Berkshire Hathaway Annual Meeting 1996 Transcript

Warren Buffett [00:00:00] (Applause) Just a little early, but I think everyone’s had a chance to take their seats. I must say this is the first time I’ve seen this program. They told me they’d surprise me, and they certainly did. Marc Hamburg, our Chief Financial Officer, who was now known around the office of CB, was in charge of putting all this together, and we have… I want you to know, we have no multimedia. This entire meeting is handled by a regular staff. We have no public relations department or investor relations or multimedia department or anything the sort, so everybody just pitches in, and Marc will forevermore be in charge of the pregame ceremonies.

We have a very large crowd today. I hope everybody has found a seat, either in this main room or in the three overflow rooms. I think we can handle around 5,400, and historically 62%, or just about exactly 62% every year of the people who request tickets have come to the meeting, and if that percentage holds true today, we have just filled the rooms, and we will have a problem in the future which we haven’t figured out the answer to yet, but we’ve got another year.

The way we’ll run the meeting is that we’ll get the business out of way, out of the way at the start, and we’ll talk about the Class B issuance then too, so it’ll take a little longer than historically has been the case, and then we’ll have Q&A for until about noon. We’ll have a short break at noon. There’ll be sandwiches outside which you can buy, and Charlie and I will have a couple of sandwiches up here at the podium, and then we will stay around until about 3:00 to answer more questions, and at that time, afternoon, I’m sure everybody in the overflow rooms will be able to find a seat here in the main room. But people have come from great distances to attend this meeting, so we really want to get a, give everyone a chance to get their questions asked, and Charlie and I are delighted to… We’ll have to break it up at 3 no matter what, but we’ll be delighted to stick around.

You can leave any time, obviously. As I’ve explained in the past, it’s much better form to leave while Charlie is talking, but the, feel free to do that, and then at noon you’ll get a chance to do it en masse. We have buses is available to take you to, if you have any money left at all after yesterday, to take you to other business establishments of Berkshire locally. So that will be the plan. I, we, I hope everyone does get their questions answered. We’ve got a system where we break this room into six zones. We have a couple of zones in other rooms, and then this afternoon everybody will be able to be here in the main room. So that is the procedure.

I’m sure you recognize Charlie Munger, the vice chairman of Berkshire Hathaway, who also had not seen that movie before showed. We were, I think Marc was afraid to show it to us. But in any event, we will go on. I thought you might be interested, this is a list of people that came in for tickets, and we had, in addition to 99 from Canada, and of course the US, we had Australia, the Channel Islands, England, Greece, Hong Kong, Israel, Portugal, Puerto Rico, Singapore, Sweden, and Switzerland. I’m not sure all of those people are with us today, but they did send for tickets, and I’ve met a number that did come in from a distance.

So with that introduction, I will call the meeting to order. I’m Warren Buffett, chairman of the board of directors, and I do welcome you to this meeting. I hope everybody has a good time this weekend, and I’d like to introduce the directors in addition to myself and to Charlie. Now, you don’t get quite your money’s worth this year from our directors. They’… collectively, they’ve lost 100 pound since last, our last meeting that I think they’ve been trying to live on the director’s fees that we have. We have with us Howard Buffett, want stand, Susan T. Buffett, Malcolm G. Chase III, and Walter Scott Jr.

Along with us today, our partners in the firm of Deloitte & Touche, our auditors, Mr. Ron Burgess and Mr. Craig Christensen. They’re available to respond to appropriate questions you might have concerning their firm’s audit of the accounts of Berkshire. Mr. Forrest Krutter is secretary, Berkshire. He will make a written record of the proceedings. Mr. Robert M. Fitzsimmons has been appointed inspector of elections at this meeting. He will certify to the count of votes cast in the election for directors. The name proxy holders for this meeting are Walter Scott Jr. and Marc D. Hamburg. Proxy cards have been returned through last Friday representing, says number to come. There’s another script. Ah, okay, there’s another, oh yeah, here’s a script on that one. 1,041,567 Berkshire shares to be voted by the proxy holders as indicated on the cards. That number of shares represents a quorum, and we will therefore proceed, directly proceed with a meeting.

We will conduct the business of the meeting, then adjourn the formal meeting. After that, we will entertain questions that you may have. First order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott Jr. will place a motion before the meeting.

WSWalter Scott Jr. [00:06:33] I move that the reading of the minutes of the last meeting of shareholders be dispensed with.

Warren Buffett [00:06:38] Do I hear a second?

[00:06:39] Shareholder: I second the motion.

Warren Buffett [00:06:41] 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.

[00:06:41] Shareholder: Aye.

Warren Buffett [00:06:50] Opposed? Motions carried. The secretary have a report of the number of Berkshire shares outstanding, entitled to vote, and represented of the meeting?

FKForrest Krutter [00:06:59] Yes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent by first class mail to all shareholders of record on March 8, 1996, being the record date for this meeting, there were 1,193,512 shares of Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at the meeting. Of that number, 1,041,567 shares are represented at this meeting by proxies return through last Friday.

Warren Buffett [00:07:25] Thank you. If a shareholder’s present who wishes to withdraw a proxy previously sent in and vote in person on the two items of businesses provided for in the proxy statement, he or she may do so. Also, if any shareholder is present is not turned in a proxy and desires a ballot in order to vote in person or on those two items, you may do so. If you wish to do this, please identify yourself to meeting officials in the aisles who will furnish two ballots to you, one for each item. With those persons desiring ballots, please identify themselves so that we may distribute them.

First item of business of this meeting is to elect directors. I now recognize Mr. Walter Scott Jr. to place a motion before the meeting with respect to election of directors.

WSWalter Scott Jr. [00:08:10] I move the Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase III, Charles T. Munger, and Walter Scott Jr. be elected as directors.

Warren Buffett [00:08:22] Is there second?

[00:08:23] Shareholder: I second the motion.

Warren Buffett [00:08:25] Are there any other nominations? Is there any discussion?

[00:08:29] Unidentified speaker: I learned a lot in China.

Warren Buffett [00:08:32] We did. So, 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. With the proxy holders, please also submit to the inspectors of elections a ballot on the election of directors voting the proxies in accordance with the instructions they have received. Mr. Fitzsimmons, when you are ready, you may give your report.

RFRobert Fitzsimmons [00:09:03] My report is ready. The ballot of the proxy holders received through last Friday cast not less than 1,014,660 votes for each nominee. That number far exceeds a majority of the number of all shares outstanding. The certification required by Delaware law regarding the precise count of the votes, including the votes cast in person at this meeting, will be given to the secretary to be placed in the minutes of this meeting.

Warren Buffett [00:09:26] Thank you, Mr. Fitzsimmons. Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase III, Charles T. Munger, and Walter Scott Jr. have been elected as directors.

The second item of business at this, of this meeting is to consider the recommendation of the board of directors to amend the company’s restated certificate of incorporation. The proposed amendment would add a provision to the restated certificate of incorporation authorizing the board of directors to issue up the 50 million shares of a new Class B common stock, with each Class B share having economic rights equivalent to 1/30th of a share of the current common stock and with 1/200th of the vote, and to redesignate the company’s current common stock as Class A common stock and to make each share of Class A common stock convertible into 30 shares of the new Class B stock at the option of the holder.

I think, before we get into moving that motion, I think this would be a good time to have a discussion and take your questions regarding the issuance of the Class B, and I should give you a little background. I think many of you know the background on this, but over the years we’ve had probably half a dozen people, one time or another, propose that the creation of an all-Berkshire investment company or unit trust, in other words, an entity that would hold nothing but Berkshire stock and then would parcel out its own shares in smaller denomination pieces to the public. And we have generally discouraged that because we felt that there was considerable potential for abuse in such an arrangement, and our discouragement has been successful up until last fall, when there was one prop, or there were two proposals that one as far as submission to the SEC for clearance that involved unit trusts.

And these unit trusts would have owned nothing but Berkshire shares and then been sold to the public in small denominations, probably with a minimum investment of around $1,000 or so, and holders of those trusts would have bought into an entity that had a defined life, but that had considerable in the way of costs and some tax consequences that they might not anticipate when they came in. And Charlie and I were worried that a combination of Berkshire’s past record, which cannot be repeated, and high sales commissions and a low denomination and a lot of publicity about Berkshire and myself, which, as you’ve seen this morning, we attempt to discourage, the, that the, a great many people would end up buying these unit trust holdings without any idea really of what they were buying and with unrealist, unrealistic expectations as to the future.

And that that would in turn create a considerable demand, because these unit trusts would go out and buy Berkshire shares, that would create a considerable demand against a fixed supply, much of which is almost unavailable because people have a low tax basis and are reluctant to sell, and I hope they’re reluctant to sell for other reasons. And that the very action of the cre… creation of these and that push on the demand would, might very well create some speculative spurt in the stock, which in turn would induce people who had been approached about the trust to feel they were missing even more of a good thing by rushing in. Rising prices in certain kinds of markets create their own kind of demand. It’s not a sustained demand, and it’s a demand that, the reversal of which later on, when people become disillusioned, can cause was a lot of problems.

But that potential was there, with the flood of buyers with unrealistic expectations, high commissions, and a fixed supply. So we attempted to dissuade both of the promoters. One backed away and then came out a few months later with something that was a combination of Berkshire and some other securities which were at least thought to be in our portfolio, and we started hearing from people that it was clear had no understanding of what they were buying or the costs involved or the potential tax implications or anything of the sort.

So at that time we faced, we had to make a decision, and we had to make it rather quickly, as to what would be the best solution to this problem that in turn wouldn’t create the same sort of thing that we felt had potential harm when being done by these promoters. Obviously, we considered a split of the stock, but we were worried that a split would send out signals to all kinds of people who want to believe in things that may not be too believable about future performance, and that they would look at it as a… some grand chance to buy at a lower price. Of course, it wouldn’t really be a lower price in relation to value, but it would be a lower denomination, and that, again, against a fixed supply, might very well have created the same kind of problem, maybe even a greater problem than would occur with the unit trust.

So we came upon the idea of the Class B shares, which would create a supply that would match the demand for, in effect, split shares, and that would be offered in a way that did not create special inducements, or to create false inducements to people thinking of buying. And one of the things we did was we stuck a commission on it, on the issuance of the Class B shares, that was about as low as any I’ve ever seen in many years in Wall Street, because we did not want salespeople to have a great inducement, we, to go out and sell the shares. We wanted anyone that was interested to read the prospectus and think about it and make their own decisions. And we did another thing, which is quite counter to the normal commercial approach, which is that we said we would issue as many shares as people wanted to buy. And you know, you do much better in this world if you’re selling something to say only one to a customer, and you have to get in early, or you have to know somebody in order to get shares. And many new issues are sold that way, and it’s very effective. I mean, it’s, you, like those old stories about in Russia, where there’d be lines and people would get in them without knowing what they were going to buy when they got to the front of the line. And that’s a very effective selling tool, and it’s one that Wall Street is not unfamiliar with. But we decided that, to reduce any of that feeling that you have to get in early or only the big guys going to get it or something of the sort, that we would announce loud and clearly that we would have shares available for everyone that wanted, so there was no reason to assume that it couldn’t be, a hot stock, in effect. And we’ve done various other things.

So I, our hope is that the Class B shareholders that we attract are of the same quality as the people in this room, that they have an investment attitude that, where they feel they are buying into part of a business that they expect to stay with it for the indefinite future, maybe the rest of their lives, and they do not think of it as a little piece of paper that may be hot because it’s a new issue or something of the sort. And it lets the people who are happy with the present shares stay in exactly the same position, which is what I’m going to do, what Charlie will do.

We have made the B very slightly disadvantageous in two respects to the A. It has a lower vote, and it will not participate in the shareholder contributions programs. There were reasons for both of those, but in addition to the, in the explicit reasons, there also is the desire that the B not be made fully… It’s just a slight bit inferior, but it’s not fully as attractive as the A, because we did not want to do anything that pushed everybody into converting into the B. If that started in a big way, the B would then enjoy the better market, and it would create its own dynamic where it made sense for everybody to do it.

So we have left it so there is no reason for you, if you own the A, to convert to the B, unless you wish to sell or give away some portion of your holding that would be less than a full A share, and it will be convenient for that reason. But beyond that, there should be no incentive. If the B should trade slightly above 1/30th of the price of the A, there will be arbitrage activity that will keep that from being anything other than a negligible amount. It, of course, could trade well below 1/30th, because the B is not convertible into the A. Charlie, would you like to add anything before we start taking questions on this? And I encourage everyone to ask…

Yeah, Charlie, as you will note during the meeting, does not get paid by the word, that, but we, I encourage every, anyone to ask any question. There are no bad questions about this. I mean, it, last year we talked about a preferred issue, and people had very valid questions.

I might take those two points of difference between the A and B just to start with. On the shareholder designated contributions program, which was $12 a share last year, in addition to wanting the A to have a very small edge over the B, which would be a reason for not having the B participate, it also would get very impractical in terms of taking $12 and dividing it by 30 and soliciting the names of charities and to designate contributions. And we can handle the present program fairly efficiently, but we would not want to be sending out checks for a dollar or two, and it would get very inefficient. So we have told prospective B holders that that’s not going to happen, and so they’re fully informed coming in.

In connection with the vote, the issuance of the B does create more votes outstanding. So, absent any change in the situation through the issuance of shares, which we’re, we are not particularly eager to issue, the vote, my vote will be diluted somewhat by this. And I had, frankly, I had no desire to create a lot more shares which would dilute the vote of the Buffett family. It will be diluted somewhat by this action, because we will have all the present votes outstanding plus some votes from the B. If there is a lot of conversion to the B, it is true that our holding will go up percentage-wise, but I see no reason why people really should convert, so I don’t think that’s likely. I think in the end it’ll stay very much the same. And as I mentioned earlier, we want there to be a slight disadvantage to the B.

In all other respects, we will treat the B just as the A. I, we have a problem with numbers at this annual meeting. We’re going to have to do something next year, which, and we haven’t figured it out yet either. But the suggestion was made by someone that maybe the B would get second class seating or something. We’re not going to have any of that, that, from this point forward, with the point, with the exception of the two things we put in the prospectus, the B shares will be treated in every way as equivalent to A, they’re.

So with that, and with Charlie’s reluctance to elaborate, we have a six zone system in here, and then we have another two zones in the overflow room. So if there are any questions in zone one, somebody just raise your hand and somebody will bring a microphone. Zone one is over there, two is back in the corner, three, four, five, and six, so it just goes right around the, clockwise. Just raise your hand and somebody will bring a microphone to you. We’ve got a question, I think, in zone one.

[00:23:14] Shareholder (Marshall Patton, Bandera, Texas): Good morning. I’m Marshall Patton from Bandera, Texas. And when the price is struck on the Class B shares, those of us who buy our shares through computer programs, do we have assurance that whoever we buy from, that will be the price that we pay for these shares?

Warren Buffett [00:23:39] Yeah, the, well, the price, there’ll be a price established probably, what, Wednesday night or thereabouts of this week, and everybody will pay the same price. And a very high percentage of that price, incidentally, will come to Berkshire. I mean, there’s a very, very low underwriting spread compared to any other offering. Now, once the initial offering is, everybody will pay the same price, large institutions, the buyer of one share will pay the same price.

Subsequently, the stock will, we expect, we’ll be listed on the New York Stock Exchange probably Thursday morning. And we have the world’s greatest specialist here, I believe, Jimmy Maguire, that who handles the trading now of the common and will handle the trading of both the A and B. Jimmy, are you here? You want to stand up, just so… There he is, the world’s greatest specialist, Jimmy Maguire. Okay, thanks. I think he leads the singing of “Wait Till the Sun Shines, Nellie” too, annually at… You can see him on CNBC occasionally, and the Nightly Business Report. I want to give equal time here.

The, but Jimmy will be trading both classes of stock starting Thursday. As I say, as I said, the, it will be impossible, after the first few days, it would be impossible for the B to sell much above 1/30th of the A, because people would buy the A and sell the B, if more than a very small, with it, with even the smallest of arbitrage differentials. But there will be markets in two shares, and in two classes. They will both trade in 10 share lots. That will be the round lot, so-called round lot. Usually the round lot on the New York Stock Exchange is 100 shares, but in the case of both Berkshire shares, the round lot will be 10 shares.

Now, I read one or two press accounts that said therefore the minimum purchase is 10 shares. That’s not true. The minimum purchase of each stock, each class of stock, is one share. I mean, you can buy one share or two shares, or you can sell one share or two shares, and you have an odd lot differential, just as you would if you were working with less than 100 shares of a company whose stock traded in 100 share round lots. But there is no, there’s no minimum size in the case of either share. And you will see, when they get the mechanics straightened out, they may have a little trouble with it, but you will see Berkshire A and Berkshire B and quoted in the papers, and I think that you’re, that it’ll be quite clear after Thursday what is going on on that.

I don’t know about the computer purchases, but I don’t, that, certainly in terms of the initial offering, that will be through one of, I think, 137 people or brokers in the selling group, and it’s the same no matter who you deal with. Zone two.

[00:26:49] Shareholder (David Hendle, Boca Raton, Florida): My name is David Hendle. I’m from Boca Raton, Florida. To your knowledge, will this program effectively discourage the unit trusts?

Warren Buffett [00:27:00] Well, we, it’s certainly designed to, and I think the answer to that is yes, because I see no way that a unit trust, either in connection with the initial offering or with the subsequent trading, I see no way that a unit trust could offer people as an efficient and inexpensive way of participating in Berkshire as direct purchase of the B. Bear in mind that the unit trust, if a unit trust were established, it would have to buy Berkshire shares in the market, so it would have the costs that people have in buying shares, and then on top of it, it would superimpose these other costs.

And in addition to the initial commission, they even had a valuation fee. That was a job I wanted to have, because every 3 months, or however often, maybe every day, somebody was, their job was to evaluate this trust value, which involved the great skill of being able to locate it alphabetically in the newspaper. The figure was left blank as to what the evaluator’s fee would be, but I had a feeling that it was one of the more cushy jobs available.

And there was an added problem too. I mean, if these unit trusts started and did not get off the ground very far, they could have become something in the way of orphans, and they certainly would have been, become expensive to operate. And then, with Berkshire paying nothing in the way of dividends, but with the trust incurring expenses, including this evaluator’s fee among others, but with the trust incurring expenses, they would have to sell small amounts periodically to pay the expenses, and that would create tax consequences for every unit trust holder. And I mean, people would not know, what we felt, they would not know what they were getting into.

The more serious problem is that somebody would flash our past record in front of them, or show them some chart on Berkshire stock price, and say, you know, this is your chance to do the same thing, and it obviously isn’t, wouldn’t have been. But based on what we have seen right now, we anticipate the offering being 350,000 shares, but the extent to which the number of tickets involved, that even seeking out informed purchasers only, there’s very substantial demand. So I think if you widen that circle to include uninformed, it might have been quite an experience. I think the answer is that we will not have a problem with the unit trust in the future. Zone three.

[00:29:43] Shareholder (Adam Ingle, Boulder, Colorado): I’m Adam Ingle from Boulder, Colorado. In terms of the number of shares that you’re going to issue, B shares, do you plan to just look at the book on Wednesday and issue enough to totally satisfy the demand? And do you have any plans to do a secondary if it starts becoming a hot number?

Warren Buffett [00:30:06] Yeah, well, I think, well, we, what we plan is to tailor the size of the offering to fit the demand that appears Tuesday night or Wednesday morning, or whenever the exact moment will be on that. But the offering will be designed to do that. Like most offerings, I would anticipate that the underwriter will, and this is a supposition at the moment, but I, it’s frequently done, would sell some more shares than the initial offering, with the intention of creating some short position in the security, and then they have an option to take from the company for 30 days up to 15% of whatever we initially sell, which protects them on their short position. But the short position also helps in terms of having an orderly market in the stock subsequently.

But we will essentially tailor the size of the issue to the demand as it appears to us midweek. We have no plans for any secondary offering. I think this has been sufficiently publicized. There, there’s a large network of selling group members, so that people that are interested but wanted to buy in a smaller denomination will have had their chance. I think there will be a, well, present indications, there’d be 350,000 shares out. There would be a fairly large, a large number of holders, based on what we’re seeing. So the market should, starting Thursday morning on the exchange, there should be, in my opinion, a reasonable market based on that kind of quantity and the number of people buying. And so I anticipate nothing subsequently. Zone four.

[00:32:17] Shareholder: You hear me?

Warren Buffett [00:32:20] Yep.

[00:32:21] Shareholder: I’ve been, that said that you…

Warren Buffett [00:32:29] (Laughter) I think I’ll leave that one up to you. What I said, I said at present prices, Charlie and I do not think Berkshire stock is undervalued. And that, now, that is not what’s gotten reported sometimes. I mean, sometimes people have said we thought it was overvalued. We did not. If you look at the prospectus, or if you look at the prospectus, you will see that what we said was we do not think it’s undervalued. I find it somewhat entertaining that people regard that as kind of an amazing statement by somebody making a public offering.

But if you think about it a bit, can you imagine a management that goes out and says to the world, we are selling you something in the new stock, and it’s way undervalued? What do you say to your present shareholders if you go out and say to the public, we’re selling you something that’s worth a dollar and we’re going to sell it to you for 80 cents? Now, that would leave me very unhappy. So I feel that any management that is talking about selling something, their stock, and they say it’s very undervalued, either doesn’t know what’s good for their present shareholders, or they may have their tongue and cheek. We would not be selling, we would not sell a part of your interest in Berkshire at a price which we did not feel was adequate for the present shareholders. It’s that simple. If we sell 1% of the company, and 350,000 shares is close to that figure, B, we are selling 1% of your ownership in See’s Candy, we’re selling 1% of your ownership in GEICO, we’re selling 1% of your ownership in the Buffalo News. Those are all valuable assets. We have no intention of selling 1% or 10% or the 100% of any of those entities at a price that is not fair to present shareholders.

That doesn’t mean it’s unfair to new shareholders, but we’re not going to, we’re not going to, we would not be selling the stock if we thought it was undervalued. I’m not sure what we would have done if we’d had that position when the unit trust came along. But we have, would put in the perspective, but we are not selling any of our shares. Frequently on a new offering you see, you see present holders… But, you know, I have very close to 100% of my net worth in Berkshire, and leaves me quite happy. I’ve got a trust I run, set up in 1964. I’m the sole trustee. I can do anything in that trust I want, and I am freed by the person who set up the trust of responsibility for a concentration of investments, and I have some members of my family who are beneficiaries of that trust. That trust owns nothing but Berkshire Hathaway stock. That doesn’t bother me at all. I’m not recommending purchase, but I’m perfectly happy owning Berkshire, that… But we do not want… (Applause)

We do not want people to think when they buy into Berkshire that they’re buying something that’s undervalued, because it’s not. And we say in that fourth caveat on the prospectus that we want people to buy it only if they expect to be holders for a very long time. Charlie and I expect to be holders for a very long time, and in fact, you may see us up here sometime where we don’t know who the guy on next to us is, but we’ll put on an act though. The, we, you know, that is our attitude toward Berkshire. We do not want people to come in who think it’s going to be a hot stock or selling for more a year from now, because we don’t have the faintest idea whether it’s going to be selling for more or less a year from now. Never have had.

We do think that to the extent that Berkshire attracts a special class of shareholder that really looks at themselves as owning a part interest in a business, like they’d own a part of a farm or part of an apartment house, and they expect to hold it really for the rest of their lives, we think that it’s a perfectly sensible thing to do, because we’re doing it ourselves, but we don’t want to go beyond that. I’m not sure whether we got zone four. Can we go back there?

[00:37:07] Shareholder (Gordon Shepherd, Montreal): My name is Gordon Shepherd from Montreal. I wondered whether you had any plans for what to do with the money.

Warren Buffett [00:37:14] Well, the answer to that is in the prospectus, but the, we have no immediate plans for the money. But we’ve faced that situation a number of times. I mean, the money, the inflow of money and outflow of money should not be, in our view, attempted to be matched too carefully in this world, because you get investment and business opportunities at times that differ from the times that funds come in. And one of the most important disciplines in running a business, or managing investments, is that, is to not get your, not to try to coordinate your actions simply with the availability of cash.

Over time we found a way to use money. It’s much tougher for us to run $17 billion than it was when we had $20 million in the business. There’s no question about that, and we pointed that out many times, and it’ll get tougher still if we get larger, which I hope we do. But the fact that if $400 million comes in on this offering, or whatever, that’s really no different than $400 million coming in in some other manner. And when our float grows, we take in more money. When our earnings are retained, we take in more money. When we have, I forget what the check would have been on the Cap Cities transaction, but it was certainly well over a billion dollars that came in on a single day.

So money’s fungible, and we have to keep looking for bigger and bigger things as we go along, and that’s what we do focus on. But it doesn’t bother me to take it. It wouldn’t bother me if we weren’t taking it. It wouldn’t bother me if we took in three times as much. It doesn’t make a lot of difference. And we will have, we, the constant challenge for Charlie and me is to allocate capital as we go along, and it’s a nice challenge. Zone five.

[00:39:27] Shareholder: Hi there. Lead to Bro, longtime shareholder, I think going back a number of years now to when it was a little more intimate affair. Not quite sure whether I should look at you in the TV here or in real life on the stage, but anyway, I’m on the very right of you. And I see all the guards around you, and I see all the security and that sort of thing, and then I see this offering of the Class B, and I sort of wonder whether, from your perspective, you feel you might be in the same boat that the pope and the president are. And I mean this absolutely sincerely, because I don’t think that you have perhaps as good a handle as some of us do on the renown that you carry outside of Omaha, Nebraska.

People who have no idea what investments are about are fully aware of who you are, and when they see this offering, I think you may find that there are substantially more people who are interested in just having a piece of you for the sake of saying they have a piece of you than having absolutely any idea what they’re doing. And I noticed that on, I try to read the fine print here, on page 14, first paragraph, second line, you indicate some 50 million shares of Class B common stock may be offered. And so I’d like you to comment on this situation that you find yourself in, where you may be perhaps out of touch with the popularity that you have.

Warren Buffett [00:41:19] Well, my first reaction is maybe I should tell the, my Barbara, we could save the clippings and say, sell them. The, I don’t think it’s quite, I don’t think it’s quite as extreme as you say, but I, you know, I, in relation to the 50 million, first we have to authorize enough shares, because we are going to allow every share of Class A, or present common stock, but the Class A, to convert to B. So we have to have the shares authorized to take care of 30 times the present almost 2 million shares, so 36 million shares, in effect, are reserved for the present common stock. And as long as we were authorizing it, well, we need that much, or we wouldn’t have the shares actually available if everybody came around to convert. That’s not going to happen, but we still have to be prepared for it. We have no plans to issue a lot of shares.

The, but the point you mentioned, which I think you stressed a little more than I would have, but the, that is what we were worried about in terms of the unit trust. It’s that there are people that think that it can all happen again from this kind of a base, which, you know, is mathematically a joke, and Charlie and I would settle for one whole lot less, you know, right today. And we have done everything we can. I mean, all, if we hadn’t done this, the unit trust would have moved forward, and I think they would have cashed in on that phenomenon you suggested, and in a few years, you know, it would not, I would have been in a somewhat different position, because people can get very disillusioned if they have hopes that aren’t realized.

And we have done everything possible, I think, to filter out those who might have an unrealistic belief. Everyone should read a prospectus before they buy shares, and I think we’ve tailored, we’ve designed what we’re doing about as well as we can to moderate that phenomenon you’re talking about. There may be a few come in, but not too many. Charlie, do you have any thoughts on that?

Charlie Munger [00:43:44] Well, if we only issue the amount we’re now talking about, it’s sort of a non-event on Berkshire, be 1% or something, that of the… It solves the problem of these disreputable followers, and 1%, what does it matter? (Applause)

Warren Buffett [00:44:05] We, you heard that remark we were referring to Charlie earlier about, all I want to know is where I’m going to die, so I’ll never go there. Well, we think about that in terms of, we believe in reverse engineering, and how do we keep people from buying it who really are going to be unhappy, you know, a few years later. You know, it’s a little like singing country songs, you all, you should sing them backwards. That way you get your home back, and your auto back, and your wife back. Zone six. So we got, was right here.

[00:44:55] Shareholder (Rena Lowie, Chicago): Good morning. I’m Rena Lowie from Chicago, proud to be here.

Warren Buffett [00:45:01] Oh, over here. Okay.

[00:45:02] Shareholder (Rena Lowie, Chicago): I have a question that’s been asked me, and I really don’t know. Several people wanted to know if they could buy directly from the company.

Warren Buffett [00:45:14] The answer to that is no. But Salomon Brothers is the underwriter of the issue. They have 10, I think 37 or something, broker dealers, all, virtually all the major ones in the country, in the selling group. The cost to the company of doing this are really very, very low compared to any issue I’ve seen. When AT&T had their spinoff, or the sale of Lucent, which was close to a $3 billion deal, you know, their percentage costs were more than double what our costs will be, for example, on this offering of Berkshire. So it’s almost as if you’re buying it, the Class B holder is buying it from us, in terms of the, what I would call the frictional costs involved of getting the issue done. In fact, if we handle it ourselves, it might cost more. But the company itself is not a broker dealer, and it’s, it would require a whole group of different hoops to jump through in order to have a direct issue. It will be sold only through broker dealers.

Zone 7. This will come in from another room.

Here we are. There aren’t any questions at zone 7? No questions in zone 7. Zone 8? No questions from zone 8. Okay, then we’ll go back to zone one.

[00:46:58] Shareholder (Mike Rocker, Flint, Michigan): Mike Rocker from Flint, Michigan, God’s country. I noticed in the press, when the, this issue of the unit trust was going on, that there apparently also were some people trying to form mutual funds to carry Berkshire stock, which I kind of thought was a good idea, because there is one potential class of Berkshire owners that could only own Berkshire stock via either an open-end mutual fund or a closed-end mutual fund, and that is those thousands of teachers and hospital employees whose future retirement money is in 403(b) plans that are limited to investing in mutual funds only. And so I wonder if, first of all, if you were aware of that, and if so, if you considered that, and if not, if you might.

Warren Buffett [00:48:13] Yeah, well, the answer is I wasn’t aware of that, so it wasn’t considered. There are, of course, some mutual funds that own Berkshire shares, but there’s no all, all-Berkshire fund outstanding. I would say this, that if the law was set up to, in some way, to restrict investments of this group you’re talking about two options that involve mutual funds, but that don’t involve individual stocks, I would think it might even be regarded as a way around it if a fund don’t nothing but one stock. Because if you can’t buy General Motors directly under, I assume, the relevant rules or statutes on that, it would seem that a fund that own nothing but General Motors might be regarded as a way of getting around that.

But the answer is it was not considered. I don’t know where the rules are derived, whether they can be changed by some organization or they’re part of some statute. But if they’re part of some organization, by a vote of their directors they might be able to allow purchase of individual stocks within those plans that you describe. But if not, it does seem to me that an all one stock fund is, might be regarded as simply a way around the rules. Zone two.

[00:49:38] Shareholder (Alan Rank, Pittsburgh, Pennsylvania): Alan Rank, Pittsburgh, Pennsylvania. Have you determined what the symbol will be for the Class B?

Warren Buffett [00:49:45] The symbol? No, we haven’t.

[00:49:47] Shareholder (Alan Rank, Pittsburgh, Pennsylvania): May I make a suggestion? As a broker, the stocks that have come out and given theirselves Class A and Class B cause massive confusion. If there be any way to make the symbol something like BRB, and just keep it a simple three-letter symbol, it aids people both in following it on the tape, on CNBC. As brokers, four-letter symbols on the New York restrict a lot of things we can do as far as punching them in. If there’s any way you could keep the symbol for the B a simple one, two, or three letter symbol, it would be greatly appreciated.

Warren Buffett [00:50:24] Well, thanks for the suggestion on that. The exchange has generally been exceptionally cooperative and trying to work with us. I mean, a 10 share trading unit is no piece of cake for them, and I’m sure at times that they have wished we were a little more like some of the other companies that list on the exchange, but they, they’ve been very, very cooperative and helpful. And we are, they’ll, they listen to things we suggest, we listen to things they suggest, so we will try to do whatever facilitates things at the exchange and the reporting of prices, and it’s nothing we will try to impose on them, believe me. I have no favorite name that I’m looking for. So we will, we’ll see what they, what ideas they have, and we’ll include that suggestion. Zone three.

[00:51:20] Shareholder (Paula Finster, Tulsa, Oklahoma): Paula Finster from Tulsa, Oklahoma. Very glad to be here. I’m one of those few second generation. Finally finagled a ticket out of my dad, three years…

Warren Buffett [00:51:30] Her dad has a soda fountain, incidentally. If you’re ever in Tulsa, be sure to see him.

[00:51:37] Shareholder (Paula Finster, Tulsa, Oklahoma): He certainly does, and you’re certainly invited to come back. I was here three years ago for the movie theater, and considering the growth, I know you won’t leave your beloved Omaha, but maybe you could build a stadium with, that’s covered, considering the growth, with adequate parking. Here’s my question. You said there’s going to be unlimited offering, as much as they want. This question is not designed to get a rise out of Mr. Munger…

Warren Buffett [00:52:13] However, that’s not easy to do.

[00:52:16] Shareholder (Paula Finster, Tulsa, Oklahoma): Understood, considering the bridge game of yesterday. Anyway, my question is, you’re authorizing up to 1%. What happens if it goes bananas, as zone five suggested, and it goes greater? You said this 1% is yours. Is the next 1% yours? Is the next 1% ours? Do, I know we’re, are limited partners and you’re a controlling partner, but how far does this ball game go?

Warren Buffett [00:52:41] Well, in terms of the size of the offering, it, if, whatever the size of the offering, it affects everybody economically the same. I mean, it, our shares are no different than the ones of the people in this room. So we do not care from an economic standpoint whether the issue turns out to be approximately 1% or whether it was one and a half or 3/4 of 1%. It simply, as long as we’re not selling the stock below its true value, we are not going to be hurt by it, so that it’s inconsequential to us. We’re not going to be helped in any significant way by a large sale.

The, it would appear to me, we’re just a few days away from the offering, and it’s been out there a while, so I would doubt if there’s huge changes. But I don’t know the answer to that. I mean, that could depend on what happens in the general stock market, but I don’t think you’ll see any huge change in the offering. If there were a big change, we obviously would very promptly let the SEC know. The SEC is, as, wanted us, as we have seen changes in demand as we’ve gone along, promptly change the size of the offering, and the covering page gets modified, and we’ve done that. We’ve, as every day, as indications come along, we’ve tried to be responsive to their instructions on that. And the 350,000 shares is our best estimate as of last Friday, and we’ll look at it the next day or two, but I don’t think it’s going to change dramatically. I don’t know, though. I don’t want to, I’m giving you a definitive answer on that, but it’s just my, it’s a strong impression.

[00:54:29] Shareholder (Paula Finster, Tulsa, Oklahoma): Thank you.

Warren Buffett [00:54:30] Zone four.

[00:54:32] Shareholder (Mike Assael, New York City): Mike Assael from New York City, with a question for Charlie about his investment models. I’d like to know the most useful models on industry consolidation, vertical integration, and models which explain the special cases when it makes sense to invest in retailing stocks.

Warren Buffett [00:54:56] Ah, well, I think, I don’t want to interrupt you now, but I think we’ll save those to the general question and answer. This is only on the issuance of the Class B right now, but we’re glad to have that question later on. It’ll give Charlie time to figure out the answer, for one thing. (Applause) We’ll go through all of the questions regarding the Class B, and then we’ll have a vote on the class, authorization of the Class B, and then we’ll get into general questions and answers. Sir, somebody over there? Well, we’ll take another one from zone four, if there’s somebody…

[00:55:28] Shareholder (Mark Findidi, Connecticut): Monitor. Mark Findidi from Connecticut. I’ll apologize ahead, this isn’t meant to be an impotent question, or in any way, shape, or form. Do you think that the issuance of the B in any way might exact, in an effort to protect the folks who might be out there suckered in by the trust, if you will, in any way penalizes the A shareholders, either one, or might penalize them either, one, financially, or two, philosophically, in the Berk experience? I don’t mean that in any kind of elitist fashion, because I don’t think you’ve ever propagated that, Berk doesn’t propagate that, but clearly there’s a room full of people, or rooms full of people, who have made a commitment financially to show that their philosophy is with you. Does that get diminished? The other part of the question is, the trust, as you portrayed them, didn’t sound terribly attractive in a longer term. Would they perhaps have ultimately failed, as folks realized that they hadn’t gotten into what they thought?

Warren Buffett [00:56:30] Well, they might have, but I think the rub-off would have been on us rather than the promoters of the truck. Probably might have been on the promoters too, but the, in terms of the failure, the trust, I don’t mean failure in an absolute sense, but in terms of disappointing their investors. I really think if tens of thousands or hundreds of thousands of people had come into something that was sold as being an all-Berkshire type truck, trust, if people came away disappointed some years, I think they would tend to project that disappointment upon Berkshire fully as much as the promoter who sold the trust to, they might not even be able to find at that time.

The first question, you know, this, I don’t think, we wouldn’t be doing this if we thought it would hurt present shareholders, we, with much as we might detest something else that was going on. And we designed it so it, we felt that it wouldn’t hurt present shareholders. In terms of them having a philosophy, new shareholders having a philosophy similar to the present ones, we’ve tried to filter those out coming in. But I intend, after the offering, to send out a booklet, you know, kind of like a freshman at college, you know, orientation, greetings to Sashu, and we’ll send it to everybody, new shareholders and the old sh… explaining our philos… philosophy, and just as an orientation, of course, on the company. And we’ll get that out probably in a month or so after the offering settles down.

I don’t see any reason, that, you know, Berkshire has evolved over a long period of time. We had 12 shareholders at the annual meeting 15 years ago, and it, we seem to be able to retain the same class and group of shareholders in terms of people who really understand the business. It’s a different group than you find at other companies, and I think we can, as long as we’ve had this filter in effect operating as new people join us, I think we can keep it. Charlie?

Charlie Munger [00:58:40] Yeah, if the offering went wild and you issued 3% of the company new, you’re also taking in a billion odd dollars. It is a, it’s a non-event for us.

Warren Buffett [00:59:01] He’s very excitable. Don’t say anything to him. Zone five.

[00:59:11] Shareholder (Ed Johnson, Park City, Utah): Ed Johnson from Park City, Utah. As you receive the proceeds of the Class B sale and generate other cash, are you seeing opportunities out in the marketplace to continue to provide the kinds of returns that we’ve been fortunate enough to experience in the past?

Warren Buffett [00:59:35] With or without the sale of the B, we don’t see things to do that can maintain anything close to the average returns of the past. We’ve tried to convey that, and it becomes a mathematical absurdity to, money just won’t compound at that rate in this world. Absent extraordinary inflation, certainly won’t compound in real terms. So, absent the issue of the B, we are not looking at thing, we’re not seeing things, we’re not hoping to find things that match some of the things that we have found in the past relative to the capital base we’ve had in the past. But we have that problem with or without the B, and it is not changed in any, even, very minor degree, by the issuance of the B.

We are looking for things all of the time. Anytime we find anything that makes sense to us, we will do it. The harder part is to make sure that we don’t do something when we don’t find something that makes sense. I mean, that, that’s the bigger worry. And when we find them, we’ll, you know, they’ll come along, and you never have, you never know when’s going to happen. We run into businesses, I described a little bit of that in the annual report, almost by accident. We’ve had, contracted to make one purchase this year. The people who run it are here today, and it came about because I was attending a birthday party. And, you know, I’ll go to more the future now that… So, you know, it, things have not ended around here. We’ll find interesting things to do over time, but they can’t remotely be as profitable as the things we found in the past, simply because of the large capital base. Zone six.

[01:01:47] Shareholder (Matt Zuckerman, Miami): Hi, I’m Matt Zuckerman from Miami. I don’t know, I think Charlie is the same class as Ev Dirksen. You know, $3 billion will soon be talking about real money.

Warren Buffett [01:02:03] Yeah.

[01:02:04] Shareholder (Matt Zuckerman, Miami): The two questions I have basically are, one, number one, referring to the gentleman over here before who commented on your popularity, which will definitely affect the stock, don’t you think? And the second part of that is that even my wife’s beautician has put in for some shares of the stock, and he represents a small tip of a large group who are probably doing the same thing on the one hand, so that there’s going to be a large popular demand for the stock which probably is not reflected in the numbers that the selling brokers are getting from institutions. And number two, mutual funds themselves, in order to lend some panache or glamour or whatever to their portfolios, will certainly be sucking up Berkshire stock after this. And if you taken all of this into consideration when you decided upon the number of shares to go that you’re sending out, number one. And number two, that the reaction, at least in the first 14 days, of the public to the shares, which will probably be in the range of $100, might not send the B shares up high enough to make a very, very interesting spike in the price of the A stock.

Warren Buffett [01:03:21] Well, I, we’ve considered what you’re talking about. I think that the issue has been well enough publicized that the demand will largely be reflected on the books of the underwriter in a day or two, and I see no reason at all for a spike in the stock. I mean, the way we’ve designed it should really prevent that. We, and we tell people not to expect it. If any institution wants to buy it, if any individual wants to buy it, they’re going to have a chance to do it, and I don’t see any reason why there should be some, in, huge influx of people immediately subsequent to the offering that didn’t hear about it during the offering period. It’s interesting, I think most of the demand will be retail and small, and in a smaller holding, not so much institutional.

The, most new offerings are done in a manner where the idea is to have far more demand than supply, and therefore cause people to maybe order stock they didn’t even want, and just on the idea that this restricted supply will cause a big jump the first day, whether, you know, you’ve seen Yahoo or a number of other offerings. Personally, like that sort of distribution arrangement, because you’ll find that 30 to 40% of the issue will perhaps trade the first day, well, I think, and perhaps at a lot higher price. I think there’s something a little wrong with that kind of an offering, because the company obviously isn’t getting proceeds that are equivalent to what people are willing to pay, and favored customers get the chance to flip the stock and really are getting paid an exorbitant underwriting fee themselves, even though they’re called purchasers, because they sell it the first day.

We will be very interested in seeing the volume in the B stock the first couple of days relative to the amount of the issuance, and I will be disappointed, and I’ll be surprised, if the trading volume in the B stock the first couple days, related to the whatever the size of the issue is, turns out to be anywhere near as high as with most new issues. I think that we will have a better success in finding people who really want to own it and who did not buy it to flip it, I think, by this method of distribution. But we’ll have a test of that. We will see what happens on trading volume, and I invite you to look at the volume and compare it to the amount we issue, and then look at that relative to other new issues this year, and just see how successful we were in finding real investors rather than people who were buying it to sell it to somebody else the next day. Let’s see, was that zone six? I guess we go to zone one.

Charlie Munger [01:06:39] Maybe we can vote.

Warren Buffett [01:06:41] Yeah, but I don’t want to cut off… Charlie says maybe we can vote, but I do, I want people to have their questions… Well, it just encourages it when you do that. I want to be sure people get their questions answered on this. I don’t want to prolong it beyond… If you feel your question has been 95% answered by an earlier question, I hope you’ll skip asking it. But we do want to have people who have questions about it answered, because I can tell by commentary and letters I’ve received that some people have genuine concerns. Yes?

[01:07:26] Shareholder (Jan Anglin, Southern Indiana): My concern… My name is Jan Anglin. I’m from Southern Indiana, and this is my first Berkshire meeting.

Warren Buffett [01:07:33] Good.

[01:07:34] Shareholder (Jan Anglin, Southern Indiana): I did have a concern about the B shares that’s less business and more, I guess it would be concerned with your and Mr. Munger’s personal safety. I often see your picture in the newspaper, and I certainly don’t mind seeing it on financial magazines, but now it’s kind of like proliferating. I don’t like the idea that you are so visible. That bothers me. It’s… I mean, do you understand what I’m saying?

Warren Buffett [01:08:04] Oh, I understand exactly. Right. It’s occurred to me. I appreciate that, and I… but the answer is there’s no other way. I mean, if over time, in terms of what happens and, as it grows, you get more visible, basically.

[01:08:18] Shareholder (Jan Anglin, Southern Indiana): I know, but along with the B shares and things, can you kind of like be quotable but less available for photos?

Warren Buffett [01:08:25] No. Well, I normally am. I… if you’ve noticed, in terms of interviews or anything of sort, I do not do them. I’ve been invited to go on all of the news shows, and I basically don’t do it. Frankly, with the shareholders, I feel differently about this group. I’m delighted to see everybody come here, and I enjoy getting together with the shareholders. M, I think the real protection is, is it if we done something that had caused the stock to balloon way up and then come way down, I might have had to be a little more careful.

Charlie Munger [01:09:04] I think she has a very good idea. Having seen that acting, I think hereafter maybe you should be the voice of Mickey Mouse.

Warren Buffett [01:09:15] I do appreciate the sentiment on it very much, and it… there is… it is unavoidable to a fair degree. Although Charlie may have thought I wasn’t pushed into those acting jobs. Zone two.

[01:09:30] Shareholder (Joe Greer, Omaha, Nebraska): Oh, this Joe Greer from Omaha, Nebraska, of all places. Regarding the conversion privilege, is there a time limit on the converting from the A to the B?

Warren Buffett [01:09:43] No. That’s a good… I’m glad you asked that question. That’s a good… The first five days or so after issuance, of business days, there’s no conversion. But after that, you’ll be able to convert until Judgment Day. It… it’s forever convertible from A to B, but it’s not convertible from B to A. So there’s no need to convert it until you have a reason to do so. That… and as I pointed out, there’s a very slight disadvantage in converting it. I wouldn’t until I had a need. I would not convert it. Zone three.

[01:10:21] Shareholder (Scott Dowling, Redmond, Washington): Scott Dowling from Redmond, Washington. Kind of related to this question, as an A shareholder, I can only see… we only two reasons to convert A shares into B shares, one of them being gifting reasons. And in regards to that, how does one convert A shares into B?

Warren Buffett [01:10:40] Yeah, that… yeah, there are instructions on that in the proxy statement as to how that… I guess it’s in the annual report too, that it describes how to do it. But basically, you get in touch with the Bank of Boston to do that and proceed from there. Or if you have your shares with a broker, you would instruct your broker to do it. Zone four.

[01:11:04] Shareholder (Ruth Owades, San Francisco): Good morning. I’m Ruth Owades from San Francisco. I wondered, how did you decide that the ratio of the B’s should be 30 to 1 instead of 300 to 1 or something in between?

Warren Buffett [01:11:16] Yeah, we wanted to have something that was roughly… would trade initially, at least, in the $1,000 range. We thought it very unlikely that anyone would find it commercially feasible to set up a trust that offered units that were denominated much below that. So that’s as low as we felt we had to go. And we did not want to signal in any way that, you know, some sort of last chance or something like that to get in for some very low sum, for people that, you know, just had some wishes that they could turn $100 into 100,000 or something. I get letters from people that, you know, think that somehow that can be done. It can’t be done. And we don’t want to appeal subliminally or any other way to people who harbor those hopes. I’m sympathetic with them, but we don’t have the answer to that. So we went down to the level to match the unit trust. Zone five.

We’ll try and do the… we’ll try and end the questions on the B fairly soon. But I don’t want anybody that feels if they got a… got some reservations about this not to have a shot at asking their question.

[01:12:30] Shareholder (Bob McClure, Singapore): My name is Bob McClure. I live in Singapore. The way I figure it, the sale of the B shares, at the price they will probably be sold, will give an immediate boost to the book value of Berkshire Hathaway. So as far as I’m concerned, the more the merrier. Can you give us your thinking on that, the accounting treatment, how this will affect the book value of…

Warren Buffett [01:12:54] Well, any sell shares we sell at the equivalent per A share of in the range of 33,000 or thereabouts, where the stock is selling now, will increase the book value per share. But that does not mean it increases the intrinsic value per share. I’ve said many times in the report, we use book value as a proxy in tracking a movement of intrinsic value, but it does not represent anything like intrinsic value per share. And the key is not what it does to book value per share but what it does to intrinsic value per share. And, you know, we believe the intrinsic value is materially higher than the book value. We don’t spoil your fund by ever giving you a number. But we do not regard the fact that it increases the book value per share as being any kind of a determinant in deciding to issue the shares. But it will have that consequence mathematically, that the key is the relation to intrinsic value. Zone six. There was a question over here. Any questions in six? Behind you.

[01:14:11] Shareholder: Your problem seems to be that you’ve attracted a fair number of potential shareholders that don’t have a way of estimating intrinsic value or developing expectations about what Berkshire’s future prospects are. Do you have any suggestions about how they might do that, short of the general guidance that you can’t continue to compound your intrinsic value at the same high rate that you have in the past because of your asset base, and that you don’t believe the share is undervalued?

Warren Buffett [01:14:57] Yeah. Well, we’ll probably talk more in the general question and answer period about our various businesses. But we simply try to give you all of the information about our businesses, in a large general way, that Charlie and I consider important and that we would want if our positions were reversed. I can assure you that if all Charlie and I knew about our businesses, what we publicly disclosed, it would not change our estimates from what they might be from being intimately involved with the businesses. The facts are out regarding what we do.

So you are in the same position, to the extent that you have followed our kind of businesses and understand industry conditions and all of that. And we’ll continue to do that. We essentially regard you as our partners, and we tell… we try to tell you exactly what we as partners would want to know if you were running the place. And we’ll continue to do that. We won’t tell you a number because we don’t know the number. We have a range in our mind. Things change that range over time. And we’d probably get in all kinds of trouble if we tried to put out that range. But, and Charlie and I would not come up with exactly the same range, but they’d be pretty close. We’ll talk more about that a little later. We do have questions now from zone seven and eight in the other room, so we’ll take on zone seven, please.

[01:16:31] Unidentified speaker: I guess you’ve answered our questions in seven.

Warren Buffett [01:16:34] Took care of zone seven. How about zone eight?

[01:16:36] Unidentified speaker: No questions from zone 8.

Warren Buffett [01:16:38] Well. (Applause) Okay, I think at this point we can move on to general questions after we have this vote. And then if you have another question or two that comes up during the general question and answer period, I’ll be glad to… we’ll be glad to work those in at that time. So we are now at the point… is there a motion to adopt the board of directors recommendation?

[01:17:05] Unidentified speaker: I move the adoption of the amendment to the Fourth Article of the restated certific… certificate of incorporation is set forth in Exhibit A of the company’s proxy statement for this meeting.

[01:17:14] Unidentified speaker: I second the motion.

Warren Buffett [01:17:16] The motion has been made and second to adopt the proposed amendment to the certificate of corporation. It says here, “Is there any discussion?” But I’m not going to say that. We are ready to act upon the motion. If there are any shareholders voting in person, they should now mark their ballot on the proposed amendment to the certificate of incorporation and allow the ballots to be delivered to the inspector of elections. With the proxy holders, please all submit to the inspector of elections a ballot on the proposed amendment, voting the proxies in accordance with the instructions they have received. Mr. Fitzsimmons, when you’re ready, you may give your report.

RFRobert Fitzsimmons [01:17:54] My report… my report is ready. The ballot of the proxy holders received through last Friday cast not less than 97,98… votes in favor of the proposed amendment. That number far exceeds the majority of the number of all shares outstanding. The certification required by Delaware law regarding the precise count of the votes, including the votes cast in person at this meeting, will be given to the secretary to be placed with the minutes of this meeting.

Warren Buffett [01:18:18] Thank you, Mr. Fitzsimmons. The amendment to the certificate of incorporation is set forth and Exhibit A to the proxy statement for this meeting is approved. After adjournment of the business meeting, I will respond to questions that you may have that relate to the business of Berkshire but do not call for any action at this meeting. Anyone have any further business to come before this meeting before we adjourn? If not, I recognize Mr. Walter Scott Jr. to place a motion before the meeting.

WSWalter Scott Jr. [01:18:47] I move this meeting to be adjourned.

[01:18:50] Unidentified speaker: I second the motion.

Warren Buffett [01:18:51] 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. The meeting’s a… (Applause) …jour.

Now we’ll move to a… to general questions. And we’ll do it by the same zone system as I said earlier. Any of you free, obviously, to leave at any time. We will break formally at noon and reconvene about 15 minutes later, at you’ve all had a chance to buy a sandwich. And you can… those in the other rooms can come in here. And we will go from then until about 3:00. So we’ll start in with zone one.

[01:19:35] Shareholder (Will Jacks, Chicago): Okay. I’m Will Jacks from Chicago. I’m sort of representing Benjamin Graham today, the question he might ask. You talked earlier about how you… about the value of your shares, the A share, let’s say, cu the B is tied to the A. But, and I know I don’t expect a complete answer, but generally, how would you go about placing a value on the A shares?

Warren Buffett [01:20:06] Yeah. Well, that’s obviously a key question. As I’ve said, we try to give you the information. But I think people, to the extent they’ve made a mistake in the past in valuing Berkshire, and they have made this mistake over time, including many commentators, including some in tions, is to look at it as simply a breakup value to our businesses. I mean, you know, you can… you could do the same thing with General Electric, with a magnificently run operation by Jack Welch. But I don’t think the way you should look at a business like General Electric is to think about what would happen if they sold each division today, paid the taxes and then distributed the proceeds. Or, and that has tended to be the case with many people looking at Berkshire, looking at it on a static basis. And that is not the way that the… Charlie and I have looked at it over time.

It lends itself a little more to that kind of analysis because we have a lot of money in marketable securities. But we have a lot of money and other things too. And the question of Berkshire, in valuing the intrinsic value of any business, of course, is what is going to be the stream of cash over many years in the future, in fact all of the years in the future, discounted back in an appropriate interest rate. I’ve talked about that in the past in the annual report. Berkshire is a collection of businesses, and some of which we own in their entirety, some of which we own part of. And some of those businesses have very interesting dynamics to them.

And they… the value of our insurance business, for example. If you go back 26… what was it, 28 years or so since we… 29, I guess, since we bought it from Jack Ringwalt. We paid 8.7 million, I believe, 8.4… 8.7 million for two companies that Jack controlled. If you had the foresight at that time to… and I didn’t, but if you had the foresight at that time to see what that would develop out of that insurance business, you would have come to the conclusion that their value to us was going to be far, far greater than the value at which they were then carried on our balance sheet. They were part of a business which had enormous potential. And that’s been probably the most significant asset that’s been developed at Berkshire.

But right now we have over seven… right at 7 billion, over 7 billion of float that’s been developed from our insurance business. We couldn’t foresee that 25 or 30 years ago. But it would have been a big mistake to think in terms of the book value of that business being representative of its actual value to us over time, if it was run right. And that situation probably prevails today. So it’s a… Berkshire is a group of unbalance very fine businesses to which we hope to add. The intrinsic value will be effective by the job we do in allocating capital. It’ll be affected by the job our managers do in running their businesses. It’ll be affected by some items that we don’t foresee now and perhaps have no control over.

But it is not measured essentially by what we could sell each separate business for and pay the tax on now. We haven’t run it that way. We’ve run it so that we get the use of a lot of capital at very low costs. Between deferred taxes and our insurance float, we have some 12 billion or so on the liability side that is, we think, will be a very low cost. And that’s doesn’t show as an asset, but it can be quite valuable. Charlie, you want to…

Charlie Munger [01:24:10] No, I don’t think I’ve got anything to add to that.

Warren Buffett [01:24:16] No? I was all set to write it down too. Zone two, please.

[01:24:22] Shareholder (Tim Medley, Jackson, Mississippi): Mr. Buffett, Mr. Munger, I’m Tim Medley from Jackson, Mississippi. My question is an allocation of capital one. You’ve indicated that one thing you like in companies is a willingness on the part of management to repurchase its own shares. Right. I wonder if you would talk for a minute about your own frame of reference on repurchases when it appears that the current price of the stock is rich in relation to its intrinsic value. And some have said that with the right company, ongoing repurchases of stock should be made irrespective of the price. So would you speak for a moment as to how you think it pencils out when the current price of the stock is rich in relation to its intrinsic value?

Warren Buffett [01:25:22] Yeah. If you’re repurchasing shares above a rationally calculated intrinsic value, you are harming your shareholders, just as if you issue shares beneath that figure, you are harming your shareholders. That’s… that’s a truism. Now, the tough part of that, of course, is coming up with the intrinsic value. And for example, a good example might be Coca-Cola. I think a number of people might have thought Coca-Cola was repurchased… purchasing shares at a very high price, because they’ll look at book value or PE ratios. But there’s a lot more to intrinsic value than book value and PE ratios. And any… anytime anybody gives you some simplified formula for figuring it out, forget it. It… you have to understand the business.

The people who understood that business well, the management, have understood and been very forthright about saying so over the years, that by repurchasing their shares, they are adding to the value per share for remaining shareholders. And like I say, people who didn’t understand Coca-Cola, or who thought mechanistic methods of valuation could… should take precedence, really misjudged the value to the Coca-Cola Company of those repurchases. So we favor, when you have a wonderful business, we favor using funds that are generated that business to make the business even more wonderful. And we favor repurchasing shares if those shares are below intrinsic value.

And I would say that if it’s a really wonderful business, we probably come up with higher intrinsic values than most people do. I… we have great respect, Charlie and I. We’ve… I think it’s developed over the years. We have enormous respect for the power of a really outstanding business, and we recognize how scarce they are. And if a management wishes to further intensify our ownership by repurchasing shares, we applaud. We own… we just went over 8% of the Coca-Cola Company probably in the last three or so months, by a very tiny fraction. But we had a second purchase one time. But our percentage interest in the Coca-Cola Company has gone up significantly through their repurchases, and we are better off because they have bought those shares at what looked like, to some people, perhaps high prices. And we thought they were wrong at the time, and I think now it’s been indicated that, or proven.

So I urge you, if you’re trying to decide on the wisdom of repurchases or of share issuances, that you don’t think in terms of book value, you don’t think in terms of specific PEs, you don’t think in terms of any little model. But do you think in terms of what would you really… a, pick businesses you can understand, and then think what you really would pay to be in those businesses. And that’s what counts over time, is whether the repurchases are made it a… at a discount from that figure.

And I would say, with the companies that we own shares in, we… our interest in GEICO went from 33 or so percent to 50% over a, oh, 15 year or so period, simply through repurchases. And we benefited significantly. So did every other shareholder, I might add, that sted with the company. And we benefited in no way just proportionate to them. But that was a very wise action on their part. And there too, they were all usually buying that stock at at least double book value. And you could compare it to other insurance stocks and say, “Well, that’s too much to pay.” But GEICO wasn’t an insurance company that was comparable to other insurance companies. It was a very different sort of business. And they were very wise, in my view, to be following that course of action. Charlie? Y… Zone three.

[01:29:25] Shareholder (Elaine Cohen, San Diego): Oh, sorry. I’m Elaine Cohen from San Diego. I’m a little confused about how the B shares are going to be moving. If they’re 1/30th of the A shares, when they get out on the market, are they always going to be 1/30th of the A shares? And if they are, is that going to dilute the earnings of the A shares? Could you just extend…

Warren Buffett [01:29:48] Yeah, it won’t… it won’t dilute the… it won’t dilute the earnings or value of the A shares, as long as we use the money reasonably effectively that is produced. As I mentioned earlier, you… if it happens to be 1%, you’ll own 1% less of all these other things. On the other hand, we’ll have close to $400 million more of cash. So it will not, in our view, it will not dilute the value of the A. I expect, over time, that the B, a very large percentage of the time, will be selling very close to a 30th. But it could sell for less than that ratio. It can’t sell for any significant amount more than that ratio, or arbitrage will eat away at any slight premium. I think that takes care of that. Zone four.

[01:30:39] Shareholder (Hugh Stephenson, Atlanta, Georgia): Mr. Buffett, my name is Hugh Stephenson. I’m a shareholder from Atlanta, Georgia. My question involves a company’s interest in Wells Fargo. As you know, Wells Fargo, like most banks, has a very expensive branch system for deposit gathering and servicing their customers. As I guess you know, they also have move more into branches in supermarkets and in online banking. That seems to have the potential to very significantly reduce their cost relative to the branch system. Would you comment on how you think that might play out and how significant it might be?

Warren Buffett [01:31:15] Well, the question… you’re right. Wells Fargo has been a leader in moving into supermarkets. They’ve got a couple different format they’ve used. And they’ve been a… they’ve certainly been a leader in the online banking services. Unfortunately, in banking, you know, it’s a little hard to have any secret formulas. Coca-Cola has 7X down there in the vaults of the, what used to be the Trust Company of Georgia, now SunTrust. But in the banking business, anything you do, your competitors can copy.

Nevertheless, there’s a… there is an advantage, and sometimes it can be quite a significant advantage, in being first, and learning more about different distribution methods. And I think Wells Fargo has done a terrific job in learning that. I think they’ve got… they’ve got some advantages. They… but they aren’t advantages that other people can’t work at coping and chipping away at. But it’s a good management. They’ve done a… they’ve done a very good job of seizing on that particular trend in supermarkets and as such… in supermarket market, and as such, they are deposit gathering operation. And every other bank in the world will be looking, though, to see how that works, not only there but at other banks, to figure out whether they can copy it. Charlie? Okay. Zone five.

[01:32:40] Shareholder (Alan Parsow, Omaha): My name is Alan Parsow from Omaha. Berkshire has increased the rate of growth in its insurance float in excess of 20% a year since 1967. In regards to GEICO, its rate of growth, what is its historical rate of growth been in its insurance float, and what impact will it have on the rate of growth in the overall Berkshire insurance float?

Warren Buffett [01:33:04] Well, I would say that GEICO is a huge plus to Berkshire. Now, we owned 50% of it before. I mean, we’ve had a… we’ve benefited from our GEICO investment in a big way ever since 1976. So it’s not a… it’s not an entirely a new benefit that’s… that’s coming in. We paid a good price for GEICO, but it is a… it is a terrific company. It has outstanding management. It has a… it has a low-cost method of distribution, which is very difficult for people to… I mean, everybody wants to have that, but they… very few come close to it. The management is focused on bringing costs down even further and widening that competitive moat.

GEICO, I personally think that, just from what I see, that GEICO, I would… I would think GEICO’s growth rate is likely to be greater, at least in the future that I can see, over where it is been in the past. But been perfectly satisfactory in the past. I think there are some advantages to it being part of Berkshire, in that there are costs attached to bringing new business on the books, and we care not at all about reported quarterly earnings. GEICO was relatively insensitive to those before, and that’s a compliment when I say that. But they had some more pressure on them in respect to reported earnings than they will have as part of Berkshire.

And I think there’s some really big opportunities in terms of what can be done with GEICO as part… as part of Berkshire. So I think, five years from now, you’ll be very happy with the fact that we own 100% of GEICO. And I think you will see that, as marvelous a company as GEICO was independently, as an independent company, it will… it will flourish maybe even a bit more as being part of Berkshire. Not because we bring anything to the party. I mean, the management will continue to run it autonomously. But there’s… there are some advantages for it in being part of a larger enterprise. Zone six.

[01:35:37] Shareholder (Steven Tuchner, Toronto, Canada): Mr. Buffett, my name is Steven Tuchner. I’m a shareholder from Toronto, Canada. And my question concerns the valuation of Berkshire shares. Given the large number and dollar size of the private businesses recorded at historical cost which Berkshire owns, shouldn’t the multiple to book that the stock trades at essentially expand over time to reflect the increases in intrinsic value of the private holdings? And I cite Buffalo News, on the books at essentially, I think, around zero, and even GEICO now will be on the books at probably between 3 and 4 billion, worth more than that, as examples of the disparity between intrinsic value and book value.

Warren Buffett [01:36:21] Most of the businesses that we own all of, or at least 80% of, are carried on the books at considerably less than there now… now worth. And with some of them it’s dramatic. Although it’s not dramatic compared to a $40 billion total market valuation for Berkshire, it’s dramatic relative to the carrying price. Because when we bought… when we bought See’s Candy for an effective 25 million in 1972, it was earning 4 million pre-tax. It earned over 50 million pre-tax last year. When we bought the Buffalo News, it was making nothing. Paid 30 and a fraction million, and it’s now… now earning maybe 45 million. And that… we’ve got a number of business. And GEICO is worth more than we carry it for because of the accounting peculiarities of the first 50%.

So it is true that overwhelmingly our businesses are worth something more than intrinsic value, than book value, and in many cases very substantially more. Although that’s reflected in the market price of our stock. I don’t think you can go from year to year and trace the intrinsic value precisely by changes in book value. We use changes in book values a very rough guide as to the movement. And sometimes I comment, there have been certain annual reports where I’ve said our intrinsic values grew more than the proportional change in book value, and there’s been others where I’ve said I thought it was roughly the same. So I don’t think you can use it as a… stick some multiplier on it and come up with a precise guide, a precise number. But I do think it’s a guide to movement.

Our insurance business, though, is the most dramatic case of dollar difference between book value and intrinsic value. I mean, the number has gotten very big over time there. And I personally think it will tend to get bigger, because I think GEICO will grow and I think our other businesses will do well. The trick, of course, is to take the new capital as it comes along, and not from the issuance of the B, because that’s relatively small compared to the amount of capital we will just generate from operations. Our float will grow from year to year. Our earnings will be retained. And we’ve got to go out and find things to do that, three or five years from now, that people say, “Well, that’s worth more than the book value.” And that’s a job. It’s a big… it’s a tougher job than it was. But it’s kind of fun. Zone 7.

[01:38:56] Shareholder (Jim Elliot, Minneapolis): Yes, my name is Jim Elliot. I’m from Minneapolis. I wonder if you could help me with an upside scenario, where the B shares, after they’re issued, are limited, and there’s not a significant reissue afterwards. The A shareholders are somewhat reluctant to convert, and you have a run on the B shares where, let’s say, it goes to $2,000 a share. Do we then have the tail wagon the dog, where the 2,000 command is six… $60,000 price on the A shares? And, you know, what does the… this arbitrage take care of that, or what… what do we do in that case?

Warren Buffett [01:39:37] If there… if there is a… if there is demand for the B that pushes the price up somewhat, it will produce conversion from the A. I mean, the only way the B will be able to get… we just pick a figure. If it were to get to $1,200, there is no way that the A could be selling appreciably below 36,000. And I don’t think… I think that introducing the B into the equation may mean… it will mean that there will be some people who like a lower denomination stock and come in. But it takes a lot of… a lot of that to, in an appreciable way, affect $40 billion worth of what is now a stock. So, you know, if there were mental demand of $100 million a year or something like that, that’s a little more than the demand that might otherwise go into the A. But I don’t… I do not see it producing anything in the way of a big movement. But you’re quite correct in that there’s no way that the B stock can go up and not really force some conversion from the A. It’ll… I think it’ll be minor. Zone 8.

[01:40:46] Shareholder (Rick Merliof, Oakland, California): Hello, this is Rick Merliof from Oakland, California. I wanted to ask you about World Book Encyclopedia.

Warren Buffett [01:40:54] Yeah.

[01:40:55] Shareholder (Rick Merliof, Oakland, California): World Book seems to me to be an example where Berkshire has invested in technology without necessarily intending to. I would expect that in 5 or 10 years, it’s going to be real tough to sell a paper encyclopedia, because at that time you’ll probably be able to buy the computer and the electronic encyclopedia for less than the paper encyclopedia. Up till now, I haven’t had the impression that World Book has been as aggressive as its competitors in marketing and developing its electronic product. It’s been the highest price that I have seen of the competition. It’s… it asked, at least a year ago, its list price was 600, and the competition was 80 to 100. You sold as low as 100 on special promotions, but it… I don’t think that was the list. A year ago, you were still selling by direct sales. I have not yet seen it in a mass market software store. I’ve never seen it bundled with a computer. And I have seen one newspaper review of electronic encyclopedias that mentioned the World Book print version but didn’t seem to be aware that a World Book electronic version was available, which it was at that time.

In terms of the product itself, we have both the World Book and the Grolier’s at our house. The Grolier’s came with a computer. And both encyclopedias, in this last year, solicited us to buy an upgrade. World Book was asking $85, Grolier’s was asking 30. But in addition, I ended up buying only the Grolier’s, because it addressed my biggest disappointment on the original version of both of them, which was… it’s sort of a, in a way, a minor issue, but I thought it was relevant for kids doing school reports. Neither one allows you to print out a very big percentage of the pictures in the encyclopedia. They have a lot of pictures, but you can’t print them. And you can get a color inkjet printer for under 200 bucks these days, so it’s real practical to print things out.

The World Book made no mention of having any improvement in this area. The Grolier said you can print out almost all the pictures, and I have found, since we got the upgrade, I found that to be true. So I’m concerned that… I don’t… I’m not an expert on this, but I don’t think World Book is as aggressive in either developing or marketing its electronic encyclopedia. So my question is, do you plan to become aggressive in this area and a leader in the electronic technology, or have you considered selling your electronic business and just getting out of it?

Warren Buffett [01:43:40] Yeah. We won’t sell the electronic business, that I can tell you. You’re quite correct. Some of the technical stuff, I’m not very good at. I have a little trouble turning on the light switch. But the… in terms of the… in terms of the bundled product, which is the encyclopedia that is offered with the purchase of a new computer, there’s no question that that’s become a large business in units. It’s not so large in terms of dollars, because those units bundled with an original equipment sale are very low. Actually, Encarta has probably… I’m sure has sold, you know, many, many millions of units bundled with a new encyclopedia. It doesn’t necessarily produce a lot of dollars, but it produces a lot of units out there.

We at World Book Encyclopedia… some of you may not have notic… but Encyclopedia Britannica has… is, within the last couple of weeks, announced the cessation of direct District unit sales of encyclopedias. Print encyclopedias in the country have gone down very significantly. Have gone down very significantly in the last few years, as h… they have at World Book. We change the… we are in the process of changing, and have already changed in some parts of the country, the distribution system, because we are going to see what can be made to work, if anything, in the direct distribution. There are some indications that we may be able to make money in that business, but with a different cost structure than before.

And it… we… well, we’ll know more about that. We’re not that far along, because we changed the distribution system within the last, or partially changed it, within the last few months. We… it is… it’s not easy to figure out how to make money in either the electronic or print encyclopedia end of the business. And we have some ideas in the electronic end that we’ll know a lot more about in about six months or so. But I can’t really… I don’t want to go into any detail on those at present. I’ve got the electronic product myself. It’s a first class product. We’ve got ideas about how to make it an even better product. And we have taken a lot of costs out of the print end of the business. We’ll be putting some of those into the electronic end. But we’ve taken a lot of cost out.

It may well be that it’ll be a workable business for us, even though it isn’t for anybody else. But we’ll… the jury still out on that. It is not the business that was five years ago, and I don’t think it will be the business that it was 5 years ago, because the world has changed in some ways on that. But we’re… we will not sell World Book. That I can just… I’ll state that unequivocally. We will not sell electronic World Book. We are in the business to stay. But we are groping a bit in terms of figuring out a configuration that will produce decent profits for us and sell a lot of World Books in the process. Charlie?

Charlie Munger [01:47:14] Yeah, we don’t have any way of avoiding declines in some of our businesses some of the time. Blue Chip Stamps once sold stamps at the rate of $120 million a year. Now it’s about $200,000 a year. So we lose some. We were in the windmill business many years ago. We try to make… we, you know, we think plenty about the problems, but there are… there are industry problems. I was in anthracite coal at one time too, at the street railways. I’ve seen them all.

Warren Buffett [01:48:00] The… but World Book is a first class product. It’s product I use, product Charlie uses. And there is, in… through an electronic means, you can deliver information at costs far, far less than… I mean, unbelievably less than was the case not that many years ago. And the world, in many forms, will be adjusting to that, not just in encyclopedias. And it affects some of the businesses we’re in. And it’s… it’s something we think about. But it’s very unlikely that the… Charlie and I are going to be smarter than the rest of the world in terms of the electronic world. I mean, we are looking at it as something where we’re looking for the obvious and something that is within our capability of doing something about. But we’re not… we’re not trying to beat people at their own game, where we’re not very good at the game. Zone one.

[01:49:03] Shareholder (Richard Charlton, Canada): Mr. Buffett. Mr. Buffett, Richard Charlton from Canada. One of the high… also, one of the highlights for me in coming to the annual meeting for the past seven or eight years was the way that you dealt with the question that was inevitably asked by a new shareholder as to why you will not split your shares. I know how much it has meant to you to keep the shares trading in an exclusive way. And you have been my mentor for the last 17 years. And I think that what you’re doing in splitting these shares in order to protect the public, and indirectly Berkshire shareholders, but most of the… to protect the public, of your and Mr. Munger’s tremendous integrity. And you’re setting a fantastic example for corporate America, and I salute you, sir. And I thank you very much.

Warren Buffett [01:50:11] Thank you. Thank you. Well, I hate to leave zone one after that, but we’ll go on to zone two.

[01:50:20] Shareholder (Wesley Jack, Oklahoma City, Oklahoma): Thank you. Wesley Jack from Oklahoma City, Oklahoma. As a stock broker, I can say I definitely don’t like it, and I appreciate your plan for the B shares. But as, along with the rest of the shareholders, what we hope, that the shares go up in value in the future. Don’t you see a problem with them coming back with this idea in the future, on the unit…

Warren Buffett [01:50:47] You mean on the issuance of unit trust?

[01:50:50] Shareholder (Wesley Jack, Oklahoma City, Oklahoma): Yes.

Warren Buffett [01:50:50] I don’t see any problem, because the B will be out there, and it is a superior product. Whatever its absolute merits may be, on a relative basis it is a superior product to anything that is going to carry a big commission to a salesperson in a lot of annual costs. So I think, my guess is, we’ve taken care of that problem. I wish it hadn’t come up, but it… but it’s… I would think that be very difficult for anyone to honestly offer a product, derivative type product, through a unit trust that would be superior to buying the product that will be available.

Charlie Munger [01:51:32] I think he’s afraid that the B will go up to the place where the whole story comes again. And I must say that if that were to happen, we’d like it.

Warren Buffett [01:51:44] Well, we’d like it only if it reflected, you know, underlying values. But yeah, we have a very strange attitude on that. I mean, most managements feel that the… on the price of their shares, that the higher the better. And that’s an understandable feeling. But the trouble is, the game isn’t over at any time. We really feel the fairer the better. Our goal is that every shareholder participates in the progress that Berkshire makes, during… as a business, during their holding period. In other words, we don’t want one party getting wealthy off the other. We want them to share based on the gain and value of the business. And to the extent that, if the stock got way overvalued or way undervalued, you know, that may make one party, in first case the seller, in the second case the buyer, very happy. But there’s somebody on the other side of the transaction.

In economics, you know, the most important question, maybe important beyond economics too, but when everybody… somebody tells you something, you know, the first question to ask yourself is, “And then what?” And we tend to do that around Berkshire. And so the stock going up is not an end of itself, because it’s the next question, is, “And then what?” And to the extent that the stock goes up because the intrinsic value goes up, everyone is getting their fair share of the pie as they go along. To the extent it exceeds that in some way, the selling shareholder gets a benefit, but the entering shareholder is a… the disadvantage.

And we really like the idea of the price tracking intrinsic value over time. And we think that by having the right kind of shareholders, and by communicating with them properly, and following the right kind of policies, that we can come as close to that as is attainable in a world where markets essentially are fairly volatile. And so far, I think it’s worked out pretty well that way. But the intention is to, and the goal is to, keep it that way.

One thing to remember, in the end, the owners of businesses in aggregate cannot come out any way better than the businesses come out. I mean, you can… the businesses are the… and not just our business, I’m talking about all American business. The profitability of American business determines the profitability of what the owners of American business have. And you can forget all about the little ticker symbols and everything else. The owners suffer to the extent that they have some extra costs imposed, in brokerage commissions, fees, all kinds of things, that diminishes the return from the business. But no one has figured out yet how to perpetually have owners do better than their businesses. And our idea is to have them do it as they go along, in proportion to the gain that occurs during their tenure as a shareholder. And that isn’t easy to do, and it’s not attained perfectly, but that is… that’s the goal as we go along. Zone three.

[01:54:46] Shareholder (Maurus Spence): More… Maurus Spence. And I have a serious question and then a less serious question. First, the less serious. You said that you and Charlie had lost, between you, 100 pound. I was curious who had lost more.

Warren Buffett [01:55:00] No, no. I said the board had lost 100 pounds. I have some members of the board who would take umbrage the fact that they weren’t included in that total.

[01:55:10] Shareholder (Maurus Spence): Okay. Who lo… who lost…

Warren Buffett [01:55:12] Charlie and I are… we’re pretty close at the moment, aren’t we?

Charlie Munger [01:55:16] Modesty prof…

[01:55:16] Shareholder (Maurus Spence): I must say you’re both looking very good anyway. Who lost the most, and what your diet secrets were? And then the most… more serious question was about float. You touched on this a little bit earlier, but you’ve often said that your insurance business is probably the most important business that you own. On page 12 of the annual report, you said, “We have benefited greatly, to a degree that has not been generally understood, because our liabilities has… have cost us very little.” I was wondering if you could describe this a little bit better, so we can understand it.

Warren Buffett [01:55:52] Yeah. The… Charlie and I have lost about the same amount, at about 20 pounds each. The insurance business provides us with float. And float is money that we hold that doesn’t belong to us. It’s like a bank having deposits. A bank has deposits. That money doesn’t belong to it, but it holds the money. Now, when a bank holds deposits, on everything except demand posit… demand deposits, there’s an explicit cost and interest rate attached to it. And then there are the costs of running the system and gathering the money, which is also… must be attributed both to demand and time deposit. So there’s a cost to getting what they would call deposits and we could call float.

In the insurance business, a similar phenomenon takes place, in that policyholders give us their money at the start of the policy period, and therefore we get the money paid in advance for the product. And secondly, it takes time to settle losses, particularly in the liability area. If you… if you banging up a fender on your car, it’s going to get settled very quickly. So there’s… but if there’s a complicated injury or something, it may take some years to settle, and during that period we hold the money. So we have, in effect, something that is tantamount to the deposits of a bank.

But whereas the deposits of a bank, it’s quite easy to calculate the approximate cost, in the case of the float that the insurance company has, you don’t really know what the cost of that float is until all your policies and losses… the policies have expired and your losses have all been settled. Well, that’s forever, in some cases. So you’re only making an estimate as you go along of what that float is costing. To date, with Berkshire, in the 29 years we’ve been in the business, it appears, never certain, because you don’t know for sure what’s going to happen, but it appears that our float has not cost us anything.

And on average, it’s been years when we’ve had an underwriting loss, when there’s a cost. There’s been years when we had an underwriting profit, and so we had a reverse cost. So we have obtained that float on very advantageous terms over the years. Far more… I… fully as important as that… it’s important to get it at the low cost, in our case no cost. But the other important thing is that we’ve grown it dramatically. And so we’ve gotten more and more money without having any cost attached to it. And if we still had our 16 or 17 million, I guess, of float that we had in 1967, and it was no cost, it would be very nice. But 17 million of free money is worth something, but it’s not worth a ton. Having 7 billion, if we can achieve that as free money, it’s worth a lot of money. And the… that growth has not probably generally been appreciated fully in connection with Berkshire, nor has the interplay of how having zero cost money, in terms of affecting our gain in value over time. People have looked at… always looked at our asset side, but they haven’t paid as much attention to the liability side. Charlie and I pay a lot of attention to that. And I mean, this… it’s not entirely an accident that the business has developed in this manner. And we have intentions of trying to make it to continue to develop in this manner and in that manner in the future. But we’ve got competitors out there too.

Float per se is not a blessing. We can show you many insurance companies that thought it was wonderful to generate float, and they have lost so much money in underwriting that they’d be better off if they’d never heard of the insurance business. But that, you know, that the job is to get it, get it in increasing quantities, but above all, get it cheap. And that’s what we work at. And you do that in the business through having some kind of competitive advantages. You won’t do it just by having an ordinary insurance company. The ordinary insurance company is not a good business. We have it in certain respects because of our attitude toward the business. We have it because of our financial strength, gives us certain competitive advantages. And we have it in the case of GEICO because of a very low-cost operation. And it’s us… up to us to try and figure out ways to maximize each one of those competitive advantages over time.

We’ve built those advantages. I mean, in 1967 we were not looked at that way in the insurance business. We were… we’ve built a position of competitive strengths. And in the case of GEICO, they had it without us, but we have bought into it over time. It’s a very important asset, and you ought to pay a lot of attention over the years as to what is happening in with that asset, as to both growth and cost. And that will aid you in calculating intrinsic value. Charlie?

Charlie Munger [02:00:54] Not… nothing to add.

Warren Buffett [02:00:56] Okay. That… zone four is the next, I believe.

[02:00:59] Shareholder (Henry Neuhoff, Dallas, Texas): Henry Neuhoff, shareholder, Dallas, Texas. My guess is that you consider the intrinsic value of the shares to be more than that represented by the price, by more than represented… by more than represented by the current price of the shares. If that be the case, what would be your thoughts about Berkshire repurchasing its own shares?

Warren Buffett [02:01:23] Yeah, no. We have said we do not consider Berkshire undervalued at this price. We didn’t say we thought it was overvalued, but we said we did not consider it undervalued. So a repurchase based on our estimate would not be in the interests of shareholders. That… it’s conceivable it could be at some time, but we do not think that’s the case. We think intrinsic value far exceeds book value, but we do not think it exceeds present price. We’re not selling any shares, though, either. Zone six.

[02:02:06] Shareholder (Carlos Lucera, Idaho): My name is Carlos Lucera. I’m from Idaho. And my question relates to street names. Our stock at Berkshire Hathaway is in a family limited partnership. And in addition to that, it’s in a street name. Now, what is the reason, and the rationale behind the reason, for street name shares not being able to participate in the charitable contributions by Berkshire Hathaway?

Warren Buffett [02:02:43] Yeah, we submitted a request for ruling to the IRS, I don’t know, 15 or so years ago, in connection with the shareholder designated contribution program. And the ruling rece… we received specifies record holders and not street name holders. Now, that doesn’t mean that a different ruling might not be obtained. But frankly, when we get into the multitude of indirect holdings, and the problems we have with those indirect holding in other respects, I think it would be a bit of a nightmare for us to attempt to get that program extended through into street name holders. It… I think the cost would far exceed the benefits.

And I think that it is the situation that anybody with it in street name can move it into their own name if they want to. So I think with very small amount of effort on the part of an individual shareholder, it would offset an enormous set of problems that we would encounter at Berkshire. We can handle the pres… system. We’ve got 12 people there, and they run the annual meeting, they make movies, they do all kinds of things. And it would be… it would be very tough. And, you know, if an extra 10,000 shares participated, that’d be $120,000 of contributions. I just don’t think it would be worthwhile. Our ruling doesn’t presently cover the subject, in any event. It’s something we’ve thought about. Charlie?

Charlie Munger [02:04:18] Yeah, I think even if they changed the ruling, we wouldn’t change the policy. It would be administratively very difficult.

Warren Buffett [02:04:25] We run into other problems in terms of people getting their material. Just the… the m… the material on the annual meeting. And we’ve heard from a number of shareholders that they can’t get it from their broker, and they’re… they don’t know what the B is all about because they didn’t get their proxies. And it just… it… street name posed more problems. Although we have a… now we have, probably have more than… forget about the B, we have more than twice as many, I believe, holders in street name as in direct ownership. Although the number of shares is far, far… I mean, it’s… it’d be less than 20% of the shares. But it’s probably double the number of holders. Zone 7.

[02:05:15] Shareholder (Bill Guerra, San Francisco Bay Area): Good afternoon. My name is Bill Guerra. I’m from the San Francisco Bay Area. I’ve owned your shares for many years and appreciate the good job you’ve done. However, in this year’s chairman’s letter… you developed a concept a few years ago called look-through earnings.

Warren Buffett [02:05:31] Right.

[02:05:31] Shareholder (Bill Guerra, San Francisco Bay Area): And I failed to see that this year. And I’m wondering if that no longer is a valid concept, or why you refrain from showing the data.

Warren Buffett [02:05:41] Yeah, that’s a good question. I should have actually covered that in the annual report, in terms of mentioning what… because I’ve talked about it, and we’ll talk about it in the future. And we do have a goal on look-through earnings of $2 billion in the year 2000, and that’s going to be adjusted upward to allow for the fact there are more shares outstanding. It’ll be the same basic goal. But there were two reasons that it was skipped this year, and like I say, I should have mentioned it. One was it was the longest letter we’ve ever had, and having that section in there would have elongated it even a bit more.

And that, coupled with the fact, and this is the important part of it, we had major changes in our… the composition of the company immediately after the end of the year. So our Capital Cities stock disappeared. At the time it disappeared, we didn’t know whether it was going into cash or all Disney stock or combination. We had the acquisition of the other half of GEICO, or even now the accounting treatment isn’t clear. And I felt that the look-through earnings last year were fine, but felt that by the time I got through explaining all of the adjustments you would have to make for the transactions then pending, that adding it to the… to already the longest letter I’ve written would have slowed things down a lot and not been particularly helpful.

It will be back in this year, this upcoming report, and future reports, because it’s a very important concept, and it’s something that we’re focused on. It’s just that last year’s number would have… it have been a mess by the time I got through trying to explain it. You know, I normally… that the accounting stuff, I know, puts a lot of you to sleep, but believe me, it isn’t so much fun writing it either. So I skipped it this year. We’ll have it next year. And the number would have been okay last year, but there would have been a lot of asterisks attached. Zone eight, please.

[02:07:36] Shareholder (Ed Walzak, New York): Yes. Mr. Buffett, good morning. My name is Ed Walzak from New York. I’m a student and admir… of your investment philosophy. I have a question. In determining a company’s intrinsic value, you seem to write or indicate that you project out a company’s own… owner earnings for a number of years and then discount that back by prevailing rates. My question is, how much of a premium, if any, to prevailing risk-free rates do you demand when you discount back the own earnings of a company? Or stated differently, for example, today, with long rates at about 7%, if you did the same exercise with Coca-Cola, at what rate of interest would you discount back their owner earnings?

Warren Buffett [02:08:07] Yeah, we get asked that question a lot, and we’ve answered it to some extent in past annual reports, about what discount rate to use. We basically think in terms of the long-term government rate. And there may be times when, in a very… we don’t, because we don’t think we’re any good at predicting interest rates. But probably in times of very… what would seem like very low rates, we might use a little higher rate. But we don’t put the risk factor in per se, because essentially the purity of the idea is that you’re discounting future cash, and it doesn’t make any difference whether cash comes from a risky business or a safe business, it so-called safe business.

So the value of the cash delivered by a water company, which is going to be around for a hundred years, is not different than the value of the cash derived from some high tech company, if any, that you might be looking at. It may be harder for you to make the estimate, and you may therefore want a bigger discount when you get all through with the calculation. But up to the point where you decide what you’re willing to pay… you may decide you can’t estimate it at all. I mean, that’s what happens with us with most companies. But we believe in using the a… a government bond type interest rate.

We believe in trying to stick with businesses that, where we think we can see the future reasonably well. You never see it perfectly, obviously, but where we think we have a reasonable handle on it. And we would differentiate to some extent. We don’t want to go below a certain threshold of understanding. So we want to stick with businesses we understand quite well, and not try to have the whole panoply with all different kinds of risk rates, because frankly, we think that’d just be playing games with numbers. I mean, we… I don’t think you can stick something numbers on a highly speculative business where the whole industry is going to change in five years and have them mean anything when you get through.

If you say, “I’m going to stick an extra 6% in on the interest rate to allow for the fact,” I tend to think that’s kind of nonsense. I mean, it may look mathematical, but it’s… but it’s mathematical gibberish, in my view. You better just stick with businesses that you can understand, use the government bond rate, and when you can buy them, something you understand well, at a significant discount, then you should start getting excited. Charlie?

Charlie Munger [02:10:40] Yeah, the discounts were once greater than we now see.

Warren Buffett [02:10:45] That’s all you’re going to get, folks. Zone one.

[02:10:50] Shareholder (Peter Newman): Hi, Warren. It’s Peter Newman, Nick and Racky’s son. You can’t see me because I’m on your hard left over here. And by the way, Racky says to send her love to you, Susie. I’m going to take a cue from something that the guy who asked the questions about the World Book… I know you’re loath to normally interfere in the running of your individual corporations, because they do so well on their own. And I am particularly fond of See’s Candy and their products. And you may or may not know that we have a chocoholic in our family, as you do in yours.

Warren Buffett [02:11:38] Yeah. Makes good chocolate syrup too.

[02:11:41] Shareholder (Peter Newman): Yeah, I won’t mention who. However, when I was in there this Christmas buying some gifts, I noted that, with the exception of the little candy canes, there’s nothing in that store that is fat-free. And we are facing a trend in the world, especially in dessert items and ice cream and candy items, of fat freeness. And I just thought that perhaps it would be a wor… worth a word to management to consider expanding the hard candy line.

Warren Buffett [02:12:13] Yeah. Well, we look at a lot of things. At… one of the problems is, you probably know, for example, and using aspartame, is it doesn’t… it doesn’t interact well with heat. And so that’s been sort of tough. Now, Charlie and I have kept getting our regular boxes of candy during this weight loss program, and we’ve devoured them. And candy, you know, it’s maybe a… on average, aund… depends on whether it’s a… the sugar product or not. But the… take the lollipop, it’d be about 100, 110 calories per ounce. But there’s… that’s one and a half, or one and a quarter lollipops, or something like that. Most things are, you know, in that 100 per ounce to 150 per ounce range. So the candy is not… is not a specific… no, no.

If we can find something that the customer likes, that makes them think they’re getting skinnier by eating it, you know, that will be a breakthrough. And we look forward to… and we test all the… we test everything that comes along, I can assure you. In fact, Charlie and I may be the main testers. But that… Chuck Huggins is here today, and if you’ve got any ideas on it, that… who runs See’s, done a terrific job of running See’s ever since we took over in 1972, he’d appreciate ideas. But we’re… we are looking for things that appeal to the consumer, that tastes good, and that they’ll go for. I mean just as is, you know, the Coca-Cola Company in terms of of carbonated soft crink. So it’s a constant subject. And, you know, there were high hopes on aspartame originally, but it just hasn’t panned out in terms of candy. And I read a few articles about the… well, I, it should be the fat substitute, which didn’t get me too excited about trying it, but I’m not sure whether some of you read those articles or not. We’ll keep looking, Peter. I appreciate it. Zone two.

[02:14:16] Shareholder: Good morning, Mr. Buffett and Mr. Munger. As an aspiring shareholder, I’m very happy and proud to be here. Maybe I can encourage Mr. Munger to respond to my question this morning. In regards to your purchase of the other half of GEICO, would you comment on your reasoning behind paying the premium above market value, and why you instead did not purchase shares in the open market?

Charlie Munger [02:14:48] Very many shares in the open market at the quoted price. And the price we… and the price we paid for the large number of shares we got, we thought was a very satisfactory price.

Warren Buffett [02:15:07] Yeah, we… but Charlie’s 100% right. We also had a restriction that we agreed to many, many years ago, almost 20 years ago, as to the number of shares we would own without the consent, I, of the directors and, I believe, the insurance department. So we actually had some special restrictions on us in the case of GEICO. But if we hadn’t had those restrictions, we’d have behaved in exactly the same manner. And we didn’t think we could buy it any cheaper than that price, and we gulped a few times and paid it. And I think we will be happy that we did, as it’s turning out. GEICO is doing very well. But I mean, I knew it would do well, but I feel very good about it. Zone three.

[02:15:57] Shareholder (David Lowe, Ventura, California): Mr. Buffett, my name is David Lowe from Ventura, California. My first Berkshire meeting, and I want to mention that I’m very intrigued at the influence you have over the shareholders here. I note that the first beverage they ran out of in the lobby was Cherry Coke. My question is about the Buffalo News. You say in the letter for the ’95 report that the newspaper industry has lost another notch in its economic attractiveness. Can you elaborate on that?

Warren Buffett [02:16:28] Yeah, the… what you are seeing in newspapers is a circulation trend that has been prevalent for a long time in terms of newspapers per household, but that has been declining, and that daily newspapers… And that, I would say the trends of the last couple years are somewhat worse in that respect. I would say that the ability to price, both at the circulation and advertising level, is… has weakened a bit in recent years. Not dramatically, but it’s weakened a bit.

At one time, newspapers really, daily newspapers in… in a… in single newspaper towns, we probably as attractive economically as any business you could find. I mean, a large percentage of advertisers had very little choice in terms of using them as an advertising medium. People had less options in the way of learning what was going on around them other than the daily newspaper. So that they started from a position of extraordinary strength. They still have a very strong position, and I’ve tried to emphasize in that report, I mean, they are… they’re a bargain at the price they sell for. They give you all kinds of information with very low price, and they’re a magnificent way for most merchants to reach their customers.

But they are not… they do not have the exclusive advantages in many cases that they had 15 or 20 years ago. Third class mail has become more of an option. People have more ways of obtaining information. As we talked earlier, information can be processed electronically and delivered at far lower cost than people dreamt of 20 years ago. So all of those things eat away a little bit. It’s still a very fine business, but those… I don’t see anything that will reverse those trends. I don’t think that they will necessarily accelerate, but I think that if the only thing you owned in life was a daily newspaper in a single newspaper town 20 years ago, you would feel slightly less secure today than you did at that time. But you’d still be a lot better off than owning virtually any other business. Charlie?

Charlie Munger [02:19:12] Nothing to add.

Warren Buffett [02:19:14] How about zone four?

[02:19:15] Shareholder (Hutch Vernon, Baltimore, Maryland): Mr. Buffett, my name is Hutch Vernon. I’m from Baltimore, Maryland. I know that you read lots and lots of annual reports, and I’m curious what you are reading for, if you would share that with us. But I’m more curious, because I think I know what you’re reading for, if there are any disclosures, any further disclosures that you would like to see companies make in their financial reporting, or that the SEC require in financial reporting or proxies or other communications with their shareholders. And that would be for both you and for Mr. Munger.

Warren Buffett [02:19:49] Yeah, the main thing that they can’t mandate in annual reports, I really like to have. I like to know as much as I can about the person that’s running it and how they think about the business and what’s really going on the business. And I words, I would like to have a report that would be identical to what, if I don’t half of a company but was away for a year and I had a partner who owned the other half, when I came back, all coming up and all of that. I… of the report is now the… SEC mandates a lot of information, and some of that is helpful. But there’s an intent behind the report. I mean, if it’s a sales document, I’m, you know, I’m less interested. I’m… And I don’t see any way to mandate what I’m talking about, but that’s the kind of report I’m looking for.

What I’m trying to do as I read reports, A, I like to understand just generally what’s going on in all kinds of businesses. If we own stock in a company in an industry and there are eight other companies that are in the same industry, I want to own or be on the mailing list for the reports for the other eight, because I can’t understand how my company is doing unless I understand what the other eight are doing. I want to have the perspective of, in terms of market share or what’s going on in the business or their margins or the trend of margins or all kinds of things that I can’t get unless I know… I can’t be an intelligent owner of a business unless I know what all the other businesses in that industry are doing. And so I try to get that information out of a report.

If I’m thinking about investing in the specific company, I try to size up their business and the people that are running it. And over the years, I found reading a lot of reports to be quite useful in terms of making business decisions at Berkshire. If we own a hall of a business, I want to own shares in all of the competitors just to keep track of what’s going on. And I want to be able to intelligently evaluate how our managers are doing that, and I can’t do that unless I know the industry backdrop against which they’re working.

It’s amazing, you know, what… how well you can do in investing, really, with what I would call outside information. I find inside information, I’m not sure how useful that is. But outside information, there’s all kinds of information around as to businesses. And you don’t have to understand all of them, and you just have to understand the ones that you’re thinking about getting in. And you can do it if you just… but you… nobody will do it for you. You can’t read, in my view, you can’t read Wall Street reports and get anything out of them. You have to do it yourself and get your arms around it. I don’t think we’ve ever gotten an idea, you know, in 40 years from a Wall Street report, but we’ve gotten a lot of ideas from annual reports. Charlie?

Charlie Munger [02:22:58] What I find is that it takes a long time to read the annual report, even if it’s a comparatively simple business. Now, if you really are trying to understand it, it’s not a bit easy.

Warren Buffett [02:23:11] Yeah, I would say that on average, in a business were really interested in, even though we know what to skip, to some extent, what to read, I mean, it’s going to be 45 minutes or an hour on a report. And if there are six or eight companies in the industry, that’s going to be six or eight hours perhaps. And then there quarterly and a lot of other… I mean, it… the way you learn about businesses is by absorbing information about them, thinking it, deciding what counts and what doesn’t count, relating one thing to another. And, you know, that’s the job that… And you can’t get that by looking at a bunch of little numbers on a chart bobbing up and down about a, you know, or reading, you know, market commentary and periodicals or anything of the sort. That just won’t do it. You’ve got to understand the businesses. That’s where it all begins and ends. Zone five.

[02:24:06] Shareholder (Hank Strickland, Fairfax, Virginia): Mr. Buffett, my name is Hank Strickland. I’m from Fairfax, Virginia, which, if it were a city, would be the 10th largest in the United States. I’m here as a stockholder, and my daughter, who’s also my broker, is here with me. We were also out there Friday night when we watched you warming up for the beginning of the ball game, and we noted that you didn’t drop the ball. You seem to be able to get it to the guy that was warming you up. We noticed your first pitch, which I had difficulty characterizing as either being a pass ball or a wild pitch.

Warren Buffett [02:24:42] It was a premature sinker, actually. Very, very hard to hit, I might add.

[02:24:47] Shareholder (Hank Strickland, Fairfax, Virginia): And then you moved spritely into the stands, did a lot of picture taking, photo opportunities, signed autographs, vaulted over a rail or two, and we noted with great enthusiasm your fitness. Now, that all having been said, many people would characterize Berkshire as a one-man company, with all due respect to Charlie. And many of us in this audience here, I’m sure, are reti… or semi-retired. It’s not unthinkable that perhaps you might want to retire, or for good…

Warren Buffett [02:25:24] God’s s… it’s unthinkable. I don’t want that one to go by.

[02:25:28] Shareholder (Hank Strickland, Fairfax, Virginia): Or for… or for something, or something worse could happen. And for those…

Warren Buffett [02:25:33] That would be the worst. I think… well, I think death would be second.

[02:25:38] Shareholder (Hank Strickland, Fairfax, Virginia): I am… I could think of some… some of us might want to do to protect our sizeible investment, say, having owned Berkshire since blue stamp, Blue Chip Stamps days. But anyway, we could put in a stop order, might take out an insurance policy, we might ask Charlie to masquerade as Warren after you moved on. Those don’t seem like very attractive options. I’m very serious now. How would you respond to the question of a stockholder that’s really concerned about Berkshire being a one-man show?

Warren Buffett [02:26:15] Yeah, well, Berkshire is not a one-man show. It’s a two-man show in terms of capital allocation, there’s no question about that at present. But it’s run by many managers that are doing an outstanding job and that don’t need any guidance from Charlie or me as they go along. But I might say that, you know, I will die with all of my Berkshire stock, essentially. And that will… stock will be held either in the family or in a foundation, depending on the order of death, for a long time thereafter. So there’s no one that’s more concerned about the subsequent management issue than I. I mean, this is not something that ends at all on my death, and it doesn’t end for the Buffett family or the Buffett foundation. So it’s a subject that Charlie and I both thought about.

The most likely situation… you got to get away from the idea it’s a one-man show, because right now we’ve got 33,000 people working for Berkshire out there, you know, as we speak, and I’m sitting around, you know, watching movies about myself or something. I mean, you can see how vital I am to the place. The… so the… but the question, and the other thing we do besides allocate capital is we do identify these managers, and hopefully we make it attractive for them to stay and work for Berkshire. But that, you know, that doesn’t require 150 IQ or anything to do that. It does require a certain sensitivity to why people want to get up in the morning and do what they do.

And when I’m not around, the logical… at some point, depends on exactly when it happens, but Charlie’s a little older than I am, and it’s likely that it will be broken into a two-person function again, but not exactly the way Charlie and I function. And that is that there will be someone in charge of investments and capital allocation. I mentioned Lou Simpson’s position, because he is younger than I am, in the annual report. And then someone in charge of operations. And we have that person in the organization now. Now, I don’t know what the situation will be when I die, because it could be in 20 minutes or could be in 20 years. And when that… so I can’t specifically name the individuals. We have the individuals now for both those functions. We’ll have the individuals for the same functions 20 years from now. I don’t know… I don’t know whether they’ll be the same people.

But it’s a quite a logical way to run the business. GEICO was run that way and still is run that way, and has been for some years. It’s always struck me as terribly illogical the way property casualty insurance companies are run, because they’ve been dominated by the underwriting side of the business. And here they have this important investment side, but it’s always been virtually every company’s been subservient to the underwriting. And GEICO very logically set up a co-CEO arrangement some years back where, originally Bill Snyder and before that, but Tony Nicely ran the underwriting end of the business and Lou Simpson ran the investment side. And those are two very different functions. Same person logically doesn’t fit both functions in most cases. I mean, it’s a rarity when the same person happens to hit for both functions. So GEICO worked very well that way, still works that way. Lou runs investments, Tony runs underwriting.

And Berkshire, slightly different, slight… it’s a variant on it, but essentially at some… at Berkshire headquarters, you need someone overseeing, and not meddling in them too much, but making sure you’ve got the right manager and you’re treating them fairly. You need someone on the operating side, you need someone on the investment and capital allocation side. We’ve got those people now, and we’ll have them, you know, whenever it happens too. But that’s the… I… that is the structure. And we’ve got some very good businesses, and, you know, nobody’s buying See’s Candy because they think I’m sitting in some office in Omaha, and no one’s buying a GEICO insurance policy because, you know, the… my name is there as chairman or CEO. The businesses are marvelous businesses. They’ll continue very well, and there will be a capital allocation problem then, just like there is now, and there will be the problem of keeping good managers in place and treating them fairly. And that’s the solvable problem. So that’s the future as seen from Kiewit Plaza. Charlie?

Charlie Munger [02:30:48] Yes. If you just run your mind through all the assets, I think you will quickly decide that there are large momentums in place that would do very well without us. I mean, is Coca-Cola going to suddenly stop selling because some manager dead at Berkshire Hathaway? You know, are the people going to stop using Gillette razor blades? Is GEICO suddenly going to stop being intelligently run? Is the Nebraska Furniture Mart going to try any less hard? So the existing assets, you can argue, have been lovingly put together so as not to require continuing intelligence at headquarters. And what there would be a disadvantage, and that I think would be unreasonable to expect, that a successor would be as good at making new investments as Warren has been in the past. Well, that’s just too damn bad. (Applause)

Warren Buffett [02:31:56] The sympathetic ear over here. (Laughter) Let’s see, where are we? Zone six now.

[02:32:05] Shareholder: Or, Mr. Buffett, I’m indebted to Walter Schloss for introducing me to you some 40 years ago, and finally in the early ’80s I became a stockholder. My question is, now that you’ve expanded headquarters 9%, from 11 people to 12 people, do you now more frequently answer letters from stockholders? As a specific, had you looked at my letter from January 198… (Laughter)

Warren Buffett [02:32:47] We haven’t gotten to January yet.

[02:32:51] Shareholder: Relating to Cap Cities/ABC and talk radio. The problem that occurred last month at Cap Cities might have been prevented.

Warren Buffett [02:33:04] You should have… you should get a form letter from us. But the… we do not, a… we do not get into the act… activities of our investee companies. I mean, it… if people are unhappy about Coca-Cola or Gillette, they shouldn’t be, but if they happen to be, they should talk to the companies themselves. I don’t interject myself into the management or operations of the investee companies.

In terms of questions about Berkshire, I put in the annual report a few years back, just running Berkshire takes up a fair amount of time in terms of keeping track of a lot of businesses, and doesn’t need to take up as much time as it does with me, but I enjoy it. But the… I feel that the annual report, the annual meeting are the time to take up everything on shareholders’ minds. And so I don’t answer one-on-one questions. I get all kinds of letters. They want career guidance, they want advice on their business. I mean, there’s a million letters that come in, and it would really… it would really be… it would take a significant amount of time that otherwise would be spent on Berkshire to reply to that sort of thing. I may note them in terms of what I address in subsequent annual reports, but the annual meeting and the annual report, I feel, are the best ways to communicate with shareholders. And I… and I really don’t do. Okay, if we’ve got a monitor over in zone one, we’re ready to… we’re ready to start.

[02:34:56] Shareholder (Maria Nicholas Kelly, Tacoma, Washington): Yes. Thank you very much. My name is Maria Nicholas Kelly. I’m from Tacoma, Washington, and my husband and I have rather different investment approaches. And in 1988, he bought me one share of Berkshire so that I could learn something about investing. We both started about that same time, and he has chosen to invest in, let’s say, about 40 different stocks, in buying and selling, and doing rather well for us, frankly. My approach is more simple, and Bas… my approach is more simple, and basically I finally figured out last year that I should in… invest in the companies of the two… I’m monly… more Berkshire and Microsoft. So then this year, and so we’ve been able to do that this year. We read in your report that Berkshire is selling at a price at which Charlie and I would not consider buying it. So my husband has challenged my investment strategy. I know that you are an honest man, and while you may not… you may not recommend to my partner Charlie to buy more Berkshire at this time, do you recommend that I continue my rather automatic investment buying of Berkshire? And I wanted… I think I know the answer, but I wanted my husband to hear it from the horse’s mouth.

Warren Buffett [02:36:35] I think you’re using me here. What… well, I… certain… I… we don’t recommend selling it, but we don’t recommend buying it either. We’re… we are neutral on that subject. And I hope you continue to be in with the two wealthiest guys. I like the other fellow too.

[02:36:57] Shareholder (Maria Nicholas Kelly, Tacoma, Washington): Thank you.

Warren Buffett [02:36:58] Yeah. Zone two.

[02:36:59] Shareholder (Harriet Morton, Seattle, Washington): Mr. Buffett, I am Harriet Morton from the Emerald City, the same area, the land of Microsoft. And I have a couple small questions. The first one is, recognizing your lack of interest in technology or sense of familiarity with it, I’m wondering if you’d give a few comments on Bill Gates as a manager. But the second one, dealing with a business that you’re familiar with, has to do with American Express. Would you comment on American Express’s strategy to deal with their declining market share in the credit card industry and the rising importance of debit cards? Thank you.

Warren Buffett [02:37:41] I’m not sure I got that entirely. Charlie, did you? I mean, I got the byeric Gates as a manager, and American Express’s problems in declining…

[02:37:51] Shareholder (Harriet Morton, Seattle, Washington): Yeah, in market share.

Warren Buffett [02:37:52] Well, the first part is very easy. You know, Bill Gates is, you know, one of the great managers of all time, and is an exceptional business talent who loves his business. And when you get that combination, in a high energy level, and now an error to leave it to… I don’t think you do what much better than that.

American Express is, you know, has slipped over from where they were 20 years ago, obviously, in the credit card business. And I think they may have taken their customer a little bit for granted for a while. I think Harvey Golub is very focused on correcting that, and has made some progress. But the credit card business is a very different competitive struggle now than it was 20 or 25 years ago. Interestingly enough, American Express itself backed into the business because the… they were worried about what was going to happen to their travelers check business originally, and they saw Diners Club come along, fellow named Ralph Schneider, and starred in. And they saw the inroads that were being made, so they… the credit card was a reactive move. And for a while, they really dominated the field, and of course they still dominate the travel and entertainment part of it. But credit cards are going to be a very competitive business over time, and you need to establish… American Express needs to establish special value for its card in some way, or it’s… it gets more commodity-like. It’s not an easy business, but they’re franch… they, they’ve got a strong franchise. It is not what it was 20 years ago relative to the competition. Zone three.

[02:39:50] Shareholder (John Weaver, Bellingham, Washington): Good afternoon. My name is John Weaver. I’m a shareholder from Bellingham, Washington. You have discussed what a wonderful business is. One of the criterias in your acquisition, page 23 of your annual report, is management. Could you discuss how you decide what good management is and how you decide whether you have a good manager?

Warren Buffett [02:40:19] The really great business is one that doesn’t require good management. I mean, that is… that’s a terrific business. And the poor business is one that can only succeed or even survive with great management. And, but we look… we look for people that know their businesses, love their businesses, love their shareholders, want to treat them as partners. And we still look to the underlying business, though. We… if we have somebody that we think is extraordinary, but they’re locked into one of those terrible businesses, because we’ve been in some terrible businesses, and, you know, the best thing you can do probably is get out of it and get into something else.

But there’s an enormous difference, frankly, there’s an enormous difference in the talent of American business managers. The CEOs of the Fortune 500 are not selected like 500 members of the American Olympic track and field team. And it is not the same process, and you do not have the uniformity of top quality that you get with the American Olympic team in any sport. You do not get that in top management in American business. You get some very able people, some terrific people, like a Bill Gates that we just mentioned, but you get a lot of mediocrity too.

And the test, I think, in some cases, that it’s fairly identifiable who has done an extraordinary job. And we like people that have batted .350 or .360 in terms of predicting that they’re going to bat over .300 in the future. And some guy says, you know, I batted .127 last year, but I’ve got a new bat or a new batting coach, you know, some management consultant has come in and told them how to do it, supposedly. We’re very suspicious of that. So we don’t… we don’t like banjo hitters who suddenly proclaim that they can become power hitters.

And then we try to figure out what their attitude is toward shareholders, and that isn’t uniform either throughout corporate America. It’s far from uniform. We still want them to be in a good business, so I would emphasize that. And we feel that… I mean, when I gave the illustration of Tom Murphy in the annual report, I mean, no one had either the ability… no one could top his ability or integrity in terms of the way he ran Cap Cities for decades. I mean, and he not only thought about them, he knew what to do to forward their interests. And in terms of building the business, he only built it when it made sense, not when it did something for his ego or to make it larger alone. He did it when it was in his shareholders’ interests. And they… they’re not all Tom Murphys, but when you find them, and they’re in a decent business, you want to bet very heavily and not make the same mistake I made by selling out once or twice too. Zone… was that zone three or… yeah, zone four.

[02:43:40] Shareholder (Mark Hake, Scottsdale, Arizona): Yeah, my name is Mark Hake. I’m from Scottsdale, Arizona, and I’m very interested in your policies on diversification and also how you concentrate your investments. And I’ve studied your annual reports going back a good number of years, and there’s been years where you had a lot of stocks in your marketable equitable securities portfolio, and there was one year where you only had three, in 1987. So I have two questions. Given the number of stocks that you have in the portfolio now, what does that imply about your view of the market in terms of, is it fairly valued, that kind of idea? And second of all, whenever you… it seems that whenever you take a new investment, you never take less than about 5% and never more than about 10% of the total portfolio with that new position. And I wanted to see if I’m correct about that.

Warren Buffett [02:44:35] Yeah, well, on the second point, that there… that really isn’t correct. We have positions which you don’t even see, because we only listed the ones above $600 million in the last report. And obviously those are all smaller positions. Sometimes be… that’s because they’re smaller companies and we couldn’t get that much money in. Sometimes it’s because the price has moved up after we’ve bought them. And sometimes it’s because we may be selling the position down, even. But so we have no… there’s nothing magic. We like to put a lot of money in things that we feel strongly about.

And that gets back to the diversification question. You know, we think diversification is, as practice generally, makes very little sense for anyone that knows what they’re doing. The diversification is a protection against ignorance. I mean, if you want to make sure that nothing bad happens to you relative to the market, you own everything. There’s nothing wrong with that. I mean, that is a perfectly sound approach for somebody who does not feel they know how to analyze businesses. If you know how to analyze businesses and value businesses, it’s crazy to own 50 stocks or 40 stocks or 30 stocks, probably, because there aren’t that many wonderful businesses at that are understandable to a single human being, in all likelihood. And it… and to have some super wonderful business and then put money in number 30 or 35 on your list of attractiveness and forego putting more money into number one just strikes Charlie and as madness. And it’s conventional practice, and it may, you know, if all you have to achieve is average, it’s… it may preserve your job, but it’s a confession, in our view, that you don’t really understand the businesses that you own.

You know, I, Bas… I mean, on a personal portfolio basis, you know, I own one stock, you know, but it’s a business I know it, and it leaves me very comfortable. So, you know, do I need to own 28 stocks in order, you know, have proper diversification? You know, and be nonsense. And within Berkshire, I could pick out three of our businesses, and I would be very happy if they were the only businesses we owned and I had all my money in Berkshire. Now, I love it, the fact that we can find more than that and that we keep adding to it, but three wonderful businesses is more than… it’s more than you need in this life to do very well. And the average person in is going to run into that. I mean, if you look at how the fortunes were built in this country, they weren’t built out of a portfolio of 50 companies. They were built by someone who identified with this… with a wonderful business. Coca-Cola is a great example. A lot of fortunes have been built on that, and there aren’t 50 Coca-Colas. You… there aren’t 20. If there were, it’d be fine. We could all go out and diversify like crazy among that group and get results that would be equal to owning the really wonderful one. But you’re not going to find it. And the truth is, you don’t need it. I mean, if you have a really wonderful business, is very well protected against the vicissitudes of the economy over time and competition. I mean, you know, we’re talking about businesses that are resistant to effective competition, and three of those will be better than a hundred average businesses. And they’ll be safer, incidentally.

I mean, they… there is less risk in owning three easy to identify wonderful businesses there than there is in owning 50 well-known big businesses. And it’s amazing what has been taught over the years in finance classes about that. But I can assure you that I would rather pick, if I had to bet the next 30 years on the fortunes of my family that would be dependent upon the income from a given group of businesses, I would rather pick three businesses from those we own than own a diversified group of 50. Charlie?

Charlie Munger [02:49:00] Yeah. What he’s saying is that much of what is taught in modern corporate finance courses is (Applause) twaddle.

Warren Buffett [02:49:10] Do you want to elaborate on that, J… (Laughter) You cannot believe this stuff. I mean, it’s a modern portfolio theory, and yeah, it has no utility. But I mean, it, you know, it will tell you how to do average, but, you know, I think anybody can figure out how to do average in fifth grade. I mean, it’s just not that difficult. It’s elaborate, and, you know, there’s lots of little Greek letters and all kinds of things to make you feel that you’re in the big leagues, but there is no value added.

Charlie Munger [02:49:53] I have great difficulty with it, because I am something of a student of dementia, and I have… we hang around a lot together. I get ordinarily classified dementia, you know, on some theory structure of models. But the modern portfolio theory, it involves the type of dementia I just can’t even classify. Something very strange is going on.

Warren Buffett [02:50:17] If you find three wonderful businesses in your life, you’ll get very rich. And if you understand them, bad things aren’t going to happen to that… those three. I mean, that’s the characteristic of it.

Charlie Munger [02:50:33] By the way, maybe that’s the reason there’s so much dementia. If you believe what Warren said, you can teach the whole course in about a week.

Warren Buffett [02:50:45] Yeah. Yeah, and the high priest wouldn’t have any edge over the lay people, and that never sells well.

Charlie Munger [02:50:53] Right.

Warren Buffett [02:50:53] Okay. Zone, what, five? Are we over there?

[02:50:56] Shareholder: Yes. Good afternoon, Mr. Buffett, Mr. Munger, board of directors. Wanted to ask, in looking ahead, do you see the trends of extensive outsize, the offshoring, the downsizing, the expendable workforce, the right sizing, the diminished commitment to company loyalty, and the greater emphasis on the short-term quick buck bottom line, versus your commitment to the long-term investment, affecting your pool of investment possibilities and your decision processes? And do you possibly think of creating new companies on your own?

Warren Buffett [02:51:32] Well, I think that the trends you talk about are the… you talk about the detention to devoted to them could have some… Historically, you know, every industry at all times is interested in downsizing or becoming more efficient. Now, if the industry is growing, you can achieve efficiency by doing more work or turning out more output with the same people. But, you know, if you go back 150 years and look at the percentage of people in farm, for example, farming has downsized from being a very appreciable percentage of the American workforce to a very small percentage. And essentially that’s release people to do other things. So it’s in the interest of society to do… to get as much output in anything as it can per unit of labor input.

It’s very difficult on the individual involved, and, you know, it’s no fun. I guess it’s no fun being a horse when the tractor comes along, or a blacksmith when the car comes along. But the… so I don’t quarrel with the activities. I quarrel sometimes with how it’s done. And I do think there’s been a certain lack of, in certain cases, some empathy or some sensitivity in terms of the way it’s being done. You should try to make… that will require us off people over time, because we hope that physical output grows and that we become more productive and can keep the same number of people to get greater output. Dexter Shoe has done a great job of that over time. They’ve become more and more productive, but they’ve sold more shoes instead of selling the same number of shoes and letting people go.

But sometimes industry trends… I mean, at World Book we have fewer people than we had a year or two ago, and we didn’t… we don’t have any answer to that. Over time, we got out of the textile business. I wish we didn’t have to, but it… we did not know how to run a textile company in New England and compete effectively. Like I say, I would… I love avoiding those businesses, and the extent we can, we will. I mean, GEICO is going to add people over time, and I think Berkshire Hathaway is going to add people over time. But I can’t… but it is in the interest of society to do jobs more effectively.

It’s also in the interest of society, it seems to me, for… to take care in some way of the people that are affected by that activity. And either, in some cases, it’s… it may be retraining, but in other cases, you know, it doesn’t work so well if you’re 55 years old and you’ve been working in a textile mill all your life, and all of a sudden the guy that runs the place can’t make any money out of selling your output. I mean, that’s not the fellow’s fault that been working in the texti over 30 years. So there’s a balance in that.

I think that the attention that’s come about lately, I think there’s… to some degree it was a media fad based on some particularly dramatic examples of a couple of companies. I don’t think there is more displacement going on now as a percentage of the labor force annually than there was 10 years ago, in terms of reconstituting what people do. But it’s gotten a lot of attention lately. There could be a backlash on that in terms of corporate tax rates or a number of things, and we might feel it in that direction.

We wanted Berkshire to do everything as efficiently as we can. Part of that, in a big way, is not taking on a lot of people we don’t need. I me… a lot of the mistakes that are being corrected now are because people got very fat, and their businesses got very fat in the past and took on all kinds of people they don’t need. We see that in a lot of businesses that were exposed to. And as long as they’re very prosperous, really no one does very much about it. And then they, when time comes, they all of a sudden find out they can get way more out. But the oil companies are a classic example. You know, the people probably actually needed to produce, refine and market oil probably hasn’t changed that much. But if you look at the employment relative to barrels produced, refined and marketed, it’s gone down dramatically over 20 years ago. To me, it just means that they weren’t being run that well 20 years ago, and never should have occurred in the first place. We don’t want to take on more people than businesses, because we don’t want to lay people off either. Charlie?

Charlie Munger [02:56:47] Name a business that has been ruined because it was over downsized. I cannot think of a single one. But if you ask me to name businesses that were half ruined or ruined by bloat, I mean, I could just rattle off name after name after name. It’s gotten fashionable to assume that downsizing is wrong. Well, it may have been wrong to let the business get so fat that it eventually had to downsize. But if you’ve got way more people than are needed in the business, I see no social benefit in having people sit around un… half employed or unemployed. And you’re very likely to compete against guy… some guy at some point who doesn’t have more people around than needed in the business too. But it doesn’t change for the people involved. They’ve got real problems. And Warren, can you name one that has been ruined by over downsizing?

Warren Buffett [02:57:55] There must be one, but… well, it’s like Eisenhower said about Nixon: give me a week and I’ll come up (Laughter) with… How about zone 6?

[02:58:08] Shareholder (Walter Kaye, New York City): Mr. Buffett, Mr. Munger, I’m Walter Kaye of New York City.

Warren Buffett [02:58:14] We’re glad to have you here, Walter.

[02:58:16] Shareholder (Walter Kaye, New York City): What?

Warren Buffett [02:58:16] We’re glad to have you here. Walter’s been a good friend.

[02:58:19] Shareholder (Walter Kaye, New York City): Thank you very, very much. You just make me more of an egomaniac, a humble egomaniac, by saying that. I don’t know if Mr. Munger’s wife is here, and Mrs. Buffett is here, but back East, where I come from, in New York, they say when people… when men are successful, as their wife’s doing, but if they’re a failure, it’s because they’re lazy. But anyhow, I just wanted to again thank you very much for the… you’ve done such great things for our family, it’s absolutely incredible. And to those of you who don’t know these two gentlemen, besides being financial geniuses, and you all know Mr. Buffett, and some Mr. Munger too, they’re the finest human beings you’ll ever meet. I mean, just the way they explain this downsizing is the most intelligent thing I’ve ever heard. And eventually, like, you know, these people eventually find work. They have to be re-educated and everything like that.

But one point of business I’d like to ask you, if you don’t mind. I have been noticing that there have been a tremendous amount of new capital going into reinsurance carriers, is, and I was wondering if you could make a few comments about that, if you think that will affect the reinsurance business, have any effect in the insurance business in general. Because, as you know better than I, we’re still in a very soft market, and there isn’t a month that goes by that I don’t hear of some new reinsurance carrier, whether in Bermuda or London or somewhere. Thank you.

Warren Buffett [02:59:34] Okay. Walter knows more about insurance than I do, but I’ll nevertheless comment on that. They… there has been a fair amount of capital, and there was a rush of it about, I’d say, maybe three years ago into the reinsurance business. But there’s been capital coming, and that is negative for our business. I mean, because any capital that’s brought in basically will get employed. We are willing at Berkshire, and we do it, we are willing to sit on the sidelines in the reinsurance business. We’ll offer quotes, but somebody that will cut those prices substantially if they’ve got a lot of capital and want to keep busy.

And if you’ve got a lot of capital in this business, or if you attracted a lot of capital, you will do something. You might like to do something smart, but if need be, you’ll do something dumb. You’ll rationalize it so you think it’s smart, but you will do it. You won’t just sit there and write the shareholders at the end of the year and said, you know, we asked you for $300 million last year, and we’d like to report that it’s all safely in a bank account at Citicorp. It just doesn’t work that way. So they will go out and do something. People don’t like to sit around all day and do nothing, and that means that prices will get cut under certain circumstances, and those circums… that’s happening now.

We will at our… at Berkshire, we do have a rule about downsizing on that, and we have promised people at all of our insurance operations that we will never have layoffs because of a drop in volume. We do not want the people who are run our insurance business to feel they have to write X dollars in order to keep everybody there. We can a… afford… we can afford some overhead around that’s costing us a little money from, for lack of using it at full capacity, because it isn’t that much relative to the size of our insurance operation. What we can’t afford are people feeling some internal compulsion to keep running business in order to keep their jobs. So we have a strong policy on that.

And if the business falls away in terms of price, we won’t be doing business, but we will be around to do business in a big way when the circumstances reversed. They reversed in the casualty business for a while in 1985 or thereabouts, and we did a terrific amount of business. They reversed in catastrophe reinsurance four or five years ago, and we became very active in that. And we will have times that are very good for us in insurance. It’s a lot like investments. If you feel you have to invest every day, you’re going to make a lot of mistakes. It just… it isn’t that kind of a business. You have to wait till you get the fat pitch. And an insurance, it’s similar. You do not…

If we had a budget for premium volume for our insurance companies, it would be the dumbest thing we could do, because they would meet the budget. I… they could meet any budget I set out. I could tell some operation that wrote $100 million last year to write $500 million this year, and they would meet it, you know, and I would be paying the bills for decades to come. So it’s a very illogical way to try and plan 8% or 10% a year growth. Now, GEICO is a different story, and that GEICO is a business that is the low-cost operator and can attract from a huge pool business at a, I think, a very good rate of growth, simply by letting people know what’s available out there. So that is a b… business that I see growing under almost any circumstances.

But our reinsurance business will swing around enormously in terms of volume, based on what the competitors is doing. And what the competitors are doing depends to a great extent on how much money they’ve got burning a hole in their pocket. And right now it’s going one direction, but it will change. I mean, it… just like investment markets change. You know, I’ve been through at least a half a dozen periods where people think, you know, they’re never going to get a chance to buy securities and intelligent prices, and it always changes. And insurance business, people that misprice their policies will pay the price for it, and the world will still need insurance, and we will still be there. Zone 7… oh, we don’t have a… I guess we have everybody in here now, so we’ll go back to zone one.

[03:04:21] Shareholder (Herculano Fortado, Portugal): Mr. Buffett, salutation from Portugal. I, from Portugal, my name is Herculano Fortado. I have been the shareholder of your company since it was traded in on the NASDAQ, and I hold the shares and went on accumulating year after year, whenever funds were available and were dis… at my disposal. Now, a little bit about my history. As a student, I’m in from India. I was born in India of Indian parentage, and my parents were very modest and could not afford me higher education. I started my school, I think…

Warren Buffett [03:05:04] I think maybe you better just get to the question, if you will, please.

[03:05:12] Shareholder (Herculano Fortado, Portugal): And then started writing insurance, a life insurance, for a company which was a subsidiary of American Life. My question now is this. I am now living in Portugal, and I see that the European market is developing, and Berkshire is having a very big slice of insurance investments. They don’t seem to be operating in the new markets that are emerging in Europe, and as well as in countries like India or the Pacific area, where the human 2/3 of human beings are living. Is there a policy or a plan on the part of Berkshire Hathaway to diversify and internationalize their insurance business? This is my only question. Thank you.

Warren Buffett [03:06:10] The reinsurance business of Berkshire Hathaway is totally international. I mean, we deal with risks all over the world, we deal with companies all over the world, and that’s the nature of the reinsurance business generally, although there might be some that would be more specialized to this country. But we are quite willing to take on risk around the world, although they have to be risks with a large premium. I mean, that’s the nature of our reinsurance business. We’re not in the retail end of the business, but we do that… we do that worldwide, and we’ll continue to do that worldwide, because there are huge risks that exist for primary insurers around the world, and they need somebody to lay them off on. Now, whether they will pay the proper price is another question, and it may be a little more difficult in a few jurisdictions to do business and others, but that’s an international operation.

GEICO has 2 and a fraction percent of the U.S. auto market, and we have about two and a half million policy holders there, over 100 million in the country. And there is such an opportunity here that it would be diversionary to go into… to other countries with… with GEICO at… There’s been a firm that was very successful over in England that introduced a somewhat GEICO-like operation about 10 years ago, and they did very well. They are now encountering more competition, and their results are falling off somewhat. But there’s a huge potential for GEICO in this country, and I would not want the management of GEICO to be going off in other directions now when there’s so much to be done here. I mean, three percentage points on our growth rate here, for example, you know, would be $75 million or so of volume, and that in turn would keep compounding over time.

Well, that… there’s too much to do here before we set up some startup operation around the world. And there are actually various problems in a lot of jurisdictions and to run a GEICO-like operation, although I wouldn’t say that that prevails every place. I mean, there could be opportunities, but the opportunity here in this country is huge, and the management of GEICO is focused. I love focus management. But management of… if you read the Coca-Cola annual report, you will not get the idea that Roberto Goizueta is thinking about a whole lot of things other than Coca-Cola. And I have seen that work time after time.

And when they lose that focus, as actually did Coke and Gillette both, that what, one point, 20 to 30 years ago, somewhat, it shows up. I mean, it… two great organizations were not hitting their potential 20 years ago, and then they became refocused, and what a difference it makes. It makes tens of billions of dollars’ worth of difference in terms of market value. GEICO actually started… they started fooling around in a number of things in the early ’80s, and they paid a price to do it. They paid a very big price. They paid a direct price in terms of the cost of those things, because they almost all worked out badly, and then they paid an additional price and the loss of focus on the main business. That will not happen with the present management. Tony Nicely thinks about nothing else but doing… carrying the GEICO message to people, who that 97 and a half percent or so that are not policy holders. And that will work very well for us over time. Charlie?

Charlie Munger [03:10:21] We are indirectly in all of these emerging markets through Coca-Cola and Gillette, so it isn’t true that we’re totally absent.

Warren Buffett [03:10:30] No. Well, at Coca-Cola, the international markets are 80% of profits, actually a little more. Gillette, I think they’re about 70% or so. So the… we love the international aspects of the Coca-Cola or Gillette businesses, and that’s a very major attraction. But the management of those companies is focused on that. But they are doing… they have distribution systems, and they have recognition, they’ve got a lot of going for them over there. And they’re… but the beauty of it is that they’re maximizing what they do have going for them, which was not the case 20 years ago. They just sort of let it go more by default, and they started fool around with a lot of diversification, and, you know, basically that has not work that well. So we like focus. We love focus.

Charlie Munger [03:11:25] Yeah. And doing it indirectly, as we’ve done, one can argue that we thereby do it a lot better.

Warren Buffett [03:11:31] We won’t explore the implications of that. Zone two.

[03:11:34] Shareholder (George Olson, Atlanta, Georgia): My name is George Olson. I’m from Atlanta, Georgia. I have a couple quick questions for you. First of all, I’d like to have your comments on the USAir preferred, that were… there are several quarters and rear on. And secondly, I was wondering about the Borsheims report from yesterday. You usually comment on that.

Warren Buffett [03:11:56] Well, Susan Jacques, who runs Borsheims, called me this morning. Her voice was horse but happy. And Borsheims, that comparable day last year was the biggest day of the year, and it was about 60% up this year. So I’m… you’ve done your part. We are starting a new custom at Berkshire Hathaway’s annual meetings. A shareholder came up to me and asked for my autograph on his sales slip from Borsheims, which was a $54,000 watch. Now, that is the kind of autographs we like to give, and so our message to you all is: go thou and do likewise. Yeah, it wasn’t a member of Charlie’s family, incident.

The USAir preferred, as I mentioned in the annual report, it looks a considerably better than it did 18 months ago or thereabouts. But they fundamental problem, and Steve Wolf has said this, the new CEO of USAir, the fundamental problems are there, and they either address and correct those fundamental problems, or those problems will address and correct them. And the… you know, they, they’re, they… their costs are out of line. Their costs are those that are relics of a regulated, protected environment, and they are not in a regulated, protective environment. And so far, they have not had any great success in correcting the situation.

I’m… knowing Mr. Wolf, I’m sure he is, you know, focused entirely on getting that changed, and he will need to get it changed. And he… his record has been pretty successful at that. So we are… we’re a lot better off with our US prefer… Air preferred than we were 18 months ago. But it still is a mistake I made, and we… we would have a lot… been a lot better off if I’d… if I just, as Charlie says, going out to a bar that night instead. You got any comments, J… on… you here? Doesn’t want to comment.

Charlie Munger [03:14:21] It may sound like it’s his deal, but it’s plainly worth a lot more than it was last year.

Warren Buffett [03:14:29] And with that, we’ll move to zone three.

[03:14:32] Shareholder (David Winters, Mountain Lakes, New Jersey): Hi. David Winters, Mountain Lakes, New Jersey. Without ruining my fund, could you give me a few hints about how I should think about calculating the intrinsic value of the insurance businesses? And secondly, I’m wondering about, and not that you can foretell the future, either one of you, but with regards to newspapers, is there any concern that it goes the way of the printed World Book and Blue Chip Stamps?

Warren Buffett [03:15:04] It could have… I don’t… I think it’s very… and I’ll answer the second part first. I think it’s very unlikely, very, very unlikely, you know, down to a few percentage points, that newspapers will go the way of Blue Chip Stamps. World Book is a different story. World Book has got… they have a reasonable shot at a decent future, but it’s not automatic. But the newspaper, it may be configured somewhat differently. It may get a different percentage of its revenue from circulation and advertising that does. I mean, there may be some evolutionary type changes in it. But it… it’s still a bargain. It is a bargain to the… to anybody that is interested in their community. It’s still a bargain to a great many advertisers. We spend a lot of money adver… advertising in newspapers in our various businesses, and we feel we are getting our money’s worth, obviously, and it works. But it just doesn’t have the lock that it used to have on the business. Now, what was the other question about? Did you want to repeat the first one? Oh yeah, the question about the insurance business, the intrinsic value.

The… I would say this. We have… I’m not going to give you a precise answer, but I will tell you this. We have $7 billion presently of float. That’s the money we’re holding that belongs to someone else, but that we have the use of. Now, if I were asked, would I trade that for $7 billion and not have to pay tax on the gain that would result if I did that, but I would then have to stay out of the insurance business forever, total forever non-compete clause of any kind in insurance, would I accept that? And the answer is no. Now, that is not because I wouldn’t rather… I would rather have $7 billion a float than $7 billion of net proceeds of free money. It’s because I expect the $7 billion to grow.

And if I’d made that trade that I’m just suggesting now, if I’d made that 27 years ago and said, will you take $17 million for the float, you have no tax to be paid, float for which you just paid $8 million when we bought the companies, and would and gotten out of the insurance business, I might have said yes in those days.

Charlie Munger [03:17:47] But you would have…

Warren Buffett [03:17:49] Yeah, yeah.

Charlie Munger [03:17:49] No, he keeps learning. That’s one of his tricks.

Warren Buffett [03:17:53] Yeah, that’s probably true in this case. I’m not sure about other cases. But it would have… it would have been a terrible mistake. It would have been a mistake to do it 10 or 12 years ago with $300 million. It is not worth $7 billion to us to forego being in insurance business for forever at Berkshire Hathaway, even though it would all be, you know, it would be… it would were… it were non… if it were non-taxed profit, so we got the full $7 billion pure addition to equity. We would not take it, and we wouldn’t even think about it very long. So, as Charlie says, that is not the answer that we would have given some time back.

But it’s a very valuable business. It has to be run right. I me… GEICO has to be run right, reinsurance business has to be run right, National Indemnity, Homestate Com… they all have to be run right. And it’s not automatic, but they have the people, the distribution structure, the reputation, the capital strength, the competitive advantages. They have those in place, and if nurtured, you know, they can become more valuable as time goes by. Zone five.

[03:19:07] Shareholder: Yes, I’d like to ask the chairman and Mr. Munger about Freddie Mac. Few years ago, I think they’re earning most of their money from the guarantee fees and the float. Now they’ve got the huge balance sheet, a lot of short-term liabilities. Do you think that’s a more risky business now, in that the spread might go away in some, you know, less than foreseen event?

Warren Buffett [03:19:41] Charlie, I think he aimed that one at you.

Charlie Munger [03:19:44] But horrible risks, it’s still a very good business.

Warren Buffett [03:19:48] Yeah. What the question referred to is that formerly Freddie Mac emphasized, and normally just the guarantee of credit, and then passed all interest rate risk onto the market. Now they’ve retained for their portfolio a greater percentage of the mortgages that come through their hands. I think they’ve structured the liabilities quite intelligently to handle what they call in the investment world the convexity problem, but which is that the borrower has the option of calling off the deal tomorrow and/or retaining it for 30 years. And that is a very disadvantageous contract to enter into if you lend money. They’ve done a quite an intelligent job of attacking that by callable debt and various things. But you can’t address a problem like that totally. There’s no way to set up some model that satisfies that entire risk. They’ve done a good job. But, Charlie says, the larger the portfolio as compared to guarantee fees, you… because you still got the… you’ve got the credit risk on the portfolio, and you’ve added a little interest rate risk at the extremes. And it doesn’t keep us up nights, but it… but it’s… it’s a tiny bit riskier than it used to be. Zone 5.

[03:21:17] Shareholder: Well, you did what you wanted. I mean, you followed my advice. I’m batting a thousand.

Warren Buffett [03:21:43] We’ll see what you’re batting next year.

[03:21:54] Shareholder: Disney at time and question is, I have to invest. I haven’t invested cette and McDonald.

Warren Buffett [03:22:19] Yeah, well, I won’t comment on the three companies that you’ve named, but in general terms, unless you find the prices of a great company really offensive, if you feel you’ve identified it, and by definition a great company is one that’s going to remain great for 30 years. If it’s going to be great, a great company for three years, you know, it ain’t a great company. I mean, it… So you really want to go along with the idea of feel bad leaving the money and on the trip and, you know, you come back and it’s going to be a terribly strong company. I think it’s better just to own them. I mean, you know, we could attempt to buy and sell some of the things that we own that we think are fine businesses, but they’re too hard to find. I mean, we found See’s Candy in 1972, where we find here and there we get the opportunity to do something, but they’re too hard to find.

So to sit there and hope that you buy them in the throws of some panic, you know, that you’d sort of take the attitude of a mortician, you know, waiting for a flu epidemic or something. I mean, it, I’m not sure that, I’m not sure that’s a will be a great technique. I mean, it may be great if you inherit. You know, Paul Getty inherited the money at the bottom in ’32. I mean, he didn’t inherit exactly, he talked to his mother out of it, but it’s true actually. Yeah, close enough. Yeah, close enough, right. But he benefited enormously by having access to a lot of cash in 19, in the early ’30s, that he didn’t have access to in the late ’20s. And so you can get some accidents like that, but that’s a lot to count on.

And, you know, if you start with the Dow X and you’re, and you think it’s too high, you know, when it goes to 90% of X, do you buy? Well, if it does and it goes to 50% of X, it gets, you know, you never get the benefit of those extremes anyway unless you just come into some accidental sum of money at some time. So I think the main thing to do is find wonderful businesses that… Is Phil Carret here? The, we got the world. Yeah, there, there’s what, there’s the hero of investing. Phil, would you stand up? Phil is 99. He wrote a book on investing in 1924. (Applause)

Phil has done awfully well by finding businesses he likes and sticking with them and not worrying too much about what they do day to day. There’s going to be an, I think there’s going to be an article in the Wall Street Journal about Phil on May 28th, and I advise you all to read it. You’ll probably learn a lot more of them by coming to this meeting. But it’s that approach of buying businesses. I mean, let’s just say there was no stock market and the owner of the best business in whatever your hometown is came to you and said, “Look at, you know, that my brother just died and he owned 20% of the business, and I want somebody to go in with me to buy that 20%, and price looks a little high maybe, but this what I think I can get for it. You know, do you want to buy in?”

You know, I think if you like the business and you like the person who’s coming to you and the price sounds reasonable and you’re really know the business, I think probably the thing to do is to take it and don’t worry about how it’s quoted. It won’t be quoted tomorrow or next week or next month. And I think people’s investment would be more intelligent if, you know, stocks were quoted about once a year, but it isn’t going to happen that way. So, and if you happen to come into some added money when, at some time when something dramatic has happened. I mean, we did well back in 1964 because American Express ran into a crook. You know, we did well in, you know, we did well in 1976 because GEICO auditors didn’t know what the loss reserve should have been the previous couple of years. So we’ve had our share of flu epidemics, but you don’t want to spend your life waiting around for… Zone 6.

[03:27:06] Shareholder (Joe Condon, London): I’m Joe, I’m Joe Condon from London. Both Mr. Buffett and Mr. Munger have addressed my question in annual reports and at previous meetings here. This is my first time. It has to do with investment in a few great high technology stocks. I know your answer has been that if you don’t understand it. I can’t, after this performance, can’t really believe that both of you don’t understand most of the high technology questions, but I’m thinking about not only Microsoft but, say, Pfizer and J&J. All three companies which have already proven that not only do they have a great product, proven management over 10 to 15 years, great market share positions which are not easy to get into, and I frankly don’t see a big difference on in the PE ratios, for example, if you say Coca-Cola, or, you know, against Johnson & Johnson or Pfizer, which are very powerful companies. I wonder if either or both of you would address that question again.

Warren Buffett [03:28:13] Charlie, what don’t you on.

Charlie Munger [03:28:16] If you have something you think you understand that looks very attractive to you, we think it’s smart to do what you understand. If we’d been unable to find companies, if we’d been unable to find companies slender talents, we well might have been in the it. We don’t snare at it. Other people with more talent have found that a wonderful course of action.

Warren Buffett [03:28:49] We generally look at businesses we feel change works is likely to work against us. We do not have great ability, we do not think we have great ability to predict the where change is going to lead. We think we have some ability to find businesses where we don’t think change is going to be very important. Now, at a Gillette, the product is going to be better 10 years from now than now, or 20 years from now then 10 years from now. You saw those earlier ads going back to the, going back to the Blue Blade and all that. The Blue Blade seemed great at the time, but they keep, the shaving technology gets better and better. But, you know, that Gillette, although they had that little experience with Wilkinson in the early ’60s, but you know that Gillette is basically going to be spending many multiples the money on developing better shaving systems than exist now compared to anyone else.

You know, they got the distribution system, they, you, they got the believability. If they bring out a product and they say this, this is something that happ… When they said to women, to look at it, in the shaving field. They wouldn’t, they don’t have, they wouldn’t have that same credibility someplace else, but in the shaving field they have it. Those are assets that can’t be built and they’re very hard to destroy at. So change, we think we know in a general way what the, so, soft drink industry or the shaving industry, what the candy business is going to look like 10 or 20 years from now. We think Microsoft is a sensational company run by the best of managers, but we don’t have any idea what that world is going to look like in 10 or 20 years.

Now, if you’re going to bet on somebody that is going to see out and do what we can’t do ourselves, I’d rather bet on Bill Gates than anybody else, but that, I don’t want to bet on anybody else. I mean, in the end we want to understand ourselves where we think a business is going. And if somebody tells us the business is going to change a lot, in Wall Street they love to tell you that, that, you know, that’s great opportunity. They don’t think it’s a great opportunity when Wall Street itself is going to change a lot, incidentally, but they, you know, it’s a great opportunity. We don’t think it’s an opportunity at all. I mean, we, it scares the hell out of us because we don’t know how it’s going to, how things are going to change.

We are looking, you know, when people are chewing gum, we have a pretty good idea what, how they chewed it 20 years ago and how chew 20 years from now, and we don’t really see a lot of technology going into the art of the chew, you know. But so that, as, and as long as we don’t have to make those other decisions, why in the world should we? I mean, you know, if I, it, all kinds of things we don’t know, and so why go around trying to bet on things we don’t know when we can bet on the simple things? Zone 1.

Charlie Munger [03:31:45] I can see the shareholders like us sticking with the simple ones. They understand us.

Warren Buffett [03:31:52] Yeah.

[03:31:52] Shareholder (Jerry Zucker, Los Angeles, California): Good afternoon, Warren. Jerry Zucker, Los Angeles, California. In the annual report, the second largest holdings of unsecured securities are labeled “others.” Could you please expand on some of the holdings there, like do we still own PNC, and are we supposed to be buying Big Macs as the press has reported?

Warren Buffett [03:32:12] Yeah, well, actually it’s a very descriptive title, “others.” It, we do that for several reasons, but one is that we have no interest in people buying Berkshire or looking at the Berkshire report, anything else in order to generate investment ideas for themselves. Some people may do it, but we are not, we are not in that business. Berkshire Hathaway shareholders are not being paid for that. There’s no way it benefits the owners of the company. So we will not disclose in the way of our security holdings more than we feel we have to disclose in order to be fair about things that can be material to the company. And we certainly have no interest in disclosing them to people who essentially want to use the information to try and figure out where our buying power may be subsequently or something of the sort.

So we will keep raising the cutoff level, and you will, you may see more and more in “others.” And I will say this, there’s a lot of speculation about what we do in the press, and I’d say about half of it’s accurate, about half of it’s inaccurate, and again we leave to you the fun of figuring out which half is right. Yeah, we hope you get a lot for your money in buying a share of Berkshire, but we don’t want to act as an investment advisory service. Zone 2.

[03:33:30] Shareholder (David Kohls, Appleton, Wisconsin): David Kohls, Appleton, Wisconsin. Earlier you made reference to the vicissitudes of time. What are the plans to ensure that all the computer systems and companies in which Berkshire has an interest will function correctly with dates of January 1st, the year 2000, and beyond? And what will you do to reassure shareholders that we will not suffer serious business loss or failure due to incorrect handling of these dates by computer systems?

Warren Buffett [03:34:01] Well, actually I’ve got a friend that’s quite involved in that, the question of… No, I’m serious about that, the 2000 question with computers. But that’s the kind of thing I don’t worry about. I mean, I’m, I will let the people who run the operating businesses work on that, and I’ll work on capital allocation, and I have a feeling one way or another we’ll get through it. But that, like I say, we have, there are a lot of things at Berkshire we don’t, we don’t spend a lot of time on a lot of things at headquarters that other companies have whole departments on. That, and we, our managers have not let us down. I mean, I must say that we’ve got a group at one business after another, and they focus on their business and they mail the money to us in Omaha, and we’re all happy. Charlie?

Charlie Munger [03:34:47] I have the feeling that our people will be quite good at keeping the computer systems in order and with backups. I also have the feeling that few companies could handle a big computer snafu better than we could. I have the feeling the Coca-Cola stock would be there, the Gillette stock would be there, the Nebraska Furniture Mart would be full of furniture and know the customers. I don’t think a computer crash is going to do us in.

Warren Buffett [03:35:14] You’re correct, though, that that is a problem for the computer world, but, as Charlie says, it’ll hit other people a lot harder than it hits us. Most of the things, we try to be in businesses that are fairly simple and that can’t get all messed up. And by and large, I think that we’ve got an unusual portfolio of those. It, and when it gets to our investees, you know, they’re going to worry about those problems themselves. We really worry about allocating money around Berkshire and having the right managers in place, that if we can do those two right, everything else will take care of itself. And Zone 3.

[03:35:56] Shareholder (Peter Bevelin, Sweden): My name is Peter Bevelin from Sweden. You have said that you like franchise companies, companies that have, that are castles surrounded by moats, companies that are possible to, you can have some prediction 5, 10 years down the road. But aren’t businesses like See’s Candy, the furniture business, the jewelry business, the shoe business, business that are hard to predict the future 5, 10 years down the road?

Warren Buffett [03:36:31] What was that on the last part of that?

[03:36:34] Shareholder (Peter Bevelin, Sweden): Aren’t these businesses hard to predict 5 or 10 years done, things like shoe business?

Warren Buffett [03:36:39] Yeah, I think they’re far easier to predict than most businesses. I think I can come closer to telling you the future of virtually all of the businesses we have, and not just because we have them. I mean, if they belong to somebody else, then if I took the Dow 30, excluding the ones we own, or with, or, you know, the first 100 companies alphabetically on the New York Stock, I think they’re, I think ours are way easier to predict. They’re fair, they tend to be fundamental things, fairly simple. Rate of change is not fast. So I feel pretty comfortable. I think when you look at Berkshire five years from now, the businesses we have now will be performing pretty much as we’ve anticipated at this time.

I hope there are some new ones, and I hope they’re big ones, but I don’t think that we’ll have had lots of surprises in the present one. My guesses will have had one surprise. I don’t know what it’ll be, but I mean, you know, you, that happens in life. But there won’t be a series of them. Whereas if you, if we were to buy, we owned a base metals business or many, many retailing businesses I can think of, or an auto business, I’m not sure I’d know where we would stand in the competitive pecking order five or 10 years from now. It, I would not want to try and come in and displace See’s Candies, for example.

in the business it does it, or the Furniture Mart. It just, it’s not an easy job. So I don’t think you’ll get lots of surprises with the present businesses of Berkshire, but the key is developing more of them. Zone 4.

[03:38:43] Shareholder (Stafford Ordahl, Morris, New York): My name is Stafford Ordahl. I’m from Morris, New York. I was just wondering if the surprise could be coming from Disney, because it seems to me they’ve been coasting up until very recently on the efforts of a person that’s no longer with the company, Katzenberg, who is one of those rare geniuses like Spielberg that has his finger on the pulse of the American people, and that they don’t come along every day, even in Hollywood. They might be a very different company now that all of his efforts are, so to speak, out of the pipeline.

Warren Buffett [03:39:34] Yeah. If you finished, or…

[03:39:36] Shareholder (Stafford Ordahl, Morris, New York): Yes.

Warren Buffett [03:39:37] Yeah, I, Katzenberg is a real talent. I would say that by far, I mean, by far the most important person at Disney in the last 12 years or whatever it’s been has been Michael Eisner. I mean, it, there’s, if you know him and what he has done in the business, there, there’s no one. Frank Wells did a terrific job in conjunction with Eisner, but Eisner has been the Walt Disney, in effect, of his tenure. He, he’s, he knows the business, he loves the business. You know, he eats and lives and breathes it, and he has been, in my view, by far the most important factor in Disney’s success.

Now, they face competition. The money is in, you know, the big money is in the animated films and everything that revolves around that, because you go from films to parks to character merchandising and back. And I mean, it’s a circular sort of thing which feeds on itself. There’s going to be plenty of competition in that. I mean, they’ve, you know, you’ve seen what MCA and Universal is going to do with in the parks in Florida, and you’ve, you know what DreamWorks is going to do in animation, and now you’ve got new technology in animation, you know, through Steve Jobs, and there’s a lot of things going on in that field.

So the question is, 10 years from now, what place in the mind, because it’s a share of mind, it’s not, you know, they call it share of market, but it starts with share of mind, and what place in the mind of billions of children around the world and their parents does Disney itself have, and their characters, relative to that owned by other organizations and other characters. And it’s a competitive world, so there will be people fighting for that. But I would rather start with Disney’s hand than anyone else’s by some margin, and I would rather start with Michael Eisner running the place than with anyone else by some margin.

So I, that does not mean that it can’t become a much more competitive business, because people look at the video releases of a Lion King and they salivate. That, you know, you sell 30 million copies of something that, whatever it may be, $16 or $17, and you can figure out the manufacturing costs, and, you know, it gets your attention and it gets your competitor’s attention. But going back, I, if I had to, if I thought the children of the world were going to want to be entertained 10 or 20 years from now and I had my choice of betting on who is going to have a special place, if anyone has a special place in the minds of the, those kids and their parents, I think I would probably rather bet on Disney. And I would feel particularly good about betting on them if I had the guy who has done what Eisner has done over those years presiding in the future. Charlie?

Charlie Munger [03:43:08] Well, I think it helps to do the simple arithmetic. Suppose you have a billion children of low middle income 20 years from now, and suppose you could make $10 per year per child after taxes from your position. It gets into very large numbers. And I don’t know about your children and grandchildren, but mine want to see Disney, and they want to see it over and over and over again. They don’t want to see Katzenberg.

Warren Buffett [03:43:50] Well, I mean, in terms of the trade name, it’s a pretty good trade name. I mean, when you think about names around the world, it’s interesting that, you know, there’s, very hard to beat the name Coca-Cola, but Disney’s got a, it’s a very, very big name. And Charlie’s point that they want to see him over and over again, and kind of nice to be able to recycle Snow White every seven or eight years. You hit a different crowd, and it’s kind of like having an oil field, you know, where you pump out all the oil and sell it and then it all seeps back in over seven or eight years. (Laughter) Zone 5.

[03:44:41] Shareholder (Randall Bellows, Chicago): I’m Randall Bellows from Chicago. Thank you for this marathon question and answer period. We enjoy it. Thanks. My question is on the security business, Wall Street firms in general, and specifically what do you feel about Salomon at this time? Thank you.

Warren Buffett [03:44:58] Well, we know more about the security business than we knew 10 years ago, and it, you know, it is a tough business to manage. There’s a lot of money made in the business, and then the, there throughout Wall Street I’m talking about there, you know, there’s very big sums of money made, and then the question is how does it get divided up between the institution and the people there. And you get to this question, I’ve often used the analogy of, you know, would you rather, if you’re an investor and you get a chance to buy the Mayo Clinic, you know, that is one sort of an investment, and if you get a chance to buy the local brain surgeon, that’s another one.

You buy the local brain surgeon and is practice for X millions of dollars, and the next day, you know, what do you own? And it’s, if you buying the local brain surgeon, you would not pay any real multiple of earnings, because he’s going to have this revelation several days later that it’s really him and not you there with your little stock certificate that’s producing the earnings, and it’s his reputation, and he doesn’t care. You imagine Berkshire Hathaway advertising brain surgery, you know how much business we would do. So he owns the business even though you’ve got the stock certificate.

Now, if you go to the Mayo Clinic, no one can name the name of anybody at the Mayo Clinic unless you live within 10 miles of Rochester, and there the institution has the power. Now, it has to keep quality up and do all the things that an institution has to do, but whoever owns the Mayo Clinic has an asset that is independent of the attitude of any one person in the place the next day. Wall Street has a mix of both, and there are some businesses that are more, where the value resides more in the institution, and there’s some where the value resides more in the individuals.

We’ve got a couple of sensational people running Salomon, and they wrestle with this problem as they go along, and they seem to be wrestling considerably more successfully currently than was the case close to a year ago. But it is not an easy business to run, and it’s not an easy business to predict, unless you have a business that’s very institutional in character, and there aren’t many of those in Wall Street. Zone 6. I’m sorry, we got it, the microphone’s over here. Yeah, just raise your hand and the monitor will supply the microphone.

[03:47:39] Shareholder (Howard Winston, Cincinnati, Ohio): Thank you. Howard Winston from Cincinnati, Ohio. One question: are you concerned about the rising valuations on the NASDAQ market, where companies traded multiples of revenues instead of multiples of earnings?

Warren Buffett [03:47:51] The rising value of what, did you say?

[03:47:54] Shareholder (Howard Winston, Cincinnati, Ohio): The NASDAQ market.

Warren Buffett [03:47:56] Oh.

[03:47:56] Shareholder (Howard Winston, Cincinnati, Ohio): That where they traded 10 times revenues or more, 30 times revenues instead of 10 times earnings.

Warren Buffett [03:48:02] Yeah, well, we don’t pay much attention to that, because there, throughout the careers Charlie and I have had in investing, there have always been hundreds of cases or thousands of cases of things that are ridiculously priced, and phony stock promotions, and the gullible being led into, to believe in things that just can’t come true. So that’s always gone on, it always will go on, and it doesn’t make any difference to us. I mean, we are not trying to predict markets. We never will try and predict markets. We’re trying to find wonderful businesses, and the fact that a part of the market is kind of screwy, you know, that is, that’s unimportant to us.

We tried a few times shorting some of those things in our innocence of youth, and it’s very tough to make money shorting even the obvious frauds. And there are some obvious frauds, and it really is, it’s not tough to, it’s not so tough to find the obvious frauds, and it’s not tough to be right over 10 years, but it’s very tough to make money being short then, although we tried a few times way back. It’s, we don’t look at indices, from stocks in general, or from P/Es or price-sales ratios or what other things are doing. We really just focus on businesses.

We don’t care if there’s a stock market. I mean, would we want to own Coca-Cola, the 8% we own of Coca-Cola, 11% of Gillette, if they said they, you know, “We’re just going to delist the stock, and we’re never, you know, we’ll open it again in 20 years”? It’s fine with us, you know. And then if it goes down on the news, we’ll buy more of it. So it, we care about what the business does. Yeah, Norton, did… Why don’t you give it, give him the microphone there.

NDNorton Dodge [03:49:59] Thank you, Warren, for including me out of order.

Warren Buffett [03:50:02] It’s good to, it’s good to have here, Norton. Norton represents a family that came in 1956, 6, yeah, that joined up with a partnership and been with us ever since. Very, very fortunate connection, and it, both, both ways. Norton, both ways. And careful, Norton, we don’t want you mobbed on the way out.

NDNorton Dodge [03:50:30] But I might say that it all began with my father discovering, thanks to professor finance that was also at the University of Oklahoma, Ben Graham back in 1940. And then later, when Ben Graham was about to retire, we were trying to find his protege, and clearly that was Warren, and so he belongs to that long tradition. But the question I wanted to ask was, you’ve mentioned the very strong companies that Berkshire has that are really international companies, like Coca-Cola and the Gillette, but are you considering, or have you ever thought of considering, the foreign companies that are undervalued, or have you for some reason not included that in your universe of companies to consider?

Warren Buffett [03:51:22] We’ve looked at companies domiciled in other countries, and we continue to look at companies domiciled in other countries. We wouldn’t, you know, we’re happy for the US and for Atlanta that Coca-Cola is domiciled in Atlanta, but would we pass on it if it happened to be domicile in England? No, we’d love it if it were domiciled in England too. And we feel that the important thing is the business, not the domicile. Although it’s a, we’re more familiar, general, in a general way with domestic companies that are domiciled here, although they make, they may make their money internationally. And we feel a tiny bit more comfortable, for just a tiny bit, in terms of understanding the nuance of taxes and politics and shareholder governance and all of that, in something where we’ve been reading and thinking about it daily, than some place where we’ve had a little less experience.

But we would love to find a wonderful business that is domiciled in any one of 30 or so countries around the world. We look some. We don’t look as hard as we look at domestic company. We’re not as familiar with them. But I have read hundreds of annual reports of companies is spread around the world, and we’ve owned a few, just a couple. They’re usually not as big, so just getting the kind of money and in many cases is, is more of a problem. But some of them are big, and we do not have such a surplus of ideas that we can afford to ignore any possibilities. And if we can find something with a market cap, probably, if at least $5 billion or greater that strikes us as having our kind of qualities and the prices right and everything, we will buy. Zone 1.

[03:53:15] Shareholder (Nelson Coburn, Silver Spring, Maryland): Good afternoon, Mr. Buffett. I’m Nelson Coburn from Silver Spring, Maryland. I have one question I want to ask. It hasn’t come up here yet. Where does the money sit that comes in, say, from dividends and whatever other income that comes into Berkshire, that you’re waiting to invest someplace else? Is it get someplace where it’s taking in a profit, or is it just sitting gathering dust?

Warren Buffett [03:53:47] Well, we only have about four or five commercial paper names we accept. We’re very picky about where we put the money. All gets invested. We do not have anything sitting around in the safe or any place else, so it’s all invested. But we do not get venturesome in the least in terms of where our short-term money goes. So we only have, like I say, maybe four or five approved names on commercial paper, all of which I approve. I mean, if anything ever goes haywire on this, it’s my fault. Right now we have, we have maybe $1 billion and something in relatively short-term Treasuries, and we have a little extra in some commercial paper maybe. But you will never see us reaching for an extra eighth of a percent on short-term yields.

Some of you may remember the fiasco in the, in Penn Central in the commercial paper market, and Penn Central around 1970 or thereabouts was paying a quarter of a point, as I remember, more than other commercial paper issuers. And of course they one day, despite showing a positive net worth, I think, of $1.5 billion or so, they said they had a lot of net worth but no cash. Turned out cash was more important, and so they defaulted. Now, the interesting thing about doing that is, if you’re getting a quarter of a point extra, and you came over on the Mayflower and you landed and you said, “Well, I’m going to apply myself to getting a quarter of a point extra on short-term money,” and you didn’t make any mistake until you got to Penn Central, you would, aside from the compounding aspect, you would be behind at that point. And I don’t like a business that you can do right for 300 years and then make one mistake and be behind. So we are very picky about short-term paper. But it is all invested, and when it’s large amounts, it probably will be in Treasuries, couple, couple firms whose commercial paper we take. Zone 2, please.

[03:56:09] Shareholder (George Gotti, Zurich, Switzerland): My name is George Gotti from Zurich, Switzerland. I’ve got a question with respect to Salomon. Salomon experienced quite a large of volatility in profits and even revenues in the past years. What are your views on how this will develop in the future with respect to volatility in profits and revenues?

Warren Buffett [03:56:32] I think get 100%. Charlie, want to?

Charlie Munger [03:56:35] Yeah.

Warren Buffett [03:56:36] Well, I can see, he can hear. That’s, we make a great (Laughter) combination.

Charlie Munger [03:56:46] Well, you can see we aren’t wasting much around the joint. Salomon’s earnings have always been volatile, at least all the time I’ve been around the place, and I don’t think that that volatility will, is likely to disappear. All that said, we very much like the people at Salomon, and they’ve done a ton of business with Berkshire over the years and a whole lot of different capacities, and they’ve done it very well. So we’re high on the firm as a customer, and firms we like as a customer, we think maybe other people will like as a customer. And generally we love it, volatile or no.

Warren Buffett [03:57:43] If you, at Salomon as well as other firms of that type, they mark their securities to market, and so that changes in those marks go through earnings daily, actually, but you see them quarterly. Interestingly, if you took Berkshire over the last 30 years and mark to market, as we do now for balance sheet purposes but not for income state purposes, because the rules are different in that case, if you did that, you would see enormous volatility quarter to quarter in Berkshire’s figures. You would, and you would, I don’t think you’d necessarily seen any down year, but you would have seen swings between a few percent and perhaps 50% or something. So, and if you looked quarterly, you’d have seen a number of quarters of losses, and you would have seen some great upsurges too, and the volatility would be extreme if it had all been run through the income account. But accounting convention does not call for running it through the income account in the case of Berkshire, and it does in the case of Salomon.

But the nature of their business is volatile earnings. The nature of most Wall Street businesses is going to be volatile earnings. Some may follow policies that tend to make it look a little less volatile than it might actually be, even. The real thing that counts is two things, really. I mean, is running it so that the volatility never kills you in any way, and then second is having a decent return on equity over time. And I think that the people, the top of Salomon, are very focused on that. I think it’s illogical for the credit rating agencies to mark down Salomon as much as they do because the earnings are volatile, but they’re in a style business, business, and it’s their game. Zone, what, we, Zone 3 now?

[03:59:48] Unidentified speaker: Yeah, Zone 3.

[03:59:49] Shareholder: Yes. I have three quick questions. Do you have any formal or informal way where the managements, I know that you don’t interfere with the managements of the holdings, but where they can cross-pollinate ideas, for instance, you know, selling World Book through the GEICO channel or something like that?

Warren Buffett [04:00:11] I’ll answer that right now. There’s very, very, very little of that. I, you know, maybe once in two or three years, maybe some idea might strike me as worth passing along, but I, they’re doing fine running their own operations, and we don’t do it within Berkshire either. They really, they go their own way. Now, they know what businesses we’re in, and so they can always go directly to somebody else, but they don’t need, they don’t need me to communicate. Zone 4.

[04:00:49] Shareholder (Mike Macy, Las Vegas, Nevada): My name is Mike Macy from Las Vegas, Nevada. My question is this: there have been some recent news articles on the problems at Lloyd’s. What effect, if any, do you see the problems at Lloyd’s having on an increase in the Berkshire insurance or reinsurance business?

Warren Buffett [04:01:12] Well, I think probably the, I think it’s fair to say that the problems of Lloyd’s have helped us, because Lloyd’s had a terrific reputation. It was the first stop and usually the last stop for all kinds of unusual risks and large risks 20 years ago. And the fact that they have lost some of their luster in that period has helped us. And, you know, we didn’t do anything to contribute to it, but it obviously benefits us as a competitor when questions develop about an organization which has been a premier player in the industry. So Berkshire probably possesses more capital than all of Lloyd’s put together, and it has established a reputation for being willing to quote on very large risk very quickly and to do exactly what it says. And it might very well be that in many cases we would get a call before they would get the call now.

So we’ve been a beneficiary, and probably in a fairly good-sized way, from their problems, and it’s more difficult for them to make inroads on us now than would have been the case 10 years ago. We have a, and I don’t like to lay it on too strong, but we do have a preeminent position in a certain area of really large scale reinsurance that will be difficult for anyone else to replicate. Now, they may not like our prices. There may not be demand for some of the things we can do. But if there is demand, we are very likely to get some very significant business out of that position, and we’ve seen it some in recent years, and we’ll see it more in the future. Zone 5.

[04:03:25] Shareholder (Mike Assael, New York City): Mike Assael from New York City, with a question for Charlie about the hundred or so models we ought to have in our head, mentioned at the end of the excellent worldly wisdom speech. I’d like to know the most useful models on industry consolidation, on product extension, on vertical integration, and any models which explain the special cases when it makes sense to invest in retailing stocks. And if Warren has anything to add or subtract, I’d love to hear it. Thank you very much.

Charlie Munger [04:03:58] Well, I’m glad to answer such a modest question. I spoke about having 100 models in your head, but those are all great big models of considerable generality that are useful over and over again. Now you’re down into very complex submodeling when you get into a separate model for what’s going to happen and industrial consolidations and retail and so on. And I’m not up to all those submodels. The truth is, you know, we’re up to a few, and, but we take the general models and, you know, plug them in, and sometimes the light goes on, and some, sometimes the light goes on and sometimes it doesn’t. But if it does, they could be quite useful.

Warren Buffett [04:04:58] That, if you focus, you do see repetition of certain business patterns and business behavior, and Wall Street tends to ignore those, incidentally. I mean, that Wall Street really doesn’t seem to learn for very long business lessons. It may not be to their advantage to learn it. Charlie, would that, would probably plug right into Charlie’s m…

Charlie Munger [04:05:28] You bet.

Warren Buffett [04:05:29] Yeah, it’s better to, you know, to, if you’re out selling the future, it may be better to forget the past if you’re getting paid on selling it and not on, not un bedding your life on it in some way. One situation at Berkshire that really is somewhat different than many companies, we assume, and unfortunately it’s an error, but we assume we’ll be around forever. So when we, in our insurance business, we assume we’re going to be here to pay every claim, and we’re not going to retire at 65 and hand over something to someone else. And we, it wouldn’t be any sense playing games on accounting, because it would catch up with us later on.

And whereas in many businesses, I don’t think they have quite the same horizon on things. They do it a Coca-Cola, or they do it a Gillette, but many companies are thinking about what kind of, I think, I’m afraid that more than you’d like are thinking about what kind of little pictures they can paint for the next four quarters or so. And that’s easy to do, but our problem is we’re going to be around a lot longer, we think, than four quarters, so that’s not an option available to us. And we have to, we really run it as if in the year 2050 or something somebody’s going to look and say, “Did, how’d it work out?” Zone, where are we, 5 or 6, wherever the microphone is? Zone 5, we got a mic over there? Maybe that was it. 6? Okay, we’ll go to 6. Could you get the microphone, or do we have one in there? Yeah, want to bring in the microphone, particularly for the people behind you. It’s a little difficult.

[04:07:14] Shareholder (Glenn Rollins, Atlanta, Georgia): Glenn Rollins, Atlanta, Georgia. You state in your letters to shareholders that with your wholly owned companies you reward them at a higher rate when they release capital to you, and you likewise charge them a higher rate when they need capital. Could you elaborate on that?

Warren Buffett [04:07:30] Well, we, some of our businesses don’t need capital at all, or need so little that it doesn’t make sense to build it in, into a formula. So we have certain businesses, those are the best businesses, incidentally, that take, to take essentially no capital, because it means that if you double the size of the business, you don’t need any more capital. And those are really wonderful businesses, and we got a few of those. But where our businesses do produce capital, we could have all kinds of complicated systems and have capital budgeting groups at headquarters and do all kinds of things, but we just figure it’s simple, simpler to charge people a fair amount for the money and then let them figure out, you know, whether they really want to buy a new slitter or whatever it may be in their business.

And it varies a little bit. It varies on the history of when we came in, it varies on the interest rates of the… But we generally will be charging people something in the area of 15% in terms of working out compensation arrangements for capital. Now, 15% pre-tax, depending on state income taxes, is only 9% to 9.5% after tax, so you say that isn’t even enough to charge people. But we find that 15% gets their attention, and it should get their attention, but it shouldn’t be such a high hurdle rate that things that we want to do don’t get done. Our managers expect to be running their businesses for a long, long time, so we don’t worry about them doing something that works for them in the next year but doesn’t work five years out, or vice, you know, where they don’t make longer plans, because they see themselves as part owners of the business. But we want them to be owners with a cost attached to capital.

We think it’s awful, frankly, the way businesses reward executives with absolutely no regard for the cost of capital. I mean, a fixed price option for 10 years, you know, imagine giving somebody an interest-free loan for 10 years. You’re not going to do it. And if a company is retaining a significant part of his earnings, and you give out a fixed price option for 10 years, you know, you, they can do nothing with it but put it in the savings account and they’ll make some money off of it. So we like attaching a cost of capital. If we had options for me and Charlie at Berkshire, which would not, it’s not going to happen, but it would not be illogical, it would not be illogical, we have responsibility for the whole place. You could have some kind of a compensation arrangement that worked in respect to how the whole enterprise fared, and it would make sense for the two of us.

It wouldn’t make sense for the rest of our managers, because they work on specific units, and you should have compensation arrangements that apply to those units. But assuming you had it for the two of us, which we’re not going to have, I want to assure you, but we would say the fair way to do that would be to have an option at not less than present intrinsic value. Forget what the market price is, because believe me, at, you know, the idea of having the more depressed your market price be, the better your option price be, does not make any sense. So we would have it at not less than intrinsic value, and then we would have it step up yearly based on something relating to a cost of capital, because we would say, why should we get free use of the shareholders’ capital?

And we could work out a fair stock action that would be perfectly appropriate. We won’t do it, but it’d be perfectly appropriate way to have us compensated that involved an issuance than an initial price of not less than intrinsic value and involved carrying costs. And then we would be in a position still not totally analogous to shareholders, because we wouldn’t have a downside that you have, but we would at least have the carrying cost that you have of ownership. And we work that through into our unit compensation plans by having a cost of capital that, like I say, tends to run about that 15% area. And if people can give us money, we should be able to figure out a way to do something better than 15% pre-tax with it. That’s part of our job too. So we will pay them to give us back money.

Charlie Munger [04:11:39] Well, we really invented a more extreme system, and that is the executives can buy Berkshire Hathaway stock in the market for cash. This is a very old-fashioned system, but most of them, it doesn’t take any lawyers or compensation consultants or… And most of them have done it, and most of them have done very well with it. I don’t know why it doesn’t spread more. People say they want their management to think like shareholders. Management, you know, they compensation going to have them think like shareholders. It’s very easy to think like a shareholder: become one, you know, and you’ll think exactly like a shareholder. It’s not a great, it’s not a, you know, not a huge psychological hurdle to get over if you actually write a check.

Warren Buffett [04:12:19] Zone 1.

[04:12:19] Shareholder (John Lichter, Boulder, Colorado): John Lichter from Boulder, Colorado. Are there some worthwhile books that you could recommend to us? And secondly, with respect to Eisner and Disney, how would you define Michael Eisner’s circle of competence, and are you concerned that he might step outside it?

Warren Buffett [04:12:39] Well, I would say that he has proven himself very good at understanding what Disney is really all about. And I, and you can look back to the predecessor management between Walt and Eisner, and they didn’t really do much with that, if you look at those years. It, you know, what is the, what is special about Disney, and how do you make it more special, and how do you make it more special to more people? I mean, those are the things that you want to m…, and you’ve got wonderful ingredients to work with when you’re working with something like Disney. I mean, it, you know, one of the advantages, we were talking about the Mayo Clinic and brain surgeons, and the nice thing about the mouse is that he doesn’t have an agent. You know, I mean, the mouse is yours, and he’s not in there renegotiating, and, you know, every week or every month, and saying, you know, “Just look at how much more famous I’ve become in China,” you know, or something. So if you own the mouse, you own the mouse, and Eisner understands all of that very well. I would say he’s been very skillful in terms of how he’s thought about it.

I worry about any manager, has nothing to do with Michael Eisner, but Charlie and I worry about ourselves in terms of getting out of our circle of competence, and we’ve done it. It is very tempting, and it’s probably part of the human condition, in terms of hubris or something, that if you know, that if you’ve, as Charlie would say, if you, you know, if you’re a duck floating on a pond and it’s been raining and you’re going up in the world, after a while you think it’s you and not the rain. You know, that you’re some duck. But, right, and we allum to that a little bit. But I think that, I think Disney, Coca-Cola, Gillette, I think those companies are very focused. I think our operating units are very focused, and I think that gives us a huge advantage over the managers that are getting a little bored and decide that they better fool around with just how talented they really are. Charlie?

Charlie Munger [04:14:44] Yeah, Eisner is quite creative, and he also distrusts projections, and that is a very good combination to have in the motion picture business.

Warren Buffett [04:14:56] Yeah, Charlie was a lawyer for, what, 20th Century, in the old…

Charlie Munger [04:15:01] Yeah.

Warren Buffett [04:15:02] And he saw a little bit of how Hollywood operated and kept us out of buying any motion picture stocks for about 30 years. Every time I go near one, he’d regale me with a few stories of the past.

Charlie Munger [04:15:18] So it’s a business where people are, can trade other people’s money for their own significance in their world, and that is a dangerous combination. Where if I can buy significance in my world with your money, you know, there’s no telling what I’ll do. Part of the business reminds me of an oil company in California, and it was controlled by one individual, and people used to say about it, “If they ever do find any oil, that old man will steal it.” And the motion picture of business, it’s only about half of it that has normal commercial morals.

Warren Buffett [04:15:53] We’re not, we’re not applying that to Disney.

Charlie Munger [04:15:56] No, Disney, Disney is really, Disney’s not an extraordinary job for the shareholders, and they make real money out of movies. Most movie companies have, they made money for everybody associated with it, but not a lot of stuck to the shareholders.

Warren Buffett [04:16:11] Zone 2. What? Oh, the books. Charlie, what are you reading these days?

Charlie Munger [04:16:17] Well, I’m almost ashamed to report, because I’ve gone back and picked up the part of biology that I put up, should have picked up 10 or 15 years earlier. And if any of you haven’t done it, it’s a total circus what they figured out over the last 20 or 30 years in biology. And I, if you take Dawkins, The Selfish Gene and The Blind Watchmaker, I mean, these are marvelous books, and there are words in those books that are entering the English language that are going to be in the next Oxford dictionary. I mean, these are powerful books, and they’re a lot of fun. I had to read The Selfish Gene twice before I fully understood it, and there were things I believed all my life that weren’t so. And I think it’s just wonderful when you have those experiences. We always say it isn’t the learning that’s so hard, it’s the unlearning.

Warren Buffett [04:17:17] Yeah, I made the mistake of taking Charlie up to Microsoft in December, and he became friends with Nathan Myhrvold, and they are corresponding back and forth with increasing fervor and enthusiasm about mole rats. And they copy me on all these communications, so I’m getting to see this flow back and forth on the habits of mole rats. I really haven’t found a way to apply it at Berkshire, but I’m sure Charlie has got something he’s working on of that. He’s gotten very interested in biology lately, at the… I like, I, you know, I’ve always liked reading biography, but since the computers changed my life, I now find myself playing bridge on the computer about 10 hours a week, and unfortunately I didn’t want to give up sleep or eating or Berkshire, so the reading has been kind of light on investment books.

If you’re asking about that, I would recommend the first two books that Phil Fisher wrote back around 1960, Common Sense and Uncommon Profits, and the second one. They very good books. You know, I obviously recommend, first and foremost, The Intelligent Investor, with chapters 8 and 20 are the ones that you really should read. Two of the, well, all of the important ideas in investing really are in that book, because there’s only about three ideas, and those two, two of them are emphasized in those two chapters. Actually, I think John Train’s Money Masters as a, as an interesting book. I don’t know, can you think of any others, Charlie, that we want to tout?

Charlie Munger [04:18:52] I don’t know. We have such a fingers and toes style around Berkshire Hathaway. We sort of count, and…

Warren Buffett [04:19:01] Yeah.

Charlie Munger [04:19:02] The, I’ve never seen, you know, we, Warren talks about these discounted cash flows. I’ve never seen him do one.

Warren Buffett [04:19:09] Yeah.

Charlie Munger [04:19:10] If it isn’t…

Warren Buffett [04:19:11] There are some things you only do in private, Charlie.

Charlie Munger [04:19:14] If it isn’t fl…, perfect obvious that it’s going to work out well if you do the calculation, he tends to go on to the next idea.

Warren Buffett [04:19:24] Yeah, it’s sort of a, o… It is true. You don’t, if you have to, if you have to actually do it on, with pencil and paper, it’s too close to think about. I mean, it ought to just kind of scream at you that you’ve got this huge margin of safety. I mentioned the three ideas. The three ideas, I should elaborate on. One is that the, think of yourself, the, think of investing as owning a business and not buying something that’s wiggles around in price. And the second one is your attitude, which ties in with that, the attitude toward the market. That’s covered in chapter 8. And if you have the proper attitude toward market movements, it’s an enormous help in securities. And the final chapter is on the margin of safety, which means don’t try and drive a 9,800 lb truck over a bridge that says, you know, “Capacity 10,000 lbs,” but go down the road a little bit and find one that says “Capacity 15,000 pounds.” Zone 2.

[04:20:20] Shareholder (Chip Tucker, Minneapolis): Yes. Chip Tucker, Minneapolis. Mr. Buffett, Mr. Munger, what market share does Berkshire have in Supercat insurance business, and what’s your outlook for both the market growth in that business and the potential market share growth with, from Berkshire? You answered a related question regarding Go Auto opportunities. Are there other insurance businesses potentially worth expanding into? Is your focus on Supercat and off and autos opportunity enough?

Charlie Munger [04:20:44] You know, Warren can answer that question a lot better than I can.

Warren Buffett [04:20:48] I, we don’t, there wouldn’t be any good market share figures in something like Supercat. We know, we know that a couple years, and last year I think too, we had to be the biggest in terms of premium volume. We simply take on so much more than anyone. Well, and we were getting the calls on the big risks, you know, $400 million here or something of the sort. We had a quote, we put on a billion dollars on the, the new M, new New Madrid fault here a little while ago. Nobody else will be doing that. So we got market share by our willingness to do large volume, by the fact that people knew we would pay subsequently. But we don’t, while we know we were the largest, we can’t, we can’t give you any precise figures. We also know we’re slipping in that now, but that makes no difference to us. We’d only be interested if we were slipping in profitable markets. And what was the second part of the question on that, Char…

Charlie Munger [04:21:49] Oh, what other opportuni… insurance business.

Warren Buffett [04:21:52] We just, this year we bought a very, very small company, the managers of whom are here, and a very fine insurance company, has a little niche. I mean, it will never be huge or anything of the sort, but it’s the kind of business that we can understand, and we like the people that run it, and we like the position they’ve achieved in the market, so we’re delighted to be in it. We are willing to think about a whole variety of things to do in insurance, but most of them we find make no sense. But that we’ll be, we’ll do other things in insurance over the next 10 or 15 years. It’s just bound to happen, but I can’t tell you what they will specifically be. The biggest single thing we will do in terms of value, though, probably is grow GEICO. But we will do other things, and who knows what they might be.

We have expanded some in the str…, it’s small business, the structured settlement business, from when we talked a year or two ago, and we are the preferred provider of structured settlements. Those are annuities, essentially, that are payable to people who are usually the victims of a very bad accident, and so they’re very severely injured people. The injuries will probably last life, and so we will be making payments to people who are incapable of earning a living, may incur substantial medical bills, for many decades, sometimes 50 or 60 years. Those annuities are provided by our companies to other insurance companies and to these injured people, usually with the approval of the injured person’s attorney. And when the advisers to the injured person think, who is going to be around in 50 years to pay, to make money to this person who’s been incapacitated, they frequently, and in our view logically, think of Berkshire.

So we have become much better known in that over the last couple of years. It’s not a big business, and it won’t be a big business, but it’s a perfectly decent business, and it’s one where we have a competitive advantage over time. We don’t obtain the competitive advantage by price. We obtain the competitive advantage from the peace of mind that the injured party obtains from knowing that that check will be in the mail 50 years from now. And that’s the kind of business where we have some edge, and we’ll find other things to do over time. But, can’t, I can’t, it isn’t like we’re looking at some specific area and saying we’re focusing on this. We’re aware generally of what’s going on in the insurance business, and we’re very ready to move. Zone 3.

[04:24:47] Shareholder: Mr. Buffett, Mr. Munger.

Warren Buffett [04:24:49] Zone 3, Zone 3.

[04:24:51] Shareholder: Mr. Buffett, Mr. Munger, a great deal of respect for your integrity and your wisdom. I work as an inner city school teacher, where there is a rising and pervasive sense of hopelessness. When I ask my students what would make you happy, their predominant response is a million dollars. As some of the richest men in the world, I wonder what your response to them might be. And as a second part of this question, the philosophical underpinnings of capitalism have largely ignored a systemic perspective involving issues of ongoing depletion of limited global resources exploited to sustain a market economy, widening gaps between the very wealthy and the severely impoverished, and an international view of America as a country whose primary values are greed and imperialism. As we move into the 21st century, do you see a need to re-envision capitalist premises towards original notions of democracy, justice and humanitarian concerns?

Warren Buffett [04:25:53] Didn’t get all of that, but…

Charlie Munger [04:25:57] Well, I will say this. I’m higher on the existing social order than you are. I, there’s always plenty wrong with a social order, and certainly there are places where ours is a lot more broken than it used to be. I don’t think Warren and I have any wonderful solution to all the problems of the world. But wishing for a million dollars instead of some more tangible short step is the wrong frame of mind. That isn’t the way we got our million dollars. But I (Applause) don’t, Warren might give a different answer, by the way. He’s…

Warren Buffett [04:26:55] No, I would agree with the, I, you know, wishing for a job, I, makes a lot of sense to me, and figuring out how to get one and then going from there. But it, there is, and always has been, that doesn’t mean it always should be, but there is a tremendous amount of inequality. What you don’t want is an inequality of opportunity. There will be a lot of inequality in ability. A market system like we have turns out what people want. If they want to watch a heavyweight fight and they want to watch Mike Tyson, they’re going to pay him $25 million for getting in the ring for a few minutes, and it produces what people like, and it produces in an abundance, and it’s done very well in terms of production. It is much better to be in the bottom 20% in this country now than it was 50 years ago, and it’s better to be in the bottom 20% of this country than in any other country. But it still isn’t very satisfactory. The market system does not reward, it does not reward teachers, it does not reward, I mean, does not reward all kinds of people who do all kinds of useful thing in any way comparable to how will reward entertainers or people who can figure out the value of businesses or athletes or that sort of thing. A market system pays very big for something that will entertain them. People want to be entertained a good bit of the day, and the pays better for people that will entertain and educate, I think.

I don’t want to tinker with the market system. I don’t think I should be telling people what they should want to do with their lives. But I do think that it’s incumbent on the people that do very well under that system to be taxed in a manner that takes reasonable care of anybody that is not well adapted to that system, that but that it’s a perfectly decent citizen in every other regard. And that is, you know, I don’t want to start getting into comparable worth in terms of how I tax, but I do think that somebody like me that happens to just fit this system magnificently, but wouldn’t be worth a dam in Bangladesh or someplace, you know, because that would, what I have wouldn’t pay off there, their system would not reward that.

I think that we get from society, the society provides me, this society provides me with enormous rewards for what I bring to the game. It, and it does the same with Mike Tyson, and it does the same with some guy whose adids at right for singing or whatever it may be. And I don’t want to tamper with that, but I do think those people who are getting all kinds of claim checks on the rest of society from that, where people who are not well adapted to that system but that are, but that are perfect, really, you know, fall through the slats on that. And I think progress has been made on that over the last 50 years, but I think we’re far from a perfect society in that respect. And I hope, you know, more progress has made in the next 50 years.

I don’t think the wishing for the million dollars, though, is that, you know, it just, it doesn’t work that way. And I think, but if you are lucky enough to have something that this, the market system rewards, you do very well here. And if you’re unlucky enough to have something it doesn’t reward, you, you do better now than you would have 30 or 40 years ago, and you do better than in other countries. But I can see where it seems very unjust to look at somebody else who has just a little different mix of talents that can achieve claim checks in a way that keeps them and the next five generations, their family in a position where they don’t have to do very much.

Charlie Munger [04:30:49] I would say that I like a certain amount of social intervention that takes some of the inequality out of results in capitalism. But I hate with a passion rewarding anything that can be easily faked, because I think then people lie, and lying works, and the lying spreads, and I think your whole civilization deteriorates. If I were running the world, the compensation for stress under workman’s compensation would be zero. Not because there isn’t real stress, because there’s no way to keep the fakery out if you reward stress at all.

There was a great article, and this applies to an earlier question, there was a very good article in Forbes about one issue ago that showed the occupational of different intervals going back the 1900. One problem you can see just by looking at that profile is that if you assume 20% of the, the bottom 20%, however you measure it in terms of employability, whether it’s measured by IQ or interest in working or energy level or whatever you want to do, they fit very well most of the jobs that were available 100 years ago. In other words, that you could do most of the jobs, of which there were many, with relatively unimpressive mental abilities. And as jobs have changed, the profile of people hasn’t changed. So there are more people that end up on the short end.

Now the good part of that is the society produces so much more that it can take care of those people one way or another. Now the trick is to take care of them and make them not only feel but be productive and be part of the act. And we’ve got enough product to do that, but we don’t have, we’re not perfect at figuring out how to make the bottom 20 or 30% in terms of abilities fit a new changing job profile. I really recommend you look at that Forbes Magazine, because if you think through the implications of those charts, I think you’ll see what social problems have to be attacked.

Warren Buffett [04:33:21] Zone 4.

[04:33:22] Shareholder (Edward Barr, Lexington, Kentucky): Edward Barr, Lexington, Kentucky. Earlier you led us through a discussion of the competitive position of Disney, and you also discussed share repurchase. I wondered if you could also lead us through a discussion of the competitive position of Wells Fargo, since they just affected such a large combination, in addition with perhaps some discussion of their share repurchase, which is probably as large in percentage terms, is any company I can think of at the present time.

Warren Buffett [04:34:02] Well, Wells should repurchase their shares if they feel that they’re repurchasing the below intrinsic business and you should have to ask the question of them how they, what their calculus is of that. But that will determine whether that share repurchase program makes good sense or not. The advantages of an in-market merger are, can be dramatic. Sometimes it just causes a bank to do what they should have done anyway. I mean, I’m not, so I’m not as always convinced that the economies come about through… Look at how they run their, we, there’s a CEO of the Bank of Granite, which is in Granite, North Carolina, and that bank earned 2.58% on assets, I believe, in… Now that bank is $400 million or $500 million of assets. You know, it doesn’t need to be $5 billion in order to get more efficient or anything of the sort. It’s got, it’s so much more efficient than any of those larger banks that had to be put together to get those ratios that it makes you kind of wonder about the underlying rationale.

But I’m sure that Mr. Forlines, who runs that bank, just focuses on, and he’s been focusing on it for a lot of years, just doing the right things day after day, and didn’t take any in-market merger or anything of the sort to cause him to do that. I recommend any of you banking business that get his report, because there is nothing magic about the community of Granite, North Carolina, nor does he work under laws that are way different than the rest of bankers or anything of the sort. He just gets a record that, a record that makes all the rest of the records look silly.

And we had a fellow over in Rockford, Illinois, in the bank we owned back in the ’70s, Gene Abegg, who, his brother was, is going to be 104. There was a fellow from Rockford here that got me to sign a note to Ed Abegg, who will be 104 soon. I wish Gene had lived to 104, but Gene ran a bank in Rockford that won bank, and he did it with way less leverage than anyone else and lower loan losses and big investment portfolio. And there wasn’t any magic about it. He just didn’t do anything that didn’t make sense. And there’s a lot of room for improvement in the banking business, with or without mergers.

But I would say that Wells, on the record, has done an exceptionally good job of running their bank compared to other big banks. And I would say that the, those two operations put together will be efficiently than if First Interstate had been run. It’s a business that can be a very good business when run, r… is the Bank of Granite or our Illinois National Bank in Rockford proved. There’s no magic to it. You just have to stay away from doing something foolish. It’s a little like investing. You know, you don’t have to do anything very smart, you just have to avoid doing things that are ungodly dumb when looked at about a year later, and, you know, airlines and that sort of thing. And, you know, that’s the trick. It is not, it is not some great crystal ball game where you look into the future and see all these things that other people can’t possibly see. I mean, what’s complicated about Coca-Cola or Gillette or Wells Fargo, for that matter?

And that’s, we like, we like businesses like banking if we’ve got somebody in charge of them that is going to run them right. We’ve got a, I don’t know whether Bob Wilmers is here, but he runs First Empire, which we have a good-sized investment in, and Bob just runs it right. You know, I do not worry about surprises from Bob or First Empire. And he’ll do things if he can grow, and it’s logical, he’ll grow. And if it isn’t logical to do something, he’ll pass. He has no ego compulsions forcing him into some sort of action, and he runs a terrific b…

[04:38:19] Shareholder (Dorothy Craig, Seattle): Dorothy Craig from Seattle. And I noticed in the annual report that your recent acus… ACU… AC… annual report that your recent acus… ACU… acquisitions dou…

Warren Buffett [04:38:29] Well, it’s, it, for one thing, we started from kind of a small base. The, but we, the GEICO acquisition, you know, added $3 billion or so of revenues, and actually more than that, a little more than that, but not much more. And R.C. Willey and Helzberg’s probably added $600 million or so in the current year. And since we were working off a base of $3.5 billion or so, those three acquisitions did double the revenues. We won’t have many years when that happens. It’s not any goal of ours to double the revenues or increase in 20%. It comes, that makes sense, we’ll do a lot, and if there’s nothing that comes along that makes sense, we’ll do nothing. So it’s, there’s a lot of accident in it. But last year, you know, a fair amount happened, and I’d love to see a lot happen next year, but we don’t know at this point.

Charlie Munger [04:39:29] Nothing.

Warren Buffett [04:39:29] Zone 6.

[04:39:30] Shareholder (Victor Luma, Virgin Islands): Oh, me. Yes, my name is Victor Luma, and I’m from the Virgin Islands. And my question is on the GEICO asset, asset side. One of the things that makes Berkshire unique is the high percentage in equity as opposed to fixed assets. And GEICO, as of the end of the year, looked like a typical insurance company with four times the fixed assets is equity assets. And my question is, over time will they have the same composite as Berkshire on the asset side? And the second part of that question is, how are the asset allocations decisions being made at GEICO after the merger as compared to before the merger?

Warren Buffett [04:40:32] The decisions at GEICO, which, as you say, is about $5 billion of marketable securities, have been made and are being made and will be made by Lou Simpson. Lou has done a fabulous job of running the investments of GEICO since about 1979, and we’re lucky to have him there’s over, but we’re delighted in the case of Louis. I mean, it’s one in a thousand or something. But Lou has done a terrific job, will do a job.

And the one thing we offer him, he has the ability to do whatever he wants to do with those assets now. He did not have that ability before GEICO became part of Berkshire, because at that time there were certain ratios that were necessary for, which were understandably necessary, that made sense, where with GEICO as a standalone entity, with its own net worth of $1.5 billion or $2 billion and doing $3 billion of business, it would have been inappropriate for him to take on a different configuration beyond a certain point in equities. So he was constrained by the nature of the business he was in and its capitalization. That constraint no longer applies.

So he, with that $5 billion, can do whatever he wants. Now if he does certain things, we would need to provide backup to GEICO so that their policyholders would be protected under the most adverse of circumstances. But that’s no problem for, we could do it by quota share reinsurance, we could do a lot of things, we could just guarantee their obligations, and we are in a position to do that. We haven’t done it yet because it’s not, hasn’t been necessary yet. But if it made sense, if gu…, if Lou wanted to be $5 billion in equities and it made, and it made, it made sense, we would arrange things so that the GEICO policyholders would be every bit as secure as under the most conservative of investment portfolios. So Lou has another string to his bow now, and there may be a time when it gets used. He’s been great under the old system, and he may be better under this system.

Charlie Munger [04:42:47] That’s a very shrewd question. You’re to be complimented.

Warren Buffett [04:42:51] That means it’s something we thought about before. But you are to be complimented, right. Let’s see, zone 1.

[04:43:00] Shareholder (Neil McMahon, New York City): Neil McMahon, New York City. Berkshire owns several companies’ stock in several career market, the one-decision stocks, high P/Es, 50, 60 times earnings. If that were to reappear again, would Berkshire’s companies still be permanent, or is there a price for everything?

Warren Buffett [04:43:25] Well, there are things that we think there are no, there’s no price for, and we’ve been tested sometimes and haven’t sold them. But I, you know, my friend Bill Gates says, you know, that has to be illogical. At some point the numbers have, at some price you have to be willing to sell something that’s a marketable security, forgetting about a controlled business. But I doubt if we ever get tested on, there’s only a couple of them in that category. Actually, there, I won’t comment on that. The, we really have a great reluctance to sell businesses where we like both the business and the people, so I don’t think’s… Keep an eye on me, Charlie.

Charlie Munger [04:44:20] The so-called two-tier market created difficulties, I would say, primarily because a lot of people, companies were called tier one when they really weren’t. They just had been at some time tier one. If you’re right about the companies, you can hold them at pretty high values.

Warren Buffett [04:44:43] Yeah, you can really hold them at extraordinary levels if you’ve got… It’s too hard to find. You’re not going to find businesses that are as good. So then you have to say, am I going to get a chance to buy back the same business at a lot lower price, or am I going to buy something that’s almost as good at a lot lower price? And we don’t think we’re very good at doing that. We’d rather just sit and hold the business and pretend the stock market doesn’t exist. That actually has worked out way better for us than I would have predicted 20 years ago. I mean, that mindset has, or 25 years ago, that mindset is, there’s been a fair amount of good fortune that’s flowed out of that that I really wouldn’t have predicted.

Zone 2.

[04:45:40] Shareholder (Alan Rank, Pittsburgh, Pennsylvania): Alan Rank, Pittsburgh, Pennsylvania. Knowing your aversion to technology, but your close affiliation with Bill Gates, Microsoft, have you ever considered either inviting him to be part of the Berkshire through the board, or being involved to maybe solve some of the problems with World Book and taking it to the new technology and expanding it? And on the other end, you also love insurance and the float. Have you considered the other businesses that would have that similarity, such as cemeteries and funeral homes, with their pre-, and their large cash reserves?

Warren Buffett [04:46:16] The, Bill and I talked about encyclopedia business some years ago, but he was pretty far down the line at Encarta, quite far down the line at Encarta, actually, before I even met him. So it wasn’t, my guess is if we’d met earlier, that, you know, there might have been something evolved in that. But he had, he had put a lot of chips on Encarta and had done a good job with it, so it really wasn’t, it wasn’t a real option to work with him on, on World Book.

Bill also is very focused on his business, and I believe he’s on the board of some biotech company in which he’s got a significant investment, but you will not see him on the boards of, at least I don’t, Pacific Northwest, where has a lot of friends and knows the companies well, maybe grew up with some of the people. But I don’t think you’ll see him on anything which really doesn’t, which is just a business that doesn’t grab him intellectually on something. I do think there’s one biotech company that he’s involved in that way. And, you know, he’d be a terrific asset, but he really focuses on Microsoft. He has his board meetings, as I remember, on Saturday, last, you know, all day, and he goes after the business that way. He’s not, I don’t think he’d be interested in being on a bank board or an insurance company board, because he just figures he’s got other things to do with his time, and I think he’s probably right.

Zone 3. Oh, the question was about other, other kinds. We’ve always had an interest in float businesses of one sort or another. But, you know, Blue Chip Stamps was such a business, and until it disappeared one day, we couldn’t find it. We went, looked in the closet, looked everywhere, out in the backyard, where was it? So we like that sort of business, but most of, most the float businesses, the costs are pretty explicit. And like I said, we don’t like most insurance companies as float businesses. We are not interested in buying the typical insurance business, because we think the float will end up costing us too much. We’d rather borrow money with an explicit cost attached to it rather than have the implicit cost of an underwriting loss with most company. But we’re always, we are interested in businesses that provide cash rather than use up cash. We’re willing to have them use cash if what they use will produce high enough returns, but we’ve got this bias toward things that throw off cash. Char…

Charlie Munger [04:49:07] Well, if we go into the preed funeral home business, that’ll be the day.

Warren Buffett [04:49:17] Yeah. Zone 3.

[04:49:18] Shareholder (Robert Keeley, Washington, D.C.): Charlie’s a difficult act to follow. I’m Robert Keeley from Washington, D.C. I have a brief comment and a brief question. The comment is that I think you may be considerably underestimating the interest there will be in purchases of Class B stock later this week and next week. I have at least 10 friends in Washington who are aware that I’m a Berkshire shareholder and that I was coming to this meeting, and they’ve insisted that I report back to them tomorrow on just what happened with the Class B stock, because they’re very interested. A to even the shareholders who are present here today, you’re talking about tens of thousands of people who are going to be in that market.

And my question relates to liquidity. On page 18 of your annual report, you say, and I quote, “The prospect that most show shareholders will stick to the A stock suggests that it will enjoy a somewhat more liquid market than the B.” Could you explain that? It seems to me that if most shareholders keep their A stock, do not convert it or sell it, the B stock will be much more liquid. Maybe I don’t understand liquidity.

Warren Buffett [04:50:35] No, I think you do. You understand it, and I’ll elaborate just a bit. The, certainly in the first week, I would expect the B stock to trade far more. Although I hope it doesn’t trade like most no issues trade in relation to the amount sold, it’s just the nature of a new offering that there’s usually, it will be, there will be some flurry of activity. But longer range, let’s just assume that there’s $400 million worth of B stock out there. There will be $40 billion of A. Now, admittedly, you know, I’m not going to do anything with my stock, and many people in this room have a very low tax basis and, except they’re under very unusual circumstances, have no intention of doing anything with their stock. So of that $40 billion, there’s a very significant percentage that you might say is almost inoculated against reaction to market changes. But there still is a very significant dollar value, there’s fair amount held by funds, for example.

And so the market value of what I would call the potentially tradable A is likely to far exceed the market value of the potentially tradeable B. Now it maybe that all of the B is potentially tradeable, whereas only a small portion of the A is, but that $40 billion to $400 million ratio, I think, almost ensures that after the initial flurry, that the better market, and when I say better market, I mean the ability to move large dollar amounts in both directions with a minimal movement of price, the better, the better market, not by a huge margin, but the better market is likely to be in the A. And frankly, we hope that it is. We still hope there’s a good market in the B, obviously.

But if you’re talking 10 shares of the A, which is a $300,000 or so investment, I think that two months from now, that it’s likely to be that buying or selling $300,000 worth of A will have slightly less of a percentage impact than buying or selling $300,000 worth of B, but not by a significant amount. But that’s what I meant by that comment of having a slightly better market in the A than the B. And I, that’s important from our standpoint, because if that situation became reverse first and the B became the better market, then people would have a real incentive to convert from A to B over time, and eventually the B market would dominate. We don’t anticipate that happening, and I think the way we’ve arranged it, it won’t happen, but it could happen.

Charlie Munger [04:53:20] Yeah, well, I think we’ve also created arrangements, and the way we’ve written the prospectus and rewarded the selling brokers, that tend to dampen demand, both individual and institutional. And we sometimes accomplish what we try to do.

Warren Buffett [04:53:42] Zone 4. Don’t ask us for a list of those that where we’ve got…

[04:53:48] Shareholder (Dan Pico, Sioux City, Iowa): Dan Pico, Sioux City, Iowa. In the mid ’70s, you wrote an article on how inflation swindles the equity investor, and that the average return on equity for corporate America would be like 12 or 13, 18%. Last year the average was more like 20. Have the laws of economics been repealed or modified, or if not, what sort of calamities might occur as we revert to the mean?

Warren Buffett [04:54:16] Well, I’ve been surprised by returns on equity. There’s a, there was a good article in Fortune about two issues ago. Well, it was in the Fortune 500 issue, whenever that was. And it discussed the question of return on equity, and it made some good points about how the introduction of putting post-retirement health benefits on the balance sheet tends to swell equity returns subsequently. In other words, it moves down the denominator in terms of total equity employed. And there’s been a lot of big bath accounting where there have been write-offs. So that counting that, I don’t think it has gotten to 20%, but it’s higher than, it’s certainly higher than I anticipated when I wrote that article. And I would say that it would seem very extreme to me, in a world of, like we’re living in now, to have equity cap, returns on equity close to the 20 average, close to the 20% rate over time. But it’s, it has surprised me how high returns have been.

Now you have had situations like a Coke, for example, where 25 years ago they would not have repurchased stock, and so they’d have piled up more equity in the business, and Coke’s return on equity, if it’d been following the policies of 1970 or ’75, would be far less than it is now. Coke really doesn’t need equity, and so it can, that has some impact on them. To the extent that General Motors sets up many, many billions of a reserved for post-retirement health benefits, that tends to make the return on GM look a lot better than it did in the past, when it wasn’t even recognizing those costs and therefore had an equity that really was much larger than the true equity. So there have been some things happen like that. But all in all, I don’t think under any system of accounting the 20% returns for American industry are in the cards. Charlie?

Charlie Munger [04:56:29] Well, I agree. And I think that this business of having way more consolidation, and the successful companies like Wells Fargo buying in stock, I think that’s had a huge effect too. I don’t think it’s actually gotten that much, and on average business has earned higher returns on equity, but I think a whole lot of things have combined to goose the results. And I don’t see how it could go much further.

Warren Buffett [04:57:09] Zone 5.

[04:57:10] Shareholder (Ted Elliott, Connecticut): Yes, my name is Ted Elliott from Connecticut. The press reported a recent investment you made in the real estate business, and I wondered if you would comment as to your outlook for that business.

Warren Buffett [04:57:23] Well, that’s just sort of a, an asterisk. I, over, I’ve got virtually everything in Berkshire, and I own a few municipal bonds outside and a few other things. But I don’t want to buy anything that Berkshire’s involved, and it just complicates life, and all the best things I like are in Berkshire. So every now and then, some little thing happens to hit the radar screen that is too small, really, for Berkshire. And I’d bought 100 shares of that company back when I, it’s called Property Capital Trust, I’d bought 100 shares of that back when we owned NHP, which had done a couple of deals with them. So I, my policy of reading every annual report in sight that can further my knowledge about anything, I bought 100 shares. And then I happened to see a year or so ago where they said they were going to liquidate. So having some money around, I bought that. But it’s not based on any feeling about the real estate business, any sophisticated analysis of the company or anything else. It’s just, it’s a minor personal investment. I have no, I have no insights whatsoever.

We’ve done a few things in real estate at Berkshire, but they’ve enlarged things. And there was a brief period when there were a couple things that were intelligent to do. If we’d started a little earlier, there might have been a lot more things, but we started a little late. So we’re doing nothing now. But we listen to things occasionally, but we’re looking, we’re basically looking for big things at Berkshire, and we haven’t found anything in real estate in a long time. And we may never, but who can tell? I mean, we got our or in the water, and the couple things we’re in are working out fine, but they’re not, they’re not significant relative to Berkshire size.

We’ll go to zone 6, and this is the last question, because it’s going to be three o’clock. And let’s have zone 6.

[04:59:23] Shareholder (Mike Nolan, New Jersey): Hi, my name is Mike Nolan from New Jersey. My wife and I have been shareholders since 1984, and happy ones. Thank you both. Two questions today. The retail store industry: in light of Berkshire’s outstanding 23% annual growth in book value per share, and the industry’s roughly 8 to…% growth in equity over the last several years, we wonder why would Berkshire exchange stock for securities such as these, when the growth and the net worth of the acquired companies, if they’re anywhere near the industry average that you’ve acquired this year, are one-third or less? To quote Barnett Helzberg from the annual, competitive…

Warren Buffett [05:00:05] And both of those companies have averaged a lot better returns on equity than the numbers you cite for the industry. The second point, you know, we have no way of making 23.6% in the future. So we do not use our historic, if we used our historical average as a yard stick for new investments, we would make no new investments, because we don’t know how to make 23.6% in the future. But we like, we like, we regard the retail business as a very tough business. We like the records of those companies, their market positions and their managements. And when we find a business like that, we feel very comfortable with the people running it, we will make the deal. But we won’t expect to make 23.6% on our money over time doing that.

I’d like to thank everybody for coming. You’ve, you know, we, I’ve had a good time the last couple days, and I hope you have. (Applause)