Berkshire Hathaway Annual Meeting 2010 Transcript

Warren Buffett [00:00:00] (Applause) Good morning. I’m Warren, he’s Charlie. He can hear, I can see. We work together for that reason. I’d like to make one correction in the movie. My fastball was filmed in slow motion. They tried it the regular way and you couldn’t even see it, so… (Applause)

Our approach today will be to announce a couple of things, our earnings, and introduce you to the directors. But as soon as that’s through, we’ll move on to questions. We’ll have those until noon, we’ll break for an hour and we’ll come back at one o’clock. Those of you who are in the overflow rooms may find that you can get into the main arena here at that time, and we’ll go till 3:30 with the questions, and then we’ll have the meeting of the annual meeting, the business meeting, for those of you who are still around at that point. And at that time we will have the election of directors.

But because not all of you may be here at that time, I would like to introduce the directors to you, and I’ll ask them to stand. And if you’ll hold your applause until they’re all done standing, or you can even hold it after that, it will make for a very orderly meeting. So let’s start in with Howard Buffett. I’m the next one alphabetically. Our new director, Steve Burke. They didn’t hear the part about stay standing, but that’s okay. They’re generally fairly obedient, but… (Laughter) Susan Decker. Bill. David Gottesman. Sandy Gottesman. Charlotte Guyman. Don Keough is unable to be with us today. He’s had a serious operation, but he’s recovering very well, and he’s got a lot of friends in this audience, and he’ll be with us next year. Charlie, we’ve already introduced. Tom Murphy. Ron Olson, the manager in our movie. And Walter Scott. Now you can go wild with applause with the girl. (Applause)

Now, before we start with the questions, we do have preliminary earnings figures for the first quarter, and I’d like to ask the projectionist to put up us slide A. There’s nothing really very surprising in these numbers, but we’d like to give them to you. They up there? Okay. Yeah. If you have any questions on these later on…

What we’re seeing in our businesses is that in what was sort of a sputtering recovery a few months ago seems to have picked up steam in March and April. So in our businesses that kind of serve broad industry, such as the railroad or Marmon or ISCAR, we’re seeing a pretty good uptick. It’s a long way from where it was a couple years ago, but what was very spotty in the recovery a couple of months ago, the trends really seem a fair amount stronger in the last few months.

And we always encourage you to focus on operating earnings. We have the figures there for our investments in derivative businesses. We don’t really think they mean anything on a quarterly basis. Obviously they’re meaningful over the years. I mean, we’ve piled up a lot of net worth over the years with capital gains, but in any quarter they mean absolutely nothing. And you’ll notice another thing about our report. We don’t even put down, we have to when we publish generally, but we don’t even put on the earnings per share. We don’t, we’re not focused on that number in any quarter, in a year. We’re focused on the build up of value.

And we really think that an undue focus on quarterly earnings not only is probably a bad idea for investors, but we think it’s a terrible idea for managers. If I had told our managers that we would earn $3.17 1/2 for the quarter, you know, they might do a little fudging in order to make sure that we actually came out at that number. And there was a very interesting study that was published a few months ago where thousands of earnings reports were examined, and instead of taking it out to the penny, which is customary in the reporting, they took it out one further digit. And of course, if you go out one further digit and it’s four or less, you round downward, and if it’s five or more, you round upward. And they found out that a statistically impossible number of, small number of fours showed up, because if they got to four tenths of a cent, somehow somebody in the accounting department managed to find another tenth of a cent so they could round upward. It was not an accident.

And you do not want to have, in our view, we think it’s terrible practice to be thinking about trying to report to some penny that you’ve whispered to Wall Street analysts in previous months. And we probably carry that to extreme at Berkshire, but we always think of the enterprise as a whole. We think about building gains or losses. Charlie may want to weigh in on this one a bit. Charlie?

Charlie Munger [00:06:30] Well, I agree with you.

Warren Buffett [00:06:33] That’s… Yeah, he is the perfect vice chairman. They don’t come any better. Okay, with that preliminary, we probably ought to quit at that point, actually.

We’re going to alternate the questions between a panel of three journalists here. We have Carol Loomis of Fortune magazine on the far right. (Applause) And we didn’t do it quite alphabetically. We have Andrew Ross Sorkin from the New York Times. (Applause) And Becky Quick of CNBC. (Applause) Andrew was maneuvered for a seat there, apparently to get earlier in the questioning order, but I’ll probably stick with the alphabetical list. And we will alternate between our journalists, and then we will go around the auditorium here, where people have been chosen by chance to ask questions. And we also, we’ll go to just, I guess, one of the overflow rooms. We have a whole lot of overflow rooms, but we’ll, will not go to all of them. So let’s just start things off. Carol?

CLCarol Loomis [00:08:16] Well, since I won the alphabetical lottery, I get to make two very short statements also. One is that we received an awfully lot of questions. I, we really don’t know how many, because some people sent their question to all three of us, but I would guess we had something between 1,500 and 2,000 questions, and obviously we’re not going to be able to ask all of those, and we’re sorry for those we didn’t get asked, at, get to answer, to ask. They were very good questions, and we appreciate the work that people put into them.

The other thing I want to mention is that Warren and Charlie have had absolutely no hint as to what the questions will be, so they will have to field them just as they come up. However, Warren and Charlie may be smart enough to have guessed that the first question will be about topic A, which is Goldman Sachs. And I received several emails about the SEC’s lawsuit against Goldman, all of them asking a different question about that problem. I have combined the several thoughts in these questions, and with thanks to Greg Fearman, Kaipan of Morgan Stanley, Brian Chan and Vic Timono, here is the question.

“Warren, every year in the Berkshire movie, you did it again today, you use the clip from the Salomon crisis in which you tell Congress that you have warned Salomon’s employees that if they lose a shred of the firm’s reputation, you will be ruthless in your reaction. Clearly reputation, because of the SEC’s action… Could you tell us your reaction to the lawsuit, your reflections in light of it about Berkshire’s large investment in Goldman, and what advice, in light of your own Salomon experience, you would give Goldman’s board of directors and management?”

Warren Buffett [00:10:36] Okay. Anytime you ask me, there’s multiple questions, I may go back to you to get all parts. But well, let’s start with the transaction, because that’s the important thing. A few weeks ago, on a Friday, a transaction described as Abacus was made the subject of an SEC complaint. I think it ran about 22 pages. And I think there’s been probably sort of misreporting, not intentional obviously, but misreporting of the nature of that transaction in at least probably a majority of the accounts that I read about it. So I would like, this will take a little time, but I think it’s an important subject. I would like to go through that transaction first, and then we’ll get to further into the questions posed by the people that emailed Carol.

The transaction, the Abacus transaction, there were four losers in, but we’re going to focus on two of them. Goldman itself was a loser. They didn’t intend to be a loser, I’m sure. They couldn’t sell the piece, a piece of the transaction, and they kept it, and they, I think they lost $90 or $100 million because they kept it. But the main loser in terms of actual cash out was a very large bank in Europe named ABN AMRO, which subsequently became part of the Royal Bank of Scotland.

Now, what did the ABN AMRO, why did they lose money? They lost money because they in effect guaranteed the credit of another company, ACA. ABN AMRO was in the business of judging credits, deciding what credits they would accept themselves, what credits they would guarantee. And in effect, they did something in the insurance world called fronting a transaction, which really means guaranteeing the credit of another party. We have done that many times at Berkshire. We get paid for it. And people do not want the credit of the XYZ insurance company, but they say they’ll take a policy from XYZ if we guarantee it. And Berkshire has made a lot of money guaranteeing things over the years.

And Charlie can remember back to the early 1970s when we ran into some very dishonest people and we lost money, and we lost a fair amount of money at that time because we guaranteed the credit of somebody that was, turned out to be not so good. It happened to be some syndicate at Lloyd’s, of all things, but they found ways not to pay when our name was on it.

So ABN AMRO agreed to guarantee about $900 million of the credit of a company called ACA. They got paid for that, and this is in the SEC complaint. It’s not mentioned very often, but they got paid, what, 17 basis points. That’s 17 hundredths of 1%. So they took on a $900 million risk of guaranteeing credit, they got paid about a million six, and the company whose credit they guaranteed went broke, and so they had to pay the $900 million. It’s a little hard for me to get terribly sympathetic with the fact that a bank made a dumb credit deal.

But let’s look at ACA, because they were sort of the nub of the transaction. ACA, and you wouldn’t really know this by reading most press accounts, ACA was a bond insurer. Now, they started out as a municipal bond insurer. They guaranteed various credits, and they were like Ambac, they were like MBIA, they were like FGIC, they were like FSA. And all of those companies, and we wrote about this a few years ago in the report, all of those companies started out insuring municipal bonds. Some of them started 30 years ago, and there was a big business in ensuring municipal bonds. And then the profit margins started getting squeezed in the municipal bond business.

So what did they do? Instead of sticking to the business they knew and accepting lower profits, they went out into the business of ensuring structured credits and all kinds of different other deals. I described their activities a couple years in the annual report as being a little bit like Mae West, who said, “I was Snow White, but I drifted.” And they, these bond insurers, and almost all of them did it, these bond insurers drifted in to ensuring things they didn’t understand quite as well, but where they could make a little more money. ACA did it, MBIA did it, Ambac did it, FGIC did it, FSA did it, and they all got into trouble, every one of them.

Now, is there anything wrong with a bond insurer ensuring a structured credit or something other than municipals? No. But you better know what you’re doing. Now, interestingly enough, Berkshire Hathaway, when these other guys got into trouble, went into the municipal bond insurance business, and we ensured things that were almost identical to what ACA or others had ensured. The difference being that we thought we knew what, more about what we were doing. We got paid better than they got paid, and we stayed away from things we didn’t understand. We never insured a CDO. We never insured, you know, any kind of a RMBS deal or anything of the sort.

But I want to give you an example of something we did ensure, because I think it will help you understand better this Abacus transaction. So if the projectionist would put up slide number one. I’m going to describe a deal to you, and as you look at this, is it up there yet? Yeah. Somebody came to us a couple of years ago, I’ll tell you a name a little later, but a large investment bank came to us a couple of years ago. Now, we were insuring bonds regularly. We insured bonds here of the Omaha Public Power District, that’s familiar to many of you. We ensured the bonds of the Nebraska, of the Methodist Hospital, which is a six or seven miles from here. We have told people that if the Nebraska Methodist Hospital does not pay its bonds, Berkshire Hathaway will pay them, and we’ve done that to the tune of about $100 million in their case. So we are in the business of insuring bonds.

Now, a couple of years ago, somebody came to us, large investment bank, and they said, “Take a look at this portfolio.” And as you can see, it’s got the names of a whole bunch of states. Yeah, it’s up there. And very different amounts. I mean, it’s got a billion one for Florida, it’s only got 200 million for the state of California. And they said to us, “Will you insure these states, that these bonds of these states will pay for the next 10 years? If any of the states don’t pay, you have to pay as the insurer.” And I looked at the list, and Ajit Jain looked at the list, and we had to decide, A, whether we knew enough to insure them, and B, what premium we would charge. That’s what we’re in the business for. And we don’t have to insure them. We can say, “Forget it, we don’t know enough to make the decision.” But we made the decision, and we offered to insure those bonds for about $160 million for a 10 year. So we collected a premium of a little over 160 million, and somebody on the other side, the counterparty, they called it, somebody on the other side, for 10 years gets a assurance that if these states don’t pay, we will pay as if they did pay.

Now, there’s, and this gets to the crux of the SEC’s case, or a complaint, in respect to Goldman. Somebody came to us with this list. We didn’t dream up the list. Another party came to us. Now, there’s about four possibilities. Now, I’ll tell you who the party was that came to us two years ago. It was Lehman Brothers. So Lehman Brothers, there’s four possibilities, roughly. Lehman Brothers might own these bonds and want protection against the credit. They might just be negative on the bond market and in effect be shorting these bonds, and using this method as a way of shorting it. They might have a customer that owned these bonds who wanted to buy protection against the credit. Or they might have a customer who was negative on these bonds and was simply wanting to short it.

We don’t care which scenario exists. It’s our job to evaluate the risk of the bonds and to determine the proper premium. If they told me Ben Bernanke was on the other side of the trade, it wouldn’t make any difference to me. I, if I have to care about who’s on the other side of the trade, I should not be insuring bonds. They could have told me Charlie was on the other side of the trade. So in effect, we did with these bonds exactly with the bonds that were presented to them. Now, ACA said, with a list of, a list of 120 that was presented to them, they said there’s about 50 of these that we were willing to ensure, and then they went back and negotiated and took on 30 more of them.

We could have said, presumably, you know, “We don’t like Texas that well at a billion 150, and we’d rather have you give us more Floridas,” or something like that. We didn’t do it. We just took the list and submitted. So it was totally the other guy’s list that we insured. In the case of the app Abacus transaction, it was sort of a mutual, a negotiation as to which bonds were included. Now, in the end, the bonds that were included in the Abacus transaction all went south very quickly. That wasn’t quite so obvious they were going to do that in early 2007, as you could see by studying something called the ABX index. But the mark, the housing, the housing bubble, really mania, blew, started blowing up in 2007.

Now, there could be troubles in these states that we insured. You can say they have big pension obligations, and maybe the guy who’s shorting them on the other side knows more about that than we do. But, you know, that is our problem. I mean, if we want to ensure bonds… In the case of ACA, in case of MBIA, they have teams of people do it. We just deal with a couple people at Berkshire. But I see nothing whatsoever… I mean, if we lose a lot of money on these bonds, I am not going to go to the guy on the other side of the transaction and say, “Gee, you took advantage of me.” I don’t care if John Paulson is shorting these bonds to me. I don’t, he has no worries that I’m going to claim that he had superior knowledge about the finances of these states or anything of the sort.

So that was basically the Abacus transaction. Then the, I think the central part of the argument is that Paulson knew more about the bonds than the bond insurer did. My guess is the bond insurer employed more people than John Paulson did in his business, and they just made it, they made what turned out in retrospect to be a dumb insurance decision. And for the life of me, I don’t see whether it makes it any different whether it was John Paulson on the other side of the deal, or whether it was Goldman Sachs on the other side of the deal, or whether it was Berkshire Hathaway on the other side of the deal. Let’s say we had decided to short the housing market in some way in early 2007. I don’t think anybody should blame us for taking our position if we did it. We didn’t do it, but, or if we take them alongside.

I think before we get the other part of Carol’s questions, I’d ask Charlie the comment on this. Is, Charlie has a law degree and in other ways is superior to me, so we’ll get his views.

Charlie Munger [00:23:33] Well, my attitude is quite simple. This was a three to two decision by the SEC commissioners under circumstances where they normally act unanimously. If I had been on the SEC, I would have voted with the minority too, and not with the three who authorized the lawsuit.

Warren Buffett [00:23:49] Carol, would you get to the three parts that we probably haven’t answered yet, and then I’ll tackle this one. But I really feel it’s important to understand the transaction. I have not seen, I have seen ACA research referred to as an investor. It’s true that ACA had a management company. It was 100% owned by ACA. ACA was a bond insurer, pure and simple, and they had this very simple, as it turned out, and they had, they had one part of the organization did this and that. But ACA lost money because they were a manager. Carol?

CLCarol Loomis [00:24:23] Well, I’m assuming that you have covered the part that says, “Could you tell us your reaction to the lawsuit?” So the next part was your reflect, reflections in light of it about Berkshire’s large investment in Goldman, and then the third was what advice you would have, given your Salomon experience and the threat of reputation that you have planted, that those words you’ve planted. Those are the last two parts.

Warren Buffett [00:24:52] Ironically, very ironically, it’s probably helped our investment in Goldman in a certain way, because we have a $5 billion preferred stock that pays us $500 million a year. Goldman has the right, the legal right, to call that at 110% of par. So anytime they want to, they can send Berkshire $5.5 billion and they get rid of this preferred stock, which is costing them $500 million a year. If we got that $5.5 billion in, we immediately would put it in very short securities, which probably wouldn’t, under today’s conditions, might produce $20 million a year or something like that. So every high that Goldman does not call our preferred is money in the bank. And it’s been pointed out that our preferred is paying us $15 a second. So as we sit here, tick, tick, tick, tick, that’s $15 every, every tick. I don’t want those ticks to go away. I just love them. They go on at night when I sleep, on weekends.

And frankly, Goldman would love to get rid of that preferred. I mean, they only agreed to sell us that preferred because it was sort of the height of the crisis. The U.S., I’m not sure what part of the government, probably the Fed, but they have been telling companies that took TARP money whether they could increase their dividends or not, whether they could redeem preferreds and all that. Up till now, probably the federal government has been doing us a big favor by telling, even before this thing happened, they’ve probably been telling Goldman that you can’t call that preferred until we tell you you can, and you can’t increase your dividend. They’ve been pretty strong with all of the TARP companies. That has not been publicized too much, but believe me that it’s the case.

So I was just sitting here hoping that the, basically, that the Fed or whomever would be, continue to be quite tough in terms of letting Goldman call our preferred. But it wasn’t going to go on forever. I think that, I think recent developments have probably delayed the calling of our preferred by sometimes. So the tick, tick, tick will go on, and we will be getting $500 million a year instead of $20 million here. The, we love the investment, and I would expect that…

In question about losing reputation, there’s no question that the allegation alone causes the company to lose reputation. And obviously the press of the past few weeks, they heard, they heard a company, hurting morale, they can, a lot of things. Nothing, it’s not remotely mortal or anything like that, but it hurts. Incidentally, Goldman Sachs had a situation that, in connection with the Penn Central, 30, 40 years ago now, and that hurt at that time. They had a connection with one fellow in terms of Boesky. That hurt at that time. And it was a source of great pain to John Weinberg, who was running Goldman. But I don’t believe that the allegation of something falls within my category of losing reputation. If something is proven, then you have to look at it.

My advice in times of some kind of a emergent, I mean, when some transgression is either found or alleged, you know, basically, you saw Ron Olson in our movie. He was the manager of the team. And back when we were working at Salomon together in a somewhat similar situation, we had as our motto, “Get it right, get it fast, get it out, get it over.” But get it right was number one. I mean, you have to have your facts right, because if you go out with the wrong facts, you get killed and you can’t redo it afterwards. And but that does mean sometimes some delay. You have to gather information from within your own organization, and you are on the defensive.

I would not, I do not hold against Goldman at all the fact that an allegation has been made by the SEC. And if it leads into something more serious, you know, then we’ll look at the situation that time. But what I’ve seen in terms of the Abacus activity, I just don’t, I do not see that that would be any different than me complaining about the list of municipals that were given to me to a couple of years ago. Charlie?

Charlie Munger [00:29:59] Well, I agree with all of that, but I also think that every business ought to decline a lot of business that’s perfectly legal and proper to accept. In other words, the standards in business should not be what’s legal and convenient. The standards should be different. And I don’t think there’s an investment bank in America of any consequence that didn’t take too many scuzzy customers and deal in too many scuzzy securities.

Warren Buffett [00:30:33] I would agree with that. But Charlie, would, do you think we should have done our municipal bond deal?

Charlie Munger [00:30:41] I think it was a closer case than you do.

Warren Buffett [00:30:45] Okay. We insure probably 40 billion now, or something like that, of municipal ones, and we have done very little in the last year. Not because of Charlie’s views that he just expressed, but because basically, because the price isn’t right. The premiums are wrong. And the reaction of other people when premiums are wrong is to take more risk, and our reaction when premiums are wrong is just to go play golf or something and tell somebody to call us when premiums get right again.

I do want to, Charlie and I will give our views on a lot of the activities that have gone on in Wall Street, and we do think plenty has been wrong. I do want to point out, though, that our experience with Goldman goes back 44 years, and during those years, we’ve bought more businesses through them than through any other Wall Street investment bank. We’ve probably done more financing. They have helped build Berkshire Hathaway. And we trade with them as well. We don’t hire them as investment advisors. I mean, they have a big investment advisory business, and if, you know, our reaction to that is, “No thanks.” You know, we are in the business of making our own decisions.

But we, when we trade with them, they can very well be shorting to us a stock we’re buying. You know, they can be buying for their own account some stock we’re selling. They do not owe us a divulgence of their position any more than we need to explain to them our reasoning or what we are doing in our position. We are acting there in a non-fiduciary capacity, I mean, and they are operating in a non-fiduciary capacity in my view when they are trading with us. Now, if they’re working on our behalf on our acquisition or financing, that’s a different story. But I would, I would say that we have had a lot of very satisfactory transactions with Goldman Sachs.

And I don’t want to prolong this, I won’t do this on any more questions, but I would, I’d like to, some people here will remember this, I’d like to take you back to the very first bond issue that Charlie and I ever did. This was our maiden voyage, back in 1967, I believe. Yeah. And if we could put slide 2 up there, I will direct your attention to the… This is an offering that was made in 1967. We just bought a department store, and we had a company called Diversified Retailing. Now, Diversified Retailing only owned one retailing operation, but we were sort of imaginative in those days, so we called it Diversified Retailing. And we went out to raise $5.5 million, and Charlie Heider of Omaha, many of you know, helped me in the financing.

And you will notice our tombstone ad there has on the top two lines New York Securities and First Nebraska Securities. They were the lead underwriters. And is customary with tombstones, they’re a group of underwriters listed below, and they’re usually listed in the degree of their participation. I was, the more that they’re involved, the higher up in the list they are, with the lead underwriters on top. And that’s been true of every tombstone I’ve ever seen, except this one.

And what happened in this one was that we were having trouble raising $5.5 million, and I called Gus Levy of Goldman Sachs and I called Al Gordon of Kidder Peabody. Those were two of the most prestigious firms in Wall Street at the time. And I said, “Would you guys help me? We’re trying to raise $5.5 million, and there’s nobody that wants to give Charlie and me $5.5 million, and the underwriters we’ve lined up are having trouble getting it done.” And both Gus Levy and Al Gordon said to me, “Warren, will take a big piece.”

And if you put up slide number three, you will see the list of underwriters, and Goldman Sachs, highlighted, and Kidder Peabody, highlighted, were actually the next largest underwriters. But they were so ashamed of being associated with our dinky little company that they asked us to leave their names off. They wanted to give us money under an assumed name. But they did, they did come through for us, and believe me, a lot of people weren’t coming through for us then. So, you know, I do have a long memory for people that have taken good care of Berkshire over time. And Al Gordon died last year at the age of 107. He worked until he was 104. He was a remarkable man. Gus Levy was a remarkable man. And I thank him for their participation, even though they did want to do it under an assumed name.

Okay, we’ll go to area number one, and we’ll shorten the answers.

[00:36:14] Shareholder (Guy Pope, Portland, Oregon): Good morning, Mr. Buffett and Mr. Munger. My name is Guy Pope and I’m from Portland, Oregon. I’m curious about your thoughts on financial reform that Congress is currently working on. Specifically, what are the good ideas that you think are out there that should be included in the bill, and what are the bad ideas that you think should be left out?

Warren Buffett [00:36:36] Charlie, it’s 1,550 pages, so you take the first 1,500, I’ll take the last 50 pages.

Charlie Munger [00:36:42] Well, I don’t think anybody in America right now, including the people in Congress, know what’s going to happen. And my guess is that most of them have not read the bill either. So I think we’re all in the doubt as to what’s going to happen. To me, one thing is perfectly clear, and that is that our governmental system which regulates the big investment banks was so permissive, and the investment banking culture had a nature, that together helped a range that, under stress, every big investment bank except Goldman Sachs was going to go bluey. A system that likely to go bluey, that is so important to the country, should be changed so it’s less permissive in what allows the banks and the investment banks to do. And people are thinking about that right now. The banks and investment banks just hate the idea of losing investment flexibility, for instance on maintaining the biggest derivative book in the world, and say JPMorgan Chase. They hate giving that stuff up. That doesn’t mean that it’s good for the country that they be allowed to continue to do as they have done.

Warren Buffett [00:38:16] Based on what you know about the bill, and I know you haven’t read all 1,550 pages, but would you vote for it today or not?

Charlie Munger [00:38:27] I simply don’t know enough about it. I know what I would do if I were the benevolent despot of America, and I would make Paul Volcker look like a…

Warren Buffett [00:38:41] You want to get more specific than that?

Charlie Munger [00:38:44] All, I was…

Warren Buffett [00:38:46] That’s quite a word picture, but they want to get more specific, Jeremy.

Charlie Munger [00:38:52] Well, I would reduce the activities that are permitted. If you’re de facto using the government’s credit to help your business run, you shouldn’t have a balance about a bunch of financial statements in the trillions which you can’t really understand even if you’re a partner in the business. This is crazy. The complexity that has come into the system is quite counterproductive, and of course the people have proven they can’t really control it. So I think the, I think what we need is a new version of Glass-Steagall that drastically limits what both commercial banks and investment banks are allowed to do. They should have a much simpler and safer mode of business.

When we owned the savings and loan association, it had a very restricted repertoire that it could use, and of course it had government credit for its deposits. And by and large, as long as the repertoire was quite limited, the savings and loan stayed out of trouble. But you give human beings the flexibility to do any damn thing they please with absolutely unlimited credit under the repo system and other systems, and they will go plum crazy. And of course they did.

Warren Buffett [00:40:28] Okay, on that cheering out, we’ll move to Becky.

Becky Quick [00:40:32] We received a lot of questions about the impending legislation. This question comes in from Jay Gelb, who wants to follow up on the point that Mr. Pope just made. “What’s the anticipated impact of pending financial reform legislation on Berkshire? In particular, how much additional collateral may need to be posted on Berkshire’s existed $63 billion of derivative contracts, and could Berkshire get too close to its minimum requirement of $20 billion of cash on hand as a result?”

Warren Buffett [00:41:05] Yeah, as I understand the bill now, the one that got presented a couple of days ago, and I could be wrong, but I think I understand it, and I’ve read the sections for the, the requirements would be zero. The, if we were found, Berkshire were found to be a, and I don’t know the exact term in the bill, but basically dangerous to the system by the Secretary of the Treasury, or I believe some commission, then we could be required to post collateral on retroactive contracts, on contracts that were written in the past.

I think the chances of us being regarded as a danger to the system, when we have 250 contracts and other companies have a million contracts… Our position was described in the Journal not long ago is huge. You know, our position is 1% in terms of notional value or liabilities or a lot of other ways of measuring. It’s 1% of that of several other very large institutions. So I’ve really wondered, if you use the word huge to describe our position, what you would use for 100 times that position. That must be some adjective that lurks out there someplace to be attributed to those other positions. We had 23,000 positions 10 years ago when we bought Gen Re, and we proceeded promptly to get rid of all but, less than 100 that are left. So we have absolutely, in my view, we have no problems.

If for any reason, though, the Treasury or this commission should go back and maybe in some more sweeping declaration decide that they wanted all past contracts to be collateralized, we would comply, obviously. We also would feel that we were do substantial money, because in negotiating those contracts, there was one price for collateralized contracts and there was another price for uncollateralized. So if I sell my house to you for $100,000, and wanted $120,000 if it were furnished, but you said, “I’ll take it unfurnished for $100,000,” and then Congress comes along later on and says all houses have to be sell, sold furnished, and by the way, that’s retroactive, if I give you the furniture now, I want something for it. I mean, a little unreasonable maybe.

We do think… Well, just a week ago, we were offered an equity put contract that’s identical, basically. It’s a 10-year contract, by one of the very largest investment banking houses. The price that they would pay us was $7.5 million uncollateralized and $11 million collateralized. So there’s a very different, there’s a price to be paid for having a collateralized contract. And we elected to forego probably $1 billion of extra premiums we could have received in the past for our contracts if they had been, if we had agreed to have them collateralized. And with a few exceptions, we declined that. And we would feel, if we ever had to collateralize them, we would be entitled to fair compensation for it, and we would like that language to be in the bill.

And incidentally, Secretary Geithner, if we’ll put up slide, slide number seven, we have his testimony before the Senate Ag Committee on December 2, and as you can see, he’s, he testified very strongly in terms of the sanctity of past contracts. But if the bill passes tomorrow, and the way it reads to us and to our attorneys, we don’t have, we would not have to put up a dime. And I would think there might be some other companies that would be determined to be dangerous to the system before Berkshire Hathaway would be.

So I really, I don’t see any consequences unless there’s some sweeping declaration that any company that, of a certain size, that has derivatives, shall be required to put up collateral. And if that’s required, we will, and it would be no problem. It would have a cost to us in terms of the opportunity cost, but then of course we would argue about what collateral was proper and so on. And if we could put up our Coca-Cola stock, then we’re gonna hold our Coca-Cola stock anyway, so really changes nothing. We still get the dividends from the Coca-Cola stock if it’s pledged as collateral. We get the profit if it goes up. Charlie?

Charlie Munger [00:46:01] Well, yes, the, if collateral requirements were inserted by file of the government into existing contracts, it would be just like having a contract to buy a house for $1 million and the government passing a law saying, “No, you’ve got to pay $2 million.” I mean, it would be a dubious constitutionality, and it would be both unfair and stupid. I don’t think the government is that crazy.

Warren Buffett [00:46:26] Plus, I think what they would see, there’s a, there’s a whole list. In fact, I think I’ve got a page even for that. There’s a… Yeah, well, let’s put up, put up slide number eight. And this is just a sample page of people who oppose putting up collateral, being required to put up collateral respectively. And you’ll see IBM, you’ll see Ford Motor, you’ll see 3M, you’ll see HCA. I mean, there’s all kinds of companies don’t want to do it in the future. We don’t care what we do in the future, as long as we get paid for it. And so it, this is not anything that is peculiar to Berkshire at all. In fact, we happen to be in a different position than the IBMs and the 3Ms and those of the world in respect to this. As long as we get paid for it, we’re indifferent to what the rules are going forward. But considering the fact that we took lesser premiums in the past, we would not like something retroactively to take money out of our pocket.

But bear in mind, Burlington Northern, when we buy it, it has some, it has some fuel contracts. MidAmerican has energy contracts. There was a story in BusinessWeek about Anheuser-Busch a couple of weeks ago, and, you know, they say, “We don’t want to take money out of our business and send it to Wall Street as a deposit on collateral.” And I think when, if they really saw that the net effect of this would be to send a whole lot of money to be held by Wall Street that was otherwise employed in operating businesses, there might be a little less congressional enthusiasm. Okay, we’ll go to number two.

[00:48:02] Shareholder (Norman Rentrop, Bonn, Germany): Good morning to all of you. Switching topics, Charlie and Warren. Norman Rentrop from Bonn, Germany. I want to first give you a big thank you and then a question. “Come by train,” you wrote in the shareholder letter, and that is how I came to Omaha for the first time back in 1997. I deliberately took the train from Denver to experience Omaha as a railroad city, and I immediately liked Omaha a lot. But the train ride, I saw a room for improvement. So thank you very much for taking the future of American railroads into your gifted hands.

Warren Buffett [00:48:51] That’s one of the best questions I’ve ever heard.

[00:48:56] Shareholder (Norman Rentrop, Bonn, Germany): Here’s a question.

Warren Buffett [00:48:57] Oh, okay.

[00:48:58] Shareholder (Norman Rentrop, Bonn, Germany): It’s about Greece, the future of the euro, and the fiscal discipline all over the world, and what we have to prepare for as investors. In the past, you have been warning us about structural weaknesses of the U.S. dollar. Now we see Greece and potentially other European countries in crisis. Berkshire has significant investments in the eurozone, the big ones like Cologne Re, Munich Re, and even small ones like ISCAR’s Comey investment in Hamburg. How are you preparing Berkshire Hathaway for potential currency failures, and what are your thoughts on the sustainability of the euro, and what is your advice for us as investors?

Warren Buffett [00:49:46] Yeah, I’m gonna… Charlie and I have not talked about Greece, actually, recently, and so I’m gonna be very interested in hearing his views on that. I will, I’ll answer the last part of your question first. We’d, we have a lot of exposure in various countries, on both the asset on liability side. In other words, we do own, we don’t, we own stock in Munich Re, and they’ve got lots of assets, majority probably in the euro. We have Cologne Re, a subsidiary of General Re, which has a substantial net worth that is basically tied to the euro.

On the other hand, we have very substantial liabilities that are denominated in other currencies, including fairly big time in the euro, around the world. For example, when we insure, reinsured, three or four years ago, three years ago maybe, Equitas, we took on many, many, many billions of liabilities around the world, and we were paid by, in effect, Lloyd’s, and we took that money and invested it in dollars. So we keep those liabilities for all kinds of old insurance claims arising from Equitas in foreign currencies. And if the euro depreciates against the dollar, we benefit on that side, but we lose, as you point out, on other sides.

I can’t tell you, and it’s something I’m not concerned about, you know, whether our net balance in euros or sterling or yen or whatever… I can’t tell you how, what it is on any given day. Some of it enters into our equity put options and things of that sort. But we have no dramatic exposures in any other currency. That doesn’t mean that other currencies are not important to us, because what happens with the Greek situation and what may fall out from that is, can be quite important in terms of the world’s economy. And Charlie is going to explain to you exactly what that might be.

Charlie Munger [00:52:11] Well, generally speaking, and with rare exceptions, of course, we’re agnostic about currencies. We simply do our business and we take those fluctuations as they fall. Wouldn’t you agree with that?

Warren Buffett [00:52:25] Yeah, we’re agnostic in terms of the relative values. We’re not agnostic about where we think all currencies are headed generally.

Charlie Munger [00:52:35] No, no, but the relative value. But Greece presents an interesting problem. Of course, what’s happened is that the past conservatism of a place like the United States gave it wonderful credit, a combination of success and conservatism, and we used that credit to win World War II and help revive Germany and Japan, and one of the most constructive and intelligent foreign policy decisions ever made in the history of the world. And we’ve used that credit to help assure prosperity for all these decades in which Berkshire has flourished. And now, of course, the government does not have quite as good of credit as it had before, started using it so heavily, and that’s happened pretty much all over the world.

And so Greece is just the start of a very interesting period. And of course, it’s more dangerous to civilization when governments push their credit so hard, because if you need credit to help civilization functional and you’ve blown it by your own aggression and using it in the past, that’s not a good thing. And I think in this country and in other countries too, responsible voices are now realizing that we’re nearer trouble from lack of government credit than we’ve been, well, in my lifetime.

Warren Buffett [00:54:14] Yeah, you should always, everything you read about country credits, currency, you always want to make a, you always want to distinguish between countries that are borrowing in their own currency pretty much exclusively, like Japan has, or the United States, and countries that are being forced, for one reason or another, because the world doesn’t trust them, to borrow in other countries’ currencies. I mean, in the past, you know, if you were some South American country and you were borrowing in your own currency, I mean, you could, you never default. You just buy a new printing press, or, and work a little harder. But the world doesn’t like that sort of thing.

So with weaker credits and people, countries with poorer reputations, they force those countries to borrow in other currencies, frequently the United States currency. And that can really put you out of business very quickly, because you can’t, if you’re some South American country, you can’t print U.S. dollars, although you can print your own currency. And that’s what’s caused failures among countries. The Europe, European Monetary Union, I mean, it’s a really interesting situation, because Greece, you know, they are a sovereign country in terms of their own budget, but they can’t print their own currency. You know, they’ve got the euro. And this is, you know, euro was regarded as quite an experiment 20 years or whatever was ago, but less than that. But you may be seeing sort of a test case play out here of a country that is not using its own currency, in effect, or using a common currency, and yet is sovereign in terms of making its own promises to its citizens. And I don’t know how this movie ends. That doesn’t mean I’m forecasting disaster, anything. I really just don’t know how this movie ends, and I try not to go to movies like that if I can, but I’ll be watching. I really, this is, this will be high drama, in my view, what happens here.

The one thing, Charlie says we’re agnostic on currencies, and we don’t make big currency plays. We didn’t make one a few years ago, and we did all right on it. But we very seldom will develop a strong view on one currency versus another. I would say this, so that events in the world of the last few years would make me more bearish on all currencies in terms of their future holding their value over time than previously. But that’s not, it’s not unique to the United States, it’s not unique the United Kingdom.

If you really could run budget deficits of 10% of your GDP and do it for a long period of time, believe me, the world would have been doing it a long time before this. I mean, that is, that’s a lot of fun if you can keep it up. And the reason it hasn’t been done in the past, I think, is probably that most people understand that it can’t be kept up. And how the world weans itself off huge deficit financing by country after country after country is going to be easy, I mean, it’s going to be interesting to watch. You do not need to worry, as long as the United States government borrows in U.S. dollars, you know, there is no possibility, none, of default. If the world won’t take our obligations denominated in dollars, then we, then you have a real problem. But you don’t default when you can print your own currency.

Charlie Munger [00:58:26] Well, yes. And of course, the published statistics are quite misleading, because the debts of the currencies of the countries are normally stated in terms of the government bonds outstanding, and the unfunded promises of the various governments are much greater than the government bonds outstanding. So whatever you think this problem is when you read the statistics, it’s miles bigger. And those unfunded promises don’t bind if you keep growing GDP at two or three percent per annum per person or something like that. You can afford the unfunded promises. But if you get to where the growth stops, then you’re going to have enormous social strains, and God knows what the effect will be on government policy and on currencies.

Warren Buffett [00:59:19] Andrew, you’ve been very patient.

ASAndrew Ross Sorkin [00:59:21] I’ve received over 300 questions as just related to Goldman Sachs, and I know we’ve covered it already, but there are a couple outstanding questions. In one individual sense, three specific questions that I thought I’d ask. The first is, as a Berkshire, since Berkshire is a Goldman shareholder, who would you like to see run Goldman Sachs if not Lloyd Blankfein? Were you made aware of Goldman’s Wells notice or anything about the case prior to being, prior to it being brought? Do you think the Wells notice constituted material information? Should have been disclosed? Would have you disclosed it? And finally, have you been contacted as part of the Galleon investigation, and the allegation that a Goldman Sachs board member passed inside information about your pending investment in Goldman in 2008, at the height of the crisis, to Galleon? I know there’s a lot of pieces to that, but I thought we’d get Goldman out of the way.

Warren Buffett [01:00:16] Okay.

ASAndrew Ross Sorkin [01:00:16] Right now.

Warren Buffett [01:00:17] Good. Yeah. Well, let’s answer the third one first. We’ve been, not been contacted in any way about Galleon. I read about that in the paper, and about the allegation, apparently, of a contact between a Goldman director and Galleon. And I think in one of the stories I read something about presumably Galleon trading out of it. The answer is no contact from anybody, and I can’t pronounce the name of the guy that runs Galleon.

The Wells notice, I’ve talked to a number of lawyers about that. And I think when we got a, we didn’t get the Wells notice, but when the Gen Re executives got the Wells notice, I’m quite sure we stuck that in the 10-K or 10-Q that came up, and maybe we filed an 8-K announcing it. That was not us receiving it ourselves, but certain executives receiving it. I have been on the board of at least one well-known company over the past 40 years, and I won’t narrow it down any more than that, but before they received a Wells notice, and they didn’t publicize it, and in truth, it was nothing. I mean, so lawyers tell me that if you regard it as material, you report it. I don’t think, if I’d received something related to the Abacus transaction, based on what I know about it, I would have considered it material to a company that was making many, many, many billions of dollars a year. Charlie?

Charlie Munger [01:02:06] Well, I wouldn’t have regretted it as material either. If every company reported every little thing that might happen with what they regarded a tiny probability, we’d just have unlimited confusing reports. There has to be some materiality standard, and you don’t want to give blackmail potential to people that are mad at you and make claims.

Warren Buffett [01:02:30] I’m not saying that’s what the SEC was doing, but…

Charlie Munger [01:02:34] No, but it could happen with a lot of…

Warren Buffett [01:02:37] It could happen with individualization, with other people. Yes. And I don’t know what percentage of Wells notices result in something that’s material to the company, but my guess is that there are plenty of them that wouldn’t be. And of course, the bigger the company, the less likelihood it that it would be material.

And then your other question about who would, who I would want running if Lloyd wasn’t running it. I guess if Lloyd had a twin brother, I’d go for him. But I’ve never given that a thought. We think about who would run Berkshire, funny, but there’s really no reason to think about that. There wasn’t any reason to think about, in my view, back in 1970 when they had the Penn Central problem, whether somebody other than Gus Levy should be running Penn Central and be running Goldman. And when the event happened in connection with the Boesky thing, I, John Weinberg was running it then, and I thought that John Weinberg was a terrific manager of Goldman. So I just don’t see this as reflecting on Lloyd. I think, as Charlie and, we’ve got strong feelings, there’s plenty of stuff goes on Wall Street that we don’t like, but we do not think it’s specific, and we know it isn’t specific to Goldman. Sarah?

Charlie Munger [01:04:00] Well, there are plenty of CEOs I’d like to see gone in America, but Lloyd Blankfein is not one of them.

Warren Buffett [01:04:09] Okay, number three. I was afraid he might start naming names. (Laughter)

[01:04:15] Shareholder (David Clayman, Chicago, Illinois): Hello, my name is David Clayman and I come from Chicago, Illinois. This question is for Mr. Buffett and Mr. Gates, principally as Berkshire shareholders, but also as Bill and Melinda Gates Foundation trustees. The leading cause of death for Americans my age are motor vehicle crashes. Over 6 million occur each year, and you ensure a significant number of these crashes. The World Health Organization ranks motor vehicle crashes as the 11th leading cause of death in the world. A new category of technologies are reaching the market. These technologies not only reduce driver distraction, but also deliver positive feedback to drivers, to help make drivers aware of how well they’re driving or how much better they could be doing. Will GEICO or the Gates Foundation make an aggressive invisible bet on driver feedback technologies to stimulate road focus and save life, liberty, property and insurance premiums? I have a note here for Mr. Gates and Mr. Buffett. I’d be happy if I could get these to you somehow.

Warren Buffett [01:05:31] Okay, I think we know your position. The Gates Foundation, I think, has a fairly major initiative, along with Mayor Bloomberg, in terms of cigarette smoking, and I think you’ll find a whole lot more people have been affected by that than auto accidents. Auto accidents per mile driven, you know, have, auto deaths have diminished. I thought I heard a figure of six. I thought the figure was more in the 30 to 40,000 range, actually, but it’s diminished over the years. You know, there have been a lot of things done to make cars safer. I’m not sure that cell phones and BlackBerrys are among them. They, and I think that, you know, I think they actually are, there will be more people die in auto accidents because the cell phone and various other instruments were invented than would otherwise be the case.

I don’t know how, you know, I don’t know how significant that item will be, but everybody has an interest in bringing down fatalities, and GEICO has a very active safety program, testing car, doing all kinds of things, working usually in conjunction with other insurance companies. I do not think that, I mean, the Gates Foundation is fairly specific and intelligent, in my view, guidelines as to where they direct their activities, and they believe in focus. So they are not going to try and solve every problem in the world. But I can assure you that the insurance industry, as well as auto companies generally, are continuously working to make cars safer. Charlie?

Charlie Munger [01:07:15] I’ve got nothing to add.

CLCarol Loomis [01:07:18] This question also concerns the Gates Foundation, but it’s entirely different. “One of your owner-related business principles says that you will attempt, through your policies and communications, to keep Berkshire’s stock price rational. Yet every year you give large amounts of your Berkshire stock to the Gates Foundation, and my understanding is that more will go to the foundation when you die.” By the way, I forgot to say, this is from Michael McLaughlin of Omaha, who continues: “Already we have seen that foundation regularly sell Berkshire stock, and it will sell more, because its purpose is to give money to charities, not hold the stock forever. Won’t the foundation selling create a downward pressure on the stock, because as much as 25% of it will be turned over?”

Warren Buffett [01:08:16] Yeah, basically, there’s five foundations I give money to every year, every July. And the amount I would be giving now, it’s a 5% declining balance. The amount I would be giving now would amount to about 1.5% of the shares outstanding annually, something like that. So if they sell, and they will, that stock fairly promptly after receipt, in order to make charitable gifts, you basically have 1.5% of the shares being sold annually.

Now, if you contrast that with trading on the New York Stock Exchange, which averages well over 100% of the amount of shares outstanding, it’s not anything unusual at all in the way of sales. And, you know, it is a free country. I mean, I could sell 10% of the company if I wanted to. I’ve never sold a share in my life, and I never plan to sell a share in my life. And I won’t sell a hell of a lot of shares after I die either, probably. The 1.5% is, if 1.5% of the outstanding shares of Berkshire move the price down in a year, it probably deserves to move down. Charlie?

Charlie Munger [01:09:34] Well, of course, I regard that degree of stock distribution to aid charity is a almost a non-event, and it may actually have been a constructive event in terms of getting Berkshire into the Standard & Poor’s indexes and so on. I think, excuse me, I think you’ve got more important things to worry about.

Warren Buffett [01:09:59] If I’d owned 100% of Berkshire, for sure it would not have been in the S&P 500. There, it was always a problem of concentration. So if, by settling down, it enhanced, and it did to some degree enhance, the chances of Berkshire being in the S&P 500, that probably accounted for maybe 7% or so of the capitalization, some number like that. So that was extraordinary, you might call it, buying that was brought in, to some extent, because of the diminution of my own holdings, as Charlie said it. I would say, if none of the stock had been given away in the last four years, I don’t know whether they, I have no idea whether the stock would be selling a little higher, a little lower. I think that’s sort of an even money bet. Okay, number four.

[01:10:54] Shareholder (Vern Cushenbery, Overland Park, Kansas): Hello, Mr. Buffett. Hello, Mr. Munger. My name is Vern Cushenbery. I’m from Overland Park, Kansas. What do you see as the biggest challenge facing the United States economy relative to other countries, and what are the implications of that with regard to investing globally over the next decade?

Warren Buffett [01:11:18] Charlie?

Charlie Munger [01:11:19] Thank you for stirring that easy problem to me. I think the answer to that is that by and large, we haven’t made our way in life by having great global allocations systems. Berkshire’s attitude generally is to find things that seem sensible to us and to concentrate to some extent in those matters, and then let the world economy and the world’s currency fluctuations fluctuate as they will. I do think we’d prefer some countries to others, and the more responsible the countries seem, the more comfortable we are. Wouldn’t you agree with that?

Warren Buffett [01:12:07] Yeah, yeah.

Charlie Munger [01:12:08] But beyond that, we can’t help you very much, because we really don’t even, we don’t have a global allocation system of Berkshire, and this, Warren is keeping it secret from me.

Warren Buffett [01:12:21] Not that one. We did not buy Burlington Northern with the idea of moving it to China or India, Brazil. And we love that, we love the fact that Burlington Northern is in the United States. I mean, it, the, this kind of, the biggest threat we have is some kind of a massive nuclear, chemical or biological attack of one sort or another. And, you know, if you say what are the probabilities of that over a 50-year period, it’s pretty high. Over a one-year period, it’s very low.

But if you talk about whether the qualities that have led to the last 220 years of incredible progress, with a lot of hiccups, but incredible progress, you know, in the status of mankind, that we’ve experienced in these two centuries, compared to any two centuries you want to pick out in history, this country is remarkable, and its system is remarkable, and it doesn’t, unleash human potential like has never been seen before. This crowd here is not smarter than a similar crowd 200 years ago, and they don’t work harder, but boy, do they live differently. And they live differently because this system has enabled fairly ordinary people, over a period of time, do extraordinary things.

And that game isn’t over. I mean, there is nothing that says we have come close, in my view, to the limits of what humans can achieve. We probably don’t even know our own potential, any more than the people in 1790 knew their own potential. I mean, they thought it would be great if somebody finally came along with some farm tool that let them work 10 hours a day instead of 12 hours a day. So I, there’s no reason, I, you know, I hope the rest of the world does well, and I think they will do well. And I, it is not a zero-sum game. If China and India do well, that does not mean we do worse. It may mean we do better. So we are not, not, what they get is taking it away from us. But I would be perfectly content if Berkshire Hathaway were forced in some way to limit an investment to the opportunities available in the United States. We would have plenty of opportunities. I’d rather have the whole world, obviously, in terms of opportunities, but there are, there will be ample in this country. Where I would not run from the United States.

Okay. (Applause) Becky?

Becky Quick [01:14:58] This is a question that has to do with the Berkshire succession plans. It comes from Craig Merrigan in Spruce Grove, who asks, “How did the four potential candidates for Berkshire CIO position perform over the course of 2008 and 2009? Did any of the four employee leverage, and have any of the four now been excluded from consideration?”

Warren Buffett [01:15:24] Yes. The answer to that is that in 2008, I reported to you last year that they didn’t, I think we got a question like that last year, they did not distinguish themselves. 2009, they did pretty darn well. It’s not, I would say that the four, that it’s not the same four. I would say that none of them, Charlie, I believe, you may use leverage at all. Do you think so?

Charlie Munger [01:15:53] Well, the one which I’m most familiar made a little over 200% using leverage of zero.

Warren Buffett [01:15:58] Well, it narrows it down. They, we, that the potential investment people, that list will be subject to more movement around than the, probably the prof, then the CEO succession. And it’s really far less urgent. If I die tonight, there will be a new CEO in place in Berkshire within 24 hours, and all the directors know who it would be, and they’re all comfortable with it. I mean, that, and there should be somebody in place within 24 hours.

The investments, they don’t need anything done next week. I can go on vacation on investments, and we could, we could go, if we wouldn’t do it, the directors wouldn’t do it, I won’t be there, but they could wait a month, they could wait two months. I mean, the Coca-Cola isn’t going to go away, Procter & Gamble’s not going away, American Express. There’s no great need to be doing things day by day. We don’t do things day by day. So they can be fairly leisurely in working out, probably in conjunction with the new CEO, who they would like to bring in, how they would like to compensate them, what the number might be. That is not fixed in stone at all. The one thing I can tell you is that there’s some very able people who would like very much, I think, to be managing money for Berkshire and who would do a good job, and then who were familiar to at least some of the directors, and that problem would get solved. The CEO problem, which is not a problem, but the CEO question, you want an answer for right now and you want to be prepared to implement it, you know, the next day. Although I did just have a physical, it came out fine.

Charlie, my doctor isn’t here today, so I’ll tell you, it drives him nuts because I eat like I do and he can’t find anything wrong, and he wants to believe me. And with that, I am not the most optimistic of the two people up here, and yet I’m quite optimistic that the culture of Berkshire will last a long, long time and will outlast greatly the life of the founder. I think it’s going to work. I really think, I mean, we shouldn’t be getting into superlative, but I think we have as strong a culture and this distinctive a culture in terms of managers, ownership, the whole works, of any really large company in the country. And it’s taken a long time to develop, but it becomes self-reinforcing after a point then, and we love it, and I think they’ll love it after I’m gone. Don’t clap there. Okay, number five.

[01:19:20] Shareholder (Steve Fulton, Louisville, Kentucky): Hi, I’m about Steve Fulton from Louisville, Kentucky. Once again, I gave up a box seat to the Kentucky Derby to come ask you a question, and I appreciate that opportunity. My questions focused on the shift, if you will, to investing in the capital intensive businesses and the related impact on intrinsic value. You again stated in the annual report that best businesses for owners are those that have high returns on capital and require little incremental capital. I realize this decision is somewhat driven by the substantial amounts of cash that the current operating companies are spinning off, but I would like you to contrast the requirement for this capital against the definition of intrinsic value, which is the discounted value of the cash that’s being taken out. And just for all of us to be aware, you’ve mentioned the fact that you think these businesses will require tens of billions of dollars over the few decades, and just the time value of that. I’d like to understand a little bit more of your insight into that.

Warren Buffett [01:20:44] Okay. Although it’s clear you understand the situation quite well, and it’s as important a question as you could ask, virtually, I would say, at Berkshire. We are putting money into good, big money into good businesses from an economic standpoint, but they are not as good as some we could buy when we were dealing with smaller amounts of money. The, you know, if you take See’s Candy, you know, it has $40 million or so of required capital in the business, and, you know, it earns something well above that. Now, if we could double the capital, we could put another $40 million in it, anything like the returns we receive on the first $40 million, I mean, we’d be down there this afternoon with the money. Unfortunately, the wonderful businesses don’t soak up capital. That’s one of the reasons they’re wonderful.

At the size we are, we earned operating earnings $2.2 billion or whatever it was in the first quarter, and we don’t pay it out, and our job is to put that out as intelligently as we can. And we can’t find the See’s Candies that will sop up that kind of money. We, when we find them, we’ll buy them, but they will not sub up the kind of money we’ll generate. And then the question is, can we put it to work intelligently, if not brilliantly? And so far we think the answer to that is yes. We think it makes sense to go into the capital intensive businesses that we have, and incidentally, so far it has made sense. I mean, it’s worked quite well, but it can’t work brilliantly. I mean, the world is not set up so that you can reinvest tens of billions of dollars, in many, many tens over time, and get huge returns. It just doesn’t happen. And we try to spell that out as carefully as we can so that the shareholders will understand our limitations.

Now, you could say, well, then, aren’t you better off paying it out? We’re not better off paying it out as long as we can translate, as you mentioned, the discounted value of future cash generation. If we can translate it into a little more, something more than a dollar a present value, we’ll keep looking for ways to do that. In our judgment, we did that with BNSF, but the scorecard will be written on that in 10 or 20 years. We did it with MidAmerican Energy. We went into a business of very capital intensive, and so far we’ve done very well in terms of compounding equity, but it can’t be a Coca-Cola in terms of a basic business where you really don’t need very much capital, if any, hardly, and you can keep growing the business, if you’re lucky, if you’ve got a growing business. See’s is not a growing business. It’s a wonderful business, but it doesn’t translate itself around the world like something like Coca-Cola would. So I would say you’ve got your finger right on the right point. I think you will, you know, you understand it as well as we do. I hope we don’t disappoint you in terms of putting money out to work at decent returns, good returns, but if anybody expects brilliant returns from this base in Berkshire, you know, we don’t know how to do it. Charlie?

Charlie Munger [01:24:22] Well, I’m just as good as not knowing as you are.

Warren Buffett [01:24:28] Okay. Andrew?

ASAndrew Ross Sorkin [01:24:28] This question comes from Victor and Amy Liu, who are shareholders from Santa Monica, California, and they ask: when you made investments during the financial crisis in February of 2009, why did you lean towards debt instruments rather than equity? For example, why did you invest $300 million in Harley-Davidson at 15% interest instead of buying equity when the shares were $12? Today they’re at $33.

Warren Buffett [01:24:54] Well, I would say that if I were writing that question now, I might write the same question, but I’m not sure he would written in the same question in February. Now, there were different risk profiles, obviously, in investing, and the truth is I don’t know whether Harley-Davidson equity is worth 33 or 20 or 45. I just have no view on that. I don’t, you know, I kind of like a business where your customers tattoo your name on their chest or something, but figuring out the economic value of that, and, you know, I’m not sure, even going on questioning those guys, I’ve learned much from them. But I do know, or I thought I knew, and I think I’m right, I was right, that, A, Harley-Davidson was not going out of business, and that, B, 15% was going to look pretty damn attractive. And the truth is, we could probably sell those bonds, I don’t know, right at the, probably 135 or something like that. So we could have a very substantial capital gain, a lot of income. I knew enough to lend them money. I didn’t know enough to buy the equity, and that’s frequently the case.

And, you know, we love buying equities, but we love buying, we love buying the Goldman preferred at 10%. Now, let’s say Goldman, instead of offering me the 10% preferred and warrants, that said, you can have a 12% preferred non-callable, I might have taken that one instead. I mean, the callable, there’s, oh, there’s a trade-off involved in all these securities. And obviously, if I can think I can make very good money, as we did on the Harley-Davidson, with a very simple decision, just a question of are they going to go broke or not, as opposed to a tougher decision, is the motorcycle market going to get diminished significantly, and, you know, are their margins going to get squeezed somewhat, and all of that, I’ll go with a simple decision. Charlie?

Charlie Munger [01:27:06] Well, of course, you’re one good answer, that you simply didn’t know enough to buy the stock, but you did know enough to buy the bonds. It’s a very good response. The other side of that is, after all, we are a fiduciary for a lot of people, and including people with permanent injuries and etc., etc. And to some extent, we are constrained by how aggressively we buy stocks versus something else. And you mix those together, why, you get our investment policy. I think, generally speaking, you raise a very good question. I think very often when you’re looking at a distressed situation and by the bonds, you should have bought the stock. So I think you’re looking in a promising area.

Warren Buffett [01:27:52] Yeah, Ben Graham wrote about that in 1934, actually, in Security Analysis, that in the analysis of senior securities, the junior securities usually do better, but you may sleep better with the senior securities. And we, as Charlie points out, we have $60 billion of liabilities to people in our insurance operation that in some cases extend out for 50 years or more, and we would never have all of our money in stocks. I mean, we might have very significant amounts, but we are running this place so that it can stand anything. And a couple years ago, we felt very good about where that philosophy left us. I mean, we actually could do things at a time when most people were paralyzed, and we’ll keep running it that way. Area six.

[01:28:51] Shareholder: Mr. Munger and Mr. Buffett, thanks for having us here. I recently joined the new organization, and for me to succeed there, the culture of the organization needs to change. So I’m interested in hearing on thoughts about how do you change culture of an organization, and if you’re building a new organization, then how do you make sure you have a strong and unique culture?

Warren Buffett [01:29:18] Well, I think it’s a lot easier to build a new organization around the culture than it is to change the culture of an existing organization. And it is really tough. And I like that fact in the sense of Berkshire. I mean, it would be very tough to change the culture of Berkshire. It’s so ingrained in all our managers, our owners, everything about the place is designed, in effect, to reinforce a culture. And for anybody to come in and try and change it very much, I think the culture would basically reject it. And the problem you describe of, if you want to walk into, you know, whatever kind of organization you want to name, I gotta be a little careful here, it is tough to change cultures. Charlie and I have bucked up against that a few times, and I would say if you have any choice in the matter, I would, I would, I would much rather start from scratch and build it around it.

But that was the, I’ve had the luxury of time with Berkshire. I mean, it goes back to 1965, and there really wasn’t much of anything there, and, you know, except some textile mills. So I didn’t have to fight anything, and as we added companies, they became complementary, and they bought into something that they felt good about. But it took decades. And, you know, at Salomon, I attempted to change a culture in terms of some respects, and I would not grade myself A plus in terms of the result. Charlie?

Charlie Munger [01:31:02] Well, I’m quite flattered that a man would say that he’s in a new place where he can’t succeed in us he changes the culture, and he wants us to tell him how to change the culture. In your position, I, my failure, failure rate has been 100%.

Warren Buffett [01:31:22] And yeah, Charlie started law firm, you know, go back to what, 1962, Charlie? What was it?

Charlie Munger [01:31:28] Yeah, I could move out, but I couldn’t change culture.

Warren Buffett [01:31:32] We can tell some interesting stories from the old law firm, but we’ll go on to Carol now.

CLCarol Loomis [01:31:39] This question is from Jon Brandt of Ruane, Cunniff in New York City. “You have emphasized many times how important Ajit Jain is to Berkshire and National Indemnity’s reinsurance operations, so I’m wondering whether you would expect National Indemnity’s float to continue to grow or instead to unwind after he retires.”

Warren Buffett [01:32:02] Well, of course, we don’t think he will retire.

CLCarol Loomis [01:32:06] “Now, another way of asking that is whether National Indemnity has competitive advantages beyond Ajit, or is all of its value above book value tied up in Ajit and the runoff profits from the deals he has already put on the books?”

Warren Buffett [01:32:24] The company, his operation has competitive advantages that go beyond Ajit, but they’ve been developed by Ajit, and he’s maximized them, and he knows how to use them in a way that’s far better than, in my view, than anybody else in the world could. But they don’t all go away. I mean, he has a cadre of about 30 people who are schooled in it, you know, in a way that would make the Jesuits look quite liberal in terms of what they let their membership do. I mean, they, Ajit, you can’t imagine a more disciplined operation than Ajit has. But Ajit cannot be replaced, on the other hand, and I’ll state that absolutely categorically. It would be a huge loss to Berkshire if anything happened to Ajit, but it would not mean that the Berkshire Hathaway Reinsurance operation would not continue to be an extremely special place that would do large deals that nobody else would do, that could think and act quickly in ways that virtually no other insurance organization can. We’ve got something very special in that unit, and then we’ve got the most special of leaders in Ajit.

As to our float, every year I think our float is peaked. I mean, I never see how we can add to it, and, you know, it’s up to $60 billion plus now, and we have things like the Equitas deal that are runoffs. I mean, there’s, every day in insurance, some of the float runs off. It’s just that we added at additional amounts. And like I said, I was ready to quit, you know, at $20 billion, but, and think, you know, that we’d reach the apex of it, but it’s over $60 billion. Things keep happening. Berkshire has become, in my view, of the premier insurance organization of the world, and we’ve got a lot of things, good things come from that. I don’t see how, with 60-odd billion afloat, I don’t see how we can increase it significantly unless we would make some very significant acquisition, and I don’t rule that out, but I don’t, there’s nothing imminent on that. But we will not organically grow the float of Berkshire at a fast clip from here. It can’t be done, and we may fight to stay even. But we may come up with something out of the blue. I mean, who would have known that Equitas was going to come along three years ago, or, you know, or that there are various things that could happen of a positive nature. But when I tell you about the value that Ajit has added to Berkshire, believe me, if anything, I’ve understated it. Charlie?

Charlie Munger [01:35:29] Well, I agree with you, and I’ve got nothing to add.

Warren Buffett [01:35:34] Now, in that case, we’ll go to number seven.

[01:35:38] Shareholder (Sabrina Chook, Los Angeles): Good morning, Warren and Uncle Charlie. I have to call you uncle because my parents are from India, and we call anybody older than us uncle or auntie.

Warren Buffett [01:35:54] We have to call him great uncle.

[01:35:58] Shareholder (Sabrina Chook, Los Angeles): I’m Sabrina Chook from Los Angeles, and I’m 12 years old. My mom owns a bunch of Berkeys, which obviously I’m gonna get one day.

My question is, 17% of the world is Indian. That’s one out of six people in the world. India’s an economy has been growing at 7, 8% per year. At this rate, it will surpass total U.S. GDP in 2043. Can you please tell me why aren’t you investing in India?

Warren Buffett [01:36:37] Well, it’s a good question, and we have connections there, obviously, but it hasn’t, in the insurance field, there have been very distinct limitations on what a non-Indian company, a non-Indian-owned company can do. We would, we’ve looked a lot, and mostly through Ajit, we’ve looked a lot at the possibility of being in the insurance business there. And actually, as of yesterday, I agreed next March to go to India, because our ISCAR business is doing very well there. But I don’t know what they think I can do additionally, but in any event, they said, come on to India in March and see if we can’t expand, expanded substantially. India is going to grow dramatically, and ISCAR belongs in every industrial country in the world. I mean, we are very basic to industry, and we’ve done wonders for our customers all over the world, and we have a good size operation in India, but ISCAR management hopes that if we take a trip over there in March, we might land a few more accounts. We do not rule out India, believe me, in looking at either direct investments or marketable securities. In fact, POSCO, Charlie can describe the POSCO situation better than I, but they have big plans for India. Charlie?

Charlie Munger [01:38:18] Yeah, the one trouble that India presents is that its governments tend to have a fair amount of paralysis: endless due process, endless objection, zoning is hard, planning com, permissions are hard, etc. And that has caused the very wise founder of modern Singapore to say that China is going to grow much faster than India because their government causes less paralysis. So these countries are different in the opportunities they present. Of course we like India, and we kind of admire the democracy that causes the paralysis, but we still don’t like the paralysis.

Warren Buffett [01:39:10] It’s not ordained, however, at the, you know, if you look to China 40 years ago, you would have not, you know, been, you wouldn’t have dreamt of what would happen. So countries do learn from each other. I mean, if, and they should. I mean, and I think they’ve learned many things from the U.S. that they adapt. I’ve never talked about India specifically, I’m talking about other countries generally. They don’t take on everything we have, but if you looked at a country that was as successful as this country has been over a couple hundred years, you might figure that there could be a few good ideas you could steal. And I think that you’re seeing that around the world, and maybe improve, they can improve on us. So I don’t think I would feel that any impediments to growth that existed now are necessarily ones that have to be permanent. Indian, we ought to figure out a lot of ways to do business in those countries. My preference is obviously in something like insurance, which I understand, and where we’ve got terrific people. Both China and India do limit us right now quite significantly in what we can own of a company, and I really hate to take some of our managerial talent and put them to work for something we only own 25% of. I’d rather have them working on something we own 100% of. So it will depend on, depending on the laws, but people in India are going to be living a lot better 20 years from now than they are now, as they are in China and as they are in the United States. Okay, Becky?

Becky Quick [01:40:57] This question comes from Jonathan Marsh in Sydney, Australia. He says: “Many shareholder letters in the 1970s and 1980s discussed various aspects of inflation and its potentially destructive effects on investment. The 2008 letter mentioned that current Federal Reserve’s quantitative easing could again bring about inflation, yet the 2009 letter made no mention of this threat. What are your current thoughts on the risk level of higher inflation in the United States?”

Warren Buffett [01:41:24] Well, I may be a little biased on this, but because I’ve always worried a lot about inflation, and there’s been a lot of inflation. And, you know, Charlie’s pointed out, you know, since I was born in 1930, the dollar’s depreciated by well over 90%. But as he also points out, we’ve done okay, so it isn’t the end of the world necessarily. I think that the prospects for significant inflation have increased, you know, with what, not only here but around the world, with the situation that governments have either been forced into or elected to embrace. And I, they may have well been the correct responses, but we may find that weaning ourselves from the medicine was harder than solving the original illness. And then the medicine, you know, has been massive dosages of debt, and like I say, not here, not only here but elsewhere. And I don’t see any way that countries running very high deficits relative to GDP don’t have a significant diminution in the value of their currency over time. Now, that it could be done for a while, I mean, we’ve done it through wars and everything else, and maybe we will, maybe we will correct the situation. But if we don’t, I wrote an, I wrote an op-ed piece in New York Times about a year ago on this, and I do think that if you wanted to bet on higher, lower inflation, that your life on it, I’ve been on higher, and maybe a lot higher. Charlie?

Charlie Munger [01:43:13] Well, again, I agree.

Warren Buffett [01:43:14] Okay, number eight.

[01:43:15] Shareholder (Lucas Rimswell, Whangarei, New Zealand): My name is Lucas Rimswell, and I’m from Whangarei, and in case you don’t know where Whangarei is, it’s in New Zealand. At the moment it’s quarter past four in the morning in New Zealand, so I’d be safe to say that my wife will be sound asleep. So I’m an idealist. What can be done to educate the children about the Sage of Omaha’s philosophy of successful money management and to prevent another reoccurrence of the financial mayhem that we’ve all seen and experienced in the 2007 and 2008 years?

Warren Buffett [01:43:59] We will see financial mayhem, as you put it, from time to time. I hope we reduce it, I hope we reduce the magnitude, etc. But people do crazy things, and it’s not a function of IQ, and some, sometimes it’s not a function of education. In fact, I would argue that some of the problems, and not a small part of what’s occurred in the last 30 years, has been because of what became the prevailing conventional wisdom in the leading business school. So I’m not particularly positive about modifying the madness of mankind from time to time. The first part, though, however, is the kind of thing in our, in our movie. I really do believe that getting good financial habits, other kinds of habits too, but what I’m thinking about here is primarily financial habits, getting those early in life is enormously important. I mean, Charlie and I were probably lucky that we grew up in households where we were getting all kinds of unspoken lessons, even in terms of how to handle our life, but in particular how to handle finances, and not everybody gets that.

And Andy Heyward, who did a terrific job with Liberty’s Kids in teaching about history of America three or four years ago, has come up with this idea of the Secret Millionaires Club. And if we get through to two or three percent or five percent or whatever it may be of the kids, in terms of giving them some ideas they might not otherwise have, and they build some habits around it, you know, isn’t going to change the world, but it could be a plus in their lives. It is, it’s very important to get the financial habits in, really. You know, Charlie’s a big fan, and so am I, of Ben Franklin’s, and he was teaching those habits a couple hundred years ago. So we’re just going to try and take Ben Franklin’s ideas and make them entertaining on, you know, for children’s stories, in effect. And I, that’s, I think that’s about what you should be doing. I don’t think, I think it’s much more important to have good learning at the elementary level that, frankly, the habit at the, in terms of advanced degrees and graduate schools. Charlie?

Charlie Munger [01:46:28] Yeah, there are other great educational institutions in America that help handle this problem. One of the ones I admire most is McDonald’s. I had fun once at a major university when I said I thought McDonald’s succeeded better as an educator than the people in the university did. And what I meant was, McDonald’s hires a lot of people who are quite marginal at the very start of their working career, and they learn to show up on time for work and observe the discipline. A lot of them go on in employment to much higher jobs, and they’ve had an enormous constructive effect about educating into responsibility a lot of people who were threatened with not making it. So I think we all owe a lot to the employment culture of McDonald’s, and it’s not enough appreciated.

Warren Buffett [01:47:27] I learned a lot from a paper manager at the Washington Times-Herald named John Daly, yeah, and probably 13 years old or 14 years old, and I was lucky to run into him. You know, basically, my life would have been somewhat different if I didn’t get those lessons from a guy that was taught him to me in a very enjoyable manner. He wasn’t preaching him to me, he just told me I’d do better if I did this and that, and it works. So getting, you know, you’re lucky if you got the parents to teach you that, but anything that brings it into a broader teaching environment, I’m for. And like I said, I really think Andy’s got a terrific project in this, and we’ll see how it goes. And speaking of Andrews, here’s Andrew.

ASAndrew Ross Sorkin [01:48:17] So we received about a dozen questions, at least I did, on the subject of your taxes, Mr. Buffett, from shareholders, no less. And I chose what I hope is the most polite version of the question.

Warren Buffett [01:48:33] I hope so too.

ASAndrew Ross Sorkin [01:48:34] This one came from Tom Kornfeld, and he says: “Mr. Buffett is often quoted as saying that his assistant pays at a higher tax rate than he does because of the disparity between the long-term capital gain and ordinary income tax rates. The implication is that taxes should be much higher on people like himself. However, I note that Mr. Buffett has donated virtually 100% of his estate to charitable organizations. Because he has owned his Berkshire shares for many, many years with no dividend distributions, is virtually certain that the bulk of his estate will therefore never be subject to taxation by the U.S. government. My question is that if Mr. Buffett feels that he should pay more taxes, how should the tax system be changed?”

Warren Buffett [01:49:17] Well, you could have a wealth tax would be one way. I mean, you could tax, I don’t know how many countries do that now, Charlie. In effect, you have that with a property tax in certain ways, but you could have a wealth tax. And I would say this, he is absolutely correct. If you want to give away all of your money, it’s a terrific tax dodge. It, and the, although I will say this also, in the tax return I just filed, on the charitable contributions line, I have an unused carry forward of something over $7 billion that I haven’t gotten a deduction for. So the, but I welcome the question, or anybody else following my tax dodge example and giving away their money. They will save a lot of taxes that way, and the money will probably do a lot of good.

Taxes, if we continue to spend 25 or 26% of GDP as a country, and we made those elections to our representatives, we are not going to be able to keep taxation at 15 or percent. We’ve got a deficit commission, and you couldn’t have two better guys than Erskine Bowles and Alan Simpson heading it. And I mean, they, you have got two classy individuals there. So they’re smart, they’re decent people, like to work with them. I mean, the President made a great choice in picking those two. But in the end, they’re either going to, they’re going to have to recommend, and it’ll be some combination of taxes quite a bit higher and expenditures quite a bit lower, and then they won’t be quite as popular as they are today. And I doubt very much if you’re going to be able to increase taxes significantly as a percentage of GDP and do it essentially from taxing lower income people a higher amount. So it’s going to be an interesting equation to solve, and I wish them the very best. They’re two terrific fellows. Charlie, what do you have to say about taxes?

Charlie Munger [01:51:38] Well, I think those who worry about your unfairly low taxes should be consoled by the fact that eventually you pay 100% when you die. And they ask, how much did old Warren leave? The answer will be, I believe he left it all.

Warren Buffett [01:51:56] And I hope they emphasize old. So it’s kind of interesting. I mean, just take Berkshire. You know, essentially I will never sell a share of Berkshire, but I’ve known that for a long, long, long time. So basically, you know, and that’s fine. If I was a trustee for some trust and they owned Berkshire, which in effect I am, you know, it’s still, it’s a lot of fun to run and everything, and I’ve got everything in life I could possibly need, and I always will. And, you know, in the end, because Berkshire’s done well, we can give away the rest. Now, you, if you want, you can argue that if I gave it all to the federal government instead of giving it to the charities, society would be better off, but I don’t think many of you would want to hold that position. Number nine.

[01:52:49] Shareholder (Jeff Chen, San Francisco): Hello. Hi, Mr. Buffett. My name is Jeff Chen from San Francisco. I wanted to ask you a little bit more detail about the inflation question. I wanted to know what are the key metrics you look at when you evaluate, the metrics you look at when you evaluate future inflation, and your evaluation methodology, and what are some of the catalysts that’s going to cause the inflation to rise in the future?

Warren Buffett [01:53:21] You give me credit for more brain power than I actually bring to the question. I, it, I don’t think you can look at any given metric in any given month and figure out exactly what that’s going to do to inflation rates, because so much, if it gets going, so much, start, it creates its own dynamic. You know, we saw that in the late 1970s and early 1980s, until Volcker came along with a sledgehammer to the economy. But we had people running from money at that time, and of course we got the prime rate up to 21 at a fraction percent, and we got governments up the very close to 15. So we had a little demonstration project 30 years ago in this country of what happens when people get fearful about money. And we, if we were to continue the policies we have now, I would think something, a rerun of that, you know, could be fairly likely. But, you know, but trend is not destiny. We don’t, we have the power to do things, and Congress has the power, and that’s why I wrote that op-ed piece a year ago, to sort of flash a yellow light. We have the power to control our future, and we do it through elected representatives. I will just go back to the conclusion that, based on what I see happening, American people, government, around the world, I think currencies are poorer bet than they have been for some time. But I have no idea what that means in terms of rates of inflation, and I hope I’m wrong on it. I would say if inflation ever really gets in the saddle, that it gets very unpredictable as to how fast it can accelerate, and how faith in institutions can break down. A lot of things, a lot of bad things could happen with it. Charlie?

Charlie Munger [01:55:32] Yeah, the best defense, of course, is to contribute as much as you can to the civilization and expect to counter inflation’s effects by europe. That’s the safest antidote. The idea that just by outsmarting other people you can somehow profit from the inflation is a much more dangerous course of action.

Warren Buffett [01:55:54] Yeah, your money can be inflated away, but your talent can’t be inflated away. If you’re the best brain surgeon in Omaha, omar the best painter, whatever it may be, you will always command your share of the resources around you. You know, and whether the currency of seashells or $10 million notes or whatever it may be, talent, talent is a terrific asset to deal with any kind of a monetary situation. But Charlie and I have to fall back on money.

Charlie Munger [01:56:28] Too late for talent.

Warren Buffett [01:56:28] Carol?

CLCarol Loomis [01:56:30] This question comes from Douglas Ott of Banyan Capital Management in Atlanta. “In your recent letter to shareholders, you wrote that it was clear you failed us in letting NetJets descend into such a condition that has recorded an aggregate pre-tax loss over the 11 years we have owned the company. What specifically were the errors committed by you and the previous CEO? What have you learned, and how will you prevent such a thing from happening with any of our other businesses in the future?”

Warren Buffett [01:57:06] Well, I probably won’t. We’ll make mistakes from time to time, and some of our managers may make mistakes, and sometimes you run into conditions that are really extraordinary. But the mistake, the biggest mistake made with NetJets is, essentially, we kept, we were buying planes at prices that were fictitious in terms of the price at which we would later be able to sell them. And there’s a certain time lapse involved in buying fractional shares. I mean, there’s a lot of explanations for it, but in the end, we didn’t properly prepare for what was obviously happening, and we lost a lot of money, a good bit of which was attributable to the write down of planes, which you could call as our inventory, where we bought them at X and we couldn’t sell them an X or 90% of X. Some of those were new planes that we should not have taken on, and many of them were planes coming back from owners. We also let our operating costs get out of line with recurring revenues.

But, you know, I made plenty of mistakes. I stayed in the textile business for 20 years, and when it was, I knew it was a lousy business. Charlie was telling me it was a lousy business in the first year, the second year, and 20 years later I woke up. I was like Rip Van Winkle. I mean, it was a, it’s kind of depressing when you think about it. But we, well, the one thing we will guarantee, we will make some mistakes. It was a big mistake in that yet, $711 million is the figure. We are now operating at NetJets at a very decent profit. The figures you saw there on the screen reflect a pre-tax profit of well over $50 million in the first quarter, and that’s not with any big boom in plane sales or anything else. It’s just with a business plan that involves not an iota of diminution of safety or service, but just got things in line that needed to be in line. And I give David Sokol an enormous credit. I mean, he turned that place around like nobody could have, and all the shareholders here, oh, I’m a big boat of thanks for that. Charlie?

Charlie Munger [01:59:33] Yes, but I believe that the episode ought to be reviewed in context. If we buy 30 big businesses and generally let the people who run them successfully and before run them with very little interference from headquarters, and it works out 95% of the time very well, and we have one episode when the basic franchise was protected but we lost profit opportunities for a while, it’s not a big failure record, nor does it indicate that we should stop being pretty easy with the remarkable people who join us with their companies.

Warren Buffett [02:00:18] No, it is not going to, what, does not change our management approach at all. I think that we have gotten performance overall from managers that are beyond the dreams I would have had when I was first putting this company together. So it’s been a, it’s, we let managers do their stuff, and oh, it’s worked, it’s worked very well for us, net, and we’re going to keep doing it. Number ten.

[02:00:53] Shareholder (Eric Chang, Beijing, China): Mr. Buffett, Mr. Munger, this is Eric Chang from Beijing, China. First, thanks for the occasion for us to engage with you like this, and also for inspiring young people to learn. Mr. Munger has described you as an incredible learning machine in terms of learning new areas and expanding your circle of competence. So what I would like to understand is, if you can make it more concrete, recently you make investment in BYD, a company in China that makes batteries and those electric cars, which are arguably technology companies. So can you go through that example and see how you should like announce, analyze the case, and to ask questions that help you make the decision to invest in such a company? Thank you.

Warren Buffett [02:01:37] Charlie deserves 100% of the credit for BYD. Someone let him answer that.

Charlie Munger [02:01:41] Well, it’s an interesting example, because Berkshire would not have made an investment in BYD if the opportunity had come along five or ten years earlier. And it shows that the old men are continuing to learn, and that’s absolutely essential. Berkshire would have a lower potential than it does if we had stayed the way we were. And so you were absolutely right in calling attention to this episode. Again, Dave Sokol helped. I didn’t, I wasn’t at all sure I could get Warren to do this all by myself, so I unveiled Dave into going over to China, and the two of us were able to help the learning process. (Laughter)

Warren Buffett [02:02:31] Well put, well put. Becky?

Becky Quick [02:02:34] This question comes from Mark Wares, and it has to do with Berkshire’s compensation. He says: “How does Berkshire structure the performance-based compensation of the CEOs of its subsidiaries? Please be as specific as you can regarding the metrics on which you focus the most and how the degree to which those metrics are attained translates into compensation.”

Warren Buffett [02:03:00] Well, the first thing we do is we never engage your compensation consultant. And the, we have, whatever it may be, 70 plus or whatever number of businesses we have. They have very different economic characteristics. To try to set some Berkshire standard to apply to businesses such as insurance, which has capital as a bulwark but which we get to invest in other things we’d invest in anyway, so there’s a minus capital involved, to a BNSF or a utility business where there’s tons of capital involved, or in between, See’s, where there’s very little capital involved. We have other businesses that are basically just so damn good that, you know, the chimpanzee could run them, and we have other businesses that are so tough at times, you know, that if we had Alfred P. Sloan back, you know, we wouldn’t be able to do very well with them. So there’s enormous differences in the economic characteristics of our business.

I try to figure out, what if I own the whole business, what is a sensible way to employ somebody and compensate them, considering the economic characters of, characteristics of the business. So we have all kinds of different plans. It doesn’t take, it doesn’t take a couple of hours of my time a year to do it. We have managers who stay with us, so they must be reasonably happy with the plans. And, you know, it is not rocket science, but it does require, it requires the ability to differentiate. It, if we had a human relations department, it would be a disaster. You know, they would be attending conferences and people were telling them all these different things to put in equations and so on, and it just, it just requires a certain amount of common sense. And it requires, incidentally, an interaction with the managers that, where, you know, I listen to them, they listen to me, and we sort of agree on what really is the measure of what they, what they’re actually adding to the company. And I would, what do you, what do you say to that, Charlie?

Charlie Munger [02:05:24] Well, I think the U.S. Army and General Electric have centralized personality, personnel policies that probably work best for them, and we have just the opposite system, and I think it clearly works best for us. And practically nobody else is entirely like us, which makes us very peculiar.

Warren Buffett [02:05:45] And yeah, we really like it that way. We get worried when people agree with us. The, we pay people, we pay some very big money on, I mean, we have managers that have made and will make in the tens of millions annually, and we have managers that, you know, when we suffer, they suffer. But it, you’ve got to treat people fairly. Even though they don’t need the money, they, everybody wants to be treated fairly, and so the rationale for how you’re doing it should be understood. But there is no cross-Berkshire rationale at all. I mean, if you run See’s Candy, to put a cost of capital factoring or something like that with the consultant, it’s nonsense, you know. And there is, it isn’t going to make any difference whether there’s $40 million or $43 million or $37 million of capital in the business. And the main thing to do is, is in terms of market position and all of that sort of thing. The real thing I really want to pay managers for is widening the moat that separates our business from our competitors’ businesses over time. Now, that’s a, that gets very subjective, so I don’t have any perfect way of doing that, but that is always going, going through my mind and trying to design compensation systems. So far, like I say, I don’t think I can’t, can you recall any manager that’s ever left us over compensation, Charlie?

Charlie Munger [02:07:27] I think it’s amazing how simple it’s been, and how little time it has taken, and how well it has worked. And there’s this idea that headquarters can do these wonderful things. Headquarters in a conglomerate kind of a company is frequently hated in the field. We don’t want to be hated in the field. We don’t want an imperial headquarters with big costs that’s imposed everywhere, and averaged out, it’s worked wonderfully well for us.

Warren Buffett [02:08:02] Yeah, we make no headquarter charges. We charge for our credit with a couple of companies, but most companies are, you know, are allocating a couple percent of sales, maybe, or whatever it might be, to all the different operations, and usually it’s resented out in the field, and is whatever. Yeah, so we don’t do it. Number 11.

[02:08:24] Shareholder (Joe Bob Hitchcock, Napa Valley, California): Thank you. My name is Joe Bob Hitchcock. I’m a winemaker from the Napa Valley in California. I would like to suggest that the next time you and Charlie have a steak at Gorat’s, that you accompany it with a new health food, a Napa Valley red wine.

Warren Buffett [02:08:42] We just went in the wine distribution business, as you may know.

[02:08:47] Shareholder (Joe Bob Hitchcock, Napa Valley, California): Excellent.

Charlie Munger [02:08:48] Warren is helpless, but I’m with you.

[02:08:51] Shareholder (Joe Bob Hitchcock, Napa Valley, California): Okay, I’ll send you a bottle. One of the keys to the success of Berkshire is your policy to allow the managers of the various Berkshire Hathaway companies to operate with minimal interference from Omaha. But if you became aware of unethical or illegal activities at a Berkshire Hathaway owned company, would you directly and personally intervene?

Warren Buffett [02:09:17] Sure, we have to jump in. We have a hotline, which I think was a very good invention of, it wasn’t an invention, but a good policy embodied in Sarbanes-Oxley, and, you know, that’s been a plus to us. I get letters directly sometimes, so I want to hear about problems. You know, I hope somebody else has heard about them first and already got them solved, but if they don’t get solved someplace else, you know, I want to hear about them. And we have an internal audit function, which is important at Berkshire. And anything that comes in, you know, when somebody calls in on the complaint line and says the guy works next to me has bad breath, I mean, I tend to skip over those. But if anything comes in that relates to alleged bad behavior, it’s going to get investigated at Berkshire, and it does. And every now and then, there have been some important transgressions that have come to us via either letters to me or calls on the hotline or maybe letters to the audit committee, whatever. We encourage that. Charlie?

Charlie Munger [02:10:42] Yeah, we care more about that than business.

Warren Buffett [02:10:46] More, we have a letter that goes out every roughly two years. It’s the only communication. I probably ought to put a copy of it in the annual report sometimes so that the shareholders see it. But it’s a page and a half long. It asks the manager to tell me who, if something happened to them that night, who I should consider putting in charge of the place the next day. Doesn’t mean I’ll follow their advice, but I want to know their reasons and the pluses and minuses. But it starts off, basically, and it says, look, we’ve got all the money we need. Well, we’d like to make more money, we love making money, but we don’t have a shred more reputation than we need, and we won’t trade reputation for money. And we want that message to get out. It’s the reason we stick that Salomon thing in the movie every year. I mean, you can probably, some of you can recite it by now, but I don’t think it can hurt or keep repeating that story. And the one thing we tell, we tell them that message.

And then I’ve added a new line in this, and I say, if the reason you’re doing something, the only, the best reason you can come up with is that the other guy is doing it, it’s not good enough. There must be, there’s got to be some other reason besides the other fellow’s doing it, or you’re in trouble. And again, and I tell them, call me if anything’s questionable. If you think it’s close to the line, give me a call. By saying that, nobody gives me a call, because they know that the very fact that they think it’s that close to the line probably tells them it’s over the line. But I wa, I want to hear about stuff. We can cure any problem if we hear about it soon enough and take action soon enough. But if it’s allowed to fester out someplace, and people cover it up, and sometimes they have, then we got a problem. And we will have more of that in the future. There’s no getting around, you know, if you have 260,000 people, there can be some things going on. I just hope we hear about them fast, and I hope their managers hear about them even faster and do something before it even gets to us. But we want very much to protect the reputation of Berkshire. It’s the right thing to do. Charlie?

Charlie Munger [02:12:53] Well, it is absolutely essential, and Berkshire, averaged out, has a very good reputation, as you can tell by the ratings from major media surveys, and that is absolutely precious to us. In a sense, you people are part of the culture too. The ideal is not to just make all the money that can legally be made without causing too much legal trouble. The idea is bigger than that. It’s that we celebrate wealth only when it’s been fairly won and wisely used. And if that idea pervades the culture of the place, including the shareholders, we think that’s very helpful to us. (Applause)

Warren Buffett [02:13:56] Andrew?

ASAndrew Ross Sorkin [02:13:56] This question relates to your investment in Burlington Northern, and it comes from Josh Sandburgs, who I believe is in New York City. And he asks: “You mention in your annual letter that regulators of the railroad industry need to provide, quote, certainty about allowable returns, unquote, in order to make huge investments. If you were going to help the regulators calculate, quote, allowable returns, how would you suggest they do it?”

Warren Buffett [02:14:23] Well, I think they act, the Surface Transportation Board, and maybe Matt Rose could help get more details, but they, I think they’ve adopted something like 10.5% or thereabouts on invested capital. And if you had a major enough change in interest rates or something, you could argue that there should be some adjustment, perhaps in one direction or another. Usually in the case of regulated utilities, they talk about return on equity, and you have it different amounts in different states, but some states that maybe 11 and some states are maybe 12 or something like that. It’s usually in that range. With the railroads, they’ve gone toward this return on invested capital, which includes debt, and as an adjusted figure. And I don’t think that’s a crazy, crazy standard.

I mean, I, the railroad, unlike the electric utility, when you get an allowed return in the electric utility, you’re almost certain of earning it. I mean, if you behave yourself, and your demand is never going to fall off that much, probably, that you’ll go way below your return. The railroad’s got more downside in it if you run into a terrific industrial recession, so you’re not as protected on the downside. But there should be some figure, and I would argue that the 10.5% or whatever, maybe on investor capital, that’s been achieved by the four big railroads in recent years, there’s something close to that or right around. And you want the railroads investing a whole lot more than depreciation, and I would think that would be certainly an inducement to me to invest money in improving the transportation system. And on the other hand, if that return were far lower than that, it would be crazy to put money in, because you can’t, you can’t change that railroad system and do something else with it. So I think the country and the railroad systems have a very common interest in not earning exorbitant profits or anything like that, but getting a decent return on what is sure to be much needed investment over the next 10, 20, 30 years. And I’d go along with, if the Surface Transportation Board says 10.5% or something, number like that, I think that is a, that’s not a crazy number. Charlie?

Charlie Munger [02:16:44] Well, yeah, the railroads have been a hugely successful system in terms of a regulated business. If you stop to think about it, the railroads of America have been essentially totally rebuilt in the last 30 or 40 years. They’ve improved the tracks, they’ve changed the size of the tunnels, they’ve improved the bridges. The average train can be more than twice as long and twice as heavy. And you can hardly imagine a business that’s done a better job in adapting to the needs of the rest of us than the American railroad industry. And that’s by and large been a system of wise regulation accompanied by wise management, and that was not always the case. And you go back a long time, neither the management of the regulation was all that wise, but the existing system has worked very well for all of us.

Warren Buffett [02:17:45] Okay, number 12.

[02:17:46] Shareholder (Ashish Taksali, New Delhi, India): Hello, my name is Ashish Taksali. I’m from New Delhi, India. First of all, I would like to thank Kelly Bros and Carol from American Express to the help they’ve extended me to make this event attending possible. The question is regarding General Reinsurance business. As the insurance business uses complex models, how is Berkshire more comfortable that insurance business models are not exposing it to significant risks like the models did for Wall Street? Also, if it is not confidential, is there concentration of risk? That is, what are those few events which can cause significant loss for insurance businesses?

Warren Buffett [02:18:28] I’m not sure about all of that, but the, we run significant risks from earthquakes. We had, in the Chilean quake, I don’t know how much would have been in the first quarter, when you read our 10-Q, there’ll be a number in there, but we insure 20% of Swiss Re. We will take 20% of their loss from that. We have various other exposures in something like that. We included our best estimate in those figures I put up earlier. We are, peak risks now, in terms of earthquakes or hurricanes, which are the two biggest natural catastrophes in terms of frequency and severity, are probably down quite considerably from a few years ago, not because of our, because of any diminished appetite for risk, but we just haven’t felt that the rates were that attractive in those areas. But if we thought the rates were attractive, we’re perfectly willing to take on a group of risks where if something very close to worst case happened, you know, we would lose $5 billion or something like that. We lost $3 billion plus in Katrina. We lost well over $2 billion, I think quite a bit more than that actually, on 9/11. There will be things come along like that. Nothing that ever remotely comes close to making us uncomfortable, though, in terms of the level. I don’t know whether I got his full question there or not, Charlie, but new.

Charlie Munger [02:20:16] Well, pretty close. I would say that the main difference between our practice and that of most other people is that we are deliberately seeking a method of operation which will give us occasional big losses in a single year, big overall losses, and everybody else is trying to avoid that. And we just want to be rich enough so a big loss in a single year is a blip. And that’s a competitive advantage, that willingness to endure fluctuating annual results.

Warren Buffett [02:20:51] Big advantage. Wouldn’t just be a huge advantage, it’s a huge advantage, and it’s one that no one else is going to pick up on. I mean, you know, they know what we do, they just don’t want to do it, and, or they’re unable to do it in terms of financial resources. So I would say that is, comes very close to a permanent and substantial advantage at Berkshire. I don’t, forget about, you shouldn’t forget about it, but forget about the human suffering and all that, just the financial consequences of a Katrina. You know, when we lose $3 billion in that, I don’t feel any different the next day that I felt the day before, and financially, I mean, it just doesn’t make any difference, because we are in that particular game. And as long as we make the right decisions over time in terms of the premiums we get, and as long as we never take, expose ourselves to a loss that would really shake up our capital structure, anything, you know, that is a game in which we have a huge competitive edge, and it gets wider every year. So, you know, risk, we are in the business, in insurance we are in the business of take, taking the other guy’s desire to smooth their earnings, and in exchange get what we think are larger lumpy earnings over time. We like the business. Carol? Well, go ahead, Charlie.

Charlie Munger [02:22:18] I say Warren has a different position than a lot of other people in the insurance business. After a year in which Berkshire has a big loss, he can look into his shaving mirror and say, your shareholder still loves you. Other people are not in that position.

Warren Buffett [02:22:37] Charlie and I knew a guy from Omaha who, 40 or 50 years ago, was one of the richest guys in the United States, named Howard Ahmanson. And Howard had a fetish about owning 100% of everything that he came in contact with. And so he said, when asked why, he said, I like to look in the mirror and say all my shareholders love me. And I’m not quite that extreme, but I like to look in the mirror and say enough of my shareholders love me. Carol?

CLCarol Loomis [02:23:07] This question is about derivatives. “What useful function do derivatives serve in our economy? We got along quite well without them for many years. If they serve no useful purpose and in fact have demonstrated that they can do considerable damage to the economy, why are they not made illegal, especially the naked ones? There is precedent for that. I believe that short selling of stocks that one does not own or has borrowed, that, or has managed to borrow, is illegal.”

Warren Buffett [02:23:41] Charlie has, he could get worked up more on this than I can, so I’m gonna let him answer that for that.

Charlie Munger [02:23:50] Well, I think the usefulness of derivatives has always been overrated. We didn’t have any derivatives at all, including contracts to buy and sell grain that were traded on exchanges, we’d still have plenty of oats and wheat. I mean, I think it’s, it is slightly more convenient for people to be able to hedge their risks of farming by using derivative markets and commodities. And the test is not, is there any benefit in derivatives. The question is, is the net benefit versus disadvantage from derivatives useful, or would we be better off without it? My own view is that if we went back to having nothing but derivative trading and commodities, metals, currencies, safely conducted under responsible rules, and all other derivatives contracts vanished from the earth, it would be a better place.

Warren Buffett [02:24:56] I’ll give it, we’ll get, we’ll take a current example. Burlington Northern has hedged diesel fuel, which they use a lot of, over the years, and then they also have fuel adjustment clauses in a lot of their contracts for transportation. With Matt Rose, does a wonderful job of running Burlington, I basically say, look, if I were running the place, I wouldn’t bother to hedge him, because if you hedge it, if you hedge it for a million years, you know, you’re going to be out the frictional cost, probably, of doing it, unless you’re smarter than the market generally on diesel fuel. And if you’re smarter in the market on diesel fuel generally, we’ll go into the business of speculating in diesel fuel. I mean, we, if we really got an edge, you know, why bother to run the trains? Let’s just regulate diesel fuel.

But I also say, you know, they’ve got an, and if you have an organization that, where you have somebody in charge of that activity, it’s going to take place. On the other hand, Matt Rose has done a fabulous job, as well as his management team, in running Burlington Northern. If they are more comfortable, or they find it useful in any way in terms of pricing contracts or anything to hedge it, that’s fine with me too. I mean, it is, it’s his company. He can figure out the best way of running it. I’ll hold him responsible for how it does over time. And, you know, I wouldn’t do it one way, and somebody else would do it another way. I don’t think that’s, I would not condemn anybody that’s running a railroad for hedging diesel fuel, nor would I condemn anybody that runs an energy company, like we do at MidAmerican, for hedging energy costs in certain ways.

But I do think, if we could put up a presentation or number four on the screen, please, I think this, it was said very well in 1935, in fact. Chapter 8 of Keynes’s General, Chapter 12, I’m sorry, Chapter 12 of Keynes’s General Theory is, by far, in my view, probably Charlie’s too, the best description of the way capital markets function, the real way people operate. You know, it’s prescriptive, it’s descriptive. Everybody should reach out to all this. Little, starts a little slow in the first few pages, but Keynes, I’m going to read this, guy, I don’t think Charlie is in front of him. The first part of it’s very familiar to people. I mean, this is, quote has been used a lot, but every word in this, to me, is right on the money. You know, “Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of specular speculation.” You can change that to gambling if you want to. “When the capital development of a country becomes a byproduct of the activities of a casino, the job is likely to be ill done.” That’s the famous part of the quote. Keynes went on to say, “The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism, which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed toward a different object.”

That was written in 1935. I don’t think there’s been anything better written about how government, how citizens should look at Wall Street and what it does. And it does, it’s always had this mixture of a casino operation and a very social, socially important operation. And when derivatives became popular, and the more academia was behind them 100%, they were teaching more about how to value an option than they were about how to value a business, and I witnessed that, and drove me crazy. But in 1982, Congress was considering the really, the expansion of a derivative contract to the general public in a huge publicized way. It was the S&P 500 contract that changed the whole derivatives game. At that point, basically, Wall Street just said, you know, come on in, and everybody can speculate in an index, not any real company, just an index, and you can buy it at 10 o’clock in the morning and sell it at 10:01, and you’re contributing to this wonderful society by doing it.

And I wrote a letter to Congressman Dingell, and we’ll put up exhibit five. I just excerpted a few of the statements I made there. And I said this, was one month before they put in trading in the S&P 500. April, they put it in April 1982 in Chicago, they live in Kansas City first. And I went through four pages of things, and I just pulled out a few things, but I think that to some extent what I forecasted then has turned out to be the case, and then it got squared and all of that, in terms as the, as both the people in Wall Street, people on Wall Street kept dreaming up new and new ways for people to gamble. And as I say, academia was applauding all along the way and getting hired as consultants to various exchanges to tell them how wonderful they were in terms of their social purpose. And I think that, well, it’s up there for you to read. I’d be glad, the whole letter was reprinted, I believe, unfortunate one time, Carol, what was it?

Charlie Munger [02:31:03] By the way, this was, if I remember right, this was like the only letter in opposition to this uniformly acclaimed new world of better gambling and things related to securities. Warren wrote the letter, and it’s all those years ago, and it was the only thing. Incidentally, he basically said the idea is insane, it’ll do more harm than good. Then, as now, people didn’t pay that much of that attention to him.

Warren Buffett [02:31:33] And I’ll venture that very few people in this room, no, you all know that if you buy a stock, you have to hold it for a very long period of time to get a special capital gains treatment on it. If you buy an S&P 500 contract at 11 o’clock and sell it at 11:01 and have a profit, it’s taxed 60% as a long-term capital gain and 40% of short-term capital gains. So you really get better tax treatment if you’re gambling on an S&P 500 derivative, which is what it is, in Chicago, than you do if you invest for four or five months in some security and then have to sell it for some reason. It’s a, it’s a tribute to the lobbying power of a rather small group that has done very well off this particular activity. Charlie, can you think of any reason why it’s 60% long-term gain if you hold something for 30 seconds?

Charlie Munger [02:32:32] And, well, of course it’s crazy. It’s neither fair nor sensible. And, but if a small group with a lot of money and influence cares a great deal about something and the rest of us are indifferent, why they tend to win before our legislative bodies. That’s just the way it is. I always like Bismarck’s remark that you shouldn’t watch two things, sausage making and legislation making.

Warren Buffett [02:33:07] Okay, with those hopeful words, we will, we’re going to break for lunch. Before we break for lunch, I made a charitable wager with a group, Protégé Partners, two years ago about the behavior of funds of funds, that they would select hedge funds, and the S&P index fund. The duration of our wagers 10 years, and whichever one loses, the money goes, well, the money from both goes to the winners charities. What it amounts to, interesting firm out in the West Coast that supervises what they call these Long Bets. So if we’ll put up, we’ll put up Exhibit 6. You can see at this point I’m behind. And if we got exhibits, you know, we’ve got… Let’s go to lunch. Okay. (Laughter) I’ll see you back here in an hour.

And I think therefore we go to 13, which is in a separate room. And is there anybody at the microphone of 13? Yes, there is. Okay.

[02:34:14] Shareholder (New York): Hello, Mr. Buffett, Mr. Munger. I’m a tinsel shareholder from New York. One could argue that a major contributor to the great bubble was that there wasn’t a healthy and open debate, that all the opinion and all the money was on one side of the trade. I was thinking about this recently as I read Christine Richard’s new book, Confidence Game, about Bill Ackman and his battle with what was once the largest bond insurer, MBIA. And the story also reminded me of David Einhorn and the questions he raised about Allied Capital, Lehman Brothers. We now know that they were 100% correct, but at the time that they first spoke up, they were attacked by the companies, pillaried by the media, ignored by the accountants of those firms and the ratings agencies, and perhaps most alarmingly were investigated by the SEC for daring to go public with their bearish analyses. And I can tell you that watching what happened to them, it’s a real deterrent to anyone else speaking up and raising similar questions. So I’d be curious for your thoughts on this, and is having short sellers speak out healthy for our markets, and in general what should be done to encourage a greater diversity of opinions so that we can avoid future bubbles? Thank you.

Warren Buffett [02:35:28] Yeah, well, I, I don’t see anything wrong with people who are positive or negative speaking out as long as they’re, they’re willing to be held responsible for the kind of statements they make. I mean, there are obviously, well, take the extreme example. If there were two banks in town and I own one of them, and I was of kind of a devious type of mind, I might go out and hire 50 people to stand in line in front of the other bank, and I would probably not have a competitor before long. So you, you can do things on either side, the long side or the short side, that I would regard as certainly unethical and in many cases should be illegal.

But any time you attack the conventional wisdom, you’re going to meet with a lot of opposition, because you’re threatening people’s positions. When we would talk about the efficient market theory 30 years ago, when it was absolutely deregular that in virtually every finance department in the, in, in the country, major schools, you either had to swear allegiance to it or you were not going to be promoted. You know, people don’t like that. And any institution, when they get a threat from the outside, they, they will attack both the threat and the threatener.

But that exists on both sides. I, I have no problem with, with short selling, and I have no problem with speaking out responsibly about your reasons for doing so, any more than I have on the, on the long side. There have been some very bad practices on the short side, and there have been some very bad practices on the long side in terms of people trying to, to, will really spread things that are untrue. But that there’s probably been more on the long side over the years and on the short side by some margin. Charlie?

Charlie Munger [02:37:30] Yeah, I think to some extent you’re criticizing the wrong people. In many cases the accountants that allowed the lousy accounting are the ones that ought to be held in the dock, and, and they get very little criticism in America, and that’s a mistake.

Warren Buffett [02:37:48] Becky?

Becky Quick [02:37:48] This question comes from Ben Zoe, who lives in the metro Vancouver area in British Columbia, Canada. This is for either Mr. Buffett or Mr. Munger. He wants to know about synergies at Berkshire. Specifically, does it make sense that the Dairy Queen stores here sell PepsiCo products and would not expect, except American Express, only MasterCard or Visa?

Warren Buffett [02:38:19] There are around the world, they’re pretty close to 6,000 Dairy Queen outlets of one sort or another, and some are called Grill & Chill now, different things, but roughly 6,000. And the company operated are 70 of those. So the 90, almost 99% are franchised, and at Dairy Queen we do not control what the franchisees do. Most of the franchisees, last time I checked, sometime back, but most of the franchisees hiding ones, but the, but it’s, it is entirely their business. I mean, they can, they can, they can serve Coca-Cola products or Pepsi.

It seems some of the other franchise operations seem to have more control over that than Dairy Queen. But if you think about it, Dairy Queen goes back before McDonald’s, before Wendy’s, before Burger King, before Kentucky Fried, all of those. It goes way back into the ’30s, and a lot of the agreements with franchisees or territorial operators were, you know, done on the back of a napkin or something of the sort. So, so to some extent we have less control over what franchisees do, in particular in certain few parts of the country, than, than other people. But, well, keep asking for Coke, and maybe you can cause them to, to see the light.

The synergies, there’s any synergies at Berkshire come about at the operational level, pretty much. We do not tell, we do not tell our companies to do business with each other. We hope they do do business with each other, and we, you know, and we hope that each side of us, a subsidiary A offers good reasons for subsidiary B to do business with them. But the whole idea at Berkshire is that our managers are responsible for their businesses, and if they’re going to be responsible for their businesses, it means we shouldn’t tell them what to do except in very limited ways. Charlie?

Charlie Munger [02:40:38] Well, you’ve accurately described the way it is.

Warren Buffett [02:40:43] What’s interesting about it is we really like it that way. It’s a lot less work. And I think actually that there’s some merit, sometimes people work better together if it’s their decision to work together than if you tell them to work together.

Charlie Munger [02:41:06] It goes beyond that. Warren and I would like it that way if we were in the subsidiaries.

Warren Buffett [02:41:13] There’s no doubt about that. Yeah, we’d probably leave if it wasn’t that way. Okay, area 1.

[02:41:19] Shareholder (Steven Roman, Vienna, Austria): Dear Mr. Buffett, dear Mr. Munger, my name is Steven Roman. I’m a student of engineering machine ball at the University of Vienna in Austria. If I one day want to apply as a manager with one of the Berkshire companies, what qualities are you especially looking for, and what do I have to do to become your successor?

Warren Buffett [02:41:52] Probably shoot me. The, the managers of our subsidiaries hire their own people. The number of decisions I have to make about managers are really, really few. As I mentioned earlier, they do send me a letter that, if something happens to them, gives me their ideas about who should succeed them. But I make no decisions about who gets hired at GEICO or Burlington or MidAmerican or anything of the sort. I mean, if they need a CFO, they go out and hire a CFO, or if they need somebody to run a plant, they go on higher than themselves. They are responsible for their operations.

And occasionally we have a death, we have an occasional, very occasional, I can’t even hardly think of one, resignation, and at that point I have to make a decision about who should be put in charge of the operation. But I don’t, I don’t think I’ve had more than 10 or 12 of those in, in 45 years. So it’s, I’m, I’m not a very good employment agency. We have 21 people, I think it is, at headquarters, and I made a terrific hire here a few months ago, but that’ll take care of me for four or five years. Charlie?

Charlie Munger [02:43:11] Yeah, there’s no indication we’d be particularly good at it either.

Warren Buffett [02:43:16] I wasn’t going to mention that.

Charlie Munger [02:43:18] But I would say this, if you want…

Warren Buffett [02:43:21] What is interesting to me is that when you find somebody outstanding, boy, do they jump out. I mean, somebody that is, is thinking about the place the right way, is working extra hard, whatever it may be. There aren’t, you don’t have that much competition in this world. So in terms of generally, in generally advancing within organizations, I think you’d be surprised that how little competition you really have if you start thinking like you would if you were an owner of the place, and working like you would if you were in order of the place, and pretty soon you may be. Andrew?

ASAndrew Ross Sorkin [02:44:03] This question comes from Tomer Mallon from Tel Aviv, Israel, and he has clearly been a long time shareholder, because he references your 1984 chairman letter. He says, he writes, “You have previously stated that a company should retain its earnings only if, quote, for every dollar retained, at least one dollar of market value will be created for owners, unquote. You also noted that if such conditions will no longer apply to Berkshire, as measured on the basis of a five-year rolling average, then, quote, we will distribute all unrestricted earnings that we believe cannot be effectively used. However, during the five-year period between July 3rd, I’m sorry, January 3rd, 2005 and December 31, 2009, the average annual earnings per share for Class A as reported amounted to $5,930, while the same period the average annual change in the shares market price was only $2,420. Consequently, are you considering a distribution of a dividend or buying back shares?” I imagine I know the answer, but I thought we had to ask.

Warren Buffett [02:45:07] Well, he does know the answer, but we’ll elaborate. The, I did, I did write that, not only in 1984, but continuously in the back of the Berkshire annual report where I’ve got our economic principles. And, and frankly, the way I, I wrote that the first time was not well thought out. And in the 2009 annual report, partly because somebody asked that question last year, I actually rewrote that section, and I pointed out that even when I wrote it in 1984, we would have flunked the test in many previous years when, generally speaking, the stock market had suffered a significant decline over a period of time.

As you can tell by looking at our report right now, every dollar that we have left in the business, you know, has produced in present value terms something over $1.30 of market value. I mean, we, we have met the test of retained earnings proving their worth. But the way I phrased that originally, any, any time the stock market went down a whole lot in a five-year period, because we were carrying our Coca-Cola at a certain price five years earlier or whatever it was that entered into our asset value, we could have done a great job of allocating capital in the five-year period and we still would have looked bad. And similarly, if the stock market had gone up a whole lot, we could have done a dumb job and, and, and look good.

So if you will look in the back of the 2009 annual report, I think is number 11, or I’m not sure about that, but read the economic principles, you’ll see that I had to confess my error and how I originally worded that. But I, I think, I think it is still intellectually honest in terms of, of meeting what I, what I intended to say. You know, I voted against this before I voted for it, or something like John Kerry said in 2004. I, I think, I, I think it does meet the test of a dollar retained earnings producing more than a dollar of, of, of market value, and, and we will continue to measure ourselves based on whether that’s, we meet that test. If we don’t, if keeping a buck doesn’t produce more than a buck in present value, I don’t mean every day or every week, but over time, we, we should figure out something else to do. Charlie?

Charlie Munger [02:47:34] Well, I, I like people that parse through a long series of documents and find an error.

Warren Buffett [02:47:42] And rub my… I should have had it more than originally. Actually, I think those were his words, just coming back to me. Okay, number 2.

[02:47:54] Shareholder (Glenn Molinar, Cleveland, Ohio): Glenn Molinar from Cleveland, Ohio. It’s been on my bucket list to come meet you, Mr. Buffett, Mr. Munger, so it’s a privilege to be here. My question has to do with hope and jobs. You know, in America, I think we need to figure out how we can go about creating jobs. I have been trying to help people get jobs. My question is, and a challenge maybe, how could we get Berkshire Hathaway and your board to maybe go out and just basically hire people to give them hope?

Warren Buffett [02:48:31] Well, we, we will hire people when we have something for them to do, but we… (Applause) But, and we are actually net hiring when the Burlington is carrying 173,000 cars a week, like last week, as opposed to sometime back 155,000. We need more people, and we need more people at some of our other businesses. But our carpet business, we are down 6,000 people plus from our peak. Well, people aren’t going to quit buying carpet forever, and I mean that we will be hiring a number of people. But there’s no sense hiring them when they’re not, when there’s nothing for them to do.

I mean, that, I went through a period, particularly, it was dramatic to me, because we owned, Berkshire Hathaway owned a couple of textile mills, one of them in New Bedford, and eventually we had to close those mills after we tried for 20 years to make them work. And if you get somebody that’s worked in the textile mill and they’re 55 years old, and in many cases so we’re speaking Portuguese, you know, retraining doesn’t mean much to that. I mean, you need, if you believe in creative destruction and you believe in capitalism, essentially figuring out ways to do the same things with less and less people, you better have a social safety net. And we’ve got a, a pretty good one in this country, a whole lot better than we had 30 or 40 years ago.

But there, right now there is significant unemployment, not any higher than it was in 1982 or thereabouts, but it’s a lot, and it’s not going to go away fast, although it is going to go away. And we, we should take, in my view, society owes some minimum, minimum living standard to people who are looking for work, trying to get work, and frankly, at a time like this, they’re not going to be able to find it. So, but I don’t think that Berkshire Hathaway should be the social safety net. Charlie?

Charlie Munger [02:50:43] Yeah, I would say that if, if Berkshire started out to create a bunch of make-work jobs in order to increase human hope, the net effect would over time would be to reduce human hope. (Applause)

Warren Buffett [02:51:04] I think that’s true, but I’d rather have Charlie saying it than me. Carol?

CLCarol Loomis [02:51:13] Our car insurance business… Oh, this comes from a New York man who asked that I use his initials, AJ. “Our car insurance business has continued to return excellent profits and expand its business within the United States. Why hasn’t Berkshire made any progress in the car insurance business in China or India or even Europe? As BYD has shown, these markets are exploding in automobile sales, so aren’t they right for the picking?”

Warren Buffett [02:51:45] No, there’s no way, we’ve known for a long time there’s no shortage of drivers around the world, and that, that there may be a lot of bus in the United States, there’s a whole lot of business elsewhere. In terms of India and China specifically, we can only own a limited amount, I believe 24.9%, of a company in either of those countries, and we’re not eager to work hard on something where we own 24.9% when we can work hard on something where we can own 100%.

Obviously, we talk all the time, we’ve thought for decades about ways we can possibly expand GEICO, because it’s a wonderful, wonderful company, and we have gone from a market share of two and a fraction percent when we bought control to eight and a half or so now. But there’s plenty to do here, and we do not have the same kind of advantages, or we don’t think we could build those in any reasonable period of time, as we look at other markets. I mean, obviously we look at Canada, you know. I mean that Tony and I talk about this kind of thing frequently. I agree with his decision that now and probably for a long time to come there is so much opportunity in the United States, and the, and the other areas, for one reason or another, as we look at them, do not off give us the same kind of competitive advantage we have here, that we pass on them.

But we love the idea of taking a business that’s working in one area and figuring out a way to have it work in other areas, whether it’s geographical adjacencies or product extensions or, or all kinds of things. We’re well aware of possibilities out there. In the case of GEICO, we have not decided to go to other countries, but it isn’t because we didn’t know there were cars there. Charlie?

Charlie Munger [02:53:49] Yeah, I’ve got nothing to…

Warren Buffett [02:53:51] Okay, number 3.

[02:53:52] Shareholder (Xinjiang, Kansas State University): Good afternoon. My name is Xinjiang. I am a Chinese student from Kansas State University. My question is, Mr. Buffett, what is the most important thing that you have learned from Charlie? Thank you.

Warren Buffett [02:54:11] Most important thing I’ve learned from China?

[02:54:15] Shareholder (Xinjiang, Kansas State University): China, yeah.

Warren Buffett [02:54:16] What’s the most important thing you’ve learned from China, Charlie?

Charlie Munger [02:54:22] It has some very unusual people in BYD.

Warren Buffett [02:54:27] I’ve learned… No other lesson is as important as that one. I’ve learned they like Sprite better than Coke. Sprite outsells Coke in China by two to one, but they’re both growing dramatically. I think China is an amazing economy. I mean, it, there is no… Just under 4 million, there were 290 million in China in 1790. Just as smart, you know, just as hard working, resources of the land, the minerals, everything’s climate very, very similar. And for 170 years or so, relatively little progress was made, and the standard of living for those people, like I say, who had all the native abilities that, that America had. But, you know, in the recent decades, that the potential of the Chinese is being, is being unleashed, and it’s huge.

And, you know, I, I think it’s very, very interesting to watch. Charlie and I and the group of the, some of the directors are going over there at the end of September, you know, and I was over there a couple years ago. It’s a sight to behold. But in terms of specific lessons, they haven’t taught me how to eat Chinese food.

Charlie Munger [02:55:55] I will say that I think I always knew that the Chinese people had an enormous potential for huge and rapid progress, because I could see that in all the Chinese Americans that I dealt with. And indeed, people came in here as Chinese coolies, in effect slaves, and they rose so rapidly that it was a marble. So I always knew that China had a potential to be a huge credit to human civilization, but I think I underrated how fast it could happen. China is setting a new record for advancement of civilization at a very rapid rate. It’s, it’s fun to watch.

Warren Buffett [02:56:41] Becky?

Becky Quick [02:56:42] This question comes from a shareholder in Aiken, South Carolina, who asked not to be identified, but he asked that Mr. Buffett or Mr. Munger discussed changes that have been made in the Berkshire annual report in the last several years and the reasons for making some of these changes. Two of the changes that he’s noticed are: number one, look-through earnings no longer seem to be discussed, and number two, the unaudited combined financial statements of the business groups no longer seem to be included, although at least some of the business groups’ materials seem to be covered in other places in the report.

Warren Buffett [02:57:19] Yeah, the second point I’m confused about, because we have broken them down into four groups and tried to give the relevant financial information for what we thought was a logical grouping, and we’ll continue to do that. So I’m not sure I, I totally get that. We, we really do have four fairly logical breakdowns. Now, you can break it down 70 ways and all that, but there’s a point at which adding 100 pages to an annual report obfuscates information rather than illuminates. And that’s what we’re trying to, we’re trying to, in a reasonable number of words, Carol might say too many, but in a reasonable number of words, convey as much as we can about the information we want to have if we were in your place and you were writing to us. And we think these four core classifications, regulated industries, terribly capital intensive, you know, insurance, capital really not a factor, but the amount of capital it gives us being a factor, and so on. So I don’t think we really changed on that.

Now, when you get into look-through earnings, or sometimes when we talk about, about the earnings per share and the investments per share, some of that I don’t repeat every year, because we try to get, run it maybe 12,000 words or something like that in, in the annual report. And I really think if you, if you extend it too much… I’ll say this, nobody’s told me it was too short yet, including my editor, who’s here today. And every other year I may, I may do that breakdown between operating earnings and then, but that takes a thousand words or so to explain it to people.

The whole report, as guided as it has been ever since I really started taking it seriously in the mid ’70s, is guided by the idea that I’m actually, I’m writing it to my two sisters over here. And I have my audience in my mind is two very intelligent, interested people, but who are not around the place, been gone for a year, and they’re very capable of understanding anything, but they’re not necessarily familiar with all the lingo, if I get, you know, too esoteric on it. So I should explain that, and I should, I really want them to understand how I’m thinking about the business, and by implication how I think they should think about it, and answer the questions that I think would be in their mind as… And they’ve got their, most of their net worth in it, so they, they’re going to read to the end. And I really haven’t changed that framework in my mind for how I’ve written it. I start mentally off writing “Dear Doris and Bertie,” and then I just crossed them off and put “To the shareholders of Berkshire Hathaway,” but that’s the way it’s done. Charlie?

Charlie Munger [03:00:24] Yeah, but the details can change as the facts change. The undistributed earnings of corporations in which we hold shares but do not control used to be way more important than they are now. It’s perfectly natural that the emphasis would shift.

Warren Buffett [03:00:42] Yeah, the undistributed earnings now, without me looking at it very carefully, you know, are probably, they’re not more than probably 15% of our reported earnings or something like that. They used to be a much higher percentage. And they’re still important, but I don’t think they’re, I think you can, I think the people that understand that Coca-Cola and American Express aren’t paying out all their earnings, and it’s not a big enough number that, that I would want to spend a lot of the report explaining it. Number 4.

[03:01:19] Shareholder (Joe Hudson, Culver, Indiana): My name is Joe Hudson, the shareholder from Culver, Indiana. I doubt either of you have any money in Roth IRAs, but what are your thought on the opportunity this year for anyone to convert IRAs to rawsi Roth IRAs, thus having all future growth on Berkshire or other investments 100% tax-free? Is the government making a big mistake here, and should people be concerned about the deal changing down the road?

Charlie Munger [03:01:47] I’ll take this one, because I have an IRA that I am going to convert to a Roth IRA. So there’s your answer.

Warren Buffett [03:01:56] Well, I still don’t understand it.

Charlie Munger [03:01:59] But you don’t have to.

Warren Buffett [03:02:02] Okay. He’s always telling me that. I assume, Charlie said it must be true. Let’s go to Andrew.

ASAndrew Ross Sorkin [03:02:12] This question, I’m actually very self-interested in it, comes from Anton Ossip and Alexander Forbes from Johannesburg, and they write: “Last year you said you were down on the newspaper industry. Given your lifelong interest in newspaper companies and your stake in the Washington Post Company and others, has your view changed in the past year with the introduction of the iPad and other e-reading technologies? Do you think we will see a contraction in the value of, in the value retained by media houses versus what will be passed on to distributors of the media?”

Warren Buffett [03:02:50] Well, you could probably answer it better than I. Again, my relatively uninformed opinion, because I’m not that up on the technology, but I just have a feeling that when the money has, basically the money to run good newspapers has come from advertising, you know, three quarters of the money or thereabouts, the papers become less useful to advertisers. I mean, they, they were the only game in town for a long, long time. They are not the only game in town, and what a difference that makes if you’re selling something.

So I, when the Philadelphia Inquirer, I went, Stan Lipsey is here, I called Stan up and I said, “Stan, this is probably like an old fire horse or something, but let’s think about it anyway a little bit.” It was sold yesterday at a bankruptcy sale, I think that’s pending confirmation. But, you know, it is very tempting if you’ve got, you’ve still got fairly substantial circulation, the Philadelphia Inquirer, and they’ve got the Daily News there, the News there too. But the math is really tough. I mean, the distribution costs, the printing cause, everything. And maybe all this changes that in some way that you would understand better than I would, but, but since I don’t understand it, I have to stay with, with the, you know, plenty of things I don’t understand, and I cannot make an affirmative decision on newspaper ownership.

I just got the, the ABC puts out FAS-FAX as big yellow publication. I just got it a couple days ago, and I can’t resist looking through there, and I’ve flipped the pages and looked at circulation of all kinds of papers. Actually, in Buffalo we were down less than a great many papers, even though, you know, our population demographics are very tough. We were down less than Rochester, I might mention, which is owned by Gannett. But you look at San Francisco Chronicle, you know, down 20-odd percent, Dallas. I mean, these are, these are communities that are thriving, and it’s, it blows your mind how fast people are dropping it. It’s not just older, it’s not just the younger people aren’t picking it up. I mean, it, the world has really changed in terms of the essential nature of newspapers.

There’s nothing that looked, back when Charlie and I would talk about him in 1970 or ’65, there was probably nothing that looked more bulletproof than, than a daily newspaper that, where the competition had melded away. But, but it’s a form of distributing information and entertainment that has lost its immediacy in many cases. It’s, it’s certainly law, it is not, it is not the, the essential place to get… Think about how stock market quotations were, you know, 30 or 35 years ago. You looked in the paper to see what stocks had done. You looked in the paper to see how the, how sports and games had turned out. So it, its primacy has withered away.

And the advertisers weren’t there because they loved the publisher of the newspaper. They were there because it was a microphone to talk to everybody in town, and they had to talk to everybody in town. And so you get this chicken and egg thing, that the newspaper becomes less valuable as the advertisers float away, and the advertisers float away as the subscribers diminish. And I don’t see it, I don’t see a good answer to it. But Charlie, what do you have to say?

Charlie Munger [03:06:28] Well, the independent newspapers, due to the accidents of history, as they became dominant in, in their individual towns, for decades had impregnable economic strength. And by and large they behaved better because they were so strong, and they were called the fourth estate. They were really a branch of the government. They helped keep government honest. And if you take the state in which we’re located, the World-Herald has been a very constructive force, net, over a long period of time. And as those dominant franchises have weakened and weakened, it’s not good for the country. I think we’re, we’re losing something that we have no substitute for, and I think it’s very sad, and I don’t know the faintest idea what to do about it.

Warren Buffett [03:07:19] Charlie and I love newspapers. That, I think the World-Herald hit a 300,000 circulation peak on Sunday at one time. I’m not, I don’t think they averaged that for the six-month period, but I seem to remember that. I could be wrong, you know. And the figures, you know, 100,000 off that or something of the sort. And, you know, the state has gained population, the city’s gained population. You know, I think it’s as, it’s as vital to me as ever, but it clearly, it has changed for the populace as a whole. And, you know, when I look at the Philadelphia Inquirer, and I forget what it was, 350,000 or something like that of circulation, and I, you know, I’m not worried about Philadelphia going away, but when I look at the figures of being down, I don’t know, I forget what it was now, 30 or 40,000, you know, in a year, it doesn’t work very well as that goes along, because the advertiser just does not need you the same way as they needed you 10 or 15 years ago. So your ability to price evaporates in them.

It used to be, Charlie and I met Lord Thomson, 1970 or so, and he owns the paper on the paper and Council Bluffs, right across the river. And he was a jovial fellow, he’s very happy to see us, and we said to him, “Lord Thomson,” he said, “we noticed you on the paper in Council Bluffs. Have you ever been there?” He said, “I wouldn’t dream of it.” But, and then I said, “Well, Lord Thomson,” I said, “you seem to increase the price of your paper every year, and your poor advertiser, I’m the advertising price, and is it, is, what can they do about it?” He says, “Nothing.” And then I said to him, “Well, in that case, how do you decide how much to increase prices, since it’s, it’s totally at your discretion?” And he said, I, I think Charlie will remember these words, he says, “I tell my U.S. managers to price to make 40% pretax. Above that, I feel I may be gouging.”

Charlie Munger [03:09:29] Well, those days are gone.

Warren Buffett [03:09:31] Yes.

Charlie Munger [03:09:31] And the politicians are not behaving better as the newspapers are weakening. We’re going to miss the newspaper power.

Warren Buffett [03:09:39] I agree with that. Number 5.

[03:09:42] Shareholder (Robert McArthur, Boston, Massachusetts): Number 5. My name is Robert McArthur from Boston, Massachusetts. I’m starting a career in investing, and many, if not most, investors my age think they’re value investors. Also, there’s a record number of people here to see you this year, and the same value investors who were laughed at three years ago are now celebrated by the financial press.

Will there be fewer metaphorical hundred dollar bills left on the street going forward? And if so, should I look for a career in managing a business instead of managing money?

Warren Buffett [03:10:22] There will probably be fewer, but I would say there will always be, except in the most bubbly of markets perhaps, but there will always be opportunities if you’re not working with large amounts of money. The money manager, there’s a basic conflict. There’s conflicts in most businesses. Everybody’s pointing out the conflicts now in the investment banking business, but the investment management business has a conflict that’s equally as significant, in the, in the fact that asset gathering can become a way more important part of your income than asset managing. But if you manage moderate sums of money, I think there will always be opportunities to over perform. That doesn’t mean lots of people are going to do it, but they will be out there.

And, you know, it might have been easier many years ago when there were fewer people looking and not as much information was available on the internet and all that, but people still make the same mistakes, and they still get… Well, I’ll give you an illustration. Charlie has a company called the Daily Journal Company, company called the Daily Journal Company, and the Daily Journal Company has a bunch of cash, and it sat there with cash, and it sat there with cash. And I own 100 shares, which is all he’ll let me own, and I got their annual report here a while back, and in their fiscal year of 2009, for, they never bought stocks before that I’d seen, and all of a sudden they bought $15 million worth of stocks, and they were worth 45 million. So by sitting around for a while, but waiting until things got really ridiculous in certain cases, he put $15 million out that became 45 million within probably a six-month period or so.

So opportunities come around. You have to be prepared to grab them when they come, and you can’t do it with the kind of money, I mean, you can’t get the extraordinary things with the kind of money that we’re running. With moderate amounts of money, I think there will always be opportunities. Charlie’s going to tell you something more pessimistic now, probably.

Charlie Munger [03:12:43] Well, yes. One piece of advice that Warren frequently gives, and it’s particularly useful to those going into money management: take the high road, it’s far less crowded.

Warren Buffett [03:12:56] Yeah, Al, Alan Simpson used to say, he said, “Those who take the high road in Washington are seldom bothered by heavy traffic.” Getting to the last part of your question, there’s going to be opportunities for talent, whether it’s in money management, operating management, whatever. I mean, that it’s going to work. Money management, you know, it’s, it’s easier to scale up and easier to get into and all of that, so it was certainly my natural inclination. In any event, I would not have wanted to work my way up to a plant superintendent and all that until I got a job at the top, you know, about the time they were going to give me a gold watch. But there’s opportunities in both places. Carol?

CLCarol Loomis [03:13:55] This question is about municipal bonds. “Municipal bond defaults on the scale you described in the 2008 letter has so far not materialized. To what extent will we see municipalities default outright in the next five to ten years? Will the bond insurance companies be able to swallow the losses? Will there be federal bailouts of states? And considering all of these risks, should investors be getting paid more than they already are for holding municipal bonds?”

Warren Buffett [03:14:25] Well, if the bonds are insured by Berkshire, you don’t need to worry at all. The, but we’re not insuring a lot of bonds currently, because we don’t think the premiums are appropriate, which gets to the question. Just the other day, within the last few days, you probably read about in the papers, Harrisburg, Pennsylvania, defaulted on a relatively small amount of bonds, and the bond insurer, named Assured Guaranty, starts paying the interest. And Harrisburg may get things worked out in a week, you know, and they may not. They, there’s certainly some incentive to do that, and if they do get it worked out, the bond insurer is not too much on the hook.

But what you worry about is, is correlation in this field, that if you, that if one entity defaults, and particularly if nothing terrible happens, that the police are on the street the next day and the fire trucks still go to fires and all that, and people start thinking, what’s, why should I have a great fiscal reputation when I can, when I can have lower taxes and still have all the services I need? It’s very hard to tell how that will play out. I personally think it would be very hard in the end for the federal government to turn away a state that was having extreme financial difficulties when they’d in effect gone into General Motors and, and, and, and, and various other entities and saved them. I mean, I, I don’t, I don’t know exactly how you would tell the governor of state X that you were going to step arm him, and, and when you participated in so many other bailouts of corporations. But who knows what would happen, and who knows how contagious it would be.

The big thing you worry about if you’re a bond insurer is contagion. Obviously, the bond insurers, that, except for Berkshire, the bond insurers in my view have got extraordinary liabilities in relation to their capital, and virtually every one of them either failed or effectively failed, had to spin off a bad bank versus a good bank type thing or something like that, with merely the troubles they encountered when they got into structured securities. And I think they’ve had a very optimistic attitude toward what could happen in the field. But I don’t know the answer on, on what default rates are going to be over the next few years. I knew that I felt I was getting paid fairly for taking that risk on a year and a half ago, and I don’t feel them that we’re getting offered a premium that’s fair now, so we’re going to let somebody else do it. Charlie?

Charlie Munger [03:17:09] Well, yeah, with the municipal bonds, I would try and invest in places that were both prosperous and disciplined. You want to invest in the prosperous because Ben Franklin was right when he said it’s hard for an empty sack to stand upright. And you want to invest in the disciplined places because integrity still matters. It’s not very difficult, it’s not very complicated.

Warren Buffett [03:17:37] But you could argue that in a country, if the undisciplined are not being punished for being undisciplined, that the taxpayers and in disciplined areas would say, “Wait a second, you know, why should we keep up a record of financial prudence and all that and pay our bills when other guys aren’t paying their bills?”

Charlie Munger [03:17:59] Well, there’s no question about the fact that bad behavior is contagious. That’s the way human nature works. But, but I’d still rather be with the disciplined prosperous people.

Warren Buffett [03:18:11] Number 6. That’s why I like the Berkshire meeting. That and free fudge.

[03:18:18] Shareholder (Srinivas Canadial, Fort Lauderdale, Florida): Good afternoon, Mr. Buffett and Mr. Munger. I am Srinivas Canadial from Fort Lauderdale, Florida. First of all, I want to thank you for sharing your wisdom with us so generously. Back in October of 2008, you highly recommended buying U.S. stocks, and that was a brilliant idea, it worked very well. And I just want to get your opinion how you think about the market going forward. Are you still that optimistic, and what’s the reasonable rate of return to expect from the equities in the next decade or so?

Warren Buffett [03:19:02] Well, I write articles very infrequently, or get interviewed very infrequently, on, on the subject of the general level of the market itself. Probably only four or five times in 40 years have I really declared myself about what I thought about the general level of the stock market. And it turned out I was pretty premature, actually, in October 2008, as was pointed out to me by a number of people. But I felt, and what I said in that article really was that it would be way better to own stocks over the long term than to follow a policy of buying either long-term bonds or, or holding cash. And I knew I could make that statement, and I would be eventually, I thought odds were very high I’d be proven right on that.

But I don’t like, I don’t know what the stock market’s going to do next week or next month or next year. I don’t have any idea. People always think I do. I, I know I don’t have any idea. I don’t think about it. It doesn’t make any difference. Charlie and I, I don’t, I can’t recall a discussion we’ve ever had on it, you know, basically. But I do think over the next 10 years or 20 years, I’d much rather own equities, including U.S. equities. I’d much rather own them than cash, or I’d much rather own them than a 10 or 20-year bond. But that’s partly because I’m very unenthusiastic about the alternatives. I think, I think equities will, are likely to give you some positive, modest positive real return over time, but beyond that I really don’t know anything. Charlie?

Charlie Munger [03:20:48] Well, that’s a cheerful thought, that equities are the best of a bad lot of available opportunities.

Warren Buffett [03:20:57] Do you disagree with it?

Charlie Munger [03:20:59] No, I think you’re right. I think people should get accustomed on average to doing less well in their investment portfolios in real terms.

Warren Buffett [03:21:08] Charlie, I think we’re in for a long period of where the ordinary result is not going to be very exciting. But we, we like owning businesses, and we’re in a position where we can own entire businesses, but we also like partial ownership of businesses. And, and we, we want to own businesses where we really think they have some competitive advantage over time, and, and, and where we feel good about the management, where we think the price is reasonably attractive. I think you can find things like that now, but they aren’t, they aren’t dramatically attractive at all. They do beat, in my view, they do beat holding cash or, or 5, 10 or 20-year, 20-year bonds. Becky?

Becky Quick [03:21:52] This question comes from John Baylor, who’s asking about the ratings agencies. He points out that you started selling your stake in Moody’s this year. “Has the investment case for Moody’s changed due to potential regulation, and if so, why not sell the position to zero?”

Warren Buffett [03:22:10] Well, we won’t discuss what we will or won’t do with any position, but I would say this. The ratings agencies have had and still have, under current conditions, an incredibly wonderful business. I mean, it takes no capital at all, you know, it, the pricing power is significant. And certain parts of the world feel they need rating agencies. They’re also, a certain part of the world is very mad at rating agencies, and, and many feel that the rating agencies let them down when the rating agencies essentially succumbed to the same mania, in effect, you can say, that prevails throughout the investment world, and, and really the political world and the media world and all, and etc.

They made the same mistake that was, again, politicians made, I made, you know, you made, mortgage brokers made, whomever. They couldn’t see a world where residential housing countrywide would collapse. And I don’t think that was done because they were the incentive part of it. There may have been some small aspect that, that played. I just think that, you know, it’s very hard to think contrary to the crowd. And on the other hand, there is a, obviously a backlash against rating agencies. There may be legal remedies, you can get views on that either way. If they are not forced to change their, the whole structure around them does not change in some dramatic way, it’s a pretty, it’s a pretty darn good business. And then in, in that, that you can’t, you can’t shop pricing in the radiating agency business.

That, we have never paid any attention to ratings for bonds. I mean, you know, at Berkshire, but we don’t think we should farm out, outsource investment judgment. If we can’t do it ourselves, we don’t, we just don’t do it, and we’re not going to rely on somebody else’s opinion, whether it’s a rating agency or an investment advisory organization or a management holding firm or anybody else. So it’s not, it’s not a business that we rely on, but we do recognize that, that if the business, if the sort of the social model doesn’t change, it still remains a phenomenal business. Charlie?

Charlie Munger [03:24:57] Well, I would argue that the rating agencies, in their present form and structured with their present incentives, have been a wonderfully constructive influence in our country for a great many decades. And, and what happened, of course, is that the cognition faltered. They drifted with the stupidity of their times in a way that was regrettable. Part of it came out of assanity and American business education. They over-believed in these ridiculous models and so on and so on. And, and I’ve yet to hear a single apology from business academia for its huge contribution to our present difficulties. (Applause)

Warren Buffett [03:25:54] Area 7.

[03:25:55] Shareholder (Mike McCoy, San Francisco): Mike McCoy from San Francisco. Chairman Buffett, you frequently speak favorably about the prosperity of future generations, that our children and our children’s childrens will live better than us. How much of our current prosperity do you attribute to us being able to get oil out of the ground at a fraction of the cost of its value to us in the economy? And how will we be able to live better in the future when we can no longer get more and more of this free lunch, and we become dependent on more dilute sources like solar and wind? Couldn’t this turn out like trying to satisfy a drug addict with Coca-Cola?

Warren Buffett [03:26:48] The oil business, obviously, the discovery of oil, one was about 1850-something, to Colonel, some Colonel Drake at Titusville, Pennsylvania, or something. The, that changed the world in a very major way, and it’s only 150 years ago. And since then we’ve been sticking straws into the earth at incredible pace. There’s over 500,000 producing wells in the United States, would you believe that? I mean, 11 barrel, 10 barrels a day average or something of the sort. I mean, we have really exploited what may have taken, I don’t know what, is hundreds of thousands of years or millions of years to create. It’s contributed in a huge way to the prosperity of the world.

But the world, in my view, will not be dependent upon that particular, call it windfall, for the next 100 years. And Charlie knows way more about this subject than I do. But, but there will be other free lunches available, you know, whether it’s solar, there’s lots of possibilities. Don’t, don’t ever, don’t ever give up on, on humans’ ability to innovate in ways that, that create solutions to problems that seem insolvable. We’ve, we’ve faced all kinds of predictions, you know, all of the inventions having been invented. There’s some famous statement, I forgot who made, on that. They’re, the, they’re the… We haven’t really started. I mean, if you could pick a time in history when you would want to be born, leaving out the nuclear, chemical and biological threat, which is something to leave out, but, you know, I would pick today. You know, the world has a bright future. Now Charlie will give you the other side of that.

Charlie Munger [03:28:51] No, I think you’re failing to recognize something really important. In the technology of 150 years ago, they really needed the oil to get ahead in our advanced civilization, which has benefited from this last 150 years of technological, 150 years of technological expertise. We don’t, we can get ahead without the oil if we have to. Now, Freeman Dyson is not a physicist, who is not an economist, but a genius, and he’s been very good at pointing out that it isn’t that horrible to contemplate a world which goes off oil, provided that world is as rich and knowledgeable as ours is now. So the fact that they couldn’t have got to where we are now without the oil starting 150 years ago does not mean we can’t do without the oil if we have to. We need the oil and the gas and the coal eventually for chemical feedstocks more than we need it for keeping warm and propelling our vehicles.

Warren Buffett [03:30:05] And the adjustment fortunately is, will be fairly gradual. I mean, it is not like 85 million barrels of a day goes to 50 million or something in five or ten years. So, so it’s, it’s a workable period of adjustment, in my view.

Charlie Munger [03:30:22] It doesn’t bother Freeman Dyson, who knows more about it. I don’t think it should bother you too much.

Warren Buffett [03:30:31] He’s always pulling that on me. Andrew?

ASAndrew Ross Sorkin [03:30:34] I received a number of questions regarding Kraft, and this one comes from a shareholder who, who says they prefer to remain anonymous. The question is: “Given your stake in Kraft and your public criticism earlier this year about the Kraft-Cadbury deal, how would you grade the Kraft board of directors’ capital allocation and management compensation abilities? What did you think of Kraft CEO Irene Rosenfeld’s $26.3 million compensation packages, package for services including her leadership in completing the Cadbury acquisition and selling Kraft’s North American frozen pizza business?”

Warren Buffett [03:31:06] Well, I didn’t like either the Cadbury decision or the pizza decision, but, but we’ve made our share of dumb deals at Berkshire, you know, and, and so I, I’ve gotten more tolerant of other people. And, and incidentally, the fact I think it’s a dumb deal doesn’t for certain make it a dumb deal, but I think the odds are it was a dumb deal. In fact, I think the odds are that both deals were dumb. The pizza deal was particularly dumb, but in my view. But just think of all the dumb things we’ve done, right, starting with that department store in Baltimore.

Charlie Munger [03:31:38] Yeah.

Warren Buffett [03:31:39] A few Irish banks, you know.

Charlie Munger [03:31:41] Yeah.

Warren Buffett [03:31:42] Right, recently. We never see anything, we never get over it. We expect to do some dumb things. It’s just we get mad when other people do dumb things with our money.

The, you know, the pizza business, somewhere I probably have some figures on that, but they, when they sold the pizza business for 3.7 billion, they announced it is selling it for 3.7 billion. They didn’t sell it for 3.7 billion. That’s what the other guy paid. What they got was about 2.5 billion, and that was a terribly tax-inefficient deal, when they’d already shown their ability to understand that you could do a tax-efficient deal when they sold the Post cereals business earlier. And when they referenced, well, they didn’t reference at all what pizza was earning beforehand, but I think, I think that Nestlé said it was earning something like 280 million pre-tax, but that was referring to the previous year. When they talked about the Cadbury earnings they were buying, they were talking about next year, and we talked about the pizza earnings they were selling, they talked about last year. Pizza in 2009, believe it or not, earned 300 and, I think, 40 million pre-tax. So they got two and a half billion for 340 million of pizza earnings that were growing as fast or faster than the Cadbury earnings, and where the sales were growing as fast or fast. It, it really didn’t make sense, in my view.

Now, you know, Irene is a perfectly capable manager, and she may know a lot of things about that business I don’t know, and, like I say, we’ve made plenty of mistakes ourselves. And, but it had been me, I would have voted to keep pizza and not buy Cadbury. And I expressed myself, and I don’t, I don’t do that too often, but we owned a lot of Kraft. And Kraft still is selling for considerably less than the value of its constituent parts, particularly if you value them the way you value, can’t, they value Cadbury. But if, if they don’t sell them all like they sold pizza, you know, the, the present price is, is, is below the value of Kool-Aid and A.1. Sauce and, and, and Jell-O and Oscar Mayer wieners and a few things. Those are very good businesses. I just hated to see them give up a significant portion of those businesses to buy Cadbury at what I felt was a very fancy price. Charlie? I, in terms of her compensation, you know, though, we’ve got a compensation system at Berkshire that I regard as quite rational, and, and there’s a lot of companies in the United States that have different compensation systems.

Charlie Munger [03:34:32] Yeah, I think generally at the top of American businesses, people think they know too much about strategy, and they tend to hate the tough competitive conditions in the business they’re in and to yearn for some business where it’s less difficult. You remember when Xerox bought Crum & Forster, an American insurance company, one of the dumbest acquisitions in all time? The reason Xerox did that is they didn’t have any tough Japanese competing in the insurance business. They were really tired of facing the tough competition they had in the business they were in. I think it’s quite typical to dream, if you’re in business, that something that’s a little different, no matter how much you pay for it, will make your troubles less. And you will have an absolute army of lawyers, investment advisors, public relations people, all of whom will have a strong economic interest in having you push ahead on deal after deal after deal, regardless of how the shareholders come out. I mean, you know, it just, it’s the way it works.

Warren Buffett [03:35:48] Okay.

Charlie Munger [03:35:48] That’s why Berkshire is a better deal. We are very stupid in many ways, but we have avoided a slight subset of stupidities, and they’re important.

Warren Buffett [03:36:02] Okay, number 8.

[03:36:03] Shareholder (Richard Rentrop, Germany): Dear Mr. Buffett, dear Mr. Munger, my name is Richard Rentrop. I’m a shareholder from Germany. Mr. Munger, you just mentioned again the importance of integrity. My question is about changes in integrity of management. One of your three key questions is, does management love what they do, or does management love the money? So how do you see the crisis having changed integrity of management?

Charlie Munger [03:36:42] Well, I think what led to the crisis, to some extent, a lack of integrity in media management. Fortunately, some of them are now gone. So integrity is very important. It’s the safest way to make money also. There’s an occasional perfect name who succeeds pretty well with money, but that kind of success reminds me of what Pope Urban said about Cardinal Richelieu. He said, “If there is a God, Cardinal Richelieu has much to answer for. But if there is no God, he’s done rather well.” And too many people want to be like Cardinal, Pope Urban’s view of Cardinal Richelieu. And, and the integrity is important, it’s terribly important, and of course everybody mouths the integrity even when it’s lacking. So it’s, it’s, it’s difficult to, to be sure that the professing integrity isn’t, is the same as having it.

Warren Buffett [03:37:59] The “everyone else is doing it” is, is, is the toughest thing, I, I think. Yeah, you had this classic example in about 1993, roughly. You know, the Accounting Standards Board came out and says what was obvious to everybody all along, was that stock options were actually expensed, and that expenses, for some reason or another, belonged on the income statement. And America, corporate America, fought back like you cannot believe. I mean, it was like World War III had broken out in terms of armies of CEOs marching on Washington. So the Accounting Standards Board backed off. Congress, Senate voted 88 to 9 to tell them that, you know, what the hell did the Accounting Standards Board know about accounting, and the Senate would tell them what accounting was all about.

When the Accounting Standards Board backed off, they said, “There will now, say that you can do it one of two ways. Number 1 is preferred,” which was to expense, “number 2 was acceptable but, but not preferred.” Of the Standard & Poor’s 500 companies, 498 chose number 2, the, the non-preferred way. Two took the preferred method. And I talked to one, a number of people in that 498 that I would trust to be a trustee of my will. You know, I’d love to have him as a next-door neighbor, they could marry my daughter. But in the end they said, “I can’t do it if the other guy isn’t doing it.” It was a variation, “I’m doing it because the other guy is doing it.” They, they basically said, “I’ll be penalizing my shareholders if I report less in the way of earnings then I can report and all the other guys are doing it that way.” And I understand your point, and the situational ethics problem is huge.

It gave you earlier that illustration of how rare it is to find, if you carry it out to tenths of a cent, a 4 in reported earnings quarterly. That’s not accidental. And it’s, but if you talk to the people that played games to get that 4 up to 5, they would say, “Well, everybody else is doing it. Your own statistics prove that.” And that is a, you know, it is a tough problem to deal with. We try to create as few situations in Berkshire as we can that would induce such behavior. You know, I don’t have the manager submit budgets to me. There is no Berkshire budget. You know, they can use them in their own operations, some do and some don’t, many do, great many do. But if they submit them to me, you know, and the temptation becomes, if they’re not quite making it and they think I’m looking at that all the time, the temptation becomes to the fudge in some way. And very few would do it, but the more the thought the other ones were doing it, the more they would do it. It’s just human behavior, and you want to kind of create a structure that minimizes the weaknesses in human behavior. And I think Berkshire is about as good a place as that as any, although I’m sure we’re not perfect at it. Charlie?

Charlie Munger [03:41:30] Yeah, what’s really interesting on this issue is that so much of the bad behavior does, does not come from malevolence or overweening greed or anything like that. It comes from subconscious poor cognition that justifies a lot of behavior that’s really not justifiable if it’s better understood. And that happens to practically everybody, and the cure is very difficult. The best cure is to have a system where the people who are making the decisions bear the consequences. And that’s why the system that Wall Street created, where nobody really owned the mortgages, they just passed them rapidly to somebody else at a profit, and so nobody felt any responsibility that the mortgages be any good, systems like that at a basic level are irresponsible systems. And it’s deeply immoral to create irresponsible systems like that, but the people who create them don’t realize they’re being immoral. They think those systems are wonderful. Who do you see apologizing for the behavior you now find so regrettable in our recent mess? There are very few apologies, you’ll note. People think they did fine.

Warren Buffett [03:42:55] Carol?

CLCarol Loomis [03:42:56] This question is from James A. Star. “I have read an enormous amount about past market declines and the opportunities they presented to investors. The last two years have seemed to me, a 43-year-old investor, a real opportunity. Yet in the thick of the action, I was too scared, because I felt the market decline, while severe, was not necessarily sufficient to match the risks of global financial meltdown. So my question is, given that we are possibly not totally out of the woods, how did, how did the two of you assess this latest buying opportunity against the previous opportunities of your life?”

Warren Buffett [03:43:44] It’s not the greatest one. We’ve seen a few that scream at us, and we’ve seen a few periods of over evaluation that scream at us, and 90% of the time we’re somewhere in between, and we don’t know exactly where we are in between. The business of being scared, you know, I, I don’t know what you do about that. If, if you’re of that, if you have a temperament that when others are fearful you’re gonna get scared yourself, you know, you are not gonna make a lot of money in securities over time, in all probability. That, you know, people really, if they didn’t look at quotations… But of course the whole world is urging them to look at quotations, and more than that, do something based on small changes in quotations.

But if you didn’t, think, I’m much more rational, we’ve talked about it before, but think how much more rational investing in a farm is than the way many people buy stocks. And if you buy a farm, do you get a quote next week? Do you get a quote next month? If you buy an apartment house, do you get a quote next week or month? No. You look at the apartment house or the farm and you say, “I expected it to produce so many bushels of soybeans and corn, and if it does that, it meets my expectations.” But they buy a stock and they think of it goes up, it’s wonderful, if it goes down, it’s bad. We think just the opposite. When it goes down, we love it, because we’ll buy more, and if it goes up, we can, it kills us to buy more.

And I, you know, all kind of, you know, Ben Graham wrote about it, it’s been explained. But if you can’t get yourself in that mental attitude, you’re gonna be scared whenever everybody else is scared, and, and expect somebody else to tell you when to buy and therefore get your courage back up or something. You know, I could get this fellow’s courage up substantially by saying it’s a wonderful time to buy, and then a week from now he’d run into somebody else that tells him the world is coming to an end, and it sell. I mean, he’s a broker’s friend, but he’s not, he’s not going to make a lot of money. Charlie?

Charlie Munger [03:45:44] Yeah, I think I developed more courage after I learned I could handle hardship. So maybe you should get your feet wet with a little more failure.

Warren Buffett [03:45:57] I’ve certainly followed that advice. You know, some people really do not have the, apparently they don’t have the temperament, emotional stability, or whatever it may be, to, to invest in security. They’d be much better off if there were no quotations at all. And Keynes talked about that some in the past, to, it, to take something that should be an asset, a quotation every day, you know, terrific liquidity. Nobody says, “How liquid is my farm?” or something of this earth. So they’re not expecting that prices to tell them something about how they’re doing. The market is saying this or that. Whenever anybody says “the market is saying,” is it, you know, it’s sort of unbelievable that… But there’s a lot of, there’s a lot of interest in, in investing, and people are going to yak about it all the time. And, and in the end, what counts is buying a good business at a decent price and then forgetting about it for a long, long, long time. And some people can do it and some people can’t. Number 9.

[03:47:08] Shareholder (Joe McCabe, Littleton, Colorado): Hi, my name is Joe McCabe. I’m from Littleton, Colorado. I want to thank you for the opportunity to ask a question, and for your annual discussions in your report, just wonderful reading. Charlie Munger, you are on a YouTube video that discusses BYD and solar energy, and I really appreciate that interview and it being available to everyone. I want to talk about that in relationship to your other companies. So the BYD was mentioned as electric car and battery, but I understand their second goal is solar energy. And you also own roofing companies and buildings companies, Clarum and Clayton, as well as utilities, Mid-America, PacifiCorp and Pacific Power. This seems to be a perfect golden opportunity for solar to be on these buildings in those kinds of utility companies. You’ve mentioned you don’t interfere with individual companies, but is there a way you can direct, suggest, motivate a synergy between all these companies to bring solar solutions? Thank you.

Charlie Munger [03:48:21] Well, the solar solutions are coming because they’re so obviously needed. And regarding solar panels on roofs, I never pass an opportunity to decline to put them in, because I think they’re going to get a lot cheaper, and I’d rather wait.

Warren Buffett [03:48:45] So what, an 86, you’re going to afford to, Charlie?

Charlie Munger [03:48:50] Yes, I have to think about the long term.

Warren Buffett [03:48:56] The…

Charlie Munger [03:48:57] And I’m going to miss you terribly.

Warren Buffett [03:49:02] Touché. He reminded me of the wife, and the husband said, “Would you still love me if I lost all my money?” And she says, “Yes, I would always love you, but I would miss you terribly.”

Charlie Munger [03:49:17] Well, the solar is coming because we have no other practical alternative, and it should be regarded as a very good thing, because what in hell would modern civilization do if we had no alternative To fossil fuels, that would be a really serious problem. And so of course the cities that are choking to death in their own poisonous air are going to go to electric cars, and we’re going to get a lot more renewable energy from the sun. I’m also quite negative about growing corn in America using fossil water and fossil fuels in order to burn up in automobiles. That is a stunningly stupid idea and another example of how our politicians have failed us. And but I’m enormously optimistic about what is going to happen. Our politicians will eventually create a big electric grid that’s way better than what we have now, will eventually have the energy we need, and we will be way better for it.

And it’s wonderful, these technical problems are proving solvable. It is not all that important over the long term if solar power costs twice as much as what we’re used to. That’s a blip in the economic future of our country. It’s just a blip. And I think it’s probably a good thing that we have all these big capital needs coming that will create a better system in the end and solve our problems in the end. So I’m quite optimistic. But in terms of immediate business decisions, I think frequently the right answer is counter-intuitive, like mine. Say if you want to put in solar panels, wait, they’re going to get cheaper. Warren, you want to criticize that?

Warren Buffett [03:51:40] I have nothing to add.

Becky Quick [03:51:43] This question comes from Jennifer Mancuso, who’s a shareholder here in Omaha, and she’s hoping that you can settle a debate between her husband and her. That’s a promising assignment. She says that he believes the Berkshire Hathaway stock will rise significantly in the next one to two years because of all the smart buys Warren made last year in Fortune 500s when stock prices were bottomed out. She said she knows this type of purchasing is driven much of your financial success, but she doesn’t know how impactful these buys are, given the size of Berkshire Hathaway, and that Warren himself indicates that we shouldn’t expect to see large increases in his stock price in the next few years. So the question is, what percentage of the portfolio is represented by those stock purchases, and what kind of an impact might they have on the fund’s value as the valuation of that stock increases?

Warren Buffett [03:52:40] Well, I would say this, that our portfolio now, I’ve always regarded our portfolio as something that we thought would be worth more money later on. But the degree of undervaluation in our portfolio now compared to what I would expect it to produce over time is not dramatic, and it’s, and that undervaluation has been exceeded many times in the past. So it isn’t like we’re sitting here on some exploding bananas or anything like that. That couldn’t be further from the truth. We think we’ll do reasonably well over time. We’ve got a lot of good businesses. We try to allocate capital rationally. We don’t waste a lot of money at the top. But we do not have a whole bunch of things that are likely to increase dramatically in value from here. It just isn’t the case. So I hope she and her husband get along fine. Charlie?

Charlie Munger [03:53:40] I don’t think I can solve any of those domestic troubles either. In my own day, I simply accepted the other point of view.

Warren Buffett [03:53:52] Number 10.

[03:53:52] Shareholder (Randy Bellows, Rock Hall, Maryland): Hello, gentlemen. My name is Randy Bellows, and I’m from Rock Hall, Maryland. I’ve been coming here for many, many years, yet today I sense from each of you a guarded sense, a sense of reserve. Not quite overt pessimism, but real reserve. You have spoken of impending inflation, government debt both here and abroad that’s higher than we’re accustomed to, increased regulation and red tape that may slow innovation and growth. And just a few minutes ago, Charlie, you spoke of that we have to reduce our expectation of investment returns. And yet in the same day, you’ll say children in India will live better than we do, Chinese will live better than we do, and our own children here in this country will live better than we, that than we do today. Can you give me four or five facts that explain your optimism? And thank you.

Charlie Munger [03:54:55] Well, having the main technical problems of civilization, which of course are all energy related, having a solution that’s on the horizon and nearly here, that is not a small benefit to humanity. That is the biggest single problem we have. So of course I’m optimistic about that. And I’m optimistic about the culture that generally pervades in Berkshire, because I think it will continue to work. And and of course it gives me some pleasure to see people that have had it tough for a long time, through their own extreme efforts and talents, rising rapidly, as in many parts of China and India. All of that gives me pleasure, and why shouldn’t it?

Of course they’re terrible problems, and of course reduced expectations are the rational way. There’s no better way to be happy than getting your expectations down. It’s much easier than getting your results, getting your results up. It’s just, I, we never know anything here except the most elementary common sense. It’s amazing that it’s sufficed for us. So no, I’m optimistic about life. I can be optimistic when I’m nearly dead. Surely the rest of you can handle a little inflation.

Warren Buffett [03:56:36] I really have nothing to add to that. Andrew?

ASAndrew Ross Sorkin [03:56:40] This question comes from Myard Shields, and I want to say in advance that I don’t, I’m not thrilled asking this question, and you’ll see why. The question is: “The American public almost certainly benefits from Mr. Buffett’s increasing media exposure, but is it the best use of your time for Berkshire’s shareholders? Probably not.”

Warren Buffett [03:57:03] I do a lot of things not the best use of my time for Berkshire shareholders. I play bridge on the internet 12 hours a week, you know. I mean, and I’m not sitting there thinking by improving my bridge skills is going to do wonders for Berkshire. No, I do, I have, I have seen over the years the development of broadcast television as opposed to print. And I would say that if you want to have a record of exactly what you said, as opposed to interpreted through not only reporters but editors who bounce back things and say, take six paragraphs down to four paragraphs, and why don’t you ask this question, I would much rather have a record on Charlie Rose, which is permanent, where people can go back and look at exactly what I said, and my body language, and whether I was kidding.

I’m sure Lloyd Blankfein would have preferred to have a television interview. He would like, he’d like to take back that remark about, you know, doing God’s work under any circumstances. But I would bet that that was delivered as a throwaway line in terms of something that was said earlier. You know, clearly he did not mean that in a literal sense, but he’s gotten killed in the media because somebody elected to treat it halfway seriously, and then other people, to fit other stories, play it that way. I like the idea, whether it’s, you know, in terms of CNBC keeping a record of it or Charlie Rose keeping a record of it, of having, of being judged by my own words rather than somebody writing a few paragraphs trying to summarize some views.

So, and that requires being on television instead of, instead of having people essentially take a one-hour interview, often just shopping for a single quote that fits their storyline, and having that somehow become representative of what I think. So the clearer I can be about what I think, whether writing my own annual report or whether being in broadcast, the better I feel about the accuracy of the reporting. And I figured that out a few years ago, so that’s the direction I go now. And whether it’s the best use of the time, and it works fine.

I’ll tell you one story on that. You have to be a little careful about broadcast. After we made the Burlington deal, Charlie Rose, who may be here, did an interview with me, and we taped it on a Friday morning, and we did the tape. We had a good time doing it. And during the tape, there was a little section on it showing great railroad scenes, and one had Cary Grant and Grace Kelly, and another one had Marilyn Monroe and Some Like It Hot, and then it showed a bunch of the kind of things we had about railroads in our movie this morning. And when we got all through that, he asked me some question, and just to give a flip answer, but it did tie in with what I just seen, I said, “Well, I would have paid more for the Burlington if they’d thrown in Grace Kelly and Marilyn Monroe.”

Well, this taped interview ran an hour and six minutes. So when they ran the tape that night, they had to take out six minutes, and they took out these railroad scenes to show Grace Kelly and Marilyn Monroe. So to anybody that viewed this thing, it looked like I was spending my time there fantasizing about these while Charlie was talking to me. So even television isn’t safe. Number 11.

[04:00:43] Shareholder (Kip Johann-Berkel, Boston, Massachusetts): Hi, my name is Kip Johann-Berkel from Boston, Massachusetts. First, thank you both for your writings, annual shareholder meetings, and even the Charlie Rose interviews, as they have helped me grow both as an investor and as a person. Berkshire has, in my opinion, the best and most loyal shareholders of any publicly traded company or mutual fund. How do you attract and retain a shareholder base, particularly when many of the same behavioral tendencies that produce mispriced securities also produced fleet-footed shareholders? Thank you.

Warren Buffett [04:01:29] Yeah, the interesting thing about marketable securities is that basically anybody can buy them. I mean, you might elect to join somebody and buy a McDonald’s franchise or a farm or an apartment house or something. But if you’re running a public company, you know, you can have anybody from, you know, from Osama bin Laden, you know, to the Pope is your shareholder. I mean, they elected you, you don’t elect them, they elect you. Now if you want a shareholder body that is going to be in sync with you, it’s important that you, in my view, it’s important that you let them know exactly what sort of institution you plan to run.

And we’ve got the annual reports, we’ve got television interviews, we’ve got various ways of conveying to people what kind of a place Berkshire is. And to some, that says come in, and there’s others it says stay out. Phil Fisher wrote a great book on investing back in the very early 1960s, and he described the situation this way. He said, look it, you can have a restaurant, and it can say French food, and if you have French fruit inside, you know, people are gonna, you’re gonna get a satisfied and returning clientele. And you can have another one says hamburgers. But what you can’t do is have hamburgers on the outside, on the marquee, and deliver French food inside.

And so many companies sort of try and promise everything to everybody. Their investor relations department tells them that any shareholder they can get interested, you know, they want. We want people who think the way we do, and we don’t, we think on balance we won’t disappoint them too much. But if we get a bunch of people who think that the earnings next quarter are going to be up 10% for some reason, and that’s the reason they own the stock, we’re going to have a lot of disappointed people. And our goal in life is not to spend our time associating with people they’re going to be disappointed with us. And if it’s our, it’s our fault if we give out the right, wrong advertisement. So we try to advertise what we are, and then we try to deliver on that.

And I do think we have the best group of shareholders in the, in the world, you know, among large publicly traded companies. And I think it’s because we’ve got people that basically look into buying a business, becoming our partners over the years, and they know we’ll treat them like partners, and they in turn give us a lot of comfort in having a stable shareholder base and a good feeling about just running the whole place. Charlie?

Charlie Munger [04:04:11] Well, what happened here is, to some extent, an accident. Warren and I started out investing money for our families and friends and the people who trusted us when we were young and unknown, of course we developed a strong affection for. And we morphed into controlling public companies from that base, and so we tend to regard our shareholders, including the new ones, as family. And that’s not put on. That’s the way we regard you. Other people can’t do that because they morphed into their situation in a different way. And if you were a CEO and dealt with the average institutional investor who is interested in having his portfolio management look good the next six months, you’d find it hard to love your shareholders. They’re sort of a hostile force that are putting unreasonable expectations on you.

And so I don’t think Warren and I deserve such wonderful credit for the fact that we have better relations with our shareholders. We came up in a totally different way. Now, we did have enough sense, when we saw that it was such a good thing and so satisfying, that we stayed with it. But when we, we got into this by accident.

Warren Buffett [04:05:33] Yeah, we got in by accident. And and we also were blessed with the fact that we did not have an industrial relations department that wanted us to go out and pump up.

Charlie Munger [04:05:43] But that was on purpose.

Warren Buffett [04:05:44] Yeah, yeah, it is. I’ve seen them in operation of dozens of companies I’ve been involved in one way or another, and I mean, it is really ridiculous. And the idea that you go out and try and cater to the expectations of people that are expecting you to do things you can’t do by operations, but maybe you can do by accounting for a short period of time, it leads to worse behavior. And in the end, somebody’s going to own all your shares, you know. There’s no way, there’s no way that shares remain empty, you know, in the shareholder list. So why not get a bunch of people are going to stick with you who are in sync? And the way they’re going to be in sync is if you, you know, if you’ve told them rather accurately what you expect, how you expect to do it, tell them when you make mistakes, all of that.

Charlie Munger [04:06:32] But we probably shouldn’t be as critical of people who came up a different way, dealing with a different shareholder face. It’s not at all clear that we wouldn’t have ended up somewhat the same way if we’d had the same manner of rising.

Warren Buffett [04:06:51] Sure. Yeah. So we’ll be giving, give up being critical for the next five or ten minutes, and then we’ll go back. Carol?

CLCarol Loomis [04:07:01] Very short question. Please comment on the implications of our existing and perhaps continuing zero percent interest rate.

Warren Buffett [04:07:08] Well, it’s very tough for anybody’s got to invest in short-term money. You know, if you’re getting a tenth of a percent on some money market fund currently, that if you started doing that when Columbus landed and didn’t pay any taxes, you’d have almost doubled your money by now. And it’s really, I mean, people talk about easy money policies, but it isn’t so easy on the people who’ve got the money. It, it won’t go on forever, but it may seem like forever to people that are on fixed income. I’m very sympathetic with them, that, you know, basically they got, many of them became fearful when the world was, looks like it was collapsing in late 2008, and the price they pay is really, I know some people like that, but it’s terrible in terms of returns, and their purchasing power will get be eaten away. But This will end at some point. I don’t know how it will end, but I would not like to be chairman of the Fed or sucker of the Treasury. Nobody’s ever asked me, but maybe that’s why I say I wouldn’t want to do it. But the, we will, it won’t work forever to run huge budget deficits and try and have very easy monetary policy. And when, if we do run into trouble, the blame should not go to the Fed. The blame should go to Congress. (Applause)

Charlie Munger [04:08:48] In some sense the reality of our situation is almost amusingly depressing. Stocks are up because the return from running your money at outed interest in a safe way is so lousy. And of course one answer is that can’t last, in which case stocks won’t be as pronounced a value relatively speaking. And of course if it does last, as it has in Japan, we won’t like that either, because it will mean we’re mired in some horrible stagnation. This is a very cheery message.

Warren Buffett [04:09:35] The pressure, the pressure that is exerted by extremely low interest rates, short-term rates, on the value of everything else is, it’s hard to overestimate that. I mean, the reason people have their money out at one-tenth of one percent is that they’re afraid of everything else. But as they’re being afraid of everything else abates, as it has over the last couple of years, the pressure to push stock prices up, push real estate prices back up, it’s enormous. And of course that’s understood by the people who have something to do with those matters. But I don’t think you should underestimate the degree to which the last year of stock prices has been a result of the agony that people are being put through that keep their money in short term money insurance. Unless they’re, unless they’re terrified of the world, they get pushed into and do other, other investments. And I think we’ve seen a lot of that, and we’ll see what happens when money rates do go up, if they do. 12.

[04:10:55] Shareholder (Jeff Colvette, Olathe, Kansas): Hello, my name is Jeff Colvette, and I’m from Olathe, Kansas. I got started in investing in 1999, right before the big tech bubble, and unfortunately I learned buy and hold and don’t fret about market price fluctuations before I learned the importance of valuing a business and applying a margin of safety. So as Charlie said, I got my feet wet with huge failure right away, and the club, thank you, and I feel so bad now. So that leads to my question. If it seems like to me, I’ve read all the Berkshire reports and all the reading I can do about you two, and I thank you for these wonderful meetings, but it seems like it boils down to some simple things: valuing a business and applying a margin of safety. So my question is, what do you recommend for an approach to getting better and better at valuing companies?

Warren Buffett [04:12:06] It was a very, very good question. And in my own case, you know, I started out without knowing anything about valuing companies, and then Graham taught me a way to value a certain type of company that would prove successful, except the universe of those companies dried up. But nevertheless, it was almost a guarantee against failure, but it wasn’t, it was not a guarantee that these things would continue to be available. Charlie taught me a lot, a lot about the value of a durable competitive advantage and a really first class business. But over time I’ve learned more about various types of businesses, but you’d be amazed how many businesses I don’t feel that I understand well.

The biggest thing is not how big your circle of competence is, but knowing where the perimeter is. If you, you don’t have to be an expert on 90% of the businesses, or 80 or 70 or 50. But you do have to know something about the ones that you actually put your money into. And if that’s a very small part of the universe, that still is not a killer. And I think if you think about what you would pay for a McDonald’s stand, what you think you would pay for, you know, think about the businesses in your own hometown of Olathe. You know, which would you like to buy into? Which do you think you could understand their economics? Which do you think will be around 10 or 20 years from now? Which you think it would be very tough to compete with? Just keep asking yourself questions about businesses, talk about with other people about them. You will extend your knowledge over time, and always remember that margin of safety.

And I think you basically have the right attitude, because you do, you recognize your limitations, and that’s enormously important in this business. You will find things to do. Six or seven years ago, maybe not that long, yeah, six or seven years ago, when I was looking at Korean stocks, for example, I never had any idea that Korean stocks would be something that I would be buying. But I looked over there, and I could see that there were a number of businesses that met the margin of safety test. And there I diversified, because I didn’t know that much about any specific one, but I knew that a package of 20 was going to work out very well, even if a crook might run one of them and a couple might run into competition I didn’t anticipate, because they were so cheap. And that was sort of the old Graham approach. You will find opportunities from time to time, and the beauty of it is you don’t have to find very many of them. Charlie?

Charlie Munger [04:14:57] Well, obviously if you want to get good at something which is competitive, you have to think about it a lot and learn a lot and practice doing it a lot. And the way the world is constructed in this field, you have to keep learning, because the world keeps changing and your competitors keep learning. So you just have to get up each morning and try and go to bed that night a little wiser than you were when you got up. And if you keep doing that for a long time and accumulate some experience, good and bad, as you try and master what you’re trying to do, people who do that almost never fail utterly. They may have a bad period when luck goes against them or something, but very few people have ever failed with that, with that. If you have the right temperament, you may rise slowly, but you’re sure to rise.

Warren Buffett [04:16:06] Charlie, did you take any business courses in school?

Charlie Munger [04:16:10] No, I took accounting.

Warren Buffett [04:16:12] And when did you start valuing businesses, and how did you go about it?

Charlie Munger [04:16:18] When I was a little boy, I can remember, I would come down to the Omaha Club, and there was an old gentleman who hit the Omaha Club about 10:30 every morning. He obviously did almost no work, and yet was quite prosperous.

Warren Buffett [04:16:33] He became your idea.

Charlie Munger [04:16:34] Well, but he made me very curious. As a little boy, I said to my father, “How in the hell does he do that?” And he said, “Charlie, he’s in a business where he enjoys practically no competition. He gathers up and renders dead horses.” Now, that was an example of avoiding competition by one stratagem. And if you keep asking questions like that of reality, starting at a young age, you gradually learn.

Warren Buffett [04:17:06] And when you were doing the same thing.

Charlie Munger [04:17:10] Yeah.

Warren Buffett [04:17:11] Thankfully he extrapolate, he went beyond his original insight there.

Charlie Munger [04:17:16] I noticed, it’s rather interesting, you take the rulers of the businesses when I was a little boy, an awful lot of those business in Omaha, a lot of those businesses went broke, a lot of them sold out at modest prices under distress. And some of the people who rose, like Kiewit, from small beginnings, what nobody thought of as the great glories of that early time. And I think that’s kind of the way life is. It’s hard to get anywhere near the top, and it’s hard to hold any possession once you’ve attained it. And but I think you could predict that Kiewit was likely to win. They cared more about doing it right, they cared more about avoiding trouble, they put more discipline on themselves. If you knew the individual well, you would have, you would have been right.

Warren Buffett [04:18:13] What if you knew the individual?

Charlie Munger [04:18:16] I would not have bet on any of the people I knew who were already wealthy, but I would have bet on Pete Kiewit. His sister taught me math. And and no, half Dutch, half German, you know. This is a tough culture.

Warren Buffett [04:18:35] And there’s your, there you’ve just heard it, folks. Half Dutch, half German.

Charlie Munger [04:18:42] Well, but go out looking for him.

Warren Buffett [04:18:45] Well, the man that’s recommending this is named Munger, anyway.

Charlie Munger [04:18:50] The no, I don’t think it’s that. But if you’re, I was just automatically doing that. What was working, what was failing, why was it working, why was it failing. If you have that temperament, you are gradually going to learn. And if you don’t have that temperament, I can’t help you.

Warren Buffett [04:19:14] If you’d followed Pete Kiewit around for 10 years, you’d never would have seen him do anything dumb, right?

Charlie Munger [04:19:22] Oh, yeah.

Warren Buffett [04:19:22] And so it, it’s avoiding the dumb thing. You don’t, you really don’t have to be brilliant, but you know, you have to avoid just sort of what almost seem the obvious mistakes. But I would say that you’re on the right track back there, in terms of having the basic fundamentals, knowing your limitations, but still seeking to learn more about various kinds of businesses. Charlie, I think when he practiced law, any client that came in, Charlie was thinking about that business as if he owned the place, and he probably generally thought he knew more about the place than the guy that actually owned it, who was his client.

Charlie Munger [04:20:08] Who was the client.

Warren Buffett [04:20:10] But, but I remember talking to him, you know, 50 years ago, and he would start talking about Caterpillar dealerships in Bakersfield or something of the sort. It was, it was incapable of looking at a business without thinking about the fundamental economics of it. How’d that guy do with the Caterpillar?

Charlie Munger [04:20:30] Well, he sold it for a perfectly ridiculous price to a dumb oil company. It wasn’t worth half what he got for it.

Warren Buffett [04:20:39] Yeah, but they had a concept and a strength.

Charlie Munger [04:20:43] They had a concept in the strategy, and no doubt they had consultants.

Warren Buffett [04:20:47] Becky?

Becky Quick [04:20:48] This question comes from Carson Mitchell in Aberdeen, South Dakota, who asks both of you, “What business has had the best return on capital for Berkshire, and what business of any on earth has had the best return on capital?” And he adds, “P.S. I would have come by rail, but there are no seats in the grain rail cars.”

Warren Buffett [04:21:10] The, there’s two ways of looking at it. If you talk about the capital necessary to run the business, as opposed to what we might have paid for the business. I mean, if we buy a wonderful business, you could run the Coca-Cola Company, assuming you had the bottling systems ever, you could run it with no capital. Now, if you buy it for $100 billion, I mean, you can look at that as your capital, or you can look at the basic capital. We, when we look at what’s a good business, we’re defining it in terms of the capital actually needed in the business. Whether it’s a good investment for us depends on how much we pay for that in the end.

There are a number of businesses that operate on negative capital. Carol’s with Fortune magazine. You know, any, any of the great magazines, and operate with negative capital. I mean, the subscribers pay in advance, there are no fixed assets to speak of, and the receivables are not that much, the inventory is nothing. So a magazine business, my guess is that People magazine operates, their Sports Illustrate, opera, Sports Illustrated operate with negative capital, and particularly People make a lot of money. So there are certain businesses. Well, we had a company called Blue Chip Stamps, that, where we got the float ahead of time and operated with really substantial negative capital.

But there are a lot of great businesses that need very, very little capital. Apple doesn’t need that much capital, that, you know, it, the best ones of course are the ones that get very large while needing no capital. See’s is a wonderful business, needs very little capital, but it, we can’t get people eating 10 pounds of boxed chocolates every day, except here, we want to. Generally the great consumer businesses need relatively little capital. The businesses where people pay you in advance, you know, magazine subscriptions being the case, insurance being the case, you know, you’re using, you’re using your customers’ capital. And we like those kind of businesses, but of course so does the rest of the world, so they can become very competitive in buying them.

We have a business, for example, this won’t run wonderfully, like Kathryn, Cathy Baron Tamraz, called Business Wire. Business Wire does not require a lot of capital. It has receivables and everything, but it is a service type business. And many of the service type businesses and consumer type businesses require little capital, and when they get to be successful, you know, they can really be something. Charlie?

Charlie Munger [04:24:19] I’ve got nothing to add.

Warren Buffett [04:24:22] But, but at any rate, the formula never changes. If you could, if you could own one business in the world, what would it be, Charlie?

Charlie Munger [04:24:33] I hope I already own it myself. You know, you and I got in trouble by addressing such a subject many decades…

Warren Buffett [04:24:43] That’s right.

Charlie Munger [04:24:44] I don’t think I’ll come back to it.

Warren Buffett [04:24:48] Okay, number 13.

Charlie Munger [04:24:49] If you name some business that has incredible pricing power, you’re talking about a business that’s a monopoly or a nearby monopoly.

Warren Buffett [04:24:59] Sure. And I don’t think it’s very smart for us to sit up here naming as our most admired business is something that other people regard as a monopoly. Okay, we’ll move right along. Let’s see, have we done number 13? No? No, I don’t think so. That’s in the other room again. Anybody there?

[04:25:19] Shareholder (Glenn Tongue, New York): Yes. Mr. Buffett, Mr. Munger, greetings from the breakout room. My name is Glenn Tongue from New York. I would like to thank you both for your exemplary stewardship through the economic crisis. We are all wealthier always as a result of your efforts. I’d like to ask about Berkshire’s growth, specifically your acquisition outlook and appetite. Has the phone been ringing?

Warren Buffett [04:25:43] The phone doesn’t ring very often at Berkshire, you know. I, that’s partly because, well, we set out our criteria in the annual report for what we’re looking for, and we’re now looking for larger and larger things. So when we start saying that we want to buy businesses that earn $75 or $100 million at a minimum before tax, you know, that weeds out a lot of phone calls. And I would say that, you know, if we get a couple of, three or four serious phone calls a year that sort of meet our criteria, that look like they might be a possibility, that’s a good year. I like that. I don’t think there’s been any major change in the frequency that something comes along that might interest us.

The answer is, in terms of being interested, we’re as interested as ever. I mean, they, you know, we wrote a big check and issued shares in connection with the BNSF. But I would love it if Monday morning my phone rings with some big deal. We’ll figure out a way to do it. Charlie?

Charlie Munger [04:27:03] Yeah, it’s a, it’s amazing to me that we have been as successful as we have been in buying desirable places. And it’s human revulsion that has helped us, because many of the people who sell to us are so smart that they’re revolted by almost everything else. They don’t want to sell into some fee driven buying system that doesn’t care about their employees or their business. They, and they finally decide they want to join this one. They don’t want to join the alternatives. And of course that’s marvelous for us. We’ve got a screening device out there that is protecting us to some extent from the wrong sort of people, and very few people have this particular look. We get offered things by people who would not sell to anybody else. That is really peculiar, and it’s happened, what, how many times?

Warren Buffett [04:28:02] Well, it’s happened, yeah, and on an important ones. I mean, though, there’s one I’ve mentioned before, so I’ll mention, I can mention the name. I mean, when I heard from ISCAR, I never heard of ISCAR before, I never heard of a Eitan Wertheimer, who wrote me. But he basically told me, they’ve been quite specific, they either wanted to sell the Berkshire Hathaway or they didn’t want to sell it anybody. And we met and we made a deal. And there’s another person, I won’t even define exactly the time period, but he came in, and he’d been thinking about it for about a year. On this business, he built it over many decades, and he said there were three possibilities. One was to sell it to a competitor, and he said they would have ideas immediately about all the people they could take out of his place and move the headquarters and everything, and they would dismantle something that he’d spent 30 years or so building. And he decided that he didn’t want to do that, even though it was probably worth more to a competitor, because that’s often the case, than anybody else.

And then he looked at selling to a leveraged buyout firm, and now would call itself a private equity firm, and he decided he did not want his place being basically a piece of meat that would be resold in not that many years. He really wanted to find a permanent home. So he said, “When I come to you, I don’t come to you because you’re so damn detractive.” He said, “You’re the only guy left.” And we bought the business. So we, that happens from time to time, and it’s accidental. It’s when something happens in someone’s life that they decide to want, they really want to assure a permanent home. And maybe because a family isn’t getting along, maybe, you know, a half a dozen, maybe somebody wants to monetize it because they want to give away a lot of money. But periodically that will come up, and we are a logical place to get the call, and we will get the calls. But there’s not much we can do to accelerate the process or do anything of the sort. We are ready to act when it happens. I mean, if I get a call and it’s a $10 billion deal on Monday and I like it, I will say yes, and then I’ll figure out how we do it.

Charlie Munger [04:30:24] Yeah, I don’t think it’s over. I, it may be, in fact it will be slower than it was in the early days, but that’s not so bad, considering how much richer we all are than we were then.

Warren Buffett [04:30:39] Andrew?

ASAndrew Ross Sorkin [04:30:40] Well, since I imagine this may be one of the last questions, Peter Brotchie, a shareholder from Wenham, Massachusetts, writes to say, “Thank you, Warren and Charlie, for improving the Q&A session last year. Along those lines, are there important questions that you were surprised that you don’t get asked about Berkshire’s financials or businesses? And if so, what is the question you would ask yourself if the roles were reversed?”

Warren Buffett [04:31:07] Well, Andrew, first of all, I will say we got a lot of comments on changing the format. I mean, it worked, and that’s why we’re continuing it. So it’s worked very well, and (Applause) and that applause is for you, not for me, and you deserve it. It really has improved the quality of the questions, in terms of having a Berkshire related, and having a system of weeding in them out without us being the ones that do the weeding out. Now, I’ve given Charlie time to think of what the answer to that question is going to be, so I’m going to turn it over to him.

Charlie Munger [04:31:53] Well, I don’t have a lot of comment about things that should be done differently at Berkshire. I think it is quite interesting that we got into BYD, because BYD is surfing along on the developing edge of new technology. And that is not, we have always bragged about avoiding that. Isn’t that a fair statement?

Warren Buffett [04:32:19] That’s fair.

Charlie Munger [04:32:20] And yet here we are. I think it’s because we’ve shown some capability for learning. And I think the BYD investment is going to work out very well, and I think it’ll work out very well in a way that gives great pleasure to all of us shareholders, because I think they’re going to help solve some significant problems of the world. And that place is, you know, I spoke with pride of at Kiewit, they tried harder, they were more self-disciplined. That’s the way I feel about BYD. And it’s a pleasure to associate with such people, and in my life, those are the people with whom I’ve achieved the most. So as far as I’m concerned, I, we found our own kind, except they’re better. And and we may do more of that. And we wouldn’t have felt confident enough to go into venture capital, typically with just a bright young man with an idea, no matter how brilliant.

Warren Buffett [04:33:35] Not me.

Charlie Munger [04:33:36] No, I wouldn’t either. But BYD had wanted spurs in life. By the time we found it, they had accomplished things that struck me as almost impossible to do, and yet they’d done them. And so I don’t think that’s the last unusual thing that Berkshire will do, when I, and the last one that’ll work. And I think the Burlington Northern acquisition, when we did it, we knew it would be better for their shareholders than it was for ours, because after all, they were getting into Berkshire. And but we also thought it was good for our shareholders, and why should we care that it was better for theirs, if it was satisfactory for us? And I think that will happen again, too. That’s our kind of a culture, you know, Middle Western and constantly improving the, improving the place. And and with MidAmerican and Burlington, we’re getting a fair amount of engineering into Berkshire, which, course, I like. And so, yeah, I hope you people are comfortable with the way things are going, because I don’t think they’re, they’ll keep going in the same direction.

Warren Buffett [04:35:05] Yeah, I think they will keep going the same direction. But to answer your question on that, Andrew, I would probably ask the question, you know, can you keep using all of the capital you generate effectively, you know, for a very long time? And the answer, I think, to that is, even we will see more things and we will do some more of this. There comes a point where the numbers get big enough that it gets extraordinarily hard to do things that add value. I mean, if you just play out the numbers, you could see where in 10 or 15 years, not only the capital has already accumulated, but the generation of capital and everything would make it very hard to do things that are essentially creating more than a dollar of value per dollar message.

A portion of the money may be able to be used that way, and likely would be used in the kind of businesses where there are… There comes a point where the numbers get too big, and actually our history is a curve that approaches that point all the time. It’s turned out to be that now, I think we can go a lot further than I would have thought 30 years ago. I mean, it just, it’s developed that way, and partly that’s because we see things that I never would have thought we would have seen 30 years ago. But there is a limit, and there will, there will come a time when we cannot intelligent, in my view, there will come a time when we cannot intelligently use 100% of the capital that we develop internally. And then we’ll do something that’s, whatever is in the most interest, the best interest of the shareholders will be done at that point.

Charlie Munger [04:36:55] I think we will get into Berkshire, on the investment side, probably starting sooner than many of you expect, people who have some promise of being, well, if not as good as Warren, maybe a decent approximation, and in some cases with abilities that Warren lacks. In other words, it won’t be all negative. And so I’m really quite optimistic. I, I can see the reason I think we will succeed at that is Warren never looks twice at anybody who isn’t a little eccentric, which of course is what you’re looking at when you look up here.

Warren Buffett [04:37:47] Well, I think we better move on to section one.

[04:37:51] Shareholder (Joseph Mazzella, Jim Thorpe, Pennsylvania): Hello, my name is Joseph Mazzella from Jim Thorpe, PA. I wanted to first thank Mr. Munger, Mr. Buffett, as well as the board of directors for this meeting, as well as the, the whole shareholder weekend. I’ve had a great time so far.

Warren Buffett [04:38:10] Terrific. Thank you. (Applause)

[04:38:12] Shareholder (Joseph Mazzella, Jim Thorpe, Pennsylvania): With that, I wanted to share: Aristotle, when asked how to define wealth, answered simply this, “It is he who spends less than he earns.” What advice could you give a young entrepreneur as myself on how to go about defining and both building wealth within their own business, as I hope to build a business that one day you’d be interested in acquiring?

Warren Buffett [04:38:43] I predict you’re going to build one. You know, it may not quite get to the size that we’re, a moving target as well. But, but if you start off with that principle you just enunciated, there are probably some other similar principles that you’ll have that we would also agree with. There’s nothing like following your passion. I mean, I love what I do, obviously, and I’ve loved it the whole time I’ve done it. Charlie, it’s the same way. We have managers, you know, they come, some of them went to business school, some of them didn’t, you know, they’re all types. But the common factor in, in them, they’re successful, the common factor is they love what they do, you know. And you’ve got to find that in life.

And some people are very lucky in finding it very early. I was, you know, I was, dumb luck that my father happened to be in the securities business, so when I would go to his office, there were a lot of books to read, and I got entranced with that. But you know, if he’d been in some other occupation, I would, I think I would have read those books eventually, but it would have been a lot later. So if you, if you find something that turns you on, my guess is you’re going to do very well in it. And the beauty of it is, in a sense, there’s not that much competition. I mean, there are not a lot of people out there that are going to be running faster than you in the race that you elect to get into. And if you haven’t found it yet, you may well have found it, but if you haven’t found it yet, you know, you’ve got to keep looking.

And it, when I, we’ve got 70 plus managers, you know. Some of them, some of them didn’t, we had one guy that didn’t go to high school even, didn’t they, Charlie?

Charlie Munger [04:40:30] And Rosner.

Warren Buffett [04:40:31] Oh yeah, he quit in fourth grade, I think. Yeah. But, well, Mrs. B never went to school a day in her life, you know. And when you go out the Furniture Mart, I hope you go out this evening, we expect to set a record today in sales, the, what you are looking at on those 78 acres, you know, is the largest home furnishing store, about $400 million of sales, largest store in the United States, and it comes from $500 of capital paid in by a woman that never went to a school a day in her life and couldn’t read or write, you know. I mean, she loved what she was doing.

And you know, I tell the story, this is a true story. When she was in, well into her 90s, she invited me over to her house for dinner. That was very unusual. And a very nice house, six or seven blocks away from the store. And I went into the house, and the sofa, the chairs, the lamp, the dining room table, they all had little green price tags hanging down at them. It made her feel at home. And I said to her, “Mrs. B, you are my kind of woman.” Yeah. Forget Sophia Loren already. I mean, this is my kind of woman. She loved it, you know, and she loved it all her life, and just think of what that produced. I mean, it just, it’s incredible. I mean, you know, one time, my dad used to quote Emerson, that the power that lies within you is new in nature, you know. And basically, the power that was within Mrs. B was new in nature, and just over a lifetime, it produced amazing things. So find, find your passion, and then don’t let anything stop you. Okay, Carol?

CLCarol Loomis [04:42:27] Well, this is a deeply philosophical question. Many things that you, the man did not want his name announced, “Many things that you and Charlie do and preach are opposite to those of what people practice and expect. For example, you do not change the management of the acquired company. You applaud long-standing employees, while others always look for fresh blood and try to fire people as they grow old. You probably do not encourage retirement, while many companies do. You do not give large compensation to directors or compensate them using stock options. You do not seem to hire many MBAs. You don’t invest in high tech, but your company has grown very fast. You did not provide earnings guidelines. You do not live near New York. You do not like sushi.”

That’s the key. “I wonder what is the fundamental reason for all of these things. In other words, there appears to be a central philosophy here that I am missing. I can understand these as isolated principles, but where is the beef? Scientists and philosophers look for a unifying theory when possible. What is yours? Is it Buddhism or paganism or something else? Yes, I am looking for your fundamental or unified theory of management and life, or fundamental guiding principles, in 10 words or less.”

Charlie Munger [04:44:02] Let me try that one.

Warren Buffett [04:44:04] Good.

Charlie Munger [04:44:05] It’s pragmatism. Partly we do things in our different way because it suits us, and partly we do it, it suits our temperament, our natures, and partly we do it because we found through experience that it works better, at least with us, sitting where we sit. It’s just that simple. And we’ve had enough good sense, when something is working very well, to keep doing it. So I’d say we, we’re demonstrating what might be called the fun, the fundamental algorithm of life: repeat what works. Is that terse enough for you?

Warren Buffett [04:44:49] We’ll go on to number three. I like it. Or number two, I’m sorry, number two.

[04:44:56] Shareholder (Carolyn Boyle, Barrington, Illinois): Good afternoon. I’m Carolyn Boyle from Barrington, Illinois. Thanks for the meeting, and thanks everybody from behind the scenes who put this together. It’s quite well orchestrated.

Warren Buffett [04:45:09] If I may, if I may interrupt you for just one second, that’s very well deserved, and I would like to point out that a Berkshire, everybody in our home office, we have 21, 21 of us, they all participate in working at this meeting. I mean, our CFO works on it. You name anybody in the office, because they enjoy it. We don’t think we should have a department, you know, for this or that or the other thing. And I think that’s probably fairly unusual with companies with market caps of close to $200 billion. But you’ve seen Marc Hamburg walking around here and doing things, that it, it’s a group effort. And they have, I hope they have fun doing it, because they sure don’t get a bonus for. And but I think it exemplifies the organization. Thank you. I’m sorry to interrupt you. Go ahead.

[04:46:05] Shareholder (Carolyn Boyle, Barrington, Illinois): It’s okay. Let me share a bit. I had some trouble getting the annual statement information, so I finally got on the internet, sending the postcard request a week ago Friday, yesterday, and I got my tickets before the meeting, so it was very well orchestrated. Thank you. Now that you already own some of real, real business, I’d like to have your perspective on whether our country needs a high-speed passenger rail service, and if you think it does, should that be a private or a public endeavor?

Warren Buffett [04:46:45] Yeah, I think, I think by its nature it would be non-economic when it competes with auto and competes with, with air. We don’t have the point-to-point density and demand, I, that would produce a return on capital. That’s just, that is my guess. I made no big study of it, but all of the times I’ve seen projections and economic, of the economics of it, it just doesn’t work that well. You know, so it will be, if it gets done, unless it’s heavily subsidized in some way, which means it’s public anyway. I don’t, I don’t think it’ll happen under, under private. It won’t meet the test of private economics. Charlie, you know, they’ve got a big proposal in California on this. What do you know about the economics of that?

Charlie Munger [04:47:55] Well, I know very little, but I’m at least as dubious as you are. The cost of putting in a high-speed rail system in a place that’s already densely populated is awesomely large. And of course you’re, you’re competing with a system that people prefer. They’re talking about, and I’m very skeptical about sticking high rate, high-speed rails. I think it’s great in Japan and China. They may, they have a different calculus.

Warren Buffett [04:48:29] Yeah.

Charlie Munger [04:48:30] Japan. Putting high-speed rail into Los Angeles just looks to me like a bottomless pit of cost and trouble.

Warren Buffett [04:48:38] And just think of how difficult that would be. If it’s going to be high speed, it can’t stop very often, you know, by definition, and it can’t go off into spurs and all of these kind of things. So you, it really gets to point-to-point operation, and the cost gets staggering with… There’s a talk in Omaha about a trolley system, and I think, and they’re talking about, you know, a couple hundred million dollars or something like that from the federal government, and the projections of actual revenue, as I remember, are something like 400,000, and that’s before operating costs. I mean, so the math, you put $200 million into something to move people a few miles in Omaha, and most people are going to want to ride their cars. And to have it be efficient, it has to be point to point pretty much for them. I mean, if you start living six blocks one way or eight blocks another way, you say, nuts, I’ll take the car.

It, the math really gets to be staggering on these things. And now, you know, everybody figures if you can get the money from the federal government, you know, it doesn’t cost anybody anything, but costs be a lot of money. And it’s been done in Buffalo, and people like it, but I’ve also, I’ve requested the figures on today, and it blows your mind, in terms, I mean, you could, you could give everybody a cab ride or something, and that would be cheaper for society as a whole. So I have a feeling that it works marvelously maybe between Tokyo and Yokohama or something, and it really does, and it even works well enough, so I think it justifies private investment. But it’s tough in a, in the country of, you know, 3 million plus square miles, and within the continental lower 48, and it’s very tough to make the math work. Now, if people get, it becomes a huge project or something of the government, so it isn’t anybody’s math. You know, maybe it’ll happen. I don’t think it’ll ever happen with, with money that wants a return. Becky?

Becky Quick [04:51:05] This is a question on the insurance portfolio from Jerry Haller. “What would be the impact on insurance companies in the U.S. economy in general if an earthquake of the same magnitude that struck Chile were to be focused on Los Angeles or San Francisco?”

Warren Buffett [04:51:22] Well, I don’t know the answer to that, and the Richter scale is not a perfect, far from a perfect index of the damage caused, even if you tell me where the epicenter will be. But, but and then you get into the, you know, the big damage in the famous San Francisco quake was the fire following. And they call that, when they distinguish between the, what coverages are involved, they call that the shake and bake. I mean, how much is shake and how much is bake afterwards. But the, I think it gets hard to get up, I mean, really extreme quick, I think it’s hard to get up much more than $100 billion. But, you know, very big quake, it’s gonna, the frequency is way less. But if you get up in the Pacific Northwest, you know, there is a possibility of a very high Richter scale quake there.

And of course the big ones that we know about, I mean, our history doesn’t go back that far, but you know, New Madrid, Missouri, had three quakes in a short, relatively short period of time that we’re all well over 8, and that will happen again someday. Maybe 500 years, you know, maybe, maybe a thousand years, and maybe tomorrow. That’s what the insurance business is all about. I tend to think, though, and when I think about quake exposure, sort of worst case in California, I think $100 billion is getting up there. Northbridge, Northridge caused far more damage than the one that was up near San Francisco a few years earlier. But we’ll have them, and Berkshire is totally prepared to handle anything that comes along, even if it’s considerably worse than, than what I’ve left.

The worst insured loss, I don’t know whether Katrina came in finally at $70 billion or something like that. I think in terms sort of worst case, and my guess is if that came along and we had a normal year and everything else, Berkshire would still have positive earnings of some substantial amount. So we are prepared. Charlie?

Charlie Munger [04:53:57] Yeah. And you know, the big San Francisco quake of whatever, was ’06, caused a terrible fire, that was fine. But the recent California quakes, the big ones, have not caused much fire, and a lot of earthquake damage is totally uninsured. So the, you might have a hell of a lot of damage without massive… Warren would know more about that than I have. So, so far, insurance is not universal like fire.

Warren Buffett [04:54:34] Oh no, no, not at all. Not at all. So it, an earthquake, a really terrible fire or terrible wind conditions seems to me catch people worse than the earthquakes in… In so far in Chile, as I understand that, I could be wrong on this, and may not be the way the final numbers come in, but what does the numbers have been coming in, something like 40% of it has been the tsunami and 60% has been the quake, in terms of damage, but that may well not hold to be in terms of final figures. There will be huge catastrophes from time to time. We are, we’re in a different class in terms of even being able to handle them, and we’ve got so much earning power outside of the insurance business.

That if you take a $250 billion quake or, or hurricane or whatever, and we have probably now not much more than 3% of that, but call it 4%, that’d be $10 billion. And you know, our pre-tax earnings in any given year, I would expect, would be substantially greater than that. So we would, we would have other, other, we’d have net earnings in a year that every other insurance company, you know, would be gasping. So we’re in pretty good shape on that. Three. Just, this is probably the last question, and then we’ll go to the business meeting.

[04:56:13] Shareholder (Frank Teed, Arkadelphia, Arkansas): Okay. My name’s Frank Teed, and I’m from Arkadelphia, Arkansas. This is also an insurance type question. But I did want to thank Mr. Buffett, Mr. Munger, the board, in Arkansas we call them the associates, the managers, for the, your integrity and running Berkshire Hathaway and dealing fairly with the shareholders. So thank you very much.

Warren Buffett [04:56:38] Thank you.

[04:56:39] Shareholder (Frank Teed, Arkadelphia, Arkansas): We, we saw in the credit crisis the gross overuse of credit, which led to the big financial meltdown, with the government ultimately stepping in. Now we see a huge increase in debt in our cities, our states, our countries. For Berkshire Hathaway, what could be our exposure on a global financial meltdown? Could there be correlated risk that could get us in trouble? You said we have $40 billion in municipal bond insurance. There’s $8 billion to the states, which I’m not sure exactly if that was municipal bond. Could a large event cause a large number of losses that was coupled with a decrease in our investments to make an AIG type situation? Thank you.

Warren Buffett [04:57:34] Well, if you postulate something where there was a total meltdown, and we essentially made the bet in 2008, there would not be, there, it would be unnecessary. And but we came close in, in 2008, and I decided that a, the government could solve the panic that existed, and finally that they would. There wasn’t any question in my, my mind they could. The question is, would they get so muddled up, would decision making get paralyzed, wouldn’t rivalries break out, would, you know, Congress grandstand, all of those sort of things. And I thought there’d be some of that, but I thought in the end we’d, we would do the right thing, which was go all in, which we did. And that would happen again.

So I, if you talk about some massive nuclear, chemical or biological attack that really does in a very significant proportion of the population or something, you know, who knows what would happen. But I would say this, that I think Berkshire can withstand anything that any corp, it won’t be our insurance business that causes a problem. If that, you know, if something extraordinary happens, and I don’t anticipate that, but at all, but there could be a situation where the world becomes paralyzed. But I think that, having gone through 2008, I think that our government probably better understands the necessity of taking massive action at a time like that, doing whatever is necessary. When they guaranteed money market funds, when they guarantee commercial paper, I mean, when they were, things like that, you know, they were sort of unprecedented, and they did them very quickly. They do it again, in my view.

That there is no reason, the plants of the country don’t disappear, the land doesn’t become less fertile, you know, people don’t become less innovative. Things will work unless somehow the gears get all entirely messed up, and I don’t, I don’t see that happening. And I, Berkshire from any insurance catastrophe, and you’re right that things correlate on the downside. When things, when things are bad in one area, they really do spread to another. But we are built, I think, to withstand anything that, other than a total sort of wipeout of, of, of, of the world. That isn’t going to happen. Charlie?

Charlie Munger [05:00:11] I’m not worried about it. Yeah, now, huge amounts of debt are not going to do us in. That, that’s one thing I can guarantee you. I can’t tell you about comets hitting us or something of that sort, but I don’t care how silly governments get in terms of finance, or corporations get, or anything, or anything of that sort, that will not harm, harm Berkshire.

Warren Buffett [05:00:41] I want to thank you all for coming, and Charlie and I really appreciate it. And (Applause) thank you. (Applause) I appreciate it. We appreciate that. I’m sure the panel does. Now we’ll, we’ll break it for about five minutes. Some of you can go shop, and some of you will want to stay around for the business meeting, and we’ll start the business meeting in five minutes, and we’ll see how long it takes.

Okay. I’ve already introduced the Berkshire Hathaway directors. Also with us today are partners in the firm of Deloitte & Touche, our auditors. They are available to respond to appropriate questions you might have concerning their firm’s audit of the accounts of Berkshire. Mr. Forrest Krutter, secretary of st Berkshire, he will make a written record of proceedings. Ms. Becki Amick has been appointed inspector of elections at this meeting, and she will certified at the count of votes cast in the election of directors. The name proxy holders for this meeting are Walter Scott and Marc Hamburg. Does the secretary have a report of the number of Berkshire shares outstanding, entitled to vote, and represented at the meeting?

FKForrest Krutter [05:02:14] 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 3, 2010, being the record date for this meeting, there were 1,029,738 shares of Class A Berkshire Hathaway common stock outstanding, with each year entitled to one vote on motions considered at the meeting, and 926,013,086 shares of Class B Berkshire Hathaway common stock outstanding, with each share entitled to one ten-thousandth of one vote on motions considered at the meeting. Of that number, 705,611 Class A shares and 566,627,821 Class B shares are represented at this meeting by proxies returned through Thursday evening, April 29th.

Warren Buffett [05:03:05] Thank you. That number represents a quorum, and we will therefore directly proceed with the meeting. First order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott, who will place a motion before the meeting.

WSWalter Scott Jr. [05:03:20] I move that the meeting of the reading of the minutes of the last annual meeting, the shareholders, and the special meeting shareholders be dispensed with and the minutes be approved.

Warren Buffett [05:03:30] Do I hear a second?

[05:03:31] Unidentified speaker: I second the motion.

Warren Buffett [05:03:33] The motion has been moved and seconded. Are there any comments or questions? We will vote on this motion by voice vote. All of those in favor, say aye. Opposed? The motion’s carried.

Second item in business is to elect directors. The shareholder is president who wishes to withdraw a proxy previously sent in and vote in person on the election of directors, he or she may do so. Also, if any shareholder that is president has not turned in a proxy and desires a ballot in order to vote in person, you may do so. If you wish to do this, please identify yourself to 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 the election of directors.

WSWalter Scott Jr. [05:04:33] I move the Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Donald Keough, Thomas Murphy, Ron Olson, and Walter Scott be elected as directors.

Warren Buffett [05:04:45] Is there a second?

[05:04:46] Unidentified speaker: Second.

Warren Buffett [05:04:47] It’s been moved and seconded that Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Donald Keough, Thomas Murphy, Ronald Olson, and Walter Scott be elected as directors. Are there any other nomination? Is there any discussion? Nominations are ready to be voted 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. Ms. Amick, when you’re ready, you may give your report.

BABecki Amick [05:05:21] Report is ready. The ballot of the proxy holders, in response to proxies that were received through last Thursday evening, cast not less than 756,041 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 [05:06:00] Thank you, Ms. Amick. Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Donald Keough, Thomas Murphy, Ronald Olson, and Walter Scott have been elected as directors. 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. [05:06:22] I move this meeting be adjourned.

[05:06:26] Unidentified speaker: Second.

Warren Buffett [05:06:26] Devotion, promotion adjourn has been made and seconded. We will vote by voice. Is there any discussion? If not, all in favor say aye. I’ll oppose, say no. The meetings adjourn. Thank you all for coming. (Applause)