[0:00]
WarrenAndy, if you're here and you can stand up, I think the crowd would like to say thanks. We have one other shall guess, too. After doing an incredible job for all Berkshire shareholders, and particularly for Charlie and me, Ralph Shea retired this year, but Ralph and Lucy, I believe, are here, and Ralph and Lucy would stand up by the shareholders, and I would like to say thanks. Scott Fetizer was one of the best acquisitions we ever made, but the reason it was among the very best was Ralph. And a great many of the other companies that we own now, our ownership was made possible because of the profit that Ralph delivered over the years. So thanks very much, Ralph. Now we will come to order. I will go through this fast. I'm Warren Buffett, Chairman of the Board of Directors of the company, I welcome you to this 2001 annual meeting of shareholders. I will first introduce the Berkshire Hathaway directors that are president in addition to myself. First of all, of course, it's Charlie on my left. And if you'll, the directors will stand when I give your name, Howard Buffett, Susan Buffett. She was the voice on the songs, the ones that were sang well. Malcolm G. Chase, Ronald L. Olson, and Walter Scott Jr. Also with us today are partners in the firm of Deloitte and Touche, our auditors. They are available to respond to appropriate questions you might have concerning their firm's audit of the accounts of Berkshire. Mr. Forrest Crudder's Secretary of Berkshire, and he will make a written record of the proceedings. As Becky Amick has been appointed an inspector of elections at this meeting. She will certify to the count of votes cast in the election for directors. The named proxy holders for this meeting are Walter Scott Jr. and Mark D. Hamburg. We will conduct the business of the meeting and then adjourn the formal meeting. After that, we will entertain questions that you might have. Does the Secretary have a report of the number of the number of the number of Berkshire? shares outstanding entitled to vote and representative at the meeting.
OtherYes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent by first-class mail to all shareholders of record on March 2, 2001, being the record date for this meeting, there were 1,343,041 shares of Class A, Berkshire Hathaway Common Stock Outstanding. With each share intel to one vote, a motion is considered at the meeting, and 5,5005,000.
[2:51]
Other791 shares of Class B, Berkshire Hathaway Common Stock Outstanding, with each share entitled the 1-200th of one vote, are motions considered at the meeting. Of that number, 1,116,384 Class A shares, and 4,507,896 Class B shares are represented at this meeting by Proxies Return through Thursday evening, April 26. Thank you. That number represents a quorum, and we will therefore present. Directly proceed with the meeting. First order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walters Scott, Jr., who will place a motion before the meeting.
QuestionerI move that the reading, the minutes of the last meeting of shareholders be dispensed with. Do I hear a second?
OtherThe motion has been moved and second. Are there any comments or questions? We will vote on this motion by voice vote. All those in favor say I? Opposed say by I'm leaving. The motion is carried. The first item of business of this meeting is to elect directors. If a share shareholders 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 is present has not turned in a proxy and desires a ballot in order to vote in person, you may do so. If you wish to do this, please identify yourself to meeting officials in the aisles who will furnish a ballot to you. With those persons desiring ballots, please identify themselves that we may distribute them. I now recognize Mr. Walter Scott, Jr. to place a motion before the meeting with respect to election of directors.
QuestionerI move with Warren E. Buffett, Susan T. T. Buffett. Howard G. Buffett, Malcolm G. Chase, Charles T. Munger, Ronald L. Olson, and Walter Scott, Jr., be elected as directors.
OtherIt has been moved in second of the Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm, J. Bacheace, Charles T. Munger, Ronald L. Olson, and Walter Scott Jr. be elected as directors. Are there any other nominations? Is there any discussion? The nominations are ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the election of directors and allow the ballots to be delivered to the inspector of elections. With the proxy holders, please also submit the inspector of elections, a ballot on the election of directors voting the proxies in accordance with the instructions they have received.
[5:07]
OtherMs. Amick, when you are ready, you may give your report.
OtherMy report is ready. The ballot of the proxy holders, in response to the proxies that were received through last Thursday evening cast not less than 1,126,480 votes for each nominee. That number far exceeds a majority of the number of the total votes related to the number of the total votes related 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. Amig.
OtherWarren E. Buffett, Susan D. Buffett, Huffett, Malcolm, G. Chase, Charles D. Mungard, Ronald L. Olson, and Walter Scott Jr., have been elected as direct. directors. The next item of business was scheduled to be a proposal put forth by Berkshire shareholder Bartlett Naylor. On April 20th, 2001, Mr. Naylor advised us he was withdrawing his proposal. Accordingly, we will not have the proposal presented at this meeting. After the adjourn of the business meeting, I will respond to questions you may have that relate to the business of Berkshire, but do not call for any action at this meeting. Does anyone have any further business to come before this meeting before we adjourn? If not, I recognize Mr. Walter Scott Jr. to place a motion before the meeting.
OtherI move this meeting be adjourned.
OtherMotion adjourned.
OtherMotion adjourned. We will vote by voice. Is there any discussion? If not, all in favor say aye. Opposed say no. The meeting is adjourned.
WarrenI ask you, am I getting slower in my old age?
QuestionerNo.
WarrenNow, the first, we're going to go, we have eight microphones strategically placed. We have the first two on my right, far back, three and four, and over to this back area over here, and then up front for the seven and eight. And if you have a question, just go to the microphone and queue up at the microphone and we'll keep rotating. Like I say, until noon, then we'll have a break, and then we'll start again around 1230 or thereabouts and go until 3.30. Now, first question in Area 1, we have a special guest. I received a letter from Mark Perkins on April 5th telling me about his. daughter who has been a shareholder since she was six months old, and she's going to be four in November, and she would like, Marietta would like to ask the first question.
[7:53]
WarrenAnd frankly, I take all the questions from four-year-olds and Charlie handles them from anybody that can round a little longer. So Marietta, if you've got the microphone there, would you ask your question, please? She said she was three, and she says, Berkshire Hathaway, fistful of dollars. And she says, what should we invest in now so that she'll be ready when she goes to college? What should she invest in or what should Berkshire invest in? And what should Berkshire invest in? Well, Berkshire, Berkshire would like very much to buy businesses of the same quality and with management of the same quality, and at prices consistent with the eight businesses that we bought over the last six. 16 or 18 months. Our first preference is and has been for many decades, although I would say most observers didn't seem to realize it, but our first preference has always to be buying outstanding operating businesses. And we've had a little more luck in that respect lately. We also own lots of marketable securities. We've bought many of those, for example, in the mid- 70s that did very well for us, but the climate has not been as friendly toward making money out of marketable securities. And we frankly prefer, we prefer the activities associated with owning and operating businesses over time. So what we hope to do, Marietta, is by the time you're ready to go to college, I would hope that, well, first of all, I'd hope I'm still around. But beyond that, I would hope that, I would hope that we would have, you'll be ready in about 14 years or so. I would hope that we would have another maybe 40 businesses or so that would be added, and I would hope that we would have every business that we have now. And I would hope we would not have more shares outstanding, or at least any appreciable number of more shares outstanding. And if we can get all that done, I think you'll probably be able to afford college. Charlie, do you have anything to add?
CharlieNo. And there's some things in life, Mary, that you can really count on.
OtherOkay, let's go to microphone number two.
QuestionerGood morning, Mr. Buffett, Mr. Munger. If you want to trade a share of Berkshire A for 30 shares of Berkshire B, as you had mentioned before, a personal stock split, or vice versa, is this considered a wash sale for tax purposes? Also, I'd like to ask you a question which you've heard before, but in a slightly different context. years ago, you said you had made a mistake by not buying shares of the major pharmaceutical
[11:15]
Questionercompanies around 1993. You cited their value to society, as well as their terrific growth, high profit margins, and great potential. You said that while you didn't know which companies would do the best, you could have made some kind of sector play because the entire sector had been decimated. These exact same words, including those about not knowing which businesses will dominate over time, can also be used to describe another industry which has recently been decimated. This industry is, of course, technology. How do you see these two investment ideas, pharmaceuticals, and 93, and technology now, and what difference in the two situations makes the first a good opportunity for Berkshire and the second not one?
WarrenWell, Charlie answers all the questions about mistakes, so I will turn the second question over to him. Personally, I think that the future of the pharmaceutical industry was easier to predict than the future of the high technology sector.
CharlieIn the pharmaceutical sector, almost everybody did well, and some companies did extremely well. In the other sector, where there are many permanent casualties in the high-tech sector. Yeah, I would say that there's certainly nothing obvious to us about the fact that the tech sector as a group, or viewed in aggregate would be a good buyer be undervalued, whereas we should have had enough sense to recognize that the pharmaceutical industry as a group was undervalued. But the pharmaceutical industry has a far better record of returns on large amounts of equity over time, and with a high percentage of the participants having those returns than the tech industry. I wouldn't regard those two as comparable at all.
QuestionerYour first question about exchanging and whether you have a washed sale, and I think you indicated exchanging from B into A, if you actually physically have a share of A and turn it in for 30 shares of B, that is not a taxable transaction. So there is no sale under such a circumstance. If you, there would be no reason unless the B was at a significant discount to actually sell the A and buy the B. But I, and I'm not giving tax advice on this, but I would. think that I think the tax code refers to substantially identical securities when they talk about wash sales. And I would think that the IRS would be entitled to at least raise the question if you had an A share, you were selling it a loss and replacing it with 30 shares
[14:02]
Warrenof B. You'd have a better argument than if you bought a share of A back the next day if you were establishing a loss. If you're establishing a gain, you'd have no reason. They're not worried about wash sales in that respect. You can't go from B to A. by exchange, which you could go by selling 30 shares of B in the market and buying a share of A. Again, if that were being done at a loss, I think the IRS could well argue that they were substantially identical, but you could argue otherwise. Charlie?
CharlieNo, no, I think the IRS would win.
WarrenYeah. Charlie might even go state's evidence, you know, if there was a fee for test. Okay, let's go to Zone 3.
QuestionerI'm Dan Blum from Seattle, Washington. As an insurance holding company, Berkser Haffirer as subject to regulation by insurance departments in every state in which Guy Coy or other insurance, etc., do business. Has that handicapped or affected your operations in any way? And do you have any trenchant or wise observations to make about governmental regulation in that context?
WarrenYeah, we've really not been impeded in any way by the fact that Berkshire Hathelah way itself is not an insurance company, but it owns various insurance companies. Of course, it owns a lot of other companies, too. But being the holding company of insurance companies, which indeed are regulated by the states in which they're admitted, it really is not slowed down any acquisition. They are not, whereas with the Public Utility Holding Company Act, under that statute, the authorities are directed to be concerned with the Act. of the holding company and in the banking business to some extent they are. In the insurance business, there's relatively little in the way of regulation or oversight that extends up to the holding company. So it is not slow this down in that business, but has been reported recently in the electric utility business, there's a statute from 1935, the Public Utility Holding Company Act. The acronym is that euphonious term puca. The Public Utility Holding Company Act has a lot of rules about what the parent company could do. And that act was put on the books because the holding companies of the 20s, most particularly ones that formed by Sam Insull, but there were others. There were many abuses and a good many of those abuses involved what took place at the holding company. So it was quite understandable that that act was passed in the 30s and it achieved a pro-social purpose
[17:00]
Warrenat the time. I don't think there's anything, frankly, pro-social about limiting Berkshire's ability to buy into other utilities. We can buy up to 5% of the stock, but we might well in the last year or two have bought an entire utility business if we're not if that statute weren't present. So we are handicapped by the utility holding company statute. We are not handicapped, in my view, by any state insurance statutes.
CharlieNothing to add.
OtherZone 4. Good morning.
QuestionerGood morning. I'm Steve Bloomberg from Chicago. I have two questions regarding insurance operations. With regard to the reinsurance contracts, which were written at what some consider and call good losses, You've discussed those insurance contracts in your report, indicating that it's generated $482 million of losses in the year 2000. Do we need an annual schedule disclosing the aggregate, amortized charges of all current and past such deals to make our adjustments to reflect economic reality?
WarrenWell, there are two unusual type deals, and you refer to one type, what I call the pain today, gain tomorrow, or good losses type deals. And under the deals you are describing, we record a usually quite significant loss in the current year, and then we have the use of float for many years to come, and there are no subsequent charges against that. So in respect to those contracts, the important thing is that we tell you, and we should tell you, really every quarter if they're significant and certainly yearly, any significant items that fall in that category. And as you mentioned, you know, we had over $400 million last year. We had a significant amount the year before. We have not had a significant amount this year. I think in the first quarter there may have been a $12 million charge for one of those. If they're significant, we're going to tell you about them. It's a one-time adjustment in your mind that, in effect, you should regard as different than any other type of underwriting loss that we experienced because we willingly enter into these. We take the HIPP the first year and accounting calls for that, and over the life of the contract, we expect to make money, and our experience would be that we do make money. But we'll tell you about any significant item of that sort so that you will be able to make an adjusted cost of float. I reported our cost of float last year. at 6%, which is high. It's not unbearable, but it's high, very high.
[20:01]
Ajit JainAnd included in that 6% cost was about a quarter of it, came from these transactions that distorted the current year figure. And therefore, our cost of float, if we hadn't willingly engaged in those transactions, would have been about 4.5%. I should mention. to you that I expect that our cost to float, I said in the annual report, that absent a mega catastrophe, and I might define a mega catastrophe as insured losses, we'll say, of 20 billion or more or something on that order, absent a mega catastrophe, we expect that our cost of float to come down this year, and I said perhaps substantially. In the first quarter, our cost of float will probably run just a touch under 3 percent. and on an annualized basis. And I think that, I think the trend is in that direction absent a mega catastrophe. I would expect the cost of float actually to come down substantially this year. But if we were to take on some of these gain, pain today, gain tomorrow transactions, and we don't have any in the works at the moment, but if we were to take those on, then it would be reflected in our cost to float, and we would lay out the impact of that sort of transaction. Charlie?
CharlieYeah, I think almost all good businesses have occasions where they're making today look a little worse than today would otherwise be to help tomorrow. So I regard these transactions as very much the friends of the shareholders. We have a second type of transaction just to complete, which we also described in the report, which also creates a large amount of float, but where accounting rules spread the cost of the cost of the that transaction over the life of the float. And those do not distort the current year figures, but they do create an annual charge that exists throughout the life of float. And that charge with us is running something over $300 million a year. But there again, it's a transaction that we willingly and enthusiastically engaged in. And that has this annual cost attached to it. So when you see our cost to float at 3% annualized in the first quarter, it includes probably a $80 million charge or so relative to those retroactive insurance contracts which were the second kind described in the report. I recognize this accounting is, you know, and even the transactions are somewhat Greek to some of you, but they are important in respect to Berkshire. So we do want to lay them out in the annual report for those who want to do their own calculations
[22:54]
Questionerof intrinsic value. Zone 5. Good morning, gentlemen. My name is Jay. Parker, I'm from Washington State. And this question regards mistakes. So that being the case, it should probably be directed to Mr. Munger. Mr. Munger, I know you're fond of evoking humility to promote rational thought. So my question is, what's the most recent business mistake that you've made, Mr. Munger, and why did it occur?
WarrenI'm going to take notes on this one.
CharlieThe mistakes that have been most extreme in Berkshire is. history are mistakes of omission. They don't show up in our figures. They show up in our figures. They show up in opportunity costs. In other words, we have opportunities. We almost do it. In retrospect, we can tell that we were very much mistaken not to do it. In terms of the shareholders, those are the ones in our history that it really cost the most. costs the most. And very few managements do much thinking or talking about opportunity costs. But Warren, we have blown billions and billions and billions. I might as well say it.
WarrenRight, right.
CharlieAnd we keep doing it. Some might say we're getting better at it. I don't like mentioning the specific companies because the, you know, we may in due course want to buy them again and have an opportunity to do so at our price. But practically everywhere in life and in corporate life too, what really costs in comparison with what easily might have been are the blown opportunities. I mean, it's an awesome amount of money. When I was somewhat younger, I was offered 300 shares of bell-rege oil. An idiot could have told that there was no possibility of losing money and a large possibility of making money. I bought it. The guy called me back three days later and offered me 1,500 more shares. But this time I had to sell something to buy the damn belleridge oil. That mistake, if you traced it through, has cost me $200 million. And it was all because I had to go to a slight inconvenience and sell something. Berkshire does that kind of thing, too. We never get over it.
WarrenYeah, I might add that when we speak of errors of omission, of which we've had plenty and some very big ones, we don't mean not buying some stock where a friend runs it or we know the name and it went from 1 to 100. That doesn't mean anything. It's only, we only regard errors as being things that are within our circle of competence. So if somebody knows how to make money in cocoa beans or they know how money would make money in a software company or anything,
[26:29]
Warrenand we miss that. That is not an error as far as we're concerned. What's an error is when it's something we understand and we stand there and stare at it and we don't do anything. Or worse yet, what really gets me is when we do something very small with it. We do an eyedropper's worth of it when we could do it very big. Charlie refers to that elegantly when I do that sort of thing is when I'm sucking my thumb. And they're really, I mean, we have been thumb suckers. at times with businesses that we understood well, and it may have been because we started buying and the price moved up a little and we waited around hoping we would get more at the price we originally started. There can be a lot of things. But those are huge mistakes. Conventional accounting, of course, does not pick those up at all, but they're in our scorebook.
QuestionerZone 6, please. My name is Joseph LaPray. I am from Minneapolis, Minnesota. In recent years, tobacco companies have been compelled to pay large damages for marketing their unhealthy but discretionary products. My question has two parts. First, does the potential for similar damage liabilities reduce the intrinsic value of Coca-Cola, seize candies, dairy ques, or any other business which sells discretionary products of questionable healthfulness. Not that I don't like these products. And second, are either of you concerned that a possible erosion in the principle of caveat emptor is undermining the legal basis of contracts in general? Thank you for taking my question.
WarrenWell, the products you described I've been living on for 70 years, so So they'll probably haul me in as a witness that they don't do much damage. No, I think, you know, if you're opposed to sugar, and I think the average human being eats something like 550 pounds dry weight of food a year, and I think 125 pounds are thereabouts. It consists of sugar in one form or another. I mean, it's in practically every product that you have. And it happens to be in Coca-Cola, it happens to be in Seas Candy, but it's in practically everything you're... I mean, it's over 20% of what Americans are consuming one way or another, and, you know, the average lifespan of Americans keeps going up. So I would not be worried at all about product liability in connection with those companies. But product liability generally is an area that is a fertile field for the plaintiff's bar, and, And we are conscious in buying into businesses, and we have passed up some businesses,
[29:41]
Warrenbecause we were worried about the product liability potential. Unless there is some legislative solution, I think you will see more and more of the GDP going into liability awards and whether there will be any chance. changed by legislation, I don't know. But it's, you know, it's a big field. And the lottery ticket aspect of it is so attractive because if an attorney can gamble a modest amount of time or even a reasonable amount of time and have a potential payoff of 10 or 20 or maybe in some cases hundreds of millions of dollars, you know, that's a decent lottery ticket. Who knows what 12 people, you know, are going to be on the jury. As one of my friends as a lawyer said, you know, he said, Lincoln said, you can fool all the people. some of the time and all of the people and all of the people, some of the time, but not all of them all the time. He says, I'm just looking for 12 that you can fool all of the time, you know, and all you have to do is get an award. And the odds are fairly favorable in a nation where lots of zeros have sort of lost meaning to people. So it's a very real concern in any business we get into in terms of trying to evaluate product liability. What's particularly pernicious is the increasing political power of the plaintiff's contingency bar. If you're on a state Supreme Court, in most places you're on for life, if you're on for life, if you want to stay for life, and the one thing that could get you off the court would be to really to irritate some important group. And I think that greatly helps a lot of abusive conduct in the courts. I think the judges of the country haven't been nearly as tough as they should be on junk science, junk economic testimony, trashy lawyers. And I don't see many signs that it's getting better. In Texas, they actually eventually improved the Supreme Court of Texas, which really needed it. So there are occasional glimmers of life. We make our decisions in insurance and in buying businesses with a very pessimistic attitude toward the chances of that particular ill that Charlie described being even moderated. I mean, we think if we would project out that the trend would accelerate, but that's just our natural way of building in a margin of safety in decisions. Don't worry about eating the Seas Candy or the Dairy Queen or the Coke. If you read the papers long, I use a lot of salt, and, you know, I was always being warned about that.
[33:06]
QuestionerAnd then, you know, a few years ago they started saying, you know, you can't get enough salt and all that. I don't know what the answer is, but I feel terrific. Zone 7. Good morning. I'm Murray Cass from Markham, Ontario. The financial community relies heavily on the PE ratio when evaluating prospective investments. When you buy a company, you must certainly consider not just the future stream of earnings, but also the company's financial condition, among other things. My financial condition, I'm speaking mainly of cash and debt. But the PE doesn't take into consideration either cash or debt. Occasionally, you see a company with consistently positive free cash flow trading just over cash value, effectively giving away the future earnings. In cases like this, the PE looks terribly overstated unless adjusted for cash and debt. I've always preferred companies with oodles of cash to those burdened with lots of debt. And then I read Phil Fisher's book, Conservative investors sleep well. Well, I haven't slept well since. He really confused me when he commented that hoarding cash was evil. He wrote that instead companies should either put the cash to good use or distribute it to shareholders. Can I get your thoughts? on this?
WarrenWell, there are times when we're awash in cash, and there have plenty of times when we didn't have enough cash. Charlie and I, I remember in the late 60s, we were, when bank credit was very difficult, we were looking for money over in the Middle East. Do you remember that Charlie?
CharlieYes, they do.
WarrenYeah. And they wanted us to repay it in dinars.
CharlieYeah, and the guy that wanted us to repay them in diners or diners or what the hell they call them. was also the guy that determined the value of those things.
WarrenSo we were not terribly excited about meeting up with him on payday and having him decide the exchange rate on that date. But we obviously are looking every day for ways to deploy cash. And we would never have cash around just to have cash. I mean, we would never think that we should have a cash position of X percent. And frankly, I think these asset allocation things that that tacticians in Wall Street put out, you know, about 60% stocks and 30... We think that's total nonsense. So we want to have all our money working in decent businesses, but sometimes we can't find them, or sometimes cash comes unexpectedly, or sometimes we sell something, and we have more cash around than we would like.
[35:40]
WarrenAnd more cash around than we would like means that we have 10 or 15 cents around. Because we want money employed, but we'll never employ. Just employ it. And in recent years, we've tended to be cash heavy, but not because we wanted cash per se. In the mid-70s, you know, we were scraping around for every dime we could find to buy things. We don't like lots of leverage and we never will. We'll never, we'll never borrow lots of money at Berkshire. It's just not our style. But you will... You will... find us quite unhappy over time if cash just keeps building up. And I think one way or another we'll find ways to use it. Charlie?
CharlieI can't add anything to that.
QuestionerZone 8. Good morning. My name is Mark Dixon from Sarasota, Florida. And I'd like to thank you for providing this forum for all of us. It's wonderful. In past years, you've been very specific about some of the numbers related to Coca-Cola, Wells Far, Wells Fargo, Rockwood, specifically like with Coca-Cola cost of aluminum and sugar and all that that goes into the bottom line of Coca-Cola. Can you provide some of the specific numbers that go into some of your more recent purchases over the last couple years?
WarrenWell, they have such different characteristics. That's very difficult. I mean, we have service businesses such as flight safety and executive yet as a service business business. And, you know, in many of those companies, the big cost is personnel. I mean, we need people at a flight safety. We've got a lot of money invested in simulators. We'll put over $200 million into simulators this year, just as we did last year. So we have a big capital cost in that business. And then we have a big people cost because we are training pilots. And that's very person-on-person-person intensive. Net jets, part of executive, have yet very people intensive. I mean, we are absolutely no better than the people that interact with our clientele. You get into something like the carpet business, and maybe only 15% of your revenues will be accounted for by employment costs, and you're a very heavy raw material buyer. I mean, you're buying lots of fiber. And so it varies enormously by the kind of business here. I mean, when we're in the insurance business, you know, we're in the business of paying future claims. And that's our big cost, and that obviously involves estimates because sometimes we're going to pay the claim five, 10, or 20 years later.
[38:35]
WarrenWe're not going to know about it sometimes until 20 years later. So it's very hard to generalize among the businesses. If you're in the retail business, which we are in the furniture and jewelry in a significant way, purchased goods are obviously very important. We don't manufacture our own goods to any extent in those businesses. And then the second cost, of course, is labor in a business like that. But we don't have any notions as to what we want to buy based on how their costs are segmented. What we really are looking for is an enduring competitive advantage. I mean, that's what's going through our mind all the time. And then we want, obviously, top-notch people. running the place, because we're not going to run them ourselves. So those are the two factors we look at. We want to understand the cost structure, but Charlie and I can understand the cost structure of many companies. There's many we can't, but we can understand a good many companies. And we don't really care whether we're buying into a people-intensive business, a raw material intensive business, a rent-intensive business. We do want to understand it and understand why it's got an edge against its competitors. Charlie?
CharlieBasically, to some extent we're like the hedgehog that knows one big thing. If you generate float at 3% per annum and buy businesses that earn 13% per annum with the proceeds of the float, we have actually figured out that that's a pretty good position to be in. It took us a long time. Incidentally, I would hope that we would, and actually expect that absent a mega catastrophe, that 3% figure will come. come down over the next, well, in the near future. But a mega catastrophe could change all of that. I mean, if you had a $50 billion insured catastrophe, Tokyo earthquake, California earthquake, Florida, hurricane, we're in the business of taking those risks. We're the largest insurer, as you may know, of the California earthquake authority. I have a sister here who is from Carmel and she is to call me when the dogs and cats start running in circles. And so we're exposed to some things that could change, but absent to make a catastrophe, experience is going in the right way at both, at really at all of our insurance companies. And I would expect that to continue for a while, and then at some point I'd expect it to to reverse itself. Isn't that helpful?
OtherArea one. Please. Good morning.
[41:38]
QuestionerI'm Martin Weekend from Chevy Chase, Maryland.
OtherGood to have you here, Martin.
QuestionerThank you. Thank you for the wonderful shareholder weekend, and thank you for the leadership and education. You give your shareholders in the general public. My question, large airlines are in the news negotiating labor contracts. They claim they can't pass along rising labor costs to their customers. In the annual report, you say Executive Jet is growing fast and doing great. Executive Jet seems to be a lot. able to pass along its rising labor costs to its customers. Is this because Executive Jet has a rational compensation plan that keeps employees in line with billable services? If not, why does Executive Jet do well while the airlines experience troubles?
WarrenWell, the big problem with the airlines is not so much what their aggregate payments will be. The real problem is when you're in the airline business and your wage rates are out of line with your competitors. competitors. When you get right down to it, the figure to look at with an airline, among a lot of other things, but you start with the cost for available seat mile, and then you work that through based on the capacity utilization to get to the revenue per occupied seat mile. And the, you could have the cost per occupied seat mile. And you could have labor costs or any other cost. You certainly have fuel costs up dramatically for the airlines from a couple of years ago. As long as you're more efficient than your competitor and your costs are not higher than your competitor, people will continue to fly. It's when you get your costs out of line with your competitor, which was the situation that, or Charlie and I were directors of U.S. Air a few years back, and our cost per seat mile were far higher than competitors. And that was fine where we didn't have competitors on many of the short routes in the east. But as the Southwest airlines would move into our territory, and they had costs, we'll say, it's from memory, but they might have had costs of below $0.8 a seat mile, and our cost might have been $0.12 cents a seat mile. You know, that is, you're going to get killed eventually. They may not get to this route this year, but they'll get there next year or the year after. So if you're running a big airline, a day. Delta or United or whatever, if your costs are on parity or less labor costs than your other major competitors, that is much more important to you than the absolute level.
[44:24]
WarrenAnd the NetJets service is not really designed to be competitive with United Airlines or an American or something of that sort. It has a different group of competitors. And I think we have an absolutely terrific pilot force there, and we want them to be happy. But there's a lot of other ways. I mean, you want to pay them fairly, but with our pilots, for example, it's extremely important to them in many cases to be able to live where they want to and to work the kind of shifts that we can offer. So we attract them in many other ways than bidding against United Airlines or American Airlines. Big thing in, you just, you can't take labor costs that are materially higher than your competitor in a business that has commodity-like characteristics such as airline seats. You just can't do it over time. And you can get away with it for a while. But sooner or later, the nature of a capitalist society is that the guy with the lower costs comes in and kills you. Charlie?
CharlieThe airline unions are. really tough, and it's interesting to see a group of people that are paid as well as airline pilots with such a brutally tough union structure. That really makes it hard in a commodity-style business, and no individual airline can take a long shutdown without having considerable effects on habit patterns and future prospects. It's just a very tough business. by its nature. Passenger rail travel, even in a previous era, it was a pretty tough way to make a buck. And nothing is all that different with the airline travel. We hope that our services are preferred by customers more than one airline seat is preferred compared to another.
WarrenYeah, fractional ownership is not a commodity business. I mean, the people care enormously. about service and the assurance of safety. And I don't think that, you know, I don't think if you were buying a parachute, you'd want to necessarily take the low bid. And now, with the big commercial airlines, with millions and millions of passengers, people, I think, probably correctly assume that there's quite a similarity in both service and safety. But if you're in a business that cannot take a long strike, you're basically playing a game of chicken, you know, with your labor unions because they're going to lose their jobs, too, if you close down. So you're playing a game of chicken periodically. And it has a lot, there's a lot of games, you know, a lot of game theory that gets involved.
[47:47]
WarrenTo some extent, you know, the weaker you are, the better your bargaining position is, because it's a lot of game theory that gets involved. position is. Because if you're extremely weak, even a very short strike will put you out of business, and the people are on the other side of the negotiating table understand that, whereas if you have a fair amount of strength, they can push you harder. But it is a, it is no fun being at a business where you cannot take a strike. We faced that one time back in the early 80s, when there were, we were in kind of a death struggle in Buffalo. with the Courier Express. And when I bought the Buffalo News, actually Charlie did, he was stranded there during a snowstorm, and he got bored, so he called me and said, what should I do? I said, well, buy the paper. So we were in this struggle, but when we bought the Buffalo News, we had two questions of the management, and one of them, I can't tell you. But the second one was, we wanted to meet with the key union leaders. and we wanted to tell them, look it, if you ever strike us for any significant length of time, we're out of business, you know, you can make our investment valueless. So we really want to look at you in the eye and see what kind of people you are before we write this check. And we felt quite good about the people, and they were good people. And we had one situation in 1981 or thereabouts where a very, very small union, I think, less than 2% of our employees, over an issue that the other 10 or 11 unions really didn't agree with them that much on. But they struck, and the other unions observe the picket line, which you would expect them to do in a strongly pro-union town, such as Buffalo. And I think, as I remember, they struck on a Monday, and I remember leaders of some of the other unions actually with tears in their eyes over this, because they could see it was going to put us out of business. And frankly, I just took the position then. I said, look, if you come back in a day, I know we're competitive. If you come back in a year, I know we will not be competitive. And if you're smart enough to figure out where exactly the point is that you can push us to to and still come back and we have a business and you have jobs, I said, you're smarter than I am. So, you know, go home and figure it out. And they came back in on Thursday, and we became very competitive again. But they could have – I mean, it was.
[50:25]
Warrenout of my hands. I couldn't make them work. And if they decided they were going to stay out long enough, we were not going to have a newspaper. And that's the kind of situation occasionally you find yourself in. And I would say the airline industry is a good example of people, where people find themselves in that position periodically.
WarrenCharlie, any way?
CharlieWell, the shareholders may be interested to know vis-vs-a-competitive advantages in our NetJet's program, that the day that other charter plane crashed in Aspen, net jets refused to fly into Aspen at all. People remember that kind of thing.
WarrenYeah.
QuestionerZone 2. Good morning, gentlemen. David Winters from Mountain Lakes, New Jersey. Thank you for hosting Woodstock for capitalists. Berkshire seems to have an enormous long-term advantage in spite of its large size and high equity prices. The structure of the company's activities, non-callable capital, substantial free cash flow, and improving insurance fundamentals permit Berkshire to capitalize on potential asset price declines and dislocations in financial markets, well, most investors would not either have the money or the cool minds to buy. Am I on the right track here?
WarrenWell, I think in certain ways you are. I mean, we do have, but we do have disadvantages, too, but we have some significant advantages in buying businesses over time. We would be the preferred purchaser, I think, for a reasonable number of private companies and public companies as well. And our check's clear. So we will always have the money. People know that when we make a deal, it will get done, and it will get done as fast as anybody can do it. It won't be subject to any kind of. Second thoughts or financing difficulties, and we bought, as you know, we bought John's Manville because the other group had financing difficulties. People know they will get to run their businesses as they've run them before if they care about that, and a lot of people do. Others don't. We have an ownership structure that is probably more stable than any company our size or anywhere near our size in the country, and that's attractive to people. So, and we are under no pressure to do anything dumb. You know, if we do things dumb, it's because we do things dumb. And it's not, but it's not because anybody's making us do it. So those are significant advantages. And the disadvantage, the biggest disadvantage we have is size.
[53:25]
WarrenI mean, it is harder to double the market value of a $100 billion company than a $1 billion company using our, what we have in our arsenal. And that isn't, I hope it isn't going to go away. I mean, I hope we don't become a billion-dollar company and enjoy all the benefits of those. And I hope, in fact, we have the agony of becoming, you know, a much larger company. So you're on the, you are on the right track, whether we can deliver or not to another question. But we go into combat every day armed with those with those advantages. Charlie?
CharlieYeah. This is not a hog heaven period for Bercher. The investment game is getting more and more competitive. And I see no sign that that is going to change. But people will do stupid things in the future. There's no question why. I mean, I will guarantee you sometime in the next 20 years that people will do some. stupid things in equity markets. And then the question is, you know, are we in a position to do something about that when that happens? But we do, we continue to prefer to buy businesses, though. That's what we really enjoy.
WarrenWhen Charlie mentioned hog heaven, I thought we ought to open the peanut brittle here, which I recommend heartily. Zone 3. Good morning. Mo Spence from Waterloo, Nebraska. You've often stated that value in growth. are opposite sides of the same coin. Would you care to elaborate on that? And do you prefer a growth company that is selling cheap or a value company with moderate or better growth prospects?
QuestionerWell, actually, I think you may be misquoting me a bit. I've really said that growth in value, they're indistinguishable. They're part of the same equation. Or really, growth is part of the value equation. So there, our position is that there is no sense. such thing as growth stocks or value stocks, the way Wall Street generally portrays them as being contrasting asset classes. Growth usually is a chance to, growth usually is a positive for value, but only when the, it means that by adding capital now, you add more cash availability later on at a rate that's considerably higher than the current rate of the, it means that by adding capital now, you add more cash availability later on at a rate that's considerably higher than the current rate of interest. So there is no, we don't, we don't, we, we, we calculate into any business we buy what we expect to have happen in terms of the cash that's going to come out of it or the cash that's going to
[56:22]
Warrengo into it. As I mentioned at flight safety, we're going to buy $200 million worth of simulators this year. Our depreciation will probably be in the area of $70 million or thereabouts. So we're putting $130 million dollars above depreciation into that business. Now, that can be good or bad. I mean, it's growth. There's no question about it. We'll have a lot more simulators at the end of the year. But whether that's good or bad depends on what we earn on that incremental $130 million over time. So if you tell me that you own a business that's going to grow to the sky and isn't that wonderful, I don't know whether it's wonderful or not, until I know what the economics are of that growth. How much you have to put in today and how much you will reap from putting that into that. day later on. And the classic case, again, is the airline business. The airline business has been a growth business ever since, you know, that Orville took off. But it's the growth has been the worst thing that happened to it. It's been great for the American public. But growth has been a curse in the in the airline business because more and more capital has been put into the business in adequate returns. Now, growth is wonderful. It sees candy because it requires relatively little like incremental investment to sell more pounds of candy. So it's growth, and I've discussed this in some of the annual reports, growth is part of the equation, but anybody that tells you you ought to have your money in growth stocks or value stocks really does not understand investing. Other than that, they're terrific people. Charlie?
CharlieWell, I think it's fair to say that Berkshire with a very limited headquarters staff, at that pretty old. We are especially partial to laying out large sums of money under circumstances where we won't have to be smart again. In other words, if we buy good businesses, run by good people at reasonable prices, there's a good chance that you people will prosper us for many decades without more intelligence at headquarters. And you can say, in a sense, that's growth stock investing. Yeah, if you'd asked Wall Street to classify Berkshire since 1965, year by year, is this a growth business or value business, a growth stock or value stock, you know, who knows what they would have said. But, you know, the real point is that we're trying to put out capital now to get more capital, or money, we're trying to put out cash now to get more cash back later on.
[59:10]
WarrenAnd if you do that, the business grows, obviously, and you can call that value. or you can call it growth, but they're not two different categories. And I just cringe when I hear people talk about now it's time to move from growth stocks to value stocks or something like that because it just doesn't make any sense.
QuestionerZone 4. Hi, my name is Steven Kopp from Irvine, California. I'm 10 years old and this is my fourth consecutive year here.
OtherTerrific. We're glad to have you here. Thanks.
QuestionerThis is my fourth consecutive year here. And how I got to owning stock is my dad taught me to start my own business, and I bought a Brookshire-Hathaway stock with my profits. In school, they don't teach you how to make and save money, not in high school or college. So my question is, how would you propose to educate kids in this area?
WarrenWell, that's a good question. Sounds to me like you could do a good job yourself, too. And I'm, you know, at 10, you're way ahead of me. Unfortunately, I didn't buy my first stock until I was 11, so I got a very slow start. And it's, you know, what it takes really is, and you find it in some classrooms and you don't and others. But it takes teachers who can explain the subject. Charlie would say Ben Franklin was the best teacher of all in that respect. But, you know, it looks like you either got it from your parents an education on that. parents can do more education, really in that respect, even than teachers. But it's, you know, I get a chance to talk to students from time to time. And, you know, one of the things I tell them is, you know, what a valuable asset they have themselves. I mean, you know, I would pay any bright student probably $50,000 for 10% of his future earnings the rest of his life. So he's a $500,000 asset just. standing there. And what you do with that $500,000 asset in terms of developing your mind and your talents is hugely important. The best investment you can make at an early age is in yourself. And it sounds to me like you're doing very well in that respect. I congratulate you on it. I don't have any great sweeping program for doing it throughout the schools, though. We have, here in Nebraska, we have an annual get-together of students from all the high schools throughout the state. And it's a day or two of economic education. I think it's a very good, a very good program. But I think if you just keep doing what you're doing, you may be an example of other students.
[1:02:10]
CharlieWell, I'd like to interject a word of caution. You sound like somebody who's likely to succeed at what you're trying to do. And that's not always a good idea. If all you succeed in doing in your life is to get early rich from passive holding of little bits of paper, and you get better at better at only that for all your life, it's a failed life. Life is more than being shrewd at passive wealth accumulation. I think he's going to do well in both. He's all in five.
QuestionerGood morning. My name is Thomas Kamai. I am 11 years old and from from Kenfield, California. This is my fourth annual meeting. Last year, I asked how the Internet might affect some of your holdings. Since a lot of the Internet companies have gone out in a business, how are you, has your view of the Internet changed?
WarrenWell, that's a good question. And I think that the Internet probably looks to most retailers like less of a competitive threat than it did a couple of years ago. For example, if you look at the jewelers who have been on the Internet, and in many cases, in several cases, at least, had very large valuations a couple of years ago. So the world was betting that they would be very effective competitors against brick-and-mortar jewelry retailers. I think that that threat has diminished substantially. I think that's been true in the furniture. business and both of those industries, very prominent dot-coms that had aggregate valuations in the hundreds of millions have vanished in short orders. So I would say that we think the Internet is a huge opportunity for certain of our businesses. I mean, GEICO continues to grow at a significant rate in Internet business. Seas Candies, internet business is up 40% this year. Last year was up a month. Last year was up a much larger percent from the year before, and it grows. And it'll continue to grow. So the Internet's an opportunity, but I think the idea that you could take almost any business idea and turn it into wealth on the Internet. Many were turned into wealth by promoting them to the public, but very few have been turned into wealth by actually producing cash results over time. So I think there's been a significant change. change in the degree to which I perceive the Internet as a possible threat to our retail businesses. There's been no change in the degree to which I regarded as an opportunity for other of our businesses.
CharlieCharlie? Warren, you and I were once engaged in the credit and delivery grocery business, and it was a terrible
[1:05:30]
Charliebusiness. It barely supported one family for a hundred years, with all of them working 90 hours a week. And somebody actually got the idea that was the wave of the future and turned it into a great internet idea. That can only be described as mania. And it sucked in a lot of intelligent people.
WarrenYeah, Charlie is talking about the infamous Buffett & Sun grocery store, which did barely support the family for a hundred years. And only then did we support the family by hiring guys like Charlie for slave wages. But I used to go out on those delivery trucks, and it was pretty damned inefficient. You know, people would phone their orders in. And now it's true we took them down with a pencil and an order pad instead of punching them into a computer. But when we started driving around the trucks and hauling the stuff off and everything, you know, we ran into the same costs that web van is running into now. And what the Internet offered was a chance for people to more. to monetize the hopes of others, in effect. I mean, you were able to capture the greed and dreams of millions of people and turn that into instant cash, in effect, through venture capital in the markets. And there was a lot of money transferred in the process from the gullible to the promoters. But there's been very little money created by pure internet businesses so far. It's been a huge trap for the public.
WarrenCharlie, any mind?
CharlieNothing more.
OtherZone 6. Thank you for taking my question. My name is Frank Jurvich. I'm from London, Ontario. It's great to see all the young people asking questions. I even have my own 11-year-old here, Matthew, this year. I first wanted to start by passing on a message from my wife to you, Mr. Buffett. And that is, thank you, Mr. Buffett. Thank you, Mr. Mr. Buffett for your autograph that Frank brought back last year. However, quite frankly, the ring in the Borschim's box you autographed was far more precious. You can repeat that if you'd like. My question relates to the future of Berkshire. Back in 1994, there was a PBS video interview of you at the Flagler Business School. And I believe you said Berkshire was not an insurance company. It appears that's not quite the case as much anymore. and I suppose insurance acquisitions will provide the financial fuel and the stability, the Johns Manville's in Mid-America, types of acquisitions will need for their future growth. But I'm hoping that you and Charlie can describe for us an anticipated future look at, say, 20 years out
[1:08:32]
Questionerof how Berkshire might be different and from how it is today. And perhaps a couple of the not so obvious problems that Berkshire will need to contend with. contend with. And thank you for all the apparently wonderful acquisitions you've made on our behalf in the last year.
WarrenWell, thank you. I think you ought to take your wife another ring, too. But thank you. We actually, as long ago as, I don't remember whether it was in the 1980 annual reporter, but at least 20 years ago, we did say that we thought insurance would be our most significant business over time. We had no idea that it would get to be as significant as it is. But we've always felt that that that was, we've always felt that that was, we were We would be in many businesses, but that insurance was likely to be our largest business. Right now, it's not our largest business in terms of employment. It's our largest business in terms of revenue. And we would hope it gets a lot bigger over time. We don't have anything in the works that would make that happen, although we will have natural growth in what we already own. But we will just keep acquiring things, and some years will, you know, we'll make make a big acquisition, some years we'll make a few small acquisitions. We'll do whatever comes down the pike. I mean, if there's a phone call waiting when this meeting is over and it's an interesting acquisition, it'll get done. We don't have a master plan. We don't, we don't, Charlie and I do not sit around and strategize or talk about the future of various industries or do anything of that sort. It just doesn't happen. We don't have any reports. We don't have any staff. We don't have any of that. We've, we try to look at at what comes in, we try to survey the whole financial field, we try to look at what comes in and look for things we understand where we think they have a durable competitive advantage, where we like the management and where the price is sensible. And, you know, we had no idea two or three years ago, you know, that we would be the 87 percent owner of the largest carpet company, broadroom carpet company in the world. You know, we just don't, we don't plan these things. But I would tell you in a general way that 20 or so years from now, we will own a lot more businesses. I would still think it likely, I mean, I think it's certain that insurance will be a bigger business for us in 20 years than it is now, probably much bigger. But I think
[1:11:03]
Warrenit's, and I think it's also likely it will be our biggest business still. But that could change. I mean, we could get a deal offered to us tomorrow that, you know, was a $15 or $20 billion deal. And then we've a lot of money in that industry at that point. So it's, we have no more master plan now than we had back in 1965 when we bought the textile mill, really. I mean, we had a lousy business. I didn't realize it was as lousy as it was when I got into it. And we had, you know, we just started to start trying to deploy capital in an intelligent way. But we've been deploying capital, you know, since I was 11. And, I mean, that, that is our, that's our business and we enjoy it. And we get opportunities to do it, but the bigger you are, the fewer the opportunities you're likely to get.
WarrenCharlie?
CharlieWell, I think it's almost a sure thing that 20 years from now, there'll be way more strength and value behind each Berkshire share. I also think it is an absolutely sure thing that the annual percentage rate of progress will go way down from what it has been in the past. No question about it.
OtherOn that happy note, we move to Zone 7. Good morning, Mr. Buffett, Mr. Munger. My name is Gary Rottstrom from right here in River City. I've been a shareholder since 93 and have loved every minute of it. Recently, there's been medication available to reduce cholesterol. My doctor even gave it to me since mine is kind of high. Every time I hear what you like to eat, Warren, it makes me wonder what your cholesterol level is. Or if you even worry about it. I think everyone here wants you to be with us for a long time, so have you considered taking this new medication to reduce your cholesterol level?
WarrenYeah, my doctor, I do know the number, and I don't remember, my doctor tells me it's a little high, but if he says it's a little high, it means it isn't that high. He would, because he always tries to push me into making a few changes in my life. But he, I've got a wonderful doctor. And I was lucky last year because I hadn't been in to see him for about five years. And due to, those guys cost a lot of money, I mean. And due to purely an accident, a reaction to some other medicine I was given when I was out of the city, he got a hold of me and then he shamed me into having a physical. And it was extremely lucky because I had a polyp. in the column that would have probably caused trouble, you know, within a couple of years.
[1:14:05]
WarrenI would say that if you ask my doctor, he would want me to make a few changes, but he would also say that my life expectancy is probably a lot better than the average person of 70. You know, I have no stress whatsoever, zero. You know, I mean, I get to do what I love to do every day. And I'm surrounded by people that are terrific. So that problem in life just doesn't exist for me, you know, and I don't smoke or drink or, well, we'll end it right there. So, you know, if you were an underwriter for a life company, you would make me considerably better than average. You'd make Charlie better than average, too. And I'm sure that, you know, it could change it slightly, perhaps, on the point. probabilities, you know, if I change my diet dramatically or something. But it's very unlikely to happen. Actually, when my mother got to be 80, you know, the most important thing in life in terms of how long you live is how long your parents live. So I got her an exercise bike when she got to be 80. She put 40,000 miles on it. And I told her to watch your diet and do all these things. And I mean, she lived to be 92. So, you know, she did her share. And I helped her do it by giving her the exercise bicycle. So I think that improved my odds at that point. Charlie?
CharlieYeah. I have a book recommendation, which will be very helpful to all shareholders that worry about Warren's health and longevity. And that's this book called Genome by Matt Ridgley, who was for years the science editor of The Economist magazine. And if Ridgely is right, Warren has a very long life expected. There are very interesting correlations between people who cause stress to others instead of suffering it themselves. And Warren has been in that position ever since I've known him. And the figures that Redley quotes are awesomely interesting. It is a fabulous book, of course. I'm recommending a bestseller, but they're selling it in the airport. It's called Gene. And you'll feel very good about Warren's future if you agree with the science of the book.
OtherZone 8. My name is Charlie Seek. I'm from North Carolina. Mr. Buffett, your article last year in Fortune Magazine was excellent. I'm thinking, well, I'm wondering what your thoughts are on American business profit margins and return on equity in the future. Also would like your thoughts about the some businesses today with their huge inventory write-offs. What your thoughts about those are?
[1:17:19]
WarrenYeah, well, in that article I talked about the unlikelyhood of corporate profits in the United States getting much larger than 6% of GDP. And historically, the band has been between 4% and 6%. And we've been up at 6% recently. So unless you think that profits as a part of the whole country's economic output are going to become a bigger slice of the pie. And bear in mind they can only become a bigger slice of the pie if other slices get diminished to some extent. And you're talking about personal income and items like that. So I think it's perfectly rational and reasonable that in a capitalistic society, the corporate profits are something like 6% of GDP. That does not strike me as outlandish in either direction. It attracts massive amounts of capital because returns on equity will be very good if you earn that sort of money. And on the other hand, I think it would be very difficult in the society to get where they'd be 10% or 12% or something in the sort because it just, it would look like an unfair division of the pie to the populace. So I don't see any reason for corporate profits. They're going to be down in the near future as a percentage of DEP from recently, but then they'll go back up at some point. So I think 10 years from now you'll be looking at a very similar picture. Now, if that's your assumption and you're already capitalizing those profits at a pretty good multiple, then you have to say that you have to come to conclusion that the value of American business will grow at a relationship that's not much greater than the growth in GDP. And most of you would estimate that probably to be, you know, maybe 5% a year, if you expect a couple percent a year of inflation. So I wouldn't change my thoughts about the profitability of American business over time. And I wouldn't change my thoughts much about the relationship of stock prices over time to those profits. So I, you know, I would come down very similarly. Now, interestingly enough, some of those same relationships prevailed decades ago, but you were buying stocks that were yielding you, perhaps, five percent. 5% or something like that. So that you were getting 5% in your pocket plus that growth as you went along. And of course, now if you buy stocks, you get 1.5% if you're the American public before the frictional cost. So that the same rate of growth produces a way smaller aggregate return. So, you know, I think stocks are a perfectly decent way to make 6% or 7% a year over the next 15 or 20 years.
[1:20:14]
WarrenBut I think anybody expects to make 15% per year or expects their broker or investment advisors. to make that kind of money is living in the dream world. And it's particularly interesting to me that back when the prospects for stocks were far better, I even wrote something about this in the late 70s, pension funds were using investment rate assumptions that were often in the 6% or thereabout range. And now when the prospects are way poor, most pension funds are using, building into their calculations, returns. of 9% are better on investments. I don't know how they're going to get 9% or better on investments, but I also know that they change the investment assumption down. It will change the charge to earnings substantially, and they don't want to do that. So they continue to use investment assumptions, which I think are quite unrealistic. And with companies with a big pension component in their financial situation, and therefore in their income statement, that can be quite significant. And it'll be interesting to me to see whether in the next couple of years, years where pension funds are experiencing significant shortfalls from their assumptions, how quickly they change the assumptions. And the consulting firms are not pushing them to do that at all. It's very interesting. The consulting firms are telling them what they want to hear, which is hardly news to any of us, but it's what's taking place. Second question about inventory write-offs, you know, that gets into the category entirely of big bath charges, which are the tendencies of management when some bad news is coming along to try and put all the bad news that's happened into a single quarter or a single year, and even to put the bad news that they are worried about happening in the future into that year. And it leads to real deception and accounting. The SEC has tried to get quite tough on that, but my experience has been that management's that want to do it usually can find some ways to do it. And management frequently are more conscious of what numbers they want to report than they are of what has actually transpired in a given quarter or given year. Charlie?
CharlieYeah. Pension fund accounting is drifting into scandal by making these unreasonable investment assumptions. It's evidently just part of the human condition that people extrapolate the recent past. And so since returns from common stocks have been high for quite a long period,
[1:22:57]
Charliethey extrapolate that they will continue to be very high into the future. And that creates a lot of reported earnings in terms of pension benefits that aren't available in cash and are likely not to be available at all. And this is not a good idea, and it's It's interesting how few corporate management have just responded like Sam Goldman include me out. You'd think more people would just say, this is a scummy way to keep the books, and I will not participate. And instead everybody just drifts along with the tide, assisted by all these wonderful consultants. Yeah, I don't think, I don't know of any case in the United States right now, and I'm sure there are some, but except for the pension funds that we take over, I don't know of any case where people. people are reducing their assumed investment return. Now, you think if interest rates drifted down several percentage points, that that might affect what you would think would be earned with money. It certainly is to bondholders or to us with float or something of the sort. But most major corporations, I believe, are using an investment return assumption of 9% or higher. And that's with long-term governments below 6%, you know, maybe high-grade corporates at 7. They don't know how to get it in the bond market. They don't know how to get it in the mortgage market. I don't think they know how to get it in the stock market. But it would cause their earnings to go down if they change their investment assumption. And like I say, I don't know of a major company that's thinking about it, and I don't know of a major actuarial consultant that's suggesting it to the management. It just, they'd rather not think about it. The way they're doing things would be like living right on an earthquake fault that was building up stress every year. every year and projecting that the longer it's been without an earthquake, the less likely an earthquake is to occur. That is a dumb way to write earthquake insurance. And the current practice is a dumb way to do pension fund planning and accounting. If you talk to a management or board of directors about that, you get absolutely no place. Oh, they, their eyes would glaze over before the hostility came.
QuestionerArea 1. Good morning, gentlemen. Mark Rabinow from Melbourne, Australia. I had a question on two of our key operating businesses. Firstly, Executive Jet, once this becomes a mature business,
[1:25:44]
Questionerwould it be fair to say that its net margin should be about 5%? And secondly, would it be fair to say that our current insurance businesses are likely to grow aggregate float at about 10% over 2%? 10% over time?
WarrenWell, it's really anybody's guess. I mean, I don't expect executive jet to become a mature business for decades. I mean, there's a whole world out there on that one. And we have something over 2,000 customers in the United States at the current time. We have a little over 100, but in Europe. But there are tens and tens and tens of thousands of perhaps hundreds of thousands. thousands of people that or businesses where it does make sense over time. So it's going to be a long time. I mean, there are only 700 roughly jets a year being produced. And of course up until a few years ago that was limited to people who wanted to buy single planes. But you won't change that output much in the next five years. But so you couldn't really take on, we can take on about 600 customers a year just in terms of the delivery schedule that we have built into our business. And we couldn't change that. We couldn't double that because the planes simply aren't available in the next year or two, although we have orders further out. But I would say it'll be a long time until Executive Jet is a mature business. And I would say that a long, long time. I mean, we're going to, when we get Europe, as we make progress in Europe, we'll move to Asia, we'll move to Latin America over time. over time. So we're going to be, I think, growing that business significantly for a very long time. When it becomes mature, or close to it, you know, if you're talking 5% after tax margins, I'd say that that's probably a reasonable figure, but we're so far away from even thinking about that that, you know, it's pure speculation. In our insurance business, we're We've grown our float and then we've purchased businesses to add to the float. This year, I would certainly expect, unless one of a big transaction would fall through or something, I would certainly expect our float to grow at least two and a half billion. And that is close to 10% of the beginning of the year float. That's a rational expectation. But whether it can grow 10% a year, you know, how far you've got? can do that. I would say the total float of the property casualty industry in the United States is probably, I'm pulling this out for making some other calculations in my head as I talk,
[1:28:45]
Warrenbut it wouldn't be much more than $300 billion. So we are close to 10% of the entire U.S. float now, and I don't think the U.S. float, the aggregate float, you know, is going to grow at a 10% rate. So when you're as big a part of the pie as we are, it may be a difficult to sustain a 10% rate. But we're doing everything possible that makes sense to grow float. I mean, that is a major, major objective, but the even bigger objective is to keep it low cost. I don't think you can see, unless the world changes in some way, I don't think you can see 10% growth over 25 years, but we'll do our darndest to get it at the rate you suggest for at least the near future. Charlie?
CharlieI agree that long term it's not going to happen. Good, but not that good. But we've been surprised at what's happened. I mean, there's no quite, I mean, when we bought Jack Ringwalt's company in 1967, you know, my memory is Jack had a float of, you know, less than 15 million. And would we have ever guessed that we might hit, you know, something close to 30 billion this year? We never dreamt of it, but we just kept doing things. And we'll keep doing things. And we'll keep doing things. But it. But it can't be It can't be at huge rates for a long period of time because we're too big a part of the pie now. We were nothing initially, and we kept grabbing a little more of the pie as we've gone along. And we like that, but it can't go on forever.
WarrenYeah, that's what I call really low-cost float. If it ever should be advantageous for us to go into what I would call higher cost float, that might change the figures upward in terms of growth of float. Yeah. Although that won't be. It could happen that we could take on incrementally some higher cost float under very special circumstances if we saw unusually good ways to use it. But that, we don't even like to think about that. We certainly don't want the people running our businesses to think about that because keeping it low cost, you know, that is the big end of the game. I mean, anybody can generate float. I mean, if we gave our managers a goal of generating $5 billion of float next year, they could do it in a minute. You know, and we would be paying the price for decades to come. You can write dumb insurance policies, you know. There's an unlimited market for dumb insurance policies. And they're very pleasant because the first day the premium comes in, and that's the last time you see any new money.
[1:31:24]
QuestionerFrom then on, it's all going out. And that's not our aim in life. Zone 2. My name is Shell Hagen. I'm a Norwegian working in Tokyo in Japan. I'm very very good. satisfied to have more than 95% of our family savings in Berkshire. I have two questions. In my work, I've seen a lot of insurance companies in Europe and Japan. And I think that Geico's business model is quite superior to most primary insurance companies in Europe and Japan. And I think that Geico would be very successful in Europe and Asia. So I'd like to hear what are the views and plans for Geico doing business in Europe and Asia. Second, regarding Coca-Cola, living in Japan, I noticed that Coke has a relatively low presence in advertising, although they are the largest player, with 30% market share versus 15 for the number 2. I think Coke is being too cheap on advertising, thus hurting the long-term position. I wonder if advertising strategy internationally is a high enough priority of Coke's management, and if the aggressive enough is sufficient. is sufficient. I'd like to hear if you have any comments on this. Also, I'd just like to thank you very much for this experience and for the wonderful company you have created. Well, thank you very much.
WarrenClearly, when you've got a business model that works as well as Geico has in this country and it continues to work well and has that fundamental advantage of being a low-cost operator, we think about every possible way that we can take that idea and extended. It's been remarkably hard to do it. I mean, the management has tried various things ever since Leo Goodwin started the company in 1936 to take it into other areas, and those efforts have been modestly successful in certain things like life insurance, but then they got out of it, and various other things. But it's an idea still, we have a, you know, we have 4% or so of the market in the United States. This market is so huge, and as well, we have a... so huge, and as we look at the drain on human resources involved in extending it into other countries, and we've looked at it a lot, and it may be something, we'll do it sometime, but we've never felt that the possible gain, considering the rigidities of these other, both in Europe and in Asia, of breaking in, it's not easy to get. It's not easy to get into those markets, and the cost, the time, we've just felt that it would be better to concentrate those same resources in this country.
[1:34:19]
WarrenIt's not a question of capital at all. I mean, we put the money in it a second. And we're doing it in something like NetJets in Europe. I mean, we, it's, there's a human cost to it, there's a financial cost to it. Financial cost bothers us not at all. Human cost is a real question because it gets back to Charlie's opportunity cost. We have talented managers, but we have a finite number of them. And I would rather have Tony Nicely and Bill Roberts and their crew focusing on how to gain additional market share in this country at the right rates than I would starting in a project in Europe or Asia now. But that's a very good question. It's something I can guarantee you we think about all the time. We'll continue to think about. We've tried to extend geography. Coke has been the most successful company in the world. company in the world in extending geography. We've tried to do it with Seas Candy, and it's had very limited success. I mean, we've tried 50 different ways because the trials are relatively cheap to do, and we think it should work. We just haven't been able to make it work. But it's a very good question. The question about Coke's advertising in Japan, as you know, Coke has a terrific presence in Japan. Japan's an interesting market because the percentage of of soft drinks sold through vending machines is just far, far, far higher than any place in the world. And the United States is a very distant second. And then the rest of the world, there's very little done in the way of vending machines. I don't know the specifics of the advertising in Japan, but of course, Doug Daft, who now is the CEO of Coke, comes with a huge background in Asia. I mean, that was his territory for much of his career. And Doug, we have a new major, very major advertising campaign coming up, and you probably read that Coke is going to spend $300 million plus additional on marketing beyond the normal spend, which is huge. And I can't tell you the specific markets in which that will be, but I would be surprised if Japan isn't a big part of it, because Japan is a big part of it, because Japan is an enormous market for Coca-Cola.
CharlieCharlie, I have nothing to add.
OtherZone 3, please. Hi, my name is Steve Rosenberg. I'm from Ann Arbor, Michigan. First, I just want to thank both of you for being two phenomenal role models I've really looked up to you both for a long time. My first question is about reinsurance.
[1:36:59]
QuestionerI believe that you're willing to write larger policies and reinsurance than anyone else, but that you still insist on the amount of your liability being capped. I'm wondering, your investments and companies that have exposure to asbestos. Have you somehow capped that or is that unlimited, especially given joint and several liability? My second question involves auto insurance, and I was wondering, does state farms structure as a mutual insurance company compensated or help it compensate for having a higher cost structure because over the long term, it need only remain solvent and not provide an adequate return on capital to its investors?
WarrenThe first question on asbestos, we have not put any significant money to our knowledge in any company that has any asbestos exposure. Now, you know, we have a small amount of money in USG where the subsidiary United States ships has a major asbestos exposure. But that's a very, very minor investment. And that would be the only one that I can think of. We've walked away from several deals that were quite attractive in every respect except asbestos, but that's like saying, you know, to a 120-year-old, you know, good health except for the fact that you're dead. So we don't go near asbestos. Now, in terms of our retroactive insurance policies, we are in the we are taking over the liabilities of companies that have lots of asbestos exposure. And in that case, we assume that those exposure, that those contracts will be paid in full. I mean, we make no assumption of any reduction in asbestos costs, but we do cap them. There's a couple of things you can't cap in insurance. You can't cap workers' compensation. losses. I mean, that they, you can as a reinsurer, but I mean, the primary insurer can't do that. I believe in auto, for example, in the UK, that it's uncapped. And I think that nobody thought that was very serious until they had a recent accident that caused, I think it involved a car doing something that, that, an auto doing something to a train that was unbelievable. So they there are a few areas where insurance is written on an uncapped basis. And in our case, we write some auto insurance in the UK, and we write some workers' compensation primarily in California. But generally, in the reinsurance business, you are capping the liabilities you take on. I mean, obviously, when we bought General Re, they had asbestos liabilities from reinsurance contracts
[1:40:10]
Ajit Jainthey had written, but the reinsurance companies are pretty careful about writing unlimited policies. We write huge limits. We're the biggest, you know, if somebody wants to write a huge limit or an unusual limit, they should call us because there's no one else in the world that will act as big or as promptly as we will. But we don't write things that are unlimited. Now, the interesting thing is that the biggest exposure. in our view are the people who write a lot of primary business and don't have the catastrophe cover they need. I mean, if you write 10% of all the business and homeowners or 15% on Long Island or in Florida, I mean, you were writing a catastrophe cover that would blow your mind. If you're Freddie Mac or Fannie Mae and you're guaranteeing mortgages, you know, for millions of people in areas like that, and they don't have insurance, earthquake in California or proper insurance in Florida, they'd be less likely to have earthquakes someplace. You are taking on enormous risks. I mean, huge risk, far beyond what we would ever take on. They just, but you don't get paid for them, unfortunately. I mean, just take the New Madrid section of Missouri down in the corner. That was the area of three of the greatest quakes. They're sort of related in time. And certainly in the recorded history, they were the three greatest quakes in the United States. You know, how much homeowner's business, how much commercial property business do somebody have in that huge territory, which, you know, supposedly caused church bells to ring in Boston when it happened back in whenever it was 1807 or 9 or something like that. So there are all kinds of risks that can aggregate in huge ways that companies are not thinking about at all. I mean, I don't know whether Freddie Mac or Fannie Mae, for example, is demanding that all of the homes they insure in the 300 miles radius of New Madrid have earthquake insurance. But, you know, that sort of thing never comes to mind until the unthinkable happens. But in insurance, the unthinkable, always happens. State Farm, as a competitor, is a mutual company. a mutual company and it has a huge amount of net worth. You referred to them as a high cost operator or a higher cost, but they're really a relatively low cost operator. But they're not anywhere near as low cost as GEICO, but they're a low cost operator compared to many people in the insurance business. And it's certainly true that they do not have the demands for profitability, partly because they've done such a great job in the past and build up so much surplus. I have nothing but basically good things to say about what State Farm has done over
[1:43:11]
Warrenthe years. They do not need, they can subsidize to some extent, current auto policyholders, with the profits that were derived from auto policyholders of the past. But that's always true when a stock company competes with a mutual company. And, you know, we know that when we go in the business. And that's true of, there are a lot of other mutual companies out there that operate without the demands of earning a high return on capital. But if I were State Farm, I'd probably be doing what they're doing. I don't criticize them at all. Charlie?
CharlieI don't criticize State Farm either. State Farm is one of the most interesting business stories in the United States. The idea that it could get as big as it is and has as good a distribution system as it does. It's a thoroughly admirable company. In fact, Berkshire has bought insurance from State Farm, not auto insurance. Geico still has a, it has a lower cost structure. I mean, it is a great... great business operation. And we have invested significantly to build that because it is so attractive. And as I pointed out in the annual report, the incremental investment we made last year did not produce the same results as incremental investments in previous years. So we are finding it hard to grow the business under current circumstances on a basis that we would like to. But it's a wonderful business. And it's a wonderful business. And it's It has, you know, it has a business model that I wouldn't, you know, I wouldn't trade for anything.
QuestionerZone 4. Hi, Mr. Buffett, Mr. Munger. My name is Dan Sheehan from Oakville, Canada. Following up on your discussion about Geico, you've often talked about their advantages as a direct seller and investor of float. My question is how do you control claims, claim costs versus your competitors other than through good underwriting? Some who may have advantages in terms of economies of scale or cutting corners you won't do. And this might allow them to eliminate some of the advantages you've gained on the other side of the combined ratio. And my second question is, you've said it's hard to be smarter than your dumbest competitor. And along that line, what are your thoughts about a recent Wall Street Journal article about a major airline getting into the fractional jet business? Thank you.
WarrenI don't worry about the dumbest competitor in a business that's service. The customer will figure that out over time.
[1:45:57]
WarrenAnd we have a huge advantage in the fractional ownership business. I mean, we have 265 planes flying around now, and you can get one on four hours notice at any one of 5,500 airports. We have planes in Europe for our American customers. We have planes here for our European customers, and nobody's going to catch us, in my view. in my view, in fractional ownership. And we've had some dumb competitors in the past in that business. And, you know, they bleed. And to the extent, you know, we've got more blood than they have. In the question of GEICO and underwriting, you know, it's a fascinating business because there are, in this audience, audience, there are people with hugely different propensities to have an accident. And of course, most people figure they're better than average. Now, part of the propensity to have an accident will depend on how many miles you drive. Obviously, somebody never takes the car out of the garage, is no matter what their driving skills might be, is not going to have an accident. They drive 10 miles a year. You know, you're pretty safe with almost anybody. So there's a relationship to miles driven, but there's a relationship to all kinds of other things. And the trick in its insurance is being able to figure out the variables and not have them too many because you still have to get people to fill out a form and you don't want something that has practically no significance. But the trick is to find out what questions you need to ask to determine in which category to place people as to their propensity to have an accident. Now in the life insurance business, you know, even Charlie and I have figured out that the older you get, the more likely you are to die in a given year. Now, that's not the only factor, but everybody understands that. The older you are, the mortality risk go up. And they've learned a few other things. They've learned that that females live longer than males. Now, that doesn't get into a judgment as to why or anything else. You just know it. So you build that in if you're pricing the product. And then you know a whole bunch of other things. You may even know that cholesterol's bad, you know, that makes a difference in terms of predicting the mortality. But in the auto insurance business, There are lots of variables that correlate with the frequency with which a person will have an accident per mile driven. And the more experience you have with a large body of people
[1:48:34]
Warrenwhom you've asked a lot of questions about and can draw conclusions there from the better off you are. State Farm has got a wonderful body of information. I mean, their actuarial judgments should be better than anybody else's because they've got more experience with more cars and drivers. But our experience with close to 5 million policyholders enables us, I think, to underwrite quite intelligently. But every day, you know, we're looking for some variable that will tell us more. People with a good credit history are better than drivers by a significant margin to be with a lousy credit history. Why? We don't care too much why, because it wouldn't help it. What we really know, what we really need to know, it needs to know, it needs to be able to. What we really need to know is that the two factors correlate and we're looking for correlations all the time and we're trying to avoid spurious correlations, which you can have. And it's, you know, it's a moving target. You keep working on it all the time, but we're better at it than we were five years ago and we'll be better at it five years from now than we are now. When we go into a new state, we will have a very small body of policyholders. And some of the factors obviously prevail over all. prevail over all states, but there's certain things that you learn actually only if you're in a given state for a while. You know, you're more likely to have an accident if you're everything else being equal. If you're an urban driver, city driver, in a big city, than if you're driving in an area that's very rural where the density of other cars is very low. If you're the only guy in the county with a car, you know, you're not going to have a lot of two-car accidents. So the underwriting question is all important. And vast, fair settlement of claims is very important because people who really weren't injured start feeling worse and worse as they talk to more and more lawyers. So, you know, the claims, the claims delivery is a vital part of running a good property casualty operation. And all I can tell you is at GEICO that we think very hard about those things, but we'll be thinking about tomorrow as well as today. Charlie?
CharlieWell, vis-a-vis the fractional jet ownership program, which has been announced for United Airlines, I find that very interesting. A senior United Airlines pilot now makes about $300,000 a year plus fancy fringes, including pension.
[1:51:16]
WarrenAnd what he does is work a very limited number of hours a month, and about half of that he's been sleeping in a comfortable bunk on long ocean flights. That is not a culture that will work well in fractional jet ownership. Maybe they think they'll get some advantage in recruiting new pilots or something. I don't know why they're doing it. I would not have done it. Well, they haven't done it yet either, but the, many of the airlines have organized second companies to take care of commuter flights and all of that. You know, that does produce problems when the pilots of the subsidiary start comparing their benefits to the pilots, you know, of the parent and all that. I mean, they try to get lower cost structures by doing that, but I would guess that if you were wanting to set up a fraction ownership company, that, that, and you were, you would probably not think about trying to align yourself with somebody that has extremely high costs in other areas. And the advertising campaign will be kind of interesting, too, that, you know, give up first-class travel, start traveling right, you know, or something. It'll be interesting. But I would tell you that we have we have competitors in the fractional ownership business, the two largest being companies that are part of a plane manufacturers, and you can understand why they went into it. But it is not an easy business. And we've got the best hand, frankly.
QuestionerZone 5. Michael Wong, San Diego, California. First of, I would like to thank both of you. My question is, when you started your business, why you started investment partnership instead of a mutual fund? And also, can you recommend a good book or books regarding how to start an investment partnership fund and how to service clients, et cetera?
WarrenYeah, I don't know about any books on starting partnerships or hedge funds. Do you know, Charlie?
CharlieNo, but people seem to manage to create them without the books. The incentives are awesome.
WarrenYeah. And the one thing, I mean, it's always interesting to both of us, how you get certain things that are fashionable, and people think that by naming something, a given name that somehow that makes everybody smarter or able to make money in it, I mean, there is no magic to private equity funds, international investing, hedge funds, all of the baloney that gets promoted in Wall Street. But what happens is that certain things become very promotable.
[1:53:58]
Warrenusually because there's been recent successes by other people and that the new entrants extrapolate the successes of a few people in the past to promote new money from people currently. So they adopt titles that, you know, that they think will attract money. And they, but it doesn't make anybody any smarter if they hang out a shingle in front of their house that says hedge fund, or they have a shingles as asset allocation firm or something of the sort. The form doesn't create talent. I backed into the business. I mean, I had worked for a mutual fund, closed-end investment company. In fact, there's a fellow here today. It's a friend of mine that the two of us worked there and we were 40% of the whole company because there were three other people, all of whom outranked us considerably. And that firm was Graham Newman Corp from 1954 to 1956. And it was a regulated investment company. It was about $6 million in assets, which seemed like a big deal at the time. And Ben Graham was one of the best known investors in the world, and he had $6 million in his fund. there was a sister partnership called Newman and Graham, which operated in what would today be called hedge fund style as far as a partnership split of the profits and so on. And when I left there in 56 and I came back here, we had seven people, a couple of whom are here in the room, who said, do you want to manage money? And I said, well, here's what I learned at Graham Newman, that Newman and Graham is a better way to do it than Graham Newman. So I formed a little partnership. And then I met Charlie a few years later, and he figured if I was making money doing it, he'd make a lot more. So he formed one, and that was the carefully calculated strategy of how we both became involved in the partnership business. Charlie?
CharlieYeah, it is amazing how big the hedge fund industry has has become, they have conventions on the subject now. And in the late 20s, you could take a course in how to run a crooked security pool. And these things come in great wages. I'm not suggesting the hedge funds are crooked. But I am suggesting that you get these waves of fashion that go to great extremes. The amount of money, what is it now, Warren, and hedge funds? It's very big, although it's a little less in a few quarters than it used to be. But I would be willing to put a lot of money up that if you take the aggregate experience of all hedge funds that as starting right today and going for the next 15 years, I would bet
[1:56:43]
Charliea lot of money that will not hit 10 percent in terms of return to partners. And I would, if you push me, I would bet on a lower figure than that. Then you have Bernie Cornfeld's idea, the fund of funds. There are people who want to get paid for selecting hedge funds for other people. And that didn't work very well for Bernie Cornfield. Well, it worked pretty well for Bernie for a while, but it didn't work so well for his investors, actually.
WarrenYeah, that result was probably something Bernie had in mind at the start, maybe.
QuestionerZone 6. I'm Michael Zenga from Denver, Massachusetts. That's a town who's banned Mr. Buffett so generously sent to the Rose Bowl parade last year, so you're a very popular guy in my town. Good morning. Mr. Buffett and Mr. Munger. Mr. Buffett, I wanted to ask you this question last week when I ran into you after Gillette's annual meeting, but I choked. So now there's no pressure, here it goes. In the years from my reading, in the years from 1956 through 69, you achieve the best results of your career quantitatively, 29% annually against only 7% for the Dow. Your approach then was different than now. You look for lots of undervalued stocks with less attention to competitive advantage or favorable economic. and sold them rather quickly. As your capital-based grew, you switched your approach to buying undervalued excellent companies with favorable long-term economics. My question is, if you're investing a small sum today, which approach would you use?
WarrenWell, I would use the approach that I think I'm using now of trying to search out businesses that were I think they're selling at the lowest price relative to the discounted cash they would produce in the future. But if I were working with a small amount of money, the universe would be huge compared to the universe of possible ideas I work with now. You mentioned that 56 to 69 was the best period. Actually, my best period was before that. It was from right after I met Ben Graham in early 1951, but from the end of 1950 through the next 10 years actually returns average to about 50% a year. And I think they were 3,000. 37 points better than the Dow per year or something like that. But I was working with a tiny, tiny, tiny amount of money. And so I would pour through volumes of businesses and I would find one or two that I could put $10,000 into or $15,000 into that was just ridiculous, they were ridiculously cheap.
[1:59:26]
WarrenAnd obviously as the money increased, the universe of possible ideas started shrinking dramatically. The times were also better for doing it. that time. But I think that I think if you're working with a small amount of money with exactly the same background that Charlie and I have and same ideas, same whatever ability we have, you know, I think you can make very significant sums, but you, but as soon as you start getting the money up into the millions, many millions, the curve on expectable results falls off just dramatically. But that's the nature of it. And you've got a lot, you know, when you get up the things you can put millions of dollars into, you've got a lot of competition looking at that, and they're not looking as I did when I started. When I started, I went through the pages of the manuals, page by page. I mean, I probably went through 20,000 pages in the Moody's industrial, transportation, banks, and finance manuals. And I did it twice. And I actually, you know, looked at every business. I didn't look very hard at some. Well, that's not a practical way to invest. tens or hundreds of millions of dollars. So I would say if you're working with a small sum of money and you're really interested in the business and willing to do the work, you can, you will find something if you were. There's no question about it in my mind. You will find some things that promise very large returns compared to what we will be able to deliver with large sums of money. Charlie?
CharlieWell, yeah, I think that's right. A brilliant man who can't get any. money from other people and is working with a very small sum. Probably should work in very obscure stocks, searching out unusual, mispriced opportunities. But, you know, you could, that's such a small world. It may be a way for one person to come up, but it's a long slog. Yeah, most smart people, unfortunately, in Wall Street figured that they can make a lot more money, a lot easier, just by one way or another, you know, getting an override on other people's money or delivering services in some way that people, and the monetization of hope and greed, you know, is a way to make a huge amount of money. And right now, it's very, just take hedge funds. I mean, it's, I've had calls from a couple of friends in the last month that don't know anything about investing money. They've been unsuccessful and everything. I said, you know, one of them called me the day, he said, well, I'm forming a small hedge fund, $125 million, he was talking about.
[2:02:23]
WarrenLike the thought that since it was only $125 million, maybe we ought to put in $10 million or something. I mean, if you looked at this fellow's Schedule D on his $1040 for the last 20 years, you know, you'd think he ought to be mowing lawns. But he may get his $125 million. I mean, you know, and it's just astounding to me how willing people are during a bull market. But just to toss money around because they, you know, they think it's easy. And, of course, that's what they felt about. Interested stocks a few years ago. They'll think it about something else next year, too. But the biggest money made, you know, in Wall Street in recent years, has not been made by great performance, but it's been made by great promotion, basically. Charlie, do you have any?
CharlieWell, I would state it even more strongly. I think the current scene is obscene. I think there's too much mania. There's too much chasing after easy money. There's too much misleading sales material about investments. There's too much on the television emphasizing speculation in stocks.
OtherZone 7. Robert Pytton from Chicago. The Honorable Warren Buffett and the Honorable Charlie Munger. I felt it would be appropriate to address you both in a manner that reflects the tremendous amount of value that the two of you have been instrumental in unleashing for your shareholders, your employees, and the good of society. The area that I'd like to inquire about is stock options. As you are aware and have written about in the past reports, companies have been taking advantage of and contributing to FASB's inadequate rules regarding stock options. In particular, the lack of head. having to expense them on the income statement. I'll let you. You've got the history on it.
WarrenWell, we don't like the accounting, which we've called corrupt, or at least I have. And I don't think that's too strong a word. I think it's corrupt to have false accounting because you like a certain outcome better than another. All that said, I don't think either of us spends a lot of time fighting with FASB or trying to create a better one. It's like splintering your lance against stone or something. You'd get a lot of back pressure from the butt of the lance and we can't be expected to cure all the ills of the world. We've written about it and talked about it. Obviously, you've picked up on it. And when it was an active issue, whenever it was, about, I don't know, four years ago or so,
[2:05:45]
WarrenSenator Levin of Michigan was one of those who, who felt as we did, and of course, FASB felt as we did. But the pressure was incredible that American business brought on Congress. They weren't getting, they tried to put pressure on FASB, and they weren't getting a result. So they just said, well, you know, we're not going to let FASB set the accounting rules. We'll have Congress set the accounting rules. And I thought that was a bad idea per se, but I thought in this, and, but they got plenty of supporters. We've got a huge number of supporters. I mean, they, and at the time I compared it, I think, there was a bill introduced in the Indiana legislature in the 1890s, I believe, and the bill was to change the value of the mathematical term pie to three even instead of 3.1415. And the legislator who introduced it said that it was too difficult for the schoolchildren of Indiana to work with this terribly long, unending term, and it would be so much easier if Pye was just three, and he thought that they ought to enact that. Well, I thought that was quite rational compared to what the Congress of the United States was going to do and telling people that since it, they, one of the arguments was it, it makes it very tough for startup companies if they have to expense this. Well, it makes it tough if they have to pay their electricity bill, too. But, I mean, that is, but those were the kind of arguments you got. And my memory is, Charlie is better on that. and I am probably, but I think the accounting firms 40 years ago or 50 years ago were in accord with our position. But every client would put pressure on, you know, and they don't want to report expenses. They particularly don't want to report expenses that are paid to them. And that can be huge, and that might prove obnoxious if recorded by conventional accounting, but if it's sort of lost in a table in the proxy statement, people don't pay much attention. The only way it will get changed, we wrote about it, and I even talked to a few senators at the time, the only way it will get changed is it, and this is the only way corporate governance problems generally will get changed. If 15 or 20 large institutional investors would band together in some way on this, but some of them have the same problem because they're getting paid extraordinary sums for doing something that, you know, is really not adding that much value.
[2:08:21]
WarrenSo they're not really inclined to call attention in many cases to what Charlie would refer to as obscenities in other people's compensation. So I think it's going to go on. I mean, it's a fascinating subject, but the institutional investors seem to focus very much on matters of form and not substance. I mean, you get a lot of, they, you know, they cluck a lot about little things that don't have anything to do with their economic return over time, Whereas on stock options, there's something that's terribly important. They're the ones that are paying the costs, and the costs are there, whether they get recorded or not. But American management will not change its position on that. Voluntarily, consultants will never change their position. They're getting paid to encourage people to look at other companies, and it just keeps ratcheting up. So I don't think you're going to see change unless institutional investors do it. And as I say, I get these questionnaires. you know, about the composition of the board or a nominating committee. None of that makes any difference in terms of how a business performs. It got one form that said, you know, it said they wanted a list of directors broken down by sex, and I said none that I know of. But it just is not germane, Charlie.
CharlieWell, I can't top that one.
QuestionerSteve Casbell from Atlanta. My question concerns Gillette. Do you think their goal of trying to grow earnings at 15 plus percent, kind of got them into their current inventory problems at the trade. And as well, the DuraCell acquisition, I know at the time neither one of you were the biggest fans of the deal. I just want to know how you feel about it now.
WarrenWell, I would say it's a mistake, and I've said it, I think it's a mistake for any company to predict 15% a year growth. There are plenty of them do. For one thing, you know, unless the U.S. economy grows at 15% a year, eventually any 15% number catches up with you. It just, it doesn't make sense. Very, very few large companies can compound their earnings at 15%. it isn't going to happen. You can look at the Fortune 500, and if you want to pick 10 names on there that will compound their growth from other than some extraordinarily depressed year, I mean, if they had a year where they just broke even, so the number is practically zero. But if you pick any company on there that currently has record earnings and you want to pick out 10 of them
[2:11:13]
Warrenthat over the next 20 years will average 15% or greater, I will, you know, I will bet you that more than half of your list will not make. it. So I think it's a mistake. And as I said in the annual report, I think it leads people to stretch on accounting. I think it tends to make them change trade practices. And I, you know, I'm not singling out Gillette in the least, but I can tell you that if you look at the companies that have done it, you will find plenty of examples of people that have made those sort of mistakes. And I think that in connection with Duracell, I mean, obviously Duricel has not turned out the way that the management of Gillette at the time hoped that it was going to do and who the investment bankers who came in and made the presentations. Those presentations would look pretty silly now. I think that kind of stuff happens all the time. It will continue to happen. It's just built into the system. I see more predictions of future earnings growth at a high rate, not less. I mean, a few people have sort of taken an abstinence pledge, but it's very few. It's what the analysts want to hear. It's what the investor relations departments want the managements to to say, it makes their life easier, you know, but they don't have to be there five years from now or ten years from now doing the same thing. It's, I mean, if we predicted 15% from Berkshire, you know, 15% means that, assuming the same multiples, I mean, that means, I know, in five years, $200 billion, in 10 years, $400 billion, you know, 15 years, $800 billion, trillion, $1,000, $800 billion, $1,6,20 years. And the values. get to be crazy. And, you know, if you have a business with a market value of four or 500 billion, and you've had a few of those not so long ago, just think of what it takes to deliver in the way of future cash at a 15% discount rate to justify that. If you've got a business that's delivering you no cash today, and it's selling for $500 billion, you know, to give you 15% on your money, it would have to be giving you $75 billion this year. But if it doesn't give you $75 billion this year, you know, it has to be giving you $86.5.5 billion next year. And if it doesn't do it next year, it has to be giving you almost $100 billion in the third year. It's just, those numbers are staggering. I mean, the implications involved in certain market valuations really, you know, belong in Gulliver's travels or something. But the, but the, but, you know, you know,
[2:14:02]
WarrenPeople take them very seriously. I mean, people were valuing businesses at $500 billion a year or a year and a half ago. And there's just no mathematical, almost no mathematical calculation you can make that would, if you demanded something like 15% on your money, there's almost no mathematical calculation you could make that would possibly lead you to justify those evaluations.
CharlieCharlie, have any more? Well, I said on another occasion that to some extent, stock, sell like Rembrandt's. They don't sell based on the value that people are going to get from looking at the picture. They sell based on the fact that Rembrandts have gone up in value in the past. And when you get that kind of valuation into stocks, some crazy things can happen. Bonds are way more rational because nobody can believe that a bond paying a fixed rate of modest interest didn't go to the sky. But with stocks, they behave partly like Rembrandts. And I said, suppose you filled every pension fund in America with nothing but Rembrandts. And of course, Rembrandts would keep going up and up as people bought more and more Rembrands or pieces of Rembrands at higher and higher prices. I said, wouldn't that create a hell of a mess after 20 years of buying Rembrandts? And to the extent that stock prices generally become sort of irrational, isn't it sort of like filling half the pension funds with Rembrandts. I think those are good questions. Once it gets going, though, people have an enormous interest in pushing Rembrandts. I mean, it creates its own constituency.
OtherZone 1? Mr. Buffett, Mr. Munger. My name is Joe Shulman. I'm a shareholder from Oxford, Maryland. Thank you for a wonderful meeting. In order for Berkshire to have an opportunity to hopefully grow its earnings by about 15 percent per year, if we can do that, at least for the next few years. It's obvious that because of the redeployment of earnings and float, the existing businesses do not need to grow at 15%. At what rate would you expect the existing businesses to grow to achieve an aggregate rate close to what I'm describing? And what do you think the probability is of achieving that?
WarrenYeah. Well, I think the probability of us achieving 15% growth in earnings over extended period of years is so close to zero it's not worth, you know, calculating. I mean, we'll do our best. And we have a lot of fun doing it. So it's not something where we have to come down and do things that are boring to us or anything
[2:17:02]
Warrenof the sort of. I mean, our inclination is to very much to do everything we can legitimately to add to Berkshire's earnings and things we can understand. But it can't happen over time. You know, we will have years when we do it, but, and you're quite correct in pointing out, we don't need to do it from the present businesses. We will add things all the time, any more than we needed to do it from the current business back in 1965 with the textile business. I mean, we have to improvise as we go along, and we will. And the businesses we have are good businesses in aggregate. They will do well. They won't do anything like 15% growth per annum, but we will take a good. rate of progress from those businesses, and we will superimpose upon that acquisitions which will add to that. But we can't do 15 over a period of time. And nor, incidentally, do we think any large company in the United States is likely to do. There will be a couple to do it for a long period of time. But to predict which of the Fortune 500 will end up being the one or two or three would be very hard to do. And it won't be, it won't be more than a couple out of 500. If you take large companies not working from a deflated base year, I think our method is a pretty good one. I mean, I think the idea of having a group of good businesses to throw off cash in aggregate in a big way that themselves grow, that are run by terrific people, and then adding on to those sometimes at a slow rate, but every now and then at a good clip, more businesses are the same kind, and not increasing the outstanding share. I think that's about as good a business model as you can have for a company our size. That what it produces we'll have to see, Charlie.
CharlieI certainly agree that the chances of this 15% per annum progress extrapolated way forward is virtually impossible. I think generally the shareholding class in America should reduce its expectations a lot. Including the pension funds. Yeah. Yeah. It's stupid the way people are extrapolating the past. Not slightly stupid, massively stupid. And this is a message, incidentally, if you think about it. I mean, nobody has any interest in saying this, financial interest in saying it, whereas people have all kinds of financial interests in saying just the opposite. I mean, so you do not get an information flow if you listen to the financial world or read the financial press. You do not get an information flow that is balanced in any information.
[2:19:53]
Warrenway in terms of looking at the problem because the money is in believing something different. And money is what, you know, it's what causes people to become prominent or it flows from becoming prominent in the investment world in terms of whether you go on television shows or whether you manage money or trying to attract it through funds or whatever it may be. I don't think if you were an actuarial consultant and you insisted that your company, the companies that you gave your actuary report to use a 6% investment rate, I don't think you'd have a client. So it's almost impossible for the advisors, in effect, in my view, to be intellectually honest on it. Don't you think so, Charlie?
CharlieYeah, there was a very smart, there is a very smart investment advisor in my town. And he said that years ago, some risk arbitrage firm would tell his clients, we know how to make 15% per annum year in and year out. And he said, years ago, everybody said, that's impossible. He says, now in this climate, they say, so what? You know, who's interested in a lousy 15%? And it was easier in the earlier climate, obviously, because the money hadn't been attracted into it. Generally speaking, there's more felicity to be gained by from reducing. expectations than in any other way, it is simply crazy for this group to have very high expectations. Moderate expectations will do fine for all of us.
OtherOkay, we'll take one more before we go. We'll break for lunch. We'll go to number two. Good morning. My name is Ken Goldberg from Sharon, Massachusetts. A few questions ago, you mentioned the company's investment in USG. I was wondering how the company, how you got comfortable with that as an investment in light of the asbestos exposure. Do you view the company the stock as cheap enough and the asbestos exposure is manageable enough over time so that the investment is justified? Or do you view it as, in a worst case scenario, if the subsidiary with asbestos exposure blows up, the rest of the solid businesses are insulated from that and are alone worth the price of the investment?
WarrenLet me answer that. I don't think we want to comment. It's one-tenth of one percent of Berkshire, roughly. I mean, but as Charlie says, that gets too close to giving stock advice. But I will tell you, there are asbestos problems. They're serious, and they would be the first to tell you that. So let's take a break for lunch. We'll be back here in a half an hour of thereabouts and look forward to seeing you then. Thanks.