Berkshire Hathaway Annual Meeting 2017 Transcript

Warren Buffett [00:00:15] Thank you, and good morning. Duh, that’s Charlie, I’m Warren. You can tell us apart because he can hear and I can see. That’s why we work together so well. We usually have our specialty. I’d like to welcome you to… We got a lot of out-of-towners here, and I’d like to welcome you to Omaha. It’s a terrific city. And Charlie, Charlie’s lived in California now for about 70 years, but he’s still got a lot of Omaha. And both of us were born within two miles of this building that you’re in. And Charlie, as he mentioned in his description of his amorous triumphs in high school, Charlie graduated from Central High, which is about one mile from here. It’s a public school, and my dad, my first wife, my three children, and two of my grandchildren have all graduated from the same school. In fact, my grandchildren say they’ve had the same teachers that my dad, my they… But oh, it’s a great city. I hope you get to see a lot of it while you’re here.

And in just a minute we will start a question period, hopefully, in a question and answer period that will last till about noon, and then we’ll take a break for an hour, so we’ll reconvene it at 1:00, and then we’ll go continue with the question and answer period till 3:30, and then we’ll break for 15 minutes or so, and then we’ll convene the annual meeting of Berkshire, which I would… We have three propositions that people wish to speak on, so that could last perhaps as long as an hour.

Before we start, I’d like to make a couple of introductions. The first being Carrie Sova, who’s been with us about seven years, and can we have a light on Carrie? I think she… Carrie, you’re there, Carrie. Stand up, Carrie. Come on. Carrie puts on this whole program. She came with us about seven years ago, and a few years ago I said, why don’t you just put on the annual meeting for me? And she handles it all. And she has two young children, and she has dozens and dozens and dozens of exhibitors that she works with, and as you can imagine, with all of what we put on and all of the numbers of you that come, the hotels and the airlines and the rental cars and everything, she does it as if, you know, she could do that and be juggling three balls at the same time. She’s amazing, and I want to thank her for putting on this program for us.

And I also would like to welcome, and have you welcome, our directors. They will be voted on later. So I’ll do this alphabetically. They’re here in the front row, and if we could just have the spotlight drop on them as they’re introduced. And alphabetically, there’s Howard Buffett, Steve Burke, Sue Decker, Bill Gates, Sandy Gottesman, Charlotte Guyman, we have Charlie Munger next to me, Tom Murphy, Ron Olson, Walter Scott, and Meryl Witmer. One more introduction I’m going to make, but I’ll save that for just a minute.

And our earnings report was put out yesterday. The… As we regularly explain, the realized investment gains or losses in any period really mean nothing. I mean, they… We could take a lot of gains if we wanted to. We could take a lot of losses if we wanted to. But we don’t really think about the timing of what we do at all, except in relation to the intrinsic value of what we’re buying or selling. We are not… We do not make earnings forecasts. And we have, on March 31st, we have over $90 billion of net unrealized gains. So if we wanted to report almost any number you can think of and count capital gains as part of the earnings, we could do it.

So in the first quarter… And I would say that we have a very, very, very slight preference this year, if everything else were equal. Well, it’s true in any year, but it’s a little more so this year. We would rather take losses than gains because of the tax effect, if two securities were equally valued. And there’s probably just one touch more of emphasis on that this year because we’re… We are taxed on gains of 35%, which means we also get the benefit, the tax benefit, of 35% of any losses we take. And I would say that there’s some chance of that rate being lower, meaning that losses would have less tax value to us after this year than they would have this… after this year than this year. That is not a big deal, but it would be a very slight preference, and it may get to be more of a factor in deferring any gains and perhaps accelerating any losses as the year gets closer to December 31st, assuming, and I’m making no predictions about it, but assuming that there were to be a tax act that had the effect of reducing earnings.

So in the first quarter, insurance underwriting was the swing factor, and then the… There’s a lot more about this in our 10-Q, which you can look up on the internet. And you really, if you’re seriously interested in evaluating our earnings or our businesses, you should go to the 10-Q, because the summary report, as we point out every quarter, does not really get to the main… a number of the main points of valuation.

I would just mention two factors in conjunction with the insurance situation, which I love. In the first four months, not the first three months, but the first four months, GEICO’s had a net gain of 700,000 policyholders, and that’s the highest number I can remember. There may have been a figure larger than that somewhere in the past. I did not go back and look at them all. But last year I believe that figure was like 300,000. And this has been a wonderful period for us at GEICO because several of our major competitors have decided, and they publicly stated this, that one of them just reiterated that the other day, although they now change their policy, but they intentionally cut back on new business, because new business carries with it a significant loss in the first year. There’s just costs of acquiring new business, plus the loss ratio, strangely enough, on first-year business tends to run almost 10 points higher than on renewal business.

And so not only do you have acquisition costs, but you actually have a higher loss ratio. So when you write a lot of new business, you’re going to lose money on that portion of the business that year. And we wrote a lot of new business, and at least two of our competitors announced that they were lightening up for a while on new business because they did not want to pay the penalty of the first-year loss. And of course that’s made to order for us. So we just put our foot to the floor and try to ride as much business, good business, as we can. And there are costs to that.

A second factor, well, it’s not a factor in the P&L, but an important event in the first quarter is that we increased our float. And on the slide, I believe it shows it, year over year, 16 billion, 14 billion of that came in the first quarter this year. So we had a $14 billion increase in float. And for some years I’ve been telling you it’s gonna be hard to increase the float at all, and I still will tell you the same thing, but it’s nice to have $14 billion or more, which is one reason, if you look at our 10-Q, you will see that our cash and cash equivalents, including Treasury bills, now has come to well over 90 billion.

So I think… I feel very good about the first quarter, even though our operating earnings were down a little bit. One quarter means nothing. I mean, over time what really counts is whether we’re building the value of the businesses that we own. And I’m always interested in the current figures, but I’m always dreaming about the future figures.

There’s one more person I would like to introduce to you today, and I’m quite sure he’s here. I haven’t seen him, but I understood he was… I understood he was coming. There’s a… I believe that he’s made it today, and that is Jack Bogle, who I talked about in the annual report. Jack Bogle has probably done more for the American investor than any man in the country. Jack, could you stand up? There he is.

Jack Bogle, many years ago, he wasn’t the only one that was talking about an index fund, but he… It wouldn’t have happened without him. I mean, Paul Samuelson talked about it. Ben Graham even talked about it. But the truth is, it was not in the interest of invest… of the investment industry, of Wall Street. It was not in their interest, actually, to have the development of an index fund, other than the index fund, because it brought down fees dramatically. And as we’ve talked about some in the reports, and other people have commented, index funds overall have delivered for shareholders a result that has been better than Wall Street professionals as a whole, and part of the reason for that is that they brought down the costs very significantly.

So when Jack started, very few people… Certainly Wall Street did not applaud him, and he was the subject of some derision and a lot of attacks. And now we’re talking trillions when we get into index funds, and we’re talking a few basis points when we talk about investment fees in the case of index funds, but still hundreds of basis points when we talk about fees elsewhere. And I estimate that Jack, at a minimum, has saved, left in the pockets of investors, without hurting them overall in terms of performance at all, gross performance, he’s put tens and tens and tens of billions into their pockets, and those numbers are going to be hundreds and hundreds of billions over time. So it’s Jack’s 88th birthday on Monday, so I just say happy birthday, Jack, and thank you on behalf of American investors.

And Jack, I’ve got great news for you. You’re going to be 88 on Monday, and in only two years you’ll be eligible for an executive position at Berkshire. So hang in there, buddy.

Okay, we’ve got a panel of expert journalists on this side, an expert analyst on that side, and expert shareholders in the middle, and we’re going to rotate, starting with the analysts. And some where here I have a… Here we go. And we will… We’ll do this through the afternoon. After we… If we get through 54 questions, which would be six for each journalist, six for each analyst, and 18 more for the audience, then we will go strictly to the audience. I don’t think I’ve got any information as to what the situation is on overflow rooms, but we’ll go to at least one of them. But let’s start off with Carol Loomis, Fortune magazine, the longest-serving employee in the history of Time Inc., I believe, was 60 years. And Carol, go to it.

CLCarol Loomis [00:15:10] Thank you. Thank you from all of us journalists up here. I know that there are many, many people out there who have sent us questions that aren’t going to get answered, and I just want to say that it’s very hard to get a question answered. The one thing I can suggest is to follow Warren’s thought in the annual report, that he wants everybody to go away from this meeting more educated about Berkshire than they were when they came. And one way you can do that is keep your questions quite directly Berkshire-related or relating to the annual letter. Even then it will be hard to get your question answered, that the three of us only requested answers… that the three of us only have 18 questions in total. But I encourage you to think in the virtual related direction when you’re submitting a question next year.

Now, my first question, it’s about Wells Fargo, which is Berkshire’s largest equity holding, 28 billion at the end of the year. And this question comes from a shareholder who did not wish to be identified. In the wake of the sales practices scandal that last year engulfed Wells Fargo, the company’s independent directors commissioned an investigation and hired a large law firm to assist in carrying it out. The findings of the investigation, which were harsh, have been released and is what is called the Wells Fargo Sales Practices Reports. You can find it on the internet. It concludes that a major part of the company’s problem was that, and I quote, “Wells Fargo’s decentralized corporate structure gave too much autonomy to the Community Bank’s senior leadership,” end of quote. Mr. Buffett, how do you satisfy yourself that Berkshire isn’t subject to the same risk with its highly decentralized structure and the very substantial autonomy given to senior leadership of the operating company?

Warren Buffett [00:17:31] Yeah, it’s true that we at Berkshire probably operate on us… We certainly operate on a more decentralized plan than any company of remotely our size. And we count very heavily on principles of behavior rather than loads of rules. It’s one reason, at every annual meeting, you see that Salomon description, and it’s why I write very few communiques to our managers. But I sent them one once every two years, and it basically says that we’ve got all the money we need. We’d like to have more, but we, we’re… it’s not a necessity. But we don’t have one ounce of reputation more than we need, and that our reputation at Berkshire is in their hands. And Charlie and I believe that if you establish the right sort of culture, and that culture to some extent self-selects who you obtain as directors and as managers, that you will get better results that way in terms of behavior than if you have a 1,000-page guidebook. You’re gonna have problems regardless. We have 367,000, I believe, employees now. If you have a town with 367,000 households, which is about what the Omaha metropolitan area is, people are doing something wrong as we talk here today. There’s no question about it. And the real question is whether the managers at… are in a better… are worrying and thinking about finding and correcting any bad behavior, and whether, if they fail in that, whether the message gets to Omaha and whether we do something about it.

At Wells Fargo, you know, there were three very significant mistakes, but there was one that dwarfs all of the others. You’re going to have incentive systems at any business, almost any business. There’s nothing wrong with incentive systems, but you’ve got to be very careful what you incentivize, and you can incentivize bad behavior, and if so, you better have a system for recognizing it clearly. At Wells Fargo, there was an incentive system built around the idea of cross-selling and number of services per customer, and the company, in every quarterly investor presentation, highlighted how many services per customer. So it was the focus of the organization, a major focus, and undoubtedly people got paid and graded and promoted based on that number, at least partly based on that number. Well, it turned out that that was incentivizing the wrong kind of behavior.

We’ve made similar mistakes. I mean, any company is going to make some mistakes in designing a system, but it’s a mistake, and you’re going to find out about it at some point, and I’ll get to how we find out about it. But the biggest mistake was, and I don’t know, obviously don’t know the facts as to how the information got, just got passed up the line at Wells Fargo, but at some point, if there’s a major problem, the CEO will get wind of it, and that is at that moment, that’s the key to everything, because the CEO has to act.

That Salomon situation that you saw happened because, I’m on April, I think, 28th, the CEO of Salomon, the president of Salomon, the general counsel of Salomon sat in a room, and they had described to them by a fellow named John Meriwether some bad practice, terrible practice, that was being conducted by a fellow named Paul Mozer, who worked for him. And Paul Mozer was flim-flaming the United States Treasury, which is a very dumb thing to do, and he was doing it partly out of spite, because they didn’t… He didn’t like the Treasury, and they didn’t like him. So he put in phony bids for U.S. Treasuries and all of that. So on April 28th, roughly, the CEO and all these people knew that they had something that had gone very wrong, and they had to report it to the Federal Reserve Board in New York, the Federal Reserve Bank of New York. And the CEO, John Gutfreund, said he would do it, and then he didn’t do it. And he undoubtedly put it off just because it was an unpleasant thing to do. And then on May 15th, another Treasury auction was held, and Paul Mozer put in a bunch of phony beds again. And at this point it’s all over, because the top management had no one ahead of time, and now a guy that was a pyromaniac had gone out and lit another fire, and he’d lit it after they’d been warned that he was a pyromaniac, essentially. And it all went downhill from there. It had to stop when the CEO learns about it.

And then they made a third mistake, actually, but again it pales in comparison to the second mistake. They made a third mistake when they totally underestimated the impact of what they had done once it became uncovered, because they… There was a penalty of $185 million, and in the banking business people get fined billions and billions of dollars for mortgage practices and all kinds of things. I… The total fines against the big banks, I don’t know whether totals 30 or 40 or billion or whatever the number may be. So they measured the seriousness of the problem by the dimensions of the fine, and they thought a $185 million fine signaled a less offensive practice than something involved $2 billion, and they were totally wrong on that. But the main problem was they didn’t act when they learned about it. It was bad enough having a bad system, but they didn’t act.

At Berkshire, we have… The main source of information for me about anything that’s being done wrong at a subsidiary is the hotline. Now, we get 4,000 or so hotline reports or that coming, and we get communications on the hotline perhaps 4,000 times here, and most of them are frivolous. You know, the guy next to me has bad breath or something like that. I mean, it’s a… But there are a few serious ones. And the head of our internal audit, Becki Amick, looks at all those. People that… A lot of them come in anonymous, probably most of them. And some of them she refers back to the companies, probably most of them. And but anything that looks serious, you know, I will hear about, and that has led to action, but we’ll put them more than once. And we spent real money investigating some of those. We put special investigators sometimes on them. And like I say, it is uncovered certain practices that we would not at all condone at the parent company.

I think it’s a good system. I don’t think it’s perfect. I don’t know what… I’m sure they’ve got an internal audit at Wells Fargo, and I’m sure they’ve got a hotline, and I don’t know the facts, but I would just have to bet that a lot of communications came in on that, and I don’t know what their system was for getting them to the right person, and I don’t know who did what at any given time. But that was, it was a huge, huge, huge error if they were getting, and I’m sure they were getting some communications, and they ignored them or they just sent them back down to somebody down below. Charlie, you followed… What are your thoughts on it?

Charlie Munger [00:26:09] Well, put me down as skeptical when some law firm thinks they know how to fix something like this. If you’re in a business where you have a whole lot of people under incentives very likely to cause a lot of misbehavior, of course you need a big compliance department. Every big wire house stock brokerage firm has a huge compliance department, and if we had one, we would have a big compliance department too. Wouldn’t we, Warren?

Warren Buffett [00:26:36] Absolutely, absolutely, absolutely.

Charlie Munger [00:26:37] But it doesn’t mean that everybody should try and solve their problems with more and more compliance. I think we’ve had less trouble over the years by being more careful in whom we pick to have power and having a culture of trust. I think we have less trouble, not more. But we will have trouble from time to time. Of course we’ll be blindsided someday.

Warren Buffett [00:27:00] Charlie says an ounce of prevention… He says when Ben Franklin, who he worships, said, I announced a prevention is worth a pound of carry, he understood… He understated it. An ounce of prevention is worth more than a pound of cure. And I would say a pound of cure promptly applied is worth a ton of cure that’s delayed. And problems don’t go away. John Gutfreund said that problem originally was… He called it a traffic ticket. He told the troops there at Salomon was a traffic ticket, you know, and it almost brought down a business that… Some other CEO that they described the problem that he had encountered as a footfall, you know, and it resulted in incredible damage to the institution. And so it… You’ve gotta… You’ve gotta act promptly.

And frankly, I don’t know any better system than hotlines and anonymous letters to me. I get anonymous letters, and I’ve gotten three or four of them probably in the last six or seven years that have resulted in major changes. And very, very occasionally they’re signed. You almost always are anonymous, but it wouldn’t make any difference, because there will be no retribution against anybody, obviously, if they call our attention to something that’s going wrong. But I will tell you, as we sit here, somebody is doing… Quite a few people are probably doing something wrong at Berkshire. And usually it’s very limited. I mean, it may be stealing small amounts of money or something like that. But when it gets to some sales practice like was taking place at Wells Fargo, you can see the kind of damage it would do. We will now shift over to the analysts and Jonny Brandt.

JBJonathan Brandt [00:28:57] Hi, Warren. Hi, Charlie. Thanks for having me. You’ve addressed the risk of driverless cars to GEICO’s business, but it strikes me that driverless trucks could narrow the cost advantage of railroads, even if the number of crew members in a locomotive eventually declines from two to zero. Is autonomous technology more of an opportunity or more of a threat for the Burlington Northern?

Warren Buffett [00:29:20] Oh, I would say that the driverless trucks are a lot more of a threat than an opportunity to the Burlington Northern. And I would say that if driverless cars became pervasive, it would only be because they were safer, and that would mean that the overall economic cost of auto-related losses had that gone down, and that would drive down the premium income of GEICO. So I would say both of those, and autonomous vehicles widespread would hurt us, if they went to, if they spread trucks, and they would hurt our auto insurance business.

I think, my personal view is that they will… They’ll certainly come. I think they may be a long way off, but that will depend… It’ll probably, frankly, depend on experience in the first, early months of the introduction and test situations. And if they make the world safer, it’s going to be a very good thing, but it won’t be a good thing for auto insurers. And similarly, if they learn how to move trucks more safely, there’s a… Tends to be driver shortages in the truck business now. It obviously improves their position vis-a-vis the railroads. Charlie?

Charlie Munger [00:30:59] Well, I think that’s perfectly, perfectly clear.

Warren Buffett [00:31:02] Finally, approval. All these years. Okay, station one, the shareholder.

[00:31:07] Shareholder (Bryan Martin, Springfield, Illinois): Hi. Hi, Warren and Charlie. My name is Bryan Martin, and I’m from Springfield, Illinois. In the HBO documentary “Becoming Warren Buffett,” you had a great analogy comparing investing to hitting a baseball and knowing your sweet spot. Ted Williams knew his sweet spot was a pitch right down the middle. When both of you look at potential investments, what attributes make a company a pitch in your sweet spot that you’ll take a swing at and invest in?

Warren Buffett [00:31:35] Well, I’m not sure I can define it in exactly the terms you would like, but the… We sort of know it when we see it. And it would tend to be a business that, for one reason or another, we can look out five or 10 or 20 years and decide that the competitive advantage that it had at the present would last over that period, and it would have a trusted manager that would not only fit into the Berkshire culture but that was eager to join the Berkshire culture. And then it would be a matter of price. But the main… You know, when we buy a business, essentially we’re laying out a lot of money now based on what we think that business will deliver over time, and the higher the certainty with which we make that prediction, the better off, the better we feel about it.

You can go back to the first one, for one, the first outstanding business we bought, but it was kind of a watershed event, which was a relatively small company, See’s Candy. And the question when we looked at See’s Candy in 1972 was, would people still want to be both eating and giving away that candy and preference to other candies? And it wouldn’t be a question of people buying candy for the low bid. And we had a manager we liked very much, and we bought a business that was… paid $25 million for it, net of cash, and it was earning about 4 million pre-tax. Then we must be getting close to $2 billion or something like that pre-tax that we’ve taken out of it. But it was only because we felt that people would not be buying necessarily a lower-price candy. I mean, it does not work very well if you go to your wife or your girlfriend on Valentine’s Day, I hope they’re the same person, and say, you know, here’s a box of candy, honey, I took the low bid. You know, it doesn’t… It loses a little of it as you go through that speech. And we made a judgment about See’s Candy that it would be special, and probably not in the year 2017, but we certainly thought it would be special in 1982 and 1992, and unfortunately we were right on it. And we’re looking for more See’s Candies, only a lot bigger. Charlie?

Charlie Munger [00:34:19] Yeah, but it’s also true that we were young and ignorant then, and now we’re all the…

Warren Buffett [00:34:25] Yeah, yes, that’s true too.

Charlie Munger [00:34:27] And the truth matter is that it would have been very wise to buy See’s Candy at a slightly higher price, and if they’d asked it, we wouldn’t have done it. So we’ve gotten a lot of credit for being smarter than we were.

Warren Buffett [00:34:43] Yeah, and to be more accurate, yeah, it’s been five million more, I wouldn’t have bought it. Charlie would have been willing to buy it. So fortunately that we didn’t get to the point where we had to make that decision that way. But he would have pushed forward when I probably would have faded. It’s a good thing, it’s a good thing that the guy came around. Actually, the seller was the grandson of a Mississippi… Wasn’t he, Charlie? Larry See’s son, am I correct, or Larry See’s brother? But he was not interested in the business, and he was interested in more interested in girls and grapes, actually. And he almost changed his mind. He did change his mind about selling. And I wasn’t there, but Rick Guerin told me that Charlie went in and gave a, an hour talk on the merits of girls and grapes over having a candy company. This is true, folks. And the fellow sold to us. So that… I pulled Charlie out in emergencies like that.

Charlie Munger [00:35:52] He’s… We were very lucky that early, the habit of buying horrible businesses because they were really cheap. It gave us a lot of experience trying to fix unfixable businesses as they headed downward toward doom. And that early experience was so horrible, fixing the unfixable, that we were very good at avoiding it thereafter. So I would argue that our early stupidity helped us.

Warren Buffett [00:36:24] Yeah, yeah. We learned we could not make a silk purse out of a house here. So we learned… So we learned, we went around looking for shields.

Charlie Munger [00:36:33] But you have to try it for a long time and fail and have… rub… have your nose rubbed in it to really understand it.

Warren Buffett [00:36:41] Okay, Becky. Okay, Quick.

Becky Quick [00:36:42] This question comes from a shareholder named Mark Blakley in Tulsa, Oklahoma, who says there has been more news than usual in some of Berkshire’s core stock holdings: Wells Fargo and the incentive and new account scandal, American Express losing the Costco relationship and playing catch-up in the premium card space, United Airlines and customer service issues, Coca-Cola and slowing soda consumption. How much time is spent reviewing Berkshire stock holdings, and is it safe to assume, if Berkshire continues to hold these stocks, that the thesis remains intact?

Warren Buffett [00:37:21] Well, we spend a lot of time thinking… Those are very large holdings. If you add up American Express, Coca-Cola, and Wells Fargo, I mean, you’re getting up, you know, well into the high tens of billions of dollars, and those are businesses we like very much. They’re different characteristics. In the case of… You mentioned United Airlines. We actually are the largest holder of all four of the large… We’re the largest holder of the four largest airlines, and that is much more of an industry thought. But all businesses have problems, and some of them have some very big pluses.

I personally… You mentioned American Express. If you read American Express’s first quarter report and talk about their Platinum card, the Platinum card is doing very well. The gains around the world, you know, I think there were 17% or something like that in buildings in the UK, and 15%, it is original currency or the local currency, Japan, Mexican, very good in the United States. There’s competition in all these business. If we thought… We did not buy American Express or Wells Fargo or United Airlines but Coca-Cola with the idea that they would never have problems or never have competition. What we did by… Why we did buy them is we thought they had very, very strong hands, and we liked the financial policies, and the cases, many of them, we like… We l… We like their position.

We bought a lot of businesses, and we do look to see where we think they have durable competitive advantage, and we recognize that if you’ve got a very good business, you’re going to have plenty of competitors who are going to try and take it away from you. And then you make a judgment as to the ability of your particular company and product and management to ward off competitors. They won’t go away. But we think… I’m not gonna get into the specific names on it, but those companies generally are very well positioned. I’ve likened, essentially, if you’ve got a wonderful business, even if there’s a small one like See’s Candy, you basically have an economic castle, and in capitalism people are going to try and take away that castle from you. So you want a moat around it, protecting it, in various ways that can protect it, and then you want a knight in the castle that’s pretty darn good at warding off marauders. But they’re going to be marauders, and they’ll never go away.

And if you look at the… I think Coca-Cola was 1886. American Express was 18, I don’t know, 51 or 52, starting out with an express business. Wells Fargo with… I don’t know what year they were started. Incidentally, American Express was started by Wells and Fargo as well. So these companies had lots of challenges, and they’ll have more challenges, than the companies we own have had challenges. Our insurance business has had challenges. But, you know, we started with National Indemnity’s $8 million purchase in 1968. Unfortunately, we’ve had people like Tony Nicely at GEICO, and we’ve been with Ajit Jain, who’s added tens of billions of value, and we’ve got some smaller companies that you probably don’t even know about but really have done a terrific job for us. So they’ll always be competition and insurance, but they’ll always be… there’ll always be things to do that a really intelligent management, with a decent distribution system, various things going for them, can do to ward off the marauders. So I… The specific question, how much time has been reviewing the holdings, I would say that I do it every day, and sure Charlie does it every day. Charlie?

Charlie Munger [00:41:31] Well, I don’t think I got anything to add to that either.

Warren Buffett [00:41:37] We’ll cut a salary if he doesn’t participate here. Okay, Jay Gelb.

JGJay Gelb [00:41:44] This question is on Berkshire’s retroactive reinsurance deal with AIG, which was the largest ever of its kind. Based on AIG’s track record of reserve deficiencies and the opportunity for Berkshire to invest afloat, what is your level of confidence that this contract, covering up to $20 billion of AIG’s reserves in return for 10 billion of premiums, will ultimately be profitable for Berkshire?

Warren Buffett [00:42:09] Well, at the time we do every deal, I think it’s smart, and then sometimes I find out otherwise as we go along. The deal, the Jay knows but might be unfamiliar to many people, is that AIG transferred to us the liability for 80% of 25 billion excess of 25 billion. In other words, they had to pay the first 25 billion, and then on the next 25 billion we had to pay 80% of what they paid, up to a limit of 20 billion, 80% of 25. And we got paid $10.2 billion for that. And we had… And this applies to their losses in many classes of business written or earned before December 31st, 2015.

So Ajit Jain, who has made a lot more money for Berkshire than I… for you than I have, but he evaluates that sort of transaction. We talk about it a fair amount ourselves. I just find it interesting. I particularly find the 10.2 billion they’re going to give us interesting. And the… We come to the conclusion that we think we’ll do well by getting 10.2 billion today, with a maximum payout of 20 billion over some in-depth, I mean, between now and judgment day, on this cl… on this large piece of business. AIG had very good reasons for doing this, because their reserves had been under criticism, and this essentially, probably, it should have been, I think, put to bed the question when the… whether they were under-reserved on that business. And we get the 10.2 billion, and the question is how fast we pay out the money and how much money we pay out. And Ajit does 99% of the thinking on that, and I do 1%. And we project out what we think will happen, and we know, whatever our projection is, that it will be wrong, but we try to be conservative.

And we’ve done a fair amount of these deals. This is the largest. The second largest was a creature that was formed out of Lloyd’s of London some years ago. And we’ve been wrong on one transaction that involved something over a billion a premium. I mean, clearly wrong. And there are a couple of others that may or may not work out, depending on what you assume we have earned on the funds, but they’re okay. They’re, you know… But they probably didn’t come out as well as we thought they would, though. But overall, what fits into the formula for making this an attractive deal… So we have… We do have to assume we’ll find uses of the money, but the money will be with us quite a while. And I think our calculations are on the conservative side. They’re not the identical calculations that AIG makes. I mean, we come up with our own estimate of payouts and all of that. And I think, actually, I think it was quite a good transaction from AIG’s standpoint, because they did take 20 billion of potential losses off for 10.2 billion, and I think they satisfied the investing community that there were quite unlikely to have adverse development in the period prior to 2015 that was not accounted for by this transaction. Charlie?

Charlie Munger [00:46:09] Well, I think it’s intrinsically a dangerous kind of activity, and but that’s one of its attractions. I don’t think there are any two people in the world that are better at this kind of transaction than Ajit and Warren, and nobody else has had the experience we’ve had. Just get me in a lot more of those businesses, and I’ll let… I’ll accept a little extra worry.

Warren Buffett [00:46:36] There’s one thing I should mention, that we actually were the only insurance operation in the world who would write that sort of a contract, and that where it would be satisfactory to the other party. I mean, when somebody hands you $10.2 billion and says, I’m counting on you to pay 20 billion back, even if it’s 50 years from now, on the last dollar, there are very few people that they want to add 10.2 billion to. And then, so it’s a… There’s limited people on the other side. I mean, there’s not that many people with remotely… that have that kind of size deal.

Charlie Munger [00:47:13] The req is a good expression.

Warren Buffett [00:47:15] He means one. Yeah. Okay, we’ll go to station two.

[00:47:19] Shareholder: Hello, Mr. Buffett, Mr. Munger. Your career of thousands of negotiations, business dealings, could you describe for the crowd which one sticks out in your mind as your favorite or is otherwise noteworthy?

Warren Buffett [00:47:41] Well, I don’t think I’ve got a favorite, but the one that probably did the most good as a learning experience, with See’s Candy. It’s just the power of the brand, the unending flow of ever-increasing money with no work. Sounds nice. It was.

Charlie Munger [00:48:04] And I’m not sure about the Coca-Cola if we hadn’t bought the See’s. I think that a life properly lived is just learn, learn, learn all the time. And I think Berkshire’s gained enormously from these investment decisions by learning through a long, long period. Every time you appoint a new person that’s never had a big capital allocation experience, it’s like rolling the dice. And I think we’re way better off having done it so long. And but the decisions blend, and the one feature that comes through is the continuous learning. If we had not kept learning, you wouldn’t even be here.

Warren Buffett [00:48:54] You’d be alive, probably, but not here. You know, there’s nothing like the pain of being in a lousy business to make you appreciate a good one.

Charlie Munger [00:49:07] Well, there’s nothing getting into a really good one. That’s a very pleasant experience, and it’s a learning experience. I have a friend who says the first rule of fishing is to fish where the fish are, and the second rule of fishing is to never forget the first rule. And we’ve gotten good at fishing where the fish are.

Warren Buffett [00:49:35] Yeah.

Charlie Munger [00:49:35] That’s only metaphorically.

Warren Buffett [00:49:37] Yeah, I went to fish, but Charlie, there’s too many other boats in the damn water.

Charlie Munger [00:49:44] But the fish are still there.

Warren Buffett [00:49:47] Yeah. We bought a department store in Baltimore in 1966, and there’s really nothing like being in the experience of trying to decide whether you’re going to put a new store in a area that hasn’t really developed yet enough to support it, but your competitor may move there first. And then you have the decision of whether to jump in, and if you jump in, that kind of spoils, and now you got two stores where even one store isn’t quite justified. How to play those games, those business games, is… You learn a lot by trying, and what you really learn is which ones to avoid. I mean, if you just stay out of a bunch of terrible businesses, you’re off to a very great start as well, because we’ve tried them all.

Charlie Munger [00:50:35] But you can really learn, because the experience is a lot like eating cockle burgers, and it really gets your attention.

Warren Buffett [00:50:44] Well, we won’t expand on that. Andrew Ross Sorkin.

ASAndrew Ross Sorkin [00:50:47] Good morning, Warren. This question comes from a longtime shareholder who, I should tell you, what costed me last night in the lobby of the Hilton hotel with this question. Warren, for years you stayed away from technology companies, saying they were too hard to predict and didn’t have moats. Then you seem to change your view about technology when you invested in IBM and again when you recently invested in Apple. But then on Friday you said IBM had not met your expectations and sold a third of our stake. Do you view IBM and Apple differently, and what have you learned about investing in technology companies?

Warren Buffett [00:51:28] Well, I do view them very differently. But, you know, obviously, when I bought the IBM, started buying it six years ago, I thought it would do better in the six years that have elapsed than it has. And Apple, I regard them as being quite different business. I think Apple was much more of a consumer products business, in terms of the, in, in terms of sort of analyzing moats around it and consumer behavior and all that sort of thing. It’s obviously a product with all kinds of tech built into it, but in terms of laying out what their prospective customers will do in the future, as opposed to, say, on IBM’s customers, it’s a different sort of analysis. That doesn’t mean it’s correct, and we’ll find out over time. But they are two different types of decisions. And I was wrong on the first one, and we’ll find out whether I’m right or wrong on this, on the second. But I don’t… I do not regard them as apples and apples, and I don’t quite regard them as apples and oranges, but it’s somewhat in between on that. Charlie?

Charlie Munger [00:52:43] Well, we avoided the tech stocks because we felt we had no advantage there, and other people did. And I think that’s a good idea, not to play where the other people are better. But, you know, if you ask me in retrospect what was our worst mistake in the tech field, I think we were smart enough to figure out Google. Those ads worked so much better in the early days than anything else. So I would say that we failed you there, and we were smart enough to do it and didn’t do it.

Warren Buffett [00:53:15] We do that all the time too. Yeah, we were their customer very early on with GEICO, for example. And we saw… I don’t… These figures are way out of date, but as I remember, you know, we were paying him $10 or $11 a click or something like that. And anytime you’re paying somebody 10 or 11 bucks every time somebody just punches a little thing where you’ve got no cost at all, you know, that’s a good business, unless somebody’s going to take it away from you. And so we were close up, seeing the impact of that.

And incidentally, if any of you don’t have anything to do in your hotel rooms tonight, just keep punching Progressive or something. And you’re gonna… Don’t really do that. The thought just happened across my mind. They… But, you know, that is… You know, you’ve never seen a business, almost never seen a business like it, where… And I think for LASIK surgery and things like that, I think that figures were, you know, 60 or 70 bucks a click, with no incremental, no cost. So and I knew the guys. I mean, they actually designed their prospectus… They came to see me, and they… A little bit after the original one, when they went public, a little bit after Berkshire, even until like… I had plenty of ways to ask questions or anything to short educate myself, but I blew it. And we blew…

Charlie Munger [00:54:42] Won’t… We blew Walmart too, when it was a total cinch. We were smart enough to figure that out, and we didn’t.

Warren Buffett [00:54:51] Yeah, yeah.

Charlie Munger [00:54:52] Figuring out execution is what council anyway.

Warren Buffett [00:54:55] Well, and I could be making two mistakes on IBM. I mean, the… You know, it’s harder to predict, in my view, the winners in various items, or how much price competition will enter in to something like cloud services and all that. I will… I made a statement the other day, which, it’s really remarkable, and I was asked Charlie whether he could think of a situation like it, where one person has built an extraordinary economic machine in two really pretty different industries, you know, almost simultaneously, as has happened from a standing start at zero, from the standing starters here, with other, with competitors with lots of capital and everything else, to do it in retailing and to do it with the cloud, like Jeff Bezos has done. I mean, I… I mean, people like the Mellons invested in a lot of different industries and all of that, but he has been in the… in effect, the CEO simultaneously of two businesses starting from scratch, that, if you know, Andy Grove used to use at Intel, used to say, you know, think about if you had a silver bullet and you could shoot it and get rid of one of your competitors, who would it be? Well, I think that both in the cloud and in retail there are a lot of people that would aim that silver bubble, Jeff. And he’s done a… It’s a different sort of game, but he’s, you know, the Washington Post, he’s played that hand as well as anybody, I think, possibly could. So it’s a remarkable business achievement, where he’s been involved, actually, in the execution, not just bankrolling it, of two businesses that are probably as feared by their competitors, almost, as any you can find. It’s… Charlie, you can further thoughts?

Charlie Munger [00:57:05] Well, we’re sort of like the Mellons, old-fashioned people who’ve done all right. And Jeff Bezos is a different species.

Warren Buffett [00:57:14] And we missed it entirely. Incidentally, we never owned a share of Amazon. Okay, Gregg Warren.

GWGregg Warren [00:57:20] Warren, my question relates to some recent stock purchases as well. Unlike the railroads, which benefit from colossal barriers to entry due to their established, practically impossible to replicate networks of rail and rights away, the airline industry seems to have few, if any, advantages. Even with the consolidation we’ve seen during the past 15 years, the barriers to entry are few and the exit barriers are high. The industry also suffers from low switching costs and intense pricing competition and is heavily exposed to fuel cost, with rising fuel prices being difficult to pass on and declining fuel prices leading to more price competition. Compare this with rail customers, who have few choices and thus wield limited buying power, and where fuel charges allow the industry to mitigate fuel price fluctuations. While you’ve noticed several times since the airline stock purchase were announced that the two industries are quite different and that comparisons should not be made to Berkshire’s move into railroad, railroads, a decade ago, could you walk us through what convinced you that the airlines were different enough this time around for Berkshire to invest close to $10 billion in the four major airlines? Because it would seem to me that UPS, which you have a small stake in, and FedEx, both of which have wider economic moats built on more identifiable and durable competitive advantages, would be a better option for long-term investors.

Warren Buffett [00:58:38] Yeah, the decision in respect to airlines that no connection with our being involved in the railroad business. I mean, you can classify them, and you know, maybe in no more connection than the fact we own GEICO, or, you know, or any other business. You couldn’t pick a tougher industry, you know, ever since Orville went up. And I said, you know, that anybody really been thinking about investors, they should have had Wilbur shoot him down and save everybody a lot of money for 100 years. You can go to the internet and type in airlines and bankrupt, and you’ll see that something like 100 airlines, in that general range, you know, gone bankrupt in the last few decades in it. And actually, Charlie and I were directors for some time of USAir, and people write about how we had a terrible experience in us. It was the one of the dumbest things I’ve ever done, and there’s a lot…

Charlie Munger [00:59:52] We made a fair amount of money out of it.

Warren Buffett [00:59:56] Yeah, and we made a lot of money out of it.

Charlie Munger [00:59:59] It’s undeserved.

Warren Buffett [01:00:00] But we made a lot of money out of it, because there was one little brief period when people got all enthused about USAir. And after we left as directors and after we sold our position, USAir managed to go bankrupt twice in the subsequent period.

I mean, you’ve named all of the… not all of them, but you’ve named a number of factors that just make for terrible economics. And I will tell you that if the capacity… You know, it’s a fiercely competitive industry. The question is whether it’s a suicidally competitive industry, which it used to be. I mean, when you get virtually every one of the major carriers, and dozens and dozens and dozens of minor carriers, going bankrupt, you know, it ought to come upon you finally that maybe you’re in the wrong industry. It has been operating for some time now at 80% or better of capacity, being available seat miles, and you can see what deliveries are going to be and that sort of thing. So if you make… I think it’s fair to say that they will operate at higher degrees of capacity over the next five or 10 years than the historical rates which caused all of them to go broke.

Now, the question is whether, even when they’re doing it in the 80s, they will do suicidal things in terms of pricing, remains to be seen. They actually, at present, are earning quite, quite high returns on invested capital, I think higher than either FedEx or UPS, if you actually check that out. But that doesn’t mean tomorrow morning, you know, if you’re running one of those airlines and the other guy cuts his prices, you cut your prices. And as you say, there’s more flexibility one future, when fuel goes down, to bring down prices than there is to raise prices when, when that one prices go up. So the industry, you know, it is no cinch that the industry will have some more pricing sensibility in the next 10 years than they had in the last 100 years. But the conditions have improved for that. They’ve got more labor stability than they had before, because they’re basically all gonna… They’re all… They’ve been through bankruptcy, and they’re all going to sort of have an industry pattern bargaining. It looks to me like they’re gonna have a shortage of pilots to some degree. But it’s not… It’s not like buying See’s Candy. Charlie?

Charlie Munger [01:02:52] No, but the investment world has gotten tougher, with more competition, more affluence, and more absolute obsession with finance throughout the whole country. And we picked up a lot of low-hanging fruit in the old days, where it was very, very easy, and we had huge margins of safety. Now we operate with a less advantageous general climate, and maybe we have small statistical advantages, where in the old days it was like shooting fish in a barrel. But that’s all right. It’s okay if it gets a little harder after you get filthy rich.

Warren Buffett [01:03:32] Yeah, Charlie’s more philosophical than I am on that point.

Charlie Munger [01:03:36] So I can’t bring back the low-hanging fruit, Warren. You’re just gonna have to keep reaching for the higher branches.

Warren Buffett [01:03:45] Greg, the… I don’t… I think the odds are very high that there are more revenue passenger miles five years now or 10 years from now. If the airlines… If the airline companies are only worth, five or 10 years from now, what they’re worth now in terms of equity, will get a pretty reasonable rate of return, because they’re going to buy in a lot of stock at fairly low mobile. So if the company’s worth the same amount at the end of the year and there’s fewer shares of stock outstanding, over time we make decent money. And all four of the major airlines are buying in stock at a…

Charlie Munger [01:04:28] You got to remember, the railroads were a terrible business for decades and decades and decades, and then they got good.

Warren Buffett [01:04:35] Yeah. We like… I like the position. Obviously, by buying all four, it means that it’s very hard to distinguish who will do the… At least in my mind, it’s hard to distinguish who will do the best. I do think, I think the odds are quite high that if you take revenue passenger miles flowing five or 10 years from now, it will be a higher number. And that will be… They’ll be low-cost people who come in, and, you know, the Spirits of the world and JetBlue, whatever it may be. But the… My guess is that all four of the companies we have will have higher revenues. The question is what their operating ratio is. They will have fewer shares outstanding by a significant margin. So even if they’re worth just what they’re worth today, we could make a fair amount of money. But it is no cinch, by a long shot. Okay, station three.

[01:05:30] Shareholder (Germany): Good morning, everybody. My name is Sevilla Arianes. I’m from Germany, and I’m member of board of Ethecon Foundation Ethics and Economy. I’m very happy that I put my question here, and maybe you are not as happy as I am to listen to it.

Warren Buffett [01:05:49] But we’ll try to stay happy. Thank you for coming.

[01:05:53] Shareholder (Germany): Thank you, Mr. Buffett. A few years ago I saw a movie in which you proclaimed that the print of the dollar bill, “In God We Trust,” does not really oppress your philosophy. In your opinion, only cash counts, and your credo is “In the dollar I trust.”

Warren Buffett [01:06:12] I don’t think I… I don’t think… I don’t think I’ve ever said that, actually, but…

[01:06:18] Shareholder (Germany): Well, I can show you the movie that will prove…

Warren Buffett [01:06:23] Oh, well.

[01:06:24] Shareholder (Germany): Well, maybe it was just joking, but always behind a joke there is also a truth. So, well, you laughed heartily at that moment. You, as one of the most richest man in of all times on this earth, a human, a good-humored, friendly, elderly gentleman. Whatever motivated those who designed the dollar notes, they certainly wanted to say that there is something higher than the value of this printed paper. Regrettably, you have shown many times in your life that you see this differently. You have accumulated billions of dollars, showed extraordinary cleverness and skill, and you knew that… You know better to pick up than many others who, like you, use the rules which are inherent to capitalism for their own intentions. But have you ever given a thought to what troubles and sacrifices, slavery and destruction of Mother Earth, and even diseases and deaths stick to the dollar bills which you gather so eagerly? Let’s take Coca-Cola. Ethecon Foundation Ethics and Economy from Germany has awarded the Black Planet Award to the members of the board of directors, as well as to the large shareholders, Warren Buffett and Allen, and Herbert Allen, because you are co-responsible for all of what makes this group make so much money, isn’t it? Among other things, Coca-Cola deprives people of their drinking water in drought-prone areas of our world.

Warren Buffett [01:08:14] Are you asking questions?

[01:08:16] Shareholder (Germany): The ground water in these areas…

Warren Buffett [01:08:18] I don’t want to interrupt you, but are you making a speech, or you’re asking a question?

[01:08:27] Shareholder (Germany): I put my question right now.

Warren Buffett [01:08:31] Okay, good.

[01:08:33] Shareholder (Germany): Will you give up your Coca-Cola shares if the destruction of the environment, the monopoly, monopolization of the right to healthy drinking water, and the shameless exploitation of the workers continue?

Warren Buffett [01:08:56] Well, that’s more speech than the question. Yeah, yeah. Now, I don’t think that quote you had earlier… I have… I’ve said, I’ve said once or twice that it should say “In the Federal Reserve we trust,” because they print the money, and if they print too much of it, it could decline in value. But I have… I have never, to my knowledge, I’ve never said anything like you originally said. And I would say this. I think, I think I’ve been eating things I like to eat all my life. And Coca-Cola, this Coca-Cola is 12 ounces. I drink about five a day. It has, it has about 1.2… There’s about 1.2 ounces of sugar in it. And if you look at what people, different people, get their sugar and calories from, they get them from all kinds of things. I happen to believe that I like to get 1.2 months with this, and it’s enjoyable. Since 1886 people have found it pleasant.

And I would say that, if you pick every meal in terms of what somebody in some recent publication has told you the very best for you, I offer you that, I think go to it. But if you told me that I would live one year longer, and I don’t even think that I would live one year longer, if I’d eat nothing but broccoli and asparagus and everything my adults wanted me to eat all my life, or I would eat everything I enjoyed eating, including chocolate sundaes and Coca-Cola and steak and hash browns, you know, I would rather eat what, in a way, I enjoy for my whole life than… and then, you know, eat some other way and live another year. And I do think that choice should be mine. You know, if somebody, somebody decides sugar is harmful, you know, maybe you’d encourage the government to ban sugar. But sugar and Coca-Cola is not, it’s not different than eating sugar, you know, put on my Grape-Nuts in the morning or whatever else I’m having. So I think Coca-Cola has been a very, very positive factor in America for, and the world, for a long, long time. And you can look at a list of achievements of the company. And I really don’t want anybody telling me I can’t drink it. Charlie?

Charlie Munger [01:11:38] Well, I’ve solved my Coca-Cola problem by drinking Diet Coke, and I swallow stuff like other people swell, I don’t know what. And I’ve been doing it for just as long as you’ve been taking all those Coca-Colas that I, I’ve had breakfast before when he has Coca-Cola’s and nuts.

Warren Buffett [01:12:03] And pretty damn good too.

Charlie Munger [01:12:06] If you keep doing that, Warren, you may not make a hundred.

Warren Buffett [01:12:12] Now, I think there’s something in longevity to be feeling happy about your lives too.

Charlie Munger [01:12:19] Absolutely.

Warren Buffett [01:12:20] OK, Carol.

CLCarol Loomis [01:12:21] This question is from Franz Tromberger of Austria, and it concerns intrinsic value, which is neither, Warren may rather, he may amend this, my definition here, but which is neither a company’s accounting value nor its stock market value, but is rather its estimated real value. So the question is, at what rate has Berkshire compounded intrinsic value over the last 10 years, and at what rate, including your explanation for it please, do you think intrinsic value can be compounded over the next 10 years?

Warren Buffett [01:13:06] Yeah, intrinsic value, you know, can only be calculated, or gains, you know, in retrospect. But the intrinsic value, pure definition, would be the cash to be generated between now and judgment day, discounted at an interest rate that seems appropriate at the time. And that’s varied enormously over a 30 or 40 year period. If you pick out 10 years and you’re back to May of 2007, you know, we had some unpleasant things coming up. But we, I would say that we’ve probably compounded it about 10%.

And I think that’s going to be tough to achieve, in fact almost impossible to achieve, if we continued in this interest rate environment. That’s the number one question. If you ask me to give the answer to the question, if I could only pick one statistic to ask you about the future before I gave the answer, I would not ask you about GDP growth, I would not ask you about who was going to be president, million things. I would ask you what the interest rate is going to be over the next 20 years on average, the 10 year or whatever you wanted to do.

And if you assume our present interest rate structure is likely to be the average over 10 or 20 years, then I would say it’d be very difficult to get to 10%. On the other hand, if I were to pick with a whole range of probabilities on interest rates, I would say that that rate might be, it might be somewhat aspirational, and it might, well, it might be doable. And it, you would say, well, we can’t continue these interest rates for a long time. I would ask you to look at Japan, you know, where 25 years ago we couldn’t see how their interest rates could be sustained, and we’re still looking at the same thing.

So I do not think it’s easy to predict the course of interest rates at all, and unfortunately predicting that is embedded in giving a good answer to you. I would say the chances of getting a terrible result in Berkshire are probably as low as about anything you can find. Chance of getting a sensational result are also about as low as anything you can find. So if I, I would, my best guess would be in the 10% range, but that assumes somewhat higher interest rates, not dramatically are, but somewhat higher interest rates in the next 10 or 20 years than we’ve experienced in the last seven years. Charlie?

Charlie Munger [01:16:03] Well, there’s no question about the fact that the future with our present size is, in terms of percentage rates of return, is going to be less glorious than our past. And we keep saying that, and now we’re proving it.

Warren Buffett [01:16:22] Do you want to end on that note, Charlie, or would you care…

Charlie Munger [01:16:28] Well, I do think Warren’s right about one thing. I think we have a collection of businesses that on average has better investment values than, say, the S&P average. So I don’t think you share with us have a terrible, terrible problem.

Warren Buffett [01:16:49] And I would say we probably, well, I’m certain on my way, we have a, we do have more of a shareholder orientation than the S&P 500 as a whole. I mean, you know, the, this company has a culture where decisions are made for, as an owner, as a private owner would make them. And frankly, that’s a luxury we have that many companies don’t have. I mean, they’re under pressures today sometimes to do things.

One of the questions I asked the CEO of every public company that I meet is, what would you be doing differently if you owned it all yourself? And the answer, you know, is usually this, that and a couple of other things. If you would ask us, the answer is, you know, we’re doing exactly what we would do if we owned them all, all the stock ourselves. And I think that’s just a small plus over time. Anything further, Charlie?

Charlie Munger [01:17:56] I think we have one other advantage. A lot of other people are trying to be brilliant, and we’re just trying to stay rational. And it’s a big advantage. Trying to be brilliant as dangerous, particularly when you’re gambling.

Warren Buffett [01:18:21] OK, Jonathan.

JBJonathan Brandt [01:18:22] If corporate tax rates are reduced meaningfully, Berkshire will enjoy a one-time boost to book value because of its sizable deferred tax liability, and its go-forward earnings should be higher too, at least in theory. How much of the reduced tax rate will be passed along to Berkshire’s customers through, for instance, lower electricity rates or lower railroad shipping rates, and how much will go to Berkshire shareholders?

Warren Buffett [01:18:51] Yeah, the question is, in the case of our utility businesses, all benefit of lower tax rates goes to customers, and it should be, because we are allowed to return on equity, in general, I mean, I’m simplifying a little bit, but the, we’re allowed to return on equities computed on an after-tax basis. And the utility commissions would, if taxes were raised, would presumably give us higher rates to compensate for that. And if taxes are lowered, they would say you’re not entitled to make more money just because tax rates on equity, because tax rates have been lowered. So forget about the utility portion of the deferred taxes.

The deferred taxes that are applicable to our unrealized gains and securities, we would get all the benefit of, because I mentioned we had $90 billion plus of unrealized gains. And if the rates were changed on those, in either direction, our owners dollar for dollar will participate in that, in that. And then you get into the other businesses. You mentioned the railroad, but it can be all of our other businesses, to some extent. If tax rates are lowered, do different degrees in different industries, depending on the number of players, the competitive conditions, some of it may, some of it almost certainly gets competed away, and some of it would likely not be competed away.

And that’s, that, you know, economists can argue about that a lot, but I’ve seen it in action in a lot of cases. You’ve got a big decline in race, for example, in the UK. And we’ve had them over my lifetime. We had 52% corporate rates, you know, we’ve had a lot of different numbers. So I have seen how behavior, where economic behavior works. And I would say that it’s certain that some of any lower rate would be competed away, and it’s virtually certain that some would win an error to the benefit of the shareholders. And it’s very industry and company specific in how that plays out. Charlie?

But with dollar for dollar, I mean, there’s $90 or $95 billion. If the rate were to drop 10%, that $9.5 billion is, is by 10 percentage points, that $9.5 billion is real. On the other hand, if it goes up, as it did, went up from 28% to 35%, they can take it away from us too.

Charlie Munger [01:21:35] Well, I think it’s true that we’re peculiar in one way. If things go to hell in a hand basket and then get better later, we’re likely to do better than most others. And we don’t wish for that, and we don’t want our country to have to suffer through it, and we fear what might happen if the country went through the ring like that. But if that real adversity comes, we’re likely to do better in the end. We’re good at navigating through that kind of stuff.

Warren Buffett [01:22:08] Yeah, and occasionally there will be a lot, there will be, there’ll be occasional hiccups in the American economy. Doesn’t have much to do with who’s president or anything like that. Those people may get blamed or given credit for different things, but it’s just an, it is the nature of market systems to occasionally go haywire in one direction or other. And it’s better with us, you know, that it’ll be over with us. It’s not, it does not have a, there’s not a, it’s not a on a regular sine wave type picture or anything of the sort, but it’s certain to happen from time to time.

And we will probably have a fair amount of money and credit at that time, and we certainly, we’re not affected when the rest of the world is fearful. We know America is going to come out fine, and we will not have a trouble, any trouble psychologically acting at all. And the question is how much do we have in the way of resources. We’ll also never put the company in any kind of risk just because we see a lot of opportunities. We’ll grab all the ones we can that we can handle and not lose a day of sleep. I didn’t quite get that, but in any event, we will now go to station for it. If the person yelling on, are we up there in station? Are you interested?

[01:23:42] Shareholder (Bruce Hertz, Glenview, Illinois): Dr. Bruce Hertz from Glenview, Illinois. I wanted to thank you for allowing me to attend. I feel both honored and blessed. My question for Mr. Buffett is, you’ve always advised us to purchase equities that appreciate and value, yet a few years ago you sold your used Cadillac at a tremendous profit. How can you justify selling a depreciating asset for its significant profit? Thank you.

Warren Buffett [01:24:18] Yeah, well, actually I gave it to Girls Inc., and they sold it. And that was kind of an interesting, a very nice guy bought it for a hundred and some thousand dollars, and I did not, and Girls Inc. got the money. And he got him, he came later actually with his family, and he drove it away without any place. He was driving back to New York, and he got picked up by the police in Illinois. And he said, well, he started giving this explanation about how he’d given this money to Girls Inc. and was driving the car back, and had this nice looking family with him, and the cops were quite, quite skeptical.

But fortunately, I had signed the dashboard for him as part of the deal when again, and so they looked at that, and then they just said, well, did he give you any stock tips? So they let him go on. I can’t recall ever selling a used car at a profit, but we, I don’t think I’ve sold any personal possession. Well, I’ve got a house for you. I don’t have any personal possessions. Yeah, yeah. Now I, anything you see with a figure attached like that…

Charlie Munger [01:25:53] You’re a fatter version of Mahatma Gandhi.

Warren Buffett [01:25:56] Oh my Gandhi. The guy was a very nice guy that bought it, and his check cleared, so we’re fine. Becky?

Becky Quick [01:26:05] I’d like to ask a question that can serve as a follow-up to the question that Carol had asked, and Charlie in that response said that he thinks the Berkshire’s businesses on the whole will do better than the S&P 500. Clark Cameron from Birmingham, Alabama, who owns 281 shares of Berkshire B, writes in and asks, why have you advised your wife to invest in index funds after your death rather than Berkshire Hathaway? I believe Munger has cancelled his offspring to, quote, not be so dumb as to sell.

Warren Buffett [01:26:44] She won’t be, she won’t be selling any Berkshire to buy the index funds. All of my Berkshire, every single share, will go to philanthropy, so that I don’t even regard myself as owning Berkshire, you know. Basically it’s committed, and I’ve so far, about 40% has already been distributed. So the question is, somebody who is not an investment professional, will be, I hope, reasonably elderly by the time that the estate gets settled, and what is the best investment, meaning one that there would be less worry of any kind connected with, and less people coming around and saying, why don’t you sell this and do something else, and all those things.

She’s going to have more money than she needs, and the big thing then you want is money not to be a problem. And there will be no way that if she holds the S&P, of virtually no way, absent something happened with weapons of mass destruction, but virtually no way that she won’t, she’ll have all the money that she possibly can use, to have a little liquid money so that if stocks are down tremendously at some point, they close the stock exchange for a while, anything like that, she’ll still feel that she’s got plenty of money. And the object is not to maximize. It doesn’t make any difference whether the amount she gets doubles or triples or anything of the sort. The important thing is that she never worries about money the rest of her life.

And I had an Aunt Katie here in Omaha, Charlie knew well, and worked for her husband, as did I. And she worked very hard all her life, and had lived in a house she paid, I think, I don’t know, $8,000 for, 45th and Hickory, all her life. And because she was in Berkshire, she ended up, she lived in 97, she ended up with, you know, a few hundred million. And she would write me a letter every four or five months, and she said, dear Warren, you know, I hate to bother you, but am I going to run out of money? And I would write her back, and I’d say, dear Katie, it’s a good question, because if you live 986 years, you’re going to run out of money. And then about four or five months later, she’d write me the same letter again.

And I have seen, there’s no way in the world, if you’ve got plenty of money, that it should become a minus in your life. And there will be people, if you’ve got a lot of money, that come around with various suggestions for you, sometimes well-meaning, sometimes not so well-meaning. So if you’ve got something as certain to deliver, you know, it was all in Berkshire, they’d say, well, if Warren was alive today, you know, he would be telling him to do this. I just don’t want anybody to go through that. And the S&P will be a, I think actually what I’m suggesting is, but a very high percentage of people should do something like that. And I don’t think they will have us, I think there’s a chance they won’t have as much peace of mind if they own one stock and they’ve got neighbors and friends and relatives that are trying to do some, like I say, sometimes well-intentioned, sometimes otherwise, to do something else. And so I think it’s a policy that will get a good result and is likely to stick. Charlie?

Charlie Munger [01:30:27] Well, as Becky said, the Mungers are different. I wanted to hold the Berkshire.

Warren Buffett [01:30:33] Well, I want to hold the Berkshire too.

Charlie Munger [01:30:36] No, I bet, I mean, I don’t like them. I recognize the logic of the fact that that S&P algorithm is very hard to beat. In a diversified portfolio of big companies, it’s all but impossible for most people. But, you know, it’s, I’m just more comfortable with the Berkshire.

Warren Buffett [01:30:59] Well, it’s the family business.

Charlie Munger [01:31:01] Yeah, yeah.

Warren Buffett [01:31:02] But it, I’ve just, I’ve seen too many people as they get older, particularly, being susceptible, just having to listen to the arguments of people coming…

Charlie Munger [01:31:13] Well, if you’re going to protect your heirs from the stupidity of others, you may have some good system, but I’m not much interested in that subject.

Warren Buffett [01:31:27] OK. OK, Jay.

JGJay Gelb [01:31:29] Berkshire reportedly partnered with 3G in Kraft Heinz’s attempt to acquire Unilever for $143 billion. How much was Berkshire willing to invest in this deal, and does this mean Berkshire’s next large acquisition is likely to be in partnership with 3G?

Warren Buffett [01:31:48] Yeah, well, Kraft, I did have to distinguish between two situations. Kraft Heinz was a widely owned company in which we and 3G act as a control group and have a little over 50% of the stock. But as originally contemplated, no certainty that this is exactly what would have happened, we would have invested an additional $15 billion, and 3G would have invested an additional $15 billion, if a friendly agreement could have been reached. So if the deal had been made, if the independent directors of Christ, Kraft Heinz had approved the transaction, the likelihood, well, then the likelihood is that we would have invested $15 billion, but it would have required the approval of the independent directors as well.

Now Kraft Heinz, in going forward with making that offer, wanted to be sure that there would be enough equity capital, in addition to the debt that would be incurred, to make the deal. And so informally we basically committed the $15 billion, and it only was approved on the basis it’d be a friendly deal with Unilever. And initially we thought they would be at least possibly interested in such a deal, and when we found out otherwise, we went through the offer. So it would have been $15 billion of additional money, in all probability. OK, station five.

[01:33:52] Shareholder (China): Dear horrible Mister, dear horrible Mr. Buffett, the Buffett, and the Mr. Munger. I’m tender from China. My company AI Holdings is spreading value investing philosophy in Asia. My business partner Ken Chi, Joe Guin and I are committed to awake 100 million Chinese people to return to regular way of investing. The hardest thing in this world is to change people’s values or belief system, and we should like to awake investors to change from speculate in the market to investing in the market. It’s like changing the speculator’s values or big belief system. May I ask you, Mr. Buffett, can you kindly advise us what we should do to bet, to spread your value investing philosophy, or is there any word of encouragement? Thank you.

Warren Buffett [01:35:09] Yeah, the, when, in any system, Keynes wrote about this in 1936, I think it was, in The General Theory, or ’35, and there’s chapter 12. It was best great chapter on investing. And he talked about investment and speculation and the propensity of people to speculate and the dangers of it, and worded eloquently. There’s always the possibility of, I mean, there’s always some speculation, obviously, and there’s always some value investors and all that sort of thing in the market. But there’s, when speculation gets rampant, and when you’re getting what I guess Charlie would call social proof, that it’s worked recently, people can get very excited about speculating in markets, and we will have it from time to time in this market.

There’s nothing more agonizing than to see your neighbor, who you think has an IQ about 30 points below you, getting richer than you are by buying stocks, and whether it’s internet stocks or whatever. And people succumb to it, and they’ll succumb in this economy just as elsewhere. There’s also a point, which gets to your question. I would say that early on in the development of markets, there’s probably a, there’s some tendency for them, I think, to be more speculative than markets have been around for a couple hundred years, because it has a, invest, markets have a casino characteristic that has a lot of appeal to people, particularly when they see, like I say, people getting rich around them. And those who haven’t been through cycles before are probably a little more prone to speculate than people who have experienced the outcome of wild speculation.

So I, you know, basically in this country, Ben Graham was, in the book I read in 1949, was preaching investment, and that book continues to sell very well. But if the market gets hot, new issues are doing well, and people on leverage are doing well, a lot of people will be attracted to not only speculation but what I would call gambling. And I’m afraid that that will be true in the United States. And I think that China, being a newer market, essentially, in which there’s widespread participation, is likely to have some pretty extreme experiences in that respect. We will have some in this country too. Charlie?

Charlie Munger [01:38:17] Well, I certainly agree with that. The Chinese will have more trouble. They’re very bright people, they have a lot of action, and sure, they’re going to be more speculative. And it’s a dumb idea, and to the extent you’re working on it way, you’re on the side of the angels. But lots of luck.

Warren Buffett [01:38:40] Well, it will, it will offer the investor more opportunities, actually, if they can keep their wits about them, if you have wild speculation. I mean, Charlie just mentioned earlier, you know, that if we get into periods that are very tough, Berkshire certainly will do reasonably well, because it won’t, we won’t be, we won’t get fearful. And fear spreads like you cannot believe until you’ve seen a few examples of it. At the start of September 2008, you had 35 million people with their money in money market funds, with $3.5 trillion in them, and none of them were afraid that that dollar wasn’t going to be a dollar when they went to cash in their money market fund. And three weeks later, they were all terrified, and $175 billion float out in three days.

And so the way the public can react is really extreme in markets, and that actually offers opportunities for investors. You’ll never, people like action, and they like to gamble, and if they think there’s easy money to be made, a lot of them, you’ll get a rush to it, and for a while it will be self-fulfilling and create new comfort converts until the day of reckoning comes down. Just keep preaching investing, and if the market swings around a lot, you’ll keep adding a few people here and there to a group that recognizes that markets are there to be taken advantage of rather than to instruct you as to what is going on. OK, Andrew, do you have any more on that show?

Charlie Munger [01:40:24] We’ve done a lot of preaching, Warren, without much effect.

Warren Buffett [01:40:28] Right, and that’s probably good from our standpoint. OK, Andrew.

ASAndrew Ross Sorkin [01:40:32] Thank you, Warren. This question comes from Ryan Prince. President Donald Trump and his advisors have talked about proposing a substantial investment tax credit to provide incentives for long-term corporate fixed capital investment. In BNSF, Berkshire owns a sprawling infrastructure portfolio requiring regular routine maintenance investment of substantial scale. What impact would an investment tax credit have on BNSF’s capital investment decision making, from a return on investment, a capital perspective, as well as in terms of timing? And just as importantly, given the current economy and employment picture, would such a tax credit amount to a subsidization of otherwise mandatory maintenance capital investment, or a proper incentive to stimulate investment?

Warren Buffett [01:41:19] Yeah, well, it would all depend on how it was worded, you know, because we’ve had investment tax credits in this country, and we’ve had bonus depreciation, it’s another form of it, and we do get extra first year depreciation. That does not enter into our calculation very much, you know. In fact, certainly at the Berkshire level, I’ve never instructed anybody to do anything different because of index, investment tax credits or accelerated depreciation of the, there may be some calculations done down at the operating company level. It’s certainly true in something like wind projects and solar projects. They are dependent on the tax law currently. There may come a time when they aren’t, but they wouldn’t have been done without some subsidization through the tax law.

But I would say if you change the depreciation schedules, and, you know, double depreciation, triple depreciation, first, that we’re going to do what we need to do with the railroad to make it safer and more efficient if we just had ordinary depreciation, and I doubt if there’d be any dramatic differences. Obviously, if you were going to say buy a bunch of planes, and the law was going to change on December 31st, and the map made it better to wait until January first or do it this December 31st, didn’t make that kind of calculation. But I can’t recall in all the years that I’ve ever sent out anything to our managers saying let’s do this because the tax laws change, is being changed or might be changed or something of the sort.

As I mentioned earlier, it changes just a little bit if you think there’s gonna be a change in capital gains rates at a given time. Obviously if it’s gonna, the rate’s gonna be lowered, you would take losses ahead of time and defer gains maybe a little. And that’s why it’s useful, actually, if the, at the tax committee’s, the Senate and the House are working on something, it might be useful if the chairmans would say that if we do make any changes, we’re likely to use this effective date or something of sort. And I think they’ve done that a few times in the past.

We are not, the big tax driven item is in wind and solar, and that is a specific policy because the government has decided they want to move people, or society is to decide they want to move people, toward those forms of electric generation, and the market system wouldn’t do it. And there may come a time when the market system will do it all by itself. We won’t make big changes, and it’s so speculative anyway in terms of even what the law would be. But beyond that, if it becomes less speculative is the law, I mean, it really looks like something is going through, it doesn’t change us big time at all. If, Charlie?

Charlie Munger [01:44:44] Nothing to add.

Warren Buffett [01:44:45] Trying to change anything at the Berkshires, at the railroad, for some little tax jiggle. If we need a bridge repaired, we’re going to repair the bridge, and, you know, and if we need, we need a lot of track maintenance all the time and that sort of thing. And it just, I don’t think Matt and I have ever had to talk about it since we won the railroad. But, Gregg Warren.

GWGregg Warren [01:45:10] My question also relates to Burlington Northern. Despite the current administration’s belief that they can bring the coal industry back, market forces continue to lead to the industry’s demise. While 90% of U.S. coal consumption is driven by electricity generation, natural gas has been built cheaper and cleaner burning, and renewable electricity generation has remade parts of the market as wind and solar gain scale and become cheaper alternatives. This has created problems for Burlington Northern, with coal shipments accounting for just 18% of volume and revenue for the railroad last year, down from an average of 24% for both measures the previous 10 years. While some of this was due to a large buildup of coal supplies the past couple of winters, which finally seem to be working their way out, what are your expectations for the contribution coal can make to BNSF longer term? And I know that the rail will currently handle some export shipments going through Canada’s Pacific coast ports, but will there be enough growth there to offset domestic demand, or will BNSF need to rely more heavily on segments like intermodal to offset lost coal volumes?

Warren Buffett [01:46:10] Yeah, the answer is, cold, coal is going to down over time. I don’t think there’s much question about that. The specifics of any given year relate very importantly to the price of natural gas. I mean, right now there are, there, the demand is somewhat up, fair amount up from last year, because natural gas is at $3.15 or $3.20, and the utilities can produce electricity in many cases quite a bit cheaper with coal than with natural gas, whereas with a $2, it would all be, it would be natural gas. But over time, coal is virtu, in my mind, is essentially certain to decline as a percentage of the revenue of the railroad.

The speed at which it does, you know, it, you don’t build, create generation of plants overnight, and so it, I can’t predict the rate. And if natural gas is cheap enough, it’s going to be a, you’ll see a big conversion back to a natural gas. Well, coal is a, coal is going to go down as a percentage of revenues significantly, you know, certainly over ten years. It will be, it’ll quite significant. And who knows exactly here in my year where we are. Looking for other sources of growth and than coal. If you’re tied to coal, you’ve got problems. Charlie?

Charlie Munger [01:47:50] Well, you go out over the extremely long term, I think that all the hydrocarbons will be used, including all the coal. So I think that in the end, these hydrocarbons are a huge resource for humanity, and I don’t think we’ve got any good substitute. And I’ve never minded saving them from the next generation. I don’t like using them up very fast. So I’m a, I’m off on a little road on my own on this one. And people think that all this hydrocarbons are going to be stranded and the whole world’s going to change. I think we’re going to use every drop of the hydrocarbon sooner or later. We’ll use them as chemical feedstocks. Well, it’s, I regard all these things as very hard to predict, and I’m not at all sure that, I would eventually expect natural gas to be pretty short in supply.

Warren Buffett [01:48:53] A change in storage would make a big difference. We will produce, within a few years, as much electricity in Iowa, or virtually as much electricity in Iowa, from wind as our customers use. But the wind only blows about 35% of the time or something like that, and sometimes it blows too hard. But the storage, you know, having it 24 hours a day, seven days a week, is a real problem, even if we’ve got the capability of producing, like I say, a self-sufficient amount essentially in Iowa before very long.

Coal, our shipments of coal are up fairly substantially this year on the BNSF, but they were very low last year, and as you said, stockpiles grew and have come down somewhat. They’re still on the high side. But in my mind, Charlie’s got a longer term outlook on this, on, in my mind, we’re going to be shipping a whole lot less coal 10 or 20 years from now than we are now. On the other hand, I think there’s some decent prospects in other long hauls. I mean, it’s a pretty cheap way to move bulk commun, commodities long distance, railways. And I think it’s a good business, but the coal aspect of it’s going to diminish. OK, station six.

[01:50:25] Shareholder (Marcus Burns, Sydney, Australia): Hi, good morning.

Warren Buffett [01:50:27] Good morning.

[01:50:28] Shareholder (Marcus Burns, Sydney, Australia): It’s Marcus Burns from Sydney, Australia. My question, Mr. Buffett, is, I used to buy a capital light, cash generative businesses, but now by lower growth, capital consumptive businesses. I realize Berkshire generates a lot of cash flow, but would shareholders have been better off if you had continued to invest in capital light companies?

Warren Buffett [01:50:53] Well, we’d love to find them. I mean, there’s no question that buying a high return on assets, very light capital intensive business that’s going to grow beats the hell out of buying something that requires a lot of capital to grow. And this varies from day to day, but I believe, and I don’t think it’s sufficiently appreciated, I believe that the probably the five largest American companies by market cap, and some days we’re in that group and some days we aren’t, let’s assume we’re not in that group, on a given day they have a market value of over $2.5 trillion. And that $2.5 trillion is a big number. I don’t know whether the aggregate market cap of the U.S. market is, but that’s probably getting up close to 10% of the whole market cap of the United States.

And if you take those five companies, essentially you could run them with no equity capital at all. None. That is a very different world than when Andrew Carnegie was building a steel miller and then using earrings to build another steel mill and getting very rich in the processor, Rockefeller was building refineries and buying tank cars. And generally speaking, over, for a very long time in our capitalism, growing and earning large amounts of money required considerable reinvestment of capital and large amounts of equity capital, the railroads being a good example. That world has really changed, and I don’t think people quite appreciate the difference. You literally don’t need any money to run the five companies that are worth collectively more than $2.5 trillion and who have outpaced any number of those names that were familiar if you looked at the Fortune 500 list 30 or 40 years ago, you know, whether it was Exxon or General Motors or you name it.

So we would love, I mean, there’s no question that a business that doesn’t take any capital and grows and has, you know, almost infinite returns on required equity capital is the ideal business. And we own a couple of businesses, a few businesses, that earn extraordinary returns on capital, but they don’t grow. We still love them, but if they had, if they were in fields that would grow, believe me, we would, you know, they would be number one on our list. We aren’t seeing those that we can buy and that we understand well. But you’re absolutely right that that’s a far, far, far better way of laying out money than what we’re able to do when buying capital intensive businesses. Charlie?

Charlie Munger [01:53:59] Yeah, the chemical companies of America at one time were wonderful investments. Dow and DuPont sold with 20 sometimes earnings, and they kept building more and more complicated plants and hiring more PhD chemists, and it looked like they owned the world. Now most chemical products are sort of commoditized, and it’s a tough business being a big chemical producer. And in comes all these other people like Apple and Google, and they’re just on top of the world. I think the questioner’s basically right that the world has changed a lot, and that, and the people who have made the right decisions and getting into these new businesses that are so different from the old ones have done very well.

Warren Buffett [01:54:53] Yeah, Andrew Mellon would be absolutely baffled by looking at the high cap companies now. I mean, the idea that you could create hundreds of billions of value essentially without assets, without tangible assets…

Charlie Munger [01:55:08] Fast.

Warren Buffett [01:55:08] Fast, yeah. But that is the world. I mean, there is, when Google can sell you something that, where GEICO was paying 11 bucks or something every time somebody clicks something, that is a lot different than spending years finding the right site and developing, you know, iron mines to supply the steel plants and, you know, railroads to haul the iron to where the steel is produced, and distribution points and all that sort of thing. The, our world was built, and when we first looked at it, our, our U.S., our capitalists system basically was built on tangible assets and reinvestment and all that sort of thing, and a lot of innovation and invention to go with it.

But this is so much better, if you happen to be good at it, to essentially be able to build hundreds of billions of market value without really needing any capital. That’s, that is a different world than existed in the past. And I think, isn’t, I think it’s a world that’s likely to continue. I mean, I, the trend is, I don’t think the trend in that direction is over by a long shot. A lot of the people who are chasing that sort of thing very hard now in the venture capital field are losing a lot of money. It’s a wonderful field, but not everybody’s going to win big. A few are going to win vega. OK, Carol.

CLCarol Loomis [01:56:41] This question is from a shareholder in California, in the Silicon Valley area, who didn’t want his name mentioned because he said he wasn’t looking for publicity, but whose picture makes him appear to be a millennial. “Every Berkshire shareholder knows about the stock market value of Berkshire, but my question is about the value of Berkshire to the world. For instance, the value of Apple to the world has been iPhones. The value of GEICO is cost effective auto insurance. The value of 3G,” and a value of 3G, and I will tell you that there aren’t all some shareholders who would be arguing about here, “but the value of 3G is improved operations. But about Berkshire, I just don’t know. In managing Berkshire’s subsidiaries, as Mr. Munger once famously said, you practice delegation just short of abdication, so hands-on management can’t be the answer. That means the majority of Berkshire subsidiaries would do just as well if they were to stay independent companies. So that’s my question. What is the value of Berkshire to the world?”

Warren Buffett [01:57:58] Yeah, well, the, I would say the question about that, I’m with him to the point where he says that, which he accurately describes as delegation to the point of abdication. But I would argue that that abdication actually, in many cases, will enable those businesses to be run better than they would if they were part of the S&P 500 and the target, perhaps, of activists or somebody that wants to get some kind of a jiggle in the short term. So I think that our abdication actually has some very positive value on the companies. But that, you know, you’d have to look at it company my company. That we’ve got probably 50 managers in attendance here, and naturally they’re not going to say anything, probably, on television or anything where they knock us or anything.

But get them off in a private corner, just ask them whether they think their business can be run better with a management by application from Berkshire, but with also all the capital strengths of Berkshire, that when any project that makes sense can be funded in a moment, without worrying whether the banks are still ending, like in 2008, you know, or whether Wall Street will applaud it or something of that story. So I think our very, our hands off style actually, I think, can add significant value in many companies. But we do have managers here, you can, you could ask about that.

We certainly don’t add the value by calling them up and saying that we’ve developed a better system, you know, for turning out additives at Lubrizol, or running GEICO better than Tony Nicely confronted, or anything of the sort. But we do take a, we have a very objective view about capital allocation. We can free managerism. I would say that we might very well free up at least 20% of the time of a CEO in the normal public, who would have otherwise have a public company, just in terms of meeting with analysts and the calls and dealing with banks and all kinds of things, that essentially we relieve them upset that they can spend all of their time figuring out the best way to run their business. So I think we bring something to the party, even if we’re just sitting there with our feet up on the desk. Charlie?

Charlie Munger [02:00:45] Yeah, we’re trying to be a good example for the world. I don’t think we’d be having these big shareholder meetings if there weren’t a little bit of teaching ethos and Berkshire. And I’ve watched it closely for a long time. I’d argue that that’s what we’re trying to do, is set a proper example, stay sane, be honest. So I’m proud of Berkshire, and I don’t worry too much if we sell Coca-Cola.

Warren Buffett [02:01:26] We, I would say GEICO is an extraordinarily well-run company, and it would be extraordinarily well run if it were public. But it has gone from two and a fraction percent of the auto insurance market to 12%, and part of the reason, the small part, the real key is GEICO and Tony Nicely, but part of the reason is that when other, at least two of our competitors, big competitors, said that they would not meet their profit objectives if they didn’t lighten up their interest in new business, eight or 10 months ago, I think our business decision to step on the gas is a better business decision.

But I think that GEICO as a public company would have more trouble making that decision than they do when they’re part of GEICO, because we are thinking about nothing but where GEICO’s gonna be in five or ten years. And if that requires having, do we want new business costs to penalize our earnings in the short term? And other people have different pressures. I’m not arguing about how they behave, because they have a different constituency than GEICO has with Berkshire, and what Berkshire has with its shareholders in turn. And I think in that case our system’s superior, but it’s not because we work harder, Charlie. I don’t do hardly anything. Jonathan?

JBJonathan Brandt [02:02:57] Could you please talk about your periodic payment annuity business? The weighted average interest rate on these contracts is 4.1%, which doesn’t sound particularly attractive given the current interest rate environment. Is the duration of these liabilities long enough to make that an attractive cost of funds, or were these contracts executed primarily when rates were higher?

Warren Buffett [02:03:22] Well, those contracts, these are what are called structured settlements, primarily. And when somebody young has a terrible auto accident or whatever it may be, perhaps urged by the court, urged by family members who really do have the interest of the injured party at harder, they may convert what could be a large sum settlement, probably against an insurance company, you know, maybe $1 million, maybe $2 million, into periodic payments for the rest of the life of the injured party. And we issue those for other insurance companies. In fact, sometimes the court directs that Berkshire, or hints strongly that Berkshire should be the one to issue those, because you’re talking with somebody’s life 30 or 40 or 50 years from now, and the court or the lawyer or the family may want to be very, very sure that whoever makes that promise is going to be around to keep it. And Berkshire has a preferred position in that.

We look, to get to your question, Johnny, we look for taking the longer maturity situations. We always have. And we have to make assumptions about mortality, and we have to make assumption, and then we have to decide on what interest rate will do it. The 4.1% is a mix of a lot of contracts over a lot of years. Obviously, we write maybe $30 million of these, $20 to $30 million a week, looking for the long maturities. And so if you take an average of 15 years or something of sort, that’s how we come up with that sort of a figure. We adjust them to interest rates at all times. We’re making an assumption that we’re going to earn more money that then is inherent in the cost of these structured settlements.

It’s a business we’ve, I think we’ve got $6 or $7 billion up now, and we’ll keep doing them. And incidentally, probably a significant perc, percentage of the $6 or $7 billion we’re not yet paying anything on. Somebody else may have the earlier payments. They’re certainly weighted far out. So it’s a business that we’ll be in 10 or 20 years from now. We’ve got some natural advantage because people trust us more than any other company to make those payments. And the test is whether we earn over time a return above that which we’re paying to the injured party. And, but that’s a bet we’re willing to long time.

We would, assuming we kept the money in fixed income instruments, we would, we’d have some loss in that. We’ve got an allowance in their instance for the expenses, incidentally, of, because we do make monthly payments to these people eventually, and we have to keep track of whether they’re still alive or not, because you cannot count on the relatives of somebody that’s deceased, when a check is coming in every month, to notify you promptly that the person has become deceased. But it’s, it’ll, that number will go up over time. If interest rates stay where they are, that 4.1% will come down a little bit as we add new business. OK, station seven.

[02:07:09] Shareholder (Harry Hong, Vancouver, British Columbia): Thank you, Mr. Buffett and Mr. Munger, for all you’ve done and the opportunity to learn even more from your approach to investing in life. My name’s Harry Hong. I’m a respirologist from Vancouver, British Columbia. The question involves, back in 2001, you made an initial investment in USG shortly before the company declared bankruptcy due to the mounting asbestos liability. You held those shares through the bankruptcy process, even though standard wisdom says that the equity in Chapter 11 is usually worthless. Can you explain why USG’s equity was a safe investment?

Warren Buffett [02:07:58] Well, I don’t really remember all the details then.

Charlie Munger [02:08:02] It was very cheap.

Warren Buffett [02:08:04] We, very cheap, yeah. But I would say this, USG, we own, I’m not sure what percentage, but it’s very significant percentage on them, probably 30% or something like that. But the, USG overall has just been disappointing, because the gypsum business has been disappointing. And I think, I may be wrong, I think they went bankrupt twice, first from asbestos going back, and then subsequently because they just had too much debt. So it has not been a brilliant investment. Now if gypsum prices were at levels that they were in some years in the past, it would have worked out a lot better.

Charlie Munger [02:08:50] But it hasn’t been terrible.

Warren Buffett [02:08:52] No, it hadn’t been terrible. But it, gypsum took, has taken a real dive several times, and there has been too much gypsum capacity. And then, when it comes back, the managements have been, not necessarily at USG, but including USG perhaps, they’ve gotten more optimist, they’ve gotten more optimistic about future demand than they should have been. They like going back historically away, they like to build new plants. And it’s a business where the supply has been significantly, potential supply has been significantly greater than demand in a lot of years. I mean, it, you’ve seen housing starts, and since 2008, not come back anywhere near as much as people anticipated. So gypsum prices have moved up, but not dramatically. So I just put that one down as not one of our great ideas. Not one of my great ideas. Charlie wasn’t involved in that.

Charlie Munger [02:09:55] It’s no disaster, though.

Warren Buffett [02:09:56] No, it isn’t. It’s, Becky?

Becky Quick [02:09:59] Hello. Oh, there we go. OK. This question comes from Axel Meyersiek in Germany, who writes, “If Ajit were to retire, God forbid, be promoted, what would be the impact on the insurance operations, both with regards to underwriting profit as well as the development of float?”

Warren Buffett [02:10:22] Well, nobody will, could possibly replace Ajit. I mean, it just, you can’t come close. But we have a terrific operation in insurance, we really do, outside of Ajit. And it’s terrific squared with Ajit. There are things only he can do, but there are a lot of things that are institutionalized, a lot of things in our insurance business where we’ve got extraordinarily able management too. So Ajit, for example, bought a company, but nobody here has heard of, probably, called GUARD Insurance a few years ago. Base, workers comp primarily. It’s based, in, improbably, in Wilkes-Barre, Pennsylvania, and is expanding like crazy in Wilkes-Barre. And it’s been, it’s been a gem. And Ajit oversees it, but we’ve got a terrific person running it.

And we bought Medical Protective some years ago. Tim Kenesey runs that. But Ajit oversees it. But Tim Kenesey can run a terrific insurance company with or without Ajit. But he’s smart enough to realize that if you’ve got somebody like Ajit that one of you to oversee it to a degree, that that’s great. But Tim is a great insurance manager all by himself, and Medical Protective has been a wonderful business for us. Most people don’t know we own it. The company goes back into the 19th century, actually. We’ve got a lot of good operations. If you look at that section in the annual report called other insurance company, I mean, that is, in aggregate, that is a wonderful insurance company. There’s very few like it. GEICO is a terrific company. So Ajit has made more money for Berkshire than I have, probably, but we’ve still got what I would consider the world’s best property casualty insurance operation, even without them. And with them, you know, it, nobody, I don’t think anybody comes close. Charlie?

Charlie Munger [02:12:49] Well, a few years ago, California made a little change in its work with compensation law, and Ajit saw instantly that would cause the underwriting results to change drastically. And he went from a tiny percent of the market to like 10% of the market, which is big, and he just grasped a couple of billion dollars at least out of the air, like was snapping his fingers. And when it got tough, he pulled back. We don’t have a lot of people like Ajit.

Warren Buffett [02:13:24] It’s hard to just snap your fingers and grab a couple of billion dollars out of the air. But we, we’ve actually, the California workers comp, though, GUARD has moved into that. We have, we have got a lot of terrific insurance managers. I mean, I don’t know of a better collection any place. And Ajit’s found some of those. I’ve gotten lucky a few times. I mean, Tom Nerney at U.S. Liability, that goes back, you know, what, 15, 16 years. He is a terrific operation. Not huge, but is so well managed, and people don’t even know we own these things. But you look at that last line, and now we’ve added Peter Eastwood with Berkshire Hathaway Specialty. And these are really good businesses.

I got to tell you, when you can produce underwriting profits and on top of that just hand more float, we don’t have, look, we don’t have many businesses like that. Those are great business. We’ve got a hundred and whatever it is, $100 billion plus of money that we get to earn on, while at the same time, overall, you know, on balance, we’re likely to make some additional money for holding it. If you can get somebody to hand you $104 billion and pay you to hold it, all you get to invest and get the proceeds, it’s a good business. Now most people don’t do well at it.

And, you know, the problem is that what I just described tempts lots of people to get into it. And recently people have got into it really just for the investment management. It’s a way to earn money off. We don’t do that, but it can be done for small companies with investment managers. So there’s a lot of competition in it. But we have some fundamental advantages, plus we have, in certain areas, plus we have absolutely terrific managers to maximize those advantages. And we’re going to make the most of it.

I’ve just been handed something. Kraft Heinz came out with, they just came out with it commercially a couple days ago, a few days ago, maybe a few weeks ago. At the director’s meeting, they had this. I had three of these. I’m sure that there’s remember two of the audience who may not approve of it, but they, I gotta tell you, folks, it’s good. It’s, it’s fella, it’s a cheesecake arrangement with topping and Philadelphia Cream Cheese especially on, so you create your own cheesecake. And I thought that I can eat it while Charlie’s talking. And you’ll be able to get it at the halftime. It’s selling very well. And I think, just so you don’t feel too guilty, I think it’s 170 calories for this cherry one. Like I said, I had three of these eaters. I don’t mind having five or six hundred calories for dessert, you know. I’ve been, I’ll let somebody else eat the broccoli and I’ll have the dessert. So we’ll be eating this, but you two at halftime. I think they brought eight or nine thousand of these. I’ll be disappointed if we don’t run out. Actually, I’ll be disappointed in you, not them. OK, Jay.

JGJay Gelb [02:17:06] This question is on the topic of succession planning. Warren, there seems to be fewer mentions by name of top performing Berkshire managers in this year’s annual letter. Does this mean you’re changing your message regarding the succession plan for Berkshire’s next CEO?

Warren Buffett [02:17:22] Well, the answer to that’s no, and I didn’t realize there were fewer mentions my name. I write that thing out and send it to Carol, and she tells me go back to work. I don’t, I don’t actually think that much about how many personally get named. I would say this, and this is absolutely true, we have never had more good manager. Now it’s because we got more good companies, but we have never had more good managers than we have now. So I, but it has nothing to do with succession. Charlie?

Charlie Munger [02:18:06] Well, I certainly agree with that. We don’t seem to have a whole lot of 20 year olds, certainly not at the front table.

Warren Buffett [02:18:17] Now we’ve got, we’ve got an extraordinary group of good managers, which is why we can manage by abdication. It wouldn’t work if we had a whole bunch of people who were, had come with the idea of getting my job. I mean, we had, if we had 50 people out there, all who wanted to be running Berkshire Hathaway, it would not work very well. And but they have the jobs they want in life. Tony Nicely loves running GEICO, you know, and you go down the line, they have jobs they love. And that’s a lot better, in my view, than having a whole bunch of them out there that are kind of doing their job, they’re kind of hoping the guy that’s competing with them will fail so that when I’m not around that they’ll get the nod. It’s a much different system than they exist at most large American corporations. It’s already gone. Well, we’re going to station 8.

[02:19:21] Shareholder (Vicky Wei, Wharton School): Hi, Warren and Charlie. My name is Vicky Wei. I’m a MBA student from the Wharton School of fitness. This is my first time to be in the first in any meeting. I’m really excited about it. Thanks for having us here. My question, my question is, where do you want to go fishing for the next three to five years? Which sectors are you most bullish on, and which sectors are you most bearish on? Thank you.

Warren Buffett [02:20:04] Yeah. Most barry shaw. Thank you. Yeah, Charlie and I do not really discuss sectors much, nor do we let the macro environment or thoughts about it enter into our decision. We’re really opportunistic, and we obviously are looking at all kinds of businesses all the time. I mean, it’s a hobby with us, almost, probably more with me than Charlie. But we’re hoping we get a call, and we’ve got a bunch of filters. And I would say this, two of, both of us, we probably know in the first five minutes or less whether something is likely to, or has a reasonable chance of happening. And it’s just going to go through there, and it’s going to, the first question is, can we really ever know enough about this to come to a decision, you know? And that knocks out a whole bunch of things. And there’s a few, and then if it makes it true, there’s a, there’s a pretty good reasonable chance we’re gonna, we may do something.

But it’s not sector specific. It, we do love the companies, obviously, with the moats around the product long, where consumer behavior can be perhaps predicted further out. But I would say it’s getting harder to, for us anyway, to anticipate consumer behavior than we might have thought 20 or 30 years ago. I think that’s just a tougher game now. But we’ll measure, and we’ll look at it in terms of returns on present capital, returns on prospective capital. We may have, we can, a lot of people give you some signals as to what kind of people they are, even in talking in the first five minutes, and whether you’re likely to actually have a satisfactory arrangement with them over time. So a lot of things go on fast. But it, we know the kind of sectors we kind of like, that, or the type of business we’d kind of like to end up in, but we don’t really say we’re going to go after companies in this field or that field or another field. Charlie, you want to?

Charlie Munger [02:22:17] Yeah, some of our subsidiaries do little bold on acquisitions that make sense, and that’s going on all the time, and of course we like it. But I would say the general field of buying hole companies, it’s gotten very competitive. There’s a huge industry of doing these leveraged buyouts. That’s what I still call them. The people who do them think that’s a kind of a bad marker, so they say they do private equity. You know, it’s like making a janitor call himself the chief of engineering or something. But anyway, the people do the leverage buyouts, they can finance practically anything in about a week or so through shadow banking, and they can pay very high prices and get very good terms and so on. So it’s very, very hard to buy businesses.

And we’ve done well because there’s a certain small group of people that don’t want to sell to private equity, and they love the business so much they don’t want it just dressed up for resale. We had a guy some years ago came to see me, and he was 61 at the time, and he said, look, I’ve got a buying business, I got all the money I can possibly need, but,” he said, “there’s only thing one, and there’s only one thing that worries me when I drive to work.” Actually there’s more than one guy’s told me that, use the same term: “There’s only one thing that bothers me when I go to work. You know, something happens to me today, my wife’s left. You know, I’ve seen these cases where executives in the company try to buy them out cheap, or they sell to a competitor and all the people.” He said, “I don’t want to leave her with a business. I want to decide where it goes, but I want to keep running it, and I love it.” And he said, “I thought about selling it to a competitor, but if I sell it to a competitor, you know, their CFO is going to become the CFO of the new company, and they’re, you know, on down the line, and all these people who help me build the business, you know, a lot of them are going to get dumped, and I’ll walk away with a ton of money, and some of them will lose their job.” He said, “I don’t want to do that.”

And they said, “I can sell it to a leveraged buyout firm,” would prefer to call themselves private equity, “but they’re going to leverage it to the hilt, and they’re going to be solid, and they’re going to dress it up some, but in the end it’s not going to be in the same place. I don’t know where it’s going to go.” He said, “I don’t want to do that.” So he said, “It isn’t because you’re so special,” he says, “there just isn’t anyone else.” If you’re ever proposing to a potential spouse, don’t use that line. I mean, but that’s what he told me, and I took it well, and we made a deal.

So logically, unless somebody has that attitude, we should lose in this market. I mean, you can borrow so much money so cheap, and we’re looking at the money as pretty much all equity capital, and we are not competitive with somebody that’s going to have a very significant portion of the purchase price carried in debt, maybe averaging, you know, 4% or something, and he won’t take the losses, so it goes down, he gets part of the profit if it goes up. Yeah, his calculus is just so different than ours, and he’s got the money to make the deal. So if all you care about is getting the highest price for your business, you know, we are not a good call. And we will get some calls in any event, and we can offer something that, that wouldn’t call it unique, but it’s unusual.

The person that sold us that business and a couple of others that, actually it’s almost word for word the same thing they say, they are all happy with the sale they made, very happy. And, you know, they are, they have lots and lots and lots of money, and they’re doing what they love doing, which is still running the business, and they know that they made a decision that will leave their family and the people who work with them all their lives in the best possible position. And that’s in their equation. They have done what’s best. But that is not the equation of many people, and it certainly isn’t the equation of somebody who buys it and borrows every dime they can with the idea of reselling it after they, you know, maybe dress up the accounting and do some other things. And but there, when the disparity gets so wide between what a heavily debit, debt finance purchase will bring as against an equity type purchase, it gets to be tougher. There’s just no question about it, and it’ll stay that way. But it’s been tough for a long time, and we’ve bought some good businesses.

Charlie Munger [02:27:24] Yeah.

Warren Buffett [02:27:24] Yeah. Okay, Andrew.

ASAndrew Ross Sorkin [02:27:26] Warren, this comes from a shareholder I think is here who has to remain anonymous. Writes: “Three years ago you were asked at the meeting about how you thought we should compensate your successor. You said it was a good question and you would address it in the next annual letter. We’ve been patiently waiting. Can you tell us now, at least philosophically, how you’ve been thinking about the way the company should compensate your successor, so we don’t have to worry when the pay consultants arrive on the scene?”

Warren Buffett [02:27:58] Yeah. Well, that, unfortunately, at my age I don’t have to worry about things I say, I said three years ago, but this guy, obviously much younger, remembers. I’m not, well, I’ll accept this word that I said that. But the, there’s a couple possibilities, actually. I don’t want to get into details on them, but you may have, and I actually would hope that we would have somebody, a, that’s already very rich, which they should be, then been working a long time, enter that kind of ability, that’s very rich and really is not motivated by whether they have ten times as much money they and their families can need or a hundred times as much. And they might even wish to perhaps set an example of by engaging for something far lower than actually what you could say their true market value is. And that could or could not happen, but I think it’d be terrific if it did. But I can’t blame anybody for wanting their market value.

And then, if they didn’t elect to go in that direction, I would say that you would probably pay them a very modest amount and then have an option which increased in value by, or increasing striking price annually. Nobody does this, hardly. The Washington, Graham Holdings has done it, the Washington Post Company did a little bit, but would increase because, assuming that there were substantial retained earnings every year, because why should somebody retain a bunch of earnings and then claim they’d actually improve the value simply because they withheld the money from shareholders? So very easy to design that, and in private companies people do design it that way. They just don’t want to do it in public companies if they get more money the other way. But they might have a very substantial one that could be exercised, but whether shares, holders, shares had to be held for a couple of years after retirement so that they really got the result over time that the majority of the stockholders would be able to get, and not be able to pick their spots as to when they exercised and sold a lot of stock. It would, it’s not hard to design. And it really depends who you’re dealing with, in terms of actually how much they care about money and having money beyond what they can possibly use, and most people do have an interest in that, and I don’t blame them. But I don’t know, what do you think, Charlie?

Charlie Munger [02:30:42] Well, I, one thing I think is that I have avoided all my life compensation consultants. To me it’s, I hardly can find the words to express my content.

Warren Buffett [02:30:59] I will say this, if the board hires a compensation consultant after I go, I will come back.

Charlie Munger [02:31:10] Mad.

Warren Buffett [02:31:10] Mad.

Charlie Munger [02:31:11] So I think there’s a lot of mumbo jumbo in this field, and I don’t see it going away.

Warren Buffett [02:31:18] Oh, it isn’t going to go away, you know.

Charlie Munger [02:31:21] No, it’s going to get worse.

Warren Buffett [02:31:23] And I mean the, if you look at, I mean, the way compensation gets handled, it, you know, everybody looks at everybody else’s proxy statement, says, “We can’t possibly hire a guy that hasn’t been…” It’s ridiculous, and so on. And the human relations department, you know, worked for the CEO, come in and suggest a consultant. What consultant is ever going to get another assignment, he says, “You should pay your CEO below the, down on the fourth quartile, because you’re getting a fourth quartile result”? And I mean, it just, you know, it isn’t that the people are evil or anything. It’s just the nature of the situation, just it produces a result that is not consistent with how representatives of the ownership should behave.

Charlie Munger [02:32:09] It’s even worse than that. Capitalism is the, is the golden goose that we all live on, and if people generally get so they have contempt for it because they don’t like the pay arrangements and the system, your capitalism may not last as well. And that’s like killing the golden goose. So I think the existing system has a lot wrong with it.

Warren Buffett [02:32:36] I think there is something coming in pretty soon, I may be wrong about this, where companies are going to have to put in their proxy statement the CEO’s pay to the average payer, something like that.

Charlie Munger [02:32:49] That isn’t going to change anything.

Warren Buffett [02:32:51] I mean, it won’t change up there, it won’t change the thing. And, you know, it’ll cost us, by the way, it won’t get any headlines either, it’ll be tucked away, it’ll cost us a lot of money with 367,000 people employed around the world. And, I mean, we’ll hope to get something that makes it somewhat simpler so we can use estimates or something of the sort, but to get the median income or meat income or whatever, however the rules may read, you know.

Charlie Munger [02:33:18] And that’s what consultants are for.

Warren Buffett [02:33:20] One, yeah, it, it’s, you know, it is human nature that produces this. And, you know, the most, I write in this letter to the managers every two years, I said the only excuse I won’t take on something is that everybody else is doing it. But of course, “everybody else is doing it” is exactly the rationale for why people did not want to count the cost of stock options as a car. I mean, it was ridiculous. All these CEOs went to Washington, they got the Senate, I think, to vote 88 to 9 to say the stock options are under cost. And then a few years later, you know, that it became so obvious that they finally put it in, so it was a cost. You know, it reminded me of Galileo or something. I mean, all these guys…

Charlie Munger [02:34:09] Worse, it was way worse. Pope behaved better to Galileo than he was.

Warren Buffett [02:34:14] Well, anyway, it’s, it, I would hope, you know, like I say, somebody, whoever, and it doesn’t even have to be, I’m not talking about the current success or anybody else, I mean, these successors down the line are probably going to gotten very, very wealthy by the time they’re running Berkshire, and the incremental value of wealth gets very close to zero at some point. And there is a chance to use it as a different sort of model. But I don’t have any problem if it’s a system is devised that recognizes retained earnings. Nobody, I’ve never heard anybody talk about it, you know, at the 20 boards I’ve been honored. You know, if you and I were partners in a business, you know, and we kept retaining earnings in the business, and I kept having the value to buy a portion of you out at a constant price, you say this is idiocy. But of course that’s the way all the option systems are designed, and it’s better to be to the CEO and for the consultants.

Charlie Munger [02:35:24] And of course, usually if this some correlation between what CEOs are paid and what boards are paid. If CEOs were getting paid at the rate that they got paid 50 years ago, adapted to present dollars, director paid would be lower. So it’s, you know, it’s got all these built-in things that to some extent sort of kindle the…

Warren Buffett [02:35:50] No Berkshire director is in it for the money.

Charlie Munger [02:35:54] Well, they are, they own a lot of stock, and they bought it in the market just like that.

Warren Buffett [02:36:01] Yeah.

Charlie Munger [02:36:01] Yeah, it’s a very old-fashioned system.

Warren Buffett [02:36:04] I looked at one company the other day, and seven of the directors had never bought a share of stock with their own money. Now, they’ve been given stock, but not one of those, not one of the, I mean, I said not one, seven of the doctors had never actually bought a share of stock, and there they are, you know, making decisions on who should be CEO and how they should be paying, all that sort of thing. But then, you know, they’ve never felt like shelling out a dollar themselves. Now, they’ve been given a lot of stock, and it’s, you know, we’re dealing with human nature here, folks. And that, what you want is to have a system that works well in spite of how human nature is going to drive it. And we’ve done awfully well in this country in that respect. I mean, American businesses overall has done very, very well for the Americans generally, but not every aspect of it is exactly what you want to teach your kids. Okay, Greg.

GWGregg Warren [02:37:04] Warren, between 2010 and 2015, intermodal rail traffic enjoyed double-digit rates of revenue growth as shorter half rate converted from truck to rail. During the past year or so, though, cheaper diesel prices and more readily available truck load capacity have made trucking more competitive, leading to a decline in intermodal rail traffic, while car load growth is expected to be solid longer term, helping to offset weakness in other segments like coal. What impact do you expect the widening of the Panama Canal, which was completed last year, to have on the West Coast port shipments that BNSF has traditionally carried through to exchange points for the eastern U.S. railroads, as shippers elect to have goods unloaded at ports in the Gulf of Mexico or up the eastern seaboard? And while loss of volumes is never a good thing, could there be a small trade-off here, as the bottleneck in Chicago, where most east-west cargo is handed off, eases a bit over time as some of the current traffic gets rerouted?

Warren Buffett [02:37:58] Well, yeah, Chicago has got lots of problems, and it’s going to continue for a long, I mean, that requires a big solution. What do you think of how the railroads develop? I mean, Chicago was the center, and, you know, he laid the rails, and there were a whole bunch of different railroads, you know, 100 years ago, and city grows up around them and everything. So Chicago can be a huge problem. But getting to intermodal, I think intermodal will do very well. But you are correct that car loadings actually hit a peak in 2006. So here we are 11 years later, and the investment of the five big Class 1 railroads, for the biggest, if you look at their investment beyond depreciation, it’s tens and tens of billions of dollars, and we’re carrying less freight, the four in aggregate, than we were in 2006. And coal will continue to decrease.

It’s a good business, and it has big advantages over truck in many respects. Truck gets, but much more of a free ride in terms of the fact that their right-of-way, which is the highway system, is subsidized to much, to greater degree, beyond the gas tax, you know, we, than the railroad industry. But it is not, it has not been a growth business in physical volume to any great degree. I think it’s unlikely to be. I think it’s likely to be a good business. I think we’ve got a great territory. I like the West better than the East. And as you mentioned, you know, there will be some intermodal traffic that gets diverted to eastern ports, perhaps, or so. Overall, I, we’ve got a terrific system in that respect, and we will do well. It would be more fun if we had something where you could expect aggregate car loadings to increase 2% or 3% or 4% a year, but that, I don’t think that’s going to happen. I do think our fundamental position is terrific, however. I think we’ll earn decent returns on capital, but that’s, I think that’s the limit of it. Charlie?

Charlie Munger [02:40:36] Nothing there.

Warren Buffett [02:40:37] Okay, station 9.

[02:40:38] Shareholder (Shankar, Gurnee, Illinois): And from Shankar, and I’m from Gurnee, Illinois. Thank you for doing everything you do for us. I have a question. The two of you have largely avoided capital allocation mistakes by bouncing ideas off of one another. Will this continue long into Berkshire’s future? And I’d like to, I’m interested in both at headquarters and at subsidiaries.

Warren Buffett [02:41:12] It can’t continue very long. I don’t get to fetus, Charlie. Any successor that’s put in, a first year, capital allocation abilities and proven capital allocation abilities are certain to be uppermost in the board’s minds, or in the current case, in terms of my recommendation, Charlie’s recommendation, for what happens after we’re not around. Capital allocation is incredibly important at Berkshire. Right now we have 280 years 90 billion, whatever may be, of shareholders’ equity. If you take the next decade alone, you know, nobody can make accurate predictions on this, but in the next 10 years, if you just take and appreciate a depreciation right now is another 7 billion a year, something on that order, the next manager in the decade is going to have to allocate maybe 400 billion or something like that, maybe more. And it’s more than already been put in. So 10 years from now, Berkshire will be an aggregation of businesses where more money has been put in in that decade than everything that took place ahead of time. So you need a very sensible capital allocator in the job of being CEO of Berkshire, and we will have one. It would be a terrible mistake to have someone in this job where really capital allocation might be, might even be their main talent, that probably should be very close to their main talent.

And of course, we have an advantage at Berkshire and that we do know how important that is, and there is that focus on it. And in a great many companies, people get to the top through ability and sales. Sometimes they come from the legal side, something, all different sides, and they then have the capital allocation sort of in their hands. Now, they may not establish strategic thinking divisions, and they may listen to investment bankers and everything, but they better be able to do it themselves. And if they come from a different background or haven’t done it, it’s a little bit, as I put in one of my letters, I think it’s like getting to Carnegie Hall playing the violin, and then you walk out on the stage and they hand you a piano. I mean, it is something that Berkshire would not do well if somebody was put in who had a lot of skills in other areas but really did not have an ability, a capital allocation.

I’ve talked about it as being something I call a money mind. I mean, people can have 120 IQs or 140 IQs or whatever it may be, very similar scoring abilities in terms of intelligence tests, and some of them have minds that are good at one type of thing and some of another. I’ve known very bright people that do not have money minds, and they can make very unintelligent decisions. They can do all kinds of other things that most mortals can’t do, but it just doesn’t, it isn’t the way their wiring works. And I’ve known other people that really would not do that brilliantly, they do fine, but on an SAT test or something like that, but they’ve never made a dumb money decision in their life. And Charlie, I’m sure, have seen the same thing. So we do want somebody, and hopefully they’ve got a lot of talents, but we certainly do not want somebody that, if they lack a money mind. Charlie?

Charlie Munger [02:45:27] Well, there’s also the option of buying in stock, which, so it isn’t like it’s some hopeless problem. One way or another, something intelligent will be done, and a money mine will recognize when it makes sense to buy in stock and doesn’t.

Warren Buffett [02:45:43] You know, and in fact, it’s a pretty good test for some people in terms of management’s, how they think about something like buying in stock, because it’s not a very complicated equation if you sort of think straight about that sort of a subject. But some people think that way and some don’t, and they’re probably miles better somewhat than something else, but they say some very silly things when you get to something that seems so clear is whether, say, buying in stock makes sense. Anything further, Charlie?

Charlie Munger [02:46:17] No.

Warren Buffett [02:46:17] Okay, Carol.

CLCarol Loomis [02:46:18] This question comes from Steve Haverstraw of Connecticut. “Warren, you’ve made it very clear in your annual letter that you think the hedge fund compensation scheme of two and twenty generally does not work well for the funds’ investors. And in the past, those they help take, Charlie Munger, for instance, in nearly every annual letter and on the movie this morning, you describe how valuable Charlie’s advice and counsel has been to you and, in turn, to the incredible rise in Berkshire’s value over time. Given that, would you be willing to pay the industry standard,” quote, “financial helper fee of 1% on assets to Charlie, or would you perhaps even consider 2 and 20 for him? What is your judgment about this matter?”

Warren Buffett [02:47:28] Yeah. Well, I’ve said in the annual report that I’ve known maybe a dozen people in my life, and I said there are undoubtedly hundreds or maybe thousands out there, but I’ve said that I’ve known personally a dozen where I would have predicted, or did predict in a fair number of those 12 cases, I did predict that the person involved would do better than average in investing over a long period of time. And obviously Charlie is one of those people. So would I pay him? Sure. But would I take financial advisors as a group and pay them 1% with the idea that they would deliver results to me that were better than the S&P 500 by 1%, and thereby leave me breaking even against what I could have done on my own? You know, there’s very few. So it’s just not a good question to ask whether, you know, I pay Charlie 1%. That’s like asking, you know, whether I’d have paid Babe Ruth, you know, $100,000 or whatever it was to come over from the Red Sox to the Yankees. I mean, sure would have, but there weren’t very many people I would have paid $100,000 to in 1919, or whatever it was, to come over to the Yankees.

So the, it’s a fascinating situation, because the problem isn’t that the advisors are going to do so terrible, it’s just that you have a, an option available that doesn’t cost you anything that is going to do better than they are in aggregate. And it’s an interesting question. I mean, if you hire an obstetrician, assuming you need one, they’re going to do a better job of delivering the baby than, you know, if the spouse comes in to do it or if they just pick somebody up off the street. And if you go to a dentist, if you hire a plumber, in all the professions there is value added by the professionals as a group compared to doing it yourself or just randomly picking layman. In the investment world isn’t true. I mean, they, the active group, the people that are professionals in aggregate, are not, cannot do better than the people, the aggregate of the people who sit, just sit tight. And if you say, well, in the active group there’s some person that’s terrific, I will agree with you, but the passive people can’t all pick that person, and they wouldn’t, they don’t know how to identify them. So I…

Charlie Munger [02:50:17] It’s even worse than that. The president, the expert who’s really good, when he gets more and more money in, he suffers just terrible performance problems.

Warren Buffett [02:50:28] Yeah.

Charlie Munger [02:50:29] And so you’ll find the person who has a long career at two and twenty, and if you analyze it net, all the people have lost money, because some of the early people have had a good record, but more money come in later and they lose it. So investing world is just, it’s a morass of wrong incentives, crazier reporting, and I’d say a fair amount of delusion.

Warren Buffett [02:50:56] Yeah. If you ask me whether I, those 12 people I picked would do better than the S&P working with $100 billion, I would answer that probably none of them would. I mean, that would not be their perspective performance. There’s, but when I was, when I was talking of them, I would, you know, are referencing them, and when they actually worked in practice, they dealt generally with pretty moderate sums. And as the sums grew, their relative advantage diminished. I mean, it’s so obvious from history. The example I used in the report, I mean, the guy who made the bet with me, and incidentally, all kinds of people didn’t make the bet with me because they knew better than to make the bet with me, there were hundreds, at least a couple hundred underlying hedge funds. These guys were incented to do well. The fun to fund manager was incented to pick the best ones they could pick. The guy who made the bet with me was incented to, but pick the best fund of funds, you know, and tons of money. And just in with those five funds, a lot of money went to pay managers for what was subnormal performance over a long period of time. And it can’t be anything but that.

And it’s an interesting, you know, it’s an interesting profession when you have tens of thousands or hundreds of thousands of people who are compensated based on selling something that in aggregate can’t be true, superior performance. So, but it’ll continue, and the best sales people will tend to attract the most money. And because it’s such a big game, people will make huge sums of money, you know, far beyond what they’re going to make in medicine, or you name it. I mean, you know, repairing the company, country’s infrastructure, I think. I mean, the big money is, huge money is in selling people the idea that you can do something magical for them. And if you have, if you even have a billion dollar fund, you know, and get 2% of it for terrible performance, that’s $20 million. In any other field, you know, it would just blow your mind, but people get so used to it, you know, in the Wall, in the field of investment, that it just sort of passes along. And $10 billion, I mean, 200 million dollar fees.

We’ve got two guys in the office, you know, they’re managing $11 billion, well, no, they’re not, I’m sorry, they’re, yeah, they’re managing 20 billion, you know, between the two of them, 21 billion maybe. You know, we pay them $1 million a year plus the amount by which they beat the S&P. They have to actually do something to get contingent compensation, which is much more reasonable than 20. But how many hedge fund managers in the last 40 years have said, “I only want to get paid if I do something for you, you know, unless I actually deliver something beyond what you can get yourself, you know, I don’t want to get paid”? It just doesn’t happen. And, you know, get back, let’s get back, it gets back to that line that I’ve used, but when I asked the guy, you know, “How can you in good conscious charge 2 and 20?” and he said, “Because I can’t get 3 and 30,” you know, anymore. Charlie, are we used up, or?

Charlie Munger [02:54:40] I think you beating up on them enough.

Warren Buffett [02:54:44] Yeah. Well, Jonathan.

JBJonathan Brandt [02:54:46] Precision Castparts represents the second largest acquisition Berkshire has ever made. There wasn’t much qualitative or quantitative information about it in the 2016 annual. Would you be willing to update us here with how it is doing currently, what excites you about its prospects, and what worries you most about it? I’m also curious if there were any meaningful purchase price adjustments beyond intangible amortization that negatively impacted Precision’s earnings in 2016, as was the case with Van Tuyl in 2015. And finally, are there any opportunities in sight for bolt-on acquisitions?

Warren Buffett [02:55:27] Yeah, we’ve actually made acquisitions, and we will make more that fit there, because we’ve got an extraordinary manager and we’ve got a terrific position in the aircraft field. So there will be sensible, there will be the chance for sensible acquisitions, and we’ve already made two anyway, and we could, we will make more over time. The, it’s the amortization of intangibles is the only big purchase price adjustment that’s something over $400 million a year, non-deductible. In my mind, that’s 400 and some million of earnings. I do not regard the economic goodwill of Precision Castparts being diminished at that rate annually. That is a, and, you know, I’ve explained that in some degree.

The, as a very long-term business, you can worry about 3D printing. I don’t think you have to worry about aircrafts being manufactured, but aircraft deliveries can be substantially altered in relation to any given backlog in most cases, so the deliveries can be fairly volatile. But I don’t think the long-term demand is anything I worry about. And the question is whether anybody can do it better or cheaper, or, like I say, whether 3D printing at least takes away part of the field in some respect. But overall, I will tell you, I feel very good about Precision Castparts. It is a very long-term business. I mean, we have contracts that run for a very long time, and, like I say, the initiation of a new plane may be delayed or something of the sort. But if you take a look at the engine that’s in the other joining room here, and in our exhibition hall, you would, if you were putting that engine together with a 20 or 25-year life or whatever it may have, carrying hundreds of people, you would care very much about your supplier. And you’d care not only in the quality, which would be absolutely good care of the work being done, but you also, if you were an engine manufacturer or an aircraft manufacturer further down the line, you would care very much about the reliability of delivery on something, because you do not want to plane the torn engine, it’s 99% complete, while somebody is dealing with the problem of faulty parts or anything else that would delay delivery. So the reliability is incredibly important. I don’t think anybody has a reputation better than Mark Donegan for, and the company, for delivery. So I love the fact we bought Precision Castparts. Charlie?

Charlie Munger [02:58:52] Yeah, well, what’s interesting about it, too, is that it’s a very good business purchased at a fair price under, but this is no screaming barton, bargain like the old days. For quality businesses, you pay up now a lot more than we used to.

Warren Buffett [02:59:08] Yeah, that’s absolutely true. And we, you don’t get a bargain price. The 400 plus million, incidentally, you know, goes on for quite a while, too, and we’ll explain it in the report, just as we’ll explain that the depreciation charge at a railroad would not be adequate. I mean, it’s the way accounting works. And starting, I don’t even want to tell you about this one, but starting the first of next year, accounting is going to become sort of a nightmare in terms of Berkshire and other companies, because they’re going to have us mark our equities to market, just like we were a Wall Street trading firm or something. And those changes in the value of Coca-Cola or American Express, everything, are going to run through the income account every month, every quarter. In fact, they run through it every day, on, in this theory. So that it really will get confusing. Now, it’s our job to explain things so that you aren’t confused when we report GAAP earnings, but GAAP earnings as reported will become even more meaningless, looking only at the bottom line, than they are now. And that was not necessarily a good idea.

Charlie Munger [03:00:23] No, I think it’s a terrible idea.

Warren Buffett [03:00:26] But we’ll deal with it, and we’ll, the, I mean, it’s my job to explain to what extent GAAP account to you in evaluating Berkshire and the times when it actually distorts things. Accounting isn’t supposed to be, it’s not supposed to describe value. On the other hand, it’s a terribly useful tool, if understood, in order to estimate value if you’re analyzing businesses. And so, in a certain way, you can’t blame the auditing profession for doing what they think is their job, which is not to present value.

Charlie Munger [03:01:04] Although by using these markets, I can blame the other position. You can blame the audited performance. Okay, that was really stupid. (Laughter)

Warren Buffett [03:01:14] Well, I agree with that, actually. But we will do our best to give you, we’re always going to give you the audited figures, and then we’re going to explain their shortcomings in either direction, and how they, how, what you should use and what you probably should ignore in looking at those numbers and using them to come to a judgment as to the value of your holdings. And I’ll explain it to you the same way I would explain it to my sisters or anybody else, that, you know, we want you to understand what you own, and we try to cover the details that are really important in that respect. I mean, there’s a million things you can talk about that are just a minor importance when you’re talking about a 400 billion dollar market value, but they’re the things that, if Charlie and I were talking about the company, that they’d be the figures or the interpretations or anything that we would regard as important in sort of coming to an estimate of the value of the business. But it’s going to be, can’t knock them, the media. I mean, they’ve only got a few paragraphs to describe the earnings of Berkshire every quarter, but if they simply look at bottom line numbers, what can be silly this year will become absolutely ludicrous next year, because of the new rule that comes into effect for 2018. Okay, station 10.

[03:02:51] Shareholder (James Chen, Shanghai, China): Hello, Warren. This is a question from China. I am James Chen, a pension fund manager from China, Shanghai. My question is quite simple: what is the probability of duplicating your great investment track record in China stock market the next decade or two, in terms of investment personal? That’s all. And I thank my friends from Hui Temple and Full Gold Fund Management House for guiding me rising this question. Thank you.

Warren Buffett [03:03:31] Charlie, you’re the expert on China.

Charlie Munger [03:03:34] It’s like determining the order of presidency between the allows them to flee. Yeah, I do think that the Chinese stock market is cheaper than the American market, and I do think China has a bright future, future, and I also think that they’ll be growing pains, of course. And but, well, we have this opportunistic way of going through life. We don’t have any particular rules about which market we’re in or anything like that.

Warren Buffett [03:04:15] Well, Charlie’s delivered a headline anyway now: “Longer prediction, China market will outperform U.S.” So, and I’ve just been informed it’s 12:15, so I apologize if you’re hungry, for holding over for 15 minutes. So we’ll reconvene around 1:15, and I’ll see you then. Thanks.

Panel over here. Okay, we’re back for action, and we’ll go right to Becky.

Becky Quick [03:04:49] All right. This question comes from Ann Newman. She says that she’s a shareholder of the Class B stock, and her question is: “The primary investment strategy of 3G Capital is extreme cost cutting after the purchase of a company. This typically includes the elimination of thousands of jobs. With the current U.S. president focusing on retention of U.S. jobs, will Berkshire Hathaway still consider future investments in 3G Capital if those investments result in the purchase of U.S. companies and the elimination of more U.S. jobs?”

Warren Buffett [03:05:26] The, essentially 3G management, and I’ve watched them, are very close at Kraft Heinz, as basically, they don’t, they believe in having a company as productive as possible. And of course, the gains in this world, for the people in this room and people in Omaha, the people throughout America, have come through gains in productivity. If there’d been no change in productivity, we would be living the same life as people lived in 1776. Now, the people, the 3G people do it very fast, and they’re very good at making a, a business productive with fewer people than operated before. But that, they’ve been, you know, we’ve been doing that in every industry, whether it’s steel or cars or you name it, and that’s why we live as well as we do.

We prefer, at Berkshire, I wrote about this a year ago, we prefer to buy companies that are already run efficiently, because frankly we don’t enjoy the process at all of getting more productive. I mean, it’s not pleasant. But it is what has enabled the country to progress, and nobody has figured out a way to double people’s consumption per capita without in some way improving productivity per capita. It’s a good question in the, whether it’s smart overall, if you think you’re going to suffer politically, because political consequences do hit businesses. So I don’t know that I can answer the question categorically, but I can tell you that they not only photo, focus on productivity and do it in a very intelligent way, but they also focus to a terrific degree on product improvement, innovation, and all of the other things that you wanted a management to focus on. And I hope that at the lunch time, if you had the Kraft Heinz cheesecake, you’ll agree with me that product improvement and innovation there is a, is just as much a part of the 3G playbook as productivity.

I don’t personally, we have been through the process of buying into a textile business that employed a couple thousand people and went out of business over a period of time, or a department towards the business that was headed for oblivion, and it is just not as much fun to be in a business that cuts jobs rather than one that adds jobs. So Charlie and I would probably forego, personally, having Berkshire directly by businesses where the main benefits were come, would come from increasing productivity by actually having of fewer workers. But I think it’s pro-social to think in terms of improving productivity, and I think the people of 3G do a very good job at that. Charlie?

Charlie Munger [03:08:41] Well, I agree. I don’t see anything wrong with increasing productivity. On the other hand, there’s a lot of counterproductive publicity to doing it. Just because you’re right doesn’t mean you should always do it.

Warren Buffett [03:08:58] Yeah, I’d agree with that. Jay?

JGJay Gelb [03:09:01] Berkshire’s cash and Treasury bill holdings are approaching $100 billion. Warren, a year ago you said Berkshire might increase its minimum valuation for share buybacks above 1.2 times book value. If this occurred, what are your latest thoughts on raising the share repurchase threshold?

Warren Buffett [03:09:20] Yeah, the, when the time comes, and it could come reasonably soon, even while I’m around, the, but we really don’t think we can get the money out in a reasonable period of time into things we like, yeah, we have to re-examine then what we do with those funds that we don’t think can be deployed well. And at that time it would make a decision, and you might, it might include both, but it could be repurchases, it could be dividends. There are different inferences that people draw from a dividend policy than from a repurchase policy, that, in terms of ex, expectations that you won’t cut a dividend and that sort of thing. So you have to factor that all in. But if we really, if we felt that we had cash that was unlikely to be used, excess cash, in a reasonable period of time, and we thought repurchases at a price that was still attractive to continuing shareholders was feasible in a substantial sum, that could make a lot of sense.

At the moment, we’re still optimistic enough about deploying the capital that we wouldn’t, we wouldn’t be inclined to move to a price much closer, where there’s only a narrow spread between an intrinsic value and the repurchase price. But at a point, the burden of proof is definitely on us. I mean, that, I, the last thing we like to do is own something a hundred times earnings where the earnings can’t grow. I mean, we’re, as you point out, we’ve got almost $100 billion, and 90 plus billion dollars invested in a business, we’ll call it a business, where we’re paying all, almost 100 times earnings, and it’s kind of a lousy business.

Charlie Munger [03:11:31] It’s more, after tax earnings.

Warren Buffett [03:11:34] Yeah. So it, you know, we don’t like that, and we shouldn’t use your money that way for a long period of time. And then the question is, you know, are we going to be able to deploy it? And I would say that history is on our side, but it’d be more fun if the phone would ring instead of just relying on history books. And, you know, I am sure that sometime in the next 10 years, and it could be next week or it could be nine years now, there will be markets in which we can do intelligent things on a big scale. But it would be no fun if that happens to be nine years off, and I don’t think it will be. But just based on, you know, how humans behave and how governments behave and how the world behaves. But like I say, at a point, the burden of proof really shifts to us big time, and there’s no way I can come back here three years from now and tell you that we hold 150 billion or so in cash or more and we think we’re doing something brilliant by doing it. Charlie?

Charlie Munger [03:12:47] Well, I agree with you. The answer is maybe. (Laughter)

Warren Buffett [03:12:50] He does have a tendency to elaborate. Station 11.

[03:12:55] Shareholder (Anil Dharan, Short Hills, New Jersey, and New Delhi, India): Thank you, Mr. Buffett and Mr. Munger. I am Anil Dharan from Short Hills, New Jersey, and New Delhi, India. This is my 18th time to this wonderful event, and profoundly thank you for your extraordinary wisdom, generosity, and time. As I’m involved with sustainable investments that also do not directly harm animals, I would appreciate your perspective, if any, on the practices of your CTB subsidiary, which is somewhat involved in pig, poultry, and egg production. Somewhat indirectly related, as you shared your concern on nuclear war extensively at the last annual meeting, I would love to pick your brain on Albert Schweitzer’s Nobel Prize, Peace Prize acceptance speech shortly after the first nuclear bombs were detonated, that compassion can attain its full breadth and depth if it is not limited to humans only. Thank you.

Warren Buffett [03:14:06] Well, that’s a pretty broad question. I would say, on your first point, we have a subsidiary, CTB, run by Vic Mancinelli, and I sit down with him once a year, and he is a terrific manager. He’s one of our very best. You don’t hear much about them, and they do make the equipment for poultry growers. And I would, I can’t answer your question specifically, but I would be glad to have you get in contact with Vic directly, because I know that which question you raised is a, it’s a major factor in what they do. I mean, they do care about how, how the equipment is used in terms of poultry and egg production. And as you know, a number of the largest purchasers and the largest producers are also in the same camp. But I can’t tell you enough about it directly that I can give you a specific answer, but I can certainly put you in touch with Vic, and I think you would find him extremely well informed and doing some very good things in the area that you’re talking about.

In terms of, in terms of the nuclear weapon question, I’m very pessimistic on weapons of mass destruction generally, although I don’t think that nuclear probably is quite as likely as either biological, primarily biology maybe, and that may be cyber. I don’t know that much about cyber. But I do think that’s the number one problem of mankind, but I don’t think I can say anything particularly constructive on it now. Charlie?

Charlie Munger [03:16:09] Well, I don’t think we mind killing chickens, and I do think we’re against nuclear war.

Warren Buffett [03:16:17] So we are not actually a poultry producer, but we do, we do, they use our equipment, and that equipment has been changed substantially in the last 10 or 15 years. But again, I’m just not, I’m not that good on the specifics that I can give them to you, but I can certainly put you in touch with Vic. Andrew?

ASAndrew Ross Sorkin [03:16:45] Warren, since Todd and Ted joined Berkshire, the market cap of the company has doubled, and cashing, cash on hand is now nearly $100 billion. It doesn’t look like Todd and Ted have been allocated new capital on the same relative basis. Why?

Warren Buffett [03:17:03] Well, actually, I would say they have been. I think we started out with $2 billion, I could be wrong, but my memory was $2 billion with Todd when he came with us. And so there have been substantial additions, and of course their own capital has grown just because, you can say, in a sense, they retain their own earnings. So, yeah, they are managing a proportion of Berkshire’s capital, or, and or also measured by marketable securities, I think they’re managing a proportion that’s pretty similar, maybe even a little higher, than when each one of them entered. And Ted entered a year or two after Todd. You know, they, I think they would agree that it’s tougher to run 10 billion than it is to run one or two billion. I mean, your expectable returns go down as you get into larger sums.

But the decision to bring them on has been terrific. I mean, they have, they’ve done a good job of managing marketable securities. They’ve, they made more money than I would have made with that same, what is now 20 billion, but originally was 2 billion, and they’ve been a terrific help in a variety of ways beyond just money management. So that decision, all, you know, that’s been a very, very good decision. And they’re smart, they’re good, they have money minds, they are good specifically at investment management, but they’re absolutely first-class human beings, and they really fit Berkshire. So that was, Charlie gets credit for Todd, he met Charlie first, and I’ll claim credit for Ted, and I think we both feel very good about the decisions. Charlie?

Charlie Munger [03:19:17] Well, I think the shareholders are very lucky to have them, because they both think like shareholders. Total, it came up that way, and that is not the normal way headwaters employees think. It’s a pretense that everybody takes on, but the reality is different. And these people really deeply think like shareholders, and they’re young and smart and constructive. So we’re all very lucky to have them around.

Warren Buffett [03:19:43] Yeah, their mindset is 100%, “What can I do for Berkshire?”, not “What can Berkshire do for me?” And believe me, you can spot that over time with people. And on top of that, you know, they’re very talented. But, you know, it’s hard to find people, young, ambitious, very smart, that don’t put themselves first. And I would, every experience we’ve had, they do not put themselves first, they put Berkshire first. And believe me, I can spot it when people are extreme in one direction or other. Maybe I’m not so good around the middle, but you’ve got, you couldn’t have two better people in those positions. But you can say, well, why don’t you give them another 30 billion each or something? I don’t think that would, I don’t think that would improve their lives or their performance. They’ll, they may be handling more as they go along. But the truth is, I’m, I’ve got more assigned to me than I can handle at the present time, is proven by the fact that we’ve got this 90 billion plus around. I think there are reasonable prospects for using it, but if you told me I had to put it to work today, I would not like the prospect. Charlie?

Charlie Munger [03:21:10] Well, I certainly agree with that. It’s a lot harder now than it was at times in the past.

Warren Buffett [03:21:17] Greg.

GWGregg Warren [03:21:17] Warren, plans for your ownership stake, which is heavily concentrated in Class A shares, are fairly well known, with the bulk of the stock going to the Bill and Melinda Gates Foundation and four different family charities over time. Your annual pledges to these different charities involve the conversion of Class A shares, which holds significantly greater voting rights, in the Class B shares. As such, the voting control held by your estate will diminish over time, with the whole layer of super voting shares being eliminated in the process. While the voting influence of Class B shareholders are expected to increase over time, it will not be large enough to have a big influence on Berkshire’s affairs. With that in mind, in recognizing the great importance of having Berkshire buy back and retire Class A shares in the long run, I was just wondering if the firm has compiled a pipeline of potential future sellers from the ranks of the company’s existing shareholders, given the limited amount of liquidity for the shares. Privately negotiated transactions with these sellers, like the one you negotiated in December 2012, would end up being in the best interest of both parties.

Warren Buffett [03:22:20] Well, again, it would depend on the price of Berkshire. So in terms of what I give away annually, you know, it’s, the last two years it’s been about 2.8 billion per year. That can be, you know, that’s one day’s trading in Apple. I mean, it, the amount I’m giving away is, in terms of Berkshire’s market cap, I mean, that, you know, you’re down to seven tenths of 1% of the market cap. So it’s not a big market factor, and it’s really, really wouldn’t be that illiquid. So I know a few big holders that, you know, might have 8,000 or 10,000 shares of A, but the market can handle it.

Now, when we bought that block of, I think it was 12,000 shares of A, I mean, we bought it because we thought it increased the intrinsic business value of a Berkshire by a significant amount, and we paid the seller what the market was at the time. And, you know, we are open to that up to 120, and who knows, if it came along at the time and it was 124 or something, a very large block, and the directors decided that that was okay, it still was a significant discount, we might very well buy it. But in terms of the orderly flow of the market or anything like that, there will be no problems, just as there haven’t been, you know, what I’ve given away. I do it every July, when I’ve given away the last two years. Some of the foundations may keep it for a while, but they have to spend what I give them, and they may build up a position and be, for, you know, a fairly significant dollar amount, but they’re going to sell it.

And it is true that for a period after I died, there’ll be a lot of votes still in the estate and later in a trust, but, you know, that will get reduced over time. I see no problem with our capitalization over time. You know, I like the idea of a fair number of votes being concentrated with people that believe in the culture strongly and, you know, would not be thinking about whether they get a 20% jump in the stock if somebody came along with some particular plan. But eventually that’s going to get diminished. It continues to get diminished, I think, in terms of, you know, there’s a very good market in Berkshire shares. And if we can buy them at a discount from intrinsic business value, and somebody offers them, some, a big piece, and it may be at 100, stock may be selling at 122, 124, you know, I would pick up the phone and call the directors and see if they didn’t want to make a change. And we did it once before, and if it made sense, I’m sure they’d say yes, and if it didn’t make sense, I’m sure they’d say no. So I don’t think we have any problem in terms of blocks of stock or anything. I don’t think people own it have a problem selling it, and I don’t think we have a problem in terms of evaluating the desirability of repurchasing it. Charlie?

Charlie Munger [03:25:51] Nothing to add.

Warren Buffett [03:25:52] Okay, station 1.

[03:25:53] Shareholder (Erin Byer, Pasadena, California, and New York City): Hello, my name is Erin Byer, and I was born and raised in Pasadena, California, and I currently live in New York City. It’s been a dream of mine to come here today. I’ve been a proud beer shareholder for almost 20 years. I asked my dad for stock for Christmas when I was 15. And I kept thinking at the opportunity to ask you a question today, that I should make it one that would change my life. Well, that question is: do you know any eligible bachelors living in the New York City area?

Warren Buffett [03:26:27] But you certainly, you certainly have the approach toward life that Charlie and I would…

[03:26:34] Shareholder (Erin Byer, Pasadena, California, and New York City): The question that might make my Monday back in the office: back in 2011, you purchased Bank of America preferred stock with a warrant. You have the opportunity at a later date to exercise and convert those into common shares. When you’re looking at evaluating that decision to exercise that position, which would increase all of our Berkshire holdings, or the value of the Berkshire holdings, what are you going to consider when you’re looking at that?

Warren Buffett [03:27:06] Well, it’s almost, well, if the price of the stock is above $7 a share, which seems quite likely, whether we were going to keep it or not, it would still make sense for us to exercise the warrant shortly before it expired, because it would be a valuable warrant. But it’s only a valuable warrant if it’s, if it’s converted, or if it’s exercised and exchanged into common. And that warrant does expire. So if it, as I put in the annual report, our income from the investment would increase if the Bank of America ever got to where it was paying 11 cents quarterly. We get 300 million off the year off the preferred, and for us to use the preferred as, in, as payment in the exercise of the warrant, we would need to, we would want to feel we were getting more than 300 million a year by, and that would take 11 cents quarterly. They may or may not get to where they pay that amount before the warrant expires in 1921, or 2021. If we, if it does get to there, we’ll exercise the warrant, and then, instead of owning the five billion are preferred and the warrant will have 700 plus million shares of common.

Then that becomes a separate decision: do we want to keep the 700 million shares of common? I, if it were to happen today, I would definitely want to keep the stock. Now, who knows what other alternatives may be available in 2021, or, but as of today, if our warrant were expiring tomorrow, we would use the preferred to buy 700 million plus shares of common, and we would keep the common. If they get to 11 cents quarterly dividend, we’ll convert it, and we’ll very likely keep the common. And if we get to 2021, if the common’s above $7, which I would certainly anticipate, we will exercise. So that’s all I can tell you on that. But I certainly wish you success on your other objective, and I think probably the fellow will be using very good judgment too. Okay, Charlie?

Charlie Munger [03:29:33] Well, I think it’s a very wise thing for a woman that owns Berkshire shock, woman to put her picture up like that.

Warren Buffett [03:29:45] It does give me a thought, though. We might, we might actually start selling ads in the annual report. And then, okay, that incident, that be of a purchase, it literally was true that I was sitting in the bathtub when I got the idea of checking with the BofA whether they’d be interested in that preferred. But I’ve spent a lot of time in the bathtub since, nothing’s come to me, so… (Laughter) Clearly I either need a new bathtub or we got to get in a different kind of market. Carol?

CLCarol Loomis [03:30:32] This is a question from George Benaroya, and it adds a layer to the discussion about 3G a little bit ago. He says: “I am a very happy long-term shareholder, but this is a concern I have regarding Berkshire Hathaway’s Kraft Heinz investment. This investment has done well in economic terms. The carrying value is 15 billion and the market value was 28 billion in 2016. But the DNA of 3G is quite different from ours. We do not make money by buying companies and firing people. 3G fired 2,500 employees at Kraft Heinz. That is what private equity firms do, but we are not a private equity firm. Our values have worked, have worked for us for over 450 years. There is a risk that is 3G continues to deviate from our principles, they will eventually harm both our value and our values. How do we prevent that from happening?”

Warren Buffett [03:31:35] Well, that’s interesting. I mentioned earlier that it was very gradual, but it would have been probably a better decision. We fired 2,000 people over time, and some retired and left and all of that, but at the textile operation, you know, it didn’t work. And at the Hochschild Kohn, the successor fortunately sold it to somebody else, but eventually they closed up the department stores, because department stores, at least that particular one, and a good many actually, including our competitors in Baltimore, could not make it work. Walmart came along with something, and now Amazon’s coming along with something that changed the way people bought them. You, you, we mentioned our poultry, the CTB, which is a lot of different farm equipment. The farm equipment often that CTB develops, the idea is that it’s more productive than what already is out there, which means fewer people are employed on farms. We had 80% of the American public population, working population, working on farms a couple hundred years ago, and if nobody had come up with things to make it more productive farming, we’d have 80% of people working on farms now to feed our populace. And we, it means that we’d be leaving a living in a far far more primitive way. So they’re, you know, if you look at the auto industry, it gets more productive. If you look at any industry, they’re trying to get more productive. Walmart was more productive than department stores, and that will continue in America, and it better continue, where we won’t live… our kids won’t live any better than we do. Our kids will live better than we do because America does get more productive. It goes along and people do come up with better ways of doing things. The… when Kraft Heinz finds that they can do whatever amount of business, $27 billion worth of business or something, and they can do it with fewer people, they are doing what American businesses done for a couple hundred years, and why we live so well. But they do it very fast. They’re more than fair in terms of severance pay and all of that sort of thing, but they don’t want to have two people doing the job that one can do.

And I frankly don’t like going through that, having faced that. I faced it down at Dempster in Beatrice, Nebraska, and it really needed change, but the change is painful for a lot of people, and I just would rather spend my days not doing that sort of thing, having had one or two experiences. But I think that it’s absolutely essential to America that we become more productive, because that is the only way we have more consumption per capita, to have more productivity per capita. Charlie?

Charlie Munger [03:34:36] Well, I your abs, we don’t want to go back to subsistence farming. I had a week of that when I was young on a western Nebraska farm, and I hated it. And I don’t miss the elevator operators used to sit there all day in the elevator around the little crank, you know. So on the other hand, it, as you say, it’s terribly unpleasant for the people that have to go through it, and why would we want to get into a the business of doing that over and over ourselves? We did it in the past when we had to, when the businesses were dying. I don’t see any moral fault in 3G at all, but I do see that there’s some political reaction that doesn’t do anybody any good.

Warren Buffett [03:35:29] Milton Friedman, I think it was, used to talk about the time, probably apocryphal, he would talk about the huge construction project in some communist country, and they had thousands and thousands and thousands of workers out there with shovels digging away on this major project, and then they had a few of these big earth-moving machines behind, which were idle and which could have done the work in 1/20th of the time of the workers. So the economist suggested to the local party worker, whoever it was, that, you know, why in the world didn’t they use these machines to get the job done at 1/10 or 1/20 at the time, instead of having all these workers out there with shovels. And the guy replied, “Well, yeah, but that would put the workers out of work.” And Friedman said, “Well, then why don’t you give them spoons to do it instead?” You know. Jonathan.

JBJonathan Brandt [03:36:25] I understand that Berkshire is much more liquid than is ideal right now, with $113 billion of consolidated cash and bonds versus policyholder float of $105 billion, but I have trouble calculating how much incremental buying power Berkshire has at any point in time. You’ve talked about having a minimum of $20 billion in cash on a consolidated basis, but for regulatory, risk control or liquidity purposes, is there some minimum amount of float beyond the $20 billion that has to be in cash, bonds or, say, preferred stocks, or can all but $20 billion be put into either common stocks or invested into wholly owned businesses if you found attractive opportunities? Yeah, what does the balance sheet look like if you were fully invested, and where does additional debt fit into the equation, if at all?

Warren Buffett [03:37:14] Yeah, the… I wouldn’t conflate the cash and the bonds. I mean, when we talk about $20 billion of cash, we could own no bonds beyond that. $20 billion would be the absolute minimum. It’s a practical matter, I’ve never… since I’ve said $20 billion as a minimum, and I’m not going to operate with $21 billion any more than I’m going to see a highway, a truck sign that says maximum mold 30,000 pounds or something, and then drive 29,800 across at them. So we won’t come that close. But the answer is that a we could use… we’re not inclined to use debt. Obviously, we found something that really let the litter fire, we might use some more dead, although it’s unlikely under today’s circumstances. But we can… $20 billion is an absolute minimum. You can say that, because I say $20 billion an absolute minimum, probably wouldn’t be below 24, 25.

And we could do a very large deal if we thought it was sufficiently attractive. I mean, we have not put our foot to the floor on anything for really a very long time. But if we saw something really attract… we spent $16 billion back when we were much smaller, in a period of two or three weeks, probably three weeks, maybe, in the fall of 2008, and we never got to a point where it was any problem for me sleeping at night. And now we obviously have a lot more money to put out. So if a good… Charlie, at what point, if I called you, would you say, “I think that’s a little bit big for us”?

Charlie Munger [03:39:15] Today I would say about $150 billion.

Warren Buffett [03:39:18] Yeah. Well, in that case I’ll call you. Yeah, don’t… I’m a little more conservative on that than actually Charlie, but we both would do a very, very big deal.

Charlie Munger [03:39:33] If we don’t have to agree perfectly.

Warren Buffett [03:39:36] Yeah, didn’t have to be. But if we find compelling sense, now you’re talking, we’re gonna do it. Okay, station 2.

[03:39:45] Shareholder (Felipe Kiyoni, Brazil): Hello, Mr. Buffett, Mr. Munger. My name is Felipe Kiyoni. I’m 19 years old, from Brazil. And your partner methods, would you and Charlie consider him to be your a member of your board or even your successor?

Warren Buffett [03:40:02] Don’t think that will happen, but I think it would complicate things in terms of the board membership. But we love the idea of being their partner, and I don’t think… I think there’s a good chance that we will do more and perhaps even bigger things together. But the… we’re probably unlikely to be doing much change in the board, certainly in the next few years. And there will be a successor, and the successor could very well be while I’m alive. But that will be… there’s a very high probability that will be from somebody that’s been in our company for some time. I mean, the world could change in very strange ways, you know, but that’s a very, very high probability. Charlie?

Charlie Munger [03:40:56] All I can say is that my back hurts, and I come to these functions because I want to indicate to the my fellow shareholders so they probably got seven more good years to get out of Warren.

Warren Buffett [03:41:11] Charlie is inspiring to me, I got to tell you that. But that we’ve been very, very, very lucky in life, and so far our luck seems to be holding. Okay, Becky.

Becky Quick [03:41:31] This question comes from Drew Estes in Atlanta, Georgia, and he asks, “Is Fruit of the Loom experiencing difficulties related to the distribution channel shift towards online and the troubles in the brick and mortar retail world? If so, do you believe the difficulties are short term in nature?” And then Drew goes on to add, “I’m hoping millennials haven’t bucked the underwear trend too.”

Warren Buffett [03:42:08] Yeah, well, he may know more about that than I do. The answer is essentially no, so far. But anybody that doesn’t think that online isn’t changing retail in a big way, and that anybody who thinks they’re totally insulated from it, is correct. I mean, the world is changing big time. And like I said, Fruit of the Loom, I don’t… it really hasn’t changed. And in our furniture operation, which is setting a record so far again this year for the shareholders weekend, you know, I mentioned in the report, I think we did $45 million in one week. And our furniture operations, it’s hard to see any effect from online outside of our own online operations. They had really good same store gains. You can take, you know, whether it’s a Nebraska Furniture Mart, but RC Willey, whether it’s in Sacramento or Reno or Boise or Salt Lake City, or Jordan’s, which in Boston, and has done very well on a same store basis. So we don’t really see it, but there were a lot of things we didn’t see 10 years ago that then materialized.

One thing you may find interesting is that the Furniture Mart here in Omaha, which is an extraordinary operation, the online has grown very substantially. And I may be wrong on this, but I think it’s getting up to… I’d like to check this with the Blumkins before I say, but I think it’s getting pretty close to 10% or so volume. But it’s a very significant percentage of those people still going and pick the product up at the Furniture Market. So apparently they’re… they… it’s the time spent entering the store, or maybe at checkout lines, or whatever it may be. I’m surprised that it gets to be that percentage. But the one thing about it is we keep looking at the figures and trying to figure out what they’re telling us. So far, I would not say that it’s affected Fruit of the Loom in a significant manner. I would not say it’s affected the furniture operation in a significant matter. But I have no illusions that that 10 years is going to look from now is going to look anything like today.

If you think about it, you know, if you go back 100 years to the great department stores, what did they offer? They offered incredible selection. You know, if you had a big department store in Omaha, you had a thousand bridal dresses, and if you lived in a small town around, the local guy had two or something of the sort. So the department store was the big exciting experience of variety and decent prices and convenient transportation, because people took the streetcars to get there. And then along came the shopping center, and they took what was vertical before and they made it horizontal, and they changed it into multiple ownerships, but they still kept incredible variety and assortments and convenience of going to one place, and accessible transportation, because now the car was the method. And now you go to… and, you know, and then we went through the discount stores and all of that.

But now you’ve got the internet, and you’ve got the ultimate in terms of assortments, and you’ve got people that are coming in at low prices, and the transportation is taken care of entirely. So the evolution that has taken place, the department stores is online now, basically, except much expanded in assortment, much more convenient and lower prices. So the world has evolved and it’s going to keep evolving, but the speed is… has increased dramatically. And what will happen with the brands are going to be tested in a variety of ways that… and have to make decisions as to whether they try to do it online themselves, or work through an Amazon, or whether they try to hang on to the old methods of distribution while embracing new ones. There’s a lot of questions in retail and in branding that are very interesting to watch, and you’ll get some surprises in the next 10 years, I can promise you that. Charlie?

Charlie Munger [03:46:42] It’s… it would be certainly be unpleasant if we were in the department store business. Just think of what we avoided, Warren.

Warren Buffett [03:46:51] And we got very lucky, actually, because we were in the department store business, and our business was so lousy that we recognized it. If it didn’t a little bit better, we would have hung on. And we owe a tremendous… our tremendous gratitude to Sandy Gottesman, our director, who’s here in the front row, because he got us out of the business when Charlie and I and Sandy were partners in that. And something we paid $6 a share for, I think it’s worth about $100,000 a share now, because we got out of the business. And if it’d been a somewhat better business, you know, it might be worth $10 or $12 a share now. So sometimes you get lucky. We don’t miss it either, do we, generally? Oh she’ll go…

Charlie Munger [03:47:39] No, we don’t miss it.

Warren Buffett [03:47:41] Jay.

JGJay Gelb [03:47:41] This question is on Berkshire’s intrinsic value. A substantial portion of the company’s value is driven by operating businesses rather than the performance of the securities portfolio. Also, the values of previously acquired businesses are not marked up to their economic value, including GEICO, MidAmerican and Burlington Northern. Based on these factors, is book value per share still a relevant metric for valuing Berkshire?

Warren Buffett [03:48:12] Well, it’s got some relevance, but it’s got a whole lot less relevance than it used to, and that’s why I don’t want to drop the book value per share factor. But the market value tends to have more significance as the decades roll along. It’s a starting point, and clearly our securities aren’t worth more than we’re carrying for the… carrying them for at that time. And on the other hand, we’ve got the kind of businesses you mentioned, but we’ve got some small businesses that are worth 10 times or so, you know, what with their carry part. We’ve also got some clunkers too. But I think the best method, of course, is just to calculate intrinsic business value, but it can’t be precise. We know… we think the probability is exceptionally high that 120 understates it, although if it was all insecure… all in securities, you know, 120 be too high.

But as the businesses have evolved, as we built in unrecognized value at the operating business is unrecognized for accounting purposes, I think it still has some use as being kind of the base figure we use. If it were a private company and 10 of us here owned it, and instead we just sit down annually and calculate the businesses one by one and use that as a base value. But that gets pretty subjective when you’ve got as many as we do. And so I think the easiest thing is to use the standards we’re using now, recognizing the limitations in them. Charlie?

Charlie Munger [03:50:00] Yeah, I think that equities in an insurance company, offsetting shareholders equity in the company, are really not worth the full market value because they’re locked away in a high tax system. And so I basically like it when our marketable securities go down, that our own businesses go up.

Warren Buffett [03:50:26] Yeah, we’re working to that end. We’ve been working that way for 30 years now or something like that.

Charlie Munger [03:50:34] We’ve done a pretty good job too.

Warren Buffett [03:50:37] Yeah, we have a lot of… we’ve replaced a lot of marketable securities with unmarketable securities that are worth a lot more.

Charlie Munger [03:50:47] Yeah, and it’s actually a more enjoyable way to operate too.

Warren Buffett [03:50:52] Beyond that, but we know a lot of people we wouldn’t otherwise.

Charlie Munger [03:50:58] Yeah, be with good people.

Warren Buffett [03:51:00] Okay, station 3.

[03:51:01] Shareholder (Michael Monahan, Long Island, New York): Hello. Hi, my name is Michael Monahan, and I’m from Long Island, New York. I don’t know if this question qualifies as investment advice, so I have a short different question if you don’t want to answer this one. Unlike the last shareholder from zone 3, this will not be a some speech nor protest. One of your most well-known pieces of investment advice is to buy what you know.

Additionally, you said earlier one of the main criteria for buying is if you could ever understand the business. Ever since I came to my first meeting in 2011, you were not known for being a tech guy. You have said smartphones are too smart for you, you don’t have a computer at your desk, and you’ve only tweeted nine times in the last four years.

Warren Buffett [03:52:05] It was either that or going to a monastery.

[03:52:09] Shareholder (Michael Monahan, Long Island, New York): Despite this, you’ve recently been investing, looking and talking more about tech companies. My question to you, and also to Charlie to comment, is what turned you from the Oracle of Omaha to the tech maven?

Warren Buffett [03:52:24] Oil. Well, I don’t think I would… I don’t think I’ve talked that much about tech companies. But the truth is, we’ve made a large investment in IB… I made a large investment in IBM, and which has not turned out that well. We haven’t lost money, but in terms of the bull market we’ve been in, it’s been a significant laggard. And then, fairly recently, we took a large position in Apple, which I do regard as more a consumer goods company in terms of certain economic characteristics, although that, you know, it has a huge tech component in terms of what that product can do, or what other people might come along to do to leapfrog it in some way. But I think I’ll… I think I’ll end up being, no guarantees, but I think I’ll end up being one for two instead of oh for two, but we’ll find out. Charlie, I make no pretense whatsoever of a being on the intellectual level of some 15 year old that’s got an interest in tech.

I think I may know, have some insights into consumer behavior. I’ve certainly can get a lot of information on consumer behavior, and then try to draw inferences about what that means about what consumer behavior is likely to be in the future. But we will find with the one… the other thing I’ll guarantee is I’ll make some mistakes on marketable securities, and I made them in other areas than tech. So it, you’re not that a thousand, you know, no matter what industries you sick… you try to stick with. I know insurance pretty well, but I think we probably lost money on an insurance stock perhaps, you know, once or twice over the years. So it, you know, about a thousand. But I have gained no real knowledge about tech in the last… well, since I was born, actually. Charlie?

Charlie Munger [03:54:40] I think it’s a very good sign that you bought the Apple. It shows either one of two things: either you’ve gone crazy or you’re learning. I prefer this… I prefer the learning explanation.

Warren Buffett [03:54:54] Well, so do I, actually. Andrew.

ASAndrew Ross Sorkin [03:54:56] Hi, Warren. This one’s a fun one. Thomas Comey is here. He’s a 27 year old shareholder from Kentfield, California. And I should preface us this question by saying that he was here 17 years ago, at 10 years old, asked you a question from the audience, asking you if the internet might hurt some of Berkshire’s investments. At the time, you said you wanted to see how things would play out. He’s now updated the question: “What do you think about the implications of artificial intelligence on Berkshire’s businesses, beyond autonomous driving and GEICO, which you’ve talked about already? In your conversations with Bill Gates, have you thought through which other businesses will be most impacted, and do you think Berkshire’s current businesses will have a significantly… will have significantly more or less employees a decade from now as a function of artificial intelligence?” Well, I’ve mixed a couple questions together.

Warren Buffett [03:55:53] Yeah. I certainly have no special insights on artificial intelligence, but I will bet a lot of things happen in that field in the next couple of decades, and probably a shorter time frame. They should lead, I would certainly think… but again, I don’t bring much to this party, but I would certainly think they would result in significantly less employment in certain areas. But that’s good for society, and it may not be good for a given business. But let’s take it to the extreme. Let’s assume one person could push a button and essentially, through various machines, robotics, all kinds of things, turn out all of the output we have in this country. So everybody… there’s just as much output as we have, it’s all being done by, you know, instead of 150-some million people being employed, one person. You know, is the world better off or not? Well, and certainly would work about less hours a week of work per week and so on. I mean, it would be a good thing, but it would require enormous transformation in how people relate to each other, what they expect of government, you know, all kinds of things.

And of course, as a practical matter, more than one person would keep working. But pushing the idea that way is one of the cert… you’d certainly think that’s one of the consequences of making great progress in artificial intelligence, and that’s enormously pro-social eventually. It’s enormously disruptive in other ways, and it can have huge problems in terms of a democracy and how it reacts to that. It’s similar to the problem we have in trade, where trade is beneficial to society, but the people that see the benefits day by day of us of trade don’t see a price at Walmart on socks or whatever they’re importing that says, you know, “You’re buying… you’re paying X, but you would pay X plus so many cents if you bought this domestically.” So they’re getting these small benefits and invisible benefits, and the guy that gets hurt by it, who’s the road kill of free trade, feels it very specifically, and that translates into politics. And so you can… it gets very uncertain as to how the world would adjust, in my view, to great increases in productivity. And without knowing a thing about it, I would think that artificial intelligence would have that hugely beneficial social effect, but a very unpredictable political effect if it came in fast, which I think it could. Charlie?

Charlie Munger [03:58:44] Well, he… you’re painting a very funny world where everybody’s engaged in trade, and the trade is “I give you golf lessons and you dye my hair,” and that would be a world kind of like the royal family of Kuwait or something. And I don’t think it would be good for America to have everything produced by one person and the rest of us just engaged in leisure.

Warren Buffett [03:59:10] How about if we just got twice as productive?

Charlie Munger [03:59:13] What?

Warren Buffett [03:59:13] How about if we got twice as productive in a short period of time, so that 75 million people could do it, what 150 million people are doing now?

Charlie Munger [03:59:22] I think you’d be amazed how quickly people would react to that.

Warren Buffett [03:59:26] In what way?

Charlie Munger [03:59:27] Favorably. I… that’s what happened during the period whenever everybody remembers that such affection, back in the Eisenhower years, 5% a year or something. People loved it. Nobody complained that they were getting air conditioning and they didn’t have it before. Nobody wanted to go back to stinking, sweating nights in the South.

Warren Buffett [03:59:46] Well, if you’ve got everybody’s hours and a half, it’s one thing, but if you fire half the people, the other people keep working. I just think it gets very unpredictable. I mean, I think we saw some of that in this election, because I think that…

Charlie Munger [04:00:02] Well, we’ve adjusted to an enormous amount of it. It just came along a few percent per year.

Warren Buffett [04:00:07] Well, and the question then…

Charlie Munger [04:00:09] I don’t think you have to worry about coming out of 25 a year, you know. I would… I think you have to worry about it, you’re gonna get less than 2% a year. That’s what’s worrisome.

Warren Buffett [04:00:22] Okay, we’ll move on. But it will be, you know, it’s an absolutely fascinating subject to see what happens with us, but it gets very, very hard to predict. If, in some way, you know, we’ve got 36,000 people, say, employed at GEICO, you know, and if some… if you could do the same… perform all the same functions, virtually all the same functions even, and do it with five or ten thousand people, and it came on quickly, and the same thing was happening in a great many other areas, you know, I don’t think we’ve ever experienced anything quite like that, and maybe we won’t experience anything like in the future. I don’t know that much about AI, but…

Charlie Munger [04:01:09] But I don’t think you have to worry about that.

Warren Buffett [04:01:13] Well, that’s because I’m 86.

Charlie Munger [04:01:14] It’s not going to come that quickly.

Warren Buffett [04:01:17] Okay, Gregg Warren.

GWGregg Warren [04:01:18] During the past five years, Berkshire Energy’s investments in solar and wind generation have been about equal, with around $4.7 billion dedicated to capital projects in each segment. Based on the company’s end-of-year capital spending forecast for 2017 through 2019, investments in wind generation were expected to be more than seven times greater than investments in solar generation the next three years, with just over $4.5 billion going into wind generation. Just wondering how much of that future spending is tied to PacifiCorp’s recently announced $3.5 billion expansion plan, which is heavily weighted towards improving and expanding the subsidiary’s existing wind fleet, and whether the economics for wind are that much better than solar, given that MidAmerican has also been spending heavily on wind investments. Or is this just this disparity between the two segments being driven more by genuine capacity needs, which would imply that you have much more solar capacity than you need?

Warren Buffett [04:02:12] Yeah, it is… we don’t look at it as having more solar capacity than we need or anything like it. It’s really a question of what comes along. I mean, and these… the projects, they’re internally generated, they’re externally offered to us, and we’ve got a big appetite for wind or solar. We have seen, you know, just based on those figures, we have seen more wind lately, but we have no bias toward either one. I mean, if we saw $5 billion of attractive solar projects we could do, and didn’t happen to see any wind during that period, and it wouldn’t slow us down from doing the $5 billion, or vice versa. So we are… we all… we have an appetite, a huge appetite, for projects in either area. Were particularly well situated, as I think I’ve explained or talked about in the past, because we pay lots of taxes, and therefore solar and wind projects all involve a tax aspect to them, and we can handle those much better than many other, certainly electric utilities. Most electric utilities really a don’t have that much money left over after dividends, and the some frequently the taxes aren’t that significant.

At Berkshire, we pay lots of taxes and we’ve got lots of money, so it’s really just a question of doing the math on the deals as they come along. We’ve been very fortunate in Iowa in finding lots of projects that made sense, and as a result, we’ve had a… we’ve got a much lower price for electricity than our main competitor in the state. We’ve got a lower price than in any states that touches. We’ve told the people of Iowa they won’t have a price increase for many, many, many years, guaranteed that. So it’s worked out extremely well. But if somebody walks in with a solar project tomorrow, and it takes a billion dollars or takes $3 billion, we’re ready to do it. There’s no specific… and we… and the more the better. There’s no specific preference between the two. It obviously depends where you are in the country. I mean, I was terrific for wind, and obviously California is terrific for sun, and there are geographical advantages to one or the other. But from our standpoint, we can do them anyplace, and we will do them anyplace. Okay, station 4.

[04:05:04] Shareholder (Joey, Wharton): Hi, my name is Joey, and I’m an MBA candidate at Wharton. Thank you for having us. Amazon has been hugely disruptive due to the brilliance of Jeff Bezos, whom Charlie earlier called the business mind of our generation. What is your current outlook on Amazon, and why hasn’t Berkshire bought in?

Warren Buffett [04:05:25] Well, because I was too dumb to realize what was going to happen. Even though I admired Jeff, I’ve admired him for a long, long time and watched what he was doing, but I did not think that he could succeed on the scale he has. And I certainly didn’t… I didn’t even think about the possibility of doing anything with Amazon Web Services or the cloud. So if you’d asked me the chances that, while he was building up the retail operation, that he would also be doing something that was disrupting the tech industry, you know, that would have been a very, very long shot for me. And I’ve underestimated… I’ve really underestimated the brilliance of the execution. I mean, it’s one thing to dream about doing this stuff on online, but it takes a lot of ability. And, you know, you can read his 1997 annual report, and he laid out a road map, and he’s done it, and done it in spades. And if you haven’t seen his interview on Charlie Rose three or four months ago, charlierose.com, go to and listen to it, because you’ll learn a lot. At least I did.

So I just… I just plain… it always looked expensive, and I really never thought that he would be where he is today. I thought he would do… I thought he was really brilliant, but I did not think he would be where he is today when I looked at it 3, 5, 8, 12 years ago, whenever it may have been. Charlie, how did you miss it?

Charlie Munger [04:07:09] It was easy. (Laughter) What was done there was very difficult, and it was not at all obvious that it was all going to work as well as it did. I don’t feel any regret about missing no out on the achievement… achievements of Amazon, but other things were easier, and I think we screwed up a little.

Warren Buffett [04:07:38] No, we won’t pursue that line.

Charlie Munger [04:07:41] I meant Google.

Warren Buffett [04:07:43] Well, we missed a lot of things.

Charlie Munger [04:07:46] Yes, we missed a lot of things, and we’ll keep doing it.

Warren Buffett [04:07:52] Yeah, and we’ll have a chat like…

Charlie Munger [04:07:56] We don’t miss everything, Warren. That’s our secret. We don’t miss them all.

Warren Buffett [04:08:02] Okay, we better move on. I think he may start getting specific.

[04:08:08] Shareholder: Longevity that Charlie does. Mr. Buffett, we all hope you win the record as mankind’s oldest living person, but at some point you and/or Charlie will go, and Berkshire stock may then come under selling pressure. My question is, if Berkshire stock falls to a price where share repurchase is attractive, can we count on the board and top management to repurchase shares? I asked this question both because of past comments you have made about not wanting to take advantage of shareholders, and because some of the passages in the owner’s manual lead me to believe this might be an instance when the board does not choose to repurchase shares. Can you clarify what course of action we might expect about repurchases in the circumstances I have outlined?

Warren Buffett [04:09:00] Yeah, as far as I’m concerned, they’re not taking advantage of shareholders if they buy the stock when it’s undervalued. That’s the only way they should buy it. And they should. But in doing so, there were a few cases, back when Charlie and I were much younger, where there were very aggressive repurchases, or the equivalent of repurchases, by people, and the repurchases instantly made a lot more sense than they do now. But they were done by people who either, for various techniques, tried to depress the shares. And if you’re trying to encourage your partners to sell out at a depressed price by various techniques, including misinformation, but there’s other techniques, you know, I think that’s reprehensible. But then our board wouldn’t be doing that. I’ll take exception to the first part of it, but I’ll still answer the second. I think the stock is more likely to go up. If I died tonight, I think the stock would go up tomorrow, and there’d be speculation about breakups and all that sort of things. So it would be a good Wall Street story, but, you know, this guy that’s obstructed breaking up something that, where the some of the parts might sell for more than the whole. They wouldn’t necessarily be… probably worth less than the whole, but might sell for temporarily for more than all, and it was gonna happen. So I would bet in that direction. But if for some reason it went down to a level that’s attractive, I don’t think the board is doing anything in the least that’s reprehensible by buying in the stock at that point, that there’s no false information, no nothing. And they’re buying means that the seller would get a somewhat better price, but they’re a lot of sellers, they’d get a mildly better price, and if they weren’t buying, and the breed and the continuing stockholders would benefit. So I think that… I think it’s obvious what they would do, and I would think it’s obvious that it’s pro shareholder to do it, and I think they would engage in pro-shared older acts as far as the eye can see. I mean, we’ve got that sort of board. Charlie?

Charlie Munger [04:11:17] Well, I think you were… I might suddenly get very stupid very quickly, but I don’t think our board is going to have that problem.

Warren Buffett [04:11:28] Well, I want to think about that one. Okay, Jonathan.

JBJonathan Brandt [04:11:31] Warren, in the past you’ve enjoyed discussing accounting for options grants, so I’m curious, what’s your view of the new accounting standard which mandates that companies report lower tax provisions… review of the new accounting standard which mandates the companies report lower tax provisions based on so-called excess tax benefits enjoyed when share-based compensation ends up being more profitable for the grantees than when it’s initially modeled? These so-called benefits, excess benefits, used to go through the shareholders equity line on the balance sheet. Which accounting method makes more sense to you, the old method or the new?

Warren Buffett [04:12:04] Johnny, I think you know a lot more about it than I do. So if I were asked to answer that question, I’d probably call you up and say, “What should I say?” I… it’s not a… it’s not a factor that will enter into Berkshire, so I really have not… I mean, I’ve heard just a little bit about that accounting standard, but I really don’t know anything about it. Charlie?

Charlie Munger [04:12:31] It’s not a big deal.

Warren Buffett [04:12:33] Yeah, well, I know that. Yeah, we… there are a few things in accounting we really disagree with, and whether they might be material to somebody trying to evaluate Berkshire. And, you know, that primarily gets an amortization of intangibles. It will certainly… it certainly gets into realized capital gains and that sort of thing. And we will go to great lengths to try to tell our partners, basically, not all of whom, you know, are accounting experts or anything, and we will try to make clear to them at least what our view is, you know, the same way as if I had a family business and I was talking to my sisters or something about it. But unless it’s material, we’ll probably stay away from trying to opine on any new accounting standards. If it’s material to Berkshire, we’ll go to great lengths to at least give our view. Charlie?

Charlie Munger [04:13:29] Oh, I certainly agree with that.

Warren Buffett [04:13:31] Okay.

Charlie Munger [04:13:31] Is that what he’s talking about? It’s not very material to Berkshire.

Warren Buffett [04:13:36] No, it isn’t, and it really won’t be. You know, I know some of these others are those, and we will bring those up if they, as like, as they come up. They, you know, we are reporting $400-and-some million less in our earnings than a Precision Castparts had remained a public company. Well, is his Precision Castparts, I mean, the earnings less real, is the cashless real, is anything, because it’s moved the ownership? I don’t think so, and I want to convey that belief to shareholders, and they can debate whether it’s right or wrong. But I think it’s a mistake not to comment, if… and just assume that the owners understand that, because, you know, it’s a fairly arcane point. And so we pointed out. But we also point out if we think depreciation is as inadequate as… for valuation purposes, the depreciation is inadequate at a very capital intensive business like BNSF, which we, I must say, still love it anyway. Charlie, anymore?

Charlie Munger [04:14:54] No.

Warren Buffett [04:14:54] Okay, section 5.

[04:14:55] Shareholder (Adam Bergman, Virginia Beach, Virginia): Thank you, and good afternoon. I’m Adam Bergman with Sterling Capital in Virginia Beach, Virginia. Earlier today, Mr. Munger commented on the valuation of China versus the U.S. market. My question for you is, our market capped to GDP and cyclically adjusted P still valid ways to consider market valuation, and how do those influence Berkshire’s investment decisions? Thank you.

Warren Buffett [04:15:27] Charlie? Thank you. Well, distracted, I guess, Charlie’s overall value in China. I would say that both of the standards you mentioned are not paramount at all in our valuation of securities. It’s harder. People are always looking for a formula, and there is an ultimate formula, but the trouble is you don’t know what to stick in for the variables in it. But the… and, you know, that’s the value of anything being the present value of all the cash is ever going to distribute. But the TE ratios, I mean, every number has some degree of meaning, means more sometimes than others. Evaluation of a business is… it’s not reducible to any formula where you can actually put in the variables perfectly. And both of the things that you mentioned get themselves… get bandied around a lot. It’s not that they’re unimportant, but sometimes they can be very important, sometimes they can be almost totally unimportant. It’s just not… it’s not quite as simple as having one or two formulas and then saying the market is undervalued or overvalued, or a company is undervalued or overvalued.

The most important thing is future interest rates. And, you know, and people frequently plug in the current interest rate, saying that’s the best they can do. After all, it does reflect a market’s judgment, and, you know, the 30-year bond should tell you what people who are willing to put out money for 30 years, and have no risk of dollar gain or dollar loss at the end of the 30-year period… But what better figure can you come up with? I’m not sure I come up with a better figure, but that doesn’t mean I want to use the current figure either. So I would say that… I think Charlie’s angel will be the… that he does not come up with China versus the U.S. market based on what you’ve mentioned is yardsticks. But now, Charlie, you tell them.

Charlie Munger [04:17:52] All I meant was that I said before that the first rule of fishing is to fish where the fish are, is that a good fisherman can find more fish in China, if you’re… it fishes the stock market. That’s all I meant.

Warren Buffett [04:18:09] Yeah. One, I’m going to go back to happier hunting ground. This doesn’t really directly… well, I just couldn’t… I want to go back to one question I was mentioned earlier. I really think if you want to be a good evaluator of businesses, an investor, you really ought to figure out a way, without too much personal damage, to run a lousy business for a while. I think you run aw… you learn a whole lot more about business by actually struggling with a terrible business for a couple of years than you run by… than you learn by getting into a very good one, where the business itself is so good that you can’t mess it up. I don’t know what… I don’t know whether Charlie has a view on that or not, but certainly it’s… it was a big part of our learning experience, and I think a bigger part, in the sense, than running, being involved with good business, was actually being involved in some bad businesses and just seeing how awful it is, and how little you can do about it, and how IQ does not solve the problem, and a whole bunch of things. I… it’s a useful experience, but I wouldn’t advise too much of it. Well, you think so? Charles here.

Charlie Munger [04:19:31] It was very useful to us. There’s nothing like personal painful experience if you want to learn, and we certainly had our share of it.

Warren Buffett [04:19:41] Okay, Becky.

Becky Quick [04:19:42] This question comes from Tom Spanfelner, and he’d like to be called Tom Spann, from Pennsylvania. He says, “In life, business and investing, strategies often work until they don’t work. Other than a massive insurance loss, any thoughts on what could cause the Berkshire enterprise to not work?” I think the only good question.

Warren Buffett [04:20:09] Yeah. Well, if there were some change, if we got some infection, outside agent of some sort, to change the culture in some major way, you know, an invasion of different thoughts. But as a practical matter, I don’t think anything… you know, and it’s the things you can’t think of, but I can’t think of anything that can harm Berkshire in a material, permanent way, except weapons of mass destruction. But I don’t regard that as a low probability. It would take a recession, a depression, a panic, you know, hurricanes, earthquakes, that all would have some effect, and in some cases it might even be that we would do better because of them. But if there were a successful, as measured by the aggressor, nuclear, chemical, science, biological or cyber attack on the United States, and there are plenty of people that would like to pull that off, for organizations and maybe even a few countries, it could disrupt society to such an extent that it would harm us. But I think, with the variety of earning streams, with the asset positions, with the general philosophy of the play, the culture, I think that we would be very close to the last one affected. But if somebody figures out how to kill millions of Americans and totally disrupt society, then, you know, then all bets are off. Charlie?

Charlie Munger [04:21:57] Well, I agree it would take something really extreme.

Warren Buffett [04:22:01] Yeah.

Charlie Munger [04:22:01] And just take the question, like British Petroleum took a huge loss with one oil well-blowing, and Berkshire has all these independent subsidiaries, and they really are independent, and the parent company is not on it. If there’s one horrible accident somewhere, we would tend to pay, of course, maybe more than our legal liability, but we are not one accident of the one subsidiary that caused a lot of damage. We’re better protected than most companies.

Warren Buffett [04:22:35] Yeah, in every way, Berkshire is structured to handle stresses. It’s the kind of thing we think about all the time. We’ve thought about ever since we started. But I really don’t know any company that can take more general adversity, or even some specific adversities. But if you get into the what could happen with weapons of mass destruction, you know, that is something we can’t predict about. But if that ever happens, there’ll be more to worry about than the price of Berkshire. Jay.

JGJay Gelb [04:23:19] Berkshire Hathaway Specialty Insurance generated $1.3 billion in premium volume in 2016. This business is on the smaller end of commercial property casualty insurers in terms of scale, although its volume did grow 40% last year in a highly competitive commercial P&C environment. What gives you confidence that Berkshire Hathaway Specialty is destined to become one of the world’s leading commercial P&C insurers, as you said in this year’s annual letter?

Warren Buffett [04:23:47] Yeah, I think it will be, and I think how fast it grows depends very… it doesn’t mean very much on the market. I mean, we are not interested in trying to be a price cutter in a market where the prices already aren’t that attractive. But we have built the scale worldwide, and a lot of this just been added in, you know, recent months and just over the past year, and we will grow. We will grow a lot, but if the market should turn hard for any reason, we would grow a lot faster. But we are destined at Berkshire Hathaway Specialty to be one of the leading P&C firms in the world, just as we were destined to have, when Ajit came in, even though we had nothing, we were destined to become a very important reinsurer throughout the world, and in certain ways almost the only reinsurer for certain types of risks in the world.

And we’ve got the people, we’ve got the capital, we’ve got the reputation. There is no stronger company in the insurance world, and there won’t be, than the Berkshire Hathaway insurers. We’ve got the talent there. So it will grow. It may grow slowly some years, it may have big jumps, just like the reinsurance operation did many years ago. But it’s a very important addition to Berkshire that brought that on. I always just wish we could have started a little earlier, but we had to have the right people, and they came to us. And as you say, we wrote whatever it was, a billion three or a billion four last year, and we’ll write more this year, but we won’t write as much as if we were in a hard market. Station 6.

[04:26:01] Shareholder (Sally Burns, Austin, Texas): Good afternoon. My name is Sally Burns. I’m from Australia, but I currently reside in Austin, Texas. My question: Mr. Buffett, I have heard that Mr. Munger says your greatest talent is that you’re a learning machine, that you never stop updating your views. What are the most interesting things you’ve learned over the last few years?

Warren Buffett [04:26:25] Well, it is fun to learn. I would say Charlie is much more of a learning machine than I am. I’m a specialized one, and he’s a bunch, and he does as well as I do in my specialty, and then he’s got a much more general absorption rate than I have about what’s going on in the world. But, you know, it’s a world that gets more fascinating all the time, and a lot of fun can occur when you learn you were wrong on something. It, you know, that’s when you really… when you really learned that the old ideas really weren’t so correct, and you have to adapt a new one, the new ones, and that, of course, is difficult. I don’t know that I would pick out… well, I think actually what’s going on, you know, in America is terribly, terribly interesting, you know, politically, all kinds of things. But just the way the world’s unfolding, it’s moving fast. I do enjoy trying, you know, figure out not only what’s going to happen, but what’s even happening now. But I don’t think I’ve got any special insights that would be useful to you, but maybe Charlie does.

Charlie Munger [04:27:38] Well, I think buying the Apple stock is a good sign in Warren. And now he did run around Omaha ask he was to take his grandchildren’s tablets away, and he did market research. And I do think we keep learning, and more important, we keep… we don’t unlearn the old tricks. And that is really important. You look at the people who try and solve their problems by printing money and lying and so forth. Take Puerto Rico. Who would have guessed that the territory of the United States would be in bankruptcy? Well, I would have predicted it, because they behaved like idiots.

Warren Buffett [04:28:30] And we didn’t… we did not buy any Puerto Rico bonds.

Charlie Munger [04:28:34] No. If you go to Europe, what… you go to Europe and look at the government bond polios, bond portfolios we’re required to hold in Europe, there’s not only no Greek bonds, they’re the bonds of nobody but Germany. Just everywhere you look in Berkshire, somebody is being sensible, and that is a great pleasure. And to combine that with being very opportunistic, so that when something comes along like a panic, it’s a nice… it’s like playing with two hands instead of one in a game that requires two hands. It helps to have a fair sized repertoire. And born, we’ve learned so damn much. There are all kinds of things we’ve done in the last 10 years we would not have done 20 years ago.

Warren Buffett [04:29:33] Yeah, that’s true. Although, if you take… it’s interesting, I’ve mentioned this before, but one of the best books on investment was written, I think, in 1958. I think I read it around 1960, by Phil Fisher, called Common Stocks and Uncommon Profits. And all the countries that companies went to hell eventually, but it talked about the importance, I mean, or the usefulness, of what he called the scuttlebutt method. And, you know, that was something I didn’t learn from Graham, but every now and then it’s turned out to be very useful. Now, it doesn’t solve everything, and I mean, there’s a whole lot of more…

Charlie Munger [04:30:11] So you do it with American Express and the Salad Oil scan.

Warren Buffett [04:30:15] Yeah, yeah.

Charlie Munger [04:30:16] You’re still doing it on Apple, you know, decades later.

Warren Buffett [04:30:19] Yeah, it… in certain cases, you actually can learn a lot just by asking a lot of questions. And I give Phil Fisher credit. That book goes back a lot of years, but Charlie said some of the companies he picked as winners forever did sort of peter out on him. But the basic idea, you can learn a lot of things just by asking, in some cases. I mean, I used to… I mean, if I got interested in the coal industry, just say, to pick one out of the air, you know, when I was much younger, more energetic, if I went and talked to the heads of 10 coal companies, and I asked each one of them, way later into the conversation, after they got feeling very about like talking, and I would just, you know, I’d just say, “If you had to go away for 10 years on a desert island, and you had to put all of your family’s money into one of your competitors, which one would it be and why?” And, you know, then I’d ask them, if they had to shell… short one of their competitors for 10 years, all their family money, why?

And they… everybody loves talking about their competitors. And if you do that with 10 different companies, you’ll probably have a better fix on the economics of the coal industry than any one of those individuals has. I mean, there’s ways of getting at things, and sometimes they’re useful, sometimes they’re not, but sometimes they can be very useful. And, you know, the idea of just learning more all the time about… I’m more specialized than that, by far, than Charlie. I mean, he wants to learn about everything, and I just want to learn about something like Berkshire. But it’s a very, you know, it’s a very useful attitude towards have toward the world. And of course, I don’t know who said it, but somebody said the problem is not in getting the new ideas but shedding the old ones, and there’s a lot of truth to that.

Charlie Munger [04:32:17] We would never have bought ISCAR if it would come along 10 years earlier. We would never have bought Precision Castparts, have been come along 10 years earlier. We are learning, and my God, we’re still learning.

Warren Buffett [04:32:30] Okay, Andrew.

ASAndrew Ross Sorkin [04:32:31] Hi, Warren. This is my final question. In 2012, you were quoted as saying, “I think the healthcare problem in is the number one problem of America and of American business. We have not dealt with that yet.” Do you believe that the current administration’s plan to repeal and replace ACA will ultimately benefit the economy and Berkshire, or not?

Warren Buffett [04:32:57] Yeah, well, I’ll answer… I’ll give you two answers here. The first one being that if you go back to 1960 or thereabouts, corporate taxes were about 4% of GDP. I mean, they bumped around some, and now they’re about 2% of GDP. And at that time, health care was 5% of GDP, and now it’s about 17% of GDP. So when American business talks about taxes strangling our competitiveness, that sort of thing, they’re talking about something that, as a percentage of GDP, has gone down from 4 to 2, while medic… medical costs, which are born to a great extent by business, have gone from 5 to 17. So medical costs are the tapeworm of economic… American economic competitiveness, I mean, if you’re really talking about it. And that… and business knows that. They don’t feel they can do much about it. But it is not… the tax system is not crippling Berkshire’s competitiveness around the world or anything of the sort. Are our health costs have gone up incredibly, and will go up a lot more.

And if you look at the rest of the world, there were a half a dozen countries that were around our 5% if you go back to the earlier years, and while we’re at 17 now, they’re at 10 or 11. So they have gained a five or six point advantage the world, and even in these countries with fairly high medical costs.

Charlie Munger [04:34:34] And that’s with socialized medicine.

Warren Buffett [04:34:37] Yeah. So it’s… it’s a huge… it’s whatever I said then goes and is accentuated now. And that isn’t a problem… I mean, that is a problem the society is having trouble with and is going to have more trouble with, and regardless of which party’s in power or anything of the sort, it almost transcends that. In terms of the new act, it was passed a couple days ago, versus the Obama administration act, it’s a very interesting thing. All I can tell you is the net effect of that act on one person is that my taxes, my federal income taxes, would have gone down 17% last year if the act… if what was proposed went into effect. So it is a huge tax cut for guys like me. And you… you’ll have to figure out the effects of the rest of the act. But the one thing I can tell you is, if it goes through the way the House put in, I mean, it… anybody with $250,000 a year of adjusted gross income and a lot of investment income is going to have a huge tax cut. And when there’s a tax cut, either the deficit goes up or they get the taxes from somebody else. So as it stands now, is that… is the one predictable effect if it should pass. Is it… the Senate will do something different, and go to a conference, and who knows what happens. But that is in the stat… in the law that was passed a couple days ago. Charlie?

Charlie Munger [04:36:28] Well, I certainly agree with you about the medical care. What I don’t like about the medical care is that a lot of… we’re getting too much medicine. There’s too much chemotherapy on people that are all but dead, and all kinds of crazy things go on, Medicare, and in other parts of the health system. And there are so many vested interests that it’s very hard to change. But I don’t think any rational person looking objectively from the outside of the American system of medical care… we all love the new life-saving stuff and the new chemotherapies and the new drugs and all that, but my God, this system is crazy, and the cost is just going wild. And it does put our manufacturers at a big disadvantage with other people where the government is paying the medical loss. And so I agree with Warren totally.

Warren Buffett [04:37:27] If you had to bet, 10 years from now, it will be at higher, lower than 17% of GDP?

Charlie Munger [04:37:33] Well, if present trends continue, it’ll get more and more. There are huge vested interests in having this thing continue the way it is, and they’re very vocal and active, and the rest of us are indifferent. So naturally we get a terrible result. And I would say that on this issue, both parties hate each other so much that neither one of them can think rationally, and I don’t think that helps either.

Warren Buffett [04:38:02] It’s… it is kind of interesting that, you know, but the federal government spends… raises, will say, $3.5 trillion or something like that. And I mean, the degree of concern everybody has about that, although that’s staying fairly steady in the 18% or so of GDP, plus or minus a couple points. But $3 trillion plus is spent on health care, and everybody wants the best, and it’s perfectly understandable, but it’s a very, very… it’s a big number compared to the whole federal budget. I mean, there’s some overlap and all of that, but it’s… if you talk about world competitiveness of American industry, it’s the biggest single variable where we keep getting more and more out of whack with the rest of the world. And it’s very, very tough for political parties to attack it.

Charlie Munger [04:39:01] Yet it’s, you know, basically it’s a political subject, but a lot of it is deeply immoral. If you have a group of hospital people and doctors that are feasting like a bunch of jackals on the carcass of some dying person, it’s not a pretty sight.

Warren Buffett [04:39:19] Tell them about that group out in California.

Charlie Munger [04:39:23] Oh yeah, perfect. This is… yeah, this is Redding. This is one of my favorite stories. They’re a bunch of very ambitious cardiologists and heart surgeons and Redding, and they got the thought that really what a heart was, was a widow maker. So everybody, every patient that came in, they said, “You’ve got a widow maker in your chest, and we know how to fix it.” And so they recommended heart surgery for everybody. And of course, they developed a huge volume of heart surgery, and they got very wonderful results, because nobody comes through heart surgery better than the man who doesn’t need it at all. And he made so much money that the hospital chain, which was Tenet, brought all its other hospitals, “Why can’t you be more like Redding?” And it’s the true story. And it went on and on and on. And finally there was some beloved Catholic priest, and they said, “You’ve got a widowmaker in your chest,” and he didn’t believe them, and he blew the whistle.

Warren Buffett [04:40:23] He was a priest. You can see why he didn’t believe it.

Charlie Munger [04:40:27] And at any rate, well…

Warren Buffett [04:40:29] Well, when you get a routine, you just keep using it, you know. A heart as a widowmaker, it’s a widowmaker.

Charlie Munger [04:40:37] Later I met one of the doctors who threw these people out of the medical profession, and I said to him, “In the end, did they think they were doing anything wrong?” He said, “No, Charlie. They thought that what they were doing was good for people.” That is why it’s so hard to fix these things. The self… the delusion that comes into people as they make money and get more successful by doing God all things should never be underestimated. And it’s… there’s a lot of that goes on. And it… you’ve been under such gross craziness, and you… the little Wells Fargo looks like innocence, you know. I had a little trouble with incentive system, but The heart surgery rate was 20 times normal or something. You’d think you’d notice if you’re running a hospital, and, but they did notice. They wanted the other hospitals to be more like it.

Warren Buffett [04:41:41] They had a terrific success ratio. Okay.

GWGregg Warren [04:41:44] Great, thank you, Warren. As you look forward, in taking into consideration some of the headwinds facing the U.S.-based utilities, including weaker electricity demand growth as increasing energy efficiency impacts demand, distributed generation, which hits vertically integrated utilities doubly hard as they face both declining energy sales revenue and increased network costs to support reliable delivery, and third, higher interest rates, which would increase borrowing costs, what are the key attributes that Berkshire Energy would be looking for in future acquisition candidates?

Warren Buffett [04:42:17] Oh, go. Excuse me, I’m sorry.

GWGregg Warren [04:42:19] Okay. In particular, are there advantages or disadvantages attached to, say, transmission assets relative to generation assets that would make you favor one over the other?

Warren Buffett [04:42:28] Yeah, well, generation assets given to have inherently more risk because that, some of them are going to be stranded, stranded, or, yeah, an obsolete. Now the question is how they treat stranded and all that sort of thing. We, on the other hand, more the capital investment is in the generating assets, so that tends to be where a good bit of the capital base is. We like the utility business, okay. I mean, the electric, electricity demand is not increasing like it was. As you point out, they’re going to be stranded assets.

They, if they’re stranded because of rank foolishness, you know, they will probably be less inclined, or the utility commissions will be less inclined to, to let you figure that in your rate base as you go forward, as opposed to things that are where societal demands are just changing. But we still think the utility business is a very decent asset. The prices are very high, but that’s what happens in a low interest rate environment.

I would be, I’d be surprised if 10 years from now we don’t have significantly more money in not only wind and solar, but, but probably will probably own more utility systems than we own now. We’re a buyer of choice with many utility commissions. In fact, if we put up the slide, there’s a slide which shows something about our pricing compared to other utilities, and Greg Abel and his group have done an extraordinary job. They’ve done it in safety, they’ve done it in, in reliability, they’ve done it in price, they’ve done it in, in renewables. It’s hard to imagine a better one operation than, than exists in MidAmerican Energy, and people want us, with that record people want us to come to their state in many, in many cases.

But when prices get to the level they have, I mean, some utilities have sold at extraordinary prices, and we can’t pay them and have it make sense for Berkshire shareholders. But just because we can’t do it this year doesn’t mean it won’t happen next year or the year after. So I think we’ll get a chance, and our utilities are not normal.

Charlie Munger [04:45:13] The way Greg has run those things, there’s so much better run in every way than normal utilities. They’re better regarded by the paying customers, they’re better regarded by the regulators, they have better safety records, which are, it’s just everything about it is way to hell better. And it’s a pleasure to be associated with people like that and have assets of that quality. And it’s a lot safer. If somebody asked Berkshire to build a $50 billion nuclear plant, we wouldn’t do it.

Warren Buffett [04:45:45] Yeah. And we have public power here in Nebraska. I mean, it’s been sort of the pride of Nebraska for many decades. It’s all, there are no privately held utility systems, and totally public power. And, you know, those utilities have no requirements for earnings on, on equity. They have, they can borrow at tax-exempt rates, we have to borrow a taxable rates, and Nebraska, you know, the win not that much different than, than Iowa, and we’re selling electricity across the river a few miles from here, you know, at lower prices than exist in Nebraska.

So it’s, it, it’s an extraordinary utility, and, and it was lucky when we got involved, and I, I thank Walter Scott, our director, for, for introducing me to it almost 17 or 18 years, 18 years ago or so. And, but I don’t think the utility business as such, I mean, if I were putting together a portfolio of stocks, I don’t think there would be any utilities in that, in that group now. But I love the fact we own Berkshire Hathaway Energy, but it’s different, way different and better, a lot better actually. Station 7.

[04:47:09] Shareholder (Grant Misterly, St. Augustine, Florida): Hi, my name’s Grant Misterly from beautiful historic St. Augustine, Florida. I’ve been a fan of yours and a Berkshire since I was a kid looking through the stock pages and seeing one crazy stock that traded for $10,000 a share. Unfortunately, I wasn’t able to convince my parents to buy it at that point, but now I’m a shareholder as an adult, and I’m here with my daughters, Mabel, who’s 7, and Willa, who’s 1 year old, my wife. I’ve religiously read the letter every year, and I, I love the stories of, from the different companies, GEICO and See’s, BNSF, that kind of teach investing lessons.

And this year when I was looking through the accounting information in the back, I noticed that one company, McLane, contributes a lot of revenue, a large portion of Berkshire’s revenue, and to a lesser extent earnings, but I don’t ever see much about it in the annual report. So I’m curious why we don’t hear more about that company, and are there any investing lessons like we get from See’s and GEICO that you can share about that company?

Warren Buffett [04:48:15] Yeah, McLane. The reason you see their figures separately is because the SEC has certain requirements that are based on sales, and McLane is a company that has an extraordinary amount of sales in relation to intrinsic value or it’s a net income. It basically is a distributor of, well, it’s, it’s a huge customer, for example, of the food companies, the candy companies, the cigarette companies, that go up and down the line of anything that goes into convenience stores. But we bought it from Walmart, and Walmart is our biggest customer. I can’t tell you the precise volume, but, well, to get Walmart’s and Sam’s together, you know, you’re getting up to 20 plus.

But it, it’s nationwide, but in the end it operates on about 6% gross margins and 5% operating expenses, so it, it has a 1% pre-tax margin. And obviously a 1% pre-tax margin only works in terms of return on capital if you turn your equity extraordinarily fast, and that’s what McLane does. Being a wholesaler, it’s moving things in, moving things out very fast, very efficiently, and it does this. It also has a few liquor distribution subsidiaries that have wider margins. But the basic McLane business is, you know, $45 billion plus, makes 1% pre-tax on sales, but the return on capital is, is, is very decent. But it sort of has an outsized appearance simply because of, of this huge volume of sales that, that go through.

Grady Rosier, who runs it, is exceptional. He was there when we bought it from Walmart, whatever it was, a dozen years ago, and I’ve been there once. We’ve got thousands and thousands of trucks, big distribution centers all over the country, is a major factor in moving goods at wholesale. I mean, if you’re, if you’re Mars Candy or something of the sort, I mean, we, we’re the, we’ll be the biggest customer.

But that, that pretty well describes the business. You know, it’s, it’s a business that is earns good returns in relation to invested capital and in relation to our purchase price. But, you know, every, every tenth of a cent is important in the business, and collect, moving your receivables exceptionally fast, and consequently, you know, you have payables moving big time. So the sales are 30 times receivables, times receivables, and 30 times payables, you’ve gotten, and maybe, you know, 35 or so times inventory. I mean, this is a business that’s moving a lot of goods. But in terms of, it’s, it’s an important subsidiary, but not as remotely as important as would be indicated by the, by the sales. Still very important, making the kind of money that shows up in the 10-K. Charlie?

Charlie Munger [04:51:38] You said that was an interesting thing.

Warren Buffett [04:51:41] Walmart wanted to sell it. They came to see us and we made a deal. The CFO came, we talked for a while, he went into the other room, called the CEO and came back and said, you have a deal. And Walmart has told me subsequently that they never had a deal that closed as fast as the one with Berkshire. I mean, they, you know, we said what we would pay, it was cash, and we got it done very promptly, and they were terrific on their side.

Charlie Munger [04:52:13] By the way, that reputation for being quick and simple and doing what we promised and so on has helped to Berkshire time after time.

Warren Buffett [04:52:22] Yeah.

Charlie Munger [04:52:22] Yeah, we wouldn’t have made that deal without essentially having that reputation. But they knew. Well, you bought the Northern Natural Gas company in one weekend, and they wanted the money on Monday. They needed the money before the lawyers could complete the legal papers. We managed to do it.

Warren Buffett [04:52:40] Well, not only that, but I think it took some clearance by, in Washington, and essentially I think I wrote a letter and said that if, if they didn’t, if they decided after looking at it they didn’t want to clear it, we’d undo the deal. But these guys needed the money so bad, we were going to give them the money essentially based on the deal clearing. And, and there wasn’t any reason why I wouldn’t clear, but there was just a procedural problem. But most companies can’t do that. I mean, we, we can. We’ve got a flexibility that really, and most large companies, just plain doesn’t exist. There’s too many people have to sign off on it or something of the sort. So the Northern Natural deal would not have been made if we’d had to follow the normal timetable. But that’s a lovely business, stone.

Charlie Munger [04:53:29] Yeah, absolutely.

Warren Buffett [04:53:31] Now we, we, we’re moving from one station to another between now and 3:30. So we now go to station 8.

[04:53:41] Shareholder (John Norwood, West Des Moines, Iowa): Good morning, or good afternoon, Warren, Charlie. John Norwood from West Des Moines, Iowa. You guys have iron bladders.

Warren Buffett [04:53:57] We won’t tell you the secret of that.

[04:54:00] Shareholder (John Norwood, West Des Moines, Iowa): I was wondering about a contraption under the table.

Warren Buffett [04:54:03] No, you can come down and inspect.

[04:54:05] Shareholder (John Norwood, West Des Moines, Iowa): All right. Hey, I had a question for each. Warren, I was fortunate to ask you a question, I think in 2011, about legacy, what you wanted to be known for 100 years from now, and I’m kind of curious to hear what Charlie would like to be known for. And then Warren, I’m 52, so I guess you started this, doing this when I was born, and I’m kind of interested in a memory from your first annual, annual meeting.

Charlie Munger [04:54:35] My first memory, when Warren got on this subject and I asked him what he wanted said at his funeral, he said, I want them to all be saying, that’s the oldest looking corpse I ever saw.

Warren Buffett [04:54:52] And, and that may be the smartest thing I’ve ever said. Well, with me, very simple. I mean, it, I really like teaching. Some basically that I’ve been doing it formally and, you can say, somewhat informally all my life, and I had certainly had the greatest teachers you can imagine. So if somebody thought that I did a decent job at teaching, I’d feel very good about that.

Charlie Munger [04:55:25] Yeah, I, it may be teaching, and durable, it has to have a bit of wise-assery in it.

Warren Buffett [04:55:34] And that we’ve both been able to supply. And for those of you who are old-time basketball fans, I might mention that on Wilt Chamberlain’s tomb it was reputative it was going to say, at last I sleep alone. (Laughter) Okay, station 9.

[04:55:56] Shareholder (China): Good afternoon, Mr. Munger and Mr. Buffett. My name is, and I’m come from China. It’s my first time to come to this meeting, and I think I’m very lucky to have a chance to ask questions.

Warren Buffett [04:56:17] We’re glad to have you.

[04:56:20] Shareholder (China): Thank you. And everyone has a dreams, and at different ages maybe dreams will come differently. And what’s your dream now?

Warren Buffett [04:56:33] Charlie won’t let you…

Charlie Munger [04:56:35] I don’t quite hear that.

Warren Buffett [04:56:38] Boy. What’s your dream now, he says. My dream…

Charlie Munger [04:56:44] Well, let’s skip the first one. Sometime when I’m especially, especially wishful, I think, oh, to be 90 again. And I got some advice for the young. If you’ve got anything you really want to do, don’t wait till you’re 93. I’ll do it now.

Warren Buffett [04:57:23] That’s the same thing I would tell students, is it, you can’t always find it the first time or the second time, but when you go out in the world, look for the job that you would take if you didn’t need a job. I mean, don’t postpone that sort of thing. Somebody, I think it’s Kierkegaard, said that, you know, life must be evaluated backwards, but it must be lived forwards. And, and you want to, you want to sort of, Charlie says all he wants to know is where he’ll die, so he’ll never go there.

You know, and so you, you do want to do a certain amount of reverse engineering in life. I mean, that’s not, that doesn’t mean you can do everything that way, but you really want to think about what will make you feel good when you get older about your life, and you at least generally want to keep going in that direction. And, and, you know, you need some luck in life, and you got to accept, accept some bad things that are going to happen as you go along. But, but life has been awfully good to me and Charlie, so we have no complaints.

What you don’t want to be is like the man, and they had his funeral, and the minister said, now it’s the time for somebody to say something nice about the deceased. And nobody came forward, and nobody came forward. He says, surely somebody can say somebody, something nice about the deceased. And nobody came forward, and finally one man came up and he said, well, he said, his brother was worse. Okay, we’ll move to station 10 and see if we can improve them.

[04:59:07] Shareholder (Andy Lijun Lin, Shanghai, China): Hi, my name is Andy Lijun Lin from Loyal Valley Innovation Capital from Shanghai. This is my sixth year from Shanghai to here. I have said, I have say, I have to say to you too, Warren and Charlie, you are highly respected and deeply loved by millions and millions or even billions globally. I have two questions today. First question, in your, in your letters to shareholders, you said you believe EBITDA is not a good parameter to value a business. Why is that? Can you elaborate on that? Second question, you both have very successful and happy lives. With great respect, my question is to each of you: in retrospect, from a personal standpoint, do you have regrets in life? If there is one thing you would have done differently in your life, family, personal or business, what is it? Thank you very much.

Warren Buffett [05:00:38] Yeah, I don’t think you should expect us to answer that on personal, but if in business, I would say I wish I’d met Charlie earlier. We’ve had a lot of fun ever since I was 29 and he was 35, but it would have been, it would have been even more fun if we, if we’d started many, many years earlier. We had a chance to, we worked in the same grocery store, but, but not at the same time.

In respect to EBITDA, depreciation is an expense, and it’s the worst kind of an expense. You know, we love to talk about float, and float is where we get the money first and we have the expense later. Depreciation is where you spend the money first, you know, and, and, and then record the expense later, and it’s reverse float, and it’s not a good thing. And to have that enter into a multiple, it’s much better to buy a business that has, everything else being equal, has no depreciation because it has essentially no investment in fixed assets, it makes X, than it is to buy a company that, that where there’s a lot of depreciation in getting to X.

And actually, I may write a little bit more on that next year, just because it, it’s such a mass delusion. And of course it’s in the interest of Wall Street enormously to focus on something called EBITDA, because it, it results in, in higher borrowing power, higher, higher valuations and all of that sort of thing. So it, it’s become very popular in the last 20 years, but I, it’s a very misleading statistic, can be used in very pernicious, pernicious ways. Charlie, on either one of those subjects?

Charlie Munger [05:02:20] I think you’ve understated the horrors of the subject and the disgusting nature of the people that brought that term into the valuation of business. It was just, it would be like a leasing broker of real estate who’s, you had a 1,000-square-foot new suite to be leased, and he says it’s got 2,000 feet in it. That’s not honorable behavior, and that’s the way that term got into common usage. Nobody, nobody’s right mind would think that depreciation is not an expense.

Warren Buffett [05:02:58] Yeah, it, but it’s very much in the interest of Wall Street.

Charlie Munger [05:03:04] Yes, that’s why they did it.

Warren Buffett [05:03:07] Yeah.

Charlie Munger [05:03:08] It made the mobile seem lower.

Warren Buffett [05:03:11] And what’s amazing is the way it’s accepted, actually. But anyway, it just illustrates that how people use language and, I’ll end, and sell concepts that work to their own use. And, and 2 and 20 has the same sort of thing. I mean, the number of, the number of people, the amount of money that’s over performed after paying 2 and 20 compared to the expenses that the men incurred, I will assure you, makes for a terrible indictment of that particular arrangement. But as long as it can get sold, it will get sold.

Charlie Munger [05:03:50] And now they use it in the business schools. Now that is, that is horror squared. I mean, I mean, it’s bad enough that a bunch of thieves start using a term, but when it gets so common the business school’s cafe, that is not a, that’s not a good result.

Warren Buffett [05:04:09] Okay, station 11.

[05:04:10] Shareholder (Whitney Tilson, New York): Good afternoon. I’m Whitney Tilson, a shareholder from New York. My question is related to the ones asked earlier about job cuts. Perhaps the only thing that makes American workers angrier than layoffs is to shut down an operation entirely and move the jobs overseas. Ask anyone in Ohio or Michigan and they’ll tell you stories about companies that have been operating in those states for decades, benefiting from the educational system, infrastructure and so forth, things that were paid for by local taxpayers, but then some high-paid consultants came along and showed the company how it could reduce its cost by relocating production to Mexico or China, and poof, the good U.S. jobs disappeared.

My observation is that most investors and those in corporate America today worship at the altar of maximizing shareholder value, which is code for doing whatever is necessary to boost the share price as high as possible. But in doing so, companies are taking actions that make millions of workers feel at best fearful and left behind, and at worst deeply harmed by corporate America. It makes so many people so angry that I think it’s testing the post-World War II economic order, which is rooted in free trade, and even the strength of our democracy. I’d argue that it was decisive in our last election.

So my question to you is, do you think that businesses should consider factors outside of pure economics when making these types of decisions? What obligations, if any, do they have to their employees and communities in which they operate? And lastly, if a Berkshire CEO came to you and asked for your approval to close a U.S. operation and relocate it overseas to save money, what questions would you ask beyond the economics of this decision? Thank you.

Warren Buffett [05:05:51] Yeah, well, the, the truth is that in certain cases, production that would otherwise, that formerly been in the United States, has definitely been supplanted by production that comes from other parts of the world. Originally, I was there when Fruit of the Loom was called Union Underwear and bought by Graham-Newman Corp in 1955, I believe, and it was probably all domestic then. And the truth is, if it was all domestic now, it wouldn’t exist. We had the same thing happened with Dexter Shoe, and a wonderful company and skilled workers, and in the end, if we sold the shoes at a price that yielded what they cost us, they were not competitive with shoes from around the world.

A trade, I would argue, both ways, export, import, massive trade should be and is actually enormously beneficial, both the United States and the world. I mean, it will, greater productivity will benefit the world in a general way. But to be roadkill, to be the textile worker in New Bedford that was put out of a job eventually, to be the shoe worker and Dexter, Dexter, to be put out of work, is, is, is, I mean, it, it would be no fun to go through life and say, I’m doing this for the greater good, and so that shoes or underwear will suffer 5% less or something, and the American public will actually never know.

So what you need is two things, in my view. You’ve got an enormously prosperous company, country. You’ve got almost $60,000 of GDP per capita. It’s unbelievable, six times what it was when I was born, in real terms. So we’ve got the prosperity, and that prosperity is enhanced by trade. We were only exporting 5% of our GDP back in 1970, and that, that’s, I think it’s around 12 or something like that now. We are doing what we do best. But we need an educator in chief, who logically the president, I don’t mean this specific president, I mean any president, has been around for decades, has to be able to explain to the American public the overall benefits of essentially free trade.

And then beyond that, we have to have policies that take care of the people that become the roadkill in the process, because it doesn’t make any difference to me, if, as far as I’m concerned, if my life is miserable because I’ve been put out of business by something that’s good for 320-some million people in some infinitesimal way, and it’s messed up my life when I’ve tried to live it in the proper way. So we have got the resources to take care of those people. The investors I don’t worry about. I wrote about this a few years ago. The investors can diversify their investments in such a way that, that overall trade probably benefits them, and they don’t get killed by a specific industry condition. But the worker, in many cases, can’t do that.

You’re not going to retrain some 55-year-old worker in New Bedford who may not even speak English in our textile mill or something. I mean, they, if, if they get destroyed by something that’s good for society, they get destroyed unless government puts in some policies that takes care of people like that. And we’ve got a rich society that can do that, and we got a society that will benefit by free trade, and I think we ought to try to hit both objectives of making sure that there, there is not roadkill, and that at the same time we get 320 million people get the benefits of free trade. Charlie?

Charlie Munger [05:09:35] Well, I don’t quarrel with that, and we have unemployment insurance for that exact reason. But I’m afraid that the capitalist system is always going to hurt some people as it modifies and improves. There’s no way to avoid it.

Warren Buffett [05:09:55] Yeah, well, capitalism is brutal to capital if you’re in the wrong businesses, and like I say, you can diversify those results. Capitalism is brutal the people that have the bad luck to be skilled or develop their skills for decades. But a rich cap, a very rich society can actually, if it’s beneficial to society overall, it can take care of those people. I mean, it’s just, you know, I, the new tax, the, the bill that was passed a couple days ago reduces my taxes, you know, by 17%, you know. And, and, you know, is that needed by the government or anything?

Charlie Munger [05:10:33] So I wouldn’t start spending the money.

Warren Buffett [05:10:36] No, and I, but, but that was, that was the will. I mean…

Charlie Munger [05:10:40] No, I agree.

Warren Buffett [05:10:41] I don’t think, who knows what happens with the bill, but I’m just, to have that happen, and I don’t think that, I think if you polled 1,000 people in Omaha that were walking through a shopping center as to whether my tax bill had been cut by some very large sum because of what passed, I don’t think many people would have the faintest idea what happened there in terms of the coverage of it and all of that, that took place. So I, we’ve got, we do have, it’s probably more like 57 or $58,000 of GDP per capita, family of four, $230,000. But, but nobody should be roadkilled in this.

Charlie Munger [05:11:15] Bismarck said there are two things that nobody should have to watch. One is the making of sausage and the other is the making of legislation.

Warren Buffett [05:11:26] Yeah, well, I would say there’s somebody ought to watch. Anyway, we’ve hit the magic hour of 3:30. We’ll reconvene at 3:45 to do, have a formal board, formal shareholders meeting, and that may take a while. So you’re welcome to stay and watch that, or you’re welcome to shop, and, and I might even have a small preference to that. But go ahead, do whatever way you wish.

Okay. Okay, let’s regroup. If you’ll all take your seats, we’ll begin the formal meeting, and I’ll work from a script in this. The meeting will now come to order. I’m Warren Buffett, chairman of the board of the directors of the company. I welcome you to this 2017 annual meeting of shareholders. This morning I introduced the Berkshire Hathaway directors that are present. Also with us today are partners in the firm of Deloitte & Touche, auditors. Sharon Heck is secretary of Berkshire Hathaway, and she will make a written record of the proceedings. Becki Amick has been appointed inspector of elections at this meeting, and she will certify to the count of votes cast in the election for directors and the motions to be voted upon at this meeting.

The named proxy holders for this meeting are Walter Scott and Marc Hamburg. Does the secretary have a report of the number of Berkshire shares outstanding, if you don’t mind keep the lights on a little more so I can read this, outstanding, entitled to vote and represented at the meeting?

SHSharon Heck [05:13:14] Yes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 8, 2017, the record date for this meeting, there were 770,994 shares of Class A Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at the meeting, and 1,310,304,247 shares of Class B Berkshire Hathaway common stock outstanding, with each share entitled to 1/10,000th of one vote on motions considered at the meeting. Of that number, 538,915 Class A shares and 734,450,954 Class B shares are represented at this meeting by proxies returned through Friday afternoon, May 5th.

Warren Buffett [05:14:26] Oh, thank you, Sharon. That number represents quorum, and will therefore, and we will therefore directly proceed with the meeting. The first, first item 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. [05:14:48] I move that the reading the minutes of the last meeting shareholders be dispensed with and the minutes be approved.

Warren Buffett [05:14:55] Do I hear a second?

[05:14:57] Unidentified speaker: I second the motion.

Warren Buffett [05:14:59] The motion has been moved and seconded. We will vote on the motion by voice vote. All those in favor say aye. Didn’t hear very many, but. Opposed? The motion is carried.

The next item of business is to elect directors. If a shareholder is present who did not send in a proxy or wishes to withdraw a proxy previously sent in, you may vote in person on the election of directors and other matters to be considered at this meeting. Please identify yourself to one of the meeting officials in the aisle so that you can receive a ballot directly.

WSWalter Scott Jr. [05:15:34] Scott and Walter Scott and Meryl Witmer be elected as directors.

Warren Buffett [05:15:38] Is there a second?

[05:15:39] Unidentified speaker: I second the motion.

Warren Buffett [05:15:41] It’s been moved and seconded that Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Thomas Murphy, Ronald Olson, Walter Scott and Meryl Witmer be elected as directors. Are there any other nominations or 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 deliver that their ballot to one of the meeting officials in the aisles. Miss Amick, when you are ready, you may give your report.

BABecki Amick [05:16:22] My report is ready. The ballot of the proxy holders, in response to proxies that were received through last Friday afternoon, cast not less than 601,375 votes for each nominee. That number 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…

Warren Buffett [05:16:46] David Gottesman, Charlotte Guyman, Thomas Murphy, Ronald Olson, Walter Scott and Meryl Witmer 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…

WSWalter Scott Jr. [05:17:08] Members of the company approve on an advisory basis the compensation paid to the company’s named executive directors as disclosed pursuant to Item 402 of Regulation and the accompanying compensation tables and the related narrative discussion in the company’s 2017 annual meeting proxy statement.

Warren Buffett [05:17:32] Is there a second?

[05:17:34] Unidentified speaker: I second the motion.

Warren Buffett [05:17:36] 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. Ms. Amick, when you are ready, you may give you a report.

BABecki Amick [05:17:54] My report is ready. The ballot of the proxy holders, in response to proxies that were received through last Friday afternoon, cast not less than 608,765 votes to approve on an advisory basis the compensation paid to the company’s named executive officers. That number exceeds a majority of the number of the total votes of all Class A and Class B shares outstanding. The certification required by Delaware…

Warren Buffett [05:18:30] Thank you, Mr. Amick. The motion to approve on an advisory basis the compensation paid to the company’s named executive officers has passed. The next item on the agenda is an advisory vote on the frequency of a shareholder advisory vote on 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. [05:18:52] I move that the shareholders of the company determine on an advisory basis the frequency, whether annual, biannual or, annual meeting proxy statement.

Warren Buffett [05:19:00] Is there a second?

[05:19:01] Unidentified speaker: Second.

Warren Buffett [05:19:02] Second, the motion has been moved, shareholders of the company determined the frequency with which they shall have an advisory vote on compensation of named executive officers, with the option being every one, two or three years. Amick, when you’re ready, you may give your report.

BABecki Amick [05:19:22] My report is ready. The ballot of the proxy holders, in response to proxies that were received through last Friday afternoon, cast 131,268 votes for a frequency of every year, 1,954 votes for a frequency of every two years, and 476,661 votes for a frequency of every three years of an advisory vote on the compensation paid to the company’s 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 [05:20:14] Thank you, Miss Amick. Chairman of the company have determined on an advisory basis that they shall have an advisory vote on the compensation paid at the company’s named executive officers every three years.

The next item of business is a motion put forth by Clean Yield Asset Management on behalf of shareholders Tom Beers and Mary Durfee. The motion is set forth in the proxy statement. The motion requested the company provide a report on its political contributions, and the directors are recommended the shareholders vote against this, the proposal. I will now recognize Eileen Durry, I hope I’m pronouncing that right, to present the motion. To allow all interested shareholders present their views, I asked to limit the, I asked to limit her remarks to five minutes, and the microsoft, microphone of zone 1 is available for those wishing to speak for or against the motion. Zone 1 is the only microphone station in operation. For the benefit of those present, ask that each speaker for, against the motion, with the exception of the original proposer, limit themselves to two minutes and confine your remarks solely to the motion. And do we have it, station 1, the representative of Clean Yield management? Everything, sorry, Clean Yield management.

EDEileen Durry [05:21:43] Good afternoon, Mr. Chairman, board of directors and my fellow shareholders. My name is Eileen Durry, and I have been asked to read the following statement by the filers of this proposal, Tom Beers and Mary Durfee. Our proposal, number four on the proxy ballot, calls on Berkshire Hathaway to fully disclose the extent of its political spending. Why do we ask for this? Corporate political spending is a controversial activity that must be carefully managed and overseeing at the most senior levels of management. Mismanagement or misjudgment around political contributions can bring reputation damage, political risks and legal consequences.

In recent years, at the urging of shareholders and other stakeholders, scores of companies have adopted stronger disclosure and better oversight of political contributions. Best practices in this area include full disclosure of direct and indirect political contributions, descriptions of policies and procedures to ensure full legal compliance, and a commitment to board oversight. But our company’s policies in this area are so non-existent or hidden that they have earned it a score of zero for six years running on the leading rating system for corporate political disclosure and accountability, the CPA-Zicklin Index. In contrast, 56% of the S&P make public a detailed policy governing political expenditures from corporate funds. Peers such as GE, Travelers, Unum, CSX and Norfolk Southern disclose political spending.

In contrast, all we know about Berkshire’s political spending is contained in the two-paragraph response to our proposal in this year’s proxy statement, which seeks to reassure us that Berkshire’s political spending is small relative to its eyes. But management statement raises more questions than it answers. It says nothing, for example, about whether Berkshire gives to third party like trade associations and 501(c)(4)s, which are leading dar sources of dark money contributions that are nearly impossible to trace. Since 2012, over $670 million in dark money was spent in the U.S. elections with no disclosure of who the underlying donors were.

No, our company is a large and complicated enterprise. Berkshire Hathaway ranks number four in the Fortune 500. At a time when the trend among large companies is to be more open about their political spending and their policies regarding dark money vehicles, it doesn’t behoove or benefit Berkshire Hathaway to be so secretive if it has nothing to hide. If you agree, please vote in favor of proposal number four. Thank you.

Warren Buffett [05:24:50] Are there other people who wish to speak on emotion? Not that I know. Okay. Thank you. And I, I will tell you that, to my knowledge, in 52 years Berkshire Hathaway at the parent company level has not made a political contribution. I don’t, I, I personally disagree strongly with the Citizens United decision, which was a five to four vote, and I think that, that having unlimited contributions by wealthy, wealthy individuals through super PACs and, and, or wealthy corporations, I don’t, I do not think it’s a plus at all, and I think it’s a minus in our democracy, and I think that, that big money does, can often distort the political process.

It’s a reality that any of our subsidiaries in heavily regulated industries are probably going to have to make some political contributions. Their competitors do it. And I tell our managers basically, if, if they ascend, I don’t want them making contributions on their own personal preferences in, in, in elections to be made from corporate funds, and I would regard that as a breach of trust with, with Berkshire. But I do recognize that if they’re in the railroad industry or the electric utility industry or, but whatever it may be, that there is a necessity essentially to make political contributions. I’m sure they give money to people that I wouldn’t vote for, but that is a reality of doing business in, in, in certain businesses which have a significant political aspect to their activities.

So I’m probably, my heart is with you to some extent in terms of, I wish Citizens United have gone the other way. I don’t like the idea of great sums being spent, but not, but I, I do not think we, I think personally, I think that it could be disadvantageous to actually list all of the, all of the plague organizations that to which people contribute when competitors don’t. And I think there’s expense involved in all three of the proposals that are coming up on this one. So I personally voted against the proposition, but I do hope, like you, that money plays a lesser part in politics, big money, in the future, and undisclosed money, than it does now. And I don’t think the odds are good that the Supreme Court is gonna reverse Citizens United.

So with that, I would say the motion is now ready to be acted upon. If there are any shareholders voting in person, they should now mark a ballot on the motion and deliver their ballot to one of the meeting officials in the, in the aisles. Amick, when you’re ready, you may give your report.

BABecki Amick [05:28:32] My report is ready. The ballot of the proxy holders, in response to proxies that were received through last Friday afternoon, cast 64,449 votes for the motion and 542,399 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 properly cast on the matter, as well as all votes 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 [05:29:29] Thank you, Miss Amick. The proposal fails. The next time a business is put forth by Baldwin Brothers Inc. on behalf of shareholder Marcia Sage. The motion is set forth in the proxy statement. The motion requests that the company provide a report reviewing the company’s policies, actions, plans and reduction targets related to methane emissions from all operations. The directors have recommended that the shareholders vote against the proposal. I will now recognize Eileen Durry to present the motion. To allow all interested shareholders to present their views, I ask her to limit her remarks to five minutes. Microphone at zone 1 is available for those wishing to speak for, against the motion. Zone 1 is the only microphone stationed in operation. For the benefit of those present, I ask that each speaker for and against, or against the motion, limit themselves to two minutes, although, Ms. Durry, that’s five minutes in your case, and to combine your remarks solely to the motion.

EDEileen Durry [05:30:31] Good afternoon, Mr. Chairman, members of the board and fellow shareholders. My name is Eileen Durry. I am here to move Arjuna Capital and Baldwin Brothers’ proposal on behalf of Marcia Sage, a long-term investor in our company. Proposal 5 seeks to protect shareholder value by ensuring the transparent disclosure of our information regarding methane emissions. The reason for this proposal are clearly in the interest of protecting long-term shareholder value. Leaked gas has a direct economic impact on our company, as it is no longer available for sale, establishing a clear business case for reduction targets and control processes.

In fact, leaked methane represented $30 billion of lost revenue in 2012, equivalent to 3% of gas produced globally. The Natural Resources Defense Council estimates that capturing currently wasted gas for sale could reduce methane pollution by roughly 80%. And while the climate benefit of replacing coal with natural gas has been widely publicized, that benefit is negated when leakage rates exceed 2.7%, as methane carries 84 times the global warming impact of CO2 over 20-year period. Recent academic studies are particularly troubling, as they have identified methane leakage far north of current EPA estimates.

Additionally, gas storage presents outsized risk. The 2015 failure of a gas injection well at Southern California Gas Company’s Aliso Canyon storage field in Los Angeles revealed major vulnerabilities in the maintenance and safety of natural gas storage facilities. The incident exposed both, both a lack of oversight and contingency planning in the face of a well blowout. Berkshire Hathaway has storage facilities that face similar risks, as it is estimated to hold the 11th highest volume of natural gas in the country. There are over 400 gas storage facilities around the country, many of which were drilled decades ago.

Numerous independent researchers have concluded that if natural gas is to lead to a more sustainable energy future, then methane emissions must be addressed. Ongoing concerns have spurred public debate and led to regulatory action at the state and federal level. A strong program of target setting, measurement, mitigation and disclosure would indicate a reduction in regulatory risk, as well as efficient operations maximizing gas for sale and shareholder value. Given this, we believe our company has a tremendous opportunity to move forward by providing shareholders with this important information. ISS, the leading provider of proxy voting advice, agrees and has recommended a vote in favor, noting such disclosures would allow shareholders to better understand the company’s management of its emissions and any related risks. Thank you for your consideration.

Warren Buffett [05:33:40] Are there other people who wish to speak on this motion? I don’t believe so. Okay, motion is now ready to be acted upon. If there are any shareholders voting in person, they should now mark their battle on the motion and deliver their ballot to one of the meeting officials in the aisles. Amick, when you’re ready, you may give your report.

BABecki Amick [05:34:06] My report is ready. The ballot of the proxy holders, in response to proxies that were received through last Friday afternoon, cast 57,600 votes for the motion and 540… on the matter, as well as all votes 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 [05:34:39] Greg, incidentally, is there, is there a live microphone here? Yeah, there we have it. Might talk a little bit about the methane situation.

Greg Abel [05:34:49] Sure, Warren. So thank you for your comments. And when you think about methane emissions, it is a serious issue relative to carbon. It was highlighted, 84 times worse than a carbon emission. But I’d be very pleased to report on our situation at Berkshire Hathaway. So three different issues were raised in the comments. One was overall emissions from oil and gas production. So the first thing I would just highlight is that we do not own any oil and gas producing assets, so we don’t have any wells and effectively don’t have that risk.

The second thing that was highlighted was the significant loss of gas at Aliso Canyon. It was a injection well that failed, took many months to fix a well. And if you fundamentally look at the problem there, and we do own other storage facilities, but we do not use their technology or that type of well. All of our wells are cased to the top, which creates a very different risk and literally can be mitigated within hours.

And then the third issue which was raised was leakage rates, and it was highlighted, at least in a, a second response to the proposal, that the leading companies in the industry have a leakage rate of 1%, or they put together programs to achieve a leakage rate of 1%. And I’m happy to report, when we look at our leakage rate from our pipelines, we’re at 0.53 of 1%, so basically half of the leading companies in the industry. So that obviously support the recommendation of, of the shareholders. Thank you.

Warren Buffett [05:36:35] Thanks, Greg. You’ve heard the vote, and the proposal fails. The next item of business is a motion put forth by a shareholder, the Nebraska Peace Foundation. The motion is set forth in the proxy statement. Motion request that the company divest of its holdings and companies involved in the extracting, processing or burning of fossil fuels. The directors are recommended that the shareholders vote against the proposal. I will now recognize Mark Vasina to present the motion. And again, to allow all interested shareholders to present their views, I asked him to limit his remarks to five minutes, and the microphone, zone 1 is available for those wishing to speak for or against the motion. Zone 1 is the only microphone station in operation, and for the benefit of those present, subsequent speakers, should I ask that they limit themselves to two minutes and combine your remarks solely to the motion. With that, if you’ll proceed.

MVMark Vasina [05:37:38] Thank you. My name is Mark Vasina. I represent the Nebraska Peace Foundation. We’re here to present our proposal asking Berkshire Hathaway to divest this carbon-based assets over a period of 12 years, a period of time we believe is a very modest proposal indeed. Last year we were here with a proposal that Berkshire Hathaway evaluate and report on the impact of climate change on their insurance companies. After our, after the meeting, we were approached by a number of shareholders who, who suggested we were pulling our punches, and they suggested the real question is divestiture. So we thought about it. We came back to ask for divestiture of the carbon-based assets. We recognize that for a public company that’s involved in investing in other companies, divestiture represents different kinds of challenges from those of university endowments, pension plans, public foundations such as the Bill and Melinda Gates Foundation, organizations which have divested or have implemented divestiture plans. However, we believe that the necessity for divestiture involves more than just a social or ethical or even moral question, also involves financial risk. As the Bank of England, in their recommendation to the insurance companies that they regulated, that they investigate and report on the climate change risk to these companies, they pointed out that financial risk of holding these carbon-based assets was real.

Unpredictable things like regulatory risk, political risk, technology changes, investment, investor sentiment changes, these things pose risks towards the financial value of assets in this, in this type of investment. So we are proposing, as I said, divestiture of all carbon-based assets over 12 years. I’m going to be followed by three prominent American climate scientists, Frank LaMere of the Winnebago tribe of Nebraska and Richard Miller, Creighton University theologian. Thank you for giving us the opportunity to make our case for this proposal.

Warren Buffett [05:40:39] Thank you. And we’ll proceed to the next speaker, please.

MMMichael Mann [05:40:45] Chairman Buffett, board members and shareholders, my name is Michael Mann. I am a professor at Penn State University and a climate scientist, and as a scientist who spends much of my time communicating the reality and threat of climate change, it’s an honor to have this opportunity to speak to you today. Warren Buffett, known as the Wizard of Omaha, is an inspiration to many, a symbol of the value of work ethic, self-made success, and the great reward that comes with foresight. Now, foresight means recognizing both opportunity and risk, and when it comes to risk, there is no better example than climate change.

I recently co-authored an article in the journal Scientific Reports, for example, demonstrating that climate change played a key role in the onslaught of unprecedented devastating droughts, floods and heat waves in recent years. And the impacts we’re seeing now are just the veritable tip of the iceberg. Carbon emissions must be brought down dramatically within the next few years if we are to avert the worst impacts of climate change. Mr. Buffett coined the term Noah’s law in his 2015 shareholder letter to describe the risk posed by climate change, stating, if there is only a 1% chance the planet is heading toward a truly major disaster and delay means passing a point of no return, in action now is foolhardy.

Well, I couldn’t agree more, and the science tells us that we are heading toward disaster in the absence of substantial reductions in greenhouse gas emissions. Board member Bill Gates demonstrated bold leadership a year ago when the Bill and Melinda Gates Foundation announced it was divesting of fossil fuel holdings. For Mr. Buffett to follow suit, it would send a profound message to the rest of the global business community, a message that we can both mitigate risk and seize opportunity in the form of massive growth in clean energy technology by tackling this problem now, head on, before it’s too late. Thank you.

Warren Buffett [05:42:49] Thank you. And I believe there’s another speaker, or maybe two. You’ll identify yourself, please.

RSRichard Somerville [05:42:55] My name is Richard Somerville. I’m a climate scientist and a professor at the University of California, San Diego. Chairman Buffett, board and shareholders, the world is warming. It is due to human activities. It is getting worse. The observational evidence is overwhelming. All the warmest years globally are recent years. We see the weather changing. We see more severe floods and droughts. Sea level rise is accelerating. Ice sheets and glaciers are shrinking worldwide. Climate change will become more and more serious unless emissions of heat-trapping gases and particles are quickly and drastically reduced.

The biggest unknown about future climate is human behavior. Everything depends on what humanity does now. We have our hands on the thermostat that controls the climate of our children and grandchildren. In 2015, the nations of the world agreed in Paris on how much warming can safely be allowed. The Paris target was informed by science, and the science shows that to meet the target, emissions need to be reduced drastically and quickly. We cannot just muddle through. Dithering and procrastinating lead to catastrophe. Alleviating the disruption of climate change is cheap compared to coping with the damage that unmitigated climate change will cause. Want an example? Doing nothing about climate change means that sea level will become so high that coastal cities must eventually be abandoned.

We cause this problem. We can solve it. And polls show that most strong actions to limit climate change. The forces driving clean energy are powerful. The market is turning against fossil fuels. The prices of solar and wind energy are dropping. They can already compete without subsidies. Vehicle electrification is happening fast. Clean energy provides jobs and economic growth. Progress and prosperity do not require emitting heat-trapping gases. Berkshire Hathaway and Warren Buffett are rightly admired and respected worldwide. Helping the world confront climate change should be an important part of their legacy. We owe it to our children and grandchildren. Thank you.

Warren Buffett [05:45:01] Thank you. I believe there’s one more speaker. (Applause)

DTDavid Titley [05:45:05] Thank you, sir. I am David Titley, retired rear admiral, former oceanographer of the Navy, and now a professor of practice at Penn State. I’ve been a shareholder of Berkshire Hathaway since December 2000. Thank you, sir, for your leadership of this enterprise. When I was stationed at the Pentagon, I had the privilege of working directly for the Pentagon’s foremost strategic planner, Mr. Andrew Marshall. He taught me how to think about risk, and especially risks that may seem distant or low probability, but one with very high impacts, such as weapons of mass destruction. Climate change is a fat-tailed emerging risk. It’s really a risk to people, to us, and when this risk is not managed, we have a security problem.

One example would be Syria. Climate is one of the links in a long chain of events that led to the tragic outcome. Non-climate events, such as over a million refugees pouring into Syrian cities from the Iraq war, stressed Syrian governance. Then, about a decade ago, an exceptionally intense drought and heat spell, linked with high confidence to a changing climate, devastated Syrian agriculture. Now you have millions of desperate people with nothing, and a breeding ground for extremists. Syria is an example of why in the security community we say that climate change accelerates the risks of instability. It can make bad places worse, a lot worse.

Senior military officers know you must address risks and take precautions while you can, before it’s too late. The U.S. Defense Department understands the risks of climate change and has been working quietly to adapt to the changing climate for years. Winston Churchill is alleged to have said, Americans can always be counted upon to do the right thing after exhausting every other possibility. But we will prevail, and you, sir, can help. Here’s my ask: what are government and business leaders doing to stabilize a climate? We should reduce rather than accept the risks of unchecked climate change, because the ice doesn’t care which party controls the White House or the Congress. It just melts. Thank you. (Applause)

FLFrank LaMere [05:47:09] I am Frank LaMere, the Bear Clan of the Winnebago tribe of Nebraska. It was the indigenous people of this continent who first consecrated the ground on which we live and grow, who offered up prayers and petitions asking that we be allowed to live and to provide a way for the generations to come. In exchange for the blessings given by the creator, our forebears agreed to be good stewards of the land. The stewardship of our Mother Earth, who provides for us, has now changed, but the covenant remains the same. Let there be no mistake about that. If we continue to disrespect our Earth Mother, those things given us, bountiful harvest, protection for the elements and good clean water, will surely be taken from us. Our elders speak of this. It has been foretold.

On Christmas Eve, my son came from Standing Rock to visit us for one hour. His mother and I worried about him. How is it there? Why did you go? I asked. He said, it is dangerous, Dad, but someone has to protect our water. I nodded and said, a ho, that is good. He is a water protector. I stand on his shoulders. Meaning the protectors proclaim water is life. Bearing that in mind, I am told that this waterway flowing south from Standing Rock and passing just a short walk from here would be fouled by any kind of breach in the Dakota Access Pipeline. My sense in my years tells me that this will happen. Millions would be poisoned.

I’m further told that this collective body holds a 15% interest in an oil company that is a 25% shareholder in the Dakota Access Pipeline. I would ask that you walk away from that investment. Stand with Mother Earth today. I’m a Winnebago Indian. The Missouri River brought us here when we had no place to go. We stand with our Mother Earth now, as she stood with us. Think about that. Mini we tony, water is life. Pina gigi. Thank you.

Warren Buffett [05:49:45] Thank you. (Applause)

RMRichard Miller [05:49:46] Dear Chairman Buffett, board members and shareholders, I’m Richard Miller. I’m an associate professor of philosophical theology and sustainability studies at Creighton University. I write and teach on ethical issues raised by the climate crisis. As a rationale for voting no on the divestment resolution, the board maintained that Berkshire should not limit its universe of potential investments based upon complex social and moral issues, and that following state and federal laws was sufficient to meet your obligations. There is not only an overwhelming consensus in the scientific community about the reality and dangers of climate change, but there is also an overwhelming consensus among all major ethical theories that one is not morally justified to use increased profit as a rationale for doing harm to others.

By continuing to invest in and thus promote the extracting, processing and burning of fossil fuels, Berkshire is doing harm to people around the world and creating conditions that will threaten future generations. While one is not morally justified to use increased profits as a rationale for doing harm to others, one cannot also opt out of, out of ethical considerations by appealing to moral complexity. When you’re doing harm to others, especially at this scale, there is no neutral space. Nor can you simply appeal to the fact that Berkshire is following state and federal laws when those laws are themselves unethical, and that they allow the United States to violate the human rights of people around the world and set in motion catastrophic future for young people.

The consensus among ethical theories will in due time become self-evident to the average person, analogous to the way slavery as an evil is self-evident today. Indeed, the recognition of the immorality of investing in fossil fuels is rapidly gaining ground as more and more institutions divest their fossil fuel holdings. Mr. Buffett, you’re standing on an ethical house of cards, and is only a matter of time before it comes tumbling down. Like the thousands gathered here and the millions on live stream, I admire your considerable achievements, but I am afraid that if you do not change course very soon, history will not judge you kindly. Thank you for your time.

Warren Buffett [05:52:46] Okay, thank you. The emotions now ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the motion and deliver their ballots and one of the meeting officials in the aisles. Miss Amick, when you’re ready, you may give your report.

BABecki Amick [05:53:03] My report is ready. The ballot of the proxy holders, in response to proxies that were received… votes against the motion exceeds a majority of the number of votes of all Class A and Class B shares properly cast on the matter, as well as all votes 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 [05:53:39] Thank you, Miss Amick. The proposal fails. And Mr. Scott, do you have a motion?

WSWalter Scott Jr. [05:53:50] I move the meeting be adjourned.

Warren Buffett [05:53:53] Is there a second?

[05:53:54] Unidentified speaker: I second the motion.

Warren Buffett [05:53:56] A motion to adjourn has now been made and seconded. We will vote by voice. Any discussion? Is not. All in favor say aye. All opposed say no. The meeting is adjourned. Thank you all for coming, and come again next year.