[0:05]
QuestionerThank you. And good morning.
WarrenThat's Charlie. I'm Warren. You can tell us apart because he can hear and I can see. That's why we work together so well. We usually have our specialty. I'd like to welcome you to. We've got a lot of out of towners here and I'd like to welcome you to Omaha. It's a terrific, it's a terrific city. And Charlie, Charlie's lived in California now for about 70 years, but he's still got a lot of Omaha in. And both of us were born within two miles of this building that you're in. And Charlie, as he mentioned in his description of his amorous triumphs in high school, Charlie graduated from Central High, which is about one mile from here. It's a public school. And my dad, my first wife, my three children, and two of my grandchildren have all graduated from the same school. In fact, my grandchildren say they've had the same teachers, but my dad, my, they, but it's a great city. I hope you get to see a lot of it while you're here. And in just a minute, we will start a question period, hopefully in question and answer period. that will last until about noon, and then we'll take a break for an hour or so. We'll reconvene it at one, and then we'll go continue with a question-answer period until 3.30. And then we'll break for 15 minutes or so. And then we'll convene the annual meeting of Berkshire, which I, we have three propositions that people wish to speak on. that could last perhaps as long as an hour. Before we start, I'd like to make a couple of introductions. The first being Kerry Solva, who's been with us about seven years. And can we have a light on, Carrie? I think she. Carrie, are you there? Carrie, stand up, Carrie, come on. Carrie puts on this whole program. with us about seven years ago and a few years ago, I said, why don't you just put on the annual meeting for me? And she handles it all and she has two young children. And she has dozens and dozens and dozens and dozens of exhibitors that she works with. And as you can imagine, with all of what we put on and all of the numbers of you that come, the hotels and the airlines and the rental cars and everything, she does it as if she does it as if she's You know, she could do that and be juggling three balls at the same time. She's amazing, and I want to thank her for putting on this program for us. I also would like to welcome and have you welcome our directors. They will be voted on later, so I'll do this alphabetically.
[4:11]
WarrenThey're here in the front row, and if we could just have a spotlight drop on them as they're introduced. and alphabetically, there's Howard Buffett, Steve Burke, Sue Decker, Bill Gates, Sandy Goddessman, Charlotte Geiman, we have Charlie Munger next to me, Tom Murphy, Ron Olson, Walter Scott, and Merrill Whitner. One more introduction I'm going to make, but I'll save that for just a minute. And our earnings report was put out yesterday. The, as we regularly explain, the realized investment gains or losses in any period really mean nothing. I mean, they, we could take a lot of gains if we wanted to. We could take a lot of losses if we wanted to, but we don't really think about the timing of what we do at all, except in relation to the intrinsic value of what we're buying or selling. We are not, we do not make earnings forecasts. We have, on March 31st, we have over $90 billion of net unrealized gains. So if we wanted to report almost any number you can think of and count capital gains as part of the earnings, we could do it. And so in the first quarter, and I would say that we have a very, very, very slight preference this year. If everything else were equal, well, it's true in any year, but it's a little more so this year. We would rather take losses than gains because of the tax effect if two securities were equally valued. And there's probably just one touch more of emphasis on that this year because we're, we are taxed on gains of 35%, which means we also get the benefit, the tax benefit of 35% of any losses we take. And I would say that there's some chance of that rate being lower, meaning that losses would have less. tax value to us after this year, then they would have this after this year than this year. That is not a big deal, but it would be a very slight preference, and it may get to be more of a factor in deferring any gains and perhaps accelerating any losses as the year gets closer to December 31st, assuming, and I'm making no predictions about it, but assuming that there were to be a tax act that had the effect of reducing the earnings. So in the first quarter, insurance underwriting was the swing factor, and there's a lot more about this in our 10Q, which you can look up on the internet. And you really, if you're seriously interested in evaluating our earnings or our businesses, you should go to the 10Q because the summary report, as we point out every quarter does not really get to the main, a number of the main points
[7:37]
Warrenof valuation. I would just mention two factors in connection with the insurance situation, which I love. In the first four months, not the first three months, but the first four months, GEICO has had a net gain of 700,000 policyholders, and that's the highest number I can remember. There may have been a figure larger than that somewhere in the past. I'm not, I did not, I did not go back and look out at the mall. But last year, I believe that figure was like 300,000, and this has been a wonderful period for us at GEICO because several of our major competitors have decided, and they publicly stated this. In fact, one of them just reiterated it the other day, although they now changed their policy, but they intentionally cut back on new business because new business carries with it. a significant loss in the first year. There's just costs of acquiring new business. Plus the loss ratio, strangely enough, on first year business tends to run almost 10 points higher than on renewal business. And so not only do you have acquisition costs, but you actually have a higher loss ratio. So when you write a lot of new business, you're going to lose money on that portion of the business that year. And we wrote a lot of new business and at least two of our competitors announced that they were lighting up for a while on new business because they did not want to pay the penalty of the first year loss. And of course, that's made to order for us. So we just we just put our foot to the floor and try to ride as much business, good business as we can. And there are costs to that. A second factor, well, it's not a factor in the PL, but an important event in the first quarter is that we we increased our float. And on the slide, I believe it shows it year over year, 16 billion. 14 billion of that came in the first quarter of this year. So we had a $14 billion increase in float. And for some years, I've been telling you it's going to be hard to increase the float at all. and I still will study the same thing. But it's nice to have $14 billion or more, which is one reason. If you look at our 10Q, you will see that our cash and cash equivalents, including treasury bills now has come to well over 90 billion. So I think, I feel very good about the first quarter, even though our operating earnings were down a little. But one quarter means nothing. I mean, over time, what really counts is whether we're building the value of the businesses that we own.
[10:20]
WarrenAnd I'm always interested in the current figures, but I'm always dreaming about the future figures. There's one more person I would like to introduce to you today, and I'm quite sure he's here. I haven't seen him, but I understood he was coming. There is a, I believe, that he's made it today, and that is Jack Bogle, who I talked about in the annual report. Jack Bogle has probably done more for the American investor than any man in the country. Jack, could you stand up? There he is. Jack Vogel many years ago. He wasn't the only one that was talking about an index fund, but he, it wouldn't have happened without him. I mean, Paul Samuelson talked about it. Ben Graham even talked about it. But the truth is it was not in the interest of the investment industry of Wall Street. It was not in their interest actually to have the development of an index industry of Wall Street. It was not in their interest actually to have the development of an index. fund, other than the index fund, because it brought down fees dramatically, and as we've talked about some in the reports and other people have commented it, index funds overall have delivered for shareholders, a result that has been better than Wall Street professionals a whole. And part of the reason for that is that they brought down the costs very significantly. So when Jack started, very few people, certainly Wall Street did not applaud him. And he was the subject of some derision and a lot of attacks. And now we're talking trillions when we get into index funds. And we're talking a few basis points when we talk about investment fees in the case of index funds, but still hundreds of basis points when we talk about fees elsewhere. And I estimate that Jack, at a minimum, has saved, left in the pockets of investors, without hurting them overall in terms of performance at all, gross performance. He's put tens and tens and tens of billions into their pockets, and those numbers are going to be hundreds and hundreds of billions over time. So it's Jack's 88th birthday. on Monday. So I just say, happy birthday, Jack. And thank you on behalf of American investors. And Jack, I've got great news for you. You're going to be 88 on Monday. And in only two years, you'll be eligible for an executive position at Berkshire. Hang in there, buddy. Okay. We've got a panel of expert journalists on this side and expert analysts on that side.
[13:49]
Otherexpert shareholders in the middle and we're going to to rotate starting with the analysts and some where here I have a here we go and we will we'll do this through the afternoon after we if we get through 54 questions which would be would be six for each journalists six for each analysts and 18 more for the audience then we will go strictly to the audience. I don't think I've got any information as to what the situation is on overflow rooms, but we'll go to at least one of them. But let's start off with Carol Loomis, a Fortune magazine, the longest serving employee in the history of time, Inc., I believe, with 60 years, and Carol go to it.
Carol Loomisall of us journalists up here. I know that there are many, many people out there who have sent us questions that aren't going to get answered. And I just want to say that it's very hard to get a question answered. The one thing I can suggest is you follow Warren's thought in the annual report that he wants everybody to go away from this meeting more, more educated about Berkshire than they were when they came. And one way you can do that is keep your questions quite directly, Berkshire related or relating to the annual letter. Even then, it will be hard to get your question answered. The three of us only have 18 questions in total. But I encourage you to think in the Berkshire related direction when you're submitting a question next year. Now, my first question. It's about Wells Fargo, which is Berkshire's largest equity holding, $28 billion at the end of the year. And this question comes from a shareholder who did not wish to be identified. In the wake of the sales practices scandal that last year engulfed Wells Fargo, the company's independent directors commissioned an investigation and hired a large law firm to assist in carrying it out. The findings of the investigation, which were harsh, have been released and is what is called the Wells Fargo Sales Practices reports. You can find it on internet. It concludes that a major part of the company's problem was that, and I quote, Wells Fargo's decentralized corporate structure gave too much autonomy to the community bank's senior leadership. End of quote. Mr. Buffett, how do you satisfy yourself that Berkshire isn't subject to the same risk with its highly decentralized structure and the very substantial autonomy given to senior leadership of the operating companies.
WarrenYeah, it's true that we at Berkshire probably operate on us.
[17:06]
WarrenWe certainly operate on a more decentralized plan than any company of remotely our size. And we count very heavily on principles of behavior rather than loads of rules of rules. It's one reason that every annual meeting you see that Solomon description. And it's why I write very few communicates to our managers, but I send them one once every two years. And it basically says that we've got all the money we need. We'd like to have more, but we're, it's not a necessity, but we don't have a necessity, but we don't have one ounce of reputation more than we need and that our reputation at Berkshire is in their hands. And Charlie and I believe that if you establish the right sort of culture and that culture to some extent self-selects who you obtain as directors and as managers, that you will get better results that way in terms of behavior than if you have a thousand-page guidebook. You're going to have problems regardless. We have 367,000, I believe, employees. Now, if you have a town with 367,000 households, which is about what the Omaha metropolitan areas, people are doing something wrong as we talk here today. There's no question about it. And the real question is whether the managers at are in a better, are worrying and thinking about finding and correcting any bad behavior. and whether if they fail in that, whether the message gets to Omaha and whether we do something about it. At Wells Fargo, you know, there were three very significant mistakes, but there was one that dwarfs all of the others. You're going to have incentive systems at any business, almost any business. There's nothing wrong with incentive systems, but you've got to be very careful what you incentivize. And you can't incentivize. bad behavior. And if so, you better have a system for recognizing it. Clearly, at Wells Fargo, there was an incentive system built around the idea of cross-selling and number of services per per customer and the company in every quarterly industrial presentation highlighted how many services per customer. So it was the focus of the organization, a major focus. And undoubtedly, people got paid and graded and promoted based on on that number, at least partly based on that number. Well, it turned out that that was incentivizing the wrong kind of behavior. We've made similar mistakes. I mean, any company is going to make some mistakes in designing a system. But it's a mistake. And you're going to find out about it at some point. And I'll get to how we
[20:25]
Warrenfind out about it. But the biggest mistake was that, and I don't know, obviously I don't know the facts as to how the information got passed up the line at Wells Fargo. But at some point, if there's a major problem, the CEO will get wind of it. And that is, at that moment, that's the key to everything, because the CEO has to act. That Solomon situation that you saw happened because I'm on April, I think, 28th, the CEO of Solomon, the president of Solomon, the general counsel of Solomon, sat in a room and they had described to them by a fellow named John Meriwether, some bad practice, terrible practice that was being conducted by a fellow named Paul Mosier who worked for him. And Paul Mosier was flim flaming the United States Treasury, which is a very dumb thing to do. And he was doing it partly out of spite because they didn't, he didn't like the Treasury and they didn't like him. So he put in phony bids for U.S. Treasuries and all of that. So on April 28th, roughly, the CEO and all these people knew that they had something that had gone very wrong, and they had to report it to the Federal Reserve Board of New York, the Federal Reserve Bank of New York. And the CEO, John, good friend, said he would do it, and then he didn't do it. And he undoubtedly put it off just because it was an unpleasant thing to do. And then on May 3rd, 15th, another treasury auction was held, and Paul Mosher put in a bunch of phony beds again. And at this point, it's all over, because the top management had no one ahead of time, and now a guy that was a pyromaniac had gone out and lit another fire, and he lit it after they'd been warned that he was a pyromaniac, essentially. And it all went downhill from there. It had to stop when the CEO learns about it. And the next, uh, the next year. they made a third mistake actually, but again, it pales in comparison to the second mistake. They made a third mistake when they totally underestimated the impact of what they had done once it became uncovered because they, there was a penalty of 185 million. And in the banking business, people get fined billions and billions of dollars from mortgage practices and all kinds of things. The total fines against the big banks, I don't know whether it totals 30 or 40 or billion or whatever the number may be. So they measured. the seriousness of the problem by the dimensions of the fine. And they thought $185 million
[23:09]
Warrenfine signaled a less offensive practice than something involved $2 billion, and they were totally wrong on that. But the main problem was they didn't act when they learned about it. It was bad enough having a bad system, but they didn't act. At Berkshire, we have the main source of information for me, about anything that's being done wrong at a subsidiary is the hotline. Now we get 4,000 or so hotline reports or that come, we get communications on the hotline, perhaps 4,000 times a year. And most of them are frivolous. You know, the guy next to me has bad breath or something like that. I mean, it's a, but, but there are a few serious ones. And, the head of our internal audit, Becky Amick, looks at all those. People, a lot of them come in anonymous, probably most of them. And some of them, she refers back to the companies, probably most of them. And but anything that looks serious, you know, I will hear about. And that has led to action, we'll put them more than once. And we spent real money investigating some of those. We put special investigators sometimes on them. And like I say, it is uncovered certain practices that we would not at all condone at the parent company. I think it's a good system. I don't think it's perfect. I don't know what I'm sure they've got an internal audit at Wells Fargo and I'm sure they've got a hotline. And I don't know the facts, but I would just have to have to bet that a lot of communications came in on that. And I don't know what their system was for for getting them to the right person. And I don't know who did what at any given time. But that was, it was a huge, huge, huge error. If they were getting, uh, and I'm sure they were getting some communications and they ignored them or they just sent them back down to somebody down below. Charlie, You've followed it. What are your thoughts on it?
CharlieWell, put me down as skeptical when some law firm thinks they know how to fix something like this. If you're in a business where you have a whole lot of people under incentives very likely to cause a lot of misbehavior. Of course, you need a big compliance department. Every big wire house stock brokerage firm has a huge compliance department. And if we had one, we would have a big compliance department too, wouldn't we warn? Absolutely. Absolutely. Absolutely. But that doesn't mean that everybody should try and solve their problems with more and more compliance.
[26:12]
WarrenI think we've had less trouble over the years by being more careful in whom we pick to have power and having a culture of trust. I think we have less trouble, not more. But we will have trouble from time to time. Yes, of course. We'll be blindsided someday. Charlie says an ounce of prevention, he said when Ben Franklin, who he worships, said an ounce of prevention is worth a pound of care. He understood it. An ounce of prevention is worth more than a pound of cure. And I would say a pound of cure promptly applied is worth a ton of cure. That's delayed. Problems don't go away. John Goodfriend said that problem originally was, uh, what do you? He called it a traffic ticket. He told the troops there at Solomon was a traffic ticket. You know, and it almost brought us. down a business that, uh, uh, some other CEO that they described the problem that he had encountered as a footfall. You know, and it resulted in incredible damage to the institution and so on it. You've got to, you've got to act promptly. And frankly, I don't know any better system than hotlines and anonymous letters to me. I get anonymous letters. And I've gotten, I've gotten three or four of them. probably in the last six or seven years that have resulted in major changes. And very, very occasionally, they're signed, almost always they're anonymous, but wouldn't make any difference because there will be no retribution against anybody, obviously, if they call our attention to something that's going wrong. But I will tell you, as we sit here, somebody is doing quite a few people are probably doing something wrong at Berkshire. And usually it's very limited. and I mean, maybe stealing small amounts of money or something like that. But when it gets to some sales practice like was taking place at Wells Fargo, you can see the kind of damage it would do. We will now shift over to the analysts and Johnny Brent. Hi, Warren. Hi, Charlie. Thanks for having me.
QuestionerYou've addressed the risk of driverless cars to Geico's business, but it strikes me that driverless trucks could narrow the cost advantage of railroad. even if the number of crew members in a locomotive eventually declines from 2 to 0. Is autonomous technology more of an opportunity or more of a threat for the Burlington Northern?
WarrenOh, I would say that the driverless trucks are a lot more of a threat than an opportunity to the Burlington Northern. And I would say that if driverless cars became pervasive, it would only be because they were safer.
[29:05]
Warrenand that would mean that the overall economic cost of auto-related losses that had gone down and that would drive down the premium income of Geico. So I would say both of those autonomous vehicles widespread would hurt us if they went to, if they spread and they would hurt our auto insurance business. I think my personal view is that they will certainly come. I think they may be a long way off, but that will depend. It'll probably, frankly, depend on experience in the first early months of the introduction in other than test situations. And if they make the world safer, it's going to be a very good thing, but it won't be a good thing. but it won't be a good thing for auto insurers. And similarly, if they learn how to move trucks more safely, there tends to be driver shortages in the truck business now. It obviously improves their position vis-a-vis the railroads. Charlie?
CharlieI think that's perfectly clear.
OtherFinally approval, all these years. Okay. Station 1, the shareholder. Hi, Warren and Charlie. My name is Brian Martin. Now, I'm from Springfield, Illinois. In HBO documentary becoming Warren Buffett, you had a great analogy comparing investing to hitting a baseball and knowing your sweet spot. Ted Williams knew his sweet spot was a pitch right down the middle. When both of you look at potential investments, what attributes make a company a pitch in your sweet spot that you'll take a swing at and invest in?
WarrenWell, I'm not sure I define it in exactly the terms you would like, but the, the, the, the, the, the, the, The, we sort of know it when we see it, and it would tend to be a business that, for one reason or another, we can look out five or ten or twenty years and decide that the competitive advantage that it had at the present would last over that period. And it would have a trusted manager that would not only fit into the, the Berkshire culture, but that was eager to join the Berkshire culture, and then it would be a matter of price. But the main, you know, when we buy a business, essentially we're laying out a lot of money now based on what we think that business will deliver over time, and the higher the certainty with which we make that prediction, the better off, the better we feel about it. You can go back to the first, wasn't the first outstanding business we bought, but it was, it was kind of a watershed event, which was a relatively small company, Seas Candy.
[32:22]
WarrenAnd the question, when we looked at Seas Candy in 1972, was would people still want to be both eating and giving away that candy and preference to other candies? And it wouldn't be a question of people buying candy for the low bid. a manager we liked very much and we bought a business that would pay $25 million for it in out of cash and it was earning about $4 million pre-tax then and we must be getting close to $2 billion or something like that pre-tax that we've taken out of it. But it was only because we felt that people would not be buying necessarily a lower price candy. I mean, And it does not work very well if you go to your wife or your girlfriend on Valentine's Day, I hope they're the same person, and say, you know, here's a box of candy, honey. I took the low bid. You know, it doesn't, it loses a little as you go through that speech. And we made a judgment about Seas Candy that it would be special in probably not in the year 2017, but we certainly thought it would be special in 1982 and 1992, and fortunately, we were right on it. And we're looking for more seized candies only a lot bigger. Charlie?
CharlieYeah. But it's also true that we were young and ignorant then. And now we're old and ignorant.
WarrenYeah. Yes, that's true too. And and the truth of the matter is that it would have been very wise to buy seize candy at a slightly higher price. And if they'd asked that we wouldn't have done it. So we've gotten a lot of credit for being smarter than we were.
CharlieYeah. And be more accurate if it's been five million more i wouldn't have bought it charlie would have been willing to buy it so fortunately that we didn't get to the point where we had to make that decision that way but he he would have pushed forward when i probably would have faded it's a good thing it's a good thing that the guy came around actually the seller uh was the uh he's the grandson of of mrs eight wasn't he charley he's son am i correct or larry see's brother but uh he was not interested in the business and he was he was he was interested in more interested in girls and grapes actually and and he almost changed his mind we did change his mind about selling and i wasn't there but rick garin told me that charlie went in and gave an hour talk on the merits of girls and grapes over having a candy company this is true folks and the fellow sold to us so that i pulled charlie out in emergencies like that he's
[35:22]
Warrenwe were very lucky that early the habit of buying horrible businesses because they were really cheap it gave us a lot of experience trying to fix unfixable businesses as they headed downward toward doom and that early experience was so horrible fixing the unfixable that we were very good at avoiding it thereafter so i would argue that our early stupidity helped us
Charlieyeah yeah we we learned we could not make a silk purse out of a souse here no we learned so we learned we went around looking for silk but you have to try out for a long time and fail and have rub have your nose rubbed in it to really understand it okay
Becky QuickBecky quick this question comes from a shareholder named Mark Blackley in Tulsa Oklahoma who says there has been more news than usual in some of Berkshire's core stock holdings, Wells Fargo and the incentive and new account scandal, American Express losing the Costco relationship and playing catch-up in the premium card space, United Airlines and customer service issues, Coca-Cola and slowing soda consumption. How much time is spent reviewing Berkshire stock holdings and is it safe to assume if Berkshire continues to hold these stocks that the thesis remains intact?
WarrenWell, we spend a lot of time thinking those are very large holdings. If you add up American Express, Coca-Cola, Wells Fargo, I mean, you're getting up, you know, well into the high tens of billions of dollars. And those are businesses we like very much. They're different characteristics. In the cases of you mentioned United Airlines, we actually are the largest holder of all four of the largest, we're the largest airlines, and that is much more of an industry thought. But all businesses have problems, and some of them have some of them have some very big pluses. I personally, they mentioned American Express. If you read American Express's first quarter report and talk about their platinum car, the platinum car is doing very well, The gains around the world, you know, I think there were 17% or something I've got in buildings in the U.K. And 15% is the original currency, or the local currency, Japan, and very good in the United States. There's competition in all these business. If we thought, we did not buy American Express or Wells Fargo or United Airlines, but Coca-Cola with the idea that they would never have problems or never have competition. And what we did buy, why we did buy them is we thought they had very, very strong hands.
[38:19]
WarrenAnd we like the financial policies in the case of many of them we like, we like their position. We bought a lot of businesses. And we do look to see where we think they have durable, competitive advantage. And we recognize that if you've got a very good business, you're going to have plenty of competitors who are going to try and take it away from you. And then you make a judgment. As to the ability of your particular company and product and management to ward off competitors, they won't go away. But we think I'm not going to get into the specific names on it, but those companies generally are very well positioned. I've likened essentially, if you've got a wonderful business, even if it's a small one like Seas Candy, you basically have an economic castle. and in capitalism, people are going to try and take away that castle from you. So you want to moat around it, protecting it in various ways that you can protect it. And then you want a knight in the castle that's pretty darn good at warding off marauders. But they're going to be marauders and they'll never go away. And if you look at the, I think Coca-Cola was 1886, American Express was 18, I don't know, 51 or 52, starting out with an express business. Wells Fargo would, I don't know what year they were started. Incidentally, American Express was started by Wells and Fargo as well. So these companies had lots of challenges, and they'll have more challenges than the companies we own have had challenges. Our insurance businesses had challenges, but, you know, we started with national indemnity as $8 million purchase in 1968. And fortunately, we've had people like Tony Nicely at Geico. And G. Jane, who's added tens of billions of value. And we've got some smaller companies that you probably don't even know about, but really have done a terrific job for us. So there'll always be competition and insurance, but there'll always be things to do that are really intelligent management with a decent distribution system, various things going for them, can do to ward off the marauders. So I, I, there's a specific question, how much time has spent reviewing the holdings, I would say that I do it every day. I'm sure Charlie does it every day. Charlie?
CharlieWell, I don't think I've got anything to add to that either.
WarrenWe'll cut his salary if he doesn't participate here. Okay, Jay Galb. This question is on Berkshire's retroactive reinsurance deal with AIG, which was the largest ever of its kind.
[41:14]
QuestionerBased on AIG's track record or reserve deficiencies and the opportunity for Berkshire to invest the float, what is your level of confidence that this contract covering up to $20 billion of AIG's reserves in return for $10 billion of premiums will ultimately be profitable for Berkshire?
WarrenWell, at the time we do every deal, I think it's smart. And then sometimes I find out otherwise as we go along. The deal, as Jay knows, but might be unfamiliar to make it. people is that AIG transferred to us the liability for 80% of 25 billion excess of 25 billion. In other words, they had to pay the first $25 billion. And then on the next $25 billion, we had to pay 80% of what they paid up to a limit of $20 billion, 80% of what they paid up to a limit of $20 billion. And we got paid $10.2 billion for that. And we had, and this applies to their losses in many classes of business, written or earned before December 31st, 2015. So Ajit Jane, who has made a lot more money for Berkshire than I, for you than I have. But he evaluates that sort of transaction. We talk about it a fair amount ourselves. I just find it interesting. I particularly find the $10.2 billion. They're going to give us interesting. And we come to the conclusion that we think we'll do well by getting $10.2 billion today with a maximum payout of $20 billion over some indefinite, I mean, between now and judgment day on this class, on this large piece of business. AIG had very good reasons for doing this because their reserves had been under criticism. and this essentially probably, it should have, I think, put to bed the question of whether they were under reserved on that business. And we get the $10.2 billion. And the question is how fast we pay out the money and how much money we pay out. And the jeet does 99% of the thinking on that, and I do 1% and we project out what we think will happen. And we know whatever our projection is, that it will be wrong. But we try to be conservative. And we've done a fair amount of these deals. This is the largest. The second largest was a creature that was formed out of Lloyds of London some years ago. And we've been wrong on one transaction that involved something over a business. billion of premium. I mean, clearly wrong. And there are a couple of others that that may or may not work out depending on what you assume we have earned on the funds. But they're okay. They're, you know, but they probably didn't come out as well as we thought they would, though.
[44:40]
WarrenBut overall, we've done okay on this. It's less okay when we're sitting around with 90 plus billion of cash. So the incremental 10.2 billion we took in in the first quarter is earning us peanuts at the moment. And peanuts is not what fits into the formula for making us an attractive deal. So we do have to assume we'll find uses of the money, but the money will be with us quite a while. And I think our calculations are on the conservative side. They're not the identical calculations that AIG makes. I mean, we come up with our own estimate of payouts and all of that. And I think it actually, I think it was quite a good transaction from AIG's standpoint because they did take $20 billion of potential losses off for $10.2 billion. And I think they satisfied the investing community that they were quite unlikely to have adverse development in the period prior to 2015 that was not accounted for by this transaction. Charlie?
CharlieWell, I think it's intrinsically a dangerous kind of activity. But that's one of its attractions. I don't think there are any two people in the world that are better at this kind of transaction than Ushy and Warren. And nobody else has had the experience we've had. Just get me in a lot more of those businesses and I'll accept a little extra worry. There's one thing I should mention to it. We actually were the only. insurance operation in the world who would write that sort of a contract and that were it would be satisfactory to the other party. I mean, when somebody hands you $10.2 billion and says I'm counting on you to pay $20 billion back, even if it's 50 years from now on the last dollar, there are very few people that they want to hand $10.2 billion to. And then, so it's a, there's limited people on the other side. I mean, there's not that many people. remotely that have that kind of size deal. Very few is a good expression. He means one.
WarrenYeah. Okay, we'll go to station two.
QuestionerHello, Mr. Buffett, Mr. Munger. My name is Grant Gibson. I'm from Denver, Colorado, and this is my fifth consecutive year here, so thank you for having us.
WarrenThanks for coming. Appreciate it.
QuestionerWith all due respect, Mr. Buffett, this question is for Mr. Munger. In your career of thousands of negotiations, business dealings, could you describe for the crowd which one sticks out? in your mind as your favorite or is otherwise noteworthy?
CharlieWell, I don't think I've got a favorite, but the one that probably did us the most good is a
[47:38]
Warrenlearning experience with Seas Candy. It's just the power of the brand, the unending flow of ever increasing money with no work. Sounds nice. It was, and I'm not sure we would have bought the Coca-Cola if we hadn't bought the Seas. I think that a life properly lived is just learn, learn, learn all the time. And I think Berkshire has gained enormously from these investment decisions by learning through a long, long period. Every time you appoint a new person that's never had big capital allocation experience, it's like rolling the dice. And I think we're way better off having done it so long. And, and, but the decisions blend. And the one feature that comes through is the continuous learning. If we had not kept learning, you wouldn't even be here. You'd be alive, probably, but not here. There's nothing like the pain of being in a lousy business to make you appreciate a good one. Well, there's nothing to getting into a really good one. That's a very pleasant experience and it's a learning experience. I have a friend who says, the first rule of fishing is to fish where the fish are. And the second rule of fishing is to never forget the first rule. And we've gotten good at fishing where the fish are. Yeah, that's only metaphorically. There's too many other... There's too many other boats in the damn water, but the fish are still there. Yeah, we bought a department store in Baltimore in 1966, and there's really nothing like being an experience of trying to decide whether you're going to put a new store in an area that hasn't really developed yet enough to support it, but your competitor may move there first, and then you have the decision of whether to jump in. And if you jump in, that kind of spoils, and now you've got two stores where even one store isn't quite justified. How to play those games, those business games, is you learn a lot by trying, and what you really learn is which ones to avoid. I mean, if you just stay out of a bunch of terrible businesses, you're off to a very great start as right, because we've tried them all. But you can really learn because the experience is like eating cockle burgers. And it really gets your attention. Well, we won't expand on that.
Andrew Ross SorkinAndrew Ross Sarkin. Good morning, Warren. This question comes from a longtime shareholder who I should tell you accosted me last night in the lobby at the Hilton Hotel with this question. Warren, for years you stayed away from technology companies saying they were too hard to predict and didn't have moats.
[50:55]
QuestionerThen you seemed to change your view about technology when you invested in IBM, and again when you recently invested in Apple. But then on Friday you said IBM had not met your expectations and sold a third of our stake. Do you view IBM and Apple differently? And what have you learned about investing in technology companies?
WarrenWell, I do view them differently, but, you know, obviously. when I bought the IBM, started buying it six years ago. I thought it would do better in the six years that have elapsed than it has. And Apple, I regard them as being a quite different business. I think Apple is much more of a consumer products business in terms of the, in terms of sort of analyzing moats around it and consumer behavior and all that sort of things. and all that sort of things. It's obviously a product with all kinds of tech bill into it. But in terms of laying out what their prospective customers will do in the future, as opposed to say on IBM's customers, it's a different sort of analysis. That doesn't mean it's correct. And we'll find out over time. But they are two different types of decisions. And I was wrong on the first one, and we'll find out whether I'm right or wrong on the first one. right or wrong on the second. But I do not regard them as apples and apples, and I don't quite regard them as apples and oranges, but it's somewhat in between on that.
WarrenCharlie?
CharlieWell, we avoided the tech stocks because we felt we had no advantage there and other people did. And I think that's a good idea not to play where the other people are better. But you know, if you asked me in retrospect, what was our worst mistake in the tech field? in the tech field. I think we were smart enough to figure out Google. Those ads worked so much better in the early days than anything else. So I would say that we failed you there. And we were smart enough to do it and didn't do it. We do that all the time, too.
WarrenYeah. We were their customer very early on with Geico, for example, and we saw, I don't, at least figures are way out of date, but I remember, you know, we were paying them $10 or $11 a click or something like that. And any time you're paying somebody, 10 or 11, every time somebody just punches a little thing where you've got no cost at all, you know, that's a good business unless somebody's going to take it away from you. And so we were close up seeing the impact of that. And incidentally, if any of you don't have anything to do in your hotel rooms tonight, just keep punching progressive or something.
[53:40]
WarrenAnd you don't really do that. The thought just happened across my mind. But, you know, that is, you've never seen a business, almost never seen a business like it where, and I think for LASIC surgery and things like that, I think the figures were, you know, 60 or 70 bucks a click with no incremental, no cost. So, and I knew the guys. I mean, they actually designed their prospectus. They came to see me. And they, a little bit after the original one, when they went public, a little bit after Berkshire even. And so I had plenty of ways to ask questions or anything of the story. and educate myself, but, but I blew it. And, uh. We blew one, we blew Walmart too. When it was a total cinch, we were smart enough to figure that out and we didn't. Yeah, figuring out, execution is what counts. So anyway, well, and I could be making two mistakes on IBM. I mean, the, you know, it's harder to predict, in my view, um, it's harder to predict, in my view, um, the winners in various items or how much price competition will enter in to something like cloud services and all that it I will I will I made a statement the other day which it's really remarkable and I was asked Charlie whether you could think of a situation like it where one person has built an extraordinary economic machine in two really pretty different industries, you know, almost simultaneously, as has happened. From a standing started zero. From a standing started zero with other, with competitors with lots of capital and everything else, to do it in retailing and to do it with the cloud like Jeff Bezos has done. I mean, I mean, I mean, I mean, people like the melons invested in a lot of different industries and all of that, but he has been in effect the CEO simultaneously. of two businesses starting from scratch that if you know andy grove used to use at intel used to say you know think about if you had a silver bullet and you could shoot her to and get rid of one of your competitors who would it be well i think that both in the cloud and then retail there are a lot of people that would aim that silver bullet at jeff and he's done a it's a different sort of game but he's you know at the washington post he's played that hand as as well as anybody i think possibly could so it's it's a remarkable business achievement where he's been involved actually in the execution not just bank rolling it of of two businesses that that are probably as feared by their competitors almost as any you can find it's
[56:52]
Charliecharlie you can further watch well we're sort of like the melons old-fashioned people who done all right and jeff bezos is the different species and we missed it entirely incident we never owned a share of amazon okay
QuestionerGreg warren my question relates to some recent stock purchases as well unlike the railroads which benefited from colossal barriers to entry due to their established practically impossible to replicate networks of rail and rights away the airline industry seems to have few if any advantages even with the consolidation we've seen during the past 15 years the barriers to entry are few and the exit barriers are high the industry also suffers from low switching costs and intense pricing competition and is heavily exposed to fuel costs with rising fuel prices being difficult to pass on and declining fuel prices leading to more price competition compare this with rail customers who have few choices and thus wield limited buying power and where fuel charges allow the industry to mitigate fuel price fluctuations while you've noticed several times since the airline stock purchase were announced that the two industries are quite different and that comparisons should not be made to berkshire's move into railroads a decade ago could you walk us through what convinced you that the airlines were different enough this time around for berkshire to invest close to 10 billion dollars in the four major airlines because it would seem to me that UPS which you have a small stake in in FedEx both of which have wider economic modes built on more identifiable and durable competitive advantages would be a better option for long-term investors
Warrenyeah the the decision in respect to airlines that had no connection with our being involved in the railroad business i mean you can you can classify i mean you know maybe in uh there's transportation business or something but it had had no connection and no more connection than the fact we own geico or you know or uh any other business uh you couldn't you couldn't pick a tougher industry you know ever since since orville went up and i said you know that anybody'd really been thinking about investors they should have at Wilbur shoot him down and saved everybody a lot of money for a hundred years you can go to the internet and type in airlines and bankrupt and you'll see that something like a hundred airlines in that general range you know gone bankrupt in the last few decades and and actually
[59:23]
Warrencharlie and i were directors for some time of u.s air and people write about how we had a terrible experience in us air it it was the one of the dumbest things i've ever done and there's a lot of money out of it too yeah and we made a lot of money out of it but we made a lot of money out of it because there was one little brief period when people got all enthused about us air and after we left as directors and after we sold our position usr managed to go back up twice in the subsequent period i mean you've named all of the not all of them but you've named a number of factors that just make for terrible economics and i will tell you that if the capacity you know it's a fiercely competitive industry the question is whether it's a suicidally competitive industry which it used to be i mean when you get virtually every one of the major carriers and dozens and dozens and dozens and dozens of minor carriers are going bankrupt you know it ought to come upon you finally that maybe you're in the wrong industry
CharlieIt has been operating for some time now at 80% or better of capacity being available seat miles and you can see what deliveries are going to be and that sort of thing. So if you make the, I think it's fair to say that they will operate at higher degrees of capacity over the next five or ten years. than the historical rates, which caused all of them to go broke. Now the question is whether even when they're doing it in the 80s, they will do suicidal things in terms of pricing, remains to be seen. They actually, at present, are earning quite high returns on invested capital. I think higher than either FedEx or UPS if you actually check that out. But that doesn't mean tomorrow morning, you know, if you're running one of those airlines and the other guy cuts his prices, you cut your prices. And as you say, there's more flexibility when fuel goes down to bring down prices than there is to raise prices when prices go up. So the industry, you know, it is no cinch that the industry will have some more pricing sensibility in the next 10 years than they had in the last 100 years. But the conditions have improved for that. They've got more labor stability than they had before because they're basically all going to, they've been through bankruptcy and they're all going to sort of have an industry pattern bargaining, it looks to me like. They're going to have a shortage of pilots to some degree.
[1:02:29]
Warrenbut it's not it's not like buying sees candy Charlie no but the investment world has gotten tougher with more competition more affluence and more absolute obsession with finance throughout the whole country and we picked up a lot of low-hanging fruit in the old days where it was very very easy and we had huge margin of the safety now we operate with a less advantageous general climate and maybe we have small statistical advantages where in the old days it was like shooting fish in a barrel. But that's all right. It's okay if it gets a little harder after you get Phil T. Ridge. Charlie's more philosophical than I am on that point. I can't bring back the low-hanging fruit war and you're just going to have to keep reaching for the higher branches.
WarrenGreg, the, I don't, I think the odds are very high. that there are more revenue passenger miles five years from now or ten years from now. If the airlines, if the airline companies are only worth five or ten years from now what they're worth now in terms of equity, we'll get a pretty reasonable rate of return because they're going to buy in a lot of stock at fairly low multiples. So if the company's worth the same amount at the end of the year and there's fewer shares of stock outstanding, over time we make decent money. and all four of the major airlines are buying in stock at a you got to remember that the railroads were a terrible business for decades and decades and decades and then they got good yeah it we like i like i like the position obviously by buying all four it means that it's very hard to distinguish uh who will do the least in my mind it's hard to distinguish who will do the best i i do the i think i think the odds are quite high that if you take revenue passenger miles flowing five or ten years from now it will be a higher number and that will be there'll be low-cost people to come in and you know the spirits of the world and jet booze whatever may be but the my guess is that all four of the companies we have will have higher revenues the question is what their operating ratio is they will have fewer shares outstanding by a significant margin so even if they're worth just what they're worth the day we could make a fair amount of money but but it is no sense by a long shot okay
Questionerstation three good morning everybody my name is the villa aureans i'm from germany and i'm member of board of etiquette foundation ethics and economy i'm very happy that i
[1:05:28]
Questionerkept put my question here and maybe you are not as happy as i am to listen to it well we'll try to stay happy thank you for coming Thank you. Mr. Buffett, a few years ago, I saw a movie in which you proclaimed that the printer in the dollar bill in God we trust does not really oppress your philosophy. In your opinion, only cash counts and your credo is in the dollar I trust.
WarrenI don't think I don't think I've ever said that actually, but...
QuestionerWell, I can show you the movie. That will prove.
WarrenOh, well, I, send me a clip by them.
QuestionerMaybe it was just joking, but always behind a joke there is also a truth. So, well, you laughed heartily at that moment. You as one of the most richest men of all times on this earth, a good humor, friendly, elderly gentleman. Whatever motivated those who designed the dollar notes, they certainly wanted to say that there is something higher than the value of this printed paper. Regrettably, you have shown many times in your life that you see this differently. You have accumulated billions of dollars, showed extraordinary cleverness and skill. And you know better to pick up than many others who, like you, use the rules which are inherent to capitalism for their own intentions. But have you ever given a thought to what troubles and sacrifices, slavery and destruction of Mother Earth, and even diseases and deaths stick to the dollar bills which you gather so eagerly? Let's take Coca-Cola! Etiquan Foundation Ethics and Economy from Germany has awarded the Black Planet Award to the members of the Board of Directors, as well as to the large shareholders. shareholders Warren Buffett and Alan, and Herbert Allen, because you are co-responsible for all of what makes this group make so much money, isn't it? Among other things, Coca-Cola deprives people of their drinking water in drought-prone areas of the world.
WarrenAre you asking a question?
QuestionerI... I don't want to interrupt you, but are you making a speech, you're asking a question.
WarrenI put my question right now.
QuestionerOkay, good. Your Coca-Cola shares. If the destruction of the environment, the monopolization of the right to healthy drinking water, and the shameless exploitation of the workers continue.
WarrenHuh. Well, that's more of a speech than a question. Yeah. Yeah. I don't think that quote you had earlier. I have said, I've said once or twice. I've said once or twice, it should say in the Federal Reserve we trust because they print the money and if they print too much of it, it could decline in value.
[1:09:02]
WarrenBut I have never, to my knowledge, I've never said anything like you originally said. And I would say this, I think I think I've been eating things I like to eat all my life. And Coca-Cola, this Coca-Cola is 12-ounce. I drink about five a day. It has about 1.2 ounces of sugar in it. And if you look at what people, different people get their sugar and calories from, they get them from all kinds of things. I happen to believe that I like to get 1.2 ounces with this and it's enjoyable. Since 1886 people have found. of Pleasant and I would say that if you pick every meal in terms of what somebody in some recent publications told you is the very best for you, I offer you that. I say go to it. But if you told me that I would live one year longer, and I don't even think of that, I would live one year longer, and I don't even think of that, I would live one year longer if I need nothing but broccoli and asparagus and everything my aunt al's wanted me to eat all my life or i would eat everything i enjoyed eating including chocolate sundays and coca-cola and steak and hash browns you know i would rather eat what in a way i enjoy for my whole life and and uh then you know eat some other way and live another year and i do think that choice should be mine you know if somebody somebody decides sugar is harmful you know they'll maybe you'd encourage the government to ban sugar but but sugar and Coca-Cola is not is not different than eating sugar you know put on my great nuts in the morning or whatever else I'm having so I I think Coca-Cola has been a very very positive a factor in America firm and the world for a long long time and you can look at a list of achievements of the company and I really don't want anybody telling me I can't drink it
CharlieCharlie well I've solved my Coca-Cola problem by drinking Diet Coke and I swell the stuff like other people swell out on a lot and I've been doing it for just as long as you've been taking all those coca-colas that are i've had breakfast before and when he has coca-cola's and nuts and pretty damn good too if you keep doing that warren you may not make a hundred
Warrenwell i think there's something in longevity to be feeling happy about your lives too so i absolutely okay carroll this question is from from France Tromberger of Austria and it concerns intrinsic value which is neither Warren may rather he may amend this my definition here but which is
[1:12:22]
Questionerneither a company's accounting value nor its stock market value but is rather its estimated real value so the question is at what rate has Berkshire compounded intrinsic value over the last ten years And at what rate, including your explanation for it, please, do you think intrinsic value can be compounded over the next 10 years?
WarrenYeah. Intrinsic value, you know, can only be calculated or gains, you know, in retrospect. But the intrinsic value, pure definition, would be the cash to be generated between now and judgment day. a discounted at an interest rate that seems appropriate at the time, and that's varied enormously over a 30- or 40-year period. If you pick out 10 years, and you're back to May of 2007, you know, we had some unpleasant things coming up, but I would say that we've probably compounded at about 10 percent, and I think that's going to be tough to achieve, in fact, almost impossible to achieve if we continued in this interest rate environment. That's the number one question. If you asked me to give the answer to the question, if I could only pick one statistic to ask you about the future before I gave the answer, I would not ask you about GDP growth. I would not ask you about who was going to be present. A million things I would ask you what the interest rate is going to be over the next 20 years on average, the 10 year or whatever he wanted to do. And if you assume our present interest rate structure is likely to be the average over 10 or 20 years, then I would say it'd be very difficult to get to 10%. On the other hand, if I were to pick with a whole range of probabilities on interest rates, I would say that that rate might be, it might be somewhat aspirational. and it might be doable. And you would say, well, we can't continue these interest rates for a long time. I would ask you to look at Japan, you know, where 25 years ago, we couldn't see how their interest rates could be sustained, and we're still looking at the same thing. So I do not think it's easy to predict the course of interest rates at all. And unfortunately, predicting that is embedded in giving a good answer to you. I would say the chances of getting a terrible result in Berkshire are probably as low as about anything you can find. Chances of getting a sensational result are also about as low as anything you can find. So if I would say, my best guess would be in the 10% range, but that that assumes some
[1:15:37]
Questionerwhat higher interest rates, not dramatically higher, but somewhat higher interest rates in the next 10 or 20% years than we've experienced in the last seven years?
WarrenCharlie?
CharlieWell, there's no question about the fact that the future with our present size is, in terms of percentage rates of return, is going to be less glorious than our past. And we keep saying that, and now we're proving it.
WarrenDo you want to end on that note, Charlie, or would you care to?
CharlieWell, I do think Warren's right about one thing. I think we have a collection of businesses that on average, better investment values than, say, the S&P average. So I don't think you shareholders have a terrible, terrible problem. And I would say we probably, well, I'm certain on my way, we have a, we do have more of a shareholder orientation than the S&P 500 as a whole. I mean, you know, the, this company has a culture where decisions are made for, uh, for, you know, the, this company has a culture where decisions are made for as an owner as a private owner would make them and and frankly that's a luxury we have that many companies don't have i mean they are under pressures today sometimes to do things one of the one of the questions i asked the ceo of every public company that i meet is what would you be doing differently if you owned it all yourself and the answer, you know, is usually this, that, and a couple of other things. If you would ask us, the answer is, you know, we're doing exactly what we would do if we own them all, all to stock ourselves. And I think that's a small plus over time.
WarrenAnything further, Charlie?
CharlieI think we have one other advantage. A lot of other people are trying to be brilliant, and we're just trying to stay rational. And, and it's an advantage, it's a big advantage.
QuestionerTrying to be brilliant. brilliant it's dangerous particularly when you're gambling okay jonathan if corporate tax rates are reduced meaningfully berkshire will enjoy a one-time boost to book value because of its sizable deferred tax liability and its go-forward earnings should be higher to at least in theory how much of the reduced tax rate will be passed along to berkshire's customers through for instance lower electricity rates or lower railroad shipping rates and how much will go to berkshire shareholders
WarrenYeah, the question is, in the case of our utility businesses, all benefit of lower tax rates goes to customers, and it should be, because we are allowed to return on equity in general.
[1:18:54]
WarrenI mean, I'm simplifying a little bit, but the, we're allowed to return on equity that's computed on an after-tax basis, and the utility commissions would, if taxes were raise would presumably give us higher rates to compensate for that. And if taxes are lowered, they would say you're not entitled to make more money just because tax rates on equity, because tax rates have been lowered. So forget about the utility portion of the deferred taxes. The deferred taxes that are applicable to our unrealized gains and securities, we would get all the benefit of because I mentioned we had $90 billion plus of unrealized gains. And if the rates were changed on those in either direction. Our owners, dollar for dollar, will participate in that. And then you get into the other businesses, you mentioned the railroad, but it can be all of our other businesses. To some extent, if tax rates are lowered, do different degrees in different industries, depending on the number of players, the competitive conditions. Some of it may, some of it all certainly gets competed away and some of it would likely not be competed away. And that's that, that, you know, economists can argue about that a lot, but I've, I've seen it in action in a lot of cases. You've had a big decline in rates, for example, in the UK. And we've had them over my lifetime. We had 52% corporate rates, you know, we've had a lot of different numbers. So I have seen how behavior, economic behavior works. And I would say that it's certain that some of any lower rate would be competed away, and it's, it's virtually certain that some would in order to the benefit of the shareholders. And it's very industry and company specific in how that plays out. Charlie?
CharlieBut with dollar for dollar, I mean, there's 90 or 95 billion, if the rate were to drop 10%, that that nine and a half, that nine and a half billion is by 10 percentage points, that that nine and a half billion is real. On the other hand, if it goes up, as it did, went up from 28 to 35 percent, they can take it away from us, too.
WarrenWell, I think it's true that we're peculiar in one way. If things go to hell in a hand basket and then get better later, we're likely to do better than most others. And we don't wish for that, and we don't want our country to have to suffer through it. And we fear what might happen if the country went through the ring or like that. But if that real adversity comes,
[1:21:46]
Warrenwe're likely to do better in the end. We're good at navigating through that kind of stuff. Yeah, and occasionally there will be a lot, in fact, we're quite good at it. There will be, there will be occasional hiccups in the American economy. It doesn't have much to do with who's president or anything like that. Those people may get blamed or given credit for different things. But it's just an, it is the nature of market systems to occasionally go haywire in one direction or other. And it's been ever thus, you know, it'll be ever thus. It's not, it does not have a, there's not a, not a regular sign wave type picture or anything of the sort. But it's certain to happen from time to time. And we will probably have a fair amount of money and credit at that time. And we certainly, we're not affected. When the rest of the world is fearful, we know America's going to come out fine. And we will not have any trouble psychologically acting at all. And the question is, how much do we have in the way of resources? We'll also never put the company in any kind of risk just because we see a lot of opportunities. We'll grab all the ones we can that we can handle and not lose a day of sleep. I didn't quite get that. But I didn't quite get that.
OtherIn any event, we will now go to Station 4, and if the person is yelling on. Are we up there in Station? Are you in Station 4?
QuestionerYes. Dr. Bruce Hertz from Glenview, Illinois. I wanted to thank you for allowing me to attend. I feel both honored and blessed. My question for Mr. Buffett is, you've always advised us to purchase equities that appreciate in value. Yet a few years ago, you sold your used Cadillac at a tremendous profit. How can you justify selling a depreciating asset for a significant profit? Thank you.
WarrenYeah. Well, actually, I gave it to Girls, Inc., and they sold it, and it was kind of an interesting a very nice guy. Bought it for $100,000 some thousand dollars. And I did not. And Girls Inc. got the money. And he came later, actually, with his family. And he drove it away without any place. He was driving back to New York. And he got picked up by the police in Illinois. And he said, well, he started giving this explanation about how he'd given this money to Girls Inc. And was driving the car back and had this nice-looking family with him. And the cops were quite skeptical. But fortunately, I had signed the dashboard form as part of the deal.
[1:25:03]
WarrenAnd so they looked at that and then they just said, well, did he give you any stock tips? And they let him go on. I can't recall ever selling a used car and a profit. But, but, uh, um, we, I don't think I've sold any personal any personal possession. I've got a house for saying. You don't have any personal possession. Yeah. Yeah. No, uh, any, anything you see with a figure attached like that? You're a fatter version of Muhammad's Gandhi. Ah, my Gandhi. The guy was a very nice guy that bought it, and that's check cleared, so we're fine.
Becky QuickBecky. I'd like to ask a question that can serve as a follow-up to the question that Carol had asked, and Charlie in that response said that he thinks the Berkshire businesses on the whole will do better than the S&P 500. Clark Cameron from Birmingham and Alabama, who owns 281 shares of Berkshire B, writes in and asks, why have you advised your wife to invest in index funds after your death rather than Berkshire Hathaway? I believe Munger has counseled his offspring to, quote, not be so dumb as to sell.
WarrenYeah. She won't be selling any Berkshire to buy the index funds. All of my Berkshire, every single share will go to philanthropy. So I don't even regard myself as owning Berkshire, you know, basically. It's committed. So far, about 40% has already been distributed. So the question is, somebody who is not an investment professional will be, I hope, reasonably elderly by the time that the state gets settled. And what is the best investment, meaning, one that there would be less worry of any kind connected with and less people coming around and saying, why don't you sell this and do something else and all those things. She's going to have more money than she needs. And the big thing then you want is money not to be a problem. And there will be no way that if she holds the S&P or virtually no way absent something happened with weapons of mass destruction, but virtually no way that she won't have she'll have all the money that she possibly can use. a little liquid money so that if stocks are down tremendously at some point, they close the stock exchange for a while, anything like that, she'll still feel that she's got plenty of money. And the object is not to maximize. It doesn't make any difference, whether the amount she gets doubles or triples or anything of the sort. The important thing is that she never worries about money the rest of her life. And I had an Aunt Katie here in Omaha who Charlie knew well and worked
[1:28:13]
Warrenfor her husband as did I. And she worked very hard all her life and had lived in a house. She paid, I think, I don't know, $8,000 for 45th in Hickory all her life. And because she was in Berkshire, she ended up, she lived in 97. She ended up with, you know, a few hundred million. And she wouldn't write me a letter every four or five months. months and she said, dear Warren, you know, I hate to bother you, but am I going to run out of money? And, and I would write her back and I'd say, dear Katie, it's a good question because if you live 986 years, you're going to run out of money. And then about four or five months later, she'd write me the same letter again. And I have seen, there's no way in the world if you've got plenty of money, that it should become a minus in your life. And there will be people, if you've got a lot of money, that come around with various suggestions for you, sometimes well-meaning, sometimes not so well-meaning. So if you've got something as certain to deliver, you know, it was all in Berkshire, they'd say, well, if Warren was alive today, you know, he would be telling him to do this. I just don't want anybody to go through that. And the S&P will be a, I think actually what I'm suggesting was what, but a very high percentage of people should do something like that. and I don't think they will have as, I think there's a chance they won't have as much peace of mind if they own one stock and they've got neighbors and friends and relatives that are trying to do some, like I say, sometimes well intention, sometimes otherwise, to do something else. And so I think it's a policy that will get a good result and is likely to stick. Charlie?
CharlieWell, as Becky said, the longers are different. I want them to hold the Berkshire. Well, I want to hold the Berkshire, too. No, I bet. I mean, I don't like the, I recognize the logic of the fact that that S&P algorithm is very hard to beat. You know, a diversified portfolio of big companies, it's all but impossible for most people. But, you know, it's, I'm just more comfortable with the Berkshire. Well, it's the family business. Yeah, yeah. But, but it, I've just, I've seen too many people as they get older, particularly being susceptible. Just having to listen to the arguments of people coming along. Well, if you're going to protect your errors from the stupidity of others, you may have some good system, but I'm not much interested in that subject.
[1:31:09]
QuestionerOkay. Okay, Jay. Berkshire reportedly partnered with 3G and Kraft-Hinds' attempt to acquire Unilever for $143 billion. How much was Berkshire? willing to invest in this deal, and does this mean Berkshire's next large acquisition is likely to be in partnership with 3G?
WarrenYeah, well, Kraft-in, you'd have to distinguish between two situations. Kraft-Hine's was a widely owned company in which we and 3G act as a controlled group and have a little over 50% of the stock, but as originally contemplated, no certainty that is exactly what would have happened. We would have invested in an additional $15 billion, and 3G would have invested an additional $15 billion if a friendly agreement could have been reached. So if the deal had been made, if the independent directors of Kraft Heinz had approved the transaction, the likelihood, well, then the likelihood is that we would have invested $15 billion, but it would have required the approval of the independent directors as well. Now, Kraft Hines, in going forward with making that offer, wanted to be sure that there would be enough equity capital in addition to the debt that would be incurred to make the deal, and so, Informally, we had basically committed the $15 billion. It only was approved on the basis that it would be a friendly deal with Unilever. And initially, we thought they would be at least possibly interested in such a deal, and when we found out otherwise, we withdrew the offer. So it would have been $15 billion of additional money in all probability.
QuestionerOkay. Mr. Buffett and Mr. Munger, I'm Tian Dehua from China. My company, AI Holdings, is spreading value investing philosophy in Asia. My best partner, Ken Qi, Zhou Guayin, and I are committed to awake 100 million Chinese people to return to rational way of the investing. The hardest thing. in this world is to change people's values or belief system. And we should like to awake investors to change from speculate in the market to investing in the market. It's like changing the speculator's values or belief system. May I ask you, Mr. Buffi, can you kindly advise us what we should do to spread to spread your value investing philosophy, or is there any work of encouragement? Thank you.
WarrenYeah, the, when, in any system, uh, Keynes wrote about this in 1936, I think it was, in the general theory or 35, I think it's it's chapter 12. It's the best, it's a great chapter on investing.
[1:35:09]
WarrenAnd he talked about investment and speculation. and the propensity of people to speculate, and the dangers of it, and worded eloquently, there's always the possibility of, I mean, there's always some speculation, obviously, and there's always some value investors and all of that sort of thing in the market. But there's, when speculation gets rampant, and when you're getting what I guess Charlie would call social proof, that it's worked recently, people can get very excited. about speculating in markets, and we will have it from time to time in this market. There's nothing more agonizing than to see your neighbor, who you think has an IQ, about 30 points below you getting richer than you are by buying stocks, and whether it's internet stocks or whatever, and people succumb to it, and they'll succumb in this economy, just as elsewhere. There's also a point which gets to your question. I would say that early on in the development of markets, there's probably a, a, there's some tendency for them, I think, to be more speculative than markets have been around for a couple hundred years. Because it has a invest, markets have a casino characteristic that has a lot of characteristic that has a lot of appeal. to people, particularly when they see, like I say, people getting rich around them. And those who haven't been through cycles before are probably a little more prone to speculate than people who have experienced the outcome of wild speculation. So I, you know, basically in this country, Van Graham was in the book I read in 1949 was preaching investment. that book continues to sell very well, but if the market gets hot, new issues are doing well, and people on leverage are doing well, a lot of people will be attracted to not only speculation, but what I would call gambling. And I'm afraid that that will be true in the United States. And I think that China being a newer market, essentially, in which there's widespread participation. is likely to have some pretty extreme experiences in that respect. We will have some in this country too. Charlie?
CharlieWell, I certainly agree with that. The Chinese will have more trouble. They're very bright people. They have a lot of action. And sure, they're going to be more speculative. And it's a dumb idea. And to the extent you're working on it, why you're on the side of the angels, but lots of lots of
WarrenWell, it will, it will offer the investor more opportunities, actually.
[1:38:24]
WarrenIf they can keep their wits about them, if you have wild speculation. I mean, we, Charlie just mentioned earlier, you know, that if we get into periods that are very tough, Berkshire certainly will do reasonably well because it, it won't, and we won't be, we won't get fearful. And fear spreads like you cannot believe. cannot believe until you've seen a few examples of it. At the start of September 2008, you had 35 million people with their money and money market funds with three and a half trillion dollars in them. And none of them were afraid that that dollar wasn't going to be a dollar when they went to cash in their money market fund. And three weeks later, they were all terrified and the $175 billion flowed out in three days. And so the way the public can react is really extreme in markets. And that actually offers opportunities for investors. You'll never, people like action and they like to gamble. And if they think there's easy money to be made, a lot of them, you'll get a rush to it. And for a while, it will be self-fulfilling and create new converts until the day of reckoning comes. Just keep preaching, investing. And if the market swings around a lot, you'll keep adding a few people here in there. adding a few people here and there to a group that recognizes that markets are there to be taken advantage of rather than to instruct you as to what is going on.
Andrew Ross SorkinOkay, Andrew. Have any more on that, Chairman?
QuestionerWe've done a lot of preaching, Warren, without much effect.
WarrenRight. And that's probably good from our standpoint.
Andrew Ross SorkinOkay. Andrew. Thank you, Warren. This question comes from Ryan Prince. President Donald Trump and his interpretation. Donald Trump and his advisors have talked about proposing a substantial investment tax credit to provide incentives for long-term corporate fixed capital investment. In BNSF, Berkshire owns a sprawling infrastructure portfolio requiring regular routine maintenance investment of substantial scale. What impact would an investment tax credit have on BNSF's capital investment decision-making from a return on investment, a capital perspective, as well as in terms of timing? And just as important, given the current economy and employment picture, would such a tax credit amount to a subsidization of otherwise mandatory maintenance capital investment or a proper incentive to stimulate investment?
WarrenYeah, well, it would all depend on how it was worded, you know, because we've had investment
[1:41:04]
Greg Abeltax credits in this country, and we've had bonus depreciation. This is another form of it, and we do get extra first year depreciation. that does not enter into our calculation very much. In fact, certainly at the Berkshire level, I've never instructed anybody to do anything different because of investment tax credits are accelerated depreciation. There may be some calculations done down at the operating company level. It's certainly true in something like wind projects and solar projects, They are dependent on the tax law currently. There may come a time when they aren't, but they wouldn't have been done without some subsidization through the tax law. But I would say if you change the depreciation schedules and, you know, double depreciation, triple depreciation. That, we're going to do what we need to do at the railroad to make it safer, more efficient if we just had ordinary depreciation. And I doubt if there'd be any dramatic differences. Obviously, if you were going to say buy a bunch of planes and the law was going to change on December 31st and the map made it better to wait until January 1st or do it this December 31st. They didn't make that kind of calculation. But I can't recall in all the years that I've ever sent out anything to our managers. saying, let's do this because the tax law is being changed or might be changed or something of the sort. As I mentioned earlier, it changes just a little bit if you think there's going to be a change in capital gains rates. At a given time, obviously, if it's going to, the rate's going to be lowered, you would take losses ahead of time and defer gains maybe a little. And that's why it's useful. Actually, if the tax committees, the Senate and the House, are working on something, it might be useful if the chairmans would say that if we do make any changes, we're likely to use this effective date or something of the sort. And I think they've done that a few times in the past. We are not, the big tax-driven item is in wind and solar, and that is a specific policy because the government has decided they want to move people or society is that it's a specific is that they want to move people toward those forms of electric generation, and the market system wouldn't do it. And there may come a time when the market system will do it all by itself. We won't make big changes. And it's so speculative anyway in terms of even what the law
[1:44:08]
Questionerwould be. But beyond that, if it becomes less speculative is the law, I mean, it really looks like something is going through. It doesn't change this big time at all. Charlie?
CharlieNothing to add. We're not going to change anything at the railroad for some little tax jiggle. If we need a bridge repaired, we're going to repair the bridge. You know, and if we need a lot of track maintenance all the time and that sort of thing. And it just, I don't think Matt and I've ever had to talk about it since we've owned the railroad. Greg?
Greg AbelWarren, my question also relates to Burlington Northern. Despite the current administration's belief that they can bring the coal industry back, market forces continue to lead to the industry's demise. While 90% of U.S. coal consumption is driven by electricity generation, natural gas has been both cheaper and cleaner burning, and renewable electricity generation has remade parts of the market as wind and solar of gain scale and become cheaper alternatives. This has created problems for Burlington Northern, with coal shipments accounting for just 18% of volume and revenue for the railroad last year, down from an average of 24% for both measures the previous 10 years. While some of this was due to a large build-up of coal supplies the past couple of winters, which finally seem to be working their way out, what are your expectations for the contribution coal can make to BNSF longer term? And I know that the rail will currently handle some export shipments going through Canada's Pacific Coast ports, but will there be enough growth there to offset domestic demand, or will BNSF need to rely more heavily on segments like intermodal to offset lost coal volumes?
WarrenYeah, the answer is coal is going to go down over time. I don't think there's much question about that. The specifics of any given year relate very importantly to the price of natural gas. I mean, right now there are, the demand is somewhat up, fair amount up, from last year, because natural gas is at 315 or 3.20, and the utilities can produce electricity in many cases quite a bit cheaper with coal than with natural gas. Whereas with $2, it would all be, it would be natural gas. But over time, coal is virtually, in my mind, is essentially certain to decline as a percentage of the revenue of the railroad. The speed at which it does, you know, you don't build, create generation plants overnight.
[1:46:49]
Greg AbelAnd so it, you can't predict the rate. and if natural gas is cheap enough, it's going to be a, you'll see a big conversion back to a natural gas. So coal is a, coal is going to go down as a percentage of revenues significantly, you know, certainly over 10 years. It'll be quite significant, and who knows exactly here by year. We are, we are looking for other sources of growth than coal if you're tied to coal. you've got problems,
CharlieCharlie? Well, you go out over the extremely long term, I think that all the hydrocarbons will be used, including all the coal. So I think that in the end, these hydrocarbons are a huge resource for humanity, and I don't think we've got any good substitute. And I've never minded saving them for the next year. generation. I don't like using them up very fast. So I'm, I'm open a little road on my own on this one. And people think that all this hydrocarbons are going to be stranded and the whole world is going to change. I think we're going to use every drop of the hydrocarbon sooner or later. We'll use them as chemical feedstocks. Well, it's, I regard all these things is very hard to predict. And I'm not at all sure of it. I would eventually expect natural gas to be pretty short in supply. A change in storage would make a big difference.
Greg AbelWe will produce within a few years as much electricity in Iowa or virtually as much electricity in Iowa from wind as our customers use, but the wind only blows about 35% of the time or something like that. And sometimes it blows too hard. But the storage, you know, having it 24 hours a day, seven days a week, is a real problem. even if we've got the capability of producing, like I say, a self-sufficient amount, essentially in Iowa before very long. Coal, our shipments of coal are up fairly substantially this year on the BNSF, but they were very low last year. And as you said, stockpiles grew and have come down somewhat. They're still on the high side. But in my mind, Charlie's got a long. longer term outlook on this. In my mind, we're going to be shipping a whole lot less coal 10 or 20 years from now than we are now. Other than I think there's some decent prospects in in other long halls. I mean, it's a pretty cheap way to move bulk commodities long distance rail is. And I think it's a good business, but the coal aspect of it's going to diminish. Okay. Station 6. Good morning.
QuestionerGood morning. It's Marcus Burns from Sydney, Australia.
[1:50:11]
QuestionerMy question, Mr. Buffett, is, you used to buy capital-light cash-generative businesses, but now buy lower-growth capital-consumptive businesses. I realize Berkshire generates a lot of cash flow, but would shareholders have been better off if he had continued to invest in capital-light companies?
WarrenWell, we'd love to find them. I mean, there's no question that buying a high return on assets. sets, very light, capital-intensive business that's going to grow beats the hell out of buying something that requires a lot of capital to grow. And this varies from day to day, but I believe, and I don't think it's sufficiently appreciated, I believe that the, probably the five largest American companies by market cap, and some days, we're in that group and some days we aren't. Let's assume we're not in that group on a given day. They have a market value of over $2.5 trillion. And that $2.5 trillion is a big number. I don't know whether the aggregate market cap of the U.S. market is, but that's probably getting up close to 10 percent of the whole market cap of the United States. And if you take those five companies, essentially you could run them with no equity capital at all. None. That is a very different world than when Andrew Carnegie was building a steel mill and then using the earrings to build another steel mill and getting very rich in the process. Rockefeller was building refineries and buying tank cars and everything. Generally speaking, over for a very long time in our capitalism, growing and earning large amounts of money required considerable reinvestment of capital and large amounts of equity capital, the railroads being a good example, that world has really changed, and I don't think people quite appreciate the difference. You literally don't need any money to run the five companies that are worth collectively more than $2.5 trillion dollars and who have outpaced any number of those names that were familiar if you looked at the Fortune 500 list 30 or 40 years ago, you know, whether it was Exxon or General Motors or you name it. So we would love, I mean, there's no question that a business that doesn't take any capital and grows and has, you know, almost infinite returns on required equity capital, is the ideal business. And we own a couple of businesses, a few businesses that earn extraordinary returns on capital, but they don't grow. We still love them, but if they had, if they were in fields that would grow, believe me, they would be number one on our list.
[1:53:20]
Warrenseeing those that we can buy and that we understand well. But you are absolutely right that that that's a far, far, far, far better way of laying out money than what we're able to do when buying capital-intensive businesses. Charlie?
CharlieYeah, the chemical companies of America at one time were wonderful investments. Dow and DuPont sold at 20 sometimes earnings and they kept building more and more complicated plants and hiring more Ph.D. Chemists and it looked like they owned the world. Now most chemical products are sort of commoditized and it's a tough business being a big chemical producer. And in comes all these other people like Apple and Google and they're just on top of the world. I think the question is basically right that the world has changed a lot and that the people who have made the right decisions and getting into these new businesses that are so different from the old ones have done very well.
WarrenYeah, Andrew Mellon would be absolutely baffled by looking at the high-cap companies now. I mean, the idea that you could create hundreds of billions of value, essentially without assets, without tangible assets. Fast. Fast, yeah. But that is the world. I mean, there is, when When Google can sell you something where GEICO was paying 11 bucks or something, every time somebody clicks something, that is a lot different than spending years finding the right site and developing, you know, iron mines to supply the steel plants and, you know, railroads to haul the iron to where the steel is produced and distribution points and all that sort of thing. Our world was built. And when we first looked at it, our U.S. our capitalist system basically was built on tangible assets and reinvestment and all that sort of thing and a lot of innovation and invention to go with it. But this is so much better if you happen to be good at it, to essentially be able to build hundreds of billions of market value without really needing any capital. That is a different world than exists in the past. And I think, isn't I think the world is likely to continue. I mean, the trend is, I don't think the trend in that direction is over by a long shot. A lot of the people who are chasing that sort of thing very hard now in the venture capital field are losing a lot of money. It's, it's a wonderful field, but not everybody's going to win big in it. A few are going to win big in it. Okay, Carol. This question is from a shareholder in California in the Silicon Valley area.
[1:56:25]
Questionerwho didn't want his name mentioned because he said he wasn't looking for prolicity, but whose picture makes him appear to be a millennial. Every Berkshire shareholder knows about the stock market value of Berkshire. But my question is about the value of Berkshire to the world. For instance, the value of Apple to the world has been iPhones. The value of GEICO is cost-effective auto insurance. The value of 3GIA. and I will tell you that there aren't some shareholders who would be arguing about here, but the value of 3G is improved operations. But about Berkshire, I just don't know. In managing Berkshire's subsidiaries, as Mr. Munger once famously said, you practiced delegation just short of abdication. So hands-on management can't be the answer. That means the majority of Berkshire's subsidiaries would do just as well, if they were to stay independent companies. So that's my question. What is the value of Berkshire to the world?
WarrenYeah. Well, I would say the question about, I'm with him to the point where he says that, which he accurately describes as as delegation of the point of the point of abdication. But I would argue that that application actually, in many cases, will enable those businesses to be run better than they would if they were. part of the S&P 500 and the target perhaps of activists or somebody that wants to get some kind of a jiggle in the short term. So I think that our abdication actually has some very positive value on the companies, but that, you know, you'd have to look at it by company. We've got probably 50 managers in attendance here, and naturally, naturally, they're not going to say anything publicly on television or anything where they knock us or anything, but get them off in a private corner and just ask them whether they think their business can be run better with a management by application from Berkshire, but with also all the capital strengths of Berkshire that any project that makes sense can be funded in a moment without worrying whether the banks are still lending, like in 2008, you know, or whether whether Wall Street will applaud it or something of that sort. So I think our very, our hands-off style, actually, I think, can add significant value in many companies, but we do have managers here you can, you could ask about that. We certainly don't add the value by calling them up and saying that we've developed a better system,
[1:59:18]
Warrenyou know, for turning out additives at Lubrizol or running GEICO better than Tony nicely confronted or anything of the sort. But we do take a, we have a very objective view about capital allocation. We can free managers. I would say that we might very well free up at least 20% of the time of a CEO in the normal public, who would have otherwise have a public company just in terms of meeting with analysts and and the calls and dealing with banks and all kinds of things that that essentially we relieve them up that they can spend all of their time figuring out the best way to run their business so I I think we bring something to the party even if it even if we're just sitting there with their feet up on the desk
Charlieyeah we're trying to be a good example for the world I don't think we'd be having these big shareholder meetings if there weren't a little bit of teaching ethos in Berkshire and and I've watched it closely for a long time I'd argue that that's what we're trying to do is set a proper example stay sane be honest
Warrenso I so I'm proud of Berkshire and I I don't worry too much if we sell Coca-Cola we um I would say Geico is an extraordinarily well-run company and it would be extraordinarily well-run if it were public but it has gone from two and a fraction percent of the auto insurance market to 12 percent and part of the reason the small part the real key is geico and tony nicely but part of the reason is that when other at least two of our competitors big competitors said that they would not meet their profit objectives if they didn't lighten up their interest in new business eight or 10 months ago I think our business decision to step on the gas is a better business decision but I think that Geico as a public company would have more trouble making that decision than they do when they're part of Geico because we we are thinking about nothing but where Geico is going to be in five or 10 years and if that requires having new we want new business cost to penalize our earnings in the short term and and other people have different pressures i'm not arguing on how how they behave because they have a different constituency than geico has with berkshire and and what berkshire has with its shareholders in turn and i think in that case our system is superior but it's not because we work harder carly i don't do hardly anything
Questioneruh jonathan could could you please talk about your periodic payment annuity business the weighted
[2:02:39]
Questioneraverage interest rate on these contracts is four point 1% which doesn't sound particularly attractive given the current interest rate environment is the duration of these liabilities long enough to make that an attractive cost of funds or were these contracts executed primarily when rates were higher
Ajit Jainwell those contracts these are what are called structured settlements primarily and when somebody young has a terrible auto accident or whatever it may be uh perhaps urged by the court uh urged by family members who really do have the interest of the of the of the injured party at harder they may convert what could be a large sum settlement probably against the insurance company you know maybe a million dollars maybe two million dollars into periodic payments for the rest of the life of the injured party and we issue those uh for other insurance companies in fact sometimes the court directs that berkshire uh or hints strongly that berkshire should be the one to issue those because you're talking with somebody's life 30 or 40 or 50 years from now and the court or the lawyer or the family may want to be very very sure that whoever makes that promise is going to be around to keep it and and berkshire has a preferred position in that we look to get to your question johnny we look for taking the longer maturity situations we always have and we have to make assumptions about mortality and we have to make assumptions and we have to decide on what interest rate we'll do it the 4.1 uh is a mix of a lot of contracts over a lot of years obviously we write maybe 30 million of these 20 to 30 million a week looking for the long maturities and so if you take an average of 15 years or something that's how we come up at that sort of a figure we adjust them to interest rates at all times and when doing that we're making an assumption that we're going to earn more money that then is inherent in the cost of these structured settlements it's a business we've i think we've got six or seven billion up now uh and we'll keep doing them and incidentally probably a significant percentage of the six or seven billion we're not yet paying anything on somebody else may have the earlier payments uh and they're certainly weighted far out so it's a business that that that uh will be in 10 or 20 years from now we've got some natural advantage because people trust us more than any other company to make those payments and the test is whether we earn over time a
[2:05:45]
Warrenreturn above that which we're paying to the injured party and that's a bet we're willing to make but if interest rates continued at present levels for a long time we would assuming we kept the money in fixed income instruments we would have some loss in that we've got an allowance in their instance for the expenses incidently of because we do make monthly payment to these people eventually and we have to keep track of whether they're still alive or not because you cannot count on the the relatives of somebody that's deceased when a check is coming in every month to notify you promptly that the person has become deceased but it's it'll that number will go up over time if interest rates stay where they are that 4.1 will come down a little bit as we had no business okay station seven thank you mr ruffet and mr mung for all you've done and the opportunity to learn even more from your approach to investing in life.
QuestionerMy name is Harry Hong and I'm a respirologist from Vancouver, British Columbia. The question involves back in 2001 you made an initial investment in USG shortly before the company declared bankruptcy due to the mounting asbestos liability. You held those shares through the bankruptcy process even though standard wisdom says that the equity in chapter 11 is usually worthless can you explain why USG's equity was a safe investment
Warrenwell I don't really remember all the details then it was very cheap we very cheap yeah but I would say this USG we own I'm not sure what percentage but it's very significant percentage I don't know 20% or something probably 30% or something like that but the USG overall has just been disappointing because the gypson business has been disappointing and I think I may be wrong I think they went bankrupt twice first from asbestos going back and then subsequently because they just had too much debt so it is it has not been a a brilliant investment now if if gypson prices were at levels that they were in some years in the past it would have worked out a lot better. But it hasn't been terrible. No, it hasn't been terrible. But it, gypson took, it's taken a real dive of several times and there has been too much gypson capacity. And then when it comes back, the management's have been not necessarily at USG, but including USG perhaps. They've gotten more optimistic about future demand than they should have. And they like going back historically away.
[2:08:58]
WarrenThey like to build new plants. And it's it's a business where the supply has been significantly, potential supply has been significantly greater than demand in a lot of years. I mean, you've seen housing starts and since 2008 and nine, not come back anywhere near as much as people anticipated. So gypsom prices have moved up, but not dramatically. So I just put that one down. is not one of our great ideas. Not one of my great ideas. Charlie wasn't involved in that. It's no disaster, though.
OtherNo, it isn't.
WarrenBecky?
Becky QuickOh. Hello? Oh, there we go. Okay. This question comes from Axel Meierseek in Germany, who writes, if Ajit Jane were to retire, God forbid, be promoted. What would be the impact on the insurance operations, both with regards to underwriting profit as well as the development of flow?
WarrenWell, nobody could possibly replace Ajit. I mean, it just, you can't come close. But we have a terrific operation in insurance. We really do. Outside of Ajit, and it's terrific squared with Ajit. There are things only he can do, but there are a lot of things that are things that are institutionalized. a lot of things in our insurance business where, uh, we've got extraordinarily able management too. Uh, so a jeet, for example, uh, bought a company, but nobody here has heard of probably called guard insurance a few years ago based in workers comp primarily. It's based in improbably in Wilkesbury, Pennsylvania, and it's expanding like crazy in Wilkesbury. And it's expanding like crazy in Wilkesbury. And it, it, it, it's expanding. It's been, it's been a gem. And Ajit oversees it, but we've got a terrific person running it. And we bought medical protective some years ago. Tim Kennessey runs that. A jeet oversees it. But Tim Kennessey can run a terrific insurance company with or without a jeet, but he's smart enough to realize that if you got somebody like Ajit, that's willing you to, to, to, uh, oversee it to a degree. that's great, but Tim, Tim is a great insurance manager all by himself and medical protective has been a wonderful business for us. Most people don't know we own it. The company goes back into the 19th century, actually. We've got a lot of good operations. If you look at that section in the annual report called other insurance company, I mean, that is in aggregate, that is a wonderful insurance company. There's very few like it. Uh, Geico is a terrific company. So, uh, a jeet has made more money for Berkshire than I have probably, but, but, but,
[2:12:10]
Warrenuh, we've still got what I would consider the world's best property casualty insurance operation, uh, even without him and with him, you know, it, no, nobody, I don't think anybody comes close.
WarrenCharlie?
CharlieWell, a few years ago, California made a little change and it's working with the compensation law. And Ajiz saw instantly that it would cause the underwriting results to change drastically. And he went from a tiny percent of the market, like 10% of the market, which is big. And he just grasped a couple of billion dollars at least out of the air, like was snapping his fingers. And when it got tough, he pulled back. We don't have a lot of people like Ajit. It's hard to just snap your fingers and grab a couple of billion dollars out of the air.
WarrenWell, we've actually, The California workers' comp, the Guard has moved into that. We have got a lot of terrific insurance managers. I mean, I don't know of a better collection anyplace. And Ajit has found some of those. I've gotten lucky a few times. I mean, Tom Nerney at U.S. liability. That goes back to about 15, 16 years. He is a terrific operation. It's not huge, but it is so well managed. And people don't even know we own these things, but you look at that last line, and now we've added Peter Eastwood with Berkshire Hathaway, especially. And these are really good businesses, I've got to tell you. When you can produce underwriting profits and on top of that, just hand more float, we don't have, we don't have many businesses like that. Those are great business. And we've got 100, whatever it is, 100 billion plus of money that we get to earn on while at the same time, overall, you know, on balance, we're likely to make some additional money for holding it. If you can get somebody to hand you $104 billion and pay you to hold it while you get to invest in and get the proceeds, it's a good business. Now, most people don't do well at it. And, you know, the problem is that what I just described, attempts lots of people to get into it. And recently, people have got into it really just for the investment management. It's a way to earn money offshore. We don't do that, but it can be done for small companies with investment managers. So there's a lot of competition in it. But we have some fundamental advantages, plus we have in certain areas, plus we have absolutely terrific managers. to maximize those advantages. And we're going to make the most of it.
[2:15:20]
WarrenI've just been handed something Kraft Heinz came out with. They just came out with it commercially a couple days ago, a few days ago, maybe a few weeks ago. At the directors meeting, they had this. I had three of these. I'm sure that there's a member or two of the audience that may not approve of it, but they I got to tell you, folks, it's good. It's, it's, it's, it's a cheesecake arrangement with topping and build it off your cream cheese special on, so you create your own cheesecake. And I thought that I can eat it while Charlie's talking. And you'll be able to get it at the halftime. It's selling very well. And I think, just so you don't feel too guilty, I think it's 170 calories for this. Cherry, when I, like I said, I had three of these years. I don't mind having five or 600 calories for dessert. You know, I've been, I'll let somebody else eat the broccoli and I'll have the dessert. So we'll be eating this, but you too, at half time. I think they brought eight or nine thousand of these. I'll be disappointed if we don't run out. Actually, I'll be disappointed in you, not them. Okay. Jay? This question is on the topic. of succession planning. Warren, there seems to be fewer mentions by name of top-perform Berkshire managers in this year's annual letter. Does this mean you're changing your message regarding the succession plan for Berkshire's next CEO? Well, the answer to that's no. And I didn't realize that we're fewer mentions by name. I write that thing out and send it to Carol and she tells me go back to work. I don't, I don't actually. think that much about how many personally get named. I would say this, and this is absolutely true. We have never had more good managers. Now, it's because we've got more good companies, but we have never had more good managers than we have now. So I, but it had nothing to do with, with succession. Charlie?
CharlieWell, I certainly agree with that. We don't seem to have a whole lot of 20-year-olds. Certainly not at the front table. Now, we've got, we've got an extraordinary group of good managers, which is why we can manage by abdication. It wouldn't work if we had a whole bunch of people who were, uh, had come with the idea of getting my job. I mean, if we had, if we had 50 people out there, all of who wanted to be running Berkshire Hathaway, it would not work very well. And, but they, uh, they have the jobs they want in life. Tony Nicely
[2:18:30]
Warrenrunning Kiko. And you go down the line. They have jobs they love. And that's a lot better, in my view, than having a whole bunch of them out there that are kind of doing their job there, kind of hoping the guy that's competing with them will fail so that when I'm not around, they'll get the nod. It's a much different system than they exist at most large American corporations. Charlie got an able.
OtherWell, we'll go to Station 8.
QuestionerHi, Warrior and Charlie. My name is Becky Wei. I'm an MBA student from the Wharton School of Business. This is my first time to be in the first, in a new meeting. I'm really excited about it. Thanks for having us here.
WarrenThanks for coming.
QuestionerMy question is, where do you want to go fishing for the next three to five years? Which sectors are you most bullish on and which sectors are you most bearish on? Thank you.
WarrenYeah. Charlie and I do not really discuss sectors much, nor do we let the macro environment or thoughts about it enter into our decision. We're really opportunistic. And we obviously are looking at all kinds of businesses all the time. I mean, it's a hobby with us almost. Probably more with me than Charlie. But we're hoping we get a call and we've got a bunch of filers. And I would say this, through of both of us, we probably know in the first five minutes or less, whether something is likely to, or has a reasonable chance of happening. And it's just going to go through there. And it's going to, the first question is, can we really ever know enough about this to come to a decision? You know, and that knocks out a whole bunch of things. And there's a few. And then if it makes it true there, there's a pretty good. A reasonable chance we're going to, we may do something. But it's not sector specific. We do love the companies, obviously, with the moats around the product, where consumer behavior can be perhaps predicted further out. But I would say it's getting harder for us anyway to anticipate consumer behavior than we might have fought 20 or 30 years ago. I think that that that's just a tougher game now. But we'll measure and we'll look at it in terms of return. on present capital, returns on prospective capital. We may have, we can, a lot of people give you some signals as to what kind of people they are even in talking in the first five minutes and whether you're likely to actually have a satisfactory arrangement with them over time.
[2:21:23]
WarrenSo a lot of things go on fast, but it, we know the kind of sectors we kind of like that, or the type of business we kind of like to end up in. But we don't really say we're going to go after companies in this field. or that field or another field.
WarrenCharlie, you want to?
CharlieYeah, some of our subsidiaries do little bold-on acquisitions that make sense. And that's going on all the time. And of course, we like it. But I would say the general field of buying whole companies, it's gotten very competitive. There's a huge industry of doing these leveraged buyouts. That's what I still call them. The people who do them think that's kind of a bad marker. So they say they do private equity. You know, it's like maybe even a janitor call himself the chief of engineering or something. But anyway, the people who do the leverage buyouts, they can finance practically anything in about a week or so through shadow banking, and they can pay very high prices and get very good terms and so on. So it's very, very hard. to buy businesses and we've done well because there's a certain small group of people that don't want to sell to private equity. And they love the business so much, they don't want to just dressed up for resale.
WarrenWell, you had a guy some years ago, came to see me, and he was 61 at the time, and he said, look, I've got a buying business, I got all the money I can possibly need. But he said, there's only thing one, there's only one thing that worries me when I drive to work. Actually, there's more than one guy that's used the same term. He said, there's only one thing that bothers me when I go to work, you know. If something happens to me today, my wife's left. You know, I've seen these cases where executives in the company try to buy them out cheap where they sell to a competitor and all the people. He says, I don't want to leave her with a business. I want to decide where it goes, but I want to keep running it. And I love it. And he said, I thought about something. selling it to a competitor. But if I sell it to a competitor, you know, their CFO is going to become the CFO of the new company. And they're, you know, on down the line. And all these people who help me build the business, you know, a lot of them are going to get dumped. And I'll walk away with a ton of money. And some of them will lose their job. He said, I don't want to do that. And he says, I can sell it to a leverage buyout firm who would prefer to call themselves private equity,
[2:24:10]
Warrenbut they're going to leverage it to the help. And they're going to resell it. And they're going to resell it. they're going to dress it up something. But in the end, it's not going to be in the same place. I don't know where it's going to go. He said, I don't want to do that. So he said, it isn't because you're so special. He says, there just isn't anyone else. If you're ever proposing to a potential spouse, don't use that lie. I mean, you know. But that's what he told me. I took it well. And we made a deal. So logically, unless somebody has that attitude, we should lose in the sense. We should lose in the market. I mean, you can borrow so much money, so cheap. And we're looking at the money as pretty much all equity capital. And we're not competitive with somebody that's going to have a very significant portion of the purchase price carried in debt, maybe averaging, you know, 4% or something. And he won't take the losses if it goes down. He gets part of the profit of it goes up. Yeah. His calculus is just so different than ours. And he's got the money to make the deal. So if all you care about is getting the highest price for your business? You know, we are not a good call. And we will get some calls in any event. And we can offer something that that wouldn't call it unique, but it's unusual. The person that sold us that business and a couple of others that, actually, it's almost word for word, the same thing they say, they are all happy with the sale they made, very happy. And, you know, they have lots and lots and lots of money. And they're doing what they love doing, which is still running the business. And they know that they made a decision that will leave their family and the people who work with them all their lives in the best possible position. And that's, in their equation, they have done what's best best. But that is not the equation of many people. And it certainly isn't the equation of somebody who buys it and borrows every time they can with the idea of reselling it after they, you know, maybe dress up the accounting and do some other things. But when the disparity gets so wide between what a heavily debit debt finance purchase will bring as against an equity type purchase, it gets to be tougher. There's just no question about it. And it'll say that way. But it's been tough for a long time and we've bought some good businesses. Yeah, yeah. Okay. Andrew.
[2:26:51]
QuestionerWarren, this comes from a shareholder who I think is here who asked to remain anonymous, writes three years ago you were asked at the meeting about how you thought we should compensate your successor. You said it was a good question and you would address it in the next annual letter. We've been patiently waiting. Can you tell us now, at least philosophically, how you've been thinking, how you've been thinking about the way the company should compensate your successor so we don't have to worry when the pay consultants arrive on the scene.
WarrenYeah. Well, unfortunately, in my age, I don't have to worry about things I said three years ago, but this guy obviously much younger remembers. I'm not, well, I'll accept his word that I said that. There's a couple possibilities, actually. I don't want to get into details on them, but you may may have, and I actually would hope that we would have somebody, A, that's already very rich, which they should be, been working a long time, and that kind of ability that's very rich, and really is not motivated by whether they have 10 times as much money they and the families can need or 100 times as much, and they might even wish to perhaps set an example of by engaging for something far lower than actually what you could say their true market value is. And that could or could not happen, I think it'd be terrific if it did, but I can't blame anybody for wanting their market value. And then if they didn't elect to go in that direction, I would say that you would probably pay them a very modest amount and then have an option. which increased in value by or increased in striking price annually. Nobody does this hardly. The Washington Graham Holdings has done it. The Washington Post Company did a little bit. But would increase because, assuming that there were substantial retained earnings every year, because why should somebody retain a bunch of earnings and then claim they'd actually improve the value simply because they withheld the money from shareholders? So very easy to design that. And in private companies, people do design it that way. They just don't want to do. in public companies could they get more money the other way. But they might have a very substantial one that could be exercised. But where the shareholders, shares had to be held for a couple years after retirement, so that they really got the result over time that the majority of the stockholders would be able to get,
[2:29:44]
Warrenand not be able to pick their spots as to when they exercised and sold a lot of stock. It's not hard to design. And it really depends who you're dealing with in terms of actually how much they care about money and having money beyond what they can possibly use. And most people do have an interest in that, and I don't blame them. But I don't know, what do you think, Charlie?
CharlieWell, I, one thing I think is that I have avoided all my life compensation consultants. To me, it's a, I hardly can find the words to express my contempt. I will say this, if the board hires the compensation consultant after I go, I will come back. Mad. So I think there's a lot of mumbo-jumbo in this field. And I don't see it going away.
WarrenOh, it isn't going to go away. No, it's going to get worse. I mean, if you look at, I mean, the way compensation gets handled, you know, everybody looks at everybody else's proxy statement says, we can't possibly hire a guy that isn't than, you know, and so on. And the human relations department, you know, work for the CEO come in and suggest a consultant. What consultant is ever going to get another assignment? He says you should pay your CEO below the down in the fourth quartile because you're going to get a fourth quartile result. I mean, it just, you know, it, it isn't that the people are evil or anything. It's just the nature of the situation just, it produces a result that is not consistent with how representatives of the owners should behave.
CharlieIt's even worse than that. Capitalism is the, is the, is the, is, the golden goose that we all live on and if people generally get so they have contempt for it because they don't like the pay arrangements in the system your capitalism may not last as well and and that's like killing the golden goose so I think the existing system has a lot wrong with it.
WarrenI think there is something coming in pretty soon. I may be wrong about this where companies are going to have to put in their products statement the CEOs pay to the average pay or something like that that isn't going to change anything I mean it won't change that thing won't change the thing and you know it'll cost us by the way I won't get any headlines either it'll be tucked away it'll cost us a lot of money with 367,000 people employed around the world and I mean we'll hope to get something that makes it somewhat simpler so we can use estimates or something of the sort but to get the median
[2:32:41]
Charlieincome or median income or whatever the rules may read you know and that's what consultants are for one yeah it it's you know it is human nature that produces this and you know the most I write in this letter to the managers every two years I said the only excuse I won't take on something is that everybody else is doing it but of course everybody else is doing it is exactly the rationale for why people did not want to count the cost of stock options as a cost I mean it was ridiculous all these CEOs went to Washington they got the Senate I think to vote 88 to 9 to say the stock options aren't a cost and then a few years later you know that it became so obvious that that they finally put it in so it was a cost you know it reminded me of Galileo or something I mean all these guys worse it was way worse but hope behaved better to Galileo than he was well anyway it's it I would hope you know like I say somebody somebody
WarrenWell, and it doesn't even have to be, I'm not talking about the current successor or anybody else. I mean, these successors down the line are probably going to have gotten very, very wealthy by the time they're running Berkshire. And the incremental value of wealth gets very close to zero at some point. And there is a chance to use it as a different sort of model, but I don't have a different sort of model. but I don't have any problem if it's a system is devised that recognizes retained earnings nobody why I've never heard anybody talk about it you know at the 20 boards I've been on or you know if you and I were partners in a business you know and we kept retaining earnings in the business and I kept having the value to buy a portion of you out at a constant price you say this is idiocy but of course that's the way all the option systems are designed and it's a better to be to the CEO and for the consultants and, of course, usually if there's some correlation between what CEOs are paid and what boards are paid. If CEOs were getting paid at the rate that they got paid 50 years ago adapted to present dollars, director paid to be lower. So it's, you know, it's got all these built-in things that to some extent, sort of kindle the day. No Berkshire director has in it for the money.
QuestionerWell, they are. They own a lot of stock. And they bought it in the market, just like to say. Yeah, yeah. It's a very old-fashioned system. I looked at one company other day, and seven of the directors had never bought a share of stock with their own money.
[2:35:36]
WarrenNow, they've been given stock, but not one of the, not one, I didn't say they not one. Seven of the directors had never actually bought the share of stock. And there they are. There they are, you know, making decisions on who should be CEO and how they should be paid and all that sort of thing. But then, you know, they've never felt like shelling on a dollar themselves. Now they've been given a lot of stock. It's, you know, we're dealing with human nature here, folks. And that, what you want is to have a system that works well in spite of how human nature is going to drive it. And we've done awfully well in this country in that respect. I mean, American businesses overall has done. very, very well for Americans generally. But not every aspect of it is exactly what you want to teach your kids. Okay, Greg.
QuestionerWarren, between 2010 and 2015, intermodal rail traffic enjoyed double-digit rates of revenue growth as shorter-haul freight converted from truck to rail. During the past year or so, though, cheaper diesel prices and more readily available truckload capacity have made trucking more competitive, leading to a decline in inter-motile rail traffic. While carload growth is expected to be solid longer term, helping to offset weakness in other segments like coal, what impact do you expect the widening of the Panama Canal, which was completed last year, to have on the West Coast port shipments that BNSF has traditionally carried through to exchange points for the eastern U.S. railroads, as shippers elect to have goods unloaded at ports in the Gulf of Mexico or up the eastern seaboard. And while loss of volumes is never a good thing, could there be a small trade-off here as the bottleneck in Chicago, where most East-West cargo is handed off, eases a bit over time as some of the current traffic gets rerouted?
WarrenWell, yeah, Chicago has got lots of problems, and it's going to continue for a long—I mean, that requires a big solution. When you think of how the railroads develop, I mean, Chicago was the center, and, you know, he laid the rails, and there were a whole bunch of different railroads. you know, a hundred years ago, and city grows up around them and everything. So Chicago can be a huge problem, but getting to intermodal, I think intermodal will do very well. But you are correct that car-loadings actually hit a peak in 2006, so here we are 11 years later, and the investment of the five big-classes actually hit a peak in 2006.
[2:38:16]
WarrenClass one railroad is four of the biggest. If you look at their investment, beyond depreciation, it's tens and tens of billions of dollars, and we're carrying less freight, the four in aggregate, than we were in 2006. And coal will continue to increase. It's a good business, and it has big advantages over truck in many respects. Truck gets much more of a free ride in terms of the fact that their right-away, which is the highway system, It's subsidized to a much greater degree beyond the gas tax, you know, than the railroad industry. But it has not been a growth business in physical volume to any great degree. I think it's unlikely to be. I think it's likely to be a good business. I think we've got a great territory. I like the West better than the East. As you mentioned, you know, there will be some inter-motive traffic that gets diverted to eastern ports, perhaps, or so on. Overall, we've got a terrific system in that respect, and we will do well. It would be more fun if we had something where you could expect aggregate car loatings to increase two or three or four percent a year. But I don't think that's going to happen. I do think our fundamental position is. terrific. However, I think we'll earn decent returns on capital, but that's, I think that's the limit of it. Charlie?
CharlieNothing to add.
WarrenOkay, station nine.
QuestionerI'm from Shankar and I'm from Gurney, Illinois. Thank you for doing everything you do for us. I have a question that two of you have largely avoided capital allocation mistakes by bouncing ideas off of one another. Will this continue along into Berkshire's future? And I'd like to, I'm interested in both at headquarters and at subsidiaries.
WarrenIt can't continue very long. I don't get to fetish, Charlie. Any successor that's put in at first year, capital allocation abilities and proven capital allocation abilities are certain to be uppermost in the board's minds, or in the board's minds, or in the current case, in terms of my record. Charlie's recommendation for what happens after we're not around. Capital allocation is incredibly important at Berkshire. Right now we have 280 years, 90 billion of whatever may be of shareholders equity. If you take the next decade alone, you know, nobody can make accurate predictions on this, but in the next next 10 years, if you just take and depreciate depreciation right now is another $7 billion a year, something on that order.
[2:41:46]
WarrenThe next manager in the decade is going to have to allocate maybe $400 billion or something like that, maybe more. And it's more than already has been put in. So 10 years from now, Berkshire will be an aggregation of businesses where more money has been put in. in that decade than everything that took place ahead of time. So you need a very sensible capital allocator in the job of being CEO of Berkshire, and we will have one. It would be a terrible mistake to have someone in this job where really capital allocation might be, might even be their main talent, that probably should be very close to their main talent. And of course, we have an advantage at Berkshire in that we do know how important that is. And there is that focus on it. And in a great many companies, people get to the top through ability and sales. Sometimes they come from the legal sides, all different sides. And they then have the capital allocation sort of in their hands. Now, they may not establish strategic thinking division. and they may listen to investment backers and everything, but they better be able to do it themselves. And if they've come from a different background or haven't done it, it's a little bit, as I put in one of my letters, I think it's like getting to Carnegie Hall playing the violin, and then you walk out on the stage and they hand your piano. I mean, it is, it is something that Persia would not do well if somebody was put in who had a lot of skills and other areas, but really did not have an ability of capital allocation. I've talked about it as as being something I call a money mind. I mean, people can have 120 IQs or 140 IQs or whatever it may be very similar scoring abilities in terms of intelligence tests, and some of them have minds that are good at one kind of thing and some of another. I've known very bright people that do not have money minds and they can make very unintelligent decisions. can do all kinds of other things that most mortals can't do. But it just doesn't, it isn't the way their wiring works. And I've known other people that really would not do that brilliantly. They do fine, but on an SAT test or something like that. But they've never made a dumb money decision in our life. And Charlie, I'm sure, has seen the same thing. So we do want somebody, and hopefully they've got a lot of talents, but we certainly do not want somebody that, if they lack a money mind.
[2:44:46]
WarrenWell, there's also the option of buying in stock, which, so it isn't like it's some hopeless problem. One way or another, something intelligent will be done. And a money mine will recognize when it makes sense to buy in stock and doesn't. You know, in fact, it's a pretty good test for some people in terms of management's how they think about something like buying in stock, because it's not a very complicated equation. if you sort of think straight about that sort of a subject. But some people think that way and some don't, and they're probably miles better at some of something else. But they say some very silly things when you get to something that seems so clear as whether, say, buying in stock makes sense. Anything further, Charlie?
CharlieNo.
OtherOK, Carol.
Carol LoomisThis question comes from Steve Haverstrawl of Connecticut. Warren, you've made it very clear in your annual letter that you think the hedge fund compensation scheme of 2 and 20 generally does not work well for the funds investors and in the past you have questioned whether investors should pay quote financial helpers unquote as much as they can but financial helpers can create tremendous value for those they help take Charlie Munger for instance in nearly every annual letter and on the movie this morning you describe how valuable Charlie's advice and counsel has been to you and in turn to the incredible rise in Berkshire's value over time. Given that, would you be willing to pay the industry standard, quote, financial helper fee of 1% on assets to Charlie? Or would you perhaps even consider two and 20 for him? What is your judgment about this matter?
WarrenYeah. Well, I've said in the annual report that I've known maybe a dozen people in my life. And I said there are undoubtedly hundreds or maybe thousands out there, but I've said that I've known personally a dozen where I would have predicted or did predict in a fair number of those 12 cases, I did predict that the person involved would do better than average in investing over a long period of time. And obviously, Charlie is one of those people. So would I pay him? am sure. But would I take financial advisors as a group and pay them 1% with the idea that they would deliver results to me that were better than the S&P 500 by 1% and thereby leave me breaking even against what I could have done on my own? You know, there's very few. So it's just not a good question to ask whether, you know, I pay Charlie 1%, that's like asking, you know, whether I'd
[2:47:54]
Warrenhave paid Babe Ruth, you know, 100,000 or whatever it was to come over from the Red Sox to the Yankees. I mean, sure, I would have, but there weren't very many people I would have paid $100,000 to in 1919 or whatever it was to come over to the Yankees. So, uh, the, it's a fascinating situation because the problem isn't that the advisors are going to do so it's terrible. It's just that you have an option available that doesn't cost you anything that is going to do better than they are in aggregate. And it's an interesting question. I mean, if you, if you hire an obstetrician, assuming you need one, they're going to do a better job of delivering the baby than, you know, if the spouse comes in to do it, or if they just pick somebody up off the street. And if you go to a dentist, if you hire a plumber, in all the professions, there is, there is, value added by the professionals as a group compared to doing it yourself or just randomly picking layman. In the investment world isn't true. I mean, they, the active group, the people that are professionals in aggregate are not, cannot do better than the people, the aggregate of the people who sit, just sit tight. And if you say, well, in the active group, there's some person that's terrific, I will agree with you. But the passive people can't all pick that person. And they wouldn't, they don't know how to identify them. So I, I, uh... It's even worse than that. The person, the expert who's really good, when he gets more and more money in, he suffers just terrible performance problems. Yeah. And so you'll find the person who has a long career at 2 and 20, and if you analyze it, net, all the people have money because some of the early people have had a good record, but more money come in later and they lose it. So, investing world is just, it's a morass of wrong incentives, crazy reporting, and I'd say a fair amount of delusion. Yeah, if you ask me whether I, those 12 people I picked, would do better than the S&P working with $100 billion. I would answer that probably none of them would. I mean, that would not be their perspective performance. But when I was, when I was talking of them, you know, or referencing them, and when they actually worked in practice, they dealt generally with pretty moderate sums. And as the sums grew, their relative advantage diminished. I mean, it's so obvious from history. The example I used in the report, I mean, the guy who paid the bet with me,
[2:51:00]
WarrenAnd incidentally, all kinds of people didn't make the bet with me, because they knew better than to make the bet with me. There were hundreds, at least a couple hundred underlying hedge funds. These guys were incented to do well. The fund to fund manager was incented to pick the best ones they could pick. The guy who made the bet with me was incented to pick the best fund of funds, you know, and tons of money. And just in with those five funds, a lot of money went to pay managers for a what was subnormal performance over a long period of time. And it can't be anything but that. And it's an interesting, you know, it's an interesting profession when you have tens of thousands or hundreds of thousands of people who are compensated based on selling something that in aggregate can't be true, superior performance. So, uh, but it'll continue and the best salespeople will tend to a the most money. And because it's such a big game, people will make huge sums of money, you know, far beyond what they're going to make in medicine or you name it. I mean, you know, repairing the country's infrastructure, I think. I mean, the big money is, huge money is in selling people the idea that you can do something magical for them. And if you have, if you even have a billion dollar fund, you know, and get two percent of it, for terrible performance. That's $20 million. In any other field, you know, it would just blow your mind. But people get so used to it, you know, in the field in the field of investment that it just sort of passes along. And $10 billion, I mean, $200 million fees. We've got two guys in the office, you know, they're managing $11 billion. Yeah, they're managing $20 billion, you know, between the two of them, $21 billion maybe. You know, we pay them a million dollars a year, plus the amount by which they beat the S&P. They have to actually do something to get a contingent compensation, which is much more reasonable than the 20%. But how many hedge fund managers in the last 40 years have said, I only want to get paid if I do something for you? Unless I actually deliver something beyond what you can get yourself, you know, I don't want to get paid. It just doesn't happen. And, you know, it gets back to that line that I've used. But when I asked the guy, you know, how can you, in good conscience charge two and 20? And he said, because I can't get three and 30, you know.
[2:53:56]
QuestionerAny more, Charlie, or we used up our... I think you've beaten up on them enough. Well, Jonathan. Precision cast parts represents the second largest acquisition Berkshire has ever made. There wasn't much qualitative or quantitative information about it in the 2016 annual. Would you be willing to update us here with how it is doing currently, what excites you about its prospects, and what worries you most about it? I'm also curious if there were any meaningful purchase price adjustments beyond intangual amortization that negatively impacted precision's earnings, earnings, and 2016, as was the case with Van Tile in 2015. And finally, are there any opportunities in sight for bolt-on acquisitions?
WarrenYeah, we've actually made acquisitions, and we'll make more that fit there, because we've got an extraordinary manager, and we've got a terrific position in the aircraft field. So there will be sensible, there will be the chance for sensible acquisitions. and we've already made two anyway, and we will make more over time. The amortization of intangibles is the only big purchase price adjustment. That's something over $400 million a year non-deductible. In my mind, that's 400 and some million of earnings. not regard the economic goodwill of precision cast ports being diminished at that rate annually. That is a, and you know, I've explained that in some degree. The, as a very long-term business, you know, you can worry about 3D printing. I don't think you have to worry about aircraft being manufactured. But aircraft delivery can be substantially altered in relation to any given backlog in most cases. So the deliveries can be fairly volatile, but I don't think the long-term demand is anything I worry about. And the question is whether anybody can do it better or cheaper, or like I say, whether 3D printing at least takes away part of the field in some respect. But overall, I will tell you, I feel very good about precision gas parts. It is a very long-term business. I mean, we have contracts that run for a very long time. And like I say, the initiation of a new plane may be delayed or something of the sort. But if you take a look at the engine that's in the other joining room here and in our exhibition hall, you would, if you were putting that engine together with a 20 or 25-year life or whatever it may have, carrying hundreds of people, you would care very much about your supplier. And you'd care not only in the
[2:57:21]
Warrenquality, which would be absolutely you'd care, of the work being done, but you also, if you were an engine manufacturer or an aircraft manufacturer further down the line, you would care very much about the reliability of delivery on something because you do not want a plane or an engine is 99% complete while somebody is dealing with the problem of faulty parts or anything else that would delay delivery. So the reliability is incredibly important. I don't think anybody has a reputation better than Mark Donegan and the company for delivery. So I love the fact we bought precision cash parts.
CharlieYeah, well, what's interesting about it, too, is that it's a very good business purchased at a fair price under, but this is no screaming bargaining bargain like the old days. For quality businesses, you pay up now a lot more than we used to.
WarrenYeah, that's absolutely true. And we don't get a bargain price. The 400 plus million, incidentally, you know, goes on for quite a while too. And we'll explain it in the report, just like just as we'll explain that the depreciation charge or the railroad would not be adequate i mean it's the way accounting works and starting i don't even want to tell you about this one but starting the first of next year accounting is going to become sort of a nightmare in terms of Berkshire and other companies because they're going to have us mark our equities to market just like we were a Wall Street trading firm or something and changes in the value of Coca-Cola or American Express or anything are going to run through the income account every month every quarter the fact they run through it every day on in this area so that it really will get confusing now it's our job to explain things so that you aren't confused when we report gap earnings but gap earnings as reported will become even more meaningless looking only at the bottom line than they are now and that was not necessarily a good idea no i think it's a terrible idea but but but we'll deal with it and we'll the i mean it's my job to explain to what extent gap accounting is useful to you in evaluating berkshire and the times when it actually distorts things accounting isn't supposed to de it's not supposed to describe value on the other hand it's a terribly useful tool if understood in order to estimate value if you're analyzing business And so certainly you can't blame the auditing profession for doing what they think is their job, which is not to not to present value, although by using these market values.
[3:00:24]
WarrenBut you can blame the audit of the audit of position. What's that? You can blame the audit of profession. Okay. Well, that was really stupid. Well, I agree with that actually. But we will do our best to give you, we're going to give you. we're always going to give you the audit figures and then we're going to explain their shortcomings in either direction and how they how what you should use and what you probably should ignore in looking at those numbers and and using them to come to a judgment as to the value of your holdings and i'll explain it to you the same way i would explain it to my sisters or anybody else that you know i we want you to understand what you own And we try to cover the details that are really important in that respect. I mean, there's a million things you can talk about that are just a minor importance when you're talking about a $400 billion market value. But they're the things that if Charlie and I were talking about the company, they'd be the figures or the interpretations or anything that we would regard it as important in sort of coming to an estimate of the value of the business. But it's going to be. I can't knock the media. I mean, they've only got a few paragraphs to describe the earnings of Berkshire every quarter. But if they simply look at bottom line numbers, what can be silly this year will become absolutely ludicrous next year because of the new rule that comes into effect for 2018.
QuestionerOkay, station 10. Hello, Warren. This is a question from China. I'm James Chan. I'm a pension fund manager from China. China, Shanghai. Yeah. My question is quite simple. What is the probability of duplicating your great investment track record in China stock market the next decade or two in terms of investment parcel? That's all. And thanks to my friends from Huitan Fu and Fulgo Fund Management House for guiding me rising this question. Thank you.
WarrenCharlie, you're the expert on China. It's like determining the order of China. determining the order of presidency between the allows them a flea.
CharlieYeah. I do think that the Chinese stock market is cheaper than the American market. And I do think China has a bright future. I also think that there'll be growing pains, of course.
WarrenWe have this opportunistic way of going through life. We don't have any particular rules about which market we're in or anything like that.
CharlieWell, Charlie's delivered a headline in. anyway now. Longer prediction. China market will outperform U.S.
OtherSo, and I've just been informed, it's 1215, so I apologize if you're hungry for holding you over for 15 minutes. So we'll reconvene around 1.15 and I'll see you then. Thanks.