Berkshire Hathaway Annual Meeting 2011 Transcript

Warren Buffett [00:00:00] Good morning. I’m Warren, he’s Charlie. I can see, he can hear, that’s why we work together. Have trouble remembering each other’s names from time to time. We’re going to, I’m going to introduce the directors, we’re going to give you some information on the first quarter earnings, we’re going to talk briefly about the David Sokol Lubrizol situation, and then we’re going to open it up for your questions. Anything is that relates to the Lubrizol matter is going to be transcribed and will be put up on the website, the Berkshire Hathaway website, just as promptly as we can. Maybe, maybe this evening, this afternoon, maybe tomorrow morning, but very promptly, because we want to be sure that all shareholders here get to read every word of what has been said here about the matter.

First thing I’d like to do is introduce the directors, and if they stand and remain standing, you can withhold your applause as they stand, but you can go crazy at the end. Or you can continue to withhold your applause, that will be your call. Charlie and I are up here and we don’t like to stand up too often, so we’ll skip our standing. The Howard Buffett, Stephen Burke, Susan Decker, Bill Gates, Sandy Gottesman, Charlotte Guyman, Don Keough, Tom Murphy, Ron Olson, and Walter Scott. (Applause)

Now we have, we have a few slides that deal with the first quarter earnings. I think Marc Hamburg would like me to emphasize that these are preliminary. This is about as early as we ever have a meeting in relation to the quarter. Normally it’s always the first Saturday in May, so they had to work a little harder than usual to get these numbers together. And I would tell you as background that, that basically pretty much all of our businesses, with the exception of those that are related to residential housing, are getting better, and you can almost see it with most of them quarter by quarter. We have a wide diversity of businesses. We have more than 70 companies we list, but then Marmon itself has over 100 businesses, so we are a cross-section of not only the American economy, but to some extent we see a fair amount about what’s going on internationally too.

And in the first quarter, as has been the case really since the fall of 2009, both our non-residential construction businesses, except for those non-residential construction businesses, our other businesses have generally gotten better quarter by quarter, and there was no exception to that in the first quarter. What was very different in the first quarter was that we had a probably the second worst quarter for the insurance industry in terms of catastrophes around the globe. Normally the third quarter of the year is the worst period because that’s when hurricanes tend to hit the U.S., with most of them, well, about 50% of them occurring in September and then sort of forming a normal curve on either side of September. So the third quarter usually is the record quarter, and the third quarter was the record quarter back at the time of Katrina. But in the first quarter of this year we had some major catastrophes in the Pacific Asian areas, and that hit the reinsurance industry particularly hard. I, no one knows at this point, it’s a wild guess, but probably those catastrophes cost the reinsurance industry on the order of $50 billion, and we usually participate to the extent of 3% to 5%.

First of all, I’ll give you our overall earnings the way we normally present them, and if we’ll put the first slide up, you can see that our insurance underwriting suffered an after-tax loss of $821 million. Now when I wrote the annual report, I postulated normal earning power of Berkshire had about $17 billion pre-tax and about $12 billion after tax, assuming break even on insurance underwriting. Our insurance underwriting has done better than breakeven, in fact it’s made quite a bit of money for eight consecutive years. But I would say with the start of these catastrophes in the first quarter, or the catastrophe experience we had in the first quarter, I would say that it’s unlikely that we would have an underwriting profit for 2011. It, if it was remarkably catastrophe free from this point forward, including hurricanes in the United States, it’s conceivable we would break even or make a tiny profit, but that’s, that’s a improbable assumption. So I think for the first time in nine years we will likely have an insurance underwriting loss this year.

I think our record may very well be quite a bit better than certainly most other reinsurers, and it does not change my expectation that over time our insurance underwriting should at least break even. And if you have followed the what I’ve written in the annual reports, if insurance breaks even, we get the free use of float, and the use of float, and that’s been enormously valuable in the past, and I would expect it to be in the, in the future.

And if you look at the other lines, insurance investment incomes down a little. That will go down more because our Goldman Sachs preferred was called in April, our General Electric preferred is almost certain to be called in October. So we have lost, and we lost a, we had called a note from Swiss Re that was paying us 12% and came to something over $360 million a year when the Swiss franc went above par. So we have lost or are losing at least three very high yield investments, which we cannot replace with sash, and that does not count the $5.5 billion that we were going to receive in April from our Goldman Sachs preferred. So that money is earning virtually nothing now, and I would not expect that to be part of the long-term picture either. So there would, you know, just a, a few percent on that would be many, many hundreds of millions of dollars. So I think over time our insurance investment income, even though it will dip throughout this year, I would expect that if we have a similar level of investments to actually grow from the level we show here.

We had the full ownership of BNSF in the quarter this year. We only had it, I think, from February 12th last year. So that in significant way accounts for the gain in that next line of railroad, utilities and energy. But, but the, the BNSF also had a significant gain in earnings, and the railroad business looks to me like it will have a, a very good year this year. Not just, not just our railroad, but, but all railroads. And the competitive advantage of railroads is becoming more and more evident almost by the day, particularly as fuel prices increase. And in the remaining lines, we also had gains in most of our businesses. So overall we got hit very hard in the insurance business.

And if we’ll move to slide two, we list the three major catastrophes that occurred, which in aggregate we estimate we have a total loss of $1.673 billion pre-tax. And that figure, as with all estimates, early estimates about major catastrophes, is subject to a lot of change. Nobody knows what the insured losses will be from the Japanese earthquake, but this is our best estimate. Now you’ll notice that over, over 40% of the underwriting loss comes from a contract we have with Swiss Re where we get 20% of their business. That contract is in the fourth of its five years. They have indicated that they will not be interested in renewing it. I just wish they told us that a few months ago. The, but we’ve, we’ve enjoyed the relationship with Swiss Re, it’s just that we enjoy it some quarters more than others. And our, our estimate, we’ve added a little something into their estimate, because on balance we feel that most catastrophe losses develop upward. It’s sort of the nature of the business.

But that ex… incidentally, the, the tornadoes in April, just at GEICO, we expect, and all we’re talking about is automobiles here, cars, because we don’t insure the homeowners. We, we act as an agent in placing insurance for people, but, but we do not take the insurance risk. We estimate that 25,000 cars will, we’ll get, we’ll get automobile claims. That’s a, that’s a lot of automobiles when you think about it. You know, our market share is about 9%, although it varies by state. But, but it’s been an extraordinary tornado season, as you know. That does not hit, I don’t, I do not believe that that hits the reinsurance business particularly hard, because there’s, there are multiple, multiple events, but no one event is anything like, say, the New Zealand earthquake. The New Zealand earthquake estimated at $12 billion of insured damage. Charlie, how many, how many people are in New Zealand?

Charlie Munger [00:12:22] Oh, well, I didn’t…

Warren Buffett [00:12:26] We didn’t, we don’t practice these things, as well become evident here. I’d guess, I’d guess a little more than that. Four, five, five, okay, five million people. So that’s 1/60th of the population, we’ll say, of the United States, and if you take $12 billion and multiply it by 60, you come up with $720 billion, which is 10 times Katrina, in terms of the impact on a, on a place like that. So those, there’s been some really extraordinary earthquakes. And yeah, as I say, the worst part of the season is generally speaking for reinsurers is yet to come. So this, this may be a year that the reinsurers will remember, although they might prefer to forget it.

There’s some good news on the insurance front. On the next slide, I show the growth in policies at GEICO month by month this year versus last year. Now if you’ll remember, in the annual report I gave an explanation, in talking about goodwill value, about how the goodwill of GEICO is carried on our books at about a billion dollars, and no matter how successful the business becomes, that goodwill value has never increased on the books. But it does grow, and as I put in the annual report, and I estimate its value currently using the same sort of yardstick we used when we purchased the second half of the company back in 1995, I estimate that value is growing, maybe to $14 billion. I mean, every policyholder at GEICO on average has a value to us, the way I calculated, of something on the order of $1,500. And when we add 318,000, and as of yesterday it was up to 381,000, when we had that, we added something approaching $500 million to the goodwill value.

That does not count the earnings from underwriting, which were substantial for GEICO. That does not count the investment income from the float. It does not count the investment income from the net worth we have attributed to it. That is added goodwill value, the same sort of goodwill, would goodwill value that a Coca-Cola has or, or a Mars has, or any company like that. And people think of it differently when they think of most consumer products, but a policyholder to Berkshire at GEICO has very, very significant value. There’s a very significant percentage have been there for 10 years or more, and, and it’s something that we do not realize on our balance sheet or income account, but it’s an asset that’s every bit as real as the numbers that we do put on the balance sheet.

So there’s good news at GEICO. We are gaining market share every day. As a matter of fact, if you think about it, we have some people in the adjacent room that will be glad to sell you GEICO policies, and if only 66 of you sign up, that’s a goodwill value of about $100,000, so it, it will take care of some of the expenses of this meeting. Not that I care whether you do it or not.

Now there’s one more item I want to go through on the earnings picture, just because it, it, and it’s been selling at, say, 80% of X for quite a while. Nobody knows exactly what quite a while means, and I’m sure they phrase it differently in the accounting textbooks, but anyway, if it sells there for quite a while, you’re supposed to mark it down to that new valuation and have that markdown go through your income account, through your profit and loss account. Now we mark it down in any event for the balance sheet, and the balance sheet is what gives you the number for book value and is our reference point. But only when it meets this other than temporary thing does the markdown actually get run through the, through the profit and loss account.

Now on March 31st, as a show, and I believe on the next slide, we owned some Wells Fargo stock which had a cost of about $8 billion, and the market value was $11.3 billion. But some of the Wells Fargo stock we bought had, had been bought at higher prices than the March 31st figure, whereas, as you can see, a lot of the stock which had a gain in at a $3.7 billion had been bought at lower prices. Well, under the rules, we were required to mark down the stock we bought at a higher price by $337 million, whereas we ignored in the, in the income account the $3.7 billion of gain. Now interestingly enough, there’s two ways you can account for securities, as I understand it, both fully meeting GAAP accounting requirements, and if we had, if we had used the average cost method, we would not have had to mark down. But we use what they call the specific identification method. Now the specific identification method is actually useful to us from a tax standpoint, because it means whenever we sell a security, we can pick up the highest priced security and attribute the sale to that. So it, it actually saves us money, or the time use of money, to get into specific identification. But we could just as easily use the average cost method, and then we would not have a write down like we have. And that’s why I, one of the reasons I emphasize that the fact that you should ignore gains or losses and securities or derivatives on a quarterly basis or even an annual basis. The important thing is, is what the operating earnings of our businesses are doing and what the gain and book value generally has been. And then on top of that, you have to make your own estimate what, for what intrinsic value is, which would include things like will the value that has been developed in GEICO.

I apologize for taking you through the accounting lessons, but the headlines often just say what the final net income is, and as that, as if that’s the all-important figure, and, and sometimes it’s the all-deceptive figure. I mean, it, it really bears, if you include gains and losses, it, it bears really no connection to the reality of whether a quarter has been satisfactory from our standpoint. But it does get a lot of attention in the press, and that’s why we spend perhaps an inordinate amount of time trying to explain what really takes place in our financials.

Now I think we’re going to get to the questions and answers here in just a second. We’ll alternate between, between the press group on my right and 13 stations that, microphones that have been placed, I think a dozen of them in this room and maybe one in one of the overflow rooms. I’d like to just comment for a few minutes, and this will be transcribed and up on the, up on the internet at our webpage. I’d like to comment for just a few minutes, and I’d like to ask Charlie then to give his thoughts on the matter of David Sokol and the purchase of Lubrizol stock.

You saw in the movie a clip from the Salomon situation, and that occurred almost 20 years ago, be 20 years ago this August. And at the time, there was a Sunday, Charlie was there, and I was elected the chairman that, what, about three o’clock in the afternoon or so, I think that, on, on a Sunday at Salomon. And I went down to address a press group, and almost the first, somewhere in the early questions, somebody sort of asked me, you know, what happened. And, well, A, I’d just gotten to Salomon fairly recently, so I didn’t know too much about it. But the, the phrase that came out of my mind then, out of my mouth then, sometimes my mind and my mouth are coordinated, the, the phrase that came out of my mouth then was that what had happened was inexplicable and inexcusable. Now it’s 20 years later, and looking back on Salomon, I still find what happened inexplicable and inexcusable. I, I, you know, I will never understand exactly why some of the events that transpired did transpire.

And to some extent, in looking at what happened a few months ago with Dave Sokol’s failure to notify me at all that he’d had any kind of contact with Citigroup, in fact he directed my attention to the fact that they represented Lubrizol and never said a word about any contact with them, and then the purchases of the stock immediately prior to recommending Lubrizol to Berkshire, I think for reasons that are laid out in the audit committee report, which I urge you to read and which is on our website, I don’t think there’s any question about the inexcusable part. That Dave violated, in that, the code of ethics, he violated our insider trading rules, and he violated the, the principles I laid out, I lay out every two years in a direct personal letter to all of our managers, and which I’ve been doing for a long time. So I, you can read the audit committee report about that.

The inexplicable part is somewhat, well, it’s inexplicable, but I’d like to talk about it a little bit, because I will tell you what goes through my mind in respect to it. Certainly, well, one interesting point is that David, to my knowledge at least, made no attempt to disguise the fact that he was buying the stock. I mean, you know, you read about insider trading cases, and people set up trusts in Luxembourg, or they use neighbors who know neighbors, or they use third cousins, or they, I mean, they have various ways of trying to buy the stock so that when it’s later that FINRA, the supervising organization, looks at the trading activity in the months prior to a deal, they do not see names that jump out at them as being associated with the deal. To my knowledge, Dave did nothing like that. So he was leaving a total record as to his purchases.

Now I think at least usually, and maybe always, we are queried after any deal. We are asked who knew about it when, and we supply a list of, whether it’s people of the law firm or people that are in a secretarial position at our place or the law firm, we give them a list of everybody that might have known or did know about the deal prior to the public announcement. And I, I don’t know whether they do that 100% of the time, but certainly it’s my experience that, that you, you get that, and then a while later you get a list of names of people that FINRA again has picked up as trading it, and they ask you whether any of those names ring a bell with you. So they’re trying to put together whether anybody did any inside trading ahead of time. So the odds that, if you’re trading in your own name and you’re on that list of people who know of a deal ahead of time, the odds that it’s not going to get picked up seem to me that are very much against you. But to my knowledge, they did not disguise the trading, which, you know, that’s somewhat inexplicable, that, that if he really felt he was engaging in insider trading, that, and, and knew the penalties that could be attached to it, that, that he essentially did it right out in the opens.

A second fact, which is less, perhaps less puzzling, but Dave obviously has a net worth and very high numbers. He made, I think, close to $24 million, he earned it from Berkshire last year, and we got our money’s worth, but he did get $24 million too. So I would say that there are plenty of activities in this world that are unsavory that are committed by people with lots of money, so I don’t regard that as, as, you know, as totally puzzling.

But I will give you one instance that does make it puzzling, makes very puzzling to me. We bought MidAmerican at the end, Berkshire Hathaway bought MidAmerican at the end of 1999. Berkshire Hathaway bought about 80%. Walter Scott, who I just introduced, in his family, was the second largest holder, I think something over 10%. And then two operating people, Dave Sokol, the senior one, owned or had options on a big piece, and Greg Abel, a terrific partner of Dave’s, also out of peace. And Walter Scott and I, I’ve told this story privately a few times, but not, I don’t think I’ve done it publicly. Walter Scott came to me a year or two after we’d bought it, and Walter said, “I think we ought to have some special compensation arrangement for Dave and Greg if they perform in a really outstanding manner.” And he said, I think maybe he suggested something involving equity, and he saw me turn white. So he said, “Why don’t you design one and let me know?”

So I just scribbled something out on a yellow pad. It didn’t take me five minutes. And we called it, sort of in honor of Charlie, although he didn’t know about it, we called it the Lollapalooza. And it provided for a very large cash payout, which I’ll get to in a second, based on the five-year compounded gain in earnings, and we were starting from a high base. In other words, this was not from any depressed level. And we set a figure that no other utility company United States was going to come close to. But if that figure were achieved, we were going to give $50 million to Dave and $25 million to Greg Abel.

And I had Dave come to the office, and I said, “Here’s what Walter and I are thinking, and what do you think of this plan?” And it had these figures on per share that, that, like I say, move forward at 16% compounded per year. And then I said, “Here’s the payout.” And he looked at it for just a very short period of time, and he said, he said, “Warren, this is more than generous.” But he said, “There’s just one change you should make.” And I said, “What’s that?” And he said, “You should split it equally between me and Greg. Instead of being $50 million for me and $25 million for Greg, it should be $37.5 million apiece.” So I witnessed, and Walter witnessed, and he talked to him about it. We witnessed Dave voluntarily, without any, Greg had nothing to do with it, he wasn’t there, we saw Dave transfer over $12.5 million, getting no fanfare, no credit whatsoever, to his, in effect, junior partner. And I thought that was rather extraordinary.

And what really makes it extraordinary is that $3 million, you know, 10 or so years later, would have led to the kind of troubles that it’s, it’s led to. I find, I, I, that, that is really the fact that I find inexplicable. And I think I’ll probably, you know, it’s 20 years after Salomon. If, 20 years from now, Charlie will be 107, and we won’t mention what I’ll be. But I, I think 20 years from now I will not understand what causes a man to voluntarily turn away $12.5 million to an associate without getting any credit for it in the world, and, and then 10 or so years later by a significant amount of stock a week before he talked to me.

And when he talked to me about Lubrizol was either the 14th or 15th. He says it was 14th. I have no reason to disagree with that. The only reason I couldn’t say specifically was I had eight university groups, 760 students, in on that Friday. That’s the only thing shows, and I spent most of the day with them. And the 10-K and the 10-Q that got printed out on Saturday had that date on them, that the 15th, when I looked at Lubrizol for the first time. Might be interested in knowing, I’ve been looking up 10-Ks and 10-Qs for 20 or 30 years, but I don’t know how to print them out. So fortunately, Tracy Britt was in the office, and I said, “Tracy, would you print this damn thing out? I can’t, I don’t know how to do it yet.” But that’s, that, that, that, that is why I don’t know whether it was the 14th or the 15th, or the, the 10-Q says the 15th.

But at that time, when Dave called me on it, he said nothing about contact with Citigroup or anything of the sort. And he, and I said, “I don’t know anything really about the company.” He said, “Well, take a look at it, you know, it might fit Berkshire.” And I said, “Well, how come?” And he said, well, and he said, “I’ve owned it, and it’s, it’s a good company, it’s a Berkshire type company.” And, you know, I obviously made a big mistake by not saying, “Well, when did you buy it?” But I think if somebody says, “I’ve owned the stock,” you know, it sounds to me like they didn’t buy it the previous week. So there we are with a situation which is sad for Berkshire, sad for Dave, still inexplicable in my mind. And we will undoubtedly get more questions on, we’ll be glad to answer them. Charlie, do you have any thoughts on this?

Charlie Munger [00:33:34] Well, I think it’s generally a spec… mistake to assume that rationality is going to be perfect, even in variable people. We prove that pretty well regularly.

Warren Buffett [00:33:55] You have any explanation for the irrational?

Charlie Munger [00:34:02] Yeah, I think hubris contributes to it.

Warren Buffett [00:34:08] Well, we’ve gotten quite a bit out of them, folks.

Okay, let’s go to work. We’ll, we’ll start with Carol Loomis of Fortune magazine. I might as well, I should introduce our, our group here. Oh, we didn’t go alphabetical this time. We got, we’ve got Carol, then we’ve got Andrew Ross Sorkin of the New York Times, and we have Becky Quick of CNBC. Now (Applause) in terms of my checkoff system, I’m still going to go to Becky, that’s alphabetical. And so, Andrew, it didn’t do you any good to try and move over there into the center spot. Carol, you’re, you’re on.

CLCarol Loomis [00:34:57] Good morning from all of us. And I will make the small preamble that I’ve made before. We’ve been getting questions for a couple of months, each of us, on our email. Sometimes a question will be sent to all three of us, and sometimes they’ll just send to one of us, therefore becomes very hard to count how many we’ve had. But certainly it’s in the many hundreds, and probably in the, up into a thousand, two thousand. And obviously we aren’t going to be able to ask every question, every good question. We have a lot of good questions we won’t be able to get to. But it’s just that you had to pick and choose. And the other thing I should say is that whatever we do ask, Warren and Charlie have no idea of the question. None. No hint.

Warren Buffett [00:35:52] Sometimes we have no idea the answer either. But go ahead.

CLCarol Loomis [00:35:57] So I will begin. I don’t think that anybody will be surprised that it is a Sokol question. And actually the, this particular long-term shareholder believed, as Warren has believed. He says, “I do not see why you should have been expected to ask Sokol about his Lubrizol stock holdings when he said he owned the stock. That wouldn’t have been a natural question. But when you found out the details of his stock purchases a short time later, I do not understand your reaction. Surely you realized immediately that these facts were going to become known and that they were going to damage Berkshire’s reputation, something you had said repeatedly you would be ruthless in protecting. Being ruthless probably would have meant you’re firing Sokol on the spot. But you didn’t do that. And then you put out a press release that many Berkshire shareholders that I have talked to found totally inadequate. You have always been very direct in stating things. You were not direct in that press release, except in praising David Sokol. Otherwise, you stated some facts and behavior that you said you didn’t believe was illegal, and then you ended the release, leaving us, now maybe you thought somehow we, we were going to read between the lines, without expressing any anger about what had happened. Why were you not incensed? If you were, why did you not express your anger? Why did you handle this matter in the inadequate way you did?”

Warren Buffett [00:37:37] Yeah, the, the (Applause) It wasn’t really immediately thereafter. I learned on March 14th, which was the day we announced. And now bear in mind, his first conversation, when he said he owned the stock, was January 14th. In between January 14th and March 14th, Dave gave no indication that he had any contact with Citigroup of any kind. And as we learned later, I mean, he went, they met in maybe October or something like that, where, and talked about possible acquisition candidates for, for Berkshire. But none of that. He told me at one point, he said Evercore and Citi represent Lubrizol, one of them represents the directors and one of them represents the company, and then not a word about any contact.

On March 14th, when the deal was announced, in the morning I got a call from John Freund. John Freund is probably here today. John Freund works for Citi in Chicago, and he handles, he’s handled the great majority of our business and equities for decades, and I’ve got a direct line to him. I talked to him frequently. And he called and said, “Congratulations,” and, you know, and, and, “Aren’t you proud of our,” words to the effect, you can talk to John directly, although I’ve been told that the Citi lawyers have told them not to talk, but that knowing the press think out of them. The, the, he’s essentially, his words were that, that Citi’s team had worked with Dave on this acquisition and they were proud to be part of it, et cetera, et cetera. And this was all news to me. So that set up some yellow lights, at least.

And the next day, I had Marc Hamburg, our CFO, call Dave, and Dave readily gave him the information about, one, he had bought the stock and how much. Marc also asked him what the participation of, of Citi had been in the reference to Berkshire side of the transaction, and Dave said that while he called a fella, he thought he called a fellow there to get their phone number, which turned out to be somewhat of an understatement.

Now during the period when we announced the deal on March 14th, Lubrizol is the one that needed to prepare a proxy statement. We were not issuing shares at Berkshire, so there was no proxy statement, no nothing of this, that sort on our part. The Lubrizol legal team, Jones Day, went to work with the Lubrizol management to start preparing the proxy statement. We eagerly awaited to see the first draft of that, because I was going to be leaving for Asia on Saturday, which I guess would be the 19th, and I wanted to see what Lubrizol had to say about this whole Citi matter or anything else. They, the most interesting part of every proxy statement is something that says, it’s basically the, the history of the transaction. And, and it’s, it’s the first thing I read on any, any deal, because it, it gives you a blow-by-blow of what has taken place. And as Marc Hamburg can tell you, I kept, and our law firm can tell you, I kept urging them to get that to me before I took off for Asia.

We got that the afternoon of Friday the 18th, and it had a fair amount of material in it about Dave’s involvement with Citigroup. Then at that point, I believe it was at that point, our law firm got involved, Munger Tolles got involved in their input to the Lubrizol lawyers as to what we had seen that was different, or what we had seen that they didn’t know about, that we could add. Ron Olson, the director of Berkshire and partner, Munger Tolles, was on the trip to Asia. So we got on the plane on, on Saturday the 19th and traveled over the next week until the 26th. And we knew at that point that his partners at Munger Tolles were interviewing Dave, as maybe some other people too, but certainly Dave. And I believe that he was interviewed at least three times about both the stock purchases, the history of things with, of his relationship with, with Citigroup, and they were assembling this information. I don’t have a BlackBerry or whatever it may be, Ron, so he would get some information as we were over there, and he was getting some input.

But, and we decided that, that when we got back, we would need to have a prompt meeting of the Berkshire board about this matter, and we would also learn what the full details, at least, of what Bob Denham and, and maybe other attorneys at Munger Tolles learned from their interviews with Dave. And we got back on, I guess it would be Saturday the 26th, and on the 28th we were going to bring Charlie into it before calling a board meeting, but there would have been a board meeting that week. And then about the afternoon, a letter was delivered by Dave’s assistant, which really came out of the blue. And I, he said to me, he felt he was retiring on a high point, and he gave the reasons why I was retiring, which I laid out, and so on. I don’t know whether the questioning the previous week had affected his attitude. He would say not. But in any event, we had that resignation.

That resignation, as I believe may have been put in the audit committee report, may have saved us some money. If we had fired him, the question would be whether it was with cause or, or not with cause, and we would have said it was with cause, but that might have well gotten litigated. And, and a retirement did provide, in effect, the same non-level of severance payments that, that a, a with cause provided.

So I drafted up a press release, which is since been the subject of at least mild criticism, and I laid out the good things that Dave had done, which he had done for the company. He had done many good things, some extraordinary things. And, and then I laid out some actions which I said, based on what I knew then, did not seem to me to be unlawful. And incidentally, I’d talk with, with both Charlie and Ron about that. Ron would have been more careful in that wording. I’m not sure Charlie would have been. I’ll let him speak for himself on that. And we ran it by, I ran up by Dave on Tuesday morning, just be sure the facts were accurate. And he said he objected very much to something that I’d put in, where I said that I thought that he was, in effect, had, had his hopes dashed for succeeding me, and that was part of the reason. And he said that was absolutely not true, that he had no hopes ever of succeeding me. And, and that I, you know, basically he was telling me what was in his mind, and I shouldn’t be trying to, to second guess what it was in his mind. So I took that part out. But he affirmed all of the other facts in that letter. And then I took it out, I sent it to him a second time to make sure that he was okay with the facts, and he said they were accurate.

Now, in there was included the fact that Dave had no indication that, that Lubrizol had any interest in an approach from Berkshire, and that, at least according to the final Lubrizol proxy, is not the case. I have not talked to anybody except John Freund at the Citigroup, so I have no idea what took place with the investment bankers at Citigroup, except for what I read in the Lubrizol proxy. But the Lubrizol proxy now says that the, Dave did know that Lubrizol had an interest on December 17th. But both in the two chances he had to review it, and then when he went on CNBC on a Thursday and he talked for half an hour, he did, made no attempt to, to correct any of the facts in it.

Now on Wednesday, when we put out the report, we had to have a board meeting first. It was news to the board. They got the release a little bit ahead of time, and then we had a board meeting. We also delivered, we’ve, through our, through our law firm, we phoned the head of the enforcement division of the Securities and Exchange Commission and told them exactly the facts regarding the stock purchases, and, and, and anything else that they might have cared to know. So I think we acted in that case very, very promptly to make sure the Securities Exchange Commission and the top of the enforcement division was well-versed on what had taken place, to our knowledge, up to that point.

So from our standpoint, my standpoint, Dave, minimum chances for lawsuits about compensation to him, and we had turned over some very damning evidence, in my view, to both the public and to the SEC. What I think bothers people is that there wasn’t some big sense of outrage or something in the, in the, in the release. And, you know, I plead guilty to that. I, I, this fellow had done a lot of good things for us over 10 or 11 years, and I felt that if I’m laying out a whole bunch of facts that are going to create lots of problems for him for years to come, that I also list his side of the equation in terms of what he’d done for Berkshire. And I, and as I said a little bit earlier, you know, one thing I didn’t even lay out was this extraordinary act where, in effect, he turned over $12.5 million to a fellow employee. So that, that’s the history of my thinking on it. Charlie, you want to add anything? (Applause)

Charlie Munger [00:50:33] Yes. Well, I think we can concede that that press release was not the cleverest press release in the history of the world. The facts were complicated, and we didn’t foresee appropriately the natural reaction. But I would argue that you don’t want to make important decisions in anger. You want to display as much ruthlessness as your duty requires, and you do not want to add one single iota because you’re angry. So Tom Murphy, one of our best directors, one of our best directors, always told the people at Cap Cities, “You can always tell a man to go to hell tomorrow if it’s such a good idea.” So the, the anger part of it, and I don’t think it was wrong to remember the man’s virtues as well as his heir. (Applause)

Warren Buffett [00:51:49] I might add, as an aside, Charlie and I worked together for 52 years, and we have disagreed on a lot of things. We’ve never had an argument that, you know, we, I, I need Tom Murphy’s advice to remind myself of it a lot of times on other things, but which hardly, it’s never even been necessary. I, long before I met Murph. Okay, let’s go to area one.

[00:52:22] Shareholder (Mary Broderick, Berkeley, California): Mary Broderick, Berkeley, California. Good morning, Mr. Buffett. Good morning, Mr. Munger. And a big thank you. You probably aren’t aware of this, but you’ve been my personal financial and investment advisors for years. I would like to know what you think the effect of the government ending the POMO program mid July this year will have on the stock market and the economy in general.

Warren Buffett [00:52:58] The government ending the QE2, or…

[00:53:01] Shareholder (Mary Broderick, Berkeley, California): Permanent open market operation.

Warren Buffett [00:53:04] Well, you’re one acronym ahead of me. The, well, it, just as we’re discussing, discussing it now, it’s no secret what they’re going to do. I mean, it’s, it’s sort of the most advertised open market purchase in history, and, and probably in terms of defining the amount per month and when it comes to an end, and, you know, the what the balance sheet will look like at the end of the Fed. So I don’t think, you know, if something is that well known by all participants in a market, I think any effect of it has been discounted by this point in time. I mean, if you know, if you, if you, if you say you’re going to increase tax rates in a year, we’ll say, on corporations, or decrease them, or whatever it may be, and, and it’s really done and locked in stone, the market doesn’t wait until the date when the tax increases or decreases go through to, and to build that into market prices.

So I don’t, I see no reason, there may be some other things that happen then, but I see no reason why the simply having will cause any significant change in stock or bond markets at that time. You know, obviously, a huge market force will be withdrawn. I mean, you buy $600 billion worth of Treasuries, and, you know, you probably leave a few traces along the way that you’ve done it. And, and it has been $100 billion or so a month, and, and that purchasing will not be in the market. But the government issuances of debt will still be at a level that are consistent with what they are now. So it will be a different market, but I think it’s a different market that’s already been anticipated. Charlie?

Charlie Munger [00:55:11] I have nothing to add.

Warren Buffett [00:55:13] Becky.

Becky Quick [00:55:13] I’d like to ask a question that comes from Rahm Tarakhand from Sugar Land, Texas. He says, “Good morning, Mr. Buffett and Mr. Munger. You have always put great emphasis on hiring and retaining managers that not only have exceptional talent but also adhere to the higher standards of corporate ethics and behavior. Recent events surrounding Mr. Sokol’s actions have demonstrated that we were not very far from a situation where someone running Berkshire Hathaway had great talent but lacked the other quality that has made Berkshire the envy of the business world. In some ways, we are relieved that these events happened when you were still at the helm. But coming back to the succession plan that you have in place, how can you ensure that there are no more Sokols in the lineup of exceptional managers that you have?”

Warren Buffett [00:55:58] Yeah, he made an assumption there about Sokol being the next in line, which I’m not sure was warned, but, but he certainly was entitled to think that he was a candidate. And, and there are, that is one of the reasons that I think it’s a good idea if my son Howard Buffett, who would have no, get paid nothing and have no activities in the company, be the chairman after I’m not around, because you can make a mistake in selecting a CEO. I mean, it did, you know, I think the odds of us making a mistake are very, very low. I certainly, the candidate that I think is the leading candidate now, I, you know, I wouldn’t, I would lay a lot of money on the fact that, that he is straight as an arrow. But mistakes can be me, you know, the, the, the Bible says the meek shall inherit the earth, but the question is, will they stay meek? You know, they, and the idea of having an independent chairman who would be voting a lot of stock, because even at my death, because of the concentration of a stock and so on, that the, the executors would have a very significant block of stock. And if some mistake were made, it would be easier to change if not only a very large block of stock were available to express an opinion, but also if the chairmanship was not locked in with the CEO.

It, it, it’s, it’s gotten less tough to change CEOs at companies where either their, their moral or their intellectual qualities are found lacking, but it’s still difficult. And if, you know, it’s, it’s particularly difficult if they turn out to be a mediocre CEO. If the person is really bad, you know, people will get rise up sometimes, and particularly if they have meetings without the CEO present. But it’s, it’s not an easy job to displace a sitting CEO who also holds the chairman’s position and controls the agenda and all of that. So I think an independent chairman, particularly one that represents a very large block of stock and has no designs himself on taking over the place, is a safety measure for the possibility, however remote, that the wrong decision is made.

But I will tell you that the directors of Berkshire will be thinking every bit as much about the quality of the person as a human being as they will be thinking about their, their managerial skills, because it’s vital that you have somebody at Berkshire, in my view, that, that is running the place that really cares more about Berkshire than he does about himself in terms of advancement. And I think we have multiple candidates that fulfill that. And the idea of an independent chairmanship is a, as, you know, part of the belt and suspenders. Charlie?

Charlie Munger [00:59:35] Well, you know, your idea about the Buffett family, as a president, the Rockefellers left the management of Standard Oil many, many decades ago, and they, but they didn’t intervene once, and that was to throw out, what was it, the head of Standard of Indiana, and it was on moral grounds. So that sort of thing can happen, and you have put another string in our bow.

Warren Buffett [01:00:06] Okay, we’ll go to area two.

[01:00:08] Shareholder (Caroline Tall, Boston, Massachusetts): Caroline Tall, Boston, Massachusetts. Mr. Buffett and Mr. Munger, if you were going to live another 50 years, and we sincerely hope you do, and could add one additional sector or asset class to your circle of competence, which sector would it be and why?

Warren Buffett [01:00:28] Well, that’s a very good question, and I particularly like the preamble. The, well, you would, you would certainly pick a sector that’s large, because it isn’t going to make any difference to Berkshire if we get to be experts on some tiny little industry or business. I would say that, that, you know, it would have to be something in the, this isn’t going to happen, but, but if I could really become expert, and I mean really expert, knowing more than most, almost anybody else about the subject, in the tech field, you know, I think that, that would be terrific. It isn’t going to happen. But it’s, it’s going to be a huge field. There are likely to be, you know, a few enormous winners, a lot of disappointments. So that the ability to pick the winners, you know, is, is far disproportionate to the ability to pick the winners, we’ll say, among major integrated oil companies, where those are all equated in price, and, you know, you’re not going to have a big edge in trying to pick Chevron against Exxon against Continental, you know, and Occidental, and you name it. But the degree of disparity and results among larger tech companies in the future is likely to be very, very dramatic. And if I had the skills where I could pick the winners there, I would do a lot better than if I had the skills to pick the winners in the major integrated oil field. You probably will have better luck with Charlie on this one, because he, he, he knows a lot more about a lot of industries than I do. Charlie, what’s your answer?

Charlie Munger [01:02:34] Well, it would either be tech or energy. And I think that we’re the wrong people to develop the expertise. I think that we were going to do it, it would have already happened. Yeah, I do think we might identify somebody else who has abilities that we lack. That’s been very hard for us, but we’re not going to tell you, but we’ve done a little better lately.

Warren Buffett [01:03:10] It’s a good question. Andrew.

ASAndrew Ross Sorkin [01:03:12] This question comes from a shareholder named Ralph Coutant, who asks, “In your press release, your original press release, you noted that Dave bought, brought the idea of purchasing Lubrizol to me on either January 14th or 15th. Initially, you said, ‘I was unimpressed.’ You went on to note that on January 24th you sent another note to Dave indicating your,” quote, “skepticism about making an offer for the company. However, in a very short period of time after Dave’s discussion with Lubrizol’s CEO, you,” quote, “quickly warmed to the idea. Please clarify what caused you to,” quote, “warm to the idea so quickly. If this didn’t strike you as being a great business at first glance, what changed, and what was David Sokol’s role in convincing you?”

Warren Buffett [01:03:58] Yeah, the, it wasn’t, it didn’t destroy, it struck me as a business I didn’t know anything about initially. You know, you’re talking about petroleum additives. I, I never would understand the chemistry of it, but I, but that’s not necessarily vital. What is important is that I understand the economic dynamics of the country, of the industry. Is there, are there competitive moats? Is there ease of entry? All of that sort of thing. I did not have any understanding of that at all initially. As a matter of fact, I suggested to Dave, I said, “Charlie’s a lot smarter about, about oil than I am. Why don’t you give him a call?” Because I don’t, you know, I, I, I just don’t know anything about that business. And I talked to Charlie a few days later, and I, I don’t remember whether I asked him whether David called or anything, but, but I, I mentioned it, Charlie. Charles said, “I don’t understand it either.” So when I talked to Dave later, he had not talked, he had not gotten a hold of Charlie. I told him, “Forget it, he’s as bad as I am.”

What Dave passed along to me, after having that dinner with James Hambrick, and which I later confirmed in a lunch when James Hambrick came out here on February, it was, but it was the same thing, because I, I, I thought, and I, and I still feel, I thought I got a good understanding of industry dynamics and how the business had developed over time, what the role of oil companies was and would be in relation to a chemicals additive. The oil companies are the biggest customers, that they sell base oil to a little resolve, but they, they buy the, they are the big customers, and they have gotten out of the business to quite a degree, although there’s two of them left in it. So this industry had consolidated over time.

I looked at the question of ease of entry. You know, every time I look at a business, when we bought See’s Candy in 1972, I said to myself, “If I had $100 million and I want to go in and take on See’s Candy, could I do it?” And I came to conclusion no, so we bought See’s Candy. If the answer had been yes, we wouldn’t have done it. I asked myself that same question, you know, can I start a soft drink company and take on Coca-Cola if I have $100 billion? You know, Richard Branson tried it some years ago in something called Virgin Cola. You know, the brand is supposed to be a promise. I’m not sure that that’s exactly the promise you want to get if you buy a soft drink. But in any event, I felt, after my conversation with Dave, subject to a second conversation with, with James Hambrick, but covering the same ground, that it’s not impossible at all for people to enter this business, but, but in terms of the service that, and the relatively low cost of what Lubrizol brings to the party, and in terms of people trying to break into a market and take them on, and it’s not a huge mark, it’s probably only a $10 billion market overall, I decided that there was a pretty good size motor on this.

But they got lots and lots of patents. But more than that, they, they have a connection with customers. They work with customers when new engines come along to develop the right kind of additive. And so I felt that I had an understanding. Didn’t understand one thing more about chemistry than when I started, but I felt that I had an understanding of the economics of the business, the same way I felt that when the ISCAR people talked to me. I mean, who would think that you could have, you know, take some tungsten out of the ground in China and put it into little carbide tools, and that you could have some durable competitive advantage? But I decided ISCAR had a durable competitive advantage after looking at it for a while.

That’s the conclusion I, I have come to the conclusion that, and Charlie as well, that, that the, the Lubrizol’s positioned as the dominant, or the number one company, not dominant, but the number one company in terms of market share, in, in that business is sustainable, and that it’s a very good business over time. It helps, you know, they’re helping engines run longer and run smoother. You know, you know, when metal is acting on metal, that lubricants are important, and they’re always going to be around. And I think Lubrizol will be the leading company for a very, very long time. And that, that’s the conclusion I came to, and I did not have a fix on that, nor did Charlie, prior to Dave relaying on to me what he had learned at that dinner. Which, incidentally, Lubrizol have been telling the world. I mean, they made investor presentations and all that quite extensively over the years. I simply hadn’t paid any real attention to it, and, and when it was explained to me, I thought I understood it, and I still think I understand. I think Lubrizol will be a very, very good addition to Berkshire. And I saw James Hambrick just yesterday, and despite the turmoil around this, they are very enthused about becoming part of Berkshire, that they regarded as the ideal home. Charlie?

Charlie Munger [01:10:14] Yeah, you know, ISCAR and Lubrizol, to some extent, are sisters under the skin. You got very small markets that aren’t really too attractive to anybody with any sense to enter, and fanaticism in service. So if you have any more like that, why, please give Warren a call.

Warren Buffett [01:10:43] Okay, area three.

[01:10:45] Shareholder (Xiang Xiaochu, Ottawa, Ontario): This is Xiang Xiaochu from Ottawa, Ontario. Warren, Charlie, I admire you guys tremendously. I want to ask a question about the valuation of your company. You said price is what you pay and value is what you get. In your letter to the shareholders this year, each Class A share owns about, in investment, about $95,000, and each commands an earning of a $6,000. So in my simplistic way of calculation, each year is worth $95,000 of investment, plus the earnings discounted at 7%, that’s another about $90,000, so it adds up to about $185,000. Is that correct? Does that mean the complexity of your empire is a value trap?

Warren Buffett [01:11:39] We, we give those figures because we think they’re important, both the investments per share and the operating earnings per share, excluding the earnings that come from the investments, and, and leaving out insurance underwriting profits or losses, because we think that, worse, they’ll break even, but they do bounce around from here to here. Those figures are pre-taxed on the operating earnings, so I’m not sure whether you’re applying your discount factor to pre-tax or after tax. But we think they’re important, and I would expect, well, the operating earnings, you know, are almost certain to increase. How much, you know, who knows, but that number is likely to go up. The investments are still about the same as at year end, but that, they could go up or down based on whether we’re able to buy more operating businesses. Our goal is, our goal is to build both numbers to some extent, but our, our primary goal is to build the operating earnings figures.

We never, we, if Charlie and I had to stick a number and an envelope right now in front of us as to what we thought the intrinsic value of Berkshire was, well, neither one of us would stick a figure, we’d stick a range, because it, it would be ridiculous to come up with a, a single specific number which encompasses not only the businesses we own but what we’re going to do with the capital in the future. But even our ranges would differ modestly, that, and they might, might differ tomorrow in terms of how I would feel versus today, but not, not dramatically at all.

I would say this, I think I certainly, well, you’ve received signals once or twice when we said we would buy in our stock. We obviously thought that it was selling below the bottom of a conservative range of intrinsic value. And we did that once some years ago, and by saying so, of course, the stock went up, and so we never got any stock bought. And so there’s sort of a self-defeating factor about, about taking the kind of approach to it that we do, in terms of really telling people that the only reason we’ll buy in stock is because if we think it’s cheap. That is not standard practice in corporate America at all. In fact, corporate America, to some extent, buys in their stock more aggressively when it’s high than when it’s low. But they may have some equation in their mind that escapes my reasoning power. But the, I would, we do not regard Berkshire as overpriced.

And I would say that we, we had very, very, very recently, we had a very, very large international company that might well have been interested in doing something with Berkshire, and it’s a very, very nice company, but it’s bigger than we can handle unless we would use a lot of stock, and we won’t use the stock. We would, we, we, we just think our shareholders would come out behind. Be a wonderful company, and, you know, make a lot of headlines, but in the end our shareholders would be poor, because our stock is a currency, and, and unless it’s fully valued, it’s, it’s, it’s a big mistake to use it as a currency. Now we used some in the Burlington deal, but we used a whole lot more cash, and in effect we only used 30% for stock. And it was worth doing, but it was painful. And if Lubrizol wanted to do a deal involving stock, we would not have done it. I, I told the James Hambrick that right off the bat. So we had absolutely no interest in, in, in buying Lubrizol. We were perfectly willing to give, you know, close to $9 billion in cash, and we, in my view, we are getting our money’s worth. But we would not have given a significant portion of it in Berkshire stock, because we would be giving away part of the businesses that we already own. And we like Burlington, and we like See’s Candy, and we, we like ISCAR, and to give away a portion of those, even to get another very good business, would not make financial sense for our shareholders. So you can draw your own deductions about our calculations of intrinsic value from that statement. Charlie?

Charlie Munger [01:16:48] Well, he’s obviously looking at the two right factors. And I think that we have not permanently lost the ability to do some interesting things eventually with our enormous wealth and cash and marketable securities. We won’t always be as inactive as we are now.

Warren Buffett [01:17:11] Oh, we’re not that active, Charlie.

Charlie Munger [01:17:15] Well, I don’t know. You practically crawl out of your skin sometimes.

Warren Buffett [01:17:21] $9 billion is, you know, we, if we say normal earning power is $12 billion, that, that uses up a good portion of one year’s quota, although we’d like to use more. I mean, there’s no question. Can you see us using stock in the next few years?

Charlie Munger [01:17:41] If the business were good enough, of course. Our trouble is, it’s a terrible trouble you people have, and the businesses you already own are so good, it’s not wise to part with them to get a business we don’t own, ordinarily.

Warren Buffett [01:18:02] Carol.

CLCarol Loomis [01:18:02] This is, Warren, this is, and Charlie too, from your longtime Omaha friend Dick Holland. “Whenever you talk in a general way about America’s economic for future, your remarks are invariably positive, even glowing, despite the severe problems of growing public and private debt, the huge budget imbalances that result, and no real policies to solve these problems. Some experts believe that we may reach the point where future bond offerings to cover the rising debt might fail. Many wonder if we are not entering a time of national decline. How can a lousy long-term U.S. economy make you so happy, and why do you see gold nuggets where others see salt?”

Warren Buffett [01:18:57] That’s from Charlie’s good friend as well, Dick Holland, who we both have known for 60-plus years. I don’t see how anybody can be other than enthused about this country. If you look back to 1776 or 1789, whichever one you wanted dated from, you know, it has been the most extraordinary economic period in the history of the world. In fact, if you go back, I was born on August 30th, 1930. Now if somebody had come to me in the womb and said, “Let me tell you what it’s like outside now. Yeah, the stock market has just crashed, but you haven’t seen anything yet. 4,000 banks are going to fail. The Dow Jones average is going to go down to 42. It was 381 back just a little bit before you were conceived, and it’s going to go to 42. They’re going to close the banks for a while. We’re going to have 25% unemployment. We’re going to have the Dust Bowl in the Midwest. The grasshoppers are going to take over.” You know, it would be like in that Woody Allen movie where he says, “Go back, go back.” And, and they, all that’s happened since August 30th, 1930, is that the standard of living of the average American has increased six for one. Six for one. You know, that’s absolutely incredible. I mean, you look at centuries where nothing happened for the average person. I mean, century after century.

So we have a system that works magnificently. It gets gummed up periodically, and it always has troubles. I mean, you know, I, my, my father was very anti-New Deal, so my sisters and I sat around a dinner table from the first we can remember hearing how things were going to go to hell. Matter of fact, my father-in-law told my wife to be and her mother that he wanted to have a talk with me before we got married. And he was very much on my side, so I was not in a panic about this or anything. But I went down to his house shortly before the marriage, and this wonderful man, Doc Thompson, sat in a chair for a couple of hours, and he said, “Warren,” he said, “I just want to tell you that you’re going to fail, but it’s not your fault.” And he said, “You and Susie, my daughter, you know, if you starve, she would have starved anyway. I mean, it, it is not your fault. It’s because, you know, it’s, it’s, it’s because the Democrats are in, you know, and they’re going to take the country down the road to communism. And, you know, and, and just don’t worry about the fact you’re gonna fail, because…” And this went on for quite a while, and then he blessed me and we got married. It was a happy ending.

But ever since, when I got out of school in 19, in 1951, the two people I admired the most in the world, my dad and Ben Graham, both said, “You know, you’ve got a good future, but don’t start in stocks now, because there’s never been a year when the Dow Jones average has not ended up below 200, and it’s above 200 now. It’s much too high. And if you start now selling stocks to people, they’re gonna have bad experiences. And so why don’t you go wait a while, go work in the Omaha National Bank, or do something, park yourself on the sidelines.” There’s always negatives. The country always faces problems. I mean, this country went through, you know, it went through a Civil War, you know, it, it, it’s gone through all kinds of things. But what happens, you know, we have a few lousy years from time to time. We’ve had probably 15 recessions since the country started, and we will always have a list of 10 or 15 things at the start of the year that will tell you why, you know, this country can’t possibly work well.

But all I can tell you is that it doesn’t do it in a straight line, but the, the power of capitalism is incredible. I mean, you know, that’s, that’s what is bringing us out of this recession. I mean, monetary and fiscal policy have some utility, and certainly in the fall of 2008, the government was needed in a huge, huge way. It could do what was, it was the only one that could do what was needed. But if you look at the history of the United States, you know, probably half of our recessions have occurred during, we’ll say, in the 19th century, when people didn’t even know what fiscal or monetary policy was. I mean, what happened was that excesses would come in, and then the resuscitative power of capitalism would, would set the country back on the right, on, on a stronger growth pattern. And that’s happened time after time after time. And the game isn’t over. I mean, it is not like the potential of America has been… What has happened is the rest of the world is caught on to some extent. So you’re seeing, you know, some state capitalism in places like China, and they’re, they’re turning economies loose that have been dormant for centuries. But it’s not because the people are smarter, it’s not because they work harder, it’s just because they have tapped into a system that works marvelously over time. And I will tell you, in the next 100 years, you’re going to have probably 15, maybe, maybe as many as 20 lousy years, but we will be so far ahead of where we are now that that will be unrecognizable. Charlie?

Charlie Munger [01:25:16] Well, I think you can go back a lot farther than that. You know, Europe surprised, survived the Black Death, where about a third of the people died. The world is going to go on.

Warren Buffett [01:25:34] That’s wildly optimistic for Charlie. Have you got anything more encouraging than that to say, Charlie?

Charlie Munger [01:25:42] I don’t know. I kind of, I understand a little bit of Dick Holland’s point of view. And by the way, I’ve known him a long time. He aced me out of any hope of being the chief candle snuffer at the Unitarian church. He was so damn good at it.

Warren Buffett [01:26:02] Anyway, can you, can you bring yourself to say anything optimistic?

Charlie Munger [01:26:06] Well, I have a little bit of, of a twist on that. And so I would say that you can be cheerful even if things are slightly deteriorating And that’s a very good quality to have. I have a personal saying that that has always amused me. I say the politicians are never so bad you don’t live to want them back.

Warren Buffett [01:26:40] Well, on that note of wisdom, let’s go to area four.

[01:26:45] Shareholder (Angie Jansen, Cambridge, Massachusetts): Good morning. Angie Jansen of Cambridge, Massachusetts. My question is, aside from the need to put huge amounts of capital to work, do you still believe that a high return on tangible capital business like See’s or Coke is the best asset to ho… to hold in an inflationary environment, or do you now think an irreplaceable hard asset with pricing power, like a railroad or a hydroelectric dam, is superior?

Warren Buffett [01:27:17] The first group is superior. Just as, I mean, if you can have a wonderful consumer product, doesn’t have to be a consumer product, a product that requires very little capital to grow and to do more dollar volume, as will happen with inflation, even if you don’t have unit growth, and it doesn’t take much capital to support that growth, that is a wonderful asset to have. Inflation, I mean, the ultimate test of that is your own earning ability. I mean, if you’re an outstanding doctor, lawyer, whatever it may be, teacher, the… you, as inflation goes along, your services will command more and more in dollar terms, and you don’t have to make any additional investment in yourself.

People think of that, you know, with a very long live real estate asset or something of the sort, or a farm, or anything where additional capital is not required to finance inflationary growth. The worst kind of businesses are the businesses with tons of receivables and inventories and all of that, and in dollar terms, if they’re… if their volume stays flat but the price level doubles, and they need to come up with double the amount of money to do that same volume of business, that can be a very bad asset.

Now, normally we are not enthused about businesses that require heavy capital investment, just like utilities and the railroad. We think that, on the other hand, that particularly with the railroad, that where you do not have any guaranteed lower rate of return, that you should be entitled to earn returns on assets that are becoming more and more valuable to the economy, as, whether it’s in… because of inflationary factors or because of just natural growth factors, or in the case of the United States, I think it will be both.

But the ideal business, See’s Candy is doing… it was doing $25 million of volume when we bought it, and it sold 16 million pounds of candy at a little more than… well, it retails $1.90, and we had some quantity discounts, so we were doing close to $30 million worth of business. Now we’re doing well over $300 million worth of business. It took $9 million of tangible assets to running when it was doing 30, and it takes about $40 million of tangible assets to at 300 and some. So we’ve only had to plow back $30 million into a business which will make us, well, it’s made us probably a billion and a half pretax during that period. And if the price of candy doubles, we don’t have any receivables to speak of, our inventory turns fast, we don’t store it or anything like that, we gear up seasonally, and the fixed assets aren’t big. So that is a much better business to own than the utility business if you’re going to have a lot of inflation. Charlie?

Charlie Munger [01:30:33] Yeah, and what’s interesting about it is that we didn’t always know this, and so, and sometimes we forget it. That’s true too. But it shows how continuous learning is absolutely required to have any significant achievement at all in the world.

Warren Buffett [01:30:52] Yeah, and it does show, you know, I’ve said in the past that I’m a better businessman because I’m an investor, and I’m a better investor because I’m a businessman. There’s nothing like actually experiencing the necessity, particularly in the 1970s when inflation was gathering strength, in early ’80s, you would see this absolutely required capital investment on a very big scale that really wasn’t producing anything commensurate in the way of earnings. I wrote an article for Fortune called “How Inflation Swindles the Equity Investor” back in 1977.

You really want the ideal asset, you know, is a royalty on somebody else’s sales during inflation, where all you do is get a royalty check every month, and it’s based on their sales volume, and you made some… you came up with some product originally, licensed it to them, and you never have another bit of capital investment. You have no receivables, you have no inventory, you have no fixed assets. That kind of a business is real inflation protection, assuming the product maintains its viability.

So even though we are going into some very capital intensive businesses, part of that reflects the fact we can’t deploy the amount of capital we have in a whole bunch of See’s Candies. We just can’t. We can’t find them. We’d love to find them, but we can’t find them in the quantity. So we are not doing as well with capital when we’re have to invest many billions a year as we would if we were investing a few millions. Here, there’s no question, that’s true in investments, it’s true in operating businesses, where there is a real disadvantage to size. And we just hope that problem grows. Now, you’re talking… Becky.

Becky Quick [01:32:35] Aside from questions about Dave Sokol, the questions I’ve received most from shareholders have to do with dividends. And Dave Corneal, who is a shareholder who couldn’t be here this weekend because he’s at his daughter’s wedding, writes in, “I know that Berkshire is a great allocator of capital, but as an owner of Berkshire stock and as I get closer to retirement, there will be a time when I will need income from my assets. Currently Berkshire does not pay dividends, yet it loves collecting on dividends on its investments. It also generates extensive cash flow in which it could pay dividends if it chooses to. Currently the only real option to get income from your Berkshire investment is to sell a share or two of the stock. Is there a point in the future where Berkshire shareholders may expect a dividend payment, or what conditions would be needed for Berkshire to consider paying a dividend?”

Warren Buffett [01:33:27] Yeah, we will pay dividend, and matter of fact, that may be an argument that when we pay dividends we should pay out almost 100%, because it does mean that we are lost the ability to find ways to invest a dollar in a manner that creates more than a dollar of present value for the shareholders. But let’s assume you had a savings account, and the savings account paid 5%, and you had your choice of taking $50 a year out or letting the 50 stay in, and somebody would pay you 120 of that savings account anytime you wanted to sell a piece of it. Now, would you want to take the $5 out, or would you rather let it accumulate and have the ability to sell it 120 cents on the dollar, that account?

Every dollar that’s been reinvested in Berkshire has created more than a dollar of market value. So it’s much more intelligent, if you control the dividend policy of a Berkshire, it’s much more intelligent for people to leave the dollar and have it valued at a $1.20 or a $1.30 or whatever it may be valued, and then sell off a little piece if they want the income or if they want to receive some cash. And the logic of it, I think, is unquestionable. The execution of it is a problem. I mean, the question of whether we can keep investing dollars to create more than a dollar of present market value, you know, there’s an end to that at some point.

But so far, people, by leaving a hundred and billion at the end of the third quarter in the business, have $200 billion that they can cash out for it anytime they wish. So it… there will come a time, and you know, who knows how soon, because the numbers are getting big, there will come a time when we do not think we can lay out a, you know, 15 or 20 billion a year and get something that’s immediately worth more than that for our shareholders. And like I say, when the time comes where a dollar is only buying us 90 cents of value, we’ll quit spending the dollar, we’ll give it to the shareholders. But I predict that today, that Berkshire declares a dividend, the stock will go down. I mean, it will, and it should go down, because it’s an admission, essentially, that a compounding machine has lost its ability to continue to continue on that course. Charlie?

Charlie Munger [01:36:17] Well, there’s nothing wrong with selling a little Berkshire stock to buy jewelry if you’re in the right place.

Warren Buffett [01:36:26] I would like to announce that my niece Cynthia visited Borsheims yesterday, around, I guess, around three o’clock, and she was there with her boyfriend, and he proposed, and they bought a ring. And congratulations. (Applause)

Her mother did the same thing a few years ago, and you know, these things can become family traditions. So go out there and who knows what will happen. Okay, number five.

[01:37:01] Shareholder (Jeremy Pose, Newton, Massachusetts): Jeremy Pose in Newton, Massachusetts. Mr. and Mr. Buffett and Mr. Munger, Berkshire Hathaway has had large investments in Wells Fargo and U.S. Bank. What are the revenue outlooks and business prospects for these two banks, giving the backdrop of slow U.S. growth, an extended U.S. consumer, a tepid rebound in the U.S. housing market with foreclosures and write downs lessening but still at historically high levels, and the potential for greater than expected inflation, or worse, possibly deflation similar to Japan? Thank you for your time and consideration.

Warren Buffett [01:37:43] Yeah, Wells Fargo and U.S. Bancorp are both among the best large banks, if not the best, in the country, and they’re different than what you think of in terms of some money center banks, but they’re very large. Wells is four types as large as USB. Banking as a whole, U.S. banking profitability will be considerably less, in my view, in the period ahead than it was, say, in the early part of this century. And one, and the… a very important reason is that the leverage will be reduced, and that’s probably a good thing for society. It’s… it may be a bad thing for individual banks that could use leverage intelligently, but the trouble was that they all thought they could use leverage intelligently, and the actions of one or more that were unintelligent about it, you know, had consequences for everybody, which you can see if you view HBO on whatever it is, is it May 26th? Then the… so I would say that return on assets, even if return on assets were as good as it was some years ago, there will be less assets per dollar of common equity than before, which means return on common equity will be less.

We still think that Wells Fargo and U.S. Bank are very good operations. We think they’re very decent businesses. They’re not as attractive as when leverage ratios could be higher. In terms of the troubles in banking, I… the… I think you’ve seen by far the worst in the past, and loan losses have been trending downward now for several quarters, and I think the expectation is that will continue. And I think banking’s a very fundamental business. But as John Stumpf said a few years ago at Wells Fargo, he said, “I don’t know why we keep thinking of new ways to lose money when the old ones were working so well.” You know, and banks periodically go crazy. It’s always on the asset side.

I mean, here you’ve got cheap money, you’ve got the, you know, you’ve got the federal government behind. Although the federal government has never had to pay out anything on in terms of the FDIC. The FDIC has handled 3,800 and… since it was established in January 1st, 1934, the FDIC has paid out probably 3,800, 3,900 by now institutions, 250 of them or so in the last couple years, and that has not cost the U.S. taxpayer a penny. I mean, that has all come from FDIC assessments on other banks. It’s been a mutual insurance company. So the banking, if you keep… if you just keep out of trouble on the asset side, is a very good business, because you get your money so cheap, and, you know, because of the implicit federal guarantee, and you do get to leverage up to a fair extent, and America’s been a pretty good place to lend money.

So I like our positions in there. You will see that if you look at those totals, you’ll see we’ve added to Wells Fargo and… I think they’re both… those companies are very well run institutions, but they will not be able to earn… I don’t know what the figures were, but I think they were up in 25 or to 30 on tangible equity, and that’s not going to get repeated in the future, and it shouldn’t be. Charlie?

Charlie Munger [01:41:56] Well, yeah, we might add that M&T Bank, which most people never talk about, is headed by a really sensible fellow, and it’s been a wonderful investment for us.

Warren Buffett [01:42:09] Yeah, a matter of fact, if you’ll get the M&T annual report, it’s written by Bob Wilmers, the letter. The first part of it’s about M&T specifically, but the second part is about, particularly, the American financial economy, and I would really recommend you read that. Bob is a very smart guy, and he has a lot of good observations. And frankly, the other one I’d recommend you read is Jamie Dimon’s letter. JPMorgan is as a tour de force in terms of describing the banking scene, the economic scene. He has some real insights in there about some very important subjects. We don’t own that stock, but it’s a letter that I think everybody could learn a lot from reading, as they could from reading Bob Wilmers’ letter at M&T.

Charlie Munger [01:43:03] And those people who like an element of morality and business, Wilmers sounds like an Old Testament prophet. I mean, he really doesn’t like it that all the really big banks are making so much money out of trading, because he says you’re really trying to outsmart your own customers, and he’d rather serve them in a culture of deserved trust in both directions. It’s hard to think he’s totally wrong. He also expresses a quite a dislike for the fact that a market system creates a reward system where money sort of disproportionately flows to people who work with money, and that tends to attract a disproportionate number of people that… of lots of ability that he thinks might be, at least some of them, might be better deployed elsewhere. It’s an interesting read. It’s one of the best annual reports that’s ever come out of banking, right out of what, Buffalo.

Warren Buffett [01:44:08] Okay, Andrew.

ASAndrew Ross Sorkin [01:44:09] This question comes from Neil Steinhoff, who writes, “The commodity market, in particularly gold, have appreciated astronomically over the last few years. My Berkshire Hathaway stock is only slightly better, or doing better, than it was in 2006. It’s barely kept up with inflation.” He says, “Please explain why you have not invested more heavily in commodities. As long as Ben Bernanke continues to print money, and there’s no indication that he’s going to stop anytime soon, isn’t it right that commodities, and particularly gold, will continue to appreciate?”

Warren Buffett [01:44:42] Well, I would point out that when we started with Berkshire, it was about three-quarters of an ounce of gold, and the old was $20 an ounce then, and it was 15. So gold, even at 1,500, as a ways to go. And the… (Applause)

I think he’s right about inflation. But if you think about it, there, the three major categories of investment, and you ought to think very hard about which category you want to be in before you start thinking about the choices available within that category. Now, the first category is anything denominated in a currency. It can be bonds, it can be deposits in a bank, it can be a money market fund, it can be cash in your pocket. And the… if you will reach in your pocket, I don’t like to do this, but, and pull out your wallet. This is… you’re watching a historic event. If you look at this, and I might point out this is a one Charlie carries, on the back of it, it says “In God We Trust,” and that’s really false advertising. The… if Elizabeth Warren were here, she would say, quite properly, it should say “In Government We Trust,” because God isn’t going to do anything about that dollar bill.

You know, if government does the wrong things in terms of keeping it as valuable as it was when you parted with it, to buy a bond or put it in the bank, any currency related investment is a bet on how government, now and in the future, will behave. And if you happen to be unfortunate… fortunate to live in Zimbabwe, and they… and you decided to make currency related investments, you know, you family would have left you by now, and it was not a good decision. Almost all currencies have declined in value over time. I mean, it maybe then built into almost any economic system that it will be easier to work with a value… a currency declines in value than a currency that appreciates in value. And the Japanese might reaffirm that here with their experience. So as a class, currency related investments, whether they’re in the UK or the United States or any place else, unless we’re getting paid extremely well for having them, we do not think make much sense.

The second category of investments regard items that you buy that don’t produce anything, but that you hope someone will pay you more for later on. And the classic case of that is gold. And I’ve used this illustration before, but if you take all of the gold in the world, don’t get too excited now, the… and put it into a cube, it will be a cube that’s about 67 feet on a side. That’d be 165 or 170,000 metric tons. So you could have a cube, if you owned all the gold in the world, you could have a cube that would be 67 or 68 feet on a side, and you could get a ladder, and you could climb up on top of it, and you could say, you know, “I’m sitting on top of the world,” and you know, and I think you’re king of the world. You could, you know, you could fondle it, you could polish it, you could do all these things with it, stare at it, but it isn’t going to do anything.

Now, it’s all you are doing when you buy that is that you’re hoping that somebody else, a year from now or five years from now, will pay you more to own something that, again, can’t do anything. Person then thinks that somebody else will buy something five years later from him. There was… you’re betting on not just how scared people are now of paper money, you’re betting on how much they think, a year from now, people will be scared two years from then on. Keynes described all of this, I think it was in chapter 12 of The General Theory, when they talked about this famous beauty contest, where the game was not to pick out the most beautiful woman among the group, but the one that other people would think was the most beautiful woman, and then he carried it on to second and third degrees of reasoning. Anytime you buy an asset that can’t do anything, produce anything, you’re simply betting on whether somebody else will pay more for, again, an asset that can’t do anything.

And actually we did that with silver, but silver had a industrial use, and we… about 13 years ago, I bought a whole lot of silver, and if you’ll notice, silver’s moved recently. So I, you know, I… my timing was only about 13 years off, but you know, it was perfect. The… the third category of asset is something that you value based on it’s… on its, what it will produce, what it will deliver. You buy a farm because you expect a certain amount of corn or soy beans or cotton or whatever it may be to be… to come your way every year, and you decide how much you pay based on how much you think the asset itself will deliver over time. And those are the assets that appeal to me and Charlie.

Now, there’s some logical follow-on to that. If you buy that farm and you really think about how many bushels of corn, how many bushels of soybeans will produce, how much do I have to pay the tenant farmer, how much do I have to pay in taxes, and so on, you can make a rational calculation, and the success of that investment will be determined in your own mind by whether it meets your expectations as to what it delivers. Logically, you should not care whether you get a quote on that farm a day later or a week later, a month later or a year later. We feel the same way about businesses. When we buy ISCAR or we buy Lubrizol or whatever, we don’t run around getting a quote on it every week and say, you know, is it up or down or anything like that. We look to the business. We feel the same way about securities. When we buy marketable security, we don’t care if the stock exchange closes for a few years.

So when we look at Berkshire, we are looking at what we think can be delivered from the productive assets that we own and how we can utilize that capital in acquiring more productive assets. And there will be times, you know, cotton doubled in price, much to our chagrin at Fruit of the Loom, but you know, if you own cotton for the right six or eight months in the past year, you came close to doubling your money. But if you go back a century and try to make money only cotton over time, it has not been a very good investment. So to pick a product, crude oil, cotton, gold, silver, anything that… and of course, cotton has utility, gold really doesn’t have utility. I would bet on good producing businesses to outperform something that doesn’t do anything over any period of time.

But there’s no question that rising prices create their own excitement. So when people see gold go up a lot, I mean, if your neighbor owns some gold and you think you’re smarter than he is, and you didn’t own any, and your wife says to you, you know, “You know, how come that jerk next door is making money, you know, and you’re just sitting here?” It can start affecting behavior, and people like to get in on things that have been rising in price and all of that. But over time, that has not been the way to get rich. Charlie?

Charlie Munger [01:53:44] Well, I certainly agree with that. And besides, it’s something peculiar to buy an asset which only will really go up if the world really goes to hell. It doesn’t strike me as a terribly rational thing to do. I think you ever figure on leaving the country because the country is going to kill you, and you assume all the other countries you might go to will also be thoroughly screwed up, I think all those people should buy a little gold. But I think the rest of us would be better off with Berkshire Hathaway stock. (Applause)

And of course, there’s another class of people that think can protect themselves by painting… buying paintings of soup cans. I don’t recommend that either.

Warren Buffett [01:54:39] One thing about gold also is that, in addition to this 67-foot cube, more gold is being produced every year. So you have to have buyers not only to offset sellers in the natural course of events, but you have to absorb something like $100 billion worth of added items of no utility. I mean, it’s really interesting. I mean, they dig it up out of the ground in South Africa, and they ship it to the Federal Reserve in New York, they put it back in the ground. I mean, if you are watching this from Mars, you know, yeah, you might think it was a little peculiar. But think of how many people it makes happy, you know.

I might mention that the value of that cube, all the gold in the world, is now about… valued at 1,500 plus, is about $8 trillion. And there are a billion acres, roughly, a farmland in the United States. That’s a little over a million and a half square miles. And that’s valued at something over 2 trillion. And if you take 10 Exxon Mobils, you get up maybe another 4 trillion, and maybe not that much even. And so you could own all of the farmland in the United States, every bit of it, and you could own 10 Exxon Mobils, and you get a sick… a trillion or so in your pocket for walking around money. And you could have your choice of that or this 67 foot piece of gold that you could fondle. And that may seem like a close choice to some people, but not to me.

Charlie Munger [01:56:33] Well, you would also need an army to defend the gold, and it’s really not a very good spot.

Warren Buffett [01:56:42] Okay, number six.

[01:56:43] Shareholder (Dallas, Texas): Yeah. Little Miller, Dallas, Texas. Mr. Buffett, Mr. Munger, when you were raising your first investment funds, how did you go about attracting investors? And once you had your first funds and your first investors, how did you go about growing them?

Warren Buffett [01:57:01] It sounds to me like a man that’s about ready to start a hedge fund. They… in my case, I’d moved back here from New York in March or so of 1956, and a few members of my family said, “We’d like to manage our investments,” just like I did when I was selling securities out here before I went to New York. And I didn’t like being in the security selling business, partly because if I sold somebody a stock at 20 and it went down to 10, I wanted to buy more, but I couldn’t face the idea of people that had bought it at 20, and based only on confidence in me, not because they understood it, and now they were feeling depressed, and it was… it just wasn’t… it wasn’t very satisfactory. I could not do as well managing money if people were watching every decision as I could if I did it in a room all by myself.

So was I just told these seven members of the family, one of them actually was my roommate in college and his mother, they came in also. I said, “You know, if you’d like to join up in a partnership, I’m not going to tell you what’s going on, but I will tell you that I will be doing with my own money what I’m doing with yours.” Later on I put all my own money in, and it just was very slow. A few months later, Graham-Newman, that I’d worked for, was liquidating, and a fellow named Homer Dodge asked Ben Graham what he should do with the money he was getting out of Graham, and he said, “This kid used to work for me, and he’s okay.” And so he came out and went with me. And another fellow late in the fall saw… had seen the notice of partnership formed in some legal paper, and he said, “What’s this?” and came in with me. And it just… we just stumbled along.

And for almost six years I operated out of my house, no employee. I kept all the books, I filed the tax returns, I, you know, went out and picked up the stocks personally and stuck them to safe deposit box. When Charlie came along, I kept chiding him about the fact… I met him in 1959, and I said, “You know, law is okay as a hobby, but it’s not… no place for a man with your intellect to spend his time.” And, well, I’ll let Charlie take it over from there.

Charlie Munger [01:59:25] It actually took me a long time to leave what it was, a family business. And so any of you who are having a slow time accepting good ideas, why, should be cheered by my example, because it was some years after you started working on me, and you pounded on me, and I slowly got the point.

Warren Buffett [01:59:52] And he was actually asking about attracting money.

Charlie Munger [01:59:55] Well, of course, it helps if you’ve conducted yourself in life so that other people trust you. And then it helps even more… he explained why I was so slow and he was so fast. Then it helps even more if other people are right to trust you. So the formula is quite simple, or first one than the other. Unfortunately, with the present fee structure, just attracting money rather than performing with it can be enormously lucrative. So it… the skill of attracting money may be, at least in the short run, and maybe the intermediate run, it may be a more important quality than the ability to manage money.

Warren Buffett [02:00:45] And but we, neither one of us ever charged any fixed fee of any kind. Am I right on that, Charlie? You didn’t.

Charlie Munger [02:00:54] Well, we stopped taking any significant overrides on other people’s money at very young ages and very small amounts of net worth. I wish our example were more common. But I like our compensation practices too, and they’re spreading slowly. We get a new company every, what, five years?

Warren Buffett [02:01:22] No. Okay, Carol.

CLCarol Loomis [02:01:24] This is from Jeff, sorry, Jeff Cunningham of Directorship. “Berkshire’s corporate strategy resembles that of the go-go conglomerates of the 1960s: Geneen’s ITT, Teledyne, Textron. Small corporate team, tight financial controls, sector neutrality, and little involvement in subsidiary operations, and ultimately not fully valued for the sum of their parts. If you disagree with this, how does Berkshire differ?”

Warren Buffett [02:01:53] Yeah, it… we are a conglomerate. And, you know, people shy from that name, but that’s exactly what we are. And I think I laid out in the annual report at least one of the advantages of being a conglomerate, namely the tax efficient transfer of money from businesses that do not have good ways of using it to businesses that have better ways of using it, which is, if it’s carried out intelligently, is a very significant plus.

The conglomerates you mentioned, I’m familiar with all of them, really became, and, sort of stock issuance machines, where the idea was to get your stock to sell at a very high multiple and then trade it for something else that was selling at a lower multiple, and voila, you know, earnings per share went up, and then people said, “You’ll do it again.” So it was… it was really accepted and endorsed by Wall Street that if you had this sort of semi Ponzi scheme of issuing shares constantly for things that had lower P/E ratios. Everybody knew what the game was, but they thought the game would continue to succeed, and for a while it did. And the Gulf and Westerns of the world, and the Littons of the world, and there were numbers of them, it was almost like an unspoken conspiracy that nobody will point out that this is kind of a perpetual motion machine. And if they don’t, it’ll keep working, but if somebody says anything about it, somebody says the emperor has no clothes, it’ll all collapse. The interesting thing, of course, you mentioned Teledyne in there. Teledyne played that game, and then it ended, and all of this stuff came back to earth. But then Teledyne went into reverse and bought in stock like crazy when their stock got underpriced. So they issued stock like crazy when it was overpriced, and they bought it in to an extraordinary degree when it was underpriced, and it created a sensational record.

Most of those companies, though, I think had, I think, a very little relationship to Berkshire. It’s true that, I think, some of them are pretty decentralized, although I remember, didn’t Harold Geneen have some famous room that he brought in everybody and shoot him out, you know, monthly, for not making their projections? So they learned to make them, whether they were actually really making them or not. And the managers were, if you took Charlie Bluhdorn at Gulf and Western, or, you know, take the group, they were primarily thinking about how… Jimmy Ling at that long time LTV, and they were primarily thinking about how they could pump the stock up to a level where they could buy big established businesses that were selling at lower P/E ratios, and sort of have this perpetual motion game going. And it came to an end.

I don’t think there’s a… you know, at Berkshire, we are not in that game. We are in the game of trying to buy very good businesses that we’re going to keep forever, and having them grow their earnings, and have them to also throw off cash that we can use to buy more similar businesses. It is a conglomerate. Conglomerates generally are unpopular, and I don’t disagree with why they are, but I think it’s a very rational way of running the business, as long as you keep it focused on running businesses and not as a stock issuance machine. Charlie?

Charlie Munger [02:05:45] Well, yes, and some of those companies got into really pretty heavy manipulation of the numbers. One of them said, “I know what I’m going to report, I just don’t know how I’m going to do it.” That’s not the attitude around this place.

Warren Buffett [02:06:04] Yeah, we don’t know what we’re going to report. No, no, and sometimes we don’t know how to do it either. (Laughter) Okay, number seven.

[02:06:15] Shareholder (John Norwood, West Des Moines, Iowa): Good morning, Warren and Charlie. John Norwood from West Des Moines, Iowa. I have a question on legacy. 100 years from now, Warren and Charlie, what would each of you like to be remembered for?

Warren Buffett [02:06:35] Old age.

Charlie Munger [02:06:36] I’ve heard Warren say that we once said at his funerals, “That’s the oldest looking corpse I ever saw.” I have a different saying that came down from one of my great grandfathers, and I think want to be remembered for a fortune fairly won and wisely used. That’s a pretty good system.

Warren Buffett [02:07:04] Yeah, I would, if you really ask me, I probably like teacher. I enjoy teaching a lot, and some people think I do a little too much of the didactic stuff, but I like students coming, and, you know, I benefited by some fun, and, you know, I’ve benefited by some fabulous teachers, starting with my dad, but going on to Ben Graham, going on to Tom Murphy. I mean, there’s lots of great teachers. So I would say that. I might point out that on Wilt Chamberlain’s gravestone, I think it says, “At last I sleep alone.” Oh, we have some people from Kansas here. Anyway. Okay, Becky.

Becky Quick [02:07:52] This question comes from Pierre Sorel. He’s a portfolio manager at Fidelity, and he says that “The U.S. dollar has been depreciating against major currencies. The Federal Reserve continues to run a zero interest rate policy, in contrast to other major economies that are raising rates or have stepped back from quantitative easing. A few years ago, Berkshire had a short U.S. dollar position to preserve the company’s value from the devaluating dollar. So what’s the company’s management doing about the risk of further U.S. dollar weakness, given that most of the company’s assets and operating businesses are denominated in the U.S. dollar?”

Warren Buffett [02:08:30] Yeah, we had a significant short position some years ago. Last year we had a small short position in two currencies, and we made about $100 million in them. But we have not been really active in the foreign exchange market. We think… shouldn’t speak for Charlie here on this, but I think that there’s no question that the purchasing power of the U.S. dollar will decline over time. The only question is at what rate. But I also think that the purchasing power of most currencies around the world, almost all currencies around the world, will decline. And of course, a short position is just a bet on which one declines at the faster rate, and I don’t have a strong conviction on that. I’ve got some mild feelings about it, but not enough to where I want to back it up with a lot of money.

We do own some businesses. Let me take Coca-Cola. Coca-Cola, I don’t have the exact figures, but my guess is that 80% or thereabouts of the earnings will be non-dollar. And we’ve got exposure in various other ways. But we are not… we’re unlikely to make another big currency bet, although I, you know, I do think that the purchasing power of the U.S. dollar is destined to decrease. And I have fears, but I’ve long had seven… some unwarranted fears of it declining at a rapid rate.

Now, Charlie has pointed out to me that the dollar of 1930, when I was born, is worth 6 cents now, you know, 16 to one in terms of depreciation, and as he points out, we’ve both done pretty well. So inflation has not destroyed us. If somebody had said to me in 1930, in addition to this Great Depression you’re facing, in a world war where it looks like we’re even losing for a little while, and all these terrible things, on top of that, dollar that, you know, your grandfather’s going to hand you when you’re born, there’s only going to be worth 6 cents in purchasing power, that might have been discouraging. But overall, we’ve still done pretty well. So I hate inflation, but we’ve adapted pretty well to it over the years, and we have not had the total runaway type inflation that really can be upsetting to a society yet. But I think it’s something you always have to guard against. Charlie?

Charlie Munger [02:11:25] No, but God knows where the world is headed. I just think that one way or another, the world muddles through. Take a really god-awful culture, which is Greece, modern Greece. I don’t mean there’s anything wrong with the Greeks, but in their family life, but the way they manage their money and pay their taxes, and the main industry in Greece, or one of the main industries, is tourist attractions, and that closed, right, most of the time during the tourist season. It’s a pretty dysfunctional government, and of course people don’t want to pay any taxes or do much work. And yet there it is. It’s… the people of grace are surviving. It’s lasted a long time.

Warren Buffett [02:12:12] Yeah, yeah. Adam Smith said it very well. He said, you know, a great civilization has a lot of ruin in it. It takes a long time, and there’s a lot left after you’ve been through a good deal of ruin. That gets an easier game than the ordinary process of living and then dying. Well, I think we’ll see a lot of inflation, but if I had a choice, you know, I would rather be born in the United States today than any other place, any other time in history. (Applause)

Okay, area eight.

[02:12:55] Shareholder (Mary Bundrick, Rochester, Minnesota): Good morning, Mr. Munger and Mr. Buffett. This is Mary Bundrick from Rochester, Minnesota. I was wondering what factors would you consider in deciding between investment in Berkshire Hathaway versus a null mutual fund.

Warren Buffett [02:13:15] Well, I advise people to buy in index funds, actually, if they’re not going to be active in investments. I mean, if you just are going… if you’ve got a day job, and you want to just put money aside over time, I think the average individual will do better buying an index fund consistently over time than almost anything else available to them. I think it’ll be a perfectly satisfactory investment. Won’t be… it will never be a regard as a great investment, but it’ll be a perfectly satisfactory investment. If I personally had a choice between an index fund or Berkshire at present prices, I would rather own Berkshire. But I wouldn’t… I wouldn’t be unhappy if you told me I had to leave all my money in an index fund for the rest of my life. And, but I like Berkshire better. Charlie?

Charlie Munger [02:14:21] Well, I like it a lot better, and I’d be very unhappy if I had to own an index fund. I… my ambitions are larger. I don’t think the average return of a skilled investor over the next 50 years is going to be as good, after all factors, as it was over the last 50 years. So I think reduced expectations are the best defense any investor has. And after that, I think Berkshire’s a pretty good bet.

Warren Buffett [02:15:01] Charlie’s big on lowering expectations.

Charlie Munger [02:15:04] Absolutely. That’s the way I got married. My wife lowered her expectations.

Warren Buffett [02:15:11] And he lived up to him. Okay, Andrew.

ASAndrew Ross Sorkin [02:15:15] The question is, “Can you explain the company’s policy for your own personal investing outside of Berkshire, and that of your other managers? And why aren’t all trades and investments first cleared through a compliance department, like that at most other companies?”

Warren Buffett [02:15:36] Well, I don’t think it is true of most other companies. We have 260,000 employees, and we have one company that’s a subsidiary of General Re called New England Asset Management, but that’s the only company that advises other people on investments or operates in the investment field. At Berkshire, there are presently three people that can execute trades, and then there are a few other clerical people that would see what was done. But we are not a investment advisory firm. We’re not in a… a mutual fund or anything of the sort. So if we… we have some, I think, pretty clear rules. They’re going to be looked at again, I can assure you, by the audit committee. But in terms of the code of conduct, code of ethics, and insider trading rules, which go to the managers, I don’t think there’s anything ambiguous in those.

Now, to extend those beyond… I don’t know, Marc, how many people those go to, but whether 60 or 70 or something, I’m not sure the number. The problem with rules, you know, is… I mean, you’ve got to have them, and we emphasize not only the letter of them but the spirit. That’s why I write that letter every couple years. I was on the audit committee, for example, of Coca-Cola, and Coca-Cola has about one-fifth as many employees, or did then, had about 50,000, has about… had about one-fifth as many employees as Berkshire. And each time the audit committee met, we had eight or ten code violations. I mean, people… if you take Berkshire at 260,000 people, you know, that’s about the number of households in the greater metropolitan Omaha. And perfect as we like to think we are, normal, I will tell you there’s a lot of things going on, and almo right as we sit here, that, you know, do not match the rules. So it’s a… it’s a real problem.

Now, the problem obviously with the so-called thing is it hit very, very high up, you know. And… but we had a case sometime back, or a fellow that was a friend of mine, vice president, one of our subsidiaries, and like I say, a personal friend, and we supplied the evidence to sent him to jail. You know, it has happened. We had… we had a, as I remember, some years ago, I think it was in Woodbury in New York, we may have had a woman arrested in the offices, just because we want to make very clear, you know, what that we mean business. And as the… as the audit committee said, that this is not public relations, this is reality.

Here’s a letter that went out from Johns Manville. I didn’t know anything about it until Todd Raba gave it to me the other day, but it describes what… dated April 27th, and it said, “The audit committee clearly found that Mr. Sokol compromised the integrally integrity related values that both Berkshire and JM have worked so hard to ingrain in the fabric of both companies. This should serve as a tragic lesson learned for every employee in JM.” And then in bold face, “There are no gray areas when it comes to integrity.” And it goes on. So we hope to get some value out of this experience that will help us reinforce, with not only the 60 or 70 managers but with 260,000 people, that we do mean business on this. And we’ve showed them we mean business when we… we have sent more than one person to jail.

But there will be, you know, if we… we can have all the records in the world, and if somebody wants to trade outside them or something, you know, I… they’re not going to tell us they’re trading in their cousin’s name. I mean, you know, it just doesn’t work that way. And then it… we will have occasions in the future when people do wrong things. Usually they get handled at the subsidiary level. I mean, it’s somebody doing something, whether it’s getting a kick back from a vendor or stealing out of a cash register or whatever it may be. And then, you know, we get the occasional mega one, which is very painful. But we will, if there’s anything we can do in the rules that will make it even more explicit, or get across further the idea that rules are not made to be danced around, but rather the spirit of them extends beyond them, we want to be sure we do it. Charlie?

Charlie Munger [02:21:06] Yeah, all that said, if you look at the greatest institutions in the world, they select very trustworthy people, and they trust them a lot. And it’s so much fun to be trusted, and there’s so much self-respect you get from it when you are trusted and are worthy of the trust, that I think your best compliance cultures are the ones which have this attitude of trust. And some of the ones with the biggest compliance departments, like Wall Street, have the most scandals. So it’s not so simple that you can make your behavior better automatically just by making the compliance department bigger and bigger and bigger. This general cultural… culture of trust is what works. And, you know, Berkshire hasn’t had that many scandals of consequence, and I don’t think we’re going to get huge numbers either.

Warren Buffett [02:22:07] Okay, number nine.

[02:22:08] Shareholder (Michelle, Decatur, Illinois): Hi, Charlie and Warren. I’m Michelle from Decatur, Illinois. Half the U.S. economy seems to be in a sluggish recovery, while most foreign economies are showing solid growth numbers. Are there any significant changes you think could be made to either current U.S. economic policy or Federal Reserve policy or tax laws to get the economy healthy and growing in the U.S.?

Warren Buffett [02:22:39] Yeah, we really had our foot to the floor in both monetary and fiscal policy. You know, you’ve seen it obviously on the monetary side, with extended period of effectively zero interest rates, and actually with the chairman just the other day saying this is going to go on for an extended period. And then they asked him what an extended period meant, and he was… he said, “An extended period.” The… but we… it’s hard to imagine pushing harder on monetary policy than has occurred. The interesting thing is, people think of fiscal policy and they think, well, we had a stimulus bill. Well, if you think about what stimulus really is, it’s not whether you call something a stimulus bill. If you had something that was called a stimulus bill and you didn’t run a deficit, it would not be, you know, it would not be a stimulus. You’d be… and if you don’t have anything you call a stimulus bill at all, but you’re spending 10% more of your GDP than you’re taking in, you are applying a incredible stimulus, fiscal stimulus, to the economy. We have a huge fiscal stimulus program going on now, and it’s called taking in 15% of GDP and spending 25% of GDP. That’s extraordinary.

So I think that we have used those levers in a way that’s almost unprecedented, and I think it’s been wise, in general, to do what’s done, and I think it was particularly wise what was done in the fall of 2008. But I think generally we have followed the right policies. I think they’re less important than most people think they are. I think if you did the wrong policies, it would really screw things up. But I don’t… I think the natural resuscitative powers of capitalism are… will be the biggest factor in taking us out, and I think you’ve seen that over the last two years, and we’re seeing it month by month.

I would say this: residential construction is flatlined at, you know, 500,000 or so units per year. I think when it comes back, and it will, but it will take… it takes working off a crazy excess inventory we had, and there’s no way to do that except through creating fewer residential units than you create households. That’s how you reduce the oversupply. When that end… when that part comes back, I think you’re going to see much more of a pickup in employment than you might think just by looking at construction workers. I mean, we have Shaw carpets. You know, I’m sure they’re not counted as construction jobs, but we have thousands fewer people working there because residential construction is where it is. And we have people at the Furniture Mart, and how many there, how much carpet they’re selling, or houses. So I think there’s a lot of indirect as well as direct reservoir of jobs that will be drawn upon, or utilized, when residential construction comes back.

I don’t think I’d measure just by the number of construction workers that are being employed currently versus, say, four or five years ago. And I think it will come back. I don’t know… I don’t know when. I said in the annual report I thought you’d be seeing it by the end of the year. I may or may not be right on that, but that would be my best guess still. We are creating households faster than we’re creating housing units, and, you know, we lose housing units just… you know, you look at the tornadoes recently. And so there are… that problem will get cured.

And I don’t think, when you mention we’re progressing more slowly than other places, certainly in terms of Asia, you know, there’s no question about it, or Brazil, but actually I think our pace of coming out of this, while it’s been slow compared to the hit we took… in 2008, the American economy was paralyzed. It’s really… it’s come back quite a distance, and we see that in our businesses. Now, you know, our peak on rail car loadings were 219,000 one week, I believe, in 2006, but… and our bottom was 150 or 51,000. We’ll probably run 190,000 or thereabouts currently, and that’ll pick up more as the year goes along. So it’s come back a significant way.

We have certain companies that are setting records that serve basic industries. If you look at TTI, which makes… which distributes electronic components, as thousands and thousands of customers all over the world, and it’s setting new records, and it’s way up in the first quarter, and set a record last year. If you look at ISCAR, which supplies nothing but basic industry, I mean, nobody buys little carbon cutting tools, you know, to put in their recreation room or anything. This stuff is used, you know, for making big things, and their business is going up and up and up, you know, month by month. So the economy is coming back, and when residential construction finally gets this huge overhang largely eliminated, I think you’ll see a lot of improvement in the employment picture. Charlie?

Charlie Munger [02:28:27] Yeah, the one place that I feel we’re making a huge mistake is not learning enough from the big mess that came from wretched access in our financial system. I don’t think we throttled the sin and folly out of that aspect of the economy nearly enough. And I think if you look at all the panics and depressions of the United States, they all came from financial collapses, usually preceded by perfectly asinine and greedy behavior. And I think there would be a lot to be said for taking an axe to our financial sector and whittling it down to a more constructive size.

Warren Buffett [02:29:16] Well, tell us more about how you use that ax.

Charlie Munger [02:29:20] Well, Warren, I’ll make myself ridiculous, but I guess I’m so old I’m entitled to do that. The… I would have the tax system discourage trading. I would have various kinds of Tobin taxes. I would have securities trading more with the frequency of real estate than the trading way computer algorithms were, one person’s computers outwit another person’s computers, and what amounts to sort of legalized front running. I don’t think we need any of that stuff. And I think making heroes out of the people who succeed at it is not good for the fiber of the country either. I hate the idea that 25% of our best engineers are going into the financial sector. So I think it’s crazy what we’ve allowed. And I think the lack of contrition in our financial sector, after the disgraceful stuff they got us into, is perfectly awesome. It makes Dave Sokol look like a hero.

Warren Buffett [02:30:36] He’s getting warmed up. Just as a side light, you know, how many of you know that if you trade an S&P future contract, 500, S&P 500 contract, and you hold it for 10 seconds, and you have a profit, that 60% of the gain is long-term gain and 40% of short-term gain? So essentially, our Congress has said that this activity should be more lightly taxed, you know, than cleaning washrooms, or doing all the things that you people do every day, that you get a special tax treatment. Now, that illustrates one of the problems with the tax code, in that there’s a few people that care intensely about having that in there, and the cost of it, in terms of less revenue for the U.S. government, is diffused among a large group, none of whom have enough interest to want to go out and write their congressman or hire a lobbyist to fight the other way. But it’s pretty extraordinary that we have decided that that particular form of activity should get 60% taxed at a 15% maximum rate, even though it may only take 10 or 20 seconds and be just a little flicker on the screen. And the hedge fund operators of America get a much lower tax rate than the professors of physics or the drivers of taxis.

Charlie Munger [02:32:15] This is demented. (Applause)

Warren Buffett [02:32:17] Well, with that, we’re getting to our break at noon. And I promised… I made a bet three years ago with some fellows that run a fund of funds, and I promise to put the figures up every year as to how we’re doing. It’s a 10-year deal. And if we can put up the slide, what number would that be? Probably five. As you can see, these funder funds, these are five fund of funds groups chosen by these people, who I like, Ted Seides and his friends. And Ted couldn’t be with us today, but we will put these figures up annually. He got off to a very good start with his group. Obviously hedge funds should do better in a down market, but… and we haven’t caught him yet with the S&P 500, but it’ll give you all a reason to keep coming back over the next seven years, as I report regularly on how we are doing in the S&P 500 versus the five fund of funds.

As Carol pointed out in an article recently, or a… maybe is on the web, on… in reporting on this, she looked at the bottom line, where the investors in the S&P 500 are behind for the three years, and the investors in the fund of funds are behind, and the only people that are ahead so far, the investment managers. They’re doing very well at this point. So we’ll keep you up to date on that. We’re going to take a break. We’re close to an hour for lunch. We’ll be back here and we’ll take up the questioning where we left off. Thank you.

Okay, they’ll all be seated. I can’t see whether Ron Olson is in the front row or not. Ron, are you here? Okay. Ron wanted to… well, we’ll get you mike, because we’re trans… we want to get it all corrected. Ron has one point or two points that he wants to correct in terms of dates that I used, so I’m… we’re going to give the microphone to him.

RORon Olson [02:34:54] Not that they’re all that telling, but I thought since we are creating a record, I wanted to clarify two points. The Berkshire law firm, namely Munger, Tolles & Olson, worked with the Lubrizol counsel in pulling together what Warren described as Lubrizol’s proxy describing the background of the transaction. We, as counsel for Berkshire, started to work on that, gathering the facts pertaining to Berkshire’s involvement, essentially David Sokol’s and Warren’s, during the week of March 15. Warren, in speaking to you about the facts this morning, I believe placed the beginning of that work in the subsequent week. So I simply wanted to clarify that as we gathered the facts, and though gathering included several interviews of David Sokol during that week.

Secondly, in describing internal policies at Berkshire to protect against misbehavior or negligent behavior, Berkshire maintains a… something that those in the trading business describe as restricted lists. And down that restricted list are any securities in which Berkshire is buying, selling, has a peculiar interest, and that prohibits any of the corporate officers, or the top officers of the subsidiaries of Berkshire, from participating in trades in those securities without the asset consent of the CFO, Marc Hamburg. That is what I wanted to clarify, Warren.

Warren Buffett [02:36:59] Thanks, Ron. Yeah. Okay, we’ll move right along, and we’re going to go to 3:30, and then we’ll adjourn for a couple of minutes, and then we’ll go to the regular meeting. And Carol again leads off.

CLCarol Loomis [02:37:15] Warren and Charlie, “Both of you expressed a very positive view of BYD and its chairman, Wang Chuanfu, when MidAmerican bought it spotted steak in 2008. Does BYD remain as attractive a long-term investment now as it was when you acquired your stake? If so, why? Has BYD’s recent pattern of unexplained product launch delays affected your confidence in the operation?”

Warren Buffett [02:37:46] Charlie’s the BYD expert, so I’m going to let him start on that one.

Charlie Munger [02:37:52] Well, of course, the price is still way higher than the price Berkshire paid, and so, by its… almost by definition, it’s not quite as cheap as it was then. Any company that tries to move as fast as BYD does, and not as many fronts, is going to have various delays and glitches. And, but I would say I’m quite encouraged by what’s going on, and I expect delays and glitches. They got in trouble in the auto distribution, but they tried to double auto sales every year for six years, and it worked the first five times.

Warren Buffett [02:38:46] Yeah, I have nothing to add. (Applause)

Okay, number ten.

[02:38:51] Shareholder (Catherine Borud, Los Angeles, California): Hi, Warren and Charlie. My name is Catherine Borud. I’m from Los Angeles, California. I invest primarily in commodities and commodity equities. I started out back in 2007 buying oil. In the summer of 2008, we reached the peak of the oil bubble. That’s when I reversed my holdings and started shorting oil. I made a nice profit. In 2009, I started buying oil again, and oil equities, and I’ve been doing pretty well. But given the status of the world today and the price of oil, I’m questioning my investments. Is this another oil bubble? Has oil reached its peak? Should I keep my holdings? Should I short oil? Should I exit oil altogether and move into other commodities or other investments? So my question to you is, what are your sentiments regarding oil?

Warren Buffett [02:39:52] Well, I would say you’ve done a whole lot better than we have, so I think the crowd would rather hear from you. We actually did take a position in oil, I don’t know how many years ago. A long time ago. A long time ago it was $10 a barrel, and it wasn’t that long ago, though, incidentally. That was in the 1990s. Although we… we’ve seen oil a lot cheaper than that, and East Texas oil sold for a dime a barrel in 1932. The… we really don’t know. I mean, obviously you’re dealing with a finite resource. I don’t know whether the world’s up to 88 million barrels or was… not around 85 million barrels, but there’s got to be some comeback. So I wouldn’t be surprised… the current figure’s getting pretty close to 88 million barrels a day. That’s a lot of oil to take out of the ground every day. And of course, their new frontiers have been found, but you are… you’ve stuck a lot of straws into the war… into the earth, and there it is a finite number. So the one thing I can promise you, as a… almost promise you, is that oil will sell for a lot more someday. Interestingly enough, you know, how many producing oil wells do you think there are in the United States? The answer is something like 500,000. Now, you know, there’s these stripper wells, there’s wells out in near Charlie that been going for 100 years.

Charlie Munger [02:41:42] Yeah, but we have looked in a lot of places now, and what’s happening, of course, from the standpoint of the United States companies, is that the smaller countries where oil is being found now are quite a bit smarter about how they grant their concessions than people were 50 or 75 or 100 years ago. So that they drive much more intelligent deals than it was originally the case when we went exploring around the world.

Warren Buffett [02:42:16] But I have no idea. You know, we traditionally… BNSF had hedged a certain amount of oil, and because they obviously use huge quantities of diesel. And I suggested to them, although how they run the BNSF is up to them, but I just… I really didn’t think we could guess the price of oil, and I thought if we could guess the price of oil, we didn’t need to run the railroad. I mean, it was a… took a lot of effort, time to run that railroad, and if we know how to make money just sitting in a room trading oil, why not do that instead? So I don’t really… we don’t hedge. Well, in terms of Berkshire’s parent company policies, we don’t hedge anything in the way of commodities. Some of our subsidiaries do, and that’s fine. They’re responsible for their businesses. But they’re very, very few commodities that I’ve ever thought I was going to… would know the direction of their movement in the next six months or a year.

The one thing I’m quite convinced of, as we talked about this morning, is the fact the dollar will become less valuable over time, so that the dollar price of most things will go up, and maybe go up very substantially. Whether they go up enough so that you have the same amount of purchasing power after you pay tax on your nominal gains is another… there’s another question. I really think that an intelligent person can make more money over time thinking about assets that… productive assets, rather than speculating in commodities, or, when for that matter, fixed dollar investments. But that’s maybe my own bias. Charlie?

Charlie Munger [02:44:05] Well, if we’d done nothing but oil from the very beginning, I am confident that we would not have done nearly as well as we have. To me, that’s perfectly obvious. So I think what we’ve done is much easier than what you’re trying to do, and we like easy.

Warren Buffett [02:44:27] Yeah, we’re not trying to make it any more difficult than we have to. I really don’t know any way to have an edge in that sort of activity. I mean, if you are going to try and figure out when to be longer short oil or natural gas or copper or cotton or whatever, I don’t know… I don’t know of people who I feel would have an edge in trying to do that over the next 10 years. But I do know people where I think they’d have a very significant edge in investing in common stocks, and maybe distressed bonds, for that matter, too.

Charlie Munger [02:45:14] Yeah, trading oil worked best of all for the people who bribed Nigeria. That’s not our media.

Warren Buffett [02:45:22] Well, that’s an insight I hadn’t heard before. The… Becky. Oh, got Ron here.

RORon Olson [02:45:32] I wanted to clarify my clarification. (Laughter)

Warren Buffett [02:45:36] Sounds like a lawyer, doesn’t it?

RORon Olson [02:45:40] It sounds like Marc Hamburg was concerned that when I spoke of our insider trading policy and mentioned that we had a restricted list, that it… somebody may interpret that as suggesting that Lubrizol was on that restricted list. It was not. What goes on our restricted list are securities that we have a position in that we publicly reported. So I just simply wanted to clarify that point. Lubrizol was not on the restricted list.

Warren Buffett [02:46:23] Okay, Becky.

Becky Quick [02:46:24] Charlie, I got several variations of this question, but this one comes from Peter Kerr in Waterloo, Canada. He says, “Could you please let us know a couple of the most important things you learned during the last year?”

Warren Buffett [02:46:41] I’ll let Charlie go first.

Charlie Munger [02:46:44] Well, I hate to admit this, because I’ve ignored high tech all my life, but I actually read that book “In the Plex” about Google, and I found it a very interesting book. And so here I am at my advanced agent, and I find it interesting the way people have created these engineering cultures, which are quite peculiar and different from most of what we have at Berkshire. And will I ever make any use of this? I doubt it. But I certainly enjoyed learning it, and if I enjoy learning it, I regard it as important, because I think that’s what you’re here for, is to go to bed every night a little wiser than you were when you got up.

Warren Buffett [02:47:34] I’m just trying to hold my own, actually. Now, what I learned in the last years is that I’m gonna have Charlie write the next press release. (Applause)

Charlie Munger [02:47:51] Warren, I approve that damn press release with no objections. The virtual shareholders are going to be in terrible trouble if they’re relying on me to fix your errors.

Warren Buffett [02:48:07] Okay, let’s go to number 11. Getting too close to confession time up here.

[02:48:14] Shareholder (Phil Drewf, Indianapolis): Good afternoon, Warren and Charlie. My name’s Phil Drewf, and I’m here with my wife Tina and our good friends Grummies and the Hendricksons. We’re all from Indianapolis, and we’re all small business people, so we are not too big to fail. And our question basically is simply this: do either of you gentlemen think that we might be headed down the same type of path years from now, when we get into a situation as taxpayers that we might have to bail out a company on Wall Street that is too big to fail? And if so, have we done anything to avert that?

Warren Buffett [02:49:01] There are institutions around the world that I think governments should properly, although people won’t like it, but I think that there are institutions around the world That governments would properly, I won’t, I think bailout has got a little bit of a pejorative term on it, and in the sense that stockholders should not be saved, managers should not be saved, but certainly the institutions in some cases should not be allowed to collapse immediately. I mean, right now we’re continuing to follow that policy, for example, with Freddie Mac and Fannie Mae. I mean, they have not reconstituted themselves as many of the banks and the auto companies. I mean, Chrysler is even paying back, which, you know, it surprises me, and I, but I, my hat’s off to him. I mean that sincerely, that I was really on the fence on saving the auto companies, but I think the administration did the right thing. I mean, they were, they weren’t saving the auto companies per se, they were still working at saving a very fragile economy, and, like I say, and particularly in retrospect, they certainly in my view made the right decision.

There are, you know, right now, you know, in Europe they’re deciding whether countries are too big to fail. And so I think that problem will always be with us. I think for that reason that you have to do things to reduce the propensity to fail, and among those things I think you have to make it so that the CEO, and to some extent the board, but not to the draconian degree that I’ll suggest for the CEO, I think that any institution that requires society to come and bail it out, for society’s sake, should have a system in place that leaves their CEO basically, and his spouse, dead broke. Because I think that the upside and downside incentives are vastly different. And I think the board of directors of those institutions should suffer a severe penalties, nothing like that, but they certainly, you know, should give back the last, say, five years of director’s fees or whatever it may be that they’ve received. Because they, if you run an institution that actually needs the society, can suffer such a blow, if you fail the society needs to come in and save you, you want to have somebody running that institution, and you have incentive practices in place that make it very, very, very painful to the people involved for the failure if it indeed happens.

And you also ought to reduce leverage in the system, and I think we’ve gone to some degree in that direction. But there will be too big to fail institutions 10 years from now or 20 years from now. Right now Freddie Mac and Fannie Mae are sort of too big to figure out. You know, we just sit there, and incidentally, there’s nothing wrong with that. We should come, it’s more important to come up with the right solution than it is to come up with an immediate solution on those. But particularly, I would say, in Europe there are banking institutions and countries that people are facing the question of whether they are too big to fail. Charlie?

Charlie Munger [02:52:55] Well, my answer is that the past panics and depressions by and large started on Wall Street or in stock brokerage. They tended to involve great waves of excessive speculation and bad behavior in the people who were profiting from those waves as salesman or market makers or promoters or what have you. And I think that this last mess, which created so much danger, should have caused something like happened in the aftermath of the ’30s, where we’ve prevented a new mess for a long, long time. But of course it hasn’t done that, and so I think you can confidently expect a new mess or two before your career is over. And I think it is really stupid for our country to have allowed this. Partly the failure is not one of evil, it’s one of stupidity, and part of the stupidity is in our great academic institutions, who believe a whole lot of things that aren’t true. And that is a really hard problem to solve.

Warren Buffett [02:54:07] You talk about particularly in financially?

Charlie Munger [02:54:10] Yes, of course, and economics too.

Warren Buffett [02:54:12] Yeah.

Charlie Munger [02:54:13] No, those are not hard scientists, sciences, finance and economics. And finance really attracts people who should have gone into snake charming.

Warren Buffett [02:54:23] Or if there’s anybody we’ve forgotten to insult, just pass a note up and we’ll get to you. Yeah. Okay. Andrew.

ASAndrew Ross Sorkin [02:54:32] This question comes from a shareholder based in Washington, D.C., who’s asked to remain anonymous. This person says, “Warren, in the past year you and Melinda Gates resigned from the board of The Washington Post. What does this say about Berkshire’s intention to hold The Washington Post stock over the long term, and is this related to the problems at its for-profit education business, Kaplan?”

Warren Buffett [02:54:57] No, I made the statement actually publicly, and they may have only run it in the Post, I’m not sure about it elsewhere, but they, I made the statement that we would not be selling any stock and it had nothing to do with that. That I’m a phone call away from Don Graham or anybody else at the Post, and they can just save a lot of directors fees and I can save a lot of travel, if at age 80 I decide that I’d rather spend a few more days at Berkshire and less on the road. I am, we will not be selling any Post shares. You can, normally I won’t comment about what we’ll do on market level securities, but I’ll be unequivocal about that. And my enthusiasm for the Post itself and the management is 100% what it’s always been, and I am just available a lot cheaper than before if the Post management wants any advice. I don’t think Melinda did it on the basis of age. You’ll have to ask her. I really decided at 80 that I’d been there since 1974, with an interruption when I was at Cap Cities/ABC, and it’s just a lot easier this way. Charlie, you have any thoughts on serving on boards generally? Charlie’s on the Costco board.

Charlie Munger [02:56:21] Well, that’s because I really admire Costco, and that’s one of the pleasures of my life, is interfacing with those people. But that’s the only one where we don’t, where I don’t have a big ownership interest. I think generally speaking, serving on a lot of different boards is for the birds.

Warren Buffett [02:56:46] No, I agree. Okay, area 12.

[02:56:49] Shareholder (Marc Rabinov, Melbourne, Australia): Good afternoon, Mr. Buffett and Mr. Munger. I’m Marc Rabinov from Melbourne, Australia. As an investor from the Asian region, I am concerned that a weaker dollar will erode the value of my Berkshire stock. However, Berkshire is highly productive with real pricing power. So can I be confident that over the long term any fall in the dollar will be offset by a rise in the value of my Berkshire stock? And by that I mean in addition to any intrinsic growth in the underlying business.

Warren Buffett [02:57:33] The answer is no. It’d be a lot easier if you just had the Australian dollar go down. The Australian dollar was one of two currencies that we did on last year that contributed to the $100 million profit. But no, I cannot tell you what policies will be followed in the United States and what policies will be followed in Australia that will, what they will be and how they will affect the relative value of those two currencies, say, 10 years from now. I think the movement could be quite dramatic, and I think it actually could be dramatic in either direction. That’s why I don’t know what to do.

But the only promise you’ll get from Charlie and me about Berkshire is that we do every day, as I said in the annual report, try to think about increasing the earning power and the intrinsic value of Berkshire. And to the degree we increase it, the shareholders will, or to the degree we decrease it, the shareholders will share in exactly the same proportion as Charlie and I do. We will, our interests are 100% aligned with, we will make or lose money through our stock, and luck to some extent will depend, it will determine how well we do. We know we can’t do remotely as well in the future as we have in the past. There is no way to compound, there’s no way we know the compound the kind of sums we’re working with now at rates that are anywhere close to what we were able to do when working with much smaller sums. But you’ll get our best efforts. Charlie?

Charlie Munger [02:59:37] I can’t add to that. Australia has these fabulous open pit mines, and in a time when Asia is just totally booming with its demand for metals, I can’t tell you how Berkshire stock isn’t going to perform vis-a-vis mines in Australia. I think we’ll do pretty well compared to companies here in the United States.

Warren Buffett [03:00:04] Yeah, I think so too. Carol.

CLCarol Loomis [03:00:07] This shareholder wishes to be known only by his initials, A.J. “The importance of Berkshire’s equity portfolio has diminished over the past few decades. Today I viewed Berkshire’s appetite for equity as an afterthought, and instead see its focus as being on large acquisitions. Would you agree with this, and where do you see the equity portfolio going over the next five or ten years?”

Warren Buffett [03:00:33] Well, I prefer large acquisitions, but it’s not an afterthought at all in terms of the portfolio. I mean, Charlie and I spend, well, we probably spend more time thinking about the portfolio, because it’s only occasionally that we get a chance to think about acquisitions that are sizable and that are available to us. So we are equally interested in both aspects of Berkshire’s, but where we hope we really get lucky is in adding significant companies to what we have already, and having our, the companies that we already own make various bolt-on acquisitions. We’ve had several of those already this year that you don’t read about. A lot of our companies have the potential to do, to earn considerably more money five or ten years from now than they’re earning now.

So both the development of those businesses, which really resides with the manager, Charlie and I don’t contribute anything on that, but we will, we spent as much time thinking about the portfolios as we ever did. And, you know, it’s important. I mean, if you talk about $150-some billion in cash and marketable securities, the performance of that particular segment is going to have a lot to do with how well Berkshire does over time. Charlie?

Charlie Munger [03:02:11] Yeah, we’ll always have a fair amount of marketable securities because of our insurance subsidiaries. And, but as we get forced by our size into the bigger and bigger stocks, of course we’re going to do less well than we did when we had a bigger universe of practical, practicable things to consider.

Warren Buffett [03:02:33] A lot less well. I mean, it’s just, it really is the nature of things. We are buying securities where we have to put billions of dollars in them in most cases, and that is not a field that is unlooked at by other analysts. And so it’s impossible to have a big edge. We hope we have a small edge.

Charlie Munger [03:02:59] On the other hand, when we were doing so well in marketable securities, nobody called us and said, “I have a wonderful business, and you’re the only place in the world where I would want to transfer it.” And now that happens, what, a couple times a year at least?

Warren Buffett [03:03:17] Yeah.

Charlie Munger [03:03:17] And I really prefer in some ways this part of the game to the earlier game. It’s more fun to create permanent partners doing constructive things than just outsmart other people and shoveling little pieces of paper.

Warren Buffett [03:03:38] It’s fun to do both, actually.

Charlie Munger [03:03:43] Yeah.

Warren Buffett [03:03:43] But, well, I don’t see you holding back. Okay, let’s go to the other room. 13.

[03:03:54] Shareholder (Whitney Tilson, New York): Hi, I’m Whitney Tilson, a shareholder from New York. Thank you for including in your latest annual letter such complete and clear valuation information regarding Berkshire. You stated that the operating earnings of the insurance businesses are excluded from your earnings table, and I know you said this morning that 2011 is going to be a break-even year at best. But in light of the disclosure in the annual report, the Berkshire earned $17 billion in profit over the last eight years without a single money-losing year, are you being overly conservative? Don’t you think the intrinsic value of your insurance businesses is more than just their float, especially GEICO, for the reasons you discussed this morning?

Warren Buffett [03:04:31] Yeah, I’d agree with that, Whitney. But I, it’s very hard to estimate, you know, what the normal underwriting profit might be over the next 20 years or something of sort. And so I agree with you. I don’t know what I’d call it overly conservative. I would say it’s conservative to assume break-even underwriting, but as you will, I mean, if we had another Katrina or something of the sort, and forget about, you know, winter storms in Europe and all that, I mean, we could lose significant money in underwriting this year. And we expect to lose significant money in underwriting, you know, maybe every 50 or every 10th year, whatever it might be. But I think you’re right in saying that it would not be inappropriate to include some normalized underwriting profit in addition to the calculation that I made in the annual report.

Charlie Munger [03:05:35] Whitney, let me help you by asking another question of Warren. Is there any other large casualty insurance operation in the world that you know of that you would trade for ours?

Warren Buffett [03:05:49] No. Not remote. No, no, no. Nothing close. I mean, we, however we lucked into it, we’ve got, we have an unbelievable insurance operation. And I mean, GEICO, you know, is fabulous. And, you know, if you think about, since 1936 the idea has been out there, but, you know, with all the strength that all the other companies had and the agency plants and everything else, you know, GEICO has now moved to where it’s the third largest in the United States and gaining ground every day on the two ahead of them, and doing it very profitably. GEICO’s combined ratio, GEICO had an underwriting profit of close to eight points, as I remembered, in the first quarter. Now, that’s going to be probably the best quarter of the year, I should add, but it’s a marvelous business.

Ajit has built a business from scratch in the reinsurance business that in many respects, you know, he operates all alone. He may not see a lot of transactions in any given period of time, but there are certain things where if somebody wants huge amounts of insurance and a quick answer, or even a slow answer, sometimes we’ll give them a quick one, there’s really nobody else to call. It’s a little like Charlie mentioned on acquisition opportunity. So he’s, and he’s done it. I mean, it didn’t exist when he got there. Tad Montross has got a magnificent operation that had Gen Re, and it did, it had to get shaken out to quite a degree, but Tad has got a very, very disciplined business there. And then we have a group of smaller companies, that some of them have some very unusual franchises. So they’re really, you know, I didn’t have anything to do with it, so I can brag about these people, but they have really done a job in building an insurance company that, I don’t think anything, I don’t think there is anything like it.

Charlie Munger [03:07:58] Yeah. Yeah, some of you people that have been around a long time, you invested with an Omaha boy and you ended up owning part of the best in casualty insurance business in the world.

Warren Buffett [03:08:10] Yeah, if you go to 30th and Harney, you’ll see a building there of National Indemnity’s. We paid $7 million for National Indemnity, a million four for its sister company, National Fire & Marine, and that’s the same building that we operated out of in 1967 we’re operating out of today. The only difference is that today it’s got more net worth than any insurance company in the world.

Charlie Munger [03:08:39] Yeah. So we, it’s not that great a business as a business, casualty insurance. It’s a tough game. There are temptations to be stupid in. It’s like banking. And, but if you’re in it, I think we’ve got the best one.

Warren Buffett [03:08:56] Okay, with those modest statements, we’ll move on to Becky.

Becky Quick [03:09:01] This question comes from Mark Jordan in Charleston, South Carolina. He writes, “In a period of high inflation, which particular business is owned by Berkshire Hathaway will perform the best, and which will perform the worst, and why?”

Warren Buffett [03:09:17] Well, the businesses that will perform the best are the ones that require little capital investment to facilitate inflationary growth and that have strong positions that allow them to increase prices with inflation. And, you know, we have a candy business, for example, and the value of the dollar since we bought that candy business has probably fallen at least 85%, I would say 80% to 85%. And that candy business sells 75% more pounds of candy than it did when we bought it, but it has 10 times the revenues, and it doesn’t take a lot more capital. So that kind of a business, any business that can, has enough freedom to price to offset inflation and doesn’t require commensurate invest, or a huge investment to support it, will do well.

Businesses like our utilities, which get in effect a bond-like return but require, you know, if you’re going to build a generating plan that costs twice as much per kilowatt hour of capacity, and all you’re going to get is a fixed return, and yields on bonds go up perhaps dramatically if you get high inflation, is not going to do that well in an inflationary period, just because it has certain aspects of a bond-like investment, and bonds generally are not going to do well in inflation. Charlie?

Charlie Munger [03:11:03] Well, but like our insurance operations, our capital intensity railroad business is certainly one of the best railroads in the world, and our utility operations are certainly one of the best utility operations in the world. And so it isn’t all bad to be up there, world class, in your main businesses.

Warren Buffett [03:11:31] Our railroad, the government’s talked about building a high-speed rail system in California. I think they’re talking about 800 miles of track, and their estimated cost was about $43 billion, and estimated costs on constructions and things like that go up dramatically much more often than they get reduced even by a minor amount. And of course we paid $43 billion, counting debt assumed, for a rail system which has 22,000 miles of main track and 6,000-plus locomotives and 13,000 bridges, if you ever want to buy a bridge. So that the replacement value of that asset during inflationary already is huge, and it would grow dramatically. And the world, our country will always need rail transportation. So it is a terrific asset to own. I’ll just leave with that. Okay, area one again.

[03:12:52] Shareholder (Martin Greenberger, UCLA Anderson School): I’m Martin Greenberger, UCLA Anderson School, where I work in disruptive technologies, not finance.

Warren Buffett [03:13:00] You’re forgiven. Go ahead.

[03:13:03] Shareholder (Martin Greenberger, UCLA Anderson School): My friend Walt would like to know if Berkshire has been considering splitting its type A shares like it did its type B shares, and if so, what are the pros and cons in your opinion, and what would be the short-term and longer-term effects?

Warren Buffett [03:13:31] Yeah, well, in effect we’ve already split it, you know, 1,500 for one, by having to be available. And, you know, we have a situation where the company will never be sold, but if any transaction involved the A stock, the B shares are going to get treated exactly the same. So there’s really no disadvantage to owning the B stock, except it has somewhat less voting power than the A stock. But in every other way it’s the same instrument. And so we already have a split stock available. So I would tell Walt that he really should not count heavily on the A stock getting split. Charlie?

Charlie Munger [03:14:24] Yeah, Warren used to cheer up his old friends by telling them, “May you live until the A stock splits.”

Warren Buffett [03:14:33] And I would love to make that deal myself. Andrew.

ASAndrew Ross Sorkin [03:14:37] This question comes from Matthew Palmer of North Andover, Massachusetts, and he writes, “Mr. Buffett, you have praised Ajit as a possible successor. Since he may be in line as our next CEO, can you give us a concrete example of a policy that he’s written that’s impressed you, and can you talk a little bit about the way he thinks, since we rarely get an opportunity to hear from him?”

Warren Buffett [03:15:04] Yeah, Ajit is not exactly a publicity hound. He, I can’t think of any decision he’s ever made that I think I could have made better. And I’ve, I’m not privy to all of his transactions anymore. They’re just, they’re lots of them that are not of huge size or of great interest, but he tells me about all the interesting things that come along and all the very big things that come along. And I would say this, you’d be better off voting with him than with me after listening to any proposition he brings up. He is as rational a thinker as Charlie is, as anybody I’ve met. He loves what he does. He’s creative, he’s very creative.

We have moved into one area after another in reinsurance, when people came in copying us in one area of business that we would be operating, energy comes up with something else. Lately we’ve been much more active in life reinsurance, but who knows what tomorrow brings. I mean, if there happens to be a huge cat in the third quarter of this year or something of sort, that might open up all kinds of opportunities in writing covers when, if capacity got strained. But who knows what will happen. All I know is that Ajit’s mind works like a machine, you know, day after day, and he does love what he does, which is an important part of doing well in any activity. And I really, I don’t know what his best deal was. I know what my best deal was, which was hiring him. Charlie?

Charlie Munger [03:17:15] Yeah, Sir William Osler, who created a model medical school for the world, used to say that the secret of success in a field was getting very interested in it. Well, Ajit is really interested in what he does.

Warren Buffett [03:17:36] Many of you don’t know this, but every Thanksgiving Ajit flies to London because they don’t have a Thanksgiving holiday. We give him Christmas off, though. Oh gee, we just, you know, he is, I say how invaluable he is, and I’m not exaggerating when we talk about him. And he is to an extraordinary degree, he thinks of Berkshire first. Ajit, at various periods when insurance companies became popular for one reason or another, that was, you know, the, it was the big thing about Bermuda companies some years ago, Ajit could have monetized himself to an incredible degree. He still could do it. I mean, people would hand him a significant percentage of any company being formed with lots of money, so that immediately he could create, I would guess, in the hundreds of millions of wealth without lifting a finger, just by somebody putting up, you know, a couple billion dollars and saying, “You’ve got 20% of it,” or whatever it may be.

And I mean, and listen, he’s smart, he knows that, and it doesn’t cross his mind to do anything like that. I mean, he, we have in compy always, he always thanks me for what I do at the end of the year, and I feel I’ve left off a zero, you know, when I get all through. It’s, he’s just a remarkable human being, and we are very, very lucky that, I think he has a lot of fun in what he does at Berkshire. He’s got a cadre of about 30 people that work with him. There’s many more that are settling claims in doing that sort of thing on runoff business. But it’s, you won’t find anything like it, in my view, not only in the insurance world, but really in almost any part of the business world. (Applause)

Charlie Munger [03:19:43] Let’s go ahead and answer the question, maybe you avoided it on purpose, is what are our worst businesses?

Warren Buffett [03:19:53] What are our worst businesses? Well, generally speaking, and this is general, I have, well, I’ve made certain mistakes in going into smaller businesses that really never had the potential of becoming big. But I would say overall, probably, I would call retailing. You know, Dexter was our worst business, but I have, the Furniture Mart in, obviously, is a terrific operation. But we have not made, despite being in numerous retailing, quite a few retailing businesses for quite a while, we have not created major earning power there. Wouldn’t you agree on that, Charlie?

Charlie Munger [03:20:46] Yeah, but luckily it’s a small part of the operation.

Warren Buffett [03:20:50] Yeah, but you’re right, but that’s been the hardest game for us. And, you know, if we were a little smarter, we could have figured that out better.

Charlie Munger [03:21:02] Well, we were a little smarter, we could have done a lot of things, but yeah.

Warren Buffett [03:21:08] Right.

Charlie Munger [03:21:08] Yeah, of course See’s is a retailing business to some degree.

Warren Buffett [03:21:12] Yes. And, you know, we had enormous success there, so maybe we started thinking we were geniuses. You know, we were like the duck on the pond when it was raining, and we thought we were rising in the world because of merit, and it was just because it was raining.

Charlie Munger [03:21:29] Yeah.

Warren Buffett [03:21:29] Okay, we’ll go to number two.

[03:21:31] Shareholder (Boston, Massachusetts): Joel Telling has, Boston, Massachusetts. What’s the proper way to think about goodwill and return on capital? Berkshire’s manufacturing, service and retail businesses earn pre-tax returns on tangible capital over 20%, which suggests either skilled managers or fantastic businesses, but the return on allocated equity is in the single digits, which looks drab. Accountants treat intangibles similarly because they have different economics. For an indestructible brand like See’s or Coca-Cola, I can see why the intangibles should not be amortized, because it’s worth more every year, and your comments on GEICO policyholders were one way to think about that. But all the tobacco companies have billions of dollars of goodwill, and unit sales of cigarettes to claim every year in developed countries, so perhaps they should be amortized. And for Time Warner AOL, goodwill definitely needed to be amortized.

Warren Buffett [03:22:36] Yeah, goodwill, you mentioned AOL Time Warner or something, sorry, it should be written off actually. I mean, it wasn’t, it was just a mistake in purchase price. The goodwill should not be used in evaluating the fundamental attractiveness of a business. There you should look at return on tangible assets, and even then there’s some minor, some other adjustments you may want to make. But basically, in evaluating the businesses we own in terms of what the management are doing and what the underlying economics of the business are, forget about goodwill. In terms of evaluating the job we’re doing in allocating capital, you have to include goodwill, because we paid for it.

So if we buy, you know, Coca-Cola goes back to 1886 and John Pemberton at Jacobs’ Pharmacy in Atlanta, and there was not a whole lot of goodwill put on the books when he sold that first Coca-Cola. If you were to buy the company now, the whole company, you would be putting a figure, you know, $100 billion or something like that on it. You shouldn’t amortize that, and you shouldn’t, in judging the economics of the business, look at that. But in terms of judging the economics of the business that purchased the nav, we’ll call it Berkshire, then you have to allow for the goodwill, because we’re allocating capital and paying a lot for it. I don’t think the amortization of goodwill makes any sense. I think write-offs of it, when you find out you’ve made the wrong purchase and the business doesn’t earn commensurate with the tangible assets employed and plus the goodwill, I think write-offs of it makes sense. But when looking at businesses as to whether they’re good businesses, mediocre businesses, poor businesses, look at the return on net tangible assets. Charlie?

Charlie Munger [03:24:27] Well, I think that’s right. But as the gentleman says, when we buy a business, a whole business, we never get a huge bargain, and of course we may get down toward 10% pre-tax earnings on what we pay. That isn’t so awful as you think when you, a lot of the money comes from insurance float that costs you nothing. In other words, if you have $60 billion of float and God gives you $6 billion a year of earnings, it’s not all bad.

Warren Buffett [03:25:03] Well, in Lubrizol, we’re paying close to $9 billion for the equity, and it earns, and you should make adjustments for debt, but it’s not an important factor there. And, you know, current rate of earnings is probably a billion pre-tax. And now Lubrizol itself is employing far, you know, they’re employing, you know, call it two and a half billion of equity to earn that billion of pre-tax. So it’s a very good business in terms of the assets that are employed. But when we end up paying the premium we pay to buy into it, it becomes a billion pre-tax on something close to $9 billion. You have to judge us based on close to a $9 billion investment. You have to judge James Hambrick in running the business based on the much lower capital that he has been playing. It can turn out to be a very good business, and we could turn out to have made at least a minor mistake if it isn’t as good a business as we think it is now, but still is a very satisfactory business based on the tangible capital employed. Charlie, can you make that clearer?

Charlie Munger [03:26:26] Well, it’s just, we are not going to buy, in the climate we’re in now, operating businesses that are all decent for low prices. Just not going to happen.

Warren Buffett [03:26:44] Carol.

CLCarol Loomis [03:26:44] In the book about Charlie, “Damn Right,” by Janet Lowe, Charlie talks about his view on teaching finance. He says that he would use the histories of a hundred or so companies that did something right or wrong as a basis for teaching the course. “Could each of you,” and sense this concern Charlie, “could each of you,” we’ll start with Charlie, “give us an example or two from either category, right moves or wrong moves?”

Warren Buffett [03:27:19] I predict Charlie’s going to talk about Costco. Go ahead, Charlie.

Charlie Munger [03:27:23] Well, Costco, of course, is a (Laughter) a business that became the best in the world in its category, and it did it with an extreme meritocracy and an extreme ethical duty, self-imposed, to take all its cost advantages as fast as it could accumulate them and pass them on to the customers. And of course that created ferocious customer loyalty. And it’s been a wonderful business to watch, and of course strange things happen when you do that and do that long enough. Costco has one store in Korea that will do over $400 million in sales this year. These are figures that can’t exist in retailing, but of course they do. And so that’s an example of somebody having the right managerial system, the right personnel solution, the right ethics, the right diligence, and etc., etc. That is quite rare. If once or twice in a lifetime you’re associated with such a business, you’re a very lucky person.

And the more normal business is a business like, say, General Motors, which became the most successful business of its kind in the world and wiped out its common shareholders, what, last year? That is a very interesting story. And if I were teaching a business school, I would have Value Line-type figures that took people through the entire history of General Motors, and I would try and relate the changes in the graph and in the data to what happened in the business. And to some extent they faced a really difficult problem: heavily unionized business combined with great success and very tough competitors who came up from Asia and elsewhere, and to some extent from Europe. And that is a real problem, which of course, to prevent wealth from killing you, your success turning into a disadvantage, is a big problem in business.

And so all these wonderful lessons in those graphs, and I don’t know why people don’t do it. The graphs don’t even exist that I would use to teach. I can’t imagine anybody being dumb enough not to have the kind of graphs I yearn for, but as far as I know there’s no business in the school in the country that’s yearning for these graphs. Partly the reason they don’t want it is if you taught a history of business this way, you’d be trampling on the territories of all the little professors and sub-disciplines. You’d be stealing some of their best cases. And bureaucracies, even academic bureaucracies, people protect their own turf. And of course a lot of that happened in General Motors.

Yeah, it’s a, I really think the world, that’s the way it should be taught. Harvard Business School once taught it much that way, and they stopped. And I’d like to make a case study as to why they stopped. I think I can successfully guess. It’s a course in history of business trampled on the territory of barons of other disciplines, like the baron of marketing, the baron of finance, the baron of whatever. And just an IBM is an interesting case. I mean, just one after another that are utterly fascinating, and I don’t think they’re properly taught at all, because nobody wants to do the full sweep.

Warren Buffett [03:31:34] Charlie and I were on a plane recently that was hijacked. With what? Was hijacked. I’m telling about our experience on that hijacked plane. When the hijackers picked us out as the two dirty capitalists that they really had to execute, and, but they were a little abashed about it. They didn’t really have anything against us. So they said that each of us would be given one request before they shot us. And they turned to Charlie and they said, “What would you like as your request?” Charlie said, “I would like to give once more my speech on the virtues of Costco, with illustrations.” And the hijacker said, “Well, that sounds pretty reasonable to me.” And he turned to me and said, “And what would you like, Mr. Buffett?” And I said, “Shoot me first.” (Laughter) Anyway, okay, number three.

[03:32:38] Shareholder (Sumit Mehraf, Kashmir, India): Sumit Mehraf from Kashmir in India. Mr. Buffett, hope you enjoyed your first trip to India. Here’s my question. One of the most important things that drive people are incentives, but if you live in a rich society, it’s very hard to get your kids to work hard and reach their full potential, because they just don’t need to. So if you’re, if you or Charlie decide to have a kid in the next five years…

Warren Buffett [03:33:16] It will be a star in the east.

Charlie Munger [03:33:20] It will take more than a decision.

[03:33:23] Shareholder (Sumit Mehraf, Kashmir, India): How would you incentivize him or her?

Warren Buffett [03:33:27] I thought you’re gonna say how would you… (Applause) Now, that’s a good question.

[03:33:34] Shareholder (Sumit Mehraf, Kashmir, India): I apologize for interrupting. How would you incentivize him or her to compete against the hungry and highly motivated kids from emerging markets like China, Brazil, Russia or India?

Warren Buffett [03:33:50] Yeah, I think certainly that if you are very rich and you bring up your kids to think that they are more important in society, or that they have some special privilege simply because they came out of the right womb, that, you know, that’s just a terrible mistake. But Charlie has raised eight children that I know quite well, most of them, and I don’t think any of them have that sense. But it’s, if you really are going to raise your kids to think that other people should do all the work for them, and that they will be entitled to sit around and fan themselves for the rest of their lives, I mean, you know, you will probably not get a good result.

I, you know, in my, Charlie has been rich most of the time when his kids, many of his kids were growing up, some of his kids were growing up. I’ve been rich while my kids were getting, certainly when they got into high school and in college. But I don’t, I don’t think, I certainly didn’t want to give them the idea that they were special just because their parents were rich. And I don’t think, I don’t think you necessarily have to get a bad result or have children that don’t have any incentives simply because their parents are rich. The one thing I don’t think you want to give them an incentive to do is try and outdo their parents and what their parents happen to be good at. I don’t think that makes sense, whether you’re a professional athlete or a rich person or whatever it may be, a great novelist, or, you know, you name it. But I think, I really think if you’re rich and your kids turn out to have no incentives, I think, I don’t think you should point at them. I think you should probably point at yourself. Charlie?

Charlie Munger [03:36:06] Well, I don’t think you can raise children in an affluent family and have them love working 60 hours a week in the hot sun digging fence post holes or something. That’s not going to work. So to some extent you are destroying certain kinds of incentives, and my advice to you is to lose your fight as gracefully as you can.

Warren Buffett [03:36:32] I’m not sure if you can, if you’re poor, if you can get your kids to love the idea working 60 hours a week. They may have to. But the kids that really get interested in something will work no matter how rich they are.

Charlie Munger [03:36:52] But it’s rare to have an Ajit-like intensity of interest. You know, if you’re a proctologist, you might not like your day as it went on and on.

Warren Buffett [03:37:06] I think we better move along. Becky.

Becky Quick [03:37:10] This question comes from a shareholder from central Iowa, who asks, “Berkshire Hathaway does well in part because its managers want to be there for non-pecuniary reasons. But it seems likely that the next operation CEO will best be filled by someone who insists on a salary of more than $100,000. What kind of compensation structure do you expect for the next generation of Berkshire leadership?”

Warren Buffett [03:37:40] Well, I think the next CEO will make a lot of money and shouldn’t make a lot of money. I mean, the responsibility for running a company with a couple hundred billion dollars in market value should pay well. I think that whatever the level the board decides then, in terms of a base salary, should be supplemented by probably an option system that incorporates a couple of things that are perhaps unusual. I don’t think the option price, original strike price, should be less than, if the company were for sale, the assets would bring. So the idea of giving somebody an option during some depressed part of the stock market at the market price, I think, is crazy, because you wouldn’t sell your business at that price, and why sell part of it on that basis?

So I think the base price should be what the business is worth at the time you start. And then I think, because of the compounding feature of leaving money there, you know, no management at all would produce some gain in value over time. So I think there should be an increase in the base price annually at some rate, and then minus the dividend that’s being paid. So if you assume a 3% dividend was paid, and you wanted to have a hurdle rate of increasing at 7% or 8% a year, then you would have the option price accelerate maybe at 4% or 5%. But with that kind of a structure, I think you can give a very large option, because if somebody is creating excess value above a given rate on a very large sum, I think they deserve something quite significant in terms of that excess earned.

Now, the present compensation system has no relevance at all to what my successor should earn. The main thing is getting the right person with the right values, who interacts well with the managers and who knows how to allocate capital. And as you just heard a little earlier, our managers who accomplish a lot, if they accomp, and if they’re working with big operations so that it turns into a lot of dollars, they can make a lot of money with Berkshire. They, nothing has worked off the eccentricities of Charlie and me at the top level. So, you know, people make well into eight figures sometimes at Berkshire, but they earn it, and they don’t get it because of any phony targets or anything of that sort. They get it because they really deliver incredible, in some cases, excess value to Berkshire. Charlie?

Charlie Munger [03:40:46] Well, I hope it will be a long time in the future. And I don’t regard it as absolutely inconceivable that Warren’s spot will someday be occupied by a very rich man who has adopted Warren’s system of pay. I think somebody in America has to be the exemplar for not grabbing all you can. I think it’s a very important part of the whole skin.

Warren Buffett [03:41:22] I don’t think you better run an ad, though, after I go, that says, “CEO wanted, $100,000 pay plus pleasant surroundings.” Okay, we’ll go to number four.

[03:41:34] Shareholder (Vern Cushingberry, Overland Park, Kansas): Hi, Mr. Buffett, Mr. Munger. My name is Vern Cushingberry, and this question is on behalf of a group of investors that made the trip up today from Overland Park, Kansas. Given your interest in renewable energy and natural resources, I wonder if you’d be willing to share your thoughts on how a world of limited and depleting clean water supplies and declining food stocks affects your investment strategies and thinking on the future.

Warren Buffett [03:42:17] Yeah, I would say it’s an important subject, but it doesn’t affect our investment strategy to any real degree. In other words, you know, we would love to buy another GEICO, we would love to buy another BNSF, we’d love to buy another MidAmerican. And we look at those businesses over a long time frame, but we are looking at what we expect their earning power to be three, five, ten, fifteen years down the road compared to what we are paying. So I would say that there are a number of societal issues that really do not enter into our investment or purchase of business type decisions. Charlie?

Charlie Munger [03:43:09] Well, I would advise not paying too much attention to the clean water issue. If there’s enough energy, you can always get enough clean water. Israel sometimes goes month after month making half its water from seawater. With enough energy, why, you have the water, problem goes away. And that’s very helpful in considering the future. And regarding the agricultural productivity, I think one of the main reason for being restrained in the use of hydrocarbons is that modern agriculture won’t work without them. So I’m a great believer in being conservative in terms of blowing all the hydrocarbons on heating houses and running cars. I think that, think of how happy we’d be if we’d taken a bunch of that $1 oil in the Middle East and just carted it here and put it in salt caverns. I mean, you can argue we really screwed up the past, and you could argue all the people who think that our main solution is to drill, drill, drill, they’re all nuts. It’s probably quite wise to use up the other fellow’s hydrocarbons but while preserving our own. It’s not going away because we’re not drilling it now. But you can see that this will lead into unproductive discussion.

Warren Buffett [03:44:52] Okay, we’ll move right on to Andrew.

ASAndrew Ross Sorkin [03:44:55] This next question actually just came in by email from someone in the audience, from their BlackBerry, actually a prominent investor who asked that his name not be named. His question’s the following. He writes, “Your purchase of Lubrizol was done in a negotiated transaction. The board of Lubrizol did not market the company for sale nor run an auction. According to the proxy, you did not permit the company to run a go-shop process. Despite their request, you allow them to do so. Did the board of Lubrizol breach its fiduciary duty by not running a more competitive process to sell the company, and if not, why not?”

Charlie Munger [03:45:37] Let me do this.

Warren Buffett [03:45:39] Okay. Charlie, he volunteered.

Charlie Munger [03:45:40] No, the board at Lubrizol did not breach its duty, because we were not going to participate in the transaction if they didn’t do it our way. (Applause)

Warren Buffett [03:45:54] Yeah, we basically don’t participate in auctions. And actually, just very, very recently, we were asked to participate in one, and we’re just not interested. They may end up getting less money than they would have gotten from us. But if they want to auction it, the one thing I can guarantee them, you know, is that when they get all through, we will not pay them what we would have paid them originally if they stepped up. So they get a very certain deal. They got a very significant price, in my view and in the view of two advisors. And if they had said, “We want to conduct an auction,” we would have said, “Good luck,” and we’d have looked at something else. Has anybody else got an easy question? Okay, number five.

[03:46:53] Shareholder (Stuart Kaye, Matarin Capital Management, Stamford, Connecticut): I, hi, Charlie, I think I have an easy question. My name is…

Charlie Munger [03:46:59] Give it to me, then.

[03:47:02] Shareholder (Stuart Kaye, Matarin Capital Management, Stamford, Connecticut): My name is Stuart Kaye from Matarin Capital Management in Stamford, Connecticut. And Warren, you have often described a big part of your job as allocating capital. Going forward, by just looking at Berkshire’s financial statements, how can we determine how good of a job you have done at allocating capital?

Warren Buffett [03:47:27] Well, the real test will be whether the earnings progress at a rate that’s commensurate with the amount of capital that’s being retained, and over time, a market value test. But markets can be very volatile and capricious. But over time, obviously, we, the, unless the market value of Berkshire is significantly greater than the amount of capital that we have kept from you, retained and used to buy businesses, you know, the verdict is against us. If we ever start selling it a discount to that factor… But you just have to, and, you know, it is not a perfect measurement, and certainly is not only three month or six months or even one year basis. But over time, if we’re going to keep your money, we have to earn a better than average return on that money we keep, and that has to translate into the stock selling at a premium over the money we’ve retained from you. And so far we’ve done okay on that, but the job gets tougher every year. Charlie?

Charlie Munger [03:48:39] Yeah, we have continued to beat the market averages. We just aren’t beating our own past record, and I guarantee that will continue, at least the last half of it.

Warren Buffett [03:48:54] Yeah, guarantee only the last half of it.

Charlie Munger [03:48:57] Right.

Warren Buffett [03:48:58] Yeah. Okay, Carol.

CLCarol Loomis [03:48:59] This question is from Mike Rifkin. He wants to ask about five transactions you made in recent years with very different terms: “Goldman, $5 billion at 10% plus warrants. GE, $5 billion at 10% plus warrants. Dow Chemical, $3 billion at 8.5%, convertible to common. Wrigley M Mars, $4.4 billion at 11.45%. Swiss Re, $2.7 billion at 12%. Now, why the different interest rates?” he said. “And how about why the warrants in some cases, and why did the rich Mars family need $4.4 billion to do a deal, and at 11.45%?”

Warren Buffett [03:49:44] Well, we’ll let the Mars family speak for themselves. But the, in terms of comparing those five deals, it was $3 billion with GE, and the Mars deal actually involved a $2.1 million preferred stock, which has some unusual characteristics, so you have to look at it as a package. But the important thing is that every one of those deals was done at a different time, although the Goldman and the GE deals were done in close proximity with each other, and market conditions, you know, you heard Charlie in the movie talk about opportunity cost. Our opportunity costs were different in every single one of those five transactions. And incidentally, we could have done a much better, I could have done a much better job of allocating our money, you know, in terms of the post-panic period. I was early on Goldman and GE compared to the situation five months later. But, you know, that, we don’t have, we not only don’t have perfect foresight, sometimes it’s pretty bad.

But each deal, when I did the Swiss Re, I was not thinking about the Dow Chemical deal, which was committed to maybe a year plus earlier. I was thinking about what else I could do with $2.7 billion. And that’s the way all the decisions are made. So they are not related, they’re not related to each other. They go through a mind that is looking at everything available that day, including the amount of cash we have, the likelihood of being able to do something else next week or next month, what else we can do that day. And past deals we’ve made don’t really make any difference. In fact, one of the things, one of the errors people make in business, and sometimes it can be a huge error, is that they try and measure every deal against the best deal they’ve ever made. So they say, you know, “I’ve made this wonderful deal,” for maybe an insurance policy written, it might be a company bought, it might be a stock bought, and they’re determined that they’re never going to make a deal that isn’t that attractive in the future. And so they, in effect, sometimes they take themselves out of the game. The goal is not to make a better deal than you’ve ever made before. The goal is to make a satisfactory deal, is the best deal that you can make at the time. And Charlie relates it to marriage, and I’ll let them expand on that.

Charlie Munger [03:52:26] No, those are, of course we’re going to make different deals at different times based on different opportunity costs. There’s no other rational way to make deals.

Warren Buffett [03:52:42] Okay, we’ll go to number six.

[03:52:45] Shareholder (Keith McGowan, Norfolk, Massachusetts): Keith McGowan, Norfolk, Massachusetts. Thank you, Mr. Buffett and Mr. Munger. Thank you for being a role model: your ethics, frugality, sense of humor, honesty, sharing your ideas on investing, sharing your ideas on business, make this world a better place for everyone. (Applause) Charlie mentioned in a pro, a prior answer, about continuous learning. Mr. Buffett, you read about five newspapers a day. You also read many annual reports and other business-related reports. You have the ability to read much faster than the vast majority of people. Reading is a fantastic thing. What advice would you give to children in high school, college, or adults who want to increase their ability to read faster?

Warren Buffett [03:54:00] Well, you know, that’s an interesting question, because I do read, as you describe, the five papers and lots of 10-Ks and 10-Qs. Unfortunately, I’m not a fast reader, and I’m not as fast as I used to be on reading. But I don’t know how effective various speed reading classes may be. But if they are effective, you know, I would really suggest anybody that can improve their speed. I wish I could read a lot faster than I can. Charlie can read faster than I can, and it’s a huge advantage to be able to read fast. And, you know, there’s that old Woody Allen story about how he took the speed reading course, and he met somebody who’s telling how wonderful it was, and the guy said, “Well, give me an example.” He said, Woody Allen said, “Well,” he said, “I read War and Peace last night in 20 minutes. It’s about Russia.” You know, man, that’s the problem I have when I try and read fast. I get all through reading the book and I say, “It’s about business.”

You know, so I really don’t know the effectiveness of speed reading type courses. But if you know of any friends, or if you can learn more about that, and there are effective techniques, obviously the thing to do is to learn them very young, because there’s really, you know, there’s nothing, it’s hardly anything more pleasurable, you know, than reading and reading and reading and reading. And Charlie and I do a lot of it. We continue to do a lot of it, but I don’t do it as fast as I would like to. Charlie?

Charlie Munger [03:55:53] Well, I think speed is overestimated. I had a roommate at Caltech who had a very distinguished mind, and I could do problems faster than he could, but he never made a mistake, and I did. So I wouldn’t be too discouraged if you have to go a little slower. What the hell difference does it make? I’ll pass that peanut brittle, Warren.

Warren Buffett [03:56:21] Yeah, thank you. Thank you. You may have noticed we have a 15-pound box out for sale in the other room, but Charlie was looking for a 25-pound box. See… Becky.

Becky Quick [03:56:37] This question comes from Eric Weissman, who asks, “Are you worried about Congress playing politics with the raising of the debt ceiling? What would this do to Berkshire Hathaway stock and to the overall economy?”

Warren Buffett [03:56:54] You mean if they didn’t raise it?

Becky Quick [03:56:58] If they didn’t.

Warren Buffett [03:56:59] Yeah. Well, it would probably be the most asinine, you know, act that Congress, which never performed that, one time in Indiana back in the 1890s, I think they passed a bill, I know it was introduced, you can look it up on a search engine, they passed a bill to change the value of pi, the mathematical term pi, to an even three, because they said it would be easier for the school children to work with. Well, that’s the only bill I can think of that would give competition to a refusal to raise the debt ceiling. I mean, it’s extraordinary. I mean, it really is extraordinary that with our deficit running, you know, well over $100 billion a month, and all kinds of items that can be changed, I mean, there’s, having a debt ceiling to start with is a mistake.

I mean, it doesn’t, the United States of 2011 has a different debt capacity in the United States of 1911, and that we’re always, it’s going to be a growing country, and we’re going to have a growing debt capacity. That doesn’t mean I think it’s a great idea at all to have debt growing as a percentage of GDP. But to stick debt ceilings on so that these games get played, and all the time that gets wasted and everything, and then, you know, the amount of, the number of silly statements that you hear, and it just seems such a waste of time for a country that’s got a lot of things to do. But in the end they won’t, in my view there’s no chance that they don’t increase the debt ceiling. And I would love to see them, you know, like, well, I’d love to see them eliminate the idea, because it just, it results in these periodic kind of stalemate operations where everybody uses it for posturing purposes and everything of the assortment.

It, the United States is not going to have a debt crisis of any kind as long as we keep issuing our notes in our own currency. You know, the difference between being able to borrow in your own currency and having to borrow in another currency is night and day. The only thing we have to worry about is the printing press and inflation. And if you’re a member of the euro, European Monetary Union, you have to worry about, you can’t print money. You can go and get your co-members to try and help you out, but giving up the right to issue debt in your own currency is a huge step, and the United States has not done it. I don’t know whether we’ve ever issued U.S. bonds in any other currency, but we certainly haven’t made a habit of it. And the Japanese, incidentally, which have a very high ratio of debt to GDP, also have consistently borrowed in their own currency. And believe me, when it’s time to pay somebody back and you have a choice of paying, and you’re forced to pay in somebody else’s currency versus paying in your own, it’s entirely different proposition.

Matter of fact, Charlie and I, we were trying to buy that bank back in Chicago, yeah, in Chicago, in the late 1960s, and this was a time of really tight money, and tight money was different than type money is today. I mean, that time many meant no money. And somebody, we wanted to buy this bank, and they wanted, the only place we could find some money, I think, was in Kuwait, and dinars wasn’t cool, yeah. And I thought to myself, and Charlie concurred, you know, who the hell knew what they were going to say the value of the dinar was when we went to pay it back? I mean, it was not something over which we had a lot of control. So we decided not to borrow the money in dinars, even though I kind of wish we’d bought the bank. But, Charlie, have you got anything to say on that?

Charlie Munger [04:01:29] No. I do think, I do think, you know, I remember an era when we had a bipartisan foreign policy and all that, and I liked that era. And that was the Marshall Plan, and a lot of wonderful constructive things were done, and they were generous things. Now, now it seems to me that both parties are trying to compete to see who can be the most stupid, and they keep topping one another. (Applause)

Warren Buffett [04:02:07] You can tell Charlie is a fellow who’s always filed an accurate income tax. For him, he’s not worried. Number seven.

[04:02:16] Shareholder (John Gory, Iowa City, Iowa): Okay. Good afternoon, Mr. Buffett and Mr. Munger. I’m John Gory from Iowa City, Iowa, where I’m a happy customer of MidAmerican Energy. Around 2004, Mr. Buffett, you told us about a great attention you had given to limiting Berkshire’s exposure to mega catastrophes, so that one could not break Berkshire. Today MidAmerican Energy is seeking approval to build a nuclear power plant in eastern Iowa. At the same time, another utility company, Tokyo Electric and Power, faces claims that Merrill Lynch has estimated as exceeding 12 trillion yen, or $140 billion, to compensate residents and businesses that have been displaced and farmers that cannot produce. Do you believe that the bond-like return that MidAmerican Energy might receive from a nuclear power plant can justify the mega catastrophe risk that it would pose to Berkshire?

Warren Buffett [04:03:19] Yeah, I don’t think it does pose, I don’t know the details of it, and Greg Abel could speak to it better than I can, but I don’t think there’s anything like the exposure that you refer to. I think nuclear power is an important part of the world’s equation, really, in dealing with its problems on the mission. It’s very long term, because you’re not going to change the installed base in any hurry. And as you know, France has a very high percentage of nuclear power, and actually 20% of the electricity generated in the United States comes from nuclear power. I probably am getting some of mine from, we have, at Fort Calhoun we have a nuclear facility, not we, but the Omaha Public Power District has a nuclear facility I’ve actually been in. But I think nuclear power is important, and I think it’s safe. I think that, I have no, I don’t think nuclear power is going to go anyplace in the United States for a while, but maybe quite a while, because of the reaction to what happened in Tokyo, or, and with Tokyo Electric Power. But that doesn’t change my view as to the advisability of continuing to develop nuclear power, not only the United States, but around the world. I think some people misinterpreted what I said when I was interviewed, when I said that I thought it would, had a major setback in its development, just because of the popular reaction to what happened in Japan. But that has not changed my view that nuclear power is important for the future of this country in the world. Charlie?

Charlie Munger [04:05:24] Yeah, we can’t be so risk-averse that things that have a very tiny chance of making a big dent in one subsidiary are unendurable for us. We have to have a certain reasonable amount of courage in operating this company.

Warren Buffett [04:05:44] We have pipeline, we have gas pipeline. You can dream of all kinds of worst case situations. We have to carry toxic materials, were required by law to carry those on the railroad, and, you know, you can picture the wrong place, the wrong time, the wrong everything. But we are not bearing any risks, in my view, ever to threaten the enterprise. I mean, that is one thing I think about all of the time. I regard myself as the chief risk officer of Berkshire, and that is not something to be delegated to a committee, in my view, at all. So I think about, whether I think about derivative positions, whether I think about leverage, whether I’m thinking about nuclear power plants or anything, I mean, we are not doing anything that I know of that, pressing my imagination as far as I can, threatens me losing a nice sleep over Berkshire’s well-being.

Charlie Munger [04:06:46] Yeah, I think you could also count on any new nuclear plant, oh, built in Iowa will be a hell of a lot safer than the ones we already have. We are learning as we go along here.

Warren Buffett [04:07:02] Yeah. And obviously more people, more people have lost their lives by far in coal mine accidents, you know, than ever, in the United States, have suffered no losses from anything involved nuclearly, with it producing 20% of the electricity used by 309 million people.

Charlie Munger [04:07:26] And if a tsunami gets to Iowa, it will be a hell of a tsunami. (Applause)

Warren Buffett [04:07:34] Yeah, and our railroad won’t do so well either. Andrew.

ASAndrew Ross Sorkin [04:07:38] This question comes from Mary and Jim Beaumont from Springfield, Illinois. They’ve been Berkshire shareholders since 1971. And I should note that we received several questions from some long-term shareholders along these lines, and this one reads, “Would Berkshire ever consider reinstating its shareholder-directed charitable giving program, now that you have a big cash position and are urging people to give away their wealth to worthy causes? When you had that program, we were able to support many local schools and charities over the years.”

Warren Buffett [04:08:12] Yeah, I love that program, which we had for maybe 20 or so years. Charlie loved it, a lot of the shareholders loved it, and it was interesting because it was a tax-efficient way to let shareholders give away some money to whatever they chose, as long as it was a 501(c)(3), and they could pick up the three charities. And some families, for example, use it as a learning device. When they would get the form from us, they get their kids around the table and they talk about philanthropy and why they were choosing what they did. And two things, well, one thing that was very interesting about it is nobody else copied it. I mean, the rest of corporate America was not interested in having their shareholders direct contributions. They were much more interested in having the CEO direct contribution. So it did not catch on, despite a fair amount of publicity.

We always had a small backlash of sorts from people who didn’t like the charities that our shareholders were choosing. So Berkshire’s name was on the check. The shareholders would tell us, we want $20 a share, let’s say, and they own 10 shares, so they can direct $200. They’d say, “We want our $200 to go to…” More churches and synagogues actually were number one, but there were schools, and there were all kinds of things. And we would always get some letters where Berkshire would be contributed to, say, Planned Parenthood of California, and people would say, “Well, we’re not going to buy See’s Candy because Berkshire is supporting Planned Parenthood in California.” And sometimes I would write the people a letter and tell them that when See’s bought almonds or milk or anything like that, we didn’t get into the charitable preferences of the person that supplied us. But it, and it never really amounted to anything.

Then we bought The Pampered Chef, and that was a different situation, because with The Pampered Chef we operated through 50,000-plus independent contractors. These are women, largely women, who sometimes to supplement their income, we have at least one in the office that, a woman that sells Pampered Chef’s products, sometimes as a main source of income. Were these 50,000 were independent contractors, and a campaign developed where people said that, because Berkshire Hathaway gives money probably primarily to pro-choice organizations, and that was at the direction, we had other people giving them to pro-life organizations. I mean, it was, these reflected the views of our shareholders, not of Berkshire management. But that they were going to boycott these independent contractors. And these were people who depended on the income, who had nothing to do with Berkshire’s policies, and they were being hurt in terms of their livelihood. And in some cities it became a radio campaign, and in some cities people regularly started interfering with the parties arranged for our Pampered Chef consultants.

And it was hurting a whole lot of innocent people who had nothing to do with Berkshire’s policies, who had nothing to do with Berkshire. And at that time, reluctantly, we decided to end the program. We’d, I did not, I didn’t mind at all losing some See’s Candy business or whatever to some people, but when we start affecting individuals, most of these people are not high income individuals, and we’re cutting off their livelihood because of something Berkshire is doing, it became, it just became apparent to me that it was unfair to continue it, and reluctantly we stopped it. And I think it’s too bad. We want the parent company involved in distracting arguments about the social issues of the times, but we certainly don’t want it where it affects, yeah, people who are just bystanders, basically, who have counted on us over the years to work with them. And it was literally affecting the income of thousands, primarily women, concentrated in certain communities around the country.

Charlie Munger [04:13:09] Okay, a lot of stock, Berkshire stock is given away every year. It isn’t like we’ve lost the flow of charity total.

Warren Buffett [04:13:20] No, a huge amount is given away, partly that’s because Charlie and I started our partnerships back in the ’50s and ’60s, and we’ve got a number of partners that are now in their 80s, and some of them have given away some exceptional amounts of money. He had a question earlier from Dick Holland, for example, and Dick Holland, it’s a matter, I think it’s a matter of record as the exact numbers, but he’s given away huge amounts of money over the years and continues to. And we’ve got dozens like that that I would say are going to end up giving back 90% or more of all the money they’ve made in Berkshire. Okay. (Applause) Number eight.

[04:14:09] Shareholder (Tonya Leneva, Boston, Massachusetts): Tonya Leneva, Boston, Massachusetts. When you think about long-term cash flows, do you try to forecast growth, or do you just think about certainty? If you have an indestructible company like Coca-Cola or Burlington Northern, do you try to estimate growth?

Warren Buffett [04:14:32] Well, we think… Are you finished on that?

[04:14:36] Shareholder (Tonya Leneva, Boston, Massachusetts): Yes.

Warren Buffett [04:14:37] We, growth is part of the investment equation, and obviously we love profitable growth. So if we would love to figure out a way to, say, take a See’s Candy to move it geographically into new areas, all kinds of things. I Mean, if we could find areas for growth with See’s, it would be likely to be very, very profitable. If Coca-Cola, which is in 200 countries, I mean, they have pursued that policy successfully now for 125 years, and some products travel way better than others. But when we look at a business, and we’re looking out in the future, obviously if we see growth in that picture, and it’s growth worth, which is, produces a high return on incremental capital involved, we love it. But we do not rule out companies where we think there’ll be little or no growth if the price is attractive relative to the earning power. You know, there will be some growth over time in something like lubricants, you know, at Lubrizol, but it won’t be dramatic growth. And would we love it if it, you know, if it were going to grow 10% a year in units or something of the sort? Sure. But it doesn’t, that’s not going to happen.

So it’s a factor in every investment decision, because we’re really looking out to the future as the future earning power, but also future capital requirements. And we think plenty about whether any business we go into is likely to grow profitably, and sometimes we’re right and sometimes we’re wrong. But we don’t rule out companies that have very slow growth or no growth possibilities. Charlie?

Charlie Munger [04:16:31] Yeah, well, the interesting thing is that in our country, the business schools teach people to make these projections way in the future, and they program these computers to grind these projections out, and then they use them in their business decision making, etc., etc. I’ve always regarded those projections as doing more harm than good. And Warren has never prepared one that I know of. And where an investment banker prepares one, we tend to throw them aside without reading them.

Warren Buffett [04:17:05] We turn them upside down, actually.

Charlie Munger [04:17:08] What?

Warren Buffett [04:17:08] We turn them upside down.

Charlie Munger [04:17:10] Yeah. And I think an enormous false precision gets into things when you program computers to make forward projections for a long period of time.

Warren Buffett [04:17:19] We make rough projections in our head all the time.

Charlie Munger [04:17:23] Sure. And we don’t do any of those formal projections, because the fact that they’re there in paper and came out of a computer makes some people think they must be significant. I really think they do more damage than they do good.

Warren Buffett [04:17:38] When we bought Scott Fetzer, which was back in about 1985, it had been shopped by First Boston to more than 30 parties. They never got around to calling us. So after shopping at the 30 parties, Scott Fetzer finally was working on a deal with an ESOP after something else had fallen through, I forget the exact details. And I sent a letter to Ralph Schey. I’d read about in the paper. I never met him, never talked to the guy, but I sent him a letter. I figured I’d gamble 21 cents or whatever the first class rate wasn’t. And I said, “We’ll pay $60 a share. If you like the idea, I’ll meet you in Chicago Sunday, and if you don’t like the idea, tear up the letter.”

So that took place, and Ralph met me, and we made the deal, and we paid the $60 a share or whatever it was. And Charlie and I went back to sign up the deal, and the fellow from First Boston was there, and he was a little abash since he had not sent us, contacted us at all when they were looking for something. But naturally he had a contract that called for a few million dollars of commission, even though he not bothered to ever contact us, and we made the deal by ourselves. So in a moment of exuberancy, while he was collecting his few million dollars, he said to Charlie, he said, “Well, we prepared this book in connection with Scott Fetzer, and since you’re paying us a couple million dollars and have gotten nothing so far,” he said, “maybe you would like to have this book.” And Charlie, with his usual tax, said, “I’ll pay you $2 million if you don’t show me the book.”

Yeah, and I should mention, this’ll, in connection with Lubrizol, Dave Sokol met James Hambrick, I think on, and whatever was January 25th or whatever the date. And he, Lubrizol had already made projections publicly out to 2013. And Dave told me that they had, they, that James had also given him some projections, I guess, out to 2015 or something, and did I want to see him? And I told him no. You know, I mean, I don’t want to look at the other fellow’s projection. I’ve never seen a projection from an investment banker that didn’t show the earnings going up over time, and believe me, the earnings don’t always go up over time. So it just, you know, it’s the old story, don’t ask the barber whether you need a haircut. You know, I mean, you do not want to ask an investment banker what he thinks the earnings are going to be in five years of something he’s trying to sell. So I pay no attention to that sort of thing.

But we do, as Charlie says, we are doing projections in our head, obviously, when we look at a business. I mean, we, when we look at any company to buy or any stock to buy, we are thinking in our mind, we’re, we’ve got a model in our mind of what that place is likely to look at like over some period of years. And then we also have some model in our mind of how far off we can be. I mean, there’s some things we can be way off on, there’s other things we were likely to be in a fair, fairly narrow range on. So all that is taking place, but we sure don’t want to listen to anybody else’s projections.

Charlie Munger [04:20:56] Those of you who are about to enter business school or there, I recommend you learn to do it our way, but at least until you’re out of school, you have to pretend to do it their way.

Warren Buffett [04:21:14] Okay. Carol?

CLCarol Loomis [04:21:15] On Berkshire’s quarterly 13F filings with the SEC, three stocks are held only by the entity recorded on the form as Warren E. Buffett and not by a Berkshire subsidiary company. Please, please clear up some confusion on this matter. Are these holdings your own personal investments outside of Berkshire, or do they belong to Berkshire Hathaway?

Warren Buffett [04:21:39] Well, you’d have to tell me what the names are.

CLCarol Loomis [04:21:43] Unfortunately, the questioner didn’t include those, but these are the three, I think, that are, that say Warren E. Buffett is the owner.

Warren Buffett [04:21:51] Yeah. Well, Marc Hamburg prepares those forms. Marc, do you have a microphone that you can, you could? I think, yeah, go ahead.

MHMarc Hamburg [04:22:00] Well, I, those are, those are securities that are owned by certain employee benefit plans, and so that, that Warren is directed into those plans, but it doesn’t, they’re not owned by Warren, or there’s no indication that they’re owned by Warren. Warren’s part of the filing because he’s considered to be a controlling shareholder of Berkshire, so every security listed on there shows Warren is one of the owners.

Warren Buffett [04:22:34] Yeah. Do we, we file stocks on by pension plans, do we?

MHMarc Hamburg [04:22:39] To the extent that you direct, have directed.

Warren Buffett [04:22:43] I got you. Yeah. Right. Yeah. No, I don’t, I don’t think I, well, Marc knows the rules on it better than I do then. I own very, very few securities that, I really spend my time thinking about Berkshire. So I’ve got a lot of the very, of the very security I’ve been telling you not to buy, which is government bonds. But that’s not because it’s a good investment. It’s just, it’s a place to have some money and forget about it, and I’ll work on Berkshire. Area nine.

[04:23:21] Shareholder (Ben Anderson, Los Angeles): Miss, Mr. Buffett, Mr. Munger, it’s an honor and a pleasure. My name is Ben Anderson, I’m from Los Angeles. When you’re looking at an investment in China, where the business culture is a lot different, and a lot different than it is here in the U.S., and successful business practices are again very different than they are here, you know, what are the characteristics you look for when placing an investment in that company, and is that any different than the general principles at Berkshire?

Warren Buffett [04:23:57] It’s, we follow the same principles, but we recognize that we know less about tax laws, about customs, about attitudes toward shareholders, any time we get outside the United States, than we know in the United States. Now, to varying degrees, we weigh in that uncertainty. At the time I bought PetroChina stock, which, I don’t know, it’s probably 2003 or thereabouts, it was extraordinarily cheap in relation to any calculation of reserves or refining capacity or cash flow or you name it. And at the same time, Yukos in Russia was similarly very, very cheap, and they were both huge. And, you know, I am no geopolitical expert or anything of the sort, but I decided I was more comfortable buying PetroChina than I was buying Yukos.

Now, was I comfortable buying PetroChina as I would have been buying, you know, some domestic company of similar size? No, because I don’t know as much. I didn’t know then and I don’t know as much now about all the intricacies of Chinese tax law and what the policies might be. But I was fairly impressed, quite impressed when I read the report of PetroChina. For one thing, they said they were going to pay out 45% of the, as I remember, 45% of their earnings and dividends. That’s more than any company, that oil company United States would tell me. So I regarded that as a plus and an indication of intent that I thought would be fulfilled, and it has been fulfilled.

So we do make, we do make allowances for our lack of understanding as well as we might in the United States various key factors, but the basic principles of trying to value the business, trying to find managements in which we have confidence in both their ability and integrity, and then finding an attractive purchase price, those principles apply wherever in the world we would be investing. Charlie?

Charlie Munger [04:26:09] Well, we make so few investments in China that trying to draw general lessons from us would be hard. It reminds me of the time a professor went west for the summer, and he came back to his faculty and he said, “I’ve learned that Indians always walk single file.” And they said, “How did you figure that out?” And he said, “I saw one.” And he did.

Warren Buffett [04:26:35] How do we get from there to China?

Charlie Munger [04:26:39] Well, we only had a couple of things in China that are like the one Indian. You can’t draw general lessons from.

Warren Buffett [04:26:48] But we’re willing to look tomorrow. I mean, obviously, if we, if we had a call on some, that would be a significant size investment, because we, it just doesn’t make any sense for us to look at things we can just put a couple hundred million dollars in. But we, you know, I love the idea of looking at, at various ideas. I mean, I find it a fascinating game to hear about companies or businesses that are new to me. And the problem now is that the universe has gotten much smaller because of our size. But we welcome a call from a lot of countries. There’s some countries that are just too small. They’re not going to have businesses that could move the needle at a place like Berkshire, and so those are off the list.

Charlie Munger [04:27:45] But China has at least one private company that makes over $3 billion a year after taxes. There’s some big things out there.

Warren Buffett [04:27:52] I’ll get the name from him later, but I don’t want you to hear. Becky?

Becky Quick [04:27:58] This question comes from Ed Schmidt in Alaska. He’s asking about Berkshire’s cash. He writes, “Where is that money held? All in Treasury bills or notes? If so, what will happen in June when the biggest buyer, the Fed, quits buying? Where is all that money on the sidelines? Is it under the mattress? We saw two years ago, I don’t see how any significant amount of money can be in banks that aren’t paying interest, corporate bonds that are risky and not paying much interest, or government bonds that seem less and less sound as each day passes.”

Warren Buffett [04:28:30] Well, he’s certainly right that all the choices are lousy for short-term money now, but we don’t play around with short-term money. So we did not own commercial paper in 2008 before problems occurred. We did not own money market funds. I mean, when I say we didn’t own them, we make, there may be small amounts at various subsidiaries, but in terms of the big money which we run out of Berkshire, we basically keep it in Treasuries, and we get paid virtually nothing now for it, and that’s irritating. But the last thing in the world we would do at Berkshire is to try and get 5 or 10 or 20 or 30 basis points more by going into some other things with this, with our short-term money. It is a parking place. It’s an unattractive parking place, but it’s a parking place where we know we’ll get our car back when we want it.

And when we need, certainly the case in 19, September of, ninth of 2008, we had committed for some time to put $6.5 billion in Wrigley when the Mars Wrigley deal occurred. And we certainly didn’t contemplate, at the time we made that commitment, which was probably in the summer, that the events would take place like they did in September. And, but we had the money. I knew I had to show up with $6.5 billion, I think it was on October 6th, and, you know, I had to show up, and I couldn’t show up with a money market fund or some commercial paper or anything of the sort. I had to show up with cash. And the only thing I feel, virtually the only thing I feel good about in terms of having large amounts of ready cash is Treasury bills, and that’s where we’ve got. If you look at our March 31st statement, I think you’ll see 38 million, and overwhelmingly that will be in Treasuries. Charlie?

Charlie Munger [04:30:40] Well, of course, I’ve watched a lot of people struggle who thought it was their duty in life to get an extra 10 basis points on the short-term money. I think it’s really stupid to try and maximize returns on short-term money if you’re not, opportunistic game the way we are, where we want to suddenly deploy money. Some of those pipelines we bought, they came for sale on Saturday and we had to close on Monday or something.

Warren Buffett [04:31:11] Yeah.

Charlie Munger [04:31:11] Yeah, we didn’t want to fool around with some dubious instrument when we had sudden needs for money like that.

Warren Buffett [04:31:19] We bought one pipeline where the seller was worried about going bankrupt the following week, and there’s a Hart-Scott-Rodino clearance required for the FTC, and they needed the money right away. And we actually, I wrote a letter, as I remember, to the FTC, and I said that we will do whatever you tell us to do later on. You can look at this all you want, we’ll give you all the data you want, and if you tell us, you know, to unwind the deal, whatever you tell us, we will do, but these guys need the money. And so we closed it earlier.

And our ability to come up with cash when people need it, and when the rest of the world is petrified for some reason, has enabled several deals to get done. And we don’t know whether that could happen tomorrow. I mean, you know, if, you know, Ben Bernanke runs off to South America with Paris Hilton or something, I mean, who knows, who knows what’ll happen, you know. And we want to be able at that moment to have our check clear. So we figured we never know what tomorrow will bring, although it won’t bring that. I want to leave that off the transcribed part of the report. The, but we are, when somebody comes to us and they say, “We need a deal right now, we need a deal right now,” we can do it, and they know we can do it, and it can be big. It just has to be attractive. Okay, area 10.

[04:33:17] Shareholder: Hi, Warren. Hi, Charlie. Thank you very much for taking the time to have a terrific shareholders meeting.

Four years ago, we announced that we’re naming our son after you, so we’re happy to say hi to both you and Charlie. Charlie, since Berkshire bought Wesco, we wanted to see if you can take some time to host a meeting of your own. It could be anywhere, anytime.

Charlie Munger [04:33:48] We’re going to do that.

[04:33:50] Shareholder: Great.

Charlie Munger [04:33:50] We won’t call it a Wesco meeting. We’ll call it an afternoon with Charlie.

[04:33:57] Shareholder: Great.

Charlie Munger [04:33:58] It’s only for hardcore addicts.

[04:34:00] Shareholder: Warren, MidAmerican Energy is investing over $1 billion in wind power. How do you feel about wind power as a source of renewable energy and its economics? Will this scale of investment continue, and what type of returns do you expect to come from wind power?

Warren Buffett [04:34:17] Yeah, it’s terrific, but wind power is terrific, but only when the wind blows. And the wind blows about, as I remember, about 35% of the time in Iowa, so you never can count on wind power, obviously, for your base load. You know, it’s basically, I guess, the cleanest energy you can come up with, except for the fact that you can’t be relying on it. The economics only makes sense with a incentive credit, tax credit provided by the federal government, which they’ve been doing for a considerable period of time. It does not, standing on their own, the investment will not return anything like an adequate return on capital. So there is a tax credit, and then your government has made a decision that it wants to subsidize, in effect, wind power. And Iowa has been, I was a good win state. This whole central belt is good, and they’re, central part of the country is good.

So it’s made sense to locate a lot of megawatts of generating capacity in Iowa, and we have more under construction now. And I think we’re now, I think, number one in the country in respect to wind power. So we’ll be doing more. It is dependent in terms of the price you can get, the percentage of the time that you’re generating capacities actually gets used and everything. It only makes sense with the tax credits.

And one thing that is kind of interesting, one of the assets of Berkshire is that it pays a lot of taxes. That doesn’t sound like much of an asset, but in these days, a lot of utilities, when you get both 100% depreciation, which has been put in now by the federal government for a short period of time, and you get these sort of tax credits on, when they really don’t have the tax paying capacity to be able to use the tax credits. So they are in a different position than Berkshire, which pays a lot of taxes. We’ve probably paid something like 2% of all the corporate taxes in the United States, maybe, over the last five years. I’d want to check that, but it’s not, that’s not, I don’t think that’s way off. So we have a lot of tax paying capacity. We can use it to build more wind projects, and I think it’s very likely we will continue to do it. It helps, it helps our Iowa customers because these projects are successful. It’s enabled us to keep rates, among other things, that the reasons it’s helped to keep rates absolutely unchanged now for more than a decade, which is very unusual among electric utilities in the United States. Charlie?

Charlie Munger [04:37:44] No, I’ve got nothing to add.

Warren Buffett [04:37:47] Andrew?

ASAndrew Ross Sorkin [04:37:47] Well, this is not a David Sokol question, but it relates to him. It’s actually a NetJets question. The shareholder asks, “I was struck by your statement when you praised Sokol for, quote, ‘having resurrected an operation that was destined for bankruptcy.’ This really got my attention, because I don’t recall you or Berkshire Hathaway saying earlier that NetJets was on the verge of bankruptcy at the time that his predecessor, Richard Santulli, had stepped down. In fact, at the time, the company seemed to give the impression he was dealing with a few short-term problems, but it was fundamentally sound. In truth, how close was it to bankruptcy, and if that was the case, why didn’t you tell us? And finally, was it ethical for NetJets to be asking prospective clients to part with their money at a time when it was, in the eyes of its main shareholder, quote, ‘destined for bankruptcy’?”

Warren Buffett [04:38:36] Yeah, I think I said it was like, when we can find the exact words here, but I think I said it was destined for bankruptcy absent the fact that Berkshire Hathaway owned it. It had been a stand-alone entity. And Berkshire never had any intent, never would have had any intent of any kind to bankrupt NetJets. But if it’d been owned as a standalone by somebody else, the public, it, that’s what would have happened to it. With Berkshire’s ownership… Berkshire has had two insurance companies that would have gone bankrupt as stand-alone insurance companies, and we, it never crossed our mind that we would let them do it. So we put money into companies that were bankrupt, that Berkshire owned, to make them whole, basically. And essentially we were doing the same thing with NetJets when we put in, up the, we got it up to $1.9 billion. But NetJets, in my opinion, well, it would have been bankrupt absent some, somebody like Berkshire owning it. And I’m almost positive that I said that, that absent, absent Berkshire’s ownership are some words of that effect.

Let’s see if I can find it. Maybe Charlie can be commenting while I looking for this. In any event, well, I’m not finding it immediately, where I even discussed it, but I know I talked about it on the bankruptcy thing, but I also know that I conditioned it on not being owned by Berkshire. Charlie?

Charlie Munger [04:40:30] No comment.

Warren Buffett [04:40:31] No comment. Well, we’ve pointed that out to Standard & Poor’s, Moody’s. We look at Berkshire, has a lot of different companies, but we feel that it’s one entity. And, you know, Moody’s or Standard business look at each one and separately and all of that, but Charlie and I did not have, not been running this business to walk away from some company. We had one in Louisiana, Southern Casualty, and we had another one in Chicago, both of which, if left to their own devices, would have gone bankrupt, and we didn’t, wouldn’t even think about not making them whole. Area 11.

[04:41:14] Shareholder (Christopher David, Arlington, Virginia): Good afternoon. My name is Christopher David. I’m an entrepreneur from Arlington, Virginia. My question is about the youth. I work with a lot of high school and college students and recent graduates who are facing a job market with 20% youth unemployment, and at the same time, one of the most favorable entrepreneurial environments. It’s easy, easier than ever to start a business or get involved with the startup. So considering that these kids are politically savvy, they like studying economics, they’re brilliant, and they’re willing to learn, what advice can you give them from an investment perspective that could help them chart their own course as opposed to get a nine-to-five job?

Warren Buffett [04:42:02] Well, the main thing you could do, and people do it different ways. I used to do it by doing a lot of reading. I was practically lived at the Omaha Public Library for three or four years, and pre-, when I was 9 or 10 or 11. I mean, anything you do to improve your own skills, you know, you never know where it’s going to pay off later on. I only, I have one diploma hanging in my office, and I got a couple of others, but the one diploma I have hanging up there is one I got from a Dale Carnegie course, which cost me $100 back in 1950. And I can’t, it’s incalculable how much value I got from that $100. There’s nothing like working to improve your own skills, and I would say communication skills are the first area I would work on to enhance your value throughout life, no matter what you do.

I mean, if I had stayed in the same position I was, I was in, in terms of communicating, back in 1950 or ’51, my life would have turned out differently. I mean, I started selling securities, and if you can’t talk to people, you’ve got a real problem selling securities. The, so I, you know, I think people, I think the, if you get lucky, you find your passion early on. But you want to, you want to work on something you’re passionate about, and then you want to work to improve your skills in that. And I think if you do both of those things, I think you’re likely to, you’re likely to do very well. Charlie?

Charlie Munger [04:44:03] Yeah, I think economics is a really tough subject. And I think it’s easy to teach the basic microeconomics and certain of the basic ideas, but the minute it gets into the full range of complexity, you have the difficulty that the experts disagree. So I don’t think I would hurry, if I were trying to learn something, into the parts of the fields where none of the experts can agree among themselves. I would master the easy stuff first.

Warren Buffett [04:44:37] Yeah, I don’t think, yeah, I would not advise taking lots of courses in economics to somebody going to school. I, just trying to think back, it’s been a long time since I took my economics courses at Wharton, but I don’t regard them as the ones that push me forward in any significant way. Carol?

CLCarol Loomis [04:45:04] A question from Jon Brandt. “Does Berkshire’s equity ownership in Munich and Swiss Re reduce the amount of catastrophe-exposed insurance business you are willing to write directly? If so, assume that prices return to being attractive, would you then limit the quantity of other reinsurance stocks you buy so that you could do more direct business?”

Warren Buffett [04:45:30] Yeah, we have invested in Munich and Swiss Re less than, well, let’s see what it would be, it’s like, it’s less than $4 billion. So we’re talking 2.5% of our net worth. So those investments in aggregate are not of a magnitude that would cause me to change at all what we’re willing to do, the risks we’re willing to bear in the reinsurance field. We’re way below sort of capacity in terms of risk that we will tolerate in insurance. I mean, we, I put in the report, you know, I expect our normal earning power to be in the $17 billion or something pre-tax range. Well, that is, that’s so unlike any other reinsurance company in the world. You know, we re-, we went for the worst quarter in reinsurance history, except for Katrina’s quarter, you know, and we end up earning, you know, very substantial sums. So those investments are no constraint at all on our willingness to write insurance. We would love to have a lot more attractive in reinsurance business on the books. We just can’t find it at prices that we think are commensurate with the risk. But it’s not because of an aversion to risk overall. Charlie?

Charlie Munger [04:47:08] Yeah, it’s insurance, and particularly reinsurance, it’s not that easy a business. It’s taken you a long time to do as well as you do, and if it weren’t for Ajit, we wouldn’t, it would be a lot smaller business.

Warren Buffett [04:47:26] Well, chippy point out, we really didn’t succeed at all in the reinsurance business in the first 15 years. Yeah, we started in reinsurance around 1970, and we had a fellow that I thought the world of running it, George Young, but net, counting the value of float, it was not a good business for us for 15 years until Ajit came along. It is not an easy business. It looks easy most of the time. I mean, that’s the trouble with it. It looks easier than it is. It looks way easier than it is. And, you know, it’s like having a pair of dice and, you know, accepting bets on box cards or something like that. And, you know, it’s going to come up once 36 times, so you can win a lot of bets by giving the wrong odds. But if you keep doing it long enough, you lose a lot of money. And so these infrequent events, you better have factored in to your pricing, and not fool yourself by whether you make money in a given year or two years or even three or four years. And most people have a little trouble with that, and we had a little trouble with it for about 15 years.

Charlie Munger [04:48:50] And incidentally, the investment bankers of the world, now that they trade so much for their own account and derivatives, they have sold some of these products where most of the time the customer wins, but when a customer loses, he really loses big. In other words, they’re smarter than the customers, and they have caused some of the most horrendous losses to ordinary businessmen. It happened in Korea, it happened in Mexico, what happened. Just beware the salesman was selling a new derivative product.

Warren Buffett [04:49:26] Or an old one.

Charlie Munger [04:49:27] An old one too, yeah. But the new ones are worse.

Warren Buffett [04:49:32] Yeah. Okay, area 12.

[04:49:33] Shareholder (Bottle Pandy, Philadelphia, Pennsylvania): Hi, my name is Bottle Pandy, I’m from Philadelphia, Pennsylvania. Questions about Todd Combs, the young money manager you hired late last year. For Mr. Munger, I understand you introduced him to Berkshire. Could you talk a little bit about that, how that relationship started, and how is, we as shareholders, are we going to be able to assess his progress?

Charlie Munger [04:49:56] Well, I hate doing this because I may get more letters than I want, but he sent me a letter. That’s how it happened. It was like Warren’s letter to the guy at, Ralph Schey. And anyway, I had a meal with him, and I called Warren and said, “I think that’s the guy who should talk to.”

Warren Buffett [04:50:20] We have a very complicated business and very elaborate procedures, as you can tell. And his results will be known over a five-year period or something. I mean, you cannot judge an investor by what they do in six months or a year. That has the advantage that he’s been thinking about financial companies like Berkshire for a great many years. That’s useful for us to have around. And as we put in the annual report, it’s more likely than not, but not a sure thing, that over time we have more than one investment manager. You know, there’s a lot of money at Berkshire to be managed, and it would not be a bad idea. But we have to find the right people, and the right people just does not mean to give an IQ or a given past record. It means a lot of things. And if we end up with two or three, you know, that’s a plus, but it’s not, we don’t mandate that sort of a result. Becky?

Becky Quick [04:51:32] This question comes in from Scott Wilkin, and he’s from Chicago, but he’s sitting in the audience right now. “Johnson & Johnson is one of Berkshire’s biggest holdings,” and he asks for your thoughts, Warren, on Johnson & Johnson’s recent acquisition of Synthes for $21 billion. “You were quite outspoken in your opposition to Kraft’s deal for Cadbury, particularly because of their use of stock. J&J’s deal also is primarily with stock. And do you support this deal?”

Warren Buffett [04:52:01] Yeah, I have not talked to anybody in the Johnson & Johnson management, and I have no specific knowledge of the company, but basically I would like the deal a whole lot better if it was all for cash. The idea When the management trades away, I think this deal is about two-thirds stock, roughly, and one-third cash. And Johnson & Johnson has plenty of ability to pay cash for a $22 billion deal. And when they trade away their present businesses for some other business, they’re either saying their own businesses are pretty fully valued, or they’re saying the guy is making a hell of a mistake that’s selling to them. And so I would like, I say, if it was all for cash, I would like it a lot better. And I think that it is, by using a lot of stock for a deal like this, that it certainly, you can draw the inference that J&J is not valuing its own businesses, you know, as attractively as you might think they should be evaluated. And if you use your own company stock to pay 20% or more, more than market, for some other company, and, you know, there probably are not a lot of synergies involved or anything in the management there. There may be some, but there’s usually some offsets too. Well, like I said, I would have much preferred it if they’d done it for cash. Charlie?

Charlie Munger [04:53:38] Yeah, you also have the disadvantage in reviewing that, you know a hell of a lot more about chocolate and pizza than you know about medical devices.

Warren Buffett [04:53:48] Do you think I know more about chocolate?

Charlie Munger [04:53:51] Well, yeah, but at Kraft, I mean, you’re talking about businesses the Warren knew a lot about, and neither of us knows much about medical devices.

Warren Buffett [04:54:02] Yeah, the pizza business has done pretty well since it was sold by Kraft. The, we go to 13 in the other room.

[04:54:12] Shareholder (Glenn Tongue, New York): Hi, I’m Glenn Tongue from New York. First off, thank you for a terrific day. My question deals with acquisitions. Pre-Lubrizol, we estimated Berkshire’s year-end 2011 cash balance could approach $60 billion. I believe you commented recently on an elephant that you thought was too big. What is your acquisition appetite? What size is too big? Has the phone been ringing lately? And what, if anything, can we as shareholders do to help?

Warren Buffett [04:54:43] I got to college answering fewer questions than that. But the, but anything you can do to help, I appreciate, Glenn. The, you know, it’s hard to name a precise figure. This one, you know, was way too big, except unless we used a lot of stock, which, like I say, we wouldn’t do. Our appetite is always there. We are not going to borrow a lot of money. We’re not going to issue shares, except perhaps in some minor amount to make a deal that couldn’t get made otherwise. But, and we obviously will never sell a business to buy some other business. So, you know, our cash balances will tend to build month to month unless we do something, and we can and will sell some portfolio securities.

But doing Lubrizol requires close to $9 billion of cash, and obviously we could do another one of that. In fact, we’re looking at a couple, but they’re no more than a gleam in the eye. But they would take sums roughly similar to Lubrizol, and, you know, we would be comfortable doing those, and they would add significant, significantly to Berkshire’s earning bars. They’re worth doing. But we couldn’t, we can’t do, and we can’t do a really, a really big elephant now. And we won’t, you know, we won’t stretch. We never, we’ve never really taken any risks, because we don’t need to. And we will not trade something that we have a need for something that we don’t have and don’t need, even if we kind of like to have it. Charlie?

Charlie Munger [04:56:54] Well, I certainly agree with all that. We are very reluctant to issue shares, and in that we’re different from most places. I have a friend that sold out to a socialist country, and they issued chairs in a controlled corporation, and the socialist executive said, “Isn’t this wonderful? We’re getting this business for nothing.” Some people really have that.

Warren Buffett [04:57:19] And of course there are some companies, and we talked about the wave that took place in the late ’60s, but periodically, when, certainly it happened during the internet period, companies just couldn’t issue shares fast enough, because they were basically, we’re trading confetti for real assets. And that is a, that is a business model that has been applied successfully for some periods of time by certain companies in the past. It usually ends in some kind of a fiasco, but, well, I shouldn’t say it usually does, but it runs out of gas at some point. But, you know, essentially, we’ve never been in that game. We hate issuing shares. And the idea of selling our, when we issue shares, we’re divesting ourselves of a portion of every wonderful business we have, from GEICO to ISCAR, you name it, and we don’t like doing that. We like owning those businesses. We’d like to own more of them. We, you know, we have a deal, for example, on Marmon, where we watch some more of it this year, and we will buy the rest of it in a few more years, and we feel good about that. We pay a fair price for it, but we get a business we know, a management we like, and that’s really what we’d like to continue doing at Berkshire. In fact, we will continue doing it. Andrew?

ASAndrew Ross Sorkin [04:58:44] This question comes from Larry Pitkowsky. I was a longtime shareholder, I think he’s in the audience, from the GoodHaven Fund. He asks, “Over the years, you built or acquired a significant number of businesses that are related to the residential and commercial real estate markets, including such segments as brokerage, servicing, insulation, carpeting, construction products, painted furniture. Berkshire’s ownership of these businesses would seem to give you a unique window through which to view current conditions. Could you give us some insight into the current state of the housing and commercial real estate market, and what we might expect to see in these businesses over,” and now this might be a long shot, “over the next decade?”

Warren Buffett [04:59:23] Oh, well, the immediate situation is it’s terrible. It’s been flatlined now for a long time, and it affects Shaw, affects, it affects MiTek, it affects Acme Brick, it affects Johns Manville, affects our HomeServices operation. And there has been no bounce at all. But you see that in the housing start figures too. I mean, I’m not telling you anything that you don’t see, except I see it with pain as we, I look at the monthly earnings figures. But those are good businesses. And as I mentioned in the annual report, we bought a, the largest brick operation in Alabama. And I think Alabama uses more brick per capita than any state in the union, but that doesn’t mean much currently, because nobody’s using any brick to speak of. But we bought it, we wrote a check for cash, and we like improving our position. MiTek has bought operations. Shaw is spending a couple hundred million dollars this year, partly because of a change in the nature of the carpet business.

This country, over time, will build houses at a rate that overall, in total, commensurate with household growth. And I think we’re going to see plenty of household growth in future decades. And I think that our companies are well positioned to make significant money when we get to a normalized level of home building. I said in the annual report I thought it would, we would be seeing the upswing by your end. I’ve seen nothing since I wrote the annual report that makes it look like I’m certain to be correct or anything that, there’s been no movement that I’ve seen so far in the, in the two months since I wrote the report. I would think it would start occurring by then, but if it doesn’t, you know, it may be a year later. I don’t think anybody knows the answer on that. Buy to bet one way or the other, though, I think it will be turning up by year and.

And it really isn’t that important to us. When I made the decision to buy the brick company in Alabama, it was not because I thought brick was going to turn in two months or six months or a year. I thought that over time, being a very important brick manufacturing distributor in Alabama, adjacent to our strong operation in Texas, would be a good investment at the price that we paid. And I feel good about the decision, but I won’t feel good about our brick results in the next six months, I can be sure of that. Charlie?

Charlie Munger [05:02:12] Well, one advantage of buying these very cyclical businesses is a lot of people don’t like them. And what difference does it make to us, if the earnings average, say, $300 million a year, if it comes in a very lumpy fashion? In the big scheme of things, what do we care if it’s lumpy, as long as it’s a good business and we have an advantage on that stuff? Nobody else was bidding for a brick plant in Alabama with no customers.

Warren Buffett [05:02:48] This we go. We’ll be there if you need brick in Alabama. You know, See’s Candy, a wonderful business, loses money roughly eight months of the year. You know, now, it just so happens we know the seasonal pattern, so we don’t worry in July that somehow Christmas won’t come. You know, we’ve got a couple thousand years on our side. So the, but that’s pretty, you know, that’s easy to see. If you just looked at one month of See’s earnings or looked at one quarter, you think, what, what are these guys doing in this business? Now, obviously cyclical businesses, you know, are not going to be, they behave exactly the same as seasonal businesses, but why look at it any differently?

I mean, if you take the next 20 years, you know, there will be, you know, three or four terrible years for residential housing, and there’ll be a lot of them that are pretty good, and there’ll be a few that are terrific. And I don’t know the order in which they’re going to appear, but I know if I can buy the assets cheap enough to participate in those 20 years, that we’ll do okay over that time. So that’s why we’re in the brick business. Now, let’s see. Yeah, we’re at 3:30, so we will adjourn for about five minutes, and then we will conduct the business meeting of Berkshire Hathaway, and we can turn the lights up, and we’ll rejoin in just a couple of minutes. (Applause)

Okay, if you’ll settle down, we’ll conduct a little business. This morning I introduced the Berkshire Hathaway directors that are present, also questions you might have concerning their firm’s audit of the accounts of Berkshire. Forrest Krutter is secretary, Berkshire. He will make a written record of the proceedings. Becki Amick had been appointed inspector of elections at this meeting. She will certify to the counter votes cast in the election for directors and the motions voted upon at this meeting. 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 [05:05:21] Yes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 2, 2011, being the record date for this meeting, there were 942,559 shares of Class A Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at the meeting, and 1,059,055,810 shares of Class B Berkshire Hathaway common stock outstanding, with each share entitled to one ten-thousandth of one vote on motions considered at the meeting. Of that number, 663,042 Class A shares and 659,697,109 Class B shares are represented at this meeting by proxies returned through Thursday evening, April 28th.

Warren Buffett [05:06:12] Thank you. That number represents a quorum, and we will therefore directly proceed with the meeting. The first order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott, who will place a motion before the meeting.

WSWalter Scott Jr. [05:06:28] I move the reading of the minutes of the last meeting of the shareholders be dispensed with and the minutes be approved.

Warren Buffett [05:06:35] Do I hear a second? The motion has been moved and seconded. Are there any comments or questions? We will vote on this motion by voice vote. All those in favor, say aye. Opposed? The motion is carried.

The next item of business is to elect directors. If a shareholder is present who wishes to withdraw a proxy previously sent in and vote in person on the election of directors, you may do so. Also, if any shareholder that is present has not turned in a proxy and desires a ballot in order to vote in person, you may do so. If you wish to do this, please identify yourself to one of the meeting officials in the aisles who will furnish a ballot to you. I recognize Mr. Walter Scott to place a motion before the meeting with respect to election of directors.

WSWalter Scott Jr. [05:07:20] I move the Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Don Keough, Tom Murphy, Ron Olson and Walter Scott be elected as directors.

Warren Buffett [05:07:34] Is there a second?

[05:07:36] Shareholder: Second.

Warren Buffett [05:07:36] It has been moved and seconded that Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Donald Keough, Thomas Murphy, Ronald Olson and Walter Scott be elected as directors. Are there any other nominations? Is there any discussion? The nominations are ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the election of directors and allow the ballots to be delivered to the inspector of elections. Miss Amick, when you are ready, you may give your report.

BABecki Amick [05:08:15] My report is ready. The ballot of the proxy holders, in response to proxies that received through last Thursday evening, cast not less than 701,770 votes for each nominee. That number far exceeds a majority of the number of the total votes of all Class A and Class B shares outstanding. The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

Warren Buffett [05:08:43] Thank you, Miss Amick. Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Donald Keough, Thomas Murphy, Ronald Olson and Walter Scott have been elected as directors.

The next item on the agenda is an advisory vote on the compensation of Berkshire Hathaway’s executive officers. I recognize Mr. Walter Scott to place a motion before the meeting on this item.

WSWalter Scott Jr. [05:09:08] I move that the shareholders of the company approve, on an advisory basis, the compensation paid to the company’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including compensation discussion and analysis, the accompanying compensation tables and related narrative discussion in the company’s 2011 annual meeting proxy statement.

Warren Buffett [05:09:32] Is there a second? It has been moved and seconded that the shareholders of the company approve, on an advisory basis, the compensation paid to the company’s named executive officers. Is there any discussion? The motion is ready to be acted upon. There are any shareholders voting in person, they should now mark their ballots on the motion and allow the ballots to be delivered to the inspector of elections. Miss Amick, when you’re ready, you may give your report.

BABecki Amick [05:09:58] My report is ready. The ballot of the proxy holders, in response to proxies that received through last Thursday evening, cast not less than 720,883 votes to approve, on an advisory basis, the compensation paid to the company’s named executive officers. That number far exceeds a majority of the number of the total votes of all Class A and Class B shares outstanding. The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

Warren Buffett [05:10:32] Thank you, Ms. Amick. The motion to approve, on an advisory basis, the compensation paid to the company’s named executive officers has passed. The next item is an advisory vote on the frequency of a shareholder advisory vote on compensation of named executive officers. I recognize Mr. Walter Scott to place a motion before the meeting with respect to this item.

WSWalter Scott Jr. [05:10:54] I move that the shareholders of the company determine, on an advisory basis, the frequency, whether annual, biennial or triennial, with which they shall have an advisory boat, vote on the compensation, company’s named Executive officers set forth in the company’s proxy statement.

Warren Buffett [05:11:09] Is there a second?

[05:11:10] Shareholder: Second.

Warren Buffett [05:11:10] It has been moved and seconded that the shareholders of the company determine the frequency with which they shall have an advisory vote on compensation of named executive officers, with the options being every one, two or three years. Is there any discussion? The motion is ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the motion and allow the ballots to be delivered to the inspector of elections. Miss Amick, when you’re ready, you may give your report.

BABecki Amick [05:11:38] My report is ready. The ballot of the proxy holders, in response to proxies that were received through last Thursday evening, cast 112,395 votes for a frequency of every year, 4,615 votes for a frequency of every two years, and 609,690 votes for a frequency of every three years of an advisory vote on the compensation of named executive officers. The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

Warren Buffett [05:12:15] Thank you, Miss Amick. Shareholders of the company have determined, on an advisory basis, that they shall have an advisory vote on the compensation paid to the company’s named executive officers every three years.

The next item of business is a motion put forth by Miss Coward, a Berkshire shareholder, represented by Mr. Bruce Herbert and Mr. Larry Doers. The motion is set forth in the proxy statement. The motion requests Berkshire Hathaway to establish goals for the reduction of greenhouse gas at its subsidiaries’ power plants and prepare a report for shareholders on how it will achieve these goals. The directors have recommended that the shareholders vote against the proposal. I will now recognize Mr. Herbert to present the motion. To allow all interested shareholders to present their views, I asked Mr. Herbert to limit his remarks to five minutes. The microphone at, well, let’s have Mr. Herbert first. If, turn up the lights.

[05:13:18] Shareholder (Bruce Herbert, Seattle, Washington): Thank you. Good day, ladies and gentlemen. My name is Bruce Herbert, and I’m chief executive of Newground Social Investment in Seattle, Washington. It is such a pleasure to be here today, representing a lifelong owner of Berkshire Class A shares, and I stand to present the resolution found on page 12 of the proxy that asks our company to set goals for reducing greenhouse gas emissions at its energy holdings. This is because serious investors know, and studies show, that climate change creates financial liability. The Investor Network on Climate Risk, whose members manage more than $10 trillion, and the Carbon Disclosure Project, representing more than $70 trillion in assets globally, call on companies to disclose risks related to climate change, as well as the actions taken to mitigate those risks.

In 2010, 66% of U.S. electric utilities had already set greenhouse gas emission reduction goals. 66%. Unfortunately, Berkshire’s MidAmerican was not among them. Now, investors have cause to be concerned. Just last year, the SEC announced that climate risks are material and that they must be disclosed. We do applaud MidAmerican for having the largest wind and import wind energy portfolio of any utility in the United States. However, it is also true that MidAmerican generates close to three-quarters of its power burning coal. Investors globally want to reduce risk through cleaner generation, and 66% of public utilities have already published their plans for doing so, but MidAmerican offers no such plan, despite the public proclamation via its website. They, quote, “We will set challenging goals and assess our ability to continually improve our environmental performance,” unquote. There is no more important environmental goal for a gold burn, for a coal burning utility, than to reduce pollution.

But more than this, Berkshire is uniquely vulnerable in that the financial burdens of climate change are pushed onto insurance companies, and as a major insurer, this has serious financial ramifications for our company. Berkshire enjoys a remarkable and well-earned reputation, earned over many decades, for being practical visionaries. Addressing climate change offers an opportunity for our company both to uphold and to enhance this reputation. So in closing, the world’s largest institutional investors call on companies to set greenhouse gas reduction goals. Such goals are key tools for managing the extraordinary business risk of climate change, to business risk of climate change. Two-thirds of utilities in the United States have already set these types of reduction goals. And this resolution, this, importantly, gives Berkshire managers the freedom to determine what those goals should be and to shape the process for meeting them. And the major proxer, proxy advisory firms have repeatedly recommended voting for similar resolutions. So I will close with a request and a question. The request is for all of you here to please join us in supporting this common sense proposal. And the question, gentlemen, is: have you evaluated the business risk of climate change to our companies, and what did you find out? Thank you.

Warren Buffett [05:17:15] Thank you, Mr. Herbert. Now we have a microphone at zone one. It’s available for anyone wishing to speak for, against the motion. You’ve seen where zone one is there. I’ll wait just a minute or two in case anybody would like. I, is there an additional speaker there that’s, that, I’ll ask that, for the benefit of those present, I ask that each speaker for, against the motion limit themselves to two minutes and confine your remarks solely to the motion. So go ahead.

[05:17:49] Shareholder (Paul Herman, HIP Investor): And I am Paul Herman, founder of HIP Investor. HIP stands for human impact and profit. We’re a registered investment advisor in the states of California, Illinois and Washington. Climate change is obviously one of the risks to Berkshire Hathaway conglomerate companies, including MidAmerican Energy and Burlington, the Burlington railway, which transports coal, much of which is getting exported to China. So we are concerned about, also about the disclosure, quantification and impact on profit of greenhouse gases, as well as the quantification of the asset of the carbon credits that might be available for eco-efficient companies. So we strongly support this resolution for increased disclosure, increased transparency, and the valuation of the financial returns that are possible, or the financial liabilities, especially with your expertise in reinsurance, because reinsurance companies typically put a quantification of the potential carbon exposure and liabilities, whereas traditional insurance companies may not do so.

So we strongly advocate for the transparency, disclosure and quantification and set of potential risks and liabilities. The SEC has encouraged this type of disclosure, though they have not mandated it. So Berkshire Hathaway would be a leader in doing this, as companies like GE, with their eco imagination initiative, the 10% of revenue that they generate from their eco imagination products, and other leaders from Jeff Immelt to leaders of Duke Power, that take a positive position on the financial returns that are possible for addressing climate change and carbon efficiency. Thank you.

Warren Buffett [05:19:45] Thank you. We have some more speakers there.

[05:19:49] Shareholder (Jefferson Lilly): Mr. Buffett, Mr. Munger, my name is Jefferson Lilly, long-term Berkshire shareholder. It’s my personal opinion that it’s the previous two speakers that are the hot air and the problem around global warming, and that we (Applause) that we not regulate Berkshire Hathaway to force it to have carbon disclosure or other silly rules. It’s fine if the managers of the individual businesses choose to do that on their own, but it’s completely inappropriate to bring this false religion of global warming to try and regulate Berkshire Hathaway. You guys are doing a great job on your own.

Warren Buffett [05:20:40] Are there any other speakers there that…

[05:20:44] Shareholder: Mr. Munger and Warren Buffett, I would just like to say one thing, which I think is really important. Berkshire Hathaway can be a leader in the environment, and I’m for transparency, as I know these two gentlemen are. And John Doerr, who is very passionate about the environment, and I know if he was here today, he would have the same sentiments as these two gentlemen. And it’s important that as American citizens we care about the environment and not keep polluting the environment, and I’m with these two gentlemen 100%. Thank you.

Warren Buffett [05:21:39] You have any others that haven’t spoken?

[05:21:44] Shareholder (Eric Schlein): Yes. My name is Eric Schlein. I am not for this, so against the motion. I think Berkshire Hathaway has a pretty good reputation at being clean, being environmentally responsible. I don’t think anyone is saying that either Mr. Buffett or Mr. Munger somehow doesn’t care about the environment. I think most people care about the environment, but doesn’t mean that we should force Mr. Buffett, Mr. Munger, or any of these CEOs to tell them how to run their business. You guys care a lot about Berkshire’s reputation. If Berkshire is, a subsidiaries are just polluting oceans and ponds and destroying the reputation in different towns and cities, I don’t think that would be too cool with either Buffett or Munger. So it doesn’t, doesn’t mean you don’t care about the environment just because you’re not going to somehow regulate and tell other people how to run their business. Let’s just do things voluntarily, do things to make money and be responsible, and in the end of the day, that’s what wins. Thank you.

Warren Buffett [05:23:04] Thank you. Anyone additional?

[05:23:06] Shareholder (Larry Dorris): Yeah, my name is Larry Dorris, and I support this resolution. I don’t think anybody is saying anything other than your gentleman of great integrity, but this is a dollars and cents issue, and the EPA is releasing new rules that are calling for more regulation of greenhouse gas emissions. So this, you know, we’re really approaching this from the point of view of a conglomerate that has insurance holdings, and it really is insurance companies that are bearing the great costs. So I’m looking very much forward to your point of view on this. Thank you.

Warren Buffett [05:23:49] Thank you. Anyone else?

[05:23:51] Shareholder (David Hughes): Yes, thank you. David Hughes, shareholder. It’s my opinion that this is the right thing to do, and I think that it makes sense to do it as an organization prior to being forced to do it. And if this gives you the tools to set the rules your way, as you see fit, then I think that’s far more powerful and sets a precedent, as Berkshire has done in the past. So I am for the resolution. Thank you.

Warren Buffett [05:24:30] Anyone additional?

[05:24:31] Shareholder (Thomas Denkenberger): Hello, my name is Thomas Denkenberger, and my background was in biochemistry, and I’m very passionate about the environment, and I think it’s very important for Berkshire to work to be a leader. And so I’m very much in support of this proposition. Thank you.

Warren Buffett [05:25:02] We got somebody else there.

[05:25:05] Shareholder (Sarah Cleveland, Portland, Oregon): Hi, my name is Sarah Cleveland, I’m from Portland, Oregon. I wanted just to also put a voice in favor of this resolution. And I think it’s not about rights or wrong, it’s about a willingness to take a look at risks and opportunities, and also for Berkshire Hathaway to be a leader and also work with the subsidiary companies on specific, specific…

[05:25:41] Shareholder (Sam Roy): Hi, my name is Sam Roy. This is my first meeting. Mr. Munger and Warren Buffett, I am so impressed how you run your business, but I think you will care for the environment as well. I don’t know whether we should impose a rule, but at least you will, by your act, how the local businesses are run and all the operating goes out and adheres, and there is no question that we do everything possibly that we never pollute the air. That cannot be changed. It is not hot air, but it is something I am very passionate about. You can do anything with your environmental, but if you are not taking charge right now, we don’t know what the implications would be for our kids and grandkids. I request you give a thorough investigation, and I think you will do that. Thank you for this opportunity. Thank (Applause) you.

[05:27:06] Shareholder (Bob Stein): You know, so Mr. Bunker, Buffett and Mr. Munger, my name is Bob Stein. I’m a registered professional engineer. I have a couple comments. I am a Berkshire stockholder. One, I think we all support very sound environmental protection, but the science before this that’s being used by EPA for greenhouse gases is not necessarily sound and is not necessary in the best engines of Berkshire Hathaway shareholders. Also, everything that the EPA has proposed is not practical and has caused a lot of problems making us competitive in the world industrial market. Thank you.

Warren Buffett [05:28:00] Thank you.

[05:28:01] Shareholder (Jason Fang, Palo Alto, California): Jason, Jason Fang, Palo Alto, California. For me, one, one thing that’s really interesting about the issue is that it’s something that deserves the passion that people bring to it, and I actually side with many of these people on the science of the issue. What concerns me is not necessarily that Berkshire agreed to the motion, I’m actually against it, but that the enterprises under Berkshire are able to help evangelize the true science behind what’s actually going on and help the American public get a better understanding, so they can also bring about change, rather than simply have it all occur from the executive level. You…

[05:28:55] Shareholder (Bill Guenther, Newfane, Vermont): Good afternoon. My name is Bill Guenther. I’m a shareholder from Newfane, Vermont. I work as a state forester back home, and I want to say, for folks that don’t believe global warming is reality, I wish you would follow me around in the woods. It definitely is. I want to support this resolution, and I hope that the rest of the shareholders will feel important enough to see it through. Thank you.

Warren Buffett [05:29:28] Thank you.

[05:29:29] Shareholder (Leon): Good afternoon, I’m Leon. I care about energy, I care about energy and environment more, more than anybody else, because I’m currently still studying energy and environmental issues. But I truly, truly believe they power our private sector, the power of free market. And I think it’s not your responsibility to put the resources of the shareholder for this issue. It’s not your expertise.

I can personally do a better job to provide environment, to do a roundabout advocacy than you do. So actually, again, there’s a resolution. Thank you.

Warren Buffett [05:30:21] Thank you.

[05:30:22] Shareholder: I’m sorry, I have a friend to say something. I can translate it for him. Hello. He says the development of solar panel has great impact on China, and the question, and he also thinks that actually Berkshire should do something and should think about the implication of that. Thank you.

Warren Buffett [05:30:58] Okay. Oops, we have one more.

[05:31:01] Shareholder (Kevin Thompson): Hi, I’m Kevin Thompson. I’m a shareholder. I’m for the motion. I am a career engineer that works with an oil company, and what we found when we started looking at greenhouse gas emissions was that what we thought was going to end up costing the company more money actually created more revenue for the company. And those are some of the stories that generally don’t get told, but they are out there, and I would recommend that you take a look at it, because in actuality, what you may be dismissing may actually be revenue for your shareholders. Thank you.

Warren Buffett [05:31:55] Thank you.

[05:31:57] Shareholder (Mike): Hello, Mr. Buffett. I’m Mike from Walmart, and there’s obviously a fine line, line between, like, cutting down the Amazon forest and, like, just burning some coal. So sometimes you could give up a little, but you can’t really give up that much. So that’s why I don’t support the motion. Thank you.

Warren Buffett [05:32:32] There do not appear to be any further comments. Okay, thank you. Democracy in action at Berkshire. The couple of questions that were raised in terms of material information or material risks in respect to Berkshire, and specifically to our insurance operation: annually, in the 10-K, there’s a recitation of risks, and in my own opinion, in terms of our insurance operation, this question does not pose material risk to Berkshire’s insurance operations. The, the question, one gentleman toward the end mentioned the fact that it might even be more profitable for Berkshire in terms of what might happen if we followed the motion. I, ironically, he could well be right if it were in our determination.

But if you just take our three major states in electric utility operation, where we serve almost 2 million customers, Iowa, Utah and Oregon, but it’s true of other states as well, we operate under the dictates of the utility commissions in those three states, all of which are, each of which sets their own rules regarding operation, and each of which we end up obeying. If we were to unilaterally, for example, decide to close down and significant coal generation, we would be told to depreciate those plants over a shorter period, and that would translate not into cost of Berkshire, would translate into higher rates for electricity. They’re, we are entitled to a return on our investment, and the faster the depreciation, the higher the rates have to be in order to achieve allowed returns.

So there was a woman from Oregon speaking, for example, and the burden of any unilateral attempt by us, and we couldn’t do it without the approval of the utility commissions, but the burden would fall on customers. And it is true, actually, that we would recoup accelerated depreciation, and we would probably have a much larger investment on which we would be allowed to return in other generating facilities. But this is a question, this is not something the stockholders of Berkshire end up incurring the cost of. It’s something that the rate, or the users of electricity in these various states will pay for, and that judgment quite properly should be made by the public utility commissions of those various states. And whatever they decide, you know, we will follow.

And over time, there’s no question, just like we’ve talked about our wind generation in Iowa, this country will move toward different, a different composition of electricity generation. And as I stated earlier, I personally favor more nuclear over time, but that, that will be determined by, at the, both at the state level and in some extents, in some ways, at the national level. So it’s our recommendation that the motion be voted down. And I think the motion is now ready to be acted upon. There, there any others? If there are any shareholders voting in person, they should now mark their ballots on the motion and allow the ballot to be delivered to the inspector of elections. Ms. Amick, when you are ready, you may give your report.

BABecki Amick [05:37:09] My report is ready. The ballot of the proxy holders, in response to proxies that were received through last Thursday evening, cast 67,733 votes for the motion and 608,576 votes against the motion. As the number of votes against the motion exceeds a majority of the number of votes of all Class A and Class B shares outstanding, the motion has failed. The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

Warren Buffett [05:37:45] Thank you, Miss Amick. The proposal fails. Does anyone have any further business to come before this meeting before we adjourn? If not, I recognize Mr. Scott to place a motion before the meeting.

WSWalter Scott Jr. [05:37:56] I move this meeting be adjourned.

Warren Buffett [05:37:58] There a second? A motion to adjourn has been made and seconded. We will vote by voice. Is there any discussion? If not, all in favor, say aye. All opposed, say no. This meeting is adjourned. Thank you.