[0:00]
WarrenGood morning. It's 11.30 or 10.30 here in Los Angeles, and we're going to hold our second virtual annual meeting of Berkshire Hathaway. We did an Omaha last year on short notice. We had more warning this time. And so we came to Los Angeles. And the reason we're doing it from here is because of the man on my left, not because he asked for it, but because all of us wanted to do it with Charlie in. and here in Los Angeles. So I'll introduce the three vice chairman of Berkshire in a minute. I'll show you the first quarter earnings. You won't take much time on that. I'll have one or two very short lessons for perhaps the new investors who are not necessarily in Berkshire Hathaway, but people who have entered the stock market in the last year and I think there have been a record number that have entered the stock market. I'll have a couple of little examples for them. And then we'll swing into a Q&A led by Becky Quech, who's looked at thousands of questions that have been submitted to her. But more can be submitted during this meeting, and we will put up on camera from time to time the way you can communicate directly with her if you want to send questions in during the meeting. She got flooded with them last time. And she miraculously keeps sorting them out. And so feel free to send it a question. And we will have a question period for about three and a half hours. And then we will finally have the annual meeting, which won't take long at the end. So with that, I would like to first introduce the three vice chairman of Berkshire I'll tell you just a little bit about them and then I'll have a mild surprise for you at the end perhaps. On my left, Charlie Munger and I met Charlie 62 years ago. He was practicing law in Los Angeles. He was building a house at that time a few miles from here and 62 years later and 62 years later he's still living in the same house. Now, that was kind of interesting because I was buying a house just a few months before, 62 years ago, and I'm still living in the same house. So you've got a couple of fairly peculiar guys, just to start with, in terms of their love affair with their homes. And Charlie and I hit it off immediately. And I would say he's He's probably the vice chairman in charge of culture, among other things. But if I ever want to get questions about where True North is, I talk to Charlie and he has been an enormous help. He's done it with a lot fewer hours and a lot less talking and everything that I have.
[3:31]
WarrenBut he's contributed in an incredible way to Berkshire. So Charlie's been out here in Los Angeles for 60 plus years. years. On my right, your left, I have the vice chairman in charge of everything except insurance and investments, Greg Abel. Greg was born and raised in Edmonton, Alberta. He's Canadian. He plays hockey. His eight-year-old plays hockey. And he came to the United States sometime after he graduated from college in Canada. And he is in charge of a business which has all over 150 billion in sales and employees more than 250,000, probably 275,000 people. And does a much better job at doing that than I was doing previously. And on my bar left, you're right, you're right. We have Ajit Jane and Ajit was born and raised in India and graduated from college there. And I met Ajit on a Saturday in 1986, and I'd been in the insurance business. Berkshire had been in the insurance business for quite a while. And I was kind of stumbling around in various ways. And Ajit came to the office, and Saturday I was opening the mail. And I said, how much, you know, about insurance? And he said, nothing. And I said, well, nobody's perfect. And let's talk about it some. And by the end of the morning, I knew I had somebody that was going to build a great insurance business. And starting from that point, this improbable little company in Omaha became the largest property casualty in the world in terms of net worth. It rights risks that occasionally in a 24-hour period that other companies simply couldn't take on themselves. They'd have to assemble other people who would take them a long time to come to a decision. That was very important at various times in the past. It's not so important now. But he's built an incredible, the world's leading property casually insurance company. So here we have Charlie from L. 60-some years. We've got Greg from Canada. We've got Ajit from India. And the one thing in common that these three fellows have aside from working for Berkshire and doing a sensational job, the one thing in common is that at one time or another, for some extended period, they lived within a mile of me in Omaha, Nebraska. And Charlie and 1934 moved about 100 yards away from where I now live and went through high school and eventually went in the service and knows the neighborhood as well as I do. Went to the same grade school my kids went to and so on. Greg spent significant time in living in Omaha, lived about five or six blocks from me.
[7:15]
WarrenAnd now lives in Des Moines. And Ajit was in Omaha, about a mile away for a couple years. So we started in very different places and sort of came together and now go our separate ways, but it's all worked very well. I would, and you'll hear from it drinks me, I urge you to send questions if you're saying, you can direct them to me. You can direct them to me or you can direct them to any one of the other three. And it will be a big relief to me if you direct a fair number to the other people. So we, this morning, as we always do, we always do it on Saturday, we published our 10Q, which gave the quarterly earnings that's up on our website, BerkshireHathaway.com. And it's very interesting. We put these out on Saturday morning. That's not because the media likes us to do it that way. It's not because the analysts like to do it that way. But we want to give you the maximum time to digest an awful lot of information that's in that tent queue. It can't be summarized in a perfect way. We'll give you some summary figures. But if you're really a student of the place, and most of our investments, is reviving because they simply have faith in these other three fellows to do a good job. And it's not a misplaced faith. But if you really enjoy going into the details and you want to understand the nuts and bolts of Berkraathaway's various operations, you should read that 10-Q. And it'll take you, it may take you a couple of hours. I mean, it's not a small investment of time, but it's got a lot of information about all our various businesses. And for those of you who are business students of a sort, I recommend you go to it. The summary figures you see here, which are the ones we put in our press release, show kind of an interesting pair of numbers. I made it down there at the bottom. You know, we have last year, when you see those brackets around numbers, you've got to start worrying. And first quarter, we actually showed a loss of almost $50 billion. I never thought I'd ever see a figure like that. And I was thinking back, I was trying to remember whether I'd gone on vacation during that quarter and turned things over to the other guys or what. But I checked the calendar, and that was me. And that figure this year is a positive figure of $11.7 billion. And neither figure is very meaningful in itself. The Accounting Standards Board a few years ago for many, many, many, many years, unrealized gains
[10:39]
Warrenor losses of a company like Berkshire were made adjustments to the net worth of the net worth of Berkshire, but they did not run through earnings. And a few years ago, the rule was changed so that every time the stocks go up or down, it goes through our earnings account. So in the first quarter of last year, when stocks went down a lot, we had a huge sum of unrealized, well, it was a reduction of unrealized gains largely. And when you start saying things like that, you start losing people. But that item was a mild plus this year. But if we reported earnings daily, you would see earnings one day of $3 billion, next day of minus $2 billion. And it's an accounting treatment that we don't think is particularly appropriate, but it's required. And we explain very carefully, both in our press releases that we try to explain. And I try to write in my letter and explain why I don't think that's the way to look at Berkshire. We think over time that we will have investment gains for reasons I lay out in my letter. Over a period of time, the companies we own stock and retain earnings, and they use those reinvested earnings usually to our benefit, and that shows up in capital gains someday. But reported earnings for a company that has a lot of common stocks, marketable stocks like ours, you don't want to look at that final line. And you do want to look at the operating earnings line. Now, I would say that if you would take in the first two months of last year and compared to the first two months of this year, those figures would have been quite comparable. But of course, in March of 2020, the economy was shut down in effect. I mean, it was a self-induced recession and an abrupt one, very abrupt. And so economy went off a cliff in March. It was it was resurrected in an extraordinarily effective way by Federal Reserve Action and and later on the fiscal front by federal reserve action and later on the fiscal front by Congress, and we'll get into that later. But the figure you see that the difference was marked, basically, the two, and our businesses have done, we'll get into more specifics later, but our business has done really quite well. This has been a very, very, very unusual recession, and that it's been localized as to the industry to an extraordinary extent. And right now, business is really very good in great many segments of the economy, which we'll talk about later.
[14:06]
WarrenBut there's still problems if you're in the, if you're in a few types of business that have really been decimated, you know, such as international or travel or something of the sort. So with that, well, we'll go back to the figures later on. perhaps in some of the questions, I would like to just go over two items that I would like particularly new entrance to the stock market to ponder just a bit before they try and do 30 or 40 trades a day in order to profit from what looks like in a very easy game. So I would like to go to slide L1. So put that up. And these, on March 31st, I ran off a list of the 20 largest companies in the world by stock market value. And those names, good many of which will be familiar to, but they were led by Apple slightly over $2 trillion. $2 trillion. And it went down to the number 20th was worth $330 odd billion. But those are the 20 largest companies in the world by market value on March 31st. Now if I had a little, I was hoping I could get a little quiz machine so I could have a really way in on this answer and we could flash it up a little later, but it proved technically impossible. But what I would like you to do is look at that list. It starts off with Apple. Saudi Aramco is a pretty kind of a specialized country, a company. I don't know whether it's 95% owned by the government or what, but it's essentially a country that's for sale there in terms of that business. But the top of the top six companies, five of them are America. So when you hear people say that America hasn't done, you know, it's got all of the top six companies, five of them are America. It's not working very well or something of the sort. In the whole world, of the six top companies in value, five of them are in the United States. And if you think about it, you know, we talked a little about this last year. But in 1790, we had one half of one percent of the world's population, and a little less, we had four million people, 3.9 million people. Six hundred thousand of them were slaves. Ireland had more people than the United States had. Russia had five times as many people as the U.S. Ukraine had twice as many people as the United States. So here we were. But what did we have? We had a map for the future, an aspirational map, that somehow now only 200 and, well, after the Constitution, 232 years later, leaves us with five of the top. companies in the world. You know, it's not an accident.
[17:31]
WarrenAnd it's not because we were way smarter, way stronger, you know. I think we had good soil, decent climate. But so some of those other countries I named. And the system has worked unbelievably. Well, just imagine, thinking of five of the top six companies in the world, ending up with a country that started with a half of 1% of the population. just a few hundred years ago. But what I would like you to do is look at that list for a minute or two, if you want to, and then make an estimate, make your own guess. How many of those companies are going to be on the list 30 years from now? Here they are, these powerhouses. And how many would you guys are going to be on the list? Well, you know, it's not going to be all 20. It may not even be all 20 today or tomorrow. This was March 31st. But what would you guess? And think about that yourself. Would you put on five, eight? Well, whatever it would be. I would now invite you to look at slide 2, or L2, which goes back a little more than 30 years, and look at the top 20 from 1989. And if you look at the top 20 from 1989, from 1989. There's two things that we should grab your interest, at least two. None of the 20 from 30 years ago are on the present list. None. Zero. There were then six U.S. companies on the list, and their names are familiar to you. We have General Electric, we have Exxon, IBM Corp, and these are, they're still around. Merca's done there at number of times. None made it. to the list 30 years later, zero. And I would guess that very few of you when I asked you to play the quiz a little. A few minutes ago would have put down zero. And I don't think it will be zero. But it is a reminder of what extraordinary things can happen. Things that seem obvious to you. Japan had this wonderful bull market for a very long time, so you had a number of Japanese companies on the list. Today, there are none. And the United States have the six. Now we have 13. But they aren't the same six. I would invite you to think about one other thing as you look at this list. 1989 was not the dark ages. I mean, we weren't just discovering capitalism or anything else. And people thought they knew a lot about the stock market and the efficient market theory was in. It was not a backward time. backward time. And if you look, the top company at that time had a market value of $100 billion, $104 billion. So the largest company in the world of title in just shade over 30 years has gone from $100 billion to $2 trillion.
[20:56]
WarrenAt the bottom, the number 20 has gone from $34 billion to something a little over 10 times that. Well, that's a number 20. It tells you something about what's happened with equality, which is a hot subject in this country. It tells you a little bit about inflation, but this was not a highly inflationary period as a whole. But it tells you that capitalism has worked incredibly well, especially for the capitalists. And it's a pretty astounding number. Do you think it could be repeated now that that 30 years from now that you could take $2 trillion for Apple and multiply any company and come up with 30 times that for the leader. You know, it seems impossible and maybe it is impossible. But I just, we were just as sure of ourselves as investors and Wall Street was in 1989 as we are today. But the world can change in very, very, very. dramatic ways and I'll just give you one other example you might ponder. This is, we start feeling too sure of yourself. One thing it shows, incidentally, is that it's a great argument for index funds is that, you know, the main thing to do is to be aboard the ship, you know, a ship. You know, they were all going to a better promised land. You just didn't know which one was the one they necessarily get on, but you couldn't help but do well. if you just had a diversified group of equities, U.S. equities, it would be my preference, but to hold over a 30-year period, but if you thought you knew a lot about which ones to pick or the person that you had hiring, you were paying a lot of money to, had all these ideas. And they could tell you their best ideas in 1989 did not necessarily do that well, although overall, all equities were absolutely the place to be. Secondly, people get enormously attracted to various industries. I mean, they think if you know, if a company says it's in the XYZ industry and that's a popular one, you can sell IPOs, you can sell SPACs, people disregard sales numbers, earnings numbers. It's just, you know, it's the place to be. So, Berkshire Hathaway, where was the place to be in 1903 when my dad was born in 1903, but that wasn't really that big of news, but, but it wasn't big news that actually Henry Ford was starting the Ford Motor Company. He failed a couple of times before, but he was about to change the world. I mean, the auto, when you think about everything, we've got a great auto insurance company, But if there weren't any autos, we wouldn't have GEICO.
[24:10]
WarrenThe, but it transformed the country. And then, Mary Ford brought in the $5 daily wage, and that was a huge thing. Assembly lines, everything, autos came along. So let's just assume that you had seen a quick glance back in 1903 of all the interstate highways, There's 290 million vehicles on the road in the United States, you know, everything about it and said, well, this is pretty easy. It's going to be cars, it's going to be autos. Well, Berkshire, let's see what we've got up there. Yeah, no, stay where you were. Go back. I don't want to change slides yet. Go back to the L's. The Berkshire by accident. Well, we own a company called Marmon. We bought it from the Pritzker family some years ago. Pritzker's had built this business from many, many, many companies that they had acquired. And the name of their company was Marmon. And I don't know exactly why Jay and Bob decided to name it Marmon, but they did own a company called Marmon. And the name it Marmon. Marmon company at, getting slightly enemy on the slides again, but that's okay. We called it, it was, they owned this company Marmon, which in 1911 had been a, the company whose car won the first Indianapolis 500. Maybe that's why they called it Marmon. They were proud of the fact that the company. company in 1911 named one of the first Indianapolis 500 also was the company that invented the rearview mirror I'm not sure whether that was a big contribution to society and certainly around your household you don't want to emphasize too much but but they uh the car that was entered in the Annapolis 500 the guy who normally sat next to the driver and looked backwards to tell what what the competitors were doing he was six so they they invented the rear view of So, uh, let's just assume that you decided that autos were this incredible thing. And someday there'd be in Indianapolis 500 and someday they'd have a review of Arizona cars and someday 2009 million cars would be buzzing around the United States car or autos or the county trucks there. And so I decided to look at the history and I thought I'd put up the list of auto companies from over the years. and I was originally going to put up just the ones that were the M so I could get them on one slide. But when I went to the M's, it went on and on and on. So I just decided to put up the ones that started with M.A. And as you can see, there were almost 40 companies that went into the auto business.
[27:37]
WarrenJust started with MA, including our little marmon there in the middle column, which lasted. for a while. But it was selling cars in 1930s were really quite special. But in any event, there were at least 2,000 companies that entered the auto business because it clearly had this incredible future. And of course, you remember that in 2009, there were three left, two of which went bankrupt. There is a lot more to picking stocks than figuring out what's going to be a wonderful industry in the future. The Maytag company put out a car, Allstate put out a car, DuPont put out a car. I mean, there was a Nebraska motor company. Everybody started car companies, just like everybody starting something now that can be where you can get money from people. But there were very, very, very, very few people that picked the winner. get the opportunity at Ford Motor, Henry Ford had a few partners, and he really didn't like him, so he figured a way to buy them out. That was sort of the, that was sort of the beginning of the auto finance. That's a long story. We won't get into that. But you couldn't buy into Ford Motor. And of course, General Motors became the dominant company. Finally went Henry Ford. really make the shift from the Model T to the Model A very, it did not work very well. So I just want to tell you, it's not as easy as it sounds. And with that, we will go to Becky quick and she will ask any of the four of us questions she has selected in which we don't, she doesn't share with us. And we will do this for a considerable period of time. You can be sending in questions to her, and then later on, after about three and a half hours, we will have the annual meeting, which won't take long. So Becky, over to you.
QuestionerThanks, Warren. And hello to everybody. This first question that came in came in from Andy Seas. He says he's the owner of not nearly enough B shares. He says, Mr. Buffett, you're well known for saying to be fearful when others are greedy and be greedy when others are fearful. But by all appearances, Berkshire was fearful when others were most fearful in the early months of COVID. Dumping airline stocks at or near the low, not taking advantage of the fear gripping the market to buy shares of public companies at exceptional discounts, and being hesitant to buy back significant amounts of Berkshire stock at very attractive prices. I'd appreciate hearing your thoughts surrounding this time and how Berkshire approached its decision-making,
[30:47]
Warrenspecifically after it was assured through the CARES Act that the government would provide a robust backstop to the financial markets. Well, of course, until late, until both monetary and fiscal policy kicked in, well, you knew we had an incredible problem. I am, just as Charlie, as the chief culture officer, I'm the chief risk officer of Berkshire. That's my job. that we hope we do well, but we want to be sure we don't do terribly. But we didn't sell a substantial amount. I mean, we're a company with probably $700 billion worth of business, some we own in their entirety, some we own a piece of. And I don't know whether we were sellers of maybe 1% of the value of all the businesses we had at that period. But the airline, it's kind of interesting with the airline business. this is in particular, and then I'll get to what was done in fiscal monetary policy. But we had a few people, various subsidiaries of Berkshire, that wanted to go in for help from the government. And in some cases, they had minority shareholders owned a few percent, and they said, well, this is, you know, we're going to get killed by what's happening with the regulations that are being put out. and we're stopping the economy. And they said, everybody's going in for them, and why don't we go in? I said, you know, Berkshire can handle it. This is for people that can't handle what's happening. So we're not applying. But the airlines were the most prominent beneficiaries of what took place immediately. They got $25 billion, initially, most of which went to the big four airlines, and some of which went in as grants, not long as. And, you know, I think that was fine public policy. I was wishing it could go to every restaurant and dry cleaner and every small business that really was out of business and had no, no, I mean, they were, they were, they were, they were made toast of, you know, basically. But the airlines, clearly what happened was not their fault in any way, shape, or form. It wasn't like 2008, 9 when people blame the banks and hated to see them help. So it was, now, airlines operate in bankruptcy. So it isn't like the three of the four big ones, you know, went through bankruptcy within the previous. So airlines were kind of used to operating in bankruptcy. They would have kept operating, but it was perfectly proper for the airlines to be helped. The entire airline business, you know, you look at these figures of $2 trillion for Apple and so on.
[33:42]
WarrenThe entire big four airlines, they were, they sold for about $100 billion. almost I mean it's a very very small combined they wouldn't come close to making the the cut I mean they wouldn't be in the top 50 so anyway they went into the government they needed the government help or they needed or they would go bankrupt some of them and and and really the Congress but Steve Mnuchin too that they decided they deserve the help which I do not quarrel with it all but imagine if Perkshire was the ten percent holder, which they had been of everyone the airlines, they said, to get a brochure. I mean, it's, it'd be like one of our, they would have had, they might have very well had a very, very, very different result if they'd had a very, very, very, very rich shareholder that owned eight or or nine percent at, uh, and they didn't have that, uh, you know, when they went in. So our, you might not have gotten the same result. In fact, I would, I would think you probably wouldn't. I mean, I can just see the headlines now. I mean, they, you know, they, you know. because you've seen the headlines on some companies that took 100 million or two, you know, and really didn't need it, and some of them gave it back, and most of them gave it back. But you were looking, you're actually looking at it, probably at a different result than if we'd kept our stock. But in any event, an industry that was really selling for less than $100 billion, lost a significant amount of money, they lost perspective earning, of earning power. I mean, right now, you know, international travels now come back. But I would say overall, too, the economic recovery has gone far better than you could say with any assurance. So we didn't like having as much money as we had in banks at that time. So I cut back some of the bank investment. But basically, our net sales were about 1% or 1.5% and looking back, you know, it would have been better to be buying, but what I do not consider it, I do not consider it a great moment in Berkshire's history, but I also don't know we've got more net worth than any, any company in the United States under accounting principles. And we've got, we've got six or 700 billion of generally good businesses. And, and I think, as I think, I think the airline business has done better because we've sold and I wish them well, but I still, I still wouldn't want to buy the airline. business, international, people really want to, they want to travel for personal reasons
[36:28]
Questionerand business travel is a other thing. And we've got a big exposure to business travel, of course, through the fact that we own 19% of American Express and we own precision cast parts, which services the air business very different. So we've still got a big investment in air travel, a big cost. amendment to it. But we wish the big four the best. And I think their managements have done a very good job during this period. More specifically beyond the airlines, though, just the idea, and this came from several questions too, including one from Chris Blaine. Just, you spent years accumulating cash insisting you had your elephant gun ready. The March 2020 listed equity sell-off came with promises from the U.S. government that they would do what it takes. Yet you sat on your hands. Please help me. me understand what I missed? I didn't get quite the last part. What was the final question? Just please help me understand what I missed? Why didn't you use more of the cash at hand?
WarrenOh, well, we have about, our cash on hand has been about 15% of our values, of our businesses. And that's a healthy chunk. And I'd say it'll never get below 20 billion, but we're going to raise that number because it's just the size and importance of Berkshire. But we could have deployed 50 or 75 billion, and right before the Fed Act. I mean, we had a point where the calls were, two calls came in, but it was two or three days. Nothing could happen. I mean, when Jay Powell acted as he did, that was incredible. important. I mean, I shouldn't say the Fed acted as they did, but they moved with speed and a decisiveness on March 23rd that changed the situation where the economy had stopped. The government bond market was even since disrupted. Berkshire Hathaway probably could not have gone out with a debt offering the day before. It didn't get a lot of publicist any time, but there was a run on money market. It finds a very substantial run. And if you look at the numbers, daily numbers on that, it was a repeat of September 2008. And this time, I give great credit to what Bernanke and Paulson did. But this time, the Fed knew that saying whatever it takes and saying it and demonstrating it, which they did on March 23rd, they took a market where Berkshire couldn't sell bonds on the day before and turned it into one where Carnival Cruise lines. or something like I could sell it to a day or two later it and there was you know it's record
[39:30]
Warrenissuance of corporate debt and uh companies losing money companies who were closed whatever it was it was the most dramatic move that you can imagine and and and at the time as I remember the chairman's saying uh you know how about a little help on the on the on the fiscal front and then Congress acted very very big again in 2008 and nine they argued about you know know we don't want to give money money those dirty banks and all that sort of thing but this time there really wasn't anybody to blame so uh they had they saw what was necessary and congress responded so you had fiscal and monetary policy that responded in a way that was incredible and it did the job and it did a I think it did a better job that either the Fed or the Treasury or anybody expected I mean this this this economy right now is 85 percent of it is is is running in super high gear and people can't you know and you're seeing some inflation and all of that it's responded in an incredible way and we learned something out of 2008 and 9 and then we applied but I don't think it was a sure thing that would happen and the one thing about Berkshire is we never do we never want we don't want to depend on anybody we're not a bank we can't go to the Federal Reserve if we need money and we've got to be sure that under any circumstances, any circumstances, we can't solve nuclear war and maybe we can't, you know. But, you know, Branch Dubois, if you remember, and the street guard named Desire, said I depend on the kindness of strangers. You can't depend on the kindness of your friends if things really stop. I mean, I've seen that in several different places and we were starting, we were seeing it on March, middle March, everybody was drawing down the credit lines. The banks did not expect that. They just weren't sure they were going to be able to draw it on their credit lines 10 days later. And so they just drew them down and they took the money out of money market funds. We got very prompt. I give great credit on both the monetary and fiscal side of what was done. But I didn't think it was a sure thing that would happen. I didn't know how it would be implemented. I think it's worked better than just about anybody as expected. And I think, well, you're seeing it now. You know, Charlie's got some beautiful. on this too, so we shouldn't leave him out of it.
CharlieWell, it's crazy to think anybody's going to be smart enough to husband money and then just
[42:14]
Warrencome out on the bottom tick in some crazy crisis and spend it all. There always is some person that does that by accident. But that's too tough a standard. Anybody expects that of Berkshire Hathaway is out of his mind. Yeah, Charlie and I never were very good at dancing, but we really can't do that dance. No, no, we can't. By the way, almost nobody. anybody else can either not with tens of billions or hundreds of billion but it's worked out well I we forgot to show one of the financial sides actually if you go back to them the balance sheet but we we did buy in and the first you'll see the shares outstanding if we'll go back to to what is it E3 the slide E2 pardon me I think it's E2 well the balance sheet yeah there there shows the share is outstanding at the bottom and we have we have we have we spent about 25 billion in the first quarter and more money since and we it's the best thing we can't buy companies as cheap as we can buy our own and we can't buy stocks as cheap as we can buy our own so and we've been able to do that with a fair amount of money but looking I mean if you you know there's definitely we could have done better things and we would have sold the We would have sold airlines and cut back on banks regardless whether we should have bought something else at the same time's another question.
QuestionerThis question comes from a long-term shareholder who's been here for more than 25 years. His name's Ben Noel. He's from Minneapolis, Minnesota and he says, Mr. Munger and Mr. Buffett, after a 15-year period of market underperformance, you're cautious about predicting Berkshire being able to outperform the market in the future. Given this, what do you see is the arguments for long-time shareholders to continue holding their stock versus diversifying the risk across an index.
WarrenCharlie, you want to answer none?
CharlieWell, sure. Well, I personally prefer holding Berkshire to holding the market. So I'm quite comfortable holding Berkshire. I think our businesses are better than the average in the market.
QuestionerIs it because you don't think the market values it fairly?
CharlieWell, these are just accidents of history and things are fluctuating at all times. But on a composite basis, I'd bet on Berkshire over the market. That's assuming we're all dead.
WarrenYeah, I recommend the S&P 500 index fund for a long, long time to people. And I've never recommended Berkshire to anybody, because I don't want people to buy it because they think I'm tipping them into some time.
[45:11]
WarrenNever, I mean, no matter what I was selling for it. And, you know, I've made it public. Like, you know, on my death, there's a fund for my then widow, and 90% will go into an S&P 500 index fund and 10% of the Treasury Bullshead. On the other hand, I'm very happy having my future contributions to a group of charities that will be spread over 12 years or so after my death, to stay in Berkshire. I think the odds are, Berkshire is, yeah, I like, I love. Yeah, I like it, but I'm not, I do not think the average person can pick stocks. We happen to have a large group of people that didn't pick stocks, but they picked Charlie and me to manage money for them 50 or 60 years ago. And so we have a very unusual group of shareholders, I think, who look at Berkshire as a lifetime savings vehicle. one they don't have to think about and one that they'll look, you know, if they don't look at it again for 10 or 20 years, that will have taken care of the money reasonably well. But that I wouldn't argue that S&P 500 over time, I would, I'm perfect, I like Berkshire, but I think that the person who doesn't know anything about stocks at all and doesn't have any special feelings about Berkshire. I think they ought to buy the S&P 500 index.
QuestionerAs a follow-up to that, Gerald Silver writes in, he says, the trustees of your estate to, I believe you've directed the trustees of your estate to invest substantial assets into the index fund. Isn't that a vote of no confidence to your managers?
WarrenWell, no, because we're talking about way less than 1% of my estate. And one thing I'm going to do, incidentally, I mean, all rich people get advised by their lawyers set up trust so that nobody can see your will and all that. sort of thing. My will is going to be a public record and you can, you'll be able to check at some point what I'm telling you the truth about what is going to get done. But 99.7% roughly of my estate will either go to philanthropy or to the federal government. And before it does it, I think I think Berkshire is a very happy, a very good thing to hold. But for a given individual, particularly my wife, I just think that having a tiny fraction, which is all it takes for her to do very well for the rest of her life, I just, I think that the best thing goes by 90% in an SME 500 index fund. Now, the index fund people naturally have started over the time, they market more and more products that go to other indices and everything.
[48:17]
WarrenSo they're really starting to say to the American public, they're saying, well, you can pick what continent to invest in, or you can pick what industry, and we'll sell you something for that. And when they just have gotten through telling them, you know, you really don't know anything about stock and just buy the whole index. So I name the 500 indexes one. But it's a tiny portion, but it'll be her livelihood, and she'll have all the money she needs and way beyond it, and that's that. But I don't mind having the 99.7 percent, a large portion of it, assuming the law is the same as now total philanthropy, to be kept in Berkshire until they finally are disposed of.
OtherThis question comes from Andrew Dixon in the U.K. He says, my question is in relation to the oil and gas business and your purchase of Chevron stock. When being asked a question on tobacco, stocks in 1997, you mentioned that individuals and companies occasionally have to draw moral lines about what they're willing to do. You stated at the time that you were not comfortable in making a big commitment in tobacco stocks and that you were uncomfortable about their prospects. Charlie has also referenced passing up on a private tobacco deal that you both knew was a sense, yet you both have no regrets in saying no to the transaction. I'm not suggesting that the oil and gas business has the same known negative externalities as cigarettes. They do not with tobacco the cause and effect relationship between the products and cancer is direct, obvious, and measurable. With hydrocarbons, the societal costs and benefits are far more complex to evaluate. However, an increasing portion of society is drawing their lines in such a way that their painting does not include hydrocarbons, period. My question is, has the alarmism from the climate community now become pervasive across society to the extent it has become irrational? Have we built our own unrealistic consensus on the pace of change achievable with regards to the transition to greener energy resources to the extent that this is becoming an overly expensive tax worn by the current younger generation. Can we gather from your purchase of Chevron stock that you do not believe the howling from society? Regulators and politician will impair the prospects of hydrocarbons and Chevron, for that matter, in the next 10 years? Can investors still assume an oil and gas business that finds and produces oil at low cost per barrel can generate a sufficient return on capital for a long time to come?
[50:44]
WarrenWell, I'll give you a 10-word answer to that. I can't remember all the questions there were there, but I would say that people that are on the extremes of both sides are a little nuts. I would hate to have all hydrocarbons banned in three years or, you know, you wouldn't want a world. It wouldn't work. And on the other hand, you know, what's happening will be adapted to over time, just as we've adapted to over time just as we've adapted to to all kinds of things. I do not think, I'm interested, I've quote from 1997, because, you know, we've talked about this before. We have no problem owning Costco or Walmart, you know, and a substantial number of their stores. And, you know, they sell cigarettes is a big item. You know, it's something that brings people in. They know the price of cigarettes and, you know, and they put them up front. So we don't, it's a very tough situation. decision a long time ago when we went to Memphis, and we looked at a business that was a very, very good business, and it was much less harmful, at least from everything I could find out, it was much less harmful than smoking tobacco, chewing tobacco was. And these were decent people, and they were running a legal business, and they all chewed tobacco themselves. And they told me that their mother was honored and chewing tobacco and all these things. But Charlie and I did go down in the lobby of that hotel. just said to ourselves, this is probably the best business we've ever seen. And I called my then son-in-law, Alan Greigberg, and he studied chewing tobacco on its effects when he was working for a NATO-related organization. And we decided not to do it. But, you know, would we, you know, I see, I used to see ads in our paper from financial companies where I knew they were terrible, you know. It's a very tough thing to decide whether you get. in or out of a business. It's a very tough time to decide what companies benefit society more than others. I mean, it's, I don't know whether, I think Chevron's benefited society in all kinds of ways, and I think it continues to do so, and I think we're going to need a lot of hydro farms for a long time, and we'll be very glad we've got them. But I do think that the world's moving away from them, too, and that could change. I don't like making the moral judgments on stocks in terms of actually running the businesses. There's something about every business that you know what you wouldn't like.
[53:25]
WarrenAnd, you know, meatpackers or anything, have you ever gone through a meatpacking? If you expect perfection, you know, in your spouse or in your friends or in companies, you're not going to find it. And what you elect to do yourself, if you don't want an index fund, you're going to own an index fund. Lemmy Chevron is not an evil company in the least. And I have no compunction about owning, in the least about owning Chevron. And if we own the entire business, I would not feel uncomfortable about being in that business. Charlie?
CharlieWell, I agree. You know, you can imagine two things. Young man marries into your family. He's a English professor at, say, Swarthmore. or he's a, he works for Chevron, which would you pick? I don't see. I want to admit I'd take the guy from Chevron.
WarrenWell, I hope your daughters agree with you.
CharlieYeah.
QuestionerOn the other side of that argument, because there were lots of emails that came in both, on both sides of these ESG questions. This one comes from Christina Gallagos, who's been a shareholder since 2018, and she says, on items two and three of the proxy materials, the board recommended voting against on the shareholder proposal regarding the reporting of climate-related risks and opportunities, as well as on the shareholder proposal regarding diversity and inclusion reporting. Berkshire is such a force for good when it comes to financial literacy and empowerment through wealth creation. Why not be a force for good and an example when it comes to these very two important, two very important issues. Please share with us more about the against recommendation.
WarrenWell, I think maybe Greg can talk a little bit about. about what Berkshire has done as opposed to, in terms of the environmental. I would say this, it's very interesting. With everything that's being, I think we have over a million shareholders, I mean, you can't be 100% sure because of street name and duplicate accounts and all that sort, but it certainly seems very, very likely. I've had, and I get the letters that are written to me. I don't think I've had three letters in the last year from shareholders. Now I have them, and our vote on this, as you'll see later, is that overwhelmingly, the people that bought Berkshire with their own money voted against those properties. Most of the votes for it were by, came from people who would never put a dime of their own money into Berkshire. And I don't think they've read our annual reports, and I don't think they've read the reports
[56:32]
Warrenof Berkshire Hathaway Energy, and I don't think they know, if I talk about what we're doing in high-voltage transmission, we're doing more enabled company of the country. The President talked about what the government's going to do, and how important it is. We have a record in that overall is incredibly good, but we have a group of organizations. we have a group of organizations just generally, and they're nice people, but they want us to answer a bunch of questionnaires their way, so they want us to go to Derry Queen and Borsheims and all those people have them fill out reports that show a bunch of figures when the reports to count are the reports that Greg gets on Berksor-Oathaway Energy and the railroad. You talk about three of our companies, and you've covered 95% of it, and it's a It's asinine, frankly, in my view. Now, we do some other asinine things because we're required to do them, so we'll do whatever's required. But to have the people as, you know, business wire, you know, dairy queen, all these places, fairly got reports to make it some common report that comes in, we don't do that stuff at Berkshire. We've got, during the pandemic, we probably have about 12 people to come into headquarters, and we've got, you know, you know, 360,000 people working in a company that, that, that all kinds of diverse activities, and it's built, I don't want to get in the whole thing, it's built on autonomy. And, and I am probably the only CEO of an S&P 500 company that does not get a consolidated income statement every month. I mean, every other company, I'll bet. and the S&B 500 prints out the earnings they had at the end, you know, from February and March and CEO gets and a whole bunch of other people get it. I don't get it. I don't need it, you know. And I could put six years, 70 companies to a whole lot of trouble with everything. And they hand me something and I know the answer to it already, and it doesn't make any difference. I mean, they've got the money they need. So we don't do things just because we've got a department of this or a department of that, and we don't want to set up. a lot of departments like that. And what's important is what we're doing in the, well, primarily at Berkshire Out of the Way energy and the railroad. I mean, that's it. And I'll let Greg tell you about that in just one second. But the, uh, I don't think we think we know the answer to the all these questions about
[59:23]
Warrenglobal warming and so forth. And the people ask the questions think they know the answers. We're just more modest. Well, but even if we knew the answer, I mean, in terms of what we, the reports, we would. Yeah. We would not collect a whole lot of things that don't mean anything to us. And to satisfy people who actually don't own any stock themselves, and in many cases, I can tell I haven't read our report even. The, you know, we, as I pointed out in the annual report, and I'd never, nobody would have guessed that people think we're a bunch of guys who own stocks and all that sort of thing. Berkshire Hathaway owns by GAAP accounting more property plant equipment, business infrastructure, which the President just got through talking about Wednesday night in infrastructure, the importance of it. We have measured by GAAP accounting more than any other company in the United States. We have more than any of those companies than on the list of the largest companies in the country, but we've got to buy a substantial margin. So we have an investment in what makes this country move and work. Fifteen percent of the interstate goods move on them on our railroad. We're building transmission. And we started in 2006 or seven planning how we would close coal plants, but you can't close coal plants until you get the electricity from where it's generated to the customer. And if you're going to generate it in Wyoming and it's going to go to Los Vegas or some place. And previously they had a coal plant near the place because that was the way it was done 50 years ago or 75 years ago. You better have the transmission. There's no sense having the wind blow in Wyoming and people turn on the lights in Las Vegas. So we went after the transmission plan question a lot earlier than people were talking about it. And we've done, we said $16 billion or whatever it was in the annual report that we underway and we just added $2 billion since the annual report came out. And there's no utility in the country that's coming anywhere close to that. Tell them a little bit about it.
Greg AbelSure, Warren. Thank you. And really, as Warren touched on, BHE and BNSF have the significant carbon footprints when you think of Berkshire. And Warren, you touched on the disclosure that we've provided in the past going all the way back to 2007. I did pull those two investor presentations, one from 2007, and then our most recent one in
[1:01:59]
Greg Abel2021. So if we could pull up BHE1 on the, as a slide, I think it would just highlight going all the way back to 2007. We've been doing investor presentations for our, what we call our fixed income investors. And we've done that through every year through 2021. We've provided very similar disclosures to our board on an annual basis and had discussions around Berkshire Hathaway's Energy's plans to decarbonize. Now, it's interesting, if you go back to the 2007 fixed income conference, and we're having a conference at that point in time, we have third-party debt, capital debt that our utilities raise. It's a traditional capital structure used across our regulated entities to manage our total cost to the customers. So we have investors. We present to them as we're highlighting on an annual basis. And if you go back to that 2007 investor conversation. conference. It's interesting. In that presentation, we're highlighting climate change, that it's a fundamental risk. And we talked and we discussed what good policy would be. We discussed innovation. We discussed market transformation and the importance of setting targets at that point in time. And we had recommendations for our industry. And then since then, each year we've presented really a plan and a strategy around how each of our businesses and BHE, but each of our regulated entities, how they're going to transform. And the whole transformation has been around decarbonization, managing that risk on behalf of our stakeholders in our many states, our customers that we serve, and ultimately managing that risk for Berkshire Hathaway's shareholders. Now, as you go through those presentations, there's a common theme and more touched on it already. You have to build the foundation first. And that foundation is around building the high voltage, the transmission system. Warren touched on it in his annual report this year and letter he highlighted that at Berkshire-Hathaway Energy will be spending just in the West $18 billion on transmission. Five billion of that's already been spent as we sit here today. And that 13 billion will be spent over the next 10 billion. 10 years. That's the foundation that then allows us to build incremental renewable resources and move it to our many states that we serve at Berkshire Hathaway Energy and well beyond that. I would highlight, while we've been building the transmission infrastructure in place,
[1:04:50]
Greg Abelwe have been building renewables. If you look at our investment through the end of 2020, we've invested 30 billion. or in excess of $30 billion into renewables and have really completely changed the way our businesses do business, i.e. our utility businesses. They've been decarbonizing and delivering a valued product to our stakeholders, to our customers. And I think the results are really amazing when you look at them and I'll give you a couple of reference points. If you go back to 2015, when was discussing, excuse me, joining the Paris Agreement. Very specific targets were set. Prior to those targets being set, Berkshire Hathaway Energy and 12 other companies, including the apples of the world, Google, Walmart, committed to Paris, and that targets needed to be set, Berkshire Hathaway Energy was one of those companies in 2015. Yeah, how many other utilities were there? Warren, there were no other energy companies that made any type of commitment at that point in time. I'm happy to report we made a variety of pledges. Well, one of them was at that point we'd invested $15 billion in renewables and that we would commit $30 billion in total. Well, we far exceeded that total now. So there's been a clear commitment to reduce decarbonizing our businesses. We have focused on very identifiable, quantifiable outcomes, and I think that's very important. If you look at the standards that were set with the or the original U.S. government's commitments associated with the Paris Agreement, the target was 26 to 28 percent reductions in carbon footprints going back to 2005, so that's the reduction period, through 2025. and they wanted the 26 to 28% reduction level. We committed to that at BHE, and I'm happy to report, warn, and to, we've briefed our board. We achieved that in 2020. So we met our pledge, and we met the commitment under the Paris Agreement. And then if you fast forward to the discussions that are occurring right now or have occurred around rejoining the Paris Agreement, The current administration has proposed that, again, using 2005 as a starting point, that the emission goals or reduction should be 50 to 52% by 2030. Again, I'm happy to brief to our shareholders and briefings we've provided to our board, but Berkshire-Hathaway Energy will achieve that by 2030. Our reductions will hit the Paris Agreement target. Again, the reason we can do it is, we've built the foundation through transmission, the substantial investment that Warren's highlighted,
[1:08:03]
Greg Abeland then followed that up with very specific investments on the renewable side. I've one incremental slide that I hope sort of pulls it all together, and that's BHE2, because as people discuss carbon, they often go to coal units, how many you own, how many of you close, And there's no important that, there's no question that can be an important metric, but it is a transition. And we have very much focused across the three utilities we own and the ones we've highlighted on the slide is to transition from our existing fleet to renewables using transmission. We have not become overly dependent on transitioning to gas. That's been a clear strategy. So over a period of time, our coal units will retire. I'm happy to report. or pleased to report to our shareholders that through 2020, we've closed 16 units to date. If you look at from 2021 through 2030, there'll be an incremental 16 units closed. And then if you go through to the end of 2049, our remaining 14 units will be closed. And at that point in time, all our coal units are closed. That slide is just an aggregate. of all the activities each of our business units have been taking to help facilitate that transition and really transitioning to a decarbonizing those units and I said decarbonizing our businesses on behalf of first and foremost our customers, the the many stakeholders they represent in the various states. And then equally important, decarbonizing those businesses on behalf of our Berkshire Hathaway shareholders. The only other thing I would add, because it is the entity that has the second largest carbon footprint in Berkshire, and when you combine BNSF and BHE, you're talking the material set of emissions within Berkshire, BNSF has also been very active in managing their carbon profile. They've committed to have science-based targets established for 2030. So again, those targets will again be consistent with the Paris Agreement. We've seen what the other participants or some of them in the class in our, in the industry that have committed to. And our commitment will be very similar. It'll be consistent with the Paris Agreement, but it'll be a 30% reduction in BNSF's footprint by 2030. So again, if you look at our, and that's been publicly disclosed, that's on the BNSF website. Everything I've discussed regarding BHE is on their website, filed in 8Ks, completely accessible by our many shareholders. So when I look at it on, from the perspective
[1:11:19]
Greg Abelof our Berkshire shareholders, I really believe this risk is being well managed and, and and we are positioning ourselves for the long term. Thanks, Warren. Yeah, incidentally, I mean, the president the other night talked about $100 billion for infrastructure. We'd love to spend $100 billion. But he was talking about, you know, transmission is really the problem. I mean, a big problem because you got to get from where the sun is shining and where the wind is blowing, essentially to concentrations of population and it'll be whether the you know you cross state lines and you and you go through people's backyards it's it's whether the federal government has a better luck in just saying this is the way it's going to be done and ramming it down the throats of where they go and getting it done I mean they may have that power and they'll be able to do it faster than we are on the other hand we'd love to do it we'll we'll spend the hundred billion but the speed at which we can do it is we bought Pacific Corp in 2006 and we had a bunch of customers out in the far west and and they had coal plants serving them and to change that you've got to be able to go to where wind blows and and and deliver it so it's it's it's but it it it is interesting that we have published this information we spent far more than any utility than that in terms of renewables and transmission in the high United States and we started with a nothing you know little operation but are the people who bought the stock with their own money the individuals they seem to understand it and they read the reports and we get calls and they say well we want to come out and talk to you about it well we're not talking to them and ignoring the million people that have been with us over time and bought it with their own money they we will not give special treatment to either to analyst or to the to the institutions over the individuals that basically trust us with their savings for their lifetime
Questionerthis question is for Warren and Ajit it comes from Fernando Lewis a longtime Berkshire shareholder from Panama who says as a shareholder that intends to remain so for many decades my biggest concern is around possible losses arising from higher than expected insurance losses we've seen this in other great companies where underwriting mistakes end up crippling businesses previously considered exemplar While I understand that Berkshire's culture is unique and the insurance division
[1:14:04]
Questioneris full of talented individuals, this is a risk that concerns me. Many of us shareholders feel comfortable now given the privilege of having Mr. Buffett, Mr. Munger, and Mr. Jane looking at these deals. However, there will be a day when this is no longer the case. Is it reasonable to think that over the long term, Berkshire should focus on plain vanilla short-tail insurance businesses like GEICO and reduce the size of some long-tail risk? I want to clarify that I have the most respect and gratitude for all of Berkshire employees that have built the best insurance group in the world. I'm confident we have this talent to remain leaders in this field for decades to come. This is focused on the inherent opakness and risk of some insurance lines. Ajit, do you want to lead off, Ruth?
Ajit JainI mean, clearly, contract certainty is an issue for us in the insurance industry. It is an issue that cuts across not only the long-tail lines that you mentioned, but even short-tailed property focus lines. The most recent example is business interruption, which is an integral part of any property insurance policy that is bought and sold by corporations. It is a risk every time we issue a contract that either because of sloppiness in terms of how that contract is written or because of the regulatory environment we all have to live in, that the words in the contract may be tortured to, and normally when they are tortured, they end up going against the insurance industry, not in their favor. So it is an risk. It's an unknown risk in terms of how bad it can be. I hope we price for it, when we price for the product, we throw in something for the unknown unknowns, if you will. And we try and aggregate our exposures by major risk categories. Hopefully that will give us some comfort in terms of having some boundaries on what the exposure really can be. But there's no question the regulators play a very important role in terms of the economics of the business, especially in the U.S. where there are 50 state regulators who we have to deal with in terms of pricing, in terms of contracts, in terms of... Most of the surprises in insurance, frankly all of them are unpleasant. I mean, you get the premium up front. That's pleasant. And then from there on, you get some very imaginative losses that come through. And you get something that you've taken. We are willing to lose in terms of sort of the outside limit we think, we're willing to lose $10 billion in a single event.
[1:16:40]
WarrenAnd we want to get paid very appropriately for that. But we've got the resources to do it. And if, but we don't want to, we don't want to lose $10 billion in something where we only thought we could lose $50 million or something like that. And, you know, the current situation, For example, with the Boy Scouts of America, you know, they, the, I think there were 1100 claims or something like that that have been filed and now there's 17,000 just in... No, no, they're close to 100,000 now. Oh, I know. And these go back to 1950 or 1960 and you've got people advertising for claims and so all of a sudden. You get a lot of claims, I'm sure a lot of the claims are valid. I'm sure a lot of them are invalid and how in the world you pick out the difference.
Ajit JainYeah, and it goes back to the issue that you just raised. The reason why this number of claims have skyrocketed from less than 2000 to close to 100,000 is because the statute of limitations had expired, but in several states, if not in most states, they have unilaterally extended the deadline by when you can make claims and expanded it by a few years as a result of which a lot of more claims have appeared, funded by plaintiff lawyers who are now very well funded, and that results. and claims just skyrocketing.
WarrenYeah. You get a lot of unpleasant surprises and insurance. But we've got a very, I'm very biased on this, but I wouldn't, I think we've got the best insurance operation in the world. And I, and Ajita's a guy that created it, and the people at GEICO, we bought that, and they did wonderful things over time to contribute their part of it, too, and other people have. But Ajita is a symphony conductor. conductor on it.
QuestionerThis question comes from Henry Zoo, and he says, it looks like Charlie and Warren have some different opinions recently, like Costco and Wells Fargo. Where's that taking Berkshire?
CharlieCharlie? Well, we're not all that different. And Costco is a company I very much admire, and I've enjoyed my long association with that company with that company. But I love Berkshire too. I love Berkshire, too. So, and luckily, there's no conflict. And Warren and I don't have to agree on every damn little thing we do. We've gotten along pretty well. We have better than pretty, we have never had an argument.
WarrenYeah. At 62 years, and it's not that we agree on everything. We literally, in 62 years. We've never got mad at each other.
[1:19:40]
QuestionerNo, no, no, no. It just doesn't happen. This question is from Jason Planner. And he says, Mr. Jane and Mr. Abel, this question's for you. One of the successful features of Berkshire is the strong bond between Mr. Buffett and Mr. Munger who managed the company better because they had each other. As you two are clear leaders of the next generation at Berkshire Hathaway, can you please tell us about how you interact with each other, or some of the other incredibly competent Berkshire managers you seek for advice?
OtherWho's that directed at?
Ajit JainI agree. Okay. Well, there's no question. that the relationship Warren has with Charlie is unique, and it's not going to be duplicated. Certainly not by me and Greg, no. I can't think of very many other pairs that can duplicate it. Nevertheless, both Greg and I, at least certainly from my perspective, and I'm sure Greg will speak for himself. We've known each other for a very long time. I certainly have a lot of respect, both at a professional level and a personal level in terms of what Greg's abilities are. We do not interact with each other as often. as Warren and Charlie do, but every quarter we will talk to each other about our respective businesses and update each other on our respective businesses. And then during the course of the quarter, well, we may not have any formal sort of meetings, if you will. But every time a question comes up, which is related to insurance, Greg will pick up the phone and call me. By the same token, if there's any question that comes up relating to any of the non-insurance operations that Greg is in charge of, like we had recently, where a client, of mine who's looking for trying to find a buyer, and I picked up the phone and talked about, you know, how best to proceed. So there's that that happens during the course of the quarter, every quarter we exchange notes, and we have a perfectly well-functioning relationship between the two of us, and I hope it remains that way.
OtherGreg?
Greg AbelYes. Well, as he well said, and as he touched on, Warren and Charlie have an exceptional relationship, but I'm very proud of the relationship, Ajit and I've had. And as Ajit touched on, it's developed over many years. We've had the opportunity, or I've seen the, had the opportunity to see how Ajit's run the insurance business. And as Warren highlight and Charlie highlights, there's no one better at it. So I've had the opportunity to observe that.
[1:22:07]
Greg AbelAnd then equally over the years, that relationship has just built and become greater and greater. And as Ajit touched on, couldn't have more personal respect for Ajit, both personally and and professionally. And even though the interaction may be different than, say, how Warren and Charlie do it, as Ajit touched on, there is a regular dialogue, both around opportunities within our two businesses and units, both if we see something unusual that the other individual should hear, we make sure we're always following up with each other. But it goes beyond that. Ajit has a great understanding of the Berkshire culture. I strongly believe I do, too. And anytime we see anything unusual in one of our businesses, it's Ajit, who I'm going to call and say, are you comfortable that we're taking this approach? Is it going to be consistent with how you think about it, how you think about it in insurance? So it goes beyond just discussing the businesses, but that maintaining the exceptional culture we have at Berkshire and building upon that. So very fortunate to have Ajit as a colleague and in a colleague and in a business. immensely enjoy working with them every day. Thank you.
OtherThis question comes from Glenn Greenberg. He says it's on the profitability of GEICO and BNSF. He said, why do these companies operate at meaningfully lower profit margins than their main competitors, Progressive and Union Pacific? Can we expect current management's to at least achieve parity? Was it GECO and? BNS.
WarrenOh, actually, when you, if you look at the first quarter figures, you'll see see that the Berkshire-Hathaway Union Pacific comparison has got quite better at Katie Farmers doing an incredible job at BNSF and and been an interesting question whether five years from now or 10 years from now BNSF or Union Pacific has the higher earnings. We've had higher earnings in the past, Union Pacific passes, the first quarter you can look at. And, you know, they think they've got a slightly better franchise. We think we've got a slightly better franchise. We know we're larger than the Union Pacific. I mean, we will do more business than they do. And we should make a little more money than they do, but we haven't in the last few years. But it's quite a railroad. I feel very good about that. I should go back to the previous question. You know, people talk about the aging management. And I always assume they're talking about Charlie, when they say that.
[1:24:56]
WarrenBut I would like to point out that in three more years, Charlie will be aging at 1% a year. And he is the, no one is aging less than Charlie. If you could take some of these new companies with 25-year-olds, they're aging at 4% of year. So we will have the slowest aging, percentage-wise, by far, that any... corporate company has. Did you want to talk about GEICO versus Progressive, too? Because I got a lot of questions on that. Progressive in recent, Progressive has had the best operation in the last, in recent years, in terms of matching rate to risk. And I mean, that's what insurance is all about, among other things. But, I mean, you have to have the right rate. If you think that 90-year-olds and 20-year-olds have an equal chance of dying, I mean, you're going to be out of business very quick. the life insurance business, and you will get all the 90-year-old risks, and the other guy will get the 20-year-old risks. And the same thing applies in auto insurance. I mean, there is a huge difference between 16-year-old males and how they drive in 40-year-old married, you know, employed people. So the companies that do the best job of actually having the appropriate rate for every one of their policyholders is going to do very well. And Progressive has done a very good job on that. And we're doing a much better job on that already, but Todd Holmes has gone there. And it's a very interesting business. Both Progressive and Geico were started in the 30s. I believe I'm right about Progressive on that, and we were started in 36. You know, we have had the better product for a long, long time, I mean, in terms of cost. And here we are. we are 85 years later in our case. And we have about 13% or so of the market, whatever it may be, and Progressive has just a slight bit less. So the two of us, that's 25% of the market, roughly. And this huge market after 80-some years of having a better product, so it's a very slow-changing competitive situation. But Progressive has done a very, very good job recently. We've done a very, very good job over the years, and we're doing a good job now, but we're doing a good job now. We have made some very significant improvements. And if you look at the, you don't want to look at the quarters too much, but our profitability in the first quarter was good. But we gave back more money under our give-back arrangement when the virus broke out. We gave $2.8 billion on our give-back program that was larger than any company as well.
[1:27:49]
WarrenIt was the largest, I think, in the country. And GEICO and Progressive are both going to do very well in the future. And actually, the Union Pacific and BNSF are going to do well in the future. It's just in both cases, we want to do a little bit better than the other guy.
QuestionerCan I just add a little bit?
WarrenYeah.
Ajit JainThere's no question, Progressive is a machine. They're very good at what they do, but it's underwriting which Warren talked about in terms of matching rate to risk, whether it's handling claims. Having said that, I think Geico is catching up with Progressive. More than a year ago, about a year ago, Progressive had margins that were almost twice as much as GEICO's, and growth rates that were almost twice as much as GEICO's. If you look at the results as of now, Progressive is still crushing it in terms of growth relative to GEICO. But GEICO is certainly caught up with progressive in terms of margins, and hopefully that gap will be nonexistent in the future. The second point I want to make on the issue of matching rate to risk, GEICO had clearly missed the bus and were late in terms of appreciating the value of telematics. They have woken up to the fact that telematics plays a big role in matching rate to risk. They have a number of initiatives and hopefully they will see the light of day before not too long and that will allow them to catch up with their competitors in terms of the issue of matching rate to risk. I will predict that five years from now, State Farm is still the largest auto insurer, but I will predict that five years from now it's very likely. that the top two will be GEICO and Progressive in which order we'll see. But both companies are going to do very well, in my opinion.
WarrenWell, they, and they, they, they, Geico's done well, extremely well, but Progressive was better at the, setting the right rate, and we're catching up, I think, fairly fast.
QuestionerYeah, excuse me, Progressive has certainly done better, but when it comes to branding GEICO is, I think, miles ahead of progressive. And in terms of managing expenses as well, I think GEICO does a much better job than anyone else in the industry.
OtherThis question comes from Vittorio Aguichi, from Switzerland, who writes in, why in the recent past did Berkshire sell some of the common stocks owned on Apple? If the company is considered Berkshire's fourth jewel, why didn't Berkshire buy more of Apple's stocks in 2020?
[1:30:20]
WarrenThis seems to be counterintuitive. Well, we have five point 3% or something like that. Now, it's gone up in the first quarter because we bought in our shares, which helps our own shareholders expand their interest in Apple indirectly without laying out a penny, and then Apple's repurchase its shares and just announced another repurchase program. So let's say, we look at Apple as a business that we own 5.3 percent. Now we've got, it's a marketable security, so it shows up as way greater than any other marketable security we have. But, of course, if you look at our railroad, we mentioned, well, Union Pacific is selling for about $150 billion in the market, and we own one that's a little larger than the Union Pacific and making a little less money, but not much less. So it's an extraordinarily apple. It's got a fantastic manager. Tim Cook was underappreciated for a while. He's one of the best managers in the world. I've seen a lot of managers. And he's got a product that people absolutely love. And there's an installed base of people, and they get satisfaction rates of 99 percent. And I get the figures from the furniture marty as to what's being sold. And if people come in and they want an Android phone, they want an Android phone, they want an average. They want an Android phone. If they want an Apple phone, you can't sell them the other one. The brand, and the product is, it's an incredible product. It's a huge, huge bargain to people. I mean, the part it plays in their lives is huge. I use it as a phone, but I'm probably the only guy in the country. You know, maybe some dissentered of Alexander Graham Bells doing the same thing. But it is indispensable to people. And, you know, it costs, you know, car costs $35,000. And I'm sure with some people, have you asked them whether they wanted to give up, had to give up their Apple or give up the, give up their car. You know, and really make the choice for the next five years. You know, who knows what they do, but it is, it's, it's, and we, you know, we got a chance to buy it. And I, uh, I sold some stock last year, although our shareholders, still have their percentage interest go up because we repurchase shares. But that was probably a mistake. And Charlie, in his usual, low-key way, let me know that you thought it was a mistake, too, didn't Charlie? I could only do so many things that I could get away with it, Charlie.
[1:33:22]
WarrenI kind of used them up between Costco's Apple. So, and suddenly, he probably, he's very likely was right in both circumstances. It's an extraordinary business. But I do want to emphasize that in his own way, it's a different way, but Tim Cook is, we see a lot of managers of a lot of businesses, and you're looking at two great ones on the both ends here, he's handled that business so well. He couldn't do what Steve Jobs, obviously, could do in terms of creation. But I don't, but Steve Jobs couldn't really, I don't think, do what Tim Cook has done in many respects. Well, I also think it's clear that that list you showed of the leading American companies, it's been very important for America that we've done so well in this new tech field. I personally would not love. like to see our present giants brought down to some low level by some anti-competitive reasonings. I don't think they're doing a lot of harm anti-competitively. I think they're credit to the Americans, credit to our civilization. And they're huge. And they're huge, and that's good for us.
QuestionerWell, let me ask a follow-up question on that then. This comes from Jack Sang, who says, what's your mindset when you see so many of these high flyers, not the GME? are meme stocks, but more like the big tech growth stocks, gaining 50%, 100%, 200%, etc., in a matter of a year or less. I know you eventually bought Apple in 2016 because of the quality of their businesses and their management. How do you assess if these high flyers are worthy of your investment, given this crazy high valuations that muddy the waters?
WarrenWell, we don't think they're crazy. But we don't, at least I'm Charlie, I feel that I understand Apple and its future with consumers around the world better than I understand some of the others. But I don't regard prices, and that gets back, well, it gets back to something fundamental in investments. I mean, interest interest rates, you know, basically are to, to the value of assets, what gravity is to matter, you know, essentially. And on the way out here, I tore out a little clipping from the Wall Street Journal yesterday. Probably the only one that read it is so small and having trouble finding it. But anyway, yes, on Thursday, the U.S. Treasury sold some eight-week, some four-week notes, treasury bills. And the price was in, if you look to it, well, you look at what you. your Wall Street Journal down a little corner next to the last page in my paper, in the very bottom corner, the, here it is, the results of the Treasury auction, a little tiny thing.
[1:36:59]
WarrenThey sold four, they had applications on the four-week Treasury bill for a hundred and some billion. They accepted bids for 43 billion worth, and it says, average average price, $100.00,000, and essentially, people were giving $40-some-billion dollars to the Treasury, and they offered to give $130 billion or something, whatever the amount tendered. And the Treasury received the money at zero. And Janet Allen has talked a couple of times about the reduced carrying cost of the debt. I think in the last fiscal quarter, the U.S. Treasury, which, the U.S. government, which owes a few billion, a few trillion dollars, I should say, a few trillion dollars more than a year ago, their interest expense was down 8 percent. So you've had this incredible reduction in the so-called super-risk-free group, the short-term Treasury bill. And that is the yardstick against which other values are... are measured. I mean, if I could reduce gravity, it's pulled by about 80 percent. I mean, I'd be in the Tokyo Olympics jumping. And essentially, if interest rates were 10 percent valuations or much, so you've had this incredible change in the valuation of everything that produces money because the risk-free rate produces really short enough right now nothing it's very interesting I I brought this book along because for 25 or more years Paul Samuelson's book was the definitive book on economics it was taught in every school and and Paul was a he was the first he was the first Nobel Prize winner it's sort of a cousin to the Nobel Prize I started giving it in economics I think in the late 60s. He was the first winner from the United States. Paul Samuelson, amazingly enough, the second winner was Ken Arrow, and both of them are the uncles of Larry Summers. Larry Summers had the first two winners his uncles. But Paul, he was a wonderful guy, a wonderful writer, the definitive writer. And so I got out to 73 economics books, and bear in mind, probably economics kind of started as kind of an interesting science and respect. with Adam Smith, we'll say, he wrote the wealth of nations in 1776, he written some books earlier, but it sort of dated from kind of when our country started. And then you had all these famous economists subsequently, and Paul became the most famous of his time. so I looked up in the back under interest rates. I looked for negative interest rates. There's nothing there. So I finally found zero interest.
[1:40:21]
WarrenAnd Paul Samuelson, brilliant man, after a couple hundred years, we've had kind of studying economics basically, he said that, he said you can conceivably, technically, you can conceive perhaps of negative interest rates, but it can't ever really happen. And that was, you know, in the 1970s. This wasn't back in the dark ages. And this was a, and no economist wrote up and said, this is a terrible line to have an And here we are in this world where we had zero interest rates last year, I mean, last week, or this week, on a four, four-week note, and Berkshire Hathaway, which had a, has more than this, but let's say we had a hundred billion dollars in treasury bills. We have more than that. Before the pandemic, a pandemic, we were getting about a billion and a half from that a year. At present rates, if it's two basis points, we'd get 20 million. Imagine your wages going from $15 an hour to 20 cents an hour or something. It's been a sea change, and it was designed to be that. I mean, it was, that's why the Fed moved the way they did. They wanted to give a massive push just like Mario Draghi did in Europe and whenever it was 2012, when he says, whatever it takes, and they want the negative. rates. And the Fed has said it doesn't want to go to negative rates, and I think the Treasury actually has got some small barra. But if present rates were destined to be appropriate, if the 10 years should really be at the price it is, those companies that the Velm mentioned in this question, they're bargaining. They have the ability to deliver cash at a rate that's, if you discounted back, if you discounted back and you're discounting at present interest rates, stocks are very, very cheap. Now the question is what interest rates do over time. But there's a view of what interest rates will be based in the yield curve out to 30 years and so on. It's a fascinating time. We've never really seen what shoveling money in on the basis that we're doing it on a fiscal basis that we're doing it on a fiscal basis while following a monetary policy of something close to zero interest rates, and it is enormously pleasant. But in economics, there's one thing always to remember, you can never do one thing. You always have to say, and then what. And we're sending out huge sums. I mean, President said it on Wednesday, 85% of the people, we're going to get a $1,400 check. You know, 85%. And a couple of years ago, we were saying 40% of the people could never come up with
[1:43:29]
Warren$400 to cash. So we've got 85% of the people getting those sums, and so far we've had no unpleasant consequences from it. I mean, people feel better. The people who get the money feel better, and people who are lending money don't feel very good, but it causes stocks to go up, it causes business to flourish, it causes an electorate to be happy, and we'll see if it causes anything else. And if it doesn't cause anything else, you can count on it. continuing in a very big way. But there are consequences to everything in economics. But that is why the Googles and the Apples, and we don't own Google, we don't own Microsoft, but they are incredible companies in terms of what they earn on capital. They don't require a lot of capital. And they gush out more money. And if you're trying to find bonds that gush out more money from the federal government, we've got $100 billion is gushing out. like, you know, $30 or $40 million a year, whatever it may be, depending on the short-term race. So that puts the pressure on, which is exactly, of course, what the monetary authorities want done. I mean, they're pushing the economy in a – and they're doing it in Europe, even more extreme, and they're pushing and we're aiding it with fiscal policy and people feel good and people will become numb to numbers. You know, trillions don't. mean anything to anybody. You know, and $1,400 does mean something to them. So we'll see where it all leads, but it's – Charlie and I consider it the most interesting movie by far we've ever seen in terms of economics, don't you?
CharlieYes, and the professional economists, of course, have been very surprised by what's happened. It reminds me of what Churchill said about Clement Adley. He said he was a very modest man and had a great deal to be modest about. And that's exactly what's happened with the professional economists. They were so confident about everything. And it turns out the world is more complicated than they thought.
QuestionerAs a follow-up to that, Pat King, what's your opinion about the economic theory, MMT, especially the United States, because it's the reserve currency for the world?
WarrenWell, I think they're more – the modern monetary theorists are more confident than they ought to be, too. I don't think we, any of us know what's going to happen with this stuff. I do think there's a good chance that this extreme conduct is more feasible than everybody thought.
[1:46:13]
WarrenBut I do know if you keep just doing it without any limit, it will end in disaster. On a related question, L. Candle wrote in on this too and said, if you can borrow money at a guaranteed low or even zero interest rate, is it still worthy of borrowing money for not that guaranteed cost from the insurance operation? It reduces the value of float by a substantial amount. And we have a flexibility with our float that virtually no one has. And I've written about this in the annual letter. But the value of float has gone down dramatically because everything is off of interest rates. And when you get to negative interest rates, If a country can borrow it, negative interest rates, you get into something that's kind of akin to the St. Petersburg paradox, and those of you want to go to search, you can find some interesting things on. But it becomes infinite. It's a crazy consequence of a bunch of abstract mathematics where you get there. But you lose gravity entirely. And, you know, if you tell me that I'm going to have to have to have to be. I'm going to have to lend money to the government minus 2% a year. And I'm talking nominal figures. You know, you're just telling me how I'll go broke over time. If I do that, so it pushes you to do other things. And of course, we've seen it, well, we saw the rest of the world in an even more extreme fashion. But nobody, Paul Samuelson, brilliant man. Nobody thought you could do this, and we don't really know what the consequences are. But we know there are consequences, obviously. This question comes from Sam Butler, who says he's been a shareholder for many years and asks, what impact does the rise of so many new SPACs have on Berkshire's ability to find and close new acquisitions? Well, it's a killer. The SPACs generally have to spend their money in two years, as I understand it. So they have to buy a business in two years. If you put a gun to my head and said, you've got to buy a big business in two years. years, you know, I'd buy one, but it wouldn't be much of one. It's, you know, we look and look, and now there are, I don't know how many, whether there's hundreds, there's always been the pressure from private equity funds. I mean, if you're running money for somebody else and you're getting paid a fee and you get the upside and you don't have the downside, you're going to buy something. And I could tell you, but I had a very famous, I had a call.
[1:49:06]
OtherI had a call from a very famous figure many years ago that was involved in it. I wanted to learn about reinsurance. And I said, well, I don't really think it's a very good business. And he said, yeah, I don't spend this money in six months. I've got to give it back to the investors. So it's a different equation that you have if you're working with other people's money where you get the upside and you have to give it back to them if you don't do something. And frankly, we're not competitive with that. That won't go on forever. But it's where the money is now, and Wall Street goes where the money is. And it does anything, you know, basically, that works. And SPACs have been working for a while, and you secure a famous name on it. You can sell almost anything. And it's an exaggerated version of what we've seen in kind of, well, gambling-done-type market. I did have a quote from Keynes that we might put up on the, let's see if I've got, yeah, this is probably one of the most famous quotes in history, because it really sums up the problem of the fact we've got the greatest markets the world could ever imagine. I mean, imagine being able to own parts of the biggest businesses in the world and putting billions of dollars in them and take it out of, you know, two days later. I mean, compared to farms or apartment houses or office buildings where it takes months to close a deal, I mean, the markets offer a chance to participate and invest in earning assets on a basis that's very, very low cost and instantaneous, huge, all kinds of good things. But it makes its real money if they can get the gamblers to come in because they provide more action and they're willing to pay cellular fees and all kinds of things. So you have this incredible a huge asset to humanity, but it really makes its money when people are doing stupid things. I mean, that's where the buddy really is. And Keynes wrote this in 1930, in 1936. It says 1939 in the slide, but he wrote in 1936 in the general theory that, you know, speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise. becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a byproduct of the activities of a casino, the job is likely to be ill done. Well, the stock market, we've had a lot of people under the casino in the last year. You have millions and billions of people who have set up accounts where they day trade, where they're
[1:51:57]
Warrenselling puts and calls, where they, I would say that you had the greatest increase in the number of gambers, essentially, and there's nothing wrong with gambling. And they got better odds than they've got if they play the state lottery. But they've had cash in their pocket, they've had action, and they actually have a lot of good results. And if they just bought stocks, they do fine and held them. But the gambling impulse is very strong in people worldwide, and occasionally it gets an enormous shove and conditions. conditions lead to this place where more people are entering the casino that are leaving every day, and it creates its own reality for a while. And nobody tells you when the clock's going to strike 12, and it all turns to pumpkins and mice. But when the competition is playing with other people's money, or whether they're paying foolishly with their own money, but the big stuff is done with other people. people's money. They're going to beat us. I mean, we're not, we're not, we're not, that's a different game and they've got more, they've got a lot of money. So we're not going to have much luck on acquisitions while this sort of a period continues. But it's happened before. This is about as extreme as we've seen it, isn't it, Charlie?
CharlieYes, of course. I call it fee-driven buying. In other words, not buying because it's a good investment. they're buying it because the advisor gets a fee. And of course, the more of that you get, the sillier your civilization is getting. And to some extent, it's a moral failing too. Because the easy money made by things like SPACs and total return derivatives and so on and so on. You push that to excess, it causes horrible problems with the civilization. It reflects no credit on the people who are doing it and no credit on the regulators and voters that allow it. that allow it. So I think we have a lot to be ashamed of current conditions. But it's where the money is.
WarrenYeah, but we still, it's shameful what's going on. It's not just stupid, it's shameful. It's not, I don't regard it as shameful on a lot of the people that gamble. I mean, gambling is a very human instinct, and they've got money in their pocket, and they know somebody else that's made money who they don't think is any smarter than they are. No, no, I don't mind the poor fish. I don't mind the poor fish that gamble. I don't like the professionals that take the suckers.
[1:54:46]
QuestionerAll right. Moshe Levine writes in. He's an American living in Israel. He says, if you deem stock prices to be overvalued or in a bubble, do you think it's best to keep your money in cash while waiting for prices to come down to a fair price? Or would it be a better idea to invest this money in some way while waiting until stock prices are fair again and then sell the investment to buy the stocks?
WarrenWell, Charlie and I have had that discussion on a lot of things. We bought some stocks we really don't know that much about, but I'm not really comfortable doing that. You're used to shooting fish in a barrel, but that's gotten harder. We've got probably 10 to 15 percent of our total assets in cash beyond what I would like to have, just as a way of protecting the owners and the people that are partners. of our partners from ever having having us ever getting a pickle. We really run that person to make sure that we don't want to lose other people's money who will stick with us for years. We can't help somebody who buys it today and sells it tomorrow. But we've got a real gene that pushes us in that direction. But we've got more than we've got probably 70 or 80 billion, something like that, maybe. like that maybe that we'd love to put to work but that's 10% of our assets roughly and then and we probably won't get we won't get a chance to do it under these conditions but conditions change very very very rapidly sometimes in markets and we do have people that would like to join us but the market option they have is just too much. great for them. If they're publicly traded, I mean, they basically can't, they would have great difficulty, well, then making a deal with us because somebody else would come along with using other people's money. It's, you know, we may be unhappy about the 70 billion, but we're very happy about the other 700 billion. So it's not like, not like we should complain.
QuestionerWarren, when we spoke before the annual meeting, you said that it was okay if I asked a follow-up or two, and I'd like to take one of those right? right now. You said you bought some stocks that you don't know a lot about. What are they?
WarrenWell, I will not get into naming what stocks. And it may be, maybe that there's something that I think I know about that I don't know about. But we have bought stocks were, Charlie and I, I mean, we know the business generally, but we don't have any insights. And they are as a group.
[1:57:45]
WarrenIf I had the, told me I was going to be shot unless I got the best result, I would rather own those stocks than the Treasury bills we own. But on the other hand, we work with the quantities of money where if we put $50 billion of the things that I'm kind of so-so about, but that are better than treasury bills, it doesn't, I'm not wildly comfortable about that, even though it can be undone. It's selling $50 billion when it's really attracted to buy something else. there's a lot of, there's a lot of slippage that can happen in moving something like that around. So that's something we talk about all the time. They're good companies. They're fine companies, but do we know something about those companies or have a way of evaluating that gives us an edge the answer? I think, what do you feel about it, Charlie? We've talked about it a lot.
CharlieWell, of course it's a lot harder. And I think one consequence of the present situation is that Bernie Sanders has basically won. And that's because with the, everything boomed up so high and interest rates so low, what's going to happen is the millennial generation is going to have a hell of a time getting rich compared to our generation. And so the difference between the rich and the poor and the generation that's rising is going to be a lot less. So Bernie has won. He did it by accident, but he won.