1997 年股东大会 · 上午场

Buffett is losing his voice

WARREN BUFFETTGood morning. I'm Warren Buffett, the chairman of Berkshire Hathaway, as you probably have gathered by now. (Laughs) I had a real problem last night. I was losing my voice almost entirely. I don't want you to think I lost it cheering for myself this morning here. I think I'll do all right, but we've always got Charlie here to — he's always done the talking. I just move my lips, you know. (Laughter) So I'd like to tell you a little bit about how we're going to conduct things. And then we'll go through a script that was written by the speechwriter for Saddam Hussein. It has all the warmth and charm and participatory elements you'd expect. And we'll get through the business of the meeting as promptly as we can, which is usually about five or six minutes. And then Charlie and I will answer questions, your questions until noon, when we'll have a break for about a half an hour. There's food outside all the time. And then at 12:30 we'll reconvene, and we'll go till 3:30 or thereabouts. And I hope my voice lasts. We've got various non-Coca-Cola products here designed to keep it going. We'll have a zone system where we have 12 microphones placed around, and — I believe it's 12 — and we'll just go around in order. And if you'll go to the microphone nearest you, there will be someone there who will try to arrange the people — get to ask questions in the order in which they arrived. And we'll make sure that everybody gets a chance to ask their questions before people go on to second questions. Particularly in the afternoon, we'll make a special effort to answer the questions from people that have come from outside North America. We really got quite an attendance today. All 50 states — at least in terms of tickets — all 50 states are represented. We had — I had it here somewhere. Yeah, we had ticket requests, at least, and I met a number of people from South Africa, Australia, Brazil, England, France, Germany, Greece, Hong Kong, Ireland, Iceland, Israel, Saipan, New Zealand, Saudi Arabia, Singapore, Sweden, Switzerland. So when people have come from that sort of distance, we want to make sure that they — obviously we want to make sure that they particularly get their questions answered. Interestingly enough, we have an increased percentage from last year who come from Nebraska this year. And you have to be a little careful in interpreting that, because some people say they're from Nebraska and really aren't, because for status reasons they, you know, like that. (Laughter and applause) So make them produce their driver's license if they tell you they came from Nebraska.

Formal business meeting begins

WARREN BUFFETTI think that's most of the preliminaries, so I'm going to get into this. We'll get the meeting over with here promptly with your cooperation. And I will go through this little script that's been prepared for me, and it says, the meeting will now come to order. I'm Warren Buffett, chairman of the board of directors of the company. I welcome you to this 1997 annual meeting of shareholders. I will first introduce the Berkshire Hathaway directors that are present in addition to myself. I've introduced you to Charlie already. And the other directors, I believe, are in the front row here. If they'd stand when I mention their names, you can withhold any applause until finished, and then it's optional. (Laughter) Howard Buffett, Howie you want to stand up? Susan Buffett. Walter Scott. And Malcolm Chace III, "Kim" Chace. And that is our extensive directorate. (Applause) Give them a lot of applause because they don't get much else for it. It's a rather low-paying board. (Applause) Also with us today are partners in the firm of Deloitte and Touche, our auditors. They are available to respond to appropriate questions you might have concerning their firm's audit of the accounts of Berkshire. Mr. Forrest Krutter is secretary of Berkshire. He will make a written record of the proceedings. Miss Becki Amick has been appointed inspector of elections at this meeting. She will certify to the count of votes cast in the election for directors. The named proxy holders for this meeting are Walter Scott Jr. and Marc B. Hamburg. Proxy cards have been returned through last Friday representing 1,012,050 Class A Berkshire shares and 645,940 Class B Berkshire shares, to be voted by the proxy holders as indicated on the cards. That number of shares represents a quorum, and we will therefore directly proceed with the meeting. We will conduct the business of the meeting and then adjourn the formal meeting. After that we will entertain questions that you might have. First order of business will be reading of the minutes of the last meeting of shareholders, and I recognize Mr. Walter Scott Jr. who will place the motion before the meeting.

WALTER SCOTT JR.I move the reading of the minutes of the last meeting of shareholders will be dispensed with.

WARREN BUFFETTDo I hear a second?

VOICES(Inaudible)

WARREN BUFFETTWe got a second. The motion has been moved and seconded. Are there any comments or questions? We will vote on this motion by voice vote. Those in favor say "aye."

VOICESAye.

WARREN BUFFETTOpposed? Say, "I'm leaving." (Laughter) The motion is carried. Does the secretary have a report of the number of Berkshire shares outstanding, entitled to vote, and represented at the meeting?

FORREST KRUTTERYes, I do. As indicated, a proxy statement that accompanied the notice of this meeting that was sent by first-class mail to all shareholders of record on March 7, 1997, being the record date of this meeting, there were 1,205,078 shares of Class A Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at the meeting, and 815,015 shares of Class B Berkshire Hathaway common stock outstanding with each share entitled to 1/200th of a vote on motions considered at the meeting. Of that number, 1,012,050 Class A shares and 645,940 Class B shares are represented at this meeting by proxies returned through last Friday.

WARREN BUFFETTThank you. If a shareholder is present who wishes to withdraw a proxy previously sent in and vote in person on the election of directors, he or she may do so. Also, if any shareholder that is present has not turned in a proxy and desires a ballot in order to vote in person, you may do so. If you wish to do this, please identify yourself to meeting officials in the aisles who will furnish a ballot to you. Will those persons desiring ballots please identify themselves so that we may distribute them?

Berkshire board elected

WARREN BUFFETTOK, the one item of business for this meeting is to elect directors. I now recognize Mr. Walter Scott Jr. to place a motion before the meeting with respect to election of directors.

WALTER SCOTT JR.I move that Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chace III, Charles T. Munger, and Walter Scott Jr. be elected as directors.

WARREN BUFFETTIt sounds good to me. Is there a second? (Laughter) It has been moved and seconded that Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chace III, Charles T. Munger, and Walter Scott Jr. be elected as directors. Are there any other nominations? Is there any discussion? My kind of group. The nominations are ready to be acted upon. If there are any shareholders voting and present, they should now mark their ballots on the election of directors and allow the ballots to be delivered to the inspector of elections. Think we had one or two to collect there. Would the proxy holders please also submit to the inspector of elections a ballot on the election of directors, voting the proxies in accordance with the instructions they have received? Miss Amick, when you are ready you may give your report.

BECKI AMICKMy report is ready. The ballot of the proxy holders in response to proxies that were received through last Friday cast not less than 1,015,697 and 2,300 votes for each nominee. That number far exceeds the majority of the number of the total votes related to all Class A and Class B shares outstanding. The certification required by Delaware law of the precise count of the votes, including the additional votes to be cast by the proxy holders in response to proxies delivered at this meeting, as well as those cast in person at this meeting, if any, will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETTThank you, Miss Amick. Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chace III, and Charles T. Munger, and Walter Scott Jr. have been elected as directors. After adjournment of the business meeting I will respond to questions that you may have that relate to the business of Berkshire but do not call for any action at this meeting. Does anyone have any further business to come before this meeting before we adjourn? If not, I recognize Mr. Walter Scott Jr. to place a motion before the meeting.

WALTER SCOTT JR.I move this meeting be adjourned.

WARREN BUFFETTSecond?

VOICES(Inaudible)

WARREN BUFFETTMotion to adjourn has been made and seconded. We will vote by voice. Is there any discussion? If not, all in favor say "aye."

VOICESAye.

WARREN BUFFETTOpposed, say "no." The meeting is adjourned. (Laughter and applause) You're a very good group. You know, in that movie they said something about $350,000 an hour, and I see you're conserving your money here by moving this thing right along. (Laughter)

Q&A session begins

WARREN BUFFETTNow we're going to answer questions. And if you'll just go to the nearest microphone, and let's see where we start here. I'm just orienting myself to a map here. And we have area 1 is right here. I might describe this ahead of time. We have six areas on the main floor and we have six areas throughout the balcony. And they sort of work their way back one through six, and then seven starts over here, and then it works its way around to 12. And we look forward to having questions, the tougher the better. And if you always would just identify yourself and where you're from, and that you're a shareholder.

McDonald's isn't as "inevitable" as Coca-Cola and Gillette

AUDIENCE MEMBERYes, sir. My name is Tom Conrad (PH) and I'm from McLean, Virginia. And I'm a shareholder. And I asked a question last year, Mr. Buffett, to you. I was struck with what you said, that it takes only three quality companies to be — to invest in to be set for a lifetime. And I asked you the question last year, "Should I wait until the market goes down, or should I get in now?" And you advised to get in now, and the three companies that I chose were Coca-Cola, Gillette and Disney. And because of that advice I was able to afford the ticket to come back this year — (laughter) — to ask you a second question. (Buffett laughs) And my question is this. I'm thinking of —

WARREN BUFFETTYou ought to quit while you're ahead, but go ahead. (Laughter)

AUDIENCE MEMBERI'm thinking of expanding to a fourth company. The fourth company that I'm thinking of is McDonald's. And —

WARREN BUFFETTI see.

AUDIENCE MEMBER— I just wanted to ask you if you feel that McDonald's has the same ability to dominate the way Coca-Cola and Gillette has. And secondly, do you feel that if the answer is yes, that I should wait until the price comes down a bit, or get in now? And that's my question.

WARREN BUFFETTWould you like it to the eighth of a point, or shall we round off? (Laughter) In the annual report, we talked about Coca-Cola and Gillette in terms of their base business being what I call "The Inevitables." But that related, obviously, to the soft drink business in the case of Coca-Cola and the shaving products with Gillette. It doesn't extend to necessarily everything they do. But fortunately in both those companies those are very important products. I would say that in the food business, you would never get the total certainty of dominance that you would get in products like Coca-Cola and Gillette. People move around in the food business, from where they eat, from — they may favor McDonald's but they will go to different places at different times. And somebody starts shaving with a Gillette Sensor Plus is very unlikely to go elsewhere, in my view. So they do not — you just — you never would get in the food business, in my judgment, quite the inevitability that you would get in the soft drink business with a Coca-Cola. You'll never get it again in the soft drink business. I mean, it took a hundred — I guess it'd be 1886, so it'd be about 111 years to get to the point where they are. And the infrastructure's incredible, and — so I wouldn't put it quite in the same class, in terms of inevitability. That doesn't mean — it can be a better stock investment, depending on the price. But you're not going to get the price from me, and knowing Charlie I doubt if you'll get the price from him. But we'll give him a chance. (Laughs) (Laughter) He's breathing, folks. He's breathing. (Laughter and applause)

CHARLIE MUNGERWe've got this down to a routine. (Laughter) No, I have nothing to add, Warren.

WARREN BUFFETTOK. (Laughter) I didn't have anything to say, either. I just took longer. (Laughter)

You can pay too much even if a business is "wonderful"

WARREN BUFFETTHow about area 2?

AUDIENCE MEMBERMr. Buffett, my name is Pete Banner (PH) and I'm from Boulder, Colorado, and I'm a shareholder. Recently [Federal Reserve Chairman] Mr. [Alan] Greenspan made his comments about exuberance. And it wasn't long thereafter that you came out in the annual report and made your comments that you felt the market was fully valued or something of that nature. Did you have, or have you had, any communication with Mr. Greenspan regarding the valuation of the stock market?

WARREN BUFFETTNo, the answer to that is no. The last time I — well, I can't remember precisely when the last time I saw Alan Greenspan was. It was a long time ago. We had one conversation the day of the Salomon crisis, and he was formerly on the board of Cap Cities before he took his job with the Fed — Cap Cities/ABC — so I knew him then, but — You know, it's very hard to understand what Alan says sometimes, so there's not much sense talking to him, I mean — (Laughter) He's very careful about what he says. But I should — I'm glad you brought up the subject of the annual report. Because what I was doing in the annual report is I had talked about Coke and Gillette as being "The Inevitables," and what wonderful businesses they were. And I thought it appropriate, particularly — the report goes to a lot of people — that they would not take that as an unqualified buy recommendation about the companies, because they're absolutely wonderful companies run by outstanding managers. But you can pay too much, at least in the short run, for businesses like that. So I thought it was only appropriate to point out that no matter how wonderful a business it is, that there always is a risk that you will pay a price where it will take a few years for the business to catch up with the stock. That the stock can get ahead of the business. And I don't know where that point is with those companies or any other companies, but I did say that I thought that the risks were fairly high that that situation existed with most securities in the market, including companies such as "The Inevitables." But it was designed to be sure that people did not take the remarks that I made about those companies, and just take that as an unqualified buy recommendation regardless of price. We have no intention of selling those two stocks. We wouldn't sell them if they were selling at prices considerably higher than they are now. But I didn't want — particularly — relatively unsophisticated people to see those names there and then think, "This guy is touting these as a wonderful buy." Generally speaking, I think if you're sure enough about a business being wonderful, it's more important to be certain about the business being a wonderful business than it is to be certain that the price is not 10 percent too high or 5 percent too high or something of the sort. And that's a philosophy that I came slowly to. I originally was incredibly price conscious. We used to have prayer meetings before we would raise our bid an eighth, you know, around the office. (Laughter) But that was a mistake. And in some cases, a huge mistake. I mean, we've missed things because of that. And so what I said in the report was not a market prediction in any sense. We never try to predict the stock market. We do try to price securities. We try to price businesses, is what we try to do. And we find it hard to find wonderful, good, average, substandard businesses that look to us like they're cheap now. But, you know, you don't always get a chance to buy things cheap. Charlie?

CHARLIE MUNGERWell, I certainly agree with that. (Laughter) The one thing we can confidently guarantee is that real inflation-adjusted returns from investing in a standard collection of stocks will be lower in the long-term future than they've been in the last 15 years or so. This has been an unprecedented period, and there will be some regression toward the mean in average returns from investing in the stock market.

WARREN BUFFETTAmerican business has done extraordinarily well in the last decade-plus. And that's a huge plus for securities, because they just represent pieces of those businesses. Interest rates over the last 15 years have fallen. That's a big plus for stocks. Anytime interest rates go down, the value of every financial asset goes up, in rational calculation. Both of those factors have combined in recent years to produce conditions that enhance the true value of American business. But those are pretty widely recognized now, and after a while — Ben Graham always used to say you can get in more trouble in investment with a good premise than with a bad premise, because the bad premise will shout out to you immediately as being fallacious, whereas with a good premise it'll work for awhile. You know, businesses are worth more money if interest rates fall and stocks rise. But then eventually the market action of the securities themselves creates its own rationale for a whole — for a large crop of buyers, and people forget about the reasons and the mathematical limitations that were implied in what they — in what got them excited in the first place. And after a while, rising prices themselves alone will keep people excited and cause more people to enter the game. And therefore the good premise, after a while, is forgotten except for the fact that it produced these rising prices. And the prices themselves take over. He wrote about that and the connection with the 1920s when Edgar Lawrence Smith in 1924 wrote a fine book on why stocks were better than bonds. And that was sort of the Bible of the bull market of the '20s, and it made sense, if you paid attention to a couple of the caveats which were in Edgar Lawrence Smith's little book, which related to price. But people tend to forget about the importance of the price they pay as the experience of a bull market just sort of dulls the senses generally.

Berkshire discourages "street name" registrations of its stock

WARREN BUFFETTZone 3?

AUDIENCE MEMBERMr. Buffett, my name is Lola Wells (PH) and I come from Florida. I'm a very minimum stockholder. And I'm curious why stockholders whose stock is held in street name aren't eligible to make recommendations for your donations.

WARREN BUFFETTThe distinction really isn't whether their stock is held in street — well, that's one distinction. The Class B shareholders, as was pointed out in the prospectus originally for the B shares, do not participate in the program. The A shares that are held by the beneficial owner do participate. We obtained a tax ruling — 1981 or thereabouts — that made sure that the — there would be no taxation as a constructive dividend of the amount that shareholders could designate. There always was that possibility that the IRS would take a position that by allowing shareholders to designate a contribution to a charity, that we were giving them something which first would be taxed as a dividend, and then they would later give away. So we have a tax ruling, and that tax ruling applies to shares held by beneficial owners, or by record holders themselves. And we followed that ruling subsequently. I might say it would be sort of a nightmare too, frankly, if we got into street name holders. We're at the point now where we probably have 30 or 35,000 street name holders of the A, and with the B it's probably 60,000 or some number like that. And it would be quite a nightmare to do. And anyone, you know, unless they have margin debt against their stock, they can put it in their own name and we encourage people to do it. One reason we encourage people to do it is that they'll get their shareholder communications more promptly, too. We find that it's quite erratic — that the distribution of reports is quite erratic — when handled through brokerage houses to street name holders. So we really do encourage you to have your stock registered in your own name. You'll get the communications promptly, and if you get the A shares you'll be able to participate in the contributions program. And don't minimize your holdings, incidentally. Between the two of us we control the company, so I'm glad to have you here. (Laughter) Charlie?

CHARLIE MUNGERThere's no ideological bias against the small shareholder. It's just not technically feasible to do it as a matter of administration.

WARREN BUFFETTI should point out that the entire shareholder-designated contributions program, really, all of the work in relation to this meeting, I mean, and Ak-Sar-Ben has been terrific. They've helped out enormously. But in terms of sending out 11,000-plus tickets to the meeting, the baseball tickets, the planning that goes into it and everything, it's all done by the people at Berkshire, basically. They pitch in to do all kinds of work. So when you look at that 3,000-plus square foot office — we get help from an internal auditor who works — does not work — in the office. But very few people just do all of their regular jobs, and then they do this on top of it. And they never thought they were getting into this. (Applause) Thank you. We could have a department of 50 people, you know, assigned to something like this. But, the same way — you know, we get thousands and thousands of requests for annual reports, and they all come in, and we've got just a few people, and they handle it with courtesy and cheerfulness and I really tip my hat to them.

Why Buffett hasn't written a book

WARREN BUFFETTNow, let's go to Zone Four please.

AUDIENCE MEMBERGood morning. I'm Marshall Patton (PH) from Bandera, Texas. And first I'd like to thank you very much for not only giving us a good investment vehicle, but giving us a good education along the way. And thanks a lot for the two-volume set of the letters to stockholders over the years. It's required reading around our place. And if you can contain your hostility, I'd like to thank Charlie Munger for — (Buffett laughs) — the copy of his speech to the University of Southern California Business School students back in 1994. It's also required reading. And I want to ask you, when are you going to write your book?

WARREN BUFFETT(Laughs) Well, first of all I'd like to comment on Charlie's talk here. I think every investor in the world ought to read that talk before they invest. I think that's a classic. And we have copies available for — we mailed it out a year or so ago to the shareholders at that time. But anybody'd like a copy of that talk I'd be glad to supply it. There doesn't seem to be any need for me to write a book. Everybody else is doing it. (Laughter) We've got Janet Lowe here who just wrote the most recent one. You know, at one time or another I said everything I know and a good bit more. So I've never felt compelled to do it. I really feel that the annual reports are sort of a book on the installment system. Plus I think very few people write two books, and I have this kind of unwarranted optimism, I guess, that the best is always yet to come and there are a lot more interesting things that are going to happen, and I would hate to preclude commenting on those. So I think it's going to be a few years. But I may get around to it at some point. But I think maybe it'd be a bad sign if it happened, because it might be that I really thought that what I was writing about was more important than what was going to happen next. Charlie, are you going to write a book?

CHARLIE MUNGERNo, but your comment about why you are unable to write a book reminds me of the Middle Western fellow who left an unfinished manuscript. And he apologized for not finishing his book, which was entitled Famous Middle Western Sons Of Bitches. (Laughter) And he said he was always meeting a new one — (laughter) — and therefore he could never finish the book. (Laughter and applause)

WARREN BUFFETTAs a courtesy, Charlie and I are leaving each other out of the book that we write. (Laughter) Charlie was — Charlie grew up in Nebraska, and he's authentic. He has the credentials to prove it. We worked in the same grocery store at different times many years ago.

"Realistic" expectations

WARREN BUFFETTArea 5, please.

AUDIENCE MEMBERMr. Buffett, my name is J.P. from Singapore. I flew 24 hours to get here. Mr. Buffett, throughout your life you have repeatedly under promised and over delivered. For many recent years, for example, you've targeted Berkshire Hathaway's long-term book value growth at 15 percent. Yet you have come through at about 24 percent. That is a big gap of 9 percent between your modesty and the outcome. Perhaps the biggest dose of modesty in corporate history. May I ask, why is there such a big gap between your modesty and the outcome? (Laughter)

WARREN BUFFETTI don't think it was modesty. I think it was — For one thing, we've had a terrific market that has reappraised all businesses in the last ten or 15 years. So when we really started worrying about future performance, the key factor was having larger amounts of capital. And there's no question that the larger the amount of capital you work with, the more difficult the job is. Now, we were fortunate that that ascension in capital happened to coincide with things that just lifted all the boats substantially. And so we've had better luck than I would have guessed we would have had ten years ago, or five years ago. But it's been aided by a huge tailwind. And absent that tailwind we would not have done as well. I think maybe we would have done relatively as well, but we would not have done as well in absolute terms. And we won't have that tailwind in the future, I can assure you of that. But we will have a larger amount of capital, which is the anchor that works on it. So, if Charlie and I could make a deal to increase the intrinsic value of Berkshire at 15 percent a year over the next ten years, we would sign up now. And I don't want you to even tempt us with lower numbers, because those numbers get astounding. If we paid no dividend at all over a ten-year period, you can figure out where a 15 percent rate would take us. And we hope to get there, but we think that is absolutely the tops. And I think it's very likely for a period when the market starts underperforming businesses, that the rate could be very substantially lower than that. Charlie, do you want to expand on that?

CHARLIE MUNGERWell, the questioner came from Singapore, which has perhaps the best economic record in the history of developing an economy. And therefore he referred to 15 percent per annum as modest. It's not modest, it's arrogant. (Laughter) Only somebody from Singapore would call it modest. (Laughter)

WARREN BUFFETTYeah. Yeah. Be careful, Charlie, or they'll have a voice vote that we should move to Singapore, I mean — This is the group that wants performance. Large quantities of money are not going to compound at super rates — at super compound rates. Small sums probably aren't either, but large sums aren't. And if anybody that manages large sums of money that promises or implies that they can achieve really outstanding returns, you know, I'd stay away from them. The numbers just get too big. And you know, you've seen some of that with certain money management organizations in recent years. And you know, 15 percent on an intrinsic value which is substantially greater than our book value gets to be a very, very big number. And we need huge ideas. We don't need thousands of ideas. I mean, we might need them, but we could never come up with them. So what we look for is the very large idea. But we're not finding them now. And we'll keep looking, and every now and then we will find something. But really, if you think we're going to have any chance of doing better than 15 percent, and believe me, that is no number that I'd want to sign my name to, but you really shouldn't — you're going to be disappointed in Berkshire. And we don't want to disappoint you, so that's the reason we try to be realistic about expectations.

Pre-Buffett Berkshire shareholders

WARREN BUFFETTZone 6?

AUDIENCE MEMBERMy name is Darrell Patrick (PH) from Dayton, Ohio. How many shareholders do you have that have owned Berkshire longer than you and Charlie? And have you ever gotten together with them?

WARREN BUFFETTHow many shareholders have had it longer than we have? Well, we started buying in 1962. And it was seven and — I think the first ticket was at 7 5/8ths or thereabouts. It was 2,000 shares. I've got the trading card on the wall, and I paid a dime commission. I can't believe I was paying a dime commission in those days. We pay a nickel now, on much higher-priced stocks. (Laughter) It's a good thing I didn't have a fistfight with a broker about whether to pay it or not. I might have not had those 2,000 shares. We have as a director, Kim Chace, and his family's holdings in Berkshire go back to, what? Kim, where are you down here? There we are. What year would you —?

MALCOLM CHACE: The '20s.

WARREN BUFFETTThe '20s, yeah. The Chace family has been in Berkshire since the '20s. But I would say — we bought about 70 percent of the — Buffett Partnership, which was a partnership I ran in the '60s — bought about 70 percent of the company. So that means they were 300,000 shares roughly that were not owned by us. Aside from the Chace family, I'm sure there are people that — I'm sure we've got, you know, 50 or 100 shareholders maybe from that earlier dates that are still around, and I'm glad they are. Charlie?

CHARLIE MUNGERNothing to add.

Buffett's jet: "Indefensible" to "Indispensable"

WARREN BUFFETTArea 7, up in the balcony over here.

AUDIENCE MEMBERMaurus Spence from Omaha, Nebraska. In light of recent stock market volatility, could you give us your definition of stock market risk, and how does your definition differ from the standard definition? Finally, due to Charlie's recent counter-revelation about jets, are you going to rename "The Indefensible?"

WARREN BUFFETTCharlie would like to make an announcement on that second point. (Laughs)

CHARLIE MUNGERPrompted by Al Ueltschi, we are changing the name of the company plane from "The Indefensible" to "The Indispensable." (Laughter and applause)

WARREN BUFFETTYeah, it was Chateaubriand, who, incidentally, was a writer and philosopher in addition to being the father of a piece of meat — Chateaubriand wrote one time, I believe I'm correct on my attribution here, that events make more traitors than ideas. And if you think about that in terms of Charlie's remark, that the purchase of FlightSafety caused Charlie to have this counter-revelation. It's an experience that is duplicated many times in life where people flip over very quickly to a new view based on their new circumstances. Now, what was that first question again? (Laughter)

CHARLIE MUNGERI might add that I have a friend who's a United Airlines pilot, and he has recently been promoted into the 747-400. Before he started carrying people like you around for hire, he had to train intensively for five weeks. One-hundred percent of his training was in a simulator. They're that good. So —

WARREN BUFFETTThey better be that good. They cost us about 19 million. I mean, but they're fabulous. I mean, if you think about — I think it's 85 percent of the problems that you can encounter in a plane, if you attempted to teach people by actually being in a plane, they wouldn't be here anymore, so there's — You want to develop the instincts and responses that can react to 85 percent of the problems, the only place to learn them is in a simulator, and probably the other 15 percent the best place is.

"Volatility is a huge plus to the real investor"

WARREN BUFFETTNow, let's go back to your first question. Give it to me again.

AUDIENCE MEMBERThe first part was, would you define — give us your definition of stock market risk and how it differs from the standard definition.

WARREN BUFFETTYeah. We don't think in terms of — well, we think first in terms of business risk, you know. We — the key to [Benjamin] Graham's approach to investing is not thinking of stocks as stocks or part of a stock market. Stocks are part of a business. People in this room own a piece of a business. If the business does well, they're going to do all right as long as they don't pay way too much to join into that business. So we look at — we're thinking about business risk. Now, business risk can arise in various ways. It can arise from the capital structure when somebody sticks a ton of debt into some business, and so that if there's a hiccup in the business that the lenders foreclose. It can come about just by the nature of the — certain businesses are just very risky. Back in — when there were more commercial aircraft manufacturers, Charlie and I would think of making a commercial airplane, a big airliner, sort of as a bet-your-company risk because you would shove hundreds and hundreds of millions of dollars out into the pot before you really had customers. And then if you had a problem with the plane, you know, that company could go. There's certain businesses that inherently — because of long lead times, because of heavy capital investment — that basically have a lot of risk. And commodity businesses have risk unless you're the low-cost producer, because the low-cost producer can put you out of business. Our textile business was not the low-cost producer. And we had a fine management, and everybody worked hard. We had cooperative unions, all kinds of things. But we weren't the low-cost producer, so it was a risky business. The guy who could sell it cheaper than we could made it risky for us. So there's a lot of ways businesses can be risky. We tend to go into businesses that inherently are low-risk, and are capitalized in a way that that low risk of the business is transformed into a low risk to the enterprise. The risk beyond that is that even though you buy — identify — such businesses, that you pay too much for them. That risk is usually a risk of time rather than loss of principal, unless you get into a really extravagant situation. But then the risk becomes the risk of you yourself. I mean, whether you can retain your belief in the real fundamentals of the business and not get too concerned about the stock market. The stock market is there to serve you, and not to instruct you. And that's a key to owning a good business, and getting rid of the risk that would otherwise exist in the market. You mentioned volatility. It doesn't make any difference to us whether the volatility of the stock market, you know, is — averages a half a percent a day or a quarter percent a day or 5 percent a day. In fact, we'd make a lot more money if volatility was higher, because it would create more mistakes in the market. So volatility is a huge plus to the real investor. Ben Graham used the example of "Mr. Market," which is the — and we've used it. I've copied it in the report. I copy from all the good writers. And Ben said, "You know, just imagine that when you buy a stock, that you — in effect, you've bought into a business where you have this obliging partner who comes around every day and offers you a price at which you'll either buy or sell. And the price is identical." And no one ever gets that in a private business, where daily you get a buy-sell offer by a party. But in the stock market you get it. That's a huge advantage. And it's a bigger advantage if this partner of yours is a heavy-drinking manic depressive. (Laughter) The crazier he is, the more money you're going to make. So you, as an investor, you love volatility. Not if you're on margin, but if you're an investor you aren't on margin. And if you're an investor, you love the idea of wild swings because it means more things are going to get mispriced. Actually, volatility in recent years has dampened from what it used to be. It looks bigger because people think in terms of Dow points and so they see these big numbers about plus 50 or minus 50 or something. But volatility was much higher many years ago than it is now. And you had — the amplitude of the swings was really wild. And that gave you more opportunity. Charlie?

CHARLIE MUNGERWell, it got to be the occasion in corporate finance departments of universities where they developed the notion of risk-adjusted returns. And my best advice to all of you would be to totally ignore this development. Risk had a very good colloquial meaning, meaning a substantial chance that something would go horribly wrong. And the finance professors sort of got volatility mixed up with a lot of foolish mathematics. To me, it's less rational than what we do, and I don't think we're going to change. (Buffett laughs)

WARREN BUFFETTFinance departments teach that volatility equals risk. Now, they want to measure risk, and they don't know any other way. They don't know how to do it, basically. And so they say that volatility measures risk. And, you know, I've often used the example that the Washington Post stock when we first bought it had gone — in 1973 — had gone down almost 50 percent from a valuation of the whole company of close to, say, 180 or 175 million, down to maybe 80 million or 90 million. And because it happened very fast, the beta of the stock had actually increased and a professor would have told you that the stock — company — was more risky if you bought it for 80 million than if you bought it for 170 million. Which is something that I've thought about ever since they told me that 25 years ago, and I still haven't figured it out. (Laughter)

University of Florida will teach Graham-style investing

WARREN BUFFETTIncidentally, I should make an announcement on that, because I think that I've made a certain amount of fun of financial departments over the years. A fellow named Mason Hawkins who runs Southeastern Asset Management just gave a million dollar gift to the University of Florida, and the state of Florida is matching that with 750,000. So this million-seven-fifty is going to be used to have several courses in what essentially is the Graham approach to investing, I think, starting very soon. So that there will be at least — and there are more than this — but there will be a finance department in this case specifically devoted to teaching the Graham approach. And I think they're even going to pick up on my suggestion that I stuck in the annual report about having a course on how to value a business and what your attitude toward the stock market should be. So thanks to Mason, who's done very well managing money, I should add. And there will be at least one university course that tackles what I think are the important questions in investing.

Compulsory reinvestment and "owner earnings"

WARREN BUFFETTZone 8, please.

AUDIENCE MEMBERGentlemen, my name is Richard Sercer from Tucson, Arizona.

WARREN BUFFETTLet's give him a hand. This is the gentleman that led to the FlightSafety purchase. (Applause)

AUDIENCE MEMBERMy question relates to owner earnings. What guidance can you give us as to the calculation of item (c), which is maintenance capital spending and working capital requirements?

WARREN BUFFETTItem (c)? Richard, I was going to ask you a question. How about another company? (Laughter) Richard and his wife Alma have attended, what, maybe eight or so meetings, and what he did is covered in the annual report. But if it had not been for Richard we would not have merged with FlightSafety. And for that we owe him a lot of thanks. Now, the item (c), I don't remember item (c).

CHARLIE MUNGERHe's talking about maintenance expenditures and working capital —

WARREN BUFFETTYeah, I know.

CHARLIE MUNGER— and so forth. The compulsory reinvestment.

WARREN BUFFETTOh, oh, back on the — goes back some years on that description. Yeah. In the case of the businesses that we're in, both wholly owned and major investee companies, we regard the reported earnings — with the exception of the — some major purchase accounting adjustment, which will usually be an amortization of intangibles item — we regard the reported earnings — actually the reported earnings plus — plus or minus, but usually plus — purchase accounting adjustments, to be a pretty good representation of the real earnings of the business. Now you can make the argument that when Coca-Cola's spending a ton of money each year in marketing and advertising that they're expensing, that really a portion of that's creating an asset just as if they were building a factory, because it is creating more value for the company in the future, in addition to doing something for them in the present. And I wouldn't argue with that. But of course, that was true in the past, too. And if you'd capitalized those expenditures in those earlier years, you'd be amortizing the cost of them at the present time. I think with a relatively low inflation situation, with the kind of businesses we own, I think that reported earnings plus amortization of any — well, it's really amortization of intangibles. Other purchase accounting adjustments usually aren't that important. I would say that they give a good representation to us of owner earnings. Can you think of any exceptions in our businesses particularly, Charlie?

CHARLIE MUNGERNo. We have — after some unpleasant early experience, we have tried to avoid places where there was a lot of compulsory reinvestment just in order to stand still. But there are businesses out there that are still like that. It's just that we don't have any.

WARREN BUFFETTYeah. I would say that in the case of GEICO, for example, the earnings — the gain in intrinsic value — will be substantially greater than represented by the annual earnings. Whether you want to call that extra amount owner earnings or not is another question. But as we build float from that business, as long as it's represented by the same kind of policyholders that we've had in the past, there is an added element to the gain in intrinsic value that goes well beyond the reported earnings for the year. But whether you want to really think of that as earnings, or whether you just want to think of that as an increment to intrinsic value, you know, I sort of leave to you. But I would say that there's no question that in our insurance business, where our float was $20 million or so when we went into it in 1967, and where it is now, that there have been earnings, in effect, through the buildup of the float that have been above and beyond the reported earnings that we've given to you. I think our look-through earnings are — they're very rough. And we don't try to — we don't believe in carrying things out to four decimal places where, you know, we really don't know what the first digit is very well. So, I don't want — I never want you to think of them as too precise, but I think they give a good rough indication of the actual earnings that are taking place, attributable to our situation every year. And I think the pace at which they move gives you a good idea as to the progress, or the lack of progress, that we've made. The only big adjustment I would make in those is in the super-cat insurance business, we're going to have a really bad year occasionally. And you probably should take something off all of the good years, and you probably should not regard — when the bad year comes — you should not regard that as something to be projected into the future. Charlie?

CHARLIE MUNGERNo more.

WARREN BUFFETTNo more.

Ratings after Walt Disney's purchase of ABC

WARREN BUFFETTZone 9, please.

AUDIENCE MEMBERMr. Buffett, I'm Rick Fulton from Omaha. Really. Recently I was in Washington, D.C. on — with my wife on a business trip, and I wanted to tell Mrs. Graham, I know she's here, what a pleasure it is to get up in the morning to a good newspaper like the Washington Post. Also, I have a question about CapCities and now Disney. And is Mr. Murphy keeping busy now that ABC's owned by Disney? (Buffett laughs) Also, every week you read in the paper the Nielsen ratings. And does it matter that ABC now, it seems that less people recently are watching? Does it matter to Disney's bottom line? Thank you.

WARREN BUFFETTWell, the first question about Mr. Murphy is that if we could hire Mr. Murphy we would. I mean, there is no one in this world that is a better manager than Tom Murphy, or a better human being as far as that's concerned, so — He — I think he's keeping pretty busy. He has been responsible for NYU Hospital. He wouldn't say that, but he's been the chairman of it for some years, and that's a $800 million a year or thereabouts organization. Charlie runs a hospital, so he knows how busy it can keep you. And he — but I would say this, that I would love to find a business that I could entice Murph to come back and run. Because they don't get any better than he is. And Charlie, you want to add anything on Murph, or?

CHARLIE MUNGERWell, I'd like to because you're absolutely right. (Laughter)

WARREN BUFFETTAnd what was the other part of the question?

AUDIENCE MEMBERSir, does recent — the decline in ABC's Nielsen ratings —

WARREN BUFFETTYeah.

AUDIENCE MEMBER— have anything to do with the bottom line?

WARREN BUFFETTAre we talking (inaudible) —

AUDIENCE MEMBER— (inaudible) Forrest Gump last night? (Laughter)

WARREN BUFFETTYeah, it makes a difference, sure. Ratings translate in many cases into, not — depends on daypart, depends on a whole bunch of things. But overall, you make more money if your ratings are good in news, if they're good in early morning, if they're good in daytime, if they're good at late evening, whatever. I mean, ratings translate into money. They may not translate immediately, particularly if they have some big hit show you may have sold it out too cheap. But over time the prices you receive for your product relate to ratings. And over time, but over a longer period of time, the price that you pay for the product also relates to the ratings. But there's a difference in the time cycle. So that it makes a difference to any network's bottom line what their ratings level is. Disney is conscious of that, and they are very able operators, and I predict you'll see in a couple of years. But you can't it immediately. The schedule fixes don't work on a, you know, week to week basis because people have habits, and there's a time lag involved in any change. And you've seen — over the last 20 years — you've seen various networks on top or on the bottom from time to time. So it moves around. It moves around a fair amount. Charlie?

CHARLIE MUNGERYeah, I think the TV network business is intrinsically a pretty tough business. And Disney did way better on ESPN than they might have forecast, and they probably did a little worse on the network. These things happen.

WARREN BUFFETTThat was, incidentally, the situation when CapCities bought ABC. In 1985, we made the deal, I think, and it closed — I think it closed the first day or two of '86. I may be wrong on that. But the network diminished — the ratings — diminished significantly, and particularly in daytime. We'd always thought daytime was almost a certainty to produce big earnings, and it had. Primetime is what people pay the most attention to, but daytime slipped significantly after we bought it. It has no relationship to those movies — I mean, to a movie you saw earlier — when I started appearing on it. Don't want anybody to make that connection, but it did happen to be at the same time. The kicker we got, again, was ESPN. ESPN was losing money when CapCities made the deal to buy ABC, and we never really regarded it as being that — having that big a potential. And you know, it has been huge. It was enormously better for us than we ever anticipated. Leonard Goldenson, who ran ABC, told us it was going to be that good. But, of course, we were too smart to pay any attention to him. And I think Disney has been pleasantly surprised by how well ESPN has done, too. It's a powerhouse.

Creation of Class B shares similar to a stock split

WARREN BUFFETTZone 10, please.

AUDIENCE MEMBERMy name is Bill Turan (PH). I'm from Des Moines, Iowa, and I'm a stockholder. It would appear that there's going to be a capital gains tax cut. If it does materialize, would you consider a stock split? (Buffett laughs) Secondly, is there an extra copy of your annual report available on the premises?

WARREN BUFFETTMy guess is we'll get you an annual report. In fact, if someone could take it up to zone 10, we'll be glad to get it to you. I don’t think — well, I'll put it this way. If they cut the capital gains tax to zero, we'll maybe — (Laughter) I don't think I'd get Charlie's vote though, anyway. No, we will not be splitting Berkshire stock. (Applause) Incidentally, we do not consider splitting the stock a pro-shareholder move. If we did, we'd do it. We think that net, to take the entire experience, it's worked out well for shareholders, and we think we have a more investor-oriented — or investment-oriented — audience in this room today than we would have had if we'd split many times. It is a way of enticing certain types of investors, and perhaps discouraging others. And so it's worked well. But I will say this, too. We got pushed into, in effect, issuing the Class B shares last year. Wasn't our — wouldn't have been something we would have done, except for the possible formation of the unit trust. And I would say that's worked out very well from our standpoint. So we're happy that it happened, and we're happy that the Class B shareholders have joined us. And we now have something that's denominated, you know, at a much lower level. And there have been no bad effects whatsoever from having the Class B out there. So anybody owns the A stock and wants to split, you can split 30-for-1 this afternoon. I mean, how many other companies give you that chance? Charlie?

CHARLIE MUNGERI think what he's trying to tell you is that you've had your stock split. (Laughter)

We don't know how to value Intel and Microsoft

WARREN BUFFETTZone 11, please.

AUDIENCE MEMBERYes, Mr. Buffett, I would like to thank you again for issuing the Class B shares.

WARREN BUFFETT(Laughs) Well, I'm glad we did, and I hope you own them.

AUDIENCE MEMBERI am a class B shareholder. I need your comment on some analysis that we did. If someone uses your investment philosophy of building a highly concentrated portfolio of six to eight stocks, and adopts your buy-and-holding principle so that the max of compounding and no tax works for you, but however, with one major modification: invest in high-octane companies like Intel and Microsoft that are growing at 30 percent, instead of typical 15 percent growth company in your portfolio. My question is, will this investment philosophy will translate into twice the shareholder return as you have historically provided to your shareholders?

WARREN BUFFETTYeah. Well, it will certainly work out to twice the return if Intel and Microsoft do twice as well as Coke and Gillette. I mean, it's a question of being able to identify businesses that you understand and feel very certain about. And if you understand those businesses, and many people do, but Charlie and I don't, you have the opportunity to evaluate them. And if you decide they're fairly priced and they have marvelous prospects, you're going to do very well. But there's a whole group of companies, a very large group of companies, that Charlie and I just don't know how to value. And that doesn't bother us. I mean, you know, we don't know what — we don't know how to figure out what cocoa beans are going to do, or the Russian ruble, or I mean, there's all kinds of financial instruments that we just don't feel we have the knowledge to evaluate. And really, you know, it might be a little too much to expect that somebody would understand every business in the world. And we find some that are much harder for us to understand. And when I say understand, my idea of understanding a business is that you've got a pretty good idea where it's going to be in ten years. And I just can't get that conviction with a lot of businesses, whereas I can get it with relatively few. But I only need a few. As you've pointed out, you only need a few, six or eight or something like that. It would be better for you — it certainly would have been better for you — if we had the insights about what we regard as the somewhat more complicated businesses you describe, because there was and may still be a chance to make a whole lot more money if those growth rates that you describe are maintained. But I don't think they're — I don't think you'll find better managers than Andy Grove at Intel and Bill Gates at Microsoft. And they certainly seem to have fantastic positions in the businesses they're in. But I don't know enough about those businesses to be as sure that those positions are fantastic as I am about being sure that Gillette and Coca-Cola's businesses are fantastic. You may understand those businesses better than you understand Coke and Gillette because of your background or just the way your mind is wired. But I don't, and therefore I have to stick with what I really think I can understand. And if there's more money to be made elsewhere, I think the people that make it are entitled to it. Charlie?

CHARLIE MUNGERWell, if you take a business like Intel, there are limitations under the laws of physics which eventually stop your putting more transistors on a single chip. And the 30 percent per annum, or something like that, you — I don't think — those limitations are still a good distance away, but they're not any infinite distance away. That means that Intel has to leverage its current leadership into new activities, just as IBM leveraged the Hollerith machine into the computer. Predicting whether somebody's going to be able to do that in advance is just — it's too tough for us.

WARREN BUFFETTBob Noyce —

CHARLIE MUNGERWe could (inaudible) to you.

WARREN BUFFETTBob Noyce, one of the two founders of — two primary founders — of Intel, grew up in Grinnell, Iowa. I think he's the son of a minister in Grinnell, and went through Grinnell College and was chairman of the board of trustees of Grinnell when I went on the board of Grinnell back in the late '60s. And when he left Fairchild to form Intel with Gordon Moore, Grinnell bought 10 percent of the private placement that funded — was the initial funding for Intel. And Bob was a terrific guy. He was very easy to talk to, just as Bill Gates is. I mean, these fellows explained the businesses to me, and they're great teachers but I'm a lousy student. And they — I mean, they really do. They're very good at explaining their businesses. Bob was a very down to earth Iowa boy who could tell you the risks and tell you the upside, and enormously likeable, a hundred percent honest, every way. So we did buy 10 percent of the original issue. The genius that ran the investment committee and managed to sell those a few years later, I won't give you his name. (Laughter) And there's no prize for anybody that calculates the value of those shares now. Incidentally, one of the things Bob was very keen on originally, in fact he was probably the keenest on it, was he had some watch that Intel was making. And it was a fabulous watch, according to Bob. It just had one problem. We sent a guy out from Grinnell who was going out to the West Coast to where Intel was. And Bob gave him one of these watches. And when he got back to Grinnell he wrote up a report about this little investment we had, and he said, "These watches are marvelous." He said, "Without touching anything, they managed to adapt to the time zones as they change as we went along." In other words, they were running very fast, as it turned out. (Laughter) And they worked with that watch for about five or six years, and they fell on their face. And as you know, you know, they had a total transformation in the mid-'80s when the product on which they relied also ran out of gas. So, it's not — And Andy Grove has written a terrific book, incidentally, "Only the Paranoid Survive," which describes strategic inflection points. I recommend that every one of you read that book, because it is a terrific book. But they had an Andy Grove there who made that transformation, along with some other people. But that doesn't happen every time. Companies get left behind. We don't want to be in businesses where companies — where we feel companies can be left behind. And that means that, you know — and Intel could have, and almost did, go off the tracks. IBM owned a big piece of Intel, as you know, and they sold it in the mid-'80s. So, you know, here are a bunch of people that should know a lot about that business but they couldn't see the future either. I think it's very tough to make money that way, but I think some people can make a lot of money understanding those kinds of businesses. I mean, there are people with the insights. Walter Scott, one of our directors, has done terrifically with a business that started, you know, just a gleam in the eye maybe ten or 12 years ago here in Omaha, and it turned into a huge business. And you know, Walter explained that to me on the way down to football games, but bad student again, so — (Laughs) Walter — if Walter could have connected, and you know, I'd cheer from the stands. But that doesn't bother me at all. I mean, what would bother me is if I think I understand a business and I don't. That would bother me. Charlie?

CHARLIE MUNGERWell, having flunked when we were young and strong at understanding some complex businesses, we're not looking to master what we earlier failed at — (laughs) — in our latter years. (Laughter)

WARREN BUFFETTZone 12? This may turn out like a revival meeting where we all confess our sins and come forward (inaudible). (Laughter)

Confident about Salomon but not rest of Wall St.

AUDIENCE MEMBERGood morning, gentlemen. My name is Cary Blecker (PH) from Wellington, Florida. I know in 1987 when you purchased — or invested — in the Salomon Brothers convertible preferred stock, you had the eight-year time frame to convert it into common or take the cash out. I know in '95 you took cash out, which was not a vote of confidence for Salomon Brothers. Any feelings on that in the future?

WARREN BUFFETTYeah. We — as the gentleman mentioned, we bought it in 1987, and starting in 1995 we have a — we have, every year for five years, we either have to take cash or convert to common, 20 percent of the original issue of 700 million. We don't have to make those decisions ahead of time. So we, in 1995, we elected to take cash. In 1996 we elected to take stock. And you know, we see no reason ever to swing at the ball while it's still in the pitcher's glove. We'd just as soon wait till it gets to the plate to make the decision. So the ball will get to the plate on October 31st of 1997, I believe, for the next 20 percent. And we'll decide whether to swing at that point. But we don't need to make that decision today. I would say that, you know, the odds are overwhelming that we'll convert, but we'll wait until that time to make the final decision. We have terrific confidence in the people that run Salomon. They helped us through some incredibly dark days in the past, and showed the stuff of which they were made. And so we feel very good about that. We don't have the same degree of conviction about the profitability of the investment banking or brokerage business as a whole. It's not the sort of — you don't develop that kind of conviction about that business versus a Coca-Cola or something. They're different. They have different economic characteristics. So we will see how the businesses — the industry — evolves. But we feel very good about the management, and the odds are extremely high that we will convert. But we will swing at the ball when it gets to the plate. Charlie?

CHARLIE MUNGERNo more.

WARREN BUFFETTOK.

Can't exchange stocks without paying taxes

WARREN BUFFETTLet's see. We did 12. We're back at 1 again.

AUDIENCE MEMBERMy name is Ted Vokali (PH) from Corpus Christi, Texas. And I would like to ask a question to you. Companies are purchased from time to time, and the purchasing company will give shares instead of cash, and their shareholder will receive new shares. Can an individual investor transfer non-Berkshire to Berkshire with or without going through a broker? And if not, how does Berkshire do this with another company? And if possible, I would like to also receive a copy of the annual report.

WARREN BUFFETTOK, we'll get you a copy of the annual report. The only way I know of — and maybe Charlie knows some other way — the only way you can switch your shares in one company for — into shares of another company is to have a tax-free merger. And the Internal Revenue Code has specifications about that. You can have a transaction, as we had with FlightSafety where a portion is — of the shareholders — can take cash, and a portion can take stock, and it's still tax-free for the people who elect stock. You can't have too many people take cash and have that happen. There are a lot of technical rules about what's tax-free. But there's no way that you can own General Motors and transfer it into General Electric stock without a tax and a broker. Well, you don't have to have a broker. If your neighbor happens to own it you could make a deal privately. But the easiest way usually is through a broker. But there's no way you can do it without tax, unless General Motors and General Electric decide to merge at some point. So the opportunities to switch from one security to another without tax are really limited to merger. And in terms of brokerage costs, it just happens to be that it's — that the most economical way of finding the person in the world that wants to both buy the stock you want to sell and sell you the stock you want to buy is through an intermediary — a broker. And the costs of that actually can be relatively low. Charlie?

CHARLIE MUNGERWell, I think there's one way still permitted by the tax laws. You can still form a partnership. If you own General Electric and I own General Motors and we each feel too concentrated, well, you could form a partnership and each put in your stock. And in essence you would each thereafter be invested half and half with some diversification. I will predict that Wall Street will eventually get around to promoting such partnerships.

WARREN BUFFETTYeah, well, they did through swap funds, you know, since 25 years ago. And then — that was where you put in your highly — your stock that had an enormous amount of unrealized appreciation in it, and a whole bunch of other people did, and then you owned a fund which itself had a lot of unrealized appreciation in it. And you had —

CHARLIE MUNGERPlus a new layer of costs.

WARREN BUFFETTYeah, plus a new layer of costs, always. And you owned a piece of this larger fund, and you owned a piece of everything else — everything that the other people wanted to get rid of, and they owned a piece of what you wanted to get rid of, and superimposed with some costs. But that vehicle was sort of stopped in its tracks, I think, in the mid-'70s by an amendment to the Internal Revenue Code. But as Charlie said, you could replicate the effect of a swap fund by doing it with a partnership. It'd be kind of awkward, but it can be done.

Strong businesses, but no "master plan"

WARREN BUFFETTZone 2?

AUDIENCE MEMBERGentlemen, I'm Marc Rabinov from Australia. I am a shareholder. I had a question really related to our own businesses, and how they're going, and where you're looking to be in ten years' time. Perhaps I could start with the insurance float. It's grown at 20 percent. Do you think that 20 percent growth rate will continue for the next ten years? Do you think our stable businesses, which have been growing at, say, 5 or 7 percent will maintain that rate? And do you think FlightSafety, which from the SEC filings has been growing at about 5 percent, do you think that'll continue at that rate?

WARREN BUFFETTWell, we're glad to have you from Australia. I think we've got about 15 people here from Australia, so it — got a good representation. I don't think the insurance float can grow at 20 percent a year. That's been helped by some acquisitions and things. I mean, it's done way better, obviously, than we ever thought it would 30, almost 30 years ago when we made the deal with Jack Ringwalt. I would say, though, that I think GEICO is going to do even better than we expected when we bought it. And we thought it was going to do awfully well then. In Tony Nicely, you know, we have an absolutely outstanding manager of that business. And he is focused on it. He knows it. I think he went to work there when he was 18. And he's been there 35 years or thereabouts. They don't come any better. And he is absolutely zeroed in on the things that he should be zeroed in on, and he's — the implementation gets better all the time. I mentioned in the annual report that the unit growth of GEICO's voluntary auto business — and we talk about voluntary because you get assigned risk-type things that lose you money, but the real business is the voluntary auto business — grew at 10 percent last year, which was the best growth rate in over two decades. First four months of this year, it's growing at about 16 percent. And 16 percent unit growth translates into about 20 percent a year premium growth. So GEICO at present would give you some encouragement for at least that segment of the insurance float growing at a rate that's sort of comparable to the past. Insurance is going to be a very big business for us. And the float will grow, in my view, at a good rate. But I wouldn't want to predict that good a rate. Most of our other businesses, very good businesses. They don't have 20 percent a year growth possibilities in them. They throw off lots of cash, which we can use to buy other things, which may turn out to be a better strategy than even having a single high-growth business. FlightSafety, about six weeks ago or thereabouts, announced a major hookup in a joint venture with Boeing, as you may have noticed. And they're a terrific partner, and it'll be a great partnership. That's just for our — the training for our — for larger planes, primarily, I think, hundred-seat and up planes, although I think there may be a few Fokkers in there that are slightly smaller planes. But it's basically the big commercial planes. And the combination of FlightSafety and Boeing worldwide in training over the coming decades, I think, will be a very powerful combination. So we've got some very good businesses. And I don't see that movie that's presented before — I sit out here like you and watch it. But I like the ending of it. And the people we have out there, they've run businesses extremely well in the past. They get better results out of those businesses, frankly, than other people would, or that other people in the industry generally do. So I think they have good futures. But they will throw off lots of cash in aggregate. And the tough job — we like to tell people it's the tough job anyway — is that Charlie and I have to figure out where to put that cash to maintain higher — reasonable — growth rate.

AUDIENCE MEMBER(Inaudible)

WARREN BUFFETTCould you — I'm not sure that's — could you turn that on, please, so that —

MARK RAVENHILLI'm sorry to pin you down, but —

WARREN BUFFETTThat's OK. You can pin me down.

AUDIENCE MEMBER— would you guess that FlightSafety, then, is more likely to be in that 10 to 15 percent ballpark?

WARREN BUFFETTWell, it's hard to tell on numbers. I mean, certainly there's going to be growth in pilot training around the world. But FlightSafety already has a significant portion of the corporate market, for example. So it would be hard to grow a lot faster in the corporate market, although I can hear Al grinding his teeth, you know, when I say that, because he plans to grow a lot faster than the market. But the corporate market, we've got a significant percentage. Commercial market, there could be a lot of potential in. You know, it won't come tomorrow or the next day. But, you know, ideally we would like to see people when they buy a 777 or 747 or something, buy a lifetime pilot training contract at that time. So I wouldn't want to stick a number on it, but I've got high hopes. And FlightSafety also announced recently a very major contract with the government through Raytheon. So it's a company that's got its sights set a lot higher than where it is now.

AUDIENCE MEMBERAnd insurance, 15 percent? (Inaudible)

WARREN BUFFETTWill you — you want tenths of a percent or will you — (Laughter) We just don't know. I mean, we didn't know 25 — we didn't — 30 years ago we didn't know we would be in the insurance business. I mean, Berkshire, we have no master plan. And Charlie and I did not sit down in 1960 — early '65 — and say, "We're going to do this and that," and all that. We're going to do — we're going to try and do sensible things as we go along. The more money we have, the harder it is to find sensible things. But that's the criteria. Insurance is certainly a major area of opportunity for us. It's been a major opportunity. We have — in certain fields we have a terrific advantage for the three reasons I laid out in the annual report. But I mean, we have capital strength, and a willingness to take on risk, and a speed of action, and a certainty of payment, that in aggregate no one matches. Now, how much demand there is for that depends on circumstances in the business and how much supply there is at lower prices that we think don't make sense is another question. But I think we'll do OK in insurance over time.

Most money managers have "gotten a lot for nothing"

WARREN BUFFETTZone 3?

AUDIENCE MEMBERMr. Buffett, Mr. Munger, I'm Tim Medley from Jackson, Mississippi.

WARREN BUFFETTWe're glad to have you back, Jim — Tim. How many years have you come?

AUDIENCE MEMBERThis is my 11th.

WARREN BUFFETTGood.

AUDIENCE MEMBERThey've been 11 great years. Thank you very much. At this meeting four or five years ago, you commented that money managers in the aggregate have not done better than various market indices. And you attributed this, in part, to the frictional cost inherent in an actively-managed portfolio. I wonder if today you would update your thoughts on this. And do you think that this underperformance compared to index funds will continue? And then a related question, if the two of you were giving advice to a classroom of equity mutual fund managers, are there two or three things in particular that you would want to suggest to them?

WARREN BUFFETTYeah. Well, I would say this. Money managers, in the last few years since I made that statement, have not disappointed me. (Laughter) In aggregate, they have underperformed index funds. And it's the nature of the game. They simply cannot overperform, in aggregate. There are too many of them managing too big a portion of the pool. And for the same reason that the crowd could not come out here to Ak-Sar-Ben in the past years and make money, in aggregate, because there was a bite being taken out of every dollar that was invested in the parimutuel machines, that people that invest their dollars elsewhere through money managers in aggregate cannot do as well as they could do by themselves creating their own index fund, or it would be easier to have — just to buy into an index fund. It's — you know, they say in this world you can't get something for nothing. But the truth is money managers, in aggregate, have gotten something for nothing. I mean, they've gotten a lot for nothing. And — (applause) And people — investors have paid — and the corollary is investors have paid something for nothing. And that doesn't mean that people are evil. It doesn't mean that they're charlatans or anything. It's the nature, if you got a 6 or $7 trillion, or whatever it may be, equity market, and you have a very significant percentage of it managed by professionals, and they charge you significant fees to invest with them, and they have costs when they change around. They cannot do as well as unmanaged money, in aggregate. And it's the only field in the world that I, you know, that I can think of — Charlie'll think of some others — but where the amateur, as long as he recognizes he's an amateur, will do better than the professional does for the people whose money he's handling. And therefore if I were in a — teaching this class or speaking to that class, I would probably tell them that for their own psychological well-being they should probably leave the room. (Laughter) Charlie?

CHARLIE MUNGERWell, I pretty well said what I had to say on this subject in that talk I gave at USC. And anybody that wants to read that, why, can read it. I will say that one of the things I like about the annual meeting is I get to interface with a whole lot of people that have even lower annual investment management expenses than Berkshire Hathaway the company does. I mean, if you stop to think about it, we've got our costs almost to zero, and many of you have gotten it to zero.

WARREN BUFFETTYeah, we — Charlie and I would be glad to take any money management organization in the world that manages — oh, just been handed a note that says, "Unfortunately, we don't have extra annual reports on site. Those shareholders desiring one should call us or write." So. And we're also on the internet. You can run it off there, too. So I apologize for not having them on the — here. But they're easy to get. Just dial 346-1400 and there's an annual report line, and you'll have one sent to you. We would be willing to take any money management organization in the world managing 10 billion or more, and in the case of brokerage houses who have their brokers in aggregate handling 10 billion or more, and we would be willing to bet that their aggregate investment experience over the next five years or ten years for the group that they advise will be less — will be poorer — than that achieved by a no-load, very low-cost index fund. And we'd put up a lot of money to make that wager with anybody that would care to step forward. Gambling may be illegal, but now you can do it through something called derivatives, you see? (Laughter) We could create an instrument that would allow that, even though it might be against the laws of the state of Nebraska. Charlie, would you join me on that or —?

CHARLIE MUNGERWell, I certainly agree with you. I always say that the — exactly one-fifth have to be in the bottom 20 percent, and — (Laughter) There are certain fundamental forces at work here that — But it is a very peculiar profession where you have to be in a state of psychological denial to shave in the morning if you do the work. I don't think that's true for a handful —

WARREN BUFFETTWell, it isn't.

CHARLIE MUNGER— of investment managers. I think we know investment managers who add value. But it's a comparatively rare and small percentage.

WARREN BUFFETTYeah. There — we have identified, in the past even — I mean, on a prospective basis, not retrospective — managers who have added value. And there's couple of them in this room.

CHARLIE MUNGERWell, and there's Lou Simpson of GEICO.

WARREN BUFFETTWell, he's the one I had in mind. (Laughter) You can do it. You can't do it with unlimited amounts of money, and a good record tends to attract money. Even a mediocre record presented by a good salesperson tends to attract money. But there are people working with smaller amounts of money that — (coughs) — where the probabilities are that they will do better than — excuse me. (Clears throat) Where the probabilities are that they will — (clears throat) — do better than average. But they're very rare. Incidentally, I apologize on this voice. I had to leave Gorat's early last night, and there were a number of you I was hoping to see. But I just — it was gone entirely last night, and then I — I'd like to tell you I did it by Cherry Coke, but I've managed to nurse it back to where it's working again in reasonable shape.

USAir CEO Stephen Wolf has done "terrific" job

WARREN BUFFETTZone 4?

AUDIENCE MEMBERMartha Copeland (PH) from San Francisco. My question involves the headwinds which face USAir. Are you considering redeploying assets? Or how will your management plan to improve this company?

WARREN BUFFETTWell, we're just an investor in US — they call it now US Airways — but we're just an investor. We've owned a preferred stock for almost eight years. The company had some very rough going. Charlie and I would not have thought its chances for survival were very good, even some years back. But it's done quite well lately. Stephen Wolf has done a terrific job of running it. So as of the middle of April, all of our dividends are — were caught up, current. We've received, I don't know, 260 or '70 million in dividends in the last eight years. But we have nothing to do with managing the company. Matter of fact, there are some people that might have noted that when Charlie and I left as directors, that was when the fortunes of the company turned abruptly upward. (Laughter) But — and we feel very good about what Stephen Wolf has done. I mean, he — there's no tougher job than running an airline. That is not a job I would wish on anyone. And he's improved the operating performance dramatically, and the financial performance has improved. And better yet, the preferred dividends have been paid. So we thank him for that, but we have nothing to do with it. By the terms of our preferred, in just a little over two years, we are due to be paid back our principal amount. It was really a loan in equity form, with a kick — possible kicker on the upside because of the conversion privilege on the preferred. We would have sold the conversion privilege for nothing a few years ago, but it actually is not so far away now. The stock's in the low 30s, and our conversion is in the high 30s. So we actually have some chance of even having conversion value on that. It's been a very pleasant surprise. You know, I made a mistake in getting into it, but Mr. Wolf is — seems to be capable of nullifying my mistake. Charlie?

CHARLIE MUNGERPass. (Laughter)

WARREN BUFFETTWe'll give him this (inaudible). (Laughter)

Put all your money into Berkshire stock?

WARREN BUFFETTZone 5, please.

AUDIENCE MEMBERI'm Eric Butler (PH) from Menlo Park, California. A couple of questions, one serious, one not quite. Considering Berkshire Hathaway is well run at low cost, and is diversified, why should anyone do anything but put all their money into Berkshire Hathaway instead of maintaining a diversified portfolio? And in some of these hagiographic kind of biographies, it's apparent that you have other investments yourself beyond Berkshire Hathaway. The second question I had, is there any significance to the fact that the Omaha World-Herald does not include Berkshire Hathaway in its stock tables on any day? Is this a sign that they do not honor profits?

WARREN BUFFETT(Laughs) No, they — actually, they have a separate little table called Midlands — I think it's entitled Midlands Investment. But they pick out about 50 stocks that are of particular interest to people in this area, and they lift those from the regular table and put it in this separate table, which is usually on a second page right following the main stock table. So they give us our just due on that, but you do have to — you should look in a different table for that. Second question about putting all your money in, I've got 99 percent of my money in Berkshire. But it was bought at a different price. (Laughter) And Charlie's was bought a little cheaper, too, I think. So you know, we like the idea of having it all in there, but we don't recommend that people do that because it's — you will get very low-cost management. What we hope — well we hope is that from this point forward, that that cost does not reflect its value. But the price at which you enter is very important. You do get a great group of businesses. You get a lot of great operating managers. You get very reasonable costs. But that is fairly widely recognized now compared to the past, and people pay more for it than they used to. I'm still very comfortable with it, and I think Charlie's comfortable with it, too. But everyone has to make up their own mind about price. Charlie?

CHARLIE MUNGERYeah. Eventually, if the success continues and we have more of this hagiography, the stock will get to such a high price that it's no longer sensible at all to buy. We hope we dampen that process as we go along. And of course, there's always the very substantial chance that we'll just fail to meet expectations due to the vicissitudes of life.

WARREN BUFFETTFalling on our face is what we call it. (Laughter)

Won't buy a tobacco company, but could buy tobacco stocks

WARREN BUFFETTZone 6.

AUDIENCE MEMBERMy name is Michael Hooper. I'm from Grand Island, Nebraska. I applaud Berkshire for starting the Class B shares. My question deals with tobacco stocks, which have been beaten down lately. Does Berkshire own any tobacco stocks, and are some of these stocks attractive now that prices are down on some of them? And in particular, a company called UST. Thank you.

WARREN BUFFETTYeah. We have owned — we won't comment on what we own now — but we have owned tobacco stocks in the past. We've never owned a lot of them, although we may have made a mistake by not owning a lot of them. But we've owned tobacco stocks in the past, and I've had people write me about whether we should do it or not. We own a newspaper in Buffalo. It carries tobacco advertising. We don't — well, actually, Charlie's a director of a sensational warehouse chain called Costco, which used to be called PriceCostco. You know, they sell cigarettes. So we are part of the distribution chain in — with a hundred percent-owned subsidiary in the Buffalo News. And so we have felt that if we felt they were attractive as an investment, we would invest in tobacco stocks. We made a decision some years ago that we didn't want to be in the manufacture of chewing tobacco. We were offered the chance to buy a company that has done sensationally well subsequently, and we sat in a hotel in Memphis in the lobby and talked about it, and finally decided we didn't want to do it. Can I give you some —?

CHARLIE MUNGERBut it wasn't because we thought it wouldn't do well. We knew it was going to do well.

WARREN BUFFETTWe knew it was going to do well. But now, why would we take the ads for those companies, or why would we own a supermarket, for example, that sells them, or a 7-Eleven, you know, or a convenience store that sells them or something of the sort, and not want to manufacture them? I really can't give you the answer to that precisely. But I just know that one bothers me and the other doesn't bother me. And I'm sure other people would draw the line in a different way. So the fact that we've not been significant holders of tobacco stocks has not been because they've been on a boycotted list with us. It just means that overall we were uncomfortable enough about their prospects over time that we did not feel like making a big commitment in them. Charlie?

CHARLIE MUNGERYeah. I think each company, each individual, has to draw its own ethical and moral lines, and personally, I like the messy complexity of having to do that. It makes life interesting.

WARREN BUFFETTI hadn't heard that before. (Laughter) We'll make him in charge of this decision.

CHARLIE MUNGERYeah, no, no. But I don't think we can justify our call, particularly. We just — we have to draw the line somewhere between what we're willing to do and what we're not, and we draw it by our own lights.

WARREN BUFFETTWe owned a lot of bonds at one time of RJR Nabisco, for example, some years back. And should we own the bonds and not own the stocks? Should we own, you know — should be willing to own the stock but not be willing to own the business? Those are tough calls. Probably the biggest distributor of — the biggest seller — of cigarettes in the United States is probably Walmart, but — just because they're the biggest seller of everything. They're the biggest seller of Gillette products, and they're huge. And you know, do I find that morally reprehensible? I don't. If I owned — we owned all of Walmart, we'd be selling cigarettes at Walmart. But other people might call it differently, and I wouldn't disagree with them.

Buffett on anti-abortion protesters

WARREN BUFFETTZone 7?

AUDIENCE MEMBERGentlemen, I'm John Tarsney (PH), a shareholder from Omaha, Nebraska. People have already asked any sophisticated question that I might have, so I'm reduced to my simple ones. I first became a shareholder through FlightSafety, and at that time I wasn't sure that I wanted to be bought out. However, I decided that any man who could agree with me on FlightSafety might be a good man to go along with.

CHARLIE MUNGER(Laughs) Well, that's one way of doing it. (Laughter) Maybe you'd fit in well at headquarters. (Laughter)

AUDIENCE MEMBERI have a couple — well, I don't use Gillette products, either, as those of you who are close to me can see. (Laughter) My questions, my simple ones then, are, a couple of years ago, or within the recent times, you had said you would not necessarily buy Berkshire Hathaway. And I'd like to know whether you still feel the same way. Secondly, since I came to you through FlightSafety I'm wondering if there's any other positions I should be looking at in that same — (laughter) — same light. And thirdly, there was a very distressing sign to me — sign that I saw when I drove in. And I don't know what the meaning of it is, or if you do. And it said something about abortion. And I just don't have a clue. If you do — now, you can use yes or no answers to these and save your voice. (Buffett laughs) Or suit yourself and elaborate.

WARREN BUFFETTYeah, we'll work backwards. I think the signs probably relate to the contributions to Planned Parenthood. (Applause) Thank you. We follow a policy, as you know, at Berkshire of corporate contributions being designated by shareholders. We have some made by our operating companies to their local communities, and the local managers do what they think appropriate within their communities and with their own businesses. So Tony Nicely at GEICO — I have no idea what GEICO contributes to, but they make those decisions at GEICO. But in terms of the parent company, we let the shareholders designate the contributions. We have a number of shareholders who designate Planned Parenthood. We have other shareholders who designate organizations that are — would be opposed to the ideas of Planned Parenthood. We make no judgment about those. (Mild applause) And in terms of — I designate the Buffett Foundation every year, and then the Buffett Foundation, in turn, gives money to other things, including Planned Parenthood. And so, in the sense that those funds come indirectly from Berkshire, they come in direct proportion to ownership the same way as everybody else gets a chance to do with their shares. And we've had people write us about it. You know, I — there's no way in the world we would — you know, in fact there's some that would say that we should be boycotted because I do this. And we would not dream of questioning, you know, the people that we buy our almonds from, or walnuts from, or chocolate from, as to what their beliefs were, you know, before we bought that, or whether we would hire somebody that they'd have to agree with our beliefs, so — It seems to me perfectly appropriate for people to express their views on it, and they probably don't like — clearly they don't like — what I do on that. But it's where my reasoning and, you know, my own judgment leads me. But they're out there, the few people out there expressing their views on it, and they're entitled to do that. And I don't have any problem with that. I think when they start saying, you know, "We don't want to hire you because you have a different view than we do," or "We don't want to buy your products," I think that's a little different position to take. I wouldn't do that. But again, it's their right to do that.

Berkshire stock is now "more appropriately valued"

WARREN BUFFETTGoing back to whether we would buy the stock, I would say this a year ago — well, it was about March 1st because that's when I wrote the annual report in 1996 — the stock was 36,000 and I said it was not undervalued at that point. And since we were more or less forced to have an offering by the unit trust, which I'm very glad in retrospect we did, but it was not our idea, we felt that it was only appropriate in connection with that offering to point out that we had said it was not undervalued, and since Charlie and I like to buy undervalued securities, that we would not buy it ourselves at that price or recommend that others do. And in the ensuing year, the intrinsic value of Berkshire changed quite dramatically. And the price didn't change. In other words, the stock, after years of overperforming the business somewhat, underperformed the business. Which, of course, it's bound to do. And we're glad that they got back more in tandem. So we said this year that we regarded the stock as being much more appropriately valued than it was a year earlier, which is obvious. And I would say that the caution I made about securities generally would apply. I would not except Berkshire from that caution, but I would rather own or purchase Berkshire myself than I would most other securities. I can tell you that. Charlie? (Applause) Charlie gives to Planned Parenthood, too, so he has to — (laughs). They didn't put his names on those signs, but I'll take care of that. (Laughter)

CHARLIE MUNGERI'm perfectly willing to have that limelight passed, as well as the opportunity to say more on the subject.

WARREN BUFFETTDid I miss one question up there? I think there were three of them, and I addressed two of them.

AUDIENCE MEMBERAbout any other area I should be looking at.

WARREN BUFFETTThat's the reason I skipped it. (Laughter) Yeah, we don't direct people to any specific investments.

World Book encyclopedia vs Microsoft's Encarta

WARREN BUFFETTZone 8, please.

AUDIENCE MEMBERGood morning, Mr. Buffett and Mr. Munger. This is Nancy Jacobs (PH) from Omaha, a shareholder for about four years now. Before I leave today, I'm planning to purchase the World Book on CD-ROM for my ten-year-old daughter. And I'd like a few words from either one of you, or both of you, about why I'm making the right choice. And second, does purchasing World Book over a competitor give her a somewhat improved chance of becoming a brilliant billionaire investor?

WARREN BUFFETTPractically guarantees it, but go ahead. (Laughter)

AUDIENCE MEMBEROK. I'm buying, then.

WARREN BUFFETTCharlie, you want to — you love to talk about World Book.

CHARLIE MUNGERWell, I think World Book is clearly the class of the field. They have every word in the English language graded for reading comprehensibility, and the articles are cleverly written so the difficulty of comprehension rises slightly as you go through it. And it's very user-friendly to young people. And since it's something you want to encourage, making it user-friendly is wonderful. I also find that with whatever intellect I have, it's more user-friendly to me. And so I think it's a hell of a product, either for the young people or the old. And for a quick reference system, I don't think there is anything better. Personally, I like the reading version, being an old-fashioned fellow. And I can hardly imagine a world where the wise people don't do a lot of reading. Now, maybe we're going to have wise people in the future who spend all their time in front of screens in the course of getting that wisdom. But I doubt it. That's all. (Laughter) I think you may have bought a wonderful product, but I would have the other one, too. (Laughter)

WARREN BUFFETTThe product you see there was the joint development, and was launched in January of this year in conjunction with IBM. IBM has been our partner in that product. I believe it's being bundled into all the IBM PCs now being sold. So they've worked very well with us. Frankly, there's a book, even, that deals with this. Bill Gates did a very good job of developing a product that was bundled with millions and millions and millions of PCs. It's called Encarta. It's actually Funk and Wagnalls. He hates it when that comes out, but they changed the name to Encarta, which was smart of him. (Laughter) And there are a few people in this room who were witness to a demonstration four or five years ago in Bermuda, where in connection with Encarta, they showed the moon and the earth. And the moon bumped into the earth in this. And I just, I don't know why it sticks in my mind. I thought I would mention it today, that the — (Laughter) But his is doing very well. So apparently there are a number of people that don't care about the fact the moon and the earth collide, but in the World Book the moon and the earth never bump into each other. (Laughter) He's done extremely well with Encarta, incidentally. I mean, it was a masterpiece of moving into an area and pushing hard. And you know, I tip my hat to him, but now we're going to —

CHARLIE MUNGERYeah, we copied him.

WARREN BUFFETTYeah, we copied him. Right. (Laughter) OK, Nancy, be sure to buy the print version, too, so Charlie will respect you. (Laughter)

Tax fairness, economic prosperity, and the "ovarian lottery"

WARREN BUFFETTZone 9.

AUDIENCE MEMBERGood morning, gentlemen. My name is Patrick Byrne. I'm here today from Hanover, New Hampshire. I've searched for a couple questions upon which I might get the two of you to disagree. First, what level of taxation — and I direct these as much to Mr. Munger, therefore, as to you Mr. Buffett — first, what level of taxation on capital gains is most conducive to the long-term economic health of a society, and is that also the fair or just rate? In other words, is the just rate of taxation on capital gains precisely that rate that creates the most economic stuff? Or is there some other goal a state might pursue? And as a not-so-subtly related question, I work in a New Hampshire factory that makes industrial torches.

WARREN BUFFETTAs CEO, I might add, Patrick. (Laughter)

AUDIENCE MEMBERSay again?

WARREN BUFFETTAs CEO of — that "working" made it sound like you were down there on the floor. I just wanted people to — (Laughter). Patrick writes me letters from chairman to chairman, so I think we've got to get him back at it.

AUDIENCE MEMBERContinuing. (Laughter) Well, it's a small company. I do work as CEO, but it's not much of a hierarchy. We make torches used in heavy manufacturing, and the fortunes of our factory echo those of industrial America. Do you agree with the conventional wisdom that maintains that the age of classical industrial America has passed, and that we will — that America cannot be competitive in the long term with low-wage countries? So the first question is on taxation of capital gains, and then the second is on the future for industrial America.

WARREN BUFFETTI have a sensational answer on the tip of my tongue, but I think I'll let Charlie go first — (laughs) — while I refine it a bit.

CHARLIE MUNGERWell, I think there's an easy answer to your capital gain issue. And one is what makes an economy work best in some abstract mathematical sense. And the other is the consideration that you allude to, which gets into issues of fairness. Aristotle felt that systems work better when they were generally perceived as fair. The civilization worked better if people saw the differences in rewards as having been fairly — reasonably fair, anyway. And I think that if you had a civilization where if you work 90 hours a week driving a taxicab with no money, no medical insurance and so forth, and somebody else does nothing but own Berkshire Hathaway shares and sit on the country club porch and peel off a few every year to pay the bills, that would be regarded as so unfair that even if it had some theoretical economic efficiency it would be counterproductive for our particular civilization to have that kind of a tax code. So I'm all for having some taxation of capital gains. Once you reach that conclusion, you get into the question of what should — what is the fair rate? I think the fair rate might well be a little lower than it is now, but not much lower.

WARREN BUFFETTSounds to me like he's a seller — of Berkshire. (Laughs) Patrick is a former heavyweight boxer, and just got his Ph.D. fairly recently from Stanford with a 700-page dissertation, which has in it some commentary that actually bears on this. And I thank Patrick, actually, for introducing me to kind of a system of construct — mental construct — to attack questions like this. Patrick gave me the example one time — and I think this may go back to John Rawls at Harvard — but he said, just imagine that you were going to be born 24 hours from now. And you'd been granted this extraordinary power. You were given the right to determine the rules — the economic rules — of the society that you were going to enter. And those rules were going to prevail for your lifetime, and your children's lifetime, and your grandchildren's lifetime. Now, you've got this ability in this 24-hour period to make this decision as to the structure, but there — as in most of these genie-type questions there's one hooker. You don't know whether you're going to be born black or white. You don't know whether you're going to be born male or female. You don't know whether you're going to be born bright or retarded. You don't know whether you're going to be born infirm or able-bodied. You don't know whether you're going to be born in the United States or Afghanistan. In other words, you're going to participate in 24 hours in what I call the ovarian lottery. (Laughter) It's the most important event in which you'll ever participate. It's going to determine way more than what school you go to, how hard you work, all kinds of things. You're going to get one ball drawn out of a barrel that probably contains 5.7 billion balls now, and that's you. Now, what kind of a society are you going to construct with that in prospect? Well, I suspect you would focus on two issues that Patrick mentioned in his question. You would try to figure out a system that is going to produce an abundant amount of goods, and where that abundance is going to increase at a rapid rate during your lifetime, and your children and your grandchildren, so they can live better than you do, in aggregate, and their grandchildren can live better. So you'd want some system that turned out what people wanted and needed, and you'd want something that turned them out in increasing quantities for as far as the eye can see. But you would also want a system that, while it did that, treated the people that did not win the ovarian lottery in a way that you would want to be treated if you were in their position. Because a lot of people don't win the lottery. I mean, Charlie — when we were born the odds were over 30-to-1 against being born in the United States, you know? Just winning that portion of the lottery, enormous plus. We wouldn't be worth a damn in Afghanistan. We'd be giving talks, nobody'd be listening. Terrible. (Laughter) That's the worst of all worlds. So we won it that way. We won it partially in the era in which we were born by being born male, you know — When I was growing up, you know, women had — they could be teachers or secretaries or nurses, and that was about it. And 50 percent of the talent in the country was excluded from, in very large part, virtually all occupations. We won it by being white. You know, no tribute to us, it just happened that way. And we won it in another way by being wired in a certain way, which we had nothing to do with, that happens to enable us to be good at valuing businesses. And you know, is that the greatest talent in the world? No. It just happens to be something that pays off like crazy in this system. (Laughter) Now, when you get through with that, you still want to have a system where the people that are born —like Bill Gates or Andy Grove or something — get to turn those talents to work in a way that really maximizes those talents. I mean, it would be a crime to have Bill or Andy or people like that, or Tom Murphy, working in some pedestrian occupation just because you had this great egalitarian instinct. The trick, it seems to me, is to have some balance that causes the people who have the talents that can produce goods that people want in a market society, to turn them out in great quantity, and to keep wanting to do it all their lives, and at the same time takes the people that lost the lottery and makes sure that just because they, you know, on that one moment in time they got the wrong ticket, don't live a life that's dramatically worse than the people that were luckier. And when I get all through with that long speech, I probably come out with the idea that the capital gains tax as it exists today is probably about right, so — I see very few people — and I've been around a lot of people with money and talent over time — they don't always go together — but I've been around both classes — (laughs) — and the — I see very few of them that are turned off from using their talents by a 28 percent capital gains tax. It just doesn't happen. I mean, they do what they like to do. And part of the reason they're good at what they do is they like to do it. And I've just never seen it happen. And I've seen a lot of people that pay taxes that are higher than 28 percent that are contributing more to society, by some judgment other than a pure market system. (BREAK IN TAPE)

"American economy encourages adaptation"

WARREN BUFFETTThe other question about the low-cost industrial — you know, how does the industrial society evolve, I — you know, the world evolves in a way, in a market society, so people do what they're best at. And this country's done very well in recent years — something like, you know, software that — where a Microsoft has been leading or an Intel or something. I mean, we have done very well. Ten years ago the American public was sort of down on itself, or 15 years ago, in terms of what the economy could do. But here we are with our unemployment rate — in Nebraska it's under 3 percent. And you know, you look at the countries of Europe that were supposedly going to beat us into the ground, or you look at Japan. I think the American economy encourages adaptation. I mean, Singapore may be better, but in terms of major large economies, I think the American economy does awfully well in encouraging adaptation to what people want, and delivering it to them in ever-increasing amounts. And you know, I view that as all to the good. So I don't regard any industry as sacred. I regard innovation and freeing up the able people to — able, in terms of production of goods in a market economy — to spend 12 hours a day all the time — I don't see Andy or Bill letting up at all, in terms of where Intel and Microsoft are now. I don't see Roberto Goizueta at Coca-Cola, or Michael Eisner at Disney, or any of those people. They don't work 40-hour weeks, they work 70 or 80-hour weeks. And I think that system works very well in this country, and I don't worry particularly about the specific products that are turned out. Charlie?

Munger critical of Harvard philosopher John Rawls

CHARLIE MUNGERI would not like the conclusion that both Warren and I have reached, that issues of fairness are properly to be considered in the tax laws, to cause anyone here to believe that I have a great respect for Harvard University's philosopher John Rawls. He is perhaps the world's best-known living philosopher. And personally, I think he's had a pernicious influence on human thought. He doesn't know enough science. He doesn't know enough economics. He doesn't know enough about how systems work to be really good at figuring out what's fair in systems. And he studied too much philosophy and too little of everything else. (Laughter) If anybody thinks we love John Rawls, well, you can count me out. (Laughter)

WARREN BUFFETTNo — I wasn't endorsing his conclusions, I was endorsing his thought — his original construct. Charlie, how about the industries part of the question that Patrick asked?

CHARLIE MUNGERWell, if Patrick isn't the smartest person in the room, there can't be many in his class. You are getting questions from a very able man, and he's deliberately made them very difficult. (Laughter) And that whole issue is too complex for me to usefully discuss here. There are also certain limitations on ability that enter the equation. (Laughter)

Class A stock may be exchanged for Class B at any time

WARREN BUFFETTSo we'll go to zone 10. (Laughter)

AUDIENCE MEMBERGood day, gentlemen. My name is Bill Rodenberg (PH) from Dayton, Ohio. I'm a shareholder, and my daughter Sarah, who is 13, is also a shareholder. She chose not to join me in the limelight. I think the hot dogs had a higher appeal to her.

WARREN BUFFETTNot to mention —

AUDIENCE MEMBERAnd I'd like to say that it's very reassuring to know that Uncle Warren and Uncle Charlie are taking care of her college fund. And it's easy to sleep at night. I have two questions, one related to a question my wife asked me, which I was unable to fake a good answer to, and a second one related to my daughter's one share of Berkshire A. My wife asked me, in the annual report you stated that if anyone out there has a good company like FlightSafety, please let you know and you'd be glad to look it over and give an answer within five minutes or less. And her question is, how can he do that? Where does he get the information to make that decision? And how does he know that that information is valid? My second question has to do with my daughter. She's 13. In five years she'll be off to college, perhaps UNL, perhaps not. In any case, she's going to face a significant capital gains when she sells that one share of stock.

WARREN BUFFETTI hope so. (Laughter)

AUDIENCE MEMBERYou mentioned earlier, and I believe this is correct, you said that you could trade one share of A for 30 shares of B this afternoon. And I thought, wait a minute, I thought there was a limited window on that. We happened to be out of the country at the time that exchange took effect, and we missed it.

WARREN BUFFETTNo, the exchange exists forever. You can —

AUDIENCE MEMBERForever?

WARREN BUFFETTYou can always exchange a share of A for 30 shares of B. You cannot do it in reverse. You cannot shift 30 shares of B into one share of A. But there was no window or timetable on that. The A stock is forever exchangeable for 30 shares of B. I don't recommend that she does it, because it's always an option, and in the meantime she gets the shareholder-designated contribution, and there's always the chance that the A will sell slight — at a price slightly above 30 shares of B. It doesn't do it very often and it won't be very much if it does, but — We didn't want to create an incentive for people to exchange A for B, but we — they will always have the right to do so.

Just takes 5 minutes to know if we're interested in a company

WARREN BUFFETTThe five minute test is a — you know — Charlie and I have — we're familiar with virtually every company of a size that would interest us in the country. I mean, if you've been around for 40 or more years looking at businesses, it's just like if you were looking at — you know, studying baseball players every day. You get to know all the players after a while. And that's the way it works. Then we have a bunch of filters we've developed in our minds over time. We don't say they're perfect filters. We don't say that those filters don't occasionally leave things out that should get through. But they're very — they're efficient. And they work just as well as if we spent months and hired experts and did all kinds of things. So we really can tell you in five minutes whether we're interesting in something, and — We'd never owned shares in FlightSafety but we'd been familiar with the company for at least 20 years, wouldn't you say, Charlie?

CHARLIE MUNGERSure, I had a partner who bought a lot of it 20 years ago. Yeah.

WARREN BUFFETTYeah. But that's true of almost any business. And we know — we've got a fix on what we don't understand, and then we don't care to know any more about them, particularly, although we'll pick up a little as we go along, maybe. And then the ones that are — we're capable of understanding, we've probably gotten about as far as we'll get already. So we do know in five minutes. Now, when we do something with FlightSafety, before the purchase and even for somewhat — a little after the purchase — I'd never been — I'd never set foot on a piece — they have 40 or so training centers around the world — I'd never set foot on one of them. I'd never been to their headquarters. We never looked at a lease. We never look at title of the properties. I mean, we don't do all of those things. And I will say this: to date, that's never cost us a penny. What costs us money is when we misassess the fundamental economic characteristics of the business. But that is something we would not learn by what people generally consider due diligence. We could have lawyers look over all kinds of things, but that isn't what makes a deal a good deal or a bad deal. And we don't kid ourselves by having lots of studies made and lots of reports made. They're going to support whatever they think the guy that pays them, you know, wants anyway. So they don't mean anything. They're nonsense. But we do care about being right about the economic characteristics of the business, and that's one thing we think we've got certain filters that tell us in certain cases that we know enough to assess. And then we make some mistakes. Charlie?

CHARLIE MUNGERI've got nothing to add to that, except that people underrate the importance of a few simple big ideas. And I think that to the extent Berkshire Hathaway is a didactic enterprise teaching the right systems of thought, I think that the chief lessons are that a few big ideas really work, as I think these filters of ours have worked pretty well. Because they're so simple.

WARREN BUFFETTYeah, I think most of the people in this room, if they just focused on what made a good business or didn't make a good business and thought about it a little while, they could develop a set of filters that would let them, in five minutes, figure out pretty well what made sense or didn't make sense. I mean, there may be some reason after five minutes we don't get together on a deal of some sort, but — Another thing you can usually tell — at least you can tell it in the extreme cases — you can tell whether you've got the kind of manager, very quickly, that you want to have. I mean, if you've got somebody that's been batting .400 all their life, and fortunately age doesn't change that picture, in terms of business performance, and they love what they do, it's going to work. If the seller cares a lot about the money, you're probably not going to make a very good deal. If their real interest is going in the — is what they're going to do with the money, they may fall out of love or have less interest in their business subsequently. We love working with people who are just plain nuts about their businesses. And it works very well. And you can usually spot that. Now, having said that, we'll have a few people figuring out how to fake that attitude, you know, when they try and sell us some piece of junk here, but — (Laughter) Charlie says we can get conned by some guy with a green eyeshade, you know, and a low-rent office and all that. But we won't get taken in by the guy with the suede shoes. (Laughter)

Buffett describes a "normal" day

WARREN BUFFETTZone 11.

AUDIENCE MEMBERMr. Buffett and Mr. Munger, thank you for having me here today. My name is Dorsey Brown from Baltimore, Maryland. I have two quick questions for you. Could you please comment on any observations that either of you may have concerning executive compensation and option issuance, a topic that seems to be getting a lot more media attention? And are we going to — getting a little bit of excesses in that area? And my second question to you, Mr. Buffett, could you just give us some idea of what a normal day, how you would like to spend a reasonable, normal day and — working on the investment side of the equation, or analysis, or reading, or just to give us some flavor of that? Thank you.

WARREN BUFFETTOK, I'll answer the second question first. Very easy. I just — I read a lot, and I talk on the telephone a fair amount. We have no meetings. We have no committees. We have no slide presentations. You know, we have nothing, I mean it — (Laughter) And so I read a lot. I read annual reports. I read business publications. I could do it in way less time, but I enjoy doing it so I make it last, I mean, you know, like some other activities in life. The - (laughter) So it's — there's really — it's the most boring job to anybody watching it, but I'm in love with it, you know. And so I like doing that. And I don't like talking about it a lot, I just like to kind of keep up with what's going on. Like I say, by this point in life I could filter out so much of that I would — I just don't need to do that much of it. But I kind of enjoy just seeing what's going on vicariously through doing a lot of reading. And I spend some time on the phone, and I'm on the computer a lot playing bridge, and I get to do what I like all the time. We'll let Charlie describe what he does, which is even more bizarre. (Laughter) And then we'll talk about compensation and options.

CHARLIE MUNGERWell, there's a little more foolishness in my life than Warren's, and — including being chairman of a large hospital. I'm not suggesting that hospitals are foolish, I'm just suggesting that it takes a certain quirk of mind to be willing to be the chairman of a hospital. And so my life is even more — it's less rational than Warren's. Warren lives one of the most rational lives I've ever seen. And it's almost unbelievable, and — (Laughter)

WARREN BUFFETTHe's got me wondering why I'm here today. (Laughter)

Abuse of stock options as executive compensation

WARREN BUFFETTWell, we'll talk about comp then, a little.

CHARLIE MUNGERYeah, comp, yeah.

WARREN BUFFETTThe — comps — there are three or four aspects to that. On the subject of options, I would say that most options are constructed poorly, from the standpoint of the owner, but they're constructed very well from the standpoint of the person who receives them, which is not entirely unexplainable because the — it's a very strange form of negotiation when the beneficiary is the one that also really does all the design and hires the experts to come in and tell him what is good for the company when the expert knows that the guy who signs the check would be quite interested also in hearing what's good for him. There's nothing wrong with options per se, at all. Frankly, in terms of Berkshire, it would have been perfectly appropriate if a properly designed option had been given to me or to Charlie. I mean, we have responsibility for the whole enterprise, and we believe that any kind of incentive for performance should be related to the area in which you have responsibility. We feel that if you want a typist to type 100 words a minute, that you ought to pay for typing 100 words a minute, not what the earnings per share were last year. We feel if a salesman gets paid for how many of the product is sold, he should get paid for that and not for some production quotas met. So we believe in tying incentive comp to performance for which you have responsibility. And there are certain areas of a business that don't lend themselves to that staff performance and so on. But that would lead to the corollary, that the people that are responsible for the entire results of the business, it's perfectly appropriate to compensate them by options that in some way reflect the performance of that entire business. The trouble is that stock prices reflect other things than the performance of the business. For one thing, over a period of time, they reflect simply the reinvestment of earnings. You know, I have pointed out in the past that if you gave me an option on your savings account — to manage your savings account — and you reinvested all the interest, I would take away a significant payment at the end of ten years simply because you left the interest in. With a company that pays no dividend like Berkshire, if you're going to leave all your capital in every year, for me to get a fixed-price option for ten years would mean that I was getting a royalty on money that you left with me. And I made the choice to have you leave it with me. So that does not strike me as equitable. So I think any option should have a step-up in price that reflects the fact that money is reinvested by the shareholders annually. That if somebody wants to pay out a hundred percent of the earnings every year, then I'd say that you can have a fixed-price option. If you give me the money every year, and you do more with the money that's left with you than the original sum, that's fine. But if money is left with someone for ten years, there's going to be some increase in value even if they spend every day golfing. And to give a piece of that away simply over — to have a royalty on the passage of time for them is a mistake. I think options ought to be granted, basically, at the fair value of the business at the time they're granted. Sometimes that's the market price, sometimes it isn't the market price, but — Certainly the management of a company would not give an option on their business to some third party at a market price they felt was way too low, so I find it a little disingenuous when managements say that they're — when they get a takeover bid, they say that the company's really worth twice that much, but they're perfectly willing to issue options to themselves at this price which they say is totally inadequate, when the owners get the option elsewhere. But options, properly structured, for people with responsibility for the business, I think, makes — can make sense. And I think that if something happened to me and to Charlie, in terms of the manager of the business subsequently, if it was structured properly, I would not see anything wrong with an option arrangement. We carry this philosophy down to our subsidiaries where they generally get incentive arrangements that relate to the operation of their business. But they don't have incentive arrangements that relate to Berkshire overall, because if Chuck Huggins does a wonderful job at See's Candy, as he has done, and I fall on my face, in terms of allocating capital, Berkshire stock will go no place despite what Chuck does. And to penalize him, or to tie his rewards to something over which he has no control, I think, is kind of silly. So we tie it instead to the operations of the candy business. In terms of overall level of compensation, the real sin is having a mediocre manager. I mean, that is what costs owners very significant amounts of money over time. And if a mediocre manager is paid a relatively small sum, it's still a great mistake. And if they're paid huge sums, it's a travesty. And that happens sometimes. It's almost impossible to pay the outstanding manager a sum that's disproportion to the value of that outstanding manager, when you get a large enterprise. Coca-Cola had a market value of $4 billion when Roberto Goizueta took over. It had stagnated during the previous decade under an earlier management, despite having the same product and those great Mean Joe Greene commercials you saw, that was — Mean Joe Greene was in the '70s. The "Teach the World to Sing" commercial was in the '70s. All these great commercials. But the company didn't do much. Roberto — if we'd bought the entire Coca-Cola Company — I wish we had — in 1981 or '2, whenever he came in, for 4 billion and we now had a business worth 150 billion, Roberto would have earned more money with us than he's earned under the present arrangement. I mean, having the right person in place is just enormously important. How much they should take is another question. That's more a philosophical question. Tom Murphy, best manager, you know, in the world, he just didn't feel like taking a lot of money out of it, you know. And you know, I tip my hat to him, but I don't think that necessarily makes it wrong for somebody else to take more money for doing the job. But I think it ought to be related to doing the job. When I ran a partnership in the 1960s, I took a quarter of the profit over 6 percent a year. And I didn't get paid any salary, but I could make a lot of money doing that. And that thought occurred to me as I ran the place from day to day, and I think it probably helped a little. (Laughter) So I don't think it's a terrible thing to have somebody get paid for making money for the shareholders. But they ought to get paid for really making it, not simply because the shareholders reinvest money with them. They ought to make it based on the fair value of what they had when they took over, and they ought to make it really for just excellent performance. Charlie?

CHARLIE MUNGERWell, we have remarked in previous Berkshire Hathaway meetings that we regard present mandated corporate accounting, with respect to stock options as weak, corrupt, and contemptible. And it is.

WARREN BUFFETTOtherwise, we're undecided. (Laughter)

CHARLIE MUNGERIf something is so wonderful as a standard technique of compensation, why does it have to be masked under weak, corrupt, and contemptible accounting? I think it is no credit to our civilization that we've drifted into this particular modality. And you can get, if you overuse stock options, where the whole thing is sort of a chain letter. I mean, in Silicon Valley there's one company that practically paid everybody in options, and as long as the chain letter galloped, it worked as far as the income account because nothing went through expense. And then once everybody is issuing stock options, everybody else feels that he has to do it. And the practice spreads. So I am not totally wild about the extreme prevalence of the stock option modality in American corporate life. Personally, I would vastly prefer different modalities, which would probably involve stock instead of stock options. I'm all for sharing with the kind of people who are doing the important work pretty well down in the organization in a place like Costco or Coca-Cola or any other such company. But I don't much like the present scheme that civilization has drifted into. With respect to the subject of do we have some wretched excesses in American corporate compensation, my answer would be yes. I don't think the excess is necessarily the guy who got the most money. In many cases I agree with Warren, that the money has been deserved. But such is the envy effect that the practice spreads to everybody else. And then the taxi driver and everybody starts thinking the system is irrational, unfair, crazy. And I think that's what causes some people, as they rise in American corporations, to, at a certain point of power gaining and wealth gaining, they start exercising extreme restraint as a sort of moral duty. And that's what Warren was saying about Tom Murphy. And I would argue that the Tom Murphy attitude is the right attitude. And it goes way, way back in the history of civilization. The word "liturgy" comes from a Greek word which is just the same. I mean, if you were an important citizen of Athens, it was a lot like being an important person in Jewish culture. I mean, you had duties to give back and to act as a certain example. And the civilization had social pressures that enforced those duties. And I would argue that the Berkshire Hathaway compensation system, considering what the people at the top already have, it would be better if we saw a little more of it.

WARREN BUFFETTA few —

CHARLIE MUNGERI think Warren and I do all right. (Laughter and applause)

WARREN BUFFETTA few years — I think an added problem is the sort of, in terms of the accounting, the sort of hypocrisy that it pushes people into, and then which becomes accepted and sort of a norm, particularly when leaders do it. And you know, you had a situation a few years back when there's no question that any manager would say that stock options are a form of compensation. They would say that compensation is a form of expense, and they would say that expense belongs in the income account. But they didn't want to have stock options counted because they felt that it might restrict their use. So when the federal — the FASB, Financial Accounting Standards Board — came up with a proposal to actually have reality reflected en masse, corporate chieftains descended on Washington to pressure legislators to have Congress start enacting accounting standards, which as I mentioned, one time in Indiana in the 1890s, there was a legislator that introduced a bill to have the value of pi changed to an even 3 because he thought that 3.14159 was too tough for the schoolchildren and it would ease computational problems. Well, that sort of behavior by corporate chieftains when they are in there, you know, arguing that black is white, in order to feather their own nest and maybe create a little higher stock prices, I think that it means that they forfeit, to some degree, their right to be taken seriously when they claim they're operating for the good of the Republic, and march on Washington in other regards. And I just think that when the organization recognizes its hypocrisy and so on, I think there's a degradation that can set in through an organization that — whose leaders are also leaders in hypocrisy. Like I say, we have no strong feelings on this subject, but — (Laughter) Charlie, do you have anything?

CHARLIE MUNGERIt's rather interesting, though. There's an earlier example. Commodore Vanderbilt took no salary from his railroads. After all, he controlled the railroads. They paid all the dividends that he needed, and he got the fun of running the whole railroad, and he thought it was beneath Commodore Vanderbilt to take a salary. We've never quite reached the Vanderbilt standard, but — (Laughter)

WARREN BUFFETTWe don't have any dividends, Charlie.

CHARLIE MUNGERYeah, yeah. (Laughs) Well, maybe that's the reason. (Laughter)