Berkshire Hathaway Annual Meeting 1998 Transcript

Warren Buffett [00:00:01] (Applause) Morning. (Applause) Good morning. I’m Warren Buffett, chairman of Berkshire, and this is my partner, this hyperactivity fellow over here is Charlie Munger. And we’ll do this as we’ve done in the past, following the Saddam Hussein, the school of management. We’re going to go through the business meeting in a hurry, and then we’re going to do questions, and we’ll do those until 3:30, with a break at noon, one will take off for 30 minutes or so while you can grab lunch. And those of you, there’s, we’re operating in an overflow room as well, so those of you who are in the overflow room now can join the main for after noon break, because we’ll have plenty of room then.

We’ll go until 3:30. We’ll try to get all the questions we can. We’ve got 11 zones, 10 of them in this room, and we’ll just make our way around them. I’ve got a little map here which I’ll get oriented on here in a second. And let’s see, and I think we’ll get through the business meeting now. The, incidentally, I don’t see that movie before it’s shown, but that was one of our directors singing in the, at that final session there. We keep costs down at Berkshire.

Okay. The meeting will now come to order. I’m Warren Buffett, chairman of the board of directors of the company, and I welcome you to this 1998 annual meeting of shareholders. I will first introduce the Berkshire Hathaway directors that are present in addition to myself. So we have, and I can’t see very well with the lights here, but if you’ll stand as I name you: Susan T. Buffett, the vocalist; Howard G. Buffett, the non-vocalist; Malcolm G. Chase; Charlie you’ve met; and Ron Olson; and Walter Scott, and Walter Scott.

Also with us today are partners in the firm of Deloitte & Touche, auditors. They are available to respond to appropriate questions you might have concerning their firm’s audit of the accounts of Berkshire. Mr. Forrest Krutter, secretary, Berkshire. He will make a written record of the proceedings. Miss Becki Amick has been appointed inspector of elections at this meeting. She will certify to the count of votes cast in the election for directors. The name proxy holders for this meeting are Walter Scott Jr. and Marc D. Hamburg.

Proxy cards have been returned through last Friday representing 1,039,276 Class A Berkshire shares and 1,080,509 Class B’s. The number of shares represents a quorum. Meeting, we will conduct the business, the meeting, and then adjourn the formal meeting. After that, we will entertain questions that you might have. First order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott Jr., who will place a motion before the meeting.

WSWalter Scott Jr. [00:03:45] I moved the minutes of the reading, the minutes, the last stockholders meeting be dispensed with.

Warren Buffett [00:03:50] Do I hear a second? A lot of seconds. The motion has been moved and seconded. Are there any comments or questions? We will vote on this motion, motion by voice vote. All those in favor say aye. Opposed? Motion’s carried. Does the secretary have a report of the number of Berkshire shares outstanding, entitled to vote and represented at the meeting?

FKForrest Krutter [00:04:10] 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 6, 1998, the record date for this meeting, there were 1,199,680 shares of Class A Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at this meeting, and 1,245,081 shares of Class B Berkshire Hathaway common stock outstanding, with each share entitled to 1/200 of one vote on motions considered at the meeting. Of that number, 1,039,276 Class A shares and 1,080,509 Class B shares are represented at this meeting by proxies returned through last Friday.

Warren Buffett [00:04:58] Thank you, Forrest. For sure, shareholders present who wishes to withdraw a proxy previously sent in and vote in person on the election of directors, he or she may do so. Also, if any shareholder that is present has not turned in a proxy, please identify yourself to meeting officials in the aisles who will furnish a ballot to you. Those persons identifying, desiring ballots, please identify themselves so that we may distribute them. The one 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. [00:05:35] I move that Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase, Charles T. Munger, Ronald L. Olson and Walter Scott Jr. be elected as directors.

Warren Buffett [00:05:45] Is there a second? Been moved and seconded that Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase, Charles T. Munger, Ronald L. Olson and Walter Scott Jr. be elected as directors. Are there any other nominations? Is there any discussion? 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. Will the proxy holders please also submit to the inspector of elections a ballot on the election of directors, voting the proxies in accordance with the instructions they have received. Miss Amick, when you are ready, you may give your report.

BABecki Amick [00:06:24] My report is ready. The ballots of the proxy holder, in response to proxies that were received through last Friday, cast not less than 1,039,298 votes for each nominee. That number far exceeds a majority of the number of the total votes related to all Class A and Class B shares outstanding. The certification required by Delaware law of the precise count of the votes, including the additional votes to be cast by the proxy holders in response to proxies delivered at this meeting, as well as those cast in person at this meeting, if any, will be given to the secretary to be placed with the minutes of this meeting.

Warren Buffett [00:07:05] Thank you, Miss Amick. Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase, Charles T. Munger, Ronald Olson and Walter Scott Jr. have been elected as directors. After adjournment of the business meeting, I will respond to questions that you may have that relate to the businesses of Berkshire but do not call for any action at this meeting. Does 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. [00:07:37] I move this meeting be adjourned.

Warren Buffett [00:07:39] Second? Motion to adjourn has been made and seconded. We will vote by voice. Is there any discussion? If not, all in favor say… all the aye say… I’m leaving. This meeting is adjourned. (Applause)

Charlie and I may not get paid much, but we work fast on an hourly basis. Now, we’re going to do this by zones, and I think you can see who is manning each, yeah, I see we’ve got a number out there already. And please ask just one question. The only thing that I can think of that we won’t discuss is what we’re buying or selling, or maybe buying or selling, but we’ll be glad to talk about anything that’s on your mind. So let’s go right to zone 1 and start in.

[00:08:29] Shareholder (Mike Assael, New York City): Thanks for the beautiful, beautiful weekend in Omaha. I’m Mike Assael from New York City, with a question for Warren and Charlie about what makes a company’s price earnings ratio move up relative to other companies in its industry. How can we as investors find company and even industries that will grow their relative price earnings ratios as well as their earnings? And thank you for the wonderful weekend and for sharing your brilliance with the shareholders.

Warren Buffett [00:09:05] Thank you. Thank you. The, you know, it’s very simple, that price earnings ratio, relative price earnings ratios move up because people expect either the industry or the company’s prospects to be better relative to all other securities than they have been in their preceding view. And that can turn out to be justified or otherwise. Absolute price earnings ratios move up in respect to the earning power, of the prospective earning power, of that is viewed by the investing public, of future returns on equity, and also in response to changes in interest rates.

And in the recent, well, really the ever since 1982, but extension recent years, you’ve had decreasing interest rates pushing up stocks in aggregate, and you’ve had an increase in corporate profits. Return on equity of American businesses improved dramatically recently, and that also, and people are starting to believe it. So that has pushed up absolute price earnings ratios. And then within that universe of all stocks, when people get more enthusiastic about a specific business or a specific industry, they will push up the relative P/E ratio for that stock or industry. Charlie?

Charlie Munger [00:10:28] Yes, I think he also has, how do you forecast these improvements in price earnings ratios? That’s your, that’s your part of the question. Around here, I would say that if our predictions have been a little better than other people’s, it’s because we tried to make fewer of them.

Warren Buffett [00:10:55] We also try not to do anything difficult, which ties in with that. We really do feel that it’s, you get paid just as well. You know, this is not like Olympic diving. In Olympic diving, you know, they have a degree of difficulty factor, and if you can do some very difficult dive, the payoff is greater if you do it well than if you do some very simple dive. That’s not true in investments. You get paid just as well for the most simple dive, as long as you execute it all right. And there’s no reason to try those three and a halves when you get paid just…

So we looked for one foot bars to step over, rather than seven foot or eight foot bars to try and set some Olympic record by jumping over. And it’s very nice, because you get paid just as well for the one foot bars. Okay, zone 2.

[00:11:50] Shareholder (Joe Lacy, Austin, Texas): Good morning. My name is Joe Lacy. I’m from Austin, Texas. In this era when the financial departments of the institutions of higher learning are referring to you as an anomaly, and they preach the efficient markets hypothesis, saying that you can’t outperform the market, where does one go to find a mentor like you found in Ben Graham, someone you can ask questions to regarding value investing?

Warren Buffett [00:12:16] My understanding is that the University of Florida has instituted a couple of courses that, actually, Mason Hawkins gave them a significant amount of money to finance, and I believe they’re teaching something other than efficient markets there. There’s a very good course at Columbia. I know that it gets a lot of visiting, years to come, teachers to come in. I go in there and teach occasionally, and, but a number of practitioners. I think the efficient market theory is less holy writ now than it was 15 or 20 years ago in, in universities, but it’s… I’d recommend, you know, looking into those two schools.

That, you know, it’s really quite useful. If you had a merchant shipping business, if all of your competitors believe the world is flat, you know, that it is a huge edge, because they will not take any, they will not take on any cargo to go to places that are beyond where they think they will fall off. And so we should be encouraging the teaching of efficient market theories in universities. And it amazes, it amazes me, but what it, you know, it, I’m almost economical about ideas that they make, the ones they learn in graduate school last a lifetime.

And what happens is that you spend years getting your PhD in finance, and you learn theories with a lot of mathematics and that the average layman can’t do, and you become sort of a high priest, and you get an enormous amount of yourself, an ego and even professional security, invested in those ideas. And it gets very hard to back off after a given point. And I think that to some extent has contaminated the teaching of investing in the universities. Charlie?

Charlie Munger [00:14:28] Well, I would argue that the contamination was massive, but it’s waning, it…

Warren Buffett [00:14:34] Yeah, it is waning.

Charlie Munger [00:14:36] It’s waning. It, the good idea is eventually triumph.

Warren Buffett [00:14:40] Yeah. And I’m, the word anomaly I’ve always found interesting on that, because it, you know, after a while, I mean, Columbus was an anomaly. What it means is something that the academicians could not explain, and rather than re-examine their theories, they simply just discarded any evidence of that sort as anomalous. And I think when you find information that contradicts previously cherished beliefs, that you’ve got a special obligation to look at it, and look at it quickly.

I think Charlie told me that one of the things Darwin did was that whenever he found out anything that contradicted some previous belief, he knew that he had to write it down almost immediately, because he felt that the human mind was conditioned, so conditioned to reject contradictory evidence, that unless he got it down in black and white very quickly, his mind would simply push it out of existence. Charlie and knows more about Darwin than I do. Maybe he can explain that.

Charlie Munger [00:15:44] Well, I don’t know about Darwin, but I did find it amusing. One of these extreme efficient market theorists explained Warren for many, many years as an anomaly of luck, and he got to six sigmas, six standard deviations of luck, and then people started laughing at him, because six, six, six sigmas of luck is a lot. So he changed his theory.

Warren Buffett [00:16:16] Now see, I’d rather have the six sigmas of luck.

Charlie Munger [00:16:20] Actually, the one thing he couldn’t bear to leave was his six sigmas.

Warren Buffett [00:16:26] Let’s try zone 3.

[00:16:27] Shareholder (Warren Hayes, Chicago, Illinois): My name is Warren Hayes. I’m from Chicago, Illinois. I understand from various publications like Outstanding Investor Digest that many of the best value investors are buying high quality multinational Japanese companies that are trading below net net working capital value. Do you agree that these values exist in Japan, and would you consider it… Do you agree that these values exist in Japan, and would you consider the purchase of some of them?

Warren Buffett [00:16:57] I will give a tout on it. I read the Outstanding Investor Digest, OID, and it’s a very good publication, and I have read some of those, some of the commentary about Japanese securities. We’ve looked at securities in all major markets, and we certainly looked at them in Japan, particularly in recent years when the Nikkei is so underperformed the S&P here. We’re quite a bit less enthused about those stocks as being any kind of obvious bargains than the people that you read about in OID. The returns on equity in most areas of Japanese business, returns on equity are very, very low, and it’s extremely difficult to get rich by owning, by being the owner of a business that earns a low return on equity.

You know, we always look at what a business does in terms of what it earns on capital. We want to be in good businesses. What we really want to be is in businesses that are going to be good businesses and better businesses 10 years from now, and we want to buy them at a reasonable price. But many years ago we gave up what labeled the cigar butt approach to investing, which is where you try and find a really kind of pathetic company, but it’s all so cheap that you think there’s one good free puff left in it. And we used to pick up a lot of soggy cigar butts, you know, I mean, I had a portfolio full of them, and there were free puffs in there. And B, we don’t find many cigar butts around that we would be attracted to.

The, but they, those are the companies that have low returns on equity. And if you have a business that’s earning 5% or 6% on equity and you hold it for a long time, you are not going to do well in investing, even if you buy it cheap to start with. Time is the enemy of the poor business, and it’s the friend of the great business. I mean, if you have a business that’s earning 20% or 25% on equity and it does that for a long time, time is your friend. But time is your enemy if you have your money in a low return business. And you may be lucky enough to pick the exact moment when it gets taken over by someone else, but we like to think when we buy a stock we’re going to own it for a very long time, and therefore we have to stay away from businesses that have low returns on equity. Charlie?

Charlie Munger [00:19:30] Yeah, it’s not that much fun to buy a business where you really hope this sucker liquidates before it goes broke. (Applause)

Warren Buffett [00:19:37] We’ve been in a few of those too, right?

Charlie Munger [00:19:41] Yeah.

Warren Buffett [00:19:42] Charlie and I, we, or at least I have, I’ve owned stock in an anthers ampersand that don’t know what anthracite is, street railway companies, windmill manufacturers. What other gems do we have?

Charlie Munger [00:19:58] Tax dollars.

Warren Buffett [00:19:58] Yeah, it’s actually going to have turtles. Yeah, don’t even think. Yeah, Berkshire was a mistake, believe it or not. I mean, it, we went into Berkshire because it was cheap statistically, just as a general investment, back in the early 60s. And it was a company that in the previous 10 years had earned less than nothing. I mean, it had a significant net loss over the previous 10 years. It was selling well below working capital. So it was a cigar butt, and it was, I mean, we could have done the things we’ve done subsequently from a neutral base rather than a negative base, and actually it would have worked out better. But it’s been a lot of fun. Number 4.

[00:20:45] Shareholder (Martin Weigand, Bethesda, Maryland): Hello, my name is Martin Weigand from Bethesda, Maryland. Again, I want to thank you for your letters and principles. They’re a great help for small business people running their business. My question is, last year you said you had filters in your mind to help you quickly analyze businesses. How do your filters take into account the very fast changes of technology and the way that businesses communicate with their customers, take orders, things like that?

Warren Buffett [00:21:13] But we do have filters, and some of those, sometimes those filters are very irritating to people who check in with us about businesses, because we really can say in 10 seconds or so, note a 90% plus of all the things that come in, simply because we have these filters. We have some filters in regard to people too. But the question of technology is very simple. That doesn’t make it through our filter. I mean, so if something comes in where there’s a technological component that’s of significance, or where we think the future technology could hurt the business as it presently exists, we look at, you know, we look at that as something to worry about. We will, it won’t make it through the filter.

We want things that we can understand, which filters out a lot of things, and we wanted to be good businesses, and we want the people to be the people we’re very comfortable with. That means ability and integrity. And we can do that very fast. We’ve heard a lot of stories in our lives, and it’s amazing how they, you can become quite efficient in probably getting 95% of the ideas through in a very short period of time that should get through. Charlie?

Charlie Munger [00:22:34] Yeah, we have to have an idea that is, A, a good idea and, B, a good idea that we can understand. It’s just that simple. And so those filters are filters against consequences from our own lack of talent.

Warren Buffett [00:22:56] Filters haven’t changed much over the years either. Okay, area 5.

[00:23:00] Shareholder (Allan Maxwell, Omaha): Hi, I’m Allan Maxwell. I live in the wonderful tropical island of Omaha. That’s right up there with Aksarben. That’s Nebraska spelled backwards. Everybody in this room has got to be wondering the same question. Who, in your opinion, both of you, is the next Warren Buffett?

Warren Buffett [00:23:24] Charlie, who’s the next Charlie Munger? Let’s try that first. That’s a more difficult question.

Charlie Munger [00:23:32] There’s not much demand. (Applause)

Warren Buffett [00:23:35] I don’t think there’s only one way to succeed in life, and our successors in due time may be different in many ways, and they may do better. Incidentally, we have a number of people in the company, some of whom are in this room today, and the ones you saw on that screen, who are leagues ahead of Charlie and me in various kinds of abilities. I mean, a lot of different talents. We’ve got fellow in this room tonight, today, who’s the best bridge player probably in the world, and Charlie and I could work night and day, and if he spent 10 minutes a week working on it, he’d play better bridge than we would. And all kinds of intellectual endeavors that for some reason or another one person’s a little bit better wired for than someone else.

And we have people running our businesses that if Charlie and I were put in charge of those businesses, we couldn’t do remotely as well as they do. So there’s a lot of different talents. The two that we’re responsible for is keep able people who are already rich motivated to keep working at things where they don’t need to do it for financial reasons. I mean, it’s that simple. And that’s a problem any of you could think about, and you’d probably be quite good at it if you gave it a little thought, because you’d figure out what would cause you to work if you were already rich and didn’t need the job. Why would you jump out of bed and be excited about going to work that day? And then we try to apply that to the people who work with us.

Secondly, we have to allocate capital, and these days we have to allocate a lot more capital than we had to allocate a decade ago. That job is very tough at present. Sometimes it’s very easy, and it will be easy at times in the future, and will be difficult at times in the future. But there are other people that can allocate capital, and we have them, we have them in the company. Charlie?

Charlie Munger [00:25:51] I mean, no.

Warren Buffett [00:25:52] Okay. Number 6.

[00:25:53] Shareholder (Chad Corey, Gaithersburg, Maryland): Good morning. My name is Chad Corey. I’m from Gaithersburg, Maryland. I just want to thank you for sharing your wisdom. And my question is, what criteria do you use to sell stock? I kind of understand how you buy it, but I’m not sure how you sell.

Warren Buffett [00:26:09] Yeah. Well, the best thing to do is buy a stock that you don’t ever want to sell. I mean, that, and that’s what we’re trying to do. And that’s true when we buy an entire business. I mean, we bought all of GEICO, we bought all of See’s Candy or the Buffalo News. We’re not buying those to resell. I mean, what we’re trying to do is buy a business that we will be happy with if we own it the rest of our lives, and we expect to with those. It’s the same principle applies to marketable securities. You get extra options with marketable securities. You can add to holdings obviously easier. We can never own more than 100% of a business, but if we own 2% of a business and we like it at a given price, we can add and have 4% or 5%. So that’s an advantage.

Sometimes, if we need money to move to another sector, like we did last year, we will trim from some holdings. But that doesn’t mean we’re negative on those businesses at all. I mean, we think they’re wonderful businesses, or we wouldn’t own them. And we would sell, A, if we needed money for other things. The GEICO stock that I bought in 1951, I sold in 1952. It was, you know, went on to be worth 100 or more times, before the 1976 problems, 100 or more times what I paid, but I didn’t have the money to do something else. So you sell if you need money for something else. You may sell if you believe that valuations between different kinds of markets are somewhat out of whack. And, you know, we have done a little trimming last year in that map, but that could well be a mistake. I mean, the real thing to do with a great business is just hang on for dear life. Charlie?

Charlie Munger [00:27:50] Yes, but this, the sales that do happen, the ideal way is when you found something you like immensely better. Isn’t that obvious?

Warren Buffett [00:27:57] That’s the ideal way to sell. And incidentally, the ideal purchase is to find, is to have something that you already like be selling at a price where you feel like buying more of it. I mean, that, we probably should have done more of that in the past in some situation. But that’s the beauty of a marketable securities. You really do, if you’re in a wonderful business, you do get a chance periodically maybe to double up in it or something that sort. If the market, the stock market would sell a lot cheaper than it is now, we would probably be buying more of the businesses that we’re all, we, that we already own. They would certainly be the first ones that we would think about. They’re the businesses we like the best. Charlie?

Charlie Munger [00:28:44] Nothing more.

Warren Buffett [00:28:45] Okay, zone 7.

[00:28:46] Shareholder (Ron Wright, Iowa City, Iowa): Good morning, Miss, Mr. Buffett, Mr. Munger. My name is Ron Wright from Iowa City, Iowa. New companies have always been an interest to me. Is it reasonable to assume an Omaha based company with only $5 billion in the bank might succeed in telecommunications?

Warren Buffett [00:29:08] Well, I think that a new company with $5 billion in the bank is probably better off than most new companies, but like Jennifer Gates, there’s a new newborn. The, I think you’re probably referring to a company that was created out of one of our local operations that’s run by Walter Scott, one of our directors, from the Kiewit company, Level 3. I can tell you it’s got very able management, and I’ll take your word for it, it’s also got five. But you’ll have to make your own judgment on this stock. I know Charlie won’t comment on that one. Zone 8. Zone 8?

[00:30:01] Shareholder (Mo Spence, Omaha, Nebraska): Yes. Good morning. This is Mo Spence from Omaha, Nebraska. In the past you’ve often said that the insurance operation is the most important business in Berkshire’s portfolio. Is that true, and what are numbers 2 and 3? I’d also like to ask if, is it true that Charlie chose the colors for the cover of this year’s annual report?

Warren Buffett [00:30:25] Did Charlie chose him? He had nothing to do with them. I chose them. They were a, their tribute to the Nebraska football team and Tom Osborne, who you saw. Tom, incidentally, has a very low key style, and Bobby Bowden a few years ago was in Lincoln, and he said that on their first date, that Nancy had to slap Tom three times. And somebody said, was he that fresh? And she said, no, I was just checking to be sure he was alive. Tom had a fairly conservative offense for a time in the past, although it hasn’t been so conservative the last few years. But somebody said at that time the most reckless thing he did was to eat some cottage cheese a day after the expiration on the carton. But then, but I, no, I chose the colors.

Now, what was the question? What was the question, Charlie? You know, a memorable question, but give it to us again. Are we back there in zone 8? Oh, the numbers. Yeah, sure. The question was about the insurance business, which we have said will be by far the most important business at Berkshire. We see that many, many years ago, and it’s proven to be the case. It obviously got a big leg up when we purchased all of GEICO. Insurance, as far as the eye can see, will be by far the most significant business at Berkshire. And the question about 2 and 3, in terms of earnings, FlightSafety is the second largest source of earnings.

But we don’t really think of them that way. I mean, we do know our main business as insurance, but we really have a lot of fun out of all of our businesses. I mean, I have a great time out of Borsheim’s yesterday, or at a Dairy Queen. So it will be accident to some extent, the second or third or fourth largest. That’ll be determined by opportunity. We’ve bid on certain businesses that, or negotiated on them, that could have been very large businesses if they become part of Berkshire, and that’ll happen again in the future. So we have no predetermined course of action whatsoever at Berkshire. We have no strategic planning department. We don’t have any strategic plan. We react to what we think are opportunities, and if it’s a business we can understand, and if it’s, particularly if it’s big, you know, we would love to make it number 2. Charlie?

Charlie Munger [00:33:17] I also want to say, proudly, that we have no mission statement.

Warren Buffett [00:33:22] It’s hard to think of anything that we do have, as a matter of fact. And we have never had a, they’ve never, I mean, I’m sure you all know this, we’ve never had a consultant, and we tried to keep things pretty simple. We still have 12 people at headquarters. We have about 40,000 people that now work for Berkshire, and we hope to grow a lot, but we don’t hope to grow at headquarters. Number 9.

[00:33:55] Shareholder (Patty Buffett, Albuquerque, New Mexico): Yes, my name is Patty Buffett, and I’m from Albuquerque, New Mexico.

Warren Buffett [00:34:00] I like your name.

[00:34:02] Shareholder (Patty Buffett, Albuquerque, New Mexico): Thanks. In your opinion, what effect will the year 2000 compliant issue have on the U.S. stock market and the global economy?

Warren Buffett [00:34:11] Well, I get different reports on 2000, but the main report I hear, I think, you know, we, you wouldn’t want to rely on me on this, but you could rely on our managers, and I think we’re in good shape. It’s costing us some money, but not huge amounts of money, to be prepared for 2000. With companies in which I’m a director, at which I’m a director, I, you know, I hear some reasonably good size numbers. Those numbers are in their annual reports and described as to the cost of compliance.

But what I’m told by people that know a lot more than I do is that they think probably that the weakest link maybe, and got think that, that in terms of where they stand versus the commercial sector, in terms of reaching where they need to be by 2000, that there’s some areas of both national and state and local governments and foreign government where they’re really behind the curve. Now, I, that is not an independent judgment of mine. But somebody said you want to be very careful about making a phone call at five seconds before midnight at the millennium, because you make a charge for 100 years, you know. (Laughter)

So it’ll be interesting. I don’t think it’s, I don’t think it’s going to affect Berkshire in any material way, and I certainly have a feeling that the world will get past it very easily. But it is turning, it, it is expensive for some companies, and it’s going to be very expensive for governments. Charlie?

Charlie Munger [00:35:49] Yeah, I find it interesting that it is such a problem. You know, it was predictable that the year 2000 would come.

Warren Buffett [00:36:00] Yeah, we decided that back in 1985, actually. We didn’t welcome it, understand. That’s not Berkshire’s style, though.

Charlie Munger [00:36:09] It is, it is fascinating, isn’t it, when you think about it, that a whole bunch of people with 160 IQs that could build up such a problem. But here we are, and that’s why we stick with simple things.

Warren Buffett [00:36:27] Number 10.

[00:36:28] Shareholder (Kristen Schramm, Springfield, Illinois): My name is Kristen Schramm. I’m from Springfield, Illinois, and I’m a proud shareholder of Berkshire Hathaway.

Warren Buffett [00:36:36] We’re glad to have you here.

[00:36:39] Shareholder (Kristen Schramm, Springfield, Illinois): I’ve heard a little about your thoughts on trying to control campaign spending. Could you tell us more about your thoughts and efforts on this topic? Thank you.

Warren Buffett [00:36:51] I think it was campaign spending?

[00:36:54] Shareholder (Kristen Schramm, Springfield, Illinois): Okay, I’m saying spending.

Warren Buffett [00:36:55] Yeah. I have joined something, to Jerry Kohlberg, this is personal, this has nothing to do with Berkshire, but I, that Jerry Kohlberg spearheaded. And it’s taken a position under probably 30 or so, mostly business people, taking a position against soft money and also taking a position on very fast disclosure, campaign finance money. Because I personally think that the arms race in terms of campaign spending by businesses, you know, has just begun. I mean, it doubled in the last election. But political influence, and I don’t mean that by buying a vote, but I mean just in terms of having a big ear in Washington or in other state capitals, political influence has been an underpriced product in the past.

I mean, the government is enormously important in this country to most companies. It was amazing how cheap, cheaply it could be, attention could be purchased. But those, the price is going up, and there will be an escalation. And I don’t think it’s easy, if you’re the manager of a business and you own 1/10 of 1% of it, and you’re in a business is heavily affected by government, I don’t think it’s very easy to tell your board of directors that you’re going to take a hands-off approach. So I think legislation is needed in that arena.

And there are over 100 campaign finance reform bills that have been introduced. Everybody wants to have their name on a bill. They just don’t want to have it passed. And it’s, you know, John McCain’s been working hard on it. And it’s something I think we have to come to grips with, because it’s going to be a battle of the wallets for influence. And like I say, it, if I were running some other company and my competitors were spending money to get the attention of would-be legislators or actual legislators, it’d be very difficult to take some high and mighty position that I wasn’t going to do it myself. And my board and my shareholders might ask me why I was taking that position.

We are lucky, basically, to be in a business that’s relatively unaffected by legislation. Although we will, we’re going to pay a lot of tax this year. I said two years ago that it would only take 2,000 entities in the whole United States, businesses, individuals, any kind of entity, to pay the same amount of taxes as Berkshire, and that would take care of the entire budget. You’d need no Social Security taxes, you need no nothing. I think we’re going to be able to say that again this year. I think that if you multiply our tax by 2,000, you will more than account for, including Social Security and everything else.

So you might say, why aren’t you in Washington lobbying for a capital gains rate, or a capital gains rate at corporations, it’s the same as individuals, or something? But we basically haven’t played that game. We feel very fortunate. I’ll say this, I would rather, in this country, be a huge taxpayer myself than be somebody who needed the other end of it, the government, the dispensary. If anybody here is paying taxes and they want to, you know, if you’d like to shift positions with somebody in a veterans hospital, or that, you know, that as a couple of children by age 19 is getting a check from the government, you know, I don’t want to shift positions. I’m happy to be paying the taxes. Zone 11, please. I think 11 is probably the remote. Yeah, so we’re going to hear this from the overflow room. Are we there?

[00:40:50] Shareholder (Patrick Brown, Charlotte, North Carolina): Yes. Good morning, Mr. Buffett, Mr. Munger. My name is Patrick Brown from Charlotte, North Carolina, and I’ve watched returns on equity for the banking sector in the U.S. go up a good bit over the last few years, and the returns on tangible equity for some of the major banks that have led the consolidation have gone up a good bit more. Leads me to wonder whether these returns are sustainable over either the near term or the longer term, five, ten years out.

Warren Buffett [00:41:18] Well, that’s the $64 question, because the returns on equity, and particularly tangible equity, as the gentleman mentioned, and particularly tangible equity in the banking sector, even those returns have hit numbers that, unprecedented. And then the question is, if they’re unprecedented, are they unsustainable? We, Charlie and I would probably think the, that we would certainly prefer, we would not, we would not base our actions on the premise that they are sustainable. 20% plus returns on tangible equity, or on book equity, and much higher returns on tangible equity. In the banking field, you have a number of enterprises that on tangible equity here are getting up close to the 30% range.

Now, can a system where the GDP in real terms is growing maybe 3%, where in nominal terms it grows 4% to 5%, can businesses consistently earn 20% on equity? They certainly can’t if they retain most of their earnings, because you would have corporate profits rising as a percentage of GDP to the point that would get ludicrous. So under those conditions, you’d either have to have huge payouts, either by repurchases of shares or by dividends, or by takeovers, actually, that would keep the level of capital reasonably consistent among industry. Or because you couldn’t sustain, let’s just say every company retained all of its earnings and they earned 20% on equity, you could not have corporate profits growing at 20% as a part of the economy year after year.

This has been a better world than we foresaw in terms of returns, and so we’ve been wrong before, and we’re not making a prediction now. But we would not want to buy things on the basis that these returns would be sustained. We told you last year, if these returns are sustained and interest rates stayed at these levels or fell lower, that’s, stock prices are in aggregate, or justified. And we still believe that. But those are two big ifs, and the particularly big if, in my view, is the one about returns on equity and on tangible assets. It goes against, certainly goes against classic economic theory to believe that they can be sustained. Charlie, how do you feel about it?

Charlie Munger [00:43:51] Well, I think a lot of the increase in return on equity has been caused by the increasing popularity of Jack Welch’s idea that you can’t be a leader in a line of business, get out of it. And if you get fewer people in the business, while returns on equity can go up. Then it’s gotten way more popular to buy in shares, even at very high prices per share, and if you keep the equity low enough by buying shares back, while you can make return on equity whatever you want. We’ve had to some extent a slow revolution in corporate attitudes. And, but Warren is right, you can’t have massive accumulations of earnings that are retained and keep earning these rates of return on them.

Warren Buffett [00:44:43] An interesting question is to think about it, if you had 500 Jack Welches, and they were running the fort, cloned, and they were running all of the Fortune 500 companies, would returns on equity for American business be higher or lower than they are presently? I mean, if you have, I mean, if you have 500 sensational competitors, they can all be rational, but that doesn’t, and they will be, and they’ll be smart, and they’ll keep trying to do all the right things, but there’s a self-neutralizing effect. It’s like having 500 expert chess players or 500 expert bridge players, that you still have a lot of losers if they get together and play in a tournament. So it’s not at all clear that if all American management were dramatically better, leaving out the competition against foreign enterprises, that returns on equity would be a lot better. They might very well drive things down.

Charlie Munger [00:45:38] That’s what to some extent can easily happen in securities markets. It’s way better to be in securities markets if you have a 100 IQ and everybody else operating has an 80 than if you have 140 and all the rest of them also have 140. So it’s the, the secret of life is weak competition.

Warren Buffett [00:45:56] Somebody said, how do you beat Bobby Fischer? You know, and you said, you play him any game except chess.

Charlie Munger [00:46:03] Well, that’s how you beat Jack Welch. You play him any game except business.

Warren Buffett [00:46:08] Oh, he’s a very good golfer, I want to point out. He would, he shot a 69 one a few months ago, and I saw him, at a very tough course. Jack manages to play 70 or 80 rounds of golf a year and come in sub-par occasionally while still doing what he does at GE. He’s a great manager. But 500 Jack Welches, I’m not at all sure would make stocks more valuable in this country. Zone 1.

[00:46:37] Shareholder (Ben Noel, Minneapolis): I’m Ben Noel, and I’m from Minneapolis. And first, I just wanted to thank you for providing your past annual letters to the shareholders, and Mr. Munger, for providing your speech to the graduate students at the USC a couple years ago. Drawn a lot of insights from that, not only investing, but also in my day job as a business manager. And I’m wondering if you could help me with my summer reading list and provide some additional suggestions for reading in the fields of investing and management, other than the standards of Graham, Fisher, so forth.

Warren Buffett [00:47:21] Charlie?

Charlie Munger [00:47:22] Yeah, I have recently read a new book twice, which I very seldom do, and that book is Guns, Germs, and Steel by Jared Diamond. And it’s a marvelous book, and the way the guy’s mind works would be useful in business. He’s got a mind that is always asking why, why, why, why, and he’s very good at coming up with answers. I would say it’s the best work of its kind I have ever read.

Warren Buffett [00:47:56] I read a little easier book recently. I’m not even sure of the title. I don’t pay much attention to titles when I get into the books, but it’s something to the effect of The Quotable Einstein. I mean, it’s all, it’s a lot of his commentary over the years, and it’s great reading. The Fermat Theorem was with the book, but that wasn’t the exact title either. It’s a story of the discovery of the answer on that. That’s a very interesting book. One of our shareholders from Sweden gave me a copy of that when I was in New York, and I’ve enjoyed it. Zone 2.

[00:48:37] Shareholder (Mark Rabinoff, Melbourne, Australia): Mark Rabinoff, shareholder from Melbourne, Australia. Gentlemen, we have large holdings in Freddie Mac and Fannie Mae, and as you both know, they were quite, well, they were hurt quite a lot when interest rates went up in the past. Are wondering if you think they’ll be hurt again when interest rates go up in the future.

Warren Buffett [00:48:58] Well, that, the question about Freddie Mac and Freddie, Freddie Mac and Fannie Mae and on interest rates. They are not as interest rate sensitive as people formerly thought they were. But it would be the pattern, you know, I have a feeling that if interest rates got extremely low, so that there was a huge turnover the portfolio, and then rates went up dramatically, that even though they have various ways of protecting themselves against interest rate scenarios, that might get very tough. They, there, I think there would be some kind of squeeze there. They may have good answers as to why that wouldn’t happen, incidentally, because they certainly worry about every kind of interest rate scenario. That’s their job.

But I think, in a sense, very low interest rates are more of a long term, because if you get a portfolio chock full of, say, 4% mortgages or something of the sort, and then you had a huge move upward, that could, that would be quite painful for some period of time, no matter what you’ve done in the way of hedging. Charlie?

Charlie Munger [00:50:09] I’ve got nothing to add.

Warren Buffett [00:50:11] That’s what happened to the savings and loans, in effect, you see, 25 years ago or whenever it was. And Freddie and Fannie have other functions, and there, and they’ve got a lot of advantages, but they have a savings and loan type operation. They just do it on a very big scale, and they get their money from, in a very different manner than from millions of depositors. But the basic economics have some similarity Zone 3.

[00:50:41] Shareholder (Jane Bell, Des Moines): Jane Bell, Des Moines. Since I became a Berkshire Hathaway shareholder, I’ve been coming to these meetings. This is my second. I’ve been coming these meetings ever since I’ve been a shareholder. Mr. Buffett, I’m a partner and owner in a consulting business, and we tell our clients and potential clients that we design solutions for what keeps them awake at night. Mr. Buffett, from your perspective as an investor, what keeps you awake at night?

Warren Buffett [00:51:18] Well, that’s a good question, and I, that’s one I always ask the managements of our subsidiaries, as well as any new investment. I want to know what their nightmare is. Andy Grove, in his book Only the Paranoid Survive, talks about the silver bullet for a competitor. So in terms of, if you only had one silver bullet, which competitor would you fire it at? And it’s not a bad question. And your question’s a little broader: if you only had one worry that you could get rid of, what would it be?

I would say that I would char, and I think I speak for sure, I let him do it, but we really don’t worry. You know, we will do the best we can, and when we have capital allocated, sometimes it’s very easy to do, sometimes it’s almost impossible to do, but we’re not going to worry about it, because it, you know, it, the world changes. And if we had something we were worried about in the business, we would correct it. We’re, I’m not worried about anything. I’m not really worried about, you know, we can lose $1 billion on a California earthquake, but I’m not worried about it. Although I have a sister who’s in the audience that lives in California. I’ve told her to call me quickly if the dogs start running in circles or anything like that.

But there’s, you know, if you’re worried about something, to do is get it corrected and get back to sleep. And I can’t think of anything I’m worried about at Berkshire. That doesn’t mean that I have any good ideas as to what we should be doing with a lot of, a whole lot of money that we have around. But, you know, I can’t do anything about that except keep looking for things that I might understand and do something with the money. And if they aren’t there, they aren’t there, and we’ll see what happens tomorrow and next week and next month, the next year. Charlie, what are you worried about?

Charlie Munger [00:53:12] Well, in the 30-some years I’ve been watching you, I would say what it takes to make you not sleep at night is an illness in the family. Short of that, Warren likes the game, I like the game, and even in the periods that look tough to other people, it’s a lot of fun.

Warren Buffett [00:53:32] It’s a lot of fun. It’s a lot of fun. In fact, it probably is the most, it, it’s sort of, it is the most. I mean, we define tough times differently than other people would. But our idea of tough times is like now. And our idea of, we don’t feel as tough times when the market’s going down a lot or anything. So we’re having a good time then. I mean, it, we don’t want to sound like undertakers during a plague or anything, but it, they’re really, you know, it makes no difference to us whether our, some, the price of Berkshire is going up or down. We’re trying to figure out ways to make the company worth more money years down the road, and if we figure that out, the stock will take care of itself.

So, and usually when the stock is going down, it means other things are going down, and that it’s a better chance for us to deploy capital, and that’s our business. So we, you will not see us worrying then. Maybe we should, you know. What, may worry? No. Zone 4.

[00:54:43] Shareholder (Pill Yoon, Los Angeles, California): My name is Pill Yoon from L.A., California. Mr. Warren Buffett, Mr. Trudeau, I’m one of the persons who highly admire you both. I have two questions. Question one, your view on world financial business environment in the next decade. Question two, U.S. position for economic competition in the next decade. Thank you.

Warren Buffett [00:55:16] Well, you’ve asked two big questions, but you’re going to get very small answers, I’m afraid. I, and that’s no disrespect, but we just, we don’t have that, we don’t think about those things very much. We just, we just are looking for decent businesses. And incidentally, our views in the past wouldn’t have been any good on those subjects. And we try to, we try to think about two things. We try to think about things that are important and things that are knowable. Now, there are things that are important that are not knowable. In our view, those two questions that you raise fall in that. There are things that are knowable but not important. We don’t want to cut our minds up with those.

So we’re, we say, what is important and what is knowable, and what among the things that fall within those two categories can we translate into some kind of an action that is useful for Berkshire? And we really, they’re all kinds of important subjects that Charlie and I, we don’t know anything about, and therefore we don’t think about them. So we have our view about what the world will look like over the next 10 years in business or competitive situations, we’re just no good. We do think we know something about what Coca-Cola is going to look like in 10 years, or what Gillette’s going to look like in 10 years, or what Disney’s going to look like in 10 years, or what some of our operating subsidiaries are going to look like in 10 years.

We care a lot about that. We think a lot about that. We want to be right about that. We’re right about that. The other things get to be, you know, they’re just, they’re less important. And if we started focusing on those, we would miss a lot of big things. I’ve used this example before, but Coca-Cola went public in, I think it was 1919, and the first year one share cost $40. The first year it went down a little over 50%. At the end of the year was down to $19. There were some problems with bottler contracts, there’s problems with sugar, various kinds of problems.

If you’d had perfect foresight, you would have seen the world’s greatest depression staring you in the face, when the social order even got questioned. You would have seen World War II. You would have seen atomic bombs and hydrogen bombs. You would have seen all kinds of things, and you could always find a reason to postpone why you should buy that share of Coca-Cola. But the important thing wasn’t to see that. The important thing was to see they were going to be selling a billion 8-ounce servings of beverages a day this year, or some large number, and that the person who could make people happy a billion times a day around the globe ought to make a few bucks off doing it.

And so that $40, which went down to $19, I think, with dividends reinvested, has to be well over $5 million now. And if you develop the view on these other subjects that in any way forestalled you acting on this more important, specific, narrow view about the future of the company, you would have missed the, missed a great ride. So that’s the kind of thing we focus on. Charlie?

Charlie Munger [00:58:27] Yeah, we’re not predicting the currents that will come, just how some things will swim in the currents, whatever they are.

Warren Buffett [00:58:35] Zone 5, please.

[00:58:36] Shareholder (Marc Gerstein, Value Line): Good morning. Marc Gerstein from Value Line. Mr. Buffett, considering the large amount of demands on your time, how do you go about reviewing the entire spectrum choices in the equity markets?

Warren Buffett [00:58:48] Give me that last part again.

[00:58:50] Shareholder (Marc Gerstein, Value Line): I got the demands on my time, and how do you and Mr. Munger manage to review the whole spectrum of choices in the equity markets?

Warren Buffett [00:59:00] A bad pitch coming up. The, but I don’t mind it at all, because the truth is that we get, I don’t know what we even pay for Value Line, Charlie and I both get it, but, in our respective offices, but we get incredible value out of it, because it’s, it gives us the quickest way to see a huge number of the key factors to tell us whether we’re basically interested in the company. Also gives us a very way of, good way of sort of periodically keeping up to date. Value Line has 1,700 or so stocks they cover, and they do it every 13 weeks. So it’s a good way to make sure that you haven’t overlooked something, if you just quickly review that.

But it, the snapshot it presents is an enormously efficient way of, for us to garner information about various businesses. We don’t care about the ratings. I mean, that doesn’t make any difference to us. We don’t, we’re not looking for opinions, we’re looking for facts. But I have yet to see a better way, including fooling around on the Internet or anything, that gives me the information as quickly. I can absorb the information on, about a company, most of the key information you can get in, probably doesn’t take more than 30 seconds in glancing through Value Line. And I don’t have any other system that’s as good. Charlie?

Charlie Munger [01:00:25] Well, I think the Value Line charts are a human triumph. I, it’s hard for me to imagine a job being done any better than is done in those charts. An immense amount of information is put in very usable form. And if I were running a business school, we would be teaching from Value Line charts.

Warren Buffett [01:00:51] And when Charlie says the charts, and he does not mean just the chart of the price behavior. It means all that information that really is listed under the charts, that…

Charlie Munger [01:01:01] Oh, yeah.

Warren Buffett [01:01:02] That gives the detailed financial information. You can run your eye across that. The chart is, the chart of the price action doesn’t mean a thing to us, although it may catch our eye just in terms of businesses that have done very well over time. But that, we, price action has nothing to do with any decision we make. Price itself has, is all important, but whether a stock has gone up or down, or what the volume is, or any of that sort of thing, that is, as far as we’re concerned, you know, those are chicken tracks, and we pay no attention to them. But that information that’s right below the chart, in those 10 lines or so, 15 lines, if you have some understanding of business, that’s a, it’s a perfect snapshot to tell you very quickly what kind of a business you’re looking at. Zone 6, please.

[01:01:55] Shareholder (David Winters, Mountain Lakes, New Jersey): David Winters from Mountain Lakes, New Jersey. With the consolidation in the insurance industry, how do you think that will affect Berkshire’s insurance businesses and the long-term development of the float? And if I may, not to encourage your dogma to run over your karma, but how do you think your policy of partnership and fair dealing has enhanced or detracted from your investment returns? Thank you.

Warren Buffett [01:02:22] Well, the consolidation taking place in insurance has been taking place for some time. There have been some big mergers over the years. It should, there are developments in insurance. We mentioned the super cat bonds, which are not bonds at all, but that has an effect. But I would say that there’s no merger that has taken place that I regard as being detrimental either to our GEICO business or to our reinsurance business. That has not been a factor, and I think if there were some more mergers, it would not be a factor. I see no way that any entities being put together would change the competitive situation in respect to GEICO. GEICO operating just as it does, independently, is as competitive as can be, and it would not benefit by being part of any other organization.

And our reinsurance business is much more opportunistic, and it’s not consolidation there. It’s just lack of fear, generally, by competitors who can price, particularly cat business, at a rate that could be totally inadequate, as I use an illustration of the report. But nevertheless it could appear to be profitable for a long time. And there’s probably more of that going on now, and there’ll probably be a lot more going on in that arena. We have some sensational insurance businesses, though, I have to tell you that. You, I don’t think you really have to worry too much about how we do insurance in the future.

We had a number of GEICO people that here today. I hope you got a chance to meet him, GEICO. And you saw Lorimer Davidson. I really was hoping he could be here, but Davy is 95 years old. I went to visit him a few months ago. It just isn’t easy for him to get around. But he built a sensational company, and it stumbled once. Jack Byrne got it back on track, and Tony Nicely got it going down the track at about 100 miles an hour. It’s getting faster all the time. So we’ve got a great business there. Charlie?

Charlie Munger [01:04:51] Nothing bad.

Warren Buffett [01:04:52] Zone 7.

[01:04:52] Shareholder (Bill Ackman, New York): Yes. Bill Ackman from New York. Is there a price at which it’s inappropriate for a company to use its capital, buy back its stock, right? Give me that example of Coca-Cola at 40 P/E. Is that a smart place for Coke to deploy capital?

Warren Buffett [01:05:12] Well, it sounds like a very high price when you name it in terms of a P/E, to buy back the stock at that sort of number. But I would say this. Coca-Cola has been around 100 and, what, 12 years now, and there are very few times in that 112 years, if any, when it would not have been smart for Coca-Cola be repurchasing its shares. Coca-Cola is probable, in my view, among businesses that I can understand, it’s the best large business in the world. I mean, it is a fantastic business. And we love it when Coke repurchases shares and our interest goes up.

We owned 6.3% of Coca-Cola in 1988 when we bought in. We actually increased that a little bit a few years later. But if they had not repurchased shares, we probably would own about 6.7 or .8% of Coke. Now, as it is, we own a little over 8%. Through repurchases, they’re going to be about a billion 8-ounce servings of Coke sold around the world, or Coca-Cola products sold around the world today. 8% of that is 80 million, and 6.8% of 68 million. So they’re 12 million extra servings for the account of Berkshire Hathaway being sold around the world, and they’re making a little over a penny a serving. So, you know, that gets me kind of excited.

And I think it, all I can tell you is I approve of Coke repurchasing shares. I’d rather have them repurchasing shares at 15 times earnings, but when I look at other ways to use capital, I still think it’s a very, it’s a very good use of capital. And maybe the day will come when they can buy it at 20 times earnings, and if they can, I hope they go out and borrow a lot of money to buy a ton of it at those prices. And I think we will be better off 20 years from now if Coke follows a consistent repurchase approach. I do not think that is true for many companies. I mean, I think that repurchases have become in vogue and done for a lot of silly reasons. And so I don’t think everybody’s repurchase of shares is well reasoned at all. You know, we see companies that issue options by the ton and then they repurchase shares much higher. You know, I started reading about investments when I was six, and I think the first thing that I read was, you know, buy low, sell high. But these companies, through their options, you know, they sell low and then they buy high, and they’ve got a different formula than I was taught. So there are a number that we don’t approve of. When we have, when we own stock in a wonderful business, we like the idea of repurchases even at prices that may give you nosebleeds. It generally turns out to be a pretty good policy. Charlie?

Charlie Munger [01:08:25] Well, I think the answer is that in any company the stock could get to a price so high it would be foolish for the corporation to repurchase its shares.

Warren Buffett [01:08:37] Sure.

Charlie Munger [01:08:38] And you can even get into gross abuse. Before the crash, the Insull utilities were madly buying their own shares as a way of promoting the stock higher. It was like a giant Ponzi scheme at the end. So there’s all kinds of excess that’s possible. But the really great companies that buy at high price earnings, where that’s… that can be wise.

Warren Buffett [01:09:04] Our interest in GEICO went from 33% to 50% without us laying out a dime because GEICO was repurchasing its shares, and we benefited substantially. But we benefited a lot more, obviously, when prices were lower. I mean, we would, our interest in the Washington Post Company’s gone from 9 and a fraction percent to 17 and a fraction percent over the years without us buying a single share. But the Post or Coke or any number of companies don’t get the bargain in repurchasing now that they used to. We still think it’s probably the best use of money in many cases. Zone 8.

[01:09:43] Shareholder (Hutch Vernon, Baltimore, Maryland): My name is Hutch Vernon, I’m from Baltimore, Maryland. My question has to do with float. He said in the annual, and you’ve said in the past, that float has had a greater value to Berkshire than an equal amount of equity. I wondered if you could clarify that statement. Is that because the float has been generated at such a low cost relative to an imputed cost for equity, or is there something else behind that statement?

Warren Buffett [01:10:12] No, it’s because the float, which is now, we’ll say, $7 billion, comes to us at a negative cost. We would not make that statement if our float was costing us a couple percent a year, even though float would then be desirable, highly desirable. But our float is even better than that, or it has been, and so it comes to us with a cost of less than zero. It comes to us with a profit attached. So if we were to replace, if we were to get out of the insurance business and give up the $7 billion of float and replace it with $7 billion of equity, we would have less going for us next year than under the present situation, even though our net worth would appear to be $7 billion higher.

And I have said, and, that if we were to make the decision, if we were offered the opportunity to go out of the insurance business and that $7 billion liability would, as part of that decision, would evaporate from our balance sheet so that our equity would go up $7 billion with no tax implications, we would turn down that proposition. So obviously we think that $7 billion, which is shown as a liability, one is part of it, viewed as part of an insurance business, is not a liability at all in terms of real economic value.

And of course the key is not what the float is today and not what the cost is today. The key is what is the float going to be 10 or 15 years from now and what is the cost going to be 10 or 15 years ago. And, you know, we will work very hard at both increasing the amount of float and keeping the cost down somewhere close to our present level. That makes it a very attractive business when that can be done. GEICO’s a big part of the, of doing that, but we’ve got other things, the other insurance operations that’ll be important in that too, and we may have others besides that in the future. Charlie?

Charlie Munger [01:12:21] Yeah, if the float keeps growing, that is a wonderful thing indeed. We really have a marvelous insurance business. In addition to having this remarkable earning power, it’s way less likely to get really clobbered than most insurance businesses. So it’s, I think it’s safer on the downside and has a better upside.

Warren Buffett [01:12:41] And it may sound strange, but we don’t regard losing a billion dollars in the California quake is getting really clobbered. I mean, that’s part of the game. There are many companies that have greater exposures than that that really aren’t getting paid for it, and you don’t see it specifically. But any company that has a ton of homeowners business in Florida or Long Island or along the coast of Texas may have exposures many times our billion and really not be getting paid appropriately, or specific. Zone 9.

[01:13:22] Shareholder (Mary Semler, Seattle, Washington): Hi, my name is Mary Semler from Seattle, Washington. Japan is a major holder of U.S. Treasuries. Given the troubled Japanese economy, do you perceive Japan cashing in the U.S. investments to bail themselves out? Why or why not?

Warren Buffett [01:13:39] I thought… I didn’t get all that. I didn’t get that, I was busy chewing here.

[01:13:46] Shareholder (Mary Semler, Seattle, Washington): But Japan is a major holder of U.S. Treasuries. Given the troubled Japanese economy, do you perceive Japan cashing in the U.S. investments to bail themselves out? Why or why not?

Warren Buffett [01:14:00] The problems with the Japanese economy, and does that mean that, are you thinking particularly about them dumping Treasuries or something?

[01:14:11] Unidentified speaker: That’s exactly what she’s…

Warren Buffett [01:14:13] Yeah. Well, you know, it’s very interesting, the whole, all the questions about what so-called foreigners do with investments. Let’s just assume that the Japanese or any other country decides to sell some U.S. government holdings that they have. If they sell them to U.S. corporations or citizens or anything, what do they receive in exchange? They receive U.S. dollars. What do they do with the U.S. dollars? You know, I mean, they can’t get out of the system. If they sell them to the French, you know, the French give them something in return. Now the French own the government securities.

But really, as long as we, the United States, run a deficit, a big deficit, a trade deficit, we are tr… we are accepting goods and giving something in exchange to foreigners. I mean, when they send us whatever that it may be, and on balance they send us more of that than we send over there, we give them something in exchange. We give them, we may give them an IOU, we may give them a government bond, but we may give them an investment they make in the United States. But they have to be net investors in this country as long as we’re net consumers of their goods. It’s a tautology. So I don’t even know quite how a foreign government dumps its government bonds without getting some other type of asset in exchange. That may have an effect on a different market.

The one question you always want to ask in economics is, and not a bad idea elsewhere too, but is “and then what?” Because there’s always a second side to a transaction. And just ask yourself, if you are a Japanese bank and you sell a billion dollars worth of government bonds, U.S. government bonds, what do you receive in exchange and what do you do with it? And if you follow that through, I don’t think you’ll be worried about foreign governments selling U.S. bonds. That, it is not a threat. Charlie?

Charlie Munger [01:16:22] If I own Japan, I would want a large holding of U.S. Treasuries. On an island nation without much in the way of national resources, I think their policy is quite intelligent for Japan, and I’d be very surprised if they dumped all their treasures.

Warren Buffett [01:16:41] If they’re in that exporter too, so what choice do they have? And think about it, they, if they send over more goods to us than we send to them, which has been the case, they have to get something in exchange. Now for a while they were taking movie studios in exchange. You know, they were taking New York real estate in exchange. I mean, they’ve got a choice of assets, but they don’t have a choice as to whether, if they can send us more than they get from us, whether they get some investment asset in return. I mean, it’s amazing to me how little discussion there is about the fact that there’s two sides to an equation. But it makes for better headlines when, I guess, when read the other way. Zone 10.

[01:17:21] Shareholder (John Bond, Detroit, Michigan): This is John Bond from Detroit, Michigan. Nebraska’s Senator Kerrey has pro… proposed private investment accounts for up to 2 percentage points of the current payroll tax. His words were, and I quote, “People want more than just a transfer payment. They want wealth.” Do you approve this proposal? And if you do, would you recommend passive investing, i.e. index, or if you recommend active investing, would you and Charlie want to give it a shot?

Warren Buffett [01:17:53] Well, I’ve talked with Bob Kerrey about that, and Bob does like the idea of giving everybody some piece of the American economy and an interest in it. He’s thought, as you know, he’s proposed really sort of small grants to the 3.5 million or so children born every year and then some build-up of that account. Senator Moynihan has come up with something recently in conjunction with Kerrey. I personally would not like to see any major amount of Social Security… and Moynihan is talking about 2%. And I actually, I suggested the idea that maybe 2% out of the 12 and a fraction percent, at the option of the beneficiary, Social Security participant, could be devoted to some other system, but then they would only get five-sixths of the basic Social Security benefit.

I don’t think you could drop it below that, because you wouldn’t want to… people turning 65, or maybe more advanced age in the future, 70, and not having the safety net of Social Security. So I wouldn’t want to drop it below about five-sixths of the present benefits. I don’t, I think it’s a perfectly reasonable topic to discuss whether you want to take that 2% then and let people build up an account, perhaps tax-free, perhaps an IRA-type account, so they would have both wealth and the safety net. But I wouldn’t want to drop the safety net very, very far. And I think that I would not want to turn an army of salespeople loose on the American public with a mandatory 2% going in some direction. I don’t think that would be particularly healthy. Charlie?

Charlie Munger [01:19:44] I’m much less enthusiastic than you are. In other words, your negative or conservative attitude is way more affirmative than mine. I think the idea of getting the government and the promoting the value of equities… In Japan we have a taste of that now. The Japanese government has been using the postal savings system to buy equities massively, year after year after year. I don’t think we need to get the government into the equity market.

Warren Buffett [01:20:19] We go to zone 11, please.

[01:20:22] Shareholder (Dale Max, University Park, Illinois): I’m Dale Max from University Park, Illinois, and I’ve got a question for each of you. A short question for Charlie and a little, maybe a little longer for Warren. My question for Charlie is, in a business school sense, what is the cost of capital for Berkshire Hathaway? And my question for Warren is that I’ve been on the internet and I look at Yahoo, and they give you recommendations for companies, and when I search for Berkshire Hathaway it shows that nobody is recommending Berkshire Hathaway, despite the fact that there are maybe a thousand people that are wearing signs here, “I love Berkshire Hathaway,” and of course I’ve got mine on too. But what seems to be the problem in lack of recommendations?

Warren Buffett [01:21:21] Well, we’re not recommending Yahoo, incidentally, either. (Applause) But I’ll let…

Charlie Munger [01:21:28] …puzzle people for thousands of years. And then the way that is taught in most business schools now, I find incoherent. And so I’m the one that asks that question and gets the incoherent answers. I don’t have a good answer to a question I consider kind of a stupid question: what is the cost of capital that Berkshire Hathaway, when we keep drowning in this torrent of cash, which they get to that and…

Warren Buffett [01:22:11] But you don’t need a mathematical answer. The first question is, when you have capital, is it better to keep it or return it to shareholders? It’s better to return it to shareholders when you cannot create more than a dollar of value with that capital. That’s test number one. And if you pass that threshold, that you think you can achieve more than a dollar a value for every dollar retained, then you simply look around for the thing that you’re, the you feel the surest about and that promises the greatest return, waited for that certainty.

So our cost of capital is, in effect, is measured by the ability to create more than a dollar value for every dollar retained. If we’re keeping dollar bills that are worth more in your hands than in our hands, then we’ve exceeded the cost of capital as far as I’m concerned. And once we think we can do that, then the question is, how do we do it to the best of our ability? And frankly, all the stuff I see in business schools, and I’ve not found any way to improve on that formula.

Now the trouble that you may have is that many managements would be reluctant to distribute money to shareholders, even if they would rationalize that they would do better than they’d then actually do. But that’s, that may be a danger on it, but that won’t be solved by them hiring a bunch of people to come up with some cost to capital. It also justifies them keeping the money, because that’s what they’ll do otherwise.

The question about recommending the stock: we’ve very seldom had stock recommendations over the years. As I think back to 1965, I can’t think of a lot of brokerage reports that have recommended Berkshire, that I… I’m not looking for any, you know, reports at all. We are not looking to have Berkshire sell at the highest possible price, and we’re not looking for, to try and attract people to Berkshire who were buying stocks because somebody else recommends them to them. We prefer people who figure out for themselves why they want, they themselves want to buy Berkshire, because they’re much more likely to stick around if they enter the restaurant because they decide it’s the restaurant they want to eat at than if somebody has touted them on it. And that’s our approach. So we do nothing to encourage. But I think even if we did, we probably wouldn’t generate a lot of recommendations. It’s not a great stock to get rich on if you’re a broker.

Charlie Munger [01:24:38] Yeah, I think the reason, I think the one of the main reasons why it’s so little recommended in the institutional market is that it’s perceived as hard to buy in quantity.

Warren Buffett [01:24:50] We prefer… we’ve got some good institutions as holders, including one that’s run by a very good friend of ours. But frankly, it’s more fun for us to have a bunch of individual shareholders. I mean, you see it, it translates, if there’s money made, it translates into changes in people’s lives and not some change in somebody’s performance figure for one quarter. And we think that individuals are much more likely to join us with the idea of staying with us for as long as we stay around. And, you know, that’s the way we look at the business. Very few institutions look at investments that way, and frankly we think they’re often less rational holders than we get with individuals. Number 1.

[01:25:36] Shareholder (Hugh Stevenson, Atlanta): Good morning.

Warren Buffett [01:25:37] Good morning.

[01:25:37] Shareholder (Hugh Stevenson, Atlanta): Gentlemen, I’m Hugh Stevenson, a shareholder from Atlanta. My question involves the company’s super cat reinsurance business. You’ve addressed some of this, but I would like for you to expound on it, please. You’ve indicated that you think this is the most important business of the company, and my question is, what do you think the long-term impact of catastrophe bonds and catastrophe derivatives will be on the float and the growth and float of the company… affect the way you price your business, but I’m wondering how you think it can affect the volume of the business. And I remember several years ago, Mr. Buffett, you talk about you can never be smarter than your dumbest competitor, right? And these are some potentially dumb competitors.

Warren Buffett [01:26:37] You’ve got it. The… I just want to put an asterisk on one thing. We say insurance will be our most important business. We’ve not said the super cat business will be our most important. Super cat has been a significant part of our business and may well over the years remain a significant part, but it is far less significant than GEICO, and I’ll mention a word or two about that. But the super cat business, you can price wrong. As I illustrated in my report, you can be pricing it at half what it should be priced at.

I used an illustration in the report of how you could misprice it. A policy that you should be getting, say, $1.5 million for, namely a $50 million policy on writing on something that had one chance in 36 of happening, so you should get almost a million halfway. I said if you price it at a million a year, you know, you would think you were making money after 10 years, 70-odd percent of the time. The interesting thing about that is if you price it for a dollar a year, you would have thought you made money 70-odd percent of the time. Because it, when you were selling insurance against very infrequent events, you can totally misprice them but not know about it for a long time.

Super cat bonds open up that field wide open. I mean, you’ve always had the problem of dumb competitors, but you have a much more chance of having dumb competitors when you have a whole bunch of people who, in the case of hedge funds who bought some of these, where the manager gets 20% of the profits in the year when there are profits and there is no hurricane, and when there is, there happens to be a hurricane or an earthquake, he doesn’t take the loss, his limited partners do. So it’s very likely to be a competitive factor that brings our volume down a lot. It won’t change our prices.

You know, the thing about the… the thing to remember is the earthquake does not know the premium that you receive. I mean, the earthquake happens regardless. So it doesn’t say, you know, you don’t have somebody out there on the San Andreas faults that says, “Well, he only charged a 1% premium, so we’re only going to do this once every 100 years.” And it doesn’t work that way. So we will probably do a whole lot less volume in the next few years in the super cat business. We have these two policies that run for a couple of more years, but in terms of new business, we will do a whole lot less.

GEICO is the, by far the most important part of our insurance business, though. GEICO in the 12 months ended April 30th had a 16.9% increase in policies in force. Year end, I told you it was 16.0. A year ago I told you it was 10. Year before that, I think it was 6 and a fraction. So its growth is accelerating, and it should be in a whole lot more homes around the country than it is now, you know, by a big factor, and it will be in my view. So that will be the big part of our insurance business. But we may be in insurance business in some other ways too as time goes along. It’s a business that if you exercise discipline, you should find some ways to make money, but it won’t always be the same way. Charlie?

Charlie Munger [01:29:58] I’ve got nothing to add.

Warren Buffett [01:30:00] Okay. Zone 2.

[01:30:01] Shareholder (Steve Davis, San Francisco): Hello, I’m Steve Davis from San Francisco. I’d like your advice on how to understand annual reports: what you look for, what’s important, what’s not important, and what you’ve learned over the years from reading thousands of reports. Thank you.

Warren Buffett [01:30:16] We’ve read a lot of reports, I will tell you that. And we, well, we start by looking at the reports of companies that we think we can understand. So we hope to find, we hope to be reading reports, and I do read hundreds of them every year, we hope to be reading reports of businesses that are understandable to us. And then we see from that report whether the management is telling us about the things that we would want to know about if we owned 100% of the company. And when we find a management that does tell us about those things and that is candid in the same way that a manager of a subsidiary would be candid with us, and talks in language that we can understand, it definitely improves our feeling about investing in such a business, and the reverse turns us off to some extent.

So if we read a bunch of public relations gobbledygook, it has some effect toward a business. We want to understand the business better when we get through with the annual report than when we picked it up. And that is not difficult for a management to do if they want to do it. If they don’t want to do it, you know, we think that is a factor in whether we want to be their partners over a 10-year period or so.

But we’ve learned a lot from annual reports. For example, I would say that the Coca-Cola annual report over the last good many years been an enormously informative document. I mean, I can’t think of any way, if I had had a conversation with Roberto Goizueta or now Doug Ivester and they were telling me about the business, they would not be telling me more than I get from reading that annual report. We bought that stock based on an annual report. We did not buy it based on any conversation of any kind with the top management of Coca-Cola before we bought our interest. We simply bought it on, based on reading the annual report plus our knowledge of how the business worked. Charlie?

Charlie Munger [01:32:20] Yeah, I do think the… if you’ve got a standardized bunch of popular jargon that looks like it came out of the same consulting firm, I do think it’s a big turn-off. That’s not to say that some of the consulting mantras aren’t right, but I think there’s a lot for sort of a candid, simple, coherent prose. A lot to be said for them.

Warren Buffett [01:32:44] Almost every business has problems, and we just assumed the manager would tell us about them. We would like that in the businesses we run. In fact, one of the things… we give very little advice to our managers, but one thing we always do say is to tell us the bad news immediately. And I don’t see why that isn’t good advice for the manager of a public company over time. You know, I’m positive it’s the best part, you know, I’m positive it’s the best policy. But a lot of companies, they’re dying just to pump out what they think is good news all the time, and they have this attitude that, you know, that you’ve got a bunch of animals out there to be fed and that they’re going to feed them what they want to eat all the time. And over time the animals learn. So it’s, we try and stay away from businesses like that.

Charlie Munger [01:33:41] What you seldom see in an annual report is a sentence like this: “This is a very serious problem, and we haven’t quite figured out yet how to handle it.” But believe me, that is an accurate statement much of the time.

Warren Buffett [01:33:57] All right. Zone 3.

[01:33:59] Shareholder (Larry): I’m Larry and I live, I’m gonna jerks, I live in the area, and I would like to know what your prediction is for Coca-Cola’s long-term growth versus Pepsi-Cola’s recent efforts to increase their pep positiveness with Coke.

Charlie Munger [01:34:29] Yeah. (Applause) Long term, I would expect Coke to continue to gain versus Pepsi. (Applause)

Warren Buffett [01:34:43] What has he been doing while I was gone? What’d you say, Charlie?

Charlie Munger [01:34:54] I knew I was taking a chance.

Warren Buffett [01:34:59] What was the question?

Charlie Munger [01:35:02] I said that long term I expected Coke to continue to gain versus Pepsi.

Warren Buffett [01:35:09] Oh, well, those kind of insights is why we keep him on the job year after year. In a moment of particular confidence, we one time told me the same thing about RC. That was, that was probably zone 3 you were answering, so we’ll go to four. What have you got there? You got peanut brittle? Zone 4, please.

[01:35:39] Shareholder (Houston, Texas): Houston, Texas. My first question is on the quality of earnings and your evaluation of quality of earnings in the U.S. right now. And the second is, what multiples should be put on asset gains, such as sale of bottling assets or reversal of merger reserves? Thanks.

Warren Buffett [01:36:00] Taking the second question, for example, the Coca-Cola, whether the bottling transactions are incidental to a long-term strategy, which in my view has been enormously successful to date and which has more successes ahead of it. But in the process of rearranging and consolidating the bottling system and expanding to relatively undeveloped markets, there have been and there will be a lot of bottling transactions, and some produce large gains, some produce small gains. I ignore those in my evaluation of Coke. The two important elements in Coke are our unit case sales and shares outstanding. And if the shares outstanding go down and the unit case sales advance at a good clip, you’re going to make money over time in Coca-Cola.

There have been transactions where people have purchased rights to various drinks. Coca-Cola’s purchased some of those around the world. And when you see what is paid for a million or 100 million unit cases of a business, and then you think to yourself that maybe Coke will add 1.5 billion cases a year, that’s a real gain in value. It’s a dramatic gain in value, and that is what counts in terms of the Coca-Cola Company. What if you think the Coca-Cola Company is going to sell some multiples of its present volume 15 or 20 years from now, and you think there’ll be a lot fewer shares outstanding, you’ve gone about as far as you need to go. But I would pay no attention to asset gains. I would just take those out of the picture.

Now as the quality of earnings, Charlie and I feel that in several respects, but in one important respects, the quality of earnings has gone down, not because the policy has changed but because it’s just become more significant, and that’s in the case of stock options. We have, there are certain companies that we’ve evaluated for possible purchase where, in our calculation of earnings, the earnings are maybe 10% less per year per share than reported. And that isn’t necessarily the end of the world, but it is a difference in valuation that is significant and is not reported under standard accounting. So we think the quality of earnings as reported by a company with significant stock option grants every year, we think is dramatically poor than one for one that, where that doesn’t exist. And there are a lot of companies that fall in that category.

Coca-Cola’s earnings are very easy to figure out. Just figure out what they’re, you know, what they’re earning per case from operations, and you’ll see over the years the earnings per case go up and the cases go up and the shares go down, and it doesn’t get much more complicated than that. Charlie?

Charlie Munger [01:39:14] You’ve said it wonderfully. I just wish we had more like that.

Warren Buffett [01:39:19] Yeah. GEICO, the key, I mean the same way, is policies in force and underwriting experience for policy. And that is exactly the way, as noted in the annual report, we pay people there. We pay them from the bottom to the very top based on what happens with those two variables. And we don’t talk about earnings per share at GEICO, and we don’t talk about investment income. We don’t get off the track, because there are two things that are going to determine what kind of business that GEICO is over a long period of time. And policies that at GEICO are unit cases at Coca-Cola. Zone 5.

[01:40:04] Shareholder (James Claus, New York City): Hello, Mr. Buffett, Mr. Munger. My name is James Claus from New York City, and I just wanted to ask you a question. Both you and Mr. Munger have repeatedly said that you don’t believe that business valuation is being taught correctly at our universities, and as a PhD student at Columbia Business School, that troubles me, understandably, because in a couple of years I’ll be joining the ranks of those teaching business valuation. My question isn’t what sources, such as Graham or Fisher or Mr. Munger’s talks, you would point people that are teaching business valuation to, but do you have any counsel about the techniques of teaching business valuation?

Warren Buffett [01:40:46] Well, I was lucky. I had a sensational teacher in Ben Graham, and we had a course there. There’s at least one fellow out in the audience here that attended with me. And just, Ben made it terribly interesting. What we did was we walked into that class and we valued companies. And he had various little games he would play with us. Sometimes he would have us evaluate company A and company B with a whole bunch of figures and then we would find out that A and B were the same company at different points in its history, for example. And then there were a lot of little games he played to get us to think about what were the key variables and, you know, how could we go off the track. I remember one time Ben met with Charlie and me and about nine or so other people down in San Diego, and 1968 or so, when he gave all of us a little true-false test. And we all thought we were pretty smart. We all flunked. But that was his way of teaching us that a smart man playing his own game and working at fooling you could do a pretty good job at it.

But I would, you know, if I were teaching a course on investments, there would be simply one valuation study after another, with the students trying to identify the key variables in that particular business and evaluating how predictable they were first, because that is the first step. If something is not very predictable, forget it. You know, you don’t have to be right about every company. You have to make a few good decisions in your lifetime. But then when you find, the important thing is to know when you find one where you really do know the key variables, which ones are important, and you do think you’ve got a fix on them.

Where we’ve been, where we’ve done well, Charlie and I made a dozen or so very big decisions relative to net worth, but not as big as they should have been, and we’ve known we were right based on those going in. I mean, they did, they just weren’t that complicated, and we knew we were focusing on the right variables and that they were dominant. And we knew that even though we couldn’t take it out to five decimal places or anything like that, we knew that in a general way we were right about them. And that’s what we look for, the fat pitch, and that’s what I would be teaching, trying to teach students to do. And I would not try to teach them to think they could do the impossible. Charlie?

Charlie Munger [01:43:20] Yes. If you’re planning to teach business valuation, and what you hope to do is teach the way people teach real estate appraising, so you can take any company and your students, after studying your course, will be able to give you an appraisal of that company which will indicate really its future prospects compared to its market price, I think you’re attempting the impossible.

Warren Buffett [01:43:47] Yeah, probably on the final exam I would take an internet company, and I would say, the final exam, the question is, “How much is this worth?” And anybody that gave me an answer, I would flunk.

Charlie Munger [01:44:04] Right.

Warren Buffett [01:44:05] Make grading papers easy, too. Okay, zone 6.

[01:44:08] Shareholder (Laurence Balter, Carlsbad, California): Good morning. Laurence Balter, Carlsbad, California. Question for the two of you. There was an article, I think about last year, in the New York Times that regarded Wesco as a Berkshire Class C share type company, and I’d like to know your comments on that. And the second question is, if I were to write you a check for the operating businesses that Berkshire owns, how much would it have to be? Big?

Warren Buffett [01:44:43] Charlie is the resident expert on Wesco, so I’m going to let him address that subject. He gets very eloquent on this.

Charlie Munger [01:44:52] Yeah, we always say that per unit of book value, Wesco is worth way less than Berkshire, and indeed the market is saying the same thing. It is not a clone of Berkshire. It’s a historical accident.

Warren Buffett [01:45:05] We want to do well, obviously, for Wesco. We own 80% of it, and we’ve got strong feelings about the people who are partners there, particularly the Peters family, who in effect invited us in 20-odd years ago and trusted us to manage a big part of their money, in effect, by letting us buy control. So we’ve got strong fiduciary feelings about it. It suffers in comparison with Berkshire because, for one thing, anybody that wants a tax-free merger is going to want to come to Berkshire. You know, that’s just the way it is, unfortunately. And we are looking for big ideas, primarily, and the big ideas are going to fit into Berkshire.

We would love to get ideas that fit into Wesco, and we had a very good one a couple of years ago, thanks to Roy Dinsdale pointing me in the right direction, and we added Kansas Bankers Surety to Wesco, and it’s a gem, and it’s run by Don Towle, who’s done a terrific job. But that’s the exception, unfortunately, because if the FlightSafety comes along, it’s not going to fit Wesco. So we will do our best for Wesco, but the nature of things is that most of the opportunities that make a lot of sense are going to come to Berkshire. Charlie?

Charlie Munger [01:46:27] Nothing more.

Warren Buffett [01:46:28] Okay, zone 7.

[01:46:29] Shareholder (Bob Swanson, Phoenix): My name is Bob Swanson from Phoenix, and I’m wondering, what are the advantages of investing in Berkshire Hathaway as opposed to investing in the stocks that Berkshire owns?

Warren Buffett [01:46:43] Well, a lot of people do one or the other, and some people do both. But no, you have to really make up your own mind on that. We’re not going to go to great lengths to tell you about everything that Berkshire is doing as we go along, and there could be some changes, and there will be things that can happen in Berkshire that I think you would have trouble duplicating elsewhere. But on the other hand, you know, if you put all your money in Coca-Cola some years back, you might have done better than if you put in Berkshire. So we really make no recommendation to what people do with their money. We do not seek to become investment advisors through, in effect, our portfolio actions at Berkshire. Charlie?

Charlie Munger [01:47:30] Basically, we hate it when people following us, follow us around buying the… we buy.

Warren Buffett [01:47:38] Nothing personal. No. By the way, the questioner before this last one asked, what is the market value under the hammer of all Berkshire’s operating subsidiaries? And the answer is, you have to figure that out yourself.

Charlie Munger [01:47:59] Mr. Nice Guy.

Warren Buffett [01:48:00] So, well, but we give you the information, incidentally, where your judgment on that should be about as good as ours. There’s nothing mysterious about valuing the Buffalo News or See’s Candy or FlightSafety or Dairy Queen. So you really have the same information we have in that. I mean, if there’s material information that we aren’t giving you about any important, but, Berkshire subsidiary, we’d like to give it to you, because we think you are entitled to have the information, enables you to value the various pieces.

Because of the aggregate size of Berkshire now, in terms of market capitalization, and some of the positions we own, the smaller subsidiaries really cannot have that much effect. We love them just as much. I enjoy all of the businesses we’re in and I enjoy the people that run them, so we don’t make a, there’s not, we don’t differentiate in our attitude within the company. But in terms of the actual impact on the valuation of Berkshire, there are a number that really just, they just don’t make that much difference in terms of figuring out whether Berkshire’s worth X or X minus a thousand or plus a thousand, because a thousand now is over a billion dollars in terms of valuation. A billion is still a lot of money. Area 8, please.

[01:49:25] Shareholder (Robert McCormick, Holdrege, Nebraska): Hello, Mr. Buffett, Mr. Munger. My name is Robert McCormick, I’m from Holdrege, Nebraska, and I would like to know how much you attribute the gains enjoyed by the stock market these past years to the baby boomer generation investing for their retirement.

Warren Buffett [01:49:49] Now, I would say that personally I would not think that has much to do with it. I think the two big factors are… well, there’s three big factors. One is the improved return on equity, which was a fundamental factor that pushed stock prices up. Two is the decline in interest rates that pushed stock prices up. And then finally, stock prices advancing themselves brings in buying. It doesn’t go on forever, but it creates its own momentum to some extent if you have these underlying factors that are, that started to push it along. So I would say two of the three factors are fundamental, and the third is a market-type factor, that bull markets do feed on themselves. And I think that you’ve seen some evidence of that.

But I don’t think that any specific, you know, the 401(k) factor or whatever it may be, was it by itself. But I do think money is pouring into mutual funds, for example, because people have had a very favorable experience with those funds, and that does, that does bring, that bring investors along. People want to be on the train. Charlie? And I think, incidentally, many of them have very unrealistic expectations.

Charlie Munger [01:51:04] Yeah, the general investment experience in the last, what, 18 years in common stocks has been awesomely high, I think, by any past standards. Now, it’s not a great war, right?

Warren Buffett [01:51:19] Well, you’ve had, since 1982, you’ve had roughly 10-fold in the Dow, and probably somewhere in the S&P, and with a huge amount of money and with more participants all the time. And there are people coming into the market every day because they feel that they’ve missed the boat, or they’re coming in heavier than they came in before simply because they’ve had a pleasant experience. And past experience doesn’t, does not mean much in terms of what you should expect from your investments. We, you will do well in your investments because you own or bought things at the right price and the businesses behave well from that point forward. Well, you won’t have 18 more years at 17% or 18% per annum. That, I think, we can virtually guarantee. Area 9.

[01:52:11] Shareholder (Tubby Stayman, Palm Beach, Florida): Hello, I’m Tubby Stayman from Palm Beach, Florida. I know you enjoyed bridge very much. I know you play my late husband’s convention. Tell me, how often are you able to devote to this wonderful game? How many times a week do you play, other than the internet?

Warren Buffett [01:52:30] Didn’t get all of that.

Charlie Munger [01:52:31] How much bridge are you playing?

Warren Buffett [01:52:34] Oh, yes. Well, this week… we should put this in the annual report, because it may be a material factor. I probably, I’m probably at least 10 hours a week, maybe a little more. I don’t get any better by doing it either. It’s rather discouraging. But it is a lot of fun, and it’s, it has to have come out of reading time. I don’t think it’s hurt Berkshire yet, but that may be because we’re in a slow period generally. It, if the market goes down a lot, I promise to cut back on my bridge. Charlie?

Charlie Munger [01:53:10] Yeah, well, I probably pay three or four hours a week, but I don’t play on any internet.

Warren Buffett [01:53:16] He plays a lot of golf, though. I confess, Charlie.

Charlie Munger [01:53:20] Oh, yes.

Warren Buffett [01:53:21] Yeah, we both spent about the same amount of time goofing off, I mean, if you want to know. Okay, area 10.

[01:53:30] Shareholder (Cary Blecker, West Palm Beach, Florida): Yes, my name is Cary Blecker, also from West Palm Beach, Florida. With all due respect to Mr. Eisner, if he’s in the audience, there’s been some criticism levied recently at the Disney Company, mainly from an accounting professor at one of the state universities in New York, in reference to Disney’s purchase of Capital Cities and the way they accounted for that purchase. Basically, what this professor is saying is that Disney somehow created a slush fund and is charging the expenses to the merger to this slush fund rather than earnings. If you’re familiar with this criticism, I’m wondering what you think of it. If you’re not, are you familiar with the way Disney accounted for the purchase of Capital…

Warren Buffett [01:54:19] Thank… Cities. And actually, Abe Briloff, who wrote that, is a fellow who in general I admire. Abe wrote me a letter, actually, where he teaches, and I wrote him back and I told him I wouldn’t be able to do it because it’s not in proximity to where I’ll be. But, and I told him, and he asked me about this anything, and I told him I disagreed with him on certain… I admire what Abe does in the attempt to have accounting reflect economic reality, but he and I don’t see it exactly the same on some points, although we would agree on other points.

I think, I don’t think Disney is a very complicated enterprise to evaluate. I mean, it, there are, when Cap Cities bought ABC, there were purchase accounting adjustments, and they tend to wash through for some, to some extent. I mean, if you have programs that you’re stuck on, you may write those down from what the previous carrying cost was. Maybe the previous management should have written them down too at that point. But I don’t think that, I think with Disney what you see now is what you get. Charlie?

Charlie Munger [01:55:42] Yeah, I’ve got no great quarrel with the accounting at Disney. I think, yeah, Briloff is a wonderful guy. He’s got a good sense of humor, and he’s, he generally fights the right demons. But I don’t think you can criticize Disney’s accounting.

Warren Buffett [01:56:03] We certainly disagree with Abe, who, like I say, is, it, I agree with Charlie, he’s a good guy, but he, we disagree with him on amortization of intangibles entirely. So we would say that if Disney is charging, whatever it may be, probably $400 million a year for amortization of intangibles, which is not tax deductible, we would include that as a component of earnings. So there might be some pluses and minuses that you’d make in adjustments, but I would say by the time you had back amortization of intangibles, that we would probably think the economic earnings of Disney might well be more than the reported earnings in the next few years.

I think that the intangible amortization question, which the FASB is looking at now, I think it should be changed. I mean, I think it absolutely distorts economic reality, and I think that it influences whether people go to purchase accounting or pooling, and they do all kinds of acrobatics to try and get pooling accounting. And, you know, it shouldn’t make that kind of difference in reported numbers, based on whether a transaction which has exactly the same economics is done through a purchase or pooling. But I have seen managements, some I know quite well, arranged to do things on a pooling basis that they think, where they, if they were private, they would do it on a purchase basis. And I think that’s nuts. And I think if accounting is pushing people to doing things that are nuts, that it’s time for a cut to look at accounting, to look at itself. I would say that net, the economic earnings of Disney, in our view, are somewhat higher than reported earnings. Zone 11, please.

[01:57:51] Shareholder (Prakash Puram, Minneapolis): Good morning, Mr. Munger and Mr. Buffett. My name is Prakash Puram from Minneapolis. There seem to be great values in the technology sector that meet most of your criteria, philosophy and investing, with the exception of the simplicity criterion. Names like IBM, Microsoft, HP, Intel. Would you ever consider investing in companies in this sector in the future?

Warren Buffett [01:58:15] Well, the answer is no, and it’s probably pretty unfortunate, because I’ve been an admirer of Andy Grove and Bill Gates, and, you know, I wish I translated that admiration. And I don’t know what that world will look like in 10 years, and I don’t want to play in a game where I think the other guys have got an advantage over me. And I could spend all my time thinking about tech, I wouldn’t be the 100th or the 1,000th or the 10,000th smartest guy in the country in looking at those businesses. So that is a seven or eight foot bar that I can’t clear. There are people that can clear it, but I can’t clear it, and no matter how I train, I can’t clear it.

So the fact that there will be a lot of money made by somebody doesn’t bother me really. And I mean, there may be a lot of money made by somebody in cocoa beans, but I don’t know anything about them, and there’s a whole lot of areas I don’t know anything about. So, you know, more power to them. And I think it would be a very valid criticism if Charlie and I, if you, if it were possible that Charlie and I, and by spending a year working on it, could become well enough informed so that our judgment would be better than other people’s. But that wouldn’t happen, and it would be a waste of time. It’s much better for us to swing at the easy pitches. Charlie?

Charlie Munger [01:59:45] Whatever you think you know about technology, I think I know less.

Warren Buffett [01:59:49] That’s probably not true, incidentally. Charlie has a little more of a, he understands some things in the physical world a lot better than I do. But anyway, we’ll go to zone 1.

[02:00:01] Shareholder (Murray Cass, Markham, Ontario): Good morning, I’m Murray Cass from Markham, Ontario. First off, against my dentist’s advice, I’d like to thank you for the free Coke and ice cream last night. Earlier this morning, Mr. Buffett, you mentioned that you liked when wonderful companies like Coke purchased their shares back. Similarly, I own shares in a wonderful company, that’s Berkshire. Should I be hoping that you buy your own shares back?

Warren Buffett [02:00:29] Well, it’s interesting. We should have, perhaps we should have bought some shares back, but usually at the time we could have bought something else that also did very well for us. I mean, maybe we were buying Coke, we could have been buying our own shares back to some extent. There hasn’t been that much trading in it. But I think it’s a valid criticism to say that we have missed the boat at various times in not repurchasing shares. We’ll see what we do in the future. If it looks like the best thing to do with money, it’s what we should be doing. And in the past I’ve probably been not optimistic enough in respect to Berkshire compared to other things we were doing with money. Now, the money we spent buying the GEICOs and all that has turned out to be a good use of money too.

But we’ve never wanted to leverage up. That’s just not our game. So we’ve never wanted to borrow a lot of money to repurchase shares. We might advise other people to do it, but we would, it’s not our style ourselves. We’ve got all our money in the company. We’ve got all of our friends’ and our relatives’ money, virtually. So we have never felt that we wanted to leverage up this company like it was just one of a portfolio of 100 stocks. But it’s a valid criticism to say that we have not repurchased shares when we should have, and it’s also a valid criticism to say that we’ve issued some shares we shouldn’t have issued. Charlie?

Charlie Munger [02:01:53] Well, I would agree with both comments.

Warren Buffett [02:02:00] Area 2.

[02:02:01] Shareholder (Michigan): Fellow inves… fellow investors of Berkshire Hathaway, Warren Buffett and Charlie Munger, I’m from, originally China, now I have a company in Michigan. I want to ask questions based on facts. I want to sell Coke, GEICO and a little book called “The Wizard of Omaha: The Investment Philosophy of Warren Buffett” in China, through all the villages, the cities, little towns. I want to make that a reality. Cheers. Cheers. Come here. (Applause)

Warren Buffett [02:03:00] Zone 3.

[02:03:01] Shareholder (Michigan): I’m not… asked the question. All right, just warming up.

Warren Buffett [02:03:06] Okay.

[02:03:07] Shareholder (Michigan): I will. They always tell me to get off the stage while you’re in good shape, but I’ll say it. I could quit, but you missed your chance. I’m the owner of Berkshire, and I spent 6% of my net worth to be engaged to Berkshire. Wise decision. I did better than, guess who, Bill Gates. I noticed Bill Gates and you were traveling on a slow boat in China. I want to go home on the fast stream. You want to cut me off? If you want to cut out, fine. To the investors, I quit if you want me to do it. I have to, I come a long ways. Okay, I know I’m a problem for you, but I’m here for a reason, because I made some money. I’m go on a train, a smile train. Yesterday or the day before at the baseball, I asked Mr. Warren Buffett, “Have you heard of the smile train?” He said no. I’m back here to respond: this is a smile train.

Warren Buffett [02:04:46] Okay, we thank you, but I think that’s your question. We better go to zone 4 on that thing. (Applause)

[02:04:55] Shareholder (Matt Schwab, Pound Ridge, New York): Good morning, or afternoon actually. My name is Matt Schwab, I’m from New York, Pound Ridge, New York. I actually had a question about the silver purchase last year. When you announced it, you said that you believe that supply and demand fundamentals would only be established at a higher price, re-established at a higher price. I was just wondering if you could go into more detail about what some of those fundamentals are. I mean, we’ve read a lot about, like, battery technology and some other things.

Warren Buffett [02:05:36] Yeah, we have no inside information about great new uses for silver or anything of the sort. But the situation, and you can get these figures, and they’re not precise, but I think they’re in general, they’re generally accurate. You can see from looking at the numbers that aggregate demand, primarily from photography, from industrial uses and from ornamental, jewelry-type uses, it’s close, call it 800 million plus ounces a year. And there are 500 million or so ounces being produced of silver annually, although there will be more coming on in the next couple of years. There’s more coming on right now.

However, most of that silver is produced as a byproduct in the mining of gold or copper and lead, zinc. So that, since it’s a byproduct, it’s not responsive to, very responsive, to price changes, because obviously if you’ve got a copper mining, you get a little silver out of it, you’re much more interested in the price of copper than silver. So you have 500 million ounces or so of mine production, and you have 150 million ounces or so of reclaimed silver, a large part of which relates to the uses in photography. So there’s been a gap in recent years of perhaps 150 million ounces, but none of these figures are precise, which has been filled by an inventory a bullion above ground, which may have been a billion two or more ounces a few years back, but which has been depleted.

And no one knows the exact figures on this, but there’s no question that the bullion inventory has been depleted significantly, which means that the present price for silver does not produce an equilibrium between supply, as measured by newly mined silver plus reclaim silver, and usage. And that eventually something will happen to change that picture. Now, it could be reduced usage, it could be increased supply, or it could be a change in price. And that imbalance is sufficiently large, even though there is some new production coming on and there’s the threat of digital imaging that will reduce silver usage perhaps in the future in photography, but we think that that gap has, is wide enough so that it will continue to deplete inventories, bullion inventories, to the point where a new price is needed to establish equilibrium. And because of the byproduct nature, which makes the supply inelastic, and because the nature of demand, which is relatively inelastic, that we don’t think that that price change would necessarily be minor.

It’s interesting, because silver has been artificially influenced for a long time. You saw that movie about, you know, it was William Jennings Bryan, who was editor of the Omaha World-Herald and a congressman from Nebraska, and his brother was governor of Nebraska, who was the big silver man, and they used to talk 16 to 1. The 16 to 1 ratio, I think, goes back to Isaac Newton when he was master of the Mint. Charlie will know all about that, because he’s our Newtonian expert here. And, but that ratio had kind of mystical significance for a while. Didn’t really mean anything.

And in 1934 the government passed a, an act called the Silver Purchase Act of, surprisingly, 1934, which set an artificially high price for silver at that time, when production and usage was much less, and the government, the US government, ended up accumulating 2 billion ounces of silver. Now, this was at a time when demand was a couple hundred million ounces a year, so you’re talking 10 years’ supply. So there was an artificially high price for a while. By the 19… early 1960s, that became an artificially low price of $1.29. And at that time I could see the inventories of the US government being depleted, somewhat akin to what inventories are being depleted now. And despite the fact that Lyndon Johnson and the administration said they would not demonetize silver, they did demonetize it, and silver went up substantially. That was the last purchase we had of silver.

But I’ve kept track of the figures ever since. The Hunt brothers caused a great amount of silver to be converted into bullion form, including a lot of silver coins. So they again increased the supply in a very big way by their action and pushing the price way up to the point where people started melting it down. So you had this dislocations in silver over a 60-plus year period, which has caused the price to be affected by these huge inventory accumulations and reductions. And we think right now, that we thought last summer when we started buying it, that at the price we bought it, that was not an equilibrium price, and sooner or later… And we didn’t think it was imminent, because we don’t wait till things are imminent. You know, we were going to buy a lot of silver. We didn’t want to buy so much as to really disrupt the market. However, we had no intention of replaying any Hunt scenario, so we wanted to be sure we didn’t buy that much silver. But we liked it. Charlie?

Charlie Munger [02:11:08] Well, I think this whole episode will have about as much impact on Berkshire Hathaway’s future as Warren’s bridge playing. We’ve got a line of activity where once every 30 or 40 years you can do something employing 2% of assets. This is not a big deal for Berkshire. The fact that it keeps Warren amused, and yeah, it is not doing counterproductive things.

Warren Buffett [02:11:37] It makes me feel better about, makes me feel better about all those pictures that people take over the weekend. They all use a little bit of silver.

Charlie Munger [02:11:50] At least it shows, at least it shows something that teaches an interesting lesson. Think of the discipline it takes to think about something for three or four decades, waiting for a chance to employ 2% of your assets.

Warren Buffett [02:12:07] I’m afraid that’s the way we are. It means there’ll be some dull stretches.

Charlie Munger [02:12:14] Right.

Warren Buffett [02:12:15] Yeah, it’s less than a billion dollars in silver. It’s $15 billion in Coke. You know, it’s a non-event. It’s $5 billion in American Express. I mean, the, it is close to a non-event.

Charlie Munger [02:12:33] But if you see it there, at least it shows the human personality at work.

Warren Buffett [02:12:41] Very peculiar personality, I might have, reinforced by a partner.

Charlie Munger [02:12:47] Yes.

Warren Buffett [02:12:47] Okay, let’s go to area 5.

[02:12:50] Shareholder: My fa… my family is a Class B shareholder. Thank you for issuing those shares. I have one observation and one question. Your Class B share is creating a new phenomena in this country. These baby shares are not only attracting my baby boomer generation, but also X generation and echo generation, your grandchildren. My question is, this next generation would like to hear from you your investment discipline, your lifestyle and your philosophy of contributing the wealth back to the society, in a language they can understand and communicate back to their friends when they get back to school on Tuesday. Thank you.

Warren Buffett [02:13:46] Thank you. I, well, I appreciate that. And I would say the only, the only speeches I give… I get a lot of requests, probably, perhaps because I don’t do them. But I get a lot of requests, including from a lot of our managers, in terms of trade conventions, all kinds of things. I don’t, I, the only groups I talk to are students. And I try to talk to college and university students. All, I’ve talked to high school students too, whenever it fits in terms of travel schedules. And I just think that, you’re going to spend your time with groups talking, that rather than entertain people, that it probably is better to talk to the group who talked about it. And Charlie and I are never reluctant to talk, so we do it.

Charlie’s, Charlie has given a couple of talks. One I sent you a few years ago from USC, but there’s been another one recently that I think everybody would profit by reading. So it was reprinted in the Outstanding Investor Digest, but if you write Charlie, I’m sure I’ll send you a copy. Area 6, please.

[02:14:58] Shareholder (David Oosterbaan, Kalamazoo, Michigan): Hi, my name is David Oosterbaan, I’m from Kalamazoo, Michigan. This is a hypothetical question about Berkshire. It’s going to take a little imagination, I think. The scenario as follows: that the U.S. Justice Department makes a ruling that Berkshire must split into two parts immediately. You and Mr. Munger must decide which part to keep. You can either choose your marketable securities, Coke, Gillette, Disney, etc., or you can choose your insurance and private businesses. Which one do you choose, and why?

Warren Buffett [02:15:37] Well, that’s an easy question for me. I would choose the operating businesses anytime, because it’s more fun. And I have a good time out of the investments too, but what I like, I like being involved with real people in terms of the businesses, where they’re a cohesive unit that can grow over time. And, you know, I wish we owned all of Disney or Coca-Cola or Gillette, but we aren’t going to. So if I had to give up one or the other, I’d give up the marketable securities. But it’s not going to happen, so we’re going to be happy in both arenas, and I look forward to being in both arenas for the rest of my life. Charlie?

Charlie Munger [02:16:24] Well, I’ll be in a hell of a fix if I’m not in the same arena.

Warren Buffett [02:16:32] We’d both be at a hell of a victim. Area 7.

[02:16:38] Shareholder (Jerry Gonzalez, Plantation): Yes, hello to Mr. Munger and Mr. Buffett. My name is Jerry Gonzalez from Plantation. My question is, what are your recommendations of Berkshire Hathaway if Charlie Munger were in charge, or your third man in charge, of your third man, which I think you said it’s the CEO of GEICO? What are your recommendations if Charlie Munger would have been in charge fully, 100%, or your third man, the CEO of GEICO?

Warren Buffett [02:17:12] Well, in due course this corporation will have a change in management. I’m afraid we have no way of fixing that. And, but we do not, apart from making sure we’ve got good options and having some system in place, we are not obsessing about a future management yet.

Charlie Munger [02:17:39] No, we, the director plans to live almost indefinitely.

Warren Buffett [02:17:44] Absolutely. The Although I must say, at my last birthday somebody asked me how old I was. I said, “Well, why don’t you just count the candles on the cake?” And he said he was driven back by the heat. So, but we’re not going to leave willingly. And we do… The directors know who, and they have a letter that says who they think, who we think should be the ones to succeed us at both the operating aspect and the investment allocation aspect. And those letters can change over time as we keep hanging around. But I don’t worry about the fact that 99% plus of my estate will be in Berkshire Hathaway stock, or that a foundation will eventually receive that stock. So it doesn’t bother me. At least I can’t think of a place I’d rather have it, and that includes my appraisal of the managers that we have who can step in and do what Charlie and I do. And who knows, one of them may even understand technology.

Charlie Munger [02:18:56] I think this place would have very respectful, or respectable, prospects if the top 25 managers all drop dead at once.

Warren Buffett [02:19:04] Well, that’s not an experiment we intend to pursue. Although I see no reason to think it wouldn’t continue to do quite well.

Charlie Munger [02:19:17] Right. It’s been lovingly put together to have a certain margin of safety.

Warren Buffett [02:19:24] We actually, if we have a choice, it’s number three through 23, though, that we’re… 25, that we’re interested. Okay. Area 8, please.

[02:19:35] Shareholder (Raul, Walnut Creek, California): This is Raul from Walnut Creek, California. Thanks, Mr. Buffett. Thanks, Mr. Munger. Thanks for your great company. Wish I had known about it 10 years ago. You are not only the greatest but the most honest. I want to commit 99% of what I have to Berkshire Hathaway, and I will. The question I want to ask is, how do you calculate the intrinsic value of the company? And based on intrinsic value, to me Berkshire Hathaway looks a great bargain at these prices, especially based on look-through earnings. Is that room? And one last question I want to ask, just for fun: what do you think about telecom IPOs like Qwest, US LEC? They seem to pop up 50% at opening. Does it make any sense to invest in these? Thank you very much.

Warren Buffett [02:20:55] I didn’t follow that at all. Intrinsic value, we give you the facts and you make your own conclusions. I like the fact that you think we’re honest, but, you know, if you people keep bidding up the price of our stock, honesty will only do so much for you in the future.

Charlie Munger [02:21:18] Yeah, we’ve never been tested. I mean, we’re very lucky. We’ve never had, you know, we’ve never had anything that we needed really that we haven’t had. And, you know, who knows what the situation be if your family was starving or something. And so our intention is to continue in a position where we’ll never be tested too.

Warren Buffett [02:21:38] I might add, the intrinsic value question, I mean, by definition intrinsic value is the present value of the stream of cash that’s going to be generated by any financial asset between now and doomsday. And that’s easy to say and impossible to figure, but it’s the kind of thing that we’re looking at when we look at a Coca-Cola, where we think it’s much easier to evaluate the stream of cash that comes in the future than it is in a company such as Intel, marvelous as it may be. We just, it’s easier for us. It may not… Andy Grove may be better at figuring out Intel than Coke.

And in Berkshire, it is complicated by the fact that we have no business that naturally employs all of the capital that flows to us. So it is dependent to some extent on the opportunities available and the ingenuity used in, when that cash pours in, as it does. Some businesses have a natural use for the cash. Actually, Intel has a good national use for the cash over time as they’ve expanded in their business, and many businesses do. But we do not have a natural use. We have some businesses that use significant amounts of cash. A FlightSafety will buy a lot of, build a lot of simulators this year, and they cost real money. But in relation to the resources available, we have to come up with new uses, new ways to use cash.

And that makes for a more difficult valuation job than if you’ve got, well, the classic case used to be a water or electric utility, where the cash could be deployed and the return was more or less guaranteed within a narrow range, and it was very easy to make calculations then as to the expectable returns in the future. But that’s not the case at Berkshire. We’ve got very good businesses, both directly and partially owned, and those businesses are gonna do well for a long, long time. But we do have new cash coming in all the time, and sometimes we have good ideas for that cash and sometimes we don’t. And that does make your job more difficult in terms of computing intrinsic value.

We’ll have… Yeah, we’re going to break after the next question, that they… At that time, we break whenever Charlie and I run out of candy up here, actually. The, we’re going to let everybody, that you can, you can get something to eat if you want to stick around, and we will be here till 3:30 when we reconvene at 12:30. And those of you who’ve been with us this morning and had enough, we thank you for being here this weekend. We’ve had a terrific time with you, so I’m very appreciative of that. Let’s have a question from zone 9, and then we’ll go to lunch.

[02:24:28] Shareholder (Frank Gurvich, London, Ontario, Canada): Good morning. My name is Frank Gurvich. I’m a shareholder from London, Ontario, and Canada. My question is for Mr. Munger, and it concerns his models. And the question specifically is related to market valuation. I know I’m not going to get a prediction; that’s not your bag. What I’m curious about is, is there any specific touchstone models that you reflect upon and trying to gain perspective these markets, whether the historic valuations are quite high, and why do you draw on those models? My second question is for Mr. Buffett, and it relates to taxation. If you were able to trade your portion of your portfolio, at least in a tax-exempt fashion like 401(k) plans, or in Canada the RSP plans, would you possibly trade more actively?

Warren Buffett [02:25:23] Charlie, you want to answer yours first?

Charlie Munger [02:25:26] Yeah. Well, the Munger system for dealing with reality is to have multiple models in the head and then run reality against multiple models. I think it’s a perfect disaster to look at reality through just one model or two. It’s, there’s an old proverb that says to the man with only a hammer, every problem looks pretty much like a nail. And that is not our system. So I can’t sit here and run through all the models in my head, even though there aren’t that many. But multiple models is the…

Warren Buffett [02:26:04] The question about taxation, it would not… If we were running Berkshire absent a capital gains tax, I don’t think it would make much difference in what we do. I don’t think it would make, that certainly wouldn’t make a difference in making, in causing us to trade actively. That we own the businesses we want to own. We don’t own them because taxes have restrained us from selling them. And as I mentioned earlier, I’m fairly sure we’ll pay at least $1 billion in income tax this year. We might not, but it looks that way to me, that we’ll pay $1 billion. And I could do things that at least deferred, and I certainly could do things by doing nothing that avoided paying that billion in tax, a good bit of the billion, call it $800 million of the billion.

But that doesn’t, that is not a big factor with me. It’s never, it’s never been a big deal with me. I paid my first income tax when I was 13, so I guess I got brainwashed at the time, and it doesn’t bother me a lot to be paying taxes. I think I’m net… Personally, I’m under taxed in relation to what the society has delivered to me. And, you know, I don’t send along any voluntary payments to the IRS, I should understand, but I really do, I mean it. I don’t… There’s nobody I want to trade places with because their tax situation is better than mine. And so it would not increase the activity.

I’ve been asked to take one more question from zone 10. I’m not sure why, but maybe because they see that I still have candy up here. So zone 10, please, and then we’ll break.

[02:27:51] Shareholder (Sanjiv Mirchandani, Boston): Mr. Buffett and Mr. Munger, my name is Sanjiv Mirchandani, shareholder from Boston. First of all, thank you to both of you for everything. I have two questions for you, Mr. Buffett. You obviously have filters that you apply on selecting people, as you do on stocks. Can you tell us a little bit about what those filters are?

Warren Buffett [02:28:08] Fillers on people?

[02:28:09] Shareholder (Sanjiv Mirchandani, Boston): Yes. In selecting, you have an ability to motivate people who have a lot of money to keep working. What do you look for to figure out who those people are?

Warren Buffett [02:28:17] That’s a, that is a key, key question, because when we buy businesses, we don’t have managers to put in them. I mean, we’re not buying them that way. We don’t have a lot of MBAs around the office that we’re…

Charlie Munger [02:28:31] Thank God.

Warren Buffett [02:28:32] Yeah. (Applause) That I, you know, I have not promised that they’re going to have all kinds of opportunities. And so as a practical matter, we need management with the businesses that we buy. And three times out of four, thereabouts, the manager is the owner and is receiving tens of millions, maybe hundreds of millions of dollars. So they’re not, they don’t have to work. And we have to decide in that time when we meet them whether they love the business or love money. And we’re not making a moral judgment. Charlie may, but I’m not making a moral judgment about whether it’s better to love the business or love money. But it’s very important for me to know what, which of the two is the primary motivator with them.

And we have had extremely good luck in identifying people who love their business. And so all we have to do is avoid anything that, on our part, that diminishes that love of the business or makes other conditions so intolerable that they overcome that level of the business. And we have all, we have a number of people working for us that no financial need to work at all, and they probably outwork, you know, 95% or more of the people in the world. And they do it because they just, they love smacking the ball. And we almost, we virtually had no mistakes in that respect.

And we have identified a number of people, Charlie and I have, in terms of proposals to us, where we felt that they did really, they liked the money better than the business. They were kind of tired of the business, you know. And they might promise us that they would continue on, and they would do it in good faith, but something would happen six months later, a year later, and they’d say to themselves, “Why am I doing this, you know, for Berkshire Hathaway, when I got, when I could be doing whatever else they want to do?” I can’t tell you exactly how we, what filter it is that we put them through mentally.

But I can tell you that if you’ve been around a while, you can, I think you can have a pretty high batting average in coming to those conclusions, as you can about other aspects of human behavior. I’m not saying you can take 100 people and take a look at them and analyze their personalities or anything of the sort. But I think when you see the extreme cases, the ones that are going to cause you nothing but trouble or the ones that are going to bring you nothing but joy, I think you can identify those pretty well. Charlie?

Charlie Munger [02:31:21] Well, yeah, I think it’s pretty simple. You’ve got integrity, intelligence and experience and dedication, and that’s what human enterprises need to run well. And we’ve been very lucky in getting this marvelous group of associates to work with all these years. It would be hard to do better, I think, than we’ve done in that respect. Look around this place, I mean, and pretty you young people, look around this place. Look at how much gratification can come into these lives, which have been mostly spent in deferring gratification. It’s a very funny group of people, you shareholders.

Warren Buffett [02:33:10] On that note of self congratulations, let’s go have lunch, and we’ll be back in half an hour.

Let’s settle down, please, and we’ll… We’re going to go to… We skipped one last time, so we’re going to go first to zone 4.

[02:34:07] Shareholder (Nelson Arata, Southern California): Hello. My name is Nelson Arata. I’m from Southern California. And I have a question. It’s not really related to intrinsic value or any of that stock stuff, but more on houses. I’m still quite young. I don’t have a house yet, and I’m thinking about buying a house someday soon. And in order to do that, I’m going to have to put a down payment, which means I might have to share or sell my shares. And I was wondering if you can provide some insight on when is the best time to buy a house and how much down payment you should be putting down in relation to interest rates, and also in relation to available cash and the stock market.

Warren Buffett [02:34:53] Well, Charlie’s going to give you an answer to that in a second. I’ll just relate one story, which was when I got married. We had, we did have about $10,000 starting off, and I told Susie, I said, “Now, you know, there’s two choices. It’s up to you. You can, we can either buy a house, which will use up all my capital and clean me out, and it’ll be like a carpenter who’s had his tools taken away from him, or you can let me work on this, and someday, who knows, maybe I’ll even buy a little bit larger house that would otherwise be the case.” So she was very understanding on that point. And we waited until 1956, that we got married in 1952. And I decided to buy a house when it was about, when the down payment was about 10% or so my net worth, because I really felt I want to use the capital for other purposes. But that was a way different environment in terms of what was available to buy. In effect, if you have the house you want to buy, I, you know, I definitely believe in just going out and probably getting the job done. But I, in effect, you’re probably making something in the area of the 7% or 8% investment implicitly when you do it. So, you know, you’ll have to figure out your own equation from that. Charlie probably has better advice on that. He’s a big homeowner in both senses of the word.

Charlie Munger [02:36:31] The, I think the time to buy a house is when you need one. And when do you need one? Well, I have very old-fashioned ideas on that too. The single people, I don’t care if they ever get a house. When do you need one? Of your marriage…

Warren Buffett [02:37:00] Charlie, I’ll follow up here for you. You need them when your wife wants one.

Charlie Munger [02:37:09] But yeah, yeah, I think you’ve got that exactly right.

Warren Buffett [02:37:15] Yep, sure.

[02:37:16] Unidentified speaker: Gregory Crawford needs to go to the security office, please, for emergency message. Gregory Crawford to the security officer, office, for emergency message. Thank you.

Warren Buffett [02:37:33] Okay. I hope it isn’t a margin call. Okay, we’ll go to zone 1, please.

[02:37:42] Shareholder (Ralph Pfeffer, Phoenix, Arizona): I’m Ralph Pfeffer from Phoenix, Arizona. The question I’m going to ask does not pertain to Berkshire Hathaway, but I would appreciate it if you gentlemen, if you can explain the justification and rationalization for the exorbitant salaries, bonuses, perks, director’s fees and other benefits that most public corporations are paying.

Warren Buffett [02:38:14] Well… (Applause) I would say this. In my own view, the most exorbitant are not the, necessarily the biggest numbers. That what really bothers me is when companies pay a lot of money for mediocrity, and that happens all too often. But we have no quarrel, in our subsidiaries for example, for paying a lot of money for outstanding performance. I mean, we get it back 10 or 20 or 50 for one. And similarly in public companies, we think that there have been managers, and our managers, who have taken companies to many, many, many billions of market value more than would have happened with virtually anyone else. And they sometimes take a lot of money for that. Sometimes, as in the case of Tom Murphy at Cap Cities, you know, he, it just didn’t make a difference to him. I mean, he performed in a way that would justify, would have justified huge sums, but it wasn’t it. He would tell you that he had all the money he needed, so, and he just didn’t care to take what the market might bear.

But I am bothered, I am bothered by irrational pay systems, and I’m particularly bothered when average managers take really large sums. I’m bothered when they design, or have designed for them, systems that are very costly to the company, maybe partly to make themselves look good, because they want huge options themselves, so they feel like they give options widely throughout the company. So they design a system that is illogical company-wide because they want one that’s illogical for them personally. But large sums per se don’t bother me. I’m not saying, you know, whether any individual might want to take them or not, but I don’t, I do not mind paying a lot of money for performance. It’s done in athletics, it’s done in entertainment.

But in business, the people who are the .200 hitters and the people who would not attract a crowd as an entertainer, I’ve worked it out so that, I mean, the system has evolved in such a way that many of them take huge sums, and I think that’s obscene. But I can tell you there isn’t much you can do about it. The system feeds on itself. And companies do look at other companies’ proxy statements. Every CEO does. And they say, “Well, if Joe Smith is, works worth X, I have to be worth more.” And they tell the directors that, “Certainly you wouldn’t be hiring anybody that was below average, so how can you pay me below average?” And the consultants come in and ratchet up the rewards. And it’s not anything that’s going to go away. It’s like we were talking about campaign finance reform earlier. The people who were the, who have their hands on the switch are the beneficiaries of the system, where the… bidding enormously, and perhaps disproportionately, from that system. Charlie?

Charlie Munger [02:41:30] Well, yeah. I’d like to report that the original Vanderbilt behaved even better than the people at Berkshire Hathaway. He didn’t take any salary at all. He thought it was beneath him as a significant shareholder to take a salary. That ideal, I’m afraid, died with him.

Warren Buffett [02:41:50] And Charlie, Charlie and I… Our directors are paid $900 a year, but I tell them on an hourly basis they’re making a fortune, because we don’t work that hard. But what Charlie and I did not think through when we established that $900 a year is that they set our salaries too. So we have not followed the standard procedure, which is to load it on the directors, and the directors shall load it on you.

Charlie Munger [02:42:18] I do think it will have pernicious effects for the country’s escalating, because I think, you’re getting at, the very top corporate salaries in America are too high. And that is not a good thing for a civilization, when the leaders are regarded as not dealing fairly with the institutions that they had, you know, if… (Applause) All I can say is, the prostitution would be a step up for them. (Applause)

Warren Buffett [02:43:07] Put him down as undecided. Zone 2, please.

[02:43:17] Shareholder (Dan Blum, Seattle, Washington): I’m Dan Blum from Seattle, Washington, via Cambridge, Massachusetts. I want to ask whether the issuance of Class B stock has achieved the objective which you announced for it when it was created.

Warren Buffett [02:43:44] Well, I would say this, that the, considering the alternatives we faced, which was the eminence of unit trusts that would have been promoted with heavy front-end commissions, with substantial annual fees, with bad tax consequences, and with probably a representation, a misrepresentation of the historical record, in such a way that people who really didn’t know much about securities would have been enticed in, with that as an alternative, I think the B stock was the best thing we could have done. And I feel good about how it’s worked out. I think that, you know, we didn’t, we didn’t set out to issue it. We don’t like talking anybody into buying our stock. But I don’t think in any way that the group we have here is diminished in the least by having a mix of B and A shareholders, as opposed to A only. The B, the B has worked out as well as possible.

I hope that it, you know, we haven’t enticed anybody in with unreasonable expectations. That’s the biggest thing that Charlie and I worry about, and it’s hard not to have that happen with the historical record. I know it would have happened in a big way with the unit trust. So, you know, it’s like, it’s like making the mistake originally of starting with Berkshire. I think we enjoy things as they come along, and we’ve gotten a good group with the B shareholders, and we’re happy with the present situation. Charlie?

Charlie Munger [02:45:21] Yeah, we wanted to step hard on what we regarded as a disreputable financial scheme, and that we did. And then, and I think the way we sold the B was such as to not, as to attract the kind of people who really did look at it on a long, long-term basis. We did everything we could to discourage people who thought they’re going to make a lot of money in a hurry. So we, I think we attracted a whole new group of shareholders who were quite similar in perspective to the shareholder group that we already had, and that was our hope.

Warren Buffett [02:45:59] Zone 3, please.

[02:46:00] Shareholder (Alan Rank, Pittsburgh): My name is, my name is Alan Rank from Pittsburgh. I first wanted to thank Susan Jacques for returning the cocktail yesterday, and I hope she was rewarded with good sales at Borsheim’s. Question is regarding the fact that you don’t report details of anything under $750 million. And with the change of the values of a small cap in relation to large cap, would that be something that Berkshire or individuals might try to look as opportunity, with the small cap premium shrinking as it has?

Warren Buffett [02:46:35] We don’t worry about whether a stock is small cap or large cap, except to the extent that by now we’ve gotten to a point where anything below a certain level just is not of interest to us, because it can’t be material to our results. So we don’t, we never think of opportunities as existing because of something as small cap or sectors or all that, you know, what generally gets merchandised. So our cutoff point is set more or less at the point where we think it’s material. If that’s, that’s not as defined by the SEC. We could have a higher limit. But we think when you get down below 2% of assets are thereabouts, that the reporting of positions would not affect anybody’s calculation of intrinsic value or give them insights about the way we run the business, but it would be more for the people who are looking for things to piggyback on.

And so we will move the cutoff point up as we go along. Because of our size, we will never be in companies that have capitalizations that, you know, of a half a billion or $1 billion, because we just can’t put enough money in. Occasionally we’ll be in one just by accident. But we’re looking at, we’re looking at things that we can put $500 million in ourselves, at least. At $500 million, a 5% position is a $10 billion market cap. And that limitation has hurt, will hurt, is hurting our performance to some degree. You would, if Berkshire were exactly 1/100th of its present size in all respects, owning the operating businesses it did, but all 1/100 the size, our prospects would be better than they are with the kind of money we have presently. Charlie?

Charlie Munger [02:48:38] I’ve got nothing to add.

Warren Buffett [02:48:40] Okay, zone 4, please.

[02:48:41] Shareholder (Tom Conrad, McLean, Virginia): Okay, my name is Tom Conrad. I’m from McLean, Virginia. I just wanted to first thank you, Mr. Buffett and Mr. Munger, for each year answering our questions. I found myself at 5 a.m. standing outside the door here, and I don’t do that for anyone, and it’s a real pleasure to hear your answers. I have two questions. One is with Travelers, the company Travelers, and the merger with Citibank. Do you have confidence in the management of Sandy Weill? My second question is, you said it in a few meetings ago that diversification is a protection against ignorance, and it only takes three great companies to be set for an investment lifetime. And I invested in those three companies, Coca-Cola, Gillette and Disney, and I went ahead and invested in a fourth company without asking you. I invested in Pfizer. And I just wonder what you think about the pharmaceutical industry, if you feel there’s some great companies in that industry. Thank you very much.

Warren Buffett [02:49:47] Yeah. Well, A, we think Sandy Weill is a very, very good manager. Sandy is, I mean, the record is clear. He, it is not easy to manage in Wall Street, and Sandy has done an excellent job there, as well as in other allied or somewhat allied fields. So his record is proven. And he is going to last… Ever since buying Commercial Credit from Control Data, he’s built a terrific company, and he’s built a terrific company in businesses that themselves aren’t necessarily so terrific. So it’s required real management skill.

Pharmaceuticals, we missed. We would not have known how to pick out any single business, but we, a single company within the industry. But we certainly should have recognized, did recognize, didn’t do anything about it, that the industry as a whole represented a group that would achieve good returns on equity, and where some sort of a group purchase might have made sense. We did, we did buy one a while back, but we didn’t, it was peanuts. And it would have been that, it was within our circle of confidence to identify the industry as likely to enjoy very high profits over time. It would not have been within our circle of confidence to try and pick a single company. Charlie?

Charlie Munger [02:51:28] Yeah, we stupidly blew that one. We’ll blow more too.

Warren Buffett [02:51:34] Zone 5. Yes, sir.

[02:51:36] Shareholder (Matt Lovejoy, Lexington, Kentucky): Good afternoon. My name is Matt Lovejoy from Lexington, Kentucky, and gladly I’m not a consultant. I have a question, sir, Mr. Buffett, about your operating management style. In my opinion, the main, mainstream media minimizes the significance of your non-public operating investments. When you consider capital allocation in these companies, do you have the managers submit annual business plans? And if so, do you formally meet with those managers to see how well you can track progress against those plans?

Warren Buffett [02:52:20] Yeah, that’s a good question. And the answer is that we, we may meet with some of them annually, we may meet with others semi-annually, but we have no formal system whatsoever, and we will never have a formal system. We don’t demand any meetings of any of our managers. We have no operating plan submitted to headquarters. Some of the companies use operating plans themselves, some of them don’t. They are all run by people who are, have terrific records, and they have different batting styles. And we’re not about to tinker with somebody that’s batting with .375 just because somebody else holds the bat a little differently or uses a different weight bat or something of the sort. So we believe in letting them do, currently and in the future, what has been successful for them in the past, and Different people have very different styles. I’ve got my own style, you know. But we have managers that like to talk things over, we have other managers that like to go their own way. And we have managers that have a by-the-book approach, which works well. We have other managers that wouldn’t dream of that. We have managers, most managers probably have monthly statements of financials, we have other managers that don’t. And it, that really isn’t a problem. We want to have as good managers, and there is, there’s more than one way to get to, at least, business heaven. And we have a number that have found different ways to get there.

So we have never imposed… We have certain requirements because we’re a public company, and SEC requirements and Internal Revenue Service coordination, but we have never imposed anything from the top on any of the operating managements. We have MBAs running companies, we have people that never saw a business school. And talent, talent is the scarce commodity. And when you find talent and they’ve got their own way of doing things, we let it, we’re delighted to have him do it, more than letting it have to do. We want them to do it their way, and we don’t want to change them. Charlie?

Charlie Munger [02:54:37] Yeah, the truth of the matter is that we have decentralized power in the operating businesses to a point just short of total abdication. And we don’t think our system is right for everybody. It has suited us and the kind of people that have joined us. But we don’t have criticism for other people, like Emerson Electric or something, who have operating plans and compare performance quarterly against plan and all that sort of thing. It’s just not our style.

Warren Buffett [02:55:15] Yeah, we centralize money, and everything else we decentralize pretty much. But, and I don’t know whether you met him here, but for example, Al Ueltschi is here. He started FlightSafety in 1951, and he’s, I don’t know what he’ll spend on simulators this year, but it could easily be $100 million or thereabouts. And he just… If I spent hours with him, I couldn’t add 1/100th of 1% his knowledge of how to allocate that money. I mean, it would be ridiculous. It’d be a waste of his time, and it would be an act of arrogance on my part. And I have no worries about how Al allocates the money, and that’s an unusually capital intensive business compared to most of our businesses.

There’s some that I get into the details more because I’ve just worked with a person that’s running things a long time, and we kind of enjoy it. Ajit and I talk virtually every night about the reinsurance business. You know, I am not improving the quality of his decisions at all, but it’s an interesting game, and I like hearing about it. He doesn’t mind talking about it, so we talk him over. But that’s just a matter of personal chemistry. And as we add managers, we will adapt to them. We adapt our accounting systems, to a degree, to them. Now, we do have certain requirements that result from the SEC and IRS. But we don’t… Our managers know their businesses, and they know how to run them. And if they don’t, this hasn’t been the case, but if they didn’t, we would, you know, we’d do something about the manager. We wouldn’t try and build a bunch of systems. Zone 6, please.

[02:56:57] Shareholder (George Donner, Fort Wayne, Indiana): Good afternoon, gentlemen. My name is George Donner from Fort Wayne, Indiana. My question has to do with estimating the intrinsic value of a company, in particular the capital intensive companies like you were mentioning. I’m thinking of things like McDonald’s and Walgreens, but there are lots of others where you have a very healthy and growing operating cash flow, but it’s largely or completely offset by heavy expenditures on putting up new stores or restaurants or building a new plant. And so my question is, what do you do for your estimate of future free cash flow? And with Treasuries around, the long Treasuries around seven, six percent, at what rate do you discount those cash flows?

Warren Buffett [02:57:52] Well, we discounted the long rate, just to have a standard of measurement across all businesses. But we would take the company that is spending the money as it comes in, and they don’t get credit for gross cash flow. They get credit for whatever net cash is get left every year. But of course, if they’re spending the money wisely, even though you have to discount it for more years, the growth in cash development should offset that, or they weren’t investing it wisely.

The best business is one that gives you more and more money every year without putting up anything to get it, or very little. And we’ve got some businesses like that. The second best business is a business that also gives you more and more money. It takes more money, but the rate at which you invest, reinvest the money to get that growth is a very satisfactory rate. The worst business of all is the one that grows a lot, and where you’re forced, and forced, in effect, forced to grow to stay in the game at all, and where you’re reinvesting the capital at a very low rate of return. And sometimes people are in those businesses without knowing about it.

But in terms of discounting, in terms of calculating intrinsic value, you look at the cash that is expected to be generated, and you discount back. In our case, we use the long-term Treasury rate. That doesn’t mean that you pay the amount that that present value calculation leads to, but it means that you use that as a common yardstick, that Treasury rate. And that means if somebody is reinvesting all their cash flow the next five years, they better have some very big figures coming in down the road, because at some day a financial asset has to give you back cash to justify you laying out cash for now, for it now. Investing is the art, essentially, of laying out cash now to get a whole lot more cash later on. And something at some point better deliver cash.

Ben Graham and his class used, we used to talk about what he called the frozen corporation. And the frozen corporation was a company whose charter prohibited it from ever paying anything to its owners, or ever being liquidated, or ever being sold, and…

Charlie Munger [03:00:16] Sort of like a Hollywood producer.

Warren Buffett [03:00:17] Yeah. And the question was, what was such an enterprise worth? Well, that’s sort of a theoretical question, but it forced you to think about the realities of what business is all about. And business is all about putting out money today to get back more money later on. Charlie?

Charlie Munger [03:00:36] I do think there is an interesting problem that you raise, because I think there is a class of businesses where the eventual cash back part of the equation tends to be an illusion. I think there are businesses where you just keep pouring it in and pouring it in, and then all of a sudden it doesn’t work and no cash comes back. And what makes our life interesting is trying to avoid those and getting the alternative kind that drowns you in cash.

One, the one figure we regard as utter nonsense is the so-called EBITDA. I mean, the idea of looking at a figure before the cash requirements of merely staying in the same place, and there usually are. Any business with significant fixed assets, you almost always has with a concomitant requirement that major cash be reinvested in order simply to stay in the same place competitively, and in terms of unit sales. To look at some figure that is before, that is stated before those cash requirements is absolute folly. And it’s been misused by lots of people who sell lots of merchandise in recent years. It’s not to the credit of the investment banking fraternity, but it has learned to speak in terms of EBITDA. I mean, the idea of abusing a measure, you, you know, is nonsense, and then piling additional reasoning on that false assumption. It’s not creditable intellectual performance. And then once everybody is talking in terms of nonsense, why, it gets to be standard.

Warren Buffett [03:02:28] Zone 7, please.

[03:02:29] Shareholder (Brandon Vecchio, Omaha): Hi, my name is Brandon Vecchio, and I’m in the Academy of Finance at Northwest High School here in Omaha. Could you explain the criteria you look at when selecting your stocks?

Warren Buffett [03:02:42] Well, we look at… And I’m glad you came. I hope there’s a large group. I got a note, I think, from your teacher on that. The… (Applause) We look at it, the criteria for selecting a stock is really the criteria for looking at a business. We are looking for a business we can understand. That means they sell a product that we think we understand, and we understand the nature of their competition, what could go wrong with it over time. And then when we find that business, we try to figure out whether the economics of it, means the earning power over the next 5 or 10 or 15 years, is likely to be good and getting better, or poor and getting worse. But we try to evaluate that future stream. And then we try to decide whether we’re getting in with some people that we feel comfortable being in with. And then we try to decide what’s an appropriate price for what we’ve seen up to that point.

And as I’ve said last year, what we do is simple but not necessarily easy. The, what, the checklist that is going through our mind is not very complicated. Knowing what you don’t know is important, and sometimes that’s not easy. And knowing the future is definitely, it’s impossible in many cases, in our view, and it’s difficult in others, and sometimes it’s relatively easy. And we’re looking for the ones that are relatively easy. And then we, and then when you get all through, you have to find it at a price that’s interesting to you. And that’s very difficult for us now, although there have been periods in the past where it’s been a total cinch.

And that’s what goes through our mind. If you were thinking of buying a service station or a dry-cleaning establishment or a convenience store in Omaha to invest your life savings in and run as a business, you think about the same sort of things. You think about the competitive position and what it would look like five or ten years from now, and how you were going to run it, who was going to run it for you, and how much you had to pay. And that’s exactly what we think of as when we look at a stock, because the stock is nothing other than a piece of a business. Charlie?

Charlie Munger [03:05:02] Yeah. If finance were, when finance is properly taught, it should be taught from cases where the investment decision is easy. And the one I always cite is the early history of National Cash Register Company. And that was created by a fanatic who bought all the patents and had the best sales force and the best production plants, and he was a very… Intel was a godsend to retailing when it, when cash registers were invented. So that was the pharmaceutical, so, of a former age. If you read the, an early annual report prepared by Patterson, who was CEO of National Cash Register, an idiot could see that this was a talented fanatic, very favorably located, and that therefore the investment decision was easy. If I were teaching finance, I would collect a hundred cases like that, and that’s the way I would teach the students.

Warren Buffett [03:06:13] We have that annual report. What was that, 1904 or something, Charlie? But it’s really a classic report, because Patterson not only tells you why his cash register is worth about 20 times, but he’s selling to, for the people, but he also tells you that you’re an idiot if you want to go in competition with him. But it’s a classic dude, it is just a bit bored and not realize that this guy can’t lose. There, you 8, please.

[03:06:46] Shareholder (Robert Rowland, London, England): Good afternoon. My name is Robert Rowland from London, England. I’ve been in Omaha all weekend with my wife on the first leg of my honeymoon, and I’ve noticed your qualifier of nostalgic assets. Can I ask whether nostalgia is one of your filters? Are there any, are there any assets like that left in the US to buy? And if not, can I suggest you come to the UK, where all we do is sell them? (Laughter)

Warren Buffett [03:07:13] Well, I don’t want to interrupt your honeymoon. Well, but if you’d send me a list of those companies over there, log on nostalgia, that might be to our liking, because Charlie and I tend to operate from sort of a Norman Rockwell frame of mind. And it is true that the kind of companies we like sort of do have a homing, or a Norman Rockwell Saturday Evening Post type character to them. They, they have character. And they’re the kind of companies, I think, frequently that the people, when they join them, expect to spend the rest of their lives there, rather than, and look at it as something to stick on their resume. And there are businesses like that. If you look at the businesses that we’ve bought in the last three or four years, there’s a, there is real character, the businesses, and to the people that build them. And that’s why the people that build them stay on and feel very strongly about running them correctly, even have no financial consequence to themselves whatsoever. So after your honeymoon, drop me a line. Zone 9, please.

[03:08:34] Shareholder (Joshua Andrews, Omaha): Good afternoon. Joshua Andrews from Omaha Northwest High School, Academy of Finance.

Warren Buffett [03:08:42] Good.

[03:08:42] Shareholder (Joshua Andrews, Omaha): And on behalf of Academy of Finance, we want to thank you for the tickets. There’s 33 of us in attendance.

Warren Buffett [03:08:51] Terrific. (Applause)

[03:08:51] Shareholder (Joshua Andrews, Omaha): We had the opportunity to play a national game, the investment challenge, and on the list of stocks there were BRK A and BRK B. Can you explain what the difference of the two stocks are?

Warren Buffett [03:09:07] Yeah. The difference between the Berkshire A and B is simply that an A can be converted to a B at any time in the ratio of 1 A into 30 B’s. The B cannot be converted into the A, so it’s a one-way street on of the B is exist. So anything that, anytime the A ever gets any money of any kind, from dividends or liquidation or a merger or something of a sort, for every $30 that you get on the A, you’re going to get $1 on the B. The two differences are that there is less voting for power proportionately in the B, and the B does not participate in a designated contributions program that’s, that Berkshire runs, simply because that would be very, very hard to administer. And when we issued the B, we pointed out those two differences. The B should never sell for more than 1/30th of the price of the A. When it sells just a tiny bit above that, then arbitrage settles in, as people buy the A and convert it to B and sell to B. Occasionally the B may be at a slight discount to the A because it’s not convertible the other way. But I think as a practical matter, you can treat the A and B as very equivalent investment choices. There’s… Area 10, please.

[03:10:50] Shareholder (Sheena Show, Academy of Finance): My name is Sheena Show from the Academy of Finance. What recommendations would you give us as teenagers to prepare for our future and become as successful as you?

Warren Buffett [03:11:07] Well, if you’re interested in business, I definitely think you ought to learn all the accounting you can, all by the time you’re in your early 20s. Accounting is the language of business. Now, that doesn’t mean it’s a perfect language, so you have to know the limitations of that language as well, as well all aspects of it. So I would advise you to learn accounting. And I would advise you to be, in terms of part-time employment or anything else, work at a number of businesses. There’s nothing like seeing how business operates to build your judgment in the future about businesses. The, you know, when you understand what kind of things are very competitive and what kind of things are less competitive, and why that works that way, all of that adds to your knowledge.

So I would do a lot of reading. If you’re interested in investments, I would, a, I would take the accounting courses, I do a lot of reading about investments, and I would get as much business experience. I would talk business with people that are in business to find out what they think makes their operation tick, or where they have problems and why. I just think you just kind of sop it up every place that you can. And if it turns you on, you’ll do well in it. I mean, I think that if it, you know, there’s certain activities grab different people. But if business is of interest to you, my guess is you’ll do well. And if you do, if you understand business, you understand investments. That investments are simply business decisions that, in terms of capital.

Charlie Munger [03:12:57] Yeah, there’s also the little matter of underspending remastered. That really works if you keep at them.

Warren Buffett [03:13:05] Yeah, I mean, Charlie and I both… Charlie started having children at a rapid rate, so he, and he was a lawyer with, there was not big money. And then, but I was… Any money you save before you get out and start having a family is probably where any dollar is probably worth $10 later on, simply because you can save it. It’s, the time to save is young, and you’ll never have a better time to save than really pre-pre-formation of a family, because the expenditures come along then, whether you like them or not. So I, you know, work for yourself first and put the money aside.

I was lucky that way. I didn’t have to pay for my own college. Probably wouldn’t have gone to college if I’d had to pay for it. But, but I, you know, I was able to save everything I made in my teens, and those dollars got magnified quite a bit. Whereas the money I, when I started first selling securities, I mean, the money I made then was taken up by family needs to quite make sense. So start saving early. A lot of us have it anyway, so it’s a great habit to have. Zone 1, please.

[03:14:29] Shareholder (Tony Allison, New York City): I’m Tony Allison from New York City, following up on the questionnaire from London. In light of the current dearth of investment opportunities, do you see yourselves investing in non-US companies which are well managed, understandable and growing?

Warren Buffett [03:14:47] Well, if we find such companies as you describe at a price that’s half attractive, we’re perfectly willing to buy them. So the answer to that is yes. But we would be looking to an extent worldwide, irrespective of market conditions in the United States. Now, market valuations in this country are, tend to be fairly well matched in most of the major company, countries. So we don’t… There’s been a bull market all over the world, in a huge way, in the bigger markets. And so, unfortunately, I mean, it would have been nice for us if the US market had tripled and other markets had stayed the same, and then we would be very likely to be finding things abroad. We’re not finding them abroad, but we certainly are, they’re certainly looking for the kind of thing you’re talking about.

We are not reluctant to invest abroad. And our two, two of our, well, all three of our largest holdings, American Express, Gillette and Coke, and we’re talking about $25 billion of market value there that we have, all three of those have major businesses abroad. And in the case of Coke and Gillette, it’s a majority of their earnings from abroad. So we’re interested, and there’s better growth opportunities in many areas abroad than here. Finding bargains as we look around the world… Charlie?

Charlie Munger [03:16:26] Nothing more.

Warren Buffett [03:16:27] Okay. Area 2.

[03:16:29] Shareholder (Henry Allen, Mamaroneck, New York): My name is Henry Allen, Mamaroneck, New York. Question I have is a little delicate. Relates to my family and heirs rather than myself, because I’m a couple of decades older than you gentlemen. You’ve been very candid about the succession and the estate planning, but how will the recipients of huge grants, charitable grants, get the liquidity they need without, to use the money, without unduly driving the stock down?

Warren Buffett [03:17:13] Well, I don’t think that supply and demand in terms of specific… You know, let’s just say that 3% of Berkshire were to be added to the supply annually. I don’t think that makes much difference. What really makes the difference is, it is the prospects of the business. I, if my charitable foundation were operative today, it would have to sell, you’ll have to, it would have to give away 5% of the value of the foundation every year. And if Berkshire paid no dividend, that means it would have to sell 5% of the holdings per year. I don’t think that the price of Berkshire would be materially different if there were a seller of that, would be in this case 2% of Berkshire’s capitalization. I don’t think it would be materially different. If it is, it probably should be different.

I mean, it, there should be a reasonable amount of trading that can take place annually without affecting the price of the stock materially, or the price of the stock is being propped for on sort of unnatural reasons. So I wouldn’t really worry about that. We had, we had one shareholder die about a year, year and a half ago that had 3/4 of 1% of the company, for example. It was sold in, I don’t know, six weeks or thereabouts, and they raised at that time $250 million or thereabouts from the sale. I am not worried about that. I’m worried about… I mean, I don’t worry, but the key factor is, what are the prospects of the businesses? If the businesses are worth money… There are all kinds of companies in their stock exchange who are perfectly decent businesses, where 30% or 40% of the stock turns over a year, and Berkshire’s price should not be way different if 10% trades a year as opposed to the present 3%. Charlie?

Charlie Munger [03:19:15] I agree with that. I don’t think there’d be any problem at all at the present time with the Buffett Foundation, we’re selling 5% of its holdings every year. Could be 500 shares a week or something like that. But there isn’t demand for 500 shares a week, if they, on a company with our capitalization, then the price probably is artificially wrong at that time.

Warren Buffett [03:19:39] I just had lunch with Susie, and she doesn’t look to me like she’s in any imminent danger of mortality. Yeah, it will come into play when the, when the survivor of the two of us dies, and when the, when the estate gets cleaned up and everything else. So I think, certainly hope, and I think it’s quite a ways away. You people have more important things to worry about. (Applause) Zone 3, please.

[03:20:17] Shareholder (Jim Howard, Syracuse, Indiana): My name is Jim Howard. I’m from Syracuse, Indiana. My question is, does the book methodology by Mary Buffett present fairly, in all material respects, the calculations you used in evaluating the business for purchase, or did the lady just write a book?

Warren Buffett [03:20:37] Well, it was written by two authors. But I would say that, no, I would say that in a general way it gets at the investment philosophy. But I wouldn’t say that, it’s not the book I would have written precisely, but I have no quarrel with it either. I actually think by reading Berkshire’s reports you should be able to get more. I would think you get more of our philosophy than in any other manner. I think Larry Cunningham, the fellow who held the symposium at the Cardozo School at Yeshiva, did the best job, actually, of sort of reconstructing the various things that have been written at Berkshire into sort of the best organized presentation of our philosophy. So he’s selling it right here.

Charlie Munger [03:21:32] It’s a very practical…

Warren Buffett [03:21:33] Yeah, he had a booth in the mall outside Borsheim’s yesterday. And Larry did a very good job, and I had nothing to do with it. But I think that, I really think he’s done a first-class job of sort of organizing by topic, I mean, all these things that I’ve sort of written annually and Charlie’s written over time. So that would be, that would probably be my… If I were picking one thing to read, that would probably be the one. Okay, zone 4, please.

[03:22:11] Shareholder (Leora Garner, Los Angeles, California): My name is Leora Garner. I’m from Los Angeles, California, and I want to begin by thanking you for having Bob Hamman. It was a stroke of genius. I could shop at Borsheim’s and my husband was entertained while I did so.

Warren Buffett [03:22:29] Well, Bob is not only the best bridge player around, buddy, but he is an entertaining guy too.

[03:22:37] Shareholder (Leora Garner, Los Angeles, California): He’s great. Yeah, he is great. I agree with you. My question: you owned Disney once before and sold it. You also owned advertising companies in the ’70s, I believe, right? And you sold them. Could we have some insight into your thinking as to why you sold them?

Warren Buffett [03:22:55] I’m not sure I want to give you any insight into that thing. Well, we’ll start off with the fact that when I was 11, I bought some Cities Service preferred at 38, and it went to 200, but I sold at 40, so grabbing my $2 a share of profit. So I had… Everything we’ve ever sold has gone up subsequently, but some have gone up more painfully subsequently than others. And certainly the Disney sale in the ’60s was a huge mistake. I should have been buying, I’d forget about holding. And that’s happened many times. I mean, we think that anything we sell should go up subsequently, because we are, own good businesses, and we may sell them because we need money for something else, but we still think they’re good businesses, and we think good businesses are going to be worth more over time.

So every, everything virtually that I can think of has gone on to sell it at a lot more, for a lot more money, and I would expect that would continue to be the case. That is nice, that is not, that’s not a source of distress. But I must say that selling the Disney was a mistake, and actually the ad agencies have done very well since we sold them too. Now, maybe some of that money went into Coca-Cola or something else, so I don’t, I don’t worry about that. I would worry, frankly, if I sold a bunch of things right at the top, because that would indicate that in effect I was practicing the bigger fool type approach to investing, and I don’t think that can be practiced successfully over time. I think the most successful investors, if they sell it all, will be selling things that end up going a lot higher, because it means that they’ve been buying into good businesses as they’ve gone along. Charlie?

Charlie Munger [03:24:43] Well, I’m glad that the questioner brought this touch of humility, because it is really useful to be reminded of your errors. I mean, and I think we’re pretty good at that. I mean, we kind of mentally rub our own noses in our own mistakes, and that is a very good mental habit. Warren can tell you the exact number of cents per share of it that he sold out and compare it with the current price. It actually hurts him.

Warren Buffett [03:25:16] It actually doesn’t hurt. The truth is, I, that, you know, because it, you know, you just keep on doing things, and it… But, but it is instructive to look at, to do post-mortems on everything, and as long as you don’t get carried away with it. But every acquisition decision, that kind of thing, you know, there should be post-mortems done. Most companies don’t like to do post-mortems on their capital expenditures. I’ve been a director of a lot of companies over the years, and they’ve not, usually not spent a lot of time on the postmortems. They spent a lot of time on telling how wonderful the acquisitions are going to be, or the capital expenditures, but they don’t like to look so hard necessarily at the results. Think of how refreshing the board of directors meeting would be if they sat down and, “Now we’ll spend three hours examining all our stupid blunders and how much we’ve blown, and then after that the compensation committee will be…” No, that is not going to happen. Right. Okay, area 5, please.

[03:26:18] Shareholder (Harpel Keller, Portland, Oregon): My name is Keller, Harpel Keller, from Portland, Oregon. Two questions, one of a personal nature. Obviously, there are many, many people here today, and I wonder if one of the true patriarchs of the investment business is here today, any, Phil. His friends and admirers would wish him well.

Warren Buffett [03:26:47] Phil, Phil, up until a week ago, was going to be here today. Phil was 101. Wrote a, wrote a book on investments in 1924, and I’ve known him, Phil, for about 46 or seven years. And Phil has made all the meetings for a number of years, would be here today, and he, he broke a hip about five or six days ago. And, but he sent a message that he will definitely be here next year, and he will be too.

[03:27:29] Shareholder (Harpel Keller, Portland, Oregon): Second question has to do with Ben Graham. And he changed his valuation standards as the decades progressed, when he couldn’t buy stocks below net net. He changed his standards because the environment changed. Now, the world today seems to be a much different place than in 1989, when the USSR collapsed. Even they are stumbling toward the free enterprise system. The Russian mafia is a perverse illustration of that. Now there is only one superpower in the world, the USA, and we must be extremely grateful for the men who put us on the track to the free enterprise system. Now the free enterprise system is out of the bottle. It’s not going to get back in. It seems to be expanding and accelerating around the world. But the resulting expansion of world trade, may that lead to a re-evaluation of historical measures for measuring investments?

Warren Buffett [03:28:44] Well, my answer to that would be that I doubt it. But I, the end, I also don’t know. But I don’t think that the end of the Cold War is something that I would factor into my evaluation of businesses. There are all kinds of events that happen, and their impact, in terms of being quantified, very difficult to figure over time. Very difficult to isolate any single variable in a complex economic equation. So in terms of how the world is going to work 10 years from now, or the returns are going to be on equity and business, you know, I don’t, I don’t know what will be all the variables that impact on that. And obviously right now people are very bullish about the fact that those returns, or something like those returns, will continue. But I don’t, I would not rely, in making such a projection, on the fact that that Cold War is ended, or really any political or economic development around the world. I don’t know how to predict future earnings of American business. And when I look at all of the great historic events of the past, nothing there gives me much in the way of a clue as to which ones would signal major changes in profitability of American business. Charlie?

Charlie Munger [03:30:26] Well, I think you raised one very interesting question. If the rest of the world becomes very much more prosperous, as it will if it adopts the free enterprise system, which investments are likely to do best? I would argue that the Cokes and Gillettes and so on are likely to be helped by a great increase in prosperity and in what is now the Third World, and I’m not so sure that’s true of a lot of other businesses.

Warren Buffett [03:30:56] We like, we like the international businesses we have. And as I say, that our three top holdings all have a major international aspect to them, and really, in aggregate, a dominant international aspect to them. And there’s no question in my mind that a Coke will grow faster outside of the United States than in the United States, and the same is true of Gillette, maybe the same is true of American Express. So that’s built into what we, our evaluation of those businesses. But I felt that way before 1989 too. I mean it. So it’s very hard to evaluate how the ball is going to bounce generally, but it, around the world, but it is a plus to have products such as Gillette has or Coca-Cola that have demonstrated the fact that they travel extraordinarily well around the world, the people crave those products, and that they’re going to, and no one’s going to find a way to do it better than those two companies in their respective fields. So, and they sell an inexpensive product. So all of that’s going for us, but in terms of how stocks generally sell or the profitability of American business generally is in the future, I don’t, it doesn’t help me anymore.

[03:32:21] Shareholder (Bartley Cohen): Hi, my name is Bartley Cohen. I just want to thank you for a great weekend. And my question is, after you bought Dairy Queen, I heard they put Coca-Cola into all the stores. But yesterday when I went to the Nebraska Furniture Mart, they said they don’t take American Express. And my question is, do you encourage the subsidiaries and the companies that you have stock to use each other’s products, or do you leave it up to the management of the subsidiary?

Warren Buffett [03:32:51] Well, that’s a good question, and it does tell you something about the Berkshire method of operation. We tell each subsidiary to run their business in the way that they think is best for their operation. And Borsheim’s takes American Express, See’s takes American Express, the Furniture Mart doesn’t, for example. But that is, that’ll be true in other areas too. If Harvey Golub, but American Express, who absolutely done a sensational job for us, if he wants to talk with or have his representatives talk with anybody at any of our operations, you know, we’re all for that happening. But we will never tell a subsidiary manager which vendor to patronize or anything of that sort. Once we start making decisions for our managers in that respect, then we become well for the operation and they are no longer responsible for the operation. They are responsible for their operations, and that means they get to call the decisions, and they should do what is best for their subsidiary.

And it’s up to any other company that wants to do business with them to prove why that’s, that is best for them. And that’s the Berkshire approach to things, and I think on balance our managers like it that way, so they’re not getting second guessed and somebody can’t go over their head. I get letters all the time from people who are trying to jump over the heads of our managers, and they want us to say this advertising agency should be used, or that, and that sort of thing. It doesn’t work at Berkshire. They deal with the managers of the businesses, and they’re not going to get around them. Charlie?

(Applause)

Charlie Munger [03:34:40] I love your answer. It gives Warren lots of time to read annual reports at headquarters.

Warren Buffett [03:34:48] Area 7.

[03:34:49] Shareholder (Steve Erico, New York): Hello, my name is Steve Erico, I’m from New York. What do you think is likely to happen with respect to the tobacco settlement, and what do you think should happen? And secondly, McDonald’s and Dairy Queen are similar businesses. Was a relationship between your acquisition of Dairy Queen and the disposal of McDonald’s? Thank you.

Warren Buffett [03:35:10] Yeah, there’s no connection in the second case there. They have certain similarities, but there’s certainly a lot of differences to, you know, a Burger King of McDonald’s would be much more similar, or Wendy’s and McDonald’s. But Dairy Queen is much more of a niche than… Away from that, the tobacco settlement’s interesting just in terms of watching the dynamics of it, because one of the things in labor negotiations is always a problem is that when you, as a manager, you have a labor negotiation, at the end of the negotiation you as management are committed, and basically the union isn’t, because the union is going to have a vote on it. And that’s just the way it is, I mean, you can’t get away from that.

But it is not fun to be in a negotiating position where you’re bound and the other side is not bound. And although that wasn’t totally contractually necessarily the situation in the tobacco area, it smelled like trouble to me for the tobacco companies, whether you feel they should have had that trouble or not. But it smelled like trouble to me when they, they were bound and you had another side that was not bound in any way, and where there were lots of political considerations and whether a lot of time was going to expire. I mean, that just, that did not smell to me like a deal that would stick. And I don’t know any of the tobacco executives that were involved in that, but I don’t know how much they agonized over getting in a position where they were bound and the other party wasn’t. But I can tell you from labor negotiations that that’s not a pleasant place to be, and it’s not a great strategic place to be. Charlie, what do you think on that?

Charlie Munger [03:37:14] I don’t feel I’ve got any great expert, deep expertise in this situation.

Warren Buffett [03:37:21] Well, neither did I, but I’m okay. So, hey, please.

[03:37:27] Shareholder (Jamie McMahon, Birmingham, Alabama): Hello, I’m Jamie McMahon from Birmingham, Alabama. And I was hoping that Mr. Buffett and Mr. Munger, y’all would expand a little bit on your ideas of an inheritance, and be positive and negative influences that that can have on your heirs, and what you might be able to do as a business person and an investor and as a parent to sort of mitigate those negative influences.

Warren Buffett [03:37:59] Yeah, well, I quoted, I think Kay Graham was quoting her father at the time, but that, some years back, as saying if you’re quite rich, probably the idea of leaving your children enough so they can do anything, but not enough so they can do nothing, is not a bad formula. I think if you’re talking about people that aren’t quite rich, I think, you know, I, socially, I wouldn’t have a system that involved inheritances, but recognizing the situation that exists, I think probably at lower levels that leaving to the children in this society is perfectly okay.

But I believe enough in a meritocracy that I, if I were devising the system, with a consumption tax and everything, I would probably make inheritance a form of consumption that would be very heavily taxed. Because I don’t believe that because you happen to be the, come out of the right womb, essentially, that you are entitled to live an entirely different life than somebody who wasn’t quite as lucky in terms of womb selection. But in my own case, you know, I follow the enough so they can do anything, but not enough so they can do nothing. I think that society showered all these… I was very lucky. I was wired the right way at the right time in history to do very well in this kind of a market economy, where, as Bill Gates has told me, if I was born some thousands of years ago, I’ve been some animal’s lunch. You know, I don’t run very fast.

And there are different assets that are useful at different times. And, you know, I’m not wired to play championship bridge or championship chess, or I’m not wired to be a basketball star or anything. It just so happens I’m an area where it pays off like crazy to be good at capital allocation. And that doesn’t make me a more worthwhile human being than anybody else or anything. It just means I was lucky, and I should, that luck enable many generations of people that I would have some reservations about that. So that’s my own feeling on inheritance, but Charlie has a bigger family, and he can give you a better answer.

Charlie Munger [03:40:36] Well, I feel in a capitalist system that there should be an inheritance tax, and, but once that’s been imposed and paid, what each person wants to do in his own testamentary arrangements is up to that person. I see very few people that I regard as ruined by money. Many of the people that I see ruined who have money would have been ruined without money. And I think the percentage of the people that are going to be living the life of the French aristocracy before the revolution is always going to be very small, and there are plenty of grasping people to take the money away from a whole class of incompetence ruling the word, world, as their money cascades ever higher. So I like a fair amount of charity, and I’m certainly, some testamentary charity is okay, but I feel it’s an individual choice that people have to make.

Warren Buffett [03:41:58] You get a choice there. Number 9.

[03:42:02] Shareholder (Sammy Wong, Urban, California): My name is Sammy Wong from Urban, California. I have two questions. Question number one, do you think the USA market is overvalued today? Question number two, would you buy Berkshire Hathaway stock today, buy Berkshire Hathaway stock today, considering the fact that if they have a nice run-up? Yes, presumably I have a kid 20 years old, and he has $150,000 to invest in Berkshire Hathaway, and you won’t need the money until five years later. Gradually, would you recommend to buy A share or B share, or the combination? Thank you.

Warren Buffett [03:42:49] If you decide to buy Berkshire, I don’t think it really makes much difference whether you buy A or B. But we don’t make any recommendations about whether people buy or sell Berkshire. We never have, and that’s a game we don’t want to get into. In terms of overvalue, the question where the market’s overvalued generally, it’s simply, as we said last year here in the annual report, it’s not, the general market is not overvalued if two conditions are met, which is, in our view, which is that interest rates remain at or near present levels or go lower, and, or, and that corporate profitability in the U.S. stay at the present, close to the present levels, which are virtually unprecedented. Now those are a couple of big gifts, as we pointed out.

A lot of the stories that came out after the annual report would emphasize one aspect or another, but it’s simply, and they say, do, what does he mean by that? Well, it means exactly what I say. If two, if the two conditions are, I think it’s not overvalued, and if the, if either of the conditions is breached in an important way, I think it will turn out to be overvalued. And I don’t know the answer, which is why I put it with the, in the form that I did. It’s very tough at any given time to look forward and know what level of valuation is justified. You do know when certain dangerous things appear. And certainly if you’re predicating your answer that stocks are okay at these prices, you have, if you come to that conclusion, you have to also come to the conclusion that, in our view, that corporate earnings at present levels are likely to be maintained. And that’s a conclusion you would have to come to. I don’t think it’s obvious that that’s the case. Area 10, please.

[03:44:46] Shareholder (Jamie Harmon, Boston): Good afternoon, my name is Jamie Harmon, and I’m from Boston. You say that companies should only spend a dollar on capital expenditures if it will create more than one dollar of market value. I’m wondering, how do you determine this? Is it based on A, historical returns on capital, B, a qualitative judgment of the company’s competitive positions, a quantitative projection of the returns on capital, or D, something else?

Warren Buffett [03:45:19] We can say today every dollar we’ve retained has been worthwhile, because, I’ve, on balance, those dollars have produced more than a dollar of market value. And it’s actually, with a great many companies you could say that now, because things have turned out so well. But it would be a case to check on it is, a, over every, if after three or four years you’ve found that the dollars we’ve retained haven’t created more than value, then the presumption becomes very strong at that point that we should start paying out money. But almost any management that wants to retain money is going to rationalize it by saying we’re going to do wonderful things with the money we retain. And we think there should be checks on that, which is why in the report and the ground rules I suggest making checks on the validity of those projections.

Charlie and I, if you asked us today whether the single dollar we retained from the earnings today, we’ve got a use for today that will produce about more than a dollar value, the answer is no. We do think that, based on history, that the prospects are that, better than 50%, well over 50%, in the next few years we would have an opportunity to do that. But there’s no certainty to it. Charlie?

Charlie Munger [03:46:54] Nothing more.

Warren Buffett [03:46:54] Okay. Area 1, please.

[03:46:58] Shareholder (Gary Byalis, Southern California): Good afternoon, my name is Gary Byalis, I’m from Southern California. I want to thank you again for producing my… Can you tell me if the rule of thumb is still applicable regarding the statement in the owner’s manual that the percent increase in the book value of attracts pretty well the percent increase in intrinsic value? Or is the fact that you now have more owned businesses, especially ones like GEICO and FlightSafety, mean that the spread between those two is possibly narrowed?

Warren Buffett [03:47:30] Well, this, you know, the true have tracked pretty well over the years. I mean, compared to the record of most businesses that are publicly owned, I would say that over the 33 or so year span, our market prices tracked intrinsic value more closely than 80% or 90% of the companies that we view, probably 90%. But that doesn’t mean it does it all the time, and there are times when the market had the change in intrinsic value, and there are times when obviously then that it will lag behind. So it’s far from perfect, but it’s better than most. Ideally we would like it to track it perfectly. If we had, we ran this as a private company, and we met once a year and set a price on the stock to have it traded once a year, and Charlie and I were responsible for setting that price, we would try to set a price that was as close to intrinsic value as we could. And that would be, to the extent that we could do it, it would be a perfect tracking. The market isn’t like that, and the market responds to a lot of other things. So it’s not perfect, it’s not getting more perfect in our view, but we still think that bird companies, Charlie companies. Charlie?

Charlie Munger [03:48:54] Nothing to add.

[03:48:56] Shareholder (Elizabeth Cruz, New York City): I’m Elizabeth Cruz from New York City. I have a question about Gillette. Another significant Gillette investor, KKR, recently sold over a billion dollars in Gillette shares, shares that they had acquired through Gillette’s acquisition of Duracell. Knowing that KKR has also been a successful investor, do you see this as a negative signal about Gillette’s future prospects, particularly on the eve of the launch of the Mach 3 razor? And what do you think their plans are for the remainder of their shares?

Warren Buffett [03:49:32] Well, I think they may have even publicly stated, I’m pretty sure they have, the Duracell shares, which, from which the Gillette shares came, were held by a specific investment fund that was formed in a, I don’t know what year, but a given year, and which was, is scheduled to disband at a certain point. So those shares, whether they were of Duracell or whether they’re of Gillette, were scheduled for disposition at some point within a given term. And I think that KKR made the decision, and they’ve made it with other stocks too, is to have maybe three or so offerings between now and that terminal date for their partnership. And why they pick any one of, any given date, you know, it’s up to them and their advisors. It means nothing to us.

I mean, with the, if they didn’t have that kind of a fun and they decided to sell, it wouldn’t make any difference to them, and I presume if we made a decision to sell, it wouldn’t make any difference in their case. So we, you know, we form our ideas of valuation independent of anybody else’s thinking on it. But in the case of KKR specifically, they have a termination date on a partnership that owned those shares, and have to dispose of them one way or another between now and the termination date, and probably decided that with the quantity of stock they had that they were going to have several sales. The Mach 3 is terrific, incidentally. I didn’t use park 3. Area 3, please.

[03:51:11] Shareholder (Gertrude Goodman, Palm Springs, California): I’m Gertrude Goodman from Palm Springs, California. Mr. Buffett and Mr. Munger, there are many stocks that rise and eventually split. My question is, do you foresee in the near future a split for Berkshire Hathaway Class A?

Warren Buffett [03:51:38] Well, that’s an easy one. No. The answer is no. We have no plans to split the A. In effect, we let people who want to split the A split themselves into a B at a. So anybody that owns the A can have a 30 for one split any morning they wake up and want to have such a split. And Charlie, do you have any additional comment?

Charlie Munger [03:52:06] No, I think you said no perfectly.

(Applause)

Warren Buffett [03:52:09] We don’t take that attitude because we’re cavalier about how shareholders feel. We really think that in your, in the long-range interests of Berkshire, that the policy we followed on not splitting has benefited the company and shareholders. We, nothing dramatic about it, but I think that we have a better class of shareholders in aggregate in this room than we would have if we were selling it $3 a share or $30 a share or maybe even $300 a share. Area 4, please.

[03:52:48] Shareholder (Jack Sutton, New York City): Good afternoon, Mr. Buffett and Mr. Munger. My name is Jack Sutton from New York City. I have two questions. The Japanese stock market has been likened to the U.S. market in 1974, with Japanese stocks selling at very low price to book values as compared to U.S. stocks. Would it not make sense to invest in a basket of Japanese stocks or an index fund of Japanese stocks? Question number two, Berkshire Hathaway tends to invest in companies with high margins and high return on common equity. Berkshire’s investment in the airline business seems to have digressed widely from those principles. Could you elaborate on why Berkshire invested in the airline industry, and would Berkshire consider new investments in the industry in the future?

Warren Buffett [03:53:52] Now, going to the first question, the reason that, and I don’t know the exact figures, the Japanese stocks would sell at a lower price book ratio than U.S. stocks is simply because Japanese companies are earning far less on book than American companies, and earnings are what determine value, not book value. Book value is not a factor we consider. Future earnings are a factor we consider. And as we mentioned earlier this morning, earnings have been poor for a great many Japanese companies. Now if you think that the return on equity of Japanese business is going to increase dramatically, then you’re going to make a lot of money, I mean, and you’re correct, you’re going to make a lot of money in Japanese stocks. But the returns on equity, the return on equity for Japanese businesses has been quite low, and that makes a low price to book ratio very appropriate, because earnings are measured against book.

And the company’s earning 5% on book value, I don’t want to buy out of book value if I think it’s going to keep earning 5% on book value. So a low price book ratio means nothing to us. It does not intrigue us. In fact, if anything, we are less likely to look at something that sells at a lower relationship to book than something that sells at a high relationship to book, because the chances are we’re looking at a poor business in the first case and a good business in the second case. The, what was the other question on, Charlie?

Charlie Munger [03:55:34] Buying it airlines.

Warren Buffett [03:55:35] All right, yeah. I always repress everything on airlines. I don’t want to… We’ve never bought an airline common stock that I can remember. So what we did was we lent money to USAir for a 10-year period, and we had a conversion privilege there. It looked like it was a terrible mistake. I made the mistake, but it, we got bailed out. But we’ve never made the determination… When we bought our stock, USAir was selling at $50 a share, they’re about to the common, and we didn’t have an interest in buying USAir at 50 or 40 or 30 or 20. And we got a chance to, as things went along, all the way down to 4, and we never bought it. And we never bought American or United or Delta or any other airline. It is not a business that intrigues us.

We did think it was intriguing to lend money to them with a conversion privilege, and it’s worked out now, as it, because we got lucky, and because Steve Wolf came along and really rescued the company from right at the brink of bankruptcy. But we’re unlikely to be in airlines, although again, we wouldn’t mind lending money to a lot of businesses that we wouldn’t buy common equity in. I mean, that could happen again in various industries, including the airline industry. Charlie, do you have anything to say on either the airlines or the Japanese market?

Charlie Munger [03:57:10] Well, the airline experience was very unpleasant for us. The net worth just melted. It was like a billion and a half, and it just went $100 million, $100 million, $100 million, and finally the cash is running down. It is a very unpleasant experience, and we try and learn from those experiences, but we’re very slow learners.

Warren Buffett [03:57:42] Japanese.

Charlie Munger [03:57:43] Oh, the Japanese market. I suppose anything could happen. After all, we bought silver.

Warren Buffett [03:58:02] But we have never made a big sector play on a country. I think we’ve almost never made a big sector play. We would have to come to the conclusion the Japanese business, instead of earning whatever it’s earning on equity now, is going to earn appreciably more on equity. I’ve got no basis for, I wouldn’t argue, anybody else feels that way, I wouldn’t argue with them, but I have no basis for coming to that conclusion. And unless you come to that conclusion, you’re not going to make good returns. I mean, unless that happens, you’re not going to make good returns from Japanese stocks. You cannot, you can’t earn a lot of money from businesses that are earning 5% on, or 6% on equity. And I look at the reports, but I don’t see the earning power now.

Now maybe it’ll all change. I mean, there’s talk of, well, there’s already been a small temporary tax cut, but corporate tax rates are quite high, as you know, in Japan, and they used to be 52% here in the United States, now they’re 35%. So you could have things happen that increased corporate profits, but I don’t have any special insight into that, that anyone that reads the press generally would not have.

Charlie Munger [03:59:16] There are also readings in corporate culture that have to be made. Owning stock in a corporation where you know that if shareholders or somebody else has to suffer, the choice is likely to be that somebody else will be chosen, that is a different kind of a company to invest in than one that thinks that the principal purpose of life is to keep some steam boiler company going in a particular community or something, no matter how much the shareholders suffer. I think it’s hard to judge corporate culture in the foreign countries as well as we can judge it in our own.

Warren Buffett [04:00:01] Area 5.

[04:00:01] Shareholder (Yvonne Edmonds, Cedar Mountain, North Carolina): Yvonne Edmonds from Cedar Mountain, North Carolina. I have a specific question, but not a trivial one. Your, you regularly compare Berkshire Hathaway’s performance to the S&P 500, which is very helpful and very interesting, but I haven’t seen a correlation coefficient between the S&P 500 daily, from day to day performance, close, say, and the, and Berkshire Hathaway’s close. Now it so happens for me, and I’m sure some other people in the audience, that I don’t always have access to newspapers or the internet, for that matter, newspapers that publish Berkshire Hathaway performance on a daily basis, or even a weekly basis, for that matter, or a monthly basis. It would be very helpful to know the extent of a correlation coefficient between those two variables. If you have that, would you let us know what it is, and if you don’t, would you please consider calculating it in the future?

Warren Buffett [04:01:16] Well, it could be calculated, but I don’t think it would have much meaning. I mean, it would be an historical correlation coefficient, which, you know, I would be very reluctant to have people place any weight, and I try to indicate even the limitations of the yearly comparison of the relative performance, because what was doable by us in the past is not doable today. I mentioned in my annual report the best decade I ever had on comparative performance, by far, was the ’50s. Now I don’t think it was because I was a lot smarter than, I’m unwilling to accept that, but, you know, I had some edge of, well, there’s probably 40 plus points per year, but I was working with it. That has no relevance to today whatsoever. It would be misleading to publish it or make calculations based on it.

So I think that you would find, I don’t know what you’d find on a specific correlation between Berkshire and the S&P. You’d find a lot of correlation, well, you might not find so much. You’d find it an intrinsic value between that and Coke and a few stocks like that. But I don’t really think that’s particularly useful information going forward. We have no objection, anybody wants to make the calculation, but it wouldn’t be something that would be of any utility to us. And if we don’t think it should be utility to us, we don’t want to put it out for shareholders as being a possible utility. We do think that the S&P annual calculation has some meaning, because it’s an alternative for people to invest. They don’t need us to buy the S&P. So unless over time we have some advantage over that, you know, what are we contributing, what value is added by our management?

So we think that that’s, people should hold us accountable, even though we wouldn’t, we would prefer not to be, because that, it is a tough comparison for us as a tax paying entity against the non, pre-tax calculation on the S&P. But we don’t pay any attention to beta or any of that sort of thing. It just doesn’t mean anything to us. We’re only interested in price and value, and that’s what we’re focusing on all the time. And any kind of market movements or anything don’t mean anything. I don’t know what Berkshire is selling for today, and it really makes no difference, you know, it just doesn’t make any difference. What does count is where it is 10 years from now. And I can’t tell you what it was selling for on May 4th, 1983, or May 4th, 1986. So I don’t care what it says on May 4th, 1998. I do care, you know, where it is, in general, 10 years from now, and that’s where all the focus is. Charlie?

Charlie Munger [04:04:05] Yeah, we’re publishing data in the forum where we would like it if we were the passive shareholder. And so you’re getting the data, and you’re getting it on a time schedule based on what we would want if we were in your position. And we don’t think the correlation confessions would help us.

Warren Buffett [04:04:33] We don’t think anything that relates either to volume, price action, relative strength, any of that sort of thing. And bear in mind, when I was in my teens, I used to eat that stuff up. I mean, I was making calculations based on it all the time, and kept charts on it, wrote, even wrote an article or two on it. But it just has no place in the operation.

Charlie Munger [04:04:55] Now, one of the pleasant things about dealing with Warren all these years is he’s never talked about a correlation coefficient. If the correlation isn’t so extreme you can see it with the negative I, he doesn’t compute it.

Warren Buffett [04:05:10] Okay, we’re going to go to zone 6, and I’m gonna have a Dilly Bar, and Charlie got one here too. These are terrific. Mike?

[04:05:22] Shareholder: My question has to do with what you mentioned earlier about how companies have to reinvest a certain amount of cash in their business every year just to stay in place. And if one could say that the best businesses are the ones that not only throw off lots of cash but can reinvest it in more capacity, but I suppose the paradox is that the better companies’ opportunities for making expansionary capital expenditures, the worse they appear to be as consumers of cash rather than generators of cash. What specific techniques have you used to figure out the maintenance capital expenditures that you need to do in order to figure out how much of cash, how much cash a company is throwing off? What techniques have you used on Gillette or other companies that you’ve studied?

Warren Buffett [04:06:16] Well, if you look at a company such as Gillette or Coke, you won’t find great differences between their depreciation, forget about amortization for the moment, but depreciation, and sort of the required capital expenditures. If we got into a hyper-inflationary period, or, I mean, you can find, you can set up cases where that wouldn’t be true, but by and large the depreciation charge is not inappropriate in most companies to use as a proxy for required capital expenditures, which is why we think that reported earnings plus amortization of intangibles usually gives a pretty good indication of earning power. And I don’t, I’ve never given a thought to whether Gillette needs to spend $100 million more, $100 million less than depreciation in order to maintain its competitive position, but I would guess it’s, the range is even considerably less than that versus its recorded depreciation.

The businesses you have to worry about, I mean, an airline business is a good case. In airlines, you know, you just have to keep spending money like crazy, and you have to spend money like crazy if it’s attractive to spend money, and you have to spend it the same way if it’s unattractive. You just, it’s part of the game. Even in our textile business, to stay competitive, we would have needed to spend substantial money without any necessary, any clear prospects of making any money when we got through spending it. And those are real traps, those kind of businesses, and they may work out one way or another, but they’re dangerous.

And in a See’s Candy, we would love to be able to spend $10 million, $100 million, $500 million and get anything like the returns we’ve gotten in the past, but there aren’t good ways to do it, unfortunately. We’ll keep looking, but it’s not a business where capital produces the profits. FlightSafety, capital produces the profits. You need more simulators as you go along, and more pilots are to be trained, and so capital is required to produce profits. But it’s just not the case at See’s. And at Coca-Cola, particularly when new markets come along, you know, the Chinas of the world, or East Germany, or something of the sort, the Coca-Cola Company itself would frequently make the investments needed to build up the bottling infrastructure to rapidly capitalize on those markets, the old Soviet Union. So those are expenditures you don’t even make the calculation on them. You just know you’ve got to do it.

You’ve got a wonderful business, and you want to have it spread worldwide, and you want to capitalize on it to its fullest. And you can make a return on investment calculation, but as far as I’m concerned, it’s a waste of time, because you’re going to do it anyway. And, you know, you want to dominate those markets over time, and eventually you’ll probably fold those investments into other bottling systems as the market gets developed, but you don’t want to wait for conventional bottlers to do it. You want to be there. One of the ironies, incidentally, it might get a kick out of some of the older members of the audience, that when the Berlin Wall went down and Coke was there that day with Coca-Cola for East Germany, that Coke came from the bottling plant at Dunkirk. So there was a certain poetic irony there. Charlie, do you have anything in there?

Charlie Munger [04:09:51] I’ve heard Warren say since very early in his life that the difference between a good business and a bad business is usually the good business just throws up one easy decision after another, whereas the bad this business gives you a horrible choice, where the decision is hard to make. Is this really going to work? Is it worth the money? The, if you want to system for determining which is a good business and which is a bad business, just see which one is throwing the management bloopers time after time after time, easy decisions. It is not very hard for us to decide to open a new See’s store in a new shopping center in California that’s obviously going to succeed. It’s a blooper. On the other hand, there are plenty of businesses where the decisions that come across your desk are just awful, and those businesses by and large don’t work very well.

Warren Buffett [04:11:01] I’ve been on the board of Coke now for 10 years, and we’ve had project after project come up, and there’s always an ROI, but it doesn’t really make much difference to me, because in the end almost any decision you make that solidifies and extends the dominance of Coke around the world, in an industry that’s growing by a significant percentage and which has great inherent underlying profitability, the decisions are going to be right, and you’ve got people there that will execute them well.

Charlie Munger [04:11:28] You’re saying you get blooper effort.

Warren Buffett [04:11:30] Yeah. And then Charlie and I sat on USAir, and the decisions would come along, and it would be a question of, you know, do you buy the Eastern Shuttle, or whatever it may be, and you’re running out of money, and yet to play the game and to keep the traffic flows, such as with connecting passengers and everything, you just have to continually make these decisions, whether you spend $100 million more on some airport. And they’re agony, because again, you don’t have any real choice, but you also don’t have any real conviction that it’s going to translate, those choices are going to, or lack of choices, are going to translate themselves into real money later on. So one game is just forcing you to push more money into the table with no idea what kind of a hand you hold, and the other one, you get a chance to push more money in knowing that you’ve got a winning hand all the way. Charlie, why’d we buy USAir?

(Laughter)

Charlie Munger [04:12:21] Could have bought more Coke.

Warren Buffett [04:12:24] Area 7.

[04:12:26] Shareholder (Bakul Patel, upstate New York): My name is Bakul Patel. I am from upstate New York. My question is, is Berkshire prepared for 1929 style of depression or like a prolonged bear market that exists in Japan?

Warren Buffett [04:12:50] Well, funny, we don’t expect what you’re talking about, but we are probably about as well prepared as any company can be for adversity, because Berkshire has been built to last. Net, we would benefit over a 20-year period by having some periods of terrible markets periodically in that 20-year period. That doesn’t mean we’re wishing for them, and it doesn’t mean they’re going to happen, but we make our money by allocating capital well, and the lower the general stock market would be, the better we can allocate capital. So we’re well prepared, but we’re not necessarily expecting. Charlie?

Charlie Munger [04:13:36] Yeah, we are not going to ever sell everything and go to cash and wait for the crash so we can go back in. On the other hand, we are structured so that, I think, net, a lot of turmoil in the next 20 years will help us, not hurt us. I don’t mean it’ll be pleasant to go through the down cycle, but it’s part of the game.

Warren Buffett [04:14:08] Area 8.

[04:14:08] Shareholder (Pete Banner, Boulder, Colorado): My name is Pete Banner from Boulder, Colorado. First of all, Mr. Buffett, Mr. Munger, thank you for your genuine generosity today. Berkshire closed yesterday, the A share was about, for Friday, $69,000, and the B share was about $2,300. Do you feel that price is grossly overpriced, or grossly underpriced, or reasonably priced?

Warren Buffett [04:14:42] Well, I’ll let Charlie answer that one. I’m not going to say. Now we’re just never going to, we’re never going to give out advice on Berkshire stock. That, there’s no, you know, that is up to people who want to buy and sell it, and anything we would say could easily get magnified, and people would be acting on it months later, and who knows all the problems that it could produce. So it would be quite eccentric if we were to every day put out an announcement, now’s the time to buy, now’s the time to sell our own stock. Eccentric we are, but that eccentric we aren’t. Area 9.

[04:15:25] Shareholder (Irene Finster, Tulsa): I’m Irene Finster, your long time partner from Tulsa.

Warren Buffett [04:15:30] Hi, Irene. Yeah, Irene has a soda fun. You ought to go visit her.

[04:15:38] Shareholder (Irene Finster, Tulsa): First, I want to thank you for giving your shareholders the opportunity to select their own charities. And second, I’m very concerned about your health due to your diet of red meat.

(Applause)

Warren Buffett [04:15:56] Irene, these are our products that I’m eating. Red meat, candy, ice cream. And that’s just what I do. That’s what I do in public.

[04:16:13] Shareholder (Irene Finster, Tulsa): And I want to know what your doctor says.

Warren Buffett [04:16:18] My doctor says I must be heavily relying on my genes. Now I will tell you, I mean, Charlie and I are both very helpful. If you were in the life insurance business, you would be happy to write us at standard rates, I can assure you. You know, they asked George Burns when he was 95, what does your doctor say about smoking these big black cigars? And he said, my doctor’s dead. Charlie and I played bridge with George when he was about 97, I’d say, at the Hillcrest Country Club, and there was a big sign behind him, and said, no smoking by anyone under 95.

(Laughter)

And actually, at his 95th birthday party, he had about five very good-looking young girls that were there to greet him with a big cake and everything, and he looked them over one after another, and he said, oh, girls, he said, I’m 95, one of you is gonna have to come back tomorrow. We’re very big on George Burns in recent years. Area 10.

[04:17:37] Shareholder (Hubert Voss, Santa Barbara, California): My name is Hubert Voss, I’m from Santa Barbara, California. Earlier this morning you made a comment that if the market fell, you would be spending less time on the internet because you’d be very busy. And this has reinforced an impression I have had that the cash flows of Berkshire Hathaway are enormous, but that possibly in the last 12 months you’ve been investing less than you had previously. And if so, if this is correct, what does that say about waiting for attractive values? How long are you willing to weigh, and what does that say to the investment public in their own habits?

Warren Buffett [04:18:24] Well, you’re correct that we have not found anything to speak up in inequities in a good many months. And the question of how long we wait, we wait indefinitely. We are not going to buy anything just to buy something. We will only buy something if we think we’re getting something attractive. And that, and incidentally, if things were 5% cheaper, that were 10% cheaper, that wouldn’t change anything materially. So we have no idea when that period ends, we have no idea whether at least… So we have no idea when that period ends, we have no idea whether free tonic would he stay where they’re at, they are, but they’re even, then they aren’t in the least mouth-watering. So we won’t feel we’ve missed anything particularly if returns stay where they are, because if it turns out that these levels are okay, they still will not produce great returns from here, in our view.

That doesn’t mean you couldn’t have a tremendous market in the short term or something of the sort. Markets can do anything. I mean, you look at the history of markets and you just see everything under the sun. But we will not, you know, we have no time frame. If the money piles up, the money piles up. And when we see something that makes sense, we’re willing to act very fast, very big, but we’re not willing to act on anything that doesn’t check out in our view. There’s no, you don’t get paid for activity, you only get paid for being right. Charlie?

Charlie Munger [04:20:04] Yeah, an occasional dull stretch for new buying, this is no great tragedy in an investment lifetime, and other things may be possible in such an era too. I mean, it isn’t like we have a quiver with only one arrow.

Warren Buffett [04:20:20] We sat through periods before. I mean, the most dramatic one being the early ’70s, late ’60s and early ’70s, for a long time, it seemed. Doesn’t seem so long when you look back on it. Seems long when you’re going through it, but it’s like having a tooth pull or something. But it’s, you know, what can you do about it? The businesses aren’t going to perform better in the future just because you got antsy and decided you had to buy something. We will wait till we find something we like. We’ll love it when we can swing in a big way, though. That’s our style. Area 1.

[04:20:56] Shareholder (Larry Pickowski, Milburn, New Jersey): Larry Pickowski, Milburn, New Jersey. Berkshire seems never to have made any real pure real estate investments, with the, not counting facilities the operating companies might own, with the exception of Wesco’s involvement in the residential project in California. I was wondering if you’ve ever looked at a real estate transaction and tried to apply the same filters, meaning competitive advantages, returns on capital, that you do in operating companies, and if not, is it a circle of competence issue, or is there something you find disinteresting about real estate?

Warren Buffett [04:21:41] Yeah, okay. Charlie?

Charlie Munger [04:21:42] I want to take this. Let me take this one, because here’s a area where we have a perfect record that extends over many decades. We have been demonstrably foolish and almost every operation had to do with real estate we’ve ever touched. Every time we had a surplus plant and didn’t want us hit the bid and let some developer kind of take on unfair advantage of us, we would have been better off later if we’d hit the bid and invested the money in fields where we had the expertise. That housing track that I developed because I didn’t want to let the zoning authorities rob me the way they wanted to, I wish I had let them. We have a certified record of failure in this field. And we, the funny thing is, we understand real estate and we’re good at it, right?

Warren Buffett [04:22:43] But, and actually, as a correct aside, we do understand real estate, and Charlie got to start real estate

Charlie Munger [04:22:51] Yeah, but we understand other things better, and so the chances that we’re going to be big in real estate are low.

Warren Buffett [04:22:59] Yeah, we’ve seen lots of things, and we’ve, the prices that, you know, just don’t intrigue us in terms of what we get for our money. I tried to buy a town when I was, what, 21 years old. The U.S. government had a town in Ohio for sale, and would have worked out very well, as I, I’ve always… There’s nothing about the arena that turns us off, but the, we don’t see great returns available. And like Charlie says, the few things, particularly having an old plant or something that is not, we have not been great at working our way out of those. Fortunately, they haven’t been very important in relation to the net worth of Berkshire. Area 2.

[04:23:49] Shareholder (Fred Castano, Detroit, Michigan): Good afternoon, my name is Fred Castano from Detroit, Michigan. My question concerns Nike. Is a company experiencing some short-term problems, but is a great company with an excellent track record. Phil Knight is similar to Bill Gates in the respect that he’s a marketing genius and is a very hard worker. Making sneakers is a very simple business with high margins. How do you view Nike, and what do you think of the company?

Warren Buffett [04:24:14] Well, I think Phil Knight is a terrific operator, I think, and he’s a competitor. He’s got a lot of money in Nike. But as, in terms of what we think of the stock, you know, we keep all of those views to ourselves, pretty much. Area 3.

(Laughter)

[04:24:39] Shareholder (Ed Clinton, Chicago, Illinois): Hello, my name is Ed Clinton, I’m from Chicago, Illinois. I’m wondering about the tobacco litigation. There’s also have been some comments about fatty food. Do you think there’s going to be a new trend of fatty food litigation coming out of the tobacco problems?

Warren Buffett [04:24:58] Well, I sign a waiver before I do any of that myself. The, no, I would doubt, I would, I do not see those two as being remotely similar. But Charlie, do you have any different views on it?

Charlie Munger [04:25:14] Well, I think the traditional tort system is particularly ill-suited for solving what might be called the tobacco health problem. So I regard that whole thing instead of a Mad Hatter’s tea party, and we set out from afar.

Warren Buffett [04:25:38] Area 4.

[04:25:39] Shareholder (Fred Bunch, Tightwad, Missouri): Yes, I’m Fred Bunch from near Tightwad, Missouri. In light of the…

Warren Buffett [04:25:46] What was the name of that company, that town?

[04:25:50] Shareholder (Fred Bunch, Tightwad, Missouri): Tightwad, Missouri.

Warren Buffett [04:25:51] Tight wide, Missouri? Huh.

[04:25:52] Shareholder (Fred Bunch, Tightwad, Missouri): There’s a bank there.

Warren Buffett [04:25:54] Did they name it after me or Charlie?

[04:25:58] Shareholder (Fred Bunch, Tightwad, Missouri): Well, neither one. You’d both fit in. In light of today’s healthy growth and stability of the American economy at the present time, and over the last five years or so, how much credit, if any, do you give the Clinton administration, and why?

Warren Buffett [04:26:16] Well, I give credit to, I give credit going back to Volcker, significant credit to Volcker. I give credit to Reagan, who, certainly to Greenspan, and to Rubin. And this tax bill was very important. They’re carried by one vote. And I think he may listen to Rubin. So I think there’s a lot to give credit for, and I think you can spread it around a fair amount. Charlie may be less charitable here. Let’s see.

Charlie Munger [04:26:58] No, I’ve got no great quarrel of the way the country economy is performed. I think it’s way better than any of us would have predicted.

Warren Buffett [04:27:09] Area 5.

[04:27:09] Shareholder (Travis Keith, Dallas, Texas): My name is Travis Keith, I’m from Dallas, Texas. And my question regards what Phillip Fisher referred to as scuttlebutt. When you’ve identified a business that you consider to warrant further investigation, more intense investigation, how much time do you spend, commonly, both in terms of total hours and in terms of the span in weeks or months that you perform that investigation over?

Warren Buffett [04:27:36] Well, the answer to that question is that now I spend practically none, because I’ve done it in the past. And one advantage of allocating capital is that an awful lot of what you do is cumulative in nature, so that you do get continuing benefits out of things that you’ve done earlier, by now, to the businesses that might qualify. But when I started out, and for a long time, I used to do a lot of what Phil Fisher described. I followed this scuttlebutt method, and I don’t think you can do too much of it. Now, the general premise of why you’re interested in something should be 80% of it or thereabouts. I mean, you don’t want to be chasing down every idea that way. So you should have a strong presumption. You should be like a basketball coach who runs into a seven footer on the street. I mean, you’re interested to start with. Now you got to find out if you can keep him in school, if he’s coordinated, and all that sort of thing. That’s the scuttlebutt aspect of it.

But I believe that as you’re acquiring knowledge about industries in general, companies specifically, that there really isn’t anything like first doing some reading about them and then getting out and talking to competitors and customers and suppliers and ex-employees and current employees and whatever it may be, and you will learn a lot. But it should be the last 20% or 10%. I mean, you don’t want to get too impressed by that, because you really want to start with a business where you think the economics are good, where they look like seven footers, and then you want to go out with a scuttlebutt approach to possibly reject your original hypothesis, or maybe in, and if you confirm it, maybe do it even more strongly. I did that with American Express back in the ’60s, and essentially the scuttlebutt approach so reinforced my feeling about it that I kept buying more and more and more as I went along.

And if you talk to a bunch of people in an industry and you ask them what competitor they fear the most and why they fear them and all of that sort of thing, you know, who would they use the silver bullet of Andy Grove’s on, and so on, you’re going to learn a lot about it. You’ll probably know more about the industry than most of the people in it when you get through, because you’ll bring an independent perspective to it, and you’ll be listening to everything everyone says, rather than coming in with these preconceived notions and just sort of listening to your own troops after a while. And I advise it. I don’t really do it much anymore. I do it a little bit.

And I talked in the annual report about how, when we made the decision on keeping the American Express, when we exchanged our perch for common stock in 1994, I was using the scuttlebutt approach when I talked to Frank Olson. I couldn’t have talked to a better guy than, Frankel said, Frank Olson, running Hertz Corporation, lots of experience at United Airlines, and consumer marketing guy by nature. I mean, he understands business. And when I ask him how strong the American Express card business, and when I ask him how strong the American Express card, I mean, he could give me an answer in fiverr that I could accomplish in hours and hours and hours or weeks of roaming around and doing other things. So you can learn from people. And Frank was a user of it. I mean, Frank was paying X percent to American Express for his Hertz cars, and Frank doesn’t like to pay out money. So why was he paying that? And if he was paying more than he was paying on MasterCharge or Visa, why was he paying more, and what could he do about it? I mean, you just keep asking questions.

And I guess Davy explained that in that video we had ahead of time. I’m very grateful to him for doing that, because that was a real effort for him. But that was really what I was doing back in 1951 when I visited him down in Washington, because I was trying to figure out why people would insure with GEICO rather than with the companies that they were already insuring with, and how permanent that advantage was, and, you know, how, what other things could you do with that advantage. And, you know, there were just a lot of questions I wanted to ask him, and he was terrific and giving me the answers. It, you know, changed my life in a major way. So I’ve got nobody to thank but Davy on that. But that’s the scuttlebutt method, and I do advise it. Charlie?

Charlie Munger [04:32:09] Nothing to add.

Warren Buffett [04:32:10] Area 6.

[04:32:11] Shareholder (Richard Lontock, Toronto, Canada): All right. My name is Richard Lontock from Toronto, Canada. I have a question for both of you. Mr. Buffett, Berkshire’s Hathaway’s earnings in 1997 is less than that of 1996. What do you intend to do in 1998 to improve that earning? And Mr. Munger, I’ve been watching you and Mr. Buffett eating the See’s candies and drinking the Coca-Cola the whole day, join in. Do you intend to do any commercials in the future, like what Dave Thomas does with Wendy’s?

(Laughter)

Warren Buffett [04:32:49] Which of us do you think we should do them? Now you’re talking. We aren’t old enough to be really good in a commercial. What we would like to do is have somebody up here happily eating See’s Candy and answering these questions who’s about 110 years old. That would really be helpful. We, in terms of the earnings, the final bottom line GAAP reported earnings mean absolutely nothing at Berkshire to us. What, now, the look-through earnings, which we publish, do have some meaning, but even those have to be interpreted in terms of whether there was a super cat occurrence or whether GEICO had an unusually good year, and we try to mention those factors. But we do hope that the look-through earnings do build us at a reasonable clip over time.

But our final earnings include capital gains, and we can report those in any number that we wanted to, and we paid no attention whatsoever to realize capital gains at Berkshire. The IRS does, but, and that’s why we may send them a billion or more dollars this year, but they mean nothing in terms of measuring our progress. They look-through earnings say something about it. That table the first couple of pages that shows are changing in book value versus the S&P says something about it, not perfect. The real test is to gain an intrinsic value for sure over time, and that, there’s no hard number for that. But so far Charlie and I judge it satisfactory, but we also judge it as non-repeatable. Charlie, anymore?

Charlie Munger [04:34:34] No.

Warren Buffett [04:34:34] Area 7, please.

[04:34:35] Shareholder (Keiko Mahalik): Good afternoon, Mr. Buffett and Mr. Munger. My name is Keiko Mahalik, and I’m an MBA student at Wharton, but please don’t hold that against me.

Warren Buffett [04:34:48] We won’t. I never made it that far. I was an undergraduate student.

[04:34:54] Shareholder (Keiko Mahalik): Could you please explain how you differentiate between types of businesses in your cash flow valuation process, given that you use the same discount rate across companies? For example, in valuing Coke and GEICO, how do you account for the difference in the riskiness of their cash flows?

Warren Buffett [04:35:18] We don’t worry about risk in the traditional, the way you’re taught, actually, at Wharton. We, but I, it’s a good question, I, believe me. But what we’re, if we could see the future of every business perfectly, it wouldn’t make any difference whether the money came from running street cars or from selling software, because all the cash that came out, which is all we’re measuring between now and judgment day, would spend the same to us. It really, the industry that it’s earned in means nothing, except to the extent that it may tell you something about the ability to develop the cash. But it doesn’t tell, it has no meaning on the quality of the cash once it becomes distributable.

We look at riskiness essentially as being sort of a no, a go, no-go valve in terms of looking at the future businesses. In other words, if we think we simply don’t know what’s going to happen in the future, that doesn’t mean it’s necessarily risky, it just means we don’t know. It measures risky for us. It might not be risky for someone else who understands the business. In that case, we just give up. We don’t try to predict those things. And we don’t say, well, we don’t know what’s going to happen, so therefore we’ll discount it at 9% instead of 7%, some number that we don’t even know. That is not our way to approach it. We feel that once it passed a threshold test of being something about which we feel quite certain, that the same discount factor tends to apply to everything. And we try to do only things about which we’re quite certain when we buy into the businesses.

So we think all the capital asset pricing model type reasoning, with different rates of risk adjusted return and all that, we tend to think it is, what, we don’t tend to, we think it is nonsense. And, but we do think it’s also nonsense to get into situations, or to try and evaluate situations, where we don’t have any conviction to speak of as to what the future is going to look like. And we don’t think you can compensate for that by having a higher discount rate, I’m saying it’s riskier, so that, I don’t really know what’s going to happen, I’ll have a higher discount rate. That just is not our way of approaching things. Charlie?

Charlie Munger [04:37:54] Yeah, this great emphasis on volatility in corporate finance we just regard as nonsense. It just, if we have a statistical probability of putting out a million and having it turn into… Let’s put it this way. As long as the odds are in our favor and we’re not risking the whole company on one throw or anything close to it, we don’t mind volatility in results. What we want is the favorable odds. We figure the volatility over time will take care of itself on get Berkshire.

Warren Buffett [04:38:36] If we have a business about which we’re extremely confident as to the business result, we would prefer that it have high volatility than low volatility. We will make more money out of a business where we know where the end game is going to be if it bounces around a lot. I mean, for example, if people reacted to the monthly earnings of See’s, which might lose money eight months out of the year and makes a fortune, you know, in November, December, if people reacted to that and therefore made its stock, as an independent company, very volatile, that would be terrific for us, because we would know it was all nonsense, and we would buy in July and sell in January. Well, obviously things don’t behave that way.

But when we see a business about which we’re very certain, but the world thinks that its fortunes are going up and down, and therefore it behaves volatile, with great volatility, you know, we love it. That’s way better than having a lower beta. So we think that we actually would prefer what other people would call risk. When they, when we bought the Washington Post, I’ve used that, as you know, went down 50% in a matter of a few months. Best thing that could have happened. I mean, that doesn’t get any better than that. The business was fundamentally very non-volatile in nature. I mean, TV stations and a strong dominant newspaper, that’s a non-volatile business, but it was a volatile stock. And, you know, that is a great combination from our standpoint. There he ate.

[04:40:16] Shareholder: Good afternoon, and thank you for staying around to answer our questions. I have two. First of all, would you give us what logic, when, and this went into your decision to both buy and sell McDonald’s? And my second question goes to a term that you’ve used. You’ve talked about the caliber of the shareholders of Berkshire Hathaway. How do you define the caliber, and what difference does it really make?

Warren Buffett [04:40:44] Well, it makes a lot of difference. And we, our idea of a high caliber group is one that is just like us.

(Laughter)

And that’s not entirely facetious, in that we basically want shareholders who look at the business the same way we do, because we’re going to be around running something, and what could be worse than having a group out there had a whole different set of expectations than we did, and that evaluated us in a different way, or all of this sort of thing? I mean, if you are going to, you’re going to have a given number of shares outstanding. Let’s say we have an equivalent of a million 200 and some thousand A shares. Somebody’s going to own every single share. Now, would you rather have them owned by people who understand your business, who understand your objectives, who measure you the same way you do, who have similar time horizons, or would you rather have the reverse? It makes a real difference over time to be in with people that are compatible with you. So it’s a significant plus to us, the operation of the business, and it leads to a more consistent relationship between price and intrinsic value when you have a group like that, because they understand themselves and they end the business, they’re not likely to do silly things in either direction. So you get a much more consistent relationship than if we had a whole bunch of people who were thinking that the most important thing in evaluating this business was next quarter’s earnings.

Question about McDonald’s simply is, you know, it’s an outstanding business, and we don’t talk about it when we buy it, we don’t talk about it if we sell it. Charlie?

Charlie Munger [04:42:28] Yeah. The question of what difference does it make to the management who the shareholders are. Well, if you are into what I call trustee capitalism, where the shareholders aren’t just a faceless bunch of nothings, but you feel, as a kind of a hair shirt, an obligation to do as well as you can by the shareholders, well, wouldn’t you rather feel an obligation to people you liked instead of people you didn’t like?

Warren Buffett [04:42:58] Yeah. Let’s say you were running a business and you had a choice of three owners. You’d have 100% of it owned by whatever your favorite philanthropy is, you could have 100% of it owned by the US government, and you could have 100% owned by, you know, the worst person you can think of in, you know, in your hometown. I mean, I think it would make a difference in how you felt about going to work every day. Number nine.

[04:43:24] Shareholder (Steve Check, Southern California): Yes. My name is Steve Check, I’m from Southern California. My question has to deal with kind of quality versus price. I’ve been to three annual meetings and I’ve heard great things about Coke every year, but as far as I’m aware, you have not bought any additional shares of Coke over the last three years, even though the stock has done just fine. If an investor has a relatively short time frame, say three to five years, how much weight do you think one should give to quality versus price?

Warren Buffett [04:43:51] Well, if your time frame is three to five years, hey, hey, I wouldn’t advise it being that way, because I think if you think you’re going to get out, then it gets more toward leaning toward the bigger pool there. The best way to look at any investment is how well I feel if I own it forever, you know, and put all my family’s net worth in it. But we basically believe in buying, if you talk about quality meaning the certainty that the business will perform as you expect it to perform over a period of time, so the range of possible performance is fairly narrow, you know, that’s the kind of business we like to buy.

And all I can say is that we like to pay a comfortable price, and that depends to some extent on what interest rates are. We haven’t found comfortable prices for the kind of businesses we like in the last year. We don’t find them uncomfortable in the sense that we want to sell them, but they’re not prices at which we… We added to Coke one time, about, I don’t know, five years ago or thereabouts, and it’s conceivable we would add again. It’s a lot more conceivable we would add and subtract, but that’s the way we feel about most of the businesses. We did make a decision last year that we thought bonds were relatively attractive, and we trimmed certain holdings and eliminated certain small holdings in order to make a big, bigger commitment in bonds. Charlie?

Charlie Munger [04:45:17] Yeah. You talk about quality versus price. The investment game always involves considering both quality and price, and the trick is to get more quality than you’re paying for in the price. It’s just that simple.

Warren Buffett [04:45:37] But not easy.

Charlie Munger [04:45:39] No, but not easy.

Warren Buffett [04:45:41] Area 10.

[04:45:41] Shareholder (Jeff Kirby, Green Village, New Jersey): Gentlemen, good afternoon. Jeff Kirby from Green Village, New Jersey. Would you comment, please, on tax-free spit-offs to shareholders in general, and particularly how you would feel about those, were you to believe that a materially higher value would be ascribed to one of your operating companies in the public arena than as part of Berkshire Hathaway?

Warren Buffett [04:46:07] Well, there’s certainly been times in Berkshire’s history when certain components of Berkshire might well have sold at higher multiples as individual companies than the amount they contributed to the whole of Berkshire, although I don’t think that would be the case now. But our reaction to spin-offs would be, even if we thought there was some immediate market advantage, it would have no interest, basically, to us. We like the group of businesses we have as part of a single unit at Berkshire. We hope to add to that group of businesses, we will add to that group of businesses over time, and the idea of creating a lot of little pieces because we could get a little more market value in the short term, it just doesn’t mean anything to us. Charlie?

Charlie Munger [04:47:02] Yeah, it would add a lot of frictional costs and overheads, and we have to… I don’t know anybody our size who has lower overhead than we do, and we like it that way.

Warren Buffett [04:47:16] Yeah. Our, right now, our after tax cost of running the operation has gotten down to a half a basis point of capital value. When you think that many mutual funds are at 125 basis points, that means they have 250 times the overhead ratio to capitalization, and only guts a bunch of marketable securities, and we got that plus businesses.

Charlie Munger [04:47:46] Yeah, we don’t need any more, but we can get lower. We can get a lot lower.

Warren Buffett [04:47:55] I know, you think they’d work for $500 a year instead of $900. Groans from the front row. Area one.

[04:48:04] Shareholder: Good afternoon, Mr. Buffett and Mr. Munger. I was kind of curious if you could tell me, do you know, or can you tell us how much business Nebraska Furniture Mart and boy, investing in the auto industry, and if not interested now, what would change your mind about this industry in the future?

Warren Buffett [04:48:27] Well, the first question, I don’t know what the Mart did, but I do know they had a lot of shareholders there. I’ve gotten a verbal report on that, if there would be less change in their normal, but they do, you know, you’re talking about a company that, at the Mart, that does $800,000 a day on average. It is a big operation. So our shareholders have an impact, but not the relative impact that they would have at Borsheim’s. Borsheim’s did over twice as much this year as last year, and they had a big day. And what was the other question, Charlie?

Charlie Munger [04:49:09] Industry. The auto industry.

Warren Buffett [04:49:11] Oh, the auto industry. Yeah, we… Charlie, Charlie was big in General Motors in the mid 60s, right? Cheerleading was your biggest commitment?

Charlie Munger [04:49:23] I had a temper. Luckily it passed.

Warren Buffett [04:49:26] Yeah. Oh, you made money on it.

Charlie Munger [04:49:30] Yeah, I did.

Warren Buffett [04:49:31] We, it’s kind of interesting. It’s interesting for us to follow. I mean, it, many years ago it was the dominant factor and, or overwhelming factor in the economy. It’s diminished fair amount, but it’s still a very important industry, and it’s the kind of industry that anyone can follow. I mean, you have experience with the product and competing products, and you, everyone in this room understands in a general way that the economic nature of the industry. But we’ve never felt that we understood it better than other people. So we’ve seen auto companies at very low multiple sometimes, and with prices that in hindsight look very attractive, but we’ve never really felt that we knew who among the auto companies five years from now would have gained the most ground relative to where they are now, or to gain the most ground relative to what the market might expect. It just isn’t given to us, that knowledge. Charlie?

Charlie Munger [04:50:36] I agree.

Warren Buffett [04:50:37] Area two.

[04:50:37] Shareholder (Scott Rudd, Eden Prairie, Minnesota): Hi, my name is Scott Rudd from Eden Prairie, Minnesota, and my question is this. Ten years from now, and I’m referring to Borsheim’s as the retail part of it, to the consumer, not so much the corporate division, ten years from now what would be the three things that you would expect on a day-to-day operating basis to change the money?

Warren Buffett [04:51:12] Are you talking about Borsheim’s specifically?

[04:51:15] Shareholder (Scott Rudd, Eden Prairie, Minnesota): Yes.

Warren Buffett [04:51:15] Yeah. I think Borsheim’s, you know, what three things, but I have… Borsheim’s may be one of a couple of our companies where the internet could be a huge, have a huge potential for us. I don’t know if that’ll happen, but there’s no question that we operate, and I’ve got a message on the internet, that at considerably, very considerably lower gross margins than does a Tiffany or publicly held jewelry operations. We are giving customers considerably more for their money. We’ve got way lower operating costs than the public companies, and I say on the internet, our operating costs are 15 to 20 percentage points, and even more in some cases, less than publicly owned competitors. So we’ve got a lot to offer.

Now the big question people always have with jewelers is, how do you know who to trust? I mean, you know, it is an article that most people feel very uncomfortable buying, and I think that the Berkshire Hathaway identification can help people feel comfortable on it. I think that the experience of customers around the country as they see it, and I don’t think that, I think it is a product, hi, it’s a high ticket item, so saving money gets to be really important. Just like auto insurance, saving money gets to be really important. So I think that the internet could be of significant assistance to Borsheim’s in terms of spreading and facilitating its nationwide reputation.

So Borsheim’s could have a lot of growth in the internet could be a big part of it. Our job is to get the message to people around the country that they can literally, you know, have us send a half a dozen items to them that they can look at with no high pressure salesmanship at all or anything of the sort, and look at the prices, decide what they want, in their own homes, and they will do very well with us. Each of that now, but we could have 10 or 20 or 50 times that number as the years go by, and I think we should work very hard on that.

GEICO has possibilities through the internet, obviously, also. Anything where you’re offering a terrific deal to the consumer. But one of the problems has been, how do you talk to that consumer? You know, the internet offers possibilities. Now, the thing is that everybody in the world is going to be there, and why should they click on you instead of somebody else? Actually, the Berkshire Hathaway name may help a little bit on that, although GEICO’s name is extremely well known. GEICO is, I said in the annual report we were going to spend $100 million, basically, in promotion this year. We’ll spend more money than that. The brand potential in GEICO is very, very big, and we intend to push and push and push on that. Charlie?

Charlie Munger [04:54:27] Well, all that said, if the internet helped some of our business, well, certainly the CD-ROM and the personal computer combined the clobber World Book for us.

Warren Buffett [04:54:40] Yeah, we paid our entry fee.

Charlie Munger [04:54:43] Yeah, we, it’s not all plus.

Warren Buffett [04:54:46] No. Area three.

[04:54:46] Shareholder (George Gotti, Zurich, Switzerland): My name is George Gotti from Zurich, Switzerland, and my question refers to two food businesses, namely McDonald’s and Dairy Queen. Are there major differences in the investment characteristics between McDonald’s and Dairy Queen, and if yes, would you explain them?

Warren Buffett [04:55:09] Yeah, there are major differences. McDonald’s, I can’t tell you the exact percentage, but if they’ve got 23,000 outlets, they own many, many thousands of them and operate them, and then of the remainder they own a very high percentage and lease them to their operators, their franchisees. So they have a very large investment, on which they get very good returns, in physical facilities all over the world. Dairy Queen has, counting Orange Julius, 6,000 plus operations, of which 30 odd are operated by the company, and even those, some are in joint ventures or partnerships. So the investment in fixed assets is dramatically different between the two. The fixed assets investment by the franchisee or the person as landlord obviously is significant at a Dairy Queen, but it’s not significant to the company as the franchisor. So that the capital employed in Dairy Queen is relatively small compared to the capital employed in McDonald’s.

But McDonald’s also makes a lot of money out of owning those locations and receives, whereas Dairy Queen will in most cases receive 4% of the franchisees’ sales in terms of a royalty. At a McDonald’s, there’s that more than that percentage plus bus rentals and so on. So they’re two different, very different economic models. They both depend on the success of the franchisee in the end. I mean, you have to have a good business for the franchisee to over time have a good business for the parent company. Both companies have that. Charlie?

Charlie Munger [04:57:18] It’s not very much, when you stop to think about providing a group of franchisees with the nationally recognized brand and quality control and all sorts of desirable business aids. 4% is it the law. If you look at the whole industry, 4% is on the, in the lower part of the range.

Warren Buffett [04:57:44] But part of the worst part of this… Yeah, yeah. Part of the protected us. Yeah, part of what attracted us was the fact that the operation for significantly more than he has invested in tangible assets, and we want it that way, obviously, because that means he’s got a successful business, and it means that over time we will have a successful business. You want the franchise operate, you want the franchise operator to make money, and you want him to create a capital asset that’s worth more than he’s put in it. That’s the goal. Area four.

[04:58:24] Shareholder (Patrick Byrne, Cincinnati, Ohio): Good afternoon, Mr. Munger, Mr. Public. My name is Patrick Byrne. I’m a shareholder and I’m here from Cincinnati, Ohio, back again this year to ask a question to see if I can get the two of you to disagree on a subject. I’ve picked education as an area where we might see some daylight between the two of you. First, though, on the subject of education, I’d like to offer some brief thanks. I’m lucky in that my parents, in the late 70s, made them a wise choice of buying some Berkshire stock and putting it in a college fund for my brothers and me, and are that basically paid for our higher education. I suspect there must be thousands of people like us who had our education paid for by wealth that the two of you created, and we owe you, although we probably all have a lot better to skip college and keep stock.

(Laughter)

Well, on the subject of education, Milton Friedman has said, it was written, that if you really care about poverty in the U.S. and the disadvantage of women and minorities and so on, that, and you could cure one single thing in the U.S., it would be the public education system. Mr. Buffett, of course, you’ve been very publicly supportive and done many things, and I’m sure Mr. Munger has as well, for public education. But I noticed last year, in this annual meeting, Mr. Munger, well, both of you, business schools, but Mr. A, he was a tad critical, I would say, of the US public education system, and I wonder if you two agree with what Friedman says, and what you think the importance of public education is, and what might be done to improve it.

Warren Buffett [05:00:42] Charlie, go on in a second, but I just want to say Patrick Byrne is the son of Jack Byrne, who made a fortune for us by resuscitating GEICO when he got into trouble in the mid 70s. In fact, I met Patrick’s dad on a Wednesday night about eight o’clock at night in Washington, when GEICO was, it was bankrupt, and it was about, very close to being declared so. And after talking with about three hours that night, the next day I went out and bought 500 and some thousand shares of GEICO that Davy referred to, at 2 1/8, which is 40 cents on the stock that we paid $70 for later on. So Patrick’s dad, we made the Byrne family a little money, he made us a lot of money.

Patrick is now running Fechheimers in Cincinnati, doing a sensational job, as brother Mark. I, on June 30th, if we hit the target date, we’ll be establishing a major operation in London and Bermuda, in which we will be a very large partner. So he’s only got one other brother left, and he’s out playing golf in California, but if times get tough, we’re going to try and recruit him too. Now, Charlie, with all that time to prepare, what do you have to say about education?

Charlie Munger [05:02:11] Well, I certainly agree with Milton Friedman that there’s, it’ll be hard to name one factor, if we could fix it, that would be more worthy of fixing than the, particularly the education where the failures are so horrible in many big cities particularly. So yes, I think it’s a terrible problem and it needs fixing. Of course, there’s a huge debate as to what the best ways to, what the best way is to fix it, and I am skeptical myself of big city school systems getting fixed under their own momentums. In other words, I’m quite sympathetic to the people who say we may have to go to an alternative like that. The incentive structure has gotten so bad in some places that you can’t fix it with evolution. It takes revolution. Warren, you’re more optimistic about…

Warren Buffett [05:03:22] Well, I’m not necessarily more optimistic. I probably feel, though, that democracy without a good public school system available to the entire population is sort of a mockery, because there’s so much inequality to start with. I mean, it isn’t just an inequality of money, but I mean, my kids, whether they inherit any money, or your kids, whether they inherit any money, compared to the kids of somebody that, or both parents are struggling to keep the place going, or maybe just one parent and living in poverty. I mean, it is so unequal to start with that if you accept giving those who are generally higher up, who have chosen the wrong womb, I think that just, I don’t think the society should tolerate that. Our rich society should tolerate that.

That doesn’t mean it’s easy to solve, because I’ve said a lot of times that unfortunately it seems like a good public school system is like virginity, that it can be preserved but not restored. And it’s very hard when you get a system that’s lousy to do much about it, because under those circumstances the wealthy people are going to all opt out of the system, and they’re going to be less interested in the bond issues, they’re going to be less interested in the PTA, they’re going to be less involved with the other people’s children if they’ve got, if they have all opted out. From another for the poor, with the poor being, getting the poorer system, strikes me as doing nothing but accentuating inequality and other problems that result from that in the future.

So I don’t know the answers on improving the system. You know, I read some of the experiments that take place, but I do believe, to start with, that you have a good public school system, as we do in Omaha, that you do your damnedest to maintain that, so that there is no incentive for the rich grandparent or the rich parent to say, you know, I love the idea of equality, but I love my grandchildren and my child more, so I’m going to yank him from the public school system. And then you get this sort of exodus which leaves behind only those who can’t afford to make that shot.

There were a way, the idea of competition I like, you know, and I think a good parochial system does, for example, create a better public system, when I think we’ve had that situation, Omaha. But I think the voucher system, if it simply amounts to giving everyone an additional amount, simply means that the rich get X dollars of the public school system subsidized, but the poor still, or whatever that differential is, remains. I mean, you could have a golf voucher system. Because I play golf, I don’t play very often, but if I play at the Omaha Country Club, then you could have a voucher system so that everybody in Omaha would have more access to the, they wouldn’t do the job for the guy who’s on the public course, because he’d still be beyond his means to move to full-scale equality with me.

I, you know, I don’t think there’s anything more important, and I agree with Charlie totally. I think the first eight grades, you know, you can forget it after that. If you have the first eight grades right, good things are going to flow, and if you have those wrong, you’re not going to correct it as you get beyond that point. And I think that on the $500 million, I think it is very tough to see results, and producing results, I think it should be replicated elsewhere. I think that obviously, fellow Chicago says that the unions have caused considerable problems in getting adjustments made, but he had the political clout behind him to overcome some of those problems. It ought to be a top national priority. We have the money to any, to educate everybody well in this country, and the question is, is if we got, you know, can we? And that’s something I hope good minds like Patrick’s work on. Charlie, you have anything for that?

Charlie Munger [05:08:01] Yeah. I think when something is demonstrably failing at performing the function which is assigned by a civilization, just to keep pouring more and more money into a failing modality, it’s not the Munger system. So I’m all for taking the worst places where there’s failure and trying a new modality, and it wouldn’t bother me at all to have vouchers only for the poor. But I think we have to do something in our most troubled schools to change our techniques. I think it’s insane to keep going the way we are.

Warren Buffett [05:08:37] So you go for means tested vouchers, basically?

Charlie Munger [05:08:39] Oh, I, I mean, I don’t disagree with that idea, but all I know is where it is a terrible place to fail. And part of the trouble is ideological. If you have a absolute rule there can’t be any tracking by ability, no matter how much better reading can measurably be taught by systems that involve tracking, well, people that brain blocked shouldn’t have the power. You know, we should do what works.

Warren Buffett [05:09:16] You always got plenty, I mean, all mod works. The problem is that once it gets behind, beyond a certain point on a downhill slope, essentially you have the citizens that are able to do something about it essentially opt out, and that, I don’t know.

Charlie Munger [05:09:31] I am a product of the Omaha public schools, and in my day, and I, my, the people who went to private schools were those who couldn’t quite hack it in the public schools. That is still a situation in Germany today. I mean, private schools are people who aren’t up to the public schools. I prefer a system like that. But once a big segment of that system measurably fails, then I think you have to do something. You don’t just keep repeating what isn’t working.

Warren Buffett [05:10:08] Well, I agree with that. Patrick, have you gotten your answer? Let’s go to area five.

[05:10:15] Shareholder (Kevin Murphy, Camarillo, California): My name is Kevin Murphy, I’m from Camarillo, California, and my question is, what do you look for when det, when determining a pers, if a person is honest or not?

Warren Buffett [05:10:30] Well, that’s a good question, Kevin. You, I think generally Charlie and I can do pretty well with the situations we see, but we have to have some evidence of behavior in front of us. And I would say even there’s some occupations where we’re going to expect to find a higher percentage of people who behave well than others. But if we work with someone over a period of a few months or more, I think we’ve got, we can come up with a pretty high batting average in terms of how they behave. But at Salomon, I think I was able to separate out the people who I felt very good about and the people I was a little more nervous about fairly quickly, among the ones I worked with actively. But how you spot that precisely, you know, leave your lunch money on their desks sometimes, maybe you’ll find out in a hurry.

But we like people, you know, you, I mean, the great example, you know, is somebody like a Tom Murphy, where they’re just bending over backwards all the time to make sure that you get the better end of the deal. Or that, that doesn’t mean they aren’t competitive. I mean, if you play my golf game for money or something like that, you know, he wants to win the worst way. But it, but he, but there are people that just, they don’t take credit for things that they didn’t do. They, in fact, they give you credit for some of the things that maybe they did. And you can get a feel for it over time. Charlie, you have any good guidelines on that?

Charlie Munger [05:12:25] Yes. I think that people leave track records in life, and so somebody at your age should figure that by the time he’s 22 or 3, well, he will have left quite a track record, and the world will be able to figure you out. So I think that, I think track records are very important. And if you start early trying to have a perfect record in some simple thing like honesty, you’re well on the way to success in this world. Johnny Angeli one time told me, he said, he said, when you get older you have the reputation you deserve. He said, you can get away with it for a while early on, buddy, by the time anybody gets to be 60 or so, they very probably have the reputation you deserve.

Warren Buffett [05:13:20] And the truth is, you can have the reputation that you want. If you list all of the things that you admire in other people, you’ll find out that almost everything you list, you may not be able to kick a football 60 yards or something of that sort, but almost everything you listen the people that you admire and like, they’re qualities that you can have if you just set out to do that. And Ben Franklin do that. Charlie?

Charlie Munger [05:13:51] Oh, sure. I always say that to get what you want is to deserve what you want.

Warren Buffett [05:14:00] I’ll have some more peanut brittle.

(Laughter)

Area six.

[05:14:03] Shareholder (Nancy Sill, Atlanta, Georgia): I’m Nancy Sill from Atlanta, Georgia. You were asked earlier this morning a question about the year 2000 computer problem. Do you anticipate any negative financial impact to the economy or to our companies due to the millennium problem, and if so, what financial strategies are you considering?

Warren Buffett [05:14:24] Well, I don’t think there’ll be major problems for our companies. You know, there are going to be some problems anytime you have something that big. If people didn’t see it coming in 1980 or 1985, they’re not going to be perfect at solving it by 2000, and you can count on that. But I don’t think it has any investment consequences for Berkshire Hathaway that we should be considering now. And I do think you’ll see most of the problems in the governmental area. You know, maybe they won’t find your tax return for two or three years, who knows. Charlie?

Charlie Munger [05:15:05] Yeah.

Warren Buffett [05:15:05] Area seven.

[05:15:05] Shareholder: In your description of McDonald’s, you have the sense that there’s a great business buried in McDonald’s, and two good businesses that are mixed in with it, and the problem is with the real estate and the operational business, that as the company is currently capitalized, they can earn the same kind of returns they can earn the franchising business. You were, or still are, as significant shareholders McDonald’s. I guess my question is, the solution is obvious, why don’t you push for a solution that creates the same opportunity you have an International Dairy Queen?

Warren Buffett [05:15:42] Well, my guess is, I don’t know the details on it, but my guess is that with 23,000 locations all over the world, I think it would be extraordinarily difficult to separate the real estate business out from the franchising business at this point. I think they could have gone a different route. I’m not saying it would have been a better route at all. In fact, I think the odds are they followed the right route in owning and controlling so much real estate. But I think, I just think the problems would be horrendous. Certainly you wouldn’t want to sell it and lease it back, because you would not end up with more value, in my view, by doing that, and spinning it off in a real estate trust or something, with operating in 100 plus countries, and with all the franchise arrangements, I think it would be a huge, huge problem. I would not want to tackle it myself.

So I think that you should look at McDonald’s, and I don’t know anything about their plans on this, but I think you should look at McDonald’s as being a very good business, but the one that will continue in its present mode visa to be the real estate, although I think they’ve signaled that they’re going to do less on new properties, somewhat less in connection with ownership, than they’ve done to this point. But there’s 23,000 locations out there, and every operator, his own arrangement is very important to him, and it just, it would be a mammoth job, and I’m not sure how much extra value would be created in the end anyway. Charlie?

Charlie Munger [05:17:17] Yeah. The net returns on capital McDonald’s is earned all these years are high, even though they have owned a lot of the real estate. I think it’s hard to quarrel with the way they did it. They had the best record, and the multiple is not greatly different, in my view, than if the real estate were separate.

Warren Buffett [05:17:40] You know, I mean, now if you get all the real estate detached in some arrangement, you might get a little more out of it, but it doesn’t strike me as a big deal. Area…

[05:17:54] Shareholder (Rachel White, Missoula, Montana): Yeah, hi, I’m Rachel White from Missoula, Montana, and during the lunch break I heard some people talking about double taxation and how that impacts Berkshire’s investment philosophy. So I was wondering if you could talk a little bit about it. I’m not sure I understood it, and if you could explain whether that impacts your investments.

Warren Buffett [05:18:17] Well, we are structured very poorly. And if you were looking, if you’re going to start all over again and do some, most of the things we’ve done, you’d probably not do it in corporate form or price precisely like we do it. I mean, what that gentleman was talking about in connection with McDonald’s applies much more to Berkshire Hathaway, even by far, than McDonald’s, in terms of detaching part of the income stream. If we own Coca-Cola with the cost of $1.2 billion or $1.3 billion and a market value of $15 billion, we’re not going to sell it, but if we did sell it, we would incur a capital gains tax on the order almost $5 billion. That means that the 15 becomes $10 billion. Now, if that $10 billion is reflected in Berkshire’s value, and you bought your stock when we bought our Coke, then you pay a second tax in, in turn, in the re, in reflection of the Coca-Cola appreciation that’s taking place after tax.

So it’s a very disadvantageous way of owning securities, to have a corporation in between you and the securities themselves. If we ran as a partnership, that would not be the case. I ran Berkshire Hathaway, I mean, I ran Buffett Partnership for many years, and we only had one tax, at the individual level. So our stockholders are, to the extent that we own marketable securities, and we own a lot of them, at the extent that we have a lot of profits over time in all those securities, in a disadvantageous way. Now, one of the, we also have a float which helps us own them, which is a big plus. But corporate ownership of securities, if you have the option of owning them directly or through a partnership, corporate ownership is disadvantageous, and we’re stuck with it. We’ve had it for all these years, we’ve got no plans to do anything about it, we couldn’t probably do anything about it if we wanted to. So that is a drag on our performance compared to what would be the situation if we operated as a partnership. And Lloyd’s syndicates, for example, didn’t have that problem. Some insurance companies that operate and Bermuda may not have that problem to the same extent. Certainly partnerships don’t have that problem, to the extent they own securities. But it’s a fact of life with us, and we’re going to pay a lot of taxes. Charlie?

Charlie Munger [05:20:46] Yeah. We have no cure for the corporate income tax, and it is a big disadvantage for the indirect owner of securities. So far we’ve surmounted it well enough, but we’re carrying a load there. It’s become a bigger disadvantage since the individual rate went to 20%, with our corporate rate being 35%.

Warren Buffett [05:21:10] Yes. If we make a dollar on a stock, it becomes 65 cents, and to the extent that you’ve owned Berkshire, that’s 65 cents. Now, 20% off that becomes 52 cents, whereas if you’d own the stock correctly, you’d have had 80 cents. Now, when we owned GEICO and it wasn’t consolidated with us, you could have carried that one more extreme. I mean, GEICO had capital gains, and we had a capital gain proportionally in GEICO, and so on. I mean, it, how your structure does make a real difference, but usually once you get into a given structure, you’re kind of stuck with it, as I indicated in the answer to the gentleman on McDonald’s.

Charlie Munger [05:21:48] Now, to the extent we have very long holding periods at the corporate level, the real mathematical disadvantage shrinks.

Warren Buffett [05:21:54] Yeah. And we might not have been able to get the float that we have if we hadn’t been operating it in a corporate structure, so that is a mitigating factor too. But we like to have the mitigating factors without anything to mitigate, if we get our choice. Area nine, please.

[05:22:13] Shareholder (Fred Strossheim, Omaha): Good afternoon. My name is Fred Strossheim, and I’m from here in Omaha. I have a question about your acquisition methodology, and I was intrigued to read in your annual report about your acquisition of Star Furniture. And as I understand the process you followed, Mr. Buffett, you met with Mr. are you, I’m sorry, you reviewed financials for a brief period, liked what you saw, and then you met with Mr. Melvyn Wolff for two hours and struck a deal. And you wrote you had no need to check leases, work out employment contracts, etc. Right? I think that most companies, when they do acquisitions, would feel the need to do a significant amount of legal due diligence, to do things like check the leases, check into things like undisclosed environmental liability or perhaps threaten litigation. And I guess my question is, have you ever been burned by your approach?

Warren Buffett [05:23:10] We’ve never been burned by the, we’ve been burned only in the sense that we’ve made mistakes on judging the future economics of the business, which would have had nothing to do with due diligence. We regard, you regard what people normally refer to due diligence as really sort of boilerplate, in most cases. It’s a process that big companies go through, and they feel they have to go through it, and they’re ignoring, oftentimes, in our view, they’re ignoring what really counts, which is evaluating the people they’re getting in with, and evaluating the economics of the business. That’s 99% of the deal.

You know, you may run into an environmental liability problem, you know, one time in a hundred, or you may, you know, you may find a bad lease. I asked Melvyn about, you know, do you have any bad leases? I mean, that’s the easiest way to do it. And I can read them all and try and look for every clause or something, but it isn’t gonna, you know, it, that is not the problem. We’ve made bad, lots of bad deals. We made a bad deal when we bought Hochschild Kohn, for example, a department store operation, back in 1966. But it had fine people, but we were wrong on the economics of the business. But the leases didn’t make any difference, or, you know, that sort of thing just was not important. And I can’t recall anytime that what other people referred to as due diligence would have avoided a bad deal for us.

Charlie Munger [05:24:35] I can’t either.

Warren Buffett [05:24:36] No, that’s 30-something years. And I, the key thing, you just don’t want to do… I go into, I’m on various public company boards, I’ve been on 19 public company boards, and, you know, their idea of the due diligence, to send the lawyers out and have a bunch of investment bankers come in and make presentations and all that, and I regard that as terribly diversionary, because the board sits there, you know, entranced by all of that, and everybody reporting how wonderful this thing is. Now they’ve checked out patents and all that sort of thing, and nobody is focusing really on where the business is going to be in five or ten years. And, you know, business judgment about economics and people, to some extent, the business economics, that is 99% of deal making.

And the rest, people may do it for their protection. I think too often they do it as a crutch, just to go through with the deal that they want to go through with anyway. And of course all the professionals know that, so believe me, they come back with the diligence, where they’re due or not. And we are not big fans of that. We have, I don’t know how many deals we’ve made over the years, but I cannot think of anything that traditional due diligence has had a thing to do with.

Charlie Munger [05:25:52] And no, we’ve had surprises on the favorable side a couple of times.

Warren Buffett [05:25:57] That is true. That is true. The kind of people that we’ve generally dealt with have usually told us the bad things first and good things after we made the deal. That, we made a deal with a fellow over in Rockford in 1969, Eugene Abegg, the Illinois National Bank and Trust Company. I made that deal on a couple of hours, and I mean, there was just, wasn’t any way that Gene was going to be hiding anything bad. For the next 10 years, when I went over, every time I go to lunch, he’d point out some building it down that we owned that wasn’t on the books, or some foundation we had that had money in it he hadn’t told me about. And he even gave me some bills, one of which I carry in my pocket, that he had still sitting around, with the, that were issued by the bank, that were our own money, which he never told me about yet, and we could cut them out like paper dolls. I mean, Gene was not a guy to show all his cards. And those are the kind of people we’ve generally dealt with, and I would certainly say that Melvyn and Shirley fit that description in spades.

We’re now at 3:30. It’s been a lot of fun this weekend. I’m glad you came, and I hope to see you next year. Thank you.