[0:17]
WarrenMorning. Good morning. I'm Warren Buffett, Chairman of Berkshire, and this is my partner, this hyperactive fellow over here is Charlie Munger. And we'll do this as we've done in the past. Following the Saddam Hussein School of Management, we're going to go through the business meeting in a hurry, and then we're going to do questions, and we'll do those until 3.30 with a break at noon, when we'll take off for 30 minutes or so while you can grab lunch. And those of you, there's, we're operating in an overflow room as well. So those of you who are in the overflow room now can join the main four after noon break because we'll have plenty of room then. We'll go until 3.30. We'll try to get to all the questions we can. We've got 11 zones, 10 of them in this room, and we'll just make our way around them. I've got a little map here, which I'll get oriented on here in a second. And let's see. And I think we'll get through the business meeting now. The incidentally, I don't see that movie before it's shown, but that was one of our directors singing at that final session there. We keep costs down at Berkshire. OK, the meeting will now come to order. I'm Warren Buffett chairman of the board of directors of the company, and I welcome you to this 1998 annual meeting of shareholders. I will first introduce the Berkshire-Hathaway directors that are present in addition to myself. So we have, and I can't see very well with the lights here, but if you'll stand as I name you, Susan T. Buffett, the vocalist, Howard G. Buffett, the non- Vocalist, Malcolm G. Chase, Charlie you've met, and Ron Olson, and Walter Scott Jr. Also with us today are partners in the firm of Deloitte and Two Shore Auditors. They are available to respond to appropriate questions you might have concerning their firm's audit of the accounts of Berkshire. Mr. Forrest Crutter, Secretary of Berkshire, he will make a written record of the proceedings. This Becky Amick has been appointed inspector of elections at this meeting. She will certify to the count of votes cast in the election for directors. The name proxy holders for this meeting are Walter Scott Jr. and Mark D. Hamburg. Proxy cards have been returned through last Friday representing 1,039,276 Class A, Berkshire shares, 1,080,509 Class B, Berkshire shares to be voted by the proxy holders as indicated on the cards. The number of shares represents a quorum, and we will therefore directly proceed
[3:32]
Otherwith a meeting. We will conduct the business to the meeting and then adjourn the formal meeting. After that we will entertain questions that you might have. First order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott Jr. or will place a motion before the meeting. I move the minutes of the reading, reading the last stockholders meeting be dispensed with. Do I hear a second? A lot of seconds. The motion has been moved in second. Are there any comments or questions? We will vote on this motion by voice vote. All those in favor say aye. Opposed? Motion's carried. Does the Secretary have a report of the number of Berkshire shares outstanding entitled to vote and represented at the meeting?
OtherYes, I do. As indicating the proxy statement that accompanied the notice of this meeting that was sent by first class mail to all shareholders of record on March 6, 1998, the record date for this meeting, There were 1,199,680 shares of Class A, Berkshire Hathaway, Common Stock Outstanding, with each share entitled to one vote on motions considered at this meeting, and 1,245,081 shares of Class B, Berkshire Hathaway Common Stock Outstanding, with each share entitled to 1,200th of one vote, a motions considered at the meeting. Of that number, 1,39,276 Class A shares, and 1,080,509 Class V shares are represented at this meeting by proxies returned through last Friday. Thank you, force.
OtherIf the shareholders present who wishes to withdraw, a proxy previously sent in and vote in person on the election of directors, he or she may do so. Also, if any shareholder that this president has not turned in a proxy and desires a ballot in order to vote in person, you may do so. If you wish to do this, please identify yourself to meeting officials in the aisles who will furnish a ballot to you. If those persons identifying, desiring ballots, please identify themselves so that we may distribute them. The one item of business with 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. I move that Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm, G. Changs, Charles T. Munger, Ronald L. Olson and Walter Scott, Jr., be elected as directors. Is there a second? Then move in second. The Warren E. Buffett, Susan T. Buffett, Howard G. Malcolm G. Chase, Charles T. Munger, Ronald L. Olson, and Walter Scott Jr. be elected as directors.
[5:58]
OtherAre there any other nominations? Is there any discussion? Nominations are ready to be acted upon? If there are any shareholders voting in person, they should now mark their ballots on the election of directors and allow the ballots to be delivered to the inspector of elections. But 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 have received. Ms. Amick, when you are ready, you may give your report.
OtherMy report is ready. The ballots of the proxy holder in response to proxies that were received through last Friday cast not less than 1,039,298 votes for each nominee. That number far exceeds a majority of the number of the total votes related to all Class A and Class B shares outstanding. The certification required by Delaware law of the precise count of the votes, including the additional votes, to be cast by the proxy holders in response to proxies delivered at this meeting, as well as those cast in person at this meeting, if any, will be given to the secretary to be placed with the minutes of this meeting.
OtherThank you, Ms. Amic. Warreny Buffett, Susan D. Buffett, Howard, G. Buffett, Malcolm G. Chase, Charles D. Munger, Ronald L. Olson, and Walter Scott Jr., have been elected as directors. 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 adjourned? If not, I recognize Mr. Walter Scott Jr. to place a motion before the meeting.
OtherI move with this meeting be adjourned.
OtherSecond.
OtherMotion adjourn has been made in second. We will vote by voice. Is there any discussion? If not all in favor say aye. All opposed say I'm leaving. This meeting is adjourned.
WarrenCharlie and I may not get paid much, but we work fast on an hourly basis. Now we're going to do this by zones, and I think you can see. I think you can see who is manning each.
CharlieYeah, I see we've got a number out there already.
WarrenAnd please ask just one question. The only thing that I can think of that we won't discuss is what we're buying or selling or maybe buying or selling. But we'll be glad to talk about anything that's on your mind. So let's go right to Zone 1 and start in.
QuestionerThanks for the beautiful weekend in Omaha.
[8:37]
QuestionerI'm Mike Asale from New York City. city with a question for Warren and Charlie about what makes the company's price earnings ratio move up relative to other companies in its industry. How can we as investors find company and even industries that will grow their relative price earnings ratios as well as their earnings? And thank you for the wonderful weekend and for sharing your brilliance with the shareholders. Thank you. Thank you.
WarrenThe, um, you know, it's very simple that relative price earnings ratios move up because people expect either the industry or the company's prospects to be better relative to all other securities than they have been, than their preceding view, and that can turn out to be justified or otherwise. Absolute price earnings ratios move up in respect to the earning power or the prospective earning power that is viewed by the investing public. of future returns on equity and also in response to changes in interest rates. And in the recent, well, really, ever since 1982, but accentuated in recent years, you've had decreasing interest rates, pushing up stocks in aggregate, and you've had an increase in corporate profits, return on equity of American businesses improved dramatically recently. And that also – and that also – and the increase in corporate profits return on equity of American businesses improved. and people are starting to believe it. So that has pushed up absolute price earnings ratios. And then within that universe of all stocks, when people get more enthusiastic about a specific business or a specific industry, they will push up the relative PE ratio for that stock or industry.
CharlieCharlie, you kind of thing? Yes, I think he also asked, how do you forecast these improvements in price earnings ratios? That's your – that's your part of the question. Around here, I would – say that if our predictions have been a little better than other people's, it's because we tried to make fewer of them. We also try not to do anything difficult, which ties in with that. We really do feel that it's – you get paid just as well. You know, this is not like Olympic diving. In Olympic diving, you know, they have a degree of difficulty factor. And if you can do some very difficult dive, the payoff is greater if you do it well than if you do some very simple dive. That's not true in investments. You get paid just as well for their – the most simple dive as long as you execute it all right.
[11:26]
WarrenAnd there's no reason to try those three and a halfs when you get paid just as well for just diving off the side of the pool and going in cleanly. So we look for one-foot bars to step over rather than seven foot or eight-foot bars to try and set some Olympic record by jumping over. And it's very nice because you get paid just as well for the one-foot bars.
OtherOkay, Zone 2. Good morning. My name is Joe Lacey. I'm from Austin, Texas. In this era when the financial departments of the institutions of higher learning are referring to you as an anomaly, and they preach the efficient markets hypothesis saying that you can't outperform the market. Where does one go to find a mentor, like you found in Ben Graham, someone you can ask questions to regarding value investing? My understanding is that the University of Florida has instituted a couple of of courses that actually Mason Hawkins gave him a significant amount of money to finance. And I believe they're teaching something other than efficient markets there. There's a very good course at Columbia, I know, that it gets a lot of visiting teachers to come in.
WarrenI go in there and teach occasionally, but a number of practitioners do. So there, I think the efficient market theory is less wholly writ. wholly writ now than it was 15 or 20 years ago in universities. But it's, there's a lot of it taught. But I think you can find more diversity in what is being offered now than 10 or 20 years ago. And I'd recommend, you know, looking into those two schools. You know, it's really quite useful. If you had a merchant shipping business, if all of your competitors believe the world is flat, you know, it is a huge edge because they will not take any, you know, they will not take on any any cargo to go to places that are beyond where they think they will fall off. And so we should be encouraging the teaching of efficient market theories in universities. And it amazes it amazes me. But what, you know, I think one time that, was it, Keynes that said that most economists are most economical about ideas that they make the ones they learn in graduate school last a lifetime. And what happens is that you spend years getting your PhD in finance, and you learn theories with a lot of mathematics in that the average layman can't do, and you become sort of a high priest. And you get an enormous amount of yourself, an ego, and even professional security,
[14:15]
Warreninvested in those ideas. And it gets very hard to back off after a given point. And I think that, to some extent, it's contaminated the teaching of investing in the universities. Charlie?
CharlieWell, I would argue that the contamination was massive. But it's waning.
WarrenYeah, it is waning. It's waning. It's waning. The good idea is eventually trial. Yeah. The word anomaly, I've always found interesting on that because, you know, after a while, I mean, Columbus was an anomaly, I suppose, for a while, but it, what it means is, what it means is something that the academicians could not explain, and rather than re-examine their theories, they simply discarded any evidence of that sort as anomalous. And I think when you find information that contradicts previously cherished beliefs, that you've got a special obligation to look at it and look at it quickly, which I think Charlie told me that one of the things Darwin did was that whenever he found anything to contradicted some previous belief. He knew that he had to write it down almost immediately because he felt that the human mind was conditioned, so conditioned to reject contradictory evidence that unless he got it down in black and white very quickly, his mind would simply push it out of existence. Charlie, he knows more about Darwin than I do. Maybe he can explain that.
CharlieWell, I don't know about Darwin, but I did find it amusing one of these extreme efficient market theorists explained Warren for many, many years as an anonymous. of luck. And he got to six sigmas, six standard deviations of luck. And then people started laughing at him because six six six sigmas of luck is a lot. So he changed his theory. Now Warren, his six or seven sigmas of skill. So you see, I'd rather have the six six sigmas of luck, actually. The one thing he couldn't bear to leave was his six sigmas.
QuestionerLet's try zone three. My name is Warren Hayes. I'm from Chicago, Illinois. I understand from various publications like Outstanding Investor Digest that many of the best value investors are buying high-quality, multinational Japanese companies that are trading below net-net working capital value. Do you agree that these values exist in Japan, and would you consider the purchase of some of them?
WarrenWell, Henry Emerson, who publishes the outstanding investment, Investors Digest is here. So I will give a tout on it. I read the Outstanding Investors Digest, OID, and it's a very good publication.
[17:06]
WarrenAnd I have read some of the commentary about Japanese securities. We've looked at securities in all major markets, and we certainly looked at them in Japan, particularly in recent years, when the Nikai has so underperformed the S&P here. we're quite a bit less enthused about those stocks as being any kind of obvious bargains than the people that you read about in OID. The returns on equity in most areas of Japanese business returns on equity are very, very low, and it's extremely difficult to get rich by being the owner of a business that earns a low return on equity. We always look at what a business does. in terms of what it earns on capital. We want to be in good businesses. What you really want to be is in businesses that are going to be good businesses and better businesses 10 years from now, and we want to buy them at a reasonable price. But many years ago, we gave up what I've labeled the Cigarbutt approach to investing, which is where you try and find a really kind of pathetic company, but it sells so cheap that you think there's one good free puff left in it. We used to pick up a lot of soft. cigar butts, you know. I mean, I had a portfolio full of them. And there were free puffs in them. I mean, I made money out of that, but A, it doesn't work with big money anyway, and B, we don't find many cigar butts around them that we would be attracted to. But they – those are the companies that had low returns on equity. And if you have a business that's earning 5 or 6 percent on equity and you hold it for a long time, you are not going to do well in investing. Even if you buy it cheap to start with. Time is the enemy of the poor business, and it's the friend of the great business. I mean, if you have a business that's earning 20 or 25 percent on equity, and it does that for a long time, time is your friend. But time is your enemy if you have your money in a low-return business, and you may be lucky enough to pick the exact moment when it gets taken over by someone else. But we like to think when we buy a stock we're going to own it for a very long time, and therefore we have to stay away from businesses that have low returns on equity. Charlie?
CharlieYeah, it's not that much fun to buy a business where you really hope this sucker liquidates before it goes broke. We've been in a few of those too.
WarrenRight. Yeah, Charlie and I, we – or at least I have – I've owned stock in an anthracite company.
[19:53]
WarrenThere are probably people in this room that don't know what anthracite is. Street railway companies, windmill manufacturers. What other gems have we had, Joe? Do you – Taxels? Yeah, I don't even think. Yeah, Berkshire was a mistake, believe it or not. I mean, we went into Berkshire because it was cheap statistically just as a general investment back in the early 60s. And it was a company that in the previous 10 years had earned less than nothing. I mean, it had a significant net loss over the previous 10 years. It was selling well below working capital. So it was a cigar butt. And it was – I mean, we could have – done the things we've done subsequently from a neutral base rather than a negative base, and actually it would have worked out better. But it's been a lot of fun. Number four. Hello, my name is Martin Wiegand from Bethesda, Maryland. Again, I want to thank you for your letters and principles. They're a great help for small business people running their business. My question is, last year you said you had filters in your mind to help you quickly analyze businesses. How do your filters take into account the very fast changes of technology and the way that businesses communicate with their customers, take orders, things like that?
WarrenWell, we do have filters, and sometimes those filters are very irritating to people who check in with us about businesses because we really can say in 10 seconds or so no to 90% plus of all the things that come in simply because we have these filters. We have some filters in regard to people. people, too. But the question of technology is very simple. That doesn't make it through our filter. I mean, so if something comes in where there's a technological component that's of significance or where we think the future technology could hurt the business as it presently exists, we look at, you know, we look at that as something to worry about. We will, it won't make it through the filter. We want things that we can understand, which filters out a lot of things, And we want them to be good businesses, and we want the people to be, the people we're very comfortable with. That means ability and integrity. And we can do that very fast. We've heard a lot of stories in our lives, and it's amazing how they, you can become quite efficient in probably getting 95% of the ideas through in a very short period of time that should get through. Charlie?
CharlieYeah, we have to have an idea that is, A, a good idea, and B, a good idea that we can understand.
[22:42]
WarrenIt's just that simple. And so those filters are filters against consequences from our own lack of talent. Filters haven't changed much over the years either. Okay, Area 5. Well, I live in the wonderful tropical island of Omaha. That's right up there with Exarbon. That's Nebraska. to spell backwards. Everybody in this room's got to be wondering the same question. Who, in your opinion, both of you, is the next Warren Buffett? Charlie, who's the next Charlie Munger? Well, let's try that first. That's a more difficult question. There's not much demand. I don't think there's only one way to succeed in life. And our successors in due time may be different in many ways. may do better. Incidentally, we have a number of people in the company, some of whom are in this room today, and the ones you saw on that screen, who are leagues ahead of Charlie and me in various kinds of abilities. I mean, there's a lot of different talents. We've got fellow in this room tonight, today, who's the best bridge player probably in the world. And Charlie and I could work night and day, and if he spent 10 minutes a week working on it, he'd play better bridge than we would. And all kinds of intellectual endeavors, that for some reason or another, one person's a little bit better wired for than someone else. And we have people running our businesses that if Charlie and I were put in charge those businesses, we couldn't do remotely as well as they do. So there's a lot of different talents. The two that we're responsible for is we have to be able to keep able people who are already rich. motivated to keep working at things where they don't need to do it for financial reasons. I mean, it's that simple. And that's a problem any of you could think about. And you'd probably be quite good at it if you gave a little thought, because you'd figure out what would cause you to work if you were already rich and didn't need the job. Why would you jump out of bed and be excited about going to work that day? And then we try to apply that to the people who work with us. Secondly, we have to allocate capital. And these days, we have to allocate a lot more capital than we had to allocate a decade ago. That job is very tough at present. Sometimes it's very easy, and it will be easy at times in the future, and it'll be difficult at times in the future. But there are other people that can allocate capital, and we have them in the company.
[25:48]
QuestionerCharlie, I mean? Oh, okay. Number six. Good morning. My name is Chad Corey. I'm from Gatorsburg, Maryland. I just want to thank you. you for sharing your wisdom. And my question is, what criteria do you use to sell stock? I kind of understand how you buy it, but I'm not sure how you sell.
WarrenYeah. Well, the best thing to do is buy a stock that you don't ever want to sell. I mean, and that's what we're trying to do. And that's true when we buy an entire business. I mean, we've bought all of GEICO or we bought all of Seas Candy or the Buffalo News. We're not buying those to resell. I mean, what we're trying to do is buy business that we will be happy with if we own it the rest of our lives and we expect to with those. It's the same principle applies to marketable securities. You get extra options with marketable securities. You can add to holdings, obviously easier. We can never own more than 100% of a business, but if we own 2% of a business and we like it at a given price, we can add and have 4% or 5%. So that's an advantage. Sometimes if we need money to move to another sector like we did last year, we will trim from some holdings, but that doesn't mean we're negative on those businesses at all. I mean, we think they're wonderful businesses or we wouldn't own them. And we would sell, A, if we needed money for other things. The GEICO stock that I bought in 1951, I sold in 1952. It was, you know, went on to be worth 100 or more times before the 1976 problems, 100 or more times would I pay. But I didn't have the money to do something else. So you sell if you need money for something else, you may sell. if you believe that valuations between different kinds of markets are somewhat out of whack. And, you know, we have done a little trimming last year in that matter. But that could well be a mistake. I mean, the real thing to do with the great business is just hang on for dear life. Charlie?
CharlieYes, but the sales that do happen, the ideal way is when you found something you like immensely better. Isn't that obvious? That's the ideal way to sell. And incidentally, the ideal purchase is to find is to have something that you already like be selling in a price where you feel like buying more of it. I mean, we probably should have done more of that in the past in some situation. But that's the beauty of marketable securities. You really do – if you're in a wonderful business, you do get a chance periodically maybe to double
[28:24]
Warrenup in it or something that sort. If the market – the stock market would have sell a lot cheaper than it is now, we would probably buying more of the businesses that we already own. They would certainly be the first ones that we would think about. They're the businesses we like the best.
WarrenCharlie?
CharlieNothing more.
QuestionerOkay, Zone 7. Good morning, Mr. Buffett and Mr. Munger. My name is Ron Wright from Iowa City, Iowa. New companies have always been an interest to me. Is it reasonable to assume an Omaha-based company? with only $5 billion in the bank might succeed in telecommunications?
WarrenWell, I think that a new company with $5 billion in the bank is probably better off than most new companies. You're like Jennifer Gates as a newborn. I think you're probably referring to a company that was created out of a company that was created out of, one of our local operations that's run by Walter Scott, one of our directors, from the Keywood company Level 3. I can tell you, it's got very able management, and I – and I'll take your word for it that's also got $5 billion in the bank, but you'll have to make your own judgment on the stock. I know Charlie won't comment on that one.
QuestionerZone 8. Yes, good morning. This is Moe, Spence from Omaha, Nebraska. In the past few of you've often said that the insurance operation is a most – important business in Berkshire's portfolio. Is that true? And what are numbers two and three? I'd also like to ask, is it true that Charlie chose the colors for the cover of this year's annual report?
WarrenDid Charlie chose him? He had nothing to with them. I chose them. They were a tribute to the Nebraska football team and Tom Osborne, who you saw. Tom, incidentally, has a very low-key style and Bobby Bowden a few years ago was in Lincoln, and he said that on their first date that Nancy had to slap Tom three times, and somebody said, was he that fresh? And she said, no, I was just checking to be sure he was alive. Tom had a fairly conservative offense for a time in the past, although it hasn't been so conservative the last few years, but somebody said at that time, the most reckless thing he did was to eat some cottage cheese a day after the expiration on the carton by then. No, I chose the colors. Now, what was the question? What was the question, Charlie?
CharlieIt's a memorable question, but give it to us again.
WarrenAre we back there in Zone 8? No, the numbers, yeah, sure. The question was about the insurance business, which we have said
[31:44]
Warrenwill be by far the most important business at Berkshire. We said that many, many years ago, and it's proven to be the case. It obviously got a big leg up when we purchased all of GEICO. As far as the I can see, will be by far the most significant business at Berkshire. And the question about two and three, in terms of earnings, flight safety is the second largest source of earnings. But we don't really think of them that way. I mean, we do know our main business is insurance, but we really have a lot of fun out of all of our businesses. a great time out of Borsheims yesterday or at a dairy queen. So it will be accident, to some extent, over the next 10 years, what ends up being the second or third or fourth largest. That'll be determined by opportunity. We bid on certain businesses that are negotiated on them that could have been very large businesses if they'd become part of Berkshire, and that'll happen again in the future. So we have no predetermined course of action whatsoever. at Berkshire. We have no strategic planning department. We don't have any strategic plan. We react to what we think are opportunities. And if it's a business we can understand, and if it's particularly if it's big, you know, we would love to make it number two. Charlie?
CharlieI also want to say proudly that we have no mission statement. It's hard to think of anything that we do have, as a matter of fact. Yeah, we have never had a, we've never, I mean, I'm sure you all know this, we've never had a consultant and we, we, we tried to keep things pretty simple. We still have 12 people at headquarters. We have about 40,000 people that now work for Berkshire, and we hope to grow a lot, but we don't hope to grow at headquarters.
QuestionerNumber nine. Yes, my name is Patty Buffett, and I'm from Albuquerque, New Mexico.
WarrenI like your name. Thanks.
QuestionerIn your opinion, what effect will the year 2000 compliant issue have on the U.S. stock market and the global economy?
WarrenWell, I get different reports on 2000, but the main report I hear, I think, you know, we – you wouldn't want to rely on me on this, but you could rely on our managers, and I think we're in good shape. It's costing us some money, but not huge amounts of money to be prepared for 2000. And with companies in which I'm a director, at which I'm a director, you know, I hear some reasonably good-sized numbers. Those numbers are in their annual reports and described
[34:41]
Warrenas to the cost of compliance. But what I'm told by people that know a lot more than I do is that they think probably that the weakest link may be in governmental units. They seem to think that in terms of where they stand versus the commercial. sector in terms of reaching where they need to be by 2000, that there's some areas of both national and state and local governments and foreign government where they're really behind the curve. Now, that is not an independent judgment of mine, but somebody said you want to be very careful about making a phone call at five seconds before midnight at the millennium because you may get charged for a hundred years, you know. So it'll – It'll be interesting. I don't think it's going to affect Berkshire in any material way, and I certainly have a feeling that the world will get past it very easily, but it is turning, it is expensive for some companies, and it's going to be very expensive for governments. Charlie?
CharlieYeah, I find it interesting, but it is such a problem. You know, it was predictable that the year 2000 would come. Yeah. Yeah, we decided that back in 1985, actually. We didn't welcome it to understand. That's not Berkshire style. It is fascinating, isn't it, when you think about it, that a whole bunch of people with 160 IQs that could build up such a problem, but here we are, and that's why we stick with simple things.
QuestionerNumber 10. My name is Kristen Schramm. I'm from Springfield, Illinois, and I'm a proud shareholder of Berkshire Hathaway. I'm glad to have you here. I've heard a little about your thoughts on trying to control campaign spending. Could you tell us more about your thoughts and efforts on this topic? Thank you.
WarrenI think it was campaign spending. Oh, campaign spending. Yeah, I have joined something to Jerry Colberg. This is personal. This has nothing to do with Berkshire, but that Jerry Colberg is spearheaded, and it's taken a position, and they're probably 30 or so, mostly business people. taking a position against soft money and also taking a position on very fast disclosure of campaign finance money because I personally think that the arms race in terms of campaign spending by businesses has just begun. I mean, it doubled in the last election, but political influence, and I don't mean that by buying a vote, but I mean, I don't mean that by buying a vote, mean, just in terms of having a big era in Washington or in other state capitals, political
[37:54]
Warreninfluence has been an underpriced product in the past. I mean, the government is enormously important in this country to most companies. It was amazing how cheap, cheaply it could be, attention could be purchased, but those, the prices going up and there will be an escalation. And I don't think it's easy if you're the manager of a business and you own one-tenth of one percent of it, and you're in a business that's heavily affected by government. I don't think it's very easy to tell your board of directors that you're going to take a hands-off approach. So I think legislation is needed in that arena, and there are over 100 campaign finance reform bills that have been introduced. Everybody wants to have their name on a bill. They just don't want to have it passed. And it's, you know, John McCain's been working hard on it, And it's something I think we have to come to grips with because it's going to be a battle of the wallets for influence. And like I say, if I were running some other company and my competitors were spending money to get the attention of would-be legislators or actual legislators, it'd be very difficult to take some high and mighty position that I wasn't going to do it myself. and my board and my shareholders might ask me why I was taking that position. We are lucky, basically, to be in a business that's relatively unaffected by legislation, although we will – we're going to pay a lot of tax this year. I said two years ago that it would only take 2,000 entities in the whole United States, businesses, individuals, any kind of entity to pay the same amount of taxes as Berkshire, and that would take care of the entire budget. You'd need no Social Security taxes. need no nothing. I think we're going to be able to say that again this year. I think that if you mobilize our tax by 2000, you will more than account for the entire federal budget, including Social Security and everything else. So you might say, why aren't you in Washington lobbying for a capital gains rate at corporations that's the same as individuals or something, but we basically haven't played that game. We feel very fortunate. I'll say this. I would rather, in this be a huge taxpayer myself, than be somebody who needed the other end of it, the government dispensing. I mean, if anybody here is paying taxes and they want to, you know, if you'd like to shift positions with somebody in a veterans hospital or, you know, that has a couple of children by age
[40:34]
Warrenthat's getting a check from the government, you know, I don't want to, I don't want to shift positions. I'm happy to be paying the taxes.
OtherZone 11, please. I think 11 is probably the remote, yeah. So we're going to hear this from the overflow room. Are we there? Yes.
QuestionerGood morning, Mr. Buffett, Mr. Munger. My name is Patrick Rown from Charlotte, North Carolina. And I've watched returns in equity for the banking sector in the U.S. go up a good bit over the last few years. And the returns on tangible equity for some of the major banks that have led the consolidation have gone up a good bit more. It leads me to wonder whether these returns are sustainable over either the near term or the longer term five, ten years down.
WarrenWell, that's the $64 question, because the returns on equity, and particularly tangible equity, as the gentleman mentioned, and particularly tangible equity in the banking sector, even, those returns have hit numbers that are unprecedented. And then the question is, if they're unprecedented, are they unsustainable? We, Charlie and I would probably think the – we would certainly prefer – we would not base our actions on the premise that they are sustainable. 20% plus returns on tangible equity, or on book equity, and much higher returns on tangible equity. In the banking field, you have a number of enterprises that on tangible equity are getting up close to the 30% range. Now, can a system where the GDP in real terms is growing maybe 3%, where in nominal terms it grows 4% to 5%. Can businesses consistently earn 20% on equity? They certainly can't if they retain most of their earnings because you would have corporate profits rising as a percentage of GDP to the point that would get ludicrous. So under those conditions, you'd either have to have huge payouts, either by repurchases of shares or by dividends or by take-holds. actually that would keep the level of capital reasonably consistent among industry or – because you couldn't sustain – let's just say every company retained all of its earnings and they earned 20% on equity. You could not have corporate profits growing at 20% as a part of the economy year after year. This has been a better world than we foresaw in terms of returns. And so we've been wrong before, and we're not making a prediction now, but we would not want to buy things on the basis that these returns would be sustained. We told you last year if
[43:25]
Warrenthese returns are sustained and an interest rates state at these levels are fell lower, that stock prices are in aggregate or justified, and we still believe that. But those are two big ifs. And the particularly big if, in my view, is the one about returns on equity and on tangible assets. It goes against – certainly goes against classic economic theory to believe that they can be sustained. Charlie, how do you feel about it?
CharlieWell, I think a lot of the increase in return on equity has been caused by the increasing popularity of Jack Welch's idea that you can't be a leader in a line of business, get out of it. And if you get fewer people in the business, why returns on equity can go up, then it's gotten way more popular to buy-in shares, even at very high prices per share. And if you keep the equity low, enough by buying shares back, why you could make return on equity whatever you want. We've had to some extent a slow revolution in corporate attitudes. But Warren is right. You can't have massive accumulations of earnings that are retained and keep earning these rates of return on them. An interesting question is to think about it. If you had 500 Jack Welch's and they were running the fortune – they're cloned and they were running – they were running. all of the Fortune 500 companies, would returns on equity for American business to be higher or lower than they are presently? I mean, if you have 500 sensational competitors, they can all be rational, but that isn't – and they will be, and they'll be smart, and they'll keep trying to do all the right things, but there's a self-neutralizing effect. It's like having 500 expert chess players or 500 expert bridge players. They still have a lot of losers if they get together and play in a tournament. So it's not at all clear that if all American management were dramatically better, leaving out the competition against foreign enterprises, that returns on equity would be a lot better. They might very well drive things down. That's what, to some extent, can easily happen in securities markets. It's way better to be in securities markets. If you have 100 IQ and everybody else operating has an 80, than if you have 140 and all the rest of them also have 140. So it's a – The secret of life is weak competition. Somebody said, how do you beat Bobby Fisher, you know, and you say, you play him any game except chess. Well, that's how you beat Jack Welch.
[46:09]
WarrenYou play him any game except business. Oh, he's a very good golfer, I want to point out. He shot a 69 a few months ago when I saw him at a very tough course. Jack manages to play 70 or 80 rounds of golf a year and come in subpar occasionally while still doing what he does at G. He's a great manager. But 500 Jack Welch's, I'm not at all sure, would make stocks more valuable in this country.
QuestionerZone 1. I'm Ben Knoll, and I'm from Minneapolis. And first, I just wanted to thank you for providing your past annual letters to the shareholders and Mr. Munger for providing your speech to the graduate students at the USC a couple years ago. Drawing a lot of insights from that, not only. investing, but also in my day job as a business manager. And I'm wondering if you could help me with my summer reading list and provide some additional suggestions for reading in the fields of investing and management other than the standards of Graham and Fisher and so forth. Charlie?
CharlieYeah. I have recently read a new book twice, which I have. I very seldom do. And that book is Guns, Germs, and Steel by Jared Diamond. And it's a marvelous book, and the way the guy's mind works would be useful in business. He's got a mind that is always asking why, why, why, why. And he's very good at coming up with answers. I would say it's the best work of its kind I have ever read. I read a little easier book. recently. I'm not even sure of the title. I don't pay much attention to titles when I get into the books, but it's something to the effect of the quotable Einstein. I mean, it's a lot of his commentary over the years, and it's great reading. The Fermat Theorem was the book, that wasn't the exact title either, but it's the story of the discovery of the answer on that. That's a very interesting book. One of our shareholders from Sweden gave me a copy of that one. I was in New York, and I've enjoyed it.
QuestionerZone 2. Mark Rabinoff. I'm a shareholder from from Melbourne, Australia. Gentlemen, we have large holdings in Freddie Mac and Fannie Mae, and as you both know, they were quite, well, they were hurt quite a lot when interest rates went up in the past. I'm wondering if you think they'll be hurt again when interest rates go up in the future.
WarrenWell, that, the question about Freddie Mac and Freddie Mac and Fannie Mae on interest rates, they are not as interest rate sensitive as people formerly thought they were.
[49:11]
WarrenBut it would be the pattern. You know, I have a feeling that if interest rates got extremely low so that there was a huge turnover of the portfolio, and then rates went up dramatically, that even though they have various ways of protecting themselves against interest rate scenarios, that that might get very tough. I think there would be some kind of squeeze there. They may have good answers as to why that wouldn't happen, incidentally, because they certainly worry about every kind of interest rate scenario. That's their job. But I think, in a sense, very low interest rates are more of a long-term threat, because if you get a portfolio chock full of, say, 4 percent mortgages or something of the sort, and then you had a huge move upward, that would be quite painful for some period of time, no matter what you'd done in the way of hedging. Charlie?
CharlieI've got nothing to add. That's what happened to the savings and loans, in effect, you see, 25 years ago, or whatever it was. And Freddie and Fannie have other functions and they've got a lot of advantages, but they have a savings and loan type operation. They just do it on a very big scale, and they get their money in a very different manner than from millions of depositors. But the basic economics have some similarity.
OtherZone 3? Belle, Des Moines, since I became a Berkshire Hathaway shareholder, I've been coming to these meetings. This is my second. I've been coming to these meetings ever since I've been to shareholder. Mr. Buffett, I'm a partner and owner in a consulting business, and we tell our clients and potential clients that we design solutions for what keeps them awake at night. Mr. Buffett, from your perspective, as an investor, what keeps you awake at night?
WarrenWell, that's a good question, and that's one I always ask the managements of our subsidiaries as well as any new investment. I want to know what their nightmare is. Andy Grove, in his book, Only the Paranoid Survived, talks about the Silver Bullet for a competitor. So in terms of if you only had one silver bullet, which competitor would you fire it at? And it's not a bad question. And your question's a little broader. if you only had one worry that you could get rid of, what would it be? I would say that, and I think I speak for sure, I let them do it, but we really don't worry. You know, we will do the best we can. And when we have capital allocated, sometimes it's very easy to do.
[52:08]
WarrenSometimes it's almost impossible to do. But we're not going to worry about it because it, you know, the world changes. And if we had something. we were worried about in the business, we would correct it. I'm not worried about anything. I'm not really worried about, you know, we can lose a billion dollars on a California earthquake. But I'm not worried about it, although I have a sister who's in the audience that lives in California. I've told her to call me quickly if the dogs start running in circles or anything like that. But there's, you know, if you're worried about something, things you do is is get it corrected and get back to sleep. And I can't think of anything. I'm worried about at Berkshire. That doesn't mean that I have any good ideas as to what we should be doing with a whole lot of money that we have around. But, you know, I can't do anything about that except keep looking for things that I might understand and do something with the money. And if they aren't there, they aren't there, and we'll see what happens tomorrow and next week and next month and next year. Charlie, what are you worried about me?
CharlieWell, in the 30-some years I've been watching you, I would say what it takes to make you not sleep at night is an illness in the family. Short of that, Warren likes the game, I like the game, and even in the periods that look tough to other people, it's a lot of fun. It's a lot of fun. It's a lot of fun. In fact, it probably is the most, it's sort of, it is the most, I mean, we define tough times differently than other people would, but our idea of tough times is like now, and our idea of, we don't feel it's tough times when the market's going down a lot or anything of the sort. So we are having a good time then. I mean, we don't want to sound like undertakers during a plague or anything, but but there's really, you know, it makes no difference to us whether, whether our, some, the price of Berkshire is going up or down. We're trying to figure out ways to make the company worth more money years down the road, and if we figure that out, the stock will take care of itself. So, and usually when the stock is going down, it means other things are going down, and it's a better chance for us to deploy capital, and that's our business. So you will not see us worrying. Maybe we should. You know, what may worry.
QuestionerZone 4. My name is Peel Yun from L.A., California.
[54:50]
QuestionerMr. Warren Buffet, Mr. Charles Bunger. I'm one of the persons. who highly admire you both. I have two questions. Question one. Your view on world financial business environment in the next decade. Question two, U.S. position for economic competition in the next decade. Thank you.
WarrenWell, you've asked two big questions, but you're going to get very small answers, I'm afraid. And that's no disrespect. But we just, we don't have that. We don't think about those things very much. We just, we just are looking for decent businesses. And incidently, our views in the past wouldn't have been any good on those subjects. And we try to, we try to think about two things. We try to think about things that are important and things that are knowable. Now, there are things that are important that are not knowable, in our view, those two questions that you raise fall in that. There are things that are knowable but not important. We don't want to color our minds. with those. So we say, what is important and what is knowable? And what among the things that fall within those two categories can we translate into some kind of an action that is useful for Berkshire? And we really, there are all kinds of important subjects that Charlie and I, we don't know anything about, and therefore we don't think about them. So we have our view about what the world will look like over the next 10 years in business or competitive situations. We're just no good. We do think we know something about what Coca-Cola is going to look like in 10 years, or what Gillette's going to look like in 10 years, or what Disney's going to look like in 10 years, or what some of our operating subsidiaries are going to look like in 10 years. We care a lot about that. We think a lot about that. We want to be right about that. If we're right about that, the other things get to be, you know, they're just, they're less important. And if we started focusing on those, we would miss a lot of big things. I've used this example before, but Coca-Cola went public in I think it was 1919. And the first year, one share costs $40. The first year, it went down a little over 50 percent. At the end of the year, it was down to $19. There were some problems with bottler contracts. There was problems with sugar, various kinds of problems. If you'd had perfect foresight, you would have seen the world's greatest depression staring you in the face when the social order even got questioned. You
[57:31]
Warrenwould have seen World War II. You would have seen atomic bombs and hydrogen bombs. You would have seen all kinds of things. And you could always find a reason to postpone why you should buy that share of Coca-Cola. But the important thing wasn't to see that. The important thing was to see that they were going to be selling a billion, eight-ounce serving of beverages a day this year, or some large number. And that the person who could make people happy a billion times a day around the globe ought to make a few bucks off doing it. And so that $40, which went down to $19, I think with dividends reinvested, it has to be well over $5 million now. And if you develop the view on these other subjects that in any way forestalled you acting on this more important, specific, narrow view about the future of the company, you would have missed a great ride. So that's the kind of thing we focus on.
WarrenCharlie?
CharlieYeah, we're not predicting the curve. that will come, just how some things will swim in the currents, whatever they are.
OtherZone 5, please.
QuestionerGood morning. Mark Gerstein from Value Line. Mr. Buffett, considering the large amount of demands on your time, how do you go about reviewing the entire spectrum choices in the equity markets?
WarrenGive me that last part again, and I got the demands on my time. And how do you and Mr. Munger manage to review the whole spectrum of choices in the equity markets? A fat pitch coming up. But I don't mind it at all because the truth is that we get – I don't know what we even pay for value line. Charlie and I both get it in our respective offices, but we get incredible value out of it because it gives us the quickest way to see a huge number of the key factors to tell us whether we're basically interested in the company. It also gives us a very way of good way of sort of periodically keeping up the date. line has 1,700 or so stocks they cover, and they do it every 13 weeks. So it's a good way to make sure that you haven't overlooked something if you just quickly review that. But the snapshot it presents is an enormously efficient way for us to garner information about various businesses. We don't care about the ratings. I mean, that doesn't make any difference to us. We don't – we're not looking for opinions. We're looking for facts. But I have yet to see a better way, including – fooling around on the internet or anything that gives me the information as quickly I can
[1:00:13]
Warrenabsorb the information on about a company. Most of the key information you can get in. It probably doesn't take more than 30 seconds in glancing through value line. And I don't have any other system that's as good.
WarrenCharlie?
CharlieWell, I think the value line charts are a human triumph. It's hard for me to imagine a job being done. better than is done in those charts. An immense amount of information is put in very usable form. And if I were running a business school, we would be teaching from value line charts.
WarrenAnd when Charlie says the charts, it does not mean just the chart of the price behavior. It means all that information that really is listed under the charts that gives the detailed financial information. You can run your eye across that. The chart of the price action doesn't mean a thing to us, although it may catch our eye just in terms of businesses that have done very well over time. But that we – price action has nothing to do with any decision we make. Price itself is all important. But whether a stock has gone up or down or what the volume is or any of that sort of thing, that is – as far as we're concerned, you know, those are chicken tracks, and we pay no attention to them. But that information that's right below the chart – in those 10 lines or so, 15 lines. If you have some understanding of business, that's a – it's a perfect snapshot to tell you very quickly what kind of a business you're looking at.
OtherZone 6, please. David Winters from Mountain Lakes, New Jersey.
QuestionerWith the consolidation in the insurance industry, how do you think that will affect Berkshire's insurance businesses and the long-term development of the insurance businesses and the long-term development of the and, if I may, not to encourage your dogma or run over your karma, but how do you think your policy of partnership and fair dealing has enhanced or detracted from your investment returns? Thank you.
WarrenWell, the consolidation taking place in insurance, it's been taking place for some time. There have been some big mergers over the years. It should – there are developments in insurance. We mention the supercat bonds, which are not bonds at all. But that has an effect. But I would say that there's no merger that has taken place that I regard as being detrimental either to our GEICO business or to our reinsurance business. That has not been a factor. And I think if there were some more mergers, it would not be a factor.
[1:03:10]
Warrenfactor. I see no way that any entities being put together would change the competitive situation in respect to Geico. Geico, operating just as it does independently, is as competitive as can be, and it would not benefit by being part of any other organization. And our reinsurance business is much more opportunistic, and it's not going to be. It's not consolidation there. It's just lack of fear, generally, by competitors who comprise, particularly cat business, at a rate that could be totally inadequate, as I use, an illustration in the report, but nevertheless, it could appear to be profitable for a long time. And there's probably more of that going on now, and there'll probably be a lot more going on in that arena. We have some sensational insurance businesses, though. I have to tell you that. But I don't think you really have to worry too much about how we do insurance in the future. We had a number of Geico people here today. I hope you got a chance to meet him. Geico, and you saw Lorimer Davidson, I really was hoping he could be here, but Davy is 95 years old. I went to visit him a few months ago. It just isn't easy for him to get around. But he built a sensational company, and it stumbled once. Beckburn got it back on track, and Tony Nicely's got it going down the track at about 100 miles an hour, and it's getting faster all the time. So we've got a great business there. Charlie?
CharlieNothing to add.
OtherZone 7? Yes. Bill Ackman from New York.
QuestionerIs there a price in which it's inappropriate for a company to use its capital buyback its stock? Give me that again. For example, Coca-Cola at 40P. Is that a smart place for Coke to do? deploy capital?
WarrenWell, it sounds like a very high price when you name it in terms of a P.E. to buy back the stock at that sort of number. But I would say this. Coca-Cola has been around a hundred and, what, 112 years now, and there are very few times in that 112 years, if any, when it would have not have been smart for Coca-Cola, be repurchasing its shares. Because Coca-Cola is, in my view, among businesses that I can understand, it's the best large business in the world. I mean, it is a fantastic business. And we love it when Coke repurchases shares, and our interest goes up. We owned 6.3% of Coca-Cola in 1988 when we bought in. We actually increased that a little bit a few years later. But if they had not repurchased shares, we probably would own about 6.7% or 6.8% of Coke now.
[1:06:20]
WarrenAs it is, we own a little over 8% through repurchases. There are going to be about a billion-eight-ounce servings of Coke sold around the world, or Coca-Cola products sold around the world today. 8% of that is 80 million, and 6.8% is 68 million. So there are 12 million extra servings for the account of Berkshire Hathaway. being sold around the world, and they're making a little over a penny a serving, so, you know, that gets me kind of excited. And I think it – all I can tell you is I approve of Coke repurchasing shares. I'd a lot rather have them repurchasing shares at 15 times earnings, but when I look at other ways to use capital, I still think it's a very – it's a very good use of capital, and maybe the day will come when they can buy it at 20 times earnings, and if they can, I hope they go out and borrow a lot of money to buy a ton of it at those prices. And I think we will be better off 20 years from now if Coke follows a consistent repurchase approach. I do not think that is true for many companies. I mean, I think that repurchases have become in vogue and done for a lot of silly reasons. And so I don't think everybody's repurchase of shares is well-reasoned at all. all. You know, we see companies that issue options by the ton and then they repurchase shares much higher. You know, I started reading about investments when I was six, and I think the first thing that I read was, you know, buy low, sell high. But these companies, through their options, you know, they sell low, and then they buy high, and they've got a different formula than I was taught. So there are a number that we don't approve of it. When we own stock in a wonderful business, we We like the idea of repurchases, even at prices that may give you nosebleeds. It generally turns out to be a pretty good policy. Charlie?
CharlieWell, I think the answer is that in any company, the stock could get to a price so high it would be foolish for the corporation to repurchase its shares. Sure. And you can even get into gross abuse. Before the crash, the insul utilities were madly buying their own shares. as a way of promoting the stock higher. It was like a giant Ponzi scheme at the end. So there's all kinds of access that's possible, but the really great company is that buy high price earnings where that can be wise. Our interest in GEICO went from 33% to 50% without us laying out a dime because GEICO was repurchasing its shares.
[1:09:15]
WarrenWe've benefited substantially, but we benefited substantially. It benefited a lot more, obviously, when prices were lower. I mean, we would – our interest in the Washington Post company has gone from 9 in a fraction percent to 17 in a fraction percent over the years without us buying a single share. But the Post or Coke or any number of companies don't get the bargain in repurchasing now that they used to. We still think it's probably the best use of money in many cases.
QuestionerZone 8. My name is Hutch Vernon. I'm from Baltimore, Maryland. My question has to do with float. He said in the annual and you said in the past that float has had a greater value to Berkshire than an equal amount of equity. I wondered if you could clarify that statement. Is that because the float has been generated at such a low cost relative to an imputed cost for equity, or is there something else behind that statement?
WarrenNo, it's because the float, which is now, we'll say, seven billion, to us at a negative cost. We would not make that statement if our float was costing us a couple percent a year, even though float would then be desirable, highly desirable, but our float is even better than that, or it has been. And so it comes to us with a cost of less than zero. It comes to us with a profit attached. So if we were to replace – if we were to get out of the insurance business and give up the $7 billion of float and replace it with $7 billion of equity, we would have less going for us next year than under the present situation, even though our net worth would appear to be $7 billion higher. And I have said, and that if we were – to make the decision – if we were offered the opportunity to go out of the insurance business, and that $7 billion liability would – as part of that decision would evaporate from our balance sheet so that our equity would go up $7 billion, would know no tax implications, we would turn down that proposition. So obviously we think that $7 billion, which is shown as a liability, when it's part of it viewed as part of an insurance business, is not a liability at all in terms of real economic value. And of course, the key is not what the float is today and not what the cost is today. The key is what is the float going to be 10 or 15 years from now. And what is the cost going to be 10 or 15 years ago? And, you know, we will work very hard at both increasing the amount of float and keeping the cost down somewhere close to our present level.
[1:12:03]
WarrenThat makes it a very attractive business when that can be done. GEICO is a big part of the – of doing that. But we've got other things – other insurance operations that will be important in that, too. And we may have others besides that in the future. Charlie?
CharlieYeah. Yeah, if the float keeps growing, that is a wonderful thing indeed. We really have a marvelous insurance business. In addition to having this remarkable earning power, it's way less likely to get really clobbered than most insurance businesses. So I think it's safer on the downside and has a better upside. And it may sound strange, but we don't regard losing a billion dollars in the California quake is getting really clobbered. No. That's part of the game. There are many companies that have greater exposures in that that really aren't getting paid for it. And you don't see it specifically, but any company that has a ton of homeowners business in Florida or Long Island or along the coast of Texas may have exposures many times our billion and really not be getting paid appropriately or specifically for taking that risk.
QuestionerZone 9. Hi, my name is Mary Semler from Seattle, Washington. Japan is a major holder of U.S. Treasuries. Given the troubled Japanese economy, do you proceed Japan cashing in the U.S. investments to bail themselves out? Why or why not?
WarrenI thought they didn't get all that. I was busy chewing. I didn't get that either. I was busy chewing here and I... But... Japan is a major holder of U.S. treasuries. Given the troubled Japanese economy, do you proceed Japan cashing in the U.S. investments to bail themselves out? Why or why not? Not. The problems with the Japanese economy and does that mean that... Are you thinking particularly about them dumping treasuries or something?
QuestionerThat's exactly what she's...
WarrenYeah. Well, you know, it's very interesting. All the questions about what so-called foreigners do with investments. Let's just assume that the Japanese or any other country decides to sell some U.S. government holdings that they have. If they sell them to U.S. corporations or citizens or anything, what do they receive in exchange? They receive U.S. dollars. What do they do with the U.S. dollars? You know, I mean, they can't get out of the system. If they sell them to the French, you know, the French give them something in return. Now the French own the government securities. But really, as long as we, the United States, run a deficit, a big deficit, a trade deficit,
[1:15:04]
Warrenwe are accepting goods and giving something in exchange to foreigners. I mean, when they send us whatever it may be, and on balance, they send us more of that than we send over there, we give them something in exchange. We give them an IOU. We may give them a government bond, but we may give them an investment they make in the United States. But they have to be net investors in this country as long as we're net consumers of their goods. It's a tautology. So I don't even know. quite how a foreign government dumps its government bonds without getting some other type of asset in exchange that may have an effect on a different market. The one question you always want to ask in economics is, and not a bad idea elsewhere too, but is, and then what? Because there's always a second side to a transaction. And just ask yourself, if you are a Japanese bank and you are a Japanese bank and you, you You sell a billion dollars worth of government bonds, U.S. government bonds. What do you receive in exchange? And what do you do with it? And if you follow that through, I don't think you'll be worried about foreign governments selling U.S. bonds. It is not a threat. Charlie?
CharlieIf I own Japan, I would want a large holding of U.S. treasuries. You're on an island nation without much in the way of national resources. I think their policy is quite intelligent for Japan, and I'd be very surprised if they dumped all their treasuries. If they're in that export or two, so what choice do they have? And think about it. If they send over more goods to us than we send to them, which has been the case, they have to get something in exchange. Now, for a while, they were taking movie studios in exchange. They were taking New York real estate in exchange. I mean, they've got a choice of assets. But they don't have a choice as to whether if they could send us more than they get from us, whether they get some investment, some investment asset in return. I mean, it's amazing to me how little discussion there is about the fact that there's two sides to an equation, but it makes for better headlines when, I guess, when read the other way.
QuestionerZone 10. This is John Vaughn from Detroit, Michigan. Nebraska's Senator Kerry has proposed private investment accounts for up to two percentage points of the current payroll tax. His words were, and I quote, people want more than just a transfer payment, They want wealth.
[1:17:42]
QuestionerDo you approve this proposal? And if you do, would you recommend passive investing, i.e. index? Or if you recommend active investing, would you and Charlie want to give it a shot?
WarrenWell, I've talked with Bob Kerry about that. And Bob does like the idea of giving everybody some piece of the American economy and an interest in. And he's thought, as you know, he's proposed really sort of small grants. to the three and a half million or so, children born every year, and then some build-up of that account. Senator Moynihan has come up with something recently in conjunction with Kerry. I personally would not like to see any major amount of Social Security, and Moynihan is talking about 2%. And actually, I suggested the idea that maybe 2% out of the 12 and a fraction percent at the option, at the option, of the beneficiary or Social Security participant could be devoted to some other system, but then they would only get five, six of the basic Social Security benefit. I don't think you could drop it below that because you wouldn't want people turning 65 or maybe more advanced age in the future, 70, and not having the safety net of Social Security. So I wouldn't want to drop it below about five, six of the present benefit. benefits. I don't, I think it's a perfectly reasonable topic to discuss whether you want to take that 2% then and let people build up an account, perhaps tax-free, perhaps a IRA-type account, so they would have both wealth and the safety net. But I wouldn't want to drop the safety net very, very far. And I think that I would not want to turn an army of salespeople loose on the American public with a mandatory 2% going in some direction. I don't think that would be particularly healthy. Charlie?
CharlieI'm much less enthusiastic than you are. In other words, your negative or conservative attitude is way more affirmative than mine. I think the idea of getting the government and promoting the value of equities. In Japan, we have a taste of that now. The Japanese government has been using the postal savings system to buy equities massively year after, year after year. I don't think we need to get the government under the equity market.
OtherWe go to Zone 11, please.
QuestionerI'm Dale Max from University of Park, Illinois. And I've got a question for each of you, a short question for Charlie, and maybe a little longer for Warren. My question for Charlie is, in a business school sense, what is the cost of capital for Berkshire Hathaway.
[1:20:48]
QuestionerAnd my question for Warren is that I've been a business school sense, what is the cost of capital for Berkshire Hathaway. I've been on the internet, and I look at Yahoo and they give you recommendations for companies. And when I search for Berkshire Hathaway, it shows that nobody is recommending Berkshire Hathaway, despite the fact that there are maybe a thousand people that are wearing signs here. I love Berkshire Hathaway, and of course I've got mine on too, but what seems to be the problem in lack of recommendations?
WarrenWell, we're not recommending. Yahoo, incidentally, either. But I'll let Charlie have that first question about the cost of capital, which is puzzled people for thousands of years. The way that is taught in most business schools, now I find incoherent. So I'm the one that asks that question and gets the incoherent answers. I don't have a good answer to a question I consider kind of a stupid question. What does the cost of capital at Berkshire Hathaway when we keep drowning in this torrent of cash, which we have to reinvest? There's really only two questions that get to that. But you don't need a mathematical answer. The first question is, is when you have capital, is it better to keep it or return it to shareholders. It's better to return it to shareholders when you cannot create more than a dollar of value with that capital. That's test number one. And if you pass that threshold that you think you can achieve more than a dollar of value for every dollar retained, then you simply look around for the thing that you feel the surest about and that promises the greatest return waited for that certainty. So our cost of capital is, in effect, is measured by the ability to create more than a dollar value for every dollar retained. If we're keeping dollar bills that are worth more in your hands than in our hands, then we've exceeded the cost of capital as far as I'm concerned. And once we think we can do that, then the question is, is how do we do it to the best of our ability? And frankly, all the stuff I see in business schools, and I've not found any way to improve on that formula. Now, the trouble that you may have is that many managements would be reluctant to distribute money to shareholders, even if they would rationalize that they would do better than they then actually do. But that may be a danger on it. won't be solved by them hiring a bunch of people to come up with some cost of capital
[1:23:33]
Warrenthat also justifies them keeping the money because that's what they'll do otherwise. The question about recommending the stock, we very seldom had stock recommendations over the years. As I think back to 1965, I can't think of a lot of brokerage reports that have recommended Berkshire. I'm not looking for any reports at all. We are not looking to have Berkshire at all. We are not looking to have Berkshire sell at the highest possible price, and we're not looking to try and attract people to Berkshire who are buying stocks because somebody else recommends them to them. We prefer people who figure out for themselves why they themselves want to buy Berkshire, because they're much more likely to stick around if they enter the restaurant because they decide it's the restaurant they want to eat at than if somebody has touted them on it. And that's our approach. So we do nothing to encourage. But I think even if we did, we probably wouldn't generate a lot of recommendations. It's not a great stock to get rich on if you're a broker.
OtherYeah, I think the reason, I think one of the main reasons why it's so little recommended in the institutional market is that it's perceived as hard-to-buy-buy-and-quantity. We prefer, we've got some good institutions as holders, and it's really one that's run by a very good friend of ours, but frankly, it's more fun for us to have a bunch of individual shareholders. I mean, you see it, it translates. If there's money made, it translates into changes in people's lives and not some change in somebody's performance figure for one quarter. And we think that individuals are much more likely to join us with the idea of staying with us for as long as we stay around. And that's the way we look at the business. Very few institutions look at investments that way. And frankly, we think they're often less rational holders than we get with individuals.
OtherNumber one.
OtherGood morning. Good morning, gentlemen. I'm Hugh Stevenson, a shareholder from Atlanta. My question involves the company's Supercat reinsurance business. You've addressed some of this, but I would like for you to expound on it, please. You've indicated that you think this is the most important business of the company. And my question is what you think the long-term impact of catastrophe bonds and catastrophe derivatives will be on the float and the growth in float of the company. And I understand that the mispricing of risk in these instruments doesn't really affect the way
[1:26:21]
Questioneryou price your business, but I'm wondering how you think it can affect the volume of the business. And I remember several years ago, Mr. Buffett, you talk about you can never be smarter than your dumbest competitor. Right. And these are some potentially dumb competitor.
Ajit JainYou've got it. I just want to put an asterisk on one thing. We say insurance will be our most important business. We've not said the Supercat business will be our most important. Supercat has been a significant part of our business and may well over the years remain a significant part. But it is far less significant than Geico, and I'll mention a word or two about that. But the Supercat business, you can price wrong as I illustrate. wrong as I illustrated in my report. You can be pricing it at half what it should be priced at. I used an illustration in the report of how you could misprice it a policy that you should be getting, say, a million and a half for, namely a $50 million policy on writing on something that had one chance in 36 of happening. So you should get almost a million and a half for it. I said if you priced it at a million a year, you would think you were making money after 10 years, 70-odd percent of the time. percent of the time. The interesting thing about that is if you priced it for a dollar a year, you would have thought you made money, 70-odd percent of the time, because it, it, when you were selling insurance against very infrequent events, you can totally misprice them but not know about it for a long time. Supercat bonds open up that field wide open. I mean, you've always had the problem of dumb competitors, but you have a much more chance of having dumb competitors when you have a whole bunch of people who, in, in the case of hedge funds who have bought some of these, where the manager gets 20 percent of the profits in the year when there are profits, and there is no hurricane, and when there happens to be a hurricane or an earthquake, he doesn't take the loss as limited partners do. So it's very likely to be a competitive factor that brings our volume down a lot. It won't change our prices. You know, the thing to remember is the earthquake does not know the premium that you receive. I mean, the earthquake happens regardless. regardless. So it doesn't say, you know, you don't have somebody out there on the San San Andreas Faults that says, well, he only charged a 1% premium, so we're only going to do this once
[1:28:46]
Ajit Jainevery 100 years. It doesn't work that way. So we will probably do a whole lot less volume in the next few years in the Supercat business. We have these two policies that run for a couple of more years. But in terms of new business, we will do a whole lot less. But GEICO is by far the most important part of our insurance business, though. GEICO in the 12 months ended April 30th, had a 16.9 percent increase in policies enforced. Year end, I told you it was 16.0. A year ago, I told you it was 10. A year before that, I think it was 6 in a fraction. So its growth is accelerating, and it should be in a whole lot more homes around the country than it is now, you know, by a big. factor, and it will be, in my view. So that will be the big part of our insurance business. But we may be in the insurance business in some other ways, too, as time goes along. It's a business that if you exercise discipline, you should find some ways to make money, but it won't always be the same way. Charlie?
CharlieI've got nothing to add.
OtherOkay, Zone 2.
QuestionerHello. I'm Steve Davis from San Francisco. I'd like to say. I'm Steve Davis from San Francisco. I'd like your advice on how to understand annual reports, what you look for, what's important, what's not important, and what you've learned over the years from reading thousands of reports. Thank you.
WarrenWell, we've read a lot of reports, I will tell you that. And we, well, we start by looking at the reports of companies that we think we can understand. So we hope to find, we hope to be reading reports, and I do read hundreds of them every year. We hope to be reading reports of businesses that are understandable to us. And then we see from that report whether the management is telling us about the things that we would want to know about if we owned 100% of the company. And when we find a management that does tell us about those things and that is candid in the same way that a manager of a subsidiary would be candid with us and talks in language that we can understand, it definitely improves our feeling about investing in such a business. and the reverse turns us off to some extent. So if we read a bunch of public relations, gobbledygook, you know, and we see lots of pictures and no facts, it has some effect on our attitude toward a business. We want to understand the business better when we get through with the annual report than when we picked it up. And that is not difficult for management to do what they want to do it.
[1:31:31]
WarrenIf they don't want to do it, you know, we think that is a factor. and whether we want to be their partners over a 10-year period or so. But we've learned a lot from annual reports. For example, I would say that the Coca-Cola annual report over the last good many years been an enormously informative document. I mean, I can't think of any way if I had had a conversation with Roberto Voizweta or now Doug Ivester, and they were telling me about the business. They would not be telling me more than I get from reading that annual report. We bought that stock based on an annual report. We did not buy it based on any conversation of any kind with the top management of Coca-Cola before we bought our interests. We simply bought it based on reading the annual report, plus our knowledge of how the business worked. Charlie?
CharlieI do think the – if you've got a standardized bunch of popular jargon that looks like it came out of the same consulting firm, I do think it's a big turnoff. That's not to say that some of the consulting – mantras aren't right. But I think there's a lot for sort of a candid, simple, coherent prose. A lot to be said for them. Almost every business has problems, and we just assume the manager would tell us about them. We would like that in the businesses we run. In fact, one of the things, we give very little advice to our managers, but one thing we always do say is to tell us the bad news immediately. And I don't see why that isn't good advice for the manager of a public company. over time, you know, I'm positive it's the best policy, but a lot of companies, for example, have investor relations people, and they are dying just to pump out what they think is good news all the time. And they have this attitude that, you know, that you've got a bunch of animals out there to be fed and that they're going to beat them what they want to eat all the time. And over time, the animals learn them. So it's – we try to stay away from businesses. What you seldom see in an annual report is a sentence like this. This is a very serious problem, and we haven't quite figured out yet how to handle it. But believe me, that is an accurate statement much of the time.
OtherAll right, zone three. I'm where Dirks, I live in the area, and I would like to know what your prediction is for Coca-Cola's long-term growth versus Pepsi Cola's recent efforts to increase the competitiveness with Coke.
[1:34:30]
WarrenYeah. Long-term, I would expect Coke to continue to gain versus Pepsi.
OtherWhat has he been doing while I was gone? What did you say, Shirley?
WarrenI knew I was taking a chance. What was the question? I said that long-term, I expected Coke to continue to gain versus Pepsi.
OtherOh, well, it's those kind of insights is why we, why we, why we, keep him on the job here after year. In a moment of particular confidence, he one time told me the same thing about RC. That was probably Zone 3 you were answering, so we'll go to 4. What have you got there? Do you got peanut brittle? Mm-hmm. Zone 4, please.
QuestionerJason, Houston, Texas. My first question is on the quality of earnings and your evaluation of quality of earnings in the U.S. right now. And the second is what multiples should be put on asset gains, such as bottling, sale of bottling assets or reversal of merger reserves. Thanks.
WarrenYeah, taking the second question, for example, at Coca-Cola, where the bottling transactions are incidental to a long-term strategy, which, in my view, has been enormously successful to date and which has more successes ahead of it. But in the process of rearranging and consolidating. the bottling system and expanding to relatively undeveloped markets, there have been, and there will be a lot of bottling transactions. And some produce large gains, some produce small gains. I ignore those in my evaluation of Coke. The two important elements in Coke are unit case sales and shares outstanding. And if the share is outstanding go down and the unicay sales advance at a good clip, you are going to make money over time in Coca-Cola. There have been transactions where people have purchased rights to various drinks. Coca-Cola's purchased some of those around the world. And when you see what is paid for a million or 100 million unit cases of of business, and then you think to yourself that maybe Coke will add a billion and a half cases a year, that's a real gain in value. It's a dramatic gain in value, and that is what counts in terms of the Coca-Cola company. If you think the Coca-Cola company is going to sell some multiples of its present volume 15 or 20 years from now, and you think there'll be a lot fewer shares outstanding, you've gone about as far as you need to go. But I would pay no attention to asset gains. I would just take those out of the picture. Now, it's the quality of earnings. Charlie and I feel that in several respects,
[1:38:06]
Warrenbut in one important respects that the quality of earnings has gone down, not because the policy has changed, but because it's just become more significant, and that's in the case of stock options. There are certain companies that we've evaluated for possible purchase where in our calculation of earnings, the earnings are maybe 10% less per year per share than reported. And that isn't necessarily the end of the world, but it is a difference in valuation that is significant and is not reported under standard accounting. So we think the quality of earnings as reported by a company with significant stock option grants every year we think is dramatically poor than one for one where that doesn't exist. And there are a lot of companies that fall in that category. category. Coca-Cola's earnings are very easy to figure it out. Just figure out what they're, you know, what they're earning per case from operations, and you'll see over the years, the earnings per case go up, and the cases go up and the shares go down. And it doesn't get much more complicated than that. Charlie?
CharlieYou've said it wonderfully. I just wish we had more like that.
WarrenYeah. Geico, the key, I mean the same way as policies in force and underwriting experience per policy. per policy. And that is exactly the way, as noted in the annual report, we pay people there. We pay them from the bottom to the very top based on what happens with those two variables. And we don't talk about earnings per share at GEICO and we don't talk about investment income. We don't get off the track because there are two things that are going to determine what kind of business that GEICO is over a long period of time. And policies that at GEICO are unique cases at Coca-Cola.
OtherZone 5. Hello, Mr. Buffett and Mr. Munger. My name is James Claus from New York City, and I just wanted to ask you a question. Both you and Mr. Munger have repeatedly said that you don't believe that business valuation is being taught correctly at our universities. And as a PhD student at Columbia Business School, that troubles me understandably because in a couple of years I'll be joining the ranks of those teaching business valuation. My question isn't what sources such as Graham or Fisher or Mr. Munger's talks, you would point people that are teaching business valuation to, but do you have any counsel about the techniques of teaching business valuation?
[1:40:50]
WarrenWell, I was lucky. I had a sensational teacher in Ben Graham, and we had a course there. There's at least one fellow out in the audience here that attended with me, and just Ben made it terribly interesting. Ben made it terribly interesting because what we did was we walked into that class and we valued companies. And he had various little games he would play with us. Sometimes he would have us evaluate company A and company B with a whole bunch of figures, and then we would find out that A and B were the same company at different points in its history, for example. And there were a lot of little games he played to get us to think about what were the key variables and, you know, how could we go off the track. I remember one time Ben met with Charlie and me and about nine or so other people down in San Diego and 1968 or so, and he gave all of us a little true false test, and we all thought we were pretty smart, and we all flunked. But that was his way of teaching us that a smart man playing his own game and working at fooling you could do a pretty good job at it. But I would, you know, if I were teaching your course on investments, There would be simply one valuation study after another with the students trying to identify the key variables in that particular business and evaluating how predictable they were first, because that is the first step. If something is not very predictable, forget it. You know, you don't have to be right about every company. You have to make a few good decisions in your lifetime. But then when you find, the important thing is to know when you find one where you really do know the the key variables, which ones are important, and you do think you've got a fix on them. Where we've been, where we've done well, Charlie and I made a dozen or so, very big decisions relative to net worth, but not as big as they should have been. And we've known we were right based on those going in. I mean, they just weren't that complicated, and we knew we were focusing on the right variables and that they were dominant. And we knew that even though we couldn't take it out the five decimal place, or anything like that. We knew that in the general way, we were right about them. And that's what we looked for, the fat pitch. And that's what I would be teaching, trying to teach students to do. And I would not try to teach them to think they could do the impossible.
[1:43:17]
QuestionerCharlie? Yes, if you're planning to teach business valuation, and what you hope to do is teach the way people teach real estate appraising. So you can take any company and your students after studying your course, we'll be able to give you an appraisal of that company, which will indicate really its future prospects compared to its market price. I think you're attempting the impossible.
CharlieYeah, probably on the final exam, I would take an internet company, and I would say the final exam. The question is, how much is this worth? And anybody that gave me an answer, I would flunk. Make grading papers easy, too.
OtherOkay, zone six. Good morning. Lawrence Balter, Carlsbad, California.
QuestionerQuestion for the two of you. There was an article I think about last year in the New York Times that regarded Westcoe as a Berkshire Class C share type company. And I'd like to know your comments on that. And the second question is, if I were to write you a check for the operating businesses that Berkshire owns, how much would it have to be?
WarrenBig. Charlie is the resident expert on Westco, so I'm going to let him address that subject. He gets a lot of It's very eloquent on this.
CharlieYeah. We always say that per unit of book value, Westcoe is worth way less than Berkshire. And indeed, the market is saying the same thing. It is not a clone of Berkshire. It's a historical accident. We want to do well, obviously, for Westcoe. We own 80 percent of it, and we've got strong feelings about the people who are partners there, particularly the Peters family who, in effect invited us in 20-odd years ago and tried to us to manage a big part of their money, in effect, by letting us buy control. So we've got strong fiduciary feelings about it. It suffers, in comparison with Berkshire, because for one thing, anybody that wants a tax-free merger is going to want to come to Berkshire. That's just the way it is, unfortunately, and we are looking for big ideas primarily, and the big ideas are going to fit into Berkshire. We would love to get ideas to fit into Westcoe, and we had a very good idea. And we had a very good one a couple of years ago, thanks to Roy Dinsdale, pointing me in the right direction. And we added Kansas Bankers surety to Westco, and it's a gem, and it's run by Don Toll who's done a terrific job. But that's the exception, unfortunately, because if a flight safety comes along, it's not going to fit Westco.
[1:46:16]
WarrenSo we will do our best for Westco, but the nature of things is that most of the opportunities that make a lot of a lot of sense are going to come to Berkshire.
WarrenCharlie?
CharlieNothing more.
OtherOkay. Zone 7. My name is Bob Swanson from Phoenix. And I'm wondering what are the advantages of investing in Berkshire Hathaway as opposed to investing in the stocks that Berkshire owns?
WarrenWell, a lot of people do one or the other, and some people do both. But no, you have to really make up your own mind on that. We're not going to go to go to go. great links to tell you about everything that Berkshire is doing as we go along. And there could be some changes, and there will be things that can happen in Berkshire that I think you would have trouble duplicating elsewhere. But on the other hand, you know, if you'd put all your money in Coca-Cola some years back, you might have done better than if you put in Berkshire. So we really make no recommendation to what people do with their money. We do not seek to become investment advisors through, in effect, our point. portfolio actions at Berkshire.
WarrenCharlie?
CharlieBasically, we hate it when people following us, follow us around buying what we buy. Nothing personal. No.
WarrenBy the way, the questioner before this last one asked, what is the market value under the hammer of all Berkshire's operating subsidiaries? And the answer is you have to figure that out yourself. Mr. Nice Guy. The zone... Well, but what? Well, we give you the information, incidentally, where your judgment on that should be about as good as ours. There's nothing mysterious about valuing the Buffalo News or Seas Candy or Flight Safety or Dairy Queen. So you really have the same information we have in that. I mean, if there's material information that we aren't giving you about any important, but Berkshire subsidiary, we'd like to give it to you because we think you are entitled to have the information enables you to value the various pieces. Because of the aggregate size of Berkshire now in terms of market capitalization and some of the positions we own, the smaller subsidiaries really cannot have that much effect. We love them just as much. I enjoy all of the businesses we're in and I enjoy the people that run them. So we don't make a, there's not, we don't differentiate in our attitude within the company, but in terms of the actual impact on the valuation of Berkshire, there are not,
[1:49:09]
Warrennumber that really just they just don't make that much difference in terms of figuring out whether Brookshire is worth X or X minus 1,000 or plus 1,000, because 1,000 now is over a billion dollars in terms of valuation. A billion is still a lot of money.
OtherArea 8, please.
QuestionerHello, Mr. Buffett, Mr. Munger. My name is Robert McCormick. I'm from Holdings, Nebraska, and I would like to know how much you attribute the gains, enjoyed by the stock market these past years to the baby Booner generation investing for their retirement.
WarrenNow, I would say that personally, I would not think that has much to do with it. I think the two big factors are, well, there's three big factors. One is the improved return on equity, which was a fundamental factor that pushed stock prices up. Two is the decline in interest rates that push stock prices up. And then finally, stock prices advancing themselves brings in buying. It doesn't go on forever, but it creates its own momentum to some extent if you have these underlying factors that are that started to push it along. So I would say two of the three factors are fundamental, and the third is a market-type factor that bull markets do feed on themselves, and I think that you've seen some of it and so that. But I don't think that any specific, you know, the 401k factor or whatever may be, was it by itself. But I do think money is pouring into mutual funds, for example, because people have had a very favorable experience with those funds. And that does bring investors along. People want to be on the train, Charlie. And I think, incidentally, many of them have very unrealistic expectations.
CharlieYeah, the general investment experience in the last, what, 18 years in common stocks has been awesome. I think by any past standards now, isn't that right?
WarrenWell, you've had, since 1982, you've had roughly tenfold in the Dow and probably similar in the S&P, with a huge amount of money and with more participants all the time. There are people coming into the market every day because they feel that they've missed the boat or they're coming in heavier than they came in before simply because they've had a pleasant experience. And past experience doesn't — does not mean much in terms of of what you should expect from your investments. You will do well in your investments because you own or bought things at the right price and the businesses behave well from that point forward.
CharlieWell, you won't have 18 more years at 17 or 18% for Anna. That I think
[1:52:04]
Otherwe can virtually guarantee. Area 9. Hello. I'm Tubby Stamen from Palm Beach, Florida.
QuestionerI know you enjoy Bridge very much. I know you play my late husband's convention. Tell me, How often are you able to devote to this wonderful game? How many times a week do you play other than the Internet?
OtherI didn't get all of that, Charlie. How much bridge are you playing?
WarrenOh, oh. Yes. Well, this week, we should put this in the annual report because it may be a material factor. I probably, I'm probably at least 10 hours a week, maybe a little more. I don't get any better by doing it either. It's a rather discouraging, but it is a lot of fun. And it's a lot of fun. It has to have come out of reading time. I don't think it's hurt Berkshire yet, but that may be because we're in a slow period generally. If the market goes down a lot, I promise to cut back on my bridge. Charlie?
CharlieYeah. Well, I probably pay three or four hours a week, but I don't play on the Internet. He plays a lot of golf, though.
WarrenI confess, Charlie.
CharlieOh, yes.
WarrenYeah, we'd both spend about the same amount of time goofing off. I mean, if you want to know.
QuestionerI want to know.
OtherOkay, Area 10. Yes, my name is Carrie Blecker also from West Palm Beach, Florida.
QuestionerWith all due respect to Mr. Eisner, if he's in the audience, there's been some criticism levied recently at the Disney Company, mainly from an accounting professor at one of the state universities in New York. In reference to Disney's purchase of capital cities and the way they accounted for that purchase, basically what this professor is saying is that Disney somehow creates. a slush fund and is charging the expenses to the merger to this slush fund rather than earnings. If you're familiar with this criticism, I'm wondering what you think of it. If you're not, are you familiar with the way Disney accounted for the purchase of Capital City?
WarrenYeah, I am familiar. Thank you. And actually, Abe Brilloff, who wrote that, is a fellow who in general I admire. Abe wrote me a letter not more in about three or four weeks ago. asked me to talk at a university where he teaches and I wrote them back and I told him I wouldn't be able to do it because it's not in proximity to where I'll be. And I told him, and he asked me about there's anything, and I told him I disagreed with him on certain. I admire what Abe does in the attempt to have accounting reflect economic reality, but he and I don't see it exactly the same on some points, although we would agree on other points.
[1:55:01]
WarrenI don't think Disney is a very complicated enterprise to evaluate. I mean, there are, when Cap Cities bought ABC, there were purchase accounting adjustments, and they tend to wash through to some extent. I mean, if you have programs that you're stuck on, you may write those down from what the previous caring cost was. Maybe the biggest management should have written them down too at that point. But I don't think that – I think with Disney what you see now is what you get. Charlie?
CharlieYeah. I've got no great quarrel with the accounting at Disney. I think – Rilloff is a wonderful guy. He's got a good sense of humor and he's – he generally fights the right demons, but I don't think you can criticize criticize Disney's accounting.
WarrenMR. disagree with Abe, who like I say is a – I agree with Charlie. He's a good guy, but he – we disagree with the amount of amortization of intangibles entirely. So we would say that if Disney is charging whatever it may be, probably $400 million a year, for amortization of intangibles, which is not tax deductible, we would include that as a component of earning. So there might be some pluses and minuses that you've making adjustments, but I would say, by the time you had back amortization of intangibles, that we would probably think the economic earnings of Disney might well be more than the reported earnings in the next few years. I think that the intangible amortization question, which the FASB is looking at now, I think it should be changed. I mean, I think it absolutely distorts economic reality, and I think that it influences whether people go to purchase or accounting or pooling, and they do all kinds of acrobatic try and get pooling accounting. And, you know, it shouldn't make that kind of difference in reported numbers based on whether a transaction, which has exactly the same economics, is done through a purchaser pooling. But I have seen managements, some I know quite well, arranged to do things on a pooling basis that they think where they – if they were private, they would do it on a purchase basis. And I think that's nuts. And I think if accounting is pushing people to doing things that are nuts, that it's time for accounting to look at itself. I would say that net, the economic earnings of Disney, in our view, are somewhat higher than reported earnings. Zone 11, please.
QuestionerGood morning, Mr. Munger and Mr. Buffett. My name is Prakash Puram from Minneapolis.
[1:58:01]
QuestionerThere seem to be great values in the technology sector that meet most of your criteria of philosophy and investing, with the exception of the simplicity criteria. names like IBM, Microsoft, HP, Intel. Would you ever consider investing in companies in this sector in the future?
WarrenWell, the answer is no, and it's probably pretty unfortunate because I've been an admirer of Andy Grove and Bill Gates, and I wish I translated that admiration into backing it up with money. But the truth is, I don't know where Microsoft or Intel. I don't know what that world will look like in 10 years. And I don't want to play in a game where I think the other guys have got an advantage over me. And I could spend all my time thinking about technology for the next year, and I wouldn't be the 100th or the thousands or the 10,000th smartest guy in the country in looking at those businesses. So that is a seven- or eight-foot bar that I can't clear. There are people that can clear it, but I can't clear it. And no matter how I train, I can't clear it. So the fact that there will be a way. be a lot of money made by somebody, it doesn't bother me really. And I mean, there may be a lot of money made by somebody in cocoa beans, but I don't know anything about them. And there are a whole lot of areas I don't know anything about it. So, you know, more power to them. And I think it would be a very valid criticism if Charlie and I, if it were possible that Charlie and I, by spending a year working on it, could become well enough informed so that our judgment would be better than other people's. But that wouldn't happen. And it would be a. waste of time. It's much better for us to swing at the easy pitches. Charlie?
CharlieWhatever you think you know about technology, I think I know less. That's probably not true, incidentally. Charlie has a little more of a, he understands some things in the physical world a lot better than I do. But anyway, we'll go to Zone 1.
QuestionerGood morning. I'm Murray Katz from Markham, Ontario. First off, against my dentist's advice, I'd like to thank you for the free Coke and ice cream last night. Earlier this morning, Mr. Buffett, you mentioned that you liked when wonderful companies like Coke purchased their shares back. Similarly, I own shares in a wonderful company, that's Berkshire. Should I be hoping that you buy your own shares back?
WarrenWell, it's interesting. We should have, perhaps we should have bought some shares back,
[2:00:37]
Warrenbut usually at the time, we could have bought something else that also did very well for us. I mean, maybe when we were buying Coke, we could have been buying our own shares back. To some extent, there hasn't been that much trading in it. But I think it's a valid criticism to say that we have missed the boat at various times in not repurchaseing shares. We'll see what we do in the future on that. If it looks like the best thing to do with money, it's what we should be doing. And in the past, I've probably been not optimistic enough in respect to Berkshire compared to other things we were doing with money. Now, the money we spent buying the guy goes in all. of that has turned up to be a good use of money too. But we've never wanted to leverage up. That's just not our game. So we've never wanted to borrow a lot of money to repurchase shares. We might advise other people to do it, but it's not our style ourselves. We've got all our money in the company. We've got all of our friends and our relatives money virtually. So we have never felt that we wanted to leverage up this company like it was just one of a portfolio of 100 stocks. But it's a valid criticism to say. that we have not repurchase shares when we should have. And it's also a valid criticism to say that we've issued some shares we shouldn't have issued. Charlie?
CharlieWell, I would agree with both comments.
QuestionerArea two. Fellow investors of Brookshire and Hetherway, Warren Buffett and Charlie Munger. I'm from originally China. Now I have a company in Michigan. I want to ask questions based on facts. I want to sell Coke, Geico, and a little book called The Wizard of Omaha, the Investment Philosophy of Warren Buffett, in China. Through all the villages, the cities, little towns, I want to make that a reality. Cheers.
OtherCheers.
OtherCheers.
QuestionerI've not asked the question. Oh, yeah, just warming up. Okay. I will. They always tell me to get off the stage while you're in good shape, but I'll say it. I could quit, but you missed your chance. I'm an owner of Berkshire, and I spend 6% of my net worth to be engaged to Berkshire. Wise decision. I did better than, guess who? Bill Gates. I noticed Bill Gates and you were traveling on a slow boat in China. I want to go home. On a fast train. You want me coming off? If you want me cut out, fine. Up to the investors. I'll quit if you want me to do it. I come a long ways. Okay. I know. I'm a problem for you.
[2:04:25]
QuestionerBut I'm here for a reason, because I made some money. I'm going on a train. A smile train. Yesterday, or the day before at the baseball, I asked Mr. Warren Buffett, have you heard of the smile train? He said no. I'm back here to respond. This is a smile train. Okay, we thank you, but I think that's your question.
OtherWe better go to Zone 4. on that thing.
QuestionerGood morning or afternoon actually. My name's Matt Schwab. I'm from New York, Pound Ridge, New York. I actually had a question about the silver purchase last year. When you announced it, you said that you believed that supply and demand fundamentals would only be established at a higher price, reestablished at a higher price. I was just wondering if you could go into more detail about what some of those fundamentals are. I mean, we've read a lot about like battery technology and some other things.
WarrenYeah, we have no inside information about great new uses for silver or anything of the sort. But the situation, and you can get these figures and they're not precise, but I think they're in general, they're generally accurate. You can see from looking at the numbers that aggregate demand, primarily from photography, from industrial uses and from ornamental. jewelry type uses. It's close, call it 800 million plus ounces a year. And there are 500 million or so ounces being produced of silver annually, although there will be more coming on in the next couple of years. There's more coming on right now. However, most of that silver has produced as a byproduct in the mining of gold or copper lead zinc, so that since it's a byproduct, it's not responsive to, not very responsive to price changes, because obviously if you've got a copper mine and you get a little silver out of it, you're much more interested in the price of copper than silver. So you have 500 million ounces or so of mine production, and you have 150 million ounces or so of reclaimed silver, a large part of which relates to the uses in photography. So there's been a gap in recent years of perhaps 150 million ounces, but none of these figures are precise, which has been filled by an inventory, a bullion above ground, which may have been a billion two or more ounces a few years back, but which has been depleted. And no one knows the exact figures on this, but there's no question that the bullion inventory has been depleted significantly, which means that the present price for silver does not produce
[2:07:35]
Warrenin equilibrium between supply as measured by newly mined silver plus reclaimed silver and usage. And that eventually, something will happen to change that picture. Now, it could be reduced usage, it could be increased supply, or it could be a change in price. And that imbalance is sufficiently large, even though there is some new production coming on, and there is the threat of digital imaging that will reduce silver usage perhaps. in the future in photography. But we think that that gap is wide enough so that it will continue to deplete inventories, bullion inventories, to the point where a new price is needed to establish equilibrium. And because of the byproduct nature, which makes the supply inelastic, and because the nature of demand, which is relatively inelastic, that we don't think that that price change would necessarily be minor. It's interesting because silver has been artificially influenced for a long time. You saw that movie about, you know, it was William Jennings Bryan, who was editor of the Omaha World World Herald and a congressman from Nebraska, and whose brother was governor of Nebraska, who was the big silver man, and they used to talk 16 to 1. The 16 to 1 ratio, I think, goes back to Isaac Newton when he was Master of the Mint. Charlie will know all about that because he's our Newtonian. per here. But that ratio had kind of mystical significance for a while. It didn't really mean anything. And in 1934, the government passed an act called the Silver Purchase Act of surprisingly 1934, which set an artificially high price for silver at that time when production and usage was much less. And the U.S. government ended up accumulating two billion ounces of silver. Now, this was at a time when demand was a couple hundred million ounces of years. So you're talking 10 years supply. So there was an artificially high price for a while. By the 19, early 1960s, that became an artificially low price of $1.29. And at that time, I could see the inventories of the U.S. government being depleted, somewhat akin to what inventories are being depleted now. And despite the fact that Lyndon Johnson and the administration said they would not demonetize silver, they did de-monetize it, and silver went up substantially. That was the last purchase we had of silver, but I kept track of the figures ever since. The Hunt brothers caused a great amount of silver to be converted into bullion form, including a lot of silver coins.
[2:10:17]
WarrenSo they, again, increased the supply in a very big way by their action and pushing the price way up to the point where people started melving it down. So they had this dislocations in silver over a 60-plus year period, which has caused the price to be affected by these huge inventory accumulations. and reductions. And we think right now that we thought last summer when we started buying it, that at the price we bought it, that that that was not an equilibrium price, and that sooner or later, and we didn't think it was imminent because we don't wait till things are imminent. You know, we were going to buy a lot of silver. We didn't want to buy so much as to really disrupt the market, however. We had no intention of replaying any hunt scenario. So we wanted to be sure we didn't buy that much silver. But we liked it. Charlie?
CharlieWell, I think this whole episode will have about as much impact on Berkshire Hathaway's future as Warren's bridge playing. We've got a line of activity where once every 30 or 40 years you can do something employing 2% of assets. This is not a big deal for Berkshire. The fact that it keeps Warren amused and not doing counterproductive things. It makes me feel better about all those pictures that people take over the weekend. They all use a little bit of silver. At least it shows something that teaches an interesting lesson. Think of the discipline it takes to think about something for three or four decades, waiting for a chance to employ 2% of your assets. I'm afraid that's the way we are. It means there'll be some dull stretches.
WarrenRight. Yeah, it's less than a billion dollars in silver. It's $15 billion in Coke. You know, it's a non-event. It's $5 billion in American Express. I mean, it is close to a non-event, but if you see it there. At least it shows the human personality at work. Very peculiar personality, I might add. Reinforced by a partner.
CharlieYeah.
QuestionerOkay, let's go to Area 5. My fact. My family is a Class B shareholder. Thank you for issuing those shares. I have one observation and one question. Your Class B share is creating a new phenomena in this country. These baby shares are not only attracting my baby boomer generation, but also X generation and eco-generation, your grandchildren. My question is, these next generation would like to hear from you. Your investment discipline, your lifestyle, and your philosophy of contributing the wealth back to the society
[2:13:38]
Questionerin a language they can understand and communicate back to their friends when they get back to school on Tuesday. Thank you.
WarrenThank you. Well, I appreciate that. And I would say the only speech is I give I get a lot of requests, perhaps because I don't do them, but I get a lot of requests, including from a lot of our managers in terms of trade conventions, all kinds of things. I don't do – the only groups I talk to are students, and I try to talk to college and university students, I'll talk to high school students, too, whenever it fits in terms of travel schedules. And I just think that you're going to spend your time with groups talking that rather than entertain people, but it probably is better to talk to the group who talked about. And Charlie and I are never reluctant to talk, so we do it. Charlie is given a couple of talks. One I sent you a few years ago from USC, but there's been another one one recently that I think everybody would profit by reading. So it was reprinted in the Outstanding Investor Digest, but if you write Charlie, I'm sure I'll send you a copy. Area 6, please.
QuestionerHi, my name is David Osterbond. I'm from Kalamazoo, Michigan. This is a hypothetical question about Berkshire. It's going to take a little imagination, I think. The scenario follows that the U.S. Justice Department makes a ruling that Berkshire must split into two parts immediately. You and Mr. Munger must decide which part to keep. You can either choose. your marketable securities, coat, Gillette, Disney, etc. Or you can choose your insurance and private businesses. Which one do you choose and why?
WarrenWell, that's an easy question for me. I would choose the operating businesses anytime because it's more fun. And I have a good time out of the investments too, but I like being involved with real people in terms of the businesses where they're a, They're a cohesive unit that can grow over time. And I wish we owned all of Disney or Coca-Cola or Gillette, but we aren't going to. So if I had to give up one or the other, I'd give up the marketable security. But it's not going to happen. So we're going to be happy in both arenas. And I look forward to being in both arenas for the rest of my life. Charlie?
CharlieWell, I'll be in a hell of a fix if I'm not in the same arena. We'd both be a hell of a fiction.
WarrenYeah, yeah. Area 7?
QuestionerYes, hello to Mr. Munger and Mr. Buffett. My name is Jerry Gonzalez from Plantation.
[2:16:47]
QuestionerMy question is, what are your recommendations of Berkshire Hathaway if Charlie Munger were in charge or your third man in charge, which I think you said, it's the CEO of Geico, what are your recommendations? If Charlie Munger would be in charge fully, 100%, 100% or your third man, the CEO of GEICO.
WarrenWell, in due course, this, this corporation will have a change in management. I'm afraid we have no way of fixing that. And we do not, apart from making sure we've got good options and having some system in place, we are not obsessing about a future management yet.
QuestionerNo. The director... The director... almost indefinitely. Absolutely.
WarrenThe, although I must say, at my last birthday, somebody asked me, how old I was, I said, well, why don't you just count the candles on the cake? And he said he was driven back by the heat, something. But we're not going to leave willingly. And we do, the directors know who, and they have a letter that says who they think. who they think, who we think should be the ones to succeed us at both the operating aspect and the investment allocation aspect. And that, those letters can change over time as we keep hanging around. But I don't worry about the fact that 99% plus of my estate will be in Berkshire Hathaway stock or that a foundation will eventually receive that stock. So it doesn't bother me in the least. I can't think of a place I'd rather have it. And that's... includes my appraisal of the managers that we have who can step in and do what Charlie and I do, and who knows, one of them may even understand technology. I think this place would have very respectable prospects if the top 25 managers all drop dead at once.
QuestionerWell, that's not an experiment we intend to.
WarrenI see no reason to think it wouldn't consider. I think it wouldn't continue to do quite well. Right. It's been lovingly put together to have a certain margin of safety. We actually, if we have a choice, it's number 3 through 23, though, that were... 25 that we're just...
OtherOkay, Area 8, please.
QuestionerThis is Raul from Walnut Creek, California. Thanks, Mr. Buffet. Thanks, Mr. Munger. Thanks for your great company. I wish I had known about it 10 years of it. it 10 years ago. You are not only the greatest, but the most honest. I want to commit 99% of what I have to Berkshire Hathaway and I will. The question I want to ask is, how do you calculate the intrinsic value of the company? And based on intrinsic value, to me,
[2:20:18]
QuestionerBerkshire Hathaway looks a great bargain. at these prices, especially based on look through earnings. Is that true? And one last question I want to ask just for fun. What do you think about telecom IPOs? Like Quest, US like, they seem to pop up 50% at opening. Does it make any sense to invest in these? Thank you very much. Thank you very much.
OtherHow do you want to tackle that on?
WarrenI didn't follow that all. Intrinsic value, we give you the facts and you make your own conclusions. I like the fact that you think we're honest, but you know, if you people keep bidding up the price of our stock, honesty will only do so much for you in the future. Yeah, we've never been tested. I mean, we're very lucky. We've never had, you know, we've never had any. We've never had anything that we needed, really, that we haven't had. And, you know, who knows what the situation be if your family was starving or something. And so our intention is to continue in a position where we'll never be tested, too, I might add. The intrinsic value question, I mean, by definition, intrinsic value is the present value of the stream of cash that's going to be generated by any financial asset between now and doomsday. And that's easy to say and impossible to figure.
Questionerimpossible to figure.
WarrenBut it's the kind of thing that we're looking at when we look at a Coca-Cola where we think it's much easier to evaluate the stream of cash that comes in the future than it is in a company such as Intel, marvelous as it may be. We just, it's easier for us. It may not, Andy Grove may be better at figuring out Intel than Coke. And in Berkshire, it is complicated by the fact that we have no business that naturally employs all of a capital that flows to us. So it is dependent to some extent on the opportunities available and the ingenuity used and when that cash pours in as it does. Some businesses have a natural use for the cash. Actually, Intel has a good natural use for the cash over time as they've expanded in their business. And many businesses do. But we do not have a natural use. We have some businesses that use significant amounts of cash. A flight safety will buy a lot of, build a lot of simulators this year, and they cost real money. But in relation to the resources available, we have to come up with new uses, new ways to use cash. And that makes for a more difficult valuation job than if you've got, well, the classic case used to be a water or electric
[2:23:19]
Warrenutility where the cash could be deployed and the return was more or less guaranteed within a narrow range. And it was very easy to make calculations then as to the expectable returns in the future. But that's not the case at Berkshire. We've got very good businesses, and both directly and partially owned, and those businesses are going to do well for a long, long time. But we do have new cash coming on all the time, and sometimes we have good ideas for that cash, and sometimes we don't, and that does make your job more difficult in terms of computing intrinsic value. We'll have, yeah, we're going to break after the next question at that time, we break whenever Charlie and I run out of candy up here, actually. We're going to let everybody that you can, you can get something to eat if you want to stick around, and we will be here to 3.30 when we reconvene at 1230, and those of you who have been with us this morning, and I've had enough. We thank you for being here this weekend. We've had a terrific time with you, so I'm very appreciative that. Let's have a question from Zone 9, and then we'll go to lunch.
QuestionerGood morning. My name's Frank Jervic. I'm a shareholder from London, Ontario, and Canada. My question is for Mr. Munger, and it concerns his models, and the question specifically is related to market valuation. I know I'm not going to get a prediction. That's not your bag. What I'm curious about is there are any specific touchstone models that you reflect upon, trying to gain perspective. These markets with the historic valuations are quite high, and why? Do you draw on those models? My second question is for Mr. Buffett, and it relates to taxation. If you were able to trade your portion of your portfolio, at least in a tax-exempt fashion, like 401K plans or in Canada, the RSP plans, would you possibly trade more actively?
WarrenCharlie, want to answer yours first?
CharlieYeah. Well, the Munger system for dealing with reality is to have multiple models in the head and then run reality against multiple models. I think it's a perfect disaster to look at reality through just one model or two. There's an old proverb that says to the man with only a hammer, every problem looks pretty much like a nail. And that is not a problem. our system. So I can't sit here and run through all the models in my head, even though there aren't that many. But multiple models is the game. The question about taxation, it would not, if we were running Berkshire absent a capital gauge tax,
[2:26:18]
Warrentax, I don't think it would make much difference in what we do. I don't think it would make, certainly it wouldn't make a difference in causing us to trade actively. We own the businesses we want to own. We don't own them because taxes have restrained us from selling them. And as I mentioned earlier, I'm fairly sure we'll pay at least a billion dollars in income tax this year. We might not, but it looks that way to me that we'll pay a billion dollars. And I could do things that at least deferred and I certainly could do things by doing nothing that avoided paying that billion in tax, or a good bit of the billion, call it 800 million of the billion. But that is not a big factor with me. It's never, it's never been a big deal with me. I paid my first income tax when I was 13, so I guess I got brainwashed at the time. And it doesn't, it doesn't bother me a lot to be paying taxes. I think I'm net personally. I'm undertaxed in relation to what the society is delivered to me. And, you know, I don't send along any voluntary payments to the IRS, I should understand. But I really do. I mean, there's nobody I want to trade places with, and because their tax situation is better than mine. And so it would not increase the activity. I've been asked to take one more question from Zone 10. I'm not sure why, but maybe because they see that I still have candy up here. So Zone 10, please, and then we'll break.
QuestionerMr. Buffett and Mr. Munger, my name is Sanjee Merchandani, shareholder from Boston. First of all, Thank you to both of you for everything. I have two questions. For you, Mr. Buffett, you obviously have filters that you apply on selecting people as you do on stocks. Can you tell us a little bit about what those filters are? Filters on people? Yes. In selecting, you have an ability to motivate people who have a lot of money to keep working. What do you look for to figure out who those people are?
WarrenWell, that is a key, key question because when we buy businesses, we don't have managers to put in them. I mean, we're not buying them that way. We don't don't have a lot of MBAs around the office that we're thank god yeah that i you know i have not promised that they're going to have all kinds of opportunities and so as a practical matter we need management with the businesses that we buy and three times out of four thereabouts the manager is the owner and is receiving tens of millions maybe hundreds of millions of dollars
[2:29:01]
Warrenso they're not they don't have to work and we have to decide in that time when we meet them, whether they love the business or love money. And we're not making a moral judgment, Charlie May, but I'm not making a moral judgment about whether it's better to love the business or love money, but it's very important for me to know which of the two is the primary motivator with them. And we have had extremely good luck in identifying people who love their business. And so all we have to do. do is avoid anything that on our part that diminishes that love of the business or makes other conditions so intolerable that they overcome that love of the business. And we have all, we have a number of people working for us that have no financial need to work at all. And they probably outwork, you know, 95 percent or more of the people in the world. And they do it because they just, they love smacking the ball. And we almost, we virtually had no mistakes in that respect. And we have identified a number of people, Charlie and I have, in terms of proposals to us, where we felt that they did really, they liked the money better than the business. They were kind of tired of the business, you know, and they might promise us that they would continue on and they would do it in good faith, but something would happen six months later, a year later, and they'd say to themselves, why am I doing this, you know, for Berkshire Hathaway when I got, when I could. to be doing whatever else they want to do. I can't tell you exactly how we, what filter it is that we, that we put them through mentally, but I can tell you that, that if you've been around a while, you can, I think you can have a pretty high batting average in coming to those conclusions, as you can about other aspects of human behavior. I'm not saying you can take 100 people and take a look at them and analyze their personalities or anything of the sort. But I think when you see the extreme cases, the ones that are going to cause you nothing but trouble or the ones that are going to bring you nothing but joy, I think you can identify those pretty well. Charlie?
CharlieWell, yeah, I think it's pretty simple. You've got integrity, intelligence, and experience, and dedication. And that's what human enterprises need to run well. And we've been very lucky in getting this marvelous group of a associate. to work with all these years. It would be hard to do better, I think, than we've done in that respect. Look around this place. I mean, and pretty you young people look around this place. Look at how much gratification can come into these lives, which have been mostly spent in deferring gratification. It's a very funny group of people, you shareholders.
OtherWell, on that note of self-congratulation, let's go have lunch, and we'll be back at a half an hour. Thank you.