OtherSo now we're ready to have questions which Becky Quick is selected from those that's been forward to her directly and from Carol Loomis and Andrew Ross Sorkin and Greg and I are available to be, we'll be answering them for some time. So Becky, you're on and I hope all the tech, I hope everything works.
QuestionerYeah, Warren, I should tell you that since you put that address up on the screen, I've gotten more than 2,500 emails that have been coming in. So there is a lot of demand from shareholders wanting to get in and ask questions. And I'll ask some that we've compiled before and some that are coming in right now. The first question, though, comes from one that just came in based on the comments that you were actually saying. This is a question that comes from William Lewis. He said, please, did I understand correctly, Mr. Buffett, to say that Berkshire Hathaway, it's interests in four different airlines, and if so, can you name them, can the names of those airlines be identified?
WarrenYeah, I wouldn't normally talk about it, but I think it requires an explanation, and it requires an explanation that means we were not disappointed at all in the businesses that they were being run and the management, but we did come to a different opinion on it. And the four large, they're the four largest U.S. Airlines, it's American Airlines, and Delah Airlines, and Southwest Airlines, and United Continental. And I think collectively they, they probably, or at least 80% of the revenue passenger miles in the, in the, in the, uh, it is flown in the United States. And, and they have significant, uh, international crew. flying too, is excluding Southwest. So we like those airlines, but we don't like, the world has changed for the airlines. And I don't know how it's changed and I hope it corrects itself in a reasonably prompt way. I don't know whether the Americans will have now changed their habits or will change their habits because of an extended period if it happens that we're semi-shut down. in the economy. I don't know whether the trends toward, you know, what people have been doing by phone. I mean, I've been, it's been seven weeks since I've had a haircut. It's been seven weeks since I, more than seven weeks since I put on a tie or anything. I've been just a question of which sweatsuit I wear. So who knows, who knows how we come out of this. But I think that there's certain industries, and unfortunately, I think that
[3:00]
Questionerthe airline industry, among others, that are really hurt by a forced, in fact, shut down by events that are far beyond their control. Greg, would you like to add anything?
Greg AbelReally nothing to add one.
WarrenOkay. Well, we've got another trailer here. I didn't intend to use that as a line, but, you know, you've covered it well, thank you. We would have bought other airlines, too, incidentally, but those were the four and those ones we could put some money into and we put whatever it was seven or eight billion into it and we did not take out anything like seven or eight billion and that was my mistake but it was it's always a problem if there there are things on the lower levels of probabilities that happen sometimes and and it happened to the airlines and and I'm the one who made the decision but
QuestionerWarren just to clarify on his question he asked did you sell your whole stake in all four of those companies?
WarrenYes. Yeah. When we sell something, when we sell something very often it's going to be our entire stake. I mean, we don't trim positions or like that's just not the way we approach it any more than if we buy 100% of a business, we're going to sell it down to 90% or 80%. I mean, if we like a business, we're going to buy as much of it as we can and keep it as long as we can. But when we change our mind.
QuestionerRight, the next question.
WarrenNo, go ahead. I'm sorry. No, go ahead. When you change your mind? Well, when we change your mind? change our mind, we don't, we don't take half measures or anything of sort. So I was amazed at how, frankly, now we sell, we were selling them at far lower prices than we paid. But I was amazed at the volume. The airlines always trade in large volume relatively, but we have sold the entire positions.
QuestionerOkay, thank you. The next question comes from Robert Thomas from Toronto, Canada, and he says, Warren, why are you recommending listeners to buy now, yet you're not comfortable buying now as evidenced by your huge cash position.
WarrenWell, A, as I explained, the position isn't that huge when I look at worst-case possibilities. I would say that there are things that I think are quite improbable, and I hope they don't happen, but that doesn't mean they won't happen. I mean, for example, in our insurance business, we could have the world's... or the country's number one hurricane that it's ever had, but that doesn't preclude the fact we could have the biggest earthquake a month later.
[5:53]
WarrenSo we are not, we don't prepare ourselves for a single problem. We prepare ourselves for problems that sometimes create their own momentum, momentum. I mean, 2008 and the 9, you didn't see all the problems the first day when really what really kicked off was when the Freddie and Fannie, the GSEs, went into conservatorship in early September. And then when money market funds broke the buck, I mean, there are things to trip other things, and we take a very much a worst-case scenario into mind that probably is a considerably worse case. than most people do. So I don't look at as huge. And I'm not recommending that people buy stocks today or tomorrow or next week or next month. I think it all depends on your circumstances, but you shouldn't buy stocks unless you expect, in my view, you expect to hold them for a very extended period and you are prepared financially and psychologically to hold them the same way you would hold a farm and never look at a quote and never Never pay it. You don't need to pay attention to them. I mean, the main thing to do, and you're not going to pick the bottom, and you're not going to, nobody else can pick it for you or anything of the sort. You've got to be prepared when you buy a stock, have it down 50% or more, and be comfortable with it as long as you're comfortable with the holding. And I pointed out, I think a year, maybe two years ago in the annual report, well, just the one before this most recent one, I pointed out that, I pointed out that there have been three times in Berkshire's history when the price of Berkshire stock went down 50%. Three different times. Now, if you owed it on borrowed money, you could have been cleaned out. There wasn't anything wrong with Berkshire when those three times occurred. But if you're going to, if you're going to look at the price of the stock and think that you have to act because it's doing this or that, or somebody else tells you why, you know, how can you stay with that? when something else is going up or anything. You really, you've got to be in the right psychological position. And frankly, some people are not really careful. Some people are more subject to fear than others. It's like the virus. It strikes. Some people with much greater ferocity than others. And fear is something I really never felt financially. But I don't think Charlie's felt it either. Some people can handle it psychologically.
[8:50]
WarrenIf you can't handle it psychologically, then you really shouldn't own stocks because you're going to buy and sell them the wrong time. And you should not count on somebody else telling you this. You should do something you understand yourself. If you don't understand it yourself, you're going to be affected by the next person you talk to. And so you should be in a position to hold. And I don't know whether today is a great day to buy stocks. I know it will work up. over 20 or 30 years. I don't know whether it'll work out over two years at all. I have no idea whether you'll be ahead or behind on a stock you buy on Monday morning or the market.
QuestionerWarren, the next question comes from Scott Kelly. And he writes in, based on the numbers you just put up, he said, what did you spend the $426 million on equities in April? Was that adding to existing positions? Or was that initiating new positions?
WarrenWell, I don't remember to tell you the truth, but one thing you have to But one thing you have to allow for, well, these are the figures for Berkshire Hathaway. And they include both Todd and Todd Combs and Ted Westler manage significant sums of money. So it could well be something they bought. It could be something I bought. I bought, $462 million is not much money at Berkshire. It's more to Todd and Ted than it is to me in terms of our positions. But I literally have no memory of... memory of... We're not doing anything big, obviously. We're willing to do something very big. I mean, you could come to me on Monday morning with something that involved $30 or $40 billion or $50 billion. And if we really liked what we were seeing, we would do it. And that will happen someday. If it happens in the market, we can't put it all in in one day or one week or one month. It took us months to build up our airline position. in many months, we were able to sell them past them and we bought them, but we were selling lower prices. So the 462 is essentially meaningless and it may not have even, probably was not mine.
QuestionerAll right, this next question comes from Lee Yandar. And his question is, in the last financial crisis, Berkshire acted as a lender of support for eight different deals. Despite the injection of expensive capital through preferred stocks and securing warrants, these companies were in fact paying for the sign of confidence from Berkshire in the midst of a crisis and that was invaluable.
[11:27]
QuestionerToday we have QE infinity, low interest rates and hungry hedge funds. Even though the economy has deteriorated rapidly over the last few months, why have we not acted as a lender of support yet?
WarrenWell, we haven't seen anything attractive. And frankly, it wasn't predicated on this, but the Federal Reserve did the right thing, and they did it very promptly, which they should have. And I salute them for it, but that means that a lot of companies that needed money and probably should have done their financing a little earlier. But they're perfectly decent companies got the chance to finance in huge ways in the last five weeks or thereabouts. I mean, it's set records. Some companies have come back twice, a number, very big companies that didn't bother to extend out their borrowings. came a couple times, Berkshire actually raised some more money. We don't need it, but we'll, I think it's still a good idea over time. And then there are some pretty marginal companies that have also had access to money. So there is no shortage of funds at rates which we would not invest at. So we have not done anything because we have not done anything because we don't I don't see anything that attractive to do. Now, that could change, you know, very quickly or it may not change. But in 2008 and 9, the truth of this, we weren't buying those things to make a statement to the world. They may have made a statement to the world to some extent, and I'm glad that they did if they did, but, but we made them because they seemed intelligent things to do and markets were such that we didn't really have much competition. Now it turned out that we would have been a lot better off if we'd waited four or five months to do similar things. So my timing was actually terrible in 2008 or nine, but what was available was so attracted that even though my timing was terrible, we still came out okay or a little bit better than okay. But it was not designed, what we did was not designed to make a statement. It was designed to take advantage of what we were. we thought were very attractive terms, but they were terms that nobody else was willing to offer at that time because the market was in a state of panic. And the market in equities was in a state of panic for a short period of time when the virus broke out and spread in the United States and became apparent. And the debt market was frozen or in the process of freezing.
[14:20]
WarrenAnd that changed dramatically when the Fed acted, but who knows what? what happens next week or next month or next year. The Fed doesn't know. I don't know. And nobody knows. There's various, there's a lot of different scenarios that can play out. And under some scenarios, we'll spend a lot of money and other scenarios, we won't.
WarrenGreg, you've been watching what's been happening around Berkshire.
Greg AbelYeah. Yeah, well, I think your comment on the Fed, Warren, because as you know, interestingly, when it was first occurring, there were calls coming in, not the size of transactions were interested in, nor companies we were inclined to act upon. But there were, there was that general interest out there, as people were, in a difficult point in time, i.e., looking at their balance sheet and deciding what they were going to do. But the reality is those companies were not of interest in. Post, basically, effectively, March 23rd, the companies have been able to act. And Warren touched on it. At Berkshire Hathaway Energy, post the Fed action, we actually issued $4 billion of securities. That was associated with debts or obligations we had maturing, some short-term obligations we wanted to clearly lengthen out. And we pre-funded one of our capital programs at Pacific Corp with the thought this was the time to get the funds in place such that we were. we could proceed with what is really an excellent opportunity both for Pacific Corp or customers and ultimately for the Berkshire shareholders so we've taken action within Berkshire as Warren noted this is a very good time to borrow money which means it may not be such a great time to lend money but the it's good for the country that it's a good it's a good time to borrow money not good for Berkshire particularly although we borrowed some money so we we we we've we put our money where our mouth is that gets kind of to another question that came in from Mark McNicholas in Chicago Illinois he says Berkshire itself has a Fort Knox like balance sheet but some of its operating companies may be tight on cash during the pandemic would Berkshire consider sending cash to its operating companies to one ensure that they can get through the pandemic and to allow them to increase market share while their competitors struggle well we've sent money to a few and And we're in a position to do that. We're not going to send money indefinitely to anything where it looks like.
[17:11]
WarrenTheir future has just changed dramatically from what it was the year or so ago or even six months ago. We made that decision in terms of the airline business. We took money out of the business, basically, even at a substantial loss. And we will not fund the company where we think that it's going to chew up money in the future. We started out with a company like that in our textile business at Berkshire Hathaway in 1965. And we went for 20 years trying to think we could solve something that wasn't that solvable. So we are not in the business of subsidizing any companies with shareholders' money if people want to do that with their own money, but we're not going to do it on their behalf. But we have advanced money. We're perfectly ready to do it. That's my gaining market share and all that. That may happen, but the companies that need money, probably, market share is not their number one problem. I'll put it that way.
QuestionerGreat, would you?
Greg AbelYeah. Well, yeah, it's interesting when we look at our different companies as we went into the pandemic or we're addressing the COVID-19 crisis, obviously the first focus by our management team and appropriately was our employees. employees and effectively making sure they're safe and that the business environment were in that they could continue to operate. Then we quickly moved to looking at where our customers were in this cycle, i.e., what was the underlying demand within the business? And to great credit to our managers, they very much have adjusted their businesses consistent with the underlying needs and demands of our of our customers. So effectively, they're moving with the customer, meaning very few of our businesses have actually required funds. Some have, and as Warren said, we've advanced the funds to them, but the businesses have really reacted in a way where they're managing consistent with where the market's at, i.e., the demand for their products. Berkshire is almost certain to generate cash. I mean, at nothing's 100% certain. But, and we're, as Greg mentioned, at Berkshire Athaway Energy, we had some short-term financing. We don't have short-term financing at any degree. We'll never get ourselves in a position where we have a lot of money that can come do tomorrow. And people that were financing heavily with commercial paper and then found their business stop. Well, you've seen what's happened to the airlines.
[20:01]
WarrenI mean, they need money. Cruise lines need money. There's some businesses that, you know, it's just the nature of what they're in. Brookshire will never get in a position where it needs money. And we factor in, like I say, we factor in some things that are not ridiculously unlikely. And I'm not going to spell out scenarios because, to some extent, you start sparing, spelling out scenarios, you may increase the chance of them happening. So it's not something that you really want to talk about a lot. But our position will be to be to stay of Fort Knox, but we don't need a, no, we don't need a hundred and, it's a little higher now than it was at core. And we don't need 130 or 35 billion, but we need a lot of money that's always available. And that means we own nothing but Treasury bills. I mean, we do not, we've never owned, we never buy commercial paper, we don't buy, we don't count on bank lines, you know, one or two of our subsidiaries, a few of our subsidiaries have them, but they, we, we basically want to be in a position to get through anything and, and we hope that doesn't happen, but you can't rule out the possibility any more than in 1929, you could rule out the possibility that, that, you know, you would be waiting. until 1955 or the end of 1954 to get even. Anything can happen, and we want to be prepared for anything. But we also want to do big things. The prices are attractive. As Greg said, there was a period right before the Fed acted. We were starting to get calls. They weren't attractive calls, but we were getting calls, and the companies we were getting calls from after the Fed that a number of them were able to get money in the public market, frankly, at terms that we wouldn't have given it to them.
OtherAll right, this next question is one that Greg, you actually touched on the answer to this, to some extent, but maybe the two of you could expand on it. It comes from Richard Serser from Tucson, Arizona. He says, Berkshire's annual report indicated that Berkshire had 391,539 employees at the end of 2019. Which areas of our operations have already been hard? have already been hardest hit or will be by the coronavirus pandemic? And what are the implications for the continued employment of those people?
WarrenThose people are employed in dozens and dozens of different industries. And there are a few industries that there's a fair likelihood that our employment could be reduced, but they're not large.
[23:11]
WarrenI'm just thinking as I'm talking. I mean, it's not like we're, you know, in the, some of the businesses that are, you know, we're not in the hotel business or various aspects of travel and entertainment and all of that that that could really be changed in a very major way. So I don't see our employment. I'll put it this way, five years from now, I think Berkshire will be employing employing considerably more people. And I don't see where we'll have large depths. But the virus could take off in certain ways that in some of our manufacturing businesses, for example, the demand could be dramatically reduced. And in those cases, we would have layoffs at some point. Greg?
Greg AbelWhat I would add, Warren, is that as we are in the the, you know, sort of crux of the pandemic, we're still dealing with it, so our businesses have adjusted. Some have had to adjust more. We have, if you look at Berkshire Hathaway Energy, for example, you can see U.S. electricity consumption's down 4%. That realistically doesn't impact that business in a significant way, and longer term, we'll continue to grow that business. So even during the crisis, a relatively small impact of the business. But as Warren knows, we do have retailers that their doors are shut right now, be it our C's candy, some of our jewelers, and at that that point in time, we do adjust and adapt to the environment, i.e., we adjust our workforce, but equally we do see, for example, C's, at a point our stores will reopen. And at that point, we reemploy the folks. And overall, for Berkshire as a whole, as Warren said, five years from now, we see our employment numbers being far greater than they are today, and that we see great prospects within the operating businesses as a whole.
WarrenC's is an interesting example because we've owned that since 1972. That's a long time. And we love it. And we continue to love it. And I have a box here of our peanut brittle, and I've got another box of fudge right here, and I'll probably take them all home and not share it with Greg. But we were in the midst of our Easter season, and Easter is a big sales period for season. I don't know whether we were halfway through, but we weren't halfway through in terms of the volume. It was going to be delivered because it comes toward the end. And essentially, we were shut down, and we remained shut down. The malls, we've got 220 or so. retail stores and we've got a lot of, you know, furniture mart sells our candy, but the furniture
[26:18]
Warrenmarks close down. And so, season business stopped. And it's a very seasonal business to start with. So we have a lot of seasonal workers, too, that come in, particularly for the Christmas season. But we have a lot of Easter candy. And Easter candy is kind of, and Easter candy is kind of specialized, too. So we won't sell it. And we produced a good bit of it. We couldn't ship it. We couldn't put it in stores. And there's some of that's going on. And, of course, Greg does all the work on those sort of situations. And our managers are terrific, of course, in dealing with it. But this is a very, very unusual period. And like I say, a few years from now, I think virtual will be employing more people than 390. over the years we started with 2,000 of the textile business and we've still got the same playbook.
QuestionerThis next question comes from Drew Johnson who says that he's a longtime shareholder who's attended a couple of meetings. He says in an interview on April 17th, Charlie mentioned that some small businesses owned by Berkshire would not reopen after the pandemic eases. Can you elaborate on which businesses might be impacted?
WarrenWell, even we have businesses within businesses at Marmonds. And don't we have 97 different businesses, for example?
OtherExactly, yeah.
WarrenYeah, and there are some that weren't doing that well before. And I'm not talking about Barnman specifically, but they got a couple of them, and there's a couple of them. And it may be that in effect, the, you know, what's happened in the last couple of months has accelerated the decline of those businesses. where their customers are developing different habits. I mean, people are developing different habits in retail. There's no question about that. Now, that doesn't mean we haven't got a bunch of good retail businesses, but there are businesses that were, there are businesses that were having problems before and that have even greater problems. Now, we don't own our newspapers anymore, but we're financing the enterprise, which does have them. We've actually increased our investment in the newspaper business. by selling the papers to Lee and then refinancing their debt. And the newspaper business was having plenty of problems with both circulation and advertising before the virus came along. But advertising declines every place. Have accelerated fairly dramatically. And, you know, when the automobile industry stops, the auto dealers don't advertise.
[29:15]
WarrenIt's it's made certain businesses. made certain businesses that were tough before, even tougher now. And there will be in management of at least one of those subsidiaries suggested to us. And so there'll be, but there'll be, there'll be some changes in a few businesses, but they're very small businesses, our major businesses. And our business of intermediate size, I can't think of anything, that's a significant. that's of significance that won't reopen. But it won't be any fun with the businesses where the world has really changed. You're seeing a lot of change. If you own a shopping center, you've got a bunch of tenants that don't want to pay you right now. And the supply and demand for retail space may change fairly significantly. The supply and demand for office space may change significantly. A lot of people learned that they can work at home or that there's other methods of conducting their business and they might have thought that from what they were doing a couple of years ago. And when change happens in the world, it will adjust to it.
OtherYeah, I think the... This next question is a follow-up.
Greg AbelYeah. Well, I was just going to add on the Marman example, our 97 companies there. For example, we have a food service group which sells equipment to a variety of the restaurants. We have a few businesses that realistically were challenged when the industry was performing really well. And as we come out of the crisis, their economic prospects aren't going to be better. And in fairness to the teams and the employees in there, they understand that and they're working through it. And there'll be other opportunities potentially within the company. within Marmon and things like that. But, you know, there's a very specific answer or example relative to the question.
OtherThis next question is a follow-up on that. It comes from Chris Freed of Philadelphia. And he says it's been a long-term policy of Berkshire to not sell or close any ongoing subsidiaries as long as their business prospects weren't a money hole. Over the last year, he points out the sale of Berkshire Hathaway Media. And then Charlie's comments from that interview saying that several small Berkshire subsidiary subsidiaries, subsidiaries will not be opening when the coronavirus lockdown is lifted. So should shareholders assume that Berkshire has now changed its long-term policy in regards to keeping underperforming subsidiaries around?
[32:05]
WarrenI think that policy would spell out for maybe 30 years or so in an end of the annual report that we have said that if a company or if an operation, we think it's prospects are that it will continually lose money in the future. But we will certainly, we'll try to sell it to somebody else, but one way or another, we will not continue to hold it. And that is not a new policy and it's not been changed. You can say, in effect, we did that with the airline industry to some extent. If we owned all of an airline now, it would be a tough decision. decision to decide whether to sustain billions of dollars in operating losses. When you know, A, you don't know how long it's going to happen or occur, and secondly, you know that it's very likely that there'll be too many planes around and we know what happens in airline pricing when load factors go down and there's an oversupply of airline seats. So, you know, we didn't have to make that decision in terms of our own operation on it, but we did make a decision that that's a very tough management decision to make. And the government, of course, is, as, well, they've had the first wave of financing for the airlines. But to the airlines credit, they have very aggressively raised money. I mean, it's amazing to me how. What a good job they've done of that. And in the case of, I think in the case of three of them, no, two of them, but there may be more coming, they've raised equity money too. I mean, they are saying to the debt holders and investors, you know, you've got to put more money into this business if we're going to be able to continue. And the government's done it and private sources have done it. It's going to, it's exactly the right thing for the management's to be doing. But, you know, whether it's, whether it makes sense, we'll find out for the investors. This next question comes from Eric LaFont, and it's directed to Greg. He asks, how is precision cast parts handling the severe slowdown in the aerospace industry? So very consistent with everything we've just discussed, which is obviously a large part of their business is the aerospace industry. And it can really be broken into three areas as we do in our queue. But two are being impacted.
Greg AbelThe defense contract business remains very sound and strong within precision cast parts. But if you look at the large body aircraft, the aircraft that they use within the regional jets, that business will move directly with the demand there and the jets that are ordered longer term. So precision cast parts is literally.
[35:30]
Greg Abelliterally as we speak, continuing to adjust their business relative to the demand that would come out of Boeing. They would be having weekly calls with Boeing, recognizing what are the production orders there and adjusting the business accordingly. Boeing raised $25 billion just a day or two ago. And they raised $14 billion before that. And a year ago, they felt they were in a fine cash position. And I understand how all that happened. Air buses had the same situation. They've made some comments recently within the last week, you know, the fact that, you know, they really don't know what their future is. And I don't know what their future is. We're going to have aircraft in this country. We're going to be flying. But the real question is whether you need a lot of new planes or not. And when you're likely to need them and it affects a lot of people. It certainly affects precision cash parts. It affects general electric. It obviously affects Boeing. And it's it is a blow to essentially have a blow to essentially have your demand dry up. And it goes up in the chain. And, you know, the aircraft manufacturers didn't, they didn't bring it on themselves. The airlines didn't bring it on themselves. precision cash parts didn't bring it on itself. General Electric didn't. It's basically that we shut off air travel in this country. And what that does to people's habits and how they behave in the future, it's just hard to evaluate it. I don't know the answer. But we do know that we'll have an effect on precision cash parts. And how severe it will be, it depends on the same sort of variables that are hitting Boeing and... And you name the company in aircrafts. And aircraft's a big business. And this country's good at it, incidentally, too. I mean, if you think about Boeing, you know, it is what hell of a company. And it's important. It's a huge exporter and it affects a lot of jobs. And some of them are with us. And we hope for the best and we wish everybody the best, obviously. and we wish ourselves the best in it. But part of it is out of our, certainly out of our control. Right.
OtherAnd this next question is for Warren. And do you think GEICO will experience unusually high profitability in 2020 due to the reduced amount of driving, even after giving customers a 15% credit?
WarrenWell, we have promised to give our customers at GEICO. We're the second largest auto insurance company.
[38:31]
WarrenAnd different auto insurers are handling a sharing of of the better experience with their policyholders in different ways. We, our plan, will deliver back $2.5 billion roughly or so. And recognizing the reduced frequency of accidents during this period. What we don't know is how long this will continue. I mean, people want to drive their cars still, but conditions have reduced that driving. dramatically, obviously. Now, we have instituted a program that runs saving people money for six months, and so far other people have largely been two months, but some of them have given a little more for those two months than than we give per month. Our total is the greatest at two and a half billion. And in addition to that, we and all the others in the industry It's not just GEICO. We've also, and insurance commissioners in many cases, I believe we've required it, but we have, we give people more time to pay if they aren't paying, and if they cancel their policy or if they don't end up paying us, we've in effect giving them free insurance during that period. And the delay in payments is obviously increased delay of payments on, if you've got of a shopping that are getting rent. The delay in payments is what happens during a period like this. And that will be a significant cost to us. We don't know how significant will be. There will be more uninsured motorist driving, and they cause a disproportionate amount of accidents. And so there's a lot of variables. We made our best guess as to what we're going to do to reflect the current reduced accidents in our premiums that we receive really over the next year applies for a six month on renewals, but that we'll be renewing policies in October that will extend it in the next April. And so we've made a guess on it and we'll see how it works out.
QuestionerThis next question comes from Steven Stoller. He's a shareholder. in Atlanta, Georgia. And he says, would you please help us understand the effects of COVID-19 on our insurance businesses? Other insurance companies have reported losses from boosting reserves for future insurance claims that they expect to be paying as a result of coronavirus. Yet in Berkshire's 10Q released this morning, we do not appear to have reported much of these future expected losses. Can you tell us why this is the case? What kind of risks? Berkshire is underwriting that allows us not to be affected by the pandemic, or conversely, what we are right?
[41:42]
Ajit JainWell, the amount of litigation that is going to be generated out of what's already happened, let alone what may happen, is going to be huge. Now, just the cost of defending litigation is a huge, enormous expense, depending on how much there is. Now, in the auto insurance field, which is our number one field in terms of premium volume by some margin, It's more definable, but who knows what comes out of it in terms of litigation. But in what they call commercial multiple peril, which involves property losses, and where some people elect to buy business interruption coverage, many policies, quite clearly in the contract would not have a claim for business interruption under a commercial multiple policy where you've elected that. But other policies do. I think I know of one company. I don't know the details that's written a fair amount where they cover, or they, certainly there's a good argument, perhaps, that they cover business interruption that might arise from a pandemic. Well, they're in a very different position than the standard language, which says that you recover for business interruption only if there's, uh, involves physical damage to the property. And you can, you can buy all kinds of different policies. We are not big in the commercial, multiple peril business. So, I mean, this is not like our auto business or anything to the sort. But we will have, we will have claims. We'll have litigation costs. But proportionally, it's not the same with us as with some other companies, which have been much heavier in writing business interruption as part of a commercial multiple peril. But you don't automatically get coverage if you have business interruption. I mean, for example, I think it would be unusual if, say, General Motors had a strike, which they did, and that they have business. interruption that covers a strike. We actually wrote about, probably the only annual report in the United States, we wrote about business interruption insurance because we had it over in France when one of our properties was adjacent to a property that's much smaller property that had a fire and then it spread to our plant. And it caused a lot of physical damage and we have bought it. We have business interruption that ties in with that. But if we had some company we were selling all auto parts to, and they had a strike, our business would be interrupted, but it's not covered by the, I mean, that is not part of the coverage unless you specifically really buy it.
[45:00]
WarrenSo there's some claims that are going to be very valid related to this. The present situation, there'll be an awful lot that there'll be litigation on that won't be valid, and there's no question that some insurance companies, I know one particular, that will pay a lot of money relative to their size in terms of policies that they've written and I think we have reserved and our history shows we generally have reserved on the conservative side adequately at least and that's certainly our intent and we tell no managers of any of our insurance operations what numbers we expect from them or do any of that that that they evaluate their losses and They build in something for social inflation. They build in things for all kinds of things. And generally speaking, Berkshire's been pretty accurate in its reserving. And I have no reason to think that we're otherwise than that currently.
QuestionerStephen Tetter from Atlanta, who says he's a 10-year Berkshire shareholder, writes in and he says, do you see Berkshire offering pandemic coverage in future insurance policies?
WarrenWell, the answer is we insure a lot of things. Sure, I don't, we had somebody come to us the other day wanting insurance involving a $10 billion protection on something very unusual. We're not going to make that deal in all probability. In fact, I would say it's dead. But we would have written, we would have written pandemic insurance if people would come to us. offered us what we thought was the right price. We would have been wrong, probably in doing it, but we have no reluctance to quote on very unusual things and very big limits. We're famous for it. We haven't done that much of it in certain periods because the prices aren't right. But if you want to come and insure almost anything, and we don't want you to insure against fire. if you happen to be a no-an-arsonist or something, but if you come to us with any unusual coverages, either in size or in the nature of what's covered, Berkshire is a very good place to stop. And so somebody wants to buy, they can dream up the coverage and they can tell us the price they'll pay, and we will consider writing it. We wrote a lot of business after 9-11, for example. And there were really only a couple companies in the world that were willing to write the business. And Berkshire and AIG wrote a lot of business, and we thought we knew what we were doing. But we could have been surprised.
[48:18]
WarrenI mean, there could have been some follow-on incidents from 9-11 that we wouldn't have known about, you don't know for sure the answer. That's why people are buying insurance. But we wouldn't, we would be willing to write pandemic. coverage at the right price.
QuestionerThis next question is for Greg, and it comes from a shareholder named Todd Flaska. He says, I don't expect Berkshire to outperform the S&P 500 during good times. However, I remain a long-term investor because of the huge war chest that can be deployed during the downturns in the market like we're seeing right now. Warren has been brilliant at negotiating mutually favorable deals with companies that have somewhat urgent capital needs during these downtimes. These opportunities may only come about once a decade. There's a small window of time for these deals. They all come at once, and you don't really know if you're at the bottom of the market when the deals start coming. Will Berkshire be able to continue this approach when Warren and Charlie are no longer at the helm?
Greg AbelI fundamentally, without Warren and Charlie at the helm, I don't see the culture of Berkshire changing. I don't see our billet, which a large part of that is having the business acumen to understand the transaction, the economic prospects, and then the the ability to act quickly. I really don't see that changing as we evolve. Listen, you know, there's no one better than Warren and Charlie, but equally, we've got a talented team in Berkshire, both at the Berkshire level and within our managers that can obviously look at opportunities too very quickly. But, you know, the reality is it's a huge advantage we have right now when we would clearly want to be in a position to maintain that position of strength, Warren?
WarrenYeah, we will maintain it. And we not only have it with the managers of the, in some cases, not all cases by a long shot, but in some cases we have managers that will occasionally come up with something that can be quite attractive. But between Greg and Todd and Ted, we've got three extraordinarily good minds in terms of allocating capital. And, you know, I, Charlie may get, and we may get an occasional call of because of someone we knew 20 years ago or something, but they know a lot more people, they've got a lot more energy, and their minds work the same way as ours. have in the past. So I think it could very well be a significant improvement when the three of them are
[51:10]
Warrenthinking about capital allocation than when Charlie and I are now, particularly now that he's found Zoom. All right, this next question comes from Max Rudolph in Omaha, Nebraska, and he asks if Berkshire or any of its fully owned businesses have participated in any of the bailouts from the Fed or the Treasury? I certainly don't know of any. I guess you could say while we own the airlines, well, you know, the question is about fully owned businesses. And there's no way that I wouldn't know about anybody that did any of that.
Greg AbelNo. In fact, we've been very clear with the businesses, but we, our businesses understood how Berkshire operates and equally we're very clear. And equally, we're very clear that we would not be participating in any of those programs or, quote, bailouts.
QuestionerThis is a similarly related question. It comes from Seth Frieden, who says, as a long-term shareholder of Berkshire B shares, I'd like to know Warren's viewpoint around smaller holdings, specifically Oriental Trading Company and Nebraska Furniture Mart that are based in your hometown of Omaha. He imagines that those smaller business units have been adversely impacted by COVID shelter-in-in-place mandates. So we'd like to know if Oriental trading or other small business. business units applied for PPP loans or participated in those acts. And if they didn't qualify for a loan or didn't participate, then how will Berkshire support those smaller businesses to make sure that they can continue to employ their employees?
WarrenWell, to my knowledge, none of them have gone in for government money. And the two that I mentioned, I don't like to get into specific companies, but I can I can assure you that the Nebraska Furniture Mart and Oriole trading, in my view, have a fine future. But I don't want to talk about, go down the list, obviously, of every single company, because some of them I don't know the answer to. You know, we actually decided some time ago that our newspapers would have a much better chance of surviving if they were run as part of Lee than if we ran them independently. And as I said earlier, we actually put considerably more money. We probably put more money in the newspaper because there's virtually anybody in the country in the last six months because we took over a loan that would have been a problem in the year, whatever it might have been, maybe a year and a half. And we enable them to just deal with one lender rather than a group.
[54:11]
Warrenand they are doing a better job with the newspapers than we would do. And that's always our preference if we've got a business that's that does not have it, looks like it is not going to sustain itself over time in our hands. If we can find somebody else that we think we'll do a better job, we'd love to have them run it. So if we have a problem business, We would prefer to find a somebody that thinks they can do a better job and probably can do a better job of running it than we can. But some businesses just as superior. We started with a textile business. We started a company called Diversified Retailing, which merged into Berkshire, became part of Berkshire, and started with a department store in Baltimore. And department stores looked good in 1966, but the world was gone against them. And we had a trading stamp business. time and we stayed longer than anybody else but the world left trading stamps behind her and that's going to happen with some businesses that's capitalism uh and it will happen to some businesses that's capitalism uh and it will happen to some berkshire businesses over the next 10 years in the next next 50 years we think we'll find more of them that will grow and and net that berkshire will grow but we do not think if you own a great many businesses that everyone is destined for success That's why I suggest to people they buy an index fund. I do not, with the exception of birth. I would not want to put all my money in any one company, although there's a few I wouldn't mind being very close to that. But I don't think, you know, you get surprises in this world, and there will be businesses that we think are very good to turn out not to be so good. And there will be other businesses that turn out to be so good. And there will be other businesses that turn out. better than we think and and it's up to the world to judge our batting average over time.
Greg AbelGreg? Well, I would just add and echo again that when it comes to the PPP loans, we're not aware of any of our businesses taking them. And, you know, as I said, we encouraged them if they were ever thinking that there was going to be a dialogue and we're not aware of any businesses pursuing them. I would also just add that when you look at our businesses as we went into the crisis, they responded very well. responded very well. So as we look at our businesses, and Warren touched on this, our large businesses, our mid-sized businesses, and even as you go down from there,
[56:56]
Greg Abelthey're in very sound shape as we go through the pandemic and are really preparing to emerge now. So they're evaluating, listen, they're going to have a different customer, there's going to be different consumer behaviors, how our employees work, a lot of work at home now, does that make sense? And the communities we're operating in have all changed. have all changed, but we're literally moving from the point of, okay, we're, we're making it through the crisis and really planning to reemerge now. And I would say our businesses aren't an extremely sound place. We don't know when the, what?
QuestionerThis next question. Well, I was just going to go ahead.
WarrenBut we don't know. We don't, we don't know how long this period lasts. And nobody knows. You know, we don't know whether the, most people think, and they know more about it and I do, that the virus will, you know, to some extent, decline in its spread during summer months. And I would say a good many think that it will come back at some later date. And how the American public reacts if they get their hopes up through some reopening, some through some summer diminution and how they would react to a second attack in effect by the virus. It's like Dr. Foss, you know, the virus is going to determine our behavior. And we're doing a lot of smart things and we've got a lot of very smart people. But there are unknowns and the unknowns that apply to the health aspect create unknowns in the unknowns in the economy. in the economy, and we will have to keep evaluating things as we go along. I hope, like crazy, obviously, that once suppressed it doesn't come back and that we readjust, but things don't always work perfectly. That doesn't mean there was a better course of action. I would not go around criticizing people at all for what they've done or anything of the sort. sort. I just think you're dealing with a huge unknown. And I think that the degree to which it's disturbed the world and changed habits and endangered businesses in the last couple of months indicates that you better be not be too sure of yourself about what will do in the next six months or year or whatever.
QuestionerWarren, a moment ago, you mentioned that you still are recommending that people invest in in an S&P 500 index fund. Let me ask this question that came in from Kevin. He says the last few weeks we've been hearing from active money managers that the day of passing in passive investing is over.
[1:00:01]
QuestionerThe historical safety of investing in an index fund long term is gone. Would you please provide your thoughts on this topic, particularly in regards to an investment time span of 10 years?
WarrenWell, I can tell you, I haven't changed my will. And it directs that my widow would have 90% of it. the funds in index funds and it's it's I think it's better advice than people are generally getting from people that are getting paid a lot to give other advice. You don't make a lot of money advising an S&P 500 index fund. I mean, and how you can say the day of index funds is over. I mean, if you say the day of investing in America is over, I would disagree quite violently. And then is there something special about index funds being a terrible way to invest? I just don't think, really, it's very hard to have evidence of that. I mean, if the index funds reflect the market and one side has high fees that think they can pick out stocks and the other side has low fees, I know which side's going to win over time. And it's, you have to recognize that it's in, in, a great many people's interest to convince you that they can do something that they may well even believe they can. And a certain percentage of them will do it from luck and a few people will do it from skill. And that's what makes it so enticing that you can find the Jim Simons or somebody that's going to produce extraordinary return. And Jim and his group have done it by brainpower. But it's very unusual. And incidentally, they are going to to charge you a lot of money and they're going to actually maybe close up their fund if they do it because they can't do it with really huge amounts of money compared to what they've, how the records been established in the past. So it's just have to recognize you're dealing with an industry where it pays to be a great salesperson and it pays even better if you're a great salesperson and you can actually produce something. But the money is in selling. There's a lot more money in selling than than in managing, actually, if you look to the essence of investment management.
QuestionerI got a number of variations on this next question. Some more polite than others. This one's right about down the middle. But this is from Mark Blakely, who writes in from Tulsa, Oklahoma, and he says, like many, I'm a proud Berkshire Hathaway shareholder. However, in comparing the performance of Berkshire with the S&P 500 over the last 5, 10, or 15 years,
[1:02:52]
QuestionerI've been disappointed in Berkshire's underperformance. Even year to date, Berkshire is trailing the S&P 5th by 8%. To what would you attribute Berkshire's underperformance?
QuestionerWell, I can't imagine ever selling my Berkshire stock. At some point, money is money.
WarrenWell, I agree with everything that, I forget his name, but just said, I mean, the truth is that that I recommend the S&P 500 to people. And I happen to believe that Berkshire is as about a sound as any single investment can be. in terms of earning reasonable returns over time, but I would not want to bet my life on whether we beat the S&P 500 over the next 10 years. I think there's a, you know, I obviously think there's a reasonable chance of doing it, but, and we've had periods, I don't know how many out of the 50, 55 years, we've been doing it, or at, I don't know how many we've been doing it or at, I don't know how many we've beaten or not. I mentioned earlier that 1954 was my best year, but I was working with absolutely with peanuts, unfortunately. And I think if you work with small sums of money, I think there is some chances, some chance of a few people that really do bring something to the game. But I think it's very, very hard for anybody to identify them. And I think that when they work with large funds, it gets tougher. And it's certainly gotten tougher with. for us with larger funds. And I would make no promise to anybody that we will do better than the S&P 500. But what I will promise them is that I've got 99% of my money in Berkshire and most members of my family are not be quite that extreme, but they're close to it. And I do care about what happens to Berkshire over the long period about as much as anybody could care about it. But, you know, caring doesn't guarantee results. It does guarantee attention.
WarrenGreg?
Greg AbelWell, I would agree one. There's never guarantees, but when I look at the assets we have in place, and the teams that are in place, i.e., you're committed to Berkshire, but we have dedicated teams that equally are dedicated to Berkshire, and they're sure going to give it their best effort every day. And I, when I look at the assets and the people, I think we have, as you said, And you can't guarantee it, but we have a great chance of sure giving a good effort to help perform it. It's hard to imagine getting a terrible result of Berger, but, you know, anything can happen. And what I do know is it would be easier to be running $5 million than our book net worth at Berkshire at the quarter end, I think, was $370 some billion, which is down.
[1:05:58]
Greg AbelBut it's still greater than the book net worth of any corporation in this. the United States. That's probably, I mean, maybe there's some federal corporation that has more, but in terms of, it may be the greatest in the world, I'm not sure. And that makes life difficult in some ways too. Right. And the potential of our operating businesses are substantial. When you think we've talked about energy, you touched on it, that that infrastructure is continuing to change. There's, you know, we're ready for $100 billion of investment opportunities there. If we just look at the business over the next 10, years and the infrastructure that's required and how it's changing substantial, substantial investments there. Just tell me we have very good prospects. It's, and we're well positioned to pursue them. Which again, to me, when you look at our core businesses, you touched on them, Burlington, the insurance and energy, our downside is very nicely protected. We have three really core great businesses. Yeah. And we're better positioned than anybody in the energy business. Just because we don't have dividend requirements, we retain 28 billion of earnings over 20 years, that you can't do it if you run a normal public company. And we've got a huge appetite, and the country needs it, the world needs it. And we are a very, very logical, well-structured, well-managed, I would say, because it doesn't involve me. doesn't involve me, a company, to participate in just huge requirements around the world. Now, you know, they're slow, and they involve governments, and they, I mean, state governments, and there's a lot of, it's not anything that happens dramatically. It will happen, and Berkshire should participate in a huge way. We can do things in insurance, nobody else can do. That doesn't mean much. many times, but occasionally it may be important. So there are some advantages to size and strength, but there are disadvantages to size, too. But there are disadvantages to size, too. If we find some great opportunity that for a billion dollars to double our money, that's a billion pre-tax, and that's $790 million aftertax, and on a market value of $450 billion or whatever it may be, it's a market value. it doesn't amount too much unfortunately we'll still try and do it if we can yeah
QuestionerI want to ask this question that came in because I think some people may have had a misinterpretation about something you said a few minutes ago this is the
[1:08:52]
Questionerbenefit of being able to get these questions real time but a few moments ago you were talking about the people at the company who will be allocating capital after you and Charlie are no longer doing it and you mentioned that you've got Todd Ted and Greg all doing that, but I've gotten a few questions that read similar to this. This one's from Edward Papula in New York City who says, Dear Warren, I noticed you didn't you didn't mention Ajit Jane when you reeled off your list of future management. is out of the picture.
WarrenWell, Ajit is not in the capital allocation business. he is the best, well, he's got one of the best minds in the world. I wrote his father after he worked for us for a few years. up again the other day, but 20 years ago I wrote him and I said if you've got another son him, send him over. from India because well-owned the world. Now, Ajeet is one of a kind. Anybody will tell you that's had any contact with him, and particularly anybody in the insurance business where they know him well, he is absolutely one of a kind. But his job is not capital allocation, it's evaluating insurance risk. And that is a rare. He possesses a rare talent and he has a huge capital backing to do. do it. So he's an incredible asset. But Greg and Todd and Ted have been in the asset allocation business in a big way for a long time. That's their game. And Ajit's game is insurance. So that's why I mentioned those three. And incidentally, while Charlie and I are around, we kind of like capital allocation ourselves. We're not going any place voluntarily, but we probably will go someplace involuntarily before that long. Charlie's in good health, incident. I'm in good else.
WarrenGreg, let me ask you one of these capital allocation questions. This one comes from Matt Libel, and he says, Berkshire directed 46% of capital expenditure in 2019 to Berkshire-Hathaway Energy. Can you walk us through with round numbers, how you think differences in CAPEX spending versus economic depreciation versus gap depreciation and help explain the time frame over which we should recognize the contractive return on equity from these large investments as we are shareholders and as we as shareholders are making in Berkshire Hathaway Energy.
Greg AbelSo when we look at Berkshire Hathaway Energy in their capital programs, we try to really look at look at it as as it was highlighted really in a couple different packages.
[1:11:29]
QuestionerOne, what does it actually require to maintain the existing assets for the next 10, 20, 20, 30 years? I.E. It's not incremental. It's effective. maintaining the asset, the reflection of depreciation, and our goal is always to clearly understand across our businesses, do we have businesses that require more than our depreciation or equal or less?
Greg AbelAnd I'm happy to say with the assets we have in place and how we've maintained the energy assets, we generally look at our depreciation as being more than adequate if we deploy it back into capital to maintain the asset. Now, the unique thing in the lion share of our energy businesses that are regulated, and that exceeds 85% of them, 83% of them, we still earn on that capital we deploy back into that business. So it's not a traditional model where you're putting it in, but you're effectively putting it in to maintain your existing earnings. So it's not drastically different, but we do earn on that capital. But what we do spend a lot of time in that. And that's what, when Warren and I think about the substantial amounts of opportunities, that's incremental capital that is truly needed within new opportunities. So it's to build incremental wind, incremental transmission that services the wind or other types of renewable solar. That's all incremental to the business and drives incremental both growth in the business. It does require capital, but it does drive growth growth within the energy. business. So there's really the two buckets. I think we would use a number a little bit lower than the depreciation. We're comfortable. The business can be maintained at that level. And as we deploy amounts above that, we really do view that as, quote, incremental or growth cap-ex.
WarrenYeah, we have what? $40 billion or something? What do we have in sort of kind of in the works?
Greg AbelOh, yeah. So we have basically, as Warren's highlighting, $40 billion. in the works of capital. That's over the next, effectively, nine years, 10-year period. A little, approximately half of that we would view as maintaining our assets, a little more than half of it's truly incremental. And those are known projects we're going to move forward with. And I would be happy to report we probably have another 30 million, 30 billion that aren't far off of becoming real opportunities in that business. Now, as Warren said, that takes a lot of time. It's a lot of work. The transmission projects, for example, we're finishing in 2020.
[1:14:18]
Greg AbelWe're initiated in 2008 when we bought Pacific Corp. I remember working on that transmission plan, putting it together, thinking six to eight years from now, we'll have them in operation 12 years later. And over that period of time, we earn on that capital. We have invested. And then when it comes in the service, we earn on the whole amount. So we're very pleased with the opportunity. But we plant a lot. of seeds, put it that way. Yeah, and these are not, it's not like they're super high return thing, but they're decent returns and over time. And we're almost uniquely situated to deploy the capital, as opposed, I mean, you could have government entities do it, too, but in terms of the private enterprise. And they take a long time, they earn decent returns. always said about the energy, but it's not a way to get real rich, but it's a way to stay real rich. And we will deploy a lot of money at decent returns, not super returns. You shouldn't earn super returns on that sort of thing. I mean, it does, you are getting rights to do certain things that governmental authorities are authorizing, and they should protect consumers, but they also should protect consumers. people to put up the capital. And, you know, it's worked now for 20 years, and it's got a long runway ahead.
OtherAll right. This next question comes from Jason in New Jersey.
QuestionerAs both a Berkshire and Occidental shareholder, I was encouraged to see your investment in the company. But with passing weeks, it became evident that your investment facilitated Occidental management's ability to avoid a shareholder vote on the Anadarko acquisition, a very shareholder and friendly outcome. This deal proved to be irresponsible and expensive for. from an Oxy perspective and ultimately very value destructive for Oxy shareholders. In my view, it also permanently hurt Berkshire's reputation in the marketplace. Please comment on this unfortunate outcome and tell me why Oxy shareholders and other market observers shouldn't feel this way.
WarrenWell, we said right from the beginning, although we didn't certainly expect to agree to what's happened. We said essentially when you buy into an oil, a huge oil. production company, you know, how it works out is going to depend on the price of oil to a great extent. It's not going to be your geological home runs or silver mistakes or anything like that. It is a investment that depends on the price of oil.
[1:17:11]
WarrenAnd, you know, when oil goes to minus $37, it's happened the other day for, I guess it was to make, contract, you know, that's off the chart. And, and if you own oil, you should only own oil, if you expect these prices to go up significantly. I don't know whether they'll go up significantly or not. We're in the, we're in the transaction. Our commitment was made on a Sunday when the management of Anadarko favored Chevron. And Chevron had a breakup fee of a billion dollars, and accidental people have been working on it for several years. And it was attractive at oil prices that then prevailed. And it doesn't work, obviously. It doesn't work at $20 a barrel. Certainly doesn't work in minus $37 a barrel, but it doesn't work a $20 a barrel. And everything the oil companies have been doing. whether it's Exxon or Oxidon or anybody else, it doesn't work at these oil prices. That's why oil production is going to go down a lot in the next few years, because it does not pay the drill. Now, that's happened at other times in the past, but the situation is, you know, you don't know where you're going to store the incremental barrel of oil, and oil demand is down dramatically. and for a while the Russians and the Saudis were trying to outdo each other and how much oil they could produce. And when you've got too much in storage, it doesn't work its way off that very fast. Now, you will have production of oil to go down in the United States. Significantly, it does not pay to drill in all kinds of formations that paid before. And it doesn't pay, it doesn't pay to have paid the... price that oil was trading at in the ground a year or two ago, and to that extent, if you're an Oxy shareholder, you know, you've, or any shareholder in any oil producing company, you join me in having made a mistake so far in terms of where oil prices went, and who knows where they go in the future.
QuestionerLet me follow up with this one, and this one comes in from a new who says, is there a risk of permanent loss of capital in the oil equity investments?
WarrenWell, there certainly is. You know, there's no question. If oil stays at these prices, there's going to be a lot of money, a whole lot of money, and it'll extend to bank loans and it will affect the banking industry to some degree. Not that doesn't destroy them or anything, but it there's a lot of money that's been invested that was not invested based on a $17 or $20 or $25 price.
[1:20:36]
Warrenfor WTI, West Texas, intermediate oil. And, but you can do the same thing in copper. You can do the same thing in some of the things we manufacture. I mean, it, but with commodities, it's particularly dramatic. And, you know, farmers have been getting lousy prices, but to some extent the government subsidized them. I'm all four in it, actually. But if you're an oil producer, you take your chances. on future prices, unless you want to sell a lot of futures forward. Oxy actually did sell 300,000 barrels a day of puts in effect that, or they bought puts, but, and sold calls in effect to match it. And they were protected on a $10 for a layer of $10 a barrel on 300,000 barrels a day. But you're really buying, when you buy oil, Well, you're betting on oil prices over time and over a long time. And oil prices, there's risk. And the risk is being realized by oil producers as we speak. If these prices prevail, there will be a lot of bad loans and energy loans, or bad debts in energy loans. And if there are bad debts and energy loans, you can imagine what happens to the equity holders. So yes, there's risk. All right.
QuestionerThis question comes from Bob Coleman. He says, Warren, could you bring us up to date with the status of your equity put contracts? Sourcing the 2019 annual report found on page 60. It appears at 2019 year in, the fair value liability was just under a billion dollars. And if the index has declined 30 percent, the liability obligations ballooned to $2.7 billion. So if the indexes are down 60 percent, would Berkshire's obligation be close to $5 billion? and a half billion dollars, does that math seem reasonable and are there any loose ends or open exposures associated with the funds?
WarrenNo, we, between 2004, I think, in 2006, I think we wrote 48, maybe 50 contracts, something like that. The shortest was 15 years, the longest was 20 years, and we received, as I remember, roughly 4.8 billion dollars, which we were free to do with what we wanted. And we agreed to pay based on where one or more of four indices were selling for. At the time of expiration, there were so-called European-style puts where they're only payable based on one date. And we did not have, with a small exception, we did not have to put up collateral, which was part of the deal. And we've had that $4.8 billion. We probably had an original nominal value of something over $30 billion, maybe $35 billion.
[1:23:56]
WarrenThat's if everything went to zero. I mean, Dow Jones went to zero, the Footsie went to zero, and the Niki and so on. A number of those have run off. So we now have about $14 billion nominal. We have something less than half left. We haven't paid out anything significant. We bought back a few of them. If everything went to zero, we would 0 $0.14 billion. If everything were to sell at the same price it was selling for on March 31st, I think the number is some, I think it's somewhat less than we carry as a liability on the balance sheet, which is $2 and a fraction billion. So far, so good. I mean, we've had the use of a lot of money, and the outstanding potential of them is the market went up a lot. We wouldn't have to pay anything. And if it goes down some more, we have to pay more than a couple of billion. But we've got the liability set up for that. But so far, so good on that. And it is not anything that causes us any problem. They come due, the final one I think comes due sometime in, in 2023. I think there's I think maybe 20 or 25% of them come due late this year. And so it's the, there's nothing that the questioner doesn't really understand about them. I can tell by the question, and there's no surprises there. There's no way that some liability could double up on us except based on, except relating to where those indices close at the expiration of a group of different puts, which like I said, have been more than cut in half. And we've done very well on it. Key to that.
QuestionerWarren, you mentioned a few minutes ago that you...
WarrenWell, I was just going to say key to that was, with just a couple of those tiny exceptions. We did not, we did not agree to put up collateral. We never would have gotten ourselves in that position. And that was when we made the deals, we just would not get ourselves in that position. And we just would not get ourselves in that position, and we never will. where on a given date, we could have some tremendous obligation that would come do that we weren't count on having come due. I'm done then, Becky, yeah.
OtherOkay, thanks. You mentioned a few minutes ago that you're very concerned about Berkshire's long-term health, too. This question came in from Drew Estes in Atlanta, Georgia, who says, there's already speculation of a post-Buffet breakup of Berkshire. And given the sway carried by modern activists, the speculation should be taken seriously.
[1:26:52]
Questionerlong-term owners see the folly in this view. A $25 billion ancillary earnings stream provides a lot of flexibility when investing insurance float. On our and your estate's behalf, could you more forcefully make the case of maintaining Berkshire's current architecture? If you don't, that responsibility will fall on an unknown set of shoulders with far less credibility.
WarrenWell, if you were to sell Berkshire's various subsidiaries, you would, incur a very significant amount of tax at the corporate level before anything was distributed to the shareholders. You can spin off a given one or something of the sort, but the ability to break up a diverse company without tax implications. There was something called the general utilities doctrine that prevailed in various ways up until 19. And a lot of people seem to comment based on the fact that that didn't happen in 1986. And there's imaginative ways where people try to avoid taxes and can do it in some cases. Uncertain types of transactions, if you were to break up Berkshire, that would be one factor. But the interaction of being able to move capital around in terms of being able to do things in insurance that we couldn't do unless there were the backup earnings and capital employed in the other entities. There's enormous advantages in capital deployment within the place. So there is not a big discount to break up value embodied in Berkshire's price. And the situation actually is that although all my Berkshire shares, every share, will be given to charities pursuant to a plan I developed back 14 years ago and followed ever since and will continue following this July of the giving away $3 billion or so worth of the stock. But it's all, it still involves a big voting percentage that, including other people that still remain in the picture, aside even from the Buffett fans. family, it isn't going to happen. Now, I will tell you, everybody in the world will come around and propose something and say it's wonderful for shareholders, and by the way, it involves huge fees. I mean, you do not, you do not get impartial advice from Wall Street when there's enormous amount of fees possible from one action and no fees applicable from another action. But you can be sure I've thought about it. And I would say that you can count on Berkshire's present posture being continued for a long time. I can't tell you what's going to happen 100 years from now.
[1:30:09]
WarrenAnd I can't tell you exactly what would happen, for example, if certain ideas in terms of wealth taxes changed or taxes on foundations change. But my plan has been thought out and in place for a long time. And it not only ensures that the money that's been made off Berkshire, all of it ends up going to various philanthropies staggered over time, but it also, it will keep the walls away.
WarrenGreg, do you have any thoughts on that?
Greg AbelI think the comment on the capital allocation is critical, that we have the ability to move the capital amongst the, be it the operating businesses, or up to the insurance or down. with really no consequences to our shareholders. That's the value driver, the unique structure of Berkshire, and it creates immense value. So that's all I would add, or second, I guess.
QuestionerAll right, this question comes from Rob Grandish in Washington, D.C. He says interest rates are negative in much of Europe, also in Japan. Warren has written many times that the value of Berkshire's insurance companies derived from the fact that policyholders pay up front creating insurance float on which Berkshire gets to earn interest. If interest rates are negative, then collecting money up front will be costly rather than profitable. If interest rates are negative, then the insurance float is no longer a benefit but a liability. Can you please discuss how Berkshire's insurance companies would respond if interest rates became negative in the United States?
WarrenWell, they were going to be negative for a long time. You better own equities, you better own something other than that. I mean, it's better own something other than that. I mean, it's, it's, It's remarkable what's happened in the last 10 years. I've been wrong in thinking that you could really have the developments you've had without inflation taking hold. But we have 120 odd billion. Well, we have some almost very high percentage in treasury bills, some and some in some just in cash. But those Treasury bills are paying as virtually nothing. Now, they're a terrible investment over time. But they are the one thing that when opportunity arises, it will arise at a time. And maybe the only thing you can look to to pay for those opportunities is the Treasury bills you have. I mean, the rest of the world may have stopped. And we also need them to protect, be sure that we can pay the liabilities we have in terms of policyholders over time.
[1:32:57]
WarrenAnd we take that very seriously. If the world turns into a world where you can issue more and more money and have negative interest rates over time, I'd have to see it to believe it. But I've seen a little bit of it. I've been surprised. So I've been wrong so far. I do not think that I don't see how you can create. I would say this. If you can have negative interest rates and pour out money and incur more and more debt relative to productive capacity, you'd think the world would have discovered it in the first couple thousand years rather than just coming on it now. But we will see. It's probably the most interesting question I've ever seen in economics is can you keep doing what we're doing now? And we've been able to do it. has been able to do it for now a dozen years or so. But we may be facing a, we may be facing a period where we're testing that hypothesis that you can continue it with a lot more force than we've tested it before. Greg, do you have any thoughts on that? I wish I knew the answer. Maybe you do.
Greg AbelNo, I think as you articulated, I think it was in the annual report too. I mean that we don't know the answer. But as you said, some of the fundamentals right now are very interesting relative to having a negative interest rate. But I know, I hate to say it, but I don't have anything to add. I'd love to be Secretary of the Treasury if I knew I could keep raising money in negative interest rates. That makes life pretty simple. And we're doing things that we really don't know the ultimate outcome. I think, and I think in general they're the right things, but I don't think they're without consequences. they could be kind of extreme consequences pushed far enough, but there would be kind of extreme consequences if we didn't do it as well. So if somebody asked us to balance those those questions.
OtherAll right, this question comes from Adam Schwartz in Miami, Florida. He says Berkshire is the largest holding in his partnership, which also houses most of their net worth. He says Berkshire's invested in many capital intensive businesses through the years, railroads as an example. How do you think about the inflationary or even deflationary risks for all of the capital intensive businesses and could this prove to be an existential problem for businesses kind of referencing what you were just talking about that eventually the bill for the debts being issued comes due will it eventually
[1:35:53]
Warrencome from all businesses through some combination of higher tax rates on corporations increased wages for the lower middle class well i certainly think that increased corporate taxes are a much higher probability than having lower corporate taxes. So I think that we got handed as a corporation a big chunk of what used to be the government's profits from our business a couple of years ago and it would depend on to some extent which party is elected and and whether they have control of both houses as well as the presidency and who knows what else but we could very easily have higher corporate income taxes and perhaps much higher corporate income taxes at some point and in terms of capital-intensive businesses they're just not as good if you can find an equally good business I mean in terms of operations that doesn't require capital I mean they're you know the sea's never sees never required capital didn't grow but it's but it's it's it just doesn't it didn't take money to expand it and it's delivered enormous sums to us and because we own it within berkshire to redeploy it elsewhere didn't require a lot of tax expense either at the corporate level or at the personal level uh uh so you really want a business and everybody wants a business that doesn't take any capital to speak of and keeps growing it doesn't take more capital as it grows now our utility business energy business requires more capital as it grows our railroad business to some extent requires more capital if it doesn't grow even uh so capital intensive businesses uh by their nature uh you know are not as good as something where people pay in advance and you don't need the capital i mean if you look at if you look at where the top market value is in a 30 trillion dollar market you know if you take the top four or five companies that account for you know maybe three three four trillion of or so of that 30 trillion basically they don't take much capital and and that's why they're worth a lot of money because they make a lot of money and they don't require the money to any great extent in the business we own some businesses like that but it's certainly not the railroad and it's not it's not the uh energy business uh they're good businesses we love them but uh if they didn't take any capital they'd be unbelievable but that's just uh that's what we've learned from 50 or 60 years of operating businesses that if you can find a great business that doesn't require a capital
[1:39:00]
Warrenwhen it grows you've really got something and to a certain extent because insurance uses the kind of assets we would like to own anyway our insurance business doesn't really take capital it requires having capital available but we're able to invest that money largely in things we'd like to own anyway so we're particularly well suited for the insurance business and it's really been the most important factor in our growth over the years although a lot of other things contribute
QuestionerGreg you're in a capital you were in the capital intensive business yeah tell us about it
Greg AbelWell, I think there's no question obviously we'd prefer to be in a less capital intensive business. But there are unique opportunities there. And the one I would touch on when I think of inflation or even potentially as we go through this crisis and maybe a prolonged one or depending on how long it takes to recover. I mean, we aren't any unique, when we're looking at energy or rail, we do have a certain amount of pricing power. And it's through our regular. regulatory formulas or how our arrangements are with our customers. So if we then were to move into an inflationary period, it's not perfect protection, but those businesses generally can recover a significant portion of their costs, even in an inflationary environment and still earn a reasonable return. They're not going to be great returns, as you highlighted weren't, but they're still going to earn a reasonable return on their capital, even in an inflationary period. There may be some lag and some things like that, but there's still going to be very sound investment.
QuestionerOh, yeah, if there was 10 for one inflation, make it extreme. Yeah.
Greg AbelWe'd be happy we own the railroad, very happy. Well, we'd be investing a lot of capital in it, but that business, in my view, is a very, very solid business for many, many, many, many decades to come. I said originally we bought it with a hundred-year time horizon, and I've extended that. it will earn more dollars if there's a lot of inflation. In real terms, who knows, but it would earn a lot more dollars. And a lot of the energy projects would, but it's better if we don't have inflation, and it's better if we don't have capital, if we can find the same sort of businesses that aren't as capital-intensive. We've got capital. I mean, we're ideally positioned for capital-intensive. intensive businesses that other people have trouble raising capital for, but they've still got a promise decent returns.
[1:41:50]
QuestionerAll right, this question comes from Charlie Wang. He's a shareholder in San Francisco. He says, given the unprecedented time of the economy and the debt level, could there be any risks and consequences of the U.S. government defaulting on its bonds?
WarrenNo. The, uh, if you, if you print bonds in your own currency, what happens to the currency? What happens to the current? is going to be a question, because you don't default. And the United States has been smart enough, and people have trusted us enough to issue its debt in its own currency. And Argentina is now having a problem because the debt isn't in their own currency, and lots of countries have had that problem, and lots of countries have had that problem, and lots of countries. will have a problem in the future. It is very painful to owe money in somebody else's currency. But if you, listen, if I could issue a currency, Buffet bucks, and I had a printing press, and I could borrow money, and I could borrow money in that, I would never default. So what you end up getting in terms of purchasing power can be in doubt. But in terms of the U.S. government, I, when Standard & Force downgrade, the United States government, I think it was standard importance, some years back. That, to me, did not make sense. I mean, in the end, how you can regard any corporation as stronger than a person who can print the money to pay you, I just don't understand. So don't worry about the government defaulting. I think it's kind of crazy, incidentally. This should be said. to have these limits on the debt and all of that sort of thing and then stopped the government arguing about whether it's going to increase the limits. We're going to increase the limits on the debt. The debt isn't going to be paid. It's going to be refunded. And anybody that thinks they're going to bring down the national debt, I mean, that, you know, there's been brief periods and I think in the late 90s or thereabouts, when the debt's come down a little bit. The country's going to print more debt. the country is going to grow in terms of its debt-paying capacity. But the trick is to keep borrowing in your own currency. Emphasis on the trick.
QuestionerThis question comes from David Cass. He is a clinical professor of finance at the University of Maryland, and he says, Berkshire has invested in many companies with stock buyback programs. Recently, there's been a backlash against buybacks.
[1:44:54]
QuestionerWhat are your views on this subject?
WarrenWell, it's very politically correct to be against buybacks. buybacks now, and you know, and they're going to incorporate it in the loan program. I mean, there's a lot of crazy things set on buybacks. Buybacks are so simple. I mean, it's a way of distributing cash to shareholders. And let's just say that you and I and Greg, the three of us, decide to buy an auto dealership or a McDonald's franchise or something, and we each put a million dollars in, you know, or whatever the number may be. And we get along with each other and the business. and the business grows and all of that. And one of us really wants to spend our share of the earnings. And the other two want to leave the money in the business to grow. Now, if the three of us did that, and we're the only shareholders, we would not establish a 100% dividend payout for everybody, and we wouldn't freeze the one that wanted to get out either. The logical thing to do is to buy a portion, whatever that person wants to spend annually from the earnings, buy a portion of their stock, and the other two find their interest in the company goes up. And the third person still has a little more of an interest by what they leave in, but they also can take some money out of the business. You're taking money out of the business in either case, and one, you call dividends and you send it to everybody whether they want it or not. And with buybacks, you give it to the ones who want the money. And I have been following a policy of giving away stock now since 2006, and I'll give away a lot of stock, but the people, the philanthropies that receive it, the gifts have to spend the money very promptly within, you know, on a current basis more or less. So they are getting $3 billion worth of stock or whatever it made. stock or whatever it may be. And I'm in effect reducing my interest in Berkshire, but I'm still, Berkshire is still retaining more capital than I'm giving away. So I have more dollars invested, but my interest goes down. And the people that need the cash to carry out the philanthropic efforts, they cash out the stock. And I don't force, I don't force my sister or whoever it may be to take a bunch of money she doesn't want. She wants it. all of it reinvest in the business and people that don't want to and sell some of their stock. And the company ends up in the same position. We've distributed some of the capital that we don't need for growth.
[1:47:43]
WarrenNow, whether the company should buy it depends on a couple of things. One is they ought to retain the money they need for intelligent growth prospects. That's fine. And secondly, and this is a point that's never mentioned, they should be buying. and they should be buying it back below what they think it's worth. Now, they'll make mistakes in that, but you make mistakes in a lot of businesses. But over that should be the guiding principle. And of my knowledge, JP Morgan, Jamie Diamond said it once, and we've said it various times, you know, we retain, we will repurchase shares when it's to the advantage of the continuing shareholder to have us do so. But you read about all these buyback problems, they say we're going to spend $5 billion. buying it back or $10 billion. Well, that's like saying I'm going to go out and buy some business this year for $5 billion without knowing what you're going to get for the money. It should be price sensitive, obviously. It should be needs sensitive, obviously. But when the conditions are right, it should also be obvious to repurchase shares, and there shouldn't be the slightest taint to it any more than there is to dividends. And people that have now sort of taken up the cries about how terrible it was that companies bought back back. Well, you can say it was terrible for him to pay dividends, too, then they'd have more money now. But they were doing what was intelligent at the time. And I hope they continue to do what's intelligent as they go forth. Greg?
Greg AbelNo, the only thing I know you've commented on in the past Warren is that I think the one thing we are seeing, and obviously we're supportive of buybacks, but there are companies that used probably their financial engineering was just a little extreme and too cute that effectively you're using every ounce of your balance sheet to buy back stock at a time where you're really creating no cushion for your business for any type of event or bump in the road. And I, you know, we're going to see that, and I think that's a very unfortunate outcome of them, and hence you get some of the backlash. But there's still companies, as you highlighted many, that do it right. Yeah. If they're buying it back because it's fashionable, because they really do like the idea, There's nothing wrong with taking an action that increases the value of the remaining shares, but if they're doing it very...
[1:50:06]
WarrenAnd instantly, I've been witnessed to some programs where it really is stupid. But I don't think it's immoral. I think it's stupid, basically. And on the other hand, we favor companies that take care of all our requirements for growth. And as Greg says, maintain sound balance sheets and all of that. Leave a margin. of air for things that you can get surprised with. And if they find their stock selling below what the business is intrinsically worth, I think they're making a big mistake if they don't buy in their stock. And it's going to be a political football. And like I say, when it becomes politically correct to do something in this country, if you're a politician, the best thing to do is get on board. But Berkshire is going to do what it thinks makes sense for shareholders. And we like investing in companies that think that way, too. And not all companies obviously do.
OtherAll right, here's a question from Lou Bogart, in Boca Raton, Florida. He says, I'm a longtime shareholder with a concern as I had into retirement. I understand the theory that splitting shares does nothing for the value of shares. However, with the extremely high price on A shares, when I wish to draw down some money on my portfolio in retirement, I'm facing a large tax hit. Say the average price has been about. $300,000 this year and I'm sitting on a $200,000 capital gains liability for each share. If I need $60,000 in additional cash during my retirement, I need to sell a full share and get hit with $200,000 tax liability. If you would split the stock 10 for one, I could sell two $30,000 shares and keep my tax liability at a more manageable $40,000. I could also maintain more of my investment in Berkshire. He said, have he thought about this? In retrospect, I should have bought B shares but didn't think of that at the time.
WarrenYou can convert A to B shares, which is exactly what takes place when I give away the money in July to the five foundations. I actually convert it immediately before the gift. I mean, and so they get B shares, and the truth is the B shares are very useful to people that want to either give away a small portion of what they have or spend it or whatever it may be. So you can convert the A to B shares, which you can convert the A to B shares, which you can. is exactly what I've been doing now for 14 years as I give it away and solve that problem. And we split the B shares, as I remember, in one point, just to make it even more manageable so
[1:52:50]
Warrenthat people could deal with smaller denominations. The B shares, the A shares have a different voting power, but we passed some resolution some time ago, I think, and certainly would be the the case in any event. We're never going to give the A shares an advantage over the B. They used to have an advantage in a shareholder designated contribution program that we had. And we put that in there when we started. But that's an, that goes way back in time. And that doesn't exist anymore. So that the B and the A are going to get treated exactly the same over time. It's true the A have more votes. And they sell, they sell very close to parity all. the time. So I would say that if you want to do anything in terms of raising cash and you've got a lot of A shares, you know, take one or two shares of A. And plenty of people I know have done this and just cash in it, turn it into B and give yourself whatever amount of cash you want to get.
QuestionerThis is one that comes from Thomas Lin in Taiwan. He says, Warren once said that banking is a good business if you don't do dumb things on the asset side. given that the pandemic might put a lot of pressure on the loans, dumb things that got done in the past few years are likely to explode. Through reading annual reports, 10 queues, and other public information, what clues are you looking for to decide whether a bank is run by a true banker who avoids doing dumb things?
WarrenThat's a very good question. But I would say that the one thing that made Chairman Powell's a job a little easier this time than it was in 2008, is that the banks are in far better shape. So in terms of thinking about what was good for the economy, he wasn't at the same time worrying about what he was going to do with Bank A or Bank B to merge them with somebody else or put strain, added trains on the system or anything. The banks were very involved with a problem. In 2008 and 9, they had done some things they shouldn't have done in some of them. And they were certainly in far different financial condition now, so that the banking system is not the problem in this particular show. I mean, the government, we decided, as a people, to shut down part of the economy in a big way. And it was not the fault of anyone that had happened. And things do happen in this world, earthquakes happen. You know, huge hurricanes happen. This was something different. But the banks, the banks need regulation.
[1:55:58]
WarrenI mean, they benefit from the FDIC, but part of having the government standing behind your deposits is to behave well, and I think that the banks would behave very well, and I think they're in very good shape. I mean, that's why the FDIC has built up $100 billion that I've talked about. I mean, they've assessed the banks in recent years at accelerated amounts in certain periods, and they even differentiated against the big banks. So they've built up great reserves there, and they've built their own balance sheets, and they are not presently part of Chairman Powell's problem, whereas they were very much part of Chairman Bernanke's problem back in 2008 and 9. How you spot the people that are doing the dumb things is not easy because, well, sometimes it's easy. But I don't see a lot that bothers me, but banks are, in the end, in the end, institutions that operate with significant amounts of other people. money and if problems become severe enough in an economy, even strong banks can be under a lot of stress and we'll be very glad we've got the Federal Reserve System standing behind them. I don't see special problems in the banking industry now. I could think of possibilities, and Jamie Diamond referred to this a little bit in the Morgan, JP Morgan report. You can dream of scenarios that puts a lot of strain on. banks, and they're not totally impossible, and that's why we have a fathom. And I think overall, the banking system is not going to be the problem. But I wouldn't say that with 100% certainty because there are certain possibilities that exist in this world where banks could have problems. They're going to have problems with energy loans. They're going to have problems, some, you know, they're going to have extra problems with consumer credit they're going to, you know, they're in, but they know it, and they're well reserved, well, they're well capitalized for it. They were reserved building in the first quarter, and they may need to build more reserves, but they are not a primary worry of mine at all. We own a lot of banks, or we own a lot of bank stocks. Greg, do you have any thoughts on it?
Greg AbelNo, I really, you touched on it earlier, too, just in general, which is we don't know how long this pandemic will go. We don't know if there's. going to be a second event, which are just risks that are really unknown at this time, and the banks will have to continue to manage you that as businesses do.
[1:59:00]
QuestionerBut you've already highlighted that, obviously. Becky. All right, this question I was looking for one of these, because I got several questions that came in similar to this. I was looking for one of these a moment ago. This one's from Andrew Wenke. He says, can you ask Warren why he didn't purchase, repurchase Berkshire shares in March when they dropped to a price that was 30% lower than the price that he had repurched shares for? for in January and February. Yeah, it was very, very, very short period where they were 30% less. But we, I don't think Berkshire shares relative to present value are at a significantly different a discount than they were when we were paying somewhat higher prices.
WarrenI mean, it's like Kane said or whoever it was, if the facts change, I changed my mind, what do you do, sir? You know, it's, so it's, we always think about it, but I don't feel that it's more, far more compelling to buy Berkshire shares now than I would have felt three months or six months or nine months ago. It's always, it's always a possibility, and we'll see what happens. Greg, you think about repurchasing shares, I mean, generally.
Greg AbelNo, I think our approach warns the right approach. I mean, you're always, I can't really add anything other than the approach is the right approach. We approach it when we see it's the right thing for our shareholders to be repurchasing, and that doesn't mean we're repurchasing all the time or the view doesn't change. There could be a price relative to the value at the time, not relative to what it was worth a year ago. I mean, the value of certain things have decreased. airline position was a mistake. Berkshire is worth less today because I took that position than if I hadn't. And there are other decisions like that. And they're not, you know, it is not more compelling to buy the shares now than it was when we were buying them. It's not, it's not less compelling. I mean, it's a wash, but we didn't do anything. We, it's not gotten, it's, the price has not gotten to a level. not been at a level where it really feels way better to us than other things, including the option value of money to step up in a big, big way.
QuestionerThis question comes from three investors in Israel, Lydars Luf, Yossi's Luf and Dan Gorfung. They want to know about the credit card industry. It says, how do you explain the rise in the average credit card interest rate in recent years compared to the federal funds rate? What are
[2:02:10]
Questionerthe forces that you think might keep it at? around current levels and what are the forces that might drive it lower in the future?
WarrenWell, that is not a subject that I'm, you know, obviously it affects American Express to some degree. It affects the banks we own, but, but interest rates on credit cards respond to competition, obviously, to loss potential, which obviously has gone up significantly in the last few months, although it's gone down perhaps from some other periods you can pick in the past. But I don't really have much I can bring to the party on that question. We are not in the, well, that isn't true. Our furniture companies, a couple of them have their own credit card, although they do a lot of business on other people's credit cards. My general advice to people, I mean, you know, we have an interest in credit cards, but people, I don't, I think people should, should avoid using credit cards as, you know, as a piggy bank to be rated. I had a woman come to see me here not long ago, and she'd come on some money, and not very much, but it was a lot to her to her. And she's a friend of mine, and she said, what should I do with it, you know, and she, you know. And I said, well, what do you own your credit card? And she said, well, I own X. And I said, well, what you should do? I don't know what interest rate she was paying, but I think, you know, I think I asked her, and she knew, and it was something like 18% or something. I said, I don't know how to make 18%. You know, I mean, if I owed any money at 18%, the first thing I do with any money I had would be to pay it off. It's going to be way better than any investment idea I've got. And that wasn't what she wanted to hear. And then later on in the conversation, she talked about her daughter, and her daughter had $1,000 or $2,000 or something. And she said, well, what should I do with, and she named the girls, money. And I said, have her lend it to you. You know, and I mean, if you're willing to pay 18% or whatever, I mean, she's not going to find a better deal. I'll lend you money. It just doesn't make sense. You can't go through life, you know, borrowing money at those rates and be better on the thing. So I encourage everybody. It's contrary to my own or Berkshire interests in certain cases, and the world is in love with credit cards. But I would suggest to anybody that the first thing they do in life is not on.
[2:05:16]
WarrenThey can get to something else later on, but don't be paying, don't be paying even 12% to anybody. I mean, it's pay that off and then, and if they're really a good credit and they don't want to do it, come and see me personally, I'll let you the money at that rate.
QuestionerGreg, what do you tell your children?
Greg AbelSame advice, excellent advice. No, I have. three that carefully use their credit card more, I would say, for not the, obviously people use it a lot more as they'd go into the digital world and e-commerce world, but then the goal has to be to repay it. It doesn't mean you, because you have to use it for those type of transactions, you run up the balance. But there's an incremental risk there now. It's a matter of convenience for some people. I would have trouble if I were paying 12% for money or whatever it might be, it would not be a good thing. You won't see Berkshire paying that.
QuestionerWarren, this question is from Lindsay Schumacher. Well, we probably ought to wind this up maybe in 15 minutes. Can you select the best ones? Okay, absolutely. Yeah, well, I've got a couple more questions for you. This one's from Lindsey Schumacher. She says, Worm, what's your opinion regarding the payroll protection plan?
WarrenWell, I don't want to get into politics generally, but I think that's a very good idea to take care of the people that are having terrible troubles taking care of themselves in a period like this. I mean, if the government and surrounding conditions and whatever it may be, if you're telling a lot of, of, of, of, you're telling a lot of, of, businesses essentially, you know, quit doing business for a long time. And it's one thing to tell me, but to tell somebody that's living from paycheck to paycheck that way, and I'm all for it. It must be held to administer, I mean, you know, any huge problem, I don't want to, I'll never get into criticizing on how people do this or that, because I've had problems myself and running a few big things. It just isn't that easy to inaugurate incredibly large problems. There's going to be a certain amount of fraud. There's going to be, you know, everything doesn't go perfectly, but I am 100% for taking care of the people that really get hurt by something that they've got nothing to do with. And where it's, you know, who knows how long it lasts, it's, you've got millions. you've got millions and millions of people that are worrying about something that they weren't worried about a few months ago.
[2:08:32]
WarrenAnd they didn't do anything. They showed up for work on time, and they pleased the people they dealt with and whatever it may have been. And now they don't have a job or they've been furtural or whatever. So I'm totally for the basic idea, and I think it's very difficult. You can't carry it out perfectly. You do your best. it promptly. And I give real credit, you know, to both Congress for acting promptly on what the problem is. They've sort of caught on from what they learned in 2008 and 9, I think. And I give credit to trying to do what I think is very much the right thing. And I don't sit around and think about how I could do it better.
Greg AbelGreg?
Greg AbelI agree the comments.
QuestionerWarren, this question comes from. Bill Murray, the actor, who's also a shareholder in Berkshire. He says, this pandemic will graduate a new class of war veterans. Health care, food supply, deliveries, community services. So many owe so much to these few. How might this great country take our turn and care for all of them?
WarrenWell, we won't be able to pay, actually. You know, it's like people that landed in Normandy or something. I mean, the poor the disadvantaged, they suffer, you know, there's an unimaginable suffering. And at the same time, they're doing all these things that, you know, that working 24-hour days, and we don't even know their names. You know, so we ought to do, if we go overboard on something, we ought to do things that can help those people. And this country, I've said it a lot of times before, but the history of it. We are a rich, rich, rich country. And the people that are doing the kind of work that Bill talks about, you know, they are contributing a whole lot more than some of the people that came out of the right womb, you know, or got lacquian things or know how to arbitrage bonds or whatever it may be. And I'm, you know, in the large part, I want of those guys. you really try to create a society that under normal conditions with more than $60,000 of GDP per capita, that anybody that worked 40 hours a week can have a decent life without a second job and with a couple of kids and have the, you know, they can't live like kings. I don't mean that, but that nobody should be left behind. It's like a rich family. You know, you find rich families. And if they have five errors or six years, you know, they try and pick maybe the most able one to run the business. But they don't forget about, you know, the kid that actually may be a better citizen in some ways, even than the one that does the best at business.
[2:11:59]
CharlieBut it just doesn't happen to have market value skills. So I do not think that a very rich company ought to totally abide by, totally abide by what the market did. out, you know, you know, 18th century style or something of the sort. So I welcome ideas that go in that direction. We've gone in that direction. You know, we did come up with Social Security in the 30s. We've made some progress, but we ought to, I mean, we have become very, very, very rich as a country. And we've been, things have been, things have improved. improved for the bottom 20%, I mean, you can see various statistics on that. But I'd rather be in the, I'd rather be in the bottom 20% now than be in the bottom 20% 100 years ago or 50 years ago. But it's what's really improved at the top of 1%. And I hope we as a country move in a direction where people, Bill, is talking about, get treated better, and it isn't going to hurt, it isn't going to hurt the country's growth and it's overdue, but a lot of things are overdue. We are, I will still say we're a better society than we were 100 years ago, but you would think with our prosperity, we could, we would hold ourselves to even higher standards of taking care of our fellow man, particularly when you see a situation like you've got today where it's the people whose names you don't know that are, well, the people come in and watching the bodies go out.
Greg AbelGreg? Yeah, I, yeah, the only other group that I would highlight, I think it'll be very interesting how it plays out is, with the number of homeschooling and the children that are home-schooling, and the children that are home, I think there's a, we've always had so much respect for our teachers, but we all talk about how we don't take care of them. And, you know, it is remarkable to hear how many people comment that clearly we don't recognize. recognize. You know, I have a little eight-year-old Beckett at home, and, you know, plenty of challenges for mom, but all of a sudden you respect the institution, the school, the teachers, and everything around it. And then when I think of our companies and the delivery employees we have, it's absolutely amazing what they're doing, and they're truly on the front line. You know, that's where we have our challenges around keeping them health and safety, and then you go all the way to the rail. The best videos you see out of our companies are when we're going to our companies are when we have our challenges
[2:14:45]
Greg AbelAnd we have folks that are actively engaged in moving supplies, food, medical products, and they're so proud of it, and they recognize they're making a difference. So a lot of it is we just owe them a great thanks. And, you know, Warren, you touched on it, we can, some way, maybe hopefully longer term, compensate them. But there's a great deal of thanks, and I probably just think an immense amount, new appreciation for a variety of folks. We're going the right direction overall in the country, but it's been awfully slowly.
Otherlove. Yeah. Gentlemen, I'll make this the last question. It comes from Phil King. He says many people in the press and politics are questioning the validity of capitalism. What can you say to them that might prompt them to take a look at capitalism more favorably?
WarrenWell, the market system works wonders, and it's also brutal if left entirely to itself. And we wouldn't be the country we are if the market system hadn't been allowed to function and to to some extent you can say that other countries around the world that have improved their way of life dramatically, to some extent, have copied us. So the market system is marvelous in many respects, but it needs government. And it, you know, it is creative destruction, but for the ones who are destroyed, it can be a very brutal game. and for the people to work in the industries and all of that sort of things. So I do not want to come up with anything different than capitalism, but I certainly do not want unfettered capitalism. And it's, I don't think we'll move away from it, but I think we'll move away from it. But I think we capitalists, I'm one of them, you know, I think there's a lot of thought that should be. given to what would happen if we all drew straws again for particular market-based skills. You know, it's somewhere way back, somebody invented television. I don't know who it was and then they invented cable, then they invented pay systems and all of that. And so a fellow that could bat 406. in 1941 was worth $20,000 a year, and now a marginal, a big leader will make vastly greater sums, because in effect the stadium size was increased from 30 or 40 or 50,000 people to the country. And the market system, capitalism took over, and it's very uneven. And instantly, I think that Ted Williams is worth a whole lot more money than I've ever. should make. But the market system can work toward a winner-takes-all type situation, and we don't want to discourage people from working hard and thinking hard.
[2:18:19]
WarrenBut that alone doesn't do it. There is a lot of randomness in the capital system, including inherited wealth. And I think we can keep the best parts of our market system and capitalism, and we can do a better job of making sure that everybody participates in the prosperity that that produces.
QuestionerGreg?
Greg AbelYeah. No, I think it's always keeping the best parts of it. And I even think if we look at the current environment we're in, i.e. in the pandemic, and we have to do it only when we can do it properly and re-emortment. but in some ways the best opportunity for people is when we're back working clearly and that the systems function again but that that's that's the obvious and then there's as Warren you've highlighted there's you know there's a lot of imperfections but it's still it's definitely the best model out there that just needs some fine tuning and Becky at the end I would just yeah I would just say that no oh sure can I can I Can I just look at one more quick question I forgot this one.
QuestionerThanks. Anderson Haxton wrote in. He said Warren mentioned that Ben Graham is one of the three smartest people he's ever met. I'd like to ask him the names of the other two.
WarrenI may not be one of the smartest but I'm smart enough not to name the other two. I'd make two people happy but I would it isn't a good. Ben Graham is one of the three smartest people and I've known some really smart people. Smartness is not necessarily, does not necessarily equate to wisdom either. And Ben Graham, one of the things he said he liked to do every day was he wanted to do something creative, something generous, and something foolish. And he said he was pretty good at the latter. But he was pretty good. It was amazing, actually, creative. But it's it's a good. It's amazing. interesting that IQ does not always translate into rationality and behavioral success or wisdom. And so I know some people that are extraordinarily wise that would not be in the top three on an IQ test. But if I wanted their judgment on some matter, even if I want to put them in a position of responsibility someplace, I might prefer them to we'll say one of the three, that'll leave the other two feeling fine of the three.
QuestionerGreg, do you have any thoughts on that?
Greg AbelI agree with the person you named. Yeah, yeah. And Becky, I would just, I would just say again that we may have, I hope we don't. But we may get some unpleasant surprises. We're dealing with a virus that that spreads. We're dealing with a virus that spreads its wings in a certain way, you know, in very unpredictable ways. And how the, how the, how Americans react to it, you know, there's all kinds of possibilities. But I definitely come to the conclusion after weighing all that sort of stuff, never been against America. So thanks.
OtherThank you. Thank you. I appreciate your time tonight. And we'll see you next year and we'll have, we'll fill this place, okay. Okay. Good night, everybody. Night.