[0:05]
WarrenGood morning. I'm Warren. He's Charlie. Charlie does most things better than I do, but this one's a little tough. Charlie, maybe you can chew on that a while. Okay. At the formal meeting that will begin at 3.45, we will elect 14 directors. Charlie and I are two of them. And I would like to introduce the other 12. I'll do it in alphabetical order. If they will stand, as I announced their name, withhold your applause. May it be hard to do, but give it your best. And when we get all through, then you can let loose. But we'll do this alphabetically, beginning with Greg Abel. If you'll stand and stay standing, Howard Buffett, Steve Burke, Sue Decker, Bill Gates, Sandy Goddessman, Charlotte Geiman, Ajit Jane, Tom Murphy, Ron Olson, Walter Scott, and Merrill Whitmer. This morning, we posted both our earnings and our 10-Q, and if we can put up, slide one, slide one, you can take a look at what was reported. And as I warned you in the annual report, a new accounting rule was introduced at the beginning of this year, and it provides that our equity securities, whether we sell them or not, are marked to market every day. So we can have a gain or loss of a couple billion dollars in our equity security security portfolio, and that day, according to the accounting principles now in effect, which are a change, will be recorded as making a couple billion dollars that they are losing a couple billion. And I told you that would produce some very unusual effects from quarter to quarter. And it further explains why I like to release our earnings early Saturday morning, and as well as the 10Q to give people a chance to read through the explanation. Because if you just were handed this with a TV monitor, you know, at 3.30 in the afternoon or whatever it might be, you would report the netterings figure understandably very quickly, and it really is not representative of what's going on in the business at all. So if you look at the figure of operating earnings, which is what we look at, we actually earned a record amount for any quarter we've ever had. And that includes no realized gains or losses on securities or on the few remaining derivatives we have. You might leave that slide up there just a little longer, maybe this up. And the insurance underwriting, GEICO had quite a good size turnaround in profitability and a good gain, although not as big a gain as last year, which was a record in terms
[4:46]
Warrenof policies and force. And really throughout most of our businesses, and the details are on the 10Q, which is up on our website now. As you can see, and the railroad was up significantly, and we had, most of our businesses tended to be up. Now, we were aided in that in a material way by the reduction in the federal income tax rate from 35% to 21%. Our businesses were up significantly on a pre-tax basis, but the gain was further enhanced by the change in the change in the income tax rate. So that pretty well sums up the first quarter. We'll probably get some, may well get some questions on it when we get into the question and answer section. The questions we'll be getting, we've got the press over here, and we have the analysts on my left, and of course, we have our partners out in front of me. we will rotate among you. And the questions we get as we go through the next six hours or so will understandably relate to a lot of current events. You know, you will, we may get asked, and we don't know the questions, but we may get asked to know about Fed policy or whether we're seeing any inflation or whether business is speeding up or down or the threats we may face competitively. in our businesses as we go along. And anything goes on the questions, except we won't tell you what we're buying or selling. But it really can be a question sometimes of confusing the forest with the trees. And I would like to just spend just a couple of minutes giving you a little perspective. on how you might think about investments as opposed to the tendency to focus on what's happening today or even as minute as you go through. And to help me in doing that, I'd like to go back through a little personal history. And we will start. I have here, I've here in New York Times. of March 12, 1942. I'm a little behind on my reading. And if you go back to that time, it was about, but just about three months since we got involved in a war which we were losing at that point, the, the newspaper headlines were filled with bad news from the Pacific, and I've taken just a couple of the headlines from the days preceding March 11th, which I'll explain, it's kind of a momentous day for me. And so you can see these headlines. We've got slide two up there, I believe, and we were in trouble, big trouble, in the Pacific. It was only going to be a couple months later that the Philippines fell, but we were getting bad news.
[8:50]
WarrenWe might go to slide three for March 9th. I hope you can read the headlines anyway. The price of the paper is three cents, incidentally. The, and let's see, we've got March 10th up there, a slide. When I get the way there's advanced technology of slides, this is advanced technology of slides. I want to make sure I'm showing you the same thing that I'm seeing in front of me. So anyway, on March 10th, when again, the news was bad, full clearing path to Australia. And it was like it, the stock market had been reflecting this. And I had been watching a stock called City Service Preferred Stock, which had sold at $84 the previous year. It had sold at $55 the year early in January, two months earlier. And now it was down to $40 on March 10th. So that night, despite these headlines, I said to my dad, I said, I think I'd like to pull the trigger. And I'd like you to buy me three shares of city service. prefer the next day. And that was all I had. I mean, that was my capital accumulated over the previous five years or thereabouts. And so my dad, the next morning, bought three shares. Well, let's take a look at what happened the next day. Let's go to the next slide, please. And it was not a good day. The stock market, the Dow Jones Industrials, broke 100 on the downside. Now, they were down 2.28%, as you see, but that was the equivalent of about a 500 point drop now. So I'm in school wondering what is going on, of course. Incidentally, you'll see on the left side of the chart, the New York Times put the Dow Jones industrial average below all the averages they calculated. They had their own averages, which have since disappeared, but the Dow Jones has continued. So in the next day, We can go to the next slide and you will see what happened. The stock that was 39, my dad bought my stock right away in the morning, because I'd asked them to, my three shares. And so I paid the high for the day, that 38 and a quarter, was my tick, which is the high for day. And by the end of the day, it was down to 37, which was really kind of characteristic of my timing in stocks that was going to appear in future years. But it was on what was then called the New York Curb Exchange, then became the American Stock Exchange. But things, even though the war, until the Battle of Midway, looked very bad. And if you'll turn to the next slide, please, you'll see that the stock did rather well. You can see where I bought it
[12:21]
Warren38 and a quarter. And then the stock went on actually to eventually be called by the city service company for over $200 a share. But this is not a happy story. Because if you go to the next page, you will see that I, well, as they always say, it seemed like a good idea at the time. So I sold those, I made $5 on it. It was, it was, again, typical of I'm the behavior. But when you watch, you go down to 27, you know, it looked pretty good to get that profit. Well, what's the point of all this? Well, we can leave behind the city service story. And I would like you to, again, imagine yourself back on March 11th of 1942. And as I say, things were looking bad in the European theater as well as what was going on. in the Pacific. But everybody in this country knew America was going to win the war. I mean, it was, you know, we'd gotten blindsided, but we were going to win the war. And we knew that the American system had been working well since 1776. So if you'll turn to the next slide, I'd like you to imagine that at that time, you had invested $10,000. And you put that money in an index fund. We didn't have index funds then, but you, in effect, bought the S&P 500. Now, I would like you to think a while, and don't do not change the slide here for a minute. I'd like you to think about how much that $10,000 would now be worth if you just had one basic premise, just like in buying a farm, you buy it to hold throughout your lifetime and independent. And you look to the output of the farm. farm to determine whether you made a wise investment. You look to the output of the apartment house to decide whether you made a wise investment if you buy an apartment, small apartment house to hold for your life. And let's say instead you decided to put the $10,000 in and hold a piece of American business. And never look at another stock quote, never listen to another person, give you advice or anything on the sort. I want you to think how much money you might have. have now. And now that you've got a number in your head, let's go to the next slide and we'll get the answer. You'd have $51 million, and you wouldn't have had to do anything. You wouldn't have to understand accounting. You wouldn't have to look at your quotations every day like I did that first day. I'd already lost $3.75 by the time I came home from school. All you had to do was figure that America was going to do well over time.
[15:35]
Warrenthat we would overcome the current difficulties and that if America did well, American business would do well. You didn't have to pick out winning stocks. You didn't have to pick out a winning time or anything of the sort. You basically just had to make one investment decision in your life. And that wasn't the only time to do it. I mean, I could go back and pick other times that would work out the even greater gains. But as you listen to the questions and answers we give today, just remember that the over, the overriding question is how is American business going to do over your investing lifetime? I would like to make one other comment because it's a little bit interesting. Let's say you'd taking that $10,000 and you'd listen to the profits of doom and gloom around you and you'll get that constantly throughout your life. And instead, you'd use the $10,000 to buy gold. Now for your $10,000, you would have been able to buy about 300 ounces of gold. And while the businesses were reinvesting in more plants and new inventions came along, you would go down every year and your look in your safe deposit box and you'd have your 300 ounces of gold. And you could look at it. And you could fondle it and you could, I mean, whatever he wanted to do with it. But it didn't produce anything. It was never going to produce anything. And what would you have today? You would have 300 ounces of gold just like you had in March of 1942. And it would be worth approximately $400,000 dollars. So if you decided to go with a non-productive asset gold, instead of a productive asset, asset, which actually was earning more money and reinvesting and paying dividends and maybe purchasing stock, whatever it might be. You would now have over 100 times the value of what you would have had with a non-productive asset. In other words, for every dollar you have made in American business, you'd have less than a penny by a gain by buying in the store of value, which people tell you to run to every time you get scared by the headlines. something to sort. It's just remarkable to me that we have operated in this country with the greatest tailwind at our back that you can imagine. It's an investor's hate. I mean, you can't really fail at it unless you buy the wrong stock or just get excited at the wrong time. But if you own a cross-section of America and you put it your money in consistently over the years,
[18:37]
Warrenthere's just, there's no comparison. against owning something that's going to produce nothing. And frankly, there's no comparison with trying to jump in and out of stocks and pay investment advisors. If you'd followed my advice, incidentally, or this retrospective advice, which is always so easy to give, if you'd follow that, of course, there's one problem about you, your friendly stockbroker would have starved to death. I mean, you know, and you could have gone to the funeral to a a tone for their fate. But the truth is, you would have been better off doing this than a very, very, very high percentage of investment professionals have done or people have done that are active. It's very hard to move around successfully and beat really what can be done with a very relaxed philosophy. And you do not have to be, you do not have to know as much about accounting or stock market terminology or whatever else it may be or what the Fed is going to do next time and whether it's going to raise three times or four times or two times. None of that counts at all really in a lifetime of investing. What counts is having a philosophy that you've, that you stick with, but you understand why you're in it and then you forget about doing things that you don't know how to do. So with all those happy words, we will move on and start the questioning and we'll start with Carol.
QuestionerGood morning.
QuestionerGood morning. In choosing a first question to ask each year, I look for a question that is definitely Berkshire-related and is timely. And this question seemed to fill a bill. The question came from William Anderson of Salem, Oregon, and he said, Mr. Buffett, you have previously said that there are two parts to your job, overseeing the managers and capital allocation. Mr. Abel and Mr. Jane now oversee the managers, which which leaves you with capital allocation. However, you share capital allocation with Ted Weschler and Todd Combs. Question, does all that mean you are semi-retired, or if not, please explain?
WarrenI've been semi-retired for decades. The answer is that I was probably, well, it's hard to break down the percentage of the time that I was involved in what now the jobs are now done by Ajit and Greg and in the case of investing, the sub-part of the job that is done by Ted and Todd. Ted and Todd each manage $12 or $13 billion. So in total, that's $25 billion. And we have in equities, $170-some billion, probably now, and $20 billion in longer-term bonds
[21:45]
Warrenthan another $100 billion in cash in short term. So they're managing 20, 25, and doing a very good job. And I'd still have the responsibility, basically, for the other $300 billion. So I think Charlie will tell you, and in fact, I'd like him to comment it, nothing's really changed that much. We've got, clearly, we've got two people in. in Ajit and Greg that are smarter, more energetic, just bring more to the job every day. But they don't bring too much because the culture is that our managers are running their business. But there's a lot, there's a good bit to overseas. So they do a superb job. And Ted and Todd not only do a great job with a 12 or 13 billion each, they started with a couple billion each. Not that it's all been the growth. of the two billion. But they also do have done a number of things for Berkshire that they do it cheerfully, but more importance or skillfully. So there's just, there's one thing after another that I will have them looking into or working on, and sometimes I steal their ideas. But I think actually, semi-retired is probably catches me at my most active point. I think you've, your questioner's got a good point. Okay. Charlie?
CharlieWell, I've watched Warren for a long time, and he sits around reading most of the time and thinking, and every once in a while he talks on the phone or talks to somebody. I can't see any great difference. A lot of people, part of the Berger's secret is that when there's nothing to do, Warren is very good at doing nothing. I'm still looking forward to being a mattress tester.
QuestionerOkay, Jonathan Brandt. Hi, Warren. Hi, Charlie. Given the growth in airplane build rates, it seems surprising that precision cast parts isn't doing better on the top or bottom line. I understand the issue with a bumpy transition from old to new programs, but I've also heard from industry sources that precision's market position is not as strong as it used to be amid intensifying competition and some technological disruption. What does precision need to do to solidify and strengthen its preeminent position with its aerospace customers so that it can deliver the growth you expected when Berkshire acquired it. More generally, two years after the acquisition, what is your outlook for that business? Give me the last part, again, the outlook. More generally, two years after the acquisition, what is your updated outlook for that business longer term?
[24:49]
WarrenA longer term, I think, and in the reasonably shorter term. It's a very, very good business. I mean, you mentioned aircraft, but we get in other industries, but certainly aircraft is the most important. You have manufacturers that are very dependent on both the quality of the parts and the promptness of delivery. You do not want to have an aircraft worth $75 or $100 or maybe $200 million and be waiting for a part or something of the sort. So it's reliability is both in terms of quality and delivery times and all of that sort of thing is enormously important. We get contracts that extend out many years. And sometimes we, I mean, we will get them well before the plane even starts in production. So there's a, there's very long lead times. And we have found in the last year, about it earlier, but I know of some specific cases in the last year, where other suppliers have failed in their deliveries, and then the manufacturers come to us and say we would like you to help us out and we say, well, we'll be glad to help you out, but we'd like about a five-year contract if we're going to do it because we're just not going to make up for these other guys shortfalls periodically. But that sort of thing has a very long lead time. The business is a very good business. One thing you will see their earnings charged with is about $400 million, a little over $400 million a little over $400 million a year. of intangible, non-deductible, in that case, amortization of goodwill, which is really is not an economic cost, it might be. We have a significant amount of that through Berkshire, but by far the largest amount is related to the precision acquisition, so whatever you see, you can add about 400,000. million that, in my view, is not an economic expense, but the accountants would argue otherwise. But it's our money, so we'll take my view. They, Mark Donegan, who runs that operation, is incredible. And he has been not only, he's a fabulous manager, I wouldn't have bought it without him in charge, he He also has been very helpful to us in other areas, and he loves to do it. So you can't beat him, both as a manager in his own operation, but with his devotion to really doing everything that will help Berkshire. It's a very good acquisition with very long tails to the products that are being developed. Charlie?
CharlieWell, yeah, I think we'd buy another one just like it tomorrow if we had the chance.
[28:13]
OtherYeah, that's the answer. Man, a few words, but he gets the point. Okay, now we will go to the shareholder in Station 1. I believe that's probably up here on my right. Hello, this is Charles from Wushi, China, saw with the capital. And being in the morning for 12 years, wish you and Charlie good health. So we're could see you both run a meeting for 12 more years. Thank you. A quick question. We know both you and China delegations, U.S. and China delegations are in China for intense discussion on so-called trade war. Let's go one step beyond the trade war. Do you think there's a win-wing situation for both countries, or the world, or the world is just too small small for both to win, and we have to revisit your 1940s chart again. Thank you.
WarrenThank you. I'd like to just mention one thing. In August, I'm going to be 88, and that will be the eighth month of the year, and it's in a year that ends with an eight. And as you and I both know, eight is a very lucky number in China. So if you find anything over there for me, This is the time we should be acquiring something. All those days. Where do? The United States and China are going to be the two superpowers of the world, economically and in other ways, for a long, long, long time. We have a lot of common interests in like any too too big economic energy. big economic entities. There are times when there'll be tensions, but it is a win-win situation when the world trades, basically, and China and the U.S. are the two big factors in that. But there's plenty of other citizens of the world that are involved in how this comes out. And there's no question. And a nice thing about it in this country, I think, is that Both Democrats and Republicans basically on balance, believe in the benefits of free trade. And we will have disagreements with each other. We'll have disagreements with other. But it's just too big and too obvious for that the benefits are huge. And the world's dependent on it. a major way for its progress, that two intelligent countries will do something extremely foolish. We both may do things that are mildly foolish from time to time. And there is some give and take, obviously, involved. But U.S. exports in 1970 and U.S. imports in 1970 and U.S. imports in 1970, and U.S. imports in 1970, We're both about 5% of GDP. So here we were selling 5% of our GDP and buying up 5% of our GDP, basically. Now people think we don't export a lot of things.
[32:18]
WarrenOur exports are 11 and a fraction percent of GDP. They're more than doubled as a share of this rising GDP. But the imports are about 14.5%. So there's a gap of 3% or thereabouts, and I would not like that gap to get too wide. But when you think about it, it's really not the worst thing in the world to have somebody send you a lot of goods that you want and hand them little pieces of paper. I mean, because the balancing item is if you have a, if you have a surplus or a deficit in your trade, you're going to have a surplus and investment. And so the world is getting more claim checks. the United States and they think they, to some extent, they buy our government securities, they can buy businesses. And over time, you don't want the gap to get to be too wide, because the amount of claim checks you were giving out to the rest of the world could get a little unpleasant under some circumstances. But we've done remarkably well with trade. China's done remarkably well with trade. The countries of the world are done remarkably well with trade. The countries of the world are remarkably well with the trade. So it is a win-win situation, and the only problem gets to be one one side or the other may want to win a little bit too much, and then you have a certain amount of tension. But we will not sacrifice the world, I mean, will not sacrifice world prosperity based on differences that arise in trade. Yeah, well, I think that both countries have been advancing. And of course, China is advancing faster economically because it started from a lower base, and they've had a little more virtue than practically anybody else in the world and having a high savings rate. And, of course, a country that was mired in poverty for a long, long time, and it assimilates the advanced technology of the world. And it has a big savings rate. is going to advance faster than some very mature company like Britain or the United States. And that's what's happened. But I think we're getting along fine, and I'm very optimistic that both nations will be smart enough to realize that the last thing they should do is have any old will for the other.
QuestionerOkay, Becky, quick. This question comes from Kirk Thompson. He says, Warren, in this year's annual letter to shareholders, you referenced both cheap debt and a willingness by other companies to leverage themselves as competitive examples as to why it's hard
[35:22]
Questionerto get more acquisition deals done. It seems like the trust and prestige of doing a deal with Warren Buffett and Charlie Munger allow Berkshire to get a hometown discount and beat out other firms that might pay a little more to a prospective seller. Have you given thought to having other Berkshire managers have more public exposure so future generations of successful business owners continue to bring deal opportunities to Berkshire like they have in prior decades.
WarrenYeah, that sort of reminds me of, was it, Tony O'Reilly remarked one time about the responsibility of a CEO that the very first job of the CEO was to search to his organization and find that person who had the initiative and the brains, the determination, all of the qualities to be his logical successor, and then fire the guy. There's no question. I think the reputation of Berkshire as being a very good home for companies, particularly private companies, good home for companies. I don't think that reputation is dependent on me or Charlie. It may take a little, you know, there'll be a little testing period for whoever. takes over in that respect. But, you know, basically, we've got the money to do the deals. We'll have the money to do the deals subsequently. People can see how our subsidiaries operate in the future. And the truth is that I think some of the other executives are getting better known. But there will be a, I'll tell you this, if things get bad enough, you don't have to worry. They'll be calling us no matter what. So I do not worry about the so-called deal flow, which is a term I hate, but I don't think there's, I think that's dependent on Berkshire and not dependent on me. And, you know, as I've mentioned, my phone isn't ringing off the hook with good deals. So that apparently this big winning personality or something is not delivering for you. So it may be the next person will be even more, get even more calls. I, Berkshire, the reputation belongs to Berkshire now, and that, and we are, for somebody that cares about a business that they and their parents and maybe their grandparents lovingly build over decades, if they care about where that business ends up being after for one reason or another, they don't want to keep it or can't keep it in the family. We absolutely are the first call, and we will continue to be the first call whether Charlie or I or answer the phone or somebody else does.
[38:41]
WarrenWell, a lot of the subsidiaries have for a long time already been making all kinds of acquisitions with people they know and we don't. So it's already happening. And in fact, it's happening. more there than it is at headquarters. Don't tell them, Charlie. You're getting your wish. And it is weird that about 99% of the public companies that change hands in terms of control, change hands in a sort of auction provided, presided over by an investment banker. And the people would buy are usually just leverage it to the gills and then if it starts doing a little better, they releverage it. And that money is coming out of the charitable endowments and pension plans. We're making these highly leveraged investments in all these companies changing hands at very high prices. Sooner or later, this is not going to work perfectly. Yeah. And it's going to have an unpleasant episode. And I think we'll be around in a good shape at that time. There was one fellow who came to me many years ago, and he had a wonderful business. wonderful business. And he had been worried because he had seen a friend of his dime and the problems that arose later when the managers, to some extent, tried to take advantage of the widow, and it became a disaster. So he said he thought about it a lot the previous year. And he decided he didn't want to sell a business to a competitor, who would be a lot, because they would fire all of his people and the CFO that would remain and, you know, all up and down the line, they'd all be the acquires people. He didn't want to do that to his people. And then he thought, and he didn't want to sell it to a private equity firm because he felt they'd leverage it up. He'd never like to leverage that much. And then they'd just resell it later on to somebody, so it would be totally out of control of what he wanted to do. And he wanted to keep running it himself. So he said, He said, Warren, he said, it isn't that you're such a great guy. He says, you're the only one left. So Berkshire will continue to be the only one left in many cases.
QuestionerGary Ransom. Good morning. Warren, in your annual letter, you wrote about the potential for a $400 billion natural catastrophe event, something out in the tail of the loss distribution. I can think of another risk that could have a a similar order of magnitude, and that would be cyber risk. I'm sure all your managers have taken steps against that potential, but out in the tail of the
[41:41]
Questionercyber risk distribution, it could hit a lot of industries, a lot of your companies. So how do you think about and prepare for the big one in cyber?
WarrenYeah. Well, I include incidentally in my, that part I wrote in the annual report where I said they're roughly Nobody knows the answer on this. I mean, I can stick down two. Somebody else much smarter insurance would stick down a different figure. But I think it's about a 2% risk of what I call a 400 billion supercat of all time. And but cyber is in that, is in that equation. I mean, that's not just earthquakes and that sort of thing. And frankly, I don't think we or anybody else reading. knows what they're doing when writing cyber. I mean, it is just very, very, very early in the game, and we don't know what the interpretations of the policies necessarily will be. We don't know the degree to which there'll be what, there'll be correlated incidents which we don't really think are correlated now or haven't had the imagination to come up with. We know that every year when I go and hear these people from the CIA or wherever it may be. They tell them, they tell me that the offense is out of the defense and will continue that way. And I can dream of a lot of cyber incidents, which I'm not going to spell out here, because people that have twisted minds maybe, they've probably got way more ideas than I've got, but I don't believe in feeding them any. But it's a business where we don't know. We have a pretty good idea of the probabilities of a quake in California or the probabilities of a three or a four hurricane hitting Florida or whatever it may be. We don't know what we're doing in cyber and we try to keep, we don't want to be a pioneer on this. We do some business in that arena in Berkshire Hathaway specially. But if you're doing something for competitive reasons, which I'm okay with, but when I'm doing something that people tell me as a competitive necessity, we are going to try not to have, we are going to try not to have, we don't want to be number one or number two or number three, and exposures on it. And I'm sure we are not in cyber, but I don't, I think anybody that tells you now that they think they know in some actuarial way, either what general experience is likely to be in the future, or what the worst case would be, I think, is getting themselves. And that's why, that's one of the reasons I say that a $400 billion event has, I think, has roughly
[45:04]
Ajit Jaina 2% probability per year of happening. Cyber is unchartered territory, and it's going to get worse, not better. And then the question is, is whether if we have a whole bunch of $25 billion commercial limits out there, whether there's some aggregation that we didn't foresee or that the course interpret those policies differently than, you know, they are generally going to give the benefit of the doubt to the insured. So you're right in pointing that out. is a very material risk, which didn't exist 10 or 15 years ago, and will be much more intense as the years go along. And all I can tell you, Gary, is that that's part of my $400 billion in my 2%, but if you've got a different guess, it's just as likely that yours is right than mine on that.
WarrenCharlie?
CharlieYeah, well, something that's very much like cyber risk is you've got computers program to do your security trading and your computer goes a little wild from some error. That's already happened at least once where somebody just was fine one morning and by the afternoon they were broke because some computer went crazy. We don't have any computers we allowed to go big automatically trading securities. I think generally Berkshire is less likely than most other places to be careless in some some really stupid way. I do think if there's a mega cat from cyber, let's say it hits 400 billion, I do not think we'll have more than a 3 percent. No, no, we'll get our share. And, but it will destroy, what will destroy a lot of companies, we will actually, if we had a $12 billion loss, I would think, except for the new accounting rule, but I would think from what I call operating earnings, we would probably still have a reasonable. profit that year. I mean, we are in a different position than any insurance company I know of in the world in our ability to handle the really super, super cat.
WarrenOkay, shareholder from Station 2. I point out that the main shareholder to my right here has almost always net worth in one security. That's likely to be more carefully managed than some public place with people just passing through.
OtherYeah. that's 64 and is going to retire at 65. A lot of decisions you really don't want him or her to be making.
WarrenStation 2.
QuestionerWally Obermeyer, Obermeier Investment Council, Aspen, Colorado. Warren and Charlie, you two have demonstrated great talent in private sector capital allocation and shown the world the power of excellence in this area.
[48:09]
QuestionerDo you think there is a similar opportunity for outstanding capital allocation outstanding capital allocation in the public sector at both the state and federal levels. And if so, what approach and our changes would you suggest for society to achieve these benefits?
WarrenThat's too tough. Why don't we go on to a new question?
CharlieI'm afraid I have nothing to add. I don't mean to be unfair to somebody asking a question, but it is, you know, it is, it is, it is, It is unfortunately an entirely different game. And the electorate, the motivations are different, the terms of, the reward system is different. I mean, everything is different. And if we know how to solve that, we wouldn't, we can't add anything to what you have, your view. I'm sorry on that.
QuestionerOkay. Andrew.
OtherHi, Warren. This question comes from Paul Speaker of Chicago, Illinois. I believe you may be here today. He writes, one of your more famous and perhaps most insightful quotes goes as follows. Should you find yourself in a chronically leaking boat, energy devoted to changing vessels, is likely to be more productive than energy devoted to patching leaks. In light of the unauthorized accounting scandal at Wells Fargo, of its admission that it charged customers for duplicate auto insurance, of its admissions that it wrongly fined mortgage holders in relation to missing deadlines caused by delays that were its own fault. Of its admission that it charged some customers and proper fees to lock in mortgage interest rates, of the sanction placed upon it by the Federal Reserve, prohibiting it from growing its balance sheet, and of the more than recent $1 billion penalty leveled by federal regulators for the aforementioned misbehavior. If Wells Fargo company is a chronically leaking boat, at what magnitude of leakage would Berkshire consider changing vessels?
WarrenWell, Wells Fargo is a company that that proved the efficacy of incentives, and it's just that they had the wrong incentives. And that was bad, but then they committed a much greater error, and I don't know exactly how or who did it or when, but ignoring the fact that they had a faulty incentive system, which was incenting people to do things that were kind of crazy like opening non-existent accounts, et cetera. And, you know, that is the Cardinal Senate, Berkshire. We know people are doing something wrong right as we sit here at Berkshire. You can't have 377,000 employees and expect that everyone is behaving like Ben Franklin or something out there.
[51:36]
WarrenI don't know whether there are 10 things being done wrong as we speak or 20 or 50. The important thing is we don't want an incentive any of that if we can avoid it. And if we find, when we find it's going on, we have to do something about it. And that is absolutely the key to it. And Wells Fargo didn't do it, but Solomon didn't do it. And the truth is we've made a couple of our greatest investments where people have made similar errors. We bought our American Express stock. That was the best investment I ever made in my partnership years. We bought our American Express stock in 1964 because somebody was incented to do the wrong thing in something called the American Express Field Warehousing Company. We bought a very substantial amount of GEICO we bought, but became half of GEICO for $40 million because somebody was incented to meet Wall Street. estimates of earnings and growth and they didn't focus on having the proper reserves. And that caused a lot of pain at American Express in 1964. It caused a lot of pain at GEICO in 1976. It caused a layoff of a significant portion of the workforce, all kinds of things. But they cleaned it up. They cleaned it up and look where American Express has moved since that time. Look at where GEICO has moved since that time. So the fact that you are going to have problems at some very large institution is not unique. In fact, almost every bank has, all the big banks have had troubles of one sort or another. And I see no reason why Wells Fargo as a company from both an investment standpoint and a moral standpoint going forward is in any way inferior to the other big banks with which it competes. So they made a big mistake. It costs, I mean, we've still got, I mean, we have a large, unrealized gain in it, but that doesn't have anything to do with our decision making. But the, I like it as an investment. I like Tim Sloan as a manager, you know, and it is correcting mistakes made by other people. I tried to correct mistakes at Solomon, and I had terrific. help from Derek Maughan as well as a number of the people at Munkertolls. And I mean, that that is going to happen. You try to minimize it. Charlie says that an ounce of prevention isn't worth a pound of cure. It's worth about a ton of cure. And we ought to jump on everything. He's pushed me all my life to make sure that I attack unpleasant problems at surface. And that's sometimes not easy to do when everything else is going fine.
[54:43]
WarrenAnd at Wells, they clearly, and I don't know exactly what, but they did what people at every organization have sometimes done, but it got accentuated to an extreme point. But I see no reason to think that Wells Fargo going forward is other than a very, very large, well-run bank that had an episode in its history at wish it didn't have. But Geico came out stronger, American Express came out stronger. The question is what you do when you find the problems. Charlie?
CharlieI agree with that. I think Wells Fargo is going to be better going forward than it would have been if these leaks had never been discovered. Or it happened.
WarrenYeah. So I think it, it, it, but I think high- Harvey Weinstein has done a lot for improving behavior, too. It's, it was clearly an error, and they're acutely aware of it and acutely embarrassed and they don't want to have it happen again. No, if I had to say which bank is more likely to behave the best in the future, it might be Wells Fargo, of all of them. of them. This New York Times that I have here from March 12, 1942, if you go toward the back of it, in the classified section, you have one big section says help wanted male and another one that says help wanted female. You know, was the New York Times doing the right thing in those days? You know, I think the New York Times is a terrific paper, but that people make mistakes and, you know, the idea of classifying between taking ads and saying, well, we'll take them and divide them up between and women with jobs we think are appropriate, or the, the advertising is appropriate. We do a lot of dumb things in this world, and GEICO, as I say, and in the early 1970s, they just ignored, and you can do it, the setting of proper reserves, which mean they charged the wrong price to new customers because they thought their losses were less than they were, and I'm sure some of that It may have been a desire to please Wall Street or just because they didn't want to face how things were going. But it came out incredibly stronger, you know, and now it's got 13 percent of the households in the United States insured and it, and it came out with an attention to reserves and that sort of thing that was heightened by the difficulties that they'd found themselves in when they almost went bankrupt. It was a lot more stupid than Wells Fargo. It was really stupid what they did way back, right?
CharlieYeah, they had the world by the tail, and then they quit looking at the reserve development.
[58:03]
WarrenBut it was American Express was just picking up a few dollars by having the field warehousing company in 1963, and, you know, they were worried whether it was going to sink the company. And when some guy named Tino DeAnneux. Angeles in I think it was Bayonne, New Jersey. In fact, I went to the annual meeting in 1964 of American Express after the scandal developed. And somebody asked if the auditor would step forward. And the auditor from one of the big firms, which I won't mention, came up to the microphone. And somebody said, how much did we pay you last year? And the auditor gave this answer. And then the questioner said, well, the questioner said, well, how much extra would you have charged us to go over to Bayonne, which was 10 miles away, and check whether there's any oil in the tanks? So it, you know, here was something in a tiny little operation. Some guy was calling in from a bar in Bayonne and telling them the phony stuff was going on, and they didn't want to hear it. They shut their ears to it. And then what emerged was one of the great company after this kind of what they felt was a near-death experience. And so it's, we're going to make mistakes. I will guarantee you that we will get some unpleasant news at Berkshire. I don't know what it'll be, you know. The most important thing is we do something about it. And there have been times when I've procrastinated, and Charlie has been the one that jabs me into action. And so he's performed a lot of services you don't know about that.
QuestionerOkay. Greg, Greg Warren. Good morning, Warren. I have a little bit of a follow-up on Beckett. Thank you. At the 2014 annual meeting, as well as this morning, you noted that the power of Berkshire brand and its reputation, as well as the strength of Berkshire's balance sheet, would allow the company's next managers to replicate many of the advantages that have come with your being the face of the organization, one of which has been an ability to extract high rents from firms in exchange for capital infusion and the Buffet's seal of approval during times of financial distress. I buy the argument about the strength of the balance sheet and believe that deals will continue to be done, with sellers still lining up to become part of the Berkshire family, especially if the company's next managers are allowed to keep a ton of cash on hand. But I'm not entirely convinced that they'll be able to garner the same 8, 9, 10% coupons,
[1:00:33]
Warrenas well as other add-ons that you've been able to extract from firms like Goldman Sachs and Bank of America in times of distress. I'd expect those rents to be at least a few percentage points lower once you're no longer running the show, that is until those managers build up a reputation to warrant higher returns. And by right to think about it that way. I'm not sure. When we, you mentioned Goldman Sachs, we also did with General Electric in September, early October of 2008, we probably could have actually extracted better terms. I think it might have been counterproductive in the end. I was, we would have done better, incidentally, financially, if we'd really waited until the panic developed further. Of course, I didn't know how far it would develop, but we could have made a lot better purchases three or four or five months later than we did at that time. And we also did not want to do something that looked to be so high as to make the transaction and disadvantageous to Goldman or the GE. They were going to take the terms we offered, but we actually didn't, we didn't push it to the limit because there really wasn't anybody else around. I think, and we're working on something right now that probably won't happen. It's not huge. But actually in this case, both Todd and Ted have brought. deals to me. One of them brought something to me. And he was thinking, and the same terms that I got, I was thinking about. And he's the one that returned the call that he had received about a transaction. And I do not think the party on the other side is going to care about the fact that they had him on the phone rather than me on the phone. I, you know, there may, there could be just a little bit at certain times in history. But, you know, we will continue to have our standards of what we think money is worth at any given time. And Ted and Todd think just as well about that as I do. And there will be times, very occasionally, when our phone will ring a lot. And I don't think they'll hang up because I don't answer. if they need the money. Charlie?
CharlieThe times he's referring to, a lot of them were like worse than 50 years. So that's a really rare kind of an occurrence. And we didn't make all that many deals. So I think he's right that it'll be harder for us to make similar deals in the future. Yeah, the problem is the sums involved now more than the problem of the problem of deciding what the proper term should be. And sometimes we can, sometimes we
[1:04:11]
Warrencan get what we think is appropriate, and sometimes we, most of the time today, we can't. But you may see a transaction or two that, not in terms of buying business, but in terms of securities, that strike you as perfectly decent ways to invest Berkshire's money. And they may well have come through, uh, Hunter Ted, instead of directly to me. I like to think I'll be missed a little bit, but I, you won't notice it.
QuestionerOkay, station three. I'm John Lichter from Boulder, Colorado. Mr. Buffett, are you still involved in pricing decisions at Seas, Candies, and the Buffalo News? And with what other Berkshire subsidiaries do you take more than a hands-off approach?
WarrenYes, you're correct that at one time, and for some, quite a while, both Charlie and I took part in the pricing decisions at Seas Candy, and certainly for some, for some years, particularly when the question of the survival of the Buffalo News was involved, was really in question, I definitely took part in question, I definitely took part those decisions. In both cases, we had good managers, but we still wanted the, we thought those decisions were important. But it's been a long, long time, very long time, since we've participated in anything like that. I can't tell you what the per pound price is for Seas Candy, which is because people, and you're invited to join this group, send me free candy from time to time. And I can't, I really, I can't tell you the prices at the Buffalo News. And all I know is it's very, very, very, very hard to move up prices on advertising, generally. So, no, we, the only, the only thing is A jeet and I talk frequently, and if there's some very big risk, if somebody wants to $5 billion cover on a chemical plant some way, excess of loss of over $3 billion or something. We have a certain amount of fun with him deciding on the price in his head, and I decide in my head, and then we compare notes. The kind of risk that you really can't look up in a book and see actually what it's, what it's, fairly, the parameters are fairly likely to be. I enjoy thinking through the pricing of that, and I particularly enjoy comparing it with the G. So these are just oddball situations, but we do, we do that sort of thing, and we've done it for three decades, and it's part of the fun, it's part of the fun of my job. The candy prices, you've got to complain about those. to go to Charlie.
CharlieWell, the answer is Warren is still doing it in talking to Ajit, and, and, and, but that's
[1:07:54]
Charliebecause Asheed likes it that way. We have a very peculiar place where the, where Warren's contact with the various people elsewhere in the organization largely depends on what they want, not what he wants. The CEO, one of our... It's very unusual, and it's worked beautifully. The CEO of one of our most successful subsidiary. I may have talked to, unless I saw him here and just hello. I probably talked to him three times in the last 10 years. And he does remarkably well. He might have done even better if I hadn't talked to him those three times. And on the other hand, Ajit and I talked very, very frequently. And he's got the kind of business, hey, I do know, I know some, I know more about the insurance business I know about the company of the other business. And it's interesting, and we are evaluating things that you don't look up in a book, you know. I mean, actuarial talent is not what's important in the things that Aegeed talks to me about. It's plenty of important throughout our insurance operation, but in these particular cases, and we're making judgments. And his judgment is better than mine, but I like to, I just like to hear about them. There are interesting propositions.
OtherOkay, Carol. This question comes from a Berkshire shareholder named Jack Sezelsky. He's a well-known accounting expert who for many years has written the accounting observer.
QuestionerMr. Buffett, in this year's shareholder letter, you have harsh words for the new accounting rule that requires companies to use market value accounting for their investment holdings. For analytical purposes, you said, Berkshire's bottom line will be useless. I'd like to argue with you about that. Shouldn't a company's earnings report say everything that happened to and within a company during an accounting period? Shouldn't the income statement be like an objectively written newspaper informing shareholders of what happened under the management for that period, showing what management did to increase shareholder value and how outside forces may have affected the firm. If securities increased in value, surely the company and the shareholders are better off, and surely they're worse off if securities decreased in value. Those changes are most certainly real. In my opinion, ignoring changes in the way that some companies ignore restructuring costs is censoring the shareholders' newspaper. So my question is, how would you answer what I say?
[1:10:53]
Warrenyou answer to what I say? Well, my answer to the question and ask what my answer would be to what he said. I would ask Jack, if we've got $170 billion of partly owned companies which we intend to own for decades and which we expect to become worth more money over time, and where we reflect the market value in our balance sheet, does it make sense to every quarter, mark those up and down for the income account? when at the same time we own businesses that have become worth far more money in most cases and become, you know, since we've bought, you name the company, just take Geico, an extreme case. We bought half the company for $50 million roughly. Do we want to be marking that up every quarter to the value and having it run through the income account? That becomes an appraisal process. There's nothing wrong with doing that in terms of evaluation. But in terms of value, and you can call it gain in net asset value or loss in net asset value. That's what a closed-end investment fund or an open-investment fund would do. But to run that through an income account, if I looked at our 60 or 70 businesses or whatever number there might be, and every quarter we mark those to market, we would have obviously a great many, in certain cases where over time we'd have them at 10 times what we paid. But how quarter by quarter, we should mark those up and run it through the income account where 99 percent of net of investors probably look at net income as being meaningful in terms of what has been produced from operations during the year, I think would be, well, I can say it would be enormously deceptive. I mean, in the first quarter of this year, you saw, you I saw the figures earlier where we had the best, what I would call operating earnings in our history, and our securities went, were down $6 billion or whatever it was. To keep running that through the income account every day, you would say that we might have made on Friday. We probably made $2.5 billion, well, if you're, if you have investors and commentators and analysts and everybody else, working off those net income numbers and trying to project earnings for quarters and earnings for future years to the penny, I think you're doing a great disservice by running those through the income account. I think it's fine to have marketable securities on the balance sheet, the information available is to their market value. But we have businesses there.
[1:13:48]
WarrenIf we were, we never would do it. But if we were to sell half, we'll say, of the BNSF railroad, we would receive more than we carry it for them. We would turn it into a marketable security, and it would look like we made a ton of money overnight, or if we were to praise it, you know, praise it every three months and write it up and down. A, it could lead to all kinds of manipulation, but B, it would just lead to the average, to any investor, being totally confused. I don't want to receive data in that manner, and therefore I don't want to send it out in that manner. Charlie?
CharlieWell, to me, it's obvious that the change in valuation should be noted, and it is and always has been, goes right into the net worth figures. So the questioner doesn't understand his own profession. I'm not supposed to talk that way, but it slips out once in a while. Sometimes he even gives it a push.
OtherOkay, Jonathan.
QuestionerMcLean's core operating margins have dropped about 50 percent. from where they've generally been since acquisition. Could you elaborate on the competitive pressures in the grocery and convenience store distribution business that have caused the deterioration in profits, and do you expect the margin structure of that business to eventually get back to where it was, or is this the new normal?
WarrenWell, I don't know the answer to the second part about the future, but there's no question that the margins have been squeezed. They were very, very narrow. So, as you know, they were about one cent on the dollar pre-tax. And they have been squeezed from that. Payment terms get squeezed, and in some cases, we have fairly long-term contracts on that, so it'll go on for five years at one, and then it's a very, very tight margin business. And the situation is even worse. than you portray because within McLean, we have a liquor distribution business in a few states, and that business has actually increased its earnings moderately, and we've added to that business. So within McLean's figures are about 70 million or so pre-tax from the liquor part that have nothing to do with the massive parts you're talking about in terms of food distribution. So it's even, the decline is even greater in what you're referring to than you've noticed. And that's just become very, very, much more competitive. And we have to decide, you'll look at our competitors and they're not making much money either. And that's capitalism.
[1:17:05]
Greg AbelI think there comes a point where the customer says, you know, I'll only pay X and you have to walk away and there's a great temptation when you're employing, particularly employing thousands of people and you build distribution facilities and all of that sort of thing, take care of them to meet what you'd like to term as irrational competition. But that is capitalism, and you're right. We took, the earnings went up quite a bit from the time we bought it, and we're still earning more than then, and we've earned a lot of money over time. But as they say, a fair amount of that is actually coming from liquor distribution and activities in about four states that we purchased, very well run, and we will do our best to get the margins up, but I would not, I could not tell you, give you a really, your guess is almost as good as mine or better than mine maybe as to what margins will be. be in that distribution business five years from now. It's a very essential service. We do 40-some billion dollars, and we move more of the product of all kinds of companies that names are known to you than anybody else. But when you get, when you get Kraft Hines, for that matter, or Philip Morris or whomever it may be on one side of the deal, and you'll get Walmart and some other 7-Eleven on the other side of the deal. Sometimes they don't leave you very much room in between.
WarrenCharlie?
CharlieI think you've described it very well.
WarrenOkay. Station four.
QuestionerGood morning, Charlie and Warren. I know that seems a little bit out of order, but I'm a huge fan of yours, Charlie, mostly for your 25 cognitive biases. I'm from Seattle, Washington. I run a one-person digital marketing firm that specializes in Facebook ads and email marketing. I use these a lot. But your breakdown of Coca-Cola was really, really solid, and I used that as reference when looking to how to understand the mechanics of my client's products and how to promote them. So I'm fairly certain that your cognitive biases work for internet-related companies. Now that you're partnering with Amazon and healthcare, I'm curious, have you started to understand how to apply these biases to internet-related companies, or is there another set of tools used to decide if you understand a business, because you guys talk a lot about not investing in businesses that you don't understand.
WarrenWell, healthcare is it, we don't plan to start healthcare companies or necessarily insurers
[1:20:08]
Warrenor anything. We simply have three organizations with leaders that I admire and trust, and we mutually goes around all three. And we hope to do something which Charlie correctly would probably say is almost impossible to change in some way a system which is was taking 5% of GDP in 1960 and now is taking close to 18%. And we have a hugely non-competitive medical cost in American business relating to any any country in the world. The countries that were some countries that were around our 5% when we were at 5%, but we managed to get to 18 without them going beyond 11 or so. Literally in 1960, we were spending $170 per capita on medical costs in the United States, and now we're spending over 10,000. And, you know, every dollar only has 100 cents. So there is a cost problem. It is a tapeworm in terms of American business and in its competitiveness. We don't, we have fewer doctors per capita. We have fewer hospital beds per capita, fewer nurses per capita, than some of the other countries that are well below us. And you've got a system that is delivering $3.3 trillion. That's almost as much as the federal government raises. It's delivering 3.3 trillion or some number like that to millions and millions and millions and millions of people who are involved in the system and every dollar has a constituency. It's just like politics. And whether we can find the chief executive, which we're working in now, and which I would expect we would be able to announce before too long, but that's a key part of it. And whether that person will have the imagination and support of people that will enable us to make any kinds of significant improvements in a system which everybody agrees is sort of out of control on cost, but they all think it's the other guy's fault, generally. We'll find out it won't be, it won't be easy, but it is not a, the motivations are not primarily profit making. They're, we want to deliver, we want our employees to get better medical service at a lower cost. We're not going to, we're certainly not going to come up with something where we think the service that they receive is, is inferior to what they're getting now. But we do think that there may be ways. to make a real, some significant changes that could have an effect. And we know that the resistance will be unbelievable. And if we fail, we've at least tried. And the idea is not that I will be able to contribute anything to, you know, in some breakthrough moment, by reading a few medical journals or something.
[1:23:59]
Warrenchanging something that is embedded as a medical system, but the idea is maybe the three organizations which employ over a million people and which, after we announced that we had a flood of calls from people who want to join in, but there isn't anything to join into now. But they will, they will if we have come up with any ideas that are useful. Whether we can bring the resources, bring the person, and the CEO is terribly important, and bring the person, support that person, and somehow figure out a better way for people to continue to receive better medical care in the United States without that 18 percent going to 20 or 22 percent, you know, in the lifetime of, you know, our children or something, this sort, because there are only 100 cents in the dollar. And we will see what happens. It's, you know, if you were a jeet. actuarially figuring you would not bet on, bet on us, but, but I think there is some chance we will do something, there's a chance to nobody can quantify it, that we can do something significant, and we are positioned better than most people to try, and we've certainly got the right partners, so we will give it a shot and see what happens, apparently. There is some precedent for success in this public service activity. If you go back many decades, John D. Rockefeller, the first, using his own money, made an enormous improvement in American medical care, perfectly enormous. In fact, there's never been any similar improvement done by any one man since that marils it. So Warren, having imitated Rockefeller in one way, it's just trying another, and maybe it'll work. Roger Fellow, incidentally, lived a very long time, so I actually am trying to imitate him three ways there. We'll see what happens, but we are, we're making a lot of progress, and I think we'll probably have a CEO within a couple of months, but if we don't have one that, we're not going to pick somebody just because we want to meet any deadline or anything like that. We've got these wonderful partners. We don't have a partnership agreement among us. Somebody started drawing up one in the legal department, and the CEO just put a stop to it. You do have places that have a lot of resources, and while we all have a share of bureaucracy, we can cut through it if we've got something that we really think makes sense. And we will get the support, we'll get a lot of resistance, too, but we will get the support
[1:27:02]
Warrenof a lot of American business if we can come up with something, it makes sense. But if it was easy, it would have already been done. There's no question about that. It's not easy.
OtherNo.
WarrenBut it should be tried. Okay.
QuestionerBecky.
OtherThis question comes from David Rolf, who is with Wedgwood Partners and has been, the company has been shareholders in Berkshire since 1989. The stock is currently the largest holding in their stocks, 18 stocks. He asks this question. Over the past two years, you have listed the individual Fund of Fund's performance from Protégé Partners. When will you start showing the annual performance on $25 billion that Ted and Tyden manage. Can you state if either Ted or Todd has beaten the S&P 500 index over the last five years?
WarrenYeah. Both, A, we'll probably never report their individual performance, but you can be sure that I have an enormous interest in, as does Charlie, and how much we think they contribute to Berkshire, and they have been terrific. They not only have the intellect and the record, but they are exceptional human beings. And they, Todd has done a tremendous amount of work, for example, on the medical project. And Ted has, I've given him several things, and he's done them better than I can do them. So the record since inception, and I'm measuring it, Ted came later than I can do him. So the record since inception, and I'm measuring it, Ted came later than. than not a year or so later. But the record since inception is almost identical, both for the two managers from their different inception and matching the S&P. And they've received some incentive compensation, which they only get if they beat the S&P. And as I say, they're just slightly had. That really hasn't. It's been better than I've done, so naturally, I can't critical. It says it. They, they, they were the, they were two, two very, very, very, very good choices.
CharlieCharlie?
OtherYou did, you did report it in a previous year. You just didn't do it this year. And, but now you have your report.
WarrenWell, I would, uh, the, the problem that all of us has, it, is size. It's actually, it's harder to run even 12 or 13 billion dollars, frankly, than it is to run a billion, and if you're running a million dollars or something, it's a whole different game. You'd agree with that, wouldn't you, Charlie?
CharlieOf course.
WarrenYeah. Okay. Just like any good lawyer, you never ask them a question unless you think you know the answer.
[1:30:17]
QuestionerThey're going to give them. Okay, Gary. My question's on GEICO. Last year, you promised growth and delivered. But along the way, the combined ratio was moving up. and it was the first time it was over 100 in about 15 years. Granted, some of that was catastrophes, but even excluding catastrophes. There was something going on in the loss trends that caused you to slow down that growth, at least as we got to the latter part of the year. And I wondered if you could tell us what was going on. And I did look this morning, too, so it looked like the first quarter settled down a little bit, but still like to know about the course.
WarrenYeah, sure. The only thing I did different with the question on slightly, when you say it causes to slow down, we didn't want to slow down the growth. I mean, you're looking at a guy here that has never wanted to slow down the growth that guy go. The growth did slow down, but it wasn't because we wanted it to. Our prices that led to the underwriting loss, the actual, we'd have been slightly in the, in the black, without the, catastrophes, but, you know, if we hadn't have paid our light bills, we might have been in the black, too. I mean, this except for stuff doesn't mean much in insurance, as far as I'm concerned. The, if you'll look at the first quarter, our margins were around 7%, which is actually a little more than we aimed for. And I've received the unaudited, I mean, the preliminary figures for April, and they're similar similar. So the underwriting gain is, or margins are perfectly satisfactory now. And we'd love to get all the growth we can. And we will gain market share this year, and we gain market share. When Tony took over the place, it was in 1993, it was two in a fraction, two in a very small fraction percent. And it'll be 13 percent of the house, you know, 13 percent of the house, you know, 13 percent of the house. households in the country now, and we will keep gaining share. We will keep riding profitably most of the time, and every now and then our rates will be slightly and modestly inaccurate, and inadequate, or inadequate, I should say, and or will have maybe some big losses on on hurricanes or something of the sort. Or we'll have a Sandy in New York. But Geico is a jewel. And it's, you know, it's really our, we've got some others we feel awfully close to similarly about, but it's an incredible company. It has a culture all of its own.
[1:33:29]
WarrenIt's saving its customers probably $4 or $5 billion a year against which they would otherwise. against what they would otherwise be paying based on the average in auto insurance. And it will be profitable on underwriting a very high percentage of the year. It contributed another $2 billion to float last year. It is a terrific company. And like I say, the first four months are dramatically better. Now, there's some seasonal in auto insurance. So the first quarter is usually the best of the four-quarter. quarters, but it's not a dramatic seasonal. So I think when you read the 10Q, and you can take my word for April, I think, I think Geico is on a good profit track as well as a good growth track. And the more it grows, the better I like it. Charlie?
CharlieWell, I think you've said it perfectly. It was never very bad and it's better now.
QuestionerOkay. Station 5. Mr. Buffett and Charlie Munger. My name is E. E. Mr. Posa, and I'm from Omaha, Nebraska. My question is, how will Donald Trump's terrorists affect the manufacturing business of Berkshire-Hathaway?
WarrenWell, today, steel costs, we've seen steel costs increase somewhat, but as I said earlier, I don't think the United States or China. There'll be some jocking back and forth, and there'll be something that leaves some people unhappy. But I don't think either country will dig themselves into something that precipitates and continues any kind of real trade war in this country. We've had that in the past a few times, and I think we've learned a general lesson on it. But there will be some. some things about our trade policies that irritate others, and there'll be some from others that irritate us, and there'll be some back and forth. But in the end, I don't think we'll come out with a terrible answer on it. Charlie, I'll let you.
CharlieSteel has reached, the conditions in steel were almost unbelievably adverse to the American steel industry. You know, even Donald Trump can be right on some of this stuff. The thing about trade, I've always said that the president, whether it's president, any president, needs to be an educator in chief, which Roosevelt was in the Depression. That's why he had those fireside chats, and it was very important that he communicated to the people what needed to be done and what was happening around them. And trade is particularly difficult. because the benefits of trade are basically not visible. You know, you don't know what you would be paying for the closure way or in today if we'd had
[1:37:26]
Warrena rule they all had to be manufactured in the United States or what you'd be paying for your television set or whatever it may be. No one thinks about the benefits day by day as they walk around buying things and carrying on their own business. The negatives, and there are negatives, are very, very – are very apparent and very painful. And if you're laid off, like happened in our shoe business in Maine, and you know you have been a very, very, very good worker, and you are proud of what you did, and maybe your parents did it before you, and all of a sudden you find out that American shoes, shoes manufactured in America, are not competitive with shoes made outside the United States. You know, you can talk all you know about Adam Smith or David Ricardo. or something and explain the benefits of free trade and comparative advantage and all that sort of thing. And that doesn't make any difference. And if you're 55 or 60 years old to talk about retraining or something like that, you know, so what? So I – it is tough in politics where you have a hidden benefit and a very, a very visible cost to a certain percentage of your constituency. And you need to do two things under those circumstances if you have that situation. You know what's good for the country, so you have to be very good at explaining how it does really hurt in a real way somebody that works in a textile mill, like we had a new Bedford where you only spoke Portuguese, half our workers only spoke Portuguese, and suddenly they have no job and they've been doing their job well for years. You've got to do two things. You have to understand that that's the price individuals pay for what's good for the collective good. And secondly, you've got to take care of the people that are, that were retraining as a joke because of their age or whatever it may be. And you've got to take care of the people to become the rogue kill in something that is collectively good for us as a country. And that takes society acting through its representation. representatives to develop the policies that will get us the right collective result and not kill too many people economically in the process. And, you know, we've done that in various arenas over the years. The people in their productive years do help take care of the people that are too old and too young. I mean, every time a baby is born in the United States, you know, we take on an obligation of
[1:40:16]
Warrenof educating them for 12 years. It'll cost $150,000 now, you know. We have a system that has a bond between the people in their productive years and the ones in the young and old, and it gets better over time, far from perfect now. But it has gotten better over time, and I believe that trade properly explained, and with policies that take care of the people in a roadkill is good for our kind. country and can be explained. But I think it's a tough, it's been a tough sell to a guy that may choose in Dexter Mayer or worked on a loom in New Bedford, Mass, or works in the Steelville in Youngstown, Ohio.
QuestionerAndrew?
OtherOkay, Warren. This question comes from a Berkshire shareholder who says they've been a shareholder for 10 years. I should say this may be one of the most pointed questions I've ever received for you. But you've elected it, though, anyway. But I did. But I did. The shareholder writes, I have watched the movie every year at this meeting when you testify in front of Congress on behalf of Solomon as the symbol of what it means to have a moral compass. Investors are increasingly looking to invest in companies. They're socially and morally responsible. So I was disturbed when you were asked on CNBC about the role that business could play in sensible policies around the sales of guns. You said you didn't think business should have a role at all, and you wouldn't impose your values on others. others. I was even more surprised when you said you'd be okay with Berkshire owning shares and gun manufacturers. At this meeting years ago, you said you wouldn't buy a tobacco company because of the social issues. The idea that Berkshire would associate with any company, as long as it isn't illegal, seems at odds with everything I think you stand for. Please tell us you misspoke.
WarrenWell, let's explore that a little. Should it be just my view or should it be the view of the owners of the company? So if I decide to poll the owners of the company on a variety of political issues, and one of them being whether, you know, Berkshire Hathaway should support the NRA, you know, I don't, if a majority of the shareholders voted to do it, or if a majority of the board of directors voted to do it, I wouldn't, I wouldn't accept that. I don't think that the, my political views, I don't think I put them in a blind trust at all when I take the job. And I, in the election of 2016, I raised a lot of money.
[1:43:07]
WarrenIn my case, I raised it for Hillary, and I spoke out in various ways that were quite frank. But I don't think that I speak, when I do that, I don't think I'm speaking for Berkshire. I'm speaking as a private citizen, and I don't think I have any business speaking for Berkshire. ever at the parent company level, we have never made a political contribution, you know. And I don't go to our suppliers, I don't do anything of that sort, where I raise money either for the school I went to or for a political candidate I went to or anything else. And I don't think that we should have a question on the Geico Policy Holder Forum. Are you an NRA member, you know? And if you are, you just aren't good enough for us or something. I think, I do not, I do not believe in imposing my political opinions on the activities of our businesses. And if you get to what companies are pure and which ones aren't pure, I think it is very difficult to make that call.
QuestionerI think that response, I'm almost afraid to call on Shirley, but go ahead, John.
OtherWell, obviously, you do draw a limit warrant. Yeah, we did. All kinds of things. Yeah. Which are beneath us, even though they're legal. But we don't necessarily draw it perfectly because we've got some sort of supreme knowledge. We just do the best we can. And certainly we're not going to ban all guns, surrounded by wild turkeys in Omaha. Okay, Greg.
QuestionerWarren, this question is also based on something you said more recently, so I can't guarantee it's going to be easier. You recently noted that you prefer sherry purchases over dividends as a means for returning capital to shareholders should Berkshire's cash balances continue to rise. And hit the $150 billion threshold, you noted as being difficult to defend the shareholders at last year's annual meeting. While I understand the rationale for not establishing a regular dividend, a one-time special dividend could be a useful option for returning a larger chunk of Berkshire's excess capital to shareholders without the implied promise to keep paying a regular dividend forever. The drawback with the special dividend, though, is that it would lead to an immediate decline in book value and book value per share, whereas a larger share repurchase purchase effort while depressing book value would reduce Berkshire's share count limiting the impact on book value per share. If we do happen to get a few years out and Berkshire does hit that $150 billion threshold, because
[1:46:07]
Questionervaluations continue to be too high, both for acquisitions and for the repurchase of company's stock, would you consider a one-time special dividend as a means for retirement? turning capital and shareholders?
WarrenWell, if we thought we couldn't use capital effectively, we would try to figure out the most effective way of returning capital to shareholders. And you could, I would have probably a, I think it would be unlikely we'd do it by a special dividend. I think it would be more likely we'd do by a repurchase if the repurchase didn't result in us paying a price above intrinsic value per share. We're never going to do anything. that we think is harmful to continuing shareholders. So if we think the stock is intrinsically worth X, and we would have to pay some multiple, some modest multiple, even above that, to repurchase shares, we wouldn't do it because we would be hurting continuing shareholders to the benefit of the people who are getting out. But we will try and do whatever makes the most sense, but not with the idea that we have to do something every day because we simply can't find something that day. We had a vote, as you know, I don't know, a few years back on whether people wanted the dividend. And the B shares, so we're not talking my shares or Charlie's or anything, but the B shares voted 47 to 1 against it. So I think through self-selection of who become shareholders, I don't think shareholders worldwide on all stocks would vote 47 to one at all. But we could self-selection in terms of it joins us. And I think they expect us to do whatever we think makes the sense for all shareholders. And obviously, if we really thought we never could use the money effectively in the business, we should get it out one way or another. And you've got a bunch of directors who own significant, very significant amounts of stock themselves. And you can expect them to think like owners. That's the reason they're on the board and you can expect the management to think like owners. And owners will return money to all of the owners if they think it makes more sense than continuing to look for things to do. But we invested in the first quarter, maybe we have to look it up on the, well, certainly through April, probably close to $15 billion or something like that, and that. And we won't always be in a world of very low interest rates, nor high private market prices. prices. So we will do what makes the most sense. But I can't see us ever making a special
[1:49:27]
Warrenor almost, it's very unlikely we would just pay out a big special dividend. And I think that if we put that to the vote of the shareholders and Charlie and I did not vote, I think we would get a big negative vote. And I'd be willing to make a bet on that one. Charlie?
CharlieWell, as long as the existing system continues to work as well as it has, why would we change it? We've got a whole lot of people that are accustomed to it, who've done well into it. And if conditions change, why we're capable of changing our minds, if the facts change?
WarrenYeah, and we've done that several times.
CharlieYes. Yeah. Although I must say it's a little hard. Ha ha ha ha ha. It always brings me back to Earth.
QuestionerOkay. Station 6. Good morning, Mr. Buffett and Ms. Munger. My name is Stephanie Yu from Horizon Insights, a China-focused research firm based in Shanghai. So I have a lot of mutual fund clients in China who are very young, relatively younger, and they manage a smaller portion of funds. So my question is, if you only have $1 billion in your portfolio today, how would you change your investments? Would you consider more investment? opportunities in emerging markets such as China. Thank you.
WarrenYeah. I would say if I were working with a billion, I would probably find within a $30 trillion market in the United States where I understood things better just generally than I do around the world. I'd probably find opportunities there that would be better, incidentally, by some margin than what we can fine for hundreds of billions. But I wouldn't, there's no way I'd rule a lot of emergency markets. There was a time 15 years ago or so. One, just because it was kind of interesting, and it took me back to my youth. On a weekend, I went through a directory of Korean stocks, and I bought, and these were small stocks. Well, they were small by the standards of, you know, they were small by the standards of either Korean or American business. They were big, big companies. But I found 15 or 20, and it were statistically cheap and what some of each one myself. And there are opportunities with smaller amounts of money to do things that we just can't do. But I, my first inclination always would be to comb through. things in the United States, but I'd come from in other countries. I probably wouldn't get into very, very small markets because there can be a lot of difficulties even in market execution and taxation, a lot of things.
[1:52:47]
WarrenYou can find, if you can't find it in America and China and Britain and a few other places, you probably aren't going to find it someplace else. So you may think you found it, but there may be, it may be a different game. And, you know, our problem is size, not geography. Charlie?
CharlieWell, I already have more stocks in China than you do as a percentage, so I'm with the young lady.
WarrenOkay, well, you want to name names? Do these stocks have names?
CharlieNo, I don't.
WarrenCarol. This question. I should just add one thing. You will find plenty of opportunities in China. Charlie would say you've got a better hunting ground than even a person with similar capital in the United States. Would you hear that?
CharlieYes, I do.
WarrenYeah, yeah. So, and in a sense, it's logical that should be the case because it's a younger market as well, but still a large market, so that markets probably work toward efficiency as they age. Japan had this very strange situation with warrants being priced out of line and all of that 30 years ago. And people notice after a while and it disappears, but there can be some very strange things happen in markets as they develop. I think you'd agree with that, Charlie, wouldn't you?
CharlieAbsolutely.
WarrenYeah. Jonathan? Did I skip? I skip Carol?
QuestionerYep.
WarrenOh, I'm sorry. Okay. Okay. This question. and I would have concede it is not a small one, comes from Gideon Pollack of Montreal. He says, the world knows generally how the looks of Berkshire Hathaway have changed since you began to run the company in 1965. Berkshire was then a tiny northeastern textile company, and now it is the number four company on the Fortune 500. What about the next 50 years? Could you give us your view of what Burkshire? of what Berkshire looks like in 2008? I think it'll look a long way away. No, the answer is I don't know, and I didn't know 50 years ago what it would look like now. I mean, it will be based on certain principles, but where that leads, and we will find out and we'll have people that are thinking about different things than I am, and we'll have a world that's different. The world is different, but we will be, I very much hope and believe, and we will be, that we'll be as shareholder-oriented as any large company in the world. We will look at our shareholders as partners, and we will be trying to do with our money exactly what we would do with our own, not seeking to get an edge on them. And who knows what else will be happening then?
[1:56:14]
WarrenCharlie. I want to talk to the younger shareholders in the group. Those of you who, after we are gone, sell your Berkshire stock and do something else with it, helped by your many friends, I think are going to do worse. So I would advise you to keep the faith. Otherwise, some of that has already happened in many families. I'll give his answer next time now that I'll see it get all the applause.
QuestionerJonathan. Dura sells $82 million of pre-tax profits in 2017 were still well below what it earned as a subsidiary of P&G. Can you clarify or quantify to what extent transition costs or purchase price accounting impacts at the segment level were still temporarily a burden last year? Or is it possible that the gap earnings contribution simply reflects a commoditization of the commoditization of the category given the entry of Amazon into the battery market. I did see that Durassel's earnings were up in the first quarter. Is that a sign of a more meaningful contribution in 2018 and beyond as you finish right-sizing the manufacturing footprint and acquisition-related charges fall away?
WarrenYeah. Duriselle should be earning more money than it is now and will be. And as you mentioned, it's well on its way there, but it's not earning. It's not earning. earning an appropriate amount now based on the history of the company. I was around when I was on the board of Gillette when Gillette bought Duracelle, and I've seen what it does when it isn't managed to its full extent. And I saw what Jim Kiltz did with it at Gillette when he ran it. And there were a lot more transition problems. in the purchase. For one thing, there's a lot of rules connected with our swap of our stock and P&G for Duracel. There are a lot of things that you cannot do that made sense to do in that period of transition from P&G's management to ours. But Duricel, the brand is strong, very strong. The product, the product line is very strong. So, and we are making more money and we should, and I believe we will, earn really what the property is capable of earning. We should be, we should be earning that relatively soon. But you're absolutely right that that it is, from a profit standpoint, is under a performance standpoint is underperforming. We're making a lot of changes. And some of those are involved in jurisdictions, countries, where it is really expensive to change in terms of employment payments that have to be made if a plant is changed or something of the sort.
[1:59:46]
WarrenBut I like the Duracill deal absolutely as well as well as when we made it. Charlie? I like it better than you do. Now, Dursel is a very, very, it's our kind of business. It is.
OtherOkay, Station 7. Good morning.
QuestionerI have a question related to the bond market, the U.S. Treasury bond market. My name is Olle Larsen. I live in the San Francisco Bay Area. And I never worked in the financial industry. I started out buying a... penny mining stocks on the Vancouver Stock Exchange, and then decade later that I got married, and my wife convinced me to buy Berkshire shares. That were probably a good decision. So, my question is, I read the newspapers about the Federal Reserve and the inflation numbers. And there must be an increased supply of treasury bonds that must go to auction. And my question is, how would, what do you expect that to impact yield or interest rate?
WarrenYeah, the answer is, I don't know. And the good news is nobody else knows, including members of the Federal Reserve and everywhere. There are a lot of variables. a lot of variables in the picture. And the one thing we know is we think that long-term bonds are a terrible investment. And we, at current rates or anything close to current rates. So basically all of our money that is waiting to be placed is in Treasury bills that they have an average maturity of four months or something like that at most. The rates on those have gone up lately so that in 2018, my guess is we'll have at least $500 million more of pre-tax income than we would have had from the bills last year. But they still, it's not because we want to hold them, we're waiting to do something else, but long-term bonds. long-term bonds, they're basically at these rates, it's almost ridiculous when you think about it, because here the Federal Reserve Board is telling you, we want 2% of your inflation, and the very long bond is not much more than 3%. And of course, if you're an individual and you pay tax on it, you're going to have some income taxes to pay, and let's say it brings your after-tax return down to 2.5%. So the Federal Revenue, is telling you that they're going to do whatever's in their power to make sure that you don't get more than a half a percent a year of inflation-adjusted income. And that seems to me a very, I wouldn't go back to penny stocks, but I think I would stick with productive businesses or productive, certain other productive assets
[2:03:33]
Warrenby far. But what the bond market does. in the next year, you know, you've got trillions of dollars in the hands of people that are trying to guess which maturity would be the best to own and all that sort of thing. And we do not bring anything to that game that would allow us to think that we've got an edge. Charlie?
CharlieWell, really wasn't fair for our monetary authorities to reduce the savings rates paid mostly to our old people with savings accounts. as much as they did. But they probably had to do it to fight the Great Recession appropriately. But it clearly wasn't fair. And the conditions were weird. In my whole lifetime, it's only happened once that interest rates went down so low and stayed low for a long time. And it was quite unfair to a lot of people. And it benefited the people in this room enormously because it drove asset prices up, including the price of Berkshire Hathaway stuff. or Berkshire Hathaway stock. So we're all a bunch of undeserving people. And I hope that we continue to be so. At the time this newspaper came out in 1942, it was the government was appealing to the patriotism of everybody. As kids, we went to school and we bought savings stamps to put in, well, they first called them U.S. war bonds, then they called them U.S. defense bonds, and then they called them U.S. savings bonds. But they were called war bonds. then, and you put up $18.75, and you got back $25 in 10 years. And that's when I learned that that that $4 per 3 in 10 years was 2.9% compounded. They had to put in small print that, and even an 11-year-old could understand that 2.9% compounded for 10 years was not a good investment. But we all bought them. It was part of the war effort, basically. And the government knew, I mean, you knew that significant inflation was coming from what was taking place in finance in World War II. We actually were on a massive Keynesian type behavior, not because we elected to follow Keynes, but because war forced us to have this huge deficit in our finances, which took our debt up to 120% of of GDP, and it was the great Keynesian experiment of all time, and we backed into it, and it sent us on a wave of prosperity like we've never seen. So you get some accidental benefits sometimes. But the United States government then was urging every citizen to put their money into a fixed-dollar investment at 2.9% compounded for 10 years, and I think treasury bonds have been unattractive
[2:06:37]
Warrenever since, with the exception of the early 80s. That was something at that time. I mean, you really had a chance to buy, you had a chance to invest your money by buying zero coupon, treasury bonds, and in effect, guarantee yourself that for 30 years, you would get a compounded return, you know, something like 14%, for 30 years of your lifetime. So every now and then something really strange happens in markets, and the trick is to be not only be prepared, but to take action when it happens. Charlie, did you ever buy any war bonds or?
CharlieNo, no. I never bought war bonds. Used to be like, take me... I didn't have any money when I was in the war.
WarrenThat's a good reason not to buy.
QuestionerOkay, Becky. This question comes from Angus Hanton, who he and his wife are based in London, and he says they've been shareholders in Berkshire Hathaway for over 30 years. He says, we have all read about the zero-based budgeting that has been so effective with Kraft Heinz and other investments that you've done with 3G partners. Can we expect these cost reduction techniques to be used by your managers and other parts of the Berkshire Hathaway Enterprise?
WarrenWell, in general, we do not expect the managers generally to get into a position where there would be a lot of change in terms of zero-based budget. In other words, why in the world aren't you thinking that way all of the time? The 3G people have gone into certain situations where there were probably primarily in personnel but in other expenses as well, a lot of expenses that were not delivering a dollar of value per dollar expended. And so they made changes very fast that to a situation that probably shouldn't have existed in the first place, whereas we hope that our managers, Take a GEICO. Guyco has gone from, I think, 8,000 to 39,000 people since we bought control. But they're all very productive. I mean, you would not find a way for a 3G operation to take thousands of people out of there. On the other hand, I can think of some organizations where you could take a whole lot of people out, where it isn't being done because the businesses are very profitable, we'll start with. That's what happened with the tobacco companies, actually. They were so profitable that they got all kinds of people around that didn't, they weren't really needed, but the money just flowed in. So I, our managers have different techniques of keeping track of, or of, or of, uh, trying to maximize customer satisfaction at the same time that they don't incur
[2:09:55]
Warrenother than necessary costs. And, and I think probably some of our managers may well use something that's either zero-based budgeting or something akin to it. They do not submit budgets never have to me. I mean, they've never been required to. We've never had a budget at Berkshire. We don't, we don't consolidate our figures monthly. I mean, I get individual reports on every company, but there's no reason to have some extra time spent, for example, by having a consolidated figures at the end of April or in the consulate figures in the May. We know where we stand. And, you know, I'm sure we're the only company that, probably in the whole Fortune 500 that doesn't do it, but we don't do unnecessary things around Berkshire. And a lot of stuff that's done at big companies is unnecessary, and that's why a 3G finds opportunities from time to time. Charlie?
CharlieWell, if you've got 30 people at headquarters and half of those are internal auditors, that is not the normal way of running a big company in America. And what's interesting about it is, obviously, we lose some advantages from big size, but we also lose certain disadvantages from having a big bureaucracy within those meeting after meeting after meeting around headquarters. And net, I think we've been way ahead with our low overhead diversified method, and it also makes our company a turn. attracted to very able, honorable people who have companies. So generally speaking, the existing system has worked wonderfully. For us, I don't think we have the employment that could be cut effectively that a lot of other places have. And I think our methods have worked so well, we'd be very unlikely to change them. I think at headquarters, you could say we have the kind of sub-zero-based budgeting. And we hope that the example of headquarters is to a great extent, emulated by our city. That isn't just the cost reduction. I think the decisions get made better if you eliminate the bureaucracy. I think a bureaucracy is sort of like a cancer, and it functions sort of like a cancer. And so we're very anti-bureaucracy. So, you know, I think it's done us a lot of good. In that case, we're quite different from, say, Anheuser-Bush at its peak. Okay, Gary.
QuestionerMy question is on small commercial and specifically direct small commercial. You seem to have some websites that enable buyers to purchase small commercial insurance directly. Buy Burke is one of them.
[2:13:03]
QuestionerIt's a very competitive, fragmented market. But what is your strategy for that market? And then can you ultimately Geico-wise the small commercial market?
WarrenWell, we'll find out. I mean, it's a very good question because that's exactly the question we ask ourselves. And we have this incredible company at Geico, which has gone direct in the personal auto field and is, you know, first started at 1936. And there's no question in my mind that over a lot of years, and maybe not so many years, something like small commercial, anything that takes cost out of the system makes it easier for the customer is going to work over time if you've got a system that was based on something that had more layers of agency costs and that sort of thing. So we are experimenting, and we'll continue to experience. experiment on something like small commercial workers, comp, whatever it may be, we'll try and figure out ways to take cost out of the system, offer the customer an equivalent product or better at lesser price, and we'll find out what can be done and what can't be done. And we're not the only ones doing it, as you know. But we're not going to, we've got some managers that are going to be quite, I'm sure, enterprising on that, and we back them. And we expect some to fail and some, and if a few succeed, we'll have some very good businesses. And the world is going in that direction. So you could expect us to try and go with it.
WarrenCharlie?
CharlieWell, if it were easy, I think it would have happened more fast. Yeah. But it will happen as we go along. I mean, it wasn't easy in auto. I mean, when you think about it.
WarrenNo, it wasn't. No.
CharlieI mean, it was a system with all kinds of extra costs to go back to the turn of the 19th century into the 20th. I mean, it was built on fire insurance and strong general agencies, and that slopped over into auto when the auto came along in 1903. 1903 from Ford or whatever. And so it grew within a system that really wasn't, really wasn't very efficient compared to what was available, but it took state farm initially to go to a direct or a captive agency system. And then it took USAA and then later GEICO and then later progressive to go to direct systems that are even more. efficient, consumer-friendly. And the same thing is going to happen to some degree in all kinds of industries and certainly small commercial. Somebody will... It could happen, but it will be slow.
[2:16:22]
WarrenIt takes an amazingly long time. I mean, it, but, you know, the battle doesn't always go to the strong and the race to the swift, but that's the way to bet, you know, as they say.
OtherOkay. Station 8. May. Austin Merriam from Jacksonville, Florida.
QuestionerMr. Buffett, with the recent news of the partnership between you, Mr. Bezos, and Mr. Diamond, to challenge the health care industry and the self-admitted difficulties you are running across, this would lead me to believe the industry has higher barriers to entry than may have originally been hypothesized, a larger moat, if you will. Would that justify a higher earnings multiple for established players in the industry, such as PBMs, for example?
WarrenWell, just though the system may have a mode against intruders, it doesn't mean that everybody operating within the system has individual modes, for one thing. Now, I, we are, if this new triumvirate succeeds at all, we are attacking an industry mode. And I'm defining industry very broadly. health care, not just, you know, health care insurers or this or that. We're trying to figure out a better way of doing it and making sure that we're not sacrificing care and the goal is to improve care. And like I say, that is a, it's a lot bigger than a single company's mode. It's bigger than a component of the industry's mode. The mode held by the whole system, since it interacts in so many ways, is actually, that's the the moat that essentially has to be attacked, and that's a huge moat. And like I say, we'll do our best. But I hope if we fail, I hope somebody else succeeds.
WarrenCharlie?
CharlieWell, I suspect that eventually, when the Democrats control both houses of Congress and the White House, we will get single-payer medicine. And I don't think it's going to be very friendly to many of the current PBMs. I won't miss them.
OtherAndrew?
QuestionerThis question comes from Key Lee and actually is directly about the issue of moats. He notes that Elon Musk this week on his Tesla earnings call said the following, quote, I think moats are lame. They are like nice in a sort of quaint, vestigial way. And if your only defense against invading armies is a moat, you will not last long. What matters is the pace of innovation. That is the fundamental determinant of competitiveness. of competitiveness, unquote. So Warren, it seems the world has changed. Business is getting more competitive, pace of innovation, technology is impacting everything.
[2:19:44]
CharlieIs Elon right? Well, yeah, Warren. Elon says a conventional mode is quaint, and that's true of a puddle of water. And he says that the best moat would be to have a big competitive position, and that is also right. It's ridiculous. Warren does not intend to build an action. mode. Even though they're quaint.
WarrenYeah. There's certainly a great number of businesses. This has always been true, but it does seem like the pace is accelerated and so on in recent years. There's been more modes that have become susceptible to invasion than seem to be the case to be the case earlier, but there's always been the attempt to do it. And here and there, there are probably places where the motor is as strong as ever, but certainly you can work at, certainly should be working at improving your own moat and defending your own mode all the time, and then Elon may turn things upside down in some areas. I don't think he'd want to take us on in candy. And we've got some other businesses that would be so easy. You can look at something like Granables out there in the other room, and it won't be technology that takes away the business and in Granibles. Maybe something else that catches the young kids' fantasy or something, but there are some pretty good modes around. Being a low-cost producer, for example, is a terribly important moat. And something like GEICO, technology is really not brought down the cost that much. And I think our position has, there are a couple of companies that have costs as low as ours, but among big companies, we are a low-cost producer, and that is not a low-cost producer, and that is bad when you're selling an essential item.
OtherOkay, Greg.
QuestionerWarren, Berkshire Energy has benefited greatly from operating under the Berkshire umbrella. By not having to pay out 60 to 70% of earnings annually as a dividend, the company was able to amassed $9 billion in capital the past five years and closer to $12 billion in the past 10. Money that could be allocated to acquisitions and capital spending, especially on renewables. While tax credits for solar energy don't run out until next year, We've already seen a dramatic reduction in Berkshire Energy's capital commitment to solar projects. And even though spending on wind generation capacity is projected to be elevated this year and next, it does wind down in 2020 as the wind production tax credits are phased out. Absent a major commitment to additional capital projects, it looks like Berkshire Energy's expenditures
[2:23:17]
Questionerin 2021 will be its lowest since 2012, leaving the firm with more cash on hand than it has had in some time. Do you think it is likely at that point that Berkshire Energy starts fund only some of that cash up to the parent company? Or will it be earmarked for debt reduction or just be left on the balance sheet as dry powder for acquisitions?
WarrenYeah. You're right about when tax credits phase out and all of that. Although they, as you know, they've extended that legislation in the past and who knows exactly what the government's position will be on incentivizing various forms of alternative energy, but my guess is, I mean, if you take the, if you take the logical expenditures that may be required in all aspects of the public, of electric generation and the utility business generally, I think there'll be a lot of money spent, and the question is whether we can spend it and get a reasonable return on it. And well, there again, we'll do what's logical. There are three shareholders, basically, of Berkshire, Hathaway Energy. Berkshire Hathaway itself owns 90 percent of it, and Greg Gable and his family, perhaps, and Walter Scott and, again, family members, own the other 10 percent. And we all have an interest in employing as much capital as we can at good rates, and we'll know when it can be done and when it can't be done. And we'll do, there's no tax consequences to Berkshire at all. So, but the three partners will figure out which makes the most sense. But when you think of what might be done to improve the grid in the U.S. And the fact that we do have the capital, I wouldn't be surprised if we find good uses for capital in Berkshire-Hathaway energy for a long time in the future.
WarrenCharlie?
CharlieYeah. Well, I think there'll be huge opportunities in Berkshire Energy as far ahead as you can see to deploy capital very intelligently. So I think the chances of a big dividend is approximately zero. Yeah. And we've not only got the money to an extent that virtually no utility company does, and we've also got the talent, too. I mean, we've got a very, very talented organization there. So it's a very, it's a big field. And we've got shareholders that are capitalists, and we've got managers that are terrific, and you would think we'd find something intelligent to do over time in the field. So far we have. I mean, we've owned it now for close to 20 years, and we've deployed a lot of capital, and so far,
[2:26:19]
Otherso good. I mean, you look at the improvements that can be made in our utility system in the United States. You're talking hundreds of hundreds and hundreds of billions of dollars, if not trillion. So at, you know, where else but Berkshire, you look for that kind of money. Okay, Station 9. I'm Richard Serser from Tucson, Arizona.
QuestionerAt Berkshire, what counts most are increases in our normalized per share earning power? That was in your last letter. What is our normalized per share earning power? you estimate?
WarrenWell, I would say that what you saw in the first quarter under these tax rates would probably be a reasonable guess, you know, obviously depends on the economy in any given year. I would say that was a reasonable estimate, but we have firepower. We haven't used and we'll have more firepower as we go along. So we do expect that normal. normalized earning power to increase over time. And if it doesn't, you know, one way or another, we're failing you because we're retaining those earnings. So I don't see anything abnormal in our earnings, figured now at a 21 percent federal rate. But as I look at the $5.5 billion in the first quarter, seasonally, insurance is better than the first quarter, but seasonally, most of our businesses, the first quarter is not enormous quarter for it. So I don't see anything abnormal in it. And then I think you can expect, you should expect, we expect substantial capital gains over time in addition to what comes from the operating businesses. So how much you figure in for that. I would say that the retained earnings beyond dividends of our $770 billion of equities. In other words, how much they are keeping from us, but there are. our share of the earnings, which can be used by them, whether it's Apple or American Express or Coca-Cola or Wells Fargo or whatever, our share, you know, is in many billions of dollars annually. And one way or another, we think that those dollars will benefit us as much as if they've been paid out. Now, in certain cases they won't, but in certain cases, they'll excel the amount in terms of market value created. So there's many billions of dollars we are not showing in our earnings that is being retained by our investees. And one way or another, I think we'll get value received out of those. So you can take 20 or 21 billion under present tax rates, present economic conditions, and then we should get something from that, and we should get more when we get
[2:29:39]
Warren$100 billion in the cash invested, and we should get more as we read earnings. So we hope it adds up to a bigger number as we go along.
WarrenCharlie?
CharlieWell, I don't think our shareholders are going to see another increase in net worth of $65 billion in a single year. They may have to wait a while for another. But I don't think that I think eventually another will come and then another. Just be patient. We don't regard the present situation as, as just disadvantageously, except we'd like to get more money out, but we like the businesses we have. We like the businesses that we own part of. We are not reflecting in the way we look at earnings. The dividends we get from those partially owned companies falls far short of what they're going to contribute in our view to Berkshire's overall earnings over time. We wouldn't own those stocks otherwise.
QuestionerAnd you also like the Apple and an airline stocks you've recently purchased better than the cash you parted with.
CharlieAbsolutely, yeah.
QuestionerAnd that's quite a lot.
CharlieYeah, yeah.
QuestionerOkay, we won't pursue that further. Carol?
QuestionerThis question is from Daniel Kane of Atlanta. Your annual letter this year pointed out that Berkshire has become a leader in real estate brokerage in the United States. Congratulations. That is a significant feat. in less than 20 years. But let me mention a sticky point. If fees charged by stock market active managers are a drag on investor performance, I would argue that real estate commissions are no different and perhaps more detrimental, especially when one considers the lifetime effects of large, foregone, upfront cash flows, and the power of compounding interest. I would be done. pleased to hear your rejoinder on the points I've raised.
WarrenWell, the purchasable home is the largest financial transaction for a significant percentage of the population that they make and people, a lot of people need a lot of attention, and you can show a lot of houses before you sell one. I would say this, if you look at our close to 50, I think they make a good living or decent living. But I would say that the people who manage money make a whole lot more money with perhaps less contribution to the welfare of the person that they are dealing with. So I don't think that there are unusual profits in involved in being a real estate agent. I don't think there are unusual profits involved in the ownership. We like it because it's fundamentally a good business.
[2:33:23]
WarrenBut here we are doing 3% of all the real estate transactions in the United States, and we're making maybe $200 million a year, which we won't get into what the comparative efforts are in Wall Street to earn $200 million, but I think I have to tell him about Roy Tolls a little bit on this. Roy Tolls, for example, Charlie's partner, many, many, many years ago, decided he was going to want to buy a house in San Marino, and he's going to have a number of kids. So he sent his wonderful wife, Martha, out, and for six months he had her look at houses in San Marino, and this was many years ago. And if they were priced at $150,000, she would offer, he had her offer $75,000. And of course, the real estate agents were going crazy, they were going to get something listed, $150 sold at $75.5. And then finally, when she found one that they both really liked, he had to offer something like $120, and the real estate agent was so happy to get a bid that was in the general area of the offering price. He said he would work very hard on the seller to take that bid because he knew what, he did not want six more months of Roy bidding at the lower prices. So you don't sell them on the first trip. Incidentally, I had Roy buy a house from me sight unseen because this was a guy that knew human nature. You don't get rich. Real estate agency is, you know, that people earn their money, and they earn it in a perfectly, in a perfectly respectable and honorable manner. in terms of what they get paid, and as in every single industry there is, you know, there can be excesses or mistakes or that sort of thing. But we will continue to buy more brokers. In fact, we'll probably have another couple to announce before long. And we will feel that if we get to where we're doing 10 percent of the real estate broker's business in the country, and we're making six or seven hundred million dollars a year pre-time, tax, we will not think that's a crazy amount of money to make for enabling 10% of 5 million people to change their homes every year in the United States. Charlie?
CharlieWell, the commissions in real estate may get unreasonable if you're talking about $20 million houses. It seems a little ridiculous to pay a 5% commission on a $20 million transaction. But do any of us really care of the kind of people who pay $20 million dollars? where a house have a slightly higher commission? The ordinary commission is not is, is, is pretty well earned.
[2:36:31]
WarrenYeah, we have a number of brokerage firms. So they, the highest has that, their average transaction in one section of the country would be close to $600,000 a unit, but the, in terms of the sales price of the house. But the, in most of our real estate operations, the average prices, the average price is, It's more like $250,000 or something in that area. And you can show a lot of houses to make one $250,000 sale. And of course, just split the listing company and the selling company are usually two different companies. So it does not strike me as excessive. And incidentally, it doesn't strike the people in the industry that way easier. It has not been particularly susceptible to... online type substitution or something of the sort. The real estate agent earns their commission in most cases, but Charlie's had more experience with $20 million houses, so he will comment on that area.
QuestionerOkay, we'll have one more question before we break. Jonathan? Given the changes in consumer tastes in the food business and Kraft Heinz is already high margin structure, do you think the brands they own today plus new product introductions can together maintain or increase the current level of profits over the the next 10 years without the benefit of acquisitions. Is there anything in their portfolio besides ketchup that is enjoying growing demand?
WarrenWell, in effect, you're asking me whether Crabt Hines is a good buy. And we don't want to give information on marketable securities in that manner. But yeah, there are a number of items besides ketchup that enjoy growing demand. And some vary quite a bit by geography. There's enormous differences in the penetration of various products in the portfolio. Consumer packaged goods are still a terrific business in return on invested assets. And, you know, but the population worldwide grows fairly small at a fairly minor rate. And people are going to eat about the same amount. And there is some more willingness to experiment, you know, or go for organic products of the sort. It's a very good business. And there are new products coming out constantly. It's not one where you're going to get terrific organic growth, but it never has been. And, you know, I like the business, and we own 26. and so percent of it. But there are a number of items within Kraft Hines that enjoy pretty, fairly healthy growth. And I think you'd find that at most food companies, and I think you'd find very good returns on invested, untangible net assets at those businesses. And with that talk about food, we will now break for lunch. And we will come back in about an hour and look forward to see. rejoining you.