[0:14]
WarrenGood morning. I'm Warren Buffett, the chairman of Berkshire Hathaway, and on my left is Charlie Munger, the vice chairman of my partner. And we'll try to get him to say a few words at some point in the proceedings. The format today is going to be just slightly different. We have one item to, normally we breeze through the meeting pretty fast, and we'll do that. But we have one item business on the preferred stock that I could tell cause some confusion with people. So I'll discuss that a little bit. And if before the vote on that, anybody would like to talk about the preferred issue. We'll have any comments or questions at that time. And then we'll breeze through the rest of the meeting and then we'll open it up. And I'll have one announcement to make then, too. And then after that, we'll go for maybe close to noon. And feel free earlier, anybody that would like to leave, you're free to obviously at any time, better form to do it while Charlie's talking, as I've mentioned. And you'll have to be quick. But then we'll have a break a little before noon for a few minutes while a more order. quarterly retreat can be conducted, and we'll have buses outside to take you back to the hotels or to any of the commercial establishments that Berkshire is involved in. And then, because so many of them, we have people here, at least based on the tickets reserved, from 49 of the 50 states, only Vermont is absent. We have, but we have Alaska, why, we have a delegation from every place. We have people from Australia, Israel, Sweden, France, UK, 40 some from Canada. So people, a lot of people have come a long way. So Charlie and I will stick around. In fact, we'll eat our lunch right up here. And we will, we will, you don't want to watch what we eat. But the, well, we'll stick around until, uh, perhaps as late as even three o'clock. But if the crowd gets below a couple of hundred, then we'll feel we can cut it off. But we do want to, we do want to answer everyone's questions. You people are, are part owners of the, of the, of the company and any question that relates to your ownership of Berkshire, we want to be able to give you a chance to ask, and it's tough because of the numbers of people here. I don't know how many are in the other room, but they're about 3,300, I believe, in this room, and we want to get to you to all of you. So that will come after the meeting. Now, we've got a little
[3:10]
Warrenbusiness to take care of. The meeting will come to order, and I'll first introduce the directors of Berkshire in addition to myself, they're right down here, and if you'll stand up when I give your name, Susan T. Buffett, Howard Buffett. These are names we found in the phone book, you can understand. Malcolm Chase III, and Walter Scott Jr. Also with us today are partners in the firm of Deloitte and Tooshire auditors, Mr. Ron Burgess and Mr. Craig Christensen. They are available to respond to appropriate questions you might have concerning their firm's audit of the accounts of Berkshire. Mr. Forrest Crutter is Secretary of Berkshire. He will make a written record of the proceedings. Mr. Robert M. Fitzsimmons has been appointed Inspector of Elections at this meeting. He will certify to the account of votes cast in the election for directors. The name proxy holders for this meeting are Walter Scott Jr. and Mark Hamburg. Proxy cards have been returned through last Friday representing 998,258, Berkshire shares to be voted by the proxy holders, as indicated on the cards. That number of shares represents a quorum, and we will therefore directly proceed with the meeting. We will conduct the business of the meeting and then during the formal meeting. After that, we will entertain questions you might have. First order of business will be a reading of the minutes to the last meeting of shareholders. I recognize Mr. Walter Scott Jr. will place the motion before the meeting.
OtherI move that the reading the minutes, the last meeting the shareholders be dispensed with.
WarrenDo I hear a second?
OtherI second the motion.
WarrenDo I hear a second?
OtherI second the motion.
WarrenThe motion has been moved and seconded it. Are there any comments or questions? We will vote on the motion by voice vote. All of those in favor say aye. Opposed. The motion is carried. The secretary have a report of the number of Berkshire shares outstanding entitled to vote and representative at the meeting.
OtherYes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent by first-class mail to all shareholders of record on March 7, 1995, being the record date for this meeting, there were 1,17770 shares of Berkshire Common Stock outstanding, with each share entitled to one vote on motions considered at the meeting. number, 998,258 shares are represented at this meeting by proxy's return through last Friday.
[5:45]
OtherThank you. If a shareholder is present who wishes to withdraw a proxy previously sent in and vote in person on the two items of business provided for in the proxy statement he or she may do so. Also, if any shareholder that's present has not turned into proxy and desires a ballot in order to vote in person on these two items, you may do so. If you wish to do this, please identify yourself to meeting officials in the aisles who will furnish two ballots to you, one for each item. With those persons desiring ballots, please identify themselves so we may distribute them. Just raise your hand and you'll get one.
OtherThe first item of business of this meeting is to elect directors. I now recognize Mr. Walter Scott Jr. to place a motion before the meeting with respect to election of directors.
OtherI move the Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase, the third, Charles T. Munger, and Walter Scott Jr. be elected as directors.
OtherI second the motion.
OtherIt's been moved in second of the Warren. Bernie Buffett, Susan T. Buffett, Howard, G. Buffett, Malcolm, G. Chase, the third, Charles, T. Munger, and Walter Scott, Jr. be elected as directors. Are there any other nominations? There are any discussion? Doing fine. The nominations are ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the election for directors and allow the ballots to be delivered to the inspector of election. Collect those, please. Would the proxy holders please also submit to the inspector of elections a ballot on the election of directors voting the proxies in accordance with the instructions they've received.
Otherreceived. Mr. Fitzsimmons, when you're ready, you may give your report.
OtherMy report is ready. The ballot of the proxy holders received through last Friday cast not less than 996,892 votes for each nominee. That number far exceeds the majority of the number of shares outstanding. The certification required by Delaware law regarding the precise count of the votes, including the votes cast in person at this meeting, will be given to the secretary to be placed in person. with the minutes of this meeting.
OtherThank you, Mr. Fitzsimmons. Warreny Buffett, Susan D. Buffett, R. G. Buffett, Malcolm, J. Chase, 3rd, Charles D. Munger, and Walterskott, Jr., have been elected as directors. The second item of business of this meeting is to consider the recommendation of the board of directors to amend the company's certificate of incorporation.
[8:16]
WarrenThe proposed amendment would add a provision to the certificate of incorporation, authorizing the board of directors to issue up the one million shares of preferred stock in one or more series, with such preferences, limitations, and relative rights as the board of directors may determine. Now, we discussed this some in the annual report, but I would say, and we'll find out the exact number, but I think we probably had 11 or 12, maybe 12,000 or so shares voted against the proposal, and I think we had a couple thousand shares that abstained. And since there really is no downside to the proposal, that indicated to me that I had not done a very adequate job of explaining the logic of author of, the preferred. So I'd like to discuss that for a minute now, and I'd also like anybody that would like to ask questions about it. They can do so now. We can talk about it later, too, but if you'd like to do it before the vote, that'd be fine. The authorization is just that. It's an authorization. It's not a command to issue shares. It's not a directive. It simply gives the directors of the company the ability in a situation where it makes sense for the company to issue preferred shares. to do so. Now, when we acquire businesses, and I'll tell you about one when we're through with this in a few minutes, when we acquire businesses, sometimes the seller of the business wants cash, sometimes they would like common stock, and it's certainly possible as one potential seller did last year that they wanted, in that case, a convertible preferred stock. Now, from our standpoint, as long as the value of the consideration that we give equates, we really don't care, aside from a question of tax basis we might obtain, but in other economic respects, we don't care what form of consideration we use because we will equate the value of cash versus a straight preferred versus a convertible preferred versus common stock, whatever it may be. So if the worry is that we will do something dumb in issuing the preferred stock, you should, that's a perfectly valid worry, but you should worry just as much we'll do something dumb in terms of using cash or the common stock. I mean, it's, if we're going to, if we're going to do something unintelligent, we can do it with a variety of instruments. And we will not get more licentious in our behavior or anything, but simply because we have the preferred stock. And the preferred stock, a preferred stock, may offer sellers of a business
[11:10]
Warrenthe chance to do a tax-free exchange with us, and they may not want common stock because they may have an ownership situation where they don't want to run the risks of common stock ownership. And that's why our preferred is flexible as the terms, because we could give those people a straight preferred with a coupon that made it worth par at the time we issued it, and then they would know what their income would be for the next umpteen years, and that may be of a paramount interest to them. We could issue them an adjustable rate preferred, which as money market conditions change, would also change its coupon, and then they would be sure of a constant principal value for the rest of their lifetimes. And one or both of those factors could be more important to one seller or another. So that we simply have more forms of currency available to make acquisitions if we have the ability to issue various forms of preferred. Because a preferred stock, if it's properly structured, allows for the possibility of a tax-free transaction with a seller. And that's important to many sellers. Now, in the end, many sources. sellers will prefer cash just as in the past, and probably most of the sellers that don't want cash will want common stock. But we will have a preferred stock available. We're only authorizing a million shares because under Delaware law, there's an annual, I think there's an annual fee. I know there's an initial fee, and I think there's an annual fee that relates to the amount of shares authorized. So if we authorized 100 million shares, it would, we would be paying a larger annual fee, which is something Mr. Munger wouldn't let me do. So what we will do, if we issue this, we will issue, undoubtedly, we will, we will issue some sub-shares so that the number of shares for taxation purposes is relatively limited, but that we will issue sub-shares to make it easier to make change, essentially, in the market. We may issue, if the occasion demands, we may issue convertible preferred, but that convertible preferred would not be worth any more at the time we issued than a straight preferred. We would adjust in terms of the coupon and the conversion price and so on. So we can equate various forms of currency to fit the desires of the seller of the business. And this is simply one more tool to do it. There's no downside, like I say, unless we do something stupid. And if we do something stupid with us, we would do something stupid with cash or whatever.
[13:55]
Warrenwhatever. So it, we probably should have done this some time ago, but we never had a case of a seller wanting that form of currency before. And so it just, and we always felt we could get it authorized promptly, but there's no reason to lose a couple of months if a transaction is pending to call a meeting to get this on the book. So it's simply one more tool. And if there are any, if there anybody that has any questions or comments on the preferred, like I say, you can hold them until later, but I'd be glad to have them before we have the vote. Do we have any?
OtherYeah, there's a question over there.
WarrenIf you'll wait just a second, we'll get a microphone to you. When you ask questions now or later, if you'll give your name and where you live, I'd appreciate it.
QuestionerAll right, my name is Dr. Lawrence Wasser. I'm from New York. My question is this. If you want to buy a business and the people in the business want cash, you have to have cash, cash that, you know, this kind of cash. We're familiar with it, huh? Yeah. But it strikes me that the preferred isn't really cash. It's fiat, that is, it's currency that is its currency that we can create.
WarrenThat's true. It's just like, it's like common stock in that respect. It is the, it is a form, it's an alternate form of currency. Uh, but it is, uh, it is just in terms of common stock, for example, assuming we had enough authorized, we have an unlimited ability to create, uh, currency now, if we created at the wrong price, it dilutes the value of the old currency, but go ahead on.
QuestionerUntil we vote in the affirmative, which I'm sure that this group will probably do because of their confidence in you, but until we vote in the affirmative, it doesn't exist.
WarrenThat is correct. You were, that would be true incidentally with common stock. If we had no more authorized common stock out than we had issued we have i think a million and a half authorized but let's assume that we'd issued all that we had authorized until more was authorized by the shareholders there would it would not be available to be issued but if more were authorized by the shareholders then isn't it true that the value of the shareholders holding would be diluted only only if we receive less in value than we give that's the key to it i mean if if we issue 200 million dollars worth of preferred and we receive a business that's only worth 150 million there's no question you're
[16:58]
Warrenworse off than before so are we incidentally but but we're all worse off the and that's true if we give cash that's worth more for a business than the business is worth if we give 200 million a cash for a business that's worth 150 million we are worse off we may not have issued a share of stock but we have diluted the value of your stock if we do that as long as we get value received uh in terms of whether of cash common stock or preferred stock then you are not diluted in terms of value that's it's an important point that uh and i and obviously a number of companies as as you may have charlie and i have commented about in reports and elsewhere a number of companies in our opinion have issued common stock particularly which has a value greater than what they receive and and when they do that they are running what i what john medlin of the wakobia called a chain letter in reverse and uh uh that's cost american shareholders a lot of money i don't think it'll cost them any money at berkshire but it's a perfectly valid worry for shareholders to have because uh a management can build an empire but just by issuing these little pieces of paper which which they feel don't cost them anything that uh i think charlie had one story about that in the past don't you want to comment on that charlie
Charlieno names basis of course there was a particular bank where one of the officers wanting stock options pointed out to the management that they could issue all these shares and it didn't cost anything now imagine hiring a manager who thinks that way and paying them money to behave like judas and you're very in your very midst
Warrenwe we have we have had conversations with managers where they tell us how how fortunate they feel because the stock is down and they can issue options cheaper now if they were issuing those to the third parties i you know i'm not i'm not sure whether they have exactly the same attitude but we have no feeling that that we're getting richer when we issue shares we we have a feeling we're getting richer when we get at least as much value in a business as the shares are worth that we issue and we don't intend to issue them under any other circumstances but it's a perfectly valid valid worry the second part of the question is that obviously with preferred issue you have a situation where the common shareholder is moves to the back of the line as it were why should the common shareholder in this room want to step to the back of the line
[19:34]
Warrenif he's at the front of the line now well it but it's also true if we buy a business for cash and let's say we borrow the money the bank that we borrow the money from will come ahead of the common shareholder there's no there's no question any time you move you engage in transactions that involve the capital structure you are changing the potential for each part of the capital structure if you issue a lot of common and you've got some debt outstanding you've generally improved the position of the debt and the question really becomes whether you think that the position of the common shareholder is improved by issuing either preferred stock or perhaps borrowing a lot of money to make an acquisition i mean a couple of times in the history of berkshire uh we've borrowed money to to buy something or to buy a business and when we do that we are placing a bank or an insurance company or whomever ahead of the position of the common shareholder we did that when we issued some some debt a few years back and there's a question of weighing whether the common shareholders are going to be better off by by borrowing money but borrowing money is not necessarily at all harmful to shareholders although certainly if it's carried to access it is and the preferred is a form of quasi borrowed money that does rank ahead of the common shareholder but then at the same time we're adding a business which we think is going to benefit the shareholder if we issue that so that's the trade-off
Questioneryeah my name is matt suckerman i'm from miami florida my question is uh it seems to me that there's some requirement for shareholder votes if convertible stock a preferred stock is issued beyond a certain limit what are those limits
Warrenthere there are no limits on the conversion term that we might do but uh for example if we were going to issue convertible preferred now we have no we have no uh plans to do it but it could happen back might well happen this year the we would and and and the alternative we'll say was was giving somebody a hundred million dollars in cash for a business if we were to issue a straight preferred we would figure out what a hundred million dollars worth of a straight preferred would sell for what coupon would be necessary and that would depend on call provisions and a few things but for a triple a credit like berkshire uh you know it would be somewhere uh in the area of of seven percent or thereabouts and then they would have no participation in the upside of the
[22:03]
Warrencommon if they wanted something that was sure to maintain its principal value then you have to issue an adjustable rate preferred that will keep its value around par that preferred might have an initial coupon of say five percent or something of the sort because it has the ability to go up or down based on interest rates but it would always be worth about par if we were to issue a convertible preferred it might have a a conversion price of just to pick a figure 28 000 or something of the sort and a coup of well below the coupon on a straight preferred and so whatever we did they would equate out in our mind as to the value we were we were giving we're not going to we're not going to give a hundred and twenty percent of x if we're only willing to pay a hundred percent of x just because the form of a deal changes but you may well see us issue at some point you may see us issue a convertible for you may see us issue a straight preferred and they see us issue an adjustable rate preferred I hope we do something because i'd like you know if we do it we'll think we're better off based on your past performance i'm sure you'll get more value than you give well but in any case uh it was my understanding that if the amount of shares issued for a conversion of a convertible issue were greater than 20 percent of the total amount of shares outstanding than it would require a vote of the stockholders under delaware law i may be wrong i think it's a stock exchange rule isn't it charley
Charlieyeah yeah you're right about the rule but it's a new york stock exchange rule it's a new york stock exchange rule
Warrenit i that would be that would be five billion dollars plus of deal and uh you know we would love to make a five billion dollar deal but i don't think we're going to do it so i i would say that the chances of any any acquisition being large enough so that it requires a shareholder vote is probably slim but but but uh but it isn't because we wouldn't be interested and if you know if we if we if we have one we'll be coming back to you with the votes already in hand are there any other questions on the preferred we can talk more about it later too i just want to oh here we have sure good morning
Questionermr buffett i'm reina de costa loy from chicago very proud to be here and i've seen you grow so that pretty soon we're going to be out in the football field i think your explanation was very helpful because as i read this and i'm sure many of the other lay folk
[24:36]
Questioneri didn't understand what you were doing and you mentioned the preferred stack but in the perspective it's not clear whether it would be the convertible preferred the straight preferred and you cleared that answering a few other questions but some of the people felt it would dilute their stock yeah well i i should have made that clear in the annual report i'm glad i've had this chance to do it today anything else on the preferred you don't have to come back to the shareholders for a vote after these shares are authorized for the terms of it and you've discussed this in terms of buying companies my question is you yourself through Berkshire Hathaway own the preferred shares of several companies solomon u.s air american express did those shareholders have to vote on the terms of the preferred shares that you bought for those companies or was that left at the board of directors decision level do you clarify that point excuse me go ahead could you clarify that point please
Warrenyeah we bought a i think we've probably bought six issues of preferred directly from um companies and since none of those triggered that New York Stock Exchange rule that we discussed earlier and they could have if they'd been somewhat larger but they didn't none of those deals had to be approved by the shareholders I think the only deal we've had with a company that had to be approved by the shareholders was when we bought the Cap Cities ABC stock well we bought early in 1986 I think it was approved by their shareholders in 1985 but But the only situations where it would have had to have been approved is if it triggered the New York Stock Exchange rule and our purchases were not that large that they did that. Any other questions? Yep, there's one more.
QuestionerMy name is Dale Valkovich. I'm from Champaign, Illinois. A recent issue of Barron's indicated that it may be possible to issue a best of all possible world's preferred. That being one where the dividend looks like interest to the issuer and a tax deductible and to the purchaser it would qualify for the dividends received deduction. Do you think that structure might be possible with these shares?
WarrenWell, we haven't thought about that. I know what you're talking about on that, but I don't think it would be possible. For one thing I don't think, I don't think you probably have a tax-free deal that way, Charlie, do you?
CharlieWe probably wouldn't try and be that cute.
[27:20]
WarrenI've got several quips in mind, but I think I'll keep it myself. My guess is that that form does not work for a long. time. I know what you're talking about, but my guess is it doesn't. Some companies, I don't then we'll get on with this, but some companies care about the consideration they give in a deal, whether it's cash or preferred or so on, because they care about the accounting treatment that they get. They usually want pooling treatment rather than purchase accounting treatment. I won't get into that here. I know it's going to disappoint you, but I won't get into that here, although I may in the next annual report. And That is of absolutely no consequence to us. We care not a whit about the accounting treatment that we receive. We feel that we have a shareholder body that's intelligent enough to understand the economic reality of a transaction and that by playing various games in terms of how we try to structure it and maybe flow part of the purchase price back through the income statement or anything of the sort, which is done, that's not something that we're, that we care about at all. we would rather do whatever makes the most sense for us and for the seller and then explain to you whatever accounting peculiarities may arise out of the transaction. And that probably differentiates us from most companies, and it probably helps us make a deal occasionally. Anything else? Really? Okay, now I can hear you fine. Okay, and I was wondering, will there be any opportunity for shareholders who may find the preferred issue preferable for any number of reasons to participate in that? Well, if we issued a preferred and it became actively traded, let's say it was a company with many shareholders instead of a few. Obviously, that would be something that any new or present shareholder could make a decision on whether they preferred that issue than others. We could, but we have no plans of doing it, and I don't think, I don't see it happening. We could offer to exchange preferred for present common. And it's conceivable. A few people would have an interest, but most people have self-selected in terms of the kind of security they want to own in terms of owning Berkshire Common, so it's unlikely they would want to switch into a preferred because we wouldn't have a premium of value. It would just be an alternative security. We could do that, though, and it would probably be a tax-free deal. We have no plans of doing that, but it's
[30:14]
OtherIt's something that if we ever thought that enough people might want, we could offer it. No one would be obliged to take it. It's a good question. Okay, we'll move on. Is there a motion to adopt the Board of Directors' recommendation?
QuestionerI move the adoption of the amendment to the fourth article, the certificate of corporation, has set forth in the exhibit A of the company's proxy statement for this meeting.
OtherIs there a second?
QuestionerI second the motion.
OtherMotion has been made and seconded to adopt. the proposed amendment to the certificate of incorporation. Any further discussion? We are ready to act upon the motion. If there are any shareholders voting in person, they should now mark their ballot on the proposed amendment to the certificate of incorporation and allow the ballots to be delivered to the inspector of election. We're collecting a few there. With the proxy holders, please also submit to the inspector of elections, a ballot on the proposed amendment voting, the proxies in accordance with the instructions they have received. Just a second here. Mr. Fitzsimmons, when you're ready, you may give your report.
Otherreport is ready. The ballot of the proxy holders received through last Friday cast lot not less than 928,889 in favor of the proposed amendment to the Certific of an Incorporation. That number far exceeds the majority of the number of all shares outstanding. The certification required by Delaware law regarding the precise count of the votes, including the votes cast in person at this meeting, will be given to the Secretary to be placed with the minutes of this meeting.
OtherThank you, Mr. Fitzsimmons. amendment to the certificate of incorporation is set forth and exhibit A to the proxy statement for this meeting is approved. After adjournment of the business meeting, I will respond to questions that you may have to relate to the businesses of Berkshire, but do not call for any action at this meeting. Does anyone have any further business to come before this meeting before we adjourn? If not, I recognize Mr. Walter Scott Jr. to place the motion before the meeting.
QuestionerI move this meeting and be adjourned.
OtherI second the motion.
OtherMotion to adjourn has been made and second. We will vote by voice. Any discussion? If not, all in favor say aye. All opposed, I know, the meeting is adjourned.
WarrenNow, I'd like to tell you about one thing that, since the annual report that some of you probably
[32:46]
Warrenread about in the papers, but maybe not all of you have heard about, just shortly after the annual report was issued, we completed a transaction with Heelsberg's diamonds, with Barnett Heelsberg, who's here today, and Barnett, would you stand up, please? There he is. hand. You may be interested in how it came about because Barnett attended two of the last three meetings of Berkshire. He had a few shares in an IRA account and he was here last year. And shortly after this meeting, I was back in New York City and I was crossing the street at 58th Street right near the Plaza Hotel on Fifth Avenue. And a woman said, Mr. Buffin, I turned around and she came up, she said she'd attended the annual meeting last year and a few days ago and said that she enjoyed. And I said, that's terrific. And I started across again, and at Barnett had been about 30 or 40 feet away. I didn't know him. And he had heard this woman, so he said the same thing. And I turned around, and we shook hands. First time I met him. And he said, you know, he said, I might have a business you'd be interested in. And I get that all the time, so I said, well, why don't you write me? And a time went by, and I got a letter from Barnett, and he'd been thinking about doing something with a business. His father started in 1915, and based in Kansas City, all that whole time. And he had been exploring various avenues, but probably in some part because of it was a lot of his background as a Berkshire shareholder. He had some specific interest in the company becoming associated with Berkshire. He cared very much about the company having a permanent home. He cared very much about it having an environment in which it could grow and be run autonomously and be based in Kansas City. And he wanted to receive something in exchange that he was happy to own for the rest of his life. We worked out a transaction shortly, just very shortly after the annual report, went to press. And so now Berkshire, as of 1201, I guess, yesterday morning, the deal closed. There's this waiting period because of the Hartscott-Rodino Act and a few other things. The transaction closed, and now Berkshire is the owner of Hellsburg's diamonds, which has roughly 150. stores around perhaps 26 or 27 states. I'm not sure the exact number. And mostly in malls, although some others. It's been enormously successful. Barnett brought in Jeff Komet, who formerly ran Wanamakers,
[36:05]
Warrenabout eight years ago, I guess it is. And the company has both expanded in its traditional format. It's gone with a new format recently, which has been very successful. It is in its position in the jewelry industry, it tends to compete with the Zales recordings, but it does a far, far better job. Their sales per store on roughly equivalent square footage will be very close to double what competitors achieve. It's got a magnificent morale, organizational structure. and the people, Barnett, was very generous with people in making the sale. He took it out of his own pocket to treat people right because they've done such a terrific job over the years. And I think you'll see Hellsburgs become a very big factor in Berkshire over time, and it just shows you what can come out of these annual meetings, so the rest of you are, you know, do your stuff. So anyway, that is an acquisition that was made for, for, largely for, for, for, for common stock. It did not involve preferred and, and, because Barnett preferred and preferred, preferred and, and, and, and, and, and, and, but different people have different needs, and sometimes there's a group of shareholders that, you can have different priorities, and, and that's the reason we, we want to have various currents. If we had not been able to use common stock, we would not have made this transaction because Barnett has been in no hurry to write a large check to the government, and we can help him in that respect with a common stock deal. So anyway, we're glad to have Hellsburgs become part of Berkshire. I wouldn't be surprised if we have another announcement or two in the next year before we have the next meeting. I hope so, but there's no, there's no guarantees. Now we're going to turn the meeting open. questions we'll do it as we've done before we've got this this room divided into six zones and if you will raise your hand the monitor and that in your zone will will recognize you and we'll keep going around we will not go to a second person in any zone until we've we've exhausted all those who have yet to ask their first question we have we have we also have have a zone in the in the overflow room so there'll be a total of seven and we'll just keep going around if you'll identify yourself please and we'll be delighted to answer your questions and the more the better so we'll start with zone one
Questionermy name is Fred Ilfeld Jr. from Sacramento California and I wanted to ask if you could elaborate upon the
[39:27]
Warrenlogic of adding two family members to the board of trustees well it's terrific for family harmony just to start with the as I've talked about in the annual report the if if I if I die tonight you know my stock goes to my wife who is a member of the board of directors and she will own that stock until her death when it will go to a foundation so there is a desire to have a as long a term and permanent ownership structure as can really be done in terms of planning and the tax laws and so on I mean I we have invited people like like Helsburgs to join in with Berkshire into what we think is a particularly advantageous way for them to conduct a business and to know the future that they're joining and and part of knowing the future that they're joining involves knowing that the ownership is stable and it will be stable for a very long period of time in Berkshire probably about as long as long as you you can you can anybody can plan for in this world after my death the family would not be involved in the management of the business but they'd be involved in the ownership of the business and you would have a very large concentrated ownership position going well on into the foundation that would care very much about having the best management structure in place and to in effect prepare for that over time I think it's very advisable that family members who will not be involved in management but who will have a key ownership role to play become more and more familiar with the business and the philosophy behind it I discussed that some in the I guess it was the 1993 annual report because I think it's important that you understand and anybody that wants to sell us a business if you build a business since 1915 and you care enormously about it and you care about the people that you've developed but you've got something else you want to do in life it's more you know then advertising your car in the paper to sell it I mean it it is an important a very important transaction to you not just in terms of how much money you receive but in terms of of who you deliver thousands of people that have joined you who you deliver them to and I think we have a structure that is about as good as you can do nothing is forever but we have a structure that's about as good as you can do in terms of people knowing what they're getting into when they when they make a deal with us and and being able to count on the conditions that prevail at the time of the deal
[42:19]
Warrencontinuing for a long period in the future many people I had a fellow tell me the other day about a business where he'd been wooed by the acquire and you know the day after the deal they came in and and fired the top half dozen people they had a secret plan all along well I don't think you run into much of that but what you do run into is the acquire the company that's the acquiring company itself they're being acquired or some new management coming along or some new management consultant coming along and saying well this doesn't fit our strategic plan anymore so let's dump this division and people to join in with Berkshire then be relatively I think I'm comfortable about nothing like that happening that Charlie you want elaborate on
Charlieno I was hoping Charlie would have a near-life experience this morning but keep encouraging him
Questionera zone two my name is Jim Lichty from Des Moines I'm interested in like Chrysler can you make a on on the Chrysler corporation
Warrenno I don't think I can make a comment on I think Solomon brothers incidentally has been retained by that we have nothing to do with Charlie and I read that in the paper and Charlie and I are not are not familiar with normally with investment banking arrangements at Solomon but it has been in the paper that that Solomon's involved that we have no involvement
CharlieCharlie you're not just commenting on question no try him on something else
Questionerzone three I'm Jeremy Bartman from Jackson Mississippi in describing the your allocation of capital to your wholly owned subsidiars you wrote in the annual report that quote you charge managers a high rate for incremental capital they employ and credit them at an equally high rate for capital they release in quote how do you determine this high rate and how do they determine how much capital they can release
Warrenwell what we try to do with those arranged the questions about about incentive arrangements we have with managers or or other situations where we either advance capital to a wholly owned subsidiary or or or withdraw usually that ties in with the compensation plan and and we want our managers to understand just how highly we do value capital and we feel there's there's nothing that creates a better understanding than to charge him for it and so we we have different arrangements sometimes it's based a little on the history of the company it may be based a little bit on the industry it may be based on interest rates at the time that we first
[45:26]
Warrendraw it up we have we have arrangements depending on the on those variables and perhaps some others and perhaps just you know how we felt the day we drew it up that range between 14% and 20% in terms of capital advanced and sometimes we have an arrangement where if it's a seasonal business where for a few months of the year when they have a seasonal requirement we give it to them very cheap at LIBOR but if they use more capital over beyond that we start saying well that's permanent capital so we charge them considerably more now if we buy a business that's using a couple hundred million of capital And we work out a bonus arrangement and the manager figures out a way to do the business with less capital. We may credit him at a very high rate, same rate we would use in charging him in terms of his bonus arrangement. So we believe in managers knowing that money costs money. And I would say that just generally my experience, in businesses that most managers, when using their own money, understand that money costs money, but sometimes managers when using other people's money, start thinking of it a little bit like free money. And that's a habit we don't want to encourage around Berkshire. We, by sticking these rates on capital, we are telling the people who in our business how much capital is worth to us. And I think that's a useful guideline in terms of the decisions they're making. Because we don't make very many decisions about our operating business. So we make very, very few. I don't see capital budgets in most cases from our 100% own subsidiaries. And if I don't see them, no one else sees them. I mean, we have no staff at headquarters looking at this kind of thing. We give them great responsibility on them, but we do want them to know how we calibrate the use of capital. And so far, I would say, it's really, it's really worked quite well. Our managers don't mind being measured. And they like getting, I think they enjoy seeing a batting average posted. And a batting average that does not include a cost of capital as a phony batting average. Charlie?
CharlieWell, I certainly agree. And his name isn't even Buffett. I mean, we, Zone 4.
QuestionerMy name is Dave Wienkiss. I'm with Business Insurance Magazine. Some of property casualty risk management experts are advising commercial insurance buyers to forge five and 10 year policies with their property casualty insurers to promote stronger partnerships with their insurers as well as to maintain the smooth PC market of the past seven to eight years.
[48:43]
QuestionerDo you believe this idea will take hold for most policy holders? and if so, what would be the implications for policyholders' costs and insurers' underwriting results? The question is about partnerships between probably commercial policyholders and their insurers. And there are a lot of ways of doing that by various retrospective plans or adjustable rates of various sorts and self-insured retentions and that sort of thing.
WarrenAs a general matter, there are only two reasons for business. buying insurance. One is to protect yourself against a loss that you are unable or unwilling to bear yourself. And that is partly an objective decision. That's partly subjective. For example, a manager that's terribly worried that his board of directors may second guess him. If he has an uninsured loss is going to buy a lot more protection probably than the company really needs, but he knows he's never going to have to go in front of his board of directors and say, we just had a million dollar fire loss. And then the next question the director asks is, was it insured? And he doesn't want to answer or no. So he may do something that's very unintelligent from the company's standpoint, merely to protect his own position. But the reason for buying insurance is whether, and this is true of life insurance, it's true of property casual, it's true of personal insurance, it's true of commercial insurance, is to protect against losses that you're unwilling or unable to bear yourself. Or the second reason, which occasionally comes up, is if you think the insurance company is actually selling you a policy that's too cheap, so that you really expect to, over a period of time, to have a mathematical advantage by buying insurance. Well, we try to avoid selling the second kind and to concentrate on selling the first kind. And we think any company we sell insurance to, and of course, much of the insurance we sell as to other insurance companies. I mean, we are a reinsurer in very large part. We are selling them insurance against a loss that they are either unable or unwilling to sustain. And a typical case, you know, might be a company that had a lot of homeowners' policies in California. And if those include earthquake coverage, they may not be able to sustain the kind of loss that is possible, even though they want to keep a distribution system in place that merchandise is en masse to homeowners in California. So we will write a policy.
[51:34]
Ajit JainThey may take the first $5 million of loss. They may take the first $50 million of loss. It depends on their own capabilities. But then they come to us. And we are really uniquely situated to take care of problems that no one else. that the companies can't bear themselves and that they can't find anybody else to insure. But we really don't want to insure someone for a loss that they can afford themselves because if we're doing that, it may be because they're dumb, but it may be because they also have a loss expectancy that's higher than the premium we're charging, which is not what we're trying to do in business. I think that, I think, I think, probably probably as compared to 30 years ago, that risk managers at corporations are probably more intelligent about the way they buy their insurance than many years ago. I think it's become a, I think they're more sophisticated and they've thought it through better. But there is a lot of insurance. There's some, there's a fair amount of insurance bought that doesn't make sense and there's a fair amount of insurance that isn't bought that should be bought. There There are certain companies that are exposing themselves in this country to losses which would wipe them out, and they prefer not to buy reinsurance because it's, quote, expensive. But what they're really doing is betting on something that won't happen very often, happening not at all. And if you take a huge hurricane on Long Island, or you take a huge hurricane on Long Island or you take a major quake in California, there are a number of companies that have not positioned themselves to withstand those losses. And if you're a 63-year-old CEO and you figure I'm going to retire in a couple of years, you know, the odds are pretty good that it won't happen on your watch, but it will happen on somebody's watch. And we try to sell reinsurance to those people, and usually we do, but sometimes we don't.
CharlieNothing to add.
OtherOkay. Zone 5. He's saving himself. He'll be dynamite when he gets going.
QuestionerMy name is Hugh Stevenson. I'm a shareholder from Atlanta, Georgia. My question involves the company's catastrophe lines of insurance. It seems that there's a relative ease of entry into that business through Bermuda-based companies and others. And given the importance of that business to the overall company, I'm curious how the ease of entering to the business affects its long-term
[54:32]
Ajit Jaincompetitive position and its rates of return. Well, you're very right. There is an ease of entry into the catastrophe business, and, you know, it's sort of attractive for, it's particularly attractive for promoters because if you start an insurance company to write earthquake insurance in California, and you raise a few hundred million dollars, and you'll either have essentially no losses, or if you write enough of it, you'll go broke. And most years, you'll have no losses. So if your intention is to sell your start. stock publicly in a year or two. The odds are very good that you will have a beautiful record for a couple of years and you can sell and, you know, maybe one time out of ten you'll go broke and nine times out of ten you'll sell to somebody else who eventually will go broke. And it, there is, there's really the ease of entry. The only thing that may restrict that is that if the buyer is sophisticated enough to, to, question the viability of that company under really extreme conditions, which is the only conditions that count when you're buying catastrophe insurance. That may restrict. But the second thing is, of course, none of the people that have started up can offer anywhere near the amount of coverage that Berkshire has. Berkshire is really one of a kind in terms of its capital strength in the business. I don't think anybody in Bermuda that I can remember, I don't think Ajit's out there, but I don't think anybody has a billion of net worth, and, you know, we have, at present, we probably have close to 13 billion of net worth and considerably more of value. So we can sustain shocks, and we will sustain shocks, I should add, that others can't, and we try to get paid appropriately for that. But when we say we can take a billion dollar loss, we can take a billion dollar loss, and we will have a billion dollar loss at some point. And anyone buying it knows we can take it or something greater. And they should know that very few other, very few of our competitors can. So there's competition. We do an unusual proportion of our business with the eight or ten largest insurance reinsurance companies and insurance companies in the world. So we really have a staff. established with the people who understand the real risks of the business, they come to Berkshire and a lot more often than they stop in Bermuda because they know that we'll pay and they've been around long enough to know that in the end that's what really counts
[57:22]
Warrenwith an insurance company. If the rates, if there were enough capacity at really ridiculous rates, I mean, in the end, we wouldn't be writing that business at that time. But I don't think that will happen. It certainly hasn't happened so far. And if it happens, you know, so be it. We will all play golf until the loss occurs. Charlie?
CharlieNothing good.
QuestionerZone 6. What do we do? Chairman, most company Brexhaar invest at this time are not in high technology, are not in high technology sector. What we have? What we have seen in the last few years that there seems to be a significant growth both in sales and earnings of the high technology area. And also what your shareholder believe that the times are changing from a brand name to high technology. My question is, can someone apply your investment principle, business philosophy, and your discipline in life to build a portfolio of, say, five or six high technology company, let's call it Berkshire, Heartway, technology? defund?
WarrenWell, I think it would sell. The question about Charlie and I won't be able to do it. We, Charlie probably understands high tech, but you can see how hard it is to get the information out of him, so he hasn't told me yet. We try not to get into things that we don't understand, and if we're going to lose your money, we want to be able to come before you, you know, next year, and tell you we lost the money. your money because we thought this and it turned out to be that. We don't want to say, you know, somebody wrote us a report saying, you know, this is what's going to happen in some field that we don't understand and that therefore we lost your money by following someone else's advice. So we won't do it ourselves. I think that the principles, I think Ben Graham's principles are perfectly valid when applied to high-tech companies. It's that we don't know how to do it, but that doesn't mean somebody else doesn't know how to do it. My guess is that if Bill Gates were thinking about some company in an arena that he understood and that I didn't understand, he would apply much the same way of thinking about the investment decision that I would. He would just understand the business. I might think I understand Coca-Cola or Gillette, and he may have a, he may have the ability to understand a lot of other businesses that seem as clear to him as Coke or Gillette would seem to me. I think once he identified those.
[1:00:16]
Charliethose, he would apply pretty much the same yard sticks in deciding how to act. I think he would act, I think he would have a margin of safety principle. It might be a little different because there's essentially more risk in a high-tech company, but he would still have the margin of safety principle on a sort of adjusted for the mathematical risk of loss in his mind. He would have, he would look at it as a business, not as a stock. You know, he would not buy it on borrowed money. I mean, a bunch of principles would be carried through. But our circle of things we understand is really unlikely to enlarge. Maybe a tiny bit here or there. But if the capital doesn't get too large, the circle's okay. But we will not, if we have trouble finding things within our circle, we will not, we will not enlarge the circle. You know, we'll wait. That's our approach.
OtherNow, how are we set up for Zone 7? Can we do it out? Yeah, here we are. Are you there?
QuestionerHi, I'm Susie Taylor from Lincoln, Nebraska. By way of explaining, we wrote down the value of U.S. Air reflecting our investment's current market value. You had a good explanation in your report as to why the economics of the business are unattractive, and I presume, given the choice, we wouldn't do it over again. I think that's a fair assumption. And I should mention anybody who wanted to ask about U.S. Air, we put them in the other room just so you'll know why. Then the second part is better. But I'm watching you. I can see you on the monitor. In quoting from your profound statement, you don't have to make it back the way you lost it. Right. Wouldn't it be a good idea to put that $89 million in something you are really behind as opposed to U.S. Air?
WarrenWell, that's a very good question, because it is true that a very important principle in investing is you don't have to make it back the way you lost it. And in fact, it's usually a mistake. to try and make it back the way you lost it. And we have, when we write our, an investment down as we did with U.S. Air at 89 million, we probably think it's worth something more than that. But we tend to want to be on the conservative side, but it's worth a whole lot less than we paid. And the nature of that preferred, as well as other private issues we've bought, usually makes it quite difficult to sell. That's one of the things we know going in. When we bought preferred, some people thought that we were getting unusually favorable terms.
[1:03:08]
WarrenI haven't heard from them lately on U.S. Air, but the, but one of the considerations in that is that if you buy 100 shares of a preferred that's being offered through a securities firm from the same issue, you can sell it tomorrow. And we are restricted in some ways legally and in other way simply by the way that markets work from disposing of holdings like that. And we know that there's an extra cost involved to us if we should try to sell or it may be impossible. And that's not a great importance with us because we don't buy things to sell, but it's of some importance. And we are not in the same position owning our Series A preferred of U.S. as we would be if we'd bought 1,000 shares or 5,000 shares of the Series B preferred, I believe it is, the trades in the New York Stock Exchange. That would be very saleable. And our preferred could well even be saleable at a price modestly above what we carry it for, but it would require, it would not, it would not be very easy to do. It might, if it were dual, if it, if we went about to do it, we could probably, assuming we could do it Assuming we could do it at all, we could probably get a little more money for it, but it would not be easy to do, partly because of the legal restrictions. Charlie and I are on the board, that complicates things. We always know something that just by being on the board that the public doesn't know, so that that complicates things. And in the end, we usually find that dealing with anything where we've got fiduciary obligations is maybe not practical at all. And if it is, it's probably more trouble than it's worth. Charlie?
CharlieWell, it's certainly been an interesting experience, the U.S. Air experience. Is that it? Charlie Hinton? No, no. Well, I'd like to repeat that business about not having to get it back the way you lost it. You know, that's the reason so many people are ruined by gambling. They get behind and then they feel they have to get it back the way they lost it. It's a deep part of the human nature, and it's very smart just to lick it. to lick it by will. And little phrases like that are very useful. Yeah, one of the important things in stocks is that the stock does not know that you own it. You know, you have all these feelings about it, you know, and you remember what you paid, you know, remember who told you about it, all these little things, you know. And it, you know, it doesn't give a damn.
[1:05:57]
WarrenIt just sits there. And it, you know, it, you know, it just sits there. It, you know, a stock at 50, somebody's paid 100, they feel terrible, somebody else paid 10, they feel wonderful. All these feelings. And it has no impact whatsoever. And so it's, it's, it's, as Charlie says, gambling is the classic example. Someone builds a business over years, you know, that they know how to do. And then they go out someplace and get into a mathematically disadvantageous game, start losing it, and they think they've got to make it back not only the way they lost it, but that night. It's a great mistake.
QuestionerZone 1. My name is Donald Stone. I'm from Riverside, Connecticut. This is my second shareholders meeting ever at age 61, so I'm really very privileged to be here. My first was Coca-Cola a week and a half ago, and there were only 200 people there. I'm trying to figure this out. I think the rule is that the number of people present is in direct proportion to the to the price of the shares.
WarrenWell, in that case, we won't split.
QuestionerOh. Territory comment to my question. The November 24, 1994 issue of Fortune magazine, had an article, a featured article entitled America's Greatest Wealth Builders dealing with the concepts of market value added and economic value added. It was with great glee that I noticed that Coca-Cola was number two on that list, second only to General Electric, and that Coca-Cola had done twice as well as Pepsi-Cola number nine on the list with one-third as much capitalization. My question is this, whether the concept of market value added and economic value added as such or any of its variance is a concept that's applicable and useful to Berkshire Hathaway as a whole or in analyzing its line of business segments. I'd really like to hear from Charlie Munger on this first because I've heard that he's thought a lot about this particular subject.
CharlieRight. If Warren is using economic value added exactly the way they're now teaching it in the business schools, he hasn't told me. Obviously, the concept has some merit in it, but the exact formal methods I do not believe we use.
CharlieWarren, are you using this stuff secretly?
WarrenNo, we, in a sense, they're trying to get at the same thing we do or we're trying to get at the same thing they do. But, but I think it's, A, I think it has some flaws in it, although I think it generally comes out with the right answers. It sort of forces itself to come out with the right answers.
[1:09:04]
CharlieBut I really don't think you need that sort of thing. I mean, I do not think it's that complicated to figure out, you know, where it, where it makes sense to put money. You may make mistakes doing it, but in terms of the, of the mental manipulations you go through, I, I've, I'm, I don't, I don't think it's a very complicated subject. And I don't think that, I think that the people marketing one or another fad in management tend to make them a little more complicated than needed so that you have to call it the high priest. And, you know, if all that really counts is the ten commandments, you know, it's very, it's very tough on religious counselors and everything. It doesn't take, it just doesn't make it complicated enough. And I think there's some of that and quite a bit of that in management consulting and in the books that you see and all of that that come out. It's way less silly than the capital assets pricing model so that at least academia is improving.
WarrenYeah. Yeah, the capital asset pricing model, which is I don't know how much it's used now. Certainly, you know, they have these great waves of popularity. You get that in management, you get in investing. I mean, real estate, you know, may have been popular or international. You can, you can read pensions and investment magazine, which is a pretty good magazine. But you can just see these fads sort of going through, and then they have seminars on them and everything. And, you know, the investment bankers create product to satisfy the demand. And there's these fads in management. I mean, obviously, listening to your customer and things like that. I mean, nothing makes more sense, but it's hard to write a 300-page book that just says, listen to your customer. And, you know, that's one of the things I liked about Graham's book. I mean, you know, he wrote everything he wrote sort of made sense. He didn't sort of get into all the frills and try and make it more complicated than it really, truly, truly is. You know, I really didn't need to read the November issue, 1994 issue of Fortune. know that Coca-Cola had had a lot of value. We added about $4 billion sum of value to Berkshire. That's good enough for me.
QuestionerZone 2. My name is Moritz, Spence, from Omaha, Nebraska. I have a two-part question on derivatives. Does Berkshire Hathaway currently, or have they in the past, engage in strategies involving derivatives?
[1:11:40]
QuestionerIf so, do you, as CEO, fully understand these financial instruments? Whoever suggested that crazy notion? Finally, would Charlie care, you or Charlie care to comment on the use of these by other financial institutions?
WarrenThe question about derivatives, the reason I inject that remark in a fortune article that all of you should read, if you haven't. I suggested that the use of derivatives would be dramatically reduced if the CEO had to say in the report whether he understood them or not. And the answer to your question, though, is we have two types, I guess it would be of, derivative transactions of a very modest size, but that doesn't mean we wouldn't if the conditions were right, we either wouldn't have them on a much greater scale now or we wouldn't have done it in the past. We have two types of transactions, and I do understand them. And there are times when there are things that we would want to do do, not often, but there would be times when they could be best accomplished by a transaction involving a derivative security, and we wouldn't hesitate to do so. We would obviously care very much about the counterparty because that transaction is just a little piece of paper between two people, and it's going to cause one of the two to have to do something painful at the end of the period, usually, which is to write a check to the other person. And therefore, you want to be sure that that person. will be both willing and able to write the check. And so we're probably more concerned about counterparty risk than most people might be. Last year and the year before, I think I said that derivatives often combined, borrowed money with ignorance, and that that is a rather dangerous combination, and I think that we've seen some of that in the last year. When you can engage in sort of non-physical transactions that involve hundreds of millions or billions or tens of billions of billions of dollars, as long as you can get some party on the other side to accept your signature, that really has the potential for a lot of mistakes and mischief. And if you've looked at the formulas involved in some, particularly, I guess, interest rate type derivative instruments, it is really hard to conceive of how any business purpose could be solved by the creation of those instruments. I mean, they essentially had a huge, really gambling element to them. And I use that in the terms of engaging in a risk that doesn't even
[1:14:54]
Warrenneed to be created, as opposed to speculative aspects, they involve the creation of risk, not the transfer of risk, you know, not the moderation of risk, but the creation of risk on a huge scale. And it may be fortunate that in the last year, half a dozen or so cases of people who have gotten into trouble on them have come out because that may tend to moderate the troubles of the future. The potential is huge. I mean, you can do things in the derivative markets. Well, I've used this example before, but in borrowing money on securities, the Federal Reserve and the U.S. government decided many decades ago that society had an interest in limiting the degree to which people could use borrowed money and buying securities. They had the example of the 1920s with what was 10 percent margin that was regarded as contributing to the great crash. So the government, through the Fed, established margin requirements and said, I don't care if you're John D. Rockefeller, you know, you're going to have to put up 50 percent of the cost of buying your general motor stock or whatever it may be. And they said that maybe Mr. Rockefeller doesn't need that, but society needs that. We don't want a bunch of people on thin margins, gambling, you know, essentially in shares where the ripple effects can cause all kinds of problems for society. still the law, but it means nothing anymore because various derivative instruments have made 10 percent margins of the 1920s, you know, look like what a small town banker in Nebraska would regard as conservative compared to what goes on. So it's been an interesting history. And like I say, perhaps the experiences of the last year, they've got everybody focused on derivatives. Nobody knows exactly what to do about them. Berkshire-Hathaway will, if we think something makes sense and Charlie and I understand it, we may find ways to use them to what we think will be our advantage. Charlie, you want anything on that?
CharlieWell, I disapprove even more than you do, which is hard. If I were running the world, we wouldn't have options exchanges. The derivative transactions would be about 5% of what they are, and the complexity of the contracts would go way down. The clearing systems would be tougher. I think the world has gone a little bonkers, and I'm very happy that I'm not so located in life, that I have to be an apologist for it. You know, a lot of these people, I feel sorry for them. You know, they had great banks,
[1:17:43]
Questionerand they have to go before people, sometimes even including their children and friends, and argue that these things are wonderful. Zone 3. Good morning. I'm John Neutcher from Kingsburg, California. And my question relates to Solomon. where I'm just asking if you could take us out the next two or three years in your vision. It started out as a good investment. You've got a good return on it or your interest. And it's clearly had some problems. And we have gotten in deeper and deeper as those problems have continued. And it doesn't look like it's super bright. So you must understand where you're going. But could you just give us where you see it going in the next two or three years.
WarrenWell, I think it's very difficult to forecast where Solomon or really almost any major investment bank slash trading house will do over actually the next two or three months, let alone the next two or three years. The nature of that business is obviously far more volatile than the blade and razor business. And the tough part is assessing over a longer period of time whether because of volatility, it's much harder to assess whether what the average returns might be from a business. And the answer is Charlie and I probably, if we were trying to write the forecast for the next two or three years, we would not have a high, a feeling that we had a high probability of being able to predict what that company or other companies in that industry either would earn three years out or would probably have in the way of average earnings. Our own commitment is to a $700 million preferred issue, which has five redemption dates starting in October 31st of this year, and then every year thereafter. On those dates, we can either take cash or stock, and that's an advantage, obviously. to have an option. Anytime you have an option in this world, it's to an advantage. It's to your advantage. It may be a very small advantage, but it's giving options is generally a mistake and accepting options is usually a good idea if it doesn't cost you anything. And we will, the other thing about options is you don't make a decision on them until you have to make a decision. But so we, in addition to that $700 million are preferred, which in our view is 100% money good. I mean, we'd like to own more of that. But we also have about 6 million odd shares of common, which we paid perhaps $48 a share for or something in that area,
[1:20:54]
Warrenin any event, considerably more than the present market of 35 or 6. So we have got a, we have a loss of probably $80 or $90 million or some number like that at market. In the common, the preferred has actually treated as fun. we've received $63 million a year. Incidentally, by owning the amount of common we own, this probably isn't generally known, but or recognized, if you own 20% of the voting power of a company, you have a somewhat different dividends received credit, you have somewhat different tax treatment than if you own less than 20%. So until we own that common, we paid somewhat more tax on our preferred dividend than we now pay. It's not a huge item, but it's not a huge item. immaterial either. Charlie?
CharlieI certainly agree. It's hard to forecast what's going to happen in the big investment banking dash slash trading houses. I would like to say that Berkshire Hathaway was a large customer of Solomon Lung before we bought the preferred, and that we've had marvelous service over the years. I think Solomon's going to be around for a long time rendering very good service to various clients. Satisfied clients. We sold our first a debt issue of Berkshire, I think in 1973 through Solomon. So we've had an investment banking relationship for 21 or 22 years there, and actually we'd done business with them before that in various other ways. So it's a long-term relationship. Well, there's no question about Solomon being around. And that's why our preferred is absolutely money good. But the question is what the average return on capital will be. And we knew that was difficult to predict when we went in, and we found out it's even more difficult to predict than we thought.
QuestionerZone 4. Thank you for the opportunity. Dick Jensen from Omaha, a fellow Nebraska University supporter. A rather convoluted question. I'm very interested in your recent purchase and your future intention of American Express. And as I understand the company, I know it's a rather involved and complicated and rather expansive company in so far as it has its interest in many areas. I know one of which, of course, is the credit card, but there is also the major part of the organization of IDS and others that I don't even know about. And I wondered what your hopes are for that investment. And I also, just recently, as perhaps you have, became curious to know if you are personally acquainted with Mr. Phil Kare, I believe
[1:23:58]
Questionerhis name is, and how about the purchase of his firm in your future? Thank you.
WarrenDick, I think Phil Karee is here today. He's right back there. Phil, would you stand up? There he is. Give him a hand. Phil is 98. I first met him in 1952, 40, 43 years ago. He attends every eclipse around the world. And you can run into him in some very strange places that wrote his first book on securities, I believe in 1924. And wrote an autobiography here recently, probably the greatest long-term investment record in this country's history. And, but I think, you know, my impression is that Phil sold part or a good bit of pioneer some years ago, which he managed for decades, many decades. In fact, I first learned about Phil when I was leafing through Moody's Banks and Finance Manual 40-odd years ago, and I saw this company with this great record and with some securities that looked terribly interesting. So we got in touch, and he was out in Omaha, and we got acquainted. So anybody that can get Phil to talk to him, listen carefully. I advise that. The question about American Express, We own just under 10% of American Express. And obviously, even though you mentioned there in a number of businesses, the, by far, the key, the most important factor in American Express's future, for a good many years to come, great many years to come, will be the credit card. And that is a business that has become and will forever probably become ever more competitive. I mean, I've followed it since, I think I met Ralph Schneider at the Diner's Club in the late 1950s, and American Express entered into the credit card business being out of fear. I mean, they were worried about what the credit card was going to do their traveler's check business. Traveler's check business had been originated back in 1890, something, I believe, and that was in turn building off of the old express business where I think was Henry Wells, And William Fargo, they would chain themselves to the express boxes as they delivered them through it to the west. And they decided that maybe issuing traveler's checks would be a little easier than carrying all this stuff around. So that, the travelers check was the, was the, was the, was the, evolved out of the, out of the express business. And the credit card business with American Express arose out of fear of what, particularly Diners Club at the time, they were all terrified of Diners Club, which got this, got the jump on everybody.
[1:27:03]
WarrenAnd they became enormously successful with it. And the American Express card, as you know, had a terribly strong position in what they call the travel and entertainment part of the card business. And, of course, the banks entered in on a big scale, and Visa's been enormously successful. So the card has a strong franchise in certain areas, like the corporate card, although people like First Bank Systems are very aggressive in going after them there. The card, but the card has a significant franchise, but it does not have the breadth of franchise that it had many years ago. For a while, it was the card, and now it's the card in certain areas, but nothing like as broad in areas before. It has certain very important advantages and economic strengths, and it has some weaknesses. And you have to assess those in deciding where it'll be in the year 2000. or 2005. And we think that the management of American Express thinks well about the question of how you keep the card special in certain situations. And they've reacted to the merchant backlash for higher discount fees, I think, in an intelligent way. So we'll see how it all plays out. But the key IDS, which has now been renamed, but is a very big part of American Express accounts for close to a third of their earnings. things. But the real key will be how the card does over time. Charlie.
CharlieAnd nothing to add.
QuestionerZone 5. Hi, my name is Philip King from San Francisco. And my question has to do with how the FASB has caved in on the stock option proposal. And the people opposed to the proposal argue that it would hurt capital formation for companies. And that the cost of stock options is already reflected in share. in shares outstanding and fully diluted calculations. And I was curious, what is your feelings about? What's happened?
WarrenWell, as those of you have followed this issue, FASB did cave in it. They hated it. I mean, they knew they were right. As a matter of fact, most of the, what are now, I guess the big six auditing firms are big, many years ago, sided with the position. But in my opinion, the auditing firms caved to their clients in that respect. And in terms of capital formation, I would argue that the most intelligent form of capital formation follows from the most accurate form of accounting. I mean, if all the companies whose names began with A through M didn't have to count depreciation and all the ones with M through Z did or something,
[1:29:57]
Warrenthat might help in capital formation for companies that had names with A through M. And incidentally, they probably all changed their name. But I don't think that bad accounting is an aid to capital formation. In fact, I think probably over time, it distorts capital formation. Because if we were to pay all of the shareholders with, I mean, all of the people who worked for Berkshire Hathaway in stock, and therefore record no wage expense, you know, we might be able to sucker in a bunch of people who thought the earnings were real, but that would not be a great step forward for capital. formation in my view. I really think that, you know, I've talked privately to a number of managers about this, and they understand it, but they prefer the present situation. And they used a lot of muscle in Washington many years ago, and I think I have this authenticated now. The fellow mathematics professor sent me some material after I'd written this. this. I'd probably get a little proof after the fact when I can. I believe it was in the Indiana legislature where a legislator introduced a bill to change the value of pie, the mathematical symbol, pi, to three, because he said that it was too difficult for the school children to work with this complicated 3.14159. And he was right. I mean, it was difficult. And I, and Congress, in connection with the stock option question, received all kinds of pressure to, in turn, pressure FASB and the SEC to not count stock option costs as part of compensation. I've never met anybody that wanted to be compensated that felt that if he received his present salary plus an option, he was not getting compensated more than if he just received the salary. So he thought it was compensation. compensation. And I will tell you that if we've been issuing options over a period of time at Berkshire for things unrelated to the performance of the entire business, that we would have had a cost, perhaps measuring in the billions of dollars, whether it was recorded or not. So it goes back to Bishop Barclay's question of whether a tree that falls in the forest and doesn't make it sound, you know, etc. But it, I think it is, I really think it is, It makes you a bit of a cynic about American business when you see the extent to which a group has pressured, even to the extent of talking about financial, withdrawing financial support from the financial accounting standards board, the degree to which they pressured
[1:32:59]
Warrenpeople to make sure the value of pie stays at three instead of 3.14, simply because it was their own ox that was being gored a bit. In any event, it looks like it's all over now for some time. In fact, now they're pressuring them to even weaken further the standards that have been set. So self-interest is alive and well in corporate America. Charlie?
CharlieYeah, I think dishonor won. And I think that I think it is quite important for a civilization to have sound engineering and good accounting. And it is a very regrettable. regrettable episode, leading politicians, leading venture capitalists. I think to some extent, it's an indictment of the educational system that this thing could be so widely looked at and so wrongly. It's bad enough to people want to cheat on their accounting, and they do cheat on their accounting, but to want it to be endorsed as the system is really kind of disgusting.
WarrenYeah, corruption one. Well, put us down as undecided on that, and we'll move on to zone. Good morning, Mr. Buffett, Mr. Munger. Mike Leachin from Hamilton, Ontario. Could you consider availing a videotape of this meeting to us, the shareholders? I didn't quite get that. Would you consider availing this videotape of this particular shareholder meeting to us, the shareholders? Distributing a videota. A transcriptor at videotape? Yes. Yeah, we've had that suggested a number of times. It's a good suggestion, and we've considered it. The thing we're worried about in connection with that is discouraging attendance. I mean, we'd hate to have two people here asking questions and then send it out to tens of thousands. Particularly when I make sales go down at the jewelry store. Since we were just attacking hypocrisy in American business, Charlie felt like he should add that to my comments. But it's a close call on that because we would like everybody. Of course, we try to cover more. many subjects in the annual report, but we would, we like the idea of the meeting answering a lot of shareholders questions and getting that people. We don't want to discourage attendance and it's it's fun to have everybody come in and ask questions. And the chances are if we had far fewer people, we would have, you know, far more, far fewer good questions so that the quality of the meeting is enhanced, I think, by having a lot of people come. But you've come a long way, so I can understand. I understand why you might be interested in that. I appreciate that. Thank you.
[1:36:09]
QuestionerOr a new. Is that a yes or a new?
OtherIt's it was a no.
QuestionerIt's a no. It's a no.
WarrenMost everything we say is a no, but we have various ways of getting there.
OtherOkay. And Zone 7 from the other room, I can see you.
QuestionerGood morning, Mr. Buffett and Mr. Munger. I was wondering if you could tell us what the sales at Borsheims were yesterday and how it compared to a year. ago?
WarrenWell, I can tell you how compared to a year ago. They were 15% above a year ago, and a year ago was 40% above the year before, and I forget how much that was before. So we keep setting records, but we haven't announced any numbers, but it's a pretty good size number.
OtherYou're a sporty crowd. Thank you. Zone 1?
QuestionerGood morning. My name is Patrick Terhune from Fort Lauderdale, Florida. And first of all, I see, per your request, there are a lot of people who wore red in honor of the cornhuskers. Of course, my team was the, or is, the Miami Hurricanes, and I've got my green and orange on under my clothes, so. But if we were to lose, I'm glad we lost in Nebraska and Tom Osborne. I've got a request for Warren and Charlie, and that is recognizing that the value, both intrinsic and extrinsic, of Berkshire Hathaway, is the result of your combined skills in acquiring growth companies and with your prudent and expert investing of the company's capital for growth. I'd like to know if you have a plan, a succession plan, to be executed in the event, God forbid, something happens to one or both of you, which would remove your input to the strategic decisions. I sincerely hope you're in the process of developing individuals to carry forward your collective visions and to manage the company's resources as effectively and as profitably as is being done now.
WarrenWell, I appreciate that question. And the answer is, obviously, we do care enormously about that because both Charlie and I, in addition to a lot of other reasons, but we both have a very significant percentage of our net worth in Berkshire, and neither one of us has figured out how to sell it all exactly, you know, 15 minutes before we get hit by a truck. So we will not have the jump on the rest of you. And therefore, our continuing interest will go. financially will go well beyond our deaths. And it will, in terms of foundations or something like that, it will go to organizations that we care very much about having a maximum resources available to. So we do have some plans.
[1:39:04]
WarrenWe don't name names or anything of the sort. It's not quite as tough as you might think because we have a collection of fabulous businesses. Some of them own totally, some of them owned in part. And I don't think razor blade sales or Coca-Cola sales are going to fall off dramatically the day Charlie or I die, that we've got some great businesses. And same true, the wholly owned businesses. So the question is more that of allocating capital in the future. And, you know, that's a problem for Charlie and me right now, simply because of the size. But it's not easy to find things to do that make sense. sense with lots of money. And sometimes a year will go by and we don't find anything. And other times a year goes by and we think we found something, but it turns out we were wrong. So it's not easy. But we think we will have some very smart people working on that. And we don't think it will be the end of the world if they don't find anything the first year because the businesses will run very well. We have a big advantage in that it's contrasted to virtually almost every other company. We now and in the future are willing, eager to buy parts of wonderful businesses or all of them. I mean, most managers are limited to buying parts of businesses, and most managers psychologically are geared to owning all of something that they can run themselves. We, you know, it's like, I think Woody Allen said some years ago, it's the advantage of being bisexual is that you had double your chances of a date on Saturday night. And we can go either direction in that respect. Our successors will also. So Charlie, you want anything?
CharlieI think few business operations have ever been constructed to require so little business operations have ever been constructed to require so little continuing intelligence and corporate headquarters. An idiot who was willing just to sit here would have a very good record long after the and present incumbents were dead. I think that's true.
WarrenYeah. I think it would be a little better if Warren would keep alive in terms of allocating the new capital. I don't think we'll easily replace Warren. But, you know, we don't have to keep getting rich at the same rate we have in the past.
OtherThat's a tie vote.
QuestionerZone 2. Hi, I'm Keith Breyer from San Francisco. I have a question. When you're valuing the companies and you discount back the future earnings you talk about, about how many years out you generally go?
[1:42:19]
WarrenAnd if you don't go out a general number of years, how do you arrive at that time period? Well, that's a very good question. And it's, I mean, it's the heart of investing or buying businesses, which we regard to the same thing. But, and it is the framework in which we operate. I mean, we are trying to look at businesses in terms of what kind of cash can they produce if we're buying all of them, or will they produce if we're buying part of them? And there's a difference. And then at what discount rate do we bring it back? And I think your question was how far out? Do we look and all that? Despite the fact that we can define that in a very kind of simple and direct equation, you know, we are, we've never actually sat down and written out a set of numbers that to relate that equation. We do it in our heads in a way, obviously. I mean, that's what it's all about. But there is no piece of paper. And, and, and, and, and, and, and, we never, there never was a piece of paper that shows what our calculation on hellsburgs or seize candy or the Buffalo News was in that respect. So it would be attaching a little more scientific quality to our analysis than there really is if I gave you some gobbly gook about, well, we do it for 18 years and stick a terminal value on and do all of this. We are sitting in the office thinking about that question. with each business or each investment. And we have discount rates in a general way in mind, but we really like the decision to be obvious enough to us that it doesn't require making a detailed calculation. And it's the framework, but it's not applied in the sense that we actually fill in all the variables. Is that a fair way stating it, Chairman?
OtherMR. Berkshire is being run the way Thomas Hunt Morgan, the great Nobel laureate, ran the biology department at Caltech, he banned the Freed and Caltech, which was the computer of that era. And people said, how can you do this? Everyplace else in Caltech, we have freedom calculators going everywhere. And he said, well, we're picking up these great nuggets of gold just by organized common sense, and resources are short, and we're not going to resort to any damn placer mining as long as we can pick up these major aggregations of gold that's the way berkshire works and i hope the placer mining arrow will never come somebody once subpoenaed our staffing papers on some acquisition and of course not only did we not have any staffing papers we didn't
[1:45:12]
Questionerhave any staff zone three i'm tom morrow from laguna beach california and the question i have to ask pertains to the issuance of the new stock. And again, as Charles mentioned, is there some potential gold mine out there that you have specifically in mind with some large acquisition that you have specifically in mind at this time without revealing any strategic secrets?
WarrenThere are things we would like to do. Whether we ever got a chance to do them or not, it's another question. You know, I will be surprised if in the next five years we haven't used some preferred stock one time or another. As I mentioned in the report, we had one last year that if we'd done it, it would have involved the issue of maybe a billion dollars worth of, no more than that, I'm sorry, a couple billion dollars worth of preferred. That one isn't going to happen in my view. I mean, there's one chance in a hundred, it'll, it could happen or something. of this sort, but probably it isn't going to happen. On the end, we want to be prepared for it. Something will happen. That's always been our experience. You know, we have sat through some dry spells, and this is true in both the stock market and the acquisition business. You know, I closed up the partnership in 1969 because there was nothing that made sense to do. And I'm glad I did because that situation prevailed in 71 and 2. In 1973 and four, you know, there were all kinds of things to do. And that will happen from time to time. People will behave, particularly in markets, just as foolishly in the future as they have in the past. It'll come at unexpected times, but we will get a chance to do something. That's more of a cash type purchase, obviously, in the market. But we will get a chance to use the preferred, and we will try to think about big things. You may not find them, but Charlie and I, the larger something is, the more interested we are.
QuestionerZone 4. Jim Moss from Los Angeles. I was reading through your annual report, and to me, an eye-popping number in there was the amount of float in 1994 at a cost of less than zero. I think it was $3 billion. And I was wondering if there are any restrictions on your investment of that money, or can that go into your marketable equity securities?
WarrenThe question relates to what, we have that long table we put in, we've introduced about four years ago or so in the annual report that shows the amount of float and the cost of float.
[1:48:28]
WarrenAnd that's a very important table. In terms of our operating businesses, that's probably the most important piece of information in the report. And that float is, as you noted, well over $3 billion now. year because of various favorable factors, including the fact that our supercat business was favorable, but also because our other insurance businesses did very well, amazingly well. The cost of that float, which is money that we're holding that eventually does not belong to us, but we'll, and we'll go to somebody else, the cost of that float was less than zero. And that is a very valuable asset. is to how much flexibility we have in investing that, which I think was the core of your question. The answer is we have a lot of flexibility. We are not disadvantaged by that money being in float as opposed to equity, really in any significant way. Now, if we had a very limited amount of equity and a very large amount of float, we would impose a lot of restrictions on ourselves as to how we would do it, because we would want to be very sure that we were in a position. to distribute that float in effect to policyholders or claimants or whatever it may be at the time that was appropriate. But we have so much net worth that, in effect, that float is just about as useful to us as equity money, and that means quite useful. It's a big asset of Berkshire.
QuestionerLet's see, we've got Zone 5. Susan Scott from Madison, Wisconsin. On a more serious note, are you beginning to feel? feel threatened by the success of the Beardstown ladies?
WarrenWhich lady was that? I didn't get it. I got everything except what lady that was, but... The Beardstown ladies, the investment group? Oh, that group. Yeah, the bestseller. Yeah. I have not read that book. I hate to admit that to an audience of shareholders that I... This is a book that's... I think it's probably number, I don't know, seven or eight or something like that on the Times bestseller list. been up there for a couple of months now. It's a group, an investment group that apparently is sharing with the world there are secrets of success. I'm always suspicious of people that are sharing with the world. Any great ideas on investments, but we are not threatened at the moment now.
QuestionerZone 6. Mike Asale from New York City. In the mistake is your section of the annual report, you mentioned a fundamental rule of economics that you missed. I'd like to know the two or three most important
[1:51:27]
Questionerfundamental rules of economics you habitually get right. In other words, what are the fundamental rules of economics you used to make money for Berkshire? And I'm not talking about Ben Graham's principles here, but rather rules of economics, which may be found in an economics textbook. Thank you.
WarrenYeah, we try to, I mean, we try to follow Ben's principles in terms of the attitude we bring toward both investing and in buying businesses. But the most important you can, you know, what we're trying to do is we're trying to find a business with a wide and long-lasting mode around it, surrounding and protecting a terrific economic castle with an honest lord in charge of the castle. And in essence, that's what business is all about. I mean, you may want to be the lord of the castle yourself, in which case you don't worry about. that last factor. But what you're trying to, what we're trying to find is a business that for one reason or another, it can be, it can be because it's the low-cost producer in some area, it can be because it has a natural franchise, it because of service capabilities, it could be, because of its position in the consumer's mind, it can be because of a technological advantage, for any kind of reason at all, that it has this moat around it. And then our, then what we have to decide is, is, is all moats are subject to attack in a capitalist, system. So everybody is going to try, if you've got a big castle in there, people are going to be trying to figure out how to get to it. And what we have to decide, and most moats aren't worth a dam in capitalism. I mean, that's the nature of it, and it's a constructive thing that's the case. But we are trying to figure out what is keeping, why is that castle still standing, and what's going to keep it standing or cause it not to be standing five, 10, 20 years from now. What are the factors and how permanent are they? How much do they depend on the genius of the Lord in the castle? And then if we feel good about the moat, then we try to figure out whether, you know, the Lord is going to try and take it all for himself or whether he's likely to do something stupid with the proceeds, et cetera. But that's the way we look at businesses.
WarrenCharlie, you want to enter here?
CharlieWell, I think he wants it translated into the ordinary terms of economics. The honest lord is low agency costs. That's the word in economics. And the microeconomic business advantages are by and large advantages of scale.
[1:54:16]
WarrenScale of market dominance, which can be a retailer that just has huge advantages in terms of buying cheaper and enjoying higher sales per square foot. So by and large, you're talking economies of scale. You can have scale of intelligence. In other words, you can have a lord with enough extra intelligence that he has a big advantage. So you're by and large, you're talking scale advantages and low agency costs. Yeah, to some extent, Charlie and I try and distinguish between business. where you have to have been smart once, and businesses where you have to stay smart. And, I mean, retailing is a good case of a business where you have to stay smart. But you can, you are under attack all the time. People are in your store. If you're doing something successful, they're in your store the next day trying to figure out what it is about your success that they can transplant and maybe add a little something on in their own situation. So you cannot coast in retailing. There are other businesses where you only have to be smart once, at least for a very long time. There was once a southern publisher who was doing very well with his newspaper and someone asked him the secret of his success, and he said, Monopoly and Nepotism. And, I mean, he wasn't so dumb. I mean, he didn't have any illusions about himself. And if you had a big network, of television affiliates station 30 years ago, there's still a major difference between good management and bad management. I mean, a major difference. But you could be a terrible manager and make a fortune, basically, because the one decision to own the network TV affiliate overcame almost any deficiency that existed from that point forward. And that would not be true if you were the first one to come up with some concept in retailing or something of the sort. I mean, you would have to be out there defending it every day. Ideally, you know, is you want terrific management at a terrific business, and that's what we look for. But as we pointed out in the past, if you have to choose between the two, get a terrific business. Charlie, any more?
CharlieNo.
OtherSee, Zone 7, I believe, is next. No question. from zone seven. Okay. How about zone one? Paul Miller from Kansas City. First, I'd like to comment on your purchase of Kansas City-based Heelsberg Jewelers. You commented about Barnett Heelsberg and his, what he's done retailing-wise. For those of us in Kansas City,
[1:57:29]
Otheryou've also picked up Barnett and Shirley Heelsberg, who are the first family in philanthropy in Kansas City. And for the shareholders in this room, The Hellsburgs are wonderful people and to have them added to this group of companies says Miles about Warren Buffett and that they pick companies based upon their management and their people. So kudos to Berkshire Hathaway for picking up the Hellsburgs and thanks to the Hellsburgs for everything they've done to Kansas City. Appreciate that. My question relates to value. We can look in the annual report and we can all see the purchase of a Washington Post, for instance, for $10 million that has a value today of $420 million. But discerning the value of the other consortium of non-publicly traded businesses, the Nebraska Furniture Marks, the Borschimes, etc., the value of their purchase price over the years versus their value today, how can we understand that value and how is it reflected in the annual reports? Well, we can we understand that value?
WarrenWe try to, that's a good question. We try to give you the information that we would want in answering that question in the annual report. Part of it we do in those pages where we say it's not according to GAAP accounting, but there's a lot of useful information in there. We don't stick a number on each company, but we try to give you enough information about the capital employee, the margins, and all of that sort of thing on the bigger businesses, that you can make estimates that are probably just about as good as ours. Charlie and I would not need more information than is in the report to come up with a pretty good idea of what the controlled businesses are worth. There's no information we're holding back that we think would be of any real importance in evaluating those businesses. But you're right, it's a lot easier with marketable securities than it is, at least in terms of current numbers, than it is with the wholly owned businesses. The wholly owned businesses, generally speaking. Some of them worth a whole lot more than they're carried on the books for. And we feel pretty good about essentially all of them. But they've turned out remarkably well, I would say that, over the years. And my guess is that they keep working pretty well. We have managers in a number of those businesses here. I'm not going to introduce them all because we have so many that it would take a considerable period of time.
[2:00:09]
WarrenBut you name the Washington Post. In the front row, or close to the front row, we have, we have Don Keel, Don Keel, would you step up of Coca-Cola? And we have Kay Graham for the Post and Tom Murphy from Cap Cities. Oh, is in here too? And I'm going to try and do, well, there's a whole bunch more. I don't want to get, but those three were sitting together, and I was struck by the fact that if those three combined, we have about six and a half billion of profit in so far. So I would say that that's a... Those are three businesses that have been fantastic. And like I emphasize so far because we want that I'd like to be able to name a bigger number of the future. But we have a group of managers, both at the controlled companies and at the partly owned companies that have just created incredible, incredible value for Berkshire. I mean, Charlie and I sit around and read. and read the paper every day and a lot of magazines and things and watch o j simpson or whatever it may be and and these people are out there creating a ton of value for us so we're not going to change it that uh now let's see i think zone is it zone two now or is it yeah hello
Questioneruh i'm tim palmer from dillon colorado i have a question for you regarding solomon uh in the past week there's been an article in the new york times the wall street journal and i believe it's business week that were rather unflattering as far as uh what's going on with the management and your selection that seems to be a somewhat of a cultural clash there i don't know that to be a fact but i wondered number one how you uh keep yourself open to bad news before its news and what is going on in solomon there the compensation plan etc how do you think that culturally is going to work out
Warrencharley and i are always we are more interested in bad news always than good news we figure good news takes care of itself and one we only give a couple of instructions to people when when they go to work for us and uh and and one of them is to think like an owner and a second one is to just tell us the bad news immediately because good news takes care of itself and we can take bad news but we don't like bad news late so i would say in connection with solomon that there is and has been uh some culture clash and there probably almost always would be a culture clash in a business where there is that amount of tension whether it be the entertainment business
[2:03:10]
Warrenor the investment banking business or the sports business there's going to be a certain amount of tension one between compensation to the people that work there and compensation to the people that work there and compensation to the owners and i i think there's been some that strain has existed at solomon uh from the day i was first there and and and far before that i mean i that that was no surprise uh it's it's understandable the you're seeing attention actually in the airline business between uh the the the uh the people that work there and and capital and it's produced terrible results in the airline business and the people that work there have been able to to to uh and i'm going to talk about u.s air specifically although that's a case but but goes beyond that they have had contracts which were as i point out in the report were executed in an earlier age which essentially will not allow in many cases capital to receive any compensation and uh that produces a lot of tension you don't have contracts like that in the investment banking business or wall street generally but but you have that same you have that same sort of tension and changing a culture around a takes time and and b probably takes some some change in people i mean i don't think that's that's a great surprise if you expect to do it i have i don't think you can find two better people than than than bob denham and derrick mawn and they're they're smart they're high grade uh they're willing to work very hard and there will be people that buy into the arrangements they want to have and they're people that won't not all of the people that have left by a long shot are are leaving of their own volition but most of them are but some some aren't i mean there solomon lost a lot of money last year and uh many of the people that have left were not responsible for some of those losses but some of the people were so that is not something where you announce names in the paper but but some people are leaving because they can make more money elsewhere and some people are maybe leaving because we think we can make more money without them
Charliecharlie yeah i don't think the tensions that have been commented on within solomon are all that unusual i think they pretty well exist everywhere on wall street and even in the banks which you've tried to imitate wall street i just think it comes with the territory i don't know what percentage of the goldman's
[2:06:03]
Warrenpartners left this year but it they had they had tensions that were produced obviously when they had a bad year and they're going to have a bad year from time to time every was going to have a bad year but at the uh the partners the general partners of uh Coleman sacks and the year end of of November 30th 1994 did not did not do well they may not have done anything at all and and and they made some very big money in prior years and they'll probably make some very big money in subsequent years but in the year when they didn't make any money there was a lot of turnover maybe some of that turnover also was not all at the at the volition of the of the general partners that you read about leaving i don't know the facts in that case but but there's a certain amount of tension exists in wall street under any circumstances and when you aren't making money there's a lot of tension
Questionerzone three yeah um my name is michael johnson i'm a native omaha however my family and i are americans living abroad in d'aharan saudi arabia my question is related to intrinsic value and ben graham security analysis i read a book earlier this year by janet low who said that you were more toward the first or second editions of security analysis and not so much toward the fourth yet the fourth edition seemed to um move more toward growth and value being kind of joined at the hip like you've said in your last few annual report and so if i'm a person that's always studying security analysis like i do i think i spend more time at that do you uh think i'm i need to get those first editions or as a fourth edition kind of more what you've moved toward with your comments such as value and growth or joint at the hip
Warrenjanet low is here incidently today she wrote a very good book on men graham i recommend that any of you that haven't read it go out and buy a copy uh the i still prefer the i think the second second edition is is cheaper to buy the than the first edition by some margin and i think it's basically the same uh book so i that's the what i would recommend i it isn't because of differences on value and growth i just i just think that the the reasoning uh is better and more consistent throughout the second edition which is really the last one that that ben was the hundred percent along with dave dot helping him in various ways was was responsible for writing and i so i think that the book has gotten away to quite an extent from both graham's thinking and from his way of expressing
[2:08:44]
Warrenhimself so i read but i have no uh quarrel with anybody wants to read later editions at all i do think probably the second edition if you if you're a real student of security analysis and you read and understand uh that you'll you'll do you'll you should do all right in terms of a lot of the mistakes that were made in terms of junk bonds and accounting and all of that sort of thing uh were covered in 1934 in that first edition and subsequently in 1940 in the second edition there's a lot of there's a lot of meat in there later on i you know i i i must admit i didn't read the last edition as as carefully as the earlier ones but it struck me it was uh it what was said was not as um is not as important and it wasn't said as well and it was more expensive and it was more expensive charlie you have any thoughts on that
Charlieno
Otherzone four uh yes uh jeff peskin from new york city and uh i have a question out of the annual report where you say that um obviously going forward uh due to the size of berkshire the returns going forward probably won't match the returns of the past and then you go uh on to state that uh one thing that may hinder that is the fact that you don't really like to sell companies that you own and i would just like to uh know what the the reasoning is in that if you've got a company or investment that you don't think is going to do as well as where you can put the money going forward what really the reasoning is for for holding on and not redeploying the money elsewhere
Warrenyeah i'll just correct you just slightly i didn't say we'd probably do worse than the past i said we will do worse than the past i mean there's no way we could match percentage numbers of the past that uh you know we would in a period that would not take that long we would assuming we paid out nothing we would we would gobble up the whole GDP which is something we may think about occasionally but we don't really expect to accomplish the um but and as and the second point that that that that relates the size that that does not relate to our unwillingness to sell businesses because that that unwillingness has existed for decades but the size has not existed for decades the size is you know doubling doubling doubling uh 12 billion or so is harder than doubling one billion two which was harder than doubling 120 million i mean there's no question about that so eventually well already it it will be a drag on
[2:11:30]
Warrenperformance it doesn't it doesn't mean that the performance will be terrible but it it does mean that 23 percent is as an historical figure that has no predictive value the unwillingness to sell business is like i say goes goes goes back a long way that is that is not what that that that that if that hurts performance it's peanuts that's simply a fact of a function uh of the attitude charlie and i have is that if we want to live our lives we find it we find it a rarity when we find people in the business that we want to associate with when we do find that we enjoy it uh we don't see any reason to make an extra a half a percent a year or or one percent a year don't try us on higher numbers but uh the uh the uh we we don't we don't we don't see a reason to uh to go around uh ending ending friendships we have with people or contact or relationships it just doesn't make any sense to us that uh we don't want we don't want to get committed to that sort of activity we know we wouldn't do it if we were a private company now in berkshire we feel we've enunciated that position we want to get that cross to everybody who might join with us because we don't want them to expect us to do it we want to expect us to work hard to get a decent result and to make sure that the shareholders get the same result we get and all of that sort of thing but we don't want to enter into any implicit contract with our fellow shareholders that will cause us to have to behave in a way that we really we don't want to behave if that's the price of making more money it's a price we don't want to pay there's other things we that other things we forego also but that is the one that people might disagree with us on so we want to be very sure that everybody understands that going in that's that's that's that's part of what you buy here and it may i don't think it'll hurt performance that much anyway but to the extent it does it's it's it's a limitation you get with us charlie i don't think there's any way to measure it exactly but my guess is that if you could appraise something you might call the character of the people that are running the operating businesses in Berkshire many of whom helped create the businesses in the first places and are leading citizens in their community like the hellsburgs i don't think there's any other corporation in america that's done as well as we have if you measure the human quality of
[2:14:16]
Warrenthe people who are in it now you can say we've collected high-grade people because we sure as hell couldn't create them but one way or another this is a remarkable system and why would we tinker with it if you want to if you want to attract high-grade people you probably ought to try and behave pretty well yourself i mean it's just it's just it besides it it wouldn't be any fun doing the other i mean is it uh i was in that position a little bit when i ran the partnership back in the 60s and i really you know people were coming into partnership with me and and my job was to turn out the best return that we could and i found that if i got into a business that that presented certain alternatives that i didn't like so but birkshire's a much more satisfactory in that respect
Questionerzone five john rankin for collins colorado thanks for having us uh in the book warren buffett way the author describes the capital growth model that you've used to evaluate intrinsic value in common stock purchases my question is do you also still use the formula ben graham described in the intelligent investor that uses evaluating anticipated growth but also book value it seems to me that fair value is always a bit higher when using mr graham's formula than the stream of cash discounted back to present value that is in warren buffett way and also that you've alluded to in annual reports
Warrenyeah we've tried to put in the annual report pretty much how we approach security And book value is not a consideration, virtually not a consideration at all. And the best businesses, by definition, are going to be businesses that earn very high returns on capital employed over at the time. So by nature, if we want to own good businesses, we're going to own things that have relatively little capital employed compared to our purchase price. That would not have been Ben Graham's approach. But Ben Graham was, Ben was not working with very large sums of money and he would not have argued with this approach. He just would have said his was easier. And it is easier perhaps when you're working with small amounts of money. My friend Walter Schloss has hewed much more toward the kind of securities that Ben would have selected. And he's worked with smaller amounts of money. He has an absolutely sensational record. And it's not surprising to me at all. I mean, when Walter left Graham, though, I would have expected him to do well.
[2:16:54]
WarrenBut I don't I don't look at the primary message from our standpoint of Graham really as being in that, in anything to do with formulas. In other words, there's three important aspects to it. You know, one is your attitude toward the stock market. That's covered in chapter 8 of the intelligent investor. I mean, if you've got that attitude toward the market, you start ahead of 99% of all people who are on the market, so you have an enormous advantage. Second principle is the margin of safety, which again gives you an enormous edge, and actually has applicability far beyond just the investment world. And then the third is just looking at stocks as businesses, which gives you an entirely different view than most people that are in the market. And with those three sort of philosophical benchmarks, the exact evaluation technique you use is not really that important because you're not going to go way off the track. whether you use Walters' approach or Waltersloss's or mine or whatever. Phil Corray has a slightly different approach, but it's got those three cornerstones to it, I will guarantee, and believe me, he's done very well. Charlie?
CharlieYeah, to the extent that the method of estimating future cash flow requires projections, I would say that projections, while they're logically required by the circumstances, on average, do more harm than good in America. Most of them are put together by people who have an interest in a particular outcome and the subconscious bias that goes into the process, and its apparent precision, makes it some, well, it's fatuous or dishonorable or foolish or what have you. Mark Twain used to say, a mine is a hole in the ground owned by a liar, and a projection prepared in America by anybody with a commission or an executive trying to justify a particular course of action will frequently be a lie. It's not a deliberate lie in most cases. The man has gotten to believe it himself, and that's the worst kind.
WarrenSo I don't think we should projections are to be handled with great care, particularly, when somebody has an interest in misleading you. Charlie and I, I think it's fair to say, we've never looked at a projection in connection with either a security we've bought or a business we've bought. We've had them offered to us in great quantities. Now, the fact that we voluntarily turned them away when people tried to thrust them upon us. I mean, the very fact that they are prepared so meticulously by the people who are selling the business,
[2:20:00]
Warrenbusinesses or by the executives who are presenting to their boards and all of that sort of thing, you know, I mean, either we're wrong or they're wrong. I mean, it's a ritual that managers go through to justify doing what they wanted to do in the first place in about nine, nine cases out of ten. I have never, you know, I have never met an executive who wanted to buy something that said, well, I had to turn it down because the projections didn't work. I mean, it just, it's never happened, and there will always be something. somebody that will come up with the projections that will satisfy the guy who's signing his paycheck or who will sign the deal that provides the commissions, and they will pass those along to whomever else they need, the bankers or the board to approve it, and it is total nonsense. I was recently involved in some in a situation where projections were a part of the presentation were a part of the presentation. And I asked that the record of the people who made the projections, their past projections, also be presented at the same time. It was a very rude act. And it was regarded as apostasy. It, it, but believe me, it proved the point. I mean, it was a joke, I mean, so we'll leave it at that. We're going to have a another one more question maybe and then we'll take a break and charlie and i will be eating up here the ones who want to stick around can stick around and and the ones who are in the other room and there will be seats in here to fill so we'll sort of regroup in 10 or 15 minutes and then we'll we'll go on as as long as that group lasts so let's take one more from zone six and then we'll we'll take a break
Questionerhello my name is peter bevelin from sweden what is the absolutely first question you ask yourself when you look at a potential investment and do you and mr munger ask yourself the same first question
Warrenyeah well i think i don't i don't ask myself whether charlie's going to like it because that will be a tough one i uh now the first question is can i understand it uh and unless it's unless it's going to be in a business that i think i can understand there's no sense there's no sense looking at there's no sense kidding myself into thinking that i'm going to understand some software company or some uh biotech company or something that's what the hell am i going to know about it i mean you know i can so that's the first threshold question and then the second question is you know does it look like it has good economics does it has it earned high returns on capital you know does it strike me as something that's likely to do that and then i sort of go from there how about you charley
CharlieYeah, we tend to judge by the past record. By and large, if the thing has a lousy past record in a bright future, we're going to miss the opportunity.
WarrenYeah. We'll take a break now and we'll reconvene in 10 or 15 minutes. Those of you are in the other room want to come in and we'll stick around then. If you want to get some food and come back later, you're welcome to do that too. Thanks.