约 1992 年 Omaha 春季问答

SPRING MEETING IN OMAHA WITH WARREN BUFFETT

Transcript of “An Evening with Warren Buffett”

http://www.oquirrhinstitute.org/about-buffett-transcripts.html

Warren Buffett: Last year, as you may remember, was not a good year

for Nebraska. It was their worst in about four years. It got so bad

that Frank Solich, our coach, was addressing a group like this and he

asked for our help and he said, “What we really need is a fullback.

And the guy I have in mind would be about 6’4″, and weigh 130 lbs.”

He said, “That might seem like kind of an odd requirement for a

fullback, but it’s the only kind of guy who could get through the

hole if the line opens up.”

So we found our fullback. We have a lot of student athletes at

Nebraska and I asked one of them the other day, “What does that big N

stand for on your helmet?” And he said, “Knowledge.” He was close.

I’m here to answer your questions. I’ll ask one of them myself.

It’s “How did you get involved in the Schwarzenegger campaign?” The

answer is, “I won a look-alike contest. Saddam Hussein has a double

and Arnold felt he needed one too.”

The Governor mentioned something in his talk that provided me with a

question I sometimes get asked by people: “How do I get into a

marriage—younger people ask me—how do I make sure I get into a

marriage that will last? What do I look for in a spouse?” It’s an

important question. They say, should I look for humor, character,

intelligence, looks? I tell them, “If you really want a marriage that

will last, look for someone with low expectations.” And I’m glad the

Governor’s taking that attitude to Washington with him.

Now let’s talk about what’s on your mind. Anything goes. We’re all

off the record—although, actually, I see something going on back

there (the video camera). I’ll try to be as candid as possible.

Mayor Riordan: Warren, we talk about the gap between the rich and the

poor and for a variety of reasons, the number of middle class is

dwindling in this country. The buying power of the middle class has

been dwindling for the last 30 years. What is this going to lead to?

What do you picture the country being like 10 years from now?

I would say that, absent a progressive income tax system, and an

estate tax, that the nature of compound interest, and the nature of a

more and more specialized economy, will lead to greater and greater

differences between the very top and the bottom. If you go back a

couple hundred years in this country when we had four million people,

you could take people with an IQ of 90, and they could satisfy 80% of

the jobs in the country—whether it was farming, or tradespeople or

whatever. As the economy has become more specialized, more advanced,

and all that, the rewards and the job profile of what pays well

compared to other jobs and so on, just gets tilted more and more and

more toward people who are wired in some way or have special talents

that enable them to prosper in a huge way in a 10 trillion-dollar-

plus economy and disparities will widen. And basically we have had a

system in this country that, through the tax system in various ways,

has sought to temper what a market system will produce in the way of

distribution and wealth. You really have unchecked, as it was many

years ago, unchecked, you will have families like mine, or whomever,

people that bring a small edge over the rest of the populous. They

will prosper at a rate that continuously outpaces the others.

And you can see it in entertainment. If you’re a Frank Sinatra or

something now and you have some edge over the others—the ability to

sing to 280 million people, or if you’re the heavyweight champion

with the ability to be seen in the homes of 280 million people or

whatever number—it’s worth far more relative to the general laborer

pay than it was 50 or 75 years ago. All technology advances and all

productivity advances and the pure market system work toward greater

inequality of wealth and we have a system in this country where

generally we have sought to temper that somewhat through a

progressive income tax and through the estate tax in the last ten

years or so—and particularly over the last five years—we’ve seen a

reversal and I think it could have some very unfortunate consequences

over time.

I was lucky to be born here at this time basically. I’m wired to be

good at capital allocation. I get no credit for it—I came out of the

womb that way. I’ve worked at it, but people work at all kinds of

things in this country and all countries to work at the job they’re

in. But I was wired in a way where in a huge capitalistic economy,

just taking little bites off what’s available, I could amass enormous

sums of money. If I’d been born two hundred years ago that would not

have been available to me. If I was born in Bangladesh it would not

be available to me.

Now people who think they do it all themselves, I pose to them the

problem of let’s just assume they were in the womb as one of two

identical twins—same DNA, same wiring, everything the same—and a

genie came along and said one of you is going to be born in

Bangladesh and one of you is going to be born in the United States.

All the human qualities are the same. Which one will bid the higher

percentage of the income they earn during their life to be the one

born in the United States? The bidding would get very spirited. I

mean, all these qualities of luck and pluck and all these things that

are supposed to take us to the top—you know, like Horatio Alger—would

not work as well in Bangladesh as here. This society delivers huge

opportunities to people who happen to have the right wiring. And it

delivers a pretty damn good result to people who could function here

compared to the rest of the world and compared to a hundred years

ago; but the disparity will widen absent the taxation system. That’s

one of the things you need government for in my view.

Our market system is a wonderful system. You look at this country and

it’s interesting. In 1790, we had just a little under four million

people. Europe had 100 million people. China had 300 million people.

So here’s this little country—and our IQs might be different from the

Chinese people or the Europeans—and they have natural resources and

we have natural resources, but somehow those four million people have

gotten to where they have close to 35% of the GDP of the world, even

though they only have 4 billion—4 _ percent of the world’s

population. What has happened here? Here we’re in this race—it’s only

been going on now for 210 years against 300 million people in

someplace else that are just as smart as we are. But somehow our

system has delivered this incredible bounty. I believe the two most

important things in that and they’re far from perfect—but I think we

have more equality of opportunity so that the right people get to the

top. The right guy ends up being on the Olympic team of science, or

business, or medicine or whatever because we have not had the

artificial barriers to quality rising to the top in various areas.

And the second system is the market system and we have had an

inducement for people to purchase what people want and that has all

kinds of wonderful fallout, but it also results in an incredible

inequality of wealth over time and absent the estate taxes—well, with

just compound interest, you could take my grandsons and you’d have a

significant percentage of wealth eventually. And you need something

that tempers where the market system leads to but you don’t want to

screw up the market system. You want to let them make it first. You

want to keep the Andy Groves or whether it’s Michael Dell or

whomever, you want to keep those people working, long after they’ve

got all the things they need in life. You want that energy and that

talent working, because it does work for the benefit of everybody,

but then you need to have something that prevents huge concentrations

of wealth.

QUESTIONAlong the same lines, I heard a speaker from India who

talked of why America’s thriving—because in India, you know your

dad’s a chemical engineer and that’s what you’re gonna be—whereas

Americans under Christianity and capitalism think we can take and

should get whatever we want. My question is how would you solve the

terrorism threat—when people hate us now because of our wealth and

freedom?

It’s the ultimate problem. I felt that way after 1945 because

essentially you always have people who are psychotic or megalomaniacs

or just plain evil or religious fanatics or whatever it may be. There

is a certain percentage of people who for one reason or another are

sociopaths and thousands of years ago their ability to afflict harm

on their fellow man was the ability to throw a rock at somebody and

it gradually went to bows and arrows and guns and a few things. But

up until 1945 the ability of misdirected people—which will be more or

less proportionate to the population over time (maybe you could make

an argument that prosperity may reduce it a little bit) but there’s

just a lot of screwy people. I mean, I’ve been to the mental

institutions in Nebraska and my father-in-law taught psychology and I

used to go down with him—I mean, there are just people who are not

very well fit for society and until 1945 their ability to afflict

harm on their fellow man had progressed, but it had progressed at a

tolerable level. At the time of Hiroshima and from that point

forward, there’s been this exponential increase in the ability of

deranged people who one way or the other—perhaps leading governments,

perhaps acting some other way—to inflict incredible harm on their

fellow man.

It takes four things. It takes intent and there will always be a

certain amount of intent in the world. There will be people that are

envious; there will be people that are crazy and so on.

It takes intent. It takes knowledge. It takes materials. It takes

deliverability. The knowledge has spread. We had a monopoly on

nuclear knowledge in 1945 and thank God we had it because if Hitler

hadn’t been so anti-Semitic, basically, he might well have had it

before we had it. But we got the knowledge first. Most of you aren’t

old enough to remember, but Hitler was lobbing those B-1s and B-2s

over into London, but the warheads were nothing. But if he’d gotten

them first, it would be a different world, or maybe no world.

So the knowledge since ’45, when we had the monopoly on this

incredible knowledge, has spread. You have Pakistan, you have India,

you have individual groups. Materials are tougher in the nuclear

arena. Now if you get into bio the materials get easier but we still

have the same levels of damage. But you get suicide bombers and

things like that and the materials are peanuts in terms of cost and

the knowledge is there. It is a problem that we do not have a perfect

answer for and all we can try to do is reduce the probabilities of

somebody successfully doing something on a large scale. It will

happen. It will happen with nuclear. In my view it will happen with

bio. Probably a little more likely to happen with bio in the next,

say, ten years than with nuclear but the truth is there are a lot of

people that have the ability to do things. I’m in the insurance

business, and anything that can happen will happen.

If you take the last 300 years in America, where do you think the

largest earthquake was in the continental United States? It was in

New Madrid, Missouri. 8.6. The Mississippi River ran backwards.

Church bells rang in Boston. Another big one was in Columbia, South

Carolina, and everybody’s forgotten about that. It killed 70 or 80

people, 6. something. Things happen over time. You just can’t keep

drawing balls out of a barrel with ten thousand white balls and four

black balls, we’ll say, without eventually drawing a black ball. We

almost drew one during the Cuban missile crisis. It was touch and go.

We sent the second message, then the contact with the guy from ABC.

But there was a lot of luck involved. I know people who were there at

the table. And they didn’t know if their kids were going to be alive

some weeks later. But we got through it. And basically, we’ve been

very lucky, but we’ve also done the right things over that time. It

doesn’t work forever. The bio thing, I mean, it’s scary. Anthrax

isn’t as easy to deliver. The deliverability of Anthrax is a problem.

You can take the amounts in those few envelopes and it would kill a

hundred thousand people but it’s a problem to disperse. The progress

of weaponry over the years (if you want to call it progress) has been

dramatic.

When I formed my foundation in the late 60s, I said that the number

one problem was the nuclear threat and I just don’t know how to

attack it with money very well. I support something called the

nuclear threat initiative.

The great problems of society are the ones money won’t solve.

Probably true in your families too. The problems you have where money

doesn’t help—those are the real problems. The problems that money can

help, this country can one way or another solve. And the ultimate one

is the one you mentioned there. There are people in the world that

want to do us great harm. We’re more the target than anybody else.

Some of them will have the knowledge, fewer will have the materials;

they won’t have the deliverability.

But North Korea—there’s a small probability in the next year that

something happens with North Korea. I don’t know whether it’s .01

or .03 or .005, but it is a probability. There’s some probability of

it. And there’s a probability of all kinds of other things. People

would have thought it was science fiction if you’d have written about

what would happen at the World Trade Center a few years ago. That 20-

odd people could carry it off with box cutters and so on. It’s the

problem of mankind. Our job is to reduce the probability in every way

we can. The number one way is to try and do whatever you can to deter

the further spread of nuclear weapons. Like India and Pakistan each

have that ability and they have the hatred that’s existed over the

years and the sort of incidents that developed by accident.

President Clinton was here last Saturday at my daughter’s house and

we had lunch and we were talking about India and Pakistan. He worked

on a solution I think it was right on the eve of the State of the

Union message a few years back. And he didn’t know whether something

was going to break out or not. The consequences are just huge. It’s

the number one problem of mankind. I don’t have any great answers,

but I think that the Commander in Chief—it’s his number one job.

Whatever it may take in terms of our borders, in terms of solving the

problems of stockpiles around the country, cooperating with the

Russians, get rid of a lot of the material like that. It will be the

problem of your lifetime and your children’s and your

grandchildren’s.

With all the storm of regulation in the last couple of years on the

subject of corporate governance, could you say something about your

views of the essentials of good corporate governance?

Well, I’ve got a somewhat different view. I’ve been on 19 public

boards and corporate business boards over 40+ years, public

companies, not counting anything Berkshire controls. And I’ve seen a

lot of interaction of boards. And the problem has been overwhelmingly

that boards, despite the fact that they exist in a business

environment, tend to be social organizations. I think it’s very

difficult for these people on the board—(I was put on the board of

Coca-Cola in 1988)—to go in there and start questioning Roberto

Goizueta in terms of his compensation. And incidentally we didn’t

even know as board members what the compensation was. I mean you read

the proxy statement unless you were on the comp committee. And they

never put me on the comp committee. And I’ve been on all kinds of

committees. They’ll put me on the greetings committee, the gardening

committee—anything really, the dance committee. They don’t put me on

the comp committee—I wonder why?

But it’s a social organization to a great degree. And generally

speaking, the only thing, absent a very large shareholder who’s

unhappy with something going on—the only things that really cause

change is when people on the board get embarrassed. Because you get a

bunch of big shots on the board. I call it “elephant-bumping” when

you go to board meetings. Everybody looks around and you see all

these elephants, and you think “I must be an elephant too.” It’s very

reassuring. You don’t want to sit there and belch in a board meeting

because it just isn’t done, like questioning comps and questioning

acquisitions, and other things worse than belching (we won’t get into

what that is). But it’s a social operation and the question is—how do

you break out of something like that? And it’s not easy. The hardest

problem is dealing with mediocrity.

I mean, if Frank Solich at Nebraska has a mediocre quarterback or

whatever, he’s gotta do something about it or he won’t be coaching

next year. When a Fortune 500 company has a mediocre CEO—a perfectly

decent guy, good family man, a friend of yours or picked you for the

board, what’s your incentive to, perhaps, you know, to get rid of

him? It isn’t going to happen. It just doesn’t make that much

difference. And of course when you get to the comp committee, it’s

ridiculous, because you have a CEO on one side to whom this whole

thing is terribly important and then you have a comp committee for

whom it’s play money. I mean that’s what I call it—play money—because

it doesn’t mean anything to him.

So you have an inequality of marketing intensity that’s very

difficult to write rules to solve, frankly. But I think the ideal

quarterback (and we talk about this when we talk about the annual

report), but you want somebody that’s business-savvy. There are a lot

of people on boards that are very smart people but they don’t know

anything about business. And if I was on a hospital board, I wouldn’t

know a thing about running a hospital or medicine. And I wouldn’t

after a year or two if a bunch of guys came in in white coats every

meeting and explained something to me for an hour or with a power

point demo—I wouldn’t know anything about it. I just wouldn’t

understand it. I could be sold any bill of goods they wanted to sell

me.

And the same would be true if I was at Cal Tech and they were talking

physics. And it’s not that I’m not smart enough to do crossword

puzzles or something. But I just don’t know the game. And there are

loads of those people on corporate boards in America that have big

names and they have no idea how to run a lemonade stand. And it’s

nothing wrong with them—they know how to do very well what they do.

So you need business savvy, you need a shareholder orientation, which

is lacking in a great many directors. You need interest, they’ve

gotta want to show up because they’re actually interested in the

business, and not because they’re interested in the fee or something.

And then you do need something called independence. But independence

has statutory defined just does not work for them. We at Berkshire

have a whole bunch of people who would meet every statutory test of

independence, but if we paid them a lot of money (which we don’t at

Berkshire for reasons I’ll get into—it may be obvious if you know

me). But if we paid them $75,000 a year and their total income’s

$200,000, we’ll say, and they’re hoping to get on one more board and

get another 75—they are not independent. But real independence comes

from an independence of mind and partly, at Berkshire we pay our

directors basically nothing. We don’t buy directors and officers

insurance. They’re not taking home insurance. We’re just about the

only ones on the New York Stock Exchange who don’t buy it. We want

directors who have a lot of their own money in the stock. Not

options. Not stock grants. Their own money. Just like I do and just

like a lot of other people—and like our owners do. We want them to

have no interest in the fees they’re getting so we don’t pay them

anything. We want them on the hook for bad decisions. If they’ve got

the wrong guy running it we want them to suffer just like the

shareholders do. So we leave them with a downside. And we’ve got some

very business-savvy people. They know business and in each case

they’ve got at least a million dollars in stock and they get $900 a

year. So their interests are aligned with the shareholders. And I

could have ten people who met the stock exchange definition. They’d

all have prominent names. And if the money was important to them

they’re not independent. They’re not any more independent than the

salaried employee of Berkshire if they’re getting a third or a fourth

of their income from it.

So it’s a difficult question to tackle. There are two functions,

really, that a board has to look at—you want to have the right CEO

and you want to make sure he or she doesn’t overreach. And if you get

that job done, that’s all you need. You need the right players at bat

and then you’ve got to make sure they’re not taking advantage of the

people who are on the team, basically. And the right CEO question is

very tough, if you’re on the board and you’ve got a reasonably good

person, but you know you could go out and get better.

And the overreaching has been very tough in recent years. Frankly

people want to appraise something. They’ve brought in consultants and

the consultants were basically hired by the management. And if they

weren’t they still do what the management wants so they’ll get

recommended to other firms. And it’s been a one-sided, dice is loaded

game. And I know what our approach has been at Berkshire in order to

tackle that. And it’s been quite unorthodox. But we’ll do it. We

still have to follow the rules. I have to make sure we qualify in

other ways too. But I don’t pay any attention except to make sure we

follow the law. But that is not the way we select directors. And

interestingly enough, I said in the annual report we have to get some

more. And I heard from about 30 people and I said they had to have

owned their stock for some time. And these people had millions of

dollars, each one of them, and they were willing to take the job. And

they were interested in the business. And we picked a couple and we

may pick another one or two.

I think some companies are making some progress. I think Jeff Immelt,

for example, at GE is leading the way to some degree in terms of

trying to set up the company’s governance in a way that makes the

most sense to the shareholders of General Electric. And he’s taken

the lead in that. He wants to do the right thing and he’s going to be

around there for 15 or 20 years and it’s interesting to me—that kind

of person. And you’ll find that. But basically, most CEOs have

learned how the game assists them and they’re not going to give it up

willingly.

Is there anybody I’ve forgotten to offend?

QUESTIONI’m interested in your opinion of American manufacturing. I

know that you’ve invested in Montgomery and mobile homes and Shaw

Industries and I know that most of those companies don’t have the

breadth of Chinese manufacturing coming at them. And I was wondering

if that is an absolute staple of how you analyze a manufacturing

company; is it childproof?

Berkshire Hathaway started the textile business; in fact it goes back

into the 1800s if you go to all the predecessor companies. I got in

in 1964. We had a couple thousand employees in New Bedford; it was

down from 12,000 by the time I got there. Twelve thousand had cut

down to two thousand. We had a couple thousand people—very decent

workers, working for low wages. It was a lousy job in terms of pay.

They were skilled at what they did. Mostly Portuguese. New Bedford

was a whaling town and there wasn’t one thing wrong with that labor

force. And we got killed, basically. If you talk about comparative

advantage in this world, people are willing to work a lot cheaper

someplace else. And there wasn’t any answer. And when you talk about

retraining people—these were people 55 years of age. I mean, a

prosperous society has to provide a safety net for people like that.

Through no fault of their own, they were in a position of being a

horse when the tractor came in. There’s no other way to put it. They

didn’t have the ability, at 55 or 60, to find work as computer

experts. The free market did them in. The free market, of course,

does all kinds of good things in this country, but you have to take

care of people like that. That happened in textiles; it’s still

happening in textiles. It’s wiping out the Burlington industry,

WestPoint companies, Tultex. Bankruptcy after bankruptcy after

bankruptcy. They won’t come back.

I also got into shoes. This country literally—Americans buy 1.2

billion pairs of shoes a year. We’re a nation of Imelda Marcos’s. I

buy a pair of shoes about every ten years or so. But a billion

200,000 pairs a year. Practically all of that was made in this

country except the very high-price lines, 40 years ago, you know

Rockford, Massachusetts. It’s down probably under 4% now. We were one

of the last American manufacturers of American shoes. We did them up

in Dexter, Maine. I bought the company some years ago and they had

terrific styling and the whole works. We had a great labor force.

Management loved the people, the people loved the management and we

were making decent money and the money just went down the tubes.

Because somebody else was willing to work for one-tenth of the wages

of the people of Dexter, Maine. There is no domestic shoe industry as

a practical matter today.

The same thing is now happening in furniture as Bill Child will tell

you. Bill, twenty years ago, I don’t know what percentage of your

purchases were made over there. But they went to North Carolina, they

went to Drexel, to Broyhill and all these people. And now we go there

and a lot of those people are buying over in China, so we go directly

and buy it ourselves. We’re big enough so we can make our own direct

purchases instead of somebody else buying it and stamping their name

on it and marking it up 20%. The furniture industry, at least in

anything but high labor content, is leaving us and it’s not the fault

of the workers at all. It’s just the nature of the globalized

sourcing, in effect.

Now you mention Shaw Industries. Shaw is the largest manufacturer of

carpet in the world. We have sales of 14.5 billion now. Labor’s only

15% of carpet. As a practical matter, if you analyze all the cost

factors and everything, it will go there. We also own Fruit of the

Loom. That manufacturing, 80% of it has gone to Central America.

First it went to Mexico and now it actually goes to Guatamala and

places like that. As long as we believe in free trade in this

country, you’re going to have all those high labor content businesses—

actually even things like software, now India has become a real

factor in that industry. And Bill Gates with Microsoft is working

more and more with people in India. It’s a real problem in this

country. I don’t know what industries are next. But you’re talking

millions of people when you go from textiles, and shoes, and now

furniture, and there aren’t great replacement jobs for those people.

They’re not going to move into all kinds of wonderful jobs.

There’s a significant percentage of your population that is non-

productive so that productive people have to turn around and be

offered more. It puts more and more strains in the economy. The fact

is, we’re seeing some of that.

I’ve learned the hard way. I’ve learned in the shoe business and the

textile business. And I’ve learned the hard way. There are times you

cannot fight. You cannot fight with labor at X here and at one-tenth,

or even a fifth, or fourth X someplace else. People aren’t going to

buy it from you just because it says “Made in America” on it. They’ll

go to Wal-Mart and if our Fruit of the Loom underwear—forget the

quality—if it has the best price on it, we’re gonna sell it. If

somebody figures out how to do it for 50 cents-a-three-pack or

something cheaper, then we’ve got a problem. We’re okay because we’ve

got 16,000 people working for us outside the United States and about

4,000 people working for us in the United States.

QUESTIONI’ve listened to you for a long time and studied your work.

It seems to have evolved as you’ve gotten into things like NetJets

and recently I’ve read about your investments in China and the oil

industry. And I just wanted you to give us some insight with your

desire to not be capital-intensive—industries that require any

capital spending—how NetJet works.

Well, we try and get, you know, flight. That’s sort of funny. Flight

is a very expensive piece of equipment. The airline business, it’s

been the great capital trap of all time. If you look at the history

of the airline business, it’s been about a hundred years exactly. No

money has been made transporting people. I mean, just imagine, you go

back to Kitty Hawk in 1903 or whenever it was, and you have this

picture all of a sudden of what it’s going to look like with planes

carrying four hundred people, going coast to coast in five hours and

all of the things that would open up. And you say, you know this is

unbelievable. Everybody’s going to get rich. And yet, it’s been a

loss, in spite of all the capital that’s been put in.

If there’d been a capitalist down in Kitty Hawk he should have shot

down all of them. There’d be a statue of him in my office. Here’s the

man that shot down Orville and saved us all a fortune. But the reason

it’s a lousy business is because the equipment is so expensive and

also because of the costs. And because it’s a commodity business to a

big extent. I mean, in the end, if you’re running XYZ Airline and you

open up USA Today in the morning and your competitor’s advertising a

lower price, you’ve gotta match it that day.

That’s not true if you sell See’s candy, like we do in the West, or

something of the sort. You just tell people that cheap candy’ll kill

you. If you’re in the commodity business, with huge capital

requirements, heavily unionized, it’s just going to be a capital

trap. And that’s been the case. In our case, at NetJets, the customer

owns part of the plane, but they save a lot of money as compared to

owning a whole plane. You know, the more you buy, the more you save,

or some crazy thing like that. But I’ve met a few customers here and

nobody gives it up. I mean, my daughter here is a user of it—she’d

trade her parents away for another fifty dollars of NetJets probably.

Once you’ve been with NetJets going back to commercial aviation is

like going back to holding hands. That’s not the direction you want

to go.

PetroChina you mentioned which is a huge oil company, that’s very

capital-intensive—we just own stock in that. That’s like our stock in

Coca-Cola. It’s true; it’s the only stock we’ve owned in China. But

there are company stocks you can own in China that are big companies.

PetroChina’s a very big company. PetroChina, turns out, produces

almost as much oil, 80% as much as much as Exxon-Mobile, we’re

talking real numbers there. But it’s also very capital intensive. But

compared to the Exxon-Mobiles of the world, Chevron and those, it’s

selling at a very low price. And it should sell for a lower price.

Although one of the reporters at our annual meeting, afterwards he

said, how can you buy stock in a company run by a bunch of

Communists? And I said after seeing some of American management I

actually preferred that. It’s just a stock with us.

QUESTIONWe’re all going to grow older. Who should administer, I

mean, how are we going to handle our medical economy situation?

There’s a good book that just came out by the guy that runs Kaiser.

I’m trying to think of the name of it. It describes the problems that

we are in already and that we face. Like 13 or 14% of GDP is going to

turn into higher percentages. And that is an incredible percentage.

It’s almost twice what anybody in the world pays. And the answer in

medicine with all the developments that go on, and with the fact that

treatment basically gets more and more expensive and people live

longer and longer, one way or another it has to be rationed. That’s a

terrible word to use in connection with something like medicine. But

it’s happened. It happens over the years, it may be rationed by

waiting time, in some socialist systems. It may be rationed by money

when you get to very high specificities. But in the end, it’s

unlimited demand, virtually, and in terms of the costs, in terms of

certain illnesses. And this country I don’t think will work very well

if 20% of GDP is going to medicine. Most medicine, obviously,

involves people beyond productive age.

Young people don’t support you. Old people don’t support you. It

costs $11,000 per student in the New York City public school system.

Per family of four, it’s $44,000 a year. Somebody’s paying for it.

That’s a tax on people who produce. It’s a tax we bear, kind of an

intergenerational compact we have over the years that you take care

of me, then I produce in the middle, then you take care of me when I

get old. Society does it, society should do it. But that equation

gets tougher and tougher as you get more and more people in the young

part and the older part because the people between 21 and 65 are the

people who have to turn on the output to take care of everybody; and

that means not only the manufacturing businesses but in services like

medicine.

We’re now starting to hit that again. We had a honeymoon period for a

few years, where in effect, hospital stays were reduced. It used to

be in terms of maternity wards, people would be in for a baby and

might be in for a number of days, and we’re cutting it down. HMOs

came in and bargained down prices and all that sort of thing for

awhile. But now we’re out of that phase and you’re starting to see

these 10% a year increases. And you start getting 10% a year

increases for companies in a world where the GDP is drawing 3-4% a

year. And somewhere it starts biting and biting badly. So we will

see. We will see some systems that put in more perks as they go

along. There’s just no question about it.

QUESTIONI wanted to go back and ask a question. When you buy a

company, is it a selection process, or a voter-type process?

It’s selection that pulls the culture. And the culture evolves more

or less. But selection you start with. The first thing I look at when

somebody wants to sell me a business before making a decision—do they

love the money or do they love the company? If somebody loves

painting, they may make a lot of money selling paintings, but they’re

going to keep painting. If they love playing golf, they may make a

ton of money, but they’ll keep playing golf. Jack Nicklaus will be

out on the Senior Tour, whatever. If they love the money, they’re

going to take the money, and they’ll promise me they’ll go to work

for awhile; then after six months, they or their spouse will

say, “Why are you jumping out of bed at 7 in the morning? You spent

40 years building this business and now you have all the money in the

world and you’re still doing the same thing as before just so you can

send a lot of money to Omaha.”

I think that decision is the most important question I’ve got to ask.

I ask questions about the economic characteristics of the business

and the price I’m paying, but I don’t have any management in Omaha.

We’ve got 16 people in Omaha and we’ve got 165,000 employees. So we

just don’t have anybody to send out. We don’t have any firemen. So I

have to count on the people who sell me the business, they take

hundreds of millions of dollars, like Rich Santulli at NetJets and

they’re still going to want to get up at 5:30 in the morning and

Thanksgiving weekend when everyone’s in such hurry because they all

want planes at the same time. Solving those problems and the thunder

storms in the east and whatever it may be. And when they get all

through at the end of the day, wanna do it again the next day.

We’ve had a problem frankly, in finding those kinds of people,

because three-quarters of our managers, at least, have more money

than they or their kids or their grandchildren will ever need.

They’ve monetized a lifetime of work or maybe their parents’ work or

their grandparents’ work. But they’ve monetized that when they handed

the business to us. And now they’ve got an option. And if they love

the business, they can’t stop. Why do I work? I can’t tell you how

much I love what I do. I would pay a lot of money (of course we don’t

want the shareholders to know)—but I would pay a lot of money to have

this job. I mean, I would do it under any circumstances. But the

truth is I could anything in the world that I want, but this is what

I like doing. It has nothing to do with how much I get paid. It just

has to do with two things. It has to do with me getting to do what I

like to do the way I want to do it. If somebody was telling me what I

had to do every day I’d be gone tomorrow. Why in the world would I

want to do that with the kind of money I have if I was being told

what I had to do and how I had to do it, and whether to part my hair

on the right or the left, or what to wear to the office or anything

like that. I’d just say goodbye.

And secondly, I like appreciation. I like the fact that by and large

our shareholders are appreciative. I’ve got an audience that I like

and that’s what causes me to work when I don’t need the money. It’s

probably what will cause other people to work in the businesses that

we buy, assuming they love the business to start with. So we let them

run their own business to an extraordinary degree. And we applaud.

And if they get applause from me they’re getting it from a

knowledgeable audience. I mean, I know business and I know enough

about business to know when applause is due and when it isn’t. So

they’re getting it from a good critic, as far as they’re concerned.

And they’re getting it from our shareholders in turn, because I pass

along the reasons for applause. And that’s what causes people to love

it. They’ve got to love what they do. There’s just no way around it.

And if they don’t, money isn’t going to keep them.

And we’ve never had, well, since 1965 I don’t know how many

businesses we’ve acquired, but dozens and dozens. And we have never

had a CEO leave us for another job voluntarily. We’ve had to make a

couple of changes in 35 years, except this year in one company where

the founder brought in a CEO to work jointly with her and the two of

them, it just didn’t work. And that was over in a couple of months.

But both of them feel good about Berkshire and it just doesn’t work

to have two people try to run that kind of business. And it usually

doesn’t work, but sometimes it works very well. We’ve had cases where

it does work very well. So there’s no magic to it, but you’d better

be sure that they love the business in the first place and that you

let them paint their own painting. I mean, I feel like I’m on my

back, and there’s the Sistine Chapel, and I’m painting away; it’s my

painting, and somebody says, “Why don’t you use more red instead of

blue?” Goodbye. It’s my painting. And I don’t care what they sell it

for. That’s not part of it. The painting itself will never be

finished. That’s one of the great things about it.

And I like it when people say, “Gee, that’s a pretty good-looking

painting.” To me, that’s what management is about. Management is

getting things done through other people that you want to get done.

The way you get it done through other people—is to get talented

people and let them work in a way that causes them to be more excited

about it than they’ve ever been before. And we get that. Flight

Safety. Al Ueltschi started that in 1951 with $10,000. Here’s a guy

that flew Lindbergh. He’s 85 years old now. He built his own business

and he got a billion dollars worth of Berkshire stock as a matter of

record. Here’s what else he does—he works seven days a week and he

solved his problem when he sold the business to Berkshire some years

ago. Because here he built this thing—it was his painting—and he

worried about what’s going to happen when I die? I have a very simple

rule. I say, look, you can sell this painting today and we’ll hang it

in the Metropolitan Museum or you can sell it to some LPO operator

and it will hang in a board room.

Now if you want this painting you’ve spent your whole life on hanging

in a board room, that’s fair enough. And maybe a few bucks is worth

it. But we’ll put it in the Metropolitan Museum and we’ll name a

special wing after it; and not only that, you go on and keep

painting. And that’s what Al wants. And when he sold it to me, his

life is better afterwards, because that’s the one thing he worries

about. You worry about your children. It was too important, when he’d

built this thing for 40 or 50 years. A line I used with him—I told

him, look, don’t worry about it. If you die tomorrow, some 26-year-

old trust officer is likely to auction the place off. And that drives

him crazy. But you do want to know what happens to your family. You

do want to know what happens to your business. And that filters out

all kinds of other things. I mean, in the end we’ve never bought a

business at an auction. It won’t happen. We’re not interested in

that. They dress up the figures and do all these other things. It’s

not going to happen. But we’ve got a filter so I don’t have to review

a thousand to buy two or something like that. I’m probably looking at

three to buy two or something of the sort because we have filters

they pass through before we even think about it. And we make deals

over the phone. We bought the McLain Company from Wal-Mart—22 billion

in sales—but to complete the deal was 29 days. The CFO from Wal-Mart

came up to Omaha. We talked for a couple of hours and we shook hands

on a price. He called down there, came back and said okay. And he

said, what due diligence do I realize? And I said, “I’ve just done my

due diligence. I’ve asked you a few questions.” We closed it 29 days

later. We’ve never had a deal that closed that fast before the one

with Wal-Mart. They loved it and we loved it. We’ve got a great guy

running it.

That’s what I want to do in life. I mean, I don’t want to go through

buying things at auction and trying to find the MBAs that are coming

out from other places. I’d rather just find four hundred diggers that

want to keep playing the game.

QUESTIONWhat’s the best business you’ve ever invested in and is

there a favorite deal you’ve ever done?

My favorite deal’s going to be the next deal. It’s tomorrow morning—

it’s going to be more fun than any day I’ve had a job as far as I’m

concerned. And that’s the way it is in what I do. We were talking

about it at dinner, I mean the best kind of business to be in is

something where you sell something that costs a penny and sells for a

dollar and is habit forming. We haven’t found that yet but we sell

things a little like that. We sell candy in the West, See’s Candy.

Now unfortunately boxed chocolates are not big in this country,

there’s about 1 pound per capita. Everybody loves to eat them and get

them as gifts but they don’t buy them to eat themselves, it’s a very

interesting phenomenon. I mean there’s nobody here that wouldn’t like

to get a box of chocolates for Christmas or when they are in the

hospital or a birthday. But you don’t go to a shop and buy it whereas

in other parts of the world people do that, so it’s a small business

but it’s still an important business. It’s a great gift and very

seasonal. I mean, we made 55 million dollars last year. We made 50

million in the three weeks before Christmas.

Our company saw what is apparently a come to Jesus moment. Can you

imagine going home on Valentine’s Day, you know and saying, there’s

my sweetheart and unwrap this box saying Happy Valentine’s, Dear, I

took the low bid. Price is not a determining factor. If you are

selling something for five dollars a pound, you don’t have to worry

about somebody selling for $4.95 a pound and taking away the market

like you do in a lot of things. It’s what’s in the mind that counts.

And if you gave a box of chocolates on your first date to some girl

and she kissed you, we all knew. As long as they are our chocolates.

If she slapped your face, we’re never going to get you back, that’s

not going to work. It’s got to be very good chocolate obviously, but

everybody in California has something in their mind about See’s

Chocolates. Just like everybody in the world virtually has something

in their mind about Coca-Cola. They have something that I call “share

of mind” and “share of market.” They’ve got something in their mind.

Now they aren’t going to have 28 things in their mind. All we want

with Coca-Cola are those that are associated with happiness. So we

want it at Disney World, we want it at Disneyland, we want it at a

baseball game. We want it everyplace people are happy. We want Coca-

Cola because we want that association. Tastes terrific to drink too.

But it’s going to be something in the mind about it that makes people

feel good about the product. So someone else is selling something in

a can for one penny less—they don’t shift. And if you say RC Cola to

people, it’s been around for 75 years, but there’s something in your

mind about RC Cola. Other than that, it doesn’t bring anything to

mind and if you are selling a consumer product you want it to be in

as many minds as possible with as favorable connotations as possible.

And the truth is you can go in, this is one of the ways I look at

business, I can give you a billion dollars and tell you to go to

California and try and beat us in the boxed chocolate business and

you’d say to yourself, how am I going to do it? Am I going to sell

them for cheaper prices? Am I going to get new outputs? You can’t

displace it because you can’t change what’s in peoples’ minds with a

billion dollar advertising campaign or anything of the sort.

You could build a shoe factory in China that will put us out of

business because in the end you may care a little bit. Remember

Florhseim shoes or Big Men shoes 20 years ago, they’re gone. You

don’t really care what shoe, you care what it looks like and if it’s

a name you recognize, fine. You don’t pay something extra for it and

you sure as hell don’t look at the bottom of the sole and see if it

says “Made in the USA” or not. You really need to be in something

where cost is not the controlling factor. Hershey bars—you know, you

go into a drug store and say, “I want a Hershey bar,” and the guy

says, “I’ve got this private label I make myself, same size as a

Hershey bar and it’s a nickel cheaper.” You walk across the street

and buy a Hershey bar some place else. That’s when you have a

business. It’s when you walk across the street if the guy tries to

sell you something, even if it is a little cheaper.

But if you sell wheat, my son lost a farm and it’s a terrible

business, and I told him the day someone walks into a place like this

and says, “I’d like some of [name-brand] corn, please,” you know you

are in a good business. But when they just say “Bring me some corn,”

it’s a lousy business. In fact, such a lousy business, they had a

fella that I read about that he won the lottery and he was a farmer

here in Nebraska that won 20 million dollars and the TV crew went out

to him and asked him, “What are you going to do with the 20 million

dollars?” He says, “I think I’ll just keep farming til it’s all

gone.” That’s what happens when you are in the commodity business.

You don’t want to go near it.

QUESTIONWhat do you think about the prospect of the current economy

and how would you change economic policy?

I pay no attention to economic forecasting. Your children are, absent

of the terrorism thing, but in terms of material wealth per capita,

your kids are going to live better than you and your grandchildren

will live better. And again in the 20th century, real GDP per capita,

real GDP, one of seven for one in this country, just think of that,

seven times. You can cash that out to fewer hours of work or more

product or all kinds of things. But it’s a wonderful, wonderful

economy and it’ll get better over time. Now to make any given 20 or

30, assuming I have 20 years left, there will be a few lousy years

and there will be a few so-so years and most will be pretty good

years and a couple fabulous years and I don’t know in what order they

are going to come. But if I’m a good golfer and I haven’t played a

course here before and I knew there would be some par 5s and some par

3s, I’m going to take some more strokes on the par 5s than on the par

3s on average. The importance is that I play, that I play each hole

well. In the end I will end up with a good score. I can’t just go

around and play the par 3s. I can’t do that in business. I worry

about being in good businesses with good people. That’s all I focus

on. Never base a decision in business, I’ve never based a decision on

expansion of a business or anything like that based on an economic

forecast because A) it’s not reliable and B) it’s not important. What

is important is where we are going to be in 5 or 10 or 20 years in

the country and will we be better off for this. So we don’t have any

clear-cut economic forecasters. My partner Charlie and I never talk

about it. We just talk about how can we put the money out in

businesses that we have owned forever, with the kind of people we can

trust.

QUESTIONCould you talk a little about your foray into telecom and

maybe about the MCI convergence?

There hasn’t been much of a foray in telecom to start with that.

Telecom is not a business I understand very well. I have no insights

into that business. It’s always struck me as a very competitive

commodity-type business, capital intensive. It’s just not a game

where I have any kind of any interest at all. I’d rather sell candy

or something of the sort, where you can understand the competitive

advantage. But I don’t like businesses that are going to change a

lot. I like Gillette, you know a hundred years ago almost, they were

the dumb regular blade. Like value, they sell over 70 percent of the

blades to the rest of the world, in the world—70 percent. Everybody

knows how to make them; they don’t have to steal the technology; they

don’t have to distribute them. But here’s a company that has 70

percent overtime. So it’s a great, great business. It will dominate

10 years from now. Dominate 20 years from now. Berkley will dominate

surely 10 years from now or 20 years from now. Coca-Cola will

dominate, but who’s going to do what in telecom? I don’t even know

what’s happened in the past very well and I have no idea in a fast-

folding industry what’s going to happen. So I view the change as

beneficial to society but potentially very harmful to investors.

Absence of change is how you get rich in investing. If you buy

something that’s very good and you don’t worry about it changing on

you and there’s certain mysteries that run themselves with that,

there’s certain industries that don’t. Anything with a lot of

technology is something to be very wrong on in a short period of

time. Now people say you can be very right on it too but I don’t know

enough to know the difference. I haven’t run into very many people

that do, occasionally people think they do but it’s very hard to

predict.

Look at the television industry. Television changes the lives of all

of us in this room. I don’t think there’s a television set being

manufactured in the United States that there aren’t 20 million of

them being sold that were manufactured elsewhere. Radio came along

and nobody made money after a little while making radio sets. There’s

just all kinds of things that are beneficial for society that involve

change. Just take the computer business. If you look at the people

that got into computers 30 years ago, you had people like, well I can

go down the list, it was a lousy business. Wonderful for society,

grew up on it. But it was like, we might use the example of the auto

business. 2,000 auto companies in the United States were formed ­

2,000. There was an Omaha Motor Company. There was a Nebraska Motor

Company. There was Maytag, there was Dupont. What you’ve got left,

you’ve got two companies struggling and the third sold out to the

Germans. They are running the company basically for the pensioners

now. It’s been a terrible business model for this country. But it’s

thoroughly fascinating. It’s little niche businesses like WD-40, or

something like that, that do very well. Just a little something to

stick together. Auto manufacturers turn out millions of cars and

hundreds of thousands of people work there and they are lousy

businesses. Capitalism has had growth in that sense. You can develop

a good restaurant and somebody can come along and copy it the next

day and figure out something new to add to the menu or add a little

more parking. People are always looking at successful models and

going after them. That’s terrific for the consumer. It can be very

brutal to be in those kinds of businesses. Like McDonalds sort of

owned the world 20 years ago, but not now. Wendy’s is doing better.

Burger King is kind of struggling. It’s tough. I don’t like tough.

QUESTIONTell us a little bit about why you’re involved in

California.

California: A) I’ve spent more time in California than any other

state, except for Nebraska. I’ve had a home up there for 30 years.

The big reason is California is too big to ignore. California is the

size of France in terms of GDP. I mean it is twelve or thirteen

percent, or whatever of the United States’ economy and it’s important

to Nebraska that California do well. We will not do wonderfully in

Nebraska if California is a mess. And California is a fiscal mess. I

mean, in May of this year we were approached by investment bankers

presenting the state of California because California needed to sell

11 billion warrants. These were warrants that were going to be issued

in June, due next June to tide over the deficit. California couldn’t

sell those. The only way California could sell 11 billion was to get

someone like Berkshire Hathaway or somebody else to guarantee, if

worse came to worse, we would buy those bonds at junk bond prices. In

other words, if they couldn’t find any buyer in the world to buy them

we would stand by it. We offered to do it for a price.

A group of seven banks led by Merrill Lynch, and Citicorp, got paid

84 million dollars. They got paid three quarters of 1 percent for

doing nothing but guaranteeing that if California could not find any

buyer in the world between now and next June they would step up and

buy this 11 billion. That got them past the June crisis. Their credit

card wasn’t any good without a guarantor. What happens in the state

of California affects the state of the country, and that was the

situation. Now they face 3 billion revenue anticipation notes. They

are talking about paying 1 percent to get a letter of credit backing

those, these are due next June. From now to next June on the market

and they are going to need to pay 100 basis points for just the

guarantee that somehow somebody will buy these damn things, cause if

they don’t they’ve got a couple other things in the works.

California, in my view, has until next June when this batch with come

due plus they will be facing further deficits. They have until next

June to be credible in the world on their own in terms of the

financial markets. Because the financial markets don’t have to buy

California paper, I mean there’s nothing to force them to buy. Now

California, I hasten to add, is too big to fail. I mean you can

predict dire things, they can run out of cash, but somebody will come

to the rescue and the only party to come to the rescue if they don’t

get their own house in order will be the federal government.

There will be a solution, but I think it’s way better if the

solutions arrive early rather than late. I mean Benjamin Franklin

said a lot of wise things but when he said, “An ounce of prevention

is worth a pound of cure, I mean that is the guiding light at

Berkshire and should be the guiding light for everybody with fiscal

problems of any kind. California’s an enormously rich state. It’s not

going to float off into the ocean or anything like that. It’s a

terrific economy actually, it’s got an added business problem but all

that’s solvable. But if it is not solved soon, it’s a few minutes

before midnight on that and then it will get solved by somebody else

for them and I just think that’s a terrible mistake.

You need leadership that has got the guts to come up with the kind of

program that is required and has the ability to communicate it both

to the people of California and in turn to the credit markets. The

burden of proof has now shifted in the credit markets to “show me” on

behalf of California. That burden of proof is, California will have

to make sense, they won’t be able to do it with smoke and mirrors

next year because they’ve got markets that will look very carefully

at where the cash is going to come from and how it’s going to go out.

You’ve got a lot of stuff out there that’s mandated, that leaves you

less room to maneuver both for taxes and expenditure than you might

have in many other states. They will have a situation where to some

extent the general electorate has set rules for both income and

expenditures that ties the hands of people and having set those

rules, the people who set them really didn’t have a responsibility

for making things. They just hit the bulldog for this or that. It’s

an interesting problem; it will get solved.

The good news is, it’s like this country. Peter Lynch says when you

buy stock, buy into a business that’s so good that even a dope can

run it, because sooner or later one will. There’s a lot of merit to

that. If you just buy businesses that your idiot nephew can run,

you’re going to do all right. You don’t want a business that a genius

has to run. That’s the worst kind of business in the world really.

And the truth is, our country is so good that we can take a fair

amount of mismanagement. We test that occasionally, but we come

through too.

On that bullish note, it’s nine o’clock. Thank you.

Governor Leavitt: Thank you, Warren; I don’t think there’s anything

we could say that would express adequately the appreciation people

feel. Two things left, one is a pitch and the second is a picture. If

you would like to have your picture taken as a memento tonight with

Warren Buffet, he’s prepared to come stand, take some pictures with

you if you would like. Now for the pitch: I want to make sure you

understand what we are doing here in terms of the Oquirrh Institute.

Most of you will know that the Oquirrh Institute is essentially a

bunch of people who believe in entrepreneurship and apply the

principles of entrepreneurship so you can solve some innovative

public policy problems. The Oquirrh Club is what we are celebrating

tonight—a group of people who come together twice a year and do what

we are doing tonight. We’ll have a unique day of recreation, a chance

to learn some things, and third we get to meet some great people—a

wonderful network. Some of you have been invited as guests tonight to

get acquainted with the Oquirrh Club. You can count on the fact that

somebody will call you asking if you want to join; we hope that you

do. We anticipate getting our numbers up to 50. We have been building

up this year, with 34 thus far. When we get to 50 we are going to cap

this program. It’s a great institution and I think you’ll see over

the course of the next few years that Oquirrh Institute will probably

become one of the country’s most prominent public policy

organizations because of the unique model that we are using. Thank

you all very much.

You should know that Dell Loy, through his generosity—his bounteous

generosity—has helped get the momentum started for the Oquirrh

Institute with a very generous 1 million dollar gift to get this

started. A picture of Early Light. Most of you know the meaning of

Oquirrh is early light. It’s a Goshute Indian word. The Oquirrh

Mountains—the Indians saw the mountains and said they liked the way

they looked when the sun hit. Dell Loy, this picture won’t do it. You

know what’s inside my heart and inside the hearts of your friends.

Thank you very, very much.

Dell Loy Hansen: I can speak for myself and almost everybody else in

the room that I’ve met that the reason we’re here is quite simple. We

all have one and the same answer—it’s Mike Leavitt. Now once we got

here we all found a lot of very, very interesting things to get

together with and go forward and do. But we all know the catalyst for

this organization was Mike Leavitt—there’s no doubt about that in my

mind. And so we have a token of gratitude to him. But there’s another

thing we can do for him and I think it’s even more important than

this token that we will give him. And that’s to remind ourselves that

the best gift we can give to Mike Leavitt is to make the Oquirrh

Institute prosper and grow and make it better than it is so that when

he comes back there’s a bigger and better institute for him to come

back to and to lead in the future. So with that, let me present to

you: To Governor Michael O. Leavitt, founder of the Oquirrh

Institute, shining early light on public policy.

Thank you all very much for your friendship. As Warren was talking

tonight about loving what you do, I must tell you, I love what I do.

I’ll hang this at the EPA but I’d be afraid somebody would come in

and ask if that that was CO2. It’s a reflection. Thank you all very,

very much for your friendship and what you are doing to make this

work. This is going to be, I believe, an organization that will make

great contributions to the world. Thanks.