Berkshire Hathaway Annual Meeting 2018 Transcript

Warren Buffett [00:00:02] (Applause) Good morning. (Applause) I’m Warren, he’s Charlie. Charlie does most things better than I do, but, well, this one’s a little tough. Charlie, maybe you can chew on that a while. Okay.

At the formal meeting that will begin at 3:45, we will elect 14 directors. Charlie and I are two of them, and I would like to introduce the other 12. I’ll do it in alphabetical order. If they will stand as I announced their name. Withhold your applause, may be hard to do, but give it your best, and when we get all through then you can let loose. But we’ll do this alphabetically, beginning with Greg Abel, if you’ll stand and stay standing. Howard Buffett, Steve Burke, Sue Decker, Bill Gates, Sandy Gottesman, Charlotte Guyman, Ajit Jain, Tom Murphy, Ron Olson, Walter Scott and Meryl Witmer. (Applause) (Applause) (Applause)

This morning we posted both our earnings and our 10-Q, and if we can put up slide one, you can take a look at what was reported. And as I warned you in the annual report, a new accounting rule was introduced at the beginning of this year, and it provides that our equity securities, whether we sell them or not, are marked to market every day. So we can have a gain or loss of a couple billion dollars in our equity securities portfolio, and that day, according to the accounting principles now in effect, which are a change, will be recorded as making a couple billion dollars, that they are losing a couple billion. And I told you that would produce some very unusual effects from quarter to quarter, and it further explains why I like to release our earnings early Saturday morning, and as well as the 10-Q, to give people a chance to read through the explanation. Because if you just were handed this with a TV monitor, you know, at 3:30 in the afternoon or whatever it might be, you would report the net earnings figure under… understandably, very quickly, and it really is not representative of what’s going on in the business at all.

So if you look at the figure of operating earnings, which is what we look at, we actually earned a record amount for any quarter we’ve ever had, and that includes no realized gains or losses on securities or on the few remaining derivatives we have. You might leave that slide up there just a little longer, maybe this up. The insurance underwriting, GEICO had quite a good size turnaround in profitability, and a good gain, although not as big a gain as last year, which was a record, in terms of policies and force. And really throughout most of our businesses, and the details are on the 10-Q, which is up on our website now. And as you can see, and the railroad was up significantly, and we had most of our businesses tended to be up. Now, we were aided in that in a material way by the reduction in the federal income tax rate, from 35 to 21. Our businesses were up significantly on a pre-tax basis, but the gain was further enhanced by the change in the income tax rate. So that pretty well sums up the first quarter. We’ll probably get some, may well get some questions on it when we get into the question and answer section.

The questions we’ll be getting, we’ve got the press over here, and then we have the analysts on my left, and of course we have our partners out in front of me, and we will rotate among you. And the questions we get as we go to the next six hours or so will understandably relate to a lot of current events. You know, you will, we may get asked, and we don’t know the questions, but we may get asked, you know, about that policy, or whether we’re seeing any inflation, or whether business is speeding up or down, or the threats we may face competitively in our businesses as we go along. And you, anything goes on the questions, except we won’t tell you what we’re buying or selling. But it really can be a question sometimes of confusing the forest with the trees, and I would like to just spend just a couple of minutes giving you a little perspective on how you might think about investments, as opposed to the tendency to focus on what’s happening today or even this minute as you go through.

And to help me in doing that, I’d like to go back through a little personal history. And we will start, I have here, up here, New York Times of March 12, 1942, and I’m a little behind on my reading. And if you go back to that time, it was about, but just about three months since we got involved in a war, which we were losing at that point. The newspaper headlines were filled with bad news from the Pacific, and I’ve taken just a couple of the headlines from the days preceding March 11th, which I’ll explain, it’s kind of a momentous day for me. And so you can see these headlines. We’ve got slide two up there, I believe. And we were in trouble, big trouble in the Pacific. It was only going to be a couple months later that the Philippines fell. But here we were getting bad news. We might go to slide three for March 9th. I hope you can read the headlines anyway. The price of the paper is 3 cents, incidentally. The… and let’s see, we’ve got March 10th up there, slide, I’m, I want to get to with this advanced technology of slides, I want to make sure I’m showing you the same thing that I’m seeing in front of me.

So anyway, on March 10th, when again the news was bad, full clearing path to Australia, and it was like it, the stock market had been reflecting this, and I’d been watching a stock called Cities Service preferred stock, which had sold at $84 the previous year. It had sold at 55 the year early, in the, in January, two months earlier, and now it was down to $40 on March 10th. So that night, despite these headlines, I said to my dad, I said, “I think I’d like to pull the trigger, and I’d like you to buy me three shares of Cities Service preferred the next day.” And that was all I had. I mean, that was my capital accumulated over the previous five years or thereabouts. And so my dad, the next morning, bought three shares.

Well, let’s take a look at what happened the next day. Let’s go to the next slide, please. And it was not a good day. The stock market, the Dow Jones Industrials broke 100 on the downside. Now, they were down 2.28, as you see, but that was the equivalent of about a 500 point drop now. So I’m in school wondering what is going on. Of course, incidentally, you’ll see on the left side of the chart, the New York Times put the Dow Jones Industrial Average below all the averages they calculated. They had their own averages, which have since disappeared, but the Dow Jones has continued.

So the next day, we can go to the next slide, and you will see what happened. The stock that was in 39, my dad bought my stock right away in the morning, because I’d asked him to, my three shares, and so I paid the high for the day. That 38 and a quarter was my tick, which is the high for day, and by the end of the day it was down to 37, which was really kind of characteristic of my timing in stocks that was going to appear in future years. But it was on the, what was then called the New York Curb Exchange, then became the American Stock Exchange. But things, even though the war, until the Battle of Midway, looked very bad. And if you’ll turn to the next slide, please, you’ll see that the stock did rather well. You can see where I bought at 38 and a quarter, and then the stock went on actually to eventually be called by the Cities Service Company for over $200 a share. But this is not a happy story, because if you go to the next page, you will see that I, well, as I always say, it seemed like a good idea at the time. So I sold those. I made $5 on it. It was, again, typical of behavior. But when you watch, you go down to 27, you know, it looked pretty good to get that profit.

Well, what’s the point of all this? Well, we can leave behind this Cities Service story, and I would like you to again imagine yourself back on March 11th of 1942. And as I say, things were looking bad in the European theater as well as what was going on in the Pacific. But everybody in this country knew America was going to win the war. I mean, it was, you know, we’d gotten blindsided, but we were going to win the war, and we knew that the American system had been working well since 1776. So if you’ll turn to the next slide, I’d like you to imagine that at that time you had invested $10,000, and you put that money in an index fund. We didn’t have index funds then, but you in effect bought the S&P 500.

Now, I would like you to think a while, and don’t, do not change the slide here for a minute. I’d like you to think about how much that $10,000 would now be worth if you just had one basic premise. Just like in buying a farm, you buy it to hold throughout your lifetime, and independent, and you look to the output of the farm to determine whether you made a wise investment. You look to the output of the apartment house to decide whether you made a wise investment if you buy an apartment, small apartment house, to hold for your life. And let’s say instead you decided to put the $10,000 in and hold a piece of American business, and never look at another stock quote, never listen to another person give you advice or anything of the sort. I want you to think how much money you might have now. And now that you’ve got a number in your head, let’s go to the next slide, and we’ll get the answer. You’d have $51 million.

And you wouldn’t have had to do anything. You wouldn’t have to understand accounting. You wouldn’t have to look at your quotations every day like I did. That first day I’d already lost 3.75 by the time I came home from school. All you had to do was figure that America was going to do well over time, that we would overcome the current difficulties, and that if America did well, American business would do well. You didn’t have to pick out winning stocks, you didn’t have to pick out a winning time or anything of the sort. You basically just had to make one investment decision in your life. And that wasn’t the only time to do it. I mean, I could go back and pick other times that would work out even greater gains. But as you listen to the questions and answers we give today, just remember that the overriding question is how is American business going to do over your investing lifetime.

I would like to make one other comment, because it’s a little bit interesting. Let’s say you’ve taken that $10,000 and you listen to the profits of doom and gloom around you, and you’ll get that constantly throughout your life, and instead you use the $10,000 to buy gold. Now, for your $10,000, here into your, look in your safe deposit box, and you’d have your three ounce, 100 ounces of gold, and you could look at it, and you could fondle it, and you could, I mean, whatever you wanted to do with it. But it didn’t produce anything. It was never going to produce anything. And what would you have today? You would have 300 ounces of gold, just like you had in March of 1942, and it would be worth approximately $400,000.

So if you decided to go with a non-productive asset, goal, instead of a productive asset, which actually was earning more money and reinvesting and paying dividends and maybe purchasing stock, whatever it might be, you would now have over 100 times the value of what you would have had with a non-productive asset. In other words, for every dollar you have made in American business, you’d have less than a penny by a gain by buying in the store value, which people tell you to run to every time you get scared by the headlines or something disorder. It’s just remarkable to me that we have operated in this country with the greatest tailwind at our back that you can imagine. It’s an investor’s, hey, I mean, you can’t really fail at it, unless you buy the wrong stock or just get excited at the wrong time. But if you own a cross-section of America and you put your money in consistently over the years, there’s just, there’s no comparison against owning something that’s going to produce nothing. And there, frankly, there’s no comparison with trying to jump in and out of stocks and pay investment advisors. If you’d followed my advice, incidentally, or this retrospective advice, which is always so easy to give, if you’d follow that, of course you’re, there’s one problem, buddy, your friendly stock broker would have starved to death. I mean, you know, and you could have gone to the funeral to atone for their fate. But the truth is you would have been better off doing this than a very, very, very high percentage of investment professionals have done, or people have done that are active. That it’s very hard to move around successfully and beat really what can be done with a very relaxed phosphate.

And you do not have to be, you do not have to be, you do not have to know as much about accounting or stock market terminology or whatever else it may be, or what the Fed is going to do next time, and whether it’s going to raise rates three times or four times or two times. None of that counts at all really in a lifetime of investing. What counts is having a philosophy that you’ve, that you stick with, that you understand why you’re in it, and then you forget about doing things that you don’t know how to do. So with all those happy words, we will move on and start the questioning, and we’ll start with Carol.

CLCarol Loomis [00:20:05] Good morning. In choosing a first question to ask each year, I look for a question that is definitely virtual related and is timely, and this question seemed to fill a bill. The question came from William Anderson of Salem, Oregon, and he said, “Mr. Buffett, you have previously said that there are two parts to your job, overseeing the managers and capital allocation. Mr. Abel and Mr. Jain now oversee the managers, which leaves you with capital allocation. However, you share capital allocation with Ted Weschler and Todd Combs. Question: does all that mean you are semi-retired, or if not, please explain?”

Warren Buffett [00:20:52] I’ve been somebody semi-retired for decades. (Laughter) The answer is that I was probably, well, it’s hard to break down the percentage of the time that I was involved in what now, the jobs that are now done by Ajit and Greg, and in the case of investing, the sub-part of the job that is done by Ted and Todd. Ted and Todd each manage 12 or 13 billion dollars, so in total that’s 25 billion, and we have in equities 170 some billion probably now, and 20 billion in longer term bonds, and another 100 billion in cash in short term. So they’re managing 20, 25, and doing a very good job, and I’d still have the responsibility basically for the other 300 billion. So (Applause) I think Charlie will tell you, in fact I’d like them to comment, nothing’s really changed that much.

We’ve got, clearly, we’ve got two people in Ajit and Greg that are smarter, more energetic, just bring more to the job every day. But they don’t bring too much, because the culture isn’t, our managers are running their businesses. But there’s a lot, there’s a good bit overseas. So they do a superb job. And Ted and Todd not only do a great job with the 12 or 13 billion each, they started with a couple billion each, ah, not that it’s all been the growth of the two billion, but they also do, have done a number of things for Berkshire that they do it cheerfully, but more important, or skillfully. So there’s just, there’s one thing after another that I will have them looking into or working on, and sometimes I steal their ideas. And but I think actually semi-retired is probably catches me at my most active point. I think you’ve, your questioner’s got a good point. Okay, Charlie?

Charlie Munger [00:23:22] Well, I’ve watched Warren for a long time, and he sits around reading most of the time, and thinking, and every once in a while he talks on the phone or talks to somebody. I can’t see any great difference. A lot of people, part of the virtual secret is when there’s nothing to do, Warren is very good at doing nothing.

Warren Buffett [00:23:49] I’m still looking forward to being a mattress tester. (Laughter) Okay, Jonathan Brandt.

JBJonathan Brandt [00:23:54] Hi Warren, hi Charlie. Given the growth in airplane build rates, it seems surprising that Precision Castparts isn’t doing better on the top or bottom line. I understand the issue with a bumpy transition from old to new programs, but I’ve also heard from industry sources that Precision’s market position is not as strong as it used to be, amid intensifying competition and some technological disruption. What does Precision need to do to solidify and strengthen its preeminent position with its aerospace customers so that it can deliver the growth you expected when Berkshire acquired it? More generally, two years after the acquisition, what is your outlook for that business?

Warren Buffett [00:24:36] Give me the last part again.

JBJonathan Brandt [00:24:38] The outlook, more generally, two years after the acquisition, what is your updated outlook for that business longer term?

Warren Buffett [00:24:45] A longer term, I think, and in the reasonably shorter term, it’s a very, very good business. I mean, you were, you mentioned aircraft, but we get another industry, but certainly aircraft’s the most important. You have manufacturers that are very dependent on both the quality of the parts and the promptness of delivery. You do not want to have an aircraft worth 75 or 100 or maybe 200 million dollars and be waiting for a part or something of the sort. So it’s reliability is, both in terms of quality and delivery times and all of that sort of thing is enormously important. And we get contracts that extend out many years, and sometimes we, I mean, we will get them well before the plane even starts in production. So there’s very long lead times.

And we have found in the last year, about it earlier, but I know of some specific cases in the last year where other suppliers have failed in their deliveries, and then the manufacturers come to us and say, “We would like you to help us out.” And we say, “Well, we’ll be glad to help you out, but we’d like about a five-year contract if we’re going to do it,” because we’re just not going to make up for these other guys’ shortfalls periodically. And but that sort of thing has a very long lead time. The businesses of is a very good business.

One thing you will see their earnings charged with is about 400 million dollars, a little over 400 million dollars a year, of intangible, non-deductible in that case, amortization of goodwill, which is really is not an economic cost in my view. We have a significant amount of that through Berkshire, but by far the largest amount is related to the Precision acquisition. So whatever you see, you can add about 400 million that in my view is not an economic expense, but the accountants would argue otherwise. But it’s our money, so we’ll take my view.

The Mark Donegan, who runs that operation, is incredible, and he has been, not only he’s a fabulous manager, I wouldn’t have bought it without him in charge, he also has been very helpful to us in other areas, and he loves to do it. So you can’t beat him, both as a manager in his own operation, but with his devotion to really doing everything that will help Berkshire. It was, it’s a very good acquisition with very long tales to the products that are being developed. Charlie?

Charlie Munger [00:28:07] Well, yeah, I think we’d buy another one just like it tomorrow if we had the chance.

Warren Buffett [00:28:15] Yeah, that’s the answer. Man, a few words, but he gets the point. (Laughter) Okay, now we will go to the shareholder, and station one, I believe that’s probably up here to my right.

[00:28:32] Shareholder (Xiao, Wuxi, China): Hello, this is Xiao from Wuxi, China, saw the capital. I’ve been in the mall team for 12 years. Wish you and Charlie good house, so we could see you both run a meeting for 12 more years. Thank you. A quick question. We know both you and China delegations, U.S. and China delegations are in China for intense discussion on so-called trade war. Let’s go one step beyond the trade war. Do you think there’s a win-win situation for both countries, or the world is just too small for those to win, and we have to revisit your 1942 chart again? Thank you.

Warren Buffett [00:29:26] Thank you. I’d like to just mention one thing. In August I’m going to be 88, and that will be the eighth month of the year, and it’s in a year that ends with an eight. And as you and I both know, eight is a very lucky number in China. So if you find anything over there for me, this is the time, this is the time we should be acquiring something, all those eights.

The United States and China are going to be the two superpowers of the world, economically and in other ways, for a long, long, long time. We have a lot of common interests, and like any two big economic entities, there are times when there’ll be tensions. But it is a win-win situation when the world trades, basically. And China and the U.S. are the two big factors in that, but there’s plenty of other citizens of the world that are involved in how this comes out. And there’s no question, and the nice thing about in this country, I think, is that both Democrats and Republicans basically, on balance, believe in the benefits of free trade. And we will have disagreements with each other, we’ll have disagreements with other countries on trade, but it’s just too big and too obvious for, that the benefits are huge, and the world’s dependent on, a major way for its progress, that two intelligent countries will do something extremely foolish. We both may do things that are mildly foolish from time to time, and there is some give and take obviously involved.

But U.S. exports in 1970 and U.S. imports in 1970 were both about 5% of GDP. So here we were selling 5% of our GDP and buying them 5% of our GDP, basically. Now, people think we don’t export a lot of things. Our exports are 11 and a fraction percent of GDP, that more than doubled as a share of this rising GDP. But the imports are about 14 and a half percent, so there’s a gap of 3% or thereabouts. And I would not like that gap to get too wide. But when you think about it, it’s really not the worst thing in the world to have somebody send you a lot of goods that you want and hand them little pieces of paper. I mean, because the balancing item is, if you have a, if you have a surplus of a deficit in your trade, you’re going to have a surplus an investment. And so the world is getting more claim checks on the United States, and they think they, to some extent they buy our government securities, they can buy businesses. And over time you don’t want the gap to get to be too wide, because the amount of claim checks you were giving out to the rest of the world could get a little unpleasant under some circumstances.

But we’ve done remarkably well with trade, China’s done remarkably well with trade, the countries of the world have done remarkably well with the trade. So it is a win-win situation, and the only problem gets to be when one side or the other may want to win a little bit too much, and then you have a certain amount of tension. But we will not sacrifice the world, I mean, will not sacrifice world prosperity based on differences that arise in trade. Charlie?

Charlie Munger [00:33:58] Yeah, well, I think that both countries have been advancing, and of course China is advancing faster economically because it started from a lower base, and they’ve had a little more virtue than practically anybody else in the world in having a high savings rate. And of course a country that was mired in poverty for a long, long time, and it assimilates the advanced technology of the world, and this has a big savings rate, is going to advance faster than some very mature company like Britain or the United States. And that’s what’s happened. But I think we’re getting along fine, and I’m very optimistic that both nations will be smart enough to realize that the last thing they should do is have an elbow for the other.

Warren Buffett [00:34:56] Okay, Becky Quick. (Applause)

Becky Quick [00:34:57] This question comes from Kirk Thompson. He says, “Warren, in this year’s annual letter to shareholders, you referenced both cheap debt and a willingness by other companies to leverage themselves as competitive examples as to why it’s hard to get more acquisition deals done. It seems like the trust in, PR and prestige of doing a deal with Warren Buffett and Charlie Munger allow Berkshire to get a hometown discount and beat out other firms that might pay a little more to a prospective seller. Have you given thought to having other Berkshire managers have more public exposure, so future generations of successful business owners continue to bring deal opportunities to Berkshire like they have in prior decades?”

Warren Buffett [00:35:50] Yeah, that sort of reminds me of, who was it, Tony O’Reilly remarked one time about the responsibility of a CEO, that the very first job of the CEO was to search through his organization and find that person who had the initiative and the brains, the determination, all of the qualities to be his logical successor, and then fire the guy.

Yeah, the, there’s no question, I think the reputation of Berkshire as being a very good home for companies, particularly private companies, a good home for companies, I don’t think that reputation is dependent on me or Charlie. It may take a little, you know, there’ll be a little testing period forever, it takes over in that respect. But you know, basically we’ve got the money to do the deals, we’ll have the money to do the deals subsequently, people can see how our subsidiaries operate in the future. And the truth is that I think some of the other executives are going, are getting better known. But there will be a, you know, I’ll tell you this: if things get bad enough, you don’t have to worry, they’ll be calling us no matter what. So I do not worry about the so-called deal flow, which is a term I hate. But I don’t think there’s, I think that’s dependent on Berkshire and not dependent on me. And you know, it’s mentioned, my phone isn’t ringing off the hook with good deals, so that apparently this big winning personality or something is not delivering for you. So it may be, it may be the next person will be even more, get even more calls. I, Berkshire, the reputation belongs to Berkshire now. And that, and we are, for somebody that cares about a business that they and their parents and maybe their grandparents lovingly built over decades, if they care about where that business ends up being, after, for one reason or another, they don’t want to keep it or can’t keep it in the family, we absolutely are the first call, and we will continue to be the first call, whether Charlie or iron answer the phone, or somebody else does them. Charlie?

Charlie Munger [00:38:36] Well, a lot of the subsidiaries have for a long time already been making all kinds of acquisitions with people they know when we don’t. So it’s already happening, and in fact it’s happening more there than it is at headquarters.

Warren Buffett [00:38:56] So don’t tell them, Charlie, you’re getting your wish.

Charlie Munger [00:39:01] And it is weird that about 99% of the public companies that change hands in terms of control change hands in a sort of auction, provided, presided over by an investment banker. And the people that buy are usually just leverage it to the gills, and the structuring a little better, they re-leverage it. And that money is coming out of the charitable endowments and pension plans. We’re making these highly leveraged investments in all these companies changing hands at very high prices. Sooner or later this is not going to work perfectly.

Warren Buffett [00:39:40] Yeah.

Charlie Munger [00:39:40] And it’s going to have an unpleasant episode, and I think we’ll be around and in good shape at that time.

Warren Buffett [00:39:48] There was one fellow who came to me many years ago, and he had a wonderful business, and he had been worried because he had seen a friend of his dime, and the problems that arose later when the managers, some extent, tried to take advantage of the widow, and it became a disaster. So he said he thought about it a lot the previous year, and he decided he didn’t want to sell the business to a competitor who would be a logical buyer, because they would fire all of his people, and the CFO that would remain, and you know, all up and down the line, they’d all be the acquirer’s people. He didn’t want to do that to his people. And then he thought, and he didn’t want to sell it to a private equity firm, because he felt they’d leverage it up. He never liked the leverage that much. And then they’d just resell it later on to somebody, so it would be totally out of control of what he wanted to do, and he wanted to keep running it himself. So he said, he said, “Warren,” he said, he said, “it isn’t that you’re such a great guy,” he says, “it’s you, you’re the only one left.” So Berkshire will continue to be the only one left in many cases. Gary Ransom.

GRGary Ransom [00:41:11] Good morning, Warren. In your annual letter, you wrote about the potential for a 400 billion dollar natural catastrophe event, something out in the tail of the loss distribution. I can think of another risk that could have a similar order of magnitude, and that would be cyber risk. I’m sure all your managers have taken steps against that potential, but in, out in the tail of the cyber risk distribution, it could hit a lot of industries, a lot of your companies. So how do you think about and prepare for the big one in cyber?

Warren Buffett [00:41:50] Yeah, well, I include, incidentally, in my, that part I wrote in the annual report, where I said that roughly, nobody knows the answer on this. I mean, I could stick down too, and somebody else much smarter, insurance would stick down a different figure. But I think it’s about a 2% risk of what I call a 400 billion super cat of all time. And but cyber is in that, is in that equation. I mean, it’s not just earthquakes and that sort of thing. And frankly, I don’t think we or anybody else really knows what they’re doing when writing cyber. I mean, we, it is just very, very, very early in the game, and we don’t know what the interpretations of the policies necessarily will be. We don’t know the degree to which there’ll be, what they’ll be, correlated incidents, which we don’t really think are correlated now, or haven’t had the imagination to come up with.

We know that every year when I go and hear these people from the CIA or wherever it may be, they tell them, they tell me that the offenses added the defense, and will continue that way. And I can dream of a lot of cyber incidents, which I’m not going to spell out here, because the people that have twisted minds, maybe, they probably got more, way more ideas than I’ve got, but I don’t believe in feeding them any. But it’s a business where we don’t, we have a pretty good idea of the probabilities of a quake in California, or the probabilities of a three or a four hurricane hitting Florida, or whatever it may be. We don’t know what we’re doing in cyber. And we try to keep, we don’t want to be a pioneer on this. We do some business in that arena in Berkshire Hathaway, especially. But if you’re doing something for competitive reasons, which I’m okay with, but when I’m doing something wrong that people tell me as a competitive necessity, we are going to try not to have, we don’t want to be number one or number two or number three in exposures on it.

And I don’t, and I’m sure we are not in cyber. But I don’t, I think anybody that can tell, tells you now that they think they know in some actuarial way either what general experience is likely to be in the future or what the worst case would be, I think it’s getting themselves. And that’s why, that’s one of the reasons I say that a 400 billion dollar event has a, I think has roughly a 2% probability per year of happening. Cyber’s uncharted territory, and it’s going to get worse, not better. And then the question is, is whether if we have a whole bunch of 25 billion dollar commercial limits out there, whether there’s some aggregation that we didn’t foresee, or that the course interpret those policies differently. Then, you know, they are generally going to give the benefit of the doubt to the insured. So you’re right in pointing that out as a very material risk, which didn’t exist 10 or 15 years ago, and that, and will be much more intense as the years go along. And all I can tell you, Gary, is that that’s part of my 400 billion and my 2%. But if you’ve got a different guess, it’s just likely that yours is right than mine on that. Charlie?

Charlie Munger [00:45:56] Yeah, well, something that’s very much like cyber risk is you got computers programmed to do your security training, and your computer goes a little wild from some error. That’s already happened at least once, where somebody just was fine one morning, and by the afternoon they were broke because some computer went crazy. We don’t have any computers we allowed, we allow to go big automatically trading securities. I think generally Berkshire is less likely than most other places to be careless in some really stupid way.

Warren Buffett [00:46:32] I do think if there’s a mega cat from cyber, let’s say it hits 400 billion, I do not think we’ll have more than a 3%, no, no, we’ll get our share. And but it, you know, it will destroy, what will destroy a lot of companies, that we will actually, if we had a 12 billion dollar loss, I would think, except for the new accounting rule, but I think from what I call operating earnings, we would probably still have a reasonable profit that year. I mean, we are in a different position than any insurance company I know of in the world in our ability to handle the really, really super, super cat. Okay, shareholder from station 2.

Charlie Munger [00:47:17] Point out that the main shareholder to my right here has almost always net worth in one security. That’s likely to be more carefully managed than some public place with people just passing through.

Warren Buffett [00:47:34] Yeah, you don’t want a guy that’s 64 and he’s going to retire at 65. A lot of decisions you really don’t want him or her to be making. Station two.

[00:47:48] Shareholder (Wally Obermeyer, Aspen, Colorado): Wally Obermeyer, Obermeyer Wood Investment Council, Aspen, Colorado. Warren and Charlie, you two have demonstrated great talent in private sector capital allocation and shown the world the power of excellence in this area. Do you think there is a similar opportunity for outstanding capital allocation in the public sector, at both the state and federal levels, and if so, what approach and/or changes would you suggest for society to achieve these benefits?

Warren Buffett [00:48:25] That’s too tough. Why don’t we go on to a new question?

Charlie Munger [00:48:33] I’m afraid I have nothing to add. (Laughter)

Warren Buffett [00:48:38] I don’t mean to be unfair to somebody asking a question, but it, you know, it is, it is unfortunately an entirely different game. And the electorate, the motivations are different, the terms of the reward system is different. I mean, everything is different. And if we knew how to solve that, we wouldn’t, we can’t add anything to what you had here in your view. I’m sorry on that. Okay, Andrew.

ASAndrew Ross Sorkin [00:49:18] Hi Warren. This question comes from Paul Speaker of Chicago, Illinois. I believe he may be here today. He writes, “One of your more famous and perhaps most insightful quotes goes as follows: ‘Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.’ In light of the unauthorized accounting scandal at Wells Fargo, of its admission that it charged customers for duplicate auto insurance, of its missions that it wrongly fined mortgage holders in relation to missing deadlines caused by delays that were its own fault, of its admission that it charged some customers and proper fees to lock in mortgage interest rates, of the sanction placed upon it by the Federal Reserve prohibiting it from growing its balance sheet, and of the more than recent one billion dollar penalty leveled by federal regulators for the aforementioned misbehavior, if Wells Fargo company is a chronically leaking boat, at what magnitude of leakage would Berkshire consider changing vessels?”

Warren Buffett [00:50:26] Well, Wells Fargo. (Applause) Wells Fargo is a company that proved the efficacy of incentives, and it’s just that they had the wrong incentives. And that was bad, but then they committed a much greater error, and I don’t know exactly how or who did it or when, but ignoring the fact that they had a faulty incentive system, which was in sending people to do things that were kind of crazy, like opening non-existent accounts, et cetera. And you know, that is the cardinal senate Berkshire. We know people are doing something wrong right as we sit here at Berkshire. You can’t have 377,000 employees and expect that everyone is behaving like Ben Franklin or something out there. And they, we, I don’t know whether there are 10 things being done wrong as we speak, or 20, or 50. The important thing is we don’t want to incent any of that if we can avoid it, and if we find that, when we find it’s going on, we have to do something about it. And that is absolutely the key to it. And Wells Fargo didn’t do it.

But Salomon didn’t do it. And the truth is, we’ve made a couple of our greatest investments where people have made similar errors. We bought our American Express, that was the best investment ever made in my partnership years. We bought our American Express stock in 1964 because somebody was incented to do the wrong thing in something called the American Express Field Warehousing Company. We bought a very substantial amount of GEICO. We bought, but became a half, that half of GEICO for 40 million dollars, because somebody was incented to meet Wall Street estimates of earnings and growth, and they didn’t focus on having the proper reserves. And that caused a lot of pain at American Express in 1964, it caused a lot of pain at GEICO in 1976. It caused a layoff of a significant portion of the workforce, all kinds of things. But they cleaned it up, they cleaned it up, and look where American Express has moved since that time, look at where GEICO has moved since that time.

So the fact that you’re going to have problems at some very large institution is not unique. In fact, almost every bank has, all the big banks, bad troubles of one sort or another. And I see no reason why Wells Fargo as a company, from both an investment standpoint and a moral standpoint, going forward, is in any way inferior to the other big banks with which it competes. They made a big mistake, it costs, I mean, we’ve still got, I mean, we have a large unrealized gain in it, but that doesn’t, that has anything to do with our decision making. But the, I like it as an investment. I like Tim Sloan as a manager, you know, and it, he is correcting mistakes made by other people. I tried to correct mistakes and Salomon, and I had terrific help from Deryck Maughan, as well as, as well as a number of the people, Munger, Tolles, and I mean, that is going to happen.

You try to minimize it. Charlie says that an ounce of prevention isn’t worth a pound of cure, it’s worth about a ton of cure. And we ought to jump on everything. He’s pushed me all my life to make sure that I attack unpleasant problems at surface, and that’s sometimes not easy to do when everything else is going fine. And at Wells they clearly, and I don’t know exactly what, but they, they did what people at every organ, it got accentuated to an extreme point. But I see no reason to think that Wells Fargo going forward is other than a very, very large, well-run bank that had an episode in his history it wished it didn’t have. But GEICO came out stronger, American Express came out stronger. The question is what you do when you find the problems. Charlie?

Charlie Munger [00:55:19] Well, I agree with that. I think Wells Fargo is going to be better going forward than it would have been if these leaks had never been discovered or happened.

Warren Buffett [00:55:39] Yeah.

Charlie Munger [00:55:40] So I think it’s, it, but I think Harvey Weinstein has done a lot for improving behavior too.

Warren Buffett [00:55:51] It’s, it was clearly an error, and they’re acutely aware of it and acutely embarrassed, and they don’t want to have it happen again.

Charlie Munger [00:56:01] No, I, if I had to say which bank is more likely to behave the best in the future…

Warren Buffett [00:56:08] Yeah.

Charlie Munger [00:56:09] It might be Wells Fargo, of all of them.

Warren Buffett [00:56:12] This New York Times that I have here from March 12, 1942, if you go toward the back of it, in the classified section, you have one big section says “Help Wanted Mail” and another one that says “Help Wanted Female.” You know, was the New York Times doing the right thing in those days? You know, I think the New York Times is a terrific paper, but that people make mistakes. And you know, the idea of classifying between taking ads and saying, “Well, we’ll take them and divide them up between men and women, what jobs we think are appropriate,” you know, or the import, the advertising things appropriate. We do a lot of dumb things in this world. And GEICO, as I say, in the early 1970s, they just ignored, then you can do it, the setting of proper reserves, which mean they charged the wrong price to new customers, because they thought their losses were less than they were. And I’m sure some of that may have been a desire to please Wall Street, or just because they didn’t want to face how things were going. But it came out incredibly stronger, you know, and now it’s got 13% of the households in the United States insured. And it’s, it came out with an attention to reserves and that sort of thing that was heightened by the difficulties that they found themselves in when they almost went bankrupt, 40, 40.

Charlie Munger [00:57:43] A lot more stupid than Wells Fargo.

Warren Buffett [00:57:46] It was really stupid what they did way back.

Charlie Munger [00:57:49] Right.

Warren Buffett [00:57:50] Yeah, they had the world by the tail, and then they…

Charlie Munger [00:57:54] Yeah.

Warren Buffett [00:57:54] Then they quit looking at the reserve development. But it was, American Express was just picking up a few dollars by having the field warehousing company in 1963, and you know, they were worried whether it was going to sink the company. And when some guy named Tino De Angelis, and I think it was Bayonne, New Jersey. In fact, I went to the annual meeting in 1964 of American Express after the scandal developed, and somebody asked if the auditor would step forward. And the auditor from one of the big firms, which I won’t mention, came up to the microphone, and somebody said, “How much did we pay you last year?” And the auditor gave this answer. And then the questioner said, “Well, how much extra would you have charged this to go over to Bayonne, which was 10 miles away, and check whether there’s any oil in the tanks?” So it, you know, here was something in a tiny little operation, some guy was calling in from a bar in Bayonne and telling them the phony stuff was going on, and they didn’t want to hear it. They shut their ears to it. And then what emerged was one great company after this kind of, what they felt was a near-death experience.

So it’s, we’re going to make mistakes. I will guarantee you that we will get some unpleasant news at Berkshire. I don’t know what it’ll be, you know. The most important thing is we do something about it. And there have been times when I’ve, I procrastinated, and Charlie has been the one that jabs me into action, and so he’s performed a lot of services you don’t know about. Okay, Greg.

GWGregg Warren [00:59:40] Greg Warren. Good morning, Warren. I have a little bit of a follow-up on Becky’s question. At the 2014 annual meeting, as well as this morning, you noted that the power of Berkshire brand and its reputation, as well as the strength of Berkshire’s balance sheet, would allow the company’s next managers to replicate many of the advantages that have come with your being the face of the organization. One of which has been an ability to extract high rents from firms in exchange for a capital infusion and the Buffett seal of approval during times of financial distress. I buy the argument about the strength of the balance sheet, and believe that deals will continue to be done, with sellers still lining up to become part of the Berkshire family, especially if the company’s next managers are allowed to keep a ton of cash on hand. But I’m not entirely convinced that they’ll be able to garner the same nine, ten percent coupons, as well as other add-ons, that you’ve been able to extract from firms like Goldman Sachs and Bank of America in times of distress. I’d expect those rents to be at least a few percentage points lower once you’re no longer running the show, that is, until those managers build up a reputation to warrant higher returns. Am I right to think about it that way?

Warren Buffett [01:00:50] I’m not sure the, when we, in two, you mentioned Goldman Sachs, and we also did with General Electric, in September, early October of 2008, we probably could have actually extracted better terms. You know, it, I think it might have been counterproductive in the end. But I was, we would have done better, incidentally, financially, if we’d really waited till the panic develop further, because I didn’t know how far it would develop, but we could have made a lot better purchases three or four or five months later than we did at that time. And we also did not want to do something that looked to be so high as to in make the transaction disadvantages. The Goldman or the GE, they were going to take the terms we offered, but we actually didn’t, we didn’t push it to the limit, because there really wasn’t anybody else around, I think.

And we’re working on something right now that won’t, probably won’t happen. It’s not huge, but actually in this case both Todd and Teddy brought deals to me. One of them brought something to me, and you know, he was thinking and the same terms that I got, that was thinking about, and he’s the one that returned the call that he had received about a transaction. And I do not think the party on the other side is going to care about the fact that they had him on the phone rather than me on the phone. I, you know, there may, there could be just a little bit at certain times in history. But, you know, we will continue to have our standards of what we think money is worth at any given time, and Ted and Todd think just as well about that as I do. And there will be times, very occasionally, when our phone will ring a lot, and I don’t think they’ll hang up because I don’t answer, if they need the money. Charlie?

Charlie Munger [01:03:30] Well, the times he’s referring to, a lot of them were like worse than 50 years. So that’s a really rare kind of an occurrence, and we didn’t make all that many deals. So I think he’s right, it’ll be harder for us to make similar deals in the future.

Warren Buffett [01:03:53] Yeah, the problem is, is the sums involved now, more than the problem of deciding what the proper term should be. And sometimes we can, sometimes we can get what we think is appropriate, and sometimes we, most of the time today, we can’t. But you may see a transaction or two that, not in terms of buying business, but in terms of securities, that strike you as perfectly decent ways to invest Berkshire’s money, and they may well have come through waterted and said it directly to me. I like to think I’ll be missed a little bit, but you won’t notice it. Okay, station three.

[01:04:38] Shareholder (Boulder, Colorado): I’m John Lichter from Boulder, Colorado. Mr. Buffett, are you still involved in pricing decisions and the Buffalo News, and with what other Berkshire subsidiaries do you take more than a hands-off approach?

Warren Buffett [01:05:03] Yeah, you’re correct that it, at one time I, and for some quite a while, both Charlie and I took part in the pricing decisions at See’s Candy, and certainly for some years, particularly with the question, the survival of the Buffalo News was, invo, was really in question, I definitely took part in those decisions. In both cases we had good managers, but we still wanted the, we thought those decisions were important. But it’s been a long, long time, a very long time, since we participated in anything like that. I can’t tell you what the per pound price is for See’s Candy, which, it’s because people, and you’re invited to join this group, send me free candy from time to time. And I can’t, I really, I can’t tell you the prices at the Buffalo News. And then all I know is it’s very, very, very hard to move up prices on advertising generally.

So now we, the only thing is, Ajit and I talk frequently, and if there’s some very big risk, if somebody wants a five billion dollar cover on a chemical plant, some way excessive loss of over three billion or something, we have a certain amount of fun with him, deciding on the price in his head, and I decide in my pri, in my head, and then we compare notes. That’s, it’s the kind of risk that you really can’t look up in a book and see actually what it’s, fairly the parameters are fairly likely to be. I enjoy thinking through the pricing of that, and I particularly enjoy comparing it with Ajit. So these are just oddball situations, but we do that sort of thing, and we’ve done it for three decades, and it’s part of the, it’s part of the fun of my job, that we, the candy prizes, got to complain about those, you have to go to Charlie.

Charlie Munger [01:07:43] Well, the answer is Warren is still doing it, and talking to Ajit, and but that’s because Ajit likes it that way. We have a very peculiar place, where the, where Warren’s contact with the various people elsewhere in the organization largely depends on what they want, not what he wants. The CEO of one of the unusual, and it’s worked beautifully.

Warren Buffett [01:08:13] The CEO of one of our most successful subsidiaries, I may have talked to, unless I saw him here and just said at all, I probably talked to him three times in the last 10 years. And he does remarkably well. He might have done even better if I hadn’t talked to him those three times. And on the other hand, Ajit and I talk very, very frequently, and he’s good, he’s got the kind of business, hey, I do know, I know some, I know more about the insurance business, I know about it community of the other business. And it’s interesting, and we are evaluating things that you don’t look up in a book, you know. I mean, it, actuarial talent is not what’s important in the things that Ajit talks to me about. It’s plenty important throughout our insurance operation, but in these particular cases, you know, we’re making judgments, and his judgment’s better than mine. But I like to, I just like to hear about them. They’re interesting propositions. Okay, Carol.

CLCarol Loomis [01:09:30] This question comes from a Berkshire shareholder named Jack Ciesielski. He’s a well-known accounting expert who for many years has written The Accounting Observer. “Mr. Buffett, in this year’s shareholder letter, you have harsh words for the new accounting rule that requires companies to use market things for analytical purposes. You said Berkshire’s bottom line will be useless. I’d like to argue with you about that. Shouldn’t a company’s earnings report say everything that happened to and within a company during an accounting period? Shouldn’t the income statement be like an objectively written newspaper, informing shareholders of what happened under the management for that period, showing what management did to increase shareholder value and how outside forces may have affected the firm? If securities increased in value, surely the company and the shareholders are better off, and surely they’re worse off if share, if securities decreased in value. Those changes are most certainly real. In my opinion, ignoring changes in the way that some companies ignore restructuring costs is censoring the shareholders’ newspaper. So my question is, how would you answer what I say?”

Warren Buffett [01:10:51] Now, my answer to the question, and asked what my answer would be to what he said, the, I would ask Jack, if we’ve got 170 billion dollars of partly owned companies, which we intend to own for decades, and which we expect to become worth more money over time, and where we reflect the market value in our balance sheet, does it make sense to every quarter mark those up and down through the income account, when at the same time we own businesses that have become worth far more, much money in most cases, and become, you know, since we bought, you name the company, just take GEICO, an extreme case, we bought half the company for 50 million dollars, roughly, do we want to be marking that up every quarter to the value and having it run through the income account? That becomes an appraisal process. There’s nothing wrong with doing that in terms of evaluation, but in terms of, in terms of a value, and you can call it gain a net asset value or loss in that asset value, that’s what a closed end investment fund or an open investment fund would do.

But to run that through an income account, if I looked at our 60 or 70 businesses, or whatever number there might be, and every quarter we marked those to market, we would have obviously a great many, in certain cases where over time we’d have them at 10 times what we paid. But how, quarter by quarter, we should mark those up and run it through the income account, where 99% of net of investors probably look at net income as being meaningful in terms of what has been produced from operations during the year, I think would be, well, I can say it would be enormously deceptive. I mean, in the first quarter of this year, you saw the figures earlier, where we had the best, what I would call operating earnings in our history, and our securities went, we’re down 6 billion or whatever it was. The… to keep running that through the income account every day, you would say that we might have made, on Friday we probably made two and a half billion dollars.

Well, if you’re, if you have investors and commentators and analysts and everybody else working off those net income numbers and trying to project earnings for quarters and earnings for future years to the penny, I think you’re doing a great disservice by running those through the income account. I think it’s fine to have marketable securities on the balance sheet, the information available to their market value. But we have businesses there, if we were, we never would do it, but if we were to sell half, we’ll say, of the BNSF railroad, we would receive more than we carry it, carry form. We would turn it, we could turn it into a marketable security, and it would look like we made a ton of money overnight. Or if we were to praise it, you know, praise it every three months and write it up and down, it, hey, it could lead to all kinds of manipulation, but B, it would just lead to the average, to any investor being totally confused. I don’t want to receive data in that manner, and therefore I don’t want to send it out in that matter. Charlie?

Charlie Munger [01:14:26] Well, to me it’s obvious that the change in valuation should be noted, and it is, and always has been, goes right into the net worth figures. So the questioner doesn’t understand his own profession. I’m not supposed to talk that way, but it slips out once in a while.

Warren Buffett [01:14:53] Sometimes he even gives it a push. Okay, Jonathan.

JBJonathan Brandt [01:14:57] McLane’s core operating margins have dropped about 50% from where they’ve generally been since acquisition. Could you elaborate on the competitive pressures in the grocery and convenience store distribution business that have caused the deterioration in profits, and do you expect the margin structure of that business to eventually get back to where it was, or is this the new normal?

Warren Buffett [01:15:23] Well, I don’t know the answer to the second part about the future, but there’s no question that the margins have been squeezed. They were very, very narrow, as you know. They were about one cent on the dollar, pre-tax, and they have been, they’ve been squeezed from that. Payment terms get squeezed, and in some cases we have fairly long-term contracts on that, so it’ll go on for five years at one. And then, it’s a very, very tight margin business. And the situation’s even worse than you portray, because within McLane we have a liquor distribution business in a few states, and that business has actually increased its earnings moderately, and we’ve added to that business. So within McLane’s figures are about 70 million or so pre-tax from the liquor park that have nothing to do with the massive parts you’re talking about in terms of food distribution. So it’s even, the decline is even greater in what you’re referring to than you’ve noticed.

And that’s just become very, very much more competitive, and we have to decide. You look at our competitors and they’re not making much money either, and that’s capitalism. I think, you know, there comes a point where the customer says, “You know, I’ll only pay X,” and you have to walk away. And there’s a great temptation, when you’re employing, particularly employing thousands of people, and you build distribution facilities and all of that sort of thing, take care of them, to meet what you’d like to term is irrational competition. But that is capitalism. And you’re right, we took the earnings went up quite a bit from the time we bought it, and we’re still earning more than that, and we’ve earned a lot of money over time. But as they say, a fair amount of that is actually coming from liquor distribution activities in about four states that we purchase, very well run. And we will do our best to get the margins up, but I would not, I could not tell you, give you a really, your guess is almost as good as mine, or better than mine maybe, as to what margins will be in that distribution business five years now.

It’s a very essential service. We do 40 some billion dollars, and we move more of the product of all kinds of companies that names are known to you than anybody else. But when you get, when you get Kraft Heinz, for that matter, or Philip Morris, or whomever it may be, on one side of the deal, and you get Walmart and some other 7-Eleven on the other side of the deal, sometimes they don’t leave you very much room in between. Charlie?

Charlie Munger [01:18:47] I think you’ve described it very well.

Warren Buffett [01:18:51] Okay, station four.

[01:18:52] Shareholder (Seattle, Washington): Good morning, Charlie and Warren. I know that seems a little bit out of order, but I’m a huge fan of yours, Charlie, mostly for your 25 cognitive biases. I’m from Seattle, Washington. I run a one-person digital marketing firm that specializes in Facebook ads and email marketing. I use these a lot. I, your breakdown of Coca-Cola was really, really solid, and I use that as reference when looking to how to understand the mechanics of my clients’ products and how to promote them. So I’m fairly certain that your cognitive biases work for internet related companies. Now that you’re partnering with Amazon on healthcare, I’m curious, have you started to understand how to apply these biases to internet related companies, or is there another set of tools you use to decide if you understand a business? Because you guys talk a lot about not investing in businesses that you don’t understand.

Warren Buffett [01:19:59] Well, healthcare is, it, we don’t plan to start healthcare companies, or necessarily insurers or anything. We simply have three organizations with leaders that I admire and trust, and we that mutually goes around all three, and we hope to do something, which Charlie correctly would probably say is almost impossible, to change in some way a system which is, was taking 5% of GDP in 1960, and now it’s taking close to 18%. And we have a hugely non-competitive medical cost in American business, relating to any country in the world. The countries that, there were some countries that were around our 5% when we were at 5%, but we managed to get to 18 without them going beyond 11 or so.

Literally, in 1960 we were spending $170 per capita on medical costs in the United States, and now we’re spending over $10,000. And you know, every dollar only has 100 cents. So there is a cost problem. It is a tapeworm in terms of American business and in its competitiveness. We don’t, we have fewer doctors per capita, we have fewer hospital beds per capita, fewer nurses per capita, than some of the other countries that are well below us. And you’ve got a system that is delivering 3.3 trillion dollars, that’s almost as much as the federal government raises. It’s delivering 3.3 trillion or some number like that to millions and millions and millions of people who are involved in the system, and every dollar has a constituency. It’s just like politics. And whether we can find the chief executive, which we’re working in now, and which I would expect we would be able to announce before too long, that, but that’s a key part of it. And whether that person will have the imagination and support of people that will enable us to make any kinds of significant improvements in a system which everybody agrees is sort of out of control on cost, but what, but they all think it’s the other guy’s fault, generally.

We’ll find out. It won’t be, it won’t be easy, but it is not a… the motivations are not primarily profit making. They’re, we want to deliver, we want our employees to get better medical service at a lower cost. We’re not gonna, we’re certainly not gonna come up with something where we think the service that they receive is inferior to what they’re getting now. But we do think that there may be ways to make a real, some significant changes that could have an effect. And we know that the resistance will be unbelievable, and if we fail, we’ve at least tried. And but the idea is not that I will be able to contribute anything to, you know, in some breakthrough moment by reading a few medical journals or something, changing something that is embedded as the medical system.

But the idea is, and maybe the three organizations, which employ over a million people, and which after we announced that, we had a flood of calls from people who want to join in, but there wasn’t anything to join into now. But they will, they will, if we have come up with any ideas that are useful. Whether we can bring the resources, bring the person, and the CEO is terribly important, and bring the person, support that person, and somehow figure out a better way for people to continue to receive better medical care in the United States without that 8%, 18 going to 20 or 22% in, you know, in the lifetime of, you know, our children or something of sort, because there are only 100 cents in the dollar. And we will see what happens. It’s, you know, if you were a gene, actually figuring, you would not, you would not bet on, bet on us. But I think there is some chance we will do something. There’s a chance nobody can quantify that we can do something significant, and we are positioned better than most people to try, and we certainly got the right partners. So we will give it a shot and see what happens. Charlie? (Applause)

Charlie Munger [01:25:34] There is some precedent for success in this public service activity. If you go back many decades, John D. Rockefeller the first, using his own money, made an enormous improvement in American medical care, perfectly enormous. In fact, there’s never been any similar improvement done by any one man since that morals. So Warren, having imitated Rockefeller in one way, it’s just trying another, and maybe it’ll work. Rockefeller instantly lived a very long time.

Warren Buffett [01:26:07] So actually I’m trying to imitate them three ways there. We’ll see what happens. But we are, we’re making a lot of progress, and I think we’ll probably have a CEO within a couple of months. But if we don’t have one, that we’re not going to pick somebody just because we want to meet any deadline or anything like that. We’ve got these wonderful partners. We don’t have a partnership agreement among us. Somebody started growing up one in the legal department, and the CEO just put a stop to it. They, you do have places that have a lot of resources, and while we all have our share of bureaucracy, we can cut through it if we’ve got something that we really think makes sense. And we will get the support. We’ll get a lot of resistance too, but we will get the support of a lot of American business if we can come up with something to make sense. But if it was easy, it would have already been done. There’s no question about that. It’s not easy, but it should be tried. Okay, Becky.

Becky Quick [01:27:10] This question comes from David Rolfe, who is with Wedgewood Partners, and has been, the company has been shareholders in Berkshire since 1989. The stock is currently the largest holding in their stocks, 18 stocks. He asks this question: “Over the past two years, you have listed the individual fund of funds performance from Protege Partners. When will you start showing the annual performance on $25 billion that Ted and Todd manage? Can you state if either Ted or Todd has beaten the S&P 500 index over the last five years?”

Warren Buffett [01:27:50] Yeah, both, a will probably never report their individual performance, but you can be sure that I have an enormous interest in, as does Charlie, and how much we think they contribute to Berkshire. And they have, they’ve been, they’ve been terrific. They not only have the intellect and the record, but they are, they are exceptional human beings. And they, Todd has done a tremendous amount of work, for example, on the medical project, and Ted has, I’ve given him several things, and he’s done them better than I can do them. So the record since inception, and I’m measuring it, Ted came later than, than 9 years old later. But the record since inception is almost identical, both for the two managers from their different interceptions, and matching the S&P. And they’ve received some incentive compensation, which they only get if they beat the S&P. And as I say, they’re just slightly had that, really hasn’t… It’s been better than I’ve done, so naturally I can’t criticize it. They, they were the, they were two very, very, very good choices. Charlie?

Charlie Munger [01:29:21] You did, you did report it in the previous year. You just didn’t do it this year. And but now you have your report.

Warren Buffett [01:29:35] Well, yeah. Well, I would… the problem that all of us has, it is size. It’s actually, it’s harder to run even $12 or $13 billion, frankly, than it is to run a billion. And if you, if you’re running a million dollars or something of the sort, it’s a whole different game. You’d agree with that, when you journey?

Charlie Munger [01:30:05] Of course.

Warren Buffett [01:30:06] Yeah. Okay. Just like any good lawyer, you never ask them a question unless you think you know the answer. I gotta give… Okay, Gary.

GRGary Ransom [01:30:18] My question’s on GEICO. Last year you promised growth and delivered, but along the way, the combined ratio was moving up, and it was the first time it was over 100 in about 15 years. Granted, some of that was catastrophes, but even excluding catastrophes, there was something going on in the lost trends that caused you to slow down that growth, at least it was as we got to the latter part of the year. And I wondered if you could tell us what was going on. And I did look this morning too, so it looked like the first quarter settled down a little bit, but I’d still like to know about before.

Warren Buffett [01:30:59] Yeah, sure. The only thing I did different with the questions I did, when you say it caused us to slow down, we didn’t want to slow down the growth. I mean, if you’re, you’re looking at a guy here that’s never wanted to slow down the growth at GEICO. The growth did slow down, but it wasn’t because we wanted it to. Our prices, that led to the underwriting loss, the actual… we’d have been slightly in the black without the catastrophes. But, you know, if we hadn’t paid our light bills, we might have been in the black too. I mean, this except-for stuff doesn’t mean much in insurance as far as I’m concerned.

The, if you look at the first quarter, our margins were around 7%, which is actually a little more than we aim for. And I’ve received the unordered, I mean the preliminary figures for April, and they’re similar. So the underwriting gain is, her margins are perfectly satisfactory now, and we’d love to get all the growth we can. And we will gain market share this year, and we gain market share. Tony, when Tony took over the place, it was in 1993, it was 2 in a fraction, 2 and a very small fraction percent, and it’ll be 13% of the house, you know, 13% of the households in the country now. And we will keep gaining share. We will keep riding on profitably most of the time. And every now and then, our rates will be in that slightly inadequate, modestly inaccurate and, inadequate I should say, and/or will have maybe some big losses on hurricanes or something of the sort, or we’ll have a Sandy in New York.

The, but GEICO is a jewel, and it’s, it’s, you know, it’s really our… we’ve got some others we feel awfully close to similarly about, but it’s an incredible company. It has a culture all of its own. It’s saving its customers probably $4 or $5 billion a year against which they would otherwise, against what they would otherwise be paying based on the average in auto insurance. And it will be profitable on underwriting a very high percentage of the year. It contributed another $2 billion to float last year. It is a terrific company. And like I say, the first four months are dramatically better. Now, there’s some seasonal in auto insurance, so the first quarter is usually the best of the four quarters, but it’s not a dramatic season. Also, I think when you read the 10-Q, and you can take my word for April, I think GEICO is on a good profit track as well as a good growth track, and the more it grows, the better I like it. Charlie?

Charlie Munger [01:34:28] Well, I think you’ve said it perfectly. It was never very bad, and it’s better now.

Warren Buffett [01:34:37] Okay, station five.

[01:34:38] Shareholder (Ethan Raposa, Omaha, Nebraska): Good morning, Warren Buffett and Charlie Munger. My name is Ethan Raposa. I’m from Omaha, Nebraska. My question is how Donald Trump’s tariffs affect the manufacturing business of Berkshire Hathaway.

Warren Buffett [01:35:01] Well, today steel costs… (Applause) So, seen us, we’ve seen steel costs increase somewhat, but as I said earlier, I don’t think the United States or China… there’ll be some jockeying back and forth, and there’ll be something that leaves some people unhappy. And but I don’t think, I don’t think either country will dig themselves into something that precipitates and continues any kind of real trade war. In this country we’ve had that in the past a few times, and I think we’ve learned a general lesson on it. But there will, there will be some things about our trade policies that irritate others, and they’ll be some from others that irritate us, and they’ll be some back and forth. But in the end, I don’t think we’ll come out with it with a terrible answer on it. Charlie, how about you?

Charlie Munger [01:36:18] Well, steel has it reached… the conditions in steel were almost unbelievably adverse to the American steel industry. You know, even Donald Trump can be right on some of the stuff.

Warren Buffett [01:36:36] The thing about trade, I’ve always said that the president, whether it’s president, any president, needs to be an educator in chief, which Roosevelt was in the Depression. That’s why he had those fireside chats. And it was very important that he communicated to the people what needed to be done and how, and what was happening around them. And trade is particularly difficult because the benefits of trade are basically not visible. You know, you don’t know what you would be paying for the closure ordering today if we had a rule they all had to be manufactured in the United States, or what you’d be paying for your television set or whatever. Maybe no one thinks about the benefits day by day as they walk around buying things and carrying on their own business.

The negatives, and there are negatives, are very, are very apparent and very painful. If you’re laid off, like happened in our shoe business in Maine, and, you know, you are, been a very, very, very good worker, you are proud of what you did, and maybe your parents did it before you, and all of a sudden you find out that American shoes, she was manufactured in America, are not competitive with shoes made outside the United States. You know, you can talk all you know about Adam Smith or David Ricardo or something and explain the benefits of free trade and comparative advantage and all that sort of thing, and that doesn’t make any difference. And if you’re 55 or 60 years old, to talk about retraining or something like that, you know, so what?

So I, it is tough in politics where you have a hidden benefit and a very, a very visible cost to a certain percentage of a con, of your constituency. And you need to do two things under those circumstances. If you have that situation, you know what’s good for the country, so you have to be very good at explaining how it does really hurt in a real way somebody that works in a textile mill, like we had a New Bedford, where you only spoke Portuguese. Half our workers only spoke Portuguese. And suddenly they have no job, and they’ve been doing their job well for years. You’ve got to do two things. You can, you have to, you have to understand that, that that’s the price individuals pay for what’s good for the collective good. And secondly, you got to take care of the people that are, that were… retraining as a joke because of their age or whatever it may be, and they’ve got to take care of the people that become the road kill in something that is collectively good for us as a country. And that takes, that takes society acting through its representatives to develop the policies that will get us the right collective result and not kill too many people economically in the process.

And, you know, we’ve done that in various arenas over the years. The people in their productivity years do help take care of the people that are too old and too young. I mean, every time a baby is born in the United States, you know, we take on an obligation of educating them for 12 years. It’ll cost $150,000 now, you know. We have a system that has a bond between the people in the productive years and the ones in the young and old, and it gets better over time. Far from perfect now, but it has gotten better over time. And I believe that the trade, properly explained and with policies that take care of the people with a roadkill, is good for our country and can be explained. But I think it’s a tough, it’s been a tough, tough sell to a guy that made shoes in Dexter, Maine, or worked on a loom in New Bedford, Mass., or works in a steel mill in Youngstown, Ohio. (Applause) Andrew.

ASAndrew Ross Sorkin [01:40:55] Okay, Warren, this question comes from a Berkshire shareholder, says they’ve been a shareholder for 10 years. I should say this may be one of the most pointed questions I’ve ever received for you, but you’ve elected to give it though anyway. But I did. The shareholder writes: “I have watched the movie every year at this meeting when you testify in front of Congress on behalf of Salomon as the symbol of what it means to have a moral compass. Investors are increasingly looking to invest in companies that are socially and morally responsible. So I was disturbed when you were asked on CNBC about the role the business could play in sensible policies around the sales of guns. You said you didn’t think business should have a role at all and you wouldn’t impose your values on others. I was even more surprised when you said you’d be okay with Berkshire owning shares and gun manufacturers. At this meeting years ago, you said you wouldn’t buy a tobacco company because of the social issues. The idea that Berkshire would associate with any company as long as it isn’t illegal seems at odds with everything I think you stand for. Please tell us you misspoke.”

Warren Buffett [01:42:14] Well, let’s, let’s explore that a little. Should it, should it be just my view, or should it be the view of the owners of the company? So if I decide to poll the owners of the company on a variety of political issues, and one of them being whether, you know, Berkshire Hathaway should support the NRA, you know, I know if the shareholders voted to do it, or if a majority of the board of directors voted to do it, I would, I wouldn’t, I wouldn’t accept that. I don’t, I don’t think that the… my political views, I don’t think I put them in a blind trust at all when I take the job. And I, in the election of 2016, I raised a lot of money, in my case I raised it for Hillary, and I spoke out in various ways that were quite frank. But I don’t think that I speak, when I do that, I don’t think I’m speaking for Berkshire. I’m speaking as a private citizen, and I don’t think I have any business speaking for Berkshire.

We have never, at the parent company level, we have never made a political contribution, you know. Let me go, and I don’t, I don’t go to our suppliers. I don’t do anything of that sort where I raise money either for the school I went to or for a political candidate I went to, anything else. And I don’t think that we should have a question on the GEICO policy hold reform: are you an NRA member? You know, and if you are, you just aren’t good enough for us or something. That, I think, I do not, I do not believe in imposing my political opinions on the activities of our businesses. And if you get to what companies are pure and which ones aren’t pure, I think it is very difficult to make that call. And I think with that response, I’m almost afraid to call on Shirley, but go ahead, John.

Charlie Munger [01:44:25] Well, obviously you do draw a limit, Warren.

Warren Buffett [01:44:28] Yeah.

Charlie Munger [01:44:29] We do kinds of things…

Warren Buffett [01:44:31] Yeah.

Charlie Munger [01:44:32] …which are beneath us, even though they’re legal. But we don’t necessarily draw it perfectly because we’ve got some sort of supreme knowledge. We just do the best we can. And certainly we’re not going to ban old guns surrounded by wild turkeys in Omaha.

Warren Buffett [01:44:53] Okay, Gregg.

GWGregg Warren [01:44:54] Warren, this question is also based on something you said more recently, so I can’t guarantee it’s going to be any easier. You recently noted that you prefer share repurchases over dividends as a means for returning capital to shareholders. Should Berkshire’s cash balances continue to rise and hit the $150 billion threshold you noted as being difficult to defend the shareholders at last year’s annual meeting… While I understand the rationale for not establishing a regular dividend, a one-time special dividend could be a useful option for returning a larger chunk of Berkshire’s excess capital to shareholders without the implied promise of to keep paying a regular dividend forever. The drawback with the special dividend, though, is that it would lead to an immediate decline in book value and book value per share, whereas a larger share repurchase effort, while depressing book value, would reduce Berkshire’s share count, limiting the impact on book value per share. If we do happen to get a few years out and Berkshire does hit that $150 billion threshold because valuations continue to be too high both for acquisitions and for the repurchase of company stock, would you consider a one-time special dividend as a means for returning capital shareholders?

Warren Buffett [01:46:15] Well, if we thought we couldn’t use capital effectively, we would figure, we would try to figure out the most effective way of returning capital to shareholders. And you could, I would have probably, I think it’d be unlikely we’d do it by a special dividend. I think it’d be more likely we’d do by a repurchase, if the repurchase didn’t result in us paying a price above intrinsic value per share. We’re never going to do anything that we think is harmful to continuing shareholders. So we think the stock is intrinsically worth X, and we would have to pay some multiple, some modest multiple even above that to repurchase shares, we wouldn’t do it, because we would be hurting continuing shareholders to, to the benefit of the people who are getting out. But we will try and do whatever makes the most sense, but not with the idea that we have to, we have to do something every day because we simply can’t find something that day.

We had a vote, as you know, I don’t know, a few, a few years back on whether people wanted the dividend and the B shares. So we’re not talking my shares or Charlie’s or anything, but the B shares voted 47-1 against it. So I think through self-selection of who become shareholders, I don’t, I don’t think shareholders world or country-wide on all stocks with vote 47, the one, at all, but we get self-selection in terms of what joins us. And I think they expect us to do whatever we think makes the sense for all shareholders. And obviously, if we really thought we never could use the money effectively in the business, we should get it out one way or another. And you’ve got a bunch of directors who own significant, very significant amounts of stock themselves, and you can expect them to think like owners. That’s the reason they’re on the board. And you can expect the management to think like owners. And owners will return money to all of the owners if they think it makes more sense than continuing to look for things to do.

But we invested in the first quarter, maybe we have to look it up on the… well, certainly through April, probably close to $15 billion or something like that. And that, so, and we won’t always be in a world of very low interest rates nor highest or high private market prices. So we will do what makes the most sense, but I can’t see us ever making a special, or almost, it’s very unlikely we would just pay out a big special dividend. I think that if we put that to the vote of the shareholders, and Charlie and I did not vote, I think we would get a big negative vote. And I’d be willing to, be willing to make a bet on that one. Charlie?

Charlie Munger [01:49:42] Well, as long as the existing system continues to work as well as it has, why would we change it? We’ve got a whole lot of people that are accustomed to it, who’ve done well into it. And if conditions change, why, we’re capable of changing our minds. If the facts change, and we’ve done that several times.

Warren Buffett [01:50:07] Yes. Yeah, although I must say it’s a little hard. It always brings me back to earth. Okay, station six.

[01:50:15] Shareholder (Stephanie Yu, Shanghai): Hi, good morning, Mr. Buffett and Ms. Monger. My name is Stephanie Yu from Horizon Insights, a China-focused research firm based in Shanghai. So I have a lot of mutual fund clients in China who are very young, relatively younger, and they manage a smaller portion of funds. So my question is, if you only have $1 billion in your portfolio today, how would you change your investments? Would you consider more investment opportunities in emerging markets such as China? Thank you.

Warren Buffett [01:50:55] Yeah, I would, I would say if I were working with a billion, I would probably find, within a $30 trillion market in the United States, where I understood things better just generally than I do around the world, I’d probably find, and find opportunities there that would be better, incidentally, by some margin than what we can find for hundreds of billions. But I wouldn’t, there’s no way I’d rule a lot of emerging markets. There was a time 15 years ago or so when, just because it was kind of interesting and it took me back to my youth, I, on a weekend, I went through a directory of Korean stocks, and I bought, and these were small stocks. Well, they were small by the standards of, of either Korean or American business. They were big, big companies, but I found 15 or 20, and they were statistically cheap, and bought some of each one myself. And there are opportunities with smaller amounts of money to do things that we just can’t do.

And but I, my first inclination always would be to comb through things in the United States. And but I’d come from in other countries. I probably wouldn’t get into very, very small markets, because there can be a lot of difficulties, even in market execution and taxation, a lot of things. You can find, if you can’t find it in, you know, an America, China, and Britain and a few other places, you probably aren’t going to find it someplace else. You may think you found it, but there may be, it may be a different game than you know. Our problem is size, not geography. Charlie?

Charlie Munger [01:53:01] Well, I already have more stocks in China than you do as a percentage, so I’m with the young lady.

Warren Buffett [01:53:11] Okay, well, you can, you want to name names? Do these stocks have names, or no?

Charlie Munger [01:53:19] I don’t.

Warren Buffett [01:53:20] Carol.

CLCarol Loomis [01:53:20] Um, this question…

Warren Buffett [01:53:21] And I should just add one thing. You will find plenty of opportunities in China. Charlie would say you’ve got a better hunting ground than even a person with similar capital in the United States. Would you agree?

Charlie Munger [01:53:39] Yes, I do.

Warren Buffett [01:53:41] Yeah. Yeah. So, and in a sense, it’s logical that should be the case, because it’s a younger market, but still a large market, so that, markets probably work toward efficiency as they age. Japan had this very strange situation with warrants being priced out of line and all of that 30 years ago, and that, people notice, after a while it disappears. But there can be some very strange things happen in markets as they develop. I think you’d agree with that, Charlie, wouldn’t you?

Charlie Munger [01:54:24] Absolutely.

Warren Buffett [01:54:24] Yeah. Jonathan. Did I skip… I skipped Carol.

CLCarol Loomis [01:54:28] Yep.

Warren Buffett [01:54:29] Oh, I’m sorry. Okay.

CLCarol Loomis [01:54:31] Okay. Um, this question, and I would have conceded, is not a small one, comes from Gideon Pollack of Montreal. He says, “The world knows generally how the looks of Berkshire Hathaway have changed since you began to run the company in 1965. Berkshire was then a tiny northeastern textile company, and now it is the number four company on the Fortune 500. What about the next 50 years? Could you give us your view of what Berkshire looks like in 2068?”

Warren Buffett [01:55:06] I think it’ll look a long way away. No, the answer is I don’t know, and I didn’t know 50 years ago what it would look like now. I mean, it will be based on certain principles, but where that leads, and I’ll admit, we will find out. And we’ll have people that are thinking about different things than I am, and we’ll have a world that’s different. And but we will be, I very much hope and believe, and we will be, that we’ll be as shareholder oriented as any large company in the world. We will look at our shareholders as partners, and we will be trying to do with our money exactly what we would do with our own, not seeking to get an edge on them. And who else, who knows what, what else will be happening then. Charlie?

Charlie Munger [01:56:12] Well, I want to talk to the younger shareholders in the group. Those of you who, after we are gone, sell your Berkshire stock and do something else with it, helped by your many friends, I think are gonna do worse. So I would advise you to keep the faith. (Applause)

Warren Buffett [01:56:38] Well, some of that has already happened in many families. I’ll give his answer next time, now that I’d see it get all the applause. Jonathan.

JBJonathan Brandt [01:56:51] Duracell’s $82 million of pre-tax profits in 2017 were still well below what it earned as a subsidiary of P&G. Can you clarify or quantify to what extent transition costs or purchase price accounting impacts at the segment level were still temporarily a burden last year? Or is it possible that the GAAP earnings contribution simply reflects the commoditization of the category, given the entry of Amazon into the battery market? I did see that Duracell’s earnings were up in the first quarter. Is that a sign of a more meaningful contribution in 2018 and beyond, as you finish right-sizing the manufacturing footprint and acquisition-related charges fall away?

Warren Buffett [01:57:34] Yeah, Duracell should be earning more money than it is now, and will be. And as you mentioned, it’s well on its way there. But it, but it is not earning, it’s not earning an appropriate amount now based on the history of the company. I was around, when I was on the board of Gillette when Gillette bought Duracell, and I’ve seen what it does when it isn’t managed to its full extent. And I saw what Jim Kilts did with it and Gillette when, when he ran it. And there were a lot more transition problems in the purchase. For one thing, there’s a lot of rules connected with our swap of our stock and P&G for Duracell. There are a lot of things that you cannot do that made sense to do in that period of transition from P&G, P&G’s management to ours.

But Duracell, the brand is strong, very strong. The product, the product line is very strong. So and we are making more money, and will, we should, and I believe we will, earn really what the property is capable earning. We should, we should be, we should be earning that relatively soon. But you’re absolutely right that, that it is, from a private standpoint, it’s underperforming. We’re making a lot of changes, and some of those are involved in jurisdictions, countries, where it is really expensive to change in terms of employment payments that have to be made if a plant is changed or something of the sort. But I like the Duracell deal absolutely as well as, as well as when we made it. Charlie?

Charlie Munger [01:59:51] I like it better than you do now. Duracell, Duracell is a very, very, it’s our kind of business, and we love it.

Warren Buffett [02:00:02] Okay, station seven.

[02:00:03] Shareholder (Ola Larsen, San Francisco Bay Area): Good morning. Um, I have a question related to the bond market, the U.S. Treasury bond market. My name is Ola Larsen. I live in the San Francisco Bay Area, and I never worked in the financial industry. I started out buying a penny mining stocks on a Vancouver Stock Exchange, and then a decade later I got married, and my wife convinced me to buy Berkshire shares that were probably a good decision. So, so my question is, um, I read that, I read the newspapers about the Federal Reserve and the inflation numbers, and there must be an increase supply of Treasury bonds that must go to auction. And my question is, how would, what do you expect that to impact the yield or interest rate?

Warren Buffett [02:01:11] Yeah, the answer is I don’t know, and the good news is nobody else knows, including members of the Federal Reserve and everywhere. It’s, there are a lot of variables in the picture. And the one thing we know is we think that long-term bonds are a terrible investment, and we, at current rates or anything close to current rates. So basically all of our money that is waiting to be placed is in, is in Treasury bills that I think have an average maturity of four months or something like that at most. The rates on those have gone up lately, so that the, in 2018, my guesses will have at least $500 million more of pre-tax income than we would have had from the bills last year. But they still, it’s not because we want to hold them. We’re waiting to do something else.

But long-term bonds, they’re basically, at these rates, it’s almost ridiculous when you think about it, because here the Federal Reserve Board is telling you, we want 2% of your inflation, and the very long bond is not much more than 3%. And of course, if you’re an individual and you pay tax on it, you’re going to have some income taxes to pay, and let’s say it brings your after-tax return down to 2.5%. So the Federal Reserve is telling you that they’re going to do whatever’s in their power to make sure that you don’t get more than a half a percent a year of inflation-adjusted income. And that seems to me a very… I wouldn’t go back to penny stocks, but I think I would stick with, I would stick with productive businesses or productive, certain other productive assets, by far. But what the bond market does in the next year, you know, you’ve got trillions of dollars in the hands of people that are trying to guess which maturity would be the best to own and all that sort of thing, and we do not bring anything to that game that would allow us to think that we’ve got an edge. Charlie?

Charlie Munger [02:03:52] Well, it really wasn’t fair for our monetary authorities to reduce the savings rates paid mostly to our old people with savings accounts as much as they did. But they probably had to do it to fight the Great Recession appropriately, but it clearly wasn’t fair. And the conditions were weird. In my whole lifetime it’s only happened once that interest rates went down so low and stayed low for a long time. It was quite unfair to a lot of people, and it benefited the people in this room enormously, because it drove asset prices up, including the price of Berkshire Hathaway stock. So we’re all a bunch of undeserving people, and I hope that we continue to be so.

Warren Buffett [02:04:44] At the time this newspaper came out in 1942, that it was the government appealing to the patriotism of everybody. As kids we went to school and we bought savings stamps to put in what they first call them, U.S. War Bonds, and they call them U.S. Defense Bonds, and they call them U.S. Savings Bonds, but they were called War Bonds then. And you put up $18.75 and you got back $25 in 10 years. And that’s when I learned that, that $4 for $3 in 10 years was 2.9% compounded, because they had to put in small print that, and even the 11-year-old could understand that 2.9% compounded for 10 years was not a good investment. But we all, we all bought them. It was, it was, you know, it was part of the war effort, basically. And the government knew, I mean, you knew that significant inflation was coming from what was taking place in finance in World War II.

We actually were on a massive Keynesian-type behavior, not because we elected to follow Keynes, but because war forced us to have this huge deficit in our finances, which took our debt up to 120% of GDP. And it was the great Keynesian experiment of all time, and we backed into it, and it sent us on a wave of prosperity like we’ve never seen. So you get some accidental benefits sometimes. But the United States government then was urging every citizen to put their money into a fixed dollar investment at 2.9% compounded for 10 years. And I think Treasury bonds have been unattractive ever since, with the exception of the early ’80s. That was something at that time. I mean, you really had a chance to buy, you got a chance to invest your money by buying zero coupon Treasury bonds and, in effect, guarantee yourself that for 30 years you would get a compounded return, you know, something like 14% for 30 years of your lifetime. So that every now and then, something really strange happens in markets, and the trick is to not only be prepared but to take action when it happens. Charlie, did you ever buy any War Bonds, or no?

Charlie Munger [02:07:18] No, I never… No, used to be like take me. I didn’t have any money when I was in the war.

Warren Buffett [02:07:26] That’s a good reason not to buy them. Okay, Becky.

Becky Quick [02:07:30] Um, this question comes from Angus Hanton, who, he and his wife are based in London, and he says they’ve been shareholders in Berkshire Hathaway for over 30 years. He says, “We have all read about the zero-based budgeting that has been so effective with Kraft Heinz and other investments that you’ve done with 3G Partners. Can we expect these cost reduction techniques to be used by your managers in other parts of the Berkshire Hathaway enterprise?”

Warren Buffett [02:08:00] Well, in general, we do not expect the managers generally to get into a position where there would be a lot of change in terms of zero-based budgeting. In other words, why in the world aren’t you thinking that way all of the time? The 3G people have gone into certain situations where there were, probably primarily in personnel, but in other expenses as well, a lot of expenses that were not delivering a dollar of a value per dollar expended. And so they made changes very fast that, to a situation that, that probably shouldn’t have existed in the first place. Whereas we hope that our managers take a… GEICO, GEICO’s gone from I think 8,000 to 39,000 people since we bought control, and but they’re all very productive. I mean, you would not, you would not find a way for a 3G operation to take thousands of people out of there.

On the other hand, I can think of some organizations where you could take a whole lot of people out, where it isn’t being done because the businesses are very profitable to start with. That’s what happened with the tobacco companies, actually. They were so profitable that they have all kinds of people around that didn’t, weren’t really needed, but they, the money just flowed in. So I, our managers have different techniques of keeping track of, or, or of trying to maximize customer satisfaction at the same time that they don’t incur other than necessary costs. And I think probably some of our managers may well use something that’s either zero-based budgeting or something akin to it. They do not submit budgets. Never have to me. I mean, they’ve never been required to. We’ve never had a budgeted… we don’t, we don’t consolidate our figures monthly. I mean, I get individual reports on every company, but there’s no reason that, to have some extra time spent, for example, by having a consolidated figures at the end of April or the consolidated figures in May. We know where we stand. And, you know, I’m sure we’re the only company that, probably in the, in the whole Fortune 500, that doesn’t do it. But we don’t do unnecessary things around Berkshire, and a lot of stuff that’s done at big companies is unnecessary, and that’s why a 3G finds opportunities from time to time. Charlie?

Charlie Munger [02:10:45] Well, if you’ve got 30 people at headquarters and half of those are internal auditors, that is not the normal way of running a big company in America. And what’s interesting about it is, obviously, we lose so much from big size, but we also lose certain disadvantages from having a big bureaucracy within this meeting after meeting after meeting around headquarters. And Ned, I think we’ve been way ahead with our low overhead, diversified method, and also makes our company attracted to very able, honorable people who have, who have companies. So generally speaking, the existing system has worked wonderfully for us.

Warren Buffett [02:11:38] I don’t think we have the, the employment that could be cut effectively that a lot of other places have. And I think our methods have worked so well, we’d be very unlikely to change them. Yeah, I think it’s, up at headquarters you could say we have kind of sub-zero-based budgeting at the… And we, we hope that the example of headquarters is to a great extent emulated by our buyers.

Charlie Munger [02:12:10] Isn’t just the cost reduction. I think the decisions get made better if you eliminate the bureaucracy.

Warren Buffett [02:12:16] Oh, yeah. I think a bureaucracy is sort of like a cancer, and it functions sort of like a cancer. And so we’re very anti-bureaucracy, and I think it still is a lot of good. In that case, we’re quite different from, say, Anheuser-Busch at its peak. Okay, Gary.

GRGary Ransom [02:12:42] My question is on small commercial, and specifically direct small commercial. You seem to have some websites that enable buyers to purchase small commercial insurance directly. biBERK is one of them. It’s a very competitive, fragmented market, but what is your strategy for that market? And then, can you ultimately GEICO-ize the small commercial market?

Warren Buffett [02:13:08] Well, we’ll find out. I mean, it’s a very good question, because that’s exactly the question we ask ourselves. And we have this incredible company at GEICO, which has gone direct in the personal auto field, and is, you know, first started in 1936. And there’s no question in my mind that, that over a lot of years, and maybe not so many years, something like small commercial, anything that takes cost out of the system, you know, makes it easier for the customer, it’s going to work over time, if you’ve got a system that was based on something that, that had more layers of agency costs and that sort of thing. So we are experimenting, and we’ll continue to experiment on, on something like small commercial, workers’ comp, whatever it may be. We’ll, we’ll try and figure out ways to take cost out of the system, offer the customer an equivalent product or better and lesser price, and we’ll find out what can be done and what can’t be done. And we’re not the only ones doing it, as you know. Um, but we are not gonna… we’ve got some managers that are gonna be quite, I’m sure, enterprising on that, and we back them, and we expect some to fail, and some, and if a few succeed, we’ll have some very good businesses. And the world is going in that direction, so, so you can expect us to try and go with it. Charlie?

Charlie Munger [02:14:59] Well, if it were easy, I think it would have happened more fast.

Warren Buffett [02:15:04] Yeah, but yes, it will happen as we go along. I mean, it wasn’t easy in auto. I mean, when you think about it, no, it wasn’t. You know, I mean, it was a system with all kinds of extra costs, to go back to the turn of the 19th century into the 20th. I mean, it was built on fire insurance and strong general agencies, and that slopped over into auto when the auto came along in 1903 from Ford or whatever. And so it grew within a system that really wasn’t, really wasn’t very efficient compared to what was available. But it took, it took State Farm initially to go to a direct, or a captive agency system, and then it took USAA, and then later GEICO, and then later Progressive to go to direct systems that are even more efficient, consumer friendly. And the same thing is going to happen to some degree in all kinds of industries, and certainly small commercial. Somebody will, should happen, but it will be slow. It takes an amazingly long time. I mean, it, but, you know, the battle doesn’t always go to the strong and the race to the swift, but that’s the way to bet, you know, as they say. So, okay, station eight.

[02:16:38] Shareholder (Austin Merriam, Jacksonville, Florida): Austin Merriam from Jacksonville, Florida. Mr. Buffett, with the recent news of the partnership between you, Mr. Bezos, and Mr. Dimon to challenge the healthcare industry, and the self-admitted difficulties you are running across, this would lead me to believe the industry has higher barriers to entry than may have originally been hypothesized, a larger moat, if you will. Would that justify a higher earnings multiple for established players in the industry, such as PBMs, for example?

Warren Buffett [02:17:10] Well, just though the system may have a moat against intruders, it doesn’t mean that everybody operating within the system has individual moats. For one thing, now I, we are, if this new triumvirate succeeds at all, we are attacking an industry moat. And I’m dividing industry very broadly, healthcare, not just, you know, healthcare insurers or this or that. We’re trying to figure out a better way of doing it, making sure that, that we’re not sacrificing care, and the goal is to improve care. And like I say, that is a, it’s a lot bigger than them, a single company’s moat. It’s bigger than a component of the industry’s moat. The moat held by the whole system, since it interacts in so many ways, is actually, that’s the most that essentially has to be attacked, and that’s a huge moat. And like I say, we’ll do our best, but I hope if we fail, I hope somebody else succeeds. Charlie?

Charlie Munger [02:18:28] Well, I suspect that eventually, when the Democrats control both houses of Congress and the White House, we will get single-payer medicine, and I don’t think it’s going to be very friendly to many of the current PBMs. (Applause) And I won’t miss them.

Warren Buffett [02:18:51] Andrew.

ASAndrew Ross Sorkin [02:18:51] This question comes from Keeley, and actually is directly about the issue of moats. He notes that Elon Musk this week on his Tesla earnings call said the following, quote: “I think moats are lame. They are like nice in a sort of quaint, vestigial way. And if your only defense against invading armies is a moat, you will not last long. What matters is the pace of innovation.

That is the fundamental determinant of competitiveness,” unquote. So, Warren, it seems the world has changed. Business is getting more competitive. Pace of innovation, technology is impacting everything. Is Elon right?

Charlie Munger [02:19:42] The idea, or Elon says a conventional moat is quaint, and that’s true of a puddle of water. And he says that the best moat would be to have a big competitive position, and that is also right. All right, it’s ridiculous. Warren does not intend to build an actual moat, even though they’re quaint.

Warren Buffett [02:20:12] Yeah, there’s certainly a great mem, a great number of businesses… this has always been true, but it does seem like it, the pace has accelerated, and so on in recent years there’s been more moats that have been become susceptible to invasion than that seemed to be the case earlier. But there’s always been the attempt to do it, and there, here and there, there are probably, um, places where the moat is as strong as ever. But certainly you could work it, certainly should be working at improving your own moat and defending your own moat all the time. And then Elon may turn things upside down and in some areas. I don’t think he’d want to take us on in candy. But, and we’ve got some other businesses that, when he’s always either… you can, um, you can look at something like, um, Garanimals out there in the other room, and that, it won’t be technology that takes, takes away the business and Garanimals, and maybe something else that catches the young kids’ fantasy or something. But there are some pretty good moats around. Being the low-cost producer, for example, is a terribly important moat. And something like GEICO, technology has really not brought down the cost that much, and that, I think, I think our position as… there are a couple of companies that have costs as low as ours, but among big, big companies, we are a low-cost producer, and that is not bad when you’re selling an essential item. Okay, Gregg.

GWGregg Warren [02:22:25] Warren, Berkshire Energy has benefited greatly from operating under the Berkshire umbrella by not having to pay out 60% to 70% of earnings annually as a dividend. The company was able to amass $9 billion in capital the past five years and closer to $12 billion the past 10, money that could be allocated to acquisitions and capital spending, especially on renewables. While tax credits for solar energy don’t run out until next year, we’ve already seen a dramatic reduction in Berkshire Energy’s capital commitment to solar projects. And even though spending on wind generation capacity is projected to be elevated this year and next, it does wind down in 2020 as the wind production tax credits are phased out. Absent a major commitment to additional capital projects, it looks like Berkshire Energy’s expenditures in 2021 will be its lowest since 2012, leaving the firm with more cash on hand than it has had in some time. Do you think it is likely at that point that Berkshire Energy starts funneling some of that cash up to the parent company, or will it be earmarked for debt reduction, or just be left on the balance sheet as dry powder for acquisitions?

Warren Buffett [02:23:34] Yeah, the, you’re right about when tax credits phase out and all of that, although they, as you know, they’ve, they’ve extended that legislation in the past, and who knows exactly what the government’s position will be on incentivizing various forms of alternative energy. But my guess is, I mean, if you take the, if you take the logical expenditures that may be required in all aspect, aspects of the public, of electric generation and the utility business generally, I think there’ll be a lot of money spent, and the question is whether we can spend it and get a reasonable return on it. And well, there again, we’ll do what’s logical. There are three, three shareholders basically a Berkshire Hathaway Energy. Berkshire Hathaway itself owns 90% of it, and Greg Abel and his family, perhaps, and Walter Scott, and again family members, the other 10%. And we all have an interest in employing as much capital as we can, and we’ll know when, when it can be done and when it can’t be done. And we’ll do… there’s no tax consequences to Berkshire at all. So, but the three partners will figure out which makes the most sense. But when you think of what might be done to improve the grid in the U.S., and the fact that we do have the capital, I wouldn’t be surprised if we find good uses for per capita and Berkshire Hathaway Energy for a long time in the future.

Charlie Munger [02:25:22] Yeah, well, I think there’ll be huge opportunities in Berkshire Energy as far ahead as you can see to deploy capital very intelligently. So I think the chances of a big dividend is approximately zero.

Warren Buffett [02:25:36] Yeah, and we’ve not only got the money to an extent that virtually no utility company does, and we, we’ve also got the talent too. I mean, we’ve got a very, very talented organization there. So it’s a very, it’s a big field, and we’ve got shareholders that are capitalists, and we’ve got managers that are terrific, and you would think we’d find something intelligent to do over time in the field. So far we have. I mean, we’ve owned it now for close to 20 years, and we’ve deployed a lot of capital, and so far so good. I mean, it’s, you look at, you look at the improvements that can be made in our utility system in the United States, you’re talking hundreds and hundreds and hundreds of billions of dollars, if not trillions. So that, you know, where else but Berkshire would you look for that kind of money? Okay, station nine.

[02:26:40] Shareholder (Richard Surser, Tucson, Arizona): I’m Richard Surser from Tucson, Arizona. “At Berkshire, what counts most are increases in our normalized per share earning power,” and that was in our, your last letter. What is our normalized per share earning power, as you estimate?

Warren Buffett [02:27:01] Well, I would say that what you saw in the first quarter, under these tax rates, would probably be a reasonable guess. You know, obviously depends on the economy in any given year. I would say that would, is a reasonable estimate. But we have firepower we haven’t used, and we’ll have more firepower as we go along. So we do expect that normalized earning power to increase over the, over time. And if it doesn’t, you know, one way or another, we’re failing you, because we’re retaining those earnings. So I don’t see anything abnormal in our earnings figured now at a 21% federal rate. But as I look at the $5.25 billion in the first quarter, seasonally insurance is better in the first quarter, but seasonally most of our businesses, the first quarter is not the strongest quarter for sign. I don’t see anything abnormal in it. And then I think you can expect, you should expect, we expect substantial capital gains over time in addition to what comes from the operating businesses.

So how much you figure in for that, I would say that the, the retained earnings beyond dividends of our $170 billion of equities… in other words, how much they are keeping from us, but then our share of the earnings, which can be used by them, whether it’s Apple or American Express or Coca-Cola or Wells Fargo or whatever, our share, you know, is in many billions of dollars annually. And one way or another, we think that those dollars will benefit us as much as if they’d been paid out. Now, in certain cases they won’t, but in certain cases, though, they’ll excel the amount in terms of market value credit. So there’s many billions of dollars we are not showing in our earnings that is being retained by the, our investees, and one way or another, I think we’ll get value received out of those. So you can take $20 or $21 billion under present tax rates, present economic conditions, and then we should get something from that, and we should get more when we get, we get $100 billion of cash invested, and we should get more as we return these. So we hope it adds up to a bigger number as we go along. Charlie?

Charlie Munger [02:29:47] Well, I don’t think our shareholders are going to see another increase in net worth of $65 billion in a single year. They may have to wait a while for another. But I don’t think that… I think eventually there another will come, and then another. Just be patient.

Warren Buffett [02:30:10] We don’t regard the present situation as, um, you know, it’s disadvantageous, except we’d like to get more money out. But we like the businesses we have, we like the businesses that we own part of. We are not reflecting, in the way we look at earnings, the dividends we get from those partially owned companies falls far short of what they’re going to contribute, in our view, to Berkshire’s overall earnings over time. We wouldn’t own those stocks otherwise. And then so…

Charlie Munger [02:30:46] And you also like the Apple and airline stocks you’ve recently purchased better than the cash you parted with.

Warren Buffett [02:30:56] Absolutely. Yeah. And it’s quite a lot. Yeah. Yeah. Okay, we won’t pursue that further. Carol.

CLCarol Loomis [02:31:04] This question is from Daniel Kane of Atlanta. “Your annual letter this year pointed out that Berkshire has become a leader in real estate brokerage in the United States. Congratulations, that is a significant feat in less than 20 years. But let me mention a sticky point. If fees charged by stock market active managers are a drag on investor performance, I would argue that real estate commissions are no different, and perhaps more detrimental, especially when one considers the lifetime effects of large foregone, foregone upfront cash flows and the power of compounding interest. I would be pleased to hear your rejoinder on the points I’ve raised.”

Warren Buffett [02:32:02] Well, the, the purchase of a home is the largest financial transaction for a significant percentage of the population that they make. And people, a lot of people need a lot of attention, and you can show a lot of houses before you sell one. I would say this: if you look at our close to 50,000 agents now, I think they make a good living, a decent living, but I would say that the people who manage money make a whole lot more money with perhaps less contribution to the welfare of the person that they’re, that they’re dealing with. So I don’t think that there are unusual profits involved in being a real estate agent. I don’t think there are unusual profits involved in the ownership. We like it because it’s a fundamentally a good business, but here we are doing 3% of all the real estate transactions in the United States, and we’re making maybe $200 million a year, which, we won’t get into what the comparative efforts are in Wall Street to earn $200 million.

But I think I have to tell them about Roy Tolles a little bit on this. Roy Tolles, for example, Charlie’s partner, many, many, many years ago, decided he was going to want to buy a house in San Marino. He’s going to have a number of kids. So he’s sent his wonderful wife Martha out, and for six months he had her look at houses in San Marino. And this is many years ago, and if they were priced at $150,000, she would offer, he had her offer $75,000. And of course the real estate agents were going crazy, because they were going to get something listed 150, sold at 75. And then finally, when she found one that they both really liked, he had to offer something like 120, and the real estate agent was so happy to get a bid that was in the general area of the offering price that he would work very hard on the seller to take that bid, because he knew what he did not want: six more months of Roy bidding at the lower prices. So you don’t sell him on the first trip.

Charlie Munger [02:34:51] Instantly, I had Roy buy a house for me sight unseen, because this was a guy that knew human nature.

Warren Buffett [02:34:58] You don’t get rich, real estate agencies, you know, that people earn their money, and they earn it in a, in a perfectly, in a perfectly respectable and honorable manner in terms of what they get paid. And as in every single industry, there is, there, you know, there can be excesses or mistakes or that sort of thing. But we will continue to buy more brokers. In fact, we’ll probably have another couple to announce before long. And we will feel that, if we get to where we’re doing 10% of the real estate brokerage business in the country and we’re making $600 or $700 million a year pre-tax, we will not think that’s a crazy amount of money to make for enabling 10% of 5 million people to change their homes every year in the United States. Charlie?

Charlie Munger [02:35:52] Well, the commissions in real estate may get unreasonable if you’re talking about $20 million houses. It seems a little ridiculous to pay a 5% commission on a $20 million transaction. But do any of us really care if the kind of people who pay $20 million for a house have a slightly higher commission? The ordinary commission is not, is, is pretty well earned.

Warren Buffett [02:36:21] Yeah, we have a number of brokerage firms, so the, the highest has that, their average transaction in one section of the country would be close to $600,000 a unit, but the, in terms of the sales price of the house. But the, in most of our real estate operations, the average price is more like $250,000 or something in that area. And you can show a lot of houses to make one $250,000 sale. And of course, just put the listing company in the, and the selling company are usually two different, two different companies. So it’s, it does not strike me as excessive. And incidentally, it doesn’t strike the people in the industry that that way easier. It has not, has been particularly susceptible to online-type substitution or something of the sort. The real estate agent earns their commission in most cases. But Charlie’s had more experience with $20 million houses, so he, he will comment on that area. Okay, we’ll have one more question before we break. Jonathan.

JBJonathan Brandt [02:37:34] Given the changes in consumer tastes in the food business and Kraft Heinz is already high margin structure, do you think the brands they own today, plus new product into introductions, can together maintain or increase the current level of profits over the next 10 years without the benefit of acquisitions? Is there anything in their portfolio besides ketchup that is enjoying growing demand?

Warren Buffett [02:38:00] Well, in fact, you’re asking me whether Kraft Heinz is a good buy, and we don’t, we don’t want to give information on, on marketable securities like in that manner. But yeah, there, there are, there are a number of items besides ketchup that enjoy growing demand, and some vary quite a bit by geography. There’s enormous differences in the penetration of various products in the, in the portfolio. Consumer package goods are still a terrific business, insurance return on invested assets. And, you know, but the population worldwide grows fairly smallly and at a very fairly minor rate, and people are going to eat about the same amount, and there is some more willingness to experiment, you know, or go for organic products of the sort. It’s a very good business, and there are new products coming out constantly. It’s not one where you’re gonna get terrific organic growth, but it never has been. And, you know, I like the business, and we own 26 and so percent of it. But there are, there are a number of items within Kraft Heinz that enjoy pretty, fairly healthy growth, that, and I think you’d find out at most food companies. And I think you’d find very good returns on invested untangible net assets at those businesses.

And with that talk about food, we will now break for lunch, and we will come back in about an hour. And look forward to seeing… enjoyable woman who carried this meeting off without a hitch, Carrie Sova, and she just had her third child here about two weeks ago. And decided that, that, she decided right after the last meeting that, that, that was going to be our full-time occupation. And this year again, we’ve had everything carried off without me having to do anything, without a hitch. And I would just like to have Melissa Shapiro stand up. We’ll get a spotlight on her. (Applause) Jay. (Applause) I can’t believe that, how she does it. It, it’s just been, it’s remarkable. I mean, we, I just tell her the date, and that’s all the help I am, and it goes on from there. So, Melissa, thank you.

Okay, I think we next go to station 10, and we will continue until 3:30, and we’ll take a 15-minute break, and at 3:45 will convene the actual annual meeting. Station 10.

[02:41:21] Shareholder (Theresa Gazinski, Omaha, Nebraska): Hi, I’m Theresa Gazinski. I’m from Omaha, Nebraska, and I have a question about Microsoft. You have gotten into the tech world with buying Apple. You have Mr. Gates there. I’m just wondering why you’ve never bought Microsoft.

Warren Buffett [02:41:44] Well, in the, in the earlier years, it’s very clear the answer is stupidity. But the, but since Bill has, particularly since Bill has joined the board, but even, even earlier than that, because of our friendship, it would be, it just would be a mistake for Berkshire to buy Microsoft. Because if something happened a week later, a month later, in terms of them having better earnings than expected or making an acquisition, anything, both Bill and I would, incorrectly, but would be, would be a target of suggestions and accusations, perhaps even, that somehow he had told me something or vice versa. And I stay away from, I try to stay away from a few things just totally, because the, the inference would be drawn that, that we might have talked, I might have talked to somebody about something. So I’ve, I’ve told the, I’ve told the fellows that, Ted and Todd, for example, that they’re just a few things that are off the list, because there’d be a lot of people that wouldn’t believe us if something good immediately happened after we bought it. And of course, we, to buy a lot of stock, you can take six months to buy it or something of the sort. We just don’t need it. But both that and my stupidity have cost us a lot of money. It’s a very, it’s a good question, and I think, I think the answer makes sense. But Charlie?

Charlie Munger [02:43:37] Though it’s part of theology, the late conversion is better than ever, and you greatly approved yourself.

Warren Buffett [02:43:45] Becky.

Becky Quick [02:43:45] All right, this question comes from Dave Shane. He says, “Warren, you are a big believer in the U.S. political system, the financial system, and in every American. You’ve said that regardless of who is president, the economy and the U.S. consumer will continue to prosper over the long run. All that said, do you believe that people in this country are more divided today than 50 years ago, or is it just social media and media in general that blows this divine out of proportion? And if you do believe the divide has grown, what words of wisdom do you have to possibly help remedy it?”

Warren Buffett [02:44:33] I would say this: multiple times in my life, people felt the country was more divided than ever. And I’ve gone through periods where people I knew it admired thought that because the other party was in, in power, that, that there never would be another election. That’s a constitution. I’ve heard everything. Now, the interesting thing is, this paper from 1942, since then there have been 14 American presidents. Just since my young venture into the stock market at 11, I’ve lived under 14 of the 44 presidents the United States has had. Now, they called Trump 45, but they count Grover Cleveland twice, so there’s really only been 44 presidents of the United States, and 14 of the 44 have been during this period when that $10,000 became $51 million. Seven have been Republicans, seven have been Democrats, one has been assassinated, one has resigned under pressure. It works. You know, it, if you’d, if you told me at the start, you know, that you’d have a Cuban Missile Crisis, and you’d have nuclear weapons, and you’d have a panic in 2000, financial panic, and you’d have many recessions, and you’d have war in the streets in the late ’60s from a divided country, you’d say, why the hell are you buying stocks? And through it all, you know, America, in fits and starts, but America really, really moves ahead. And we are always, we survive the Civil War. I mean, yeah, hate to think of having to do it that way, but this country, in only less than three of my lifetimes, if you go back three of my lifetimes, you go back 263 years, I guess, and Thomas Jefferson is 12 years old, and that’s just three, and there was nothing here.

It, you know, you’ve flown in from all over to Omaha today, and you flew over a country with more than 75 million owner-occupied homes and 260 million vehicles and great universities and medical systems and everything, and it’s all, it’s all a net gain in less than three of my lifetimes. So, and we’ve had these events since, since I started buying my first stock. This country really, really works, and it, and it always will have lots of disagreements, and after every election you’ll have people feeling the world is coming to an end, and you know, how could this happen?

And I remember my future father-in-law in 1952, he won’t have a talk with me before his daughter and I got married. So kind of reluctantly I sat down with him, and he said, “Warren,” he said, “there’s just one thing I want to tell you.” He said, “You’re going to fail.” He said, “You know, the Democrats are going to get in, you know, they’re going to take over the country, and you’re going to fail, but don’t feel responsible for it, because it’s not your fault.” I mean, he wanted to absolve me from this feeling that while his daughter was starving to death, it was my fault. And I kept buying stocks and doing a little bit better all the time, but, and if the Republicans were in, it was okay, and it was because of them that I was doing well, and if they were out, forget it, it was all going to disappear.

So I’ve been, I’ve seen a lot of American public opinion over the years, I’ve seen a lot of media commentary, I’ve seen the headlines, and when you get all through with it, this country has six times the per capita GDP growth, the GDP per capita that it had when I was born. One person’s lifetime, six-for-one change. Everybody in this room essentially is living better in multiple ways than John D. Rockefeller Sr. was, who was the richest person, you know, in the world during my early years, and we’re all living better than he could live. So this is a remarkable, remarkable country, and we found something very special. (Applause) I would love to be a, I would love to be a baby being born in the United States today. Charlie? Okay, Charlie, you get the other side of this. (Laughter)

Charlie Munger [02:49:34] There’s a tendency to think that our present politicians are much worse than any we had in the past, but we tend to forget how awful our politicians were in the past. I can, I can remember a prominent senator arguing with an absolute earnestness that mediocre people ought to have more representation on the United States Supreme Court. Yeah, he came from Nebraska, incidentally. He came from Nebraska. So we’re not quite as bad as that yet.

Warren Buffett [02:50:08] Yeah, he succeeded my dad in the House of Representatives. Okay, Gary.

GRGary Ransom [02:50:14] Yes. On reinsurance, I know we’ve talked in the past about reinsurance not really being as attractive in industry in, say, the next 10 years as the last 10, but I don’t think we’ve talked specifically about General Re. And I looked this morning at the 10-Q, and I see Gen Re has grown nicely. I know there’s been some changes in the, in the management, and I wondered if you could just give us a sense of what’s going on at the company to bring about some of that growth and what looks like improvement.

Warren Buffett [02:50:53] Yeah, well, the reinsurance business, I don’t, I don’t think I’d say that’s tougher than it was 10 years ago, but if you go back to 40 or 50 years ago, it was, it was not brutally competitive, I’ll put it that way. And the Gen Re, Tad Montross, who did a fantastic job for us at Gen Re, retired, and we have under Ajit and then Kara in addition, but under Ajit the focus of the place has changed somewhat, and it probably, it probably is more growth oriented than before. But I can assure you that anything associated with Ajit is also has underwriting discipline attached to it.

But I, there has, as you’ve correctly noticed, there’s been some pickup, and I think, I think actually we’ll see the property casualty reinsurance business grow a fair amount, and the life business, reinsurance business, and this is really the only place we do much in life, but that has grown very substantially ever since we took it over, particularly, and particularly internationally. And so that, that part I like, and we will have some, I think we’ll have a somewhat larger operation in January.

But we have, we have various methods, as you know, of being in reinsurance. We do these huge bulk deals. That’s why our net revenues are down this year. We did that $10 billion deal with AIG, which was the biggest deal in history, last year, and we don’t have a repeat of it this year. We will be in the reinsurance business five years from now, 10 years from now, 20 years from now, and 50 years from now, in my view, and we will have some unusual advantages that stem both from our capital position, our attitude toward the business, and the talent that we have.

I, we have, we have in a way better than average insurance business generally. We have some real gems that nobody really knows much about, and we have a very, very good reinsurance business that will be subject to more ups and downs than something like GEICO will be, which just moves ahead every year. But it will be an important part of Berkshire. Charlie?

Charlie Munger [02:53:33] Yeah, I would argue the part that any idiot villains here can easily get into has gotten way tougher. And why wouldn’t it?

Warren Buffett [02:53:50] Charlie is my substitute for my father-in-law, that was. Okay, station 11.

[02:53:59] Shareholder: Hey Warren, Charlie, thank you again for having us, and having me. I just can’t thank you guys enough and appreciate you guys enough for the body of work that you guys have delivered to us and the exemplar example that you guys have set with your principles.

Warren Buffett [02:54:16] Thank you.

[02:54:17] Shareholder: Charlie, you mentioned that, (Applause) Charlie, you’ve mentioned that if given the chance, or the same chance, with a smaller capital base, you would still look for mispriced stock opportunities, of course, and that would be determined through, obviously, what we call the intrinsic value of the organization or the company in question, an aggregate of the discounted future cash flows. Would you work the arithmetic using a fictional data set to illustrate the mathematical principia to determine an intrinsic value? And I hope you include the comprehensive metal, mental model of the key metrics considered, and equal qualitative assessments of the management and any assumptions of its industry to determine the durability of its earning power. And Warren, same, same to that effect, would you also demonstrate or illustrate a, an arithmetic problem set using with a significant capital base and provide the object lessons on how those have changed from a small to a large capital base?

Charlie Munger [02:55:18] Well, I can’t give you a formulaic approach because I don’t use one, and I just mix, so I just mix all the factors, and if the gap between value and prices not attractive, I’d go on to something else. And sometimes it’s just quantitative. For instance, when Costco was selling at about 12 or 13 times earnings, I thought that was a ridiculously low value just because the competitive strength of the business was so great, and it was so likely to keep doing better and better. But I can’t produce that to a formula for you. I like the cheap real estate, I like the competitive position, I liked the way the personnel system where, I liked everything about it, and I thought, even though it’s three times book or whatever it was then, that it, it’s worth more. But that’s not a formula that anybody… If you want a formula, you should go back to graduate school. I’ll give you lots of formulas that won’t work.

Warren Buffett [02:56:34] This is the longest we’ve ever gone in the Berkshire meeting without Charlie saying that, getting to the point where he prefers Costco to Berkshire. Okay, Andrew.

ASAndrew Ross Sorkin [02:56:46] We got a handful of questions relating to Apple. This is a bit of a mashup of a couple of them. “Warren, you have bought in, in and sold out of IBM. You have praised Jeff Bezos but never bought Amazon. And you have doubled down on Apple. Can you tell us what it is about Apple? And giving your sometimes critical views on buybacks, do you think Apple would do better spending $100 billion on buybacks or buying other productive businesses the way you have generally preferred?”

Warren Buffett [02:57:17] $100 billion is a lot of money. I used to think so. (Applause) The Apple has a incredible consumer product, which you understand a lot better than I do. Whether they should buy in their share, they shouldn’t buy in their shares at all unless they think that they’re selling for less than their, their worth. And if they are selling for less than they’re worth, and they have the money, and they don’t see an acquisition that’s even more attractive, they should buy in their shares. And I think that that’s very, because I think it’s extremely hard to find acquisitions that would be a, accretive to Apple that would be in the $50 or $100 billion or $200 billion range. They do a lot of small acquisitions.

And you know, I’m delighted to see them repurchasing shares. We own, let’s say we own 200, 215 million or so shares. They have, I think, 4,923 million or something like that. If you, and mentally you can say we own 5% of it, but I figure when, you know, with the passage of a little time, we may own 6% or 7% simply because they repurchase shares. And that I find that if you’ve got an extraordinary product and ecosystem, and there’s lots to be done, I love the idea of having our 5% or whatever it may be grow to 6% or 7% without us laying out a dime. I mean, it, it’s worked for us in many other situations.

But you have to have some very, very, very special product, and which has an enormous wide, enormously widespread ecosystem, and the products extremely stable. And they’re not going to find $50 or $100 billion acquisitions that they can make it remotely a sensible price that really become additive to that. And they may, they may find it, who knows, but they’re certainly, as I look around the horizon, I don’t see anything that would make a lot of sense for them in terms of what they’d have to pay and what they would get. Whereas I do see a business that they know everything about and where they may or may not be able to buy it at an attractive price when they repurchase their shares. That remains to be seen.

Incidentally, that’s one thing that I always enjoy. People, people say, well, you’re talking your book or something. If you talk from our standpoint, we would love to see Apple go down in price. They’re going to, well, just put it this way. If Andrew and Charlie and I were partners in a business that was worth $3 million, so each of us had a $1 million interest in it, if Andrew offered to sell out his one-third interest at $800,000 and we had the money around, we’d jump at the chance to buy them out. I mean, it’s so simple, but people get all lost. And if you want $1.2 million for it, we wouldn’t pay it to them. It’s, it’s very simple math, but it gets lost in all these discussions. And of course, like I say, Tim Cook can do simple math and probably do very complicated math too. So we, we very much approve of them repurchasing shares. Charlie?

Charlie Munger [03:01:17] I think generally speaking in America, when companies go out hell bent to buy other companies, they do, they’re worth less after the transaction is made than they were before. So I don’t think you have a general weight of wealth for American corporations to go out and buy other corporations. Averaged out, it’s a way down, not up. And I think that a great many places have nothing better to do than to buy in their own stock, and nothing has advantageous to do as they can as buying in their own stock. So I think we know pretty damn well what’s going to happen to Apple. They’d be very lucky if there was something available at a low price that they could buy. It’s, I don’t think the world’s that easy. I think that the reason these companies are buying their stock is that, is that they’re smart enough to know that it’s better for them than anything else.

Warren Buffett [03:02:15] That does not mean we approve of every buyback at all, though. I mean, we’ve said…

Charlie Munger [03:02:22] No, no, no. I think some people just buy it to keep the stock up, and that of course is insane and the immoral. But apart from that, it’s fine.

Warren Buffett [03:02:34] Okay, Gregg.

GWGregg Warren [03:02:35] Warren, if we look at the performance of your equity investment portfolio to last three to five years, some of the strongest performances come from Visa, MasterCard, which put up returns that were three to four times greater than American Express. Unfortunately, your holdings of the two names, which we assume were held by Todd or Ted, have accounted for less than 1% of stock on a combined basis the past five years, while American Express has tended to be a top five holding, accounting for 10% of the portfolio on average and closer to 8% of late. Given that all three firms benefit from powerful network effects along with valuable brands, were there any particular reasons Berkshire did not ramp up its stakes in Visa and MasterCard to more meaningful levels, especially during those years when American Express was struggling? After all, you’ve shown a willingness to own several stocks from the same industry, holding shares in several competing banks and buying stakes in all four domestic airlines in fairly equal amounts when you pick them up in late 2016.

Warren Buffett [03:03:37] Yeah, when Ted and Todd, or either one of them, I won’t get into which specifically, which one of them specifically, watered, for that matter, they could both have bought Visa and Master Charge.

They were significant portions of their portfolio, and there was no embargo or anything on them owning those stocks because we had a big investment in American Express, and I could have bought them as well, and looking back, I should have. And then, I think American Express has done a fabulous job, and now we own 17 and a large fraction percent of a company that not that long ago we may have owned 12%. We’ve done it without spending time and without, you know, it’s a company that, that, that has really done a fantastic job in a very competitive field where lots of people would love to take their customers away from them, but they have more customers than ever, and they’re spending more money than ever, the customers are. And the foreign, the international growth has accelerated, the small business penetration is terrific. It’s really quite a business. And you know, we love the fact we own it. Like I said, it didn’t preclude me from it anyway from buying Master Charge and Visa, and if I’d been as smart as Ted and Todd, I would have. Charlie?

Charlie Munger [03:05:07] Well, we would have been a lot better in all of our stock making if we could do it in retrospect. But, but at the time, we have a big position in American Express. And there is one tiny cloud on the horizon of the payments processors, and, and that is the system of WeChat and China. And so it isn’t as though there isn’t a little cloud somewhere off in the… And I don’t have the faintest idea how important that cloud is, and I don’t think Warren does either. Now payments, payments are a huge deal worldwide, and you’ve got all kinds of smart people working in various ways to change the payment arrangements to destroy what we have now.

Warren Buffett [03:05:54] Sure, sure. And you’ve got some very smart people that, you know, I am the part, that are building a company. And American Express made a decision a few years ago not to bid as low as somebody else did to retain the Costco business, and I think Charlie and I disagree on this, but I think it was a smart decision. He doesn’t think it was a smart decision. But one of us will be right, and one of us will remind you that they were right.

The, but if you look at the American Express, it is, it’s a remarkable coming. I mean, you know, they came after them with Sapphire last year. People want that business, and payments are changing, and you can see in different countries different, different ways things are going on. And that, and there are a lot of people that will play the game of gaming the system and switch from one to another based on the rewards on this card or that, and all of that sort of thing. But there also is a, I think there’s a very substantial group for which American Express does something very special, and they keep capitalizing on that premier position with that group, and they, and they’re doing it successfully around the country.

And you’ll see in the first quarter, you’ve seen in the first quarter, you know, where in, in Britain and Mexico and Japan, you’re seeing gains of 15% or better in local currencies, and the base is not, it’s not tiny, it was not huge, so there’s a lot of room left to go in that. And, and the small business penetration is good. The loan portfolios behave sensationally compared to really just about anybody. So I like very much our holdings of American Express. The first half, because of the accounting changes, they had to suspend their repurchase program for six months, but I, they’ve announced that they expect to renew it, and someday we’ll even, you know, will loans a greater percentage of American Express, and it’ll be a bigger company, in my opinion, and I think we’ll do very well.

But as Charlie says, nobody knows how payments is for sure comes out, and nobody knows how autos for sure come out. That is true of a great many businesses we’re in, and we’ve faced it before. We used to buy things that were certain failures, like textiles and second-rate department stores and trading stamps in California. Now we just face things that face real difficulty, so we’re actually moving up the, the ladder. Okay, station 1.

[03:08:39] Shareholder (Daphne, New York City): Mr. Buffett, my name is Daphne Clear Star. I’m eight years old and live in New York City. I’ve been a shareholder for two years, and this is my second annual shareholding, shareholders meeting. Berkshire Hathaway’s best investment on which the company built its reputation have been in very capital efficient businesses such as Coke, See’s Candy, American Express and GEICO. But recently Berkshire has made really big investments in a few businesses that require huge capital investments to maintain that offer only a regulated low rate of return, such as Burlington Northern Railroad. My question to you, Mr. Buffett, is could you please explain why Berkshire’s largest recent investments have been departed from your old capital efficient philosophy, and why specifically have you invested Burlington Northern instead of buying a capital efficient company like American Express? (Applause)

Warren Buffett [03:10:35] You’re killing me, Daphne. Yeah, I’m certainly glad she’s not nine years old. I’m just sitting here thinking which of the six panelists we’re going to bump next year and put you in. (Laughter) Well, I thought I was doing well when I bought that Cities Service at 11.

The, the answer is that we have, we’d love, we always prefer the businesses that earned terrific returns on capital, like a See’s Candy when we bought it, or a good many of the businesses, and, and we’ve, and we’ve, and you know, American Express act, you know, earns a, a terrific return on equity and has for a very long time. The fact that, that we buy a Burlington, BNSF, Burlington Northern, means that essentially we can’t get more money deployed in capital light business, businesses at prices that make sense to us. And so we have gone into more capital intensive businesses that are good businesses, but wouldn’t it be wonderful if we could run the railroad without, you know, without trains and track and tunnels and bridges and a few things?

We get a decent return on the capital intensive businesses. We’ve bought most of them at, at very decent prices, and they’ve been run very well since we’ve, we bought them. We still love a business that takes very little capital and earns high returns and continues to grow and requires very little incremental capital. We can’t deploy as much money as we have in doing that. And so is the second best choice still a good choice? The answer is yes. It’s not as good as the best choice. Charlie?

Charlie Munger [03:12:53] Yes, I like the aspiration of that young lady. She basically wants a royalty on the other fellow’s sales, and of course that’s a very good model, and if everybody could do that way, nobody would do anything else. The reason we’re satisfied with our utility returns and our railroad returns is they’re quite satisfactory, and we, and the quite satisfactory, I wish we had two more just like them. Don’t you, Warren?

Warren Buffett [03:13:22] Yeah, definitely.

Charlie Munger [03:13:23] So the answer is they’re good enough, and you’re asking us to get perfection if you want us to have all our money and Coke and say 5% of what it’s now selling for.

Warren Buffett [03:13:37] Yeah. And a business like Apple really doesn’t take much capital, but so you got to spend a lot of money to buy businesses like that. Very few are for sale. And, and the answer is we have not forgotten any opportunity to buy businesses that earn high returns, very high returns on equity capital, or when we could buy them at a sensible price, to buy these other businesses. So they haven’t shoved anything else off the table. But you are, you definitely have a job in our capital allocation department. Okay, Carol.

CLCarol Loomis [03:14:22] This question is from Max Taylor of Chicago, and it concerns the newspapers that Berkshire owns. “In your 2012 you had a section devoted to Berkshire’s buying 28 newspapers during the year just passed. Since then, you have not come back to the newspaper subject, but this year at the end of the annual report you published a list of the newspapers Berkshire owns today along with their circulation. I compared that list with the one you published five years ago at the end of 2012. As you no doubt know better than anyone, the circulation of the 26 newspapers that Berkshire still owns of the 28 originally bought fell sharply, in many cases by big amounts like 30% to almost 50%. I know that five years ago you acknowledged the risk in owning newspapers, but you still said, ‘Charlie and I believe that papers delivering comprehensive and reliable information to tightly bound communities and having a sensible internet strategy will remain viable for a long time.’ Skip to today and imagine that you are writing about Berkshire’s experience with newspapers. What would you be saying?”

Warren Buffett [03:15:41] Yeah, I would say that, I forget the modifying word on internet strategy, but I guess I said sensible. The, the, the problem is, has been about 1,300 daily newspapers in the United States, there were 1,700 not that long ago, is that no one except the Wall Street Journal, the New York Times, and now probably the Washington Post has come up with a digital product that really, in any really significant way, will replace the revenue that is being lost as, as print newspapers lose both circulation and advertising. And if you look at the communities in which we operate, or the communities in which, you name it, other, other newspapers operate, the community could be prospering. We’re in a prosperous economy presently. And all are losing daily circulation, they’re losing Sunday circulation, they’re using street, what’s called street circle, street sales, they’re losing home delivered. And it is, I’ve been surprised that the rate of decline has not moderated in the last five years.

We, we’ve bought all the papers at reasonable prices, so it’s, it is not a great economic consequence of Berkshire, but I would like to see daily newspapers actually, you know, be economically viable because of the importance to society. But I would say that the trends, which I put those circulation figures in there because I think shareholders entitled to look year to year at what is happening, and it’s not only, it’s happening to 1,300 newspapers throughout the United States, and it happens in small towns where you would think that the alternative sources of information would not be that good. It happens, it happens every place.

And the Journal, the Times, and probably the Post have a viable economic model in the digital world, and probably will continue to shrink, I’m almost certain will continue to shrink in the print world, but the digital world will be big enough that, and they’ll be successful enough, so that they have, in my view, a sustainable business model. But it is very difficult to see, with the lack of success in terms of important dollars arising from digital, it’s, it’s, it’s difficult to see how the, how the print product survives over time. And that’s, I’m afraid that’s true of 1,300 papers in this country.

And we’ll keep looking to see if there is a way to do it, but, but you’d have to look at our experience and, and look at the experience of everyone else’s. McClatchy newspapers came out the other day, you know, and I think the newspaper, which is very good, fine cities that they operate in, and advertising revenues down something like 17% or 18% in circulation. But it isn’t that just them, it’s, it’s everybody in the business. And I’ve, I wish I had a better answer for you, but the, but I don’t. I would say that the economic significance to Berkshire is, is almost negligible, but, but the significance to the society, I think, actually is, is enormous. And you know, I hope, I hope that we find something, help others find something, because we’ll copy it. But so far we have not succeeded in that. Charlie?

Charlie Munger [03:20:02] Well, the decline was faster than we thought it was going to be, so it was not our finest bet of economic prediction. And I think it’s even worse. I think to the extent we miscalculated, we may have done it because we both love newspapers and are, and have considered them so important in our country. These little local newspapers, monopolies, tended to be owned by people who behaved well and tended to control the politicians, and we’re going to miss these newspapers if they disappear. We’re going to miss them terribly. And, and I think you mentioned that it doesn’t happen, but the figures are not good, Warren.

Warren Buffett [03:20:45] No, no, they aren’t. And, and it isn’t just, you know, it isn’t some town that has a particular problem with unemployment or anything of the sort, and it isn’t due to general economic conditions. It’s, it’s due to the fact that in this paper, if you wanted to know the baseball results from the present day and the box scores and everything else, I told you the following morning, and it was still news to you. And the financial material that I read from there, in terms of looking at the stock prices and everything, they were news to you the following morning. And the, what was developing in the Pacific in terms of the war was news to you when you read about it in the morning in the New York Times. And it’s, news is what you don’t know that you want to know.

And the, and those help wanted ads, you know, segregated as they may have been, still with a place to go to look to find a job. And you can go up and down the line, and one element after another where the daily print newspaper was primary, they’re no longer primary. And the, the business has changed in a very material way, and we’ve had, and been able to figure out any solutions that, and we’ll keep trying. And like I say, it’s, it’s not of economic consequence, but, but I think it is societal consequence, and we haven’t been able to solve it. Okay, Jonathan.

JBJonathan Brandt [03:22:19] TTI has been a nice growth story since Berkshire acquired it 11 years ago, more than doubling its pre-tax earnings to about $400 million due to fine organic growth and at least two successful bolt-on acquisitions. Business momentum appeared to accelerate in the first quarter. Can you please talk about the competitive landscape in the electronic components distribution industry and what TTI’s advantages are. It is, is it just a great industry to be in, or is TTI’s business model and/or management team special? Do you expect it to be, continue to be one of Berkshire’s faster growing non-insurance subsidiaries?

Warren Buffett [03:23:00] TTI is run by a fellow named Paul Andrews, who’s done an absolutely sensational job with us. He’s a wonderful man, he’s a wonderful manager, and in the last, he’s, he’s quadrupled the business basically, but in the last year, and accelerating right to this point. They distribute little electronic components. They actually, their average, their many billion dollar business, and their average item is less than, less than the nickel that they sell. So it’s kind of like being in the jelly bean business or something like that, except these things go into all kinds of fancy machines that I don’t understand.

And we, we, we have a worldwide operation based in, in the Dallas Fort Worth area, and built by one man who left a division of General Dynamics 45 or 50 years ago, step by step build up this business. Like we just bought, within the last two months, we bought an operation in South Korea that will be another substantial addition. We do business worldwide, and electronic components have absolutely taken off in the last year. And they use something called the bill, you know, that the, well, it’s essentially a measure of backlogging, and book to build is the ratio they call it, but it’s just kind of a special term. But the, but it’s grow, I mean, it’s just improved dramatically in, in the last year, and it continues month after month.

So something is going on out there, because nobody buys these things to store them in their basement or anything of the sort. I mean, these get used, these electronic components. Some of them are on, on allocation. We have a great relationship with suppliers. We have a very good relationship with, with our customers because we carry, we carry more inventory than most of our competitors, so particularly when, when the business is tight, we can deliver, and, and do a very first class job doing it. So I give great credit to Paulie, and he, he, he increased his physical facility, started on that a few years ago, and, and it’s a godsend that he did it, because with the business going through there now, we, we, we wouldn’t have been able to handle it.

But it’s a competitive business. I mean, if you look at Arrow, like Arrow Electronics, you know, on the New Stock Exchange, we’ve got competitors. I think Paul is doing a better job by a considerable margin than they are, and I’m delighted as part of the Berkshire family. There will be times when that business slows down because they’re, they’re, their customers, you know, will, will have their own cycles, and what it does will go down, but over time that business is going to grow. Charlie?

Charlie Munger [03:26:27] Yeah, it’s a wonderful business because it’s so difficult to do that competitors don’t want to try it. When I lived in Omaha, there was a man who lived in great prosperity and almost no work, and his business was gathering up and rendering dead horses. And he never had any competitors. He used to come up to the Omaha Club and start drinking about 11 in the morning. It was not a difficult business, but nobody ever crowded him with new competition. And very few people want to distribute zillions of electronic parts that are worth a nickel each. It’s very complicated, and of course that business is terribly good at it, and it keeps getting more and more of the same. So you’re right, it’s a huge growth business, which is sort of the electronic equivalent of gathering up and rendering dead horses.

Warren Buffett [03:27:24] Imagine keeping track of close to a million different items, you know, with very small values attached to them, and getting them out to your customer fast because they want them fast, all over the world, you know. And then those things are not easy to manage. I mean, I, I, I’m saying in stock on so many items, it’s, it’s very complicated, and that business is very good at it.

Charlie Munger [03:27:51] Yeah, and of course it’ll grow. The horses went away, but these parts aren’t going to go away.

Warren Buffett [03:27:58] Charlie made a, made a profession of stunning businesses where the owners could sit around and drink all day and have them, you know, that was where we ought to be competing with, or buying.

Charlie Munger [03:28:14] My theory, Warren, is if it, it can’t stand a little mismanagement, it’s no business.

Warren Buffett [03:28:21] Yeah, yeah. And we’re testing that sometimes. Okay, station 2.

[03:28:25] Shareholder (Ben Sherber, Topeka, Kansas): Hi, Ben Sherber, Topeka, Kansas. Just wanna say, Warren and Charlie, thank you again for hosting us all. This is a great event.

Warren Buffett [03:28:36] Thank you.

[03:28:37] Shareholder (Ben Sherber, Topeka, Kansas): My question is about the recent decision to sell shares back of Phillips 66. Not to put you on the hot seat, but right after that share prices jumped up about $22 a share. You, you mentioned at the time that there’s some regulatory requirements if you own over 10% of a company. Could you talk about the factors that go into how you decide whether to retain more than that or get under that threshold? And then what are your thoughts long term on Phillips 66, like their business, mid, midstream, refining?

Warren Buffett [03:29:17] Yeah, well, it was the Cities Service preferred of last year. They, we sold the stock at around 93 or 4, and, and probably 115 now. But we, we own just under 10% of the company, and, and the more Ted and Todd and I think about various problems connect with regulatory problems and trading problems and so on, overwhelmingly we will, we will stick below 10% on marketable security holdings. We’ve done it with the airlines. Now, that does not mean we’re going to reduce our holdings in American Express or any sort.

But, and Greg Garland has done a great job at Phillips 66. We’ve had, we’ve had very good relations with the company. They’ve, they’re very, he’s a very, very, very experienced and sensible manager. But I did this side that I wanted to be below 10% in that holding, and we, like I say, we will, we’ll stay just slightly under 10% of Wells Fargo. We’ve actually sold a few shares just to stay below 10% in the case, I think, of both American Airlines and United Continental. We, we, unless there’s something unusual, we’re going to stay under 10%.

But we, we have, we have nine and a significant fraction percent of Phillips, and I think they’ve been good at operations, I think they’ve been good at capital allocation. We traded them a business, we traded in stock for a business some years ago, which has been a very nice business that we’ve retained in operation. So we’ve got, we’ve got a lot of money stolen Phillips, and I wish I’d made the deal at a higher price, and, but we made money on what we sold, and we accomplished an objective. But Charlie?

Charlie Munger [03:31:22] Well, we like the subsidiary we traded the stock for.

Warren Buffett [03:31:27] I missed that, but…

Charlie Munger [03:31:29] Do we traded the stock for a subsidiary.

Warren Buffett [03:31:33] Yeah, yeah.

Charlie Munger [03:31:34] Well, we like the subsidy area.

Warren Buffett [03:31:36] Oh, yeah.

Charlie Munger [03:31:37] Well, it appears like the stock went away for nothing.

Warren Buffett [03:31:42] Yeah, yeah. Actually, we’ve done pretty well with Phillips. Becky.

Becky Quick [03:31:47] This question comes from Vlad Koptev in Ukraine. He says, “Capitalization of cryptocurrencies approached that of Berkshire and Apple last year, and clearly the idea behind crypto will affect conventional banking groups where Berkshire is a shareholder. You always say you didn’t go into too much detail to obtain an understanding on cryptocurrencies, so what factors caused you to say that it’s a bubble?”

Warren Buffett [03:32:22] Well, generally non-productive assets remain, you know, if you bought gold at the time of Christ and you figure the compound rate on it, you know, it’s, it may be a couple tenths of 1%. The, it’s, it essentially is not going to deliver anything other than supposed scarcity, you know, because they’ll only, you can only mine so many. But so what? I mean, what is, what does it produce itself? You know, the check is a wonderful idea. Just imagine how the world would be without being able to write checks or have wire transfer of funds. But it doesn’t make the check intrinsically itself worth a lot of money, and if you said you can’t use something called check, with a little piece of paper, you’d do something else to transfer money.

I, I think that any time you buy a non-productive asset, you are counting on somebody else later on to buy a non-productive asset because they think they can sell it to somebody for more money. And it’s been tried with tulips, and it’s been trying, it’s been tried with various things over time, and it does come to a bad ending. I’m having, you have a hard time, you can, you can think of, think of raw land. I mean, the Louisiana Purchase was, say, $15 million for 800,000 or so square miles of land. In fact, you’re sitting on land that came with the Louisiana Purchase. And, and so what we pay, we paid 20 bucks a square mile, and, you know, 640 acres in a square mile, and you’re down to three cents or something. So that was a pretty good purchase. I’ve been, what was then a non-productive property, but it depends.

But it’s very hard. You can buy stamps. Bill Gross got every, you know, collected a wonderful stamp collection, and it sold for more money in the end. But it’s dependent on somebody else wanting to buy, hoping they will sell it for more money, and so on. And in the end you make your money out of productive assets. If you buy a farm, you, you estimate what the crops, what amount per acre of soybeans or corn or whatever may be raised, and how much you have to pay the farmer that farms it for you, and what your taxes will be, and various things, and you make a conclusion based on what the asset itself will produce over time, and that’s an investment.

When you buy something because you’re hoping tomorrow morning you’re going to wake up, you know, and the price will be higher, you know, you need more people coming and do it than they’re leaving, and, and they, and you can get that, and it will feed on itself for a while, and sometimes for a long while, and sometimes do extraordinary numbers. But in the end, but they come to bad endings, and cryptocurrencies will come to bad endings. And along with the fact that there’s nothing being produced in the way of value from the asset, that you also have the problem that it draws in a lot of charlatans and that sort of thing, who are trying to create various sorts of exchanges or whatever it may be. It, you know, it’s something where, where people who are of less than stellar character see an opportunity to clip people who are trying to get rich because their neighbors getting rich buying this stuff that neither one of them understands. It will come to a bad ending. Charlie?

Charlie Munger [03:36:08] Well, I like crypto currencies a lot less than you do. And so to me it’s just dementia. And I think the people who are professional traders that go into trading cryptocurrencies, it, it’s, it’s just disgusting. It’s like somebody else is trading turds and you decide I can’t be left out. (Applause)

Warren Buffett [03:36:34] To the extent that this, bro, we’re being webcast around the world, I hope some of our stuff doesn’t translate very well, actually. Okay, Gary.

GRGary Ransom [03:36:48] Yes, I had a question on the corporate tax rate, and we have a debate in my investment world about where the benefits of that cut fall. And it, I’d say the consensus is going to the consumer as it gets competed away over time, but perhaps it, some of it sticks to shareholders. And my, my question is, do you think over the long run some of the benefits sticks to shareholders, and maybe it’s even beyond auto insurance, maybe it’s other businesses you have as well?

Warren Buffett [03:37:21] I, well, what people do generally with that is they take what they want to be the answer for them, and then they hire, or, or they just attach themselves to some economist that gives them a more complicated way of saying it’s all going to be wonderful because it, it’s happened. But the answer is that in the case of our regulated public utilities, the benefits are all supposed to go and we’ll go to the utility customer, because we’re entitled to return on equity if we perform well, and, and we’re not entitled to get excess returns because our tax rates changed. And so, and, and similarly, if tax rates would go back up, we would expect to get compensated for that. So in that area, and that was $5 or $6 billion for us, but in that area absolutely goes to the user, the consumer, and it should.

Then the question is, with the remainder, does it get competed away or not? And the answer is sometimes it does. Sometimes it gets competed very quickly and substantially, sometimes it may be slow, and other times it probably won’t. The one thing you know is that the change in the corporate tax law was good for shareholders generally, and, and, and Berkshire shareholders. I mean, that, and that’s, that’s what Congress passed, and, and the intent had to be that if you were going to cut taxes, that, that shareholders would get a, a particularly large portion this time. And some of you will agree with that politically, and some of you won’t agree with it politically, but you’ll all benefit.

And I think it’s, I think it’s, it’s human nature, if you’re getting a break, to say it’s going to work wonderfully for everybody else, and we’ll find out whether it will or not. It’s very, very, very difficult in economics to measure the impact of single variables. You cannot just do one thing in economics. People kind of learn that in physics and talk about butterflies in China and all that sort of thing. But the, in that, every question you get in economics, the next used in their any statement, you should say, and then what? And when you get into the and then what’s, you start favoring people who give an answer to that in, in political life that happens to usually help you in some way or another, and including your pocketbook. And, and we’ve seen that with this, and it’s helped the shareholders of Berkshire Hathaway. I would say that, that some will be competed away, some biological utilities, and some will benefit Berkshire shareholders. Charlie?

Charlie Munger [03:40:21] I have nothing to add.

Warren Buffett [03:40:23] Okay, station 3.

[03:40:24] Shareholder (Kevin, Shenzhen, China): Hi, Mr. Buffett and Mr. Munger. My name is Kevin, and I’m from Shenzhen, China, currently studying finance and philosophy at Boston College. I have a rather broad question. And there’s more and more globalized world, what do you think our younger generation can do to best leverage our background and experience of both China and U.S. to create values and further benefit to countries in economy and relationship? And what do you think, what do you see valuable in a person, in a person with a, with a multi-cultural background? Thank you.

Warren Buffett [03:41:06] Well, I think in answer to the last question, I think it’s terrific to have a multi-cultural background, and I never was any good in languages, but if I were in college today, and in either country, I’d be learning the language of the other country. Is it, I think it’ll be a great, great advantage over time. The first part of the question, I’d like to have that it again to me. I want to make sure I’m answering your specific aspect on the… I think it’s, I think it’s going to be good for your future, but I’m done. Can we have the microphone on up there again?

[03:41:56] Shareholder (Kevin, Shenzhen, China): So my first, the first part of the question is like, what do you think our younger generation can do to best leverage our background and experience of both China and U.S.?

Warren Buffett [03:42:07] Well, I’d start with being multi-lingual. I mean, certainly in terms of, you know, I mean, obviously you want to be able to express yourself in both. And the better you can understand, obviously, the culture of another society, obviously that’s a benefit. But I think, I think the market system, modified as it may be both in China and in the United States, the way it really does, there will be an invisible hand to some extent that does work to improve the lot of future generations by the fact that both China and the United States and, and, and the rest of the world is improving.

I mean, it is much better, in my view, particularly in a nuclear world, but it’s much better to have people prospering, prospering throughout the world, partly through their own efforts, but partly through their interactions with the rest of the world. And we’ve made a lot of progress in that respect, particularly since World War II. I mean, it was a, a terrific idea to have the Marshall Plan, you know, instead of behaving like we did after World War I and getting the result that we got. I think we may have much more intelligently after World War II. So I, I, I’m, I’m bullish on the future of the United States, but I’m bullish on the future of China, and, and to a significant extent, you know, the rest of the world. People are going to be living better 10, 20, 50 years from now, and I don’t think that’s something that can be stopped, even, Charlie, absent weapons of mass destruction.

Charlie Munger [03:43:57] Yeah, well, the multicultural stuff, it wouldn’t do you much good to be fluent in both English and Chinese if you were, say, a proctologist in China or a proctologist in Nebraska. You just, so if you’re going to use your multicultural background, you’ve got to work at some interface between, between the United States and China. And you can raise money in China, in the United States, and invest it in China like Li Lu does, or you can be some kind of an importer or a trade specialist. But you’ve got to get near that interface to benefit from bilingual and so on.

Warren Buffett [03:44:43] But you would bet that the interface will be substantially greater.

Charlie Munger [03:44:48] Huge.

Warren Buffett [03:44:48] Yeah, huge. And that’s what you want to prepare for.

Charlie Munger [03:44:53] Yes. And, and I think that generally speaking, when you get multicultural, you can also be multidisciplinary. But generally I think people make more money if they’re, if they’re very narrowly specialized, like the proctologist. And, and it’s much harder to make a lot of money for most people if you try and imitate Warren and me. I’m glad I didn’t meet him earlier, I mean. (Laughter)

Warren Buffett [03:45:20] Okay, Andrew.

ASAndrew Ross Sorkin [03:45:21] Okay, this question comes from someone who says, “I am a Berkshire employee and shareholder. I read an investigative article from ProPublica on the Washington Post that many of Berkshire’s various units only offer 401(k) plans with high fees that are actively managed, rather than the low-cost indexes you have advocated as the best path for savings for retirement. The article’s author said he contacted the company and nobody would comment. Will you do something to improve our 401(k) offerings to match your investment philosophy? And from an operational perspective, how did this happen, given your strong views on the topic?”

Warren Buffett [03:46:03] Well, I’ve absolutely said what, many, many times through annual reports, and our managers know what I think about the attractiveness of having an, a index fund option. But they all have different plans, different histories, and they run their businesses, and who knows, you know, which particular… If you go back to the older businesses, they have defined benefit pension funds. Generally nobody puts them in any anymore. Then the question is, you know, do you transition to something else? In the end, we overwhelmingly let our managers make those kind of decisions and others. And my guess is that a very high, significant percentage of people who have work at a company that has a 401(k) plan will have an index fund option, but they may not in some cases.

The only thing we, I think we have asked the companies to have a limit on the percentage, I think, that they might put in Berkshire’s stock through the 401(k). But we don’t, we don’t want people whose jobs are tied to Berkshire them, we certainly don’t want me in the position of encouraging to put 100% or something of their, their savings in, in Berkshire itself. I don’t want to be in that, in that position. But I don’t think even there we’ve insisted on any company doing that. I think we’ve probably made that, when we’ve been asked about it once or twice, I think we’ve gotten that suggestion.

But the managers were on the companies. The employees, if they feel, and some of our companies have human relations departments, if they feel that, that they’d like different options or something like that, you know, they, they should make those views known to the managers, and some cases the managers, I think, will pay attention to them, and others they probably won’t. We’ve got a wide variety of managers that run our businesses, and, and we’re not going to start trying to run them from Omaha. Charlie?

Charlie Munger [03:48:12] Well, I think you’re right that, that has happened, that business of the high fee choices, because we’ve delegated the whole subject to the managers of the subsidiaries, and so no attention at all is being given to the employee choices at headquarters. And what you’re pointing out is that a lot of the employees in the subsidiaries would do better if they indexed instead of choosing what they did choose, and my guess is you’re absolutely right about that. Yeah, and if there are any people managers in the business today, I hope we’ll do a little better at encouraging better choices.

Warren Buffett [03:48:47] Yeah, although I would, we, we wouldn’t want them, and we don’t want them to interfere too much in, you know, in directing what they, people, it’s, you know, we can take over human relations, it’s up to the managers. But we wouldn’t object to a little different viewpoint, and we have made it very clear what we think. I mean, they just, some of them don’t listen to us. (Laughter) Okay, Gregg.

GWGregg Warren [03:49:14] Warren, you’ve noted time and again that there’s a strong common culture shared across Berkshire subsidiaries, built on a commitment to honesty and integrity, a focus on the long term, and an emphasis on customer care, and that it’s also critical to find cultures that mesh well with Berkshire’s when acquiring operating companies. In most cases, the managers that are currently running these subsidiaries are the same individuals or members of the families that originally sold their firms to Berkshire, leaving them with a vested interest in the businesses they are running and a strong connection to the culture they tend to share in common with Berkshire. It seems to me that the greater challenge is in ensuring that the large publicly traded firms that have been acquired and account for a meaningful and growing amount of Berkshire’s overall value stayed the course. Could you comment on whether or not this is the case, and what the greatest challenge is for you and Charlie when it comes to not only maintaining Berkshire’s culture, but in finding firms that would fit in well with what you’ve built?

Warren Buffett [03:50:11] Yeah, I think the culture is very, very strong, and I think it gets reinforced, frankly. I think it gets reinforced by the shareholders we have. I mean, we have a different body of shareholders, and we, and we look at those shareholders, I think, in, in a somewhat different way than a good many other companies do. I mean, they, I think there are a fair number of public companies that wish they didn’t have, you know, public shareholders. We’re happy to have public shareholders. The, and we like having individual shareholders, and we don’t favor institutions, and we’re not going to, you know, give guidance and talk especially to them on investor calls and all that sort of thing. But we, we want our con, we wanted to be directly with, with, with, with, we want shareholders or partners, basically.

And that begins with that, it goes to the directors. We have directors who are not, well, I’ve been on 19 boards, and I’ve never seen another board like ours. And I think it’s terrific that we’ve got the people who represent, in many cases, lots of shares themselves. They didn’t get special deals. They, they, it’s a group of owner-oriented, Berkshire-conscious, business savvy owners, and we don’t have anybody on the board because they’re a leading, you know, educator or whatever it may be. We want people who, who basically think about it, how to run a business well for themselves and for their partners. And we’ve got managers who fit into that culture, who have chosen that culture and coming with us, and sometimes we have the second or the third or fourth generation, say, at the Nebraska Furniture Mart, that share that.

Is it perfect? No, it’s far from perfect. I mean, that you don’t get everybody thinking the same way. We have people, we, we have people that are very independently minded running a lot of businesses, and some of them have, they have different political beliefs, they have different, they have different, they see through different lenses than we do to some degree. But in terms of having a common, strong, positive culture, I don’t think there’s any big public company that has it any better than Berkshire, and I think that will continue because people opt into it to a great deal.

Cultures get passed along. You do things that are consistent with the culture, so you, you do what you talk about is what you do. And you don’t find, you don’t find people saying, you know, we’re a wonderful partnership, and then voting themselves, you know, huge options, and a whole bunch of other people will say options beneath them because it, they can’t look like they’re taking it all for themselves, and arranging… I read about some deal where could pay off with many, many, many billions of dollars the other day. We won’t name names. But the, the, we’ve got as good a culture you can get, and if, I would say net it grows stronger.

We have a few people all of the time really don’t buy into it entirely. I mean, it is not 100%, but it’s as close to it, and I think it gets closer all the time as we go along. And we’ll keep, we’ll like, we will try to keep behaving in a way that reinforces it and doesn’t dilute it, and I think that will go, I think that will not only work from Charlie and me, but it’ll work for our successors very well. It won’t be perfect. Charlie?

Charlie Munger [03:53:52] Every time I come to one of these meetings and sit in the manager’s luncheon, I feel more strongly at the end of the luncheon that the culture and values of Berkshire Hathaway will go on and on for a long time after the present management is gone. In fact, I think it’ll go on after all of the present managers are gone. I think we’ve started something here that will work well enough that it will, it will last. And one of the reasons it will last is it’s not that damned easy to duplicate. So the, the one that is present is likely to just keep going and going. Think of how little direct copying of the virtual system there’s been. And, but it won’t, it won’t produce the returns it’s produced in the past, either.

Warren Buffett [03:54:47] No, I, I think it’s gonna, I think it’s gonna last a long time for a very simple reason. It’s, it’s deserved to last a long time. It works. It’s gonna work. Okay. (Applause) Station 4.

[03:55:10] Shareholder (Christian Marx, Cologne, Germany): My name is Christian Marx. I’m a proud shareholder from Cologne, Germany. It is my pleasure to be here. My question relates to the Berkshire insurance operations. When I look at the quarterly balance sheets of the last two decades, I noticed a pattern that I kindly asked you to discuss. The sum of cash plus fixed income always hovers around 100% of the amount of insurance float. Therefore my question is, is it fair to say that from the $128 billion of consolidated cash plus fixed income as of March, $116 billion are actually needed to support the insurance operations?

Charlie Munger [03:55:58] No.

Warren Buffett [03:55:58] I, I appreciate you, the answer is no.

Charlie Munger [03:56:02] Yes, the answer is no.

Warren Buffett [03:56:04] But the, he deserves an explanation of how this… Maybe I haven’t looked at it the way he’s looked at it. But we have a hundred, and we would much rather have a number closer to 20 than they have 116. And we do not correlate, or in effect measure the float and then decide how much to put it or leave, leaving cash and fixed incumbents. It’s, the, the fact our float keeps growing, and lately our cat, which is by design and has been terrific for us, and our, our cash and cash equivalents has grown because the competition for our acquisitions has become much stronger, as both as money is piled up in, with the buyers of businesses, and because debt has been so cheap, and a variety of factors. But I don’t think those are necessarily permanent impacted, to be reasonably sure they aren’t permanent. It’s just a question of when they change.

We are not tying, as Charlie said, we’re not, we’re not tying the cash and cash equivalents at all, the float. The float is surprising. The float went up $2 billion in the first quarter, and, and there is no way that, that float can shrink a lot in a short period. It’s just, it’s structurally has been set up in such a way that it, it will not, it cannot shrink, and actually I think it’ll grow a little bit for a while. I mean, I’ve always been amazed by how much it has grown. We’ve got so much more flow than any property casualty company in the world, and it’s, it’s pretty amazing that it all came from that little building the Jack Ringwalt built and depicted the location because it was near the tennis courts. Okay, Carol.

Charlie Munger [03:58:18] Well, oh, that’s encouraging recent developments. The, some of the cash has gone out recently for securities we vastly prefer over the cash, and we have a, a lot of cash that could be remaining that could be deployed in securities we might like a lot better than Treasury notes. So stay tuned.

Warren Buffett [03:58:42] Yeah, to make it very simple, in the first quarter we earned 500 from operations, we earned a little over $5 billion. Now, we only spent about our depreciation. Normally we would spend somewhat more than that. But that’s 500 fraction billion. $2 billion came in net from float. So that’s $7 billion that basically in the first quarter that would have been added to our cash if we hadn’t done something with it. And, and, and instead our cash and equivalents went down because we, we net invested more in equities by some margin than the 7 that came in. But we do have this position where, even absent a change in float, about $400 million comes into Berkshire every week, which is very comfortable. And we will, we want to get it so that more than $400 million is going out into productive assets, and we succeeded in doing that in the first quarter. Net net, we improved our position in the first quarter. Carol.

CLCarol Loomis [03:59:49] “In your 1999 article in Fortune magazine, you stated your belief that after-tax corporate profits were unlikely to hold much above 6% for any sustained period due not only to competition but also to public policy. You stated in the article, ‘If corporate investors in aggregate are going to eat an every, ever growing portion of the economic pie, some other group will have to settle for a smaller portion. That would justifiably raise political problems.’ Since 2008, after-tax corporate profits have been 8% to 10% of GDP. Do you believe that is a permanent shift in the U.S. economy, and of course we have to think about the, the latest tax bill, or will corporate profits revert back to the 4% to 6% of GDP range that was normal in the 20th century?”

Warren Buffett [04:00:48] Well, it’s been an interesting development during that period. It goes back a little bit before that period, but, but you now have the four largest companies by market value in the United States, the $30 trillion market, you have four companies that essentially don’t need any net tangible assets. And if you go back many years, I mean, if you looked at the largest companies, Carol used to put out the Fortune 500 list, and, you know, it would be AT&T and General Motors, and it was companies that, Exxon Mobil, it was companies that just required lots of capital in order to produce earnings. So American industry has gotten incredibly more profitable in aggregate in the last 20 or 30 years.

You look at the return on the S&P 500, the earnings as a percent of net tangible assets, and the rest is just, you know, if you buy a company that has $1 million worth of net worth and you pay $1 billion for it, it still only had the $1 million a net worth. I mean, you just paid more for it. So the basic profitability of the company is huge, even though you, your investment may be at a significantly higher price. And so that what has happened is that, I think if you look at the earnings on tangible net worth of the S&P 500 and compared to 20 years ago, it is amazing. And that is really due to the fact that this has become somewhat, you could call it an asset light economy.

And, you know, those four companies that earn 10% of, of the, of the, they comprise close to 10% of the, the market value of the entire publicly traded corporate America, they don’t, and they don’t take any money, basically. And that, that is a changing world, and, and they will earn even more money with the tax rate going down, and, and I don’t think people have quite processed all that information and in terms of what is going on in, in the market. You don’t, you know, Carnegie built a steel mill, and then he paid it off early, they borrowed a little money, and then he built another steel mill and all that sort of thing, but it was enormously capital intensive. And one industry after another, AT&T was enormously capital intensive.

And now the money is in the asset light. I mean, huge money is in the not only asset light business, but the, the negative assay. You know, IBM, even, you know, it has no tangible, there’s a net minus tangible net worth. There’s nothing wrong with that, it’s terrific, but it is, it is not the world we lived in 30 years ago. And in that sense, I didn’t see that coming in 1999 when I wrote whatever I wrote there. It hasn’t changed the profitability of the asset heavy companies particularly. I mean, it isn’t like oil… If you take the five most capital intensive industries in the ’90s, I don’t think you’ll find that their, their earnings on tangible assets have increased a lot, but you will find that this group has moved in that, that really doesn’t, they don’t need any net tangible assets at all, or they need very minor amounts. Charlie?

Charlie Munger [04:04:40] There’s also a lot of financial engineering that’s raised leverage even in the capital intense businesses. And you know, while Warren may have predicted a little wrong when he wrote that very scholarly article, he didn’t invest wrong. And so it just shows it’s hard to make these economic predictions.

Warren Buffett [04:05:02] Okay. John, very right on that one. Yeah, actually the performance of the stock market since then has been pretty accurate.

Charlie Munger [04:05:12] Yes, but…

Warren Buffett [04:05:13] And that’s true. Yeah, being right for the wrong reason or something wrong for the right reasons. Anyway, Jonathan.

JBJonathan Brandt [04:05:23] Berkshire received a $10.2 billion retroactive premium from AIG early last year. If the upper, upperly revised estimate of $18.2 billion of ultimate claims proves to be correct, will the cost of float, adjusted for favorable tax attributes, likely be lower or higher than what Berkshire would have paid to borrow $10 billion for a similar duration?

Warren Buffett [04:05:46] Well, we certainly go in with the idea that it will be, the cost will be lower. And it’s an interesting situation. We essentially, AIG, which is one of the largest property casualty, particularly commercial property casualty companies in the world, said, we want to give you all of the losses that we incurred in a very big percentage of our domestic business before December 31st of 2015, and we will pay the first $25 billion. And then after we pay 25 million, AIG pays 25 million, then you pay 80% of the next $25 billion. So that, and they gave us $10 billion for doing that.

And that’s, if we are correct about our estimates of how much money will be paid and when it will be paid, we should come out being better off than if we had borrowed a similar amount. We have a history of doing 10 or so, maybe 12 big deals like that. We hold the record. We did it for Lloyd’s of London ten or more years ago, and we did it now with AIG. And sometimes we’ve been on the low side in our estimate, and sometimes we’ve been on the high side. So far AIG just said that they, I think they paid 15 and a fraction billion on these pre-12/31/2015 losses. They paid 15 a fraction billion. But the payment tend to trickle down over years as you get further away from when the losses occurred.

So I would say that we still feel okay about it, and we’ll be wrong one way or the other. Everybody is when you estimate losses that may not get settled for 20 or 30 years. But so far, on the group as a whole of these deals we’ve done, we’ve been okay, and I think on the AIG thing we think we’ll be okay, and I think AIG thinks we’ll be okay. I mean, they entered into it for good reasons of their own. So it looks okay. I’m sorry to get into this technical stuff, but, but Jonathan always asks me questions like that, so I have to be ready. I want to answer them. Okay, station 5.

[04:08:28] Shareholder (Adam Bergman, Virginia Beach, Virginia): Good afternoon. My name is Adam Bergman with Sterling Capital in Virginia, Virginia Beach, Virginia. I’m here with my daughter Michelle from Cape Henry Collegiate in Virginia Beach. Hi Warren, hi Charlie. Our question for you is how you go about attempting to forecast the degree of future success of one specific product in a good business versus another, such that you invest in American Express and Coca-Cola rather than Diners Club or RC Cola, for example. Thanks.

Warren Buffett [04:09:14] Well, with American Express it was, it was an interesting situation, because Diners Club got there first. I think American Express, in a certain sense, I mean, they did it for a lot of reasons, but they went into the credit card business because they were worried about what was going to happen to travelers checks. And although traveler’s checks still exist in a significant way. But the interesting thing, when American Express went into competition with Diners Club, and with Carte Blanche, as I remember, that was also existed at the time, was that instead of charging less than Diners Club, and going in figuring they were going against the established guy and they’d come in at a lower price, they went in at a higher price, as I remember.

And the American Express Centurion was on that card. I’ve got one that I got in 1964, but they run up before that. It, it, it had more value in time. I mean, it, it got better representation. And frankly, if you were a salesperson out with somebody and you could pull out that American Express card with that Centurion, you look like you were J.P. Morgan. If you pull out the Diners Club, had a whole bunch of flashy signals, you look like a guy that was kiting his checks from one month to the next. And fellow, fellow named Ralph Schneider, and Ralph Schneider and Al Bloomingdale developed the Diners Club, and they were very smart about getting their first, but they weren’t smart about how they merchandised it subsequently.

RC Cola, you know, at, it, it did, there all kinds of colors that came after Coke. I mean, you know, you go back to 1886 and come up with something at Jacobs’ Pharmacy that’s incredibly successful. You know, fairly soon you’re going to get lots of imitators. But Coke really is the real thing. And you know, you, you offer me RC Cola and say, I’ll give it to you at half the price of Coca-Cola, in terms of drinking it. I mean, this, this is a product that’s six and a, six and a half ounces sold for a nickel in 1900, you know, and now if you buy it on the weekend and buy it large quantities, everything, you’re not paying that much more. This newspaper was three cents in 1942. That the, the, the amount of enjoyment per real, in terms of the real, of what you pay for this, has gone dramatically down in inflation-adjusted money. So it’s, it is a bargain product.

You have to look at See’s Candy. You know, if you live in California and you were, you were a teenage boy, and you went to your girlfriend’s house and you gave the box of candy to her or mother or father, and she kissed you, you know, you lose price sensitivity at that point. That’s… So we really want products where people feel like kissing you, you know, rather than slapping you. Is it, it’s, it’s, it’s an interesting thing. I mean, you know, in effect we’re, we’re betting on the ecosystem of, of Apple products, but led by the iPhone. And, and I see characteristics in that that make me think that, that it’s extraordinary, but I may be wrong.

And you know, so far we’ve been, I would say we’ve been right on American Express and, and Coca-Cola. American Express had this huge salad oil scandal in 1960, happened in, north, 63, November, right around the time Kennedy was shot. And there was really worry about what the company would survive. But nobody quit using the, the car, nobody quit using the traveler’s checks, and they charged a premium price for their traveler’s checks. So there are things you can see around consumer products that sometimes can give you a pretty good insight into the future, and then sometimes we make mistakes. Charlie?

Charlie Munger [04:13:35] I got nothing to add, except that if we’d been offered a chance to go into Coca-Cola right after it was invented, we probably would have said we need to turn it down.

Warren Buffett [04:13:48] Yeah, it would have looked kind of silly to us. Well, unless we drank it. Now, Charlie, listen. No, he’s right. I mean, we don’t, we don’t foresee things that we haven’t got a lot of evidence in on. I mean, we, and you know, we, we, we want to see a lot of, if we’re talking about a consumer product, we want to see how a consumer product behaves under a lot of different circumstances. And then we want to use something, actually there was a book by Phil Fisher written around 1960 called Common Stocks and Uncommon Profits, is one of the great books on investing. And it talks about the scuttlebutt method of investing, which was quite a ways from what Ben Graham taught me in terms of figures. But it’s a very, very good book.

And you can learn a lot, you know, just by, by going out and using some shoe leather. Now they, they call them channel checks now, or something like that. But it’s, you can get a feel for some products, and then there are others you can’t, and then sometimes you’re wrong. But, but it is, it is a good technique. It’s an important investing technique, I would say that. And, and Ted and Todd do a lot of that, and they have people, some people that help them out on doing it too. Charlie’s done it with Costco. I mean, he’s, he’s, he has, I mean, all the time he is finding new virtues in Costco, you know. And, and he’s right, incidentally. I mean, Costco has an enormous appeal to its constituency. You know, they, they delight, they surprise and delight their customers, and there is nothing like that in business. You have delighted customers, you’re a long way home with them. Okay, Becky.

Becky Quick [04:15:41] This comes from John Hegarty at Bright Star Capital Partners, who writes: “Warren, you’re stepping down from the Kraft Heinz board at a time when the company is looking to do a large acquisition, Unilever, for example. Do you fundamentally disagree with the combative nature of hostile bids, activist investing and competitive proxy contests?”

Warren Buffett [04:16:04] Well, we will not make hostile offers ourselves. I do not believe that there, there’s anything fundamentally wrong with the idea. And if you take the Fortune 500 companies, I’m sure that all 500 are not managed by the best, or in some cases even the friendliest to investor, or any managements in the world. So I don’t think, I don’t think it’s evil or anything to conduct a hostile offer for a company. It’s just we won’t do it. And, and we don’t want to get into that. We, we like, we like being liked by the managements that we join, because we’re counting on them to run the company, and we’re not bringing in a whole bunch of people that know how to, how to change businesses.

And the, we seldom take a position opposite to management, very seldom, on, on anything involving a proxy, but, contest of sorts. But we, we don’t rule it out. We don’t think every management is entitled to be, you know, that they don’t, they don’t have a lifetime hold on their business. But it’s not our style at all to, to, well, we won’t do it in terms of initiating it ourselves, and we’d be very, very, very unlikely to support the contest. But we have, we have voted against a couple of propositions over 50 years that, that managements have had made in relation to stock options. We withheld the voted Coca-Cola a few years ago to express our opinion. But we don’t think it’s evil for the shareholders, in some cases, they have different, different opinions about who should run the company, or whether compensation is appropriate, or matters of that sort. They, the stockholders still own the company. Charlie?

Charlie Munger [04:18:19] I’ve got nothing to add to that. And I don’t envy these people that are in these unfriendly uproars all the time. Imagine doing that after you were already rich. It’s insane.

Warren Buffett [04:18:37] Yeah, we are definitely not looking for, but there are, there are certainly companies that deserve challenge, I mean, and they propose things that deserve challenge occasionally. But again, it’s not, it’s not our, our main activity. And this has, the question was asked in reference to Kraft Heinz. The people of 3G are great, great managers. They’ve been wonderful partners. I have made a determination before we got involved there, I was going to be on no more public boards. I’d been on 19 of them, and, and it takes a lot of time. And they asked me if I’d go on for a while, and I did. But it really is like seven and a half days or something, and if you’re on a bank board it may be quite a bit more than that.

I mean, they’re, they’re, they’re just, being on a public board usually means quarterly meetings, plus maybe an extra one. And, and, you know, at 87, I think I’ve now learned what, I’ve learned what happens, and it’s fine. But I don’t want to spend seven and a half days a year when I’m, maybe I can call up people that I trust and admire who are on the board in five minutes, you know, find out what’s going on, or whatever it may be, any questions that come up. And so we are their partners, and delighted to be their partners, and now we have two people on the board of Kraft Heinz, and they can do the traveling, and I can stay home. Charlie, how many public, you’re on Costco, of course, but over the, your lifetime, how many, and public boards?

Charlie Munger [04:20:30] Well, I, I, Costco, except for something like the Daily Journal, where I own part of it, Costco is the only public board. Berkshire or something I own personally.

Warren Buffett [04:20:41] Yeah.

Charlie Munger [04:20:41] I was on Kansas City Power and Light. Boy, that goes way back. But, but basically it has, it hasn’t happened. I don’t envy people who float around a lot of different board meetings.

Warren Buffett [04:20:54] Now, generally speaking, you have very little influence and spend a lot of time. And the trouble is, if you’re going to a board meeting, particularly to get the international, and sometimes they feel they have to have one that’s international, you know, they feel they have to take up a fair amount of your time, or it wouldn’t have been worth coming, you know, thousands of miles for. So you get a lot of this show and tell stuff, and that, that I’ve, I find my mind drifting. Okay, Gary.

GRGary Ransom [04:21:24] Yes. You’ve said that you are looking for non-insurance large acquisitions to put that cash to work. And when you’ve said that, I’ve usually thought of the United States, because you’re a big fan of the US business. And I just was wondering whether you’re seeing more opportunities as the rest of the world opens up, grows, whether there’s opportunities for some of those mega transactions in other parts of the world, say Asia or Europe.

Warren Buffett [04:21:53] Yeah, Gary, I would say that I’ve been disappointed in that, because we do see some outside the United States, and thank heavens we saw the one we saw in Israel some years ago, when, when Eitan wrote me a letter. But, and you know, we bought a business which is a very important part of Berkshire now. But we are still not, they’re certainly aware of Berkshire Hathaway outside the United States, but they don’t sort of pick up the phone automatically. In the United States, I think any large, particularly private company that thinks, is thinking about doing something, they at least think about Berkshire, and but that, in Europe or Asia, then we are not embedded in the minds the same way. They, they know about us, they know we’ve got a lot of money, and they know we like to buy things. But, but we have really, we’re on the radar screen big time in the United States, and we’re not as, we’re not as, we don’t, the immediate desire to be sure that they’ve thought about the Berkshire option does not occur the same way outside the United States. And we’ve tried to encourage it a few ways, but I would say that the results have not been, been great at all. And, but I hope tomorrow, you know, I get a call from Germany or Britain or Italy, or you name it, and Austria, wherever it may be. And I hope I get a call, and, and, and we get an opportunity to do it. Where there’s a good many countries we’d be quite happy to put substantial money into it. Like I say, our experience in Israel has been just terrific. Charlie?

Charlie Munger [04:23:41] Yeah, but the corporate acquisition game now is so driven by the, by the leveraged buyout, and the so-called, whatever they call them, strategic…

Warren Buffett [04:23:56] Yes, strategic.

Charlie Munger [04:23:58] I usually translate that into barnyard language. And, and we’re, so there’s so much craziness in price from our viewpoint, of course it’s very hard for us to do it. The people in the leveraged buyout game, who love massive leverage and don’t mind high prices, even they are getting nosebleeds.

Warren Buffett [04:24:22] It’s hard. And it’s not an environment that means that it allows Berkshire just to go out and buy a whole lot of companies. Have you ever made a strategic deal? We have to wait. We made a strategic deal that you can remember? Have we ever made a deal that we would have regarded a strategic?

Charlie Munger [04:24:43] We’ve never had a strategic plan.

Warren Buffett [04:24:46] Unless you hid it from me. Okay, that answers that. Station 6.

[04:24:50] Shareholder (Brady Ritchie, St. Louis, Missouri): Hi, I’m Brady Ritchie from St. Louis, Missouri, shareholder since 1996.

Warren Buffett [04:24:55] Terrific.

[04:24:55] Shareholder (Brady Ritchie, St. Louis, Missouri): Warren, you and Charlie have been critical of business schools in the past and what they teach with respect to value investing. In Superinvestors of Graham-and-Doddsville, you featured the returns of many great investors with different backgrounds, work and education, with the lesson being following the philosophy is the key to be successful. Today, does it still just fall back to Chapter 8 of The Intelligent Investor? And what do you think of programs and designations such as CFA, CFP, etc., which purport high standards, yet rooted heavily into academia? And I’d like to challenge you to around a bridge tomorrow.

Warren Buffett [04:25:39] What was the last part? You…

Charlie Munger [04:25:42] Well, you start. What do we think about…

Warren Buffett [04:25:45] Yeah, business goes and all that.

Charlie Munger [04:25:48] Business schools and all that.

Warren Buffett [04:25:50] Yeah, I didn’t catch the last month.

Charlie Munger [04:25:53] They’re better.

Warren Buffett [04:25:54] Oh, he challenged me to rick brown bridge. Okay. The, I went to three business schools, and at each I found a teacher or two. I went to one specifically to get a given teacher. But each one of them I found a teacher too that everybody got a lot out of. The, so we’re not in anti-business school here at all. We, we do think that the priesthood saved 30 years ago, for example, in terms of, or 40 years ago, in terms of efficient market, their internet, they, they, they strayed pretty far, in, in our view, from the reality of investing. And I would rather have a person, if I could hire somebody among the top five graduates of number one, two or three of the business schools, and my choice was somebody that had, was bright but had Chapter 8 of The Intelligent Investor absolutely, it just was natural to them, they had it in their bones, basically, I, I take, I take the person from Chapter 8.

It, this is not, what we do is not a complicated business. It’s got to be a disciplined business, but it is, it does not require a super high IQ or anything of the sort. And there are a few fundamentals that are incredibly important, and you do have to understand accounting, and it helps to get out and talk to consumers and start thinking like a consumer in many ways, in certain industries, and all of that. But it just doesn’t require advanced learning. And I, I, I certainly, you know, I didn’t want to go to college, so I, I don’t know whether I would have done better or worse if I’d just quit after high school, you only read the books I read and all of that.

I think that if you run into it a few great teachers, and they really change the way you see the world to some degree, you know, you’re lucky, and you can find them, and you can find them in academia, and you can find them in ordinary life. And I, I’ve been extraordinarily lucky in having great teachers, including Charlie. I mean, Charlie’s been a wonderful teacher. And you know, the, any place you can find somebody that, that gives you insights into things you didn’t understand before, maybe makes you a better person than you would have been before, you know, you get, that’s very lucky, and you want to make the most of it. If you can find it and academia, make the most of it, and if you can find it in the rest of your life, make the most of it. Charlie?

Charlie Munger [04:29:17] Well, when you found Ben Graham, he was unconventional, and he was very smart, and of course that was very attractive to you. And then when you found out it worked, and you could make a lot of money by sitting on your ass, of course you were an instant convert.

Warren Buffett [04:29:33] And, and, and so it still appeals to me, actually. I mean… (Laughter)

Charlie Munger [04:29:38] But the world changed before he died. Bill Graham, I mean, I mean Ben Graham recognized that the exact way he sought undervalued companies wouldn’t necessarily work for all times under all conditions. And, and that’s certainly the way it worked for us. We gradually morphed into trying to buy the better companies when they were underpriced, instead of the lousy companies when they were underpriced. And, and of course that worked pretty well for us. And, and, but, and Ben Graham, he outlived the game that he played personally, most of the time. He lived to see most of it fade away.

I mean, just to find some company that’s selling for one third of its working capital, and figure out it could easily be liquidated and distribute $3 for every dollar of market price. Lots of luck if you can find those in the present markets. And, and if you can find them, they’re so small that Berkshire wouldn’t find them of any use anyway. So we’ve had to learn a different game. And that’s a lesson for all the young people in the room. If you’re going to live a long time, you have to keep learning.

Warren Buffett [04:30:50] Yeah.

Charlie Munger [04:30:51] What you formerly knew is never enough. So if you don’t learn to constantly revise your earlier conclusions and get better ones, why, you are, I always use the same metaphor, you’re like a one-legged man in an ass-kicking contest. If anybody has suggestions for another metaphor, send them to me.

Warren Buffett [04:31:13] Graham, incidentally, one, one point, important point, Graham was not scalable. I mean, you could not do with really big money. And when I worked for Graham-Newman Corp. here, he was the dean of all analysts, and you know, he was an intellect above all others around that time. But our, the investment fund was $6 million, and the, and the partnership that worked in tandem with, with the investment company also had about $6 million in it. So we had 12 million bucks we were, we were working with. Now, you’re going to make adjustments for inflation, but in everything, but it was, it was just a tiny amount. It wasn’t, it wasn’t really scalable. And, and the truth is, Graham didn’t care, because he really wasn’t interested in making a lot of money for himself. So it had no reason to want to find something that could go on and on, become larger and larger. And then, so the utility of Chapter 8, in terms of looking at stocks as a business, is of enormous value. The utility of Chapter 20, about a margin of safety, is of enormous value. But that’s not complicated stuff.

Charlie Munger [04:32:31] I finally figured out why the teachers of corporate finance often teach a lot of stuff that’s wrong. When I had some eye troubles very early in life, I consulted a very famous eye doctor, and I realized that his place of business was doing a totally obsolete cataract operation. They were still cutting with a knife after better procedures have been event. And I said, why are you, in a great medical school, performing absolute obsolete operations? He said, Charlie, it’s such a wonderful operation to teach. Well, that’s what happens in corporate finance. They get these formulas, and it’s a fine teaching experience. You give them a formula, you present the problem, they use the formula, it’s, you get a real feeling of worthwhile activity. There’s only one trouble: it’s all balderdash.

Warren Buffett [04:33:34] Yeah, whenever you hear a theory described as elegant, watch out.

Charlie Munger [04:33:40] Right.

Warren Buffett [04:33:40] Okay, Andrew.

ASAndrew Ross Sorkin [04:33:41] This question, we got a couple like this one, comes from Lauren Taylor Wolfe, managing partner at Impactive Capital. “Warren, you’ve recently said that one of the things that makes you optimistic about America is women entering the workforce, and the, quote, doubling of the talent that’s effectively employed in that workforce. When it comes to positions of leadership, however, women make up less than 21% of boards of S&P 500 companies, and an even smaller 5% of the CEOs. What can Berkshire do, and what is Berkshire specifically doing as a major investor in many of these large companies, to advance gender equality, both at the board level and among senior leadership?”

Warren Buffett [04:34:21] Yeah, well, again. (Applause) You know, as I’ve pointed out in the past, one of my sisters is here, and I have two sisters that are absolutely as smart as I am, and they have better personalities, as anybody that knows both of us, or all of us, going to test. And, and they didn’t remotely have the same opportunities I had. And they had this 1942 or New York Times, and you know, women could be nurses or teachers or retail clerks or stenographers. And that actually worked enormously to my advantage when I was a kid in Omaha in the 30s, because I had way better teachers, because there was, that was a job open to women. I didn’t have a single male teacher in grammar school, and Charlie didn’t when he went to Dundee, I don’t think, either. And we had this huge talent pool that was being funneled into very few opportunities, and, and therefore we got better than we deserved in terms of a market system producing it.

The, you know, I, again, our managers run their companies, but I’ve probably named, before we made this management change, I probably named only six or seven CEOs in the last five or six years. We don’t, we don’t change that much. But, but I would say that half of them that I’m named have been women, which is about what you would, what should turn out to be the case in terms of ability. Now, there is a certain pipeline problem, but that, that gets cured with time, and you can’t use that forever as an excuse. And, you know, I feel very good about the decisions we’ve made for CEOs. I’d, I prefer all our CEOs to live forever, and one woman almost did that that we hired. Mrs. B lived to be 104. She retired at 103. And that’s a lesson to our other managers, that if you retire prematurely, you know, no telling, no telling what will happen.

But it is absolutely true, it does make me bullish. It makes me bullish on the human race, but it’s certainly on our country. Because if you look at what happened, you know, before the 19th Amendment, and then after the 19th Amendment, for a long time, and continuing to this day, but it’s that, that, that there’s been significant improvement. And I do feel more optimistic about the future, because I think, I think there will be more selection by merit rather than by, you know, by gender or by race or by, by inheritance. I think that if you had a system where all businesses got passed on to the eldest son or something, I think, I think that society would make a lot less progress than, than one that’s merit-based. Charlie?

Charlie Munger [04:37:36] Well, we did live in a different age. There’s an old saying that the past is a very strange country. People behave quite differently there. And it was just totally different, and it was ridiculous. That I cannot remember, I had one or two male teachers in my high school, but almost none. And the world has really changed. And within Berkshire, I’ve never seen any over discrimination anywhere on the grounds of gender. There probably has been some, though. I mean, I’m sure that we have our care of all the peculiarities of human nature.

Warren Buffett [04:38:27] Sure.

Charlie Munger [04:38:27] But, but it’s generally, it’s, everything is always improved. Wouldn’t you agree with that?

Warren Buffett [04:38:35] Yeah. And, and I think it’ll keep improving. Okay, Gregg.

GWGregg Warren [04:38:41] Warren, in this year’s annual report it was noted, much as it is every year, that payments of dividends by the company’s insurance subsidiaries are restricted by insurance statutes and other regulations, with Berkshire’s insurance operations currently allowed to declare up to $16 billion as ordinary dividends during 2018. My question here is, should we view this annual regulatory threshold for dividends as a benchmark for allowable share repurchases as well? And in the event that Berkshire wanted to buy back more stock than that, or pay out even more as dividends, would there be an issue with you using capital from operations that aren’t held by the insurance operations to return additional capital? With the side question here being with the annual cash distribution from BNSF, which is held on National Indemnity’s books, be excluded?

Warren Buffett [04:39:30] Yeah, the, we will obviously follow the rules of the states and which were domiciled, and all the rules, of course. But, but basically it’s the state of domestication in the insurance companies, and, and they do restrict the amount of dividends in any given year. Although you could, if you wanted to, request some additional amount. But we don’t, we don’t ever consider that. And, but repurchases, if repurchases were really attractive, we would do it in a very big way. And you know, I wouldn’t rule, there’s all kinds of ways that we could arrange things to do either a very large acquisition, which is what I would, or a very large repurchase, which I don’t think is probably in the cards, just because the way our stock trades, not because we wouldn’t like it, it was at a large discount.

So Charlie and I, we’ve got the appetite, and we would have, we’ve got a lot of cash, but we could, we could have a lot more cash. We, we can make any deal of even one of a very large size. We could make anything that came along, and we could, we could work out how to get it done. We would, we would have, we’re not going to be doing this, but we would have partners who would come in and give us a preferential part of a partnership. That’s way, that’s not like, that’s not going to happen at all, probably. But there’s a lot of things that we could do. So don’t, don’t rule out anything based on unstatutory limitations of distributions from insurance companies, and that we could get a special permission, steve, oh, we can declare bigger and evidence. We are not, you should not assume that we’re constrained by the laws of nature to the amount that we can take out under the statutes now. Okay, station 7.

[04:41:50] Shareholder (David, Shanghai): Hi Warren, Charlie. Thank you for everything. I’m David from King of Global, investment manager in Shanghai. I’ve been here for eight years. If you must win the sport in Olympics, you are our champion team. So my question is, facing the fast-growing machine intelligence, how do you see the new competition impact the capital allocation productivity in the future? For Charlie, what is the first principle of capital allocation from general economic interest points of view? Thank you.

Warren Buffett [04:42:28] Well, two questions. Machine intelligence…

Charlie Munger [04:42:30] I’m afraid the only intelligence I have is, is being provided by something that’s not a machine, and I don’t think I’m going to learn machine intelligence.

Warren Buffett [04:42:42] Yeah.

Charlie Munger [04:42:43] If you ask me how to beat the game of Go with my own intelligence, I couldn’t do it. And I think it’s too old for me to learn computer science. Generally, I’m, I think that the machine intelligence has worked. After all, the machine now can be the best human player of Go. But I think there’s more hype in that field than there is probable achievement.

Warren Buffett [04:43:13] Yeah.

Charlie Munger [04:43:13] So I, I don’t think the world is going to be changed that much by, by machine intelligence. Some, but not, not hugely. And what was the other question?

Warren Buffett [04:43:26] Well, one was machine intelligence. I think he was getting a capital allocation.

Charlie Munger [04:43:31] Oh yeah, yeah. That’s such a general question. Generally speaking, we’re always trying to get the best, to get something that’s worth buying. And the human mind rejects that if you’re in academia, because you could come in and make one declaratory sentence at the opening of the semester, and you would anything to do for the rest of the, of your time. So people want to find some formula. It’s what I call physics envy. These people want the world to be like physics, but the world isn’t like physics outside of physics, and that false precision just does nothing but get you in trouble. So I would, I would say you’ve got to master the general ideas, and you’ve got to work to improve your judgment slowly, the way all the rest of us had. And I, I don’t think most individuals have much hope of individual gain from machine intelligence.

Warren Buffett [04:44:37] No, I don’t. I’m impressed when machines beat Go, or something of disorder, or even when the chess, or whatever it may be. I don’t really think they bring much to the table in terms of capital allocation or investing. And then I may be missing something entirely. You know, maybe I’m just blind to what’s out there.

Charlie Munger [04:45:03] You’re missing a lot of very immunity fee earning twaddle.

Warren Buffett [04:45:07] Well, well, that takes care of that. So we’re going to station 8.

[04:45:13] Shareholder (Jian, Tiger Brokers, China): Dear Mr. Buffett and Mr. Munger, thank you very much for hosting the meeting. It’s truly been remarkable. Thank you. My name is Jian, and I’m a partner at Tiger Brokers, a leading electronic brokerage firm from China. Let me, let me rephrase that. So I and my colleagues flew half away from the globe with i.t and fan talks to be here, and then it’s honored. Just like everyone else in the stadium, we’re honored to be here. My question is, you mentioned earlier that investors don’t really have to be struggling in picking the right stocks, they would do well in picking property, the right market, on the right country. China is the second largest economy, and property has the biggest growth potential. Just by passively weighting a portfolio, by passively evaluating a portfolio, U.S. investors are significantly underweight in China. So in your opinion, what are stopping the investors from investing in China? Thank you.

Charlie Munger [04:46:33] Well, I think the answer is that you’re absolutely right, that we are, American investors are missing China. And they’re missing it because it’s a long way away, it looks different, they’re not used to it, it’s complicated, the headlines confuse them. In other words, it just looks too hard, sitting in Omaha, to outsmart the Chinese market. But I think you’re absolutely right. It’s where they should be looking.

Warren Buffett [04:47:09] Okay, channel. We’ve actually had a couple investments in chat. We actually, we’ve done pretty well. But there were, you know, the, well, if you go back a number of years, one prior to better time, in terms of getting a lot of money into something, you know, many billions, and we have to get billions into things, and to move any kind of a needle, that, that can be tougher in, in markets that you’ve got, you’re unfamiliar working in. And it’s difficult under any circumstances. But, but accumulating a $6 or $8 or $10 billion position in, in investments outside the United States can be very difficult.

For example, in, in UK and much of Europe, we have to report when we own 3% of a company. In fact, we can be asked to report if we even have less than 3%. That really gets very tough when we get a bunch of followers and a lot of publicity that probably isn’t deserved in terms of what we’re doing in the markets and everything. So it, some of the problems are just by the nature of our size. It would be a lot, it, it’d be a lot easier for a running smaller. PetroChina, we managed to get a very big position, but the government owned 90% of it, so we bought 14% of what the government didn’t know. But it was still only 1.4% of the company. But Charlie, Charlie actually keeps pushing me to do more in China, and we’ve tried a couple of times, actually. And then there was, there was one operation that we got involved…

Charlie Munger [04:48:59] Well, you did, so partly. The first time you put in 200,000 and got about 2 billion.

Warren Buffett [04:49:07] Yeah. Well, it wasn’t encouraging enough. Okay, station 9.

[04:49:12] Shareholder (Dr. Sherman Silber, St. Louis): My name is Dr. Sherman Silber. I’m an infertility doctor from St. Louis, and I have been a shareholder in coming to this meeting for 23 years, and I want to thank you very much for making my grandchildren very rich. (Applause) And they sometimes compare me, in the medical world, infertility world, as the Berkshire Hathaway of infertility, because I’m so old and I come from a relatively small community. But I’m wondering about your interest in not just Apple, but all the tech stocks, like Amazon and Google, because you’ve avoided them. You stated in the past, because they’re complicated, you should stick with something you understand. On the other hand, Amazon and Google have what you call a very durable competitive advantage. They really hardly have any competitor. And that’s true in China too, of Alibaba and Tencent. So it seems like it’s a conflict, and I’m wondering if you’re going to be turning the corner and going into these tech companies that seem to have no serious competition.

Warren Buffett [04:50:27] Well, we certainly look at them, and we, we don’t think of whether we should be in tech companies or not, or that sort of thing. We, we are looking for things where we, we do get into the durability of the competitive advantage, and whether we think that our opinion might be better than other people’s opinion in assessing the probability of the durability, and so to speak. But the truth is that I’ve watched Amazon from the start, and I, I think what Jeff Bezos has, has done is something close to a miracle. And, and the problem is, if I think something will be a miracle, I tend not to bet on it.

The, it would have been better, or far better, obviously, if we, if I’d had some insights into certain businesses. But you know, that Bill told me early on, Bill Gates told me early on, you know, that, that, I think I was on aldavist, and they suggested I turned to Google. But the trouble is, I, I saw that Google was, was, was skipping past all of this, and then I wondered if anybody could skip past Google some. And I saw at GEICO that we were paying a lot of money for something that cost them nothing incrementally. We’ve looked at it, and you know, I’ve made a mistake, and, and, and, and not being able to come to a conclusion where I really felt that, that at the present prices, that, that the prospects were far better than the prices indicated.

And I didn’t go into Apple because it was a tech stock in the least. I mean, that I went to Apple because I made certain, came to certain conclusions about, about both the intelligence was with the capital would be employed, but more important, about the value of an ecosystem, and how permanent that ecosystem could be, and what the threats were to it, and a whole bunch of things. And that didn’t, I don’t think that required me to, you know, take apart an iPhone or something and figure out what all the components were, anything. It, it was more, it’s much more the nature of consumer behavior, and some things strike me as having a lot more permits than others.

But the answer is, we’ll miss a lot of things that are almost, a lot of things that, that I don’t feel I understand well enough. And there’s, there’s, there is no penalty in investing if you don’t swing at a ball that’s in the strike zone, as long as you swing at something at some point. And you know, eventually that you find the pitch, pitches you like. And that’s the way we’ll continue to do it. We’ll try to stay within our circle of competence, and, and Charlie and I generally agree on, on sort of where that circle ends, and what, what kind of situations where we might have some kind of an edge in our reasoning or our experience or something, that where we might evaluate something differently than other people. But the answer is, we’re going to miss a lot of things. Charlie?

Charlie Munger [04:54:01] Yeah, we have a wonderful system. If one of us is stupid in some areas, so is the other. And of course, we were not ideally located to be high-tech wizards, you know. How many people of our age quickly mastered Google? I’ve been to Google headquarters. They look to me like they’re, it looks like a kindergarten. A very rich kindergarten.

Warren Buffett [04:54:35] So it’s, it’s impressive what they’ve done. And like I say, at GEICO we were paying them a lot of money at the time they went public. And, and, and all three of them, the main characters, Eric, Larry and Sergey, they actually came and saw me, but they were warners, and talking about going public, and the mechanics of it, and various things along that line. But it wasn’t like what they were doing was a mystery to me. The mystery was how much competition would come along, and how effective they would be, and whether it would be a game where four or five people were slugging it out without making as much money as they could if one company dominated. Those, those are tough decisions to make.

You can have industries where there’s only two people in it, and they still aren’t very, very good, because they beat each other’s brains out. And that’s one of the questions in the airline business. It’s, is a better business now than it used to be, but it used to be suicide. So, and you know, that the competitive influ, competitive factors are, are extraordinary in, in airlines. And how much better business is it with, with four people operating at 85% capacity than it was, it was seven or eight operating in the mid 70s, and with more planes around? Those are tough decisions. But I made the wrong decision on, on Google and Amazon. I just, I really consider that a miracle, that you could be doing Amazon Web Services and, and changing retail at the same time, with relative, you know, without enormous amounts of capital, and do it with the speed and effectiveness of what Amazon has done. I just, I would, I underestimated, I had a very, very, very high opinion of Jeff’s ability when I first met him, and I underestimated him. Charlie?

Charlie Munger [04:56:44] Well, my comment would be that the shareholders have one thing to be thankful for. Some of the age-related stupidity at headquarters has been ameliorated by Ted and Todd joining us. We are looking at the world with the aid of some younger eyes now, and they’ve had a contribution significantly beyond their own investments. And so you’re, you’re very lucky to have, the shareholders, because there’s a lot of ignorance in the older generation that needs removal. (Applause)

Warren Buffett [04:57:24] Okay, station 10.

[04:57:25] Shareholder (Eugene, China): Hi, good afternoon. Good afternoon, Warren. Good afternoon, Charlie. And my name is Eugene. I come from China, and I work for Kantian Thai Food family office, and we are serving highways individual clients in China, and you too will be my dream customer. I know you, your shareholder Bill Gates has a family office, which helping his welshing. So my question is, do you have a family office, and what can, can we know what they do, some anything for you? And if not, are you planning to have a family office in the future?

Warren Buffett [04:58:13] We already have a family office. It’s sitting right here.

Charlie Munger [04:58:18] Yeah, we, we would be the last guys in the world, I have a family office. Actually, there are a lot of them around, and, but it’s not something that, that fit the Munger family or the woman family.

Warren Buffett [04:58:37] Don’t you have anything?

Charlie Munger [04:58:39] Oh, no.

Warren Buffett [04:58:40] Okay, let’s, we’ll do one more. Station 11.

[04:58:43] Shareholder (Adam Mead, Derry, New Hampshire): Hi Warren, Charlie. My name is Adam Mead, Mead Capital Management, from Derry, New Hampshire. In the past you have touched on certain compensation arrangements with key executives. Could you please provide some specific examples of compensation arrangements within Berkshire that speak to incentivizing good behavior, while not penalizing the manager for size or the relative ease or difficulty of the business or industry? Thank you.

Warren Buffett [04:59:15] Well, that is a very, very good question, and a very, very tough question, because some of our…

Charlie Munger [04:59:23] He really doesn’t want to answer.

Warren Buffett [04:59:25] Well, some of our managers, now, some of our, some of our managers are in businesses that are just much easier. I mean, we, we bought into a variety of businesses. People are obviously influenced by what pay arrangements are elsewhere. That wouldn’t be human if, if they weren’t. And trying to, trying to come to the right answer when you have different degrees of capital intensity, different degree, very different degrees of, of basic profitability, and how much you scale up based on size, because there is an incentive, incentive to grow businesses, if usually of businesses get much larger, everybody from the CEO down expects to earn more money for something that we, where they really bring the same amount of, amount of intensity and work and building to it. It is really a tough question. I think that, that if you engage compensation consultants at public companies, which they all do, they’re going to, they’re going to recommend things that cause them to have CEOs recommend them to other companies. It’s just, you, you’re working against human nature when you have an arrangement like that.

I would say that we have obviously kept a very, very, very high percentage of the managers that we hope to have stay with us. In fact, just about 100%. It’s, and I think people do like, they do like to make their own decisions, they do like recognition. You know, they, they, most people respond, they, they like doing a good job, and they like, they like the fact that we understand it. And compensation is part of that, but it’s not the whole thing. And I wish I could give you some precise formulas, but there aren’t. I really don’t want, but we, it’s an advantage at Berkshire to keep our individual deals private. There would be no advantage to just publishing.

Charlie Munger [05:01:53] No.

Warren Buffett [05:01:53] We’re not going to do that.

Charlie Munger [05:01:56] No, of course not. So what we’re saying, he makes all those decisions personally. He’s got every formula in the book, and he keeps them all private. That’s our system.

Warren Buffett [05:02:07] Well, we, we do, we publish what the directors are paying for. We have to. Okay, it’s, it’s 3:30 now. We’re going to reconvene at 3:45. Charlie and I, we love the fact that our partners basically turn out for this, so we, we thank you for coming. I hope you’ve had a good time, both at the meeting in Omaha, and we look forward to seeing you again next year. Thanks. (Applause)

Warren Buffett [05:02:35] We’re going to move it right along. The little gun jumping here, so if you please take your seat. Thank you. This is the formal meeting, so the, the meeting will now come to order. I am Warren Buffett, chairman of the board of directors of the company, and I welcome you to this 2018 annual meeting of shareholders. This morning I introduced the Berkshire Hathaway directors that are present, and also with us today are partners in the firm of Deloitte & Touche, our auditors. Jennifer Tselentis is assistant secretary of Berkshire Hathaway. 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 motion to be voted upon at the meeting. The name proxy holders for this meeting are Walter Scott and Marc Hamburg. Does the assistant secretary have a report of the number of Berkshire shares outstanding, entitled to vote and represented at the meeting? We’re building the suspense here.

JTJennifer Tselentis [05:04:04] Yes, I do. As indicated in the proxy statement that accompanying the notice of this meeting that was sent to all shareholders of record on March 7, 2018, the record date for this meeting, there were 748,347 shares of Class A Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at the meeting, and 1,344,969,701 shares of Class B Berkshire Hathaway common stock outstanding, entitled to one ten-thousandth of one vote on motions considered at the meeting. Of that number, 537,524 Class A shares and 823,145,874 Class B shares are represented at this meeting by proxies returned through Thursday evening, May third.

Warren Buffett [05:05:02] Thank you. That number represents a quorum. Who will therefore directly proceed with the meeting. First order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott, who will place a motion before the meeting.

WSWalter Scott Jr. [05:05:21] I move that the reading of the minutes of the last meeting of shareholders be dispensed with and the minutes be approved.

Warren Buffett [05:05:28] Do I hear a second?

[05:05:29] Unidentified speaker: I second the motion.

Warren Buffett [05:05:30] The motion has been moved and seconded. We will vote on this motion by voice vote. All those in favor say aye.

[05:05:37] Unidentified speaker: Aye.

Warren Buffett [05:05:37] Opposed? The motion is carried. The next item of business is to elect directors. If a shareholder is president who did not send in a proxy, or wish 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 isles so that you can receive a ballot. I recognize Mr. Walter Scott to place a motion before the meeting with respect to the election of directors.

WSWalter Scott Jr. [05:06:09] I moved to Warren Buffett, Charles Munger, Greg Abel, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Ajit Jain, Thomas Murphy, Ron Olson, Walter Scott and Meryl Witmer be elected as directors.

Warren Buffett [05:06:26] Their second?

[05:06:27] Unidentified speaker: I second.

Warren Buffett [05:06:28] Devotion has been moved and seconded that Warren Buffett, Charles Munger, Gregory Abel, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Ajit Jain, Thomas Murphy, Ronald Olson, Walter Scott and Meryl Witmer be elected the 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 not now mark their ballots on the election of directors and deliver their ballots to one of the meeting officials in the isles. Ms. Amick, when you’re ready, you may give your report.

BABecki Amick [05:07:11] My report is ready. The ballot of the proxy holders in response to proxies that were received through all Class A and Class B shares outstanding. The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

Warren Buffett [05:07:33] Thank you, Ms. Amick. Warren Buffett, Charles Munger, Greg Abel, Howard Buffett, Steve Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Ajit Jain, Thomas Murphy, Ron Olson, Walter Scott and Meryl Witmer have been elected as directors. The next item of business is a motion put forth by Freeda Cathcart on behalf of shareholder Marcia Sage. The motion set forth in the proxy statement. Motion request that the company provide a report reviewing the company’s policies, actions, plans and reduction targets related to methane emissions from all operations. The director, directors have recommended that the shareholders vote against the proposal. I will now recognize Ms. Cathcart to present the motion. To all, allow all interested shareholders to present their views, I ask that the representative of the Baldwin Brothers limit the present, presentation of the motion to five minutes.

FCFreeda Cathcart [05:08:28] Good morning, Chairman Buffett, Mr. Munger, members of the board and fellow shareholders. I am presenting this proposal on behalf of Baldwin Brothers on the issue of methane asset risk. This is the second year for this methane focus proposal. Last year 10% of shareholders approved of it. Methane asset risk is a serious financial, safety and environmental issue across the entire natural gas supply chain. The failure of a gas injection well at Southern California Gas Aliso Canyon storage facility and Los Angeles revealed major vulnerabilities and the maintenance and safety of natural gas facilities. In that situation, cleanup and containment costs have soared to close to $1 billion. Governor Jerry Brown of California has threatened to shut down the facility.

Berkshire Hathaway owns the largest interstate natural gas pipeline system in the United, in the United States. It has natural gas storage, distribution and transportation facilities that may face similar safety risks through the Northern Natural Gas Company, Kern River Gas and Mid-American Energy corporations. On an environmental front, research indicates methane leaks could erase the climate benefits of reducing coal use to meet internationally agreed upon climate change targets. Methane emissions have an impact on global temperature of roughly 84 times that of CO2 over 20-year period.

Berkshire is a voluntary member of the EPA’s Methane Challenge and ONE Future emissions intensity commitment framework, and should be applauded for reducing its leakage rates to below the 1% target along its value chain. Since this framework is a cost effective versus prescriptive approach, shareholders would like to understand if this cost-effective approach employed at Berkshire is sufficient. Maintenance and enhanced disclosure should help mitigate the potential for these financial and regulatory risks. In closing, we think it prudent that Berkshire Hathaway issue a report reviewing and disclosing the company’s specific best practices, policies and safety standards for methane assets, and required upgrade costs to facilities to mitigate potential business risks. The report would make it easier for investors, customers and regulators to understand Berkshire’s overall approach to managing methane emissions and risks. Thank you for your consideration.

Warren Buffett [05:11:46] Mr. Cathcart, could you help me out? Are there some other people there to speak? I can’t quite see from here.

FCFreeda Cathcart [05:11:56] No, there are no other shareholders who wish to speak on this issue. There’s nobody behind me to speak.

Warren Buffett [05:12:04] Did you get that? No. The, Greg, could we put up slide 1? And then if somebody will give graydon a microphone, I’d be helpful. He could elaborate some on this chart and, okay, what else we’re doing.

Greg Abel [05:12:21] Thanks. Thanks, Warren, and appreciate the comments there. What we’ve prepared here is in response to the proposal. It demonstrates the ONE Future initiative goal. As it was highlighted, they’d like to see our pipelines operating by 2025 at a 1% throughput, or loss of throughput at 1%. I’m happy to report, as a slide shows, that in 2017 our throughput loss was .046, 20 times better than the request in 2025. Thank you. It’s a great compliment to our operating team. Obviously they take the issue that it’s been highlighted very seriously. I would also add, as it was noted, were part of the EPA program, where we report on a voluntary basis. Our practices are disclosed and reviewed by the EPA, and additionally added on our, our website accordingly. I think, I strongly feel we’re getting the results in, in disclosing the appropriate information. Thank you.

Warren Buffett [05:13:32] Yeah. And, and, and thanks, Greg. And Ms. Cathcart, we are on the same, we’re on the same side you are on this, basically. We just, we just are not, we’re not looking for ways to conduct more studies and prepare reports that may cause us money and generate more reports and all that. But I, I can tell you two things. This is something that is reported to the board of directors of Berkshire Hathaway Energy quarterly, and I’m on that, I’m on that board. And, and we believe in achieving the same engine. We think Berkshire Hathaway Energy is, is both, both sensitive and effective, sensitive to and effective in, in, in reducing methane emissions. So if, I think we’re now ready. The motion is 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 ballot to one of the meeting officials in the isles. Ms. Amick, when you’re ready, you may give your report.

BABecki Amick [05:14:47] My report is ready. The ballot of the product of the proxy holders, in response to proxies that were received through last Thursday evening, cast 48,040 votes for the motion and 558,000 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 [05:15:29] Thank you, Miss Amick. The proposal fails. The next item of business is a motion put forth by shareholder Freeda Cathcart. The motion is set forth in the proxy statement. The motion requested Berkshire adopter policy to encourage more Berkshire subsidiary companies to issue, issue annual sustainability reports. I will now recognize Freeda Cathcart to present the motion, and to all interested shareholders have been interviewed. I ask her to limit her remarks to five minutes. You have the forum, Mrs. Cathcart.

FCFreeda Cathcart [05:16:02] Thank you so much. It is a privilege to be here, and a privilege I can give thanks to my grandfather, James Cathcart, who started out in the mail room of Gen Re and worked himself up through the company to become the chair of Gen Re. During that time he accumulated a lot of Gen Re stock, which he bestowed generously upon his family. And when he did so, he encouraged the members of his family to do good and to pay it forward, to do something that would make a difference in the world and in our communities. For my father, he did so by being philanthropic with educational institutions, with the theory that if you give a person a fish, you feed them for a day, but if you teach them to fish, you feed them for a lifetime. My focus has been on the environment, with the thought that when people fish, it would be nice if they were able to eat the fish.

I want to take this opportunity to clarify my proposal about the sustainability reports and put the emphasis on the word encourage. It is evident that Berkshire Hathaway’s management of allowing the subsidiaries to work without getting guide well mandates from you is being very successful, and I wouldn’t recommend changing it. You’re doing a great job. Please keep it up. But I do think that there’s something to be said to encourage them and support them. In many ways you already are. There is a high level of interest from investors and the public and corporate social responsibility. One-fifth of investments are based on socially responsible investment strategies. And back in 2012, I found an article by Planet Earth Herald where they wrote, “When Warren Buffett talks, people listen. He is now talking about the environment. He believes that companies need to have a triple bottom line, and respecting the environment is absolutely critical to a company’s economic performance.” In times, this is a direct quote from you, Mr. Buffett, “In times such these, a company must invest in the key ingredients of profitability: its people, communities and the environment.”

One third of Berkshire Hathaway subsidiaries already have a sustainability presence on the web, and one of them is Berkshire Energy, that has the acronym RESPECT, R-E-S-P-E-C-T, which stands for responsibility, efficiency, stewardship, performance, communication and training.

And Berkshire Hathaway provides an annual sustainability summit to help bring the subsidiaries together, so they can learn how to be more sustainable, how to share tips and how to be profitable. And that’s excellent. But when I tried to find a web presence about the sustainability summit, I wasn’t able to find it. And that’s where I think that we can do a better job in Berkshire Hathaway when it comes to communication with our shareholders and with the outside world about the good work that we’re doing. A simple solution to that would be to create a link on the Berkshire Hathaway website to sustainability that people could click on and go and find out about initiatives like the sustainability summit. And from there, perhaps they could click on to go to the subsidiaries that have a web presence about sustainability, to see what they’re doing.

In doing so, we give a window to the world where they can see what we’re doing to make a difference. That might inspire other corporations to follow the example, or perhaps a college student working on a paper would read about it and think that that is a good business model, that that’s something that he wants to bring forward when he goes into his career. There is a Facebook page called Berkshire Hathaway Sustainability that will be available for shareholders and the outside world to look at, to see research and to encourage each other to learn how we can support sustainability practices, and that is available now. I greatly appreciate this opportunity to speak with you today and to clarify what my proposal is, and I do greatly applaud and appreciate all the work that you’re doing on behalf of our corporation in the world. Thank you so much, and thank you. (Applause)

Warren Buffett [05:21:14] Many of the managers, a great many of the managers of Berkshire are here, and, and are listening to you. And I suspect that a very high percentage of them agree with what you’re saying. Whether they, what they do in terms of web pages and so on, in our view, was basically up to them. But I can tell you that one leading proponent, as you mentioned, was Greg Abel. Until recently, I was running Berkshire Hathaway Energy, and that was by sherman. And Greg may want to say a few words on this too. And, but I can assure you, our managers are listening to you.

Greg Abel [05:21:59] Thanks, Warren. Yeah, we do. Everything that was touched on, I’ll just maybe add a few points for our, for our shareholders. Obviously sustainability is a priority for Berkshire and each of our operating subsidiaries. It was highlighted that a number of them have sustainability reports, but I would go beyond that. If you go to our various companies’ websites, you’ll see specific actions they’re taking relative to sustainability. So it may not be summarized in a specific report, but that type of information is available. I can also add that when you think of the Berkshire Hathaway Energy corporation, we’re trying to lead by example, with support from Warren, Charlie, Walter Scott.

I’m happy to report, if you look at where our energy production is right now, at the end of 2017, 50% of our energy that is produced and consumed by our customers comes from renewable energy. That’s something we’re strongly communicating across the US and globally, as an example of what can be done in our industry. And I’m happy to report, by the end of 2021, 100% of the energy utilized by our customers can be met through renewable energy in Iowa. So I understand the concept of sustainability. We’re working across that, across our organizations to share best practices. But as Warren highlighted, it’s really resides in each of our companies, but they’ll be, it will be encouraged, and you’ll continue to see great results. Thank you.

Warren Buffett [05:23:38] Thank you. The motion is now ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballot on the motion and deliver their ballot to one of the meeting officials in the isles. Ms. Amick, when you’re ready, you may give your report.

BABecki Amick [05:24:00] My report is ready. The ballot of the proxy holders, in response to proxies that were received through last Thursday evening, cast 67,282 votes for the motion and 544,256 votes against the motion. As the number of votes against the motion exceeds the 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 [05:24:41] Thank you, and sam. Again, I would say, Ms. Cathcart, our managers have heard you. I mean, you, you have had an impact, and I appreciate what you’ve done. Walter, and I guess we’re now ready for motion.

WSWalter Scott Jr. [05:24:54] I move this meeting be adjourned.

Warren Buffett [05:24:56] There a second?

[05:24:57] Unidentified speaker: I second the motion.

Warren Buffett [05:24:58] A motion to adjourn has been made and second, and we will vote by voice. Is there any discussion? If not, all, if not, all in favor say aye. All opposed? Now the meeting is adjourned, and thank you again for coming. (Applause)