[0:05]
OtherThank you. Good morning and welcome to Berkshire Hathaway. And for those of you who have come from out of state, welcome to Omaha. The city is delighted to have you here for this event. And for those of you who came from outside of the country, welcome to the United States. So we've got people here from all over the world. We've got some overflow rooms that are taking care of people. And we will just have a few preliminary. And then we will move right into the Q&A period. We'll break about noon for about an hour. We'll come back and do more Q&A until about 3.30. Then we'll adjourn for a few minutes. And then they will conduct the meeting. I understand that in the room adjacent that Charlie has been conducting a little insurgency campaign. I don't know whether you've seen these, but these are the buttons that are available for those of you who, you keep asking questions about succession. And Charlie wants to answer that question by getting your vote today. So it says, this one says, maturity, experience, why accept second best vote for Charlie? I, however, have appointed the monitors who have collected the votes, so I feel very secure. The first thing I'd like to do, Charlie, is my partner of 60 years, director, and vice chairman, and we make the big decisions jointly. It's just that we haven't had any big decisions. So we haven't, we've, we're keeping him available for the next big one. And now, at the formal meeting today, we'll, we'll elect, um, we've, we're keeping him available for the next big one. 14 directors, and you're looking at two of them. And I'd like to introduce the 12 that will be on the ballot at 345. And I'm going to proceed alphabetically. And if they'll stand, if you withhold your applause, because some of them get sensitive if certain people get more applause than others. And so, and if you're withhold it to until I'm finished. Then you can applaud or not as you see fit having looked at these directors. So we'll start on my left, Greg Abel, who's both a chairman and a director. Greg, yeah. Oh, there we are. Right, okay. And going along alphabetically, Howard Buffett, Steve Burke, Sue Decker, Bill Gates, Sandy Godessman, Goddessman, Charlotte Geiman, Ajit Jane, who is also a vice chairman, Tom Murphy, Ron Olson, Walter Scott, and Merrill Whitmer. Now you can applaud. Now this morning we posted on our website, the quarterly of the 10 queue that's required
[3:54]
Warrento be filed with the SEC, we published it at 7 o'clock, central time, and we also published an accompanying press release. And these figures, as usual, require some explanation. As we've mentioned in the annual report, the new relevant, the new GAAP rule generally excepted accounting principles, require that we mark our securities to market and then report any unrealized gains in our earnings. And you can see, I've warned you about the distortions from this sort of thing. And, you know, the first quarter of 2019 actually was much like the first quarter of 2018. And I hope very much that newspapers do not read headlines saying that we made 21.6 billion in the first quarter this year against the loss of last year. year. The bottom line figures are going to be totally capricious. And what I worry about is that not everybody studied accounting in school or they can be very smart people, but that doesn't mean that they've spent any real time on accounting. And I really regard these bottom line figures, particularly if they're emphasized in the press, as doing as potentially as potentially being harmful to our shareholders and really not being helpful. So I encourage you now, and I encourage all the press that's here, focus on what we call our operating earnings, which were up a bit, and forget about the capital gains or losses in any given period. Now, they're enormously important over time. We've had substantial capital gains in the future. We have substantial unrealized. capital gains at the present time, we expect to have more capital gains in the future. They are an important part of Berkshire, but they have absolutely no predictive value or analytical value in the, on a quarterly basis or an annual basis, and I just hope that nobody gets misled in some quarter when stocks are down and people said Berkshire loses money or something of the sort, it's really a shame that the rules got changed in that way, but we will report. But we will also explain and we will do our best to have the press understand the importance of focusing on operating earnings and that we do not attract shareholders who think that there's some enormous gain because in the first quarter the stock market was up. There's one other footnote to these figures that I should point out, it's already been picked up by the wires from our 7 o'clock filing. We report on Kraft Heinz of which we own about 27 percent or so.
[7:20]
WarrenWe report on what they call the equity method. Now most stocks, when you get dividends that goes into our earnings account and their undistributed earnings don't affect us. They affect us in a real way. But they don't affect us in an accounting way. We are part of a control group at Kraft Heinz. So instead of reporting dividends, we report what they call equity earnings. Kraft Heinz has not filed their 10K for the 2018 year with the SEC, and therefore they They have not released the first quarter of 2019 earnings. Now, normally we would include our percentage share of those earnings, and we've done that every quarter up till this quarter. But because we do not have those figures, we've just, we've not included anything. We received $40 million dollars of dividends in the first quarter from the first quarter from our shares, but that reduces our caring basis and it is not reflected in the earnings. So that's an unusual item which we have mentioned specifically pointed out in our press release as well as included in our own. But there is nothing in here plus or minus for Kraft earnings, Kraft Heinz, this year, whereas there was last year and when we have the figures obviously. we will report them. I think, oh yes, I wanted to mention to you, the Keywood Company, which has been a landlord, since 1962, 57 years, has owned the building in which Berkshire is headquartered. Keywood Company is moving their headquarters and in the process will be doing something with the building. and they very generously, as they always have been, they came and said, what kind of a lease would you like since we're leaving and we've always sort of worked these things out as we've gone along. And Bruce Rukaku runs Kiwit said you just sort of, you name your terms and what you'd like. So you, no matter what happens with the building, you're all set. So I was about to sign a 10-year lease to the present space, but Charlie said 10 years might be long enough for me, but he said he would like me to sign one for 20 years, considering it. And so we are entering a 20-year lease, and I confess to you that we now occupy one full floor, as we have for decades. And the new lease provides for two floors, so I just want you to know that your management is loosening up just a little bit. And whether or not we fill them is another question. But we will have that. And I would like to say to Omaha that I think the
[11:08]
Warrenfact that Berkshire has signed up for 20 years is very good news for the city over time. And now I would like to tell you something about the people that make all of this possible. This is totally a, this is a homegrown operation. We started with a few people meeting in the lunchroom at National Indemnity many years ago. And I think we will probably set another record for attendance today yesterday afternoon. And 16,200 people came in five hours, and that broke the previous record by a couple thousand. On Tuesday, the Nebraska Furniture Mart did $9.3 million worth of business. And if any of you are in the retail business, you know, that that's a yearly volume for some furniture stores. And here in Omaha, the 50th or so largest mark in the country, maybe even a little less. 9.3 billion, I think, probably exceeds anything, any home furnishing stores ever done in one day. And we have people pitching in. We have all of the people, virtually all of the people from the home office, some of them, they'll take on any task. We have a bunch of people from National Indemnity, for example, that come over and they've been some of the monitors around. And in terms of the exhibit hall, more than 600 people from our various subsidiaries give up a weekend, come to Omaha, work very hard, and tomorrow 4.30, they are, I should say today at 4.430, they will start packing up things and heading back home. And they come in, and I saw them all yesterday, and they were a bunch of very, very happy-smiling faces, and they don't, you know, they work hard all year, and then they come in and help us out on this meeting. And then finally, if we could get a spotlight, I think Melissa Shapiro is someplace here. She runs the whole show. I mean, we, Melissa, where are you? Melissa's name was Melissa Shapiro before she got married, then she married a guy named Shapiro, so now she's Melissa Shapiro, Shapiro, so that's Melissa Shapiro, she can handle that sort of thing. She handles everything. And never, totally unflappable, totally organized, everything gets done, everybody likes you when they get through, so it's marvelous to get a chance to work with people like this. It's, it's, I think it's, it's a special quality that, at Berkshire, I think other people would hire some group to put on the meeting and I'll be very professional on all of that. But I don't think you can get, I don't think you can buy the enthusiasm and energy and help the next guy feeling that you've seen out on that exhibition floor.
[14:48]
OtherAnd you'll see as you meet people here at the whole, and as you meet the people around Omaha, they're very, very happy that you're here. And with that, with that, I would like to. start on the questions. We'll do it just as we've done it. In recent years, we'll start with the press group. They've received emails from a great many people, perhaps they can tell you how many, and selected the questions they think would be most useful to the Berkshire shareholders. Yahoo is webcasting this. As they've done for several years now, they've done a terrific job for us. So this meeting is going out both in English and in Mandarin. And I hope our results translate well, or our comments translate well. Sometimes we have trouble with English, but we're going to, we'll start in with English. with Carol Loomis, my friend of 50 years, but you'll never know it by the question she's going to ask me. I'm going to start very briefly. This is for the benefit of people who send us questions next year. There are kind of two things that you get wrong a lot of time. You can't send two-part questions or three-part, etc. We can't, we need a one-part question. And the other thing is that the question really needs to have some relevance. to Berkshire because Warren said when he started it that his hope was that shareholders would come out of the questions with a further education about the company. So keep those in mind for next year. Many people, a number of people, wrote me about repurchases of stock, and that's the question I picked for my first one. The question, this particular question, comes from Warren. Cookie, who lives in Belgium and who was still emailing me this morning in reference to the first quarter report. And he asked, my question concerns your repurchase of Berkshire shares. In the third quarter of last year, you spent almost $1 billion buying Berkshire B stock at an average price of $207. But then you got to a period between December 26th and April 11th when the first of the The stock languished for almost four months under 207, and yet you purchased what I think of as a very limited amount of stock, even as you were sitting on an enormous pile of 112 billion. My question is why you did not repurchase a lot more stock unless, of course, there was for a time an acquisition of, say, $80 billion to $90 billion on your radar. Yeah. The question, whether we had $100 billion or $200 billion would not make a difference,
[18:14]
Warrenor $50 billion, would not make a difference in our approach to repurchase of shares. We repurchase shares. We used to have a policy of tying it to book value, but that became a policy. It really became obsolete. It did not. The real thing is to buy stock, repurchase shares, only when you think you're doing it, at a price where the remaining shareholders have had are worth more the moment after you've repurchased it than they were the moment before. It's very much like if you were running a partnership and you had three partners in it and the business was worth $3 million and one of the partners. came and said, I'd like you to buy back my share of the partnership for a billion. I started out with millions, I'll stay with millions, but for 1.1 million, and we'd say, forget it. And if he said one million, we'd probably say forget it. And if he said 900,000, we'd take it because at that point, the remaining business would be worth $2 million, 1, and we'd have two owners, and our interest in value would have gone from a million a million and $50,000. So it's very simple arithmetic. Most companies adopt re-purchase programs and they just say we're going to spend so much. That's like saying we're going to buy X, Y, Z stock and we're going to spend so much. We're going to buy a company. We're going to spend whatever it takes. We will buy stock when we think it is selling below a conservative estimate of its intrinsic value. Now, the intrinsic value is is not a specific point. It's probably a range in my mind that might have a band maybe of 10 percent. Charlie would have a band in his mind, and it would probably be 10 percent. And ours would not be identical, but they'd be very close. And sometimes he might figure a bit higher than I do, a bit lower. But we want to be sure when we repurchase shares, the that those people who have not sold shares are better off than they were before we re-purchase them. And it's very simple. And in the first quarter of the year, they'll find we bought something over a billion dollars with the stock. And that's nothing like my ambitions. But what that means is that we feel that we're okay buying it, but we don't salivate over buying it. We think that the shares we repurchased in the first quarter leave the shareholders better off than if we hadn't, the remaining shareholders, better off than if we hadn't bought it. But we don't think the difference is dramatic. And you could easily see periods where we would
[21:23]
Warrenspend very substantial sums if we thought the stock was selling at, say, 25 or 30 percent less than it was worth, and we didn't have something else that was even better. But we We have no ambition in any given quarter to spend a dime unless we think you're going to be better off for us having done so.
WarrenCharlie?
CharlieWell, I predict that we'll get a little more liberal than repurchasing chairs. I was going to give you equal time, but then...
QuestionerOkay, John Brandt. Hi, Warren and Charlie. Thanks for having me, as always. Every major North American railroad other than Burlington Northern has adopted at least some aspects of precision-scheduled railroading. railroading, generally to good effect to their bottom line. Some believe that point-to-point scheduled service and minimal in transit switching is good for both returns on capital and customer service. Others believe precision railroading has done little for on-time performance, and its rigidity has jeopardized the compact that railroads have had with both regulators and customers. Do you and current BNSF management believe that it's now a good idea for BNSF to adopt precision railroading playbook? Or do you agree with its critics?
WarrenYeah, precision railroading, as it's labeled, was probably invented by a fellow named Hunter Harrison. I think maybe it was at the Illinois Central Railroad at the time. There's a book that came out about Hunter who died maybe a year ago or thereabouts. And it describes his procedure toward railroading. It's an interesting read. Reed, if you're interested in railroading. And he took that to Canadian National, CN. There are six big railroads in North America, and he took that to CN, and he was very successful. And actually, Bill Gates is probably the largest holder of CN. And I think he's done very well with that stock. And then later, Canadian Pacific was the subject of an activist. And when they, as they proceeded, they got a hunter to join them and brought in an associate, Keith Creole, who, and they instituted a somewhat similar program. Now the same thing has happened at CSX. And all of those companies dramatically improve their profit margins. And they had varying degrees of difficulty. difficulty with customer service in the implementing of it. But I would say that we watch very carefully. The Union Pacific is doing a somewhat modified version. But the, we are not, we are not above copying anything that is successful.
[24:39]
Greg AbelAnd I think that there's been a good deal that's been learned by watching these four railroads. And we will, if we think we can serve our customers well and get more efficient in the process, we will adopt whatever we observe. We don't have to do it today or tomorrow. But we do have to find something that gets at least equal and hopefully better customer satisfaction and that makes our railroad more efficient. And there's been growing evidence that from the actions of these other four railroads, there's been growing evidence that we can learn something from what they do. Charlie?
CharlieI doubt that anybody is very interested in unprecision in railroading.
OtherWell, Johnny, if Charlie answered your question?
OtherYes, thank you.
OtherOkay. Station number one from the shareholder group up on my part, right?
QuestionerGood morning. My name is Bill Moyer, and I'm from Vashon Island, Washington. And I'm part of a team called the Solutionary Rail Project. Interestingly, only 3.5% of the value of freight in the U.S. moves on trains. Berkshire Hathaway is incredibly well positioned with its investments in the northern and southern transcons. and Transcon through BNSF to grab far more of that freight traffic off of the roads and get diesel out of our communities as well as harness transmission corridors for your Berkshire renewable energy assets for which you're obviously very proud. Would you consider meeting with us to look at a proposal for utilizing your assets and leveraging a public-private partnership to electrify your railroads and open those corridors for renewable energy future?
Greg AbelNo, we've examined a lot of things in terms of LNG. I mean, obviously, we want to become more energy efficient as well as just general. efficient. And I'm not sure about the value of freight. You mentioned three and a half percent. I believe, I mean, I'm not sure what figure you're using as the denominator there. Because if you look at if you look at the movement of traffic by ton miles, Rails are around 40 percent of the U.S. We're not talking local deliveries or all kinds of things like of that. But they're 40 percent, roughly by rail. And BNSF moves more ton miles than any other entity. We move 15 percent plus of all the 10 miles moved in the United States. But if you take trucking, for example, on intermodal freight, we're extremely competitive on the longer halls, but the shorter the hall, the more likely it is that the flexibility of freight
[28:48]
Greg Abelwhere a truck can go anyplace, and we have rails. So the equation changes depending on distance haul and other factors, but distance halls is a huge factor. We can move a ton mile with 500, we can move 500 plus ton miles of freight for one gallon of diesel. And that is far more efficient than trucks. So the long haul traffic and the heavy track traffic is going to go to the rail, to the rails and we try to improve our part of the equation on that all the time. But if we're going to transport something 10 or 20 or 30 miles between a shipper and a receiver and there, you're not going to move that by rail. So we look at things all the time, I can assure you. Carl Ice is in, well, he's probably here now and it'll be in the other room. And he's running the railroad. You're free to talk to him. But I don't see any breakthrough like you're talking about. I do see us getting more efficient year by year by year. And obviously, if truck's, driverless trucks, that moves things toward trucking, that moves things toward trucking. But on long haul, heavy stuff. And there's a lot of it. You're looking at the railroad that carries more than any other mode of transportation. And BNS is the leader. Charlie?
CharlieWell, over the long term, our questioner is on the side of the Angels. Sooner or later, we'll have it more electrified. I think Greg will decide when it happens. Yeah. But we're all working on the technology. But, and we're considerably more efficient than 10, 20, 30 years ago, if you look at the numbers. But one interesting figure, I think right after World War II, when the country probably had about 140 million people against our 330 million now. So we had 40 percent of the population. And we had over a million and a half people employed in the railroad industry. Now there's less than 200,000 and we're carrying a whole lot more freight. Now, obviously, there's some change in passengers, but the efficiency of the railroads compared to and the safety compared to what it was even immediately after World War II has improved dramatically. Charlie, any more?
CharlieNo.
OtherOkay. Becky?
QuestionerThis is a question that comes from Mike Hebel. He says, the Star Performers Investment Club has 30 partners, all of whom are active or retired San Francisco police officers. Several of our members have worked in the fraud detail and have often commented after the years-long fraudulent behavior of Wells Fargo employees
[32:32]
Questionershould have warranted jail sentences for several dozen. Yet Wells just pays civil penalties and changes management. As proud shareholders of Berkshire, we cannot understand Mr. Buffett's relevant. relative silence compared to his vigorous public pronouncement many years ago on Solomon's misbehavior. Why so quiet?
WarrenYeah, I would say this. The probably, well, as I see it, although, you know, I had been no, I've read no reports internally or anything like that, but, but it looks to me like Wells made some big mistakes. in what they incentivize, and as Charlie says, there's nothing like incentives, but they can incentivize the wrong behavior. And I've seen that a lot of places. And that clearly existed at Wells. The interesting thing is to the extent that they set up fake accounts, a couple million of them, that had no balance in them, that could not possibly have been profitable to Wells. to Wells. So you're going to set it by some crazy things. The problem is, I'm sure, is that, and I don't really have any insider information on it at all, but, but when you find a problem, you have to do something about it. And I think that's where they probably made a mistake at Wells Fargo. They made it to Solomon. I mean, John, John Goodfriend would never have played around with the government, he was the CEO of Solomon in 1991. He never would have done what the bond trader did that played around with the rules that the federal government had about government bond betting. But when he heard about it, he didn't immediately notify the Federal Reserve. And he heard about it in late April. And May 15th, the government bond auction came along, and Paul Mosier did the same thing he'd done before and game the auction. And at this point, John Goodfriend, you know, the destiny of Solomon was straight downhill from that standpoint, from that point forward, because essentially he heard about a, about a pyromaniac, and he'd let them keep the box of matches. And at Wells, my understanding, there was an article in the Los Angeles Times, maybe a couple of years before the whole thing, was exposed and, you know, somebody ignored that article. And Charlie has beaten me over the head all the years at Berkshire because we have 390,000 employees, and I will guarantee you that some of them are doing things that are wrong right now. There's no way to have a city of 390,000 people and not need a policeman or a court system. And some people don't follow
[35:45]
Warrenthe rules. And you can incentivize the rules. wrong behavior. You've got to do something about it when it happens. Wells has become, you know, exhibit one in recent years, but go back a few years, you know, you can almost go down. There's quite a list of banks where people behave badly. And where they, I would not say, I don't know the specifics at Wells, but I've actually written in the annual report that they talk about moral hazard if they allow people to, the shareholders of Wells that paid a price. The shareholders of Citibor paid a price. The shareholders of Gov and Sacks, the shareholders of Bank of America. They paid billions and billions of dollars, and they didn't commit the acts. And, of course, nobody did go. There were no jail sentences. And that is infuriating. But the lesson that was taught was not that the government bailed out because the government. The government got its money back, but the shareholders of the various banks pay many, many billions of dollars. And I don't have any advice for anybody running a business, except when you find out something is leading to bad results or bad behavior, you know, if you're in the top job, you've got to take action fast. And that's why we have hotlines. That's why we get, when we get a certain anonymous letters, we, we, we, we talk about to, you turn them over to the audit committee or to outside investigators. And we will have, I will guarantee you that we will have some people who do things that are wrong at Berkshire in the next year, five years, 10 years, and 50 years. You cannot have 390,000 people. And it's the one thing that always worries me about my job. But because I've got to hear about those things and I've got to do something about them when I do hear about them. Charlie?
CharlieWell, I don't think people ought to go to jail for honest errors of judgment. It's bad enough to lose your job. And I don't think that any of those top officers was deliberately malevolent in any way. I just, we're talking about honest errors in judgment. And I don't think Tim Sloan even committed honest errors of his judgment. I just think he was an accidental casualty that didn't deserve the trouble. I wish this, Tim's loan was still there. Yeah, there's no evidence that he did a thing. But he stepped up to take a job that where he was going to be a pinata, basically, for all kinds of investigations. And rightfully, Wells should be checked out on everything they do.
[38:43]
WarrenAll banks should. I mean, they get a government guarantee, and they receive trillions of dollars in deposits. And they do that basically because of the FDIC. And if they abuse that, they should pay a price. And if anybody does anything like a Paul Mosier did, for example, of Solomon, they ought to go to jail. Paul Mosier only went to jail for four months. But if you're breaking laws, you should be prosecuted. on it. If you do a lot of dumb things, I wish they wouldn't go away. The CEOs wouldn't go away so rich under those circumstances. But people will do dumb things. I actually proposed, I think I may have been on one of the annual reports even, I proposed that if a bank gets to where it needs government assistance, that basically the response responsible CEO should lose his net worth and his spouse's net worth. If he doesn't want the job under those circumstances, you know, and I think that the directors, I think they should come after the directors for the last five years. I think I've proposed of everything they've received. But it's the shareholders who pay. I mean, if we own 9% of wells, whatever this is cost, 9% of it is being borne by us. And it's very hard to tie it. It's very hard to tie it directly. One thing you should know, incidentally, though, is that the FDIC, which was started, I think it was started January 1, 1934, but it was a New Deal proposal. And the FDIC has not cost the United States government a penny. It now has about $100 billion in it, and that money has all been put in there by the banks. And that's covered all the losses of hundreds and hundreds and hundreds of financial institutions. And I think the impression is that the government guarantees save the banks, but the government money did not save the banks. The bank's money, as an industry, not only have paid every loss, but they've accumulated an extra $100 billion, and that's the reason the FDIC assessments now are going back down. They had them at a high level. And they had a higher level for the very big banks. So it, it, uh, when you, when you hear all the talk about, the political talk about the banks, they had not caused the federal government, but they have, they did, there were a lot of actions that took place that should not have taken place. And there's a lot fewer now, I think, than there were in the period leading up to 2008 and nine. But, uh, uh, some banks will make big money.
[41:55]
CharlieI've got nothing to add to that.
QuestionerJay Gell from Barclays. Barclays just had a proxy contest of sorts in that.
WarrenThat's right.
QuestionerI also have a question on Berkshire Hathaway. I'm sorry, on share buybacks. Warren, in a recent Financial Times article, your quote is saying that the time may come when the company buys back as much as $100 billion of its shares, which equates to around 20% 20% of Berkshire's current market cap. How did you arrive at that $100 billion figure, and over what timeframe would you expect this to occur?
WarrenYeah. I probably arrived at that $100 billion figure in about three seconds when I got asked the question. It was a nice round figure, and we could do it. And we would like to do it if the stock was, we've got the money to buy in $100 billion with the stock. And bear in mind, if we were buying in $100 billion stock, it probably would be that the company wasn't selling at $500 billion, so it might buy well over 20%. We will spend a lot of money. We've been involved in companies where the number of shares has been reduced 70 or 80% over time. And we like this. idea of buying shares at a discount. We do feel if shareholders, if we're going to be repurchasing shares from shareholders who are partners, and we think it's cheap, we ought to be very sure that they have the facts available to evaluate what they own. I mean, just as if we had a partnership. It would not be good if there were three partners, and two of them decided that they would sort of freeze out the third maybe in terms of giving them material information that they knew, that that third party didn't know. So it's very important that our disclosure be the same sort of disclosure that I would give to my sisters who were the imaginary, they're not imaginary, but they're the shareholders to whom I address the annual report every year, because I do feel that you, if you're going to sell your stock, you should have the same information that's important that's available to me and to Charlie. But we will, if our stock gets cheap, relative to intrinsic value, we would not hesitate. We wouldn't be able to buy that much in a very short period of time in all likelihood, but we would certainly be willing to spend $100 billion.
CharlieI think when it gets really obvious, we'll be very good at it.
QuestionerLet me get that straight. What did you say exactly?
CharlieWhen it gets really obvious, we'll be very good at it.
[45:01]
WarrenYeah. I was hoping that's what you said. Yeah, we will be good at it. We don't have any trouble being decisive. We don't do it. We don't say yes very often. But if we something obvious, I mean, Jay, if you and I are partners, you know, and our business is worth a million dollars and you say you'll sell your half to me for $300,000, you'll have your $300,000 very quickly.
OtherStation 2.
QuestionerGood morning. My name is Patrick Donahue from Eden Prairie, Minnesota, and I'm with my 10-year-old daughter, Brooke Donahue. Hi, Warren. Hi, Charlie. Hi.
WarrenIt's Brooke, is it?
QuestionerIt is. Yeah.
QuestionerFirst, I'm a proud graduate of Creighton University, and I need to say a personal thank you for coming over the years to share your insights, and it's been a tradition since I graduated. since I graduated in 1999 to come to the annual meeting and thank you for a lifetime of memories. Thank you. Brooke is a proud Berkshire shareholder and read the letter and had some questions regarding investments that have been made in the past. And she had made some interesting comments about what she thought was a lot of fun. fun. So our question for both of you is, outside of Berkshire Hathaway, what is the most interesting or fun, personal investment you have ever made?
WarrenWell, they're always more fun when you make a lot of money off of them. Well, I bought one time I bought one share of stock and the Atlet Corp, that's spelled A-T-L-E-D, and And atlid had 98 shares outstanding, and I bought one. And not what you call a liquid security. And atlid happened to be the word delta spelled backwards. And 100 guys in St. Louis had each chipped in $50 or $100 or something to form a duck club in Louisiana. And they bought some land down there. Two guys didn't come up with it. There were 100 of them, two of them defaulted on their obligation to come up with $100. So there were 98 shares out. And they went down to Louisiana and they shot some ducks, but apparently somebody fired a few shots into the ground and oil spurted it out. And those Delta Duck Club shares. And I think the Delta Duck Club field is still producing by what's not going to 40 years ago. for $29,200 a share. And it was, it had that amount in cash and it was producing a lot and they sold it. If they kept it, that stock might have been worth $2 or $3 million a share, but they sold out to another oil company. But I, that was certainly, that was the most interesting thing.
[48:44]
WarrenActually, I didn't have any cash at the time. And I went down and borrowed the money and I bought it for my wife. I bought it for my wife and I borrow the money and the loan officer said, would you like to borrow some money to buy a shotgun as well?
WarrenCharlie, tell them about the one you missed.
CharlieWell, I have two investments that come to mine. When I was young and poor, I spent $1,000 once buying an oil royalty that paid me $100,000 a year for a great many years. But I only did that once in a lifetime. In a later occasion, I bought a few shares of Valerie oil, which went up 30 times, rather quickly. And, but I turned down five times as much as I bought. It was the dumbest decision of my whole life. So if any of you have made any dumb decisions, look up here and feel good about yourselves. I can add a few, but Andrew.
QuestionerWarren and Charlie, this is a question. Actually, we got a handful of questions on this topic. This is probably the best formulation of it. Warren, you have been a long-term question. time outspoken Democrat. With all the talk about socialism versus capitalism taking place among Democratic presidential candidates, do you anticipate an impact on Berkshire in the form of more regulations, higher corporate taxes, or even calls for breakups among the many companies we own if they were to win? And how do you think about your own politics as a fiduciary of our company, and at the same time as someone who has said that simply being a business leader, doesn't mean you've put your citizenship in a blind trust.
WarrenYeah, I have said that you do not put your citizenship in a blind trust, but you also don't speak on behalf of your company. You speak, you do speak as a citizen if you speak, and therefore you have to be careful about when you do speak because it's going to be assumed you're speaking on behalf of your company. Berkshire Hathaway, uh, certainly in 54 years has never and will never made a contribution to a presidential candidate. I don't think we've made a contribution to any political candidate, but I don't want to say for 54 years that we don't do it now. We operate in several regulated industries and our railroad and our utility is a practical matter They have to have a presence in Washington or in the state legislatures in which they operate. So they have, we have some, a few, I don't know how many political action committees, which existed when we bought it,
[51:55]
Warrenwe bought the companies at subsidiaries, and I think unquestionably they, they make some contributions. simply to achieve the same access as their competitors. I mean, if the trucking industry is going to lobby, I'm sure the railroad industry is going to lobby. But the general, well, the rule is, I mean, that people do not pursue their own political interests with your money here. We've had one or two managers over the years, for example, that would do some fundraising where they were fundraising from people who were suppliers to them or something of the sort. And if I ever find out about it, that ends promptly. But this, my position at Berkshire is not to be used to further my own political beliefs, but my own political beliefs can be expressed as a person, not as a representative of Berkshire, when the campaign is important. I try to minimize it, but it's no secret that in the last election, for example, I raised money. I won't give money to PACs. I accidentally did at one time. I didn't know it was a PAC, but I don't do it, but I've raised substantial sums. I don't like the way money is used in politics. I've written op-ed pieces for the New York Times in the past. on the influence of money in politics. I spent some time with John McCain many years ago before McCain find gold and on ways to try to limit it. But the world has developed in a different way. On your question about the, I will just say, I'm a card-carrying capitalist. I believe we wouldn't be sitting here, except for the market system and the rule of law and some things that are embodied in this country. So you don't have to worry about me changing in that manner, but I also think that capitalism does involve regulation and involves taking care of people who are left behind, particularly when the country gets enormously prosperous. But beyond that, I have no Berkshire podium for pushing at anything. Charlie?
CharlieWell, I think we're all in favor of some kind of government, social safety net in a country as prosperous as ours. What a lot of us don't like is the vast stupidity with which parts of that social safety net are managed by the government. It'd be much better if we could do it more wisely. But I think it also might be better if we did it more liberally.
WarrenYeah, one of the reasons we're involved in this effort along with J.P. Morgan and Amazon, with Jamie Diamond and Jeff Bezos. On the medical question is we do have as much money going $3.3 or $3.4 trillion, we have as much
[55:26]
Othermoney going to medical care as we have funding the federal government. And it's gone from five to 17 percent or 18 percent, while actually the amount going to the federal government to state about the same at 17 percent. So we hope we hope there's a lot. a some major private improve major improvements from the private sector because I generally think the private sector does a better job than the public sector in most things. But I also think that the private sector doesn't do something, you'll get a different sort of answer. And I think, I like to think that the private sector can come up with a better answer than the public sector in that respect. But I will probably, it depends who's nominated, but I voted for plenty of Republicans over the years. I've been ran for Delegate to the Republican National Convention in 1960. But we are not, I don't think the country will go into socialism. in 2020 or in 2040 or 2016. Okay, Greg Warren. Warren. Warren, my first question, not surprisingly, is on Sherry Purchase. Stock buybacks in the open market are function of both willing buyers and sellers. With Berkshire having two shares of classes, you should have more flexibility when buying back stock. But given the liquidity difference that exists between the two share classes, with an average of 313 Class A shares, exchanging hands daily the past five years, equivalent to around $77 million a day. And an average of 3.7 million class B shares doing the same, equivalent to around 622 million, Berkshire is likely to have more opportunities to buy back class B shares than Class A, which is exactly what we saw during the back half of last year in the first quarter of 2019. While it might be more ideal for Berkshire to buy back Class A shares allowing you to retire shares with far greater voting rights, given that there's relatively little arbitrage between the two share classes and the number of Class B shares increase every year as you gift your Class A shares to the Bill of Melinda Gates Foundation and your children's foundations. Can we assume that you're likely to be a far greater repurchaser of Class B shares going forward, especially given your recent comments to the Financial Times about preferring to have loyal individuals on your shareholder list, which a price tag of $328,000 of Class A shares seems to engender?
WarrenYeah, we will, when we're repurchasing shares, if we're purchasing substantial amounts,
[58:24]
Warrenwe're going to spend a lot more on the Class B, with the Class A, just because the trading volume is considerably higher. We may, from time to time, well, we got offered a couple blocks in history, going back in history, from the and when we had a transaction exchanging our Washington Post stock for both a television station and shares held, A shares held by the Washington Post. So we may see some blocks of A, we may see some blocks of B, but there's no question. If we are able to spend $25, 50, or $100 billion in reporting. purchasing shares, more of the money is almost certainly going to be spent on the B than the A. We don't, there's no master plan on that other than to buy aggressively when we like the price. And as I say, the trading volume and the B is just a lot higher than the A in dollar amounts. Charlie?
CharlieI don't think we care much which class we buy.
WarrenYeah. We would like, we really want the stock, ideally, if we could do it, if we were a small, once a year we'd have a price and, you know, we'd do it like a private company, and it would be a fair price and people would want to get out, could get out, and if other people wanted to buy their interest fine, and if they didn't, then we thought the price was fair, if we'd have the company repurchase it. We can't do that. But that's, we don't want the stock to be either. significantly underpriced or significantly overpriced, and we're probably unique on the overpriced part of it. But we don't want it. I do not want the stock selling it twice as what it's worth because I'm going to disappoint people. You know, I mean, we can't make it. There's no magic formula to make a stock worth what it's selling for if it sells for way too much. We don't, from a commercial standpoint, if it's selling very cheap. We have to like it and we repurchase it, but ideally, we would hope the stock would sell in a range that more or less is its intrinsic value, business value. We have no desire to hype it in any way, and we have no desire to depress it so we can repurchase it. But the nature of markets is that things get overpriced and they get underpriced, and we will, if it's underpriced, we'll take advantage of it. Okay, station three. Hello, Charlie Mungo and Warren Buffett, my idols. I'm Terry from Shanghai Judge P.E. Fund, which aim to catch the best investment opportunity in that era. So my question is, as we all know, 5G is coming.
[1:01:52]
QuestionerIt says that the mode of all industry will be challenged in 5G era. So what is the core competence that we should master if Bukchewa Hathaway wants to catch the best investment opportunities in next era? Thank you.
WarrenWell, there's no core compliments at the very top of Berkshire. The subsidiaries that will be involved in developments, relating to the very top of Berkshire, but we, the subsidiaries that will be involved in developments relating the 5G or any one of all kinds of things that are going to happen in this world, the utility of LNG in the railroad or all those kinds of questions. We have people in those businesses that know a lot more about them than we do. And we count on our managers to anticipate what is coming in their business, and sometimes they talk to us about it. But we do not run that from a central, on a centralized basis. And Charlie, do you want to have anything to add to that?
QuestionerDo you know anything about 5G?
CharlieI don't know.
WarrenWell, you probably know a lot about 5G.
CharlieNo, I know very little about 5G. But I do know a little about China. And we have bought things in China, and my guess is a little by more. But I mean, we basically want to have a little bit more. a group of managers, and we do have a group of managers, who are on top of their businesses. I mean, you saw something that showed BNSF and Berkshire-Hathaway Energy and Rubber is all there. Those people know their businesses. They know what changes they're likely to be ahead. Sometimes they find things that they can cooperate on between their businesses, but we don't try to run those from headquarters. And that may mean, that may have certain weaknesses at certain times. I think Net has been a terrific benefit for Berkshire. Our managers, to a great degree, own their businesses, and we want them to feel a sense of ownership. We don't want it to be lost in some massive conglomerate than nobody, where they get directions from this group, which is a subgroup of that group. And I could tell you a few horror stories from companies we bought when they tell us about their experience under such an operation. So the world is going to change in dramatic ways. Just think how much it's changed in the 54 years that we've had, Berkshire. And some of those changes hurt us. They hurt us in textiles. They hurt us in shoes. They hurt us in the department store business. Hurd us in the trading stamp. business. These were the founding businesses of this operation. But we do adjust and
[1:05:19]
Warrenwe've got a group overall of very good businesses. We've got some that will be actually destroyed by what happens in this world. But that's, you know, I still am the card carrying capitalists, and I believe that that's a good thing. You have to make changes. We had 80% of the people working on farms in 1800. And if there hadn't been a lot of changes, and you needed 80% of the people in the country producing the food and cotton we needed, we would have a whole different society. So we welcome change, and we certainly want to have managers that can anticipate and adapt to it. But sometimes we'll be wrong, and those businesses will. wither and die, and we better use the money someplace else. Okay, Carol. Cheryl, you haven't had any peanut brittle.
OtherThis question comes from Vincent James of Munich, Germany. There has been a lot written about the recent impairment charge at Kraft Hines. You were quoted as stating that you recognize that Berkshire overpaid for Kraft Hines. Clearly, major retail chains are being more aggressive in developing house brands. In addition, Amazon has announced intentions to launch grocery outlets, meaning that as Mr. Bezos has often stated, your margin is my opportunity. The more fundamental question related to Kraft Times may be whether the advantages of the large brands and zero-based budgeting that 3G is applied are appropriate and defensible at all in consumer foods. In other words, will traditional consumer good brands in general and Craft Times and particular have any moot in their future. My question is, to what extent do the changing dynamics in the consumer food market change your view on the long-term potential for Kraft Hines?
WarrenYeah, actually what I said was we paid too much for Hines. I mean, Kraft, I'm sorry. The Hines part of the transaction, when we originally owned about half of Hines, we paid an appropriate price there. And we actually did, well, we had some preferred redeemed and so on. We paid too much money for Kraft. To some extent, our own actions had driven up the prices. Now, Kraft Hines, the profits of that business, $6 billion, we'll say, very, very, very, roughly, I'm not projecting them out. I'm not making forecasts. But $6 billion. pre-tax on $7 billion of tangible assets is a wonderful business, but you can pay too much for a wonderful business. We bought Seas Candy, and we made a great purchase, as it turned out, and we could have paid
[1:08:39]
Warrenmore. But there's some price at which we could have bought even Seas Candy, and it wouldn't have worked. So the business does not know how much you paid for it. I mean, it's going to earn based on its fundamentals, and we paid two. paid too much for the craft side of Kraft Heinz. Additionally, the profitability has basically been improved in those operations over the way they were operating before. But you're quite correct that Amazon itself has become a brand. Kirkland of Costco, the $39 billion brand. Now, all of Kraft-Hein says $26 billion, and it's been around for, on the hindsight, it's been around for 150 years, it's been advertised billions and billions of billions of dollars in terms of their products, and they go through tens of thousands of outlets. And here's somebody like Costco establishes a brand called Kirkland, and it's doing $39 billion more than virtually any food company. And that brand moves from product to product. product, which is terrific if a brand travels. I mean, Coca-Cola moves it from Coke to Cherry Coke and Coke Zero and so on. But to have a brand that can really move, and Kirkland does more business than Coca-Cola does. And Kirkland Act operates through 775 or so stores, they call them warehouses at Costco, and Coca-Cola is through millions of distribution outlets. So brands, the retailer, and the brands have always struggled as to who gets the upper hand in moving a product to the consumers. And there's no question in my mind that the position of the retailer relative to the brands, which varies enormously around the world in different countries. You've had 35 percent, even maybe 40 percent, be private label brands and soft drinks, and it's never gotten anywhere close. of that in the United States. So it varies a lot, but basically retailers, certain retailers, the retail system has gained some power, and particularly in the case of Amazon and Walmart and their reaction to it, and Costco, and Aldi and some others I can name, has gained in power relative to brands. Kraft-Hinds is still doing very well operationally, but We paid too much. We paid $50 billion. It would have been a different business. It'd still be earning the same amount. You can turn any investment into a bad deal by paying too much. What you can't do is turn any investment into a good deal by paying little, which is sort of how I started out in this world. But the idea of buying the cigar butts that are declining
[1:11:46]
Warrenof poor businesses for a bargain price is not something that we try to do anymore. We try to buy good businesses at a decent price, and we made a mistake on the craft part of Kraft Times.
WarrenCharlie?
CharlieWell, we, it's not a tragedy that out of two transactions, one worked wonderfully and the other didn't work so well. That happens. Reduction it costs, you know, there can always be mistakes made when you've got places in your rearranging, reorganizing them to do more business. with the same number of people. And we like buying businesses that are efficient to start with, but the management, the operations of Kraft Heinz have been improved under the present management overall. But we paid a very high price in terms of the craft part. We didn't, we paid an appropriate price in terms of Heinz.
QuestionerJonathan? Internet-based furniture retailers like Wayfair, appear willing to stomach large current losses acquiring customers in the hope of converting them to loyal online shoppers. I've been wondering what this disruptive competition might do to our earnings from home furnishing retail operations like Nebraska Furniture Mark. If we have to transition to more of an online model, might we have to spend more heavily to keep shoppers without a corresponding increase in sales? The sharp decline in first quarter earnings from home furnishing suggests perhaps some widening impact from intensifying competition. Do you believe Wayfair is customers first, profits later, model is unsustainable, or do you think our furniture earnings will likely be permanently lower than they were in the past?
WarrenI think furniture, the jury is still out on that, whether the operations which have grown very rapidly in size, but still are incurring losses, how they will do over time. It is true that in the present market, partly because of some successes like most dramatically Amazon in the past, that investors are willing to look at losses as long as sales are increasing and hope that there will be better days ahead. We do a quite significant percentage of our sales online in the furniture operation that might surprise you. We do the highest percentage in Omaha, and what's interesting is that we, I won't give you the exact numbers, but it's large. We do a significant, with dollar volume, but a very significant portion of that volume, people come to the store to pick up so that they will order something from us online, but they don't mind, they don't
[1:15:03]
Warrenseem to mind at all, and they don't have to do it, but they get a pickup at the store. So, you know, you learn what customers like, just like people learned in fast food, you know, that people would buy a lot of food by going through a drive-in that they don't want to stop and go into the place. We learn about customer behavior as it unfolds, but we did do now on Tuesday, we did 9.2 million of, or 9.3 million, a profitable volume at the Nebraska Furniture Mart, and I think that company had paid in capital of $2,500, and I don't think anything's been added since. So it's working so far. The first quarter, it's interesting, the first quarter was weak at all four of our furniture operations, but there's certain other parts of the economy. Well, just home building generally. It's considerably below what you would have expected, considering the recovery we have had from the 2008-9 period. I mean, if you look at single-family home construction, the model has shifted more to people living in apartment rentals. I think it's gone from 69 in a fraction percent. They got down to 63 percent. It bounced up a little bit. But people are, they're just not building or moving to houses as rapidly as I would have guessed. They would have based on figures prior to 2008 and 9, and considering the recovery we've had, and considering the fact that money is so cheap, and that has some effect on our furniture stores. But I think we've got a very good furniture operation, not only at the Nebraska furniture market, but other furniture operations. And we will see whether the models work over the long run, but they, I think, you know, they have a reasonable chance. Some things people, people, we're learning that people will buy some things that they've always go on to the mall or to a retail outlet to buy that they will do it online and others don't work so well. Charlie?
CharlieI think that we'll do better than most furniture retailers. I think that's a certainty. Overall, overall. Yeah. We've got some good operations there. But we don't want to become a showroom for the online operation. and have people come and look around the place and then order someplace else. So we have to have the right prices, and we're good at that at the furniture market.
OtherStation 4. Warren and Charlie. My name is Brent Muyo. I'm from Winnipeg, Canada. First, thank you for devoting so much time and energy to education.
[1:18:38]
QuestionerI'm a better investor because of your efforts. But more importantly, I'm a better partner, friend, son, brother, and sooner. brother, and soon to be first-time father. There's nothing more important than these relationships, and my life is better because you're willing to pass on your experience and wisdom. My path into finance was unconventional. I worked as an engineer for 12 years. While two years ago, I began a career in finance, working for the Civil Service Superannuation Board, a $7 billion public pension fund in Winnipeg. I work on alternative investments, which include infrastructure, private equity, and private credit. I go to work every day knowing that I'm there to benefit the hardworking, current, and future beneficiaries of the fund. Like most asset classes, alternative purchase multiples have increased. More of these assets are funded with borrow money, and the terms and covenants on this debt are essentially non-existent. With this in mind, and knowing the constraints of illiquid, closed-end funds, please give me your thoughts on private alternative investments, the relevancy, and public pension funds and your view on long-term return expectations.
WarrenYeah, if you would leverage up investments in just common stocks, and you'd figure it away so that that you would have staying power if there were any market debt. I mean, you'd obviously have obtained extraordinary returns. I pointed out in my end. investing lifetime. You know, an index fund would do 11 percent. Well, imagine how you'd have done if you'd leverage that up, 50 percent, whatever the prevailing rates were over time. So a leveraged investment in a business is going to be an unleveraged investment in a good business, a good bit of the time. But, as you point out, the covenants to protect debt holders have really dear deteriorated in the business. And, of course, you've been in an up market for businesses, and you've got a period of low interest rates. So it's been a very good time for it. I, my personal opinion is if you take, if you take unleveraged returns against unleveraged common stocks, I do not think what is being purchased today and marketed today would work well. But if you can borrow money, I think my assets that will yield seven or eight percent and you can borrow enough money at four or five percent and you don't have any covenants to meet, you're going to have some bankruptcies, but you're going
[1:21:31]
Warrento also have better results in many cases. It's not something that interests us at all. We are not going to leverage up Berkshire. If we'd leveraged up Berkshire, we'd have made a whole lot more money, obviously, over the years. But both Charlie and I probably have seen some more high IQ people. people, really extraordinarily high-queued people, destroyed by leverage. We saw long-term capital management where we had people who could do in their sleep math that we couldn't do, at least I couldn't do, you know, working full-time at it during the day. And I mean, really, really smart people working with their own money and with years and years of experience of what they were doing. And, you know, it all turned to pumpkins and mice. in 1998, and actually was a source of national concern, just a few hundred people. And then we saw some of those same people after that happened to them once, go out and do the same thing again. So it's, I would not get excited about so-called alternative investments. You can get all kinds of different figures, but there may be, there's probably at least a trillion dollars committed. two buying, in effect, buying businesses, and if you figure they're going to leverage them, you know, two for one on that, you may have three trillion of buying power trying to buy businesses in a, well, the U.S. market, maybe something over 30 trillion now, but there's all kinds of businesses that aren't for sale and that thing. So the supply-demand situation for buying businesses privately and leveraging them up has changed dramatically from what it was 10 or 20 years ago. And I'm sure it doesn't happen with your Winnipeg operation, but we have seen a number of proposals from private equity funds where the returns are really not calculated in a manner that, well, they're not calculated in a manner that I would regard as honest. And so I, it's not calculated in a manner that I would regard as honest. But it's not something, if I were running a pension fund, I would be very careful about what was being offered to me. If you're going to have a choice in Wall Street between being a great analyst or being a great salesperson, the salesperson is the way to make it. If you can raise $10 billion in a fund and you get a 1.5% fee and you lock people up for 10 years, you and your children and your grandchildren will never have to do a thing if you are the dumbest investor in the world.
[1:24:36]
QuestionerCharlie?
WarrenWell, I think what we're doing will work more safely than what he's doing and, but I, I wish him well. Yeah, Brent, you sound, actually, you sound like a guy that I would hope would be working for a public pension fund, because frankly, most of the, most of the institutional funds, you know, well, we had this terrible, right here in Omaha, and you can get a story of what happened with our, with our Omaha Public Schools Retirement Fund, and they were doing fine, and until the manager started going in a different direction, and the trustees here, perfectly decent people, and the manager had done okay to that point, and it'd be able to that point, and it They're smarter in Winnipeg than they are here. Yeah, well, that was pretty bad here. It's not a fair fight, actually, when, usually when a bunch of public officials are listening to people who were motivated to, who really just get paid for raising the money. Everything else is gravy after that, but, but you, if you run a fund it, you get even 1%, you know, of a billion. You're getting $10 million. $10 million a year coming in. And if you've got the money locked up for a long time, it's a very one-sided deal. And, you know, I told the story of asking the guy one time in the past, how in the world can you, why in the world can you ask for 2 and 20 when you really haven't got any kind of evidence that you are going to do better with the money than you? doing an index fund? And he said, well, that's because I can't get 3 and 30. What I don't like about a lot of the pension fund investment is I think they like it because they don't have to mark it down as much as it should be in the middle of the panics. I think that's a silly reason to buy something because you're given leniency in marking it down. Yeah, and when you commit the money, in the case of private equity often, you they don't take the money, but you pay a fee on the money that you've committed. And of course, you really have to have that money to come up with at any time. And, of course, it makes their return look better. If you sit there for a long time in treasury bills, which you have to hold because they can call you up and demand the money, and they don't count that. They count it in terms of getting a fee on it, but they don't count it in terms of what the so-called internal rate of return is. It's not as good as it looks. And I really do think that when you have a group sitting as a state pension fund...
[1:27:49]
QuestionerWarren, all they're doing is lying in a little bit to make the money come in.
OtherYeah.
OtherYeah. That sums it up.
OtherYeah.
QuestionerBecky?
QuestionerThis question is from Ken Scarbeck in Indianapolis. He says, with the full understanding that Warren had no input on the Amazon purchase and that relative to Berkshire, it's likely a small stake, the investment still caught me off guard. I'm wondering if I should begin to think differently about Berkshire looking out, say, 20 years. Might we be seeing a shift in investment philosophy away from value-investing principles that the current management has practiced for 70 years? Amazon is a great company, yet it would seem its heady shares 10 years into a bull market appear to conflict with being fearful when others are greedy. Considering this in other recent investments like Stoneco, should we be preparing for a change in the price versus value decisions that built Berkshire?
WarrenIt's interesting that the term value investing came up because I can assure you that both managers who and one of them bought some Amazon stock in the last quarter, which will get reported in another week or 10 days. He is a value investor. The idea that value is somehow connected to book value or low price earnings ratios or anything. As Charlie has said, all investing is value investing. I mean, you're putting out some money now to get more later on and you're making a calculation as to the probabilities of getting that money and when you'll get it and what interest rates will be in between and all the same calculation goes into it whether you're buying some bank at 70% of book value or you're buying Amazon at some very high multiple of reported earnings. Amazon, the people making the decision. on Amazon are absolutely much value investors as I was when I was looking around for all these things selling below working capital years ago. So that has not changed. The two people that, one of whom made the investment in Amazon, they are looking at many hundreds of securities, and they can look at more than I can because they're managing less money and their universe, possible universe is the greater. But they are looking for things that they feel they understand what will be developed by that business between now and Judgment Day and cash. And it's not, sales, current sales can make some difference, current profit margins can make some difference, tangible assets, excess cash, excess debt, all of those things
[1:30:40]
Warrengo into making a calculation as to whether they should buy A versus B versus C. And they are absolutely following valuable principles. They don't necessarily agree with each other or agree with me, but they are very smart. They are totally committed to Berkshire. And they're very good in human beings on top of it. So I don't second guess them out anything. Charlie doesn't second guess me. me on in 60 years, he's never second guessed me on an investment. And the considerations are identical when you buy Amazon versus some, say, bank stock that looks cheap statistically against book value or earnings or something of the sort. In the end, it all goes back to ESOP. who in 600 BC said, you know, that a bird in the hand is worth two in the bush. And when we buy Amazon, we try and figure out whether the fellow that bought it, tries to figure out whether there's three or four or five in the bush, and how long it'll take to get to the bush, how certain he is that he's going to get to the bush, you know, and then who else is going to come and try and take the bush away, and all of that sort of thing. And we do the same thing, and it really, it really, despite Despite a lot of equations you'll learn in business school, the basic equation is that of ESOP and your success in investing depends on how well you are able to figure out how certain that bush is, how far away it is, and what the worst case is instead of two birds being there, only one being there, and the possibilities of four or five or ten or twenty being there. and that will guide me, that will guide my successors in investment management at Berkshire, and I think they'll be right more often than they're wrong, Charlie.
CharlieWell, Warren and I are a little older than some people. Yeah, I'm near everybody. And we're not the most flexible, probably in the whole world. And of course, if something as extreme as this internet development, happens, and you don't catch it why other people are going to blow by you. And I don't mind not having caught Amazon early. The guy is kind of a miracle worker. It's very peculiar. I give myself a pass on that. But I feel like a horse's ass for not identifying Google better. I think Warren feels the same way.
WarrenYeah. We screwed up. He's saying we blew it. Yeah. And we did have some insights into that because we were using them at Geico and we were seeing the results produced and we saw that we were paying $10 a click or whatever it might have been for something that had a marginal cost of them of exactly zero.
[1:34:00]
WarrenAnd we saw it was working for us, so we can see in our own operations how well that Google advertising was working and we just sat there sucking our thumbs. Right. So we're ashamed. We're trying to atone. Maybe Apple was atonement.
OtherWhen he's sucking her thumbs, I'm just glad he didn't use some other example.
QuestionerOkay, Jay. This question is on Berkshire's intrinsic value. Warren, in your most recent annual letter, you discussed a methodology to estimate Berkshire's intrinsic value. However, a major component of Berkshire's value that many investors find challenging to estimate is that of the company's vast and unique insurance business. insurance business. Could you discuss how you value the company's insurance unit based on information Berkshire provides, especially since gap book value is not disclosed of the insurance unit?
WarrenWell, our insurance business gives us a flow. That's other people's money which we're temporarily holding, but which gets regenerated all the time. So it's a practical matter. It has a very, very long life and it's probably a little more likely to grow than shrink. So we have a very much. $124 billion that people had given us and it's somewhat like having a bank that just consists of one guy and people come in and deposit $124 billion and promise not to withdraw it forever. And we've got a very good insurance business. It's taken a very long time to develop a very long time. In fact, I think we probably have the best property casualty operation in all things considered. considered in the world that I know of any size. So it's worth a lot of money. It's probably, we think it's worth more to us and we particularly think it's worth more while lodged inside Berkshire. We'd have a very, very high value on that. I don't want to give you an exact number because I don't know the exact number, because I don't know the exact number, but, and any number I would have given you in the past would have turned out to be wrong on the low side. We have managed to earn money on money that is given to us for nothing and have to side earnings from underwriting and then have these large earnings from investing. And it's an integral part of Berkshire. There's a certain irony to insurance that most people don't think about, but if you really are prepared and you've really have a diversified property casualty insurance business, a lot of property business in it. If you're really prepared to pay your claims under any circumstances that come along in the
[1:37:14]
Ajit Jainnext hundred years, you'll have to have so much capital in the business that it's not a very good business. And if you really think about a worst-case situation, the reinsurance, that's the insurance you buy from other people as an insurance company to protect you against you. extreme losses, among other things, that reinsurance probably could likely be not good at all. So even though you think you're laying off part of the risk, if you really take the worst case example is you're not laying off, you may well not be laying off the risk. And if you keep the capital required to protect against that worst case example, you'll have so much capital in the business that it isn't worthwhile. Berkshire is really the ideal form. for writing the business because we have this massive amount of assets that in many cases are largely uncorrelated with natural disasters. And we can, we don't need to buy reinsurance from anybody else. And we can use that, we can use the money in a more efficient way than most insurance companies. It's interesting, three, in the last 30 years, the three largest reinsurance companies, and I'm counting Lloyds as one company, although it isn't, it's a group of brokers assembled and underwriters assembled at a given location. But people think of Lloyd's as a massive reinsurance market, which it is, not technically one entity. But if you take the three largest companies and they're all in fine shape now, I've, they're They're first-class operations. But all three of them came close to extinction sometime in the last 30 years, reasonably close. And we didn't really have any truly extraordinary natural catastrophes. The worst we had was Katrina, whatever it was 2006 or there, about 2005. But we didn't have any worst-case situation. And all three of those companies, which everybody looks at, is totally good on the asset side if you show a recoverable from them. Two of the three actually made some deals with us to help them in some way. And they're all in fine shape now. But it's really not a good business if you keep your, as a stand-alone insurer, if you keep enough capital to really be sure you can pay anything to comes along under any kind of conditions. And Berkshire can do that, and it can use the money in ways it likes to use. So it's a very valuable asset. I don't want to give you a figure on it, but we would not sell it. We certainly wouldn't want to sell it for its float value.
[1:40:31]
WarrenAnd if that float is showing on the balance sheet is a liability. So it's extraordinary. And it's taken a long time. a long time to build. It would be very, very, very hard for anybody to, I don't think they could build anything like. It just takes so long. And we continue to plow new ground. If you went in the next room, you would have seen something called 3, which is our movement toward small and medium business owners for commercial insurance. And it's an online operation. And we'll take all kinds, we'll do all kinds of mid-course adjusting and that sort of thing. We're only, we only just started up in four states. But we'll, you know, 10 or 20 years from now, that will be a significant asset of Berkshire, just like Geico is growing from 2 in a fraction billion of premium to, you know, who knows, but well into the mid-30 billion, just with Tony nicely. And when I said in the annual report that Tony Nicely, who's here today, Warren, is there anybody in the world who has a big casualty insurance business that you'd trade our business for theirs? We really, it's taken a long time and it's taken some tremendous people. And Tony Nicely has created more than 50 billion, with his associates, and he's got 39,000 of them, probably more now because he's drawing this year. He's created more than $50 billion that guy go of value for Berkshire. It's pretty much what you'd expect. It's such an easy business taking in money now in cash and just giving the books and giving a little of it back. There's a lot of stupidity gets into it. And if you're not way better than average at it, you're going to lose money in the end. It's a mediocre business for most people. And it's good at Berkshire only because we're a lot better at it. If we ever stop being a lot better at it, it wouldn't be safe for us either. And Ajit Jane has done a similar thing. He's done it in a variety of ways within the insurance business. But I would not want to undo, if somebody would have to give me more than $50 billion to undo everything he has produced for Berkshire. And he walked into my office on a Saturday in the mid-1980. He's never been in the insurance business before, and I don't think there's anybody in the insurance world that doesn't wish that he'd walked into their office instead of ours at Berkshire. It's been extraordinary. It's surely been extraordinary. But we have Tom Nernie. We have Tim Kennessey.
[1:43:38]
WarrenWe have at MedPro. We have Tom Nerney at U.S. liability. We have at Guard insurance. We only bought that a few years ago. That's a terrific operation that's based in Wilkesbury, Pennsylvania. We'd expect to find a great insurance operation of Wilkesbury. But we've got a really great insurance operation right here in Omaha, about two miles from here. And it was bought by us in 1967, and it changed, you know, it changed, Berkshire we built on that base. So we've got a, we've really got a great insurance business. and I won't give you a number, but it's probably a bigger number than you've got in your head for, and it's worth more within Berkshire than it would be worth as an independent operation. Somebody can say, well, this little gem, if it was put out there, would sell it a higher multiple or something sort. It works much better as being part of a whole where we have had two tiny operations doing tiny insurance operations many, many years ago. And they both went broke. They were the underwriting was bad. But we paid all the claims. We did not walk away. We paid every dime of claims. And nobody worries about doing any kind of financial transaction with Berkshire. And, you know, today on Saturday, about 9 in the morning, I got a phone call. And People made a deal the next day committing Berkshire to pay out $10 billion, come hell or high water, no outs for, you know, material adverse change or anything like that. And people know we'll be there with $10 billion. And they know in the insurance business, when we write a policy that may come be payable during the worst catastrophe in history or maybe payable 50 years now, they know Berkshire we'll pay. And that's why we've got $124 billion of float. Okay, station five.
QuestionerGood morning, Charlie. I'm Neil Narona. I'm 13 years old and from San Francisco. I feel like I see you in our living room a lot. My dad is constantly playing these videos of you at these meetings. And he teaches me a lot of less. about you guys. But many of them require the delayed gratification skill. Is there any way that kids can develop the delayed gratification skill?
CharlieI'll take it if you want me to learn. I'll take that because I'm a specialist in delayed gratification. I've had a lot of time to delay it. And my answer is that they sort of come out of the womb with the delayed gratification thing, or they come out of the womb where they have to have everything right now.
[1:47:22]
WarrenAnd I've never been able to change them at all. So we identify it. We don't trend it in. Charlie's had eight children, so he's become more and more of a believer in nature versus nurture. You'll probably sign some nice old woman to about 95 out there. breadbare clothing and she's delaying gratification right to the end and probably has 4,000 a shares. It's just these second and third generation types that are buying all jewelry. It's interesting if you think about, we'll take it to a broader point, but if you think of the long, a 30-year government bond paying 3%, and you allow for, as an individual paying some taxes on the 3% you'll receive, and you'll have the Federal Reserve board saying that their objective is to have 2% inflation, you'll really see that that delayed gratification, if you own a long government bond, is that, you know, you get to go to Disneyland and write the same number of rides 30 years from now that you would if you did it now. I know, the low interest rates for people who invest in fixed dollar investments really mean that you really aren't going to, you know, get, have, eat steak later on if you eat hamburgers now, which is what I used to preach to my wife and children and anybody else that would listen many years ago. So it's, I don't necessarily think that for all families in all circumstances, that saving money is necessarily the best thing to do in life. I mean, you know, if you really, if you really tell your kids they can, whatever it may be, they never go to the movies or we'll never go to Disneyland or something of the sort, because if I save this money 30 years from now, you know, we'll be able to stay a week instead of two days. I think there's a lot to be said for doing things that bring you and your family enjoyment rather than trying to sever every time. So, I advise, delayed gratification is not necessarily an unqualified course of action under all circumstances. I always believed in spending two or three cents out of every dollar I earn, saving the rest. But I really, I always had everything I wanted. I mean, one thing you should understand. If you aren't happy having $50,000 or $100,000, you're not going to be happy if they have $50 million or $100 million. I mean, a certain amount of money does make you feel, and those around you feel better, just in terms of being more secure in some cases. But loads and loads of money, I've probably known as many rich people, was just about anybody.
[1:50:54]
WarrenI do not, I don't think they're happier because they get super rich. I think they are happier when they don't have to worry about money. But you don't see a correlation between happiness and money beyond a certain place. So don't go overboard on delayed gratification.
QuestionerAndrew. This question comes from a shareholder of yours for more than 20 years who asked to remain anonymous. But wanted me to start by saying, Warren and Charlie, I want to preface this question by saying it comes from a place of love for both of you and the beautiful painting you drawn for us in the form of Berkshire. But now, please update us on succession planning. And as you think about succession, would you ever consider having Greg and Ajit join you on stage at future annual meetings and allow us to ask questions of them and Ted and Todd as well. well so we can get a better sense of their thinking.
WarrenThat's probably a pretty good idea, and we've talked about it. We have, we have Greg and Ajeet here, and any questions that anybody wants to direct on them, it's very easy to move them over. And so we thought about having four of us up here. And this format is not set in stone at all. Because you, I can tell you that, actually the truth is Charlie and I are afraid of looking bad. Those guys are better than we are. The, you could not have two better operating managers than Greg and Ajit. I mean, they, it's just fantastic what they accomplished. They know that business is better. They work harder by far. and you were absolutely invited to ask questions that to be directed over to them at this meeting. I don't think, yeah, this format will not be around forever, and if it's better to get them up on the stage where we'll be happy to do it. Ted and Todd, they're basically not going to answer investment questions. We regard investment. decision is proprietary, basically. They belong to Berkshire. And we are not an investment advisory organization. So that is counter to the interests of Berkshire for them to be talking about securities they own. It's a counter to the interest of Berkshire for Charlie or me to be doing it. We've done better because we don't publish every day what we're buying and selling. I mean, if somebody's working on a new product at Apple or somebody's working on a new drug or they're assembling property or something of the sort, they do not go out and tell everyone in the world exactly what they're doing every day.
[1:54:23]
WarrenAnd we're trying to generate ideas and investment. And we do not believe in something in the world what we're doing every day, except to the extent that we're legally required. But it's a good idea, Charlie.
WarrenWell, one of the things. the reasons we have trouble with these questions is because Berkshire is so very peculiar. There's only one thing like it. We have a different kind of unbureaucratic way of making decisions. There aren't any people in headquarters. We don't have endless committees deliberating forever and making bad decisions. We just, we're radically different. And it's awkward being so different. But I don't want to be like everybody else. It's because this has worked better. So I think you're just going to have to endure us. We do think that it's a huge corporate asset, which may only surface very occasionally, and depending very much on how the world is around us. But to be the one place, I think, in the world almost, where somebody can call on a Saturday morning and meet on Sunday morning and have a $10 billion commitment. And nobody in the world doubts whether that commitment will be upheld. And it's not subject to any kind of welching on the part of the company that's doing it. It's got nothing involved other than Berkshire's word word. And that's an asset that's an asset that every now and then we'll be worth a lot of money to Berkshire and I don't really think it will be subject to competition. So, and Ted and Todd in particular, are an additional pipeline and have proven to be an additional pipeline in terms of facilitating the exercise of that ability. I mean, they, things come in through them, but for one reason or another, I might not hear about otherwise. So they've expanded our universe. In the markets we've had in recent years, that hasn't been important. I can see periods where they would be enormously valuable. Just take the question that was raised by the fellow from Winnipeg about Weecoven and bonds. I mean, we could have a situation, who knows when, who knows where, or who knows whether, but we could have a situation where there could be massive defaults in the junk bond type market. We've had those a couple times and we made a fair amount of money off of them. But Ted and Todd would multiply our effectiveness in a big way, if such a period of comes along or some other types of periods come along. They're very, very, very, very
[1:58:11]
Warrenuseful to Berkshire. The call happened to come in on Friday from Brian Moynihan of of CEO of Bank of Americans. It's done an incredible job, but we have, we have a better chance of getting more calls than having improper filtered and everything, appropriately filtered, the next time conditions get chaotic than we did last time, and that's important. Well, I do think it's true that if the world goes to hell in a handbasket, that you people will be in the right company. We've got a lot of cash, and we know how to behave well in a panic. And if the world doesn't go to hell, Are things so bad now? And I also want to report that your vice chairman is getting new social distinction. I've been invited during this gathering to go to a happy hour put on by the Bitcoin people. And I've tried to figure out what the Bitcoin people do in their happy hour. And I finally figured it out. They celebrate the life and work of Judas Iskariot. Is your invitation is still good? Well, Bitcoin, actually, on my honeymoon in 1952, my bride 19 and I, 21, stopped in Las Vegas. We just got in my aunt, Alice, gave me the car, and said, have a good time, and we went west. So we stopped in the Flamingo, and I looked around, and I saw all of these well-dressed, they dressed, they dressed better in those days, well-dressed people who had come, in some cases, thousands of miles away. And this was before jets. So transportation wasn't as good. And they came to do something that every damn one of them knew was mathematically dumb. And I told Susie, I said, we are going to make a lot of money. I mean, imagine people going to stick money on some roulette number with a zero and a double zero there and knowing the percent. They all could do it, and they just do it. And I have to say, Bitcoin has rejuvenated that feeling in me.
QuestionerOkay, Greg. Warren and Charlie, while I understand Berkshires need to trim its stake in Wells Fargo and any other banks you hold, each year in order to bring Berkshire's ownership stake below the 10% threshold required by the Federal Reserve for bank holdings, given the ongoing sherry purchase activity that has taken place in the industry. I was kind of surprised, though, to see you move to trim all of your holdings where possible, on a regular basis, to eliminate the regulatory requirements that come with ownership levels above 10%, which in my view, limits the investment universe that Berkshire, at least Warren, can meaningfully invest in longer term,
[2:01:45]
Questionergiven that Warren manages a large chunk of Berkshire's $200 billion-billion-dollar equity portfolio. Could you elaborate more on the regulatory impact for Berkshire of holding more than 10% of any company's stock, as well as how you feel about the Fed's recent proposal to allow investors like Berkshire own up to 25% of the shares of the bank without triggering more restrictive rules and oversight. Basically, if that proposal were to come to fruition, would you be willing to forego that 10% threshold self-imposed that you've done and put money to work in names that you're already fairly comfortable with?
WarrenYeah, the 10%, there's a couple of reasons. That's the right answer, yeah. Yeah. Yeah. We will, there's two, there's two factors beyond. And in the case of banks, there's the Federal Reserve requirement there. But many people probably don't even, might not know about this, but if you own over 10% of security, common stock, and you sell it within six months of a profit, you give them the money over to the company. It's a short swing profit that you give them and you match your any sale against your lowest purchase. And I think if you sell it and then buy it within six months, I'm not as positive about that because I haven't really read the rule for a lot of years. But I think if you sell it, if you sell and then buy within six months and the purchase is below the price of which you made the sale, you owe the money to the company. There used to be lawyers that would scan that monthly SEC report that I used to get 30 or 40 years ago. They would scan it to find people that inadvertently had broken that role, and they would get paid a fee for recovering it for the company. So it restricts a norman, it restricts significantly, your ability to reverse a position or change your mind or something of the sort. Secondly, I think you're going to reverse a position or change your mind or something of the sort. You have to report within two or three business days every purchase you make once you're in that over 10 percent factors. So you're advertising to the world and the world tends to follow us some. So it really has a huge execution cost attached to it. Nevertheless, and those are both significant minuses and they're both things that people generally don't think about. We did go over recently, for example, in Dell Airlines. That was actually an action. but I don't mind the fact at all that we did.
[2:04:44]
WarrenAnd if the Federal Reserve changes its approach, we won't have to trim down below that. We don't want to become a bank holding company, and we don't want to. We went in many years ago and got permission with Wells, but then our permission expired, and we went in again a few couple of years ago, and we spent a year or so. There were just a million questions. that Wells got asked about us and so on. So it's been a deterrent. It'll be less of a deterrent in the future. But it does have those two, the short swing thing is less honorous to us than it would be to most people who buy and sell stocks because we don't really think in terms of doing much with this. But if we didn't have all these damn rules, we would cheerfully buy more, wouldn't we?
OtherSure.
OtherSure.
WarrenYeah. Well, anytime we probably do it cheerfully. But the, yeah, we, and we will, you'll probably see us at more than 10% in more things. And if the Fed should change its rules, there will be companies where we drift up over 10% simply because they're repurchasing their shares. That's been the case with Wells, and it's been the case with an airline or two in the last year. or so. If we like 9.5% of a company, we'd like 15% better. And you may see us behave a little differently on that in the future.
OtherWell, one more awkward disadvantage of being extremely rich.
WarrenYeah. And it really is. I mean, yeah, and being, and people following you. I mean, the followers problem can be a real problem.
OtherOkay, station six. Hi, I'm Jeff Malloy from San Francisco, and this is my first shareholders meeting. Mr. Buffett and Mr. Munger, I'm 27 years old and aspire to be a great money manager like you two one day. I am considering starting my own investment fund, but I also recognize that I am young and have a lot to learn. My question to both of you is how did you know you were ready to manage other people's money and what general advice would you give to someone in my shoes? Thank you.
WarrenWell, it's a very interesting question because I've faced that and I sold securities for a while, But in May of 1956, I had a number of members of my family. I'd come back from New York, and they wanted me to help them out with stocks as I had earlier before I'd taken a job in New York. And I said, I did not want to get in the stock sales business, but I wanted to, I enjoyed investing. I was glad to figure out a way to do it, which I did through a partnership form.
[2:08:15]
WarrenBut I would not have done that if I thought there was any chance, really, that I would lose them money. And what I was worried about was not how I would behave, but how they would behave, because I needed people who were in sync with me. So when we sat down for dinner in May of 1956, with seven people who either were related to me or one was a roommate in college and his mother. And I showed them the partnership agreement. I said, you don't need to read this. You know, there's no way that I'm doing anything in the agreement that there's any way that, you know, you don't need a lawyer to read or anything of the sort. But I said, here are the ground rules as to what I think I can do and how I want to be judged. And if you're in sync with me, I want to manage your money because then I won't worry about the fact that you will panic if the market goes down. or somebody tells you something different. So we have to be on the same page. And if we're on the same page, then I'm not worried about managing your money. And if we aren't on the same page, I don't want to manage your money, because you may be disappointed when I think that things are even better to be investing and so on. So I don't think you want, I don't think you want to manage other people's money until you have a vehicle and can reach the kind of people that will be in sync with you. I think you ought to have your own ground rules as to what your expectations are when they should send you roses and when they should throw bricks at you and you want to be on the same. And that's one reason I never, we didn't have a single institution in the partnership because institutions meant committees and committees meant that you had some ants that trusted you. What's that? You had some aunts who trusted you. Yeah, well, and a father-in-law that gave me everything he had in the world, you know, but And I didn't mind taking everything he had in the world as long as he would stick with me and wouldn't get panicked by headlines and that sort of thing. And so it's enormously important that you don't take people that have expectations of you that you can't meet. And that means you turn down a lot of people. It means you'd probably start very small and you get an audited record. And when you've got the confidence where if your own parents came to you and they were going to give you all their money and you were going to invest for them. You've got the kind of confidence that you'll say, I may not get the best record,
[2:10:56]
Warrenbut I'll be sure that you get a decent record over time. That's when you're ready to go on it. It may tell you a story that I tell young lawyers who frequently come to me and say, how can I quit practicing law and become a billionaire instead. And so I say, well, it reminds me of a story they told about Mozart. A young man came to him and he said, I want to come compose symphonies. And I want to talk to you about that. And Mozart said, how old are you? I said, 22. And Mozart said, you're too young to do symphonies. And the guys said, but you were writing symphonies when you were 10 years old. He says, yes, but I wasn't running around asking other people how to do it. Carol, we wish you well. And actually, we really do, because the fact you ask that sort of a question is a isn't, to some extent, indicative of the fact that you got the right attitude going in. It isn't that easy to be a great investor. I don't think we've quite made it. This question is from France Tromburger of Austria and his son Leon, who are both Berkshire shareholders. And it's interesting to me that in the years we've been doing this, nobody has ever asked this question as far as I know. Their question is, Mr. Buffett. I believe it is correct that in its, SEC filings, that is the Securities and Exchange Commission, Berkshire does not have to give information about foreign stocks it holds. Assuming we hold foreign stocks, could you please tell us what our five largest positions are? Another fellow wants investment information. We really aren't in the investment information business. We disclose what we have to disclose, but we could, we could, we could, we could, We could set up an investment advisory firm and probably take in a lot of money, but we haven't done it, and we aren't giving away what belongs to our shareholders for nothing. But he's correct that I'm 99 percent sure he's correct, and Mark Hamburg can correct me from our office. But we do not have to report foreign stocks, and we do have to report foreign stocks. And we do have In certain important countries, there's lower thresholds at which we have to report our holdings as a percentage of the company's stock outstanding. There's lower thresholds than there are in the United States. So in a sense, in certain stocks, I think when we bought Munich Re stock or bought Tesco stock, or there's certain stocks we've had to report at before we would have had to report in the
[2:13:58]
WarrenUnited States. But we will never. unnecessarily advise, if we plan to buy some land someplace, if we plan to buy some land someplace, if we plan to buy a business, we are not about giving business information that's proprietary to Berkshire. We don't give it unless we're required by law. And he is correct that I'm virtually certain that we do not have to report our foreign stocks to, uh, on the FCC filings. and they'll have to find his own holdings in Austria. I think his Mozart story may have encouraged that particular question from Austria. What stocks we're going to own in Austria? Okay, Charlie, do you have any comments?
CharlieNo. No. I didn't think it would.
QuestionerJohnny? Precision cast parts pre-taxed profit margins, while perfectly fine relative to American industry as a whole, It continued to be almost 10 percentage points below where they were in the years preceding the acquisition, and I'm guessing they're lower than contemplated when the purchase price was determined. The annual report hints that unplanned shutdowns, the learning curve on new plane models, and a shift of oil and gas capacity to aerospace might all be temporarily depressing margins, but it's unclear what a reasonable long-term margin expectation is for this unit. Now, I know you won't want to issue a specific margin target or forecast, but I do have a question that I hope you can answer. Is the downward trend in earnings since 2015 mostly due to these transitory items or have the competitive structure of the industry in precision's relationship with its customers change to the point that meaningful increases from current margin levels are probably unlikely?
WarrenYour prelude is quite correct. I mean, they are below what we projected a few years ago. And my expectation But I would have told you this a year ago, and they haven't, they have grown improved somewhat. My expectation is based on the contracts we have and the fact that initial, the initial years in anything in the aircraft industry, for example, tend to be less profitable as you go further down the learning curve and the volume curve, tend to be lower in the near term. My expectation is that the earnings of precision will improve fairly significantly. And I think I mentioned maybe to you last year, in those earnings, there is about $400 million a year of purchase amortization, which are economic earnings in my viewpoint. So, but I, even including that $400 million a year, which they would be reporting
[2:17:09]
Warrenif they were independent, and we don't report because we bought them and there's a purchase amortization charge, even without that, they are below what I would anticipate by a fair margin within a year or two. That's the present expectation on my part.
WarrenCharlie?
CharlieNo, I don't have anything.
Warrenthat question for me next year. I think I'll be giving you a different answer.
WarrenOkay, station seven.
QuestionerGood morning, Mr. Buffett. Mr. Munger. My name is J.C. I am 11 years old and I come from China. This is my second year at the meeting. Mr. Munger, it's great to see you again after the daily journal meeting in February. Mr. Buffett, you mentioned that the older you get, the more you understood about human nature. Could you elaborate more about what you've learned? And how can the differences of human nature help you make a better investment? I would also like Mr. Munger to comment on that, please. Thank you very much.
WarrenYou should wait for Charlie's answer because he's even older. He can tell you more about being old, but I can't even. It's absolutely true that that virtually any yardstick you use, I'm going downhill. And the, you know, if I would take a SAT test now and you could compare it to a score of when I was in my early 20s, I think it would be quite embarrassing. And it's certainly, Charlie and I can give you a lot of examples and there's others we won't tell you about about how things decline as you get older. But I would say this. It's absolutely true, in my view, that you can and should understand human behavior better as you do get older. It's had more experience with it, and I don't think you can read. Charlie and I read every book we could on every subject we were interested in, you know, and we were very young, and we learned that We learned an enormous amount just from studying the lives of other people. But I don't think you can really, I don't think you can get to be an expert on human behavior at all by reading books, no matter what your IQ is, no matter who the teacher is. And I think that you really do learn a lot about human behavior. Sometimes you have to learn it by having multiple experiences. I think you, I actually think I, despite all the other shortcomings, and I can't do mental arithmetic as fast as I used to, and I can't read as fast as I used to. But I do think that I know a lot more about human behavior than I did when I was 25 or 30. If you want one mantra, it comes from a Chinese gentleman who just died, Lee Kuan Yu, who is the greatest nation bill.
[2:20:45]
Warrennation builder probably that ever lived in the history of the world. He said one thing over and over and over and over again all his life. Figure out what works and do it. You just go at life with that simple philosophy from your own national group. You will find it works wonderfully well. Figure out what works and do it. And figuring out what works means figuring out how other people behave. Of course. Of course. And Charlie and I have seeing the extremes in human behavior in so many unexpected ways. Now we get it every night. Extremes of human behavior. Yeah. All we got it was around the television. I'm glad to use that example. Okay, Becky. Warren, you mentioned in response to an earlier question that Ajit and Greg are both here to answer questions. And so I thought I'd asked this question that comes from Will in Seattle. He says, his question is from from for Mr. Ajit Jane and Mr. Warren Buffett, you have said that you communicate regularly about unconventional insurance contracts that expose the company to extremely unlikely but highly costly events. I'm curious about how you think about and safely priced these unconventional insurance contracts. What analyses and mental checks do you run through your head to make sure that Berkshire Hathaway will profit without being unduly exposed to catastrophic risk? Furthermore, Mr. Buffett, would you want a future CEO to continue to consider? continue a similarly close collaboration with the chief underwriter?
QuestionerWe will get a microphone to Ajit in a spotlight in just a second, just a second.
QuestionerAnd there he is. Ajit, why don't you answer first if you'd like to.
Ajit JainHi. Obviously the starting point, I mean, these situations where there's not enough data, not enough data to hang our hat on, it's more of an art than a science. We start off with as much science as we can use looking at historical data that relates to the risk in particular or something that comes close to relating to the risk that we're looking at. And then beyond that, if there's not enough historical data we can look at, then clearly we have to make a judgment in terms of what are the odds of something like that happening. We try, we absolutely, in situations like that, we absolutely make sure we cap our exposure. so that if something bad happens or if we got something wrong, we absolutely know that how much money we can lose and whether we can absorb that loss without much pain to the income statement of the balance sheet.
[2:23:37]
OtherIn terms of art, it's a difficult situation. More often than not, it's impossible to have a point of view and we end up passing on it. But every now and then we think we can get a price where the subjective odds we have or something like that happening has a significant margin of safety in it. So we feel it's a risk that's worth taking. And then finally, the absolute asset test is, I pick up the phone and call Warren. Warren, here's a deal. What do you think?
WarrenOkay. Your turn, Warren. Okay. It's not easy, and you wouldn't want just anybody doing it for you. No. No. No. In fact, the only one I would want doing it for us on the kind of things we have sometimes received is a gene. I mean, it's that simple. There isn't anybody like him. And as Ajit said, we'll look at a worst case, but we are willing, if we like the odds. And like you say, there's no way to look these up. We can tell you how many, you know, how many 6.0 or greater earthquakes have happened in the last 100 years in Alaska or California or so on. There's a lot of things you can look up figures on. Now, sometimes those are useful and sometimes there, but there's a lot where you can get a lot of data. And then there's others that, well, after 9-11, you know, was that going to be the first of several other attacks that were going to happen very quickly? There were planes flying that couldn't, well, they couldn't land in Hong Kong, as I remember, I think it was, Cafe Pacific, couldn't land in Hong Kong the following. Monday unless they had a big liability coverage placed with somebody. I mean, the world had to go on. The people that held mortgages on the Sears Tower and all of a sudden wanted the coverage or, I mean, I think that actually was one, but they were just pouring in of people that hadn't been worried about something a week earlier, and now they were worried about things involved huge sums. And there were really only a couple of people in the world that would even listen and had the capacity to take on a lot of the deals we were proposed. And there's no book to look up. So you do, there's a big element of judgment. Ajit and I, I mean, Jeet's a hundred times better at this than I am, but we do tend to think alike on this sort of thing. You don't want to think too much a lot. But we think alike, I've got a willingness to lose a lot of money. And most, well, virtually every insurance company, if they get up to higher limits, they've
[2:26:50]
Warrengot treaties in place, and they can only take this much. So the world was paralyzed on that. We don't get those, but now, obviously, but we do occasionally get, occasionally get uh, inquiries about doing things that really nobody else in the world can do. It's a little like our investment situation, only transferred over the insurance. We don't build the business around it, but we are ready when the time comes. And, and Ajit is an asset that no other company in the world has. And, uh, and, uh, we work him. And, and we actually enjoy a lot of it is an asset that no other company in the world has. a lot talking to each other about these kind of risks because, uh, he'll ask me to think about what the price should be and he'll think about, we don't tell each other ahead of time. And then I'll name it and then he'll say, have you lost your mind, Warren? You know, and then he'll point something out to me that I've overlooked it. It's a lot of fun and it's made us a lot of money. And, uh, the shareholders of Berkshire Hathaway are extraordinarily, you can't hire people like I mean, you know, you get them, you get them once in a lifetime, Charlie?
CharlieI don't think you, we helped him very much. It's really difficult.
WarrenThere will be a time when, I mean, I probably won't be around it, but there will be a time, but there will be a time occasionally, just like in financial markets, when things are happening in the insurance world, and basically, uh, Berkshire will be the only one, virtually the only one people, people turn to. But in the past, Aji, talking to you, has added more than 50 billion dollars to the balance sheet at Berkshire by making these odd vault calls. And if he hadn't talked, it'd be probably 49.9 billion, yeah. But, but, but you don't want to try, don't try this at home. I mean, and, yeah, this is, that, this is, that, this is, that, that's, that, this is, that, doesn't mean it's easy.
CharlieNo. And it's not very teachable. I mean, it...
WarrenNo, it isn't very teachable. You're right.
CharlieNo, it is not, it's not something that Berkshire has some secret formula someplace for. It basically is a very unusual talent with the jeet and... We're not holding anything back. It's hard.
OtherOkay, Jay. This question is on Berkshire's relationship with 3G Capital. Kraft-Hines is. recent challenges have raised questions about whether Berkshire's partnership with 3G has become a weakness for Berkshire.
[2:29:58]
QuestionerWarren, what are your thoughts on this? And would Berkshire be open to partnering again with 3G in a major acquisition?
WarrenYeah, they are our partners. We joined them at a one-page agreement, which I haven't even actually ever re-read. I mean, it's a George Apollo. I mean, there's a good friend of mine. I think he's a marvelous human being. And I'm pleased we made that we are partners. It's conceivable that something would come up. They have more of a taste for leverage than we do, and they probably have more of a taste for paying up. But they also are, in certain types of situations, they'd be way better operators than we would. They go into situations that need improvement, and they have improved them. But I think both they and we, I know we, I know we did underestimate, not what the consumer is doing so much, but what the retailer is. And at Seas Candy, we sell directly to the consumer, but what the retailer is. candy, we sell directly to the consumer, but at Kraft Heinz, they're intermediaries. And the question, and those intermediaries, you're trying to make money, we're trying to make money. And the brand is our protection against the intermediaries making all the money. Costco tried to drop Coca-Cola back in, I think, 2008. And you can't drop Coca-Cola. You know, and not disappoint a lot of customers. Snickers bars are the number one candy that Mars makes them. And they've been number one for 30 or 40 years. And if you walk into a drugstore and the guy says, I've got the Snickers is 75 cents or whatever it might be, and I've got this special little bar we make, my wife and I make in the back of the store and it's only 50 cents and it's just as good. don't buy it. You know, when you're at the some other place the next time you buy the Snickers bar. So it, brands can be enormously valuable, but many of the brands are dependent, most of them. Geico is not. Geico goes directly to the consumer. If we save the consumer money on insurance, they're going to buy it from us. And our brand, you know, and we'll spend well over a billion and a half on advertising this year, and you think, my God, we started this in 1936, and we were saying the same thing then about saving 15 percent and 15 minutes or something. It was not exactly the same, but that brand is huge, and we have to come through on the promise we give, which is to save people significant money on insurance a great many
[2:33:16]
Warrenpeople. That brand is huge, and we're dealing directly with the consumer. And when you're selling Kool-Aid or ketchup or, you know, Heinz 57 sauce or something, you are going through a channel and they would, as the phrase was used earlier today, you know, our gross margin is their opportunity and we think, we think that the customer is going to force them to have our product and that we will get the gross margin. And that, that fight, that tension has increased in the last five years, and I think it's likely to increase in the next five or ten years. And Charlie is the director of a company that has caused me to think a lot about that subject, Charlie?
CharlieWell, what I think is interesting about the 3G situation, there's a long series of transactions that worked very well. And finally, there was one transaction at the end that didn't work so well. That is a very normal outcome of success. in a big place with a lot of young men who want to get rich quick. And it just happens again and again. And it's, you want to be careful. It's so much easier to take the good ideas and push them for wretched excess.
WarrenYeah, that is, no idea is good at any price. And the price element is probably something that we worry more about generally than our partners, but we are their partners in the in Kraft Heinz and it's not at all inconceivable that we could be partners in some other transaction in the future.
QuestionerOkay, Station 8. Hello, Warren and Charlie. Consumer tastes are changing. I think if we asked how many people here in the arena have eaten Velvita cheese in the last year or so, there'd be only a small handful, maybe more for jello. ThreeG's playbook of cutting R&D looks to have stifled new product development and missed changing preferences. So here's my question. Why continue to hold when the moat appears to be dry, or do you think it is filling back up?
WarrenWell, I don't think the problem was that they cut research or something. I think the problem was they paid a little too much for the last acquisition. Yeah, Jello, I can't give you the exact figure. There's certain brands. that may be declining 2% a year or 3% a year in unit sales. And there's others that are growing 1 or 2%. There's not dramatic changes taking place at all. I mean, Kraft Heinz is earning more money than Kraft and Heinz were earning six or seven years ago. I mean, and the products are being used in a huge way.
[2:36:43]
WarrenNow, it's true that certain. There are always trends going, but they have not fallen apart remotely, and they have widened the margin somewhat, but it is tougher in terms of the margin and the price negotiations, probably to go through to the actual consumer that has become a somewhat tougher passageway for all food companies than it was 10 years ago. It's still a terrific business. I mean, you know, you mentioned Jello or Velvita. Charlie works at my grandfather's grocery store in 1940. I work here in 41. And if they were buying those products, then they buy the products now. The margins are still very good. They earn terrific returns on invested capital, but we paid too much in the case of, in the case of crafts. You can pay too much for a growing brand. I mean, you can pay way too much for a growing, probably easier to be sucked into that. So I don't, I basically don't worry about the brands. Certain of them are very strong and certain of them are declining a bit. But that was the case 10 years ago, it'll be the case 10 years from now. There's nothing dramatic happening in that. Okay, we'll take one more. and then we'll break for logic.
QuestionerAndrew. Thank you, Warren. Question on technology and the company's biggest holding now. Given that Apple is now our largest holding, tell us more about your thinking. What do you think about the regulatory challenges the company faces, for example? Spotify has filed a complaint against Apple in Europe on antitrust grounds. Elizabeth Warren has proposed ending Apple's control over the App Store, which would impact the company's strategy to increase its services businesses. businesses? Are these criticisms fair?
WarrenWell, again, we're not, I will tell you that all of the things, points you've made, I'm aware of, and I like our Apple holdings very much. I mean, it is our largest holdings. And actually, what hurts in the case of Apple, is that the stock has gone up. And we'd much rather have the stock, and I'm not proposing anything we'd done about it. But we'd much rather have the stock at a lower price so we could buy more stock. And importantly, if Apple, I think they authorized another $75 billion the other day, but let's say they're going to spend $100 billion in buying in their stock in the next three years. You know, it's very simple. If they buy it at 200, they're going to get 500 million shares. They've got $4,600 million out now, and so they'll end up with $4.1 billion under that circumstance.
[2:39:44]
WarrenIf they're buying it at $150, they'd buy in $667 million shares. and instead of owning what we would own the first case, we'd now, the divisor would be less than $4 billion and we'd own a greater percentage of it. So in effect, a major portion of earnings, at least possibly, has been authorized, will be spent in terms of increasing our ownership without us paying out a dime, which I love for a business, a wonderful business. And the recent development, when the stock has moved up substantially, actually hurts Berkshire over time. We still do, my opinion, we'll do fine. But we're not going to get into, we're not going to dissect our expectations about Apple, you know, for people who may be buying it against us tomorrow or something. We don't give away investment advice on that for nothing. But we have all the things you've mentioned. Obviously, we know about. We know some. We've got a whole bunch of other variables that we crank into it. And we like the fact that it's our largest holding. Well, in my family, the people who have Apple phones, it's the last thing they'll give up. Not a bad item to have. And the other thing we won't give up is lunch. And we'll now adjourn and we'll reconvene at a at one o'clock or thereabouts. I'll see you a little later.