[0:00]
WarrenGood morning. I'm Warren, and this hyperkinetic fellow is Charlie, and we're going to conduct this pretty much as we have in the past. We'll take your questions, alternated among the media and analysts in the audience, until 3.30 with a break around noon for an hour. And then we'll have the regular meeting of the shareholders beginning at that time. Feel free to drift away and shop in the other room. We have a lot of things for you there. We only have one scripted part of this meeting, and Seas Candy has placed on all of the seats a little packet. And what we'd like you to do, we're going to like, we'd like to videotape everyone eating their pop at the same time for posting on Facebook and for use by the media on today's meeting. So each of you will open up the lollipop now. Now first of all, you've got them open. We'd like you to hold them up above your head. We're going to get a shot of 18,000. Guinness, here we come, and we'll get a few shots of that. We got it all, Maley? Okay, and now you can take off the cover, and the good part comes. And Charlie and I have, we have fudge up here, and we have peanut brittle. And I said the meeting would run till 3.30. If we've consumed 10,000 calories each, we sometimes have to stop a little early at that point. The only slide we have at this point is we did put out our earnings, first quarter earnings yesterday, And in general, all of our companies are, with the exception of the ones in the residential construction business, which was the case last year, and it's the case this year that all of the companies except those in that area pretty much have shown good earnings. And in the case of the bigger ones, the five largest non-reinsurance companies earned, all had record earnings last year, aggregating of those five companies, something over $9 billion pre-tax. And in the annual report, I said I thought they would, they would, if business didn't take a nosedive this year, that they would earn over $10 billion pre-tax this year. And certainly nothing we've seen so far would cause me to backtrack on that prediction. The insurance, if you read our 10Q and turn to the insurance section, you will see that there was an accounting change mandated for all property casualty insurance companies, which rather technical and I won't get in the details. If it changed something that's called the deferred policy acquisition cost called D-PAC, it has no effect.
[3:58]
Warrenon the operations at all on the cash. But it did change the earnings downward by about 250 million pre-tax for GEICO in the first quarter. It's based on whether you defer some advertising. GEICO had a terrific first quarter, had a real profit margin of almost nine percentage points, and the float grew, and everything good happened at GEICO in the first quarter. We had good growth. But we did make that accounting change. That accounting change also affects, to a lesser degree, the second quarter, and it may even trail just a bit into the third. But the underlying figures are somewhat better than the figures that we've presented there. And so overall, we feel good about the first quarter. We feel good about the year. even though we'll do it again at the meeting, but we should probably introduce the directors. And I don't know whether the audience can see the people here, but if you can turn up the lights or something so they can. We'll start off, of course, with Charlie, Charlie Munger. And then alphabetically, if the directors are just, I was going to suggest that you withhold your applause until the end, but I know he's sort of irresistible, so we'll make an excuse for him. For the remainder of the directors, if they stand and remain standing, and then you can applaud them at the end, if you will. We've got Howard Buffett, Stephen Burke, Susan Decker, Bill Gates, David Godesman, Charlotte Geiman, Don Keough, Tom Murphy, Ron Olson, and Walter Scott, Jr. Now you can go wild. Now we'll start with the questions, and what we will do is We'll start over here with the media, with one of them, move to one of the analysts, and then move to one of the shareholders. And we'll go by stations with the shareholders. And if we get, sometimes we've had as many as 60 or 62 questions, if we get to 54, at which point each person on the panel here has had a shot at six questions, then from that that point on, we'll do nothing but the, but from the shareholders from 54 on. So we'll see how that goes. And with that, we'll start off with Carol Loomis of Fortune Magazine.
Carol LoomisGood morning. I'll make my mini speech, which the most important point is that neither Warren or Charlie have an idea what we're going to ask. The other thing is that we received hundreds, if not thousands, of questions. We don't know the exact count. So we certainly couldn't use everyone. If we didn't use yours, we're sorry.
[7:27]
QuestionerSo for the first question, Warren, two shareholders wrote me about the heavy responsibilities that will fall on your successor and his or her ability to deal with them. So I'll make this a two-part question. From Chris Ng, Mr. Buffett, you have stated that you believe the CEO of any large financial organization must be the chief risk officer as well. So, at Berkshire, does the leading CEO candidate for successor, as well as the backup candidates, possess the necessary knowledge, experience, and temperament to be the chief risk officer? The related question is about the Goldman Sachs, GE, and Bank of America deals, all giving Berkshire warrants that you have negotiated. Shareholder, Jacques Cartier, excuse me, asked whether these specific transactions could have been done done with similar terms without your involvement? If not, what implications would that have for Berkshire's future returns?
WarrenYeah, I do believe that the CEO of any large, particularly financial-related company, and it really should apply beyond that, but certainly with a financially related company, should be the chief risk officer. It's not something to be delegated. In fact, Charlie and I have seen that function. delegated at very major institutions, and the risk committee would come in and a report every week, every month, and they'd report to the directors, and they'd have a lot of nice figures lined up and be able to talk in terms of how many sigmas were involved and everything. And the place was just ripe for real trouble. So I do, I am the chief risk officer at Berkshire. It's up to me to understand. anything that could really hit us in any catastrophic way. My successor will have the same responsibility, and we would not select anybody for that job that we did not think had that ability. It's a very important ability. It ranks right up there with allocation of capital and selection of managers for the operating units. It's not an impossible job. I mean, the basic risks. could involve excessive leverage, and then they could involve excessive insurance risk. Now, we have people in charge of our insurance businesses that themselves worry very much about the risk of their own unit, and therefore the person at the top really has to understand whether those three or four people running the big insurance units are correctly assessing their risks, and then also has to be able to aggregate and think how they accumulate over the
[10:24]
Warrenunits. That's where the real risk is, unless you're engaging in a lot of leverage in your financial structure, which isn't going to happen. Before I answer the second, Charlie, would you like to comment on that?
CharlieWell, not only was it this risk decision frequently delegated in America, but it was delegated to people who were using a very silly way of judging risks that they'd been taught in some of our leading business schools. So this is a very serious problem this man is raising. The so-called value at risk and the theories that outcomes in financial markets followed a Gaussian curve invariably. It was one of the dumbest ideas ever put forward.
WarrenHe's not kidding either. We've seen an action. And the interesting thing is that we've seen an action with people that know better, that have very high IQs that studied lots of mathematics, but it's so much easier to work with that curve because everybody knows the properties of that curve and can make calculations to eight decimal places using that curve, but the only probability is that curve is that curve is not applicable to behavior in markets, and people find that out periodically.
QuestionerThe second question, but we're well-equipped, Carol, and answer that question.
WarrenWe would not have anybody, you know, we're not going to have an arts major in charge of Berkshire. Yeah. The question about negotiated deal, there's no question that partly through age, partly through the fact we've accumulated a lot of capital, partly the fact that I know a lot more people than I used to know, and partly because Berkshire can act with speed and finality that is really quite rare among large American corporations. We do get a chance occasionally to make large transactions, but that takes a willing part on the other side. When we got in touch with Brian Moynihan at the Bank of America last year, I had dreamt up a deal which I thought made sense for us, and I thought it made sense for the Bank of America under the circumstances that existed. But I'd never talked to Brian Moynihan before in my life. I had no real connection with the Bank of America. But when I talked to him, he knew that we met what we said, so that if I said we would do five, billion and I laid out the terms of the warrants and I said we'd do it. And he knew that that was good and that we had the money. And that ability to commit and have the other person know your commitment is good for very large sums and maybe complicated instruments is a big plus.
[13:17]
WarrenBerkshire will possess that subsequent to my departure. I don't think that every deal that I made would necessarily be makeable by a successor. But they'll bring other talents as well. I mean, I can tell you the successor that the board has agreed on is can do a lot of things much, much better than I can do. So if you give up a little on negotiated financial deals, you may gain a great deal just in terms of somebody's more energetic about going out and making transactions. And those deals have not been key to Berkshire. If you look at what we did with General Electric and Goldman Sachs, for example, on those two deals in 2008, I mean, they were okay, but they are not remotely as important as, you know, maybe buying Coca-Cola stock, which was done in the market over a period of six or eight months. We bought IBM over a period of six or eight months last year in the market. We bought all these businesses on a negotiated basis. So the values in Berkshire that have been accumulated by some special security transaction are really just peanuts compared to the values that have been created by buying businesses like GEICO or ISCAR or BNSF or the sort. It's not a key to Berkshire's future, but the ingredients that allowed us to do that will still be available. and to some extent, peculiar to Berkshire in terms of sizable deals. If somebody gets a call from most people and they say, you know, we'll give you $10 billion dollars tomorrow morning and we'll have the lawyers work on it overnight. And here are the terms, and there won't be any surprises. You know, they're inclined to believe it's a prank call or something of sort, but with Berkshire, they believe it can get done. Charlie?
CharlieYeah. In addition, a lot of the Berkshire direction, are terrific at risk analysis. Think of the Kiwit Company, succeeding as it has over decades, and bid construction work on oil well platforms and tunnels and remote places and so on. That's not easy to do. Most people fail at that eventually, and Walter Scott has presided over that bit of risk control all his life and very routinely. And Sandy Goddessman created one of my favorite risk. control examples. One day he fired an associate and the man said, how can you be firing me when I'm such an important producer? And Sandy said, yes, he says, but I'm a rich old man and you make me nervous. Yeah, we do not have anybody around Berkshire makes us nervous.
[16:25]
OtherOkay, now we go to our new panel. Cliff Galant of KBW. We're getting the first question here from an analyst. I don't think that is on. Oh, can you hear me? No. Oh, okay. Sorry.
QuestionerThank you again for the opportunity. The subject generally still is mortality. In your 2011 annual report, Berkshire disclosed that Berkshire Hathaway Reinsurance Group made changes in its assumptions for mortality risk, which resulted in a charge, specifically saying that mortality rates had exceeded assumptions in the Swiss Recontract. Conversely, in Genry's life health segment, they reported lower than expected mortality. And I believe these trends continued into the first quarter that we cited. saw in the report last night. What was the surprise in the Swiss Re contract, and is there a difference in basic assumptions and trends for things like mortality rates among Berkshire's different businesses? In the property casualty businesses, for example, are the same assumptions and reserving philosophies applied company-wide?
WarrenStarting off with the Swiss Re example, we wrote a very, very large contract of reinsurance with Swiss Re, I would say, I don't know, a year and a half ago now, are there about. abouts, and it applied to their business written, I think, in 2004 and earlier. And they had a lot of business. It was an American business. And we started seeing, we got reports quarterly, and we started seeing mortality figures coming in quarterly that were considerably above our expectations and what looked like should be the case, should have been the case. looking at their earlier figures. So at the end of last year, we have a stop-loss arrangement on this. So we set up a reserve that really reserves it to the worst case, except we present valued that. But we, until we figure out what can be done about that contract, and we have some possibilities in that respect, we will keep that reserve. We will keep that reserved at this worst case. And so we took a charge for that amount. We are reinsuring Swiss Re, and then they are reinsuring a bunch of American life insurers. And there is ability to reprice that business as we go along. But the degree to which we in Swiss re-re might want to repriced that, maybe a subject of controversy, we'll see. So we just decided to put it up on a worst case basis. Getting to the question of our GEICO reserves, Ogenre reserves, there, I would say that it's described to some extent in our annual report,
[19:36]
Warrenbut I would say that the one overriding principle is that we hope that we hope that we hope that we And our plan is to reserve conservatively. I mean, it's a lot different reserving in the auto business where on short tail lines, and physical damage and property damage, you know, you find out very quickly how you're doing. And if you look at GEICO's figures, you know, we've had redundancies year after year after year. Gen Re was under-reserved at the time we bought it, and back in those 19, 1999, 1998, those developed very badly. Now they've been developing favorably for some time. I think with had mantras, we've got a fellow that, where I feel very good about the way he reserves. But he is not, there's no coordination between him and Tony at Geico, nor with Ajit at Merkshire Hathaway Reinsurance. They all have, I think, the same mindset, but they don't, there are three very different businesses.
CharlieWell, there's always going to be some contract where the results are worse than we expected. Why wouldn't it would buy our insurance if that weren't the case? The, it's interesting how, I mean, just take 9-11, you know, it's very hard to reserve after something like 9-11, because to what extent is business interruption insurance, you know, when you close the stock exchange for a few days, are you going to, are you going to, are you, are you, I'm, are you going to be able to collect on insurance? And, you know, when you close restaurants at airports, you know, 2,000 miles away, because the airport's closed for a few days, is that business interruption insurance? And I mean, there's a lot of questions come up. We turned out to be somewhat over-reserved for 9-11, as it turned out. You've got the same situation going on in both Thailand and Japan, because, as you know, The supply chain for many American companies was interrupted by the tsunami in Japan and the floods in Thailand. And if you're a car manufacturer in the United States and you aren't getting the parts, you know, it does your business interruption insurance, you know, cover the fact that there were floods for your supplier in Thailand or the tsunami hit in Japan. And sometimes that stuff takes years and years to work out. On balance, I think you will find that our reserves generally develop favorably.
OtherOkay, we go to the audience now up at post number one, and there he is. There he is. There he is.
[22:42]
QuestionerGood morning, Mr. Chairman, Mr. Vice Chairman. My name is Andy Peek, and I'm from Weston, Connecticut. In the past, you have made a few investments in China, PetroChina, and B.YD, to name two. Given the growing importance of China and the world, what advice would you give the new Chinese leadership and corporate CEOs such that you would make more investments in China?
WarrenWell, Charlie's made the most recent investment in China, so I'll let him handle that one.
CharlieYeah, we're not spending much time giving advice to China. That's not because they're not hungry for our advice. If you stop to think about it, China's been doing very, very well from a very tough start. To some extent, we ought to seek advice there instead of give it. And we have, I would say that we've found it almost useless in 60 years of investing to give advice to anybody in business. We have found that we have a lot of control. It's kind of like controlling the pairs by pushing on a noodle. It's amazing how little influence we've had when we've had 20% of the stock. People have this illusion of vast control.
Warrenheadquarters the beauty of Berkshire is that we created a system that doesn't require much control of headquarters that we if you look at our four largest investments which you're worth will say they're certainly worth 50 billion dollars today we've had some of them for 25 years one of them and another one for 20 years the number of times that we have talked unless we were on the board which it wasn't at Coca-Cola, but the number of times we've talked to the CEO of those companies where we have $50 billion. I would say does not, doesn't average more than twice a year, and we are not in the business of giving them advice. If we thought that the success of our investment depended upon them following our advice, we'd go on to something else.
Becky QuickBecky.
Becky QuickThis question comes from a shareholder. holder named Ben Noll, and I got several different emails that were very similar to this one, but I'm choosing Ben's question. He writes that while pleased by your announcement to buy back stock at 110% of book value, he feels like a bit of a chump for sometimes having paid nearly 200% of book in the past few years. Since you've stated repeatedly that it's as bad to be overvalued as to be undervalued, why didn't you warn us previously when the price book relationship was very different, or have you not felt that Berkshire was?
[25:54]
Warrenwas trading above intrinsic value over the last decade? Yeah. We've written in the back of the report how we prefer to, not to see our shares sell at the highest possible price. I mean, we've got a whole different view on that than many managers. If we could have our way, we would have the stock trade once a year, and Charlie and I would try to come up with a fair value for intrinsic business value, and it would trade at that. That's, incidentally, what some private companies do, but you're not allowed that luxury in the public market, and public markets do very strange things. If Charlie and I think Berkshire is overvalued, you know, it would be a very interesting proposition to have us announce, you know, half an hour before the market open someday, and have us both saying, gee, we think your stock is overpriced. I mean, and we would – We would have to do that with every shareholder simultaneously, and they would, who knows how they would react. We have never, I don't think, certainly never consciously done anything to encourage people to buy our stock at a price we thought was above intrinsic value. The one time we sold stock under some pressure back in the mid-1990s when somebody was going to do something with a stock that we thought would be injurious to people. We created a stock, and we thought the stock was a little on the high side then, and we put on the cover of the prospectus something I don't think has ever been seen, which we said that neither Charlie nor I would buy the stock at the price, nor would we recommend that our family did it. And if you want a collector's item for a proxy, for material, offering material, get that, because I don't think you'll see that one again. We think that if we are going to repurchase shares from people, that we ought to let them know what – that we think we're buying it too cheap. I mean, we wouldn't buy out – if we had two or three partners and somebody wanted to sell out, but we'd probably try to arrive at a fair price, but if we didn't – if it was established by a market and they were going to sell too cheap, we'd tell them we would – we'd probably try to arrive at a fair price, but if we didn't – if – if it was established by a market and they were going to sell too cheap, we'd tell them. We thought they were selling it too cheap. We are not selling, we are not saying that 11%, but we're using 110% above 111% or 111% or 112% is intrinsic business value.
[28:37]
WarrenWe know it's significantly above 110. And I don't think we will ever announce, because I don't see how we would do it, I don't think we would do it, I don't think we'll ever announce that we think the stock is selling considerably above intrinsic business value. But we will certainly do nothing to indicate that we think the stock is attractively priced if that that comes about.
CharlieCharlie? I've got nothing to add.
QuestionerJay Gell from Berkley's. Thank you. My question is also on share buybacks. Warren, in last year's annual letter, you said not a dime of cash has left Berks for dividends or share repurchaseases during the past 40 years. In 2011, Berkshire changed course. and announced a share repurchase authorization, what I'd like to focus in on is what is Berkshire's capacity for share buybacks based on continued strong earnings power? How attractive is deploying excess capital and share buybacks compared to acquisitions, even above 1.1 times book value. And what are your latest thoughts on instituting a shareholder dividend?
WarrenYeah, the 1.1 is a figure that we feel very comfortable with. So we would probably feel. comfortable with a figure somewhat higher than that. But we want it to be dramatically or very significantly undervalued to do buybacks. And we want to be very sure that every shareholder that sells to us knows that we think that it's dramatically under or significantly undervalued when we do it. But we have a terrific group of businesses. The marketable securities that we own we think are going to be worth more in the future, but we carry them at what they're selling for today. So they're not, that's not an undervalued item, you know, in the balance sheet. But some of the businesses we own are worth far more money than we carry them at. And we have no significant business that's worth any significant discount from the carrying value. So we would, from strictly a money-making viewpoint, we would love to buy billions and billions and billions and billions of dollars worth of stock. And we'll move that up to tens of billions. at 110% of book. You know, I don't think it'll happen, but it could happen. You'd never know what kind of a market you'll run into. And if we get the chance to do it, as long as we don't take our cash position below 20 billion, we will — we would buy it very aggressively at that price. We know we're making significant money for remaining shareholders.
[31:22]
WarrenThe value per share goes up when we buy at 110 percent a book. And therefore — and it's so obvious to it to us that we would — we would do it on a big scale, if given the chance to, and if it did not take our cash position down below a level that leaves us, leaves us comfortable.
WarrenCharlie, you have been — Well, some people buy their own stock back, regardless of price. That's not our system.
CharlieWell, we think it's — we think a lot of the share repurchaseersersers are idiotic.
QuestionerI mean, yeah. I was trying to say that more gently. You've never done it before.
CharlieI mean, it's for ego. I've been in a lot of boardrooms where share repurchase authorizations have been voted, and I will guarantee you it's not because the CEO is thinking the way we think at all. They like buying their stock better at higher prices. They like issuing options at lower prices. You know, it's just exactly the opposite of the way. we would think.
WarrenWe will only do it for one reason, and that's the increase of per share value the day after we've done it. And if we get a chance to do that with both, you know, in a big way, we'll do it in a big way. I don't — strictly operating as a financial guy, I would hope we'd get a chance to do a lot of it. Operating as a fiduciary for hundreds of thousands of people, I don't want to see them sell up.
CharlieYeah, we hope the opportunity never.
WarrenYeah. But if it does, we'll grab it.
QuestionerOkay. Station 2, shareholder. Hello. Hi, Mr. Buffett. My name is Bernard Fuhr from Australia, Vienna. My question is about banks. What's your view on the European banks? What's your view on the U.S. banks? And what must happen that you invest in the European banks? Thank you.
WarrenWell, I have a decidedly different view. European banks and American banks. The American banks are in a far, far, far, far better position than they were three or four or four years ago. They've taken most of the abnormal losses that existed or that were going to manifest themselves in their portfolios from what's now three and a half or four years ago. They've buttressed their capital. in a very big way. They've got liquidity coming out their ears at the bigger banks. The American banking system is in fine shape. The European banking system was gasping for error a few months back, which is why Mr. Draghi opened up his wallet at the ECB and came and came up with roughly a trillion euros of liquidity for those banks. Now, a trillion euros is about $1.3 trillion, and $1.3 trillion is about $1.3 trillion is about
[34:54]
Warrenone-sixth of all the bank deposits in the United States. I mean, it was a huge act by the European Central Bank, and it was designed to replace funding the was running off from European banks. European banks had more wholesale funding than American banks, on average. If you look at the Bank of America or Wells Fargo, they get an enormous amount of money from a natural customer base. European banks have tended to get much more of it on a wholesale basis, and that money can run pretty fast. So the European banks need more capital in many cases. They've done very little along that line. One Italian bank. Bank had a rights offering here three or four months ago. But basically, they have not wanted to raise capital, probably because they didn't like the prices at which they would have had to do so. And they were losing their funding base. The problem on the funding base has been solved by the ECB because the ECB gave them this money for three years at 1%. I'd like to have a lot of money at 3 years at 1%, but I'm not in trouble, so I can't can't get it. But I just, if you look at our banking system, it's really remarkable what's been accomplished. I thought at the time that the Treasury and the Fed were maybe a little overdoing it when they brought those bankers to Washington and bang their heads together and said, you're going to take this money whether you like it or not. But overall, I think that policy was very sound for this country's economy. economy. And if some banks were forced to raise capital that they didn't need, you know, which I might not have liked as a shareholder, one of them, overall, I think that our society benefited enormously. And I think the Fed and the Treasury has handled things quite sensibly during a period, when if they hadn't handled this sensibly, that our world today would be a lot different. Charlie?
CharlieYeah, Europe has a lot of problems. We don't, we've got this full federal union, and the country that runs the central bank can print its own money and pay off its own debt and so on. And in Europe, they don't have a full federal union, and that makes it very, very difficult to handle these stresses. Yeah.
WarrenWe're more comfortable with the risk profile in the United States. It's night and day. I mean, in the fall of 2008, when essentially Bernanke, and Paulson, and implicitly the President of the United States said, we'll do whatever it takes. You knew that they had the power and the will to do whatever it took. But when
[38:02]
Warrenyou get 17 countries that have surrendered their sovereignty as far as their currency is concerned, you know, you have this problem. Henry Kissinger said it a long time ago. He said, And if I want to dial, if I want to call Europe, what number do I dial? And when you have 17 countries, and just imagine if we'd had 17 states in 2008 and we had the governors of those states, I'll go to Washington and agree on a course of action when money market funds were, there was a panic in there, a panic in commercial paper, you name it, we would have had a different outcome. So I would put European banks and American banks in two very different categories.
Andrew Ross SorkinAndrew. Thank you, Warren. This question comes from a shareholder who works at a coal mining company. And he asked the following, Burlington Northern and Mid-American are two key links in a critical supply chain. Can you describe your views on coal and natural gases investments? And can you discuss how the current low-price environments impact the prospects for each of these businesses. You seem to have created an elegant hedge. As Burlington Northern suffers from the decline in coal, Mid-American may benefit from the fire sale in its fuel sources.
WarrenYeah, well, Mid-American will never really benefit or be penalized too much by the price of coal, because if coal is cheap, the benefit's going to be passed on to customers, and if it's expensive, the costs are going to be passed on. You know, Mid-American really is a, it's a regulated public market. utility. It has several, we have two mid-Americans. We have a mid-American holding and the mid-American that operates in Iowa, and then we have utilities on the West Coast. But those utilities are passed-through organizations. They need to be operated efficiently in order to achieve their rate of return. But if they are operated efficiently and in the public interest, whether coal or labor, whatever it is, may go up or down, really doesn't affect them, although it affects their customers. Coal traffic is important to all railroads in the United States, and coal traffic is down this year. This may interest you that this year in the first quarter, kilowatt hours used in the United States went down 4 percent, 4.7 percent. That is a remarkable decrease in electricity usage, 4.7 percent, and that affected, of course, the demand for coal. But the other thing that's happening is happening.
[40:45]
Warrenas you mentioned, natural gas got down under $2, it's a little higher now, but it got down under $2 at the same time oil was $100. And if you told Charlie or me five years ago that you'd have a 50-to-one ratio between oil and natural gas, I don't, I think we would have asked you what you were drinking. Did you ever think that was possible, Charlie?
CharlieNo, and I think what's happening now is, to use your word, it's idiotic. We are using up a precious resource, which we need to create fertilizer and so forth, and sparing a resource which is precious, but not as precious, which is thermal coal. If I were running the United States, I would use up every ounce of thermal coal before I'd touch a drop of natural gas. But that's, the conventional view is exactly the opposite. I think those natural gas reserves we just found are the most of the most. precious things we could leave our descendants. I'm in no hurry to use it up, and the gas is worth more than the coal.
WarrenDespite the wild things we've seen in pricing, particularly this ratio of natural gas prices to oil, you can't change, I mean, the install base is so huge when you get into electricity generation that you can't really change the percentages too much, although there has been a shift in recent months. Where gas generation is feasible, it has supplanted some coal generation. And certainly in the future, you're going to see a diminution in the percentage of electricity generated from coal in this country. But it won't be dramatic because it can't be dramatic. You just can't, the megawatts involved are just too huge to have some wholesale change. It's going to be very interesting to see how this whole gas oil ratio plays out, because it has changed. Everyone's thinking, and it's changed in a very short period of time. I mean, three years ago, people wouldn't have said this was possible.
CharlieYeah, the conventional wisdom of the economics professors is that if it happens in a free market, it must be okay. And it'll work out best in the end. That is not my view with 100 percent accuracy. I think there are exceptions to that idea. And I think it's crazy to use up natural gas at these prices.
QuestionerOkay, Gary Ransom of Dowling. Telematics is the latest pricing technology in the auto insurance business, whereby you put a little device in your car and you can either get a discount or some other determination of your pricing based on actual driving behavior.
[43:48]
QuestionerWhat is GEICO doing to keep pace with that change, and are there any other initiatives that GEICO has in place to maintain its competitive advantages in pricing.
WarrenYeah. Well, progressive, as you know, has probably been the leader in what you just described. And we have not done that at GEICO. But if we think there becomes a superior way to evaluate the likelihood of anybody having an accident, you know, I think we have 50, I think you have to answer 51 questions. which is more than I would like if you go to our website and to get a quote. And every one of those is designed to evaluate your propensity to get in an accident. Obviously, if you could ride around in the car with somebody for six months, you might learn quite a bit about the propensity. Particularly if they didn't know you were there, you know, like with your 16-year-old son. But I do not see that as being a major change. but if it becomes something that gives you better predictive value about the propensity of any given individual to have an accident, we will take it on, you know. And we will try to get rid of the things that don't really tell us that much all the time. We're always looking for more things that will tell us if we look around at these people in this room, one by one, you know, what tells us their likelihood of having an accident the next year. We know that you think that you think, this, for example. I mean, there's no question that a 16-year-old male is much more likely to have an accident than some guy like me that drives 3,500 miles a year and is not trying to impress a girl when he does it, you know. So, you know, that one's pretty obvious. Some of these others, some things are very good predictors that you wouldn't necessarily expect to be. credit scores are, but, and they're not allowed in all places, but they will tell you a lot about driving, driving habits. We'll keep looking at anything, but I do not see any, I don't see in this new experiment anything that threatens Geico in any way. Geico, in the first quarter of the year, now the first quarter is our best quarter, but we added a very significant number of policies. I forget what the exact number was. In February, it turns out to be the best month for some reason, but we were up there getting pretty close to 300,000 policies. So our marketing is working extremely well, and our risk selection is working extremely well, and our retention
[46:36]
Warrenis working extremely well, and our retention is working well. So GEICO is quite a machine. That's one of the – that's a business that we carry, as I've mentioned in the past. I think we carry it at a billion dollars. roughly a billion dollars over its tangible book value. You know, it's worth a whole lot more than that. I mean, based on the price we paid, that figure would come up these days to, you know, certainly something more like $15 billion more than carrying value. And we wouldn't sell it there. We wouldn't sell it at all, but that would not tempt us in the least.
WarrenCharlie?
CharlieNothing to add.
OtherOkay. Station three. Hi, Charlie and Warren. My name is Chris Reese. I'm here with a group of MBA students from the University of Virginia in Charlottesville. In recent years, business schools have taken a lot of blame for some of the recent state of the economy. What would you suggest to change the way that business leaders are trained in our country?
WarrenWell, I wouldn't – I don't know, Charlie, I wouldn't blame business schools particularly for – most of the ills, would you? I think they've taught the students a lot of nonsense about investments, but I don't think that's been the cause of great societal problems. What do you think?
CharlieNo, but it was a considerable sin.
WarrenWell, do you want to elaborate on what was the more sinful?
CharlieNo, no. I think business school education is improving.
WarrenIs the implication from a low base or?
CharlieYes.
WarrenI'd agree with that. In investing, I would say that probably the silliest stuff that we've seen taught at major business schools probably has been in, maybe it's because it's the area that we operate in, but it's been in the investment area. I mean, it is, it is astounding to me how the schools have focused on sort of one fad after another and in financial. theory and it's usually been very mathematically based. When it's become very popular, it's almost impossible to resist if you're, if you hope to make progress in faculty advancement. Going against the revealed wisdom of your elders can be very dangerous to your career path at major business schools. And, you know, really investing is not that complicated. I would have, you know, a couple of a courses. I would have a course on how to value a business, and I would have a course on how to think about markets. And I think if people grasp the basic principles in those two courses that they would be far better off than if they were exposed
[50:05]
Warrento a lot of things like modern portfolio theory or option pricing. Who needs option pricing, you know, to be in an investment business? And that, you know, when people, you know, when Ray Kroc started McDonald's, I mean, he was not thinking about the option value of what the McDonald's stock might be or something. He was thinking about whether people would buy hamburgers, you know, and what would cause them to come in and how to make those fries different than other peoples and that sort of thing. It's totally drifted away the teaching of investments. I look at the books that are used. use sometimes. And there's really nothing in there about valuing businesses. And that's what investing is all about. If you buy businesses for less than they're worth, you're going to make money. And if you know the difference between the businesses that you can value and the ones that you can't value, which is key, you're going to make money. But they've tried to make it a lot more difficult. And of course, that's what the high priests in any particular arena do that have to convince the laity that the priest have to be listened to. Charlie?
CharlieWell, the following creeps into the accounting, too. A very long-term option on a big business you understand the stock of a big business that you understand, or even a stock market index, should not be, the optimal way to price it is not by using black shoals. And yet the accounting profession does that. They want some kind of a standardized solution that requires them not to think too hard. And they have one.
OtherIs there anybody we've forgotten to offend at the – you'll send a note up. Carol?
Carol LoomisWell, talking about not offending. The talk of the Buffett Rule is all over newspapers and TV. But I believe your concept of what should happen to taxation of very high earners is different from what is now promulgated as the Buffett Rule. rule. Could you clear us up on this? This is a question from Leo Slazeman from the Kansas City metropolitan area.
WarrenYeah, I would say this. It has gotten used in different ways. I think intentionally, in some cases, because it was more fun to attack something that I hadn't said than tried to attack what I had said. Basically, the proposal is that people that make very large incomes pay a rate that is commensurate with what people think is paid by people with those incomes. I mean, I think most people believe when they look at the tax rates and all that, that if you're
[53:07]
Warrenmaking 30 or 40 or 50 million dollars a year, that you're probably paying tax rates in the 30 percent area, at least. And many people are. But the figures are such that if you look at the most recent year and you aggregate, you aggregate both payroll and income taxes because they both go to the federal government on your behalf. If you take the 400 largest incomes in the United States, they average $270 million each. That's per person, 270 million each. 131 of those 400 paid tax rates that were below 15 percent. Now, counting payroll taxes too. In other words, they were paying at less than what the standard payroll rates. tax was up until we've had this give back here recently, but a payroll tax was 15.3% for most of the last decade. So under the Buffett rule, we would have a minimum tax only for these very, very high earners that essentially would restore their rate to what it used to be. Back in 1992, when the average income of the top 400 was only $45 million, there were only 16 out of the 400 that we're at 15% or below. But now there's 131. There's still plenty of them that are paying in the 30s. I wouldn't touch them. But I would say that when we're asking for shared sacrifice from the American public, when we're telling people that we formerly told we're given promises on Social Security and Medicare and various things, and we're telling them we're sorry, but we kind of overpromised and we're going to have to cut back a little, I would at least make sure that the people with these huge incomes get taxed at a rate that is commensurate with the way they used to be tax not that long ago and probably and it's commensurate also with the way that two-thirds of the people in that area get taxed at higher rates. So it's gotten butchered a little bit, but it would affect very, very, very few people. It would raise a lot of money.
QuestionerWarren, isn't the suggestion that you can give about half of the 30% to charity instead of the government.
WarrenWell, but the tax rate still, after the charitable deduction, after the charitable deduction, you have to give, if you're going to give 50% and get a deduction, it has to be all cash. If you start giving appreciated securities. And then if you give to a private foundation, you're down to 20%.
QuestionerYeah. But there is some exception in this proposal now, isn't it, Obama's proposal, that charitable contributions help you?
WarrenWell, there is a, there's a
[56:04]
WarrenThere's a bill actually by Senator White House of Rhode Island. I mean, that is the only actual bill. That was voted on, and it did not get the vote. We got 51 votes in the Senate and needed 60. I can't tell you the exact precision on what it included there. I don't have any, you know, there can be all kinds of other ways of getting at the same proposition. I just think that people like me that have huge incomes, and I have no I have no tax planning. I don't have any gimmicks. I don't have Swiss bank accounts. I don't have any of that kind of stuff. But when I get all through, you know, I've done, I made the calculation four different times, three different times, 2004, 2006, and 2010. And in all three of three of those years, when my income was anywhere from 25 to 65 or so million, I came in with the lowest tax rate in our office. And we had maybe 15 to 22 or so people in the office at different different times during that. And everybody in the office was surprised. They were all in the 30s, and I was several times, you know, in this area of 17 percent. And that's because the tax law has gotten moved over the years in a way to favor people that make huge amounts of money. Imagine having 270 million of income. And there were, I believe there were 31 of the 400 that were below 10 percent on tax rates. And that counts payroll taxes as well. And like I say, you know, my cleaning lady, and instead I've been asked to explain, I kept talking about my cleaning lady. Well, my wife wants it very clear. She doesn't have a cleaning lady. This is a cleaning lady at the office, Mary, that I, my wife has gotten very, she does not have a cook. She does not have a cleaning lady. And she got a little tired of me, implying that she had one. So it's my cleaning lady at the office has been paying 15.3 percent. on Social Security taxes at the same time that an appreciable number of people making hundreds of millions of dollars a year are paying less than 10 percent. I think it's time to take a look at that.
OtherOkay. Cliff. Over the past two years, the world has witnessed a number of surprisingly large financial losses from major catastrophes, including earthquakes in Chile, Japan, and New Zealand, as well as floods in Thailand. Near term, what do you expect the impact on reinsurance? pricing will be for catastrophe risks. And longer term, does this trend of increased frequency of major catastrophes affect Berkshers'
[58:51]
Ajit JainYeah, it's very hard, you know, because of the random nature of quakes and hurricanes and that sort of thing, it's very hard to know when you really have had a trend. We've had that situation in global warming. I mean, it has been a godly warm here in the last few months, but a few years ago, it was extremely cold. And anything that moves us slowly. So as the things affecting our globe, separating out the random from new trends is really not easy to do. We tend to sort of assume the worst. I mean, if we see more earthquakes in New Zealand than have existed in the last few years than existed over the last 100 years, we don't say that we'll extrapolate the last couple of years and say that's going to be the case that's huge. explosion of quakes. But we also don't take the 100-year figure anymore. We have written, in the last few months, we have written far more business in Asia, and by that I mean New Zealand, Australia, Japan, and Thailand, we've written quite a bit more, a lot more business than we wrote a year ago or two years ago or three years ago, because they've had some huge losses. And they have found that the rates that they had been using were really inadequate. And they are looking for large amounts of capacity in some cases. And we are there to do that if we think the rate's right. But nobody knows for sure what the right rate is. I mean, we can tell you how many 6.0 or greater quakes have happened in California in the last 100 years and how many category three hurricanes have hit, you know, both sides of Florida, whatever. There's all kinds of data available on that. But the question is, how much does it tell you about the next 50 years? And so we, if we think we're getting a rate that if a fairly negative hypothesis would indicate, then we move ahead. And we've done that in the Pacific. I don't know whether you know it, but if you, last year, the I forget whether they had two or three quakes in Christchurch in New Zealand. But the, I believe it, the second one caused like $12 billion of insured damage. And if you think of that in relationship of a country of four or five million, and you compare that to the kind of cats we've had in the United States, that's 10 Katrina's. There have been some really severe. And Thailand was the same way with the floods. It was, the losses were just huge in respect to the entire premium volume in the country.
[1:01:53]
Ajit JainSo when that happens, everybody reevaluates the situation, and we are perfectly willing to take on very big limits if we think we're getting the right price. We have propositions out for as much as $10 billion of coverage. You know, now we don't want that $10 billion to correlate with that. anything else and we want to be sure we get the right price, but, and we may write some, you know, at some point. It's certainly the market for cat business in some parts of the world is significantly better from our standpoint than it was a year or two ago. But that's not true every place.
OtherOkay, station four. Good morning, Mr. Buffett, Mr. Munger. My name is Byrne Cushenberry. and I asked this question on behalf of a group of investors that made the trip up from Overland Park, Kansas. Mid-American has a large investment in wind and solar power. What effect do subsidies and incentives have on that business? And could you share your thoughts on a sustainable energy policy? I gather we should be conserving our natural gas. What is the most appropriate use of that resource?
WarrenYeah, well, I believe the, on wind, and we're much bigger in wind than solar, although we've entered solar in the last six months or so. We've got two solar projects that we own about a half of each one of them. But we've been doing wind for quite a while. And I think the subsidy is 2.2 cents for 10 years per kilowatt hour. And that's a federal subsidy. And there's no question that that makes wind price. And there's no question that that makes wind price. in areas where the wind blows fairly often, that makes wind projects work, whereas they wouldn't work without that subsidy. The math just wouldn't work out. So the government, by putting in that $2.2.2 subsidy, has encouraged a lot of wind development. And I think if there had been none, my guess if there would have been no wind development, I don't think any of our projects would make sense without that subsidy. In the case of solar, the projects we have have got a commitment from Pacific Gas and Electric to a very long-term purchase commitment. How that ties in with their particular obligations or anything. I mean, there may be some subsidy involved in why they wish to buy it at the price they do from us. I'm sure there is. I don't know the specifics of it. But neither one of those projects, neither solar nor wind, and if Greg Abel is here and wants to go over to a microphone, then correct me on this, it'd be fine.
[1:05:16]
WarrenBut I don't think any solar or wind would be working without subsidy. And of course, you can't can't count on wind for your base load. I mean, it works and it's clean, but if the wind isn't blowing, you know, it does not mean that everybody wants to have their lights off. So it's a supplementary type of generation, but it can't be part of your base generation. Charlie, do you have any thoughts on that? And Greg, do we have Greg up there? Up there? Go ahead, Charlie.
CharlieWell, I think, of course, eventually we're going to have to take a lot of power from these renewable sources, and of course we're going to have to help the process along with subsidies. And I think it's very wise that that's what the various governments are doing. Yeah, you can say the future is subsidizing, you know, oil and natural gas now in a sense.
WarrenIs Greg up there? If we have a... He needs a mic. He needs a mic. Zone 7? Yeah. Yeah. Yeah, just to touch on the, both the wind projects and the solar, Warren, you were exactly right. Obviously, the subsidy associated with the wind has allowed us to build now 3,000 megawatts across our two utilities, and you were absolutely correct. We would have not moved forward without that type of subsidy. On the solar, there's actually a couple other incentives that are in place. We get a very large incentive associated with constructing the assets. We recover 30% of the construction costs as we build it. Significant advantage there relative to Berkshire being a full taxpayer, where a lot of other entities in the U.S. are not, where the corporate entities that are competing for those projects relative to ourselves often don't have the tax appetite for those type of assets. So we do benefit from the underlying tax. structure. There's no question both in wind and in solar. Greg said on a point that people don't, or often don't understand about Berkshire, we have a we have a distinct competitive advantage. It's not unique, but it's a distinct competitive advantage in that Berkshire pays lots of federal income tax. So when there are programs in the energy field, for example, that involve tax credits, we can use them because we can use them because we have a lot of taxes that we're going to pay and therefore we get a dollar-for-dollar benefit. I don't have the figures, but I would guess that perhaps 80% of the utilities in the United States cannot reap the full tax benefits or maybe any tax benefits from doing the things
[1:08:32]
Greg Abelthat we just talked about because they don't pay any federal income taxes. They've used bonus depreciation, which was enacted last year. where you get 100% right off in the first year, they wipe out their taxable income. And if they've wiped out their taxable income through such things as bonus depreciation, they do not, they cannot have any appetite for wind projects where they get a tax credit or in the solar arrangement. So by being part of, by being part of Berkshire Hathaway, which is a huge taxpayer, here. Mid-American has extra abilities to go out and do a lot of projects without worrying about whether they've sort of exhausted their tax capacity. It's an advantage we have.
Becky QuickBecky?
Becky QuickThis question comes from John in Brunswick, Georgia. He says, you are clearly entitled to speak your mind on any and all subjects as an individual, but the recent publicity around the Buffett tax has become quite loud. As a shareholder, I fear it is limiting to some degree the interest in the Berkshire stock on principle for some people. For instance, my 84-year-old father is not interested in investing in Berkshire because of his opposition to this tax position, and otherwise he likely would. While being a public company CEO, should some of the political dialogue be somewhat muted for the betterment of the company and its share price?
WarrenYeah, that's a question that's raised frequently, but I really, in the end, you know, I don't I think that any employee of Berkshire, I don't think that the CEOs of any of the companies that we own stock in should in any way have their citizenship restricted. And I mean, we did not, when Charlie and I took this job, we did not decide to put our our citizenship in a blind trust. And the, you know, people are perfectly willing, you know, it's fine if they disagree. with us, I think it's kind of silly. I don't know the politics of necessarily of Ken Chenol or Muttar Kant or John Stump. I got a pretty good idea with Kovassovich at one time. But they run these businesses in which we have 10 – Ginny Rametti, I mean, we've got $11 and $12 billion with her. I don't know what her politics are. And, you know, I don't know what her religion is. She's got all kinds of personal views, I'm sure, that. that probably are better than mine, but it doesn't make any difference. I just want to how she runs the business. And I really think that that 84-year-old man making a decision on what he invests in based
[1:11:37]
Questioneron who he agrees with politically, and it sounds to me like you ought to own Fox. Charlie?
CharlieWell, I want to report that Warren's view on taxes for the rich has reduced my popularity on around one of my country clubs. If it keeps him from hanging around the country club, I'm all for it. And it's a disadvantage I am willing to bear in order to participate in this enterprise.
WarrenCharlie and I, we don't disagree on as many things as you might think, but we certainly have disagreed on some things over 53 years. It's never, in any, we've never had an argument in 53 years, and maybe you can get one started here if you work on it, but they, and it, it's just, it's irrelevant. I mean, it, you know, roughly half of the country is going to feel, from one way, you know, this November and the other half is going to feel a different way. And, and if you start selecting your investments or your friends or your neighbors based on trying to get people that agree with you, totally, you're going to live a pretty peculiar life, I think.
QuestionerOkay, Jay. Warren, this question is on acquisitions. Would you consider an acquisition in excess of $20 billion? And if so, would you so, would you? it be funded in terms of existing cash as well as issuing debt and equity or perhaps even selling existing investments?
WarrenYeah, we considered one here just a month or two ago, which we would have likened, I wish we could have made it, there was probably about $22 billion. I mean, it gets, above $20 billion, it gets to be more and more of a stretch, particularly because we won't use our stock at all. We used stock in the Burlington Northern acquisition, and we felt that it was a mistake, but we were using it for what, in effect, turned out to be about 30% of the deal, and we felt that we were doing well enough with the cash that overall that the mix was okay. But we would not use our stock now, and we wouldn't even use it for 30 or 40% of some deal, and it's hard to imagine. So we really have to... It's hard to imagine, but it could conceivably happen. It could happen. It could happen. But I don't think it will happen. I don't need it. I don't need it. Well, we looked at this $22 or $23 billion deal, and we would have done it if we could have made the deal. But it would have stretched us, but we would not have pushed it to the point where it would have taken our cash below $20 billion. We would have sold securities.
[1:14:31]
WarrenWe would have done whatever was necessary to have a $20 billion cash balance when we got done done with the deal. But I would have had to sell some securities. I didn't want to sell. I liked the deal well enough, so I would have done it. Now, if that had been $40 billion, I don't think we, you know, no matter how well I liked it, I don't think I would have wanted to peel off $25 billion or so a marketable surer here to try to get it done. And I certainly wouldn't want to be in limbo not knowing exactly where the money was going to come from and therefore be subject to some terrible shock in the world or the market. If you have a $20 billion deal, though, I would have a $20 billion deal, though. I've got an 800 number, so . But you've actually sort of hit the point where we start squirming a little bit as to where we would come up with the money. On the other hand, the money's building up month by month, so I — we will — if we can make the right $20 billion deal, we'll do it. And next year, if we haven't made a deal, I'll probably say if we can find the right $30 billion deal, we would do it.
QuestionerOkay. Section 5. Glenn Molinar, Westlake, Ohio. First of all, I want to thank you for having us here today. Very nice. Warren, I'd like to have dinner with you tomorrow night at Garatz. They'll have a bidding and glide here in June. It went for $2,006 last year. Thank you. My question is about jobs coming back to the U.S. I notice a number of companies have started to bring jobs back here. Is Berkshire Hathaway looking at doing that for any job they've shipped out of the United States?
WarrenWell, I have to finish my fudge here. I would say that of the 200 number of jobs we have is listed in the back of the report. I think it's about 270,000, 858 at year end. I'm just trying to think we probably, I don't think we have more than than $15,000 on the outside of those 270 outside the United States. So as I put in the annual report, you know, we invested in plant and equipment, not in stocks, but in plant and equipment and not in acquisitions, over $8 billion last year, and 95 percent or so that was in the United States. So we don't really have a lot around the world. I'm not opposed to it. I mean, our Isfkar operation, which is based in Israel, operates throughout the world. I mean, they, I've been to their plants in Japan. I've been to their plants in Korea. I've been their plants in India.
[1:17:41]
WarrenThe product they sell is going to be sold throughout the world. The U.S. is an important market for them, but it's not a majority of their business or anything like it. So that company has about 11,000 employees or, you know, so and relatively few of theirs are going to be in the United States. We'd like to do more business in the United States, but we'd like to do more business in Korea and Japan and Indian, you name it. We have utility operations in the U.K. But other than, we have, we just bought a business in Australia at Marmon here recently. Well, we bought just, in last day or so, it's been an hour. We're buying a, for CTB, which we've had a terrific history with Vic Mansonelli. He's been a great man to manage businesses just in the last day or two. We bought an operation based in the Netherlands, although they have employment here. But I would say that it's extremely likely that 10 years from now, when you look at the breakdown of our employees, that we have many, many more employees, you know, know, maybe hundreds of thousands more employees, and some of those will be outside this country, but most of them will be in the country in this country. We find all, there's lots of opportunity in the United States. There is no shortage of opportunity. You know, that 8.2 billion or whatever it was last year, you know, we loved putting that money out, and we'll put out more this year. And this is, I mean, it's a real land of opportunity. That's not to knock opportunities elsewhere, but we find lots of things that. do that make a, what we think make a lot of sense in this country. Charlie?
CharlieYou can't bring a lot back if it never left. That's the long version of my answer. Andrew?
Andrew Ross SorkinWell, Warren, I should say I was not planning to ask you this question, but in the past hour I've received probably two dozen emails from shareholders in this room who want the question asked, so I will ask it, and it's a very simple question. How are you feeling?
WarrenI feel terrific. And I always feel terrific. That's not news. I love what I do. I work with people I love. It's more fun every day. And it basically, I seem to have a good immune system. You know, I mean, my diet is such that, you know, as any fool can plainly see, that I'm eating properly. All I can say is it works. And I have four doctors. At least a few of them, I think, own Berkshire Hathaway, but not a screen I put everybody
[1:20:52]
Warrenthrough, but I, and my wife and my daughter and I listened to the four of them for an hour and a half about two weeks ago, and they described various alternatives. And none of them, well, not the, the ones that they recommend, you know, do not involve a day of hospitalization. They don't require me to take a day off from work. The survival numbers are way up. I've read one, you know, where it's 99 and a half percent for 10 years. So, you know, maybe I'll get shot by a jealous husband, but this is not, this is a really minor event. And Charlie will tell you how minor it is.
CharlieWell, as a matter of fact, I rather resent all this attention and sympathy warrant is getting. I probably have more prostate cancer than he does.
WarrenHe's bragging. I don't know because I don't let them test for it.
CharlieHe's not kidding. He's not kidding.
WarrenIn any rate, I want the sympathy. My secretary was getting too much attention, so I decided I had to throw the spotlight back on myself. In all seriousness, it is a non-a-men. The med center is about two minutes. two minutes from the office and for two months I'll have the drop over there every afternoon and it'll take a few minutes and and I may have a little less energy but that I mean I do fewer dumb things who knows okay Gary yes your insurance operations have taken on a good chunk of some runoff property casualty businesses there's another business that has an increasing amount of runoff and that's the annuity business Hartford ING Cigna etc. Is there a time or are there conditions under which you might consider taking on some of those liabilities?
QuestionerSure. In effect, in some of our businesses were taking on some annuity, but not like, I mean, it's generally classified as property casually, but we would take on annuity books. The problem is there, we're not going to assume anything much better than the risk-free rate in making a bid for that sort of thing. I mean, we do not like the idea of taking on long-term liabilities and paying 150 basis points, you know, above treasuries or something to do that. And there are people that will do that. They may not be quite as likely to fulfill those promises in the years to come as we would. But we want to get... money on the liability side at attractive rates. Now, the most attractive is that we can write property casualty business at an underwriting profit and get it for nothing. But we're willing to pay for annuity-type liabilities, and I don't think it's impossible you'll
[1:24:30]
WarrenI think you have all kinds of opportunities. opportunities. I would probably do very much what I have done in life, except I'd try and do it a little earlier, and I would have tried to be a little bit better when I was running a partnership in terms of aggregating the money faster. I used to work with $5,000 contributions from partners, and, you know, I would try to develop an audited record of performance as early as I could. I would try to attract some money, and then when I'd build up a fair amount of money out of investing, I would try to get into something much more interesting, which would be buying businesses to keep. You mentioned private equity, which very often is buying businesses to sell. But I don't want to be buying and selling businesses. I mean, if I establish relationships with people that come to me with their business and they want to join Berkshire, I want it to be for keeps. And that's been enormously satisfying. But it takes some capital to get into that business, and I didn't have any capital when I started out. So I built it through managing money for myself and other people combined. And like I say, I would get through that process as fast as I could and then into a game where I could buy businesses of significance and interest to me. And then I spend the rest of my life doing it just as I've been. done.
CharlieWell, I've got nothing to add to that either.
WarrenAnd I do it with Charlie, incidentally.
Carol LoomisCarol.
Carol LoomisThis comes, this question comes from a man who believes the stock, that Berkshire stock is being held down some by your talking about the Buffett rule. I know you said you'd doubt that. But he suspects that at least 95% of the people in this arena believe that Berkshire Hathaway stock is undervalued. If you don't think it's the Buffett rule, could each of you give us your opinions about why the stock stays stuck at these levels?
[1:27:25]
WarrenYeah, we've run in Berkshire now for 47 years. There have been several times, four or five times when we thought it was significantly undervalued. We saw the price get cut in half at least four times, or roughly in half, in fairly short periods of time. And I would say this. If you run any business for a long period of time, there are going to be times when it's overvalued and sometimes when it's undervalued. Tom Murphy ran one of the most successful companies the world's ever seen. And in the early 1970s, his stock was selling for about a third of what you could have sold the properties for. And, you know, Berkshire, back in 2001, whenever it was that I wrote in the annual report that we were also going to repurchase shares was selling at what I thought was a very low price, and we didn't get any repurchased. But that stocks, the beauty of stocks is they do sell at silly prices from time to time. I mean, that's how Charlie and I have gotten rich. You know, Ben Graham writes about it in Chapter 8 of the Intelligent Investor. You know, next, well, chapters 8 and chapters 20 are really all you need to do to get rich in this world. And chapter 8 says that in the market, you're going to have a partner name Mr. Market. And the beauty of him as your partner is that he's kind of a psychotic drunk. And he will do very weird things over time. And your job is to remember that he's there to serve you and not to advise you. And if you can keep that mental state, that all those thousands of prices that Mr. Market is offering you every day on every major your business in the world, practically, that he is making lots of mistakes. And he makes them for all kinds of weird reasons. And all you have to do is occasionally oblige him when he offers to either buy or sell from you at the same price on any given day, any given security. So it's built into the system that stocks get mispriced. And Berkshire has been no exception to that. I think Berkshire, generally speaking, has come closer to selling a around its intrinsic value over a 47-year period or so, then most large companies. If you look at the range from our high to low in a given year and compare that to the range high and low on 100 other stocks, I think you'll find that our stock fluctuates somewhat less than most, which is a good sign. But I will tell you, in the next 20 years, Berkshire will someday be significantly old.
[1:30:25]
Warrenovervalued than at some at some point significantly undervalued. And that will be true for Coca-Cola and Wells Fargo and IBM and all of the other securities. I just don't know in which order and at which times. But the important thing is that you make your decisions based on what you think the business is worth. And if you make your buy and sell decisions based on what you think a business is worth and you stick with businesses that you think you've got good reason to think you can value. You simply have to do well in stocks. The stock market is the most obliging, money-making place in the world because you don't have to do anything. You know, you sit there with thousands of businesses being priced at the same price for the buyer and the seller, and you don't, and it changes every day, and you've got lots of information about most of those businesses, and you don't have to do anything. And you know, compare that to any other investment alternative you've got. I mean, you can't do that with farms. If you own a farm and the guy has the farm next to you and you kind of like to buy him out or something, he's not going to name a price every day at which he'll buy your farm or sell you his farm, but you can do that with, you know, you can do it with Berkshire Hathaway or IBM. It's a marvelous game. I mean, the rules are stacked in your favor if you don't turn those rules upside down and start behaving like the drunken psychotic instead of the guy that's there. to take advantage of him. Charlie?
CharlieWell, what's interesting about this place is that I think we've had a lot more fun when we got rich enough, so we bought businesses and stocks to hold instead of to resell. It's an enormously more constructive life. So as fast as you can work yourself into our position, the better off you'll be. And you should be very encouraged by the fact that he's only 88 and I'm only 81, just it may take you a little while. Cliff?
QuestionerSome along those lines we talk about the drunken market. Have systemic fear, risk or systemic risk fears ever caused you to pause in your eagerness to buy equities? You know, back in 2008, 2009, you know, why weren't you more aggressive back then?
WarrenYou'll probably find this interesting. Charlie and I, in my memory, in 53 years, I don't think we've ever had a discussion about buying a stock or a business or selling a stock or a business. that has been where we've talked about macro affairs.
[1:33:13]
WarrenI mean, if we find a business that we think we understand and we like the price at which it's being offered, we buy it, and it doesn't make any difference what the headlines are. It doesn't make any difference what the Federal Reserve is doing. It doesn't make any difference what's going on in Europe. We buy it. You know, there's always going to be good and bad news out there. And which gets emphasized the most, you know, it depends on the moods of the moods of people. people or newspaper editors or whomever. And there's, you know, there's a ton of bad. I bought my first stock, you know, in June of, in June of 42. And, you know, what had happened, you know, we were losing the war, you know, until the Battle of Midway. I mean, so here was a country that, you know, all my older friends had gone, you know, were disappeared. We weren't going to make any kinds of goods that were people wanted. We were going to build battleships and things to drop in the sea, and we were losing. You know, but stocks were cheap. And I wrote that article in October of 2008 in the Times that I should have written a few months later. But in the end, I said, we've just had a financial panic, and it's going to flow over into the economy. And, you know, you're going to read all kinds of bad news. But so what? You know, America's not going to go away, and stocks are cheap. You've got to, we look to value, and we don't look to value. and we don't look to headlines at all. And we really don't, everybody thinks that we sit around and talk about macro factors. We don't have any discussions about macro factors. Charlie?
CharlieYeah, but we did keep liquid reserves at the bottom of the panic that if we know, was not going to get any worse, we would have spent. Because we didn't know that. Yeah, we know what we don't know. And we all, we know we don't want to go broke. I mean, we start with that. And we know you can't go broke if you got a fair amount of liquid reserves around and you don't have any near-term debts and so on. So our first rule is always to play it tomorrow, no matter what happens. But if we've got that covered and we can find things that are attractive, we buy it.
WarrenWell, Charlie has a little company called the Daily Journal Company, and he sat there with a whole lot of cash, and when 2008 came along, he went out and bought a few stocks, he won't tell me the names of them, but, you know, that was the time to use the money, not to sit
[1:35:39]
QuestionerWas that the name of a stock, Charlie? You don't get anything out of them. Station 7. Mr. Buffett, Mr. Munger, thank you for your inspiration and insight. When you look at the stable of businesses that Berkshire owns, which business has greatly improved its competitive position over the last five years and why? And then conversely, perhaps you might name a business? that was not so lucky.
WarrenYeah. Yeah, we don't like to dump on the ones that aren't, that haven't done as well. But there's no question, and fortunately the big ones, the big ones have done well, there's no question that even though we didn't, well, we didn't own all of it. We actually have owned a significant piece of Burlington Northern over the last five, but the railroad business for very fundamental reasons, which I should have figured out earlier, has improved its position dramatically over the last, really, 15 or 20 years. But it continues to this day. I mean, it is an extremely efficient and environmentally friendly way of moving a whole lot of things that have to be moved. And it's an asset that couldn't be duplicated for, you name it, three, four, five, six times, you know, what it's selling for, so that it's, it's, it's, it's, you know, it's... It's a whole lot better business than it was five or ten years ago. Now, GEICO is a whole lot better business than it was five or ten years ago, although I think you could have predicted that the chances were good that that was going to happen. But, you know, we have, we're approaching 10% of the market now, and you go back to 1995, we had 2% of the market. We had the ingredients in place to become much larger, and then, fortunately, we had Tony Nicely, who absolutely maximized what was there to be done. And Geichel's worth billions and billions and billions and billions of dollars more than when we bought it. And the Burlington is worth considerable billions more than when we bought it, even though it was recently. Mid-American has done a great job. We bought that stock and $34 or so dollars a share in 1999, and I think we appraised. it not around $250 a share, and that's in the utility business. So his car has been wonderful since we bought it. We bought that six years ago, and they just don't stop. You know, they do everything well. And I would not want to compete with them. So we've, there are a number of them. And we weren't having to 80% or so of our businesses by value at least increased their market
[1:38:48]
Warrenstrength. Yeah, by value, I would say more than a year. More than a, yeah. Yeah. Not by number, but by value. By value. We're not suffering at all. We're never going to get the right disease 100%. And the mistakes have been made in the purchasing. I mean, it's where I misgaged the competitive position of the business. It isn't because of the faults of management. It's because I just, either because I had too much money around or because I was, you know, been drinking too much sherry coke or whatever it was. I assessed the future competitive position in a way that was really inappropriate, but it wasn't because it really changed on me so much. And, you know, we've done some of that. But the big ones have worked out very well. Gen Re, which looked like real problems for some years. I mean, Tad is running a fabulous operation there. Ajeet has created something from nothing that's worth tens of billions of dollars. And, you know, he created that out of walking into the office in 1985 and entering the insurance business for the first time. But he just brought brains and energy and character to something, and we backed him with some money. And he's created a business like nobody I've never seen. Charlie, and we've been very fortunate. And what's interesting is the good fortune is not going to go away merely because we're going to have. to die. It won't help him, but what? You'll have an explanation of that in the second half of this. Becky?
Becky QuickThis question comes from Joel Bannister in Dallas, Texas, who says, Warren, you personally run the derivative book. Who will manage these weapons of mass destruction after your tenure? We don't want to end up like AIG under someone else's watch. He also adds, P.S., I am wearing the wedding ring you saw. sold my wife last year at the annual meeting at Borsheims.
WarrenWell, obviously, a man of intelligence. Yeah, I don't think, I don't think there'll be much of a derivatives book after I'm around. In fact, there won't be much of a derivatives of a book while I am around. I mean, it's not that, it's not that big a deal. But there will be, there could well be, well, I'll go back to there will be, because it's almost required in certain of our utility operations that they engage in certain types of derivative activities, the utility boards that they respond to want them to hedge out certain types of activities. And then they engage in squaps of generation.
[1:41:49]
WarrenAnd there are a number of activities that there are some derivatives that fit into doing that. But it's not of a huge scope. The railroad formerly hedged diesel fuel, for example. They may do that in the future, they may not. I mean, that, so there's a few operating businesses that will have minor positions. I don't think that, I think it's unlikely that whoever follows me, well, there'll be several investment guys that follow me, at least two, and they're on board now, Todd Combs and Ted Westler. We had a home run with both of them. We got better than we deserve, but Charlie and I like that. And they, it's unlikely they do anything, very unlikely they do anything in derivatives, although I wouldn't restrict them from doing it because they're smart people. And sometimes derivatives get mispriced, so, but it's not going to be a huge factor at Berkshire. I think we're going to do really probably quite well with the derivative positions that we, that we have. We've done fine with the ones that have expired so far, and I like the positions. But the rules have changed in relation to collateralizing, and I don't like ever exposing us to anything that would cause me to worry about Berkshire's financial condition if the Federal Reserve were hit by a nuclear bomb tomorrow or anything of the sort or Europe, you know, something terrible happened. We just, we think about worst cases all of the time around around Berkshire. Charlie and I probably think about worst cases more than any two managers you'll ever find. And we are never going to expose ourselves to a worst case. And a requirement to collateralize things means that you are putting yourself in a position where you may have to come up with some cash tomorrow morning. And we're never going to do that on any significant scale because we don't know what tomorrow morning will bring. Charlie?
CharlieWell, we wouldn't have. we wouldn't have, the derivatives that bothered some people, we never would have entered if we'd had to sign normal contracts. We had better credit than anybody else and we got better terms. And I think by the time that is all run off, we will have made at least $10 billion, maybe a lot more. In other words, we're going to be very lucky we did those contracts.
QuestionerJay? Jay? Warren, when you discuss Berkshire's intrinsic value, why do you value the Union, why do you value the insurance business that only cash plus investments per share? And what's a reasonable
[1:44:53]
WarrenWell, I would, I don't, I don't value the insurance business quite the way you said. I would value GEICO, for example, differently than I would value Gen Re and I would value even some of our minor companies differently. But basically, I would say that GEICO is worth has an intrinsic value that's greater, significantly greater, than the sum of its net worth and its float. Now, I wouldn't say that about some of our other insurance businesses, but that's for two reasons. One is I think it's quite rational to assume a significant underwriting profit at GEICO over the next decade or two decades, and I think it's likely that it will have significant growth. And both of those are value. items of enormous value. So that adds to the present float value. But I can't say that about some other businesses. But in any event, I'll let you come up with your own valuation on that. In terms of the operating business, obviously different ones have different characteristics. But I would love to buy a new bunch of operating businesses that had similar competitive positions and everything. Under today's conditions, I would love to buy those that they would love to buy those that But certainly nine times pre-tax earnings, maybe 10 times pre-tax earnings. I'm not talking about EBIDA or anything like that, which is nonsense, but I'm talking about regular pre-tax earnings. If they have similar characteristics, we'd probably play a little more in that because we know so much more about them than we might know about some other businesses. What would you say, Charlie?
CharlieWell, when you use the word EBITDA, I thought to myself, I don't even like hearing the word. There's so much nutcase thinking. involving ebidav, earnings before what really counts and costs. We prefer EBE, which is earnings before everything. It's nonsense. And I mean, if you compare a business that, you know, leases pencils or something like that, where they all get depreciated in a two-year period, and then compare that some businesses that uses virtually no capital, you know, like C's Kennedy, it's just nonsense. But, but it works for the people to sell businesses. It's like Charlie's friend that used to sell fishing flies, right?
WarrenRight. Right. Yes, I don't sell these lures to fish.
OtherStation 8. Hi, thanks for Neil Steinhoff from Phoenix. Thanks for holding the meeting today.
[1:47:58]
QuestionerYou mentioned a while ago that you were concerned about you and Charlie exposing yourself. Well, I, for one, I'm glad that you're not doing that. Since 1999, the Berkshire Hathaway stock has really not gotten up appreciably. whereas gold has gone up multiple times. I don't own your stock for the glamour. I want to earn money. What happened?
WarrenWell, I would say this, that when we took over Berkshire, gold was at $20, and Berkshire was at $15, so gold is now at 1,600, and Berkshire is at 120,000. So you can pick different starting periods. Obviously, if you pick anything that's gone up a lot in the last you know, month or a year. I mean, it will beat 90% or 95% of other investments. But the one thing I would bet my life on, essentially, is over a 50-year period, not only will Berkshire do considerably better than gold, but common stocks as a group will do better than gold, and probably farmland will do better than gold. I mean, if you own an ounce of gold now and you, you know, you caress it for the next 100 years, you'll have an ounce of gold 100 years from now. If you own 100 acres of farmland, you'll also have 100 acres of farmland 100 years from now, and you'll have taken the crops for 100 years and sold them and presumably bought more farmland with the process. It's very hard for an unproductive investment to beat productive investments over any long period of time. And I recognize that it's very interesting. I can say bonds are no good, and Bernanke still still. smiles on me, you know, and I can, or I can say some stock is no good, but if you say anything negative about gold, I mean, it, it arouses passions with people, which is kind of fascinating, because usually if you thought through something intellectually, it should really make much difference what people say. It should be the, you know, the question is whether your facts are right and your reasoning is right. But when you run into people that are really excited about gold, and I came from a family where my dad loved gold, and he was tolerant. He could take a discussion of it. I find many people have trouble with it. Charlie?
CharlieWell, I have never had the slightest interest in owning gold. It's a much better life to work with businesses and people engaged in business. I can't imagine a worse crowd to deal with than a bunch of gold bugs.
Andrew Ross SorkinAndrew? We got a couple of questions on this topic. You said in an interview on CNBC that you had bought shares in J.P. Morgan for your personal
[1:51:06]
QuestionerCan you explain how you decide to make a personal investment versus one in your role as a fiduciary for us as shareholders of Berkshire? And while you're at it, could you please share some names of stocks you've recently bought for your own account?
WarrenWell, the truth is I like Wells Fargo better than I like J.P. Morgan, but I also, and I also, and We bought, we're buying Wells Fargo stock, and that takes me out of the business of buying Wells Fargo, so therefore I go into something that I don't like quite as well, but that I still like very much. And that's one of the problems I have is that I can't be buying what Berkshire is buying, and I've got some money around, and therefore I go into my second choices, or into tiny little companies like I did with Korean companies and that sort of thing. But my best ideas are all in Berkshire, that I can promise you.
WarrenCharlie?
CharlieCharlie bought real estate, too, and different things. I would avoid that problem. Yeah, but basically, the monger families in two or three things only. Diversification is my idea of something I have practically no interest in, except as it happens automatically in a big place like Berkshire. I rejoiced the day I got rid of a quote, you know, know, a stock quoting machine. I like this buy-and-hold investing. It's a lovely way to live a life, and you deal with a better class of people. And it's worked pretty well for all of us, so, and I don't think you need to worry about where you're on site investments, his investments through Berkshire are so huge and those are so small relatively that if that's your main problem in life, you have a very favored life.
QuestionerWell, if you have 98 and a half percent of your money in Berkshire, And you really are trying to do your thinking about what's best for the one and a half percent. You're a little bit crazy. You should be thinking about Berkshire, which I can assure you, I do.
WarrenBut that, you know, there could be — And he does like Wells Fargo better than J.B. Morgan.
CharlieYeah, I do.
WarrenYeah. And we have 400 and some million shares of Wells Fargo in Berkshire, and I think — I like J.B. Morgan, fine, obviously, but I know Wells' better. It's easier to understand. And so, you know, we, well, we, we, we, we bought Wells Fargo in the first quarter. We bought Wells Fargo last year. We bought it an awful, a lot of years. And if I wasn't managing Berkshire, you know, but instead was sitting with my own money, I'd
[1:54:05]
QuestionerWhen Berkshire bought BN.S. SF, it raised the surplus of the property casualty industry by about 4%. It's unusual to have a property casualty company own such a large non-operating company. I'd also characterize your whole organization chart as challenging a lot of different pieces to it, which gives rise to the issue of capital efficiency. And I'm just wondering, are there any parts of your organization structure that have any hindrance, whether it's regulatory or otherwise, to making use of the capital in the best way, generally, and in particular for BNSF.
WarrenYeah. Well, I would say that money in our life companies has less utility to us. I'd rather have $100 million in our property cash leave companies than $100 million in our life companies because we're more restricted as to what we can do with the money in the life companies. So, and we've got a fair amount of money in life companies. that money cannot be used as effectively, over a period of years, in my view, as money we have in the property cash flow business. It's a disadvantage to being in the life business versus the PC business. And the best place, obviously the number one place that where we like to have money is in the holding company. And we've got about $10 billion in the holding company right now. That you have the ultimate flexibility with. Most of our operating businesses keep more cash around than they need, but it's there. And as long as I have $20 billion someplace, I feel comfortable. We'll never have anything that can come up remotely that would cause me to lose any sleep, as long as I start with the $20 billion. That's probably considerably more than we need, but it just leaves us comfortable. And it makes us feel we can do other things. aggressively, as long as we know the downside is protected. Having the railroad in the national indemnity was just something we thought was nice to have a huge asset like that there that should make the rating agencies and everyone feel comfortable, and there's no disadvantage to us.
QuestionerVery interesting. The rating agencies, at least one rating agency, said they didn't want to give us any credit for that asset in there. Although if we had 20% like we had had earlier, they would have given us full credit for the market value.
WarrenI didn't push them too hard on that.
[1:57:01]
WarrenBut there's a fair amount of logic, I think, to where things are placed. If we were to make a big acquisition, it might require shifting some funds from one place to another. But we'll always leave every place more than adequately capitalized. And if you can figure out a way that I could. use the life funds more like I can use the property casualty funds. Call me, I got an 800 number.
QuestionerWell, two things are peculiar about that casually operation. One is that it has so much more capital in relation to insurance premiums than anybody else. And the other is that it has among the assets in that great surplus of capital is something like the Burlington Northern Railroad, which makes it immensely stronger from the viewpoint of the policy holder. It's a huge advantage. you're talking about, not a disadvantage.
WarrenYeah, here's a, here's a property casualty company that has an asset in it, that unrelated to insurance, will probably make $5 billion pre-tax or more. So if we're writing, well, in that entity, we're writing less than that, but let's say we're writing $25 billion of premiums. That means we can write at $120, and just our railroad operation will bring us to the underwriting neutrality. I mean, it's a terrific. It's like having a role. loyalty or something. You know, it's a wonderful position we have. And nobody else has it. And nobody else has it. And they wouldn't let us do it if we weren't so strong.
OtherStation 9. Yes. John Horton, Water Street Capital, Jacksonville, Florida.
QuestionerSince Berkshire will likely need to offer a stock component for very large acquisitions like Burlington Northern, wouldn't Berkshire lower its cash outlay by increasing the price of its stock to near fair value, perhaps by offering a 2% to 3% dividend or a promised percentage of cash earnings. Might this have the effect of actually lowering the cash outlay needed for such acquisitions? As 30-year shareholders, with almost $1 billion of exposure, we like this approach. Thank you.
WarrenYeah, we would obviously prefer to have our stocks sell it exactly intrinsic business value, even though we don't know that precise figure. But Charlie and I would have a range that would not differ too widely. And if it sold an intrinsic business value and we could use it as part of the consideration for buying something else at intrinsic business value and then use cash for the balance, you know, we would like that situation.
[1:59:50]
WarrenAnd that's very likely to occur in the future. It's occurred in the past. Berkshire, without paying a dividend, is sold probably at or above intrinsic value as much of the time in the last 35 or so years as it has below. I mean, it'll bob around. And I do not think a dividend would be a plus in terms of having itself at intrinsic value most of the time. I think that might be just the opposite. I mean, here we are. We're willing to pay, you know, 110 cents on the dollar for, what's in there. So the idea of paying out money, which we think is worth at least 110 cents on the dollar within the place and turn into 100 cents on the dollar when paid out just does not appear attractive to us, unless we find we can't do things in the future that makes sense. But our goal, and we put it in the annual report, our goal is to have the stock sell at as close to intrinsic business value as it can. But with markets, you know, the way markets operate, most of the time it will be bobbing up or down from that level. And we've seen that now for 40 plus years. And we've tried to, at least in a way, point out what we think is going on. And if it ever, if it will, I mean, when trades at intrinsic business value or higher, and there may be times when we will use it, we'd still prefer using cash, though. Cash is our favorite medium of purchase, just because we're going to generate a lot. lot of it, and we hate giving out shares. We do not like the idea of trading away part of Seas Candy or GEICO or ISCAR or BNSF, the idea of leaving you with a lower percentage interest in those companies because of any acquisition ambitions of ours is anathema to us. Charlie?
CharlieWell, what he suggested is a very conventional approach, and we think it's better for the shareholders to do it the way we're doing. I should point out, I'm in the position giving away all of my stock between now and 10 years after my death and my estate is settled, but I'm giving it away every year. You know, it will do more good in terms of its philanthropic consequences if it's at a higher price than a lower price. I mean, there's nobody here that has more of an interest in the stock selling at what I'll call it. fair value as opposed to a discount value than I do because I know I'm a I'm not a seller, but I'm disposing of the stock and I would rather have it buy, you know, X quantity of vaccines than 80% of X. So it isn't like we've got some great desire to have the stock sell cheap.
[2:03:05]
WarrenIf it does sell cheap, we'll, you know, we'll buy it in. But our interest is really in having a sell it more or less the fair value. And we think that if we perform reasonably well in terms of running the business and if we tell the truth about the business and explain to a selected group of shareholders who are interested in that aspect of investing, that over time it will average that. And that's happened over the years. But it doesn't happen every year. If people get excited enough about internet stocks, they're going to forget about Berkshire. When they get disillusioned with internet stocks, then I'm going back to 10 or 12 years on that. But there have been times when people have gotten very excited about Berkshire and there have times when they've gotten very depressed.
Carol LoomisOkay. Carol?
Carol LoomisThis question comes from Kevin Gettnowski of U-Tan, Nebraska. And to it, I've added one question at the end, which came from another shareholder writing about the same subject. You have described the newspaper business in the past as chopping down trees, buying expensive printing presses and having a fleet of delivery trucks, all to get pieces of paper to people to read about what happened yesterday. You constantly mention the importance of future intrinsic value and evaluating a business or company. With all of the new options available in today's social media and the speculation of the demise of the newspaper media, why by the Omaha World Herald? Was there some, this is the question from the other one, was there some self-indulgence? in this.
WarrenWell, I would say this about newspapers. It's really fascinating because everything she read is true, and it's even worse than that. The newspapers have three problems, two of which are very difficult to overcome. And one, if they don't, the third, if they don't overcome it, they're going to have even worse problems. maybe can be overcome. Newspapers, you know, news is what you don't know that you want to know. I mean, everybody in this room has a whole bunch of things that they want to keep informed on. And if you go back 50 years, the newspaper contained dozens and dozens and dozens and dozens of areas of interest to people where it was the primary source. If you wanted to rent an apartment, you could learn more about running an apartments by looking at a newspaper than going anyplace else. If you wanted a job, you could learn more about running an apartment.
[2:05:49]
Warrencould learn more about that job. If you want to know where bananas were selling the cheapest this weekend, you can find it out. If you want to know how you're, whether Stan Musial, you know, went two for four, three for four last night, you went to the newspapers. If you wanted to look look at what your stocks were selling at, you went to the newspapers. Now, all of those things, which are of interest to many, many, many, many people have now found other means. They found other venues where that information is available. on a more timely, often cost-free basis. So newspapers have to be primary about something of interest to a significant percentage of the people that live with in their distribution area. And there were so many areas where they were primary 30 or 40 years that you could buy a newspaper and only use a small portion of it, and it still was valuable to you. But now, you don't use a newspaper to look for stock prices. You get them instantly off the computer. You don't need, you don't look for the newspapers for apartments to rent in many cases or jobs to find or the price of bananas or what happened in the NFL yesterday. So they've lost primacy in all of these areas that were important. They still are primary in a great many areas. The World Herald tells me every day a lot of things that I want to know that I can't find someplace else. They don't tell me as many things as they did 20 or 30 or 40 years ago that I want to know, but they still tell me some things that I can't find out elsewhere. Most of those items, overwhelmingly those items, are going to be local. You know, they're not going to tell me a lot about Afghanistan or something of the sort. that I want to know, but I don't know. I'm going to get that through other medium. But they do tell me a lot of things about my city, about local sports, about my neighbors, about a lot of things that I want to know. And as long as they stay primary in that arena, they've got an item of interest to me. Now, the problem they have, it's a.R. expensive to distribute, as the question or mention. And then the second problem is that throughout this country, we have 1,700, daily newspapers. We have about 1,400 now. The very, in a great many cases, they are going up on the web and giving free the same thing that they're charging for in delivery. Now, I don't know of any business plan that has sustained itself for a long time. Maybe you can think of, maybe Charlie can think of one, but
[2:09:00]
Warrenthat has charged significantly in one version and offers the same version free to people that had a business model that would work over time. And lately, in the last year, even, many newspapers have experimented with and, to some extent, succeeded in those experiments in getting paid for what they were giving away on the net that otherwise they were trying to charge for in terms of delivery. I think there is a future for newspapers that exist in an area where there's a sense of community where people actually care about their schools and they care about they care about what's going on in the given geographic area. I think there's a market for that. It's not as bulletproof at all as the old method when you had 50 different reasons to subscribe the newspaper. But I think if you're in a community, where most people have a sense of community, and you don't give away the product, and you cover that local area in telling people about things that are concerned to them and doing that better than other people, whether it be high school sports. I've always used the example of obituaries. I mean, people still get their obituaries from the newspapers. It's very hard to go to the internet and get obituaries. But I'm interested in Omaha and knowing who's getting married or dying or having children or getting divorced or whatever it may be. If I lived, when I lived in White Plains, New York, I really wasn't that interested in it. I did not feel a sense of community there. So we have bought, and we own a paper in Buffalo where there's a strong sense of community, and we make a reasonable money in Buffalo. It's declined and we have to have an internet presence there where people have to pay to come on. We have to develop that. But I think that the, I think the economics, based on the prices we've paid, and we may buy more newspapers, I think the economics will work out okay. It's nothing like the old days, but it still fulfills an important function. It's not going to come back and tell you what you're and tell you that on Wednesday what stock prices closed out on Tuesday and have you rushed to the paper to find out. It's not going to tell you what happened in basketball last night when you've gone to ESPN.com and found out about it. But it will tell you a whole lot about what's going on if you're interested in your local institutions and we own papers in in towns where people have strong local interests. Charlie?
[2:11:52]
WarrenWell, we had a similar situation years ago when World Books Encyclopedia business was about 80% destroyed by Bill Gates. He gave away a free computer with every bit of software. We charged $5, I think, Charlie. And, well, whatever it was. But we are still selling encyclopedias, and we still make a reasonable profit, but not nearly as much as we used to. Right. Some of these newspapers, we hope, will be the same kind of investments. They're not going to be our great loopholes. The prices were, well, I want, we actually may be doing more in newspapers, and we will be going where there's a strong sense of community. But if you live in Grand Island, Nebraska, where we have a paper, North Platte, and your children live there, your parents probably live there, your church is there, you are going to be quite interested in a lot of things that are going on in North Platte and in the state of Nebraska that you won't find readily on television or the Internet and you'll be willing to pay something for it and advertisers will find it a good way to talk to you. But it won't be like the old days. Cliff?
QuestionerThank you. Just on that general topic, it is true that in the past, some of your investments have been greatly affected by technology in newspapers or world. book. Other businesses were you concerned about technology affecting them? For example, you know, Amazon or online grocery stores. Could they affect a business indirectly like McLean?
WarrenAmazon is a tough one to figure. I mean, Amazon, it could affect a lot of businesses that don't think they're going to be affected today. I mean, in the retail area. It's huge. It's a powerhouse. I don't think it's going to affect the Nebraska Furniture Mart. But I think it could affect some of the other retailing operations. that we have. It won't affect the Nebraska Furniture Mart. I should report to you that in the first four days, Tuesday, Wednesday, Thursday, and Friday of this week, our business at the Furniture Mart is up about 11 percent over last year. So you people are doing your part at air. We had a — on Tuesday, we did over $6 million of business. Now, those of you are in the retailing business, thinking about a Tuesday. And 6 million plus of volume. We'll do more probably today, but those are huge, huge volumes. And we're going to go to Dallas here in a couple of years. We've got a 433-acre plan of ground down there. And I think we're going to have a store that will make any records we've said in the past look
[2:14:58]
Warrenlike nothing. Going back to Amazon, though, in terms — Geico was very affected by the Internet. And at first, at first, we missed that. I mean, we would — Geico's got an interesting history. It was male originally, if you go back into the late 30s and early 40s, and it was very successful. And then it moved — not leaving cable, male totally behind, but it moved to television big time. And then the Internet came along, and it — I thought originally that only young people would look for quotes on the Internet and that — You know, I mean, I never would have done it. I would have been calling on a rotary dialed phone, you know, and saying, well, they said, number please, for to get my quote on Geico forever. But it just changed dramatically, you know, to the Internet. So things do change very significantly, and if the consumer finds something that they like to do do better in some new way, and Amazon has been an incredible success. It's very hard to find people who have done business with Amazon that are unhappy about the transaction. They have happy customers. And, you know, a business that has millions and millions of happy customers can introduce them to new items and then, you know, and it will be a powerhouse. And I think it could, I think it could affect a lot of businesses. It's hard for me to figure out. I think it's almost sure to hurt a lot of businesses a lot.
QuestionerYeah. Which ones you think it'll hurt the most, Charlie?
CharlieWell, anything that can be easily bought by using a home computer or an iPad for that matter.
QuestionerWhich of our businesses you think it can hurt?
CharlieI won't be buying the stuff because I'm habit-bound. Besides, I almost never buy anything. But I think it will hugely affect a lot of people. I think it's terrible for most retailers. Not slightly terrible, really terrible.
OtherWell, with that cheerful assessment, we'll go to Station 10.
Questionerindustry fund management company in China. My question is, you mentioned, acquiring insurance flow with zero or even negative cost is one of the key competitive advantages of Bookshel Hesway. And we also found that the average leverage of Bookshel are always above 100%. I guess the net asset growth will significantly decline without using that leverage. Therefore, to own an insurance count, or acquiring insurance flow will be an important strategy. If institutions want to copy bookshadow business model, would you please give me a comment?
[2:18:00]
QuestionerJohn, I didn't get all that so easy.
WarrenI didn't get it all either. But we have a very peculiar model. It works very well for us. I think it's very hard for other people to get the same result.
QuestionerYeah, I think it's almost impossible at the size. I mean, it's taken a long, long time. time to get here.
WarrenIt's taken a great amount of consistency, and that consistency has been allowed because basically we've had a controlling shareholder during that time. So we've not had to bow to any of the urgings of Wall Street or, you know, whatever may be the fad of the day. We have had a culture that, that, where we could write out 13 or 14 principles more than 30 years ago, and we've been able to stick with them. And that's very hard to do for most American corporations. And I think it's very hard to do when managers come and go and they have small shareholdings. I think it takes a very unusual structure to be able to do it. And, you know, it took a long time to get to the point where people with large private businesses in this country who really cared about where those businesses were lodged after they gave up their stewardship. It took a long time to have it get so that a great many of those people would think of Berkshire first. And the nice thing about it is, if they think of Berkshire first, they don't think of anybody second. So we get the call. We don't do well buying businesses at auction. I mean, if somebody's the only interest is to get the top price for their business, you know, sell them. We'll get one. We did buy one at auction. I mean, but there was an ad on the Dutch company we bought yesterday. We bought an auction. But that sometimes happens with our smaller acquisitions, but the big private acquisitions are going to come to Berkshire because they want to come to Berkshire. And that's a significant competitive edge. And I don't see how anybody really challenges on that.
QuestionerWell, not only do I think other people will have a hard time copying it effectively. I think Warren went back to being 30 years of age with a modest amount of capital and not much else. He'd have a hell of a time doing it again, too.
WarrenI'd like to try.
Becky QuickOkay, Becky. This question comes from David Skirmerhorn in Boulder, Colorado. And he writes that Berkshire Hathaway has several substantial investments in other publicly traded companies. As a shareholder, Berkshire is entitled to annually cast votes on matters such as election of directors, advisory
[2:20:56]
Questionervote on executive compensation, approval of stock option plans and so forth. So could you tell us what goes into your thinking and decisions with respect to how you vote our shares in these companies?
WarrenYeah, we virtually never have voted against management, but we've done it a couple of times. There have been a... Yeah, in 50 years. Yeah. There have been a couple of times when we thought on the question of stock option expensing when that was put on about a ballot. put on a ballot and if we, there may have been a particularly egregious option grant or something we might have voted against. But our general feeling is that when we're a large shareholder of a company that we certainly generally like the business, we generally like the management, we realize that they're not going to subscribe to our views 100%, in many cases 90% or 80%. It doesn't mean we think they're bad people or anything. people or anything. They just, they have a different, they're sort of judging by by behavior elsewhere and they're perfectly decent people, but they don't think about things exactly the same way we do. But that doesn't, that doesn't rule out owning a big piece of the business. And we are not in the business of trying to change people. We don't try and change people. When we buy the entire business, we think it's like marrying somebody to change them. It just doesn't work very well. And it doesn't work very well with children either. No. And we know we don't want anybody to marry us to change us. So, I mean, we're not going to do it. We accept people the way they come pretty much. It doesn't mean we decide we'll associate with anyone, but we don't expect everybody to be clones of us. And if we were to see a particularly dumb merger, a particularly egregious stock option, plan, we might vote against it. It would pass anyway. We wouldn't conduct a campaign against it. But we have seen a few of our companies engage in some what we thought were really dumb deals. And we've usually been right. But we couldn't stop them. But we have, I think we voted against maybe one or two of them.
WarrenCharlie?
CharlieWell, I think you said it all.
OtherOkay. Jay.
QuestionerThis question is on Berkshire's commercial insurance operations. Berkshire has a smaller presence in primary commercial lines insurance compared to its much larger reinsurance and auto insurance businesses. Under what circumstances would Berkshire be open to increasing the scale of its primary commercial
[2:23:53]
Warreninsurance operations, including acquisitions? Yeah, we thought we could either expand internally, which would be tough, or buy a great company in the commercial field, which would, that'd be the more likely way. You know, we'd do it. Now, we got a chance, I don't know, six or seven years ago to get in the medical malpractice field when GE wanted out, and we bought that, and then we added to that with our Princeton insurance acquisition last year. So we did get a chance to go into a first-class company with a first-class manager and Tim Kennessey. about six or seven years ago, and we jumped at it. And GE was just getting out of the insurance business. So it's hard to think of very many commercial insurance companies that I would get excited about, very few. There might be a couple, and we'd like the business. I mean, there are very few personal lines companies we'd like, but we love GEICO, obviously. There's very few reinsurance companies we would like, but we love the ones we've got. And if we can find a quality company and commercial lines, and presumably it would have quality management, we'd buy it in an instant. We've got nothing against that business.
QuestionerStation 11. Mr. Munger, Mr. Buffett, this is Whitney Tilsen. I'm a shareholder from New York. I have a question for Debbie. I'm just kidding. I applaud the fact that you've set. She's in the president's box. I applaud the fact that you've set a price above which you won't buy back your stock, but it seems based on the trading of the stock since the announcement that while it may have put a floor on the stock, it also may have put a ceiling on it slightly above 1.1 times book value. If so, this is obviously contrary to your desire to have the stock trade close to intrinsic value, which you've said is far higher than 1.1 times book. Have you considered being a little more flexible in the price at which you'd buy back your stock, depending on how well your business is going and what other opportunities are available? For example, I would have much preferred, if you bought back 3.4 billion of your own stock at 1.15 times book value last quarter rather than the stocks you bought of other companies.
WarrenYeah, so would I. But the, I'm afraid, I don't think it puts the ceiling on, but I do think it certainly has an effect on a floor. It doesn't make a floor. I mean, you and I have seen enough of markets to know that, you know, if things get chaotic
[2:26:37]
Warrenor anything like that, floors disappear. So I think there could be circumstances under which we would buy a lot of stock, but I don't think they're, you know, highly likely at all. I think if we were at 1-1-5, and believe me, 1-1-5 would not be a crazy price, I don't think we'd probably buy a lot more stock. It might have the effect of the stock selling it, you know, a little above that or even a lot above it, just like 110 can do the same thing. I do think it signals to a lot of people that they don't have much to lose if they buy it just slightly above the price we've named, and perhaps they've got a lot to gain. But I don't think it sets a ceiling, Whitney. When people feel differently in markets, it could sell at a much different price. If I thought we would buy a whole lot more stock at a slightly higher price, I would probably, I would probably, I would probably adjust the price, but I don't think that's the case. I think it would just cause everybody to think, you know, I can buy it at this little higher price and have very little to lose, just like they may very well think now. But you get into any kind of a chaotic market, and we'll have chaotic markets in the future, and we might buy a lot of stock.
WarrenCharlie?
CharlieWell, I've got nothing to add to that either.
QuestionerOkay. Well, we'll just have one or two more and then we'll break. Andrew.
Andrew Ross SorkinOkay. This question comes from. from a shareholder named David Cass of Maryland. He says one of Berkshire's largest investments in recent years has been Walmart. Has your opinion of this company changed as a result of the Mexican bribery scandal?
WarrenNo, I think they may, it looks if you read the New York Times story, and there's always another side to it, but it looks like they may well have made a mistake in how that was handled. But I do not think it, and it may well. result in a significant fine, you know, but I don't think it, I don't think it changes the fundamental dynamic. I mean, Walmart does operate on low gross margins, which means it offers low prices, and that works in retailing, and a lot of other things they do work in retailing. So I do not see, I mean, it's a huge diversion of management time, and it's costly and a whole bunch of things. But I don't think the earning power of Walmart five years from now will be materially affected by the outcome of the situation.
WarrenCharlie?
CharlieThese are interesting issues. I'm unaware of any place where Berkshire is slipping on this,
[2:29:43]
Warrenbut we have so many employees that it's not inconceivable. We could have some slippage somewhere. And he is as big as Walmart. You're going to have an occasion. no glitch. I don't think there's something fundamentally dishonorable about Walmart. When you have some of these biggest birch shirt, you're going to have a yeah. Yeah. I mean, we have 270,000 people today interacting with customers and government officials and vendors and all kinds of people. I will guarantee you somebody is doing something wrong. In fact, I would guarantee you at least, you know, probably 20 people are doing something wrong. You can't have a city of 270,000. people and not have something going on. And we can talk to we're blue in the face about what people should do and not do, but people don't get messages sometimes the same way that you give them and they're, you know, we're layers removed from people operating in others. And a lot of people just do crazy things. So it is a, I mean, it is a real worry if you're running a business like this, that you don't worry about the fact somebody's doing something wrong because they're going there is going to be somebody doing something wrong. What you worry about is that it's material and nothing gets done about it and that you act fast if you hear about something. And, you know, we've got hotlines and we've got all communications and everything. But that does not stop the fact that right now somebody is doing something wrong at Berkshire. And if we get twice as large someday, we'll have more people. And we try to convey to the managers that When they find out about something, you know, act on it, immediately let us know. We can handle bad news as long as we get it promptly. But I'm very sympathetic to anybody running hundreds of thousands of people to the problems of the ones that, sometimes they don't even think they're doing something wrong. I mean, if you get 270,000 people together, maybe even a crowd this size, you'll have some very peculiar people. Okay, we're at noon roughly. I made this bet four years ago with a group at the at the protege partners about the S&P versus or an index fund versus five funds of funds. And I told them at the time I put up the results every year. And as you can see, I can't see it from here. But the first year, they, it was a huge down year. as you might expect, just like us, we beat the, we beat the S&P a lot in the down year.
[2:32:36]
WarrenAnd the last three years, the S&P has, has beaten them. But we're still, still a tiny bit behind the hedge funds at the end of four years. There's six years to go. You might find it interesting. We each bought a, we each bought a zero coupon 10-year bond, so that there would be a million dollars to go to the charity of selected by either, even, either them or by me, depending on who won the bet. And that zero-coupon bond has performed magnificently, much better than Berkshire. So we should have bought nothing but zero-coupon bonds. But the zero-coupon bond, because interest rates are so low, you know, is practically selling apart. So we have petitioned the stakeholder in this case, and I don't think we've heard yet, but to let us sell the zero-coupon bond and put the money in Berkshire, and I'll guarantee, him that it will be worth more than the million bucks at the end of 10 years. But so far, the best thing you could have done was ignored both of us and just looked at where we were putting the money. And I will keep you up to date on this bed as we go along, and we're having a lot of fun. We'll come back in an hour, and then we'll go to 3.30, and then we'll have the business of the meeting. And in the meantime, shop your heart's content. Thank you.