARLIE MUNGER: Well, I suspect that eventually when the Democrats control both houses of Congress and the White House, we will get single-payer medicine. And I don’t think it’s going to be very friendly to many of the current PBMs. (Applause)

And I won’t miss them. (Laughter)

28. Buffett vs Elon Musk on whether competitive moats are “lame”

WARREN BUFFETT: Andrew?

ANDREW ROSS SORKIN: This question comes from Kiwi (PH) and actually is directly about the issue of moats.

He notes that - “Elon Musk, this week, on his Tesla earnings call, said the following, quote, ‘I think moats are lame. They are, like, nice in a sort of quaint, vestigial way. And if your only defense against invading armies is a moat, you will not last long. What matters is the pace of innovation. That is the fundamental determinant of competitiveness,’ unquote.

“So, Warren, it seems the world has changed. Business is getting more competitive. Pace of innovation. Technology is impacting everything. Is Elon right?”

CHARLIE MUNGER: Let me answer that one, Warren.

Elon says a conventional mode is quaint. And that’s true of a puddle of water. And he says that the best moat would be to have a big competitive position. And that is also right. You know, it’s ridiculous. (Laughter)

Warren does not intend to build an actual moat. (Laughter)

Even though they’re quaint.

WARREN BUFFETT: Yeah. (Laughter)

There’s certainly a great number of businesses - this has always been true, but it does seem like it - the pace has accelerated and so on, in recent years. There’s been more moats that have been - become susceptible to invasion - than seemed to be the case, earlier. But there’s always been the attempt to do it.

And there - here and there, there are probably places where the moat is as strong as ever. But certainly - you could work at - certainly should be working at improving your own moat and defending your own moat all of the time. And then - Elon may turn things upside down in some areas.

I don’t think he’d want to take us on in candy. But - (Laughter)

And we’ve got some other businesses that wouldn’t be so easy to -

You can look at something like Garanimals out there in the other room. And - it won’t be technology that takes away the business in - (laughs) - Garanimals. Maybe something else that catches the young kid’s fantasy or something.

But - there are some pretty good moats around. Being the low-cost producer, for example, is a terribly important moat. And something like GEICO - technology has really not brought down the cost that much. I think our position as - there is a couple of companies that have costs as low as ours. But among big companies, we are a low-cost producer, and that is not bad when you’re selling an essential item.

29. Not surprised “if we find good uses” for Berkshire Hathaway Energy’s capital

WARREN BUFFETT: OK, Gregg?

GREGG WARREN: Warren, Berkshire Energy has benefited greatly from operating under the Berkshire umbrella. By not having to pay out 60 to 70 percent of earnings annually as a dividend, the company was able to amass 9 billion in capital the past five years, and closer to 12 billion in the past ten, money that can be allocated to acquisitions and capital spending, especially on renewables.

While tax credits for solar energy don’t run out until next year, we’ve already seen a dramatic reduction in Berkshire Energy’s capital commitment to solar projects. And even though spending on wind generation capacity is projected to be elevated this year and next, it does wind down in 2020 as the wind production tax credits are phased out.

Absent a major commitment to additional capital projects, it looks like Berkshire Energy’s expenditures in 2021 will be its lowest since 2012, leaving the firm with more cash on hand than it has had in some time.

Do you think it is likely at that point that Berkshire Energy starts funneling some of that cash up to the parent company? Or will it be earmarked for debt reduction, or just be left on the balance sheet as dry powder for acquisitions?

WARREN BUFFETT: Yeah. The - you’re right about when tax credits phase out and all of that. Although, as you know, they’ve extended that legislation in the past. Who knows exactly what the government’s position will be on incentivizing various forms of alternative energy?

But my guess is - I mean, if you take the logical expenditures that may be required in all aspects of the public - like regeneration and the utility business generally - I think there’ll be a lot of money spent.

And the question is whether we can spend it and get a reasonable return on it. There again, we’ll do what’s logical.

There are three shareholders, basically, of Berkshire Hathaway Energy. Berkshire Hathaway itself owns 90 percent of it. And Greg Abel and his family, perhaps, and Walter Scott and, again, family members - own the other 10 percent. And we all have an interest in employing as much capital as we can at good rates.

And we’ll know when it can be done and when it can’t be done. And we’ll do - there’s no tax consequences to Berkshire at all. So - but the three partners will figure out which makes the most sense.

But when you think of what might be done to improve the grid in the U.S. and the fact that we do have the capital, I wouldn’t be surprised if we find good uses for capital in Berkshire Hathaway Energy for a long time in the future.

Charlie?

CHARLIE MUNGER: Yeah. Well, I think there’ll be huge opportunities in Berkshire Energy as far ahead as you can see to deploy capital very intelligently. So I think the chances of a big dividend is approximately zero.

WARREN BUFFETT: Yeah. And we’ve not only got the money to an extent that virtually no utility company does - we’ve also got the talent, too. I mean, we’ve got a very, very talented organization there.

So it’s a big field and we’ve got shareholders that are capitalists. And we’ve got managers that are terrific. And you would think we’d find something intelligent to do over time in the field.

So far, we have. I mean, we’ve owned it now for close to 20 years. And we’ve deployed a lot of capital and so far, so good. I mean, it’s -

If you look at the improvements that can be made in our utility system in the United States, you’re talking hundreds and hundreds and hundreds of billions of dollars, if not trillions. So - you know, where else but Berkshire would you look for that kind of money? (Laughs)

30. “We do expect that normalized earning power to increase over time”

WARREN BUFFETT: OK, station 9.

AUDIENCE MEMBER: I’m Richard Sercer (PH) from Tucson, Arizona.

“At Berkshire what counts most are increases in our normalized per-share earning power.” That was in your last letter. What is our normalized per-share earning power, as you estimate it?

WARREN BUFFETT: Well, I would say that what you saw in the first quarter, under these tax rates, would probably be a reasonable guess. You know, obviously, it depends on the economy in any given year. I would say that would - is a reasonable estimate.

But we have firepower we haven’t used. And we’ll have more firepower as we go along. So we do expect that normalized earning power to increase over time. And if it doesn’t, you know, one way or another, we’re failing you because we’re retaining those earnings.

So - I don’t see anything abnormal in our earnings, figured now at a 21 percent federal rate. But as I look at the 5 1/4 billion in the first quarter - seasonally, insurance is better in the first quarter - but seasonally, most of our businesses, the first quarter is not the strongest quarter for us. I don’t see anything abnormal with it.

And then I think you can expect, you should expect, we expect, substantial capital gains over time in addition to what comes from the operating businesses.

So how much you figure in for that - I would say that the retained earnings beyond dividends of our 770 billion of equities - in other words, how much they’re keeping from us, but that our share of the earnings, which can be used by them, whether it’s Apple or American Express or Coca-Cola or Wells Fargo or whatever, our share, you know, is in many billions of dollars annually. And one way or another, we think that those dollars will benefit us as much as if they had been paid out.

Now, in certain cases, they won’t. But in certain cases, they’ll excel the amount, in terms of market value created.

So there’s many billions of dollars we are not showing in our earnings that is being retained by our investees. And one way or another, I think we’ll get value received out of those.

So you can take 20 or 21 billion under present tax rates, present economic conditions, and then we should get something from that and we should get more when we get 100 billion of cash invested. And we should get more as we retain the earnings. So we hope it adds up to a bigger number as we go along.

Charlie?

CHARLIE MUNGER: Well, I don’t think our shareholders are going to see another increase in net worth of $65 billion in a single year. They may have to wait a while for another. But I don’t think that - I think eventually there - another will come, and then another. Just be patient. (Laughter)

WARREN BUFFETT: We don’t regard the present situation as, you know, as disadvantageous, except we’d like to get more money out. But we like the businesses we have. We like the businesses that we own part of. We are not reflecting - in the way we look at earnings - the dividends we get from those partially-owned companies falls far short of what they’re going to contribute, in our view, to Berkshire’s overall earnings over time. We wouldn’t own those stocks otherwise. So -

CHARLIE MUNGER: And you also like the Apple and airline stocks you’ve recently purchased better than the cash you parted with.

WARREN BUFFETT: Absolutely. Yeah.

CHARLIE MUNGER: And that’s quite a lot.

WARREN BUFFETT: Yeah, yeah, yeah. OK. We won’t pursue that further. Carol? (Laughter)

31. No “unusual profits involved in being a real estate agent”

CAROL LOOMIS: This question is from Daniel Kane (PH) of Atlanta.

“Your annual letter this year pointed out that Berkshire has become a leader in real estate brokerage in the United States. Congratulations. That is a significant feat in less than 20 years.

“But let me mention a sticky point. If fees charged by stock market active managers are a drag on investor performance, I would argue that real estate commissions are no different, and perhaps more detrimental, especially when one considers the lifetime effects of large, forgone, upfront cash flows and the power of compounding interest. I would be pleased to hear your rejoinder on the points I’ve raised.”

WARREN BUFFETT: Well, the purchase of a home is the largest financial transaction, for a significant percentage of the population, that they make. And - people - a lot of people need a lot of attention. And you can show a lot of houses before you sell one.

I would say this. If you look at our close to 50,000 agents now, I think they make a good living - or a decent living. But I would say that that people who manage money make a whole lot more money with perhaps less contribution to the welfare of the person that they are dealing with.

So I don’t think that there are unusual profits involved in being a real estate agent. I don’t think there are unusual profits involved in the ownership. We like it because it’s fundamentally a good business.

But here we are, doing 3 percent of all the real estate transactions in the United States, and we’re making, maybe, $200 million a year - which - well, we won’t get into what the comparative efforts are in Wall Street to earn $200 million. But -

I think I have to tell them about Roy Tolles a little bit on this. Roy Tolles, for example - Charlie’s partner - many, many, many years ago, decided he was going to want to buy a house in San Marino. He’s going to have a number of kids.

So he sent his wonderful wife, Martha, out. And for six months, he had her look at houses in San Marino. And this was many years ago. And if they were priced at 150,000, she would offer (inaubible), or offer 75,000. And of course, the real estate agents were going crazy because they’re never going to get something listed at 150 sold at 75.

And then finally, when she found one that they both really liked, he had her offer something like 120 and the real estate was so happy to get a bid that was in the general area - (laughs) - of the offering price that he would work very hard on the seller to take that bid. Because he knew what - (laughs) - he did not want six more months of Roy bidding at the lower prices. So you don’t sell them on the first trip.

Incidentally, I had Roy buy a house for me, sight unseen, because this was a guy that - (laughs) - knew human nature.

You don’t get rich - real estate agency - you know, the people earn their money, and they earn it in a perfectly respectable and honorable manner in terms of what they get paid. And as in every single industry there is, you know, there can be excesses or mistakes or that sort of thing.

But we will continue to buy more brokers. In fact, we’ll probably have another couple to announce before long.

And we will feel that if we get to where we’re doing 10 percent of the real estate brokerage business in the country and we’re making 6- or $700 million a year, pretax, we will not think that’s a crazy amount of money to make for enabling 10 percent of 5 million people to change their homes every year in the United States.

Charlie?

CHARLIE MUNGER: Well, the commissions in real estate may get unreasonable if you’re talking about $20 million houses. It seems a little ridiculous to pay a 5 percent commission on a $20 million transaction.

But do any of us really care if the kind of people who pay $20 million for a house have a slightly higher commission? (Laughter)

The ordinary commission is pretty well-earned.

WARREN BUFFETT: Yeah. We have a number of brokerage firms. So the highest has their average transaction - in one section of the country - would be close to $600,000 a unit. But the - in terms of the sales price of the house. But the - in most of our real estate operations - the average price is more like $250,000 or something in that area. And you can show a lot of houses to make one $250,000 sale.

And of course, you split - the listing company and the selling company are usually two different companies. So it’s - it does not strike me as excessive.

And incidentally, it doesn’t strike the people in the industry that way either. It has not been particularly susceptible to online-type substitution or something of the sort. The real estate agent earns their commission in most cases.

But Charlie’s had more experience with $20 million houses. So he will comment on that area. (Laughter)

32. Some Kraft Heinz products “enjoy fairly healthy” growth

WARREN BUFFETT: OK, we’ll have one more question before we break. Jonathan?

JONATHAN BRANDT: Given the changes in consumer tastes in the food business, and Kraft Heinz’s already high margin structure, do you think the brands they own today, plus new product introductions, can together maintain or increase the current level of profits over the next ten years without the benefit of acquisitions? Is there anything in their portfolio besides ketchup that is enjoying growing demand?

WARREN BUFFETT: Well, in effect, you’re asking me whether Kraft Heinz is a good buy. And we don’t - (laughs) - we don’t want to give information on marketable securities in that manner.

But - yeah, there are a number of items besides ketchup that enjoy growing demand. And some vary quite a bit by geography. There’s enormous differences in the penetration of various products in the portfolio.

Consumer packaged goods are still a terrific business in terms of return on invested assets. And you know - but the population, worldwide, grows fairly smally and at - a fairly minor rate. And - people are going to eat about the same amount. And there is some more willingness to experiment, you know, or go for organic products of the sort.

It’s a very good business. And there are new products coming out constantly. It’s not one where you’re going to get terrific organic growth, but it never has been. And - you know, I like the business and we own 26 or so percent of it.

But there are a number of items within Kraft Heinz that enjoy pretty - fairly - healthy growth. And I think you’d find that at most food companies. And I think you’d find very good returns on invested - on tangible net assets - at those businesses.

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lastmover · 6 years

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2017 Berkshire Hathaway Annual Meeting (Afternoon) Transcript

1. Berkshire and 3G’s different approaches to job cuts

WARREN BUFFETT: Panel all here? OK. We’re back for action. And we’ll go right to Becky.

BECKY QUICK: All right. This question comes from Anne Newman (PH). She says that she’s a shareholder of the Class B stock.

And her question is, “The primary investment strategy of 3G Capital is extreme cost-cutting after the purchase of a company. This typically includes the elimination of thousands of jobs.

“With the current U.S. president focusing on retention of U.S. jobs, will Berkshire Hathaway still consider future investments with 3G Capital if those investments result in the purchase of U.S. companies and the elimination of more U.S. jobs?”

WARREN BUFFETT: Now, the, essentially, 3G management — and I’ve watched them up very close at Kraft Heinz — is — basically, they don’t — they believe in having a company as productive as possible.

And, of course, the gains in this world, for the people in this room, and people in Omaha, and people throughout America, have come through gains in productivity.

If there had been no change in productivity, we would be living the same life as people lived in 1776.

Now, the people — the 3G people — do it very fast. And they’re very good at making a business productive with fewer people than operated before.

But that — they’ve been, you know, we’ve been doing that in every industry, whether it’s steel, or cars, or you name it. And that’s why we live as well as we do.

We prefer at Berkshire — I wrote about this a year ago — we prefer to buy companies that are already run efficiently because, frankly, we don’t enjoy the process at all of getting more productive. I mean, it’s not pleasant.

But it is what has enabled the country to progress. And nobody has figured out a way to double people’s consumption per capita without, in some way, improving productivity per capita.

It’s a good question in the — whether it’s smart overall if you think you’re going to suffer politically because political consequences do hit businesses. So I don’t know that I can answer the question categorically.

But I can tell you that they not only focus on productivity and do it in a very intelligent way, but they also focus, to a terrific degree, on product improvement, innovation, and all of the other things that you want a management to focus on.

And I hope that, at the lunchtime, if you had the Kraft Heinz cheesecake, you’ll agree with me that product improvement and innovation there is a — is just as much a part of the 3G playbook as productivity. I don’t —

Personally, we have been through the process of buying into a textile business that employed a couple thousand people and went out of business over a period of time, or a department store, a business that was headed for oblivion.

And it is just not as much fun to be in a business that cuts jobs rather than one that adds jobs.

So, Charlie and I would probably forego, personally, having Berkshire directly buy businesses where the main benefits were come — would come from increasing productivity by actually having fewer workers.

But I think it’s pro-social to think in terms of improving productivity. And I think that people at 3G do a very good job at that.

Charlie?

CHARLIE MUNGER: Well, I agree. I don’t see anything wrong with increasing productivity. On the other hand, there’s a lot of counterproductive publicity to doing it. Just because you’re right doesn’t mean you should always do it.

WARREN BUFFETT: Yeah. I’d agree with that.

2. Pressure to deploy Berkshire’s cash grows as it nears $100B

WARREN BUFFETT: Jay?

JAY GELB: Berkshire’s cash and Treasury bill holdings are approaching $100 billion.

Warren, a year ago, you said Berkshire might increase its minimum valuation for share buybacks above 1.2 times book value if this occurred. What are your latest thoughts on raising the share repurchase threshold?

WARREN BUFFETT: Yeah, the — when the time comes — and it could come reasonably soon, even while I’m around — but [if] we really don’t think we can get the money out in a reasonable period of time into things we like, we have to reexamine then what we do with those funds that we don’t think can be deployed well.

And at that time, we’d make a decision. And it might include both, but it could be repurchases. It could be dividends.

There are different inferences that people draw from a dividend policy than from a repurchase policy that, in terms of expectations that you won’t cut a dividend and that sort of thing. So you have to factor that all in.

But if we really — if we felt that we had cash that was unlikely to be used — excess cash — in a reasonable period of time, and we thought repurchases at a price that was still attractive to continuing shareholders was feasible in a substantial sum, that could make a lot of sense.

At the moment, we’re still optimistic enough about deploying the capital that we wouldn’t be inclined to move to a price much closer where there’s only a narrow spread between an intrinsic value and the repurchase price. But at a point, the burden of proof is definitely on us.

I mean, that — I — the last thing we like to do is own something at a hundred times earnings where the earnings can’t grow.

I mean, we’re — as you point out, we’ve got almost a hundred billion — it’s $90-plus billion invested in a business, we’ll call it a business, where we’re paying almost a hundred times earnings. And it’s kind of a lousy business.

CHARLIE MUNGER: It’s more after after-tax earnings.

WARREN BUFFETT: Yeah. So, it — you know, we don’t like that. And we shouldn’t use your money that way for a long period of time. And, then, the question is, you know, are we going to be able to deploy it?

And I would say that history is on our side, but it’d be more fun if the phone would ring instead of just relying on history books.

And, you know, I am sure that sometime in the next 10 years — and it could be next week or it could be nine years from now — there will be markets in which we can do intelligent things on a big scale.

But it would be no fun if that happens to be nine years off. And I don’t think it will be, but just based on how humans behave and how governments behave and how the world behaves.

But like I say, at a point, the burden of proof really shifts to us, big-time. And there’s no way I can come back here three years from now and tell you that we hold 150 billion or so in cash or more, and we think we’re doing something brilliant by doing it.

Charlie?

CHARLIE MUNGER: Well, I agree with you. The answer is maybe. (Laughter)

WARREN BUFFETT: He does have a tendency to elaborate. (Laughter)

3. CBT and animal rights

WARREN BUFFETT: Station 11.

AUDIENCE MEMBER: Thank you, Mr. Buffett and Mr. Munger. I am Anil Daron (PH) from Short Hills, New Jersey and New Delhi, India.

This is my 18th time to this wonderful event, and profoundly thank you for your extraordinary wisdom, generosity, and time.

As I’m involved with sustainable investments that also do not directly harm animals, I would appreciate your perspective, if any, on the practices of your CTB subsidiary, which is somewhat involved in pig, poultry, and egg production.

Somewhat indirectly related, as you share your concern on nuclear war extensively at the last annual meeting, I would love to pick your brain on Albert Schweitzer’s Nobel Peace Prize acceptance speech, shortly after the first nuclear bombs were detonated, that compassion can attain its full breadth and depth if it is not limited to humans only. Thank you.

WARREN BUFFETT: Well, that’s a pretty broad question. I would say on your first point, we have a subsidiary, CTB, run by Vic Mancinelli. And I sit down with him once a year. And he’s a terrific manager. He’s one of our very best. You don’t hear much about him.

And they do make the equipment for poultry growers. And I would — I can’t answer your question specifically, but I would be glad to have you get in contact with Vic directly because I know that what — question you raised is a — it’s a major factor in what they do.

I mean, they do care about how the equipment is used, in terms of poultry and egg production. And, as you know, a number of the largest purchasers and the largest producers are also in the same camp. But I can’t tell you enough about it directly that I can give you a specific answer.

But I can certainly put you in touch with Vic. And I think you would find him extremely well-informed and doing some very good things in the area that you’re talking about.

In terms of the nuclear weapon question, I’m very pessimistic on weapons of mass destruction, generally. Although, I don’t think that nuclear, probably, is quite as likely as either biological — primarily, biological — and maybe cyber. I don’t know that much about cyber.

But I do think that’s the number one problem with mankind. But I don’t think I can say anything particularly constructive on it now.

Charlie?

CHARLIE MUNGER: Well, I don’t think we mind killing chickens. (Laughter)

And I do think we’re against nuclear war, so — (Laughter)

WARREN BUFFETT: Yeah. (Applause)

We are not actually a poultry producer, but we do — they use our equipment. And that equipment has been changed substantially in the last 10 or 15 years.

But, again, I’m not that good on the specifics that I can give them to you. But I can certainly you put you in touch with Vic.

4. Giving Weschler and Combs more to manage wouldn’t help them

WARREN BUFFETT: Andrew ?

ANDREW ROSS SORKIN: Warren. Since Todd [Combs] and Ted [Weschler] joined Berkshire, the market cap of the company has doubled, and cash on hand is now nearly a hundred billion dollars.

It doesn’t look like Todd and Ted have been allocated new capital on the same relative basis. Why?

WARREN BUFFETT: Well, actually, I would say they have been.

I think we started out with two billion. That could be wrong, but my memory was two billion with Todd when he came with us. And so, there have been substantial additions.

And, of course, their own capital has grown just because — say, in a sense, they retain their own earnings.

So yeah, they are managing a proportion of Berkshire’s capital — also measured by marketable securities — I think they’re managing a proportion that’s pretty similar, maybe even a little higher than when each one of them entered. And Ted entered a year or two after Todd.

You know, they — I think they would agree that it’s tougher to run 10 billion than it is to run one or two billion. I mean, your expectable returns go down as you get into larger sums.

But the decision to bring them on has been terrific. I mean, they have — they’ve done a good job of managing marketable securities. They made more money than I would’ve made with that same, what is now 20 billion, but originally was two billion.

And they’ve been a terrific help in a variety of ways beyond just money management. So that decision, I’ll — you know — that’s been a very, very good decision.

And they are — they’re smart. They have money minds. They are good, specifically, at investment management. But they’re absolutely first-class human beings. And they really fit at Berkshire. So, that was —

Charlie gets credit for Todd. He met Charlie first. And I’ll claim credit for Ted. And I think we both feel very good about the decisions.

Charlie?

CHARLIE MUNGER: Well, I think the shareholders are very lucky to have them because they both think like shareholders.

WARREN BUFFETT: Totally.

CHARLIE MUNGER: After all, it came up that way. And that is not the normal way headquarters employees think. It’s a pretense that everybody takes on, but the reality is different.

And these people really, deeply think like shareholders. And they’re young, and smart, and constructive. So we’re all very lucky to have them around.

WARREN BUFFETT: Yeah. Their mindset is a hundred percent, “What can I do for Berkshire,” not, “What can Berkshire do for me?” And, believe me, you can spot that over time with people.

And on top of that, you know, they’re very talented.

But, you know, it’s hard to find people young, ambitious, very smart, that don’t put themselves first. And I would — every experience we’ve had, they did not put themselves first. They put Berkshire first.

And believe me, I can spot it when people are extreme in one direction or another. Maybe I’m not so good around the middle, but you’ve got —

You couldn’t have two better people in those positions.

But — and you say, “Well, why don’t you give them another 30 billion each or something?” I don’t think that would improve their lives or their performance.

They may be handling more as they go along, but the truth is, I’ve got more assigned to me than I can handle at the present time, as proven by the fact that we’ve got this 90 billion-plus around.

I think there are reasonable prospects for using it. But if you told me I had to put it to work today, I would not like the prospect.

Charlie, anything?

CHARLIE MUNGER: Well, I certainly agree with that. It’s a lot harder now than it was at times in the past.

5. Private transactions not needed now for Class A shares

WARREN BUFFETT: Gregg?

GREGG WARREN: Warren, plans for your ownership stake, which is heavily concentrated in Class A shares, are fairly well known, with the bulk of the stock going to the Bill and Melinda Gates Foundation and four different family charities over time.

Your annual pledges to these different charities involve the conversion of Class A shares, which hold significantly greater voting rights than the Class B shares.

As such, the voting control held by your estate will diminish over time, with a whole layer of super-voting shares being eliminated in the process.

While the voting influence of Class B shareholders are expected to increase over time, it will not be large enough to have a big influence on Berkshire’s affairs.

With that in mind, and recognizing the great importance on having Berkshire buy back and retire Class A shares in the long run, I was just wondering if the firm has compiled a pipeline of potential future sellers from the ranks of the company’s existing shareholders.

Given the limited amount of liquidity for the shares, privately negotiated transactions with these sellers, like the one you negotiated in December of 2012, would end up being in the best interest of both parties.

WARREN BUFFETT: Well, again, it would depend on the price of Berkshire.

So, in terms of what I give away annually, you know, it’s — the last two years, it’s been about 2.8 billion per year. That can be — you know that’s one day’s trading in Apple.

I mean, the amount I’m giving away is, in terms of Berkshire’s market cap, I mean, you know, you’re down to seven-tenths of one percent of the market cap. So, it’s not a big market factor, and it really wouldn’t be that illiquid.

So, I know a few big holders that, you know, might have 8- or 10,000 shares of A. But the market can handle it now.

When we bought that block of — I think it was 12,000 shares of A, I mean, we bought it because we thought it increased the intrinsic business value of Berkshire by a significant amount. And we paid the seller what the market was at the time.

And, you know, we’re open to that up to 120 percent. And who knows? If it came along at a time and it was 124 percent or something, it was a very large block and the directors decided that that was OK, it still was a significant discount, we might very well buy it.

But in terms of the orderly flow of the market or anything like that, there will be no problems just as there haven’t been, you know, when I’ve given away — I do it every July — when I’ve given away the last two years.

Some of the foundations may keep it for a while. But they have to spend what I give them. And they may build up a position in B for, you know, a fairly significant dollar amount. But they’re going to sell it.

And it is true that for a period after I die, there’ll be a lot of votes still in the estate and later in a trust.

But, you know, that will get reduced over time. I see no problem with our capitalization over time.

You know, I like the idea of a fair number of votes being concentrated with people that believe in the culture strongly and, you know, would be thinking about whether they’d get a 20 percent jump in the stock if somebody came along with some particular plan.

But, eventually, that’s going to get diminished. It continues to get diminished. And I think, in terms of — you know, there’s a very good market in Berkshire shares.

And if we can buy them at a discount from intrinsic business value and somebody offers some sum — a big piece — and it may be at a hundred — stock may be selling at 122 percent, 124 percent, you know, I would pick up the phone and call the directors and see if they didn’t want to make a change.

And we did it once before. And if it made sense, I’m sure they’d say yes. And if it didn’t make sense, I’m sure they’d say no. So, I don’t think we have any problem in terms of blocks of stock or anything.

I don’t think people that own it have a problem selling it. And I don’t think we have a problem in terms of evaluating the desirability of repurchasing it.

Charlie?

CHARLIE MUNGER: Nothing to add.

6. Deciding whether to exercise Bank of America warrant

WARREN BUFFETT: OK. Station 1.

AUDIENCE MEMBER: Hello. My name is Erin Byer. And I was born and raised in Pasadena, California, and I currently live in New York City.

It’s been a dream of mine to come here today. I’ve been a proud BH shareholder for almost 20 years.

I asked my dad for stock for Christmas when I was 15. And I kept thinking at the opportunity to ask you a question today that I should make it one that would change my life.

Well, that question is, do you know any eligible bachelors living in the New York City area? (Laughter and applause)

WARREN BUFFETT: Well, you certainly have the approach toward life that Charlie and I would. (Laughs)

AUDIENCE MEMBER: But the question that might make my Monday, back in the office: back in 2011, you purchased Bank of America preferred stock with a warrant. You had the opportunity, at a later date, to exercise and convert those into common shares.

When you’re looking at evaluating that decision to exercise that position, which would increase all of our Berkshire holdings — or the value of the Berkshire holdings — what are you going to consider when you’re looking at that?

WARREN BUFFETT: Well, it’s almost — well, if the price of the stock is above seven dollars a share, which seems quite likely, whether we were going to keep it or not, it would still make sense for us to exercise the warrant shortly before it expired, because it would be a valuable warrant, but it’s only a valuable warrant if it’s converted — or if exercised — and exchanged into common. And that warrant does expire.

So, as I put in the annual report, our income from the investment would increase if the Bank of America ever got to where it was paying 11 cents quarterly.

We get 300 million off the — a year — off the preferred. And for us to use the preferred as payment in the exercise of the warrant, we would need to — we would want to feel we were getting more than 300 million a year by — and that would take 11 cents quarterly.

They may or may not get to where they pay that amount before the warrant expires in 1921 — or 2021.

If we — if it does get to there, we’ll exercise the warrant. And then, instead of owning the five billion of preferred and the warrant, we’ll have 700-plus million shares of common.

Then that becomes a separate decision. Do we want to keep the 700 million shares of common?

I — if it were to happen today, I would definitely want to keep the stock. Now, who knows what other alternatives may be available in 2021 or —

But as of today, if our warrant were expiring tomorrow, we would use the preferred to buy 700 million-plus shares of common. And we would keep the common.

If they get to 11 cents quarterly dividend, we’ll convert it. And we’ll very likely keep the common.

And if we get to 2021, if the common’s above seven dollars, which I would certainly anticipate, we will exercise.

So that’s all I can tell you on that. But I certainly wish you success on your other objective. (Laughter)

And I think, probably, the fellow will be using very good judgment, too.

OK. Charlie?

CHARLIE MUNGER: Well, I think it’s a very wise thing for a woman that owns Berkshire stock and is a good looking woman to put her picture up like that. (Laughter and applause)

WARREN BUFFETT: It does give me a thought, though. We might actually start selling ads in the annual report. And — (Laughter)

OK. That — incidentally, that BofA purchase, it literally was true that I was sitting in the bathtub when I got the idea of checking with the BofA, whether they’d be interested in that preferred.

But I’ve spent a lot of time in the bathtub since, and nothing’s come to me. So — (Laughter)

Clearly, I either need a new bathtub or we got to get in a different kind of market.

7. Defending 3G’s job cuts

WARREN BUFFETT: Carol?

CAROL LOOMIS: This is a question from George Benaroya. And it adds a layer to the discussion about 3G a little bit ago.

He says, “I am a very happy, long-term shareholder. But this is a concern I have regarding Berkshire Hathaway’s Kraft Heinz investment.

“This investment has done well in economic terms. The carrying value is 15 billion, and the market value was 28 billion in 2016.

“But the DNA of 3G is quite different from ours. We do not make money by buying companies and firing people. 3G fired 2,500 employees at Kraft Heinz. That is what private equity firms do, but we are not a private equity firm.

“Our values have worked for us for over four — 50 years. There is a risk that as 3G continues to deviate from our principles, they will, eventually, harm both our value and our values. How do we prevent that from happening?”

WARREN BUFFETT: Well, that’s interesting. I mentioned earlier that it was very gradual. But it would’ve been, probably, a better decision. We fired 2,000 people over time — and some retired and left and all of that — but at the textile operation [Berkshire Hathaway]. You know, it didn’t work.

And at Hochschild Kohn, the successor — we fortunately sold it to somebody else — but eventually, they closed up the department stores because department stores, at least that particular one and a good many, actually, including our competitors in Baltimore, could not make it work.

Walmart came along with something — and, now, Amazon’s coming along with something — that changed the way people thought they knew. You —

We mentioned our poultry with CTB, which is a lot of different farm equipment.

The farm equipment, often, that CTB develops, the idea is that it’s more productive than what already is out there, which means fewer people are employed on farms.

We had 80 percent of the American public — population, working population — working on farms a couple of hundred years ago.

And if nobody had come up with things to make it more productive — farming — we’d have 80 percent of people working on farms now to feed our populace. And it means that we’d be living in a far, far more primitive way.

So there — you know — if you look at the auto industry, it gets more productive. If you look at any industry, they’re trying to get more productive. Walmart was more productive than department stores, and —

That will continue in America. And it better continue or we won’t live in — or our kids won’t live any better than we do.

Our kids will live better than we do, because America does get more productive as it goes along. And people do come up with better ways of doing things. The —

When Kraft Heinz finds that they can do whatever amount of business — $27 billion worth of business or something — and they can do it with fewer people, they’re doing what American business has done for a couple hundred years and why we live so well. But they do it very fast.

They’re more than fair, in terms of severance pay and all of that sort of thing. But they don’t want to have two people doing the job that one can do.

And I, frankly, don’t like going through that, having faced that.

I faced that down at Dempster in Beatrice, Nebraska. And it really needed change. But the change is painful for a lot of people. And I just would rather spend my days not doing that sort of thing, having had one or two experiences.

But I think that it’s absolutely essential to America that we become more productive because that is the only way we have more consumption per capita, is to have more productivity per capita.

Charlie?

CHARLIE MUNGER: Well, I — you’re absolutely right. We don’t want to go back to subsistence farming. I had a week of that when I was young on a western Nebraska farm. And I hated it. (Laughter)

And I don’t miss the elevator operators who used to sit there all day in the elevator, run the little crank, you know.

So, on the other hand, it — as you say it’s terribly unpleasant for the people that have to go through it and why would we want to get into a — the business of doing that over and over ourselves?

We did it in the past when we had to, when the businesses were dying.

I don’t see any moral fault in 3G at all, but I do see that there’s some political reaction that doesn’t do anybody any good.

WARREN BUFFETT: Milton Friedman, I think it was, used to talk about the time — probably apocryphal — he would talk about the huge construction project in some communist country. And they had thousands and thousands and thousands of workers out there with shovels digging away on this major project.

And, then, they had a few of these big, earth-moving machines behind — which were idle — and which could’ve done the work in one-twentieth of the time of the workers.

So the economists suggested to the local party worker or whoever it was that, you know, why in the world didn’t they use these machines to get the job done in one-tenth or one-twentieth the time instead of having all these workers out there with shovels?

And the guy replied, “Well, yeah. But that would put the workers out of work.” And Friedman said, “Well, then, why don’t you give them spoons to do it instead,” you know? (Laughter)

8. Berkshire’s $20B cash cushion is an “absolute minimum”

WARREN BUFFETT: Jonathan?

JONATHAN BRANDT: I understand that Berkshire is much more liquid than is ideal right now with a 113 billion of consolidated cash and bonds versus policyholder float of 1-0 — 105 billion. But I have trouble calculating how much incremental buying power Berkshire has at any point in time.

You’ve talked about having a minimum of 20 billion in cash on a consolidated basis.

But for regulatory, risk control, or liquidity purposes, is there some minimum amount of float beyond the 20 billion that has to be in cash bonds or, say, preferred stocks?

Or can all but 20 billion be put into either common stocks or invested into wholly-owned businesses if you found attractive opportunities?

WARREN BUFFETT: Yeah.

JONATHAN BRANDT: What does the balance sheet look like if you were fully invested? And where does additional debt fit into the equation, if at all?

WARREN BUFFETT: Yeah. The — I wouldn’t conflate the cash and the bonds. I mean, when we talk about 20 billion in cash, we can own no bond beyond that. Twenty billion would be the absolute minimum. As a practical matter, I never —

Since I’ve set 20 billion as a minimum, I’m not going to operate with 21 billion any more than I’m going to see a highway, a truck sign that says maximum load 30,000 pounds or something and, then, drive 29,800 across it. So, we won’t come that close.

But the answer is that, A, we could use — we’re not inclined to use debt. Obviously, if we found something that really lit the — lit our fire — we might use some more debt, although that’d be a — it’s unlikely under today’s circumstances. But we can —

Twenty billion’s an absolutely minimum. You can say that because I say 20 billion’s an absolute minimum, it probably wouldn’t be below 24 or 25.

And we could do a very large deal if we thought it was sufficiently attractive. I mean, we have not put our foot to the floor on anything for really a very long time. But if we saw something really attractive —

We spent 16 billion back when we were much smaller in a period of two or three weeks — probably three weeks maybe — in the fall of 2008. And we never got to a point where it was any problem for me sleeping at night. And now, we, obviously, have a lot more money to put out.

So, if a good — Charlie, at what point, if I called you, would you say, “I think that’s a little bit big for us today?”

CHARLIE MUNGER: I would say about $150 billion.

WARREN BUFFETT: Well, in that case, I’ll call you. (Laughter)

Don’t — I’m a little more conservative on that than, actually, Charlie. But we both would do a very, very big deal if we —

CHARLIE MUNGER: We don’t have to agree perfectly.

WARREN BUFFETT: Yeah. It’d have to be —

But, if we find a really big deal that makes compelling sense —

CHARLIE MUNGER: Now, you’re talking.

WARREN BUFFETT: — we’re going to do it. (Laughter)

9. Very unlikely Jorge Paulo Lemann would succeed Buffett as CEO

WARREN BUFFETT: OK. Station 2.

AUDIENCE MEMBER: Hello, Mr. Buffett, Mr. Munger.

My name is Felipe Kioni (PH). I’m 19 years old from Brazil.

And your partnership with Jorge Paulo Lemann and his associates at 3G has been very successful, taking into account great outcome of transactions such as the Kraft Heinz merger.

Even though you and Jorge Paulo have different investment methods, would you and Charlie consider him to be your — a member of your board, or even your successor?

WARREN BUFFETT: I don’t think that will happen, but I — but then, I think it would complicate things, in terms of the board membership.

But we love the idea of being their partner. And I don’t think — I think there’s a good chance that we will do more, and perhaps even bigger, things together.

But the — we’re probably unlikely to be doing much change in the board, certainly in the next few years.

And there will be a successor, and the successor could very well be while I’m alive.

But that will be — there’s a very high probability that will be from somebody that’s been in our company for some time. I mean, the world could change in very strange ways, you know. But that’s a very, very high probability.

Charlie?

CHARLIE MUNGER: All I can say is that my back hurts when I come to these functions because I want to indicate to the — my fellow shareholders — that they probably got seven more good years to get out of Warren. (Laughter and applause)

WARREN BUFFETT: Charlie’s inspiring me. I got to tell you that.

But we’ve been very, very lucky in life. And so far, our luck seems to be holding.

10. Online competition hasn’t yet affected Berkshire retailers

WARREN BUFFETT: OK. Becky?

BECKY QUICK: This question comes from Drew Estes in Atlanta, Georgia.

And he asks, “Is Fruit of the Loom experiencing difficulties related to the distribution channel shift towards online and the troubles in the brick and mortar retail world? If so, do you believe the difficulties are short term in nature?”

And, then, Drew goes on to add, “I’m hoping millennials haven’t bucked the underwear trend, too.” (Laughter)

WARREN BUFFETT: Yeah. Well, he may know more about that than I do. (Laughter)

The answer is essentially no, so far. But anybody that doesn’t think that online isn’t changing retail in a big way, and that anybody who thinks they’re totally insulated from it is correct —

I mean, the world is changing big time. And like I say, at Fruit of the Loom, I don’t — it really hasn’t changed. And at our furniture operation, which is setting a record so far again this year for the shareholder’s weekend. You know, I mentioned it in the report, but I think we did $45 million in one week.

And our furniture operations — it’s hard to see any effect from online, outside of our own online operations. It had really good same-store gains.

You can take, you know, whether it’s the Nebraska Furniture Mart, but RC Willey, whether it’s in Sacramento, or Reno, or Boise, or Salt Lake City, or Jordan’s, which, in Boston, has done very well on a same-store basis.

So, we don’t really see it, but there were a lot of things we didn’t see 10 years ago that then materialized.

One thing you may find interesting is that the Furniture Mart here in Omaha, which is an extraordinary operation — the online has grown very substantially.

And I may be wrong on this, but I think it’s getting up to — I’d like to check this with the Blumkins before I say it, but I think it’s getting pretty close to 10 percent or so of volume. But it’s a very significant percentage of those people still go and pick the product up at the Furniture Mart.

So apparently, they — it’s the time spent entering the store or maybe at check-out lines or whatever it may be. I’m surprised that it gets to be that percentage.

But the one thing about it is we keep looking at the figures and trying to figure out what they’re telling us.

So far, I would not say that it’s affected Fruit of the Loom in a significant manner. I would not say it’s affected the furniture operation in a significant manner. But I have no illusions that 10 years is going to look — from now — is going to look anything like today.

If you think about it, you know, if you go back a hundred years to the great department stores, what did they offer? They offered incredible selection.

You know, if you had a big department store in Omaha, you had the thousand bridal dresses. And if you lived in a small town around, the local guy had two or something of the sort.

So the department store was the big, exciting experience of variety and decent prices and convenient transportation, because people took the street cars to get there.

And, then, along came the shopping center. And they took what was vertical before. And they made it horizontal. And they changed it into multiple ownerships.

But they still kept incredible variety, and assortments, and convenience of going to one place, and accessible transportation because, now, the car was the method. And now you go to — and, you know, and then, we went for the discount stores and all of that.

But now you’ve got the internet. And you’ve got the ultimate, in terms of assortments. And you’ve got people that are coming in at low prices. And the transportation is taken care of entirely, so the evolution that has taken place —

The department store is online now, basically, except much expanded in assortment, much more convenient, and lower prices.

So the world has evolved, and it’s going to keep evolving. But the speed has increased dramatically.

And what’ll happen with — the brands are going to be tested in a variety of ways that — and they have to make decisions as to whether they try to do an online themselves, or work through an Amazon, or whether they try to hang onto the old methods of distribution while embracing new ones.

There’s a lot of questions in retail and in branding that are very interesting to watch. And you’ll get some surprises in the next 10 years, I can promise you that.

Charlie?

CHARLIE MUNGER: It’s — it would be certainly — be unpleasant if we were in the department store business. Just think of what we avoided, Warren.

WARREN BUFFETT: Yeah, we got very lucky, actually, because we were in the department store business, and our business was so lousy that we recognized it. If it had been a little bit better, we would’ve hung on.

And we owe a tremendous gratitude to Sandy Gottesman, our director who’s here in the front row, because he got us out of the business when Charlie and I, and Sandy, were partners in that.

And something we paid six dollars a share for, I think it’s worth about $100,000 a share now, because we got out of the business.

And if it had been a somewhat better business, you know, it might be worth 10 or $12 a share now. So, sometimes you get lucky.

We don’t miss it either, do we, Charlie? Hochschild Kohn.

CHARLIE MUNGER: No. We don’t miss it.

11. Book value a “whole lot less” relevant to Berkshire

WARREN BUFFETT: Jay.

JAY GELB: This question is on Berkshire’s intrinsic value. A substantial portion of the company’s value is driven by operating businesses rather than the performance of the securities portfolio.

Also, the values of previously acquired businesses are not marked up to their economic value, including GEICO, MidAmerican, and Burlington Northern.

Based on these factors, is book value per share still a relevant metric for valuing Berkshire?

WARREN BUFFETT: Well, it’s got some relevance, but it’s got a whole lot less relevance than it used to. And that’s why — I don’t want to drop the book value per share factor, but the market value tends to have more significance as the decades roll along.

It’s a starting point. And clearly, our securities aren’t worth more than we’re carrying for — carrying them for — at that time. And, on the other hand, we’ve got the kind of businesses you’ve mentioned.

But we’ve got some small businesses that are worth 10 times or so, you know, what would — could carry it for. We’ve also got some clunkers, too.

But I think the best method, of course, is just to calculate intrinsic business value. But it can’t be precise.

We know — we think the probability’s exceptionally high that 120 percent understates it. Although, if it was all in securities, you know, 120 percent would be too high.

But as the businesses have evolved, as we built in unrecognized value at the operating businesses — unrecognized for accounting purposes — I think it still has some use as being kind of the base figure we use.

If it were a private company and 10 of us here owned it, instead we’d just sit down annually and calculate the businesses one by one and use that as a base value.

But that gets pretty subjective when you’ve got as many as we do. And so, I think the easiest thing is to use the standards we’re using now, recognizing the limitations in them.

Charlie?

CHARLIE MUNGER: Yeah. I think the equities in the insurance company offsetting shareholders equity in the company are really not worth the full market value because they’re locked away in a high-tax system.

And so I, basically, like it when our marketable securities go down and our own businesses go up.

WARREN BUFFETT: Yeah, we’re working to that end. We’ve been working that way for 30 years now or something like that.

CHARLIE MUNGER: We’ve done a pretty good job, too.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: We have a lot of — we’ve replaced a lot of marketable securities with unmarketable securities that are worth a lot more.

WARREN BUFFETT: Yeah. And it’s actually a more enjoyable way to operate, too, beyond that, but —

CHARLIE MUNGER: Yeah. We know a lot of people we wouldn’t otherwise —

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: — be with. Good people.

12. I don’t know tech, but I know consumer behavior

WARREN BUFFETT: OK. Station 3.

AUDIENCE MEMBER: Hello.

WARREN BUFFETT: Hi.

AUDIENCE MEMBER: My name is Michael Monahan (PH). And I’m from Long Island, New York.

I don’t know if this question qualifies as investment advice. So I have a short, different question if you don’t want answer this one. (Laughter)

Unlike the last shareholder from zone 3, this will not be a stump speech, nor a protest.

One of your most well-known pieces of investment advice is to buy what you know. Additionally, you said earlier, one of the main criteria for buying is if you could ever understand the business.

Ever since I came to my first meeting in 2011, you were not known for being a tech guy. You have said smart phones are too smart for you, you don’t have a computer at your desk, and you’ve only tweeted nine times in the last four years. (Laughter)

WARREN BUFFETT: It was either that or going to a monastery. (Laughter)

AUDIENCE MEMBER: Despite this, you’ve recently been investing, looking, and talking more about tech companies.

My question to you and also to Charlie to comment is, what you turned you from the Oracle of Omaha to the Tech Maven of Omaha?

WARREN BUFFETT: (Laughs) Well, I don’t think I would — I don’t think I’ve talked that much about tech companies.

But the truth is, we made a large investment in IB — I made a large investment in IBM, and — which has not turned out that well. We haven’t lost money. But in terms of the bull market we’ve been in, it’s been a significant laggard.

And, then, fairly recently, we took a large position in Apple, which I do regard as more a consumer goods company, in terms of certain economic characteristics. Although, that —

You know, it has a huge tech component in terms of what that product can do, or what other people might come along to do, to leapfrog it in some way.

But I’ve — I think I’ll end up being — no guarantees — but I think I’ll end up being 1- for-2 instead of 0- for-2. But we’ll find out.

Charlie?

I make no pretense whatsoever of being on the intellectual level of some 15-year-old that’s got an interest in tech. I think I may know — have some insights into consumer behavior.

I, certainly, can get a lot of information on consumer behavior and, then try to draw inferences about what that means about what consumer behavior is likely to be in the future. But we will find with —

The one — the other thing I’ll guarantee is I’ll make some mistakes on marketable securities, and I’ve made them in other areas than tech. So it — you’ll not bat a thousand, you know, no matter what industries you stick — you try to stick by.

I know insurance pretty well. But I think we probably lost money on an insurance stock, perhaps, you know, once or twice over the years. So it — you don’t bat a thousand.

But I have gained no real knowledge about tech in the last — well, since I was born, actually. (Laughter)

Charlie?

CHARLIE MUNGER: I think it’s a very good sign that you bought the Apple. It shows either one of two things. Either it is you’ve gone crazy or you’re learning. (Laughter)

I prefer the learning explanation.

WARREN BUFFETT: Well, so do I, actually. (Laughter)

13. Artificial intelligence impact is hard to predict

WARREN BUFFETT: Andrew?

ANDREW ROSS SORKIN: Hi, Warren. This one’s a fun one. Thomas Kimay (PH) is here. He’s a 27-year-old shareholder from Kentfield, California.

And I should preface this question by saying that he was here 17 years ago at 10 years old, asked you a question from the audience asking you if the internet might hurt some of Berkshire’s investments.

At the time, you said you wanted to see how things would play out. He’s now updated the question. (Buffett laughs)

“What do you think about the implications of artificial intelligence on Berkshire’s businesses, beyond autonomous driving and GEICO, which you’ve talked about already? In your conversations with Bill Gates, have you thought through which other businesses will be most impacted?

“And do you think Berkshire’s current businesses will have a significantly — will have significantly more or less employees a decade from now as a function of artificial intelligence?”

WARREN BUFFETT: Well, I —

ANDREW ROSS SORKIN: I mixed a couple questions together.

WARREN BUFFETT: Yeah. I certainly have no special insights on artificial intelligence, but I will bet a lot of things happen in that field in the next couple of decades, and probably a shorter timeframe.

They should lead, I would certainly think — but again, I don’t bring much to this party. But I would certainly think they would result in significantly less employment in certain areas. But that’s good for society.

And it may not be good for a given business, but let’s take it to the extreme. Let’s assume one person could push a button and, essentially, through various machines and robotics, all kinds of things, turn out all of the output we have in this country.

So, everybody’s — there’s just as much output as we have. It’s all being done by, you know, instead of 150-some million people being employed, one person.

You know, is the world better off or not? Well, certainly we’d work a lot less hours a week — of work per week and so on.

I mean, it would be a good thing, but it would require enormous transformation in how people relate to each other, what they expect of government, you know, all kinds of things. And, of course, as a practical matter, more than one person would keep working.

But pushing the idea that way is one of the — you’d certainly think that’s one of the consequences of making great progress in artificial intelligence.

And that’s enormously prosocial, eventually. It’s enormously disruptive in other ways. And it can have huge problems, in terms of a democracy and how it reacts to that.

It’s similar to the problem we have in trade where trade is beneficial to society, but the people that see the benefits day by day of a — of trade — don’t see a price at Walmart on socks or whatever they’re importing, that says, you know, “you’re buying — you’re paying X, but you would pay X-plus-so-many-cents if you bought this domestically.”

So they’re getting these small benefits and invisible benefits. And the guy that gets hurt by it, who’s the roadkill of free trade, feels it very specifically. And that translates into politics.

And so, you can — it gets very uncertain as to how the world would adjust, in my view, to great increases in productivity.

And without knowing a thing about it, I would think that artificial intelligence would have that hugely beneficial social effect, but a very unpredictable political effect if it came in fast, which I think it could.

Charlie?

CHARLIE MUNGER: Well, you’re painting a very funny world where everybody’s engaged in trade. And the trade is, I give you golf lessons and you dye my hair. And that would be a world kind of like the royal family of Kuwait or something.

And I don’t think it would be good for America to have everything produced by one person and the rest of us just engaged in leisure.

WARREN BUFFETT: How about if we just got twice as productive?

CHARLIE MUNGER: What?

WARREN BUFFETT: How about if we got twice as productive in a short period of time, so that 75 million people could do what 150 million people are doing now?

CHARLIE MUNGER: I think you’d be amazed how quickly people would react to that.

WARREN BUFFETT: In what way?

CHARLIE MUNGER: Favorably.

WARREN BUFFETT: I —

CHARLIE MUNGER: That’s what happened during the period when there — I’m sure everybody remembers with such affection — back in the Eisenhower years, five percent a year or something — people loved it.

Nobody complained that they were getting air conditioning and they didn’t have it before. Nobody wanted to go back to stinking, sweating nights in the South and —

WARREN BUFFETT: Well, if you cut everybody’s hours in half, it’s one thing. But if you fire half the people and the other people keep working, I just think it gets very unpredictable. I mean, I think we saw some of that in this election because I think that —

CHARLIE MUNGER: Well, we’ve adjusted to an enormous amount of it. It just came along a few percent per year.

WARREN BUFFETT: Well, and the question, then, is —

CHARLIE MUNGER: Don’t think you have to worry — I don’t think you have to worry about coming out at 25 percent a year. You know, I think you have to worry about it — you’re going to get less than two percent a year. That’s what’s worrisome.

WARREN BUFFETT: OK. We’ll move on. But it will be, you know, it’s an absolutely fascinating subject to see what happens with this. But it’s very, very hard to predict.

If — in some way, you know, we’ve got 36,000 people, say, employed at GEICO, you know.

And if you could do the same — perform all the same functions, virtually all the same functions even, and do it with five- or 10,000 people, and it came on quickly, and the same thing was happening in a great many other areas, you know, I don’t think we’ve ever experienced anything quite like that.

And maybe we won’t experience anything like it in the future. I don’t know that much about AI, but —

CHARLIE MUNGER: I don’t think you have to worry about that.

WARREN BUFFETT: Well, that’s because I’m 86. (Laughter)

CHARLIE MUNGER: It’s not going to come that quickly.

14. We have a “huge appetite” for both wind and solar projects

WARREN BUFFETT: OK. Gregg.

GREGG WARREN: Warren, during the past five years, Berkshire Energy’s investments in solar and wind generation have been about equal, with around 4.7 billion dedicated to capital projects in each segment.

Based on the company’s end-of-year capital spending forecast for 2017 through 2019, investments in wind generation were expected to be more than seven times greater than investments in solar generation the next three years, with just over $4.5 billion going into wind generation.

Just wondering how much of that future spending is tied to PacifiCorp’s recently announced $3.5 billion expansion plan, which is heavily weighted towards improving and expanding the subsidiary’s existing wind fleet, and whether the economics for wind are that much better than solar given that MidAmerican has also been spending heavily on wind investments?

Or is this disparity between the two segments being driven more by genuine capacity needs, which would imply that you have much more solar capacity than you need?

WARREN BUFFETT: Yeah. It is — we don’t look at it as having more solar capacity than we need or anything like —

It’s really a question of what comes along. I mean, and these — the projects, they’re internally generated, they’re externally offered to us, and we’ve got a big appetite for wind or solar. We have seen — you know — just based on those figures, we’ve seen more wind lately.

But we have no bias toward either one. I mean, if we saw five billion of attractive solar projects we could do and didn’t happen to see any wind during that period, it wouldn’t slow us down from doing the five billion or vice versa.

So we are — we have an appetite, a huge appetite, for projects in either area. We’re particularly well situated, as I think I’ve explained or talked about in the past, because we pay lots of taxes.

And therefore, solar and wind projects all involve a tax aspect to them. And we can handle those much better than many other — certainly, electric utilities.

Most electric utilities really, A, don’t have that much money left over after dividends and these — frequently, the taxes aren’t that significant.

At Berkshire, we pay lots of taxes, and we’ve got lots of money. So it’s really just a question of doing the math on the deals as they come along.

We’ve been very fortunate in Iowa, in finding lots of projects that made sense. And as a result, we’ve had a — we’ve got a much lower price for electricity than our main competitor in the state. We’ve got a lower price than in any states that touch us.

We’ve told the people of Iowa we won’t — they won’t have a price increase for many, many, many years — guaranteed that. So this worked out extremely well.

But if somebody walks in with a solar project tomorrow and it takes a billion dollars or it takes three billion dollars, we’re ready to do it. There’s no specific —

And the more, the better. There’s no specific preference between the two. Obviously, it depends where you are in the country.

I mean, Iowa’s terrific for wind. And, obviously, California’s terrific for sun. And there are geographical advantages to one or the other. But from our standpoint, we can do them anyplace. And we will do them anyplace.

15. I “underestimated the brilliance” of Jeff Bezos at Amazon

WARREN BUFFETT: OK. Station 4.

AUDIENCE MEMBER: Hi. My name is Joey (PH). And I’m an MBA candidate at Wharton. Thank you for having us.

Amazon has been hugely disruptive, due to the brilliance of Jeff Bezos, whom Charlie earlier called the business mind of our generation.

What is your current outlook and — on Amazon? And why hasn’t Berkshire bought in?

WARREN BUFFETT: Well, because I was too dumb to realize what was going to happen — (laughs) — even though I admired Jeff. I’ve admired him for a long, long time and watched what he was doing.

But I did not think that he could succeed on the scale he has. And I certainly didn’t — I didn’t even think about the possibility of doing anything with Amazon Web Services or the cloud.

So if you’d asked me the chances that, while he was building up the retail operation, that he would also be doing something that was disrupting the tech industry, you know, that would’ve been a very, very long shot for me. And I’ve underestimated — I’ve really underestimated the brilliance of the execution.

I mean, it’s one thing to dream about doing this stuff online, but it takes a lot of ability. And, you know, you can read his 1997 annual report. And he laid out a roadmap. And he’s done it, and done it in spades.

And if you haven’t seen his interview on Charlie Rose three or four months ago — CharlieRose.com — go to it and listen to it because you’ll learn a lot. At least, I did. So, I just plain —

It always looked expensive. And I really never thought that he would be where he is today. I thought he would do — I thought he was really brilliant. But I did not think he would be where he is today when I looked at it three, five, eight, 12 years ago — whenever it may have been.

Charlie, how did you miss it? (Laughter)

CHARLIE MUNGER: It was easy. (Buffett laughs)

What was done there was very difficult, and it was not at all obvious that it was all going to work as well as it did.

I don’t feel any regret about missing out on the achievements of Amazon. But other things were easier. And I think we screwed up a little.

WARREN BUFFETT: No. We won’t pursue that line. (Laughs)

CHARLIE MUNGER: Well, I meant Google.

WARREN BUFFETT: Well, we missed a lot of things.

CHARLIE MUNGER: Yes.

WARREN BUFFETT: We missed a lot of things.

CHARLIE MUNGER: And we’ll keep doing it.

WARREN BUFFETT: Yeah. (Laughter) And we’ll have a two —

CHARLIE MUNGER: Luckily, we don’t miss everything, Warren. That’s our secret. We don’t miss them all. (Laughter)

WARREN BUFFETT: OK. We better move on, I think. (Applause)

He may start getting specific.

16. “If I died tonight, I think the stock would go up tomorrow.”

WARREN BUFFETT: Carol?

CAROL LOOMIS: The creator of this question, Jim Keifer (PH) of Atlanta, has even higher expectations for Warren’s longevity than Charlie does.

“Mr. Buffett, we all hope you win the record as mankind’s oldest living person. But at some point, you and/or Charlie will go, and Berkshire stock may then come under selling pressure.

“My question is, if Berkshire stock falls to a price where share repurchase is attractive, can we count on the board and top management to repurchase shares?

“I ask this question both because of past comments you have made about not wanting to take advantage of shareholders and because some of the passages in the owner’s manual lead me to believe this might be an instance when the board does not choose to repurchase shares.

“Can you clarify what course of action we might expect about repurchases in the circumstances I have outlined?”

WARREN BUFFETT: Yeah. Well, as far as I’m concerned, they’re not taking advantage of shareholders if they buy the stock when it’s undervalued. That’s the only way they should buy it. And they should —

But in doing so — there were a few cases back when Charlie and I were much younger — where there were very aggressive repurchases — or the equivalent of repurchases — by people. And the repurchases, incidentally, made a lot more sense than they do now.

But they were done by people who either — for various techniques — tried to depress the shares. And if you’re trying to encourage your partners to sell out at a depressed price by various techniques, including misinformation — but there’s other techniques — you know, I think that’s reprehensible. But our board wouldn’t be doing that.

I’ll take exception to the first part of it, but I’ll still answer the second. I think the stock is more likely to go up. If I died tonight, I think the stock would go up tomorrow. And there’d be speculation about break ups and all that sort of thing.

So, it would be a good Wall Street story that, you know, this guy that’s obstructed breaking up something that — where some of the parts might sell for more than the whole.

They wouldn’t necessarily be — probably be worth less than the whole — but might sell for — temporarily — for more than the whole. And it would happen. So I would bet in that direction.

But if, for some reason, it went down to a level that’s attractive, I don’t think the board is doing anything in the least that’s reprehensible by buying in the stock at that point. No false information, no nothing. It should —

And their buying means that the seller would get a somewhat better price — if there are a lot of sellers — they’d get a mildly better price than if they weren’t buying. And the continuing stockholders would benefit.

So I think that — I think it’s obvious what they would do. And I would think it’s obvious that it’s pro-shareholder to do it. And I think they would engage in pro-shareholder acts as far as the eye can see. I mean, we’ve got that sort of board.

Charlie?

CHARLIE MUNGER: Well, I think you or I might suddenly get very stupid very quickly, but I don’t think our board is going to have that problem. (Laughter)

WARREN BUFFETT: Well, I want to think about that one. (Laughter)

17. We try to explain material accounting issues to shareholders

WARREN BUFFETT: OK. Jonathan.

JONATHAN BRANDT: Warren, in the past, you’ve enjoyed discussing accounting for options grants.

So I’m curious, what’s your view of the new accounting standard which mandates that companies report lower tax provisions, based on so-called excess tax benefits enjoyed when share-based compensation ends up being more profitable for the grantees than when it’s initially modeled?

These so-called benefits — excess benefits — used to go through the shareholder’s equity line on the balance sheet. Which accounting method makes more sense to you, the old method or the new?

WARREN BUFFETT: Jonny, I think you know a lot more about it than I do. So, if I were asked to answer that question, I’d probably call you up and say, “What should I say?” (Laughter)

It’s not a factor that will enter into Berkshire, so I really have not — I mean, I’ve heard just a little bit about that accounting standard. But I really don’t know anything about it.

Charlie?

CHARLIE MUNGER: It’s not a big deal, Warren.

WARREN BUFFETT: Yeah. Well, I know that. (Laughter)

Yeah. We — there are few things in accounting we really disagree with and whether they might be material to somebody trying to evaluate Berkshire. And, you know, that primarily gets into amortization of intangibles.

It will certainly — it certainly gets into realized capital gains and that sort of thing. And we will go to great lengths to try to tell our partners, basically, not all of whom, you know, are accounting experts or anything.

And we will try to make clear to them, at least, what our view is. You know, the same way as if I had a family business and I was talking to my sisters or something about it.

But unless it’s material, we’ll probably stay away from trying to opine on any new accounting standards. If it’s material to Berkshire, we’ll go to great lengths to, at least, give our view.

Charlie?

CHARLIE MUNGER: Well, I certainly agree with that.

WARREN BUFFETT: OK —

CHARLIE MUNGER: That is, that what he’s talking about is not very material to Berkshire.

WARREN BUFFETT: No. It isn’t. And it really won’t be. You know, and —

CHARLIE MUNGER: No.

WARREN BUFFETT: Some of these others are, though, and we will bring those up as they come up. The — yeah.

We are reporting 400-and-some million dollars less in our earnings than if Precision Castparts had remained a public company.

Well, is Precision Castparts — I mean, are the earnings less real? Is the cash less real? Is anything — because it’s moved, the ownership? I don’t think so.

And I want to convey that belief to shareholders. And they can debate whether it’s right or wrong. But I think it’s a mistake not to comment if — and just assume that the owners understand that because it, you know, it’s a fairly arcane point. And so, we point it out. But we also point out if we think depreciation is inadequate.

As for valuation purposes, the depreciation is inadequate at a very capital-intensive business like BNSF, which we, I must say, still love anyway.

Charlie, any more?

CHARLIE MUNGER: No.

18. “Valuation … is not reducible to any formula”

WARREN BUFFETT: OK. Section 5.

AUDIENCE MEMBER: Thank you, and good afternoon. I’m Adam Bergman with Sterling Capital in Virginia Beach, Virginia.

Earlier today, Mr. Munger commented on the valuation of China versus the U.S. market.

My question for you is, are market cap to GDP and cyclically adjusted P/E still valid ways to consider market valuation? And how do those influence Berkshire’s investment decisions? Thank you.

WARREN BUFFETT: Charlie, I think — well, I expect that I guess Charlie’s overall valued in China.

I would say that both of the standards you mention are not paramount at all in our valuation of securities. It’s harder —

People are always looking for a formula. And there is an ultimate formula, but the trouble is you don’t know what to stick in for the variables. But the —

And, you know, that’s the value of anything, being the present value of all the cash it’s ever going to distribute. But the P/E ratios — I mean, every number has some degree of meaning, means more sometimes than others.

Valuation of a business is — it’s not reducible to any formula where you can actually put in the variables perfectly.

And both of the things that you mentioned get — themselves, get bandied around a lot.

It’s not that they’re unimportant. But sometimes they’re — they can be very important. Sometimes they can be almost totally unimportant. It’s just not quite as simple as having one or two formulas and, then, saying the market is undervalued or overvalued or a company is undervalued or overvalued.

The most important thing is future interest rates. And, you know, and people frequently plug in the current interest rate saying that’s the best they can do. After all, it does reflect a market’s judgment.

And, you know, the 30-year bond should tell you what people who are willing to put out money for 30 years and have no risk of dollar gain or dollar loss at the end of the 30-year period.

But what better figure can you come up with? I’m not sure I can come up with a better figure. But that doesn’t mean I want use the current figure, either. So, I would say that —

I think Charlie’s answer will be that he does not come up with China versus the U.S. market based on what you’ve mentioned as yardsticks. But, no, Charlie, you tell them.

CHARLIE MUNGER: All I meant was that — I said before that the first rule of fishing is to fish where the fish are — is that a good fisherman can find more fish in China if your — if fish is the stock market. That’s all I meant.

WARREN BUFFETT: Yeah. One — I’m going to go back to one —

CHARLIE MUNGER: It’s a happier hunting ground.

19. Lessons from running a “lousy business”

WARREN BUFFETT: This doesn’t really directly relate. Just going — I want to go back to one question that was mentioned earlier.

I really think if you want to be a good evaluator of businesses — an investor — you really ought to figure out a way, without too much personal damage, to run a lousy business for a while.

I think you learn a whole lot more about business by actually struggling with a terrible business for a couple of years than you run by — than you learn by getting into a very good one where the business itself is so good that you can’t mess it up.

I don’t know what — I don’t know whether Charlie has a view on that or not. But it’s certainly — it’s — it was a big part of our learning experience. And I think a bigger part, in a sense, than running — being involved — with good businesses was actually being involved in some bad businesses and just seeing —

CHARLIE MUNGER: How awful it was.

WARREN BUFFETT: — how awful it is, and how little you can do about it, and how IQ does not solve the problem, and a whole bunch of things.

It’s a useful experience. But I wouldn’t advise too much of it. Would you think so, Charlie? Or —

CHARLIE MUNGER: It was very useful to us. There’s nothing like personal, painful experience if you want to learn. And we certainly had our share of it.

20. Weapons of mass destruction pose biggest risk to Berkshire

WARREN BUFFETT: OK. Becky.

BECKY QUICK: This question comes from Tom Spanfelner (PH). And he’d like to be called Tom Span from Pennsylvania.

He says, “In life, business, and investing, strategies often work until they don’t work. Other than a massive insurance loss, any thoughts on what could cause the Berkshire enterprise to not work?”

WARREN BUFFETT: I think the only —

CHARLIE MUNGER: Good question.

WARREN BUFFETT: Yeah. Well, if there were some change, if we got some infection — outside agent of some sort that changed the culture in some major way, an invasion of different thought.

But as a practical matter, I don’t think anything — you know, and it’s the things you can’t think of — but I can’t think of anything that can harm Berkshire in a material, permanent way except weapons of mass destruction. But I don’t regard that as a low probability.

It would take a recession, a depression, a panic, you know, hurricanes, earthquakes. They all would have some effect. And in some cases, it might even be that we would do better because of them.

But if there were a successful — as measured by the aggressor — nuclear, chemical, biological, or cyber-attack on the United States — and there are plenty of people that would like to pull that off or organizations and maybe even a few countries — it could disrupt society to such an extent that it would harm us.

But I think — with the variety of earning streams, with the asset positions, with the general philosophy at play — the culture — I think that we would be close to the last one affected.

But if somebody figures out how to kill millions of Americans and totally disrupt society, then, you know, then all bets are off.

Charlie?

CHARLIE MUNGER: Well, I agree. It would take something really extreme.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: And just take the question like — British Petroleum took a huge loss with one oil well blowing.

And Berkshire has all these independent subsidiaries. And they really are independent. And the parent company is not (inaudible) if there’s one horrible accident somewhere.

We would tend to pay, of course, maybe more than our legal liability, but we are not — one accident in one subsidiary that caused a big lot of damage, we’re better protected than most companies.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: In every way, Berkshire is structured to handle stresses.

WARREN BUFFETT: It’s the kind of thing we think about all the time. We’ve thought about it ever since we started. But I really don’t know any company that can take more general adversity or even some specific adversities.

But if you get into the “what could happen with weapons of mass destruction?” that is something we can’t predict about. But if that ever happens, there’ll be more to worry about than the price of Berkshire.

21. Buffett confident about growth for property-casualty business

WARREN BUFFETT: Jay?

JAY GELB: Berkshire Hathaway Specialty Insurance generated $1.3 billion of premium volume in 2016. This business is on the smaller end of commercial property-casualty insurers in terms of scale, although its volume did grow 40 percent last year.

In a highly competitive commercial P&C environment, what gives you confidence that Berkshire Hathaway Specialty is destined to become one of the world’s leading commercial P&C insurers, as you said in this year’s annual letter?

WARREN BUFFETT: Yeah. I think it will be. And I think how fast it grows depends very — it does depend very much on the market.

I mean, we’re, you know, we are not interested in trying to be a price-cutter in a market where the prices already aren’t that attractive.

But we have built the scale, worldwide. And a lot of this has just been added in, you know, recent months and just over the past year. We have —

We will grow a lot. But if the market should turn hard for any reason, we would grow a lot faster. But we are destined, at Berkshire Hathaway Specialty, to be one of the leading PC firms in the world, just as we were destined to have — when Ajit [Jain] came in, even though we had nothing — we were destined to become a very important reinsurer throughout the world and, in certain ways, almost the only reinsurer for certain types of risks in the world.

And we’ve got the people. We’ve got the capital. We’ve got the reputation. There is no stronger company in the insurance world — and there won’t be — than the Berkshire Hathaway insurers. We’ve got the talent there.

So it will grow. It may grow slowly some years. It may have big jumps just like the reinsurance operation did many years ago. But it’s a very important addition to Berkshire that brought that on. I wish — just wish we could’ve started a little earlier.

But we had to have to right people. And they came to us. And, as you say, we wrote whatever it was, a billion-three or a billion-four last year, and we’ll write more this year. But we won’t write as much as if we were in a hard market.

22. “My God, we’re still learning”

WARREN BUFFETT: Station 6?

AUDIENCE MEMBER: Good afternoon. My name Sally Burns. I’m from Australia. But I currently reside in Austin, Texas.

My question, Mr. Buffett, I have heard that Mr. Munger says your greatest talent is that you’re a learning machine, that you never stop updating your views.

What are the most interesting things you’ve learned over the last few years?

WARREN BUFFETT: Well, it is fun to learn. I would say Charlie is much more of a learning machine than I am. I’m a specialized one, and he’s a much — he does as well as I do in my specialty. And, then, he’s got a much more general absorption rate than I have about what’s going on in the world.

But, you know, it’s a world that gets more fascinating all the time. And a lot of fun can occur when you learn you were wrong on something. It — you know, that’s when you really learn that the old ideas really weren’t so correct. And you have to adapt to new ones. And that, of course, is difficult.

I don’t know that I would pick out — well, I think, actually, what’s going on, you know, in America is terribly, terribly interesting, you know, and politically, all kinds of things. But just the way the world’s unfolding, it’s moving fast.

I do enjoy trying, you know, to figure out not only what’s going to happen, but what’s even happening now. But I don’t think I’ve got any special insights that would be useful to you. But maybe Charlie does.

CHARLIE MUNGER: Well, I think buying the Apple stock is a good sign in Warren. (Laughter)

And he did run around Omaha and ask if he could take his grandchildren’s tablets away. (Buffett laughs)

And he did market research.

And I do think we keep learning. And more important, we keep — we don’t unlearn the old tricks. And that is really important.

You look at the people who try and solve their problems by printing money and lying and so forth.

Take Puerto Rico. Who would’ve guessed that a territory of the United States would be in bankruptcy? Well, I would’ve predicted it because they behave like idiots. (Laughter) And so —

WARREN BUFFETT: And we did not buy any Puerto Rico bonds. (Laughs)

CHARLIE MUNGER: No. And if you go to Europe — you go to Europe, you should look at the government bond portfolios we’re required to hold in Europe. There’s not only no Greek bonds, they’re the bonds of nobody but Germany.

Everywhere you look in Berkshire, somebody is being sensible. And that is a great pleasure. And if you combine that with being very opportunistic so that when something comes along like a panic, why, it’s a nice — it’s like playing with two hands instead of one on a game that requires two hands.

It helps to have a fair-sized repertoire.

And, Warren, we’ve learned so damn much. There are all kinds of things we’ve done over the last 10 years we would not have done 20 years ago.

WARREN BUFFETT: Yeah. That’s true, although if you take — it’s interesting. I’ve mentioned this before. But one of the best books on investment was written, I think, in 1958. I think I read it around 1960, by Phil Fisher, called Common Stocks and Uncommon Profits. And he told —

CHARLIE MUNGER: All the countries went — companies went to hell eventually.

WARREN BUFFETT: But it talked about the importance, I mean, or the usefulness of, what do you call, the “scuttlebutt method.” And, you know, that was something I didn’t learn from [Benjamin] Graham.

But every now and then, it’s turned out to be very useful. Now, it doesn’t solve everything. And, I mean, there’s a whole lot of more —

CHARLIE MUNGER: I saw you do it with American Express in the Salad Oil scandal.

WARREN BUFFETT: Yeah, yeah.

CHARLIE MUNGER: You’re still doing at Apple, you know, decades later.

WARREN BUFFETT: Yeah. It — in certain cases, you actually can learn a lot just by asking a lot of questions. And I give Phil Fisher credit. That book goes back a lot of years.

But as Charlie said, some of the companies he picked as winners forever did sort of peter out on him.

But the basic idea, that you can learn a lot of things just by asking in some cases — I mean, I used to —

I mean, if I got interested in the coal industry — just say to pick one out of the air — you know, when I was much younger, more energetic, if I went and talked to the heads of 10 coal companies and I asked each one of them — way later into the conversation, after they got feeling very — they felt like talking.

And I would just, you know, I’d just say, “If you had to go away for 10 years on a desert island and you had to put all of your family’s money into one of your competitors, which one would it be and why?”

And then, you know, and then I’d ask them if they had to sell short one of their competitors for 10 years, all their family money, why?

And they — everybody loves talking about their competitors. And if you do that with 10 different companies, you’ll probably have a better fix on the economics of the coal industry than any one of those individuals has.

I mean, the — it — there’s ways of getting at things. And sometimes they’re useful. Sometimes, they’re not. But sometimes, they can be very useful.

And, you know, the idea of just learning more all the time about —

I’m more specialized in that by far than Charlie. I mean, he wants to learn about everything. And I just want to learn about something that’ll help Berkshire.

But — (laughs) — it’s a very, you know, it’s a very useful attitude toward — have toward — the world.

And, of course, I don’t know who said it. But somebody said the problem is not in getting the new ideas but shedding the old ones. And there’s a lot of truth to that.

CHARLIE MUNGER: We would never have bought ISCAR if it had come along 10 years earlier. We would never have bought Precision Castparts if it had come along 10 years earlier. We are learning. And, my God, we’re still learning.

23. “We’re getting too much medicine”

WARREN BUFFETT: OK. Andrew?

ANDREW ROSS SORKIN: Hi. Warren, this is my final question.

In 2012, you were quoted as saying, “I think the health care problem in — is the number one problem of America and of American business. We have not dealt with that yet.”

Do you believe that the current administration’s plan to repeal and replace ACA will ultimately benefit the economy and Berkshire or not?

WARREN BUFFETT: Yeah. Well, I’ll answer — I’ll give you two answers here, the first one being that if you go back to 1960 or thereabouts, corporate taxes were about four percent of GDP. I mean, they bounced around some.

And, now, they’re about two percent of GDP. And at that time, health care was five percent of GDP. And now, it’s about 17 percent of GDP.

So when American business talks about taxes strangling our competitiveness or that sort of thing, they’re talking about something that, as a percentage of GDP, has gone down from four to two while medical costs, which are borne to a great extent by business, have gone from five to 17 percent.

So medical costs are the tapeworm of economic — American economic competitiveness, I mean, if you’re really talking about it.

And that — and business knows that. They don’t feel they can do much about it, but it is not —

The tax system is not crippling Berkshire competitiveness around the world or anything of the sort. Our health costs have gone up incredibly and will go up a lot more. And if you look at the rest of the world, there were a half a dozen countries that were around our five percent if you go back to the early years.

And while we’re at 17, now, they’re at 10 or 11. So they have gained a five or six point advantage — the world — even in these countries with fairly high medical costs.

CHARLIE MUNGER: And that’s with socialized medicine.

WARREN BUFFETT: Yeah. So it’s a huge — whatever I said then goes and is accentuated now. And that isn’t a problem —

I mean, that is a problem this society is having trouble with and is going to have more trouble with, and — regardless of which party’s in power or anything of the sort. It almost transcends that.

In terms of the new act that was passed a couple days ago versus the Obama administration act, it’s a very interesting thing.

All I can tell you is the net effect of that act on one person is that my taxes — my federal income taxes — would’ve gone down 17 percent last year, if the act — if what was proposed went into effect.

So, it is a huge tax cut for guys like me. And you’ll have to figure out the effects of the rest of the act.

But the one thing I can tell you is if it goes through the White House — put in, I mean, it — anybody with $250,000 a year of adjusted gross income and a lot of investment income is going to have a huge tax cut. And when there’s a tax cut, either the deficit goes up or they get the taxes from somebody else.

So, as it stands now, it is — that is the one predictable effect, if it should pass, as it — and it — the Senate will do something different and hold a conference. And who knows what happens? But that is in the law that was passed a couple days ago.

Charlie?

CHARLIE MUNGER: Well, I certainly agree with you about the medical care. What I don’t like about the medical care is that a lot of — we’re getting too much medicine.

There’s too much chemotherapy on people that are all but dead, and all kinds of crazy things go on in Medicare and in other parts of the health system.

And every — there are so many vested interests that it’s very hard to change.

But I don’t think any rational person looking objectively from the outside of the American system of medical care — we all love all the new life-saving stuff, and the new chemotherapies, and the new drugs, and all that.

But, my God, the system is crazy. And the cost is just going wild. And it does put our manufacturers at a big disadvantage with other people where the government is paying the medical bills. And so, I agree with Warren totally.

WARREN BUFFETT: If you had to bet, 10 years from now, we’ll be higher or lower than 17 percent of GDP?

CHARLIE MUNGER: Well, if present trends continue, it’ll get more and more. There are huge vested interests in having this thing continue the way it is. And they’re very vocal and active. And the rest of us are indifferent. So, naturally, we get a terrible result.

And I would say that on this issue, both parties hate each other so much that neither one of them can think rationally. And I don’t think that helps, either.

WARREN BUFFETT: It’s — (Applause)

It is kind of interesting that, you know, with — the federal government spends — or raises, we’ll say — 3 1/2 trillion or something like that — I mean, the degree of concern everybody has about that — although that’s stayed fairly steady in the 18 percent or so of GDP plus or minus a couple points — but three trillion-plus is spent on health care.

And everybody wants the best. And it’s perfectly understandable. But it’s a very, very — it’s a big number compared to the whole federal budget. I mean, there’s some overlap and all of that. But it’s —

If you talk about world competitiveness of American industry, it’s the biggest single variable where we keep getting more and more out of whack with the rest of the world.

And it’s very tough for political parties to attack it. Yet, it’s, you know, it — basically, it’s a political subject.

CHARLIE MUNGER: A lot of it is deeply immoral. If you have a group of hospital people and doctors that are feasting like a bunch of jackals on the carcass of some dying person, it’s not a pretty sight.

WARREN BUFFETT: Tell them about that group out — (applause) — in California that —

CHARLIE MUNGER: Oh yes.

WARREN BUFFET: Perfect — this is —

CHARLIE MUNGER: This is Redding. This is one of my favorite stories. There are a bunch of very ambitious cardiologist and heart surgeons in Redding.

And they got the thought that, really, what a heart was was a “widowmaker.” So everybody — every patient that came in, they said, “You’ve got a widowmaker in your chest. And we know how to fix it.” And so they recommended heart surgery for everybody.

And, of course, they developed a huge volume of heart surgery. And they got very wonderful results because nobody comes through heart surgery better than the man who doesn’t need it at all. (Laughter)

And they made so much money that the hospital chain, which was Tenet, brought all its other hospitals — why can’t you be more like Redding? And this is a true story. And it went on and on and on.

And finally, there was some beloved Catholic priest. And they said, “You’ve got a widowmaker in your chest.” And he didn’t believe them. And he blew the whistle.

WARREN BUFFETT: He was a priest. You could see why he didn’t believe them. (Laughter)

CHARLIE MUNGER: At any rate — well, when you get a routine, you just keep using it, you know. A heart is a widowmaker. It’s a widowmaker.

Later, I met one of the doctors who threw these people out of the medical profession. And I said to him, “In the end, did they think they were doing anything wrong?”

He said, “No, Charlie. They thought that what they were doing was good for people.” That is why it’s so hard to fix these things. The self — the delusion that comes into people as they make money and get more successful by doing God-awful things should never be underestimated. And it’s — there’s a lot — (Applause)

A lot of that goes on. And you’re (inaudible) such gross craziness. And you thought little Wells Fargo looks like innocence. He only has a little trouble with his incentive system.

But the heart surgery rate was 20 times normal or something. You’d think you’d notice if you’re running a hospital. And — but they did notice. They wanted the other hospitals to be more like it.

WARREN BUFFETT: They had a terrific success ratio.

24. Buffett expects Berkshire will own more utilities

WARREN BUFFETT: OK. Gregg? (Laughs)

GREGG WARREN: Thank you, Warren.

As you look forward, in taking into consideration some of the headwinds faced in the U.S.-based utilities, including weaker electricity demand growth as increasing energy efficiency impacts demand, distributed generation, which hits vertically integrated utilities doubly hard as they face both declining energy sales revenue and increased network cost to support reliable delivery and, third, higher interest rates, which would increase borrowing costs, what are the key attributes that Berkshire Energy would be looking for in future acquisition candidates? In —

WARREN BUFFETT: Yeah. Oh, excuse me. I’m sorry.

GREGG WARREN: I’m sorry. In particular, are there advantages or disadvantages attached to, say, transmission assets relative to generation assets that would make you favor one over the other?

WARREN BUFFETT: Yeah. Well, generation assets, you can say, have inherently more risk because that — some of them are going to —

CHARLIE MUNGER: Be stranded.

WARREN BUFFETT: — stranded, yeah, and obsoleted. Now the question is how they treat stranded and all of that sort of thing.

We — on the other hand, more of the capital investment is in the generating assets. So that tends to be where a good bit of the capital base is.

We like the utility business OK. I mean — electric — electricity demand is not increasing like it was, as you point out. They’re going to be stranded assets. They —

If they’re stranded because of rank foolishness, you know, they will probably be less inclined — or the utility commissions — will be less inclined to let you figure that in your rate base as you go forward as opposed to things that are — where societal demands are just changing.

But we still think the utility business is a very decent asset. The prices are very high, but that’s what happens in a low interest rate environment. I would be —

I’d be surprised if 10 years from now, we don’t have significantly more money in not only wind and solar, but probably — we’ll probably own more utility systems than we own now.

We’re a buyer of choice with many utility commissions. In fact, if we can put up the slide, there’s a slide which shows something about our pricing compared to other utilities.

And Greg Abel and his group have done an extraordinary job. They’ve done it in safety. They’ve done it in reliability. They’ve done it in price. They’ve done it in renewables. It’s hard to imagine a better run operation than exists at MidAmerican Energy.

And people want us — with that record — people want us to come to their state in many cases.

But when prices get to the level they have, I mean, some utilities have sold at extraordinary prices. And we can’t pay them and have it make sense for Berkshire shareholders.

But just because we can’t do it this year doesn’t mean it won’t happen next year or the year after. So I think we’ll get a chance.

CHARLIE MUNGER: And our utilities are not normal. The way Greg has run those things, they’re so much better run in every way than normal utilities. They’re better regarded by the paying customers. They’re better regarded by the regulators. They have better safety records. They charge —

It’s just everything about it is way the hell better. And it’s a pleasure to be associated with people like that and to have assets of that quality.

And it’s a lot safer. If somebody asked Berkshire to build a $50 billion nuclear plant, we wouldn’t do it.

WARREN BUFFETT: Yeah. And we have public power here in Nebraska. I mean, it’s been sort of the pride of Nebraska for many decades. It’s all — there are no privately-held utility systems, and totally public power. And, you know, those utilities have no requirements for earnings on equity. They have —

They can borrow at tax-exempt rates. We have to borrow at taxable rates. And Nebraska — you know, the wind — it’s not that much different than Iowa. And we’re selling electricity across the river, a few miles from here, you know, at lower prices than exist in Nebraska. So it’s an extraordinary utility.

And it was lucky when we got involved in it. I thank Walter Scott, our director, for introducing me to it almost 17 or 18 years ago or so. And —

But I don’t think the utility business, as such — I mean, if I were putting together a portfolio of stocks, I don’t think there would be any utilities in that group now. But I love the fact we own Berkshire Hathaway Energy.

CHARLIE MUNGER: But it’s different —

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: — radically different —

WARREN BUFFETT: A lot —

WARREN BUFFETT: — and better.

WARREN BUFFETT: A lot better, actually.

25. McLane: lots of revenue, but very thin profit margin

WARREN BUFFETT: Station 7.

AUDIENCE MEMBER: Hi.

WARREN BUFFETT: Hi.

AUDIENCE MEMBER: My name’s Grant Misterly from beautiful, historic Saint Augustine, Florida.

I’ve been a fan of yours and of Berkshire since I was a kid, looking through the stock pages and seeing one crazy stock that traded for $10,000 a share.

Unfortunately, I wasn’t able to convince my parents to buy it at that point. But now I’m a shareholder as an adult. And I’m here with my daughters, Mabel, who’s seven and Willa, who’s one year old, my wife.

I voraciously read the letter every year. And I love the stories of — from the different companies, GEICO and See’s, BNSF, that kind of teach investing lessons.

And this year, when I was looking through the accounting information in the back, I noticed that one company, McLane, contributes a lot of revenue, a large portion of Berkshire’s revenue and, to a lesser extent, earnings. But I don’t ever see much about it in the annual report.

So I’m curious why we don’t hear more about that company? And are there any investing lessons like we get from See’s and GEICO that you can share about that company?

WARREN BUFFETT: Yeah, McLane — the reason you see their figures separately is because the SEC has certain requirements that are based on sales. And McLane is a company that has an extraordinary amount of sales in relation to intrinsic value or to net income.

It, basically, is a distributor of — well, it’s a huge customer, for example, of the food companies, the candy companies, the cigarette companies, it — go up and down the line of anything that goes into convenience stores.

But we bought it from Walmart. And Walmart is our biggest customer. I can’t tell you the precise volume, but — well, if you get Walmart’s and Sam’s together, you know, you’re getting up to 20 percent-plus.

But it’s nationwide. But in the end, it operates on about six percent gross margins and five percent operating expenses, so it has a one percent pre-tax margin.

And, obviously, a one percent pre-tax margin only works in terms of return on capital if you turn your equity extraordinarily fast. And that’s what McLane does. Being a wholesaler, it’s moving things in, moving things out very fast, very efficiently. And it does this —

It also has a few liquor distribution subsidiaries that have wider margins. But the basic McLane business is, you know, 45 billion-plus, makes one percent pre-tax on sales.

But the return on capital is very decent. But it sort of has an outsized appearance simply because of this huge volume of sales that go through it.

Grady Rosier, who runs it, is exceptional. He was there when we bought it from Walmart, whenever it was, a dozen years ago.

And I’ve been there once. We’ve got thousands and thousands of trucks, big distribution centers all over the country. It is a major factor in moving goods at wholesale.

I mean, if you’re a Mars Candy or something of the sort, I mean, we — we’re — we’ll be the biggest customer.

But that pretty well describes the business. You know, it’s a business that earns good returns in relation to invested capital and in relation to our purchase price.

But, you know, every tenth of a cent is important in the business. In collect — moving your receivables exceptionally fast, and consequently you have — you know, you have payables moving big time.

So the sales are 30 times receivables and 30 times payables, you’ve got — and maybe, yeah, 35 or so times inventory. I mean, this is a business that’s moving a lot of goods. But, in terms of its —

It’s an important subsidiary but not remotely as important as would be indicated by the sales. It’s still very important making the kind of money that shows up in the 10-K.

Charlie?

CHARLIE MUNGER: You said it all. (Buffett laughs)

WARREN BUFFETT: That was an interesting thing. Walmart wanted to sell it. They came to see us, and we made a deal. And the CFO came. We talked for a while. He went into the other room and called the CEO and came back and said, “You have a deal.”

And Walmart has told me subsequently that they never had a deal that closed as fast as the one with Berkshire. I mean, they — you know, we said what we would pay. It was cash. And we got it done very promptly. And they were terrific on their side.

CHARLIE MUNGER: By the way, that reputation for being quick and simple, and doing what we promised and so on, has helped at Berkshire time after time.

WARREN BUFFETT: Yeah. Yeah, we wouldn’t have made that deal without, essentially, having that reputation. But they knew —

CHARLIE MUNGER: Well, you bought the Northern Natural Gas Company in one weekend. And they wanted the Monday — that money on Monday.

WARREN BUFFETT: They needed the money on Monday.

WARREN BUFFETT: Before the lawyers could complete the legal papers, we managed to do it.

WARREN BUFFETT: Well, not only that, but I think it took some clearance by — in Washington. And, essentially, I think I wrote a letter and said that if they didn’t — if they decided after looking at it they didn’t want to clear it, we’d undo the deal.

But these guys needed the money so bad, we were going to give them the money, essentially, based on the deal clearing. And there wasn’t any reason why it wouldn’t clear, but that was just a procedural problem.

But most companies can’t do that. I mean, we can. We’ve got a flexibility that, really, in most large companies just plain doesn’t exist. There’s too many people have to sign off on it or something of the sort.

So the Northern Natural deal would not have been made if we’d had to follow the normal timetable. It —

CHARLIE MUNGER: And it’s a lovely business to own.

WARREN BUFFETT: Yeah. Absolutely.

26. Buffett wants to be remembered as a (very old) teacher

WARREN BUFFETT: Now, we’re moving from one station to another between now and 3:30, so we now go to station 8.

AUDIENCE MEMBER: Good morning or good afternoon, Warren and Charlie, John —

WARREN BUFFETT: Hi.

AUDIENCE MEMBER: — Norwood from West Des Moines, Iowa. You guys have iron bladders. (Laughter)

WARREN BUFFETT: We won’t tell you the secret to that.

AUDIENCE MEMBER: Fine — (Laughter)

I was wondering about a contraption under the —

WARREN BUFFETT: No.

AUDIENCE MEMBER: — table there.

WARREN BUFFETT: No. You can come down and inspect.

AUDIENCE MEMBER: All right. (Laughter)

Hey, I had a question for each. Warren, I was fortunate to ask you a question, I think, in 2011 about legacy and what you wanted to be known for a hundred years from now. And I’m kind of curious to hear what Charlie would like to be known for.

Warren, I’m 52. So I guess you started this — doing this — when I was born. And I’m kind of interested in a memory from your first annual meeting.

CHARLIE MUNGER: My first memory when Warren got on this subject and they asked him what he wanted said at his funeral.

He said, “I want them to all be saying ‘that’s the oldest looking corpse I ever saw.’” (Laughter) And —

WARREN BUFFETT: That may be the smartest thing I ever said. (Laughter)

Oh, it — well — with me, it —very simple. It — I really like teaching.

So, basically, I’ve been doing it formally and, you could say, somewhat informally, all my life. And I certainly had the greatest teachers you can imagine. So, if somebody thought that I did a decent job at teaching, I’d feel very good about that. (Applause)

CHARLIE MUNGER: Yeah. To make the teaching endurable it has to have a bit of wise-assery in it. And that we’ve both been able to supply. (Laughter)

WARREN BUFFETT: And for those of you who are old-time basketball fans, have I mentioned that on Wilt Chamberlain’s tomb it was reputed that it was going to say, “At last, I sleep alone?” (Laughter)

27. “Don’t wait till you’re 93”

WARREN BUFFETT: OK. Station 9.

AUDIENCE MEMBER: Good afternoon, Mr. Munger and Mr. Buffett.

My name is Ji Wen Yue (PH). I come from China. It’s my first time to come to this meeting. And I think I’m very lucky to have a chance to ask question.

WARREN BUFFETT: We’re glad to have you.

AUDIENCE MEMBER: Thank you. Everyone has personal dreams. And at a different age, maybe dreams will come different to you. And what’s your dream now?

WARREN BUFFETT: Charlie, we’ll let you go first.

CHARLIE MUNGER: I didn’t quite hear that.

WARREN BUFFETT: Oh, I — what’s your dream now? She says —

CHARLIE MUNGER: My dream. Well — (Laughter)

WARREN BUFFETT: Let’s skip the first one. (Laughter)

CHARLIE MUNGER: Sometime when I’m especially wishful, I think, oh, to be 90 again. (Applause)

And I got some advice for the young. If you got anything you really want to do, don’t wait till you’re 93.

WARREN BUFFETT: No, do it. (Laughter)

No, that’s the same thing I would tell students is, you can’t always find it the first time or the second time. But when you go out in the world, look for the job that you would take if you didn’t need a job.

I mean, don’t postpone that sort of thing. Somebody — I think it was Kierkegaard, said that, you know, life must be evaluated backwards but it must be lived forwards.

And you want to sort of — Charlie says all he wants to know is where he’ll die so he’ll never go there, you know. And so you — (Laughter)

You do want to do a certain amount of reverse engineering in life. I mean, that’s not — that doesn’t mean you can do everything that way.

But you really want to think about what will make you feel good, when you get older, about your life.

And you, at least generally, want to keep going in that direction. And, you know, you need some luck in life. And you got to accept some bad things that are going to happen as you go along.

But life has been awfully good to me and Charlie, so we have no complaints.

CHARLIE MUNGER: What you don’t want to be is like the man, when they held his funeral, and the minister said, “Now, it’s the time for somebody to say something nice about the deceased.” And nobody came forward. And nobody came forward.

He said, “Surely, somebody can say somebody — something nice — about the deceased.” And nobody came forward.

And finally, one man came up. And he said, “Well,” he said, “His brother was worse.”

WARREN BUFFETT: Yeah. (Laughter)

28. Buffett’s regret: “I wish I’d met Charlie earlier”

WARREN BUFFETT: OK. We’ll move to station 10 and see if we can improve on it. (Laughter)

AUDIENCE MEMBER: Hi. My name is Andy Lijun Lin from Loyal Valley Innovation Capital from Shanghai.

This is my sixth year from Shanghai to here. I have say — I have to say to you two, Warren and Charlie, you are highly respected and deeply loved by millions and millions, or even billions, globally.

I have two questions today. First question, in your letters to shareholders you said you believe EBITDA is not a good parameter to value a business. Why it’s not? Can you elaborate on that?

Second question, you both have very successful and happy lives with great respect. My question is to each of you. In retrospect, from a personal standpoint, do you have regrets in life?

If there is one thing you could have done differently in your life, family, personal, or business, what is it? Thank you very much.

WARREN BUFFETT: Yeah. I don’t think you should expect us to answer that on personal.

But in business, I would say I wish I’d met Charlie earlier. (Laughs)

We’ve had a lot of fun ever since I was 29 and he was 35. But it would’ve been even more fun if we’d started many, many years earlier. We had a chance to. We worked in the same grocery store but not at the same time.

29. Teaching the “delusion” of EBITDA is “horror squared”

WARREN BUFFETT: In respect to EBITDA, depreciation is an expense. And it’s the worst kind of an expense. You know, we love to talk about float. And float is where we get the money first and we have the expense later.

Depreciation is where you spend the money first, you know, and, then, record the expense later. And it’s reverse float. And it’s not a good thing.

And to have that enter into a multiple — it’s much better to buy a business that has, everything else being equal — has no depreciation because it has, essentially, no investment and fixed assets that makes X, than it is to buy a company where there’s a lot of depreciation in getting to X.

And I — actually, I may write a little bit more on that next year, just because it’s such a mass delusion. And, of course, it’s in the interests of Wall Street, enormously, to focus on something called EBITDA because it results in higher borrowing power, higher valuations, and all of that sort of thing.

So it’s become very popular in the last 20 years, but I — it’s a very misleading statistic that can be used in very pernicious ways.

Charlie, on either one of those subjects?

CHARLIE MUNGER: I think you’ve understated the horrors of the subject and the disgusting nature of the people that brought that term into the valuation of business. It was just —

It would be like a leasing broker of real estate who’s got a thousand square-foot new suite to be leased, and he says it’s got 2,000 feet in it. That’s not honorable behavior. And that’s the way that term got into common usage.

Nobody in his right mind would think that depreciation is not an expense.

WARREN BUFFETT: Yeah. It — but it’s very much in the interest of Wall Street.

CHARLIE MUNGER: Yes. That’s why —

WARREN BUFFETT: You —

CHARLIE MUNGER: — they did it.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: It made the multiple seem lower.

WARREN BUFFETT: And what’s amazing is the way it’s accepted, actually.

But anyway, it just illustrates how people use language, you know, and sell concepts that work to their own use.

And “2 and 20” has the same sort of thing. I mean, the number of people — the amount of money that’s overperformed after paying 2 and 20, compared to the expenses that have been incurred, I will assure you, makes for a terrible indictment of that particular arrangement.

But as long as it can get sold, it will get sold. And —

CHARLIE MUNGER: And, now, they use it in the business schools. Now, that is horror squared.

I mean — (laughter) — it’s bad enough that a bunch of thieves start using a term. But when it gets so common that the business schools copy it, that is not a — that’s not a good result.

WARREN BUFFETT: OK. (Applause)

30. “Nobody should be roadkill in this sort of society”

WARREN BUFFETT: Station 11.

AUDIENCE MEMBER: Good afternoon. I’m Whitney Tilson, a shareholder from New York.

My question is related to the ones asked earlier about job cuts. Perhaps, the only thing that makes American workers angrier than layoffs is to shut down an operation entirely and move the jobs overseas.

Ask anyone in Ohio or Michigan, and they’ll tell you stories about companies that have been operating in those states for decades, benefitting from the educational system, infrastructure and so forth, things that were paid for by local taxpayers.

But, then, some high-paid consultants came along and showed the company how it could reduce its costs by relocating production to Mexico or China. And poof, the good U.S. jobs disappeared.

My observation is that most investors and those in corporate America today worship at the altar of maximizing shareholder value, which is code for doing whatever is necessary to boost the share price as high as possible.

But in doing so, companies are taking actions that make millions of workers feel, at best, fearful and left behind and, at worst, deeply harmed by corporate America.

It makes so many people so angry that I think it’s testing the post-World War II economic order, which is rooted in free trade, and even the strength of our democracy. I’d argue that it was decisive in our last election.

So my question to you is, do you think that businesses should consider factors outside of pure economics when making these types of decisions? What obligations, if any, do they have to their employees and communities in which they operate?

And lastly, if a Berkshire CEO came to you and asked for your approval to close a U.S. operation and relocate it overseas to save money, what questions would you ask beyond the economics of this decision? Thank you.

WARREN BUFFETT: Yeah. Well, the truth is that — (applause) — in certain cases, production that would otherwise — that had formerly been in the United States has definitely been supplanted by production that comes from other parts of the world.

Originally — I was there when Fruit of the Loom was called Union Underwear and bought by Graham-Newman Corp in 1955, I believe. And it was probably all domestic then. And the truth is if it was all domestic now, it wouldn’t exist.

We had the same thing happen with Dexter Shoe. And it was a wonderful company and skilled workers. And in the end, if we sold the shoes at a price that yielded what they cost us, they were not competitive with shoes from around the world.

Trade, I would argue — both ways, export, import — massive trade should be — and is, actually — enormously beneficial both to the United States and the world. I mean, it will — it — greater productivity will benefit the world in a general way.

But to be roadkill, to be the textile worker in New Bedford that was put out of a job eventually, to be the shoe worker in Dexter — at Dexter to be — was put out of work, you know, is —

I mean, it would be no fun to go through life and say, “I’m doing this for the greater good and so that shoes or underwear will sell for five percent less,” or something, “and the American public will actually never know.”

So what you need is two things, in my view. You’ve got an enormously prosperous country. You’ve got almost $60,000 of GDP per capita. It’s unbelievable — six times what it was when I was born, in real terms.

So we’ve got the prosperity. And that prosperity is enhanced by trade. We were only exporting five percent of our GDP back in 1970, and that’s — I think it’s around 12 percent or something like that now.

We’re doing what we do best. But we need an educator-in-chief, logically the president — I don’t mean this specific president. I mean any president who’s been around for decades — has to be able to explain to the American public the overall benefits of, essentially, free trade.

And then, beyond that, we have to have policies that take care of the people that become the roadkill in the process.

Because it doesn’t make any difference to me if — as far as I’m concerned, if my life is miserable because I’ve been put out of business by something that’s good for 320-some million people in some infinitesimal way, and it’s messed up my life when I’ve tried to live it in a proper way.

So we have got the resources to take care of those people. The investors, I don’t worry about. I wrote about this a few years ago.

The investors can diversify their investments in such a way that, overall, trade probably benefits them and they don’t get killed by a specific industry condition.

But the worker, in many cases, can’t do that. You’re not going to retrain some 55-year-old worker in New Bedford who may not even speak English in our textile mill or something. I mean, they —

If they get destroyed by something that’s good for society, they get destroyed, unless government puts in some policies that takes care of people like that. And we’ve got a rich society that can do that. And we got a society that will benefit by free trade.

And I think we ought to try to hit both objectives of making sure that there is not roadkill and that, at the same time, we get — 320 million people — get the benefits of free trade. (Applause)

Charlie?

CHARLIE MUNGER: Well, I don’t quarrel with that. And we have unemployment insurance for that exact reason.

But I’m afraid that a capitalist system is always going to hurt some people as it modifies and improves. There’s no way to avoid it.

WARREN BUFFETT: Yeah. Well, capitalism is brutal to capital if you’re in the wrong businesses. And, like I say, you can diversify those results.

Capitalism is brutal to people that have the bad luck to be skilled or develop their skills for decades.

But a rich — a very rich society can actually — if it’s beneficial to society overall, it can take care of those people. I mean, it just — you know, the new tax —

The bill that was passed a couple days ago reduces my taxes, you know, by 17 percent. You know, and is that needed by the government or anything of the sort?

CHARLIE MUNGER: I wouldn’t start spending the money.

WARREN BUFFETT: No. And — (laughter) — but that was the will, I mean, of the —

No, I agree. I don’t think — who knows what happens with the bill? But I’m just — to have that happen, and I don’t think —

I think if you polled a thousand people in Omaha that were walking to a shopping center as to whether my tax bill had been cut by some very large sum because of what passed, I don’t think many people would have the faintest idea what happened, in terms of the coverage of it and all of that that took place.

So I — we’ve got — we do have — it’s probably more like 57- or $58,000 of GDP per capita — family of four, $230,000. But nobody should be roadkill in this sort of society —

CHARLIE MUNGER: Well, remember what Bismarck said: There are two things that nobody should have to watch. One is the making of the sausage. And the other is the making of legislation. (Laughter)

WARREN BUFFETT: Yeah. Well, I would say that somebody ought to watch. (Laughter)

Anyway, we’ve hit the magic hour of 3:30. We’ll reconvene at 3:45 to do — have a formal shareholders meeting.

And that may take a while. So, you’re welcome to stay and watch that. Or you’re welcome to shop. And I might even have a small preference of that. But go — do whatever you wish. OK. (Applause)

31. Formal business meeting begins

WARREN BUFFETT: OK. Let’s regroup.

If you’ll all take your seats, we’ll begin the formal meeting. And I’ll work from a script in this.

The meeting will now come to order. I’m Warren Buffett, chairman of the board of the directors of the company. I welcome you to this 2017 annual meeting of shareholders.

This morning, I introduced the Berkshire Hathaway directors that are present. Also with us today are partners in the firm of Deloitte and Touche, our auditors.

Sharon Heck is secretary of Berkshire Hathaway, and she will make a written record of the proceedings.

Becki Amick has been appointed inspector of elections at this meeting, and she will certify to the count of votes cast in the election for directors and the motions to be voted upon at this meeting.

The named proxy holders for this meeting are Walter Scott and Marc Hamburg.

Does the secretary have a report of the number of Berkshire shares outstanding —?

VOICES: (Inaudible)

WARREN BUFFETT: if you don’t mind, keep the lights on a little more so I can read this — outstanding, entitled to vote, and represented at the meeting?

SHARON HECK: Yes. I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 8th, 2017, the record date for this meeting, there were 770,994 shares of Class A Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at the meeting, and 1,310,304,247 shares of Class B Berkshire Hathaway common stock outstanding, with each share entitled to 1/10,000th of one vote on motions considered at the meeting.

Of that number, 538,915 Class A shares and 734,450,954 Class B shares are represented at this meeting by proxies returned through Friday afternoon, May 5th.

WARREN BUFFETT: Thank you, Sharon. That number represents a quorum and will therefore — we will therefore directly proceed with the meeting.

The first item of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott, who will place a motion before the meeting.

WALTER SCOTT: I move that the reading of the minutes of the last meeting of the shareholders be dispensed with and the minutes be approved.

WARREN BUFFETT: Do I hear a second?

RON OLSON: I second the motion.

WARREN BUFFETT: The motion has been moved and seconded. We will vote on the motion by voice vote. All those in favor say, “Aye.”

VOICES: Aye.

WARREN BUFFETT: I didn’t hear very many. But opposed? The motion is carried.

32. Election of Berkshire directors

WARREN BUFFETT: The next item of business is to elect directors. If a shareholder is present who did not send in a proxy or who wishes to withdraw a proxy previously sent in, you may vote in person on the election of directors and other matters to be considered at this meeting.

Please identify yourselves to one of the meeting officials in the aisle so that you can receive a ballot.

I recognize Mr. Walter Scott to place a motion before the meeting with respect to election of directors.

WALTER SCOTT: I move that Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Thomas Murphy, Ron Olson, Walter Scott, and Meryl Witmer be elected as directors.

WARREN BUFFETT: Is there a second?

RON OLSON: I second the motion.

WARREN BUFFETT: It’s been moved and seconded that Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Thomas Murphy, Ronald Olson, Walter Scott, and Meryl Witmer be elected as directors.

Are there any other nominations or any discussion?

The nominations are ready to be acted upon. If there are any shareholders voting in person, they should now mark the ballots on the election of directors and deliver their ballot to one of the meeting officials in the aisles.

Miss Amick, when you are ready, you may give your report.

BECKI AMICK: My report is ready. The ballot of the proxy holders in response to proxies that were received through last Friday afternoon cast not less than 601,375 votes for each nominee.

That number exceeds a majority of the number of the total votes of all Class A and Class B shares outstanding. The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Thank you, Miss Amick. Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Thomas Murphy, Ronald Olson, Walter Scott, and Meryl Witmer have been elected as directors.

33. Advisory vote on Berkshire’s executive compensation

WARREN BUFFETT: The next item on the agenda is an advisory vote on the compensation of Berkshire Hathaway’s executive officers. I recognize Mr. Walter Scott to place a motion before the meeting at this time.

WALTER SCOTT: I move that the shareholders of the company approve, on an advisory basis, the compensation paid to the company’s named executive directors as disclosed pursuant to Item 402 of Regulation S-K, including the compensation discussion and analysis, and the accompanying compensation tables, and the related narrative discussion, in the company’s 2017 annual meeting proxy statement.

WARREN BUFFETT: Is there a second?

RON OLSON: I second the motion.

WARREN BUFFETT: It has been moved and seconded that the shareholders of the company approve, on an advisory basis, the compensation paid to the company’s named executive officers.

Miss Amick, when you are ready you may give your report.

BECKI AMICK: My report is ready. The ballot of the proxy holders in response to proxies that were received through last Friday afternoon cast not less than 608,765 votes to approve, on an advisory basis, the compensation paid to the company’s named executive officers.

WARREN BUFFETT: Thank you, Miss Amick. The motion to approve, on an advisory basis, the compensation paid to the company’s named executive officers has passed.

34. Advisory vote on frequency of advisory compensation votes

WARREN BUFFETT: The next item on the agenda is an advisory vote on the frequency of a shareholder advisory vote on compensation of Berkshire Hathaway’s executive officers. I recognize Mr. Walter Scott to place a motion before the meeting on this item.

WALTER SCOTT: I move that the shareholders of the company determine, on an advisory basis, the frequency, whether annual, biannual, or triannual, with which they shall have an advisory vote on the compensation paid to the company’s named executives as set forth in the company’s 2017 annual meeting proxy statement.

WARREN BUFFETT: Is there a second?

RON OLSON: Second the motion.

WARREN BUFFETT: It has been moved and seconded that the shareholders of the company determine the frequency with which they shall have an advisory vote on compensation of named executive officers with the option being every one, two, or three years.

Miss Amick, when you are ready, you may give your report.

BECKI AMICK: My report is ready. The ballot of the proxy holders in response to proxies that were received through last Friday afternoon cast 131,268 votes for a frequency of every year, 1,954 votes for a frequency of every two years, and 476,661 votes for a frequency of every three years of an advisory vote on the compensation paid to the company’s named executive officers.

The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Thank you, Miss Amick. The shareholders of the company have determined, on an advisory basis, that they shall have an advisory vote on the compensation paid to the company’s named executive officers every three years.

35. Shareholder motion to disclose political contributions

WARREN BUFFETT: The next item of business is the motion put forth by Clean Yield Asset Management on behalf of shareholders, Tom Beers and Mary Durfee. The motion is set forth in the proxy statement.

The motion requests that the company provide a report on its political contributions. The directors recommended that the shareholders vote against the proposal.

I will now recognize Eileen Durry (PH) — I hope I’m pronouncing that right — to present the motion.

To allow all interested shareholders present their views, I ask to limit the — I ask to limit her remarks to five minutes.

And the microzone — the microphone at zone 1 is available for those wishing to speak for or against the motion. Zone 1 is the only microphone station in operation.

For the benefit of those present, I ask that each speaker for or against the motion, with the exception of the original proposer, limit themselves to two minutes and confine your remarks solely to the motion.

And do we have, at station 1, the representative of Clean Yield Management? Or, wait. Sorry. Clean Yield Asset Management.

EILEEN DURRY: Good afternoon, Mr. Chairman, board of directors, and my fellow shareholders.

My name is Eileen Durry. And I have been asked to read the following statement by the filers of this proposal, Tom Beers and Mary Durfee.

Our proposal, number four on the proxy ballot, calls on Berkshire Hathaway to fully disclose the extent of its political spending.

Why do we ask for this? Corporate political spending is a controversial activity that must be carefully managed and overseen at the most senior levels of management.

Mismanagement or misjudgment around political contributions can bring reputation damage, political risks, and legal consequences.

In recent years, at the urging of shareholders and other stakeholders, scores of companies have adopted stronger disclosure and better oversight of political contributions.

Best practices in this area include full disclosure of direct and indirect political contributions, descriptions of policies and procedures to ensure full legal compliance, and a commitment to board oversight.

But our company’s policies in this area are so nonexistent or hidden that they have earned it a score of zero for six years running on the leading rating system for corporate political disclosure and accountability, the CPA-Zicklin Index.

In contrast, 56 percent of the S&P make public a detailed policy governing political expenditures from corporate funds. Peers such as GE, Travelers, Unum, CSX, and Norfolk Southern disclose political spending.

In contrast, all we know about Berkshire’s political spending is contained in the two paragraph response to our proposal in this year’s proxy statement, which seeks to reassure us that Berkshire’s political spending is small, relative to its size.

But management’s statement raises more questions than it answers. It says nothing, for example, about whether Berkshire gives to third party, like trade associations and 501(c)(4)s, which are leading sources of dark money contributions that are nearly impossible to trace.

Since 2012, over $670 million in dark money was spent in the U.S. elections with no disclosure of who the underlying donors were.

Fellow shareholders, as you know, our company is a large and complicated enterprise. Berkshire Hathaway ranks number four in the Fortune 500.

At a time when the trend among large companies is to be more open about their political spending and their policies regarding dark money vehicles, it doesn’t behoove or benefit Berkshire Hathaway to be so secretive if it has nothing to hide. If you agree, please vote in favor of proposal number four.

WARREN BUFFETT: Thank you. Are there other people that wish to speak on the motion?

EILEEN DURRY: Not that I know of.

WARREN BUFFETT: OK. Thank you.

And I will tell you that, to my knowledge, in 52 years, Berkshire Hathaway, at the parent company level, has not made a political contribution. I don’t — I, personally, disagree strongly with the Citizens United decision, which was a five-to-four vote.

And I think that having unlimited contributions by wealthy individuals through super PACs and — or wealthy corporations — I do not think it’s a plus at all. And I think it’s a minus in our democracy. And I think that big money does — can often distort the political process.

It’s a reality that any of our subsidiaries in heavily regulated industries are probably going to have to make some political contributions. Their competitors do it.

And I tell our managers, basically, if they — I don’t want them making contributions on their own personal preferences in elections to be made from corporate funds. And I would regard that as a breach of trust with Berkshire.

But I do recognize that if they’re in the railroad industry, or the electric utility industry, or whatever it may be, that there is a necessity, essentially, to make political contributions. And I’m sure they give money to people that I wouldn’t vote for.

But that is a reality of doing business in certain businesses which have a significant political aspect to their activities.

So, I (inaudible) and my heart is with you to some extent, in terms of I wish Citizens United had gone the other way. I don’t like the idea of great sums being spent.

But I do not think we — I think it — personally, I think that it could be disadvantageous to actually list all of the political organizations to which people contribute when competitors don’t. And I think there’s expense involved in all three of the proposals that are coming up on this one.

So I, personally, voted against the proposition. But I do hope, like you, that money plays a lesser part in politics — big money — in the future — and undisclosed money — than it does now. And I don’t think the odds are good that the Supreme Court is going to reverse Citizens United.

So with that, I would say the motion is now ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballot on the motion and deliver their ballot to one of the meeting officials in the aisles.

Miss Amick, when you’re ready, you may give your report.

BECKI AMICK: My report is ready. The ballot of the proxy holders in response to proxies that were received through last Friday afternoon cast 64,449 votes for the motion and 542,399 votes against the motion.

The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Thank you, Miss Amick. The proposal fails.

36. Shareholder motion on methane emissions

WARREN BUFFETT: The next item of business is put forth by Baldwin Brothers Inc. on behalf of shareholder Marcia Sage. The motion is set forth in the proxy statement.

The motion requests that the company provide a report reviewing the company’s policies, actions, plans and reduction targets related to methane emissions from all operations. The directors have recommended that the shareholders vote against the proposal.

I will now recognize Eileen Durry to present the motion. To allow all interested shareholders to present their views, I ask her to limit her remarks to five minutes.

The microphone at zone 1 is available for those wishing to speak for or against the motion. Zone 1 is the only microphone station in operation.

For the benefit of those present, I ask that each speaker for and against — or against the motion — limit themselves to two minutes — although, Miss Durry, that’s five minutes in your case — and to confine your remarks solely to the motion.

EILEEN DURRY: Good afternoon, Mr. Chairman, members of the board, and fellow shareholders.

My name is Eileen Durry. I am here to move Arjuna Capital and Baldwin Brothers’ proposal on behalf of Marcia Sage, a long-term investor in our company.

Proposal five seeks to protect shareholder value by ensuring the transparent disclosure for information regarding methane emissions.

The reason for this proposal are clearly in the interest of protecting long-term shareholder value. Leaked gas has a direct economic impact on our company as it is no longer available for sale, establishing a clear business case for reduction targets and control processes.

In fact, leaked methane represented $30 billion of lost revenue in 2012, equivalent to three percent of gas produced globally.

The National Resources Defense Council estimates that capturing currently wasted gas for sale could reduce methane pollution by roughly 80 percent.

And while the climate benefit of replacing coal with natural gas has been widely publicized, that benefit is negated when leakage rates exceed 2.7 percent, as methane carries 84 times the global warming impact of CO2 over a 20-year period.

Recent academic studies are particularly troubling as they have identified methane leakage far north of current EPA estimates. Additionally, gas storage presents outsized risks.

The 2015 failure of a gas injection well at Southern California Gas Company’s Aliso Canyon storage field in Los Angeles revealed major vulnerabilities in the maintenance and safety of natural gas storage facilities. The incident exposed both a lack of oversight and contingency planning in the face of a well blowout.

Berkshire Hathaway has storage facilities that face similar risks as it is estimated to hold the 11th highest volume in natural gas in the country.

There are over 400 gas storage facilities around the country, many of which were drilled decades ago. Numerous independent researchers have concluded that if natural gas is to lead to a more sustainable energy future, then missing emissions must be addressed.

Ongoing concerns have spurred public debate and led to regulatory action at the state and federal level. A strong program of target-setting measurement, mitigation, and disclosure would indicate a reduction in regulatory risk as well as efficient operations maximizing gas for sale and shareholder value.

Given this, we believe our company has a tremendous opportunity to move forward by providing shareholders with this important information.

ISS, the leading provider of proxy voting advice, agrees and has a recommended a vote in favor, noting such disclosures would allow shareholders to better understand the company’s management of its methane emissions and any related risks. Thank you for your consideration.

WARREN BUFFETT: Are there other people who wish to speak on this motion?

EILEEN DURRY: I don’t believe so.

WARREN BUFFETT: OK. The motion is now ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballot on the motion and deliver their ballot to one of the meeting officials in the aisles. Miss Amick, when you’re ready, you may give your report.

BECKI AMICK: My report is ready. The ballot of the proxy holders in response to proxies that were received through last Friday afternoon cast 57,600 votes for the motion and 542,870 votes against the motion.

The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Greg, incidentally — is there a live microphone? You’re — yeah, there we — you might talk a little bit about the methane situation.

GREGORY ABEL: Sure, Warren. So thank you for your comments.

And when you think about methane emissions, it is a serious issue, relative to carbon. It was highlighted 84 times worse than a carbon emission. But I’d be very pleased to report on our situation at Berkshire Hathaway.

So, three different issues were raised in the comment. One was overall emissions from oil and gas production. So, the first thing I would just highlight is that we do not own any oil and gas producing assets. So we don’t have any wells and, effectively, don’t have that risk.

The second thing that was highlighted was the significant loss of gas at Aliso Canyon. It was a injection well that failed. Took many months to fix the well.

And if you fundamentally look at the problem there — and we do own other storage facilities, but we do not use their technology or that type of well. All of our wells are cased to the top which creates a very different risk and, literally, can be mitigated within hours.

And, then, the third issue which was raised was leakage rates. And it was highlighted, at least in a second response to the proposal, that the leading companies in the industry have a leakage rate of one percent, or they’ve put together programs to achieve a leakage rate of one percent.

And I’m happy to report, when we look at our leakage rate from our pipelines, we’re at 0.53 of one percent. So, basically, half of the leading companies in the industry. So that, obviously, support the recommendation of the shareholders. Thank you.

WARREN BUFFETT: Thanks, Greg. You’ve heard the vote. And the proposal fails.

37. Shareholder motion to divest fossil fuel holdings

WARREN BUFFETT: The next item of business is a motion put forth by a shareholder, the Nebraska Peace Foundation. The motion is set forth in the proxy statement. The motion requests that the company divest of its holdings in companies involved in the extracting, processing, or burning of fossil fuels.

The directors have recommended the shareholders vote against the proposal.

I will now recognize Mark Vasina to present the motion. And, again, to allow all interested shareholders to present their views, I asked him to limit his remarks to five minutes.

And the microzone at zone 1 is available for those wishing to speak for or against the motion. Zone 1 is the only microphone station in operation.

And for the benefit of those present, subsequent speakers should — I ask that they limit themselves to two minutes and confine your remarks solely to the motion. With that, if you’ll proceed.

MARK VASINA: Thank you. My name’s Mark Vasina. I represent the Nebraska Peace Foundation. We’re here to present our proposal asking Berkshire Hathaway to divest of its carbon-based assets over a period of 12 years, a period of time we believe is a very modest proposal indeed.

Last year, we were here with a proposal that Berkshire Hathaway evaluate and report on the impact of climate change on their insurance companies.

After our — after the meeting, we were approached by a number of shareholders who suggested we were pulling our punches. And they suggested the real question is divestiture. So we thought about it. We came back to ask for divestiture of the carbon-based assets.

We recognize that for a public company that’s involved in investing in other companies, divestiture represents different kinds of challenges from those of university endowments, pension plans, public foundations, such as the Bill and Melinda Gates Foundation — organizations which have divested or have implemented divestiture plans.

However, we believe that the necessity for divestiture involves more than just a social, ethical, or even moral question, but also involves financial risk.

As the Bank of England, in their recommendation to the insurance companies that they regulated, that they investigate and report on the climate change risk to these companies, they pointed out that financial risk of holding these carbon-based assets was real — unpredictable.

Things like regulatory risk, political risk, technology changes, investment — investor sentiment changes — these things pose risks towards the financial value of assets in this type of investment.

So we are proposing, as I said, divestiture of all carbon-based assets over 12 years.

I’m going to be followed by three prominent American climate scientists, Frank LaMere of the Winnebago tribe of Nebraska, and Richard Miller, Creighton University theologian. Thank you for giving us the opportunity to make our case for this proposal.

WARREN BUFFETT: Thank you. And we’ll proceed to the next speaker, please.

MICHAEL MANN: Chairman Buffett, board members and shareholders, my name is Michael Mann. I’m a professor at Penn State University and a climate scientist.

And as a scientist who spends much of my time communicating the reality and threat of climate change, it’s an honor to have this opportunity to speak to you today.

Warren Buffett, known as the Wizard of Omaha, is an inspiration to many, a symbol of the value of work ethic, self-made success, and the great reward that comes with foresight.

Now, foresight means recognizing both opportunity and risk. And when it comes to risk, there is no better example than climate change. I recently co-authored an article in the journal, “Scientific Reports,” for example, demonstrating that climate change played a key role in the onslaught of unprecedented, devastating droughts, floods, and heat waves in recent years.

And the impacts we’re seeing now are just the veritable tip of the iceberg. Carbon emissions must be brought down dramatically within the next few years if we are to avert the worst impacts of climate change.

Mr. Buffett coined the term “Noah’s Law” in his 2015 shareholder letter to describe the risk posed by climate change, stating, “If there is only a one percent chance the planet is heading toward a truly major disaster and delay means passing a point of no return, inaction now is foolhardy.”

Well, I couldn’t agree more. And the science tells us that we are heading toward disaster in the absence of substantial reductions in greenhouse gas emissions.

Board member Bill Gates demonstrated bold leadership a year ago when the Bill and Melinda Gates Foundation announced it was divesting of fossil fuel holdings.

Were Mr. Buffett to follow suit, it would send a profound message to the rest of the global business community, a message that we can both mitigate risk and seize opportunity in the form of massive growth in clean energy technology by tackling this problem now head-on before it’s too late. Thank you.

WARREN BUFFETT: Thank you. And I believe there’s another speaker or maybe two. If you’ll identify yourself, please.

RICHARD SOMERVILLE: My name is Richard Somerville. I’m a climate scientist and a professor at the University of California San Diego.

Chairman Buffett, board and shareholders, the world is warming. It is due to human activities. It is getting worse. The observational evidence is overwhelming.

All the warmest years, globally, are recent years. We see the weather changing. We see more severe floods and droughts. Sea level rise is accelerating. Ice sheets and glaciers are shrinking worldwide.

Climate change will become more and more serious unless emissions of heat-trapping gases and particles are quickly and drastically reduced.

The biggest unknown about future climate is human behavior. Everything depends on what humanity does now. We have our hands on the thermostat that controls the climate of our children and grandchildren.

In 2015, the nations of the world agreed in Paris on how much warming can safely be allowed. The Paris target was informed by science. And the science shows that to meet the target, emissions need to be reduced drastically and quickly.

We cannot just muddle through. Dithering and procrastinating lead to catastrophe. Alleviating the disruption of climate change is cheap compared to coping with the damage that unmitigated climate change will cause.

Want an example? Doing nothing about climate change means that sea level will become so high that coastal cities must eventually be abandoned.

We caused this problem. We can solve it. And polls show that most Americans want strong actions to limit climate change.

The forces driving clean energy are powerful. The market is turning against fossil fuels. The prices of solar and wind energy are dropping. They can already compete without subsidies. Vehicle electrification is happening fast.

Clean energy provides jobs and economic growth. Progress and prosperity do not require emitting heat-trapping gasses.

Berkshire Hathaway and Warren Buffett are rightly admired and respected worldwide. Helping the world confront climate change should be an important part of their legacy. We owe it to our children and grandchildren. Thank you.

WARREN BUFFETT: Thank you. I believe there’s one more speaker. (Applause)

DAVID TITLEY: Thank you, sir. I am David Titley, retired rear admiral, former oceanographer of the Navy and now a professor of practice at Penn State.

I’ve been a shareholder of Berkshire Hathaway since December of 2000. Thank you, sir, for your leadership of this enterprise.

When I was stationed at the Pentagon, I had the privilege of working directly for the Pentagon’s foremost strategic planner, Mr. Andrew Marshall.

He taught me how to think about risk, and especially risks that may seem distant or low probability, but one with very high impact, such as weapons of mass destruction. Climate change is a fat tail, emerging risk.

It’s really a risk to people, to us. And when this risk is not managed, we have a security problem.

One example would be Syria. Climate is one of the links in a long chain of events that led to the tragic outcome. Non-climate events, such as over a million refugees pouring into Syrian cities from the Iraq War, stress Syrian governance.

Then, about a decade ago, an exceptionally intense drought and heat spell, linked with high confidence to a changing climate, devastated Syrian agriculture. Now, you have millions of desperate people with nothing and a breeding ground for extremists.

Syria is an example of why, in the security community, we say that climate change accelerates the risks of instability. It can make bad places worse, a lot worse.

Senior military officers know you must address risks and take precautions while you can, before it’s too late. The U.S. Defense Department understands the risks of climate change. And it’s been working quietly to adapt to the changing climate for years.

Winston Churchill is alleged to have said, “Americans can always be counted upon to do the right thing after exhausting every other possibility.” But we will prevail. And you, sir, can help.

Here’s my ask. What are government and business leaders doing to stabilize the climate? We should reduce rather than accept the risks of unchecked climate change because the ice doesn’t care which party controls the White House or the Congress. It just melts. Thank you. (Applause)

FRANK LAMERE: I am Frank LaMere, of the Bear Clan of the Winnebago Tribe of Nebraska.

It was the indigenous people of this continent who first consecrated the ground on which we live and grow, who offered up prayers and petitions asking that we be allowed to live and to provide a way for the generations to come.

In exchange for the blessings given by the creator, our forbearers agreed to be good stewards of the land. The stewardship of our Mother Earth, who provides for us, has now changed. But the covenant remains the same. Let there be no mistake about that.

If we continue to disrespect our earth mother, those things given us, bountiful harvest, protection from the elements and good, clean water will surely be taken from us. Our elders speak of this. It has been foretold.

On Christmas Eve, my son came from Standing Rock to visit us for one hour. His mother and I worried about him. “How is it there? Why did you go?” I asked. He said, “It is dangerous, dad. But someone has to protect our water.”

I nodded and said, “Ahoo! That is good.” He is a water protector. I stand on his shoulders. Mni wiconi. The protectors proclaim water is life.

Bearing that in mind, I am told that this waterway flowing south from Standing Rock and passing just a short walk from here would be fouled by any kind of breach in the Dakota Access Pipeline.

My sense and my years tells me that this will happen. Millions would be poisoned.

I’m further told that this collective body holds a 15 percent interest in the — an oil company that is a 25 percent shareholder in the Dakota Access Pipeline.

I would ask that you walk away from that investment, stand with Mother Earth today.

I’m a Winnebago Indian. The Missouri River brought us here when we had no place to go.

We stand with our Mother Earth now as she stood with us. Think about that. Mni wiconi. Water is life. Pinagigi. Thank you.

WARREN BUFFETT: Thank you. (Applause)

RICHARD MILLER: Dear Chairman Buffett, board members and shareholders.

I am Richard Miller. I am an associate professor of philosophical theology and sustainability studies at Creighton University. I write and teach on ethical issues raised by the climate crisis.

As a rationale for voting no on the divestment resolution, the board maintained that Berkshire should not limit its universe of potential investments based upon complex social and moral issues, and that following state and federal laws was sufficient to meet your obligations.

There is not only an overwhelming consensus in the scientific community about the reality and dangers of climate change, but there is also an overwhelming consensus among all major ethical theories that is one not morally justified to use increased profit as a rationale for doing harm to others.

By continuing to invest in, and thus promote, the extracting, processing, and burning of fossil fuels, Berkshire is doing harm to people around the world and creating conditions that will threaten future generations.

While one is not morally justified to use increased profits as a rationale for doing harm to others, one cannot also opt out of ethical considerations by appealing to moral complexity. When you’re doing harm to others, especially at that — this scale, there is no neutral space.

Nor can you simply appeal to the fact that Berkshire is following state and federal laws when those laws are, themselves, unethical in that they allow the United States to violate the human rights of people around the world and set in motion catastrophic future for young people.

The consensus among ethical theories will, in due time, become self-evident to the average person, analogous to the way slavery, as an evil, is self-evident today.

Indeed, the recognition of the immorality of investing in fossil fuels is rapidly gaining ground as more and more institutions divest their fossil fuel holdings.

Mr. Buffett, you’re standing on an ethical house of cards. It is only a matter of time before it comes tumbling down.

Like the thousands gathered here and the millions on live stream, I admire your considerable achievements. But I am afraid that if you do not change course very soon, history will not judge you kindly. Thank you for your time.

WARREN BUFFETT: OK. Thank you. (Applause)

The motion is now ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the motion and deliver their ballots to one of the meeting officials in the aisles.

Miss Amick, when you’re ready, you may give your report.

BECKI AMICK: My report is ready. The ballot of the proxy holders in response to proxies that were received through last Friday afternoon cast 7,784 votes for the motion and 594,044 votes against the motion.

The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Thank you, Miss Amick. The proposal fails. And Mr. Scott, do you have a motion?

WALTER SCOTT: I move the meeting be adjourned.

WARREN BUFFETT: Is there a second?

RON OLSON: I second the motion.

WARREN BUFFETT: The motion to adjourn has now been made and seconded. We will vote by voice. Any discussion, if not, all in favor say, “Aye.”

VOICES: Aye.

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2017 Berkshire Hathaway Annual Meeting (Morning) Transcript

1. Welcome and introductions

WARREN BUFFETT: Thank you, and good morning.

That’s Charlie. I’m Warren. (Laughter)

You can tell us apart because he can hear and I can see. That’s why we — (laughter) — work together so well. We each have our specialty.

I’d like to welcome you to — we’ve got a lot of out-of-towners here, and I’d like to welcome you to Omaha. It’s a terrific — (Applause)

Thank you.

It’s a terrific city. And Charlie’s lived in California now for about 70 years, but he’s still got a lot of Omaha in him.

Both of us were born within two miles of this building that you’re in. And Charlie — as he mentioned [in the pre-meeting movie] in his description of his amorous triumphs in high school — Charlie graduated from Central High, which is about one mile from here. It’s a public school.

And my dad, my first wife, my three children and two of my grandchildren have all graduated from the same school.

In fact, my grandchildren say they’ve had the same teachers that my dad — (Laughter)

The — but it’s a great city. I hope you get to see a lot of it while you’re here.

And in just a minute we will start a question period — hopefully a question and answer period that will last till about noon, and then we’ll take a break for an hour or so. We’ll reconvene at one. And then we’ll go — continue with the question and answer period till 3:30.

And then we’ll break for 15 minutes or so. And then we’ll convene the annual meeting of Berkshire, which I — we have three propositions that people wish to speak on, so that could last perhaps as long as an hour.

Before we start, I’d like to make a couple of introductions, the first being Carrie Sova, who’s been with us about seven years. And can we have a light on Carrie? I think she — Carrie, are you there? (Applause)

Carrie. Stand up, Carrie, come on. (Laughter and applause)

Carrie puts on this whole program. She came to us about seven years ago and a few years ago I said, “Why don’t you just put on the annual meeting for me?” And she handles it all. And she has two young children.

And she has dozens and dozens and dozens of exhibitors that she works with and, as you can imagine, with all of what we put on and all of the numbers of you that come, the hotels and the airlines and the rental cars and everything, she does it as if, you know, she could do that and be juggling three balls at the same time.

She’s amazing, and I want to thank her for putting on this program for us. And — (Applause)

I also would like to welcome and have you welcome our directors.

They will be voted on later, so I’ll do this alphabetically. They’re here in the front row. And if we could just have the spotlight drop on them as they’re introduced.

And alphabetically, is Howard Buffett, Steve Burke, Sue Decker, Bill Gates, Sandy Gottesman, Charlotte Guyman, we have Charlie Munger next to me, Tom Murphy, Ron Olson, Walter Scott, and Meryl Witmer. Yeah. (Applause)

One more introduction I’m going to make, but I’ll save that for just a minute.

2. First quarter earnings

WARREN BUFFETT: And our earnings report was put out yesterday.

The — as we regularly explain, the realized investment gains or losses in any period really mean nothing. I mean, they —

We could take a lot of gains if we wanted to. We could take a lot of losses if we wanted to. But we don’t really think about the timing of what we do at all, except in relation to the intrinsic value of what we’re buying or selling. We are not —

We do not make earnings forecasts. And we have — on March 31st, we have over $90 billion of net unrealized gains. So if we wanted to report almost any number you can think of and count capital gains as part of the earnings, we could do it.

So in the first quarter — and I would say that we have a very, very, very slight preference this year, if everything else were equal — well, it’s true in any year, but it’s a little more so this year — we would rather take losses than gains, because of the tax effect if two securities were equally valued.

And there’s probably just one touch more of emphasis on that this year, because we are taxed on gains at 35 percent, which means we also get the benefit — the tax benefit — at 35 percent of any losses we take.

And I would say that there’s some chance of that rate being lower, meaning that losses would have less tax value to us after this year than they would have this — after this year than this year.

That is not a big deal, but it would be a very slight preference. And it may get to be more of a factor in deferring any gains, and perhaps accelerating any losses, as the year gets closer to December 31st, assuming — and I’m making no predictions about it — but assuming that there were to be a tax act that had the effect of reducing the earnings.

So in the first quarter, insurance underwriting was the swing factor. And the — there’s a lot more about this in our 10-Q, which you can look up on the internet.

And you really, if you’re seriously interested in evaluating our earnings or our businesses, you should go to the 10-Q, because the summary report, as we point out every quarter, does not really get to a number of the main points of valuation.

I would just mention two factors in connection with the insurance situation, which I love.

In the first four months — not the first three months — but the first four months, GEICO’s had a net gain of 700,000 policy holders, and that’s the highest number I can remember.

There may have been a figure larger than that somewhere in the past. I did not go back and look at them all. But last year I believe that figure was like 300,000.

And this has been a wonderful period for us at GEICO, because several of our major competitors have decided — and they publicly stated this — in fact one of them just reiterated it the other day — although they’ve now changed their policy — but they intentionally cut back on new business because new business carries with it a significant loss in the first year. There’s just costs of acquiring new business.

Plus the loss ratio, strangely enough, on first-year business tends to run almost 10 points higher than on renewal business. And so not only do you have acquisition costs, but you actually have a higher loss ratio.

So when you write a lot of new business, you’re going to lose money on that portion of the business that year.

And we wrote a lot of new business, and at least two of our competitors announced that they were lightening up for a while on new business, because they did not want to pay the penalty of the first-year loss.

And, of course, that’s made to order for us, so we just put our foot to the floor and tried to write as much business — good business — as we can. And there are costs to that.

A second factor — well, it was not a factor in the P&L — but an important event in the first quarter is that we increased our float.

And on the slide, I believe it shows that year-over-year, 16 billion. Fourteen billion of that came in the first quarter of this year, so we had a $14 billion increase in float.

And for some years I’ve been telling you it’s going to be hard to increase the float at all, and I still will tell you the same thing.

But it’s nice to have $14 billion or more, which is one reason, if you look at our 10-Q, you will see that our cash and cash equivalents, including Treasury bills, now has come to well over 90 billion.

So I think I feel very good about the first quarter, even though our operating earnings were down a little bit.

One quarter means nothing. I mean, over time, what really counts is whether we’re building the value of the businesses that we own.

And I’m always interested in the current figures, but I’m always dreaming about the future figures.

3. Tribute to Vanguard’s Jack Bogle

WARREN BUFFETT: There’s one more person I would like to introduce to you today, and I’m quite sure he’s here. I haven’t seen him, but I understood he was coming. There’s a — I believe that he’s made it today. And that is Jack Bogle, who I talked about in the annual report.

Jack Bogle has probably done more for the American investor than any man in the country. (Applause)

And Jack, would you stand up? There he is. (Applause)

Jack Bogle, many years ago, he wasn’t the only one that was talking about an index fund, but he — it wouldn’t have happened without him.

I mean, Paul Samuelson talked about it. Ben Graham even talked about it.

But the truth is, it was not in the interest of invest — of the investment industry of Wall Street. It was not in their interest, actually, to have the development of an index fund — the index fund — because it brought down fees dramatically.

And, as we’ve talked about some in the reports, and other people have commented, index funds, overall, have delivered for shareholders a result that has been better than Wall Street professionals as a whole.

And part of the reason for that is that they’ve brought down the costs very significantly.

So when Jack started, very few people — certainly Wall Street did not applaud him, and he was the subject of some derision and a lot of attacks.

And now we’re talking trillions when we get into index funds, and we’re talking a few basis points when we talk about investment fees, in the case of index funds, but still hundreds of basis points when we talk about fees elsewhere.

And I estimate that Jack, at a minimum, has saved — left in the pockets of investors, without hurting them overall in terms of performance at all — gross performance — he’s put tens and tens and tens of billions into their pockets. And those numbers are going to be hundreds and hundreds of billions over time.

So, it’s Jack’s 88th birthday on Monday, so I just say happy birthday, Jack, and thank you on behalf of American investors. (Applause)

And Jack, I’ve got great news for you.

You’re going to be 88 on Monday, and in only two years you’ll be eligible for an executive position at Berkshire. (Laughter)

Hang in there, buddy. (Laughter)

4. Q&A begins

WARREN BUFFETT: OK. We’ve got a panel of expert journalists on this side, and expert analysts on that side, and expert shareholders in the middle. And we’re going to rotate, starting with the analysts. And some who are here I have a — here we go. And we will — we’ll do this through the afternoon.

After we — if we get through 54 questions, which would be six for each journalist, six for each analyst, and 18 more for the audience, then we will go strictly to the audience.

I don’t think I’ve got any information as to what the situation is on overflow rooms. But we’ll go to at least one of them.

But let’s start off with Carol Loomis of Fortune Magazine, the longest serving employee in the history of Time Inc., I believe, with 60 years. And Carol, go to it. (Applause)

5. Loomis asks for Berkshire-related questions

CAROL LOOMIS: Thank you. Thanks from all of us journalists up here.

I know that there are many, many people out there who have sent us questions that aren’t going to get answered. And I just want to say that it’s very hard to get a question answered.

The one thing I could suggest is that you follow Warren’s thought in the annual report, that he wants everybody to go away from this meeting more educated about Berkshire than they were when they came.

And one way you can do that is keep your questions quite directly Berkshire-related or relating to the annual letter. Even then it will be hard to get your question answered.

The three of us only have 18 questions in total, but I encourage you to think in the Berkshire-related direction when you’re submitting a question next year.

6. Wells Fargo didn’t act quickly enough to stop bad behavior

CAROL LOOMIS: Now, my first question. It’s about Wells Fargo, which is Berkshire’s largest equity holding — 28 billion at the end of the year. And this question comes from a shareholder who did not wish to be identified.

“In the wake of the sales practices scandal that last year engulfed Wells Fargo, the company’s independent directors commissioned an investigation and hired a large law firm to assist in carrying it out.

“The findings of the investigation, which were harsh, have been released in what is called the Wells Fargo Sales Practices Reports.” You can find it on the internet.

“It concludes that a major part of the company’s problem was that, and I quote, ‘Wells Fargo’s decentralized corporate structure gave too much autonomy to the community banks’ senior leadership,′ end of quote.

“Mr. Buffett, how do you satisfy yourself that Berkshire isn’t subject to the same risk, with its highly decentralized structure and the very substantial autonomy given to senior leadership of the operating companies?”

WARREN BUFFETT: Yeah, it’s true that we at Berkshire probably operate on as — we certainly operate on a more decentralized plan than any company of remotely our size.

And we count very heavily on principles of behavior rather than loads of rules.

It’s one reason at every annual meeting you see that Salomon description. And it’s why I write very few communiqués to our managers, but I send them one once every two years and it basically says that we’ve got all the money we need. We’d like to have more, but we’re — it’s not a necessity.

But we don’t have one ounce of reputation more than we need, and that our reputation at Berkshire is in their hands.

And Charlie and I believe that if you establish the right sort of culture, and that culture, to some extent, self-selects who you obtain as directors and as managers, that you will get better results that way in terms of behavior than if you have a thousand-page guidebook.

You’re going to have problems regardless. We have 367,000, I believe, employees. Now, if you have a town with 367,000 households, which is about what the Omaha metropolitan area is, people are doing something wrong as we talk here today. There’s no question about it.

And the real question is whether the managers at — [audio drops out] — are in a better — are worrying and thinking about finding and correcting any bad behavior, and whether, if they fail in that, whether the message gets to Omaha, and whether we do something about it.

At Wells Fargo, you know, there were three very significant mistakes, but there was one that dwarfs all of the others.

You’re going to have incentive systems at any business — almost any business. There’s nothing wrong with incentive systems, but you’ve got to be very careful what you incentivize. And you can’t incentivize bad behavior. And if so, you better have a system for recognizing it.

Clearly, at Wells Fargo, there was an incentive system built around the idea of cross-selling and number of services per customer. And the company, in every quarterly investor presentation, highlighted how many services per customer. So, it was the focus of the organization — a major focus.

And undoubtedly, people got paid and graded and promoted based on that number — at least partly based on that number.

Well, it turned out that that was incentivizing the wrong kind of behavior.

We’ve made similar mistakes. I mean any company’s going to make some mistakes in designing a system.

But it’s a mistake. And you’re going to find out about it at some point. And I’ll get to how we find out about it.

But the biggest mistake was that — and I don’t know — obviously don’t know all the facts as to how the information got passed up the line at Wells Fargo.

But at some point, if there’s a major problem, the CEO will get wind of it. And that is — at that moment, that’s the key to everything, because the CEO has to act.

That Salomon situation that you saw happened because of — on April, I think, 28th, the CEO of Salomon, the president of Salomon, the general counsel of Salomon, sat in a room and they had described to them, by a fellow named John Meriwether, some bad practice, terrible practice, that was being conducted by a fellow named Paul Mozer, who worked for them.

And Paul Mozer was flimflamming the United States Treasury, which is a very dumb thing to do. And he was doing it partly out of spite, because he didn’t like the Treasury and they didn’t like him. So he put in phony bids for U.S. Treasurys and all of that.

So on April 28th, roughly, the CEO and all these people knew that they had something that had gone very wrong, and they had to report it to the Federal Reserve Board in New York — the Federal Reserve Bank of New York.

And the CEO, John Gutfreund, said he would do it, and then he didn’t do it. And he undoubtedly put it off just because it was an unpleasant thing to do.

And then on May 15th, another Treasury auction was held, and Paul Mozer put in a bunch of phony bids again.

And at this point, it’s all over, because the top management had known ahead of time, and now a guy that was a pyromaniac had gone out and lit another fire. And he lit it after they’d been warned that he was a pyromaniac, essentially.

And it all went downhill from there. It had to stop when the CEO learns about it.

And then they made a third mistake, actually, but again, it pales in comparison to the second mistake.

They made a third mistake when they totally underestimated the impact of what they had done once it became uncovered, because they — there was a penalty of 185 million. And in the banking business, people get fined billions and billions of dollars for mortgage practices and all kinds of things.

The total fines against the big banks, I don’t know whether the total’s 30 or 40 or a billion or whatever the number may be.

So, they measured the seriousness of the problem by the dimensions of the fine. And they thought $185 million fine signaled a less offensive practice than something involved 2 billion, and they were totally wrong on that.

But the main problem was they didn’t act when they learned about it. It was bad enough having a bad system, but they didn’t act.

At Berkshire, we have — the main source of information for me about anything that’s being done wrong at a subsidiary is the hotline. Now, we got 4,000 or so hotline reports — or that come — we get communications on the hotline — perhaps 4,000 times a year.

And most of them are frivolous. You know, the guy next to me has bad breath or something like that. I mean it’s — (laughter) — but there are a few serious ones, and the head of our internal audit, Becki Amick, looks at all those. People — a lot of them come in anonymous, probably most of them.

And some of them, she refers back to the companies, probably most of them. And — but anything that looks serious, you know, I will hear about, and that has led to action — well, put it, more than once.

And we’ve spent real money investigating some of those. We put special investigators, sometimes, on them. And, like I say, it has uncovered certain practices that we would not at all condone at the parent company.

I think it’s a good system. I don’t think it’s perfect. I don’t know what — I’m sure they’ve got an internal audit at Wells Fargo, and I’m sure they’ve got a hotline.

And I don’t know the facts, but I would just have to bet that a lot of communications came in on that, and I don’t know what their system was for getting them to the right person. And I don’t know who did what at any given time.

But that was — it was a huge, huge, huge error if they were getting — and I’m sure they were — getting some communications and they ignored them, or they just sent them back down to somebody down below.

Charlie? You’ve followed it. What are your thoughts on it?

CHARLIE MUNGER: Well, put me down as skeptical when some law firm thinks they know how to fix something like this.

If you’re in a business where you have a whole a lot of people under incentives very likely to cause a lot of misbehavior, of course you need a big compliance department.

Every big wirehouse stock brokerage firm has a huge compliance department. And if we had one, we would have a big compliance department too, wouldn’t we, Warren?

WARREN BUFFETT: Absolutely.

CHARLIE MUNGER: Absolutely, but doesn’t mean that everybody should try and solve their problems with more and more compliance.

I think we’ve had less trouble over the years by being more careful in whom we pick to have power and having a culture of trust. I think we have less trouble, not more.

WARREN BUFFETT: But we will have trouble from time to time.

CHARLIE MUNGER: Yes, of course. We’ll be blindsided someday.

WARREN BUFFETT: Charlie says an ounce of prevention — he said when Ben Franklin, who he worships, said, “An ounce of prevention is worth a pound of cure,” he understated it. An ounce of prevention is worth more than a pound of cure.

And I would say a pound of cure, promptly applied, is worth a ton of cure that’s delayed. It — problems don’t go away.

John Gutfreund said that problem, originally, was — he called it a traffic ticket. He told the troops there at Salomon it was a traffic ticket. You know, and it almost brought down a business.

Some other CEO, that they described the problem that he’d encountered as a foot fault. You know, and it resulted in incredible damage to the institution.

And so you’ve got to act promptly. And frankly, I don’t know any better system than hotlines and anonymous letters to me. I get anonymous letters. And I’ve gotten three or four of them probably in the last six or seven years that have resulted in major changes.

And very, very occasionally they’re signed. Almost always they’re anonymous, but it wouldn’t make any difference, because there were — will be no retribution against anybody, obviously, if they call our attention to something that’s going wrong.

But I will tell you, as we sit here, somebody is doing — quite a few people — are probably doing something wrong at Berkshire, and usually, it’s very limited. I mean maybe stealing small amounts of money or something like that.

But when it gets to some sales practice like was taking place at Wells Fargo, you can see the kind of damage it would do.

7. Driverless vehicles would hurt BNSF and GEICO

WARREN BUFFETT: We will now shift over to the analysts and Jonny Brandt.

JONATHAN BRANDT: Hi, Warren. Hi, Charlie. Thanks for having me.

You’ve addressed the risk of driverless cars to GEICO’s business. But it strikes me that driverless trucks could narrow the cost advantage of railroads, even if the number of crew members in a locomotive eventually declines from two to zero.

Is autonomous technology more of an opportunity or more of a threat for the Burlington Northern?

WARREN BUFFETT: Oh, I would say that driverless trucks are a lot more of a threat than an opportunity — (laughs) — to the Burlington Northern.

And I would say that if driverless cars became pervasive, it would only be because they were safer. And that would mean that the overall economic cost of auto-related losses had gone down, and that would drive down the premium income of GEICO.

So, I would say both of those — and autonomous vehicles — widespread — would hurt us if they went — if they spread to trucks, and they would hurt our auto insurance business.

I think my personal view is that they will certainly come. I think they may be a long way off, but that will depend. It’ll probably, frankly, depend on experience in the first early months of the introduction in other than test situations.

And if they make the world safer, it’s going to be a very good thing, but it won’t be a good thing for auto insurers.

And similarly, if they learn how to move trucks more safely, there’s a — tends to be driver shortages in the truck business now — it obviously improves their position vis-à-vis the railroads.

Charlie?

CHARLIE MUNGER: Well, I think that’s perfectly clear. (Laughter)

WARREN BUFFETT: Finally, approval. All these years. (Laughter)

8. Buying See’s Candies from someone who preferred “girls and grapes”

WARREN BUFFETT: OK. Station 1. The shareholder.

AUDIENCE MEMBER: Hi, Warren and Charlie. My name is Bryan Martin and I’m from Springfield, Illinois.

In the HBO documentary, “Becoming Warren Buffett,” you had a great analogy comparing investing to hitting a baseball and knowing your sweet spot.

Ted Williams knew his sweet spot was a pitch right down the middle. When both of you look at potential investments, what attributes make a company a pitch in your sweet spot that you’ll take a swing at and invest in?

WARREN BUFFETT: Well, I’m not sure I can define it in exactly the terms you would like, but the — we sort of know it when we see it.

And it would tend to be a business that, for one reason or another, we can look out five, or 10, or 20 years and decide that the competitive advantage that it had at the present would last over that period.

And it would have a trusted manager that would not only fit into the Berkshire culture, but that was eager to join the Berkshire culture. And then it would be a matter of price.

But the main — you know, when we buy a business, essentially, we’re laying out a lot of money now based on what we think that business will deliver over time. And the higher the certainty with which we make that prediction, the better off — the better we feel about it.

You can go back to the first — it wasn’t the first outstanding business we bought, but it was kind of a watershed event — which was a relatively small company, See’s Candy.

And the question when we looked at See’s Candy in 1972 was, would people still want to be both eating and giving away that candy in preference to other candies?

And it wouldn’t be a question of people buying candy for the low bid. And we had a manager we liked very much. And we bought a business that was — paid $25 million for it, net of cash, and it was earning about 4 million pretax then. And we must be getting close to $2 billion or something like that, pretax, that was taken out of it.

But it was only because we felt that people would not be buying, necessarily, a lower-price candy.

I mean it does not work very well if you go to your wife or your girlfriend on Valentine’s Day — I hope they’re the same person — (laughter) — and say, you know, “Here’s a box of candy, honey. I took the low bid.” You know, it doesn’t — it loses a little as you go through that speech.

And we made a judgment about See’s Candy that it would be special and — probably not in the year 2017 — but we certainly thought it would be special in 1982 and 1992. And fortunately, we were right on it. And we’re looking for more See’s Candies, only a lot bigger.

Charlie?

CHARLIE MUNGER: Yeah, well, but it’s also true that we were young and ignorant then. And —

WARREN BUFFETT: Now we’re old and ignorant. Yeah. (Laughter)

CHARLIE MUNGER: And yes, that’s true, too.

And the truth of the matter is that it would have been very wise to buy See’s Candy at a slightly higher price. You know if they’d asked it, we wouldn’t have done it, so we’ve gotten a lot of credit for being smarter than we were.

WARREN BUFFETT: Yeah, and to be more accurate, if it had been 5 million more, I wouldn’t have bought it. Charlie would have been willing to buy it, so, yeah.

Fortunately, that we didn’t get to the point where we had to make that decision that way. But he would’ve pushed forward when I probably would’ve faded.

It’s a good thing that a guy came around — actually the seller was the — well, he’s the grandson of Mrs. See, wasn’t he, Charlie? He was Larry See’s son. Am I correct? Or Larry See’s brother.

But he was not interested in the business. And he was interested in — more interested in girls and grapes, actually. And he almost changed his mind. Well, he did change his mind about selling.

And I wasn’t there, but Rick Guerin told me that Charlie went in and gave a — an hour talk on the merits of girls and grapes over having a candy company. (Laughter)

This is true, folks. And the fellow sold to us, so that — (laughter) — I pull Charlie out in emergencies like that. He’s — (Laughter)

CHARLIE MUNGER: We were very lucky that, early, the habit of buying horrible businesses because they were really cheap. It gave us a lot of experience trying to fix unfixable businesses as they headed downward toward doom.

And that early experience was so horrible, fixing the unfixable, that we were very good at avoiding it, thereafter. So, I would argue that our early stupidity helped us.

WARREN BUFFETT: Yeah, yeah. We learned we could not make a silk purse out of a sow’s ear.

CHARLIE MUNGER: No, we learned —

WARREN BUFFETT: So, we went out looking for silk after that.

CHARLIE MUNGER: But you have to try it for a long time and fail and have rub — have your nose rubbed in it to really understand it.

9. “There are going to be marauders” at the moat

WARREN BUFFETT: OK, Becky? Becky Quick.

BECKY QUICK: This question comes from a shareholder named Mark Blakley in Tulsa, Oklahoma, who says, “There has been more news than usual in some of Berkshire’s core stock holdings.

“Wells Fargo in the incentive and new account scandal, American Express losing the Costco relationship and playing catch-up in the premium card space, United Airlines and customer service issues, Coca-Cola and slowing soda consumption.

“How much time is spent reviewing Berkshire’s stock holdings? And is it safe to assume, if Berkshire continues to hold these stocks, that the thesis remains intact?”

WARREN BUFFETT: Well, we spend a lot of time think — those are very large holdings. If you add up American Express, Coca-Cola, and Wells Fargo, I mean, you’re getting up, you know, well into the high tens of billions of dollars. And those are businesses we like very much. There’re different characteristics.

In the case of — you mentioned United Airlines, we actually are the largest holder of all four of the — we’re the largest holder of the four largest airlines. And that is much more of an industry thought.

But all businesses have problems. And some of them have some very big plusses.

I personally — you mentioned American Express. If you read American Express’s first quarter report and talk about their Platinum Card, the Platinum Card is doing very well.

The gains around the world. You know, I think there were 17 percent or something like that in billings in the U.K. and 15 percent is original currency — or the local currency — Japan, Mexico, and very good in the United States.

There’s competition in all these businesses. If we thought — we did not buy American Express or Wells Fargo or United Airlines, Coca-Cola, with the idea that they would never have problems or never have competition.

What we did buy — why we did buy them — is we thought they had very, very strong hands. And we liked the financial policies in the cases of many of them. We liked their position.

We’ve bought a lot of businesses. And we do look to see where we think they have durable competitive advantage.

And we recognize that if you’ve got a very good business, you’re going to have plenty of competitors that are going to try and take it away from you. And then you make a judgment as to the ability of your particular company and product and management to ward off competitors.

They won’t go away, but the — we think — I’m not going to get into specific names on it — but those companies generally are very well-positioned.

I’ve likened essentially — if you’ve got a wonderful business, even if it was a small one like See’s Candy, you basically have an economic castle. And in capitalism, people are going to try and take away that castle from you.

So, you want a moat around it, protecting it in various ways that can protect it. And then you want a knight in the castle that’s pretty darn good at warding off marauders. But there are going to be marauders. And they’ll never go away.

And if you look at — I think Coca-Cola was 1886. American Express was 18 — I don’t know — ’51 or ’52 — starting out with an express business.

Wells Fargo was — I don’t know what year they were started. Incidentally, I — American Express was started by [Henry] Wells and [William] Fargo as well.

So these companies had lots of challenges. And they’ll have more challenges. And the companies we own have had challenges.

Our insurance business has had challenges. But, you know, we started with National Indemnity’s $8 million purchase in 1968. And fortunately, we’ve had people like Tony Nicely at GEICO. And we’ve had Ajit Jain, who’s added tens of billions of value.

And we’ve got some smaller companies that you probably don’t even know about, but really have done a terrific job for us.

So there’ll always be competition in insurance, but there’ll always be things to do that a really intelligent management with a decent distribution system, various things going for him, can do to ward off the marauders.

So I — there was a specific question, “How much time is spent reviewing the holdings?” I would say that I do it every day. I’m sure Charlie does it every day.

Charlie?

CHARLIE MUNGER: Well, I don’t think I had anything to add to that, either. (Laughter)

WARREN BUFFETT: We’ll cut his salary if he doesn’t participate here. (Laughter)

10. “We think we’ll do well” with AIG reinsurance deal

WARREN BUFFETT: OK, Jay Gelb.

JAY GELB: This question is on Berkshire’s retroactive reinsurance deal with AIG, which was the largest ever of its kind.

Based on AIG’s track record of reserve deficiencies and the opportunity for Berkshire to invest the float, what is your level of confidence that this contract covering up to $20 billion of AIG’s reserves in return for $10 billion of premiums will ultimately be profitable for Berkshire?

WARREN BUFFETT: Well, at the time we do every deal, I think it’s smart. And then sometimes — (laughs) — I find out otherwise as we go along.

The deal, that Jay knows, but might be unfamiliar to many people, is that AIG transferred to us the liability for 80 percent of 25 billion — excess — of 25 billion.

In other words, they had to pay the first 25 billion. And then on the next 25 billion, we had to pay 80 percent of what they paid up to a limit of 20 billion, 80 percent of 25. And we got paid $10.2 billion for that.

And we had — and this applies to their losses in many classes of business written — or earned — before December 31st, 2015.

So Ajit Jain, who has made a lot more money for Berkshire than I — for you — than I have, but he evaluates that sort of transaction.

We talk about it a fair amount ourselves. I just find it interesting. I particularly find the 10.2 billion that they’re going to give us interesting.

And the — we come to the conclusion that we think we’ll do well by getting 10.2 billion today with a maximum payout of 20 billion over some — I mean, between now and judgment day — on this large piece of business.

AIG had very good reasons for doing this, because their reserves had been under criticism. And this essentially — probably — and should have, I think — put to bed the question of whether they were underreserved on that business. And we get the 10.2 billion.

And the question is how fast we pay out the money and how much money we pay out. And Ajit does 99 percent of the thinking on that. And I do one percent. And we project out what we think will happen.

And we know whatever our projection is, that it will be wrong, but we try to be conservative.

And we’ve done a fair amount of these deals. This is the largest. The second largest was a creature that was formed out of Lloyd’s of London some years ago.

And we’ve been wrong on one transaction that involved something over a billion of premium. I mean clearly wrong.

And there are a couple of others that may or may not work out depending on what you assume we have earned on the funds. But they’re OK.

But they probably didn’t come out as well as we thought they would, though. But overall, we’ve done OK on this.

It’s less OK when we’re sitting around with 90-plus billion of cash. So the incremental 10.2 billion we took in in the first quarter is earning us peanuts at the moment. And peanuts is not what fits into the formula for making this an attractive deal.

So we have — we do have to assume we’ll find uses of the money, but the money will be with us quite a while. And I think our calculations are on the conservative side. They are not the identical calculations that AIG makes. I mean, we come up with our own estimate of payouts and all of that.

And I think it — actually, I think it was quite a good transaction from AIG’s standpoint. Because they did take 20 billion of potential losses off for 10.2 billion.

And I think they satisfied the investing community that they were quite unlikely to have adverse development in the period prior to 2015 that was not accounted for by this transaction.

Charlie?

CHARLIE MUNGER: Well, I think it’s intrinsically a dangerous kind of activity. And — but that’s one of its attractions. I don’t think there are any two people in the world that are better at this kind of transaction than Ajit and Warren.

And nobody else has had the experience we’ve had. Just get me in a lot more of those businesses and I’ll accept a little extra worry.

WARREN BUFFETT: There’s one thing I should mention, too, that we actually were the only insurance operation in the world that would write that sort of a contract and that — where it would be satisfactory to the other party.

I mean, when somebody hands you $10.2 billion and says, “I’m counting on you to pay 20 billion back, even if it’s 50 years from now, on the last dollar,” there are very few people that they’d want to hand 10.2 billion to. And there —

So it’s a — there’s limited people on the other side. I mean, there’s not that many people remotely that have that kind of size deal. But —

CHARLIE MUNGER: “Very few” is a good expression. He means “one.” (Laughter)

WARREN BUFFETT: Yeah.

11. “A life properly lived is just learn, learn, learn”

WARREN BUFFETT: OK. We’ll go to station 2.

AUDIENCE MEMBER: Hello, Mr. Buffett, Mr. Munger. My name’s Grant Gibson (PH). I’m from Denver, Colorado, and this is my fifth consecutive year here. So thank you for having us.

WARREN BUFFETT: Thanks for coming.

AUDIENCE MEMBER: Appreciate it. With all due respect, Mr. Buffett, this question is for Mr. Munger. (Laughter)

In your career of thousands of negotiations and business dealings, could you describe for the crowd which one sticks out in your mind as your favorite or is otherwise noteworthy?

CHARLIE MUNGER: Well, I don’t think I’ve got a favorite. But the one that probably did us the most good as a learning experience was See’s Candy.

It’s just the power of the brand, the unending flow of ever-increasing money with no work. (Laughter)

AUDIENCE MEMBER: Sounds nice. (Laughter)

CHARLIE MUNGER: It was. And I’m not sure we would have bought the Coca-Cola if we hadn’t bought the See’s.

I think that a life properly lived is just learn, learn, learn all the time. And I think Berkshire’s gained enormously from these investment decisions by learning through a long, long period.

Every time you appoint a new person that’s never had big capital allocation experience, it’s like rolling the dice. And I think we’re way better off having done it so long. And —

But the decisions blend, and the one feature that comes through is the continuous learning. If we had not kept learning, you wouldn’t even be here.

You’d be alive probably, but not here. (Laughter)

WARREN BUFFETT: There’s nothing like the pain of being in a lousy business — (laughs) — to make you appreciate a good one.

CHARLIE MUNGER: Well, there’s nothing like getting into a really good one that’s a very pleasant experience and it’s a learning experience.

I have a friend who says, “The first rule of fishing is to fish where the fish are. And the second rule of fishing is to never forget the first rule.” (Laughter)

And we’ve gotten good at fishing where the fish are.

WARREN BUFFETT: Yeah, that’s only metaphorically.

CHARLIE MUNGER: There’re too many other —

WARREN BUFFETT: I went to fish with Charlie one time. He didn’t get —

CHARLIE MUNGER: There are too many other boats in the damn water. (Laughter)

But the fish are still there.

WARREN BUFFETT: Yeah, we bought a department store in Baltimore in 1966. And there’s really nothing like being in an experience of trying to decide whether you’re going to put a new store in a area that hasn’t really developed yet enough to support it, but your competitor may move there first.

And then you have the decision of whether to jump in. And if you jump in, that kind of spoils it. Now you’ve got two stores where even one store isn’t quite justified.

How to play those games — those business games — is — you learn a lot by trying. And what you really learn is which ones to avoid.

I mean, it — you just stay out of a bunch of terrible businesses, you’re off to a very great start, as far as — because we’ve tried them all.

CHARLIE MUNGER: But you can really learn, because the experience is a lot like eating cuttle (PH) burgers. And it really gets your attention. (Laughter)

WARREN BUFFETT: Well, we won’t expand on that. (Laughter)

12. Making mistakes with IBM, Google, and Amazon

WARREN BUFFETT: Andrew Ross Sorkin.

ANDREW ROSS SORKIN: Good morning, Warren.

This question comes from a long-time shareholder who I should tell you accosted me last night in the lobby of the Hilton Hotel with this question.

“Warren, for years, you stayed away from technology companies, saying they were too hard to predict and didn’t have moats. Then you seemed to change your view about technology when you invested in IBM, and again when you recently invested in Apple.

“But then on Friday you said IBM had not met your expectations and sold a third of our stake.

“Do you view IBM and Apple differently? And what have you learned about investing in technology companies?”

WARREN BUFFETT: Well, I do view them differently. But, you know, obviously, when I bought the IBM — started buying it six years ago — I thought it would do better in the six years that have elapsed than it has.

And Apple — I regard them as being in quite different businesses. I think Apple is much more of a consumer products business, in terms of the — in terms of sort of analyzing moats around it, and consumer behavior, and all that sort of thing.

It’s obviously a product with all kinds of tech built into it. But in terms of laying out what their prospective customers will do in the future, as opposed to, say, IBM’s customers, it’s a different sort of analysis.

That doesn’t mean it’s correct. And we’ll find out over time. But they are two different types of decisions.

And I was wrong on the first one, and we’ll find out whether I’m right or wrong on the second. But I do not regard them as apples and apples, and I don’t quite regard them as apples and oranges, but they’re — it’s somewhat in between on that.

Charlie?

CHARLIE MUNGER: Well, we avoided the tech stocks, because we felt we had no advantage there and other people did. And I think that’s a good idea not to play where the other people are better.

But, you know, if you ask me, in retrospect, what was our worst mistake in the tech field, I think we were smart enough to figure out Google. Those ads worked so much better in the early days than anything else.

So I would say that we failed you there. And we were smart enough to do it and didn’t do it. We do that all the time, too.

WARREN BUFFETT: Yeah. We were their customer very early on with GEICO, for example. And we saw — I don’t — these figures are way out of date, but I — as I remember, you know, we were paying them 10 or 11 dollars a click or something like that.

And any time you’re paying somebody 10 or 11 bucks every time somebody just punches a little thing where you’ve got no cost at all, you know, that’s a good business, unless somebody’s going to take it away from you.

And so we were close up, seeing the impact of that.

And incidentally, if any of you don’t have anything to do in your hotel rooms tonight, just keep punching Progressive or something. And — (Laughter)

Don’t really do that. (Laughter)

The thought just happened to cross my mind. The — (Laughter)

But, you know, that is — and you’ve never seen a business — almost never seen a business — like it, where —

And I think for LASIK surgery and things like that, I think the figures were, you know, 60 or 70 bucks a click with no incremental — no cost.

So — and I knew the guys. I mean, they actually designed their prospectus. They came to see me. And they — a little bit after the original one, when they went public, a little bit after Berkshire even. And so I had plenty of ways to ask questions or anything of the sort, educate myself. But I blew it — (laughs) — and —

CHARLIE MUNGER: We blew Walmart, too. When it was a total cinch, we were smart enough to figure that out and we didn’t.

WARREN BUFFETT: Yeah, figuring out — execution is what counts. So — (Laughs)

Anyway, we’ll — and I could be making two mistakes on IBM. I mean, the — you know, they’re — they —

It’s harder to predict, in my view, the winners in various items, or how much price competition will enter in to something like cloud services and all of that.

I will — I made a statement the other day, which it’s really remarkable, and I was — I asked Charlie whether he could think of a situation like it — where one person has built an extraordinary economic machine in two really pretty different industries, you know, almost simultaneously, as has happened —

CHARLIE MUNGER: From a standing start at zero.

WARREN BUFFETT: From a standing start at zero, with other — with competitors with lots of capital and everything else.

To do it in retailing and to do it with the cloud, like Jeff Bezos has done, I mean, I —

People like the Mellons invested in a lot of different industries and all of that. But he has been, in effect, the CEO, simultaneously, of two businesses starting from scratch that if — you know, Andy Grove used to use — at Intel — used to say, you know, “Think about if you had a silver bullet and you could shoot it at — and get rid of one of your competitors, who would it be?”

Well, I think that both in the cloud and in retail, there are a lot of people that would aim that silver bullet at Jeff.

And he’s done — it’s a different sort of game — but he’s, you know, at The Washington Post, he’s played that hand as well as anybody I think possibly could.

So it’s a remarkable business achievement, where he’s been involved, actually, in the execution, not just bankrolling it, of two businesses that are probably as feared by their competitors, almost, as any you can find.

It’s — Charlie, you got further thoughts?

CHARLIE MUNGER: Well, we’re sort of like the Mellons, old-fashioned people who done all right. And Jeff Bezos is a different species. (Laughter)

WARREN BUFFETT: And we missed it entirely, incidentally. We never owned a share of Amazon. (Laughs)

13. Buffett defends investing in competitive airline industry

WARREN BUFFETT: OK, Gregg Warren.

GREGG WARREN: Warren, my question relates to some recent stock purchases as well.

Unlike the railroads, which benefit from colossal barriers to entry due to their established, practically impossible to replicate, networks of rail and rights of way, the airline industry seems to have few, if any advantages.

Even with the consolidation we’ve seen during the past 15 years, the barriers to entry are few and the exit barriers are high.

The industry also suffers from low switching cost and intense pricing competition, and is heavily exposed to fuel costs, with rising fuel prices being difficult to pass on, and declining fuel prices leading to more price competition.

Compare this with rail customers who have few choices and thus wield limiting buying power, and where fuel charges allow the industry to mitigate fuel price fluctuations.

While you’ve noted several times since the airline stock purchases were announced that the two industries are quite different and that comparisons should not be made to Berkshire’s move into railroads a decade ago, could you walk us through what convinced you that the airlines were different enough this time around for Berkshire to invest close to $10 billion in the four major airlines?

Because it would seem to me that UPS, which you have a small stake in, and FedEx, both of which have wider economic moats built on more identifiable and durable competitive advantages, would be a better option for long-term investors.

WARREN BUFFETT: Yeah, the decision in respect to airlines had no connection with our being involved in the railroad business.

I mean, you can classify them, you know, maybe in — as transportation businesses or something. But it had no connection, had no more connection than the fact we own GEICO or, you know, any other business.

You couldn’t pick a tougher industry, you know, ever since Orville [Wright] went up and I said, you know, that if anybody’d really been thinking about investors, they should have had Wilbur [Wright] shoot him down and save everybody a lot of money for a hundred years.

You can go to the internet and type in “airlines” and “bankrupt,” and you’ll see that something like a hundred airlines — in that general range, you know, gone bankrupt in the last few decades.

And actually, Charlie and I were directors for some time of USAir. And people write about how we had a terrible experience in USAir. It was the — one of the dumbest things I’d ever done. And there’s a lot of —

CHARLIE MUNGER: You made a fair amount of money out of it, too.

WARREN BUFFETT: Yeah, and we made a lot of money out of it. (Laughs)

CHARLIE MUNGER: It was undeserved.

WARREN BUFFETT: But we made a lot of money out of it, because there was one little brief period when people got all enthused about USAir. And after we left as directors and after we sold our position, USAir managed to go bankrupt twice in the subsequent period.

I mean, you’ve named all of the — not all of them — but you’ve named a number of factors that just make for terrible economics.

And I will tell you that if capacity — you know, it’s a fiercely competitive industry. The question is whether it’s a suicidally competitive industry, which it used to be.

I mean, when you get virtually every one of the major carriers, and dozens and dozens and dozens of minor carriers going bankrupt, you know, it ought to come upon you, finally, that maybe you’re in the wrong industry.

It has been operating for some time now at 80 percent or better of capacity — being available seat miles — and you can see what deliveries are going to be and that sort of thing.

So if you make — I think it’s fair to say that they will operate at higher degrees of capacity over the next five or 10 years than the historical rates, which caused all of them to go broke.

Now the question is whether, even when they’re doing it in the 80s, they will do suicidal things in terms of pricing, remains to be seen.

They actually, at present, are earning quite high returns on invested capital. I think higher than either FedEx or UPS, if you actually check that out.

But that doesn’t mean — tomorrow morning, you know, if you’re running one of those airlines and the other guy cuts his prices, you cut your prices, and as you say, there’s more flexibility when fuel goes down to bring down prices than there is to raise prices when prices go up.

So the industry, you know — it is no cinch that the industry will have some more pricing sensibility in the next 10 years than they had in the last hundred years. But the conditions have improved for that.

They’ve got more labor stability than they had before, because they’re basically all going to — they’ve been through bankruptcy.

And they’re all going to sort of have an industry pattern bargaining, it looks to me like. They’re going to have a shortage of pilots to some degree. But it’s not like buying See’s Candy.

Charlie?

CHARLIE MUNGER: No, but the investment world has gotten tougher with more competition, more affluence, and more absolute obsession with finance throughout the whole country. And we picked up a lot of low-hanging fruit in the old days, where it was very, very easy. And we had huge margins of safety.

Now we operate with a less advantageous general climate. And maybe we have small statistical advantages, where in the old days it was like shooting fish in a barrel.

But that’s all right. It’s OK if it gets a little harder after you get filthy rich. (Laughter)

WARREN BUFFETT: Yeah. Charlie’s more philosophical than I am on that point. (Laughter)

CHARLIE MUNGER: Well, I can’t bring back the low-hanging fruit, Warren. You’re just going to have to keep reaching for the higher branches.

WARREN BUFFETT: Gregg, the — I don’t — I think the odds are very high that there are more revenue passenger miles five years from now or 10 years from now.

If the airlines — if the airline companies are only worth, five or 10 years from now, what they’re worth now, in terms of equity, we’ll get a pretty reasonable rate of return, because they’re going to buy in a lot of stock at fairly low multiples.

So if the company’s worth the same amount at the end of the year and there’s fewer shares of stock outstanding, over time we make decent money. And all four of the major airlines are buying in stock at a —

CHARLIE MUNGER: You’ve got to remember that the railroads were a terrible business for decades and decades and decades and then they got good.

WARREN BUFFETT: Yeah, it — we like — I like the position. Obviously, by buying all four, it means that it’s very hard to distinguish who will do the — at least in my mind — it’s hard to distinguish who will do the best.

I do think the odds are quite high that, if you take revenue passenger miles flown five or 10 years from now, it will be a higher number. And that will be —

There’ll be low-cost people who come in. And, you know, the Spirits of the world and JetBlues, whatever it may be. But the — my guess is that all four of the companies we have will have higher revenues. The question is what their operating ratio is.

They will have fewer shares outstanding by a significant margin. So even if they’re worth just what they’re worth today, we could make a fair amount of money. But it is no cinch, by a long shot.

14. Coca-Cola and Buffett get “Black Planet Award”

WARREN BUFFETT: OK, station 3.

AUDIENCE MEMBER: Good morning, everybody. My name is Savilla Aliance (PH). I’m from Germany. And I’m member of board of Ethecon Foundation Ethics and Economy.

I’m very happy that I can put my question here. And maybe you are not as happy as I am to listen to it.

WARREN BUFFETT: (Laughs) Well, we’ll try to stay happy. Thank you for coming. (Laughter)

AUDIENCE MEMBER: Thank you. Mr. Buffett, a few years ago, I saw a movie in which you proclaimed that the print on the dollar bill — “In God We Trust” — does not really express your philosophy. In your opinion, only cash counts. And your credo is, “in the dollar I trust.” You obviously thought —

WARREN BUFFETT: I don’t think I’ve ever said that actually. But —

AUDIENCE MEMBER: Well, I can show you the movie. (Laughs) That will prove.

WARREN BUFFETT: Oh, well, I — send me a clip. I —

AUDIENCE MEMBER: Well, maybe it was just joking. But always behind a joke there is also a truth. So — well, you laughed heartily at that moment.

You, as one of the most richest men in — of all times on this Earth, are you not a good-humored, friendly, elderly gentleman?

Whatever motivated those who designed the dollar notes, they certainly wanted to say that there is something higher than the value of this printed paper.

Regrettably, you have shown many times in your life that you see this differently. You have accumulated billions of dollars — (applause) — showed extraordinary cleverness and skill, and you knew — you knew better to pick up than many others who, like you, used the rules which are inherent to capitalism for their own intentions.

But have you ever given a thought to what troubles and sacrifices, slavery and destruction of Mother Earth, and even diseases and deaths stick to the dollar bills which you gather so eagerly? (Booing)

Let’s take Coca-Cola. (Booing)

Ethecon Foundation Ethics and Economy from Germany has awarded the Black Planet Award to the members of the board of directors as well as to the large shareholders, Warren Buffett and Allen — and Herbert Allen —because you are co-responsible for all of what makes these group make so much money, isn’t it?

Among other things, Coca-Cola deprives people —

WARREN BUFFETT: Well, I —

AUDIENCE MEMBER: — of their drinking water —

WARREN BUFFETT: — at some point, yeah, I —

AUDIENCE MEMBER: — in drought-prone areas of the world.

WARREN BUFFETT: Well, are you asking a question?

AUDIENCE MEMBER: And many (inaudible) contaminate the groundwater in these areas.

WARREN BUFFETT: I don’t want to interrupt you, but are you — (applause) — making a speech or asking a question?

AUDIENCE MEMBER: Well, I put my question right now.

WARREN BUFFETT: OK, good.

AUDIENCE MEMBER: Will you give up your Coca-Cola shares if the destruction of the environment, the monopolization of the right to healthy drinking water, and the shameless exploitation of the workers continue?

CHARLIE MUNGER: Well, that’s more of a speech than a question.

WARREN BUFFETT: Yeah. (Applause)

I don’t think that quote you had earlier — I have — I’ve said once or twice that it should say “In the Federal Reserve We Trust” because they print the money. And if they print too much of it, it could decline in value.

But I’ve never — to my knowledge, I’ve never said anything like you originally said.

And I would say this. I think I’ve been eating things I like to eat all my life. And Coca-Cola — this Coca-Cola’s 12 ounces, I drink about five a day. (Laughter) It has about 1.2 ounces of sugar in it.

And if you look at what people — different people — get their sugar and calories from, they get them from all kinds of things. I happen to believe that I like to get 1.2 ounces with this. And it’s enjoyable.

Since 1886, people have found it pleasant. And I would say that if you pick every meal in terms of what somebody in some recent publication has told you is the very best for you, I offer you that. I say, “Go to it.”

But if you told me that I would live one year longer. And I don’t even think that — that I would live one year longer if I’d eaten nothing but broccoli and asparagus and everything my Aunt Alice wanted me to eat all my life or I could eat everything I enjoyed eating, including chocolate sundaes, and Coca-Cola, and steak, and hash browns, you know, I would rather eat what — in a way I enjoy for my whole life than — and — than, you know eat some other way and live another year. (Applause)

And I do think that choice should be mine, you know? If somebody decides sugar is harmful, you know, there — maybe you’d encourage the government to ban sugar. But sugar in Coca-Cola is not different than eating sugar, you know, put on my Grape-Nuts in the morning or whatever else I’m having.

So I think Coca-Cola’s been a very, very positive factor in America for — and the world — for a long, long time. And you can look at a list of achievements of the company. (Applause)

And I really don’t want anybody telling me I can’t drink it.

Charlie?

CHARLIE MUNGER: Well, I’ve solved my Coca-Cola problem by drinking Diet Coke. And I swill the stuff like other people swill I don’t know what. And I’ve been doing it for just as long as you’ve been taking all those Coca-Colas that — I’ve had breakfast with Warren when he has Coca-Colas and nuts. (Laughter)

WARREN BUFFETT: And pretty damn good too. (Laughter)

CHARLIE MUNGER: If you keep doing that, Warren, you may not make a hundred.

WARREN BUFFETT: Well — (laughter) — I think there’s something in longevity to feeling happy about your life, too. It’s not —

CHARLIE MUNGER: Absolutely. (Applause)

15. Intrinsic value projections depend on interest rates

WARREN BUFFETT: OK, Carol?

CAROL LOOMIS: This question is from Franz Tramberger (PH) of Austria. And it concerns intrinsic value, which is neither — Warren may rather — he may amend this, my definition here, but — which is neither a company’s accounting value nor its stock market value, but is rather its estimated real value.

So the question is, “At what rate has Berkshire compounded intrinsic value over the last 10 years? And at what rate, including your explanation for it please, do you think intrinsic value can be compounded over the next 10 years?”

WARREN BUFFETT: Yeah. Intrinsic value, you know, can only be calculated — or gains — you know, in retrospect.

But the intrinsic value pure definition would be the cash to be generated between now and Judgment Day, discounted at an interest rate that seems appropriate at the time. And that’s varied enormously over a 30 or 40-year period.

If you pick out 10 years, and you’re back to May of 2007, you know, we had some unpleasant things coming up. But we’ve — I would say that we’ve probably compounded it at about 10 percent.

And I think that’s going to be tough to achieve, in fact almost impossible to achieve, if we continued in this interest rate environment.

That’s the number one — if you asked me to give the answer to the question, if I could only pick one statistic to ask you about the future before I gave the answer, I would not ask you about GDP growth. I would not ask you about who was going to be president.

I would — a million things — I would ask you what the interest rate is going to be over the next 20 years on average, the 10-year or whatever you wanted to do.

And if you assume our present interest rate structure is likely to be the average over 10 or 20 years, then I would say it’d be very difficult to get to 10 percent.

On the other hand, if I were to pick with a whole range of probabilities on interest rates, I would say that that rate might be — it might be somewhat aspirational. And it might well — it might be doable.

And if you would say, “Well, we can’t continue these interest rates for a long time,” I would ask you to look at Japan, you know, where 25 years ago, we couldn’t see how their interest rates could be sustained. And we’re still looking at the same thing.

So I do not think it’s easy to predict the course of interest rates at all. And unfortunately, predicting that is embedded in giving a good answer to you.

I would say the chances of getting a terrible result in Berkshire are probably as low as about anything you can find. Chance of getting a sensational result are also about as low as anything you can find. So if I — I would — I —

My best guess would be in the 10 percent range, but that assumes somewhat higher interest rates — not dramatically higher — but somewhat higher interest rates in the next 10 or 20 years than we’ve experienced in the last seven years.

Charlie?

CHARLIE MUNGER: Well, there’s no question about the fact that the future, with our present size is, in terms of percentages of rates of return, is going to be less glorious than our past. And we keep saying that. And now we’re proving it. (Laughter)

WARREN BUFFETT: Do you want to end on that note, Charlie? Or would you care to — (Laughter)

CHARLIE MUNGER: Well, I do think Warren’s right about one thing. I think we have a collection of businesses that on average has better investment values than, say, the S&P average. So I don’t think you shareholders have a terrible problem.

WARREN BUFFETT: And I would say we probably — well, I’m certain — we have — we do have more of a shareholder orientation than the S&P 500 as a whole. I mean, for — you know, the —

This company has a culture where decisions are made for — as an owner, as a private owner would make them. And frankly, that’s a luxury we have that many companies don’t have. I mean, they’re under pressures today, sometimes, to do things.

One of the questions I ask the CEO of every public company that I meet is, “What would you be doing differently if you owned it all yourself?” And the answer, you know, is usually this, that, and a couple of other things.

If you would ask us, the answer is, you know, we’re doing exactly what we would do if we owned them all — all the stock ourselves. And I think that’s a small plus over time.

Anything further, Charlie? (Applause)

CHARLIE MUNGER: I think we have one other advantage. A lot of other people are trying to be brilliant. And we’re just trying to stay rational. And — (laughter and applause) — it’s a big advantage. Trying to be brilliant is dangerous, particularly when you’re gambling.

16. Who benefits from corporate tax cut varies by industry

WARREN BUFFETT: OK, Jonathan?

JONATHAN BRANDT: If corporate tax rates are reduced meaningfully, Berkshire will enjoy a one-time boost to book value because of its sizable deferred tax liability, and its go-forward earnings should be higher, too, at least in theory.

How much of the reduced tax rate will be passed along to Berkshire’s customers through, for instance, lower electricity rates or lower railroad shipping rates? And how much will go to Berkshire shareholders?

WARREN BUFFETT: Yeah, the question is, in the case of our utility businesses, all benefit of lower tax rates goes to customers. And it should be, because we are allowed a return on equity — in general — I mean, I’m simplifying a little bit. But the —

We’re allowed a return on equity that’s computed on an after-tax basis. And the utility commissions would, if taxes were raised, would presumably give us higher rates to compensate for that.

And if taxes are lowered, they would say, “You’re not entitled to make more money just because tax rates — on equity — because tax rates have been lowered.” So forget about the utility portion of the deferred taxes.

The deferred taxes that are applicable to our unrealized gains in securities, we would get all the benefit of. Because I mentioned we had 90 billion-plus of unrealized gains. And if the rates were changed on those in either direction, our owners, dollar for dollar, will participate in that.

And then you get into the other businesses. You mentioned the railroad, but it can be all of our other businesses.

To some extent, if tax rates are lowered, to different degrees in different industries, depending on the number of players, the competitive conditions, some of it may — some if it almost certainly gets competed away. And some of it would likely not be competed away.

And that’s — you know, economists can argue about that a lot. But I’ve seen it in action in a lot of cases.

You got a big decline in rates, for example, in the U.K. And we’ve had them over my lifetime. We had 52 percent corporate rates. You know, we’ve had a lot of different numbers.

So I have seen how behavior — economic behavior — works. And I would say that it’s certain that some of any lower rate would be competed away. And it’s virtually certain that some would enure to the benefit of the shareholders. And it’s very industry and company specific in how that plays out.

Charlie?

Well, we — dollar for dollar, I mean, there’s 90 or 95 billion, if the rate were to drop 10 percent, that 9 1/2 billion is — by 10 percentage points — that 9 1/2 billion’s real.

On the other hand, if it goes up as it did — went up from 28 to 35 percent, they can take it away from us, too.

CHARLIE MUNGER: Well, I think it’s true that we’re peculiar in one way. If things go to hell in a handbasket and then get better later, we’re likely to do better than most others.

And we don’t wish for that. And we don’t want our company to have to suffer through it. And we fear what might happen if the country went through the ringer like that.

But if that real adversity comes, we’re likely to do better in the end. We’re good at navigating through that kind of stuff.

WARREN BUFFETT: Yeah, and occasionally, there will be —

CHARLIE MUNGER: A lot — in fact, we’re quite good at it. (Laughter)

WARREN BUFFETT: There will be occasional hiccups in the American economy. Doesn’t have much to do with who’s president or anything like that. Those people may get blamed or given credit for different things.

But it’s just — it is the nature of market systems to occasionally go haywire in one direction or another. And it’s been ever thus, you know, and it’ll be ever thus.

It’s not — it does not have a — there’s not a — it’s not a — on a regular sine wave-type picture or anything of the sort. But it’s certain to happen from time to time.

And we will probably have a fair amount of money and credit at that time. And we certainly —

We’re not affected. When the rest of the world is fearful, we know America’s going to come out fine. And we will not have a trouble — any trouble — psychologically, acting at all.

And then the question is how much do we have in the way of resources? We’ll also never put the company in any kind of risk just because we see a lot of opportunities. We’ll grab all the ones we can that we can handle. And not lose a day of sleep.

(Someone shouts in the audience)

I didn’t quite get that. But —

17. Why Buffett sold his used Cadillac for a profit

WARREN BUFFETT: In any event, we will now go to station 4. And if the person yelling — are we up there in station — are you on station 4?

AUDIENCE MEMBER: Yes, Dr. Bruce Hertz from Glenview, Illinois. I wanted to thank you for allowing me to attend. I feel both honored and blessed.

My question for Mr. Buffett is, you’ve always advised us to purchase equities that appreciate in value. Yet a few years ago you sold your used Cadillac at a tremendous profit. (Laughter)

How can you justify selling a depreciating asset for a significant profit? Thank you.

WARREN BUFFETT: Yeah, well — (laughter) — actually I gave it to Girls Inc. And they sold it. And it was kind of an interesting — (Applause)

A very nice guy bought it for a hundred and some thousand dollars. And I did not — and Girls Inc. got the money. And he got in the — he came later, actually, with his family.

And he drove it away without any plates. He was driving back to New York. And he got picked up by the police — (laughter) — in Illinois. And he said, “Well” — he started giving this explanation about how he’d given this money to Girls Inc. and was driving the car back. And he had this nice looking family with him.

And the cops were quite skeptical. But fortunately, I’d signed the dashboard for him as part of the deal when he — and so they looked at that. And then they just said, “Well, did he give you any stock tips?” And they let him go. (Laughter)

I can’t recall ever selling a used car at a profit. But we — I don’t think I’ve sold any personal possession. Well, I’ve got a house for sale.

CHARLIE MUNGER: You don’t have any personal possessions. (Laughter)

WARREN BUFFETT: Yeah. No, I — anything you see with a figure attached like that —

CHARLIE MUNGER: You’re a fatter version of Mahatmas Gandhi — (laughter) — Mahatma Gandhi.

WARREN BUFFETT: The guy was a very nice guy that bought it. And, you know, his check cleared. So we were fine. (Laughter)

18. Why Buffett wants his wife to own an index fund after he dies

WARREN BUFFETT: Becky?

BECKY QUICK: I’d like to ask a question that can serve as a follow-up to the question that Carol had asked. And Charlie, in that response, said that he thinks that Berkshire’s businesses on the whole will do better than the S&P 500.

Clark Cameron (PH) from Birmingham, Alabama, who owns 281 shares of Berkshire B, writes in and asks, “Why have you advised your wife to invest in index funds after your death rather than Berkshire Hathaway? I believe Munger has counseled his offspring to quote, ‘Not be so dumb as to sell.’”

WARREN BUFFETT: Yeah. (Laughter)

She won’t be selling any Berkshire to buy the index funds. All of my Berkshire, every single share, will go to philanthropy.

So the — I don’t even regard myself as owning Berkshire, you know, basically — (applause) — it’s committed.

And so far, about 40 percent has already been distributed.

So the question is, somebody who is not an investment professional will be, I hope, reasonably elderly by the time that the estate gets settled.

And what is the best investment, meaning one that there would be less worry of any kind connected with and less people coming around and saying, “Why don’t you sell this and do something else?” and all those things. She’s going to have more money than she needs.

And the big thing, then, you want is money not to be a problem. And there will be no way that if she holds the S&P — or virtually no way, absent something happening with weapons of mass destruction — but virtually no way that she won’t — she’ll have all the money that she possibly can use.

She’ll have a little liquid money so that if stocks are down tremendously at some point, there’s — they close the stock exchange for a while, anything like that — she’ll still feel that she’s got plenty of money.

And the object is not to maximize. It doesn’t make any difference whether the amount she gets doubles or triples or anything of the sort. The important thing is that she never worries about money the rest of her life.

And I had an Aunt Katie here in Omaha, who Charlie knew well, and worked for her husband, as did I. And she worked very hard all her life. And had lived in a house she’d paid, I think, I don’t know, $8,000 for at 45th and Hickory all her life.

And because she was in Berkshire, she ended up — she lived to 97 — she ended up with, you know, a few hundred million. (Laughter)

And she would write me a letter every four or five months. And she said, “Dear Warren, you know, I hate to bother you. But am I going to run out of money?”

And — (laughter) — I would write her back. And I’d say, “Dear Katie, it’s a good question because, if you live 986 years, you’re going to run out of money.” And — (laughter) — then about four or five months later, she’d write me the same letter again.

And I have seen there’s no way in the world, if you’ve got plenty of money, that it should become a minus in your life. And there will be people, if you’ve got a lot of money, that come around with various suggestions for you, sometimes well-meaning, sometimes not so well-meaning.

So if you’ve got something as certain to deliver — you know, it was all in Berkshire, they’d say, “Well, if Warren was alive today, you know, he would be telling you to do this.” I just don’t want anybody to go through that.

And the S&P will be a — I think actually what I’m suggesting is what — a very high percentage of people should do something like that. And I don’t think they will have as — I think there’s a chance they won’t have as much peace of mind if they own one stock.

And they’ve got neighbors and friends and relatives that are trying to do some — like I say, sometimes well-intentioned, sometimes otherwise, to do something else. And so I think it’s a policy that’ll get a good result and is likely to stick.

Charlie?

CHARLIE MUNGER: Well, as Becky said, the Mungers are different. I want them to hold the Berkshire.

WARREN BUFFETT: Well, I want to hold the Berkshire, too. (Laughter)

CHARLIE MUNGER: No, but I mean I don’t like the — I recognize the logic of the fact that that S&P algorithm is very hard to beat. You know, diversified portfolio of big companies. It’s all but impossible for most people. But, you know, it’s — I’m just more comfortable with the Berkshire.

WARREN BUFFETT: Well, it’s the family business.

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: Yeah. But it — I’ve just — I’ve seen too many people as they get older, particularly, being susceptible and just having to listen to the arguments of people coming along.

CHARLIE MUNGER: Well, if you’re going to protect your heirs from the stupidity of others, you may have some good system. But I’m not much interested in that subject.

WARREN BUFFETT: OK. (Laughter)

19. Berkshire probably would have put $15B into failed Unilever deal

WARREN BUFFETT: OK. Jay?

JAY GELB: Berkshire reportedly partnered with 3G and Kraft Heinz’s attempt to acquire Unilever for $143 billion.

How much was Berkshire willing to invest in this deal? And does this mean Berkshire’s next large acquisition is likely to be in partnership with 3G?

WARREN BUFFETT: Yeah, well, Kraft, I — you’d have to distinguish between two situations. Kraft Heinz was a widely-owned company in which we and 3G act as a control group and have a little over 50 percent of the stock.

But as originally contemplated — no certainty that this exactly is what would have happened — we would have invested an additional 15 billion and 3G would have invested an additional 15 billion if a friendly agreement could have been reached.

So if the deal had been made, if the independent directors of Kraft Heinz had approved the transaction, the likely — well, then the likelihood is that we would have invested 15 billion. But it would’ve required the approval of the independent directors as well.

Now Kraft Heinz, in going forward with making that offer, wanted to be sure that there would be enough equity capital, in addition to the debt that would be incurred, to make the deal. And so, informally, we had basically committed the 15 billion.

It only was approved on the basis that it be a friendly deal with Unilever. And initially, we thought they would be at least possibly interested in such a deal.

And when we found out otherwise, we withdrew the offer. So it would have been 15 billion of additional money, in all probability.

20. Speculation is inevitable in China and the U.S.

WARREN BUFFETT: OK, station 5?

AUDIENCE MEMBER: Dear Honorable Mr. Buffett and Mr. Munger, I’m Tian Du Hua (PH) from China. My company (Inaudible) Holdings is spreading value investing philosophy in Asia.

My business partner Ken Chi (PH), Cho Quy Ying (PH), and I are committed to awake 100 million Chinese people to return to rational way of investing.

The hardest thing in this world is to change people’s values or belief system. And we should like to awake investors to change from speculate in the market to investing in the market. It’s not changing the speculator’s values or belief system.

May I ask you, Mr. Buffett, can you kindly advise us what we should do to spread your value investing philosophy? Or is there any word of encouragement? Thank you.

WARREN BUFFETT: Yeah, the — when — in any system — Keynes wrote about this in 1936 — I think it was, in “The General Theory,” or ’35. I think it’s Chapter 12. It’s — great chapter on investing.

And he talked about investment and speculation and the propensity of people to speculate and the dangers of it.

And worded eloquently, there’s always the possibility of, I mean, there’s always some speculation, obviously, and there’s always some value investors and all that sort of thing in the market. But there’s —

When speculation gets rampant, and when you’re getting what I guess Charlie would call “social proof” — that it’s worked recently — people can get very excited about speculating in markets. And we will have it from time to time in this market.

There’s nothing more agonizing than to see your neighbor who you think has an IQ about 30 points below you getting richer than you are by buying stocks. And whether it’s internet stocks or whatever. And it — and people succumb to it. And they’ll succumb in this economy just as elsewhere.

There’s also a point which gets to your question. I would say that early on in the development of markets — there is probably a — there’s some tendency for them, I think, to be more speculative than markets that have been around for a couple hundred years because the — it has a — invest —

Markets have a casino characteristic that has a lot of appeal to people, particularly when they see, like I say, people getting rich around them. And those that haven’t been through cycles before are probably a little more prone to speculate than people who have experienced the outcome of wild speculation.

So I — you know, basically in this country, Ben Graham was, in the book I read in 1949, was preaching investment. And that book continues to sell very well.

But if the market gets hot, new issues are doing well and people on leverage are doing well, a lot of people will be attracted to, not only speculation, but what I would call gambling. And I’m afraid that that will be true in the United States.

And I think that China, being a newer market, essentially, in which there’s widespread participation, is likely to have some pretty extreme experiences in that respect. We will have some in this country, too.

Charlie?

CHARLIE MUNGER: Well, I certainly agree with that. (Laughter)

The Chinese will have more trouble. They’re very bright people. They have a lot of action and, sure they’re going to be more speculative.

And it’s a dumb idea. And to the extent you’re working on it, why, you’re on the side of the angels. But lots of luck. (Laughter)

WARREN BUFFETT: Well, it will offer the investor more opportunities actually — (laughs) — if they can keep their wits about them — if you have wild speculation. I mean, we —

Charlie just mentioned earlier, you know, that if we get into periods that are very tough, Berkshire certainly will do reasonably well because it won’t — we won’t be — we won’t get fearful. And fear spreads like you cannot believe until you’ve seen a few examples of it.

At the start of September 2008, you had 35 million people with their money in money market funds with $3 1/2 trillion in them. And none of them were afraid that that dollar wasn’t going to be a dollar when they went to cash in their money market fund.

And three weeks later, they were all terrified, and 175 billion flowed out in three days. And so the way the public can react is really extreme in markets. And that actually offers opportunities for investors.

You’ll never — people like action and they like to gamble. And if they think there’s easy money to be made, a lot of them, you’ll get a rush to it. And for a while it will be self-fulfilling and create new converts until the day of reckoning comes. They’ll —

Just keep preaching investing, and if the market swings around a lot, you’ll keep adding a few people here and there to a group that recognizes that markets are there to be taken advantage of, rather than to instruct you as to what is going on. OK. Andrew?

Anything more on that, Charlie?

CHARLIE MUNGER: We’ve done a lot of preaching, Warren, without much effect.

WARREN BUFFETT: Right. And that’s probably good, from our standpoint.

21. We don’t do anything differently due to tax law changes

WARREN BUFFETT: OK. Andrew?

ANDREW ROSS SORKIN: Thank you, Warren. This question comes from Ryan Prince (PH).

“President Donald Trump and his advisors have talked about proposing a substantial investment tax credit to provide incentives for long-term corporate fixed capital investment.

“In BNSF, Berkshire owns a sprawling infrastructure portfolio requiring regular routine maintenance investment of substantial scale.

“What impact would an investment tax credit have on BNSF’s capital investment decision-making, from a return on investment capital perspective, as well as in terms of timing?

“And just as importantly, given the current economy and employment picture, would such a tax credit amount to a subsidization of otherwise mandatory maintenance capital investment or a proper incentive to stimulate investment?”

WARREN BUFFETT: Yeah, well, it would all depend on how it was worded — you know, because — we’ve had investment tax credits in this country, and we’ve had bonus depreciation. It’s another form of it. We — and we do get extra first-year depreciation. That does not enter into our calculation very much.

You know, in fact — certainly at the Berkshire level, I’ve never instructed anybody to do anything different because of investment tax credits or accelerated depreciation. There may be some calculations done down at the operating company level.

It’s certainly true in something like wind projects and solar projects. They are dependent on the tax law, currently. There may come a time when they aren’t, but they wouldn’t have been done without some subsidization through the tax law.

But I would say, if you change the depreciation schedules and, you know, double depreciation — triple depreciation, for — that — we’re going to do what we need to do at the railroad to make it safer and more efficient if we just had ordinary depreciation.

And I doubt if there’d be any dramatic differences. Obviously, if you were going to, say, buy a bunch of planes and the law was going to change on December 31st, and the math made it better to wait till January 1st or do it this December 31st, you make that kind of calculation.

But I can’t recall, in all the years, that I’ve ever sent out anything to our managers saying, “Let’s do this because the tax law is being changed or might be changed,” or something of the sort.

As I mentioned earlier, it changes just a little bit if you think there’s going to be a change in capital gains rates at a given time. Obviously if it’s going to — the rate’s going to be lowered, you would take losses ahead of time and defer gains, maybe, a little.

And that’s why it’s useful, actually, if the tax committees in the Senate and the House are working on something, it might be useful if the chairmans would say that, “If we do make any changes, we’re likely to use this effective date,” or something of the sort. And I think they’ve done that a few times in the past.

We are not, the big tax-driven item — is — in wind and solar. And that is a specific policy, because the government has decided they want to move people — or society has decided — they want to move people toward those forms of electric generation. And the market system wouldn’t do it.

And there may come a time when the market system will do it all by itself.

We won’t make big changes. And it’s so speculative anyway, in terms of even what the law would be.

But beyond that, if it becomes less speculative as the law and it really looks like something is going through, it doesn’t change us big time at all.

Charlie?

CHARLIE MUNGER: Nothing to add. We’re not going to change anything at the Berkshire — at the railroad — for some little tax jiggle.

WARREN BUFFETT: Yeah, if we need a bridge repaired, we’re going to repair the bridge, you know. And if need — we need a lot of track maintenance all the time and that sort of thing. And it just, I don’t think [BNSF’s] Matt [Rose] and I have ever had a talk about it since we’ve owned the railroad, but —

22. Coal shipment revenues will drop for BNSF

WARREN BUFFETT: Gregg?

GREGG WARREN: Warren, my question also relates to Burlington Northern.

Despite the current administration’s belief that they can bring the coal industry back, market forces continue to lead to the industry’s demise.

While 90 percent of U.S. coal consumption is driven by electricity generation, natural gas has been both cheaper and cleaner burning, and renewable electricity generation has remade parts of the market as wind and solar have gained scale and become cheaper alternatives.

This has created problems for Burlington Northern, with coal shipments accounting for just 18 percent of volume and revenue for the railroad last year, down from an average of 24 percent for both measures the previous 10 years.

While some of this was due to large buildup of coal supplies the past couple of winters, which finally seem to be working their way out, what are your expectations for the contribution coal can make to BNSF longer term?

And I know that the railroad currently handles some export shipments going through Canada’s Pacific Coast ports, but will there be enough growth there to offset domestic demand? Or will BNSF need to rely more heavily on segments like intermodal to offset lost coal volumes?

WARREN BUFFETT: Yeah, the answer is coal’s — coal is going to go down over time. I don’t think there’s much question about that.

The specifics of any given year relate very importantly to the price of natural gas. I mean, right now there are — there —

Demand is somewhat up — fair amount up — from last year because natural gas is at 3.15 or 3.20, and the utilities can produce electricity, in many cases, quite a bit cheaper with coal than with natural gas. Whereas, with a $2, it would all be — it would be natural gas.

But over time, coal is — in my mind — is essentially certain to decline as a percentage of the revenue of the railroad.

The speed at which it does, you know, it — you don’t build — create generation plants overnight. And so it —

You can’t predict the rate. And if natural gas is cheap enough, it’s going to be a — you’ll see a big conversion back to natural gas.

So coal is a — coal is going to go down, as a percentage of revenues, significantly.

You know, certainly over 10 years it’ll be quite significant, and who knows exactly, year by year. We are looking for other sources of growth than coal. If you’re tied to coal, you got problems.

Charlie?

CHARLIE MUNGER: Well — you go out over the extremely long term, I think that all hydrocarbons will be used, including all the coal.

So I think that, in the end, these hydrocarbons are a huge resource for humanity, and I don’t think we’ve got any good substitute.

And I’ve never minded saving them for the next generation. I don’t like using them up very fast. So, I’m often on a road on my own on this one.

And people think that all this hydrocarbons are going to be stranded and the whole world’s going to change. I think we’re going to use every drop of the hydrocarbon sooner or later. We’ll use them as chemical feed stocks. It’s —

I regard all these things as very hard to predict. And I’m not at all sure that — I would eventually expect natural gas to be pretty short in supply.

WARREN BUFFETT: A change in storage would make a big difference.

We will produce, within a few years, as much electricity in Iowa — or virtually as much — electricity in Iowa from wind as our customers use. But the wind only blows about 35 percent of the time or something like that. And sometimes it blows too hard.

But the storage, you know, having it 24 hours a day, seven days a week, is a real problem, even if we’ve got the capability of producing, like I say, a self-sufficient amount, essentially, in Iowa before very long.

Coal — our shipments of coal are up fairly substantially this year on the BNSF. But they were very low last year, and as you said, stockpiles grew and have come down somewhat. They’re still on the high side.

But in my mind — Charlie’s got a longer-term outlook on this — in my mind, we’re going to be shipping a whole lot less coal 10 or 20 years from now than we are now.

On the other hand, I think there’s some decent prospects in other long hauls.

I mean, it’s a pretty cheap way to move bulk commodities long distance. Rail is. And I think it’s a good business, but the coal aspect of it’s going to diminish.

23. Big change: You don’t need money to run America’s biggest companies

WARREN BUFFETT: OK. Station 6.

AUDIENCE MEMBER: Good morning. It’s Marcus Burns from Sydney, Australia.

My question, Mr. Buffett, is, you used to buy capital-light, cash-generative businesses, but now buy lower-growth, capital-consumptive businesses.

I realize Berkshire generates a lot of cash flow, but would shareholders have been better off if you had continued to invest in capital-light companies?

WARREN BUFFETT: Well, we’d love to find them. I mean, there’s no question that buying a high-return-on-assets, very light-capital-intensive business that’s going to grow beats the hell out of buying something that requires a lot of capital to grow.

And this varies from day to day, but I believe — and I don’t think it’s sufficiently appreciated. I believe that probably the five largest American companies by market cap — and some days we’re in that group and some days we aren’t — let’s assume we’re not in that group on a given day — they have a market value of over $2 1/2 trillion, and that 2 1/2 trillion is a big number.

I don’t know whether the aggregate market cap of the U.S. market is, but that’s probably getting up close to 10 percent of the whole market cap of the United States. And if you take those five companies, essentially, you could run them with no equity capital at all. None.

That is a very different world than when Andrew Carnegie was building a steel mill and then using the earnings to build another steel mill and getting very rich in the process, or Rockefeller was building refineries and buying tank cars and everything.

Generally speaking, over — for a very long time in our capitalism, growing and earning large amounts of money required considerable reinvestment of capital and large amounts of equity capital, the railroads being a good example.

That world has really changed, and I don’t think people quite appreciate the difference.

You literally don’t need any money to run the five companies that are worth collectively more than $2 1/2 trillion, and who have outpaced any number of those names that were familiar, if you looked at the Fortune 500 list 30 or 40 years ago, you know, whether it was Exxon or General Motors or you name it.

So we would love — I mean, there’s no question that a business that doesn’t take any capital and grows and has, you know, almost infinite returns on required equity capital, is the ideal business.

And we own a couple of businesses — a few businesses — that earn extraordinary returns on capital, but they don’t grow.

We still love them, but if they had — if they were in fields that would grow, believe me, we wouldn’t — you know, they would be number one on our list.

We aren’t seeing those that we can buy and that we understand well.

But you are absolutely right that that’s a far, far, far better way of laying out money than what we’re able to do when buying capital-intensive businesses.

Charlie?

CHARLIE MUNGER: Yeah. The chemical companies of America, at one time, were wonderful investments.

Dow and DuPont sold at 20-some times earnings, and they kept building more and more complicated plants and hiring more Ph.D. chemists, and it looked like they owned the world.

Now, most chemical products are sort of commoditized and it’s a tough business being a big chemical producer. And in comes all these other people like Apple and Google and they’re just on top of the world.

I think the questioner’s basically right that the world has changed a lot, and that the people who have made the right decisions in getting into these new businesses that are so different from the old ones have done very well.

WARREN BUFFETT: Yeah, Andrew Mellon would be absolutely baffled by looking at the high-cap companies now. I mean, the idea that you could create hundreds of billions of value essentially without assets — without tangible assets —

CHARLIE MUNGER: Fast.

WARREN BUFFETT: Fast, yeah. But that is the world. I mean, there is —

When Google can sell you something that — where GEICO was paying 11 bucks or something every time somebody clicked something — that is a lot different than spending years finding the right site and developing, you know, iron mines to supply the steel plants and, you know, railroads to haul the iron to where the steel is produced and distribution points, and all that sort of thing.

Our world was built — you know, when we first looked at it, our U.S. — our capitalist system, basically, was built on tangible assets, and reinvestment, and all that sort of thing, and a lot of innovation and invention to go with it.

But this is so much better, if you happen to be good at it, to essentially be able to build hundreds of billions of market value without really needing any capital.

That is a different world than existed in the past. And I think, listen, I think it’s a world that is likely to continue. I mean, the trend is, I don’t think the trend in that direction is over by a long shot.

CHARLIE MUNGER: A lot of the people who are chasing that sort of thing very hard now in the venture capital field are losing a lot of money. It’s a wonderful field, but not everybody’s going to win big in it. A few are going to win big in it.

24. Benefits of Berkshire’s “management by abdication”

WARREN BUFFETT: OK. Carol?

CAROL LOOMIS: This question is from a shareholder in California, in the Silicon Valley area, who didn’t want his name mentioned because he said he wasn’t looking for publicity, but whose picture makes him appear to be a millennial.

“Every Berkshire shareholder knows about the stock market value of Berkshire, but my question is about the value of Berkshire to the world.

“For instance, the value of Apple to the world has been iPhones. The value of GEICO is cost-effective auto insurance. The value of 3G,” and I will tell you that there are some shareholders who would be arguing about it here, but “the value of 3G is improved operations.”

“But about Berkshire, I just don’t know. In managing Berkshire’s subsidiaries, as Mr. Munger once famously said, you practice ‘delegation just short of abdication.’ So, hands-on management can’t be the answer.

“That means the majority of Berkshire’s subsidiaries would do just as well if they were to stay independent companies. So that’s my question. What is the value of Berkshire to the world?”

WARREN BUFFETT: Yeah, well, the — I would say the question about — I’m with him to the point where he says that our — which he accurately describes as “delegation to the point of abdication.”

But I would argue that that abdication, actually, in many cases, will enable those businesses to be run better than they would if they were part of the S&P 500 and the target, perhaps, of activists or somebody that wants to get some kind of a jiggle in the short term.

So I think that our abdication actually has some very positive value on the companies. But that, you know, you’d have to look at it company by company.

We’ve got probably 50 managers in attendance here. And naturally, they’re not going to say anything, probably, on television or anything where they knock a certain thing.

But get them off in a private corner and just ask them whether they think their business can be run better with a “management by abdication” from Berkshire, but with also all the capital strengths of Berkshire, that when any project that makes sense can be funded in a moment without worrying whether the banks are still lending, like in 2008, you know, or whether Wall Street will applaud it or something of that sort.

So I think our very — our hands-off style, actually, I think can add significant value in many companies, but we do have managers here you could ask about that.

We certainly don’t add to value by calling them up and saying that we’ve developed a better system, you know, for turning out additives at Lubrizol, or running GEICO better than Tony Nicely can run it or anything of the sort.

But we do take a — we have a very objective view about capital allocation.

We can free managers up. I would say that we might very well free up at least 20 percent of the time of a CEO in the normal public — who would have — otherwise have a public company — just in terms of meeting with analysts, and the calls, and dealing with banks, and all kinds of things that, essentially, we relieve them of so that they can spend all of their time figuring out the best way to run their business.

So I think we bring something to the party, even if it — even if we’re just sitting there with our feet up on the desk.

Charlie?

CHARLIE MUNGER: Yeah. We’re trying to be a good example for the world. I don’t think we’d be having these big shareholders meetings if there weren’t a little bit of teaching ethos in Berkshire.

And I’ve watched it closely for a long time. I’d argue that that’s what we’re trying to do, is set a proper example. Stay sane. Be honest. Yeah. (Applause)

So I’m proud of Berkshire, and I don’t worry too much if we sell Coca-Cola. (Laughter)

WARREN BUFFETT: We — I would say, you know, GEICO is an extraordinarily well-run company and it would be extraordinarily well-run if it were public.

But it has gone from 2-and-a-fraction percent of the auto insurance market to 12 percent.

And part of the reason, a small part — the real key is GEICO and Tony Nicely — but part of the reason is that when other — at least two of our competitors — and big competitors — said that they would not meet their profit objectives if they didn’t lighten up their interest in new business, eight or 10 months ago, I think our business decision to step on the gas is a better business decision.

But I think that GEICO, as a public company, would have more trouble making that decision than they do when they’re part of GEICO [Berkshire].

Because we are thinking about nothing but where GEICO’s going to be in five or 10 years, and if that requires having new— we want new business cost to penalize our earnings in the short-term.

And other people have different pressures. I’m not arguing about how the —how they behave, because they have a different constituency than GEICO has with Berkshire and what Berkshire has with its shareholders, in turn.

And I think in that case, our system’s superior. But it’s not because we work harder. Charlie and I don’t do hardly anything. (Laughter)

25. Structured settlements interest rate

WARREN BUFFETT: Jonathan?

JONATHAN BRANDT: Could you please talk about your periodic payment annuity business? The weighted average interest rate on these contracts is 4.1 percent, which doesn’t sound particularly attractive given the current interest rate environment.

Is the duration of these liabilities long enough to make that an attractive cost of funds? Or were these contracts executed primarily when rates were higher?

WARREN BUFFETT: Well, those contracts — these are what are called structured settlements, primarily.

And when somebody young has a terrible auto accident or whatever it may be — perhaps urged by the court, urged by family members who really do have the interest of the injured party at heart, or — they may convert what could be a large sum settlement, probably against the insurance company — you know, maybe a million dollars, maybe $2 million — into periodic payments for the rest of the life of the injured party.

And we issue those for other insurance companies.

In fact, sometimes the court directs that Berkshire — or hints strongly — that Berkshire should be the one to issue those, because you’re talking about somebody’s life 30 or 40 or 50 years from now.

And the court, or the lawyer, or the family, they want to be very, very sure that whoever makes that promise is going to be around to keep it. And Berkshire has a preferred position in that.

We look — to get to your question, Jonny — we look for taking the longer maturity situations. We always have.

And we have to make assumptions about mortality, and we have to make — and then we have to decide at what interest rate we’ll do it.

The 4.1 is a mix of a lot of contracts over a lot of years, obviously. We write maybe 30 million of these, 20 to 30 million a week, looking for the long maturities.

And so, if you take an average of 15 years, or something of the sort, that’s how we come up with that sort of a figure. We adjust them to interest rates at all times.

And when doing that, we’re making an assumption that we’re going to earn more money that — than is inherent in the cost of these structured settlements. It’s a business we’ve — I think we’ve got six or seven billion up now. And we’ll keep doing them.

And incidentally, probably a significant percentage of the six or seven billion, we’re not yet paying anything on. Somebody else may have the earlier payments. And they’re certainly weighted far out. So it’s a business that we’ll be in 10 or 20 years from now.

We’ve got some natural advantage, because people trust us more than any other company to make those payments. And the test is whether we earn, over time, a return above that which we’re paying to the injured party.

And that’s a bet we’re willing to make. But if interest rates continued at present levels for a long time — we would, assuming we kept the money in fixed-income instruments — we would — we’d have some loss in that.

We’ve got an allowance in there for the expenses, incidentally, because we do make monthly payments to these people, eventually.

And we have to keep track of whether they’re still alive or not. Because you cannot count on the relatives of somebody that’s deceased when a check is coming in every month to notify you promptly that the person has become deceased. But it’s — it’ll —

That number will go up over time. If interest rates stay where they are, that 4.1 will come down a little bit as we add new business.

26. USG investment not “great,” but not a “disaster”

WARREN BUFFETT: OK. Station 7.

AUDIENCE MEMBER: Thank you, Mr. Buffett and Mr. Munger, for all you’ve done and the opportunity to learn even more from your approach to investing and life.

My name’s Harry Hong, and I’m a respirologist from Vancouver, British Columbia.

The question involves, back in 2001, you made an initial investment in USG, shortly before the company declared bankruptcy due to the mounting asbestos liability.

You held those shares through the bankruptcy process, even though standard wisdom says that the equity in Chapter 11 is usually worthless. Can you explain why USG’s equity was a safe investment?

WARREN BUFFETT: Well, I don’t really remember all the details then.

CHARLIE MUNGER: It was very cheap. (Laughter) Very cheap. (Laughter)

WARREN BUFFETT: Yeah, but I would say this. USG, we own — I’m not sure what percent, but it’s very significant percentage. I don’t know what —

CHARLIE MUNGER: Twenty percent, or something.

WARREN BUFFETT: Probably 30 percent or something like that. But USG, overall, has just been disappointing because the gypsum business has been disappointing.

And I think — I may be wrong — I think they went bankrupt twice, first from asbestos going back and then, subsequently, because they just had too much debt. So it has not been a brilliant investment.

Now if gypsum prices were at levels that they were in some years in the past, it would have worked out a lot better.

CHARLIE MUNGER: But it hasn’t been terrible.

WARREN BUFFETT: No, it hasn’t been terrible, but it — gypsum took — has taken a real dive several times, and there has been too much gypsum capacity.

And then when it comes back, the managements have been — not necessarily at USG, but including USG perhaps — they’ve gotten more optimistic about future demand than they should have. And it —

And they like — going back historically a way — they like to build new plants. And it’s a business where the supply has been significantly — potential supply — has been significantly greater than demand in a lot of years. I mean, it —

You’ve seen housing starts in — since 2008 and 2009 — not come back anywhere near as much as people anticipated. So gypsum prices have moved up but not dramatically.

So just put that one down as not one of our great ideas. Not one of my great ideas. Charlie wasn’t involved in that. It’s no disaster, though.

CHARLIE MUNGER: No it isn’t. It’s —

27. “Terrific” insurance operations are even better with Ajit Jain

WARREN BUFFETT: Becky?

BECKY QUICK (off microphone): This question — this question —

WARREN BUFFETT: Oh.

BECKY QUICK: Hello? Oh, there we go.

WARREN BUFFETT: OK.

BECKY QUICK: This question comes from Axel Meyersiek in Germany who writes, “If Ajit Jain were to retire, God forbid, be promoted, what would be the impact on the insurance operations, both with regards to underwriting profit as well as the development of float?”

WARREN BUFFETT: Well, nobody will — could possibly replace Ajit. I mean, it just — you can’t come close.

But we have a terrific operation in insurance. We really do, outside of Ajit, and it’s terrific-squared with Ajit.

There are things only he can do. But there are a lot of things that are institutionalized, a lot of things in our insurance business, where we’ve got extraordinarily able management, too.

So Ajit, for example, bought a company that nobody here has heard of, probably, called Guard Insurance a few years ago, based in worker’s comp, primarily. It’s based in — improbably — in Wilkes-Barre, Pennsylvania.

And it’s expanding like crazy in Wilkes-Barre. And it — it’s been a gem. And Ajit oversees it, but we’ve got a terrific person running it.

And we bought Medical Protective some years ago. Tim Kenesey runs that. Ajit oversees it, but Tim Kenesey can run a terrific insurance company, with or without Ajit. But he’s smart enough to realize that, if you got somebody like Ajit that’s willing to oversee it to a degree, that’s great.

But Tim is a great insurance manager all by himself, and Medical Protective has been a wonderful business for us. Most people don’t know we own it. The company goes back into the 19th century, actually.

We’ve got a lot of good operations. If you look at that section of the annual report called “Other” — insurance company, I mean that is — in aggregate, that is a wonderful insurance company. There’s very few like it. GEICO is a terrific company.

So, Ajit has made more money for Berkshire than I have, probably. But we’ve still got what I would consider the world’s best property-casualty insurance operation, even without him. And with him, you know, it — nobody, I don’t think anybody comes close.

Charlie?

CHARLIE MUNGER: Well, a few years ago, California made a little change in its workmen’s compensation law, and Ajit saw instantly that it would cause the underwriting results to change drastically.

And he went from a tiny percent of the market, (inaudible) 10 percent of the market, which is big, and he just grasped a couple billion dollars, at least, out of the air, like it was snapping his fingers. And when it got tough, he pulled back.

We don’t have a lot of people like Ajit. It’s hard to just snap your fingers and grab a couple billion dollars out of the air. (Laughter)

WARREN BUFFETT: Well, we’ve — actually, the California Workers’ Comp (inaudible), Guard has moved into that. I — we have got a lot of terrific insurance managers. I mean, I don’t know of a better collection any place. And Ajit has found some of those.

I’ve gotten lucky a few times. I mean, Tom Nerney at U.S. Liability, that goes back, what, 15, 16 years. He has a terrific operation. It’s not huge, but it is so well-managed.

And people don’t even know we own these things. But if you look at that last line — and now we’ve added Peter Eastwood with Berkshire Hathaway Specialty. And these are really good businesses, I got to tell you. (Laughs)

When you can produce underwriting prowess, and on top of that just hand more float — we don’t have many businesses like that. Those are great businesses.

We’ve got a hundred — you know, whatever it is — a hundred billion-plus of money that we get to earn on, while at the same time, overall, you know, on balance, we’re likely to make some additional money for holding it.

And if you can get somebody to hand you $104 billion and pay you to hold it while you get to invest and get the proceeds, it’s a good business.

Now, most people don’t do well at it. And, you know, the problem is that what I just described tempts lots of people to get into it.

And recently, people have gotten into it, really, just for the investment management. It’s a way to earn money offshore. And we don’t do that, but it can be done for small companies with investment managers.

So there’s a lot of competition in it. But we have some fundamental advantages, plus we have — in certain areas — plus we have absolutely terrific managers to maximize those advantages. And we’re going to make the most of it.

28. Promo for Kraft Heinz Philadelphia Cream Cheese product

WARREN BUFFETT: I’ve just been handed something Kraft Heinz came out with. They just came out with it commercially a couple days — a few days ago, maybe a few weeks ago. At the directors’ meeting they had this. I had three of these.

I’m sure that there’s a member or two of the audience that may not approve of it, but they — (laughter) — I got to tell you folks, it’s good.

It’s a cheesecake arrangement with topping and Philadelphia Cream Cheese (Inaudible), so you create your own cheesecake.

And I thought that I can eat it while Charlie’s talking. And — (laughter) — you’ll be able to get it at the halftime. It’s selling very well.

And I think, just so you don’t feel too guilty, I think it’s 170 calories for this cherry one. Like I say, I had three of these here. I don’t mind having five- or 600 calories for dessert, you know. (Laughter)

I’ll let somebody else eat the broccoli and I’ll have the dessert. (Laughter)

So we’ll be eating this, but you, too, at halftime — I think they brought 8- or 9,000 of these. I’ll be disappointed if we don’t run out. Actually, I’ll be disappointed in you, not them. (Laughter)

29. Subsidiary managers aren’t competing for Buffett’s job

WARREN BUFFETT: OK. Jay?

JAY GELB: This question is on the topic of succession planning.

Warren, there seem to be fewer mentions, by name, of top-performing Berkshire managers in this year’s annual letter. Does this mean you’re changing your message regarding the succession plan for Berkshire’s next CEO?

WARREN BUFFETT: Well, the answer to that’s no. And I didn’t realize there were fewer mentions by name.

I write that thing out and send it to Carol [Loomis], and she tells me, “Go back to work.” (Laughs)

I don’t actually think that much about how many personally get named.

I would say this. And this is absolutely true. We have never had more good managers — now, it’s because we’ve got more good companies — but we have never had more good managers than we have now, so I — but it has nothing to do with succession.

Charlie?

CHARLIE MUNGER: Well, I certainly agree with that. We don’t seem to have a whole lot of 20-year-olds. (Laughter)

WARREN BUFFETT: Certainly not at the front table. (Laughter)

No, we’ve got an extraordinary group of good managers, which is why we can manage by abdication.

It wouldn’t work if we had a whole bunch of people who were — had come with the idea of getting my job. I mean, if we had 50 people out there, all of who wanted to be running Berkshire Hathaway, it would not work very well. And —

But they have the jobs they want in life. Tony Nicely loves running GEICO. You know, it — then you go down the line. They have jobs they love.

And that’s a lot better, in my view, than having a whole bunch of them out there that are kind of doing their job there kind of hoping the guys competing with them will fail so that, when I’m not around, that they’ll get the nod.

It’s a much different system than exists at most American corporations.

Charlie, got anything?

30. Berkshire’s buying advantage: “There just isn’t anyone else”

WARREN BUFFETT: Well, we’ll go to Station 8.

AUDIENCE MEMBER: Hi, Warren and Charlie. My name’s Vicky Wei. I’m an M.B.A. student from the Wharton School of Business.

This is my first time to be in the first — in the annual meeting. I’m really excited about it. Thanks for having us here. My —

WARREN BUFFETT: Thanks for coming.

AUDIENCE MEMBER: My question is, where do you want to go fishing for the next three to five years? Which sectors are you most bullish on, and which sectors are you most bearish on? Thank you.

WARREN BUFFETT: Yeah. Charlie and I do not really discuss sectors much. Nor do we let the macro environment or thoughts about it enter into our decisions.

We’re really opportunistic. And we — we, obviously, are looking at all kinds of businesses all the time. I mean, it’s a hobby with us, almost — probably more with me than Charlie.

But we’re hoping we get a call, and we’ve got a bunch of filters.

And I would say this is true of both of us. We probably know in the first five minutes or less whether something is likely to — or has a reasonable chance of happening.

And it’s just going to go through there, and it’s going to — first question is, “Can we really ever know enough about this to come to a decision?” You know, and that knocks out a whole bunch of things.

And there’s a few. And then if it makes it through there, there’s a pretty good — reasonable chance we’re going to — we may do something. But it’s not sector specific. It —

We do love the companies, obviously, with the moats around the product long — where consumer behavior can be, perhaps, predicted further out. But I would say it’s getting harder to — for us, anyway — to anticipate consumer behavior than we might’ve thought 20 or 30 years ago. I think that it’s just a tougher game now.

But we’ll measure it and we’ll look at it in terms of returns on present capital, returns on prospective capital. We may have — we can —

A lot of people give you some signals as to what kind of people they are, even in talking in the first five minutes, and whether you’re likely to actually have a satisfactory arrangement with them over time. So a lot of things go on fast, but it —

We know the kind of sectors we kind of like to — or the type of business we’d kind of like to end up in. But we don’t really say, “We’re going to go after companies in this field, or that field, or another field.”

Charlie, you want to?

CHARLIE MUNGER: Yeah. Some of our subsidiaries do little bolt-on acquisitions that make sense, and that’s going on all the time. And, of course we like it when —

But I would say the general field of buying whole companies, it’s gotten very competitive. There’s a huge industry of doing these leveraged buyouts. That’s what I still call them.

The people who do them think that’s a — kind of a bad marker, so they say they do private equity. You know, it’s like (inaudible) a janitor call himself the chief of engineering or something. (Laughter) And —

But at any rate, the people who do the leveraged buyouts, they can finance practically anything in about a week or so through shadow banking. And they can pay very high prices and get very good terms and so on.

So, it’s very, very hard to buy businesses. And we’ve done well, because there’s a certain small group of people that don’t want to sell to private equity. And they love the business so much that they don’t want it just dressed up for resale.

WARREN BUFFETT: We had a guy some years ago, came to see me, and he was 61 at the time. And he said, “Look, I’ve got a fine business. I got all the money I can possibly need.” But he said, “There’s only one thing that worries me when I drive to work.”

Actually, there’s more than one guy’s told me that that’s used the same term.

He said, “There’s only one thing that bothers me when I go to work. You know, if something happens to me today, my wife’s left.

“You know, I’ve seen these cases where executives in the company try to buy them out cheap or they sell to a competitor and all the people —”

He says, “I don’t want to leave her with the business. I want to decide where it goes, but I want to keep running it, and I love it.”

And he said, “I thought about selling it to a competitor, but if I sell it to a competitor, you know, their CFO’s going to become the CFO of the new company, and there, you know, on down the line.

“And all these people who helped me build the business, you know, they’re — a lot of them are going to get dumped. And I’ll walk away with a ton of money, and some of them will lose their job.” He said, “I don’t want to do that.”

And he says, “I can sell it to a leveraged buyout firm, who would prefer to call themselves private equity, but they’re going to leverage it to the hilt and they’re going to resell it. And they’re going to dress it up some, but in the end, it’s not going to be in the same place. I don’t know where it’s going to go.”

He said, “I don’t want to do that.” So he said, “It isn’t because you’re so special.” He says, “There just isn’t anyone else.” (Laughter)

And if you’re ever proposing to a potential spouse, don’t use that line, you know. (Laughter)

But that’s what he told me. I took it well, and we made a deal.

So, logically, unless somebody had that attitude, we should lose in this market. I mean, you can borrow so much money so cheap. And we’re looking at the money as pretty much all equity capital.

And we are not competitive with somebody that’s going to have a very significant portion of the purchase price carried in debt, maybe averaging, you know, 4 percent or something.

CHARLIE MUNGER: And he won’t take the losses if it goes down. He gets part of the profit if it goes up.

WARREN BUFFETT: Yeah, his calculus is just so different than ours. And he’s got the money to make the deal.

So, if all you care about is getting the highest price for your business, you know, we are not a good call.

And we will get some calls in any event. And we can offer something that — wouldn’t call it unique, but it’s unusual.

The person that sold us that business and a couple of others that have — actually it’s almost, word for word, the same thing they say. They are all happy with the sale they made, very happy.

And, you know, they are — they have lots and lots and lots of money, and they’re doing what they love doing, which is still running the business. And they know that they made a decision that will leave their family and the people who work with them all their lives in the best possible position.

And that’s — in their equation, they have done what’s best. But that is not the equation of many people, and it certainly isn’t the equation of somebody who buys and borrows every dime they can with the idea of reselling it after they, you know, maybe dress up the accounting and do some other things.

And — but there — when the disparity gets so wide between what a heavily debt-financed purchase will bring as against an equity-type purchase, it gets to be tougher. There’s just no question about it. And it’ll stay that way.

CHARLIE MUNGER: But it’s been tough for a long time, and we’ve bought some good businesses.

WARREN BUFFETT: Yeah. Yeah.

31. “If the board hires a compensation consultant after I go, I will come back”

WARREN BUFFETT: OK. Andrew?

ANDREW ROSS SORKIN: Warren. This comes from a shareholder who I think is here, who asked to remain anonymous.

Writes: “Three years ago, you were asked at the meeting about how you thought we should compensate your successor. You said it was a good question, and you would address it in the next annual letter. We’ve been patiently waiting. (Laughter)

“Can you tell us now, at least philosophically, how you’ve been thinking about the way the company should compensate your successor, so we don’t have to worry when the pay consultants arrive on the scene?”

WARREN BUFFETT: Yeah. Well, that — unfortunately, at my age I don’t have to worry about things I say — said three years ago, but this guy, obviously much younger, remembers. (Laughter)

I’m not — well, I’ll accept his word that I said that. But the — there’s a couple possibilities, actually.

I don’t want to get into details on them, but you may have — and I, actually, would hope that we would have somebody, A) who’s already very rich — which they should be if they’ve been working a long time and have got that kind of ability — that’s very rich, and really is not motivated by whether they have 10 times as much money that they and the families can need or a hundred times as much.

And they might even wish to perhaps set an example by engaging for something far lower than actually what you could say their true market value is. And that could or could not happen, but I think it’d be terrific if it did. But I can’t blame anybody for wanting their market value.

And then — if they didn’t elect to go in that direction, I would say that you — would probably pay them a very modest amount and then have an option which increased in value by — or increased in striking price — annually.

Nobody does this, hardly. The Washington — Graham Holdings has done it, The Washington Post Company did a little bit — but would increase because it’s assuming that there were substantial retained earnings every year.

Because why should somebody retain a bunch of earnings and then claim they’ve actually improved the value, simply because they withheld the money from shareholders?

So it’s very easy to design that, and in private companies people do design it in that way. They just don’t want to do it in public companies, because they get more money the other way.

But they might have a very substantial one that could be exercised, but where the shareholder’s — the shares had to be held for a couple years after retirement, so that they really got the result over time that the majority of the stockholders would be able to get, and not be able to pick their spots, as to when they exercised and sold a lot of stock.

It’s — it would — it’s not hard to design. And it really depends who you’re dealing with, in terms of actually how much they care about money and having money beyond what they can possibly use.

And most people do have an interest in that, and I don’t blame them.

But I don’t know. What do you think, Charlie?

CHARLIE MUNGER: Well, I — one thing I think is that I have avoided, all my life, the compensation consultants. To me it’s a — I hardly can find the words to express my contempt. (Laughter)

WARREN BUFFETT: I will say this. If the board hires a compensation consultant after I go, I will come back. (Laughter)

CHARLIE MUNGER: Mad. Mad.

So I think there’s a lot of mumbo jumbo in this field, and I don’t see it going away.

WARREN BUFFETT: Oh, it isn’t going to go away. No, it’s going to get worse. It — I mean, the — if you look at, I mean, the way compensation gets handled, I mean, it — you know, everybody looks at everybody else’s proxy statement and says, “We can’t possibly hire a guy that hasn’t been — ”

CHARLIE MUNGER: It’s ridiculous.

WARREN BUFFETT: —so on. And the human relations department, you know, who work for the CEO, come in and suggest a consultant.

What consultant is ever going to get another assignment if he says, “You should pay your CEO below the — down in the fourth quartile because you’re getting a fourth quartile result?” It —

I mean, it just, you know — it isn’t that the people are evil or anything. It’s just the nature of the situation just — it produces a result that is not consistent with how representatives of the owners should behave.

CHARLIE MUNGER: It’s even worse than that. Capitalism is the golden goose that we all live on. And if people generally get so they have contempt for it because they don’t like the pay arrangements in the system, your capitalism may not last as well. And that’s like killing the golden goose.

So I think the existing system has a lot wrong with it.

WARREN BUFFETT: I think there is something coming in pretty soon — I may be wrong about this — where companies are going to have to put in their proxy statement the CEO’s pay to the average pay, or something like that. That isn’t going to change anything. I mean —

CHARLIE MUNGER: It won’t change a thing.

WARREN BUFFETT: It won’t change a thing. And, you know, it’ll cost us virtually —

CHARLIE MUNGER: By the way, it won’t get any headlines, either. It’ll be tucked away.

WARREN BUFFETT: It’ll cost us a lot of money, with 367,000 people employed around the world. And, I mean, we’ll hope to get something that makes it somewhat simpler so we can use estimates or something of the sort.

But to get the median income or mean income or whatever, however the rules may read, you know, and —

CHARLIE MUNGER: That’s what consultants are for, Warren. (Laughter)

WARREN BUFFETT: It — it’s, you know, it is human nature that produces this. And, you know, the most —I write in this letter to the managers every two years, I said, “The only excuse I won’t take on something is that everybody else is doing it.”

But of course, “everybody else is doing it,” is exactly the rationale for why people did not want to count the costs of stock options as a cost — I mean, it was ridiculous.

All these CEOs went to Washington and they got the Senate, I think, to vote 88 to 9 to say that stock options aren’t a cost. And then a few years later, you know, it became so obvious that they finally put it in so it was a cost. You know, it reminded me of Galileo or something, I mean, all these guys.

CHARLIE MUNGER: Worse. It was way worse. The pope behaved better to Galileo in the —and he was —

WARREN BUFFETT: Well, anyway, it’s — it — I would hope, you know, like I say, somebody — well — and it doesn’t even have to be, I’m not talking about the current successor or anybody else.

I mean, successors down the line are probably going to have gotten very wealthy by the time they’re running Berkshire. And the incremental value of wealth gets very close to zero at some point. And there is a chance to use it as a different sort of model.

But I don’t have any problem, if it’s — a system is devised that recognizes retained earnings. Nobody wanted — I’ve never heard anybody talk about it, you know, in the 20 boards I’ve been on.

You know, if you and I were partners in a business, you know, and we kept retaining earnings in the business and I kept having the value to buy a portion of you out at a constant price, you’d say, “This is idiocy.”

But of course that’s the way all option systems are designed, and it’s better to be — for the CEO and for the consultants. And of course, usually if there’s — there’s some correlation between what CEOs are paid and what boards are paid.

If CEOs were getting paid at the rate that they got paid 50 years ago, adapted to present dollars, director pay would be lower. So it’s — you know, it’s got all these built-in things that, to some extent, sort of kindle the —

CHARLIE MUNGER: No Berkshire director is in it for the money.

WARREN BUFFETT: Well, they are if they own a lot of stock. And they bought it in the market just like the —

CHARLIE MUNGER: Yeah, it’s —

WARREN BUFFETT: — shareholder did.

CHARLIE MUNGER: It’s a very old-fashioned system.

WARREN BUFFETT: I looked at one company the other day, and seven of the directors had never bought a share of stock with their own money. Now they’d been given stock, but not one of them — I mean, I shouldn’t say not one — seven of the directors had never actually bought a share of stock.

And there they are, you know, making decisions on who should be CEO and how they should be paid and all that sort of thing. But, you know, they never felt like shelling out a dollar themselves. Now they’d been given a lot of stock.

And it’s, you know, we’re dealing with human nature here, folks. (Laughs) And that — what you want is to have a system that works well in spite of how human nature’s going to drive it.

And we’ve done awfully well in this country in that respect. I mean, American business has — overall has done very well for the Americans generally. But not every aspect of it is exactly what you want to teach your kids.

32. BNSF is a “good” business, but probably won’t grow much

WARREN BUFFETT: OK. Gregg?

GREGG WARREN: Warren.

WARREN BUFFETT: Yeah.

GREGG WARREN: Between 2010 and 2015, intermodal rail traffic enjoyed double-digit rates of revenue growth as shorter-haul freight converted from truck to rail.

During the past year or so, though, cheaper diesel prices and more readily available truckload capacity have made trucking more competitive, leading to a decline in intermodal rail traffic.

While carload growth is expected to be solid longer term, helping to offset weakness in other segments like coal, what impact do you expect the widening of the Panama Canal, which was completed last year, to have on the West Coast port shipments that BNSF has traditionally carried through to exchange points for the Eastern U.S. railroads, as shippers elect to have goods unloaded at ports in the Gulf of Mexico or up the Eastern seaboard?

And while loss of volumes is never a good thing, could there be a small trade-off here as the bottleneck in Chicago, where most East-West cargo is handed off, eases a bit over time, if some of the current traffic gets rerouted?

WARREN BUFFETT: Well, you know — I — Chicago has got lots of problems, and it’s going to continue for a while. I mean, that requires a good solution.

When you think of how the railroads developed, I mean, they — Chicago was the center and, you know, they laid the rails — and there were a whole bunch of different railroads — you know, a hundred years ago. And the city grows up around them and everything. So Chicago is a — can be a huge problem.

But getting to intermodal, I think intermodal will do very well. But you are correct that car loadings actually hit a peak in 2006, so here we are 11 years later.

And the investment of the five big Class I railroads — four of the biggest — if you look at their investment beyond depreciation, it’s tens and tens of billions of dollars, and we’re carrying less freight before, in aggregate, than we were in 2006. And coal will continue to decrease.

It’s a good business, and it has big advantages over truck in many respects. Truck gets much more of a free ride in terms of the fact that their right of way, which is the highway system, is subsidized to a much greater degree beyond the gas tax — you know, we — than the railroad industry.

But it has not been a growth business, in physical volume, to any great degree. I think it’s unlikely to be. I think it’s likely to be a good business. I think we’ve got a great territory.

I like the West better than the East, and as you mention, you know, there will be some intermodal traffic that gets diverted to Eastern ports perhaps or so on.

Overall, I —we’ve got a terrific system in that respect. And we will do well.

It would be more fun if we had something where you could expect aggregate car loadings to increase two or three or four percent a year, but I don’t think that’s going to happen.

I do think our fundamental position is terrific, however. I think we’ll earn decent returns on capital. But that’s — I think that’s the limit of it.

Charlie?

CHARLIE MUNGER: Nothing to add.

33. Berkshire’s next CEO needs a “money mind”

WARREN BUFFETT: OK. Station 9.

AUDIENCE MEMBER: I’m from — Shankar Anant from Gurnee, Illinois. Thank you for doing everything you do for us. I have a question.

The two of you have largely avoided capital allocation mistakes by bouncing ideas off of one another.

Will this continue long into Berkshire’s future? And I’d like to — I’m interested in both at headquarters and at subsidiaries.

CHARLIE MUNGER: It can’t continue very long.

WARREN BUFFETT: I — (Laughter)

Don’t get defeatist, Charlie. (Laughter)

Any successor that’s put in at Berkshire, capital allocation abilities, and proven capital allocation abilities, are certain to be uppermost in board’s minds or in, in the current case — in terms of my recommendation, Charlie’s recommendation, for what happens after we’re not around.

Capital allocation is incredibly important at Berkshire. Right now we have 280 or -90 billion, whatever it may be, of shareholders’ equity. If you take the next decade alone, you know, nobody can make accurate predictions on this.

But in the next 10 years, if you just take — and depreciation right now is another seven billion a year, something on that order.

The next manager in the decade is going to have to allocate, maybe, 400 billion or something like that, maybe more. And it’s more than already has been put in.

So 10 years from now, Berkshire will be an aggregation of businesses where more money has been put in in that decade than everything that took place ahead of time. So you need a very sensible capital allocator in the job of being CEO of Berkshire. And we will have one.

It would be a terrible mistake to have someone in this job where, really, capital allocation might be — might even be their main talent. It probably should be very close to their main talent.

And of course, we have an advantage at Berkshire, in that we do know how important that is and there is that focus on it.

And in a great many companies, people get to the top through ability, and sales sometimes, if they come from the legal side, something like that — all different sides — and they then have the capital allocation, sort of, in their hands.

Now, they may not establish strategic thinking divisions. And they may listen to investment bankers and everything, but they better be able to do it themselves.

And if they’ve come from a different background or haven’t done it, it’s a little bit, as I put in one of my letters, I think — it’s like getting to Carnegie Hall playing the violin, and then you walk out on the stage and they hand you a piano.

I mean, it is something that — Berkshire would not do well if somebody was put in who had a lot of skills in other areas but really did not have an ability to capital allocation.

I’ve talked about it as being something I call a “money mind.” I mean, people can have 120 IQs or 140 IQs or whatever it may be, very similar scoring abilities in terms of intelligence tests. And some of them have minds that are good at one kind of thing and some of them another.

I’ve known very bright people that do not have money minds, and they can make very unintelligent decisions. They can do all kinds of other things that most mortals can’t do. But it just doesn’t, it isn’t the way their wiring works.

And I’ve known other people that really would not do that brilliantly. They do fine, but on an SAT test or something like that. But they’ve never made a dumb money decision in their life. And Charlie, I’m sure, has seen the same thing.

So we do want somebody — and hopefully they’ve got a lot of talents — but we certainly do not want somebody that — if they lack a money mind.

Charlie?

CHARLIE MUNGER: Well, there’s also the option of buying in stock, which — so, it isn’t like it’s some hopeless problem. One way or another, something intelligent will be done.

WARREN BUFFETT: And a money mind will recognize when it makes sense to buy in stock and doesn’t. You know, and —

In fact, it’s a pretty good test for some people, in terms of managements, how they think about something like buying in stock, because it’s not a very complicated equation if you sort of think straight about that sort of a subject.

But some people think that way and some don’t, and they’re probably miles better at something else. But they say some very silly things when you get to something that seems so clear as whether, say, buying in stock makes sense.

Anything further, Charlie?

CHARLIE MUNGER: No.

34. Most financial advisors don’t deserve their fees

WARREN BUFFETT: OK, Carol?

CAROL LOOMIS: This question comes from Steve Haverstroll (PH) of Connecticut.

“Warren, you have made it very clear in your annual letter that you think the hedge fund compensation scheme of ‘2 and 20’ generally does not work well for the fund’s investors.

“And in the past, you have questioned whether investors should pay, quote, ‘financial helpers,’ unquote, as much as they can. But financial helpers can create tremendous value for those they help.

“Take Charlie Munger, for instance. In nearly every annual letter and on the movie this morning, you describe how valuable Charlie’s advice and counsel has been to you and, in turn, to the incredible rise in Berkshire’s value over time.

“Given that, would you be willing to pay the industry standard, quote ‘financial helper’ fee of one percent on assets to Charlie? Or would you perhaps even consider ‘2 and 20’ for him? What is your judgment about this matter?”

WARREN BUFFETT: Yeah. (Laughter)

Well, I’ve said in the annual report that I’ve known maybe a dozen people in my life — and I said there are undoubtedly hundreds or maybe thousands out there.

But I’ve said that I’ve known, personally, a dozen where I would have predicted or did predict — in a fair number of those 12 cases — I did predict that the person involved would do better than average in investing over a long period of time.

And obviously, Charlie is one of those people. So would I pay him? Sure. But would I take financial advisors as a group and pay them one percent with the idea that they would deliver results to me that were better than the S&P 500 by one percent, and thereby leave me breaking even against what I could have done on my own? You know, there’s very few.

So it’s just not a good question to ask whether, you know, I’d pay Charlie one percent. That’s like asking, you know, whether I’d have paid Babe Ruth, you know, 100,000 or whatever it was to come over from the Red Sox to the Yankees. I mean, sure I would have, but there weren’t very many people I would have paid 100,000 to in 1919, or whatever it was, to come over to the Yankees.

And so, the — it’s a fascinating situation, because the problem isn’t that the advisors are going to do so terrible. It’s just that you have an option available that doesn’t cost you anything that is going to do better than they are, in aggregate.

And it — it’s an interesting question. I mean, if you hire an obstetrician, assuming you need one, they’re going to do a better job of delivering the baby than, you know, if the spouse comes in to do it, or if they just pick somebody up off the street.

And if you go to a dentist, if you hire a plumber, in all of the professions, there is value added by the professionals as a group, compared to doing it yourself or just randomly picking laymen.

In the investment world, it isn’t true. I mean, they, the active group, the people that are professionals, in aggregate, are not, cannot do better than the aggregate of the people who just sit tight.

And if you say, “Well, in the active group there’s some person that’s terrific,” I will agree with you. But the passive people can’t all pick that person. And they wouldn’t — they don’t know how to identify them. So I —

CHARLIE MUNGER: It’s even worse than that. The (inaudible) — the expert who’s really good, when he gets more and more money in, he suffers just terrible performance problems.

WARREN BUFFETT: Yeah. Yeah.

CHARLIE MUNGER: And so you’ll find the person who has a long career at “2 and 20,” and if you analyze it, net, all the people who’ve lost money because some of the early people have had a good record but more money coming in later and they lose it.

So, the investing world is just, it’s a morass of wrong incentives, crazy reporting, and I’d say a fair amount of delusion.

WARREN BUFFETT: Yeah, if you asked me whether I — those 12 people I picked would do better than the S&P working with a hundred billion dollars, I would answer that probably none of them would. I mean, they — that would not be their prospective performance.

They’re not, but when I was talking of them, I — you know, or referencing them — and when they actually worked in practice, they dealt, generally, with pretty moderate sums. And as the sums grew, their relative advantage diminished.

It — I mean, it’s so obvious from history. The example I used in the report — I mean, the guy who made the bet with me, and incidentally all kinds of people didn’t make the bet with me because they knew better than to make the bet with me.

You know, there were hundreds, at least a couple hundred underlying hedge funds. These guys were incented to do well. The fund of fund manager was incented to pick the best ones he could pick. The guy who made the bet with me was incented to pick the best fund of funds.

You know, and tons of money, and just in with those five funds, a lot of money went to pay managers for what was subnormal performance over a long period of time. And it can’t be anything but that.

And it’s an interesting — you know, it’s an interesting profession when you have tens of thousands, or hundreds of thousands of people, who are compensated based on selling something that, in aggregate, can’t be true: superior performance. So —

But it’ll continue, and the best salespeople will tend to attract the most money. And because it’s such a big game, people will make huge sums of money, you know, far beyond what they’re going to make in medicine or you name it. I mean, you know, repairing the country’s infrastructure, I think.

I mean, the big money — huge money — is in selling people the idea that you can do something magical for them.

And if you have — if you even have a billion-dollar fund, you know, and get two percent of it — for terrible performance, you make — that’s $20 million.

In any other field, you know, it would just blow your mind. But people get so used to it, you know, in the Wall — in the field of investment that it just sort of passes along. And $10 billion, I mean, $200 million fees?

We’ve got two guys in the office, you know, that are managing $11 billion. Well, no they’re not. I’m sorry. Yeah, they’re managing 20 billion, you know, between the two of them, 21 billion maybe.

And, you know, we pay them a million dollars a year, plus the amount by which they beat the S&P. They have to actually do something to get contingent compensation, which is much more reasonable than the 20 percent.

But how many hedge fund managers in the last 40 years have said, “I only want to get paid if I do something for you?” You know, “Unless I actually deliver something beyond what you can get yourself, you know, I don’t want to get paid.” It just doesn’t happen.

And, you know, it get back — it’s get back — it gets back to that line that I’ve used, but when I asked a guy, you know, “How can you, in good conscience, charge ‘2 and 20?’” And he said, “Because I can’t get 3 and 30.” You know — (Laughter)

Any more, Charlie? Or have we used up our —

CHARLIE MUNGER: I think you’ve beaten up on them enough.

WARREN BUFFETT: Yeah, well. (Laughter)

35. “I love the fact we bought Precision Castparts”

WARREN BUFFETT: Jonathan.

JONATHAN BRANDT: Precision Castparts represents the second largest acquisition Berkshire has ever made. There wasn’t much qualitative or quantitative information about it in the 2016 annual.

Would you be willing to update us here with how it is doing currently, what excites you about its prospects, and what worries you most about it?

I’m also curious if there were any meaningful purchase price adjustments beyond intangible amortization that negatively impacted Precision’s earnings in 2016, as was the case with Van Tuyl in 2015?

And finally, are there any opportunities in sight for bolt-on acquisitions?

WARREN BUFFETT: Yeah, we’ve actually made acquisitions, and we will make more that fit there, because we’ve got an extraordinary manager. And we’ve got a terrific position in the aircraft field.

So there will be sensible — there will be the chance for sensible acquisitions. And we’ve already made two, anyway. And we will make more over time. The — it’s —

The amortization of intangibles is the only big purchase price adjustment. That’s something over $400 million a year, nondeductible. In my mind, that’s 400-and-some million of earnings.

I do not regard the economic goodwill of Precision Castparts being diminished at that rate annually. That is a — and, you know, I’ve explained that in some degree. The —

As a very long-term business, you can worry about 3-D printing. I don’t think you have to worry about aircrafts being manufactured. But aircraft deliveries can be substantially altered in relation to any given backlog in most cases.

So the deliveries can be fairly volatile, but I don’t think the long-term demand is anything I worry about.

And the question is, whether anybody can do it better or cheaper, or like I say, whether 3-D printing at least takes away part of the field in some respects.

But overall, I would tell you I feel very good about Precision Castparts. It is a very long-term business. I mean, we have contracts that run for a very long time, and like I say, the initiation of a new plane may be delayed or something of the sort.

But if you take a look at the engine that’s in the other adjoining room here and in our exhibition hall, you would, if you were putting that engine together for the 20 or 25-year life or whatever it may have, carrying hundreds of people, you would care very much about your supplier.

And you’d care not only in the quality, you know — which would be, absolutely you’d care — of the work being done. But you also, if you were an engine manufacturer or an aircraft manufacturer further down the line, you would care very much about the reliability of delivery on something.

Because you do not want a plane that — or an engine — that’s 99 percent complete while somebody’s dealing with a problem of faulty parts or anything else that would delay delivery.

So, the reliability is incredibly important. And I don’t think anybody has a reputation better than Mark Donegan for — and the company — for delivery.

So I love the fact we bought Precision Castparts.

Charlie?

CHARLIE MUNGER: Yeah, well, what’s interesting about them, too, is that it’s a very good business purchased at a fair price under — but this is no screaming bargain like the old days.

WARREN BUFFETT: No.

CHARLIE MUNGER: For quality businesses, you pay up now a lot more than we used to.

WARREN BUFFETT: Yeah, that’s absolutely true, and we — you don’t get a bargain price.

The 400-plus million incidentally, you know, goes on for quite a while, too.

And we’ll explain it in the report just like — just as we’ll explain that the depreciation charge at a railroad would not be adequate. I mean, it’s the way accounting works.

36. A “really stupid” accounting rule change

WARREN BUFFETT: And starting — I don’t even want to tell you about this one — but starting the first of next year, accounting is going to become sort of a nightmare in terms of Berkshire and other companies because they’re going to have us mark our equities to market just like we were a Wall Street trading firm or something.

And those changes in the value of Coca-Cola, or American Express, or everything, are going to run through the income account every quarter. In fact, they run through it every day in this theory, so that it really will get confusing.

Now, it’s our job to explain things so that you aren’t confused when we report GAAP earnings, but GAAP earnings, as reported, will become even more meaningless, if looking only at the bottom line, than they are now, and —

CHARLIE MUNGER: That was not necessarily a good idea.

WARREN BUFFETT: No, I think it’s a terrible idea, but we’ll deal with it. And we’ll — and, I mean, it’s my job to explain to what extent GAAP accounting is useful to you in evaluating Berkshire, and the times when it actually distorts things.

Accounting isn’t supposed to — it’s not supposed to describe value.

On the other hand, it’s a terribly useful tool, if understood, in order to estimate value if you’re analyzing businesses. And so, you know, certainly, you can’t blame the auditing profession for doing what they think is their job, which is not to present value. Although, by using these market values —

CHARLIE MUNGER: But you can blame the audit —

WARREN BUFFETT: What’s that?

CHARLIE MUNGER: You can blame the audit profession for that one.

WARREN BUFFETT: OK, well.

CHARLIE MUNGER: That was really stupid. (Laughter)

WARREN BUFFETT: Well, I agree with that actually. (Laughter)

But we will do our best to give you — we’re always going to give you the audited figures.

And then we’re going to explain their shortcomings in either direction and how they — how what you should use and what you probably should ignore in looking at those numbers and using them to come to a judgment as to the value of your holdings.

And I’ll explain it to you the same way I would explain it to my sisters or anybody else that — you know, we want you to understand what you own. And we try to cover the details that are really important in that respect.

I mean, there’s a million things you can talk about that are just of minor importance when you’re talking about a $400 billion market value.

But they’re the things that, if Charlie and I were talking about the company, that they’d be the figures or the interpretations or anything that we would regard as important in sort of coming to an estimate of the value of the business. But it’s going to be —

You can’t knock the media. I mean, they’ve only got a few paragraphs to describe the earnings at Berkshire every quarter. But if they simply look at bottom line numbers, what can be silly this year will become absolutely ludicrous next year because of the new rule that comes into effect for 2018.

37. Munger: China’s stock market is cheaper than U.S.

WARREN BUFFETT: OK. Station 10.

AUDIENCE MEMBER: Hello Warren. This is a question from China.

VOICE: (Inaudible)

WARREN BUFFETT: Pardon me?

AUDIENCE MEMBER: I am Jeff Chan (PH), a pension fund manager from China, Shanghai. My question is quite simple.

What is the probability of duplicating your great investment track record in China’s stock market the next decades or two in terms of a (inaudible)? That’s all.

And I thank my friends from (FOREIGN LANGUAGE) Fund Management House for guiding me in writing this question. Thank you.

WARREN BUFFETT: Charlie, you’re the expert on China. (Laughter)

CHARLIE MUNGER: It’s like determining the order of precedency between a louse and a flea. Yeah.

I do think that the Chinese stock market is cheaper than the American market. And I do think China has a bright future. And I also think that there’ll be growing pains, of course. And —

But —

WARREN BUFFETT: Well —

CHARLIE MUNGER: We have this opportunistic way of going through life. We don’t have any particular rules about which market we’re in or anything like that.

WARREN BUFFETT: Well, Charlie’s delivered a headline anyway, now: “Munger Predicts China Market Will Outperform U.S.” (Laughter)

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lastmover · 6 years

Text

2016 Berkshire Hathaway Annual Meeting (Afternoon) Transcript

1. Sell commercial insurance on the internet?

WARREN BUFFETT: OK. If you’ll take your seats, we’ll get underway.

CLIFF GALLANT: Thank you.

Berkshire has an online portal for commercial insurance business. I believe it’s CoverYourBusiness.com. Is there an opportunity in commercial lines to go direct akin to what we’ve seen GEICO do in personal auto insurance?

WARREN BUFFETT: Yeah. Well, the answer to that is we’ll find out. We have actually two online arrangements. I’m not sure whether they’re both up yet.

One is called — I believe it’s called Big. I think we got that domain name, B-I-G, and that will be run by the Applied Underwriters, which is a subsidiary of ours that writes workers comp.

And the other is run by Ajit [Jain]. And then, actually, we do commercial auto, some commercial auto, through GEICO as well, so we will learn soon —

I guess my message about inherited wealth is getting delivered here. (Laughter)

The kid probably wants to put himself up for adoption now. (Laughter)

The — so we will be — we have been a little bit, and we will be experimenting more with various insurance lines.

When you look at what has happened, you know, just take Amazon, you have to — you want to try a lot of things, and it amazed me how fast the inquiries on personal auto migrated from phone to the internet, and, you know, I would’ve thought that the younger people would do it, but the people like myself would be very slow to do it.

But the adaptation by the American public of internet response has really been pretty incredible and shows no sign of slowing down.

So the answer is, we’ll try various things and we’ll make some mistakes, and my guess is that 10 and 20 and 30 years from now, it’ll be a lot different.

2. Our culture will endure for “many, many decades”

WARREN BUFFETT: Station 8.

AUDIENCE MEMBER: Hi. My name is Matt Clayborn from Columbus, Ohio. And thank you for putting this on for all of us.

My question is: you have said before that your role will be divided into parts for your succession, one of which will be the responsibility of maintaining culture by having [son] Howard [Buffett] as non-executive chairman.

What is the plan for how Berkshire will maintain its culture when Howard no longer fills the role, and what should shareholders watch for to make sure that the culture is being properly maintained decades from now when I am your age?

WARREN BUFFETT: Yeah. Well, that’s a question we’ve obviously given a lot of thought to, and although I hope that Howard is made chairman just for the reason that if a mistake is made in selecting a successor, it’s easier to correct it if you have a non-executive chairman. But that’s a very, very — I mean, that’s a 1-in-100 or 1-maybe-in-500 probability, but there’s no sense ignoring it totally.

It’s not a key factor. The main — by far, the main factor in keeping Berkshire’s culture is that you have a board and you’ll have successor board members. You have managers and you’ll have successor managers. And you have shareholders that clearly recognize the special nature of the culture, that have embraced the culture. When they sold their businesses to us, they wanted to join that culture.

It’s a — it thrusts out people that really aren’t in tune with it, and there are very few of them. And it embraces those who enjoy and appreciate it, and I think, to some extent, we don’t have a lot of competition on it. So it becomes very identifiable, and it works.

So I think the chances of us going off the rails in terms of culture are really very, very, very slight, regardless of whether there’s a non-executive chairman or not. But that’s just a small added protection.

So it’s — I think that the main problem that Berkshire will have will be size, and I’ve always — I thought that when I was managing money, when I first started managing money. Size is the enemy of performance to a significant degree.

But I do think that the culture of Berkshire adds significantly to the value of the individual components viewed individually. And I don’t see any evidence that there’d be any board member, any managers, or anything that would — could in any way really move away from what we have now for many, many decades. Charlie?

CHARLIE MUNGER: I’m even more optimistic than you are.

WARREN BUFFETT: I’ve never noticed it. (Laughter)

CHARLIE MUNGER: I really think the culture is going to surprise everybody — how well it lasts — and how well they do. They’re going to wonder why they ever made any fuss over us in the first place. It’s going to work very well.

WARREN BUFFETT: We’ve got so many good ingredients in place just in terms of the businesses and people already here, you know, that — at the companies.

CHARLIE MUNGER: That’s what I’m saying.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: There’s just so much power in place.

WARREN BUFFETT: Another thing that’s interesting is how little turnover we get in it, too. So that — the number of managers that have been needed, that we’ve had to replace in the last ten years, are very few.

You know, without a retirement age, and I tend to bring that up at every meeting to reinforce the idea, the — but without a retirement age and with people working because they love their jobs — and they like the money as well — but their primary motive is that they really like accomplishing what they do in their jobs. And that means that we get long tenure out of our managers.

So the turnover is low, the directors are not here for the money, and so we have great tenure among the directors, and I would argue that’s a huge plus. It’s going to go on a very long time.

3. Diversity isn’t a factor in choosing Berkshire directors

WARREN BUFFETT: Andrew.

ANDREW ROSS SORKIN: Thank you, Warren. The following question comes from Ariz Galdos (PH), and several other shareholders asked similar questions that are a part of this as well. It’s a bit of a multipart question.

WARREN BUFFETT: Uh-uh.

ANDREW ROSS SORKIN: “About two dozen men and women work with you, Warren, at our corporate office. I see from last year the quality of the picture has been improved in the annual report, so congratulations on that.

“However, looking at it, there is something that comes to anyone’s attention and is the lack of diversity among the staff. A 2015 analysis by Calvert Investments found that Coca-Cola was one of the best companies for workplace diversity while Berkshire Hathaway was one of the worst.

“You’ve explicitly stated that you do not consider diversity when hiring for leadership roles and board members. Does that need to change? Are we missing any investment opportunities as a result?

“And do you consider diversity, however defined, of company leadership and staff when analyzing the value of a company that you may want to purchase?

WARREN BUFFETT: Well, it’s a multiple part question. The answer to the last one is no.

What was the one before it? (Laughter)

ANDREW ROSS SORKIN: “You’ve explicitly stated you do not consider diversity when hiring for leadership roles and board members. Does that need to change, and are we missing any investment opportunities as a result?”

WARREN BUFFETT: No. We will select board members, and we lay it out. And we’ve done so for years, and I think we’ve been much more explicit than most companies.

We are looking for people who are business savvy, shareholder oriented, and have a special interest in Berkshire. And we found people like that. And as a result, I think we’ve got the best board that we could have. They’re not in it — they’re clearly not in it for the money.

I get called by consulting firms who have been told to get candidates for directors for other companies, and by the questions they ask, it’s clear they’ve got something other than the three questions we ask, in terms of directors, in mind.

They really want somebody whose name will reflect credit on the institution, which means a big name. You know, and one organization recently, the one that did the blood samples with small pricks, got — they got some very big names on their board. Theranos, I think, or — is that the way you pronounce it, Charlie? Theranos?

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: Yeah. I mean the names are great, but we’re not interested in people that want to be on the board because they want to make 2- or $300,000 a year, you know, for 10 percent of their time. And we’re not interested in the ones who — for whom it’s a prestige item and who want to go and check boxes or that sort of thing.

So I think we’ve got — we will continue to apply that test: business savvy, shareholder oriented, and with a strong personal interest in Berkshire.

And every share of Berkshire that our shareholders own, they bought just like everybody else in this room. They haven’t gotten them on an option or they haven’t — I’ve been on boards where they’ve given me stock, you know, and they — I get it for breathing, basically. Half a dozen places that are — maybe three or four that I was on the board of.

We want our shareholders to walk in the shoes — I mean, our directors to walk in the shoes of shareholders. We want them to care a lot about the business, and we want them to be smart enough so that they know enough about business that they know what they should get involved in and what they shouldn’t get involved in.

The people in the office — I’m hoping that when we take the Christmas picture again this year, they’re exactly the same 25 that were there last year, even though we might have added 30,000 employees elsewhere and maybe 10 billion of sales or something like that.

It’s a remarkable group of people, and they — I mean, just take this meeting. Virtually every one of the 25, our CFO, my assistant, whoever, they’ve been doing job after job connected with making this meeting a success and a pleasant outing for our shareholders. It’s a cooperative effort.

The idea that you would have some department called Annual Meeting Department and, you know, you’d have a person in charge of it and she’d — or he — would have an assistant and then they would go to various conferences about holding annual meetings and build up — and then they’d hire consultants to come in and help them on the meeting. We just don’t operate that way. It’s a place where everybody helps each other, but — (Applause)

Part of the — what makes — part of what makes my — well, my job is extraordinarily easy, but the people around me really make it easy. And part of the reason it’s easy is because we don’t have any committees. Maybe we have some committee I don’t know about, but I’ve never been invited to any committees, I’ll put it that way, at Berkshire.

And we don’t — we may have a PowerPoint someplace, I haven’t seen it, and I wouldn’t know how to use it anyway.

The — we just don’t do — we don’t have make-work activities. And we might go a to a baseball game together or something like that, but it — I’ve seen the other kind of operation and I like ours better, I’ll put it that way. Charlie?

CHARLIE MUNGER: Well, years ago I did some work for the Roman Catholic Archbishop of Los Angeles, and my senior partner pompously said, you know, you don’t need to hire us to do this. There’s plenty of good Catholic tax lawyers. And the archbishop looked at him like he was an idiot and said, “Mr. Peeler,” he says,” last year I had some very serious surgery, and I did not look around for the leading Catholic surgeon.” That’s the way I feel about board members. (Applause)

4. Buffett’s “mixed emotions” on Berkshire buybacks

WARREN BUFFETT: OK. Gregg.

GREGG WARREN: Warren, while —

WARREN BUFFETT: Gregg. (Laughter.)

GREGG WARREN: While Berkshire has authorized a share repurchase program, originally aimed at buying back shares at prices no higher than 10 percent premium to the firm’s most recent book value per share, a figure that was subsequently increased to repurchase shares at prices no higher than 20 percent premium to book value, there’s been relatively little share repurchase activity during the last four-and-a-half years.

Even as the shares dipped down below the 1.2 times book value threshold during both January and February of this year, if you base it on a buyback price calculated on Berkshire’s book value per share at the end of 2015, a number that had not yet been published when the stock did dip that low.

Given your belief that Berkshire’s intrinsic value continues to exceed its book value, with the difference continuing to widen over time, are we at a point where it makes sense to consider buying back stock at a higher break point than Berkshire currently has in place, and would you ever consider stepping in and buying back shares if they dip down blow 1.2 times book value per share even if that prior year’s figure had not yet been released?

WARREN BUFFETT: Yeah. Gregg, you mentioned that it sold below 1.2, and I don’t think that’s correct. I keep a pretty close eye on that, and it’s come fairly close to 1.2. But I could almost guarantee you that it has not hit 1.2, or we would’ve done it. And I’d be happy to send you figures on any day that you might feel that it did hit the 1.2.

Clearly in my view, Charlie’s view, the board’s, the stock is worth significantly more than 1.2, but it should be worth significantly more, or we wouldn’t have it at that level.

On the other hand, we did move it up from 1.1 to 1.2 because we had acquired more businesses over time that were — where the differential between our carrying value and the book value — and the intrinsic value really had widened from when we set the 1.1.

I have mixed emotions on the whole thing, in that from strictly a financial standpoint, and from the standpoint of the continuing shareholders, I love the idea of buying it at 1.2, which means I probably would love the idea of buying it a little higher than 1.2.

On the other hand, I don’t take — and it’s the surest way of making money per share there is. I mean, if you can buy dollar bills for anything less than a dollar, you know, there’s no more certain way of making money.

On the other hand, I don’t particularly like — enjoy the actual act of buying out people who are my partners at a price that is below — well below what I think the stock is worth.

So — but we will buy stock, almost certainly. We don’t make it a 100 percent pledge because there’d be a lot of ramifications to that, but the odds are extremely high that we would buy a lot of stock at 1.2 times or less. But we would do it in a manner where we were not propping the stock at any given level. And if it happens, it will be very good for the stockholders who continue.

It is kind of an interesting situation, though, because if it’s true that we will, and are eager even, from a financial standpoint, to buy it at that price, it’s really like having a savings account where if you take your money out as a dividend, or as an interest payment on a savings account, you know, you get a dollar.

But if you leave it in, you’re almost guaranteed that we’ll pay you $1.20. I mean, why would anybody want to take money out of a savings account if they could cash it in, what they left, at 120 percent?

So it’s a — it acts as a backstop for ensuring that a no-dividend policy results in greater returns than it would be if we paid out a dollar and people got a dollar. If they leave a dollar in, they’re going to get at least $1.20 in my view, at least — it’s not a total guarantee, but it’s a pretty strong probability.

So would we increase that number? Perhaps. If we run out of ideas, and I don’t mean, you know, day by day, but if it really becomes apparent that we can’t use capital effectively within the company, in the quantities with which it’s being generated, then at some point the threshold might be moved up a little because it could still be attractive to buy it.

And you don’t — you know, you don’t want — you don’t want to keep accumulating so much money that it burns a hole in your pocket. And it’s been said, actually, that — you know, that a full wallet is a little like a full bladder, that you may get an urge fairly quickly to pee it away, and we don’t want that to happen.

But so far that hasn’t happened, and we will — if it ever gets to where we have 100 billion or 120 billion or something like that around, we might have to increase the price.

Anytime you can buy stock in for less than it’s worth, it’s advantageous to the continuing shareholders, and — but it should be by a demonstrable margin. You can’t — intrinsic value can’t be that finely calculated that you can figure it out to four decimal places or anything of the sort. Charlie?

CHARLIE MUNGER: Well, you’ll notice that elsewhere in corporate America, these buyback plans get a life of their own, and it’s gotten quite common to buy back stock at very high prices that really don’t do the shareholders any good at all. I don’t know why people exactly are doing it. I think it gets to be fashionable.

WARREN BUFFETT: It’s fashionable and they get sold on it by advisors.

CHARLIE MUNGER: That’s true, too.

WARREN BUFFETT: Yeah. Can you imagine somebody going out and saying, we’re going to buy a business and we don’t care what the price is? You know, we’re going to spend $5 billion this year buying a business, we don’t care what the price is.

But that’s what companies do when they don’t attach some kind of a metric to what they’re doing on their buybacks. To say we’re going to buy back 5 billion of stock, maybe they don’t want to publicize the metric, but certainly they should say, we’re going to buy back 5 billion of stock if it’s advantageous to buy it back.

But they don’t — you know, if they say we’re going buy the XYZ Company, they say, we’ll buy it at this price, but we won’t buy it at 120 percent of that price. But I have very rarely seen — Jamie Dimon is very explicit about saying he’s going to buy back the stock when he’s buying it below what he considers intrinsic value to be.

But I have seen hundreds of buyback notices, and I’ve sat on boards of directors one after another where they have voted buybacks and basically — and they said they were doing it to prevent dilution or something like that. It’s got nothing to do with preventing dilution. I mean, if you’re — dilution by itself is a negative and buying back your stock at too high a price is another negative.

So it has to be related to valuation. And as I say, you will not find a lot of press releases about buybacks that say a word about valuation.

CHARLIE MUNGER: The occasion — we’re always behaving a lot like what some might call the Episcopal prayer. We prayerfully thank the Lord that we’re not like these other religions who are inferior. (Laughs)

I’m afraid there’s probably too much of that in Berkshire, but we can’t help it. (Laughter.)

5. New Nebraska Furniture Mart store in Dallas doing big business

WARREN BUFFETT: OK. Station 9.

AUDIENCE MEMBER: Good afternoon, Mr. Buffett.

WARREN BUFFETT: Hi.

AUDIENCE MEMBER: My name is Shawn Montgomery (PH) from Fort Worth, Texas. The Nebraska Furniture Mart has been open for about a year in Dallas.

WARREN BUFFETT: Right.

AUDIENCE MEMBER: I was just curious how sales have been, how they compare to your other stores, and what you think they’ll be in the future. Thank you.

WARREN BUFFETT: Yeah. It’s our largest store in volume. But we had a problem there that we had in Kansas City, and we’ll probably have every time we open a store, in that we generate so much initial volume that we had a delivery problem. Like I say, it was worse in Kansas City — that was the first one we opened.

So we really had to take our foot off the gas pedal because the last thing in the world we want to do, you know, is make first impressions with delivery problems — accompanied by delivery problems.

So, it’s our largest store in volume. The deliveries have gotten far better. They actually are meeting our company standards that we have in Omaha.

But that wasn’t the case for some months. And it’s hard to go open up — we opened up the largest home furnishing store in the United States, and we did it in an area where we naturally thought we trained the drivers as well as we could and everything.

But delivery with 100-plus units out there in a new operation, you know, taking in carpet and people getting lost and routing being bad and all kind — there was plenty of work to be done. And it’s been done.

So I expect that store, which already is the largest store we have, but I think it’ll be a billion-dollar annual store before very long. We’re getting ready to step on the gas. It’s a terrific area.

We have 20-plus auto dealerships there in the Dallas/Fort Worth area. We probably have three or four of them in the area where our Furniture Mart is. They can’t build fast enough down there. Toyota’s moving there. Lexus.

It’s going — it already is a great store, but it’s going to be something even far beyond that.

We’ve opened up about — I think there are about four food places so far. We’ve got four or five more in the works. And they’re doing terrific volumes.

I’m starting to sound like Donald Trump here, you know, tremendous, terrific, you know, fantastic, I’ve never seen anything like it. (Laughter)

Just wait until next year. I’ll come back, I’ll really be in shape then.

It’s doing well. We couldn’t have picked a better area. We have 400 and — have over 400 acres that we were very fortunate in corralling a whole bunch of land, and we’re bringing prices and variety like they — nobody’s seen. And now we’ve just got to bring in delivery like nobody’s ever seen.

6. Buffett’s concerns about weapons of mass destruction

WARREN BUFFETT: OK. Carol.

CAROL LOOMIS: This question comes from Chris Gottscho (PH) of New York.

Mr. Buffett, you have expressed concern about cyber, biological, nuclear, and chemical attacks, but preventing catastrophe is not getting enough attention.

For example, a bill passed the house unanimously to harden the electric grid against the high-altitude nuclear explosion. Not too many bills pass unanimously these days, but then the bill got bottled up in the Senate.

Have you considered funding — wouldn’t it be a good idea for you to consider funding a lobbying and educational campaign to promote the public good in this area and counteract industry lobbyists who are often more interested in short-term profits?

WARREN BUFFETT: Yeah. Well, in my view, there is no problem remotely like the problem of what I call C-N-B-C, cyber, nuclear, chemical, and biological attacks, that either by rogue organizations, even possibly individuals, rogue states, I mean, you know, if you think about — you can think about a lot of things. It will happen.

I think we’ve been both lucky and, frankly, the people have done a very good job in government, because government is the real protection on this, in not having anything since 1945.

We came very, very close during the Cuban Missile Crisis. And I don’t know what the odds were, but I do think that if there had been — I can think of many people that if they’d been in place of either [U.S. President John] Kennedy or [USSR Premier Nikita] Khrushchev, we would’ve had a very different result.

And it’s the ultimate problem. As I put in the annual report, it’s the only real threat to Berkshire’s economic — external threat to Berkshire’s economic well-being over time. And I just hope when — it’ll happen — I hope when it happens that it’s minimized.

But the desire of psychotics and megalomaniacs and religious fanatics and whatever to do harm on others is a lot more when you have 7 billion people on earth than when you had 3 billion or so, which was the case when I was born — less than 3 billion.

And unfortunately, there are means of doing it. You know, if you were a psychotic back far enough, you threw a stone at the guy in the next cave, and you would sort of limit — relationship of damage to psychosis.

But the — and that went along, you know, through bows and arrows and spears and cannons and various things. And in 1945, we unleashed something like the world had never seen, and that is a pop gun compared to what can be done now.

So there are plenty of people that would like to cause us huge damage. And I came to that view when I was in my 20s. And in terms of my philanthropic efforts, I decided that that was one of two issues that I thought should be the main issue, and I got involved with all kinds of things like the Concerned — Union of —

CHARLIE MUNGER: You supported the Pugwash Conference year after year and were exactly all by yourself.

WARREN BUFFETT: Union of Concerned Scientists, and I have given some money to the Nuclear Threat Initiative that was going to create a — sort of a Federal Reserve system to bank uranium that will take away some of the excuse for countries to develop their own highly-enriched uranium.

So — but it’s overwhelmingly a governmental problem on what you’re dealing, and it should be, and I think it actually has been the top priority for president after president. It’s not the thing they can go out and talk about it every day, and they don’t want to scare the hell out of everybody, and they also don’t want to tip people’s hands as to what they’re doing.

But being in the insurance business — you don’t have to even be in the insurance business — you can — you know that someday somebody will pull off something on a very, very, very big scale that will be harmful.

Maybe it will — the United States is probably the most likely place it happens, but it can happen a lot of other places, and that’s the one huge disadvantage to innovation. I mean, people —

CHARLIE MUNGER: Warren, I think he also asked, why don’t we, Berkshire, spend a lot more time telling the government what it should be doing and thinking?

WARREN BUFFETT: Well, I’ve tried telling people. (Laughs)

Nobody disagrees with you on it. They just — it seems sort of hopeless to — I mean, they don’t know what to do beyond what they’re doing.

And incidentally, they’ve done a lot of things. I mean, not all gets publicized, but — and I think Kennedy and Khrushchev — I mean, Khrushchev shouldn’t have been sending it over to Cuba, but at least he had enough sense when he knew Kennedy meant business to turn the ships around.

But it’s — you can’t count on there being Kennedys and Khrushchevs all the time in charge of things.

And the mistakes that are — I see the mistakes that are made in business or human behavior where people act so contrary to their own long-range self-interest that — humans are very — you know, they’ve got a lot of frailties.

You can argue that if Hitler hadn’t been so anti-Semitic, you know, he could’ve kept a lot of scientists that might have gotten him to the atomic bomb before we did, but he was — he drove out the best of the scientific minds and fortunate —

CHARLIE MUNGER: Imagine a guy stupid enough to think the way to improve science is to kick out all the Jews. (Laughter.)

WARREN BUFFETT: It was — the hero of the 20th century may have been Leo Szilard. I mean, Leo Szilard is the guy that got [Albert] Einstein to cosign a letter to [President Franklin] Roosevelt and say, you know, one side or the other is going to get this, and we better get it first, basically. He said it much more eloquently than that. You can go to the internet and look up the letter, but — you know, we’ve both been good and we’ve been lucky.

But, if you remember post-9/11, people started getting a few envelopes with anthrax, and they went to, like, the National Enquirer and Tom Brokaw and Tom Daschle — I can’t remember.

I mean, who knows what — when you’re — when you’ve got a mind that’s going to send anthrax to people, you know, how that decision making is made is just totally beyond comprehension. And that person did not end up doing a lot of damage, but the capability for damage is absolutely incredible.

I don’t know how Berkshire does anything about — I don’t know how to do it philanthropically. If I knew how to do — reduce the probabilities of the C-N-B-C-type mass attack, if I knew how to reduce the probability by 5 percent, all my money would go to that, no question about that, maybe 1 percent.

CHARLIE MUNGER: But hasn’t it been true we haven’t been very good at getting the government to follow any of our advice?

WARREN BUFFETT: Yeah. But this one’s important. (Laughter.)

CHARLIE MUNGER: Yeah, well —

WARREN BUFFETT: Yeah. Nobody argues with you about it. They just sort of throw up their hands. And some people work for a while on it and just get discouraged and quit.

I was involved — I forget the exact name of it, but their idea was — a bunch of nuclear scientists — this is long ago, but their idea was to affect elections in small states, the theory being that government was the main instrument and you would have the maximum impact. And just one after another, you know, people took it up and got discouraged.

I don’t — I don’t think it’s because we — we’ve had the wrong leaders. I think our leaders have been good on this.

I think that any candidate — well, I do not worry about the fact that either [Hillary] Clinton or [Donald] Trump would regard that as the paramount problem of their presidency.

But I just don’t know — the offense can be ahead of the defense, and that’s — you can win the game 99.99 percent of the time, but eventually anything that has any probability of happening, you know, will happen.

I wish I could give you a better answer. Charlie, have you got any —

CHARLIE MUNGER: I have no hope of giving a better answer.

WARREN BUFFETT: That’s what they all say to me. Yeah.

7. Lubrizol’s lubricant additives business

WARREN BUFFETT: Jonathan.

JONATHAN BRANDT: The Lubrizol lubricant additives business is one of your six largest noninsurance units, but there’s been relatively little disclosure about its performance since it was acquired nearly five years ago.

Can you please update us on how the core business has done and how the competitive landscape and end markets have evolved since it was acquired?

I know the core business is not a growth business, but has the increase in miles driven helped their top line at all?

Could you also talk about the performance of one or two of their more important bolt-on acquisitions, whether it be Chemtool, the pipeline flow-improver company, Warwick, Weatherford, or Lipotec?

WARREN BUFFETT: Yeah. The additive business — there’s four companies in it, basically — and it’s a no-growth, but very good, business, and we’re the leader.

So it has performed almost exactly as you would anticipate since purchase. And other specialty companies have — some of which have — have growth possibilities, but they’re small.

So Lubrizol overall, on an operational basis, has been very much as we anticipated, or you would’ve anticipated, if you looked at the prospectus at the time we bought it.

They made one large acquisition which is — was a big mistake, and that was in the oil field specialty chemical area, and was made just about the time that — or even a little after — that oil took a nosedive.

So we’ve had a — we’ve had some decent acquisitions there, but the biggest acquisition should not have been made.

It is — we still got the fundamental earning power of the additives business and everything. That has not disappointed us in any way. It’s a very well-run operation that way, but it’s not a growth operation.

Charlie?

CHARLIE MUNGER: Nothing to add.

8. “We like to look at micro factors”

WARREN BUFFETT: OK. Station 10.

AUDIENCE MEMBER: Hello. Hello, Mr. Buffett and Mr. Munger, thank you so much for your insights, teaching, and being great role models. My name is Eric Silberger, a violinist based in New York City.

My question for both of you is related to psychological biases. Through Berkshire Hathaway’s operations, you get a very good read on macroeconomic factors. Yet, Berkshire does not make investment decisions based upon macroeconomic factors.

How do you control the effect of information, such as knowing macroeconomic factors, or the anchoring effect of knowing stock prices, because after a while it’s hard not to once you’ve analyzed them before?

And how does that influence your rational decision making, whether you should ignore it, or whether you should try to use it in a positive way?

WARREN BUFFETT: Charlie and I are certainly — we read a lot, so we — and we’re interested in economic matters, and political matters, for that matter. And so we — we know a lot, or are familiar a lot, I should say, with almost all the macroeconomic factors.

That doesn’t mean we know where they’re going to lead. We don’t know where zero interest rates are going to lead. But we do know what’s going on, if we don’t know what — what is likely to —

CHARLIE MUNGER: Warren, there’s a confusion here.

WARREN BUFFETT: Oh.

CHARLIE MUNGER: It says microeconomic factors.

WARREN BUFFETT: Oh, micro.

CHARLIE MUNGER: We pay a lot of attention to those.

WARREN BUFFETT: Oh, yeah. I’m sorry.

CHARLIE MUNGER: If you talk about macro, we don’t know any more than anybody else.

WARREN BUFFETT: He summed it up.

In terms of the businesses we buy, and we — when we buy stocks, we look at it as buying businesses, so they’re very similar decisions — we try to know all, or as many as we can know, of the microeconomic factors.

We — I like looking at the details of a business whether we buy it or not. I mean, I just find it interesting to study the species, and — and that’s the way you do study it. So I — I don’t think there’s any lack of interest in those factors or denying the importance of them. So am I getting his question or not, Charlie?

CHARLIE MUNGER: Well, there hardly could be anything more important than the microeconomics. That is business. Business and microeconomics is sort of the same term.

AUDIENCE MEMBER: I guess —

CHARLIE MUNGER: Microeconomics is what we do, and macroeconomics is what we put up with.

AUDIENCE MEMBER: The anchoring effect, I mean, how do you deal with that as well?

CHARLIE MUNGER: Well, we’re not anchored to what we’re ignoring.

AUDIENCE MEMBER: I see. (Laughter)

WARREN BUFFETT: But we — Charlie and I are the kind that literally find it interesting in every business — we like to look at micro factors.

If we buy — when we buy a See’s Candy in 1972, you know, there may have been 140 shops or something. We’ll look at the — we’ll look at numbers on each one, and we’ll watch them over time, and we’ll see how third-year shops behave in the second year — we really like understanding businesses.

It’s just — it’s interesting to us. And some of the information is very useful, and some of it may look like it’s not helpful, but who knows when some little fact stored in the back of your mind pops up and really does make a difference.

So, we’re fortunate in that we’re doing what we love doing. I mean, we love doing this like other people like watching baseball games, and which I like to do, too.

But they — just the very act, every pitch is interesting, and every movement, you know, and whether the guy’s — you know, a double steal is interesting, or whatever it may be, and so that’s what our activity is really devoted to, and we talk about that sort of thing.

CHARLIE MUNGER: We try and avoid the worst anchoring effect, which is always your previous conclusion. We really try and destroy our previous ideas.

WARREN BUFFETT: Charlie says that if you disagree with somebody, you want to be able to state their case better than they can.

CHARLIE MUNGER: Absolutely.

WARREN BUFFETT: And at that point, you’ve earned the right to disagree with them.

CHARLIE MUNGER: Otherwise, you should just keep quiet. It would do wonders for our politics if everybody followed my system. (Laughter and applause)

9. I’d “much rather make money for Berkshire than for myself”

WARREN BUFFETT: OK, Becky.

BECKY QUICK: Warren, just a quick request. Would you please stop using C-N-B-C as an acronym for mass destruction? (Laughter.)

WARREN BUFFETT: But if I use N-B-C-C, then I’ve got a problem with [NBCUniversal CEO] Steve [Burke].

BECKY QUICK: This question comes from Matt Bandy in Dallas, Texas.

He’s asking about Seritage Growth Properties. He says, “In December, 2015, you filed a personal 13-G evidencing a roughly 8 percent ownership position in the real estate investment trust Seritage Growth Properties, which to my knowledge is not paralleled as a Berkshire investment.

“Alternatively, in September, 2015, Warren filed a personal 13-G evidencing ownership in Phillips 66, which is paralleled as a Berkshire investment.

“My question is, how do you decide when making a personal investment for your own account versus an investment for Berkshire? I understand market cap and ownership sizing are the likely factors, but does it still not behoove him to invest for the shareholder’s benefit in a company like Seritage that might have significant upside, and where are you putting your personal money to work?”

WARREN BUFFETT: Right. I do not own a share, or never have owned, a share of Phillips 66, so I’m not sure where that person — what he’s referring to.

It may be that there’s some way when the form is filled out that — that because I’m CEO of Berkshire that on some line it imputes ownership to me or something. The answer is I’ve never owned a share of Phillips.

And Seritage is a real estate investment trust that had a total market value of under $2 billion when I bought it. And my situation is that I have about 1 percent of my net worth outside of Berkshire and 99 percent in it, and I can’t be doing things that Berkshire does.

So a Seritage, with a $2 billion market cap, is not really something that is of a Berkshire size. Plus we’ve never owned a real estate investment trust to my knowledge, or my memory, in Berkshire at all. I mean, it’s just not a — so, I could buy that and not have any worry about a conflict with Berkshire.

As a practical matter, you know, my best ideas are — I hope they’re my best ideas —are off-limits for me because they go to Berkshire, if they’re sizable enough to have a significance to Berkshire.

We will not be making investments — unless it’s something very odd — we will not be making investments in companies with a total market cap of a couple billion while we’re our present size.

But — so, every now and then I see something that’s subsize for Berkshire that I’ll put my — that 1 percent of my net worth in, and the rest of the stuff is off-limits, basically, unless Berkshire’s all done buying something or — I mean, I own some wells that I bought a long, long time ago, and Berkshire was not in — was not interested. I mean, we bought enough or something at the time, or maybe we didn’t have money for investment.

But I try to stay away from anything that could conflict with Berkshire.

And if I’d been buying Phillips, when Berkshire was buying Phillips, or immediately — or prior — or subsequently, there could be a case where it’d be OK when — we might have hit some limit.

But the answer is I didn’t buy any, and I’ve never owned any. Charlie?

CHARLIE MUNGER: Well, part of being in a position like that we occupy, is you really don’t want conflict of interest or even the appearance of it. And it’s been 50 or 60 years, when have we embarrassed Berkshire by some of our side-gunning?

Both of us have practically nothing of significance, in the total picture, outside of Berkshire. I’ve got some Costco stock, because I’m director of Costco. Berkshire’s got some Costco stock.

There are two or three little overlaps like that, but basically Berkshire shareholders have more to worry about than some conflict that Warren and I are going to give it. We’re not going to do it.

WARREN BUFFETT: It may sound a little crazy, and it’s only because I can afford to say this, but I would much rather make money for Berkshire than for myself.

I mean, it isn’t going to make any difference to me anyway. I’ve got all the money I could possibly need, and way more, and on balance, my personality — everything’s more wound up in how Berkshire does than I am myself, because I’m going to give it all away.

So, I know my end result is zero, and I don’t want Berkshire’s end result to be zero. So I’m on Berkshire’s side. (Laughs)

10. Berkshire’s cash flow outlook

WARREN BUFFETT: Cliff. (Applause.)

CLIFF GALLANT: One of the great financial characteristics of Berkshire today is its awesome cash flow.

While its simple earnings-less-capex formula yields an annual free cash flow calculation of, I figure, of around 10 to 12 billion, in reality it seems to be much higher, closer to 20 billion, and I think, in part, due to changes in the deferred tax asset year-to-year.

What is the outlook for free cash flow, and can investors continue to expect similar dynamics going forward?

WARREN BUFFETT: Yeah. There’s a lot of deferred tax that’s attributable to unrealized appreciation in securities. I don’t have the figure, but let’s just assume that’s 60 billion of unrealized appreciation in securities. Well, then there would be 21 billion of deferred tax.

That isn’t really cash that’s available. It’s just an absence of cash that’s going to be paid out until we sell the securities.

Some arises through bonus depreciation. The railroad will have depreciation for tax purposes that’s a fair amount higher than for book purposes.

But overall, I think of, primarily, the cash flow of Berkshire as a practical matter relating to our net income plus our increase in float, assuming we have an increase.

And over the years, float has added $80-billion-plus to make available for investment beyond what our earnings have allowed for, and that’s the huge element.

We’re going to spend more than our depreciation in our businesses, primarily, number one, because of the — well, the railroad and Berkshire Hathaway Energy are two entities that will spend quite a bit more than depreciation, in all likelihood, for a long, long, long, long time.

And the other businesses, unless we get into inflationary conditions, it won’t be a huge swing one way or the other.

So, our earnings, the 17 — not counting investment, not counting capital gains — but our earnings, which were — whatever they were, you know, around 17 billion — plus our change in float is the net new available cash. But, of course, we can always sell securities and create additional cash. We can borrow money and create additional cash.

But it’s not a very complicated economic equation at Berkshire. People didn’t — for a long time, they didn’t appreciate the value of float. We kept explaining it to them, and I think they probably do now.

The big thing, the goal, what Charlie and I think about, we want to add, every year, something to the normalized — you know, the normalized earning power per share of the company.

And we think we can do it because we should be able to do it. We have retained earnings to work with every year to get that job done.

Sometimes it doesn’t look like we’ve accomplished much, and we haven’t accomplished much.

And other years, we — something big happens, and we don’t know ahead of time which year is going to be which. Charlie?

CHARLIE MUNGER: Well, there are very few companies that have ever been similarly advantaged.

In the whole history of Berkshire Hathaway, we’ve lived in a torrent of money, and we were constantly deploying it, and disbursed assets, and we were wising up as we went along. That’s a pretty good system.

WARREN BUFFETT: It’s a —

CHARLIE MUNGER: We’re not going to change it.

WARREN BUFFETT: No. And it’s allowed for a lot of mistakes. I mean, that’s the interesting thing.

American business has been good enough that you don’t have to be — you don’t have to really be smart to get a decent result. And if you can bring a little bit of intellect, you know, then you should get a pretty good result.

CHARLIE MUNGER: What you’ve got to do is be aversive to the standard stupidities. You just keep those out. You don’t have to be smart.

WARREN BUFFETT: Thank God.

CHARLIE MUNGER: Thank God, right.

11. We’ve “avoided the self-destructive behavior”

WARREN BUFFETT: OK. Section 11.

AUDIENCE MEMBER: Hey, Warren and Charlie. Thank you so much for your generosity and sharing your life’s accumulation of knowledge and financial capital to the progress of humanity. Thank you for that.

And Berkshire managers, thank you for building important companies and stewarding our financial futures. Thank you, guys.

This is Bruce Wang from MICROJIG, traveling west from Orlando, Florida.

Last year, you kindly shared with me the importance of getting the best reputation you can and behaving well. This year I’d like to ask and preface with, Bill Gates wrote, “Warren’s gift is being able to think ahead of the crowd. It requires more than taking his aphorisms to the heart to accomplish that, although Warren is full of aphorisms well worth taking to heart.”

And he also added that, “I’ve never met anyone who thought in business in such a clear way.”

Warren, what elusive, yet obvious to you, truth has allowed you to think ahead of the crowd and build a clear mental framework to produce a historically significant institution powerhouse brand?

And, Charlie, same to you, what obvious truth presents itself so clearly to you, but many would fervently disagree with you upon?

WARREN BUFFETT: I think I got the question, and I — you know, I owe a great deal to Ben Graham in terms of learning about investing.

And I learned a — I owe a great deal to Charlie, in terms of learning a lot about business.

And then I’ve also been around — I mean, I spent a lifetime, you know, looking at businesses and why some work and why some don’t work.

You know, as Yogi Berra said, you can see a lot just by observing. And that’s pretty much what Charlie and I have been doing for a long time.

And you do — I mentioned pattern recognition earlier — you know, there’s — you — and I would say it’s important to recognize what you can’t do. So we have — we may have tried the department store business and a few things, but we’ve — we’ve generally tried to only swing at things in the strike zone, and our particular strike zone. And it really hasn’t been much more complicated than that.

You do not need — you don’t need the IQ in the investment business that you need in certain activities in life. But you do have — you do have to have emotional control.

I mean, we see very smart people do very stupid things, and it’s fascinating how humans do that. Just take the people that get very rich and then leverage themselves up in some way that they lose everything.

I mean, they are risking something that’s important to them for something that isn’t important to them.

Well, you can say, you could figure that one out in first grade, but people do it time after time.

And you see that constantly, self-destructive behavior of one way or another. I think we’ve probably — and it doesn’t take a genius to do it, but I think we’ve sort of avoided the self-destructive behavior.

Charlie?

CHARLIE MUNGER: Well, there’s just a few simple tricks that work — work well, and particularly if you’ve got a temperament that has a combination of patience and opportunism in it.

And I think that’s largely inherited, although I suppose it can be learned to some extent.

Then I think there’s another factor that accounts for the fact that Berkshire has done as well as it has, is that we’re really trying to behave well.

And I had a great-grandfather. When he died, the preacher gave the talk, and he said none envied this man’s success, so fairly won and wisely used. That’s a very simple idea, but it’s exactly what Berkshire’s trying to do.

There are a lot of people who make a lot of money and everybody hates them, and they don’t admire the way they earned the money.

And I’m not particularly admirable of making money running gambling casinos. And, you know, we don’t own any. And we’ve turned down businesses, including a big tobacco business.

So, I don’t think Berkshire would work as well if we were just terribly shrewd, but didn’t have a little bit of what the preacher said about my grandfather, Ingham.

We want to have people think of us as having won fairly and used wisely.

It works. (Applause.)

WARREN BUFFETT: And we were very, very lucky to be born when we were and where we were. And I mean, we — you could’ve dropped us at some other place in time or some other part of the world, and things would’ve turned out —

CHARLIE MUNGER: And think of how lucky you were to have your Uncle Fred. Warren had an uncle who was one of the finest men I ever knew. I used to work for him, too. You know, a lot of people have terrible relatives. (Laughter.)

WARREN BUFFETT: That’s not an unimportant point. Just yesterday, we had a meeting of all my cousins and a whole bunch that we just get together at the annual meeting time. There are probably 40 of us or 50 of us there.

And they were pulling out some old pictures, and four — I had four aunts, they are all in these pictures — and every one of them — you know, I mean, you were so lucky to have one like that, and I had four. I mean, they just were — in every way they reinforced a lot of things that needed some reinforcement in my case.

CHARLIE MUNGER: I wish you’d had a couple more. (Laughter.)

WARREN BUFFETT: But —

CHARLIE MUNGER: We’d be doing even better.

WARREN BUFFETT: But, he mentioned my Uncle Fred, but my Aunt Katie worked in the store, too. My Aunt Alice worked in the store, and they just — you just couldn’t have been around better people. I think Charlie would agree with that.

CHARLIE MUNGER: Yeah. Well, we were very lucky.

WARREN BUFFETT: Yeah. My grandfather was a little tough, however. Tell them what my grandfather used to do when he paid you on Saturday, Charlie.

CHARLIE MUNGER: Well, that was very interesting. Warren’s a Democrat, but he came from different antecedents. I worked for his grandfather, Ernest, and he was earnest. (Laughs)

And when they passed Social Security, which he disapproved of because he thought it reduced self-reliance — and he paid me $2 for 10 hours work, there was no minimum wage in those days — on Saturday, and it was a hard ten hours.

At the end of the ten hours, I came in and he made me give him two pennies, which was my contribution to Social Security. (Laughter)

And he gave me two $1 bills and a long lecture about the evils of Democrats, and the welfare state, and a lack of self-reliance, and it went on and on and on and on.

So, I had the right antecedents, too. I had Ernest Buffett telling me what to do.

WARREN BUFFETT: OK. Enough family history.

CHARLIE MUNGER: I haven’t overstated that, have I?

WARREN BUFFETT: No, you haven’t overstated it at all. (Laughs)

CHARLIE MUNGER: You can’t believe what people — and he thought he was doing his duty by the world to do that.

WARREN BUFFETT: But we were lucky then. The people we were around when we were young, we were very lucky.

12. Due diligence doesn’t find the real risks of buying a company

WARREN BUFFETT: Andrew.

ANDREW ROSS SORKIN: “Warren and Charlie, you’re famous for making a deal over a day or two with nothing more than a handshake. You pride yourself on the small overhead of doing the diligence mostly yourself.

Other successful acquisitive companies use teams of internal people, outside bankers, consultants, and lawyers to due diligence, often over many months to assess deals.

Speed may be a competitive advantage. You’ve done some amazing deals. But does your diligence process also put us at greater risk? And if you’re ever gone, how would you recommend Berkshire change how we approach dealmaking?

WARREN BUFFETT: Yeah. I get that question fairly often, sometimes — often from lawyers.

In fact, our own — we talked to Munger Tolles, the law firm, and that was one of the questions I got, why we didn’t do more due diligence, which we would have paid them by the hour for.

The — (Laughter)

It’s interesting. We’ve made plenty of mistakes in acquisitions. Plenty. And we made mistakes in not making acquisitions, but the mistakes are always about making an improper assessment of the economic conditions in the future of the industry of the company.

They’re not a bad lease. They’re not a specific labor contract. They’re not a questionable patent. They’re not the things that are on the checklist, you know, for every acquisition by every major corporation in America. Those are not the things that count.

What counts is whether you’re wrong about — whether you’ve really got a fix on the basic economics and how the industry’s likely to develop, or whether Amazon’s likely to kill them, you know, in a few years, or that sort of thing.

We have not found a due diligence list that gets at what we think are the real risks when we buy a business. And like I say, we’ve made — we’ve certainly made at least — oh, at least a half a dozen mistakes and probably a lot more if you get into mistakes of omission.

But none of those would have been cured by a lot more due diligence. They might have been cured by us being a little smarter.

It isn’t — it just isn’t the things that are on the checklist that really count. Assessing whether a manager, who I’m going to hand a billion dollars to, for his business, and he is going to hand me a stock certificate, assessing whether he’s going to behave differently in the future in running that business than he has in the past when he owned it, that’s incredibly important, but there’s no checklist in the world that’s going to answer that.

So, if we thought there were items of due diligence — and incidentally, there are a few that get covered. I mean, you want to make sure that they don’t have twice as many shares out as you’re buying or something of the sort.

But they’re — if we thought there were things that we were missing that were of importance in assessing the future economic prospects of the business, you know, we would, by all means, drill down on those.

But the question of — you know, when we bought See’s, it probably had 150 leases. You know, when we — when we buy Precision Castparts, they have 170 plants, you know, there’s going to be pollution problems at some place.

Those are — that is not what determines whether a $32 billion acquisition is going to look good five years from now, or ten years from now.

We try to focus on those things. And I do think it probably facilitates things with, at least, certain people that our method of operation does cut down —

You get into squabbles on small things. I’ve seen deals fall apart because people start arguing about some unimportant point, and their egos get involved, and, you know, they draw lines in the sand and all of that.

I think we gain a lot. When we start to make a deal, it usually gets done. Charlie.

CHARLIE MUNGER: Well, if you stop to think about it, business quality usually counts on something more than whether you cross the T in some old lease or something.

And the human quality of the management who are going to stay are very important. And how are you going to check that as — by due diligence, you know?

And I think — I don’t know anybody who’s had a generally better record than Berkshire in judging business quality and the human quality of the people.

We’re going to lead the business after it’s acquired, and I don’t think it would’ve improved at all by using some different method. So I think the answer is that for us, at least, we’re doing it the way we should.

WARREN BUFFETT: Negotiations that drag out have a tendency — they’re more likely to blow up for some reason. I mean, people — they can get obstinate about very small points, and it’s silly to be obstinate, but people get silly sometimes.

I like to keep things moving. I like to show a certain amount of trust in the other person, because usually trust comes back to you.

But the — you know, the truth is there’s some bad apples out there, and spotting them is not going to come from looking at documents.

You really have to size up whether that person who’s getting a lot of cash from you is going — how they’re going to behave in the future, because we’re counting on them.

And that assessment is as important as anything involved — you know, we know all the figures and everything going in, and we know what we’ll pay, and so we don’t want things to get gummed up in negotiations.

And I’m perfectly willing to lose small points here and then on a deal. If I have the deal on the right terms, I don’t believe in — in making a — and Tom Murphy taught me this — I mean, you know, you just don’t try and win every point. It’s a terrible mistake.

You make a decent deal, and if you find something that bends a little different someway, that’s OK.

If you think it’s bad faith and gives an indication of the character of the person you’re dealing with, then you got another problem, and you’re lucky if you find that out early. Charlie, any more?

CHARLIE MUNGER: How many people who, in this room, are happily married, carefully checked their spouse’s birth certificate and so on? (Laughter)

My guess is that our methods are not so uncommon as they appear.

WARREN BUFFETT: Yeah. I’ll think about that. (Applause.)

13. “We don’t pay any attention to titles”

WARREN BUFFETT: OK, Gregg.

GREGG WARREN: Warren, the announcement earlier this month, that Ajit Jain would be taking over responsibility for all of Berkshire’s reinsurance efforts once Tad Montross retires from General Re, has raised some questions about not only the change in leadership structure but succession planning.

Given the state of the reinsurance market, it makes sense to have Ajit overseeing both businesses, especially if the pricing environment expected to be difficult for another ten years, and there are duplicative efforts that can be streamlined.

Given this move and the change in responsibilities we’ve seen at several of Berkshire’s subsidiaries the last few years, I was just wondering if you could just give us some color on how succession planning is handled at the subsidiary level, and any insight you could give us into what led you to finally decide to have Ajit oversee both of Berkshire’s reinsurance arms, and whether or not it will change the amount of work you’ll be doing on the specialty side of the business, would be greatly appreciated.

WARREN BUFFETT: Yeah. Well, Tad Montross, after 39 years, has done an absolutely sensational job for Berkshire. You know, originally — (applause)

Gen Re was a problem child for a while, as you know. Some brought on by itself and some external. But the — and Tad is — I mean, he’s sensational, and I tried several times, maybe successfully in terms of months but not in terms of years, to get him to stay on longer.

As you say, it makes sense to have the reinsurance operation under Ajit. Ajit’s ability to handle more and more things in insurance — he oversees a company called GUARD, which most of you have never heard it, and we bought it a few years ago, and it’s doing terrifically. It’s based in Wilkes-Barre, Pennsylvania.

It’s doing a great job with small business policies, primarily workers’ comp, around the country. And it’s flourished, you know, being put under Ajit.

He started the specialty operation a couple years ago, and under Peter [Eastwood], that is going gangbusters.

And I have found — and this is interesting, but it’s true — I have found with really able people, they can handle so much.

I mean, they almost — well, just take Carrie Sova, that put this meeting together.

You know, if you have some preconceived notion that an annual meeting that’s going to have 40,000 people therefore needs, you know, to spend millions of dollars with all kinds of organizational planning and meetings and meetings and meetings, but really able people — my assistant, Debbie Bosanek, she can do anything.

So there’s just no limit to what talented people can accomplish. And if I had something else in insurance tomorrow that needed doing, I’d probably call Ajit on that, too.

So it has no — you know, in terms of my succession, that’s something — we’ll have a board meeting on Monday, but we’ll talk about it as we always do at every meeting and — you know, when — we haven’t — our thoughts are as one on that, and everybody knows why it makes the most sense.

But five years from now, something different could make sense. That’s one reason for not announcing any names. I mean, who knows what happens in terms of the time when it happens or what happens to the person involved? Maybe their situation changes.

So it’s not a — there are no tea leaves to read in the fact that Ajit is supervising Gen Re from this point forward. Charlie?

CHARLIE MUNGER: Well, and there’s an obverse side of that. Not only can the able people usually do a lot more, but the unable people by and large you can’t fix. So —

WARREN BUFFETT: That is for sure.

CHARLIE MUNGER: I think you’re forced to use our system if you have your wits about you.

WARREN BUFFETT: And we don’t feel the need to follow any kind of organizational common view as to, you know, you do this and you have — only so many people can report to you or any of this sort of thing.

Berkshire — every decision that comes up, you know, we just try and figure out the most logical thing to do at that time. But we don’t have some grand design in mind of, you know, like an army organizational chart or something of the sort, and we never will.

CHARLIE MUNGER: Warren and I once reached a decision we wouldn’t pay more than X dollars for something, and the man who was subordinate to both of us who was working on it just said, you guys are out of your minds. This is really stupid. This is a quality operation, you ought to pay up for it. We just looked at one another, and did it his way.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: We don’t pay any attention to titles or —

WARREN BUFFETT: He was right, too.

CHARLIE MUNGER: He was right, yeah, of course. (Laughs)

WARREN BUFFETT: OK. I’m sorry. Have you got —?

CHARLIE MUNGER: If a charwoman gave us a good idea, we’d accept it cheerfully.

WARREN BUFFETT: Actually, one time the woman that does clean my office came in, and I think she’d been kind of wondering what I did, you know, based on — and I’d see her frequently, and her name was Ruby.

And finally one day she decided to really get to the heart of the matter, and she said, “Mr. Buffett, do you ever get any good horses?” Apparently thought this is where I was really making my money, was at the track, but — (Laughter)

14. “The rating agencies are wrong” on Berkshire

WARREN BUFFETT: OK. Station 1.

AUDIENCE MEMBER: Hello, Mr. Buffett —

WARREN BUFFETT: Hi.

AUDIENCE MEMBER: — Mr. Munger. Nirav Patel. Haverhill, Massachusetts. Thank you for taking my question.

With Berkshire Hathaway being so well managed, why doesn’t it have a highest credit bond rating?

CHARLIE MUNGER: Let me take that one.

WARREN BUFFETT: OK.

CHARLIE MUNGER: The rating agencies are wrong — (laughter and applause)

— and set in their ways.

WARREN BUFFETT: And we don’t fit their model very well.

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: Yeah. I mean, we don’t look like anything, exactly, they see otherwise. But —

CHARLIE MUNGER: But that’s the answer.

WARREN BUFFETT: Yeah. And we — (Laughter)

I’ll say this, though. What I do, when they come in the door, I always say, “Let’s talk quadruple-A.” I believe in starting the negotiation from that standpoint. I never get any place.

15. 3G’s cost cutting hasn’t hurt Kraft Heinz

WARREN BUFFETT: OK. Carol.

CAROL LOOMIS: Questions continuing to come in about the financing and working relationship that Berkshire formed with 3G a couple of years ago, and this is one of those questions:

“While 3G has been very successful in cutting costs and increasing margins at Kraft Heinz, the company has seen volumes and revenues decline.

As a long-term investor, how do you judge when a management is cutting muscle as well as fat? Can a business increase revenues while cutting costs?”

And I forgot to say, this came from Rick Smith at New York City.

WARREN BUFFETT: Well, the answer is, yes, that sometimes you can cut costs that are a mistake to cut, and you can — and sometimes you can keep costs that are a mistake to keep.

Tom Murphy had the best approach. I mean, he never hired a person that he didn’t need, and therefore, they never had layoffs.

And you might say that at headquarters at Berkshire, we follow a similar approach. You would never — we just don’t — we don’t take on anybody.

Now, I think it is totally crazy when companies are in — now, if you’re in a cyclical business, you may have to cut a workforce because there aren’t as many carloads of freight moving, or something like that, so you cut back on crane crews and all that — but the idea that you give up your staff, whatever it may be, economists or something like that, because business has slowed down — if you didn’t need them — if you don’t need them now, you didn’t need them in the first place, you know.

I mean, the people that are there just because somebody started a department, and they hired more people, and so on, I would argue that — since we’ve forgotten to insult this group so far — I would suggest that happens in investor relations departments, perhaps, or something of the sort.

You know, you get people — you get a department going and they’re always going to want to expand.

The ideal method is not to do it in the first place. But there are all kinds of American companies that are loaded with people that aren’t really doing anything or are doing the wrong thing. And if you cut that out, it should not really have any significant effect on volume.

On the other hand, if you cut out the wrong things, you could have a big effect. I mean, it can be done in a dumb way or a smart way.

My impression, with everything I’ve seen, and I’ve seen a fair amount so far, is that 3G, in terms of the cost cuts that they have made, have been extremely intelligent about it, and have not done things that will cut volume.

It is true that in the packaged goods industry, volume trends for everybody — whether they’re fat or lean in their operation — volume trends are not good. And the test will be over time — you know, three, five years — are the operations which have had their costs cut, do they do poor, in terms of volume, than the ones, that in my judgment, look very fat? So far I see no evidence of that whatsoever.

I do think at Kraft Heinz, for example, we’ve got certain lines that will decline in volume. I think we’ve got certain lines that will increase. But I think overall, the packaged goods industry is not going to go anyplace in terms of physical volume, and it may decline just a bit.

I can’t — I’ve never — I’ve never seen anybody run anything more sensibly than 3G has, in terms of taking over operations where costs were unnecessarily high, and getting those costs under control in a hurry.

And the volume question, we’ll look at as we go along. But believe me, I look at those figures every month, and I look at everybody else’s figures every month, and I try to — I’m always looking for any signs of underperformance because of any decisions made, and I’ve seen none. Charlie?

CHARLIE MUNGER: Yeah. And sometimes when you reduce volume, it’s very intelligent, because you’re losing money on the volume you’re discarding.

It’s quite common for a business, not only to have more employees than it needs, but sometimes it has two or three customers that it would be better off without. And so it’s hard to judge from outside whether things are good or bad just because volume is going up or down a little.

Generally speaking, I think the leanly-staffed companies do better at everything than the ones that are overstaffed. I think overstaffing is like getting to weigh 400 pounds when you’re a normal person. It’s not a plus.

WARREN BUFFETT: Yeah. Sloppy thinking in one area probably indicates there may well be sloppy thinking elsewhere.

And I have been a director of 19 public corporations, and I’ve seen some very sloppy operations, and I’ve seen a few really outstanding business operators. And there’s a huge, huge difference.

If you have a wonderful business, you can get away with being sloppy. We could be wasting a billion dollars a year at Berkshire, you know, 650 million after tax, that’d be 4 percent of earnings, and maybe you wouldn’t notice it. But —

CHARLIE MUNGER: I would.

WARREN BUFFETT: — it grows. (Laughter)

Charlie would notice it, so I —

But it’s the really prosperous companies that — you know, some — well, the classic case I think were the tobacco companies many years ago. I mean, they, you know, they went off into this thing and that thing and — and it was practically play money because it was so easy to make, and it didn’t require, you know — it didn’t require good management, and they took advantage of that fact. You can read about some of that in “Barbarians at the Gate.”

16. We paid less for Van Tuyl than it appears

WARREN BUFFETT: OK. Jonathan.

JONATHAN BRANDT: Berkshire paid 4.1 billion for Van Tuyl’s auto retailing business and consolidated its earnings for nearly ten months last year.

Given prevailing acquisition multiples in the industry, and margins, and the record level of retail auto sales, it seems that the acquisition should have contributed more to Berkshire’s bottom line in 2015 than it seemed to, although it’s hard to tell for sure since its results were lumped in with those of the German motorcycle apparel acquisition, which was only owned for a part of the year, also.

I understand the deductive — tax-deductible intangibles reduce the effective purchase price of Van Tuyl, but I still wonder whether there were any one-time charges or whether profits from insurance and finance operations could have been reported somewhere other than in the retail segment?

WARREN BUFFETT: Yeah.

JONATHAN BRANDT: I imagine Berkshire is earning a better return on the acquisition than is so far apparent, but I wonder if you could explain the difference between the likely economics of the deal and what I infer from the annual report figures.

WARREN BUFFETT: Yeah. Well, you’re right about it. It is better than it looks.

For one thing, we got a billion dollars of securities, roughly, with the 4.1, and those securities we’re basically carrying at a quarter of a percent. But that billion is available to us, and that came with the deal.

There’s some very significant acquisition accounting charges that will continue for a couple of years, and that I’m happy to have taken that way.

The economics of Van Tuyl, I would say, have worked out almost exactly as — if you had me, a year ago, lay out a projection — I don’t do it — but if I had, it would look very much like things have turned out.

And Jeff Rachor, who runs that operation, really fits the Berkshire mold. I mean, we’ve got a first-class CEO there.

But take a billion off the purchase price just for openers, and then there are some amortization charges of items that are allowable that make you correctly see a fairly low figure against what it appears the acquisition price was. So far, it’s exactly on schedule, and the schedule was perfectly satisfactory.

OK. Station 2.

We haven’t — incidentally — we haven’t had much luck, so far, in acquiring other auto dealerships based on the same metrics that we bought Van Tuyl. And I think to a small degree, that’s because people think we paid more for Van Tuyl than we did.

They’re not seeing certain factors in it, so they think we paid X, and therefore they’re entitled to X, and we didn’t pay X, so we haven’t made — we’ve bought very little so far. I hope that changes in the future.

But we’re not going to change — we’re not going to change our metrics, in terms of how we value auto dealerships.

17. “Very cheap money makes me pay a little more”

WARREN BUFFETT: OK. Station 2.

AUDIENCE MEMBER: Good afternoon, Mr. Buffett and Mr. Munger. I’m John Gorry from Iowa City, Iowa.

When interest rates go from zero to negative in a country, how does that change the way that you value a company or a stock?

Do you choose a high valuation because the discount rate is low, or on the other hand, do you choose a low valuation because the cash flow is likely to be poor?

WARREN BUFFETT: Well, going from — which we haven’t done in this country, yet — but going from zero to minus-a-half is really no different than going from 4 to 3 and a half.

It has a different feel to it, obviously, if you have to pay a half a point to somebody. But if you have your yield — or your base rate — reduced by a half a point, it’s of some significance, but it isn’t dramatic.

What’s dramatic is interest rates being where they are, generally. I mean, whether they’re zero, plus a quarter, minus a quarter, plus a half, minus a half, we are dealing with a situation of, essentially, very close to zero interest rates, and we have been for a long time and longer than I would’ve anticipated.

The nature of it is that you’ll pay more for a business when interest rates are zero than if they were, like, 15 percent when [former Federal Reserve Chairman Paul] Volcker was around, and you can take that up and down the line.

I mean, we don’t get too exact about it, because it isn’t that exact a science, but very cheap money makes me pay a little more for businesses than when money was at what we previously thought was normal rates. And very tight money would cause me to pay somewhat less.

I mean, you know, the — we had a rule for 2600 years that — Aesop lived around 600 BC, but he didn’t happen to know it was BC, but, you know, you can’t know everything — and it was that a bird in a hand is worth two in the bush. But a bird in the hand now is worth about nine-tenths of a bird in the bush in Europe, you know, because it depends on how far out the bush, but it keeps getting a little less as you go on. So these are very unusual times that way.

And if you ask me whether I paid a little more for Precision Castparts because interest rates were around zero, than if they’d been 6 percent, the answer is yes.

I try not to pay too much more, but it has an effect. And if interest rates continue at this rate for a long time, if people ever really start thinking something close to this is normal, that will have an enormous effect on asset values.

It already has some effect. Charlie?

CHARLIE MUNGER: Yeah, but I don’t think anybody really knows much about negative interest rates. We never had them before.

And we’ve never had periods of stasis like — except for the Great Depression — we didn’t have things like happened in Japan: great modern nation playing all the monetary tricks, Keynesian tricks, stimulus tricks, and mired in stasis for 25 years.

And none of the great economists who have studied this stuff, and taught it to our children, understand it, either. So we just do the best we can.

WARREN BUFFETT: And they still don’t understand it.

CHARLIE MUNGER: No. Our advantage is that we know we don’t understand it.

WARREN BUFFETT: It’s interesting, though. I mean, we are — you know, it’s — it makes for an interesting movie.

And it does modestly affect what we pay for businesses. Whether — I don’t think anybody expected it to last this long, do you Charlie, personally?

CHARLIE MUNGER: I don’t think — if you’re not confused, you haven’t thought about it correctly.

WARREN BUFFETT: Yeah. I thought about it correctly, then. (Laughs)

18. No comment on GEICO-IBM cooperation

WARREN BUFFETT: Becky.

BECKY QUICK: Warren, in the past you’ve talked about GEICO working with IBM’s Watson.

WARREN BUFFETT: Yeah.

BECKY QUICK: And this shareholder, Guillermo Bermudez, writes in and wants to know, “Would IBM be able to offer insurance industry competitors of GEICO the solutions developed with GEICO help and expense?

“I would think that there would be confidentiality provisions to protect GEICO, because in as much as GEICO educates IBM as to insurance issues, GEICO could be at jeopardy of competitors gaining or equaling its advantage if they purchase solutions jointly developed by GEICO and IBM.”

WARREN BUFFETT: Yeah. I would say the answer to that is that both parties have thought about that matter, very intensively and extensively, and neither would be in a position to talk about it.

I don’t like to not answer any questions, but there’s some things that it doesn’t pay to answer. Am I right, Charlie?

CHARLIE MUNGER: Yes, of course you’re right. (Laughter)

WARREN BUFFETT: I like that.

19. American Express faces tough competition

WARREN BUFFETT: Cliff.

CLIFF GALLANT: You’ve long stressed the importance of taking a long-term view when investing. Over the decades, your substantial returns in American Express seem to support your point.

Now, you’ve talked in the past about the ability of American Express to reinvent itself over time, but today it seems to be a company that doesn’t have alternative businesses and its brand doesn’t seem to have the same cachet as it once did.

Shouldn’t a prudent investor — shouldn’t Berkshire — periodically reassess its reasons for owning an investment?

WARREN BUFFETT: Well, we reassess our reasons for owning all investments on almost a continuous basis.

And both Charlie and I do that, and we’re usually in a general range of agreement, but sometimes we are a fair distance apart, perhaps.

There’s no question that payments are an area of intense interest to a lot of very smart people, who have got a lot of resources, and —

CHARLIE MUNGER: And rapid change.

WARREN BUFFETT: Yeah. And rapid change, and it will change.

And I personally feel OK about American Express. We — and I’m happy to own it. I think — but their position — and it has been under attack for decades, more intensively later — lately — and it will continue to be under attack.

I mean, it’s too big a business, and it’s too interesting a business, and it could be too attractive a business, for people to ignore it.

And it plays to the talents of some very smart people. I mean, it’s a natural, that a great many organizations that are really quite able, think about it. And it’s big. So —

CHARLIE MUNGER: A lot of great businesses aren’t quite so great as they used to be.

The packaged good business, the Procter & Gambles and so forth of the world — General Mills — they’re all weaker than they used to be at their peak and —

WARREN BUFFETT: And the auto companies. I mean when Charlie and I were —

CHARLIE MUNGER: Oh, my God. When I think of the power of General Motors when I was young, and what happened — they wiped out all the shareholders — I would no more have predicted that.

When I was young, General Motors loomed over the economy like a colossus. It looked totally invincible. Torrents of cash. Torrents of everything.

WARREN BUFFETT: Trying to hold down market share.

CHARLIE MUNGER: Yes, because they — yeah, they were afraid they’d be too monopolistic.

And so the world changes, and we can’t change — make a portfolio change — every time something is a little less advantaged than it used to be.

WARREN BUFFETT: But you have to be —

CHARLIE MUNGER: Alert.

WARREN BUFFETT: — you have to be thinking all the time and alert to whether there’s been something that really changes the game in a big way. And that’s not only true for American Express, that’s true for other things we own, including things we own 100 percent of.

And we’ll be wrong sometimes. We’ll be late sometimes, we’ll be wrong sometimes. But we’ll be right sometimes, too. But it’s not that we’re not cognizant of threats.

Assessing the probabilities of those threats being a minor problem, or a major problem, or a life-threatening problem, you know, it’s a tough game, but that’s what makes our job interesting.

CHARLIE MUNGER: I think anybody in payments, probably has — with an established long-time player with an old method — has more danger than used to exist. It’s just — there’s more fluidity in it.

20. We like steak but aren’t interested in owning cattle

WARREN BUFFETT: OK. Station 3.

AUDIENCE MEMBER: Hi, Mr. Buffett.

WARREN BUFFETT: Hi.

AUDIENCE MEMBER: Hi, Mr. Munger. I’m from Flagstaff, Arizona. My name is Nick Kelly. My family runs some cattle ranches down in Arizona, and that’s kind of what my question pertains to.

I’m curious on your thoughts as it relates to the expanding global population and investing in cattle and if you think it’s wise. Thank you.

WARREN BUFFETT: Charlie?

CHARLIE MUNGER: I think it’s one of the worst businesses I can imagine for somebody like us. (Laughter)

WARREN BUFFETT: There’s nothing personal about this.

CHARLIE MUNGER: Yeah. Not only is it a bad business, but we have no aptitude for it.

WARREN BUFFETT: Some people have done well in it, Charlie.

CHARLIE MUNGER: Well, I — yeah. They have one good year every 20 years or something.

AUDIENCE MEMBER: I know you guys like steak.

WARREN BUFFETT: Very much.

CHARLIE MUNGER: But not owning cattle. (Laughs)

WARREN BUFFETT: You know, it — actually, I know a few people that have done reasonably well in cattle, but they usually own banks on the side or something, so — (Laughter)

But I wish you the best at it. (Laughter)

And I’m in Kiewit Plaza, if want to send anything along. (Laughs)

CHARLIE MUNGER: Somebody has to occupy the tough niches in the economy.

We need you. (Laughter)

AUDIENCE MEMBER: Thank you.

WARREN BUFFETT: Thank you.

CHARLIE MUNGER: Yeah. (Applause)

21. Don’t reward profits in compensation plans

WARREN BUFFETT: Andrew.

ANDREW ROSS SORKIN: Warren and Charlie — well, the first part is for Charlie; second part is for Warren.

“Charlie, you clearly understand the power of incentives. How do you apply this at Berkshire when designing compensation formula?

“Without naming names or dollar amounts, please illustrate for us with examples — of a couple of examples — of how Berkshire’s operating managers get paid for performance in different industries.”

The second part is for Warren, which is, “You once said you’d write about how we should compensate the next Berkshire CEO. Can you describe exactly how we should do it now?”

CHARLIE MUNGER: I’ll let Warren worry about the next CEO.

But the — when it comes to assess — our incentive systems are different and what they try and adapt to is the reality of each situation.

And the basic rule on incentives is you get what you reward for. So, if you have a dumb incentive system, you get dumb outcomes.

And one of our really interesting incentive systems is at GEICO, and I’ll let Warren explain it to you, because we don’t have a normal profits-type incentive for the people at GEICO.

Warren, tell them, because it’s really interesting.

WARREN BUFFETT: Yeah. Well at GEICO, we have two variables, and they apply to well over 20,000 people. I think you have to be there a year, but beyond that point, anybody that’s been there a year or more — and I could be wrong on the exact period — is subject — and knows — understands — that these two variables will determine bonus compensation. And as you go up the ladder, it has a multiplier effect.

It’s still the same two variables, but it gets to be larger and larger, in terms of bonus compensation as a percentage of your base, but it’s always significant. It’s always significant.

And those two variables are very simple. I care about growing the business, and I care about growing it with a profitable business. So we have a grid, which consists of growth and policies in force on one axis — not gross in dollars, because that’s reflected by average premiums, which are outside their control — but growth in policies in force.

And then on the other grid, we have the profitability of seasoned business. It costs a lot of money to put business on the books. I mean, we spend a lot of money on advertising and all of that.

So the first year, any business we put on the books is going to reduce profits significantly. And I don’t want people to be worried about the profit if it’s going — that comes — that might be impaired by growing the business fast.

So, profit of seasoned business, growth of policies in force. Very simple. We’ve used it since 1995. We put a tiny little tweak or two in for new businesses or something, but it’s overwhelmingly a simple system.

Everybody understands it. In February, or so, it’s a big day when the two variables are announced and people figure out how they come out on it.

And it totally aligns the goals of the organization, in terms of compensation, with the goals of the owner.

And that’s a simple one. The interesting thing about —

CHARLIE MUNGER: It’s simple, but other people might reward something like just profits, and so the people don’t take on new business, they should take it on, because it hurts profits.

So you’ve got to think these things through, and, of course, Warren’s good at that, and so is [GEICO CEO] Tony Nicely.

WARREN BUFFETT: Yeah. And just thinking about — you know, I mean, very — somebody comes in and says, well, if you reward profits — you don’t want to award profits, alone. It’d be the dumbest thing you could do.

You just quit advertising, and, you know, start shrinking the business a little. That’s a — and like I said, that — people there know that the very top person is getting paid based on those same two variables. So that they — they don’t think that the guys at the top have got a cushy deal compared to them, and all of that. It’s just a very logical system.

The interesting thing — and I’ll get to your second thing in a — second question — in a minute, but the interesting thing is that if we brought in a compensation consultant, they would start coming up with plans that would be designed for all of Berkshire, and get us all pulling together, you know —

CHARLIE MUNGER: Maybe an undertaking parlor.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: God knows where they’d get the plan.

WARREN BUFFETT: The — you know, the idea of having a — sort of — a coordinated arrangement for incentive compensation across 70 or 80 businesses, or whatever, is just totally nuts.

And yet, I would almost guarantee you that if we brought in somebody, they would be thinking in terms of some master plan, and little subplans, and all this kind of thing, and explain it with all kinds of objectives.

We try to figure out what makes sense in each business we’re in. There’s some businesses where the top person is enormously important, or some businesses where the business itself dominates the nature — the result.

We try to design plans that make sense. In certain cases — I asked one fellow that came to work for us — or that was selling me his business — the day I met him he came to the office, and he had a business he wanted to sell, but he also wanted to keep running it. And I made a deal with him on it.

And then I said, you know, tell me what the compensation plan should be. And he said, well, he said, I thought you told me that. (Laughs)

I said no. I said, I don’t want a guy working for me that has a plan that he thinks doesn’t make sense, or that he’s unhappy with, or chewing at him, or he’s complaining to his wife about it, whatever it may be.

You tell me what makes sense. And he told me what made sense, and it made sense, and we’ve been using it ever since. Never changed a word.

We have so many different kinds of businesses. Some of them are very tough businesses. Some of them are very easy businesses. Some of them are capital intensive. Some of them don’t take capital.

I mean, you just go up and down the line, and to think that you’ll have a simple formula that can be sort of stamped out for the whole place, and then with some overall stuff for corporate results on top of it, you’d be wasting a lot of money, and you’d be misdirecting incentives.

So we think it through one at a time, and it seems to work out pretty well.

In terms of the person that succeeds me, it’s true, I have sent a memo to the — in fact, I sent two memos to the board — with some thoughts on that. Maybe I’ll send a third one.

But I don’t think it would be wise to disclose exactly what’s in those letters. But it’s the same principle as I’ve just gotten through describing.

CHARLIE MUNGER: And he wanted more bad examples.

A lot of the bad examples of incentives come from banking and investment banking. And if you reward somebody with some share of the profits, and the profits are being reported using accounting practices that cause the profit to exist on paper that are not really happening in terms of underlying economics, then people are doing the wrong thing, and it’s endangering the bank and hurting the country and everything else.

And that was a major part of the cause of the great financial crisis: it’s that the banks were reporting a lot of income they weren’t making, and the investment banks were, too.

The accounting allowed, for a long time, a lender to use his bad — as his bad debt provision — his previous historical loss rate. So an idiot could make a lot of money by just making way-gamier loans at high interest, and accruing a lot of interest, and saying, “I’m not going to lose any more money on these, because I didn’t lose money on different loans in the past.”

That was insane for the accountants to allow that. And — literally insane. That’s not too strong a word.

And yet nobody’s ashamed of it. I’ve never met an accountant that’s ashamed of it.

WARREN BUFFETT: The other — another thing that — possibility is when you get the very greedy chief executive who wants an enormous payoff for himself, and to justify it, designs a pyramid, so that a whole bunch of other people down the line get overpaid in some relation — or get paid — in relation to something they have no control over, just so it doesn’t look like he’s all by himself, in terms of that fantastic payoff he’s arranged for himself.

There’s a lot of misbehavior.

And, you know, we saw it — you saw it in pricing of stock options. I mean, people that — you know, I literally would hear conversations in a board room where they hoped they were issuing the options, you know, at a terribly low price.

Well, if you’ve got people interested in having options issued at a terribly low price, they may occasionally do something that might cause that. And it certainly — what could be dumber than a company looking for a way to issue shares at the lowest price?

Compensation isn’t as complicated as the world would like to make it, but that’s — if you were a consultant, you would want to make people think it’s very complicated, and that only you could solve this terrible problem for them that they couldn’t solve.

CHARLIE MUNGER: We want it simple and right, and we don’t want it to reward what we don’t want.

If you have — those of you with children — just imagine how your household would work if you constantly rewarded every child for bad behavior.

The house would be ungovernable in short order.

22. BNSF’s capital expenditures

WARREN BUFFETT: OK. Gregg.

GREGG WARREN: During the past several years, Burlington Northern has spent more than just about every railroad on capital expenditures.

While the company reduced its capex budget from $5.7 billion during 2015, to $4.3 billion this year, it stills represents around 20 percent of annual revenue, which we believe is at least a bare minimum for most railroads to continue to invest indefinitely.

Other than maintenance capex, which is likely to account for around 60 percent of that total, what do you believe are the most likely additional investment opportunities for BNSF, realizing that the secular decline in coal, which has accelerated of late, and the complicated nature of crude oil shipments, where BNSF has already invested heavily the past few years, are likely to push it more towards other parts of the business?

WARREN BUFFETT: As I mentioned in the annual report, in the case of all railroads, merely spending their depreciation expense will not keep them in the same place.

So depreciation is an inadequate measure of the actual steady state of capital expenditure needs of a railroad, even in these fairly noninflationary ways.

And that’s an important consideration in buying the business. We knew that going in, and it’s been reinforced since.

We spent a lot of money in 2015 because we had a lot of problems to correct. That was when we spent the 5.7 billion.

I would say that the true maintenance capex, if you’re looking at 4.3 billion, is higher than 60 percent of that number, when you really evaluate keeping the railroad in competitive shape to do just the same volume as it would be doing the year before.

There is an additional expense at BNSF that is not reflected in the figures. There — we also have a lot of intangible expenses at some other businesses that aren’t real expenses. I mean, overall, I think that Berkshire’s figures actually are on the conservative side, in relation to real economic earnings. But that’s not true at any railroad.

We’ve also had something called “positive train control,” which amounts to a lot of money for the industry. I think we may be a little further along than most of them in paying for that, but that’s 2 or $300 million a year and maybe — I don’t know whether it’d be close to 2 billion, or something like that, in aggregate.

So it is a very capital-intensive business. We run — at the BNSF — we run far more gross, in revenue ton miles, than any other railroad in North America. And that has obviously some — is a factor on capital expenditures.

But I would say that it’s very likely that we will spend more than depreciation — unfortunately, quite a bit more than depreciation — to stay in the same place for a long, long time, as will other railroads.

And that is — that’s a negative in the picture. We will always be looking for ways to use capital expenditure money to develop additional business, and we get that opportunity regularly. It’s just a question of the size of it.

And, you know, we did a lot of that in the Bakken, and we got benefits from it. We’re not getting benefits as much as we thought we would at this point when the price of oil was falling off. But that was a very sensible capital expenditure. And I hope we get the opportunity to do more.

What’s happening in coal, with the decline, I mean, that doesn’t really have anything to do with our overall capital expenditure budget except we won’t be spending a whole lot of money to expand in that arena.

Does that answer your question OK?

GREGG WARREN: I was just thinking maybe with intermodal as well, if that’s, you know, a longer-term opportunity to invest more heavily there.

WARREN BUFFETT: Well, we’re always open to it. But we would want — you know, you have to see a fair amount of revenue coming from —

We had a proposition, very recently, which we worked on for many, many years, in terms of making the port at Long Beach considerably more efficient. And we spent a lot of money on that, and spent a lot of time, and we would’ve spent a lot more money — a whole lot more money — if it’d been approved.

Recently a court came out with a decision that was negative on it, and whether that kills the chance to do that or we look someplace else, you know, we’ll have to look at the situation.

CHARLIE MUNGER: Our competitors there pretend to be environmentalists. (Laughs)

It’s a common practice now.

WARREN BUFFETT: Yeah. In any event, we wouldn’t — we thought we had something that made a lot of sense, for both the area and for the transportation system of the country, and — but there are —

CHARLIE MUNGER: We are trying to do the right thing, and so far we’ve lost.

WARREN BUFFETT: But we’re still willing to spend a lot of money —

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: — if we can find things that make the railroad more efficient, or make it larger, I mean, either way.

23. U.S. benefits overall from low oil prices

WARREN BUFFETT: OK. Section 4.

AUDIENCE MEMBER: Good afternoon, Mr. Buffett and Mr. Munger. My name is Marcus Douglas. I’m an investment advisor from Houston, Texas.

Where I’m from, there are a lot of people losing their jobs, mostly due to the sharp decline of crude oil prices. My question pertains to the overall state of the union, more so than my dear city.

Keeping in mind that crude oil is primarily bought and sold in American dollars, do either of you believe the major fluctuations in the supply of crude oil influence the future monetary policy decisions?

WARREN BUFFETT: Well, that’s yours, Charlie.

CHARLIE MUNGER: Well, my answer would be, not much.

WARREN BUFFETT: Yeah, it’s an important industry, obviously. And the decline in the price of oil has had a lot of effects, very good for the consumer, millions and — well, hundreds and millions of consumers — and very bad for certain of the businesses, like the one we bought in Lubrizol, and some others, to a degree.

You know — net, it should be good for the United States, overall, to have low prices for oil. We’re a net oil importer. I mean, just like it’s good for the United States to have low prices for bananas. We’re a banana importer.

Anything we net buy is a plus when prices fall, but oil is big enough, and extends into so many areas, that it also hurts, plenty, when the price of oil falls, and it particularly hurts capital values.

So the value — the consumer gets the benefit when he or she goes to the filling station, you know, every two or three weeks, or something like that, and it comes in relatively small increments.

The capital value contraction, which is huge, if you project out lower-price oil for a while, you know, hits immediately. I mean, an oil field that was worth X may be worth half X, or a third of X, or no X, overnight.

And so, there’s certain big factors — well, in terms of our chemical operation, people just stop ordering.

So you have this big impact on capital values immediately, and you have the benefits move in over time. But net, the United States is better off, and Saudi Arabia is worse off, when prices of oil are lower.

Oil is a big part of the economy, but our economy has continued to make progress, overall, during the oil price decline.

But obviously, different regions suffer disproportionately, just like they boomed — you know, they got a real boom in — during the period when it was at $100, and when trucking came in big time. Charlie?

CHARLIE MUNGER: Well, I think that that will do it for this subject.

24. No need to sweep cash from subsidiaries

WARREN BUFFETT: OK. Carol.

CAROL LOOMIS: The question is from Larry Levowitz (PH) of Boston.

“The year-end balance sheet for our manufacturing, service, and retailing operations shows total current assets of 28.6 billion, of which cash and equivalents are 6.8 billion.

“Meanwhile, total current liabilities are 12.7 billion, implying net working capital of 15.9 billion.

“It has become increasingly common for companies like Apple and Dell to finance their business via their suppliers, in some cases with negative working capital.

“Why is it necessary for these Berkshire businesses to have so much working capital, particularly so much cash?

“More generally, how do you think about efficiently managing the working capital of a business segment so large, sprawling, and decentralized as this one?”

WARREN BUFFETT: Yeah. Well, we have excess cash every place at Berkshire, so we don’t — at present, it really doesn’t make any difference whether we have it at certain subsidiaries or other subsidiaries.

So we do not — we have excess cash. As I pointed out in the past, we’ll never go below 20 billion in cash, and we’ll actually stay comfortably above it, but — allowing for the preferred that’s going to — of Kraft Heinz — we’ll be, again, over 60 billion of consolidated cash.

We don’t really worry much about what pocket it’s in. It’s not making anything, anyway, at these levels.

Now, if rates move higher, we’ve actually got the mechanics in process to do sweep accounts and that sort of thing, which — so I would pay no attention to the particular cash that’s being held in that category there.

The cash in Berkshire Hathaway Energy, the cash in the railroad, we have independent levels, that we don’t guarantee their debt, and they run with ample cash, and we would not look at sweeping that down to a minimum.

But if you talk about 40 or 50 of our miscellaneous subsidiaries, we will go to a sweep account when rates gets where it really makes any difference to do it.

But right now, when you’re getting zero, it doesn’t make much difference where you get zero. So I think the fellow’s overanalyzed it a little bit, but I understand why he did it.

CHARLIE MUNGER: Warren, one of these ideas is, why don’t we imitate some of these other people, and pay our suppliers a lot more slowly, so we have more working capital?

WARREN BUFFETT: Yeah. Well, that’s a big thing in business now. And last year, Walmart, for example, went to almost all of their suppliers, as I understand it, and certainly the companies that we supply, and they basically had a list of half a dozen things that they wanted present suppliers to agree to, and one of those things was more-extended terms.

And each of our companies made their own decisions, but my guess is they got more extended terms from most of their suppliers, maybe a very high percentage of their suppliers, and they may have gone from — I don’t remember the exact request, whether they went from 30 to 60 days, or what it was — but they got a meaningful extension.

So, you will — you know, in a couple years or a year, takes time to implement, you’ll see higher payables, relative to sales, at Walmart than you saw a year or two ago.

And, you know, they are under a lot of pressure competing with Amazon and others, and that’s one of the ways they expressed it.

And I’ve seen it done other places, and it’s conceivable that one of our subsidiaries might deem it wise to do it, but I don’t think they will. I mean, I think that the pressure for cash at Berkshire is not that high, and I think that the pressure for — or the desire for — great relations with suppliers is — would probably overcome, in most of our managers’ minds, any desire to start extending terms.

CHARLIE MUNGER: Yeah. I think it’s hard to do that, brutally, when you’re rich and your supplier isn’t, and think that your supplier is going to love you.

And so I think there’s something to be said for leaning over backward to have a win-win relationship with both suppliers and customers, always. (Applause)

WARREN BUFFETT: It’s never been pushed at Berkshire, that’s for sure.

You can argue we got a pretty good thing going in float anyway, so — (Laughs)

CHARLIE MUNGER: Yeah, and we don’t need it. Let somebody else set the record on that one.

25. “We don’t need to inflate the figures”

WARREN BUFFETT: OK. Jonny?

JONATHAN BRANDT: Most American corporations separate out supposedly one-time restructuring costs, whereas Berkshire doesn’t. Berkshire’s reported operating earnings are, therefore, in my opinion, of higher quality.

Have you ever calculated how much higher operating earnings, on average, would be if Berkshire separated out plant closing costs, product line exits, severance pay, and similar items?

Is it a material number? Or does Berkshire not incur much in the way of these types of costs typically because most of your acquisitions are stand-alones?

CHARLIE MUNGER: Let me take that one.

That’s a question like asking, why don’t you kill your mother to get the insurance money? (Laughter)

We don’t do it. We’re not interested in manipulating those numbers, and we haven’t had a restructuring charge ever, and I don’t think we’re about to start. (Applause)

WARREN BUFFETT: Yeah. I would say this, too, Johnny.

We don’t do that. The numbers would not be huge. You know, there could be a year, I suppose, when they might be, for some reason, but they are more conservatively stated than most companies, and I think they’re of higher quality.

But I’ve pointed out, also, that I think that our depreciation expense at the railroad, which is standard and which all of the other railroads use, is inadequate as a measure of true operating earnings, but that’s —

CHARLIE MUNGER: And you’re talking about — we like to advertise our defects.

WARREN BUFFETT: Not all of them. (Laughs)

There’s no question that we — I think we will have more amortization of certain intangibles in our — which reduce earnings and reported earnings, but which, in reality, are not expenses — we’ll have more of that than some companies.

And I’ve pointed that out. I haven’t — I never want to report one of these things where I have the whole adjusted earnings set out and say, this is what you’re supposed to pay attention to, because every one of those I’ve seen virtually results in some inflation of figures.

Things are good enough at Berkshire. We don’t need to inflate the figures.

26. Berkshire Hathaway’s credit default swaps

WARREN BUFFETT: OK. Station 5.

AUDIENCE MEMBER: This is Martin, calling from Germany. I’m a fixed-income manager.

We launched, with (inaudible), a fund and —

WARREN BUFFETT: You have my — you have my sympathy.

AUDIENCE MEMBER: Yeah, yeah. The volume is about 600, 650 million. We are 4.1 percent ahead this year.

Obviously my question is about fixed income. If I look in your annual report, it’s about the volume of 25 billion. And if I add, let’s say, the CDS, you were selling the CDS, it is by the volume of 7 or 8 billion.

So my concrete question is, the premium on your CDS is about 31 percent — 31 basis points — at the end of the year, so mark-to-market, it is probably at the high teens or 20s.

So would you consider to unwind this position? Are you allowed to do it and the (inaudible) say no? But probably you can make exactly the contrary trade on it. That means you are buying protection.

Is that a philosophy which you stand behind? Could you do that from the (inaudible) point of view, when the premiums are extremely low, which is at the case that the spreads are, as I said, between 15 and 20 basis points? Can you give —?

WARREN BUFFETT: Charlie, that sounds like it was designed for you. (Laughs)

I think he was referring to — we have one position left over from six or seven years ago, or thereabouts, that involves us selling protection on zero coupon municipal bonds with a nominal value — maturity value, which is — since there’s zero coupons, is far off, and not present value, at all. I think 7.7 billion or something like that.

And we’re just sitting with that position because we like the position. And the gentleman mentions that our CDS — our CDS is — that’s an insurance premium against our debt that people buy.

A, there’s a fair amount of activity in it from time to time, and I think that’s partially caused by the fact that we neither collateralize that municipal contract that he refers to, but we don’t collateralize, with minor exceptions, the equity puts that are still out there.

So the counterparties have to buy — I believe this is the case — I think the counterparties have to buy protection on Berkshire’s credit through CDSs.

Now, the people they buy it from, their credit probably isn’t as good as Berkshire’s, so I mean I think they’re — but it’s probably an internal rule at some of these firms that are on the other side of the contract, and so — but that really doesn’t make any difference to us.

Back in 2008 and ’9, our CDS prices went up to a crazy level, and I even commented here at the annual meeting that I would love to be selling them myself, except I wasn’t allowed to.

But what goes on in a CDS market really isn’t of any particular interest to us, and it’s too bad for the other guys. They didn’t get collateral from us and we wouldn’t have given it to them. And so they have to buy these things that, like I say, from our standpoint, they’re wasting their money, but they probably have internal rules that make them.

I think I’ve addressed your question, but — Charlie, do you think I’ve addressed his question?

CHARLIE MUNGER: Well, the truth of the matter is that we don’t pay much attention to trying to get an extra two basis points by being gamey on our short-term things. And that credit default position is a weird, historical accident, and we don’t pay much attention to it, either. It’ll go away in due course.

WARREN BUFFETT: Yeah. All of our contracts are just going to expire. We’re not — now, we do a few operational contracts in our energy company. I’ve mentioned a couple places where they — for their own reasons and sometimes because the utility commissions want them to — they do certain things, but it’s peanuts.

And the positions that I instituted six or seven years ago are basically all in a runoff position, and the first big runoffs will be in 2018, in a couple years.

CHARLIE MUNGER: We’re basically not in — we don’t fool around with our own credit defaults.

WARREN BUFFETT: No, no, never, no. But I would’ve liked to have sold them in 2008. (Laughs)

They actually got up — people were paying —

CHARLIE MUNGER: I know, it was crazy.

WARREN BUFFETT: — 500 basis points, 5 percent, in terms of betting that Berkshire would go broke, which was totally crazy, but I couldn’t take advantage of it. I wanted to, though.

27. A fantastic manager makes a huge difference

WARREN BUFFETT: Becky.

BECKY QUICK: This question comes from Tom Hinsley, a long-time shareholder from Houston, Texas, who says, “Over the years, you’ve been effusive in your praise of Ajit Jain and his contributions to Berkshire.

“In the 2009 chairman’s letter you wrote, ‘If Charlie, Ajit, and I are ever sinking in a boat, and you can only save one of us, swim to Ajit.’

My question is, what if we don’t get to Ajit in time? Please comment on the impact on National Indemnity and Berkshire, and whether or not there’s another Ajit in the house.”

WARREN BUFFETT: There’s not another Ajit in the house.

I didn’t hear the part immediately before it when you were — but there is not another Ajit on the house.

BECKY QUICK: The impact on National Indemnity — I guess the impact on the insurance companies, as a result —

WARREN BUFFETT: If we lost him?

BECKY QUICK: Yeah.

WARREN BUFFETT: It would be very significant. And that would be true of some other managers of some other subsidiaries.

But it’s quite dramatic with Ajit’s operation, because, literally, there were a few years when we had, like, 25 or so — or 30 — people where that operation — it was an unusual period to be in — but where it’s earning potential, under Ajit, was fantastic. That probably won’t happen to that degree again. I wish it would.

But he’s done a tremendous amount for Berkshire. But I can, you know, you can start with [GEICO CEO] Tony [Nicely] — you go to all — there have been a lot of managers that have created billions and billions of dollars of value for Berkshire. I mean, and maybe you can get into the tens of billions, you know.

It’s — having a fantastic manager that has a large business — potential business — available to them, and who makes the most of it, you know, it’s huge over time. You don’t see it necessarily in a week or a month or anything of the sort.

But when you’re building capital value, I mean, think of the value of [CEO] Jeff Bezos to Amazon. It wouldn’t have happened without him, you know, and you’re looking at huge values.

And I could name other situations. You know, the value of Tom Murphy and Dan Burke was the difference between zero and what they ended up with. I mean, they built that thing from a bankrupt UHF station in Albany.

It wasn’t that they were — they didn’t invent television or anything of the sort, they just managed it so well.

So, really outstanding managers, they’re invaluable, and we want to —

Charlie and I can’t do it ourselves, but we want to align ourselves with them and then, you know, have them feel about Berkshire the way we feel about it.

And if we do that, we have an enormous asset, and we do have, in Ajit and a number of the other managers. Charlie?

CHARLIE MUNGER: Yes, and Ajit has a longer shelf life than we do. (Laughter)

He’d be particularly missed.

WARREN BUFFETT: Well, let’s not give up here, Charlie. (Laughter)

I reject such defeatism. (Laughs)

28. Paying a little money now to have a lot of money later

WARREN BUFFETT: Cliff.

CLIFF GALLANT: Thank you.

Low-to-negative interest rates is something that’s been discussed a few times today, and you’ve mentioned its implications for a return on float.

I was wondering, how should shareholders value the 25 percent of the float that’s been created by retrocessional reinsurance, where the business is booked at an underwriting loss, and at times, has adversely developed?

WARREN BUFFETT: Yeah. Cliff brings up, some of our business, in the insurance business, we take with either the probability of some underwriting loss, in order to get to use the money for a very long period of time. And it would look, under today’s interest rates, like we can’t do much with that.

There’s two answers to that. We don’t think it will — for the duration of the kind of contracts we have — we don’t expect these rates, but we could be wrong.

But the second one, also, is that we do think that occasionally we will get chances, even in periods of low interest rates, to do things that are — will produce quite a bit — very reasonable returns.

And so we do not — we are not measuring it against, you know, double-A corporates, or anything of the sort. We’re measuring it in the potential utility, to us with our really pretty unusual flexibility, in respect to the deployment of funds, and this long period when we’ll have an opportunity, perhaps, to come up with one or two things that — where we can deploy money at a rate that may be quite a bit higher than other people. Assume now the money can be deployed. Charlie?

CHARLIE MUNGER: Yeah, we’re willing to pay a little money now to have just a certainty of having a lot of money available in case something really attractive comes up in a difficult time.

WARREN BUFFETT: Yeah. It’s an option cost.

CHARLIE MUNGER: It’s an option cost, right.

WARREN BUFFETT: And that option came in handy in 2008 and ’9, for example.

CHARLIE MUNGER: Did it ever.

29. No nationwide bubble in residential real estate now

WARREN BUFFETT: OK. Station 6.

AUDIENCE MEMBER: Hi, Charlie and Warren. My name is Mindy Jensen, and I’m from Longmont, Colorado. I work for the largest real estate investing social network online, called BiggerPockets.com.

We’re seeing investors starting to get concerned that the real estate market is a bit frothy, similar to the run-up of 2005, ‘6, and ’7, that led to the crash in 2008.

Warren, in 2012, you told Becky Quick that if you had a way to easily manage them, you’d buy 100,000 houses and rent them out. How do you feel about the real estate market today?

WARREN BUFFETT: It’s not as attractive as it was in 2012. (Laughs)

The — you know, we’re not particularly better at predicting real estate markets than we are stock markets, or interest rate markets, but there’s certainly — and it’s driven to some extent by these low interest rates — but there’s certainly properties that are being sold at very, very low cap rates that strike me as having more potential for loss than gain.

But again, if you can borrow money for very, very little, and you think you’re getting into some very safe asset, 100 basis points or 150 basis points higher, there’s a great temptation to do it.

I think it’s a mistake to do that, but, you know, I could be wrong.

I don’t see a nationwide bubble in residential real estate now, at all. I think, you know, I think in a place like Omaha or, you know — most of the country — you are not paying bubble prices for residential real estate.

But it’s quite different than it was in 2012. And I don’t think the next time around the problem is going to be a real estate bubble. I think that it certainly was the cause, in a very large part, of what happened in 2008 and ’9, but I don’t — I don’t think it’ll be a replica of that. Charlie?

CHARLIE MUNGER: Nothing to add.

30. Praise for portfolio managers Ted Weschler and Todd Combs

WARREN BUFFETT: OK. Andrew.

ANDREW ROSS SORKIN: Warren, Todd and Ted now have been at Berkshire for several years.

What have been their biggest hits, and failures, specifically?

And what have they learned from Charlie and Warren, and what are the biggest differences between you and them?

WARREN BUFFETT: Well, I’ll answer the last part, the easiest.

I am trying to think of very big deals that we can do something in, in investments, or in business, preferably just in operating businesses.

I mean, they still are — their primary job is working on — each has a $9 billion portfolio, and one of them has, I don’t know, perhaps seven or eight positions, and the other one has maybe thirteen or fourteen, but they have a very similar approach to investing.

They’ve both been enormously helpful in doing several things, including important things, that — for which they don’t get paid a dime, and which they’re just as happy working on as — working on the things — as they are when they’re working on things that do pay off for them financially.

They’ve got — they’re perfect cultural fits for Berkshire. They’re smart at what they do. And, you know, they’re a big addition to Berkshire. Charlie?

CHARLIE MUNGER: Again, I’ve got nothing to add.

WARREN BUFFETT: Did I cover the whole thing, Andrew, or was there one —a part I missed there?

ANDREW ROSS SORKIN: Biggest hits and failures. I think they specifically wanted to know, in terms of investments, and trying to understand the way you think perhaps — I think the question was more — I think — the implication was, the way they think and the way you think, are there differences?

WARREN BUFFETT: Yeah. They’re — I would say they’re — they have a bigger universe to work with, because they can look at ideas in which they can put 500 million, and I’m looking — I’m trying to think of ways to put, you know, sums into billions.

But — and they probably — well, they certainly — have more extensive knowledge of certain industries and activities in business that have developed in the last ten or fifteen years. They’d be smarter on that than I am.

But their approach to investing, I mean, they’re looking for businesses that they understand and that are going to — and through the stocks of those businesses — that they can buy at a sensible price and that they think will be earning significantly more money five or ten years from now.

So it’s very similar to what I’m thinking about, except I’d probably add another zero to it.

CHARLIE MUNGER: And we don’t want to talk about specific hits and failures.

WARREN BUFFETT: No.

OK. Gregg.

Yeah, we will never get into disclosing — I mean, we file reports every 90 days that show what Berkshire does in marketable securities, but we don’t identify — I may identify whether it’s mine or theirs, but we don’t get into identifying what they do individually.

31. We moved money to pay for Precision Castparts

GREGG WARREN: Looking at Berkshire’s finance and financial products segment, there was a fairly significant increase in the amount of cash carried on the group’s books last year.

After holding steady between 2 and 2-and-a-half billion dollars during 2012 to 2014, the amount of cash held at the segments spiked up to 5.4 billion at the end of the third quarter of last year, and $7.1 billion at the end of 2015.

This incidentally coincided with your acquisition of GE’s railcar leasing unit, as well as the acquisition of several railcar repair maintenance facilities.

Sales and profitability were fairly solid last year, but don’t really seem to account for the magnitude of the change in cash. And investments, debt, and other liabilities do not look to have changed significantly enough to count for the difference, perhaps accounting for about $1 billion of the increase.

Just wondering where the additional $3.5 billion in cash came from, and whether or not the elevated level of cash at the end of last year is excess to the business, or a new required level of cash for the operation?

WARREN BUFFETT: Yeah. Well, I can — I can’t tell where it came from — you think I would, 3-and-a-half billion — but I can tell you why we were funneling money into the parent company and the finance company.

That money was basically dedicated to making the 22 billion portion of the Precision Castparts purchase that was accounted for by cash. We borrowed — we actually borrowed 12 billion — but 10 billion was what was — of the borrowing — was there.

And we pushed money from various sources, depending on who owned what and that sort of thing, we pushed money into those two entities, and eventually into the parent company, to take care of the 22 billion that was coming due, turned out to be at the end of January, when the Precision Castparts closed. There’s really no significance to it other than that.

32. IBM is “coping with a considerable change”

WARREN BUFFETT: OK. Station 7.

AUDIENCE MEMBER: Good afternoon, Mr. Buffett and Mr. Munger. My name is Jeffrey Ustep (PH) from Cranford, New Jersey.

I just have a simple question for you. How would you explain IBM’s moat?

WARREN BUFFETT: I’m not sure that’s a simple question. (Laughs)

CHARLIE MUNGER: No, I don’t either.

WARREN BUFFETT: Well, it has certain strengths and certain weaknesses. And I don’t think we want to get into giving an investment analysis of any of the portfolio companies that we own.

I would — I think I probably better leave it there. Charlie?

CHARLIE MUNGER: Yeah. It’s obviously coping with a considerable change in the computing world, and it’s attempting something that’s big and interesting, and God knows whether it’s going to work modestly or very well.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: I don’t think Warren knows either.

WARREN BUFFETT: No. We’ll find out whether the strengths are strengths. But —

CHARLIE MUNGER: But it’s a field that a lot of intelligent people are trying to get big in.

33. Where Buffett and Munger get their sense of humor

WARREN BUFFETT: OK. We’re going to go to Section 8, and then we will adjourn for 15 minutes, prior to the formal meeting of the company.

Station 8.

AUDIENCE MEMBER: Hello, everybody. Good afternoon. My name is Cristian Campos. I’m from New York City. I’m a senior accounting major at Baruch College, part of the City University of New York.

And, Mr. Buffett, in your annual shareholder letters, and during interviews, and even today, your sense of humor always shines through. Where does your sense of humor come from? Please tell us. Thank you. (Laughter)

WARREN BUFFETT: That’s just the way I see the world. It’s a very interesting and, at times, very humorous place. And actually, I think Charlie has a better sense of humor than I have, so I’ll let him answer where he got his. (Laughter)

CHARLIE MUNGER: I think if you see the world accurately, it’s bound to be humorous, because it’s ridiculous. (Laughter and applause)

WARREN BUFFETT: Well, I think that’s a good note to close on.

34. Shareholder Q&A concludes

WARREN BUFFETT: We will reconvene in 15 minutes for the formal part of the meeting.

We have one proxy item to act on, and — so I hope that those of you who are interested in learning more about, actually, the insurance aspects of climate change, will stick around, and we’ll have a discussion on that. And I’ll see you at 3:45. Thank you.

35. Berkshire’s formal annual meeting begins

WARREN BUFFETT: OK. If everybody will please settle down, we’ll proceed with the meeting.

The meeting will now come to order.

I’m Warren Buffett, chairman of the board of directors of the company. I welcome you to this 2016 annual meeting of shareholders.

This morning, I introduced the Berkshire Hathaway directors that are present.

Also with us today are partners in the firm of Deloitte & Touche, our auditors. They’re available to respond to appropriate questions you might have concerning their firm’s audit of the accounts of Berkshire.

Sharon Heck is secretary of Berkshire Hathaway, and she will make a written record of the proceedings.

Becki Amick has been appointed inspector of elections at this meeting. She will certify the count of votes cast in the election for directors, and the motion to be voted upon at this meeting.

The named proxy holders for this meeting are Walter Scott and Marc Hamburg.

Does the secretary have a report of the number of Berkshire shares outstanding — turned off the lights on me — entitled to vote and represented at the meeting?

SHARON HECK: Yes, I do.

As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 2nd, 2016, the record date for this meeting, there were 807,242 shares of Class A Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at the meeting, and 1,254,393,030 shares of Class B Berkshire Hathaway common stock outstanding, with each share entitled to one ten-thousandth of one vote on motions considered at the meeting.

Of that number, 575,608 Class A shares and 772,724,950 Class B shares are represented at this meeting by proxies returned through Thursday evening, April 28th.

WARREN BUFFETT: Thank you. That number represents a quorum, and we will therefore directly proceed with the meeting.

The first order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott who will place a motion before the meeting.

WALTER SCOTT: I move that the reading of the minutes of the last meeting of shareholders be dispensed with and the minutes be approved.

WARREN BUFFETT: Do I hear a second?

MARC HAMBURG: I second the motion.

WARREN BUFFETT: The motion has been moved and seconded. We will vote on the motion by voice vote. All those in favor say, “Aye.”

Opposed? The motion is carried.

36. Election of Berkshire directors

WARREN BUFFETT: The next item of business is to elect directors.

If a shareholder is present who did not send in a proxy or wishes to withdraw a proxy previously sent in, you may vote in person on the election of directors and other matters to be considered at this meeting. Please identify yourself to one of the meeting officials in the aisle so that you can receive a ballot.

I recognize Mr. Walter Scott to place a motion before the meeting with respect to election of directors.

WARREN BUFFETT: Is there a second?

MARC HAMBURG: I second the motion.

WARREN BUFFETT: It has been moved and seconded that Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Thomas Murphy, Ronald Olson, Walter Scott, and Meryl Witmer be elected as directors.

Are there any other nominations or any discussion?

The nominations are ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballot on the election of directors and deliver their ballot to one of the meeting officials in the aisles.

Miss Amick, when you are ready, you may give your report.

BECKI AMICK: My report is ready.

The ballot of the proxy holders, in response to proxies that were received through last Thursday evening, cast not less than 643,789 votes for each nominee. That number far exceeds a majority of the number of the total votes of all Class A and Class B shares outstanding.

The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Thank you, Miss Amick.

Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Thomas Murphy, Ronald Olson, Walter Scott, and Meryl Witmer have been elected as directors.

37. Shareholder proposal on climate change risks

WARREN BUFFETT: The next item of business is a motion put forth by the Nebraska Peace Foundation.

The motion is set forth in the proxy statement, and will the projectionist please put up number 9? Here we are.

The motion requested our insurance business issue a report describing their response to the risks posed by climate change, including specific initiatives and goals relating to each risk issue identified.

The directors have recommended that the shareholders vote against the proposal.

I will now recognize — and I think it’ll be up in area one — I will now recognize Dr. James Hansen to present the motion.

But I believe, maybe, the gentleman from the Nebraska Peace Foundation may be introducing it, and then he may introduce Dr. Hansen.

To allow all interested shareholders to present their views, I ask the initial speaker to limit his remarks to five minutes, and then those — the microphone in zone one is available for those wishing to speak for or against the motion, subsequently — zone one is the only microphone station in operation.

For the benefit of those present, I ask that each speaker for or against the motion limit themselves, with the exception of the initial speaker, to two minutes, and confine your remarks solely to the motion. And the motion should be left up on the — let’s see, is that up there or not? Yeah, OK, the motion shall be left up there.

In a sense, incidentally, it asks us to present a report about the risk to the insurance division by climate change, and I did address this subject in the annual report. That would be a report, and it was a report that was concurred in by Ajit Jain, who is our number one expert on insurance risks. So that does represent the view of our insurance division, and myself, as the chief risk officer.

But the subject now is open and we welcome the initial speaker’s comments.

And if you’re just going to introduce Dr. Hansen — I can’t see who’s who up there — then I presume that he will have the five minutes and then subsequent speakers will have two minutes. So go to it, you’re on.

MARK VASINA: Thank you. My name is Mark Vasina. I’m the treasurer of the Nebraska Peace Foundation, the owner of one A share of Berkshire Hathaway.

We are the sponsor of the shareholder resolution which Mr. Buffett has described. In so doing, making the recommendation to develop a risk analysis and report on it, we’re following the lead of the Bank of England, which last September published a comprehensive report on climate change risks facing the insurance industry, and recommended that its regulated companies conduct reviews of the risks and make this available.

The Bank of England regulates the UK insurance industry, which is the third-largest global insurance market. I’ll turn the rest of my time over to world-renowned climate scientist Dr. James Hansen.

DR JAMES HANSEN: Thank you for this opportunity.

I want to make a suggestion that I hope you will ponder.

Some aspects of climate have become clear. Humans are changing the atmosphere, and we can measure how this is changing earth’s energy balance. More energy is coming in than going out.

So the ocean is warming, ice sheets are melting, and sea level is beginning to rise.

We are now close to a point of handing young people a situation that will be out of control, with ice sheet disintegration and multimeter sea level rise during the lifetime of today’s young people, which would mean loss of coastal cities and economic devastation.

Sea level rise would be irreversible on any time scale of interest to humanity. The other irreversible effect of rapid climate change would be extinction of a substantial fraction of the species on Earth.

The bottom line is that we cannot burn all fossil fuels, and the economic law of gravity is that as long as fossil fuels appear to be the cheapest energy, we will keep burning them.

So my request, given the respect and the trust the public has in you, is that you reflect upon the possibility of a public statement in favor of a revenue-neutral, gradually-rising carbon fee.

A carbon fee is needed to make the price of fossil fuels honest, to include the costs to humanity of their air pollution, water pollution, and climate change.

A rising carbon fee is needed to spur effective investments by the private sector in clean energies and energy efficiency.

Most important, it will steadily phase down fossil fuel use. I’m not asking you to endorse a carbon fee on the spot, but I hope that you will reflect upon it and perhaps provide a clear statement in your next report.

It could be your greatest legacy. It could affect everything, even the course of our future climate. T

Thanks.

WARREN BUFFETT: Thank you, Dr. Hansen.

I might say that we — (Applause)

— although we may differ on some specifics, and I don’t know — I am no expert on this subject whatsoever — I don’t think you and I have any difference in the fact that it’s important that climate change — you know, since it’s something where there is a point of no return — if we are on the course that you think is certain and I think is probable, that it’s a terribly important subject.

But the motion that was put forth was relating to the insurance aspects of it, and we have discussed — believe me, we have thought and discussed insurance aspects, and I’ve, in effect, given a report in the — which was asked for by this — within the annual report.

So it is really not — the issue before the shareholders is not how I feel about whether climate change is real, or whether a carbon tax is appropriate, it’s whether it poses a risk to our insurance business.

And I recognize the Bank of England — read that report — but we respectfully disagree with them in terms of — not in terms of the importance of climate change — but in terms of the risk to our insurance business.

We don’t — we are not forced — we don’t write policies for a long period of time. We’re not forced to write a policy on anything, so we are — our judgment is made as propositions are presented to us, usually as to whether, for one year, we are willing to accept a given risk for a given price.

And that — obviously, climate is enormously important in our activities, hurricanes being the most important, probably, although we also get involved in earthquakes — but that is what the proposal is about, and that — and we’ve given a response to that, and it does not mean that we differ on the importance of climate change to the human race.

So with that, I would be delighted to hear from the various seconders.

JIM JONES: Hello. My name is Jim Jones. I’m the executive director of the Katie School of Insurance at Illinois State University.

I would like to express my concerns, based on three hidden risks associated with climate change.

The first relates to stranded assets of insurers investing in fossil fuels. The second is a more insidious risk related to climate change. This risk is associated with the long-term liabilities associated with property, life, and health lines of business.

And I realize that a number of intelligent people and experts don’t see a long-term liability, but they’re missing one important part, is that primary insurers are not able to withdraw or reprice books — entire books of business.

Following Hurricanes Katrina, Rita, and Wilma, new hurricane models were developed in Florida, and they attempted to get the recommended rate approvals for that. They were not allowed to, and so many insurers began to withdraw from that market.

Ten years later, that — about 40 percent of the underperforming business is still on the books of those insurers, and this could play out in several other states that are exposed to climate risk.

For a reinsurer, the value of reinsurance with their customers is a long-term business.

The reason why this is so important is because, according to my count, 156 of your reinsurance customers have filed climate change disclosures, and these customers are looking for long-term interest being protected by their reinsurer.

And if not, there’s a potential for a relationship default risk that could occur if they perceived your reinsurance as just being one-year contracts that can be repriced or withdrawn.

And you enter into that world of the expanding market competition of alternative reinsurance, which just last year was $72 billion, and earlier this quarter, we set a record of $2.2 billion in cap bonds.

WARREN BUFFETT: Thank you. The — I would point out that we have not been asked, ever, to my knowledge, to write long-term contracts. Our primary insurers know that we look at it one year at a time, and we will not write business that we think has a major negative probability. They don’t expect us to.

It’s way less a relational business than in the past. It’s much more a transactional business.

But it — we will not write — if we lose a customer because they want us to do something stupid, we lose the customer, and there is not a — in our business — I’m not speaking for other reinsurers, but in our business, and I believe with most other reinsurers, they are not going to do something that they think is terribly disadvantageous to them just to maintain a relationship. That’s not really a relationship. It’d be a subsidy.

So I do — that does not strike me, frankly, as a factor at all of any negative consequence at Berkshire.

We — in terms of what happened after Katrina — rates went up, and actually it — the hurricane experience in Florida has been better than any period since before 1850 that we have any records on.

That’s been a surprise to us, incidentally. But we have not written business — catastrophe business — in Florida during that period, because we didn’t think the rates were adequate. They were adequate, we just were wrong about it.

So the — and incidentally, that does not — the fact that we walked away from cat business in Florida that we thought was mispriced — does not hurt us in the business.

It’s really a — it’s much more of a transactional business in the — there may have been a time when relationships were very big in reinsurance, but with so many entrants in it, it is very much a transactional business. And no one expects you to do something that’s very stupid.

You know, if they do, it’s the wrong kind of a relationship. But glad to hear the next speaker.

JANE KLEEB: Hello, Mr. Buffett. My name is Jane Kleeb. I run a group called Bold Nebraska, which was part of an unlikely alliance who beat Keystone XL, to protect the aquifer in our state as well as property rights.

And I met you several years at Senator Nelson’s home, and I had pulled you aside and asked how could we get health care reform passed?

And you told me two things: You said, the polling numbers matter, and that we have to keep on applying public pressure.

And we feel the same way about climate change and climate action. The most recent Yale study said that even 47 percent of conservatives believe in climate change and want to start seeing corporate and government action.

And your response to this resolution struck me, because one of the sentences said that if you live in a low-lying area, you should probably move.

Well, we work with Native brothers and sisters who live in coastal communities, and one of those tribes is now the first United States climate refugees.

They didn’t have the option to move. They were forced to move.

And so we’re turning to you and we’re turning to ourselves to continue to apply public pressure and hope that both you and Charlie stand with us.

And maybe it’s not this year, and maybe it’s not the year after, but we really look forward to you doing full climate risk analysis, as well as divesting from all the fossil fuels that you own.

And lastly, it takes both small and mighty, as well as big and powerful, to solve this problem of climate change. So you blocking small solar in Nevada is the wrong road to go down. Thank you. (Scattered applause)

WARREN BUFFETT: I think you’ll have a reasonable time to move, but I would say, if you’re making a 50-year investment in low-lying properties, it’s probably a mistake.

I actually said you may — as a homeowner in a low-lying area — you may wish to consider moving.

And I would say that if you expect to be there for ten years or so, I don’t think I would consider moving. But if I thought I was making a 100-year investment, I don’t think I would make it.

I think it gets to the question — we have a shareholder proposal that says, what are the risks to the insurance division from climate change?

We’re not denying climate change is an incredibly important subject. We’re not denying its existence.

But it will not hurt our insurance business, and it’s immaterial compared to other things that could affect our insurance business. And, you know, that is the issue before the meeting. But I’ll be glad to hear from the next speaker.

AUDIENCE MEMBER: Good afternoon, Mr. Buffett. My name is Kay Harn (PH). I’ve been a shareholder for more than a decade, basically my investing life.

Today someone said that you think ahead of the crowd. With regards to this resolution, you’re saying that the Berkshire insurance business will just raise rates the next time the policy is renewed, and that makes sense. But you agree that climate change poses a major problem for our planet.

I would say that climate change poses a major problem for the stability of our global financial markets, if the political action continues at its current pace with regards to this issue.

I personally agree with Dr. Hansen, that a carbon fee is the solution to address this issue. I’m wondering if you can tell us what you think the solution to address this issue is, and whether you think the Berkshire businesses, more broadly than just insurance, will be impacted by this issue in the next decade or two.

WARREN BUFFETT: Yeah. I would doubt if it’s affected in the next decade or two.

But I won’t argue with you at all that it’s likely, not certain, that — unless various techniques are designed for reducing — well, for sequestration, different things of that sort — that plenty of people will be working on — or unless the emissions greenhouse — gas emissions — are reduced significantly — that it’s a terribly important problem for civilization.

And there have been other — I mean, there’s certainly going to be some very smart people working on ways to change the balance in some way, either through less being released in the atmosphere or by various techniques that might diminish the impact, but no one here will deny that it’s important.

I don’t think it will impact — I don’t think it will impact, in a serious way, the climate — or insurance, for that matter — in the next decade or two.

But, as I pointed out in the report, if you’re dealing with something where there’s a point of — where you pass a point of no return, the time to do something isn’t when we get ten minutes away from the point of no return.

So there are policies, which we’ve subscribed to very strongly, in terms of renewables and that sort of thing, but I think there’s also possibilities that within the scientific community, there will be solutions that are beyond my limited knowledge of physics to conjure up myself, but there are a whole lot of people out there that are a lot smarter.

And I think that a basic problem on the reduction — if those things don’t come to pass — is the fact that it’s a planetary problem, and it requires cooperation by very important countries, and I think President Obama has made a good start in working with leaders of other countries. But it can’t be solved by the United States alone, as you know better than I.

I’d be glad to hear from the next speaker.

AUDIENCE MEMBER: Hello. My name is Nancy Meyer (PH), and I’ve been a shareholder for 15 years with my husband.

We have great faith in Berkshire Hathaway. That’s why we invested. So I’m just here to say that, as a shareholder, I’d like to ask my fellow shareholders to consider the economic costs of climate change and urge Berkshire Hathaway to adopt this resolution to show leadership in the insurance industry. Thank you.

WARREN BUFFETT: Thank you. I appreciate the fact you’ve been a shareholder, but I do think for reasons that — I don’t really think that the resolution — I think the resolution is, in a sense, inapplicable to our insurance business.

I mean, insurance — global climate is not a risk to our insurance business. It may be a risk to the planet over time, but that’s a different thing.

I mean, you can — we can adopt all kinds of resolutions about saying that, obviously, nuclear proliferation is a threat to the planet, and you can say, well then, it’s a threat to Berkshire.

But in terms of being Berkshire-specific, you know, you can read the resolution and, like I say, our answer, with Ajit Jain, probably the smartest person I know in insurance, and I have 99 percent of my net worth in Berkshire that’s all destined to go to philanthropic institutions, and I’m not eager to see that disappear, and I do regard myself as the chief risk officer of Berkshire, and I worry about things that can hurt Berkshire, and I do not see it in our insurance division, in relation to climate change. But, thank you.

RICHARD MILLER: Good afternoon, Mr. Buffett. I am Richard Miller, in the Creighton Theology Department, here in Omaha. And I study and teach climate change and its social effects.

I just wanted to make you aware that Berkshire is operating within a larger economy, and that the most important climate analysis — economic analysis — from Nicholas Stern, indicates that on our current path, by the end of this century, 30 percent loss in global GDP is possible.

The other issue is, when we talk about doing something about climate change, doing something means to avoid major sea level rise, we need to reduce emissions globally, starting today, 7 percent per year.

The only time we’ve ever reduced emissions, over a ten-year period, in a growing economy, was in the 1990s in England, and we reduced them 1 percent per year.

So we’re talking about a completely different thing than President Obama’s gradual move.

And we need to do something — no, we need to do massive transformation — immediately. And with your large global holdings, you are a world significant figure on this, not just about this particular shareholder resolution. Thank you for your time.

WARREN BUFFETT: Thank you.

Is that the — complete the speakers?

AUDIENCE MEMBER: Say that again?

WARREN BUFFETT: Are you the final speaker?

AUDIENCE MEMBER: Yes, I think those are all the speakers.

WARREN BUFFETT: OK. Well, thank you. Charlie, do you have anything you want to say?

CHARLIE MUNGER: Well, yes.

We’re in Omaha, which is considerably above sea level. We have no big economic interest in this subject in our insurance companies. We don’t write much of that catastrophic insurance we used to write many years ago.

So we’re asked, as a corporation, to take a public stance on very complicated issues. We’ve got crime in the cities. We’ve got 100 — we’ve got 1,000 — complicated issues that are very material to our civilization.

And if we spend our time in the meeting taking public stands on all of them, I think it would be quite counterproductive.

And I don’t like the fact that the people that constantly present this issue never discuss any solution, except reducing consumption of fossil fuels.

So there are geo-engineering possibilities that nobody’s willing to talk about, and I think that’s asinine, so put me down as not welcoming. (Applause)

WARREN BUFFETT: We don’t want to have a political rally.

The motion is now ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the motion and deliver their ballot to one of the meeting officials in the aisles.

Ms. Amick, when you are ready, you may give your report.

BECKI AMICK: My report is ready.

The ballot of the proxy holders, in response to proxies that were received through last Thursday evening, cast 69,114 votes for the motion and 531,724 votes against the motion.

The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Thank you, Ms. Amick. The proposal fails.

38. Adjournment

WARREN BUFFETT: Does anyone have any questions for our audit firm before we adjourn? If not, I recognize Mr. Scott to place a motion before the meeting.

WALTER SCOTT: I move this meeting be adjourned.

WARREN BUFFETT: Mr. Olson?

RON OLSON: And I second it.

WARREN BUFFETT: Motion to adjourn has been made and seconded. We will vote by voice. Is there any discussion? If not, all in favor say, “Aye.”

All opposed say, “No.”

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lastmover · 6 years

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2016 Berkshire Hathaway Annual Meeting (Morning) Transcript

1. Charlie Munger always “gets the girl”

WARREN BUFFETT: Good morning. I’m Warren Buffett. This is Charlie Munger. (Applause)

I’m the young one. (Laughter)

You may notice in the movie, incidentally, that Charlie is always the one that gets the girl, and he has one explanation for that. But I think mine is more accurate.

As you know, every mother in this country tells her daughter at an early age, if you’re choosing between two very old and very rich guys, pick the one that’s older. (Laughter)

2. Welcome webcast viewers

WARREN BUFFETT: I’d especially — we’re webcasting this for the first time, so I’d especially like to welcome our visitors from all over the world.

We’re having this meeting simultaneously translated into Mandarin. And that poses certain problems for me and Charlie, because I’m not sure how sensible all our comments will come out once translated into Mandarin.

In fact, I’m not so sure how sensible they come out initially sometimes. (Laughter)

But we’re delighted to have people around the world joining us.

3. Meeting agenda

WARREN BUFFETT: Now the drill of the day is that I’ll make a couple of introductions, and we’ll show a couple of slides, and then we’ll go on to questions from both our two panels and from the audience, we’ll rotate them. And we’ll do that until about noon.

Actually, about a quarter of twelve, I’ll give you a rundown on a bet that was made that we report on every year.

But then I’ll also, in connection with that, explain, and it ties in with it, what I really think is probably the most important investment lesson in the world. So we’ll have that about a quarter of twelve and I hope that keeps you around.

And then we’ll break at noon for an hour for lunch. We’ll reconvene at one o’clock.

We’ll proceed until 3:30 with questions. We’ll then adjourn for fifteen minutes and at 3:45 convene the formal meeting.

4. Introductions

WARREN BUFFETT: I’d like to just make a couple of introductions.

I hope Carrie Sova is here. Do we have a spotlight? Carrie puts this whole meeting together. There she is.

Wonder Woman. (Applause)

Carrie joined us, Carrie joined us as a receptionist about six years ago, and I just kept throwing more and more problems at her.

And she’d put together the 50th anniversary book, which we’ve actually expanded further this year. We have a revised edition.

Charlie and I autographed a hundred of them. We interspersed them among the group being sold.

And Carrie, while doing that, she also had a young baby girl, her second baby, late in January. But then she’s gone ahead to put on this whole annual meeting.

It’s a remarkable achievement and I really want to thank her, it’s been terrific. (Applause)

Actually, we have one surprise guest. I think my youngest great-grandchild, who will be about seven months old, is also here today and if he happens to break out crying a lot, and don’t let it bother you. It’s just his mother is explaining to him my views on it inherited wealth and… (Laughter)

We also have our directors with us. And they’re here in the front row.

I’ll introduce them. If they’ll stand when introduced, withhold your applause, no matter how extreme the urge to applaud them individually. And when we’re finished, then you can go wild.

First of all, Howard Buffett. Steve Burke. Sue Decker. Bill Gates. Sandy Gottesman. Charlotte Guyman. Tom Murphy. Ron Olson. Walter Scott. And Meryl Witmer. And that’s our wonderful group. (Applause)

5. Q1 earnings

WARREN BUFFETT: Now we just have two slides to show you now.

The first one is a preliminary… summary figures — for the first quarter.

And you’ll notice that insurance underwriting — these are after-tax figures by category — are down somewhat.

The basic underwriting at GEICO is actually improving, but we had some important hailstorms in Texas toward the end of the quarter. We’ve actually had some since the end of the quarter, too, so there were more cat losses in the first quarter than last year.

Railroad earnings are down significantly, and railroad car loadings throughout the industry, all of the major railroads, were down significantly in the first quarter, and probably will continue to be down, almost certainly will continue to be down, the balance of the year.

We have two companies which we added to the manufacturing, service, and retailing field: Precision Castparts and Duracell, but they were added during the quarter, so their full earnings aren’t shown in the figures.

In the other category, we have, and I don’t like to get too technical here, and you should read the 10-K — 10-Q — when it comes out next weekend.

But, when we borrow money in other currencies, and the only currency we’ve done that with is the euro, but we have a fair amount of money that we borrowed in euros, and the nature of accounting is that the change in value of the foreign exchange — change in value each quarter — is actually shown in interest expense.

So if the euro goes up, we have a lot of extra interest expense, they’re shown that way. It’s not a realized factor, but it moves from quarter to quarter. And if the euro goes down, it offsets interest expense.

It’s a technicality, to some extent, because we have lots of assets in Europe and they are expressed in euros when they go up. It does not go through the income account. It goes directly to other comprehensive income. So I just, that figure which looks a little unusual, that’s the reason for it.

And we always urge you to pay no attention to the figures below operating earnings. They will bounce around from quarter to quarter, and we make no attempt to manage earnings in any way, to have them be smoother. We could do that very easily, but it’d be ridiculous.

We make investment decisions solely on the basis of what we think the best investment decision is, not on the basis of how it will affect earnings in any quarter or in any year.

And in the first quarter we exchanged - we completed a transaction that was begun over a year ago — whereby we exchanged our Procter and Gamble stock for cash and for Duracell, and that accounts for the large — largely accounts — for the large capital gain in the quarter.

So, those are the figures for the first quarter.

6. Share count and earnings

WARREN BUFFETT: And then, to illustrate what we’re sort of all about here, I put up a second slide.

And I started this slide in 1999. The reason being that at the end of 1998, we affected a large merger with Gen Re, and at that point we sort of entered a different era.

After 1998 merger with Gen Re, we had a little over a 1,500,000-some A-equivalent shares out. And our shares — up to that point, we’d increase the outstanding shares by more than 50 percent over the 30-some years preceding that point.

Since that time, as I note here, we’ve only increased the number of shares, over the next 17 years, we’ve only increased the shares outstanding by 8.2 percent.

So these figures represent a fairly unchanged share count since that point, whereas the share count had changed quite a bit before.

And, as you’ll note, in terms of operations, I’ve told you that our goal at Berkshire is to increase the normalized earnings, operating earnings, every year.

And I’ve said sometimes it will — we hope it will only be — it’ll turn out to be only a little bit — and sometimes we can get some fairly decent jumps. But that’s the goal.

Now, earnings will not increase every year, because there’s such a thing as a business cycle, and in times of recession we’re going to earn less money, obviously, than in times when things are much better overall.

And on top of that, we’re heavily in an insurance business, and earnings there can be quite volatile because of catastrophes.

And this chart shows you what’s happened to the operating earnings since that time. Again, pointing out that shares outstanding have gone up very little during that period.

You’ll notice in 2001, when we suffered significant insurance losses due to 9/11, we actually were in the red, in terms of operating earnings.

And you’ll notice the figures are very irregular, but over time, by adding new subsidiaries, by further developing the businesses we have by bolt-on acquisitions, by the reinvestment of retained earnings, the earnings have moved up, in a very irregular fashion, quite substantially.

I’ve put in, also, the capital gains we’ve achieved through investments in derivatives, and they total some $32 billion after-tax, close to fifty billion pretax.

Those are not important in any given year. Those numbers can go all over the place.

The main advantage, from my standpoint, in that $32 billion, is it gives us money to buy other businesses.

What we really want to focus on, what we hope, is that the bigger under operations, five, or ten, or twenty, years from now, grow substantially, partly because retained earnings from operations, partly because our operations improve in their own profitability, partly because they make bolt-on acquisitions, partly because we have gains from securities, which enable us to buy even more businesses.

But we don’t manage, as you know, we don’t manage to try to get any given number from quarter to quarter. We never make a forecast on earnings. We don’t give out earnings guidance. We think it’s silly.

We do not have budgets at the parent company level. Most of our subsidiaries have budgets, but they don’t submit them, or they’re not required to submit them, to headquarters.

We just focus, day after day, year after year, decade after decade, on trying to add earning power, sustainable and growing earning power, to Berkshire.

So that’s a quick summary. Now we’ll move on to the questions.

I just ask, with the audience, that you limit your question to one question. The multiple questions have a way of sneaking in, occasionally, but — so let’s keep them to a single question.

7. “One of the problems of prosperity”

WARREN BUFFETT: We’ll start off with the journalist group on my right, and we’ll start off with Carol Loomis.

CAROL LOOMIS: Good morning. I’ll make my very short little speech about the fact that the journalists and the analysts, too, have given Charlie and Warren no hint of what they’re going to ask, so they will be learning for the first time what that’s going to be, also.

This question comes from Eli Moises.

“In your 1987 letter to shareholders, you commented on the kind of companies Berkshire likes to buy, those that required only small amounts of capital. You said, quote, ‘Because so little capital is required to run these businesses, they can grow, while concurrently making almost all of their earnings available for deployment in new opportunities.’

“Today the company has changed its strategy. It now invests in companies that need tons of capital expenditures, are overregulated, and earn lower returns on equity capital. Why did this happen?”

WARREN BUFFETT: Yeah. Well, it’s one of the problems of prosperity.

The ideal business is one that takes no capital, but yet grows, and there are a few businesses like that, and we own some.

But we are not able — we’d love to find one that we could buy for $10 or $20 or $30 billion that was not capital intensive and we may, but it’s harder.

And that does — that does hurt us, in terms of compounding earnings growth, because, obviously, if you have a business that grows and gives you a lot of money every year and doesn’t take it — it isn’t required in its growth — you know, you get a double-barreled effect from the earnings growth that occurs internally without the use of capital, and then you get the capital it produces to go and buy other businesses. And See’s Candy was a good example of that. I’ve used that.

Back when the newspaper business was good, our Buffalo newspaper was, for example, was a good example of that. The Buffalo newspaper was making, at one time, $40 million a year and had no capital requirement, so we could take that whole $40 million and go and do — go buy something else with it.

But capital — increasing capital — acts as an anchor on returns in many ways. And one of the ways is that it drives us into — just in terms of availability — it drives us into businesses that are much more capital intensive.

You just saw a slide, for example, on Berkshire Hathaway Energy, where we just announced, just in the last couple of weeks, we announced a $3.6 billion investment coming up in wind generation. And we pledged overall to have $30 billion in renewables.

Anything that Berkshire Hathaway Energy does, anything that BNSF does, takes lots of money. We get decent returns on capital, but we don’t get the extraordinary returns on capital that we’ve been able to get in some of the businesses we acquire that are not capital intensive.

As I mentioned in the annual report, we have a few businesses that actually earn 100 percent a year on true invested capital. And clearly, that’s a different sort of operation than something like Berkshire Hathaway Energy, which may earn 11 or 12 percent on capital — and that’s a very decent return — but it’s a different sort of animal than the business that’s very low capital intensive — intensity.

Charlie?

CHARLIE MUNGER: Well, when our circumstances changed, we changed our minds.

WARREN BUFFETT: Slowly and reluctantly. (Laughs)

CHARLIE MUNGER: In the early days, quite a few times we bought a business that was soon producing 100 percent per annum on what we paid for it and didn’t require much reinvestment.

If we’d been able to continue doing that, we would have loved to do it, but when we couldn’t, we got to plan B. And plan B is working pretty well. In many ways, I’ve gotten so I sort of prefer it. How about you, Warren?

WARREN BUFFETT: Yeah, that’s true. When something’s forced on you, you might as well prefer it. (Laughter)

But, I mean, we knew that was going to happen. And the question is, does it lead you from what looks like a sensational result to a satisfactory result.

And we don’t — we’re quite happy with a satisfactory result. The alternative would be to go back to working with very tiny sums of money, and that really hasn’t gotten a lot of serious discussion between Charlie and me. (Laughs)

8. Precisions Castparts acquisition

WARREN BUFFETT: OK. From the analyst group, Jonathan Brandt.

JONATHAN BRANDT: Hi Warren. Thanks for having me again.

WARREN BUFFETT: Thanks for coming.

JONATHAN BRANDT: My first question is about Precision Castparts.

Besides your confidence in its talented CEO Mark Donegan, what in particular do you like about their business that gave you the confidence to pay historically high multiple?

Are there ways Precision can be even more successful as, essentially, a private company?

For instance, are there long-term investments to support client programs or acquisitions that Precision can make now that they couldn’t realistically have done as a publicly traded entity?

WARREN BUFFETT: Yeah, we completed the acquisition of Precision Castparts at the end of January this year. We agreed — we made the deal last August.

And you covered the most important asset in your question. Mark Donegan, who runs Precision Castparts, is an extraordinary manager. I mean we’ve seen very — and Charlie and I’ve seen a lot of managers over the years — and I would almost rank Mark as one of a kind.

I mean he is doing extremely important work, in terms of making — primarily making — aircraft parts.

I would say that there’s certainly no disadvantages to him to be working as a — and for that company to be a subsidiary of Berkshire and not be a public company.

And I think he would say, and I think Charlie and I would agree with him, that over time, there could be some significant advantages.

For one thing, he can spend 100 percent of his time now on figuring out better things to do with aircraft engines. And it was always his first love to be thinking about that, and he did spend most of his time, but he also had to spend some time, you know, explaining quarterly earnings to analysts and perhaps negotiating bank lines and that sort of thing.

So his time, like all of our managers, can be spent exactly on what makes the most sense to them and their business. Mark does not have to come, ever, to Omaha to put on some show for me, in terms of justifying a billion dollar acquisition or plant investment.

He wastes — doesn’t have to waste his time on anything that isn’t productive. And running a public company, you do waste your time on quite a bit of stuff that isn’t productive.

So I would say we’ve taken the main asset of Precision Cast and made it — made him in this case — even more valuable to the company.

In terms of acquisitions, Precision’s always made a number of them. But, as being part of Berkshire, there’s really no limitations on what can be done. And so, there again, his canvas has been broadened, in large, with the acquisition by Berkshire.

I see no downside whatsoever. If he needs capital, I’ve got an 800 number.

And, you know, he wasn’t paying much of a dividend before, but he doesn’t have to pay any dividend now.

Precision Cast will do better under Berkshire than it would have independently, although it would have done very, very well independently.

Charlie?

CHARLIE MUNGER: Well, in the early days, we used to make wiseass remarks. And Warren would say we buy a business an idiot can manage, because sooner or later, an idiot will.

And we did buy some businesses like that in the early days, and they were widely available.

Of course we’d prefer to do that, but the world has gotten harder, and we had to learn new and more powerful ways of operating.

A business like Precision Castparts requires a very superior management that’s going to stay superior for a long time.

And we gradually have done more and more and more of that, and it’s simply amazing how well it works.

I think, to some extent, we’ve gotten almost as good at picking the superior managers as we were in the old days at picking the no-brainer businesses.

WARREN BUFFETT: Yeah, we would love to find — we won’t be able to find them because they’re very rare birds — but we would love to find another three or four of a similar type to Precision Castparts, where they, forever, are going to be producing something that — where quality is enormously important, where the customers depend very heavily on them, when there’s contracts that extend over many years, and where people don’t simply just take the low bid in order to get this gadget of one sort or another.

It’s very important that you have somebody there that has enormous skill running the business, and their reputation, among aircraft manufacturers, engine manufacturers, you know, is absolutely unparalleled.

9. “Can’t imagine anybody any happier”

WARREN BUFFETT: OK, now we go to the audience, and we go up to section 1. And if you’ll give your name and where you’re from, I’d appreciate it.

AUDIENCE MEMBER: Hi, good morning. My name is Gaspar. I’m Spanish and I come from London.

I admire you both in many ways, but I would like to know that, when looking backwards, what would you have done differently in life in your search for happiness?

WARREN BUFFETT: Well, I’m 85 and I can’t imagine anybody any happier than I am.

So — by accident or whatever, I still — I mean, you know, I’m sitting here eating exactly what I like to eat, doing in life exactly what I love to do, with people I love. So it really doesn’t get any better than that and I — (applause)

I did decide, fairly early in life, that my favorite employer was myself. (Laughter)

And, that — I think that presented — I’ve managed to avoid, really, aggravation of almost any sort.

Really, you know, if you, or those around you that you love, have health problems or something, I mean, that is a real tragedy, and there’s not much you can do about it but accept it.

But Charlie and I have, every day, been blessed. I mean, here Charlie is, 92, and he’s doing, every day, something that he finds fascinating.

You know he — I think he probably finds what he is doing at 92 as interesting, as fascinating, and as rewarding, as socially productive, you know, as any period you can pick in his life.

And so we’ve been extraordinarily lucky. We’ve been, you know, we’re lucky it’s a partnership. It’s more fun doing things as a partnership.

So, I’ve got no complaints. It would be very churlish of me to have any kind of complaint. I would say, if you’re talking about business life, I don’t think I would have started with a textile company. (Laughter)

Charlie?

CHARLIE MUNGER: Well, looking back, I don’t regret that I didn’t make more money, or become better known, or any of those things. I do regret that I didn’t wise up as fast as I could have and —

But there’s a blessing in that, too. Now that I’m 92, I still have a lot of ignorance left to work on. (Laughter and applause)

10. Reinsurance outlook a factor in Munich Re and Swiss Re sales

WARREN BUFFETT: OK, Becky Quick.

BECKY QUICK: This question comes from Solomon Ackerman, who’s in Frankfurt, Germany.

He wants to know why Berkshire has significantly sold down their holdings in Munich Re, which is the world’s biggest reinsurance company, based in Germany, while sticking with the reinsurance operations within Berkshire, like Berkshire Hathaway Reinsurance and General Re.

Would you reduce exposure to Berkshire Hathaway Reinsurance and General Re if they were listed companies? And he’s hoping that this can bring out some of your insights as to what’s happening in the reinsurance business right now.

WARREN BUFFETT: Yeah, we — I said in the annual report that I thought it was very likely that the reinsurance business would not be as good in the next ten years as it has been in the last ten years.

I may be wrong on that, but that’s just a judgment based on seeing the competitive dynamics of the reinsurance business now versus 10 or 20 years ago.

Both Munich — we sold our entire holdings, which were substantial — of Munich Re and Swiss Re. We owned about 3 percent of Swiss Re, and we own more than 10 percent of Munich Re, and last year we sold those two holdings.

They’re fine companies. They’re well-managed companies. I like the people that run them.

I think their business — the business of the reinsurance companies generally — is less attractive for the next 10 years than it has been for the last 10 years.

In part, that’s because what’s happened to interest rates. A significant portion of what you earn in insurance comes from investment of the float. And both of those companies, and for that matter almost all of the reinsurance industry, is somewhat more restricted in what they can do with their float, because they don’t have this huge capital cushion that Berkshire has, and also because they don’t have this great amount of unrelated earning power that Berkshire has.

Berkshire has more leeway in what it can do simply because it does have capital that’s many times what its competitors have, and it also has earning power coming from a whole variety of unrelated areas — unrelated to insurance.

So it was not a negative judgment, in any way, on those two companies. It was not a negative judgment on their managements. But it was a — at least — a mildly negative judgment on the reinsurance business.

Now, we have the ability at Berkshire to actually rearrange, to a degree — we are certainly affected by industry factors — but we have more flexibility in modifying business models, and we’ve operated that way, over the years, in insurance generally, and particularly in reinsurance.

So, a Munich, a Swiss, all the major reinsurance companies, except for us, is pretty well tied to a given type of business model.

They don’t really have as many options, in terms of where capital gets deployed. They have to continue down the present path.

And I think they’ll do fine. But I don’t think they will do as fine in the next 10 years as they have in the last 10.

And I don’t think if we played the same game as we were playing the last 10, we would do as well, but we do have considerably more flexibility — in terms of how we conduct all of our insurance operations, but particularly in reinsurance — we have an extra string to our bow that the rest of the industry doesn’t have.

The amount of capital that’s come in to the reinsurance business — you know, it is no fun running a traditional reinsurance company and having money come in — particularly if you’re in Europe — and have money come in, and look around you for investment choices and find out that a great many of the things that you were buying a few years ago now have negative yields.

The whole idea of float is it’s supposed to be invested at a positive rate — a fairly substantial — positive rate.

And that game has been over for a while, and it looks like it will be, at least, unattractive, if not terrible, for a considerable period in the future.

Charlie?

CHARLIE MUNGER: Yeah. But, you know, there’s a lot of new capacity in reinsurance and there’s a lot of very heavy competition.

A lot of people from finance have come over into reinsurance, and all the old competitors remained, too. That’s different from Precision Castparts, where most of the customers would be totally crazy to hire some other supplier, because Precision Castparts is so much more reliable and so much better.

Of course, we like the place with more competitive advantage. We’re learning.

WARREN BUFFETT: The — to put it in terms of Economics 101 — basically, in reinsurance, supply has gone up and demand has not gone up.

And some of the supply is driven by investment managers who would like to establish something offshore where they don’t have to pay taxes, and reinsurance is sort of the easiest beard — what you might call beard — behind which to actually engage in money management in a friendly tax jurisdiction.

And you can set up a reinsurance operation with very few people, by taking large chunks of what brokers may offer. It’s not the greatest reinsurance in the world, and a couple of the operations that have done that have proven that statement to be right.

But nevertheless, it is a very, very easy way to have a disguised investment operation in a friendly tax jurisdiction. But that becomes supply in the reinsurance field, and supply has gone up relative to demand, and it looks to me like that will continue to be the case. And couple that with the poor returns on float, and it’s not as good a business as it was.

11. Rise in auto death rate hurt GEICO

WARREN BUFFETT: Now we’ll talk to an insurance man about it, Cliff Gallant.

CLIFF GALLANT: Thank you.

In terms of growth in profitability, GEICO really got whupped by Progressive Direct over the last year. In 2015, Progressive Direct’s auto business group grew its policy count by 9.1 percent. GEICO, only 5.4. And in terms of profitability, the combined ratio at Progressive was a 95.1 and GEICO’s was a 98.0.

Is this evidence that Progressive’s investments in technology, like Snapshot, investments that GEICO has spurned, is it making a difference in a time of difficult loss trends? Why is GEICO suddenly losing to Progressive Direct?

WARREN BUFFETT: Yeah, well, I would say this. Over the — over the last — well, I forget what year it was we passed Progressive and what year it was we passed Allstate, but GEICO’s growth rate in the first quarter was not as high as in the past couple first quarters, but it was it was quite satisfactory.

Now the first quarter is, by far, the best quarter for growth. But last year, both frequency — how often people had accidents — and severity — which is the cost per accident; in other words, just how much those accidents cost you — both of those went up quite suddenly and substantially. And Progressive’s figures show that they were hit by that less than Allstate and GEICO and some others.

But I don’t think you’ll see, necessarily, those same trends this year.

It’s an interesting thing. Last year, for the first time in I don’t know how many years, the number of deaths in auto accidents, per 100 million miles, went up.

Now, if you go back to the mid-1930s, there were almost 15 people killed per 100 million miles driven. It got down to just slightly over one — from 15 — to one.

You had almost as many — you had roughly as many — people killed in auto accidents in the mid-1930s, about 30, 32,000 a year, as we had last year — or the year before — when people drove almost 15 times as many miles.

Cars have gotten far, far, far, far safer.

And it’s a good thing, because if we’d had the same rate of deaths from auto accidents as we had in the ’30s, relative to miles driven, we would have had over a half a million people die last year from auto accidents, instead of a figure closer to 40,000.

But last year, for the first time, there was more driving, and I think there was more distracted driving. So you really had this uptick in frequency, and more important, in severity.

GEICO has adjusted its rates. As I mentioned, my own prediction would be that the underwriting margins at GEICO will be better this year than last year, although you never know when catastrophes are coming along. March and April have had a lot of cat activity.

I made a bet a long time ago on — a mental one — on the GEICO model versus the Progressive model. And, as I say, they were significantly ahead of us in volume a few years back. Then we passed them and we passed Allstate and, as I put in the annual report, I hope on my 100th birthday that the GEICO people announce to me that they passed State Farm.

But I have to do my share on that, too, by getting to 100. So we’ll see what happens on that particular one. (Laughs)

Charlie?

CHARLIE MUNGER: Well, I don’t think it’s a tragedy that some competitor got a little better ratio from one period. GEICO’s quadrupled its market share since we bought all of it.

WARREN BUFFETT: Quintupled.

CHARLIE MUNGER: Yeah, quintupled, all right. (Laughter)

I don’t think we should worry about the fact that somebody else had a good quarter.

WARREN BUFFETT: Yeah. (Applause)

I think it’s far more sure that GEICO will pass State Farm someday than that I’ll make it to 100, I’ll put it that way. (Laughs)

12. Amazon has “disrupted plenty of people”

WARREN BUFFETT: OK. We’ll go to the shareholder from station 2.

AUDIENCE MEMBER: Greetings to all of you from the Midwest of Europe. I’m Norman Rentrop from Bonn, Germany, a shareholder since 1992.

My question is about the future of salesmanship in our companies.

Warren, you have always demonstrated a heart for direct selling. When we met you in the midst of a tornado warning, in the barbershop, you immediately offered to write insurance for us. (Laughter)

WARREN BUFFETT: That’s true. They were all huddled down there in the barbershop. There wasn’t going to be any tornadoes, so I told them they give me a dollar, I’d — they can go upstairs and if anything happened to them I’d pay them — I forget — a million dollars, or something of the sort. (Laughter)

AUDIENCE MEMBER: Now we see with the rise of Amazon.com and others a shift from push marketing to pull marketing. From millions of catalogs having been sent out in the past, to now consumers searching on what they are looking for.

What is your take on how this shift from push to pull marketing will affect our companies?

WARREN BUFFETT: Well, Norman, the development you refer to is huge. I mean, really huge.

And it isn’t just Amazon, but Amazon is a huge part of it and what they’ve accomplished, in a fairly short period of time, and continue to accomplish, is remarkable. The number of satisfied customers they’ve developed and —

We don’t make any decision involving even the manufacturing of goods, the retailing, whatever it is, without thinking long and hard about what the world will look like in five or 10 or 20 years with that powerful trend — really hugely powerful trend — that you just described.

So, we’re not — we don’t look at that as something where we’re going to try and beat them at their own game, you know. They’re better than we are at that. And so, Charlie and I are not going to out-Bezos Bezos, by a long shot.

But we are going to think about that.

It does not worry us, obviously, with Precision Cast — it doesn’t worry us, in terms of the overwhelming majority of our businesses.

But it is a huge economic trend that, 20 years ago, was not on anybody’s radar screen, and lately, has been on everybody’s radar screen. And many of them have not — and including us, in a few areas — have not figured the way to either participate in it or to counter it.

GEICO’s a good example of a company in an industry that had to adjust to change, and some people made the change better than others.

We were slow on the internet. The phone had worked so well for us, you know, this traditional advertising, and the phone had worked so well, you know, there’s always a resistance to think about new possibilities.

When we saw what was happening on the internet, we jumped in with both feet and you know, with mobile and whatever. But — but there are — capital — the nature of capitalism is somebody’s always trying to figure — if you’ve got some good business — they’re always trying to figure out how to take it away from you and improve on it.

And the effect — I would say just of Amazon, but others that are playing the same game — the effect on industry — the full effect — is far from having been seen.

I mean, it is a big, big force and it will — it already — has disrupted plenty of people and it will disrupt more.

I think Berkshire is quite well situated. For one thing, one big advantage we have is we didn’t ever see ourselves as starting out in one industry. I mean, we didn’t go into — we went into department stores — but we didn’t think of ourselves as department store guys, or we didn’t think of ourselves as steel guys, or tire guys, or anything of that sort.

So we’ve thought of ourselves as having capital to allocate. If you start with a given industry focus and you spend your whole time working on a way to make a better tire, or whatever it may be, I think it’s hard to have the flexibility of mind that you have if you just think you have a large — hopefully large — and growing pile of capital, and trying to figure out what is the best — next — best next move that you can make with that capital. And I think we do have a real advantage that way.

But I think — I think the fellow that — I think Amazon’s got a real advantage, too, in this intense focus on having, you know, hundreds of millions of, generally, very happy customers getting very quick delivery of something that they want to get promptly, and they want to shop the way they shop.

And if I owned a bunch of shopping malls, or something like that, that would be — I’d be thinking plenty hard about what they might look like 10 or 20 years from now.

Charlie?

CHARLIE MUNGER: Well, I would say that we failed so thoroughly in retailing when we were young that we pretty well avoided the worst troubles when we were old.

I think, net, Berkshire has been helped by the internet. The help at GEICO has been enormous. And it’s contributed greatly to the huge increase in market share.

And our biggest retailers are so strong that they’re — they’ll be among the last people to have troubles from Amazon.

WARREN BUFFETT: I didn’t get that dollar from you, Norman, actually that — after I gave you that wonderful advice.

13. Defending Coca-Cola from sugar health worries

WARREN BUFFETT: Andrew?

ANDREW ROSS SORKIN: Thank you, Warren. Great to see you today.

Got a lot of questions on this particular topic, and this question is a particularly pointed one.

“Warren, for the last several years at this meeting, you’ve been asked about the negative health effects of Coca-Cola products, and you’ve done a masterful job dodging the question, by telling us how much Coke you drink personally. (Laughter)

“Statistically, you may be the exception. According to a peer-reviewed study by Tufts University, soda and sugary drinks may lead to 184,000 deaths among adults every year.

“The study found that sugar-sweetened beverages contributed to 133,000 deaths from diabetes, 45,000 deaths from cardiovascular disease, 6,450 deaths from cancer.”

Another shareholder wrote in about Coke, noted that you declined to invest in the cigarette business on ethical grounds, despite once saying, quote, “It was a perfect business because it cost a penny to make, sell it for a dollar, it’s addictive, and there’s fantastic brand loyalty.”

“Again, removing your own beverage consumption from the equation, please explain directly why we Berkshire Hathaway shareholders should be proud to own Coke.”

WARREN BUFFETT: Yeah, I think people confuse — (Applause)

— you know, the amount of calories consumed.

I mean, I happen to elect to consume about 700 calories a day from Coca-Cola. So I’m about one-quarter Coca-Cola, roughly. (Laughter)

Not sure which quarter, and I’m not sure we want to pursue the question.

I think if you decide that sugar, generally, is something that the human race shouldn’t have — I think the average person consumes something like 150 pounds of dry weight sugar here and 125 pounds — I mean, you know, it —

What’s in Coca-Cola, largely, are more of the calories come from is sugar.

I elect to get my 26 or 2700 calories a day from things that make me feel good when I eat them. And that’s been my sole test. That wasn’t a test that my mother necessarily thought was great, or my grandfather.

But there are over 1.9 billion 8-ounce servings of some Coca-Cola drink. Now they have an enormous range of products, you know. I mean, you have a few that are called Coke, Diet Coke, Coke Zero and that sort of thing, but they have literally thousands of products.

One-point-nine billion. That’s — what is that — 693,500,000,000 8-ounce servings a year, except it’s a leap year. (Laughter)

That’s almost 100 8-ounce servings per capita for 7 billion people in the world every year. And that’s been going on since 1886.

And I would find quite spurious the fact that somebody says, if you’re eating 3500 or so calories a day, and you’re consuming 27-or-8 hundred, and some of the 3500 is Coca-Cola, to lay it — any particular obesity-related illnesses — on the Coca-Cola you drink.

You have the choice of consuming more than you use, I mean. And I make a choice to eat — or get — 700 calories from this, and I like fudge a lot, peanut brittle.

And I am a very, very, very happy guy and I don’t know — I think — and I’m serious about this — I think if you are happy every day, you know, it may be hard to measure, but I think you’re going to live longer as well. So there may be a compensating factor. (Applause)

And I really wish I’d had a twin, and that twin had eaten broccoli his entire life, and we both consume the same number of calories. I know I would have been happier. And I think the odds are fairly good I would have loved longer.

I think Coca-Cola is a marvelous product, you know. I mean, if you consume 3500 or 4000 calories a day, and live a normal life, in terms of your metabolism, you know, something’s going to go wrong with your body at some point.

But if you keep — I think if you balance out the calories so that you don’t become obese, I do — I have not seen evidence that convinces me that, you know, I’ll make it — it will be more likely I reach 100 if I suddenly switch to water and broccoli.

Incidentally, a friend of mine, Arjay Miller, a remarkable man — born about 100 miles from here, west — eighth child — near Shelby, Nebraska.

He said Shelby’s population was 596 and it never changed because every time some girl had a baby a guy had to leave town, it was a very stable. (Laughter)

But Arjay went on to be president of Ford Motor Company, from this farm near Shelby, and he had his 100th birthday on March 4th of this year. So I went out to see Arjay for his birthday on March 4th, and Arjay told me that there were 10,000 men in the United States that had lived to be 100 or greater, and there were 45,000 women that were 100 or greater.

So I came back and I checked that on the internet — I went to the census figures — and sure enough, that is the ratio. There’s 10,000 men over 100, roughly, and 45,000 women.

So if you really want to improve your longevity prospects, I mean a guy in my position, you have a sex change. (Laughter)

I mean as a — you’re 4 1/2 times more likely to get to be 100.

That sounds like one of those studies that people put out. It’s just a matter of facts, folks.

I think I’ll have Charlie go first, though, on that one. (Laughter)

Charlie, do you have any comments?

CHARLIE MUNGER: Well —

WARREN BUFFETT: Have some fudge.

CHARLIE MUNGER: I like the peanut brittle better than the Coke. I drink a lot of Diet Coke and — I think the people who ask questions like that one always make one ghastly error that’s really inexcusable. They measure the detriment without considering the advantage.

Well, that’s really stupid. That’s like saying we should give up air travel through airlines because 100 people die a year in air crashes or something. That would be crazy. The benefit is worth the risk.

And if every person has to have about 8 or 10 glasses of water every day to stay alive, and it’s pretty cheap and sensible, and it improves life to have a little extra flavor to your water, and a little stimulation, and a little calories, if you want to eat that way, there are huge benefits to humanity in that, and it’s worth having some disadvantage.

We ought to have, almost, a law in the editorial — I’m sounding like Donald Trump — (laughter) — where these people shouldn’t be allowed to cite the defects without citing the offsetting advantage. It’s immature and stupid. (Applause)

14. Renewable energy investments

WARREN BUFFETT: OK. Gregg Warren.

GREGG WARREN: Warren, with both coal fired and natural gas plants continuing to generate around two-thirds of the nation’s electricity, and renewables accounting for less than 10 percent, there remains plenty of room for growth.

At this point, Berkshire Energy, which has invested heavily in the segment, is one of the nation’s largest producers of both wind and solar power, and yet still only generates around one-third of its overall capacity from renewables.

As you noted earlier, MidAmerican recently committed another $3.6 billion to wind production, which should lift the amount of electricity it generates from wind to 85 percent by 2020.

You’ve also had the company, overall, pledging to have around 30 billion in renewables longer term.

The recent renewal of both the wind and solar energy tax credits has made this kind of investment more economically viable and should clear the path for future investments.

Eliminating coal-fired plants looks to be the main priority, but natural gas-fired plants are also fossil fuel driven and are exposed to the vagaries of energy prices.

Is the endgame here for Berkshire Energy to get 100 percent of its generation capacity converted over to renewables, and what are the risks and rewards associated with that effort?

After all, the company operates in a highly-regulated industry, where rates are driven by an effort to keep customer costs low, while still providing adequate returns for the utilities.

WARREN BUFFETT: Yeah, well, I think implicit in what you say is that we do — any decision we make — including the one that we just showed on the — during the movie to — on any decision about new generation, changes in generation — has to go through what’s usually called the Public Utility Commission, they may have different names in a few states.

But the utility industry is overwhelmingly regulated at the state level, and we cannot make changes that are not approved by the Public Utility Commission.

We’ve had more problems, for example, in bringing in renewables in our western utility, Pacific Corp, because it’s, in effect, regulated by six states — I believe it’s six states — and they don’t necessarily agree on how the cost and benefits should be divided if we put in a bunch of renewables, and we have to follow their instructions.

Iowa was just been marvelous about encouraging — I mean at every level — I mean the consumer groups, the governor, you name it — they have seen the benefits.

And in Iowa it’s literally true that we have one major competitor, called Alliant, and they have not — either been able to — I don’t know the reasons — but they have not pursued renewables the way we have, so our rates are considerably lower than theirs.

And, if you look at their budget projections — although they’re substantially higher rates than we have now — they may well need a rate increase within a year or so.

And with our latest expansion, we have said that we will not need a rate increase till 2029 at the earliest. That’s thirteen years off.

So there’ve been great benefits if you have a regulation that works with you on that, but it is a determination that is made at the state level.

Now, the federal government has encouraged, in a major way, the development of renewables by this production tax credit, which currently amounts to about 2.3 cents per kilowatt hour.

We would not have the renewable generation that we have if it hadn’t been for the fact that that building of those projects is subsidized by the federal government, because the benefits of reducing solar emissions are — or carbon emissions — are worldwide, and therefore it’s deemed proper that the citizenry as a whole should participate in subsidizing the cost of reducing those emissions.

And that has encouraged — in fact, it’s allowed — things like have happened in Iowa as well.

But the degree to which the renewables replace, primarily coal — although there’s plenty of emissions connected with natural gas if you trace it all the way through — will depend on governmental policy.

And I think, so far, I think it’s been quite sensible in encouraging — having the cost borne by society as a whole, in terms of reduced tax revenues, and having the benefits, which is less CO₂, into the atmosphere.

They also, broadly — you know, they’re not just limited to the people of Iowa when we build that. That’s a benefit that accrues to the world.

I think you’ll see continued change. It will vary by jurisdiction.

And we would hope — we’ve got the capital, we’ve got lots of taxes, federal taxes, paid in our consolidated returns — so we’re in a particularly advantageous position to take advantage of massive investments that companies with limited tax appetites couldn’t handle.

I think you’ll see us be a very big player. But governmental policy is going to be, you know, the major driver.

Charlie?

CHARLIE MUNGER: Yeah, I think we’re doing way more than our share of shifting to renewable energy, and we’re charging way lower energy prices to our utility customers than other people.

If the whole rest of the world were behaving the way we are, it would be a much better world.

I will say this about the subject, though, and that is that I think that the people who worry about climate change as the major trouble of Earth don’t have my view.

I think that we — I like all this shifting to renewables, but I have a different reason. I want to conserve the hydrocarbons, because eventually, I think, we’re going to use every drop, humanity, for chemical feedstocks. And so I’m in their camp, but I’ve got a different reason.

WARREN BUFFETT: One thing you’ll find — might find — kind of interesting: Nebraska has not done much with wind power. And maybe three miles from — two miles — from where we’re sitting, right across the river, people are buying their electricity cheaper, in Council Bluffs right across the river, than they are in Omaha.

And yet Omaha — Nebraska is entirely a public power state, so there’s no stockholders who have to have any earnings, the bonds are issued on a tax-exempt basis, and yet electricity is considerably cheaper right across the river.

And, you know, the wind blowing doesn’t just start at the Missouri River. I mean, it comes across Nebraska and that wind could be captured. And, so far, it really hasn’t.

And the real irony is that because our electricity is so much cheaper in Iowa, you have these massive server farms of people like Google. It’s become a tech haven for these operations that just gobble up electricity. And Iowa has gotten plant after plant after plant and job after job after job, and increased property tax — I mean gotten more property tax revenues — and that’s being done — the Google server is probably seven or eight miles from here — and it’s located in Iowa because we have cheap wind-generated electricity. And it’s creating jobs. It’s fascinating.

Nebraska has prided itself on public power. It was originated back, I believe, in the ’30s when George Norris was a very powerful senator here and it’s been a source of pride. But lately, it’s been a source of cost, too.

15. Derivatives still a “danger to the system”

WARREN BUFFETT: OK, shareholders section 3.

AUDIENCE MEMBER: Good morning Mr. Buffett and Mr. Munger. My name’s Adam Bergman. I’m with Sterling Capital in Virginia Beach.

In your 2008 shareholder letter, you said, “Derivatives are dangerous… They have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks.”

So my question for you is: how do you analyze and value companies like Bank of America Merrill Lynch and other commercial banks that Berkshire has investments in, relative to their significant derivative exposures? Thanks.

WARREN BUFFETT: Yeah, derivatives do complicate the problem very dramatically.

Now, they are moving away to being collateralized, which helps.

But there’s no question that if you asked me to describe the derivative position of the B of A, for example, I would know that they have done a conscientious job and worked hard at properly evaluating.

But the great danger in derivatives is if there’s a discontinuity. If there’s not discontinuities, you probably don’t have much of a problem, assuming they get marked to market, and collateralized, and so on.

But if the system stopped for a while — the system stopped after 9/11 for three or four days. It stopped at the time of World War One. They closed the New York Stock Exchange for many months.

They debated closing the stock exchange, very seriously, the day after October 19, 1987. And it was — there were a lot of people that wanted to close it. And on that Tuesday morning, it looked like it was about to stop, but it continued.

But if you had a — if you have a major cyber, nuclear, chemical, biological, attack on the country — which will certainly happen at some point — if you have a major discontinuity, then you’ll have a lot of problems, a lot of problems.

But you will also — when things reopen — you will find there can be enormous gaps in things that you thought were fully protected by collateral, and that sort of thing, or netting arrangements, and that type of thing.

So I regard very large derivative positions as dangerous.

We inherited a modest- sized position at Gen Re and, in a benign market, we lost about $400 million, just in trying to unwind it, with no pressure on us whatsoever.

So I do think it continues to be a danger to the system.

CHARLIE MUNGER: By the way, the accountants blessed that big derivative position as being worth a lot of money. They were only off, what, many hundreds of millions.

WARREN BUFFETT: Yeah, well. Charlie found one position when he was on the audit committee at Salomon. I think it was mismarked by $20 million.

I actually, by happenstance, happen — I do know of one incredibly mismarked position — doesn’t affect any of our operations — but it almost staggers the mind to know the way that position is marked. And you can only come to the conclusion that some trader got somehow — influenced whoever did mark it, or marked it himself, heaven forbid, and probably just influenced someone.

Or they didn’t know enough. Some of these things get so complicated, they are very hard to evaluate. That’s the kind that have the most profit in them, usually, so they were quite enthusiastic about those when we were at Solomon.

They can be extraordinary hard to mark. And, like I say, I know one that’s so mismarked it would blow your mind.

And, you know, the auditors, I don’t think, are necessarily capable of holding that behavior in check.

It’s very interesting, because now there’s really four big auditing firms, and obviously, they’re auditing companies where there’s a derivative position, and they’re auditing company A that’s on one side of the transaction, and they’re auditing company B that’s on the other side of the transaction. In some cases, it’s the same auditor.

And I will guarantee you that there’s plenty of times when the marks on what they’re attesting to are significantly different, which would be an interesting exercise to pursue, in terms of checking those numbers out.

Derivatives are still dangerous, in large quantities, and we have — we would not do them, on a collateralized basis, because if there was a discontinuity, I don’t know exactly where we would end up, and I’m never going to get us in a position where we could have money demanded of us and not be able to fulfill it with ease, and with me sleeping well.

So we won’t engage in it. We’ve got some in runoff, but so far we’ve made money and had the use of money for a decade or more, and it’s been very attractive for us. But that does not entice me, at all, into doing any derivative transactions that would involve collateral, when collateral is not required.

It’s still a potential time bomb in the system.

Anything where discontinuities — and basically that means closing up and stopping trading markets from functioning — anything where discontinuities can exist, can be real poison in markets.

Kuwait, some years ago, went to a very delayed system on settlement of stock purchases, so they didn’t have to settle up for six months or thereabouts. And it caused all kinds of problems, because, you know, you’ve got an IOU from somebody for six months and if you got zillions of those, a lot of trouble can ensue.

So I agree with your general caution. I’m not in the least troubled by our Bank of America investment, nor our Wells Fargo — we added to Wells Fargo — and our Bank of America position, right now, is a preferred stock, but we’re very likely to exercise the warrants on that.

On the other hand, there are a great number of banks in the world. If you take the 50 largest banks in the world, we wouldn’t even think about probably 45 of them. Wouldn’t you say that, Charlie?

CHARLIE MUNGER: Well, we’re in the awkward position where I think we’ll probably make about $20 billion out of derivatives, and just those few contracts that you and Ajit [Jain] did years ago.

All that said, we’re different from the banks. We would really prefer it if those derivatives had been illegal for us to buy. It would have been better for our country.

16. Float still “useful” despite low interest rates

WARREN BUFFETT: Carol?

CAROL LOOMIS: This questions relates to something that Warren briefly said earlier today. The question comes from Lynn Palmer, who is just finishing her freshman year at a Houston, Texas high school.

“My question,” she says, “concerns the float generated by Berkshire’s insurance companies. In Mr. Buffett’s 2015 annual letter, he said that the large amount of float that Berkshire possesses allows the company to significantly increase its investment income.

“But what happens when interest rates decline? If the U.S. were to implement negative interest rates in the same way that the eurozone and Japan have done, how would Berkshire be affected?”

WARREN BUFFETT: Yeah, well some of our float actually exists in Europe, where we have the problem of negative interest rates on very high-grade and short-term and medium — even medium-term bonds — and obviously anything that reduces the value of having money is going to affect Berkshire, because we’re always going to have a lot of money.

We — because we have so much capital, and so many sources of earning power, we have the ability, quite properly, to use our float in — to a certain degree — in ways that most insurance companies can’t think about.

So we can find things to do, but sometimes we get, you know we — we’ve got fifty-odd billion of short-term government securities now, and we’re going to get another $8.3 billion, in all likelihood, early in June when our Kraft Heinz preferred is called, so we’ll be back over 60 billion again very soon.

So we’ve got 60 billion out, that’s out at, say, a quarter of 1 percent. Well, the difference between a quarter of 1 percent and minus a quarter of 1 percent, you know, is not that great. I mean, it’s almost as painful to have 60 million out at a quarter of a percent, as to have it out at a negative rate.

Float is not worth as much to insurance companies now as it was 10 years ago or 15 years ago. And that’s true at Berkshire. I think it’s worth considerably more to us than it is to the typical insurance company, because I think we have a broader range of options as to what to do with it.

But there’s no question about it, that having a lot of money around now is not just a problem for insurance companies. It’s a problem for retirees. It’s a problem for anybody that’s stuck with fixed-dollar investments and finds that their income now is a pittance or, you know, in Europe, perhaps a negative rate. And that was not something in their calculation at all 15 years ago.

We love the idea, however, of increasing our float. I mean that money has been very useful to us over time.

It’s useful to us today, even under present conditions, and it’s likely to be very useful to us in the future. It’s shown as a liability, but it’s actually a huge asset.

Charlie?

CHARLIE MUNGER: I’ve got nothing to add.

WARREN BUFFETT: He’s now in full swing. (Laughter)

17. We still love BNSF despite falling coal shipments

WARREN BUFFETT: Jonathan?

CHARLIE MUNGER: We can’t hear you.

JONATHAN BRANDT: Testing. The railroad industry seems, right now, to be suffering from exposure to some of the weakest parts of the economy, with volume declines of varying magnitudes in coal, oil, sand, and metals. Even intermodal, usually a steady source of growth, has been relatively weak of late.

How much of the weakness is cyclical, how much is secular?

In the last 15 months, the other western railroad’s market capitalization is down by 30 — 35 percent — as projections of future growth have come down.

Is your estimate of BNSF’s intrinsic value down by a material amount during the same period, or is your view of the value of BNSF’s irreplaceable network unaffected by these short-term wiggles?

WARREN BUFFETT: Well, I would — certainly the decline in coal — which is a very important commodity — it’s about 20 percent of revenues — that’s secular.

Now, there’s other factors that may cause the line of decline to jiggle around. We had a very mild winter, and we went into the winter with utilities carrying unusual amounts of coal.

And ironically, part of the reason for that was that our service the year before had been bad and they’d gotten low on coal, so then they compensated by bringing in more than they needed, just to catch up. And because the weather was mild, electricity use was poor in the winter time. And so they continue, at this point, to have considerably more coal on hand than they would like.

So they are not only — they’re trying to under order what they will be using, and that has a little effect. But the decline in coal, for sure, is secular. And at 20 percent of revenues, that’s a significant factor.

But — and it’s true that the market, generally, got very enthused about railroad stocks a year or two ago, so they sold up a lot. And now that people have seen that car loadings are down and earnings are down, in some places, that equity valuations have come down.

We don’t — we love the fact we own BNSF. We think we bought it at an attractive price. We’d love to be able to buy a second thing exactly like it at that price. We’d do it in a second. We’d even pay a little bit more, probably.

But we don’t mark up, and down, our wholly-owned businesses, based on stock market valuations.

Obviously, stock market valuations are some factor in our thinking, but we are not marking our wholly-owned businesses to market because we know we’re going to hold them forever. And we regard BNSF as a very good business to hold forever.

But it will it will lose coal volume and, you know, it may lose in other areas, but it will gain in other areas. It’s a terrific and valuable asset, and it will learn a lot of money this year, but it won’t earn as much money as it earned last year.

Charlie?

CHARLIE MUNGER: I’ve got nothing to add.

18. Don’t envy people making money from risky behavior

WARREN BUFFETT: OK. Station 4.

AUDIENCE MEMBER: Hi, Warren. Hi, Warren and Charlie. Great to see you. This is Cora and Dan Chen from Taulguard Investments of Los Angeles.

This annual meeting reminds me of the magical world of Hogwarts, of Harry Potter. This arena is our Hogwarts. Warren, you are our Headmaster and Professor Dumbledore. (Laughter)

WARREN BUFFETT: I haven’t read Harry Potter, but I’ll take it as a compliment. (Laughter)

AUDIENCE MEMBER: Charlie is our Headmaster Snape, direct, and full of integrity.

The magic of long-term, concentrated, value investing is real, yet similar to Harry Potter, the rest of the world doesn’t believe we exist.

Your letter to me has changed my life. Your “Secret Millionaire’s Club” has changed my children’s life. They go to class chatting about investing.

My question is for my children watching at home today and the children in the audience.

How should they look at stocks, when every day in the media they see companies that have never made a dime in their life go IPO?

They’re dilutive and they see a lot of very short-term spin. The cycle is getting shorter and shorter.

How should they view stocks, and what’s your message for them?

Finally, Cora and I would love to thank you in person and shake your hand personally today. I’ll repeat what I said last year: thank you for putting — setting — the seeds for my generation to sit in the shade, and for my children’s generation to sit in the shade with the “Secret Millionaire’s Club.”

I truly walk amongst giants. Thank you.

WARREN BUFFETT: Would you mind repeating the whole thing? (Laughter)

“The Secret Millionaire’s Club,” we want to give great credit to Andy Heyward on that. I think it has helped — I know it’s helped — thousands and thousands of children and Andy — it was Andy’s idea — and it grows in strength.

And having young children learn good lessons, in terms of handling money, and making friendships, and just generally behaving as better citizens is a great objective, and Andy makes it easy for them to do. So, on his behalf, I accept your comments.

You don’t really have to worry about, you know, what’s going on in IPOs, or people making money.

People win lotteries every day, but there’s no reason to have that effect you at all. You shouldn’t be jealous about it.

I mean, you know, if they want to do mathematically unsound things, and one of them occasionally gets lucky, and they put the one person on television, and the million that contributed to the winnings, with the big slice taken out for the state, you know, don’t get on — it’s nothing to worry about.

Just, all you have to do is figure out what makes sense. And you don’t — you look at buying — when you — when you buy a stock, you get yourself in the mental frame of mind that you’re buying a business, and if you don’t look at a quote on it for five years, that’s fine.

You don’t get a quote on your farm every day or every week or every month. You don’t get it on your apartment house, if you own one. If you own a McDonald’s franchise, you don’t get a quote every day.

You know, you want to look at your stocks as businesses, and think about their performance as businesses. Think about what you pay for them, as you would think about buying a business.

And let the rest of the world go its own way. You don’t want to get into a stupid game just because it’s available.

And I’m going to say a little more about that close to the break. But with that, I’ll turn it over to Charlie.

CHARLIE MUNGER: Yeah, well, I think that your children are right to look for people they can trust in dealing with stocks and bonds.

Unfortunately, more than half the time, they will fail, in a conventional answer. So you — they really have to — they have a hard problem. If you just listen to your elders, they’ll lie to you and make — spread — a lot of folly.

WARREN BUFFETT: But they really have an easy problem, in the sense that American business, as a whole, is going to do fine over time. So the only way they can —

CHARLIE MUNGER: But not the average client of a stock broker.

WARREN BUFFETT: Well, we’ll get to that later. (Laughs)

The stockbroker will do fine. The — (laughter)

CHARLIE MUNGER: Yes, that’s true.

WARREN BUFFETT: But, they don’t have to do that and we can talk — I’d rather address that just a little later.

But — just — you don’t want to worry — you don’t want to be — a lot of problems are, as Charlie would say, are caused by envy. You don’t want to get envious of somebody who’s won the lottery, or bought an IPO that went up. You have to figure out what makes sense and follow your own course.

19. Nevada utility customers shouldn’t have to subsidize solar power

WARREN BUFFETT: Becky?

BECKY QUICK: This question comes from a shareholder named Lisa Kang Le (PH) in Singapore. And this has to do with NV Energy’s issue with solar energy in Nevada.

“Can the chairman help his environmentally conscious shareholders understand why NV Energy has lobbied for new rules in Nevada that make it prohibitive for households to use solar energy? Is there a good reason that we haven’t yet heard about?

“And can the chairman or vice chairman share their views on whether there’s a need to implement an environmental, social, and governance policy, on Berkshire investments going forward?

“I understand that Berkshire Hathaway typically lets the underlying operating companies and CEOs manage their own policies autonomously, but should Berkshire’s board influence better environmental protection policies going forward?”

WARREN BUFFETT: Well, the public utility and the pricing policies and everything in Nevada, as well as other places, but they’re determined by a public utility commission. So, there are, I believe, three commissioners that decide what’s proper.

The situation in Nevada is that, in terms of rooftop power, was that for the last few years, if you had a solar project on your roof, you could sell back excess power you generated to the grid at a price that was far, far, far above what we, as a utility, could buy it for elsewhere.

So, you could sell it back, we’ll say, at roughly 10 cents a kilowatt hour. And about 17,000 — maybe a few more now — about 17,000 people had rooftop installations.

Now they get — there were federal credits involved, but those usually got sold to other people, in terms of tax credits.

So they were being subsidized by the federal government, and that encouraged solar generation, as it’s encouraged us to do solar generation and wind generation, as well.

But the people who had these 17,000 rooftop installations were selling back to the grid at 10 cents, roughly, a kilowatt hour, energy we could purchase or produce — either — but purchase elsewhere, too — for 3 1/2 cents, or thereabouts.

So, 99 percent of our consumers were being asked to subsidize the 1 percent that had solar units, by paying them a significantly — triple the market price, basically — of what we could otherwise buy electricity to sell to the 99 percent.

So then it’s just a question of whether you wish to have the 99 percent subsidize the 1 percent.

And the public utility commission in Nevada, they had originally let this small amount of rooftop solar generation be allowed as an experiment with this 10 cent, roughly 10 cent, rebate.

And they decided that they did not believe that the 99 percent should be subsidizing the 1 percent.

There may — there’s no question — that for solar to be competitive, just like wind, it needs subsidization. Costs are not yet at a level where it becomes competitive with natural gas, for example.

And who pays the subsidy gets to be a real question, if you want to encourage people to use renewables.

And, in general, the federal government has done it through tax subsidies, which means taxpayers, generally, throughout the country subsidize it.

And the public utility commission in Nevada decided that after seeing this experiment, they decided that it was not right for a million — well over a million — customers to be buying electricity at a price that subsidized the 17,000 people, and therefore increase the prices of electricity for the million.

And that question of who subsidizes renewables, and how much, is, you know, going to be a political question for a long time to come.

And I personally think that if society is the one that’s benefiting from the lack of — reduction of — greenhouse gases, that society should pick up the tab.

And I don’t think that somebody sitting in a house in someplace in Nevada, we’ll call it Las Vegas, but it could be other cities because we serve most of Nevada, should be picking up the subsidy for their neighbor, and the public utility commission agrees with that.

I think we have Greg Abel here who — NV Energy is a subsidiary of Mid-American — of Berkshire Hathaway Energy.

Greg, was there anything you want to add? Can we get a spotlight down here? Maybe?

It’s not live.

GREG ABEL: I think it’s on now.

So, as usual Warren, you summarized it extremely well. When we think of Nevada, it’s exactly as you described. I would just add a few things.

One: as you’ve touched on earlier, we absolutely support renewables. So we start with the fundamental concept that we are for solar. But, as you highlighted, we want to purchase renewable energy at the market rate, not at a heavily subsidized rate that 1 percent of the customers will benefit from and harm the other 99 percent.

And it goes back to being as fundamental as this: if you take, as you touched on, a working family in Nevada who can’t afford the roof top unit and you ask him, “Do you want to subsidize your neighbor, that 1 percent?” the answer is clearly no.

At the same time, we’re absolutely committed to Nevada utilizing renewable resources, and absolutely proud of what our team’s doing. By 2019, we will have eliminated or retired 76 percent of our coal units and be replacing it with solar energy. So we’re on a great path there. Thank you. (Applause)

And we’re just going to encourage our team. And with the work of the commission, and obviously led by the state, we’ll head down a great path. Thank you.

WARREN BUFFETT: Yeah, if the projectionist would put up slide 7, it will give you a view of what the situation is.

This counts all of our all our Berkshire Hathaway Energy operations, and you can see, in a 20-year period we’ll have a 57 percent reduction.

You wouldn’t want a 100 percent reduction tomorrow. Believe me, the lights would be off all over the country. But it’s moving at a fast pace.

But, you do — you want to be sure that you treat fairly the people involved in this, because somebody pays the cost of electric generation.

And I do think that if you’re doing something that’s to benefit the planet — and it’s important that it be done — but that you have the cost be assessed for that, not on a specific person who’s having trouble, perhaps, making ends meet in their job.

And obviously, if you’ve got over a million customers in Nevada, a lot of them are struggling. A lot of them are going fine, too. But they are not the ones, in my view, to subsidize the person who could afford to put the solar unit in.

20. We don’t buy or sell based on commodity price predictions

WARREN BUFFETT: OK. Cliff?

CLIFF GALLANT: Over the past year we’ve learned — perhaps I’ve learned — that Berkshire’s results are more influenced by oil markets than I previously appreciated. Revenues at the railway company and some of Berkshire’s manufacturing businesses were negatively impacted. And arguably, low gas prices hurt GEICO’s loss ratio.

Yet during this year, Berkshire invested in Phillips 66, Kinder Morgan, and even PCP has revenues associated with the oil and gas industries.

I know Berkshire wouldn’t make a bet on a commodity like oil, but is Berkshire making a statement about the long-term outlook for oil?

WARREN BUFFETT: Making a statement about what?

CLIFF GALLANT: Oil.

WARREN BUFFETT: The price? The price of oil?

CLIFF GALLANT: Yes.

WARREN BUFFETT: No. We haven’t the faintest idea what the long-term price of oil was and there’s always a better system available.

You can buy oil, as you know, for delivery a year from now, or two years from now, or three years from now. We actually did that once, Charlie, didn’t we? Some years back.

CHARLIE MUNGER: Cashed it in too soon, too.

WARREN BUFFETT: Yeah. We made money but we could have made a lot more money.

We don’t think we can predict commodity prices. We don’t hedge cocoa or sugar (inaudible). We do some forward buying of chocolate coatings or something of the sort.

But basically, we are not two fellows who think we can predict the price of soybeans or corn or oil or anything else.

So, anything you have seen in our investment transactions — some of those securities you mentioned there were bought by Todd or Ted, and one was bought by me — but neither they nor I bought those, or if we sell them, sell them, based on commodity price predictions.

We don’t know how to do it. And we’re thinking about other things when we make those decisions.

Charlie?

CHARLIE MUNGER: I’m even more ignorant than you are.

WARREN BUFFETT: That would be hard to beat. (Laughs)

OK. I think that’s the first time I’ve heard him say that. It has a nice ring to it. (Laughter)

21. Don’t expect efficiency in higher education

WARREN BUFFETT: OK, station 5.

AUDIENCE MEMBER: Hi Warren. Hi Charlie.

WARREN BUFFETT: Hi.

AUDIENCE MEMBER: I’m Ken Martin. I’m an MBA student from the Tuck School at Dartmouth.

My question is about college tuition and the problem of rising student debt balances.

In the past, prominent philanthropists have founded institutions that are now prominent research universities in our country. Why is this not a bigger part of today’s philanthropic debate, the founding of new colleges? Would not new supply in higher education be at least part of the solution to this problem?

WARREN BUFFETT: Charlie, you want to tackle that one? You’re more of an expert than I am.

CHARLIE MUNGER: Yeah. I think that if you expect a lot of efficiency — financial efficiency — in American higher education, you’re howling at the wind. (Laughter and applause)

WARREN BUFFETT: Well. I think he’s also talking about just more philanthropy to deliver there. Am I right?

Want to give him the light back on there?

AUDIENCE MEMBER: Yeah, that’s right.

CHARLIE MUNGER: What’s the question again?

WARREN BUFFETT: The question about is — maybe — whether more philanthropy ought to be devoted to that relatively because of the cost. But —

CHARLIE MUNGER: Well, I do a lot more than Warren does in this field — (laughs) — and I am frequently disappointed but — (Laughter)

Monopoly has kind of — and bureaucracy — have kind of pernicious effects everywhere, and the universities aren’t exempted from it.

But of course, they are the glory of civilization, and if people want to give more to it, why, I’m all for it.

WARREN BUFFETT: Yeah, it — you know, you’ve got the option of very good state schools and — we spend a lot of money on education in this country.

You know, if you just take — you take kindergarten through twelve, it’s interesting. People talk about entitlements in this country. They say it’s terrible we have all these entitlements for Social Security and everything.

We have entitlements for the young. We spend $600 billion a year educating 50 million kids in the public schools between kindergarten and twelfth grade, and just think what that is as an entitlement.

Nobody ever seems to bring that up. But it’s a huge — and I believe in it, obviously, but — you know, the people in their working ages, generally speaking, I think have an — in a rich society — have an obligation to both the young and the old.

And based on the amount we spend, if we have problems with our school system it’s not because we’re cheap. No, there are other problems that contribute to it. In terms of the money we put out, we’re right up there. (Applause)

But I was the trustee of a college that saw the endowment go from $8 million to over a billion. And I didn’t see the tuition come down. And I didn’t see the number of students go up.

CHARLIE MUNGER: Nothing went up, except the professors’ salaries.

WARREN BUFFETT: Yeah. From 8 million to a billion. I mean — and very, very decent people running the place.

But when you read the figures on endowment of the big schools, you know, and some of them have really got up in the big numbers, the main objective of the people running the endowment is to have the endowment grow larger. And that will be ever thus. That is the way humans operate.

You have any more comments on that, Charlie? You’ve seen a lot.

CHARLIE MUNGER: I’ve made all the enemies I can afford at the moment.

WARREN BUFFETT: OK. (Laughter.)

That’s never slowed him down in the past. (Laughter)

22. Berkshire will “do fine” if Trump or Clinton wins

WARREN BUFFETT: Andrew.

ANDREW ROSS SORKIN: Thank you, Warren. This from a shareholder who asked to remain anonymous.

“If Donald Trump becomes the president of the United States, and recognizing your public criticism of him and your public support for Hillary Clinton, what specific risks, regulatory, policy, or otherwise, do you foresee for Berkshire Hathaway’s portfolio of businesses?

WARREN BUFFETT: That won’t be the main problem. (Laughter and applause)

Well. Government, you know, is a very big factor in our business and in all businesses. I mean, there’s the very broad policies that affect practically everybody, and sometimes there can be some pretty specific policies.

But, I will predict that if Don — either Donald Trump or Hillary Clinton becomes president — and one of them is likely to be — very likely to be — I think Berkshire will continue to do fine.

Charlie?

CHARLIE MUNGER: I’m afraid to get into this area. (Laughter)

WARREN BUFFETT: Yeah. We’ve operated under all — I mean, we’ve operated under price controls. I mean, there —

We’ve had 52 percent federal taxes applied to our earnings for many years. Even high — I mean, they were higher at other times — but there — you know, we’ve had regulations come along and, in the end, business in this country has done extraordinarily well for a couple of hundred years, and it was adapted to the society and the society has adapted to business.

This is a remarkably attractive place in which to conduct a business. Imagine, in a world of practically zero interest rates, you know, American business earning terrific returns on tangible cap — equity. I mean, those are the assets that were actually employed in the business. The numbers are staggering.

And, you know, people who have had their money in savings accounts or something like that get destroyed.

But owners of business, if you look at returns on tangible equity, just check them out some time, and they have not suffered even as people who own fixed-interest — fixed-income — instruments have suffered enormously.

And, you know, farm prices are down now. Farmer income has fallen off a lot in the last couple of years.

But business has managed to take care of itself. And for a good reason, because it contributes to, and has been the engine of, our market economy that’s delivered output that is staggering by the imagination of anyone that might have existed 100 years ago.

In my lifetime, the GDP per capita, in real terms, of the United States, has gone up six-for-one. Can you imagine a society where in one person’s lifetime, overall, people have six times the real output that they had at the beginning.

It’s — you know, the system works very well in terms of aggregate output. In terms of distribution of that output, sometimes it can fall very short, in my view. But, it’ll keep working. You don’t have to worry about that.

Twenty years from now, they’ll be far more output per capita in the United States, in real terms, than there is now. In 50 years, it will be far more. It’ll — and the quality will get better.

And no presidential candidate or president is going to end that. They can shape it in ways that are good or bad, but they can’t end it.

Now Charlie, give something pessimistic here to balance me out.

CHARLIE MUNGER: No, I want to say something optimistic.

I think that the GDP figures greatly understate the real advantage that our system has given our citizens. It underweighs a lot of huge achievements because they don’t translate right into money in a certain way that the economists can easily handle.

But the real achievements over the last century, say, are way higher than are indicated by the GDP figures, and the GDP figures are good.

I don’t think the future is necessarily going to be quite as a good as the past. But it doesn’t have to be.

WARREN BUFFETT: There’s no one you’ll run into, at least in my experience, that says, “With my same talents, I wish I’d lived 50 years ago instead.” Born 50 years earlier.

But a majority of the American public thinks that it’s a bad time to be born today compared to when they were born. They think their children will not — they’re wrong. I mean, it’s — the pace of innovation — just think how different you’re living compared to 20 years ago, in terms of what you do with your time.

Now, a lot of people may condemn it, or something of the sort, but you’re making free choices that were not available to you 20 years ago and you’re making them in a different direction than —

I’m still staying with the landline, but you people are way ahead of me. (Laughs).

23. BNSF CEO doesn’t see rail mergers in near future

WARREN BUFFETT: OK. Gregg?

GREGG WARREN: Warren. Late last year we saw Canadian Pacific make a hostile bid for Norfolk Southern, a combination that would have linked Canada’s second largest carrier with one of the two largest railroads in the eastern U.S.

This move led to a largely negative reaction from not only Norfolk Southern, but from federal and state lawmakers, shippers, and other railroad operators, even though a formal evaluation process hadn’t even begun with the U.S. Surface Transportation Board. Canadian Pacific eventually backed down.

Looking back to 1999, when the Transportation Board blocked a proposed merger between BNSF and Canadian National, the attitude was that any additional mergers amongst railroads would have to be accretive to competition.

What do you think they meant by this? And if one believes that the hookup of one of the two major western railroads with one of the two eastern railroads would not alter the current landscape, where most shippers have just two choices amongst the large railroads operating in the region, and could actually generate efficiencies and cost savings that could be passed along to customers, how does a combination of someone like BNSF with Norfolk Southern or CSX not satisfy their goal?

WARREN BUFFETT: I — I think now there’s — and is Matt Rose, is he here? He can probably answer that — some of that — better than I can — certainly. He can answer all of it better than I can.

Yeah. There’s Matt. Yeah.

MATT ROSE: Yeah. So, the statement is actually right.

Back in 1999, we had a failed merger with Canadian National. New rules were put in place by our regulator, a little group called the STB, and what they said was that the public litmus test for the next merger would have to be different.

And, at that point in time we didn’t really think that a large merger was possible. And so, when Canadian Pacific announced their merger of the Norfolk Southern, when we think about our four constituencies, and those four are our customers, the labor groups, the communities in which we serve, and shareholders, which, our shareholder, of course, is BRK, we didn’t see any interest in the final round of these mergers occurring outside of the shareholder community.

And so our position was simply to say, if the rest of the shipping community believes that we ought to see this final round, that’s fine, we’ll participate, but we don’t see it occurring right now.

We do believe that when that final round occurs, there will be great efficiencies made for shippers and communities, but right now we don’t see the dynamics in place.

So, what are those dynamics? It will be as the country continues to grow in population from where we are today, 315 million people, to, say, 320, 330, 350, transportation becomes more scarce and the railroads will need to do more. And that’s really when we think the next round will occur.

24. Berkshire indifferent to Wells Fargo’s investment banking

WARREN BUFFETT: OK. Station 6.

AUDIENCE MEMBER: Hi, my name is Michael Mozia. I’m from Brooklyn, New York and I’ll be starting at Wharton Business School in the fall.

In an interview with Bloomberg Markets recently, Jamie Dimon defended the role banks play in financial markets, saying, “Banks aren’t markets. The market is amoral… You’re a trade to the market… A bank is a relationship.”

But banks, namely investment banks, have struggled as regulators have favored market-based solutions, and many of those relationships investment banks have worked so hard for have proven to be less lucrative, especially compared to the growing fixed costs of supporting them.

As it relates to our marketable securities portfolio, how do you feel about the investment banking component, particularly as Wells moves into that space? Would you feel differently if the cost basis was higher?

And Warren, Charlie, thank you so much for doing this every year.

WARREN BUFFETT: Thank you. Charlie, I didn’t totally get that, but does he feel the investment banking firms are being disadvantaged?

CHARLIE MUNGER: Well, he’s basically, how do we feel about — Jamie says —

AUDIENCE MEMBER: How do you feel about —?

CHARLIE MUNGER: You can’t make as much money as you used to out of relationships, and it’s getting tougher and so forth?

WARREN BUFFETT: Yeah. Well, the public policy since 2008-9 has been to, very much, toughen up capital requirements in a variety of ways for banks, but it is specifically been designed to make large banks- very large banks — less profitable relative to smaller banks.

And you do that by increasing capital requirements. You can change the math of banking, and the attractiveness of banking, totally, by capital requirements. Obviously, if you said every bank had to be 100 percent equity, it would be a terrible business. You couldn’t possibly earn any money that was significant on capital.

And if you let people operate with 1 percent capital ratios, they can make a lot of money and they will cause the system all kinds of trouble.

So, since 2009, the rules have been tilted against the larger banks by — primarily — through capital requirements. And that just means returns on equity go down, but returns on equity were awfully high prior to that. So it doesn’t — it hasn’t turned it into a bad business, it’s turned it into a less attractive business than earlier.

And that — some of the investment banks operate as bank holdings companies, still, and they’ve been affected by those capital requirements, too.

I’m not sure I’m getting 100 percent to your question, so I invite you to give me a follow-up, if you like, on that.

AUDIENCE MEMBER: In the marketable securities portfolio, do you feel good about the going-forward prospects of the investment — of the investment banking companies — especially as Wells Fargo moves into that business?

WARREN BUFFETT: Well, Wells Fargo has an investment banking aspect to it that primarily came in through Wachovia. And it’s not insignificant.

But our ownership of Wells Fargo, which is very large — it’s our largest single marketable security — I’m not counting Kraft Heinz, which is about the same size, because in that situation we’re in a control position — it’s the largest non-control situation that we have, at Wells Fargo.

And that’s by intent. I like it extremely well compared to other securities. Not because it has the most upside, but I feel that, weighted for upside and downside, that it’s —

CHARLIE MUNGER: It’s not the investment banking that charms you in Wells Fargo. It’s the general banking that —

WARREN BUFFETT: Yeah. No. We’re not — it isn’t that big a deal, and that’s not what attracts us.

We think Wells Fargo is a very well run bank. But, we didn’t make any decision to buy a single share based on the fact they were going to be more in the investment banking business because of the Wachovia acquisition.

They’ve got a lot of sources of income. They’ve got a huge base of very cheap money, but unfortunately, they’ve got it out at very cheap rates on the other side now. But, spreads will probably work in their advantage eventually. And we think it’s a very well run bank.

Investment banking business — Charlie and I are probably a little affected by the experience we had in running one for a short period of time — it’s not been something that we invested in significantly.

We, obviously, made a major investment in Goldman Sachs, and we continue to hold shares that came out of the warrants that we received when we made the investment in 2008.

But I think I can’t recall us making an investment banking purchase — a marketable security involving an investment bank — for a long time. Can you, Charlie?

CHARLIE MUNGER: No, I think, generally, we fear the genre more than we love it.

25. “Very, very unlikely” activists could break up Berkshire

WARREN BUFFETT: Carol?

CAROL LOOMIS: In the conclusion of the book “Dear Chairman,” which you recommend in this year’s annual letter — a new book you recommend- the author argues that, quote, “The life’s work of great investors is inevitably reabsorbed into the industrial complex with little acknowledgement of their accomplishments.”

He then argues that Berkshire Hathaway will eventually be targeted by activist investors if it trades at too sharp a discount to intrinsic value.

Do you agree with this assessment and have you considered installing corporate defenses that might prevent future generations of activists from trying to break up Berkshire Hathaway?

WARREN BUFFETT: Yeah, I used to worry more about that than I do now.

Partly, size is one factor. I think the more important factor would be that Berkshire will always be in a position to repurchase very significant amounts of stock, and as long as it’s willing to buy that stock at some price — and it should be — close to intrinsic value, there should not be a large margin, in terms of anybody that might come along and think there’d be a lot money to be made by breaking up.

There would be money lost by breaking it up, in terms of we’d lose — there’d be certain advantages lost.

MidAmerican Energy could not have done what it has done in renewables without Berkshire being the parent. I mean, if it had been split off, it would have been worth — the parts would have been worth — less than the whole. And there are other instance — I could give you significant instances of that in other cases.

So, I don’t think there will be a spread that will be enticing to anyone. And beyond that, I think the numbers involved would be staggering, and I think we have a shareholder base that recognizes the advantages of both the Berkshire businesses and its culture and — so I think it’s very, very unlikely.

But there have been periods in business history where stocks sold at — where practically all stocks — sold at dramatic discounts from what you might call intrinsic value. And it’s interesting that very little activity occurred there.

In the 1974 period, 1973 and ’74, you know, there were company — really good companies — one of which was Cap Cities, for example, that Tom Murphy ran, that was selling at a huge discount to what it was worth. But people did not come along. And so, to some extent, when the discounts are huge, money is hard to get.

It’s not a huge worry with me. Actually, in my own case, because of the way my stock will get distributed to philanthropies after I die, it’s very likely that my estate, for some years, will be, by far, the largest shareholder of Berkshire, in terms of votes, even with this distribution policy that occurs.

So I — it’s not something I worry about now. I used to worry about it some, but it’s not a factor now.

Charlie?

CHARLIE MUNGER: Well I — I think we have almost no worries at all on this subject, and that most other people have a lot of thoroughly justifiable worry, and I think that helps us. So, I look forward on this subject with optimism.

WARREN BUFFETT: You want to explain how it helps us, Charlie?

CHARLIE MUNGER: Well, if you’re being attacked by people you regard as evil and destructive and so on, and you want a strong ally, how many people would you pick in preference to Berkshire?

WARREN BUFFETT: My name is Warren Buffett and I approve of that message. (Laughter)

26. No interest in “pure” leasing businesses

WARREN BUFFETT: Jonathan?

JONATHAN BRANDT: Leasing has quietly become an important contributor to Berkshire’s earnings with its several leasing units logging about $1 billion in combined annual pre-tax income.

Could you talk about Berkshire’s competitive advantages in its varying leasing businesses including containers, cranes, furniture, tank cars, and rail cars?

Are there other leasing businesses you’d be interested in entering, for instance, airplanes or commercial auto fleets? Plane leasing companies, in particular, seem to sell for reasonable prices and are often available.

WARREN BUFFETT: Yeah. Well, we’ve got a very good truck leasing business in XTRA, and we’ve got a good, primarily tank car leasing, business at Union Tank Car and Procor. And we expanded by a billion dollars when we bought the GE fleet recently.

Leasing, generally, isn’t something that will — we have to bring something to the party.

At XTRA , that’s much more than just handing people a trailer and taking a check every month. There’s important service advantages brought to that.

But pure leasing — leasing of new cars, which is a huge business — the math is not that attractive for us.

The banks have an advantage over us because their cost of funds is so low now. It’s not quite as low as it looks, but I think Wells Fargo, I think the last figure was, you know, down around 10 basis points.

And when somebody has, you know, maybe a trillion dollars or so, and they’re paying 10 basis points for it, I don’t feel very competitive at Berkshire in that situation.

So, pure money-type leasing is not an attractive business for us when we’ve got other people with a lower cost of funds. I mean, they’ve got the edge.

And we have got — railcar leasing involves a lot more than just a financial transaction. I mean, we repair — we’ve got huge activity in the repair field, and those cars require servicing, and the same way in our trailer business.

But you will not see us get in — aircraft leasing doesn’t interest me in the least. We’ve looked at that a lot of times, at various aircraft leasing companies offered to us. And that’s a scary business. And some people have done well in it by, in recent years, by using short-term money to finance longer-term assets which have big residual risks, and that just isn’t for us.

Charlie?

CHARLIE MUNGER: I think you’ve said it pretty well. We’re well located now but we — I don’t agree that we have huge opportunities.

27. “We’re not targeting competitors for destruction”

WARREN BUFFETT: OK. Station 7.

AUDIENCE MEMBER: Good morning Warren and Charlie. I am Vandemere Se from the Philippines. Warren, my wife and I sent original paintings to your office two days ago, we hope you like them.

WARREN BUFFETT: Thank you.

AUDIENCE MEMBER: Today — sorry — today Berkshire’s size ensures that it faces competition from numerous businesses. If you had a silver bullet, which competitor would you take out and why? I’m sorry — and you can’t say Donald Trump. (Laughter)

WARREN BUFFETT: Which competitor in which businesses? I mean, you’re asking about which —

CHARLIE MUNGER: Which — which competitor would you kill if you could? I don’t think — I don’t think we have to answer this one.

WARREN BUFFETT: (Laughs) Charlie’s a lawyer. (Laughter)

But I’ve thought about the question. (Laughter)

We have lots of tough competitors. And in many areas, we’re a pretty tough competitor ourselves.

And — and the real — what we want our managers to be doing, you know, is thinking every day about how to achieve a stronger competitive position. We call it “widening the moat.”

But, we want to turn out better products, we want to keep our costs down to a minimum, you know, we want to be thinking about what our customer’s likely to be wanting from us, you know, a month, a year, 10 years from now.

And, generally, if you take care of your customer, the customer takes care of you. But there are cases where there is some force coming along that really is — you may not have the answer for it. And then, you know, you get out of that business.

We had that department store in Baltimore in 1966, and if we’d kept it, we would have gone out of business.

So, recognizing reality is also important. I mean, you do not want to try and fix something that’s unfixable.

CHARLIE MUNGER: We’re not targeting competitors for destruction. We’re just trying to do the best we can everywhere.

WARREN BUFFETT: Spoken like an anti-trust lawyer. (Laughter)

OK. We really hope to be the ones that the other guys want to use the silver bullet on.

28. Sequoia Fund was “overly entranced” by Valeant

WARREN BUFFETT: Becky?

BECKY QUICK: This question comes from Rom and Raji Terracod from Sugarland, Texas.

He writes, “My wife and I have the vast majority of our net worth invested in Berkshire and in shares of the Sequoia Fund. Mr. Buffett, you have endorsed the Sequoia Fund on more than a few occasions.

“Recently, the Sequoia Fund has been in the news because of its large position in Valeant Pharmaceuticals. Mr. Munger has termed Valeant’s business model ‘highly immoral.’

“Mr. Buffett, do you agree with Mr. Munger’s assessment? Have your views about Sequoia Fund changed? Also, as you know, Sequoia is an admirer and large holder of Berkshire stock. ”

WARREN BUFFETT: Yeah, in a sense, I’m the father of Sequoia Fund, in that when I was closing up my partnership at the end of 1969, I was giving back a lot of money to partners, and these people had trusted me, and they wanted to know what they should do with their money.

And we helped out those who wanted to put it in municipal bonds for a few months, Bill Scott and I stayed around and helped those people come up with those. But most of them were equity oriented-type investors.

And we said there were two people that we admired enormously in the investment business, not simply because they were terrific investors, but they were terrific people. And they would be the kind of people that you’d make trustee of your will.

So those two, one of whom is in the room — Sandy Gottesman, our director — and one was Sandy and one was Bill Ruane. They were friends themselves.

So, Sandy took on a number of our clients — a number of our partners — and they became clients, and very happy clients, of his, and I’ll bet some of them are still clients, or their children or their grandchildren are, to this day.

Others went with Bill — a lot of them went with both of them, actually — in fact, I would be surprised if the majority who had a lot of money gave some to Sandy and gave some to Bill.

But Bill — we had a lot of people whose total funds were really not of a size that made them economic individual clients. And so, Bill, who would not have otherwise set up a fund, Bill said, “I’ll set up a fund.”

And they actually had an office in Omaha. John Harding, who used to work for me, became the employer here.

And a number of our ex-partners — my ex-partners — joined Sequoia Fund as a way to find an outstanding investment manager, like I say, both for ability and for integrity, and could deploy small sums with him.

And Bill ran Sequoia until, I think, roughly 2005, when he died, and did a fantastic job.

And even now, if you take the record from inception to now, with the troubles they’ve had recently, I don’t know of a mutual fund in the United States that has a better record. There probably is one, maybe, or two, But it’s — it’s far better than the S&P, and you won’t find many records that go for 30 or 40 years that are better than the S&P.

So Bill did a great job for people. And Bill died in 2005, and the record continued to be good until a year or so ago.

And at that time, they — the management company — the manager, I should say — took an unusually large position in Valeant and, despite the objection of some people on the board, not only maintained that position but actually increased it, after a fair amount of doubt had been expressed by the board about the advisability of doing that.

The record, like I say, to date, still, from when it started, is significantly better than average.

My understanding is that the manager who made the decision on Valeant is no longer running the operation, and that other people have (inaudible) for doing so, and I have every reason to believe that they’re — I know that they’re very smart, decent people, who are good, probably way better than average analysts, in terms of Wall Street.

So, I think it was a very unfortunate period when the manager got overly entranced with a business model, which, if you — I watched the Senate hearings a couple of days ago when Senator Collins and Senator McCaskill interrogated three people from Valeant, and it was not a pretty picture.

In my view, the business model of Valeant was enormously flawed. It had been touted to us. We had several people who urged us, strongly, to buy Valeant, and wanted us to meet Pearson, and all that sort of thing.

But it illustrated a principle that Pete Kiewit, I think, said many, many years ago. He said if you’re looking for a manager, find somebody that’s intelligent, energetic, and has integrity. And he said that if they don’t have the last, be sure they don’t have the first two. If you’ve got somebody that lacks integrity, you want them to be dumb and lazy.

You know — and if you get an intelligent, energetic guy, or woman, who is pursuing a course of action which, if put on the front page, you know, would make you very unhappy, you can get in a lot of trouble.

It may take a while. But Charlie and I have seen, and we’re not remotely perfect at this, I don’t mean that, but we’ve seen patterns. You get — pattern recognition gets very important in evaluating humans and businesses. And, the pattern recognition isn’t 100 percent, and none of the patterns exactly repeat themselves, but there’re certain things in business and securities markets that we’ve seen over and over, and that frequently come to a bad end, but frequently look extremely good in the short run.

One, which I talked about last year — I’m not referring to Valeant in this regard — is the chain letter scheme, the disguised chain letter. You’re going to see chain letters the rest of your life.

Nobody calls them chain letters because that has a connotation that will scare you off. But they’re disguised chain letters. And many of the schemes in Wall Street that are designed to fool people have that particular aspect to it.

And there were patterns at Valeant that I think — certainly if you go and watch those Senate hearings, I think, you’ll decide that there were patterns there that really should have been picked up on, and it’s been very painful to the people of Sequoia.

And I personally think that the people running Sequoia now are able people, and I’ll get into in a second the difficulty in managing money, but first, I’ll give Charlie a chance to comment on this.

CHARLIE MUNGER: Well, I totally agree with you that Sequoia, as reconstituted, is a reputable investment fund and that the manager, as reconstituted, is a reputable investment adviser.

I’ve got quite a few friends and clients that use Ruane, Cunniff, and I’ve advised them to stay with the place as reconstituted. I believe you’ve done the same thing, haven’t you?

WARREN BUFFETT: Right.

CHARLIE MUNGER: So we trust — we think the whole thing is fixed.

Valeant, of course, was a sewer, and those who created it deserve all the opprobrium that they got. (Applause)

29. Buffett leads in wager against hedge funds

WARREN BUFFETT: In a few minutes we’ll break, but I think it almost ties in with this last question.

If we could put slide 3 up.

I promised — some years ago I made a wager — and I promised to report, before the lunch, how the wager was coming out.

And I’ve been doing that regularly, but it probably seems appropriate, since it’s developed this far, to point out a rather obvious lesson, which is what I hoped to drive home, to some degree, by offering to make the wager originally.

Incidentally, when I offered to make the wager, namely that somebody could pick out five hedge funds and I would take the unmanaged S&P index used by Vanguard Fund, and I would bet that over a ten-year period that the unmanaged index would beat these five funds that were all being managed, presumably — they could pick any five funds — that were managed by people who were charging incredible sums to people because of their supposed expertise.

And, fortunately, there’s an organization called, or at least you go — if you go to the Internet, if you put in longbets.org — it’s a terribly interesting website.

You can have a lot of fun with it because people take the opposite side of various propositions that have a long tail to them and make bets as to the outcome, and then they both give their — each side gives their reasons.

And you can go to that website and you can find bets about, you know, whether — what population will be doing 15 years from now or — all kinds of things.

And our bet became quite famous on there. They — and a fellow I like, who I didn’t know before this, Ted Seides, bet that he could pick out five hedge funds — these were funds of funds.

In other words, there was one hedge fund at the top and then that manager picked out who he thought were the best managers underneath, and then bought into these other funds in turn, so that the five funds of funds represent, maybe, 100 or 200 hedge funds underneath.

Now bear in mind that the hedge fund — the fellow making the bet — was picking out funds where the manager on top was getting paid, perhaps, 1/2 percent a year, plus a cut of the profits, for merely picking out who he thought were the best managers underneath, who in turn were getting paid, maybe, 1 1/2 or 2 percent, plus a cut of the funds’ profits.

But certainly the guy at the top was incentivized to try and pick out great funds, and at the next level, those people were presumably incentivized, too.

So the result is, after eight years, and several hundred hedge fund managers being involved, is that now the totally unmanaged fund by Vanguard with very, very minimal costs, is now 40-some points ahead of the group of hedge funds.

Now that may sound like a terrible result for the hedge funds, but it’s not a terrible result for the hedge fund managers. (Laughs)

These managers — A), you’ve got this top-level manager that’s charging probably 1/2 percent, I don’t know that for sure, and down below you’ve got managers that are probably charging 1 1/2 to 2 percent.

So if you have a couple of percentage points sliced off every year, that is a lot of money.

We have two managers at Berkshire that each manage $9 billion for us. They both ran hedge funds before.

If they had a 2-and-20 arrangement with Berkshire, which is not uncommon in the hedge fund world, they would be getting $180 million each, you know, merely for breathing, annually. (Laughter)

That — I mean that — it’s a compensation scheme that is unbelievable to me, and that’s one reason I made this bet.

But what I’d like you to do is for a moment imagine that in this room we have the entire — you people own all of America, all the stocks in America are owned by this group. You are the Berkshire 18,000, or whatever it is, that has someone managed to accumulate all the wealth in the country.

And let’s assume we just divide it down the middle, and on this side we put half the people — half of all the investment capital in the world — and that capital is what a certain presidential candidate might call “low energy.”

In fact, they have no energy at all. They buy half of everything that exists in the investment world, 50 percent, everyone on this side. And so now half of it is owned by these — by these no-energy people.

They don’t look at stock prices. They don’t turn on business channels. They don’t read The Wall Street Journal. They don’t do anything. They just — they are a slovenly group that just sits for year after year after year owning half of the country — half of America’s business.

Now what’s their result going to be? Their result is going to be exactly average, as how America business does, because they own half of all of it. They have no expenses, no nothing.

Now what’s going to happen with the other half? The other half are what we call the “hyperactives.”

And the hyperactives, their gross result is also going to be half, right? They can’t — the whole has to be the sum of the parts here, and this group, by definition, can’t change from its half of the ultimate investment results.

This half is going to have the same gross results — you’re going to have the same results as the low-energy — no-energy people, and they’re also going to have terrific expenses, because they’re all going to be moving around, hiring hedge funds, hiring consultants, paying lots of commissions and everything.

And that half, as a group, has to do worse than this half. The people who don’t do anything have to do better than the people that are trying to do better. It’s that simple.

And I hoped through making this bet to actually create a little example of that, but that offer was open to anybody. And I would make, incidentally, the same offer now except, you know, being around in 10 years to collect gets a little more problematic as we go through life. (Laughs)

But it seems so elementary. But I will guarantee you that no endowment fund, no public pension fund, no extremely rich person, wants to sit in that part of the auditorium.

They just can’t believe that because they have billions of dollars to invest that they can’t go out and hire somebody who will do better than average. I hear from them all the time.

So this group over here, supposedly sophisticated people, generally richer people, hire consultants, and no consultant in the world is going to tell you, just buy an S&P index fund and sit for the next 50 years.

You don’t get to be a consultant that way. And you certainly don’t get an annual fee that way.

So the consultant’s got every motivation in the world to tell you, this year I think we should concentrate more on international stocks, or this year this manager is particularly good on the short side.

And so they come in and they talk for hours, and you pay them a large fee, and they always suggest something other than just sitting on your rear end and participating in American business without cost.

And then those consultants, after they get their fees, they, in turn, recommend to you other people who charge fees which, as you can see over a period of time, cumulatively eat up capital like crazy.

So, I would suggest that what I felt sure — I didn’t feel sure because nothing — you can’t tell for sure about any 10-year period — but it certainly felt very probable or I wouldn’t have stuck my neck out.

It just demonstrates so dramatically — I’ve talked to huge pension funds, and I’ve taken them through the math, and when I leave, they go out and hire a bunch of consultants and pay them a lot of money. And — it — just unbelievable. And the consultants always change the recommendations a little bit from year to year. They can’t change them 100 percent, because then it didn’t look like they knew what they were doing the year before, so they tweak them from year to year.

And they come in and they have lots of charts and PowerPoint presentations, and they recommend people who, in turn, are going to charge them a lot of money. And they say, well, you can only get the best talent by paying 2-and-20, or something of the sort.

And the flow of money from the hyperactive to what I call the helpers is dramatic, while this group over here sits here and absolutely gets the record of American industry.

So I hope you realize that for most — for the population as a whole — American business has done wonderfully, and the net result of hiring professional management, you know, is a huge minus.

And at the bookstore we have a little book called “Where Are the Customer’s Yachts?” written by Fred Schwed. I read it when I was about 10-years-old. Been updated a few — well it hasn’t been updated, but new editions have been put out a few times — but the basic lessons are there.

That lesson is told in that book from 1940. It’s so obvious, and yet all the commercial push is behind telling you that you ought to think about doing something today that’s different than you did yesterday.

You don’t have to do that. You just have to sit back and let American industry do its job for you.

Charlie, do you have anything to add to my sermon? (Applause)

CHARLIE MUNGER: Well, you’re talking to a bunch of people who have solved their problem by buying Berkshire Hathaway. (Laughter)

That worked even better. And there have been a few of these managers, the managers —

WARREN BUFFETT: Sure.

CHARLIE MUNGER: — who’ve actually succeeded. They are a few in the universities who are really good.

But it’s a tiny group of people. It’s like looking for a needle in a haystack.

WARREN BUFFETT: Yeah. And when I was given the job of naming two in 1969, I knew — I knew two — I knew a couple of others. Charlie wasn’t interested in managing more money then, and my friend Walter Schloss would not scale up well, although he had a fabulous record over 45 years, or thereabouts.

But, you know, that was all I could come up with at that time. And fortunately, you know, I did have a couple. And the people who went with Sequoia Fund have been well-served, if they stayed for the whole period.

But the — the people — there’s been far, far, far more money made by Wall — by people in Wall Street — through salesmanship abilities than through investment abilities.

There are a few people out there who are going to have an outstanding investment record. But there are very few of them, and the people you pay to have identify them don’t know how to identify them. And — and they do know how to sell you. That’s my message.

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lastmover · 6 years

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2015 Berkshire Hathaway Annual Meeting (Afternoon) Transcript

1. Didn’t get Clayton Homes question in advance

WARREN BUFFETT: OK. Everybody will settle down, we’ll move right along.

I want to clear up one thing. My daughter told me that because we had all those — I had — all those slides that were in answer to Carol’s first question, that Carol [Loomis] and I had discussed it ahead of time.

I will guarantee you that I’ve discussed no questions with anyone on the panel, and they will tell you the same thing.

But I knew I was going to be asked questions about Clayton, so I prepared the slides.

It was an accident that it turned out to be the first question, but it was certain to be in the first few.

So, Carol did not — Carol in 60 years has never tipped me off on anything, nor have the other panelists.

And everything — but we were — but I was — prepared for the fact that people would be asking questions about Clayton.

OK. Let’s move right along, and we’ll go to Becky.

2. Businesses that do best in high inflation

BECKY QUICK: OK. This is a question — oops, that’s not the question. Hold on.

Here it is. This is a question from John Wells, right here in Omaha, and he says, “You’ve described inflation as a gigantic corporate tapeworm. Which of Berkshire’s businesses are best suited to thrive during a period of high inflation and why? Which will suffer the most and why?”

WARREN BUFFETT: Yeah. Well, the best businesses during inflation are usually the best — they’re the businesses that you buy once and then you don’t have to keep making capital investments subsequently.

So you get — you do not face the problem of continuous reinvestment involving greater and greater dollars because of inflation.

That’s one reason real estate, in general, is good during inflation. If you built your own house 55 years ago like Charlie did, or bought one 55 years ago like I did, it’s a one-time outlay, whereas if you’re — and you get the — you get an inflationary expansion in replacement capital without having to replace yourself.

And if you’ve got something that’s useful to someone else, it tends to be priced in terms of replacement value over time, so you really get the inflationary kick.

Now, if you’re in a business such as the utility business or the railroad business, it just keeps eating up more and more money, and your depreciation charges are inadequate and you’re kidding yourself as to your real economic profits.

So, any business with heavy capital investment tends to be a poor business to be in in inflation and often it’s a poor business to be in generally.

And the business where you buy something once — a brand is a wonderful thing to own during inflation.

You know, See’s Candy built their brand many years ago. Now, we’ve had to nourish it as we’ve gone along, but the value of that brand increases during inflation, just as the value of, really, any strongly branded goods.

Gillette bought the entire radio rights to the World Series in 1939. And as I remember, it cost them $100,000, and for that they got to broadcast the Yankees, I think, versus the Reds in 1939.

And think of the number of impressions they made on minds in 1939 dollars for $100,000, and they were getting in the minds of young guys like myself. I was eight or nine. And millions of people — and they did it in those dollars then.

And, of course, if you were going to go out and try out and do — have similar impressions on millions of minds now, it’d cost a fortune. And part of that is due to inflation. Part of it’s due to other things.

But it was a great investment, which could be made in 1939 dollars that paid off, in terms of selling razors and blades in 1960 and 1970 and 1980 dollars.

So that’s the kind of business you want to own.

Charlie?

CHARLIE MUNGER: Well, yeah, but if the inflation ever goes completely out of control, you have no idea how it’s going to end up.

If it weren’t for the Weimar inflation, we might never have had Adolf Hitler. It was the twosome of the great German inflation followed by the Great Depression that brought us Hitler. And think of the price that the world paid for that one.

We don’t want inflation because it’s good for See’s Candy. (Laughter)

WARREN BUFFETT: I didn’t quite realize I was —

CHARLIE MUNGER: No, I wasn’t criticizing you.

WARREN BUFFETT: What’s good for See’s Candy is good for the United States. (Laughter)

3. Organic growth vs. acquisitions

WARREN BUFFETT: OK. Gary?

GARY RANSOM: Three years ago you noted that you had looked at a large commercial lines insurance company as a possible acquisition, and now you’ve started up Berkshire Specialty, which seems to be off to a good start.

What are your thoughts on whether that has replaced the idea of taking over — of buying or acquiring a large company, or is Berkshire Specialty doing well enough that you’re content with that —

WARREN BUFFETT: Yeah.

GARY RANSOM: — organic growth?

WARREN BUFFETT: I would say that it’s almost certain that we — I don’t want to say 100 percent certain — but it’s almost certain we will not take over a large commercial insurance company.

We’ve got the ideal operation, in my view, in Berkshire Hathaway Specialty.

We’ve got the right people running it. We’ve got Ajit overseeing it. We’ve got more capital than any commercial insurance company in the world so that our securities are — and, therefore, our policies — are really better than anyone else’s.

So, we’ve got all these things going for us. And if we bought a big operation, we would have paid a very substantial nondeductible acquisition premium, and this way we’ve actually made money while we’re in the building stage.

And I think it can be a very, very big operation five or 10 years from now. So it’s almost zero probability that we’ll buy somebody else.

Charlie?

CHARLIE MUNGER: Well, I certainly agree with you.

WARREN BUFFETT: OK. The — that’s how he keeps his job. (Laughter)

We’ll go to — incidentally, all the overflow rooms, including at the Hilton, got filled. I’m not sure where a couple — where station 11 is — but we always lose a fair number at lunchtime.

So I’m sure everybody can find a seat, but we do apologize to those who could not find a seat this morning.

4. Munger on reputation and behaving well

WARREN BUFFETT: Station 11?

AUDIENCE MEMBER: Yes. Hey, Warren and Charlie. How are you guys? Congratulations on 50 years.

WARREN BUFFETT: Thank you.

AUDIENCE MEMBER: So, in this year’s annual letter, Charlie wrote about the peculiar attributes that made the Berkshire system, and the leader of the system, a historically organizing entity — organizational entity.

So, my question to both of you is what practical mental model or mental models would you impress upon a young, enterprising individual at the infancy of their career to build an important enduring enterprise of that particular distinction and impact?

And if you could give, like, maybe some contrasting examples, like why is a Microsoft able to build itself into a dominating monolithic company, versus a See’s Candy, which can be a great enterprise to spin off cash flow but not necessarily be an enduring — or not necessarily enduring — but an impactful enterprise to the level of a Berkshire or Microsoft?

CHARLIE MUNGER: Thank you, Warren. (Laughter)

WARREN BUFFETT: You’re the guy that wrote it. (Laughter)

This is pineapple juice, incidentally. People were questioning that. (Laughter)

They say it’s good for your throat if you’re going to talk a long time.

CHARLIE MUNGER: Yes. Well, of course, reputation you get over a long period of time.

Very few people are like Charles Lindbergh where you just suddenly have a great reputation.

Most of us have to acquire one very slowly, and that was true in Berkshire’s case.

And any individual you just have to get the best reputation you can in the years you’re allotted and the time available.

And it may work out well, it may work out poorly. But it’s a wise investment.

I see, all the time, opportunities come to people where it’s the credibility they’ve gotten in the past that causes them to have the new opportunity.

So, I think hardly anything is more important than behaving well as you go through life.

And — I think we actually try to behave better as we got more prosperous, and I think you’d be crazy if you didn’t.

So, I’d certainly recommend that you follow those old-fashioned principles.

And I don’t think there’s any way of guaranteeing a total powerhouse brand, nor can — if a result is a one in 50 million-type result, you’re probably not going to get it.

WARREN BUFFETT: Gianni Agnelli of Fiat, back in — I think it was 1988 — I was at dinner with him one time, and he said something to me that stuck with me. He said, “When you get old,” he says, “You’ll have the reputation you deserve.” He says, “For a while you can” —

CHARLIE MUNGER: Fool people.

WARREN BUFFETT: — “fool people,” but he says, “When” — he was talking about himself at the time — but he said, “When you get to be my age,” he said, “Whatever reputation you have, it’s probably the one you deserve.”

And I think the same is true of companies. And, frankly, you know, it has helped Berkshire a whole lot that it has gotten a reputation to be a somewhat different sort of company.

I mean, I don’t think we set out to do that, exactly, but it has worked out that way.

5. Climate change risk for insurance subsidiaries

WARREN BUFFETT: Andrew?

ANDREW ROSS SORKIN: Warren, you have said that global warming has not increased Berkshire’s payouts for weather-related events. Yet, other insurers, including Travelers, have cited climate change as a risk factor that they use.

Are Berkshire’s models different and, if so, how?

WARREN BUFFETT: Yeah. No. I’ve seen the — of course, the SEC requires you put in all these risk factors, and the lawyers will tell you to put in, you know, everything possibly you can think of, you know, that you’ll develop Alzheimer’s or whatever it may be.

They just want you to have a laundry list so that it’s all been covered in case of later litigation or something of the sort.

So people do put in weather risk, and maybe they put it in because they’ve got some model that shows it. But, you know, we price our business — basically, we price it every year.

It’s not like a life insurance company. A life insurance company you make a contract that — so much a thousand. And if you buy whole life insurance, you’ve set a price for — if you’re 20, you may have set a price for 60 or 70 years in the future. But that is not the property casualty insurance business, which we’re in.

We set it one year at a time. And I see nothing that tells me that on a yearly basis that global warming is something that should cause me to change my prices a lot, or even a small amount.

That doesn’t mean that it isn’t a threat to humanity or — you know, and terribly important. It just means that if I’m going to sell a one-year insurance policy, and I’m going to sell it on a $1 billion plant, I may care enormously about the fire protection, and other various other kinds of protection, within that plant.

I may care about what’s going on adjacent to that plant, and all kinds of things, but I am not thinking about global warming. It does not change the situation, in a material way, in any one-year period of time, in my judgment.

And, you know, it — if I was writing a 50-year wind storm policy in Florida, I would think very hard about what global warming might do in that case to the incidence and the intensity of potential hurricanes.

But I do not think it has any material effect on the likelihood of — or the intensity — of a hurricane in Florida or Louisiana or Texas or — next year.

So, it is not a — it’s not something I would put in the 10-K as a threat.

Charlie?

CHARLIE MUNGER: I don’t think it’s totally clear what the effects of global warming will be on extremes of weather. I think there’s a lot of guesswork in that field, and a lot of people like howling about calamities that are by no means sure.

WARREN BUFFETT: Yeah. Do you think — would it change your one-year prediction as to what the rate should be?

CHARLIE MUNGER: No.

WARREN BUFFETT: No. It wouldn’t change mine either, so I don’t really understand why they put that in there.

CHARLIE MUNGER: A lot of people get very invested. It’s like a crazy ideology.

It’s not that global warming isn’t happening. It’s just that you can get so excited about it you make all kinds of crazy extrapolations that aren’t necessarily correct.

WARREN BUFFETT: Yeah. Look at it this way. Would you change the rate for tomorrow on insurance because — from the rate today — for global warming? I doubt it very much.

Now, you know, would you change it for 50 years? Might very well.

But I think that one year is much closer to one day than it is to 50 years, in terms of focusing on that factor.

So, I do not want our underwriters to sit there thinking a lot about — in terms of writing a risk or the price at which to write that risk — I do not want them thinking about global warming. I want them thinking about whether there’s a moral risk involved and who owns the property.

I mean, that can be very significant. There used to be one fellow called “Marvin the Torch,” that if you insured “Marvin the Torch,” global warming didn’t really make much difference. His building was going to go. (Laughter)

Marvin had a marvelous way of looking at it, though. He said, “I don’t burn buildings; I create vacant lots.” (Laughter)

6. More oil & gas investments possible despite poor record

WARREN BUFFETT: OK. Gregg?

GREGG WARREN: When we look back at some of your bigger stock purchases during the past decade, two names actually stand out: ConocoPhillips and ExxonMobil.

In the first instance, you bought shares near the height of the spike in oil prices in 2008, later acknowledging that this was a mistake given how dramatically oil prices fell during the crisis.

While you’ve been able to swap some of those holdings, post a spinoff of Phillips 66 into operating assets, most of what you sold the last six years, by our estimates, has been at a loss.

Given that experience, it surprised some of us to see you take a meaningful position in ExxonMobil during the summer of 2013.

While it looks like you were able to eliminate that stake at cost as oil prices fell last year, these types of investments, which can be negatively impacted by the volatility in oil prices, don’t really seem to fit well with the other types of investments in your stock portfolio, many of which are built on strong franchises with unique competitive advantages.

With that in mind, and given the track record that Greg Abel and his team at Berkshire Hathaway Energy have had acquiring and investing in energy assets, does it make more sense to leave future energy-related investments in their hands?

WARREN BUFFETT: Well, there’s nothing we like better than to back up Greg in buying utility properties.

And — but they — we call it energy, but it’s not oil and gas in Berkshire Hathaway Energy, and they’re really in a dramatically different business than ConocoPhillips or ExxonMobil.

But we are looking, constantly, for opportunities for Berkshire Hathaway Energy to spend big money, and it will.

Berkshire Hathaway Energy, we paid $35.05 per share in 1999 to buy the stock.

I was at $35, and I don’t change my prices and Berkshire — the company was then called MidAmerican — they hired some investment bankers to come out from New York, and investment bankers spent a week here doing nothing.

But they felt — before they went home, they said, you know, “You’ve got to give us something because we’re going to send a big bill.” And I said, “Well, in that case, we’ll pay $35.05 and you can say you got the last nickel out of me.” (Laughter)

So my ambition ever since has been to have Berkshire Hathaway Energy earn $35.05 per share. It’s never paid a dividend.

It will probably earn about $30 a share this year, which is a great tribute to Greg and his management. But we will get the 35 or better because he will make some good deals.

It’s not at all analogous to the ConocoPhillips or ExxonMobil investments. As it turned out, we wrote ConocoPhillips down because we were required by the auditors to do it.

We actually, by the time we got all through, we made some money in it, and we made a little money in ExxonMobil, too.

But we will not be buying, very often, oil and gas stocks, but we will — we probably haven’t bought the last one.

In the end, we look at the cash, we look at available opportunities, both in investments and businesses, and we make decisions, occasionally, on buying something and sometimes we change our mind.

And that will continue that way. It’s been going on that way for a lot of years.

And we have not distinguished ourselves, at all, in the oil and gas field, although we’ve made a little money, and we passed up one or two where we could have made a lot of money.

Charlie?

CHARLIE MUNGER: Yeah. And with interest rates being so low and the dividend on ExxonMobil being the size it was, it was not a bad cash substitute, if you think only in those terms.

WARREN BUFFETT: Yeah. It worked out OK. There were other things we could have done a lot better, but that’s always been true and will continue to be true.

7. No “tears” for corporations on taxes

WARREN BUFFETT: Station 1.

AUDIENCE MEMBER: Mr. Chairman, Mr. Vice Chairman, my name is Andy Peake, and I’m from New York City.

First, congratulations to you on a remarkable 50 years, and second, thank you for hosting a one-of-a-kind annual meeting where you patiently answer questions from shareholders. I believe you are both — (Applause)

WARREN BUFFETT: Thank you.

AUDIENCE MEMBER: I believe you are two of the most knowledgeable and authoritative people on planet Earth on the U.S. tax code.

Our tax code is obviously broken at both the individual and the corporate levels.

Today, we have 2.1 trillion in offshore corporate cash sitting there not being brought home. We have the highest corporate tax rates in the world, and for high-income earners in the U.S., other than hedge fund managers, in states like New York and California, an all-in rate greater than 50 percent.

What can be done to effect real change to bring about a simpler, more rational tax code? Thank you.

WARREN BUFFETT: Well, it takes 218 members of the House of Representatives and 51 U.S. senators, and a president that will sign the bill.

The question is: how much you think the country should spend and then from whom do you get it?

And I would point out that despite the tax rates that all the corporate chieftains complain about, the share of earnings — share of GDP — accounted for by corporate profits is at a record.

Corporate taxes 40 years ago were 4 percent of GDP. They’re now running about 2 percent. They’ve decreased significantly while payroll taxes have increased.

You know, it’s a real question.

And once you get special provisions in the code, it is really hard to get rid of them, absent a major revision of the code.

I actually think — I may be an optimist on this, but I’m — I think both Ron Wyden and Orrin Hatch, the two ranking members, Senate Finance Committee, I think they’re capable of working out something that they — neither one of them likes — but they both like it better than what exists now, and I think it can be made considerably more rational.

But in the end, if we’re going to spend 21 or 2 percent of GDP, we should probably raise 19 percent of GDP.

We can take a gap of a couple percent without getting further into debt as a proportion of GDP than we are, so we’ve got that leeway.

But, you know, you take 19 percent of 17 1/2 trillion, or thereabouts, and you’re talking, as Senator [Everett] Dirksen said one time, real money.

And how much you get from corporations, how much you get from individuals, how much you get from estate taxes, you know, it’s a fight up and down the line.

So I — and in terms of the cash abroad, basically you can bring it back, you just have to pay tax at U.S. corporate rates. And our corporate rates are 35 percent.

Charlie and I, a good bit of our life, operated with corporate rates of 52 percent, later at 48 percent, and the country grew well. American business prospered during that period.

I don’t shed any tears for American business, in terms of the tax rate overall. I think there could be a much more equitable code, in terms of the corporate tax, but I do not think that the 2 percent of GDP that’s being raised from corporate taxes, which is far lower than was the percentage 30 or 40 years ago, I do not think that’s an onerous number.

And for people who are getting 1/4 or 1/2 percent on their CDs, who have retired, and with American business earning, on tangible equity, which is the way they measure it, you know, probably averaging close to 15 percent, I think equity holders are getting treated extraordinarily well compared to debt holders in this economy. (Scattered applause)

Charlie?

CHARLIE MUNGER: Well, I agree with you, and I don’t die over these little differences in the tax code, either.

I live in California, of course, where — there’s, like, a 13 1/2 percent tax on long-term capital gains, nondeductible for federal purposes. That’s a ridiculous kind of a tax to have in California because it drives rich people out.

Hawaii and Florida have enough sense to know that rich people don’t commit a lot of crimes, they don’t burden the schools, and they provide a whole lot of medical expenditures that are good for everybody else’s income.

I think California has a really stupid tax policy. But I don’t think the U.S. — but I don’t think the U.S. policy is — (applause) — I don’t think the U.S. policy is bad at all.

WARREN BUFFETT: And it’s nondeductible because of the alternative income tax —

CHARLIE MUNGER: Yes, exactly.

WARREN BUFFETT: Yeah. That really wasn’t the case before, but it —

CHARLIE MUNGER: No, it’s always —

WARREN BUFFETT: — kind of slipped in.

CHARLIE MUNGER: No, they did it on purpose. (Laughter)

No, they did it on purpose.

WARREN BUFFETT: Early stages of paranoia. (Laughter)

CHARLIE MUNGER: Yeah. But it is — it’s amazing. The idea of driving the rich people out, Florida is so much smarter than California on that subject. And it is really demented.

Who in the hell doesn’t want rich people coming in and spending in their state?

WARREN BUFFETT: Yeah, yeah. Remember that as you come here to Nebraska for the meeting. (Laughter)

I would say I really do think there’s some chance this year — and not a tiny chance.

I know both Ron Wyden and Orrin Hatch. They’re patriotic, they’re smart, they want to do the right thing. They’ve got different ideas about what the right thing is, there’s no question about that, but they also know they can’t get any place without cooperating.

But I think the real opportunity is if they work out of the public eye in doing — in working on something — and I wouldn’t be surprised if they are. I think that’s the way to get it done.

Charlie has always pointed out, what would have happened if the Constitutional Convention back there in Philadelphia had been held with every delegate running out immediately to tell the TV cameras how right he was and how wrong everybody else was.

It doesn’t accomplish much to dig in on positions, and not be in a position to compromise, because it takes a lot of compromise to write something when you have two different — fundamentally different — views on some important aspects of the tax code.

But those are two good guys, and I would not — I don’t think it’s impossible that we have a new corporate tax code within a year.

8. Buffett on Adam Smith’s “Wealth of Nations”

WARREN BUFFETT: OK. Carol?

CAROL LOOMIS: This question, which is a little bit offbeat, comes from Jordan Shopof (PH) of Melbourne, Australia.

“Mr. Buffett, in the forward to the sixth edition of Benjamin Graham’s ‘Security Analysis,’ you identified four books that you particularly cherish.

“Three of these books were authored by Graham himself, and their influence on you is well-known.

“The contributions of the fourth book to your thinking, however — that book was Adam Smith’s ‘The Wealth of Nations,’ published in 1776 — what that book meant to you is seldom discussed.

“So my question is, what did you learn from “The Wealth of Nations” and how did it shape your investment and business philosophy?”

WARREN BUFFETT: Well, it doesn’t shape my investment philosophy, but I certainly learned economics from it. And my friend Bill Gates gave me an original copy of it. I was able to study this.

Adam Smith wrote it in 1776. It’s — you know, there’s just — if you read Adam Smith and if you read Keynes, Ricardo, and then — and if you also read that little book we’ve got out there called “Where Are the Customers’ Yachts?” you will have a lot of wisdom.

I forgot to mention, I was supposed to mention, too: we didn’t want to put it on sale earlier because it would have given away the movie, but we do have “Berkshire Bomber” underwear out there, or sweatshirts, or whatever it may be, so Fruit of the Loom has those.

And we have Fred Schwed’s “Where Are the Customers’ Yachts?” book, which contains an incredible amount of wisdom and very few pages and very entertaining.

But if you want to go for — if you want to not only get a lot more wisdom but appear more erudite, you should read “The Wealth of Nations,” also.

Charlie?

CHARLIE MUNGER: Adam Smith is one of those guys that has really worn well. I mean, he is rightly recognized as one of the wisest people that ever came along.

And, of course, the lessons that he taught way back then were taught again when communism failed so terribly, and places like Singapore and Taiwan and China, and so forth, came up so fast.

The productive power of the capitalist system is simply unbelievable, and he understood that fully and early, and he’s done a lot of good.

WARREN BUFFETT: I took an idea of his on the specialization of labor, you know, and he talked about people making pins or something, but I applied that, actually, to philanthropy.

You know, I mean, the idea that you let other people do what they’re best at and stick with what you’re best at, I’ve carried from mowing my lawn to philanthropy, and it’s a wonderful thing to just shove off everything and say somebody else is better than I am at that, and then work in the field that’s most productive for you.

CHARLIE MUNGER: Yeah. You didn’t do your own bowel surgery, either.

WARREN BUFFETT: No. (Laughter)

I’m not sure I have any reply to that. (Laughter)

9. Subsidiaries aren’t too focused on short term

WARREN BUFFETT: OK. Jonathan?

JONATHAN BRANDT: Warren, you have told the managers of your businesses to think of their businesses as something they will own forever and that their first priority should be to widen the moat and take care of their customers.

In more than one case, according to people I’ve spoken to, Berkshire’s subsidiaries that were formally publicly traded have run into trouble by — now this is on the margin, mind you — trying to maximize calendar year earnings and dividends to the parent, as opposed to focusing on the long-term health of the business.

Do you find that managements of formally public companies, through force of habit, perhaps, have more trouble making decisions with only minimal concern for short-term results than would be the case for formally private companies?

If this dynamic is a real one, is there something more that can be done to combat it?

And I’m curious, are most of Berkshire’s compensation structures based on 12-month results or are they already based over multiyear periods?

WARREN BUFFETT: Yeah. I don’t think we’ve had any particular problem with public companies versus private companies that we’ve bought.

I mean, if you took the aggregate of the public companies we bought and matched them up against the private companies, I don’t know which group I would rather own or which has delivered the greater returns.

CHARLIE MUNGER: I don’t know where he gets the idea.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: It’s not apparent to us.

WARREN BUFFETT: Yeah. Well, you’ve heard Charlie. And I can’t think of it myself.

And, you know, if we tell them to think about 100 years, we mean think about 100 years, and I think they know we mean it. They certainly know we run Berkshire, you know, in terms of our own decisions that way.

So, I think we set the right example, and I think we use the words to convey that belief as strongly as we can, and we try to reinforce — we try to put it in the annual report, we try to talk about it in meetings like this.

We believe in sort of hammering the same message out there over and over again.

Now, we don’t ignore yearly results at all, it’s just we don’t live by them. But I get figures every month on virtually every business, and I read them with great interest, and, you know, I’m thinking about them all the time.

I don’t think they’re unimportant, but we don’t live by them. And I think what really counts, you know, is where we’re going to be three years, five years, or 10 years from now.

But I also — I wouldn’t — if we’re subpar in some area, I wouldn’t accept the fact that we’re working to maximize things in 10 years mean that we should be throwing away money, or anything like that, in the short run, or not paying attention to the business.

But I’d have to say what Charlie has, I don’t really agree with the premise.

10. Buffett’s interest in German companies

WARREN BUFFETT: OK. Station 2.

AUDIENCE MEMBER: Dear Warren, dear Charlie. Thank you for 50 great years. I’m a happy shareholder and hope to have you continue long.

My name is Victoria Von Tropp (PH). I’m from Bonn in Germany.

And my question is, you own companies both here in the U.S. as well as in Germany. What differences in corporate culture and in performance do you see between German and U.S. starter companies?

WARREN BUFFETT: Charlie?

CHARLIE MUNGER: Differences between what —

WARREN BUFFETT: I know the question. I’m just looking to you for the answer, not the question. (Laughter)

CHARLIE MUNGER: Now that he can hear so much better, he —

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: Well, we — we’ve had a hard time buying things in Europe. It’s been quite rare.

And I think the traditions, and the family traditions, are different in Europe than they are in the United States, and in some other countries.

And Germany, of course, has a long tradition of being very good at technology and capitalism, and that’s been a godsend to Germany. And we’ve always admired the way the Germans have performed.

The Germans actually work fewer hours than a lot of other people and produce a lot more and, of course, Warren and I are pretty good at that. (Laughter)

So we’re — we admire the Germans, particularly the engineering side, and — but we’ve been thinking about owning good German companies for a long time and we finally bought one.

WARREN BUFFETT: Yeah. But I’ll make a prediction. I will predict we buy at least one German company in the next five years.

I think that — I think we are far more on the radar screen than we were just a few years ago in Germany. I think we now have a woman over there who brought, through somebody else as well, but brought Louis to our attention.

I think she is going to hear about more things because of her association with us on the transaction and the fact that we tried to get the word out as to her help with us.

So, I would really be surprised if we don’t make at least one deal in Germany in the next five years, and I would look forward to it. I mean, we’ll be very, very happy with — you know, we have to get a business, we understand.

I’ve had, probably, four or five letters in the last couple months, ever since the Louis deal was announced, but they’ve been very small businesses in practically each case.

But we’ll get one. We’re eager, we’ve got the money, and we do fit the family situation, occasionally.

And prices may be a little more attractive there than in the United States, although I haven’t seen anything yet that we’ve bought.

But I would say that there’s a reasonable chance that the price of something we’re offered over there might catch my attention more than U.S. prices, currently.

11. Why competitors sometimes underprice GEICO

WARREN BUFFETT: OK. Becky.

BECKY QUICK: This question caught my attention not because I think it’s a complaint, but I think it’s an actual question about the actuarial models that you use at GEICO.

It comes from Stan Zion (PH). And he says, “My wife and I are stockholders of Berkshire Hathaway. I’m 78 and she’s 74. We have a long-time accident-free driving record.

Yet, when we applied to GEICO with our stockholder discount, GEICO was unable to beat our rates for comparable coverage with other fine companies. Why?”

WARREN BUFFETT: Well, it’s the reason that we probably can beat the rate maybe 40 percent of the time with people who contact us and 60 percent of the time we can’t.

No company is going to be the lowest in all cases. And we have our own underwriting criteria that involves many variables, one of which is age, but it wouldn’t be a dominant one at that age.

But we have many, many variables. And we make our calculations, and very good competitors like State Farm and Allstate, USAA, and so on, they have somewhat different underwriting weightings and sometimes they come in below us.

But I don’t think any company, of size, will be the lowest more often than GEICO.

We give out quotes on the telephone to many, many thousands of people every week. I get the figures every week, and I get the number of quotes, and I get the number of policies sold.

And I can tell you the percentages are very substantial that we sell. And we’re not selling them if we’re charging them more than the people before them. So it — different people have different weightings for different variables.

And the couple you referred to sound like they should get a very good rate from somebody, but they apparently got a better rate from somebody else other than us. And that’s going to happen, perhaps 60 percent of the time, and 40 percent of the time we’re going to get the business.

And since we’re only 11 percent of the whole market now, it means we’ve got a lot of policyholders yet to gather.

The — it’s an interesting question when you’re looking at how to evaluate drivers. You know, we know that 16-year-old boys are about as bad as they get; 16-year-old girls are a better class.

Does that mean they’re better drivers? Not necessarily.

It may mean they don’t have the same tendency to show off. It may mean they don’t drive as many miles. It may mean a whole lot of things.

So we ask a lot of questions, and other people ask different questions, and we will come up with different rates. But it’s definitely worth 15 minutes to call GEICO. (Laughter)

Charlie?

CHARLIE MUNGER: Well, I would say besides if — when you get into the older people’s group and you find you’re not deteriorating as fast as most of your contemporaries, you may be paying an unfair price for the insurance, but it’s a good tradeoff. (Laughter)

WARREN BUFFETT: Gary.

I haven’t thought of it that way before. (Laughter)

12. Reinsurance business getting worse due to “facades”

GARY RANSOM: The reinsurance market has changed dramatically over the last two or three years, a lot of alternative capital coming into the business, making it much harder to make the assumption that there would be a big opportunity after the next big catastrophic event.

What is it that you and Ajit are planning to change, or do, to take advantage of whatever opportunities might be there?

WARREN BUFFETT: Well, wouldn’t our competitors like to know? (Laughs)

The reinsurance business is not as good as it was, and it’s unlikely to be as good as it was.

There’s a lot of money that’s come into reinsurance, not because they want to reinsure people, but because it’s become either a fashionable asset class for people that are looking for so-called noncorrelated investments and may not know what they’re doing, but it’s something you can sell people, you know, that’s an attractive line to go to pension funds with.

And then, secondly, it’s a beard for doing — for asset management. So, if you go to Bermuda and start a reinsurance company, you can actually run a hedge fund, and you need a little business to make it look like you’re doing something other than running a hedge fund, and locating it offshore so you don’t pay any tax, but that’s the primary motivation.

So when you get a whole lot of people that are bringing money in and they sort of need your facade of reinsurance to cover up what their real motivations are, you’re likely to get less attractive prices in reinsurance.

And that’s been happening on a fairly large scale, and I would say that I would expect the reinsurance business in the next 10 years to not be as good as it has been — I’m talking about the whole industry — as it has been, you know, in the last 30 or something like that.

It’s a business whose prospects have turned for the worse, and there’s not much we can do about it.

We do find things to do. There are certain things that only Berkshire can do, and we’ve — I mentioned in the annual report that there have been eight—I think it was eight—contracts written with premiums of a billion dollars or more, and we’ve written all eight of them.

So, we do — there’s a certain corner of the world that we’ve got a strong position in, and there’s a few other things we will do, but it’s not as good as it was.

Charlie?

CHARLIE MUNGER: Well, I think, generally speaking, of course, it’s going to be harder and, of course, this competition from promotional finance is getting more and more intense and they’re more optimistic.

They’re searching for a robust narrative. We’re not searching for a robust narrative so we can sell something. We’re playing the game for the long pull and other people just pretend to be doing so.

WARREN BUFFETT: Yeah. We could — we’ve had the opportunity over — for a long period of time — to go out and promote reinsurance-type money, and really take advantage, you know, of people on it, because we would have the best reputation in the field, and we could attract a ton of money, and we could get a big overwrite on it.

But it’s not our game.

CHARLIE MUNGER: And we don’t particularly admire the way it’s being played.

13. How to win friends and influence people

WARREN BUFFETT: Station 3.

AUDIENCE MEMBER: Mr. Buffett and Mr. Munger, my name is (inaudible) from South Florida, and I’m currently in seventh grade.

My question is how do you make lots of friends and get people to like you and work with you?

WARREN BUFFETT: That’s not a bad question. (Applause)

Very good question.

CHARLIE MUNGER: Well, you know, I was pretty obnoxious when I was your age and asked a lot of impertinent questions, and not everybody liked me.

And so the only way I could get the people to like me a little bit was to get very rich and very generous. (Laughter)

That will work.

WARREN BUFFETT: People will see all kinds of virtues in you if they think you’ll write a check. (Laughter)

Yeah. The two of us — both Charlie and I were on the obnoxious side early on, but you should get a little smarter about human behavior as you get older.

And I turned out to have some pretty good teachers as I went along, in terms of what worked.

I mean, I have looked at other people during my lifetime and at these wonderful teachers. They weren’t teachers in the standard definition, but they were people I admired and I thought to myself, “Why do I admire these people?” And if I want to be admired myself, you know, why shouldn’t I take on some of their qualities?

So, it’s not a complicated proposition, you know. If you look around you at the people you like in your school, write down three or four things they do that make you like them, and then look around at the three or four people that turn you off, and write down those qualities, and decide that you’re going to be a person you, yourself, would like, that you’d take on the qualities of the person on the left.

You’re generous, you’re friendly, you know, you accept things with good humor, you don’t claim credit for things you don’t do, all of these things. And they’re all possible to do.

And if you like that in other people, people are going to like it in you. And if you find things that are kind of obnoxious, you’re always late, you’re always claiming credit for more than you do, and you’re kind of negative on everything, and you don’t like those in other people, get rid of them in yourself and you’ll find out it works pretty well. (Applause)

CHARLIE MUNGER: And it really works in marriage. If you can change yourself instead of trying to change your spouse, that’s a good idea. (Laughter)

WARREN BUFFETT: Charlie has said the most important thing in selecting a marriage partner is that you don’t look for intelligence or humor or character. He says you look for someone with low expectations. (Laughter)

14. NetJets wasn’t a mistake despite labor problems

WARREN BUFFETT: OK. Andrew?

ANDREW ROSS SORKIN: OK. This is a question about NetJets. We received several related to NetJets. We’ve combined these two.

The first is, can you comment on the lengthy dispute with NetJets’ pilots who are picketing outside, and Whitney Tillson asks, “What type of return on investment do you expect from the billions on order in aircraft for NetJets,” and in a very pointed way, he writes, “Was buying NetJets a mistake?”

WARREN BUFFETT: No, I don’t think buying NetJets was a mistake. We’ve had a few things where it looked like a mistake for quite a while and some of them turned out to be a mistake.

But NetJets is a very decent business. We have a good business; the pilots have a good job.

And the — it’s not really the right way to look at it, I don’t think, in terms of return on investment in the billions of dollars of orders we have because we resell those planes to owners.

And we do have a core fleet that represents an investment, but the investment is held, in very large part, by the owners themselves. I own — what do I own? Three-sixteenths, or something like that, of one type of plane that my children use. I own an eighth of another plane that I use. But that’s my investment; it’s not the NetJets investment.

The — labor relations — at Berkshire we’ve had hundreds of labor unions over the years, literally hundreds. In fact, we probably have hundreds at the present time.

And we’ve only had — in 50 years — we’ve had three strikes that I can remember. I don’t think there have been any others. There could have been some one-day walkout, maybe.

But we had a four-day strike at a Berkshire Hathaway textile operation, we had a four-day or so strike at the Buffalo News 30 years ago, and we had another strike at See’s Candy one time.

So, we have no anti-union agenda whatsoever, and we think we have sensational pilots.

I mean, I’ve flown NetJets, my family has flown NetJets, now for 20 years, and we’ve had nothing but professional pilots and friendly pilots.

And it’s not — you know, it’s in human nature to have differences, sometimes, about what people get paid.

Our pilots make an average of 145,000 a year. They worked — they work seven — they have options, but one of the options, and the main option, is seven days on and seven days off.

We pay for their time to get to where they’re based. They can live anyplace in the country. And compared to our competitors at Flexjets or Flight Options or so on, or in charter, we pay well.

But it’s perfectly understandable that employers and employees have some differences from time to time. And we’ll get it worked out, but that doesn’t necessarily come in a day or a week or a month.

And our volume is up, in terms of flying. Our volume is up, in terms of owners in the United States. Europe is flat. But the United States is the bigger end of it.

So it’s a business I’m very glad we own. I’m proud we own it. It’s a first-class operation. We give our pilots more training, I believe, than anybody else.

I’m flying on NetJets. My kids are all flying on NetJets. Our managers, in many cases, are flying on it, so nobody cares more about safety.

This is not a company where the CEO flies on his own jet and other people fly in other ways. So I — and I get the same — I get the same planes that the other people get and the same pilots. I mean, there’s no special arrangements.

So we’ve got this intense interest in safety, and we’ve got very professional pilots. And at the moment, we’ve got a difference of opinion about a contract, but that will get settled, in my view.

Charlie?

CHARLIE MUNGER: I have never, in all the years, had a NetJets pilot who didn’t affect me as a wonderful fellow and a very skilled, able, and dutiful, reliable person.

And I would say most — I can think of no NetJets pilot that has ever in any way indicated that he’s dissatisfied with his life, and a lot of them say they just love it, because of the — I’m not at all sure the union is fairly representing the pilots.

WARREN BUFFETT: OK. (Applause)

He said fellows. Actually, we have a lot of women pilots, too.

15. Tax code helped Duracell-P&G deal

WARREN BUFFETT: Gregg?

GREGG WARREN: Warren, looking at your acquisition of Duracell from Procter & Gamble, at the time of the deal, you noted that Duracell is a leading global brand with top quality products. You’re obviously familiar with the business, which was initially acquired by Gillette in 1996.

While Duracell does provide fairly steady cash flows and has a strong brand in market position, its core business is in decline, with advances in technology making alkaline batteries far less relevant than they were 20 years ago.

Looking back historically, you’ve been willing to hang onto businesses operating in declining industries as long as they continue to generate some cash for Berkshire overall, so having Duracell in the portfolio is not necessarily out of the ordinary.

The question I have is, how much of a role did tax planning actually play in doing this deal, given the extremely low-cost basis on your P&G shares, some of which you’ve been selling the last several years?

And would you have done this deal without tax considerations? And, if so, at what price?

WARREN BUFFETT: Well, both Procter & Gamble and Berkshire Hathaway had tax advantages in doing the deal this way, so they probably wouldn’t have sold it at the price at which the deal took place, and we wouldn’t have bought it at the price, without the tax benefits that each enjoyed.

And this is something — we had to have held our stock for over five years in Procter & Gamble.

It’s something that’s been in the code a long time that we’ve had nothing to do with it being in the code, but it’s part of the code.

And it’s somewhat similar to the real estate exchange arrangement, where you can exchange real estate and defer any tax.

And we don’t get a new tax basis on the Duracell; we keep the old lower tax base, just like on — what do they call it? Is it section 1231 or —

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: — real estate exchanges. So it’s analogous to that, and the answer is that there wouldn’t have been a transaction from Procter & Gamble’s standpoint and there wouldn’t have been a transaction, probably, from Berkshire’s standpoint, if it hadn’t been for the fact that we could do an exchange arrangement.

As to the declining business part, the battery business will be a declining business, but it will be around for a very, very, very long time on a worldwide basis.

And Duracell has a very strong position. It’s a very good business. And, like you say, I was familiar with it when I was on the Gillette board.

But the — you know, it will have unit declines over a period of time, but I think we’ll do fine with the Duracell investment. I’m looking forward to getting the deal complete, which probably won’t take place until the fourth quarter because we have to get it detached from a lot of other things like the IT and distribution centers and everything else that it’s involved in with P&G.

But P&G has been great to work with. They’re making the transition — you know, they couldn’t be better to work with during that period, and I’ll be very happy when we own it.

16. Why I’m giving away most of my wealth

WARREN BUFFETT: Station 4.

AUDIENCE MEMBER: Hello, Warren and Charlie. I am Marvin Blum, an estate planning lawyer from Fort Worth, Texas, home to four of your companies.

And by the way, we’re excited about the new Nebraska Furniture Mart and the Berkshire Hathaway Automotive Group in the Dallas/Fort Worth area.

Next to Omaha, we hope you think of Fort Worth as your second home.

WARREN BUFFETT: It’s been good to us. And actually, we have five companies down there. MiTek just bought one.

AUDIENCE MEMBER: All right. Even better.

At the annual meeting a couple years ago, I asked about your estate plan and your idea of leaving kids enough so they can do anything, but not so much that they can do nothing.

Today, I’d like to ask you about your decision to sign the Giving Pledge, promising to give away at least one-half of your assets to charity.

Can you talk about your views on philanthropy, and how to balance leaving an inheritance to your family versus assets to charity?

WARREN BUFFETT: Well, it depends very much on the individual situation. And actually, I promised to give over 99 percent, in my case. But that still leave plenty left over. (Applause)

As you know, the estate tax exemption has been moved up substantially here in the last couple years, so you — I might have a very different feeling if I’d had a child that worked actively, helped me build the business, and all that sort of thing, and it was a small business, and I wanted to give it to them. But that can be really done without any estate tax these days, particularly if a little planning is used ahead of time.

It’s a very individual thing. I — as Charlie — you know, when you get to the — figuring out what you do with your money, the options get very — fairly — limited. And as Charlie said the other day, you know, he said where he’s going it won’t do him much good anyway. (Laughter)

There’s no Forbes 400, you know, in the graveyard.

So the question is, where does it do the most good? And I think it does limited amounts to do some real good for my children, so I’ll be sure that they have that, or they already have it, to a degree.

And, on the other hand, when I look at a bunch of stock certificates in a safe deposit box that were put there 50 years ago or so, they have absolutely no utility to me, zero. They can’t do anything for me in life.

I mean, they can’t let me consume 7,000 calories a day instead of 3,000. They can’t — there’s nothing they can do.

I’ve got everything in the world I want, and I’ve had it for decades. If I wanted something additionally, I’d go buy it.

So, here these things are that have no utility to me and they have enormous utility to some people in other parts of the world. I mean, they can save lives. They can provide vaccines. They can provide education. There are all kinds of utility.

So why in the world should they sit there for me or for, you know, some fourth generation down of great-grandchildren or something, when they can do a lot of good now?

So that’s my own philosophy on it, but I think everybody has to develop their own feelings about it and should follow where they go.

I do think — I do think they might ask themselves, what — you know, where will it do the most good?

And it can be pretty dramatic between what it can do for millions of people that don’t really have remotely the same shot at having a decent life that I’ve had, or what it, you know, what it can do for me.

I mean, if it — I could have 10 houses, but, you know, I could buy a hotel to live in, you know. But would I be happier? It would be crazy.

Charlie and I both like fairly simple lives. But the one thing we do know is we know what we like and what we don’t like, and we don’t judge it by what other people like.

So I don’t have too much advice for anybody, but I would say start thinking about it.

When I call people on the Giving Pledge, you know, some of them — I’ll get some 70-year-old and he says, “You know, I don’t want to think about it yet.” And I always tell him. “Are you going to make a better decision when you’re 95 with some blond on your lap?” (Laughter)

That actually was tried a few years ago, as you may know. (Laughter)

Charlie?

CHARLIE MUNGER: No, but it does occur to me that that fellow that was complaining about the tax system should remember that when — they recently changed the estate tax rules, so you can leave 5 million to your kids, and so forth. I think that’s a very constructive change in the law.

So I don’t think we should assume that our politicians are always going to be totally crazy. That was a very desirable change, I think.

17. Distribute long-term stock holdings to shareholders?

WARREN BUFFETT: OK. Carol.

CAROL LOOMIS: The questioner’s name is Andre Bartel (PH), and he’s a Berkshire shareholder.

“Would it make sense” — and I’m going to add my own edit here to say, and would it be legally permissible — “for Berkshire to distribute, at some time in the future, any or some of the long-term equity investments, for example, Coca-Cola or American Express, to the shareholders in a tax-sufficient way, as Yahoo is planning to do with the Alibaba stake, for example?

“The idea would be to return capital to shareholders using assets that Berkshire is not actively managing, that is, has not bought or sold for some time, and has very low incentive to sell because of income tax implications, while not taking away resources—cash—that could be reinvested by the Berkshire management better than by its shareholders.”

WARREN BUFFETT: Yeah, I don’t think Yahoo solved it, actually. Charlie, you follow that, too.

CHARLIE MUNGER: I don’t think that we can do that with American Express and so forth. It’s a bad example. We’ve got no way of doing that.

WARREN BUFFETT: No. There used to be a way to do that many years ago, and it was done. I don’t mean by us, but I saw other examples of it.

But, under the code, there’s no way to use appreciated securities to redeem your own shares, to — you can do it for something like acquiring, where you’re exchanging it for like asset type thing on the Duracell arrangement, but there’s no way to distribute it to shareholders without paying the full capital gains tax. And —

CHARLIE MUNGER: Yeah, spinoffs of whole businesses to shareholders, if you held them a long time, but that’s about the only thing you can do.

WARREN BUFFETT: Yeah, but even there, I mean, what Yahoo has done has not got rid of the tax.

CHARLIE MUNGER: I don’t know anything about Yahoo.

WARREN BUFFETT: Yeah. No. The — or what they’re planning to do.

It may give them some other option if Alibaba wants to eventually redeem it themselves.

I mean, there could be something where they could work out a deal with Alibaba. I do not see how that they’ve gotten rid of the tax, unless they do a subsequent transaction of some sort with Alibaba, but maybe they have different tax advice than I’ve seen.

I mean, I know all kinds of cases where people — where corporations — have unrealized — large unrealized — gains in marketable securities, and I have not seen, in recent years — although I did see it early in my career when the law was different, but I’ve not seen in recent years any way that people have gotten that money into the hands of the shareholders without paying a tax at the corporate level.

Charlie?

CHARLIE MUNGER: No. That’s — that’s what we say.

18. Is reduced household formation by young people permanent?

WARREN BUFFETT: Yeah. Jonathan?

JONATHAN BRANDT: Berkshire owns many companies that benefit from single-family home construction: ACME, Johns Manville, Benjamin Moore, MiTek, and Shaw among them, not to mention the railroad.

After the financial crisis, you said that young adults who are postponing household formation by living with parents or in-laws would eventually get sick of that arrangement and we would start to see normal rates of household formation once the job market improved or even if it didn’t.

Jobs are now more plentiful. Yet, household formation still continues to be below rates thought to be normal, whether because of high student debt, a shift in attitudes about homeownership, or stricter mortgage terms for first-time buyers.

Could something more secular be going on where household formation rates, relative to the population, could continue to be lower than historical rates?

Could the U.S. become more like Europe where many adult children live with their parents or in-laws for quite some time, or do you think, still, that the subdued rate of household formation is a mostly cyclical phenomenon, and that the rate will eventually revert to the historical mean, boosting single-family home starts and earnings for this group of companies?

WARREN BUFFETT: Yeah. I don’t know the answer, obviously, but I think the latter is more likely.

I may be wrong. When’s the last set of figures you’ve looked at in that connection? I’ve heard that it’s turned up a fair amount in the last six months, but — have you seen anything on that, Jonny?

JONATHAN BRANDT: Nothing really recently, no.

WARREN BUFFETT: Yeah. I should know the figures, but I don’t, for the last six months or nine months. But my impression was they had turned up somewhat.

I did my best on selling that ring in the movie to that guy, and they’re going to form a household here in another month or two to which I’ve been invited.

But the truth is I don’t know, the — you know, what’s going to happen on household formation.

I would expect — but I expected it earlier than this — I would expect it to turn up. It always turns down in a recession, and you could argue that we’re not all the way back from the recession yet.

Your guess would be as good as mine.

Charlie?

CHARLIE MUNGER: I feel exactly the same way, but I think I speak for a lot of members of the audience when I say I have some grandchildren that I wish would marry somebody suitable promptly. (Laughter)

WARREN BUFFETT: What’s the reason for your interest, Charlie?

CHARLIE MUNGER: I don’t think it’s healthy for these people to hang around looking for pie in the sky or whatever in hell they’re doing. (Laughter)

WARREN BUFFETT: Are they in attendance today?

CHARLIE MUNGER: I don’t know. Some of them may be. I don’t want to name names. (Laughter)

WARREN BUFFETT: No. I think you’ve already been pointed enough.

19. Why individual over corporate philanthropy?

WARREN BUFFETT: OK. Station 5.

AUDIENCE MEMBER: Gentlemen, thank you for a great day.

My name is Mark Roy (PH), and I am the executive director of the Immanuel Vision Foundation here in Omaha.

Earlier today, I sat up in the corner and spoke to my son who is working and living in Indonesia, among the poorest of the poor, funded, incidentally, by the Gates Foundation.

The contrast between where he is sitting today and where I am sitting could not be more dramatic.

You have been a model of philanthropic caring for the needs of others. You have demonstrated that it’s not how many shares we have but how we share with others.

So following up on the last speaker, I want to ask, how can corporations be encouraged to make an even greater impact in the lives of those who are not shareholders?

WARREN BUFFETT: Yeah. I agree, you know, entirely with your motivation about increasing philanthropy.

I am much more of a believer, however, in individual philanthropy than corporate philanthropy.

I really feel that I’ve got everything I need, but I do also feel that I’m working for the shareholders and they should determine their own philanthropic activities, that it’s their money. (Applause)

Now, we participate in — I mean, I encourage all our companies to continue the philanthropic behavior that they had before we’ve acquired them, and, you know, we want them to participate in their communities and to help the entities that help their employees and their customers.

But I don’t really think it’s my business, ever, to write a check to my alma mater or whatever it may be, and do it on company funds. I just — I don’t feel it’s my money.

I really look at this as a partnership. We’ve always looked at it as a partnership. And we had a system some years back where all the shareholders could designate contributions, and I felt that was quite a good system. And then we had to give it up for reasons that — I hated to give it up, but we had to do it.

The interesting thing about philanthropy — I mean, I have never given a penny to any organization that has cost me anything in my life. I mean, I’ve never given up a movie, I’ve never given up a trip, I’ve never given up a vacation, I’ve never given up a present to my kids.

You know, people give money this Sunday, you know, that really, actually, changes their lifestyle in a small way, and that hasn’t happened with me. Everything I’ve given has been ungodly surplus, you know, and I’m glad I can do it.

But it’s people like your son, you know, that I really admire.

Charlie? (Applause)

CHARLIE MUNGER: Well, my taste for giving away somebody else’s money is also quite restrained. (Laughter)

WARREN BUFFETT: I was on the board one time of an organization that needed to raise a fair amount of money, and it wasn’t church affiliated or anything like that.

And so they asked me to call on four or five corporate chieftains and they said, “Be sure not to ask them to give anything personally, just ask them to give corporate money.”

And just — I said, “I’m not going to do it,” basically. If they’re not — if they won’t put up their own money, why should they write checks on behalf of all their shareholders?

So I’ve got real reservations about corporate philanthropy for the personal reasons, to some extent, of the CEO, or the directors.

20. Euro can survive eurozone changes

WARREN BUFFETT: OK. Becky?

BECKY QUICK: This question comes from Felipe, and he asks, “Do Charlie and you think that the euro currency has had a positive or negative effect overall on the eurozone economy, and do you think it would be a good decision for France to quit the euro currency and go back to the franc?

WARREN BUFFETT: Well, that’s too easy for me to answer, so I’ll give it to Charlie. (Laughter)

CHARLIE MUNGER: I haven’t got the faintest idea. (Laughter)

I think the euro had a noble motivation and had promise of doing a lot of good and it undoubtedly has done a lot of good.

But it’s a flawed system, in some ways, to put countries that are so different together, and it’s straining at the moment. The big strains aren’t in France.

WARREN BUFFETT: No.

CHARLIE MUNGER: The big strains are in Greece and Portugal and so on.

And I do think they created something that was probably unwise. They got countries in there that shouldn’t have been there.

You can’t form a business partnership with your frivolous, drunken brother-in-law, you know. (Laughter)

I mean, you have to make your partnerships with somebody else. And I think they lowered their standards a little and it’s caused strains.

WARREN BUFFETT: I think — (laughs) — everything here is off the record, understand. (Laughter)

They — I think it’s a good idea that needs a lot of work, still.

And I think it has been a good thing, net, to this point.

But it — you know, it is flawed and the flaws are appearing, but that doesn’t mean it can’t be corrected.

I mean, we wrote a Constitution in 1789 that, you know, still took a few amendments, you know, and some of them didn’t happen for a long time in respect to some very important factors.

So, I don’t think the fact that it wasn’t perfectly designed initially should condemn it to being abandoned, but I think that if there are flaws, you have to face up to them. And I think that maybe the events that are happening currently will cause that.

We could have had — presumably — we could have had a common currency with Canada and probably have made it work, I mean, if we decided —

CHARLIE MUNGER: Sure, we could have made it work.

WARREN BUFFETT: Yeah. We could have had a North American currency with Canada and, you know, we’d have worked it out, and it might have even been useful.

But we couldn’t have had a hemisphere-wide currency with Venezuela in it or —

CHARLIE MUNGER: With Argentina.

WARREN BUFFETT: Yeah. (Laughter)

And so — he loves to name names. (Laughter)

Praise by name; criticize by category. (Laughter)

And I actually think it’s probably desirable to have a euro currency properly designed and enforced so that — you know, that the rules really apply. There were rules, originally, on the euro, which got broken very early on, by not the Greeks, but by the Germans and the French, as I remember. So —

CHARLIE MUNGER: The investment bankers let them — they helped them prepare phony financial statements.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: They — actually, it was investment banker-aided fraud.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: Not exactly novel. (Laughter)

WARREN BUFFETT: So, returning to our main point, I think the euro can and probably should survive and I think it’s going to take some real changes and maybe some examples to enable it to do so.

I hope it really — I mean, it’s going to go in the direction of more cohesion or less, and very soon, probably. And I think if it can figure out a way to do it with more cohesion, overall it will be a good thing for Europe.

But it certainly, you know, in its present form it’s not going to work.

Charlie? I don’t know why I’m giving you another shot, but — (Laughter)

CHARLIE MUNGER: I think I’ve offended enough people.

WARREN BUFFETT: Right. (Laughter)

There’s two or three in the balcony. (Laughter)

21. Munger: GEICO synergies are “dumb idea”

WARREN BUFFETT: OK. Gary.

GARY RANSOM: With the Van Tuyl acquisition — or now Berkshire Hathaway Automotive — there may be some natural synergies with GEICO, if it’s nothing more than just putting a gecko on the salesman’s desk.

Would you expect to do anything in that regard to encourage getting more customers through that relationship?

WARREN BUFFETT: Yeah, I don’t think so.

You always have these things that the investment banker will tell you will produce synergy and all that. Most times that doesn’t work.

And historically, selling auto insurance through dealerships hasn’t been particularly effective. And if we were to do that, we would probably have to compensate people who did the insurance work — or made the insurance sales — out of Van Tuyl. That would add to costs.

I mean, GEICO is a low-cost model, and it’s a wonderful low-cost model. And [CEO] Tony Nicely has done an incredible job of keeping those costs down and our — and you can see it in our expense ratios.

We spend a lot of money on advertising. But its success depends on delivering first-class insurance at a better price than other people can get, and the more people we put in distribution system or anything —

So, I would doubt very much that we do anything along that line. I think that those two companies will do better if run as two independent businesses than if we try to push through something.

We — Charlie and I have seen a lot of things on paper that involve that sort of a proposition and very, very few succeed.

Charlie?

CHARLIE MUNGER: Well, I agree. It’s a very dumb idea, and we’re not going to do it. (Laughter)

22. Buffett doesn’t follow silver market anymore

WARREN BUFFETT: OK. Station 6.

AUDIENCE MEMBER: Mr. Buffett, in this environment of quantitative easing, low interest rates, and an overvalued stock market, what value in silver at these prices do you see, and do you still follow the silver market?

WARREN BUFFETT: I really don’t follow it much anymore. But at one time, we owned over 100 million ounces of silver, and I knew a fair amount about the supply and demand for it, and the prospective supply and demand.

But I really don’t — I haven’t paid much attention to it for a long, long time.

CHARLIE MUNGER: That’s a very good thing too. (Laughter)

We didn’t do that well.

WARREN BUFFETT: Yeah. We made a little money.

CHARLIE MUNGER: Yes.

WARREN BUFFETT: The — you know, photography — the interesting thing about silver is that there are some pure silver mines, but overwhelmingly, silver is produced as a by-product, you know, in terms of copper mining and that.

So it — it doesn’t respond as much to its own supply and demand characteristics — that’s still a factor — as it does in terms of the supply and demand characteristics of the things of which it’s a by-product, like copper.

So, it’s a very small market, too. But we came out better than the Hunt brothers, but other than that, we don’t think about silver anymore.

23. Could activists take control after Buffett?

WARREN BUFFETT: OK. Andrew.

ANDREW ROSS SORKIN: Charlie, question about activism.

Activism continues to grow and, as Charlie stated at the 2014 annual meeting, he sees it getting worse instead of getting better.

So the question is, we hope that Charlie and Warren will both be around forever, but, unfortunately, there will be a time when they’re no longer here to manage the store.

WARREN BUFFETT: I reject such defeatism. (Laughter)

ANDREW ROSS SORKIN: If Warren is giving away his shares to charity over a ten-year period through his estate plan, and activists become increasingly more powerful, how will Berkshire defend itself from activists in the near and far future?

And would you consider it a failure if Berkshire were broken up in the future and shareholders received a significant premium? And for you to consider it success, what would the premium need to be?

WARREN BUFFETT: Well, if it’s run right, there won’t be a premium in breaking it up.

It may look like it. I mean, people will say there’s subsidiary A that would sell at 20 times earnings and the whole place would sell, like, at 15. But the whole place won’t sell at 15 if you spin off the one at 20.

I mean, it — I laid out in the annual report — there are a lot of benefits to Berkshire, in terms of having the companies in the same corporate tax return.

So I think it’s unlikely that, on any long-term basis or intermediate-term basis, that the value of the parts will be greater than the value of the whole.

The best defense against activism is performance. But lately, there’s been so much money pouring into activist funds, because it’s been easy to raise money for that — I mean, it’s been a successful way of handling money for the last few years, and institutional money then starts flowing into it, and the consultants recommend it, and all of that sort of thing.

And so, I would say that much of what I see as activism now, people are really reaching, in terms of what they’re — of the kind of companies that they’re talking about and the claims of what they can do and that sort of thing.

I think the biggest — you know, if you’re talking about my shares getting dispensed over 10 years after my estate is settled, and the voting power they have, and I think, by the time that gets to be a reality, I think the market value of Berkshire is likely to be so great that even if all the activists gathered together, they wouldn’t be able to do very much about it.

Berkshire is likely to really be a very, very large organization 10 or 20 years from now.

CHARLIE MUNGER: Besides, the Buffett super-voting power is going to last a long time.

WARREN BUFFETT: Last a long time, yeah.

I always — I’ve got these friends that call me — other companies and they’ve got an activist, and they’re worried about it. I just tell them to send them over to Berkshire. We’ll welcome them.

We’d love to have them buy our stock because they’re not going to get anyplace. And that’s going to be the situation for a long, long time.

We should be a place where people can dump their activists. (Laughter)

Charlie?

CHARLIE MUNGER: Well, the thing that I find interesting is, in the old days when many — most — stocks sold for way less than they were worth, in terms of intrinsic value, it was very rare to find an American corporation buying the stock in.

WARREN BUFFETT: Oh, yeah.

CHARLIE MUNGER: Now, in many cases, the activists are urging corporations to buy the stock in heavily, even though it’s selling for more than it’s worth.

This is not a constructive activity, and it’s not a desirable change, and it’s not a very responsible activity for the activists.

WARREN BUFFETT: There’s been more stupid stuff written on such a simple activity as stock repurchase. Both stupid stuff written and stupid stuff done.

I mean, it’s a very simple decision, in my view, as to whether you repurchase your shares. You know, you repurchase them if you’re taking care of the needs of the business and your stock is selling for less than it’s intrinsically worth. That — I don’t see how anything could be more simple.

If you had a partnership and the partner wanted to sell out to you at 120 percent of what the business is worth, you’d say forget it.

And if he’d want to sell out to you for 80 percent of what it’s worth, you’d take it. It’s not complicated.

But there’s so many other motivations that entered into people’s minds about deciding whether to repurchase shares or not. It’s gotten to be a very contorted and kind of silly discussion in many cases.

And Charlie is right. The — if you look at the history of share repurchases, you know, it falls off like crazy when stocks are cheap and it tends to goes up dramatically when stocks get fully priced.

But it’s not what we’ll do at Berkshire. At Berkshire, you know, we will presently — you know, we would love to buy it by the bushel basket at 120 percent of book, because we know it’s worth a lot more than that.

We don’t know how much more, but we know it’s worth a lot more.

And we don’t get a chance to do that very often. But if we do get a chance, we’ll do it, big time.

But we won’t buy it in at 200 percent of book, because it isn’t worth it.

You know, it’s not a complicated question, but people that — I’ve been around a lot of managements that announce they’re going to buy X worth and then they buy it regardless of price.

And a lot of times the price makes sense. But if it doesn’t, they don’t seem to stop, and nobody tries to — seems to want to stop them.

Charlie?

CHARLIE MUNGER: Well, I certainly agree with you.

WARREN BUFFETT: OK.

CHARLIE MUNGER: I don’t think it’s a great age, this age of activism.

WARREN BUFFETT: Want to expand on that? (Laughter)

CHARLIE MUNGER: Well, I — it’s hard for me to think of any activists I want to marry into the family. (Applause)

WARREN BUFFETT: I better stop before he names names. (Laughter)

24. American Express & credit card history

WARREN BUFFETT: OK. Gregg.

GREGG WARREN: Warren, American Express, which is Berkshire’s third largest stock holding, has relied on powerful network effects and its valuable brand to generate economic profits over the years.

It has created a virtual cycle with its collection of cardholders being desirable to merchants, who have been willing to pay higher transaction fees with those fees ending up funding rewards programs and services for American Express’s cardholders.

More recently, though, competitors have turned this model against the firm, targeting its cardholder base with ever-increasing levels of rewards and services, while charging merchants lower fees than American Express does.

The company also saw its image of exclusivity take a bit of a hit earlier this year when Costco ended a 16-year relationship with the firm, a move that affects one in 10 American Express cards in circulation and which will impact results this year and next.

With restrictions on interchange fees and the growth and acceptance of mobile payment technologies likely to impact future revenue streams, and moves by the firm to go down-market in pursuit of transaction volume potentially diminishing the brand, how does American Express defend its moat?

WARREN BUFFETT: Well, American Express has been pretty good at that, and particularly when Ken Chenault’s been running it.

The — it will be — you know, it — all aspects of payments will be subject to lots of innovation and various modes of attack.

I think that American Express is still a very special company. And like I say, Ken has done a sensational job in anticipating a lot of these trends and guiding it into different markets. As you mentioned, it’s going down in the — into debit cards, effectively, and things of that sort.

I think there’s a lot of loyalty with American Express cardholders. I do think a proprietary card is worth more than a co-branded card, but I think that — I probably shouldn’t get into the specifics of Costco. I’ve got a Costco director sitting next to me.

But we’re very happy with American Express, but we’d be even happier if the stock goes down and the 4 or 5 billion they spend a year buying in stock buys even more shares.

Charlie?

CHARLIE MUNGER: Well, I like it a little better when they had a little less competition, but that’s life. (Laughter)

WARREN BUFFETT: Incidentally, you’ll find in this 50-year history of Berkshire, you know, American Express did wonders for us back in the 1960s. And there’s a little history in there on the fact that it was an assessable stock until 1965, which nobody paid any attention to until 1963 on.

But the company has an incredible history of adapting. I mean, they started out as an express company, you know, move trunks around, and valuables around.

And then the railroad came around and started doing the same thing, so they went to traveler’s checks as a way to — very handy way — of moving money around the world.

And then the credit card came along, Diner’s Club came along, in the 1950s, and that threatened the traveler’s check and then they moved into the Travel and Entertainment card, as it was called then.

And the interesting thing is that Diner’s Club, who was first — Ralph Schneider and Al Bloomingdale priced their card at, as I remember, $3, and they looked like they were sewing up the market.

And American Express came along and did something very interesting. They priced their card, I think, at $5, and actually established a better image.

I mean, people that pulled out their American Express card at a dinner table, they looked like J.P. Morgan.

And the guy that pulled out a Diner’s Club card, they’d have a whole bunch of flashy things on it, he looked like a guy who was kiting his expense account or something of the sort. So you just automatically felt like a more important person with your American Express card.

They have been very nimble, and very smart, and particularly in recent years, under Ken, in terms of meeting all kinds of challenges. And I think they’ll have plenty of challenges in the future, and I’m delighted we own 15 percent of the company.

25. Why children need good financial habits

WARREN BUFFETT: OK. Station 7.

AUDIENCE MEMBER: Hi. My name is Chang, originally from Seoul, South Korea, and working in Los Angeles, California.

I’ve been traveling more than 27 countries, and last year I taught financial literacy lesson in one of the local elementary school in (inaudible) city.

Today here, we’re talking about investments in capital markets, but young students in developing countries, they don’t know how to save money, or they don’t know the concept of interest.

So, in order to overcome the educational challenges, I would like to provide volunteer opportunities to talented Americans to teach in South American schools to overcome the — while they are traveling.

So, what do you think about my plan or do you have any advice? Thank you.

WARREN BUFFETT: Charlie, do you have any advice?

CHARLIE MUNGER: Well, I failed in this activity with some of my relatives, so I don’t think I can improve South America. (Laughter)

No, I think if you don’t — if you don’t know how to save, I can’t help you. (Laughter)

WARREN BUFFETT: No, but the important thing is to get good habits early on.

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: You really — you know someone said the chains of habit are too light to be felt until they’re too heavy to be broken. And habits really make an enormous difference in your life.

So Andy and Amy Heyward have developed the “Secret Millionaires Club,” which I’ve helped out with a little, and our goal is to, in an entertaining way, present good habits to young kids through a kind of a comedy series.

And I think that’s — it’s actually having a pretty good effect. And here in a few days, we’re going to have a — here in Omaha — we’re going to have eight finalists in young kids from around the country that have developed businesses of their own, and I’m always enormously impressed with these kids.

But the importance of developing good habits yourself, or encouraging good habits in your children very early on, in respect to money, can change their lives.

And, you know, I was 9 or $10,000 ahead when I got out of college, and I got married young and had kids very fast.

And if I hadn’t had that start, my life would have been vastly different. So it — you can’t start young enough on working on good money habits.

And I do think the “Secret Millionaires Club” is very good, but there could be lots of other good ways of teaching those lessons.

26. No plans to change debt level

WARREN BUFFETT: OK. We now have moved solely to the audience, so we’ll go to station 8.

AUDIENCE MEMBER: Hello, Warren, Charlie. My name is Stefano Grasso (PH), and I come from Genova, Italy. It’s great to be here today for the 50th anniversary.

Last year, I asked you what was the right level for leverage at Berkshire Hathaway, and why not to increase it. I argued that increasing liability more at the cheap level would benefit Berkshire, thanks to the investment capabilities of the present management.

This year, I would like to get your view on the possibility of working on the other side of the balance sheet and using part of the cash sitting on bank chair — bank accounts — to reduce some of the liabilities currently on its balance sheet.

For example, the index puts at Berkshire sold between 2004 and 2008, generated a premium of almost 5 billion.

Few years down the line, Berkshire benefited from the float. The indexes are higher and the time to maturity of the put got shorter.

The question is, if the unwinding of the puts were acceptable by the counterparts which bought them, would you consider unwinding them at a reasonable price? Thank you.

WARREN BUFFETT: Are you speaking — you’re speaking specifically of the equity put options we have?

AUDIENCE MEMBER: I’m speaking about them, but as just an example. I’m talking also of maybe reducing debts or doing other —

WARREN BUFFETT: Yeah. Well, what we hope, of course, is that what we call the excess cash, which is cash beyond 20 billion that we can put to work buying a business. But you can’t do, you know, one a week or one a month. So it’s opportunistic.

And I don’t know whether the phone call that’s going to result in the next deal will come in next week or it may come in a year from now.

We will get calls and we will put money to work. You know, we just — we can’t do it at an even flow. And we have, you know, virtually no debt.

If someone had told the two of us 50 years ago that we’d be able to borrow money in euros with a long duration of 1 percent or something like that, we would have felt we would have ended up with a way different balance sheet than we have today.

But, I mean, money is so cheap that it causes people to do almost anything on the asset side, and we try to avoid doing that because we don’t, you know, we don’t want to drop our standards too fast just because the liability side is costing us so little.

But I don’t think — obviously, if we can unwind a derivative trade on a basis where we thought we were mathematically ahead by a significant amount, we would do it.

But I think that’s very unlikely with the contracts we have now, so we’ll probably — I think it’s very likely they just run out over time.

We carry a liability of well over — I think it’s getting somewhere between 3 1/2 and 4 billion — for something that has a settlement value today of 400 million.

So it’s very hard for us to — it’s very hard for us on the other side of the contract to arrive at a price that we both would be happy with.

We’re not going to deleverage Berkshire. There isn’t that much leverage to start with.

I mean, the float really is, essentially, very close to permanent. I mean, it can decline a couple percent in a year, but it can also increase a few percent.

So, I see no drain on funds of any consequence from the float for as far as the eye can see, and we have very little debt out. So I would not want to pay down the debt we have now.

Logically, we probably should take on more debt at these prices, but that’s just not something that appeals to us.

Maybe if we find a really big deal, we might take on a little more. I would like to at least have that as something I was thinking about.

Charlie?

CHARLIE MUNGER: We’d love to have something come along where we actually felt a little capital constrained. We haven’t felt capital constrained for a long time.

It’s a problem we’d love to have, something so attractive that we —

WARREN BUFFETT: We’d stretch a little.

CHARLIE MUNGER: We’d stretch a little. That would be glorious.

And it could happen, by the way.

WARREN BUFFETT: And it could happen.

27. No economies of scale for auto dealers

WARREN BUFFETT: OK. Station 9.

AUDIENCE MEMBER: Hi, Mr. Buffett and Mr. Munger. My name is George. I’m translating for my father, (inaudible), from Shanghai, China.

Last year it was my father standing here asking his question, and this year it’s me. I feel so lucky.

I know at the end of last year, you purchased a car sales dealer. This year, you said in your public letter that you are going to continue to buy. The ultimate purpose of investment is to seek the return.

So my question is, whether the rate of return can be necessarily higher with the scale of the dealers?

If so, why we cannot see that happen in China? How come the differences with the dealership business of the same nature in the United States and China? Thank you.

WARREN BUFFETT: Yeah. I don’t know the dealership situation in China.

I would say — I think I mentioned this a little earlier — that I don’t think we’re going to get significant benefits of scale as we buy more units in the auto field. I just don’t see where it would come from.

But we don’t need it. What we really need is managers in those individual dealerships that have skin in the game of their own, and that run them, you know, as first-class businesses, independently.

And that’s what we’ll be looking for. We’ll not be looking for scale. I don’t know the situation in China. Maybe Charlie knows more about that. I think he does.

CHARLIE MUNGER: No. But I don’t think we’d be very good at running dealerships in China. And I think the people who run Van Tuyl are very good at running the ones here, so —

WARREN BUFFETT: Yeah with 17,000 here and we’ve got 81 of them, there’s a little room to expand.

The problem is going to be price. Our purchase probably caused people to move up their multiples by one or two — people that have them — and we paid a full, but fair, price for Van Tuyl and we’ll be using that price, more or less, as a yardstick.

And we really thought we bought the best there, so, if anything, we would be hoping to buy others, maybe for a bit less.

So we will not — we may buy a lot of them, we may buy very few, just depending on price developments.

The — we’re having a big car year and profits are good in the dealership field. But when profits are good, we want to pay a lower multiple.

I mean, because, if we’re going to be in the car business forever, we’re going to have some good years and we’re going to have some bad years. And we would rather buy at a 10 or 12 times multiple of a bad year than buy at an eight times multiple of a good year.

And that’s not necessarily the way that sellers think, although they probably understand it, but they don’t want to think that way. So we’ll see what happens.

28. Buffett values internet more than private jet

WARREN BUFFETT: OK. Station 10.

AUDIENCE MEMBER: Hi. Mr. Buffett and Munger, very excited to be here.

My name is (inaudible), also from Shanghai, China. Because now (inaudible) a company providing wealth management to the high-net wealth individuals in China. The company name is North, from North Ark (PH), listed at (inaudible).

You two are my idols. What’s your secrets of keeping so young, so energetic, and so quick?

Please don’t say because of Coca-Cola. (Laughter)

And as someone says that old papa could not understand the internet, but I don’t believe that.

What’s your opinion? Will you pay more attention to internet? Could I invite both two gentlemen to answer my question? Thank you very much.

WARREN BUFFETT: Charlie, I didn’t get all that, so you —

CHARLIE MUNGER: Well, he asked are we going to be using the internet.

Warren is a big internet user compared to me. And — but —

WARREN BUFFETT: I love it. (Laughs)

CHARLIE MUNGER: He plays bridge on it.

WARREN BUFFETT: I use a lot of — I use search. It’s been a huge change in my life, and it costs me a hundred dollars a year, or something like that.

If I had to give up the plane or I had to give up the internet: the plane costs me a million-and-a-half a year, the internet costs me a hundred dollars a year. You know, I wouldn’t want to give up either one of them, but I’d give up the plane.

CHARLIE MUNGER: Interesting. (Laughter)

WARREN BUFFETT: Charlie’s given up both.

CHARLIE MUNGER: Are we going to be doing more — I think everybody’s going to be doing more things on the internet. It is growing in importance. And so like it or not, we’re dragged into modern reality.

WARREN BUFFETT: Doesn’t sound like he likes it, does it? (Laughs)

CHARLIE MUNGER: No, I don’t like it.

I don’t like multitasking. I see these people doing three things at once, and I think, God, what a terrible way that is to think.

I am so stupid, though, I have to think hard about a thing for a long time. And the idea of multitasking my way to glory has never occurred to me. (Laughter)

But at any rate, the internet is here and it’s going to be more and more important and everybody’s going to think more about it and do more about it, like it or not. And, of course, the younger people are way more prone to use it than we are.

But Berkshire — you have what, how many Bloombergs now?

WARREN BUFFETT: In the office?

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: Do we have two or three. Mark?

I don’t know. They don’t tell me about them. They sort of hide them when I come in the room.

CHARLIE MUNGER: We’re into the modern world.

WARREN BUFFETT: We have — [CFO] Marc Hamburg tells me we have three — but we’ll reevaluate that situation when I get back to the office. (Laughter)

What’s that?

Oh, we’re not paying for one. I like that. (Laughter)

Let’s see if we can not pay for two. (Laughter)

No, the internet — and it’s changed many of our businesses. I mean, it’s changed GEICO’s business very, very dramatically. And it’s affecting — it affects them all, to one degree or another.

It’s amazing to me — I mean, people get pessimistic about America. Just think in the last 20 or 25 years—well, just 20 years on the internet—how dramatically it’s changed your life.

You know, the game is not over yet. There’s all kinds of things that are going to happen to make life better.

And Charlie may not think the internet makes life better, but when I compare trying to round up three other guys on a snowy day to come over to my house to play bridge, versus snapping the thing on and having my partner in San Francisco there and two other friends, and so on, in 10 or 20 seconds, I think the world has improved.

CHARLIE MUNGER: Well, if I had your partner, I’d think it had improved, too. (Laughter)

29. Raise earned income tax credit instead of minimum wage

WARREN BUFFETT: OK. Station 11.

AUDIENCE MEMBER: Hi. I’m Whitney Tillson, a shareholder from New York.

Mr. Buffett, I know many shareholders have felt irritation, to put it mildly, when you’ve weighed in on social issues such as tax policy, or endorsed and raised money for a particular candidate, but I, for one, applaud it.

I think everyone, but especially people who’ve achieved wealth and prominence and thus have real ability to effect change, have a duty to try and make the world a better place, not just through charitable donations, but also through political engagement, and I’d say that even to people whose political views are contrary to my own.

My question relates to one of the big issues today: rising income inequality, and related to that, the campaign to raise the minimum wage, which has had some recent successes with some of the largest businesses in the country like Walmart and McDonald’s.

How concerned are you about income inequality? Do you think raising the minimum wage is a good idea? And do you think these efforts might meaningfully affect the profitability of corporate America?

WARREN BUFFETT: Yeah. I think income inequality is — I think it’s extraordinary, in the United States, to see how far we’ve gone.

Well, just go back to my own case. Since I was born in 1930, the average GDP per capita in the United States has gone up six for one.

Now, my parents thought they were living in a reasonably decent economy in 1930, and here their son has lived to where the average is six times what it was then.

And if you’d asked them at that time, and they’d known that fact, that it would go from 8 or $9,000 in today’s terms to $54,000, they would have said, “Well, everybody in America is going to be enjoying a terrific life,” and clearly they’re not.

So, I think it is a huge factor. There are a million causes for it, and I don’t pretend to know all the answers, in terms of working towards solutions.

But I do think that everybody that is willing to work should have a reasonably decent livelihood in a country like the United States, and — (applause) — how that is best achieved — I’m actually going to write something on it pretty soon.

I have nothing against raising the minimum wage, but to raise it to a level sufficient to really change things very much, I think, would cost a whole lot of jobs.

I mean, there are such things as supply and demand curves. And if you were to move it up dramatically, I think you would — it’s a form of price fixing. I think you would change the opportunities available to people very dramatically.

So I am much more of a believer in reforming and enlarging the earned income tax credit, which rewards people that work, but also takes care of those whose skills don’t fit well into a market system. So I think you put your finger on a very big problem.

I don’t think — I don’t have anything against raising the minimum wage, but I don’t think you can do it in a significant enough way without creating a lot of distortions.

Whereas, I do think the earned income tax credit makes a lot of sense and I think it can be improved. There’s a lot of fraud in it. It pays out this lump sum, so you get into these payday type loans against — I mean, there’s — a lot of improvements can be made in it.

But I think the answer lies more in that particular policy than the minimum wage. And, like I said, I think I’m going to write something on it pretty soon. And if there’s anybody I haven’t made mad yet, you know, I’ll take care of it in the next one.

Charlie?

CHARLIE MUNGER: Well, you’ve just heard a Democrat speaking and here’s a Republican who says I agree with him.

I think if you raise the minimum wage a lot, it would be massively stupid and hurt the poor, and I think it would help the poor to make the earned income credit bigger. (Applause)

30. “Ridiculous argument” that college boosts lifetime earnings

WARREN BUFFETT: Let’s go to station 1.

AUDIENCE MEMBER: Hi. I’m Michael Monahan (PH) from Long Island, New York.

Warren, Charlie, the higher education system has expanded, covering almost everyone who would like to receive a college education. This demand has translated into rising college costs.

As a high school junior, I’m looking at prestigious institutions such as UPenn, Villanova, NYU, Fordham, and Boston University.

On the other hand, my parents are experiencing sticker shock. All of these schools have a sticker price of over $60,000, with some students, as shown in a businessinsider.com article, can pay over $70,000, as the case at NYU.

How will the average American family be able to pay this in the future and, more importantly, how do you two feel about this?

WARREN BUFFETT: Charlie?

CHARLIE MUNGER: Well, the average American family does it by going to less expensive places and getting massive subsidies from the expensive places.

If we had to give our college education to only people who could write cash checks for 60 or $70,000 a year, we wouldn’t have that many college students.

WARREN BUFFETT: No.

CHARLIE MUNGER: So most people are paying less or getting subsidies. And — but I think it is a big problem, that education has just kept raising the price, raising the price, raising the price.

And they say, but college educated people do better. It’s a big bargain. But maybe they do better because they were better to start with before they ever went to college, and they never tell you that. (Applause)

WARREN BUFFETT: It’s a ridiculous argument.

CHARLIE MUNGER: And so —

WARREN BUFFETT: I think that’s one of the silliest statistics that they publish, I mean, to say that a college education is worth X because people that go to college earn this much more than the ones that don’t. You’re talking about two different universes.

And to attribute the entire difference to the one variable, that they went to college as opposed to the difference between the people who want to go to college and have the ability to get into college —

CHARLIE MUNGER: It’s completely nutty —

WARREN BUFFETT: — it’s a fraud

CHARLIE MUNGER: — and about 70 percent of the people believe in it. So it gives you a certain hesitation about relying on your fellow man. (Laughter)

So I think most people have to struggle through with the system the way it is.

There’s a big tendency to have prices rise to what can be collected. And people just rationalize that the service is worth it. And I think a lot of that has happened in education, and, of course — (applause) — a lot is taught in higher education that isn’t very useful to the people who are learning it and, of course, a lot of those people would never learn much from anything.

So it’s really wasting your time, and that’s just the way it works. So I think there’s a lot wrong.

What I noticed that was very interesting is that when the Great Recession came, every successful university in America was horribly overstaffed and they all behaved just like 3G. They all, with a shortage of money, laid off a lot of people. And the net result was they all worked better when it was all over with the people gone.

And so this right-sizing is not all bad. I don’t think there’s a college in America that wants to go back to its old habits. And — but you put your finger on — it is a real problem to look as those sticker shocks.

It’s like any other problem in life. You figure out your best option and just live with it.

We can’t change Villanova or Fordham. They’re going to do what they’re going to do. And as long as it works, they’ll keep raising the prices.

WARREN BUFFETT: And it will keep working.

CHARLIE MUNGER: Yes. And that’s pretty much the way the system works.

When it really gets awful there’s finally a rebellion. In my place in Los Angeles, the little traffic accident got so it cost too much to everybody because of so much fraud, and the chiropractors, and some of the plaintiffs’ attorneys, and so on.

And finally, the little accidents were costing so much that they worried about the guy who lived in a tough neighborhood who couldn’t afford to drive out to get a job. And the auto insurance companies thought, my God, with prices going up like this, they’ll have legislation creating state auto insurance or something.

So the net result is they put the plaintiffs’ attorneys to trial in every case, and that fixed it. And maybe something like that will happen in higher education. But without some big incentive, I think higher education will just keep raising the prices.

31. Bullish on China

WARREN BUFFETT: On that cheerful note, we’ll move to station 2.

AUDIENCE MEMBER: Thank you for taking my question.

My name is Brendan Chin (PH). I’m form Taipei, Taiwan.

My question is, China is undergoing a number of structural changes. What do you — when you take the pulse of the Chinese economy, what do you read and what advice would you give? Thank you.

WARREN BUFFETT: Charlie’s the China expert. I think China’s going to do very fine over a period of time.

CHARLIE MUNGER: Yeah. I’m a big fan for what’s happening in China.

And as a matter of fact, I’ve just ordered — prepared — a bust of Lee Kuan Yew, the recently deceased ex-prime minister of Singapore, because I think he’s contributed so much to fixing, first Singapore, and then China.

And one of the things Lee Kuan Yew did in China — in Singapore — was to stop the corruption, including cashiering some of his close friends.

And China is doing the same thing. And I consider it the smartest damn thing I’ve seen a big country do in a long, long time, and I think that to — it’s hard to set the proper example if the leading political rulers are kleptocrats.

You know, you don’t want to be run by a den of thieves. You want responsible people.

And what Lee Kuan Yew did is he paid the civil servants way better and recruited very good people. And he just created a better system and, of course, China is widely copying him. And it’s a wonderful thing they’re doing.

So I’m very high on what’s going on in China, and I think it’s — I think it’s very likely to work. If you — they’ve actually shot a few people. That really gets people’s attention. (Laughter)

WARREN BUFFETT: Now we’re starting to get some practical advice here. (Laughter)

What has happened in China, you know, over the last 40 or so years, I mean, I — it just strikes me as totally miraculous. I don’t think — I would not have believed that a country could move so far so — a country of that size, particularly — so far so fast. And it’s —

CHARLIE MUNGER: It never happened before, in the history of the world, that a company so big had come so far. When I was a little boy, 80 percent of the population of China was illiterate and mired in subsistence poverty and agriculture.

Now just think — and they’ve been through horrible wars and look at them. It’s one of the most remarkable achievements in the history of the Earth.

And a few people made an extreme contribution to it, including this Chinese politician in Singapore.

And I give the Communist Party a lot of credit for copying Lee Kuan Yew.

That’s all Berkshire does is copy the right people.

WARREN BUFFETT: Yeah. In 1790, the United States had 4 million people. China had 290 million people.

They were just as smart as we were. They worked as hard, similar climate, similar soil. And for 200 — close to 200 — years, you know, the United States went with those 4 million people to close to 25 percent of the world’s GDP and China really didn’t go anyplace.

And then those same people, in 40 years — and they’re not working harder now than they were 40 years ago — they’re not smarter now than they were 40 years ago, in terms of the basic intelligence — and just look at what’s been accomplished.

I mean, it does show you the human potential when you find a system that unleashes it, and we found a system that unleashed human potential a couple hundred years ago and they found a system that unleashed human potential 40 or 50 years ago.

And, you know, when you see that example, you know, it has to have a powerful effect on what happens in the future.

And it’s just amazing that you can have people go nowhere, basically, in their lives for centuries and then just — it explodes. And it just blows me away to see it, and you make it — it’s the same human beings, but they’ve — they found a way to unlock their potential and I congratulate them for it.

And as Charlie said earlier, China and the United States are going to be the superpowers for as far as the eye can see. And it is really good for us, in my view, that the Chinese have found the way to unlock their potential.

And I think its imperative for two countries with nuclear weapons that, in this kind of world, that they figure out ways to see the virtues in each other rather than the flaws.

We’ll have plenty of disagreements with the Chinese, and they will with us, but remember that on balance, we’re both better off if the other one is doing well. That’s just my own view. OK. (Applause)

32. “We just kept reading … and went with our instincts”

WARREN BUFFETT: Station 3, please.

AUDIENCE MEMBER: Hello, Mr. Buffett and Mr. Munger. My name is Chander Chawla and I’m from San Francisco. Thank you for the last 50 years of sharing your wisdom and being an exemplar of integrity.

Fifty years ago, when you were starting out or getting into new industries, how did you figure out the operational metrics for a new industry where you did not have previous experience?

WARREN BUFFETT: Well, we — A) we didn’t have it thought out that well, in a sense, at that time.

But we basically looked for companies where we thought we could understand what the future would look like 5 or 10 or 15 years hence. And that didn’t mean we had to do it to four decimal places or anything of the sort, but we had to have a feel for it, and we had to know our limitations. So we stayed away from a lot of things.

And at that time, prices were different, so we — in terms of knowing we were getting enough for our money, it was a much easier decision than it is currently.

But it wasn’t — they weren’t elaborate — well, there were no planning sessions or anything of the sort. We just kept reading and we kept thinking and we kept looking at things that came along, as Charlie described it in the movie, and you know, comparing Opportunity A with Opportunity B.

And in those days, we were capital constrained, so we usually had to sell something if we were going to buy something else. And that always makes for — you know, that’s the — an interesting challenge, always, when you’re measuring something you hold against something that has come along and to see which is more attractive.

And we probably leaned very much toward things where we felt we were certain to get a decent result than where we were hopeful of getting a brilliant result.

Went with our instincts, and kept putting one foot in front of the other.

Charlie, what would you say?

CHARLIE MUNGER: Well, that’s exactly what we did, and it worked wonderfully well. And part of it is because we were such splendid people and worked so constructively, and part of it is we were a little lucky. We had some good fortune.

Now, Warren says he was lucky to go to GEICO, but not every 20-year-old was going down to Washington, D.C., and knocking on the doors of empty buildings to try and find something out that he was curious about.

So we made some of our luck by being curious and seeking wisdom, and we certainly recommend that to anybody else.

And there’s nothing that produces wisdom more thoroughly than really getting your own nose whacked hard when you make a mistake, and we had a firm amount of that, didn’t we?

WARREN BUFFETT: We had plenty of them. If you read this book, you’ll see about a few of them.

We thought we knew the department store business in Baltimore and we thought we knew about the trading stamp business.

We’ve had a lot of experience with bad businesses, and that makes you appreciate a good one. And to some extent, it sharpens your ability to make distinctions between good and bad ones.

And we’ve had a lot of fun along the way. That helps too. If you’re enjoying what you’re doing, you know, you’re likely to get a better result than if you go to work with your teeth clenched every morning.

CHARLIE MUNGER: I think we were helped because we came from families where there was some admirable people, and we tended to identify other admirable people better than we would have coming from a different background.

So, my deceased wife used to say, you can’t accomplish much in one generation.

We owe a considerable amount, both of us, to the families we were raised in. I think the family standards helped us to identify the good people more easily than we would have if we’d had a more disadvantaged background.

Do you agree with that, Warren?

WARREN BUFFETT: Yeah. Have you still got your father’s briefcase?

CHARLIE MUNGER: I’ve still got it, but I don’t know where it is. (Laughter)

Can’t carry it anymore. It’s worn out. It’s got holes in it.

WARREN BUFFETT: I’ve got my dad’s desk from 75 years ago.

33. How Buffett found his first investors

WARREN BUFFETT: OK. Station 4.

AUDIENCE MEMBER: Hi, Warren and Charlie. This is Cora and Dan Chen from Talguard in Los Angeles, and we’re thrilled to be here again.

Thank you for planting the seeds for which my generation can sit under the shade, and for my children’s generation with “The Secret Millionaires Club,” so that they can sit under the shade. I walk amongst giants.

WARREN BUFFETT: Go on. Go on. (Laughter)

AUDIENCE MEMBER: That’s all I have. (Laughter)

WARREN BUFFETT: Don’t hold back.

AUDIENCE MEMBER: Seriously though, thank you so much for everything you’ve taught us.

WARREN BUFFET: Thank you.

AUDIENCE MEMBER: How were you able to persuade — (applause)

WARREN BUFFETT: Thank you.

AUDIENCE MEMBER: How were you able to persuade your early investors, all early on, besides your family and friends, to overcome their doubts and fears and to believe in what you’re doing?

There’s a lot of other asset classes out there, such as — a lot of people believe, real estate, bonds, gold. How were you able to get over that? And something I’ve been really dying to ask you —

CHARLIE MUNGER: We didn’t do very well until we had a winning record. (Laughter)

AUDIENCE MEMBER: Prior to the early winning record, how were you able to get them to buy into what you were trying to do?

I mean, no one has ever done what you’re doing, and no one has, still. And I’ve been really wanting to ask you, in the past, you said you’re 90 percent Graham and 10 percent Fisher. Where does that percentage stand today?

Thank you again from a grateful student of your teachings, and my children love what you do, too. They wrote you a letter.

WARREN BUFFETT: Thank you. Thank you. (Applause)

A lot of it — you know, I started selling stocks here when I was 20 years old. I got out of Columbia. And although I was 20, I looked about 16 and I behaved like I was about 12.

So I was not — I did not make a huge impression selling stocks. I used to just walk around downtown and call on people, which is the way it was done, and then I went to work for Graham.

But when I came back, the people that joined me, actually — one of my sisters, her husband, my father-in-law, my Aunt Alice, a guy I roomed with in college, and his mother, and I’ve skipped one — but in any event, those people just had faith in me.

And my father-in-law, who was a dean at the University — what was then the University of Omaha — he gave me everything he had, you know, and to quite an extent they all did.

And so it was — they knew I’d done reasonably well by that time. That would have been 1956, so I’d been investing five or six years. And actually, I was in a position where when I left New York and came back to Omaha, I had about $175,000 and I was retired.

So I guess they figured if I was retired at 26, I must be doing something right and they gave me their money.

And then it just unfolded after that. An ex-stockholder of Graham-Newman, the president of a college came out, Ben Graham was winding up his partnership for his fund and he recommended me.

And then another fellow saw the announcement in the paper that we formed a partnership and he called me and he joined, and just one after another.

And then, actually, a year or two later, a doctor family called and they were the ones that ended up with me meeting Charlie.

So a lot of stuff just comes along if you just keep plodding along.

But the record, later on, of the partnership attracted money, but initially it was much more just people that knew me and had faith in me. But these were small sums of money. We started with 105,000.

Charlie?

CHARLIE MUNGER: Well, of course that’s the way you start, and — but it’s amazing. We’ve now watched a lot of other people start. And the people that have followed the old Graham-Newman path have one thing in common: they’ve all done pretty well. I can hardly think of anybody who hasn’t done moderately —

WARREN BUFFETT: Everybody did well, yeah.

CHARLIE MUNGER: So, if you just avoid being a perfect idiot — (laughter) — and have a good character and just keep doing it day after day, it’s amazing how it will work.

WARREN BUFFETT: Yeah. It was accident, to a significant extent.

If a few of those people hadn’t have said to me, you know, “What should I buy?” And I said, “I’m not going to go back in the stock brokerage business, but I will — you know, we’ll form a partnership and, you know, your fate will be the same as mine and I won’t tell you what I’m doing.”

And they joined in, and it went from there.

But it was not — it was not planned out in the least. Zero.

I met Charlie, and he was practicing law, and I told him that was OK as a hobby, but it was a lousy business. (Laughter)

And so he —

CHARLIE MUNGER: Fortunately, I listened. (Laughter)

It took a while, however.

WARREN BUFFETT: Yeah.

34. Munger: rationality is a moral virtue

WARREN BUFFETT: OK. Station 5. We’ve got —

AUDIENCE MEMBER: Hi. My name is Arthur. I’m from Los Angeles. I want to thank you for having us in your hometown.

And we’ve all been listening to your business prowess and all your successes. There’s no question that you’re good at business and finance and have fun doing it.

But there are comments that you’ve made on income inequality, giving away 99 percent of your wealth, and I’m led to believe that you’re motivated by more than just amassing wealth or financial gains.

So, I’d like to speak to your value core and ask what matters to you most and why?

WARREN BUFFETT: Charlie, what matters to you most?

CHARLIE MUNGER: Well, I think that I had an unfortunate channeling device.

I was better at figuring things out than I was at everything else. I was never going to succeed as a movie star, or as an athlete, or as an actor, something, so — and I, early, got the idea that — partly from my family, my grandfather, in particular, whose name I bore, had the same idea — that really, your main duty is to become as rational as you could possibly be.

I mean, rationality was just totally worshiped by Judge Munger, and my father and others.

And since I was good at that and no good at anything else, I was steered in something that worked well for me and — but I do think rationality is a moral duty.

That’s the reason I like Confucius. He had the same idea all those years ago. And I think Berkshire is sort of a temple of rationality. What’s really admired around Berkshire is somebody who sees it the way it is. Wouldn’t you agree with that, Warren?

WARREN BUFFETT: Yeah, that —

CHARLIE MUNGER: More than anything, more than —

WARREN BUFFETT: You better see it the way it is.

CHARLIE MUNGER: Huh?

WARREN BUFFETT: You better see it the way it is.

CHARLIE MUNGER: See it the way it is.

And so, that’s the way I did it.

But that goes beyond a technique for amassing wealth. To me that’s a moral principle.

I think if you have some easily removable ignorance and keep it, it’s dishonorable. I don’t think it’s just a mistake or a lack of diligence. I think it’s dishonorable to stay stupider than you have to be, and so that’s my ethos.

And I think you have to be generous because it’s crazy not to be. We’re a social animal, and we’re tied to other people.

WARREN BUFFETT: Well, I would say — this doesn’t sound very noble, but the — what matters to me most now, and probably has for some time — I mean, there are things that matter that you can’t do anything about, I mean, in terms of health and the health of those around you and all that — but actually, what matters to me most is that Berkshire does well.

Basically, I’m in a position where we’ve probably got a million or more people that are involved with us, and it just so happens that it’s enormously enjoyable to me so I can rationalize it, the activity.

But I would not be happy if Berkshire were doing poorly. That doesn’t mean whether the stock goes down or whether, you know, the economy has a bad year.

But if I felt that we weren’t building something every year that was better than what we had the year before, I would not be happy.

And, you know, I get this enormous fun out of it and I get to work with people I like and —

CHARLIE MUNGER: But that’s very important. Truth of the matter is it’s easy for somebody like Warren or me to lose a little of our own money, because it doesn’t matter that much, but we hate losing somebody else’s.

It’s — and that’s a very desirable attitude to have in a civilization.

Don’t you hate losing Berkshire money?

WARREN BUFFETT: Yeah. That would be the only thing that would keep me up at night. (Laughs)

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: Yeah. We won’t do it.

We can lose money on individual things, obviously. We can have bad years in the economy, and we can have years the stock market goes down a lot. That doesn’t bother me in the least.

What bothers me is if I do something that actually costs Berkshire, in terms of its long-term value, and then I feel, you know, I do not feel good about life on that day.

But we can avoid most of that, fortunately. We do get to pick our spots. We’re very fortunate with that.

CHARLIE MUNGER: Well, a good doctor doesn’t like it when the patient dies on the table, either, you know. (Laughter)

Not a new thought. (Laughter)

35. No help for “the most intelligent question”

WARREN BUFFETT: OK. Let’s go to — let’s go to station 6.

AUDIENCE MEMBER: Hi, Mr. Buffett and Mr. Munger. My name is Petra Bergman. I’m from Stockholm, Sweden, in northern Europe. I work at something called EFN.SE.

I wanted to ask you, from my point of view, what would be the answer to the most intelligent question I could ask you right now? (Laughter)

CHARLIE MUNGER: Everybody tries that question, and it would be wonderful if that would solve all your problems. But I don’t think it’s a very good question. (Laughter)

Or perhaps I should say —

WARREN BUFFETT: Let’s phrase that differently, Charlie.

CHARLIE MUNGER: Well, what I mean is, you’re asking too much of somebody when you — you ask him to honestly say what is the most enlightening question he can answer.

WARREN BUFFETT: Yeah. I get that asked by the students a lot. And I’ve had a lot of practice in hearing it asked, but I haven’t had very much success in answering it.

So I’ll have to beg off on that one.

36. Buffett on fun and “the game”

WARREN BUFFETT: How about 7?

AUDIENCE MEMBER: Good afternoon, Warren and Charlie. Congrats on 50 years. My name is Jim and I’m from Brooklyn, New York.

This is kind of a follow-on to a recent question. You both had success in investing, even before Berkshire Hathaway, as investors and as fund managers.

While it’s well known you closely followed Graham’s teachings, others, like Walter Schloss and his son, also had success with similar teachings, yet different strategies.

What would you cite as the most important reason for your early success with small amounts of capital, and given hindsight today, what might you have done to improve your strategy with these small funds?

WARREN BUFFETT: Yeah. Well, I had a great teacher, I had exceptional focus, and I had the right sort of emotional qualities that would help me in being an investor.

I enjoyed the game. You do give it all back in the end. It wouldn’t make any difference if I — you know, that was not the key thing.

The game was enormously fun. And I think Gene McCarthy said about football one time, you know, it’s just about, you know, hard enough to be interesting but not so hard as to be beyond the capabilities of people understanding it, and that’s kind of the way this game is.

I mean, it’s not like Henry Singleton, kind of questions he took on. It’s actually a pretty easy game, and it does require a certain emotional stability.

And I went at it hammer and tong. I went through the manuals and everything, but I was enjoying when I did it.

And, like I say, I started out — between ages seven and about 19, I had that same enthusiasm, but I didn’t really have any guiding principle.

And then I ran into “The Intelligent Investor” and Ben Graham. And then at that point, I was able to take all this energy and everything, and enthusiasm for it, and now I had a philosophy that made a lot of sense — total sense — and I found that I could employ, and so the game became even more fun. But it wasn’t really more complicated than that.

Charlie?

CHARLIE MUNGER: Well, I don’t have anything to add.

I do think that it’s an easy game if somebody has the temperament for it and keeps at it because he’s — likes it and it’s interesting — interested in it.

I have a problem that Warren has less of. I don’t like being too much an example to people who want to get rich by being shrewd and buying and passively holding securities.

I don’t think that’s enough of a life. If you wrest a fortune from life by being shrewder than other people and buying little pieces of paper, I don’t think that’s an adequate contribution in exchange for what you’re taking.

So, I like it when you’re investing money for an endowment, or a pension fund, or your relatives, or something, but I never considered it enough of a life to merely be shrewd in picking stocks and passively holding them.

WARREN BUFFETT: Yeah. Running Berkshire has been far, far more fun than running, in my case, multiple partnerships, or just an investment fund. I mean, that —

CHARLIE MUNGER: You’d be less of a man. If you’d run that partnership —

WARREN BUFFETT: It would be a crazy way to go through life.

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: Yeah. I mean, it just — you know, Berkshire is incredibly more satisfying.

CHARLIE MUNGER: So if you’re good at just investing your own money, I hope you’ll morph into doing something more.

37. Dow Jones’s big missed opportunity

WARREN BUFFETT: OK. We’ll do 8 and then we’ll move onto the annual meeting.

AUDIENCE MEMBER: My name is John Boxtose (PH). I’m from South Dartmouth, Massachusetts.

My question was regarding an interview that you gave, Mr. Buffett, several years ago.

You made a very interesting point. It was about the old Wall Street Journal, if you will, the one before it was purchased by News Corp.

You mentioned in the interview that Wall Street Journal, at some point in the past, had very significant competitive advantages, but a number of them were largely unrealized.

I was just wondering if you could elaborate on that, what the advantages were, how they were unrealized, et cetera. Thank you.

WARREN BUFFETT: Well, Dow Jones, which owned the Wall Street Journal, you know, in the ’60s and ’70s, going into the era of the enormous spread of financial information — and value of financial information — you know, they basically, they owned the field.

They had the news ticker and they had the Journal, which, you know, anybody interested in finance in the country identified with.

And they — starting with that, in what would be an incredible growth industry, finance, you know, for the next 30 or 40 years they — I forget a couple of those ventures they went into, and they bought a chain of small newspapers, I remember, one time — and they just totally missed what was going to happen.

You know, here comes Michael Bloomberg and, you know, takes away financial information. They had such an advantage. And they didn’t really see various areas that they could have pursued, which could have turned that company into something worth many hundreds of billions of dollars, in all probability.

And, you know, they had a situation where a family owned it, and a lawyer essentially controlled the family’s behavior, and they were sitting pretty. You know, they were all getting dividends, but there was nobody there with any imagination as to what could be done in the financial field.

So, starting with this position, they were a trusted name, they were in every brokerage firm in the country with a news ticker.

I mean, I went to Walter Annenberg’s house one time and he had the Dow Jones ticker there — it just — or the news ticker.

And it was — they couldn’t have been in a better place. They couldn’t have started with a stronger position. They had a very good balance sheet. And they just let the world pass them by.

Now, Rupert is changing it into a different newspaper. He’s going into — he’s basically going into competition with the — or he’s gone into competition — with the New York Times, so he — but that’s the game he likes. And it makes for a very interesting competitive situation.

Charlie?

CHARLIE MUNGER: Well, they did end up with 6 or $7 billion, so they may have blown their opportunities, but they didn’t destroy their fortune.

WARREN BUFFETT: If you’d had the hand — if Tom Murphy had had the hand —

CHARLIE MUNGER: Oh, yeah.

WARREN BUFFETT: — it would have been in the hundreds of billions, wouldn’t it?

CHARLIE MUNGER: Well, I don’t know. I’m not sure if we had had that hand we would have —

WARREN BUFFETT: Well, I’m not so sure. I’m talking about Murph. (Laughs)

There were a lot of opportunities there.

CHARLIE MUNGER: Well, I think even Murph is more like us than he is like Bill Gates.

WARREN BUFFETT: Well, I’m not sure where that goes, but... (Laughter)

CHARLIE MUNGER: Well, but I think it’s hard to invent new — entirely new — modalities and so on.

WARREN BUFFETT: I think Bill would have done well with Dow Jones, too.

CHARLIE MUNGER: Yes. He might —

WARREN BUFFETT: I’d like to buy into that retroactively.

38. Q&A concludes

WARREN BUFFETT: OK. 3:30 has arrived. We’re going to go to the annual meeting in about five minutes. We’ve got a certain amount of formal business to take care of. And I thank you all for coming. (Applause)

39. Berkshire’s formal annual business meeting

WARREN BUFFETT: Let’s reassemble and we’ll conduct the business of the meeting.

The meeting will now come to order. I’m Warren Buffett, chairman of the board of directors of the company, and I welcome you to this 2015 annual meeting of shareholders.

This morning I introduced the Berkshire Hathaway directors that are present.

Also with us today are partners in the firm of Deloitte & Touche, our auditors. They are available to respond to appropriate questions you might have concerning the firm’s audit of the accounts of Berkshire.

Sharon Heck is secretary of Berkshire Hathaway, and she will make a written record of the proceedings.

Becki Amick has been appointed inspector of elections at this meeting. She will certify to the count of votes cast in the election for directors and the motion to be voted at this meeting.

The named proxy holders for this meeting are Walter Scott and Marc Hamburg.

Does the secretary have a report of the number of Berkshire shares outstanding, entitled to vote, and represented at the meeting?

SHARON HECK: Yes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 5, 2015, the record date for this meeting, there were 824,920 shares of Class A Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at the meeting, and 1,227,069,442 shares of Class B Berkshire Hathaway common stock outstanding, with each share entitled to one ten-thousandth of one vote on motions considered at the meeting.

Of that number, 592,750 Class A shares and 736,403,387 Class B shares are represented at this meeting by proxies returned through Thursday evening, April 30.

WARREN BUFFETT: Thank you, Sharon. That number represents a quorum, and we will therefore directly proceed with the meeting.

First order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott, who will place a motion before the meeting.

WALTER SCOTT: I move that the reading of the minutes of the last meeting of shareholders be dispensed with and the minutes be approved.

WARREN BUFFETT: Do I hear a second?

VOICE: I second the motion.

WARREN BUFFETT: The motion has been moved and seconded. Are there any comments or questions?

We will vote on this motion by voice vote. All those if favor say “Aye.”

AUDIENCE: Aye.

WARREN BUFFETT: Opposed? The motion is carried.

40. Election of Berkshire directors

WARREN BUFFETT: The next item of business is to elect directors.

I recognize Mr. Walter Scott to place a motion before the meeting with respect to election of directors.

WALTER SCOTT: I move that Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Thomas Murphy, Ronald Olson, Walter Scott, and Meryl Witmer be elected as directors.

WARREN BUFFETT: Is there a second?

VOICE: Second.

Are there any other nominations? Is there any discussion? The nominations are ready to be acted upon.

If are there any shareholders voting in person, they should now mark their ballot on the election of directors and deliver their ballot to one of the meeting officials in the aisles.

Ms. Amick, when you are ready, you may give your report.

BECKI AMICK: My report is ready. The ballot of the proxy holders in response to proxies that were received through last Thursday evening cast not less than 657,744 votes for each nominee. That number far exceeds a majority of the number of the total votes of all Class A and Class B shares outstanding.

The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Thank you, Ms. Amick. Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Thomas Murphy, Ronald Olson, Walter Scott, and Meryl Witmer have been elected as directors.

41. Adjournment of formal Berkshire annual meeting

WARREN BUFFETT: Does anyone have any further business to come before this meeting before we adjourn?

If not, I recognize Mr. Scott to place a motion before the moving.

WALTER SCOTT: I move that this meeting be adjourned.

WARREN BUFFETT: Second?

VOICE: Seconded.

WARREN BUFFETT: A motion to adjourn has been made and seconded. We will vote by voice. Is there any discussion? If not, all in favor say “Aye.”

AUDIENCE: Aye.

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Text

2015 Berkshire Hathaway Annual Meeting (Morning) Transcript

1. Buffett’s opening joke

WARREN BUFFETT: Thank you. Thank you. Thank you.

I’m Warren; this is Charlie. He can hear. I can see. We work together. (Laughter)

In just a couple of minutes we’ll move onto the questions and answers and follow the same procedures as in previous years.

2. John Landis and “Trading Places”

WARREN BUFFETT: But first, there’s just a couple of special introductions I’d like to make. And I’d like to start it off with John Landis. Do we have a spotlight that we can pick out John?

John is the man that directed, conceived, et cetera, of the Floyd Mayweather fight.

And John, as you know, directed “Coming to America,”″ Animal House,” and the one I particularly like is “Trading Places.”

If you haven’t seen “Trading Places,” by all means get it. It has Dan Aykroyd, and Eddie Murphy, and Charlie’s favorite, Jamie Lee Curtis. (Laughter)

And it’s a truly great movie.

It brought back Ralph Bellamy and Don Ameche.

Don Ameche had disappeared. Have we got a light on — can we get a light on John? Where’s John? He should be right down here. (Applause)

We’re going to find — over here? Come on.

Well, John, thank you, thank you, thank you. He did all that and now came to the meeting. We really appreciate it.

3. Thank you, Carrie Sova

WARREN BUFFETT: The other person I want to say — have a special thanks for — is a young, 30-year-old woman who has a 1 1/2-year-old baby at home and manages to put on this whole event with the help of hundreds that come from our various companies, and that’s Carrie Sova.

I hope Carrie is here, that we can give her a thanks. (Applause)

Carrie, a few months ago, while she was already working on this meeting, I said to Carrie, “I think it would be kind of nice if we had a commemorative book, sort of a retrospective on the 50 years.” And I said, “Would you mind turning out a book, you know, in your spare time during these couple months while you’re putting together the meeting?”

And she put together what I think is an absolutely terrific book, which we have outside. We printed up — we thought we printed 15,000 copies, but I think there’s not quite that many. We sold 5,000 yesterday and then held back copies.

But it’s really a nice history of Berkshire Hathaway. And the credit, 100 percent, goes to Carrie for putting that together. So I’d just like to thank her personally and I hope you’ll thank her.

4. More people than seats

WARREN BUFFETT: Now, we’ll have the annual meeting at 3:30, and at that time we will be voting on directors, but many of you won’t be here at that time, although we’ll have a full house in here.

I should mention all of the overflow rooms in — here at the CenturyLink — are full now.

There may be seats — we’ve got the grand ballroom and the second ballroom over at the Hilton — and there may be some seats left over at the Hilton. So if you can’t find a seat here at the CenturyLink, either here or in the overflow rooms, at least give it a try over there at the Hilton.

We’ve got all the rooms we could possibly get, but I think the attendance may have outrun the seats this time.

5. Berkshire directors introduced

WARREN BUFFETT: I’d like to introduce the directors, and, like I say, you’ll vote on them at a little after 3:30.

And if they’ll stand — and we’ll get a light down here — and withhold your applause until the end, and you can withhold it then, if you would like. (Laughter)

And we’ll do this alphabetically.

You’ve met Charlie, of course, but we’ll start with Howard Buffett, Steve Burke, Sue Decker, Bill Gates, Sandy Gottesman, Charlotte Guyman, Tom Murphy, Ron Olson, Walter Scott, and Meryl Witmer. They’re a great bunch of directors. (Applause)

We’re missing one of our great directors, Don Keough, my neighbor from over 55 years ago.

He was a coffee salesman, then, for Butter-Nut Coffee, for those of you around Omaha.

He broadcast Nebraska football games and around 1950 had a radio show on WOW, for 15 minutes.

He was followed by a fellow named Johnny Carson, who had another 15-minute program. And Don, when I would see him in later years, he’d always say, “What happened to that Carson fellow?” (Laughs)

And Don died a few weeks ago, but we are very grateful that his wife, Mickie Keough, has joined us together, so let’s have a hand for Mickie Keough. Mickie, will you stand? (Applause)

Mickie practically raised our kids, so if they have any faults, talk to Mickie about it. (Laughter)

6. Q1 earnings

WARREN BUFFETT: OK. We have just — we have one slide that relates to our quarterly earnings that — if we could put up.

We released these yesterday afternoon, and nothing particularly remarkable.

The railroad, BNSF, did dramatically better last year, not only in earnings, but in all kinds of performance measures, in terms of train velocity, and on time, and you name it, so that the —

You know, we got behind last year, early in the year, and there’s been lots of money, and more important, lots of effort, spent to get the railroad operating like it should be.

And in the first quarter those efforts paid off. We gained share. Our earnings, relative to other railroads, improved dramatically, so, you know, we got the trains running. We’re going to spend a lot of money making sure we get even better.

But the improvement has been huge, and I want to thank Matt Rose and Carl Ice for a really extraordinary performance and having our railroad running the way it should be running. So thanks, Matt and Carl. (Applause)

VOICE FROM AUDIENCE: (Inaudible)

WARREN BUFFETT: I didn’t quite get, it but I’ll assume it was complimentary. (Laughter)

7. Rotating questioners

WARREN BUFFETT: OK. I think we’re ready to move on to our questioners.

We’ll handle it the same way as before. We start with the journalists, we move to the analysts, and then we move to the audience, and we keep doing that until about noon.

And at that time, we take a break for about an hour, and then we come back and we repeat the procedure.

After we get through a — I think it’s either 48 or 54 questions, then we just take them all from the audience. We have various zones where people have been selected, by drawing, to ask questions personally.

8. Carol Loomis introduction

WARREN BUFFETT: But we start off the first one with a woman who retired after 60 years, setting a longevity record for all of Time Inc. — she retired at Fortune — been my friend for many years, and in my opinion the best print business journalist in the world, Carol Loomis. That doesn’t soften her up at all, folks. (Applause)

CAROL LOOMIS: I’ll make my customary, very short speech.

The three of us have been getting questions for two months, and there have been a lot of them.

Warren and Charlie have no idea what our questions are going to be, and some of them are very tough. Warren is right that I don’t normally soften them up.

And we’re sorry, we got hundreds of questions, literally, many hundreds, and we’re sorry if we didn’t pick yours, which doesn’t mean it wasn’t a good question. It’s just that the — our ability to ask as many as you’d like — as you would like to get yours in — was limited.

9. Defending Clayton Homes from predatory lending accusations

CAROIL LOOMIS: So, my first question is from a man in Timpson, Texas, who happens to have a familiar name, Frank Gifford, but wants to make it clear that he isn’t the football Frank Gifford, but rather a travel photographer.

And his question is a hard one. He says, “I’ve been a shareholder for 15 years, but I’m now suffering heartburn. Until recently I considered Berkshire an ethical company, benefiting society through” — and here he mentions two Berkshire companies headquartered in his home state — he says, ”— through BNSF and ACME Brick.

“Two points call that opinion into question now: One is the Seattle Times story on predatory practices at our Clayton Homes subsidiary.

“Clayton mainly responded with platitudes to this article and would not answer questions, so I have to assume the facts in the story are correct.

“The other point that I want to mention is our growing partnership with 3G Capital. I sold my Tim Horton stock in disgust before 3G gutted 20 percent of the corporate staff and plunged this well-run company deep into junk territory.

“Other takeovers 3G has made have been still more brutal.

“You and Charlie have made many statements about upholding Berkshire’s reputation, and you have avoided anti-social investments like tobacco and gambling.

“Your efforts years ago to keep Berkshire’s textile mills running show you once aspired to balance capitalism with compassion.

“I cannot make the moral case for practices at either Clayton or 3G, and I wonder how you can do so.”

WARREN BUFFETT: OK. Let’s talk first about the Clayton article because there was some important mistakes in that, but I think it’s first — it’s better to back up even to the situation in mortgage lending that’s taken place, and why Clayton follows a pattern that, actually, is exemplary and rather extraordinary, in the home building and mortgage business.

If you look back at the housing bubble in — well, ending more or less in 2008, one of the great problems, in fact, maybe the greatest cause, was the fact that the mortgage holder became totally divorced from the mortgage originator and from the home builder.

In other words, the home builder built a house and sold it, took his profit, and that was that. It didn’t really make much difference who he sold it to.

And the mortgage originator would originate a mortgage but then package those, securitize them, and often sell them around — even around the world — so people thousands and thousands of miles had no connection with the original transaction.

And the mortgage originator suffered no loss if the loan went bad.

So we had these two parties: the one that connected with the home buyer, and the one that originated the mortgage, and they had no connection with the actual outcome of whether it was a good mortgage or not.

At Clayton, unlike virtually anybody — there’s a few — we offer the — we offer mortgages to all the buyers of our homes. And we have retained roughly 12 billion of mortgages on 300,000 homes.

Now, when a mortgage goes bad, two people lose: the person that owns the house loses, and the person that owns the mortgage loses.

And in our case, we have this identity of interest. We have no interest in selling anybody a house, and having that mortgage default, because it is a net loss to us. It is a net loss to the customer.

And like I say, that’s not true of most home builders. It’s not true of most mortgage originators.

So you — and there’s been much talk, in terms of possible changes in mortgage rules, to try and get the mortgage originator to keep some skin in the game. And they’ve talked about them retaining maybe 3 percent of the mortgage or something like that, just so they would have an interest in, really, what kind of a mortgage they were putting on the books.

Well, we keep — in many cases — we offer to everybody, but we keep — probably in half the cases, we keep 100 percent of the mortgage, so we have exactly the same interest as society has, and as the home buyer has, in not making mortgage loans to people who are going to get in trouble on those loans.

Now, it’s true that manufactured housing hits the lower end of the market, in terms of house values. Of the homes selling for $150,000 — new homes selling for $150,000 or less — 70 percent of them are manufactured houses.

And some of those people — most — many — of those people do not qualify, on a FICO score, to obtain loans that are government guaranteed. Some do, but most don’t.

And the question is: can you lend intelligently to people who have a good chance of making the payments, keeping that house?

And Clayton has been exemplary in doing that. About 3 percent of the mortgages default in a year, you know, and when they do, we lose money and the person who bought the house loses money.

But 97 percent don’t, and most of those people would not be living in the kind of houses that you can see right here at the auditorium, without the financing availabilities that Clayton makes available, and others make available.

And I invite you to go out and look at that house for $69,500. That house will be transported and erected, ready to go — you have to have the land and that — and I’ll get to that in a second — but for 69,500, you have that house with appliances, with air-conditioning, with a couple bedrooms, 1200 square feet. And probably you’ll put another 25,000 or so in the house, but — in terms of the land and preparation there — so maybe it will be $95,000.

But I just — you know, you can make your own judgment as to whether that’s a decent value. And I know most of you are not living in $95,000 homes, but there are an awful lot of people that aspire to do that.

And we help them, with our own money at risk, to move into those homes. And if we make a mistake, it hurts them and it hurts us. And that is a very unusual arrangement in the financial industry.

Now, I read that story, and in it, there was an item in it, which, reading through the story, I just knew wasn’t true. I mean, nobody that knew anything about manufactured housing could have put that up.

I’d like to put that up on the slide, where it says, “Another Clayton executive said in a 2012 affidavit that the average profit margin on Clayton homes sold in Arkansas between 2006 and 2009 was 11,170 — roughly 1/5 of the average sales price of the homes.”

So this fellow is quoting somebody as saying that we’re making a 20 percent profit on home sales.

Well, I knew that that was nonsense, so I asked for the affidavit. And I read the affidavit about three times, and nowhere in that affidavit was it — was this statement made.

Now, what was said was what I’ll show in the next slide. It’s hard for me to see what’s up there, but it should show Item 6, where it says Clayton Manufactured Homes sold 2,201 homes, and Item 7, that four percent of the gross profit from the home sales totaled 983,000.

So if we’ll move to the next slide. I did a little arithmetic and, sure enough, if you take 25 times the commission for — the commission is 4 percent, so you take 25 times — and then you divide by the number of homes, you come up with 11,170.

But, that statement in the affidavit said gross profit, and gross profit is not the same thing as profit. I’m not sure that the fellow that wrote the story understood that.

So I have put on the next page the difference, for example, of a couple other retailers. I put Macy’s and Target.

And Macy’s has a 40 percent gross profit margin, but a pretax margin of 8 1/2 percent, after taxes of 5.4.

Gross profit is what you — if it’s the case of Macy’s, what they pay for a sofa or something, and what they sell it for. But they also have the expenses of paying salespeople, rent, utilities, advertising, all kinds of other things.

So the idea that gross profit and net profit are the same thing is — you know — anybody that understands accounting would never make a mistake like that.

In our particular case, on the next page, our gross margin is what the fellow said in the affidavit, and he used the word “gross,” of 20 percent. But the writer of the story turned that into a profit margin, and our profit margin is actually three percent. So I’d just like to point out the mathematics on that particular subject.

There’s one other item you should see — and, again, I have trouble seeing the — what’s up there — but we have a — in every retail Clayton establishment, we have a lender board which shows exactly what a variety of lenders are willing to do and what their terms are.

And we also have a sheet, which I think will be put up there, and it’s less than a full page, and it sets out the lenders who are available.

And at the very top — I’m just looking to see whether I can find that right here — at the very top of it, it basically says, you know, check out more than one lender, and you can send the application to any of these people. And we have people sign at the bottom, and there’s no small print on it. I can’t see it here, but — it may look like small print — but it’s one page, and multiple lenders are put on that sheet.

Sometimes people borrow — if there’s a credit union in San Antonio that’s very big, the local bank is very big, and we also will lend money to the buyer of the home, if they wish.

If you buy that home that’s out there, we’ll give you a list of four or five lenders, probably including your local bank, and you will probably take the loan that offers you the best terms.

So, I make no apologies whatsoever about Clayton’s lending terms.

I get letters from people complaining about our subsidiaries in various ways. I mean, some people call the office, some people write in. I can say, in the last three years I have not received one call — we’ve got 300,000 loans — I’ve not received one call from any party in connection with a Clayton Home.

Moreover, we are — at Clayton — we are regulated in almost every state — every state in which we have financing, which is practically every state.

And in the last three years, we have had — I think its 91 examinations by the state, 91 examinations.

They come in. They look at our practices. They make sure that they conform with the laws.

And in those 91, we — I think the largest fine we’ve had has been $5,500, and the largest group of refunds we had was about $110,000.

Yeah, there were — and, you know, those were regulated, not only by those states, were regulated by HUD, all kinds of people.

When we can, we try to get people an FHA loan, because that’s the best loan for them to get.

But, as I say, most of our borrowers are below the 620 FICO score. And it’s true that three percent or so will lose their homes in a year. It’s true that 97 percent of those people will have a home where their average principal and interest payment is a little under $600 a month, and that takes care of having a two- and perhaps three-bedroom house, well equipped. I invite you to go through it.

And Clayton has behaved, in my book, extraordinarily well.

The article talked about 30-year mortgages. Over 4 1/2 years ago, I said we’re not going to have 30-year mortgages. So we don’t have them, except for the FHA-guaranteed ones, which, of course, have a very low rate.

So I have no — I’m proud of the Clayton management. I’m proud of the fact they put, this year, maybe 30,000 people in homes at a very low cost, a very good home. And a very high percentage of those people are going to have those loans paid off, probably in 20 years, and have a home that has cost them — has been a real bargain, basically.

I’ll get to the other question — the 3G question, too — in just a second, but we’ll give Charlie a chance to say what he’d like to.

CHARLIE MUNGER: I don’t know a lot about the mortgage practices at Clayton, but I certainly know that we’ve sold an enormous number of houses and we have a big share of the total market in manufactured.

WARREN BUFFETT: About 50 percent.

CHARLIE MUNGER: Fifty percent.

And it’s a very constructive thing. Personally, I’ve always wondered why manufactured houses don’t have a bigger share of the market. It’s such an efficient way of creating quite usable houses.

Part of the reason is that the track builders, under capitalism, got so efficient. And isn’t Clayton now doing some track building itself?

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: I think so, yes.

So, Clayton is a very productive part of the economy, but we can’t make lending to poor people who buy houses 100 percent successful for everybody. We wouldn’t be running the business right if the foreclosure rate was zero. Too many people would deserve credit that wouldn’t get it.

WARREN BUFFETT: Yeah. The big causes of default are the loss of a job, death, and divorce. And, you know, that happens with high-priced houses as well, but it happens more often with people that are living closer to the edge.

But I don’t think that’s a reason to deny them a house, and particularly when so many — it turns out so well for so many.

The 2008 recession was — and ’9 — was very interesting, because all kinds of securitized deals, involving houses costing hundreds and hundreds of thousands of dollars, the default rate on those was many, many, many times what happened in our own case.

And similarly with delinquency rates. Our delinquency rates are running 3 percent, currently.

And, you know, it — the people want to live in those houses, and I think they deserve the right to.

Incidentally, we had a — a few years ago we had a couple houses here, we called them the “Warren” and the “Charlie.”

The “Charlie” sold first, and it sold to one of the cameramen who was in the credits on the movie you just saw. And you can check with Matt, and he’s — Matt Mason — he is very, very happy with that house he bought four or five years ago.

10. Defending 3G from accusations of excessive job cuts

WARREN BUFFETT: The second question was about 3G, and I don’t think you can ever find a statement that Charlie and I have ever made, in terms of Berkshire’s companies or anybody else’s, where we said that there should be more people working than are needed in a company.

And the 3G people have been successful in building marvelous businesses. And it is true that they have entered into some purchases where there were considerably more people running the business than needed. And the interesting thing is that after they reduced the headcount to the number needed, the companies have done extremely well.

I mean, you’ve seen Burger King outgrow its main competitor by a significant margin. You’ve seen Tim Horton have some very good figures in the first quarter.

And I don’t know of any company that has a policy that says we’re going to have a lot more people than we need. But a good many companies end up in that position, and if 3G buys into one, they quite promptly — and treat people well in terms of the severance — but they get it down to what they need.

And I hope our Berkshire companies are not being run with more people than they need, either. They usually aren’t when we buy them, and, you know, we look for those companies that are well managed.

3G is — will — if they find out that 100 people are doing what 50 people can do, they’ll get it to where 50 people are doing it. And I think that actually makes sense throughout American business. Charlie?

CHARLIE MUNGER: Well, the alternate to the system of having your company right-sized, the right number of people, is what eventually happened in Russia. And there, everybody had a job. And the way it all worked out was some workers said, “Well, they pretend to pay us and we pretend to work,” and the whole damn economy didn’t work. Of course, we want the right number of people in the jobs.

WARREN BUFFETT: It’s interesting. In the railroad business — in the railroad business after World War II, in 1947 or thereabouts — I think there were about 1.6 million people in the railroad business, and it was a lousy business. And capital was short for any kind of improvements.

And now there are less than 200,000. So they’ve gone from a million-six to less than 200,000, carrying more freight, more distance, and doing it in far safer conditions. Safety has improved dramatically in the railroad industry.

And if somebody thinks it would be better to be running the railroads with a million-six, you know, people doing it, you would have a terrible railroad system. You wouldn’t have anything like you have today.

Efficiency is required over time in capitalism, and I really tip my hat to what the 3G people have done.

11. Will Van Tuyl move away from negotiations in auto sales?

WARREN BUFFETT: OK. Jonny Brandt?

JONATHAN BRANDT: Thank you, Warren, for allowing me — inviting me — to be part of this 50th anniversary celebration. I have a question about Van Tuyl.

Van Tuyl is a fabulously productive auto dealer that has, since its founding, used a traditional negotiated model with a particular successful emphasis on profitable add-on insurance and financial products.

Meanwhile, at least some other auto dealers, CarMax and Don Flow among them, have adopted, or are moving towards, models which emphasize fixed prices, transparency, and low sales pressure.

Given the evolving regulatory environment and changing consumer preferences, will Van Tuyl eventually need to adapt to this new mode of selling, or do you feel the traditional method of selling cars will be viable for decades into the future?

If the market requires a new way of selling, how hard is it for a sales culture that has been successful for decades doing business one way to change to another?

WARREN BUFFETT: Yeah. If a change is required, it will be made. And I don’t know the answers to which way it’s going to go on that. The — it’s true that people are — have been — and that’s not new — that’s been experimented with before — where people have tried a one-price system and no negotiating, no haggling and everything.

And I think a very large number of people would like to see that system, except when they actually get into it, it seems to break down for some reason.

It — there’s negotiation going on in a lot of businesses that — and it always amazes me. People say they don’t like it, but it’s what ends up happening.

And so Van Tuyl will adapt to what the customer wants. We’ll see how some of these experiments go. And I don’t think there would be any problem at all if the world goes in that direction and Van Tuyl going to it.

But I wouldn’t be surprised if five or ten years from now the system is pretty much the same. I wouldn’t be totally surprised if it changes, either, but I can’t predict the outcome.

I can predict that Van Tuyl, and the subsequent auto dealerships we buy, I can predict that they will be a very important part of Berkshire and I think will be quite profitable in relation to the capital we employ in the business.

Charlie?

CHARLIE MUNGER: Well, I very much like that acquisition, partly because I think we can do a lot more like it. I —

WARREN BUFFETT: Do you think you’ll be negotiating on cars ten years from now, when you buy a new one?

CHARLIE MUNGER: It’s been amazingly resistant to change for my whole lifetime.

WARREN BUFFETT: Yeah. Happens in the jewelry business, too.

I mean, there’s certain items — well, it happens in real estate. I mean, let’s just say that some real estate firm said we’re only going to take listings where you can’t negotiate.

Do you think? — I’m not sure how it would do, in terms of obtaining both listings and customers.

People seem to want to negotiate. If they hear a house is priced at 200,000, they’re not going — unless it’s some unusual situation — they’re not going to step right up and pay the 200. They’re going to bid.

When people are dealing with a big ticket item — a lot of people — their natural tendency is to negotiate and they particularly will do so if they think that’s built into the system.

So I’m not sure how it changes, but we’ll do fine, whatever direction it goes.

12. Company characteristics for predictable earnings

WARREN BUFFETT: OK. Now we go to the shareholder at Station 1.

AUDIENCE MEMBER: Hi, Warren. Hi, Charlie. Great to be here. This is my first time here, incredibly lucky to have my question answered.

So my question is this: can you name at least five characteristics of a company that gives you confidence to predict its earnings ten years out in the future? And can you also use IBM as a case study, how we check all those boxes?

WARREN BUFFETT: Charlie, what are your five? (Laughter)

CHARLIE MUNGER: We don’t have a one-size-fits-all system for buying businesses. They’re all different, every industry is different, and we also keep learning. So what we did ten years ago, we hopefully are doing better now. But we can’t give you a formula that will help you.

WARREN BUFFETT: Now, if you’re looking at the BNSF railroad as we were in 2009 or if you’re looking at Van Tuyl in 2014, there are a lot of things that go through our minds. And most of the things that go through our minds are things that will stop us from going further.

I mean, there’s — the filters are there. And there are a lot of things that, if we see it in a business, including, maybe, who we’re dealing with, will stop us from going on to the next layer. But it’s very different in different businesses.

We are looking for things where we do think we’ve got some reasonable fix on how it’s going to look in five or ten years, and that does eliminate a great many businesses. But it’s not the same — it’s not the same five questions at all.

Certainly, when we’re buying a business where we’re going to have somebody that’s selling it to us continue to run it for us, you know, a very big question is, you know, do we really want to be in partnership with this person and count on them to behave in the future when they don’t own the business, as they behaved in the past when they do own the business. And that stops a fair number of deals.

But I can’t give you five — we don’t have a list of five. Or if we do, Charlie has kept it from me. (Laughter)

WARREN BUFFETT: You want anything more?

CHARLIE MUNGER: No.

13. Munger supports IBM stake purchase

WARREN BUFFETT: Becky?

BECKY QUICK: This question is for Charlie. It comes from John Baylor (PH).

He says, “Charlie, you broke Warren of his cigar butt buying habits. With the significant innovation that is occurring in technology, is IBM similar to those textile mills in the 1960s, and did you try to talk Warren out of buying IBM?”

CHARLIE MUNGER: The answer is no.

I think IBM is a very interesting company. It totally dominated Hollerith machines, you know, the punch card computing. And then when they invented electronic computing, it dominated that for a while.

It’s very rare that when a technological change comes along that people adapt as successfully as IBM did that time.

Well, now they have the personal computer, and that’s been a mixed bag. And — but I think IBM is a very credible company.

We own a lot of companies that have temporary reverses, or once were mightier in some ways than they are now.

IBM is still an enormous enterprise, and I think it’s still a very admirable enterprise, and I think we bought it at a reasonable price.

WARREN BUFFETT: When we bought it, it was a two-to-nothing vote. (Laughs)

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: OK. (Laughter)

14. Why we don’t “talk up” our investments

WARREN BUFFETT: Incidentally, there’s one thing I always find interesting.

We get asked questions about investments we own, and people think we want to talk them up, you know, or —

We have no interest in encouraging other people to buy what — the investments we own.

I mean, we are better off, because either we or the company is likely to be buying stock in the future. Why would we want the stock to go up if we’re going to be a buyer next year, and the year after, and the year after that?

But the whole mentality of Wall Street is that if you buy something — even if you’re going to buy more of it later on, or if the company is going to buy its own stock in — the people seem to think that they’re better off if it goes up the next day, or the next week, or the next month, and that’s why they talk about “talking your book.”

If we talked our book, from our standpoint, we would say pessimistic things about all four of the biggest holdings we have, because all four of them are repurchasing their shares, and, obviously, the cheaper they repurchase their shares, the better off we are. But people don’t seem to get that point.

Do you have any idea why, Charlie?

CHARLIE MUNGER: Warren, if people weren’t so often wrong, we wouldn’t be so rich. (Laughter and applause)

WARREN BUFFETT: He’s finally explained it to me. OK. (Laughter)

15. “Three extraordinary pieces of luck” with insurance

WARREN BUFFETT: Gary?

GARY RANSOM: Thank you.

In his letter, Charlie talked about Berkshire’s insurance success, quote, “being so astoundingly large that I believe that Buffett would now fail to recreate it if he returned to a small base while retaining his smarts and regaining his youth.”

Do you agree that you could not repeat that success today? And if so, what do you think are the conditions in the insurance industry today that would inhibit a repeat of that performance?

WARREN BUFFETT: Well, I had many, many, many pieces of luck, but I had three extraordinary pieces of luck, in terms of the insurance business.

One was, when I was 20 years old, having a fellow on a Saturday, a fellow named Lorimer Davidson, be willing to spend four hours with some 20-year-old kid who he never heard of before, explain the insurance business to him.

So I received an education at age 20 that was — I couldn’t have gotten at any business school in the United States. And that was just pure luck. I mean, I just happened to go to Washington. I had no idea I would run into him. I had no idea whether he would talk to me, and he spent four hours with me. So just chalk that one up, the chance of that happening again.

In 1967, I got lucky again when Jack Ringwalt, who, for about five minutes every year wanted to sell his company, because he would get mad about something, some claim would come in that he didn’t like or something of the sort. And I told my friend Charlie Heider, I said, “Next time Jack is in the mood, be sure to get him to my office.” And Charlie got him up there one day, and we bought National Indemnity.

We couldn’t have done that — we not only couldn’t have done it a day later, we couldn’t have done it an hour later. You know, that — that was lucky.

And then I really got lucky in the mid ’80s when, on a Saturday, some guy came in the office and he said, “I’ve never worked in the insurance business, but maybe I can do you some good.” And that was Ajit Jain. And, you know, how lucky can you get?

So, if you ask me whether we can pull off a trifecta like that again in the future, I’d say the odds are very much against it.

But the whole — the whole thing in business is being open to ideas as they come along, and insurance happened to be something that I could understand. I mean, that was in my sweet spot.

If Lorimer Davidson had talked to me about some other business, you know, it wouldn’t have done any good. But it just so happened he hit a chord with me on that in explaining it. I could understand what he was talking about. And I could understand what National Indemnity was when Jack had it for sale.

And that’s — there’s an awful lot of accident in life, but if you keep yourself open to having good accidents happen, and kind of get past the bad accidents, you know, some good things will happen. Might not happen in insurance — you know, it can happen in some other field — probably would happen in some other field — if you were to start in today.

So, no, we could not have — you couldn’t expect to have three lucky events like that happen, and there were many more along the way.

But, you know, we — I think if we were starting over again, we’d find something else to do. What about it, Charlie?

CHARLIE MUNGER: Yeah. I don’t think we would have that kind of success.

You know, mostly we bought wonderful businesses and nourished them. But the reinsurance division was just created out of whole cloth right here in Omaha, and it’s a huge business. Insurance has been different for us.

16. Berkshire’s culture “runs deep”

WARREN BUFFETT: OK. Station 2? And if you’ll say where you’re from too, please?

AUDIENCE MEMBER: Dear Warren, dear Charlie. I’m Lawrence from Germany, and in my home country, you two are regarded as role models for integrity. And at Berkshire, its culture is its most important competitive edge.

Hence, my question: how can we, as outside investors, judge the state of Berkshire’s culture long after you depart from the company?

WARREN BUFFETT: Well, I think it’s fair that you do, you know, come with a questioning mind to the culture, post-me and Charlie, but I think you’re going to be very — I don’t think you should be surprised, but I think you will be very pleased with the outcome.

The culture — I think Berkshire’s culture runs as deep as any large company could be in the world.

It’s interesting you’re from Germany, because just three or four days ago, we closed on a transaction with a woman named Mrs. Louis, in Germany.

And she and her husband had built a business [Detlev Louis Motorrad-Vertriebs GmbH]. Over 35 years, they’d spent developing this business of retail shops, dealing with motorcycle owners, and lovingly, had built this business.

Her husband died a couple years ago. And Mrs. Louis, in Germany — it came about in sort of a roundabout way — but she wanted to sell to Berkshire Hathaway. And, you know, that would not have been the case 30 or 40 years ago.

So it does — it’s a vital part of Berkshire to have a clearly defined, deeply embedded culture that pervades the parent company, the subsidiary companies. It’s even reflected in our shareholders.

And, you know, when you have 97 percent of the shareholders vote and say we don’t want a dividend, I don’t think there’s another company like that in the world.

So we have a — our directors sign on for it and, there again, we behave consistently. Instead of having a bunch of directors who are — love to be a director because they’d like to get $2- or $300,000 a year for showing up four times a year, we have directors who look at it as a great opportunity for stewardship, and who want their ownership, and have their ownership, represented by buying stock in the market, exactly like you do.

So we — it’s — we try to make clear and define that culture in every way possible, and it’s gotten reinforced over the years to an extreme degree. People who join us believe in it; people who shun us don’t believe in it, so we — it’s self-reinforcing.

And I think it’s a virtual certainty to continue and to become even stronger, because once Charlie and I aren’t around, it will be so clear that it’s not the force of personality, but it’s the — it’s institutionalized that, you know, nobody will doubt that it will really continue for decades and decades and decades to come.

Charlie?

CHARLIE MUNGER: Well, as I said in the annual report, I think Berkshire is going to do fine after we’re gone. In fact, it will do a lot better, in dollars. But, percentage-wise, it will never gain at the rate we did in the early years, and that’s all right. There’s worse tragedies in life than having Berkshire’s assets and have the growth rates slow a little.

WARREN BUFFETT: Name one. (Laughter)

CHARLIE MUNGER: Warren and I have one not very far ahead.

WARREN BUFFETT: OK. Yeah, yeah. (Laughter)

OK. Andrew?

I should say culture is everything at Berkshire. And if you run into a terrible culture, it’s — you know, the Salomon thing was up there on the screen, and it would be hard to turn Salomon into a Berkshire. I don’t think we could have done it, Charlie.

CHARLIE MUNGER: I don’t think anybody’s ever done it on Wall Street.

WARREN BUFFETT: No. It’s just — it’s a different world.

And that doesn’t mean that Berkshire is a monastery, by any means, but it does mean that — I can guarantee you that Charlie and I, and a great, great many of our managers, are more concerned — and Carrie Sova who put this meeting together and everything — they are more concerned about getting a good job done for Berkshire than what they get out of it themselves.

And, you know, it’s great to work around people like that.

17. Health concerns about sugar won’t stop Coca-Cola’s growth

WARREN BUFFETT: Andrew?

ANDREW ROSS SORKIN: OK, Warren. This question comes from Simone Wallace (PH) in New York, New York.

And she writes, “Over the last 50 years, we Berkshire shareholders have, effectively, been long sugar consumption, through directly owned companies, such as See’s Candies, Dairy Queen, in funding Heinz, and publically-traded investments, such as Coca-Cola today.

“Yet, from improvements in scientific research, we as a society have become increasingly attuned to the true costs of greater sugar consumption, in the form of rising health-care costs.

“We are seeing this awareness of sugar’s impact in changing consumer behavior. Carbonated soft drink volumes are declining, and consumer packaged goods companies, focused on the center aisles of supermarkets, are struggling with organic growth.

“If we have reached — have we reached an inflection point in human behavior in how consumers view sugar consumption? And do you think Coca-Cola’s moat, and potentially that of Heinz’s or Kraft’s, is narrowing? And if not, what news would it take you to be convinced that it is?”

WARREN BUFFETT: Well, I think it’s an enormously wide moat, but I think it’s also true that the trends you described are happening.

But, you know, there will be 1.9 billion eight-ounce servings of Coca-Cola products, not Coca-Cola, but Coca-Cola products, consumed in the world today.

I don’t think you’re going to see anything revolutionary, and I think you will see all food and beverage companies adjust to the expressed preferences of the consumers as they go along.

No company ever does well ignoring its consumers.

But there will be — I would predict — 20 years from now there will be more people — there will be more Coca-Cola cases consumed — than there are now, by some margin.

Back in the late 1930s, Fortune ran an article saying that the growth of Coca-Cola was all over.

And when we bought our Coca-Cola stock in 1988, you know, people were not that enthused about growth possibilities for the product.

I sit here as somebody who, for the — in the last 30 years, one-quarter of all the calories I’ve consumed come from Coca-Cola. (Laughter)

And that is not an exaggeration. I am one-quarter Coca-Cola. I’m not sure which quarter.

But — and, you know, if you really — I don’t think there is this choice. I think there’s a lot to be said about being happy with what you’re doing.

If I’d been eating broccoli and Brussels sprouts, and all that, all my life, I don’t think I’d live as long. You know, I — (Laughter)

Every meal, I would approach, thinking, you know, it’s like going to jail or something. (Laughter)

No. I think — I think — Charlie? (Laughter)

Charlie’s 91, and his habits aren’t that different than mine. They’re slightly better, but —

CHARLIE MUNGER: There’s no question about it. The way I look at it is, sugar is an enormously helpful substance. It prevents premature softening of the arteries. (Laughter)

And the way I look at it, is that, if I die a little sooner that will just be avoiding a few months of drooling in a nursing home. (Laughter)

WARREN BUFFETT: Charlie and I have enjoyed every meal we ever had, virtually, except when I was eating at my grandfather’s and he made me eat those damn green vegetables.

There, obviously, are some shifts in preferences, although it’s remarkable how durable items are in this field.

We — Berkshire Hathaway — I believe, was the largest shareholder of General Foods from about 1981 or thereabouts, to about 1984 when it was bought by Philip Morris.

And, you know, that’s 30-plus years ago, and those same — those same brands — you know, they went through Philip Morris, they got spun out as Kraft, they broke Kraft into two pieces. But now, we’re going to own those brands, and they’re terrific brands.

Heinz — Heinz goes back to 1869. The ketchup came out a little later. They went bankrupt, actually, when they were counting on the horseradish or whatever it was.

But the ketchup came out in the 1870s. Coca-Cola dates to 1886. It’s a pretty good bet that an awful lot of people are going to like the same thing.

And when I compare drinking Coca-Cola, you know, to something that somebody would sell me at Whole Foods —(Laughter)

I don’t know — I don’t see smiles on the faces of people at Whole Foods. (Laughter and applause)

So I like the brands we’re buying, Andrew.

18. Why Buffett likes local auto dealerships

WARREN BUFFETT: OK. Gregg Warren?

GREGGORY WARREN: Thank you, Warren. I just wanted to circle back and add on to Jonathan’s question on Van Tuyl Group.

What is it that attracted you most to the deal? Potential for consolidation in a highly fragmented industry, which would allow you to put some of your excess capital to work, or the unique positioning in the auto chain of the auto dealer sector, which has its hands not only in auto sales but financing insurance and parts and services?

I know that Charlie just said that he’d like to do more deals like it, but where do you feel the greatest return will come from longer term? Rolling up auto dealerships or tapping into the advantages that are inherent in the full service model?

WARREN BUFFETT: Yeah. There are not any huge advantages of scale, at least that I’m aware of, in owning lots of dealerships. But running dealerships well is a very good business. It’s a local business.

So I don’t see that having some — there’s 17,000 dealers in the country, and if you ask the people here in Omaha to name a bunch of dealers, they’d come up with a bunch of local names.

And I don’t think that you widen profit margins, particularly, by having a thousand dealers versus having a hundred or even having one very good dealer.

So we will be buying, I hope, more dealerships, but it will be based on local considerations.

We don’t see the finance business, in dealers — we don’t bring anything to that party.

[CEO] John Stumpf is here from Wells Fargo. I think they’re the biggest auto finance company in the United States. And they have a cost of funds advantage over Berkshire.

Berkshire is able to borrow money at a low price, but I forget whether John’s liabilities cost him something like 12 basis points or something like that last quarter. And we can’t come up with money as cheap as the banks can, and they’re the natural lenders for loans, so we’re not going to be in the finance business.

We will keep looking for dealerships, maybe groups of dealers. It doesn’t give us a buying advantage from a manufacturer. And we will hope that we run those local operations very well and that they’re regarded by the people who buy cars as a local business, not some part of some giant operation.

So, I think you’ll see us buying more, but I don’t think you’ll see us widening out margins from what existed before, except in the cases where we can run a local dealer better.

Charlie?

CHARLIE MUNGER: Yes. And Van Tuyl has a system of meritocracy where the right people get the power and get some ownership.

So on the — it reminds me a lot of the Kiewit Company, an Omaha company and whose headquarters Berkshire resides as a tenant. And the Van Tuyl and Kiewit are kissing cousins. Those are very successful cultures, and I think they’ve got a very good thing going for them. The right people are prospering in Van Tuyl.

19. Building culture and values at Berkshire

WARREN BUFFETT: OK. Station 9? And if you’ll identify where you’re from, please.

Oh, I’m sorry. Station 3. You’re number 9. I apologize.

AUDIENCE MEMBER: Apology accepted. (Laughter)

WARREN BUFFETT: We’d have cut off your mic if you hadn’t. (Laughter)

AUDIENCE MEMBER: Fair enough.

My name is Stuart Kaye, and I’m from Stamford, Connecticut.

And I wanted to follow up on the questions that have been asked about culture and stewardship at Berkshire Hathaway, because I’m currently in year five of helping build a firm called Matarin Capital Management, and we discuss values and culture quite a bit.

And so I’d like some tips from you about what characteristics you thought about 45 years ago when you were building the culture and values at Berkshire Hathaway.

WARREN BUFFETT: Yeah, well I think culture has to come from the top, it has to be consistent, it has to be part of written communications, it has to be — you know, has to be lived, and it has to be rewarded when followed, and punished when not.

And then it takes a very, very long time to really become solid.

And obviously, it’s easier — much easier — to do it if you inherit a culture you like, and it’s easier in smaller firms, I think.

I can think of a lot of companies — very big companies — in this country, and I don’t think if Charlie and I were around them for ten years we’d be able to accomplish much of anything.

So it — you know, it is a grain of sand type of thing. And people — just like your child, you know, sees what you do rather than what you say, it’s the same thing in a business, that people see how those above them behave and they move in that direction.

They don’t all move that way. We’ve got 340,000 people now working for Berkshire, and I will guarantee you that there’s, you know, some number —a dozen, maybe 50, maybe 100 —that are doing something today that they shouldn’t be doing.

And we — what you have to do is when you find out about it, you have to do something about it.

I didn’t like, for example, making 30-year mortgages at Clayton five years ago. And I said, “We’re not going to make 30-year mortgages, you know, unless they’re government guaranteed.”

And when we bought Kirby, there was some sales practices we didn’t like, and we particularly didn’t like them with older people. So we put in a golden age policy where, if you’re over 65 and you bought a Kirby and for any reason you didn’t like it, any time up to a year, you could send it and get all of your money back. And I encouraged people to write me if they had a problem on anything like that.

So it takes a lot of time, and you’ll — you know, at GEICO we’re going to — you know, we’re going to settle millions and millions and millions of claims. And I will guarantee you that when two people are in an auto accident, they don’t agree 100 percent of the time on whose fault it was, so they may go away and be unhappy for a time.

But we work all the time at trying to behave with other people as if our positions were reversed. That’s what Charlie’s always advised in all our activities, and we’ve tried to follow it. And we’re certainly far from perfect at it, but if you keep working at it, it does get results.

Charlie?

CHARLIE MUNGER: Yeah. I think the one thing that we did that’s worked best of all is we were always dissatisfied with what we already knew and we always wanted to know more. And Berkshire, if Warren and I had stayed frozen in time, particularly Warren, it would have been a —

WARREN BUFFETT: I’d like to do it, understand.

CHARLIE MUNGER: It would have been a terrible place. It’s what we kept learning that made it work, and I don’t think that will ever stop.

20. Any company with an economist has “one employee too many”

WARREN BUFFETT: Carol?

CAROL LOOMIS: This question comes from Mona Dyan (PH). And it concerns two indicators, Warren, that you have discussed in the past about the general level of the stock market.

The first one is the percentage of total market cap relative to the U.S. GNP, which you have said is probably the best single measure of where valuations stand at any given moment.

This indicator is at about 125 percent. That is the ratio of total market cap to U.S. GNP, and that’s about what it was when Warren talked about this back in 1999 just before the — shortly before — the bubble broke.

The second indicator, which you mentioned in a famous 1999 speech that subsequently became an article in Fortune, is the corporate profits — is corporate profits — as percent of GNP.

You had said at the time that that number ranged between 4 percent to 6 1/2 percent over a long period of time, which I believe was 1951 to 1999.

Well, as of Friday, it is about 10 1/2 percent, according to the St. Louis Federal Reserve site. That is way above the range you had mentioned.

Are the current levels of either one, or both, of these indicators a matter of concern for the general investing public?

WARREN BUFFETT: Yeah. Well, the — it might be — the second figure, which is the profits as a percentage of GDP, might be a concern for other segments of society because what it indicates is that American business has done wonderfully well in recent years.

And I know it says how — what a terrible disadvantage it has, because of U.S. tax rates and a host of other things, you know, the facts are that American business has prospered incredibly.

And the first comparison is very much affected by the fact that we live in an interest rate environment, which Charlie and I probably would have thought was almost impossible, not too many years ago.

And, obviously, profits are worth a whole lot more if the government bond yield is 1 percent, than they’re worth if the government bond yield is 5 percent.

So it gets back — and, you know, Charlie in that movie talked about alternatives and opportunity cost. And for many people, the opportunity cost is owning a lot of bonds, which pay practically nothing, or owning stocks, which are selling at fairly high prices historically, but they weren’t selling at those historic prices with interest rates like this.

So I would not — I look at those numbers, but I also look at them in the context of the fact that we’re living in a world that has incredibly low interest rates, and the question is how long those are going to prevail. Is it going to be something like Japan that goes on decade after decade, or will we be back to what we thought was normal interest rates?

If we get back to what are normal interest rates, stocks at these prices will look pretty high. If we continue with these kinds of interest rates, stocks will look very cheap. And now I’ve given you the answer and you can take your pick. (Laughs)

Charlie?

CHARLIE MUNGER: Well, since we failed to predict what happened, and what exists now, why would anybody ask us what our prediction is in the future? (Laughter)

WARREN BUFFETT: Yeah, yeah. We — incidentally, the one thing I can assure you, Charlie and I, to my knowledge, or my memory, I can’t recall ever us making an acquisition or turning down one based on macro factors that — you know, and we talk about deals when they come along, but whether it was See’s Candy, or whatever it might have been, the Burlington Northern we bought at a terrible time, in general economic conditions.

But we don’t — it just doesn’t come up, because we don’t — we know we don’t know what the next 12 months, 24 months, 30 — we know we don’t know what that’s going to look like. But it doesn’t really make any difference if we’re buying a business to hold for a hundred years.

What we have to do is figure out what’s likely to be the average profitability of the business over time and how strong its competitive mode is and that sort of thing.

So, people have trouble believing that. They think we talk about it. We think any company that has an economist, you know, certainly, has one employee too many. (Laughter)

Charlie? Can you think of anything rude to say that I haven’t said? (Laughter)

CHARLIE MUNGER: Well, it would be hard to top that one. (Laughter)

WARREN BUFFETT: I know. OK. (Laughter)

21. Effect on BNSF of new crude-by-rail safety rules

WARREN BUFFETT: OK. Jonathan?

JONATHAN BRANDT: There’s been an awful lot written about what should be done to improve the safety of the crude-by-rail infrastructure. Both this week and last month, federal regulators introduced new standards. These new standards include thicker tanks, better fire protection, electronically controlled pneumatic brakes, and speed limits in more populous areas to reduce the chance of derailments near where people live.

The railroad association has complained that the brakes are too expensive, while others have complained about what they view as an overly-long timetable to switch out the old tank cars.

Given the tank car industry’s limits on manufacturing and retrofitting capacity, and the impact on overall rail network velocity from speed limits, do you think the new rules strike the right balance between efficiency and safety?

For Berkshire, what impact will these new rules have on the operations of Marmon’s Union Tank Car subsidiary and on the BNSF Railroad?

Can you also update us on the BNSF initiative to purchase up to 5,000 of its own oil tankers — oil tank cars — which is a departure from historic industry practices, and what drove that decision?

WARREN BUFFETT: Yeah. Well, you’ve asked all the questions I’ll be asking.

But I think those rules just came out, what, two days ago now? Yeah. And they’re 300 pages. And little as I have to do with this meeting and everything, I have not read those, although I have talked very briefly to Matt Rose and also Frank Ptak who runs our — the company that manufactures and leases tank cars.

You know, our interest — actually, the interest of our railroad and our tank car manufacturing and leasing operation may diverge in various ways.

Clearly, we’ve got an interest — the country has an interest — in developing safer cars, and we found that the — some cars we thought were safe have turned out to be less safe than we thought going in.

The most dangerous kinds of thing we carry, of course, are — as a common carrier, we have to carry chlorine, we have to carry ammonia, and we’re required to carry that. We’d rather not carry it.

There are dangerous products that have to get transported in the country, and they’re — it’s more logical to transport them by rail than either truck or pipeline, and some of those we’d rather not carry but we do carry.

I would say that the — probably everybody will be somewhat unhappy with the rules, but the — you know, it’s up to — it is up to Washington, and the government, to devise the rules under which something that is potentially dangerous is transported.

And transporting by pipeline has its problems. Transporting by rail has its problems.

And railroads have gotten dramatically safer over the years. Our safety figures — and Burlington Northern leads the industry in safety — but the safety figures get better and better year after year.

And — but you are — but you’re going to have derailments, and you better have very safe cars carrying that, and nothing will be perfect.

Charlie?

CHARLIE MUNGER: Yeah. Well, big companies and successful companies, like Burlington Northern and Exxon and Chevron and so on, have a lot of engineers and they have long histories of trying to be way safer than average and knowing a lot about how to do it. And none of that is going to change.

You’d be out of your mind to own these big companies and not run them with big attention to safety. And we’re not out of our minds and neither are the people who run Burlington Northern. The safety is going to be improved continuously, and should be.

WARREN BUFFETT: Yeah. And it has been consistently, but —

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: But there are new problems. For one thing, the Bakken crude has been proven to be quite a bit more volatile than most of the crude that is —

CHARLIE MUNGER: It’s not really crude. It’s condensate. I mean, it’s almost misnamed, to call it crude. It is more volatile.

WARREN BUFFETT: Yeah.

I can tell you — and I may write about this next year in the report, though — that Burlington Northern has the best safety record among the big railroads. And Berkshire Hathaway Energy, it’s extraordinary, their safety record, in terms of utilities. And every new utility we purchase at Berkshire Hathaway Energy, we’ve brought — the safety statistics, they’ve gotten far better after Greg Abel has taken over.

CHARLIE MUNGER: After they bought the Omaha pipeline, which had been mismanaged and safety had been improperly ignored, we watched those people, the Berkshire employees, just work day and night improving the safety. They didn’t want more pipeline explosions.

WARREN BUFFETT: Yeah. We went from last out of 40-some — I think it was — to either second or first. And if we were second, it was because our other pipeline was first. (Laughter)

22. “Lucky” to have avoided business school

WARREN BUFFETT: OK. Station 4?

AUDIENCE MEMBER: Hello, Mr. Munger and Mr. Buffett. Nirav Patel from Haverhill, Massachusetts.

What advice would you give to someone who’s trying to network with influential people but doesn’t have access to the alumni network of a top business school?

CHARLIE MUNGER: Let me take that one. I think you should do the best you can — (Laughter)

— playing the hand you’ve got.

WARREN BUFFETT: Charlie is very Old Testament on this. (Laughter)

He didn’t get much past Genesis. (Laughter)

Was his question that he didn’t have a lot of associations because of —?

CHARLIE MUNGER: Well, he’d like to have you help him —

WARREN BUFFETT: — tap into —

CHARLIE MUNGER: — tap — do well without business school training. I never had any business school training, why should you have any? (Laughter)

WARREN BUFFETT: And actually, I would say the business school training, particularly in investments, was a handicap about 20 years ago when they were preaching efficient market theory because essentially they told you it didn’t do any good to try and figure out what a company was worth because the market had a price perfectly already. Imagine paying, you know, 30 or $40,000 a year to hear that. (Laughter)

CHARLIE MUNGER: You were very lucky to avoid a lot that you’ve avoided. (Laughter)

WARREN BUFFETT: How do you feel about your law school training, Charlie, while we’re on it? (Laughter)

CHARLIE MUNGER: Well I have a son-in-law who recently explained how modern profit-obsessed law school — law firms — work. He said it’s like a pie eating contest, and if you win, you get to eat a lot more pie. (Laughter)

23. Railroad accidents, insurance, and BNSF

WARREN BUFFETT: OK, Becky. You’re on.

BECKY QUICK: This question is a follow-up to the one that Jonathan Brandt just asked. It’s an appropriate follow-up for that, though.

It comes from Mark Blakley in Tulsa, Oklahoma, who says that one risk to Berkshire and BNSF appears to be a large railroad accident.

“It appears many recent accidents have occurred in rural areas. However, how would a worst-case scenario, perhaps one in a more urban area or a BP-type accident, impact BNSF and Berkshire Hathaway? And is the company insured or protected against such losses?

WARREN BUFFETT: Our insurance — reinsurance — unit actually went to the four major railroads offering very high limits. I think we — this is from memory, I could be off on this somewhat, but I think we offered something like $5 or $6 billion, excess — or maybe a billion and-a-half or something like that that the railroad retained.

So we — there’s no question about it. If you had the exact wrong circumstances, you know, a train with a lot of ammonia or chlorine or something, you know, right in some terrible urban area, the possibility always exists that that can happen.

It can happen — you know, you can have plane crashes. There are things that are very small probabilities.

But if we run trains millions and millions of miles, year after year, something will happen just like, you know, they happen in every other possible accident way.

So you minimize it. You obviously — you run trains slower in urban areas. They’ve already instituted that with crude. I think they’ve brought it down to 35 miles an hour in towns of 100,000. That’s the maximum.

So you’re always working to be safer; you’ll never be perfectly safe.

We do not — we have some insurance at Burlington Northern, but we don’t need insurance at Berkshire. You know, we’ve got the capability to take any loss that comes along. So we actually would be more likely to be offering that insurance, and we did offer that insurance, and the railroad industry didn’t like our rates, which is understandable, and so they haven’t bought it. But that doesn’t mean they won’t at some time in the future.

I should add one thing that I forgot to say to Jonathan. The — I don’t think we will be buying the 5,000 railcars. I think — I don’t know that for sure, but, you know, there’s going to be a lot going on in terms of retrofitting.

Our Marmon operation has actually taken on a new facility that will be working very hard — once we know what the retrofit requires — we will be, I’m sure, working three shifts on retrofitting cars, probably our own, probably some other people’s. We’ll be building new cars. The industry has been waiting to see what the requirements would be before moving ahead.

The first quarter of 2015, there were practically no tank cars ordered. There’s a backlog, but there’s — no tank cars were ordered, because we need to see what the regulations are.

But we’ll be very active in retrofitting and in manufacturing new cars, but I don’t think we’ll be — historically the railroads have never really owned tank cars. That goes back to the Rockefeller days.

And I think the present method of having car lessors, such as the one we own, I think will continue in the future rather than having the railroads own them.

24. Why move assets around insurance subsidiaries?

WARREN BUFFETT: OK. Gary?

GARY RANSOM: I have a question on intercompany transactions within the insurance companies.

In the last couple of years, you’ve had a number of them, including 50 percent of the business ceded up to — from GEICO — to National Indemnity.

You did something similar with MedPro and with GUARD. You also moved some of the companies — or the subsidiaries — like Clayton Homes, out of the Geico sub and up into the holding company.

It seems like a lot more activity than normal, and I’m just asking, what is the main purpose of all those movements, what financial flexibility might it provide you, and why now?

WARREN BUFFET: Yeah. Well, there are a lot of things at Berkshire that the ‘why now’ is answered by — going to be answered by the fact, well, we just got around to it.

The huge chunk of capital, in the insurance companies, is at National Indemnity. So we have moved through these, quote, “share arrangements,” we moved premium volume that is generated at GEICO or MedPro or different companies, we’ve moved that up to the parent, because that’s where all the — there’s a — you know, there’s just extra layer after extra layer after extra layer of capital there, and it makes it a little simpler that way.

It makes it a little simpler just in keeping all the money invested, as opposed to having 50 pockets or 75 pockets to look at it, if you have a couple of main pockets to look at it.

There’s no real change in the certainty of payment of policies or anything of the sort.

It really makes life a little — just a little easier — in terms of managing the money by having most of the — most of the funds concentrated in National Indemnity.

So there’s no mastermind to it. We ended up with a few companies in GEICO Corp, which was a holding company for GEICO itself. And it just seemed that we probably ought to get those up to the parent company level and we put them there.

But our general approach is just to keep every place loaded with more capital than anybody could possibly conceive of us needing. And that’s going to result, more and more, probably, in the funds being concentrated in National Indemnity.

25. “Dollar will be the world’s reserve currency 50 years from now”

WARREN BUFFETT: OK. Station 5.

AUDIENCE MEMBER: Good morning, Warren. Good morning, Charlie. My name is David Tollefson (PH) from Minneapolis, Minnesota.

Currently, the U.S. is not a prospective founding member of the Asian Infrastructure Investment Bank, where many European countries are. The AIIB is relatively small, but if this is part of an ongoing trend in the next 50 years, how will that impact the U.S. multinational corporations? Thank you.

WARREN BUFFETT: Well, that’s a subject I know absolutely nothing about, so let’s hope Charlie does. (Laughter)

CHARLIE MUNGER: I know a little less than you do. (Laughter)

WARREN BUFFETT: I really apologize to you, in terms of your question, but, you know, if we started talking about it, we’d be bluffing.

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: Do you have a second question? (Laughter)

AUDIENCE MEMBER: Off the top of my head, how about the dollar as a reserve currency? Do you have any issues or concerns in the next 50 again — I know we’re in a good position now — but with us losing that position?

WARREN BUFFETT: I think the dollar will be the world’s reserve currency 50 years from now, and I think the probabilities of that are very high. Nothing certain, but I would bet a lot of money on that one.

Charlie?

CHARLIE MUNGER: Well, I have a little feeling on that subject. I’m probably more nervous than a lot of people about printing a lot of money and spending it. There are times when you have to do it, I’m sure, and we just came through one.

But I’m happier when we print money and use it improving infrastructure than I am when we just spread it around with a helicopter. (Applause)

WARREN BUFFETT: So what do you think is going to happen if we keep spreading it around with a helicopter?

CHARLIE MUNGER: I think it’s always more dangerous than the economic profession thinks.

26. Subsidiaries using the Berkshire Hathaway name

WARREN BUFFETT: OK. With that, we’ll go to Andrew.

ANDREW ROSS SORKIN: This question comes from a local shareholder, Max Rudolph, who writes in:

“Recently, several subsidiaries were renamed to include Berkshire or BH in their name, which Mr. Buffett has avoided doing previously, at least due in part, I imagine, to increased reputational risk should something go wrong.

“Can you discuss how you decide which subs are allowed to rebrand, and discuss those risks, given that Clayton, NetJets, and others, have received negative publicity this year?”

And attached to that question, Steve Rider (PH) of Chicago asks, “Will Fruit of the Loom become Berkshire Undergarments?” (Laughter)

WARREN BUFFETT: Well, if it does, we won’t pay him a royalty for the idea. (Laughter)

The — we did create a Berkshire Hathaway HomeService operation, which is a franchise operation.

We bought two-thirds of the Prudential franchise operation a couple of years ago, and we have a contract where we can buy the — where we will — buy the remaining third in another couple of years.

And so we were going to lose the rights to Prudential over time. And Greg Abel asked me about using Berkshire Hathaway, and I told him that they could use it, but that if I started hearing of any abuses of it or anything of the sort, we would yank it, and that maybe that would be a useful tool in making sure that people behaved like we wanted them to. And so far, that’s worked out fine.

We’ve had no idea that we wanted to take Berkshire Hathaway into becoming a household name and that that would create extra value, but we were going to rename a large franchising operation.

And, like I say, as long as the name does not get abused, that will be fine. And the Van Tuyl Auto — we’re calling it the Berkshire Hathaway Automotive Group.

Certain of the dealers will have the right to use that as a tag line and others won’t. And, again, if there’s problems connected with it, we’ll change it.

But in a sense, that isn’t bad. If there are going to be problems, I’d just as soon hear about them. If I hear about them because the name is “Berkshire Hathaway,” that may mean that I get on top of them faster than I would otherwise.

We have no — we have — a good many of our companies, at the bottom of their letterhead or something of the sort, they say a “Berkshire Hathaway Company,” and that’s fine.

But we have no — we do not anticipate that we’re going to turn it into some huge asset by branding a bunch of products that way.

Charlie?

CHARLIE MUNGER: We’d be crazy to try and sell Berkshire Hathaway peanut brittle instead of See’s. Those old brand names are worth a lot of money.

27. MidAmerican’s embrace of wind power

WARREN BUFFETT: OK. Gregg?

GREGGORY WARREN: This question is on the energy business.

During last year’s meeting, we touched briefly on the topic of distributed generation, a method of generating electricity on a small scale at the point of consumption, from renewable and nonrenewable energy sources. Much of this has come around the last several years due to the growth of renewable energy sources like solar and wind.

Up until now, though, it has been difficult, if not cost prohibitive, for self-generators to store this energy.

Now that Elon Musk has joined the fray this week with his idea of batteries for the home, for his new Tesla Energy initiative, which could lead the way for larger systems, and realizing that disruptive technologies can, at times, upend an industry’s business model and competitive positioning, how long do you believe it will be before distributed generation becomes a meaningful threat to your utilities, especially if power can be stored more easily at the end user’s place of business or home?

WARREN BUFFETT: Well, you put your finger on storage being the key. And Charlie follows storage a little bit more than I do, and maybe I’ll have Greg Abel talk about it.

But obviously, distributed energy is something we pay a lot of attention to.

One of the — probably the best defense is to have very low-cost energy, and MidAmerican has done a terrific job in that respect. And the figures, in terms of people who have adopted solar in our territories, are just minuscule and will stay that way.

But huge improvements in storage would make a difference in a lot of ways. And, Charlie, what are your thoughts on that?

CHARLIE MUNGER: Well, obviously, we’re going to use a lot more renewable energy because the fossil fuels aren’t going to last forever. And, obviously, Berkshire is very aggressive and very well located, in terms of this development.

You know, I grew up here in this part of the world, and to have 20 percent of the power of Berkshire utilities in Iowa coming from the wind, I regard as a huge stunt.

And it’s, of course, very desirable, in a windy place like Iowa where the farmers like the extra income, to be getting a lot of power out of the wind. And, of course, we’re going to have a lot better storage, and the technology has been improving.

And this is — it’s not a threat, it’s a huge benefit to humanity, and I think it will be a huge benefit to Berkshire. And everything is working for us.

I love owning MidAmerican in an era where we’re going to have more storage, more wind, more solar, more grid.

And I think we’re so lucky. What the hell would we do if the fossil fuels run down, if we didn’t have the sun to use indirectly in these forms?

And, of course, the — it’s going to be a lot more storage. And, of course, there will be some disruption in the utility industry, but there will be more opportunity, I think, than disruption.

WARREN BUFFETT: Just in the last week, we’ve announced two different — we’re already the leader — and we’ve announced two different projects.

One in Nebraska — I think it’s 400 megawatts in Nebraska. That will be the first time we’ve had a wind farm here.

And then, we just got approval in the last couple days for, I think, a billion-and-a-half-worth more of wind in Iowa.

And I think Charlie mentioned 20 percent, but if we could — if Greg Abel could take the microphone, I think it’s a lot greater percentage than that now. It’s a moving target. So I may not have kept Charlie posted on the number.

But, Greg, would you bring people up to date on what percent we will be in Iowa when the present projects are completed, and also what has happened in Nevada and a few places like that? Greg?

GREG ABEL: So, I’d love to provide an update. Actually, as it’s been touched on, we announced our tenth project in Iowa. That brings us to more than 4,000 megawatts built over the last ten years in that state.

And at the end of 2016, we will now have 58 percent of our energy — approximately 58 percent — of our energy that we provide to our customers coming from wind.

And then, if you continue to — thank you. (Applause)

And then, if you continue to look at our other utilities and our unregulated businesses — Warren, you’ve touched on this in the past — we now have more than $18 billion committed to renewable assets across our different utilities.

And if you look at NV Energy, our Nevada utility, for example, we’ve committed to retire 76 percent of their coal by 2019, and a large portion of that will be replaced with renewable energy. So, clearly a continued commitment to that. (Applause)

CHARLIE MUNGER: Greg, in our utility business, do you think we have more disruption to fear, or more opportunity to love?

GREG ABEL: Distributed generation and solar bring great opportunities for all of our different utilities, and we’ll embrace it.

CHARLIE MUNGER: The answer is, you couldn’t be luckier, is what I’m telling you.

WARREN BUFFETT: And one thing that has helped in this respect, is that wind and solar are — the development of wind and solar at present — are dependent on tax credits.

In other words, the federal government has made a decision that the market system would not produce solar or wind under today’s economics, but it has an interest, as a society, in developing it. So they have established a credit — I think it’s one-point — electric is 1.9 cents a kilowatt — for ten years.

And because Berkshire Hathaway Energy is part of the consolidated tax return of Berkshire Hathaway Incorporated, it has been able to invest far more money than it would make sense to invest on a stand-alone basis.

Among electric utilities in the United States, there’s really no one situated as well as MidAmerican Energy is, because it’s part of this consolidated tax return, to really put its foot to the floor, in terms of developing wind and solar.

So it’s become the biggest developer, by far, among the utility industry, and it — I think it’s very likely to continue to be, simply because most utilities really don’t pay that much income tax and, therefore, they’re sort of limited in how far they can push development of wind and solar.

28. Buffett’s most memorable failure

WARREN BUFFETT: OK. Station 6?

AUDIENCE MEMBER: Hello. I’m Linen Cygaloski (PH). I’m from Chicago, Illinois, and Berkeley, California.

I’d like to thank you for giving the opportunity to ask this question. This is my first meeting. I plan to attend once every 50 years. (Laughter)

And also, for your essay on the — both of your essays — on the past, present, and future of Berkshire.

As we reflect on the last 50 years, I’d like to ask you this question: what was your most memorable failure and how did you deal with it? Thank you.

WARREN BUFFETT: Yeah. Well, we’ve discussed Dexter many times in the annual report, where I — back in the mid-1990s — I looked at a shoe business in Dexter, Maine, and decided to pay 400-or-so million dollars for something that was destined to go to zero in a few years, and I didn’t figure that out.

And then on top of that, I gave the purchase price in stock, and I guess that stock would be worth, I don’t know, maybe 6 or 7 billion now. It makes me feel better when the stock goes down because the stupidity gets reduced. (Laughter)

Nobody misled me on that, in any way. I just looked at it and came up with the wrong answer. But I would say almost any time we’ve issued shares, it’s been a mistake. Wouldn’t you say that, Charlie?

CHARLIE MUNGER: Of course.

WARREN BUFFETT: Yeah. (Laughter)

CHARLIE MUNGER: We don’t do it much anymore.

WARREN BUFFETT: No.

We probably could have pushed harder, particularly in the earlier years.

We’ve always been — well, we’ve had all of our own net worth in the company, we’ve had all our family’s net worth, and we’ve had all these friends that came out of our partnership, many of whom put half or more of their net worth with us, so we’ve been very, very, very cautious in what we’ve done.

And there probably were times when we could have stretched it a little and pulled off something quite large, that we made a mistake, looking back.

But, I wouldn’t want to take a 1 percent chance, you know, of wiping out my Aunt Katie’s net worth or something. It’s just not something in life that I could live with.

So I would rather be, you know, a hundred times too cautious than 1 percent too incautious, and that will continue as long as I’m around.

But people looking at our past would say that we missed some big opportunities that we understood, and could have swung, if we wanted to go out and borrow more money.

Charlie?

CHARLIE MUNGER: Well, it’s obviously true. If we had used the leverage that a lot of successful operators did, Berkshire would be a lot bigger.

WARREN BUFFETT: A lot bigger.

CHARLIE MUNGER: A lot bigger.

And — but we would have been sweating at night. It’s crazy to sweat at night. (Laughter)

WARREN BUFFETT: Over financial things.

CHARLIE MUNGER: Over financial things, yes. (Laughter and applause)

WARREN BUFFETT: Well, we won’t pursue that.

29. Surprised that low rates haven’t sparked inflation

WARREN BUFFETT: Carol? (Laughter)

CAROL LOOMIS: In your 2008 annual letter, you mentioned that a likely consequence of the Treasury and Federal Reserve’s action to stabilize the economy would be, quote, “an onslaught of inflation.”

Now that we are presumably nearing the time when the Federal Reserve will begin raising interest rates, could you share your thoughts regarding both the likelihood of accompanying high inflation, and the consequences that might follow?

And if high rates of inflation did occur, how would the consequences for Berkshire compare to those for most large companies?

And this question, I say belatedly, came from James Cook (PH) of Waterville, Maine.

WARREN BUFFETT: Well, so far we’ve been very wrong — or I’ve been very wrong. Charlie has probably been a little bit wrong, too. (Laughs)

CHARLIE MUNGER: Of course.

WARREN BUFFETT: Yeah. The —

No, I would not have predicted that you could have five or six years of, you know, close to zero rates, and now get negative rates in Europe, and run fairly large deficit, although the current deficit is not that large. I mean, the country could sustain on average, you know, 2 or 2 1/2 percent deficits forever and not increase the ratio of debt to GDP. So the word “deficit” is not a dirty word. But very large deficits, and sort of uncontrollable, are scary.

But, you know, we’ve taken the Federal Reserve balance sheet up from a trillion to over 4 trillion, and we’ve done a lot of things that weren’t in my Economics 101 course, and so far nothing bad has happened, except for the fact that people who saved and kept their money in short-term savings instruments have just totally gotten killed, in terms of their — the income that they received from that.

But it’s still hard for me to see how if you toss money from helicopters that eventually you don’t have inflation.

Certainly, if the money supplied grows faster and faster relative to the output of goods and services, something like that is supposed to happen.

But I’ve been surprised by what’s happened. I’ve been — you know, when Poland issues bonds at negative interest rates, you know, I did not have that list — in my list — of forecasts a few years ago.

And so I think we’re operating in a world that Charlie and I don’t understand very well and that —

And to the second part of the question, I think Berkshire, in almost any kind of environment, will do better than most big companies.

I mean, we are prepared for anything. We’ll always be prepared for anything. And if we see really unusual opportunities, we’re also prepared to act. And that gives us a real advantage over most big companies.

We don’t count on anybody else. We’re sitting with over 60 billion right now. I’d rather be sitting with 20 billion and made a great $40 billion acquisition.

But we will — you know, we will be very willing to act if economic turbulence of any kind occurs, and we’ll be prepared and most people won’t be.

Charlie?

CHARLIE MUNGER: Yeah. We have made very little progress in life by trying to outguess these macroeconomic factors. We basically have abdicated.

We’re just swimming all the time, and we let the tide take care of itself.

WARREN BUFFETT: And we really don’t see — we’ve not seen great successes by others who have been all involved in macro predictions. I mean, they get a lot of air time, but that’s about all that happens.

CHARLIE MUNGER: The trouble with making all these economic pronouncements is that people gradually get so they think they know something. (Laughter)

It’s much better just to say, “I’m ignorant.” (Laughter)

WARREN BUFFETT: Yeah. We will find things, though, under any circumstances.

They don’t come at an even flow. They may not — and, you know, you cannot predict the size or anything — but you can be sure that over the next ten years, you’ll see a lot of things you didn’t think were possible.

And we will occasionally see something that makes sense for Berkshire, and we will be prepared to do it both psychologically and financially.

30. Deferred taxes aren’t a “hidden form of equity”

WARREN BUFFETT: OK. Jonathan?

JONATHAN BRANDT: For a variety of reasons, bonus depreciation on fixed assets investments in the noninsurance businesses perhaps being the most important, Berkshire’s cash taxes have been meaningfully lower than reported taxes for the last several years.

The cumulative difference between cash taxes and reported taxes, which could be viewed as another form of float, now stands at around 37 billion.

Do you consider any portion of the cash flow from annual increase in deferred taxes to be economic earnings?

Is this a sustainable dynamic, or do you expect the relationship between cash and reported taxes to ever flip, for instance, if bonus depreciation ever expires?

Given Berkshire’s massive appetite for capital spending at the utility and the railroad, is it possible, instead, that its deferred tax liability will never have to be paid, no matter what Congress does with bonus depreciation? And is it perhaps even likely that this form of float will continue to grow?

WARREN BUFFETT: Probably the most likely answer — there’s two forms of float from deferred taxes.

One is the unrealized appreciation on securities, and they’re — who knows what happens? I don’t think the appreciation is going to disappear, but we may decide to realize some of it from time to time. In fact, we could realize a lot of it.

If you move over to the depreciation, which you’re talking about, on the 37 billion — because the total deferred taxes, as I remember, maybe 60 billion or something like that — that is a factor of accelerated depreciation. And one form or another of accelerated depreciation has been around a long time.

Occasionally the — I think the bonus depreciation one year went to 100 percent. I could be wrong on that.

The — certainly in our utility business, that helps our customer and it doesn’t help us, basically. I mean, we get a — we will get a return on equity, and that is not — that’s not free equity to us, or anything of the sort.

The regulatory commissions take that into account. Return on invested capital, in terms of how the surface transportation board would look at it, again, I don’t think we benefit enormously by that.

But it does mean there’s less cash going out the door and we, therefore, don’t need to borrow as much money for capital investment as otherwise.

But I don’t think I would look at that as a hidden form of equity. I’d rather have the deferred taxes than not have them, but it’s not meaningful there.

Now what could happen, is that, overwhelmingly, those deferred taxes were probably, entirely even — to the extent they’re in the United States — were accrued at a 35 percent rate.

So if the corporate rate changed, then you would have a major change in the deferred tax item. And there’s always a possibility of that.

CHARLIE MUNGER: But it would be a book entry. It wouldn’t mean much.

WARREN BUFFETT: It wouldn’t mean much. Yeah, yeah.

We do — the float from the insurance business, we regard as a terrific asset. The deferred tax liability is a plus, but it’s not — it’s not a big asset.

31. Lessons on hidden incentives from Teledyne’s Henry Singleton

WARREN BUFFETT: OK. Station 7.

AUDIENCE MEMBER: Hi. My name is Dan Hutner from Vermont.

I was wondering if you could talk about Henry Singleton’s Teledyne, and whether you learned lessons from that, used it as a model, and what you think about how it ultimately unwound, and how you might want Berkshire to continue differently?

WARREN BUFFETT: Yeah. That’s a very good question. And Charlie knew Henry Singleton. I knew a lot about him. I mean, I studied him very carefully, but Charlie knew him personally, as well as studying him.

So I’m going to let Charlie answer that. But there’s a lot to be learned from both what Singleton did in his operating years and then what happened subsequently.

CHARLIE MUNGER: Henry Singleton was very interesting. He was a lot smarter than either Warren or I.

Henry was the kind of guy that always got 800 on every test and left early. And he could play chess blindfolded, at just below the grand master level, when he was an old man.

That said, I watched him invest, and I watched Warren invest, and Warren did a lot better. He just worked at it.

Henry was thinking about inertial guidance, and Warren was thinking about securities. And the extra work enabled Warren to get by with his horrible deficit of IQ, compared to Henry. (Laughter)

And the interesting thing —

WARREN BUFFETT: But let’s not quantify it. (Laughter)

CHARLIE MUNGER: No. The interesting thing about Singleton is he had very clever incentives on all the key executives, and they were tough, and they were important, and they were meaningful.

And in the end, he had three different Defense Departments that got into scandals.

He wasn’t doing anything wrong. He wasn’t trying to hurt the Defense Department on purpose. But the incentives got so strong, and the culture of performance got so strong, that people actually — it went too far — in dealing with the government, Teledyne did.

And so, we haven’t had any trouble like that, that I know of. Can you think of any, Warren?

WARREN BUFFETT: No. And Charlie and I, we really believe in the power of incentives. And there’s these hidden incentives that we try to avoid.

One — we have seen, both of us, more than once, really decent people misbehave because they felt that there was a loyalty to their CEO to present certain numbers — to deliver certain numbers — because the CEO went out and made a lot of forecasts about what the company would earn.

And if you — if you go and say — if I were to say that Berkshire’s going to earn X per share next year, and we have a bunch of executives in the insurance business that set loss reserves and do all kinds of things, or companies in other areas that can load up channels at the end of quarters, at the end of years, I’ve seen a lot of misbehavior that actually doesn’t profit anybody financially, but it’s been done merely because they don’t want to make the CEO look bad, in terms of his forecast. Or he’s done it, because he doesn’t want to look —

When they get their ego involved, people do things that they shouldn’t do.

So we try to eliminate incentives that would cause people to misbehave, not only for financial rewards, but for, you know, ego satisfaction.

I think that’s probably pretty unusual to even be considering that in the business, but we’ve seen enough, so we do consider it.

CHARLIE MUNGER: I might also report that at the end, Henry wanted to sell his business to Berkshire for stock, so he was very smart right to the very end.

WARREN BUFFETT: We had a case at National — it’s interesting.

You really have to understand — should understand — human behavior, if you’re going to run a business, because when National Indemnity — we’re going back to the late 1960s —

Jack Ringwalt was a marvelous man, and he ran it, and he had another marvelous man who worked for him, his tennis partner, and that fellow was in charge of claims.

And when the claims man would come in to Jack and say, “I just received a claim for $25,000” or something, for some long-haul truck or something, Jack would say — Jack — it was just his personality.

He would start berating the fellow and say, “How could you do this to me?” and “These claims are killing me,” and all of that, and he was joking.

But the fellow he was joking with couldn’t take it, really, and he started hiding claims. And he just didn’t — he stuck them in a drawer.

And that caused us to not only misreport fairly minor figures, but it also caused us to misinform our reinsurers, because they had an interest in the size of claims.

And the fellow that was hiding the claims had no financial interest in doing it at all, but he just didn’t like to walk into the office and have Jack kid him about the fact that he was failing him.

And you really have to be very careful in the messages you send as a CEO. And if you tell your — if you tell your managers you never want to disappoint Wall Street, and you want to report X per share, you may find that they start fudging figures to protect your predictions.

And we try to avoid all that kind of behavior at Berkshire. We’ve just seen too much trouble with it. (Applause)

32. Berkshire isn’t “too big to fail”

WARREN BUFFETT: Becky?

BECKY QUICK: This question comes from Anthony Sterochi (PH) in Lincoln, Nebraska.

He says, “If government regulators deem Berkshire Hathaway’s reinsurance business too big to fail, how would government regulation of the reinsurance business affect Berkshire Hathaway?”

WARREN BUFFETT: Yeah. The question — there’s two, essentially, regulatory aspects to it.

One is there’s the European — and I hope I’m describing this right — I may be wrong, a little bit, on some technicality — there’s a European group that is looking at insurers, generally, and has designated, I believe, nine or so insurance companies as — I’m not sure what they call them — but they deserve special attention, I’ll put it that way. There’s a technical name for it.

The one that’s more relevant in the United States is the Financial Stability Oversight Committee, I believe they call it, which designates so-called SIFIs, systemically important financial institutions.

And large banks are in that category. And then the question is, what non-banks are in it?

And they designated General Electric, and Prudential, and recently, Metropolitan, and Metropolitan is fighting the designation.

The question is whether — question isn’t just whether you’re large. I mean, Exxon Mobil is large, Apple is large, Walmart’s large, and nobody thinks about them as SIFIs.

The definition on a non-bank SIFI would be 85 percent of revenues coming from financial matters, and we don’t come remotely close on that. I mean, we’re 20 percent or thereabouts.

But the real question is whether problems that Berkshire might encounter could destabilize the financial system in the country. And we have not been approached. Nobody’s ever called me.

They spent a year with Metropolitan, even before they designated them. So there’s — we have no reason, in logic, or in terms of what we’ve heard, to think that Berkshire would be designated as a SIFI.

I mean, during the last time of trouble, we were about the only party that was supplying help to the financial system, and we will always conduct ourselves in a way where the problems of others can’t hurt us in any significant way.

And I think we’re almost unique, among financial institutions, in the layers of safety that we’ve built into our system, in terms of both cash, and operating methods, and everything else. So, it’s a moot question.

It — the law exists. We haven’t been approached about it as we — as I know — as I mentioned.

Apparently it takes a year or so, even if they approach you while they listen to your presentation and look at your facts. And I do not think Berkshire Hathaway comes within miles of qualifying as a SIFI.

Charlie?

CHARLIE MUNGER: I think that’s true. But I think that, generally speaking, there is still too much risk in a lot of high finance. And the idea that Dodd-Frank has removed it all permanently is nonsense. And people like hanging onto it.

You know, trading derivatives, as a principle, if you’re shrewd, is a lot like running a bucket shop in the ’20s or a gambling parlor in the current era. And you have a gambling parlor that you have a proprietary edge in, and you say it’s sharing risk, and helping the economy, and so forth. That’s mostly nonsense.

The people are doing it because they like making money with their gambling parlor, and they like favorable labels instead of unfavorable labels.

So, I think there’s still danger in the financial system. And I also think our competitors don’t like it that they deserve regulation and we don’t. And I think there’s danger in that too.

WARREN BUFFETT: Yeah. One thing that may not be — (Applause)

I haven’t read much about it, but my understanding is that Dodd-Frank actually weakens the power of the Fed, and to some extent the Treasury, too, to take the kind of actions they took in 2008, primarily.

And those powers were needed to keep our system, in my view, from really going into utter chaos.

The ability to say, and have people believe you when you say it, that whatever needs to be done, will be done, has resided in the Federal Reserve and with the Central Bank — the European Central Bank.

And the fact that people believed when Hank Paulson said that the money market funds are going to be guaranteed, that stopped a run on 3 1/2 trillion of money market funds that had lost 175 billion in deposits in the first three days, there, back in September of one week.

If that — if people hadn’t believed that, you would have seen that 175 billion turn into a trillion very quickly. I mean, the system would have gone down.

So the — when you have a panic, you have to have someone, somewhere, who can say and be believed, and be correctly believed, that he or she will do whatever it takes.

And you saw what happened in Europe when Draghi finally said that, and you saw what happened in the United States when Bernanke and Paulson, more or less together, said it.

And if you don’t have that, panics — they will accelerate like you cannot believe.

You know, in the old days, the only way you could stop a run on a bank was, basically, for somebody to come and pile up gold. I mean, they used to race it to the branches that were having a problem. I remember reading the history of the Bank of America on that, and how they would put out runs before the Federal Reserve existed, and the only thing that stopped it was to pile up gold.

I mean, if the CEO of the bank came out and said, you know, our Basel II ratio is 11.4 percent, the line would just lengthen. It would not get the job done.

Gold got the job done. Bernanke and Paulson got the job done, but the only way they got it done was saying, “We’re guaranteeing new commercial paper. We’re guaranteeing that the money market funds won’t break the bank. You know, we’re going to do whatever’s necessary.”

I think Dodd-Frank weakens that, and I think that’s a terrible thing to weaken. (Applause)

33. Selling workers’ comp insurance online

WARREN BUFFETT: OK. Gary?

GARY RANSOM: You have started a direct workers’ comp operation online, BHDWC.com. It looks a little bit like you’re Geico-izing some of the commercial lines.

What’s the overall strategy of that effort, and how big do you think it can grow, and what concerns might you have on channel conflict with GUARD, who uses independent agents?

WARREN BUFFETT: Yeah. We — well, Progressive did pretty well with the channel conflict between direct writing and agents.

We will find out what the consumer wants. But we are experimenting with online workers’ comp. As you can tell, we’ve done pretty well with online direct auto over the years.

We’ll find out. I don’t think that — I don’t think the channel conflict is a big problem for us. It might be a bigger problem for some other companies, but I don’t think that’s a big problem.

It’s a trickier thing. We write commercial auto through GEICO, and that’s grown and it’s not small, but it hasn’t achieved private passenger auto proportions at all. So we’ll find out.

But we believe in experimenting at Berkshire, and we’ve got the know-how to write that business in direct, and we’ll find out if the customer wants to buy it that way.

We’ve got an awfully good insurance business, but the nature of the insurance business has changed. I mean, GEICO was all direct mail back in 1936, when Leo Goodwin and his wife sat there and stuffed envelopes.

And the basic idea of saving people money on auto insurance continues to this day, but it went from direct mail to — it went to the TV and the phone, went to cable TV, and then went to the Internet and — and goes to mobile and it — you know, the world moves on.

And the key is to be able to save people money and give them good service. And whatever way does that in the most effective way is going to be what wins 20 or 30 or 50 years from now, and we’ll try to stay on top of it.

34. Question you’ve never been asked

WARREN BUFFETT: OK. Station 8.

AUDIENCE MEMBER: Hello. My name is Paula, and I’m from Gainesville, Florida.

And I would just like to ask Mr. Buffett, after all these years of interviews and meetings, what is the one question that you’ve never been asked that you would like to answer now? (Laughter and applause)

WARREN BUFFETT: Well, I can think of the question I haven’t been asked, but I’m not sure I want to answer it now. (Laughter)

I think I’ve been asked almost all of them, and many of them, time after time after time.

Charlie, do you have anything that you’re just dying to be asked?

CHARLIE MUNGER: Well, if this lady will first tell us the worst thing she ever did in her life. (Laughter)

AUDIENCE MEMBER: Those secrets are not —

WARREN BUFFETT: Paula, I wish we could help you. Have you got another question you’d like to throw at us?

AUDIENCE MEMBER: I could ask you another question.

WARREN BUFFETT: Good.

AUDIENCE MEMBER: Can I buy you lunch? (Laughter)

WARREN BUFFETT: I think she’s talking to you, Charlie. (Laughter)

He always wins. You saw him in the movie. He always gets the girl.

CHARLIE MUNGER: Yeah. I’m so heavily involved with those girls in the movie, I just don’t have room on my list. (Laughter)

WARREN BUFFETT: Thank you, Paula. (Laughs)

35. Buffett: We run Berkshire almost as tightly as 3G would

WARREN BUFFETT: OK. Andrew.

ANDREW ROSS SORKIN: This is a toughy, and I should say we’ve probably got — or at least I got — several dozen emails on 3G, and so this is a follow-up to what you talked about on 3G earlier.

And specifically, actually, it’s two questions in one that actually came from the audience after your response about 3G. So just to put it in perspective, those shareholders are in the audience, and they asked not to be named, so here we go.

This shareholder writes, “I intend no disrespect to 3G’s money making abilities and, as a Berkshire shareholder, like the partnership very much. However, you took more than a decade to shut down the Berkshire mills.

“You take great pride in letting Berkshire’s managers run their companies for you, and as Charlie says, almost to the point of abdication. And that approach has made Berkshire a very attractive home for companies.

“You’ve even bought newspaper groups in the face of the internet tidal wave, and acknowledged they didn’t have the same investment characteristics of other Berkshire businesses.

“Are you actually saying 3G’s management method is congruent with yours?

“Asked another way, if 3G ran Berkshire, would there not be significant layoffs and consolidation among the companies and intense focus on short-term profits?”

WARREN BUFFETT: No. I think there would be — there would be some companies they’d make changes in. But I would say that GEICO, for example, 33,000 employees, or whatever the number is, is run just as efficiently as 3G would run it.

I would say our home office, with 25 people — we could have a home office with 500 people. We could have floors devoted to strategy, and floors devoted to human resources and comparing the salaries of everybody at all our different companies, and so on.

If they walked into that situation, they’d cut it back. I don’t know whether they’d get it down to the 25 we have, but we do not believe in having extra people around.

And our newspapers, you know, unfortunately, you know, they have had to cut back, as revenue has kept shrinking.

And the idea that you run a fat operation just because you’re making a lot of money — we cut back on our textile business — I closed the Waumbec mill considerably before we closed the Berkshire mills. It was only when it became apparent that it was just hopeless, we gave up on it.

But in the meantime, every time at Berkshire — I had a drawer full of proposals that said if we put in this kind of a loom, we’ll be able to get rid of eight people, and we put in the loom.

I mean, we were trying to reduce our labor complement all the time because we were in competition with people that were doing the same thing.

So I don’t think there’s any — I don’t think there’s anything in — we do have some businesses that probably have more people than we need, and I don’t do something about it.

But I don’t encourage it in any way and most of our managers don’t operate that way.

And it’s true, if 3G were running our operations, they would get more active at that than I will. But that doesn’t mean that I endorse it. It just means that I basically tolerate it where I’ve got a manager that I think well of.

I think better of the 3G way — method — of operation than I do of our operators where they really have excess people in it. We’ve got very few of those, but we do have a few.

So, I would never advocate running a business at a loss. If you — where it’s going to continue. And you’ll see that in our economic principles that’s been in the back of the book — back of the annual report — for 30 years or so.

And the same goes for having excess people around, and I think you’ll see our attitude toward excess people best expressed in our office here that has 25 people, and Charlie’s office in Los Angeles that has two, counting him.

CHARLIE MUNGER: I’d say we’ve got two-thirds of one. (Laughter)

We’re getting by with practically nothing.

WARREN BUFFETT: Yeah.

36. “Great brands will survive and the great retailers will do well”

WARREN BUFFETT: OK. Gregg?

GREGGORY WARREN: This is sort of a follow-on to the 3G question.

When we look at the body of work that the firm has put together in the consumer staples universe, Anheuser-Busch, InBev, Burger King, Tim Hortons, and now Kraft Heinz, one gets the sense that they view the average consumer staples firm as being undermanaged, with a potential for substantially greater levels of profitability.

Given the ongoing struggles of many packaged food firms, most of which compete in a mature category against private label and/or store brand offerings that undercut them in price and diminish the value of their brands, and many of them having to deal with large retailers, like Walmart, that provide meaningful sales volumes but are also quite demanding and continuously pushing for the lowest price available, do you see the potential for further consolidation in the industry with a firm like Kraft Heinz emerging as a big consolidator? Or do you feel that Nestle’s more recent squawking about the deal, and 3G Capital’s reputation as being a bit heavy-handed with cost cutting, being enough to keep further consolidation at bay?

WARREN BUFFETT: Well, there will be deals in the future. I mean, there are bound to be.

But the strong brands — you know, just look at the ones that General Foods added in the 1980s and the ones that Kraft has now that come from that same company.

And, I mean, Coca-Cola sold more cases of beverages last year than any year in their history and they’ll sell more this year. I mean, it’s — a strong brand is really potent stuff.

I mean, take Heinz Ketchup or something of the sort. It’s 60 percent brand share in the United States, but it’s much higher in many other countries.

So you’ll always have the fight between the retailer and the brand, and the retailer is going to use all the pressure they’ve got and, therefore, the brand has to stand for something in the consumer’s mind.

Because, in the end, the retailer may want to shift to a house brand, a private label, but — and they — private labels have been around forever in the soft drink field. I mean, I can remember when I was looking at Cott Beverage and all of those and thinking, what will it do to us?

I remember when Sam Walton sent me the first six-pack. He told me, it’s the first six-pack of Sam’s Cola, 20 years ago, and believe me, Walmart has plenty of power, but so does Coca-Cola.

And the brand — you’ve got to nourish them. You know, you’ve got to take very, very, very good care of them. They have to stand for the promise that’s in people’s mind about them.

But a lot of people have tried to — I don’t know how many dozens, or maybe hundreds, of cola beverages there have been over the years. RC Cola. You know, they came up with the first diet product back in the early ’60s, and that looked like a big maneuver.

Wilkinson came up with the blade back in the ’60s after Gillette, but Gillette ends up with 70 percent, by dollar value, worldwide of razor blades after 100 years.

So there’s all — you’ve got to protect a brand. You’ve got to enhance it in every way. You’ve got to get a promise in people’s minds that gets delivered that way.

But that’s the question Charlie and I faced in 1972 when we looked at See’s. See’s was selling for $1.95 a pound, Russell Stover was selling a little cheaper, and you had to decide how much damage could a Russell Stover do if they came after See’s, and they copied our shops, and all that sort of thing.

If you protect a brand — if you got a terrific brand and you protect it, it’s a fabulous asset.

But you’ll always have trouble dealing with Costco and Walmart and the rest of the guys — Kroger, you name it, you know, they’re tough, too.

But the great brands will survive and the great retailers will do well.

Charlie?

CHARLIE MUNGER: Well, we’ve almost exhausted this topic. The — there’s no question about the fact that waves of layoffs frighten people. A job is a very important part of a person’s life, and it’s no small thing to lose it.

So — but on the other hand, I don’t think you — what would our country be if we kept everybody on the farms? All this prosperous group would be pitching hay and milking cows at 4:00 in the morning. No, we need — we need our businesses to be right sized.

37. Value investing in China?

WARREN BUFFETT: Station 9?

Better have some fudge, Charlie.

AUDIENCE MEMBER: Very exciting to see my superstars here. I’m Leo (inaudible) from China and a loyal fan of you and Charlie.

Many Chinese investors feel all kinds of performance pressure, question, and even laughing, at value investing.

Many also believe that value investing, that doesn’t apply to China, where the stock market just doubled over the last six months.

I would like to ask Mr. Buffett, do you think value investment can be widely applied in all markets, or just the (inaudible) markets, just as the ones in the United States?

Do you have any suggestions for value investors to hold against pressure and to be much happy? Thank you.

WARREN BUFFETT: I’m not sure I got all of it, but Charlie will help me.

I certainly think investment principles do not stop at borders. So if I were investing in China or any place else — India, UK, Germany — I would apply exactly the same sort of principles that I learned from “The Intelligent Investor.”

I would think of stocks as a small piece of a business. I would think of investment fluctuations being there to benefit me, rather than to hurt me. And I would try to focus my attention on businesses where I thought I understood the competitive advantage they had and where they would — what they would — look like in five or ten years.

So I don’t think I would change the principles at all. I’m not sure I got all of the question.

Maybe Charlie can elaborate on the rest.

CHARLIE MUNGER: Well, the Chinese have a history of being very entrepreneurial and gambling very heavily when they have the opportunity, and it has created great volatility in the Chinese stock markets.

And when things get bouncy and prosperous, like our Internet craze here in the United States, China looks a lot like Silicon Valley.

I think China would be way better to be more value investor minded and less absorbed in waves of speculation.

So I think the more China copies the way Berkshire operates, I think the better it will be for China. (Applause)

WARREN BUFFETT: Yeah. There’s a certain irony, in that we will — we would — do the best, over decades, if we operated in a market where people operated very foolishly.

And the more people respond to short term events and exaggerated things or — anything that causes people to get wildly enthusiastic or wildly depressed, actually, is what allows people to make lots of money in securities.

And, on the other hand, it’s not the greatest thing for a society. And Charlie and I have benefited enormously by the fact that over a 50-year period, there have been a few periods, probably the most extraordinary being 1973 and ’74, where you could buy stocks unbelievably cheap, cheaper than happened in 2008 and 2009.

And, you know, it doesn’t make sense to have that much volatility in the market, but humans behave the way humans behave, and they’re going to continue to behave that way in the next 50 years.

I mean, if you’re a young investor, and you can sort of stand back and value stocks as businesses and invest when things are very cheap, no matter what anybody is saying on television or what you’re reading, and perhaps, if you wish, sell when people get terribly enthused, it is really not a very tough intellectual game. It’s an easy game, if you can control your emotions.

And as Charlie says, we’ve talked about a little bit that the Chinese market may be more — there may be more speculative influences in it, even than in the United States, because it’s a relatively new development and it may lend itself to greater extremes, and that should produce great opportunities. Charlie?

CHARLIE MUNGER: Yeah. But there’s great opportunities for excess and nasty contractions after unnatural booms and so on.

I think China is wise to dampen the speculative booms and to — and I think the Chinese — I don’t think that value investing will ever go out of style. Who in the hell doesn’t want value when you buy something? How can there be anything else that makes any sense except value investing?

WARREN BUFFETT: It never gets that popular though. (Laughs)

CHARLIE MUNGER: People are looking for an easier way.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: And that’s a mistake. It looks easier, but, in fact, it’s harder. And there’s a lot of misery to be obtained by misusing stocks.

WARREN BUFFETT: Yeah. Nobody buys a farm to make a lot of money next week or next month, or they buy, you know, an apartment house. They buy it based on what they think the long-term future is. And if they get a — if they make a reasoned calculation of that and the purchase price looks attractive, they buy it and then they don’t get a quote on it every day or every week or every month or even every year, and that’s probably a better way to look at stocks.

38. U.S. needs to protect against catastrophic terror attacks

WARREN BUFFETT: Carol?

CAROL LOOMIS: “Mr. Buffett, you have expressed your optimism about the future of America many times and have often made the point that the U.S. simply has a superior economic system.

“But my question” — and this is from Christopher Gottchio (PH) of New York City — “my question concerns the risk of chemical, nuclear, biological, and cybersecurity problems and the audience should reflect on the initial letters of those words when I tell you that Mr. Buffett has sometimes dubbed that C-N-B-C.” Sorry, Becky. (Laughter)

WARREN BUFFETT: I just do that to tease people, but the —

CAROL LOOMIS: Wait a minute. One more. “How do these threats affect your outlook?”

WARREN BUFFETT: Well, they are the great threat to the United States. The — we will have — we have, and will have, a wonderful economic system.

You know, your children are going to live better than you do, and your grandchildren are going to live better than they do. That is — there are fits and starts and ups and downs. But just go outside or — as you fly home, just imagine what you’re flying over looked like in 1776, and everything since then is profit.

I mean, the farms are incredibly more productive. The cities have grown. It’s all here, you know, and that’s all come from unleashing the energies and brains of the American people and the system that has worked quite well despite all the deficiencies that we talk about all the time. So that hasn’t been lost at all.

And, you know, people get upset because we’re having 2 percent growth. Well, 2 percent growth with 1 percent population growth means 20 percent gain in a generation, and 20 percent on 54,000 of GDP per capita is another 10,000 of GDP per capita coming in the next generation.

This country has a wonderful future, but as the questioner pointed out, that can all be nullified by either madmen, or rogue states, or religious fanatics, or sociopaths, or whatever it may be, who have — who wish to have — access to weapons of mass destruction.

And to nuclear, which, as I used to think was the primary one, you know, you can now add biological and chemical and cyber.

And there will be an increasing number — there already are a huge number — of people that would wish harm, and particularly on the United States, although on others as well.

And those people aren’t going to go away, and they’re going to look for more ingenious ways of utilizing the raw materials that they have access — or might get access to — and better delivery systems.

And we need an extremely vigilant security operation in the United States, and we will have threats. I can’t — I do a little bit about those things in a few ways — but that’s something we live with.

But we also live in a country that is going to do extraordinarily well. And if we successfully ward off those threats, or at least minimize their impact on us, I still maintain that the luckiest person ever born in history, on a probabilistic basis, is the baby being born in the United States today. (Applause)

Charlie?

CHARLIE MUNGER: Well, of course, we were a favored place, and we’ve had a favored outcome, and we’ve been lucky too.

I think I probably lived in the most ideal era that any man in human history could have been born into. I think you have, too, Warren.

WARREN BUFFETT: Right.

CHARLIE MUNGER: But I don’t think we should get too smug. China has come up a lot faster than any other big nation ever came up, and —

WARREN BUFFETT: But that’s good for us.

CHARLIE MUNGER: Oh, I think — I can hardly think of anything more important than future close collaboration between the United States and China.

I think you’re talking about the two most important nations in the world going forward. And I think it is very important that we like and trust one another, and have very good relations, and work together to avoid bad consequences that come from other people’s mistakes and misbehavior.

So I’m — (Applause)

I think both China and the United States would be crazy not to collaborate and increase trust.

I don’t think there’s anything more important that we could do for our respective safety and for the general benefit of the world. (Applause)

WARREN BUFFETT: If you had your choice, would you rather be born now with all the qualities you’ve got, or when you were born?

CHARLIE MUNGER: Well, I must say it’s very interesting now, but it was always interesting.

And I think that’s too tough a question. I don’t like these very theoretical questions. (Laughter)

I’d rather think about something where I might gain some advantage or help somebody else to gain an advantage.

39. Unlikely that one person will run both investments and operations

WARREN BUFFETT: OK. Then we’ll move on to Jonathan. (Laughs)

JONATHAN BRANDT: Warren, you have up to this point said that Berkshire in the future will have a chief executive officer and one or more chief investment officers.

You haven’t explicitly said that a chief investment officer cannot be the CEO, but that has, for me at least, been implied.

Berkshire has been successfully managed for 50 years by a chairman and vice chairman whose principal experience was in allocating capital amongst a number of businesses and industries with which they were familiar and whose attributes they could compare.

Since capital allocation is the key skill needed for a company structured the way Berkshire is, why couldn’t the company’s principal decision maker in the future also be someone who is experienced in choosing among different reinvestment options, with perhaps a second outstanding person expert in operations acting as chief operating officer, albeit a route of the hands-off one, given Berkshire’s extreme decentralization?

WARREN BUFFETT: That’s a very good question.

It’s not inconceivable. It’s very unlikely, Jonny, that — but as you say, the — a chief investment officer has a — will have — or should have — a significant array of skills that would be useful, also, for a chief executive officer.

But I would say, also, that I would not want to move — if I were voting on it — I would not want to vote to put somebody whose sole experience had been investments in charge of an operation like Berkshire, who had not had any, also, significant operating experience.

I’ve said that I’m a better investment manager because I’ve been an operating manager, and I’m a better operating manager because I’ve been the investment manager.

But the — you — operations — I’ve learned a lot through operations that I wouldn’t have learned if I’d stayed in investments all my life. I would not have been equipped to run it.

I learned a lot of things about operations by being in operations. So if you had somebody that had the dual experience and was very good at investments, but had a lot of experience in operations, that would be conceivable. Otherwise, I wouldn’t vote that way.

Charlie?

CHARLIE MUNGER: Well, every year at Berkshire, as now constituted, the owned and controlled businesses get more and more important, and the measurable securities are relatively less important.

So, I think it would be crazy not to go with the tide to some extent.

And we need more — we need expertise beyond that of a typical portfolio analyst.

WARREN BUFFETT: Yeah. But the CEO should have some real understanding of investments and investment alternatives and all that.

I’ve seen a lot of businesses run by people that really don’t understand the math of investing or capital allocation very well. So having a dual background is useful, but actually our operating managers know — some of them know — a lot about investing.

40. Weschler and Combs are good investors and good people

WARREN BUFFETT: OK. Station 10,

AUDIENCE MEMBER: Hello. Warren, Charlie, it’s a pleasure to be here. My name is Douglas Coburn. I’m originally from Caracas, Venezuela, but I’m here with a large group from Columbia Business School. (Cheers)

My question —

Thank you.

My question is regarding Ted Weschler. Can you please share your views regarding his investment philosophy, his investment process, and the qualities that he brings to Berkshire?

WARREN BUFFETT: Yeah. Well, both Ted and Todd [Combs], the two investment managers, aside from myself, at Berkshire, are very, very smart about businesses and investments.

I mean, they understand the reality of business operations. They understand what makes for competitive strength, and all of the things that you’d learn in business school or learn through investing.

And on top of that, they have qualities of character which are terribly important to me and Charlie.

We have seen dozens and dozens and dozens of investment managers with great records over the years. We used to drop in and see some of those guys, you know, that were running — I’m talking back in the 1960s and ’70s.

And when I gave up my partnership, I knew probably 20 people with great records from the previous six or eight years, but I picked Bill Ruane to handle the funds of my partners going forward.

And he set up a fund called Sequoia Fund, and 10,000 put in that fund has become over $4 million now.

Well, Bill was a terrific investment manager, but he was a terrific human being. And we really want people where they do more than their share, where they don’t claim credit for things they don’t do, where they — you know, they — just every aspect of their personality is such that you want to be around them, and you want to hand responsibility over to them.

And Ted and Todd fit that bill, and there’s plenty of investment managers in Wall Street with great records that don’t fit that bill, in our view. So that’s about all I can tell you.

Charlie met — he met Todd first. I met Ted first. And we both — when we talked about them, we talked about their record and the kind of stocks they owned, but we talked a whole lot more about what kind of people they were and we haven’t been disappointed.

Charlie?

CHARLIE MUNGER: Yeah, I think the whole thing is working pretty well. And I think those people will be constructive around Berkshire for reasons apart from their expertise in handling securities. In fact, they already are.

WARREN BUFFETT: They already very are.

CHARLIE MUNGER: Oh. They’re — they’ve just — each one has helped buy a business recently.

WARREN BUFFETT: Yeah. And they will help oversee it, too, the businesses. They’re smart about business, and they know just exact — they know the right touch to apply in terms of how much they get involved.

I mean, Todd worked on Charter Brokerage. He worked on an acquisition we made from Phillips.

Ted just worked on this operation over in Germany, went over there a couple of times.

And he’s just smart. You know, he’s got good sense. He knows how to deal with people. You know, if a deal is to be made, he’ll get it made.

And we — Charlie and I run into more dysfunctional people with 160 IQs, probably, than anybody alive.

But Salomon gave us a head start on that, as a matter of fact. Wouldn’t you say that —?

CHARLIE MUNGER: We’ve specialized in it.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: We’ve absolutely specialized in it.

WARREN BUFFETT: We’ve seen — take the Salomon — we’ve seen a group of people whose IQs far surpassed those of people at Berkshire, and we’ve seen them self-destruct to make money they didn’t need, when they were already rich. You know, I mean, see, that’s madness.

But a lot of people are just incapable of functioning well day after day, even though they’re capable of brilliance from time to time.

And we’re looking — we’ve got very solid people in Ted and Todd. They’re very bright and they identify with Berkshire and not with themselves, and that’s a — it’s a huge factor over time.

Any more, Charlie, on that?

CHARLIE MUNGER: Well, yeah. And that trustworthiness is more important than the brains. It’s not that they don’t have the brains, but we wouldn’t hire anybody, no matter how able, if we didn’t trust them.

WARREN BUFFETT: Yeah. Very occasionally — (Applause)

Yeah. We’ll get disappointed on that occasionally, but not very often.

41. Update on Buffett’s hedge fund wager

WARREN BUFFETT: We’re approaching noon. We’ll come back at 1:00.

I promised — seven years ago I made this bet, which was originally to produce a million dollars for the charity of the winner, and another fellow who was in the hedge fund business — and I offered this bet to anybody. Only one person took me up on it.

And we made this bet where a million dollars goes to the winner’s charity, as to whether a group of five hedge funds, the funds would beat the S&P Vanguard fund.

And my point being that the fees would not overcome — would not be overcome — by managerial brilliance and that the hedge funds would fall short.

And the other fellow betting, essentially, that paying people 2-and-20, and having an override to the fund of funds, was nothing to pay for the brilliance of getting Wall Street to manage your money.

And I promised that every year I would report the update.

And the first year I fell far behind, but we reported it then.

So we’ll put that slide up. And as you can see, seven years into it, it’s interesting that just buying Vanguard fund, you know, with no — nothing but putting the S&P 500 in there, has now given a cumulative return of 63 1/2 percent, and the hedge funds are at 19 percent.

The interesting thing is, some of that is underperformance, but the hedge fund managers have done very well during that period. If they were managing a billion dollars, for example, at 2-and-20, you get $20 million a year just for coming to the office.

It’s — you know, it’s been — the hedge funds haven’t done bad. It’s the investors in the hedge funds have paid a very big price. And the — (Applause)

We originally funded this with zero-coupon bonds. We each bought about 350,000 of zero-coupon bonds that would be worth 500,000 at the end of the period.

We converted it to Berkshire Hathaway stock — so — a few years ago, the fellow on the other side of the bet did it with me. So now it now looks like the winner will get appreciably more than a million dollars.

And if you want to entertain yourself, you can go to Long Bets — on search, just put in Long Bets, and you’ll find this organization out in Washington that sort of acts as the stakeholder, sets the rules for these long bets.

And now there’s hundreds of them up there, and they’re on all kinds of predictions, and you can go there, and if you want to disagree with one of the parties on there, you can make these bets that pay off in 50 years or 25 years.

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2014 Berkshire Hathaway Annual Meeting (Afternoon) Transcript

1. Record attendance

WARREN BUFFETT: OK, let’s get ready to proceed.

We never get any precise figures, because people come and go from the meeting. But I did know that we sent out about 11,000 more tickets this year than in any other year, and we had all the overflow rooms filled. We’re using space in a room over at the Hilton and everything, so clearly this year we have substantial more attendance than any year in the past, and I hope the spending patterns reflect that. (Laughter)

2. Risk of change to businesses

WARREN BUFFETT: So with that, we’ll go to Becky. Assuming she’s here.

BECKY QUICK: I am, I’m here.

WARREN BUFFETT: OK.

BECKY QUICK: Let’s see, this is a question that comes, and I hope I pronounce your name correctly, Michael.

It’s Michael — Michael Locheck (PH) and he says, “Energy Future Holdings’ likely bankruptcy is a consequence of unexpected and dramatic decline in prices of natural gas prices caused by a revolution in drilling technology. To what extent do you believe other assets held in Berkshire’s portfolio, debt, equity, et cetera, may be subject to disruptive technological or other changes that erode business models and barriers to entry?”

“For example, changes in consumer behavior and regulation could affect Coca-Cola. Revolution in payment systems could affect American Express, ever-increasing rate of change in technology and competitive landscape could affect IBM, wireless delivery of media content and urbanization could be disruptive to DirecTV.

“Could you also comment on whether participation of some sponsors of Energy Future Holdings, which include the very best of private equity, contributed to your decision to invest? Was it the degree of crowd mentality at play, and what lessons are to be learned from the experience?”

WARREN BUFFETT: Yeah, well. I would be unwilling to share the credit for my decision to invest in Energy Future Holdings with anybody else. I would think that’s very unfair of anyone to insinuate that they had anything to do with that decision.

That was just a mistake on my part. It was a big — it was a significant mistake, and we will make mistakes in the future.

All businesses should constantly be thinking about what can mess up their business model. And with Energy Future Holdings it was a fairly simple assumption that was made that just turned out to be wrong.

I mean, the assumption there was that gas prices would stay roughly as high as they were or go higher, and instead they went a whole lot lower.

And at that point the whole place toppled. They had a lot of reserve holdings and they had some futures positions which kept them alive for a while. But that was a basic error.

We look at all of our businesses as subject to change. A classic case would be GEICO. I mean, GEICO set out in 1936 to operate at low costs and pass on those low costs to the customer through lower prices for something that was a necessity, auto insurance.

And they originally did it by mail offerings, U.S. Postal Service, two people who were government employees. That’s where the name comes from, GEICO, Government Employees Insurance Company.

And they had to adapt over the years, and they adapted first to widening classifications. But they went from the U.S. mail, primarily, to the telephone, and later went to the internet, and onto social media.

But in there they stumbled one time, too, as they went to adapt, and they — when they left the government employees classification, at one point they became too aggressive about expanding and they almost — they really did go broke.

So there’s — change is going on all the time, and it’s going on with all of our businesses. And we want managers that are thinking about change, and what can — what’s going to be needed for their business model in the future. And we know they’re not going look the same five or ten years from now.

I mean, BNSF, something as basic as railroads, is looking big at LNG for its locomotives. Everything is going to change.

Our businesses generally deal from strength and they’re generally not subject to rapid change. But they’re all subject to change, and of course, slow change can be much harder to perceive, and can lull you to sleep easier, sometimes than when rapid change is clearly in sight.

So I would say, in answer to that question, A) I will make mistakes in the future. I mean, when you — that’s guaranteed.

We do not make anything like “bet the company” decisions that will ever cause us real anguish. That just doesn’t happen at Berkshire. But you’re not going to make a lot of decisions without making some significant mistakes.

And occasionally they work out very well. Charlie and I, and Sandy Gottesman, in 1966, bought a department store in Baltimore. Now, there’s probably nothing dumber than buying a department store in the mid-1960s. There were four department stores on the corner of Howard and Lexington Street in Baltimore in 1966, and none of them are there. And the number one store, Hutzler’s, went broke a little later than our store went broke.

But fortunately Sandy did a great job of selling it, so the $6 million invested in that department store became worth about $45 billion in Berkshire Hathaway stock as we did other things with the money as we went along.

So you do have to be very alert to what is going on in your businesses, and we want our managers to do that. But actually, it’s something that Charlie and I, and our directors, are going to think about, as well as our managers. Charlie?

CHARLIE MUNGER: Yeah, I spoke earlier about the desirability of removing your ignorance piece by piece, and there’s another trick, which is scrambling out of your mistakes. And we’ve been quite good at both, and it’s enormously useful.

Imagine Berkshire, a textile mill sure to go broke because power costs in New England were about twice as high as they were in TVA country, a sure-to-fail department store, and a trading stamp sure to be forced out of business by change in mode. Out of that comes Berkshire Hathaway. Talk about scrambling out of mistakes, I think of what we might have done if we’d had a better start. (Laughter)

WARREN BUFFETT: Yeah. The point was driven home to me — my great-grandfather started a grocery store here in Omaha in 1869. And my grandfather was running it in 1929, and he wrote my uncle who was going to be running it with him.

And the letter started out, this is in 1929, “The day of the chain store is over.” And that is why we ended up with one grocery store, which went out of business in 1969.

It — you really have to face facts around you, and the wish being father to the thought was, unfortunately, what overcame my grandfather.

3. Heinz earning power

WARREN BUFFETT: OK, Jay?

JAY GELB: This question is on the Heinz transaction.

Berkshire’s 50 percent ownership in Heinz is included in Berkshire’s results, which can be meaningful to its earnings over time.

What is Heinz’s current normalized earning power, after the substantial restructuring of the business, and what do you anticipate Heinz could earn within a few years?

WARREN BUFFETT: Yeah. Well, Heinz will be filing its own 10-Qs. In fact, I guess its first quarter would be — they went to a calendar year now — first quarter would be about due now. So you’ll get to see Heinz’s figures.

And I will say this, that Heinz was actually a very reasonably run food company with about 15 percent pre-tax margins for many years, and that’s not an unusual operating margin in the food business.

And I would just invite you to look quarter by quarter and maybe next year, too, I think the margins of Heinz will be significantly improved from those historical figures. What Bernardo Hees and his associates have done there is — they’ve just restructured the business model.

And I think that the brands, which are all-important, are as strong as ever. And I think the cost structure is going to be significantly improved without cutting into marketing expenditures.

So I think you’ll see a significant improvement, but I don’t want to name a number on that. You’ll find it out soon enough.

4. Buy companies or stock?

WARREN BUFFETT: OK. Station 11.

AUDIENCE MEMBER: Hi, Mr. Buffett and Mr. Munger. My name is Dev Contessaria (PH) and I’m a fund manager from Philadelphia.

You’ve touched on some of this already today, but I wanted to ask, if you could expand on how you think about comparing investment opportunity.

In the past, you haven’t been afraid to make a single position a large portion of your portfolio, such as Coca-Cola.

So when there is a chance to buy more of your favorite names, as in 2008 and early 2009, how did the case of buying more of companies like Coca-Cola or even a Moody’s, which had dropped from 75 to 15, as examples, compare with other things that you actually did?

Could Berkshire have achieved its historical returns with a more simple, concentrated portfolio of your favorite names with positive characteristics such as durable competitive advantage, pricing power, strong organic growth, et cetera, versus the larger, more complex collection of businesses which exist today? Thank you.

WARREN BUFFETT: Yeah. Well, depends which favorite name we might have hit harder back in the 2008 and 2009 period.

In the first instance, I spent a considerable part of our cash reserves too early, looking back, too early in the 2009 panic. The bottom of that was reached early in March in 2009, and that bottom was quite a bit lower than September and October of 2008 when we spent 16 or so billion.

Now, we were committed to finance Mars for 6.6 billion, and that commitment had been made many months earlier, so we didn’t really have much choice in terms of the timing of that.

But we did fine on the expenditures we made during that period, but obviously we didn’t do as well, remotely as well, as if we’d kept all of the powder dry and then just spent it all at once at the bottom.

But we’ve never really figured out how to do that, and we won’t figure out how to do that.

So, the timing could have been improved dramatically. On the other hand, as late as the late fall of October of 2009, when the economy was still in the dumps, really in the dumps, you know, we were able to buy BNSF, which will be an enormous part of our future.

So, overall we did reasonably well going through that period. But looking back, the most money would have been made just by buying a bundle of stocks.

When we were buying Harley Davidson bonds at 15, looking back we should have been buying the stock. But that’ll always be the case.

Overall, we would love the idea — what really we want to do at our present size and scope, and with the objectives we’ve got for our shareholders, is we want to buy big businesses with good management at reasonable prices and then try to build them over time.

I mean, when we start 2014, we’ve got a really good group of businesses, some of them very big. Those businesses will earn more over time, and then the — what we’re trying to do is add onto them and make sure we don’t issue any shares in the process. So it’s not a complicated process.

And looking back we’ll always be able to do it better than we’ve done it. That’s just the nature of things. But I don’t — I feel the game is still a very viable one, and will be for some time. It won’t be forever, it can’t be forever. But it’s still got some juice left in it. Charlie?

CHARLIE MUNGER: Well, what’s happened, of course, is the private businesses that we control have gotten to be a bigger and bigger percentage of the thing. For a great many of the early years we had more in common stocks than the total value of the company. And so we were — it was like a big portfolio of common stocks and a lot of businesses thrown in as extras.

And now, of course, the private companies are worth way more than the stocks. And, I would guess that that will continue, wouldn’t you Warren?

WARREN BUFFETT: Sure, it’ll continue. And the difference is when we’re right about stocks, it shows up in market value and in net worth.

When we’re right about businesses, it shows up in future earning power, which you can see, but it doesn’t jump out at you the same way changes in stock values do. So it’s a different sort of buildup of value, and one is somewhat easier to see than the other.

But the other is more enduring and does not require going from flower to flower. And they’re both fine, but we’ve moved into phase two. Say that’s fair, Charlie?

CHARLIE MUNGER: Yeah, well, if you’re just investing moderate amounts of capital in the middle of some panic, you take the bottom tick, it’s a very attractive price. But no significant volume of the shares could have been purchased at that price.

And so when we buy these businesses, we can get huge chunks of money into things. And now if we’d wanted to go much heavier into Moody’s, we couldn’t have bought that much anyway.

WARREN BUFFETT: No, no.

CHARLIE MUNGER: Yeah, so, we are sort of forced by our own past success, more into these bigger positions represented by the private companies.

But really, that’s in the advantage of all of us, I think.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: I love it when we buy transmission lines in Alberta. I don’t think anything horrible is going happen to Alberta. And nor do I think transmissions —

WARREN BUFFETT: If it does, we won’t know it.

CHARLIE MUNGER: Yeah, right, right. (Laughter)

And — no, I think we’ve adapted pretty well to changes in our circumstances.

And that, again, is part of life. I mean, since change is inevitable, how well you adapt to it is terribly important. And I would say the changes that many of you have watched in Berkshire over the years have been very much in our interest, and then there may be future changes that are just as desirable.

WARREN BUFFETT: We bought a fair amount of Wells Fargo, for example, really over the last few years. And because the economy came back, really, the most money, if you were buying at the bottom, came from buying the banks of lesser quality because they — their weaknesses drove them down even further in price, and they needed a good economy to come back.

But they were kind of like a marginal copper producer or something, that you make more money if copper goes up, not if you buy the best copper company but, usually, if you buy the worst one, because it — they have the highest marginal cost, but that gives it the biggest kick on profits.

To some extent that’s been true, for example, the banks. But we felt 100 percent comfortable buying Wells Fargo, and we might have felt 50 percent comfortable buying some others and so we went where we were comfortable.

Looking back, you can say we should have just bought them all. And in fact, bought the ones that had had the worst record going into 2008 or ’09, because they had the greatest recovery possible, simply because they’d fallen so far. Andrew?

5. Technology and GEICO’s future

ANDREW ROSS SORKIN: — And it has to do with the future as well, and it relates to GEICO.

And the questioner asked, “Could you, and perhaps Tony Nicely, please explain how you think about usage-based pricing, tracking drivers electronically and charging premiums accordingly, and how that will affect the auto insurance industry in the U.S. in the next decade, and how these changes impact the moat at GEICO?

I’m also sure you’ve studied the potential impact of self-driving cars on GEICO. Google says it’s now five years away. What does this mean to the future of the profit machine that is GEICO, and if the analysis showed a challenging future, would you ever sell?”

WARREN BUFFETT: Yeah. Well, the answer to the very last question is no.

The usage-based pricing is something that’s popular with some companies that have done a lot of work on it. Probably the one most identified with it is Progressive doing something called “Snapshot.”

And there’s no question that knowing how customers drive, or policy holders drive, and how they use their cars is a valuable input to assessing the proper premium to people.

And insurance is all about comparing the propensity of loss to achieve — or evaluating the propensity of loss to establish the proper premium.

And it’s very easy to understand in life insurance. I mean, if somebody is 90, they’re more likely to die than 20, despite Charlie — situation. (Laughter)

Even at 83 they’re more likely to die than somebody at 20.

The — so you know, that’s obvious. Females live longer. That’s not quite as obvious but it’s been established.

So there are various variables in insurance, and you try to assess those variables and set the proper price for the policy holder. If you lived in a state, for example, where the population of the state was one instead of, you know, 100 million, there’d be a whole lot less chance of an accident, you know, than — because of the lack of density of driving and so on. There’s all kinds of variables.

And through studying usage, by various methods, Progressive being probably the best known on it, they’re attempting to look at some variables and hope they get better information about the propensity of that particular driver to — or the likelihood of that particular driver — to be in an accident.

And we look at lots of variables, they look at lots of variables. We think we’ve got a pretty good system, and so far I think that’s been proven correct. But we’ll continue to look at many variables.

I feel very, very, very good about GEICO, GEICO’s management, and its ability to evaluate risk. And I think there are plenty of other people that are good at it, but I don’t think there’s — in my view, there’s nobody better at it, in terms of auto insurance, than the GEICO people.

So — but we ought to keep asking ourselves, “Can we do it better?” And we do ask ourselves that.

Now, when you get to the self-driving car, that is a real threat to the auto insurance industry. I mean, if that proves successful and reduces accidents dramatically, it will be very good for society and it will be very bad for auto insurers.

So you know, that can happen. I don’t know how to evaluate over how long a period that might take or what percentage of cars might be affected with that. But it certainly could happen and it would not cause us to be thinking for one second about selling GEICO. Charlie?

CHARLIE MUNGER: Yeah, some of these things happen a lot more slowly than you might think. I went to a program at Harvard, oh, at least 30 years ago, describing how color movies were going come to the house on demand, and they were just around the corner.

Well, they’ve come, but it was 30 years later. I have a feeling that self-driving cars having a huge impact on the market may take quite a while. And so I’m not —

WARREN BUFFETT: That would be my guess, but we could be wrong, you know.

CHARLIE MUNGER: Yeah, it could be wrong.

WARREN BUFFETT: But — (Laughter)

CHARLIE MUNGER: But —

WARREN BUFFETT: But if we are wrong, we’ll be wrong together. (Laughs)

It is hard to figure out how it could have a major impact in 10 years, but it may not work at all, who knows?

But GEICO will be doing more business, a lot more business, in my view, five years from now than now, and ten years from now.

You know, 30 years from now, you’re young enough to find out, and I will go away peacefully without knowing.

OK. (Laughter)

6. More international acquisitions?

WARREN BUFFETT: Gregg.

GREGG WARREN: Thank you, Warren.

You’ve been pretty explicit about your acquisition criteria over the years, and some years ago, perhaps around the time of the ISCAR deal, you mentioned at one of the annual meetings that a concerted effort was being made to make non-U.S. companies more aware of Berkshire’s positive attributes as a preferred acquirer.

Yet, despite the higher proportion of large family-owned businesses in places like Europe and the fact that over half of the world’s listed market cap currently comes from outside of the U.S., Berkshire has deployed very little capital outside of the U.S. with just ISCAR, and more recently AltaLink, coming to mind.

Is the U.S. truly that much more attractive a destination for capital, or is there some other reason why the firm has not deployed serious capital outside of the region?

WARREN BUFFETT: Yeah, no, we’ve never turned down a chance to make a significant acquisition outside the United States because of any feeling we’d much rather be doing something in the United States. We just — you know, you mentioned the Alberta deal.

But we have not had as much luck getting on the radar screen of owners around the world as we have in the United States.

Our best bet, by far, in buying a business is to buy it from the family of a founder or the founder himself or herself. So we’ve, you know, that’s our strong suit, and in the United States I think almost anybody that fits in that category with a business of size thinks of us. And a fair number would prefer us.

I don’t think that same — I think there’s some recognition outside the U.S. Certainly when we heard from ISCAR, that was in 2006, Eitan Wertheimer said, he wrote me a letter, I’d never heard of him before, I’d never heard of the company. And he said the family had thought about it, and we were the only company to which they wanted to sell, and if they didn’t sell it to us, they weren’t going to sell it.

So, there’s some awareness. But I’ve been a little disappointed in that we haven’t had better luck outside the country. And we’ll keep working at it and see what happens.

Incidentally, I just talked to Jacob Harpaz, who does an incredible job of running ISCAR. I talked to him yesterday when I was touring the exhibition hall.

They set a new record in April. Now, that won’t be the last new record they set. But that may have some slight meaning, in terms of how world business is doing, because they sell, you know, these tiny little cutting tools, and so on, that go into basic industry all over the world.

And people don’t buy those because they — you know, they’re going look pretty in their offices or anything else, they buy them because they’re using them up. And, it was a record in April. March had been extremely good, too. So they are seeing strength in the business that certainly would make it hard to believe there’s weakness going on throughout the industrial world.

ISCAR’s been a wonderful company for us. The people have been sensational. The business is extraordinary. It just is — it fits us so well that I just wish I could find a few more like it out there.

But this year, aside from the one we announced yesterday, we have not been contacted by any significant ones that made sense. We have heard from people over the last five years, I mean, we’ve — fair number. But nothing that really makes sense. But we’ll keep trying.

7. Knowing your “circle of competence”

WARREN BUFFETT: OK, station 1. We’re back at — here we are.

AUDIENCE MEMBER: Hello, Mr. Buffett, and hello, Mr. Munger. Thank you for being extremely generous with sharing your wisdom. My name is Chander Chawla, and I am visiting from San Francisco.

In the past, you have said that people should operate within their circle of competence. My question is, how does one figure out what one’s circle of competence is? (Laughter)

WARREN BUFFETT: Good question. (Laughs)

Some of the people in the audience are identifying with it, I can hear them.

The — it’s — you know, it is a question of being self-realistic, and that applies outside of business as well.

And, I think Charlie and I have been reasonably good at identifying what I would call the perimeter of that circle of competence, but obviously we’ve gone out of it.

I would say that in my own case, I’ve gone out of it more often in retail than in any other arena. I think it’s easy to sort of think you understand retail, and then subsequently find out you don’t, as we did with the department store in Baltimore.

You could say I was outside of my circle of competence when I bought Berkshire Hathaway, although I bought it, really, to resell as a stock, originally.

I probably was out of my circle of competence when I decided that I should go in and buy control of the company. That was a dumb decision — which worked out.

The — being realistic in appraising your own talents and shortcomings, I think — I don’t know whether that’s innate, but some people seem a whole lot better at it than the others. And I certainly know of a number of CEOs that I feel have no idea of where their circle of competence begins and ends.

But, we’ve got a number of managers who I think are just terrific at it. I mean, they really know when they’re playing in the game they’re going win in, and they don’t go outside of that game.

The ultimate was Mrs. B, at the Furniture Mart. She told me that she did not want stock, in terms of the Berkshire Hathaway deal. Now, that may sound like it was a bad decision. It was a splendid decision.

She did not know anything about stock, but she knew a lot about what to do with cash. She knew real estate, she knew retailing, and she knew exactly what she knew and what she didn’t know, and that took her a long, long, long, long way in business life.

And that — that ability to know when you’re playing the game in which you’re going to win, and playing outside of that game, is a huge asset.

I can’t tell you the best way to develop a great sense of that about yourself. You might get some of your friends that know you well to offer contributions. Charlie’s given me a few contributions occasionally, saying, “What the hell do you know about that?” That’s one way of putting it, of course. (Laughs)

But Charlie, do — can you help him out?

CHARLIE MUNGER: Well, I don’t think it’s as difficult to figure out competence as it may appear to you. If you’re five-foot-two, you don’t have much of a future in the National Basketball League. And if you’re 95 years of age, you probably shouldn’t try and act the romantic lead part in Hollywood. (Laughter)

And if you weigh 350 pounds, you probably shouldn’t try and dance the lead part in the Bolshoi Ballet. And if you can hardly count cards at all, you probably shouldn’t try and win chess tournaments playing blindfolded, and so on and so on.

WARREN BUFFETT: You’re ruling out everything I want to do. (Laughter)

CHARLIE MUNGER: But competency is a relative concept. And what a lot of us need, including the one speaking, is — what I needed to get ahead was to compete against idiots, and luckily there’s a large supply. (Laughter)

WARREN BUFFETT: OK, Carol. (Laughter)

8. Comparing Berkshire’s book value to stock index

CAROL LOOMIS: This question comes back a little to a question asked earlier about your annual performance standard that you comparison.

“Mr. Buffett and Mr. Munger, I think of you as running a rational company. But when I look at your annual comparison of Berkshire’s book value per share versus the S&P average, I don’t see any rationality in that at all.”

“What is the logic of comparing a stock market index against the rise in an operating company’s book value? And an operating company is predominantly what Berkshire is these days, so why do you annually make this irrational comparison?”

CHARLIE MUNGER: Let me answer that one.

WARREN BUFFETT: OK. (Laughter)

CHARLIE MUNGER: The answer is you’re totally right, and we do that because Warren wants to make it eccentrically difficult for himself. So if you don’t understand people who like to wear hair shirts, you’ll never figure out why anybody would do such a thing.

It’s a ridiculous way to make a comparison, but it makes it hard for Warren to look good. And he likes to climb mountains that are difficult. But it’s insane, you’re right. (Laughter and applause)

WARREN BUFFETT: Yeah, yeah.

Normally when he goes all wishy washy like that, I like to clarify. But I don’t think I’ll try. (Laughter)

9. ISCAR and Marmon deal valuations

WARREN BUFFETT: OK. Jonathan.

JONATHAN BRANDT: The multiple of pre-tax profit that Berkshire paid for minority interests in Marmon and ISCAR in 2013 were considerably higher than the multiples Berkshire paid for earlier purchases of majority stakes in those two firms.

Can you please explain why the valuation formulas changed, why the multiples weren’t fixed for future increases in Berkshire’s stake, which at least in Marmon’s case were always contemplated, and why Berkshire was willing to accept meaningfully lower returns on the more recent purchases, not so many years after the first purchases?

WARREN BUFFETT: Yeah, well, the multiple with ISCAR was actually determined precisely on the basis of which the original purchase was made. In other words when we made the deal in 2006, we took multiples of earnings and allowed for cash and a few things.

But — and then we took that formula and we stuck that in as both a put and call option for the family or Berkshire. They had the put, we had the call. And we stuck that in to govern things for, you know, between now and judgment day, and so that there’s no variation from the original formula.

We would never — shouldn’t say never, but we had — our style would not be ever to call that from the family, even though we had the right to do it.

The put and call were at the same price, or at the same — following the same formula. But the family elected to put it to us, but they put it to us exactly on the same basis as what was involved in the original purchase of the 80 percent.

The Marmon deal is entirely different. The Marmon deal was an installment sale, and, in effect, to make the deal and buy the originals turned out to be 64 percent, we intended it to be 60 but gave them the option to do more.

That was simply an installment sale, and we looked at the consequences of the formulas being applied in the future. The family would not have sold us the 64 percent, which they did on the original piece, unless they had the formula applying to the second and third piece that was embodied in the contract.

And we looked at that as a single transaction, knowing that if the business improved we would be paying more money, and as the cash position improved, we’d be paying more money later on. But it was all built into the original deal, so one was one — was at exactly the same price, and one was part of a three-step deal, in effect. Charlie?

CHARLIE MUNGER: But the price went up because the value went up.

WARREN BUFFETT: Yeah, but it was — and because it was built into —

CHARLIE MUNGER: Yeah, and we’d agreed to — that that would be — we’d pay value.

WARREN BUFFETT: In both cases, I should say too, both with the Pritzker family at Marmon and with the Wertheimer family at ISCAR, it couldn’t have been — they couldn’t have behaved better — or the feelings are entirely good, everybody felt good about the transaction. The initial transaction and the subsequent transaction. So it pays to have to have deals in which people feel good when they —

CHARLIE MUNGER: Nothing that happened there is that — we got just an enormous respect for the intelligence of those two families. The more we looked at those businesses, the smarter and better those families looked. It was just amazing what each family had done, wouldn’t you say, Warren?

WARREN BUFFETT: Right, right.

CHARLIE MUNGER: Absolutely amazing.

WARREN BUFFETT: And those were two important acquisitions. I mean, they — you know, they add up to lots of intrinsic value. And there, partly because of some accounting peculiarities, but the carrying value of the businesses is well below what the intrinsic business value is now.

CHARLIE MUNGER: And by the way, that Union Tank Car that’s within Marmon is John D. Rockefeller’s old business. The first John D. Rockefeller. It’s amazing how some of these good businesses have lasted.

WARREN BUFFETT: Yeah, well, actually the corporate form it — the original corporation that is Marmon, I’m quite sure, is Rockwood and Company, which I did a cocoa arbitrage with back in 1955 or something, and that’s where I met Jay Pritzker. So it — these things wind their way along.

It — one thing you learn in life, but also learn particularly in business, is that you’re going to meet a lot of people and entities and experiences — in the future that — you may have thought were one shot —one stop shops originally in your life.

10. How to find what you love and do it

WARREN BUFFETT: Station 2.

AUDIENCE MEMBER: Mr. Bung — this — Mr. Buffett, Mr. Munger, my name is Nicholas Erdenberger. I hail from the beautiful Garden State of New Jersey. And I guess the — (laughs) — I guess the question —

WARREN BUFFETT: Withhold your applause, applause. (Laughter)

AUDIENCE MEMBER: So I guess this is a follow up question to the question before.

I really connect with the idea of not investing in industries you can’t fully understand. Being a young guy who has limited ability to code and who can’t build robots, tech is certainly not an industry I fully understand.

And yet these days, the concept of entrepreneurship is nearly synonymous with tech amongst people my age. So my question to you, Mr. Buffett, is if you were 23-years-old with entrepreneurial tendencies, what non-tech industry would you start a business in and why?

WARREN BUFFETT: I’d probably do just what I did when I was 23. (Laughs)

The — you know, I would go in the investment business. And I would look at lots of companies and I would go and talk to lots of people, and I would try to learn from them what I could about different industries.

One thing I did when I was 23, if I got interested in the coal business, I would go out and see the CEOs of eight or ten coal companies. And the interesting thing was I never made appointments usually or anything, I just dropped in. But they —they felt a fellow from Omaha who looked like me couldn’t be too harmful.

So they’d always see me. And I would — I’d ask them a lot of questions, but one question I’d always ask them, two questions at the end, I would ask them if they had to put all of their money into any coal company except their own and go away for ten years and couldn’t change it, which one would it be and why?

And then I would say, after I got an answer to that, I would say, and if as part of that deal they had to sell short in the equivalent amount of money — in one coal company — which would it be and why?

And if I went around and talked to everybody in the coal business about that, I would know more about the coal companies from an economic standpoint than any one of those managers probably would.

So, I think there’s lots of ways to learn about business. You’re not going learn how to start another Facebook or Google that way, but you can — you can learn a lot about the economic characteristics of companies by reading, personal contact.

You do have to have — you have to have a real curiosity about it. I mean, you — I don’t think you can do it because your mother’s telling you to do it, or something of the sort. (Laughs)

I think you — it really has to turn you on. And I mean, what could turn you on more than running around asking questions about coal companies? (Laughter)

You have to maybe be a little odd, too.

But that’s what I would do. And I might, in the process of doing that, find some industry that particularly interested me, in my case the insurance industry did, and you might become very well equipped, even perhaps, to start your own insurance company, but perhaps to pick the most logical one to go to work for.

If you just keep learning things, something will come along that you’ll find extremely useful to do. I mean, it — but you’ve got to be open to it. Charlie?

CHARLIE MUNGER: Well, you might try a version of the trick that Larry Bird used. When he wanted an agent to negotiate his new contract, he asked every agent why he should be selected. And if he was not going be selected, whom the agent would recommend. And since everybody recommended the same number two choice, Larry Bird just hired him and negotiated the best contract in history. There’s —

WARREN BUFFETT: Well —

CHARLIE MUNGER: — there are a lot of tricks that people use.

WARREN BUFFETT: We did the same thing with Solomon, actually. It was a Saturday morning —

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: — when I call —and you were there, Charlie, weren’t you? -

CHARLIE MUNGER: Yes —

WARREN BUFFETT: — I wasn’t sure.

I called in, I don’t know whether it was eight or ten of the manager — I had just gotten in there on Friday afternoon, and now it’s Saturday morning and we had to open for business Sunday night in Tokyo, and I had to have somebody to run the place.

So I called in eight people and I said, you know, “Who besides you would be the ideal person to run this, and why?”

One guy told me that there was nobody compared to him. (Laughter)

He was gone from the firm within a few months. (Laughter)

But — the — it’s not a bad system to use.

You can really learn a lot just by asking. I mean, it’s starting to sound a little bit like a Yogi Berra quote or something, but it is — it is literally true that you — if you talk to enough people about something they know something about, and people like to talk. You know, and — here we are talking ourselves. (Laughs)

And you just have to be open to it. And you will find your spot. You may not find it the first day, or the week, or month, but you’ll find what fascinates you.

I was very lucky because I found what fascinated me when I was seven or eight years of age. But — you know, some people find chess or music, you know, fascinates them when they’re four or five.

If you’re lucky you find it early, and sometimes it takes you longer, but you’ll find it.

CHARLIE MUNGER: If it’s a very competitive business, and it plainly requires the qualities that you lack, it should probably be avoided.

I could — when I was at Caltech I took thermodynamics, and Homer Joe Stewart, who was a genius, taught the course. And it was fairly apparent to me that no amount of time or effort would turn me into a Homer Joe Stewart. He was utterly, impossibly more talented than I could be.

Gave up. I immediately said I wasn’t going try and be a professor of thermodynamics at Caltech. And I’ve done that with field after field, and pretty soon there was only one or two left. (Laughter)

WARREN BUFFETT: Yeah, I had a similar experience in athletics. (Laughter)

11. Hotel room economics during Berkshire meeting

WARREN BUFFETT: OK, Becky.

BECKY QUICK: This question comes from Darren Bordemier (PH). He says, “Warren, you’ve commented in the press that you are concerned about the hotel price gauging in the Omaha area during the Berkshire meeting weekend.” (Applause)

Hold your applause, you haven’t heard the rest. “Please elaborate further on that position, as it seems to contradict free market capitalism. Shouldn’t the law of supply and demand apply in this case?”

WARREN BUFFETT: Absolutely. And so therefore, since we want to increase the demand, the proper thing to do is increase the supply, right? (Laughs)

And that’s why we have encouraged, for example, Airbnb, to come in and — they supplied some rooms this year.

But it’s very logical. If you think about most cities, the big events that come to their convention centers and use their hotels, they size themselves in deciding where to go. If you have a relatively small industry, they can pick a moderate-sized city and they can have their convention there, and they don’t outstrip the supply of rooms.

If you have a very big industry and you’re having a convention, you know, you have to go to some place like Vegas or some place that has a lot of rooms because otherwise you do throw the supply-demand out of whack.

So, if you have an event, which isn’t sized by the people that are scheduling it, can’t be sized by the people that are scheduling it, then you can totally outstrip rational supply of rooms.

I mean, you know, the great case would be something like the Masters tournament. I mean, Augusta can’t size its hotel industry to Augusta, to the Masters, and the Masters isn’t going move any place. Well, there — are certain events like that, but there aren’t very many.

And Omaha cannot size its hotel supply to the Berkshire meeting. It sizes it to the kind of conventions it normally gets and all of that, but the Berkshire meeting has grown beyond what we anticipated.

So fortunately, there’s developed — and for that reason people started putting in — what really bothered me were the three-day minimums. I mean, it — you know, I think there’s something particularly irritating about somebody’s coming in for a one-day event to have to buy — have a three-day minimum. And the prices were getting high.

Incidentally, the Omaha Hilton right across the street, they — they’ve been magnificent throughout this, as have many others. But there were a few that were really pushing things, and we didn’t want to cut down on the demand. We didn’t want to move to Dallas, even though we’re opening a store there next year, it would be kind of fun for that.

But we’re not going move to Dal — I mean, we want — Omaha people love this event, it’s an economic boon for Omaha, but — and people get a good impression of Omaha when they come here, generally.

So it’s — there’s a lot of good things about having the meeting in Omaha, and we can’t expect anybody to build new hotels to take care of three days a year. So, fortunately, something like Airbnb is sort of a flex supply arrangement that seems to me to make a lot of sense for it.

And I think that it will be more developed by next year, and I think that the hotels will do extremely well next year. But I don’t think they can push it to the ultimate extreme of a total scarcity product. And we want them to do well, and that’s why we’ve gone where we have. Charlie?

CHARLIE MUNGER: Nothing to add.

12. Will GEICO eventually overtake State Farm?

WARREN BUFFETT: Jay?

JAY GELB: This question is on GEICO. GEICO continues to gain the most market share of the large auto insurers while delivering attractive margins. It also has the largest advertising budget of the auto insurers while maintaining the advantage of being a low-cost operator.

My question is, will GEICO, with 10 percent market share currently in auto insurance, eventually overtake State Farm, which currently has 19 percent market share in auto insurance, keeping in mind that State Farm is also a major writer of homeowners insurance coverage?

WARREN BUFFETT: Yep. Well, that’s a good question. Nobody knows the answer to that for sure. But I will tell you this, we passed Allstate this year.

And State Farm is a terrific company, I mean, it’s one of the great histories — has one of the great company histories in America. It was started by a farmer who had no insurance experience to speak of when he was, I think, in his early 40s. There’s a book called “The Farmer from Merna,” I think it is, over in Illinois, and you know, he built this incredible business based on a better business model. And that was done around 1920 or so, I believe.

And then, of course, GEICO came out with an even better model, but State Farm was huge by that time. Allstate was very, very large. And it’s taken us since 1936 to become number two.

Now, I have some projections that if I live to be 100, that we should be number one. And I tell GEICO, I’m going do my part. So the rest is up to them. (Laughter)

We will gain share, in my view. We will gain share month after month, year after year, as long as we never forget that our job is to take extremely good care of the customer, and as long as we can properly rate risks.

We’ve got some basic advantages that will enable us to do that as long as we take care of those two matters. And Tony Nicely has done a job that belongs in, you know, world’s hall of fame, in terms of achieving that objective.

The 15 years prior to Tony coming — taking over — roughly 15 years, maybe 14 years — the market share had hovered around 2 percent. And you know, maybe two-one or two-two. And you know, since he took over in 1993, it’s gone to ten-plus and it will keep going.

But State Farm has got a net worth of probably 70 billion now or there abouts, 60 to 70 billion, and they’ve got a strong presence in homeowners and they’ve got a strong agency force. They’ve got a lot of satisfied customers. So it won’t come fast, but I do think it will come. Charlie?

CHARLIE MUNGER: Well, GEICO to me is very much like Costco. And one of the reasons it’s succeeded is that they really feel a holy duty to have a wonderful product at a very low price.

A lot of people talk that game, but very few have it just right down under the body and soul of the company. But GEICO does, and companies like that do tend to grind ahead over time.

WARREN BUFFETT: One thing you’ll find about it, I think this is true about Costco, too, it’s certainly true about GEICO, is that people don’t come and go from there as they — I mean, we have practically no one from the rest of the insurance industry that’s come over to GEICO, and they don’t leave us.

I mean, they really have their own idea about how it should be done, what should be done right. And it becomes very, very reinforced. And, of course, it becomes reinforced by success. Is that true at Costco, Charlie?

CHARLIE MUNGER: Oh, Costco’s unbelievable. And it reminds me very much of GEICO, and I’m not surprised that both companies keep taking share.

It’s easy to talk the game, but living the game is something else. I mean, it’s against the human nature of many entrepreneurial people to try and get the price down and the service quality up all the time. I mean, it’s like wearing the ultimate hair shirt and yet it works.

13. Has Buffett’s frugality hurt Berkshire?

WARREN BUFFETT: OK, station 3.

AUDIENCE MEMBER: Mr. Buffett, my name is Neil Patel from Chicago. I greatly admire the way you have lived a frugal personal life even with your considerable wealth.

How do you think your frugality has helped Berkshire shareholders over the years? And Charlie, are there any instances where you think that Warren’s frugality has hurt Berkshire and shareholders?

WARREN BUFFETT: Well, first of all, let’s ask who is the more frugal between us. Charlie, who do you think — (Laughs)

CHARLIE MUNGER: Well, in personal consumption, Warren is more frugal. (Laughter)

WARREN BUFFETT: Would you care to give an example? (Laughs)

CHARLIE MUNGER: Warren lives in the same house he bought for a very modest price, what, in 1950-something?

WARREN BUFFETT: I bought in 1958, and you moved into yours about 1960, didn’t you?

CHARLIE MUNGER: Yeah, and I paid more. (Laughter)

WARREN BUFFETT: But he designed his own —

CHARLIE MUNGER: Absolutely, I could get —

WARREN BUFFETT: — he designed his own house.

CHARLIE MUNGER: — he’s more frugal.

WARREN BUFFETT: He did not pay an architect, right?

CHARLIE MUNGER: I did, I paid an architect $1,900. It was as much as 30 percent of the normal price.

WARREN BUFFETT: Yeah. Notice how he remembers the details. (Laughter)

No, I would — I have everything in life I want. It’s a very simple thing. If there’s anything that money can buy — there are things money can’t buy, but if there’s anything money could buy that I wanted, I’d do it this afternoon. I wouldn’t have any problem with that at all.

I do not think that standard of living equates with cost of living beyond a certain point. I mean, up to a certain point there’s no question that it does in — in terms of having good housing, good health, good health service, good food, everything. But — good transportation.

But there’s a point I think, if anything, you start getting inverse correlation. My life would not be happier, and it’d be worse, if I had six or eight houses or, you know, a whole bunch of different things I could have. It just doesn’t correlate.

And so I — having everything I have, I mean, you can’t have more than that. And that doesn’t really make any — it makes a difference up to a point. I mean, you could start thinking a lot differently when you got to X, but when you get to ten-X, or a 100-X, or 1,000-X, it just doesn’t make any possible difference. Charlie, can you —?

CHARLIE MUNGER: The frugality, basically, has helped Berkshire. And I look out at this audience and I see a bunch of understated, frugal people, too. We collect you people. (Laughter)

WARREN BUFFETT: But forget about it this weekend. (Laughter and applause)

The more you buy the more you save at these prices, folks. (Laughter)

14. Berkshire doesn’t “begrudge” paying taxes

WARREN BUFFETT: OK. Andrew.

ANDREW ROSS SORKIN: This question comes from Azhar Quader who’s in the audience, Queens Court Capital, wants you to know that he’s a Columbia B School grad just like you, Warren.

WARREN BUFFETT: Good.

ANDREW ROSS SORKIN: The question is the following, “Berkshire paid $8.9 billion in taxes in 2013. Pfizer is currently contemplating an acquisition that would allow it to move its technical holding company overseas and thereby save income tax expense and create shareholder value. Is this something you and Charlie would ever consider if it would create value for Berkshire shareholders?”

WARREN BUFFETT: I think the answer to that is no. What do you say, Charlie? (Applause)

CHARLIE MUNGER: I think it would be — I think it would be crazy to be as prosperous as Berkshire and get our tax to zero while we remain this prosperous. That would not be a legitimate ideal. (Applause)

WARREN BUFFETT: Yeah. We could not have done Berkshire in any other country except the United States, either. You know, and just look at what we’ve acquired and everything.

America has, in a very, very, very big way helped Charlie and I become very, very, very rich. (Laughs). Charlie?

CHARLIE MUNGER: I’ve got no complaints. And I look around at this group, I see you at breakfast, it’s a very happy group of people. I don’t think a lot of people are gnashing their teeth that somebody else has a little more.

WARREN BUFFETT: But we don’t pay — I don’t want to make it holier than thou, this stuff. We don’t pay anything beyond that — when we get all through figuring out tax on our 20,000 page-plus return, we just don’t — we don’t add a tip of 20 percent or 15 percent or anything. (Laughter)

And we do certain transactions which are tax driven. We’re in low-income housing tax credits, which actually George Bush 41 congratulated me for. So it’s bipartisan.

We — the wind energy deals we do, the solar deals we do, they are tax driven to — I mean, they won’t make economic sense otherwise.

So we follow the rules. But we don’t begrudge the taxes we pay. We’ve earned a lot of money while paying U.S. taxes. (Applause)

15. Try for Mexico’s rail freight market?

WARREN BUFFETT: OK, Gregg.

GREGG WARREN: Warren, Burlington Northern’s main competitor in the west, Union Pacific, generates around 10 percent of its revenue from freight moving to and from Mexico. It also owns a 20 percent stake in the large Mexican railroad, Ferromex.

Given the expectation for strong auto production growth in Mexico with 30 percent more capacity coming online in the next two years, and the potential for additional near-sourcing manufacturing in Mexico, how attractive do you find the Mexican freight market?

And assuming that the answer to that question is positive, would it not be a greater benefit to Burlington Northern to own the smallest Class-I railroad at Kansas City Southern, which generates about half its revenue from its Mexican concession, whether than just receiving cargo from the firm?

WARREN BUFFETT: Yeah, Union Pacific has a big edge in terms of Mexico. I mean, their route structure is such, I think they cross the border at six different places. Their route structure is far better than ours in relation to Mexico.

And Kansas — it’s true as you say, that Kansas City Southern has a very significant presence in Mexico.

But, in terms of what we can do with our money and what we see as the prospects — there are good prospects there, but there are good prospects elsewhere for traffic, too.

So it doesn’t make sense for us. But, you know, maybe someday something will, but — the math does not work for Mexico. But we’re continuously thinking about Mexico, but we’re thinking about lots of other markets, too.

There are lots of possibilities for moving more freight on the BNSF over the years. And we won’t forget about Mexico, but we won’t do anything silly, either. Charlie?

CHARLIE MUNGER: I don’t have anything to say.

You know, it’s awfully easy to imagine combinations that just make you rich with sleight of hand. And, of course, the easiest transaction is buying a competitor. But most of that stuff, when you get to a certain size, you can’t do. So why spend time even thinking about it? I’m afraid Burlington Northern is going have to get ahead on its own from here on.

WARREN BUFFETT: Wouldn’t worry about that.

CHARLIE MUNGER: I’m not worried about it.

16. Intrinsic value and the Berkshire model

WARREN BUFFETT: Station 4.

AUDIENCE MEMBER: Hi, Warren and Charlie. Dan Hua from Los Angeles. My wife, Cora, and I are thrilled to be here.

WARREN BUFFETT: We’re delighted to have you.

AUDIENCE MEMBER: Thank you. You earlier today discussed intrinsic value, and I’m a big fan of Graham and Fisher, especially “Security Analysis.” What differences do you have, if any, for calculating intrinsic value, versus what was said in “Security Analysis?”

And for examples, how does management factor into that? You recently mentioned evaluating management is like dating, and recently you said, also, management does matter.

My second part is, which company do you fear the most? Why is it that no one else has done what you have done? I mean, Coca-Cola has their Pepsi. Thank you.

WARREN BUFFETT: Yeah, the — actually Graham didn’t get too specific about intrinsic value in terms of precise calculations. But intrinsic value has come to be equated with, and I think quite properly, with what you might call private business value.

Now, I’m not sure who was the first one that came up with it, but — well, the first one that came up with it was Aesop, actually. But the intrinsic value of any business, if you could foresee the future perfectly, is the present value of all cash that will be ever distributed for that business between now and judgment day.

And we’re not perfect at estimating that, obviously. (Laughs)

But that’s what an investment or a business is all about. You put money in and you take money out.

Aesop said, “A bird in the hand is worth two in the bush.” Now, he said that around 600 B.C. or something like that, but that hasn’t been improved on very much by the business professors now.

Now the question is, you know, how sure are you that there are two in the bush, you know? How far away is the bush? There are all kinds of things. What are interest rates? But I mean, Aesop wanted to leave us something to play with over the next couple thousand years, so he didn’t spell the whole thing out. But that’s what intrinsic value essentially is.

And, we don’t — Graham would say that, Phil Fisher would say that. Phil Fisher would say that in calculating that, he would want to look a lot harder at the qualitative factors of the business in making that estimate of how many birds were in the bush.

Graham would say he would want to see the bush — you know, $2 worth of cash in the bush, you know, and to pay a dollar for it now.

One emphasized quantitative factors and one emphasized qualitative factors, but neither one would have disagreed with the math.

And I started out very influenced by Graham, so I emphasized quantitative factors. Charlie came along and said I was all wrong, and that he’d learned more in law than I’d learned in financial studies and everything, and that I should think more about qualitative factors, and he was right. And Phil Fisher said the same thing.

But that’s what intrinsic value is about, you know. if you buy a McDonald’s franchise, if you buy General Motors, whatever it may be, the real question is, A) are you going to have to put more cash into after you buy it? But it’s really cash in, cash out? When? What discount rate? All the standard stuff.

In terms of — if I had a silver bullet, what company would I shoot as being a threat to us? I don’t really — I don’t see any competitor to Berkshire. I see private equity buying lots of businesses and having an advantage in that they’ll leverage up when we won’t, and also that presently they can borrow money very cheap and all of that.

So I mean, there are always going to be people competing with us to buy businesses. But — which is our main business — main occupation for me and Charlie.

But I don’t see anybody that’s got a model, or trying to build a model, that will essentially go after what we’re trying to achieve, which is to buy wonderful businesses from people that care about where their business goes, and who generally want to keep on running them. Charlie?

CHARLIE MUNGER: Well, as I’ve said earlier, I think the Berkshire model as now constructed will have — as said in show business, with legs. It will go a long time, and I think it will be quite creditable. And I think it has enough advantage that it will just keep going a long time. And I think most big businesses don’t.

If you stop to think about it, all the great big businesses of yesteryear, how few of them have really gotten big and stayed big.

Of the really old businesses, only one stayed big and that was Rockefeller’s Standard Oil. And so we’re getting up into a territory where very few people keep going well.

But I think what we’ll be more like Standard Oil, than we’ll be like ordinary businesses, because I think we will just keep going. We will keep doing what we’re already doing, and we’ll keep learning from our mistakes.

And the people up here are no longer all that important. The momentum’s in place, the ethos is in place. It’s going to keep going. And to you young people in the audience, I always say, “Don’t be too quick to sell the stock.”

WARREN BUFFETT: Why don’t we get more copycats?

CHARLIE MUNGER: It reminds me of our mutual friend, Ed Davis. He figured out how to do an operation that was so difficult that he operated the bottom of a dark hole with instruments of his own creation. He gave his own shots by Novocain, 87 of them, while he was operating. And it was a better operation. His death rate was 2 percent and everybody else was 20.

And the other surgeons came to copy him, and they watched him. And they just said, “Well, I don’t think I’ll try and copy that.” (Laughs)

I think it looks just too hard to do. There’s — nothing in the American business school teaches people to be like Berkshire.

WARREN BUFFETT: Eddie Davis is the guy that, in effect, introduced the two of us. He was a famous urologist here in Omaha, and —

CHARLIE MUNGER: But people didn’t try and learn his operation. And it doesn’t look all that easy. It’s very different.

WARREN BUFFETT: It’s slow, too.

CHARLIE MUNGER: And it’s slow, it’s — yeah, very slow.

WARREN BUFFETT: I think the slowness deters more people than anything else.

CHARLIE MUNGER: And the difficulty with being slow is you’re dead before it’s finished. (Laughter)

WARREN BUFFETT: Well, that’s kind of cheerful. (Laughter)

Carol, let’s come up with something a little — (Laughs)

CAROL LOOMIS: Well, for a more cheerful subject, mine is inflation. In it — (Laughter)

WARREN BUFFETT: Only compared to Charlie can inflation be cheerful. (Laughter)

17. Positive and negative effects of inflation

CAROL LOOMIS: This comes from Larry Pitkowsky and Keith Trauner at the GoodHaven Fund.

“In your 1981 shareholder letter, you discuss returns on equity, interest rates and inflation, and how difficult it was for many companies to function under inflationary conditions. Indeed that Berkshire itself was not immune and would be negatively — could be negatively affected.

“Today it seems like every central banker in the world is desperate to create inflation, something that is generally great for debtors, not so great for creditors, and difficult for owners and managers.

Should investors and business owners be thinking more about inflation and higher interest rates after 30 years of declines in both? How would Berkshire behave differently if it became apparent that the future was turning inflationary?”

WARREN BUFFETT: Well, inflation would hurt us, but it would hurt most businesses. It doesn’t — there’s certain assets that if highly leveraged, obviously, would benefit from inflation. But, well, it’s just —

We’ll set up an inflationary condition. Let’s just assume tonight that drones are sent up over all of the United States and they happen to drop a million dollars in every household.

Now, the question is would the country be better off? Every individual would now have — or every family would now have a million dollars that they didn’t have the day before.

The one thing I can guarantee you is that Berkshire would be worse off at that point, obviously. And obviously, what I’ve described would be wildly inflationary.

The trick in that circumstance is to find out that you’ve got a million dollars before anybody else finds out that they have, and you’ll do very well if you’re first.

But essentially, you don’t create wealth by inflation or by having — you can move it around, but you don’t create it by inflation, and you don’t — a firm like Berkshire, you know, our earnings per share would go up. The intrinsic value of our business, measured in dollars, would go up. But under lots of inflation, unless we had leveraged those businesses, the value of your investment, in real terms, would go down. Charlie?

CHARLIE MUNGER: Well, we had a test of hyperinflation in Weimar Germany, and the people who owned stocks in places like Berkshire got through. And they didn’t prosper joyously, but they got through. And everybody else, practically, life insurance policies, bank deposits, you name it, got wiped out.

And, of course, if you create so much misery that you get a Hitler, and a World War, and a Holocaust and so forth, it’s not a good thing to let things go that far.

And so I’m — I don’t like this huge confidence that all you have to do is just keep printing money and spending it. I think there’s some limit to when that will work, and I am never going forget Weimar Germany. And I don’t think any of the rest of us should either.

We can handle a little bit of subpar growth for some stretch or other. But it would be quite dangerous to let the whole damn thing blow up because a bunch of crazy politicians were printing money. (Applause)

WARREN BUFFETT: If you own a home, though, with a very large mortgage, and you have incredible inflation that wipes out the mortgage, then you’ve still got the home. I mean, it’s just —

CHARLIE MUNGER: In Weimar, Germany, they gave you the mortgage back at the end. It was very interesting. That’s the one thing they did right. (Laughs)

WARREN BUFFETT: He’s way ahead of me, folks. (Laughs)

18. Why companies make “dumb” deals

WARREN BUFFETT: Jonathan?

JONATHAN BRANDT: In evaluating the after-tax returns Berkshire earns on its acquisitions of non-insurance businesses, whether it be the utilities, the railroad, or the manufacturing service and retailing business, in terms of choosing a benchmark, what would be your best estimate of the returns on acquisitions earned by an aggregate of all American industry, adjusted, of course, to exclude the impact of accounting write-offs and equalizing for leverage?

WARREN BUFFETT: That sounds too tough for me, but go ahead, Charlie. I’ll be thinking. (Laughs)

CHARLIE MUNGER: Well, let me summarize. I think the sum total of all acquisitions done by American industry will be lousy. It’s in the nature of corporations that are prosperous to be talked into dumb deals, and bureaucracy tends to feed on itself and create unnecessary costs.

So I think the history of acquisitions is that it’s not an enormous way to wealth. Now, it has been for us, but we’re very peculiar, and luckily a lot of people don’t want to be peculiar in our way.

WARREN BUFFETT: Yeah, I would — it’s really hard to, you know, come up with a useful answer on that. But I certainly —

CHARLIE MUNGER: But you don’t have a great deal of optimism, do you?

WARREN BUFFETT: When we read that a company we don’t control is going to make an acquisition, I’m much more inclined to cry than to smile.

But on the other hand, we love making acquisitions ourselves, so it’s a little hard to get too harsh just because we don’t like the other guy’s acquisitions.

I have been — I have sat in on, probably, hundreds of acquisition discussions conducted by people I didn’t control, as a director. And most of them have been bad ideas, but there have been some —

CHARLIE MUNGER: Some are mediocre. (Laughter)

WARREN BUFFETT: A great case is GEICO. I mean, it’s really a great case study because GEICO had this wonderful business prior to going off the tracks in the early 1970s, but it’d been an incredible business and everybody — it was well known in the financial world.

And then it went off the tracks in its own business, got back on the tracks. And then in the next — after it got back on the tracks, it made a couple of acquisitions. And they weren’t disasters, but they certainly weren’t successes, and they tended to take people’s — I think they took their eyes off the ball in terms of the potential of GEICO itself.

So the accounting costs of those — there were two acquisitions in particular — the accounting costs of those two acquisitions was not — it was poor, but it wasn’t disastrous.

But if you look to secondary effects, it was huge. I mean, there were a dozen years there or so where all kinds of gains could have been made that weren’t. And you don’t get those years back.

Now, that was probably a net plus for Berkshire, you know, in the end, because we’d bought half of the company then we got to buy the other half later on. If they’d done wonderfully, we probably would have never bought the second half. Now, maybe the first half would have been worth that much more.

But it’s human nature, to some degree, to, you know, keep wanting — I mean, normally the people who get to be CEOs are not shrinking violets, you know.

And they have animal spirits, as Keynes talked about, and they like to do things. And the supporting staff certainly senses that they like to do things. I mean, they often have people in charge of strategy or acquisitions, or all of those things.

What do you think those people are going to do? Sit around and suck their thumbs? No, they’re going keep coming up with deals. And the investment bankers will be, you know, calling on them daily.

So there are all these forces that push toward deals, and if you try to push toward deals, you’re going to get a lot of dumb deals.

We try very hard, Charlie and I, not to get eager to do a deal. We’re just eager to do a deal that makes sense.

And that would be a lot harder if we had directors, strategy departments, whatever it might be, all pushing us toward, you know, what have you done in the last three months, or something of the sort.

So the setting in which you operate really can be very important. Charlie, anything further?

CHARLIE MUNGER: No, but it’s — you know how much more tactful he is.

WARREN BUFFETT: Yeah, well the comparison isn’t tough. (Laughter)

19. Prosecute individuals or corporations?

WARREN BUFFETT: Station 5.

AUDIENCE MEMBER: I’m Russell Narig (PH) from Neenah, Wisconsin. The — not another Packer fan.

The people in this hall tonight are here because of the invest into your money, in anticipation and hope that you and Charlie would make that investment grow.

We recognize that things go wrong and that we might lose money. But never, ever, has it ever crossed our minds that we’d be cheated out of their money.

Unfortunately, that — that’s not — that’s new — I’m sorry, having problems with this microphone. Unfortunately, particularly in the investment banking business, confidence, my confidence, and I’m sure the confidence of many people in this room, are falling.

Particularly distressing are reports in the “New York Times” in the last week or so about private meetings in the Justice Department, Securities and Exchange Commission, the Fed, and others, about the need or desire, the requirement, perhaps, to bring criminal charges against some of the largest banks dealing business, for, among other things, knowingly laundering billions of Iranian dollars through our U.S. banks, knowingly laundering billions of drug cartel money through U.S. banks, soliciting on U.S. soil deals which would include tax evasion by moving assets offshore, and even fixing the LIBOR.

The problem the Justice Department is having is that they are being told that if they bring criminal charges against those banks, and we can list those banks, they’ve been in the “New York Times,” that those banks would be sorely hurt, may be required to go out of business, and require — and evolve into a new financial crisis of some sort. (Applause)

CHARLIE MUNGER: Now, we can’t —

AUDIENCE MEMBER: My question — my question, though, to you is do you believe a financial crisis will be — come about as a result of bringing justice to criminal activity on a large scale? Or have we reached a new point where criminal activity in Wall Street is being institutionalized, sort of allowed to happen because they’re too big to fail, too big to go to jail, and too big to be regulated, to follow the law?

WARREN BUFFETT: Charlie, you’re the lawyer, you take it up. (Applause)

CHARLIE MUNGER: Well, I think behavior on Wall Street has enormously improved as a result of the trauma we’ve just been through. And so I think the worst of it is behind us.

But you’re never going to have perfect behavior when a bunch of human beings live in a miasma of easy money. It’s just this is always going happen to some extent, and —

WARREN BUFFETT: How do you feel about the prosecution of individuals versus the prosecution of corporations?

CHARLIE MUNGER: Well, I think there’s hardly anything that changes behavior more than prosecuting individuals.

When they took Boy Scout leaders out of Pittsburgh or wherever it was and put them in the federal penitentiary for fixing steel prices, it really changed behavior of American businessmen. So I do think that a few criminal prosecutions do change behavior a lot. And it looks to me like we’ll get a few.

WARREN BUFFETT: Yeah. I may be biased a little bit by the experience at Salomon, but — I lean way more toward prosecution of individuals than corporations.

You know, I literally saw, you know, a bad act, or maybe multiple bad acts, by just a couple of people and negligence in reporting by a couple more, you know, come close — certainly upsetting, hurting, and maybe destroying, you know, possibly thousands and thousands of other people’s lives, forgetting about the financial investment.

And it is — it did seem to me, and that’s — had that experience a couple of other times in what I’ve seen, that — that it really — it may be easy — it’s way easier to prosecute the corporation. The corporation’s going write a check, and you know, I mean, it’s somebody else’s money.

And the prosecutor knows he’s going get a win, basically, if he goes against the company, whereas he’s got a way tougher job going against individuals. The company’s going to cave, it’s just their calculus is such that it just doesn’t make sense to fight if they can write a check, whereas the individual is fighting to stay out of jail.

So the prosecutor’s got an easy case, or relatively easy case, and probably a headline-grabbing case, if he goes against the corporation. And he has a grinded-out type of thing, which he can very well lose and which really takes a lot of work, against individuals. So — but I still lean very much — toward going against individuals. And —

CHARLIE MUNGER: I do, too. That’s what I meant when I said when antitrust violations were regarded as forgivable offenses, menial sins, we had a lot of them, and we still have some now that we prosecute people criminally. But we have really changed behavior on price fixing by the individual prosecutions, and we haven’t had many of those prosecutions in finance yet. And we probably need some more. Don’t you agree with that?

WARREN BUFFETT: Yeah, it’s — absolutely, absolutely.

And I will tell you this: we have 300,000-plus people working at Berkshire. Somebody is doing something wrong now, I mean, that — you know, you cannot have a city of 300,000 people and not have somebody behaving badly.

And that’s the thing — that is the one thing that — I don’t worry about us making money, we’ll figure out a way to do that. And it may be better or worse than we hope for. But it won’t be a disaster, ever.

The disaster is if somebody is doing something wrong that, you know, that actually reflects badly on the whole organization.

And I know that’s, to a degree, out of my hands. I can tell the managers, and they can tell the people that work for them that reputation is more important than anything else. And that’s going to have an effect, and I think it’s going to have more of an effect than having them — giving them some 200-page manual.

But it’s not going cure everything. And what we hope is when there is something wrong that we find it out early, and then it’s up to us to do something about it.

But we will have a problem of some sort, at some time, because it just — you know, 300,000 people are not going to all behave properly every day. It just doesn’t happen.

But the individual prosecution, and I’ve written about that a little bit in the annual report in terms of — the way to change behavior is to have the fear, at least among people who may be doing the wrong things, is to have the fear that somehow it’s going to come home to them and hit them hard.

And if the only fear is that the company’s going have to write a big check, you’re going to get way less change in behavior than if it’ll hit home to the individual. Becky? (Applause)

20. Effect of major railroad accident on BNSF and Berkshire

BECKY QUICK: This comes from Mark Blakley from Tulsa, Oklahoma.

He says there’s been a number of railroad accidents in the past year. In January, the Wall Street Journal published an article highlighting the lack of insurance to cover a worst-case accident scenario.

“Mr. [Matt] Rose of BNSF was mentioned as wanting to set up an insurance fund funded by the railroads to protect the industry in case of an accident, similar to a fund currently set up by nuclear power companies, but that idea has gained no traction.

“How would a worst-case accident scenario impact BNSF and Berkshire Hathaway? And if the industry is lacking insurance for such an event, how can the company protect itself, and what exposure does Berkshire have should a major accident occur?”

WARREN BUFFETT: Yeah, well we’re on both sides of that because Ajit [Jain] has offered the rail industry some very high limits to all the major railroads. But they don’t like his price, presumably. And I would say this, the four major railroads really have the financial capacity to pay a huge award if something really terrible happened.

The most — you know, I don’t know which is the most dangerous — they have what they call hazmat, hazardous materials, and rails have to carry them. You’re a common carrier, you’re forced to carry them. And the railroads would really prefer they didn’t carry them, but they do, they have to. And they probably can’t get enough, ever get enough, in the way of payments per carload to really compensate them for the risk involved.

But the four major railroads, certainly have the — it might be a very, very significant financial hit to them, but I think they have the capability of, if something really drastic happened, I think they do have the financial capability to handle that size — kind of an award.

And if they feel that they don’t, they can buy insurance from Ajit, but so far we haven’t sold any.

The companies have insurance, but they don’t like — they’re not going talk about the amounts that they have or anything of the sort because that becomes a honey pot sometimes, and it’s not advisable to discuss your insurance limits publicly.

But I would — it is true, as the writer mentions, that the nuclear risk — the government decided was too big, as they have with terrorism — decided it was too big to be borne by private industry.

I don’t think the consequences of any conceivable accident — you could probably dream up one — but of any conceivable accident on rails would go beyond the capability of the major railroads to pay. But it could be very, very large, relative to their net worth and relative to their current earnings. Charlie?

CHARLIE MUNGER: Yeah, the big surprise for everyone, of course, was British Petroleum.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: Nobody in their wildest dreams believed that a major oil company, from an accident in one well, would have a loss in so many tens of billions of dollars. And, of course, that’s gotten a lot of attention.

I don’t know about Warren, but after that happened, I would have less enthusiasm for drilling in the Gulf. It was just such a big loss compared to anything.

WARREN BUFFETT: And a gain, possible gain.

CHARLIE MUNGER: And gain — possible gain. And that was a big oil field they tapped into, but it wouldn’t remotely pay for this accident. And so — but I — Matt will know, the biggest rail accident in the history of the rails, has it cost $200 million? Is Matt there?

WARREN BUFFETT: I don’t think — I don’t think Norfolk Southern has ever announced what that accident cost.

But we are not getting paid enough, I can tell you this, for carrying chlorine or ammonia or something like that. I mean, it — just — you know, to buy appropriate insurance just to cover those kind of products, compared to the revenue, I don’t think it ever would make sense.

But we’re required — they’re going move from one place to another one way or another, either by truck or in some manner. And we are a common carrier.

But it is not — that’s not one that keeps me awake nights from a financial standpoint. The big risk is some form of very effective terrorism or action by a rogue state in terms of nuclear, chemical, biological, or cyber.

And, you know, war acts are excluded in insurance policies. But you could have some kind of a terrorist act that would create damages, whether they’re liable under insurance contracts is another matter, but could create damages like we have never seen. And there’s a, you know, there’s obviously a reasonable probability of that happening sometime in the next 50 years, and what that probability is I don’t know. But it’s not insignificant. Charlie?

CHARLIE MUNGER: Well, we saw what one pilot could do recently in this Malaysian airplane.

I think we live in a world where there are always going be big events, and I think we’re lucky, to some extent, that we have some big corporations that can have elaborate safety programs and that can handle the losses when they occur. I don’t think we’d be better off if we had a bunch of little Flivvers going around the airplanes.

21. Is commercial property-casualty insurance expansion too late?

WARREN BUFFETT: Jay?

JAY GELB: — question is on Berkshire’s primary commercial property-casualty insurance business.

Berkshire plans to substantially expand the Berkshire Hathaway specialty insurance unit and has also become a major insurer of Lloyd’s business through an Aon-brokered facility.

Why is Berkshire increasing its presence in commercial property-casualty insurance when pricing has peaked?

WARREN BUFFETT: We — it’s the first one that’s more important.

We entered the commercial insurance field the middle of last year, and we had some wonderful talent that wanted to join us. And we have a great amount of capital, a very, very good reputation, and we think we have the ability to both underwrite more intelligently than most, to keep larger limits than anybody, and to operate at costs significantly below average.

So if you put those elements together, and you throw in Ajit Jain overseeing the operation, I think it’s a terrific opportunity.

And I think you will — and it wouldn’t make any difference when we entered it. I mean, we entered it because we had the availability of some terrific people. That was the reason for the timing of it.

And we’ll have — we’ve added to that group significantly. Peter Eastwood runs it, and I think we will build a very, very significant commercial insurance operation over time. And I believe that that operation will operate with better underwriting results than the great majority of our competitors.

Charlie?

CHARLIE MUNGER: Well, I think it’s a very logical thing for us to do. And, of course, when something is logical we don’t hold back because we think the business cycle might possibly be a little better. It’s a long-term play.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: We’re not going away based on the little short-term troubles.

WARREN BUFFETT: No, it’s a forever play. And — when we see a chance to enter a business we like, basically, with outstanding people and with some very fundamental competitive advantages, we’re going to play the game and we’re going to play the game hard.

22. Buy a sports team or sports equipment company?

WARREN BUFFETT: Station 6?

AUDIENCE MEMBER: My name’s Ed Boyle (PH) and I’m from Chicago. My question’s for Warren and Charlie.

Do you ever have any plans, or would you be interested, in buying a professional sport team —(laughter) — or sports equipment manufacturing company, being that we’re — sports is in a global world today? Or is this out of the Berkshire game?

CHARLIE MUNGER: Warren’s already done it.

WARREN BUFFETT: I owned a quarter of a major — a minor-league team, but it’s not responsible for my position on the Forbes 400. (Laughter)

The answer to your question about buying a sports team is no. In fact, if — Charlie and I — if you read that either one of us is buying a sports team, it may be time to talk about successors. (Laughter)

We are — we do — sports equipment has generally not been a very good business, although, you know, obviously Nike’s done incredibly well in its overall operation.

But — we own Spalding. We own Russell. And you know, Spalding has been around a long, long time. A.G. Spalding, I forget when the hell he was — I think he was trying to take baseball to the rest of the world back in the, I don’t know, the 1880s or something like that.

But it’s — generally speaking, if you look at the people that have made golf equipment, footballs, helmets particularly, baseball gloves, baseballs, it’s not been a particularly profitable business.

And certain aspects of it, like helmets, you know — the last thing Berkshire should do is own a helmet company. A helmet company should be owned by some guy that owes about a million dollars and doesn’t have a dime to his name, because, you know, he is not going to be a target. And we would be the ultimate target.

That’s the reason — we used to be involved in Pinkerton, but we’d had no interest in — and we got offered the chance to buy the whole place, and the idea of owning a business that provided guards at airports, you know, when anything went wrong, you know, you’re going to say that it was the guard’s fault. And here’s this super-rich corporation around there that is a perfect target.

I mean, a guard company at airports, again, should be owned by somebody whose net worth does not get out to two figures. (Laughter)

So, you won’t see much of us in the sports arena.

But Charlie here, are you looking at the Clippers or —? (Laughter)

Now I’m worried that he is. No — (Laughter)

CHARLIE MUNGER: Whatever Warren thinks about sports teams ownership, I like it less. (Laughter)

23. Secrecy, Bill Ackman, and activist investors

WARREN BUFFETT: OK. Andrew.

ANDREW ROSS SORKIN: OK, Warren. You have long advocated for transparency and disapproved of greenmailers. Bill Ackman compared his amassing his stake in Allergan in stealth ahead of Valeant’s bid to your purchase of Coca-Cola in the 1980s.

Is that right? What do you make of the covert tactic Ackman is using from a policy perspective for the markets?

And just as important, what do you make of the larger trend of activism in corporate America?

WARREN BUFFETT: I hadn’t heard that about Coca-Cola. I’m really not sure how that would come about. I mean, we bought stock in the open market, we never used a derivative transaction or any sort in buying it, or anything. I mean, and we certainly haven’t taken it over yet. The — so I — I’m not sure — can you elaborate, Andrew?

ANDREW ROSS SORKIN: I don’t have more from the —

WARREN BUFFETT: Oh yeah.

ANDREW ROSS SORKIN: — the question. I believe Bill Ackman went on television at one point, had commented that using his stake, or buying the stake, rather, he did it covertly, and I think he was perhaps suggesting that, I don’t know, maybe I will adjust the question.

There have been times in the past when you have bought stakes in other companies and used specific rules through the SEC to do so with — to give you some room without disclosing. Maybe, will that adjust the question?

WARREN BUFFETT: It —

ANDREW ROSS SORKIN: Or you could just go to the activism question.

WARREN BUFFETT: Yeah, and tell me the activism question again, because we have never used derivatives or anything that would get us around the rules of reporting, I mean, it’s that simple.

But what’s the second part?

ANDREW ROSS SORKIN: I think that the second part is what do you make of the larger trend of activism in corporate America, given that it’s in the news so much today?

WARREN BUFFETT: Well, I don’t think it’ll go away, and I think it scares the hell out of a lot of managers. (Laughs)

The — there are cases — certainly cases where corporate management should be changed. I mean, you can’t have thousands of corporations without that being the case.

I think, generally speaking, that the — you know, the activists, if they get the price of the stock up one way or another, you know, that’s going to end their interest in the business, so I don’t think they’re looking for — often they’re not looking for permanent changes for the better in the business. But they’re looking for a specific event that will result in a big price change, and —

They’re certainly attracting more and more money. In other words, the funds flowing to activist hedge funds and so on is — multiply them, sure, by a significant factor, and that means they can play the game on a bigger scale.

And anything in Wall Street that looks like it’s successful will generate a funds flow that will, you know, go on until it’s no longer successful. Charlie?

CHARLIE MUNGER: Well, you’re right that the activism is causing more of a stir in corporate management than anything has in years. Practically nobody feels immune.

When an activist comes into a company, 20 or 30 percent of the stock can change hands rather rapidly, and management that seemed entrenched is — suddenly is threatened. And, of course, that sort of thing causes a lot of anguish.

And on the other side, the activists, by and large, are making a fair amount of money. And, of course, in the culture we live in, most people don’t care how the money is earned, they just care whether they get it or not.

And so that — that just grows like some — I don’t know, the beanstalk of Jack. And so I think we have a very significant effect.

And some of the stuff — you’ll find an activist who is not what you’d want to marry into the family, going after a company you would never buy into. And when that happens, it reminds me of Oscar Wilde’s definition of fox hunting. He said, “The pursuit of the uneatable by the unspeakable.” (Laughter)

And I think we’re seeing some of that. It’s — I don’t think it’s good for America, what’s happening —

WARREN BUFFETT: What do you think —

CHARLIE MUNGER: — averaged out.

WARREN BUFFETT: What do you think it’ll be three years from now?

CHARLIE MUNGER: Bigger.

WARREN BUFFETT: Wow.

CHARLIE MUNGER: Well, what’s stopping it?

WARREN BUFFETT: Yeah. If it’s bigger three years from now, it’ll be a lot bigger. I mean, just the compounding of numbers.

CHARLIE MUNGER: It’s really serious.

24. Buy smaller companies instead of waiting for an “elephant?”

WARREN BUFFETT: OK. Gregg. (Laughter)

GREGG WARREN: If Berkshire’s size is expected to be an ongoing constraint for growth, does it make more sense for the firm to target a larger collection of smaller companies that are growing faster and can do so for a longer period of time, rather than looking to bag a big elephant that is in all likelihood already reached maturity, leaves the firm to sit on larger-than-normal cash balances for a longer period of time, even if it means paying a higher price for the growth?

And if the answer is no, then what is the opportunity cost to Berkshire shareholders for keeping a lot of excess cash on hand until the right deal comes along?

WARREN BUFFETT: Well, the answer to the first is one doesn’t preclude the other. You know, we’d be delighted to buy some company for 2 or 3 billion that we thought would do very well over time.

But that applies to one for 20 or 30 billion. Now, if you get down to buying one for a couple hundred million, that may fit one of our subsidiaries to do that that knows the business.

But — we’re not passing up anything of any size that can have any real impact on Berkshire. And like I say, our subsidiaries made 25 tuck-ins last year, and they’ll keep making more. They’ll see things that fit them.

But one, you know, one $30 billion deal is ten $3 billion deals, and a hundred $300 million deals. So, in terms of the reality of how we build a lot more earning power into Berkshire, which is what we’re trying to do, our main emphasis should be on bigger deals. Charlie?

CHARLIE MUNGER: Well, I agree with that. The idea of buying hundreds and hundreds of small businesses —

WARREN BUFFETT: Not worth a damn.

CHARLIE MUNGER: — not as bolt-ons for what we already have, it would be anathema.

WARREN BUFFETT: Yeah, there’s lots of competition for the small deals. I mean, private equity is going after all kinds of small deals. In fact they just keep selling them to each other to some degree.

We don’t feel envious when we look at what they’re doing, in the least. But that doesn’t mean we can’t find an occasional small business that fits in and that will do well.

It’s not going be the future of Berkshire, though. But I want to emphasize one does not preclude the other.

25. The most intelligent question you’ve been asked?

WARREN BUFFETT: Station 7.

AUDIENCE MEMBER: Willy Larsen (PH) from San Francisco.

You both mingle with the smartest investors in the country, something that I don’t have the opportunity to do. So to my question, what is the most intelligent question you have been asked recently on investing, and what was your answer to that question? (Laughter)

WARREN BUFFETT: Charlie, you can go first on that while I think.

CHARLIE MUNGER: Well, I’ve already done that when I answered the young gentleman who said he couldn’t understand why Warren compared his — or Berkshire’s book value increase to stock market index performance.

In other words there are a lot of interesting questions that don’t get much attention where there’s a lot of irrationality.

WARREN BUFFETT: The question you asked, I get that frequently from the college students that come out. They say, “What’s the most intelligent question that you’ve gotten in the past.” And I never come up with a good answer, and I’m not coming up with one today —

CHARLIE MUNGER: I don’t like the question, do you?

WARREN BUFFETT: No. (Laughter)

That’s why we changed —

CHARLIE MUNGER: I don’t think it’s quite fair.

WARREN BUFFETT: That’s why I let you go first. (Laughter)

CHARLIE MUNGER: Yeah.

26. MidAmerican energy return on assets

WARREN BUFFETT: OK, now we’ve hit 54 questions. So now we start going around to the stations in order. All of the journalists of each had six apiece, so we’ll go to station 8.

AUDIENCE MEMBER: Philip Case, Manchester, New Hampshire.

My question pertains to the MidAmerican Energy segment. On page 64 of our annual report, you provide us with segment data for each business.

For the MidAmerican Energy segment, when I take earnings before interest and taxes and add back depreciation expense and subtract capex, the result is negative operating cash flow.

When I repeat that exercise for each of the past five years, in its best year the segment generates $308 million of operating cash flow. When I divide that by tangible assets, the result is a return on tangible assets of 0.86 percent.

Why are we allocating capital to a business that in its best year generates a return on tangible assets of less than 1 percent?

WARREN BUFFETT: You were doing great until you got to return on tangible assets. The — we love the math that you just described, as long as we are going to get returns on the added capital investment. And we are in businesses, whether it’s wind energy in Iowa or whether with PacifiCorp after we bought it, there were lots of opportunities for capital investment. And the energy which we bought, we’re looking forward to putting more capital in because as long as we get treated fairly by the regulators in the states that we operate, we will get appropriate returns on that.

And the return is not measured by the cash minus the increased capital investment we’re making. It’s measured by the operating earnings after depreciation. And there will be times in our businesses where no net investment may be required. But we actually prefer the ones where net — in the utility business — where net investment is required because we like the idea of getting more capital out at reasonable returns.

Now, the bet we are making is that regulatory authorities will treat us fairly in the future. And we’ve got every reason to believe that’s true in the jurisdictions in which we operate. And one of the reasons we believe it’s true is because we’ve done so much better than, really, the great majority of utilities in delivering electricity at lower rates than are charged by most utilities.

We have a situation in Iowa, for example, where there is one stockholder-owned competitive utility, and some other municipal-owned ones, and if you look at our rates, they are significantly below those of our competitors.

And in fact, one of our directors has a farm where he buys from two different sources, one being us. And his rate from us is dramatically lower than the one from the cooperative arrangement that exists.

So, we have a deserved good reputation with the regulators that we’re dealing with. We’ve improved the operations, including safety, incidentally, dramatically from the conditions that existed before we purchased the utilities. That’s why they welcome us when we come to new states.

And so if we can put more money into useful projects in those states, we’ve got every reason to believe we will get returns that are appropriate.

But if you compute net cash generated from those, you will see nominal or negative figures for a considerable period as we add to our investment and we make those utilities even more useful for people in those jurisdictions. I think we’ll get a fair return.

We have somewhat similar situation at the railroad, too. But we’re very happy about both of those businesses. Charlie?

CHARLIE MUNGER: Yeah, if the numbers you recited came from a declining department store, we would just hate it. But when it comes from a growing utility, we like it because we have such confidence that the reinvested money is going to do exceptionally well. It’s just that simple.

WARREN BUFFETT: Yeah.

Greg —

CHARLIE MUNGER: They’re two different kinds of businesses.

WARREN BUFFETT: Greg? Is Greg here? You want to — you might be able to give him a few figures that I don’t remember off the top of my head in terms of comparative — how our prices compare, and give him a little more of a flavor on how the utility commissions do regard us and how they treat us fairly.

GREG ABEL: Sure. When you look at our rates across each of the regions, effectively we’re generally the low-cost provider, or in the low quartile.

Your example, Warren, in Iowa was a great example. The last time we had a rate increase there was 1998. We’ve just currently had one this past year, so it’s the first one in the past 16 years. And we don’t see another one in the foreseeable future. And when you create that type of model with our regulators, obviously they’re very supportive of the various projects we’ve introduced.

So this past year we introduced a project in Iowa, it’s a 1,000 megawatt project, $1.9 billion being incurred. And if you go to the gentleman’s comment, yes, we’re going put the — we’ll deploy that $1.9 billion over the coming two years, but we’ll earn 11-and-a-half percent — 11.6 percent return on it.

Generally when we look at our utilities, we do pay attention to our capital, we try to keep it very close to our depreciation. That’s what we put back into the business. We’ll even earn on that capital, but the reality is the lion’s share of our capital right now is growth capital. And we earn a very nice return on that.

WARREN BUFFETT: Greg, you might comment, just a minute, I think they’d find it interesting, on what’s happening in Iowa with the tech companies, simply because of what we’re doing in the electric field. Or not simply, but in part because of what we’re doing in the field of electricity.

GREG ABEL: Right. So when you look at the tech companies and the data centers that exist, if you just go across the river, we service Google in Council Bluffs.

They’ve got a site that was initially a relatively small data center. They’re looking at taking it to 40 to 50 megawatts, which is a small size of a power plant. But the reality is they’re talking about ultimately building that to 1,000 megawatts. And we’re seeing that replicated time after time in the state.

And it’s really due to two things. One, we’ve got these exceptionally low rates. And then the fact that a significant portion of our energy, as Warren highlighted earlier and I touched on, comes from renewable energy. They want those credits, they want to be associated with a utility that’s producing green power.

27. Education market’s future in U.S. and China

WARREN BUFFETT: OK. Station 9, please. (Applause)

AUDIENCE MEMBER: Good afternoon, Mr. Buffett and Mr. Munger. My name is Gao Ling Yun and I came from Shanghai, China. I focus on the education investment.

Today, my co-worker, Yi Nuo Education Company and I have a question. What do you think about the education market in America and China in future? Thank you.

WARREN BUFFETT: Charlie?

CHARLIE MUNGER: Well, I didn’t catch those last two words. In what?

WARREN BUFFETT: He wanted to know what we thought of the education market in U.S. and China, but he didn’t —

CHARLIE MUNGER: But in what? He said in some — is it health care?

AUDIENCE MEMBER: In future.

CHARLIE MUNGER: In the future, I see.

Well, we certainly are getting the easy questions late in the day. (Laughter)

WARREN BUFFETT: Yeah. Yeah. (Laughter)

CHARLIE MUNGER: I think America —

WARREN BUFFETT: Whatever he says, I agree with. (Laughter)

CHARLIE MUNGER: I think America made a huge mistake when they allowed the public schools, and many particularly big school systems, to just go to hell. (Applause)

And I think the Asian cultures are less likely to do that. So to the extent that Asian cultures are avoiding some of our mistakes, why, I just wish we were more like them.

WARREN BUFFETT: OK. (Applause)

28. Buffett’s joke about Munger’s hearing

WARREN BUFFETT: I probably shouldn’t tell you this. When Charlie was having a little trouble there on those last two words — I get a little worried about Charlie, don’t know whether I should talk about this, but — (Laughter)

I thought maybe he was losing his hearing and I didn’t want to confront him with it. I mean, we’ve been pals for a long time, so I went to the doctor and I said, “Doc, I’ve got this wonderful partner, but I think maybe his hearing is going on him.

“And I want to talk to him about it. I mean, how do you say that to somebody you’ve known that long? And what should I do?” He says, “Well, you stand across the room, talk to him in normal course of — tone of voice, and let me know what happens.”

So the next time I was with Charlie, I stood across the room and I said, “Charlie, I think we ought to buy General Motors at 35, do you agree?” Not a flicker.

I go halfway across the room. I say, “Charlie, I think we ought to buy General Motors at 35, do you agree?” Nothing.

Get right next to him, in his ear, “Charlie, I think we ought to buy General Motors at 35, do you agree?”

He said, “For the third time, yes.” (Laughter and applause)

So speak up, speak up. (Laughs)

29. Is housing lending reform needed?

WARREN BUFFETT: Station 10.

AUDIENCE MEMBER: Yes, this is — Glen Green (PH) from Chicago.

First of all, I want to thank you for allocating capital so well all these years, very much appreciated.

The question has to do with housing and housing reform more specifically, and there’s clearly legislation in Washington, D.C. right now talking about reforming the GSEs, specifically Fannie and Freddie. Do you think we need housing reform? What would be a reasonable approach to do it, and if private participants were involved, would that make sense for Berkshire given Ajit’s actuarial skills and your ability to allocate capital?

WARREN BUFFETT: Well, I think that — and Charlie may disagree with me on it, I think that the 30-year fixed-rate mortgage is a terrific boon to home owners.

It’s not necessarily such a great instrument to own as an investor, but I think it’s done a lot for home ownership. May have been abused in some cases, but overall it’s done a terrific job for home ownership in the country. Let people get into homes earlier than they might have been able to otherwise, kept costs down to quite a degree.

And so I would hope that — and the government guarantee part of it does keep the cost down. Nobody — no private organizations can do it. I mean, home mortgages are an 11 trillion-or-so dollar market, and there’s not the insurance capacity, or remotely the insurance capacity, for private industry to do the job, and the rates would be much higher.

So I think you keep the government in the picture. Now, the question is how you keep the government in the picture without keeping politics in the picture? And we’ve found some of the problems with that, in terms of not only Fannie and Freddie being — doing a lot of dumb things on their own, but being prodded into doing some of those things by politicians.

And I think there could be a way — I wrote an article 20, or 30 or — probably 30 years ago, an op-ed piece that appeared, I think, in the “Washington Post,” when the F-D-I — well, when FSLIC, the savings and loan guarantee operation was essentially falling apart, and suggesting for the FDIC some way to get the private sector into pricing and evaluating the risk, in that case, of banks, but essentially the government being the main insurer.

There could be — there could well be a way that that model, and it’s being explored now, that model works in terms of home mortgage insurance.

I don’t think we would likely be a player, because I think that other people would be more optimistic than we would be in setting rates.

In the end, the government would have to be the main insurer. You might have a situation where private industry priced 5 percent of it and the government took the other 95 percent and, in turn, even guaranteed the 5 percent by the private industry once the private investors went broke.

But I do think it’s very important to get housing, the mortgages for homes — to get that a correct national policy. I know it’s being worked on. And I think, you know, I think it’s very unlikely that Berkshire Hathaway would play any part in it.

Charlie, what are your thoughts?

CHARLIE MUNGER: Well, when private industry was allowed to take over pretty much the whole field, we got the biggest bunch of thieves and idiots that you can imagine screwing up the whole system and threatening all of us. So I’m not very trustful of private industry in this field.

And so, as much as I hate what politicians frequently do, I think the existing system is probably pretty sound.

At the moment, Fannie and Freddie are being pretty conservative and they’re making almost all the home loans. I think that’s OK, and I’m not anxious to go back to where the investment banks were in a big race to the bottom, in terms of creating phony securities.

WARREN BUFFETT: Yeah, and I think — one question is whether you let Fannie and Freddie just run off as is, and I don’t know —

CHARLIE MUNGER: Instead of keep doing just what they’re doing.

WARREN BUFFETT: But I think — I think you may — I think certainly one of the things that led Fannie and Freddie astray was the desire to serve two masters and increase earnings at double-digit ranges. And to do that, they started doing big portfolio activities.

I think if Freddie and Fannie had stuck to insuring mortgages and not become the biggest hedge funds in the country, because they did have this capability of borrowing very cheap, very long, and therefore could get a reasonable — what looked like a reasonable spread on a huge portfolio action. I think that was a big contributing factor to —

CHARLIE MUNGER: Well, they became, in effect, private corporations. But they’re not anymore, Warren. They’re —

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: — and they are at the moment being fairly conservative.

WARREN BUFFETT: There are people who want them to return to being private corporations, though.

CHARLIE MUNGER: Yeah, but I think that’s a mistake because when they really got lousy, it’s because the private companies were taking over the whole mortgage market as bad lending drove out good. And Fannie May and Freddie Mac, to hold up their volumes, joined in the rush to laxity and fraud and folly. And so —

WARREN BUFFETT: Would you let them have portfolio activities at all?

CHARLIE MUNGER: I don’t see any need for it.

WARREN BUFFETT: Yeah, I don’t either. And I think that did get them into quite a bit of trouble. And I think those were done in order to keep the earnings per share game going.

CHARLIE MUNGER: No, I think that particular experiment in privatization was a total failure. (Applause)

WARREN BUFFETT: OK. Station 11, and —

CHARLIE MUNGER: And we made a billion dollars out of it, if you remember.

WARREN BUFFETT: Well, I wasn’t going mention that. (Laughter)

30. “Fortunate” to partner with 3G and Jorge Paulo Lemann

AUDIENCE MEMBER: Good afternoon. Whitney Tilson, shareholder from New York City.

I’ve just started reading “Dream Big,” the book recently released about your new Brazilian partners and I’m really enjoying it. Their track records are unbelievable, and as a long-time Berkshire shareholder I’m delighted that you’ve partnered with them, and hope that Heinz is the first of many elephants that you bag together.

WARREN BUFFETT: Can I interrupt you just for one second, Whitney? I appreciate that sentiment, and that book is available in — (Laughter)

I should have mentioned it earlier. The book was written in Portuguese and it was a best seller in Brazil for the last year. But it just got translated very, very, very recently and it is available at the Bookworm. So — Whitney, you can go on from there, but I did want to mention it’s available.

CHARLIE MUNGER: Why would you assume that all of our shareholders don’t read Portuguese? (Laughter)

AUDIENCE MEMBER: I’ll also mention that it is only available on Amazon via Kindle. The only hard copies in the world in English that I’m aware of are available downstairs, so that will create quite a run on the book, I think.

WARREN BUFFETT: We will raise the price. (Laughter)

AUDIENCE MEMBER: So I have two questions related to this. First, I know you’ve known these gentlemen probably for a couple decades, and I’d love to hear your observations on what’s their secret sauce? It’s got to be more than zero-based budgeting, which we all hear about. What are the key things they do that produces such extraordinary returns?

And secondly, when I look at some of the biggest, best deals that you’ve done in recent years, important factors seem to be your longtime personal relationships, for example, with Jorge Paulo Lemann in the Heinz deal, or your brand name.

The Warren Buffett stamp of approval mattered a lot to some of the deals you did with, for example, Goldman or GE during the financial crisis. And I just wonder what your thoughts are on whether your successors will have the same opportunities to do wonderful deals like this?

WARREN BUFFETT: It will become the Berkshire brand. I mean, the first year or so people will wonder about it, but the person that follows me will bring the same qualities, including the ability to write a very big check. But other things besides that, and it will be a Berkshire brand that may have started with me, but that will continue.

Going on to our Brazilian friends, they’re very smart, they’re very focused, they’re very hardworking and determined. They’re never satisfied.

And as I said earlier, when you make a deal with them you’ve made a deal with them. They don’t overreach, they don’t overpromise. They’ve got a lot of good qualities. And if you read the book, I think you’ll probably learn a lot more about the qualities that made them what they are.

But we are very fortunate to be associated with them, and we’re very fortunate to be associated with a number of the managers that have joined us, too.

We want to be a good partner ourselves because it attracts good partners. And that is a reputation that Berkshire deserves. I mean, Charlie and I do our part toward keeping that reputation intact, but that takes a lot of other people also behaving in a way that causes people to want to join them, causes people to want to trust them. And that will be part of a Berkshire brand. Charlie?

CHARLIE MUNGER: Yeah, I always say the way to get a good spouse is to deserve one. And the way to get a good part —

WARREN BUFFETT: What’s your second way? (Laughter)

CHARLIE MUNGER: — and the other — well, but to get a good partner you deserve a good partner. It’s an old-fashioned way of getting ahead. And the interesting about it is it still works in these modern times. Nothing changes, if you just behave yourself correctly, it’s amazing how well it works. (Applause)

WARREN BUFFETT: You have any further thoughts on the Brazilians?

CHARLIE MUNGER: On what?

WARREN BUFFETT: On the success of Jorge Paulo and his associates, beyond what I laid out?

CHARLIE MUNGER: Well, there — you can’t skirt the fact that they’re very good at removing unnecessary costs.

WARREN BUFFETT: Sure.

CHARLIE MUNGER: And I do not consider that in any way immoral or wrong or something.

WARREN BUFFETT: Not in the least.

CHARLIE MUNGER: I think removing unnecessary costs is a service to civilization. And I think it should be done with some — what do they call it? Mercy, really.

WARREN BUFFETT: Sensitivity.

CHARLIE MUNGER: Yeah, sensitivity. But I don’t think it’s good for our system to have a lot of make-work and what have you. So —

WARREN BUFFETT: If it was, we’d love government, right?

CHARLIE MUNGER: Yeah, and so, generally speaking, I think they’re an interesting example to all of us.

WARREN BUFFETT: Yeah, we’re learning from them.

CHARLIE MUNGER: Everybody is.

WARREN BUFFETT: OK —

CHARLIE MUNGER: Some reluctantly.

31. We’ll decide what to do with “too much” cash when we get there

WARREN BUFFETT: OK. Station 1.

AUDIENCE MEMBER: Hi, Warren. Hi, Charlie. My name is Walter Chang (PH) and I came from Taiwan for this meeting.

Seven years ago, I named my first-born son after you, Warren, so the second one hasn’t come yet —

WARREN BUFFETT: How’s he — how’s he —

AUDIENCE MEMBER: — so sorry —

WARREN BUFFETT: — how’s he — how’s he doing?

AUDIENCE MEMBER: He’s doing great.

WARREN BUFFETT: OK.

AUDIENCE MEMBER: So he says hi. He always says, “Warren Buffalo,” so, sorry — (Laugher) — sorry about that.

WARREN BUFFETT: I’ve been called — I’ve been called worse. (Laughter)

AUDIENCE MEMBER: My question is for both of you. We wish you continued good health, and when both of you break Mrs. B’s record of working to 103 years old, that will be 20 years from now.

If Warren — or sorry, if Berkshire breaks that record and basically doubles over the next ten years and doubles again, you’ll have a market cap of $1.2 trillion.

What do you think Berkshire will look like at that time and can you get there sooner? (Laughter)

WARREN BUFFETT: We may have to. Your original hypothesis may not hold up.

I do plan on writing about that next year, but there’s no question that at some point we will have more cash than we can intelligently deploy. And then — in the business — and then the question is what do we do with the excess? And that will depend on circumstances at the time.

I mean, if the stock can be bought in at a price that makes sense for continuing shareholders, in other words that their value is enhanced by the repurchase, you know, if I were around at that time I would probably be very aggressive about repurchasing shares. But who knows what the circumstances will be. Who knows what the tax law will be then, you know.

What I do know is that we will have more cash than we can intelligently invest at some point in the future. That’s built into what we’re doing, and I hope that isn’t real soon, and I don’t think it probably will be.

But it’s not on a distant horizon. I mean, the numbers are getting up to where we will not be able to deploy intelligently everything that’s coming in.

But then we can deploy — it may be that we can deploy very intelligently and repurchase the shares. Who knows what the circumstances will be?

All I can tell you is that whatever is done will be done in the interest of the shareholder. That, you know, that is what every decision starts from, from that principle. Charlie?

CHARLIE MUNGER: It’s not a tragedy to succeed so much that future returns go down. That’s success, that’s winning.

WARREN BUFFETT: Well, he’ll name his next child after you. (Laughter) OK.

32. Uber, Airbnb, and the “disruptive” sharing economy

WARREN BUFFETT: Station 2.

AUDIENCE MEMBER: Afternoon. My name’s Michael Sontag (PH) and I’m from Washington, D.C.

My question’s about the sharing economy. What larger implications do you expect companies like Uber and Airbnb to have on their sectors, and do you think this business model is here to stay?

WARREN BUFFETT: Well, they are obviously trying to disrupt some other businesses, and those businesses will fight back in competitive ways, and they may try to fight back through legislation.

You know, when anybody’s threatened, or any business is threatened, it tries to fight back.

If you go back to when State Farm came on the scene in 1921, that the — or ’20, or whenever it was, the agency system was sacrosanct, in terms of insurance. It’d been around forever and the big companies were in Hartford or New York and they fought over having the number one agency in town.

So if you came to Omaha and you were at Travelers or Aetna, or whomever it might be, your objective was to get the agent. And the policy holder really wasn’t being thought about.

And then State Farm came along and they had a better mouse trap, and then GEICO came along with a better mouse trap yet.

And so, every — the industries originally — the insurance companies fought back in a lot of ways. But one of the ways they tried to do it was to insist, you know, on various state laws involving what agents could do and what could not be done in insurance without agents and all that.

It’s — that’s standard. And you’ll see that, and in the end the better mouse trap usually wins. But the people with the second or third-best mouse trap will try to keep that from happening.

The ones you name, I don’t know anything about. I mean, I know what they do, but I don’t their specific prospects, which is why we kind of stay away from that sort of thing because we don’t — we know there’ll be change, and we don’t know who the winners will be. And we try to stick with businesses where we know the winners.

We know — and there are energy companies that — a railroad. A lot of our businesses are very, very, very likely to be winners, and that doesn’t mean they don’t have some change involved with them, but they’re going to be winners.

And then there’s other fields where we can’t pick the winners, and so we just sit and watch. We find them interesting but we don’t get tempted. Charlie?

CHARLIE MUNGER: Well, I think the new technology is going to be quite disruptive to a lot of people. I think retailing, in particular, is facing some very significant threats.

And you heard Greg Abel talk about a power plant in Iowa that was huge to serve one Google server farm. When you get computer capacity all over the world on this scale, it is changing the world. I mean, you’re talking about —

WARREN BUFFETT: Fast, too.

CHARLIE MUNGER: Yeah, fast. So — and I think it’s going to hurt a lot of people just as all the past technology investments hurt a lot of people. I think Berkshire, by and large, is in pretty good shape.

WARREN BUFFETT: Where do you think we’re most vulnerable?

CHARLIE MUNGER: Well, I don’t think I want to name them.

WARREN BUFFETT: OK. (Laughs)

Now you’ve got them all wondering, Charlie. (Laughs)

33. Teach financial literacy to children in school?

WARREN BUFFETT: Section 3.

AUDIENCE MEMBER: Good afternoon. My name is Diane Wieland (PH), and I’m from Hollywood, Florida.

I’ve worked in public education for over 35 years. My concern is that I think that we need to do more to proactively prepare our children and youth to be financially literate, especially in light of the serious financial stresses many adults in our society face on a daily basis.

My question is, do you think that financial literacy should be a standard part of the curriculum in our nation’s schools and, if so, how early do you think it should begin and what do you think some of the most important learning goals would be?

WARREN BUFFETT: Well, certainly the earlier the better. I mean, habits are such a powerful force in everyone’s life, and certainly good financial habits.

You know, I see it all the time. I get letters every day from people that have committed some kind of financial lunacy or another, but they didn’t know it was lunacy and, you know, they didn’t get taught that. Their parents didn’t teach it to them.

And digging yourself out of the holes that financial illiteracy can cause, you know, you can spend the rest of your lifetime doing it. So I’m very sympathetic to what you’re talking about.

We’ve done a little bit. I don’t know whether you saw our “Secret Millionaire’s Club” exhibit in the exhibition hall.

And you want to talk to people at a very young age. Charlie and I were lucky. I mean, we got it in our families so that, you know, we were learning it at the dinner table when we were — before we knew what we were learning. And that happens in a lot of families, and in a lot of families it doesn’t happen.

And, of course, you mention about childhood financial literacy. Then there’s a big problem with adulthood, adult financial illiteracy. And it’s harder to be smarter or have better habits than your parents unless the schools intercede or —probably, you know, the schools are your best bet, but it can be done — a lot can be done on television or through the internet.

But it is really important to have good financial habits, and I think anything you can do very early through the school system, you know, would certainly have my vote. Charlie?

CHARLIE MUNGER: Well, I’m not sure if the schools are at fault. I would place most of the fault with the parents. I think the most powerful example (applause) is the behavior of the parent, and so if you’re —

WARREN BUFFETT: Well, I agree with — the most important thing is the parents, but not everybody gets the right parents.

CHARLIE MUNGER: Yeah. Well, it’s very hard to fix people who have the wrong parents. (Laughter)

WARREN BUFFETT: Well, let’s just say you have the job of fixing people that have the wrong parents. What would you do about it?

CHARLIE MUNGER: Well, what’s the — if you had the job of living forever, what would you do about it? It gets to be so impractical. (Laughter)

Who would ever believe that I would have any ability to fix all the people that have the wrong parents?

WARREN BUFFETT: How about a few? (Laughs)

CHARLIE MUNGER: I don’t think I’m good at that, either. The only thing I’ve ever been slightly good at in my life is raising the top higher. It’s just — they left the talent out of me.

I don’t scorn it. I think it’s a noble work. I just — I’m no good at it.

I don’t think you’re so hot, either. (Laughter)

WARREN BUFFETT: If he hadn’t been in public, it would have been stronger. (Laughs)

Stop by our “Secret Millionaire’s Club,” though. You may get some ideas.

CHARLIE MUNGER: By the way, the main troubles with education in this field are probably not in the grade schools. They’re probably in the colleges.

There’s a lot of asininity taught in the finance courses at the major universities, and even the departments of economics have much wrong with them. So, if you really want to start fixing the world, you shouldn’t assume that when it gets highfalutin, it’s a lot better.

WARREN BUFFETT: Well — (Applause)

There was certainly a period of at least 20 years, I would say, when I think the net utility of knowledge given to finance majors was negative in major universities. I think maybe it’s getting better now, but it is a —

CHARLIE MUNGER: Imagine it. Net utility was negative. It was (unintelligible) asinine.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: I wish you’d use normal English. (Laughter)

WARREN BUFFETT: I’m worried about what English you’re going to use. (Laughter)

I don’t want to egg him on.

The — it was — frankly, it was fascinating to me because here was something I understood.

And to watch — I mean extraordinary universities that, essentially, were teaching people some very, very dumb things. And where even to obtain the positions in the departments of those schools, you had to subscribe to this orthodoxy, which made no sense at all.

And it got stronger and stronger, and then — now it’s changing to quite a degree. But it may have soured my feeling on higher education to an unwarranted degree because that — you know, it may have been particularly bad in the area that I was familiar with, but it was bad.

Have I got — is my language okay, Charlie?

CHARLIE MUNGER: You would have liked academics better if you’d have taken physics instead of finance. (Laughter)

WARREN BUFFETT: Yeah. Well, I’m glad I didn’t. (Laughs)

34. “There’s no advantage to breaking Berkshire into pieces”

WARREN BUFFETT: OK. Area 4.

AUDIENCE MEMBER: Mr. Buffett and Mr. Munger. First of all, great party last night. I stood there for half an hour and still couldn’t get a drink, so great crowd. Oh, by the way this is Zhang Xiaozhu (PH) from Ottawa, Ontario.

My question relates to the age-old question about dividends and also valuation. I think you guys are penalized by the great success of your enormously successful company. It’s huge, so no one knows how to properly valuate it, and also because of your yardstick you picked, which is not quite fair.

Every year I see some of the old shareholders, and they are waiting to get a dividend, using some of the monies to supplement their retirements.

I do not feel it’s essentially fair for them to sell their shares. I remember the case study you had in last year’s letter to the shareholders. You did a case study comparing issuing dividends or having the shareholders selling their shares directly.

Because of the shares are so depressed, I do not feel it’s very fair. So I’m wanting to ask, is there a practical way for you to break up the company into four logical groups, as you report in every year’s AGM, and unlock some of the values and still allow you to allocate the capital freely, please?

WARREN BUFFETT: We would lose — we would not unlock value. We would lose significant value if we were to break it into four companies.

There are large advantages in both capital allocation, occasionally in the tax situation. There’s — Berkshire is worth more as presently constituted than in any other form that I can conceive of unless we engaged in something to de-tax the whole place, which we’re not going to do and which would probably be impossible anyway, but even if it was possible, we wouldn’t be doing it.

But the — we did have this vote, and it’s now time to adjourn and then we’ll come back in a few minutes for the annual meeting. But we did have a vote, and unfortunately we — there’s not a way to deliver a dividend to a few shareholders and not to others, although — whereas there is a way to — for shareholders to maintain an even and greater dollar investment in Berkshire, in terms of the underlying assets, and still cash out annually some portion of their investment, just like they would with a partnership, and incur fairly little tax in the matter. And I wrote about that last year and you’ve read that.

But there’s no advantage to breaking Berkshire into pieces. It would be a terrible mistake. Charlie?

CHARLIE MUNGER: Well, generally I think that you’re not being deprived when the stock goes from 100 to 200, and you didn’t get a dividend that year.

WARREN BUFFETT: Yeah. Well, it isn’t going to go up every year, though. I mean, it’s going to —

CHARLIE MUNGER: Or two years or whatever it was.

WARREN BUFFETT: Yeah. We had, by a 45-to-1 vote, we had people — which actually surprised me. We had people say that they prefer the present policy to a change in that policy, so it would be a big mistake to change.

And with that we will end the Q-and-A session. We’ll be back in about ten or so minutes, and we’ll have an annual meeting. Thank you. (Applause)

35. Berkshire’s formal annual meeting

WARREN BUFFETT: OK. If you’ll take your seats, we’ll get on to the meeting.

OK. I have a script here that I’ll read from and make sure everything’s proper.

The meeting will now come to order. I’m Warren Buffett, chairman of the board of directors of the company, and I welcome you to the 2014 annual meeting of shareholders.

This morning, I introduced the Berkshire Hathaway directors that are present. Also with us today are partners in the firm of Deloitte & Touche, our auditors. They’re available to respond to appropriate questions you might have concerning their firm’s audit of the accounts of Berkshire.

Sharon Heck is secretary of Berkshire Hathaway. She will make a written record of the proceedings.

Becki Amick has been appointed inspector of elections at this meeting. She will certify that the count of votes cast in the election for directors and the motion to be voted upon at the meeting.

The named proxy holders for this meeting are Walter Scott and Marc Hamburg.

WARREN BUFFETT: Does the secretary have a report of the number of Berkshire shares outstanding, entitled to vote, and represented at the meeting?

SHARON HECK: Yes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 5, 2014, there were 857,848 shares of Class A Berkshire Hathaway common stock outstanding with each share entitled to one vote on motions considered at this meeting and 1,179,267,338 shares of Class B Berkshire Hathaway common stock outstanding with each share entitled to one ten-thousandth of one vote on motions considered at this meeting. Of that number, 601,494 Class A shares and 682,365,717 Class B shares are represented at this meeting by proxies returned through Thursday evening, May 1.

WARREN BUFFETT: Thank you. That number represents a quorum, and we will, therefore, directly proceed with the meeting.

36. Approval of last year’s minutes

WARREN BUFFETT: First order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott who will place the motion before the meeting.

WALTER SCOTT: I move that the reading of minutes of the last meeting of the shareholders be dispensed with and the minutes be approved.

WARREN BUFFETT: Do I hear a second?

VOICE: I second the motion.

WARREN BUFFETT: The motion has been moved and seconded. Are there any comments or questions?

We will vote on this motion by voice vote. All those in favor say, “Aye.” Opposed? The motion is carried.

37. Election of Berkshire directors

WARREN BUFFETT: The next item of business is to elect directors. If a shareholder is present who did not send in a proxy or wishes to withdraw a proxy previously sent in, you may vote in person on the election of directors and other matters to be considered at this meeting. Please identify yourself to one of the meeting officials in the aisle so that you can receive a ballot.

I recognize Mr. Walter Scott to place a motion before the meeting with respect to election of directors.

WALTER SCOTT: I move that Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Don Keough, Thomas Murphy, Ronald Olson, Walter Scott, and Meryl Witmer be elected as directors.

WARREN BUFFETT: Is there a second?

VOICE: I second the motion.

WARREN BUFFETT: It has been moved and seconded that Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Don Keough, Thomas Murphy, Ronald Olson, Walter Scott, and Meryl Witmer be elected as directors.

Are there any other nominations? Is there any discussion? The nominations are ready to be acted upon.

If there are any shareholders voting in person, they should now mark their ballot on the election of directors and deliver their ballot to one of the meeting officials in the aisles.

Ms. Amick, when you are ready you may give your report.

BECKI AMICK: My report is ready. The ballot of the proxy holders in response to proxies that were received through last Thursday evening cast not less than 660,619 votes for each nominee.

That number far exceeds a majority of the number of the total votes of all Class A and Class B shares outstanding. The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Thank you, Ms. Amick.

Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Don Keough, Thomas Murphy, Ronald Olson, Walter Scott, and Meryl Witmer have been elected as directors.

38. Advisory vote on executive compensation

WALTER SCOTT: I move that the shareholders of the company approve, on an advisory basis, the compensation paid to the company’s named executive officers as disclosed pursuant to Item 402 of the regulation S-K, including the compensation discussion and the analysis and the accompanying compensation tables and the related narrative discussion in the company’s 2014 annual meeting proxy statement.

WARREN BUFFETT: Is there a second?

VOICE: I second the motion.

WARREN BUFFETT: It has been moved and seconded that the shareholders of the company approve, on an advisory basis, the compensation paid to the company’s named executive officers.

Is there any discussion? I believe there may be on this. Do we have anyone?

OK. Ms. Amick, when you are ready, you may give your report.

BECKI AMICK: The report is ready. The ballot of the proxy holders in response to proxies that were received through last Thursday evening cast not less than 666,751 votes to approve, on an advisory basis, the compensation paid to the company’s named executive officers.

WARREN BUFFETT: Thank you, Ms. Amick.

The motion to approve, on an advisory basis, the compensation paid to the company’s named executive officers is passed.

WALTER SCOTT: I move that the shareholders of the company determine, on an advisory basis, the frequency, whether by annual, biannual, or triannual, with which they shall have an advisory vote on the compensation paid to the company’s named executive officers as set forth in the company’s 2014 annual meeting proxy statement.

WARREN BUFFETT: Is there a second?

VOICE: I second the motion.

WARREN BUFFETT: It has been moved and seconded that shareholders of the company determine the frequency with which they have an advisory vote on compensation of named executive officers with the options being every one, two or three years. Is there any discussion? I believe on this one there is a — somebody wishes to speak? Yes.

AUDIENCE MEMBER: — Boston, Massachusetts. I suggest a vote of one year in order to change the policy of named executives.

In addition to Warren, Charlie, and Marc, the company should report Ajit Jain’s salary. He is irreplaceable, and Warren works integrally with him in setting insurance rates.

Since —five — there should be five members of management, either another insurance manager or someone from the capital-related industries group, from BNSF or MidAmerican, should also be added.

You are so lean at corporate, the group managers should be named. Two should be named, but at least Ajit should be added.

The CEOs of former Fortune 500s used to disclose what is their compensation now. There is no retirement age at Berkshire, which is fine, but there should be more depth of disclosure, and this should be done next year, not three years from now.

WARREN BUFFETT: Is there anyone else that — doesn’t appear to be.

I personally actually agree with a one-year frequency on this, normally, but it does seem in the case of Berkshire that considering what’s required and considering what the numbers are and everything, that it probably doesn’t make a whole lot of sense. But I generally feel one year is not a bad idea.

I do not think it’s a good idea to start selecting people among the managers to give compensation for the reasons discussed earlier.

OK. Ms. Amick, when you are ready, you may give your report.

BECKI AMICK: My report is ready. The ballot of the proxy holders in response to proxies that were received through last Thursday evening cast 113,530 votes for a frequency of every year, 2,412 votes for a frequency of every two years, and 552,309 votes for a frequency of every three years of an advisory vote on the compensation paid to the company’s named executive officers. The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Thank you, Ms. Amick.

Shareholders of the company determined, on an advisory basis, that they shall have an advisory vote on the compensation paid to the company’s named executive officers every three years.

39. Proposal to set greenhouse gas reduction goals

WARREN BUFFETT: The next item of business is a motion put forth by Meyer Family Enterprises, LLC, a Berkshire shareholder represented by Brady Anderson and Linda Nkosi.

The motion is set forth in the proxy statement. The motion directs Berkshire Hathaway to establish quantitative goals for reduction of greenhouse gases and other air emissions at its energy generating holdings and publish a report to shareholders on how it will achieve those goals.

The directors have recommended that the shareholders vote against the proposal.

I will now recognize Brady Anderson and Linda Nkosi to present the motion. To allow all interested shareholders to present their views, I ask them to limit their remarks to five minutes.

LINDA NKOSI: Good afternoon, Mr. Buffett, Mr. Munger, ladies and gentlemen. My name is Linda Nkosi from Swaziland, and this is Brady Anderson from Iowa.

We are students of economics and finance at Wartburg College in Iowa and are here representing a delegation of students who manage a $1.2 million portfolio that includes shares of Berkshire Hathaway. We very much appreciate the opportunity to take part in this celebrated event.

We stand to represent Investor Voice SPC of Seattle on behalf of the Meyer Family Enterprises to move Item 4 on page 12 of the proxy, a proposal that Berkshire establish goals for greenhouse gas reduction at its energy holdings.

We applaud Berkshire Hathaway Energy for having the largest renewable energy portfolio in the country.

That said, it is also true that BH Energy generates close to half its power by burning coal, which makes BH Energy a huge emitter of greenhouse gas. Given these facts, it would benefit BH Energy to have a carbon reduction plan.

Sixty-six percent of U.S. electric utilities have greenhouse gas reduction goals. Berkshire Hathaway Energy is not among them, despite stating on its website, “We will set challenging goals and assess our ability to continually improve our environmental performance.”

As shareholders are aware, climate disruption creates profound financial risk for the global economy as well as for Berkshire. The Investor Network on Climate Risk, whose members manage more than $11 trillion, and the Carbon Disclosure Project, representing more than $80 trillion in assets globally, have called on companies to disclose risks related to climate change, as well as to take steps to reduce that risk.

BRADY ANDERSON: The SEC has stated that climate risks are financially material and that they must be disclosed. This is because a high-carbon approach creates risk, whereas a low-carbon approach avoids risk, both now and into the future.

Without planning and a set of forward-looking goals, neither management nor investors can truly know where they stand.

In addition, Berkshire’s core businesses are vulnerable to climate disruption. Why? Because many of the most negative financial impacts of climate disruption are borne by insurance companies.

Berkshire’s GEICO took its single largest loss in history from Superstorm Sandy, a $490 million loss due to claims on more than 46,000 flooded vehicles.

Berkshire’s reinsurance business is likely to bear significantly more risk from the trends towards increasingly extreme weather.

For a time, some portion of these costs may be pushed onto customers in the form of higher premiums, but it is a prudent — it is (not) a prudent or sustainable long-term strategy to impose on customers the cost of not planning for the greenhouse gas reductions that climate scientists agree are urgently needed.

In summary, hundreds of the world’s largest institutional investors, representing trillions of dollars of invested assets, call on companies to set greenhouse gas reduction goals. Such goals are key tools for reducing the profound business risk that climate change creates.

More than two-thirds of United States utilities already have such goals, and institutional proxy advisory firms repeatedly recommend voting for goal setting and disclosure of this sort.

Therefore, please join us in voting for this common sense proposal, which not only benefits the planet, it will preserve, if not boost, Berkshire profits by avoiding risk.

Thank you for this truly amazing opportunity to share our concerns.

WARREN BUFFETT: OK, and thank you. (Applause)

I assume that the fact the lights went off, there’s nobody additionally that would like to speak on the motion for or against?

Hearing nothing, I’ll say that the motion is now ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballot on the motion and deliver their ballot to one of the meeting officials in the aisles.

Ms. Amick, when you’re ready, you can give your report.

BECKI AMICK: My report is ready. The ballot of the proxy holders in response to proxies that were received through last Thursday evening cast 49,553 votes for the motion and 561,642 votes against the motion.

As the number of votes against the motion exceeds a majority of the number of votes of all Class A and Class B shares outstanding, the motion has failed. The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Thank you, Ms. Amick. The proposal fails.

40. Shareholder proposal to pay a dividend

WARREN BUFFETT: The next item of business is a motion put forward by David Witt. The motion is set forth in the proxy statement. The motion requested the board of directors consider payment of a dividend. The directors have recommended the shareholders vote against the proposal.

Mr. Witt available?

As neither Mr. Witt nor his representative is present to present their proposal for action, the motion fails.

41. Meeting adjourned

WARREN BUFFETT: OK. Does anyone have any further business to come before this meeting before we adjourn? If not, I recognize Mr. Scott to place a motion before the meeting.

WALTER SCOTT: I move that this meeting be adjourned.

WARREN BUFFETT: Is there a second?

VOICE: I second the motion to adjourn.

WARREN BUFFETT: The motion to adjourn has been made and seconded. We will vote by voice.

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2014 Berkshire Hathaway Annual Meeting (Morning) Transcript

1. Buffett’s “second career” with singer Paul Anka

WARREN BUFFETT: Thank you. (Applause)

Good morning. Before we start, there are two very special guests that I’d like to introduce, have stand up.

The first, even though he was on tour, he took a quick detour to Omaha to be here today. And will my friend [singer-songwriter] Paul Anka please stand up. Paul? (Applause)

With all the talk that had been around about my succession, I thought it was probably a good idea to try and hook up with someone famous that might give me a shot at a second career here. (Laughter)

So we’re available for weddings and funerals and bar mitzvahs. (Laughter)

We actually had one offer the other day. I thought it was kind of insulting. They offered $1,000. And, I mean, for me and Paul, that really seemed a little ridiculous.

I told the people that and they said, “OK. We’ll make it $10,000 if just Paul comes.” (Laughter)

2. Berkshire’s Carrie Sova introduced

WARREN BUFFETT: Now we have one other very special guest.

This affair does not just happen by itself.

And there’s a young woman who had a baby, a young boy named Brady, in September. And she has marshaled together 400-plus of the people from our various companies and put on the show you’re witnessing today.

And I just want to say a special thanks to the woman we all love, and especially me, Carrie Sova. Carrie? (Applause)

Please stand up. There she is. (Applause)

3. Berkshire directors introduced

WARREN BUFFETT: OK. Now we get down to the minor players and we’ll introduce the board of directors. (Laughs)

We’re going to have the — we’ll have the board meeting — the shareholders meeting, I should say — after the Q&A, which will end at 3:30. And then we’ll recess for 15 minutes. And at 3:45, reinstitute the — or begin — the shareholders meeting.

But for those of you who won’t be around at 3:45, I’d like you to have a chance to meet the directors now.

So, I will introduce them one at a time and ask them to stand. Hard as it may be, withhold your applause until they’re all finished standing, and then you can go crazy.

So, doing it alphabetically, and if you’ll stand as I give your name.

Howard Buffett, Steve Burke, Sue Decker, Bill Gates, Sandy Gottesman, Charlotte Guyman, Don Keough, my partner Charlie Munger, Tom Murphy, Ron Olson, Walter Scott, and Meryl Witmer.

And that is the board of directors at Berkshire. (Applause)

4. Berkshire’s Q1 earnings summary

WARREN BUFFETT: We have just a couple of slides and then we’ll move right into the questioning, which will go on until roughly at noon.

We’ll take a break at noon and come back about 1:00, and then we’ll continue till 3:30, at which point we’ll adjourn and then have the annual meeting at 3:45.

But, there are just a couple slides. We released our earnings yesterday.

And I’ve always emphasized — we try to release our earnings always after the market’s closed, and, preferably, after the market’s closed on a Friday, so that people will have a full weekend to digest the information, because there’s a lot of information about Berkshire every quarter. And it’s contained, primarily, in a 10-Q that we make available for you to read over the full weekend.

So we always urge you not to just look at the summary figures, but take a look at the 10-Q. It’s great reading. And absorb all that by Monday morning.

But here we have the summary for the first quarter.

And as you can see, our operating earnings were down a bit. And that was more than accounted for in insurance underwriting. And you should understand that insurance underwriting from quarter to quarter really doesn’t mean that much.

For one thing, it can be quite affected by changes in foreign exchange, which really don’t have anything to do with our insurance business. But — or at least in the reality of interim results.

Our insurance business now has a float of $77 billion. And that $77 billion is ours to invest. And whether it costs us anything or not is determined by whether we have an underwriting profit.

So even though our underwriting profit in the first quarter was quite satisfactory, but nevertheless down from the first quarter of last year, the insurance business is marvelous for us.

And if we even break even, that $77 billion, which is subtracted from net worth, I mean, it’s a liability on the balance sheet, but if it’s cost free, it really does us about as much good as net worth itself does. So it’s a very remarkable business.

And frankly, if we average an underwriting profit over the years, I’ll be very happy and you should be very happy with what our insurance business does for us.

But it was down in the first quarter. And, like I said, that more than accounted for the decline in earnings.

We always advise you to pay little — pay no attention, really — to quarterly or even annual realized gains or losses in securities because we make no attempt to time the sales of securities to produce earnings in any given quarter.

We just try to manage the money as well as we can. And we let the chips fall where they may, in terms of whether those actions produce gains or losses in the short term.

We hope that they produce a lot of gains over the longer term, and they have.

But they should be ignored in attempting to interpret our shorter-term earnings.

5. Buffett praises shareholders for rejecting dividend proposal

WARREN BUFFETT: With that, I would like to give you a little preview of a vote that has taken place and which we will talk more about when we get the shareholders meeting.

But it’s so remarkable, that I wanted to put it up for all of you to look at now.

As you know, we had a shareholder resolution. Yeah, it’s up there.

We had a shareholder resolution, rather elegantly stated, that suggested that we pay a dividend. And with the sort of subliminal suggestion that we weren’t paying it because I was so rich that I could live in this grand style to which I’ve become accustomed, without a dividend, but that the shareholders were out there essentially bereft of the necessities of life because we were holding all the money here in Omaha. (Laughter)

So this gentleman put this on the ballot. And if we’ll go to the next slide, you’ll see some remarkable figures.

Bear in mind that, you know, you people get these proxies at your home or at your office. And you can mark anything you want.

We hire no proxy solicitation firms. So we are making no calls. We make no attempt to influence how anybody votes. We just count them as they come in.

And as you’ll see at the top, among the Class A shares, the vote was roughly 90-plus-to-one, against the dividend. But you might suspect that I stuffed the ballot box, which I did. (Laughter)

And so I took my vote out. And you’ll see down below, the vote was a little less than 40-to-one among the untainted shareholders of A against receiving a dividend.

And then you may say to yourself, “Well, you know, those are Warren and his rich friends, all the plutocrats. And easy for them to say.”

So let’s go onto the next slide. And you will see there that among the B shareholders — and we believe we may have as many as a million B shareholders. We don’t know the exact number. We don’t even know an approximate number very well. But it’s not a bad guess that we have a million or so shareholders.

And remarkably, by a vote of 45-to-one — these are people — we’re not making any phone calls to get their vote or anything — by 45-to-one, our shareholders said, “Don’t pay us a dividend.”

I’m not sure that there’s any company in the world that would get quite that vote.

And now you go to one more slide and that’ll be the end.

But this is the rather disturbing part of that vote. If you go to the next page, you’ll see again, among the B shareholders, that — I’ve got that same vote up there — and if you look down below, you will notice that almost the same number of people voted against, or withheld their vote for me, as voted for having a dividend.

So from that you can only deduce that if the shareholders are ever forced with the choice — or I should say, if the directors are ever forced with the choice — of paying a dividend or getting rid of me, it’s a close vote. (Laughter)

So you can see why I’m rather reluctant to bring up the dividend question with the directors.

The vote, actually, up until two days earlier, before these final figures, the vote was actually just virtually a dead heat.

The number of people that wanted to have a dividend and the number of people that wanted me to get out of the place were running neck in neck. So it — again, it’s a rather unusual voting arrangement.

6. Q&A begins

WARREN BUFFETT: Well, with that we’re going to do the questioning, as we always do.

We have journalists on this side. We have financial analysts on this side. And we’ve got a wonderful group of shareholders in the audience.

So we’re going to alternate among these groups. And we will keep doing that until noon. And then we’ll pick up where we left off at 1 o’clock, then continue doing it.

And we will start off with Carol Loomis of Fortune Magazine.

CAROL LOOMIS: Good morning. I’ll make my two or three sentence introductory remarks.

First, Becky and Andrew and I get hundreds, if not thousands, of questions, and we can only ask a few. So, if we didn’t get to your question, please excuse us.

Secondly, Warren and Charlie got no hint of what we were going to ask.

Though they read the news like we do, and that may explain that they would sometimes get a thought about what they were going to get asked. And that will explain my first question.

7. Buffett defends abstaining on “excessive” Coca-Cola compensation

CAROL LOOMIS: The question is from Will Elridge (PH) of New York City.

And he says, “Mr. Buffett, this is a question about Berkshire’s holdings in Coca-Cola.

“This spring, Coke asked shareholders to approve a magnanimous stock option program for its executives.

“Asked about it by the press after the vote, you said the program was excessive. Yet, you did not tell the world prior to the Coke shareholders meeting that you believed the program to be excessive, a disclosure that, had it been made earlier, might’ve made shareholders vote against it.

“And in fact, you did not vote Berkshire’s shares against the plan. You only abstained in the voting.

“I guess you had your reasons. I must say, I don’t expect to agree with them. And I cannot see how they can stand up under examination.

“But I still would like to know why you engaged in this very strange, un-Buffett-like behavior.

“So why did you abstain rather than voting no against a corporate action that deserved to be shouted down?”

WARREN BUFFETT: Yeah. Well, some people, incidentally, think that strange and un-Buffett-like are really not quite right. Strange is frequently Buffett-like. (Laughter)

The proposal was made by a shareholder who’d owned shares for a long time and was opposed to the option program.

His calculations — and I probably should explain this in a minute — but his calculations of the dilution were wildly off. And we did not care to get into a discussion of that or anything else.

But we did talk — or I did talk — to Muhtar Kent. And I informed him that we were going to abstain.

I told him that we admired, enormously, the Coca-Cola Company. We admire the management.

And we thought the compensation plan, although it was very similar to a great many plans, was excessive.

And Muhtar and I had a very good discussion right here in Omaha, as a matter of fact, as well as a couple of telephone discussions. And then immediately after the vote, I announced that we had abstained, and gave the reasons that we thought the plan was excessive.

And I think that in terms of having an effect on the Coca-Cola compensation practices, as well as maybe having an effect on some other compensation practices, that that is the most effective — was the most effective — way of behaving for Berkshire.

We made a very clear statement about the excessiveness of the plan. And at the same time, we, in no way, went to war with Coca-Cola. We have no desire to go to war with Coca-Cola.

And we did not endorse some calculations that were wildly inaccurate, and joined forces with someone that I had really no contact with him. I received several letters in the mail after they’d first been given to the press.

So, I think you have to be — I don’t think going to war is a very good idea in most situations. And I think if you’re going to join forces in going to war with somebody, you’d better be very sure about what that alliance might mean.

So, I think the best result for the Coca-Cola Company was achieved by our abstention. And we will see what happens in terms of compensation between now and the next meeting with Coke.

Charlie?

CHARLIE MUNGER: I think you handled the whole situation very well. (Laughter)

WARREN BUFFETT: And Charlie remains vice chairman. (Laughter)

Charlie, incidentally, was the — Charlie was the only one with whom I talked over the vote before — or the abstention — before I did it.

I called Charlie. And told him about the plan. And we agreed on the course of action.

I should point out one thing. And in fairness to David Winters who may — who led the war — he took figures from the Coca-Cola proxy statement. So it’s hard to fault him for that.

But for those of you who would really — would like to know how to think about calculating dilution, Coca-Cola has regularly repurchased the shares that are issued through options.

And the share count has, thereby, come down just a small bit at Coca-Cola. Not anywhere near as much as if they hadn’t issued as many shares, though, in repurchased shares.

But Coca-Cola has a plan that involves 500 million shares. And they say in the annual report that they expect to issue these over approximately four years. And then they have a further calculation between performance shares and option shares, but I’ll leave that out. Make this a little simpler.

And that’s a lot of shares.

Let’s assume for the moment that Coca-Cola’s selling around $40 a share now, which it is. And that when — and that all the options are issued at $40. And that the — when they’re exercised, we’ll say the stock is $60.

Now, at that point, there has been a $10 billion transfer of value. Twenty dollars a share times 500 million shares, a $10 billion transfer of value.

Now, the company, when that is done, gets a tax deduction — and at the — for 10 billion — and at the present tax rates, that would result in 3 1/2 billion less tax.

So if you take 20 billion of proceeds from exercise of the options, and you add 3 1/2 billion of tax savings, the Coca-Cola Company receives 23 1/2 billion.

And if they should buy in the stock at $60 a share, which it would be selling for then, they would be able to buy 391,666,666 shares.

So, in effect, the Coca-Cola Company, net, would be out a little over eight — 108 million shares. And that’s on a base of four-billion-four.

So the dilution — assuming all the proceeds from the option exercise and the tax refund were used to buy shares — the dilution would be 108 million shares on 4.4 billion, or about 2 1/2 percent.

And I don’t like dilution and I don’t like 2 1/2 percent dilution. But it’s a far cry from the numbers that were getting tossed around.

It’s a long explanation, but I’ve never seen the math written about. I mean, I’ve seen people throwing out claims and all of that.

And you can change my supposition from 55 — 60 to 55 — or 65. It doesn’t change things very much.

8. Berkshire likely to team with 3G again despite different styles

WARREN BUFFETT: Jon Brandt

JONATHAN BRANDT: Hi, Warren. Thanks again for having me back.

My first question is as follows: Berkshire has a track record of buying successful companies and leaving them alone.

3G has a more hands-on strategy with its acquisition. Its zero-base budgeting would seem to offer the potential to improve margins at any non-insurance business.

Is there a way for Berkshire to use 3G’s methods to boost profits without violating promises made to selling shareholders or breaking faith with Berkshire’s decentralized culture?

Would it be consistent with Berkshire’s culture to hire a 3G alumnus to run a Berkshire subsidiary after an existing manager retired? Or alternatively, how hard would it be for a non-3G alumnus to learn and implement their management process? Thank you.

WARREN BUFFETT: Yeah. I don’t think the two blend very well.

But I do think that we — I think 3G does a magnificent job of running businesses. And I’ve watched them in the past from afar and I’ve watched them more recently up close.

And there’s no question that it’s a different style than Berkshire. And I don’t think it would pay to try and blend the two.

But I certainly think that we will see more opportunities to partner with 3G. And we’re very likely to jump at those opportunities, because I think they’re as able as anybody I’ve seen in the management of businesses.

And to get a chance to join with them — and in addition to that, they’re marvelous partners. They’re more than fair in everything they do with us.

So we will, as I’ve put in the past, I think we’re very likely to partner with them, perhaps in things that are very large.

But I do not think a blending of the two would work very well. We’ve got a system, works very well for us.

And managers, when they join Berkshire, are joining into a large business that’s unlike virtually any large business that’s around. They really can’t find a home exactly like Berkshire.

And that’s a huge corporate asset. It’s one that’s grown over time. It’ll continue to grow. And we want to maintain that with a very clear message that it goes well beyond my lifetime.

But we welcome the chance to join with 3G.

Charlie?

CHARLIE MUNGER: I don’t think we’ve ever had a policy that loved overstaffing. (Laughter)

WARREN BUFFETT: Well, I would only slightly disagree with that.

We certainly never had a policy that allows for overstaffing at the home office.

We only feel happy when people are sitting in other people’s laps. I mean, you have to understand this.

But the — but we have not enforced, or attempted to enforce, nor would wish to enforce, a strong discipline on every subsidiary as to whether they have a few too many people or not.

A great many don’t. In fact, I mean, most of them are — overwhelmingly — they’re managed on a lean basis.

But that’s not true of everyone we’ve been involved in over the years. And it probably won’t be true of everyone in the future.

We encourage — I mean, we encourage, just by example. But we do not encourage it by edicts, particularly.

Charlie?

CHARLIE MUNGER: I think a lot of great businesses spill a little just because they don’t want to be fanatic.

And that’s all right. I don’t think you have to have the last nickel out of the staffing cost.

9. Corporate taxes aren’t holding back businesses

WARREN BUFFETT: OK. We’ll go to the shareholder in station 1, up on my far right.

AUDIENCE MEMBER: Yes, hello. My name is Doug Merrill (PH). I’m from Denver, Colorado, the home of Peyton Manning.

WARREN BUFFETT: Omaha, Omaha. (Laughter)

AUDIENCE MEMBER: Awesome.

The president’s approval rating is at 40 percent. Steve Wynn said, “Obama is the biggest wet blanket to the economy.” Other countries are lowering taxes and reducing debt.

You have Obama’s ear. The train’s going in the wrong direction. Can you conduct Obama to change the train’s direction? (Applause)

WARREN BUFFETT: Doug, I think I’ll let you communicate with him directly. (Laughter)

I don’t agree with a number of things you’ve said there. American business is doing extraordinarily well. (Applause)

The — many of the American people are not. And, you know, and I think Obamacare is more about doing something for them than many other people would.

But we’re going to have a difference of opinion on politics. And I’m not going to convince you, and you’re not going to convince me.

But I will say that anybody that thinks American business is doing — is not doing well — should just look at corporate profits.

Anybody that thinks our corporate taxes are too high should look at a chart of corporate taxes as a percentage of GDP since World War II, and it’s come down from 4 percent of GDP to 2 percent of GDP, while many other forms of taxes have, obviously, increased.

And American business earnings on net tangible assets, which is the way to measure profitability overall, you know, it’s basically the envy of the world. I mean, we have extraordinary returns on tangible assets — net tangible assets — in this country.

And our tax rates now for corporations are far lower than when Charlie and I were operating. And American business actually was doing pretty good then.

But for much of our life, taxes were at — corporate taxes — were at either 52 percent or 48 percent.

But I don’t want to try and convince you because I don’t want you to try and convince me. So we’ll call a truce on that and I’ll let Charlie comment. (Laughter)

CHARLIE MUNGER: I’m going to avoid this one. (Laughter)

WARREN BUFFETT: And people complain about me abstaining. (Laughter)

10. Berkshire underperforms when stock market is strong

WARREN BUFFETT: OK, Becky Quick.

BECKY QUICK: This question is from Manolo Salseda (PH).

And I’ll preface it by saying he says that he is “a true admirer of Buffett and what he stands for, so please don’t confuse my bluntness and straightforwardness with a lack of admiration or empathy with this amazing person and his master creation.” With that disclaimer —

WARREN BUFFETT: “But.” (Laughter)

BECKY QUICK: But. His question is, “You’ve stated several times in the past that if management, you, wasn’t capable of delivering a better return than the index, than management wasn’t doing the job.

“Then you said that the yardstick should be any five-year period. You’ve just missed your five-year period comparison.

“How come you didn’t tackle the issue in your annual shareholder letter? Are you changing the yardstick, and what’s next?”

WARREN BUFFETT: No, we’re not changing the yardstick.

But I would point out that we said, actually, in the 2012 report — and it’s in the upper half of the first page — we pointed out how we do worse in very strong years and better in poor years.

And I said then, “If the market continues to advance in 2013, our streak of five-year wins will end.”

I didn’t say it might end, or could end, or anything. It was obvious that if you have five strong years in a row, we will not beat the S&P. And that will be true in the future, for sure.

And of course, last year was — I think there were two years in the last 40 or so that the market was up more than it was last year. So, despite the things mentioned about President Obama, the stock market seems to have done quite well.

We will underperform in very strong up years. We’ll probably, more or less, match in moderate up years. We’ll do better than average in even years or down years.

And I have said, and I’ll continue to say, and it’s been true that over any cycle, we will — I think we will overperform. But there’s no guarantee on that.

But it was clearly said — like I say, on the first page of the 2012 report — that if the market went up, we would have a five-year streak of underperformance. And that’s exactly what happened.

Charlie?

CHARLIE MUNGER: Well, we should remember that Warren’s standard talks about net worth of Berkshire increasing, after full corporate taxes, at roughly 35 percent. And the indexes aren’t paying any taxes.

And so, Warren has set a ridiculously tough standard and has so far met it over a long period of time.

In the last couple of years, the net worth of Berkshire, after full corporation income taxes, went up, what, 60?

WARREN BUFFETT: Something like that, yeah —

CHARLIE MUNGER: $60 billion —

WARREN BUFFETT: Yeah. Pre-tax, probably 90 billion in —

CHARLIE MUNGER: Yeah. And so, if this is failure, I want more of it. (Laughter and applause)

11. “Eager” to buy back shares at 120% of book value

WARREN BUFFETT: OK. Jay Gelb.

JAY GELB: Warren, this question is on Berkshire’s intrinsic value.

In the annual letter, you appear to strongly signal that Berkshire’s shares are undervalued, especially relative to intrinsic value.

Aside from share buybacks, what actions can Berkshire take to narrow the discount between the current share price and intrinsic value? For example, would you ever consider an IPO of Berkshire’s individual operating units?

WARREN BUFFETT: The answer to the last part is no.

But the — I think we try to explain —my guess is I’ve never seen an annual report that uses the term, “intrinsic value,” or even talks about the intrinsic value of its units or business, as much as Berkshire does.

So, Charlie and I really devote considerable effort to explaining which of our businesses — where there’s really a significant discrepancy between what carrying value is, or book value — call it carrying value — and the true value, or the intrinsic value, of the business.

And I got very specific in the case of GEICO in the past year, for example.

And I said that GEICO, which is carried at about 1 billion over tangible assets, may be worth as much as 20 billion over tangible assets. And I wouldn’t be surprised if five years or ten years from now that that figure itself will be a lot larger.

So we’ve talked about it. We said we are willing to buy — not only willing, but eager to buy — stock at 120 percent of book value.

Well, with book value being close to 230 billion now, that obviously means we think that at $45 billion, roughly, over that figure, we are getting a bargain, in relation to intrinsic value.

But we’re never going to try and put out an exact number because we don’t know an exact number.

And it’s — A, it changes from day to day. And — although not a lot day to day, but certainly changes, you know, over the quarters and over the years.

And the second reason is, if you ask Charlie and me to write down a figure as we sit here as to the intrinsic value of Berkshire, we’d probably be within 5 percent of each other.

But we might very — we probably would not be within 1 percent of each other.

And so we will continue to try to give shareholders information about the important units.

It isn’t — the small ones are not unimportant to us, but they are — they do not have a big impact on the overall intrinsic value.

We’ve got a few businesses. I mean, we have some businesses that may be carried at a few hundred million that might be worth a billion or maybe 2 billion, even.

But that isn’t where the big, undisclosed by the balance sheet, values are.

You know, they’re in the railroad, they’re in the insurance business, they’re in our utility business.

And we — they add up to some pretty big numbers. We try to tell you exactly the numbers and, really, and use the words that we use when we’re thinking about those businesses ourselves, in terms of estimating their value. But we don’t want to go further than that.

The 120 percent, obviously, is a loud shoutout as to a figure that we think is very significantly below intrinsic value, or we wouldn’t use it to repurchase shares.

We only believe in repurchasing shares when we can do so at a significant discount from intrinsic value.

Some companies talk about — Coca-Cola does — they talk about buying in shares to cover options. That actually isn’t the best reason to buy in shares.

I mean, the stock could be overpriced, and even though you issued on options, you shouldn’t be buying it in.

But that’s become sort of a mantra throughout corporate America, that if you buy shares to cover the option exercises that you’ve negated the dilution to shareholders.

But again, if you buy shares — if you buy a dollar bill for 90 cents, you’re doing your shareholders a favor. And if you buy it for $1.10, you are doing them no favor at all.

Charlie?

CHARLIE MUNGER: Well, I don’t believe we’ve ever wanted to get the stock way over intrinsic value so that we can issue it to other people and get an advantage for ourselves and a disadvantage for them.

And, I think the people that want the stock up very close to intrinsic value, or higher, really want egg in their beer. It’s okay if it’s a little below.

And we’re not in the game of ballooning our stock up as high as we can get it so we can issue it more at a profit to ourselves.

I think over the long term, our system will work pretty well. And I think the stock will eventually go above intrinsic value, whether we like it or not.

WARREN BUFFETT: Yeah. But we have — we really watched a lot over the years of certain managers attempting to get their stock to sell for way more than it was worth, so they could use it to trade for other companies. I mean, that was all the rage in the late ’60s.

One of the reasons that I wound up my partnership was that that activity was going on so much and it affected all other values.

And it was really a game. And it was a game that some people played sort of halfway honestly, and other people really cheated like crazy, because if you’re trying to get your stock to be overpriced, you’re very likely to cheat on your earnings and cheat on projections. Cheat on everything.

And it works, incidentally. It doesn’t work indefinitely, but it works.

Some companies, whose names you know, were, to some extent, built on that principle.

That’s a game that we not only don’t want to play, we really found it very distasteful, because we saw a lot of these people in action.

And it comes in waves. And we just — we don’t want to come close to playing it.

Unless I’m careful, Charlie will name names, so we’d better move on to shareholders. (Laughter)

12. Why sellers trust Berkshire with the companies they’ve built

WARREN BUFFETT: Well, let’s go to station number 2.

AUDIENCE MEMBER: Hi, Mr. Buffett—

WARREN BUFFETT: Hi.

AUDIENCE MEMBER: — and Mr. Munger.

My name is Masato Luso (PH) and I’m from Los Angeles, California.

Berkshire is known to buy into whole companies for many, many years. But earlier in your careers, that was not known.

And typically, acquisitions of other companies is very disruptive. Employees fear losing their jobs as a redundancy. And managers really have to think twice and be diligent about it.

So my question is, what do you do to gain the trust of founders or owners of the companies you have bought out in the past?

WARREN BUFFETT: Well, we’ve kept our word to them.

And now we have to be very careful about what we promise, because we can’t promise, for example, never to have a layoff in a business we buy, because who knows what the world holds.

But we can promise that we won’t sell their business, for example, if it turns out to be disappointing, as long as it doesn’t run into the prospect of continuing losses or having significant labor problems.

But we keep — we are keeping — certain businesses that you would not get a passing grade at business school on if you wrote down our reasons for keeping them.

But the reason is, we made a promise.

And we put that — we not only make the promise, we put it in the back of the annual report now — we’ve done it for 30 years or so — where we list the economic principles.

And we put it there because we believe it. But we put it there, also, so that the managers who sell us their— the owners who sell us their business — know they can count on it.

And if we behave differently, you know, the word would get around. And it should get around.

So, we can make promises. We can’t make promises we’ll never change employment. We can’t even make a promise that we’ll keep a business forever.

But we can promise what we do promise, which is that if it turns out to be somewhat disappointing on earnings, but does not promise, sort of, unending losses, or if we have labor problems, we can keep that promise.

And we have kept that promise. We’ve only had to get rid of a few businesses, including our original textile business.

We promise the managers, you know, that they are going to continue to run their businesses.

And believe me, if we didn’t do it, the word would get around on that very quickly. But we’ve been doing it now for 49 years.

And we’ve put ourselves in a class that is hard for other people to compete with, if that’s important to the seller of a business.

A private equity firm is going to be totally unimpressed by what’s in the back of our annual report. They don’t care. And that’s — there’s nothing wrong with that. That’s their business.

But for somebody that’s built up their company over 20 or 30 or 40 years — and maybe their father or grandfather built it up even before that — some of those people care about where their businesses go.

They’re very rich, they’ve accomplished all kinds of things in life. And they don’t want to build up something which somebody else tears apart very quickly believe they handing it over to a few MBAs who want to show their stuff.

So, we do have a unique — close to a unique — asset at Berkshire. And as long as we behave properly, we will maintain that asset. And really, no one else will have much luck in competing with us.

But it doesn’t solve all problems, but — and it — and frankly, it’s the way we want to operate anyway.

So it’s — we’re comfortable with it. The sellers that do come to us that care about their businesses are comfortable with it. And I think it’ll continue to work well.

Charlie?

CHARLIE MUNGER: Well, obviously, we behave the way we do because we like doing it. And number two, it’s worked pretty well and we’re unlikely to stop.

WARREN BUFFETT: OK. (Applause)

You can tell that he doesn’t get paid by the word. (Laughter)

13. “Social dynamics” weaken oversight by corporate boards

WARREN BUFFETT: Andrew?

ANDREW ROSS SORKIN: Warren. This is a tough corporate governance question. I probably received about a dozen of them this week, some polite and some less polite. This —

WARREN BUFFETT: Use one of the polite ones.

ANDREW ROSS SORKIN: This is probably one of the more polite ones.

“Your son Howard serves on the board of Coke and voted to support its CEO pay package proposal, which you have said was excessive and you were against.

“You have said Howard will become non-executive chairman of Berkshire after you step down, as its, quote, ‘protector of culture,’ to uphold the morals that you and we all hold so dear.

Given his role in the Coke vote, how can we count on Howard to defend the culture of Berkshire and ensure that the future management of Berkshire does not benefit at the expense of its shareholders?”

WARREN BUFFETT: Yeah. Well, I think, as I mentioned in at least one interview, I voted for not — I’m not referring to Coke here necessarily — but as a director of various companies, I not only voted for comp plans that were far from what I would’ve come up myself, but I voted for acquisitions that I didn’t think make much sense.

I voted against a few. And they attracted a lot of attention. But they were big ones, where I really think — where I thought — it really made a difference.

But the nature — and this is something worth exploring, generally, because the nature of boards is such that they’re part business organizations and part social organizations. And people behave in some ways with their business brain and they behave to some extent with their social brain.

And I would say — and I said this — that in 55 years of being on corporate boards, and 19 companies aside from Berkshire, I don’t think I’ve ever seen a comp committee report come in and get a dissenting vote.

And the social reason for that is that the board organizes itself in a way whereby certain activities are delegated to a smaller portion of the board, one being a compensation committee.

And that committee presumably meets for a few hours the day before the meeting, or maybe the morning of the meeting. And then they go into a board meeting. And the comp committee reports on its activities. And you’ve delegated that activity, as a board member, to that group.

It’s almost unheard of to question that. I’m not saying that maybe it shouldn’t be questioned, but I’m just saying that that is the way it works.

Now bear in mind that the so-called independent directors on such a board are probably receiving maybe $200,000 a year, maybe $300,000 a year. Believe me, they are not independent.

They’re independent as measured by some standards, perhaps, at the SEC, but they — you know, how would you feel about having a job that required you to go to work four or six times a year, pleasant company, you know, certain amount of prestige attached with it, and on top of it, you get paid maybe $300,000 a year and you kind of hope to get another job like that? That is not independence.

So, you get a group coming in like that from the comp committee. And in those 19 boards, I was put on the comp committee exactly once. Charlie might be able to tell you exactly what the result was that time. They do not look for Dobermans. (Laughter)

They look for cocker spaniels. And then they make sure that the tails are wagging. (Laughter)

But that is — don’t condemn it too much because you and I are doing similar things in other parts of our lives.

You know, the social dynamics are important in board actions. My son Howard — in fact, my other two children as well, if they were involved — you know, they would have a dedication, and do have a dedication, to the culture of Berkshire, which is clearly defined. It’s one of the reasons I want it clearly defined. And it’s reinforced by the behavior and it’s reinforced by results.

And, incidentally, their job would not be to set the compensation. I mean, the non-executive board chairman is not there to select the compensation of the CEO or others. He’s not there to select the CEO.

He is there to facilitate a change if the board of directors decides a change is needed. And that can be important. Very, very, very unlikely to be important in the case of Berkshire.

But it’s a nice, little, extra safety valve. And Howie’s the perfect guy to carry that out.

And like I say, I voted for comp plans at various places, including way back, you know, at Coke that were far from what I would’ve designed myself. And the ones I designed myself would have worked.

But that is the way boards work.

I was made chairman of one comp committee, and Charlie can tell you a little about that.

CHARLIE MUNGER: Yeah. (Laughter)

Warren was totally voted down at Salomon Inc. In fact, people acted like, what in the hell is he doing? How could he be disapproving compensation on Wall Street?

And I think the general idea that a person should just shout disapproval all day long of everything he disapproves of is very suspect. In the world in which we inhabit, people accomplish more if they pick their spots for public disapproval.

And knowing both Howie and Warren Buffett, I don’t think you have to worry that they’re going to go crazy or be soft and foolish just because they don’t shout all the time about everything they disapprove of. If we all did that, we wouldn’t be able to hear each other.

WARREN BUFFETT: Yeah. (Applause)

If you — if you’re in any social organization and you keep belching at the dinner table, you’ll be eating in the kitchen before very long. (Laughter)

And people won’t pay any attention to you.

I mean, you really have to — you not only have to pick your spots, you have to pick how you do it.

I mean, you — that could even be — I mean, sure, Charlie gives the marital advice around here, as you noticed, in the movie, but it’s not even a bad thought to keep in mind in marriage, I mean, in terms of — of attempting to change the behavior of others, which is — you’ll have a very limited ability to do, in any event. It’s not helped by shouting a lot.

CHARLIE MUNGER: I offend more people than you do. And I’m quite satisfied with your level of disapproval. (Laughter)

14. Everyone else is wrong on cost of capital

WARREN BUFFETT: OK. Gregg Warren of Morningstar. Gregg, welcome.

GREGG WARREN: Thank you. Warren and Charlie, on behalf of Morningstar, I want to thank you for having us on the panel this year.

I may not be an accredited bear, but hopefully, I ask probing questions that add value for shareholders.

My first question relates to the measurement of management performance.

For Morningstar, the ultimate measure of success is not just whether or not a firm can earn more than its cost of capital, but whether or not it can do so for an extended period of time.

Berkshire has historically done a good job of generating outsized returns. But as you’ve noted in the past, the sheer size of the firm’s operations, which continue to grow, will ultimately limit the returns that Berkshire could generate.

With that in mind, what do you believe Berkshire’s cost of capital is? How much do you think that this hurdle rate is increased as you’ve acquired more capital intensive, debt-heavy firms?

And how much confidence do you have that future capital allocators at Berkshire will be able to generate returns in excess of the firm’s cost of capital, acknowledging, of course, the fact that Berkshire’s days of outsized returns are most likely behind it?

WARREN BUFFETT: Yeah. Well, there’s no question that size is an anchor to performance. And we intend to prove that up to the point where it starts really biting.

But it — we cannot earn the returns on capital with well over 200 — well, with a market cap of 300-plus billion. It just isn’t doable.

Archimedes, he said he could move the world if he had a long enough lever, didn’t he, or something like that, Charlie?

CHARLIE MUNGER: Yes, he did.

WARREN BUFFETT: Well, I wish I had his lever because we don’t have that lever at Berkshire.

So we — well, we’ll answer two questions there.

In terms of cost of capital, Charlie and I always figure that our cost of capital is the — is what could be produced by our second best idea. And then our best idea has to exceed that.

We think — I have listened to so many nonsensical cost of capital discussions, that —

CHARLIE MUNGER: I’ve never heard an intelligent one.

WARREN BUFFETT: Yeah. Yeah. (Laughter)

It’s really true. I mean, and there’s — that’s another thing. I’ve been on boards and the CFO comes in and explains why we’re doing this and it always gets down to, you know, it exceeds our cost of capital.

And he doesn’t know what the hell his cost of capital is, and I don’t know. And — but I don’t embarrass him, you know?

So I just sit there and listen to this stuff and apply my own thing, and then still end up voting for it, probably, if I don’t like it, although there have been a few exceptions to that.

The real test, you know, over time, is whether the capital we retain produces more than a dollar of market value as we go along.

And if we keep putting billions in and those billions, in effect, are worth, in terms of present value terms, in terms of what they add to the value of the business, more than what we’re putting in, you know, we’ll keep doing it.

We bought a company day before yesterday, I guess it was. And we are spending close to $3 billion U.S. It’s a Canadian company.

And we think we will be better off financially because we did that and we thought it was the best thing that we could do with the $3 billion on that day. And those are the yardsticks that we have.

And what I do know is that I’ve never seen a CEO who wanted to do a deal where the CFO didn’t come in and say it exceeded the cost of capital.

It’s just — it’s a game, as far as we’re concerned.

And we think we can evaluate businesses. And we know the capital we have available. And we have things that we can sell to buy. Not businesses, but marketable securities that we can sell to buy businesses if we like.

And we are constantly measuring that opportunity cost that Charlie talked about in the movie. It’s an important subject. And one that I think has had more nonsense written about it than about anything.

But I’ll turn it over to Charlie to go over —

CHARLIE MUNGER: Well, a phrase like “cost of capital,” which means different things to different people, and often means silly things to people who teach in business schools, we just don’t use it.

Warren’s definition of behaving in a corporation, so that every dollar retained tends to create more than a dollar of market value for the shareholders, is probably the best way of describing cost of capital. That is not what they mean in business schools.

The answer’s perfectly simple. We’re right and they’re wrong. (Laughter)

WARREN BUFFETT: I look good compared to him, don’t I? (Laughter)

15. Buying Nebraska Furniture Mart from the Blumkins

WARREN BUFFETT: OK. Station 3.

AUDIENCE MEMBER: Good morning. My name is Jonathan Fye (PH) and I’m from Denton, Texas, just up the road from the new Nebraska Furniture Mart that’s going to be located in The Colony.

My question relates to your original acquisition of that business from the Blumkin family in 1983.

Based on the data you provided in this year’s annual report, it appears you were able to purchase this business for roughly 85 percent of book value, or roughly two times earnings.

Can you comment on the factors or the environment in Omaha that enabled you to purchase this wonderful business for such a wonderful price?

WARREN BUFFETT: Well, I wish we had bought it that cheap, Jonathan, but no — we paid at the time, as I remember, probably 11 or 12 times after-tax earnings. It was not a discount from book value.

I’m not sure where those numbers come. Well, we bought 80 percent of the company. It was bought on the basis, as I remember, of 100 —of $60 million of purchase price.

So we —actually there was a second transaction involved in it. But 60 million was 100 percent value. We ended up with 80 percent.

The 60 million would’ve been more than book at the time. Not way more, but more than book.

And it would’ve been a multiple of 11 or 12 times earnings, as I remember. The sales were about 100 million. Pre-tax margins were in the 7 percent range.

So, it was about 7 million pre-tax. And, you know, 4 ½, probably, after-tax. That’s ballpark.

So, it was not a bargain purchase. It was a great business. It was a wonderful opportunity to join as fine a family as I’ve ever met.

But it was — and incidentally, there was another company, I believe, from Germany, that was trying to buy it at the time.

And believe it or not, Erskine Bowles, of Simpson-Bowles, was representing them, my friend Erskine — I didn’t know this at the time.

And then I went out on my birthday, August 30th, 1983. And had that contract, which is in the annual report.

And I gave it to Mrs. B. And — and she didn’t read, but Louie, her son, told her what was in it.

And I never asked her for an audit. I just asked her if she owed any money. And I asked her if she owned the building. And she said yes. And we made the deal. But it was not a bargain purchase.

Now, if you want to talk about bargain purchases, we should talk about going out to the Nebraska Furniture Mart. (Laughter)

So far, in the three — we —in the days of this annual meeting, our sales, which were a record 40 million for the week last year, are up about — I think they’re up about 7 percent now. And last year, of course, it was a record.

And on Tuesday, which was the first day, we did 7.8 million.

And Berkshire owns the largest home furnishing store in Sacramento, California. We own the largest one in Boise, Idaho. We own the largest one in Salt Lake City. We own the largest one in Las Vegas. Largest one in Reno.

Our sales at the Furniture Mart on Tuesday were larger than the monthly sales of any one of those stores I’ve just named, being the largest ones in places like Sacramento. So it is a remarkable organization. (Applause)

And the good news is there’s still time for you to avail yourself of those prices. (Laughter)

I would like to put in a plug for the Dallas store, where — I was down there a week ago. And it’s a plot of land like you wouldn’t believe. It’s a store like you wouldn’t believe. It is 1,800,000 square feet under one roof. Over 40 acres.

It will do more volume, I predict, than any other home furnishing store in the world. And I wouldn’t be surprised if I could add to that by a factor of at least two.

It’s a remarkable store. And I toured around it. And we’re, you know, we’re putting in streets. We’re — site preparation, utilities, racking, all these things. This wonderful woman, Michelle, who showed me around.

And the Blumkins later told me that she had started — worked for Nebraska Furniture Mart as a cashier, and she is in charge of this, you know, many hundreds of millions of dollar project. It’s really — it’s the good thing about America.

And at the end of the tour, she’d had this number two person working — walking around with us, who — she was explaining some things to us, too. And I learned at the end of the tour that number two was Michelle’s husband. (Laughter)

Interesting pillow talk, you know? “How many cubic yards did you move today, honey,” you know? (Laughter)

16. Why Buffett recommends an index fund for his wife’s inheritance

WARREN BUFFETT: OK. Carol.

CAROL LOOMIS: This question comes from Jason Rothman (PH) of Oklahoma City, who was the first shareholder to ask a question that subsequently was framed by a number of other shareholders as well.

In my mailbox, this was the most popular question asked.

“Mr. Buffett, you state in your annual letter to shareholders that in your will you have given instructions to the trustee who will be acting for your wife’s benefit to put 10 percent of the cash given her in short-term government bonds and 90 percent in a very low-cost S&P 500 index fund.

“My question is why are you advising the trustee to put 90 percent of the cash into an S&P 500 index fund instead of into Berkshire shares?”

WARREN BUFFETT: Well —

CAROL LOOMIS: “This might imply that you expect the index fund to outperform Berkshire in the future when the company is run by a new CEO and chairman. Please clarify.”

WARREN BUFFETT: Yeah, I’ll be glad to clarify. That letter didn’t come from Vanguard, by any chance, did — (Laughter)

When I die, incidentally, then all the Berkshire shares I have at that point will go to five different foundations. Every single share. I mean, there are no shares that have not been designated, mentally, to charity. A good many of them have been designated specifically to — in numbers and all that.

But — and they will be distributed over the ten years after my estate is closed. So figure over 12 years.

And I tell my — I tell the trustees that will be holding these shares, you know, “Don’t sell any Berkshire shares until they have to be sold.”

So my views, on Berkshire at least through 12 years after my death are as bullish as anybody could possibly come up with.

And incidentally, without those kind of instructions, anybody would say, “You know, you’re crazy to keep many, many billions of dollars all in one stock.” I can’t think of anything better to do it over those 12 years.

In terms of my wife’s situation, you know, that is not a question of maximizing capital. It’s just a question of total, 100 percent peace of mind on something that cannot get a bad result.

And, like I said, there’s way more money for her than she’ll ever use. As a matter of fact, those of you who know her, you know, may feel that I’ve added about three zeros too many.

But it is not designed for her to get even larger amounts of capital. And there’ll be capital, loads of capital left over on that part of it.

On the part that I care about maximizing, I have instructed the three trustees to not sell a single share until it has to be sold. So, that’s good for 12 years after I die, as to my best advice as to what I want them to hold.

Charlie?

CHARLIE MUNGER: Well, Warren is a little peculiar in the way he distributes money in the family. And I think he’s entitled to do what he damn pleases. (Applause)

Speaking —

WARREN BUFFETT: Do I — do I hear my — children applauding? Do I hear my children applauding? (Laughs)

CHARLIE MUNGER: And I’ve never had this feeling I had to starve the family down to a few trifles.

And Warren really — and Susie, when she was alive, was the same way.

He really is a meritocrat. He’s really quite extreme in wanting to let most of his money go back to the civilization in which it was earned.

I like being associated with it. (Applause)

17. BNSF service problems are hurting earnings

WARREN BUFFETT: Jonathan?

JONATHAN BRANDT: The BNSF has done very well since Berkshire acquired it in 2010.

But its western competition of Union Pacific has actually grown its earnings more. And at the moment, the UP seems to be operating more smoothly for its customers.

Could you shed some light on the service challenges Burlington has experienced recently and perhaps discuss any differences between the two railroads in end markets, geography, and strategy that may have led to the divergent result?

Would it be fair to say that, in trying to aggressively sign up new business volume last year, that the railroad did not allow for a sufficient margin of safety in terms of what its capacity could handle, should there be a harsher than normal winter or other adverse circumstances?

WARREN BUFFETT: Yeah. It — we’ve handled more volume, actually, than in the past. I mean, in 2006, we had a peak of 219,000 carloads. That was in the late fall.

But no question that we’ve had a lot of service problems, particularly on our northern route.

We have been spending more money than Union Pacific, and they spend a lot, in terms of attempting to anticipate the kind of problems that can occur when you get a big increase in volume, on that one route particularly, from the boom in the — particularly the Bakken shale oil.

We’ve got a lot of unit trains that are running over those lines that weren’t running five years ago.

I think I’ve got Matt Rose here — right — I think somewhere in the front. And he might address some of the problems of cold weather. I mean, want to get — there were a lot of days where it was 15 below or worse.

And in terms of sending people out to work on problems, under those circumstances, it can be really — it can be life threatening.

But Matt, do you have — oh, there he is. OK. Could you shine a light down on him, please, too? So he’s right here in the front. In the front.

MATT ROSE: Warren. So last year, the industry grew at about 820,000 units. BNSF handled 53 percent of all those units.

And it’s not what we wanted to take or what we didn’t want to take. Quite frankly, it’s the geographic nature of our franchise. And the oil came a lot faster than we were expecting and we’ve been spending money at a rapid clip to try and build into it.

The second issue was, you know, I had previously, prior to this past year, been in the CEO role for 13 years, and I have never seen a weather — a winter weather — like that.

We had 83 inches of snow in Chicago. We had multiple days, over 30 days, where it didn’t get to zero in the Minnesota area.

So, you know, we know this is an outdoor sport. We get it, on the weather. But quite frankly, when we get to about 0 to 10 degrees below, things just don’t work.

The weather’s getting better. Last week, we handled 206,000 units. No other railroad has ever handled 205,000 units.

So the railroad’s coming back. And we’re making the significant investments to be able to handle all the business that’s out there.

WARREN BUFFETT: Thanks, Matt. (Applause)

We will spend $5 billion on the railroad this year. No railroad’s ever spent that kind of money, or even very close to it.

But I got a call — or I got a letter — from a fellow in North Dakota. And they were having a problem getting fertilizer. And I called and talked to him. And they sent it down to Matt.

But we’ve now put on — I think we’re going to have 52 unit trains of fertilizer. And they will get there in time for the planting. And that’s important. I mean, we take it seriously.

But cold in winter or floods in the summer, I mean, we’re now really functioning a lot better and our earnings will be, in my view, are very likely to be a lot better.

But the thing that could disrupt that is, if for some reason, you had incredible floods. You’re dealing with 22,000 miles of track. And if you get weak links, one of which, always, for all four big railroads, is Chicago, because that’s where things get interchanged and that’s where a lot of bottlenecks have been this year, and that’s where weather was tough as well.

But you’re right, Jon, in the comparative financials in recent months. And believe me, Matt’s paying a lot of attention to them and Carl’s paying a lot of attention to them, and I even pay a little attention to them.

So I have a feeling that they will be getting better over the remainder of the year.

18. Generating electricity with natural gas

WARREN BUFFETT: OK, station 4.

AUDIENCE MEMBER: Rosal Kerkhove (PH). I’m from Omaha, Nebraska. My question relates to our company’s use of natural gas to generate electricity.

This past winter, natural gas in storage has declined substantially.

In the future, how do our companies assure that they have an adequate supply of natural gas to generate electricity?

And if the price of natural gas increases in multiples, how do our companies assure that they can sell the electricity at a satisfactory return on investment? Thank you.

WARREN BUFFETT: Yeah. We have — I’m going to ask Greg Abel to be more specific on this.

But we are the largest alternative generator of — using alternative sources — I think, in the country. And I think by the end of 2015, we will be capable of producing 40 percent of our needs in Iowa through wind, which will be unlike any other company you can find in the country. (Applause)

But I think I’ll have Greg answer the specifics of any natural gas-dependent generating units we have.

I’m not worried about that thing, but I — about what you raised —but Greg would know a lot more about the mix on natural gas and the opportunity to shift to coal. And exactly the profile of the generating capacity.

Greg? Now, let’s get a light down on him, if you can. He —

GREG ABEL: I think it’s — okay, there it is.

WARREN BUFFETT: Yeah, there we go —

GREG ABEL: Yup. Sorry. So like Matt touched on, obviously, we had a very cold winter in the Midwest.

So our systems, for the first time, were challenged in a significant way. But very proud of how the resources were managed.

So if you look at the question around natural gas, and specifically the gas availability, there was substantial gas available to be utilized both to heat homes and produce the energy, because ultimately, we’re worried about both, the — keeping the furnaces on and, equally, keeping the lights on.

So when you looked at the balance of supply, there was gas there.

But clearly, we have to continue to look at the unique situation as we continue to move towards using more gas in the United States.

Warren touched on an important point. This past year, as he highlighted — he highlighted 2015 — but if you look at just what we produced on the renewable side in Iowa, that was 39 percent renewable, i.e. wind. And that’ll only get larger.

So as we continue to manage these multiple resources, there’s clearly a way to meet the needs of our customers. And we’re meeting it in an extremely cost-effective fashion.

I’d also highlight that when you think through the cost recovery side of it, we’ve got very unique mechanisms within our utilities.

When the underlying cost of gas goes up, where we have to purchase more than we had anticipated, we’ve got clear pass-throughs back to our customers. And we’ve negotiated those across each of our states.

So we’re well positioned to service our customers long term, and equally protect the fundamental financials of the underlying businesses.

WARREN BUFFETT: The —

GREG ABEL: Thank you.

WARREN BUFFETT: The company that Greg runs has many subsidiaries. And our gas pipeline subsidiaries move about 8 percent of the gas in the United States.

And I think you said you were from Omaha. And the gas that comes into this area comes through a pipeline that we own. And we just renamed the company to Berkshire Hathaway Energy, from MidAmerican Energy. We changed it to Berkshire Hathaway Energy.

But, it’s a point of some pride to us that that company, Northern Natural Gas, which originally came from Omaha, when we bought that from Enron a decade or so ago — actually, Dynegy had it in between — but its origin then was Enron.

You know, they’d skimped on maintenance, done all kinds of things. And it was ranked number 42 out of the 42 ranked pipelines in the United States at that time. And last year it was ranked number one.

So it went from last to first under Greg’s management. And I tip my hat to him. (Applause)

And number two was our other pipeline — current pipeline. So we’re running one, two at the moment.

19. Two heads running Berkshire are better than one

WARREN BUFFETT: Becky?

BECKY QUICK: This question comes from Fred Ireman (PH) in Richmond, Virginia, and it’s addressed to you, Warren.

He says that, “During the past several years, much has been written and many have speculated about your successor. I shall not even go down that path, as it would cause you to repeat yourself.

“However, has there been any discussion at your board meetings about a replacement for your partner, longtime friend, and co-chairman, Charlie Munger?

“Has it been determined Berkshire will continue to be led by a similar dynamic duo? Two magnificent investor minds, each providing a unique point of view, have been a major reason the business has performed magnificently over the decades and has delighted the shareholders.”

WARREN BUFFETT: Well, Charlie is my — he’s my canary in the coal mine. (Laughter)

Charlie turned 90. And I find it very encouraging how well he’s handling middle age. (Laughter)

So I hope to be able to do the same thing myself.

No — you raised a point, which is — I hadn’t thought about, but I’m a little sensitive now that you raised it.

They always talk about replacing me, but they never talking about replacing Charlie.

I do think — I think it’s very likely, incidentally, that whoever replaces me as CEO probably has, over the years certainly, developed — they’ll never be able to develop another Charlie — but they’ll develop somebody that they work with very closely. It’s a great way to operate.

Berkshire is better off because the two of us have worked together than if either one of us had been working individually, there’s no question about that. (Applause)

And —but I do think, you know, we saw it with Roberto Goizueta and Don Keough at Coke, we saw it with Tom Murphy and Dan Burke at Cap Cities. I mean, these were magnificent companies.

And I think that in both cases that I just named, I think that they accomplished far more because they had two incredible people running them who admired and worked well with the other. And they were complimentary, in terms of the talents they brought.

In many ways, it’s a great way to operate. You can’t will it to somebody.

But I would be very surprised if, a few years after my successor takes over, or maybe sooner, that there isn’t some relationship, a partnership, that enhances the CEO’s not only — not only achievements — but the fun they have.

And — but so far, nobody’s brought up, in the meeting, any successor to Charlie.

And frankly, I have a lot of trouble thinking of anybody that could be a successor to Charlie. (Laughs)

Charlie, you want to comment? I’ve got to give you a chance. (Laughter)

CHARLIE MUNGER: I don’t think the world has much to worry about. Most 90-year-old men are gone soon enough. (Laughter)

WARREN BUFFETT: Well, the canary has spoken. OK. (Laughter)

20. Subsidiary shuffles aren’t related to Berkshire succession plans

WARREN BUFFETT: Jay?

JAY GELB: I have a question on succession planning, as well.

Matt Rose recently shifted his role from CEO of the Burlington Northern unit, to executive chairman of Burlington. Does this change affect who will be the next CEO of Berkshire? And what is the succession plan for Ajit Jain at Berkshire’s reinsurance unit?

WARREN BUFFETT: The only succession for Ajit would be reincarnation. (Laughter)

We will not get another Ajit. But fortunately, we won’t have to for a very, very long time.

The situation with Matt, which was at Matt’s suggestion, was designed to fit specifically the succession situation at BNSF and the wishes of certain people. It doesn’t have any implications for Berkshire.

I have letters from every one of our managers telling me what I should — I keep — these are private, I don’t share these with the board, even — telling me what I should do if something happens to them tonight.

So I have their ideas. In some cases, they talk about more than one person. In some cases, they tell me the strengths and weaknesses of the people.

But the — I would not try to make any judgments about the succession plans at the parent company from what is done in terms of succession planning at any of the subsidiaries.

Charlie?

CHARLIE MUNGER: Well, I always say, I’m not the least bit worried about it. If I — I wish my main problem in life was the fear about succession problems at Berkshire. I think we’re in very good shape.

21. “Great” question, but no answer

WARREN BUFFETT: OK. Station 5.

AUDIENCE MEMBER: I am Bill Melby from Northfield, Minnesota.

At the 2009 annual meeting, Mr. Buffett, you said that if you were required to invest your total net worth in one company, that that company would be Wells Fargo.

So in 2014, I ask the same company — or the same question. If you were required to invest your total net worth in one company, what would that be?

WARREN BUFFETT: When the question was asked in 2009, did you exclude Berkshire? Because I think I would’ve answered Berkshire. (Laughs)

But I wouldn’t quarrel with Wells Fargo as a marketable security outside of Berkshire at that time.

Well, I guess he’s checking his notes on — the — well —

AUDIENCE MEMBER: The question is other than Berkshire —

WARREN BUFFETT: Oh, other than Berkshire.

AUDIENCE MEMBER: —what would you invest in today?

WARREN BUFFETT: Yeah. Well, it’s a great question, but it’s not going to get an answer. (Laughter)

Charlie, do you want to answer?

CHARLIE MUNGER: No, no, I think you’ve given exactly the right answer. (Laughter)

WARREN BUFFETT: Yeah. Well, I’m sorry to disappoint you, but we’ve disappointed others when they’ve asked that question.

22. Shareholders aren’t helped by rule requiring CEO pay disclosure

WARREN BUFFETT: OK, Andrew?

ANDREW ROSS SORKIN: Thank you, Warren. This question comes from Dave Hitchy (PH) from Auburn.

It’s a long question. He says, “As a shareholder for about a dozen corporations in addition to Berkshire, I always see a number of proxy statements each year. In all, except Berkshire, the summary compensation table has the compensation listed for at least five or more of the highest paid executives. Berkshire lists three, Warren, Charlie and Mark.

“I assume that since Berkshire is a holding company structure, that’s the way it is. I think it would be instructive to include at least two of the highest paid executives from the wholly-owned subsidiaries in the summary table, Ajit, Tony, or Greg, or Matt, to give the shareholders, your partners, a sense of how Berkshire compensates its strongest and highest-paid leaders, as other companies do.

“This would be particularly valuable since two-thirds of the current listees, Warren and Charlie, only receive nominal salaries of $100,000 per year, a figure that is vastly below the value they bring to the company.

“Would you, in the spirit of transparency, be willing to add at least two of the highest-paid subsidiary officers in the table in future years? And how much do you think the next CEO of Berkshire should be paid?”

WARREN BUFFETT: Well, the answer to the last is he certainly will be entitled to pay — get paid a lot. But their decision as to how much they accept is another question.

But I’m going to write about that very end question next year in the annual report because it has a lot of interesting ramifications.

We, obviously, are following the SEC rules, which I can’t recite, in terms of the officers required to be in the proxy statement as to their pay.

But, you know, Andrew, in my sporting mood, I would say that Comcast probably has some people in the employ that make a lot more money — not at CNBC, we’re not —but — that would exceed the salaries of the people that they list in the proxy statement, as well.

And there’s a real question as to whether it’s in the interests of the shareholders of the company to start listing, you know, how much the person who’s the anchor of the nightly news or whomever it might be, gets paid because it might have a very negative effect, in terms of negotiating salaries with other people within the organization.

I would say that the — I would say the shareholders of Comcast would be hurt, actually, if you published the five highest salaries paid at the subsidiaries or at Comcast itself.

And certainly, if you carried it to every subsidiary there was. I mean, if you were to publish the five highest salaries at CNBC, I don’t think the salaries overall would go down the following year.

So, I think that is a — I think that’s a good reason for not — for us not publishing the salaries of, you know, say, our top ten managers of the company.

At Salomon — we mentioned that a little earlier — everybody — virtually everybody — was dissatisfied with what they were getting paid. And they were getting paid enormous amounts of money.

But they were disappointed, not because of the absolute amount. They were disappointed because they looked at somebody else in the place and it drove them crazy.

And as a matter of fact, the first big crisis we had in compensation was when the management made a — what was regarded as a secret deal, with the arb group, as I remember — whereby, John Meriwether and his crew got paid a lot of money, which I would argue they earned. I mean, I think they deserved it.

But as soon as that happened, it made compensation, which had always been a terrible problem, an even greater problem because of the jealousy that broke out among the people that weren’t in John Meriwether’s group.

I think it’s been — I think it’s very seldom that publishing compensation accomplishes much for the shareholders.

In fact, you can argue that much of what’s going on in corporate America — well, I would put it this way: corporate CEOs, as a group, would be being paid a lot less money if proxy statements hadn’t revealed how much other people were getting paid.

It is only human to look at a whole bunch of proxy statements and say, “Well, I’m worth more than that guy,” and negotiate that way. And a comp committee is going to respond to that.

So, American shareholders are paying a significant price for the fact that they get to look at that proxy statement every year and see how much those top five officers are earning.

Charlie? (Scattered applause)

CHARLIE MUNGER: In the spirit of transparency, you’re asking for something that wouldn’t be good for the shareholders. And it’s not going to happen unless the SEC makes it happen.

We’re way better off without adding to the culture of envy in America.

WARREN BUFFETT: Yeah, there’s no one that looks at —there’s no CEO that looks at other proxy statements and comes away thinking, “I should get paid less.” I mean, that — you know? (Laughter)

We haven’t seen — have we ever seen them?

CHARLIE MUNGER: No.

WARREN BUFFETT: No.

CHARLIE MUNGER: No, I —

WARREN BUFFETT: Well, we’re not old enough.

CHARLIE MUNGER: I would say that envy is doing the country a lot of harm. And our practices are envy dampeners.

23. Why Berkshire maintains $20B cash cushion

WARREN BUFFETT: OK. Greg. (Applause)

GREGG WARREN: Thank you. As you know, Berkshire’s cash balances are an issue for some investors. Especially with excess cash being in the 25 to $30 billion range the last couple of years, and Berkshire having a more difficult time than it’s had historically reinvesting capital as quickly as it comes in.

Although Berkshire did provide $3.5 billion of the $3.6 billion of cash that was used to acquire NV Energy last year, with MidAmerican funding the remainder with debt, was there something that kept Berkshire from providing all of the capital for the acquisition, perhaps via inter-company debt?

And on a separate note, can you provide with us some insight into the decision to allow MidAmerican to retain all of its earnings, while Burlington Northern, which spent $3 billion on capital expenditures last year and is on pace to spend $5 billion this year, continues to pay a distribution to Berkshire, all while it takes on additional debt to help fund capital spending?

WARREN BUFFETT: Yeah. MidAmerican, now renamed Berkshire Hathaway Energy — we’ll call it BH Energy — will have multiple opportunities, I hope, and we’ve seen two of them in the last 12 months, to buy other businesses.

And, as you noted, we spent a substantial amount of money on NV Energy and two days ago we agreed to buy transmission lines in Alberta.

So, we will — we hope we will — and so far we’ve been able to — come up with really large businesses to buy at BH Energy.

That will not — at BNSF, we will spend a lot of money to have the best railroad possible. But we’re not going to be buying other businesses.

So, we distribute substantial money out of BNSF and we will continue to do so because it’ll earn substantial money. And it can easily handle the debt that it has and will incur.

Whereas, at Berkshire Hathaway Energy, we have pretty much the appropriate level of debt at both the subsidiary and the parent company level. So as we buy things, we need not only the retained earnings that we have, but occasionally we need some money from the shareholders.

And there are three shareholders of BH Energy. Berkshire owns 90 percent and then Greg and Walter Scott have the balance.

And so, if we make a large acquisition and we need a little more equity, we will have a pro rata subscription, which the other two shareholders are welcome to participate in. But if they don’t — if they decided not to, it wouldn’t hurt them. They’d still have an improvement in the value of their shares.

So those two companies are quite different that way.

I hope that more possible deals for Berkshire Hathaway Energy come along. And I think they will.

So we may invest many, many, many billions there. We will invest billions at the railroad, but it’ll all be to improve the railroad. It won’t be to buy additional businesses.

So far this year, if you think about it, counting yesterday — now, two of these deals started last year — but we’ve spent 5 billion on acquisitions, roughly.

And, of course, in the first quarter, we spent another 2.8 billion on property, plant, and equipment.

But we are finding — we are finding things to do that tend to sop up the cash.

We always will have $20 billion around Berkshire. We will never be dependent on the kindness of strangers. It didn’t work that well for Blanche DuBois, either.

But in any event, the — we don’t count on bank lines. You know, we don’t count on — we don’t count on anything.

There will be some time in the next 100 years, and it may be tomorrow and it may be 100 years from now, and nobody knows, you know, where we cannot depend on anybody else to keep our own strength and to maintain our operations.

And we spent too long building Berkshire to have that one moment destroy us.

I mean, we lent money, as you probably know, to Harley-Davidson at 15 percent. And we lent it at a time when short-term rates were probably a half a percent.

Well, Harley-Davidson is a fine company — but it, like Goldman Sachs and General Electric and a bunch of other companies —we lent money to Tiffany’s — they — you know, they needed — when you need cash, you know, it’s the thing — it’s the only thing — you need. And it’s because other people aren’t coming up with it.

I’ve always said that, you know, cash is — available cash or credit — is a lot like oxygen: that you don’t notice it — the lack of it — 99.9 percent of the time.

But if it’s absent, it’s the only thing you notice. And we don’t want to be in that position.

So we will keep 20 billion. We will never go to sleep at night worrying about any event that’s taken place that could hurt our ability to keep playing our game.

And above 20 billion, we’ll try to find ways to invest it intelligently. And so far, we’ve generally done it. I mean, right — you know, we always had something above that.

But, you know, we’ve spent a fair amount of money so far this year. We’ll probably spend more later in the year.

So, so far, I feel we could get the cash out at reasonable returns. We never feel a compulsion to use it though, just because it’s there.

Charlie?

CHARLIE MUNGER: I think we’re very lucky to have these businesses that can employ a lot of new capital at very respectable rates.

And if — earlier in the history of Berkshire, we didn’t have such automatic opportunities. And now that we’re so affluent, we really are way better off having these opportunities.

It’s a blessing. I mean, who would want to get rid of MidAmerican and the Burlington Northern Railroad? Nobody in his right mind.

I mean, we love the opportunity to invest more capital intelligently in a world where short-term interest rates are half a percent, or lower.

WARREN BUFFETT: And we love the opportunity to go in with 3G at Heinz and —

CHARLIE MUNGER: Yes.

WARREN BUFFETT: —employ significant capital. We’ll get the chances to use capital.

Eventually, you know, compound interest will catch up with us. And it’s certainly dampened things.

But it hasn’t delivered its final blow yet.

24. Buffett and Munger disagree, but never argue

WARREN BUFFETT: Station 6.

AUDIENCE MEMBER: Hi Warren, Charlie. John Norwood from West Des Moines, Iowa. Thank you so much for the annual meetings. And please don’t move it to Dallas or some other place. I’ve got my system worked out here.

WARREN BUFFETT: We won’t.

AUDIENCE MEMBER: Thank you. Hey, two quick questions.

One is allocation of capital and how you wrestle with the operating companies and how much cash comes up to the operating companies — or comes up to the mother ship — versus the operating companies.

And you and Charlie, do you ever fight or argue? And any lessons over the years for how you manage your partnership of two? Thank you.

WARREN BUFFETT: Yeah. Charlie and I have never had an argument. We met in 19 — when I was 29. He was 35. We’re a little older now.

And in those years, 55 years, we’ve disagreed on a lot of things. And it’s just never led, and never will, lead to an argument.

We argue with other people. (Laughs)

But it just — it hasn’t occurred.

I called Charlie on the Coca-Cola vote, you know, and then said what the proxy statement said and everything. Said, “What do you think?” And we thought alike, you know?

Sometimes we don’t think alike. And we never go away in the least bit mad if we don’t, or —

CHARLIE MUNGER: Most of the time, we think alike. That’s one of the problems. If one of us misses it, the other is likely to, too. (Laughter)

WARREN BUFFETT: Yeah. I would say that — well, there’s no question. If you look at the really bad mistakes we’ve made, I’ve made them.

I’m probably a little more inclined toward action than Charlie. Would you say that’s fair, Charlie? Or —

CHARLIE MUNGER: Well, you once called me the abominable ‘no’ man. (Laughter)

25. Berkshire’s cash cushion is partially held by subsidiaries

WARREN BUFFETT: Now we’ve missed — what’s the — what was the first part of the question? (Laughter)

AUDIENCE MEMBER: Capital allocation. How do you decide how much cash comes up from the operating companies —

WARREN BUFFETT: Yeah, that’s —

AUDIENCE MEMBER: — to the mother ship?

WARREN BUFFETT: Yeah, that’s pretty simple, in that we don’t really care too much where that 20 billion minimum is.

We wouldn’t — but we don’t count the money in a regulated — well, in the energy business or the railroad.

So we really count the money that we could make a phone call and get.

With interest rates at these levels, we sit around sometimes with — every one of our companies, I would say, probably has more cash in it than if some other large conglomerate was running the place.

They would probably have sweep accounts and all of that. And we may get around to that at some point, but it just doesn’t make that much difference, because if we had it at the parent company, we’d have it out at five basis points. And if it’s at the — if it’s down at the subsidiary, it’s probably getting five basis points.

So we’re not — it’s not something we think about on a day to day or week to week or month to month basis.

I know where the cash is. And I know when we’re going to need cash and I know what I’m thinking about doing, or may possibly do in the next few months, that maybe something’s a 50/50 probability of happening.

And anything I am committing to do, I know where the cash is coming from.

But it doesn’t mean that we try to get it all in the parent company, day by day or week by week like many companies do. We could change that procedure someday. Maybe a sweep account would make sense at some point. Probably would.

But we’re not big disciplinarians of our subsidiaries day by day. We don’t want them to feel that way.

And there’s one company I’m thinking of, where I’ve never been there. Probably only talked to the fellow who runs it three or four times in ten years. You know, and there’s a lot of cash around. And every now and then, he sends me some.

And if I really need it, I mean, I know where it is. And he’ll give it to me. But there’s — it doesn’t really make much difference, you know, whether it’s sitting there, whether it’s sitting at Berkshire.

I don’t want to encourage to our managers of our other subsidiaries who are listening to this a new way of behaving. But, I sort of adapt to the companies, except when we really need the money, and then I grab it. (Laughter)

Charlie?

CHARLIE MUNGER: That’s just fine.

26. Buffett admits he’s “slow to make personnel changes”

WARREN BUFFETT: Carol?

CAROL LOOMIS: This question comes from an astute fellow named Richard Sercer of Tucson, who spotted an opening and is going for it.

And it actually reminds me of a question that you, Warren, or Charlie, could’ve thought up yourself.

“In an interview on April 23rd, 2014 about the Q&A session, Warren said, quote, ‘I hope we will get questions that probe at our weak points.’ My question is, what is our weak points and what can be done to address them?” (Laughter)

WARREN BUFFETT: Well, that would spoil all the fun for the journalists. (Laughs)

They’re the ones that are supposed to look for the weak points.

We have a lot of weak — we point them out. You know, I’ve just pointed out one.

Probably, I would say if you’d — if we’d — executed a sweep account for all our subsidiaries some years ago, you know, we would have a few more dollars than we have now.

You know, it — who knows what they’re doing with some of those balances in terms of — we wouldn’t — it wouldn’t be because we do riskier things. But we — you know — we are very disciplined in some ways. And by ordinary business standards, we’re sloppy in other ways.

And, oh, well, a clear weak point of mine would be I’m slow to make personnel changes. I mean, I like the managers we have.

And Charlie and I had a wonderful friend who couldn’t have been a greater guy. And, you know, we were slow to make a change there. We loved the guy. And it wasn’t killing us in our business.

And how long would you say we went beyond where somebody else would’ve acted in that case, Charlie?

CHARLIE MUNGER: Well, I don’t know exactly.

But that, turning to the sweep account system, reminds me of a friend I had when I was in the Air Corps and he was a very skinny man. And he decided to give blood. And they put the needle into his arm and the blood stopped flowing.

And the nurse just started stripping his arm as though it were the udder of a cow. And he got the impression that he was going to — they were going to get that blood whether it took all he had. And he fainted.

It was a very unpleasant occurrence. And I don’t think a sweep account is all that pleasant to sit there and just — every little dollar comes in, somebody sweeps it away.

WARREN BUFFETT: Charlie, our —

CHARLIE MUNGER: I like the tone of our business.

WARREN BUFFETT: Our managers are listening here. I mean, don’t give them that illustration to use when I ask for money. (Laughter)

CHARLIE MUNGER: But, you know, I’ve seen people subject to — Teledyne and Litton, those people, swept every dime every day, basically.

And it was a little more economic, but it created a tone in the company that — which I think is less desirable than ours.

WARREN BUFFETT: We’ve waited too long on managers, though, sometimes, Charlie.

CHARLIE MUNGER: Well, sure. You and I participated in taking one man directly from an executive chair into a Alzheimer’s home. There was no — (Laughter)

WARREN BUFFETT: You’re hitting a sensitive subject here, Charlie. (Laughter)

CHARLIE MUNGER: We’d arranged that he could do no harm, and we loved him well enough so that we just made it easy for him.

I’ve never regretted it, have you?

WARREN BUFFETT: No. Not —

CHARLIE MUNGER: No.

WARREN BUFFETT: Not at all. Not at all. It —

CHARLIE MUNGER: On the other hand, I want to be pretty careful.

WARREN BUFFETT: It — we will be slow. And we — there will be times when what you might call our lack of supervision over subsidiaries, you know, we’ll miss something.

Now, we think that giving our managers the degree of freedom that they enjoy will also accomplish a lot.

So someone will come along someday and say, “If you’d had many more checks and oversight and all of that sort of thing,” you know, something — well, something will happen at Berkshire and they’ll say, “That wouldn’t have happened if you’d followed the procedure that some other company followed.” And they’ll be right.

But what they won’t be able to measure is how much on the positive side we have achieved with dozens and dozens of people because we gave them that same sort of leeway.

I mean, we operate differently in terms of the level of control and supervision. You know, we don’t have a general counsel’s office at Berkshire. We don’t have a human relations department at Berkshire.

And that would be almost unthinkable to other companies. And we’re not saying that’s a 100 percent benefit in all ways. We think — but we think on balance, it’s a benefit.

But when the down side of such a procedure shows up, people will say, “Well, you should of done it differently and you should’ve been spending lots of money over the years and restricting the activities more of your subsidiary managers,” and so on.

And our reaction will be that they are wrong. But we will look bad in that individual case.

Wouldn’t you say that’s true, Charlie?

CHARLIE MUNGER: Yeah. The — by the standards of the rest of the world, we over trust. And so far, our results have been way better because we carefully selected people because they were going to be over trusted. And it’s worked very well for us.

And, I think a lot of places work better when they create a culture of deserved trust. And that’s been our system. And some people regard that as a weakness.

And this modern accounting treatment, when everybody’s measured on internal controls, I think it’s going to do more harm than good. (Applause)

27. Trying, and failing, to expand See’s Candies’ geographic market

WARREN BUFFETT: Jonathan?

JONATHAN BRANDT: See’s Candy is obviously small in the context of Berkshire’s currently expansive operations, but has long been one of your favorite businesses.

And no wonder, given that its pre-tax profits grew consistently from less than $5 million in 1972 when Berkshire acquired it, to $74 million in 1999.

However, since 1999, profit growth appears to have stalled.

Can you explain why See’s was able to grow its profits through the ’70s, ‘80s and ’90s, but not, so far, in this millennium?

Did something change about the business, for instance, the growth and demand for boxed chocolates or its market position?

Could you or Brad Kinstler discuss whether the relatively recent geographic expansion could help reignite See’s growth? Thank you.

WARREN BUFFETT: Yeah, the boxed chocolate business is, basically, not growing.

I mean, if you go back 100 years, the — each city of any size was characterized by lots of candy shops. Chicago was a big leader. New York was a big leader.

Believe it or not, the predecessor company to Pepsi Cola was the — a company with the most — it was a company called Loft’s — that had the most candy shops in New York City.

It was a candy shop company, originally, that a fellow that — what was his name?

CHARLIE MUNGER: [Charles] Guth.

WARREN BUFFETT: Yeah. What was it?

CHARLIE MUNGER: Guth.

WARREN BUFFETT: Yeah. He acquired Pepsi for a few thousand bucks, stuck it in Loft’s.

And the corporate — the corporate name, if you go all the way back on Pepsi, is Loft’s.

So there were loads of candy shops around everyplace. And including in Omaha.

Boxed chocolates have lost position dramatically. Primarily, I would guess, to salted snacks of one sort or another. Various things.

See’s has done remarkably well, far better than any chocolate company in the country.

Russell Stover did very well for a while. Very well, with a different business model. But, you know, they ran into their problems as well.

So, we can’t do much about increasing the size of the market. And we’ve tried a lot of ways. And we’ve tried moving out of our strong geography, multiple times.

I mean, Charlie and I looked at what we were earning in California in the ’70s and said to ourselves, “If we could do this in 50 states instead of one, you know, we’ll get very rich.”

So we tried it and we didn’t get very rich. It doesn’t travel that well.

CHARLIE MUNGER: Well, sometimes it does and sometimes it doesn’t. And you figure out whether it’s going to work by trying it.

WARREN BUFFETT: Yeah. And we’ve tried it many times.

But so far — it’s interesting. Two-thirds — people in the East prefer dark chocolate, two-thirds to one-third. In the West, they prefer milk chocolate, two-thirds to one-third.

They like miniatures in the East. They won’t eat miniatures in the West. There’s a lot of different things.

But in the end, there isn’t a lot of boxed chocolates volume.

And we’ve done very, very, very well in See’s. And it not only has provided us with earnings that we’ve used to buy other businesses, so we’ve added lots of earnings power through See’s, beyond the earning power we’ve added at See’s.

But it opened my eyes to the power of brands and probably you could say that we made a lot of money in Coca-Cola partly because we bought See’s, or at least in my case, bought See’s, because I’d understood brands to some degree, but there’s nothing like owning one, and sort of seeing the possibilities with it as well as the limitations, to educate yourself about things you might do in the future.

And in 1972, we bought See’s. And in 1988 we bought Coca-Cola.

And I wouldn’t be at all surprised, if we had not owned See’s, whether we would’ve owned Coca-Cola later on.

Charlie?

CHARLIE MUNGER: Yeah. There’s no question about the fact that its main contribution to Berkshire was ignorance removal. And it’s not the only big contributor to ignorance removal.

If it weren’t for the fact we were so good at removing our ignorance, step by step, Berkshire would be practically nothing today.

What we knew originally wasn’t enough. We were pretty damn stupid when we bought See’s. We were just barely smart enough to buy it.

And if there’s any secret to Berkshire, it’s the fact that we’re pretty good at ignorance removal. And the nice thing about that is we have a lot of ignorance left to remove. (Laughter)

WARREN BUFFETT: Well, that’s what happens when I call on him. (Laughter)

28. Buffett explains deal to change Bank of America investment

WARREN BUFFETT: Station 7.

AUDIENCE MEMBER: My name is Ben Ottenhoff and I’m from Washington, D.C.

I was wondering if you could talk — I’ve read recently that the Bank of America investment, you changed it so they can now treat it as tier one capital.

WARREN BUFFETT: Right.

AUDIENCE MEMBER: Can you explain a little bit why you did that and what benefit, if any, there is to Berkshire’s shareholders?

And also, does it give you any pause that they can’t calculate their tier one capital requirements properly?

WARREN BUFFETT: The — it came about some — really, a good many months ago, that Brian Moynihan called me and asked me whether we would be willing to change our preferred stock, five billion of it, from a cumulative preferred, to a noncumulative preferred.

Now, a non-cumulative preferred has certain defects, obviously, compared to a cumulative preferred. As, for example, the shareholder — the preferred shareholders — of Freddie Mac and Fannie Mae are finding out.

Noncumulative preferreds — Ben Graham wrote about them in the 1934 edition of “Security Analysis” — they’re a terribly weak form of security.

But, partly because they are that weak form of security, they count different in capital with banks.

So Brian asked me to do that and then he said, “If you will do that” — and this requires approval by their shareholders and everything — but he said, “If you’ll do that, we would be willing to make your preferred noncallable for five years.”

Now, in a world of five-basis money — five-basis-point money — you know, practically nothing — no returns — I was very willing to make that trade-off.

It was — they felt it was good for them and I felt it was good for Berkshire.

So, I get five years at Berkshire of non-call of a 6 percent preferred, which I can always use as payment for the warrants we have.

So, I don’t have a problem of being locked into it forever, into a noncumulative committed preferred, and the BofA gets the benefit of using it in their calculation of capital.

That was all done before this recent — I mean, a long time ago — before the recent, you know, week ago or so when they had the miscalculation involving some structured notes of Merrill Lynch.

That error they made does not bother me. I mean, it — you know, we work on our figures, you know, we’ve got that 20,000 page-plus tax return. We have 10-Ks, 10-Qs, going in and out. You do the best you can.

But I — that error did not affect their GAAP reported numbers or anything of the sort. And they wished they hadn’t made it. And they’ll pay a penalty, in the sense of their capital plan, because they did make it.

But it doesn’t change my feeling about the Bank of America or its management one iota.

And I do think that this — they were going to pay the dividend anyway. You know, I mean, the probabilities that going to non-cumulative hurts us are very, very low. And the probability that making it noncallable for five years is a real plus to us.

So, it was an exchange I was happy to make. And I think that it was good for us and good for them.

Charlie?

CHARLIE MUNGER: Well, I agree with you.

WARREN BUFFETT: OK. (Laughter)

29. NetJets is “satisfactory,” but don’t expect big growth

WARREN BUFFETT: Becky?

BECKY QUICK: This question comes from Frank Robinson in Madison.

And he asks, “Ten years ago, NetJets was mentioned at the annual meeting each year as an exciting growth opportunity for Berkshire. Five years ago, there were some problems which seem to have been addressed since they’re no longer mentioned.

“What are the current prospects for NetJets? Is it a substantial contributor to growth and revenue and earnings?”

WARREN BUFFETT: Yeah, it’s not a big grow — it’s a very — it’s a perfectly decent business.

The number — it peaked in new unit volume more or less coincident with what happened in the stock market in 2007 and ’08.

I mean, there were a fair number of people whose income was dependent on stock market behavior, particularly hedge fund managers. But other — a lot of others.

And they gave us quite a boom in sales. And not only did their demand fall off, but when their contracts ran out — and they tended to run out in, like, 2011 and ’12 — a lot of them did not renew.

Until the last — won’t be totally accurate on this — but until the last six or eight months, net ownership in the U.S. was declining just slightly. And that’s turned around now. Net ownership is growing month by month.

But it is not a huge growth business at all. I mean — it’s a very large-size business. I mean, we are, you know, probably 60-some percent of the industry and there’s nobody remotely close as a second. I mean, we are the premier product.

But I don’t see the market being double or triple the present size.

We are going to China very soon. But that’s a very, very long-range play. We are in Europe and that is not — that still is declining a little bit in unit volume.

Now, the flight hours have picked up a fair amount. So the owners are using the planes more in the last six months to a year, and that fell off a lot in the 2007- 8 period.

So I would not characterize NetJets as a big growth opportunity. But I would — but I’m glad we own it. And I think it’s very — it’s a very satisfactory business.

But it is not one I would expect to see a whole lot of growth out of.

Charlie?

CHARLIE MUNGER: Well, I demonstrated my optimism by buying 25 more hours. (Laughter)

WARREN BUFFETT: He was a tough sell, too, I got to tell you that. (Laughter)

I can think of a few more comments, but I won’t make them.

30. Unlikely to use major stock holdings to pay for acquisitions

WARREN BUFFETT: Jay.

JAY GELB: This question is on acquisitions.

How large of an acquisition is Berkshire comfortable targeting currently?

And to what extent are Berkshire’s major equity investments in Wells Fargo, Coke, American Express, and IBM realistically a potential source of funds for deals?

WARREN BUFFETT: Well, they could be a source of funds. But it’s very unlikely they will be.

But — the — our goal is to buy really good businesses, and big businesses, and businesses where we like the management, and businesses that we think we can grow over time.

I mean, Berkshire is about building earning power. When we buy, as we did a day or two ago, agreed to buy that transmission line in Alberta, I mean, I’m looking at trying to add earning power to Berkshire.

And we try to do that every day or every week or every month. And we don’t get opportunities that often.

But if the opportunities were large enough and we needed to raise some money, you know, we can dip into a huge reservoir of securities and still have, you know, huge investments thereafter.

It hasn’t come to that. You know, when we’ve got 40-some billion of capital — or cash — and I’m willing to take it down to 20, it — you know, we’ve got a fair cushion there.

But if I needed to, we would do something, if it was attractive enough, and big enough, that it required us to.

So, that could happen. Could happen this year, could happen ten years from now. You never know.

Charlie, have you got any thoughts on that?

CHARLIE MUNGER: Well, no, I think the — our acquisitions have been irregular in the past. They’ll be irregular in the future.

I do think we’ll get more, sort of, automatic, intelligent redeployment of capital from our railroad and our utility subsidiary than we have in the past. And I think that’s good, good for the shareholders.

WARREN BUFFETT: I think people may think that what we get turned on is by finding some stock we’d like to buy. That’s fine.

But what really — there’s no comparison — what really turns us on is finding a business that we want to buy, and that fits well for Berkshire, and that’ll be earning money for Berkshire 10 and 20 and 50 years from now.

That’s what we’re — that’s what we’ve been trying to build for 49 years.

And marketable securities have played a big part in that, because the profits that we’ve made from them have helped do that, and it’s a great place to deploy capital on an — you know, it’s easy to do there.

But if you — what we’re really thinking about, at least Charlie and I — we’ve got Todd and Ted thinking about marketable securities — what we’re really thinking about is buying businesses. And that’s what it’ll continue to be.

We’re in no hurry to sell any of those stocks you mentioned. (Laughs)

They — there probably would be other stocks — if we were going to go out to raise five or 10 billion from stocks, they would not be the names you mentioned.

31. Still reluctant to borrow despite cheap money

WARREN BUFFETT: OK. Station 8.

AUDIENCE MEMBER: Hello Warren, Charlie. My name is Stefano Grasso (PH) and I come from Genova, Italy, all the way from there. It’s a pleasure to be here today with you.

I have a question about increasing leverage for Berkshire in this day. This question is really to trigger a discussion and to hear your thoughts on that.

And also, this question was triggered by the fact that following the acquisition of BNSF, few years ago, which was partially financed by Berkshire stock, shortly after, there was plenty of cash around.

There could be different advantages for Berkshire to wisely increase leverage these days. Some generally true for all the companies. Some Berkshire specific.

And the Berkshire specific, most important one for me as a shareholder, is that the investment decision made to invest the funds would be made by the present team, you and the other managers.

Question is then, why not go out and ask for several billions in bonds with a long maturity, and maybe even with some earlier endorsement or callable options embedded at Berkshire discretion, and good — and make a good use of it? Thank you.

WARREN BUFFETT: Well, what you say makes great sense.

And it’s the kind of thing Charlie and I used — I think if you’d asked Charlie and me 40 years ago, that if we were looking at the present set of interest rates and we had some wonderful businesses that were making a lot of money, whether we would have gone out and borrowed a whole lot of money for the long term. We would’ve said yes, right, Charlie?

CHARLIE MUNGER: Wouldn’t have been a hard decision.

WARREN BUFFETT: But, we’ve got several reasons. We — A, we do have a good way of generating funds other than through equity: through float. And we’ve done that to the tune of 77 billion.

And we don’t like the idea of operating a very conservatively-leveraged company, and then changing courses so that the people who bought bonds that were rated double-A, sort of find themselves with much lower rated bonds of the sort.

We don’t have any problem leveraging up the utility or the railroad. They deserve to have even a lot more debt than they do, but we keep it sort of in line with what the rating agencies think should be conventional ratios.

But they’re — if you look — if you analytically look at them — both of them could withstand a fair amount more debt.

At the parent level, we — you know, looking back on the BNSF deal, we borrowed some money that time and we used some equity.

I think using equity helped us make the deal. But it was, you know, it was not a smart thing to do, basically.

I should — and I could’ve always gone to the market and repurchased a bunch of stocks subsequently, and that’s probably what I should’ve done on that.

So I understand your point. I completely — you know, another 30 or 40 billion of debt at Berkshire would be nothing and it would cost very little.

We don’t actually have great places to put it now, as evidenced by the fact that we’ve got 25 billion or so of excess cash.

We’d be — we are reluctant to leverage it up a lot at the parent now, since we have these other sources of money that are really pretty attractive.

We are selling what we call structured settlements, for example, that have a very long duration. And they actually have an interest cost to us of less than if we were to sell bonds.

So we are doing certain things that are along the lines you urge, but not nearly as aggressively as you urge.

And you probably are right. And you’re certainly right if we saw a $50 billion deal and we passed on it for some reason because we were unwilling to take on some debt.

If we see a really good $50 billion deal, we’ll figure out a way to do it.

Charlie?

CHARLIE MUNGER: I think we’d welcome it. We’re — even though what you suggest is intelligent, we’re probably not going to do it in advance.

WARREN BUFFETT: You caught the last two words there.

32. Climate change threat doesn’t affect investment decisions

WARREN BUFFETT: Andrew.

ANDREW ROSS SORKIN: Question comes from Rory Holscher in Galena, Illinois. This question is about Berkshire’s investments in climate change.

“On one hand, Berkshire’s utilities have large commitments to wind and solar power. Berkshire also has an investment in BYD, an innovative transportation company that may be comparable in some ways to Tesla.

“On the other hand, Burlington Northern hauls a lot of coal. You point out in the 2013 annual report that its profits could shrink if coal burning was curtailed.

And then there’s the reinsurance business.

How do these and other Berkshire investments align with your understanding of the risks and opportunities posed by climate change? How should we think about this as investors?”

WARREN BUFFETT: Well, I think that you’ve stated the facts on a whole bunch of businesses. And, I mean, if you own a railroad that’s carrying a lot of coal, it’ll carry a lot of coal for a long period. A very long period. But it’ll probably carry less at some point. I don’t think —I think that’s very likely, too.

But, I get all these questions from people who tell me they want me to fill out lots of forms and everything about how it’ll affect our insurance business. It doesn’t — it just doesn’t operate in that — in that time period.

I mean, we are not making — when Ajit and I talk about what we’ll charge for catastrophe insurance, you know, whether it’s hurricanes in Florida, or whether it’s earthquakes in New Zealand, or whatever it may be, the year-to-year change in probabilities on that are, at least in our view, extremely low.

I mean, it doesn’t come close to being anything that affects your prices in any material way in any given year.

And, you know, we will continue to develop alternative sources of energy. We’ll continue to use coal in our coal generation plants until the utility commissions under which we operate tell us that we should do something different. We have no choice about that.

We, incidentally, have no — I mean, we’re happy to carry the coal, but beyond that, we are a common carrier. I mean, we might love to turn away chlorine or ammonia or something like that because of the dangers in carrying it. And we can’t get compensated adequately for that.

But we are a common carrier. So, we — by law, we’re required to carry the freight that is offered to us.

So I — I don’t think in making an investment decision on Berkshire Hathaway, or most companies, virtually all of the companies I can think of, that climate change should be a factor in the decision- making process. Charlie?

CHARLIE MUNGER: Yeah, I think a lot of the people who think they know how climate change is going to change weather patterns and hurricanes are overclaiming. (Applause)

We’re sort of agnostic. It isn’t that there isn’t some global warming, because there plainly is.

But the people who think they know exactly what’s going to happen and how many people are going to die from tropical diseases and so forth are mostly talking through their hats.

I think there’s a class of people who like the idea they’ve got a calamity to worry about. And —

WARREN BUFFETT: Well, but — and when you say it, I mean, just in terms of being an economic variable in making a decision, this —

CHARLIE MUNGER: No. We’re not saying, “How can we structure our whole investment program to take into account what we think we know about climate change?”

But I think we’re very well located long term, no matter what happens.

I think that transmission lines and more or — we’re going to have to produce a lot more electricity directly from the sun or indirectly through things like wind. And, we’re beautifully positioned.

It’s just like GEICO made a lot of money when the internet came along, that they didn’t really plan on, I think we’ll make a lot of money as more and more electricity is produced more directly from the sun.

So I think we’re in a very good shape. But I don’t think we deserve any great credit for it. We just stumbled into it.

33. Praise for portfolio managers Todd Combs and Ted Weschler

WARREN BUFFETT: Gregg?

GREGG WARREN: Since Berkshire started to transfer some of the responsibility for the company’s investment portfolio over to Todd Combs and Ted Weschler, the two men have gone from managing around $3 billion each in early 2012, to managing more than $7 billion each earlier this year.

That said, this still represents less than 10 percent of the equity portion of your investment portfolio, with big legacy positions in Wells Fargo, Coca-Cola, American Express, IBM and Proctor & Gamble, overshadowing the rest of the holdings.

Can you give us an update on how much money each of your lieutenants is now running and how much you see that growing into over the next five years?

And given that both men have seemingly been involved in things beyond their roles as portfolio managers the last couple of years, how much do you expect their roles to expand over time?

And on a completely separate note, at what point can we expect to see Todd and Ted join you and Charlie up there on stage to talk about their efforts managing Berkshire’s investment portfolio?

WARREN BUFFETT: I got through college answering fewer questions than that. (Laughter)

They are managing about —it’s a little over 7 billion now. We will change that periodically and it will always be upward. But we don’t change it month by month.

I mean, their portfolios may change in value month by month. But they will be handling more money in the future than they are now.

I think, to some extent, they, as well as I — you know, I’ve had the unpleasant experience of handling more and more money as the years go by — they are seeing that it does get a little more difficult as the sums get larger.

But it’s still far better to keep moving money over to them and away from me as time passes. And that’ll continue to be the case.

They’re both terrific additions to Berkshire, beyond their investment skills in that they know — they each know — a whole lot about business. They know a whole lot about management.

And there are a lot of things that come across the desk at Berkshire that I get an idea on, but I just don’t feel like carrying out myself, because they might involve a lot of time, particularly if they get involved in negotiating small points and that sort of thing.

So Ted and Todd have both, as I mentioned in the report, been very helpful in doing things beyond their investment management duties that have added a significant value to Berkshire. And I think it’s a cinch that that will continue.

They want to do it. They enjoy doing it. They don’t ask for extra compensation, at all, because they do it.

They’re 100 percent attuned to Berkshire. They know how I think. And if I tell them, you know, “Here’s a deal that I think makes sense if you can get it done,” they’ll know why it makes sense, and they’ll know how to get it done, and they’ll spend the time to do it.

So it’s been a big, big plus for Berkshire to bring them onboard. And they’ll be more important factors as the years go by. OK.

Charlie? I’m sorry, I’m —

CHARLIE MUNGER: Nothing to add.

WARREN BUFFETT: OK.

CHARLIE MUNGER: How’s that?

34. Praise for Federal Reserve and Chairman Ben Bernanke

WARREN BUFFETT: Station 9.

AUDIENCE MEMBER: Good morning, Warren and Charlie. My name is Jason. I’m from Toronto and my question relates to the general financial markets.

We’ve been in an environment of virtually zero interest rates now for many years. In recent times, prolonged periods of low rates have led to asset bubbles, such as the housing bubble and, potentially, now a bond bubble.

If you were running the Fed, what would be your policy with respect to interest rates? Do you see a need for a hike? And what would be your time horizon for such a change? Thank you.

WARREN BUFFETT: Well, since it’s — you’re right about the — who would’ve guessed five years ago that you’d have had rates this low for this long?

You’re — I would say that I’m surprised at, really, how well things are going.

I don’t think I would be doing much differently. And I particularly say that because it’s worked so well so far. So I would like to say that I would’ve done exactly the same thing and take credit for it.

I’ve been surprised at how well this worked. But as I said last year, this is really an interesting movie because we haven’t seen it before. And what makes it interesting is also we don’t know how it ends. But, I think Ben Bernanke was a hero, both at the time of the crash — or the panic — and subsequently.

I think he’s a very smart man. I think he handled things very well.

What was interesting to me was when the minutes of the Fed from the period in 2007 and 2008 came out, it was interesting to me how a number of the members of the Fed were not getting it, as to what was happening.

That was really fascinating. It wasn’t — there were a lot of them that didn’t really understand, it seems that way, or some of them that didn’t understand just how serious things were.

And so I give particular credit to Bernanke, considering the fact that he was really not getting a cons — certainly not a unanimous view from those surrounding him, that the kind of actions he knew were necessary, were really necessary.

And yet, he went ahead with them. And in my opinion, did a masterful job. And from everything I’ve seen of Janet Yellen, I feel the same way about her.

We will see how this movie plays out. You know, I do not know the answer as to what happens if you keep rates close to zero for a very, very long time. And keep absorbing more and more of the debt issuance of the country because so far, we’ve tapered, but we’re still buying.

I’d be interested to hear Charlie’s thoughts on it.

CHARLIE MUNGER: Well, nobody, for instance, in Japan would ever have anticipated that interest rates would go way down and stay down for 20 years.

And nobody would’ve expected common stocks to decline by huge amounts and stay down for 20 years.

So strange things have happened. And they’re very confusing to the economics profession.

In fact, if you’re not confused, you really probably don’t understand it very well.

And at Berkshire, what I noticed is there aren’t many long-term bonds being bought.

WARREN BUFFETT: Yeah. We — well, you know, in 2008, I wrote an article saying, you know, that — everybody was saying cash is king. Well, cash may have been king if you used it, but cash was the dumbest damn thing you could possibly own, you know, if you weren’t going to use it.

And people cling to cash at — usually at the wrong times.

But it is — a zero interest rate policy has had a huge effect, both in rejuvenating the economy and — and in terms of asset prices.

It has not, in my view, produced a bubble. That doesn’t mean it can’t produce one. But this is not — this is not a bubble situation, at all, that we’re living in. But it’s an unusual situation that we’re living in.

Any further thoughts, Charlie?

CHARLIE MUNGER: No, I’m as confused as you are.

WARREN BUFFETT: Oh good. Good. (Laughter)

That’s why we get along so well.

35. How Berkshire benefits from being a conglomerate

WARREN BUFFETT: Carol?

CAROL LOOMIS: This question concerns another uncertainty. It’s from Chris Gotcho (PH) of Gotcho Capital Management in New York City.

“You’ve been looking for a credentialed bear to ask questions at this meeting. I’m not it. In fact, selling short on Berkshire would be quite silly.

“However, in the long term, Berkshire has a business model of owning over 70 non- financial, unrelated businesses — bricks and chocolate, for example — which is a model that has almost universally not worked well in the past 100 years of American business.

“The model has worked well for you two, Mr. Buffett and Mr. Munger, who are uniquely talented.

“But the question is, the probabilities do not seem likely to be favorable that their successors will be able to have it continue to work nearly as well.”

So that is my question.

WARREN BUFFETT: OK. Actually, the — it’s interesting.

The model has worked well for America. I mean, if you look at all these disparate businesses in America, they’ve done extraordinarily well over time.

So if you want to look at the Dow Jones average as one entity — now, it was a changing group of companies over a 100-year period — but, you know, any business unit that goes from 67 — or 66 — to 11,497 while paying you out a fair amount of money every year, actually is a model that’s worked pretty well. But it hasn’t been, of course, under one management.

But owning a group of good businesses is not a terrible business plan. A good many of the conglomerates were put together to perform financial magic of one sort or another.

They were based upon — you know, if you go back to the Litton Industries and the Gulf and Westerns and just — you could name them by the hundreds. They were really put together — Ling-Temp — LTV, and — on the idea of serial issuance of stock, where you issued stock that was selling at 20 times earnings to buy businesses that were at ten times earnings.

And it was the idea that somehow you could fool people into continuously riding along on this chain letter scheme, without the primary thought being given to what you were actually building in the management.

I think our business plan makes nothing but great sense, to own a great group, a group of great businesses, diversified, outstanding managers, conservatively capitalized.

And with one enormous advantage, which people don’t really understand. I mean, capitalism is about, in an important way, it’s about the allocation of capital. And we have a system at Berkshire where we can allocate capital without tax consequences.

So we can move businesses from See’s Candy, to generate surplus capital, to other areas. It doesn’t hurt See’s in the process, and we can move it, as the textbooks say, to places where capital can be usefully employed, like wind farms or whatever it may be.

So we are — you know — there’s nobody else really better situated to do that than Berkshire Hathaway, and it makes perfectly good sense.

But it has to be applied with business-like principles, rather than with stock promotion principles. And I would say a great many of the conglomerates have been — have had, as their underlying premise, stock promotion.

You know, you saw what happened with Tyco or — the serial acquirers were usually interested in issuing a lot of stock.

I think if you had to look at one of the primary indicators of what sort of species you’re viewing, you would see whether somebody’s issuing — if they’re issuing stock continuously, one way or another, they’ve probably got a chain letter game going on. And that does come to a bad end.

I think our method of acquiring for cash, and acquiring good businesses, and building many, many sources of growing earning power, I think, is a terrific model.

Charlie?

CHARLIE MUNGER: Well, I think there’re a couple of differences between us and the people who are generally thought to have failed at a conglomerate model.

One is we have an alternative when there’s nothing to buy in the way of companies. We’ve got more securities to buy in the insurance company portfolios. And that’s an option which most of the other conglomerates didn’t have.

Number two, they were hell bent to buy something or other quite regularly. And we don’t feel any compulsion to buy. We’re willing to just sit until something makes sense.

We’re quite different. We’re a lot more like the Mellon brothers than we are like Gulf and Western. And the Mellon brothers did very, very well for what, 50, 60, 70 years.

And they were willing to own minority interest, they were willing to grow companies, they were a lot like us.

And so I don’t think we’re a standard conglomerate. And I think we’re likely to continue to do very well, sort of like if the Mellon brothers had just kept young forever.

WARREN BUFFETT: Now you’re talking.

CHARLIE MUNGER: Yeah. (Laughter)

36. Praise for Forest River’s Pete Liegl

WARREN BUFFETT: Jonathan.

JONATHAN BRANDT: Forest River is one of Berkshire’s better performing acquisitions. Since Berkshire purchased it in 2005, its sales have grown considerably faster than those of its principle competitor, Thor. And I believe it has taken the number one spot at retail for recreational vehicles.

Can you explain what Forest River is doing differently from Thor? And tell us whether Forest River is accepting lower operating margins than Thor’s 7 percent to gain the share.

Does Forest River have any sustainable, structural advantages over Thor that will help it maintain its number one position?

Also, with three companies now accounting for about 80 percent of the share in the RV market, are there greater barriers to entry than in the past, or can a feisty upstart like Forest River, in its day, still come out of nowhere and gain a lot of share?

WARREN BUFFETT: Yeah. We bought a company called Forest River, run by a fellow named Pete Liegl, I’d say about ten years ago or so.

And it’s interesting. Pete, who is not an MBA type at all, he’s a terrific guy, he built up a — (Laughter)

That was not a statement, that was an observation. (Laughter)

Pete built up a very successful, but much smaller, RV business. And he sold it to a private equity firm in the mid-1990s. And they promptly started telling him how to run it. And he, very shortly thereafter, told them to go to hell.

And, not very long after that, it went broke, which is not an unusual — I would’ve predicted that.

So Pete then bought it out of bankruptcy, and rebuilt it, and then came to see me about ten years ago.

And in one afternoon — we went to dinner that night. He brought his wife and his daughter. And we bought the business.

And he made me a couple of promises then. He’s very limited in his promises. I told him what I’d do. And we’ve lived happily ever after.

I’ve never been to Forest River. It’s based in Elkhart, Indiana. I hope it’s there. I mean, maybe they’re just making up these figures — you know?

I could see that. Some guy saying, “What figures shall we send Warren this month, you know, ha, ha, ha.” (Laughter)

Pete does a terrific job of running the company. We made a deal at the time he came, on incentive comp and base comp. He’s never suggested a change, I’ve never suggested a change.

He’s built the company to where it’ll do over — I think it’ll do over $4 billion of business this year.

I’ve probably had three or four phone calls with him in the whole time.

It’s his company. And he does a sensational job.

I don’t know about the Thor-Forest River situation in terms of how tough it is to go in to compete with him. I think it’d be tough to compete with Pete under any circumstances.

His IT department, for a $4 billion business, consists of six people. He just knows what’s going on in the place.

And the important thing is that it’s his company. I couldn’t run an RV company, and we don’t have anybody at headquarters that could run one.

It’s a tough business. And you do work on narrow margins, to get to your point on that, Jonny. The —it’s a business that runs with maybe 11 or 12 percent gross margins, and probably 5 to 6 percent of SG&A. So, you know, your margins are in that 6-or-so percent range.

We have a very good — both from his standpoint and from our standpoint — we worked out an incentive comp. Like I say, we worked it out that afternoon in Omaha when he came by.

And it’s worked for him. It’s worked for us. You know, it couldn’t be a better arrangement. I wish we had 20 like it.

And probably, most of our shareholders don’t even know we own Forest River. But that is a company that will do 4 billion of business this year, and I’ll bet will do more business over time. It’s the leader in its industry. The industry’s not going to go away.

And, you know, maybe we can even sell a little insurance on RVs. So that’s the story on Forest River.

37. Modest impact of Bakken oil shale on Berkshire

WARREN BUFFETT: Station 10.

AUDIENCE MEMBER: Hi, Warren, Charlie. My name is Vishal Patel (PH). I’m visiting from Toronto, Canada, and my question is about the oil sands.

Can you please share with the audience your view on the oil sands industry and their impact on Berkshire Hathaway?

WARREN BUFFETT: Well, in terms of —are you thinking of the oil sands or are you thinking of shale production?

AUDIENCE MEMBER: I’m thinking oil sands, Alberta.

WARREN BUFFETT: Alberta, yeah.

AUDIENCE MEMBER: Keystone XL.

WARREN BUFFETT: It’s not a huge impact. We have a crane business at Marmon that does a lot of business in oil development, generally. But, certainly, is active in the oil sands.

We will soon have a transmission operation that will cover 85 percent of Alberta. Alberta’s a big place. It’ll have 8,000 miles, or something like that, of transmission lines, for example.

But the oil sands business is — I mean, you know, oil sands are huge. And we own some Exxon Mobil, when they’ve got an operation in the oil sands, obviously.

One thing you might find kind of interesting, you know, we are moving 700,000 barrels a day of crude oil on our railroad. We’ve got — probably got — maybe, nine unit trains — now [BNSF Executive Chairman] Matt [Rose] can correct me on that — you know, that carry 100 cars or so.

And each one has 650 barrels, or so, of oil so that — oil, you may find interesting, not only is there a significant advantage in terms of the flexibility of where you take it, so that spreads are different in different places, and you can move it to refineries that you might otherwise have trouble moving it to. Rail’s flexible that way.

But rail, actually, you know — mentally, you think of oil gushing through pipelines. But rail is probably, I would say, close to twice as fast in moving oil as is — as are pipelines.

But we recently bought a company from Phillips 66. We got it in an exchange for our Phillips stock. We bought a specialty chemicals company.

And its main product is a chemical additive that causes oil to move through pipelines about 10 percent faster than it would otherwise. So it may take a day off of a trip.

So we’re actually in the pipeline business in a small way — the crude pipeline business — in a small way, through that.

I don’t think — I think the oil sands are an important asset for mankind, obviously. There’s a huge amount of oil there. They’re an important asset for mankind, you know, in — over the centuries to come.

But I don’t think there’s — I don’t think it will dramatically change anything at Berkshire.

Matt might have a different view on that. I’ll ask Charlie to talk. And then if Matt would like to say anything, I’d be glad to hear from him, too.

CHARLIE MUNGER: Well, but, a lot of the oil sand production uses natural gas to produce the heavy oil.

So it’s a very peculiar thing. It’s economic only if oil stays at a very high price, and it’s delightfully economic only if natural gas is too cheap.

So it’s a very peculiar business. And it is good for mankind. But whether it’s a great investment or not, I haven’t the faintest idea.

WARREN BUFFETT: Matt, would you — do you have anything to add on the crude situation there?

38. Update on Buffett’s hedge fund bet

WARREN BUFFETT: OK. We’re at noon.

I promised a group — some people — six years ago I made a bet for charity on how a index — Standard and Poor’s 500 index fund — would compare in performance to a group of hedge funds. And a firm in New York took me up on the bet.

And I promised that every year I would give the up-to-date results on how we’re doing. And it’s getting to be more fun to give these results every year. (Laughter)

We’re now six years into the bet. And it’s interesting, because the people who selected these funds are very decent people and smart people. And, obviously, the fund of funds gets paid based on the per — they get paid a fee, naturally.

But they also get paid an additional performance fee based on how the hedge funds they select do. So they have every economic incentive to come up with a wonderful group of hedge funds.

And underneath these fund — five funds of funds that are involved in the bet — there are probably, at least, 200 hedge funds that the fund of fund managers have carefully picked in order to enhance their own income. They got the ultimate motivation going for them.

So we are now five years — six years — into the bet. And the first year, the fund of fund groups, in a down market, did considerably better than the S&P.

But as you can see in the five years subsequently, the S&P has been running away, to some degree.

Interestingly enough, we bought — we each put in 350, or something, thousand dollars, and we bought zero-coupon bonds so there would be a million dollars in ten years.

We bought ten-year Treasurys, zero coupon. And we bought a million dollars principal. We each put up 350.

Well, the way interest rates changed after a few years to practically zero rates, it meant the bonds, even though they had no coupons attached to them, practically went to par.

So, a year or two ago, we sold the bonds at about 95 or 6, we got almost the full million dollars. We put that all in Berkshire stock. I guaranteed them that they would have a million dollars at the end of ten years, no matter what happened.

And so the prize looks like it’s going to be quite a bit more than a million dollars when the ten years comes around, so. So, so far, everyone’s happy

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2013 Berkshire Hathaway Annual Meeting (Afternoon) Transcript

1. Buffett’s hot dog lunch

WARREN BUFFETT: I had a hot dog with a lot of ketchup for lunch. I hope you did the same.

2. Buffett: I haven’t lost any intensity

WARREN BUFFETT: And we’ll go to Doug.

DOUG KASS: Thank you, Warren.

Mae West once said, “The score never interested me, only the game.”

Are you at the point now where the game interests you more than the score? But before you answer the question, let me explain to you why I asked it.

In the past, your research has been all-encompassing, whether measured in time devoted to selecting investments and acquisitions, or the intensity of analysis, your interest in the old days of knowing the slightest minutia about a company.

You once said, in characterizing Ben Rosner, quote, “Intensity is the price of excellence,” closed quotes.

Your research style has seemed to morph over time from a sleuth-like analysis — American Express comes into mind when you hired Jonathan’s dad, Henry Brandt. You and he conducted weeks of analysis and sight visits and channel checks.

Not so much in the later investments. As an example, you famously thought of making the Bank of America investment in your bathtub.

There is an investment message of this transformation from being intense to less intense.

Would you please explain the degree it has to do with the market, Berkshire’s size, or some other factors?

WARREN BUFFETT: Yeah. I think, actually, you have to love something to do well at it. There may be exceptions on that, but it is an enormous, enormous advantage if you absolutely love what you’re doing, every minute of it.

And the nature of it is that that intensity adds to your productivity.

And I have every bit of the intensity — not manifested exactly the same way — but it’s there every minute. I mean, I love thinking about Berkshire. I love thinking about its investments. I love thinking about its businesses. I love thinking about its managers. It’s part of me.

And it is true, you can’t separate the game from the scorecard. I mean, you — so your score card is part of playing the game and loving the game.

The proceeds are — you know, to me — are unimportant, but the proceeds are part of the score card, so they come with a score card.

But it’s much more important — I mean, I would — no question about it, I wouldn’t be — feel — the same way about Berkshire at this point if I didn’t own a share of it, if I didn’t get paid. I mean, it’s what I like doing in life, and that’s why I do it.

So, I don’t think you’ll — I don’t think it’s actually a correct observation — and Charlie can comment on this — to say that because we’re doing things in a somewhat different way, that any of the intensity or the passion has been lost.

There’s nothing more fun for me than finding something new to add to Berkshire, and that was true 40 years ago. It’s true now. And it’ll be true 10 years from now, I hope.

Charlie, how would you answer that?

CHARLIE MUNGER: Well, I think when you bought American Express for the first time, you didn’t know that much about it, so, naturally, you were digging in rather deeply.

The second time you bought it, I remember you got on the golf course with Olson —

WARREN BUFFETT: Frank Olson, yep.

CHARLIE MUNGER: — and you just saw how he couldn’t get rid of American Express if he wanted to, and then you bought it the second time.

The research is still — the first one was hard, and the second was easy.

WARREN BUFFETT: It’s all cumulative.

CHARLIE MUNGER: Yeah, it’s cumulative, eventually.

WARREN BUFFETT: Yeah. And, you know, what I learned sitting with Lorimer Davidson on a Saturday at GEICO in January of 1951 is still — is useful to me, and I don’t have to learn it a second time. I can build on it.

But that’s one of the great things about investing. I mean, the universe, there’s enough in it so that you can finds lots of opportunities, but there — it’s not like it’s changing dramatically all the time.

There’s some things that may change, and we just don’t play in that part of the game if we don’t understand them.

But what Charlie says is true. I didn’t know a thing about American Express when the Salad Oil Scandal hit in November of 1963. But I thought I saw an opportunity, so I learned a lot about it.

I went around to restaurants and talked to people about travel and entertainment cards, as they were called then. I learned about traveler’s checks. I talked to banks. And I was absorbing some knowledge.

And then, as Charlie said, when we were up at Prouts Neck playing golf with Frank Olson, and he was running the Hertz Corp., and he was telling me that there was no way in the world that he could get rid of American Express, or even get them to cut their fees. That was my kind of business.

And I knew enough to proceed to buy a fair amount of stock, and now we own whatever it is, probably 13 percent of the company or thereabouts. And they keep buying in their stock. We can’t buy anymore stock ourselves.

I got asked that question in March of 2009 by Joe Kernen, “Why aren’t you buying the stock of American Express?” Well, it was a bank holding company, and we couldn’t add a share.

But they are doing it for us, and I love it.

At Coca-Cola, at Wells Fargo, to a lesser degree, at IBM, at most of our companies, our interest in the company goes up every year because the companies are repurchasing shares and they probably earn more money so we got a double play going for us.

But the passion is not gone, I promise you.

3. We don’t buy anything just “by the numbers”

WARREN BUFFETT: Station 1.

AUDIENCE MEMBER: Hi, Warren and Charlie. My name is Vincent Wong (PH) from Seattle.

When people analyze a stock, a lot of them look at quantitative metrics, such as P/E ratio, return on equity, debts-to-asset ratio, et cetera.

So, Mr. Buffett, when you analyze a stock for purchase, what’s your top five quantitative metrics that you looked at, and what’s your preferred number for each metric? Thank you.

WARREN BUFFETT: Well, we’re looking at quantitative and quality — we aren’t looking at the aspects of the stock, we’re looking at the aspects of a business.

It’s very important to have that mindset, that we are buying businesses, whether we’re buying 100 shares of something or whether we’re buying the entire company. We always think of them as businesses.

So when Charlie and I leaf through Value Line or look at annual reports that come across our desk or read the paper, whatever it may be, that, for one thing, we have a — we do have this cumulative knowledge of a good many industries and a good many companies, not all by a long shot.

And different numbers are of different importance — or various numbers are of different importance — depending on the kind of business.

I mean, if you were a basketball coach, you know, you would — if you were walking down the street and some guy comes up that’s 5′4″ and says, you know, “You ought to sign me up because you ought to see me handle the ball,” you would probably have a certain prejudice against it. But there might be some — one player out there it made sense on.

But on balance, we would say, “Well, good luck, son, but, you know, we’re looking for 7-footers.” And then if we find 7-footers, we have to worry about whether we can get them halfway coordinated and keep them in school, a few things like that.

But we see certain things that shout out to us, look further or think further.

And over the years, we’ve accumulated this background of knowledge on various kinds of businesses, and we also have come up with the conclusion that we can’t make an intelligent analysis out of — about all kinds of businesses.

And then, usually, some little fact slips into view that causes us to rethink something. It was mentioned how I got the idea about buying the Bank of America — or making an offer to Bank of America on a preferred stock — when I was in the bathtub, which is true.

But the bathtub really was not the key factor. (Laughter)

The truth is, I read a book more than 50 years ago called “Biography of a Bank.” It was a great book, about A.P. Giannini and the history of the bank.

And I have followed the Bank of America, and I’ve followed other banks, you know, for 50 years.

Charlie and I have bought banks. We used to trudge around Chicago trying to buy more banks in the late ’60s.

And so, we have certain things we think about, in terms of a bank, that are different than we think about when we’re buying ISCAR. And so there is not one-size-fits-all.

We have certain things we think about when we’re buying an insurance company, certain things we think about when we’re buying a company dependent upon — that depended upon — brands. Some brands travel very well, Coca-Cola being a terrific example, and some brands don’t travel.

And, you know, we just keep learning about things like that, and then every now and then we find some opportunity.

The Bank of America — whenever it was — in 2011 — was subject to a lot of rumors, terrible — I mean, lots — big short interest, morale was terrible, and everything else. It just struck me that an investment by Berkshire might be helpful to the bank and might make sense for us.

And I’d never met Brian Moynihan at that point — maybe I’d met him at some function, some party of something, but I had no memory of it — and I didn’t have his phone number but I gave him a call. And things like that happen.

And it’s not because I calculate some price — precise — P/E ratio or price-book value ratio or whatever it might be.

It is because I have some idea of what the company might look like in five or ten years, and I have a reasonable amount of confidence in that judgment, and there’s a disparity in price and value, and it’s big.

Charlie, would you like to elaborate?

CHARLIE MUNGER: We don’t know how to buy stocks just by looking at financial figures and making judgments based on the ratios.

We may be influenced a little by some of that data, but we need to know more about how the company actually functions. And anything a computer could be functioned to do, in terms of screening — I know I never do it. Do you use a computer to screen anything?

WARREN BUFFETT: No. I don’t know how to. (Laughter)

CHARLIE MUNGER: No. Bill’s still trying to explain it to me.

WARREN BUFFETT: I — we — you can — it’s a little hard to be precise on, because we don’t really use screens — (inaudible) were screening everything. But it’s not like we sit there and say, you know, we want to look at things that are below the price of book value, or low P/Es, or something of the sort.

We are looking at businesses exactly like we’d look at them if somebody came in and offered us the entire business, and then we try to think, what is this place going to look like in five or ten years, and how sure are we of it.

And most — a lot of companies, you know, we just don’t know the answer to it. We do not know which auto company is going to, you know, be knocking the ball out of the park ten years from now or which one is going to be hanging on by its fingernails.

You know, we watched the auto business for 50 years, a very interesting business, but we don’t know how to — we don’t know how to foresee the future well enough on something like that.

CHARLIE MUNGER: We think that the Burlington Northern will have a computer — a competitive —advantage 15 years from now, with a high degree of confidence. We would never have that degree of confidence about Apple, no matter what their financial statement showed.

WARREN BUFFETT: No.

CHARLIE MUNGER: It’s just — it’s too hard.

WARREN BUFFETT: Yeah. We don’t know about an oil company ten years from now, you know, in terms of what the product will be selling for or anything.

I would say we’re — you know, we’re virtually 100 percent confident about a Burlington Northern, or a GEICO, or some other companies that I won’t name.

CHARLIE MUNGER: People with very high IQs who are good at math naturally look for a system where they can just look at the math and know what security to buy. It’s not that easy.

You really have to understand the company and its competitive position, and the reasons why its competitive position is what it is, and that is often not disclosed by the math.

WARREN BUFFETT: Yeah. It’s not what I learned from Ben Graham, although the fundamentals of looking at stocks as businesses, and the attitude toward the market and all that, is absolutely still part of the catechism.

But I wouldn’t — I don’t know exactly how I would manage money if I was just trying to do it by the numbers that —

CHARLIE MUNGER: You’d do it poorly. (Laughter)

WARREN BUFFETT: Yeah. That takes care of that. (Laughs)

4. Disagreement on whether the “new normal” will bring lower returns

WARREN BUFFETT: OK. Carol?

CAROL LOOMIS: This question is from Benjamin Knoll of Greater Twin Cities United Way.

“Every time Bill Gross writes a new essay on the, quote, ‘new normal,’ unquote, I get more depressed about the prospects for my retirement.

“Do you share his view that market returns in the next few decades will be much lower than in the past few? And should we expect Berkshire’s future market returns to be greatly constrained, not only by its size, but also by much lower equity returns overall?

WARREN BUFFETT: Yeah, Charlie and I don’t pay any attention to macro forecasts.

We have worked together now for 54 years, and I can’t think of a time when we made a decision on a stock, or on a company, where a macro discussion — where we’ve talked about macro.

We don’t know what things are going to look like, in any precise way. And, incidentally, naturally, we think if we don’t know it, nobody else knows. That’s the conceit that we have. (Laughs)

And — so we — you know, why talk — why spend time talking about something you really don’t know anything about? I mean it — people do it all the time, but it not very productive. So we talk about the businesses.

I like Bill Gross. Sounds like Lloyd Bentsen, you know, back in the — he’s a friend of mine.

But I don’t — it doesn’t make any difference to me what he thinks about the future, doesn’t make any difference to me, you know, what any economist thinks about it.

I have a general feeling that America will continue to work well. And I don’t — you know — there’s — throughout my adult lifetime, and before that, there’s always been all kinds of opinions that, you know, about what’s going to happen this year or the next year or anything like that. And nobody knows.

What you do know, with a very high degree of certainty, in my view, is that BNSF will be carrying more carloads 10 years from now, 20 years from now; that there will be no substitute for the service that they provide; that there will be two important railroads in the west and two important railroads in the east; and that they will have an asset that has incredible replacement value, nobody could turn out something like it, and that they’ll get paid fairly for what they do. It’s not very complicated.

And to ignore what you know because of predictions about what you don’t know, or what nobody else knows, in our view, it’s just plain silly.

So we don’t have anything against somebody talking about a new normal or an old normal or an in-between normal, but it doesn’t mean anything to us.

My own guess is that people will do very well owning good businesses, if they don’t pay too much for them, you know, whether they hold them for 10 years or 20 years or 30 years.

And if they try and time their purchases in some way by listening to forecasts about what’s going to happen in business and try and buy and sell them, they’re going to do very well for their broker and not so well for themselves.

Charlie?

CHARLIE MUNGER: Yeah. But, of course, Warren, we have a lot of money. We have to do something with it. So we’re going to do our thing no matter what the external climate is.

If you’re a busy surgeon and trying to decide whether to work two more years before you retire, then you may be more interested, and rationally so, in the new normal.

And I would personally advise the guy to work an extra couple of years. (Laughter)

In other words, I kind of agree with Bill Gross.

WARREN BUFFETT: What do you think the normal is?

CHARLIE MUNGER: Well, less than we’ve enjoyed in our lifetimes, the new normal.

WARREN BUFFETT: What have we enjoyed in the last 10 years? I mean, you know —

CHARLIE MUNGER: It hasn’t been so bad.

WARREN BUFFETT: No. And it hasn’t been —

CHARLIE MUNGER: It’s not nearly as good as it was in the first 30.

WARREN BUFFETT: Yeah. And do you think it would be worse than the average of the last 10 years?

CHARLIE MUNGER: I think that’s quite a conceivable outcome.

WARREN BUFFETT: So take your pick. OK. (Laughter)

5. Fruit of the Loom’s vs. Gildan Activewear

WARREN BUFFETT: Jonathan?

JONATHAN BRANDT: Warren, I’m sorry. My last question about solar was directed at Charlie, but my next question is about underwear, so I think you can probably field this one.

WARREN BUFFETT: Boxers or briefs? (Laughs)

JONATHAN BRANDT: I’m not talking.

Over time, Fruit of the Loom and others have lost nearly all of the T-shirt-focused wholesale screen print market to Gildan, a relatively new player with very low cost structure.

Gildan is now going after the underwear-focused retail market and is having some success with certain large customers. Branding is obviously more important in the retail market, but is there any reason to think Fruit of the Loom won’t lose significant amounts of share here over time, just as they did in the wholesale screen print market?

What can they do to protect what remains of their franchise?

WARREN BUFFETT: Yeah. You keep — you keep your costs down and you constantly work at brand building, and you try very hard to make sure that your main customers, in turn, have their customers happy with the product, and are happy with the price points that you can deliver it at.

And you’re correct that Gildan, in terms of certain aspects, the non-branded aspects, basically, of some parts of the business, has hurt Fruit in the last — well, last 10 years, certainly.

But we turn out first-quality, low-priced underwear with a strong brand recognition. And I think it will be very tough to either build a brand against it or to beat our costs significantly.

Now Gildan pays very little in the way of income taxes, you know, because they route stuff through the Cayman Islands, and that’s a modest factor.

But I think you’ll find five years from now, or 10 years from now, that our market share in men’s and boys’, particularly underwear, will hold up.

But you’re right. They’re a competitive threat. Hanes is a competitive threat. And it’s not a business that you can coast on. It’s not Coca-Cola, but it’s not an unbranded product, either.

And I think Fruit will do reasonably well, but it will not get anything like, you know, the kind of profit margins that you can get in certain branded products.

Charlie?

CHARLIE MUNGER: Yeah. And then, too, as many products as we have, we may average out pretty well, in terms of market shares, but we’re not going to win every skirmish or every battle.

6. Influential books and early investments

WARREN BUFFETT: OK. Station 2.

AUDIENCE MEMBER: Yeah. Hi, Warren. Hi, Charlie. I’m Fritz Hauser (PH) from Offenburg, Germany.

I’d like to know what 10 books influenced you the most and that weren’t written by Graham and Fisher, and I’d also like to tell you that I think it would be great if you would publish the portfolio statements of the Buffett Partnership years.

I think there are a lot of small investors that would get a kick out of knowing, you know, what you invested and how you went ahead and analyzed the companies. Thank you.

WARREN BUFFETT: Yeah. Well, Charlie ran something called Wheeler,Munger and his portfolio was even more interesting, so we’ll start with you, Charlie. (Laughs)

He ran a more concentrated portfolio than I did in those days.

CHARLIE MUNGER: Yeah. I don’t think people would be greatly helped. You wouldn’t recognize the names, most of them, clearly, by the partnership.

You’d recognize American Express. Rattle off some of the names.

WARREN BUFFETT: Yeah. Well, we can start with Mosaic Tile and —

CHARLIE MUNGER: The map company.

WARREN BUFFETT: — Meadow River Coal & Land. There’s hundreds of them. Flagg-Utica, Philadelphia Reading Coal & Iron, you name it.

I’ve literally owned — I bet I’ve owned 4- or 500 names at one time or another, but most of the money’s been made in about 10 of them.

CHARLIE MUNGER: And I couldn’t name 10 books either that have — that I regard as that much better than the next 10. My mind is a blend of so many books I can’t even sort it out anymore. (Laughter)

WARREN BUFFETT: Yeah. “The Intelligent Investor” changed my life, in terms of — I literally had read every book in the Omaha Public Library by the time I was 11 on the subject of investing, and there were a lot of books.

And there were a lot — there were technical books, Edwards & Magee, I mean, that was a classic in those days, and a whole bunch of them, Garfield Drew. But — and I love — I enjoyed reading them a lot. Some of them I read more than once.

But I never developed a philosophy about it. I enjoyed it. I charted stocks. I did all that sort of thing.

Graham’s book gave me a philosophy, a bedrock philosophy, on investing that made sense. I mean, he taught me how to think about a stock, he taught me how to think about the stock market, and he taught me that the market was there not to instruct me but to serve me.

And he used that famous “Mr. Market” example. He taught me to think about stocks as pieces of businesses, rather than ticker symbols or things that, you know, you could chart, or something of the sort.

And so it was that philosophy — and in some way, further influenced by Phil Fisher’s book — and Phil Fisher was just telling me the same thing that Charlie was telling me, which was that it’s very important to get into a business with fundamentally good economics, and one that you could ride with for decades, rather than one where you had to go from flower to flower every day.

And those — that philosophy has carried me along. Now, I’ve learned different ways of applying it over the years, but it’s the way I think about businesses now.

I have not found any aspect of that bedrock philosophy that has flaws in it. You have to learn how to apply it in different ways.

So those are the books that influenced me.

And, of course, in other arenas, Charlie’s probably read more biography than anybody that I know of. And I like to read a lot of it.

We’re just about through reading the Joe Kennedy biography. You’ve read that, haven’t you, now, Charlie?

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: You know, I’m not sure you want to emulate everything he did, but it’s still interesting reading. (Laughs)

We read for the enjoyment of it. I mean, it’s been enormously beneficial to us, but the reason we read is that it’s fun. And, you know, it’s still fun.

And on top of it, we have gotten very substantial benefits from it. My life would have been different if Ben Graham hadn’t gone to the trouble of writing a book, which he had no financial need to do at all. You know, I would have a very different life.

7. Buffett remains bearish on airlines

WARREN BUFFETT: OK. Becky.

BECKY QUICK: This question comes from Bill Miller of Legg Mason.

He writes, “The U.S. airline industry has been plagued with terrible economics for over 100 years. With the pending merger of USAir and American, the industry will have consolidated to the point where the top four carriers will control almost 90 percent of the traffic.

“As a result, the industry has been consistently profitable this past several years, with many of the airlines now earning double-digit returns on invested capital and generating substantial free cash flow.

Do you think the industry’s much improved economics are likely to persist? And would there be any economic benefits if Berkshire were to own a domestic airline and pair it with NetJets?”

WARREN BUFFETT: Yeah. Well, the answer to the second is no.

But the question about the industry is really interesting, because it is true that it has consolidated very significantly.

And in some businesses, you can have only two competitors and they’re still terrible businesses, they beat each other’s brains out. And sometimes they end up competing to do very stupid things. You can argue that that’s what happened with Freddie Mac and Fannie Mae. I mean, enormous companies that had a huge advantage over everybody else, but they still, in their battle to both report higher earnings every quarter and to beat the other guy out, you know, drove prices for insuring loans down to the improper levels, and did a lot of other stupid things, too.

So you see — you do see certain industries where once they get down to very — a very few companies, do extremely well. And you see other industries where, even when they get to be two of them, they don’t do that that well.

I mean, you can take Coke and Pepsi in the United States.

I mean, they’re the only two colas that people can name, and 50 percent or so of the soft drinks are colas. But if you go into a supermarket on the weekend, you will see them pricing their product at ridiculously low prices and competing very vigorously.

So it’s very industry specific. The airline industry, you know, has this situation where they have very, very, very low incremental costs per seat, you know, with enormous fixed costs, and the temptation to sell that last seat at a very low price is very high and it’s very — and sometimes it can be very difficult to distinguish between the last seat and other seats.

So it’s a labor-intensive, capital-intensive, largely commodity-type business, and it’s been — as Bill Miller points out in that question, it’s been, you know, a death trap for investors ever since Orville [Wright] took off.

I mean, as I’ve said, if there had been a capitalist at Kitty Hawk he should have shot down Orville and done us all a favor. (Laughter)

But the — but having neglected to do that, investors have poured money into airline companies, and aircraft manufacturing companies, now for 100 years-plus, with terrible results.

And if it ever gets down to where there’s one airline and there’s no regulation, it will be a wonderful business. And then the question is whether, having gotten down, now, through a lot of bankruptcies, to a relatively few that are doing a high percentage of the seat miles, whether it’s a good business yet. I don’t know the answer, but I’m skeptical.

Charlie?

CHARLIE MUNGER: Well, the last time we were presented with a similar opportunity was when the railroads did exactly what Bill Miller suggests. The railroads got down and consolidated and got better control of their labor costs and it turned into a wonderful business. And what did we do? We missed it. We stumbled in very late to the party, right?

WARREN BUFFETT: Right.

CHARLIE MUNGER: So we’ve proven ourselves to be slow learners in this field, and it’s conceivable, isn’t it, that Bill Miller is right in what he suggests?

WARREN BUFFETT: Which way do you bet?

CHARLIE MUNGER: It goes into my too hard pile. (Scattered laughter)

WARREN BUFFETT: Mine, too.

CHARLIE MUNGER: But he could be right.

WARREN BUFFETT: Yeah, sure he could. And it will be fun to watch.

But we like things we have stronger feelings about.

We do not think that things will change dramatically in — well, with See’s Candy, you know, it’s — we’ve got — even there, you know, the real profitability is limited to the West Coast, but we do not see some competitor coming along and taking away business.

CHARLIE MUNGER: You really couldn’t create another railroad and —

WARREN BUFFETT: I hope not.

CHARLIE MUNGER: — and you — and you can create another airline.

WARREN BUFFETT: Very easily, and you have people that like to do it.

CHARLIE MUNGER: That’s what we don’t like about it.

WARREN BUFFETT: And people love doing it. It’s exciting to people.

And you can sell the idea. I’ve had, probably, a dozen proposals over the last 25 or 30 years from people that want to get into the airline business one way or the — and a number of them have. It’s sexy, for some reason.

I mean, it — you know, if you go to the office of some Mr. Big CEO and say, “I want to talk to you about this new airplane,” you get in the door. You know, I mean, if you want to talk to him about hauling coal or something, it’s a little different.

So it is a business that attracts people. And you can go out and raise money for a new airline, and the record is — it’s really been something. I don’t know how many bankruptcies there have been in the airline field, but it’s an enormous number.

And, of course, some have done it more than once. We bought USAir. I bought that. I was at Gorat’s with [CEO] Ed Colodny, and he explained to me how wonderful the airline was — he’s a good guy, incidentally — and I wrote a check.

And by the time the check was cashed, they were having troubles. I mean, it did not take long.

CHARLIE MUNGER: No.

WARREN BUFFETT: And then they went bankrupt twice. We were very lucky on — we actually made quite a bit of money on it, as it turned out, because there was a little blip at one point. But I think it went bankrupt twice after we bought it.

And Charlie and I were on the board, and we would look at these projections, you know, and they were just ridiculous. I mean, they never came true, did they, Charlie?

CHARLIE MUNGER: No, no, no. It was —

WARREN BUFFETT: We were very popular because we actually pointed that out a few times. (Laughter)

8. Mixed feelings on Berkshire stock buybacks

WARREN BUFFETT: OK. Cliff.

CLIFF GALLANT: I want to ask you about share repurchases. How hard a floor should shareholders think about the 1.2 times book value buyback multiple?

Are there circumstances under which you would not be buying back at 1.2?

WARREN BUFFETT: Yeah. Well, generally speaking, book value has got nothing to do with the price at which you should purchase your shares; intrinsic business value does. And the correlation between intrinsic business value and book value throughout the investment universe is — you know, there’s virtually no correlation.

So book value is unimportant to most companies. It actually has — it has a reasonable tracking utility at Berkshire.

Our intrinsic business value is very considerably above book value, and we have signaled that — we’ll say it right here, we’ve said it before — but in addition, we’ve signaled that by saying that we would repurchase our shares as long as we had a substantial cash balance, met all the needs of our operating companies, at 120 percent of book value, and if we got the opportunity to buy it there, we would probably buy a whole lot of it.

The calculus is very much what I put in the report. You know, you take care of your business with money first, and if you can buy additional businesses at something where you add to the per-share value of the business, you do that.

If you can repurchase your shares at a significant discount from intrinsic value, it like buying dollar bills at 90 cents or 80 cents or whatever it may be, and it’s a very sure way of improving per-share value.

It’s been very difficult for us to do it because every time we announce it, people say, “Well, if it’s — if he thinks it’s worth more than 120 percent of book,” you know —

CHARLIE MUNGER: Yeah. Those cheapskates are willing to pay that.

WARREN BUFFETT: Yeah, right. Well, if at least one cheapskate is willing to pay that, the —

And, you know, they’re right. And we don’t really — we’ve got mixed emotions on it.

We don’t really like the idea of running a company where it makes most of its money by buying its partners out at a discount, but if partners want to sell out at a discount, we also like the idea of buying and making, you know, sure money that way.

We haven’t done much of it. Most of the time our stock has sold in a reasonable range in relation to intrinsic business value. We would think that probably a fairly significant percentage of the time in recent years it sold at at least some discount. There were a few years when we thought it sold for more than intrinsic business value.

But if it, in our opinion, the directors’ opinion, the stock is selling at a significant discount and we’ve got the money around and we’ve got the stock offered to us in a reasonable quantity, we will buy it, and then — and there could be circumstances — it’s unlikely — but there could be circumstances where we’d buy a whole lot at a price that would be attractive for the stockholders who stayed in.

Charlie?

CHARLIE MUNGER: Nothing to add.

9. Munger won’t be moving to Omaha

WARREN BUFFETT: Station 3.

AUDIENCE MEMBER: Hi there. Sean Cawley. I’m a real estate agent in Los Angeles, California.

Question for Charlie. It’s kind of a real estate question, and it’s also a company culture question. Have you ever considered moving to Omaha to be closer to corporate headquarters?

CHARLIE MUNGER: (Laughs) Oh, I think the answer to that is no. (Laughter)

WARREN BUFFETT: I’m sure the answer to that is no.

Our partnership works extremely well. And even though we’re somewhat technophobic, we have gotten to the point where we can handle using the phone — (laughter) — don’t push us beyond that.

CHARLIE MUNGER: No, we’ve never learned anything beyond the phone.

WARREN BUFFETT: But we — I mean, as a practical matter, we each know exactly how the other guy thinks, so that we don’t really even need the phone, exactly. (Laughter)

We used to do a lot of phoning back when it cost a lot of money to phone. Now it doesn’t cost anything to phone, and we don’t talk to each other, hardly. (Laughter)

Charlie — but Charlie has a lot of fond thoughts about Omaha, incidentally, as do I.

CHARLIE MUNGER: Yes. Although, I — as I said earlier on this weekend, they’re rebuilding it so rapidly now that I felt like Rip Van Winkle. They’ve torn down so many of the buildings I remember. It’s amazing how much Omaha has changed the last five years.

WARREN BUFFETT: Well, you have to remember that a third of the lifetime of the country has passed during our lifetime, so you have to expect a little change occasionally, Charlie. (Laughter)

10. Climate change isn’t a factor for short-term insurance rates

WARREN BUFFETT: OK. Andrew.

ANDREW ROSS SORKIN: OK, Warren. We got a couple of questions related, this year, to climate change and its impact on the company.

So let me ask this question from Clem Dinsmore, who asks: “If asked, what would the underwriting experts at your casualty insurance and reinsurance companies advise you and your fellow board members are the emerging risks to Berkshire’s many enterprises from the changes in extreme weather associated with climate change?”

And I would add that Jed McDonald asked a separate question, but related, saying, “What are your thoughts on the price on carbon debate?”

WARREN BUFFETT: Yeah. Well, as you’ve noticed if you’ve been here the last few years, the climate really is getting a lot warmer. (Laughter)

Obviously — well, Charlie knows far more about science than I do, which is not saying a whole lot, but the — my general feeling is that there is a — certainly a reasonable chance — that people that are worried about warming and the effect of CO2, et cetera, are right.

But I don’t know enough so that I can say that, you know, that I can speak as any kind of an expert on it.

I don’t know the answer on it, but I certainly am willing to assume that — there are a lot of very smart people who think that, and I think that it’s a reasonable assumption.

I don’t think that it makes any real difference in assessing insurance rates from year to year.

We have a general tendency to be pessimistic in our assumptions about the likelihood of natural catastrophes, but we would have that general bias, which I think is useful, regardless, if there were no carbon emissions of any kind going on.

We would still assume that whatever the past history had been of natural disasters, we would assume that they were going to be somewhat worse.

And the global warming, in terms of resetting prices of insurance from year to year, is not a real factor.

Our general pessimistic bias is something of a factor.

The second part about pricing of carbon emissions, do you want to repeat that again?

ANDREW ROSS SORKIN: The full question — and I abbreviated it — was, “What are your thoughts on the carbon — the price of carbon — debate?

“Do you think it’s a feasible way, for example, to incentivize efficiency improvements and capture the externalities of carbon’s damaging effects, or is it a lofty, idealized concept too tricky to figure out in practice?”

WARREN BUFFETT: I would say that the question calls for having Charlie give the answer. (Laughter)

CHARLIE MUNGER: Well, you’ve got to realize that I’m a Caltech-trained meteorologist, but that was before they’d invented most of modern meteorology. (Laughter)

I think that I think that carbon trading is pretty impractical, a whole bunch of nations with different ideas, and so on.

And I think if you’re going to change habits, the correct answer is carbon taxes.

I think Europe, because they’re socialists and wanted to tax the thing the people needed the most, they put these big high taxes on motor fuel. So they did it by accident, and not because it was a good idea, vis-a-vis global warming and a lot of other issues, but because they really needed the money.

But I think they stumbled into the right policy. I think the United States should have way higher taxes on motor fuel, and that’s efficient. (Applause)

Some group of shareholders, though. They like clapping for high taxes. (Laughter)

WARREN BUFFETT: They weren’t all clapping. (Laughter and applause)

11. Doug Kass’s short-selling challenge

WARREN BUFFETT: OK. Doug.

DOUG KASS: Warren, my next question is both a question and an unusual challenge.

I’m asking this next question because in the past, you’ve been open to inviting your audience to apply for jobs.

In 2002, you suggested that shareholders who thought they were eligible to send in their qualifications if they were interested in seeking a seat on your board of directors.

And, again, in your 2006 letter, when you advertised for a successor to Lou Simpson at GEICO, you said at the time “Send me your resume.”

In the past, you have discussed your views on short selling. You have cited that stocks tend to rise over time, and you’ve talked about the asymmetry between reward and risk.

By contrast, the last 15 years has demonstrated that short selling can be a value additive tool to total return when done by professionals. In fact, I believe Todd Combs had success as a short seller when you hired him.

CHARLIE MUNGER: He had so much success he stopped doing it. (Laughter and applause)

DOUG KASS: Yes, Charlie, but he got the job from that success. My question is —

WARREN BUFFETT: No, no, he didn’t. (Laughs)

Can’t slide that one in there, Doug. (Laughter)

DOUG KASS: My question is: would you ever consider committing capital to a short-selling strategy? Would you or Berkshire consider being my Homer Dodge, who invested in your partnership after the original seven investors?

Would you or Berkshire Hathaway be willing to give my firm at least $100 million in a managed account?

If Seabreeze failed to outperform the increase, during the two-year period, of the book value increase in Berkshire, all the earned fees earned would be contributed half to the Sherwood Foundation, and half to two charities of my choice, including the Jewish Federation of Palm Beach County?

And even if Seabreeze outperformed Berkshire’s change in book value, 25 percent of the earned fees would be contributed to the charities.

And I want to add something else. You talked about being technophobic.

Technology may be very hard for Berkshire to invest in, but it is also disruptive to many industries whose business models are scathed by it, and this produces very fertile ground for short-selling opportunities.

WARREN BUFFETT: Well, we got to —

CHARLIE MUNGER: Let me add to that.

WARREN BUFFETT: OK — 1:55 without an ad, but — (laughs)

CHARLIE MUNGER: The answer to your question is no. (Laughter and applause)

WARREN BUFFETT: Charlie and I are no strangers to short selling. I mean, we both —

CHARLIE MUNGER: Failed at it.

WARREN BUFFETT: Yeah. (Laughter)

So we’ll — just think about how lucky you are. You don’t have the competition from all kinds of people that listen to us or — ourselves.

No, we — I may even propose a little wager at some point, but we’ll let that ride for the time being.

I’ve known — well, if you go back far enough, you know, we did a reasonable amount of short selling, and I’ve certainly identified lots of companies that I thought were far overpriced, and I’ve identified a fair number of companies that I not only thought, but was virtually certain, were frauds. And so, Charlie — we’ve been seeing them ever since we got in the business.

But making a lot of money short selling, still, is not a game that appeals to us over a long period of time. It’s one of those things that —

CHARLIE MUNGER: We don’t like trading agony for money. (Applause)

WARREN BUFFETT: But we wish you well. (Laughter)

12. Reluctantly paying more for a great business

WARREN BUFFETT: Station 4.

AUDIENCE MEMBER: Ben Sauer (PH) from Shreveport, Louisiana.

Could you be more specific about what factors you considered when determining what a fair price was for an acquisition such as Heinz?

And also, what sources do you use to make judgments about major changes that will affect an industry?

WARREN BUFFETT: Well, we usually — we usually feel we’re paying too much. Isn’t that right, Charlie? (Laughs)

But we find the business so compelling, the management, our associates, so compelling, that we gag and we get there on the price.

But we — there is no mathematical — perfect mathematical — formula.

Looking back, when we’ve bought wonderful businesses that turned out to continue to be wonderful, we could’ve paid significantly more money, and they still would have been great business decisions. But you never know 100 percent for sure.

And so it isn’t as precise as you might think. Generally speaking, if you get a chance to buy a wonderful business — and by that, I would mean one that has economic characteristics that lead you to believe, with a high degree of certainty, that they will be earning unusual returns on capital over time — unusually high — and, better yet, if they get the chance to employ more capital at — again, at high rates of return — that’s the best of all businesses. And you probably should stretch a little.

Charlie and I have had several conversations where we were looking at a building — a business — which we liked, and were sort of gagging at the price, and Charlie or I will say, you know, “Let’s do it,” even though it kind of kills us to pay that last 5 percent.

We did that with See’s Candy. Charlie was the one that said, “For God’s sakes, Warren, write the check.” I was the one that was suffering.

But it’s happened quite a few times, hasn’t it, Charlie?

CHARLIE MUNGER: It almost always happens. (Laughter)

Modern prices are not cheap.

WARREN BUFFETT: No, no. And great businesses, you know, you’re not going to find lots of them, and you’re not going to get the opportunity to buy them and — although you do in the market.

The stock market will offer you opportunities for profit, percentage-wise, that you’ll never see, in terms of negotiated purchase of business.

In negotiated purchase of a business, you’re almost always dealing with someone that has the option of either selling or not selling, and can sort of pick the time when they decide to sell, and all of that sort of thing.

In stock markets, it’s an auction market. Crazy things can happen.

You can have, you know, some technological blip that will cause a flash crash or something. And the world really hasn’t changed at all, but all kinds of selling mechanisms are tripped off, and that sort of thing.

So you will see opportunities in the stock market that you’ll never really get in the business market.

But what we really like, we really like buying businesses to hold and keep. We like buying cheap marketable securities, too. But particularly when you’ve got lots of cash coming in and you’re going to continue to have lots of cash coming in, you really want to deploy it in great businesses that you can own forever.

Charlie, anything?

CHARLIE MUNGER: No. It — we’re sort of in a different mode now, and that has a great lesson, in that if we’d kept our earlier modes, if we’d never learned, we wouldn’t have done very well.

The game of life is a game of everlasting learning. At least it is if you want to win.

WARREN BUFFETT: We want to win.

CHARLIE MUNGER: Yeah.

13. George W. Bush’s 10 words of economic wisdom

WARREN BUFFETT: Carol.

CAROL LOOMIS: This question is from Logan Reed (PH) of Pawling, New York, and has both a question and a postscript, and I’m going to do the postscript first. It’s friendly.

“I’m an 86-year-old World War II vet, which puts me about halfway between you and Mr. Munger. I would respectfully and urgently request that you quit eating so many hamburgers. (Laughter)

“Those things plug up your arteries, and I want to keep you around for a while, in spite of the fact” — the unfriendliness comes in here — “that you voted for President Obama.” (Laughter)

Now, here is the question.

WARREN BUFFETT: This guy is trying to kill me, and he’s doing it — (Laughter)

CAROL LOOMIS: “Over the years, you’ve frequently alluded to your legendary reputation for thriftiness, and you’ve extolled the virtues of the managers of Berkshire companies who have invariably been extremely cost conscious.

“If these are hallmarks of the philosophy which has enabled you to achieve your astounding success, how can you possibly support an administration which has plunged our country into $16 trillion worth of debt, and has not indicated the slightest concern — (applause) — over the efficiency — inefficiency — over the inefficiency of big government?”

WARREN BUFFETT: Yeah. Well, the 16 trillion, we’ll have to give Bush a certain amount of credit for that, too. (Applause)

They certainly didn’t — certainly wasn’t — the Obama administration that, at least, allowed policy that created the greatest financial crisis and required an appropriate stimulus on the part of the government. (Applause)

But, in the end, I find it totally unproductive — and that fellow at 86 probably is — should have found it out by now — to discuss politics with people. I mean, you’re to have roughly half agree with you and half disagree.

So if you — if you look at this — the trouble is, Charlie and I, even though he’s a Republican, I’m a Democrat, we really don’t disagree as much as you might think based on that.

Otherwise, I could say you could just take your pick here and vote for one of us and ignore the other one, and we would offer a little something for everyone.

The amount of deficit spending in the last four years, the amount of stimulus provided — fiscal stimulus provided — I think, has been quite appropriate in relation to the threat to the economy that was posed by the greatest panic in my lifetime.

I mean, you literally had a situation where Berkshire Hathaway was getting a phone call because General Electric needed money, and we were the last stop.

That is quite a situation. It’s quite a situation when Freddie and Fannie go into conservatorship and WaMu and Wachovia fail, and where money market funds have 5 percent drained out of them in three days, and with a panic underway.

So I — we needed fiscal stimulus in this country.

Now, the real question is: how do you get off of that? And that is a problem, but it’s a lesser problem than we would’ve had if we’d decided to follow some austerity program, in my view, at least, starting in 2008.

How do you feel about that, Charlie?

CHARLIE MUNGER: I agree with you completely. (Applause)

And, by the way, so did George W. Bush.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: That was bipartisan. We were in so much trouble, that on both sides of the aisle, we finally got together and supported these extreme interventions.

WARREN BUFFETT: George Bush issued, probably, the ten greatest words of economic thought in history. Most people don’t give him credit for that.

They think of Adam Smith and comparative advantage and Keynes and animal spirits and all those guys.

But George Bush went out there in September of 2008 and said, “If money doesn’t loosen up, this sucker could go down.” (Laughter)

I mean, that is a man that knew how to get to the point. (Laughter)

And I give him great credit for it, enormous credit.

And plenty of members of his party did not agree with what he was doing, but we owe him a lot, in that respect.

And, you know, we — our leaders, generally speaking, in both parties, once they were in the terrible trouble, I think they behaved, or came up with policies that, in general, were very useful in avoiding something far worse than what we experienced.

And they weren’t easy to do. I mean, it took some guts.

So, I am disturbed by a national debt that grows in respect to GDP. In fact, I wrote an article in The New York Times, an op-ed piece, in — I think maybe 2009 or 2010 — talking about this very problem.

But, you know, we came out of World War II with a debt higher — a gross or net debt — higher in relation to GDP than we have now, and people were predicting terrible things at that time because of that situation, and the country has done sensationally.

The real danger is that it just continues to grow, and it gets easier to print money than exercise some discipline.

But we’ve encountered far worse problems than we face now. I mean, this is not our country’s toughest hour, by a huge margin.

And I think we will do fine, but with a lot of bickering, and kind of nonsense that will bother you when you read about it day to day. But when you look at it from a viewpoint of history 10 or 20 years from now, you will not be that disturbed.

Charlie?

CHARLIE MUNGER: Well, I agree with you about George W. Bush, and I like these nonpartisan episodes when we get together and do things right.

And I also think that our current problems are quite confusing. In fact, if you aren’t confused, I don’t think you understand it very well. (Laughter)

WARREN BUFFETT: That sort of immunizes you from everything. (Laughs)

How bothered are you by the level of debt in relation to GDP?

CHARLIE MUNGER: Well, I don’t think there’s any one fixed ratio that is written in the stars.

As a matter of fact, most of the debt, as I conceive it, is not even counted in what you call “debt.” The off-the-books debt of the United States is bigger than the on-the-books debt, all the present value of future promises that are unfunded.

WARREN BUFFETT: That can be changed, however.

CHARLIE MUNGER: Yes. But, if they can be changed, but are we really going to take Social Security away from somebody who’s worked a lifetime?

WARREN BUFFETT: Well, we shouldn’t.

CHARLIE MUNGER: I don’t think it’s very likely.

WARREN BUFFETT: No, no. But Social Security is not a killer, actually, in terms — if you have a GDP that rises a couple percent in real terms —

CHARLIE MUNGER: Of course — that’s the great problem. All of our problems are trivial, if GDP will just rise at 2 percent per annum, per capita.

All these problems that the Republicans are screaming about fade into insignificance if we can do that.

But you’ve got to have policies that enable you to do it, and I’m not sure we always do that very well. (Applause)

WARREN BUFFETT: OK. Stay tuned.

14. Benjamin Moore won’t go downmarket

WARREN BUFFETT: Jonathan.

JONATHAN BRANDT: I have a question about the competitive landscape in the paint business.

I personally always use Benjamin Moore, but some say that Benjamin Moore is disadvantaged because it doesn’t control its own distribution, as does Sherwin-Williams, and they note that it has lost market share to Behr, which is sold in the home centers at lower prices.

You recently replaced management there. What changes in strategy and/or pricing, if any, are being undertaken at that unit, and what is the outlook for that franchise?

WARREN BUFFETT: Yeah. Benjamin Moore, it’s a relatively small percentage of the total paint industry, but it — at the high end, it is the best regarded paint, and we have not lost position in that respect.

But the — when we purchased Benjamin Moore, I made a promise. I even made a video. It had a dealer system, and people that invested their savings and passed on from generation to generation dealerships from Benjamin Moore, and counted on the company adhering to a dealer system, even though you could always get a huge jump in volume, particularly in the first year, if you went with the big boxes.

So we were always approached by the big boxes, and they said, you know, “Let us take Benjamin Moore into our stores,” whether it be Home Depot or whomever. And we would’ve gotten a big jump in volume when that happened and they would’ve loved us — to have us — as a brand with that kind of identity in their stores, but it would’ve represented a total change in the distribution arrangement.

I don’t think it would’ve worked out as well over time, and I know it would have been essentially — particularly after my pledge, which the other — which the management pledged too, they would’ve been double-crossing a network of dealers that trusted us, and trusted us when we bought it to continue with the policy.

A dealer policy will work with a first-class brand like Benjamin Moore. It will never get the kind of market share as will take a Behr, which is distributed through Home Depot.

We were actually offered Behr at one time. Charlie, do you remember that one?

CHARLIE MUNGER: Yes, I do.

WARREN BUFFETT: Yeah, yeah. But the company was actually investigating, and went on its way to implementing, some moves that would’ve, in effect, gutted, or we felt would drastically hurt the dealers and violate the pledge that I’d made to them back when we bought it.

So we did have a change there. And we will — we will not follow the Sherwin-Williams path, which is a very — I mean, it’s a very effective business strategy. I’m not knocking that at all, but that is not our strategy. Our strategy will be a dealer strategy, focused on the high end of the market.

CHARLIE MUNGER: Besides, it’s worked very well.

WARREN BUFFETT: Oh, yeah, it’s worked well, and it’ll continue to work well.

It doesn’t mean that Sherwin-Williams won’t do extremely well. I think they will. It doesn’t mean that Behr won’t do well. I think they will.

But we are in a different segment and it’s up to us to protect and really foster the dealer distribution network, and I think we can have something, and do have something, very special with those dealers and with the position that Benjamin Moore has.

But it will not lead to far higher market shares or anything. I think it will lead — and it has — to very decent profitability. Benjamin Moore is a good business, and I think it will continue to be a good business.

Charlie?

CHARLIE MUNGER: Well, I agree totally. I always wish we could buy five more like it tomorrow.

WARREN BUFFETT: Yeah, exactly.

15. Stock strategy

WARREN BUFFETT: OK. Station 5.

AUDIENCE MEMBER: Derek Foster, Ottawa, Canada.

First of all, thank you, Warren, for sharing all your information. You’ve changed my life. I took finance in university, couldn’t understand Greek formulas, but now I can invest reasonably well.

My question to you is, in the past you’ve said for an investor, you should simply — for 99 percent of investors — you should simply stick money in an index fund and let it go and don’t worry about it. Those 1 percent of investors, choose your best five stocks and put a substantial amount of money in it.

I’m just wondering, how about a strategy of, perhaps, buying 20 of the best stocks in America, you know, Procter & Gamble, Coca-Cola, Johnson & Johnson, whatever, the companies that have been around for centuries — or a century or decades or whatever — and just leaving it at that.

Do you think that that would outperform an index fund over the long term? And I want Charlie’s opinion as well.

WARREN BUFFETT: Well, I don’t know whether you’re saying the 20 largest companies or the 20 best. You might get different thoughts from different people on what they are.

But I think you would — probably the 20 you would pick would virtually match the results of an index fund. Who knows exactly which ones would be the best?

But the real distinction — and Graham made this in his book, basically — is between the person who is going to spend an appreciable amount of time becoming something of an expert on businesses, because that’s what stocks are, or the person who is going to be busy with another profession, wants to own equities, and actually will actually do very well in equities. But the real problem they have is that they may tend to get excited about stocks at the wrong time.

You know, they, really, the idea of buying an index fund over time is not to buy stocks at the right time or the right stocks. It’s to avoid buying them at the wrong time, the wrong stocks.

So equities will do well over time, and you just have to avoid getting — you know, getting excited when other people are excited, or getting excited about certain industries when other people are, trying to behave like a professional when you aren’t spending the time and bringing what’s needed to the game to be a professional.

And if you’re an amateur investor, there’s nothing wrong with being an amateur investor, and you just simply — you’ve got a very logical, profitable course of action available to you, and that is simply to buy into American business in a broadly diversified way and put your money in over time.

So I would say your group of 20 will probably match an index fund, and you’ll probably do well in that, and you will do well in an index fund.

Charlie?

CHARLIE MUNGER: Well, I have nothing to add. I do think it’s — that knowing the edge of your own competency is very important. If you think you know a lot more than you do, well, you’re really asking for a lot of trouble.

WARREN BUFFETT: Yeah. And that’s true outside of investments, too.

CHARLIE MUNGER: Yes. Works particularly well in matrimony. (Laughter)

WARREN BUFFETT: Do you want to give any other advice on that subject?

CHARLIE MUNGER: No.

WARREN BUFFETT: He gave it in the movie. I saw people taking notes.

16. Are Buffett’s stock donations hurting Berkshire’s price?

WARREN BUFFETT: OK. Becky?

BECKY QUICK: This question comes from James Brodbelt Harris of Columbus, Ohio.

He says that your enormously generous multibillion charitable gifts of Berkshire Hathaway stock over the past decade have, and will continue to be, sources of salable assets for the charities linked to the Buffett, Gates, and Munger families.

Could annual sales of billions of dollars’ worth of donated stock by these charitable foundations be a reason why shares have traded under 120 percent of book value, and will announced share repurchase plans fully address this selling by the charitable funds in the coming decade?

WARREN BUFFETT: Yeah. I give away 4 3/4 percent of my stock, we’ll say, every year, and let’s say that’s $2 billion worth of stock, roughly. That’s 1 percent — a little less than 1 percent — of the market value of Berkshire.

Many companies in the New York Stock Exchange trade over 100 percent a year. A 1 percent sale annually of the outstanding capitalization is absolutely peanuts, and you can even argue, in some cases, that it can aid, in terms of market price, because the availability of stocks sometimes determines whether people get interested in buying.

But a supply of 1 percent annually is not going to change the level at which a stock trades. I mean, it just it’s insignificant compared to the volume.

Berkshire — I think Berkshire’s volume, A and B combined, is — probably averages, what, 4 or $500 million a day, so 2 billion spent over a year is not going to affect things.

And you can argue that, you know, everybody else has a right to sell their stock or give it to a charity. I don’t think I should be totally tied up, in terms of being able to give the stock away.

Charlie?

CHARLIE MUNGER: Well, there’s nothing so insignificant as an extra $2 billion to an old man. (Laughter)

WARREN BUFFETT: I’ve never given away a penny that in any way changed my life. Have you, Charlie?

CHARLIE MUNGER: No, of course not.

WARREN BUFFETT: We never even thought of it. (Laughs)

CHARLIE MUNGER: It would be unthinkable.

WARREN BUFFETT: It’s — it has a lot more utility in the hands of other people than it does in my safe deposit box.

17. Most of our opportunities will be in the U.S.

WARREN BUFFETT: OK. Cliff? (Applause)

CLIFF GALLANT: Looking over your first quarter results in the 10-Q, I was wondering — and this might apply more to the noninsurance businesses — what are you seeing in terms of reading the tea leaves for the U.S. economy right now?

Are you starting to see lift? And I’m curious if you have any — if you feel any — need to start to expand Berkshire internationally outside of the U.S.?

WARREN BUFFETT: Well, we’re willing to go, you know, anyplace where we think we understand what things are — in a reasonable way— what things are going to look like in five or 10 years, and where we get our money’s worth, and good management, and all of the things that we emphasize.

But — so we don’t — we’ve never foreclosed anything, but we’re going to find most of our opportunities in the United States. It’s just the nature of things that this is a huge, huge market for businesses, and we’re better known here.

But, you know, most of our deals will take place here, but we find things outside the United States, particularly in terms of bolt-on acquisitions.

In terms of current business, ever since the fall of 2009, coming on four years, we’ve seen a gradual improvement. And sometimes people have gotten encouraged to think it was speeding up quite a bit, and then they get feeling that — they start talking about a double-dip, which I’ve never believed in and hasn’t happened.

What we see overall is just a slow progress in the American economy. You saw those figures on carloadings for the first 17 weeks. And, you know, we were up 3-and-a-fraction percent, but the other railroads were up 4/10 of a percent, so the industry as a whole might be up 1 percent or thereabouts, a little over 1 percent.

This economy is not — for the last four years — it’s not come roaring back in any way, shape, or form.

It’s never faltered, and I wouldn’t be surprised if it keeps going this way.

Now, finally, the overhang in housing ended — it ended about a year ago — but — so we’re starting to get — we’re seeing some recovery in home prices, which has a big psychological effect, and we’re seeing some improvement in construction.

But we don’t want to start overbuilding again. We really want to have housing starts that more or less equal household formation. And I think we’re seeing that.

So if you ask me where we’re going to be when we meet here next year, you know, I think we will have moved forward.

But I don’t think it will be in any surge of any sort, but I don’t think we’ll stall, either.

Charlie?

CHARLIE MUNGER: Well, it’s not a field where —

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: — I’ve been good.

WARREN BUFFETT: We do know what’s going on now, though. I mean —

CHARLIE MUNGER: Yeah, we know what’s going on now.

WARREN BUFFETT: And I guess that ends it? (Laughs)

CHARLIE MUNGER: Can’t make a lot of money knowing what’s going on now. (Laughter)

WARREN BUFFETT: And you can’t make a lot of money thinking you know what’s going to go on tomorrow if you don’t, either.

We will — we’ll just keep — we keep playing the game. I mean —

CHARLIE MUNGER: Yeah, we keep playing the game.

WARREN BUFFETT: And if we hear about something tomorrow that we can spend 15 or $20 billion on and we feel we like the business, United States or otherwise, we’ll move in an instant, and if we don’t, we won’t do anything.

And we just never know when opportunity is going to come along, but it does come along from time to time. And sometimes in financial markets, it comes in a huge way. I mean, that will happen from time to time.

We may not see very many more, but most of the people in this room will see four or five times in their — during their lifetimes — they will see incredible opportunities offered in — probably in equity markets — but maybe in bond markets as well.

People — things will happen, and then, you know, you have to be able to act, and then you have — and that means both in terms of having the ability and also having the mental fortitude to jump in when most people are jumping out. OK. Station 6. Charlie, you want to —

CHARLIE MUNGER: No.

18. How should a young money manager attract investors?

WARREN BUFFETT: OK. Station 6.

AUDIENCE MEMBER: Hi. Brandon from Los Angeles.

I’m in my 20s and I’m starting a partnership. What advice do you have about getting people to put in money before I have a track record as a solo investor? (Laughter)

WARREN BUFFETT: Well, you haven’t sold me. (Laughter)

No, I think people should be quite cautious about investing money with other people, even when they have a track record, incidentally. There are a lot of track records that don’t mean much.

But overall, I would advise any young person that wants to manage money, and wants to attract money later on, to start developing an audited track record as early as they can.

I mean, it was far from the sole reason, far from the sole reason, that we hired Todd and Ted, but we certainly looked at their record, and we looked at a record that we both believed and could understand, because we see a lot of records that we don’t really think mean much.

I mean, if you get — you know, if you have a coin flipping contest, as I wrote, you know, some years ago, and you get 310 million orangutans out there and they all flip coins and they flip them 10 times, you know, you will — instead of having 300 million left, you’ll have 300,000, roughly, left that’ll flip ten times in a row successfully.

And those orangutans will probably go around trying to attract a lot of money to back them in future coin flipping contests.

So it’s our job when we hire somebody to manage money to figure out whether they’ve been lucky coin flippers or whether they really know what they’re —

CHARLIE MUNGER: When you had his problem, didn’t you scrape together about $100,000 from a loving family?

WARREN BUFFETT: Yeah. Well, I hope they kept loving me after they gave me the money. That was —

Well, it was very slow, and it should have been very slow. As Charlie has pointed out, some people thought I was running a Ponzi scheme, probably, there.

And other people may not have thought it, but it was to their advantage to sort of scare people because they were selling investments in Omaha.

But you — to attract money, you should deserve money, and you should develop a record over time that — and then you should be able to explain to people why that record is a product of sound thinking rather than simply being in tune with a trend or simply just being lucky.

Charlie? You’re starting today and you’re 25 years old. How do you attract money?

CHARLIE MUNGER: I think most people start with friends and family, or people whose trust they’ve already earned in some other way. So it’s hard to do when you’re young, and that’s why people start so small.

WARREN BUFFETT: And a relatively few will be successful.

CHARLIE MUNGER: That’s right, too.

WARREN BUFFETT: Some of them — a great many will be successful and make — I mean, you know, we have the hedge fund record here. And during that time, the hedge fund managers have probably made a very considerable amount of money.

As I pointed out, Todd and Ted, working under a 2 and 20 arrangement, if they put the money in a hole in the ground, would make $120 million each this year.

So it’s not exactly an arrangement that you don’t want to think about a little bit before you engage in it.

CHARLIE MUNGER: The arithmetic attracts many of the wrong sort of people.

WARREN BUFFETT: Naturally, we thought we were exceptions.

CHARLIE MUNGER: Yes.

19. Is Ajit Jain going to run Berkshire after Buffett?

WARREN BUFFETT: Andrew?

ANDREW ROSS SORKIN: OK. At Berkshire, there is a unique dynamic that exists between your recognition of Ajit’s special skills and Ajit’s special skills.

You comment often about how unique Ajit’s skills are. So just tell us, is Ajit your successor? (Buffett laughs)

And if not, what happens to Ajit’s businesses without Ajit?

WARREN BUFFETT: Well, they won’t be without Ajit for a long time. And he — what — he’s remarkable in many ways, but one of the ways he’s particularly remarkable is that when people start copying something he’s doing and turning what was maybe quite profitable into something that becomes something every Tom, Dick, and Harry is doing, he figures out new ways to do business.

And I notice you started with the ‘A’s when you started on a possible successor with Ajit, and you won’t have any more luck when you get to the ’B’s. (Laughs)

Charlie?

CHARLIE MUNGER: Well, I think the basic answer is that if Ajit ever is not with us —

WARREN BUFFETT: We won’t look as good.

CHARLIE MUNGER: Yeah, we won’t look as good, right.

WARREN BUFFETT: And that’s true of a number of other managers, too. We have an extraordinary group of people, in most cases, who do not need the money that they earn working for us. They may make substantial money. And they are doing a job for you shareholders and for me and Charlie that you can almost say we don’t deserve.

But they are having — I think they’re having — a good time running their businesses. The one thing we do is try and create an atmosphere where they can enjoy running the businesses rather than spend all their time running back and forth to headquarters and doing show-and-tell operations and that sort of thing.

And it’s taken a long time, though, too. I mean, we operated Berkshire for 20 years without Ajit. If he’d come in the office in 1965 instead of 1985, we’d probably own the world. (Laughter)

Kind of fun to think about, isn’t it?

Charlie?

20. Howard Buffett’s role after his father isn’t running Berkshire

WARREN BUFFETT: Doug?

DOUG KASS: Howard, like you, I have two sons that I love. Like you, I have a son in the audience today. This question is not meant to be disrespectful —

WARREN BUFFETT: Sounds like it’s going to be, but go ahead. (Laughter)

DOUG KASS: — but it’s a question I have to ask.

WARREN BUFFETT: OK.

DOUG KASS: Someday your son, Howard, will become Berkshire’s nonexecutive chairman. Berkshire is a very complex business, growing more complex as the years pass. Howard has never run a diversified business, nor is he an expert on enterprise risk management.

Best as we know, he hasn’t made material stock investments, nor has he ever been engaged in taking over a large company.

Away from the accident of birth, how is Howard the most qualified person to take on this role?

WARREN BUFFETT: Well, he’s not taking on the role that you described. He is taking on the role of being nonexecutive chairman in case a mistake is made in terms of who is picked as a CEO.

I don’t — I think the probabilities of a mistake being made are less than 1 in 100, but they’re not 0 in 100. And I’ve seen that mistake made in other businesses.

So it is not his job to run the business, to allocate capital, do anything else. If a mistake is made in picking a CEO, having a nonexecutive chairman who cares enormously about preserving the culture and taking care of the shareholders of Berkshire, not running the business at all, it will be far easier to then make another change.

And that — he is there as a protector of the culture, and he has got an enormous sense of responsibility about that, and he has no illusions about — at all — about running the business.

He would have no interest in running the business. He won’t get paid for running the business. He won’t have to think about running the business.

He’ll only have to think about whether the board and himself — but as a member of the board — but whether the board may need to change the CEO.

And I have seen many times, really many times, over 60-plus years or — well, probably 55 years as a director — times when a mediocre CEO, likable, you know, not dishonest, but not the person who should run it, needs to be changed.

And it’s very, very hard to do when that person is in the chairman’s position. It’s not as — it’s a bit easier now that you have this procedure where the board meets at least once a year without the chairman present.

That’s a very big improvement, in my view, in corporate America. Because it — a board is a social institution, and it is not easy for people to come in, we’ll say, to Chicago or New York or Los Angeles once every three months, have a few committee meetings, and maybe have some doubts about whether they’ve really got the right person running it.

They may have a very nice person running it, but they could do better. But who’s going to make a change?

And that’s the position that the nonexecutive chairman, in this case, Howard, will be in. And I know of nobody that will feel that responsibility more in terms of doing that job as it should be done than my son, Howard, you know.

CHARLIE MUNGER: Yeah. I think the Mungers are much safer — (applause) with Howard there.

You’ve got to remember, the board owns a lot of stock, you know. We’re thinking about the shareholders. We’re not trying to gum it up for the shareholders.

WARREN BUFFETT: Yeah. After my death, whatever it may be in terms of value then, but it would be $50 billion worth of stock, will, over a period of time, go to help people around the world and it makes an enormous difference, you know, whether the company behind that stock is doing well or not.

And both Charlie and I have seen — we’ve seen some — more than one example — of where a CEO who might be a six on a scale of 10, and is perfectly likable and has, perhaps, helped select some of the directors that sit there, and continues to run the business year after year when somebody else could do it a whole lot better.

And it can be hard to make that — very hard — to make that change if that person controls the agenda and, you know, keeps everybody busy when they come into town for a little while.

CHARLIE MUNGER: You can have a CEO that’s nine out of 10 on everything but with deep flaws, too.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: It helps to have some objective person with a real incentive sitting in the position Howard will be in.

WARREN BUFFETT: The example I’ve used in the past, I mean, that — you know, that blessed are the meek for they shall inherit the earth, but after they inherit the earth, will they stay meek?

Well, that could be the problem, you know, if somebody got named CEO of Berkshire. It could be a position where people might want to throw their weight around in various ways.

You may have noticed that in the annual report, in terms of our newspapers, I said, you know, I am not going to be telling them who to endorse for president. Ten of them endorsed Romney and two endorsed Obama. I voted for Obama, but I’m not going to change that.

But when I write that sort of thing, I’m trying to box in my successor, to some degree, too, and we do not want somebody using Berkshire Hathaway as a power base in the future. We want them to be thinking about the shareholders. It’s that simple.

CHARLIE MUNGER: Sometimes somebody becomes CEO who has the characteristic of a once-famous California CEO, and they used to say about him he’s the only man who could strut sitting down. (Laughter)

21. Near-zero rates “brutal” for bonds

WARREN BUFFETT: OK. Station 7.

AUDIENCE MEMBER: Hi. I’m Brad Johnston from Minneapolis, Minnesota.

And my question is within the context of a very low interest rate environment that may be sustained for some time and the challenge that insurance companies are facing in that environment with respect to managing their capital, as well as managing their risk and uncertainty when they have future liabilities and potentially the need for liquidity.

And maybe you could transcend that down to the individual, as well, who is dealing with a low interest rate environment, trying to manage uncertainty and yet still get some cash return from investments.

I appreciate your concept of selling, you know, some of your shares periodically and being better off to do that rather than take dividends, but many people are dealing with the challenges of cash flow.

WARREN BUFFETT: Yeah.

AUDIENCE MEMBER: And then — and just one final tag-on. If you could at the end, could you explain what Federal Reserve Chairman Ben Bernanke believes he has as a tool in his toolbox called the “term credit facility”?

WARREN BUFFETT: No. The answer is I can’t. Can you, Charlie?

CHARLIE MUNGER: No.

WARREN BUFFETT: The problem faced by people who have stayed in cash, or cash equivalents, or short-term Treasurys, or whatever, I mean, it is brutal.

The loss — if they live off their income, you know — the loss of purchasing power, it’s just staggering when you get into these low interest rates. They are huge victims of a low-interest policy and a dramatically low-interest policy, you know.

Basically, you know, I’ve written — I wrote back in 2008 to own equities. I mean, it was — equities were cheap.

And you were almost certain to get killed, you know, in terms of — for at least a while — we had a promise that the Fed was going to hold rates very low, so it was a great time to own equities.

And I feel sorry for people that have clung to fixed-dollar investments, particularly short-term ones, during a period like this, and I don’t know what I would do if I were in that position.

Imagine having, you know, some sum that seemed like a very large amount of money in the past but, you know, a quarter of a percent on a million dollars is $2,500 a year, and that is not what people anticipated when they were saving over the years.

So I — well, anybody I’ve advised, I’ve always felt that owning businesses certainly made sense — more sense — than fixed dollars, under most circumstances.

Not every time in my life, but probably 90 percent of the time in my life, it’s made more sense than owning fixed-dollar investments. And it’s certainly made dramatic sense a few years ago when equities were marked down to where they were, you know, terrific buys, and where you could see the prospect that fixed-dollar investments were going to pay very little for a considerable period of time.

And I didn’t anticipate that we would see the kind of rates for the extended period that we have already, and I don’t know how long it will go on.

But it’s a real dilemma for people. I get letters — I get a lot of letters — from people that say, you know, “I’ve got $300,000,” and they say, “What should I do?”

So it’s — the fallout from low interest rates has hit millions of people in a very harsh way. And you don’t read much about it and they don’t have much of a voice, but it’s been a good argument for owning productive assets rather than dollars during a period like this.

Charlie?

CHARLIE MUNGER: Well, they had to hurt somebody, and the savers were convenient.

WARREN BUFFETT: What would you do about it?

CHARLIE MUNGER: I would’ve done about what they did.

WARREN BUFFETT: Yeah, so would I.

CHARLIE MUNGER: I would’ve felt bad about it, but I would have — that’s what I would have done.

22. IBM’s competitive moat

WARREN BUFFETT: OK. Station 8. We’re now going to the shareholder base. We’ve gone through the panels, and we’ve got about 45 minutes left and so we’re going to give the shareholders a chance to ask — answer — to ask all the questions — maybe answer them — ask all the questions from this point.

Station 8.

AUDIENCE MEMBER: Hi. Chris Hu (PH) from Tokyo, Japan.

Can you talk a little bit more about the IBM investment? Where do you see the moat for that business? And just in the spirit of full disclosure, I work for Microsoft.

WARREN BUFFETT: Yeah. Was your — what was your — the moat about which business?

AUDIENCE MEMBER: IBM.

WARREN BUFFETT: Oh, IBM. Well, I would say that I do not understand the moat around an IBM as well as I understand the mode around a Coca-Cola. I think I have some understanding of it, but I feel I would have more conviction about the moat around a Coca-Cola, or a Wrigley or a Heinz, for that matter, than an IBM.

But I feel good enough about IBM that we’ve put a considerable amount of money in it. And there’s nothing that precludes both Microsoft, which you mentioned, and IBM being successful. In fact, I hope they both are.

We — I’ve got enough conviction about IBM’s position that we took a very large position.

I like their financial policies. I think the odds are good that their position is maintained in a strong way over time, but I don’t feel the same degree of conviction about that as I do about the BNSF railroad. I mean, you know, it’s very hard for me to think of anything that could go wrong with BNSF. I could think of some things that could go wrong with IBM.

They, incidentally, have a very large pension obligation. Now, they have a large pension fund, too, but you’re talking 75 or $80 billion of assets and liabilities that, you know, is a big — it is a big annuity company on the side.

And you can have — balls can take funny bounces in the annuity field. I would rather they didn’t have that, but that is a fact that I take into consideration when I buy. They show the assets and liabilities of being roughly equal, but the liabilities are a lot more certain than the assets over time.

Charlie?

CHARLIE MUNGER: Yeah. Well, at least the IBM pension plan has the resources of IBM. Suppose you’re a big life insurance company now. All over the world, the life insurance companies have started to suffer the tortures of hell.

In Japan, they agreed to pay 3 percent interest, and, of course, there was no way to earn 3 percent interest once the Japanese policies had been in place a long time.

A whole lot of once revered, secure places look unsecure now.

And around Berkshire, you’ll notice the life operations are — where we have our own policies as distinguished from reinsurance — are pretty small, right?

WARREN BUFFETT: Yeah. We do not like giving options in this world, and people tend to — well, particularly they’ve got a sales force pushing them on, as you have in the life insurance industry. They have tended to give people options that have, in certain cases, cost them huge amounts of money.

It’s — you know, you always want to accept an option; you never want to give an option. But the life business is in just the reverse side of that.

Actually, the mortgage business — I mean, you know, Charlie and I were in the savings and loan business. The idea of giving somebody a 30-year mortgage where they can — if it’s a good deal for you — they can call it off tomorrow, and if it’s a good deal for them, they keep it for 30 years.

Those are terrible instruments. They’re good for you if you’re buying a house, and I recommend that you — I recommend everybody in this room get a 30-year mortgage immediately on a house for all they can.

If it’s a bad deal and rates go to 1 percent, you can refund it. If rates go to 6 or 7 percent, maybe you can buy it back for 70 cents on the dollar or something of the sort.

So the life companies have engaged in that big time — big, big time — in the last few decades, and a lot of them are paying the price, and some of them haven’t even realized exactly quite what the problems are.

They’re kind of like the fellow in the switchblade fight, you know, where the other guy takes a big swipe at him with a switchblade and the fellow says, “You didn’t touch me,” and the other guy says, “Well, just wait until you try and shake your head.” Well, that’s a little bit like where some of the life companies are right now.

Charlie? Anything further, Charlie?

CHARLIE MUNGER: No, that’s gloomy enough.

23. Investing with much smaller amounts of money

WARREN BUFFETT: OK. Station 9. (Laughter)

AUDIENCE MEMBER: Hi. My name is Masato Muso. I’m from Los Angeles, California, and an MBA student at Boston University.

You have mentioned that you are 85 percent Benjamin Graham and 15 percent Phil Fisher, and you have also said that if you only had $1 million today, you could generate 50 percent returns.

Since I’m a young investor, this is my question for the both of you: how was your investment strategy different when you were still accumulating money as opposed to managing billions?

Did you focus on specific industries, small cap, large cap, et cetera? Thank you.

WARREN BUFFETT: Well, managing a million dollars is an entirely different game than running Berkshire Hathaway, or running some 20 or $50 billion fund of money.

And if Charlie and I were running a million dollars now or 100,000 or — we would be looking in some — we’d be looking at some — probably some very small things. We would be looking for small discrepancies in certain situations.

And the opportunities are out there, and periodically, they’re extraordinary.

But that’s something we really don’t think about anymore because our problem is handling 12 or 14 billion, or whatever it might be, coming in every year, and that means we have to be looking for very big deals and forget about what we used to do when we were very young.

Charlie?

CHARLIE MUNGER: Yeah. I’m glad I’m through with that particular problem. (Laughter)

WARREN BUFFETT: He worked pretty hard at it when —

CHARLIE MUNGER: Yes.

WARREN BUFFETT: We both did.

CHARLIE MUNGER: Did we ever.

WARREN BUFFETT: Yeah, yeah. We looked under a lot of rocks, and —

CHARLIE MUNGER: I used to make big returns on my float on my own income taxes. Between the time I got the money and I paid it to the government, I frequently made enough money to pay the tax. It was working for small amounts of money and doing it on most things.

WARREN BUFFETT: He didn’t tell me how to do it, though. (Laughs)

24. Don’t invest in countries or categories

WARREN BUFFETT: OK. Station 10.

AUDIENCE MEMBER: Hi, Warren and Charlie. This is Andy Ling (PH) from Shanghai, China.

Thank you very much for what you have said and what you have done. People around the globe have benefited a lot from your philosophies, so you have fans — even a lot of fans — even in China.

My question is: how did you see investments in emerging markets where Berkshire is spend its investments in places like China? If yes, what kind of industries and companies you are interested in? Thank you.

WARREN BUFFETT: Yeah. We don’t really start out looking to either emerging markets or specific countries or anything of the sort.

We may find things, you know, as we go around, but it isn’t like Charlie and I talk in the morning and we say, you know, it’s a particularly good idea to invest in Brazil or India or China or whatever it may be. We’ve never had a conversation like that, have we, Charlie?

CHARLIE MUNGER: No.

WARREN BUFFETT: It just won’t happen.

We don’t think that’s where our strength is. We know that our strength is not there. And we think, probably, most people’s strength isn’t there either. I mean, it sounds good, but I don’t really think it’s the best way to look at investments.

If you told me that we can only invest —

We’re perfectly willing to do it. We owned a lot of PetroChina at one time. We own some BYD now. We’ve owned securities outside the United States and will continue to.

But if you told us that we could only invest in the United States the rest of our lives, we would not regard that as a huge hardship, would we, Charlie?

CHARLIE MUNGER: Yeah. It’s a great way to sell investment advice, to have a whole lot of different categories, lots of commissions, lots of advice, lots of action.

And a lot of things we just — we don’t feel we’ve got enough of an edge so that we want to play.

WARREN BUFFETT: Yeah. When we hear somebody talking concepts, of any sort, including country-by-country concepts or whatever it might be, we tend to think that they’re probably going to do better at selling than at investing.

It’s just such an easy way — I mean, it’s what people expect to hear when — you know, when somebody comes calling that, you know, today we think you ought to be looking at this or that around the world.

The thing to do is just find a good business at an attractive price and buy it.

CHARLIE MUNGER: Our experts really like Bolivia. And you say, “Well, last year you liked Sri Lanka.” It’s just — we’re not comfortable with that.

WARREN BUFFETT: Yeah. And we usually think it’s a lot of baloney, but —

CHARLIE MUNGER: That’s why we’re not comfortable.

WARREN BUFFETT: Yeah. (Laughter)

25. Washington not solely to blame for housing bubble

WARREN BUFFETT: OK. Station 11.

AUDIENCE MEMBER: Hello, Mr. Buffett, and Mr. Munger. My name is Brandt Hooker from Los Angeles.

I want to thank you both, first of all, for all the years of advice and your financial philanthropy, as well as your education and/or knowledge philanthropy you’ve given to so many investors around the world.

And my question is: the U.S. government was seemingly complicit in enticing the American public to buy a home, and, therefore, a mortgage, at any cost. Do you think our legislators are doing the same thing now, and are we creating a bubble?

WARREN BUFFETT: No. I don’t think we’re remotely near a bubble, in terms of housing, now.

And I certainly think that your statement is accurate but not complete, in terms of what went on before.

I mean, the whole country, almost, every — really kind of went crazy in terms of housing. And the government was a very big part of it because they’re a very big part of the financing of it. And it’s certainly true that plenty of legislators were encouraging Freddie and Fannie to be doing things that they shouldn’t have been doing, not just in retrospect. I mean, if you looked at it at the time, you could come to that conclusion.

But there were an awful lot of people doing the same thing. I mean, it was coming from all sources. And it had that aspect to it, which bubbles do, where year after year for three or four or five years, whatever it might be, that the skeptics looked like idiots and that the people who jumped on the bandwagon were the ones that were refinancing their houses at ever higher prices and people who were speculating on other houses.

So it just looked all so wonderful. And people are really susceptible to that sort of bandwagon effect where they see their neighbors making easy money, everybody’s making easy money but them, and they finally succumb.

It’s just — it’s the nature of things. And it doesn’t mean the people at Freddie or Fannie were necessarily evil — a few of them were — or that legislators, necessarily, were evil, although, again, a few of them probably were. But overwhelmingly, I think most people just get caught up in a grand illusion.

And, you know, it’s happened many times in history, it’ll happen again, and you can use that very much to your profit.

We’re not in that kind of a period now on housing. You’ve got very, very low interest rates, which support, in many cases, the purchase of houses, because it brings down the payments, obviously.

But I personally, about a year ago, I mean, I recommended to people that they buy houses, and I certainly recommend to people that they finance them now.

And most places I would recommend if you find a — if you’re going to live in the community for some time and you find a house that fits your needs, I think it’s probably a very good time to buy it, in part because the financing is so unbelievably attractive.

Charlie?

CHARLIE MUNGER: Well, the main problem was that as things got crazier and crazier, the government could’ve intervened by pulling away the punch bowl before everybody was totally drunk, and instead, the government increased the proof.

And this was not a good idea. But you — it’s hard to get governments in a democracy to be pulling away the punch bowl from voters who want to get drunk.

WARREN BUFFETT: Well, it’s almost impossible.

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: Yeah. I mean, it isn’t —

CHARLIE MUNGER: So you’re complaining a little bit about what’s sort of inevitable in life. Not too good an idea.

WARREN BUFFETT: Yeah. You’ll see it again, not necessarily in housing, but you will see it.

And humans will continue to make the same mistakes that they have made in the past.

I mean, they get fearful when other people are fearful. I mean, that’s — you saw it in those money market funds when 175 billion, you know, flowed out in three days. I mean, everybody gets — when people get scared, you know, they — it’s very, very pervasive.

I’ve often thought that, you know, if I owned a bank in a two-bank town, you know, I’d — if I were inclined to — I might hire a whole bunch of Hollywood extras to form a line in front of the other guy’s bank. (Laughter)

The hell of it is that they — you know, as soon as they got through forming a line there, they’d start forming a line at my bank because they — people really get — they get fearful en masse.

Confidence comes back sort of one at a time, but when they get greedy, they get greedy en masse, too.

I mean, it just — it’s just the way the humans are constructed. That’s where Charlie and I have an edge. We don’t have an edge, particularly, in many other ways.

But we are able, I think, perhaps better than most, to not really get caught up with what other people are doing. And, you know, I don’t know whether we learned that over time or what.

But when we see falling prices, you know, we think it’s an opportunity to buy, and it doesn’t bother us.

Now, we don’t own things on margin or, you know, we don’t get ourselves in a position where somebody else can pull the rug out from under us. That’s enormously important in life. You never want to, you know, get out on a limb.

And, of course, leverage gets very tempting when things are going up. And leverage was what was introduced into housing in a huge, huge way. I mean, people just felt that you were an idiot if you didn’t keep borrowing more on your house, and using that to buy more houses, or using it to live on, or whatever, and then finally the roof fell in.

Charlie?

26. Ready to invest in Europe despite its debt problems

WARREN BUFFETT: OK. Station 1.

AUDIENCE MEMBER: Hi, Warren. Hi, Charlie. My name is George Islets (PH) from Cologne.

Do you see investment opportunities in the eurozone? For example, extending your stake in Munich Re?

Do you trust in the policy of the ECB to bring the things together? Thank you.

WARREN BUFFETT: Yeah. Well, we’re perfectly willing to look at business opportunity in the eurozone, and we bought a couple of bolt-on acquisitions, one for a couple hundred million in the farm equipment area. And we’ll be happy if we find a business in any one of the 17 countries tied to the euro.

There might be a few of them we may be a little less inclined than others. (Laughs)

But — you know, it may create opportunities for us to buy businesses. We’d be happy to. Europe is not going to go away. But the European monetary union was — you know, had a major flaw, and they’re grappling with a way to correct that flaw.

And with 17 political bodies and a lot of diverse cultures, it’s really tough for them to do so.

They’ll do it in time, in my view. But essentially they synchronized a currency without synchronizing much else.

And nature finds the fatal flaw always, and so does economics, and they found it fairly quickly, in terms of the euro. And the structure that was put in place will not work, and they’ll have to find something that does work.

And they will, eventually, but they may go through a fair amount of pain in the process.

Charlie?

CHARLIE MUNGER: Yeah. Structured as Europe was structured, letting in Greece into the European Union was a lot like using rat poison as whipping cream. (Laughter)

It just — it was an exceptionally stupid idea. (Laughter)

It’s not a responsible capitalistic country, a place where people don’t pay taxes and so on and so — it just — and —

WARREN BUFFETT: I’ve tried for years to get him to use ‘Country A’ and ‘Country B,’ but he — (Laughter)

CHARLIE MUNGER: — and committed fairly extreme fraud in the course of getting into the union. They lied about their debt.

And so Europe made terrible mistakes. They have politicians, too. (Laughter and applause)

WARREN BUFFETT: You think it’ll be behind them in ten years?

CHARLIE MUNGER: I think Europe will muddle through.

WARREN BUFFETT: Sure.

CHARLIE MUNGER: Think what Europe has already muddled through.

WARREN BUFFETT: But we would be delighted, even with that dire forecast, not overly — we would be delighted, tomorrow, to buy a big business in Europe that we liked, and we’d pay cash for it.

CHARLIE MUNGER: I hope you’ll call me if it’s in Greece. (Laughter)

WARREN BUFFETT: I make these small suggestions, but you can see it doesn’t help much. (Laughs)

27. Social media will help some Berkshire businesses

WARREN BUFFETT: OK. Station 2.

AUDIENCE MEMBER: Hi. I’m David Yarus (PH) from Miami Beach, Florida.

On behalf of the internet, welcome to Twitter.

And my question is: how has social media impacted your business and any Berkshire companies, and what impact do you see it having on the world in the short and long term?

WARREN BUFFETT: Probably half the people or more in this audience could answer that question better than I can.

It has — certainly in a place like GEICO, you know, we are — it makes a difference, and over time will make a huge difference in marketing, just as the internet made a change.

I mean, GEICO was founded in 1936 and it had a great business idea of going direct, but it did it entirely by mail, initially, and it worked very well.

And then it progressed to — as the world changed, it, you know, went to TV advertising and phone numbers and that sort of thing, and then it went to the internet, and now it goes on to social media.

So, you know, we have to listen to our customers in all our businesses. Some of them it’s much more dramatic than others.

And I’ve been amazed, you know, at how fast the world has changed. I thought the internet, for example, in terms of GEICO, would affect younger people very quickly, in terms of their buying habits.

But the truth that it spread across the entire age range very, very quickly, a huge change. And you have to respond to that. And I am not the best person, by miles, to do that, but we have people that are very good at it at our businesses, and they’re thinking about it plenty, and they’ll continue to think about it.

But it would be a terrible mistake to put me in charge of social media at Berkshire Hathaway. (Laughter)

And Charlie would not be a particularly good choice, either. (Laughter)

Charlie, do you want to defend yourself, or —

CHARLIE MUNGER: Well, I don’t understand it very well. For very good reason, I avoid it like the plague.

And I hate the idea of the teenagers in my own family immortalizing for all time the three dumbest things they said when they were 13. (Laughter)

WARREN BUFFETT: We would have been in big trouble, Charlie. (Laughs)

CHARLIE MUNGER: We would have been in big trouble, both of us, if that were the system.

And so I think there’s a time when your ignorance and folly ought to be hidden. (Laughter and applause)

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: I also think that when you multitask like crazy, like the young people do, none of the tasks is likely to be done well. (Applause)

WARREN BUFFETT: Is there anyone we’ve forgotten to offend? (Laughter)

28. Frauds, crooks, and accounting

WARREN BUFFETT: OK. Station 3.

AUDIENCE MEMBER: Hello. My name is Stuart Kaye (PH) and I work in Stamford, Connecticut.

Earlier in the meeting, you said when reading over financial statements, you identified companies you were virtually certain were frauds.

What was it in those financial statements that you saw that made you be so certain they were frauds?

WARREN BUFFETT: Well, it varies just enormously over the years, but there are — we can’t identify 100 percent of the frauds, or 90 percent, or 80 percent, but there are certain ones that jump out to you, just — people give themselves away a lot, too.

I mean, in poker they talk about tells. And Charlie and I have bought a lot of businesses, and it’s very important when we buy those businesses that we assess the individuals that we’re buying from with some degree of accuracy.

Because, you know, they hand us the stock certificate and we hand them a lot of money, and then we count on them to run the business with as much enthusiasm after they have the money as they did before.

And so we are assessing people. And we don’t think we can assess everyone accurately. We just have to be right about the ones where we make an affirmative decision.

And those decisions have not always been perfect, but they’ve been pretty good. And I would say they’ve probably gotten a little bit better, even, as the years have passed.

Similarly, in looking at financial statements — for example, in the insurance field, we’ve seen some frauds, and they’re — you can see things being done with loss reserves occasionally. We saw it back in — I won’t name any names. Unlike Charlie, I don’t — we’ll call them Company As and Bs instead of naming names.

But you would see companies that, when they were offering stock to the public, you know, the year or two before that, the reserves would be down very suspiciously, and — you know, then — or even when they were selling them to other insurance companies, if they were buying in stock they might be building the reserves.

But there’s a million different ways. And I don’t claim I know all the ways, obviously, but I have seen enough situations over the years, and I’ve seen how promoters act. And you can spot certain people who you know are, one way or another, playing games with the numbers. They give themselves away.

But I can’t give you a checklist of 40 items or something of the sort that you look for in the balance sheet or the income account or the footnotes.

Charlie, can you help?

CHARLIE MUNGER: Sometimes it’s pretty obvious. I once was introduced by Warren, of all people, by accident, to a man who wanted to sell us a fire insurance company. One of the first things he said, with a thick accent, from Eastern Europe, I think —

WARREN BUFFETT: Don’t name countries. (Laughter)

CHARLIE MUNGER: And I don’t remember the country.

WARREN BUFFETT: Good. (Laughter)

CHARLIE MUNGER: But what he told me was — he says, “It’s like taking candy from babies,” he said.

“We only write fire insurance on concrete structures that are underwater.” And I figured out instantly that it was probably fraudulent.

WARREN BUFFETT: The guy’s a crook.

CHARLIE MUNGER: I’m a very acute man.

WARREN BUFFETT: Yeah, the guy’s a crook.

Well, you actually — you had some experience — you know, he was a lawyer in the movie industry. (Laughs)

CHARLIE MUNGER: Oh, my God.

WARREN BUFFETT: Yeah. The — when you get into accounting for — well, movies are a good thing, in terms of how fast you write off properties, and anything where you’ve got construction in progress or progress payment-type things — there’s so many ways you can cheat in accounting.

And financial institutions are particularly, probably, prone to it. And there’s been plenty of it in insurance.

CHARLIE MUNGER: A lot of it, they’re not being deliberately fraudulent, because they’re deluded. In other words, they believe what they’re saying.

WARREN BUFFETT: Yeah. People like to hire them as salesmen. (Laughter)

If you’ve got doubts, forget it. There’s probably some reason you —

It’s interesting. The accounting — they worked harder and harder and harder at coming up with disclosures in accounting. And I’m not sure I find present financial statements more useful or, in some cases, as useful as I found them 30 or 40 years ago. (Scattered applause)

Charlie?

CHARLIE MUNGER: Well, I think the financial statements of big banks are way harder to understand now than they used to be. They just do so many different things, and they’ve got so many footnotes, and there’s so much gobbledygook, that it doesn’t — they’re not my grandfather’s banks.

WARREN BUFFETT: Well, we couldn’t understand them when we owned them.

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: I mean, we bought a company that — Gen Re — where they had 23,000 derivative contracts. And Charlie and I could’ve spent 24 hours a day, and had the help of 10 or 20 math Ph.Ds. and we still wouldn’t have known what was going on.

It cost us about $400 million to find out, but — and that was in a benign market. But nobody can.

CHARLIE MUNGER: And the accountants had certified the balance sheet.

WARREN BUFFETT: Sure.

CHARLIE MUNGER: It’s a new kind of asset I invented a name for. I said, “Good until reached for.” (Laughter)

WARREN BUFFETT: Yeah. Well, and you would — you would actually — the same auditing firm would be auditing two different companies that are on the opposite side of a derivative transaction and attesting to different values to the same contract.

And Charlie found one mistake at Salomon on a derivative contract. What was it, 20 million?

CHARLIE MUNGER: No. It was a big contract, and both sides reported a large profit, blessed by their accountants, on the same contract —

WARREN BUFFETT: Kind of like us and Swiss Re.

CHARLIE MUNGER: — just for breaking it.

Once people get in a competitive frenzy, things just go out of control.

WARREN BUFFETT: I became the interim chairman of — interim CEO — of Salomon in 1991, and, fortunately, I testified to both the House and Senate committee before I found this out.

And, generally speaking, incidentally, Salomon wanted to have conservative accounting. I think that would be a fair statement. And in many cases did.

But they did come in to me one day and they said, “Warren, you probably should know that we have this item” — and I think it was around 180 million or something like that — with a capital base of 4 billion, maybe — but 180 million.

And they said, this is a plug number, and we’ve been plugging it ever since Phibro merged with Salomon in 19 — I guess, ’81.

For ten years, this number moved around every day. And as I remember, Phibro or some — one of them was on a trade date system, and that was on a settlement date system.

And in ten years, with Arthur Andersen as their accountant, paying a lot of money in auditing fees, they just never figured out how the hell to get the thing to balance, so they just stuck a number in every day.

And they literally plugged it for ten years, and I couldn’t figure out how to unplug it myself. I mean, it was — you almost had to start over. Didn’t they do that one time out there?

CHARLIE MUNGER: We did that, Warren.

WARREN BUFFETT: Right. (Laughs)

CHARLIE MUNGER: We had a discrepancy when we changed accounting systems in our savings and loan, and none of the accountants could fix it. So we just let it run out.

WARREN BUFFETT: Yeah, we let the account —

CHARLIE MUNGER: We just let the account run out, and then —

WARREN BUFFETT: Figured we’d start over again.

CHARLIE MUNGER: We started over, right.

WARREN BUFFETT: Accounting is not quite the science that people might want you to —

CHARLIE MUNGER: In accounting, you can do things like they do in Italy when they have trouble with the mail. You know, it piles up and irritates the postal employees. They just throw away a few carloads — (laughter) — everything flows smoothly thereafter.

WARREN BUFFETT: You’re naming names again, folks. (Laughs)

That happened in some unnamed international country. (Laughter)

CHARLIE MUNGER: Yeah, Italy. (Laughter)

29. Would Berkshire invest in sub-Saharan Africa?

WARREN BUFFETT: OK. Section 4.

AUDIENCE MEMBER: Good afternoon. My name is Jerry Lucas (PH) from Newark, Delaware.

You answered the question earlier about emerging markets. I just have a similar question.

If you found the business that attracted you in sub-Saharan Africa, outside of South Africa, are the conditions right today to make that investment?

WARREN BUFFETT: Well, I might not know enough to do it myself, but I think — and I wouldn’t rule — if it was attractive enough and I thought I understood the nature of the business, I would probably get some advice from some other people. And I might not end up doing it, but I wouldn’t totally preclude it.

CHARLIE MUNGER: I saw that done. The University of Michigan hired an investment manager in London who specialized in sub-Saharan Africa. And I thought, “My God, how are they doing this?”

What they did is the little banks would trade in the pink sheets in Africa, and the first thing people would want was not to have the money under their pillow, and they just bought all the little banks in Africa, and they made a lot of money.

So it is possible, if you know what you’re doing, to go into very unlikely places. I would say we’re not very good at it.

WARREN BUFFETT: No, that isn’t our specialty, but it can be done. And if we were poor enough, we might even be thinking about doing it, right, Charlie?

CHARLIE MUNGER: I don’t think so.

WARREN BUFFETT: OK. (Laughter)

Next year we’ll prepare for this. (Laughter)

30. Read over your will with your adult children

WARREN BUFFETT: OK. Station 5.

AUDIENCE MEMBER: Hello. I’m Marvin Blum from Fort Worth, Texas, the home to four of your companies.

WARREN BUFFETT: Absolutely. We love Fort Worth.

AUDIENCE MEMBER: Thank you. We love you, too, and your presence in our community.

I’m an estate planning lawyer, and it’s interesting as we wrap up today to ponder that the Baby Boomer generation is about to pass along the greatest transfer of wealth in history.

I can design plans that eliminate estate tax and pass down great amounts of wealth to the next generation, but many of my clients come to me and say they want a plan like Warren Buffett’s, leaving their kids enough so they can do anything, but not so much that they can do nothing.

Now they ask me, and I’m asking you, how much is that, and how do you keep from ruining your kids?

WARREN BUFFETT: Yeah. Well.

(Applause)

I think more kids are ruined by the behavior of their parents than by the amount of the inheritance. (Applause)

Your children are learning about the world through you, and more through your actions than through your words, you know, from the moment they’re born. You’re their natural teacher, and, you know, it’s a very important and serious job.

And I don’t think — I don’t actually think — that the amount of money that a rich person leaves to their children is the determining factor, at all, in terms of how those children turn out. But I think that the atmosphere, and what they see about them, and how their parents behave, is enormously important.

I would say this: I’ve loosened up a little bit as I go along.

Every time I rewrite my will, my kids are happy because they know I’m not reducing the amount, anyway. (Laughter)

And I do something else that — I find that — which I think is an obvious thing, but it’s amazing to me how many don’t do it.

I think that your children are going to read the will someday — that’s assuming you’re a wealthy person — your children are going the read the will someday.

It’s crazy to have them read it after you’re dead, for the first time. I mean, you’re not in a position to answer questions then unless the Ouija board really works or something of the sort.

So if they’re going to have questions about how to carry out your wishes, or why you did this or that, you know, why leave them endlessly wondering after you die?

So in my own case, I always have my children — I rewrite a will every five or six years or something like that — and I have them read it.

They’re the executors under it. They should understand how to carry out their obligations that are embodied in the will, and they should — also, if they feel there’s anything unfair about it, they should express themselves before I sign that will, and we should talk it over, and we should figure out whether they’re right or I’m right, or someplace in between.

So I do think it’s very important in wealthy families, once the kids are of a certain age. I mean, I don’t advise doing this with your 14-year-old or something, but when they get — you know, certainly by the time they’re in the mid-30s or thereabouts — I think they should be participants in the will.

And I do think that if you get to be very wealthy that the idea of trying to pass on, create a dynasty of sorts, it just sort of runs against the grain, as far as I’m concerned.

And the money has far more utility — you know, the last hundreds of millions or billions have far more utility to society than they would have to make — create a situation — where your kids don’t have to do anything in life except call a trust officer once a year and tell them how much money they want.

Charlie?

CHARLIE MUNGER: I don’t think I want to go into this one.

WARREN BUFFETT: OK.

CHARLIE MUNGER: And I’m absolutely sure you don’t want to discuss your will with your children if you’re going to treat them unequally.

WARREN BUFFETT: No.

CHARLIE MUNGER: That is poison.

WARREN BUFFETT: But there — one of the problems you have — I mean, and what you want to discuss just for that very situation is there may be circumstances where one child will have much more of an interest in one type of asset than others, or something of the sort.

And you want to make sure that your definition of equality, in terms of handling different kinds of assets, meshes, or at least is understood, by the children so that they don’t think the fact that you may gave one a farm and another a house or something of the sort resulted in inequality when you thought it was equality.

Charlie, you got anything?

CHARLIE MUNGER: No. I’m —

WARREN BUFFETT: He’s staying away from this one.

31. No question from station 6 — Buffett’s happy

WARREN BUFFETT: OK. Station 6.

AUDIENCE MEMBER: No question.

WARREN BUFFETT: No questions. I like station six. (Laughter)

32. Don’t hold your breath until …

WARREN BUFFETT: Station 7.

AUDIENCE MEMBER: Mr. Buffett, Mr. Munger, thanks for everything that you do for us, including advice that you give us, and also for — as an individual investor — for the things that you’ve done for me.

I have a question. You’ve long been against stock splits, but as you think about the Berkshire A share and one day can — if you don’t split it — it can get to a million dollars, is the board thinking about how to deal with that, in terms of getting new stock owners, the ownership structure, and so on?

WARREN BUFFETT: Well, I — we actually — I think we’ve got a pretty good arrangement now.

It evolved, originally, through some people that were going to try and make a lot of money off of our shareholders by creating their own split shares, so we created the B shares.

And then when the BNSF acquisition came along, we wanted to be sure that people that wanted to have a stock-free exchange, or that wanted to get shares, would not prohibit it simply because they had a small amount of BNSF, and, therefore, our B shares were too expensive.

So I think now with one stock, you know, in the $100 range, people can split the — people that own the A stock can split their stock anytime they wish.

And we’ve always pledged that there won’t ever be this situation, but if there was some corporate transaction or anything like that, we will — the A and B will get treated identically.

And so I really see no reason to change the present situation.

Charlie?

CHARLIE MUNGER: I would not hold your breath until we change. (Laughter)

WARREN BUFFETT: That may apply to almost anything in our lives.

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2013 Berkshire Hathaway Annual Meeting (Morning) Transcript

1. Welcome

WARREN BUFFETT: Good morning.

I’m a little worn out. (Laughter)

We’re going to — well, first of all, I really want to thank Brad Underwood. He puts the movie together every year, does a terrific job. (Applause)

Andy Heyward and Amy are responsible for the cartoon. They also produce “The Secret Millionaire’s Club,” which has been a huge hit this year, and I really want to thank them for their part in this, too. (Applause)

And finally, Carrie Sova who — who puts this whole affair together, she’s four months pregnant. She got her MBA, I think, yesterday or — and, in addition, she is the ringmaster for all of this. Let’s give Carrie a terrific hand. (Applause)

We’ll go through a few figures, few slides. I’ll introduce the directors and make one or two more announcements, and then we’ll get on to the questions.

2. Q1 earnings

WARREN BUFFETT: Now, if we could put up the first slide, which is the earnings that were released yesterday. And as you can see, it was a good quarter.

It wasn’t quite as a good a quarter as it looks, which I’ll explain in a second. But really all of our businesses did very well.

You should focus on operating earnings. Charlie’s getting a head start here on the peanut brittle and fudge, so I’ll catch up later.

It was a very good — it was a benign quarter in insurance, but our other businesses, particularly our big businesses, did quite well, and I don’t remember whether we’ve ever had operating earnings of more than 3 point — almost 8 billion. But, in any event, it was quite satisfactory.

Now, we’ll put up slide two. The insurance earnings were helped a bit. They were still terrific without these factors, but they were helped a bit by the fact that the dollar was strong, and that reduces the liabilities we have on outstanding in foreign currencies.

So if we have losses we’re going to pay in the future and they’re payable in pounds or euros and the dollar appreciates against those currencies, we get a small benefit from that.

We also have it — it hurts us in other ways. We have so many different kinds of businesses, and then we own other earnings through Coca-Cola that operate around the world, that I really never know whether when the dollar goes up or down, whether it helps us or not.

So I’ve never been able to figure it out. So we just sort of take it as it comes. And we do want to explain that to you, the insurance earnings.

And then we had another item, which is kind of interesting. We’ve had a disagreement with Swiss Re about a life reinsurance contract, and that’s — the disagreement’s probably lasted for well over a year, and that was settled in the first quarter.

And as you can see, we showed a gain of 255 million pretax from settling this disagreement, but, interestingly, Swiss Re showed a gain of 100 million also from settling the disagreement. (Laughter)

So, we are working on an arrangement with Swiss Re whether we’ll get in an argument every quarter (laughter), and both report higher earnings when we settle it.

It’s magnificent what accounting can do. (Laughter)

One real high point of the first quarter was the pickup which I noticed — which I noted — in the annual report, about the gain in both the closure rate and the persistency rate at GEICO. These are hugely important factors.

And if we’ll put up the chart showing the gain of GEICO’s auto policies, the strengths I mentioned in 2012, and not only continued in 2013, but the trend has become even stronger.

And there’s a lot of seasonal to policy gains. But as you can see, month by month, our gains have — and policies have very significantly improved over 2012.

And, again, it’s because our closure ratio, in other words, the number of people that get a quote from us and then go on to buy a policy, that rate has improved very significantly this year, and with it we also had a gain in persistency, the people that renew the policies with us, and that’s pure gold.

A policy has a mathematical value to us of at least $1,500, so if we had a million policies in a year — and I’m hopeful we might do that this year — that’s a billion-and-a-half of value that gets built into our intrinsic value, which does not show up on the income statement or balance sheet at all, but it does increase the value of GEICO versus what we carry it for.

And I can’t resist a little sales pitch on that because this closure rate, which, like I say, is at incredible levels, means that when people go to our website or call us and get a quote, they find that they can save a lot of money.

I mean, people love our little gecko, but they buy the policies because we save them money.

And it just so happens that in the auditorium right near here, the exposition hall, we have a lot of very friendly people that will help you save money, too.

So I urge you — you can walk out anytime Charlie is talking (laughter) and go and get a quote, and a very high percentage of you could save money by doing that.

And, you know, that is in the Berkshire spirit, to save money at every opportunity. So I’m hoping you will check that out, and we will set a record for policies sold.

And, finally, our railroad, this year, is doing very well. You saw the earnings in the first quarter report, if you’ve had a chance to look at that.

And we’ve got some figures up that show our gain in car loadings in the first 17 weeks. It’s been 3.8 percent, whereas the other four major Class I railroads in the United States have had a gain of four-tenths of a percent.

That’s significant money that — and we don’t have the Canadian railroads here that operate in the United States. They both come down, the Canadian National, Canadian Pacific. But — but this is representative of what’s been happening.

We’ve been helped by the fact that, fortunately, a lot of oil has been found very, very close to our railroad tracks, and what better place to find oil? (Laughter)

And so we’ve been moving a lot of that, and it’s worth — and we’ll be moving a lot more the way things are going.

And the result of all this — we now will put up the next slide — we’re now the fifth most valuable company in the world. (Applause)

And that will change over time, but I hope it changes for the better.

3. Directors introduced

WARREN BUFFETT: I’d like — the business part of this meeting starts at around 3:30, and at that time we’ll have the election of directors.

But I would like, nevertheless, for those of you who won’t stick around to the bitter end, I would like to introduce our directors, and — Charlie and I are directors.

And if our directors would stand and remain standing when I call your name. And no matter how strong the urge, withhold your applause until they’re all finished standing, and then you can withhold your applause then if you wish, too, but I plan to applaud. OK.

Howard Buffett. Steve Burke. Susan Decker.

So just stand and remain standing — there we are. OK.

Bill Gates. Sandy Gottesman. Charlotte Guyman. Don Keough. Tom Murphy. Ron Olson. Walter Scott, Jr.

And our soon to be new member, Meryl Witmer.

OK. No more withholding. (Applause)

4. Table tennis champ Ariel Hsing

WARREN BUFFETT: Now, we’ll start the questioning in just one minute, but there were one or two announcements to make.

We did not put it in the — we did not put it in the annual report because we hadn’t firmed it up yet, but tomorrow at Borsheims, our friend Ariel Hsing will be available to play table tennis with any of you foolish enough to challenge her.

I met Ariel when she was nine, and she became the youngest women’s table tennis champion of the United States, and then last summer she went on to the Olympics.

And at the Olympics, she won her first two matches, and she won more games off the woman that became the eventual Olympic champion than any other participant in that event.

So Ariel will be out there tomorrow at 1 o’clock. And if you’re courageous, you’ll show up with your paddle and end up looking like an idiot. (Laughter))

5. Buffalo News publisher Stan Lipsey retires

WARREN BUFFETT: One more introduction, I don’t know whether we can get a spotlight on him or not, but Stan Lipsey retired this year as publisher of The Buffalo News.

And, as Charlie can attest, as well as I, back in 1978, ’79, ’80, we had an enormous business problem in the Buffalo News. We were locked in a competitive struggle. And we were not doing well, in part, because of we were operating under a tough judicial order for a while until it got reversed on appeal.

And Stan gave up a wonderful life here in Omaha and asked no questions and for no pay came up to Buffalo, and The Buffalo News would not have turned out to be the paper that it’s turned out to be or produced the profits that have been produced for Berkshire, without Stan Lipsey.

So, if Stan could stand, let’s give him a hand. Stan the Man. (Applause)

6. Berkshire buys remaining ISCAR stake

WARREN BUFFETT: One other announcement, then we’ll go to the questions.

It was announced a couple of days ago that we bought out the final 20 percent of ISCAR held by the family for about $2 billion. It’s a transaction they’re happy with, we’re happy with.

As a matter of fact, if you saw Eitan Wertheimer dancing at “Dancing with the Stars” there, you could have seen how happy he was.

So we will now own 100 percent of ISCAR, but our relationship with the Wertheimer family will continue.

It’s been a sheer joy. The business has done terrifically. The people have behaved magnificently, and ISCAR will be part of Berkshire forever. So I want to thank Eitan and his family.

And, Eitan, are you here? Can you stand up, and your family? Thank you. (Applause)

Let’s have a light here in the front row. OK. (Applause)

7. Q&A begins

OK. We’ll now move on to our questions. We’ll continue these until about noon. We’ll take an hour break for lunch. We’ll come back, and then we’ll continue until about 3:30, at which time we will convene the business meeting.

And we will start off — we have three journalists who have been here before on the right, and we have a distinguished panel on the left, including a short seller, perhaps the first at any annual meeting, and we will start off with Carol Loomis.

8. Berkshire lagging the S&P 500

CAROL LOOMIS: Good morning. Speaking for the three of us, I hope here, we have received into the thousands of questions. We don’t even know how many. And if we didn’t pick your question, it was because we just didn’t get to it.

I do want to tell you that Warren and Charlie have no idea of what our questions are going to be, no hints at all, and so we look forward to sending them curve balls.

I’ll start off here. Warren, you measure Berkshire — this is from William Bernard (PH) of Colleyville, Texas.

You measure Berkshire’s corporate performance based on growth and book value per share. The table on page 103 of the annual report shows book value per share has grown at less than an average 12 percent a year for 9 of the last 11 5-year periods, yet in your last annual letter, you state, quote, “The S&P 500 earns considerably more than 12 percent on net worth,” and then you say, “That seems reasonable for Berkshire also.”

Why do you say that, given the past record showing that Berkshire has not been earning that much, or is it that you expect to earn that much, recognizing that it is not assured in the future?

WARREN BUFFETT: It certainly is not assured in the future. And the last ten or so years have not been the best for business, generally.

But if the stock market continues to behave in 2013 as it has so far, this will be the first five-year period where the gain in book value per share has fallen short of the market performance, including dividends, of the Standard & Poor’s.

And that won’t be a happy day, but it won’t be — it won’t totally discourage us because it will be a period where the market has gone up in every one of the five years. And as we’ve regularly pointed out, we’re likely to be better in down years as we did in 2008, for example, which is the year that gets dropped this year. We’re likely to do better in down years, relatively, than we do in up years.

Charlie, how do you feel about the prospects of — I should point out, incidentally, that we use book value because it’s a calculable figure, and it does serve as a reasonable proxy of the year-to-year change in the intrinsic value of Berkshire.

If we could really give you a figure for intrinsic value, and back it up, that would be the important figure.

As I pointed out, if we gain a million policyholders at GEICO, that actually adds a billion-and-a-half to intrinsic value, and it doesn’t add a dime to book value.

So, there’s a significant gap, which is why we’re willing to buy in stock at 120 percent of book value — a significant gap between the two. But book value is a useful tracking device.

I should point out also — I did this in the annual report in respect to Marmon — when we buy the ISCAR stock, which we pay about 2 billion for, the day we buy it, we mark it down in terms of our book value by roughly a billion dollars.

So a billion dollars comes off our book value for making a purchase which we regard as quite satisfactory. And so there are these distortions that occur.

But in the end, we have to do better for you than you would do in an index fund. And if we don’t, we aren’t earning our pay.

And I think we’ll do that in the future, but I don’t think we’ll do it every year, and we’ve proven that in the last few years.

Charlie?

CHARLIE MUNGER: Well, I confidently expect that Berkshire’s going to do quite well over the long term.

I don’t pay much attention to whether it’s five years or three years or — I think we have momentums in place that are going to do OK.

Of course, we won’t do as well in the future, in terms of annual gain averaged out, because our past returns were almost unbelievable.

So, we’re slowing down, but I think it’ll still be very pleasant.

WARREN BUFFETT: At 89, Charlie is not really concerned about this stuff year-to-year. I mean, he’s taking a longer-range view. (Laughter)

CHARLIE MUNGER: I’m trying to take care of my old age, which might come on at any time. (Laughter)

WARREN BUFFETT: I haven’t noticed it.

9. Jonathan Brandt introduced

WARREN BUFFETT: OK. Jonathan Brandt, who is a newcomer to the panel, his area is the other-than-insurance aspects of Berkshire Hathaway.

And I can assure you that no one has paid more — I played Jonny in chess when he was about four years old, and, I don’t know, I must have been 40 or something at the time, and he kept insisting during dinner that we play chess afterwards.

And we started playing, and, of course, he got me into some impossible position in a few moves, and I told his parents to put him to bed. (Laughter)

So, Jonny, I still have kind of comebacks in me, so be careful what you ask. Jon Brandt. (Laughs)

10. ISCAR vs Sandvik

JONATHAN BRANDT: Good to see you, Warren.

A question about ISCAR: what do you feel are the specific competitive advantages that ISCAR has over its primary competitor, Sandvik, and, in turn, what advantages does Sandvik have over ISCAR as the larger player?

WARREN BUFFETT: Yeah. Sandvik is a very good company, and ISCAR is a much better company.

The advantage it has is brains and incredible passion for the business.

It’s interesting to reflect on ISCAR because if you go back to — what would it be? — 1951 or thereabouts, when Stef Wertheimer, who had come from Germany, was in Israel, started ISCAR, just think of the prospect that was facing him.

Here was a company like Sandvik, or in this company — country — Kennametal, or different countries, well-entrenched companies, well-entrenched, well-financed.

And here’s this fellow in Israel, 25 years old, and the raw material for these cutting tools comes from China. It isn’t that the raw material is in Israel.

So everybody buys their tungsten from China, and they sell to customers that are using large machine tools throughout the world, but they’re selling it to heavy industry to a significant extent.

So they’re selling to people like Boeing or General Motors or big industrial companies in Germany, and there’s no great locational advantage, in terms of being in Israel doing this.

But here’s this 25-year-old fellow getting the tungsten from thousands of miles away, selling it to customers thousands of miles away, competing against people like Sandvik, and this remarkable business, ISCAR, comes from that.

And there’s no other answer you can give to your question when you see that result than to say that you have had some incredibly talented people who never stopped working, never stopped trying to improve the product, never stopped trying to make customers happy, and that continues to this day.

Sandvik is a very good company. I can tell you that based not only on the figures, but on every other aspect of business observation that I possess, that ISCAR is one of the great companies of the world, and we feel very fortunate to own it and to be associated with their management.

Charlie?

CHARLIE MUNGER: Well, it’s a good comparison. Sandvik is a fabulous company, and it’s a particular achievement to really do a little better in the competitive market, as ISCAR has done.

WARREN BUFFETT: Quite a bit better.

CHARLIE MUNGER: They’ve gained.

WARREN BUFFETT: Have you really ever seen much — a better operation than ISCAR in the manufacturing business?

CHARLIE MUNGER: It’s the only place I was ever in where I saw nothing but robots and engineers working computers.

WARREN BUFFETT: It’s a —

CHARLIE MUNGER: You cannot believe how modern ISCAR is.

WARREN BUFFETT: Yeah. And the game’s not over yet, either.

11. Preserving Berkshire’s culture after Buffett

WARREN BUFFETT: OK. Now we go to a shareholder in station number 1.

AUDIENCE MEMBER: Hi. Dan Lewis (PH) from Chicago. First of all, I wanted to thank you for letting us in the building early today. But let’s not — (Applause)

Let’s not do that again next year, though. I don’t want to wake up any earlier to get in line.

WARREN BUFFETT: If we had a company that sold coats, we would have left you out there. (Laughter)

AUDIENCE MEMBER: Always a comeback.

When you think about Berkshire in the decade after you’re gone, my question is what worries you the most? What — I know nothing keeps you up at night — but what are your big worries and, you know, what can go wrong?

WARREN BUFFETT: Well, it’s a good question. It’s one we think about all the time.

And that’s why the culture is all important, the businesses we own are all important, because those trains will keep running and people will keep calling GEICO the day after I die. There’s no question about that.

And the key is preserving the culture and having a successor as CEO that will have more brains, more energy, and more passion for it, even than I have.

And it’s the number one subject that our board considers at every meeting, and we’re solidly in agreement as to whom that individual should be.

And I think the culture has just become intensified year after year after year. And I think Charlie would agree with that.

I mean, we always knew what we were about when we first got involved with Berkshire, but making sure that everybody that joined us, that the owners, the shareholders, directors, managers, everybody that bought into this what I think very special culture. That took time, and — but it is — I think it’s really one of a kind now, and I think that it will remain one of a kind.

I think that anything that came in — any foreign-type behavior would be cast out because people have self-selected into this group, into the company, and it would be rejected like a foreign tissue if we got the wrong sort of person in there.

We have a board that is especially devoted to Berkshire. We don’t hold them by paying them huge amounts, it may be noted.

And we have people who have brought their companies to Berkshire because they want to be part of it, as did ISCAR.

So, I think that whoever succeeds me — and it will be a lot of newspaper stories and people — after six months, there will be a story that says, you know, it isn’t the same thing.

It will be the same thing. You can count on that.

Charlie, what are your thoughts?

CHARLIE MUNGER: Well, I — my thoughts are very simple. I want to say to the many Mungers in the audience, don’t be so stupid as to sell these shares. (Laughter)

WARREN BUFFETT: That goes for the Buffetts, too. (Laughter)

12. Partnering with 3G Capital for $23B Heinz deal

WARREN BUFFETT: OK. Becky?

BECKY QUICK: This is a question that comes from Ben Knoll, who happens to be the chief operating officer at the Greater Twin Cities United Way.

And he writes in that after the Heinz deal, there was a column that was written indicating that you had gotten the better end of the Heinz deal from your Brazilian partners [3G Capital].

That column said that your return was likely to come from the preferred stock dividends, with the common equity portion being dead money.

It also said that the way the deal was structured indicated your low expectations for the market overall.

Is this an accurate portrayal of the deal and of your expectations for the market overall?

WARREN BUFFETT: No. It’s totally inaccurate.

The — it’s interesting. [3G Capital co-founder] Jorge Paulo Lemann and I were in Boulder, Colorado, in early December. And I can’t remember if it was — yeah, on the way to the airport or when we got in the plane. But he said that he was thinking about going to the people at Heinz and proposing a deal and would I be interested.

And I, because I knew both Heinz and I knew Jorge Paulo, and I thought highly, very highly, of both, I said, “I’m in.”

And maybe a week later — I don’t remember exactly how long — I received from Jorge Paulo, who I had known for many years starting at Gillette when we were both directors — I received a term sheet on the deal and another sheet on the governance procedures that he suggested.

And he said, “If you got any thoughts about changing this, just let me know.” They were just his thoughts.

It was an absolutely fair deal, and it was — I didn’t have to change a word in either the term sheet or the governance arrangement.

Now, we actually, Charlie and I, probably paid a little more than we would have paid if we had been doing the deal ourselves, because we think that Jorge Paulo and his associates are extraordinary managers.

They’re both classy, and they’re unusually good, and so we stretched a little because of that fact.

We like the business, and the design of the deal is such that if we do quite well over time at Heinz, that their 4.1 billion will achieve higher rates of return than our overall 12 billion.

We have a less-leveraged position in the capital structure than they have. We created — they wanted more leverage, and we provided that leverage on what I regard as fair terms and what they regard as fair terms.

If anybody thinks that the common is dead money, you know, we think they’re making a mistake.

But we’ll know the answer to that in five years.

But the design of the deal, essentially — we have more money than operating ability at the parent company level, and they have lots of operating ability and wanted to maximize their return on 4 billion.

So my guess is that five years from now or ten years from now, you will find that they’ve earned a higher rate of return on their investment. But because we put more dollars in, we will have received that same rate of return on our 4 billion, plus of cap common equity, but we also will have received a very fair return on the 8 billion that we put in that created more leverage for them.

Charlie?

CHARLIE MUNGER: Well, as you said, the report was totally wrong. (Laughter)

WARREN BUFFETT: That’ll teach them. (Laughter)

13. Moving into commercial insurance

WARREN BUFFETT: OK. We have Cliff Gallant from Nomura who will ask insurance-related questions for this meeting.

CLIFF GALLANT: Thank you.

At Berkshire Hathaway Reinsurance group, Mr. Ajit Jain appears to be employing a new strategy recently with some high profile actions.

Berkshire signed a portfolio underwriting arrangement with Aon to do business with Lloyd’s. And then last week, there was the hiring of several AIG executives.

It appears that Berkshire may be taking a broader share of the market.

What is the goal of these moves, and won’t these actions eventually produce more average results?

WARREN BUFFETT: Well, you — the goal is to take a greater share of the market.

There have been two important moves made by Ajit’s operation in the last month or so.

One is the — the first one that was announced — was this participation of 7 1/2 percent in all of the business.

Originally, it was announced as applying to the Lloyd’s market. I believe it’s been extended to the entire London market.

And, now, bear in mind that the people that are insured still have the right to pick who their insurers shall be, so it isn’t totally automatic that we receive 7 1/2 percent of every slip.

But we had had an arrangement for a couple of years with Marsh on a marine book and perhaps some other areas, but not across the board.

And we think that — we think that the profit possibilities are reasonable for that business, or we wouldn’t have entered into it.

It will give us more of a cross-section of business than we’ve been used to having, but it doesn’t mean that we give up our present business at all, either.

The second item you mentioned is just in the last week or thereabouts. It was announced that four pretty well-known insurance people that had been with AIG had joined us to write, primarily, commercial insurance, initially domestically, perhaps, but around the world.

And these are people that reached out to Berkshire. In the case of at least one of them, even reached out a number of times in the past.

But we were ready to enter this field with these people who were very able people. We’ve had a number of people reach out since the announcement was made only a week or so ago.

So I think you will see Berkshire, in addition to all of the other insurance businesses that has had over the years, I think you’ll see us become a very significant factor, worldwide, in the commercial insurance business.

I mean, it could be business that reaches into the billions. In fact, I would hope that it would — it could be — you know, a fair number of billions over time.

And we’ve got the right people. We’ve got capital like nobody else has. We have the ability to sign on to coverages that other people have to spread out among others.

So, I think we’re ideally situated to go into this business, and I’m looking forward to it.

Charlie?

CHARLIE MUNGER: Well, generally speaking, I don’t think the reinsurance business is a very good business for most people.

And I think it’s a very desirable part of Berkshire’s business, the way it’s run, but it’s different from something like the other businesses, which would work pretty well if somebody else owned them.

I think our reinsurance business under Ajit is very peculiar, and other people who think it’s easy are going to find out that it isn’t.

WARREN BUFFETT: Yeah. And I should point out, this commercial insurance business also, I mean, it will be primary insurance. The Aon arrangement is a reinsurance arrangement, but we will be in the primary business.

So, it will be large commercial risks, but there’s a lot of premium buy-in there, and there’s a lot of chances to make mistakes.

But I’d rather have the group we have overseeing that business than any other group I can think of.

14. GEICO vs Progressive’s Snapshot

WARREN BUFFETT: OK. Station 2?

AUDIENCE MEMBER: Hi. Mike Sorenski (PH) from New York.

In regards to GEICO, Warren, last year you said the firm had no plans to adopt usage-based driving technology, similar to what competitor Progressive —

WARREN BUFFETT: Right.

AUDIENCE MEMBER: — called Snapshot.

Is that still the case, and if so, why wouldn’t that technology give GEICO better data to potentially give discounts to customers?

WARREN BUFFETT: Yeah. That still is the case, and Snapshot has attracted a fair amount of attention and there are other companies doing that.

It’s an arrangement, essentially, to tie — well, the term “Snapshot,” perhaps, says it — to get a picture of how people really do drive.

Insurance underwriting, you know, is an attempt to figure out the likely propensity, based on a number of variables, of a person having an accident.

Now, you know, in life insurance, it’s very obvious that somebody 100 is — if you don’t know anything else about them — is more likely to die in the next year than somebody that’s 20.

When you get into auto insurance, figuring out who’s likely to have an accident involves assessing a number of variables, and different companies go at it different ways.

Clearly, on statistics, if you’re a 16-year-old male, you’re more likely to have an accident than I am.

Now, that isn’t because I’m a better driver. It’s because the 16-year-old is probably driving about ten times as much, and he’s trying to impress the girl sitting next to him.

And that doesn’t work with me anymore, so I’ve given it up. (Laughter)

But the — we ask a number of questions, and our attempt, as much as possible, is to figure out the propensity of any given applicant, or the possibility, that they will have accidents.

And there are a number of variables that are quite useful in predicting. And Progressive is focusing on this Snapshot arrangement, and we’ll see how they do.

I would say that our ability to sell insurance at a price that’s considerably lower than most of our competitors, evidenced by the fact that when people call us, they shift to us, and, at the same time, earn a significant underwriting profit, indicates that our selection process is working quite well.

I mean, if your selection process is wrong, if you treat a 16-year-old male and give him the same rate that you’d give a 40-year-old that’s driving their car 3 or 4,000 miles a year, you know, you’re going to get terrible underwriting results.

So our systems, our underwriting criteria, have been developed, you know, over many decades. We have a huge number of policyholders, so that it becomes very credible, these different underwriting cells.

And everybody in the business is trying to figure out ways to predict with greater accuracy the possibilities that a given individual will have an accident.

And Progressive is focusing on this Snapshot approach, and we watch it with interest, but we’re quite happy with the present situation.

OK. Andrew Ross Sorkin?

Oh, Charlie, I’ve got to give you a chance to comment.

CHARLIE MUNGER: I have nothing to add. (Laughter)

15. Business Wire and new rule allowing internet disclosures

WARREN BUFFETT: OK. Andrew?

ANDREW ROSS SORKIN: OK. Warren, we got a couple questions related to this.

Warren, now that you’re on Twitter and the SEC is allowing companies to make material announcements over social media, what are the implications for Business Wire, a unit of Berkshire?

Do you agree with the SEC’s new position on the distribution of material information, and would you consider selling Business Wire given the new rules?

If not, how do you think Business Wire will have to transform itself? And, by the way, what are you doing on Twitter? (Laughter)

WARREN BUFFETT: I haven’t figured that last one out yet.

The — no, I think it is a mistake. Some companies have announced — made important announcements — on webpages, and some, in certain cases, they’ve messed it up and caused a fair amount of trouble.

But the key to disclosure is accuracy and simultaneity. I mean, if we own stocks, or are thinking about owning stocks, we want to be very sure that we get accurate information and we get it exactly at the same time as all other people.

And Business Wire does a magnificent job of that.

And I do not want, if I’m buying Wells Fargo, or selling it, or whatever it may be, I do not want to have to keep hitting up to their webpage, or something, and hoping that I’m not 10 seconds behind someone else if there’s some important announcement.

So, Business Wire has got a traffic record of accuracy and of getting the information to every part of the globe in a simultaneous manner, and that is the key to disclosure.

And I think — I don’t think that — I don’t think anything has come close to doing that as well as Business Wire.

So I think we will do very well. We’ve got a sensational manager in Cathy Baron Tamraz.

I couldn’t be happier with the business, so we will not be selling it. And if I could clone Cathy, I would do it.

I will not — Berkshire, when it puts out its information — and we like to put it out, actually, after the market closes because we think there’s so much to digest that it’s a terrible mistake to have people try and figure it all out in reading a one- or two-page announcement.

But anything important from Berkshire, or any of our companies, is going to come out on Business Wire so that people get accurate information at exactly at the same time.

Charlie?

CHARLIE MUNGER: Well, it’s very hard for me to know anything about Twitter when I’m avoiding it like the plague.

WARREN BUFFETT: He sent me out to venture in it, and he’s going to see if anything bad happens to me. (Laughter)

16. As Berkshire grows, it’s paying more for bigger acquisitions

WARREN BUFFETT: OK. We now have a short seller in a first, I believe, at any meeting, Doug Kass.

DOUG KASS: Thank you, Warren and Charlie. Thanks for this unusual invitation. I’m honored, and I look forward to playing the role of Daniel in the lion’s den in front of 45,000 of your closest friends and greatest admirers.

WARREN BUFFETT: You can bring your own crowd next year. (Laughter)

DOUG KASS: I would note, you have me asking the last question in the group, though.

My first question is a follow-up to Carol Loomis’s first question. Warren, it’s said that size matters.

WARREN BUFFETT: It does. (Laughter)

DOUG KASS: In the past, Berkshire has purchased cheap or wholesale. For example, GEICO, MidAmerican, your initial purchase of Coca-Cola.

And, arguably, your company has shifted to becoming a buyer of pricier and more mature businesses, for example, IBM, Burlington Northern, Heinz, and Lubrizol. These were all done at prices, sales, earnings, book value multiples, well above your prior acquisitions and after the stock prices rose.

Many of the recent buys might be great additions to Berkshire’s portfolio of companies; however, the relatively high prices paid for these investments could potentially result in a lower return on invested capital.

You used to hunt gazelles. Now you’re hunting elephants. As Berkshire gets bigger, it’s harder to move the needle.

To me, the recent buys look like preparation for your legacy, creating a more mature, slower-growing enterprise.

Is Berkshire morphing into a stock that has become to resemble an index fund and that, perhaps, is more appropriate for widows and orphans, rather than past investors who sought out differentiated and superior compounded growth?

WARREN BUFFETT: Yeah. There’s no question that we cannot do as well as we did in the past, and size is a factor.

Actually, the — it depends on the nature of markets, too. We might — there will be times when we’ll run into bad markets, and sometimes there our size can even be an advantage. It may well have been in 2008.

But there — I would take exception to the fact that we paid fancier prices in some cases than, say — in GEICO, I think we paid 20 times earnings and a fairly-sized — good-sized — multiple of book value.

So we have paid up — partly at Charlie’s urging — we’ve paid up for good businesses more than we would have 30 or 40 years ago.

But it’s tougher as we get bigger, I we’ve always known that would be the case.

But even with some diminution from returns of the past, they still can be satisfactory and we are willing — there’s companies we should of bought 30 or 40 years ago that looked higher priced then, but we now realize that paying up for an extraordinary business is not a mistake.

Charlie, what would you say?

CHARLIE MUNGER: Well, we’ve said over and over again to this group that we can’t do as well in percentage terms per annum in the future as we did in our early days.

But I think I can make the short seller’s argument even better than he did, and I’ll try and do that.

If you look at the oil companies that got really big in the past history of the world, the record is not all that good.

If you stop to think about it, Rockefeller’s Standard Oil is practically the only one, after it got monstrous, continued to do monstrously well.

So, when we think we’re going to do pretty well in spite of getting very big, we’re telling you we think we’ll do a little better than the giants of the past. We think we’ve got a better system.

We don’t have a better system than riding up oil, you know, but we have a better system than most other people.

WARREN BUFFETT: Yeah. In terms of the acquisitions we’ve made in the last five years, I think we feel pretty good about those and — overall — and, obviously, including the Heinz.

We are buying some very good businesses.

We actually, as we pointed out, we own eight different businesses that would each be on the Fortune 500 list if it was a separate company, and then in a few months, we’ll own half of another one, so we’ll have eight-and-a-half, in effect.

Well, you haven’t convinced me yet to sell the stock, Doug, but keep working. (Laughter)

17. Will U.S. dollar lose reserve currency status?

WARREN BUFFETT: Section 3.

AUDIENCE MEMBER: Thank you. Jonathan Schiff, visiting from Macau, China.

You briefly touched upon this. But on our side of the world, there’s a lot of discussion about the U.S. dollar’s status at the world’s reserve currency.

I’m sorry, there’s some feedback. It’s kind of weird.

What would be the effect upon the U.S. and the world economy if the dollar loses that status as a world reserve currency?

WARREN BUFFETT: Well, I don’t know the answer to that, but fortunately, I don’t think it’s going to be relevant.

I think the dollar bill will be the world’s reserve currency for some decades to come. I think China and the United States will be the two supereconomic powers, but I don’t see any — I think it’s extremely unlikely — that any currency supplants the U.S. dollar as the world reserve currency for many decades, if ever.

Charlie?

CHARLIE MUNGER: Well, there are advantages to a country that has the reserve currency, and if you lose that, you lose some advantage.

England had a better hand when it had the reserve currency of the world than it had later when the United States had the reserve currency of the world.

If that eventually happened to the United States, it would not be, I think, all that significant.

It’s in the nature of things that sooner or later every great leader is no longer the leader.

Over the long run, as Keynes said, we’re all dead, and over the long run —

WARREN BUFFETT: This is the cheery part of the section. (Laughter)

CHARLIE MUNGER: Well, if you stop and think about it, every great leading civilization of the past passed the baton.

WARREN BUFFETT: What do you think the probabilities are that the U.S. dollar will not be the reserve currency 20 years from now?

CHARLIE MUNGER: Oh, I think it’ll still be the reserve currency of the world 20 years from now. That doesn’t mean that it’s forever.

18. “Extraordinary” corporate profits despite tax complaints

WARREN BUFFETT: OK. Carol?

CAROL LOOMIS: This question comes from John Custabal (PH) of the Philadelphia area.

Mr. Buffett, you have said in the past, specifically in a 1999 speech that was printed in Fortune, quote, “You —”

WARREN BUFFETT: You would bring that up, wouldn’t you?

CAROL LOOMIS: I would bring that up, right. I’m so glad he sent this question.

“You have to be” — you have said, “You have to be wildly optimistic to believe that corporate profits, as a percent of GDP can, for any sustained period, hold much above 6 percent.”

Corporate profits are now greater than 10 percent of GDP. How should we think about that?

WARREN BUFFETT: What we should think is pretty unusual, and particularly considering the economic backdrop.

Corporate profits are extraordinary, as a percentage of GDP, at least looking back on the history of the United States.

And what’s interesting about it, of course, is that American business, to a great extent, is complaining enormously — or frequently, anyway — about the level of the corporate income tax.

Now, the corporate income tax is about half what it was 40 years ago, as a percentage of GDP. But yet, as you point out, corporate profits are at an all-time record, as a percentage of GDP.

So I would have you take with a grain of salt the complaint that American business is noncompetitive because of our corporate income tax rate, which gets so widely complained about.

American business has done extraordinarily well at a time when inequality, actually, is — has widened considerably — both measured by net worth and measured by income, if you take the top versus the people down below.

And — (loud noise) —

Well, we heard from one of the people here. (Laughter)

And, it will be interesting to see whether these levels can be maintained.

Corporate — business has come back very, very strong, in terms of profits, from the precipice that we were on in the fall of 2008, the panic.

Employment has not come back, the same way. And that’s going to be, I would say, a subject of a lot of public discourse. And you’re seeing — you’re reading more about that, currently.

If I had to bet on whether corporate profits would be 10 percent of GDP — and, of course, we’re talking about profits that are earned outside the United States, I believe, in that — in the figures you quote — I would say they’re likely to trend downward.

But I think that, of course, GDP will be growing, so that does not mean any terrible things will be happening to profits.

Charlie, what do you think about the —?

CHARLIE MUNGER: Well, I wouldn’t be too surprised if that 6 percent figure turned out to be on the low side, in the estimate.

Just because Warren thought something 20 years ago, doesn’t mean it’s a law of nature. (Laughter)

WARREN BUFFETT: We’ll talk this over at lunchtime. (Laughter)

How do you feel about 10 percent?

CHARLIE MUNGER: Well, I’m a natural conservative on such items.

But you’ve got to recognize that the stocks themselves are owned by a lot of endowments and pension funds and so on. So it — that figure doesn’t mean that the world’s becoming grossly more unequal.

There’s no automatic correlation between those two figures.

WARREN BUFFETT: Do you feel the corporate tax rate is too high?

CHARLIE MUNGER: Well, I think when the rest of the world is — keeps bringing the rates down, —there’s some disadvantage to us if we’re much higher. So I — (Applause)

I rather like Warren’s idea that people like us should pay more, but the corporate tax rate, I’m glad to have lower.

WARREN BUFFETT: OK. He’s the Republican; I’m the Democrat.

19. Too many subsidiaries for Buffett’s successor to manage?

WARREN BUFFETT: Jonathan? (Laughter)

JONATHAN BRANDT: Thanks, Warren.

You probably have a couple of dozen direct reports from the multitude of noninsurance businesses that Berkshire owns, and this arrangement seems to work wonderfully for you.

But I wonder if this could potentially pose a challenge to your successors.

Adding smaller units like Oriental Trading and the newspaper group, even if they are economically sound transactions individually, could arguably add to the unwieldiness of the organization.

How do you weigh the benefits of adding earnings with the risk of leaving a less-focused and harder-to-manage company for even highly capable successors?

WARREN BUFFETT: Yeah. I think my successor will probably organize things a little differently on that, Jonathan, but not dramatically so.

And we’ll certainly never leave the principle of our CEOs running their businesses in virtually all important ways except, perhaps — except for capital allocation.

But, I actually have delegated a few units to an assistant of mine, and my guess is that my successor will modestly organize things in a somewhat different way.

I’ve grown up with these companies and with the people and everything, and so it’s a lot easier for me to communicate with dozens of managers, sometimes very infrequently, because they don’t need it. It just — sometimes it’s their own preference to some degree.

And somebody coming in fresh would want, obviously, to be — to understand very well — and that person will understand, in fact, understands now — very well, the major units.

But you’re right, when you get down to units that we have, you know, some businesses that make, you know, only 5 or $10 million a year or something like that.

And my guess is that it gets rearranged a little bit, but that won’t really make any difference.

I mean, the real money is made by the big businesses. It will continue to be made by the big businesses, and the insurance business, and a little change in reporting arrangements, maybe one more person at headquarters if they go crazy, will really take care of things.

Charlie?

CHARLIE MUNGER: Well, I think, of course, it would be unwieldy to have so many businesses, a lot of them small, if we were trying to run them through an imperial headquarters that dominated all the details.

But our system is totally different. If your system is decentralization, almost to the point of abdication, what difference does it make how many subsidiaries you have?

WARREN BUFFETT: Yeah. It’s working pretty well now.

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: It’ll work pretty well afterwards, too.

But my successor is not going to do things identically. It’d be a mistake.

But the culture will remain unchanged. And the preeminence of the managers of the operating units will remain unchanged, and then every now and then something comes along and a change needs to be made. Sometimes it’s through death or disability, or sometimes a mistake is made.

But, in the end, we’re now trying to acquire companies that are at least at the $75 million pretax level.

Incidentally, the best acquisitions — to some extent, the best acquisitions — certainly from my standpoint makes it easier — is the one — is these bolt-ons that I talked about in the annual report, in which we did, I think, 2-and-a-half billion worth of last year, because they fall under the purview of managers that we’ve got terrific confidence in and they add really nothing to what happens at headquarters.

And, of course, the best bolt-ons out of all are when we do buy a — buy out — a minority interest.

When we buy $2 billion worth more of ISCAR, or a billion-and-a-half more of Marmon, with another billion-and-a-half to come in the next year, you know, that’s adding earning power without it, you know, posing any more work.

Those are the ultimate in bolt-on acquisitions, getting more of a good thing.

Charlie, any more on that, or—?

CHARLIE MUNGER: Well, if you stop to think about it, if it were all that difficult, what we’re doing now would be impossible, and it isn’t.

WARREN BUFFETT: I’ll have to think about that a little. (Laughter)

CHARLIE MUNGER: Well, think if 50 years — 20 years ago — they said to you, can you make something this size with a staff of ten or something in a little office in Omaha? People would’ve thought that’s ridiculous. But it’s happened, and it works.

WARREN BUFFETT: Well, we’ll let it go at that.

20. Dangers when Fed reverses economic stimulus

WARREN BUFFETT: Station 4? (Laughter)

AUDIENCE MEMBER: Thank you. Scott Moore (PH), Overland Park, Kansas.

With the Fed buying 85 billion per month of mortgage securities and Treasurys, what do you think are the long-run risks to this process, and how does the Fed stop this without negative implications? Thank you.

WARREN BUFFETT: Charlie, you answered that yesterday in an interview, so I’ll let you lead off.

CHARLIE MUNGER: My basic answer is I don’t know.

WARREN BUFFETT: Yeah. (Laughter)

I might say I have nothing to add. (Laughter and applause)

But Scott, you came from Overland, so we’ll do our best.

CHARLIE MUNGER: I think you’re— the questioner — is right to suspect that it’s going to be difficult.

WARREN BUFFETT: It’s going to be — yeah, it is really uncharted territory.

And as many people have found out, whether it was the Hunt Brothers buying silver or whatever it might be, it’s a lot easier to buy things, sometimes, than it is to sell them.

And the Fed’s balance sheet is up around 3.4 trillion now, and that’s a lot — those are a lot of securities.

And the bank reserve positions are incredible. I mean, Wells Fargo is sitting with $175 billion at the Fed earning a quarter of a percent, and really earning nothing, after attendant expenses.

So, there’s all this liquidity that’s been created. It hasn’t really hit the market because the banks have let it sit there.

You know, in classical economics, you know, that’s how you juice the economy, and you pushed it out by having the Fed buy securities and create reserves for the banks and all of those things.

But, believe me, the banks want loans. I mean, they are not happy — Wells is not happy — having 175 billion at the Fed, and they’re looking every place they can to get it out, with the proviso that they hope to get it back from whoever they get it out to, which can slow down a bank at times.

But it— we really are in uncharted territory. I’ve got a lot of faith in Bernanke. I mean, he — if he’s running a risk, he’s running a risk he knows and understands.

I don’t know whether he’s affected by the fact that his term expires pretty soon, so he just hands the baton off to the next guy and said, “Here. Here’s this wonderful balance sheet. And all you have to do is bring it down a few trillion dollars,” you know. (Laughs)

And I gave a few lectures at George Washington University last year, if you care to read them, and maybe it’ll help you.

The — this is something we haven’t seen. It certainly has the potential for being very inflationary. It hasn’t been so far. In fact, my guess is that the Fed wishes it had been a little more inflationary.

If you’re running up a lot of debt, it gets measured in relation to nominal GDP, and the best way to run up — easiest way to run up, not the best way — the easiest way to run up nominal GDP is to inflate, and my guess is that they never would admit it but that the — that at least some Fed members — are probably disappointed that they haven’t seen more inflation.

It won’t be when they start selling. It’ll be — when the market gets a — any kind of a signal — that maybe just the buying ends, maybe that selling will take place, you know, it’s likely to be the shot heard around the world.

Now, that doesn’t mean the world will come to an end, but it will certainly mean that everybody that owns securities and who’s felt that they’ve been driven into them by extremely low rates or that the assets have to go up in price because interest rates are so low, will start re-evaluating their hand, and people re-evaluate very fast in markets.

So, while I’ve been talking, Charlie, have you got any new insights?

CHARLIE MUNGER: Well, generally speaking, I think that what’s happened in the realm of macroeconomics has surprised all the people who thought they knew the answers, namely the economists.

Who would have guessed that interest rates could go so low and stay so low for so long? Or that Japan, a mighty, powerful nation, could have 20 years of stasis after using all the tricks in the economist’s bag?

So I think given this history, the economists ought to be a little more cautious in believing they know exactly how to stay out of trouble when they print money in massive amounts.

WARREN BUFFETT: It is a huge experiment.

CHARLIE MUNGER: Yeah. (Applause)

WARREN BUFFETT: What do you think the probabilities are that within ten years you see inflation at a rate of 5 percent or higher a year?

CHARLIE MUNGER: Well, I worry about even more than inflation.

If we could get through the next century with the same results we had in the last century, which involved a lot of inflation over that long period, I think we’d all be quite satisfied.

I suspect it’s going to be harder, not easier, in this next century. And it wouldn’t surprise me — I’m not going to be here to see it — but I would predict that we may have more trouble than we think — than we now think.

WARREN BUFFETT: Charlie says he won’t be here to see it, but I reject such defeatism. (Laughter)

21. Effects of low interest rates

WARREN BUFFETT: Becky?

BECKY QUICK: This is actually a follow-up to the shareholder from Overland Park, the question that was just asked.

This comes from Anthony Starace (PH) who is in Lincoln, Nebraska, and he says, “How has the Fed’s zero-interest policy affected Berkshire Hathaway’s various business segments? For example, has it helped or hurt their operations and profitability?”

WARREN BUFFETT: Well, it’s helped. You know it— interest rates are to asset prices, you know, sort of like gravity is to the apple.

And when there are very low interest rates, there’s a very small gravitational pull on asset prices.

And we have seen that getting played out. I mean, people make different decisions when they can borrow money for practically nothing than they made back in 1981 and ’2 when Volcker was trying to stem inflation and use — and the government bond rates got up to 15 percent.

So, interest rates power everything in the economic universe, and they have some effect on the decisions we make.

We borrowed the money on the Heinz purchase a lot cheaper than we could’ve borrowed it 10 or 15 years ago, so that does affect what people are willing to pay.

So it’s a — it’s a huge factor and, of course, it will — presumably — it will change at some point, although, as Charlie was pointing out in Japan, it hasn’t changed for decades.

So, if you wanted to inflate asset prices, you know, bringing down interest rates and keeping them down — at first, nobody believed they’d stay down there very long, so it reflects the permanence that people feel will be attached to the lower rates.

But when you get the 30-year bond down to 2.8 percent, you know, you are — you’re able to have transactions take place.

It makes houses more attractive.

I mean, it’s been a very smart policy, but the unwind of it, you know, has got to be more difficult, by far, than buying.

I mean, it is very easy if you’re the Fed to buy 85 billion a month and — I don’t know what would happen if they started trying to sell 85 billion.

Now, when you’ve got the banks with loads of reserves there, it might — it’d certainly — be a lot easier than if those reserves had already been deployed out into the real economy. Then you would really be tightening things up.

But I have — you know, this is like watching a good movie, as far as I’m concerned, because I do not know the end, and that’s what makes for a good movie.

So, we will be back here next year and I will — or maybe in two or three years — and I will tell you I told you so and hope you have a bad memory.

Charlie? (Laughter)

CHARLIE MUNGER: Well, I strongly suspect that interest rates aren’t going to stay this low for hugely extended periods. But as I pointed out, practically everybody has been very surprised by what’s happened, because what’s happened would’ve seemed impossible to practically all intelligent people not very long ago.

At Berkshire, of course, we’ve got this enormous float in the insurance business, and our incremental float, when we’re carrying huge amounts of cash, is worth less than it was in the old days.

And that, I suppose, should give some cheer to you people because if that changes, we may get an advantage.

WARREN BUFFETT: Yeah, we have 40 — at the end of the first quarter, we had, whatever it was, 48 or maybe 9 billion or something like that — in short-term securities.

We’re earning basically nothing on that. We do not — we never stretch for yield in terms of commercial paper that brings ten basis points more than Treasury.

Our money— we don’t count on anybody else, so we keep it in Treasurys, basically, and so we’re earning nothing on that.

So if we get back to an environment where short-term rates are 5 percent, and we would still have the same amount, then that would be a couple billion dollars of annual earnings, pretax, that we don’t have now.

But of course, it would have lots of other effects in our business.

We have benefited significantly, and the country has benefited significantly, by what the Fed has done in the last few years.

And if they can successfully pull off a reversal of this without getting a lot of surprises, you know, we will all have been a lot better off.

22. Building, not buying, commercial insurance growth

WARREN BUFFETT: Cliff?

CLIFF GALLANT: Thank you.

WARREN BUFFETT: Cliff, incidentally, you ran a 2:40 last year, didn’t you, in the marathon at Lincoln?

CLIFF GALLANT: I ran the Lincoln marathon after the shareholder meeting.

WARREN BUFFETT: OK. We’ve got incredible talent on this thing. (Laughter)

CLIFF GALLANT: I wanted to ask you more about the commercial insurance business and Berkshire’s interest.

WARREN BUFFETT: Right.

CLIFF GALLANT: If the business is attractive, why not make an acquisition? Do you think that public company valuations are too high today?

WARREN BUFFETT: Yeah. There aren’t too many commercial operations that we would want to acquire, big ones.

It wouldn’t do much — I mean, we’re acquired — when we acquired GUARD Insurance, it’s workers’ compensation, but it’s just — it’s a small acquisition. It’s a good acquisition, but that is a commercial, in effect, underwriter that we acquired late last year.

But, if you look at the big ones, some of them we wouldn’t want. There’s a couple that we would. But the prices would be probably far higher than what we think we might be able to develop a comparable operation for.

I mean, we — in effect — I think we’re going to build a very large commercial operation, and essentially we’ve built it at book value. And we pick up no bad habits of other companies, at least we hope we don’t.

And so, it’s really better to build than buy, if you can find the right people with the right mind-set, and everything, in the business.

And you know, we’ve got a terrific manager, obviously, in Ajit, and these other people have sought him out, so I think — if there were certain commercial operations, and we could’ve bought them at the right price, we’d have done it.

But we have not been able to do that so we will build our own. And I predict that we will have a good and significant commercial insurance operation in a relatively short time.

23. Munger: bitcoin won’t be “big universal currency”

WARREN BUFFETT: OK. Station 5?

AUDIENCE MEMBER: Good morning. My name is Benjamin. I’m from Appleton, Wisconsin, and I had a question for you regarding unregulated digital currency, such as bitcoin.

I was wondering what you think the significance of something like that showing up in the last few years is, and what you think that might mean for the future? Thank you.

WARREN BUFFETT: Charlie, I hope you know something about this subject because I don’t know a thing. (Laughs)

CHARLIE MUNGER: I know what he’s talking about.

WARREN BUFFETT: I know what he’s talking about, but I just don’t —

CHARLIE MUNGER: I have no confidence whatsoever in bitcoin being any kind of a big universal currency.

WARREN BUFFETT: That would certainly be my gut reaction, but I don’t — I haven’t really looked into it.

But I— I’ll put it this way: of our 49 billion, we haven’t moved any to bitcoin. (Laughter)

My— well, the truth is I don’t know anything about it. That doesn’t always stop me from talking about things, but it will in this case.

24. Pampered Chef isn’t a pyramid scheme

WARREN BUFFETT: OK. Andrew? (Laughter)

ANDREW ROSS SORKIN: OK.

Bill Ackman, the activist investor, who’s also a Berkshire investor as well, has raised questions in recent months about the legality of the multilevel marketing company Herbalife. He called it a pyramid scheme.

Berkshire owns a multilevel marketing company, too: the Pampered Chef.

Will Ackman’s attack on Herbalife have any impact on the Pampered Chef or Berkshire, and do you believe Ackman’s concerns are legitimate?

How do you think about the debate over multilevel marketing companies and decipher which ones are legitimate and which ones are not?

WARREN BUFFETT: Yeah. I don’t know anything— I’ve never actually even looked at a 10-K of Herbalife, so I do not know about their operation.

But, I think the key, obviously, is whether a direct marketing operation is really based on selling product to would-be distributors of one sort, and loading them up, instead of sell— in effect — selling it to end users.

And Pampered Chef is a million miles away from anything where the money is made, in any way, by selling to level A, and then those people selling to level B, and all that sort of thing.

It is true that certain people — lots of people — get paid on the results — the selling results — of other people that they recruit.

But this business of loading up people with a couple-hundred dollar package of something that they never sell, and that being sort of the main business — and I don’t know anything about Herbalife on this, I do know about Pampered Chef — and that is not Pampered Chef’s business.

Pampered Chef’s business is based on selling to the end user.

And we have thousands and thousands and thousands of parties every week where people who are actually going to use the product buy it from somebody, and we are not making it — we’re not making the money — by loading up people and then having them leave the sales force and our profit coming from that.

Charlie?

I think that should be the distinguishing characteristic. If I were regulating the industry, I would look very hard at operations where thousands of people got their hopes as to earning a living by selling the product, invested their savings, and buying a whole bunch of product that they didn’t need themselves, and then sort of being — abandoning the hope and being left with the product.

And the parent company just— or the main company — just going out and selling millions and millions of people on a dream that was not fulfilled.

Charlie?

CHARLIE MUNGER: Well, there’s likely to be more flimflam in selling magic potions than pots and pans. (Laughter)

WARREN BUFFETT: At our age, we’re in the market, though, for any magic potions, if any of you have them. (Laughter)

That’s the extent of your comment, I assume, Charlie?

CHARLIE MUNGER: Yes.

25. “Lender of last resort” after Buffett?

WARREN BUFFETT: OK.

Doug?

DOUG KASS: Warren —

WARREN BUFFETT: Doug. (Laughs)

DOUG KASS: Warren. (Laughter)

Much of Berkshire’s returns over the last decade have been based on your reputation and your ability to extract remarkable deals from companies in duress, as compared to the past, when you conducted yourself more as a value investor digging and conducting extensive analysis.

What gives you confidence that your successor’s imprimatur will be as valuable to Berkshire as yours has been?

WARREN BUFFETT: Well, the successor will probably have even more capital to work with, and they will have capital, presumably, from time to time, when markets are in distress.

And at those times, very few people — few people have the capital, and a lot fewer people have the willingness, to commit.

But I have no question that my successor will have unusual capital at times when — at turbulent times when — the ability to say “yes” very quickly with very large sums sets you apart from virtually anybody in the investing universe.

And I would not worry about that successor being willing to deploy capital under those circumstances, and being called upon.

I mean, Berkshire is the 800 number when there’s really, sort of, panic in markets, and for one reason or another, people need significant capital.

Now, that’s not our main business. You know, it happened a couple times in 2008. It happened once in 2011. But that’s not been our main business, but it’s fine. And it will happen again.

And I would think if you come to a day when the Dow has fallen 1,000 points a day for a few days, and the tide had gone out and we’re finding out who’s been swimming naked, that those naked swimmers may call Berkshire — they will call Berkshire — if they need lots of money.

I mean— and Berkshire’s reputation will become even more solidified, in terms of being willing to provide capital for sound deals at times when most people are frozen.

And when that happens when I’m not around, it becomes even more the Berkshire brand and not anything attached to a single individual.

Charlie?

CHARLIE MUNGER: Well, I would argue that in the early days, Warren had huge success as a value investor in little-owned companies because his competition was so small.

If he stayed in that field, he would have to be in bigger companies, and his competition would be way more intense.

He’s gotten into a field, being a good home for a big companies that don’t want to be controlled in meticulous detail by headquarters, where there isn’t much competition.

So I would argue that he’s done exactly the right thing, and it’s ridiculous to think that the past is the thing he should have stayed in.

WARREN BUFFETT: Well, we will send— I think he’s probably referring to something like the Bank of America transaction or Goldman Sachs and GE — and there will come a time, in markets, where large sums — I’ve gotten calls on other things, too, but —

CHARLIE MUNGER: Yeah, but other people are not getting the calls.

WARREN BUFFETT: Well, they don’t have the money and they don’t have the willingness to act immediately.

And Berkshire will — those qualities will remain with Berkshire after I’m gone.

In fact, in a sense, the area we occupy becomes more and more our own as we get even bigger, I would say, Charlie.

CHARLIE MUNGER: That’s what I like about it. (Laughter)

26. We only buy from willing sellers

WARREN BUFFETT: OK. Station 6?

AUDIENCE MEMBER: Hi. My name is Andre from Beverly Hills, California.

During very key events, like the Sanborn incident, when you were buying See’s, or when you were buying Berkshire stocks, you persuaded people to sell you their shares when they really didn’t want to.

What were your three keys to influencing people in those specific situations?

WARREN BUFFETT: Yeah. I don’t think — you brought up Sanborn and you brought up See’s and— I don’t think —the See’s family, there had been a death in the See’s family— it was Larry See, wasn’t it, that died?

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: And he had been the instrumental, I guess, grandson of Mary See, and the operator, and there was a— the rest of the family really didn’t want to run the business.

So it was put up for sale, and I didn’t even hear about it until they’d had one other party— I don’t know even know who it was— but that they negotiated a deal with and that it didn’t go through.

Charlie probably remembers this better than I do. We certainly — the See family— and Charlie persuaded me to buy it. We didn’t persuade them to sell it. Charlie?

CHARLIE MUNGER: Yeah. We didn’t buy anything from any unwilling sellers.

WARREN BUFFETT: No. And Berkshire, we started buying that in 1962 in the open market. It had quite a few shareholders. It was a — it traded fairly actively, and we bought a lot of stock, and we did buy a couple of key pieces.

We bought one from Otis Stanton, who was Seabury Stanton’s brother, but Otis wanted to sell.

It wasn’t the most attractive business in the world. I mean, here was a textile company that lost money in most of the previous years, and over a ten-year period, that had significant losses. And it was a northern textile company.

So, we bought stock in the market, a lot of stock in the market. We had two big blocks from Otis Stanton and from some relatives of Malcolm Chace, but they were happy to sell.

I never met — at the time I bought the stock from Otis Stanton — I had never met him, and so I delivered no personal sales talk to him.

And the same thing is true of the Chase family, not Malcolm himself, but some relatives, they sold us a block of 100,000 shares. But we were not out convincing anybody to sell their stock.

So there’s been very little that I can remember where — we talked to Betty Peters about avoiding a transaction we thought was dumb, when Wesco was considering merging with Financial Corp of Santa Barbara.

I flew out to see her in San Francisco. But she stayed with us. She did not sell her stock and remains a shareholder to this day, 30-plus years, almost 40 years later.

Charlie?

CHARLIE MUNGER: Well, I’ve got nothing to add to that at all.

27. Berkshire’s edge for acquisitions

WARREN BUFFETT: OK. Then we’ll go to Carol.

CAROL LOOMIS: This question comes from Mark Trautman of Crested Butte, Colorado.

And you’ve touched on this, Warren and Charlie, on little fringes today, but this is a direct question.

“Warren, both you and Charlie have described over the years how you have built Berkshire Hathaway to be sustainable for the long term.

“I am having difficulty explaining to my 13-year-old daughter, and frankly, to many adults, also, in easy to understand terms, Berkshire’s business model and long-term sustainable, competitive advantage.

“Can you give all of us, and particularly my daughter, Katie, who is here today, the Peter Lynch two-minute monologue explaining the business of Berkshire Hathaway and its merits as a long-time investment for future decades?”

WARREN BUFFETT: OK, Charlie, you talk to Katie. (Laughter)

I’m going to have some fudge. (Laughter)

CHARLIE MUNGER: All right. I’ll try that.

We’ve always tried to stay sane, and other people, a lot of them, like to go crazy. That’s a competitive advantage. (Laughter and applause)

Number two: as we’ve gotten bigger, we’ve used this sort of golden rule that we want to treat the subsidiaries the way we would want to be treated if we were in the subsidiaries.

And that, again, is a very rare attitude in corporate America, and it causes people to come to us who don’t want to come to anybody else. That is a long-term competitive advantage.

We’ve tried to be a good partner to people who come to us and need a partner with more money. That is a competitive advantage.

And so, we are leaving behind a field that’s very competitive and getting into a place where we’re more unusual.

This was a very good idea. I wish we had done it on purpose. (Laughter)

WARREN BUFFETT: A few years ago, a person who’s in this audience, I believe, came to me and he was in his 60s, and he said that for about a year, he’d been thinking about selling his business.

And the reason he had been thinking about it was not because he wanted to retire. We’re not — we very seldom buy businesses from people who want to retire. He didn’t want to retire at all. He loved what he was doing.

But he’d had an experience in buying a business a few years earlier from a family where he had known the fellow that built it, the fellow had died, and then just everything bad started happening in the family and the business and the employees, everything else.

So he really wanted to put to bed the question of what happened with his business.

It wasn’t that he really cared a lot about monetizing it or having the money. He just wanted — he wanted to put his mind at ease, that what he had spent lovingly building up over 30 or 40 years was not going to get destroyed — or that his family would get destroyed — if he — if he made a — if he died.

So he said he thought about it a year. And he thought about it and he thought, “Well, if I sell it to one of my competitors” — and they would be a logical buyer, they usually are. That’s why we have antitrust laws.

If he sold it to a competitor, they would come in and basically they would put their people in charge.

They would have all these ideas about synergy, and synergy would mean that the people that had helped him build the business over 30 years would all get sacked and that the acquiring company would come in like Attila the Hun and be the conquering people, and he just didn’t want to do that to the people that helped him over the years.

And then he thought he could — he might — sell it to some private equity firm. And he figured that if he sold it to them, they’d load it up with debt, which he didn’t like, and then they’d resell it later on. And so he would, again, have lost control and they might do the same thing that he didn’t want to have happen in the first place, in terms of selling it to a competitor, or whatever it might be.

So when he came to me, he said — he described this — and he said, “It really isn’t because you’re so attractive.”

But he said, “You’re the only guy left standing. You know, I mean, you’re not a competitor, you’re not a private equity firm, and I know I will get a permanent home with Berkshire and that the people that have stayed with me over the years will continue to get opportunities and they will continue to work for me. I’ll keep to get doing what I love doing, and I won’t have to worry about what will happen if something happens to me tonight.”

Well, that company has turned out to be a wonderful acquisition for Berkshire, and our competitive advantage is we had no competitors. And I think — well, we will see more of that. We’ve seen a lot of that over the years. We’ll see more of it.

Charlie, anything?

And I don’t think you mentioned the fact that developing a shareholder base, too, that’s different than —we do look at shareholders as partners, and, you know, it’s not something a public relations firm wrote for us, or anything of the sort. We want you to get the same result we get, and we try to demonstrate that in every way we can.

28. BNSF outlook for carrying coal and oil

WARREN BUFFETT: Jonathan?

JONATHAN BRANDT: I have a — (Applause)

I have a couple questions about Burlington Northern’s two energy franchises, coal and crude.

WARREN BUFFETT: Uh-huh.

JONATHAN BRANDT: Given that coal-fired generation is in gradual structural decline, can you discuss whether the tracks, locomotives, and other assets used to deliver coal can be redeployed, equally profitable, serving other customers? Are those assets fungible?

Can you also discuss whether crude by rail can continue to grow even as pipelines are built to serve the Bakken, and as the currently large geographic spreads in crude prices potentially narrow?

You’ve talked about the flexibility of crude by rail on TV. Can you elaborate on that, please?

WARREN BUFFETT: Yeah. If there was no coal moving, we would not find a lot of use for some of the tracks we have, there’s no question about that.

So, the — I think what you’re talking about would be very gradual over time. But, I mean, the outlook for coal is not the same as the outlook for oil.

A lot of the coal, in terms of the year-by-year fluctuations, may depend on the price of natural gas because some of the generating capacity can go in either direction.

In terms of oil, I think the view a few years ago was that there might just be a little blip in terms of rail transportation. But I’ve talked to some oil producers, the largest up there in the Bakken, and I think there will be a lot of rail usage for a long time, in fact, increased rail usage.

Oil moves a whole lot faster, incidentally, by rail than it does by pipeline. Most people have sort of a visual conception that the oil is flowing at terrific speeds through pipelines and that the railcars are sitting on the sidelines someplace.

But it’s just the opposite. You can move oil a lot faster.

And with change — with different market prices and different refinery situations and all that — there’s a lot of flexibility in the oil transportation by rail.

Matt Rose is right up front here, and if somebody would give him a microphone, I think he can probably tell you a lot more about moving coal and oil than I can. Matt?

We got a spotlight someplace that can focus right on here?

MATT ROSE: Yes. So, Warren, the two franchises are really different. That’s just the way the geographic is laid out.

We expect the coal franchise to basically stay about where it is today, depending on natural gas prices as well as what happens with the EPA.

Our crude by rail, right now we have about 10 loading stations in the Bakken with about 30 destination stations. We’re currently in negotiation, looking at about another 30 destination stations.

So it’s really an exciting time right now. We’re handling about 650,000 barrels of crude a day. We think we’ll be at 750 by the end of this year, and we see a pathway to a million-two to a million-four.

WARREN BUFFETT: When you think of the whole country producing 5 million barrels a day not long ago, that is a lot of oil.

And of course, it isn’t just the Bakken. You know, the shale developments, they can open up a lot of things over time.

29. Sorry to see Harley-Davidson notes expire

WARREN BUFFETT: OK. Station 7?

AUDIENCE MEMBER: Good morning, Warren and Charlie. My name is Bill Hennessy (PH) and I’m from Milwaukee, Wisconsin.

I have a similar question. Back in 2009, you made a substantial investment in Harley-Davidson with the five-year term at 15 percent. I noticed that note comes due in 2014.

What are your plans or thoughts once that investment comes due?

WARREN BUFFETT: Well, what we’d like to do is not answer the mail, and just let him keep paying his 15 percent, but that won’t happen.

The — no, those were — we had a few private transactions during a period when the corporate bond market was basically frozen and received unusual terms, although the best terms those companies obviously could obtain at that time. And those deals are coming due, and I wish the five-year deals had been ten-year deals.

But, now those — that was a special time. And in effect, that’s a depleting asset that we have that’s left over from five years ago.

We won’t see anything like that for a while, but we’ll see similar things at some point in the future.

I mean, the world is given to excesses, and they have consequences, and we are always willing to act.

I mean, we did not think Harley-Davidson was going to go broke. I mean, it was that simple.

You know, any kind of company that gets its customers to tattoo ads on their chest can’t be all bad, you know, I mean— (Laughter)

But it will be a sad day when the Harley-Davidson notes mature.

30. Todd Combs and Ted Weschler’s stock-picking independence

WARREN BUFFETT: OK. Becky?

BECKY QUICK: This question comes from Andishi Tuzush (PH) who asks, “If Todd Combs and Ted Weschler, if they purchase stock in a company that you have reviewed before and did not believe to be a good investment, would you share your thoughts with them?”

WARREN BUFFETT: I would probably not know they were even buying it until, maybe, a month after they started.

I do not — they do not check with me before they buy something.

I gave them each another billion dollars on March 31st, and I do not know whether they’ve spent the billion or whether — which stocks they bought or—

Now, I will see it on portfolio sheets. I get them monthly, but they’re in charge of their investments.

They’ve got one or two things that they’re restricted on, in terms of— things that — for example, if we own a chunk of American Express, and under the Bank Holding Company law we would not be able to buy another share.

So there’s a couple things like that — restrictions they have. But otherwise, they have no restrictions on what they buy.

They’ve bought things I wouldn’t buy. You know, I buy things they wouldn’t buy. That part of the investment process.

I do not tell them how much to diversify. They can put it all in one stock if they want to. They can put it in 50 stocks, although that’s not my style.

They are managing money. And when I managed money, you know, I wanted to be a free agent.

If he wanted to give me — they could make the decision on whether they wanted to give me the money, but once they gave me the money, and I had the responsibility for managing it, I wanted free reign to do what I wanted. And I did not want to be held responsible for things with my hands tied.

And that’s exactly the position we have with Todd and Ted now.

It takes a lot of — it’s an unusual person that we will give that kind of responsibility to. That’s not something that Charlie and I would do lightly at all.

But we thought they deserved the trust when we hired them, and we believe that more than ever after watching them in action for a time.

Charlie?

CHARLIE MUNGER: What can I say in addition to that?

31. Why GEICO isn’t copying Progressive’s Snapshot

WARREN BUFFETT: OK. Cliff?

CLIFF GALLANT: Thank you. I wanted to ask a follow-up question about Snapshot at Progressive.

Now, I realize that GEICO’s first quarter numbers are very good, things are going very well at the company.

But Progressive is claiming that the data is profound, that they’re getting from Snapshot. That they can give their best drivers 30 percent rate cuts, and those customers are still their most profitable customers.

We have a lot of GEICO policyholders here today. I’m sure they’re very good drivers.

Why shouldn’t they go try Snapshot and try to save 30 percent or more? Why isn’t GEICO investing in what I think appears to be a credible underwriting tool and potential threat?

WARREN BUFFETT: Yeah. They — I don’t think — but obviously Progressive disagrees with us — but I don’t think their selection method is better than ours. And I would say that I might even feel that ours is a little bit better than theirs.

But every company has a different approach to it.

Peter Lewis, who runs Progressive, when he started the company— he told me this story himself. I mean, it was a tiny, tiny little company. It came out of a mutual company, as you know.

And he went in the motorcycle business. And the first guy that he insured— or the first loss, I think, that was reported— came from some guy that was redheaded, and he just decided not to insure any redheads for a while. (Laughter)

That — you know—when you don’t have very much money, you can’t afford to experiment too long.

Well, Peter learned that that was not a criteria, and he knew that, but he had fun telling the story.

But all we’re trying to do— if I’m looking at all these people here and I’m going to issue them insurance policies for the next year, I’m going to charge different rates to different people.

And, if I’m going to sell them life insurance, I’m going to charge different rates to them. If I’m going to sell them health insurance, I’m going to charge different rates.

There’s a different — there’s a different probability attached to each individual, based on a whole lot of variables.

And Progressive — before Snapshot, they had a different selection approach than GEICO.

And like I say, ours has worked very well and we think it will continue to work well.

And we are obtaining, under our selection system, we are obtaining a hugely disproportionate number of new policyholders compared to the growth in the market, so our rates are attractive and our underwriting results are attractive.

And we continue, always, to look for further ways, obviously, to refine the selection technique.

But we don’t do any of it lightly because what we’re doing now is working very well.

And I just invite you to compare the Progressive results with the GEICO results in the next two or three years, and I will — if we’re wrong — I will be here to freely admit that we were wrong, but I don’t think we will be.

OK, station 8?

Oh, Charlie, you want to add something?

CHARLIE MUNGER: Well now, obviously, we’re not going to immediately copy the oddball thing that every single competitor does in the world, particularly when we’ve got an operation that’s working so well.

WARREN BUFFETT: If I were starting in the direct auto insurance business, I think I would attempt to copy GEICO.

It wouldn’t work, but it would offer you the best chance, I think. It’s a remarkable system.

And Tony Nicely, you can’t give him enough credit. I mean — you know, we will — I hope we will — gain a million policies this year.

The entire industry, I don’t think, will gain more than a million-and-a-half. So we will probably get two-thirds — in my view — we’ll get two-thirds of all the growth and we’ll do it profitably, and we’ll save people a lot of money. So I think that’s quite a company.

32. We rely on sugar and caffeine, not to-do lists

WARREN BUFFETT: OK. Station 8?

AUDIENCE MEMBER: Hi. My name is Alex, and I’m from Los Angeles.

Mr. Buffett, I’ve heard that one of your ways of focusing your energy is that you write down the 25 things you want to achieve, choose the top 5, and then avoid the bottom 20.

I’m really curious how you came up with this, and what other methods you have to prioritizing your desires?

WARREN BUFFETT: Well, I’m actually more curious about how you came up with it, because — (laughter) — it really isn’t the case.

It sounds like a very good method of operating, but it’s much more disciplined than I actually am. (Laughter)

If they stick fudge down in front of me, I eat it, you know, I’m not thinking about 25 other choices. (Applause)

So I don’t mean to —you know, Charlie and I live very simple lives. We know what we do enjoy, and we now have the option of doing it, pretty much.

Charlie likes to design buildings. I mean, he’s not—he’s no longer a frustrated architect — he’s a full-fledged architect now. And, you know — and we both like to read a lot.

But we — I’ve never made lists. I can’t recall making a list in my life, but maybe I’ll start.

You’ve given me an idea. Thank you.

Charlie?

CHARLIE MUNGER: Well, what’s really interesting on the subject of Warren’s operating methods, you can see happening here.

We didn’t know, when we started out, this modern psychological evidence to the effect that you shouldn’t make a lot of important decisions when you’re tired and that making a lot of difficult decisions is tiring.

And we didn’t also know, as well as we now do, how helpful it is to be consuming caffeine and sugar when you’re making important decisions. (Laughter)

And what happens, of course, is that both Warren and I live entirely on autopilot, in terms of the ordinary decisions in life, which is totally habitual, so we don’t work — waste — any decision making industry — I mean energy — on that stuff, and we’re ingesting caffeine and sugar.

And, it turns out, under the modern evidence, this is an ideal way to sit where Warren sits. And he didn’t know that, he just stumbled into it. (Laughter)

WARREN BUFFETT: When we write our book on nutrition, it promises to be a huge seller. (Laughter)

CHARLIE MUNGER: I cannot remember an important decision that Warren has made when he was tired.

He’s never tired. (Laughter)

He sleeps soundly, and he doesn’t waste time thinking about what he’s going to eat. As you say, he just eats what he’s always eaten.

You know, his style turns out to be absolutely ideal for human cognition. (Laughter)

It looks peculiar, but he stumbled into something very good.

WARREN BUFFETT: You can write the forward to my next book. OK. (Laughter)

33. Buffett defends buying newspaper companies

WARREN BUFFETT: Andrew?

ANDREW ROSS SORKIN: This following question comes from a shareholder who asked to remain anonymous.

They write, “I’m from Omaha, and I’m thrilled you bought our newspaper as a local citizen, but not so much as an investor in Berkshire.

“I read your reasons for acquiring newspapers, but it still doesn’t make sense to me, economically, given the downward trends in the industry.

“Don’t you think there are other businesses with higher rates of return that you could buy?

“Why would you buy such a small business, since you always say you want to buy elephants?

“Please quantify exactly what rate of return you expect from the newspapers.” (Scattered applause)

WARREN BUFFETT: Yeah. I would say that we will get a decent rate of return.

Whether it’s — most of them, incidentally, have been bought, and they were either S corporations or partnerships of some sort.

So they — compared to buying a Heinz, for example, or a BNSF or something of the sort — they actually have a certain structural advantage in terms of the eventual return after tax, because we get to write off the intangibles we’re purchasing.

That affects the after-tax return, compared to the pretax return that would come from this.

But I would say that our after-tax return, with declining earnings, which I expect, would be at least 10 percent after tax, but I think — and it could well be somewhat higher.

I think it’s very unlikely that it would be significantly lower.

And everything we have seen to date, and it hasn’t been that long, but we have a number of papers now, would indicate that we will meet or beat the 10 percent.

It doesn’t have — it’s not going to move the needle at Berkshire.

You know, the papers we have bought now, we’re probably getting close to maybe having 100 million of pretax earnings, a good bit of which is — fair amount of which — we get a favorable tax treatment on, because they were bought from S corporations.

You know, and 100 million is real money, but it doesn’t move the needle at Berkshire.

But it will end up being a very — I think it will be a perfectly decent return in relation to capital employed.

Now, we wouldn’t have done it in any other business. I mean, there’s no question — the questioner is right about that.

But, it doesn’t — you know — doesn’t require an extra ounce of effort by me or Charlie or people at headquarters. We will get a decent return and we like newspapers and —

Although, the one thing I’ll promise to do with you is I will be glad to give you figures, annually, as to how we are doing relative to investment.

We are buying the papers at very, very low prices compared to current earnings, and we must do that because the earnings will go down.

Now, the interesting thing is, of course, is that we see books from investment bankers on all kinds of businesses, and always the projected earnings go up in the book.

A lot of times they don’t — you know, in reality — they don’t go up. The difference is that we expect them to go down in the newspapers, and whatever the investment salesmen expect, they certainly don’t project that any business they sell will have declining earnings.

Charlie?

CHARLIE MUNGER: Well, I think what you’re saying is that it’s an exception and you like doing it. (Laughter)

WARREN BUFFETT: I wish I hadn’t asked. (Laughter) OK.

34. Follow Teledyne CEO Henry Singleton’s lead

WARREN BUFFETT: Doug? Sort of a lead-in to you, Doug. (Laughter)

DOUG KASS: Warren, in a previous answer to a question, you suggested, I think for the first time, that when you’re gone — and everyone here hopes that’s not for a very long time —

WARREN BUFFETT: No one more than I. (Laughter)

DOUG KASS: I thought you would say that —

You’re going to move — Berkshire will likely move — to a more centralized style, or approach, to management.

My question is, in the past you’ve demonstrated a great deal of respect for Dr. Henry Singleton, the founder and longtime CEO of the diversified conglomerate Teledyne.

You have written about Singleton, quote, “Henry is a manager that all investors, CEOs, would-be CEOs, and MBA students should study.

“In the end, he was 100 percent rational, and there are very few CEOs about whom I can make that statement,” close quotes.

Prior to his death, he broke up Teledyne into three companies. Dr. Singleton told our mutual friend, Lee Cooperman, that he did it for several reasons.

There was one reason in particular that Lee mentioned to me that I want to ask you about. According to Singleton, Teledyne was getting very hard to manage for one CEO.

What would you say about the Berkshire situation, given your company’s greater complexity, size, and the management issues that you faced in the last three years?

And what is the advisability of restructuring Berkshire into separately-traded companies along business lines?

WARREN BUFFETT: Berkshire, to me, seems about the easiest company to manage imaginable.

And if you took an earlier answer — and I understand why you did, that implied greater centralization after my death, there will be a tiny bit more, just in terms of the small companies. But I do not anticipate any change of any real significance.

Now, Charlie knew Henry Singleton, and I think it might be interesting for Charlie to give you his views on what Singleton did right and, eventually, wrong.

And, I’ll answer the last part of your question, though.

Breaking it up into several companies, I’m convinced, would produce a poorer result. Certainly now, and I believe in the future.

Charlie?

CHARLIE MUNGER: Well, Henry Singleton was a genius who could play chess blindfolded just below the grandmaster level and never got less than an 800 on any complicated math or physics exam.

And, I knew him. He lived in my community.

But he started as a conglomerate where he was very interested in reporting higher earnings all the time so he could keep the daisy chain going. And when he managed it on the way down, he bought in the stock relentlessly and very logically, like a great chess player should.

And — but he managed those companies on a way more centralized basis than Berkshire has ever operated.

And in the end, the great bulk of the enterprises, he wanted to sell to us. And by that time, he was ill and he really wanted to sell to us. And of course, he wanted Berkshire stock.

And we basically said to him, “Henry, we love you and we’d love to buy your businesses, but we don’t want to issue Berkshire stock.”

So, I don’t think you should get the idea that just because he was a genius he did it better than we did.

He did, in some ways, because he understood these very high-tech businesses, but —

WARREN BUFFETT: He played the public markets way better. I mean, it—

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: We’re not interested in doing that, actually.

CHARLIE MUNGER: No, we’re not.

WARREN BUFFETT: And he was incredible in that, and he made a fortune for shareholders that stayed with him.

But he was — to some extent, he looked at the shareholder group as somebody to be taken advantage of, and he issued stock like crazy. I’ll bet he did at least 50 acquisitions where—

CHARLIE MUNGER: Yes.

WARREN BUFFETT: He wanted to use a very fancy price stock. He was playing the game of the ’60s, and we actually have never wanted to get in that game.

I mean, he promoted the stock. And, you know, he had the Litton Industries background on it, and it was a game that worked wonderfully if you didn’t care about how it ended up.

And so we have not played that game. He was — in terms of wanting to get Berkshire stock — you know, he essentially was going into the third stage—(laughs) — of first issuing shares at overprice, then buying it back very underpriced, and then he was going to —

CHARLIE MUNGER: — sell it to us for more than it was worth.

WARREN BUFFETT: Yeah, exactly.

CHARLIE MUNGER: It was the wrong stock. But he was an enormously talented man and that cool rationality was to be admired.

I like our system better. We’re more avuncular than Teledyne was.

WARREN BUFFETT: Not the toughest test. (Laughs)

35. High health costs are hurting competitiveness

WARREN BUFFETT: OK. Station 9?

AUDIENCE MEMBER: Hi. My name is Kelly Morrell (PH) from New York, and I have a question.

You’ve been both very outspoken on corporate and personal tax rates, as well as the trade deficit.

And I’m wondering if you can elaborate on what the top two or three things you think both business leaders and policy makers should be focused on to preserve U.S. competitiveness?

WARREN BUFFETT: Well, I would say health care costs would be a big item.

We’re spending — we’re a country that’s spending, we’ll say — you get different figures — but call it 17 1/2 percent or so of GDP. And most of our rivals in the world are paying anywhere from, probably, 9 1/2 to, maybe, 11 1/2, or thereabouts.

So, you know, there are only 100 cents in the dollar, and if you give up 6 or 7 or 8 points of that dollar, I mean, it’s just like having a raw material that costs you more, or something of the sort.

So, that will be a major problem in American competitiveness. It is right now, and it will — all signs point to the fact that it will become more so.

And it doesn’t relate to the Medicare problem, which is a huge problem, obviously, but the real problem is health care costs, whether it’s in the private system or whatever payer system you have.

We have a big, big disadvantage in cost versus the rest of the world.

People used to talk about how General Motors had $1500 a car in health care costs that Toyota didn’t have. Well, if they had $1500 a car disadvantage in steel costs, I mean, you know, the management would be focused on that.

If they had $150 — if they had $15 — difference in steel costs, but health care costs, which are sort of beyond the control of any one company, promise to be a huge competitive disadvantage.

Overall, though, incidentally, I mean, the United States — since the crisis of 2008 — we have done very well, compared to most countries, and our system works.

But if you asked me the number one problem for American business, I would say it’s that health care cost disadvantage.

Charlie?

CHARLIE MUNGER: Well, I would add that I don’t think it does our competitiveness any good to have this grossly swollen securities and derivative market — markets. (Scattered applause)

And the young men from Caltech and MIT going into high finance and derivative trading, and so on, I think this is a perfectly crazy outcome in terms of its effect on the country.

WARREN BUFFETT: Anything further? (Scattered applause)

CHARLIE MUNGER: Well, I agree with you about the health care, but I find the other more revolting.

WARREN BUFFETT: Charlie’s very Old Testament. And he’s right.

36. Obamacare’s effect on Berkshire?

WARREN BUFFETT: Carol?

CAROL LOOMIS: This question picks up, indeed, from where you were on the previous answer. It’s from John Sealme (PH).

“I have never heard or read whether all of Berkshire’s nearly 300,000 employees are currently receiving health benefits.

“If all employees today are not receiving benefits, has Berkshire quantified the cost of complying with the Affordable Care Act? And if so, what will be the costs be?

“In other words, how is the Affordable Care Act going to affect Berkshire?”

WARREN BUFFETT: Yeah. I don’t know the answer to that.

The— I’m virtually certain that — you know, we’ve got 70-plus subsidiaries, some of which — one of which — has over 100 itself.

So, very hard to speak totally categorically. But to my knowledge, I don’t know of any units that don’t have health care benefits.

But like I say, I mean, we just bought 27 or 28 daily newspapers, some of them are very small, so I can’t really speak to every single unit.

But health care costs are a huge cost for us. We’re actually going to do — we do very few things with, as you know, on a centralized basis — but that is something where all of our companies will try to learn what’s in store for them and try to figure out some answers.

But we have not yet — we have not assessed in any way — put together — the kind of figures that that question calls for.

We spent a lot of money, obviously, I mean, to get up to the kind of numbers that are coming through on health care costs.

I see them at some of our — a few of our — individual units, as I look at their monthly reports. I will see costs rising 10 or 12 percent.

And what happens in 2014, I don’t know.

But the same thing will be happening to our competitors, and we will try to figure out what makes the most sense at that time.

And our individual managers are already working, particularly the larger units, are spending a lot of time on that.

But it’s not something we try to control out of headquarters.

Charlie?

CHARLIE MUNGER: Yeah, it’s a — we really don’t want to try and control it out of headquarters. We like that kind of decision being made near the firing line.

37. Future of rooftop solar power

WARREN BUFFETT: Jonathan?

JONATHAN BRANDT: Here’s a question for Charlie on a subject which I consider him an expert on, and I hope I don’t prove my ignorance by asking the question.

The question is about capital spending plans at your regulated utilities and a potential long-term risk to realizing returns on current and future capacity.

With the ongoing reduction in the cost of solar panels causing more utility customers to, at least, consider generating electricity from their own rooftops, some worry about a vicious circle of customers reducing their dependence on the grid, forcing utilities to raise rates, to maintain returns on the remaining customers who, in turn, are then incentivized to reduce their dependence on the grid, or even exit it.

I understand the risks are greatest to regulated utilities in sunny places like Arizona and California, but given how much solar power is generated in cloudy places like Germany, are regulated utilities in Iowa, the Pacific Northwest, the Rocky Mountains, and the UK really immune?

CHARLIE MUNGER: Well, my answer would be I don’t think anybody really knows exactly how this is going to play out.

I confidently predict there will be more solar generation in deserts than there is going to be on rooftops in cloudy places — (laughter) — and there’s a good reason for that.

And Berkshire’s big operations, as you — in solar — are in what amounts to desert.

And we get very favorable terms and incentives, and I think Berkshire’s going to do fine in solar.

I am skeptical, myself, about trying to run the utilities of the world from a bunch of little, tiny rooftops. I suspect there’s some twaddle in that — and some fancy salesmanship in that arena.

And of course, the people that did it early were foolish because the price came down rapidly thereafter. So put me down as not totally charmed by rooftops in cloudy areas.

WARREN BUFFETT: We have Greg Abel here from MidAmerican Energy. If we can direct a spotlight down there, Greg can probably speak to this with a lot more intelligence than Charlie and I. I noticed that —

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: I noticed that—I noticed that Jonathan left me out of the thing entirely when he wanted to get an intelligent answer, but I’m not taking any offense at that. Greg?

GREG ABEL: Sure. Happy to touch on it.

Jonathan, I would touch on the fact you’re absolutely right. We’re seeing, when it comes to rooftop solar, a decline in the total cost of installing them.

At the same time, when you compare it to a regional tariff, or a specific tariff in most of those states, the utility is extremely still competitive.

And I would highlight that as you see more rooftops coming on, you’ll see a restructuring of the tariffs, but at the same time, there’s a lot of protection for the utilities.

So in the regions we’re supplying power, we will see some introduction of solar, but we’re absolutely comfortable our systems for the long-term are valuable both to our customers and to our shareholders — Berkshire shareholders — for the long term. Thanks.

38. Luck, timing, and success

WARREN BUFFETT: OK. Station 10.

AUDIENCE MEMBER: Thank you. Marc Marzotto, Toronto, Canada.

Bill Gross made recent comments that his generation of investors, yourselves included, owed a deal of their success to timing.

Do you agree with Bill’s comment, and do you think a similar opportunity will provide itself to today’s investors? Thank you.

WARREN BUFFETT: Yeah, there’s no question that being born in the United States was a huge, huge, huge advantage to me, and as I’ve pointed out in a recent article, being born male was a big advantage.

I would not have had the same opportunities in the investment, or in the business world, remotely, that I’ve had if I’d been a female born in 1930.

And the timing could have been a little better. Actually, my dad was a security salesman and, you know, I was conceived in November, 1929. And if you remember, the stocks had gone down dramatically at that time.

There really wasn’t anybody to call on, for my dad, and there wasn’t any television at home or anything. So here I am, you know. (Laughter)

So I feel myself very lucky that the crash of 1929 came along.

And that also provided a decade, more than a decade, of people who were very turned off. Well, it was a decade of terrible business for quite a while, and then a decade of — more of people that were turned off on stocks, just as we sort of had a decade like that in the past decade going up to 2010 or so, people that — a lot of people — that had gotten turned off by stocks.

So that was a favorable environment. But the United States itself was an incredibly favorable environment. If I’d been born five years earlier, I probably would have made more money. But if I’d been born 10 or 15 years later, I would’ve made, probably, less money.

But, it— I envy the baby that’s being born today in the United States. I mean, I think, on a probability basis, that’s the luckiest individual that’s ever been born.

And I think that they will do very well in life in all kinds of ways, on a probability basis, better than existed when I was born.

And I think they’ll have opportunities to do very well in the investment field.

It may not be as good a field as it was for me starting in 19-, say, ’50, ’51 or thereabouts, but it will be a very good field to operate in.

The person that has a passion for investing, born today, coming of age 20 years from now, is likely, in my view, to do very well, and to live far better than we live today, just as we live far better than John D. Rockefeller lived many years ago.

Charlie?

CHARLIE MUNGER: Well, the competition was very weak in your early days, and I don’t think the competition is as weak now.

So I think, sure, we got advantages from timing. And I don’t think that means there’s nothing to be done ahead.

WARREN BUFFETT: But Charlie, in 2008 and ’9, there were all kinds of high IQ —

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: — highly experienced, investment professionals, I mean, thousands and thousands and thousands of them.

And you invested at the Daily Journal Company in some equities at X that are worth, what, three X or four X now, or something like that?

CHARLIE MUNGER: That’s right.

WARREN BUFFETT: Yeah. Well, I call that opportunity, but it may be routine to him. (Laughs)

CHARLIE MUNGER: But I sat for a lot of years before I did it.

WARREN BUFFETT: But it still became available.

CHARLIE MUNGER: Oh, yes. But you were drowning in opportunities when I first knew you. (Laughter)

You were waiting for —

WARREN BUFFETT: I wasn’t drowning in money, unfortunately. (Laughs)

CHARLIE MUNGER: No, what you lacked was money.

WARREN BUFFETT: Yeah. Well, now we’ve got money and no ideas.

39. You have to like what you’re doing

WARREN BUFFETT: OK. Station—(Laughter)

Station 10? Station 10? Do we have a Station 10? Let’s take a look. It should be right over there.

AUDIENCE MEMBER: Hi.

WARREN BUFFETT: Hi.

AUDIENCE MEMBER: My name is Dexter Ang (PH). I’m from Stafford, Virginia.

I’m 30 years old, and I’m wondering what my life will be like in a few years, let alone 50 years from now.

My question for both Mr. Buffett and Mr. Munger is: how do you think you’ve changed over the last 50 years?

And if you could communicate to yourself 50 years ago, what would you tell them, one piece of advice, business or personal, and how would you do it in a way where your former self would actually heed it? (Laughter)

WARREN BUFFETT: Charlie, I’ll let you answer that. (Laughter)

Incidentally, I’ll trade you places, so don’t worry about your future.

CHARLIE MUNGER: Yeah, we’re basically so old-fashioned that we’re boringly trite.

We think you ought to keep plugging along and stay rational and stay energetic and just all the old virtues still work, and—

WARREN BUFFETT: But find what turns you on.

CHARLIE MUNGER: You’ve got to work where you’re turned on.

I don’t know about Warren, but I have never succeeded to any great extent in something I didn’t like doing.

WARREN BUFFETT: Charlie and I both started in the same grocery store, and neither one of us are in the grocery business. (Laughs)

CHARLIE MUNGER: We were not going to be promoted, either, and even though you had the family name.

WARREN BUFFETT: Yeah. (Laughter)

My grandfather was right, too. (Laughs)

It’s really — I mean, if you’re lucky, and Charlie and I were lucky in this respect. We — well, we were lucky to be in this country to start with — but we found things we like to do very early in life, and then we, you know, we pushed very hard in doing those things, but we were enjoying it while we did it.

We have had so much fun running Berkshire, I mean, it’s almost sinful.

But, we were lucky to — you know, my dad happened to be in a business that he didn’t find very interesting but I found very interesting.

And so when I would go down on Saturday, there were a lot of books to read, and, you know, it just flowed from a very early age. And Charlie found — he found —

CHARLIE MUNGER: We found a way to atone by your — for your — sins in having so much fun. You’re giving all the money back.

WARREN BUFFETT: Yeah, but you give it all back whether you want to or not, in the end.

CHARLIE MUNGER: That’s true, too. (Laughter)

40. Rational insurance pricing

WARREN BUFFETT: OK. Becky?

BECKY QUICK: This question comes from Laurence Endersen in Dublin, Ireland.

And he asks, “What factors have enabled Berkshire’s insurance pricing policy to stay so rational while also being a very sizable market participant?”

WARREN BUFFETT: In insurance, was that the —

BECKY QUICK: In insurance, yeah.

WARREN BUFFETT: Yeah. Well, I would say this: I really do think that Berkshire is an unusually rational place.

I mean, we know what we want to accomplish. We’ve had the benefit of a very, very long run, and we’ve had the benefit of a — you can argue whether it was a benefit or not — but of controlling shareholders, so we did not have outside influences that pushed us in directions that we didn’t want to go.

So, you know, insurance should be conducted as a rational activity. And one of the problems that some insurers have had is that they would have a pressure for increasing premium volume every year, brought upon by Wall Street, you know— very few—

We actually contracted the business written by National Indemnity, formerly our main business, its traditional business, I think we contracted it, probably, by 80 percent or something of the sort when the business became less attractive.

I’m not sure any manager of a public company that was answering to quarterly earnings calls and that sort of thing, I’m not sure whether they could’ve really stood up to the kind of pressure that they would receive if they followed a similar policy.

We have no — if we do something stupid, it’s because we did something stupid. It’s not — no external factors are pressing on us. And that’s a great way to operate, and it’ll continue to be the way we operate.

Most people, if you own a half of 1 percent of the company or less, you know, and other people are doing things that Wall Street is applauding and you’re not doing them, it could be very hard to resist.

And you know, you respond to media criticism and all kinds of things that—

We don’t have — we don’t have to do it. And there’s no reason for us to do anything stupid in insurance.

You get offered a lot of opportunities to do things that are stupid. We were major writers of catastrophe — natural catastrophe — insurance in the United States some years ago when the prices were right.

We don’t think the prices are right now, so we don’t write it. We haven’t left the market, the market left us, and — but we are not about to do something where we get paid 90 cents for running the — running a probabilistic loss of a dollar.

It just doesn’t make any sense and we won’t do it. And we don’t put any pressure on anybody to do it, and their incomes are not dependent on doing it. So it’s not hard to be rational at Berkshire.

Charlie?

CHARLIE MUNGER: Yeah. There are pressures on other people that we don’t want and therefore don’t have.

It is very hard to shrink an insurance operation by 80 percent when the people who come in every day don’t have enough to do, and it’s just — it’s a counter-intuitive thing to do.

But it’s absolutely required that you do it in a place where people go as crazy as they do in insurance.

WARREN BUFFETT: Well, it’s like buying Internet stocks, you know, in the late 1990s. I mean, the — all around you, you have these people that have high IQs and they’re doing it and they’re being successful in it.

So, you know, everybody from your, you know, your spouse to your employer to the press says, you know, “How come all these other — how come you think you’re so smart, you know, avoiding this when everybody else is doing it and they’re making a lot of money?”

And, of course, it creates this social proof where it works for a while.

That’s the great danger period in all of these bubbles, is that what starts out with skepticism ends up with your neighbor getting richer than you are because he went along and you didn’t.

And that sort of thing — the bandwagon effect and everything — those things are very hard to resist.

But we don’t have any pressures to do that sort of thing. I mean, we just don’t give a damn, you know, and if —

We don’t necessarily think we’re smarter than the other person on that. We just think we don’t understand what it’s all about.

And if they can make a lot of money, you know, day trading or whatever it may be, you know, good luck to them. But we’re not envious of them, but we certainly are not going to do it just because they’re doing it.

Charlie, any more on that?

CHARLIE MUNGER: Oh, I always say there’s a reason why all that stuff is in the Bible. You can’t covet your neighbor’s ass or — (Laughter)

I mean, they were having trouble with envy a long time ago. And it’s a perfectly terrible thing to do, and how much fun can you have being envious?

We always say it’s the one sin there’s no fun in.

WARREN BUFFETT: Yeah. (Laughter)

Gluttony is a lot of fun. (Laughs)

Lust has its place, too, but we won’t get into that.

41. “Dumb” competition from hedge funds in reinsurance

WARREN BUFFETT: Cliff? (Laughter)

CLIFF GALLANT: We can follow that up. (Laughter)

Reinsurance pricing is expected to be down at midyear renewals this year, despite the fact that we’ve had a lot catastrophes in recent years.

The finger is being pointed towards alternative capital entering the market, new capacity entering the market.

How concerned are you about this new capacity, and, you know, what is the likelihood that cheap reinsurance pricing soon leads to cheaper primary commercial pricing?

WARREN BUFFETT: Yeah. We hate dumb competition, and hedge fund — managed money, but particularly hedge funds — have entered the insurance, and more particularly, probably, the reinsurance business, quite aggressively in the last few years.

For one thing, it gives them a chance to have a beard, in effect, to operate in Bermuda or someplace where the tax rates are low and where they defer their own income from U.S. income taxes for a long time, and it’s a perfectly respectable beard.

And it can be sold to investors. And people talk about it, you know, being an uncorrelated type of operation and all of that. Anything Wall Street can sell, it will sell. I mean, you can count on that. And —

CHARLIE MUNGER: They like big words, too.

WARREN BUFFETT: Yeah. And it’s very salable now, and the money will flow in and the money will — may — bring down prices, it may do stupid things in reinsurance, but that’s happened before.

And in the end, you know, we know what we’re willing to do, we know what we think the prices should be, and we will do insurance business where we think that the odds favor us earning an underwriting profit. And if we can’t do it, we’ll watch for a while.

You can’t afford, you know, to go along with the crowd in investment, insurance, or a whole lot of other things.

And it can be irritating to have a dumb competitor. I mean, if you’ve got a service station on the corner and you’ve got a guy across the street that is willing to sell gas below cost, you know, you’ve got a terrible problem. That’s why I got out of the gas station business a long time ago.

But insurance, it’s — nice thing about it is— the standby costs are not huge, so it’s not like idling steel plants or something.

So we were perfectly willing in the 1980s to have our expense ratio go up significantly because our volume went down so dramatically.

And, you know, it was a standby cost that was real, but it wasn’t back breaking, and we just waited for better days, and they came along.

Charlie?

CHARLIE MUNGER: With our cranky, wait-it-out methods, we probably have ended up with the best large-scale causality insurance operation in the world.

WARREN BUFFETT: Yeah, I think that’s true, but —

CHARLIE MUNGER: So why would we change?

WARREN BUFFETT: We never really anticipated it would happen, though, when we started in.

CHARLIE MUNGER: That’s true.

WARREN BUFFETT: Yeah. It just sort of evolved.

But the principles were useful, and then we were very lucky in getting some sensational people.

You know, we’ve got Tad Montross at Gen Re, we’ve got Ajit Jain, we’ve got Don Wurster, we’ve got Tony Nicely at GEICO.

I mean, we have just hit the jackpot, in terms of the people. And they like the environment of Berkshire in which to operate, because they do not get pressures to do dumb things, which they would get at many other places.

42. Buffett calls for more women in corporate leadership roles

WARREN BUFFETT: OK. Station 11.

AUDIENCE MEMBER: Hi. My name is Susan Tilson, and I’m from New York City. I am a long-term shareholder, but this is my first time to Omaha. This is quite the little gathering you’ve got going on here.

You, just a few minutes ago, Mr. Buffett, mentioned that you enjoyed a lot of advantages as a male.

I have three daughters, and I would like them to be able to go as far as their aspirations and hard work take them.

I’ve noticed and applaud the fact that you’ve added women to Berkshire’s board, but both the board and senior management at Berkshire still reflect the reality that in 2013, there are very few women holding the top jobs in corporate America.

Do you see this as a problem? And if so, what should be done about it?

WARREN BUFFETT: Well, I do see it as a problem, and I — (Scattered applause)

I’ve written an article in Fortune Magazine, which if you go to Fortune.com, I guess it’s in front of the paywall. You can click on it. It’s only 1150 words or so. And you’ll see my views on that.

But there’s no question that women throughout my lifetime and, you know, for a millennia before that, have not had the same shot at many things in the world that males have.

I mean, I have two sisters, as I pointed out in this article — both here today, I believe — and, you know, a couple years on each side of me, and absolutely as smart as I am. They’re more personable than I am. They got along with people much better than I did when we were young. Got — their grades were the same, but they did not have the same opportunities at all.

I mean, nobody really wanted to limit them. Certainly the— you know, my parents love them the same way as they felt about me, and they never would’ve dreamt of saying to them that, you know, Warren gets all these opportunities and you don’t. But it just existed.

And, you know, all my teachers in grade school, every one of them was a female. And the reason they were females is because they only had a few occupations open to them.

So, as a result, I had way better teachers than I sort of deserved for the pay level that existed in it because all this talent was being compressed into a few areas.

Well, a lot of improvement has been made, but there’s still a ways to go.

And there is a pipeline effect, so I mean, you couldn’t change it all in one day if you wanted to. But on the other hand, that should not be an excuse for not changing at all.

And then I also wrote about the fact that there’s — that when people are placed in that position, they start believing it about themselves, so they do not set their own objectives as high as their potential would indicate.

And that’s — I use the example of Katharine Graham, who I knew quite well, and she was, you know, she was very, very intelligent. She was very high-grade. She had all kinds of good qualities.

But she had been told by a mother, and she had been told by a husband, and she had been told by society that women couldn’t run businesses as well as men.

And she knew it wasn’t true, but she couldn’t get rid of it. And she saw herself in this funhouse mirror, and it — no matter how hard you tried, you couldn’t really get rid of the funhouse mirror. It had just been there too long.

And I kept saying, you know, “Look at yourself in a regular mirror, and you’ll see somebody who’s very smart and very high-grade and just as good as any male you’ll find.”

Her stock went up 40-for-1 when she was CEO. She wrote a Pulitzer Prize-winning autobiography. And to her dying day, you know, she — at one level she knew she was the equal of the males around her, and at another level, she couldn’t get rid of that little voice inside of her that came from her mother and came from all of society that said, you know, “You should take care of the garden and let the males do all the important work.”

So, both the exterior obstacles— they’re crumbling to a very significant degree and they should. I mean, it only took thousands of years.

I mean, as I point out in the article, we said in the Declaration of Independence, “We hold these truths to be self-evident, that all men are created equal,” but they weren’t so self-evident when they got around to writing the Constitution and they used a bunch of male pronouns in describing the presidency in Article II, or when they didn’t get around to putting a Supreme Court—a female Supreme Court — justice on until 1981.

So, the country has come a long way on it. It continues to move. It’s moving in the right direction.

But you know, I hope it keeps moving and moving faster, and I hope that the females that are laboring under these beliefs that were told to them about themselves that aren’t true, get rid of the funhouse mirrors and get regular mirrors. And I say all this in this article if you want to read it in Fortune.com. Thank you. (Applause)

43. Berkshire is not “too big to fail”

WARREN BUFFETT: OK. Andrew?

ANDREW ROSS SORKIN: You’ll know why I’m asking this question in a second, and why I picked it.

This question is the following: “Is Berkshire too big to fail? On the same topic — “

WARREN BUFFETT: I think I heard of a book by that name. Who wrote it? (Laughs)

ANDREW ROSS SORKIN: “On the same topic, how do you feel about Dodd-Frank? And now that it’s being implemented, how is it impacting Berkshire’s insurance businesses and our investments in banks like Wells Fargo and Goldman Sachs?”

WARREN BUFFETT: Yeah. I don’t think it’s affecting Berkshire’s insurance businesses, to my knowledge. I mean — we’re — we’ve had — to my knowledge, you know, we’ve never had anything that impinges on our activity arising from a too-big-to-fail doctrine.

The capital ratios for large banks are being established at somewhat higher levels than smaller banks, and that obviously affects return on equity.

The ratios, as I understand it, for Wells are not as high as they would be for Citi or J.P. Morgan, but they’re higher than they would be for a local bank in Omaha.

And the higher the capital ratio, the lower the return on equity will be.

I consider the banking system in the United States to be stronger than, certainly, any time in the last 25 years.

Capital is dramatically higher. A lot of the — well, a very significant part — of the loans that were troublesome are gone. The loans that have been put on the last four or five years are far better.

It’s a — I think we’ve got — the Canadian banking system is very strong, but compared to Europe, I think our banks — or compared to our banks of 20 years ago — I think they’re dramatically stronger than they were then.

I do not worry about the banking system being the cause of the next bubble. I mean, it will be something else.

I mean, we will have bubbles in capitalism. Capitalism goes to excess, and it’s because of the humans that operate it.

And we will have that again, but usually you don’t get it the same way as you got it before. I don’t think it will be a housing boom next time.

But, I am — you know, I feel very good about our investment in Wells Fargo. I feel very good about our investment in U.S. Bank. I feel very good about our investment in M&T.

All of those are very strong banks pursuing, in my view, sound practices, and they should result — they should be decent investments, over time.

They won’t earn as high a return on tangible equity, nearly as high a return as they would have seven or eight years ago, because the rules have been changed. And they have been changed to provide thicker equities, and that pulls down return on equity.

Charlie has been known to express himself on this subject, and I’ll give him the floor.

CHARLIE MUNGER: Well, I’m a little less optimistic about the banking system, long-term, than you are.

I would like to see something more extreme, in terms of limiting bank activities. I do not see why massive derivative books should be mixed up with insured — deposits that are insured — by the country.

WARREN BUFFETT: I’m with Charlie on that. (Applause)

CHARLIE MUNGER: The more bankers want to be like investment bankers instead of bankers, the worse I like it. (Applause)

I don’t want to say more.

WARREN BUFFETT: Yeah. (Laughter)

CHARLIE MUNGER: I get in enough trouble on the subject already.

WARREN BUFFETT: (Laughs) I can—I can see the journalists just licking their chops over there waiting for Charlie to throw a thunderbolt, but he’s unusually restrained.

44. Buffett updates his bet against hedge funds

WARREN BUFFETT: We’re now very close to noon.

I promised — five years ago — I wrote about five or six years ago about the inordinate costs that investors bear in — many investors bear in—getting sold various types of products.

And I talked about hedge funds and private equity and all kinds — and a whole variety of things.

The investment world has been very good at extracting a very significant percentage of the returns that investors get for themselves.

So I offered to bet anyone that wanted to step up to the plate that a group of hedge funds would not beat an unmanaged no-load index over a ten-year period.

And I promised — and then I got a taker, a very nice group of people. I like them. Ted Seides is in the group.

So they took me up on this. So we each put about $350,000 or so into something where in ten years — well, we put it in zero-coupon Treasurys, which would mature and be worth a million dollars in ten years.

And I promised to report on the bet every year.

And what we did this year, interest rates fell so far that our original 700,000 or so investment got to be worth like 950,000 just because the five-year Treasury got so low. So there was very little appreciation left into it between now and five years from now when it matures.

So, we sold the zero-coupon Treasurys and we bought Berkshire with the proceeds, and I guaranteed that it would be worth a million dollars. Currently it’s worth about a million-two, so that the charities are benefiting to some extent.

Now, Ted has one charity, which is a very worthwhile charity. I have Girls Inc. of Omaha, which is a charity I selected.

And we’ll put the — we can put the figures up on the — there as to where we stand at the moment.

The hedge funds got off to a fast start, and were 13 points ahead of the index fund at the end of the first year.

But the last four years — and these are funds of funds, so they really represent probably 2 or 300, maybe, hedge funds underneath.

But there’s two levels of fees involved. There’s the standard fees of the hedge funds, which probably many times are “2 and 20,“ but can be other things, and then there’s the fee of the fund of funds on top of it.

So, we now are at the halfway point, and I’ll keep reporting to you every year how we do. And if Berkshire does well, we’ll have well over a million dollars to distribute to one of two charities.

You might enjoy going to a website called longbets.org. That’s where — they’re the people that hold the money.

And you will see that there are a number of propositions that people have wagered on, and the proponents and the opponent of every proposition give a short little description. Ted gave a description of why he thought he’d win. I gave a description of why I thought I’d win.

But some of these are — I just can’t resist a couple of — pointing out a couple of them. You can see these on the web.

But one of it is that a large collider will destroy the Earth in 10 years. Now there’s a $1,000 bet on that, but I’m not sure who will collect. (Laughter)

I thought that was an interesting one. And there was one other, and then we’ll go to lunch. But there are a number of these that are quite interesting.

At least one human alive in the year 2000 will still be alive in 2150. Now, that’s 148 years from when the bet was entered, there’s a $2,000 bet on that.

And I hope Charlie is in contention for the — being the winner of that one.

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lastmover · 6 years

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2012 Berkshire Hathaway Annual Meeting (Afternoon) Transcript

1. Gen Re improving after “major fix-up operation”

WARREN BUFFETT: OK. Round two. Gary, you’re up.

GARY RANSOM: Am I up yet?

WARREN BUFFETT: You’re up.

GARY RANSOM: OK. A question on General Re. If I look back at the General Re property-casualty premiums, it’s been cut in half, roughly, from 10 years ago, maybe a little more stable recently.

Can you give us some idea of how you’ve had to adjust the personnel over that time, and then also what opportunities are there for General Re to grow as we go forward?

WARREN BUFFETT: Yeah, Gen Re, I think, got off the track. It may — it was probably off the track when we bought it, and I didn’t spot it.

CHARLIE MUNGER: Sure it was.

WARREN BUFFETT: Yeah. OK. (Laughter)

I was in charge of that part. And, they had — I think they’d gotten more concerned about growth and satisfying certain personnel, in terms of their activities, than they had about emphasizing profitability, and it took us awhile to figure that out.

And when Joe Brandon came in, he operated 100 percent, in terms of focusing on underwriting profit instead of premium volume, and Tad Montross has followed through on that, with terrific results.

But it did mean getting rid of a lot of business that didn’t make any sense. They did an awful lot of what I would call “accommodation business.” So, it’s true that the PC volume dropped very significantly during that period, but it’s not volume that we miss.

The life business kept growing consistently during that period. Their life business strikes me as very, very good. They’ve got a little long-term care mixed in there that we wish we didn’t have.

But I think Gen Re is — it’s right-size, in terms of people. It’s got an underwriting discipline to it. And I wouldn’t be surprised if it grows at a reasonable rate in the future.

But it, there was a major change that had to be made in the culture at Gen Re. And, you don’t make that overnight, and you don’t keep a lot of the business — or some of the business — that you got through a wrong culture when you do straighten it out.

It’s a terrific asset to us now. And I think that, the life business will continue to grow, and I would bet the PC business grows, too. But it will only grow if we see the chance to do it on a profitable basis.

That’s one we feel enormously better about than we did some years back.

Charlie?

CHARLIE MUNGER: Well, it was a major fix-up operation, but we finally got it done.

WARREN BUFFETT: We don’t go looking for those, though.

CHARLIE MUNGER: No.

2. Threats to Berkshire’s culture after Buffett

WARREN BUFFETT: OK. Station 1.

AUDIENCE MEMBER: Hi. Dan Lewis (PH) from Chicago.

I wanted to get your thoughts on two of my concerns about a post-Buffett Berkshire.

Do you worry that some of your key operating and investing managers might leave for more lucrative opportunities once they realize they’re working for one of their peers instead of a legend?

And do you think it’s possible that a large investor or hedge fund could ever gain enough control of Berkshire to force a change in the unique culture and structure?

WARREN BUFFETT: Yeah. I think that — I would say I virtually know — that the successor we have in mind will not be the kind that will turn off our managers because that — the manager in mind is a — successor in mind — has got the culture as deeply embedded in as I do.

They would not — our managers would not — I don’t think it would be a question of leaving for more lucrative jobs.

I think it would be because they love the kind of environment in which they exist. And if that environment didn’t exist, it wouldn’t be a question whether the alternative was more lucrative.

Many of them, a majority, could retire, wouldn’t need to work at all. They’re only going to work if it’s more fun for them to work than to do anything else, you know, in the world, because they’ve got the money to leave, in a great many cases.

The conditions — it’s the same reason I work. I mean, I’m 81, and I am doing what I find the most enjoyable thing to do in the world, and there are a couple reasons for that. I get to paint my own painting and, you know, I have a lot of fun, working with the people I work.

And our managers work for the same reason. They do get to paint their own paintings. And my successor will understand that just as well as I do. And there would be a lot of people that might very well manage other companies that, I think if stuck in my position, would lose a fair number of managers. They just have a different style. And our managers don’t need that style.

In terms of a takeover, I think that really gets unlikely. The size is a huge factor. And, even because of the A and B shares, the A shares get converted to B shares when I give them away.

And even 10 years from now, it would be likely that I would own, or my estate would own, something in the area, you know, perhaps, of 20 percent of the votes, thereabouts.

So the Buffett family will probably have 10 times the voting power, for a long time, of anybody else. So I really — I think it’s extraordinarily unlikely for both those reasons, size and the concentration that will exist.

And the longer we go, the larger we’ll get. So the — as the voting power aspect goes down, the size aspect goes up. So I don’t think there will be a takeover of Berkshire.

And I really — you do not need to worry about my successor. You know, in many ways he’ll be better than I am.

He will be totally imbued with the culture. The company is imbued with the culture. It would reject anything. The board of directors reflect that culture. It’s everyplace you look around.

Berkshire stands for something different than most companies, and, that’s not going to change.

Charlie?

CHARLIE MUNGER: Well, what I said last night was that the first 200 billion was hard, and the second 200 billion, with the momentum in place, is likely to be pretty easy compared to what’s been accomplished in the past.

So, I don’t think it’s going to hell at all. I think the momentums are in place and the right kind of people are in place and the culture is, by and large, pretty well loved, I would say, by the people who’ve chosen to be in it. Nobody’s going to want to change it.

WARREN BUFFETT: Yeah, the businesses are in place to take it to 400 billion.

CHARLIE MUNGER: Hmm?

WARREN BUFFETT: The business — we have the businesses to take it to 400 billion.

CHARLIE MUNGER: Well, but in addition to that, I think people of the type who have sold to us when we were the only acceptable buyer, I think will come to our successors because they will be the only acceptable buyer, at least for some significant part of what’s done.

So I don’t think it’s going to be all that difficult.

WARREN BUFFETT: Don’t make it sound too attractive, Charlie. (Laughter)

3. Buffett OK with 12 percent return for cash-consuming businesses

WARREN BUFFETT: Carol?

CAROL LOOMIS: You’re interested in businesses that throw off lots of cash, for instance, See’s Candies, as well as those where you expect significant capital reinvestment needs, for example, Burlington Northern.

What is it about a capital-consuming business that persuades you to forego the cash yield you seem to have historically preferred?

How do you balance the expected need for reinvestment in a capital-consuming business against the other possible uses of cash Berkshire may have in the future, such as new investments or stock repurchases?

WARREN BUFFETT: Well, cash-consuming businesses, by their nature, are unattractive unless the cash they consume gets to earn a reasonable return.

And, in the electric utility business, you know, we can expect, cash retained to perhaps earn an average of 12 percent or something like that, which we regard as quite satisfactory.

It’s not as exciting as having some business that’s going to grow 20 percent a year and not require any capital. I mean, there are a few wonderful businesses like that, but it’s perfectly satisfactory.

Same way with the railroad business. You know, we are going to invest a lot of capital over the next 10 years in railroads. Every year we will spend way more than depreciation charges. I think the prospect of earning reasonable returns on that are pretty darn good.

But if I had to put a lot of money, you know, into some capital intensive business where all we were doing was staying alive with that money, you know, we would be in a terrible situation.

And we don’t have — in any meaningful way — we do not have any capital-consuming businesses where I see that as the prospect.

It’s true, if you go back to a world where we thought we could earn 20 percent on equity or something of the sort, then there’s very few capital-consuming businesses where huge amounts of incremental capital can earn at a 20 percent rate.

So that would be disadvantageous, but we don’t know how to make 20 percent on equity going forth in the future with the kind of sums we’re working with.

And we will be very happy if we can earn 12 percent or something like that on equity, particularly when some of that capital is being consumed is generated by float, which doesn’t cost us anything. We’ve got some small advantage there.

Charlie?

CHARLIE MUNGER: Well, I think it’s going to work pretty well. (Laughter)

There’s some Mungers here. I hope you won’t listen to the siren songs of others and kind of stay with the family heirloom.

WARREN BUFFETT: My family is just hoping for an heirloom. (Laughter)

4. Berkshire’s float growth rate likely to slow

WARREN BUFFETT: Cliff?

CLIFF GALLANT: Along those lines, in regard to float, in your annual letter this year, you say that you expect the rate of growth in your float to slow going forward.

How slow? What are the drivers? Is it possible that float could shrink going forward?

WARREN BUFFETT: The float could shrink because we have lots of retroactive contracts, that by their nature, the float runs off, although not at a really rapid rate.

And, the float at GEICO is going to grow. I mean, that — the float at our smaller insurance companies will probably net grow over time a little bit, but it’s not a lot of money.

In Ajit’s operation, where we have a lot of the retroactive stuff, it’s very, very tough. You’ve always got a melting ice cube that you’ve got to, you know, add a little more water to.

And I have felt — I felt when the float was 40 billion it probably wasn’t going to grow very much, and now we’re at 70 billion. So, we are looking for ways to intelligently grow the float all the time. That’s been true ever since I got in the insurance business in 1967.

So, the desire is always there. We’ve been reasonably imaginative in figuring out ways to do it and still have the float cost us less than nothing. We’ve got the smartest guys in the business out there working on it. But the numbers are huge now, and you do have a natural runoff from the retroactive contracts.

So I just thought that it was fair to tell the shareholders that they really should — while they look at that history of float growth, that they really can’t extrapolate that.

If we get lucky, you know, we could add a fair amount more, but it’s also — it’s possible that it will actually dwindle down a little bit and — not at a fast rate — and it certainly is more than possible that it won’t grow at very much of a rate from here on.

Ajit told me that when I put that in the annual report that it became a challenge to him. So I’m glad I stuck it in there. He wants to make me look like an idiot, which isn’t too hard sometimes, and I may have to stick some other things in the annual report next year to get the attention.

I — if I had to bet on whether float will be higher or lower five years from now, I probably would bet just a slight bit higher, but I also wanted the shareholders to know there’s a possibility that it will decline a bit.

We’re working on things, though. Every day we’re working on things to try to figure out how to increase it.

Charlie?

CHARLIE MUNGER: Yeah. The casualty insurance business, by its nature, is not a terribly good business. You have to be in the top 10 percent, really, to do at all well in it, and I think we’re very lucky.

We probably have the best large-scale casualty insurance business in the world. Just because it came out of nothing doesn’t mean it’s nothing now. But I don’t think it will be wildly — it won’t grow wildly, will it, Warren?

WARREN BUFFETT: No.

CHARLIE MUNGER: No. But if you have something that is very good and it doesn’t grow wildly, that’s not the end of the world.

WARREN BUFFETT: It’s certainly brought us to where we are today.

CHARLIE MUNGER: Yes.

WARREN BUFFETT: It’s done wonders for us, and there’s been multiple people that have done — I mean, with the jobs that Tony has done at GEICO, I mean, he’s created billions and billions of dollars of value for Berkshire shareholders. That’s true certainly with Ajit. You know, it’s huge.

CHARLIE MUNGER: We get used to having Ajit work miracles, and he’ll probably continue to do so for a long time. But if Matt Rose has to carry some of the future freight, well, that’s all right.

5. Past mistakes buying declining businesses

WARREN BUFFETT: OK. Station two.

AUDIENCE MEMBER: Greetings to all of you from the Midwest of Europe. I’m Norman Rentrop from Bonn, Germany.

Warren, thank you very much for being so open about your health situation. You are in my thoughts and in my prayers, and I wish you a thorough healing.

WARREN BUFFETT: Thank you. (Applause)

AUDIENCE MEMBER: As I have traveled a long way and can no longer ask questions in Pasadena, I’m hoping for an elaborate answer from you, Charlie, as well. (Laughter)

My question is, how do you value declining businesses? You were talking about the encyclopedia businesses brought down by Encarta or retailing disrupted by Amazon and others by comparison shopping. How do you value declining businesses?

CHARLIE MUNGER: Want me to answer that one? They’re not worth nearly as much as growing businesses. (Laughter)

WARREN BUFFETT: Well —

CHARLIE MUNGER: But they can still be quite valuable if a lot of cash is going to come out of them.

WARREN BUFFETT: Yeah. Generally speaking, it pays to stay away from declining businesses.

It’s very hard. You’d be amazed at the offerings of businesses we get where they say, you know, it’s — I don’t want to upset Charlie, but they say, you know, it’s only six times EBITDA, and then they project some future that doesn’t have any meaning whatsoever.

If you really think a business is declining, most of the time you should avoid it. Now, we are in several declining businesses.

You know, the newspaper business is a declining business. We will pay a price in that business. We do think we understand it pretty well. We will pay a price to be in that, but that is not where we’re going to make the real money at Berkshire.

The real money is going to be made by being in growing businesses, and that’s where the focus should be.

I would never spend a lot of time trying to value a declining business and think, you know, I’m going to get one free — what I call the cigar butt approach, where you get one free puff out of the cigar butt that you find.

It just isn’t — the same amount of energy and intelligence brought to other types of businesses is just going to work out better. And so we — our general reaction, unless there’s some special case, is to avoid new ones.

We’re playing out certain declining businesses, by their nature, but you know, we started with declining businesses. We started with textiles in New England and we tried U.S.-made shoes and we’ve —

CHARLIE MUNGER: Department store in Baltimore.

WARREN BUFFETT: Department store in Baltimore. Howard and Lexington Street.

CHARLIE MUNGER: Trading stamp company. We’re specialists in — (Laughter)

WARREN BUFFETT: Yeah. We have one business that did 120 million or so of sales in 1967 or ’8, and what did we do last year, about 20,000?

CHARLIE MUNGER: Yes.

WARREN BUFFETT: 20,000. Yeah.

CHARLIE MUNGER: I presided over it myself. (Laughter)

WARREN BUFFETT: Yeah. Well, I want to say I helped. I mean, he didn’t do it all by himself.

CHARLIE MUNGER: No, no, but I sat there on the location and watched the —

WARREN BUFFETT: We thought of bringing the sales chart down here and turning it upside down to impress you, but Charlie is still in charge of this business. He’s — (laughter)

I can’t get him to sell it, but make me an offer. (Laughs)

CHARLIE MUNGER: If you think what came out of those three declining businesses, all of which failed, it’s so many billions you — it’s hard to imagine how much came out of it. We’re not looking for an opportunity to do it again.

WARREN BUFFETT: No. But it was — in 1966 — maybe we should, because in 1966, Sandy Gottesman — one of our directors and Charlie and I — we put $6 million into a company.

We called it Diversified Retailing, although we only had one operation but, you know — (Laughter)

It was kind of like Angelo Mozilo calling his one location, you know, in New York, Countrywide Mortgage, at the time. (Laughter)

And we bought a department store at Howard and Lexington Street. Now, in our defense, I would have to say there were four department stores at Howard and Lexington Street in Baltimore, and all four of them are gone.

But that $6 million has turned into about $30 billion, starting with that —

CHARLIE MUNGER: — failed business.

WARREN BUFFETT: Failed business. Yeah, yeah.

And of course, Blue Chip Stamps was another example of that because that was another company that — and then, of course, Berkshire was the textile business.

So we were sort of masochistic in the early days. (Laughs)

Becky?

CHARLIE MUNGER: Ignorant, too. (Laughter)

WARREN BUFFETT: Yeah, OK. (Laughter)

That was the word that came to mind, but I didn’t really like to use it. (Laughter)

6. Stay away from IPOs and big commissions

BECKY QUICK: This question is from Bill Nolan who’s a shareholder from West Des Moines, Iowa.

He says, “Many of us are interested in what you,” meaning Berkshire, “are buying and you won’t tell us that.

“Using Charlie’s principle of invert, invert, always invert, maybe you can help us by suggesting what to avoid and stay away from, specifically, what in the investment world today strikes you as folly, fad, unsustainable, crazy, or dumb?

CHARLIE MUNGER: A lot. (Laughter)

WARREN BUFFETT: Yeah, well. We — I think I would describe it as we try to stay away from the things, to start with, that we don’t understand. And when I say don’t understand, it isn’t that I don’t understand, you know, what a certain business does.

But when I say understand, it means that I think I have a reasonably — a reasonable fix on about what the earning power and competitive position will look like in five or 10 years. So I’ve got some notion of how the industry will develop and where the company will stand within the industry.

Well, that eliminates a whole bunch of things. And then, beyond that, if the price is crazy, even though I understand it, that eliminates another bunch. So you get down to a very small universe, and you get down to a particularly small universe when we’re working with lots of money, as we are now.

But we — well, I would say this: I can’t recall any time in the last 30 years, at least, that we’ve bought a new issue, have we, Charlie?

CHARLIE MUNGER: I can’t think of one.

WARREN BUFFETT: No. I mean, the idea, that somebody is bringing something to market today, a seller who has a choice of when to come to market, and that that security, where there’s going to be a lot of hoopla connected with it, is going to be the single cheapest thing to buy out of thousands and thousands and thousands of businesses in the world is nonsense, you know.

CHARLIE MUNGER: And then when it carries a 7 percent commission, or higher. It’s ridiculous.

WARREN BUFFETT: Yeah, it’s ridiculous. So you know it can’t be the most attractive thing. But people get excited about what’s coming and all that sort of thing.

But I will guarantee you that if you have thousands of opportunities among stocks all over the world and most of them are not being promoted or being sold with special commissions in them or something else, and then some other security is coming to market that day, when the seller picks the time to bring it, as opposed to just this auction market operating otherwise, you know, it just doesn’t make any sense to spend five seconds thinking about new issues, so we don’t think about them.

And we also — you know, there’s industries we know that may have a wonderful future, but we don’t have the faintest idea who the winners will be, so we don’t think about those, either.

So there’s a whole lot of things we don’t think about. And we have a — Charlie and I have a number of filters that things have to get through very quickly before we’re willing to think about them.

And sometimes we’re thought of as rude — probably Charlie is thought of that way a little more often than I am — (laughter) — sometimes we’re thought of as rude because people will call us and they start explaining some idea to us, and it just doesn’t make it through the first filter or two.

So we just — we think we’re saving their time if we just politely say, you know, that we just have no interest, and we don’t want to have you finish the sentence. (Laughter)

But we do that, don’t we, Charlie?

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: We don’t have to do very many things that work. I mean, that’s the beauty of this business.

You don’t have to be able, you know, to spell 500 words or something to get to the end of the spelling bee and beat everybody else.

You just have to do one or two things every now and then that — where you don’t make a big mistake and where every now and then one works out real well. And the solution — you know, you’ll get a good result.

You can’t have a big disaster. You just — that is what we try to avoid. We do not ever want to lose a significant percentage of Berkshire’s net worth, and so far we haven’t.

CHARLIE MUNGER: I think there are a couple little rules of thumb. If it’s got a really large commission in it —

WARREN BUFFETT: Forget it.

CHARLIE MUNGER: — don’t read it. Because the chance of somebody who is paying a very high commission to give you a big advantage is very low.

And the other thing that is, I think, helpful in reverse, is — as a place to look, looking at things that other smart people are buying. That is not a crazy search method as a sorting device for opportunities to consider.

WARREN BUFFETT: Charlie knew me when, I used to look at — I grabbed the Graham-Newman reports as fast as they would come out. (Laughs)

CHARLIE MUNGER: Yeah, sure.

WARREN BUFFETT: You know, if Graham Newman was doing something, it was certainly worth my time to look at it.

CHARLIE MUNGER: Warren has made a lot of people rich he doesn’t even know. Just copied him.

WARREN BUFFETT: Don’t go into things with big commissions.

7. Berkshire is “not just an investment company”

WARREN BUFFETT: Jay?

JAY GELB: On the subject of regulation, a question I often get from investors is, what are the implications if Berkshire ends up being subject to the Investment Company Act of 1940 because of insurance becoming a smaller part of Berkshire’s overall business?

WARREN BUFFETT: I don’t — I may be —

CHARLIE MUNGER: That’s too remote. That’s not going to happen.

WARREN BUFFETT: Yeah. I used to — I read the Investment Company Act of 1940 probably 20 times because it was quite pertinent when I was setting up my partnership and all that.

I don’t remember every detail now, but I see no way that — that Berkshire comes close to that.

We used to worry about both personal holding company status and investment company status, but we steered — we made very clear that we steered clear of both of those. But now — I think we’re a million miles away from it now.

CHARLIE MUNGER: Yeah, we really need the financial heft we have to make our basic businesses work. We are not just an investment company.

WARREN BUFFETT: Yeah. We’ve got 270,000 employees. We own 8 companies that each would qualify for Fortune 500 stand-alone. So it’s — people thought of us as investment company long after we were nothing remotely —

CHARLIE MUNGER: Like one.

WARREN BUFFETT: — like one, and where we had no intention of going in that direction.

But the background of both of us caused people to hang on to that notion longer than it was appropriate.

8. Great Chinese companies

WARREN BUFFETT: Station 3.

AUDIENCE MEMBER: Hello, Mr. Buffett and Mr. Munger. Good afternoon. My name is Yung (PH). I’m from Toronto, Canada. I appreciate you giving me this opportunity to stand here and ask a question.

And my question is, how long do you think it will take China to appear a great company like Coca-Cola, and in which industry you think it will be? Thank you.

WARREN BUFFETT: How long will it take China to do what?

CHARLIE MUNGER: I didn’t quite get that one.

WARREN BUFFETT: Connection to Coca-Cola, yeah.

CHARLIE MUNGER: How long will it take China to do what?

AUDIENCE MEMBER: Oh, just how long do you think it will take China to appear a great company like Coca-Cola, and in which industry you think?

CHARLIE MUNGER: China already has some great companies. It’s hard to think of a great branded goods company, but China has some very great companies already.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: (Inaudible). I can’t pronounce them, but they’ve got some very great companies. (Laughter)

WARREN BUFFETT: Yeah. So far it has not been Chinese fast food companies that have been exported to the United States as opposed to — you know, we’ve got over 500 Dairy Queens now in China.

We tend to export certain products well, some consumer products, entertainment products, that sort of thing.

But China’s got some huge companies and they may eclipse in market value, you know, some of the ones such as Coca-Cola that we’re talking about.

9. Won’t invest in Apple or Google, but wouldn’t bet against them

WARREN BUFFETT: Let’s see, that was station 3. Andrew?

ANDREW ROSS SORKIN: OK. This question comes from Larry Pitkowsky from the GoodHaven Fund, also another shareholder, also asked a similar question that I’ve tried to combine.

Given that you’re now in IBM, are there any other entrenched leaders in technology that are, to use one of your terms, inevitable, in the same way that Coke and Gillette were?

For example, is Google inevitable? Is it reminiscent of the advertising agencies you owned in the 1970s, i.e., a toll bridge on all digital spending that’s highly likely to keep growing over time?

What are the one or two things about Google, for example, that you think are real risks? And what about Apple?

WARREN BUFFETT: Well, those are extraordinary companies, obviously, and both — they’re both huge companies. They make lots of money. They earn fantastic returns on capital. They look very tough to dislodge, where they have their strengths.

You know, I would not be at all surprised to see them be worth a lot more money 10 years from now, but I wouldn’t want to buy either one of them.

I do not get to the level of conviction that would cause me to buy them. But I sure as hell wouldn’t short them, either.

Charlie?

CHARLIE MUNGER: Well, I think we can fairly say that other people will always understand those two companies better than we do. We have the reverse of an edge. And we’re not looking for that. (Laughter)

WARREN BUFFETT: Now he’s going to say isn’t the same thing true in IBM?

CHARLIE MUNGER: Well, I don’t think it is. I think IBM is easier to understand.

WARREN BUFFETT: Yeah. The chances of being way wrong in IBM are probably less, at least for us, than being way wrong with Google or Apple. But that doesn’t mean that those — the latter two companies —aren’t going to do, say, far better than IBM.

But we wouldn’t have predicted what would happen with Apple 10 years ago. And it’s very hard for me to predict, you know, what will happen in the next 10 years.

They’re certainly — you know, they’ve come up with these brilliant products. There’s other people trying to come up with brilliant products.

I just don’t know how to evaluate the people that are out there working, either in big companies or in garages, that are trying to think of something that will change the world the way they have changed it in recent years.

CHARLIE MUNGER: And what do we know about computer science?

WARREN BUFFETT: There’s no reply. (Laughter)

10. Strong freight railroad economics will overcome politics

WARREN BUFFETT: Gary?

GARY RANSOM: Politics sometimes affects your businesses. Recently we’ve seen some coal plant closings, turndown of XL pipeline, all of which seemed to have potential effect on BNSF revenues.

Can you talk about how you manage that risk or what the impact might be of some of those political issues?

WARREN BUFFETT: Yeah. Well, BNSF runs their own business very much. I went down to Fort Worth once after we bought it a few years ago, and I haven’t been there since. And I probably talk to Matt on the phone, I don’t know, once every three months or something of the sort.

But there’s no question that railroads, utilities, insurance companies, are all very much affected by the political process.

Fortunately, I think, in the railroad industry, you know, we’ve got economics on our side. And economics usually win out.

I mean, we can move a ton of product 500 miles on one gallon of diesel, and that may be three times or so as efficient as trucking. And that may be why the railroads currently move, say, 42 percent of all intercity traffic.

I don’t think our percentage is going to go down, the railroad industry as a whole, no matter what the politics may be. It’s just too compelling to move heavy traffic long distances over steel rail. And in terms of congestion, in terms of emissions, all kinds of reasons.

So we’ve got a wonderful product, and there will always be struggles in the political arena between competitors and railroads, and customers and railroads. It’s just — it’s the nature of the game, and there will be some of that in utilities, too. But overall, I like our position in it.

They do have to be involved in politics. I mean, the railroads — all four of the big railroads — are going to be involved in the political process because people have got a — who would like to change some of the rules, either as customers or competitors, are going to be in politics, too, and things will get decided in state capitals ,and more important in Washington, of importance.

So they will — they’ll have lobbyists and they’ll play a political game and their opponents will.

I like our position. The — it would be very dumb for the country to do anything that discouraged the railroad industry from spending the kind of capital that will need to be spent to take care of the transportation needs of this country in the future.

If you think about the money that will have to be spent on highways, and on the costs involved in there, and the congestion problems, the emissions problems, everything, the country has a strong interest in the railroad industry having every incentive to invest.

And the railroad industry pays its own way, you know. We’ll spend $3.9 billion this year, and a lot of it will go to improve our present system an awful lot, and some will go toward expansion of a type. And the country will be better off on that, and the Federal Government will not write a check for it.

Charlie?

CHARLIE MUNGER: Yeah. It’s in the nature of things that there are waves of good breaks and bad breaks.

Burlington Northern was enormously helped when you could double the container carriage by making the tunnels a little higher and the bridges a little stronger. And they were enormously helped when they found all this oil in North Dakota and there weren’t any pipelines.

And they will get some bad breaks, too, occasionally, where somebody will take away a little break. But averaged out, it’s a terrific business with terrific management. I don’t think our main problems are political at all.

WARREN BUFFETT: No. The railroad industry —

CHARLIE MUNGER: For one thing, we’re headed by a prominent Democrat.

WARREN BUFFETT: The railroad industry was — (laughter) — that may not be a help, Charlie. (Laughter)

Right after World War II — now, there was a lot of passenger traffic then — but the railroad industry, I think, had as many as 1,700,000 employees in the United States.

And here we are today, there’s less than 200,000. I mean, railroads have become so much more efficient, just by a huge factor, and it’s a fundamentally very good way to move heavy stuff a long distance.

I mean, it’s hard to conceive of anything — it’s be nice maybe to have barge traffic, but you only got a few rivers that are going to lend themselves to real volume along that line.

And so, you know, you have air, pipeline, you know, vehicles, planes, trains. Trains are pretty darn good.

11. No question from station 4

WARREN BUFFETT: OK. Station 4.

AUDIENCE MEMBER: Section 4 does not have any questions at this time. Thank you.

WARREN BUFFETT: Well, that’s a first. (Laughter)

12. Comparing Berkshire to the S&P

WARREN BUFFETT: Carol, have you run out?

CAROL LOOMIS: Unprepared as I am, this is a question about the table on the first page of the annual letter, which shows the relative performance of the S&P 500 index against Berkshire’s book value.

“This is an unfair apples-to-oranges presentation. An investor in the S&P 500 index can easily earn the returns shown for the S&P, but an investor in Berkshire will not earn the returns implied by the company’s book values figures shown.

“Instead, he or she will earn returns over any given period that depend on the market’s assessment thereof, that is, the price-to-book value ratio, and we’ve seen that go down in the last few years.

“A fairer comparison would be against the annual percentage change in the book value per share of the S&P 500 with dividends included. Wouldn’t your shareholders be better served by better information?”

WARREN BUFFETT: Well, actually you can make the calculation two different ways as alternatives to what we do. You could have the market value of the S&P, which is in there with dividends added back, versus the market value of Berkshire.

Berkshire would show up better on that table than it does in the table I present. In other words, our advantage over the S&P would be larger if calculated that way because we started at a discount from book value and we ended up at a premium.

So it would bounce around the years. But overall, our gain would be probably at least — well, it would be about 35 or so percent higher in aggregate over the time than is shown by the book value gain, which is a lot of dollars when you make the calculation.

You could also show the book value of the S&P versus the book value of Berkshire. That figure will be a wash, pretty much, because if you take the S&P’s price to book value, if that maintains the ratio at the beginning to the same ratio at the end, it’s a wash as to how that calculation comes out.

So I think we could show — we could make a calculation that was more favorable to Berkshire. I don’t think what the person suggests there would result in a calculation that’s less favorable to Berkshire.

CHARLIE MUNGER: Long-term, the stock value has tracked fairly well with book value.

WARREN BUFFETT: But it’s over-performed book value —

CHARLIE MUNGER: Yes.

WARREN BUFFETT: — for the whole time. Which is the point this question seems —

CHARLIE MUNGER: Well, you’ve been criticized for making yourself look worse.

WARREN BUFFETT: Yeah. (Laughter)

CHARLIE MUNGER: It’s all right. You can bear it. (Laughter)

WARREN BUFFETT: I’ve done the other, too. (Laughs)

13. We don’t even try to coordinate our subsidiaries

WARREN BUFFETT: Cliff.

CLIFF GALLANT: In studying the collapse of AIG, one of the things we learned is there were parts of the company that understood there were certain financial risks in the market and they were lowering their exposure.

While, at the same time, there were other parts of AIG which were actually increasing their exposure to the same risk.

In terms of enterprise risk management at Berkshire, how do you share information across units to make sure that the same mistakes aren’t made?

WARREN BUFFETT: I didn’t totally get that. Did you get that, Charlie?

CHARLIE MUNGER: Well, he was talking about how do we share information across units.

Well, if there’s any sharing, they’re doing it; we’re not.

WARREN BUFFETT: Yeah. We don’t —we don’t have any — we’re the most uncoordinated pair of individuals, operating both in sports or at the executive level.

There are certainly some people at Berkshire that have some contact with other people at Berkshire, but there’s nothing in the way of an organized way of doing that.

I mean, [Gen Re CEO] Tad [Montross] and [GEICO CEO] Tony [Nicely] and [reinsurance chief] Ajit [Jain] are friends, and [National Indemnity President] Don Wurster, and they see each other sometimes so they’re — and I’m sure they talk insurance.

But we don’t make any attempt — if somebody goes in to get a quote from Gen Re and gets a quote from Ajit, there’s no — we have no system that prevents — or that coordinates — our two units to give the same quote or anything of the sort.

We want our businesses to run very autonomously, and we want the managers of those businesses to feel like they’re their own business. That’s enormously important at Berkshire.

So we don’t tell the people at Clayton Homes to buy their carpet from Shaw or to buy their paint from Benjamin Moore. We just don’t do that.

And you could say that’s kind of silly, but it’s — any gains we would get from doing that, by selling incremental units, I think would be far offset by the change in the feeling of the manager as to whether they’re really running their own business.

We hand people billions of dollars and they hand us stock certificates and they have been running those businesses for decades in many cases.

And we want them to feel the same way the next day, when they’ve got the money and we’ve got the stock certificates, as the day before when they had the stock certificates and we had the money.

And the moment we start telling them how to change the way they operate, or to coordinate with this guy, or get this person’s approval, or anything like that, you know, that just erodes that advantage, which we think is very substantial, that they have this proprietary feeling about their business.

Have I answered that, Charlie?

CHARLIE MUNGER: Yeah. We’re trying to fail at what you wanted us to succeed at. (Laughter)

WARREN BUFFETT: I’ll have to think about that a little. (Laughter)

14. Acquisition of a forest products company unlikely

WARREN BUFFETT: Station 5?

AUDIENCE MEMBER: Hello, Charlie and — Warren.

WARREN BUFFETT: I’m Warren, yeah. (Laughs)

AUDIENCE MEMBER: Yes. Well, my name is Richard Cooper, and I’m from Honor, Michigan. And I’m a professional forester.

Trees are one of America’s greatest resources, and it seems that a well-run forest products firm would fit well with Berkshire’s holdings.

You’ve got the transportation system to move the product. You have the construction firms to use the product — furniture companies, home builders — and you’ve got insurance companies to cover the insurance end of the holdings.

Have you given any thought to getting a forest products firm?

WARREN BUFFETT: Well, your question touches on the answer we just gave. We would not really consider the other activities that Berkshire has in determining whether we would get into forest products.

We’ve looked at forest products companies, but we don’t think about them in terms of how they may divert their products to some other subsidiaries of ours, or how other subsidiaries might benefit from selling them something.

To date, we’ve looked at several. To date, we’ve never really found any that met our test for returns against purchase price.

I mean, it’s a business that’s easy — or reasonably easy — to understand, I mean, in terms of the economics and its permanence and all that sort of thing. But the math has escaped us, in terms of being compelling.

Charlie?

CHARLIE MUNGER: A lot of forest products companies convert themselves into flow-through partnerships of some kind so they don’t pay normal full corporate income taxes the way we do.

Berkshire is actually organized so that we’d be a disadvantage — we’d be at a disadvantage — in bidding for forests.

WARREN BUFFETT: Yeah. We’re at a disadvantage in terms of any kind of activity that people manage to convert into pass-through organizations.

So particularly — take REITs, Real Estate Investment Trust, you know, they have eliminated one tax in their structure that we would bear.

And like Charlie says, you know, you have firms like Plum Creek Timber and those sort of operations where they have eliminated the federal income tax, and we don’t have any structure like that. So just going in, we have a structural disadvantage that is really quite significant.

15. No magic formula for calculating risk

WARREN BUFFETT: Becky?

BECKY QUICK: This question comes from Scott Bondurant who is from Chicago, Illinois, and he’s a shareholder.

And he asks, “Can you please elaborate your views on risk? You clearly aren’t a fan of relying on statistical probabilities, and you highlight the need for $20 billion in cash to feel comfortable. Why is that the magic number, and has it changed over time?”

WARREN BUFFETT: Yeah. Well, it isn’t the magic number, and there is no magic number.

I would get very worried about somebody that walked in every morning and told us precisely how many dollars of cash we needed to be, you know, secured at three sigma or something like that.

Charlie and I have had a lot of — we saw a lot of problems develop in an organization that expressed their risks in sigma, and we even argued sometimes with the appropriateness of how they calculated their risk.

CHARLIE MUNGER: It was truly horrible.

WARREN BUFFETT: And they were a lot smarter than we were. (Laughs) That’s what’s depressing.

But we both have the same bend of mind whereby we think about worst cases all the time, and then we add on a big margin of safety, and we don’t want to go back to go.

I mean, I enjoy tossing those papers in the other room, but I don’t want to do it for a living again.

So we undoubtedly build in layers of safety that others might regard as foolish, but we’ve got 600,000 shareholders and we’ve got members of my family that have 80 or 90 percent of their net worth in the company.

And I’m just not interested in explaining to them that we went broke because there was a one-hundredth of 1 percent chance that we would go broke and there was a — the remaining probability was filled by the chance of doubling our money, and I decided that that was just a good gamble to take.

We’re not going to do that. It doesn’t mean that much. We are never going to risk what we have and need for what we don’t have and don’t need. We’ll still find things to do where we can make money, but we don’t have to stretch to do it.

And it’s my job — and Charlie thinks the same way. We don’t have to talk about it much.

But it’s our job to figure out what can really go wrong with this place and, you know, we’ve seen September 11th, and we’ve seen September of 2008, and we’ll see other things of a different nature but similar impact in the future.

And we not only want to sleep well all those nights, we want to be thinking about things to do with some excess money we might have around.

So it is — if you’re calibrating it in some mathematical way, I would say it’s really dangerous. I could give you a couple examples on that, but unfortunately I’ve learned about them on a confidential basis.

But some really great organizations have had dozens of people with advanced mathematical training and make — and thinking about it daily, making computations, and they don’t really — they don’t really get at the problem.

So it’s at the top of the mind, always, around Berkshire, and your returns in 99 years out of 100 will probably be penalized by us being excessively conservative, and one year out of a hundred, we’ll survive when some other people won’t.

Charlie?

CHARLIE MUNGER: Yeah, how do these super-smart people with all these degrees in higher mathematics end up doing these dumb things?

I think it’s explainable by the old proverb that, “To a man with a hammer, every problem looks pretty much like a nail.” They’ve learned these techniques and they just twist the problem so they fit the solution, which is not the way to do it.

WARREN BUFFETT: And they have a lack of understanding of history, I would say.

One of the things — in 1962, when I set up our office in Kiewit Plaza, where we still are, it’s a different floor, I put seven items on the wall. Our art budget was $7, and I went down to the library, and for a dollar each I made photo copies of the pages from financial history.

And one of those cases, for example, was in May of 1901 when the Northern Pacific Corner occurred, and it’s kind of interesting in terms of being in Omaha because Harriman was trying to get control of the Northern Pacific, and James J. Hill was trying to control the Northern Pacific.

And unbeknownst to each other, they both bought more than 50 percent of the stock. Now, when two people buy more than 50 percent of the stock each, and they both really want it, they’re not just going to resell it. You know, interesting things happen.

CHARLIE MUNGER: To the shorts.

WARREN BUFFETT: And in that paper of May 1901, the whole rest of the market was totally collapsing because Northern Pacific went from $170 a share to $1000 a share in one day, trading for cash, because the shorts needed it.

And there was a little item at the top of that paper, which we still have at the office, where a brewer in Troy, New York, committed suicide by diving into a vat of hot beer because he’d gotten a margin call.

And to me, the lesson — that fellow probably understood sigmas and everything and knew how impossible it was that in one day a stock could go from 170 to 1,000 to cause margin calls on everything else.

And he ended up in a vat of hot beer, and I’ve never wanted to end up in a vat of hot beer. (Laughter)

So those seven days that I put up on the wall — life in financial markets has got no relation to sigmas.

I mean, if everybody that operated in financial markets had never had any concept of standard errors and so on, they would be a lot better off.

Don’t you think so, Charlie?

CHARLIE MUNGER: Well, sure. (Laughter)

WARREN BUFFETT: Here, have some fudge. (Laughs)

CHARLIE MUNGER: It’s created a lot of false confidence and — now, it has gone away.

Again, as I said earlier, the business schools have improved. So has risk control on Wall Street. They now have taken the Gaussian curve and they’ve just changed its shape.

WARREN BUFFETT: Threw it away.

CHARLIE MUNGER: They threw it away. Well, they just made a different shape than Gauss did, and it’s a better curve now, even though it’s less precise.

WARREN BUFFETT: They talk about fat tails, but they still don’t know how fat to make them. They have no idea.

CHARLIE MUNGER: Well, but they knew — they’ve learned through painful experience they weren’t fat enough.

WARREN BUFFETT: Yeah. They learned the other was wrong, but they don’t know what’s right.

CHARLIE MUNGER: We always knew there were fat tails. Warren and I, in the Salomon meetings, would look over at one another and roll our eyes when the risk control people were talking.

16. Swiss Re contract expiration is “nonevent”

WARREN BUFFETT: OK. Jay?

JAY GELB: This question is on Swiss Re.

Berkshire’s quota share treaty with Swiss Re, covering 20 percent of Swiss Re’s property-casualty risk, ends in 2012. Does Berkshire plan to replace that premium volume through another transaction?

WARREN BUFFETT: Well, we would hope to — we always hope to get more good volume, but what we do has no relationship to the expiration of that contract.

I mean, that contract was a five-year contract. It’s a big contract, billions of dollars a year. But the fact that that expires and our premium volume will go down by multiple billions does not cause us to do one thing differently than we would do otherwise.

We’ve got the capacity to write billions and billions of business, and we would love to do it if we were expanding the Swiss Re contract, and we don’t want to write any dumb business when we lose that contract. It’s just — it’s a nonevent, in terms of future strategy.

It’s not a nonevent, in terms of losing some business that we like, but it’s a nonevent in terms of any future strategy.

We regard every decision, you know, as independent. We don’t do — if money comes in, that doesn’t cause us to want to think about doing something today that we weren’t thinking about doing the day before. We just don’t operate that way.

We’ll have things that come along that are terrific, and that doesn’t mean the next day we don’t want to look for something in addition that’s terrific. Every decision is sort of independent.

CHARLIE MUNGER: I don’t think there’s another large insurance operation in the world that is more cheerful about losing volume than we are. If it doesn’t make sense —

WARREN BUFFETT: We don’t want it.

CHARLIE MUNGER: — if the business has to shrink, we let it shrink.

WARREN BUFFETT: We don’t measure ourselves in any way —

CHARLIE MUNGER: By size.

WARREN BUFFETT: — by size, except by the growth in value over time.

17. Housing problems after Fannie and Freddie “left the tracks”

WARREN BUFFETT: OK. Station 6.

AUDIENCE MEMBER: Wendy Wasserman (PH) from Boston. Warren, best wishes on a speedy and complete recovery.

My question is regarding Fannie Mae and Freddie Mac. You wrote that you expected the housing market to be improved by now but that it hasn’t improved.

You spoke about demographics and the housing-dependent parts of the business. You did not, however, speak about Fannie and Freddie. Fannie Mae, the Federal Reserve, and Freddie Mac are the three largest financial institutions.

Then comes J.P. Morgan and Bank of America. Fannie and Freddie have been in conservatorship for 3 1/2 years, the longest. Initially they had combined assets of 1.6 trillion, each a Lehman Brothers.

Now they have 5.5 trillion, adding 4 trillion of off-balance sheet items and government mortgage modification programs.

They are public companies with operating losses, a negative net worth, owned by the government, acting at times with the power of the government, financed with a blank check from Treasury, and taxpayers, who are usually also homeowners.

Most near-bankrupt companies shed assets. These two added assets and liabilities. AIG and General Motors have emerged; these two have not.

Contrary to popular belief, the securities law did not need the biggest rewriting since the Great Depression. The 1933 and 1934 Securities Acts worked. Sarbanes-Oxley works.

Fannie and Freddie, and the 1938 and 1968 governing laws, do not, no matter how much they have contributed to U.S. housing standards.

What is the solution? How many years can they stay in conservatorship? Can the resolution trust authority be used? Are they truly too big to fail? What role will banks like Wells Fargo and U.S. Bancorp, who are leading mortgage players — (applause) — play now that they are well capitalized?

What happens to the MBS market and the (inaudible) system? How can housing improve even with better demographics without an answer to Fannie and Freddie?

WARREN BUFFETT: Well, I got through college answering fewer questions than that. (Laughter and applause)

I would say that the overall tone of your remark, which indicates that you think Fannie and Freddie are a mess, is probably justified.

And of course, the reason they’re a mess is we haven’t figured out yet, or we can’t get agreement, on what the best structure is to have in this country going forward to generally finance mortgages.

There’s no question that a government guarantee program brings down the overall cost of financing mortgages over time.

And then we had one, of course — we’ve had several — but we had one in Fannie and Freddie that went wild when we introduced the profit motive into the mix of two institutions that really were half trying to serve a housing mission and half trying to serve a profit mission, and gradually the profit mission sort of overcame the housing mission.

Congress hadn’t sorted that out yet. It’s a huge item, obviously. There are roughly 50 million residential mortgages in the United States, you know, and they total 10 trillion or so.

It’s important that you have a market that does minimize costs for borrowers who have adequate down payments and adequate income and all of that.

And I think for a while, we were going in that direction with Fannie and Freddie, and then they left the tracks.

But that’s going to get — how long they can stay in conservatorship? They can stay there a long time.

They will stay there, in my view, until politically we get some kind of a resolution that — as to a future policy — that both parties can go along with, and it looks to me that’s a ways off.

Charlie?

CHARLIE MUNGER: Well, of course, the interesting thing is that Canada, right to the north, kept a more responsible real estate lending system, and they had almost no trouble.

We departed completely from sanity and decency and morality in mortgage lending in the United States, and the government of the United States participated in the folly, and they did it in a big way.

And it was wrong not to step on the boom that was obviously so full of fraud and folly. And I sometimes say that [former Federal Reserve Chairman] Alan Greenspan overdosed on [author] Ayn Rand when he was young. (Laughter)

He thought if an ax murder happened in a free market, it was probably all for the best.

And so we had — there’s a lot of disgraceful behavior we have to regret, in terms of what happened, and it caused enormous damage. And a modest little country like Spain, and another one called Ireland, you had something somewhat similar.

People just allowed craziness to go unchecked, and that was a big mistake. And Greenspan was really wrong. It’s the duty of the government to step on crazy market booms — (applause) — and prevent them by keeping sound policies, as Canada did.

And so you put your finger on a very disgraceful episode in United States history.

But once we were into it, I think we had no option but to do exactly as the government did, which was to nationalize Fannie Mae and Freddie and try to make them behave better in the future, and that’s what’s happened.

WARREN BUFFETT: It’s going to be a long runoff.

And Congress, it wasn’t just the Fed— Congress did their share in that, too. But it was —

CHARLIE MUNGER: Everybody did.

WARREN BUFFETT: Everybody did. I mean, it —

CHARLIE MUNGER: By the way, we didn’t. (Laughter)

WARREN BUFFETT: Charlie, we resigned from the Savings and Loan League a good many years ago just because we thought such nutty stuff was going on and —

CHARLIE MUNGER: It was disgraceful.

WARREN BUFFETT: Yeah. And Charlie got lectured for it, too. (Laughs)

CHARLIE MUNGER: Yes, I did.

WARREN BUFFETT: They made him go to school, learn how to loan money, and I think one of the regulators said, “Well, what kind of people do you lend money to?”

And I think Charlie said, “Well, the one thing we do is we don’t lend money to people like you.” (Laughter)

And for some reason we had regulatory problems after that. (Laughter)

CHARLIE MUNGER: I was not popular because he said you’re using the government’s credit in our savings and loan, and therefore, you have to make a lot of dumb loans because we’re telling you to.

And I said, “We’re not using the government’s credit. As a condition of one of our mergers, Berkshire Hathaway agreed you’d never have trouble with our savings and loan. We’re paying you insurance premiums, and you’re using our credit.” This did not make me popular.

WARREN BUFFETT: No. (Laughter)

CHARLIE MUNGER: And he was a florid-faced alcoholic. (Laughter)

I remember it very well.

WARREN BUFFETT: I do, too, but —

CHARLIE MUNGER: We left the savings and loan business.

WARREN BUFFETT: We have more problems when Charlie wins an argument. (Laughter)

But it’s a lot of fun. (Laughter)

CHARLIE MUNGER: Well.

18. How Todd Combs and Ted Weschler are compensated — and taxed

WARREN BUFFETT: OK. Andrew?

ANDREW ROSS SORKIN: OK, here’s the question:

“Please tell us more about your experience this past year with Todd Combs and Ted Weschler. What did they do well, and did they make any mistakes? And please discuss how you compensate them a bit more.

In an interview, you said that Todd Combs was well compensated for the performance of his stock picks last year.

Should we be worried about a short-term horizon for compensation? How do you ensure that Todd and Ted don’t chase high-flying stocks for the sake of compensation?

WARREN BUFFETT: Well, we’ve always been more concerned about how our record is achieved than the precise record itself. And with both Todd and Ted, Charlie and I were struck by, not only a good record, but intellectual integrity and qualities of character, a real commitment to Berkshire, a lifelong-type commitment.

And we’ve seen hundreds and hundreds of good records in our lifetimes; we haven’t seen very many people we want to have join Berkshire.

But these two are perfect, and we pay them each a salary of a million dollars a year, and we give them 10 percent of the amount by which their portfolios beat the S&P.

So that if they beat the S&P by 10 points, they get one point, for example, and we get nine points. But we do it on a three-year rolling basis so you don’t get the seesaw effect.

And each one gets paid 80 percent based on their own efforts and 20 percent based on the other person’s, so that they have every incentive to operate in a collaborative way rather than sit there jealously guarding their own ideas and hoping the other guy doesn’t do very well.

So it’s a — I don’t think we could have a better — it’s the same structure on pay, basically, that we had with Lou Simpson for 20-some years, except he did not have a partner.

To the extent that they employ people underneath them, that comes out of their performance record, and it’s worked far better than either Charlie and I had hoped, and we had pretty high hopes.

We had 1 3/4 billion with each of them at year end, but we’ve added another billion each on March 31, so they’re running 2 3/4 billion apiece.

I don’t look at what they do. I see it eventually when I look at a GEICO portfolio at the end of the month or something of the sort.

But they operate through their own brokers. They don’t — I’ve told them that the only thing I want to know is, if they’re getting into a new name, I just want to know the name so I’m certain that it isn’t something that I am familiar with some inside information on, or something, so that there’s no inadvertent appearance that we would be — or that their purchase would have been influenced by something that I knew about.

That’s never come up. They can’t — they can’t — if there’s something we would have to file a 13D on, they would have to check with me. But basically none of that’s going to happen. Never happened with Lou, either.

They operate in different stocks. They’ve got a much bigger universe than I have because they’re working with 2 3/4 billion instead of 150 billion, so they can look at a lot more things.

And they’ve cheerfully pitched in for other duties that they don’t really get compensated directly on, but that are helpful to Berkshire. And they will — they’ll do a great job for Berkshire when they’re running a whole lot more money than they are now.

Ted only joined us this year. Todd did substantially better than the S&P last year, so he racked up a big performance gain, a third of which was paid to him in the first year, but the two years is deferred and he could lose that back if he were to underperform.

So I think we’ve got a good system and terrific people.

Charlie?

CHARLIE MUNGER: What’s interesting about it is that at least 90 percent of the investment management business of the United States would starve to death on our formula. I think — and I think these people will do pretty well with it. So —

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: And not only that, they’ll be terrific for the long pull for Berkshire. They’re the kind of people we like having around headquarters.

WARREN BUFFETT: Yeah. I hope they get into that — those 400 taxpayers I mentioned, but if they do, even under the present haul, they’ll be paying taxes in the mid-30s.

They are doing what they did before which — they ran hedge funds — but they’re going to work every day thinking about the same things, and they get taxed at 35 percent-plus.

And if they were running hedge funds, they’d get taxed at 15 percent. And for all of those in the audience who can reconcile that, there’ll be a free Dilly Bar. (Laughter)

CHARLIE MUNGER: I think each of them could earn more money in a different format but with a less desirable lifestyle.

WARREN BUFFETT: Yeah. We have a little free Coke machine at our office. (Laughter)

CHARLIE MUNGER: Well, they get to hang around with a fellow eccentric of the same type as Warren.

19. GEICO’s profit hurt by Florida decision on auto insurance liabilities

WARREN BUFFETT: OK, Gary, before we go too far with this. (Laughs)

GARY RANSOM: My next question is on GEICO, a little bit more detailed question.

In the fourth quarter of last year, the GEICO combined ratio went up over 100 percent for the first time since, I think, in some quarter in 2001.

Now I realize a quarter doesn’t make a trend, but something unusual happened in the quarter. Can you tell us more about that?

WARREN BUFFETT: The biggest thing that happened was a decision, or maybe a couple of decisions — Tony Nicely could elaborate more on them — but they involved Florida and some interpretation down there, I think, of the PIP coverage that caused us to set up some extra reserves that — they weren’t extra — I mean, they were called for by what was happening in Florida at that time.

But it was a one-time sort of arrangement. And in the first quarter of this year, on a comparable basis, as you’ve probably seen in our Q, we wrote at about 91.

So, the basic business is good, but the Florida decision cost us significant money because it changed our potential liability for a bunch of claims already outstanding.

And my guess is you’re more familiar with the exact terms of that than I am, but that is the bottom line answer on it.

And GEICO — every metric for GEICO that I’ve seen this year, in terms of retention, combined ratio on seasoned business versus new, all of that sort of thing, is quite consistent with our general record.

GEICO is a terrific asset for Berkshire. I mean, it will be worth — it’s worth a lot of money now. It will be worth a lot more money in the future.

20. Environmental benefits of freight railroads

WARREN BUFFETT: Station 7.

AUDIENCE MEMBER: Hello, Charlie and Warren. My name is Stuart Kaye from Matarin Capital Management in Stamford, Connecticut.

You mentioned earlier today that one of Burlington Northern Santa Fe’s competitive advantages is its environmentally-friendly business relative to transportation alternatives.

When evaluating other investment opportunities, what financial statement or other publicly available data do you use to gauge whether a company is both environmentally responsible and a good investment?

WARREN BUFFETT: Well, in terms of what’s a good investment, you know, we try to look at every aspect, everything we can that will tell us how the world is going to develop for both that industry and the company in the future.

And sometimes we feel a lot of confidence about that. If we’re looking at Coca-Cola, we think we know a lot about how the world will look with the Coca-Cola Company over the next five or 10 or 20 years.

If we’re looking at some retail business or something, we would not have the same degree of conviction at all.

I mentioned the environmentally-friendly aspect of it. It is just — you know, it is just — requires less, in the way, of the world’s resources to move goods, you know, on a steel rail in large containers, you know, with only a couple people involved with 120 cars, a train a mile long, than it does if you’re working, you know, with trucks that have many, many more people and much more in the way of fuel to deliver the same kind of tonnage.

So there’s no — we don’t — there’s no magazine we go to or books we go to or anything like that. We just look at the dynamics of the specific industry and company.

Charlie?

CHARLIE MUNGER: Warren, even though he’s an unseasoned young man, was able to figure out that if you used a lot less fuel per ton of freight, you were causing fewer undesired particles to go into the air.

WARREN BUFFETT: That’s about the limit of my capabilities, folks. (Laughter)

21. Berkshire lets managers paint their own pictures

WARREN BUFFETT: OK. Station 8.

We’ve gotten into the — we’ve covered 36 questions from the two panels, so we’re now going to keep going around the audience as long as the questions last, we’re going to give you more than your share at this point.

AUDIENCE MEMBER: Good afternoon, Warren and Charlie. Up here.

WARREN BUFFETT: Yeah, I see ya.

AUDIENCE MEMBER: All right. Very good.

John Norwood from West Des Moines, Iowa. We spent a lot of time today talking about two out of the three things you fellows said you spend a lot of time thinking about. One is allocating capital; one is managing risk.

We’ve had just one question related to motivating your people and tied into executive compensation. So that’s what I’m interested in learning more about: executive compensation, how you motivate Berkshire managers, financial versus nonfinancial incentives. Can you speak more about that?

WARREN BUFFETT: Yeah. Well, obviously, Charlie and I have thought a few times about why do we do what we do when we don’t need the money at all. And we jump out of bed excited about what we’re going to do every day, and why is that the case?

Well, we get the opportunity to paint our own painting every day, and we love painting that painting, and it’s a painting that will never be finished.

And you know, if we had somebody over us that was saying why don’t you use more red paint than blue paint, and we had all the money in the world, we might tell them what they could do with the paint brush. (Laughter)

But we get to paint our own painting, and ours overlap. We have more fun doing it together than we would have doing it singly, because it is more fun to do with people around you that are pleasant and interesting to be around, and we also like applause.

So if that works with us, we say to ourselves — (applause) — that was not a brazen — (Laughs)

If that works for us, why shouldn’t it work for a bunch of other people who have long been doing what they like to do and now, in many cases, have all the money they possibly need? But still, they may have to sell us their business for one reason or another connected with family or taxes, who knows what else?

But they really like what they’ve been doing. That’s the reason — probably — the reason they’ve been so good at it — part of the reason they’ve been so good at it.

So we give them the paint brush, let them keep the paint brush, and we don’t go around and tell them to use more red paint than blue paint or something of the sort. And we applaud and we try to compensate them fairly, because though they aren’t primarily doing it for the money in many cases, nobody likes to be taken advantage of.

But that has not been a big problem at Berkshire. We have not had compensation problems over time. If you think about it, over 40-odd years, the times when compensation has been of importance are practically nil.

And it — we don’t — we’ll just take that we’ve talked about the investment — the compensation of two investment people. Those people are making below hedge fund standards, below private equity standards, and having a less favorable tax treatment.

They’ll still make a lot of money, I mean, huge amounts of money. And I hope that they are having a good time doing what they’re doing. I think that’s why they’re here.

And I think they’ll enjoy it a lot more over the years than going around to a bunch of people explaining why they’re worth two and twenty even in the years that aren’t so good and trying to attract new money when other people are making bigger promises someplace else. It’s just a different way to live your life.

So we want to have our managers enjoying their lives and enjoying their business lives. And we get rid of some of the things they don’t like, a lot of them.

I was with a fellow the other day that had come from England. And he’s got plenty of business problems to work on, and he’s spending a significant part of his time talking to investors, which does him no good.

I mean, he ought to be talking to customers or, you know, employees or something, but he — I think a number of managers may have to spend time talking to lawyers or talking to bankers or talking to investors and what they really like to do is run their businesses, and we give them the best opportunity to do that.

So I can’t put passion into somebody about their jobs, but I can certainly create a structure that will take that passion away from them.

And Berkshire is a negative art in that way. We focus on not messing up something that’s already good, and that’s my job. And I think the person that follows me will have a very similar job.

But we have a unique — we have a bunch of managers nobody else can hire and, you know, how many companies of size can you say that about around the country these days?

And I think we will retain that advantage for many, many decades to come. It works, and people know that it works within the company.

So it’s self-reinforcing, and there’s nothing like getting proof that what you’ve designed works, to cause you desire to perpetuate it and to build upon it.

Charlie?

CHARLIE MUNGER: Well, and we don’t have any standard formulas like they have in some big companies where X percent is on diversity and Y percent is on something else and Z percent is on something else and everybody is putting all this stuff through a big human resources department.

And every incentive arrangement with a key executive is different from every other, so we can’t help you with a standard formula. We don’t have one.

WARREN BUFFETT: Our businesses are all so different. It would be crazy to try and have some master arrangement, you know, that involved return on capital — there are some businesses that don’t use any capital in our companies — or operating margins. They’re just — you know, we could hire consultants in compensation to come in and they —

CHARLIE MUNGER: We never have.

WARREN BUFFETT: No, we never will.

But, you know, they would want to please the people they were working for and get referred elsewhere.

I mean, I will guarantee that you can go to many corporations, if you’ve got a comp committee, it meets periodically, and the human relations VP comes in and probably suggests a compensation consultant to take. And, you know, who does a human relations VP want to — whose approval do they want? The CEO’s.

Whose approval does the compensation consultant want? Well, they want to get recommended elsewhere by the CEO and the human relations VP. So what kind of a system do you get? You get what I call ratchet, ratchet, and bingo, you know.

We’re not going to have any of that at Berkshire, and like I say it’s worked very well.

Now, we’ve had people make lots of money at Berkshire. I mean, we’ve got numbers in eight figures, you know, a page-and-a-half or so, I saw it the other day, that would be at a million dollars and over, and we’ll have more.

But it does relate to logical measures of performance in practically all cases. And the amount of time we spend on it is just — I am the compensation committee for 60 or 70 people, and I’m not overworked. (Laughs)

Anything further on that, Charlie?

CHARLIE MUNGER: Well, in past years, I’ve made the remark about compensation consultants that prostitution would be a step up for them. (Laughter)

WARREN BUFFETT: Charlie is also in charge of diplomacy at Berkshire. (Laughter)

We told you we’d get to everybody in terms of offending them before the day was over. (Laughter)

It didn’t even take until 3:30.

22. Modest GDP growth creates “staggering” increases over time

WARREN BUFFETT: Station 9.

AUDIENCE MEMBER: Good afternoon gentleman. (Inaudible), Arlington, Virginia. I have a question for you.

What will it take to get America growing by 4 percent again?

WARREN BUFFETT: Well, Charlie, that’s too easy for me. You take it. (Laughter)

CHARLIE MUNGER: A lot. A lot. It’s not going to be easy.

WARREN BUFFETT: No. But if population grows 1 percent a year and GDP, in real terms, grows 2 1/2 percent a year, by the standards of 2,000 or 5,000 years, that would be remarkable.

I mean, it would result in, you know, a quadrupling of real GDP per capita every century.

We don’t — it’s nice to have 4 percent in real terms, but 2 1/2 percent, it may be slow in getting us out from the slump that we entered into a few years ago, but it’s a really — it’s a remarkable rate of growth for a country that already enjoys a very high standard of living.

It’s a remarkable rate of growth for a country that has 1 percent a year gain in population. It is huge over one person’s lifetime. I’ve used this a lot of times, but in my lifetime, the real GDP per capita has increased six-for-one.

CHARLIE MUNGER: But it’s nowhere near 4 percent per annum.

WARREN BUFFETT: No. It’s staggering. It’s staggering. And we have $48,000 or thereabouts of GDP per capita in the United States. We are unbelievably rich.

But an awful lot of people are not feeling that way, and in many cases for good reason. But we’ve got a tremendous country to work for — to work with.

It’s got all kinds of strengths. And it has this huge abundance that — if my parents back in 1930, if you’d told my mother and father that when I was 81, that I would be living in a country that had six times the per capita output of their day, they would have thought, you know, that this would be a utopia. And it hasn’t been bad, I might add.

But our country is not a mess. Our politics may be a mess, but the output is — (applause) — you know, it’s terrific.

Charlie, if you had to guess the real growth rate per capita over the next 20 years in the United States, what do you think it would be?

CHARLIE MUNGER: That’s after inflation?

WARREN BUFFETT: No. This is just real.

CHARLIE MUNGER: Real, that’s what I mean. After taking inflation out of it?

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: Well, if God were making the guarantee, I would settle for a very low figure. I think we’re a very mature economy, with a lot of social safety net, and a lot of competition from new nations rising, I think 1 percent per capita in real growth would be a sensational result.

WARREN BUFFETT: Yeah, which in 20 years means people would be living close to 25 percent better on average. That’s not bad. That’s the next generation — in one generation.

CHARLIE MUNGER: You get your expectations too high. When you think that 4 percent is what the world ought to provide, you’re asking for trouble.

WARREN BUFFETT: It won’t do it.

CHARLIE MUNGER: That’s what happened in the housing boom. People got these foolish dreams, and they just started doing foolish things to try and reach unattainable objectives.

WARREN BUFFETT: But if you had the 1 percent, you would be talking about each generation living something over 20 percent better than their parents did.

CHARLIE MUNGER: For this base, it would be a sensational result.

WARREN BUFFETT: And we’ll probably get it, in my view.

It won’t come in even increments, but the system still works.

And incidentally, you’ve actually seen — even after the incredible crash, in effect, that we had in the fall of 2008, you’ve seen an enormous amount of resilience here and, of course, you compare it with Europe and it looks particularly strong, but —

CHARLIE MUNGER: Yes, but the resilience has been better for the businesses than it has been for the employment situation —

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: — which is too bad.

WARREN BUFFETT: Yeah. Business has done extraordinarily well.

Business profits as a percent of GDP were right at the height, you know, last year — and of course our own worth.

I mean, that produces a lot of strains on the political system.

Well, we’ve mused enough on that.

23. Buffett won’t contribute to super PACs

WARREN BUFFETT: So let’s go to station 10.

AUDIENCE MEMBER: Hi, Warren. Arthur Lewis (PH) from Denver, Colorado, new home of Peyton Manning. But my question is —

WARREN BUFFETT: It’s also the home of Johns Manville. (Laughter)

AUDIENCE MEMBER: My question is with the election coming up, have you thought about making a donation to a super PAC to try to protect a competitive advantage?

WARREN BUFFETT: No, I won’t. You know, I wish it never — (applause) — [U.S. Supreme Court case] Citizens United never happened.

It’s very tempting, and I will hear this argument put forth to me. People will say, well, you know, we don’t believe in it either, but they’re doing it on the other side, and, you know, you’ve got hundreds of millions pouring in on the other side and you’re going to tie your hands behind your back, you know, just over principle.

But, you know, I think the whole idea of super PACs is wrong, and I think the idea of huge money by relatively few people influencing politics, I think we’ve got enough of a push toward a plutocracy from a lot of other factors that we don’t need to throw it into the voting process.

And I might say that — I’ll say this for [Las Vegas Sands CEO and GOP contributor] Sheldon Adelson who was — you know, he and his wife I think have probably put 12 million in or something. He says this, and I believe him entirely. He says the same thing. He thinks the system is wrong, but he says that’s the way the system is. So he has to — you know, he has to play or other people will play and he won’t be.

I can understand that, but I don’t want to do it. I just think that, you know, you’ve got to take a stand someplace.

And the idea that I should toss $10 million into some super PAC which is going to spend its whole time kind of misleading people about the opponent’s behavior or record, I don’t want to see democracy go in that direction.

Charlie? (Applause)

CHARLIE MUNGER: Well, I’m ordinarily so negative and I am extremely negative about our — the nature of our politics with both parties doing the gerrymandering and requiring this unified thought so that the crazies on each side get all this power.

And I remember when we did the Marshall Plan with bipartisan support. That’s more my kind of a world. So I don’t like it.

That said — (applause) - I think we’re lucky to have two candidates as good as we have. Considering the system, I think we’ve done pretty well this year.

WARREN BUFFETT: How would you feel about contributing to a super PAC if the other side had way more going to their super PACs?

CHARLIE MUNGER: Well, there are certain subjects where I would give money to a super PAC if I thought it would work. If I thought I could really reduce legalized gambling in the United States by a major amount, I would be willing to spend some money to get it done. (Applause)

I think it does us no good. And to the extent we have allowed our securities markets to be more like gambling casinos, I think that’s a dumb outcome, too. (Applause)

WARREN BUFFETT: Yeah. If you’ve got a super PAC out there, call on Charlie, not me.

24. Don’t worry about Berkshire’s short-term stock moves

WARREN BUFFETT: 11.

AUDIENCE MEMBER: Glenn Tongue, T2 Partners, shareholder from New York.

In an interview with Becky yesterday, Mr. Munger commented that in the old days, the vast majority of Berkshire’s value was embedded in the investment portfolio, which is presumably worth around book value.

Today the majority is in the controlled businesses, which we believe are worth a substantial premium to book. In light of this, Berkshire Hathaway’s intrinsic value, as a multiple of book value, should be increasing over time, yet Berkshire’s price-to-book value has been declining. I’m trying to understand this.

Since the beginning of the year, Berkshire’s investment portfolio — I’m sorry — since the beginning of last year, Berkshire’s investment portfolio has increased in value by $20 billion and you’ve acquired Lubrizol. The controlled businesses are going gangbusters, yet the stock price hasn’t budged. Is “Mr. Market” simply in one of his manic moods?

WARREN BUFFETT: Charlie?

CHARLIE MUNGER: Well, I’d say no, but I’d say it’s in the nature of things that the market is not going to do exactly what you want when you want it.

I think over time, “Mr. Market” will treat the Berkshire shareholders fine, and I wouldn’t worry too much about what happens over this six months or this 12 months.

I don’t think you’re really all that welcome in this room if the short-term orientation is what turns you on. (Applause)

WARREN BUFFETT: I think you’d agree, though, probably, that Berkshire is somewhat cheaper relative to its price than it was a year ago.

CHARLIE MUNGER: Yes, absolutely, if that’s your test. Should you feel better about the margin of safety in Berkshire? Yes, it’s fine.

25. Why Berkshire hasn’t paid a dividend

WARREN BUFFETT: OK. Station 1.

AUDIENCE MEMBER: Good afternoon. Based on your earlier — oh, this is Roberta Cole (PH) from the Twin Cities of Minnesota.

Based on your earlier comments you made this morning, we understand you will buy back shares to help increase share value.

Our confusion, and appreciate clarification, arises as to why you are unwilling to distribute a dividend on a sporadic basis when the stock is too expensive to buy back, and you have the excess cash so that you could do that, particularly in a low interest rate environment. We look forward to clarification. Thank you.

WARREN BUFFETT: Yeah. By and large, we feel, perhaps unjustifiably, but so far justified, that we can create more than a dollar of present value by investing.

Sometimes, if the stock is cheap, we can create more than a dollar of present value by simply repurchasing shares. But even if that option isn’t available, we feel that by every dollar we retain, we can — overall — we can turn that into a greater than a dollar of present value.

And for 47 years, that’s worked. I mean, we have — every dollar retained is turned into more than a dollar of value.

So, if somebody wanted to create their own income stream out of it, they were much better off selling a little bit of stock every year than they were by getting a dividend out of it.

They would have more money working per share in Berkshire if they sold off 2 percent of their holdings than if we actually paid them out in 2 percent dividends.

So the math has been compelling to this point. Now, the question is whether we can keep doing that in the future.

But so far, at any point in our history, if we had paid out dividends — and I paid out 10 cents a share back in the 1960s which was a big mistake, but — we won’t repeat that.

If we paid out dividends, our shareholders, net, would be worth less money than they are by having left it in, and I think that will continue to be the case, but who knows?

Charlie?

CHARLIE MUNGER: Well, I think the dividends will come in due course because eventually we’ll find it difficult to multiply the rabbits, but we hope that that evil day is delayed.

WARREN BUFFETT: And even events of the last few years are encouraging in that respect.

CHARLIE MUNGER: Yeah, absolutely, particularly encouraging.

WARREN BUFFETT: Yeah. I would feel better about — well, the last few years have been better than we anticipated, in terms of being able to put money to work in ways that we think are creating more than a dollar of present value at the time we did it.

CHARLIE MUNGER: You know, MidAmerica may have very unusual opportunities in the next ten or fifteen years to employ an enormous amount of capital at a very reasonable return.

WARREN BUFFETT: Perhaps 100 billion.

CHARLIE MUNGER: What?

WARREN BUFFETT: Perhaps 100 billion.

CHARLIE MUNGER: Perhaps $100 billion. And you can see why that doesn’t make us too excited about dividends.

WARREN BUFFETT: We’ll think about it when we’re older. (Laughter)

CHARLIE MUNGER: A lot older. (Laughs)

26. “Learning and learning and learning”

WARREN BUFFETT: Number 2.

AUDIENCE MEMBER: Hi, Warren and Charlie. This is Thomas Schulz (PH) from Germany.

You once said that if you had just $1 million to invest now, you could achieve returns of 50 percent per year.

Given what you know now, how would you be able to improve on the already spectacular performance of when you started out with your partnership?

CHARLIE MUNGER: We can’t do with our present resources what we did once. There are a lot of things I can’t do that I used to do better. (Laughter)

WARREN BUFFETT: Well, you can confess to those, Charlie. (Laughter)

CHARLIE MUNGER: And so —

WARREN BUFFETT: Well, but I think he may be driving it to the point that have we learned things in managing since we were at that level where we can do even better with $1 million now than we could have done with $1 million then, and I would say the answer to that is yes. Wouldn’t you?

CHARLIE MUNGER: Yeah, I think that’s true.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: There’s enough craziness out there. If you have endless time and only a very small amount of money, I think you could find ways to do pretty well.

WARREN BUFFETT: And in the course of 50 or so years, we have probably learned more, or been exposed to more, that if we were back at the million-dollar level we would know more places to look, I think.

CHARLIE MUNGER: Well, I say what’s interesting about Berkshire, and many of you have been around for so long you’ve actually seen it happen, Berkshire’s record would have been terrible compared to the way it turned out if Warren hadn’t kept learning and learning and learning all the way.

I mean, each decade, to make the record decent, he had to learn to do some things he didn’t know how to do at the start of the decade. And I think that’s pretty much the human condition, and of course, he’s getting old. I worry about him a lot. (Laughter)

WARREN BUFFETT: I’ll resist commenting. (Laughter)

27. Learning from the follies of others

WARREN BUFFETT: OK. Station 3.

AUDIENCE MEMBER: Hi. My name is Jeff Chen (PH). I’m from San Francisco. I’m 26, and I run a software start-up out there.

My question is about mistake minimization. I found that I’ve made a lot of mistakes in my business, looking back, and I want to know besides thinking harder and learning from your own mistakes, what are the most effective techniques you’ve used to minimize the mistakes?

WARREN BUFFETT: Yeah. Well, I — we made mistakes; we’ll make more mistakes.

We do — we think not so much — we think in terms of not exposing ourselves to any mistakes that could really hurt our ability to play tomorrow.

And so we are always thinking about, you know, worst-case situations and there are — on the other hand, we have a natural instinct to do things big, both of us.

So we have to think about whether we’re doing anything really big that could have really terrible consequences.

And, I would say this, that A) I don’t worry much about mistakes, I mean, the idea of learning from mistakes. The next mistake is something different. So I do not sit around and think about my mistakes and things I’m going to do differently in the future or anything of the sort.

I would say that the — you may get some advantage — I think I’ve learned something over the years. I haven’t learned more about a basic investment philosophy. I got that when I was 19 and I still —

I think I’ve learned more about people over the years. And I’ll make mistakes with people. You know, that’s inevitable. But, I think I’ll make more good judgments about people. I’ll recognize the extraordinary ones better than I would have 40 or 50 years ago.

So I think that improves, but I don’t think it improves by certainly any conscious sitting around and focusing on what mistake did I make with that person or this person. I just don’t operate that way.

Charlie?

CHARLIE MUNGER: Warren, I would argue that what you’ve done, and what I’ve done to a lesser extent, is to learn a lot from other people’s mistakes. That is really a much more pleasant way to learn hard lessons. (Laughter)

And we have really worked at that over the years, partly because we find it so interesting, the great variety of human mistakes and their causes. And I think this constant study of other people’s disasters and other people’s errors has helped us enormously, don’t you, Warren?

WARREN BUFFETT: Oh yeah, well that’s true. In terms of reading of financial history and all that sort of thing, I’ve always been absolutely absorbed with reading about disasters. (Laughs)

And there’s no question. I mean, when you look at the folly of humans — you know, I’ve focused on the folly in the financial area — there’s all kinds of folly elsewhere — but just the financial area will give you plenty of material if you like to be a follower of folly.

And I do think that understanding — and that’s what gave us some advantage over these people that have IQs of 180, you know, and can do things with math that we couldn’t do.

They just — they really just didn’t have an understanding of how human beings behave and what happens. 2008 was a good example of that, too.

So we’ve — we have been a student of other people’s folly, and its served us well.

28. We don’t build strong barriers to entries, we buy them

WARREN BUFFETT: Station 4, have we got a question yet?

AUDIENCE MEMBER: John Boxters (PH), Dartmouth, Massachusetts, which as you know is next door to New Bedford, a former home of Berkshire.

My question is how do you build barriers to entry, especially in industries which have few?

WARREN BUFFETT: Industries which have?

CHARLIE MUNGER: Few barriers to entry.

WARREN BUFFETT: Oh.

CHARLIE MUNGER: How do we build barriers?

WARREN BUFFETT: Pretty tough. (Laughs)

CHARLIE MUNGER: Yeah. We sort of buy barriers; we don’t build them. (Laughter)

WARREN BUFFETT: Yeah. Well, think about that because it’s true. It’s very — there are some industries that are just never going to have barriers to entry.

And in those industries, you better be running very fast because there are a lot of other people that are going to be running and looking at what you’re doing and trying to figure out, you know, what your weakness is or what they can do a little bit better.

You really — you know, a great barrier to entry, you know, is something like this. If you gave me 10, 20, $30 billion and told me to go in and try and knock off the Coca-Cola Company with some new cola drink, I wouldn’t have the faintest idea how to do it.

I mean, there are billions of people around the world that have something in their mind about Coca-Cola, and you’re not going to change that with 10 or $20 billion.

CHARLIE MUNGER: Yeah, but our great brands we bought, we didn’t create.

WARREN BUFFETT: We didn’t create them, no.

We eat them but we don’t create them. (Laughter)

But you know, not so many years ago, you remember Richard Branson, he came to this country and he came up with something called Virgin Cola. And, you know, they say a brand is a promise. Well, I’m not sure what promise he was trying to convey by that particular branding — (laughter) — but you know, you haven’t heard anything about that since.

I don’t know how many cola drinks there have been in the history. Don Keough would probably know but there’s been hundreds, I’m sure.

And those are real barriers, but it’s hard to do.

I mean, the people — as Pfizer finds out with Lipitor, you know, the time runs out and what was an absolute gold mine still is a pretty good mine, it’s not what it was by a long shot.

But we’ve got a number of businesses that have — well, nobody’s going to build another railroad, you know. We have a competitor and we will have competitors in alternative methods of transportation and all of that.

But if you’re buying something at a huge discount from replacement cost and it’s an essential sort of activity, you’ve certainly got a barrier to new competition.

But the UP is out there fighting for every bit of business every day, of course.

Charlie?

CHARLIE MUNGER: Yeah. We have found in a long life that one competitor is frequently enough to ruin a business.

WARREN BUFFETT: Well, I did find that out. I started with a gas station out at 30th and Redick here in Omaha, and we had a Phillips station next to it. I had a Sinclair station. And you know, whatever he charged for gas was my price. (Laughs)

I didn’t have much choice. You don’t like to be in a business like that.

29. Munger on China’s BYD and electric cars

WARREN BUFFETT Number 5.

AUDIENCE MEMBER: Hi. I’m Kyle Miller (PH) from Kansas City, Missouri, and I was wondering about the BYD electric car company and if — with the new cars going on sale in the U.S., if that will hopefully increase the value of the company.

WARREN BUFFETT: Charlie is our expert on BYD, and he will now carry forth. (Laughter)

CHARLIE MUNGER: Well, the car market in China is a huge market, and they happen to be located in China. So that’s the main focus of BYD.

I think the first cars they will try and bring here will be for fleets in California where we have environmental troubles and so on, and there may be a market for electric cars with that.

And of course, there are various subsidies that come to people who use electric cars.

I have some relatives who commute into Washington, D.C., and they can only use the fast lane on the freeway if they buy a Prius, and that’s been very helpful to Toyota. And we’ll see a lot more of that sort of thing.

Generally speaking, I think BYD is an interesting company, if you stop to think about it.

Here’s one of eight children of a peasant that becomes a famous engineering school professor, and before he’s reached 50, he’s won the equivalent of China’s Nobel Prize.

And he has created a company which has 180-some thousand employees, a land holding about the size of Macau, and 100-and-some million square feet of buildings.

It’s a very interesting start-up company.

WARREN BUFFETT: What percent of the cars do you think in 2030 will be electrics?

CHARLIE MUNGER: Not many. (Laughter)

WARREN BUFFETT: I shouldn’t have asked.

CHARLIE MUNGER: I think society — it’s like the wind power that’s being subsidized in Iowa.

We should subsidize electric cars in various ways, as they do in Washington, D.C. by letting them use the fast lane on the freeway, in order to get the technology going so that we can wean ourselves from oil more quickly.

So I think there will be more subsidies, and there will be more electric cars, but I’m not expecting a sudden revolution.

I drove the latest version of BYD’s electric car. I was driven around the block Tuesday, and I was flabbergasted at how much improved that car was.

It’s simply amazing how fast people in China are learning to do what took us a long time to learn. The world is getting very much more competitive.

30. Berkshire’s insurance float and low interest rates

WARREN BUFFETT: OK. Area 6.

AUDIENCE MEMBER: Good afternoon, Warren and Charlie. Jay (inaudible) from Mumbai, India, residing in Austin, Texas.

I want to thank you for a great show again, and over the few years that I’ve been here, I’ve truly enjoyed hearing both of you speak and especially ability to synthesize and clarify so many issues on important things like, you know, valuation, the philosophy of life, or sometimes even the trivial things, Warren, like you clarifying two years ago about, you know, your joke on Charlie Rose about Sophia Loren.

They’ve all been extremely beneficial.

My question is regarding some clarification around the insurance business, and especially how you value it. Now, typically we’ve had, you know, a lot of float information and the underwriting profit or loss info.

So, in one way we’ve been geared to think about it is the value of the investments that you get — the present value of the investments that you get — from the future expected float.

However, I think last year, you also talked about the economic goodwill, especially in GEICO, and I think you were using some ratio, 90 percent of that year’s insurance premiums.

So I was wondering if you could just talk to us a little bit about the different ways you could look at valuing the different insurance businesses. That would be of huge help. Thank you.

WARREN BUFFETT: Well, the economic value comes from the ability to utilize float if obtained at a bargain rate.

Now, if interest rates were 7 or 8 percent and float even cost you 2 percent to obtain, it still would be very valuable.

But the economic — at GEICO, for example, I think it’s quite reasonable to expect a fairly substantial underwriting profit, on average, for as far as the eye can see, and growth for as far as the eye can see.

And then coupled with that is a growing float, because float grows with the premium volume. Well, that’s the most — you know, that is a very attractive combination of factors that comes about because GEICO is a low-cost producer.

And it has some real advantages, in terms of scale, in terms of the whole method of operation, that makes it very hard for other companies to duplicate their cost structure. It’s always good, though, to own a low-cost producer in any business, but it’s very, very nice in the insurance business.

Now, Ajit’s business did not come the same way at all. I mean, at GEICO we have, you know, almost — we have well over 10 million policies, and that’s a statistical-type business.

And so we have, you know, hundreds of thousands of drivers in New York, and we have them by age and profession and all kinds of things. So it’s a very statistical-type business, and that coupled with a low cost, is very, very likely to produce a good result over time.

In Ajit’s business, he has to be smart on each deal, because something comes along and somebody wants to buy coverage for events causing the loss of more than $10 billion in Japan in the next year.

That is not — you can’t look it up in any book, and you can’t do enough transactions just like that one to even know whether your calculation was right on that specific deal.

Now, if you make 100 calculations on 100 of these type of deals, you’ll soon find out whether you have the right person making those calculations or not.

But the economic goodwill with Ajit’s operation is based much more on the skill to price individual transactions and the ability to find the people even that want those transactions. Whereas at GEICO, it’s based basically on a machine.

But it’s enormously important how that machine is run, and Tony Nicely has absolutely knocked the ball out of the park, in terms of managing it.

In the years prior to when he took over, it was — you know, it had gone along at 2 percent of the market and really hardly gone anyplace.

And Tony is — quintupled, virtually, our share of the market, while at the same time producing great underwriting results.

So he took a machine that had a current — had a lot of potential — and then he exceeded even the potential that I thought it had. So you get the value in different ways.

It does relate in the end to a combination of growing a large float, and extremely low-cost float, and in our case, the cost of float has been negative, so people are actually paying us to hold $70 billion of their money, and that’s a lot of fun. (Laughter)

And I think that the chances of that continuing are really quite high, although I don’t think the chances of the 70 billion growing at a fast clip are high at all. I think we’ll be lucky to hold onto the 70 billion.

But I think the chances of the fact of us being able to get that at a less-than-zero cost is good, and I think that will even be true if interest rates go up to 4 or 5 or 6 or 7 percent. I think we may very well be able to do it, and that’s a huge asset under circumstances like that.

Charlie?

CHARLIE MUNGER: Yeah. And we’re currently in a low-return environment from conventional investment float, but that won’t last forever.

And there were times in the past when Ajit would generate a lot of one-of-a-kind float, and Warren would make 20 or 30 percent with it before we had to give it back. That was a lot of fun, and we did it over and over and over again.

Whether that will ever come again on that scale, I don’t know, but it doesn’t have to.

WARREN BUFFETT: You know, when we have 30 — presently our cash position — well, really if you counted all the companies, it’s probably 36 or 7 billion — you know, we’re essentially getting nothing on that.

So if you — our earning power today is being affected by current Fed policies.

And I — you know, that is not going to be a normal rate for many, many — for over the longer term. So we — in that sense, our normal earning power is being depressed by Mr. Bernanke but probably for very good reason.

31. Munger: Energy independence is a “stupid idea”

WARREN BUFFETT: Seven?

AUDIENCE MEMBER: Ola Larson (PH), Salt Lake City.

Five, six years ago, you wrote in your annual shareholders report that the current account deficit, the trade deficit, couldn’t go on indefinitely. Of course, a very large part of that is crude oil import.

Now some people in the energy markets are sort of talking about United States becoming independent in the energy market.

Could you shed some light on how this might affect the trade deficit? Thank you.

WARREN BUFFETT: Yeah. It will be a huge plus, obviously, if our total energy production increases substantially and what we have to import costs us less. I mean, it is a big factor in the current account deficit.

We’re doing a lot in oil. I don’t see us getting self-sufficient in oil, but gas is huge. We — our picture has changed a lot in the last three years, in terms of energy.

Charlie and I might argue that, over time, we’d still be better off using somebody else’s up and keeping our own for a long time.

CHARLIE MUNGER: That’s my view.

WARREN BUFFETT: Yeah. For a long time — we were an oil exporter in my lifetime, a substantial oil exporter. And it might have been better if we would have been using Saudi —

CHARLIE MUNGER: It would have been better.

WARREN BUFFETT: Yeah. (Laughs)

You can’t get by with much with Charlie here.

It would have been better. OK. It would have been better if we had been using Saudi Arabia’s oil then and just, in effect, treated all of those huge reserves we had in places like East Texas and such as a strategic petroleum reserve which we just kept around for another century, but —

CHARLIE MUNGER: It would have been much better.

WARREN BUFFETT: Yeah, it would have.

But our picture has changed for the better, and that means our current account deficit picture has changed for the better.

We still got a ways to go, but it does look better than three or four years ago. Don’t you think so, Charlie?

CHARLIE MUNGER: Well, I think the — those — that’s a very complex interaction.

My view is that the single-most precious resource in the United States are its hydrocarbon reserves, the ones that are right here and, of course, I want to use up —

I’m a puritan. I always want to suffer now to make the future better, because I think that’s the way grown-ups should behave. So I’m all for — (applause) — using up the other fellow’s oil and conserving our own.

You know, I think the idea of energy independence is one of the stupidest ideas I’ve ever heard grown people talk about.

Think of what terrible shape we’d been in if we’d achieved total energy independence way earlier.

We wouldn’t have any oil and gas left at all. Wouldn’t that be a wonderful condition? We don’t want energy independence. We want to conserve this stuff.

And thank God other people have some of this precious stuff they’re willing to sell.

I have the exact opposite idea on this subject than most people and, of course, I think I’m right. (Laughter)

WARREN BUFFETT: This is Charlie’s version of saving up sex for your old age. (Laughter)

CHARLIE MUNGER: No, we’re going to use the oil. (Laughter)

32. Wealth inequality and economic growth

WARREN BUFFETT: OK. Number 7. Was that 7?

AUDIENCE MEMBER: Jim Powers (PH), Newton, Massachusetts.

A few minutes ago you were talking about per capita GDP, and if it went up 1 percent a year, each generation would be 20, 25 percent better off than the previous one.

In Boston right now, we have a big controversy where the executive officer of Liberty Mutual Insurance Company has been making over 50 million a year in compensation plus other perks.

And that amount of money, in an hour or two, is more than 95 percent of the employees of that company make in the course of a year.

The newspapers have been commenting on the concentration of the profits of that mutual insurance company not going to the insurance policyholders who own the company because it’s a mutual insurance company, and the lack of compensation going to the average employee.

What good does it do the average American for the economy to improve 1 percent of GDP per year if they don’t — if they don’t enjoy some of that themselves?

WARREN BUFFETT: We certainly agree — (applause) — without commenting on any specific individuals, but obviously, if we start out with $48,000 per capita GDP and we do increase by 20 percent or so each generation, you would certainly hope that that would not keep bubbling to the people at the top as it has during the past generation.

I mean, the past 20 years we have not seen the progress that the country overall has made distributed in any kind of way except very, very much at the top.

And the tax code has encouraged that. The tax code is — you know, the tax code, which was taking those people making the $45 million incomes in 1992, was taking 27 or 28 percent from them. When they got up to 270 million now, it’s taking a figure that’s more like 18 percent.

So, we’ve got a tax code that has become more and more pro the ultra-rich, and coupled with what you see, and you’ve seen in compensation, and what the CEO makes in relation to the average worker and all that, you know, we’ve gone a long direction — a long way — in making sure that what we were promised in the way of trickle-down benefits has not been achieved.

CHARLIE MUNGER: It’s also true that most of the great mutual insurance companies — and there are a lot of them in the United States — do not have that kind of compensation abuse in them.

WARREN BUFFETT: That’s true, for example —

CHARLIE MUNGER: That’s quite fair.

WARREN BUFFETT: — State Farm, or something like that, does not have that.

CHARLIE MUNGER: No, no. Most of them don’t. That’s a very egregious example, but Boston has always led in egregious examples. (Laughter)

WARREN BUFFETT: No — it’s — the corporate world —

CHARLIE MUNGER: It got there early, you know. It mastered the art. (Laughter)

WARREN BUFFETT: The corporate world has been — there’s been a lot more egregious behavior in the corporate world than the mutual world.

CHARLIE MUNGER: Well, that’s why it’s so anomalous, really.

WARREN BUFFETT: Yeah, yeah.

CHARLIE MUNGER: No wonder it’s drawing some attention.

WARREN BUFFETT: The rich like it that way. You have to understand that. (Laughs)

But the tax code is basically — you know, that is an important place where people decide, you know, who actually bears the cost of this government, and we have moved away from the rich on that as they have gotten further and further away from the middle class, in terms of earnings.

And, you know, there’s a — there may be a natural tendency in a democracy to work toward a plutocracy. If you think about the effect of money in politics, if you think of the nature of how market systems work, you know, there may be some underlying trends that push a democracy toward plutocracy, and you need countervailing factors to prevent it.

CHARLIE MUNGER: I don’t think you ought to be too discouraged about Boston, either, because when I first went to Boston, the mayor was running the city from the federal penitentiary. (Laughter)

WARREN BUFFETT: Was that Curley or —

CHARLIE MUNGER: Yes, Mayor Curley.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: And nobody in Boston saw anything peculiar about it. (Laughter)

WARREN BUFFETT: If you live long enough, you’ll see everything. (Laughter)

CHARLIE MUNGER: Yeah, right.

33. Sovereign debt and “fiscal virtue”

WARREN BUFFETT: Area 8.

VOICES FROM AUDIENCE: Nine, nine.

CHARLIE MUNGER: Nine, he says.

WARREN BUFFETT: Oh, 9? OK. Nine.

AUDIENCE MEMBER: My name is Brian Chilton (PH), also from the Boston, Massachusetts, area.

WARREN BUFFETT: I’m surprised you admit it. (Laughter)

AUDIENCE MEMBER: I was tempted.

Warren, a lot of today’s questions referenced risk. It seems to me one of the biggest risks facing us is the (inaudible) sovereign debt levels both here in the U.S. and in many countries in Europe.

The liquidity injections by the Fed, and more recently the ECB, have given us some breathing room, but how do these large debts get balanced and do they concern you? (Applause)

WARREN BUFFETT: Well, the nice thing about sovereign debt is they can not pay you in the end and you can’t grab anything from them, unlike other kinds of debts.

And, you know, the truth is that the world has seen many, many failures of sovereign debt. I remember when Walt Wriston, back in the early 1980s, said sovereigns don’t default.

Well, the truth is they’ve defaulted many, many times over history. And what happens then is you get a big reallocation of wealth.

Now, the wealth doesn’t go away. I mean, you don’t lose the farms, you don’t — you lose the (inaudible), you don’t lose the people with their skills and all of that sort of thing. I mean, there may be some marginal losses.

But I don’t know how it plays out in Europe. We have seen the ECB here recently give the trillion dollars to banks which are loaded with sovereign debt, which really is questionable in many cases.

And I wouldn’t be surprised, in some cases, if they haven’t used some of those — some of the borrowing to even buy more of it.

So it’s like giving a guy with a margin account with some perhaps bad assets in it even more money to play with to further leverage themselves up and make an even bigger bet.

But when they did that at MF, or whatever it was, Global, you know, then it had a bad ending, and it might have a bad ending over there.

I would much prefer, you know, a world that was getting its fiscal house in order, including in the United States.

The counterargument, of course, is that when you’re in a recession, or close to it, as some or all of Europe might be, that that will feed on itself and be destructive in the same way that it was in the early ’30s in the United States.

But we have been having in the United States — it’s very interesting. We talk about the fact that there was a stimulus bill a few years ago, even though they didn’t call it that, and whether it was adequate and inadequate and all that.

When the government is operating at a deficit that’s 8 to 9 percent of GDP, that is stimulus on a huge, huge level. They don’t call it — they may not call it, but that is, by definition, huge fiscal stimulus.

So we have been having consistent, huge fiscal stimulus in this country, and we will have to wean ourselves off of that fairly soon.

And the interesting, I think, almost — leaders of both parties realize that you probably have to get revenues up to something around 19 percent of GDP and you have to get expenses down to 21 percent of GDP.

And that that will work fine over time, but you have a situation where both sides feel they will show weakness by going first.

And you also have a situation where the leader, probably, of at least one party can’t speak for their party, so that you can’t have negotiations in private, which are probably the way to get something like this solved.

I would avoid — I would — certainly at these rates, I would totally avoid buying medium-term or long-term government bonds. I think that’s the obvious answer. I wish I had answers that would solve the problem further beyond than that.

But in terms of your own situation, I would stay away from medium- or long-term government bonds, our own, or those of other countries.

Charlie?

CHARLIE MUNGER: Well, of course, he’s asking the really intelligent question of the day, and of course we’re having difficulty answering it. (Laughter)

It is very hard to know how much of this Keynesian stuff will work after you’ve lost all your fiscal virtue.

You know you come to a time, if you’re a government which has pretty much lost all its fiscal virtue, that the Keynesian stuff won’t work, and the money printing won’t work, and it’s all counterproductive, and you’re heading for calamity.

We don’t know the precise point at which it stops working. And somebody like Paul Krugman — who I think is a genius — but I also think he’s more optimistic about doing well with various economic tricks after you’ve lost a lot of fiscal virtue than I think is justified by the facts.

I think it’s very dangerous to go low on fiscal virtue and, of course, here in the United States, we’ve used up some of our store.

And it’s very important that we not go too far in that direction because we want to be able to do what we did in the Great Recession, where we avoided a huge calamity because we had enough fiscal virtue left so the economic tricks would work.

So it’s a terrible problem, and I ask you the question, Warren. Is it inconceivable that we could get a very mediocre result in the United States as a result of all this trouble?

WARREN BUFFETT: I think we’ll get a good result over time.

CHARLIE MUNGER: I know you do, but — (Buffett laughs) — is it inconceivable? I’m trying —

WARREN BUFFETT: Well, we can have problems, but —

CHARLIE MUNGER: I’m a little less optimistic than he is. I’m roughly in his position. I think there’s some slight chance that we can get a pretty mediocre result.

WARREN BUFFETT: Let’s say I came to you right now with a budget that made sense in general — in what it achieved — it had a 19 percent revenue built into it and 21 percent of expenditures. Would you want to adopt that now?

CHARLIE MUNGER: I think the reason intelligent people disagree on this subject is because it’s so difficult.

Everybody wants fiscal virtue but not quite yet. They’re like that guy who felt that way about sex. He was willing to give it up but not quite yet. (Laughter)

WARREN BUFFETT: Saint Augustine.

CHARLIE MUNGER: Saint Augustine, yes.

WARREN BUFFETT: He’s a hero to many of us. (Laughter)

CHARLIE MUNGER: I think these are very, very hard questions. And I have one thing I’m sure of: that it is safer, if you’re going to these deficit financing things, to use the money intelligently to build something you’re sure to need than it is to just throw it off the end of trains or give it to crooked lawyers. (Applause)

And so I think we all have an interest in making sure that whatever tricks we play are intelligently used because it will protect our reputation and reality in having this fiscal virtue.

WARREN BUFFETT: I’ll let you design the 21 percent that gets expended.

CHARLIE MUNGER: Oh, if I were doing it, I would expend it sensibly on infrastructure that I knew we were going to need, and I would have a massive program — (applause) — and I would have the whole damn country pay more cheerfully, like we were so many Romans in the Punic Wars.

The Punic Wars, the Romans paid off two-thirds of the war debt before the war was over. That’s my kind of —

WARREN BUFFETT: That’s our campaign slogan, folks. Punic Wars again. (Laughs)

CHARLIE MUNGER: But the answer is, I think we do need more sacrifice. I think we need more patriotism, we need more sensible ways of spending money, and we need more civilized politics. (Applause)

But it’s still a hard question. I think we should go on to an easier one. (Laughter)

Warren is not strained, but I’m at my limit. (Laughter)

34. Economy held back by health costs, not tax rates

WARREN BUFFETT: OK. We’ll do one more question, from area 10.

AUDIENCE MEMBER: This will be an easier question.

WARREN BUFFETT: Good.

AUDIENCE MEMBER: Thank you so much both for being here today, and I hope when you’re both in your 90s and your 100s, you’ll still be here doing these meetings. (Applause)

WARREN BUFFETT: Thank you.

AUDIENCE MEMBER: And I’m Candy Lewis (PH) from Denver, Colorado.

And my question has to do with taxes and what do you feel is the ideal corporate tax rate to get this economy started and excited?

WARREN BUFFETT: Yeah. Last year the actual taxes paid were about 13 percent of profits, as I remember.

So the corporate rate is 35 percent, and last year you were allowed to write off 100 percent of most kinds of fixed-asset purchases.

I don’t think the — corporate profits are not the problem, or corporate balance sheets, or corporate liquidity, is not the problem in the economy moving.

I mean, there is money available, huge amounts of money available in the corporate world, including at Berkshire, to push forward on opportunities.

You know, we will — we’re spending money where we see opportunity. And we spent lots of money in the railroad business, we spent lots of money in the energy business, and we built plants elsewhere and did other things.

But — so it is not a lack of capital at all that’s holding back, nor is it tax rates, in my view, that are holding back, at all, investment.

You know, this country prospered in the ’50s and the ’60s when the corporate rate was 52 percent and people actually paid it.

When it was cut to 48 percent, we all rejoiced. And our GDP per capita grew. So it is not a factor holding back.

I will tell you, I mean, corporate tax rates last year were 1.2 percent of GDP. Medical costs were 17-and-a-fraction percent of GDP. And there we have at least a 7 percentage point disadvantage against the rest of the world, which is a big multiple of all the corporate taxes paid.

So if you ask me about the tapeworm of American industry, you know, it’s basically our medical costs. We’ve got a huge cost disadvantage against the rest of the world. (Applause)

Now, that’s unbelievably tough to address, but that is where — as Willie Sutton would say — that’s where the money is.

And you can fiddle around with corporate tax rates. I don’t think that will have any big effect on the economy.

You may achieve greater fairness within the corporate tax code, I wouldn’t argue about that at all.

And incidentally, the Treasury — I mean, I think both parties agree that they would like to see a lower overall corporate tax rate but one that applies more equally across corporations so that the —

But getting from here to there is going to be very, very difficult, because it’s fine when you talk about it in the terms I just used. But once you put specific proposals out, everyone whose tax rate is going to go up — and some have to go up if others are going to go down — everyone whose tax rate is going to go up will fight with an intensity against that bill that far outstrips the intensity with which those on the other side fight.

It’s a real complex problem that way. But corporate tax rates are not our country’s problem, in my view.

Charlie?

CHARLIE MUNGER: Well, I used to say when I was younger that I expected to live to see a value-added tax, and now I’m not so sure. But I think it’s going to come eventually and probably should.

It equalizes the import-export effect of the taxes, and I think it’s quite logical to tax consumption.

I think we get in a lot of trouble when we give people the money and then come around later and try and take it back.

Human nature really resists that. And I think it’s much better, if you’re going to rely on taxes, to have taxes that are sort of taken out right off the top, and they don’t vary so much from year to year.

I come from a state where the state income tax is based on capital gains — go way up and then they collapse. And of course, the politicians spend like crazy when they go up, and there’s agony when — it’s a crazy way to have a tax system.

We have a lot of problems.

And I don’t think a 52 percent tax rate — we may have gotten by with it when we sort of led the world, but I’m not so sure it would be such a good right now to have our tax at 52 percent and the rest of the world taxing corporate profits at 15 percent or something.

That might have a lot of perverse consequences. And since so little money is involved, it’s not where the game should be played.

And if Warren could save a lot of money on medical expense for everybody, why, he probably would have done it already. It’s really hard.

WARREN BUFFETT: It’s hard. So we’ll end with a hard one. And I thank you all for coming. We’re going to reconvene in about ten minutes to conduct the business of the meeting, and thank you. (Applause)

35. Formal business meeting begins

WARREN BUFFETT: We’ll now go to the business meeting. We follow a script here, at least to quite a degree. And the meeting will now come to order.

I’m Warren Buffett, Chairman of the Board of Directors of the company. I welcome you to this 2012 annual meeting of shareholders.

This morning, I introduced the Berkshire Hathaway directors that are present.

Also with us today are partners in the firm of Deloitte & Touche, our auditors. They are available to respond to appropriate questions you might have concerning their firm’s audit of the accounts of Berkshire.

Forrest Krutter is secretary of Berkshire. He will make a written record of the proceedings.

Becki Amick has been appointed inspector of elections at this meeting and she will certify to the count of votes cast in the election for directors and the motions to be voted upon at this meeting.

The named proxy holders for this meeting are Walter Scott and Marc Hamburg.

Does the secretary have a report of the number of Berkshire shares outstanding, entitled to vote, and represented at the meeting?

FORREST KRUTTER: As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 7, 2012, being the record date for this meeting, there were 934,158 shares of Class A common stock outstanding, with each share entitled to one vote on motions considered at the meeting, and 1,075,302,988 shares of Class B common stock outstanding, with each share entitled to 1/10,000th of one vote on motions considered at the meeting.

Of that number, 640,153 Class A shares, and 664,293,280 Class B shares are represented at this meeting by proxies returned through Thursday evening, May 3rd.

WARREN BUFFETT: Thank you. That number represents a quorum and we will therefore directly proceed with the meeting.

The first order of business will be a reading of the minutes of the last meeting of shareholders, and I recognize Mr. Walter Scott, who will place a motion before the meeting.

WALTER SCOTT: I move that the reading of the minutes of the last meeting of the shareholders be dispensed with and the minutes be approved.

WARREN BUFFETT: Do I hear a second?

The motion has been moved and seconded. Are there any comments or questions?

We will vote on this motion by voice vote. All those in favor, say aye. Opposed? The motion’s carried.

36. Election of directors

WARREN BUFFETT: The next item of business is to elect directors.

If a shareholder is present who wishes to withdraw a proxy previously sent in and vote in person on the election of directors, you may do so.

Also, if any shareholder that is present has not turned in a proxy and desires a ballot in order to vote in person, you may do so.

If you wish to do this, please identify yourself to one of the meeting officials in the aisles, who will furnish a ballot to you.

I recognize Mr. Walter Scott to place a motion before the meeting with respect to election of directors.

WARREN BUFFETT: Is there a second?

It has been moved and seconded that Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Donald Keough, Thomas Murphy, Ronald Olson, and Walter Scott be elected as directors.

Are there any other nominations? Is there any discussion?

The motions are ready to be acted upon. If there are any shareholders voting in person they should now mark their ballots on the election of directors and allow the ballots to be delivered to the inspector of elections.

Miss Amick, when you are ready, you may give your report.

BECKI AMICK: My report is ready.

The ballot of the proxyholders in response to proxies that were received through last Thursday evening, cast not less than 697,021 votes for each nominee. That number far exceeds a majority of the number of the total votes of all Class A and Class B shares outstanding.

The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Thank you, Miss Amick.

Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Donald Keough, Thomas Murphy, Ronald Olson, and Walter Scott have been elected as directors.

37. Shareholder proposal for written CEO succession planning policy

WARREN BUFFETT: The next item of business is a motion put forth by the AFL-CIO Reserve Fund. The motion is set forth in the proxy statement.

The motion requests Berkshire Hathaway to amend its corporate governance guidelines to establish a written succession planning policy, including certain specified features.

The directors have recommended that shareholders vote against this proposal.

I will now recognize Ken Mass to present the motion. To allow all interested shareholders to present their views, I ask Mr. Mass to limit his remarks to five minutes.

KEN MASS: Mr. Buffett — Mr. Buffett, members of the board of directors. My name is Ken Mass. I represent the AFL-CIO, a federation of 56 unions, representing more than 12 million members.

I’m here today to introduce the AFL-CIO shareholders proposal for succession planning.

Our proposal urges the board of directors to adopt and disclose a policy on CEO succession planning.

Planning for the succession of CEO is one of the most important responsibilities of the board of directors. Having a succession plan in place is particularly important at a company like Berkshire Hathaway where the CEO has created tremendous value.

Shareholders are thankful for Warren Buffett’s leadership as CEO.

Last year, shareholders became concerned when David Sokol resigned from the company after allegations of improper trading.

Mr. Sokol has been rumored to be a possible successor to Mr. Buffett.

We filed our proposal last fall because we feel that an internal CEO candidate is needed to carry out Mr. Buffett’s legacy.

Internal candidate may be maintain — can help maintain — Berkshire Hathaway’s strong culture.

In Mr. Buffett’s letter to shareholders earlier this year, he disclosed that the board of directors had identified his successor, as well as two superb backup candidates.

We were relieved to hear this news.

We are not asking the company to disclose the name of Mr. Buffett’s successor. All we’re asking for is the board of directors update shareholders annually on the status of its succession planning.

We are pleased that Berkshire Hathaway has adopted all of these practices we recommended in our shareholders proposal, except for an annual reporting.

We hope the company will continue to keep shareholders informed about the status of its succession plan.

Thank you again — AFL-CIO — for considering this proposal. Thank you.

WARREN BUFFETT: Thank you Mr. Mass.

Is there anyone else that wishes to speak?

OK, if there’s no one — no one else, I would say, Mr. Mass, you know, we are on the same page.

We regard it — and I speak for all the directors — we regard it as the number one obligation of the board to have a successor, and one that we’re very happy with, as to both ability and integrity, and that we know well, to step in tomorrow morning if I should die tonight.

And we spend more time on that subject than any other subject that might come before the board.

So we do not disagree with you on the importance of it. We have taken it very seriously, and I note that you do not ask us to name the candidates, and I think there are obvious disadvantages to doing that. So again, we’re on the same page on that.

And so as I understand it, you basically want to be sure that we report annually to you that the subject continues to be at the top of the list, and I can assure you that it will. And in terms of affirming that fact, I would say that certainly more often than once a year, I get — in some public forum — I get asked questions where I get to answer precisely the question that you want me to address, and I think that will continue in the future.

We have not built it into any formal item in the proxy statement, which your organization has suggested we do, but we have covered it in the annual report. We cover it at these meetings. We cover it when I’m interviewed, frequently.

And I don’t think that anything would be gained by putting it in some other form, but I do want to say that we — I’m glad you take it seriously. We take it seriously. And I think we’re going to get a result that you’ll be very happy with, although I hope it doesn’t happen too soon. (Laughter)

So, with that I would say that the motion is now ready to be acted upon. If there are any shareholders voting in person they should now mark their ballots on the motion and allow the ballots to be delivered to the inspector of elections.

Miss Amick, when you’re ready, may you give your report.

BECKI AMICK: My report is ready.

The ballot of the proxyholders in response to proxies that were received through last Thursday evening, cast 32,179 votes for the motion and 672,285 votes against the motion.

As the number of votes against the motion exceed a majority of the number of votes of all Class A and Class B shares outstanding, the motion has failed.

The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: The vote was about 95 percent — 5 percent, and thank you, Miss Amick. The proposal fails.

38. Formal meeting adjourns

WARREN BUFFETT: Does anyone else have any further business to come before this meeting before we adjourn?

If not, I recognize Mr. Scott to place a motion before the meeting.

WALTER SCOTT: I move that this meeting be adjourned.

WARREN BUFFETT: Is there a second?

A motion to adjourn has been made and seconded. We will vote by voice.

Is there any discussion? If not, all in favor say yes. Aye. Yes.

All opposed say no.

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lastmover · 6 years

Text

2012 Berkshire Hathaway Annual Meeting (Morning) Transcript

1. Welcome

WARREN BUFFETT: Good morning. I’m Warren, and this hyperkinetic fellow is Charlie.

And we’re going to conduct this pretty much as we have in the past. We’ll take your questions, alternating among the media and analysts in the audience until 3:30, with a break around noon for an hour.

And then we’ll have the regular meeting of the shareholders beginning at that time. Feel free to drift away and shop in the other room. We have a lot of things for you there.

2. See’s Candy lollypop group photo

WARREN BUFFETT: We only have one scripted part of this meeting, and See’s Candy has placed on all of the seats a little packet.

And what we’d like you to do, we’re going to like — we’d like to videotape everyone eating their pop at the same time for posting on Facebook and for use by the media in today’s meeting.

So, if each of you will open up the lollipop now.

Now, first of all, you’ve got them open. We’d like you to hold them up above your head. We’re going to get a shot of 18,000. Dennis, here we come. And we’ll get a few shots of that.

We got it all, Mele?

OK. And now you can take off the cover and the good part comes, and Charlie and I have — we have fudge up here and we have peanut brittle.

And I said the meeting would run until 3:30. If we’ve consumed 10,000 calories each, we sometimes have to stop a little early at that point. (Laughter)

3. Q1 earnings

WARREN BUFFETT: The only slide we have at this point is we did put out our earnings — first quarter earnings — yesterday.

And in general, all of our companies are — with the exception of the ones in the residential construction business, which was the case last year and it’s the case this year — that all of the companies, except those in that area, pretty much have shown good earnings.

And in the case of the bigger ones, the five largest non-reinsurance companies earned — all had record earnings last year, aggregating of those five companies something over 9 billion pretax.

And in the annual report I said I thought they would — if business didn’t take a nosedive this year — that they would earn over $10 billion pretax this year. And certainly nothing we’ve seen so far would cause me to backtrack on that prediction.

The insurance — if you read our 10-Q and turn to the insurance section, you will see that there was an accounting change mandated for all property-casualty insurance companies, which — rather technical and I won’t get into the details of it — it changed something that’s called the deferred policy acquisition cost, called DPAC.

It has no effect on the operations at all, on the cash, but it did change the earnings downward by about $250 million pretax for GEICO in the first quarter. It’s based on whether you defer some advertising.

It has — GEICO had a terrific first quarter, had a real profit margin of almost 9 percentage points, and the float grew, and everything good happened at GEICO in the first quarter. We had good growth.

But we did make that accounting change. That accounting change also affects, to a lesser degree, the second quarter, and it may even trail just a bit into the third.

But the underlying figures are somewhat better than the figures that we’ve presented there.

And so, overall, we feel good about the first quarter. We feel good about the year.

4. Berkshire directors introduced

Maybe we should — even though we’ll do it again at the meeting — but we should probably introduce the directors. And I don’t know whether the audience can see the people here but if you can turn up the lights or something so they can.

We’ll start off, of course, with Charlie, Charlie Munger. And then alphabetically — if the directors would just — (Applause)

I was going to suggest that you withhold your applause until the end, but I know he’s sort of irresistible, so we’ll make an excuse for him. (Laughter)

For the remainder of the directors, if they stand and remain standing, and then you can applaud them at the end, if you will.

We’ve got Howard Buffett, Stephen Burke, Susan Decker, Bill Gates, David Gottesman, Charlotte Guyman, Don Keough, Tom Murphy, Ron Olson, and Walter Scott, Jr.

Now you can go wild. (Applause)

5. Q&A begins

WARREN BUFFETT: Now we’ll start with the questions. And what we will do is we’ll start over here with the media —with one of them — move to one of the analysts, and then move to one of the shareholders, and we’ll go by stations with the shareholders.

And if we get — sometimes we’ve had as many as 60 or 62 questions.

If we get to 54, at which point each person on the panel here has had a shot at 6 questions, then from that point on we’ll do nothing but the — but from the shareholders from 54 on.

So we’ll see how that goes.

6. Buffett: My successor will also be the “chief risk officer”

WARREN BUFFETT: And with that, we’ll start off with Carol Loomis of Fortune Magazine.

CAROL LOOMIS: Good morning. I’ll make my mini speech, which the most important point is that neither Warren nor Charlie have an idea of what we’re going to ask.

The other thing is that we received hundreds, if not thousands, of questions. We don’t know the exact count, so we certainly couldn’t use every one. If we didn’t use yours, we’re sorry.

So for the first question, Warren, two shareholders wrote me about the heavy responsibilities that will fall on your successor and his or her ability to deal with them. So I’ll make this a two-part question.

From Chris Inge (PH), “Mr. Buffett, you have stated that you believe the CEO of any large financial organization must be the chief risk officer as well.

“So, at Berkshire, does the leading CEO candidate for successor, as well as the backup candidates, possess the necessary knowledge, experience, and temperament to be the Chief Risk Officer?”

The related question is about the Goldman Sachs, GE, and Bank of America deals, all giving Berkshire warrants, that you have negotiated.

Shareholder Jacques Cartier — Catere (PH), excuse me — asked whether these specific transactions could have been done with similar terms without your involvement.

If not, what implications would that have for Berkshire’s future returns?

WARREN BUFFETT: Yeah. The — I do believe that the CEO of any large, particularly financial-related, company should — it really should apply beyond that, but certainly with a financially-related company — should be the chief risk officer.

It’s not something to be delegated. In fact, Charlie and I have seen that function delegated at very major institutions, and the risk committee would come in and report every week, every month, and they’d report to the directors, and they’d have a lot of nice figures lined up, and be able to talk in terms of how many sigmas were involved and everything, and the place was just ripe for real trouble.

So I do — I am the chief risk officer at Berkshire. It’s up to me to understand anything that could really hit us in any catastrophic way.

My successor will have the same responsibility, and we would not select anybody for that job that we did not think had that ability.

It’s a very important ability. It ranks right up there with allocation of capital and selection of managers for the operating units.

It’s not an impossible job. I mean, it — the basic risks could involve excessive leverage and they — and then the — they could involve excessive insurance risk.

Now, we have people in charge of our insurance businesses that themselves worry very much about the risk of their own unit and, therefore, the person at the top really has to understand whether those three or four people running the big insurance units are correctly assessing their risks, and then also has to be able to aggregate and think how they accumulate over the units.

That’s where the real risk is, unless you’re engaging in a lot of leverage in your financial structure, which isn’t going to happen. Before I answer the second, Charlie, would you like to comment on that?

CHARLIE MUNGER: Well, not only was it — this risk decision frequently delegated in America, but it was delegated to people who were using a very silly way of judging risk that they’ve been taught in some our leading business schools. (Laughter)

So this is a very serious problem this man is raising. The so-called “Value at Risk” and the theories that outcomes in financial markets followed a Gaussian curve, invariably. It was one of the dumbest ideas ever put forward. (Laughter)

WARREN BUFFETT: He’s not kidding, either. We’ve seen it in action.

And the interesting thing is we’ve seen it in action with people that know better, that have very high IQs, that study lots of mathematics. But it’s so much easier to work with that curve, because everybody knows the properties of that curve, and can make calculations to eight decimal places using that curve.

But the only problem is that curve is not applicable to behavior in markets, and people find that out periodically.

The second question: we’re well equipped, Carol, to answer that question. We would not have anybody — we’re not going to have an arts major in charge of Berkshire. (Laughter)

The question about negotiated deal, there’s no question that partly through age, partly through the fact we’ve accumulated a lot of capital, partly the fact that I know a lot more people than I used to know, and partly because Berkshire can act with speed and finality that is really quite rare among large American corporations, we do get a chance, occasionally, to make large transactions.

But that takes a willing party on the other side. When we got in touch with Brian Moynihan at the Bank of America last year, I had dreamt up a deal which I thought made sense for us, and I thought it made sense for the Bank of America, under the circumstances that existed.

But I’d never talked to Brian Moynihan before in my life. I had no real connection with the Bank of America.

But when I talked to him, he knew that we meant what we said, so that if I said we would do 5 billion and — I laid out the terms of the warrants — and I said we’d do it.

And he knew that that was good and that we had the money.

And that ability to commit, and have the other person know your commitment is good for very large sums and, maybe, complicated instruments, is a big plus.

Berkshire will possess that subsequent to my departure. I don’t think that every deal that I made would necessarily be makeable by a successor, but they’ll bring other talents as well.

I mean, I can tell you the successor that the board has agreed on can do a lot of things much, much better that I can do.

So, if you give up a little on negotiated financial deals, you may gain a great deal, just in terms of somebody that’s more energetic about going out and making transactions.

And those deals have not been key to Berkshire. If you look at what we did with General Electric and Goldman Sachs, for example in those two deals in 2008, I mean, they were OK, but they are not remotely as important as, you know, maybe buying Coca-Cola stock, which was done in the market over a period of six or eight months.

We bought IBM over a period of six or eight months last year in the market. We bought all these businesses on a negotiated basis.

So the values in Berkshire that have been accumulated by some special security transaction are really just peanuts compared to the values that have been created by buying businesses like GEICO or ISCAR or BNSF, and the sort.

It’s not a key to Berkshire’s future, but the ingredients that allowed us to do that will still be available and, to some extent, peculiar to Berkshire, in terms of sizable deals.

If somebody gets a call from most people and they say, you know, we’ll give you $10 billion tomorrow morning, and we’ll have the lawyers work on it overnight, and here are the terms and there won’t be any surprises, they’re inclined to believe it’s a prank call or something of the sort. But with Berkshire, they believe it can get done.

Charlie?

CHARLIE MUNGER: Yeah, and in addition, a lot of the Berkshire directors are terrific at risk analysis.

Think of the Kiewit Company succeeding, as it has over decades, in bid construction work on oil well platforms and tunnels and remote places and so on.

That’s not easy to do. Most people fail at that eventually, and Walter Scott has presided over that bit of risk control all his life and very routinely.

And Sandy Gottesman created one of my favorite risk control examples. One day he fired an associate, and the man said, “How can you be firing me when I’m such an important producer?”

And Sandy said, “Yes,” he says. “But I’m a rich old man and you make me nervous.” (Laughter)

WARREN BUFFETT: Yeah. We do not have anybody around Berkshire that makes us nervous.

7. We “reserve conservatively” at insurance operations

WARREN BUFFETT: OK. Now we go to our new panel.

Cliff Gallant of KBW, we’re getting the first question here from an analyst.

I don’t think that is on.

CLIFF GALLANT: Oh, can you hear me?

BUFFETT: Yeah.

CLIFF GALLANT: OK, sorry. Thank you again for the opportunity. The subject, generally, still is mortality.

In your 2011 annual report, Berkshire disclosed that Berkshire Hathaway Reinsurance Group made changes in its assumptions for mortality risk, which resulted in a charge, specifically saying that mortality rates had exceeded assumptions in the Swiss Re contract.

Conversely in Gen Re’s Life/Health segment, they reported lower than expected mortality, and I believe these trends continued into the first quarter that we saw in the report last night.

What was the surprise in the Swiss Re contract? And is there a difference in basic assumptions and trends for things like mortality rates among Berkshire’s different businesses?

In the property-casualty businesses, for example, are the same assumptions and reserving philosophies applied companywide?

WARREN BUFFETT: Starting off with the Swiss Re example, we wrote a very, very large contract of reinsurance with Swiss Re — I would say, I don’t know, a year-and-a-half ago now, or thereabouts — and it applied to their business written, I think, in 2004 and earlier. And they had a lot of business. It was American business.

And we started seeing — we got reports quarterly — and we started seeing mortality figures coming in quarterly that were considerably above our expectations and what looked like should be the case — should have been the case — looking at their earlier figures.

So at the end of last year — we have a stop-loss arrangement on this — so we set up a reserve that really reserves it to the worst case, except we present-value that.

But until we get — until we figure out what can be done about that contract — and we have some possibilities in that respect — we will keep that reserved at this worst case. And so we took a charge for that amount.

We do — we are reinsuring Swiss Re, and then they are reinsuring a bunch of American life insurers, and there is ability to reprice that business as we go along, but the degree to which we and Swiss Re might want to reprice that may be a subject of controversy, we’ll see, so we just decided to put it up on a worst-case basis.

Getting to the question of how GEICO reserves, how Gen Re reserves, I would say that — it’s described to some extent in our annual report — but I would say that the one overriding principle is that we hope, and our plan is, to reserve conservatively.

I mean, it’s a lot different reserving in the auto business, where on short-tail lines and physical damage and property damage, you know, you find out very quickly how you’re doing.

And if you look at GEICO’s figures, you know, we’ve had redundancies year after year after year.

Gen Re was under reserved at the time we bought it, and back in those 1999/1998 years, those developed very badly. Now they’ve been developing very favorably for some time. I think with Tad Montross, we’ve got a fellow that — where I feel very good about the way he reserves.

But he is not — there’s no coordination between him and Tony [Nicely] at GEICO, nor with Ajit [Jain] at Berkshire Hathaway Reinsurance. They all have, I think, the same mindset, but they don’t — they’re three very different, different businesses.

Charlie?

CHARLIE MUNGER: There’s always going to be some contract where the results are worse than we expected. Why would anybody buy our insurance if that weren’t the case? (Scattered laughter)

WARREN BUFFETT: It’s interesting how — I mean, just take 9/11. You know, it’s very hard to reserve after something like 9/11, because to what extent is business interruption insurance — when you close the stock exchange for a few days, are you going to be able to collect on insurance?

And, you know, when you close restaurants at airports, you know, 2,000 miles away, because the airport is closed for a few days, is that business interruption insurance? There’s — a lot of questions come up.

We turned out to be somewhat over-reserved for 9/11, as it turned out.

You’ve got the same situation going on in both Thailand and Japan because, as you know, the supply chain for many American companies was interrupted by the tsunami in Japan and the floods in Thailand.

And if you’re a car manufacturer in the United States and you aren’t getting the parts, you know, does your business interruption insurance cover the fact that there were floods for your supplier in Thailand or the tsunami hit in Japan? Sometimes that stuff takes years and years to work out.

On balance, I think you will find that our reserves generally develop favorably.

8. “It’s amazing how little influence we’ve had”

WARREN BUFFETT: OK. We go to the audience now up at post number 1, and there he is.

AUDIENCE MEMBER: There he is. Good morning, Mr. Chairman, Mr. Vice Chairman. My name is Andy Peake (PH), and I’m from Weston, Connecticut.

In the past, you’ve made a few investments in China: PetroChina and BYD, to name two.

Given the growing importance of China in the world, what advice would you give the new Chinese leadership and corporate CEOs such that you would make more investments in China? Xièxiè.

WARREN BUFFETT: Well, Charlie has made the most recent investment in China, so I’ll let him handle that one.

CHARLIE MUNGER: Yeah, we’re not spending much time giving advice to China. (Laughter)

WARREN BUFFETT: That’s not because they’re not hungry for our advice. (Laughs)

CHARLIE MUNGER: If you stop to think about it, China has been doing very, very well from a very tough start. To some extent, we ought to seek advice there instead of give it.

WARREN BUFFETT: We have — I would say that we’ve found it almost useless in 60 years of investing to give advice to anybody in business.

CHARLIE MUNGER: We have found that we have a lot of control — it’s kind of like controlling affairs by pushing on a noodle.

It’s amazing how little influence we’ve had when we had 20 percent of the stock.

And people have this illusion of mass control at headquarters. The beauty of Berkshire is that we created a system that doesn’t require much control at headquarters.

WARREN BUFFETT: But we — if you look at our four largest investments, which are worth, we’ll say — they’re certainly worth $50 billion today.

We’ve had some of them for 25 years — one of them — and another one for 20 years.

The number of times that we have talked — unless we were on the board, which I was at Coca-Cola — but the number of times we’ve talked to the CEO of those companies, where we have $50 billion, I would say doesn’t average more than twice a year, and we are not in the business of giving them advice.

If we thought that the success of our investment depended upon them following our advice, we’d go onto something else. (Laughter)

9. No warnings when Berkshire shares are overvalued

WARREN BUFFETT: Becky?

BECKY QUICK: This question comes from a shareholder named Ben Noll (PH), and I’ve got several different emails that were very similar to this one but I’m choosing Ben’s question.

He writes that while pleased by your announcement to buy back stock at 110 percent of book value, he feels like a bit of a chump for sometimes having paid nearly 200 percent of book in the past few years.

Since you’ve stated repeatedly that it’s as bad to be overvalued as to be undervalued, why didn’t you warn us previously when the price-book relationship was very different, or have you not felt that Berkshire was trading above intrinsic value over the last decade?

WARREN BUFFETT: Yeah, we’ve written in the back of the report how we prefer to — not to see our shares sell at the highest possible price.

I mean, we’ve got a whole different view on that than many managers.

If we could have our way, we would have the stock trade once a year, and Charlie and I would try to come up with a fair value for intrinsic business value, and it would trade at that.

That’s incidentally what some private companies do, but you’re not allowed that luxury in the public market, and public markets do very strange things.

If Charlie and I think Berkshire is overvalued, then it would be a very interesting proposition to have us announce, you know, a half an hour before the market opens someday, and have us both saying, gee, we think your stock is overpriced.

I mean, we would have to do that with every shareholder simultaneously, and they would — who knows how they would react. We have never — I don’t think — certainly never consciously done anything to encourage people to buy our stock at a price we thought was above intrinsic value.

The one time we sold stock, under some pressure back in the mid-1990s when somebody was going to do something with the stock that we thought would be injurious to people, we created a stock and we thought the stock was a little on the high side then and we put on the cover of the prospectus something that I don’t think has ever been seen, which we said that neither Charlie nor I would buy the stock at the price, nor would we recommend that our family did it. (Scattered laughter)

And if you want a collector’s item for a proxy material — offering material — get that because I don’t think you’ll see that one again.

We think that if we are going to repurchase shares from people, that we ought to let them know what — that we think we’re buying it too cheap.

I mean, we wouldn’t buy out — if we had two or three partners and somebody wanted to sell out — but we’d probably try to arrive at a fair price — but if it was established by a market and they were going to sell too cheap, we’d tell them we thought they were selling it too cheap.

We are not selling it. We are not saying that 111 percent — we’re using 110 percent of book — 111 percent or 112 percent is intrinsic business value — we know it’s significantly above 110.

And I don’t think we will ever announce — because I don’t see how we would do it — I don’t think we’ll ever announce that we think the stock is selling considerably above intrinsic business value, but we will certainly do nothing to indicate that we think the stock is attractively priced, if that comes about.

Charlie?

CHARLIE MUNGER: I’ve got nothing to add. (Laughter)

10. We’ll buy “significantly” undervalued Berkshire shares

WARREN BUFFETT: Jay Gelb from Barclays.

JAY GELB: Thank you. My question is also on share buybacks.

Warren, in last year’s annual letter, you said not a dime of cash has left Berkshire for dividends or share repurchases during the past 40 years.

In 2011, Berkshire changed course and announced a share repurchase authorization.

What I’d like to focus in on is, what is Berkshire’s capacity for share buybacks, based on continued strong earnings power? How attractive is deploying excess capital and share buybacks compared to acquisitions, even above 1.1 times book value? And what are your latest thoughts on instituting a shareholder dividend?

WARREN BUFFETT: The 1.1 is a figure that we feel very comfortable with. So, we would probably feel comfortable with a figure somewhat higher than that, but we wanted to be dramatically — or very significantly — undervalued to do buybacks, and we want to be very sure that every shareholder that sells to us knows that we think that it’s dramatically — or significantly — undervalued when we do it.

But we have a terrific group of businesses.

The marketable securities that we own, we think, are going to be worth more in the future, but we carry them at what they’re selling for today. So they’re not — that’s not an undervalued item, you know, in the balance sheet.

But some of the businesses we own are worth far more money than we carry them, and we have no significant business that’s worth any significant discount from the carrying value.

So we would — from strictly a money-making viewpoint �� we would love to buy billions and billions and billions of dollars’ worth of stock at — we’ll move that up to tens of billions — at 110 percent of book.

You know, I don’t think it will happen, but it could happen. You never know what kind of a market you’ll run into.

And if we get the chance to do it, as long as we don’t take our cash position below 20 billion, we will — we would buy very aggressively at that price. We know we’re making significant money for remaining shareholders.

The value per share goes up when we buy at 110 percent of book, and therefore — and it’s so obvious to us that we would do it on a big scale if given the chance to, and if it did not take our cash position down below a level that leaves us comfortable.

Charlie?

CHARLIE MUNGER: Well, some people buy their own stock back regardless of price. That’s not our system.

WARREN BUFFETT: Well, we think it’s — we think a lot of the share repurchases are idiotic.

CHARLIE MUNGER: I was trying to say that more gently.

WARREN BUFFETT: You’ve never done it before. (Laughter)

The — it’s — I mean, it’s for ego. I’ve been in a lot of board rooms where share repurchase authorizations have been voted, and I will guarantee you it’s not because the CEO is thinking the way we think at all.

They like buying their stock better at higher prices, and they like issuing options at lower prices. You know, it’s just exactly the opposite than the way we would think.

We will only do it for one reason, and that’s to increase the per-share value the day after we’ve done it.

And if we get a chance to do that, we both, you know, in a big way, we’ll do it in a big way.

I don’t — strictly operating as a financial guy, I would hope we get a chance to do a lot of it. Operating as a fiduciary for hundreds of thousands of people, I don’t want to see them sell —

CHARLIE MUNGER: We hope the opportunity never comes.

WARREN BUFFETT: Yeah. But if it does, we’ll grab it.

11. U.S. banks are in better shape European banks

WARREN BUFFETT: OK. Station two, shareholder?

AUDIENCE MEMBER: Hello, Mr — Hi, Mr. Buffett. My name is Bernard Fura (PH) from Austria, Vienna.

My question is about banks. What’s your view on the European banks? What’s your view on the U.S. banks? And what must happen that you invest in European banks? Thank you.

WARREN BUFFETT: Well, I have a decidedly different view on European banks than American banks.

The American banks are in a far, far, far better position than they were three or four years ago. They’ve taken most of the abnormal losses that existed, or that were going to manifest themselves, in their portfolios from what’s now 3 1/2 or four years ago.

They’ve buttressed their capital in a very big way. They’ve got liquidity coming out their ears at the bigger banks. The American banking system is in fine shape.

The European banking system was gasping for air a few months back, which is why Mr. Draghi opened up his wallet at the ECB and came up with roughly a trillion euros of liquidity for those banks.

Now a trillion euros is about $1.3 trillion, and $1.3 trillion is about one-sixth of all the bank deposits in the United States.

I mean, it was a huge act by the European Central Bank, and it was designed to replace funding that was running off from European banks. European banks had more wholesale funding than American banks, on average.

If you look at the Bank of America or Wells Fargo, they get an enormous amount of money from a natural customer base. European banks tended to get much more of it on a wholesale basis, and that money can run pretty fast.

So the European banks need more capital in many cases. They’ve done very little along that line.

One Italian bank had a rights offering here three or four months ago, but basically they have not wanted to raise capital, probably because they didn’t like the prices at which they would have had to do so, and they were losing their funding base.

The problem on the funding base has been solved by the ECB because the ECB gave them this money for three years at 1 percent.

I’d like to have a lot of money at three years at 1 percent, but I’m not in trouble, so I can’t get it. (Laughter)

But I just — if you look at our banking system, it’s really remarkable what’s been accomplished.

I thought at the time that the Treasury and the Fed were maybe a little overdoing it when they brought those bankers to Washington and banged their heads together and said you’re going to take this money whether you like it or not.

But overall, I think that policy was very sound for this country’s economy. And if some banks were forced to raise capital that they didn’t need, you know, which I might not have liked as a shareholder at one of them, overall, I think that our society benefited enormously.

And I think the Fed and the Treasury has handled things quite sensibly during a period when if they hadn’t handled this sensibly, that our world today would be a lot different.

Charlie?

CHARLIE MUNGER: Yeah. Europe has a lot of problems we don’t. We’ve got this full federal union, and the country that runs the central bank can print its own money and pay off its own debt and so on.

And in Europe, they don’t have a full federal union and that makes it very, very difficult to handle these stresses. So we’re more comfortable with the risk profile in the United States.

WARREN BUFFETT: It’s night and day. I mean, it — in the fall of 2008, when essentially Bernanke and Paulson, and implicitly, the President of the United States, said we’ll do whatever it takes, you knew that they had the power, and the will, to do whatever it took.

But when you get 17 countries that have surrendered their sovereignty, as far as their currency is concerned, you know, you have this problem. Henry Kissinger said it a long time ago. He said, “If I want to call Europe, what number do I dial?”

You know, and when you have 17 countries and — just imagine if we’d had 17 states in 2008, and we had to have the governors of those states all go to Washington and agree on a course of action when money market funds were — there was a panic in there, the panic in commercial paper, you name it — we would have had a different outcome.

So I would put European banks and American banks in two very different categories.

12. Munger: “Idiotic” to use natural gas instead of coal

WARREN BUFFETT: Andrew?

ANDREW ROSS SORKIN: Thank you Warren. This question comes from a shareholder who works at a coal mining company and he asked the following:

“Burlington Northern and MidAmerican are two key links in a critical supply chain. Can you describe your views on coal and natural gas investments, and can you discuss how the current low-price environments impact the prospect for each of these businesses?

“You seem to have created an elegant hedge. As Burlington Northern suffers from the decline in coal, MidAmerican may benefit from the fire sale in its fuel sources.”

WARREN BUFFETT: Yeah. Well, MidAmerican will never really benefit or be penalized too much by the price of coal, because if coal is cheap, the benefit is going to be passed on to customers, and if it’s expensive, the costs are going to be passed on.

You know, MidAmerican really is a — it’s a regulated public utility. It has several — we have two MidAmericans. We have a MidAmerican Holding and a MidAmerican that operates in Iowa, then we have utilities on the West Coast.

But those utilities are pass-through organizations. They need to be operated efficiently in order to achieve their rate of return, but if they are operated efficiently and in the public interest, whether coal or labor, whatever it is, may go up or down, really doesn’t affect them, although it affects their customers.

Coal traffic is important to all railroads in the United States, and coal traffic is down this year.

This may interest you. This year, in the first quarter, kilowatt hours used in the United States went down 4 percent — 4.7 percent. That is a remarkable decrease in electricity usage, 4.7 percent, and that affected, of course, the demand for coal.

But the other thing that’s happening, as you mentioned, natural gas got down under $2 — it’s a little higher now — but it got down under $2 at the same time oil was $100.

And if you told Charlie or me five years ago that you’d have a 50-to-1 ratio between oil and natural gas, I think we would have asked you what you were drinking.

Did you ever think that was possible, Charlie?

CHARLIE MUNGER: No. And I think what’s happening now is, to use your word, it’s idiotic.

We are using up a precious resource, which we need to create fertilizer and so forth, and sparing a resource which is precious but not as precious, which is thermal coal.

If I were running the United States, I would use up every ounce of thermal coal before I’d touch a drop of natural gas. But that’s — conventional view is exactly the opposite. I think those natural gas reserves we just found are the most precious things we could leave our descendants.

I’m in no hurry to use it up, and the gas is worth more than the coal.

WARREN BUFFETT: Despite the wild things we’ve seen in pricing, particularly this ratio of natural gas prices to oil, you can’t change — I mean the installed base is so huge when you get into electricity generation — that you can’t really change the percentages too much, although there has been a shift in recent months.

Where gas generation is feasible, it has supplanted some coal generation. And certainly in the future, you’re going to see a diminution in the percentage of electricity generated from coal in this country.

But it won’t be dramatic because it can’t be dramatic. You just can’t — the megawatts involved are just too huge to have some wholesale change.

It’s going to be very interesting to see how this whole gas-oil ratio plays out, because it has changed everyone’s thinking, and it’s changed in a very short period of time. I mean, three years ago, people wouldn’t have said this was possible.

CHARLIE MUNGER: Yeah. The conventional wisdom of the economics professors is if it happens in a free market it must be OK. It will work out best in the end.

That is not my view with 100 percent accuracy. I think there are exceptions to that idea. And I think it’s crazy to use up natural gas at these prices.

13. GEICO has no plans to use driver tracking technology

WARREN BUFFETT: OK. Gary Ransom of Dowling.

GARY RANSOM: Telematics is the latest pricing technology in the auto insurance business whereby you put a little device in your car and you can either get a discount or some other determination of your pricing based on actual driving behavior.

What is GEICO doing to keep pace with that change, and are there any other initiatives that GEICO has in place to maintain its competitive advantages in pricing?

WARREN BUFFETT: Yeah. Progressive, as you know, has probably been the leader in what you just described. And we have not done that at GEICO, but it — if we think there becomes a superior way to evaluate the likelihood of anybody having an accident, you know, I think we have 50 — I think you have to answer 51 questions — which is more than I would like, if you go to our website to get a quote.

And every one of those is designed to evaluate your propensity to get in an accident.

Obviously, if you could you could ride around in a car with somebody for six months, you might learn quite a bit about the propensity, particularly if they didn’t know you were there, you know, like with your 16-year-old son.

But I do not see that as being a major change, but if it becomes something that gives you better predictive value about the propensity of any given individual to have an accident, we will take it on, you know, and we will try to get rid of the things that don’t really tell us that much all the time.

But we’re always looking for more things that will tell us if we look around at these — the people in this room, one by one, you know — what tells us their likelihood of having an accident in the next year.

We know that youth is, for example. I mean, there is no question that a 16-year-old male is much more likely to have an accident than some guy like me that drives 3500 miles a year and is not trying to impress a girl when he does it, you know. (Laughter)

So, you know, that one is pretty obvious. Some of these others — some things are very good predictors that you wouldn’t necessarily expect to be. Credit scores are, but — and they’re not allowed in all places — but they will tell you a lot about driving habits.

We’ll keep looking at anything, but I do not see any — I don’t see in this new experiment — anything that threatens GEICO in any way. GEICO, in the first quarter of the year — now the first quarter is our best quarter — but we added a very significant number of policies.

I forget what the exact number was, but February turns out to be the best month for some reason. We were up there getting pretty close to 300,000 policies.

So our marketing is working extremely well, and our risk selection is working extremely well, and our retention is working well. So GEICO is quite a machine.

That’s one of the — that’s the business that we carry, as I’ve mentioned in the past — I think we carry it at a billion dollars — roughly a billion dollars over its tangible book value. You know, it’s worth a whole lot more than that.

I mean, based on the price we paid, that figure would come up these days to, you know, certainly something more like $15 billion more than carrying value.

And we wouldn’t sell it there. We wouldn’t sell it at all, but that would not tempt us in the least.

Charlie?

CHARLIE MUNGER: Nothing to add.

14. Business schools are improving but still teach “nonsense”

WARREN BUFFETT: OK. Station 3.

AUDIENCE MEMBER: Hi, Charlie and Warren. My name is Chris Reese. I’m here with a group of MBA students from the University of Virginia in Charlottesville.

In recent years, business schools have taken a lot of blame for some of the recent state of the economy.

What would you suggest to change the way that business leaders are trained in our country?

WARREN BUFFETT: Well, I wouldn’t — I don’t know. Charlie, I wouldn’t blame business schools particularly for most of the ills — would you?

I think they’ve taught to students a lot of nonsense about investments, but I don’t think that’s been the cause of great societal problems. What do you think?

CHARLIE MUNGER: No, but it was a considerable sin. (Laughter)

WARREN BUFFETT: Well, you want to elaborate on what was the more sin —

CHARLIE MUNGER: No, no. I think business school education is improving. (Laughter)

WARREN BUFFETT: Is the implication from a low base or —

CHARLIE MUNGER: Yes. (Laughter)

WARREN BUFFETT: I’d agree with that. (Laughter)

No, in investing, I would say that probably the silliest stuff that we’ve seen taught at major business schools probably has been — maybe it’s because it’s the area that we operate in — but has been in the investment area.

I mean, it is astounding to me how the schools have focused on sort of one fad after another in finance theory, and it’s usually been very mathematically based.

When it’s become very popular, it’s almost impossible to resist if you’re — if you hope to make progress in faculty advancement.

Going against the revealed wisdom of your elders can be very dangerous to your career path at major business schools.

And you know, really, investing is not that complicated. I would have — you know, a couple of the courses. I would have a course on how to value a business, and I would have a course on how to think about markets.

And I think if people grasped the basic principles in those two courses that they would be far better off than if they were exposed to a lot of things like modern portfolio theory or option pricing. Who needs option pricing to be in an investment business?

You know, when people — you know, when Ray Kroc started McDonald’s, I mean, he was not thinking about the option value of what the McDonald’s stock might be or something. He was thinking about whether people would buy hamburgers, you know, and what would cause them to come in, and how to make those fries different than other people’s, and that sort of thing.

It’s totally drifted away — the teaching of investments.

I look at the books that are used, sometimes, and there’s really nothing in there about valuing businesses, and that’s what investing is all about.

If you buy businesses for less than they’re worth, you’re going to make money.

And if you know the difference between the businesses that you can value and the ones that you can’t value, you know, which is key, you’re going to make money.

But they’ve tried to make it a lot more difficult and, of course, that’s what the high priests in any particular arena do. They have to convince the laity that the priests have to be listened to.

Charlie?

CHARLIE MUNGER: The folly creeps into the accounting, too. A very long-term option on a big business you understand — the stock of a big business that you understand — or even a stock market index — should not be — the optimal way to price it is not by using Black Scholes, and yet the accounting profession does that.

They want some kind of a standardized solution that requires them not to think too hard, and they have one. (Laughter)

WARREN BUFFETT: Is there anybody we’ve forgotten to offend? (Laughter)

If you’ll send a note up. (Laughs)

15. Buffett Rule: minimum tax for “very, very high earners”

WARREN BUFFETT: Carol?

CAROL LOOMIS: Well, talking about not offending, “The talk of the “Buffett Rule” is all over newspapers and TV.

“But I believe your concept of what should happen to taxation of very high earners is different from what is now promulgated as the ‘Buffett Rule.’

“Could you clear us up on this?” This is a question from Leo Slazeman (PH) from the Kansas City metropolitan area.

WARREN BUFFETT: Yeah. I would say this: it has gotten used in different ways.

I think, intentionally, in some cases, because it was more fun to attack something that I hadn’t said than try to attack what I had said.

Basically the proposal is that people that make very large incomes pay a rate that is commensurate with what people think is paid by people of those incomes.

I mean, I think most people believe, when they look at the tax rates and all that, that if you’re making 30 or 40 or $50 million a year, that you’re probably paying tax rates in the 30 percent area, at least. And many people are.

But the figures are such that if you look at the most recent year, and you aggregate both payroll and income taxes, because they both go to the federal government on your behalf, if you take the 400 largest incomes in the United States, they average $270 million each.

That’s per person, 270 million each. 131 of those 400 paid tax rates that were below 15 percent. Now — counting payroll taxes, too.

In other words, they were paying at less than what the standard payroll tax was — up till we’ve had this giveback here recently — but payroll tax was 15.3 percent for most of the last decade.

So, under the “Buffett Rule,” we would have a minimum tax — only for these very, very high earners — that, essentially, would restore their rate to what it used to be back in 1992.

When the average income of the top 400 was only 45 million, there were only 16 of the 400 that were at 15 percent or below. But now there’s 131.

There’s still plenty of them that are paying in the 30s. I wouldn’t touch them.

But I would say when we’re asking for shared sacrifice from the American public, when we’re telling people that we formally told — were given promises on Social Security and Medicare and various things — and we’re telling them we’re sorry but we kind of overpromised so we’re going to have to cut back a little, I would at least make sure that the people with these huge incomes get taxed at a rate that is commensurate with the way they used to be taxed not that long ago and probably — and is commensurate also with the way that two-thirds of the people in that area get taxed at higher rates.

So it’s gotten butchered a little bit, but it would affect very, very, very few people. It would raise a lot of money. (Applause)

CHARLIE MUNGER: Warren, isn’t the suggestion that you can give about half of a 30 percent to charity instead of the government?

WARREN BUFFETT: Well, but the tax rates, still, after the charitable deduction, after the charitable deduction, you have to give — if you’re going to give 50 percent and get a deduction — it has to be all cash. If you start giving appreciated securities —

And then if you give to a private foundation, you’re down to 20 percent. Yeah. But —

CHARLIE MUNGER: But there is some exception in this proposal now isn’t it — Obama’s proposal — that charitable contributions help you?

WARREN BUFFETT: Well, there is a — there’s a bill, actually, by Senator [Sheldon] Whitehouse of Rhode Island. I mean, that is the only actual bill. That was voted on, and it did not get the vote. It got 51 votes in the Senate and needed 60. I can’t tell you the exact precision on what it included there.

I don’t have any — you know, there can be all kinds of other ways of getting at the same proposition. I just think that people like me that have huge incomes — and I have no tax planning, I don’t have any gimmicks, I don’t have Swiss bank accounts, I don’t have any of that kind of stuff.

But when I get all through, you know, I’ve made the calculation four different — three different times — 2004, 2006, and 2010 — and in all three of those years, when my income was anywhere from 25 to 65 or so million, I came in with the lowest tax rate in our office. And we had maybe 15 to 22 or so people in the office at different times, and everybody in the office was surprised.

They were all in the 30s. And I was, several times, you know, in this area of 17 percent, and that’s because the tax law has gotten moved over the years in a way to favor people that make huge amounts of money.

Imagine having 270 million of income and there were — I believe there were — 31 of the 400 that were below 10 percent on tax rates, and that counts payroll taxes as well.

And like I say, you know, my cleaning lady — incidentally, I’ve been asked to explain — I keep talking about my cleaning lady.

Well, my wife wants it very clear, she doesn’t have a cleaning lady. This is the cleaning lady at the office, Mary that I — (laughter) — my wife has gotten very — she does not have a cook, she does not have a cleaning lady, and she got a little tired of me implying that she had one.

So it’s my cleaning lady at the office has been paying 15.3 percent on Social Security taxes, at the same time that an appreciable number of people making hundreds of millions of dollars a year are paying less than 10 percent.

I think it’s time to take a look at that. OK — (applause)

16. Catastrophe insurance: “nobody knows for sure what the right rate is”

WARREN BUFFETT: Cliff.

CLIFF GALLANT: Over the past two years, the world has witnessed a number of surprisingly large financial losses from major catastrophes, including earthquakes in Chile, and Japan, New Zealand, as well as floods in Thailand.

Near term, what do you expect the impact on reinsurance pricing will be for catastrophe risk? And longer term, does this trend of increased frequency of major catastrophes affect Berkshire’s view on the global reinsurance business?

WARREN BUFFETT: It’s very hard, because of the random nature of quakes and hurricanes and that sort of thing, very hard to know when you really have had a trend.

We’ve had that situation with global warming. I mean, it has been ungodly warm here in the last few months. A few years ago, it was extremely cold.

Anything that moves as slowly as the things affecting our globe, separating out the random from new trends is really — is not easy to do.

We tend to sort of assume the worst. I mean, if we see more earthquakes in New Zealand than have existed, you know, in the last few years than existed over the last 100 years, we don’t say that we’ll extrapolate the last couple of years and say that’s going to be the case, this huge explosion of quakes. But we also don’t take the 100-year figure anymore.

We have written — in the last few months — we have written far more business in Asia, and by that I mean New Zealand, Australia, Japan, and Thailand.

We’ve written quite a bit more — a lot more business — than we wrote a year ago, or two years ago, or three years ago, because they’ve had some huge losses, and they have found that the rates they had been using were really inadequate. And they are looking for large amounts of capacity in some cases, and we are there to do that if we think the rate is right.

But nobody knows for sure what the right rate is.

I mean, we can tell you how many 6.0 or greater quakes have happened in California in the last hundred years and how many Category 3 hurricanes have hit, you know, both sides of Florida, whatever.

There’s all kinds of data available on that, but the question is, how much does it tell you about the next 50 years?

And so we — if we think we’re getting a rate that — if a fairly negative hypothesis would indicate — then we move ahead, and we’ve done that in the Pacific.

I don’t know whether you know it, but if you — last year, we had two or three quakes in Christchurch, New Zealand, but I believe it was — the second one caused, like, $12 billion of insured damage.

And if you think of that in relationship of a country of 4 or 5 million and you compare that to the kind of cats we’ve had in the United States, that’s ten Katrinas. You know, there’s been some really severe —

And Thailand was the same way with the floods.

It was — the losses were just huge in respect to the entire premium volume in the country.

So when that happens, everybody reevaluates the situation, and we are perfectly willing to take on very big limits if we think we’re getting the right price.

We have propositions out for as much as 10 billion of coverage, you know. Now, we don’t want that 10 billion to correlate with anything else, and we want to be sure we get the right price. But — and we may write some at some point.

It’s certainly — the market for cat business in some parts of the world is significantly better from our standpoint than it was a year or two ago, but that’s not true every place.

17. Wind power wouldn’t “make sense” without subsidies

WARREN BUFFETT: OK. Station 4.

AUDIENCE MEMBER: Good morning, Mr. Buffett, Mr. Munger. My name is Verne Fishenberry (PH), and I ask this question on behalf of a group of investors that made the trip up from Overland Park, Kansas.

MidAmerican has a large investment in wind and solar power. What effect do subsidies and incentives have on that business, and could you share your thoughts on a sustainable energy policy?

I gather we should be conserving our natural gas. What is the most appropriate use of that resource?

WARREN BUFFETT: Yeah. Well, I believe the — on wind — and we’re much bigger in wind than solar, although we’ve entered solar in the last six months or so. We’ve got two solar projects that we own about a half of each one of them.

But we’ve been doing wind for quite a while, and I think the subsidy is 2.2 cents for ten years per kilowatt hour, and that’s a federal subsidy.

And there’s no question that that makes wind projects — in areas where the wind blows fairly often — that makes wind projects work, whereas they wouldn’t work without that subsidy. The math just wouldn’t work out.

So the government, by putting in that 2.2 cents subsidy, has encouraged a lot of wind development. And I think if there had been none, my guess is there would have been no wind development. I don’t think any of our projects would make sense without that subsidy.

In the case of solar, the projects we have have got a commitment from Pacific Gas and Electric to a very long-term purchase commitment.

How that ties in with their particular obligations or anything, I mean, there may be some subsidy involved in why they wish to buy it at the price they do from us. I’m sure there is; I don’t know the specifics of it.

But neither one of those projects, neither solar nor wind — if Greg Abel is here and wants to go over to a microphone and correct me on this, it would be fine — but I don’t think any solar or wind would be working without subsidy.

And, of course, you can’t count on wind for your base load. I mean, it works and it’s clean, but if the wind isn’t blowing, you know, it does not mean that everybody wants to have their lights off.

So it’s a supplementary type of generation, but it can’t be part of your base generation.

Charlie, do you have any thoughts on that? And Greg, do we have Greg up here? Go ahead, Charlie.

CHARLIE MUNGER: Well, I think, of course, it — eventually we’re going to have to take a lot of power from these renewable sources and, of course, we’re going to have to help the process along with subsidies.

You know, I think it’s very wise that that’s what the various governments are doing.

WARREN BUFFETT: Yeah, you could say the future is subsidizing, you know, oil and natural gas now, in a sense.

Is Greg up there?

CHARLIE MUNGER: He needs a mic.

WARREN BUFFETT: He needs a mic.

GREG ABEL: Zone 7. Yeah.

WARREN BUFFETT: Yeah.

GREG ABEL: Just to touch on the — both the wind projects and the solar, Warren, you were exactly right. Obviously the subsidy associated with the wind has allowed us to build, now, 3,000 megawatts across our two utilities.

And you are absolutely correct, we would have not moved forward without that type of subsidy.

On the solar, there’s actually a couple other incentives that are in place. You get a very large incentive associated with constructing the assets.

We get — we recover 30 percent of the construction costs as we build it.

Significant advantage there, relative to Berkshire being a full taxpayer, where a lot of other entities in the U.S. are not — or the corporate entities that are competing for those projects relative to ourselves often don’t have the tax appetite for those type of assets.

So we do benefit from the ongoing tax structure, there’s no question, both in wind and in solar.

WARREN BUFFETT: Greg has hit on a point that people don’t — often don’t — understand about Berkshire.

We have a distinct competitive advantage. It’s not unique, but it’s a distinct competitive advantage in that Berkshire pays lots of federal income tax.

So when there are programs in the energy field, for example, that involve tax credits, we can use them because we have a lot of taxes that we’re going to pay, and therefore, we get a dollar-for-dollar benefit.

I don’t have the figures, but I would guess that perhaps 80 percent of the utilities in the United States cannot reap the full tax benefits, or maybe any tax benefits, from doing the things that we just talked about because they don’t pay any federal income taxes.

They’ve used bonus depreciation, which was enacted last year and where you get 100 percent write-off in the first year. They wipe out their taxable income.

And if they’ve wiped out their taxable income through such things as bonus depreciation, they do not — they cannot — have any appetite for wind projects where they get a tax credit or — in the solar arrangement.

So, by being part of Berkshire Hathaway, which is a huge taxpayer, MidAmerican has extra abilities to go out and do a lot of projects without worrying about whether they sort of exhausted their tax capacity. It’s an advantage we have.

18. Political views shouldn’t affect investing decisions

WARREN BUFFETT: Becky?

BECKY QUICK: This question comes from John in Brunswick, Georgia.

He says, “You are clearly entitled to speak your mind on any and all subjects as an individual, but the recent publicity around the Buffett tax has become quite loud.

“And as a shareholder, I fear it is limiting, to some degree, the interest in the Berkshire stock, on principal, for some people.

“For instance my 84-year-old father is not interested in investing in Berkshire because of his opposition to this tax position, and otherwise, he likely would.

“While being a public company CEO, should some of the political dialogue be somewhat muted for the betterment of the company and its share price?”

WARREN BUFFETT: Yeah. That’s a question that’s raised frequently. (Applause)

But I really — in the end, I don’t think that any employee of Berkshire, I don’t think that the CEOs of any of the companies that we own stock in, should in any way have their citizenship restricted.

We did not — (Applause)

When Charlie and I took this job, we did not decide to put our citizenship in a blind trust. People are perfectly willing — it’s fine if they disagree with us. I think it’s kind of silly.

I don’t know the politics of — necessarily — of [American Express CEO] Ken Chenault or [Coca-Cola CEO] Muhtar Kent or [Wells Fargo CEO] John Stumpf. I got a pretty good idea with [banker Richard] Kovacevich at one time. (Laughs)

But they run these businesses in which we have ten — [IBM CEO] Ginni Rometty, I mean, we’ve got 11 or $12 billion with her. I don’t know what her politics are, and, you know, I don’t know what her religion is.

She’s got all kinds of personal views, I’m sure, that probably are better than mine, but it doesn’t make any difference. I just want to know how she runs the business.

And I really think that that 84-year-old man making a decision on what he invests in based on who he agrees with politically, sounds to me like you ought to own FOX. (Laughter and applause)

Charlie?

CHARLIE MUNGER: Well, I want to report that Warren’s view on taxes for the rich has reduced my popularity around one of my country clubs. (Laughter)

WARREN BUFFETT: If it keeps him from hanging around the country club, I’m all for it.

CHARLIE MUNGER: And it’s a disadvantage I am willing to bear in order to participate in this enterprise. (Laughter)

WARREN BUFFETT: Charlie and I, we don’t disagree on as many things as you might think, but we’ve certainly disagreed on some things over 53 years. It’s never — we’ve never had an argument in 53 years. Maybe you can get one started here if you work on it. (Laughter)

But it — it’s just — it’s irrelevant. I mean, you know, roughly half of the country is going to feel one way this November and the other half is going to feel a different way.

And if you start selecting your investments, or your friends, or your neighbors, based on trying to get people that agree with you totally, you’re going to live a pretty peculiar life, I think.

19. Size of potential deals limited by commitment to not use stock

WARREN BUFFETT: OK. Jay.

JAY GELB: Warren, this question is on acquisitions. Would you consider an acquisition in excess of $20 billion?

And if so, would it be funded in terms of existing cash, as well as issuing debt and equity, or perhaps even selling existing investments?

WARREN BUFFETT: Yeah. We considered one here just a month or two ago which we would have liked — I wish we could have made it. There was probably about 22 billion.

I mean, it gets — above 20 billion it gets to be more and more of a stretch, particularly because we won’t use our stock at all.

We used stock in the Burlington Northern acquisition, and we felt that it was a mistake, but we were using it for what, in effect, turned out to be about 30 percent of the deal, and we felt that we were doing well enough with the cash that overall that the mix was OK.

But we would not use our stock now, and we wouldn’t even use it for 30 or 40 percent of some deal. It’s hard to imagine. So we really —

CHARLIE MUNGER: It’s hard to imagine, but it could be conceivably happen.

WARREN BUFFETT: It could happen, it could happen.

But I don’t think it will happen. (Laughs)

CHARLIE MUNGER: I don’t either.

WARREN BUFFETT: So, we looked at this 22 or $23 billion-dollar deal, and we would have done it if we could have made the deal.

But it would have stretched us, but we would not have pushed it to the point where it would have taken our cash below 20 billion.

We would have sold securities, we would have done whatever was necessary to have a $20 billion cash balance when we got done with the deal.

But I would have had to sell some securities I didn’t want to sell. I liked the deal well enough so I would have done it.

Now, if that had been 40 billion, I don’t think we, you know, no matter how well I liked it, I don’t think I would have wanted to peel off 25 billion or so of marketable securities trying to get it done, and I certainly wouldn’t want to be in limbo not knowing exactly where the money was going to come from, and therefore, be subject to some terrible shock in the world, in the market.

If you have a $20 billion-dollar deal, though, I’ve got an 800 number, so — (Laughter)

But you’ve actually sort of hit the point where we start squirming a little bit as to where we would come up with the money.

On the other hand, the money is building up month by month so I — we will — if we can make the right $20 billion deal, we’ll do it. And next year, if we haven’t made a deal, I’ll probably say if we can find the right $30 billion deal, we would do it.

20. We can’t bring jobs back to the U.S. because they never left

WARREN BUFFETT: OK. Station 5.

AUDIENCE MEMBER: Glenn Mollenhour (PH), Westlake, Ohio. First of all, I want to thank you for having us here today. Very nice. Now Warren, I’d like to have dinner with you tomorrow night at Gorat’s.

WARREN BUFFETT: They’ll have a bidding at Glide here in June. It went for two million-six last year. (Laughter)

AUDIENCE MEMBER: My question is about jobs coming back to the U.S. I notice a number of companies have started to bring jobs back here.

Is Berkshire Hathaway looking at doing that for any job they’ve shipped out of the United States?

WARREN BUFFETT: Well, I have to finish my fudge here — the — I would say that of the 200 — the number of jobs we have is listed in the back of the report — I think it’s about 270,000 — 270,858 at year-end.

I’m just trying to think.

We probably — I don’t think we have more than 15,000 on the outside — of those 270 — outside the United States.

So as I put in the annual report, we invested in plant equipment — not in stocks, but in plant equipment, and not in acquisitions — over $8 billion last year, and 95 percent or so of that was in the United States.

So we don’t really have a lot around the world. (Applause)

I’m not opposed to it. I mean, our ISCAR operation, which is based in Israel, operates throughout the world.

I mean, they — I’ve been to their plants in Japan, I’ve been to their plants in Korea, I’ve been to their plants in India.

The product they sell is going to be sold throughout the world. The U.S. is an important market for them, but it’s not a majority of their business or anything like it.

So that company has about 11,000 employees or so, and relatively few of theirs are going to be in the United States.

We’d like to do more business in the United States, but we’d like to do more business in Korea and Japan and India and you name it.

We have utility operations in the UK, but other than — we have — we just bought a business in Australia at Marmon here, recently.

Well we bought — just the last day or so it’s been announced — we’re buying a — for CTB, which we’ve had a terrific history with. Vic Mancinelli has been a great man to manage businesses.

And just in the last day or two, we bought an operation based in The Netherlands [poultry-processing device maker Meyn Holding], although they have employment here.

But I would say that it’s extremely likely that 10 years from now, when you look at the breakdown of our employees, that we have many, many more employees, you know, maybe hundreds of thousands more employees. And some of those will be outside this country, but most of them will be in this country.

We find — there’s lots of opportunity in the United States. There is no shortage of opportunity.

In that 8.2 billion, or whatever it was last year, we loved putting that money out, and we’ll put out more this year.

And this is — I mean it’s a real land of opportunity. That’s not to knock opportunities elsewhere. But we find lots of things to do that make a — we think — make a lot of sense in this country.

Charlie?

CHARLIE MUNGER: You can’t bring a lot back if it never left. (Laughter)

WARREN BUFFETT: That’s the long version of my answer. (Laughter)

21. Buffett: prostate cancer treatment is “nonevent”

WARREN BUFFETT: Andrew?

ANDREW ROSS SORKIN: Well, Warren, I should say I was not planning to ask you this question, but in the past hour, I’ve received probably two dozen emails from shareholders in this room who want the question asked, so I will ask it, and it’s a very simple question. How are you feeling?

WARREN BUFFETT: I feel terrific. And — I always feel terrific, incidentally. That’s not news. (Applause)

I love what I do. I work with people I love. It’s more fun every day.

And it — basically, I seem to have a good immune system. You know, I mean, my diet is such that, you know, as any fool can plainly see, I’m eating properly. (Laughter)

All I can say is it works.

And I have four doctors, at least a few of them, I think, own Berkshire Hathaway.

Not a screen I put everybody through, but —

And my wife and my daughter and I listened to the four of them for an hour and a half about two weeks ago.

And they described various alternatives, and none of them — well, not that — the ones that they recommend, you know, do not involve a day of hospitalization.

They don’t require me to take a day off from work. The survival numbers are way up. I read one where it’s 99 1/2 percent for 10 years.

So, you know, maybe I’ll get shot by a jealous husband, but — (laughter) — this is not — this is a really minor event, and Charlie will tell you how minor it is.

CHARLIE MUNGER: Well, as a matter of fact, I rather resent all this attention and sympathy Warren is getting. (Laughter)

I probably have more prostate cancer than he does. (Laughter)

WARREN BUFFETT: He’s bragging.

CHARLIE MUNGER: I don’t know because I don’t let them test for it. (Laughter and applause)

WARREN BUFFETT: He’s not kidding. (Laughs)

CHARLIE MUNGER: At any rate, I want the sympathy. (Laughter)

WARREN BUFFETT: My secretary was getting too much attention, so I decided I had to throw the spotlight back on myself. (Laughter)

In all seriousness, it is a nonevent, yeah.

The Med Center is about two minutes from the office, and for two months, I’ll have to drop over there every afternoon and it will take a few minutes. And I may have a little less energy, but that may mean I do fewer dumb things, who knows? (Laughter)

22. We’ll take on runoff annuity liabilities at the right price

WARREN BUFFETT: OK. Gary?

GARY RANSOM: Yes. Your insurance operations have taken on a good chunk of some runoff property-casualty businesses.

There’s another business that has an increasing amount of runoff, and that’s the annuity business, Hartford, ING, Cigna, et cetera.

Is there a time, or are there conditions, under which you might consider taking on some of those liabilities?

WARREN BUFFETT: Sure. In effect, in some of our businesses, we’re taking on some annuity, but not like — I mean, it’s generally classified as property-casualty.

But we would take on annuity books. The problem is there, we’re not going to assume anything much better than the risk-free rate in making a bid for that sort of thing.

I mean, we do not like the idea of taking on long-term liabilities and paying 150 basis points, you know, above Treasuries or something, to do that.

And there are people that will do that. They may not be quite as likely to fulfill those promises in the years to come as we would.

But we want to get money on the liability side at attractive rates. Now, the most attractive is if we can write property-casualty business at an underwriting profit and get it for nothing.

But we’re willing to pay for annuity-type liabilities, and I don’t think it’s impossible you’ll see us do a little of that.

We’ve done some in the UK. We’ve actually taken on a little bit, but it’s not huge. But we’re beginning to take on more.

23. What Buffett would have done differently

WARREN BUFFETT: OK. Station 6.

AUDIENCE MEMBER: Good morning, Warren and Charlie. Glad you’re feeling well.

My name is Ryan Boyle, and I’m 26 and working for a private equity firm in Chicago.

If you were me and had the chance to start over, what areas would you look to get into?

And do you think that my generation will have the same number of opportunities as yours? And if not, would you look to focus on emerging markets?

WARREN BUFFETT: Oh, I think you have all kinds of opportunities.

I would probably do very much what I have done in life, except I’d do it — I’d try and do it a little earlier, and I would have tried to be a little bit better when I was running a partnership, in terms of aggregating the money faster.

I used to work with $5,000 contributions from partners and, you know, I would try to develop an audited record of performance as early as I could.

I would try to attract some money, and then when I’d build up a fair amount of money out of investing, I would try to get into something much more interesting, which would be buying businesses to keep.

You mentioned private equity, which very often is buying businesses to sell. I don’t want to be buying and selling businesses. I mean, if I establish relationships with people that come to me with their business, and they want to join Berkshire, I want it to be for keeps.

And that’s been enormously satisfying. But it takes some capital to get into that business, and I didn’t have any capital when I started out, so I built it through managing money for myself and other people, combined.

And like I say, I would get us through that process as fast as I could and then into a game where I could buy businesses of significance and interest to me. And I’d spend the rest of my life doing it, just as I’ve done.

Charlie?

CHARLIE MUNGER: Well, I’ve got nothing to add to that, either.

WARREN BUFFETT: And I’d do it with Charlie, incidentally. (Laughs)

24. Take advantage when “Mr. Market” acts like a “psychotic drunk”

WARREN BUFFETT: Carol.

CAROL LOOMIS: This comes — this question comes from a man who believes the stock — that Berkshire stock — is being held down some by your talking about the Buffett Rule.

I know you said you doubt that, but he suspects that at least 95 percent of the people in this arena believe that Berkshire Hathaway stock is undervalued.

If you don’t think it’s the Buffett Rule, could each of you give us your opinions about why the stock stays stuck at these levels?

WARREN BUFFETT: Yeah. We’ve run Berkshire now for 47 years. There have been several times — oh, four or five times — when we’ve thought it was significantly undervalued.

We saw the price get cut in half at least four times — or roughly in half — in fairly short periods of time.

And I would say this: if you run any business for a long period of time, there are going to be times when it’s overvalued and sometimes when it’s undervalued.

Tom Murphy ran one of the most successful companies [Capital Cities] the world has ever seen, and in the early 1970s, his stock was selling for about a third of what you could have sold the properties for.

And, you know, Berkshire, back in 2000/2001, whenever it was that I wrote in the annual report that we were also going to repurchase shares, was selling at what I thought was a very low price, and we didn’t get any repurchase.

But that — stocks — the beauty of stocks is they do sell at silly prices from time to time. That’s how Charlie and I have gotten rich. You know, Ben Graham writes about it in Chapter 8 of the Intelligent Investor.

You know, next to — well, Chapters 8 and Chapters 20 are really all you need to do to get rich in this world.

And Chapter 8 says that in the market you’re going to have a partner named “Mr. Market,” and the beauty of him as your partner is that he’s kind of a psychotic drunk — (laughter) — and he will do very weird things over time and your job is to remember that he’s there to serve you and not to advise you.

And if you can keep that mental state, then all those thousands of prices that Mr. Market is offering you every day on every major business in the world, practically, that he is making lots of mistakes, and he makes them for all kinds of weird reasons.

And all you have to do is occasionally oblige him when he offers to either buy or sell from you at the same price on any given day, any given security.

So it’s built into the system that stocks get mispriced, and Berkshire has been no exception to that.

I think Berkshire, generally speaking, has come closer to selling around its intrinsic value, over a 47-year period or so, than most large companies.

If you look at the range from our high to low in a given year and compare that to the range high and low on a hundred other stocks, I think you’ll find that our stock fluctuates somewhat less than most, which is a good sign.

But I will tell you, in the next 20 years, Berkshire will someday be significantly overvalued, and at some points significantly undervalued.

And that will be true for Coca-Cola and Wells Fargo and IBM and all of the other securities that — I don’t — I just don’t know in which order and at which times.

But the important thing is that you make your decisions based on what you think the business is worth.

And if you make your buy and sell decisions based on what you think a business is worth, and you stick with businesses that you think — you’ve got good reason to think — you can value, you simply have to do well in stocks.

The stock market is the most obliging, money-making place in the world because you don’t have to do anything.

You know, you sit there with thousands of businesses being priced at the same price for the buyer and the seller, and you don’t — and it changes every day, and you’ve got lots of information about most of those businesses, and you don’t have to do anything.

Compare that to any other investment alternative you’ve got. I mean, you can’t do that with farms.

If you own a farm and the guy has the farm next to you and you’d kind of like to buy him out or something, he’s not going to name a price every day at which he’ll buy your farm or sell you his farm, but you can do that with Berkshire Hathaway or IBM.

It’s a marvelous game. The rules are stacked in your favor, if you don’t turn those rules upside down and start behaving like the drunken psychotic instead of the guy that’s there to take advantage of it.

Charlie?

CHARLIE MUNGER: Well, what’s interesting about this place is I think we’ve had a lot more fun and we got rich enough so we bought businesses and stocks to hold instead of to resell.

It’s an enormously more constructive life. So as fast as you can work yourself into our position, the better off you’ll be. (Laughter)

WARREN BUFFETT: And you should be very encouraged by the fact he’s only 88 and I’m only 81. Just think, it may take you a little while. (Laughs)

25. We ignore headlines and macro factors

WARREN BUFFETT: Cliff?

CLIFF GALLANT: I guess along those lines, you talk about the drunken market, have systemic fear — systemic risk fears — ever caused you to pause in your eagerness to buy equities?

You know, back in 2008/2009, you know, why weren’t you more aggressive back then?

WARREN BUFFETT: You’ll probably find this interesting. Charlie and I, to my memory, in 53 years, I don’t think we’ve ever had a discussion about buying a stock or a business, or selling a stock or a business, that has been — where we’ve talked about macro affairs.

I mean, if we find a business that we think we understand and we like the price at which it’s being offered, we buy it. And it doesn’t make any difference what the headlines are, it doesn’t make any difference what the Federal Reserve is doing, it doesn’t make any difference what’s going on in Europe. We buy it.

You know, there’s always going to be good and bad news out there, and which gets emphasized the most, you know, depends on the moods of people or newspaper editors or whomever.

And there’s — you know, there’s a ton of bad — I bought my first stock, you know, in June of — in June of ’42, and what had happened?

You know, we were losing the war, until the Battle of Midway. I mean, so here was a country that — you know, all my older friends had gone, you know, disappeared.

We weren’t going to make any kinds of goods that were — people wanted. We were going to build battleships and things to drop in the sea, and we were losing.

But stocks were cheap.

And I wrote that article in October of 2008 in the Times. I should have written it a few months later, but in the end, I said we’ve just had a financial panic and it’s going to flow over into the economy, you know, you’re going to read all kinds of bad news, but so what, you know?

America is not going to go away. Stocks are cheap.

You’ve got to — we look to value, and we don’t look to headlines at all. And we really don’t — everybody thinks we sit around and talk about macro factors. We don’t have any discussions about macro factors.

Charlie?

CHARLIE MUNGER: Yeah, but we did keep liquid reserves at the bottom of the panic that, if we’d known it was not going to get any worse, we would have spent, but we didn’t know that.

WARREN BUFFETT: Yeah. We know what we don’t know.

We all — we know we don’t want to go broke. I mean, we start with that.

And we know you can’t go broke if you’ve got a fair amount of liquid reserves around and you don’t have any near-term debts and so on.

So our first rule is always to play it tomorrow, no matter what happens. But if we’ve got that covered, and we can find things that are attractive, we buy it.

Well Charlie has a little company called the Daily Journal Company and he sat there with a whole lot of cash. And when 2008 came along, he went out and bought a few stocks. He won’t tell me the names of them, but —

You know, that was the time to use the money, not to sit on it.

Was that the name of the stock, Charlie? (Laughter)

You don’t get anything out of him. (Laughter)

26. Big Berkshire subsidiaries have “done well” over past 5 years

WARREN BUFFETT: Station 7.

AUDIENCE MEMBER: Mr. Buffett, Mr. Munger, thank you for your inspiration and insight.

When you look at the stable of businesses that Berkshire owns, which business has greatly improved its competitive position over the last five years, and why?

And then conversely, perhaps you might name a business that was not so lucky.

WARREN BUFFETT: Yeah. We don’t like to dump on the ones that aren’t — that haven’t done as well. But there’s no question — and fortunately, the big ones have done well.

There’s no question, even though we didn’t — well, we didn’t own all of it, but we actually have owned a significant piece of Burlington Northern over the last five.

But the railroad business for very fundamental reasons, which I should have figured out earlier, has improved its position dramatically over the last, really, 15 or 20 years, but it continues to this day.

I mean, it is an extremely efficient and environmentally-friendly way of moving a whole lot of things that have to be moved.

And it’s an asset that couldn’t be duplicated for, you name it, three, four, five, six times, you know, what it’s selling for. So that it’s a whole lot better business than it was five or 10 years ago.

Now, GEICO is a whole lot better business than it was five or 10 years ago, although I think you could have predicted that the chances were good that that was going to happen.

But, you know, we have — we’re approaching 10 percent of the market now. And you go back to 1995, we had 2 percent of the market.

We had the ingredients in place to become much larger, and then fortunately, we had [CEO] Tony Nicely who absolutely maximized what was there to be done.

And GEICO’s worth billions and billions and billions of dollars more than when we bought it.

And the Burlington is worth considerable billions more than when we bought it, even though it was recently.

MidAmerican has done a great job. We bought that stock at 34 or so dollars a share in 1999, and I think we appraise it now at around $250 a share, and that’s in the utility business.

So ISCAR has been wonderful since we bought it. We bought that six years ago. And they just don’t stop. You know, they do everything well. And I would not want to compete with them.

So we’ve — there are a number of them. And —

CHARLIE MUNGER: We have 80 percent or so of our businesses, by value, at least, increased their market strength.

WARREN BUFFETT: Yeah. By value, I would say more than 80 percent.

CHARLIE MUNGER: More than, yeah.

WARREN BUFFETT: But not by number, but by value.

CHARLIE MUNGER: By value. We are not suffering at all. We’re never going to get the rate to 100 percent.

WARREN BUFFETT: And the mistakes have been made in the purchasing. I mean, it’s where I misgauged the competitive position of the business.

It isn’t because of the faults of management. It’s because I just — either because I had too much money around or because I was — been drinking too much Cherry Coke or whatever it was — I assessed the future competitive position in a way that was really inappropriate.

But it wasn’t because it really changed on me so much. And, you know, we’ve done some of that.

But the big ones — the big ones have worked out very well.

Gen Re, which took, like, real problems for some years. I mean, Tad [Montross] is running a fabulous operation there.

Ajit [Jain] has created something from nothing that’s worth tens of billions of dollars. You know, he created that out of walking into the office in 1985 and entering the insurance business for the first time, but he just brought brains and energy and character to something, and we backed him with some money, and he’s created a business like nobody I’ve ever seen.

Charlie?

CHARLIE MUNGER: Well, we’ve been very fortunate. And what’s interesting is the good fortune is not going to go away merely because Warren happens to die. (Laughter)

It won’t help him but — (Laughter)

WARREN BUFFETT: You’ll have an explanation of that in the second half of this. (Laughter)

27. Derivatives are “not going to be a huge factor at Berkshire”

WARREN BUFFETT: Becky?

BECKY QUICK: This question comes from Joel Bannister (PH) in Dallas, Texas, who says, “Warren, you personally run the derivative book.

“Who will manage these weapons of mass destruction after your tenure? We don’t want to end up like AIG under someone else’s watch.”

He also adds, “P.S. I am wearing the wedding ring you sold my wife last year at the annual meeting at Borsheims.”

WARREN BUFFETT: Well, obviously a man of intelligence. (Laughter)

Yeah, I don’t think there will be much of a derivatives book after I’m around. In fact, there won’t be much of a derivatives book when I am around. I mean, it’s not that big of a deal.

But there will be — there could well be — well, I’ll go back to will be, because it’s almost required in certain of our utility operations that they engage in certain types of derivative activities. The utility boards that they respond to want them to hedge out certain types of activities.

And then they engage in swaps of generation. And there’s a number of activities that there’s some derivatives that fit into doing that, but it’s not of a huge scope.

The railroad formerly hedged diesel fuel, for example. They may do that in the future; they may not. I mean — so there’s a few operating businesses that will have minor positions.

I don’t think that — I think it’s unlikely that whoever follows me — well, they’ll be in — there will be several investment guys that follow me, at least two, and they’re on board now, Todd Combs and Ted Weschler.

We hit a home run with both of them. We got better than we deserved, but Charlie and I like that.

And they — it’s unlikely they do anything — very unlikely they do anything — in derivatives, although I wouldn’t restrict them from doing it because they’re smart people and sometimes derivatives get mispriced.

But it’s not going to be a huge factor at Berkshire. I think we’re going to do really, probably, quite well with the derivative positions that we have. We’ve done fine with the ones that have expired so far, and I like the positions.

But the rules have changed in relation to collateralizing, and I don’t like ever exposing us to anything that would cause me to worry about Berkshire’s financial condition if the Federal Reserve were hit by a nuclear bomb tomorrow, or anything of the sort, or Europe, you know, something terrible happened.

We just — we think about worst cases all of the time around Berkshire. Charlie and I probably think about worst cases more than any two managers you’ll ever find, and we are never going to expose ourselves to a worst case.

And a requirement to collateralize things means that you are putting yourself in a position where you may have to come up with some cash tomorrow morning, and we’re never going to do that on any significant scale, because we don’t know what tomorrow morning will bring.

Charlie?

CHARLIE MUNGER: We wouldn’t — the derivatives have bothered some people. We never would have entered if we’d had to sign normal contracts.

We had better credit than anybody else, and we got better terms. And I think by the time that has all run off, we will have made at least $10 billion, maybe a lot more.

In other words, we’re going to be very lucky we did those contracts.

28. Different valuation methods for different companies

WARREN BUFFETT: Jay?

JAY GELB: Warren, when you discuss Berkshire’s intrinsic value, why do you value the insurance business at only cash plus investments per share?

And what’s a reasonable multiple to apply to the pretax earnings of the noninsurance businesses?

WARREN BUFFETT: I would — I don’t value the insurance business quite the way you say it. I would value GEICO, for example, differently than I would value Gen Re, and I would value even some of our minor companies differently.

But basically, I would say that GEICO is worth — has an intrinsic value — that’s greater — significantly greater — than the sum of its net worth and its float. Now, I wouldn’t say that about some of our other insurance businesses.

But that’s for two reasons. One is, I think it’s quite rational to assume a significant underwriting profit at GEICO over the next decade or two decades, and I think it’s likely that it will have significant growth.

And both of those are value — items of enormous value. So that adds to the present float value, but I can’t say that about some other businesses.

But in any event, once you come up with your own valuation on that, in terms of the operating business, obviously different ones have different characteristics.

But I would love to buy a new bunch of operating businesses that had similar competitive positions in everything.

Under today’s conditions, I would love to buy those at certainly nine times pretax earnings, maybe 10 times pretax earnings. I’m not talking about EBITDA or anything like that, which is nonsense. I’m talking about regular pretax earnings.

If they have similar characteristics, we’d probably pay a little more than that, because we know so much more about them than we might know about some other businesses.

What would you say, Charlie?

CHARLIE MUNGER: When you used the word EBITDA, I thought to myself, I don’t even like hearing the word. (Laughter)

There’s so much nutcase thinking involving EBITDA. Earnings before what really counts in costs. (Laughter)

WARREN BUFFETT: Yeah. We prefer EBE, which is earnings before everything. (Laughter)

CHARLIE MUNGER: Right.

WARREN BUFFETT: It’s nonsense. I mean, if you compare a business that, you know, leases pencils or something like that where they all get depreciated in a two-year period and then compare that to some business that uses virtually no capital, you know, like See’s Candies, it’s just nonsense. But it works for the people that sell businesses.

It’s like Charlie’s friend that used to sell fishing flies, Charlie, right?

CHARLIE MUNGER: Right. They don’t sell these lures to fish. (Buffett laughs)

29. Buffett’s negativity on gold “arouses passions”

WARREN BUFFETT: Station 8.

AUDIENCE MEMBER: Oh, hi, thanks. Neil Steinhoff (PH) from Phoenix. Thanks for holding the meeting today.

You mentioned a while ago that you were concerned about you and Charlie exposing yourself. Well, I for one am glad that you’re not doing that. (Laughter)

Since 1999, the Berkshire Hathaway stock has — we have not gone up appreciably, whereas gold has gone up multiple times. I don’t own your stock for the glamour. I own it to earn money. What happened?

WARREN BUFFETT: Well, I would say this: when we took over Berkshire, gold was at $20 and Berkshire was at $15 so — gold is now at $1600 and Berkshire is at $120,000. So you can pick different starting periods. (Applause)

Obviously, you can pick anything that’s gone up a lot in the last, you know, month or year. I mean, it will beat 90 percent of — or 95 percent — of other investments.

But the one thing I would bet my life on, essentially, is over a 50-year period, not only will Berkshire do considerably better than gold, but common stocks as a group will do better than gold, and probably farmland will do better than gold.

I mean, if you own an ounce of gold now and, you know, you caress it for the next hundred years, you’ll have an ounce of gold a hundred years from now.

If you own a hundred acres of farmland, you’ll also have a hundred acres of farmland a hundred years from now and you’ll have taken the crops for a hundred years and sold them and presumably bought more farmland in the process.

It’s very hard for an unproductive investment to beat productive investments over any long period of time, and I recognize that —

It’s very interesting. I can say bonds are no good and [Federal Reserve Chairman Ben] Bernanke still smiles at me. You know, and I can say some stock is no good, and people —

But if you say anything negative about gold, I mean, it arouses passions with people, which is kind of fascinating, because usually if you thought through something intellectually, it shouldn’t really make much difference what people say. It should be that, well, you know, the question is whether your facts are right and your reasoning is right.

But when you run into people that are really excited about gold — and I came from a family where my dad loved gold.

And he was tolerant. He could take a discussion of it. I find many people have trouble with it.

Charlie?

CHARLIE MUNGER: Well, I have never had the slightest interest in owning gold. It’s a much better life to work with businesses and people engaged in business. I can’t imagine a worse crowd to deal with than a bunch of gold bugs. (Laughter)

30. Buffett: “my best ideas are all in Berkshire”

WARREN BUFFETT: Andrew?

ANDREW ROSS SORKIN: We got a couple of questions on this topic.

“You said in an interview on CNBC that you had bought shares in J.P. Morgan for your personal account.

“Can you explain how you decide to make a personal investment versus one in your role as a fiduciary for us as shareholders of Berkshire?

“And while you’re at it, could you please share some names of stocks you’ve recently bought for your own account?” (Applause)

WARREN BUFFETT: The truth is I like Wells Fargo better than I like J.P. Morgan but I — but I also — we bought, and we’re buying, Wells Fargo stock, and that takes me out of the business of buying Wells Fargo. So therefore, I go into something that I don’t like quite as well but that I still like very much.

And that’s one of the problems I have, is that I can’t be buying what Berkshire is buying, and I’ve got some money around, and therefore, I go into my second choices, or into tiny little companies like I did with Korean companies and that sort of thing.

But my best ideas are all in Berkshire. That I can promise you.

Charlie? Charlie’s bought real estate, too, and different things to avoid that problem.

CHARLIE MUNGER: Yeah. But basically the Munger family is in two or three things only.

Diversification is my idea of — not something I have practically no interest in, except as it happens automatically in a big place like Berkshire.

I rejoiced the day I got rid of a quote — you know, a stock quoting machine.

And I like this buy and hold investing. It’s a lovely way to live a life and you deal with a better class of people, and it’s worked pretty well for all of us.

And I don’t think you need to worry about Warren’s side investments. His investments in Berkshire are so huge and those are so small, relevantly, that if that’s your main problem in life, you have a very favored life.

WARREN BUFFETT: Well, if you have 98 1/2 percent of your money in Berkshire and you really are trying to do your thinking about what’s best for the 1 1/2 percent, you’re a little bit crazy. (Laughs)

You should be thinking about Berkshire, which I can assure you I do. But, there could be —

CHARLIE MUNGER: And he does like Wells Fargo better than J.P. Morgan.

WARREN BUFFETT: Yeah, I do, yeah. And we have 400 and some million shares of Wells Fargo in Berkshire.

I like J.P. Morgan fine, obviously, but I know Wells better. It’s easier to understand.

So, you know, we — well, we bought Wells Fargo in the first quarter. We bought Wells Fargo last year. We’ve bought it an awful lot of years.

And if I wasn’t managing Berkshire, you know, but instead was sitting with my own money, I’d have a lot of money in Wells Fargo and I’d probably have some money in J.P. Morgan, too.

31. Why is BNSF a subsidiary of National Indemnity?

WARREN BUFFETT: Gary?

GARY RANSOM: When Berkshire bought BNSF, it raised the surplus of the property-casualty industry by about 4 percent. It’s unusual to have a property-casualty company own such a large non-operating company.

I’d also characterize your whole organization chart as challenging, a lot of different pieces to it, which gives rise to the issue of capital efficiency.

And I’m just wondering, are there any parts of your organization structure that have any hindrance, whether it’s regulatory or otherwise, to making use of the capital in the best way, generally, and in particular for BNSF?

WARREN BUFFETT: Yeah. Well, I would say that money in our life companies has less utility to us — I’d rather have $100 million in our property-casualty companies than 100 million in our life companies, because we’re more restricted as to what we can do with the money in the life companies.

So — and we’ve got a fair amount of money in life companies, and that money cannot be used as effectively over a period of years, in my view, as money we have in the property-casualty business. It’s a disadvantage to being in the life business versus the PC business.

And the best place — obviously, the number one place where we like to have money is in the holding company. And we’ve got about 10 billion in the holding company right now. That, you have the ultimate flexibility with.

Most of our operating businesses keep more cash around than they need, but it’s there. And I’m — as long as I have 20 billion someplace, I feel comfortable. We’ll never have anything that can come up, remotely, that would cause me to lose any sleep as long as I start with the 20 billion.

That’s probably considerably more than we need, but it just leaves us comfortable, and it makes us feel we can do other things aggressively, as long as we know the downside is protected.

The — having the railroad in National Indemnity was just something we thought was nice to have a huge asset like that there that should make the rating agencies and everyone feel comfortable, and there’s no disadvantage to us.

Very interesting, the rating agencies — at least one rating agency — said they didn’t want to give us any credit for that asset in there, although if we had 20 percent, like we had had earlier, they would have given us full credit for the market value. I didn’t push them too hard on that.

But there’s a fair amount of logic, I think, to where things are placed. If we were to make a big acquisition, it might require shifting some funds from one place to another, but we’ll always leave every place more than adequately capitalized.

And if you can figure out a way that I could use the life funds more like I can use the property-casualty funds, call me. I’ve got an 800 number. (Laughs)

CHARLIE MUNGER: Well, two things are peculiar about that casualty operation. One is that it has so much more capital, in relation to insurance premiums, than anybody else. And the other is that it has, among the assets in that great surplus of capital, is something like the Burlington Northern Railroad, which makes it immensely stronger from the viewpoint of the policyholder.

It’s a huge advantage you’re talking about, not a disadvantage.

WARREN BUFFETT: Yeah. Here’s a property-casualty company that has an asset in it that, unrelated to insurance, will probably make $5 billion pretax or more.

So if we’re writing — well, in that entity, we’re writing less than that — but let’s say we’re writing 25 billion of premiums. That means we can write at 120, and just our railroad operation will bring us an underwriting neutrality. I mean, it’s a terrific — it’s like having a royalty or something.

CHARLIE MUNGER: It’s a wonderful position we have.

WARREN BUFFETT: And nobody else has it.

CHARLIE MUNGER: And nobody else has it. And they wouldn’t let us do it if we weren’t so strong.

32. We don’t want Berkshire’s stock to be too high or too low

WARREN BUFFETT: Station 9.

AUDIENCE MEMBER: Yes. John Horton, Water Street Capital, Jacksonville, Florida.

Since Berkshire will likely need to offer a stock component for very large acquisitions like Burlington Northern, wouldn’t Berkshire lower its cash outlay by increasing the price of its stock to near fair value, perhaps by offering a 2 to 3 percent dividend or a promised percentage of cash earnings?

Might this have the effect of actually lowering the cash outlay needed for such acquisitions? As 30-year shareholders with almost $1 billion of exposure, we like this approach. Thank you.

WARREN BUFFETT: Yeah. We would obviously prefer to have our stock sell at exactly intrinsic business value, even though we don’t know that precise figure, but Charlie and I would have a range that would not differ too widely.

And if it’s over intrinsic business value, and we could use it as part of a consideration for buying something else at intrinsic business value, and then use cash for the balance, you know, we would like that situation.

And that — that’s very likely to occur in the future. It’s occurred in the past. Berkshire, without paying a dividend, has sold, probably, at or above intrinsic value as much of the time in the last 35 or so years as it has below.

I mean, it will bob around. And I do not think a dividend would be a plus, in terms of having it sell at intrinsic value most of the time. I think it might be just the opposite.

I mean, here we are, we’re willing to pay, you know, 110 cents on the dollar for what’s in there.

So the idea of paying out money, which we think is worth at least 110 cents on the dollar within the place, and have it turn into 100 cents on the dollar when paid out, just is not very attractive to us, unless we find we can’t do things in the future that make sense.

But our goal — and we put it in the annual report. Our goal is to have the stock sell at as close to intrinsic business value as it can.

But with markets — you know, the way markets operate, most of the time it will be bobbing up or down from that level. And we’ve seen that now for 40-plus years, and we’ve tried to, at least in a way, point out what we think is going on.

And if it ever — if it — and it will. I mean, when it trades at intrinsic business value or higher, there may be times when we will use it.

We’d still prefer using cash, though. Cash is our favorite medium of purchase just because we’re going to generate a lot of it. And we hate giving out shares.

We do not like the idea of trading away part of See’s Candies or GEICO or ISCAR or BNSF. The idea of leaving you with a lower percentage interest in those companies because of any acquisition ambitions of ours is anathema to us.

Charlie?

CHARLIE MUNGER: Well, what he suggested is a very conventional approach, and we think it’s better for the shareholders to do it the way we’re doing it. (Applause)

WARREN BUFFETT: I should point out, I’m in the position — giving away all of my stock between now and 10 years after my death when my estate is settled — but I’m giving it away every year.

You know, it will do more good, in terms of its philanthropic consequences, if it’s at a higher price than lower price. I mean, there’s nobody here that has more of an interest in the stock selling at what I’ll call a fair value, as opposed to a discount value, than I do.

I know I’m not a seller, but I’m disposing of the stock, and I would rather have it buy, you know, X quantity of vaccines than 80 percent of X.

So it isn’t like we’ve got some great desire to have the stock sell cheap. If it does sell cheap, we’ll, you know, we’ll buy it in, but our interest is really in having it sell at, more or less, the fair value.

And we think if we perform reasonably well, in terms of running the business, and if we tell the truth about the business, and explain to a selected group of shareholders who are interested in that aspect of investing, that over time, it will average that.

And that’s happened over the years, but it doesn’t happen every year. If people get excited enough about internet stocks, they’re going to forget about Berkshire. When they get disillusioned with internet stocks then — I’m going back 10 or 12 years on that.

But there have been times when people have gotten very excited about Berkshire, and there have been times when they’ve gotten very depressed.

Charlie, anything?

33. Buffett sees value in local newspapers

WARREN BUFFETT: OK. Carol.

CAROL LOOMIS: This question comes from Kevin Getnowski (PH) of Yutan, Nebraska. And to it, I’ve added one question at the end, which came from another shareholder writing about the same subject.

“You’ve described the newspaper business in the past as chopping down trees, buying expensive printing presses, and having a fleet of delivery trucks, all to get pieces of paper to people to read about what happened yesterday.

“You constantly mention the importance of future intrinsic value in evaluating a business or company. With all of the new options available in today’s social media and the speculation of the demise of the newspaper media, why buy the Omaha World-Herald?”

“Was there some” — this is a question from the other one — “Was there some self-indulgence in this?”

WARREN BUFFETT: No, I would say this about newspapers. It’s really fascinating, because everything she read is true, and it’s even worse than that. (Laughter)

The newspapers have three problems, two of which are very difficult to overcome, and one, if they don’t — the third — if they don’t overcome it, they’re going to have even worse problems, but maybe can be overcome.

Newspapers — you know, news is what you don’t know that you want to know. I mean, everybody in this room has a whole bunch of things that they want to keep informed on.

And if you go back 50 years, the newspaper contained dozens and dozens and dozens of areas of interest to people where it was the primary source. If you wanted to rent an apartment, you could learn more about renting apartments by looking at a newspaper than going anyplace else.

If you wanted a job, you could learn more about that job. If you wanted to know where bananas were selling the cheapest this weekend, you could find it out. If you wanted to know how — whether Stan Musial, you know, went two for four, or three for four, last night, you went to the newspapers.

If you wanted to look at what your stocks were selling at, you went to the newspapers.

Now, all of those things, which are of interest to many, many people, have now found other means — they’ve found other venues — where that information is available on a more timely, often cost-free, basis.

So newspapers have to be primary about something of interest to a significant percentage of the people that live within their distribution area.

And the — there were so many areas where they were primary 30 or 40 years ago that you could buy a newspaper and only use a small portion of it and it still was valuable to you.

But now you don’t use a newspaper to look for stock prices. You get them instantly off the computer. You don’t look for the newspapers for apartments to rent, in many cases, or jobs to find, or the price of bananas, or what happened in the NFL yesterday.

So they’ve lost primacy in all of these areas that were important.

They still are primary in a great many areas. The World-Herald tells me, every day, a lot of things that I want to know that I can’t find someplace else.

They don’t tell me as many things as they did 20 or 30 or 40 years ago that I want to know, but they still tell me some things that I can’t find out elsewhere.

Most of those items — overwhelmingly — those items are going to be local. You know, they’re not going to tell me a lot about Afghanistan or something of the sort that I want to know but I don’t know. I’m going to get that through other medium.

But they do tell me a lot of things about my city, about local sports, about my neighbors, about a lot of things that I want to know. And as long as they stay primary in that arena, they’ve got an item of interest to me.

Now, the problem they have, they are expensive to distribute, as the questioner mentioned. And then the second problem is that, throughout this country, we had 1700 daily newspapers. We have about 1400 now.

The — in a great many cases, they are going up on the web and giving free the same thing that they’re charging for in delivery. Now, I don’t know of any business plan that has sustained itself for a long time, maybe you can think of — maybe Charlie can think of one — but that has charged significantly in one version and offers the same version free to people, that had a business model that would work over time.

And lately, in the last year even, many newspapers have experimented with, and to some extent succeeded, in those experiments, in getting paid for what they were giving away on the net that otherwise they were trying to charge for in terms of delivery.

I think there is a future for newspapers that exist in an area where there’s a sense of community, where people actually care about their schools, and they care about what’s going on in the given geographic area. I think there’s a market for that.

It’s not as bullet proof, at all, as the old method when you had 50 different reasons to subscribe to the newspaper.

But I think if you’re in a community where most people have a sense of community, and you don’t give away the product, and you cover that local area in telling people about things that are of concern to them, and doing that better than other people, whether it be high school sports, you know.

I’ve always used the example of obituaries. I mean, people still get their obituaries from the newspaper. It’s very hard to go to the internet and get obituaries.

But I’m interested in Omaha and knowing who’s getting married, or dying, or having children, or getting divorced, or whatever it may be.

When I lived in White Plains, New York, I really wasn’t that interested in it. I did not feel a sense of community there.

So we have bought — and we own a paper in Buffalo where there’s a strong sense of community, and we make reasonable money in Buffalo. It’s declined, and we have to have a internet presence there where people have to pay to come on. We have to develop that.

But I think that the economics, based on the prices we paid — and we may buy more newspapers — I think the economics will work out OK. It’s nothing like the old days, but it still fulfills an important function.

It’s not going to come back and tell you what your — and tell you on Wednesday what stock prices closed at on Tuesday and have you rush to the paper to find out.

It’s not going to tell you what happened in basketball last night when you’ve gone to ESPN.com and found out about it. But it will tell you a whole lot about what’s going on, if you’re interested in your local institutions. And we own papers in towns where people have strong local interest.

Charlie?

CHARLIE MUNGER: Well, we had a similar situation years ago when World Book’s encyclopedia business was about 80 percent destroyed by Bill Gates. (Laughter)

He gave away a free computer with every bit of software.

WARREN BUFFETT: He charged $5, I think, Charlie —

CHARLIE MUNGER: And well, whatever it was. But we are still selling encyclopedias and we still make a reasonable profit but not nearly as much as we used to.

WARREN BUFFETT: Right.

CHARLIE MUNGER: Some of these newspapers, we hope, will be the same kind of investments. They’re not going to be our great lollapaloozas.

WARREN BUFFETT: The prices were — well, we actually may be doing more in newspapers, and we will be going where there’s a strong sense of community.

But if you live in Grand Island, Nebraska, where we have a paper, or North Platte, and your children live there and your parents probably live there, your church is there, you are going to be quite interested in a lot of things that are going on in North Platte, and in the state of Nebraska, that you won’t find readily on television or the internet.

And you’ll be willing to pay something for it, and advertisers will find it a good way to talk to you, but it won’t be like the old days.

34. Buffett: Amazon won’t affect Nebraska Furniture Mart

WARREN BUFFETT: Cliff?

CLIFF GALLANT: Thank you. Just on that general topic, it is true that in the past some of your investments have been fairly affected by technology, in newspapers or World Book.

Are there other businesses where you’re concerned about technology affecting them, for example, you know, Amazon or online grocery stores? Could they affect a business indirectly, like McLane?

WARREN BUFFETT: Amazon is a tough one to figure. I mean, Amazon — it could affect a lot of businesses that don’t think they’re going to be affected today in the retailing area. It’s huge. It’s a powerhouse.

I don’t think it’s going to affect a Nebraska Furniture Mart, but I think it could affect some of the other retailing operations THAT we have. It won’t affect the Nebraska Furniture Mart.

I should report to you that in the first four days: Tuesday, Wednesday, Thursday, and Friday of this week, our business at the Furniture Mart is up about 11 percent over last year, so you people are doing your part there.

We had — on Tuesday we did over $6 million of business. Now, those of you who are in the retailing business, thinking about a Tuesday and 6 million-plus of volume, we’ll do more probably today, but those are huge, huge volumes.

And we’re going to go to Dallas here in a couple of years. We’ve got a 433-acre plot of ground down there, and I think we’re going to have a store that will make any records we’ve set in the past look like nothing.

Going back to Amazon, though, in terms — GEICO was very affected by the internet, and at first, we missed that.

I mean, we — GEICO’s got an interesting history. It was mail originally, if you go back into the late ’30s and early ’40s, and it was very successful. And then it moved — not leaving mail totally behind — but it moved to television big time.

And then the internet came along, and I thought, originally, that only young people would look for quotes on the internet and that — you know, I mean, I never would have done it. I would have been calling on a rotary dial phone, you know, and saying — when they said number, please, first, I have to get my quote on GEICO — forever.

But it just changed dramatically, you know, to the internet.

So, things do change very significantly, and if the consumer finds something they like to do better in some new way — and Amazon has been an incredible success. It’s very hard to find people who have done business with Amazon that are unhappy about the transaction. They have happy customers.

And a business that has millions and millions of happy customers can introduce them to new items and then, you know, and it will be a powerhouse, and I think it could affect a lot of businesses. It’s hard for me to figure out.

CHARLIE MUNGER: I think it’s almost sure to hurt a lot of businesses a lot.

WARREN BUFFETT: Which ones do you think it will hurt the most, Charlie?

CHARLIE MUNGER: Well, anything that can be easily bought by using a home computer, or an iPad, for that matter.

WARREN BUFFETT: Which of our businesses do you think it can hurt?

CHARLIE MUNGER: I won’t be buying the stuff because I’m habit bound. Besides, I almost never buy anything. (Laughter)

But I think it will hugely affect a lot of people. I think it’s terrible for most retailers. Not slightly terrible, really terrible.

WARREN BUFFETT: Well, with that cheerful assessment, we’ll go to station 10. (Laughter)

35. “Almost impossible” to copy Berkshire

AUDIENCE MEMBER: Hi. This is Hector from (inaudible) Industry Fund Management Company in China.

My question is, you mentioned acquiring insurance float with zero, or even negative cost, is one of the key competitive advantages of Berkshire Hathaway. And we also found that an average leverage of Berkshire always about 100 percent.

I guess the net asset growth will significantly decline without using that leverage.

Therefore, to own an insurance company acquiring insurance float would be an important strategy if (inaudible) want to copy Berkshire business model. Would you please give me a comment?

WARREN BUFFETT: Charlie, I didn’t get all that so you —

CHARLIE MUNGER: I didn’t get it all, either. (Laughter)

But, we have a very peculiar model, and it works very well for us. I think it’s very hard for other people to get the same result.

WARREN BUFFETT: Yeah, I think it’s almost impossible. Besides, I mean, it’s taken a long, long time to get here. It’s taken a great amount of consistency, and that consistency has been allowed because, basically, we’ve had a controlling shareholder during that time.

So we’ve not had to bow to any of the urgings of Wall Street or, you know, whatever may be the fad of the day. But we have had a culture that — where we could write out 13 or 14 principles more than 30 years ago, and we’ve been able to stick with them.

And that’s very hard to do for most American corporations, and I think it’s very hard to do when managers come and go and they have small shareholdings. I think it takes a very unusual structure to be able to do it.

And, you know, it took a long time to get to the point where people with large private businesses in this country really cared about where those businesses were lodged after they gave up their stewardship. Took a long time to have it get so that a great many of those people would think of Berkshire first.

And the nice thing about it is, if they think of Berkshire first they don’t think of anybody second, so we get the call.

We don’t do well buying businesses at auction. I mean, if somebody’s only interest is to get the top price for their business, you know, seldom we’ll get one.

We did buy one at auction, I mean, but it was an add-on. The Dutch company we bought yesterday, we bought at auction. But that sometimes happens with our smaller acquisitions.

But the big private acquisitions are going to come to Berkshire because they want to come to Berkshire. And that’s a significant competitive edge, and I don’t see how anybody really challenges us on that.

CHARLIE MUNGER: Well, not only do I think other people will have a hard time copying it effectively, I think if Warren went back to being 30 years of age with a modest amount of capital and not much else, he’d have a hell of a time doing it again, too.

WARREN BUFFETT: I’d like to try. (Laughter)

OK. Becky?

36. Rarely try to change companies in our stock portfolio

BECKY QUICK: This question comes from David Schermerhorn (PH) in Boulder, Colorado.

And he writes that “Berkshire Hathaway has several substantial investments in other publicly traded companies.

“As a shareholder, Berkshire is entitled to annually cast votes on matters such as election of directors, advisory vote on executive compensation, approval of stock option plans, and so forth.

“So could you tell us what goes into your thinking and decisions with respect to how you vote our shares in these companies?”

WARREN BUFFETT: Yeah. We virtually never have voted against management, but we’ve done it a couple of times. There have been a —

CHARLIE MUNGER: Yeah, in 50 years.

WARREN BUFFETT: Yeah. There have been a couple of times when we thought — on the question of stock option expensing when that was put on a ballot.

If we — there may have been a particularly egregious option grant or something, we might have voted against, but our general feeling is that when we’re a large shareholder of a company that we certainly generally like the business, we generally like the management.

We realize that they’re not going to subscribe to our views 100 percent, in many cases 90 percent or 80 percent. Doesn’t mean we think they’re bad people or anything. They just — they have a different — they’re sort of judging by behavior elsewhere. And they’re perfectly decent people, but they don’t think about things exactly the same way we do.

But that doesn’t rule out owning a big piece of the business. We are not in the business of trying to change people. We don’t try and change people when we buy the entire business. We think it’s like marrying somebody to change them. It just doesn’t work very well.

CHARLIE MUNGER: Doesn’t work very well with children, either. (Laughter)

WARREN BUFFETT: No. And we know we don’t want anybody to marry us to change us.

So I mean, we’re not going to do it — we accept people the way they come, pretty much. Doesn’t mean we look — we decide we’ll associate with anyone, but we don’t expect everybody to be clones of us.

And if we were to see a particularly dumb merger, a particularly egregious stock option plan, we might vote against it. It would pass anyway. We wouldn’t conduct a campaign against it.

But we have seen a few of our companies engage in some — what we thought were really dumb deals, and we’ve usually been right, but we couldn’t stop them.

But we have — I think we’ve voted against maybe one or two of them.

Charlie?

CHARLIE MUNGER: Well, I think you’ve said it all.

37. Good commercial insurance companies are hard to find

WARREN BUFFETT: OK. Jay.

JAY GELB: This question is on Berkshire’s commercial insurance operations. Berkshire has a smaller presence in primary commercial lines insurance compared to its much larger reinsurance and auto insurance businesses.

Under what circumstances would Berkshire be open to increasing the scale of its primary commercial insurance operations, including acquisitions?

WARREN BUFFETT: Yeah, if we thought we can either expand internally, which would be tough, or buy a great company in the commercial field, which would — that would be the more likely way — you know, we’d do it.

Now, we got a chance, I don’t know, six or seven years ago to get in the medical malpractice field when GE wanted out and we bought that, and then we added to that with our Princeton Insurance acquisition last year.

So we did get a chance to go into a first-class company with a first-class manager in Tim Kenesey about six or seven years ago, and we jumped at it. And GE was just getting out of the insurance business.

So it’s hard to think of very many commercial insurance companies that I would get excited about, a very few. There might be a couple, and we’d like the business. I mean, you know, there are very few personal lines companies we like, but love GEICO, obviously.

There are very few reinsurance companies we like, but we love the ones we’ve got. And if we could find a quality company in commercial lines and we — presumably it would have quality management — we’d buy it in an instant. We’ve got nothing against that business.

38. More flexible buyback threshold?

WARREN BUFFETT: Station 11.

AUDIENCE MEMBER: Mr. Munger and Mr. Buffett, this is Whitney Tilson. I’m a shareholder from New York. I have a question for Debbie.

I’m just kidding. I applaud the fact that you’ve —

WARREN BUFFETT: She’s in the president’s box. (Laughs)

AUDIENCE MEMBER: I applaud the fact that you’ve set a price above which you won’t buy back your stock, but it seems, based on the trading of the stock since the announcement, the wall may have put a floor on the stock. It also may have put a ceiling on it slightly above 1.1 times book value.

If so, this is obviously contrary to your desire to have the stock trade close to intrinsic value, which you’ve said is far higher than 1.1 times book.

Have you considered being a little more flexible in the price at which you’d buy back your stock depending on how well your business is going and what other opportunities are available?

For example, I would much prefer it if you bought back 3.4 billion of your own stock at 1.15 times book value last quarter, rather than the stocks you bought of other companies.

WARREN BUFFETT: Yeah, so would I. But the — I’m afraid — I don’t think it puts a ceiling on, but I do think it certainly has an effect on a floor. It doesn’t make a floor. I mean, you and I have seen enough of markets to know that if things get chaotic or anything like that, floors disappear.

So, I think there could be circumstances under which we would buy a lot of stock, but I don’t think they’re, you know, highly likely at all.

I think if we were at 115 — and believe me 115 would not be a crazy price — I don’t think we’d probably buy a lot more stock. It might have the effect of the stock selling at, you know, a little above that or even a lot above it, just like 110 can do the same thing.

I do think it signals to a lot of people that they don’t have much to lose if they buy it just slightly above the price we’ve named and perhaps they’ve got a lot to gain. But I don’t think it sets a ceiling, Whitney.

When people feel differently in markets, it can sell it at a much different price.

If I thought we would buy a whole lot more stock at a slightly higher price, I would probably adjust the price, but I don’t think that’s the case. I think it would just cause everybody to think, you know, I can buy it at this little higher price and have very little to lose, just like they may very well think now.

But you get into any kind of a chaotic market — and we’ll have chaotic markets in the future — and we might buy a lot of stock.

Charlie?

CHARLIE MUNGER: Oh, I’ve got nothing to add to that, either.

39. No permanent damage to Walmart from Mexico bribery scandal

WARREN BUFFETT: OK. We’ll just have one or two more and then we’ll break. Andrew?

ANDREW ROSS SORKIN: OK. This question comes from a shareholder named David Cass (PH) of Maryland.

He says, “One of Berkshire’s largest investments in recent years has been Walmart. Has your opinion of this company changed as a result of the Mexican bribery scandal?”

WARREN BUFFETT: No. I think — it looks — if you read the New York Times story, there’s always another side to it. But it looks like they may well have made a mistake in how that was handled, but I do not think it — and it may well result in a significant fine, you know.

But I don’t think it changes the fundamental dynamic. I mean, Walmart does operate on low gross margins, which means it offers low prices. And that works in retailing, and a lot of other things they do work in retailing.

So I do not see — I mean, it’s a huge diversion of management time and it’s costly and a whole bunch of things, but I don’t think the earning power of Walmart five years from now will be materially affected by the outcome of this situation.

Charlie?

CHARLIE MUNGER: Well, these are interesting issues.

I’m unaware of any place where Berkshire is slipping on this, but we have so many employees that it’s not inconceivable we could have some slippage somewhere.

And you get as big as Walmart, you’re going to have an occasional glitch. I don’t think there’s something fundamentally dishonorable about Walmart.

WARREN BUFFETT: When you have something as big as Berkshire, you’re going to have an occasional glitch. I mean, we have 270,000 people today interacting with customers and government officials and vendors and all kinds of people. I will guarantee you somebody is doing something wrong.

In fact, I would guarantee you at least, you know probably 20 people are doing something wrong. You can’t have a city of 270,000 people and not have something going on.

And we can talk until we’re blue in the face about what people should do and not do, but people don’t get messages sometimes the same way that you give them, and you know, we’re layers removed from people operating and others. And a lot of people just do crazy things.

So it is a — I mean, it is a real worry if you’re running a business like this that — you don’t worry about the fact somebody is doing something wrong, because there is going to be somebody doing something wrong. What you worry about is that it’s material and nothing gets done about it, and that you act fast if you hear about something.

And, you know, we’ve got hotlines and we’ve got all communications and everything, but that does not stop the fact that right now, somebody is doing something wrong at Berkshire.

And if we get twice as large someday we’ll have more people. And we try to convey to the managers that when they find out about something, you know, act on it, immediately let us know. We can handle bad news as long as we get it promptly.

But I’m very sympathetic to anybody running hundreds of thousands of people to the problems of the ones that — sometimes, you know, they don’t even think they’re doing something wrong. I mean, if you get 270,000 people together, maybe even a crowd this size, you’ll have some very peculiar people in it. (Laughter)

40. Update on Buffett’s wager against hedge funds

WARREN BUFFETT: OK, we’re at noon, roughly.

I made this bet four years ago with a group at Protege Partners about the S&P versus — or an index fund — versus five funds of funds. And I told them at the time I’d put up the results every year.

And as you can see — I can’t see it from here, but the first year they — it was a huge down year. And as you might expect, just like us, we beat the S&P a lot in a down year and the last three years, the S&P has beaten them, but we’re still a tiny bit behind the hedge funds at the end of four years.

There’s six years to go. You might find it interesting, we each bought a zero-coupon 10-year bond so that there would be $1 million to go to the charity of — selected by either them or by me, depending on who won the bet — and that zero-coupon bond has performed magnificently, much better than Berkshire. (Laughter)

We should have bought nothing but zero-coupon bonds. But the zero coupon bond, because interest rates are so low, you know, is practically selling at par, so we have petitioned the stakeholder in this case — and I don’t think we’ve heard yet — but to let us sell the zero-coupon bond and put the money in Berkshire. And I’ll guarantee them that it will be worth more than a million bucks at the end of 10 years.

But so far, the best thing you could have done was ignored both of us and just looked at where we were putting the money.

And I will keep you up to date on this bet as we go along and we’re having a lot of fun.

We’ll come back in an hour, and then we’ll go till 3:30, and then we’ll have the business of the meeting.

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2011 Berkshire Hathaway Annual Meeting (Afternoon) Transcript

1. Two clarifications on David Sokol and Lubrizol

WARREN BUFFETT: OK. If you’ll all be seated.

I can’t see whether Ron Olson is in the front row or not.

Ron, are you here?

OK. Ron wanted to — well, we’ll get you a mic.

Because we’re transcribing this and we want to get it all corrected, Ron has one point or two points that he wants to correct in terms of dates that I used. So we are going to give the microphone to him.

RON OLSON: Not that they’re all that telling, but I thought since we are creating a record, I wanted to clarify two points.

The Berkshire law firm, namely Munger, Tolles & Olson worked with the Lubrizol counsel in pulling together what Warren described as Lubrizol’s proxy describing the background of the transaction.

We, as counsel for Berkshire, started to work on that gathering of facts pertaining to Berkshire’s involvement, essentially David Sokol’s and Warren’s, during the week of March 15.

Warren, in speaking to you about the facts this morning, I believe, placed the beginning of that work in the subsequent week. So I simply wanted to clarify that as we gathered the facts, and that gathering included several interviews of David Sokol during that week.

Secondly, in describing internal policies at Berkshire to protect against misbehavior or negligent behavior, Berkshire maintains a — something that those in the trading business describe as restricted lists.

And on that restricted list are any securities in which Berkshire is buying, selling, has a peculiar interest, and that prohibits any of the corporate officers or the top officers of the subsidiaries of Berkshire from participating in trades in those securities without the consent of the CFO, Marc Hamburg.

That is what I wanted to clarify, Warren.

WARREN BUFFETT: Thanks, Ron.

2. Munger still bullish on electric-car maker BYD

WARREN BUFFETT: OK. We’ll move right along. And we’re going to go to 3:30 and then we’ll adjourn for a couple minutes, and then we’ll go to the regular meeting.

WARREN BUFFETT: Carol again leads off.

CAROL LOOMIS: Warren and Charlie, both of your expressed a very positive view of BYD and its chairman, Wang Chuanfu, when MidAmerican bought its stake in 2008.

Does BYD remain as attractive a long-term investment now as it was when you acquired your stake?

If so, why? Has BYD’s recent pattern of unexplained product launch delays affected your confidence in the operation?

WARREN BUFFETT: Charlie is the BYD expert, so I’m going to let him start on that one.

CHARLIE MUNGER: Well, of course, the price is still way higher than the price Berkshire paid, and so almost by definition it’s not quite as cheap as it was then.

Any company that tries to move as fast as BYD does, and on as many fronts, is going to have various delays and glitches. But I would say I’m quite encouraged by what’s going on, and I expect delays and glitches.

They had trouble in the auto distribution, but they tried to double auto sales every year for six years, and it worked the first five times. (Laughter)

WARREN BUFFETT: I have nothing to add. (Laughter)

3. Making money by trading oil is too hard

WARREN BUFFETT: OK. Number 10.

AUDIENCE MEMBER: Hi, Warren and Charlie. My name is Catherine Brood (PH). I’m from Los Angeles, California.

I invest primarily in commodities and commodity equities. I started out back 2007 buying oil.

In the summer of 2008, we reached the peak of the oil bubble. That’s when I reversed my holdings and started shorting oil.

I made a nice profit.

In 2009, I started buying oil again and oil equities, and I’ve been doing pretty well. But given the status of the world today and the price of oil, I’m questioning my investments.

Is this another oil bubble? Has oil reached its peak? Should I keep my holdings? Should I short oil? Should I exit oil altogether and move into other commodities or other investments?

So my question to you is, what your sentiments regarding oil?

WARREN BUFFETT: Well, I would say you’ve done a whole lot better than we have. (Laughs)

I think the crowd would rather hear from you.

We actually did take a position in oil — I don’t know how many years ago.

CHARLIE MUNGER: A long time ago.

WARREN BUFFETT: A long time ago.

CHARLIE MUNGER: It was $10 a barrel. (Laughter)

WARREN BUFFETT: It wasn’t that long ago though, incidentally. That was in the 1990s, although we’ve seen oil a lot cheaper than that.

East Texas Oil sold for a dime a barrel in 1932.

The — we really don’t know.

I mean, obviously, you’re dealing with a finite resource. I don’t know whether the world is up to 88 million barrels or — it was down around 85 million barrels, but there’s got to be some comeback, so I wouldn’t be surprised if the current figure is getting pretty close to 88 million barrels a day.

That’s a lot of oil to take out of the ground every day. And, of course, there are — new frontiers have been found, but you are — you’ve stuck a lot of straws into the Earth, and it is a finite number.

So, the one thing I can promise you is — almost promise you — is that oil will sell for a lot more someday.

Interestingly enough, how many producing oil wells do you think there are in the United States?

The answer is something like 500,000. You know, there’s these stripper wells, there’s wells out near Charlie that have been going for a hundred years.

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: But we have looked in a lot of places now.

And what’s happening, of course, from the standpoint of United States companies, is that the smaller countries where oil is being found now are quite a bit smarter about how they grant their concessions than people were 50 or 75 or 100 years ago, so that they drive much more intelligent deals than was originally the case when we went exploring around the world.

But I have no idea — you know, we — traditionally, BNSF had hedged a certain amount of oil and — because they obviously use huge quantities of diesel — and I suggested to them — although how they run the BNSF is up to them — but I really didn’t think we could guess the price of oil.

And I thought if we could guess the price of oil, we didn’t need to run the railroad. I mean, it was a — took a lot of effort, time to run that railroad. And if we know how to make money just sitting in a room trading oil, why not do that instead?

So I don’t really — we don’t hedge — well, in terms of Berkshire’s parent company policies, we don’t hedge anything in the way of commodities. Some of our subsidiaries do, and that’s fine. They’re responsible for their businesses.

But there are very, very few commodities that I’ve ever thought I was going to — would know the direction of their movement in the next six months or a year.

The one thing I’m quite convinced of, as we talked about this morning, is the fact the dollar will become less valuable over time, so that the dollar price of most things will go up, and maybe go up very substantially.

Whether they go up enough so that you have the same amount of purchasing power after you pay tax on your nominal gains is another question.

I really think that an intelligent person can make more money, over time, thinking about assets that — productive assets — rather than speculating in commodities, or for that matter, fixed dollar investments, but that’s maybe my own bias.

Charlie?

CHARLIE MUNGER: Well, if we’d done nothing but oil from the very beginning, I’m confident that we would not have done nearly as well as we have.

To me, that’s perfectly obvious. So I think what we’ve done is much easier than what you’re trying to do.

WARREN BUFFETT: And we like easy.

CHARLIE MUNGER: We’re not trying to make it any more difficult than we have to.

WARREN BUFFETT: I really don’t know any way to have an edge in that sort of activity.

I mean, if you are going to try and figure out whether when to be long or short oil, or natural gas, or copper or cotton or whatever, I don’t know of people who I feel would have an edge in trying to do that over the next 10 years.

But I do know people where I think they’d have a very significant edge in investing in common stocks, and maybe distressed bonds, for that matter, too.

CHARLIE MUNGER: Yeah, trading oil worked best of all for the people who bribed Nigeria.

That’s not our milieu.

WARREN BUFFETT: Well, that’s an insight I hadn’t heard before. (Laughter)

4. Clarification of the clarification on Sokol and Lubrizol

WARREN BUFFETT: Becky? Oh, I got Ron here.

RON OLSON: I wanted to clarify my clarification. (Laughter)

Sounds like a lawyer, doesn’t it?

WARREN BUFFETT: It sounds like a lawyer. (Laughter)

RON OLSON: Marc Hamburg was concerned that when I spoke of our insider trading policy and mentioned that we had a restricted list, that it — somebody may interpret that as suggesting that Lubrizol was on that restricted list. It was not.

What goes on our restricted list are securities that we have a position in that we publicly reported.

So I just simply wanted clarify that point. Lubrizol was not on the restricted list.

5. “I’m going to have Charlie write the next press release”

WARREN BUFFETT: OK. Becky?

BECKY QUICK: Charlie, I’ve got several variations of this question, but this one comes from Peter Kerr (PH) in Waterloo, Canada.

He says, “Could you please let us know a couple of the most important things you learned during the last year?”

WARREN BUFFETT: I’ll let Charlie go first. (Laughs)

CHARLIE MUNGER: Well, I hate to admit this because I’ve ignored high-tech all my life, but I actually read that book “In the Plex” about Google, and I found it a very interesting book.

And so here I am at my advanced age, and I find it interesting the way people have created these engineering cultures, which are quite peculiar and different from most of what we have at Berkshire.

And will I ever make any use of this? I doubt it. But I certainly enjoyed learning it.

And if I enjoy learning it, I regard it as important, because I think that’s what you’re here for, is to go to bed every night a little wiser than you were when you got up.

WARREN BUFFETT: I’m just trying to hold my own, actually. (Laughs)

What I learned in the last year is that I’m going to have Charlie write the next press release. (Laughter)

CHARLIE MUNGER: Warren, I approved that damn press release with no objections. (Laughter)

The Berkshire shareholders are going to be in terrible trouble if they’re relying on me to fix your errors. (Laughter)

6. CEO should be left “dead broke” after a bailout

WARREN BUFFETT: OK. Let’s go to number 11.

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: Getting too close to confession time up here. (Laughter)

AUDIENCE MEMBER: Good afternoon, Warren and Charlie. My name is Phil Drew (PH), and I’m here with my wife Tina and our good friends the Grummys (PH) and the Henriksens (PH).

We’re all from Indianapolis, and we’re all small businesspeople. So we are not too big to fail.

And our question, basically, is simply this: do either of you gentlemen think that we might be headed down the same type of path years from now when we get into a situation as taxpayers, that we might have to bail out a company on Wall Street that is too big to fail? And if so, have we done anything to avert that?

WARREN BUFFETT: There are institutions around the world that I think governments should properly — although people won’t like it — but I think that there are institutions around the world that governments would properly — I think bailout has got a little bit of a pejorative term on it, in the sense that stockholders should not be saved, managers should not be saved — but certainly the institutions, in some cases, should not be allowed to collapse immediately.

I mean, right now, we’re continuing to follow that policy, for example, with Freddie Mac and Fannie Mae. I mean, they have not reconstituted themselves, as many of the banks and the auto companies.

I mean, Chrysler is even paying back, which, you know, surprises me, but my hat is off to them, and I mean that sincerely. I was really on the fence on saving the auto companies, but I think the administration did the right thing.

I mean, there were — they weren’t saving the auto companies, per se, they were still working at saving a very fragile economy.

And, like I say, particularly in retrospect, they certainly, in my view, made the right decision.

There are — right now, you know, in Europe they’re deciding whether countries are too big to fail.

And so I think that problem will always be with us.

I think for that reason that you have to do things to reduce the propensity to fail, and among those things, I think you have to make it so that the CEO, and to some extent the board — but not to the draconian degree that I’ll suggest for the CEO — I think that any institution that requires society to come and bail it out for society’s sake should have a system in place that leaves their CEO, basically, and his spouse, dead broke, because I think that the upside and downside incentives are vastly different. (Applause)

And I think the board of directors of those institutions should suffer severe penalties. Nothing like that, but they certainly, you know, should give back, say, the last five years of directors’ fees or whatever it may be that they received.

Because they — if you run an institution that actually needs — society can suffer such a blow if you fail — that society needs to come in and save you, you ought to have somebody running that institution, and you ought to have incentive practices in place that make it very, very, very painful to the people involved for the failure if it indeed happens.

And you also ought to reduce leverage in the system, and I think we’ve gone, to some degree, in that direction.

But there will be too big to fail institutions 10 years from now or 20 years from now. Right now Freddie Mac and Fanny Mae are sort of too big to figure out.

We just sit there — and incidentally, here’s nothing wrong with that. It’s more important to come up with the right solution than it is to come up with an immediate solution on those.

But particularly, I would say, in Europe there are banking institutions in countries that people are facing the question of whether they are too big to fail.

Charlie?

CHARLIE MUNGER: Well, my answer is that the past panics and depressions, by and large, started on Wall Street or in stock brokerages.

They tended to involve great waves of excessive speculation and bad behavior in the people who were profiting from those waves as salesman, or market makers, or promoters or what have you.

And I think that this last mess, which created so much danger, should have caused something like happened in the aftermath of the ’30s, where we prevented a new mess for a long, long time, but, of course, it hasn’t done that.

And so I think you can confidently expect a new mess or two before you career is over, and I think it is really stupid for our country to have allowed this.

Partly the failure is not one of evil, it’s one of stupidity. And part of the stupidity is in our great academic institutions who believe a whole lot of things that aren’t true. And that is a really hard problem to solve.

WARREN BUFFETT: You’re talking about particularly in finance?

CHARLIE MUNGER: Yes, of course, and economics, too.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: Those are not hard sciences, finance and economics. And finance really attracts people who should have gone into snake charming or — (Laughter)

WARREN BUFFETT: If there’s anybody we’ve forgotten to insult, just pass a note up, and we’ll get to you. (Laughter)

CHARLIE MUNGER: Yeah.

7. No Washington Post shares will be sold after board resignation

WARREN BUFFETT: OK. Andrew?

ANDREW ROSS SORKIN: This question comes from a shareholder based in Washington, DC, who has asked to remain anonymous.

This person says, “Warren, in the past year you and Melinda Gates resigned from the board of the Washington Post. What does this say about Berkshire’s intention to hold the Washington Post stock over the long term, and is this related to the problems at its for-profit education business, Kaplan?”

WARREN BUFFETT: No, I made this statement, actually, publicly, and they may have only run it in the Post, I’m not sure about elsewhere.

But I made the statement that we would not be selling any stock, and it had nothing to do with that, that I’m a phone call away from Don Graham or anybody else at the Post, and they can just save a lot of directors fees and I can save a lot of travel if at age 80 I decide that I’d rather spend a few more days at Berkshire and less on the road.

I am — we will not be selling any Post shares.

Normally I won’t comment about what we’ll do on marketable securities, but I’ll be unequivocal about that.

And my enthusiasm for the Post itself and the management is 100 percent what it’s always been, and I — I’m just available a lot cheaper than before if the Post management wants any advice.

I don’t think Melinda did it on the basis of age. You’ll have to ask her.

I really decided at 80 that I’d been there since 1974, with an interruption when I was at Cap Cities/ABC, and it’s just a lot easier this way.

Charlie, do you have any thoughts on serving on boards generally? Charlie is on the Costco board.

CHARLIE MUNGER: Well, that’s because I really admire Costco. And that’s one of the pleasures of my life, is interfacing with those people.

But that’s the only one where we don’t �� where I don’t have a big ownership interest.

I think, generally speaking, serving on a whole lot of different boards is for the birds. (Laughter)

WARREN BUFFETT: Yeah. I agree. (Laughs)

8. Can’t predict if Berkshire will outperform the Australian dollar

WARREN BUFFETT: OK. Area 12.

AUDIENCE MEMBER: Good afternoon, Mr. Buffett and Mr. Munger. I’m Marc Rabinov from Melbourne, Australia.

As an investor from the Asian region, I am concerned that a weaker dollar will erode the value of my Berkshire stock.

However, Berkshire is highly productive with real pricing power, so can I be confident that over the long term any fall in the dollar will be offset by a rise in the value of my Berkshire stock? And by that I mean in addition to any intrinsic growth in the underlying business.

CHARLIE MUNGER: The answer is no. (Buffett laughs)

WARREN BUFFETT: It would be a lot easier if you just had the Australian dollar go down. The Australian dollar was one of two currencies that we did own last year that contributed to the $100 million profit.

But, no, I cannot tell you what policies will be followed in the United States and what policies will be followed in Australia that will — what they will be and how they will affect the relative value of those two currencies, say, 10 years from now.

I think the movement could be quite dramatic, and I think it actually could be dramatic in either direction. That’s why I don’t know what to do.

But the only promise you’ll get from Charlie and me about Berkshire is that we do every day, as I said in the annual report, try to think about increasing the earning power and the intrinsic value of Berkshire.

And to the degree we increase it, the shareholders will — or to the degree we decrease it — the shareholders will share in exactly the same proportion as Charlie and I do.

We will — our interests are 100 percent aligned. We will make or lose money through our stock and luck, to some extent, will depend — will determine — how well we do.

We know we can’t do remotely as well in the future as we have in the past.

There is no way to compound — there’s no way we know to compound the kind of sums we’re working with now at rates that are anywhere close to what we were able to do when working with much smaller sums. But you’ll get our best efforts.

Charlie?

CHARLIE MUNGER: I can’t add to that.

Australia has these fabulous open pit mines, and at a time when Asia is just totally booming with its demand for metals, I can’t tell you how Berkshire stock is going to perform vis-a-vis mines in Australia.

I think we’ll do pretty well compared to companies here in the United States.

WARREN BUFFETT: Yeah, I think so, too.

9. We’re not neglecting the stock portfolio

WARREN BUFFETT: Carol?

CAROL LOOMIS: This shareholder wishes to be known only by his initials, AJ.

The importance of Berkshire’s equity portfolio has diminished other the past few decades. Today I view Berkshire’s appetite for equity as an afterthought and instead see its focus as being on large acquisitions.

Would you agree with this, and where do you see the equity portfolio going over the next five or 10 years?

WARREN BUFFETT: Well, I prefer large acquisitions, but it’s not an afterthought at all in terms of the portfolio.

I mean, we — Charlie and I spend — well, we probably spend more time thinking about the portfolio because it’s only occasionally that we get a chance to think about acquisitions that are sizable and that are available to us.

So we are equally interested in both aspects of Berkshire’s operations. But where we hope we really get lucky is in adding significant companies to what we have already, and having our — the companies that we already own — make various bolt-on acquisitions.

We’ve had several of those already this year that you don’t read about.

A lot of our companies have the potential to do — to earn — considerably more money five or 10 years from now than they’re earning now.

So both the development of those businesses, which really resides with the managers — Charlie and I don’t contribute anything on that — but we will — we spend as much time thinking about the portfolio as we ever did.

And, you know, it’s important. I mean, if you talk about $150-some billion in cash and marketable securities, the performance of that particular segment is going to have a lot to do with how well Berkshire does over time.

Charlie?

CHARLIE MUNGER: Yeah, we’ll always have a fair amount of marketable securities because of our insurance subsidiaries and — but as we get forced by our size into the bigger and bigger stocks, of course we’re going to do less well than we did when we had a bigger universe of practicable things to consider.

WARREN BUFFETT: A lot less well. I mean, it really is the nature of things.

We are buying securities where we have to put billions of dollars in them in most cases, and that is not a field that is unlooked at by other analysts.

So it’s impossible to have a big edge. We hope we have a small edge.

CHARLIE MUNGER: On the other hand, when we were doing so well in marketable securities, nobody called us and said, I have a wonderful business, and you’re the only place in the world where I would want to transfer it.

And now that happens, what, a couple times a year at least?

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: And I really prefer, in some ways, this part of the game to the earlier game. It’s more fun to create permanent partners doing constructive things than just outsmart other people and shuffling little pieces of paper.

WARREN BUFFETT: It’s fun to do both, actually. (Laughter)

CHARLIE MUNGER: Yeah. Well, I don’t see you holding back. (Buffett laughs)

10. “We have an unbelievable insurance operation”

WARREN BUFFETT: OK. Let’s go to the other room. 13.

AUDIENCE MEMBER: Hi, I’m Whitney Tilson, a shareholder from New York. Thank you for including in your latest annual letter such complete and clear valuation information regarding Berkshire.

You stated that the operating earnings of the insurance businesses are excluded from your earnings table, and I know you said this morning that 2011 is going to be a break-even year at best.

But in light of the disclosure in the annual report that Berkshire earned $17 billion in profit over the last eight years without a single money-losing year, are you being overly conservative?

Don’t you think the intrinsic value of your insurance businesses is more than just their float, especially GEICO, for the reasons you discussed this morning?

WARREN BUFFETT: Yeah, I’d agree with that, Whitney, but I — it’s very hard to estimate, you know, what the normal underwriting profit might be — might be over the next 20 years or something of the sort.

And so I agree with you. I don’t know whether I’d call it overly conservative. I would say it’s conservative to assume break-even underwriting.

But as you — I mean, if we had another Katrina or something of the sort — and forget about, you know, winter storms in Europe and all that — I mean, we could lose significant money in underwriting this year, and we expect to lose significant money in underwriting, you know, maybe every fifth year, every tenth year, whatever it might be.

But I think you’re right in saying it would not be inappropriate to include some normalized underwriting profit in addition to the calculation that I made in the annual report.

CHARLIE MUNGER: Whitney, let me help you by asking another question of Warren. Is there any other large casualty insurance operation in the world that you know of that you would trade for ours?

WARREN BUFFETT: Not remotely — no, no. Nothing close. I mean, we — however we lucked into it, we’ve got — we have an unbelievable insurance operation.

And, I mean, GEICO, you know, is fabulous. And, you know, if you think about — since 1936, the idea has been out there, but, you know, with all the strength that all the other companies had, and the agency plants and everything else, GEICO has now moved to where it’s the third largest in the United States and gaining ground every day on the two ahead of them, and doing it very profitably.

GEICO’s combined ratio — GEICO had an underwriting profit of close to eight points, as I remember it, in the first quarter. Now that’s going to be, probably, the best quarter of the year, I should add, but it’s a marvelous business.

Ajit [Jain] has built an insurance business from scratch in the reinsurance business, that, in many respects, you know, he operates all alone.

He may not see a lot of transactions in any given period of time, but there are certain things, where if somebody wants huge amounts of insurance and a quick answer, or even a slow answer sometimes — we’ll give them a quick one — there’s really nobody else to call. It’s a little like Charlie mentioned on acquisition opportunities.

So he’s — and he’s done it. I mean, it didn’t exist when he got there.

Tad Montrose has got a magnificent operation at Gen Re. It had to get shaken out to quite a degree, but Tad has got a very, very disciplined business there.

And then we have a group of smaller companies that some of them have some very unusual franchises.

So there really — you know, I didn’t have anything to do with it, so I can brag about these people, but they have really done a job in building an insurance company that I don’t think there’s anything like it.

CHARLIE MUNGER: Some of you people that have been around a long time, you invested with an Omaha boy, and you ended up owning part of the best casualty insurance business in the world.

WARREN BUFFETT: If you go to 30th and Harney, you’ll see a building there, National Indemnities. We paid 7 million for National Indemnity, a million-four for its sister company National Fire & Marine, and that’s the same building that we operated out of in 1967, we’re operating out of today.

The only difference is that today it’s got more net worth than any insurance company in the world.

CHARLIE MUNGER: Yeah, so we — it’s not that great a business as a business, casualty insurance.

It’s a tough game. There are temptations to be stupid in it. It’s like banking. (Laughter)

And — but if you’re in it, I think we’ve got the best one.

11. Why See’s Candies does well in inflationary times

WARREN BUFFETT: With those modest statements, we’ll move onto Becky. (Laughs)

BECKY QUICK: This question comes from Mark Jordan (PH) in Charleston, South Carolina.

He writes, “In a period of high inflation, which particular businesses owned by Berkshire Hathaway will perform the best, and which will perform the worst and why?”

WARREN BUFFETT: Well, the businesses that will perform the best are the ones that require little capital investment to facilitate inflationary growth and that have strong positions that allow them to increase prices with inflation.

And, you know, we have a candy business, for example, and the value of the dollar since we bought that candy business has probably fallen at least 85 percent, I would say — 80 to 85 percent — and that candy business sells 75 percent more pounds of candy than it did when we bought it, but it has ten times the revenues and it doesn’t take a lot more capital.

So that kind of a business — any business that can — that has enough freedom to price to offset inflation and doesn’t commensurate invest — or huge investment — to support it, will do well.

Businesses like our utilities which get, in effect, a bond-like return but require — you know, if you’re going to build a generating plant and it costs twice as much per kilowatt hour of capacity, and all you’re going to get is a fixed return and yields on bonds go up, perhaps dramatically, to get high inflation, is not going to do that well in an inflationary period, just because it has certain aspects of a bond-like investment, and bonds generally are not going to do well in inflation.

Charlie?

CHARLIE MUNGER: Well, but like our insurance operations, our capital intensive railroad business is certainly one of the best railroads in the world. And our utility operations are certainly one of the best utility operations in the world.

And so it isn’t all bad to be up there, world class, in your main businesses.

WARREN BUFFETT: Our railroad — the government has talked about building a high-speed rail system in California.

I think they’re talking about 800 miles of track, and their estimated cost was about 43 billion, and estimated costs on construction and things like that go up dramatically much more often than they get reduced even by a minor amount.

And, of course, we paid 43 billion, counting debt assumed, for our rail system, which has 22,000 miles of main track and 6,000-plus locomotives, and 13,000 bridges, if you ever want to buy a bridge.

So that — the replacement value of that asset during inflation already is huge and it would grow dramatically, and the world — our country will always need rail transportation. So it — it is a terrific asset to own, I’ll just leave it at that.

12. “May you live until the A stock splits”

WARREN BUFFETT: OK. Area 1 again.

AUDIENCE MEMBER: I’m Martin Greenberger, UCLA Anderson School, where I work in disruptive technologies, not finance.

WARREN BUFFETT: You’re forgiven. Go ahead. (Laughs)

AUDIENCE MEMBER: My friend Walt would like to know if Berkshire has been considering splitting its Type A shares, like it did its Type B shares, and if so, what are the pros and cons, in your opinion? And what would be the short-term and longer-term effects?

WARREN BUFFETT: Yeah. Well, in effect, we’ve already split it, you know, 1500-for-one by having the B available.

And, you know, we have a situation where the company will never be sold, but if any transaction involves the A stock, the B shares are going to get treated exactly the same. So there’s really no disadvantage to owning the B stock, except it has somewhat less voting power than the A stock.

But in every other way it’s the same instrument, and so we already have a split stock available.

So I would tell Walt that he really should not count heavily on the A stock getting split.

Charlie?

CHARLIE MUNGER: Yeah, Warren used to cheer up his old friends by telling them, may you live until the A stock splits. (Laughter)

WARREN BUFFETT: And I would love to make that deal myself. (Laughs)

13. Buffett’s best deal: hiring Ajit Jain

WARREN BUFFETT: Andrew?

ANDREW ROSS SORKIN: This question comes from Matthew Palmer of North Andover, Massachusetts.

And he writes, “Mr. Buffett, you have praised [Berkshire Hathaway reinsurance chief] Ajit [Jain] as a possible successor. Since he may be in line as our next CEO, can you give us a concrete example of a policy that he’s written that’s impressed you, and can you talk a little about the way he thinks since we rarely get an opportunity to hear from him?”

WARREN BUFFETT: Yeah, Ajit is not exactly a publicity hound.

Ajit — (laughs) — he —

I can’t think of any decision he’s ever made that I think I could have made better.

And I’ve — I’m not privy to all of his transactions anymore. There just — there are lots of them that are not of huge size or of great interest, but he tells me about all the interesting things that come along and all the very big things that come along. And I would say this: you’d be better off voting with him than with me after listening to any proposition he brings up.

He is as rational a thinker as Charlie is, as anybody I’ve met. He loves what he does.

He’s creative. He’s very creative. We have moved into one area after another in reinsurance when people came in copying us in one area of business that we would be operating in. Ajit comes up with something else.

Lately we’ve been much more active in life reinsurance, but who knows tomorrow brings. I mean, if there happens to be a huge cat in the third quarter of this year or something of the sort, that might open up all kinds of opportunities in writing covers when — if capacity got strained.

But who knows what will happen. All I know is that Ajit’s mind works like a machine, you know, day after day. And he does love what he does, which is an important part of doing well at any activity.

And I really — I don’t know what his best deal was. I know what my best deal was, which was hiring him.

Charlie?

CHARLIE MUNGER: Yeah. Sir William Osler, who created a model medical school for the world, used to say that the secret of success in a field is getting very interested in it.

Well, Ajit is real interested in what he does. Many of you don’t know this, but every Thanksgiving, Ajit flies to London because they don’t have a Thanksgiving holiday. (Laughter)

WARREN BUFFETT: We give him Christmas off, though. (Laughter)

Ajit, we just — he — I say how invaluable he is, and I’m not exaggerating when we talk about him. He is — to an extraordinary degree, he thinks of Berkshire first.

Ajit, at various periods when insurance companies became popular for one reason or another, there was, you know, there was the big thing about Bermuda companies some few years ago, Ajit could have monetized himself to an incredible degree. Still could do it.

I mean, people would hand him a significant percentage of any company being formed with lots of money, so that immediately he could create, I would guess, in the hundreds of millions of wealth without lifting a finger, just by somebody putting up, you know, a couple billion dollars and saying you’ve got 20 percent of it or whatever it may be.

I mean, listen, he’s smart. He knows that, and it doesn’t cross his mind to do anything like that.

I mean, he — we have, in comp — he always thanks me for what I do at the end of the year, and I feel I’ve left off a zero, you know, when I get all through. (Laughs)

He’s just a remarkable human being. And we are very, very lucky that, I think, he has a lot of fun in what he does at Berkshire.

He’s got a cadre of about 30 people that work with him. There’s many more that are settling claims and doing that sort of thing on runoff business, but it’s — you won’t find anything like it, in my view, not only in the insurance world, but really in almost any part of the business world. (Applause)

WARREN BUFFETT: Let’s go —

CHARLIE MUNGER: You didn’t answer the question. Maybe you avoided it on purpose.

WARREN BUFFETT: Oh.

CHARLIE MUNGER: He said, what are our worst businesses?

WARREN BUFFETT: What are our worst businesses?

Well, generally speaking — and this is general — I have — well, made certain mistakes in going into smaller businesses that really never had the potential of becoming big.

But I would say overall, probably, I would call retailing — you know, Dexter was our worst business, but I’ve — the Furniture Mart, obviously, is a terrific operation. But we have not made — despite being in numerous retailing — quite a few — retailing business for quite a while, we have not created major earning power there.

Wouldn’t you agree on that, Charlie?

CHARLIE MUNGER: Yeah, but luckily it’s a small part of the operation.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: But you’re right. That’s been the hardest game for us. And, you know, if we were a little smarter we could have figured that out better. (Laughs)

WARREN BUFFETT: Well, if we were a little smarter we could have done a lot of things. (Laughs)

Of course, See’s is a retailing business, to some degree.

CHARLIE MUNGER: Yes.

WARREN BUFFETT: And we had enormous success there, so maybe we started thinking we were geniuses. We are like the duck on the pond when it was raining, and we thought we were rising in the world because of merit and it was just because it was raining. (Laughter)

14. “Forget about goodwill” when evaluating a business

WARREN BUFFETT: OK. We’ll go to number 2.

AUDIENCE MEMBER: Joe Tellinghas (PH), Boston, Massachusetts.

What’s the proper way to think about goodwill and return on capital?

Berkshire’s manufacturing, service, and retail businesses earn pretax returns on tangible capital over 20 percent, which suggests either skilled managers or fantastic businesses. But the return on allocated equity is in the single digits, which looks drab.

Accountants treat intangibles similarly because they have different economics. (Inaudible)

For an indestructible brand like See’s or Coca-Cola, I can see why the intangibles should not be amortized because it’s worth more every year, and your comments on GEICO policyholders were one way to think about that.

But all the tobacco companies have billions of dollars of goodwill in unit sales of cigarettes to claim every year in developed countries, so perhaps they should be amortized. And for Time Warner- AOL, goodwill definitely needed to be amortized.

WARREN BUFFETT: Yeah, goodwill — you mention AOL-Time Warner or something of the sort, it should be written off, actually. It was just a mistake in purchase price.

Goodwill should not be used in evaluating the fundamental attractiveness of a business. There you should look at return on tangible assets, and even then there’s some minor — some other adjustments you may want to make.

But basically, in evaluating the businesses we own, in terms of what the management are doing and what the underlying economics of the business are, forget about goodwill.

In terms of evaluating the job we’re doing in allocating capital, you have to include goodwill, because we paid for it.

So if we buy — you know, Coca-Cola goes back to 1886 and John Pemberton at Jacobs Pharmacy in Atlanta, and there was not a whole lot of goodwill put on the books when he sold that first Coca-Cola.

If you were to buy the company now, the whole company, you’d be putting a figure, you know, of 100 billion or something like that on it.

You shouldn’t amortize that, and you shouldn’t, in judging the economics of the business, look at that.

But in terms of judging the economics of the business that purchased it — we’ll call it Berkshire — then you have to allow for the goodwill, because we are allocating capital and paying a lot for it.

I don’t think the amortization of goodwill makes any sense. I think write-offs of it, when you find out you’ve made the wrong purchase and the business doesn’t earn commensurate with the tangible assets employed plus the goodwill, I think write-offs of it make sense.

But when looking at businesses as to whether they’re good businesses, mediocre businesses, poor businesses, look at the return on net tangible assets.

Charlie?

CHARLIE MUNGER: Well, I think that’s right. But as the gentleman says, when we buy a business, a whole business, we never get a huge bargain and, of course, we may get down toward 10 percent pretax earnings on what we pay.

That isn’t so awful as you think when you — a lot of the money comes from insurance float that costs you nothing.

In other words, if you have 60 billion of float and God gives you 6 billion a year earnings, it’s not all bad.

WARREN BUFFETT: Well, on Lubrizol we’re paying close to 9 billion for the equity, and it earns — and you should make adjustments for debt but it’s not an important factor there — and, you know, current rate of earnings is probably a billion pretax.

And now Lubrizol itself is employing far — you know, they’re employing, you know, call it 2 1/2 billion of equity to earn that billion of pretax, so it’s a very good business, in terms of the assets that are employed. But when we end up paying the premium we pay to buy into it, it becomes a billion pretax on something close to 9 billion.

You have to judge us based on close to a $9 billion investment. You have to judge James Hambrick in running the business based on the much lower capital that he has employed.

It can turn out to be a very good business, and we could turn out to have made at least a minor mistake if it isn’t as good a business as we think it is now, but still is a very satisfactory business based on the tangible capital employed.

Charlie, can you make that clearer? (Laughs)

CHARLIE MUNGER: Well, it’s just — we are not going to buy, in the climate we’re in now, operating businesses that are at all decent for low prices. It’s just not going to happen.

15. Munger really loves Costco

WARREN BUFFETT: Carol?

CAROL LOOMIS: In a book about Charlie, “Damn Right!” by Janet Lowe, Charlie talks about his view on teaching finance.

He says that he would use the histories of a hundred or so companies that did something right or wrong as a basis for teaching the course.

Could each of you — and since this concerned Charlie, could each of you — we’ll start with Charlie — give us an example or two from either category, right moves or wrong moves?

WARREN BUFFETT: I predict Charlie is going to talk about Costco. Go ahead, Charlie. (Laughs)

CHARLIE MUNGER: Well, Costco, of course, is a — (laughter) — a business that became the best in the world in its category, and it did it with an extreme meritocracy and an extreme ethical duty, self-imposed, to take all its cost advantages as fast as it could accumulate them and pass them onto the customers. And, of course, that created ferocious customer loyalty.

And it’s been a wonderful business to watch, and, of course, strange things happen when you do that and do that long enough.

Costco has one store in Korea that will do over 400 million in sales this year. These are figures that can’t exist in retailing, but, of course, they do.

And so that’s an example of somebody having the right managerial system, the right personnel selection, the right ethics, the right diligence and et cetera, et cetera, et cetera. That is quite rare.

And if you — if once or twice in a lifetime you’re associated with such a business, you’re a very lucky person.

And the more normal business is a business like, say, General Motors, which became the most successful business of its kind in the world and wiped out its common shareholders, what, last year?

That is a very interesting story, and if I were teaching in a business school, I would have Value Line-type figures that took people through the entire history of General Motors. And I would try and relate the changes in the graph and in the data to what happened in the business.

And to some extent, they faced a really difficult problem: heavily unionized business, combined with great success, and very tough competitors who came up from Asia and elsewhere, and to some extent from Europe. And that is a real problem, which, of course — to prevent wealth from killing you, your success turning into a disadvantage, is a big problem in business.

And so there are all these wonderful lessons in those graphs. And I don’t know why people don’t do it. The graphs don’t even exist that I would use to teach.

I can’t imagine anybody being dumb enough not to have the kind of graphs I yearn for. (Laughter)

But so far as I know there’s no business school in the country that’s yearning for these graphs.

Partly the reason they don’t want it is if you taught a history of business this way you’d be trampling on the territories of all the little professors in subdisciplines. You’d be stealing some of their best cases.

And in bureaucracies, even academic bureaucracies, people protect their own turf. And, of course, a lot of that happened at General Motors. (Applause)

Yeah.

It’s a — I really think the world — that’s the way it should be taught. Harvard Business School once taught it much that way, and they stopped.

I’d like to make a case study as to why they stopped. (Laughter)

I think I can — I think I can successfully guess. It’s that, of course, the history of business trampled on the territory of barons of other disciplines like the baron of marketing, the baron of finance, the baron of whatever.

And IBM is an interesting case. I mean, there’s just one after another that are utterly fascinating, and I don’t think they’re properly taught at all because nobody wants to do the full sweep.

WARREN BUFFETT: Charlie and I were on a plane recently that was hijacked.

CHARLIE MUNGER: With what?

WARREN BUFFETT: It was hijacked. I’m telling about our experience on that hijacked plane when the hijackers picked us out as the two dirty capitalists that they really had to execute.

But they were a little abashed about it. They didn’t really have anything against us, so they said that each of us would be given one request before they shot us, and they turned to Charlie and they said, “What would you like as your request?”

Charlie said, “I would like to give once more my speech on the virtues of Costco, with illustrations.” (Laughter)

And the hijacker said, “Well, that sounds pretty reasonable to me.”

And he turned to me and said, “And what would you like, Mr. Buffett?”

And I said, “Shoot me first.” (Laughter)

CHARLIE MUNGER: Anyway.

16. Incentivizing kids

WARREN BUFFETT: OK. Number 3.

AUDIENCE MEMBER: Sumat Mehra (PH) from Kashmir in India. Mr. Buffett, hope you enjoyed your first trip to India.

WARREN BUFFETT: I sure did.

AUDIENCE MEMBER: Here’s my question. One of the most important things that drive people are incentives, but if you live in a rich society it’s very hard to get your kids to work hard and reach their full potential because they just don’t need to.

So if you or Charlie decide to have a kid in the next five years — (Laughter)

CHARLIE MUNGER: It would be a star in the east.

WARREN BUFFETT: It will take more than a decision. (Laughter)

AUDIENCE MEMBER: How would you incentivize him or her —

WARREN BUFFETT: I thought you were going to say, “How would you?” (Laughter)

No, it’s a good question. I apologize for interrupting.

AUDIENCE MEMBER: How would you incentivize him or her to compete among the hungry and highly motivated kids from emerging markets like China, Brazil, Russia, or India?

WARREN BUFFETT: I think certainly that if you are very rich and you bring up your kids to think that they are more important in society, or that they have some special privilege, simply because they came out of the right womb, that, you know, that’s just a terrible mistake.

But Charlie has raised eight children that I know quite well, most of them, and I don’t think any of them have that sense.

But it’s — if you really are going to raise your kids to think that other people should do all the work for them and that they will be entitled to sit around and fan themselves for the rest of their lives, I mean, you know, you will probably not get a good result.

I — you know, in my — Charlie has been rich most of the time when his kids — many of his kids — were growing up — some of his kids were growing up,

I’ve been rich while my kids were getting — certainly when they got into high school and college — but I don’t think — I certainly didn’t want to give them the idea that they were special just because their parents were rich.

And I don’t think you necessarily have to get a bad result or have children that don’t have any incentives simply because their parents are rich.

The one thing I don’t think you want to give them an incentive to do is try and outdo their parents at what their parents happen to be good at.

I don’t think that makes sense, whether if you are a professional athlete, or a rich person, or whatever it may be, a great novelist, you name it.

But I really think if you’re rich and your kids turn out to have no incentives, I don’t think you should point at them. I think you should probably point at yourself.

Charlie?

CHARLIE MUNGER: Well, I don’t think you can raise children in an affluent family and have them love working 60 hours a week in the hot sun digging fence post holes or something. That’s not going to work.

So to some extent, you are destroying certain kinds of incentives. And my advice to you is to lose your fight as gracefully as you can. (Laughter)

WARREN BUFFETT: I’m not sure if you’re poor if you can get your kids to love the idea of working 60 hours a week. They may have to, but —

CHARLIE MUNGER: Kids that really get interested in something will work no matter how rich they are.

But it’s rare to have an Ajit-like intensity of interest.

You know, if you were a proctologist, you might not like your day as it went on and on. (Laughter)

WARREN BUFFETT: I think we better move along. Becky? (Laughter)

17. Compensation incentives for Berkshire’s next CEO

BECKY QUICK: This question comes from a shareholder from central Iowa who asks, “Berkshire Hathaway does well, in part, because its managers want to be there for nonpecuniary reasons. But it seems likely that the next operations CEO will be best be filled by someone who insists on a salary of more than $100,000.

“What kind of compensation structure do you expect for the next generation of Berkshire leadership?”

WARREN BUFFETT: Well, I think the next CEO will make a lot of money and should make a lot of money.

I mean, the responsibility for running a company with a couple hundred billion dollars of market value should pay well.

I think that whatever the level the board decides then, in terms of a base salary, should be supplemented by, probably, an option system that incorporates a couple things that are perhaps unusual.

I don’t think the option price — the original strike price — should be less than if the company were for sale, the assets would bring.

So the idea of giving somebody an option during some depressed part of the stock market at the market price, I think, is crazy because you wouldn’t sell your business at that price and why sell part of it on that basis.

So I think the base price should be what the business is worth at the time you start, and then I think if, because of the compounding feature of leaving money there — you know, no management at all would produce some gain in value over time — so I think there should be an increase in the base price annually at some rate, and then minus the dividend that’s being paid.

So, if you assume a 3 percent dividend was paid, and you wanted to have a hurdle rate of increasing at 7 or 8 percent a year, then you would have the option price accelerate, maybe, at 4 or 5 percent.

But with that kind of a structure, I think you can give a very large option because you — if somebody is creating excess value above a given rate on a very large sum, I think they deserve something quite significant in terms of that excess earned.

Now, they — the present compensation system has no relevance at all to what my successor should earn. The main thing is getting the right person with the right values who interacts well with the managers and who knows how to allocate capital.

And as you just heard a little earlier, our managers who accomplish a lot, if they — and if they’re working with big operations so that it turns into a lot of dollars — they can make a lot of money with Berkshire.

They — nothing is worked off the eccentricities of Charlie and me at the top level.

So, you know, people make well into eight figures, sometimes, at Berkshire. But they earn it, and they don’t get it because of any phony targets or anything of that sort. They get it because they really deliver incredible, in some cases, excess value to Berkshire.

Charlie?

CHARLIE MUNGER: Well, I hope it will be a long time in the future, and I don’t regard it as absolutely inconceivable that Warren’s spot will someday be occupied by a very rich man who has adopted Warren’s system of pay.

I think somebody in America has to be the exemplar for not grabbing all that you can. I think it’s a very important part of the whole scheme. (Applause)

WARREN BUFFETT: I don’t think you better run an ad, though, after I go, that says CEO wanted, $100,000 pay plus pleasant surroundings. (Laughs)

18. Societal issues are important but don’t affect investment decisions

WARREN BUFFETT: OK. We’ll go to number 4.

AUDIENCE MEMBER: Hi, Mr. Buffett, Mr. Munger. My name is Vern Cushenbery and this question is on behalf of a group of investors that made the trip up today from Overland Park, Kansas.

Given your interest in renewable energy and natural resources, I wonder if you’d be willing to share your thoughts on how a world of limited and depleting clean water supplies and declining food stocks affects your investment strategies and thinking on the future.

WARREN BUFFETT: Yeah, I would say it’s an important subject but it doesn’t affect our investment strategy to any real degree.

In other words, you know, we would love to buy another GEICO. We would love to buy another BNSF. We’d love to buy another MidAmerican.

And we look at those businesses over a long time frame, but we are looking at what we expect their earning power to be three, five, 10, 15 years down the road compared to what we are paying.

So I would say that there are a number of societal issues that really do not enter into our investment or purchase of business-type decisions.

Charlie?

CHARLIE MUNGER: Well, I would advise not paying too much attention to the clean water issue. If there’s enough energy, you can always get enough clean water.

Israel sometimes goes month after month making half its water from sea water. With enough energy, why, you have — the water problem goes away. And that’s very helpful in considering the future.

And regarding the agricultural productivity, I think one of the main reasons for being restrained in the use of hydrocarbons is that modern agriculture won’t work without them.

So I’m a great believer in being conservative, in terms of blowing all the hydrocarbons on heating houses and running cars. I think that — think of how happy we’d be if we’d taken a bunch of that dollar oil in the Middle East and just carted it here and put it in salt caverns.

I mean you could argue that we really screwed up the past, and you could argue all the people who think that our main solution is to drill, drill, drill. They’re all nuts. (Laughter and applause)

It’s probably quite wise to use up the other fellow’s hydrocarbon while preserving our own.

It’s not going away because we are not drilling it now.

But you can see that this will lead into unproductive discussion. (Laughter)

19. We wouldn’t participate in an auction for any company

WARREN BUFFETT: OK. We’ll move right onto Andrew.

ANDREW ROSS SORKIN: This next question, actually, just came in by email from someone in the audience from their BlackBerry, actually a prominent investor that asked that his name not be named.

And his question is the following: He writes, “Your purchase of Lubrizol was done in a negotiated transaction. The board of Lubrizol did not market the company for sale nor run an auction.

“According to the proxy, you did not permit the company to run a go-shop process, despite the requests you allow them to do so.

“Did the board of Lubrizol breach its fiduciary duty by not running a more competitive process to sell the company? And if not, why not?”

CHARLIE MUNGER: Let me do this.

WARREN BUFFETT: OK. Charlie will. (Laughter)

He volunteers —

CHARLIE MUNGER: The answer is no, the board at Lubrizol did not breach its duty because we were not going to participate in the transaction if they didn’t do it our way. (Laughter and applause)

WARREN BUFFETT: Yeah, we basically don’t participate in auctions.

And actually, just very, very recently we were asked to participate in one, and we’re just not interested.

They may end up getting less money than they would have gotten from us. But if they want to auction it, the one thing I can guarantee them, you know, is that when they get all through, we will not pay them what we would have them paid originally if they stepped up.

So they get a very certain deal, they got a very significant price, in my view, and in the view of two advisors.

And if they had said we want to conduct an auction, we would have said good luck, and we’d have looked at something else.

CHARLIE MUNGER: Has anybody else got an easy question? (Laughter)

20. How to judge if Buffett is doing a good job of allocating capital

WARREN BUFFETT: OK. Number 5.

AUDIENCE MEMBER: Hi, Charlie. I think I have an easy question. My name is —

WARREN BUFFETT: Give it to me then. (Laughter)

AUDIENCE MEMBER: My name is Stuart Kaye from Matarin Capital Management in Stanford, Connecticut.

And, Warren, you’ve often described a big part of your job is allocating capital.

Going forward, by just looking at Berkshire’s financial statements, how can we determine how good of a job you have done at allocating capital?

WARREN BUFFETT: Well, the real test will be whether the earnings progress at a rate that’s commensurate with the amount of capital that’s being retained. And over time, a market value test — but markets can be very volatile and capricious — but over time, obviously, we — unless the market value of Berkshire is significantly greater than the amount of capital that we have kept from you, retained, and used to buy businesses, you know — the verdict is against us if we ever start selling at a discount to that factor.

But you just have — and, you know, it is not a perfect measurement and certainly is not on any three-month or six months or even one-year basis, but over time, if we’re going to keep your money, we have to earn a better-than-average return on that money we keep and that has to translate into the stock selling at a premium over the money we retain from you.

And so far we’ve done OK on that, but the job gets tougher every year.

Charlie?

CHARLIE MUNGER: Yeah. We have continued to beat the market averages. We just aren��t beating our own past record. And I guarantee that will continue, at least the last half of it. (Laughter)

WARREN BUFFETT: Yeah. Only the last half of it, right?

CHARLIE MUNGER: Yeah.

21. Don’t compare opportunities now to your best-ever deal

WARREN BUFFETT: OK. Carol?

CAROL LOOMIS: This question is from Mike Rifkin (PH). He wants to ask about five transactions you’ve made in recent years with very different terms.

Goldman, 5 billion at 10 percent plus warrants; GE, five billion at ten percent plus warrants; Dow Chemical, 3 billion at 8.5 percent convertible to common; Wrigley- M&M Mars, 4.4 billion at 11.45; Swiss Re 2.7 billion at 12 percent.

Now, why the different interest rates you set and how about why the warrants in some cases, and why did the rich Mars family need 4.4 billion to do a deal, and at 11.45 percent?

WARREN BUFFETT: Well, we’ll let the Mars family speak for themselves.

But in terms of comparing those five deals, it was 3 billion with GE, and the Mars deal actually involved a $2.1 billion preferred stock, which has some usual characteristics, so you have to look at it as a package.

But the important thing is that every one of these deals was done at a different time, although the Goldman and the GE deals were done in close proximity with each other.

And market conditions — you know, you heard Charlie in the movie talk about opportunity costs. Our opportunity costs were different in every single one of those five transactions. And incidentally, we could have done a much better — I could have done a much better — job of allocating our money, you know, in terms of the post-panic period.

I was early on Goldman and GE, compared to the situation five months later. But, you know, we don’t have — we not only don’t have perfect foresight, sometimes it’s pretty bad.

But each deal — when I did the Swiss Re deal, I was not thinking about the Dow Chemical deal, which was committed to, maybe, a year-plus earlier. I was thinking about what else I could do with $2.7 billion, and that’s the way all the decisions are made.

So they are not related — they’re not related to each other. They go through a mind that is looking at everything available that day, including the amount of cash we have, the likelihood of being able to do something else next week or next month, what else we can do that day. And past deals we’ve made don’t really make any difference.

In fact, one of the things — one of the errors people make in business — and sometimes it can be a huge error — is that they try and measure every deal against the best deal they’ve ever made.

So they say, you know, I made this wonderful deal for, maybe, an insurance policy written, or it might be a company bought, it might be a stock bought, and they’re determined that they’re never going to make a deal that isn’t that attractive in the future.

So they, in effect — sometimes they take themselves out of the game.

The goal is not to make a better deal than you’ve ever made before. The goal is to make a satisfactory deal that’s the best deal you can make at the time. And Charlie relates it to marriage, and I’ll let him expand on that. (Laughter)

CHARLIE MUNGER: No, those are — of course, we’re going to make different deals at different times based on different opportunity costs. There’s no other rational way to make deals.

22. You don’t have to read quickly but you should read

WARREN BUFFETT: OK. We’ll go to number 6.

AUDIENCE MEMBER: Keith McGowan, Norfolk, Massachusetts. Thank you, Mr. Buffett and Mr. Munger. Thank you for being a role model.

Your ethics, frugality, sense of humor, honesty, sharing your ideas on investing, sharing your ideas on business, make this world a better place for everyone. (Applause)

Charlie mentioned in a prior answer about continuous learning. Mr. Buffett, you read about five newspapers a day. You also read many annual reports and other business-related reports.

You have the ability to read much faster than the vast majority of people. Reading is a fantastic thing.

What advice would you give to children in high school, college, or adults who want to increase their ability to read faster?

WARREN BUFFETT: Well, you know that’s an interesting question because I do read, as you described, the five papers and lots of 10Ks and 10Qs.

Unfortunately, I’m not a fast reader, and I’m not as fast as I used to be on reading.

But I don’t know how effective various speed reading classes may be, but if they are effective, you know, I would — I would really suggest anybody that can improve their speed — I wish I could read a lot faster than I can.

Charlie can read faster than I can. And it’s a huge advantage to be able to read fast.

And, you know, there’s a that old Woody Allen story about how he took the speed reading course, and he met somebody, he was telling him how wonderful it was, and the guy said, “Well, give me an example.”

And Woody Allen said, “Well,” he said. “I read ‘War and Peace’ last night in 20 minutes. It’s about Russia.” (Laughter)

That’s the problem I have when I try and read fast. I get all through reading the book, and I say, it’s about business, you know, so —

I really don’t know the effectiveness of speed reading-type courses, but if you know of any friends or — you can learn more about that, and there are effective techniques.

Obviously, the thing to do is to learn them very young because there really — there’s nothing — there’s hardly anything more pleasurable, you know, than reading and reading and reading and reading.

And Charlie and I do a lot of it. We continue do a lot of it. But I don’t do it as fast as I would like to.

Charlie?

CHARLIE MUNGER: Well, I think speed is overestimated. I had a roommate at Caltech who had a very distinguished mind, and I could do problems faster than he could, but he never made a mistake, and I did. (Laughter)

So, I wouldn’t be too discouraged if you have to go a little slower. What the hell difference does it make? (Laughter and applause)

Pass that peanut brittle, Warren.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: Thank you. Thank you.

WARREN BUFFETT: You may have noticed we have a 15-pound box out for sale in the other room, but Charlie is looking for a 25-pound box.

23. Buffett: There shouldn’t even be a debt ceiling

WARREN BUFFETT: Becky?

BECKY QUICK: This question comes from Eric Wiseman (PH) who asks, “Are you worried about Congress playing politics with the raising of the debt ceiling? What would this do to Berkshire Hathaway stock and to the overall economy?”

WARREN BUFFETT: You mean if they didn’t raise it?

BECKY QUICK: If they didn’t raise it, right.

WARREN BUFFETT: Yeah, well. It would probably be the most asinine, you know, act that Congress has ever performed.

One time in Indiana back in the 1890s, I think they passed a bill — I know it was introduced — you can look it up on a search engine. They passed a bill to change the value of pi, the mathematical term pi, to an even 3 — (laughter) — because they said it would be easier for the school children to work with.

Well, that’s the only bill I can think of that would give competition to a refusal to raise the debt ceiling.

I mean, it’s extraordinary. I mean, it really is extraordinary that with our deficit running, you know, well over $100 billion a month, and all kinds of items that can’t be changed — I mean, there’s — having a debt ceiling to start with is a mistake.

I mean, it doesn’t — the United States of 2011 has a different debt capacity than the United States of 1911, and we’re always — it’s going to be a growing country, and we’re going to have a growing debt capacity.

That doesn’t mean I think it’s a great idea at all to have debt growing, as a percentage of GDP.

But this — the debt ceiling’s on — so that these games get played and all the time that gets wasted and everything, and, you know, the amount of — number of — silly statements that you hear. It just seems such a waste of time for a country that’s got a lot of things to do.

But in the end, they won’t, in my view — there’s no chance that they don’t increase the debt ceiling and I would love to see them — well, I’d love to see them eliminate the idea, because it results in these periodic kind of stalemate operations where everybody uses it for posturing purposes and everything of the sort.

The United States is not going to have a debt crisis of any kind as long as we keep issuing our notes in our own currency. You know, the difference between being able to borrow in your own currency and having to borrow in another currency is night and day.

The only thing we have to worry about is the printing press and inflation. And if you’re a member of the euro, European Monetary Union, you have to worry about — you can’t print money. You can go and get your co-members to try and help you out.

But giving up the right to issue debt in your own currency is a huge step. And the United States has not done it. I don’t know whether we’ve ever issued U.S. bonds in any other currency but we certainly haven’t made a habit of it.

And the Japanese, incidentally, which have a very ratio of debt-to-GDP, also have consistently borrowed in their own currency.

And believe me, when it’s time to pay somebody back, and you have a choice of paying — and you’re forced to pay somebody else’s currency versus paying in your own — it’s entirely a different proposition.

As a matter of fact, Charlie and I, we were trying to buy that bank back in —

CHARLIE MUNGER: Chicago.

WARREN BUFFETT: Yeah, in Chicago in the late 1960s, and this was a time of really tight money.

And tight money was different then than tight money is today. I mean, tight money meant no money.

And somebody — we wanted to buy this bank, and they wanted — the only place we could find some money, I think, was in Kuwait in dinars, wasn’t it?

CHARLIE MUNGER: Kuwaiti dinars. (Laughter)

WARREN BUFFETT: And I thought to myself, and Charlie concurred, who the hell knew what they were going to say the value of the dinar was when we went to pay it back. It was not something over which we had a lot of control. So we decided not to borrow the money in dinars even though I kind of wish we’d bought the bank.

Charlie, do you have anything to say on that?

CHARLIE MUNGER: No. (Laughter)

I do think — I do think — you know, I remember an era when we had a bipartisan foreign policy and all that, and I liked that era. And that was the Marshall Plan, and a lot of wonderful constructive things were done, and they were generous things.

Now, it seems to me that both parties are trying to compete to see who can be the most stupid — (laughter) — and they keep topping one another. (Laughter and applause)

WARREN BUFFETT: You can tell Charlie is a fellow who has always filed an accurate income tax form. (Laughter)

He’s not worried.

24. Nuclear power is “important” and “safe”

WARREN BUFFETT: Number 7.

AUDIENCE MEMBER: Good afternoon, Mr. Buffett and Mr. Munger. I’m John Gorrie (PH) from Iowa City, Iowa, where I’m a happy customer of MidAmerican Energy.

Around 2004, Mr. Buffett, you told us of a great attention you had given to limiting Berkshire’s exposure to mega-catastrophes so that one could not break Berkshire.

Today, MidAmerican Energy is seeking approval to build a nuclear power plant in eastern Iowa. At the same time, another utility company, Tokyo Electric and Power, faces claims that Merrill Lynch has estimated as exceeding 12 trillion yen, or $140 billion, to compensate residences and businesses that have been displaced and farmers that cannot produce.

Do you believe that the bond-like return that MidAmerican Energy might receive from a nuclear power plant can justify the mega-catastrophe risk that it would pose to Berkshire?

WARREN BUFFETT: Yeah, I don’t think it does pose — I don’t know the details of it, and Greg Abel can speak to it better than I can, but I don’t think there’s anything like the exposure that you refer to.

I think nuclear power is an important part of the world’s equation, really, in dealing with its problems on — it’s very long term because you’re not going to change the installed base in any hurry.

And as you know, France has a very high percentage of nuclear power. And, actually, 20 percent of the electricity generated in the United States comes from nuclear power.

I probably am getting some of mine from — we have — at Fort Calhoun, we have a nuclear facility — not we, but Omaha Public Power District has a nuclear facility I’ve actually been in.

But I think nuclear power is important, and I think it’s safe. I think that — I know — I don’t think nuclear power is going to go any place in the United States for a while — maybe quite a while — because of the reaction to what happened in Tokyo — with Tokyo Electric Power.

But that doesn’t change my view as to the advisability of continuing to develop nuclear power, not only in the United States, but around the world.

I think some people misinterpreted what I said when I was interviewed, when I said that I thought it would have a major setback in its development, just because of the popular reaction to what happened in Japan.

But that does not change my view that nuclear power is important for the future of this country and the world.

Charlie? (Applause)

CHARLIE MUNGER: Yeah, we can’t be so risk averse that things that have a very tiny chance of making a big dent in one subsidiary are unendurable for us. We have to have a certain reasonable amount of courage in operating this company.

WARREN BUFFETT: We have pipelines — we have gas pipe — you can dream of all kinds of worst-case situations.

We have to carry toxic materials. We’re required by law to carry those on the railroad, and, you know, you can picture the wrong place, the wrong time, the wrong everything. But we are not bearing any risks, in my view, ever, that threaten the enterprise.

I mean, that is one thing I think about all the time. I regard myself as the Chief Risk Officer of Berkshire, and that is not something to be delegated to a committee, in my view, at all.

So I think about — whether I think about derivative positions, whether I think about leverage, whether I’m thinking about nuclear power plants or anything, I mean, we are not doing anything that I know of that — pressing my imagination as far as I can — threatens me losing a night’s sleep over Berkshire’s well-being.

CHARLIE MUNGER: And I think you’d also count on any new nuclear plant built in Iowa will be a hell of a lot safer than the ones we already have. We are learning as we go along here. (Applause)

WARREN BUFFETT: Yeah. Obviously, more people — more people have lost their lives, by far, in coal mine accidents, you know, than ever in the United States — have suffered no losses from anything involving nuclear — with it producing 20 percent of the electricity used by 309 million people.

CHARLIE MUNGER: And if a tsunami gets to Iowa, it will a hell of a tsunami. (Laughter)

WARREN BUFFETT: Yeah. And our railroad won’t do so well, either. (Laughter)

25. Charity program fell victim to pressure groups

WARREN BUFFETT: Andrew?

ANDREW ROSS SORKIN: This question comes from Mary and Jim Beaumont (PH) from Springfield, Illinois. They’ve been Berkshire shareholders since 1971, and I should note that we received several questions from some long-term shareholders along these lines, and this one reads:

“Would Berkshire ever consider reinstating its shareholder-directed charitable giving program now that you have a big cash position and are urging people to give away their wealth to worthy causes?

“When you had that program, we were able to support many local schools and charities over the years.”

WARREN BUFFETT: Yeah, I love that program, which we had for, maybe, 20 or so years. Charlie loved it. A lot of the shareholders loved it.

And it was interesting because it was a tax-efficient way to let shareholders give away some money to whatever they chose, as long as it was a 501(c)(3), and they could pick up to three charities.

And some families, for example, used it as a learning device. When they would get the form from us, they’d get their kids around the table and they’d talk about philanthropy and why they were choosing what they did.

Two things — well, one thing that was very interesting about it is nobody else copied it. I mean, the rest of corporate America was not interested in having their shareholders direct contributions. They were much more interested in having the CEO direct contributions. So it did not catch on, despite a fair amount of publicity.

We always had a small backlash of sorts from people who didn’t like the charities that our shareholders were choosing.

So Berkshire’s name was on the check. The shareholders would tell us we want $20 a share, let’s say — and they own ten shares, so they can direct $200 — they’d say, we want our $200 to go to more —churches and synagogues, actually, were number one — but there were schools and there were all kinds of things.

And we would always get some letters where Berkshire would be contributing to, say, Planned Parenthood of California, and people would say, “Well, we’re not going to buy See’s Candy because Berkshire is supporting Planned Parenthood in California.”

And sometimes I would write the people a letter and tell them that when See’s bought almonds or milk or anything like that we didn’t get into the charitable preferences of the person supplying us, but it never really amounted to anything.

Then we bought the Pampered Chef, and that was a different situation because with the Pampered Chef we operated through 50,000-plus independent contractors.

These are women, largely, women, who sometimes, to supplement their income — we have at least one in the office that — a woman that sells Pampered Chef products — sometimes as a main source of income — were — these 50,000 were independent contractors, and a campaign developed where people said that because Berkshire Hathaway gives money, probably primarily to pro-choice organizations, and that was at the direction — we had other people giving them to pro-life organizations.

I mean, these reflected the views of our shareholders, not of Berkshire management — but that they were going to boycott these independent contractors.

And these were people who depended on the income, who had nothing to do with Berkshire’s policies, and they were being hurt, in terms of their livelihood, and in some cities it became a radio campaign, and in some cities people regularly started interfering with the parties arranged for our Pampered Chef consultants.

And it was hurting a whole lot of innocent people who had nothing to do with Berkshire’s policies, who had nothing to do with Berkshire.

And at that time, reluctantly, we decided to end the program.

I did not — I didn’t mind at all losing some See’s Candy business or whatever to some people.

But when we start affecting individuals — most of these are not high-income individuals — and we’re cutting off their livelihood because of something Berkshire is doing, it became — it just became apparent to me that it was unfair to continue it, and reluctantly, we stopped it, and I think it’s too bad.

Charlie?

CHARLIE MUNGER: We don’t want the parent company involved in distracting arguments about the social issues of the times.

WARREN BUFFETT: Well, we certainly don’t want it where it affects —

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: — people who are just bystanders, basically, who have counted on us over the years to work with them. And it was literally affecting the income of thousands, primarily women, concentrated in certain communities around the country. OK.

CHARLIE MUNGER: A lot of stock — Berkshire stock — is given away every year. It isn’t like we’ve lost the flow of charity totally.

WARREN BUFFETT: No, a huge amount is given away. Partly that’s because Charlie and I started our partnerships back in the 50s and 60s, and we’ve got a number of partners that are now in their 80s, and some of them have given away some exceptional amounts of money.

You had a question earlier from Dick Holland, for example, and Dick Holland — I think it’s a matter of record as to exact numbers — but he’s given away huge amounts of money over the years and continues to.

And we’ve got dozens like that that I would say are going to end up giving back 90 percent or more of all the money they’ve made in Berkshire.

26. Why we hate projections

WARREN BUFFETT: OK. (Applause)

Number 8.

AUDIENCE MEMBER: Tanya Laneva (PH), Boston, Massachusetts.

When you think about long-term cash flows, do you try to forecast growth? Or do you just think about certainty?

If you have an indestructible company like Coca-Cola or Burlington Northern, do you try to estimate growth?

WARREN BUFFETT: Well, we think — are you finished on that?

AUDIENCE MEMBER: Yes, thank you.

WARREN BUFFETT: We — growth is part of the investment equation, and obviously, we love profitable growth. So we would love to figure out a way to, say, take a See’s Candy, to move it geographically into new areas, all kinds of things.

I mean, if we could find areas for growth with See’s, it would be likely to be very, very profitable.

If Coca-Cola, which is in 200 countries, I mean they have pursued that policy successfully now for 125 years. And some products travel way better than others.

But when we look at a business and we’re looking out in the future, obviously, if we see growth in that picture and it’s growth which is — produces a high return on incremental capital involved, we love it, but we do not rule out companies where we think there will be little or no growth, if the price is attractive relative to the earning power.

You know, there will be some growth, over time, in something like lubricants, you know, at Lubrizol, but it won’t be dramatic growth.

Would we love it if it, you know, if it were going to grow ten percent a year in units or something of the sort? Sure. But that’s not going to happen.

So it’s a factor in every investment decision because we’re really looking out to the future as to future earning power, but also future capital requirements.

And we think plenty about whether any business we go into is likely to grow profitably, and sometimes we’re right and sometimes we’re wrong. But we don’t rule out companies that have very slow growth or no-growth possibilities.

Charlie?

CHARLIE MUNGER: Yeah, well, the interesting thing is that in our country, the business schools teach people to make these projections way in the future, and they program these computers to grind these projections out. And then they use them in their business decision making, et cetera, et cetera.

I’ve always regarded those projections as doing more harm than good. And Warren has never prepared one that I know of, and where an investment banker prepares one, we tend to throw them aside without reading them.

WARREN BUFFETT: We them upside down, actually.

CHARLIE MUNGER: What?

WARREN BUFFETT: We turn them upside down.

CHARLIE MUNGER: Yeah, yeah. And I think an enormous false precision gets into things when you program computers to make forward projections for a long period of time.

We make rough projections in our head all the time.

WARREN BUFFETT: Sure.

CHARLIE MUNGER: And we don’t do any of those formal projections, because the fact that they’re there on paper and came out of a computer makes some people think they must be significant. I really think they do more damage than they do good.

WARREN BUFFETT: When we bought Scott Fetzer, which was back in about 1985, it had been shopped by First Boston to more than 30 parties. They never got around to calling us.

So after shopping it to about 30 parties, Scott Fetzer, finally, was working on a deal with an ESOP after something else had fallen through, I forget the exact details.

And I sent a letter to Ralph Schey. I’d read about it in the paper. I’d never met him, never talked to the guy. But I sent him a letter.

I figured I’d gamble 21-cents, or whatever the first class rate was then, and I said, “We’ll pay $60 a share. If you like the idea, I’ll meet you in Chicago Sunday, and if you don’t like the idea tear up the letter.”

So that took place and Ralph met me, and we made the deal, and we paid the $60 a share or whatever it was.

And Charlie and I went back to sign up the deal, and the follow from First Boston was there, and he was a little abashed since he had not sent us — contacted us at all — when they were looking for something. But naturally he had a contract that called for a few million dollars of commission even though he’d not bothered to ever contact us and we made the deal by ourselves.

So, in a moment of exuberance while he was collecting his few million dollars, he said to Charlie, he said, “Well, we prepared this book in connection with Scott Fetzer, and since you’re paying us a couple million dollars and have gotten nothing so far,” he said, “maybe you would like to have this book.”

And Charlie, with his usual tact, said I’ll pay you $2 million if you don’t show me the book. (Laughter)

And I should mention, this will — in connection with Lubrizol, Dave Sokol met James Hambrick, I think on whatever it was, January 25, or whatever the date, and he — Lubrizol had already made projections publicly out to 2013.

And Dave told me that they had — they — that James had also given him some projections, I guess out to 2015 or something, and did I want to see them? And I told him no.

I mean, I don’t want to look at the other follow’s projections. I’ve never seen a projection from an investment banker that didn’t show the earnings going up over time, and believe me, the earnings don’t always go up over time.

So, it’s just — you know, it’s the old story: don’t ask the barber whether you need a haircut, you know.

You do not want to ask an investment banker what he thinks the earnings are going to be in five years of something he’s trying to sell.

So I pay no attention to that sort of thing.

But we do, as Charlie says, we are doing projections in our head, obviously, when we look at a business. I mean, when we look at any company to buy, or any stock to buy, we are thinking in our mind, we’ve got a model in our mind, of what that place is likely to look like over some period of years. And then we also have some model in our mind of how far off we can be.

I mean there’s some things we can be way off on, there’s other things we’re likely to be in a fairly narrow range on.

So all that is taking place, but we sure don’t want to listen to anybody else’s projections.

CHARLIE MUNGER: Those of you about to enter business school, or who are there, I recommend you learn to do it our way, but at least until you’re out of school you have to pretend to do it their way. (Laughter and applause)

27. Buffett owns a few stocks and lots of bonds

WARREN BUFFETT: OK. Carol?

CAROL LOOMIS: On Berkshire’s quarterly 13F filings at the SEC, three stocks are held only by the entity recorded on the form as Warren E. Buffett, and not by a Berkshire subsidiary company.

Please clear up some confusion on this matter. Are these holdings your own personal investments outside of Berkshire, or do they belong to Berkshire Hathaway?

WARREN BUFFETT: Well, you’ll have to tell me what the names are.

CAROL LOOMIS: Unfortunately, the questioner didn’t include those. But these are the three, I think, that are — that say Warren E. Buffett is the owner.

WARREN BUFFETT: Yeah. Well, Marc Hamburg prepares those forms. Marc, do you have a microphone that you can — you could —

MARC HAMBURG: I think —

WARREN BUFFETT: Yeah. Go ahead.

MARC HAMBURG: Well, those are securities that are owned by certain employee benefit plans and so that — Warren is directed into those plans, but it doesn’t — they’re not owned by Warren, or there’s no indication that they’re owned by Warren.

Warren is part of the filing because he’s considered to be a controlling shareholder of Berkshire. So every security listed on there shows Warren as one of the — one of the owners.

WARREN BUFFETT: Yeah. Do we file stocks owned by pension plans?

MARC HAMBURG: To the extent that you direct — have directed —

WARREN BUFFETT: I got you, yeah.

MARC HAMBURG: Right.

WARREN BUFFETT: Yeah. No, I don’t — I don’t think I — well, Marc knows the rules on it better than I do. I own very, very few securities.

I really spend my time thinking about Berkshire, so I’ve got a lot of the very security I’ve been telling you not to buy, which is government bonds, but that’s not because it’s a good investment. It’s a place to have some money and forget about it, and I’ll work on Berkshire.

28. Evaluating a company outside the U.S.

WARREN BUFFETT: Area 9.

AUDIENCE MEMBER: Mr. Buffett, Mr. Munger, it’s an honor and a pleasure. My name is Ben Anderson (PH), I’m from Los Angeles.

When you’re looking at an investment in China, where the business culture is a lot different than it is here in the U.S., and successful business practices are, again, very different than they are here, what are the characteristics you look for when placing investment in that company, and is that any different than the general principles at Berkshire?

WARREN BUFFETT: We follow the same principles, but we recognize that we know less about tax laws, about customs, about attitudes towards shareholders, any time we get outside the United States, than we know in the United States. Now, to varying degrees, we weigh in that uncertainty.

At the time I bought PetroChina stock, which, I don’t know, was probably 2003 or thereabouts, it was extraordinarily cheap, in relation to any calculation of reserves or refining capacity or cash flow or you name it. And at the same time, Yukos in Russia was similarly very, very cheap, and they were both huge.

And I’m no geopolitical expert or anything of the sort, but I decided I was more comfortable buying PetroChina than I was buying Yukos. Now, was I as comfortable buying PetroChina as I would have been buying, you know, some domestic company of similar size?

No, because I don’t know as much — I didn’t know then, and I don’t know as much now, about all the intricacies of Chinese tax law and what the policies might be.

But I was fairly impressed — quite impressed — when I read the report of PetroChina.

For one thing, they said they were going to pay out 45 percent of — as I remember — 45 percent of their earnings in dividends. That’s more than any company — oil company — in the United States would tell me.

So I regarded it as a plus and an indication of intent that I thought would be fulfilled, and it has been fulfilled.

So we do make allowances for our lack of understanding, as well as we might in the United States, various key factors.

But the basic principles of trying to value the business, trying to find managements in which we have confidence, in both their ability and integrity, and then finding attractive purchase price, those principles apply wherever in the world we would be investing.

Charlie?

CHARLIE MUNGER: Well, we make so few investments in China that trying to draw general lessons from us would be hard.

It reminds me of the time a professor went west for the summer and came back to his faculty and he said, “I’ve learned that Indians always walk single file.” And they said, “How did you figure that out?” And he said, “I saw one and he did.” (Laughter)

WARREN BUFFETT: How did we get from there to China? (Laughter)

CHARLIE MUNGER: Well, we only had a couple of things in China. They’re like the one Indian. You can’t draw general lessons from them.

WARREN BUFFETT: But we’re willing to look tomorrow.

I mean, obviously, if we had a call on some — that could be a significant size investment because we — it just doesn’t make any sense for us to look at things we can just put a couple of hundred million dollars in — but we, you know, I love the idea of looking at various ideas.

I mean, I find it a fascinating game to hear about companies or businesses that are new to me. And the problem now is that the universe has gotten much smaller because of our size. But we welcome a call from a lot of countries.

There’s some countries that are just too small. They’re not going to have businesses that could move the needle at a place like Berkshire, and so those are off the list, but —

CHARLIE MUNGER: China has at least one private company that makes over $3 billion a year after taxes. There’s some big things out there.

WARREN BUFFETT: I’ll get the name from him later, but I don’t want you to hear. (Laughter)

29. Where Berkshire’s short-term cash goes

WARREN BUFFETT: Becky?

BECKY QUICK: This question comes from Ed Schmidt (PH) in Alaska. He’s asking about Berkshire’s cash.

He writes, “Where is that money held? All in Treasury bills or notes? If so, what will happen in June when the biggest buyer, the Fed, quits buying? Where is all that money on the sidelines? Is it under the mattress we saw two years ago?

“I don’t see how any significant amount of money can be in banks that aren’t paying interest, corporate bonds that are risky and not paying much interest, or government bonds that seem less and less sound as each day passes.”

WARREN BUFFETT: Well, he’s certainly right that all of the choices are lousy for short-term money now, but we don’t play around with short-term money. So we did not own commercial paper in 2008 before problems occurred. We did not own money market funds.

When I say we didn’t own them, maybe small amounts at various subsidiaries, but in terms of the big money, which we run out of Berkshire, we basically keep it in Treasurys.

And we get paid virtually nothing now for it, and that’s irritating, but the last thing in the world we would do at Berkshire is to try and get 5 or 10 or 20 or 30 basis points more by going into some other things with our short-term money.

It is a parking place. It’s an unattractive parking place, but it’s a parking place where we know we’ll get our car back when we want it.

You know, when we need — certainly the case — in September of 2008, we had committed for some time to put $6.5 billion in Wrigley when the Mars/Wrigley deal occurred, and we certainly didn’t contemplate at the time we made that commitment, which was probably in the summer, that the events would take place like they did in September and — but we had the money.

I knew I had to show up with 6 1/2 billion dollars — I think it was on October 6 — and, you know, I had to show up. (Laughs)

I couldn’t show up with a money market fund or some commercial paper or anything of the sort. I had to show up with cash.

And the only thing I feel — virtually the only thing I feel good about, in terms of having large amounts of ready cash is Treasury bills, and that’s where we’ve got — if you look at our March 31st statement, I think you’ll see 38 billion, and overwhelmingly that will be in Treasurys.

Charlie?

CHARLIE MUNGER: Well, of course, I’ve watched a lot of people struggle who thought it was their duty in life to get an extra 10 basis points on the short-term money.

I think it’s really stupid to try and maximize returns on short-term money if you’re in an opportunist game the way we are, where we want to suddenly deploy money.

Some of those pipelines we bought, they came for sale on Saturday, and we had to close on Monday or something?

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: Why fool around with some dubious instrument when we had sudden needs for money like that?

WARREN BUFFETT: We bought one pipeline where the seller was worried about going bankrupt the following week. And there’s a Hart-Scott-Rodino clearance required through the FTC, and they needed the money right away, and we — I wrote a letter, as I remember, to the FTC, and I said that we will do whatever you tell us to do later on.

You can look at this all you want. We’ll give you all the data you want. And if you tell us, you know, to unwind the deal, whatever you tell us, we will do.

But these guys need the money, and so we closed it earlier. And our ability to come up with cash when people need it and when the rest of the world is petrified for some reason, has enabled several deals to get done.

We don’t know whether — that could happen tomorrow. I mean, if — you know, Ben Bernanke runs off to South America with Paris Hilton or something — (laughter) —I mean, who knows what will happen. And we want to be able, at that moment, to have our check clear.

So, we figure we never know what tomorrow will bring, although it won’t bring that, I want to — leave that off the transcribed part of the report. (Laughter)

But we are — when somebody comes to us and they say, we need a deal right now, we can do it, and they know we can do it, and it can be big. It just has to be attractive.

30. Wind power needs government subsidies

WARREN BUFFETT: OK. Area 10.

AUDIENCE MEMBER: Hi, Warren. Hi, Charlie. Thank you very much for taking the time to have a terrific shareholders meeting.

Four years ago we announced that we’re naming our son after you, so we’re happy to say hi to both you and Charlie.

Charlie, since Berkshire bought Wesco, we wanted to see if you can take some time to host a meeting of your own? It can be anywhere, anytime.

CHARLIE MUNGER: We’re going to do that.

AUDIENCE MEMBER: Great.

CHARLIE MUNGER: We won’t call it a Wesco meeting. We’ll call it, “An Afternoon with Charlie.”

AUDIENCE MEMBER: Great.

CHARLIE MUNGER: It’s only for hard-core addicts. (Laughter)

AUDIENCE MEMBER: Warren, MidAmerican Energy is investing over a billion dollars in wind power. How do you feel about wind power as a source of renewable energy and its economics? Will this scale of investment continue and what type of returns do you expect to come from wind power?

WARREN BUFFETT: Yeah, it’s terrific, but wind power is terrific, but only when the wind blows. And the wind blows about — as I remember— about 35 percent of the time in Iowa.

So you never can count on wind power, obviously, for your base load. And, you know, that is a real limitation.

On the other hand, wind power, you know, is basically, I guess, the cleanest energy you can come up with, except for the fact that it can’t be relied on. It — the economics only make sense with an incentive credit — tax credit — provided by the federal government, which they’ve been doing for a considerable period of time.

It does not — standing on their own, the investment will not return anything like an adequate return on capital. So there is a tax credit that your government has made a decision that it wants to subsidize, in effect, wind power.

And Iowa has been — Iowa is a good wind state. This whole central belt is good and — central part of the country is good — so it’s made sense to locate a lot of megawatts of generating capacity in Iowa, and we have more under construction now, and I think we’re now, I think, number one in the country in respect to wind power.

So we’ll be doing more. It is dependent, in terms of the price you can get, the percentage of the time that you’re generating capacities actually get used and everything, it only makes sense with the tax credits.

And one thing that is kind of interesting — one of the assets of Berkshire is that it pays a lot of taxes. That doesn’t sound like much of an asset, but in these days, a lot of utilities, when you get both a hundred percent depreciation, which has been put in now by the federal government for a short period of time, and you get these sort of tax credits on wind, they really don’t have the tax paying capacity to be able to use the tax credits.

So they are in a different position than Berkshire, which pays a lot of taxes. We’ve probably paid something like 2 percent of all the corporate taxes in the United States, maybe, over the last five years. I want to check that, but it’s not — I don’t think that’s way off.

So we have a lot of tax paying capacity. We can use it to build more wind projects. And I think it’s very likely we will continue to do it.

It helps our Iowa customers. Because these projects are successful, it’s enabled us to keep rates — among other reasons — it’s helped to keep rates absolutely unchanged now for more than a decade, which is very unusual among electric utilities in the United States.

Charlie?

CHARLIE MUNGER: No, I’ve got nothing to add.

31. We would not have let NetJets go bankrupt

WARREN BUFFETT: Andrew?

ANDREW ROSS SORKIN: Well, this is not a David Sokol question, but it relates to him. It’s actually a NetJets question.

This shareholder asked, “I was struck by your statement when you praised Sokol for, quote, ‘having resurrected an operation that was destined for bankruptcy.’

“This really got my attention because I don’t recall you or Berkshire Hathaway saying earlier that NetJets was on the verge of bankruptcy at the time that his predecessor, Richard Santulli, had stepped down.

“In fact, at the time, the company seemed to give the impression it was dealing with a few short-term problems but that it was fundamentally sound. In truth, how close was it to bankruptcy? And if that was the case, why didn’t you tell us?

“And finally, was it ethical for NetJets to be asking perspective clients to part with their money at a time when it was, in the eyes of its main shareholder, quote, ‘destined for bankruptcy?’”

WARREN BUFFETT: Yeah, I think I said it was — maybe we can find the exact words here — but I think I said it was destined for bankruptcy, absent the fact that Berkshire Hathaway owned it, if it had been a standalone entity.

And Berkshire never had any intent, never would have had any intent of any kind, to bankrupt NetJets.

But if it had been owned as a standalone by somebody else, the public, that’s what would have happened to it.

With Berkshire’s ownership, Berkshire has had two insurance companies that would have gone bankrupt as standalone insurance companies. And we — it never crossed our mind that we would let them do it.

So we put money into companies that were bankrupt that Berkshire owned to make them whole, basically. And, essentially, we were doing the same thing with NetJets when we put in — we got it up to 1.9 billion.

But NetJets, in my opinion — well, it would have been bankrupt, absent somebody like Berkshire owning it. I’m almost positive that I said that, that absent Berkshire’s ownership, or some words to that effect — let’s see if I can find it.

Maybe Charlie can be commenting while I’m looking for this.

In any event — (Laughter)

Well, I’m not finding it immediately where I even discussed it, but I know I talked about it on the bankruptcy thing, but I also know that I conditioned it on not being owned by Berkshire.

Charlie?

CHARLIE MUNGER: No comment.

WARREN BUFFETT: No comment. (Laughter)

We’ve pointed that out to Standard & Poor’s and Moody’s. We look at — Berkshire has a lot of different companies, but we feel that it’s one entity and, you know, Moody’s or Standard and Poor’s has to look at each one separately and all of that, but Charlie and I did not — have not been running this business to walk away from some company.

We had one in Louisiana, Southern Casualty, and we had another one in Chicago, both of which, if left to their own devices, would have gone bankrupt, and we didn’t even think about not making them whole.

32. Buffett’s advice: invest in your own skills

WARREN BUFFETT: Area 11?

AUDIENCE MEMBER: Good afternoon. My name is Christopher David (PH). I’m an entrepreneur from Arlington, Virginia. My question is about the youth.

I work with a lot of high school and college students and recent graduates who are facing a job market with 20 percent youth unemployment, and at the same time one of the most favorable entrepreneurial environments. It’s easier than ever to start a business or get involved with a startup.

So considering that these kids are politically savvy, they like studying economics, they’re brilliant and they’re willing to learn, what advice can you give them from an investment perspective that could help them chart their own course, as opposed to get a nine-to-five job?

WARREN BUFFETT: Well, the main thing you could do — and people do it different ways. I used to do it by doing a lot of reading — I was — practically lived at the Omaha Public Library for three or four years in pre- — when I was 9 or 10 or 11.

I mean, anything you do to improve your own skills, you know, you never know where it’s going to pay off later on.

I only — I have one diploma hanging in my office, and I got a couple of others, but the one diploma I have hanging up there is one I got from a Dale Carnegie course, which cost me a hundred bucks back in 1951, and I can’t — it’s incalculable how much value I got from that hundred dollars.

There’s nothing like working to improve your own skills, and I would say communications skills are the first area I would work on to enhance your value throughout life, no matter what you do.

I mean, if I had stayed in the same position I was in, in terms of communicating, back in 1950 or ’51, my life would have turned out differently. I mean, I started selling securities. If you can’t talk to people, you’ve got a real problem selling securities.

The — so I — you know, I think people — I think the — if you get lucky, you find your passion early on, but you want to work at something you’re passionate about, and then you want to work to improve your skills in that. And I think if you do both of those things, I think you’re likely to do very well.

Charlie?

CHARLIE MUNGER: Yeah, I think economics is a really tough subject, and I think it’s easy to teach the basic microeconomics and certain of the basic ideas, but the minute it gets into the full range of complexity, you have the difficulty that the experts disagree.

So, I don’t think I would hurry if I were trying to learn something into the parts of the fields where none of the experts can agree among themselves. I would master the easy stuff first.

WARREN BUFFETT: Yeah, I don’t think — yeah, I would not advise taking lots of courses in economics to somebody going to school.

I’m just trying to think back. It’s been a long time since I took my economics courses at Wharton, but I don’t regard them as the ones that pushed me forward in any significant way.

33. Reinsurance is a lot harder than it looks

WARREN BUFFETT: Carol?

CAROL LOOMIS: Question from Jon Brandt. Does Berkshire’s equity ownership in Munich and Swiss Re reduce the amount of catastrophe-exposed insurance business you are willing to write directly?

If so, assume that prices return to being attractive, would you then limit the quantity of other reinsurance stocks you buy so that you could do more direct business?

WARREN BUFFETT: We have invested in Munich and Swiss Re less than — well, let’s see what it would be — it’s less than $4 billion, so we’re talking 2 1/2 percent of our net worth.

So those investments, in aggregate, are not of a magnitude that would cause me to change at all what we’re willing to do — the risks we’re willing to bear — in the reinsurance field.

We’re way below, sort of, capacity, in terms of risk that we will tolerate in insurance. I mean, I put in the report, you know, I expect our normal earning power to be in the $17 billion or something pretax range.

Well, that is so unlike any other reinsurance company in the world. We went through the worst quarter in reinsurance history, except for Katrina’s quarter, you know, and we end up earning, you know, very substantial sums.

So those investments are no constraint at all on our willingness to write insurance. We would love to have a lot more attractive reinsurance business on the books, we just — we just can’t find it at prices that we think are commensurate for the risk. But it’s not because of an aversion to risk overall.

Charlie?

CHARLIE MUNGER: Yeah, it’s — insurance, and particularly reinsurance, it’s not that easy a business. It’s taken you a long time to do as well as you do. And if it weren’t for Ajit, why, we wouldn’t — we’d be a lot smaller business.

WARREN BUFFETT: Well, it should be pointed out, we really didn’t succeed at all in the reinsurance business in the first 15 years.

We started in reinsurance around 1970, and we had a fellow that I thought the world of running it, George Young, but net, counting the value of float, it was not a good business for us for 15 years until Ajit came along. It is not an easy business. It looks easy most of the time. I mean —

CHARLIE MUNGER: That’s the trouble with it. It looks easier than it is.

WARREN BUFFETT: It looks way easier than it is.

And, you know, it’s like having a pair of dice, and, you know, accepting bets on boxcars or something like that, and, you know, it’s going to come up once in 36 times, so you can win a lot of bets by giving the wrong odds, but if you keep do it long enough, you lose a lot of money.

So these infrequent events, you better have factored in to your pricing, and not fool yourself by whether you make money in a given year or two years or even three or four years. And most people have a little trouble with that, and we had a little trouble with it for about 15 years.

CHARLIE MUNGER: And incidentally, the investment bankers of the world, now that they trade so much for their own account and derivatives, they have sold some of these products where most of the time the customer wins but when the customer loses, he really loses big.

In other words, they’re smarter than the customers, and they have caused some of the most horrendous losses to ordinary businessmen. It happened in Korea, it happened in Mexico, it happened —

Just beware of the salesman who’s selling a new derivative product.

WARREN BUFFETT: Or an old one. An old one, too.

CHARLIE MUNGER: Yeah, but new ones are worse.

WARREN BUFFETT: Yeah.

34. How Buffett first met Todd Combs

WARREN BUFFETT: OK. Area 12.

AUDIENCE MEMBER: Hi, my name is Bottle Pondy (PH). I’m from Philadelphia, Pennsylvania.

Question’s about Todd Combs, the young money manager you hired late last year.

For Mr. Munger, I understand you introduced him to Berkshire. Could you talk a little bit about that — how that relationship started, and how we as shareholders, are we going to be able to assess his progress?

CHARLIE MUNGER: Well, I hate doing this because I may get more letters than I want, but he sent me a letter. That’s how it happened. It was like Warren’s letter to the guy at — Ralph Schey.

And at any rate, I had a meal with him, and then I called Warren and I said, “I think this is the guy you should talk to.” We have a very complicated business and very elaborate procedures, as you can tell. (Laughter)

WARREN BUFFETT: And his results will be known over a five-year period or something. I mean, you cannot judge an investor by what they do in six months or a year.

CHARLIE MUNGER: Todd has the advantage that he’s been thinking about financial companies like Berkshire for a great many years. That’s useful for us to have around.

WARREN BUFFETT: And as we put in the annual report, it’s more likely than not, but not a sure thing, that over time, we have more than one investment manager.

You know, there’s a lot of money at Berkshire to be managed. And it would not be a bad idea, but we have to find the right people, and the right people just does not mean a given IQ or a given past record, it means a lot of things.

And if we end up with two or three, you know, that — that’s a plus. But it’s not — we don’t mandate that sort of a result.

35. Acquisitions and stock

WARREN BUFFETT: Becky?

BECKY QUICK: This question comes in from Scott Wilkin, and he’s from Chicago, but he’s sitting in the audience right now.

Johnson & Johnson is one of Berkshire’s biggest holdings, and he asks for your thoughts, Warren, on Johnson & Johnson’s recent acquisition of Synthes for $21 billion.

You were quite outspoken in your opposition of Kraft’s deal for Cadbury, particularly because of their use of stock. J&J’s deal also is primarily with stock, and do you support this deal?

WARREN BUFFETT: I have not talked to anybody in the Johnson & Johnson management, and I have no specific knowledge of the company, but basically, I would like the deal a whole lot better if it was all for cash.

The idea — when a management trades away — I think this deal is about two-thirds stock, roughly, and one-third cash. And Johnson & Johnson has plenty of ability to pay cash for a $22 billion deal. And when they trade away their present businesses for some other business, they’re either saying their own businesses are pretty fully valued, or they’re saying the guy is making a hell of a mistake that’s selling to them.

So I would — like I say, if it was all for cash, I would like it a lot better. And I think that it is — by using a lot of stock for a deal like this, that it certainly — you can — you can draw the inference that J&J is not valuing its own businesses, you know, as attractively as you might think they should be evaluated.

And if you use your own company stock to pay 20 percent or more than market for some other company and, you know, there probably are not a lot of synergies involved or anything in the management. There may be some, but there’s usually some offsets too.

But like I said, I would have much preferred it if they’d done it for cash.

Charlie?

CHARLIE MUNGER: Yeah, you also have the disadvantage in (inaudible) that you know a hell of a lot more about chocolate and pizza than you know about medical devices.

WARREN BUFFETT: You think I know more about chocolate?

CHARLIE MUNGER: Well, you — (Laughter)

But at Kraft, I mean, you’re talking about businesses that Warren knew a lot about, and neither of us knows much about medical devices.

WARREN BUFFETT: Yeah, the pizza has business has done pretty well since it was sold by Kraft. (Laughs)

36. Why we won’t issue stock to make an acquisition

WARREN BUFFETT: We go to 13 in the other room.

AUDIENCE MEMBER: Hi, I’m Glenn Tongue from New York. First off, thank you for a terrific day.

My question deals with acquisitions. Pre-Lubrizol, we estimated Berkshire’s year-end 2011 cash balance could approach $60 billion.

I believe you commented recently on an elephant that you thought was too big.

What is your acquisition appetite? What size is too big? Has the phone been ringing lately? And what if anything can we, as shareholders, do to help?

WARREN BUFFETT: I got through college answering fewer questions than that. But the — (Laughter)

But anything you can do to help, I appreciate, Glenn.

The — you know, it’s hard to name a precise figure. This one, you know, was way too big unless we used a lot of stock, which, like I say, we wouldn’t do.

Our appetite is always there. We are not going to borrow a lot of money. We’re not going to issue shares, except perhaps in some minor amount to make a deal that couldn’t get made otherwise.

But — and, obviously, we’ll never sell a business to buy some other business. So, you know, our cash balances will tend to build month to month unless we do something.

And we can, and will, sell some portfolio securities. But doing Lubrizol requires close to $9 billion of cash, and obviously we could do another one of that size.

In fact, we’re looking at a couple, but they’re no more than a gleam in the eye, but they would take sums roughly similar to Lubrizol, and, you know, we would be comfortable doing those, and they would add significant — significantly to Berkshire’s earning power. They’re worth doing.

But we can’t do a really — a really big elephant now, and we won’t — you know, we won’t stretch. We never — we’ve never really taken any risks because we don’t need to, and we will not trade something that we have and need for something that we don’t have and don’t need, even if we’d kind of like to have it.

Charlie?

CHARLIE MUNGER: Well, I certainly agree with all that.

We are very reluctant to issue shares. And in that, we’re different from most places.

I have a friend that sold out to a socialist country, and they issued shares in a controlled corporation, and the socialist executive said, “Isn’t this wonderful we’re getting this business for nothing.”

WARREN BUFFETT: Some people really have that, and, of course, there are some companies — and we talked about the wave that took place in the late ’60s, but periodically — one certainly happened during the internet period — companies just couldn’t issue shares fast enough, because they basically were trading confetti for real assets. And that is a business model that has been applied successfully for some periods of time by certain companies in the past.

It usually ends in some kind of a fiasco, but — well, I shouldn’t say it usually does, but it runs out of gas at some point.

But, you know, essentially, we’ve never been in that game.

We hate issuing shares and the idea of selling our — when we issue shares we’re divesting ourselves of a portion of every wonderful business we have, from GEICO to ISCAR to you name it. And we don’t like doing that. We like owning those businesses. We’d like to own more of them.

We — you know, we have a deal, for example, on Marmon where we bought some more of it this year, and we will buy the rest of it a few more years, and we feel good about that. We pay a fair price for it, but we get a business we know, a management we like, and that’s really what we’d like to continue doing at Berkshire. In fact, we will continue doing it.

37. Housing market is terrible, but we’ll profit on the rebound

WARREN BUFFETT: Andrew?

ANDREW ROSS SORKIN: This question comes from Larry Pitkowsky, who is a long-time shareholder, I think he’s in the audience, from the GoodHaven Fund.

He asks, “Over the years, you built or acquired a significant number of businesses that are related to the residential and commercial real estate markets, including such segments as brokerage servicing, insulation, carpeting, construction products, painted furniture.

“Berkshire’s ownership with these businesses would seem to give you a unique window through which to view current conditions. Could you give us some insight into the current state of the housing and commercial real estate market and what we might expect to see in these businesses over” — and this might be a long shot — “over the next decade.”

WARREN BUFFETT: Well, the immediate situation is it’s terrible. It’s been flatlined now for a long time, and it affects Shaw, it affects MiTek, it affects Acme Brick, it affects Johns Manville, it affects our HomeServices operation.

And there has been no bounce, at all, but you see that in the housing start figures, too.

I’m not telling you anything you don’t see, except I see it with pain as I look at the monthly earnings figures.

But those are good businesses. And as I mentioned in the annual report, we bought the largest brick operation in Alabama. And I think Alabama uses more brick per capita than any state in the union, but that doesn’t mean much currently, because nobody is using any brick to speak of.

But we bought it. We wrote a check for cash, and we like improving our position.

MiTek has bought operations. Shaw is spending a couple hundred million dollars this year, partly because of a change in the nature of the carpet business.

This country, over time, will build houses at a rate, overall, in total, commensurate with household growth, and I think we’re going to see plenty of household growth in future decades, and I think that our companies are well-positioned to make significant money when we get to a normalized level of home building.

I said in the annual report I thought it would — we would be seeing the upswing by year-end. I’ve seen nothing since I wrote the annual report that makes it look like I’m certain to be correct or anything, that there’s been no movement that I’ve seen so far in the two months since I wrote the report.

I would think it would start occurring by then, but if it doesn’t, you know, it may be a year later. I don’t think anybody knows the answer on that.

If I had to bet one way or another, though, I think it will be turning up by year-end.

It really isn’t that important to us. When I made the decision to buy the brick company in Alabama, it was not because I thought brick was going to turn in two months or six months or a year.

I thought that over time, being a very important brick manufacturer and distributor in Alabama adjacent to our strong operation in Texas, it would be a good investment at the price that we paid. And I feel good about the decision, but I won’t feel good about our brick results in the next six months. I can be sure of that.

Charlie?

CHARLIE MUNGER: Well, one advantage of buying these very cyclical businesses is a lot of people don’t like them. And what difference does it make to us if the earnings average, say, 300 million a year, if it comes in in a very lumpy fashion?

In the big scheme of things, what do we care if it’s lumpy, as long as it’s a good business? And we have an advantage on that stuff. Nobody else was bidding for a brick plant in Alabama with no customers to speak of. (Laughter)

WARREN BUFFETT: We’ll be there if you need brick in Alabama. (Laughter)

You know, See’s Candy, a wonderful business, loses money roughly eight months of the year.

Now, it just so happens we know the seasonal pattern, so we don’t worry in July that somehow Christmas won’t come, you know. We’ve got a couple thousand years on our side. (Laughter)

So the — but that’s — you know, that’s easy to see. If you just looked at one month of See’s earnings or looked at one quarter, you’d think, what are these guys doing in this business?

Now, obviously, cyclical businesses, you know, are not going to behave exactly the same as seasonal businesses, but why look at it any differently?

I mean, if you take the next 20 years, there will be, you know, three or four terrible years for residential housing, and there will be a lot of them that are pretty good, and there will be a few that are terrific.

And I don’t know the order in which they’re going to appear, but I know if I can buy the assets cheap enough to participate in those 20 years, that we’ll do OK over that time. So that’s why we’re in the brick business.

38. Short adjournment before formal business meeting

WARREN BUFFETT: Now let’s see. Yeah, we’re at 3:30, so we will adjourn for about five minutes, and then we will conduct the business meeting of Berkshire Hathaway, and we can turn the lights up, and we’ll rejoin you in just a couple of minutes. (Applause)

39. Berkshire formal annual meeting begins

WARREN BUFFETT: OK. If you’ll settle down, we’ll conduct a little business.

This morning I introduced the Berkshire Hathaway directors that are present.

Forrest Krutter is secretary of Berkshire. He will make a written record of the proceedings.

Becki Amick has been appointed inspector of elections at this meeting. She will certify to the count of votes cast in the election for directors and the motions voted upon at this meeting.

The named proxy holders for this meeting are Walter Scott and Marc Hamburg.

Does the secretary have a report of the number of Berkshire shares outstanding, entitled to vote, and represented at the meeting?

FORREST KRUTTER: Yes, I do.

As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 2, 2011, being the record date for this meeting, there were 942,559 shares of Class A Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at the meeting, and 1,059,055,810 shares of Class B Berkshire Hathaway common stock outstanding, with each share entitled to 1/10,000th of one vote on motions considered at the meeting.

Of that number, 663,042 Class A shares, and 659,697,109 Class B shares are represented at this meeting by proxies returned through Thursday evening, April 28th.

WARREN BUFFETT: Thank you. That number represents a quorum and we will therefore directly proceed with the meeting.

The first order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott, who will place a motion before the meeting.

WALTER SCOTT: I move that the reading of the minutes of the last meeting of the shareholders be dispensed with and the minutes be approved.

WARREN BUFFETT: Do I hear a second?

VOICE: Second.

WARREN BUFFETT: The motion has been moved and seconded. Are there any comments or questions?

We will vote on this motion by voice vote. All those in favor, say aye. Opposed? The motion is carried.

40. Election of directors

WARREN BUFFETT: The next item of business is to elect directors.

If a shareholder is present who wishes to withdraw a proxy previously sent in and vote in person on the election of directors, you may do so.

Also, if any shareholder that is present has not turned in a proxy and desires a ballot in order to vote in person, you may do so.

If you wish to do this, please identify yourself to one of the meeting officials in the aisles, who will furnish a ballot to you.

I recognize Mr. Walter Scott to place a motion before the meeting with respect to election of directors.

WALTER SCOTT: I move that Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Don Keough, Tom Murphy, Ron Olson, and Walter Scott be elected as directors.

WARREN BUFFETT: Is there a second?

VOICE: I second the motion.

WARREN BUFFETT: It has been moved and seconded that Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Donald Keough, Thomas Murphy, Ronald Olson, and Walter Scott be elected as directors.

Are there any other nominations? Is there any discussion?

The nominations are ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the election of directors and allow the ballots to be delivered to the inspector of elections.

Miss Amick, when you are ready, you may give your report.

BECKI AMICK: My report is ready.

The ballot of the proxyholders in response to proxies that were received through last Thursday evening, cast not less than 701,770 votes for each nominee. That number far exceeds a majority of the number of the total votes of all Class A and Class B shares outstanding.

The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Thank you, Miss Amick.

41. Shareholder advisory vote on Berkshire’s executive compensation

WARREN BUFFETT: The next item on the agenda is an advisory vote on the compensation of Berkshire Hathaway’s executive officers.

I recognize Mr. Walter Scott to place a motion before the meeting on this item.

WALTER SCOTT: I move that the shareholders of the company approve, on an advisory basis, the compensation paid to the company’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including compensation discussion and analysis, the accompanying compensation tables, and related narrative discussion, in the company’s 2011 annual meeting proxy statement.

WARREN BUFFETT: Is there a second?

VOICE: I second the motion.

WARREN BUFFETT: It has been moved and seconded that the shareholders of the company approve, on an advisory basis, the compensation paid to the company’s named executive officers.

Is there any discussion?

The motion is ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the motion and allow the ballots to be delivered to the inspector of elections.

Miss Amick, when you are ready, you may give your report.

BECKI AMICK: My report is ready.

The ballot of the proxyholders in response to proxies that were received through last Thursday evening, cast not less than 720,883 votes to approve, on an advisory basis, the compensation paid to the company’s named executive officers.

That number far exceeds a majority of the number of the total votes of all Class A and Class B shares outstanding.

The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Thank you, Miss Amick.

The motion to approve, on an advisory basis, the compensation paid to the company’s named executive officers has passed.

42. Shareholders decide to hold a compensation vote every three years

WARREN BUFFETT: The next item is an advisory vote on the frequency of a shareholder advisory vote on compensation of named executive officers.

I recognize Mr. Walter Scott to place a motion before the meeting with respect to this item.

WALTER SCOTT: I move that the shareholders of the company determine, on an advisory basis, the frequency, whether annual, bi-annual, or tri-annual, with which they shall have an advisory vote on the compensation of the company’s named executive officers, set forth in the company’s proxy statement.

WARREN BUFFETT: Is there a second?

VOICE: I second the motion.

WARREN BUFFETT: If has been moved and seconded that the shareholders of the company determine the frequency with which they shall have an advisory vote on compensation of named executive officers, with the options being every one, two, or three years.

Is there any discussion?

Miss Amick, when you are ready, you may give your report.

BECKI AMICK: My report is ready.

The ballot of the proxyholders in response to proxies that were received through last Thursday evening, cast 112,395 votes for a frequency of every year; 4,615 votes for a frequency of every two years; and 609,699 votes for a frequency of every three years, of an advisory vote on the compensation of named executive officers.

The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Thank you, Miss Amick.

The shareholders of the company have determined, on an advisory basis, that they shall have an advisory vote on the compensation paid to the company’s named executive officers every three years.

43. Shareholder motion on reduction of greenhouse gases

WARREN BUFFETT: The next item of business is a motion put forth by Miss Coward, a Berkshire shareholder represented by Mr. Bruce Herbert and Mr. Larry Dorrs (PH).

The motion is set forth in the proxy statement.

The motion requests Berkshire Hathaway to establish goals for the reduction of greenhouse gas at its subsidiaries’ power plants, and prepare a report for shareholders on how it will achieve these goals.

The directors recommend that the shareholders vote against the proposal.

I will now recognize Mr. Herbert to present the motion. To allow all interested shareholders to present their views, I ask Mr. Herbert to limit his remarks to five minutes.

The microphone at, well, let’s have Mr. Herbert first, if we can turn up the lights.

BRUCE HERBERT: Thank you.

Good day, ladies and gentlemen. My name is Bruce Herbert and I’m chief executive of Newground Social Investment in Seattle, Washington.

It is such a pleasure to be here today, representing a life-long owner of Berkshire Class A shares. And I stand to present the resolution found on page 12 of the proxy, that asks our company to set goals for reducing greenhouse gas emissions at its energy holdings.

This is because serious investors know, and studies show, that climate change creates financial liability.

The Investor Network on Climate Risk, whose members manage more than $10 trillion, and the Carbon Disclosure Project, representing more than $70 trillion in assets globally, call on companies to disclose risks related to climate change, as well as the actions taken to mitigate those risks.

In 2010, 66 percent of U.S. electric utilities had already set greenhouse gas emission reduction goals. Sixty-six percent. Unfortunately, Berkshire MidAmerican was not among them.

Now, investors have cause to be concerned. Just last year, the SEC announced that climate risks are material, and that they must be disclosed.

We do applaud MidAmerican for having the largest wind energy portfolio of any utility in the United States.

However, it is also true that MidAmerican generates close to three-quarters of its power burning coal. Investors, globally, want to reduce risk through cleaner generation, and 66 percent of public utilities have already published their plans for doing so.

But MidAmerican offers no such plan, despite the public proclamation via its website, that, quote, “We will set challenging goals and assess our ability to continually improve our environmental performance,” unquote.

There is no more important environmental goal for a coal-burning utility than to reduce pollution. But more than this, Berkshire is uniquely vulnerable, in that the financial burdens of climate change are pushed onto insurance companies, and as a major insurer, this has serious financial ramifications for our company.

Berkshire enjoys a remarkable and well-earned reputation, earned over many decades, for being practical visionaries. Addressing climate change offers an opportunity for our company both to uphold and to enhance this reputation.

So in closing, the world’s largest institutional investors call on companies to set greenhouse gas reduction goals. Such goals are key tools for managing the extraordinary business risk of climate change.

Two-thirds of utilities in the United States have already set these types of reduction goals, and this resolution, importantly, gives Berkshire managers the freedom to determine what those goals should be and to shape the process for meeting them.

And the major proxy advisory firms have repeatedly recommended voting for similar resolutions.

So I will close with a request and a question. The request is for all of you here to please join us in supporting this common sense proposal.

And the question, gentlemen, is, have you evaluated the business risk of climate change to our companies and what did you find out? Thank you.

WARREN BUFFETT: Thank you, Mr. Herbert.

We have a microphone at zone 1. It’s available for anyone wishing to speak for or against the motion. You’ve seen where zone 1 is there.

I’ll wait just a minute or two in case anybody would like — is there an additional speaker there that —?

I’ll ask that, for the benefit of those present, I ask that each speaker for or against the motion limit themselves to two minutes and confine your remarks solely to the motion.

So go ahead.

AUDIENCE MEMBER: Hi, I’m Paul Herman, founder of HIP Investor. HIP stands for Human Impact and Profit. We’re a registered investment advisor in the states of California, Illinois, and Washington.

Climate change is obviously one of the risks to Berkshire Hathaway conglomerate companies, including MidAmerican Energy and Burlington — the Burlington railway — which transports coal, much of which is getting exported to China.

So we are concerned about, also, about the disclosure, quantification, and impact on profit, of greenhouse gases, as well as the quantification of the asset of the carbon credits that might be available for eco-efficient companies.

So we strongly support this resolution for increased disclosure, increased transparency and evaluation of the financial returns that are possible, or the financial liabilities, especially with your expertise in reinsurance, because reinsurance companies typically put a quantification of potential carbon exposure and liabilities, whereas traditional insurance companies may not do so.

So we strongly advocate for transparency, disclosure, and quantification as to the potential risks and liabilities. The SEC has encouraged this type of disclosure, though they have not mandated it. So Berkshire Hathaway would be a leader in doing this, as companies like GE, which their Ecomagination initiative, the 10 percent of revenue that they generate from their Ecomagination products, and other leaders from Jeff Immelt to the leaders of Duke Power that take a positive position on the financial returns that are possible for addressing climate change and carbon efficiency. Thank you.

WARREN BUFFETT: Thank you.

We have some more speakers there?

AUDIENCE MEMBER: Mr. Buffett, Mr. Munger. My name is Jefferson Lilly (PH), a long-term Berkshire shareholder. It’s my personal opinion that it’s the previous two speakers that are the hot air in the problem around global warming, and that we — (applause) — that we not regulate Berkshire Hathaway to force it to have carbon disclosure or other silly rules.

It’s fine if the managers of the individual businesses choose to do that on their own, but it’s completely inappropriate to bring this false religion of global warming to try and regulate Berkshire Hathaway.

You guys are doing a great job on your own. (Applause)

WARREN BUFFETT: Are there any other speakers there that —?

AUDIENCE MEMBER: Mr. Munger and Warren Buffett. I would just like to say one thing, which I think is really important.

Berkshire Hathaway can be a leader in the environment. And I’m for transparency, as I know these two gentlemen are, and John Doerr, who is very passionate about the environment, and I know if he was here today, he would have the same sentiments as these two gentlemen.

And it’s important that as American citizens, we care about the environment. And not keep polluting the environment. And I’m with these two gentlemen 100 percent.

WARREN BUFFETT: Thank you. (Applause)

Do we have any others that haven’t spoken?

AUDIENCE MEMBER: Yes. My name is Eric Shlime (PH). I am not for this, so against the motion.

I think Berkshire Hathaway has a pretty good reputation at being clean, being environmentally responsible. I don’t think anyone is saying that either Mr. Buffett or Mr. Munger is somehow — doesn’t care about the environment.

I think most people care about the environment. But it doesn’t mean that we should for Mr. Buffett and Mr. Munger, or any of the CEOs, to tell them how to run their business.

You guys care a lot about Berkshire’s reputation. If Berkshire’s subsidiaries are just polluting oceans and ponds and destroying the reputation in different towns and cities, I don’t think that would be too cool with either Buffett or Munger.

So, doesn’t mean you don’t care about the environment just because you’re not going to somehow regulate and tell other people how to run their business. Let’s just do things voluntarily, do things to make money, and be responsible. At the end of the day, that’s what wins. Thank you.

WARREN BUFFETT: Thank you. (Applause)

Anyone additional?

AUDIENCE MEMBER: Yeah, my name’s Larry Dorrs (PH) and I support this resolution.

I don’t think anybody is saying anything other than you’re gentlemen of great integrity. But this is a dollars and cents issue. And the EPA is releasing new rules that are calling for more regulation of greenhouse gas emissions.

So this — you know, we’re really approaching this from a point of view of a conglomerate that has insurance holdings, and it really is insurance companies that are bearing the great costs.

So I’m looking very much forward to your point of view on this. Thank you.

WARREN BUFFETT: Thank you.

Anyone else?

AUDIENCE MEMBER: Yes, thank you. David Hughes (PH), a shareholder.

It’s my opinion that this is the right thing to do and I think that it makes sense to do it, as an organization, prior to being forced to do it.

And if this gives you the tools to set the rules your way, as you see fit, then I think that’s far more powerful and sets a precedent, as Berkshire has done in the past, so I am for the resolution.

WARREN BUFFETT: Thank you. (Scattered applause)

Anyone additional?

AUDIENCE MEMBER: Hello. My name is Thomas Dankenburter (PH) and my background was in biochemistry, and I’m very passionate about the environment, and I think it’s very important for Berkshire to work to be a leader, and so I’m very much in support of this proposition.

WARREN BUFFETT: Thank you. (Scattered applause)

Got somebody else there?

AUDIENCE MEMBER: Hi. My name is Sarah Cleveland. I’m from Portland, Oregon.

I want to just also put a voice in favor of this resolution, and I think it’s not about rights or wrong. It’s about a willingness to take a look at risks and opportunities. And also for Berkshire Hathaway to be a leader. And also work with the subsidiary companies on specific possibilities.

WARREN BUFFETT: Thank you. (Scattered applause)

AUDIENCE MEMBER: Hi.

WARREN BUFFETT: You’re on.

AUDIENCE MEMBER: My name is Sam Roy (PH). This is my first meeting.

Mr. Munger and Warren Buffett, I’m so impressed how you run your business, but I think you will care for the environment as well. I don’t know whether we should impose a route, but at least you will, by your act, how the local businesses are run, and all the operating goes out and appears, and there is no question that we do everything possibly that we never pollute the air that cannot be changed.

It is not hot air, but it is something I’m very passionate about. You can do anything with your environmental, but if you are not taking charge right now, we don’t know what the implications would be for our kids and grandkids.

I request you give it total investigation, and I think you will do that. Thank you for this opportunity.

WARREN BUFFETT: Thank you. (Scattered applause)

AUDIENCE MEMBER: Yes. Mr. Buffett and Mr. Munger, my name is Bob Stein (PH). I’m a registered, professional engineer, and I have a couple comments, and I’m a Berkshire stockholder.

One, I think we all support very sound environmental protection. But the science before this — that’s being used by EPA for greenhouse gases is not necessarily sound, and is not necessarily in the best interests of Berkshire Hathaway shareholders.

Also, everything that the EPA has proposed is not practical and has caused a lot of problems making U.S. competitive in the world industrial market. Thank you.

WARREN BUFFETT: Thank you. (Scattered applause)

AUDIENCE MEMBER: Jason Bang (PH), Palo Alto, California. For me, one thing that’s been very interesting about the issue is that it is something that deserves the passion that people bring to it. And I actually side with many of these people on the science of the issue.

What concerns me is, not necessarily that Berkshire agrees to the motion, I’m actually against it, but that the enterprises under Berkshire are about to help evangelize the true science behind what’s actually going on and help the American public get a better understanding, so they can also bring about change, rather than have it all occur from the executive level.

WARREN BUFFETT: Thank you.

AUDIENCE MEMBER: Good afternoon. My name is Bill Guenther. I’m a shareholder from Newfane, Vermont.

I work as a state forester back home and I want to say for folks that don’t believe global warming is reality, I wish you would follow me around in the woods. It definitely is.

I want to support this resolution and I hope that the rest of the shareholders will feel it important enough to see it through. Thank you.

WARREN BUFFETT: Thank you. (Scattered applause)

AUDIENCE MEMBER: Good afternoon. I’m (inaudible). I care about energy. I care about energy and environment more than anybody else because I’m currently still studying energy and environment issues.

But I truly believe the power of private sector, the power of free markets. And I think it’s not your responsibility to put the resources of the shareholder for this issue. It’s not your expertise.

I can personally do a better job to provide (inaudible) to do environmental advocacy than you do. So actually, against this resolution. Thank you.

WARREN BUFFETT: Thank you. (Scattered applause)

AUDIENCE MEMBER: Sorry, I have a friend to say something. I can translate it.

(OFF-MICROPHONE SPEAKING)

OK. He says the development of the solar panel has great impact on China. And the question — and he also thinks that, actually, Berkshire should do something, as should think about the implication of that.

WARREN BUFFETT: Thank you. (Scattered applause)

OK. Whoops, we have one more.

AUDIENCE MEMBER: Hi, I’m Kevin Thompson (PH). I’m a shareholder.

I’m for the motion. I am a career engineer that works with an oil company. And what we found when we started looking at greenhouse gas emissions was that what we thought was going to end up costing the company more money actually created more revenue for the company.

And those are some of the stories that generally don’t get told, but they are out there. And I would recommend that you take a look at it, because in actuality, what you may be dismissing may actually be revenue for your shareholders. Thank you.

WARREN BUFFETT: Thank you. (Scattered applause)

AUDIENCE MEMBER: Hello, Mr. Buffett. I’m Mike from (inaudible) and there’s obviously a fine line between, like, cutting down the Amazon forest and, like, just burning some coal.

So sometimes you can give up a little but you can’t really give up that much. So that’s why I don’t support the motion.

WARREN BUFFETT: Thank you. (Scattered applause)

AUDIENCE MEMBER: You’re welcome.

MEETING OFFICIAL: There do not appear to be any further comments.

WARREN BUFFETT: OK, thank you. (Applause)

Democracy in action at Berkshire.

The — a couple of questions that were raised. In terms of material information, or material risks, in respect to Berkshire and specifically to our insurance operation, annually in the 10-K, there’s a recitation of risk. And, in my own opinion, in terms of our insurance operation, this question does not pose material risk to Berkshire’s insurance operations.

The question one gentleman, toward the end, mentioned the fact that it might even be more profitable for Berkshire, in terms of what might happen if we followed the motion. Ironically, he could well be right if it were in our determination, but just take our three major states in electric utility operation, where we serve almost two million customers, Iowa, Utah, and Oregon, but it’s true of other states as well.

We operate under the dictates of the utility commissions in those three states, all of which — or each of which — sets their own rules regarding operation, and each of which we end up obeying.

If we were to unilaterally, for example, decide to close down significant coal generation, we would be told to depreciate those plants over a shorter period, and that would translate, not in the cost to Berkshire, it would translate into higher rates for electricity there.

We are entitled to a return on our investment and the faster the depreciation, the higher the rates have to be in order to achieve allowed returns.

So there was a woman from Oregon speaking, for example. And the burden of any unilateral attempt by us — and we couldn’t do it without the approval of the utility commissions — but the burden would fall on customers.

And it is true, actually, that we would recoup accelerated depreciation and we would probably have a much larger investment on which we would be allowed a return in other generating facilities.

But this is a question — this is not something that the stockholders of Berkshire end up incurring the costs of. It’s something that the rate, or the users of electricity in these various states, will pay for. And that judgment, quite properly, should be made by the public utility commissions of those various states. And whatever they decide, you know, we will follow.

And over time, there’s no question, just like we’ve talked about our wind generation in Iowa, this country will move toward a different composition of electricity generation.

And as I stated earlier, I personally favor more nuclear over time, but that will be determined both at the state level, and in some ways, at the national level.

So it’s our recommendation that the motion be voted down. And I think the motion is now ready to be acted upon.

If there are any shareholders voting in person, they should now mark their ballots on the motion and allow the ballot to be delivered to the inspector of elections.

Miss Amick, when you are ready you may give your report?

BECKI AMICK: My report is ready.

The ballot of the proxyholders in response to proxies that were received through last Thursday evening cast 67,733 votes for the motion, and 608,576 votes against the motion.

As the number of votes against the motion exceeds a majority of the number of votes of all Class A and Class B shares outstanding, the motion has failed.

The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Thank you, Miss Amick.

The proposal fails.

44. Formal meeting adjourns

WARREN BUFFETT: Does anyone have any further business to come before this meeting before we adjourn?

If not, I recognize Mr. Scott to place a motion before the meeting.

WALTER SCOTT: I move this meeting be adjourned.

WARREN BUFFETT: Is there a second?

VOICE: I second it.

WARREN BUFFETT: A motion to adjourn has been made and seconded. We will vote by voice.

Is there any discussion? If not, all in favor say aye.

All opposed say no.

0 notes