Berkshire Hathaway Annual Meeting 2007 Transcript

JBJimmy Buffett [00:00:00] There. So, with a great bit of pride and admiration, please welcome my junior partners, Warren and Charlie. Separated at birth. Separated at birth.

Warren Buffett [00:00:33] Thanks. Okay. I actually had asked Charlie to do that number that got a lot of people to thank, starting off with Jimmy’s been wonderful. We hit him out, came in last night kind of late, and we be sure it was a surprise, we stashed him away over at the Hilton, and I just want to say thanks to him. We both got the commercial gene, but unfortunately he got the singing gene. I got this voice you’re hearing.

We, the movie, as we mentioned, we get a lot of help from a lot of people. They all do it just for the fun of it. I particularly want to thank Andy Heyward of DIC, who did that cartoon. He’s done him now for a number of years. They come back here to get my voice recorded, and they get Bill’s voice and Charlie’s voice. They do it all themselves just to participate in the movie. Andy and I, I’m working with Andy on a cartoon series that’ll be out pretty soon, which we’re aiming toward younger people, to try and work a little financial education into a good time on Saturday morning kids, and we’ll see how that all comes out. But Andy’s wonderful to work with it, then my daughter Sue puts that movie together. It’s a lot of work and it’s a labor of love. She does a terrific job, and I just want to thank her for, as usual. Thank you.

And finally, I want to particularly thank the grand empresario of this whole affair is Kelly Broz. And Kelly puts this all together, the exhibition hall. I just turn it over to her, I forget about it, and Charlie and I just show up on Saturday morning. And Kelly is having her 50th birthday tomorrow. So, Kelly, would you stand up and take a bow, please? Yeah. Happy birthday to you, happy birthday to you, happy birthday, dear Kelly, happy birthday to you. For Kelly.

Now, today we’re going to follow the usual format. We have a number of microphones placed around this room, and we have overflow rooms. We will go from one station to the other, keep going until about noon or thereabouts, and then we’ll break for 30 or 45 minutes for lunch. We’ll come back here and we will then go until about 3:00, continuing the same routine. We don’t pre-screen the questions or the questioners. Whoever got in line first for the microphones. At 3:00, we will take a break for a few minutes. We will reconvene at 3:15 for the official business meeting.

The, we have an item of business. Normally we take care of business in about five minutes, reelect the directors, but today we have an item on the proxy relative to our holdings of PetroChina. We were not required to put that on the ballot. The SEC told us we didn’t have to it, but we really thought it would be a good idea to do it, so that all of you that are interested can hear about our reasoning and the reasoning of the people who disagree with us. We’ll give them plenty of time to tell you why they think we’re wrong, and we’ll respond. And I hope anybody that’s interested at all on the subject, I hope you stay right until 4:00, when we will adjourn, because Charlie and I are then going to greet perhaps as many as 600 shareholders who have come from outside of North America.

We have a record number. I think we have a 100 or so from Australia, and we have close to that number from South Africa, and we have shareholders from all over the world. So we feel if they come all the way to Omaha, Charlie and I at least like to shake their hands, and we have that from about 4:00 till 6:00. And then we’ll be doing some other things this evening. But that’s, that is the drill for this meeting.

We won’t elect the directors until the regular meeting, which commences at 3:15, but I would like to introduce them at this time, and we have a few special announcements in that connection. But we start off, this is Charlie. This fellow’s been making all the noise over here, that, he’s quite hyperkinetic, but, he say, I think he’s on his medicine. Charlie. Charlie, incidentally, can hear quite well, and I can see, so we work together. I have a little, I thought I was doing pretty well when I remembered his name, actually. But our combined ages are 159, for those who can’t work with big numbers. So, Charlie. And then we have, and if you’ll stand as I read your name: Howard Buffett, Bill Gates, Sandy Gottesman, Charlotte Guyman, a former Omahan, Don Keough, Tom Murphy, Ron Olson, and a lifetime Omaha, and Walter Scott.

Now, in addition, we have with us a director whose family has been involved with Berkshire Hathaway and its predecessor companies for over 100 years. His father played a very key role in Buffett Partnership obtaining control of Berkshire Hathaway in 1965. He was supportive in every possible way, as his father, and now his son. And Kim Chace has been on our board for a great number of years. He’s been a, just like his father before him, he’s been a wonderful director, he’s been a great friend. He will be leaving the board this year, but Kim is here with his family, and Kim and the family, if you would stand up, I’d like the shareholders to recognize you. And then, finally, we will have a new director get elected, and I’ve got the votes in my pocket, so there’s no question about it. And that is Sue Decker. And Sue, if you will, please stand.

Just one or two items of business, the, before we start the questioning. We did report our earnings yesterday after the close, and I can’t see the, are they up on the monitor? But it was a good first quarter. We had a good year last year. The insurance earnings are going to go down, there’s no question about that. How much they go to down depends on Mother Nature and a few other factors, but it’s been an extraordinary period for insurance. I mean, nothing bad happened last year, and the same was true in the first quarter. As you might expect, that favorable experience has caused people to lower prices in some areas quite dramatically.

And the nature of insurance, if you write a one-year contract, say, 6 months ago, you were still getting premium at the old rate. If you write a one-year policy, for another 6 months. So there’s a lag effect when things are getting either better or worse, and the lag effect from this point forward, we will, our insurance results will show the effect of lower prices. They will probably show, certainly we had the most benign hurricane season imaginable last year. We have less hurricane exposure that we’ve written this year, but nevertheless, as natural catastrophes occur, we will be paying out lots of money if and when they occur. It couldn’t get any better than it was last year from our standpoint.

So things in the insurance world, our insurance earnings, underwriting earnings, are bound to decrease. Now, it, what we really hope over time is more or less to break even on the underwriting of insurance. So when you see a significant profit like last year, or underwriting profit this year, just look at that as kind of the good side of what will later be an offset to it in the way of an underwriting loss. But if we break even in insurance on underwriting, we do very, very well, because we generate lots of float and we earn money on that float, and our float is in an all-time high. So this is really the frosting on the cake when we have an underwriting profit, and it’s not to be expected to necessarily, well, won’t occur year after year.

Over, ever since we’ve been in the insurance business, about half the years we’ve made money underwriting and half we haven’t. I think our mix of business now is such that we’ll even maybe do a touch better than that in the future, but we won’t do anything like what we did in the last year and in the first quarter of this year.

There’s one unusual item in our balance sheet that you should be aware of. At March 31st, first, you’ll see our receivables went up by about $7 billion. That was because of the Equitas transaction I described in the annual report. On March 31st, the deal basically was closed at the end of the quarter, so we had a receivable of $7 billion, and then a couple of days later we were given $7 billion of, so that receivable very quickly turned into liquid assets, cash, and we sold all the securities we got. So we had $7 billion transferred from receivables to cash very early in April.

Other than that, most of our non-insurance businesses did fine. The residential construction related businesses are getting hit, in some cases getting hit very hard, in some cases getting just, but still reflecting decreases in their business. And my guess is that that continues, perhaps for quite a while. So you will see lower earnings coming from the companies that are related to residential construction, such as Shaw, Johns Manville, Acme Brick, and that’s that group. But overall, compared to our, compared to the companies they compete with, our managers continue to do an absolutely sensational job. We have the greatest group of managers, and for that matter we got the greatest group of stockholders of any company I know of in the world. And Charlie and I are very grateful.

That, you saw in the movie Charlie and I going over there to give the fellows in Israel a lot of advice on how to run their operation better, and Charlie might want to, you might want to comment on ISCAR.

Charlie Munger [00:13:17] Well, that was a great experience, and ISCAR is a very great company. I have never seen anything as automated as that ISCAR operation. I think they regarded it as a disgrace if any human hand has to do anything.

Warren Buffett [00:13:34] We, we bought it without looking at it, but after we looked at it, we really liked it. For those of you who won’t be around for the 3:15, and I hope everybody’s interested sticks around for that, it’ll be an interesting discussion, but we do have a preliminary vote. And again, I can’t see the vote up there, that, Marc, is a vote up there? Me unable to hear anything there. But I assume it, the, basically, I can’t see it from here, but it’s about 2% are in favor of the resolution and about 98% oppose, and that was true of both the A and the B stock. So there really wasn’t any great difference in the way people voted on the proposal. And even if you leave out my personal vote, which was against, it’s about a 25 to 1 margin that voted in opposition to it. And anybody that wishes to vote in person or to change their vote, be sure and stay for the meeting at 3:15, and I think you’ll find the discussion very interesting if you care to stay.

Let’s, got a map here. Here we are. We will start, we will start with area one, which I think is over here, and there we are. And we have a questioner.

[00:15:09] Shareholder (Kevin Truet, Chicago, Illinois): Good morning, Mr. Buffett and Mr. Munger. My name is Kevin Truet from Chicago, Illinois. Thank you both for, again, hosting this Woodstock for capitalist for your shareholders and fellow capitalists. I have two questions. My first question is for both Mr. Buffett and Mr. Munger.

Warren Buffett [00:15:31] I, I don’t like to interrupt you, but we’re only letting everybody do one question, so pick whichever one you feel the strongest about getting an answer for, please.

[00:15:45] Shareholder (Kevin Truet, Chicago, Illinois): Okay. First, given the ocean of equity money that is out there, private equity money that is out there today chasing deals, and with the quality of the deal continually diminishing as the quantity of good deals continues to go down, and given the fact that these private equity funds are getting their equity portion of the money from the pension funds in college endowments and using very high levels of borrowed money from the banks, this has the look, feel and smell of a bubble that is about to burst, and is likely to end badly for many of the deal makers and the investors. What events, in your opinion, could cause this bubble to burst, and how do you think this is likely to all end?

Warren Buffett [00:16:48] Well, as you were reading off that list, we are competing with those people, so I started to cry as you explain the difficulty we have in finding things to buy. The nature of the private equity activity is such that it really isn’t a bubble that bursts, because if you’re running a large private equity fund and you lock up $20 billion and for five or longer years, and you buy businesses which are not priced daily, as a practical matter, the plug will not, even if you do a poor job, it’s going to take many years before the score is put up on the scoreboard. And it takes many years in most cases for people to get out of the private equity fund, even if they wish to earlier. So it does not, it’s not like a lot of leverage can lead to inm marketable securities or to something there. And the investors can’t leave, and a scorecard is lacking for a long time.

What will slow down the activity, or what could slow down the activity, is if yields on junk bonds became much higher than the yields on high-grade bonds. Right now the spread between yields on junk bonds and highgrade bonds is down to a very low level, and history has shown that periodically that spread widens quite dramatically. That will slow down the deals, but it won’t cause the investors to get their money back.

There’s one other aspect, of course, that of this frenzied activity, you might say, in private equity, is that if you have a $20 billion fund and you’re getting a 2% fee on it, or $400 million a year, which seems like chump change to those that are managing them but sounds like real money in all, if you’re getting $400 million a year from that $20 billion fund, you can’t start another fund with any, with a straight face, until you get that money pretty well invested. It’s very hard to go back to your investors and say, “Well, I’ve got $18 billion uninvested and I’d like you to start, give me money for another fund.” So there’s a great compulsion to invest very quickly, because it’s the way to get another fund and another, like another bunch of fees coming in.

And those are not competitors for businesses that Charlie and I are going to be particularly effective in competing with. I mean, they, we are going to own anything we buy forever. The math has to make sense to us. We’re not given to optimistic assumptions, and we don’t get paid based on activity. But I think it will be quite some time before, it’s likely to be quite some time before disillusionment sets in and the money quits flowing to these people that are promoting these. And whether they can continue to make deals will depend on whether people will give them lots of financing at what I would regard as quite low rates. Charlie?

Charlie Munger [00:20:10] Yeah, it can continue to go on a long time after you’re in a state of total revulsion.

Warren Buffett [00:20:18] The voice of optimism has spoken. We’ll go on to two. And I should have mentioned at the start, we really only take one question per person, because there are a lot of people waiting, and some people get very talented about rolling four or five into one, but we get, we’ve gotten more talented about unraveling them. So try to keep it to one. Area two, please.

[00:20:45] Shareholder (Norman Rentrop, Bonn, Germany): Greetings to all of you from the Midwest of Europe, from the city of Bonn in Germany. My name is Norman Rentrop. I’m a shareholder in Berkshire since 1992, as well as a shareholder in Wesco and Cologne Re. I’m a great admirer of both of you and want to thank you again for sharing your wisdom with us and for continuing to stay humble by managing Berkshire for the benefit of all of us without any big two and 20% fees, without stock option plans.

Warren Buffett [00:21:30] Be careful, you’re giving Charlie ideas here.

[00:21:37] Shareholder (Norman Rentrop, Bonn, Germany): And I want to applaud you in setting another great example by donating most of your wealth to charity, and for donating it in a very intelligent and selfless, that is not your name on the foundation, way.

Now, I am a little disturbed by remarks from another great investor, from John Templeton, who continues to say that you are narrow cited in not investing more overseas. You do focus on the US with relatively little so far internationally. You explained that it does not really matter whether a company is headquartered in the US or London or Munich or Paris, and that you would pay almost as high an amount for such companies as for similar US companies. You were audacious to invest your petty cash in South Korean stocks. Coca-Cola went truly global many years ago, whereas Hershey’s missed the opportunity to go global, leaving the chocolate globalization to Swiss based Lindt & Sprungli. Now, what would it take you to go truly global with Berkshire by investing internationally in a big way?

Warren Buffett [00:23:09] Well, that’s a very good question. And I would say that, I know I probably bought my first stock outside the United States at least 50 years ago. It is not that we have not looked in the marketable securities field beyond this country, and we made some investments there. It really wouldn’t make any difference to us if Coca-Cola was based in Amsterdam or Munich or Atlanta, as long as they had the business they had. So we’re very involved in international business.

But the hard fact is that in terms of buying entire businesses, we were simply not on the radar screen to the same extent, to close to the same extent, outside the United States as we came, became in the United States. When we started in the United States, really nobody knew anything about Berkshire either, so we had a selling job to do here. But we did not do the selling job, or I did not do the selling job, well abroad. And thanks to Eitan Wertheimer, he found us, and I think has contributed in a very significant way to getting us better known.

We have no bias against buying either marketable securities or entire businesses outside the United States. Eitan is even planning a little procedure to get us even better known, get Berkshire even better known outside the United States, and I’m going to participate in that with him within the next six or eight months. But it, we can be very validly criticized for not making a better effort to get on that radar screen. I think we’re, I think it’s improving. We own a number of non-US securities. We own stock in, just stock, marketable securities. We own two that are based in Germany, and we own others. It’s been pointed out we own, for example, 4% of POSCO, POSCO, which is based in South Korea. That’s over a billion dollar investment at current market. And we have, I can think of a half a dozen or so marketable securities investments outside the United States.

We don’t have to report those in the 13F, I believe I’m right on this, Marc. We don’t, we, so they don’t necessarily get picked up the same way as do our domestic investments by reports we make to the SEC. There’s a problem, for example, in Germany. We have to report our holdings in Germany if our holdings exceed 3%. Well, if you’re talking about a company with $10 billion of market value, that means at $300 million we have to tell the world what we’re buying, and telling the world what we’re buying is not the favorite activity of Charlie and myself. So, and it tends to screw up a future buying. So that 3% threshold, which exists in the UK, exists in Germany, is a real minus to us in terms of accumulating shares. But I can assure you that the entire world is definitely on our radar screen, and we hope to be on its. And Charlie?

Charlie Munger [00:26:41] Well, yes. I’d say that John Templeton made a fortune going into Japan very early and having the Japanese stocks go up to 30 or 40 times earnings, and that was a very admirable piece of investment. But, you know, we did all right in the same period.

Warren Buffett [00:27:03] Let’s go to station three, please.

[00:27:06] Shareholder (F. Natani, Hoboken, New Jersey): Hi. F. Natani. Lived most of my life in India, but now in Hoboken, New Jersey. Warren, first, thank you for replying to my letter. I had misspelled your name, and where I come from, if I did the same thing, the reply would have been more on, “Get my name correct before asking me a question.” So thank you once again.

Investment managers nowadays are benefit, benefiting a lot more at the expense of the investors and the profession. My question is, what to you and Charlie is, what do you think is the best structured term fees SL Fe that an manager should have that will give him an opportunity to maximize the time vated and money vated returns over the next few decades, and be fair to the profession, the invest, investors, and himself? Thank you.

Warren Buffett [00:28:35] Before I answer that, I think I should tell you a very short story. It’s a little embarrassing, but I got worried a few years ago about Charlie’s hearing. But I mean, the guy’s been my pal for 45 or 50 years, and I didn’t really want to confront him with this apparent evidence of old age. So I went to a doctor, and I said, “You know, I got this good pal. I don’t think he’s hearing so well. I really don’t want to confront him with it. So what do you suggest I do to check this out?” He said, “Well, stand across the room, talk in a normal tone of voice, see what happens.”

So the next time it was Charlie, I was, got across the room, and I said, “Charlie, I think we ought to buy General Motors at 30. Do you agree?” Not a flicker, not a flicker. I went halfway across the room. I said, “Charlie, I think we ought to buy General Waters at 30. Do you agree?” Nothing changes. Get right next to him, put my voice in his ear, said, “Charlie, I think we ought to buy a General Motors at 30. Do you agree?” Charlie said, “For the third time, yes.” So, Charlie, would you like to address that question?

Charlie Munger [00:30:05] Yes. The question addressed the problem of unfairness of executive compensation and the effects of that unfairness on investors. And now that you know the question, you can solve the problem.

Warren Buffett [00:30:23] Well, Charlie and I have had plenty to say about compensation, and there’s, and some of makes our stomach turn. I will say this, though. There are more problems with having the wrong manager than with having the wrong compensation system. I mean, it is enormously important who runs, you name the company, Procter & Gamble, Coca-Cola, American Express, and the, any compensation sins are generally of minor importance compared to the sin of having somebody that’s a mediocre running a huge company.

That said, Charlie and I think that compensation has, there’s a natural tendency, because of ratcheting, because of the publicity of what other people get, and because of the lack of intensity in the bargaining process. I mean, you read about labor contracts, you know, where impasses go on for weeks and where they negotiate till 3 in the morning, and, you know, both sides take their case to the press and everything. I ask you, when have you heard of the, of a comp committee, you know, working till 4 in the morning, declaring an impasse for a week, not being able to make a deal? It just doesn’t happen, because the CEO cares enormously how he or she is paid, and the, to the comp committee, and they’re doing perhaps a little better job now, but it’s basically play money.

And of course, as I pointed out in the past, I’ve been on 19 boards. They put me on one comp committee, and they regretted it subsequently. You know, they are looking for cocker spaniels with their tails wagging to put on comp committees, and, you know, they are not looking for Dobermans. And I try to pretend I’m a cocker spaniel just to get on one, but it doesn’t work.

But it is, it is not, there is not a parity of intensity in the bargaining process. One guy cares enormously and the others don’t. And as Charlie has pointed out in the past, what really drives a lot of this ratcheting impact is envy. It, I saw that on Wall Street, that you can talk about greed, but if you paid somebody $2 million, they might be quite happy until they found out the guy next to them made $2.1 million, and then they were miserable. And Charlie also has pointed out that envy, of the seven deadly sins, is probably the dumbest, because if you’re Envy as somebody, you feel terrible. You know, the other guy isn’t bothered at all. So all you get out of envy is this miserable grinding in your stomach and all that sort of thing. You know, compare that to some of the other sins, like gluttony, which we are about to engage in. You know, there’s some upside to gluttony. I’m told there’s upside to lust, but I’ll leave that to Charlie to explain. But envy, where the hell is the upside? You know.

But it does produce, it does produce this ratcheting effect in pay. The comp committee sits down, the human relations person comes in. The human relations person knows that what the CEO thinks of them is going to determine their future. And the human relations, the department recommends some comp consultant. The comp consultant knows that his recommendation to other firms is dependent on whether, what these people say about him. So under those circumstances, you know, can you imagine that it’s anything like a fair fight? It’s a joke. You know. Charlie?

Charlie Munger [00:34:15] Yes. The process has contributed to by a wonderful bunch of people called compensation consultants. And that reminds me of the old story where the mother asked the child why she told the census taker that the man of the house was in prison for embezzlement, and the child said, “I didn’t want to admit he was a compensation consultant.”

Warren Buffett [00:34:42] We’ll get around to the rest of you later on too. Don’t feel smug because we haven’t attacked your. I just had a note handed me. We do have about 27,000 people here. The overflow rooms are full, and we have a whole bunch in the exhibition hall as well. Let’s go to number four.

[00:35:04] Shareholder (Rob Vinall, UK): Yes. Good morning. I’m Rob Vinall. I’m from the UK, and I traveled from some Switzerland to be here to today. This is a quest just that Charlie will like. There’s a study by David Yermack, the companies with private jets underperform their peers by 4%. What is the yardstick that you use to judge whether people are good stewards of money management?

Warren Buffett [00:35:36] Did he direct that to you, Charlie?

Charlie Munger [00:35:40] Well, he referred to, yeah, private jets being a possible indication of executive excess.

Warren Buffett [00:35:48] I want to report that we’re solidly in favor of private jets. We been, pay for ourselves, Charlie. Charlie used to only, he traveled on the bus, and only then when they offered a senior citizens discount. But in recent years, I’ve shamed him into getting his own NetJets share.

Charlie Munger [00:36:14] I have my own two NetJets shares.

Warren Buffett [00:36:18] Actually, Berkshire is significantly better off in a number of its businesses, and including at the corporate level, because we use corporate jets. I don’t know which deals wouldn’t have been made, but I do know that I would have not, excuse me, I would not have had the same enthusiasm for traveling thousands of miles and to go after deal after deal and so on. And I see what it produces at our, a number of our other businesses. So it has been a, it has been a valuable business tool. It can be misused like anything else. I remember many, many years ago, we own stock in a public company, and the CEO stopped off in Omaha on the way to see me, and he explained that they use some grocery chain and Idaho or something to be sort of their test case on all new products. They would go out and visit it because they also had this lodge out there. And I mean, you can abuse any system, but properly used, I would say that corporate jets have been a real asset to Berkshire.

I would go back to this comp question just one second, too. I mean, comp is not rocket science. I mean, we have very simple systems that compensate those people whose pictures you saw during the movie. They’re terrific people. We compensate them based on things that are under their control and that we care about, and we don’t make it complicated, and we don’t pay them for things that are happening that they have nothing to do with. I mean, we talked last year about what you do in a commodity business like copper, oil. I mean, if oil goes from $30 to $60 a barrel, there’s no reason in the world why oil executives should get paid more for what’s going on. They didn’t get it to $60 a barrel. If they have low finding costs, which is under their control and which is important, I would pay like crazy for that, because the person who finds oil and develops reserves at $6 a barrel is worth a whole lot more than somebody that finds and develops them at $10 a barrel, assuming they’re similar quality reserves. That is the job that you hire the person for. But the price of oil, they’ve got nothing to do with them, and they hand them huge checks because oil goes up, or to cut them back because it goes down. If some, if oil went down and somebody had the lowest finding costs that was working for us, we would pay them like crazy. Charlie?

Charlie Munger [00:39:17] Yeah, well, I’d like to go back to that corporate jet thing. If the trappings of power are greatly abused, I think you would find it correlation that some of those companies would be disappointing to investors. And, you know, man is known for a long time that getting too enchanted with the trappings of power is counterproductive. The Roman Emperor that’s most remembered as presiding over a period of great felicity was Marcus Aurelius, who was totally against the trappings of power, even though he had them all. He had all the power. So I think it, all these things can be abused, and I think the best way to tackle the subject is to provide examples of contrary behavior.

Warren Buffett [00:40:14] Charlie, have a trap or two here at, go away. This is our idea of corporate benefits up here. Lots of, lots of fudge, lots of peanut brittle. I recommend the diet to everyone. Let’s go to number five.

[00:40:35] Shareholder (David Winters, Mountain Lakes, New Jersey): David, what, wh, David Winters, Mountain Lakes, New Jersey. Could you please explain what you believe the impact and hopefully benefit of a credit contraction would be on Berkshire Hathaway, and maybe higher interest rates as well?

Warren Buffett [00:40:57] Well, we do benefit, one other suffer. That doesn’t mean we enjoy their suffering, but times of chaos in financial markets, the situation that existed in junk bonds in 2002, the situation that existed in equities, you know, back in 1974. So I don’t think you’ll necessarily see a contraction in credit that, I think most authorities are very reluctant to really step on the brakes. You know, it’s too easy to figure out who did step on the brakes. But you could very well see some exogenous event that starts feeding on itself in markets. In fact, I think it’s much more prone to feed on itself in markets than in most periods in the past. If you really got a shock to the system, and that would result in a huge widening of credit spreads, cheaper equity prices, all kinds of things that actually are helpful to Berkshire, because we usually have at least some money around to do something at times like that. There will be periods like that.

If you go back 30 or 40 years, when credit contracted, it just really wasn’t available. Charlie and I went through a couple periods like that. We were trying to buy a bank in Chicago 40 or so years ago, and the only people that would lend it to us in the world, because the banks weren’t lending for acquisitions, we found some people over in Kuwait who said they lend it to us in dinars. And we thought, you know, it might be fine to borrow it, but when it came time to pay him back the dinars, they would probably be telling us what the dinar was worth, so we passed on that particular deal.

You had real credit contractions then. And of course the whole reason, not, I would say the major reason the Federal Reserve was established was the huge contractions in credit that were felt, particularly here in places like the Midwest, where they were dependent on correspondent banks in the larger cities. And when those banks had problems, these, the banks here got shut off, and we really needed a system that would not have that happen except by design. And I would say the Fed, by design, is probably not going to produce any credit crunch, credit crunches. Charlie?

Charlie Munger [00:43:32] Well, the last time we had that credit contraction, we made what, a quick three or four billion dollars, and we were acting with vigor. The whole investment world is more and more competitive. And if you talk about a real credit contraction, which gums up the whole civilization, no one would welcome that. And I would predict that if we ever had a really big credit contraction after a period like the one we’re in, with all this excess which is causing so much envy and resentment, that we would get legislation that most of us wouldn’t like.

Warren Buffett [00:44:16] There’s a book by Jonathan Alter that came out about a year ago that talks about the first 100 days after Roosevelt took over, and by the nature of the book, it tells about some of the days before that too. But if you want to get an example of, I mean, this country was close to the brink at that point, and basically Roosevelt could got anything he passed, he wanted, just as fast as they could write the bills there initially. And that was a good thing, you know, with banks closing and people dealing in script and that sort of thing. So nobody wants that to come back, and we’ve learned a lot more about that sort of thing since the Great Depression.

I don’t think you’ll see a, an orchestrated credit contraction. Now, you had, in 1998, in the fall, when Long-Term Capital Management got in trouble, you had a seize up of the credit markets. It wasn’t that, it wasn’t an orchestrated by the Fed type contraction. You simply had people panicked about even the most, even the safest of instruments in credit spreads doing things that they’d never done before. And that’s rather an interesting example, because that was not 100 years ago. It was less than 10 years ago. You had all kinds of people with high IQs in Wall Street, you had all kinds of people with cash available, and you had some really, really extraordinary things happen in credit markets, simply because people panicked and they felt other people were going to panic, and you get these second and third degree type reactions in markets. We will see that sort of thing again. It won’t be the same, but, you know, as Mark Twain said, you know, history doesn’t repeat itself, but it rhymes. And we will have something that rhymes with 1998. Number six.

[00:46:09] Shareholder (Andrew Paen, Massachusetts): Hello. My name is Andrew Paen, a former Michigander, now from Wuber, Massachusetts. My question is for Charlie, the Warren, please add your thoughts as well. Charlie, you were quoted in Poor Charlie’s Almanack as saying, quote, “Ben Franklin was a very good ambassador, and whatever was wrong with him from John Adams’s point of view probably helped him with the French,” end quote. If you are willing, I am curious to hear your additional thoughts regarding John Adams and his wife, Abigail Adams.

Charlie Munger [00:47:04] Well, of course, they were wonderful people, both of them, and…

Warren Buffett [00:47:12] Did you know them personally, Charlie?

Charlie Munger [00:47:16] No. But if you wanted to have a really jolly evening, I would have take Franklin every time. And the French loved Franklin. I think I remind many people too much of John Adams and too little of Ben Franklin.

Warren Buffett [00:47:38] He does pretty well in respect to Ben Franklin too. Let’s go to number seven.

[00:47:46] Shareholder (Takashi Ito, Japan): My name is Takashi Ito from Japan. In addition to the global excess liquidity, corporate profits are very high compared to the share of labor. Does that make it extra challenging for you to find investment opportunities? Thank you.

Warren Buffett [00:48:06] Yes. Corporate profits in the United States are, except for just a very few years of record in terms of GDP. It’s, I’ve been amazed that after being in a range between 4 and 6% of GDP, they have jumped upward, and you would not think this would be sustainable over time. Excuse me just one second. Charlie want to talk for a second. You’ve just heard him on the subject.

But corporate profits, when they get up to eight or percent plus of GDP, you know, that is very high, and so far it has caused no reaction. One reaction could be higher corporate taxes. You have lots and lots of businesses in this country earning 20 or 25% on tangible equity in a world where long-term bond rates are 4 and 3/4%, government bond rates. That’s extraordinary. If you’d read an economics book 40 years ago and it talked about that kind of a situation persisting, well, you wouldn’t have found a book like that. I mean, that does not make sense under pure economic theory, but it’s been occurring for some time, and as a matter of fact, it’s gotten more extreme.

I, corporate profits continue to rise as a percentage of GDP, that means somebody else’s share of GDP is going down, and you’re quite correct that the labor component of GDP has actually fallen fairly significantly. Whether that becomes a political issue, maybe in the next campaign, whether it becomes something the Congress does something about, the Congress has the power to change that ratio very quickly. Corporate tax rates not that long ago were 52%, and now they’re 35%, and a whole lot of companies get by with paying 20% or less. So I would say that at the moment Corporate America is kind of living in the best of all worlds, and history is shown that those conditions don’t persist indefinitely. What brings it to an end, when it happens, I don’t know, but I would not expect corporate profits to be eight and a fraction percent of GDP on average in the future. Charlie?

Charlie Munger [00:50:37] Yeah, of course a lot of the profits are not in the manufacturing sector or the retailing sector either. A lot of them are in this financial sector, and so we’ve had a huge flow of profit to banks and investment banks and investment management groups of all kinds, including various kinds of private equity. And that has, I think, no precedent. I don’t think it’s ever been as extreme as it is now. Do you agree with that?

Warren Buffett [00:51:15] Yeah. And Charlie and I would have said 20 years ago, and we’ve done things in banking from time to time, including owning a bank, but if you’d said to us, in a world of 4 and 3/4% long-term governments, will one major bank after another be earning more than 20% on tangible equity, dealing in what is basically a commodity, money, we would have said that that condition just wouldn’t persist. Now, part of that is because the banks are geared up more. So if you earn one and a half percent on deposits, you know, and you have, or one and a half percent on assets, and you have assets of 15 times equity, you’re going to be earning 22.5% on equity. And by gearing up more, it does improve the return on equity. But you still would think that would be self-neutralizing. You think after one guy did it, another guy would do, did it, would do it, and instead of earning one and a half percent on assets, you’d earn, you know, 9/10 of a percent or 1% on assets. But it hasn’t happened. That’s gone on for a long time.

And, you know, we are, we, we living at, I’d have to look at a chart on it, but there may have been a year or two post World War II, but I don’t think that, I would bet there haven’t been more than two or three years in the last 75 when corporate profits as a percentage of GDP have been this high.

Charlie Munger [00:52:48] Some of this has come from consumer credit, which I think has been pushed to extremes that we’ve never before seen in the history of this country. Some other countries that pushed consumer credit very hard had enormous collapses. Korea had one, for instance, that caused chaos for what, two or three years, maybe longer. So I don’t think this is a time to just swing for the fences.

Warren Buffett [00:53:15] And that chaos in 1997 and 1998, when the IMF stepped in, I mean, it was bad in Korea for a while. It produced some of the most ridiculously low stock prices that I’ve ever seen in my life. In fact, I mean, you could go back to 1932 in this country, and you wouldn’t have seen things any cheaper. And in the meantime, the companies rebuilt their balance sheets and their earning power. So things do turn around in financial markets. You will, if you’re young enough, you will see, you will see everything and then some.

I mentioned in the annual report, in looking for an investment manager to succeed me, that we care enormously about finding somebody who’s not all, not cognizant of everything risky that’s already happened, but that also can envision things that have not yet been experienced. That’s our job in the insurance business, and it’s our job in the investment business. And there are a lot of people that just don’t seem to, they’re not, they’re very smart, but they just, they’re just not wired to think about troubles that they haven’t actually witnessed before. But, you know, that’s the problem Noah had. You know, the first 40 days, it was tough sledding for Noah. He got revenge eventually. Let’s go to number eight.

[00:54:43] Shareholder (Brian Vok, Fremont, Nebraska): Hello. My name is Brian Vok, Fremont, Nebraska. With the growing number of failed to deliver trades happening in our stock markets, including investors’ cash accounts, Roth IRA and other retirement accounts, it seems like the problem is getting worse, with some companies being on the Regulation SHO list for hundreds of days. What can be done to make Wall Street deliver stock that they have sold but never delivered? Thank you.

Warren Buffett [00:55:18] Yeah, so-called failed to deliver and naked shorting, I think, is the question. I don’t know exact, I’ve never been in a position where I’ve asked a broker from whom I bought stock to give me the certificate and had them decline it for any period of time. I would think that you might have some action against them. But I’ve never, I do not see the problem at all with people shorting stocks. I mean, I would welcome people shorting Berkshire Hathaway. I mean, it, if you own stock and they need to borrow from you, you can get some extra income from your stock, and the one sure buyer of your stock eventually is somebody who shorted it. I mean, that guy’s going to buy it someday.

And I have no, I have no problem with shorts. If there’s some kind of a game that’s played, and I’ve read about it, I’ve never seen it happen to anything that we’ve owned. Like I say, if anybody wants the naked short Berkshire Hathaway, they can do it till the cows come home, and we’ll be, we’ll be happy to him. We’ll have a special meeting for him. But, and I would say this, the shorts generally have the tougher time of it in this world. I mean, there are more people bulling stocks for phony reasons than there are bearing stocks for phony reasons. So I do not see shorts as any great threat to the world. If enough people shorted Berkshire stock, they would have to borrow it, and they would pay you to borrow your stock, and that’s just, that’s found money. We did that on USG. When USG got hammered after they went into bankruptcy, or maybe just before, one large brokerage firm came to us and they wanted us to lend them millions of shares, and they paid us a lot of money, and we happily lent them the stock. We wish borrowed more. In fact, we insisted that they borrowed for a given length of time, just so that we could collect a large premium. And I don’t know how many, I’d have to look it up, but you know, I don’t know whether it’s in the 100 thousands or maybe low millions, but we were better off, and they didn’t do too well shorting USG at $4 a share either. But it was immaterial to us.

So I do not regard, I do not regard shorts as, it’s a tough way to make a living. It’s very easy to spot phony stocks and promoted stocks, but it’s very hard to tell when that’ll turn around, and somebody that’s promoted a stock to five times what it’s worth may very well promote it to 10 times what it’s worth, and if you’re short, that can get very painful. Charlie, do you have any thoughts on shorting?

Charlie Munger [00:58:18] Well, not on shorting, but those delays in delivering sometimes reflect a tremendous, a slop in the clearance process. And it is not good for a civilization to have a huge slop in the clearance processes for its security trades. That would be sort of like having a lot of slop in the management of your atomic power plants. It’s not a good idea to have slop that causes a lot of financial exposure that people are ignoring.

Warren Buffett [00:58:51] Charlie, reach back into your law practice. If I buy a thousand shares of General Motors, and my broker doesn’t deliver it to me, and I ask him to deliver, and he doesn’t deliver to me after a week or two weeks or three weeks, what’s the situation?

Charlie Munger [00:59:10] Well, if you’re a private customer, you may wait a while. And the, a lot of the other trades, clearance systems do cause people to put up collateral and so on. But a lot of, take derivative trading. There’s a lot of slop and derivative trading, and the clearance problem would be awful if a lot of people wanted to do something at once.

Warren Buffett [00:59:39] But if I demand delivery after three weeks, can I bring, can I walk into court and say, “I want my stock, I’ve given you the money”?

Charlie Munger [00:59:51] I don’t think there’s any court that can hand you your stocking certificate just because you want it. No. If the clearance system is failing you, I, you can scream a lot, and you may have some ultimate remedy, but there’s…

Warren Buffett [01:00:12] I’ll get somebody else to represent me. Number nine.

[01:00:16] Shareholder (Joan Fenberg, Hanover, Germany): Hello. Hello. My name is Joan Fenberg from Hanover, Germany. Do you think gambling companies will have a great future? Thank you.

Warren Buffett [01:00:28] What kind of companies?

[01:00:30] Shareholder (Joan Fenberg, Hanover, Germany): Gambling companies.

Warren Buffett [01:00:31] Gambling companies. Gambling companies will have a terrific future if they’re legal. That, you know, which ones or anything, I don’t know anything about that, but desire of people to gamble, and they gamble in stocks, incidentally, too. Day trading, I would say, in very often was, came very close to gambling as defined. But people, people like to gamble. You know, I mean, it’s a, if the Super Bowl is on, or even, well, better yet, if a terribly boring football game is on, but you don’t have anything to do, and you’re sitting there with somebody else, you’re probably going to enjoy the game more if you bet a few bucks on it one way or the other. As you know, I mean, we ensure hurricanes, so I watch the Weather Channel. But that’s a, it can be exciting.

But people, the human propensity to gamble is huge. Now, when it was legalized only in pretty much in Nevada, you had to go to some distance or break some laws to do any serious gambling. But as the states learned to, you know, what a great source of revenue it was, they gradually made it easier and easier and easier for people to gamble. And believe me, the easier it’s made, the more people will gamble. I mean, when I was, my children are here, and 40 years ago I bought a slot machine and I put it up on our third floor, and I could give my kids any allowance they wanted, as long as it was in dimes. I mean, I had it all back by nightfall. I thought, I thought it would be a good lesson for him. And now, they weren’t going to Las Vegas to do it, but believe me, when it was on the third floor, they could find it, you know. And my payout ratio was terrible too, but that’s the kind of father I was.

The, but gambling, you know, people are always going to want to do it. And for that reason, I particularly think that access, you know, in terms of friendly gambling or anything like that, I’m not a prude about it, but I do think that to quite an extent gambling is a tax on ignorance. I mean, if you want to, if you want to tax the ignorant people who will do things with the odds against them, you know, you just put it in, and guys like me don’t have to pay taxes. And I really don’t, I find that, I find it kind of socially revolting when a govern, a government praise on the weaknesses of its citizenry rather than acts to serve them. And believe me, when a government six lot, yeah, know, I, when a government makes it easy for people to take their Social Security checks and start pulling handles, or participating in lotteries or whatever it may be, it’s a pretty cynical act. It works. It’s a pretty cynical act. And it, it relieves taxes on those, you know, who don’t fall for those, and, or who don’t, who aren’t dreaming about having a car instead of actually having a car, dreaming about a color TV instead of having one. So it’s not government at its best, and I think other things flow from that over time too. Charlie?

Charlie Munger [01:04:10] Yeah, I would argue that the gambling casinos use clever psychological tricks to cause people to hurt themselves. There is undoubtedly a lot of harmless amusement in the casino, but there’s also a lot of grievous injury that is deliberately caused by the casinos. It’s a dirty business, and I don’t think you’ll find a casino soon in Berkshire Hathaway.

Warren Buffett [01:04:43] Number 10, please.

[01:04:44] Shareholder (Thomas Keh, San Francisco): Good morning. I’m Thomas Keh from San Francisco. I’m 17 years old, and this is my 10th consecutive annual meeting.

Warren Buffett [01:04:53] It must be a PhD by now, at least.

[01:04:58] Shareholder (Thomas Keh, San Francisco): Mr. Buffett, Mr. Munger, I’m curious about what you think is the best way to become a better investor. Should I get an MBA, get more work experience, read more Charlie Munger Almanacks, or merely is a genetic and out of my hands?

Warren Buffett [01:05:19] Well, I think you should read everything you can. I can tell you, in my own case, I think by the time I was, I know by the time I was 10, I’d read every book in the Omaha Public Library that had anything to do with investing, and many of them I’d read twice. So I don’t think there’s anything like reading. And not just as limited to investing at all, but you just got to fill up your mind with various competing thoughts and sort them out as to what really makes sense over time. And then once you’ve done a lot of that, I think you have to jump in the water, because investing on paper and doing, you know, and investing with real money, you know, is like the difference between reading a romance novel and doing something else. So I would, I, there is nothing like actually having a little experience in investing, and you soon find out whether you like, if you like it. If it turns you on, you know, you’re probably going to do well on it.

But, and the earlier you start, the better, in terms of reading. But, you know, I read a book at age 19 that formed my framework for thinking about investments ever since. I mean, what I am doing today at 76 is running things through the same thought pattern that I got from a book I read when I was 19. And I read all the other books too, but if you, and you have to read a lot of them to know which ones really do jump out at you and which ideas jump out at you over time. So I would say that, read, and then on a small scale, in a way that can’t hurt you financially, do some of it yourself. Charlie?

Charlie Munger [01:07:17] Well, Sandy Gottesman, who is a Berkshire director, runs a large and successful investment operation, and you can tell what he thinks causes people to learn to be good investors by noticing his employment practices. When a young man comes to Sandy, he asks a very simple question, no matter how young the man is. He says, “What do you own and why do you own it?” And if you haven’t been interested enough in the subject to have that involvement already, why, he’d rather you go somewhere else.

Warren Buffett [01:07:54] Yeah, it’s very, that whole idea that you own a business, you know, is vital to the investment process. And if you were going to buy a farm, you’d say, “I’m buying this 160 acre farm because I expect that the farm will produce 120 bushels an acre of corn or 45 bushels an acre of soybeans, and I can buy the fer,” you know, you go through the whole process. It be, it’d be a quantitative decision, and it would be based on pretty solid stuff. Would not be based on, you know, what you’re on television that day. It would not be based on, you know, what your neighbor said to you, or anything of the sort. It’s the same thing with stocks.

I used to always recommend my students that they take a yellow pad like this, and if they’re buying 100 shares of General Motors at 30, and General Motors has, whatever it has out, 600 million shares or a little less, that they say, “I’m going to buy the General Motors Company for $18 billion, and here’s why.” And if they can’t write a good essay on that subject, they’ve got no business buying 100 shares or 10 shares or one share at $30 per share, because they are not subjecting it to business tests. And to get in the habit of thinking that way, you know, Sandy would have followed it up with the questions, based on how you answered the first two questions, that made you defend exactly why you thought that business was cheap at the price at which you were buying it. And any other answer, you’d flunk. Number 11.

[01:09:28] Shareholder (Mark Ranov, Melbourne, Australia): Mr. Buffett and Mr. Munger, I’m Mark Ranov from Melbourne, Australia. I just wanted to ask you, how do you judge the right margin of safety to use when investing in various common stocks? For example, in a dominant, longstanding, stable business, would you demand a 10% margin of safety, and if so, how would you increase this in a weaker business? Thank you.

Warren Buffett [01:10:08] We favor the businesses where we really think we know the answer. And therefore, if a business gets to the point where we think the industry in which it operates, the competitive position, or anything, is so chancy that we can’t really come up with a figure, we don’t really try to compensate for that sort of thing by having some extra large margin of safety. We really go on, try to go on to something that we understand better. So if we buy something like See’s Candy as a business, or Coca-Cola as a stock, we don’t think we need a huge margin of safety, because we don’t think we’re going to be wrong about our assumptions in any material way.

What we really want to do is buy a business that’s a great business, which means a business is going to earn a high return on capital employed for a very long period of time, and where we think the management will treat us right. And we don’t have to mark those down a lot. When we find those factors, we’d love to find them when they’re selling at 40 cents on the dollar, but we will buy those at much closer to a dollar on the dollar. We don’t like to pay a dollar on the dollar, but we’ll pay something close. And if we really get to something, you know, when we see a great business, it’s like if you see somebody walk in the door and you don’t know whether they weigh 300 lb or 325 lbs, you still know they’re fat, right? You know. And so if we see something where we know it’s fat financially, we don’t worry about being precise. And if we can come in, in that particular example of the equivalent of 270 pounds, will feel good.

But if we find, if we find something where the competitive aspects are, it’s just the nature of the business that you really can’t see out five or 10 or 20 years, because that’s what investing is, is seeing out. You don’t get paid for what’s already happened, you only get paid for what’s going to happen in the future. The past is only useful to you in the extent to which it gives you insights into the future, and sometimes the past doesn’t give you any insights into the future. And in other cases, like the stable business that you postulated, it probably does give you a pretty good guideline as of what’s going to happen in the future, and you don’t need a huge margin of safety. You should have something that you always should feel you’re getting a little more than what it’s worth.

And there are times when we’ve been able to buy wonderful businesses at a quarter of what they’re worth, but we haven’t seen those time, well, we saw it in Korea here recently, but you don’t see those sort of things very often. And does that mean you should sit around and hope they come back for 10, or, you know, wait 10 or 15 years? That’s not the way we do it. If we can buy good businesses at a reasonable valuation, we’re going to keep doing it. Charlie?

Charlie Munger [01:13:13] Yeah, you’re, that margin of safety concept boils down to getting more value than you’re paying, and that value can exist in a lot of different forms. If you’re paid four to one on something that’s an even money proposition, well, that’s a value proposition too. It’s high school algebra, and people who don’t know how to use high school algebra should take up some other activity.

Warren Buffett [01:13:47] Number 12.

[01:13:47] Shareholder (Mike Klein, Salinas, California): Morning. Good morning. Morning. My name is Mike Klein, and I’m a general surgeon from Salinas, California. Given your resources and experience in underwriting insurance, do you have any thoughts of venturing into, or helping to solve our health care mess? Time is right for a new approach, with Burk clarity brought to the formula. Let’s acknowledge the stakes are huge, with implication for our economy and our future as a country.

Charlie Munger [01:14:29] Let me try that one. It’s too tough. I would, we can’t, Warren and I can’t solve that one.

Warren Buffett [01:14:36] Yeah, we can’t solve that one. We try to look for easy problems, because those are the ones we find we have the answers for, and you can do that in investments. We don’t really try tough things. Now, sometimes life hands you a problem, not in the financial area in our case usually, but it’ll hand you a problem that is very tough and that you have to wrestle with. But we don’t go around looking for tough problems. I would say this, we do very, very little in health insurance. You know, if we were to have, if we were looking for a solution through the private sector, we would be looking for something with very, very low distribution costs. I mean, you do not want a lot of the revenue soaked up in frictional cost between the benefits paid and the premiums received. I don’t know how to do that, and I haven’t seen anybody else that’s very good at doing it. And you can say, if you’re paying close to 15% of GDP for health costs, you know, somebody ought to be able to figure out something. But I haven’t, I haven’t heard it. Maybe we’ll hear it in the upcoming political campaign. But Charlie’s view reflects mine at the present.

Now we’re going to go to the Grand Ballroom. We have these two overflow rooms that are full, or more or less full, and Grand Ballroom is number 13. Would they come in, please?

[01:16:08] Shareholder (Fel McCall, Connecticut): This is Fel McCall from Connecticut. I wondered if you could comment on a subject I don’t think you like to talk about very much, which is intrinsic value, and the evolution over the past 10 or 12 years of going to, off and on, but giving us in investments and then giving us the operating income, and suggesting that might be a good guide to us. I find it extremely helpful. I’m not sure other people do. When looking out the 20 years you’re talking about, looking ahead on both those two parts, any comments you might have, I surely appreciate.

Warren Buffett [01:16:49] Yeah. Well, the intrinsic value of Berkshire, like any other business, based on the future amount of cash that can be expected to be delivered by the business between now and Judgment Day, discounted back at the proper rate. Now, that’s pretty nebulous. Another way of looking at it is to try and figure out the value of the businesses we own presently, and we try to give you the information that will enable you to make a reasonably close estimate of that. We own lots of marketable securities. It’s probably safe to say that they are worth more or less what they are carried for. And then we own a number of operating businesses, and we try to give you the figures on those businesses that are the figures that we use in making our own judgments about the value of those businesses.

Now, that tells you what we have today and more or less what it’s worth. But since Berkshire retains all of its earnings, it becomes very important to evaluate what will be done with those earnings over time. I mean, it is not only a question what the present businesses are worth, it’s a judgment on the efficiency or the effectiveness with which retained earnings will be used. If you had looked at the intrinsic value of Berkshire in 1965, we had a textile business that was probably worth about $12 a share, but that was not the only part of the equation, because we intended to use any cash generated to try and buy into better businesses than we had. And we were fortunate enough to be able to buy in the insurance business in 1967 and build on that. So it was not only a combination of the business we had, but the skill with which retained earnings would be used, that determined what the present value actually should have been at Berkshire going back that far.

It’s the same situation today. We will put to work billions and billions of dollars this year, next year, the year after. If we put that to work effectively, each dollar has a greater present value than a dollar has and simply in cash or distributed. If we do it ineffectively, it has value of something less. The businesses today, you know, we have, whatever the figure is in the annual report, roughly $80,000 in marketable securities. If our insurance business breaks even, that $80,000 is free to us in terms of using it. And we have a group of operating businesses, and we show their earnings in the report, and we’re going to try and add to those, and they’ll try to add to their earnings. But if Charlie and I were each right now to write down on a piece of paper what we think the intrinsic value of Berkshire is, our figures would not be the same. They’d be reasonably close. And I think with that, I’ll turn it over to Charlie.

Charlie Munger [01:20:03] Yeah. What’s hard to judge at Berkshire is the likelihood that you’ll have anything like the past to look forward to in the future. Berkshire has gotten very extreme in terms of investment results. In fact, it’s gotten so extreme that it’s hard to think of another similar precedent in the history of the world. And the balance sheet is gross, considering the small beginnings of the place. Now, what on Earth has caused this extreme record to go on for such a very long time? I would argue that the young man who was reading everything he could read when he was 10 years old became a learning machine, and he got a lot of power early, and then he got a very long run when he kept learning. If Warren had not been learning all the while, I’m telling you, having watched the process closely, the record would be a pale shadow of what it is. And Warren has improved since he passed the retirement age of man. In other words, in this field at least, you can improve when you’re old. Now, most people don’t even try and create that kind of a record. They pass power from one 65-year-old to 59-year-old, and then do it over and over again. But you get an enormous advantage from practice in this field. And so what happened accidentally in the case of Warren has helped you shareholders greatly, because you had this long run with power extremely concentrated, and with the man holding the power being a ferocious learner. Our system ought to be more copied than it is. This idea of passing the power from one old codger to another in a settled way is not necessarily the right system at all.

Warren Buffett [01:22:13] We have a very strong culture now of rationality, of being owner-oriented, that will go on long after I’m not around. And we have the talent on the operating side in place to do a lot of wonderful things over time. We will need in capital allocation to keep doing intelligent things. We won’t get to do brilliant things, because you don’t get to do brilliant things with the kind of sums we’re talking about. Maybe once in a blue moon something, you know, you’ll get a chance. But we will need somebody that never does a… basically doesn’t do any dumb things and occasionally does something that’s… it’s reasonably good. That can be done, and we have… we’re on that road all the already. It is not… fitting into this organization as a investment officer or a capital allocator, you’re getting in the right vehicle. It has the right standards. It will reject ideas that really are irrational. I’ve been on a lot of boards. Charlie’s been on a lot of boards. You would be amazed at the number of things that are responding to animal spirits rather than the rationality that take place. And we have our animal spirits, but we devote them to other areas. Let’s go on to number 14. That’s in the junior ballroom.

[01:23:49] Shareholder (Whitney Tilson, New York): Yes. Hi, Mr. Buffett, Mr. Munger. This is Whitney Tilson, a shareholder from New York. For many years, both of you have been warning about the dangers of derivatives, at one point calling them financial weapons of mass destruction. Yet every year tens of trillions of dollars of derivatives are bought and sold. It just seems to be getting bigger and bigger, and almost certainly improperly accounted for. And so I was wondering if you could comment, in specifically, if you have any thoughts on how much longer this might go on. Do you see anything imminent that could derail this ever-inflating bubble? What might trigger it? And who should be doing what to try and mitigate this looming danger?

Warren Buffett [01:24:30] Well, we’ve tried to do a little to mitigate it ourselves by talking about it. But the… you’re right that… and it isn’t the derivative itself. I mean, there’s nothing evil about a derivative instrument. As I mentioned, we have 60-some of them at Berkshire, and on Monday I will go over the directors, with the directors I’ll go over all 60-some, and believe me, we’ll make money out of those particular instruments. But the usage of them on an expanding basis, more and more imaginative ways of using them, introduces essentially more and more leverage into the system. And it’s an invisible, or largely invisible, sort of leverage.

If you go back to the 1920s, after the crash the United States government held hearings. They decided that leverage, margin in those days as they call leverage, contributed to perhaps the crash itself, and certainly to the extent of the crash. And it was like pouring gasoline on a fire, was when people’s holdings got tripped, you know, when stocks went down 10%, people had to sell, and another 10%, more people had to sell, and so on. So leverage was regarded as dangerous, and the federal… and the United States government empowered the Federal Reserve to regulate margin requirements, regulate leverage. And that was taken very seriously, and for decades it was a source of real attention. If you went to a bank and tried to borrow money on a stock, they may just sign certain papers as to that you weren’t in violation of the margin requirements, and they policed it, and it was taken quite seriously. When the Fed increased or decreased margin requirements, it was a signal of how they felt about the level of speculation.

Well, the introduction of derivatives and index future, all that sort of thing, has just totally made any regulation of margin requirements a joke. They still exist, and you know, it’s an anachronism. So I believe, I think Charlie probably agrees with me, that we may not know where exactly the danger begins and where and at what point it becomes a super danger and so on. We certainly don’t know what will end it precisely. We don’t know when it will end precisely. But we probably, at least I believe that it will go on and increase to the point where at some point there’ll be some very pleasant things happen in markets because of it.

You saw one example of what can happen under forced sales back in October 19th, 1987, when you had so-called portfolio insurance. Well, now, portfolio insurance, and you ought to go back and read the literature for the couple years preceding that. I mean, this was something that came out of academia, and it was regarded as a great advance in financial theories and everything. It was a joke. It was a bunch of stop-loss orders, which, you know, go back 150 years or something, except that they were done automatically and in large scale by institutions, and they were merchandised. People paid a lot of money to people to teach them how to put in a stop-loss order. And what happened, of course, was that if you have a whole series of stop-loss orders by very big institutions, you are pouring gasoline on fire. And when October 19th came along, you had a 22% shrink in the value of American business, caused essentially by a Doomsday Machine. A dead hand was selling as each level got hit. And three weeks earlier, you know, people were proclaiming the beauty of this.

Well, that is nothing compared… it’s… it was a formal arrangement to have these, this dynamic hedging or portfolio insurance, sell things. But you have the same thing existing when you have fund operators operating with billions, and in aggregate trillions, of dollars, leveraged, who will respond to the same stimulus. They have what is… they have what we would call a crowded trade, but they don’t know it. It’s not a formal crowded trade. It’s just that they’re all ready to sell if a certain given signal or certain given activity occurs. And when you get that coupled with extreme leverage, which derivatives allow, you will someday get a very, very chaotic situation. I have no idea when. I have no idea what the exogenous factor… I didn’t know that shooting some archduke, you know, would start World War I. And I have no idea what will cause this kind of a thing. But it’ll happen. Charlie?

Charlie Munger [01:29:40] Yeah, and of course, the accounting being deficient enormously contributes to the risks. If you get paid enormous bonuses based on reporting profits that don’t exist, you’re going to keep doing whatever causes those phony profits to keep appearing on the books. And what makes that so difficult is that most of the accounting profession doesn’t even recognize how stupidly it is behaving. And one of the people in charge of accounting standards said to me, “Well, this is better, this derivative accounting, because it’s mark-to-market, and don’t we want current information?” And I said, “Yes, but if you marked a model, and you create the models, and your accountants trust your models, and you can just report whatever profit you want as long as you keep expanding the positions bigger and bigger and bigger, the way human nature is, that will cause terrible results and terrible behavior.” And this person said to me, “Well, you just don’t understand accounting.”

Warren Buffett [01:30:56] Yeah. Four years ago, or whenever it was, when we started to liquidate Gen Re’s portfolio, we had it, we had reserves set up for in the hundreds of millions, with and all sorts of things. And our auditor, and I emphasize any other of the Big Four auditors, absolutely would have attested to the fact that our stuff was marked to market. You know, I just wish I’d sold the portfolio to the auditors that day. Maybe $400 million better off. So it’s a real problem.

Now, there’s one thing that’s really quite interesting to me. You know, if I owe you on my dry cleaning bill or something $15, and they’re auditing the dry cleaners, they check with me and they find out that I owe you $15, and it’s all fine. If they’re auditing me, they find out that I owe the dry cleaner 15 bucks. There are only four big auditing firms, you know, basically in this country. And I will… and so in many cases, if they’re auditing my side of the derivative transaction, you know, what I’m valuing it at, they… the same firm may often be valuing or attesting to the value of the mark by the person on the other side of the contract. I will guarantee you that if you add up the marks on both sides, they don’t equate out to zero.

We have 60-some contracts, you know, and I will bet that people are valuing them differently on the other side than we value them themselves. And it won’t be to the disadvantage of the trader on the other side. I don’t get paid based on how ours are valued, so I’ve got no reason to want to gain the system. But there are people out on the other side that do have reasons to gain the system. So if I’m valuing some contract at plus $1 million for Berkshire, that contract on the other side is just one piece of paper, should be valued at a minus $1 million by somebody else. But I think you probably have cases, and this is… I’m not talking about our auditors, I’m talking about all four the firms, but they have many cases where they are attesting to values that of the exact same piece of paper where the numbers are widely different on both sides. Do you have any thoughts on that, Charlie?

Charlie Munger [01:33:17] Well, I… as sure as God made little green apples, this is going to cause a lot of trouble in due course. As long as it keeps expanding and ballooning and so on, and the convulsions are minor, it can just go on and on. But eventually there will be a big denouement.

Warren Buffett [01:33:39] Let’s go back to number 1.

[01:33:41] Shareholder (Stanley Ku, Hong Kong): Hi. I’m Stanley Ku from Hong Kong. My question is about the proliferation of short-term mindset to investing, as more money is being placed under the absolute return mandate. These managers, as you just said, respond to the same response, and crowded trade issues. So with credit spread on… I should say risk premium on various products declining across the board, and correlation across markets increasing, can we read into it and say whether it’s healthy or not healthy for the economy or the market? And can we arguably say the portfolio insurance dynamics is already in place today?

Warren Buffett [01:34:36] Well, I think you put your finger on it, and I… you know, we do think it’s unhealthy. Obviously, if you take… there’s no way I’m precisely measuring this, but I’m quite certain I’m right. If you take the degree to which, say, B… either bonds or stocks, the percentage of them that are held by people who could change their minds tomorrow morning based on a given stimulus, whether it be something the Fed does or whether it be some kind of an accident in financial markets, the percentage is far higher. There is an electronic herd of people around the world managing huge amounts of money who think that a decision on everything in their portfolio should be made basically daily or hourly or by the minute.

And that has increased turnover on the F… on the New York Stock Exchange, and I don’t know the exact figures, but I think it was down around the 15 or 20% range 40 years ago, and it’s increased it to 100%, I believe, plus now. So, and certainly in the bond market, the turnover of bond has increased dramatically. People used to buy bonds to own them, and they buy bonds to trade them. And there’s nothing evil about that, but it just means that the participants are playing a different game, and that different game can have different consequences than in a buy-and-hold environment.

And I do think it means that if you’re trying to beat the other fellow on a day-to-day basis, you’re watching news events very carefully, or watching the other fellow very carefully, and if he… you think he’s about to hit that key, you know, you’re going to try and hit the key faster, if that’s the game you’re playing, and if you’re getting measured on results weekly. So I think that you’ve described the conditions that will lead to a result that we’ve been talking about expecting at some point. It’s not new to markets, though. I mean, markets that do crazy things over time. Every time when Charlie and I were Salomon, they’d always talk to us about five sigma events or six sigma events, and that’s fine if you’re talking about flipping coins, but it doesn’t mean anything when you get human behavior involved. And people do things that… and intelligent people do things, very intelligent, educated people do things that are totally irrational, and they do them in mass. And you saw it in 1998, you saw it in 2002, and you’ll see it again.

And you’ll see it… it’s more likely to happen when you have people trying to beat currency, bond, stock markets day by day. It’s… I think it’s a fool’s game. But, you know, it may be what’s required to attract money. When I set up my partnership, I told the partners, you know, “You’ll hear from me once a year.” And I even thought, in 1962, I put the partnerships together, and May of 1962 the market got terrible, and I actually thought of sending all my partners a letter then, sending it down to Brazil to have it reship back up, just to sort of test them out, so how they felt about things. But, you know, I had a few with bad hearts. I decided it wasn’t worthwhile. Charlie?

Charlie Munger [01:38:11] Yeah. When people talk about sigmas in terms of disaster potentialities in markets, they’re all crazy. They got the idea that bad results in markets would be predicted by Gaussian distributions. And the way they decided on that outcome was it made everything so easy to compute. They don’t follow Gaussian distributions. You have to believe in the tooth fairy to believe that. And the disasters are bigger and more irritating than Gauss would have predicted.

Warren Buffett [01:38:45] It was easier to teach as well.

Charlie Munger [01:38:48] It was easier to teach too. Yeah. I once asked this distinguished medical school professor why he was still doing an obsolete procedure, and he said, “It’s so wonderful to teach.” There’s more of that in finance departments than you might think.

Warren Buffett [01:39:09] It’s very discouraging to learn advanced mathematics and, you know, how to do things that none but the priesthood can do in your field, and then find out it doesn’t have any meaning. You know, I mean, and what you do when confronted with that knowledge, after you’ve invested these years to get your PhD, you know, and maybe you’ve written a textbook and a paper or two, having a revelation that that stuff has no utility at all, and really has counter-utility. I’m not sure, you know, too many people can handle it well. And I think they just generally keep on teaching. Number 2.

[01:39:56] Shareholder (Burkard Witk, Munich, Germany): Hello. Burkard Witk from Munich and Germany. I would like to get some transparency on how you make investment decisions, particularly how you determine intrinsic values. You mentioned that the theoretically correct method is discounted cash flow, but at the same time, you point out the inherent difficulties of the methodology. Other books, I see that you use multiples on operating earnings or owner multiples. Your daughter Mary, in one of her books, describes another methodology where you apply compounding economics to the value of the equity. Could you give us a bit more transparency, which quantitative approach you use, and how many years out you try to quantify the results of the investments you’re interested in?

Warren Buffett [01:40:46] I understand the question, but I’m going to pretend I don’t. Let Charlie answer first. I really do.

Charlie Munger [01:40:55] Yeah. When you’re trying to determine something like intrinsic value and margin of safety and so on, there is no one easy method that could be simply mechanically applied by, say, a computer and make anybody who could punch the buttons rich. By definition, this is going to be a game which you play with multiple techniques and multiple models, and a lot of experience is very helpful. I don’t think you can become a great investor very rapidly, anymore than you could become a great bone tumor pathologist very rapidly. It takes some experience, and that’s why it’s helpful to get a very early start.

Warren Buffett [01:41:41] But if you’re… if, let’s just say that we all decided we’re going to buy a… or think about buying a farm, and we go up 30 miles north of here, and we find out that a farm up there can produce 120 bushels of corn and it can produce 45 bushels of soybean per acre. We know what fertilizer costs, and we know what the property taxes cost, and we know what we’ll have to pay the farmer to actually do the work involved, and we’ll get some number that we can make per acre using fairly conservative assumptions. And if you… let’s just assume that when you get through making those calculations, it turns out to be that you can make $70 an acre to the owner without working at it. Then the question is, how much do you pay for the $70?

Do you assume that agriculture will get a little bit better over the years, so that your yields will be a little higher? Do you assume that prices will work a little higher over time? They haven’t done much of that, although recently it’s been good with corn and soy beans. But over the years, agriculture prices have not done too much. So you would be conservative in your sub… and you might decide that for $70 an acre, you know, you would want to… if you decided you wanted a 7% return, you’d pay $1,000 an acre. Now, if farmland is selling for $900, you know, you’re going to have a buy signal, and if it’s selling for $1,200, you’re going to look at something else.

That’s what we do in businesses. We are trying to figure out what those corporate farms that we’re looking at are going to produce. And to do that, we have to understand their competitive position. We have to understand the dynamics of the business. We have to, you know, we have to be able to look out in the future. And like I’ve said earlier, some businesses you can’t look out very far at. But the mathematics of investment were set out by Aesop, 600 BC, and he said, “A bird in the hand is worth two in the bush.” Now, our question is, when do we get the two? You know, how long do we wait? How sure are we that there are two in the bush? Could there be more? You know, what’s the right discount rate? And we measure one against the other that way.

I mean, we are looking at a whole bunch of businesses. How many birds are they going to give us? When are they going to give them to us? And we try to decide which ones, you know, basically which bushes we want to buy out in the future. It’s all about… and it’s all about evaluating future ability to distribute cash or to reinvest cash at high rates if it isn’t distributed. Berkshire has never distributed any cash, but it’s growing in its cash-producing abilities, and we retain it because we think we can create more than a dollar present value by retaining it. But it’s the ability to distribute cash that give Berkshire its value. And we try to increase that ability to distribute cash year by year by year. And then we try to keep it and invest it in a way so there’s a dollar bill is worth more than a dollar.

You may have an insight into very few businesses. I mean, if we left here and walked by a McDonald’s stand, you know, and you decided, would you pay $1 million for that McDonald’s stand, or $1.3 million, or $900,000? You’d think about how likely it was there would be more competition, how… whether McDonald’s could change the franchise arrangement on you, whether people are going to keep eating hamburgers, you know, all kinds of things. And you actually would say to yourself, “This McDonald’s stand will make X, X plus 5% maybe in a couple years, because over time prices will increase a little.” And that’s all investing is. But the… you have to know when you know what you’re doing, and you have to know when you’re getting outside of what I call your circle of competence and you don’t have the faintest idea. Charlie?

Charlie Munger [01:45:31] Yeah. The other thing, you got to recognize that we’ve never had any system for being able to make correct judgments on the values of all businesses. We throw almost all decisions into the too-hard pile, and we just sift for a few decisions we can make that are easy. And that’s a comparative process. And if you’re looking for an ability to correctly value all investments at all times, we can’t help you.

Warren Buffett [01:46:07] No. We know how to step over one-foot bars. We don’t know how to jump over seven-foot bars. But we do know how to recognize occasionally what is a one-foot bar.

Charlie Munger [01:46:21] Yeah, and we know enough to stay away from the seven-foot bars too.

Warren Buffett [01:46:27] Number 3.

[01:46:28] Shareholder (John Steo, Chicago): John Steo, shareholder from Chicago. Mr. Buffett, Mr. Munger, thank you for the great weekend. In your annual shareholders letter, you stated that you’re looking for someone younger to possibly work at Berkshire, and I was wondering if you could expand on that, and how would I apply for the job?

Warren Buffett [01:46:51] I think you just did. They… we’re looking for one or more. I mean, I don’t think it’s at all impossible we would… might even find as three or four that we would decide to have run some money and to take a closer look. We’re not looking for someone to teach. I probably didn’t make that clear enough in the annual report. We’re not going to be mentors or teachers or anything of the sort. We’re looking for somebody that we think knows how to do it, and there are people like that out there. We’ve heard from 600 or 700. I did hear… I heard from one that had a four-year-old son. I thought that was quite a compliment, that they thought… I mean, I knew a caveman could do my job, at a four-year-old.

The… but we’re looking, and we have heard from a number of very intelligent people. We have heard from a number of people that have had good investment records for, in recent years, and in some case sometime the biggest problem we have is whether they would scale up, because it’s a different job to run $100 billion than it is to run $100 million. And incidentally, and you can’t do as well running $100 billion as $100 million in terms of returns. You can’t come close to doing it. That doesn’t bother us. But we do want to find somebody that we think can run large sums of money mildly better than the general performance and securities, and I emphasize mildly. There’s no way in the world somebody’s going to beat the S&P by 10 percentage points a year with $100 billion. It isn’t going to happen. But we think maybe we can find somebody, or some group, several of them, that can maybe be a couple percentage points better.

But we really are interested in being sure that we have somebody that, under conditions that people haven’t even seen yet, will not blow it at… you know, anything times zero is zero, and I don’t care how many wonderful figures are in between. So we are looking for somebody that’s wired in a way that they see risks that other people don’t see, that haven’t occurred, and they’re plenty cognizant of the risks that have occurred. And those people are fairly rare. Charlie and I have seen a lot of very smart people go broke, or end up with very mediocre records, where, you know, 99 out of the 100 things they did were intelligent, but the hundredth did them in. So our job is to filter through these hundreds and hundreds of applications, find a couple of them that we think can do the job, who are much younger perhaps, give them a chunk, $2 billion, $3 billion, $5 billion, have them manage it for some time, have them manage it in the kind of securities that they would scale up to a larger portfolio, because… and then either one or more of them will get the job turned over to him at some point. Charlie?

Charlie Munger [01:50:20] Yeah, our situation and looking for this help reminds me of an apocryphal tale about Mozart and young man of 25 or so once asked to see Mozart, and he said, “I’m thinking of starting to write symphonies, and I’d like to get your advice.” And Mozart said, “Well, you’re too young to write symphonies.” And the guy says, “But you were writing with them when you were 10 years old.” And Mozart says, “Yes,” he says, “but I wasn’t asking anybody else for advice how to do it.” And so if you remind yourself of young Mozart, well, you’re the man for us.

Warren Buffett [01:51:02] We will come up with probably a couple of people, and, you know, it’s… I’ve known people over the years. I’ve been in the job before. I mean, in 1969 I wound up my partnership, and I had a lot of people that trusted me, and I wasn’t going to just mail the money back to them and, you know, say goodbye, because they would have been sort of adrift, most of them. And so I had the job of finding somebody to replace me, and there were three absolutely standout candidates. Any one of the three would have been a great choice. Charlie was one of them, Sandy Gottesman was one of them, and Bill Ruane was one of them. Charlie wasn’t interested in having more partners. Sandy was interested in individual accounts and took on the accounts of some of my partners, and they were very, very happy, and they’re still happy that he did it. And Bill Ruane set up a separate mutual fund called Sequoia Fund to take care of all of the partners, whether they had small amounts or not, and he did a sensational job.

So I really identified three people in 1969 that were not only superior money managers, but that were also the kind that could never get you a terrible result, and that were terrific stewards of capital. Now, they were about my age at the time, so it was a universe that I was familiar with. And now I have the problem that at the people I know that are anywhere close to my age, we don’t want anyway, and besides, most of them are already rich, they don’t care about having a job. But I have… so I have to look into an age cohort where I don’t really know lots of people. But it can be done. And like I say, we did it successfully with three people in 1969, and it was done successfully in 1979 with Lou Simpson for GEICO. And I never knew Lou Simpson before I met him down at the airport here, and I spent a few hours with him, and it was clear that he was the… he was a steward of capital. He was going to get an above-average result, and there was no chance he was going to get a bad result. And he’s been managing money for GEICO now for 28 years, roughly. So it’s doable. It’s a little more work than I like to do. I’ve been kind of spoiled. But I’ve got a job to do on it, and I’ll do it. Number 4.

[01:53:39] Shareholder (Glenn Strong, Canton, Ohio): Good morning. I’m Glenn Strong from Canton, Ohio. Please tell us where you stand on the global warming debate, or where your managers at General Re stand in particular. Perhaps you can give us your thoughts on the science of global warming and how serious you believe it is, and whether warming is actually more harmful than helpful. Thank you.

Warren Buffett [01:54:03] Yeah. Well, I believe the odds are good that it is serious. I’m not enough of a sign… I can’t say that with 100% certainty or 90% certainty, but I think that there’s enough evidence that it would be very foolish to say that it’s 100% certain or 90% certain that it isn’t a problem. And since it’s… if it is a problem, it’s a problem that once it manifests itself to a very significant degree, it’s a little too late to do something about it. In other words, you really have to build the ark before the rains come. In this case, I think if you make a mistake in terms of a social decision, you should, what I call, err on the side of the planet. In other words, you should build a margin of safety into your thinking about the future of the only planet we’ve got 100 years from now. So I think it… I take it seriously.

In terms of our own businesses, you mentioned General Re. General Re writes less, way less, business that would be subject to the annual increments in global warming that were… would have an effect on their results than the reinsurance division of National Indemnity, where we write the far more of the catastrophe business. It’s not going to affect, you know, in any measurable degree at all, you know, excess casualty insurance, property insurance. You’re thinking much more of whether it’s going to produce atmospheric changes, the change materially the probabilities of really cat… of catastrophes, both their frequency and their intensity. In my own mind, and in the minds of the people that run National America… National Indemnity reinsurance division, we crank… we think the exposure goes up every year because of what’s going on in the atmosphere, even though we don’t understand very well what goes on in the atmosphere.

And the relationship between damage caused and these cause and the causal factors is not linear at all. I mean, it can be explosive. So if temperatures in the waters of the Atlantic or something change by relatively small amounts, or what seem like small amounts, it could increase the expectable losses from a given hurricane season by a factor of two, three, four, five. So we’re plenty cautious about it. It’s not… it’s not something that keeps me up in terms of our financial prospects at all at Berkshire, but it’s something that I think every citizen ought to be very cognizant of and make a decision on. Charlie?

Charlie Munger [01:56:53] Well, of course, carbon dioxide is what plants eat. And so, and generally speaking, I think it’s a little more comfortable to have it a little warmer instead of a little colder.

Warren Buffett [01:57:08] Hope you don’t get a chance to test that after death, Charlie.

Charlie Munger [01:57:14] It isn’t as though there’s a vast flood of people trying to move to North Dakota from Southern California. And so you’re talking about dislocation. It’s not at all clear to me that net, it would be worse for mankind in general to have the planet a little hotter, but the dislocations would cause agonies for a great, great many places, particularly those that would soon find themselves underwater.

Warren Buffett [01:57:43] Yeah, I was going to ask you about how do you feel about the sea level being 15 or 20 feet higher?

Charlie Munger [01:57:51] Well, that’s very unfortunate, but Holland lives with what, 25% of the nation below sea level. With enough time and enough capital, I… these things can be adjusted to. I don’t think it’s a utter calamity for man that threatens the whole human race or anything like that. You know, you’d have to be a pot-smoking journalism student or something, believe that.

Warren Buffett [01:58:20] We’re finally unleashing him, folks. Well, we’ll have… we’ll continue to have people in charge of insurance who are plenty worried about global warming, I promise you. But it… we don’t know. We do know the 2004 and 2005, there was a frequency, and more particularly there was an intensity of hurricanes that would not be expected at all by looking at the previous century. And we were spared, even though we had Katrina, we were spared what could have been a far worse case by a couple of Category fives that didn’t hit the mainland.

So I do not regard Katrina as being anywhere near a worst-case scenario. And like I say, I don’t know whether… how much of that… I don’t know whether the water is a half a degree or one degree Fahrenheit warmer than 30 years ago, but I don’t know. And I don’t know all the factors that go into hurricanes. I mean, I know that, you know, obviously the water temperature, you know, contributes to energy and all that, right? But there could be 50 variables. All I know is, on balance, I think they’re probably getting more negative for us, and I know we ought to be very careful about it. And I know that it would be crazy to write insurance in 2007 at the same rates that it was being written a few years ago in relation to catastrophes. And since we’re in the catastrophe business, it… that is something I think about, and the people that actually write the policies think about it as well. So it’s a factor with us. Five.

[02:00:15] Shareholder (John Golob, Kansas City): Hi, I’m John Golob from Kansas City. I have question about the Chinese economy. Some serers have suggested that the Chinese banking system looks a little like Japan back in the 1990s. Are you concerned that China could experience similar disruptions as Japan in the ’90s, or as China, possibly with different institutions, possibly more resistant economic disruptions?

Warren Buffett [02:00:53] I would have to say I don’t know the answer to that. I mean, it’s a… it’s an… it’s a very interesting question. It’s a very important question. But, you know, I didn’t necessarily understand what was going to happen in Japan before it happened, and my insight into Chinese banks is about zero. We’ve been offered chances to buy into various Chinese banks, and again, because I don’t know anything about them, I pass. It’s no judgment that there’s anything bad. It just means that sitting in Omaha, Nebraska, not knowing what some item of loans and advances, what composes it, or anything about the real operation of the place, that I can make a decision whether it’s worth X, half of X, 2X, quarter of X. I just don’t know. And I really don’t know. They… I just have no notion as to the answer to your question. But maybe Charlie does.

Charlie Munger [02:01:51] Well, if you stop to think about it, all of the remarkable economic progress that we’ve seen in China in the last 15 years has been accompanied by practices in their government banks that would make you shudder if you compared them to normal banking standards. So everything you see in terms of progress has occurred despite… you… the banks were almost doing out money for aid, as distinguished from doing normal banking. So I’d be very leery of predicting that that’s sure to cause a huge economic collapse in Japan… in China. They’ve been doing it for a long time, and they may actually be getting better now.

Warren Buffett [02:02:40] Yeah, we’ve had our share of banking troubles in this country. I mean, it wasn’t that long ago in terms of the savings and loan crisis and all kinds of things, and strong economy come through those things. So, you know, if ahead of time you’d seen all the problems with foreign loans that the commercial banks got into, all the problems with real estate loans that the savings loans got out into, you could have said, you know, it’s going to be terrible for the American economy. And it did produce a lot of dislocations and all of that. But if you look at the record of the American economy, it’s come through all kinds of financial crisis with the real output per capita rising at a very substantial rate, just decade after decade. I don’t know what will happen in China. I think it’s pretty amazing in terms of the gains that have been made, and I think they’ll… I think they’ll be… I think they’ll continue to be made. I don’t know what will happen with the banking system, though. Number 6.

[02:03:41] Shareholder (Frank Martin, Elkhart, Indiana): Good morning, Warren and Charlie. My name is Frank Martin from Elkhart, Indiana. I’m a shareholder.

Warren Buffett [02:03:50] Yeah. You wrote a good book too, Frank.

[02:03:55] Shareholder (Frank Martin, Elkhart, Indiana): Thanks, Warren. I’ll do my best to be succinct with this question. As you know, my long suit is not brevity in the written word. Recently, I sequentially read everything that you and Charlie have written or that has been written about you since 1999, including your health… help-wanted ad in the annual report, which sought not a Ted Williams, but the consummate defensive player, and your forcefully worded quotations in last Monday’s Wall Street Journal. When contemplating the chronology, I sensed a gradual but unmistakable sea change in your perspective on the investment environment for marketable securities. The intensification of your preoccupation with managing risk is conspicuous by its absence among the other biggest players at the margin, hedge funds, private equity, mutual funds, who are shamefully mute both about what are likely to be anemic prospective returns and the unconscionable risks assumed to achieve them, all the while charging a king’s ransom for such low value-added services.

When I give free reign to my intuition, the post-1999 Warren Buffett reminds me of the Warren Buffett of post-1969. Back then, when Berkshire was a small fraction of its current size, you spoke of the difficulty in playing a game you did not understand, that there was little margin of safety in the equity markets in general. You weren’t forecasting what in its own time became the bear market of ’73-’74, but you were surely intuitively aware of what Greenspan years later has repeatedly warned, the inevitable day of reckoning that follows long periods of low equity risk premium. Imagine yourself, if you are willing, cast overnight into a new role with a clean slate as head of the investment committee of a $10 billion pension fund today. Would your decision reflect the same risk-averse mindset that dominated your behavior in the post-1969 period? And might you anticipate that following all of this might appear opportunities that were as mouthwatering as appeared in ’73-’74? Please explain, and I hope Charlie will weigh in on the subject as well. Thank you.

Warren Buffett [02:07:19] Yeah, Frank, when I closed up the partnership, if I’d had a endowment fund to run then, the perspective return, and actually I wrote this in a letter to my partners that I’d be glad to send you a copy of, the perspective return, and I was looking at them as individuals on an after-tax basis, was about the same, I felt, from equities and from municipal bonds over the next decade, and it turned out to be more or less the case. I would say that I do not regard that as being the same situation now. If I were managing a very large endowment fund, for one thing, it would either be 100% of stocks or 100% in long bonds or 100% in short-term bonds. I mean, I don’t believe in layering things and saying I’m going to have 60% of this and 30% of that. Mak… why do I have the 30% of… I think the 60% makes more sense.

So, and if you told me I had to invest the fund for 20 years and I had a choice between buying the Index 500 or a 20-year bond, you know, I would buy stocks. You know, that doesn’t mean they won’t go down a lot, but if you… I would rather have a equity investment. I wouldn’t rather have an equity investment where I paid a ton of money to somebody else that took my stock return down dramatically. But simply buying an index fund for 20 years of equities, or buying a 20-year bond, I would… it would not be a close decision with me. I would buy the equities. I’d rather buy them cheaper, you know, but I’d rather buy the bond with a bigger yield too. But in terms of what’s offered to me today, that’s the way I would come down. Charlie?

Charlie Munger [02:09:11] Yeah, I don’t think that was the answer that was expected.

Warren Buffett [02:09:15] But that’s the answer, that doesn’t have a thing to do with where we think stocks… or we don’t think at all, but where stocks could be or bonds could be. And we don’t have the faintest idea where the S&P will be in three years or where the long-term bond will be in three years, but we do know which we would rather own on a 20-year basis.

Charlie Munger [02:09:44] We’d also expect that the current scene will cause some real disruption, yeah, but not too many years ahead.

Warren Buffett [02:09:50] That’s true. But if you go back 100 years, you can almost say that, you know, almost any period, and you will get disruptions from time to time. And it’s very nice if you have a lot of cash then and you have the guts to do something with it. But predicting them or waiting around for them, that sort of thing is not our game. And I mean, we bought $5 billion worth of equities in the first quarter, something like that. And, you know, we don’t think they’re anything like… well, they’re not. It’d be a joke to even compare them to 1974 or a whole bunch of other periods. But we decided we would rather have them than cash, or we would rather have them than sit around and hope that things get a lot cheaper. We don’t spend a lot of time doing that. It… you can freeze yourself out indefinitely. So anytime we find something in what we think is intelligent to do, we just do it, and we hope we can do it big. Number 7.

[02:10:55] Shareholder (Nathan Narusis, Vancouver, Canada): My name is Nathan Narusis from Vancouver, Canada. Mr. Buffett, Mr. Munger, my question concerns your previous silver bullion investment. I’m curious to hear more about why you sold when you did. More specifically, whether you sold your bullion to the organizers of the silver exchange-traded fund in return for cash plus perhaps important non-cash consideration in order to keep silver markets from either rising or falling sharply. Thank you very much for anything you would care to share with us.

Warren Buffett [02:11:31] I’m not sure who we sold it to, but whoever we sold it to was a lot smarter than I was. I bought it too early. I sold it too early. Other than that, it was a perfect trade. Could have done… Charlie, do you have anything to add? Charlie had nothing to do with the silver decision, so that one falls entirely on me.

Charlie Munger [02:11:56] I think we’ve demonstrated how much we know about silver.

Warren Buffett [02:12:01] Fact, you ask us a question on silver flatters us, because nobody asks us about silver anymore. But we’ll come up with something else at some point with the, you know, the… there, the last part of your question there, there was a small implication, I think, of perhaps a silver conspiracy or conspir… We’ve… as soon as we started… it got knowing that we bought silver, we started getting all these letters in the mail from people who had all these different theories about the fact that hedging was killing things, or these kind of traders were doing something. In the end, silver responds is supply and demand, just like oil… responds to supply and demand. Oil is… the price of oil at 60 or 60 is not a product of a bunch of oil executives conspiring or anything of the sort. It’s supply and demand on a huge commodity. Silver is a small commodity, but on any kind of commodity like that, supply and demand is what determines prices over time. Although the Hunt Brothers, I must admit, for a short period there in a few years, managed to change the equation, and they forever wished they hadn’t. Number 8.

[02:13:22] Shareholder (Eben Pagan, Santa Monica, California): Hello, Mr. Buffett. Eben Pagan, Santa Monica, California. You seem amazing at keeping your composure in tough situations. I would be very interested to know what your thought process was when you, in that incredibly stressful situation, you knew the world was watching, and you went head-to-head with LeBron James.

Warren Buffett [02:13:46] The game was rigged. He was the one that had a problem.

[02:13:53] Shareholder (Eben Pagan, Santa Monica, California): What I’d really like to know is, I’m a real big fan of you and Mr. Gates and your philosophy of channeling all the value you’ve created back into the world. And I have a successful business, and I’d like to do the same, but maybe in 20 or 30 or 40 years. And with a time horizon like that, I’d love to know what advice you’d give someone like me.

Warren Buffett [02:14:19] Well, there’s nothing wrong with your time horizon, in my view, as long as you’re going… as long as you plan to give it back. I mean, the decision is yours entirely anyway, whether you want to do it. But if, assuming you want to give it back, or give it to society in some way, if you’re compounding your money at a rate greater than people generally do, you are an effect an endowment fund for society. And, you know, all kinds of organizations in the nonprofit area have endowment funds, and they think it’s wise to have it, and they do that in order to get standard returns usually. And if you can compound it more and you’re going to give it back later on, let somebody else take care of current giving, and you can take care of giving in 20 or 30 years.

But, you know, I regard that as a personal decision. I always felt that I would compound money at a rate higher than average, and it would have been foolish to give away a significant portion of my capital. Somebody would spend it within, you know, months, when that… there could be a really much larger amount later on. And on the other hand, the time had come… I really thought my wife would be doing that, and the… when that didn’t work out, the time had come to do something with it. And fortunately, I had some great options available, and I get to keep on doing what I love doing, and I let some… my farm out all the work. But, you know, when my wife had a baby, we hired an obstetrician. I didn’t try and do it myself. I mean, when my tooth hurts, you know, I don’t have Charlie fix it. I go to a dentist. So when I had money to go give away, I believe in turning it over to people who are… and I’ve got five different organizations, including my three kids, and I believe in turning it over to people who are energized, working hard at it, smart, you know, doing it with their own money, the whole thing. And I get to keep doing what I like doing. So as far as I’m concerned, I haven’t given away a penny. Charlie?

Charlie Munger [02:16:27] Well, I think it’s wonderful for the shareholders that somebody else is giving away the money. I tell you, if all Warren wanted to talk about was interfacing with applicants for donations, we would have a different life, and we wouldn’t be very well adapted to it either.

Warren Buffett [02:16:44] No. No, actually, on the smaller ones, I send them all to my sister Doris, and she does a great job with it and enjoys it, spends lots of time on it, good at it, and I’m glad she does it, and I don’t. But it’s, you know, the truth is I haven’t given away anything. It’s a practical matter. If I want… you know, there’s no way I can sleep better. I can eat better… other people might think I can eat better, but I… they… there… I haven’t given up anything.

Now, if you think about it, you know, somebody that gives up having an evening out, somebody, you know, gives up their time working on something, somebody that doesn’t take their kids to Disneyland this year because they, you know, they’ve given the money instead to their church, I mean, those people are changing their lives in some way, what they give. I haven’t changed my life at all. I don’t want to change my life. I’m having a lot of fun doing what I do. And, you know, it’s just a bunch of stock certificates. At one way or another, they’re going to go someplace. And what I really want to do is keep doing what I enjoy doing and feel that the claim checks that I accumulate, that comes about through this, are going to get used effectively for the same general purposes that I wanted… would want to use them for if I really had the energy and the interest in doing the job myself. But somebody else can keep doing the work. Number 9.

[02:18:07] Shareholder (Eric Schline, Larchmont, New York): Hi, I’m Eric Schline from Larchmont, New York. My question is directed to Mr. Buffett. Mr. Buffett, you claim you can do 50% a year if you had to start over with a small portfolio. Would you still be doing buy-and-hold, buying quality companies at a good price, or would you be doing arbitrage and really getting down to the nitty-gritty Benjamin Graham cigar butts that you did in the Buffett Partnership?

Warren Buffett [02:18:35] If I were working with a very small sum, and you should all hope I’m not, if I were working with a very small sum, I would be doing entirely, almost entirely different things than I do. I mean, there, there’s… your universe expands. I mean, if you’re looking, there’s thousands and thousands and thousands of times as many of options to think about if you’re investing $10,000 than if you’re investing $100 billion. And obviously, if you have that many, you got all the options you got with $100 billion, except buying entire businesses, and you’ve got all of these other options. So you can earn very high returns with very small amounts of money, and it will always be such. I don’t mean that everybody can do it, but if you know something about values and investments, you will find opportunities with small sums.

And it will not be with the portfolio that Berkshire… it cell phones… it… you… we can’t earn… we cannot earn phenomenal returns putting $3 billion, $4 billion, $5 billion in a stock. It won’t work that way. It won’t even come close to working that way. But if Charlie or I were in a position of working with $1 million or $500,000 or $2 million, we would find little things here and there, and wouldn’t always be stocks, where we would earn very high returns on capital. Charlie?

Charlie Munger [02:20:14] Yeah, but it’s… there’s no point our thinking about that now.

Warren Buffett [02:20:23] But he’s thinking about it, Charlie. Okay, we’ll take one more, and then we will go to lunch, and then we’ll… after that, we’ll come back in about… go… so we’ll go to number 10 now. Is the microphone open and there? 10.

[02:20:46] Shareholder (Calvin Chong, New York): Hello? Hello? I have a problem, mayor. Warren, Charlie, I have a questions. What’s your opinion regarding the subprime market relative to the financial markets?

Warren Buffett [02:20:59] We can’t hear that. We can’t hear that.

[02:21:02] Shareholder (Calvin Chong, New York): What’s your opinion regarding the subprime market relative to the financial market? Sorry, my name is Calvin Chong. I’m from New York.

Warren Buffett [02:21:12] Yeah. Well, the, you know, the subprime market, encouraged by both lenders, intermediaries and borrowers themselves, has resulted in a lot of people buying a lot of houses that they really didn’t want to own, or that they can’t make payments on, for once the normal payments were required. And the people, the institutions, some cases the intermediaries, are going to suffer in various degrees. Now, the question is whether it spills over and starts affecting the general economy to a big degree. And I would… my guess would be, it’s quite severe some places, but my guess would be that if unemployment doesn’t rise significantly, and interest rates don’t move up dramatically, that it will be a… it would be a very big problem for those involved, and some people are very involved, some institutions are very involved, but I don’t see it… that’s… I think it’s unlikely that that factor alone triggers anything of a massive nature in the general economy.

I think it… you know, I’ve looked at several financial institutions. I’ve looked at their 10-Qs and 10-Ks, and I’ve seen that a very high percentage of the loans they made in the last few years allowed people to make very tiny payments on the mortgages, but of course those subnormal payments increased principal, so that they had to make above-average payments later on at some point. And I think that’s dumb lending, and I think it’s dumb borrowing, because somebody that can only make 20 or 30% of their normal mortgage payments the first year is very unlikely to be able to make 110% of their normal mortgage payments a few years later. Those people and those institutions were largely betting on the fact that house prices would just keep going up, and it really didn’t make any difference whether they could make the payments. And that worked for a while, until it didn’t work.

And when it doesn’t work, you have an abnormal supply of housing coming on the market, similar to what happened in manufactured housing, the business we’re in, six or seven years ago. And that changes the whole equation. From people on the demand side, you no longer have people thinking they’re buying something that’s bound to go up, and then you have the supply coming on from the people who were anticipating that before and really don’t want to own the asset unless it’s going to go up. So you’ll see plenty of misery in that field. You’ve already seen some. And I don’t think it’s going to be any huge anchor to the economy. Charlie?

Charlie Munger [02:23:57] Yeah, a lot of what went on was a combination of sin and folly. And a lot of it happened because the accountants allowed the lending institutions to show profits on loans where nobody in his right mind would have showed any profit until the loan had matured into a better condition. And once again, if the accountant lay down on their basic job, why, huge excess and folly is going to come inevitably, and that happened here. The national experience with lowest starter home loans to what I would call the deserving poor has been very good. But the minute you pay a bunch of people high commissions to make loans to the undeserving poor or the overstretched rich, you can get loan losses that are staggering. And I don’t see how the people did it and still shaved in the morning, cuz looking back at them was a face that was evil and stupid.

Warren Buffett [02:25:08] You’ve seen some very interesting figures in the last few months on the number of… on the percentage of loans where people didn’t even make the first or second payment. And there’s really… that shouldn’t happen. That happened, incidentally, you had a prelude to this in the manufactured housing industry, I mean, in the late 1990s. And securitization accentuated the problem, because once you had somebody in Grand Island, Nebraska, selling a mobile home or manufactured home to someone, and they needed a $3,000 down payment, and the salesman was going to get a $6,000 commission, believe me, you start getting some very strange things going on. Now, if the person doing that had to borrow the money in Grand Island, the chances are the local banker would have seen what was happening and said, you know, “We don’t want any of this, where the salesman fakes the down payment and all that.”

But once you just package those things and securitize them, so they get sold through major investment banking houses and sliced up in various tranches and so on, you know, the discipline leaves the system. And securitization really accentuates that. And we have had that in subprime loans, just as we had it in manufactured housing six or seven years ago. And like I say, that has not all worked its way through the system, but I don’t think it’s going to cause huge troubles. Now, we do see certain areas of the country where it will be at least a couple of years before real estate recovers. I mean, the overhang is huge compared to normal monthly volume in certain sections, and the people that were there are going to get flipped, but in a different way.

With that, let’s come back at 12:45, and we’ll go then until 3:00, and at 3:15 we’ll have the regular meeting. And I’ll see you a little later. Thanks.

Warren Buffett [02:27:29] Okay, if you’re ready, we’re going to keep going in the same order, because there’s people in the other rooms that have been waiting. So we will go to number 11.

[02:27:45] Shareholder (Christian Baha, Superfund): Hi, I’m… my name is Christian Baha from Superfund. I have a question for you, Mr. Buffett. What do you think about managed futures funds?

Warren Buffett [02:27:58] About which one? I didn’t quite get that. What kind of fund?

[02:28:04] Shareholder (Christian Baha, Superfund): Managed futures funds, like a very well-diversified portfolio in stocks and bonds, going long and short all the different markets, based on the most natural human behavior, trend following or herd behavior.

Warren Buffett [02:28:19] Yeah, managed future funds. Well, I would say that we think the most logical fund is the one we have at Berkshire, where essentially we can do anything that makes sense and are not compelled to do anything that we don’t think makes sense. So any entity that is devoted to a limited segment of the financial market, we would regard as being at a disadvantage to one that has total authority, if you have the right person in charge. But you… that’s an assumption you’re going to make under any fund. So we would not want to devote our funds to something that was only going to buy bonds, something was only going to buy futures, or anything of the sort. We buy futures at Berkshire. We buy bonds at Berkshire. We bought… we buy currencies. We buy businesses. So I think it’s a mistake to shrink the universal possibilities. Ours is shrunk simply by size, but we don’t try to… we don’t set out to circumscribe our actions in any way.

But in the end, there’s no form that produces investment results. Hedge funds don’t produce investment results. Private equity doesn’t produce investment results. Mutual funds don’t produce it. That if it was simply a matter of form, we’d all call ourselves, you know, whatever that form happened to be. What really makes the difference is whether the person that’s running it knows what their limitations are, knows where their strengths are, plays when they have the opportunity to play advantageously, and stays out when they don’t see any opportunities. Charlie?

Charlie Munger [02:30:13] Yeah, I’d go further. I’d say, averaged out, I would expect that the return per dollar per year in managed futures funds would be somewhere between lousy and negative.

Warren Buffett [02:30:24] And I would agree with that. Yeah, usually those are sales tools. I mean, people find out something that will sell, and it can be, you know, it can be bond funds at some point, it can be ind… but when they find something, sell, it’ll get sold to the public. There will be… it will sell till it stops selling. And that means lots of money comes in and lots of competition for a limited number of opportunities. And I think it’s a mistake to get sold something on the basis that here is a great area of opportunity. Areas don’t make opportunities. Brains make opportunities, basically. Number 12.

[02:31:08] Shareholder (Matthew Monahan, Palo Alto, California): Matthew Monahan from Palo Alto, California. Mr. Buffett, Mr. Munger, first of all, I want to thank both of you so… for so freely sharing your wisdom and knowledge over the years. Even though we’ve never met in person, I consider you both to be close personal mentors and attribute your teachings and philosophies to any success I’ve had in business so far. So thank you. Here’s my question. For a 23-year-old with high ambitions, some initial working capital, and a genetic wiring, as you call it, for disciplines like investments, mathematics and technology, what do you foresee as the significant areas of opportunity over the next 50, even 100 years? And if you were in my shoes, what would be your approach and methodology for really learning, tackling and mastering these areas of opportunity for the purpose of massive value creation?

Warren Buffett [02:32:03] Well, I’m… I remain very… and frankly, when you get the chance to talk to somebody like Lorimer Davidson, as I did, was when I was 20 years old, I probably learned more from Lorimer Davidson in those four or five hours than I learned in college, with the, you know, exception of learning some accounting or one or two subjects like that. So you just want to soak it up. If you have those qualities you talked about, you’ll see the areas as you go along. I mean, we have… Charlie and I, probably, you know, we’ve made money in a lot of different ways, some of which we didn’t anticipate, you know, when we were 30 or 40 years ago. But we did have the ability to recognize some. We didn’t have the ability to recognize others. But we did know when we knew what we were doing and when we didn’t, and we just kept looking. We had a curiosity about things.

You would know at a time like the Long-Term Capital Management crisis, for example, that there were going to be ways to make money. I mean, it just… they were going to be out there, and all you had to do was just read and think eight or 10 hours a day, and you were going to a lot of possibilities, probably a very high percentage of them good, and some of them sensational. So you can’t really lay it out ahead of time. You can’t have a defined road map. But you can have a reservoir of thinking, looking at different kinds of businesses, looking at different kinds of securities, looking at markets in different places, and you will then spot a reasonable number of things that come along. You won’t spot every one of them. We’ve missed all kinds of things.

But the biggest thing, too, is to have something in the way you’re programmed so that you don’t ever do anything where you can lose a lot. I mean, that we… our best ideas have not been better than other people’s best ideas, but we’ve never had a lot of things that pulled us way back. So we never went two steps forward and one step back. We probably went two steps forward and a fraction of a step back. But it’s… avoiding the catastrophes is a very important thing, and it will be important in the future. I mean, you will have your chance to participate in catastrophes. Charlie?

Charlie Munger [02:34:28] Yeah, and of course, the place to look when you’re young is in the inefficient markets. You shouldn’t be trying to guess whether, you know, one drug company has a better drug pipeline than another. You want to go, when you’re young, someplace that’s very inefficient. And you shouldn’t be trying to guess whether the stock market is going to go up or whether long-term bonds are going to change in yield. I mean, you don’t have anything to going in that kind of a game. But you can have a lot going in games that very few people are playing, and maybe where they’re even got their heads screwed on wrong in terms of how they’re thinking about the subject.

Warren Buffett [02:35:07] The RTC was a great example of a chance to make a lot of money. I mean, here was a seller of 10… hundreds of billions of dollars worth of real estate, where the people that were selling it had no economic interest in it, were eager to wind up the thing, you know, and they were selling at a terrible time, when the people who had been venturesome and lending were no longer lending, the people who have been venturesome in the equity end of real estate had gotten cleaned out. So you had a great background of environment, and then you had an imbalance of intensity in terms of analyzing situations between the seller, which was the government, with a bunch of people had no economic interest in it, were probably eager to wind up the job, and buyers on the other side who were of the generally cautious type, because the more venturesome time had taken themselves out of action. So, and there were huge amounts of property. So you get these opportunities, and you’ll get more. I mean, there won’t be any scarcity of opportunities in your life, although there would be days when you feel that way.

Okay, let’s go to the other rooms now. They’ve been waiting. Number 13.

[02:36:17] Shareholder (John Goss, Key West, Florida): John Goss, Key West, Florida. Katrina created litigation that resulted in some rulings that combined flood damage and wind damage, where the insurance companies thought they covered wind only. As a result, some insurance companies are re… significantly reducing coverage in those states. Florida recently empowered their insurance company called Citizens to be more aggressive, not only with windstorm, but also with homeowners, while at the same time not allowing requested rate increases of other insurance companies. The result is that some solid insurance companies have announced reducing their coverage or pulling out of Florida. Is this type of government interference a random fluctuation in insurance, or a major cause of concern for the future?

Warren Buffett [02:36:59] Well, that’s an easy one to understand both sides of the question on. I mean, the average homeowner is not going to sit there and as an insurance policy, and a lot of times the agent is not going to explain it carefully to him. So when something comes along and he thinks it’s insured, and it turns out that he bought a policy where it wasn’t insured, he’s going to feel very unhappy about it. And when tens of thousands of people feel unhappy about it, you’re very likely to get some kind of governmental inference and probably an inflation by judicial degree, or by threats of the government to, in effect, extend the terms of the policy beyond what the insurance company thought it was insuring. Now, an insurance company that’s had that kind of experience is going to be very reluctant to write insurance policies in the future if they don’t think that the words will be adhered to.

And other hand, I can fully understand some guy who’s had his house blown away in a storm, and a lot of it was water damage and a lot of it was wind damage, thinking that, you know, that he’s been wiped out, and the insurance company comes around waving a policy that’s got a lot of small print in it. You know, he’s going to be unhappy. So it’s a real tussle on that, and, you know, I guess I would fire writing policies, I would put the exclusions in very big, very big type and very easy to understand. But I still would expect that if thousands of people suffered losses, that courts and legislators would probably seek to stretch the terms or even abgate the terms of the contract in order to take care of their own constituents, and figure that guys like me or institutional investors who own insurance companies can afford it better than their, the homeowner.

When you get into the question of whether you should, in effect, have all of the people in the country pay premiums for, we’ll say, hurricanes, in a way subsidize it through policies in Nebraska or Minnesota or someplace for hurricanes in Florida, that gets very tough. I mean, it can be very expensive to insure hurricanes if hurricanes become more frequent and more intense. In fact, it can become so expensive that people really will not want to bear the cost of insurance, and they’ll want to socialize it some way. And of course the guy in Nebraska says, “Look at you, you went down there to live on the ocean, and you know, you thought it was wonderful, and we’re back here with these terrible winners, but why should we pay a portion of your insurance?”

So you’re going to have that tussle go on, and you’ll really have that tussle go on if you get a $100 billion or $150 billion insured loss in a Florida, because that will mean a huge change in taxation. If the government, if the State of Florida steps in to compensate people, they’ll be, there’ll be calls for Washington to pay for it. But you know, it’s how much people who are not exposed to a risk should pay for the people who have elected to be exposed to the risk is, you know, it becomes a political question. And my guess is that sometimes in the next 5 or 10 years, you’ll see a struggle on that subject that exceeds, far exceeds what we saw on Katrina. Charlie?

Charlie Munger [02:40:31] I’ve got nothing to add.

Warren Buffett [02:40:33] Number 14.

[02:40:33] Shareholder (Glenn Tongue, New York): Hi, my name is Glenn Tongue and I’m a shareholder from New York. I’d like to congratulate you on Berkshire’s newest director. Sue is a terrific edition. My question is…

Warren Buffett [02:40:44] We agree with you.

[02:40:45] Shareholder (Glenn Tongue, New York): My question is, according to the 10-Q filed yesterday, you purchased about $5.3 billion in shares in the first quarter. This acceleration in activi is occurring while the general market levels are getting more expensive. Does this indicate some shift in your thinking about hurdle rates of return for your ever growing asset base and/or your prospects for an elephant sized acquisition?

Warren Buffett [02:41:07] Well, that’s a good question. I would inent, I would say in the first quarter, actually, stocks didn’t rise, but they’ve risen a lot in April, and, but they didn’t go down either. I mean, they were pretty much flat, and we did invest $5 billion or so in equities. Did we change our standards? You know, I don’t think so, but, you know, you can’t be 100% sure that you haven’t, you know, if you haven’t had a date for a month, you know, that you may say that was a girl you would have dated the first day. But who knows. So I don’t know, I don’t know for sure the answer, but I think, I think we would have dated that girl the first day.

And the second question, in terms, does it re, does it reflect giving up on finding an elephant to acquire in terms of a business? The answer to that is no. We’ve got plenty, we would sell stocks if we really, I mean, that would not be a problem if we really needed to, to buy a really big business. So we’re as prepared as we’ve ever been prepared to buy a big business outright. We hope we do. We hope we buy relatively small ones if they’re attractive. We bought a very attractive business, a TTI, run by Paul Andrews, terrific business, in the first quarter, and, you know, I wish it was five times the size, but maybe it will be someday. But we know that we’re in with the kind of person we want and the kind of business we want, and if we find larger ones, one way another will swing them. Charlie?

Charlie Munger [02:42:52] Yeah, the one thing I think we can promise you is that we won’t make returns on average and the kind of stuff we’re buying now like those that we made 10 or 15 years ago.

Warren Buffett [02:43:08] Yeah, we won’t come close. No, it’s a different world, with more modest expectations, and we hope you share them. Let’s go to number one.

[02:43:20] Shareholder (Bill Paparella, St. James, New York): Hello, Charlie, Warren. Bill Paparella from St. James, New York. Warren, I brought my 10-year-old daughter Gina with me. She asked me last summer, “How do I get rich?” So I gave her your letters, writings, even gave her Charlie’s Almanac, so she’s been reading ever since, asking me a lot of questions. So I said, maybe we’ll go to our first meeting together.

Warren Buffett [02:43:49] Is she married? I mean, she’s the kind of girl that I want my granddaughter or grandson to meet.

[02:44:00] Shareholder (Bill Paparella, St. James, New York): So we’re learning together. Warren, my question for you, in, is in regards to your recent charitable gifts. And if I could start by saying that I mean no disrespect, respect, you, my hero, so, and no, nor is it political.

Warren Buffett [02:44:27] You’re doing fine so far.

[02:44:30] Shareholder (Bill Paparella, St. James, New York): Okay. I am, as a father of five daughters, perplexed and upset that one or, I’ve read that one or more of these foundations is a big supporter of Planned Parenthood and abortion rights. If you were to go on the Planned Parenthood website, you would see a website that promotes promiscuity, goes out of its way to support internet porn…

Warren Buffett [02:45:21] Yeah, let’s get to the question, please. Ask, you have a question?

[02:45:29] Shareholder (Bill Paparella, St. James, New York): Question is, Warren, I was hoping that you could speak to the billions of dollars that’s been allocated with an agency as Planned Parenthood that is very well funded. It just doesn’t seem to drive with the hero that I study, and I was hoping that you could speak to it.

Warren Buffett [02:45:56] Yeah, well, I’ll be glad to speak to. I think it’s a terrific organization, and I, and I really think it’s too bad that for millennia, you know, women, not only the United States but all over the world, you know, have had involuntary bearing of babies forced upon them, and usually by a government run by men. So I don’t think we want to get into a, we don’t want to get into a cheering contest here, but, you know, I think that it’s a very important issue. I think it tends to have a small natural funding constituency, because it isn’t a popular type thing where, like, sticking your name on a hospital or something like that. But I would say that if we’d had a Supreme Court with nine women on it, starting when the country became the United States, that by now I don’t think a question like yours would even raised. You know, men set the rules for a lot of years, and think it’s wonderful that a woman can make reproductive choices. But, you know, we got a lot of people to disagree with me on that. I’ve got a lot of people to agree with me on it, and I hope you’ll respect my opinion as I do yours. Thank you. Number two, please.

[02:47:44] Shareholder (Bob Klein, Los Angeles): Hi, I’m Bob Klein from Los Angeles. Pursuing your earlier comments on sigmas from a different angle. The conventional wisdom in the investment world is that an investment’s risk can be measured by the volatility of the price of the investment in the marketplace. To me, this approach has it backwards. Since changes in price are determined by the changes in the opinions of investors in the marketplace, why would a rational investor substitute the opinions of the marketplace, as reflected in the volatility of the price, for his own assessment of the risk of the investment? And consultants take this idea further by tracking the volatility of a portfolio manager’s results in an attempt to measure risk. So could you guys expand on your thoughts on this?

Warren Buffett [02:48:40] Yes. Volatility does not measure risk. And the problem is that the people who have written, and taught about volatility do not know how to measure, or taught about risk, do not know how to measure risk. And the nice thing about beta, which is a measure of volatility, is that it’s nice and mathematical and wrong, in terms of measuring risk. It’s a, it is a good, it’s a measure of volatility, but past volatility does not determine the risk of investing.

I mean, actually, take it with farmland. Here in 1980, in the early 1980s, farms that sold for $2,000 an acre went to $600 an acre. I bought one of them when the banking and farm crash took place. And the beta of farms shot way up, and according to standard economic theory, market theory, I was buying a much more risky asset at $600 an acre than the same farm was at $2,000 an acre. Now people, because farmland doesn’t trade often and prices don’t get recorded, you know, they would regard that is nonsense, that that might purchase, a $600 an acre of the same farm that sold for $2,000 an acre a few years ago was riskier. But in socks, because the prices jiggle around every minute, and because it lets the people who teach finance use the mathematics they’ve learned, they have, in effect, they would explain this away a little more technically, but they have effect, in effect, translated volatility into all kinds of, past volatility, in terms of all kinds of measures of risk. And it’s nonsense.

Risk comes from the nature of certain kinds of businesses. It can be risky to be in some businesses just by the simple economics of the type of business you’re in. And it comes from not knowing what you’re doing. And, you know, that it is, if you understand the economics of the business in which you are and engaged, and you know the people with whom you’re doing business, and you know the price you pay and is sensible, you don’t run any real risk. And I don’t think Charlie and I, certainly Berkshire, I don’t think we’ve ever had a permanent loss in marketable securities that was what, 1%, maybe half a percent of that worth. I made a terrible mistake in buying Dexter Shoe, which cost us a significantly more than 1% of net worth, where I bought an entire business then. But I was wrong about the business. Had nothing to do with the volatility of shoe prices or leather or anything else, just was wrong.

But in terms of marketable securities, I cannot recall a case where we’ve lost me. We’ve done a lot of things in, things in securities that had a very high beta, we done things, a lot of things in securities had a low beta. It just, the whole development of volatility as a measure of risk, it’s really occurred in my, and it been very useful for people who wanted a career in teaching, but it is not, we’ve never, never find a way for it to be useful to us. Charlie?

Charlie Munger [02:52:25] Well, it’s been amazing that both corporate finance and investment management courses as taught in the major universities, we would argue it’s at least 50% twaddle. And yet these people have very high IQs. One of the reasons we’ve been able to do pretty well is that we early recognized that very smart people do very dumb things, and we tried to figure out why.

Warren Buffett [02:52:58] I also wanted to know who, so we could avoid them. And we will not run big risks at Berkshire. Now, we will be willing to lose, as I put in the annual report, $6 billion in a given catastrophe. But our catastrophe business, run over many years, is not risky. The, you know, a roulette wheel will occasionally pay off at 35 to 1. That sounds like you’re paying out an awful lot of money compared to the mount B on one number, but I would love to own a lot of roulette wheels. Number three.

[02:53:38] Shareholder (Stuart Kaye, New York City): Hi, my name is Stuart Kaye, and I’m from New York City. Warren and Charlie, you spend a lot of time evaluating the management quality and integrity of the companies that you may invest in. In my current job, I do not have the opportunity to do that. As I read through annual reports and financial statements, what do you suggest I focus on to help me to determine the quality and integrity of management?

Warren Buffett [02:54:15] Well, you can, we’ve spent many, many years and we’ve bought many things, I mean, I, without meeting managements at all, having any entree to them. The stocks, the $5 billion of stocks that we may have bought in the first quarter, most of those were companies I’ve never met the management, never talked to them. We read a lot. We read annual reports, we read about competitors, we read about the industries they’re in. In terms of sizing up managements, obviously, we’re going to buy the whole business, that’s a different question than you, because you, we’re gonna buy it, be in bed with them, they’re going to run them, and we care very much about whether they’re going to behave in the future as they have in the past once we own the business. And we’ve had very good luck on that. But in terms of marketable securities, we read the reports.

Now, Charlie and I were just talking about one the other day where we read an annual report of a large oil company, and the company, you know, 100 pages, public relations people, lots of pictures, spent a fortune on it, and you can’t find in that report what their finding cost per mcf, for, per barrel of oil was last year. That’s the most important figure in an oil and gas company over a period of years. But every year it counts. The fact it wouldn’t even be discussed, the reason it wasn’t discussed, it was absolutely terrible. But the fact it wouldn’t even be discussed, and to the extent it was touched on, it was done on in a dishonest manner. When we read things where we basically are getting dishonest messages from the management, it makes a difference to us. You know, it, like I say, in marketable securities, we can solve that by selling the stock, and it’s not the same thing as buying the entire business.

But I think you can learn a lot by reading the annual letters. I mean, for one thing, if it’s clearly the product of some investor relations department or outside consultant or something of the sort, you know, that tells you something about the individual. If he’s not willing to talk once a year through a few pages to the people that gave him their money to invest, I mean, that, I’ve really got, I’ve got some questions about people like that. So I like that feeling that I’m hearing directly from somebody who regards me as a partner. And you may not get it all the way, but when I get a 0% of the way, I don’t like it. I’ve still bought, we’ve still bought into some, in marketable securities, we’ve bought into some extremely good businesses where we thought they were run by people we didn’t really like very well. We didn’t feel they could screw them up. Charlie?

Charlie Munger [02:57:17] Yeah, I think that’s exactly right, but that there are two things, the quality of the business and the quality of the management. And if the business is good enough, it will carry a lousy manager. And the converse case, where a really good manager gets in a really lousy business, you’ll ordinarily have a very imperfect record. In other words, it’s a rare person that can take over a textile business totally doomed, which was what Warren did in his youthful F, and turn it into what’s happened here. You should not be looking for other Warrens on the theory there under every bush.

Warren Buffett [02:57:57] I figured it out in 20 years, though, I’ll have to say that for myself. 20 years and I finally figured out I was in the wrong business. But there are business, if you gave me first draft pick of all those CEOs in America and said it’s your job to run Ford Motor now, or, you know, pick a company that’s in a terribly tough business, you know, I wouldn’t do it. I mean, that it’s just, it’s just too tough. They may, they may get it solved, and, you know, if they get cooperation from unions and a whole bunch of things, but it will not be solely in the control of the CEO has that job. He’s got, he is dependent on too many good things happening outside to say that he alone can get the job, even if he’s the best in the world. Number four.

[02:58:48] Shareholder (Walter Chain, San Jose, California): Hi, hi Charlie, I’m Walter Chain from San Jose, California. My wife and I are expecting our first baby boy in July, and we’re going to name him Warren after you.

Warren Buffett [02:59:00] You’re trying to get into my again.

Charlie Munger [02:59:04] I’m rooting for you for the next one.

Warren Buffett [02:59:08] I’d move him further down the line, maybe. Number five.

[02:59:13] Shareholder: Warren and Charlie, Warren, if you were writing a followup to the very precent, Forbes, I’m sorry, Fortune magazine article from November 1999, in which you were talking about the lean and fat 17-year periods, what would you be writing? And since we’re halfway through this third 17-year period, how is it turning out, based on your expectations from back in 1999?

Warren Buffett [02:59:42] Yeah, the 17 years, of course, I had a little fun with because of the fact that there were two 17-year periods and there also 17-year locust, so I stretched it a little from a literary standpoint. But there is nothing magic about given spans of time. There was something very different between the first 17 years of that 34-year period and the second 17, and I used that for kind of, kind of a dramatic contrast. If I were writing something now, I would say what I said just a little earlier in response to Frank Martin’s question, that it is, if I had to own long bonds or long-term position equities, I’d rather have equities, but I would not have high expectations for them. But I would have expectations beyond 4 and 3/4%. How much beyond, I’m not sure, but something enough beyond 4 and 3/4% that I would rather own equities than bonds.

I did not feel, I felt in 1999, mind, that people were extrapolating the experience of the previous 17 years and assuming there was something magic about owning equities, and expectations of the people were bound to be, they were, they were, people were bound to be disappointed. They simply had an unrealistic view by extrapolation, and that was the main purpose of that article. But if I were writing something now, I would, would not, I would not have high expectations for equities, but I would have better expectations for equities than for bonds. Charlie?

Charlie Munger [03:01:27] Yeah, and I would say that since that article was written, the results from owning equities have been pretty lean, at least compared to what happened in the glorious 17 years that preceded. So Warren has been right so far, and he’s probably right now when he says modest expectations.

Warren Buffett [03:01:49] Yeah, you really don’t have, in markets you can’t say something terribly important or intelligent every day or every week or every month. That’s one of the problems of, if you want on television too often or to write weekly letters or something of the sort. Every now and then you get something extreme. I mean, I didn’t, I did close down the partnership in 1969, and an article appeared, I did give an interview in ’74, I gave another interview in ’81 or two. I mean, every now and then things really get out of whack, and, but the great as in between, they’re too tough. But the nice thing about it is you don’t have to have an opinion every day or every week or every month. You know, if you own some good businesses and you bought them at the right price, if they get to a silly price you probably should sell them. And if you find that everything is extremely cheap, like in ’74, you should put every available dime in the, in equities, and that’s what we’ve tried to do. Number five.

[03:03:02] Shareholder (Ronnie Peline, Eureka, California): Yes, thank you, gentlemen, for this opportunity to ask you a question. My name is Ronnie Peline, and this is my 14-year-old daughter Michaela. We’re here representing hundreds of ocean commercial hook and line salmon fishermen and their families from the West Coast. They are barely hanging on to their livelihoods because of the Klamath River crisis. My husband is a fourth generation hook and line commercial fisherman from Eureka, California. His family has fished for the last 100 years. Last year our commercial salmon season was completely shut down because of the crisis in the Klamath River. It is caused by the four lower hydroelectric dams owned by your subsidiary PacifiCorp. We personally took a 95% hit in our income, excuse me, and we had no way to make up that loss. We have used our savings and were forced to take out a Small Business Administration disaster loan to meet our financial needs.

Our daughters were so upset after overhearing my husband and I last Christmas, they came to us wanting to give us all the money in their bank accounts. I am telling you this, gentlemen and shareholders, because you and the shareholders can help. Under Klamath dam relicensing, it is shown that this dam removal makes economic sense for Pacific and MidAmerican. You are a great businessman who have built an incredible empire. We sure could use your creativity and expertise in solving this crisis situation, so the Indian people along the river and we in the coastal communities can continue our long and proud heritage. People back home are eagerly waiting for me to bring a response back from you. My question is, what can I tell them is your position on removing the outdated Klamath dams?

Warren Buffett [03:05:28] Yes. All the, our position on that is quite simple. The FERC and several of the regulatory commissions have before them 27 different proposals or positions by various interest groups. Some want, some like hydro power, which is what comes from the dams, because it does not generate the emissions that comes from coal or gas fired generation. Some like the fact that hydro power is cheaper, several hundred, consumers. Some people have been hurt by what you describe in terms of the fish. And you have a public policy question which will not be determined by PacifiCorp, it will be determined by FERC, because they are, they represent the public. The fact the Secretary of Interior has advised FERC that it’s a very tough question. FERC will be have hearing, that they will listen to the positions. The Oregon and what, Utah, California, perhaps, public utility commissions will be listening to the arguments. And in the end, we are a public utility responding to public policy, public policy weighing both your interests and the interests of others in the matter will come to a determination, and PacifiCorp will do exactly what they say. We are responsive to the, to the people that regulate us, just as people have been in that position since the first am was put in 1906. So that is entirely a question for FERC and the state commissions. Number six.

[03:07:17] Shareholder (Cameron Sparrow, Boulder, Colorado): Good afternoon, Mr. Buffett and Mr. Munger. Thank you for taking my question. This is my second time at the Berkshire Hathaway meeting that I have attended. My name is Cameron Sparrow. I am 13 years old and from Boulder, Colorado. My question is for Mr. Buffett. Mr. Buffett, what is your opinion about the merger of the New York Stock Exchange with the Euronext? Do you think this, that the merger will have a positive or negative effect on the market?

Warren Buffett [03:07:53] Well, I really don’t know the answer to that. My guess is that, I mean, both of those institutions were very large institutions beforehand, and we would judge a positive effect in terms of narrowness of spreads, as an investor, in terms of cost of execution and that sort of thing. My, both places have been very efficient in the past. I mean, we pay quite low co payments, although my broker is here, we could probably should be paying even less. But the, both the New York Stock Exchange has gotten far more efficient in terms of costs from 30, or from the days of fixed commissions back in the early ’70s and before that. I mean, it’s a fraction of the cost. And the real test from our standpoint is, you know, do we get better execution and less costly executions? And like I say, both institutions were big, big effective institutions beforeand. If they get a little more efficient, I hope it gets passed on to the customers, but it may just result in larger profit. But we’re pretty satisfied with, quite satisfied actually with the functioning, the New York Stock Exchange is where we do most of our business. But we’ve done business, we’ve been buying international stocks, and we’ve had generally good executions throughout the world. So it’s not a source of be either concern or enthusiasm to me. Charlie?

Charlie Munger [03:09:26] I don’t know anything about it.

Warren Buffett [03:09:29] I don’t either, but I took longer to say so. Number seven, pleas.

[03:09:35] Shareholder (Chander Chava, Seattle, Washington): Mr. Buffett and Mr. Munger, thanks for hosting this wonderful meeting. I’m, my name is Chander Chava, and I’m visiting from Seattle, Washington. And I think Berkshire Hathaway can contribute to the reduction of global warming if for next year’s shareholder meeting Mr. Gates and I fly on the same plane. My question is, I have made a few mistakes in business by trusting the wrong people. So in, and I don’t know where to learn how to trust the right people. They don’t teach you that in business school, and the people who are supposed to teach you in the corporate world sometimes betray you. So how can I learn who to trust and who not to trust?

Warren Buffett [03:10:35] Well, it’s a great question, but you probably have about as good a chance of getting a good answer for me on that as you have of getting on Bill Gates’s play next year. But they, I get letters all the time, and I hear from people who have been taken advantage of in financial transactions, and, you know, it really is, it’s sad. And a lot of it isn’t even, it’s not fraud or anything. For one thing, I mean, just the charges involved, the frictional costs, and the baloney that is presented is tough.

Charlie and I have had very good luck in terms of buying businesses and putting our trust in people. It’s been just overwhelmingly good. But we filter out a lot of people, and then they say, how, well, how do you filter them out? I would say, and I think Charlie will agree with this, people give themselves away fairly often, and maybe it does help to been around as long as we have in seeing the various ways they give themselves away. They, when somebody comes to me with a business, and I probably shouldn’t tell this publicly because they’ll probably tailor their approach subsequently, but when they come, just the very things they talk about, what they regard as important and not important, there are a lot of clues that come as the subsequent behavior. And like I say, we’ve really had a batting irage I wouldn’t have thought we would have had in the people that we’ve joined with. But it hasn’t been 100%. It’s been well above 90. And I get asked that, you know, I mean, how do you, how do you make those judgments? And I don’t know. Charlie, can you articulate the way we do it?

Charlie Munger [03:12:39] Well, partly we’re deeply suspicious when the proposition is too good to be true. Warren once introduced me to a gentleman promoter who wanted to inv vagle us into an insurance program, and he said, “We only write fire insurance on concrete bridges that are covered by water.” He says, “It’s like taking candy from babies.” We are able to filter out propositions like that.

Warren Buffett [03:13:09] Yeah, anybody that, any, anybody that, implicit in their comments, or what they kind of laugh about, or all kinds of things in terms of the fact, you know, it’s so easy, and it ain’t that easy, you know. And we get suspicious very quickly. And the truth is, we rule out 90% of the times, and we may be wrong about a fair number that we’re ruling out. The important thing is whether the ones we’re ruling in were right about. And so we don’t mind, we’re looking for the obvious cases of people you can trust.

I mean, go back to 1969 again, when I was thinking about who to turn my partners over to. All kinds of people with great records. That was a, a hedge fund, that was the first heyday of hedge funds. There were books written about it, New Breed in Wall Street, and someone, you can look them up, and dozens and dozens and dozens of people with good records. And when I sat down and thought about, I’m going to, I’m going to write my partners and tell them who to turn over all their money to, because most of them had 100% or something close to it with me. You know, Charlie, Sandy, Bill Ruane, you know, I couldn’t have told you which of the three was going to do the best, you know, and I couldn’t even tell you that those three would have done better than five others that somebody else might pick. But the one thing I was sure of, it was, it was they were going to be sensational stewards of money. They were going to care more about those people, people that were turned over to them, and getting the best result possible than they were going to care about, you know, whether they made X or 2X this year in terms of commissions or fees or any of that sort of thing. Anytime I find somebody with a, what I regard as an unfair fee structure, and saying, well, I can get it, well, I, you know, I rule them out. And I may rule out some of the wrong people, but the ones I, that are left in, I feel very good about. And I wish I could give you better advice than that, but that’s all I can do. Eight.

[03:15:16] Shareholder: Yes. Mr. Buffett, Mr. Munger, thank you again for being so generous with your time with us every year. I’d like to follow up on the question from the gentleman from Australia and from Munich on valuation. The gentleman from Australia asked about margin of safety, and you replied that a superior business may not require that much of a margin of safety. And my followup would be, is, does that suggest market rate of returns going forward for superior businesses? And then on the Munich valuation, in which you cited a farm example on discounted cash flows, I’m very curious how you come up with your discount rate, and how you might adjust that discount rate based upon various businesses. Might you might want to discuss your discount rates used for Coca-Cola, J&J, or some of your past investments?

Warren Buffett [03:16:15] Yeah, we don’t, we don’t formally have discount rates. I mean, every time I start talking about all this stuff, Charlie reminds me that I’ve never prepared a spreadsheet. But I do, you know, in effect, in my mind I do. But we are going to want to get a significantly higher return, obviously, in terms of cash produced relative to the amount we’re outlaying now for a business than we are from a government bond. I mean, we, you know, we’re going to, that has to be the yard stick at a base. Then how much more do we want? Well, if government bond rates were 2%, we’re not going to buy a business to earn 3% or 3.5% expectancy over the years. We just don’t want to commit our money that way. We’d rather sit around and wait a little while. If they’re 4 and 3/4%, you know, what do we hope to get over time? Well, we want to get a fair amount more than that.

But I can’t, I can’t tell you that we sit down every morning and I call Charlie in Los Angeles and say, “What’s our hurdle rate today?” I mean, we have never used the term. You know, it’s a little bit of the, we want enough so that we feel very comfortable if they close on the stock market for a couple of years, if interest rates go up another 100 basis points or 200 basis points, we’re still happy with what we’ve bought. And above that, I really, you know, I know it sounds kind of fuzzy, but it is fuzzy. Charlie?

Charlie Munger [03:17:46] Yeah, the concept of a hurdle rate makes nothing but sense, and yet a lot of terrible errors are made by people who are talking about hurdle rates. Just because you can measure something and guess, it doesn’t mean that it’s the controlling variable in what you’re dealing with in a messy world. And I don’t think there’s any substitute for thinking a about a whole lot of investment options and thinking about why one is better than another and what the likely returns are from each, etc., etc. And the trouble with the hurdle rate concept, not that we don’t have one in a sense, is that it doesn’t work as well as a system of comparing things.

In other words, if I have something available that I think will give me 8% for sure, and I can buy all I want of it, and you’ve got a perfectly good investment that I think will earn seven, I don’t have to waste five minutes with you. You’re like the mail order service offering the bride through the mail, and she’s got AIDS. You know, I can go on to some different subject. And it’s, and so this, the concept of opportunity cost is, it’s so little taught in investment M. They teach it in the freshman course in economics in all the major universities, but when you get to the corporate finance departments and so forth, it doesn’t lend itself to the kind of mathematics they want to use, so they ignore it. But in the real world, your opportunity costs are what you want to make your decisions based on.

Warren Buffett [03:19:34] Yeah, and even if you were, if you had something that you were really familiar with and were very sure on the 8%, 8.5% wouldn’t tempt you if somebody came along, that’s a practical matter of you. It, I’ve been on, as I mentioned, I’ve been on 19 corporate boards. I would say that of the presentations I’ve seen, and I’ve seen a lot of them, and every one of them had a calculation of internal rate of return, you, if they’ burned them all, the boards would have been better off. I mean, it is, there is so much nonsense presented, because the presenters essentially know what the listeners are desires of hearing and what is needed in order to get through something that the CEO wants to do anyway, that you just, it’s just, you just get nonsense figures. And, you know, we may get nonsense figures too, but they’re ours. You…

Charlie Munger [03:20:26] We, let me give you an example of that. I have a young friend who sells private partnership interests to investors, and he’s in a really tough field where it’s hard to get decent returns. And I said, “What return do you tell them you’re aiming for?” And he said, “20%.” And he said, how did you pick that number? He said, “If I chose any lower number, they wouldn’t give me the money.”

Warren Buffett [03:20:53] And there’s no one in the world we think can earn 20% with big money. I mean, it just, so anybody making a promise like that, basically we’re going to write off immediately. It’s amazing to me what, you know, in a sense, how gullible big investors are, pension funds and so on, and that they have people come around and promise them the holy grail, and they want it so badly, you know, that they’re willing to believe things that just have to be nonsense. Let’s go to number nine.

[03:21:30] Shareholder (Robert Piton, Chicago, Illinois): Good afternoon, Mr. Buffett, Mr. Munger. My name is Robert Piton, and I’m from Chicago, Illinois. Over your careers, has there been any question, either personally or professionally, that you haven’t been able to get a comfortable answer to, that you cannot simply put in your too difficult pile? Thank you.

Warren Buffett [03:21:59] Charlia?

Charlie Munger [03:21:59] Well, sure, you get problem. You may have just asked one. Yeah, sure, if you got a child dying of some horrible disease, you have a problem you can’t just put in a too difficult pile. So there are lots of things in life that come to you that you, that where you have no option to not consider the issue. But where it’s voluntary, like choosing one investment for many, from many, then the too difficult pile is a marvelous way of sifting your daily grist.

Warren Buffett [03:22:36] Yeah, I have a file on my desk, Laura Graham gave it to me, that entitled “Too Hard.” And as Charlie said, if something is optional and it’s too hard, you just throw it in there. If you got the problems of weapons of mass destruction, it is too hard, but just, you have to keep wrestling with it, because if you even reduce the probabilities a tiny bit, you know you’re doing something. But you’re never going to solve it. You just have to keep working at certain types of problems that, and you hope you don’t have too many like that. 10.

[03:23:12] Shareholder (Bernard Yarden, Germany): Another, another greetings from Germany. I am Bernard Yarden from Floren wison, a little town close to the Black Forest, and I’m the mayor of it. My question to Mr. Buffett and Mr. Munger is, how often do you review each single position in your portfolio, folio? Some look at their stocks every day, sometimes more, some only once a year. What is your frequency? Thank you.

Warren Buffett [03:23:59] Well, that sort of breaks down into two periods of my life. When I had more ideas than money, I was thinking about everyone all the time, because I was thinking about buying the next one, and which one I would have to sell in order to buy something even more attractive. So my opportunity cost, as Charlie would put it, then was the least attractive stock, which I would give up to buy something more attractive. So I was, I literally, if I had $100,000 and it was all invested, and I wanted to put $10,000 or $20,000 in something I F felt was more attractive, I would be thinking all the time of which one of these do I unload.

Now our situation is such that we have more money than ideas, and that means that we really aren’t reexamining something every minute, because the option is cash and not doing something that we really are excited about. We still think about the businesses we’re in, whether they’re wholly owned or whether they’re partially owned through stocks. We think about them all the time. I mean, it, you know, we’ve got a lot of information filed away in our minds, and you keep getting little incremental bits about that company or the competition or other things going on. So it’s, you know, it’s, it is a continuous process, but it’s not a continuous process with the idea that daily activity or weekly activity or monthly activity is going to result. It’s just we want to just keep adding to our thinking, the knowledge, refining it further about every business that we’re in. If we needed some money for a very big deal, for example, let’s say we needed $20 or $30 or $40 billion dollar, and we had to decide to sell $10 billion of equities, just to pick a figure, you know, we would use the information we’ve been collecting daily, which hasn’t redem meant much as we’ve gone along, and then we would come to a decision about where we raised the $10 billion. Charlie?

Charlie Munger [03:26:05] Yeah, but even in Warren’s salid days, when he had way more ideas than he had money, he did not spend a lot of time thinking about his number one choice. You know, he could put that aside and devote his efforts to other subjects.

Warren Buffett [03:26:27] Number 11.

[03:26:27] Shareholder (Charles Friser, New York): Good afternoon. Charles Friser from New York. In the last 18 months, the company has allocated at least $1 billion to 4, 5 publicly traded companies. Berkshire has an abundance of capital and a scarcity of ideas. Since these stocks investments were made in large cap companies in which we could have probably made $5 billion in investments, have you thought about allocating more capital to each stock investment?

Warren Buffett [03:27:06] Yeah, we do think about that, obviously, and there’s certain ones that we have added billions of dollars to that we already had substantial positions in a couple years, a couple years ago. Obviously, when we add to the present list, we think we’re adding to the ones either that look the most attractive to us or to the ones that we can just buy. I mean, there’s some things where we can’t put that much money in, or where we will hit reporting thresholds that will cause a problem. If we own over 10% of a company, you know, if we can’t sell a share of it then for six months without it being, if there’s a profit, of being recaptured pursuing to a short swing rule. So there’s some, there’s some technical things that enter into whether we cross certain thresholds of ownership size.

But if you look at, you know, if you look at the portfolio at the end of 2007, you’re going to see that certain positions in there from 2006 have probably been increased by billions of dollars. And that’s always something that I’m considering, and Charlie’s considering. We like, we like to add to present positions. I mean, those are companies we know, understand, obviously like to some degree, and if the price gets reasonably attractive, we got money around, we will add. If we can find a good business to buy, you know, we will sell the least attractive. Charlie?

Charlie Munger [03:28:40] Yeah, it isn’t as easy as it looks to buy these big positions. When we were buying Coca-Cola, we were buying every share we could with what, 30% or 40% of the daily trading.

Warren Buffett [03:28:56] Yeah.

Charlie Munger [03:28:56] And it took us a long, long time to get our position. And so there are huge difficulties to managing great big common stock portfolios. Now, we like it way better when we have those problems now than we liked it when we didn’t have them early, but it does make it much harder. We have no easy way of moving these elephants around.

Warren Buffett [03:29:23] In general, we think we usually can buy something like 20% of the daily trading volume and feel that we’re not causing the price to be violently different than it would have been if we hadn’t been participating in the market. So that means if we’re going to buy $5 billion worth of something, $25 billion worth of it’s going to have to trade, and that’s a lot for many stocks. So it’s, it, we are a big ocean liner, and that has its disadvantages compared to being a smaller boat. Number 12.

[03:30:00] Shareholder (Wendy George, Hoopa Indian Reservation, California): Hey young hallo. My name is Wendy George, and I am from the Hoopa Indian Reservation in Northern California. I’m here with the Yurok and Karuk indigenous people who live along…

Warren Buffett [03:30:18] I don’t know whether the microphone isn’t working or not, but we want to make sure it is working.

[03:30:33] Shareholder (Wendy George, Hoopa Indian Reservation, California): Who live along the Klamath River. My people are river people. Our entire culture, religion, and subsistence is centered around the river. Your subsidiary company PacifiCorp owns dams on our river. Mr. Buffett, I know you care very much about humanity and ethical business. We also understand that you cannot exercise direct control over paor PacifiCorp operations. However, there are things you can do to help us. So we are here to ask you if you would be willing to meet with the tribal representatives, learn more about our issues, and explore ways to help save our salmon.

Warren Buffett [03:31:43] Are you complete, or just take your time here.

[03:31:48] Shareholder (Wendy George, Hoopa Indian Reservation, California): Complete.

Warren Buffett [03:31:49] Okay. The, as I said earlier, we will not make the determination in the end. It will be made by FERC. We, it’s the same way as if we’re going to put in a coal generation plant or a gas generation plant or more wind powerered. For example, we put in a lot of wind power in Iowa, but that was decided essentially by the Utility Commission in Iowa, that they wish to make that decision. And incidentally, sometimes people are unhappy when we put in wind, because they don’t want the transmission lines that are going to be involved. They’re usually happy to give us the plots on which to put the wind turbines, because they get paid very well for it, but they’re not happy to have the transmission lines. And there, any time you get into the public utility field, there are people happy and unhappy with decisions. That nobody body wants a generating plant building near them, and that’s the nature of it.

The world does want electricity, and because it wants electricity and it wants more electricity, it essentially has to decide the public policy issues through regulatory authorities. When we will do exactly what FERC finally, and with the consent of the state commissions, but they finally decide on it. And all of the arguments will be presented to them, as I say, they’re 27 groups, I believe, and then they go, and then they get the opinion of the Secretary of the Interior and so on, and a lot of other groups, and somehow they come out with the decision on public policy, and we will follow it. It, it takes a lot of time, too, I must say. Anytime you’ve got an issue that’s got 27 different views and more than one authority, it’s going to take significant time.

I’m in a, I’m in a peculiar position on this, because when we bought PacifiCorp, we had to, Walter Scott and I both signed affidavits as part of the acquisition of PacifiCorp. The Oregon Public Utility Commission required that we submit these affidavits, and I’ll read you from this. I don’t, I don’t want to, you to think I’m ducking behind this, but this was executed several years ago, and it says, “I agree I will not exercise any control, directly or indirectly, on matters that pertain to PacifiCorp, except for relating to PacifiCorp that are ministerial in nature.” And then, “I agree, as a MidAmerican Holding Company and Berkshire Hathaway directors, I will recuse myself from voting on MidAmerican Holding Corp or Berkshire Hathaway Board of Director matters concerning Pacific corporate activities or operations.” This, this is part of the order that came down that allowed MidAmerican to buy PacifiCorp. I must say, too, that in terms of the Oregon commission and the five other states, that our application went through in almost record time, because MidAmerican does have such a good record in terms of being responsive to the public utility commissions under which it’s operated. And we will continue to be responsive, but I appreciate your point. Thank you. Number 13, please.

[03:35:11] Shareholder (Peter Vanden Broeck, Cleveland, Ohio): Peter Vanen Brook, Cleveland, Ohio. Mr. Buffett, Mr. M, thank you for so eloquently answering some of these tough questions. I know of no other public company that would allow a forum such as this. You’re doing a great job. Thank you. My question is a follow-up question to the Katrina aftermath situation and regarding policy holders with insurance companies, and the tussle between coverage and what’s the prop, proper remedy for those that suffered after such a storm. U part of that tussle, or one of the results of that tussle, was some legislation that was passed in the State of Florida. Could you please explain that legislation as you understand it to shareholders, and what, what effect, if any, does that have on Berkshire’s insurance subsidiaries? Thank you.

Warren Buffett [03:36:16] Yeah, I can’t tell you with precision what the Florida, I don’t know whether Joe Brandon or a, or Tad Montross, if they’re in the manager group, if somebody could pass a microphone over to them. Essentially, I should let them explain it. But the State of Florida has gotten more into the business of ensuring the citizens by a considerable margin than it did before, but there are some significant limitations on that. And I think if we’ve got a microphone with one of the three of them, they could answer that question better than I do. We have somebody over there? Are they all outriding insurance, or I, more likely, buying jewelry. Check one two. Who do we have? It’s impossible for me to see over there with the lights, but I’m getting a mic. What are they yelling? Seven.

JBJoe Brandon [03:37:22] Hello. Ah morning, it’s Joe. Took me a, took me a little time to get here. I was looking for a je. What was this specific question?

Warren Buffett [03:37:34] I think the question, I think the questioner wanted to know what has really happened in Florida in the last three or four months, in terms of the state getting involved in the homeowners insurance business.

JBJoe Brandon [03:37:50] Well, back in mid January, the Florida legislature met in a special session and passed legislation at the urging of the governor that expanded the reinsurance fund, and ultimately is moving a lot of risk, both personal lines, commercial lines, from the private market to the public market. And, you know, this is, is going and has manifested itself in lower prices for wind risks in Florida, and has freed up capacity that was dedicated to Florida for other markets. So ultimately it’s going to have a depressing effect on the insurance industry longer term. You know, there is no free launch, and the state and the citizens of Florida are taking a tremendous amount of risk, risk, and it will all work out if the wind doesn’t blow. But the odds are eventually it will, and Florida’s going to have a large public policy issue to deal with.

Warren Buffett [03:38:58] Are they, Joe, are they explicitly taking on about $30 billion, and then sort of leaving it in the laps of the gods above that? I’m not sure myself.

JBJoe Brandon [03:39:13] But yeah, I believe the, they take out about $30 billion. It’s about, the increase was $12 billion to $16 billion. So they previously had taken about $18 billion out, and they took an additional 12 to 16.

Warren Buffett [03:39:27] Yeah, the real problem will be if there turns out to be a $100 billion in insured loss. And then, this, you know, the state may decide to issue $60 or $70 billion of bonds. They may decide to go to the federal government and say, “This really isn’t our fault,” and they, for the entire country should pay in some form. Who knows what will happen. And the truth is, there, you know, it’s very unlikely that a $100 billion dollar storm occurs. The biggest one was Hurricane Andrew, which, trended through inflation to present day, probably wouldn’t quite hit $30 billion. But if that same storm had come through as a category 5 about 20 miles north of where it came, where it hit, you would have, or you could easily have something like a $100 billion dollar storm.

So, you know, we, you’re going to have to stay tuned on that. And if they don’t have any hurricanes in the next couple of years, the whole matter will die down. And big hurricanes, and if they have $1 billion dollar storm, they will probably go to Washington, and we will find out whether the whole country has been ensuring hurricanes in Florida, or whether the federal government will throw it back to the State of Florida, and the state affa will, would presumably issue a lot of bonds, and taxes would go up, and in effect you would distribute, you would distribute insurance, what might an insured losses, in relation to the, to the proportion people pay of the general tax revenues of a state like Florida. It’s tough to be where the wind blows a lot, but it’s also a very nice place to live, apparently. So we will find out how it plays out. Number 14, please.

[03:41:18] Shareholder (Steve Rosenberg, Michigan): Steve Rosenberg, originally from Michigan. Thank you very much for continuing to serve as excellent role models and for the values that you continue to teach by example. I’m curious to know, who are your present day role models? And I know that your prior heroes included your father, Ben Graham, and Davy, but would be curious to know who, in addition to those three. Thank you.

Warren Buffett [03:41:45] Well, I’ve had a number of them, and I’m not sure I want to name them, because I, the ones you don’t name may might feel a little left out. But the one thing I’ve been very lucky on is that the ones I’ve had have never let me down. So I have never had that experience where you’ve looked up enormously to somebody and then had that person let you down in some way, which would be a terrible experience and very hard to get over it. And, you know, I’m sure some people have had that in marriage, and they’ve had it in business, and the worst situation, of course, is if you have it with your parents. But that did not happen. In fact, the reverse happened, happened with me. So I can just tell you that choosing your heroes is very important. I tell that to the students when they come, because you are going to gravitate toward the behavior of those around you. I tell people to be sure and associate with people that are better than you are. Marry up, you know, and hope you find somebody who doesn’t mind marrying down. And it will do wonders for you, for you. It was a huge help to me, I can tell you that. Charlie?

Charlie Munger [03:43:02] Yeah, I would say that you’re not restricted to living people and picking your mentors. Some of the very best people are dead.

Warren Buffett [03:43:12] Well, with that, we better go to number one.

[03:43:17] Shareholder (Kendall Brubaker, West Lafayette, Indiana): Hello, everyone. My name is Kendall buer. I’m a senior from Purdue University in West Lafayette, Indiana. I have my resume screen printed on my shirt. Charlie and Warren, I brought a shirt for each of you, as well as one for Deb Bray, who is responsible for my presence today. Additionally, I have a strong interest in social entrepreneurship and the Gates Foundation, and would love to offer shirt to Bill, if he is willing to accept. Now, I had an overly technical question about the historic rate of economic growth and why it’s 3% as opposed to 2 or 5. However, given my circumstances, I feel it is more appropriate to ask if I made a sound economic decision to make this trip to Omaha to display my own intrinsic value, and to turn down the $500 that the man just offered me for my spot in line to 27,000 people, and to learn from you, or if I would been better off charging the equivalent amount to my American Express card on See’s Candy and Coca-Cola. Thank you. And again, my name is Kendall Brewer.

Warren Buffett [03:44:51] Thank you. I thought your question was going to be what shirt size we wore, but mine, mine is small. I think we’ll move on to number two.

[03:45:09] Shareholder (Tom Nelson, North Oaks, Minnesota): Tom Nelson, North Oaks, Minnesota. This one is for Charlie. What are your current views on the costs and benefits of ethanol production in this country?

Charlie Munger [03:45:26] Well, you know, even McCain has had a counter revelation lat. He’s decided that ethanol is wonderful now that he realizes that’s the way they think in Iowa. And I’m somewhat in his position here, but I won’t allow that to stop me. I think the idea of running automobiles on corn is one of the dumbest ideas that has gotten widespread acceptance that I have ever seen. But in a government with a lot of political pressures, weird decisions get made, but that has to be about as crazy a decision as was ever made. The, you want a social safety net under people, and the most basic safety net of all is food, and you’re going to raise the cost of food so you can run these automobiles around. And you use up just about as much hydrocarbons making the corn as you get out of the ethanol. No, I would say that, and you don’t count in the cost of the ethanol the cost of the top soil, goes away forever when you, it’s a… I love Nebraska, I’m a Nebraskan to my core, but this was not my home State’s finest moment.

Warren Buffett [03:47:01] We’re going to try and smuggle him out of town tonight.

Oh, I should make one, one announcement in terms of the books at the Bookworm outside. Jerry Goodman, friend of mine from way back, wrote a book many years ago called Supermoney, which he just brought out a new addition. They actually flew those in. They arrived here at the auditorium about 9 or 10 o, or 10 or 11 o’clock, I guess, this morning, and the new revised issue of Supermoney is now out there, in addition to all the other titles. And I would feel remiss, after all the trouble they went to, if I didn’t mention that to this group. It’s a very good book. Jerry was a great writer. He wrote The Money Game, which was the classic, and Supermoney is a good book too. Let’s go to number three.

[03:47:51] Shareholder (Paul Wigdor, Montclair, New Jersey): Good afternoon, gentlemen. Paul Wigdor from Montclair, New Jersey. What are you doing to protect our company’s portfolio against the perils of inflation? Specifically, are you looking at further currency investing and metals investing?

Warren Buffett [03:48:04] Well, we would not necessarily look at metals investing as being any protection against in inflation at all. But we are, the best, the best protection for inflation is your own earning power. I mean, somebody that is a first class surgeon or lawyer or teacher or salesperson or anything else, whether the currency is sea shells or paper money or whatever, we’ll do all right in terms of commanding the resources of other people. So your own earning power is your best, is the best hedge against inflation.

The second best hedge is to own a wonderful business. Not a metals business necessarily, not a, not a raw material business, not a minerals business, but a wonderful business. And the truth is, if you own Coca-Cola, if you own Snickers bars, if you own Hershey bars, if you own anything that people are going to want to give a portion of their current income to keep getting, and it has relatively low capital investment attached to it, so that you don’t have to keep plowing tremendous amounts of money in just to meet inflationary demands, that’s the best, that’s the best investment you can probably have in an inflationary world.

But inflation is bad news for investors under almost any circumstances. You can argue that if you owned, if you owned some business required very little capital investment, and had real flexibility of price during an inflationary period, so that people would continue to give up a half an hour work of their own work every month to buy your product, and you leveraged it, then you might even beat inflation to some extent. But leverage is not our game. But we try to own good businesses. I think that Berkshire would not do as well during high rates of inflation at all as it does, in real terms, as it does in periods of low inflation, but I think we would do better than a good many companies. Charlie?

Charlie Munger [03:50:15] I’ve got nothing to add.

Warren Buffett [03:50:17] Number for.

[03:50:18] Shareholder (Felton Jenkins, Savannah, Georgia): Hello, Warren and Charlie. My name is Felton Jenkins. I’m from Savannah, Georgia. I’ve been a shareholder for a number of years, and this is my third annual meeting. Thanks to you guys, and thanks to your managers and all your employees for the great job. Just briefly follow up on one thing. It’s been published in the Washington Post, LA Times, a number of media outlets, that the FERC, the California Regulatory Commission, the Department of Interior have determined that it would save between $100 million to $200 million to decommission the dams and find alternative power, versus doing the capital retrofit. But anyway, my question is, what can you tell us about your views on the future profitability of the railroad industry, and what might make that more exciting going forward versus what it’s done historically? Thank you.

Warren Buffett [03:51:17] Yeah, thank you. I don’t think it’ll be a lot more exciting, but the relative, the competitive position of the rails has improved somewhat from really not a very good competitive position 20 or 25 years ago. They, there been a lot of progress made on the labor front. They benefit in their competitive position, Visa truck, as oil prices go up. Higher diesel fuel obviously raises cost for rails, but it raises cost for their competitors, the truckers, by a, a, probably a factor of close to four, compared to how it hurts them. So, and there isn’t a whole lot of new capacity being created in the rail industry. So what was a terrible business 30 years ago, and it was operating under regulation, it’s still under, operates under the threat of re-regulation, which has a tempering effect on their pricing power, but it’s a better business now. It’ll never be a sensational business. It’s a very capital intensive business, and when you put tons of capital out every year, it’s very hard to earn really extraordinary returns on capital. But if they earn a decent return on capital, it’ll be a, it can be a good business overtime, and it can be a lot better business, business than it was in the past. Charlie?

Charlie Munger [03:52:54] I’ve got nothing to add to that one either.

Warren Buffett [03:52:58] Number five.

[03:52:58] Shareholder (Marie Blevins, Bardstown, Kentucky): Hello, Mr. Buffett and Mr. Munger. My name is Muray Bens, and I am from Bardstown, Kentucky. This is my first shareholder meeting. My question is, what do you think are the best ways a 10-year-old can earn money?

Warren Buffett [03:53:18] Well, I must say that was a, that was a subject I gave a lot of thought to when I was 10, more than I gave to school and some other things. You know, you have to, probably a little lot young to deliver papers. That was always my favorite. And I got a about half, half the capital I started with by delivering papers, and I always liked it because I could sort of do it by myself. I don’t know the situation in the town in which you live, but like I say, 10 is probably a little young, but 12 or 13 would not be. And almost any, there, there can be a lot of little bit, I tried to, I must have tried 20 different businesses by the time I got out of high school. The best one was a pinball machine business, but I’m not sure I want to recommend that you get into that. When I did, it was a much purer business, where you put a nickel in and that was about it.

But it is interesting, I’ve read a study a long time ago, I wish I’d get my hands on it, because I’ve quoted it a lot, but I’ve never quoted it as authoritatively as I would be able to if I could actually find the damn thing that I read 30 years ago. But it correlated business success with certain variables, and, you know, they tried grades in school, and they tried what your parents did, and they tried whether you went to business school, all those kind of things. And they found it correlated best with the age at which you enter, got started your first business, got into business. That the younger you were when you did your first piece of business seemed to correlate best with later business success. And to some extent that’s sort of natural. It’s probably true that, that when you see it in athletics, you see it in music, and that sort of thing.

So whatever you can figure out that other people will pay you to do that they don’t want to do themselves, or they like done for them, I advise you to look around the neighborhood and talk to your parents, talk to your friends, see what other people have done that have been 10 or 11 or 12 years old, that’s worked for them, and copy it. But if you can get a good paper out when you’re 12 or 13, that’s a sure way to save some money. I’ve often wondered about people that are having trouble being in debt, you know, that have a normal eight hour job, if they added a route in the morning and just put that aside, you know, it could be the way out of being behind the game, instead of being, and getting ahead of the game, and take another hour and a half out of their day. But not, not too many people seem to do it. Charlie used to sell, didn’t you used to sell yourself the best hour of the day or something, Charlie? Early in the morning?

Charlie Munger [03:56:20] Yeah.

Warren Buffett [03:56:20] Tell them what you did.

Charlie Munger [03:56:21] Well, when I was young, I read that savings bank thing, The Richest Man in Babylon, which taught the joys of underspending your income and investing the difference, and how wonderfully it would work over time. And lo and behold, I did exactly what this little pamphlet suggested, and it worked. And the other idea, and, and so I got the idea that I had a mental compound interest thing too, and so I finally decided I was just going to give the best hour day of the day to improving my own mind, and then the world could buy the rest of the time. And that may have been a very selfish thing to do, but it worked.

Warren Buffett [03:57:10] Yeah, Charlie was selling his time. I don’t, what were we getting per hours a lawyer, those?

Charlie Munger [03:57:15] Not much.

Warren Buffett [03:57:16] Yeah, he just decided to sell himself the best hour, and not a crazy thing to do.

Charlie Munger [03:57:22] But I would tell that little girl that if you make yourself a very reliable person and stay reliable all your life, faithfully doing whatever you’ve engaged to do, it will be very hard for you to fail it anything you want.

Warren Buffett [03:57:46] Number six.

[03:57:47] Shareholder (Dennis Batrowski, West Point): Good afternoon, everyone. My name is Dennis Patski. My hometown is West Point Nebraska, and I now live in Omaha with my family.

Warren Buffett [03:57:59] As you may know, my mother came from West Point.

[03:58:04] Shareholder (Dennis Patski, Omaha, Nebraska): Yes. Thank you, Warren and Charlie, for your incredible education, generosity in this great meeting. I’ve attended every meeting since 1994. Warren and Charlie, assuming a necessary margin of safety in the future cash flow estimates and proper adjustments in a discount rates, would you discuss which trends of global economic growth that you think will be sustainable, given our holdings in railroads, steel, materials and energy, with our modest expectations, enormous trade deficit, tight credit spreads, low-risk premiums and explosive growth in emerging economies? Thank you.

Warren Buffett [03:58:43] Yeah, we think we’re in a pretty good group of businesses for the world we face. You know, we don’t know which ones will turn out to be the best. There’s a few that we think were a real super winners, and we think a significant number of them are will do okay. And we don’t try to buy our businesses with a thought much of world trends. We certainly think in terms of international comp, foreign competition. I mean, we do not want to buy into a business that has a very high labor content and that has a product that can be shipped in from abroad very easily, because sooner or later that will probably be trouble. Just like Charlie and I really, I bought into an airline, he came along and tried to rescue me, some years ago that had very high seat mile costs, and it had protected routes, US Airways. So it was able to operate with 12 cents a seat mile of cost because Southwest hadn’t gotten there yet with their 8 cent costs, but they get there.

And they, you do not want to have something whose competitive position is going to erode over time. But I think our most of our businesses have got pretty strong competitive conditions, and really the variables you name don’t bother us. You know, we will play the hand as well as we can, and we’re playing it with terrific people in very good businesses, and we’re dealing from strength all the time. You know, we’ve always got a loaded gun, and we think we’ve got the right values with our managers, the people. Think we got a culture that’s owner oriented, and we got a lot of things going for us. And they won’t produce huge returns, but they’re likely to work okay. Charlie?

Charlie Munger [04:00:51] Well, we learned about foreign labor competition in our shoe business, and in that it reminds me of Will Rogers, who didn’t think man should have to learn these easy lessons in such a hard fashion. Will Rogers believed that you should learn not to pee on an electrified fence without actually trying it.

Warren Buffett [04:01:21] Will told Charlie a lot of things he didn’t tell me. Number seven.

[04:01:30] Shareholder (Fort Lauderdale, Florida): Hello. Hello, Mr. Buffett and Mr. Munger. This I’m shr was adal from Fort Lauderdale, Florida. First of all, I want to thank you for your efforts in making investors aware of the, you know, high transaction cost involved with several investments, and I got lot of personal benefit by reading your articles. My question today is in reference to the declining value of dollars compared to all other major currencies. In last three years, dollar declined as high as 25 to 30%. So I want to understand how it is going to impact as a, as to individual investors, and how big is the threat? Thank you.

Warren Buffett [04:02:29] Questions about the declining dollar, but I didn’t get all the, just ask you for what do we think about it, what are we going to do about it. We think the dollar over time is, like, less policies are changed in a major way, is likely to decline somewhat more against most major currencies. And we’ve, we originally backed that opinion up with transactions that got as high as $21 or $22 billion in the ownership of foreign currencies. And then the carry on that, the difference between interest rates in the various countries, made that quite an expensive way to express that belief. So we have focused much more on buying into companies that have, that earn lots of money in other currencies, on the thought that they will be somewhat favored over companies earning just US. But that’s not, as I mentioned in the report, that is not a huge determination of what we buy. It’s a factor, but it’s not 50% of the decision or anything like that.

We are following policies in this country that are likely to cause the dollar to decline in value against many major currencies, and who knows what speed, whether it happens this year or next year. We don’t have any idea on that sort of thing. But the fundamental forces are fairly strong. We actually only own one currency now trade, which would surprise you. Actually, we’ll tell you about it next year. Charlie?

Charlie Munger [04:04:23] Yeah, so far something peculiar has happened. During this exact period of maximum dollar decline in value versus other currencies, the dollar prices at Costco have showed an inflation factor of approximately zero. So what really matters, of course, is how things are working in your own country, and it’s been perfectly amazing how well we’ve gotten by so far with the decline of the dollar.

Warren Buffett [04:04:55] Yeah, as Charlie says, you know, we reference everything in terms of our own country. If you look at oil, for example, which we’ll say has gone from roughly $30 a barrel to $60 a barrel over the last few years, you know, during that same time the euro has gone from like 83 cents to $1.35. So the price of oil, if you’re a European, has gone up very little. I mean, we think oil’s run wild, but in terms of the, anybody that’s using the euro, the price of oil has gone up about 25%, and we think, and we feel the price has gone up 100%. So you do have this anchoring of thought to your own currency, which is not, is understandable.

We do, we, I do think you’ll need to think about currency matters more than Americans traditionally have. I was struck 20, 30, 40 years ago when I would travel elsewhere how much more sophisticated most people in Europe, in the UK, wherever, were about currency than the United States. We never had to really think about it because, you know, everything was dollar based, and American didn’t have to be smart about currency or even think too much about it in terms of their business. But that world has changed. Number eight.

[04:06:25] Shareholder (John Norwood, Des Moines, Iowa): John Norwood from Des Moines, Iowa. A quick qu, a quick comment and a question. Comment following on Charlie’s comments on ethanol: I would ask him at least to look at the environmental benefits of ethanol as a fuel BL octane boosters, superior to other types of chemical additives such as MTBE, which has been so damaging to groundwater. My question is for Mr. Buffett, and I’m hoping you might be able to tell us a little bit more about your interactions with the board of directors and the types of ideas and idea exchange, and perhaps a model for how you believe a board of directors is supposed to function with management. Thank you.

Warren Buffett [04:07:22] Yeah, I would say that mo, most writers and most shareholders probably have a little bit of a distorted version, at least, how most corporations, large corporations, have operated over the years. Usually, for a long time, I would say that directors generally were sort of potted plant. I mean, you sat there and the management had its agenda and didn’t really want input on major matters. And Charlie and I can certainly testify the fact that we had had great lack of success, even when we were the largest shareholder of a company, in terms of talking about the things that really count. I mean, if somebody spends their whole lifetime, 25, 30 years, rising to the position of CEO, you know, they want to be boss, and you can’t blame them. And the only thing in their way is the board of directors. So they look for people who are big names and they look for ways to keep them happy, but they don’t really want them getting into the business very much.

There’s a lot more process now that’s been imposed by the recent rules, but I would stay still, in terms of the reality of the guts of business and the discussions that take place and all that, I think you might be surprised that the level over all of that throughout corporate America. As I’ve written in the report, you know, overwhelmingly the job of the board of directors is to have the right CEO. I mean, if you’ve got the right CEO, you know, 90% of it takes care of a… If you were a director of Cap Cities and you had Tom Murphy as the CEO, you know, case closed. It was all you needed. And if you have that CEO, I think you have an obligation on the board, and to make sure that there’s not overreaching by the CEO, because the CEO can have different interests.

And I think the third thing that the board does, should do, is they really should bring some independent judgment in on major acquisitions, because there is a natural tendency for people with usually big egos, big motors, who get to be CEOs, to like to do big things and to become bigger, spending other people’s money. And normally when big deals come along, you know, the management, by the time it gets there, they’ve made the deal anyway. They have investment bankers there who go through a little ritual. I’ve never seen one come in and make a presentation that says it’s a dumb idea. I mean, they know what the answer is supposed to be, and it just becomes kind of a little game.

And I, so I think in those three respects, a good director will first make an affirmative decision you got a very good CEO, not the best in the whole world, not everybody can do that, but a good, very good CEO; that that CEO is not overreaching; and when significant deals come along, that they get a chance to weigh in and that you really get a balanced discussion about the real economic of what you’re doing. And I would say in that latter point, what I’ve seen over the years has really been pretty bad. But I can understand it, because the CEO wouldn’t bring in the deal unless he wants it done, and he, and once he brings it in, he’s going to stack the deck and make the presentation in such a way that it’s almost impossible to exercise independent judgment. Charlie, do you have any thoughts on…

Charlie Munger [04:11:08] Yeah, I think big deals on average in America are contrary to the shareholders’ interest. That’s the way to bed.

Warren Buffett [04:11:17] Yeah, on the acquirer side, usually the shareholders are worse off. Most stock deals, they think about what they’re getting and they don’t think about what they’re giving. I mean, I’ve had been involved time after time where people are giving a significant percentage of the business which they wouldn’t sell at the current market price. If somebody came along with a tender offer 20% higher, they would say that’s inadequate, but they hand away a piece of the business because they want to own something else. And there’s nothing wrong with that, but you just have to be sure that you’re getting as much as you’re giving. I have very seldom heard a discussion, in fact, I don’t think I virtually ever heard a discussion of weighing what you were actually giving away on a stock deal versus what you’re getting.

I’ve heard a lot of discussion about dilution and when dilution will be overcome and all that sort of thing, but that is not the question. You know, the real question is, are you, if more value is being created, how is it being whacked up between the two companies? And if not extra value is being created, what are you getting more than you’re giving? When I gave away 2% of Berkshire Hathaway to acquire Dexter Shoe, that was one of the dumbest deals in the history of the world. You know, and I did it all by myself. Charlie didn’t participate in that one. I wish he had. But, you know, it was dumb. I mean, here’s, it wasn’t 2% of what I had at Berkshire, it’s 2% of the present Berkshire Hathaway company. You’d all be 2% richer, a little more than 2% richer, but you’d be a full 2% richer if I hadn’t done that.

Charlie Munger [04:12:53] And fortunately you made some better decisions.

Warren Buffett [04:12:56] Yeah, well, I’d have to, or we wouldn’t be here. But, you know, the point is that doesn’t show up under conventional accounting at all. You know, it gets brushed under the rug. At Gillette, literally, we had 10 deals in a row that never met, came close to meeting the case that was presented at the time they were presented to the board. Was that ever mentioned to shareholders? Did it show up in our financial? Never, you know, and never will. And that goes on all the time in corporate America. And unfortunately, shareholders, to the extent they got unhappy with managements, are complaining about, you know, whether they’ve got diversity on the board or something like that. But it’s when they’re, when you’re blowing away the company, I mean, that to me is a whole lot more important. Charlie, you want to…

Charlie Munger [04:13:44] Yeah, the self-serving delusional nature of even some very good minds in terms of IQ points is amazing. I had a friend who sold a business to a government controlled business in a socialized Scandinavian country, and my friend had a very nice business, and the people on the other side, after they had bought it for stock in their government corporation, said, “This was such a marvelous deal. We got your whole business and we didn’t have to give anything.”

Warren Buffett [04:14:17] Well, we own stock in the Third National Bank one time down in Nashville, and they got the ability, and they’re wonderful people, really wonderful people, but they got the ability to acquire other banks where they formerly had been limited in that ability. And they went out to some very small bank, and the guy at the very small bank said, “I want stock.” And he says, “My stock is worth private market value, and your stock is worth market price.” Well, market price happened to be half a… But he says, “You know, all I’m getting is whatever the market is, so I want you to value your stock at market and value mine at this huge premium.” And he said, “And then there’s one other condition.” He said, “Since I’m going to be putting my whole net worth in your stock,” he said, “I want your promise you’ll never do a deal that’s dumb in the future.” And you remember that one?

Charlie Munger [04:15:08] I remember.

Warren Buffett [04:15:08] Yeah. And that fellow was just being a little, it was just getting a little more out in the open than is typically the case. I’ve been on some terrific boards. There was a local one here called Data Documents that really functioned, with everybody on the board thinking about the business, understanding the business, making decisions as owners. Every one of them had a significant percentage of their net worth in the business, and probably the best board I’ve ever been on. I mean, every decision there was made for business reasons. The worst decisions, at least they have the potential for the worst Ian, but it’s standard procedure now when an acquisition comes up to trot in, you know, investment bankers and the lawyers, and the momentum is just totally to get the deal done. And like I say, there will be a lot of slides presented, and believe, I can, I don’t need to look at the slides. I know what the answer is going to be at the end. They’re going to say it’s a great deal, you know. But, and there will be no, nobody arguing the other side. They’re just, you know, it is not like something where you would make a decision and you’d have somebody get pro and con. It just doesn’t work that way. I don’t know how to improve that a lot. I think we’ve got a sensational group at Berkshire. You have a group with a, almost everybody on the board having a significant percentage of their net worth. Bill’s is so big we can’t get them to a significant percentage, but that he’s got hundreds of millions of dollars in it. We’ve got a board that is in the exactly the same position as the shareholders. They don’t have directors and officers insurance. They’ve got the downside as well as the upside. They bought their stock in the open market, so it hasn’t been given to them. It is a real owner’s board, and I like it that way, and I think it’s a terrific group. But I’m glad I can get them to work cheap. Number nine, please.

[04:17:07] Shareholder (Kuwait): My name, my name is ID, and I’m from Kuwait. In response to earlier comment about borrowing from Kuwait, I can tell you that after 40 years we now land in dollars, and you are always welcome in Kuwait. My question is, if you would pick a partners to invest with you in big deals, what would be your criteria for choosing partners?

Warren Buffett [04:17:34] Yeah, we know. Is that, are you complete on that?

[04:17:38] Shareholder (Kuwait): I’m complete. Thank…

Warren Buffett [04:17:39] We normally don’t want to do deals with partners. If we like a deal, we want to own it all, you know, and we usually have the money to do it all. So we, there would me almost, in very few cases would there be a need for a money partner. And then is there a question for a knowledge partner? And we really wouldn’t want to be going into something in most cases where we were reing on somebody else to be the brains of the deal. We’ve made exceptions on that, but not very seldom. So, you know, we, by our nature, we would like to have 100% of any deal for the benefit of our shareholders. We’re going to spend, if we’re going to spend our time on it, we just assume get 100% of the rewards. We don’t mind taking 100% of the downside, and we ought to understand it well enough so we don’t need a partner. Charlie?

Charlie Munger [04:18:38] I’ve got nothing to add to that one either.

Warren Buffett [04:18:41] Number 10. I’m just trying to think, have we done any big partnership deals, or…

Charlie Munger [04:18:46] Well, you made that partnership deal with Leucadia, but they brought you the deal.

Warren Buffett [04:18:51] That is true. We made a very good partnership deal with Leucadia. They did way more than their share. They brought, but they brought us the deal, and so they asked us to participate in their deal. Now, in effect, we own less than 100% of some of our businesses, and we’re in partnership with the management, but that’s perfect. I mean, we’ve had some great experience with that, and we’ll continue to have great experiences. But, you know, and they came, they’re in on the same term as we are, and they, they’re owners. All of our managers think like owners, but in certain cases they are real owners directly in those businesses as well. But just some outside party as a partner, we really haven’t done, although I would do another deal with Leucadia if they came to me and I like the deal. I mean, that was a very, a very good experience. Number 10.

[04:19:41] Shareholder (Ari Jahja, Baruch College, New York City): Good afternoon, ladies and gentlemen. My name is Ari Jahja. I’m a junior from Baruch College, New York City, and on behalf of the portfolio management club, I would like to thank you, Mr. Buffett, for inviting us to this wonderful event. And my question is that, no, first of all, speaking about the Berkshire portfolio, there’s an increasing exposure of your investments towards commodities, such as to oil through PetroChina, to steel through POSCO, and to coal and ulture through the rail stocks that you recently purchase. So my question is that, what is your long-term view on commodities, and how does it impact your view on the geopolitical state of the world in the future? Thank you.

Warren Buffett [04:20:28] Yeah, I, and to my knowledge, Charlie will hear from him, but we have no opinion on commodities. We, if we’re in an oil stock, it’s because we think it offers a lot of value at this price, but it does not mean that we think the price of oil is going up. If we thought oil was going up, we could buy oil futures, which we actually did once, and, but very seldom, very, very seldom would we have any opinion on what any given commodity would do. Owning POSCO, we just think it’s one of the, well, it is the probably the best steel company in the world. Remarkable record. When we bought that stock, we were buying it at four or five times earnings, with a debt-free balance sheet, one of the lowest cost producers around. I mean, it’s fabulous company. And un addition, it was a play on the Korean won, and we made 20% on the won by being invested through, in through a won-denominated security. So we may occasionally be in those kind of businesses.

We basically like best the businesses that require very little capital, because they’re the only ones that have a chance of earning really high returns on capital. You can’t have a business that has huge capital expenditures year after year and end up with a high return business. It just doesn’t work in this world. But you can find some businesses that really require relatively minimal capital investment. Here’s the case, this is a small one, but See’s Candy is not going to require a huge capital investment. Requires some capital investment, but it’s a wonderful business. It’s a small business, but it’s a wonderful business, and it’s far better business relative to size, adjusted for size, it’s a far better business than any steel business is going to be or any oil business is going to be. It’s just that it’s not very big. We’d love to have it bigger, and we’ll do our share in every way we can, as you may have noticed up here. But we do not have any, we do not have a bias toward at all toward businesses involved in commodities, and if we had any bias, it would be against. Charlie?

Charlie Munger [04:22:47] Yeah, we’re going to be investors in businesses, not commodities, by and large, and that has to work better over time.

Warren Buffett [04:22:57] Number 11.

[04:22:57] Shareholder (Andy Peake, Weston, Connecticut): Good afternoon. My name is Andy Peake from Weston, Connecticut. Recently the newspapers have been in the news: their Murdoch bid for Dow Jones, Morgan Stanley’s Hassan Elmasry’s push to eliminate the New York Times dual class sh. Given you are both experts in the dual class share and newspapers, what advice would you give to the longsuffering New York Times shareholders, and what advice do you have for Arthur Sulzberger, the besieged CEO of the New York Times and head of the family that owns the newspaper?

Warren Buffett [04:23:30] Yeah, well, I think the longsuffering, as you put it, sharehold of the New York Times is probably made a mistake. I mean, I don’t think I’d necessarily blame the Sulzbergers for the woes of the newspaper business. I mean, it, we have said for a good many years that we thought, in effect, we thought newspapers were overpriced because they reflected evaluation based on looking in the rearview mirror rather than through the window. And we act, it’s interesting, we have this dual class structure at Berkshire, but because I converted a whole bunch of shares to B, I own about the same percentage of the B as the A, cuz I converted about six or seven times as much as I needed for present gifts. I only go down on my safe deposit box when I have to, and I didn’t want to go down every year to convert stock, so I just converted a bunch of stock early on, and now I own about 30% of each. So it has no effect in terms of the voting power of Berkshire.

But the woes of the newspaper business are not connected with the difference in voting structure at the, at the time or other places. The newspaper business has just gotten a lot tougher. And if you think about it, I mean, let’s assume that Mr. Gutenberg, back there in the 15th century, instead of wasting his time developing movable type and all of those kind of things, it decided to become a day trader or a hedge fund operator and really made something of himself, so that we never had print. But we, along came the internet, along came cable TV, all kinds of other things. And then now, this year, you know, Johannes Gutenberg the 28th or something came along and said, “I’ve got this wonderful idea. We’re going to chop trees down, we’re going to haul them great distances, and then we’re going to put them through expensive newsprint machines, and then we’re going to send them down to someplace where they got expensive presses, and we’ll run these things all night, and then we’ll send delivery trucks out through the snow to get to see these little pieces of paper out to people where they can read about what happened yesterday.” Well, I don’t think we would be backing him, you know.

Now, it happened, you know, that the other one came along first, and people’s habits don’t change immediately, and, you know, the world doesn’t turn over. But in effect, you know, the position of newspapers today still reflects the fact that they have inertia and momentum on their side from the past. And I don’t care how smart you are. You know, there was a fellow that came into the LA Times few years back, he was going to take the circulation up to a 1.5 million, as I remember, surely. And the circulation is now 800 and some thousand of the LA Times, and it’s going to go down. It’s going down every week. And I don’t know that, you know, I don’t know that Joseph Pulitzer or William Randolph Hearst or E.W. Scripps or anybody who were geniuses in their day, maybe, at building circulation can do much about that. The truth is that the world has changed in a significant way.

We used to sell 300,000 World Books a year. It was a good value, you know, and we sell 22,000 sets or something like that now. And it isn’t because the World Book isn’t worth what it sells for, is it? It’s just not worth what it sells for to most people who can go on the internet and get an awful lot of that information free. So I don’t think I would blame the dual class structure on anybody’s investment losses in the New York Times. And the companies that have not had dual class structures… I mean, we own the Buffalo News, and the Buffalo News earnings have been, they’re certainly down over 40% from the peak. We have terrific management. We’ve got a paper that has among the highest penetration in circulation of any large metropolitan paper in the country. But we are, our earnings are going down, and it’s a fact of life. Charlie?

Charlie Munger [04:27:51] Yeah, he was talking about that dual class structure as being intrinsically wrong, but I would argue that the Sulzbergers set it up that way when they went public, and so that was in the basic contract. And once a contract has been made, the idea that you can just stamp your foot and take away the contract strikes me as a kind of an immature idea.

Warren Buffett [04:28:18] The, I would add too that the Sulzbergers, from the start, you, anybody that bought in the New York Times knew that they would not try to maximize earnings in a given quarter or try to minimize the downturn by slashing costs or something of the sort. They didn’t build the New York Times by doing that. It did not have a reputation which allows it perhaps to have a decent future on the internet. It did not get to where it is by a policy of, you know, management 101 as taught at some business school. And yet, following that differing course, you know, I don’t know how many papers in New York disappeared, but whether it’s the Herald Tribune or the Sun or the World-Telegram, or you name it, the World, the obser, they had a different management approach, and they all fell by the wayside, and the Times are still around.

So I don’t, I’m not sure 10 years from now or 15 years from now that people regard the Times as playing of their hand as being necessarily an inferior one. They may have a better position going into the internet than, well, almost any newspaper around. Certainly a lot better than, you know, the Philadelphia Inquirer. The LA Times has, you know, the LA Times will have more trouble monetizing their reputation on the internet than a New York Times will, if there’s a national game to be played in that. So we’ll see how it plays out. Number 12.

[04:29:58] Shareholder (Betty Stewart Rogers, Illinois): My name is Betty Stewart Rogers, Jeff Hills, Illinois, 35 miles northwest of Chicago. This is the first time I’ve ever been to your annual meeting, and I want to thank you both for giving us so much time to answer our questions and give us such words of wisdom. I would also like to thank you for giving us a wonderful weekend of lunches, brunches, cocktail parties, time at Gorat’s and Borsheims. The problem is that when I told my two adult daughters that I was going to have such a wonderful weekend, they both made me promise to bring them next year. And if 25,000 people bring two people next year, where are we going to meet?

Warren Buffett [04:30:49] Well, I would, if you get the answer to that, I’m really waiting to hear it, because we, it’s about 27,000, and we are just about maxed out here. We’re just about maxed out in terms of hotel rooms. We’re going to have a, I think we’re going to have four new hotels in Omaha. Oh, good. But before next year. But, you know, that’s a couple thousand people, and, you know, based on the growth, at some point we sort of hit the wall, and I haven’t figured out how to handle that. If anybody has any suggestions, I’ll appreciate hearing about them. But I’m delighted you’re having a good time here. I hope you’ve all had a good time here. Thank you. We’re now going to take a 10-minute recess, and then we’ll reconvene. Thank you.

Okay, if you’ll please take your seats. We want to finish by 4:00, so we’d like to move quickly through the rest of the business, and we’ll get on to the PetroChina question. And let’s see, here we are. The meeting will now come to order. I’m Warren Buffett, chairman of the board of directors of the company. I welcome you to this 2007 annual meeting of shareholders. I will first introduce the Berkshire directors. I’ve already done that. So also today with us are partners in the firm of Deloitte & Touche, our auditors. They are available to respond to appropriate questions you might have concerning the firm’s audit of the council Berkshire. Mr. Forrest Krutter, Secretary of Berkshire, you 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 meeting at Walter Scott, Marc Hamburg. Does the Secretary have a report of the number of Berkshire shares outstanding, entitle of vote and representative of the meeting? All right, Forrest.

FKForrest Krutter [04:32:53] Yes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 6, 2007, being the record date of this meeting, there were 1,3,4 shares of Class A Berkshire stock outstanding, with each share in to one vote on motions considered at the meeting, and 12,888,424 shares of Class B Berkshire Hathaway common stock outstanding, with each share entit to 1/200th of one vote on motions considered at the meeting. Of that number, 955,276 Class A shares and enough sh, 11,301,274 Class B shares are represented at this meeting by proxy return through Thursday, May 3rd.

Warren Buffett [04:33:42] Thank you. That number represents a quorum, and we’ll therefore directly proceed with the meeting. The first order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott will place a motion before the meeting.

WSWalter Scott Jr. [04:34:01] I move that the reading of the minutes of the last meeting of the shareholders be dispensed with and the minutes be approved.

Warren Buffett [04:34:07] Do I hear a second? I guess I heard a second. The motion has been moved in second. Are there any comments or questions? We will vote on this question by voice vote. All those in favor say I. Opposed? The motion’s carried. The first item of business is to elect directors. The 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 is present does not turned in a proxy and desires a ballot in order to vote in person, you may do so. If you wish to do this, please identify yourself to meeting officials in the aisles who will furnish a ballot to you. With those persons desiring ballots please identify themselves so that we may distribute them. I now recognize Mr. Walter Scott to place a motion before the meeting with respect to election of directors.

WSWalter Scott Jr. [04:34:59] I move the Warren Buffett, Charles Munger, Howard Buffett, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Don Keough, Tom Murphy, Ron Olson and Walter Scott be elected as directors.

Warren Buffett [04:35:10] Is a second? It’s been moved and second the Warren Buffett, Charles Munger, Howard Buffett, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Donald Keough, Thomas Murphy, Ronald Olson, Walter Scott be elected as directors. Are there any other nominations? Is there any discussion? The nominations are ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the election of directors and allow the ballots to be delivered to the inspector of elections. Would the proxy holders please also submit to the inspectors of election speci SC elections ballot on the election directors, voting the proxies in accordance with the instructions they have received. Miss Amick, when you’re ready, you may give your report.

BABecki Amick [04:35:52] My report is ready. The ballot of the proxy holders, in response to proxies that were received through last Thursday evening, cast not less than 1,8,564 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 any cast in person at this meeting, will be given to the secretary to be placed with the minutes of this meeting.

Warren Buffett [04:36:29] Thank you, Miss Amick. Warren Buffett, Charles Munger, Howard Buffett, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Donald Keough, Thomas Murphy, Ronald Olson, Walter Scott have been elected as directors. Now, the next item of business was spend more time on, and that is a pro, proposal put by, forth by Berkshire shareholder Judith Porter, the owner of 10 Class B shares. Miss Porter’s motion is set forth in the proxy statement, provides that Berkshire Hathaway not invest in the securities of any foreign corporation or subsidiary thereof that engages in activities that would be prohibited for US corporations by executive order of the President of the United States. The directors have recommended that the shareholders vote against this, the proposal.

The microphones at zone 1 and 7 are available for those wishing to speak for or against Miss Porter’s motion. These are the only microphone zones in operation, so I ask that you go to either one or seven if you’d like to talk on this. I ask that you can find your remarks solely to Miss Porter’s ocean. Now, we have a number of shareholders who want to talk about this, and we will let shareholders speak, if there’s sufficient time at the end of that, and we’re willing to, certainly willing to have them speak for a half an hour, and Charlie and I will give maybe a couple minutes of response after that. But you’ve got a half an hour, different shareholders can speak. I hope you tailor the length of your remarks, the early ones, so that it gives other people a chance. And if we have time after the shareholders have spoken, and there are other people that are in attendance as visitors that wish to speak, we’ll have them also. But if we, if the shareholders use up the full time until almost 4:00, then we’ll have to finish at that time. So Miss Porter, if you’re available, if we can turn the light on there at the, at station one to speak, you have the floor.

JPJudith Porter [04:38:28] Thank you, Mr. Buffett. My name is Judith Porter, and I’m the shareholder who introduced the proxy resolution involving Berkshire Hathaway’s divestment of PetroChina. PetroChina is implicated in the genocide in Darfur, Sudan. I want to thank you for allowing us to speak to this resolution. In many countries it would be impossible for us to do so, but we are indeed fortunate to live in a country where we can express our opinion without fear or without recrimination. Before my husband formally presents the resolution, I want to explain to you why I have introduced it.

My family is no stranger to genocide. My grandparents were murdered in 1941 in the Nazi genocide, as were other members of my family. I will never forget the despair my father expressed when my aunt, who was released from Bergen-Belsen concentration camp, sent him a letter telling him what happened to his family. It deeply affected him for the rest of his life, and I was raised to believe that genocide should never ever again happen. Never again. The world was silent when my grandparents were murdered, but genocide has continued. In the genocide in Cambodia, the world was silent. In the genocide in Bosnia, the world was silent until late in the slaughter. The world was again silent in the horrible genocide in Rwanda. How many times must we say never again?

Now there is the first genocide of the 21st century, in Darfur. 2 and a half million civilians have been driven from their homes, more than 400,000 have been killed, and 1,600 villages have been destroyed. Berkshire Hathaway can play a role in ending this slaughter by divesting in PetroChina. As we’ll shortly describe, as an exemplar of both business ethics and personal integrity, your support of divestment will send a signal to China and to the Sudan that there are costs to continuing this destruction, and it will lead other corporations to follow your ethical actions. Genocide is never a good investment. I can think of no greater tribute to my grandparents than introducing this resolution.

As Elie Wiesel said in his Nobel Peace Prize speech, “We must take sides. Neutrality helps the oppressor, never the victim. Silence encourages the tormentor, never the tormented. Sometimes we must interfere.” My husband will now present the proxy resolution. He will be followed by Jason Miller, who will speak about the relationship between CNPC and PetroChina. Abdul mjed, who is from Sudan, will speak about the genocide taking place. And Bob Edgar, Secretary General of the National Council of Churches, will conclude our discussion of this resolution. Thank you. (Applause)

[04:42:11] Shareholder (husband of Judith Porter): Thank you, Mr. Buffett. Since you’ve read the resolution, I will not repeat the resolution. I will speak about the resolution, though. On November 3rd, 1997, President Bill Clinton issued executive order 13067, which imposed a trade embargo prohibiting most American businesses from operating in the Sudan. The, this executive order was expanded on April 27th, 2006, by President George W. Bush. While it is true that American companies cannot do business in the Sudan, Americans can invest in Asian and European companies that do business in the Sudan. Such investments do not violate the letter of this law, but they certainly do violate the spirit of the law and are counter to the stated policy of the United States.

We believe there is general agreement that the Chinese National Petroleum Company, CNPC, plays a major role in funding the genocide, in providing weapons to the sudanes, in cooperating with the sudin military in forcibly displacing local populations, and in Mirad other ways facilitating the killing of hundreds of thousands of darf waries. CNPC is the largest foreign investor in Sudan’s oil industry, and fully 70% of the revenues Khartoum generates from cnp’s operations go to its military, which in turn conducts the genocide in Darfur. We are here today because Berkshire Hathaway is the major non-Chinese investor in CNPC’s subsidiary, PetroChina.

You, Mr. Buffett, have stated that you believe that we are wrong, both in our analysis of PetroChina’s connection to the genocide and the belief that divesting the company’s PetroChina holdings would in any way have a beneficial effect on sudanes behavior. We disagree. You are correct in stating that PetroChina does not do business in the Sudan. However, as you agree, it’s parents company, CNPC, is a major investor in the Sudan, and funds from that relationship help provide the instrumentalities of genocide. Managements claim that the relationship between PetroChina and CNPC is similar to that between Fannie Mae and the US government, that argument is fallacious.

The Harvard University advisory committee on social responsibility exam the management of the two country companies. The results of that review were striking. There was almost total management overlap between the two companies. Andrew Leonard, writing for Salon.com, commented, “To declare that a subsidiary has no ability to control the policies of the parent when the two entities are run by exactly the same people is an exercise in specious obfuscation.” In short, PetroChina is an artifact created for the sole purpose of allowing some shareholders to distance themselves from the action of its parents, CNPC. In China the companies share the same brand name and the same logo. If you look at a coin, the images on the two sides are different, but the coin is a unity. You cannot spend one side of a dime or own one side of a quarter. It’s the same with PetroChina and with CNPC. They look different, but they are simply two faces of the same corporation.

Two US presidents have stated clearly that it’s against the national interests of the United States for US companies to do business in the Sudan. It is the position of the US government that a targeted economic boycott of the Sudan will help end the genocide in Darfur. For a US company to invest in a subsidiary of a foreign company such as PetroChina that engages in business in the Sudan is a circumvention of executive order 13067 and weakens the US sanctions. Economic sanctions against the Sudan have worked in the past. For example, Talisman oils sale of its assets in the Sudan helped bring about the end of the civil war in the Sudan.

Sudan’s main protector in the United Nations is the government of China. China will be hosting the 2008 Olympics and is very sensitive about negative publicity that could be aimed at that event. In response to the recent criticism of the Chinese support of Sudan by Mia faroh and Steven spear wiberg, a senior Chinese official traveled to Sudan to push the Sudanese government to accept the United Nation’s peacekeeping force. You and the company are viewed as exemplars of ethical behavior. If Berkshire were to take the lead and divest, others would follow. If Mia Pharaoh can cause change to occur, then so too can Warren Buffett.

No one divestment in South Africa brought about the end of apartheid, but if we all act together, we have tremendous power to bring pressure on the Sudanese government to stop the killing of innocent people. During the last two decades, beginning with the tearing down of the Berlin War, wall in October 1989, we have seen events that no person could ever have anticipated: the breakup of the Soviet Union, the democratization of Eastern Europe, and an unbelievable transition in South Africa. What we have learned is that all things are possible. There are important issues in our society that desperately need our attention. Remember the words of Hillel: “If I am not for myself, who will be for me? If I am for myself alone, what am I? If not now, when?” Thank you. And I’m pleased to introduce Jason (Applause) Miller.

JMJason Miller [04:49:18] I’m Jason Miller, the national policy director for the Sudan investment task force, and also an owner of three shares of Berkshire Class B stock. I’d like to echo the Porter’s comments that CNPC is by far in a way the most irresponsible and abusive o oil operator in Sudan. They’ve participated with the government en forc displacement and other human rights violations, and 70% of the revenue that they provide to Sudan gets fineled into the military that prosecutes the genocide of Dar for. But what does that have to do with Petro China?

Currently, the chairman of Petro China’s board is the immediate past president of cm PC. The president of CMPC is the president of Petro China and vice chair of the Petro China board. The CFO of CNPC is the CFO of Petro China. The chairman of the Petro China supervisory board is the chief of discipline and inspection at CNPC. Eight of the nine Petro China directors have a current or immediate past connection to CNPC. For the five Petrina supervisors have a current or immediate past connection to CMPC. All Petrina senior executives are currently or forly connected to CMPC. We’ve also documented a slew of other management irregularities.

Furthermore, asset transfers between the two are fluid and often Crush subsidized. After Petra China’s IPO, it took on $15 billion dollar in debt from CMPC, which freed up cash flows for CMC, CMPC to spend on Sudan. 10% of IPO revenue from Petro China went to CMC’s operations in Sudan. 50% of CNPC’s profits come from Petra China dividends. Petro China in 2005 provided $33.15 billion doll in cash for CNPC’s finance arm to provide to other CMPC subies like those in Sudan, and 64% of CNPC’s assets are represented by Petro China stock. If this isn’t management overlap and two manifestations of the same entity, I would challenge people to find one that is more overlapping.

As a result, and because of the huge magnitude of the atrocities in Dar for, even a whip between Petra China and CNPC and the lack of corporate, strong corporate governance structures there would suggest that engagement with Petro China by Berkshire Hathaway is a minimum requirement in order to investigate these connections and their potential contributions to the Dar for genocide. I’d very quickly also like to mention the important question that Berkshire Hathaway was asked, which is, what’s next? If we engage Petrina, ask them about these questions, what happens? The answer, by unanimous consent with all foreign policy experts we interact with and those international organizations working in Sudan, is that China would change its behavior in Sudan. Sudan is too important to China as an energy policy for China for it to abdicate those assets. And as a result, we’ve already seen changes in China’s behavior, and taking leadership from the cues of Berkshire Hathaway would be one more in the line of Mia phoh and Steven Spielberg’s that could help catalyze the important sea change that’s necessary to bring an end to the (Applause) genocide.

I’d now like to introduce a Dar forian who’s from Des Moines and would like to speak.

Warren Buffett [04:53:35] I would, I would, I would, is he a shareholder or not? I want to be sure all the shareholders have…

JPJudith Porter [04:53:42] He has the pro, he has the proxy of Etta and James Friend, who are the shareholders of…

Warren Buffett [04:53:48] I just want to make sure, are there other shareholders at seven that want us talk to or not? I want to make sure that all the time isn’t taken.

JPJudith Porter [04:53:58] We will not take all the time.

Warren Buffett [04:54:01] Okay, that’s fine. I just want to make sure that the shareholders aren’t shut up.

[04:54:06] Shareholder (Abdul, Des Moines, Iowa): Good afternoon, and thank you for inviting me to speak about Dar for. My name is Abdul YF, and I’m speaking today as a proxy of it for it and Jam’s Friend, who are the holder of four shares of Class B stocks. I am from westan Dar for, and my parents still Liv in Dar for. I fled from Sudan to Egypt in September 2002 after being exed from Sudan University in Khartoum for speaking out intu of there for. We are detained for a few week, and we suffered from abuse, physically and Physiology, every day until they released and told us we are not allowed to go to any university, and we had to stay away from any activity for the Student Association. I gained Refuge status in the United stat, and I moved to Des Moines, Iowa, on March 2005. The Janjaweed attacked my family, my family’s home in Darfur. In January 8, 2007, four armed men from the Janjaweed attack our home in the early morning. At that time there was a guest in my family home. The Janjaweed left him without attention, so he run away to get help from our neighbors. The Janjaweed started by taking all the money and jewelry from my family. When the Janjaweed found out that someone had run to get help, they left my family, but they promised them they were going to come back.

Even thought my family escaped injury, my neighbor Hassan and his entire family of five were murdered by the Janjaweed. The Janjaweed also took their horses. And their activ, activities were go Ando, and there, and this activities were ongoing in my town for while, and everybody in my community and, or someone was murdered, have someone was murdered and raped by the Janjaweed. And my mom told me, everybody wake up every day, and the first thing they do is check the neighbor and the relative to see if they are alive or not. And so do I. The Janjaweed are still in my town now. They work as a gangs who kill and rap. Every family is affected and nobody can stop them.

Even thought I live in safety and peace there, I still worry about my family back home. And therefore, please try to do anything to help my family and all people in there for. I need your help. If you do the simple thing, like tell your friend about a genocide in there for, or join an organization for talk, or talk, or send letter to your member of Congress, or don’t invite in any companies do help J in therefor. Please, Mr. Buffett and Berkshire Hathaway shareholders, get involved to bring the hope and peace to the children and women and all of us in there for. Whatever you do to stop the genocide in there for is a saving life of human being. Thank you for listening. And now I would like to U Bob Edgar, the General Secretary of the National Council of the church. Thank you.

BEBob Edgar [04:58:14] As we close, I’m Bob Edgar, General Secretary of the National Council of Churches and a former member of the United States Congress. I’m here in support of the resolution and a proxy for Doris Gluck, who holds 10 shares in the company, Class B stock. In February of 1968, had the privilege of meeting Dr. Martin Luther King five weeks before he was assassinated. Later, as a member of Congress, I served on the select committee on assassinations, looking into both the death of Dr. King and John F. Kennedy. I come here today in honor of the kind of dream that Dr. King had. He said this: “Our lives begin and end the day we have become silent about the things that matter.” We will not be silent. I am here today representing millions of faithful Americans, Christians, Jews, Muslims and others who have stood up and said no to this genocide.

Just 11 or 12 or 13 years ago, 800,000 people were killed in Rwanda in 90 days, and we were silent. We will be silent no more. Mr. Buffett, this morning you said a great thing, and I quote: “I find it reprehensible when a government prays on the weaknesses of its citizens rather than protecting them.” I wholeheartedly agree. You were talking about gambling. We urge you to think the same way about genocide. On the document in opposition to this resolution, you said this: “Proponents of the Chinese government’s divesting should ask the most important question in economics, and then what?” We are prepared to answer that question. And then what? And then what? Then the world will finally focus on the issue of genocide in Darfur. Then the international investors all over the world in many companies would follow the ethical actions of Berkshire Hathaway’s moral leadership, moral leadership, and call for all governments of the world to stop the genocide.

And then what? Children would be saved, women would not be raped, fathers would not be killed, and we would find our way in this human family to care for one another. Jesus said we should love our neighbors as ourselves. I think he meant we should probably try every means available to stop those neighbors from being killed. This is just one way we can follow those words of Jesus. And finally, the former Pope John Paul said, “I dream of a world where none will be so poor they have nothing to give, and none will be so rich they have nothing to receive.” I urge support of this resolution.

Warren Buffett [05:01:58] Are there other shareholders that would like to talk before we respond?

[05:02:03] Shareholder (Aaron Frank): Mr. Buffett, my name is Aaron Frank. Thank you for hearing us on this matter. And along with being a, along with being a Berkshire shareholder, I also independently own shares of Petro China, and this issue is something I’ve struggled with for years in terms of whether to divest or not. What I’ve done personally is given the dividends that I received from Petro China to organizations that help into our four, but this is mostly symbolic. What is clear to me is, if I had the opport, opportunity to engage pet, the management of PetroChina in a meaningful way, as I do with you here today, that I would be compelled to do so ethically. As owners of Berkshire Hathaway, we have a unique opportunity to engage the management of Petro China in a way that will be heard not only by the management of Petro China but by CNPC, China and the international community, due to your standing. That’s a unique opportunity, and this is an incredibly, this is an incredible important matter, and I think we have an ethical obligation to do so. Thank you for listening.

Warren Buffett [05:03:18] Okay, thank you. Is there anyone…

[05:03:20] Shareholder (Bill Rosenfeld, Lexington, Massachusetts): Yeah, my name is Bill Rosenfeld from Lexington, Massachusetts. In your web posting, you claim that a subsidiary can’t control the actions of its parent, so actions against PetroChina will have no impact on CNPC. Suppose that millions of Americans boy Ed GEICO insurance or other Berkshire companies because of a policy of Berkshire Hathaway. Wouldn’t that make you reconsider that policy, even though your subsidiaries are voiceless? And Berkshire ha, and Berkshire Hathaway management had it’s targeting Petro China to influence CNPC differ from this situation?

Warren Buffett [05:04:00] Well, I actually would say it’s quite different. If a shareholder of Wesco, you might, Marc, you might put up the chart that shows the flow of ownership, both with China and with… It’s up there. Okay. Wesco does not control Berkshire Hathaway. We can have all the, we can have lots of overlap of management, everything. Berkshire Hathaway controls Wesco. If a shareholder of Wesco were to complain to the management of Wesco, which is analgous to Petro China, about the fact that, let’s say, that Berkshire bought his car or any other activity or anything I was doing personally, they would have no ability to control me. If somebody control, complained to Berkshire about something that was going on at Wesco, we could certainly introduce action. So the, it flows downward. The overlap means nothing.

I mean, obviously the Chinese government controls PetroChina. They own 88% of the stock. We control MiTek, we own 90% of the stock. We contr Wesco, we own 80% of the stock. We can tell MiTek what to do, we can tell Wesco what to do, but MiTek and Wesco cannot tell Berkshire what to do. I think there’s a fundamental misunderstanding on that. The Chinese government controls 20, 32 of the largest 33 publicly owned companies in China, and the Chinese government in effect is in charge of all of those companies. The Chinese government does business with the Sudan. PetroChina does not. PetroChina in no way tells the Chinese government what to do, and we’ve seen evidence of that in a lot of ways.

So it seems to me it’s backwards. If it was PetroChina following a policy that the Chinese government disagreed with, me, believe me, that there would be a change in hurry. We have no disagreement at all about what’s going on in Darfur. There’s two questions. One is, is PetroChina influence the Chinese government? And secondly, if we don’t agree with what the Chinese government is doing, should we sell our stock in PetroChina? The people here who have come, who own stock in Berkshire Hathaway, have obviously made the choice, even though they disagree with what our policy is, to continue as shareholders, and I agree with them with that 100%. And we in turn elect to continue to hold our shares in PetroChina, because we have no disagreement with what PetroChina is doing. If there’s a disagreement, it may be with what the Chinese government is doing.

Now, in terms of what the Chinese government is doing, you know, we’ve heard talk about divesture by China. If the Chinese left the Sudan tomorrow, 400,000 barrels of oil would be being produced, a good bit with the money that China has invested into Sudan. You can’t take the assets, you can’t take the refinery, you can’t take pipelines, you can’t take oil out of it. They can sell, they could sell it to other people who are doing business in the Sudan. They could sell it to the Sudanese government, but believe me, they would probably sell it very cheap. The Sudanese government would get a bargain, or the Sudanese government might very well renegotiate terms in their favor if they allowed a third party to buy, believe me. You know, they would be in a position, if they, assuming they could affect the transfer. And I think there’s a lack of understanding of what really would happen if China said tomorrow, “We’re going to get, we’re going to take our interest away from our activities in Sudan.” They would have to sell them or they’d have to give them up one way or the other. And like I say, I think the Sudanese government would probably end up better off financially, if they had a half decent advisor in the question, than they are presently.

I might mention one other thing which is kind of interesting in this. We buy about, currently about $250 billion worth more of goods from China than we sell to them, and we give them little pieces of paper in exchange. And we say to them, “We want your goods, and you should work hard and send us your goods, and we’ll send you these little pieces of paper called American dollars.” Two years ago, China wanted to use some of those American dollars we’d use their goods to, want to buy a company called Unocal. Unocal was a low tier US company. The majority of their production of oil and gas came from outside the United States, a substantial majority. It was came from places like Thailand, Indonesia. And the Chinese wanted to buy that company, and by a vote of 395 to 18, the US House of Representatives sent their message to President Bush that it would be against the national interest to let this company be sold, which, as I say, produced very little oil and gas in the United States. Prod, got most of it from the rest of the world.

So in effect, we THB snub, snubbed the Chinese in a big way on something important to them, energy. And I might mention that we import perhaps four times as much energy from all the countries around the world as the Chinese do, even though they have four times the population. So we have in a sense told the Chinese a couple of years ago, “Don’t even think about buying this small US company with a lot of production, a fair amount of production abroad, to satisfy your energy needs.” And I think it’s understandable to some extent that the Chinese are looking for energy around the world, just as we have for the last century. They are buying significant amounts of oil from Sudan. They put money in there, and the Sudan, they are going to buy four or five, they’re going to buy that 400,000. They’re not taking the whole 400,000 barrels a day from the Sudan, but they’re taking significant amounts. They’re going toy buy that oil in the world market, that mark. That oil is going to get produced. Revenue is going to flow to the Sudan. The question is how much the Sudanese keep themselves and how much gets dispersed to the Chinese because of the investment they’ve made.

So I see no effect whatsoever in Berkshire Hathaway trying to tell the Chinese government how to conduct their business. I agree 100% with the fact that what is happening in the Sudan should not be happ, happening. And I, there are other parts of the world where, say, some, that same situation may exist, although not to the same degree. But I don’t think you can, I don’t think it’s proper for us to divest our shares in PetroChina. They would be sold to somebody else. I think the proponents of the motion probably would like the idea that the price of the stock would go down. Well, we don’t sell stocks, you know, basically to try and drive them down in price. We might sell Petro China if it went up enough, but we would not be selling it to try and dive down the price, because all that would be doing would be giving a bargain to somebody else who is buying the stock of Petro China. It doesn’t change the funds available to them at all.

One of the speakers mentioned the amount of money that goes from PetroChina up to its parent. Well, money from Wesco comes up to Berkshire from our subsidiaries. It, you know, that’s the nature of having the, a major ownership in a subsidiary, that you get money from MiTek, you get money from the Nebraska Furniture Mart, which we own 80% of. But that really has nothing to do, in my view at least, it has nothing to do with the fact that it is China that has a policy in respect to being partners in Sudan, and it is not PetroChina at all. Selling our stock would not change one thing. If we would have any communications, practical matter, the communication should be with the Chinese government. And actually, people here have had a chance, because we have a lot of media here, they’ve had a chance to express their views to the Chinese government. Believe me, unless they, unless the govern, expressing PetroChina means nothing. I mean, it, the, PetroChina is controlled by the, by the Chinese government, and they are not, if you an official of PetroChina, you’re are not going to tell the Chinese government what to do. They are going to tell you what to do. Charlie?

Charlie Munger [05:12:35] Well, the issue also is, China is a rapidly rising nuclear power, and who should decide how the federal government or how the Americans should react to China? There’s a lot to be said for letting the policy flow through the US government instead of sort of a vigilante effort of various citizens. And I would also point out that there’s a lot wrong all over the Earth, and there’s a lot of cruelty, and there always has been, and there’ll always be a lot of oil produced in a lot of lands with a lot of cruelty. And nobody’s in favor of cruelty, but there’s a limit to how much you can fix. And so I’m very skeptical of the idea that Berkshire should become an instrument of telling, of setting United States policies vis-a-vis China.

Warren Buffett [05:13:35] Yeah, Charlie and I have our own views, for example, on reproductive freedom, but we don’t have a Berkshire Hathaway policy on reproductive freedom, nor do we finance from Berkshire Hathaway funds, the funds of our shareholders. We do not finance any activities that relate to our personal beliefs, although we may obviously fund them by ourselves or speak out on them by themselves. But we do not have a Berkshire Hathaway of funding just because we believe that the women should have the right to choose, or questions of that sort. I think reasonable minds can disagree on these subjects. At Berkshire, there’s all kinds of businesses we won’t buy and control individually, but we’re willing to own stock in the same businesses. Is that the correct moral line to draw? I don’t know. We do our best, and we make the decisions, and we make the calls.

I would s, I would, I wonder really whether, when the Unocal question was be being determined here, were the Chinese, to whom we’d given lots of little tickets in exchange for taking their goods, and they came along with a perfectly decent offer to the shareholders of Unocal, $18.5 billion. They wanted to buy a little more oil and gas production around the world, and the US Congress overwhelmingly said, “This is a terrible thing, and we want the United States to oppose it. We want it sold to Chevron for less money.” And I really don’t recall a lot of people speaking up on behalf of the Chinese right to buy oil companies over here, just like we’ve bought oil companies around the world for many decades. So to the extent that they may feel themselves somewhat alienated from the rest of the world in this respect, I think we’ve actually contributed our share. Charlie?

Charlie Munger [05:15:33] Well, another thing in the complexity of life: the woman who lost her family to the Holocaust, we clobbered the people that committed that genocide by joining genocidal Joe Stalin. These issues are complicated.

Warren Buffett [05:15:54] Okay. If there any shareholders that want to vote in person in this, on this matter, or to change their proxies, we have monitors, if you just raise your hand. And if there are none of those, Miss Amick, are you ready to give your report?

BABecki Amick [05:16:21] My report is ready. The ballot of the proxy holders, in response to proxies that were received through last Thursday evening, cast 15,740 votes for the motion and 835,198 votes against the motion. As number of votes against the motion exceeds a majority of the number of votes related to all Class A and Class B shares outstanding, the motion has failed. The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

Warren Buffett [05:16:57] Thank you, Miss Amick. The proposal fails. Does anyone have any further business to come before this meeting before we adjourn? If not, I recognize Mr. Scott to place a motion before the meeting.

WSWalter Scott Jr. [05:17:09] I move this meeting be adjourned.

[05:17:11] Unidentified speaker: Second.

Warren Buffett [05:17:13] All those in favor say I. Oppose? No. Thank you, and I’ll see you next year. Thank you.