[0:00]
QuestionerOkay, round two. Gary, you're up. Am I up yet? You're up. Okay. A question on General Re, if I look back at the General Ree property casualty premiums, it's been cut in half roughly from 10 years ago, maybe a little more stable recently. Can you give us some idea of how you've had to adjust the personnel over that time? And then also, what opportunities are there for General Re to grow as we go forward?
WarrenYeah, Jen Rey, I think, got off the track. It probably was off the track when we bought it, and I didn't spot it. Sure, it was. Yeah, okay. I was in charge of that part. And they had, I think they'd gotten more concerned about growth and satisfying certain personnel in terms of their activities than they had about emphasizing profitability. It took us a while to figure that out. And when Joe Brandon came in, he operated 100% in terms of focusing on underwriting profit instead of premium volume. And Tad Montrose has followed through on that with terrific results. But it did mean getting rid of a lot of money. business that didn't make any sense. They did an awful lot of what I would call accommodation business. So it's true that the PC volume dropped very significantly during that period, but it's not volume that we miss. The life business kept growing consistently during that period. Their life business strikes me as very, very good. They got a little long-term care mixed in there that we wish we didn't have. But I think Jenry is, it's right-sized in terms of people, it's got an underwriting discipline to it, and I wouldn't be surprised if it grows at a reasonable rate in the future. But there was a major change that had to be made in the culture at Jenry, and you don't make that overnight, and you don't keep a lot of the business, there's some of the business that you got through a wrong culture when you do straighten it. down. It's a terrific asset to us now. And I think that I think the life business will continue to grow. And I would bet the PC business grows too, but it will only grow if we see the chance to do it on a, on a profitable basis. That's one we feel enormously better about that we had some years back. Charlie?
CharlieWell, it was a major fix-up operation, but we finally got it done. We don't go looking for those, though.
QuestionerNo. Okay. Station 1. Hi, Dan Lewis from Chicago. I wanted to get your thoughts on two of my concerns about a post-Buffet Berkshire.
[3:30]
QuestionerDo you worry that some of your key operating and investing managers might leave for more lucrative opportunities once they realize they're working for one of their peers instead of a legend? And do you think it's possible that a large investor or hedge fund could ever gain enough control of Berkshire to force a change in the unique culture and structure?
WarrenYeah, I think that I would say I virtually know that the successor we have in mind will not be the kind that will turn off our managers because that the manager is in mind, as a successor in mind, has got the culture as deeply embedded in as I do. They would not, our managers would not, I don't think it would be a question of leaving for more lucrative jobs. I think it would be because they love the kind of environment in which they exist. And if that environment didn't exist, it wouldn't be a question whether the alternative was more lucrative. Many of them, a majority, could retire. They wouldn't need to work at all. They're only going to work if it's more fun for them to work than to do anything else in the world, because they've got the money to leave in the great many cases. The conditions, it's the same way. reason I work. I'm in, I'm 81, and I am doing what I find the most enjoyable thing to do in the world. And there are a couple reasons for that. I get to paint my own painting, and I, you know, I have a lot of fun working with the people I work. And our managers work for the same reason. They do get to paint their own paintings. And my successor will understand that just as well as I do. And there would be a lot of people that might very well manage other companies that I think have stuck in my position would lose a fair number of managers. They just have a different style, and our managers don't need that style. In terms of a takeover, I think that really gets unlikely. The size is a huge factor. And even because of the A and B shares, the A shares get converted to these shares when I give them away. And even 10 years from now, it would be likely that I would own or my state would own something in the area, you know, perhaps of 20% of the votes thereabouts. So the Buffett family will probably have 10 times the voting power for a long time of anybody else. So I really, I think it's extremely. extraordinarily unlikely for both those reasons, size and the concentration that will exist. And the longer we go, the larger we go, the larger we'll get. So as the voting power aspect
[6:36]
Warrengoes down, the size aspect goes up. So I don't think there will be a takeover of Berkshire. And I really, you do not need to worry about my successor. You know, in many ways, he'll be better than I am. He will be totally imbued with the culture. The company is imbued with the culture. It would reject anything. The board of directors reflect that culture. It's every place you look around. Berkshire stands for something different than most companies, and that's not going to change.
CharlieCharlie?
CharlieWell, what I said last night was that the first 200 billion was hard. And the second $200 billion with the momentum in place is likely to be pretty easy compared to what's been accomplished in the past. So I don't think it's going to hell at all. I think the momentums are in place and the right kind of people are in place and the culture is by and large pretty well loved, I would say, by the people who've chosen to be on it. Nobody's going to want to change it. Yeah, the businesses are in place to take it to $400 billion. The business, I mean, we have the businesses to take it to $400 billion. Well, but in addition to that, I think people of the type who have sold to us when we were the only acceptable buyer, I think we'll come to our successors because they will be the only acceptable buyer, at least for some significant part of what's done. So I don't think it's going to be all that difficult.
WarrenDon't make it sound too attractive, Charlie.
Carol LoomisCarol?
Carol LoomisYou're interested in businesses that throw off lots of cash. For instance, East Candy. as well as those where you expect significant capital reinvestment needs, for example, Burlington Northern. What is it about a capital-consuming business that persuade you to forego the cash yield you seem to have historically preferred? How do you balance the expected need for reinvestment in a capital-consuming business against the other possible uses of cash Berkshire may have in the future, such as new investments or stock repurchases?
WarrenWell, cash-consuming businesses are by the business. their nature are unattractive unless the cash they consume gets to earn a reasonable return. And in the electric utility business, you know, we can expect cash retained to perhaps earn an average of 12 percent or something like that, which we regard it is quite satisfactory. It's not as exciting as having some business that's going to grow 20 percent a year and not require
[9:26]
Warrenany capital. I mean, there are a few wonderful businesses like that, but it's perfectly satisfactory. Same way with the railroad business. You know, we are going to invest a lot of capital over the next 10 years in railroads. Every year we will spend way more than depreciation charges. I think the prospect of earning reasonable returns on that are pretty darn good. But if I had to put a lot of money, you know, into some capital-intensive business where all we were doing was staying alive with that money, you know, we would be in a terrible situation. And we don't have, in any meaningful way, we don't have any capital consistent. We don't, we do not have any capital-consuming businesses where I see that as the, as the, as the prospect. It's true, if you go back to a world where we thought we could earn 20% on equity or something of the sort, then there's very few capital-consuming businesses where huge amounts of incremental capital can earn at a 20% rate. So that would be disadvantageous. But we don't know how to make 20% on equity going forth in the future with the kind of sums we're working with. And we will be very happy if we can earn 12% or something like that on equity, particularly when some of that capital is being consumed is generated by float, which doesn't cost us anything. I mean, we've got some small advantage there. Charlie?
CharlieYeah, well, I think it's going to work pretty well. There's some mongers here. I hope you won't listen to the siren songs of others and will kind of stay with the family heirloom. My family's just hoping for an heirloom.
QuestionerCliff? Actually, along those lines about in regard to float, in your annual letter this year, you say that you expect the rate of growth in your float to slow going forward. How slow? What are the drivers? Is it possible that float could shrink going forward?
WarrenThe float could shrink because we have lots of retroactive contracts that by their nature the float runs off of, although not in a really rapid rate. And the float at Geico is going to grow. I mean, the float at our smaller insurance companies, but we'll probably net grow over time a little bit, but it's not a lot of money. In a Jeets operation where we have a lot of the retroactive stuff, it's very, very tough. You've always got a melting ice cube that you've got to, you know, add a little more water to. And I have felt when the float was $40 billion, there probably wasn't going to grow very much, and, you know, now we're 70 billion.
[12:15]
WarrenSo we are looking for ways to intelligently grow the float all the time. I mean, that's been true ever since I got in the insurance business in 1967. So the desire is always there. We've been reasonably imaginative in figuring out ways to do it and still have the float costs us less than nothing. We've got the smartest guys in the business. out there working on it. But the numbers are huge now, and you do have an actual runoff from the retroactive contract. So I just thought that it was fair to tell the shareholders that they really should, while they look at that history of float growth, that they really can't extrapolate that. If we get lucky, you know, we could add a fair amount more. But it's also, it's possible that it'll actually dwindle down a little bit. not at a fast rate. And it's certainly more than possible that it won't grow it very much of a rate from here on. Ajit told me that when I put that in the annual report, that it became a challenge to him. So I'm glad I stuck it in there. He wants to make me look like an idiot, which isn't too hard sometimes. And I may have to stick some other things in the annual report next year that if I get the attention, if I had bet on whether a float will be higher or lower five years from now, I probably bet just a slight bit higher. But I also want the shareholders to know there's a possibility that it will, it will decline a bit. We're working on things, though, you know, every day we're working on things to try and figure out how to increase it.
CharlieYeah, the casualty insurance business, by its nature, is not a terribly good business. You have to be in the top 10% really to do it all well on it. I think we're very lucky. We probably have the best large scale casualty insurance business in the world. Just because it came out of nothing doesn't mean it's nothing now. But I don't think it'll be wildly. It won't grow wildly, will it, Warren?
WarrenNo. No. But if you have something that's very good and it doesn't grow wildly, that's not the end of the world. It certainly brought us to we are today.
CharlieYeah. It's done wonders for us. And there's been multiple people that have done that. I mean, but the jobs that Tony has done at Geico, he's created billions and billions of dollars of value for Berkshire shareholders. And that's true. Certainly with the jeet, it's, you know, it's huge.
WarrenWell, we get used to having Ajit worked miracles.
[15:10]
WarrenAnd he'll probably continue to do so over a long time. But if Matt Rose has to carry some of the future freight, but that's all right. All right. Okay, station two.
QuestionerGreetings to all of you. From the Midwest of Europe, I'm Norman Rentrop from Bonn, Germany. Warren, thank you very much for being so open about your health situation. You are in my thoughts and in my prayers, and I wish you a thorough healing. Thank you. As I have traveled a long way and can no longer ask questions in Pasadena, I'm hoping for an elaborate answer from you, Charlie, as well. Well, my question is, how do you value declining businesses? You were talking about the encyclopedia business brought down by Encarter or retailing, disrupted by Amazon and others, by comparison, shopping. How do you value declining businesses?
WarrenWill me to answer that one? They're not worth nearly as much as growing businesses.
CharlieWell. But they can still be quite valuable if a lot of cash is going to come out of them.
WarrenYeah, generally speaking, it pays to stay away from declining businesses. Yeah. It's very hard. You'd be amazed at the offerings of businesses we get where they say, you know, it's, I've been upset Charlie, but they say, you know, it's only six times EBITDA, and then they project some future that doesn't have any meaning whatsoever. If you really think of business is declining, most of the time, you should avoid it. Now, we are in several declining businesses, you know. The newspaper business is a declining business. We will pay a price in that business. We do think we understand it pretty well. We will pay a price to be in that, but that is not where we're going to make the real money at Berkshire. The real money is going to be made by being in growing businesses, and that's where the focus should be. I would never spend a lot of time trying to value a declining business and think, you know, I'm I'm going to get one free, it's what I call the cigar butt approach where you get one free puff out of the cigar butt that you find. It just isn't, the same amount of energy and intelligence brought to other types of businesses is just going to work out better. And so we, our general reaction, unless there's some special case, is to avoid new ones. playing out certain declining businesses by their nature. But, you know, we started with declining businesses. We started with textiles in New England, and we tried U.S. made shoes.
[18:20]
WarrenAnd we've, we've, Department store in Baltimore. Department store in Baltimore. Howard and Lexington Street. Trading stamp company. We're a specialist in that. Yeah. We have one business that did one business that did a million, 120 million. million or so of sales in 1967 or eight. And what we do last year, about 20,000?
QuestionerYes. 20,000.
WarrenI presided over it myself.
QuestionerYeah. Well, I want to say I helped. I mean, he didn't do it all by himself.
CharlieNo, no, no. I mean, I've sat there in the location and watched the... We thought of bringing the sales chart down here and turning it upside down to impress you. But Charlie is still in charge of this business. businesses, and I can't get him to sell it, but make me an offer.
WarrenBut if you think what came out of those three declining businesses, all of which failed, it's so many billions you, it's hard to imagine how much came out of them.
QuestionerYeah. We're not looking for an opportunity to do it again.
WarrenNo, but it was not, in 1966, maybe we should because in 1966, Sandy Godisman, one of our directors, and Charlie and I. We put $6 million into a company. We called it diversified retailing, although we only had one operation, but it's not, you know. It was kind of like Angelo Mozilla calling his one location, you know, in New York Countrywide Mortgage at the time. And we bought a department store at Howard and Lexington Street. Now, in our defense, I would have to say there were four department stores at Howard and Lexington Street in Baltimore, and all four of them are gone. But that's $6 million. dollars has turned into about $30 billion, starting with that.
QuestionerFailed business.
WarrenFailed business.
QuestionerYeah. Yeah. And of course, Blue Ship Stamps was another example of that, because that was another company that. And then, of course, Berkshire was the textile business. So we were sort of masochistic in the early days.
Becky QuickBecky.
WarrenIgnorant, too.
Becky QuickYeah. Okay. That was the word. that came to mind, but I didn't really like to use it. This question is from Bill Nolan, who's a shareholder from West Des Moines, Iowa. He says many of us are interested in what you, meaning Berkshire, are buying, and you won't tell us that. Using Charlie's principle of invert, invert, always invert, maybe you can help us by suggesting what to avoid and stay away from. Specifically, what in the investment world today strikes you as folly, fad, unsusely, sustainable, crazy, or dumb?
[21:12]
WarrenA lot. Yeah, well, we, we, I think, I would describe it, is we try to stay away from the things to start with that we don't understand. And when I say don't understand, it isn't that I don't understand, you know, what a certain business does, but when I say understand, it means that I think I have a reasonable fix on about what the earning power and competitive position will look like in five or ten years. So I've got some notion of how the industry will develop and where the company will stand within the industry. Well, that eliminates a whole bunch of things. And then beyond that, if the price is crazy, even though I understand it, that eliminates another bunch. So you get down to a very small universe, and you get down a particularly small universe when we're working with lots of money as we are now. But we, well, I would say this, I can't regret. call any time in the last 30 years, at least, that we've bought a new issue. I can't think of one. No. No. I mean, the idea that somebody is bringing something to market today, a seller who has a choice of when to come to market, and that that security, where there's going to be a lot of hooplaught connected with it, is going to be the single cheapest thing to buy out of thousands and thousands and thousands of businesses in the world is nonsense. And when it carries a seven percent commission or higher. It's ridiculous. It's ridiculous. So you know, you know it can't be the most attractive thing. Now, you know, but people get excited about what's coming and all that sort of thing. But I will guarantee you that if you will have thousands of opportunities among stocks all over the world, and most of them are not being promoted or being sold with special commissions in them or something else, And then some other security is coming to market that day. When the seller picks the time to bring it, as opposed to just this auction market operating otherwise, you know, it just doesn't make any sense to even spend five seconds thinking about new issues, so we don't think about them. And we also, you know, there's industries we know they may have a wonderful future, but we don't have the faintest idea who the winners will be, so we don't think about those either. So there's a whole lot of things we don't think about. of things we don't think about. And we have a, Charlie and I have a number of filters that things have to get through very quickly before we're willing to think about them.
[23:58]
WarrenAnd sometimes we're thought of as rude, probably Charlie's thought of that way a little more often than I am. Sometimes we're thought of as rude because people will call us and they start explaining some idea to us. And it just doesn't make it for the first filter or two. And so we just, we think we're saving their time if we just politely say, you know, that we're We just have no interest that we don't want to have you finish the sentence. But we do that, don't we do that, John. We don't have to do very many things that work. I mean, that's the beauty of this business. You don't have to be able to spell 500 words or something to get to the end of the spelling B and beat everybody else. You just have to do one or two things every now and then where you don't make a big mistake and where every now and then one works out real well. And the solution, you know, you'll just do. get a good result. You can't have a big disaster. I mean, you just, you know, that is, that's what we try to avoid. We do not ever want to lose a significant percentage of Berkshire's net worth, and so far we haven't. I think there are a couple of little rules of thumb. It's got a really large commission in it. Forget it. Don't read it because the chance of somebody who's paying a very high commission to give you a big advantage is very low. And the other thing that is, I think, helpful in reverse is, as a place to look, looking at things that other smart people are buying. That is not a crazy search method as a sorting device for opportunities to consider. Charlie knew me when I used to look at, I grabbed the Graham Newman reports as fast that they would come out. Yeah, sure. You know, if Graham Newman was doing something. And it was certainly worth my time to look at.
CharlieNo, Warren has made it a lot of people, Richie doesn't even know. He just copied him. Don't go into things with big commissions. Jay?
QuestionerOn the subject of regulation, a question I often get from investors is, what are the implications if Berkshire ends up being subject to the Investment Company Act of 1940 because of insurance becoming a smaller part of Berkshire's overall business? I may be...
WarrenThat's too remote. That's not going to happen. I used to do, I read the Investment Company Act of 1940 probably 20 times because it was quite pertinent when I was setting on my partnership and all that. I don't remember every detail now, but I see no way that that Berkshire comes close to that.
[26:51]
WarrenWe used to worry about both personal holding company status and investment company status, but we steered, we made very clear that we steered clear of both of those. Well, I think we're a million miles away from it now. Yeah, we really need the financial heft we have to make our basic businesses work. We are not just an investment company. Yeah, we've got 200,000, 27,000 or 270,000 employees and we own eight companies that each would qualify for the Fortune 500 to stand alone. So it's people thought of us as an investment company long after we were nothing remotely like. Like one. And where we had no intention of going in that direction, but the background of both of us caused people to hang on to that notion longer than it was appropriate.
QuestionerStation 3. Hello, Mr. Buffett and Ms. Munger. Good afternoon. My name is Young. I'm from Toronto, Canada. I appreciate you give me the opportunity to stand here as a question. And my question is, how long do you think we'll take China to a PRG company like Coca-Cola? company like Coca-Cola, and in which industry you think it will be? Thank you.
WarrenHow long will take China to do what? I didn't quite get that one.
QuestionerConnection to Coca-Cola, yeah. How long will take China to do what?
QuestionerOh, just how long do you think will take China to appear a great company like Coca-Cola, and in which industry you think?
WarrenWell, China already has some great companies. It's hard to think of a great branded goods company, but China has some very great companies.
Charliehas some very great companies already. Yeah. Who do I was? I can't pronounce them. But they've got some very great companies.
WarrenYeah, so far it has not been Chinese fast food companies that have been exported to the United States as opposed to, you know, we've got over 500 dairy queens now in China. We tend to export certain products well, some consumer products, entertainment products, that sort of thing. But China. got some huge companies and they may eclipse in market value, you know, some of the ones such as Coca-Cola that we're talking about.
OtherSee, that was Station 3. Andrew?
Andrew Ross SorkinOkay. This question comes from Larry Pekowski from the Goodhaven Fund. Also another shareholder also asked a similar question that I've tried to combine. Given that you're now in IBM, are there any other entrenched leaders in technology that are to use one of your terms inevitable in the same way that Coke and Gillette were. For example,
[29:53]
Questioneris Google inevitable? Is it reminiscent of the advertising agencies you owned in the 1970s, i.e. a toll bridge on all digital spending? That's highly likely to keep growing over time. What are the one or two things about Google, for example, that you think are real risks? And what about Apple?
WarrenWell, those are extraordinary companies, obviously. And both, they're both huge companies. They make lots of money. They earn fantastic returns on capital. They look very tough to dislodge where they have their strengths. I, you know, I would not be at all surprised to see them be worth a lot more money 10 years from now, but I wouldn't want to buy either one of them. I do not have, I do not get to the level of conviction that would cause me to buy them. But I'm sure as hell wouldn't short them either, Charlie
CharlieWell, I think we can fairly say that other people will always understand those two companies better than we do. We have the reverse of an edge, and we're not looking for that. Now he's going to say isn't the same thing true in IBM. Well, I don't think it is. I think IBM is easier to understand. Yeah. The chances of being way wrong in IBM are probably less, at least for us, than being way wrong with Google or Apple. But that doesn't mean that those, the latter two companies aren't going to do, say, far better than IBM. I mean, but we wouldn't have, we wouldn't have predicted what would happen with Apple 10 years ago. And it's very hard for me to predict, you know, what will happen with the next 10 years. There's certainly, you know, they've come up with these brilliant products. There's other people trying to come over with brilliant products, and I just don't know how to evaluate. The people are out there working either in big companies or in garages that are trying to think of something that will change the world the way they have changed it in recent years. And what do we know about computer science? There's no reply.
QuestionerGary. Politics sometimes affects your businesses. Recently, we've seen some coal plant closings, turned down an Excel pipeline, all of which seem to have have potential effect on BNS revenues. Can you talk about how you manage that risk or what the impact might be of some of those political issues?
Greg AbelYeah. Well, BNSF runs their own business very much. I went down to Fort Worth once after we bought it a few years ago, and I haven't been there since.
[32:58]
Greg AbelAnd I probably talked to Matt on the phone, I don't know, once every three months or something of the sort. But there's no question that railroads, utility, these insurance companies are all very much affected by the political process. Fortunately, I think, in the railroad industry, you know, we've got economics on our side. And economics usually went out. I mean, we can move a ton of product 500 miles on one gallon of diesel. And that may be three times or so as efficient. as trucking, and that may be why the railroads currently move, say, 42% of all inner city traffic. I don't think our percentage is going to go down. The railroad industry as a whole, no matter what the politics may be. It's just too compelling to move heavy traffic long distances over steel rail. And in terms of congestion, in terms of emissions, all kinds of reasons. So we've got a wonderful product. product and there will always be struggles in the political arena between competitors and railroads and customers in railroads. It's just, it's the nature of the game, and there'll be some of that in utilities too. But overall, I like our position in that. They do have to be involved in politics. I mean, the railroads, all four of the big railroads are going to be involved in the political process because people who have got, who would like to change some of the rules, either as customers or competitors, are going to be in politics, too. And things will get decided in state capitals and more important in Washington of importance. So they will, they'll have lobbyists and they'll play a political game and their opponents will. I like our position. It would be very dumb for the country to do anything that discourage the railroad industry, from spending the kind of capital that will need to be spent to take care of the transportation needs of this country in the future. If you think about the money that will have to be spent on highways and the costs involved in there and the congestion problems, the emissions problems and everything, the country has a strong interest in the railroad industry, having every incentive to invest, and the railroad industry pays its own way. You know, we'll spend $3.9 billion this year, and a lot of it will go to improve our presence system an awful lot, and some will go toward expansion of a type, and the country will be better off on that, and the federal government will not write a check for it.
[36:07]
WarrenCharlie? Yeah, it's in the nature of things that there are waves of good breaks and bad breaks. Burlington Northern was enormously helped when you could double the container carriage by making the tunnels a little higher and the bridges a little stronger. And they were enormously helped when they found all this oil in North Dakota and there weren't any pipelines. And they will get some bad breaks, too, occasionally, where somebody will take away a little freight. But averaged out, it's a terrific business, with terrific management. I don't think our main problems are political at all.
QuestionerNo. The railroad industry... One thing, we're headed by a prominent Democrat. The railroad industry was...
WarrenThat may not be a help, Charlie.
WarrenRight after World War II, now there was a lot of passenger traffic then, but the railroad industry, I think, had as many as a million seven hundred thousand employees in the United States. And here we are today. there's less than 200,000. I mean, that, railroads have become so much more efficient. It's just by a huge factor. And it's a fundamentally very good way to move heavy stuff a long distance. I mean, it's just hard to conceive of anything. It's nice maybe to have barge traffic, but, you know, we've got a few rivers that are going to lend themselves to real volume along that line. And so, you know, you have air pipeline, you know, vehicles, planes, trains. Trains are pretty darn good.
OtherOkay, station four. Section 4 does not have any questions at this time. Thank you.
WarrenWell, that's the first. Carol, have you run out? Unprepared as I am.
Carol LoomisThis is a question about the table on the first page. of the annual letter, which shows the relative performance of the S&P 500 index against Berkshire's book value. This is an unfair Apples to Orange's presentation. An investor in the S&P 500 index can easily earn the returns shown for the S&P, but an investor in Berkshire will not earn the returns implied by the company's book values figure shown. Instead, he or she will earn returns over any given period that depend on the market's assessment thereof, that is, the price-to-book value ratio, and we've seen that go down in the last few years. A fairer comparison would be against the annual percentage change in the book value per share of the S&P 500, with dividends included. Wouldn't your shareholders be better served by better information?
WarrenWell, actually, you could make the calculation two.
[39:24]
Warrendifferent ways as alternatives to what we do. You could have the market value of the S&P, which is in there, with dividends at it back, versus the market value of Berkshire. Berkshire would show up better on that table than it does in the table I present. In other words, our advantage over the S&P would be larger, if calculated that way, because we started at a discount from book value, and we ended up at a premium. So it would bounce around during the years, but overall, our gain would be probably at least, well, it'd be about 35 or so percent higher in aggregate over the time than the shown by the book value gain, which is a lot of dollars when you get, make the calculation. You could also show the book value of the S&P versus the book value of Berkshire, but that figure will be awash pretty much because if you take the S&P's price to book value, if that, maintains the ratio at the beginning to the same ratio at the end, it's a wash as to how that calculation comes out. So I think we could show, we could make a calculation that was more favorable to Berkshire. I don't think what the person suggests there would result in a calculation that's less favorable to Berkshire. Long term, the stock value, has tracked fairly well the book value. But it's over-performed book value for the whole time, which is the point this question seems.
QuestionerWell, you've been criticized for making yourself look worse.
WarrenYeah. It's all right, you can bear it. I've done the other, too. Not been...
OtherCliff?
QuestionerIn studying the collapse of AIG, one of the things we learned is that there were parts of the company which understood there were certain financial risks in the market and were lowering their exposure. While at the same time, there were other parts of AIG which were actually increased their exposure to the same risk. In terms of enterprise risk management at Berkshire, how do you share information across units? to make sure that the same mistakes aren't made.
WarrenI didn't totally get that. Did you get this, certainly?
CharlieWell, he was talking about how do we share information across units?
WarrenOh. Well, if there's any sharing they're doing it, we're not. Yeah. Yeah, we don't have any. We're the most uncoordinated pair of individuals and operating both in sports or at the executive level. There are certainly some people at Berkshire that have some kind of. have some contact with other people at Berkshire, but there's nothing in the way of an organized way of doing that.
[42:14]
WarrenI mean, Tad and Tony and the Jeet are friends and Don Worcester, and they see each other sometimes, and I'm sure they talk insurance, but we don't make any attempt. If somebody goes in to get a quote from Genri and gets a quote from Ajit, there's a no, we have no system that prevents, or that coordinates them our two units to give the same code or anything of the sort. We want our businesses to run very autonomously, and we want the managers of those businesses to feel like they're their own business. That's enormously important in virtue. So we don't tell the people at Clayton Holmes to buy their carpet from Shaw or to buy their paint from Benjamin Moore. We don't, we just don't that and you can say that's kind of silly, but any gains we would get from doing that by selling incremental units, I think would be far offset by the change and the feeling of the manager as to whether they're really running their own business. We hand people billions of dollars, and they hand us stock certificates, and they have been running those businesses for decades, in many cases, and we want them to have been running those businesses for decades in many cases, and we want them to to feel the same way the next day when they've got the money and we've got the stock certificates, as the day before, when they have the stock certificates and we had the money. And the moment we start telling them how to change the way they operate or to coordinate with this guy or get this person's approval or anything like that, you know, that just erodes that advantage, which we think is very substantial, that they have this proprietary feeling about their business. Have I answered that?
QuestionerYeah, we're trying to fail at what you want us to succeed at. I'll have to think about that little.
OtherStation 5.
QuestionerHello, Charlie, and Warren.
WarrenI'm Warren, yeah.
QuestionerYes. My name is Richard Cooper, and I'm from Honor, Michigan, and I'm a professional forester. And I'm a professional forester. Trees are one of America's greatest resources. And it seems that a well-run forest products firm would fit. it well with Berkshire's holdings. You've got the transportation system to move the product. You have the construction firms to use the product, furniture companies, home builders, and you've got insurance companies to cover the insurance end of the holdings. Have you given any thought to getting a fortings? Forest Products firm?
[45:25]
WarrenWell, your question touches on the answer we just gave. We would not really consider the other activities that Berkshire has in determining whether we would get into forest products. We've looked at forest products companies, but we don't think about them in terms of how they may divert their product to some other subsidiaries of ours or how other subsidiaries might benefit from selling them something. To date, we've looked at several. To date, we've really never. found any that met our tests for returns against purchase price. I mean, it's a business that's reasonably easy to understand, I mean, in terms of the economics and its permanence and all of that sort of thing. But the math has escaped us in terms of being compelling. Charlie?
CharlieIt's a lot of forest products companies convert themselves into flow-through partnerships of of some kind so they don't pay normal full corporate income taxes the way we do. Berkshire is actually organized so that we'd be a disadvantage, we'd be at a disadvantage in bidding for forests.
WarrenYeah. Yeah, we're at the disadvantage in terms of any kind of activity that people have managed to convert in the past through organizations. So particularly, we'll take REITs, real estate investment trusts, you know, they have eliminated one tax in their short. structure that we would bear. And like Charlie says, you know, you'll have firms like Plum Creek, Timbers, those sort of operations, where they have eliminated the federal incomebacks, and we don't have any structure like that. So just going in, we have this structural disadvantage that is really quite significant. Becky?
Becky QuickThis question comes from Scott Bondurant, who is from Chicago, Illinois, and he's a shareholder. And he asks, can you please elaborate your views on risk, you clearly aren't a fan of relying on statistical probabilities, and you highlight the need for $20 billion in cash to feel comfortable. Why is that the magic number, and has it changed over time?
WarrenYeah. Well, it isn't the magic number, and there is no magic number. I would get very worried about somebody that walked in every morning and told us precisely how many dollars of cash we needed to be, you know, secured a three sigma or something like that. Charlie and I have had a lot of, we saw a lot of problems develop in an organization that expressed their risks in Sigma. And we even argued sometimes with the appropriateness
[48:13]
Warrenof how they calculated their risk. And they... It was truly horrible. Yeah. And they were a lot smarter than we were. That's what was depressing. But we both have the same band of whereby we think about worst cases all the time. And then we add on a big margin of safety, and we don't want to go back to go. I mean, I enjoy tossing those papers in the other room, but I don't want to do it for a living again. So we undoubtedly build in layers of safety that others might regard as foolish. But we've got 600,000 shares. And we've got members of my family that have 80% of their net worth in the company. And I'm just not interested in explaining to them that we went broke because there was a 100% to 1% chance that we would go broke. And there was a remaining probability was filled by the chance of doubling our money. And I decided that that was just a good gamble to take. We're not going to do that. It doesn't mean that much. we are never going to risk what we have and need for what we don't have and don't need. We'll still find things to do where we can make money, but we don't have to stretch to do it. And it's my job, and Charlie thinks the same way. I mean, we don't have to talk about it much, but it's our job to figure out what can really go wrong with this place. And, you know, we've seen September 11th, and we've seen. September of 2008, and we'll see other things of a different nature, but similar impact in the future. And we not only want to sleep while of those nights, we want to be thinking about things to do with some excess money we might have around. So it is, if you're calibrating it in some mathematical way, I would say it's really dangerous. I could give you a couple of examples on that, but that unfortunately they're, I've learned about them on a confidential basis, but some really great organizations have had dozens of people with advanced mathematical training and make, and thinking about it daily, making computations, and they don't really, they don't really get at the problem. So it's at the top of the mind, always around Berkshire, and your returns in 99. Nine years out of 100 will probably be penalized by us being excessively conservative, and one year out of 100 will survive when some other people won't. Charlie?
CharlieYeah, but how do these super smart people with all these degrees and higher mathematics end up doing these dumb things? I think it's explainable by the old proverb that to a man with a hammer, every problem looks pretty much like a nail.
[51:38]
WarrenSo they've learned these techniques and they just twist the problem so they fit the solution, which is not the way to do it. And they have a lack of understanding of history, I would say, that one of the things in 1962, when I set up our office at Keywood Plaza, where we still are, it's a different floor, I put seven items on the wall. Our art budget was seven dollars, and I went down to the library, and for a dollar each I made folks. copies of the pages from financial history. And one of those cases, for example, was in May of 1901, when the Northern Pacific Corner occurred. And it's kind of interesting in terms of being in Omaha because Harriman was trying to get control of the Northern Pacific, and James J. Hill was trying to control the Northern Pacific. And unbeknownst to each other, they both bought more than 50% of the stock. Now, when two people, buy more than 50% of the stock each, and they both really want it, they're not just going to resell it. You know, interesting things happen. To the shorts. And in that paper of May 1901, the whole rest of the market was totally collapsing because Northern Pacific went from $170 a share to $1,000 a share in one day, trading for cash because the shorts needed it. And there was a little item at the time. And there was a little item at the top of that paper, which we still have at the office, where a brewer in Troy, New York committed suicide by diving into a vat of hot beer because he'd gotten a margin call. And to me, the lesson, that fellow probably understood sigmas and everything and knew how impossible it was that one day a stock could go from 170 to a thousand to cause margin calls on everything else. And he ended up in the vat of hot beer, and I've never wanted to end up in the vat of hot beer. So, those seven days that I put up on the wall, life in financial markets has got no relation to sigmas. I mean, if everybody that operated in financial markets had never had any concept of standard errors and so on, they would be a lot better off. Don't you think so, Charlie?
CharlieWell, sure. Here, have some fudge. It's created a lot of false confidence, and now it has gone away. Again, as I said earlier, the business schools have improved. So has risk control on Wall Street. They now have taken the Gaussian curve and they just changed its shape. They threw it away. Well, they just made a different shape than Gauss did.
[54:34]
CharlieAnd it's a better curb now, even though it's less precise. They talk about fat tails, but they still don't know how fat to make them. I have no idea.
QuestionerWell, but they knew that they learned through painful experience. They weren't fat enough.
CharlieYeah, they learned the other was wrong.
QuestionerYeah. But they don't know what's right.
CharlieBut we always knew that there were fat tails. Warren and I at the Solomon meetings would look over at one another and roll our eyes when the risk control people were talking.
OtherOkay, Jay. This question is on Swiss Rhee. Berkshire's quota share treaty with Swiss Rhee covering 20% of Swiss Rees' property casualty risk ends in 2012. Does Berkshire plan to replace that premium volume through another transaction?
WarrenWell, we would hope to, we always hope to get more good volume. But what we do has no relationship to the expiration of that contract. I mean, that contract was a five-year contract. It's a big contract, billions of dollars a year. But the fact that that expires and our premium volume, we've been down by multiple billions, does not cause us to do. do one thing differently than we would do otherwise. We've got the capacity to write billions and billions of business. And we would love to do it if we were expanding the Swiss Free contract, and we don't want to write any dumb business when we lose that contract. It's just, it's a non-event in terms of future strategy. It's not a non-event in terms of losing some business that we like, but it's a non-event in terms of any future strategy. We regard every decision, you know, is independent. We don't do so. If money comes in, that doesn't cause us to want to think about doing something today that we weren't thinking about doing the day before. We just don't operate that way. We'll have things that come along that are terrific, and that doesn't mean us that the next day we don't want to look for something additionally that's terrific. Every decision is sort of independent. I don't think there's another large insurance operation in the world that is more cheerful about losing volume than we are. If it doesn't make sense, the business has to shrink, we let it shrink. We don't measure ourselves in any way.
OtherBy size.
WarrenBy size. Except by the growth and value over time.
OtherOkay, station six. Indy Wasserman from Boston, Warren, best wishes on a speedy and complete recovery. My question is regarding Fannie Mae and Freddie Mac.
[57:15]
QuestionerYou wrote that you expected the housing model to be improved by now, but that it hasn't improved. You spoke about demographics and the housing-dependent parts of the business. You do not, however, speak about Fannie and Freddie. Fannie Mae, the Federal Reserve and Freddie Mac are the three largest financial institutions. Then comes Jacob P. Morgan and Bank of America. Fannie and Freddie have been in conservatorship for three and a half years, the longest. Initially, they had confined assets of 1.5.3.5 years. $6 trillion, each Elieman brothers. Now they have $5.5 trillion, adding $4 trillion of off-balance sheet of items and government mortgage modification programs. They are public companies with operating losses, a negative net worth, owned by the government, acting at times with the power of the government, financed with a blank check from Treasury and taxpayers who are usually also homeowners. Most near bankrupt companies shed assets. These two added assets and liabilities. AIG and General Motors have emerged. These two have not. Contrary to popular belief, the securities law did not need the biggest rewriting since the Great Depression. The 1933 and 1934 Securities Act work. Sarbanes-Oxley works. Fannie and Freddie and the 1938 and 1968 governing laws do that. No matter how much they have contributed to U.S. housing standards. What is the solution? How many years can they stay in conservatorship? Can the resolution trust authority be used? Are they truly too big to fail? What role will banks? will banks like Wells Fargo and U.S. Bank are, who are leading mortgage players, play now that they are well capitalized. What happens to the NBS market and the mayor system? How can how is it improve, even with better demographics, without an answer to Penny and Freddie?
WarrenWell, I got through college answering fewer questions than that. I would say that the overall tone of your which indicates that you think that Freddie and Fannie are a mess is probably justified. And of course, the reason they're a mess is we haven't figured out yet, or we can't get agreement, on what the best structure is to have in this country going forward to generally finance mortgages. There is no question that a government guarantee program brings down the overall cost. of financing mortgages over time. And then we had one, of course, we've had several, but we had one in Fannie and Freddie that went wild when we introduced the profit motive
[1:00:41]
Warreninto the mix of two institutions that really were half trying to serve a housing mission and half trying to serve a profit mission, and gradually the profit mission sort of overcame. the housing mission. Congress hasn't sorted that out yet. It's a huge item, obviously. There are roughly 50 million residential mortgages in the United States, you know, in a total 10 trillion or so. It's important that you have a market that does minimize costs for borrowers who have adequate down payments and adequate income. and it's inadequate income and all of that. And I think for a while we were going in that direction with Fannie and Freddie and then they left the tracks. But that's going to get fought out. How long they can stay in conservatorship, they can stay there a long time. They will stay there, in my view, until politically we get some kind of a resolution that, as to a future policy that both parties can go along with and looks to me like that's a resolution. That's a ways off. Charlie?
CharlieWell, of course, the interesting thing is that Canada, right to the north, kept a more responsible real estate lending system, and they had almost no trouble. We departed completely from sanity and decency and morality in mortgage lending in the United States, and the government of the United States participated in the folly. And they did it a big way. And it was wrong not to step on a boom that was obviously so full of fraud and folly. And I sometimes say that Alan Greenspan overdosed on Ayn Rand when he was young. He thought of an axe murder happened in a free market. It was probably all for the best. And so we had, there's a lot of disgraceful behavior. We have to regret in terms of what happened and it caused enormous damage. And in a modest little country like Spain, another one called Ireland, you had something somewhat similar. People just allowed craziness to go unchecked. And that was a big mistake. And Greenspan was really wrong. It's the duty of the government to step on crazy crooked booms and to prevent them by keeping sound policies as Canada did. And so. So you put your finger on a very disgraceful episode in the United States history. But once we were into it, I think we had no option but to do exactly as the government did, which was to nationalize Fannie Mae and Freddie and try and make them behave better in the future. And that's what's happened. It's going to be a long runoff.
[1:03:57]
WarrenAnd Congress, it wasn't just a fair, Congress did their share in that too, but it was... Everybody did. Everybody didn't. I mean, it... By the way, we didn't. Charlie, we resigned from the Savings and Home League a good many years ago just because we thought such nutty stuff was going on. It was disgraceful.
CharlieYeah. And... And Charlie got lectured for it, too.
WarrenYes, I did. They made him go to school, or not alone, money. And I think one of the regulators said, well, what kind of people do you lend money to? And I think Charlie said, well, the one thing we do is we don't lend money to people. we don't have money to people like you. And then, for some reason, we had regulatory problems after that. It was not popular because he said, you're using the government's credit and our savings and loan, and therefore you have to make a lot of dumb loans because we're telling you to. And I said, we're not using the government's credit. As a condition of one of our mergers, Berkshire Hathaway agreed, you'd never have trouble with our savings and loan. We're paying you insurance premiums, and you're using our credit. Our credit, this did not make me popular.
CharlieNo. He was a florid-in-faced alcoholic. I remember it very well.
WarrenI do too, but... We left the savings in loan business. We have more problems when Charlie wins an argument. But it's a lot of fun.
Andrew Ross SorkinOkay. Andrew. Okay, here's the question. Please tell us more about your experience this past year with Todd Combs and Ted Westler. What did they do well? And did they make any mistakes? And please discuss how you compensate them a bit more. In an interview, you said that Todd Combs was well compensated for the performance of his stock picks last year. Should we be worried about a short-term horizon for compensation, how do you ensure that Todd and Ted don't chase high-flying stocks for the sake of compensation?
WarrenWell, we've always been much more concerned about how our record is achieved than the precise record itself. And with both Todd and Ted, Charlie and I, was struck by not only a good record, but intellectual integrity, qualities of character, a real commitment to Berkshire, a lifelong type commitment. And we've seen hundreds and hundreds of good records in our lifetimes. We haven't seen very many people we want to have Joanne Berkshire, but these two are perfect. And we pay them. And we pay them. each a salary of a million dollars a year, and we give them 10% of the amount by which
[1:07:02]
Warrentheir portfolios beat the S&P so that if they beat the S&P by 10 points, they get one point, for example, when we get nine points. But we do it on a three-year rolling basis so that you don't get the seesaw effect. And each one gets paid 80% based on their own efforts, and 20% based on the other persons, so that they have every incentive to operate in a collaborative way rather than they're jealously guarding their own ideas and hoping the other guy doesn't do very well. So it's, it's a, I don't think we could have a better structure. It's the same structure on pay, basically, that we had with Lou Simpson for 20-some years, except he did not have a partner. To the extent that they employ people underneath, them that comes out of their performance record, and it's worked far better than either Charlie and I had hoped, and we had pretty high hopes. We had one and three-quarters billion with each of them at year end, but we've added another billion each on March 31st, so they're running two and three-quarters billion apiece. I don't look at what they do, I see it eventually, when I look at a GEICO portfolio at the end of the month or something of sort. But they operate through their own brokers, they don't. I've told them that the only thing I want to know is that they're getting into a new name, I just want to know the name so that I'm certain that it isn't something that I am familiar with some insight information on or something so that there's no inadvertent appearance that that we would be, or that their purchase would have been influenced by something that I knew about. That's never come up. They can't, they can't, they can't, there's something we would have to file a 13D on, they would have to check with it. Basically, that's going to happen, never happen with Lou either. I mean, they operate in different stocks. They've got a much bigger universe than I have because they're working with two and three quarters billion, instead of 150 billion. They can look at a lot more things. And they've cheerfully pitched in for other duties that they don't really get compensated directly on, but that are helpful to Berkshire. And, you know, they will, they'll do a great job for Berkshire when they're running a whole lot more money than they are now. Ted only joined us this year. Todd did substantially better than the S&P last year, so he racked up a big performance game.
[1:09:53]
WarrenWell, what's interesting about it is that at least 90% of the investment management business of the United States would starve to death on our formula. And I think these people will do pretty well with it, so.
CharlieAnd not only that, that they'll be terrific for the long pole for Berkshire, the kind of people we like having around headquarters.
WarrenYeah, I hope they get into those 400 taxpayers I mentioned, but if they do, even under the present law, they'll be paying taxes in the mid-30s. They are doing what they did before, which they ran hedge funds, but they're going to work every day thinking about the same things, and they get taxed at 35% plus, and if they were running hedge funds, they get taxed at 15%. And for all of those in the audience who can reconcile that, they'll be a free billy bar. I think each of them could earn more money in a different format, but with a less desirable lifestyle.
CharlieYeah, we have a little free Coke machine in our office.
WarrenYes. Well, I got to hang around with a fellow eccentric of the same type in Warren.
QuestionerOkay, Gary, before we go too far with us. My next question is on GEICO, a little bit more detailed question. In the fourth quarter of last year, the GEICO combined ratio went up over 100% Senate for the first time since, I think, some quarter in 2001. Now I realize a quarter doesn't make a trend, but something unusual happened in the quarter. Can you tell us what more about that?
WarrenThe biggest thing that happened was a decision, or maybe it was a couple of decisions. Tony Nicely could elaborate more on them, but they involve Florida and some interpretation down there, I think, of the PIP coverage that caused us to set up some extra reserves that, and they weren't extra. I mean, they looked called for by what was happening in in Florida at that time. But it was a one-time sort of arrangement, and in the first quarter of this year on a comparable basis, as you've probably seen in our queue, we wrote it about 91. So the basic business is good, but the Florida, that Florida decision cost us significant money because it changed, it changed our potential liability. liability for a bunch of claims already outstanding. And my guess is you're more familiar with the exact terms of that than I am, but that is the bottom line answer on it.
[1:12:43]
WarrenAnd GEICO, every metric for GEICO that I've seen this year in terms of retention, combined ratio on season business versus new, all of that sort of thing, is quite consistent with our general record. Geico is a terrific asset for Berkshire. I mean, it will be worth, it's worth a lot of money now, it'll be with a lot more money in the future.
OtherStation 7. Hello, Charlie and Warren. My name is Stuart K. From Materan Capital Management in Stanford, Connecticut. You mentioned earlier today that one of Burlington Northern Santa Fe's competitive advantages is its environmentally friendly business relative to transportation alternatives. When evaluating other investment opportunities, what financial statement or other publicly available data do you use to gauge whether a company is both environmentally responsible and a good investment?
WarrenWell, in terms of what's a good investment, you know, we try to look at every aspect, every everything we can that will tell us how the world is going to develop for both that industry and the company in the future. And sometimes we feel a lot of confidence about that. If we're looking at Coca-Cola, we think we know a lot about how the world will look for the Coca-Cola company over the next five or 10 or 20 years. If we're looking at some retail business or something, we would not have the same degree of conviction at all. I mentioned the environmentally friendly aspect of it. And it is just, you know, it is just requires less in the way of the world's resources to move the goods, you know, on a steel rail in large containers, you know, with only a couple people involved with 120 cars a train a mile long than it does if you're working, you know, with trucks that have many, many, many, many more people and much more in the way of fuel. to deliver the same kind of tonnage. So there's no, we don't, there's no magazine we go to or books we go to or anything like that. We just look at the dynamics of the specific industry and company.
CharlieCharlie? Warren, even though he's an unseasoned young man, was able to figure out that if he used a lot less fuel per ton of freight, who were causing fewer undesired particles to go into the air. That's about the limit of my capabilities, folks.
OtherOkay, Station 8, we've covered 36 questions from the two panels, so we're now going to keep going around the audience. As long as the questions last, we're going to give you more than your share at this point.
[1:16:09]
OtherGood afternoon, Warren and Charlie up here. Yeah, I see you. All right, very good. John Norwood from West Moyne, Iowa. We've spent a lot of time today talking about two out of the three things you fell as sake. You spent a lot of time thinking about one's allocating capital, one's managing risk. We've had just one question related to motivating your people and tied into executive compensation. So that's what I'm interested in learning more about, executive compensation, how you motivate Berkshire managers, financial versus non-financial incentives. Can you speak more about that? Thank you.
WarrenWell, obviously Charlie and I have thought a few times about why do we do what we do when we don't need the money at all, and we jump out of bed, excited about what we're going to do every day, and why is that the case? Well. We get the opportunity to paint our own painting every day. And we love painting that painting. And it's a painting that'll ever be finished. And, you know, if we had somebody over us that was saying, why don't you use more red paint than blue paint, and we had all the money in the world, we might tell them what they could do with the paintbrush. But we get to paint our own painting, and ours overlap. We have more fun doing. it together than we would have doing it singly, because it is more fun to do it with people around you that are pleasant, interesting to be around, and we also like applause. So if that works with us, we say to ourselves, that was not a brazen. If that works for us, why shouldn't it work for a bunch of other people who have long been doing what they like to do, and now in many cases have all the money they possibly need, but still they may have to sell us their business for one region or connect with family or Texas, who knows what else, but they really like what they've been doing. That's the reason, probably the reason they've been so good at it, part of the reason they've been so good at it. So we give them the paintbrush, let them keep the paint brush, and we don't go around and tell them use more red paint than blue paint or something of the sort. And we applaud. and we try to compensate them fairly because though they aren't primarily doing it for the money in many cases, nobody likes to be taken advantage of. So it, but that has not been a big problem at Berkshire. We have not had compensation problems over time. If you think about it over 40 odd years, you know,
[1:19:12]
Warrenthe times when compensation has been of importance is just, I'm practically nil. And it, we don't, we don't, we'll just, we'll just, take that we talked about the investment, the compensation of two investment people. Those people are making below hedge fund standards, below private equity standards, and having a less favorable tax treatment, they'll still make a lot of money. I mean, huge amounts of money. And I hope that they are having a good time doing what they're doing. I think that's why they're here. And I think they'll enjoy it a lot more over the years. than going around to a bunch of people explaining why they're worth two and 20 even, you know, in the years that aren't so good, and trying to attract new money when other people are making bigger promises someplace else. It's just a different way to live your life. So we want to have our managers enjoying their lives and enjoying their business lives, and we get rid of some of the things they don't like, a lot of them. I was with a fellow the other day that he'd come from England. And he's got plenty of business problems to work on, and he's spending a significant part of his time talking to investors, which doesn't know good. I mean, I'll be talking to customers or, you know, employees or something, but he, I think a number of managers may have to spend time talking to lawyers or talking to bankers or talking to investors, and what they really like to do is run their businesses. And we give them the best opportunity to do that. So I can't put passion in the sense. somebody about their jobs. But I can certainly create a structure that will take that passion away from them. And Berkshire is a negative art in that way. We focus on not messing up something that's already good. And that's my job, and I think the person that follows me will have a very similar job. But we have a bunch of managers nobody else can hire. And And, you know, how many companies of size can you say that about, you know, around the country these days? And I think we will retain that advantage for many, many decades to come. It works. And people know that it works within the company. It's so it's self-reinforcing. And there's nothing like getting proof that what you're, you know, what you've designed works to cause you desire to perpetuate it and to build upon it. Charlie?
CharlieWell, we don't have any standard formulas like they have in some big companies where X percent
[1:22:03]
Warrenis on diversity and Y percent is on something else and Z percent is on something else. And everybody is putting all this stuff through a big human resources department. And every incentive arrangement with a key executive is different from every other. So we don't, we can't, we can't help. be with a standard formula. We don't have one. Yeah, our businesses are all so different. It'd be crazy. Try and have some master arrangement, you know, that involve return on capital. There's some businesses don't use any capital in our companies or operating margins. And they're just, you know, we could, we could hire consultants and compensation to come in and they'd want. We never have. No, we never will. So, you know, they would want to please the people they were working for and get referred elsewhere. I mean, I will guarantee you that you go to many corporations, you know, if you've got a comp committee, it meets periodically, and the human relations and BP comes in and probably suggests, say, compensation consultant to take. And, you know, who does the human relations VP want to, want to, who's approval do they want? You know, the CEOs, you know, whose approval does the compensation consultant want? Well, they want to get recommended elsewhere by the CEO and the human relations BP. So what kind of assistance do you get? You get what I call ratchet, ratchet, and bingo. You know, I mean, we're not going to have any of that at Berkshire. And like I say, it's worked very well. Now, we may have people to make lots of money at Berkshire. I mean, we've got... We've got numbers in eight figures and, you know, a page and a half or so, I saw it the other day that would be at a million dollars or an over. And we'll have more. But it does relate to logical measures of performance in practically all cases. And the amount of time we spend on it is just, you know, I am the cost. I know, I am the Compensation Committee for 60 or 70 people, and I'm not overworked. Anything further on that, Charlie?
CharlieWell, in past years, I've made the remark about compensation consultants, that prostitution would be a step up for them.
WarrenCharlie's also in charge of diplomacy at Berkshire. We told you we get to everybody in terms of offending him before the day was over. Didn't even take till 3.30.
OtherStation 9. Good afternoon, gentlemen. Arlington, Virginia. I have a question for you. What will it take to get America growing by 4% again?
[1:25:19]
WarrenWell, Charlie, that's too easy for me. You take it.
CharlieA lot. It's not going to be easy.
WarrenNo, but if population grows 1% a year, and GDP, in real terms, grows 2.5% a year, by the standards of 2,000 or 5,000 years, or 5,000 years, that would be remarkable. I mean, it would, you know, it would result in, you know, a quad-trupling of real GDP per capita every century. We don't, it's nice to have 4% in real terms, but 2.5%, it may be slow in getting us out from the slump that we entered. into a few years ago, but it's a really, it's a remarkable rate of growth for a country that already enjoys a very high standard of living. It's a remarkable rate of growth for a country, a country that has 1% a year gain in population. It is, it is huge over one person's lifetime. I've used this a lot of times, but in my lifetime, the real GDP per capita has increased six for one. But it's nowhere near 4% per annum.
CharlieNo, it's staggering. It's staggering. And we have $48,000, or thereabouts, of GDP for capital in the United States. We are unbelievably rich, you know, but an awful lot of people are not feeling that way, and in many cases for good reason. But we've got a tremendous country to work for, I mean, to work with, it's, it's got all kinds of strengths. And it has this huge abundance that if my parents, back in 1930, if you told my mother and father that when I was 81, that I would be living in a country that had six times the per capita output of their day, they would have thought, you know, that this would be a utopia. And it hasn't been bad, I might add. But it's, our country is not a mess. You know, our politics may be a mess, but the output is, you know, it's terrific.
QuestionerCharlie, if you had to guess at the real growth rate per capita over the next 20 years in the United States, what do you think it would be? That's after inflation.
CharlieOh, no, this is just real.
QuestionerRight, yeah, real. That's what I mean, but I mean after taking inflation out of it.
CharlieYeah. Well, yeah. God would make the guarantee I would settle for a very low figure. I think in a very mature economy with a lot of social safety net and a lot of competition from new nations rising, I think 1% per capita in real growth would be a sensational result.
QuestionerYeah, which in 20 years means people would be living close to 25% better on average.
CharlieYeah, yeah. That's not bad. That's the next generation, and one generation they improve.
[1:29:14]
WarrenWhen you get your expectations too high, when you think that 4% is what the world ought to provide you. You're asking for trouble. It won't do it. That's what happened in the housing boom. People got these foolish dreams, and then they just started doing foolish things to try and reach unattainable objectives. But if you had the 1%, you would be talking about each generation living. Something over 20% about, something over 20% than the parents did. From this base, it would be a sensational result. And we'll probably get it, might you. It won't come in even the increments, but this system still works. It works. And incidentally, you've actually seen, even after the incredible crash in the effect that we had in fall of 2008, you've seen an enormous amount of resilience here, and of course you compare it with Europe, and it looks particularly strong.
QuestionerYes. Yes, but the resilience has been better for the businesses than it has been for the employment situation, which is too bad.
WarrenYeah, business has done extraordinarily well. You know, business profits is a percent of GDP. We're right at the height, you know, in the last year. And of course, our own work. I mean, and that produces a lot of strains on the political system.
QuestionerWell, we've mused enough on that, so let's go to Station 10.
QuestionerHi Warren. Arthur Lewis from Denver, Colorado, a new home of Peyton Manning. But my question is...
WarrenIt's also the home of John's Man Bill.
QuestionerMy question is, with the election coming up, have you thought about making a donation to a super PAC to try to protect a competitive advantage?
WarrenNo, I won't. You know, I wish it never had... Citizens United never have enough. It's very tempting. I will hear this argument put forth to me. put forth to me. People will say, well, you know, we don't believe in it either, but they're doing it on the other side. And, you know, you've got hundreds of millions pouring it on the other side, and you're going to tie your hands behind your back, you know, just over principle. But, you know, I think the whole idea of Super PACs is wrong, and I think the idea of huge money by relatively few people influencing politics. I think we've got enough of a push towards. the plutocracy from a lot of other factors that we don't need to throw it into the voting process. And I might say that, I'll say this for Sheldon Adelson, who was, you know, he and his wife, I think, probably put 12 million or something like that.
[1:32:05]
WarrenHe says this, and I believe him entirely. I mean, he says the same thing. He thinks the system is wrong, but he says that's the way the system is, so he has to, you know, he has to play or other people will play, and he won't be. I can understand that, but I don't want to do it. But I don't want to do it. I mean, I just think that, you know, you've got to take a stand someplace, and that the idea that I should toss $10 million into some super PAC, which is going to spend its whole time kind of misleading people about the opponent's behavior or record. I don't want to see democracy go in that direction. Charlie?
CharlieWell, I'm ordinarily so negative, and I am extremely negative about our, the nature of our, the nature of our, politics with the both parties doing the gerrymandering and requiring this unified thought so that the crazies on each side get all this power. And I remember when we did the Marshall Plan with bipartisan support, that's more my kind of a world. So I don't like it. That said, I think we're lucky to have two candidates as good as we have. Considering the system, I think we've done pretty well this year. How would you feel about contributing to a super PAC? if the other side had way more going to their super PACs?
WarrenWell, there are certain subjects where I would give money to a super PAC if I thought it would work. If I thought I could really reduce legalized gambling in the United States by a major amount, I would be willing to spend some money to get it done. I think it does us no good. And the extent we have allowed our securities markets to be more like gambling casinos, I think that's a dumb outcome, too. If you got a server back out there, call on Charlie. Not me. Eleven.
OtherGlenn Tung, T2 Partners, shareholder from New York. In an interview with Becky yesterday, Mr. Munger commented that in the old days, the vast majority of Berkshire's value was embedded in the investment portfolio, which is presumably worth around book value. Today the majority is in the controlled businesses, which we believe are worth a substantial premium to book. In light of this, Berkshire Hathaway's intrinsic value, as a multiple of book value, should be increasing over time. Yet Berkshire's price to book value has been declining. I'm trying to understand this. Since the beginning of the year, Berkshire's investment portfolio, I'm sorry, since the beginning of last year, Berkshire's investment portfolio
[1:35:02]
Questionerhas increased in value by $20 billion and you acquired Lubrizol. The controlled businesses are going gangbusters. Yet the stock price hasn't budged. Is Mr. Market simply in one of his manic Moods? Charlie?
CharlieWell, I'd say no, but I'd say it's in the nature of things that the market is not going to do exactly what you want when you want it. I think over time, Mr. Market will treat the Berkshire shareholders fine, and I wouldn't worry too much about what happens over this six months or this 12 months. I don't think you're really all that welcome in this room if the short-term orientation is what turns you on.
QuestionerI think you'd agree, though, that probably that Berkshire is somewhat cheaper relative to its price than it was a year ago.
CharlieYes, absolutely.
QuestionerIf that's your test, should you feel better about the margin of safety in Berkshire?
CharlieYes, it's fine.
OtherOkay, station one.
QuestionerGood afternoon. Based on your earlier, oh, this is Roberta Cole from the Twin Cities of Minnesota. Based on your earlier comments you made this morning, we understand you will buy back shares to help increase share of value. Our confusion and appreciate clarification arises to why you are unwilling to distribute a dividend on a sporadic basis when the stock is too expensive to buy back, and you have the excess cash so that you could do that, particularly in a low interest rate environment. We look forward to a clarification, thank you.
WarrenYeah. By and large, we feel, perhaps unjustifiably, but so far justified, that we can create more than a dollar of present value by investings. Sometimes if the stock is cheap, we can create more than a dollar of present value by simply repurchasing shares. But even if that option isn't available, we feel that by every dollar we retain, we can, overall, we can turn that into a greater than a dollar of present value. And for 47 years, that's worked. I mean, we have, we have, every dollar, retained is turned into more than a dollar of value. So if somebody wanted to create their own income stream out of it, they were much better off selling a little bit of stock every year than they were by getting a dividend out of it. They would have more money working per share in Berkshire if they sold off 2% of their holdings than if we actually paid them out of 2% dividend. So the math has been compelling to this point. Now the question is whether we can keep doing that in the future. But so far
[1:37:59]
Warrenat any point in our history, if we'd paid out dividends, and I paid out 10 cents a share back in the 1960s, which was a big mistake, but if we, we won't repeat that. If we'd paid out dividends, our shareholders net would be worth less money than they are by having left it in. And I think that will continue to be the case, but who knows?
CharlieCharlie?
CharlieWell, I think the dividends will come and do course. will come and do course because eventually we'll find it difficult to multiply the rabbits. But we hope that that evil day is delayed. And even events of the last few years are encouraging in that respect.
WarrenYes, absolutely. Yeah. Particularly encouraging. Yeah. Yeah. I would feel better about, well, the last few years have been better than we anticipated in terms of being able to put money to work in ways that we think we're creating more than a dollar of present value at the time we did it. You know, mid-America may have very unusual opportunities in the next 10 or 15 years to employ an enormous amount of capital at a very reasonable return.
CharlieYeah. Perhaps a hundred billion.
WarrenWhat? Perhaps a hundred billion. Perhaps a hundred billion dollars. And you can see why that doesn't make us too excited about dividends. We'll think about it when we're older. A lot older.
QuestionerNumber two. Hi. Hi, Warren and Charlie. This is Thomas Schultz from Germany. You once said that if you had just $1 million to invest now, you could achieve returns of 50% per year. Given what you know now, how would you be able to improve on the already spectacular performance of when you started out with your partnership?
WarrenWe can't do with our present resources what we did once. There are a lot of things I can't do. that I used to do better.
CharlieYeah.
WarrenWell, you can confess to those, Charlie. So. Well, but I think he may be driving at the point that have we learned things in managing since we were at that level, where we could do even better with a million dollars now than we could have done with a million dollars then? And I would say the answer to that is yes.
CharlieYeah, I think that's true. There's enough craziness out there. If you have an endless time and only a very small amount of money, I think you could find ways to do pretty well. And in the course of 50 or so years, we have probably learned more or been exposed to more, that if we were back at the million dollar level, we would know more places to look, I think.
[1:41:04]
CharlieWell, I say what's interesting about Berkshire, and many of you have been around for so long, you've actually seen it happen. Berkshire's record would have been terrible compared to the way it turned out. But if Warren hadn't kept learning, learning, learning all the way, each decade, to make the record decent, he had to learn to do some things he didn't know how to do at the start of the decade. And I think that's pretty much the human condition. Of course, he's getting old. I worry about him a lot. I'll resist company.
OtherOkay, station three. My name is Jeff Chen. I'm from San Francisco. I'm 26. And I run a... software startup out there. My question is about mistake minimization. I found that I've made a lot of mistakes in my business looking back. And I want to know, besides thinking harder and learning from your own mistakes, what are the most effective techniques you've used to minimize the mistakes?
WarrenWell, we made mistakes, we'll make more mistakes. We do, we think, Not so much, we think in terms of not exposing ourselves to any mistakes that could really hurt our ability to play tomorrow. And so we are always thinking about, you know, worst-case situations. And there are, on the other hand, we have a natural instinct to do things big, both of us. So we have to think about whether we're doing anything really big that could have really terrible consequences. And I would say this, that, A, I don't worry much about mistakes. I mean, the idea of learning from mistakes, the next mistake is something different. I mean, so I do not sit around and think about my mistakes and think about things I'm going to do differently in the future or anything of the sort. I would say that you may get some advantage. I think I've learned something over the years. I haven't learned more about a basic investment. philosophy. I got that when I was 19 and I said, look, I think I've learned more about people over the years. And I'll make mistakes with people. And, you know, that's inevitable. But I think I'll make more good judgments about people. I'll recognize the extraordinary ones better than I would have 40 or 50 years ago. So I think that improves. But I don't think that improves. But I don't think it's improved by certainly any conscious sitting around and focusing on what mistake that I make with that person or this person. I just don't operate that way. Charlie?
CharlieWell, Warren, I would argue that what you've done and what I have done to a lesser extent is to learn a lot from other people's mistakes.
[1:44:27]
CharlieThat is really a much more pleasant way to learn hard lessons. And we have really worked at that over the years, partly because we've found it's so interesting the great variety of human mistakes and their causes. And I think this constant study of other people's disasters and other people's errors has helped us enormously. Don't you, Warren?
WarrenOh yeah, well, that's true. In terms of reading of financial history and all that sort of thing, I've always been absolutely absorbed with reading about disasters.
CharlieYeah. And there's no question. I mean, when you look at the folly of humans, you know, I've always been absolutely absorbed with reading about disasters.
WarrenYou know, I focused on the folly in the financial area. There's all kinds of folly elsewhere, but just the financial area will give you plenty of material if you like to be a follower of folly. And I do think that understanding, and that's what gave us some advantage over these people and had IQs of 180, you know, and could do things with math that we couldn't do. They just, they really just didn't have an understanding of how human beings behaved. and what happens. 2008 was a good example of that, too. So we've been a, we have been a student of other people's, of other people's folly, and it served as well.
OtherAs Station 4, have we got a question yet?
QuestionerJohn Boxstos, Dartmouth, Massachusetts, which as you know is next door to New Bedford, a former home of Berkshire. My question is, how do you build? barriers to entry, especially in industries which have few. Industries which have a few barriers to entry.
CharlieOh. How do we build barriers? Pretty tough.
WarrenYeah. We sort of buy barriers. We don't build them.
CharlieYeah. Well, think about that because it's true. It's very, there are some industries that are just never going to have barriers to entry. And those industries, you better be running very fast. be running very fast because there are a lot of other people who are going to be running and looking at what you're doing and trying to figure out, you know, what your weaknesses or what they can do a little bit better.
WarrenYou really, you know, a great barrier to entry, you know, is something like this. If you gave me $10, 20, $30 billion and told me to go in and try and knock off the Coca-Cola company with some new cola drink, I wouldn't have the faintest thing. idea how to do it. I mean, there are billions of people around the world that have something
[1:47:23]
Warrenin their mind about Coca-Cola, and you're not going to change that with $10 or $20 billion. Yeah, but our great brands we bought, we didn't create. We didn't create them. No, we eat them, but we don't create them. But, you know, not so many years ago, you remember Richard Branson, he came to this country, and he came up with something called virgin cola. And, you know, they say that a brand, is a promise. Well, I'm not sure what promise he was trying to convey by that particular branding. But, you know, you haven't heard anything about that since. I mean, I don't know how many cold drinks there have been in the history. Don Keel would probably know, but there's been hundreds, I'm sure. And those are real barriers. But it's, it's hard to do. I mean, as Pfizer finds out with Lipitory, you know, the time runs out. And what was an an absolute gold mine. Still is a pretty good mine, but it's not what it was by a long shot. But we've got a number of businesses that have, well, nobody's going to build another railroad, you know. We have a competitor, and we will have competitors in alternative methods of transportation and all of that. But if you're buying something that at a huge discount from replacement cost, and it's an essential sort of activity, you certainly got a barrier to new competition. But the UP is out there fighting for every bit of business every day, of course.
QuestionerYeah, we have found in a long life that one competitor is frequently enough to ruin the business.
WarrenWell, I did find that out. I started with a gas station out of 30th in Reddick here in Omaha, and we had a Phillips station next to his out of Sinclair station. And, you know, whatever he charged for gas was my price. I didn't have much choice. You don't like to be in a business like that.
QuestionerNumber five. Hi. I'm Kyle Miller from Kansas City, Missouri. And I was wondering about the VYD electric car company. And if with the new cars going on on sale in the U.S., if that will hopefully increase the value of the company.
WarrenCharlie is our expert on B.Y.D. and he will now carry forth.
CharlieWell, the car market in China is a huge market, and they happen to be located in China. So that's the main focus of B-Y-D. I think the first cars they will try and bring here will be for fleets in California where we have environmental troubles and so on. And there may be a market for electric cars with that. And of course, there are various subsidies that come to people who use electric cars.
[1:50:33]
Warrencars. I have some relatives who commute into Washington, D.C., and they can only use the fast lane on the freeway if they buy a Prius, and that's been very helpful to Toyota. And we'll see a lot more of that sort of thing. Generally speaking, I think BYD is an interesting company. If you stop to think about it, here's one of eight children of a peasant that becomes a famous engineering school professor. And before he's reached 50, he's won the equivalent of China's Nobel Prize. And he has created a company which has 180,000 employees, a landholding about the size of Macau, and a hundred and some million square feet of buildings. It's a very interesting startup company. What percent of the cars do you think in 2030 will be electric? Not many. I shouldn't have asked. I think society, it's like the, it's like the, it's like, Like the wind power that's being subsidized in Iowa, we should subsidize electric car in various ways, as they do in Washington, D.C., by letting them use the fast lane on the freeway in order to get the technology going so that we can wean ourselves from oil more quickly. So I think there will be more subsidies, and there will be more electric cars, but I'm not expecting a sudden revolution. Yeah. I drove the latest version of BYD's electric car. A guy in dro, I was driven around the block Tuesday, and I was flabbergasted at how much improved that car was. It's simply amazing how fast people in China are learning to do what took us a long time to learn. And the world is getting very much more competitive.
QuestionerOkay, Area 6. Good afternoon, Warren and Charlie. Jay Srinivasa from Mumbai, India, residing in Austin, from Mumbai, India, residing in Austin. in Texas. I want to thank you for a great show again. And over the few years that I've been here, I've truly enjoyed hearing both of you speak, and especially ability to synthesize and clarify so many issues on important things like, you know, valuation or the philosophy of life, or sometimes to even the trivial things, Warren, like you clarifying two years ago about, you know, your joke on Charlie Rose about Sophia Loren, they've all been extremely beneficial. My question is regarding some clarification around the insurance business and especially how you value it. Now, typically we've had, you know, a lot of float information and the underwriting profit or loss info. And so, you know, one way we've been geared to think about
[1:53:43]
Questionerit is the value of the investments that you get, the present value of the investments that you get from the, from the future expected flow. However, I think last year you also talked about the economic goodwill, especially in GEICO, and I think you were using some ratio as, you know, 90% of that year's insurance premiums. So I was wondering if you could just talk to us a little bit about how the different ways you could look at valuing the different insurance businesses. That would be a huge hell. Thank you.
WarrenWell, the economic value comes from the availability of the evaluation. to utilize float if obtained at a bargain rate. Now, if interest rates for 7 or 8%, and float even cost you 2% to obtain, it still would be very valuable. But the economic, at GEICO, for example, I think it's quite reasonable to expect a fairly substantial underwriting profit on average for as far as the eye can see, and growth for as far as the eye can see, and then coupled with that is a growing float, because the float grows with the premium volume. Well, that's the most, you know, that is a very attractive combination of factors that comes about because GEICO is a low-cost producer. And it has some real advantages in terms of scale, in terms of the whole method of operation that makes it very hard for other companies to duplicate their cost structures. and with the, it's always good to own a low-cost producer in any business, but it's very, very nice in the insurance business. Now, at GEEP's business does not come the same way at all. I mean, at GEICO, we have almost, we have well over 10 million policies, and that's a statistical-type business. And so we have, you know, hundreds of thousands of drivers in New York, and we have them by age and profession. and all kinds of things. So it's a very statistical type business, and that coupled with the low costs, very, very likely to produce a good result over time. And Gene's business, he has to be smart on each deal because something comes along and somebody wants to buy coverage for events causing a loss of more than $10 billion in Japan in the next year. That is not, you can't look it up in any book. And you can't do enough transactions just like that one and even know whether your on, whether your calculation was right on that specific deal. Now, if you make 100 calculations on 100 of these type deals, you'll soon find out whether
[1:56:37]
Warrenyou got the right person making those calculations or not. But the economic goodwill with the JETS operation is based much more on the skill to price individual transactions and the ability to find the people even that want those transactions. And at GEICO, it's based, you know, basically on a machine. But it's enormously important how that machine is run. And Tony Nicely has absolutely knocked the ball out of the park in terms of manager. In the years prior to when he took over, it was, you know, it had gone along at 2% of the market and really hardly gone anyplace. And Tony has quintupled virtually our share of the market while at the same time producing great underwriting results. So he took a machine that had a lot of potential, and then he exceeded even the potential that I thought it had. So you get the value in different ways. It does relate in the end to a combination of growing and large float and extremely low-cost float. And in our case, the cost of float has been negative. So people are actually paying us to hold $70 billion of their money, and that's a lot of fun. And I think that the chances of that continuing are really quite high, although I don't think the chances of the 70 billion growing at a fast clip or high at all. I think that we'll be lucky to hold on to the 70 billion. But I think the chances of the fact of us being able to get that at less than zero cost is good. And I think that will even be true if interest rates go up to four or five or six or seven percent. I think we may very well be able to do it. And that's a huge asset under circumstances like that. Charlie?
CharlieYeah. And we're currently in a low return environment from conventional investment of float. But that won't last forever. And there were times in the past when Ajit would generate a lot of one-of-a-kind float. And Warren would make 20 or 30 percent with it before we had to give it back. That was a lot of fun. And we did it over and over and over again. Whether that will ever come again on that scale, I don't know, but it doesn't have to. Is it, you know, when we have 30, presently our cash position, well, really, if you counted at all the companies, it's probably 36 or $7 billion. You know, we're essentially getting nothing on that. So if you, our earning power today is being affected by current Fed policies, and I, you know, that is not going to do. to be a normal rate for many, many, for over the longer term.
[1:59:36]
QuestionerSo we, in that sense, our normal earning power is being depressed by Mr. Bernanke, but probably for very good reason. Seven? Only Larsen, Salt Lake City. Five, six years ago you wrote in the annual shareholders report that the current account deficit, the trade deficit, couldn't go on indefinitely. Of course, a very large part of that is crude oil import. Now some people in the energy markets are sort of talking about the United States becoming independent in the energy market. Could you shed some light on how this might affect the trade deficit?
WarrenWell, yeah, it will be a huge plus, obviously, if our our total energy production increases substantially, and what we have to import costs us less. I mean, it is a big factor in the current account deficit. I don't, I mean, we're doing a lot in oil. I don't see us getting self-sufficient in oil, but gas is huge. Our picture has changed a lot in the last three years in terms of energy now. Charlie and I might argue that over time, we'd still be better off using somebody else's up and keeping our own for a long time. That's my view.
CharlieYeah. For a long time, I mean, you know, we were an oil exporter in my lifetime, a substantial oil exporter. And it might have been better if we'd been using Saudi oil. It would have been better.
WarrenYeah. Can't get by with Charlie here. It would have been better. Okay. It would have been better if we had been using Saudi Arabia. Arabia's oil then and just, in effect, treated all of this huge reserves we had in places like East Texas and such as a strategic petroleum reserve, which we just kept around for another century. It would have been much better.
CharlieYeah. It would have.
WarrenBut our picture has changed for the better, and that means our current account deficit picture has changed for the better. We've still got a ways to go, but it does look better than three or four years. years ago. Don't you think so, Charlie?
CharlieWell, the, those are, that's a very complex interaction. My view is that the single most precious resource of the United States, or its hydrocarbon reserves, the ones that are right here, and of course, I want to use up, and I'm a Puritan. I always want to suffer now to make the future better, because I think that's the way grown up should behave. And so I'm all for using up the other. fellow's oil and conserving our own. And I think the idea of energy independence is one of the stupidest ideas I've ever heard
[2:02:51]
Warrengrown people talk about. Think of what terrible shape we'd been if we'd achieved total energy independence way earlier. We wouldn't have any oil and gas left at all. Wouldn't that be a wonderful condition? We don't want energy independence. We want to conserve this stuff. And thank God other people have some of this precious stuff there. willing to sell. I have the exact opposite idea on this subject for most people. And of course, I think I'm right. This is Charlie's version of saving up sex for your old age.
CharlieYou do.
WarrenNo, we're going to use the oil. Okay, number seven. Was that seven? Jim Powers, Newton, Massachusetts. A few minutes ago, you were talking about per capita GDP. And if it went up one, If it went up 1% a year, each generation would be 20, 25% better off than the previous one. In Boston right now, we have a big controversy where the executive officer of Liberty Mutual Insurance Company has been making over $50 million a year in compensation plus other perks. And that amount of money is. in an hour or two is more than 95% of the employees of that company making the course of a year. The newspapers have been commenting on the concentration of the profits of that mutual insurance company, not going to the insuracy policyholders who own the company because it's a mutual insurance company. and the lack of compensation going to the average employee. What good does it do the average American for the economy to improve 1% of GDP per year if they don't enjoy some of that themselves? But we certainly agree. They, without commenting on any specific individuals, but obviously, if we start out with 48, $1,000 per capita of GDP, and we do increase by 20% or so each generation, you would certainly hope that that would not keep bubbling to the people of the top as it has during the past generation. I mean, in the past 20 years, we have not seen the progress that the country overall has made, distributed in any kind of way, except very, very much at the top. And the tax code has encouraged that. tax code is, you know, the tax code which was taking those people making the $45 million incomes in 1992 was taking 27 or 28% from them. When they got up to 270 million now, it's, you know, it's taking a figure that's more like 18%. So we've got a tax code that has become more and more pro-deal for rich and coupled with what you see and you've seen in compensation. and what the CEO makes in relation to the average worker and all that.
[2:06:30]
CharlieYou know, we've gone a long direction, a long way in making sure that what we were promised in the way of trickle-down benefits has not been achieved. It's also true that most of the great mutual insurance companies, and there are a lot of them in the United States, do not have that kind of compensation abuse in them. That's true, for example. That's quite clear. State Farm or something like that does not have. No, no. Most of them don't. And that's a very egregious example, but Boston has always led in egregious examples. No, it's the corporate world. It got there early, you know, it mastered the art. The corporate world has been, there's been a lot more egregious behavior in the corporate world than the mutual world.
WarrenWell, that's why it's so anomalous, really.
CharlieYeah, yeah. Yeah, I, no wonder it's drawing some attention. The rich like it that way, you have to understand that. And it, uh, but the tax code is, is basically, you know, that is an important place where people decide, you know, who actually bears the cost of this government, and we have moved away from the rich on that as they have gotten further and further away from the middle class in terms of earnings. And, you know, there's a, there may be a natural tendency in a democracy to work toward a plutocracy. If you think about the effect of money in politics, if you think of the nature of how much, market systems work. You know, that may, there may be, that may be, there may be some underlying trends that push a democracy toward plutocracy, and you need countervailing factors to prevent it. I don't think he ought to be too discouraged about Boston either, because when I first went to Boston, the mayor was running the city from the federal penitentiary.
WarrenYeah. Was that Curley?
CharlieYes, Mayor Curley. Yeah. And nobody. Nobody in Boston saw anything peculiar about it.
WarrenIf you live long enough, you see everything.
CharlieYeah, right.
OtherArea eight. Nine, he says. Oh, nine? Okay, nine. My name is Brian Chilton, also from the Boston, Massachusetts area. I'm surprised you admit it, huh? I was tempted. Warren, a lot of today's questions referenced risk. It seems to me one of the biggest risks facing us facing us is the pure sovereign debt levels both here in the U.S. and in many countries in Europe. The liquidity injections by the Fed and more recently the ECB have given us some breathing room. But how do these large debts get balanced and do they concern you?
[2:09:40]
CharlieWell, the nice thing about sovereign debt is they can not pay you at the end and you can't grab anything from them, unlike other kinds of debts. And, you know, the truth is that's that the world has seen many, many failures of sovereign debt. I remember when Walt Wriston back in the early 1980s said, you know, sovereigns don't default. Well, the truth is they've defaulted, you know, many, many times over history. And what happens then is you get a big reallocation of wealth. Now, the wealth doesn't go away. I mean, you don't lose the farms, you lose the plants, you don't lose the people with their skills and all of that sort of thing. I mean, there may be some. marginal losses, but I don't know how it plays out in Europe. We have seen the ECB here recently give the trillion dollars to banks which are loaded with sovereign debt, which really is questionable in many cases. And I wouldn't be surprised in some cases if they haven't used some of those, some of the borrowing to even buy more of it. So it's like giving a guy with a margin account with some perhaps bad assets in it, even more money to play with them, to further leverage themselves up and make an even bigger bet. When they did that at MF or whatever it was, global, you know, that had a bad ending and it might have a bad ending over there. I would much prefer, you know, a world that was getting its fiscal house in order, including in the United States. States. The counterargument, of course, is that when you're in a recession or close to it, as some or all of Europe might be, that that that will feed on itself and be destructive in the same way that it was in the early 30s in the United States. But we have been having in the United States, it's very interesting. We talk about the fact that there was a stimulus bill a few years ago, even though it's a they didn't call it that, and whether it was adequate or inadequate and all that. When the government is operating at a deficit that's 8 to 9% of GDP, that is stimulus on a huge, huge level, you don't call it stimulus. We may not call it, but that is, by definition, huge fiscal stimulus. So we have been having consistent huge fiscal stimulus in this country, and we will have to we will have to wean ourselves off of that fairly soon. And the interesting, I think almost leaders of both parties realize that you probably have to get revenues up to something around 19% of GDP, and you have to get expenses down
[2:12:45]
Warrento 21% of GDP, and that that will work fine over time. But you have a situation where both sides feel they will show weakness by going first. And you have also have a situation where the leaders probably have at least one party can't speak for their party so that you can't have negotiations in private, which are probably the way to get something like this solved. Well, I would avoid, well, I would certainly at these rates, I would totally avoid by medium-term or long-term government bonds. I think that's the obvious answer, and I wish I had answers that would solve the problem further behind that. But in terms of your own situation, I would stay away from medium or long-term government bonds.
Questionerour own or those of other countries, Charlie?
CharlieWell, of course, he's asking the really intelligent question of the day, and of course, we're having difficulty answering it. It is very hard to know how much of this Keynesian stuff will work after you've lost a lot of your fiscal virtue. You know you come to a time, if you're a government, which is pretty much lost all its fiscal virtue, that the Keynesian stuff won't work, and the money printing won't work, and it's all counterproductive, and you're headed for calamity. We don't know the precise point at which it stops working, and somebody like Paul Krugman, who I think is a genius, but I also think he's more optimistic about doing well with various economic tricks after he lost a lot of fiscal virtue than I think is justified by the facts. I think it's very dangerous to go low on fiscal virtue, and, of course, Here in the United States, we've used up some of our store. And it's very important that we not go too far in that direction because we want to be able to do what we did in the Great Recession, where we avoided a huge calamity because we had enough fiscal virtue left so the economic tricks would work. So it's a terrible problem, and I ask you the question, Warren, is it inconceivable that we can get a very mediocre result in the United States as a of all this trouble?
WarrenI think we'll get a good result over time. I know you do, but is it inconceivable?
CharlieWell, we can have problems, but I, and, but...
WarrenWell, I'm a little as optimistic than he is. I'm roughly in his position. I think there's some slight chance that we can get a pretty mediocre result. Let's say I came to you right now with a budget that made sense in general,
[2:15:37]
Charliein what it achieved, that had a 19% revenue build and do it and 21% of expenditures. Would you want to adopt that now? I think the reason intelligent people disagree on this subject is because it's so difficult. Everybody wants fiscal virtue, but not quite yet. They're like that guy who felt that way about sex. He was willing to give it up, but not quite yet. And... St. Augustine. St. Augustine, yes. He's a hero to many of us. I think... I think these are very, very hard questions. And I have one thing I'm sure of, that it is safer if you're going to these deficit financing things to use the money intelligently to build something you're sure to need. That is, to just throw it off the end of trains or give it to crooked lawyers. And so I think we all have an interest in making sure that whatever tricks we play are intelligently used because it will protect our reputation and reality in having this fiscal virtue. I'll let you design the 21% that gets expended. Oh, if I were doing it, I would expend it I would expend it sensibly on infrastructure that I knew we were going to need, and I would have a massive program. And I would have the whole damn country pay more cheerfully like we were so many Romans in the in the Punic Wars. In one of the Punic Wars, the Romans paid off two-thirds of the war debt before the war was over. That's my kind of... That's our campaign slogan, folks. Punic Wars again. But the answer is I think we do need more sacrifice. I think we need more patriotism. We need more sensible ways of spending money. And we need more civilized politics. But it's still a hard question. I think we should go on to it. easier one. Warren's not strained, but I'm at my limit.
OtherOkay, we'll do one more question from area 10. This will be an easier question. Good. Thank you so much for being here today. And I hope when you're both in your 90s and your 100s, you'll still be here doing these meetings. Thank you.
QuestionerAnd I'm Candy Lewis from Denver, Colorado. And my question has to do with taxes. And what? What do you feel is the ideal corporate tax rate to get this economy started and excited?
WarrenYeah, the last year, the actual taxes paid were about 13% of profits, as I remember. So the corporate rate is 35%, and last year you were allowed to write off 100% of 100% of most kinds of fixed asset purchases. I don't, I don't think the corporate profits are not the problem, or corporate balance sheets, or corporate liquidity,
[2:19:31]
Warrenis not the problem in the economy moving. I mean, there is money available, huge amounts of money available in the corporate world, including at Berkshire to push forward push forward on opportunities. You know, we will, we're spending money where we see opportunity. And we spent lots of money in the railroad business. We spent lots of money in the energy business. And we built plants elsewhere and did other things. But so it is not, it's not a lack of capital at all that's holding back, or nor is a tax rates, in my view, that are holding back at all investment. I mean, I, you know, this country prospered in the 50s and the 60s when the corporate rate was 52% and people actually paid it. And when it was cut to 48%, we all rejoiced. And our GDP per capita grew. So it is not a factor holding back. I will tell you, I mean, corporate tax rates last year were 1.2% of GDP. Medical costs were 17 in a fraction percent of GDP. And there we have a at least a 7 percentage point disadvantage. against the rest of the world, which is a big multiple of all the corporate taxes paid. So if you ask me about the tapeworm of American industry, you know, it's basically our medical costs. We've got a huge cost disadvantage against the rest of the world. Now, that's unbelievably tough to address. But that is where, you know, as Willie Sutton would say, that's where the money is. And you can fiddle around with corporate tax rates. I don't think that will have any big effect on the economy. You may achieve greater fairness within the corporate tax code. I wouldn't argue about that at all. And incidentally, the Treasury, I mean, I think both parties agree that they would like to see a lower overall corporate tax rate, but one that applies more equally across corporations. But getting from here to there is going to be very, very difficult because it's fine when you talk about it in the terms I just used, but once you put specific proposals out, everyone whose tax rate is going to go up, and some of them have to go up, if others are going to go down, everyone whose tax rate is going to go up, will fight with an intensity against that bill that far outstrips the intensity with which those on the other side fight. It's a real complex problem that way. But corporate tax rates are not our country's problems, in my view. Charlie?
CharlieWell, I used to say when I was younger that I expected to live to see a value added tax.
[2:22:22]
CharlieNo, I'm not so sure. But I think it's going to come eventually, and probably should. It equalizes the import-export effect to the taxes, and I think it's quite logical to tax consumption. I think we get in a lot of trouble when we give people the money and then come around later and try and take it back. Human nature really resists that. And I think it's much better if you're going to rely on taxes to have taxes that are sort of taken out right off the top. And they don't vary so much from year to year. I come from a state where the state income taxes based on capital gains go way up and then they collapse. And of course, the politicians spend like crazy when they go up and there's agony when it's a crazy way to have a tax system. So we have a lot of problems. And I don't think a 52% tax rate, we may have gotten by with it when we sort of led the world, but I'm not so sure it would be a good idea right now to have our taxes 52% and the rest of the world taxing corporate profits at 15% or something. That might have a lot of perverse consequences. And since so little money is involved, it's not where the game should be played. And if Warren could save a lot of money on Medicaid. on medical expense for everybody. He probably would have done it already. It's really hard. It's hard. So we'll end with a hard one. And I thank you all for coming.
WarrenWe're going to reconvene in about 10 minutes to conduct the business of the meeting. And thank you. We'll now go to the business meeting. We follow a script here, at least to quite a degree. And the meeting will now come to order. I'm Warren Buffett, chairman of the board of directors at the company. I welcome you to this 2012 annual meeting of shareholders. This morning, I introduced the Berkshire Hathaway directors that are present. Also with us today, our partners in the firm of Deloitte and Touche are auditors. They are available to respond to appropriate questions you might have concerning their firm's audit of the accounts of Berkshire. Forrest Crutter is Secretary of Berkshire. He will make a written record of the proceedings. Becky Amick has been appointed inspector of elections at this meeting, and she will certified at the count of votes cast in the election for directors and the motions to be voted upon at this meeting. The name proxy holders for this meeting are Walter Scott and Mark Hamburn. Does the Secretary have a report of the number of Berkshire shares outstanding entitled to vote
[2:25:15]
Otherand representative of the meeting? As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 7, 2012 being the record date for this meeting, there were 934,158 shares of Class A, Common Stock Outstanding, with each share entitled to one vote on motions considered at the meeting, and $1,75,302,988 shares of Class B common stock outstanding, with each share entitled to 110,000th of one vote on motions considered at the meeting. Of that number, 640,153 Class A shares and 664 million. million, 293,280 Class B shares are represented at this meeting by proxies returned through Thursday evening, May 3rd. Thank you. That number represents a quorum, and we will therefore directly proceed with the meeting. The first order of business will be a reading of the minutes of the last meeting of shareholders, and I recognize Mr. Walter Scott, who will place a motion before the meeting.
QuestionerI move that the reading of the minutes of the last meeting the shareholders be dispensed with and the minutes be approved. Do I hear a second?
OtherThe motion has been moved and seconded. Are there any comments or questions? We will vote on this motion by voice vote. All those in favor say aye. Opposed? The motion is carried. The next item of business is to elect directors. If a shareholder is present who wishes to withdraw a proxy previously sent in and vote in person on the election of directors, you may do so. Also, if any shareholder that is present does not turn in a proxy and desires about. in order to vote in person, you may do so. If you wish to do this, please identify yourself to one of the meeting officials in the aisles who will furnish a ballot to you. I recognize Mr. Walter Scott to place a motion before the meeting with respect to election of directors.
QuestionerI move that Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Goddisman, Charlotte Gaiman, Don Keough, Thomas Murphy, Ron Olson, and Walter Scott be elected as directors. Is there a second?
OtherIt has been moved and seconded that Warren, Buffett, Charles, Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Goddisman, Charlotte, Guyman, Donald Keighman, Donald Keough, Thomas Murphy, Ronald Olson, and Walter Scott be elected as directors. Are there any other nominations? Is there any discussion? The motions are ready to be acted upon.
[2:28:02]
OtherIf 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. Ms. Amick, when you are ready, you may give your report.
OtherMy report is ready. The ballot of the proxy holders in response to proxies that were received through last Thursday evening casts not less than 697,021 votes for each nominee. That number far exceeds a majority of the number of the total votes of all Class A and Class B shares outstanding. The certification required by Delaware law of the precise count of the votes will be given to the Secretary to be placed with a minutes of this meeting.
OtherThank you, Ms. Amick. Warren Buffett, Charles Munger, Howard Buffett, Steven, Berks, Susan Decker, William, Gage, David Goddustman, Charlotte, Guyman, Donald, Keough, Thomas, Murphy, Ronald Olson, and Walter Scott have been elected as directors. The next item of business is a motion put forth by the AFL-CIO Reserve Fund. The motion is set forth in the proxy statement. The motion requests Berkshire Hathaway to amend its corporate governance guidelines to establish a written succession planning policy, including certain specified features. The directors have recommended that the shareholders vote against the proposal. I will now recognize Ken Mast to present the motion. To allow all interested shareholders to present their views, I ask Mr. Mast, to limit his remarks to five minutes.
QuestionerMr. Buffett, members of the Board of Directors, my name is Ken Mast. I represent the AFL CIO, a federation of 56 unions, representing more than 12 million members. I'm here today to introduce the AFL. L. CIO shareholders' proposal for secession planning. Our proposal urges the Board of Directors to adopt and disclose a policy on CEO secession planning. Planning on for the secession of the CEO is one of the most important responsibilities of the Board of Directors. Having a secession plan in place is particularly important at a company like Bershaw-Hathaway where the CEO has created a tremendous value. Shareholders are thankful for Warren Buffett leadership as CEO. Last year, shareholders became concerned when David Sokol resigned from the company after allegations of improper trading. Mr. Sokol has been rumored to be a possible successor to Mr. Buffett. We filed our proposal last fall because we feel that an interim CEO candidate is needed
[2:30:48]
Questionerto carry out Mr. Buffett's legacy. Internal candidate may be maintained, can help me. maintained Berkshire-Hathaway strong culture. In Mr. Buffett's letter to shareholders earlier this year, he disclosed that the Board of Directors had identified his successor, as well as two superb backup candidates. We will, we were relieved to hear this news. We are not asking the company disclose the name of Mr. Buffett's assessor. All we're asking for as the Board of Directors update shareholders annually on the status of its secession planning. We are pleased that Berkshire and Hathaway has adopted all of these practices we recommended in our shareholders' proposal except for an annual reporting. We hope the company will continue to keep shareholders informed about the status of its secession plan. Thank you again, the AFLCIO, for considering this proposal. Thank you.
OtherThank you, Mr. Mass. Is there anyone else that wishes to speak?
WarrenOkay. And no one else, I would say, Mr. Mass, you know, we are on the same page. We regard it, and I speak for all the directors, we regard it as the number one obligation of the board to have a successor and one that we're very happy with is to both ability and integrity and that we know well to step in tomorrow morning if I should die tonight. And we spend more time. more time on that subject than any other subject that might come before the board. So we do not disagree with you on the importance of it. We have taken it very seriously. And I note that you do not ask us to name the candidates. And I think there are obvious disadvantages to doing that. So again, we're on the same page on that. And so as I understand it. You basically want to be sure that we report annually to you that the subject continues to be at the top of the list. And I can assure you that it will. And in terms of affirming that fact, I would say that certainly more often than once a year, I get in some public forum, I get asked questions where I get to answer precisely. the question that you want me to address, and I think that will continue in the future. We have not built it into any formal item in the proxy statement, which your organization has suggested that we do, but we have covered it in the annual report. We cover it at these meetings. We cover it when I'm interviewed frequently. And I don't think that anything would be gained by putting in some other form. But I do want to say that we, I'm glad you take it seriously, we take it seriously, and I think
[2:34:23]
Otherwe're going to get a result that you will be very happy with, although I hope it doesn't happen too soon. So with that, I would say that the motion is now ready to do. be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the motion and allow the ballots to be delivered to the inspector of elections. Ms. Amick, when you're ready, may you give you a report.
OtherMy report is ready. The ballot of the proxy holders in response to proxies that were received through last Thursday evening cast 32,179 votes for the motion and 6702,285 votes against the motion. As the number of votes against the motion exceeds a majority of the number of votes of all Class A and Class B shares outstanding, the motion has failed. The certification required by Delaware law of the precise count of the votes will be given to the Secretary to be placed with the minutes of this meeting.
OtherYes, the vote was about 95 percent, 5 percent. And thank you, Ms. Amick, the proposal fails. Does anyone have any further business to come before this meeting before we adjourn? we adjourned. If not, I recognize Mr. Scott to place a motion before the meeting.
OtherI move that this meeting be adjourned.
OtherIs there a second? A motion to adjourn has been made and seconded. We will vote by voice. Is there any discussion? If not all in Taver say yes?
OtherI?
OtherYes. All opposed say no? This meeting is adjourned. Thank you.