1998 年股东大会 · 上午场

Welcome

WARREN BUFFETTMorning. Morning. I'm Warren Buffett, chairman of Berkshire, and — this is my partner. This hyperactive fellow over here is Charlie Munger. (Laughter) And we'll do this as we've done in the past, following the Saddam Hussein school of management, we're going to go through the business meeting in a hurry, and then we're going to do questions. And we'll do those until 3:30, with a break at noon, when we'll take off for 30 minutes or so while you can grab lunch. And those of you — there's — we're operating in an overflow room as well — so those of you who are in the overflow room now can join the main floor after the noon break, because we'll have plenty of room then. We'll go until 3:30. We'll try to get to all the questions we can. We've got 11 zones, ten of them in this room, and we'll just make our way around them. I've got a little map here, which I'll get oriented on here in a second. And let's see. And I think we'll get through the business meeting now. Incidentally, I don't see that movie before it's shown, but that was one of our directors singing at that final session there. (Applause) We keep costs down at Berkshire. (Laughter)

Board of directors introduced

WARREN BUFFETTOK, the meeting will now come to order. I'm Warren Buffett, chairman of the board of directors of the company and I welcome you to this 1998 annual meeting of shareholders. I will first introduce the Berkshire Hathaway directors that are present in addition to myself. So we have — and I can't see very well with the lights here, but if you'll stand as I name you. Susan T. Buffett, the vocalist. (Applause) Howard G. Buffett, the non-vocalist. (Applause) Malcolm G. Chace. (Applause) Charlie, you've met. And Ron Olson. (Applause) And Walter Scott Junior. (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 inspect of elections at this meeting. She will certify to the count of votes cast in the election for directors. The named proxy owners for this meeting are Walter Scott Junior and Marc D. Hamburg. Proxy cards have been returned through last Friday, representing 1,039,276 Class A Berkshire shares, and 1,080,509 Class B Berkshire shares to be voted by the proxy holders as indicated on the cards. The 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.

Minutes and shares outstanding

WARREN BUFFETTFirst order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott Jr., who will place a motion before the meeting.

WALTER SCOTT JR.I move the minutes — the reading — reading of the minutes of the last stockholders meeting be dispensed with.

WARREN BUFFETTDo I hear a second? (Voices) A lot of seconds. The motion has been moved and seconded. Are there any comments or questions? We will vote on this motion by voice vote. All those in favor say aye.

VOICESAye.

WARREN BUFFETTOpposed? Motion's carried. Does the secretary — (laughter) — have a report of the number of Berkshire shares outstanding, entitled to vote, and represented at the meeting?

FORREST KRUTTERYes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent by first-class mail to all shareholders of record on March 6, 1998, the record date for this meeting, there were 1,199,680 shares of Class A Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at this meeting. And 1,245,081 shares of Class B Berkshire Hathaway common stock outstanding, with each share entitled to 1/200th of one vote on motions considered at the meeting. Of that number, 1,039,276 Class A shares and 1,080,509 Class B shares are represented at this meeting by proxies returned through last Friday.

WARREN BUFFETTThank you, Forrest. 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. Those persons desiring ballots, please identify themselves so that we may distribute them.

Election of directors

WARREN BUFFETTThe one item of business at this meeting is to elect directors. I now recognize Mr. Walter Scott Junior to place a motion before the meeting with respect to election of directors.

WALTER SCOTT JUNIORI move that Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chace, Charles T. Munger, Ronald L. Olson, and Walter Scott Junior, be elected as directors.

WARREN BUFFETTIs there a second? It's been moved and seconded that Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chace, Charles T. Munger, Ronald L. Olson, and Walter Scott Junior be elected as directors. Are there any other nominations? Is there any discussion? Nominations are ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the election of directors and allow the ballots to be delivered to the inspector of elections. 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 ballots of the proxy holder, in response to proxies that were received through last Friday, cast not less than 1,039,298 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, Charles T. Munger, Ronald L. Olson, and Walter Scott Junior have been elected as directors. After adjournment of the business meeting, I will respond to questions that you may have that relate to the businesses of Berkshire that do not call for any action at this meeting. Does anyone have any further business to come before this meeting before we adjourn?

Adjournment of formal business meeting

WARREN BUFFETTIf not, I recognize Mr. Walter Scott Junior to place a motion before the meeting.

WALTER SCOTT JUNIORI move this meeting be adjourned.

WARREN BUFFETTSecond? (Laughter) Motion 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 BUFFETTAll opposed say I'm leaving. This meeting is adjourned. (Laughter and applause) Charlie and I may not get paid much, but we work fast on an hourly basis. (Laughter)

Q&A session begins

WARREN BUFFETTNow, we're going to do this by zones, and I think you can see who is manning each — yeah, I see we've got a number out there already. And please ask just one question. The only thing that I can think of that we won't discuss is what we're buying or selling or may be buying or selling, but we'll be glad to talk about anything that's on your mind. So let's go right to zone 1 and start in.

Price/earnings explanation

AUDIENCE MEMBERThanks for the beautiful — beautiful weekend in Omaha. I'm Mike Asale (PH) from New York City, with a question for Warren and Charlie about what makes a company's price-earnings ratio move up relative to other companies in its industry. How can we, as investors, find companies, and even industries, that will grow their relative price-earnings ratios as well as their earnings? And thank you for the wonderful weekend and for sharing your brilliance with the shareholders.

WARREN BUFFETTOh, thank you.

AUDIENCE MEMBERThank you. (Applause)

WARREN BUFFETTYou know, it's very simple, the price-earnings ratio — relative price-earnings ratios — move up because people expect either the industry or the company's prospects to be better relative to all other securities than they have been — than their proceeding view. And that can turn out to be justified or otherwise. Absolute price-earnings ratios move up in respect to the earning power — or the prospective earning power of — that is viewed by the investing public of future returns on equity, and also in response to changes in interest rates. And in the recent — well really, ever since 1982, but accentuated in recent years, you've had decreasing interest rates pushing up stocks, in aggregate. And you've had an increase in corporate profits. Return on equity of American businesses improved dramatically recently. And that also — and people are starting to believe it, so that has pushed up absolute price-earnings ratios. And then within that universe of all stocks, when people get more enthusiastic about a specific business or a specific industry, they will push up the relative P/E ratio for that stock or industry. Charlie, you got anything?

No "degree of difficulty" bonus

CHARLIE MUNGERYes, I think he also asked, how do you forecast these improvements in price-earnings ratios.

WARREN BUFFETTThat's your — that's your part of the question. (Laughter)

CHARLIE MUNGERAround here I would say that if our predictions have been a little better than other people's, it's because we tried to make fewer of them. (Laughter and applause)

WARREN BUFFETTWe also try not to do anything difficult, which ties in with that. We really do feel that you get paid just as well — you know, this is not like Olympic diving. In Olympic diving, you know, they have a degree of difficulty factor. And if you can do some very difficult dive, the payoff is greater if you do it well than if you do some very simple dive. That's not true in investments. You get paid just as well for the most simple dive, as long as you execute it all right. And there's no reason to try those three-and-a-halfs when you get paid just as well for just diving off the side of the pool and going in cleanly. (Laughter) So we look for one-foot bars to step over rather than seven-foot or eight-foot bars to try and set some Olympic record by jumping over. And it's very nice, because you get paid just as well for the one-foot bars.

Efficient market hypothesis "contaminates" business schools

WARREN BUFFETTOK, zone 2.

AUDIENCE MEMBERGood morning. My name is Joe Lacey (PH). I'm from Austin, Texas. In this era when the financial departments of the institutions of higher learning are referring to you as an anomaly, and they preach the efficient markets hypothesis, saying that you can't outperform the market, where does one go to find a mentor like you found in Ben Graham? Someone you can ask questions to regarding value investing.

WARREN BUFFETTMy understanding is that the University of Florida has instituted a couple of courses that, actually, Mason Hawkins gave them a significant amount of money to finance. And I believe they're teaching something other than efficient markets there. There's a very good course at Columbia I know that gets a lot of visiting teachers to come in. I go there and teach occasionally, but a number of practitioners do. So there — I think the efficient market theory is less holy writ now than it was 15 or 20 years ago in universities, but it's — there's a lot of it taught, but I think you can find more diversity in what is being offered now than ten or 20 years ago. And I'd recommend, you know, looking into those two schools. You know, it's really quite useful. If you had a merchant shipping business, if all of your competitors believe the world is flat, you know, that is a huge edge, because they will not take on any cargo to go to places that are beyond where they think they will fall off. And so we should be encouraging the teaching of efficient market theories in universities. (Laughter) It amazes me. But, you know, I think one time that — was it Keynes that said that most economists are most economical about ideas? That they make the ones they learned in graduate school last a lifetime. (Laughter) And what happens is that you spend years getting your Ph.D. in finance and you learn theories with a lot of mathematics in them that the average layman can't do. And you become sort of a high priest. And you get an enormous amount of yourself and ego, and even professional security, invested in those ideas. And it gets very hard to back off after a given point. And I think that to some extent has contaminated the teaching of investing in the universities. Charlie?

CHARLIE MUNGERWell, I would argue that the contamination was massive. (Laughter) But it's waning.

WARREN BUFFETTYeah, it is waning.

CHARLIE MUNGERIt's waning. The good ideas eventually triumph.

WARREN BUFFETTYeah. The word "anomaly" I've always found interesting on that, because, you know, after a while — I mean Columbus was an anomaly, I suppose, for a while. But what it means is something that the academicians could not explain, and rather than re-examine their theories, they simply discarded any evidence of that sort as anomalous. And I think when you find information that contradicts previously cherished beliefs, that you've got a special obligation to look at it and look at it quickly. I think Charlie told me that one of the things Darwin did was that whenever he found anything that contradicted some previous belief, he knew that he had to write it down almost immediately because he felt that the human mind was conditioned, so conditioned to reject contradictory evidence, that unless he got it down in black and white very quickly his mind would simply push it out of existence. Charlie knows more about Darwin than I do. Maybe he can explain that.

CHARLIE MUNGERWell, I don't know about Darwin, but I did find it amusing. One of these extreme efficient market theorists explained Warren for many, many years as an anomaly of luck. And he got the six sigmas, six standard deviations of luck. And then people started laughing at him because six sigmas of luck is a lot. So he changed his theory. Now Warren has six or seven sigmas of skill. (Laughter)

WARREN BUFFETTNo.

CHARLIE MUNGERSo you see —

WARREN BUFFETTI'd rather have the six sigmas of luck, actually. (Laughter)

CHARLIE MUNGERThe one thing he couldn't bear to leave was his six sigmas. (Laughter)

"Time is the enemy of the poor business"

WARREN BUFFETTLet's try zone 3.

AUDIENCE MEMBERMy name is Warren Hayes (PH). I'm from Chicago, Illinois. I understand from various publications, like Outstanding Investor Digest, that many of the best value investors are buying high-quality, multi-national Japanese companies that are trading below net-net working capital value. Do you agree that these values exist in Japan? And would you consider a purchase of some of them?

WARREN BUFFETTWell, Henry Emerson, who publishes the Outstanding Investor's Digest is here, so I will give a tout on it. I read the Outstanding Investor's Digest, OID, and it's a very good publication. And I have read some of the commentary about Japanese securities. We've looked at securities in all major markets, and we certainly looked at them in Japan, particularly in recent years when the Nikkei has so underperformed the S&P here. We're quite a bit less enthused about those stocks as being any kind of obvious bargains than the people that you read about in OID. The returns on equity in most areas of Japanese business, returns on equity are very low. And it's extremely difficult to get rich by owning — by being the owner of a business that earns a low return on equity. You know, we always look at what a business does in terms of what it earns on capital. We want to be in good businesses. Where you really want to be is in businesses that are going to be good businesses and better businesses ten years from now. And we want to buy them at a reasonable price. But many years ago we gave up what I've labeled the "cigar butt" approach to investing, which is where you try and find a really kind of pathetic company, but it sells so cheap that you think there's one good free puff left in it. And — (laughter) — we used to pick up a lot of soggy cigar butts, you know. I mean, I had a portfolio full of them. And there were free puffs in them. I mean, I made money out of that. But A, it doesn't work with big money anyway, and B, we don't find many cigar butts around that we would be attracted to. But those are the companies that had low returns on equity. And if you have a business that's earning 5 or 6 percent on equity and you hold it for a long time, you are not going to do well in investing. Even if you buy it cheap to start with. Time is the enemy of the poor business, and it's the friend of the great business. I mean if you have a business that's earning 20 or 25 percent on equity, and it does that for a long time, time is your friend. But time is your enemy if you have your money in a low-return business. And you may be lucky enough to pick the exact moment when it gets taken over by someone else. But we like to think when we buy a stock we're going to own it for a very long time, and therefore we have to stay away from businesses that have low returns on equity. Charlie?

CHARLIE MUNGERYeah, it's not that much fun to buy a business where you really hope this sucker liquidates before it goes broke. (Laughter)

WARREN BUFFETTWe've been in a few of those, too.

CHARLIE MUNGERRight. (Laughter)

WARREN BUFFETTYeah, Charlie and I, we — or at least I have, I've owned stock in an anthracite company. There are probably people in this room that don't know what anthracite is. Three railway companies. Windmill manufacturers. What other gems have we had, Charlie?

CHARLIE MUNGERTextiles. (Laughter)

WARREN BUFFETTYeah, textiles. Don't even think. (Laughter) Yeah, Berkshire was a mistake, believe it or not. I mean we went into Berkshire because it was cheap statistically just as a general investment back in the early '60s, and it was a company that in the previous ten years had earned less than nothing. I mean it had a significant net loss over the previous ten years. It was selling well below working capital, so it was a cigar butt. And it was — I mean we could have done the things we've done subsequently from a neutral base rather than a negative base, and actually it would have worked out better, but it's been a lot of fun.

Munger wants "a good idea we can understand"

WARREN BUFFETTNumber four.

AUDIENCE MEMBERHello. My name is Martin Weigand from Bethesda, Maryland. Again, I want to thank you for your letters and principles. They're a great help for small business people running their business. My question is, last year you said you had filters in your mind to help you quickly analyze businesses. How do your filters take into account the very fast changes of technology and the way that businesses communicate with their customers, take orders, things like that?

WARREN BUFFETTWell, we do have filters, and sometimes those filters are very irritating to people who check in with us about businesses, because we really can say in ten seconds or so "no" to 90 percent-plus of all the things that come in, simply because we have these filters. We have some filters in regard to people, too. But the question of technology is very simple. That doesn't make it through our filter. I mean, so if something comes in where there's a technological component that's of significance, or where we think the future technology could hurt the business as it presently exists, we look at, you know, we look at that as something to worry about. We will — it won't make it through the filter. We want things that we can understand, which filters out a lot of things. (Laughter) And we want them to be good businesses, and we want the people to be people we're very comfortable with. That means ability and integrity. And we can do that very fast. We've heard a lot of stories in our lives, and it's amazing how they — you can become quite efficient in, probably, getting 95 percent of the ideas through in a very short period of time that should get through. Charlie?

CHARLIE MUNGERYeah, we have to have an idea that is A, a good idea, and B, a good idea that we can understand. It's just that simple. And so those filters are filters against consequences from our own lack of talent. (Laughter)

WARREN BUFFETTFilters haven't changed much over the years, either. (Laughter)

"A lot of different talents" within Berkshire

WARREN BUFFETTOK, area five.

AUDIENCE MEMBERHi. I'm Allan Maxwell. I live in the wonderful tropical island of O-maha. (Laughter)

WARREN BUFFETTThat's right up there with Aksarben. That's Nebraska spelled backwards. (Laughter)

AUDIENCE MEMBEREverybody in this room's got to be wondering the same question. Who, in your opinion, both of you, is the next Warren Buffett?

WARREN BUFFETTCharlie? Who's the next Charlie Munger? Well, let's try that first. That's a more difficult question. (Laughter)

CHARLIE MUNGERThere's not much demand. (Laughter) I don't think there's only one way to succeed in life, and our successors, in due time, may be different in many ways. And they may do better.

WARREN BUFFETTIncidentally, we have a number of people in the company, some of whom are in this room today, and the ones you saw on that screen, who are leagues ahead of Charlie and me in various kinds of abilities. I mean a lot of different talents. We've got a fellow in this room today who's the best bridge player, probably, in the world. And Charlie and I could work night and day, and if he spent ten minutes a week working on it, he'd play better bridge than we would. And there are all kinds of intellectual endeavors that, for some reason or another, one person's a little bit better wired for than someone else. And we have people running our businesses that if Charlie and I were put in charge of those businesses, we couldn't do remotely as well as they do. So there's a lot of different talents. The two that we're responsible for is, we have to be able to keep able people, who are already rich, motivated to keep working at things where they don't need to do it for financial reasons. I mean it's that simple. And that's a problem any of you could think about, and you'd probably be quite good at it if you gave it a little thought, because you'd figure out what would cause you to work if you were already rich and didn't need the job. Why would you jump out of bed and be excited about going to work that day? And then we try to apply that to the people who work with us. Secondly, we have to allocate capital. And these days we have to allocate a lot more capital than we had to allocate a decade ago. That job is very tough at present. Sometimes it's very easy. And it will be easy at times in the future and it'll be difficult at times in the future. But there are other people that can allocate capital, and we have them in the company. Charlie, you have any —?

CHARLIE MUNGERNo.

One of the few reasons to sell a stock

WARREN BUFFETTOK. Number 6.

AUDIENCE MEMBERGood morning. My name is Jad Khoury (PH). I'm from Gaithersburg, Maryland. I just want to thank you for sharing your wisdom. And my question is, what criteria do you use to sell stock? I kind of understand how you buy it, but I'm not sure how you sell.

WARREN BUFFETTYeah. Well, the best thing to do is buy a stock that you don't ever want to sell. I mean — and that's what we're trying to do. And that's true when we buy an entire business. I mean, we bought all of GEICO or we bought all of See's Candy or The Buffalo News. We're not buying those to resell. I mean, what we're trying to do is buy a business that we will be happy with if we own it the rest of our lives, and we expect to with those. It's the same principle applies to marketable securities. You get extra options with marketable securities. You can add to holdings. Obviously easier — we can never own more than a hundred percent of a business, but if we own 2 percent of a business and we like it at a given price, we can add and have 4 or 5 percent. So that's an advantage. Sometimes, if we need money to move to another sector, like we did last year, we will trim some holdings, but that doesn't mean we're negative on those businesses at all. I mean, we think they're wonderful businesses or we wouldn't own them. And we would sell A, if we needed money for other things. The GEICO stock that I bought in 1951, I sold in 1952. And it went on to be worth a hundred or more times — before the 1976 problems — 100 or more times what I'd paid. But I didn't have the money to do something else. So you sell if you need money for something else. You may sell if you believe the valuations between different kinds of markets are somewhat out of whack. And, you know, we have done a little trimming last year in that manner. But that could well be a mistake. I mean the real thing to do with a great business is just hang on for dear life. Charlie?

CHARLIE MUNGERYes, but the sales that do happen, the ideal way is when you found something you like immensely better. Isn't that obvious that's the ideal way to sell?

WARREN BUFFETTAnd incidentally, the ideal purchase is to find — is to have something that you already liked be selling at a price where you feel like buying more of it. I mean, we probably should have done more of that in the past in some situations. But that's the beauty of marketable securities. You really do — if you're in a wonderful business, you do get a chance, periodically, maybe to double up in it, or something of the sort. If the market — if the stock market were to sell a lot cheaper than it is now, we would probably be buying more of the businesses that we already own. They would certainly be the first ones that we would think about. They're the businesses we like the best. Charlie?

CHARLIE MUNGERNothing more.

Make up your own mind

WARREN BUFFETTOK. Zone 7.

AUDIENCE MEMBERGood morning, Mr. Buffett, Mr. Munger. My name is Ron Wright (PH) from Iowa City, Iowa. New companies have always been an interest to me. Is it reasonable to assume an Omaha-based company with only $5 billion in the bank might succeed in telecommunications?

WARREN BUFFETTWell, I think that a new company with 5 billion in the bank is probably better off than most new companies. (Laughter) Be like Jennifer Gates, as a newborn. (Laughter) I think you're probably referring to a company that was created out of one of our local operations that's run by Walter Scott, one of our directors, from the Kiewit Company, Level 3. I can tell you, it's got very able management. And I'll take your word for it that it's also got 5 billion in the bank, but you'll have to make your own judgment on the stock. I know Charlie won't comment on that one. (Laughs)

Buffett jokes about Nebraska football's Tom Osborne

WARREN BUFFETTZone 8.

AUDIENCE MEMBERYes, good morning. This is Mo Stintz (PH) from Omaha, Nebraska. In the past you've often said that the insurance operation is the most important business in Berkshire's portfolio. Is that true? And what are numbers two and three? I'd also like to ask, is it true that Charlie chose the colors for the cover of this year's annual report?

WARREN BUFFETTDid Charlie chose them? (Laughs) He had nothing to do with them. I chose them. (Laughter) They were a tribute to the Nebraska football team and Tom Osborne, who you saw. (Applause) Tom, incidentally, has a very low-key style, and Bobby Bowden, a few years ago, was in Lincoln. And he said that on their first date that Nancy had to slap Tom three times. And somebody said, "Was he that fresh?" And she said, "No, I was just checking to be sure he was alive." (Laughter) Tom had a fairly conservative offense for a time in the past, although it hasn't been so conservative the last few years, but somebody said at that time the most reckless thing he did was to eat some cottage cheese the day after the expiration on the carton by then. (Laughter) But I — no, I chose the colors. Now what was the question? (Laughter) What was the question, Charlie? Do you remember? A memorable question, but give it to us again. (Laughter)

Proud not to have a strategic plan

WARREN BUFFETTAre we back there in zone 8? Oh, the number — yeah, sure. The question was about the insurance business, which we have said will be, by far, the most important business at Berkshire. We said that many, many years ago, and it's proven to be the case. It obviously got a big leg up when we purchased all of GEICO. Insurance, as far as the eye can see, will be, by far, the most significant business at Berkshire. And the question about two and three: in terms of earnings, FlightSafety is the second largest source of earnings. But we don't really think of them that way. I mean we do know our main business is insurance, but we really have a lot of fun out of all of our businesses. And I had a great time out at Borsheims yesterday, or at a Dairy Queen. So it will be accident, to some extent, over the next ten years, what ends up being the second or third or fourth largest. That'll be determined by opportunity. We bid on certain businesses — or negotiated on them — that could have been very large businesses if they become part of Berkshire. And that'll happen again in the future. So we have no predetermined course of action whatsoever at Berkshire. We have no strategic planning department. We don't have any strategic plan. We react to what we think are opportunities. And if it's a business we can understand, and particularly if it's big, you know, we would love to make it number two. Charlie?

CHARLIE MUNGERI also want to say proudly that we have no mission statement.

WARREN BUFFETTNo. (Laughter and applause) It's hard to think of anything that we do have, as a matter of fact. (Laughter) Yeah, we have never had — I mean I'm sure you all know this. We've never had a consultant. And we try to keep things pretty simple. We still have 12 people at headquarters. We have about 40,000 people that now work for Berkshire. And we hope to grow a lot, but we don't hope to grow at headquarters. (Laughter)

In "good shape" to handle Y2K problem

WARREN BUFFETTNumber 9.

AUDIENCE MEMBERYes, my name is Patty Buffett and I'm from Albuquerque, New Mexico.

WARREN BUFFETTI like your name. (Laughter)

AUDIENCE MEMBERThanks. In your opinion, what effect will the year 2000 compliant issue have on the U.S. stock market and the global economy?

WARREN BUFFETTWell, I get different reports on 2000, but the main report I hear — I think, you know, we — you wouldn't want to rely on me on this, but you could rely on our managers. And I think we're in good shape. It's costing us some money but not huge amounts of money to be prepared for 2000. With companies in which I'm a director, you know, I hear some reasonably good-sized numbers. Those numbers are in their annual reports and described as to the cost of compliance. But what I'm told by people that know a lot more than I do, is that they think probably that the weakest link may be in governmental units. They seem to think that in terms of where they stand versus the commercial sector, in terms of reaching where they need to be by 2000, that there's some areas of both national and state and local governments, and foreign government, where they're really behind the curve. Now, that is not an independent judgment of mine. But somebody said, "You want to be very careful about making a phone call at five seconds before midnight at the millennium because you may get charged for 100 years," you know. (Laughter) So it'll be interesting. I don't think it's going to affect Berkshire in any material way, and I certainly have a feeling that the world will get past it very easily. But it is turning — it is expensive for some companies, and it's going to be very expensive for governments. Charlie?

CHARLIE MUNGERYeah, I find it interesting that it is such a problem. You know, it was predictable that the year 2000 would come.

WARREN BUFFETTYeah. (Laughter and applause) Yeah. Yeah, we decided that back in 1985, actually. (Laughter) We didn't welcome it, understand. That's not Berkshire's style, though. (Laughs) It is fascinating, isn't it, when you think about it, that a whole bunch of people with 160 IQs that could build up such a problem, but here we are. And — (laughter) — that's why we stick with simple things. (Laughter)

Laws needed to check campaign spending "arms race"

WARREN BUFFETTNumber 10.

AUDIENCE MEMBERMy name is Kristin Cham (PH). I'm from Springfield, Illinois. And I'm a proud shareholder of Berkshire Hathaway. (Applause)

WARREN BUFFETTWe're glad to you have you here.

AUDIENCE MEMBERI've heard a little about your thoughts on trying to control campaign spending. Could you tell us more about your thoughts and efforts on this topic? Thank you.

WARREN BUFFETTCharlie, did you get all of that?

CHARLIE MUNGERI think it was campaign spending.

WARREN BUFFETTOh, campaign spending. Yeah, I have joined something that Jerry Kohlberg — this is personal. This has nothing to do with Berkshire — that Jerry Kohlberg spearheaded. And it's taken a position — and probably 30 or so mostly business people — taken a position against soft money, and also taken a position on very fast disclosure of campaign finance money, because I personally think that the arms race, in terms of campaign spending by businesses, you know, has just begun. It doubled in the last election. But political influence — and I don't mean that by buying a vote, but I mean just in terms of having a (inaudible) in Washington or in other state capitols. Political influence has been an underpriced product in the past. I mean, the government is enormously important in this country to most companies. It was amazing how cheap — cheaply — it could be — attention could be purchased. But the price is going up, and there will be an escalation. And I don't think it's easy — if you're the manager of a business and you own 1/10th of 1 percent of it and you're in a business that's heavily affected by government, I don't think it's very easy to tell your board of directors that you're going to take a hands-off approach. So I think legislation is needed in that arena, and there are over a hundred campaign finance reform bills that have been introduced. Everybody wants to have their name on a bill. They just don't want to have it passed. (Laughter) And, you know, John McCain's been working hard on it. And it's something I think we have to come to grips with because it's going to be a battle of the wallets for influence. And, like I say, if I were running some other company, and my competitors were spending money to get the attention of would-be legislators, or actual legislators, it'd be very difficult to take some high and mighty position that I wasn't going to do it myself, and my board and my shareholders might ask me why I was taking that position. We are lucky, basically, to be in a business that's relatively unaffected by legislation, although we will — we're going to pay a lot of tax this year. I said two years ago that it would only take 2,000 entities in the whole United States — businesses, individuals, any kind of entity — to pay the same amount of taxes as Berkshire, and that would take care of the entire budget. You'd need no Social Security taxes. You'd need no nothing. I think we're going to be able to say that again this year. I think that if you multiply our tax by 2,000 you will more than account for the entire federal budget, including Social Security and everything else. So you might say, "Why aren't you in Washington lobbying for a capital gains rate at corporations that's the same as individuals?" or something, but we basically haven't played that game. We feel very fortunate. I'll say this. I would rather, in this country, be a huge taxpayer myself than be somebody who needed the other end of it, the government dispensing. I mean, if anybody here is paying taxes and they want to — (applause) If you'd like to shift positions with somebody in a veteran's hospital or, you know, that has a couple of children by age 19 and is getting a check from the government, you know, I don't want to shift positions. I'm happy to be paying the taxes.

"The secret of life is weak competition"

WARREN BUFFETTZone 11, please. I think 11 is probably the remote — yeah. So we're going to hear this from the overflow room. Are we there?

AUDIENCE MEMBERYes. Good morning, Mr. Buffett, Mr. Munger. My name is Patrick Rown (PH) from Charlotte, North Carolina. And I've watched returns on equity for the banking sector in the U.S. go up a good bit over the last few years. And returns on tangible equity for some of the major banks that have led to consolidation have gone up a good bit more. Leads me to wonder whether these returns are sustainable over the near-term or the longer-term, five, 10 years out.

WARREN BUFFETTWell, that's the $64 question, because the returns on equity — and particularly tangible equity, as the gentleman mentioned — and particularly tangible equity in the banking sector, even — those returns have hit numbers that are unprecedented. And then the question is, if they're unprecedented, are they unsustainable? Charlie and I would probably think the — we would certainly prefer — we would not base our actions on the premise that they are sustainable. Twenty percent-plus returns on tangible equity — or on book equity — and much higher returns on tangible equity. In the banking field, you have a number of enterprises that on tangible equity are getting up close to the 30 percent range. Now, can a system where the GDP in real terms is growing, maybe, 3 percent — where in nominal terms this grows 4 to 5 percent — can businesses consistently earn 20 percent on equity? They certainly can if they retain most of their earnings, because you would have corporate profits rising as a percentage of GDP, to the point that would get ludicrous. So under those conditions, you'd either have to have huge payouts — either by repurchases of shares or by dividends or by takeovers, actually — that would keep the level of capital reasonably consistent among industry, because you couldn't sustain — let's just say every company retained all of its earnings and they earned 20 percent on equity — you could not have corporate profits growing at 20 percent as a part of the economy year after year. This has been a better world than we foresaw, in terms of returns, so we've been wrong before. And we're not making a prediction now, but we would not want to buy things on the basis that these returns would be sustained. We told you last year, if these returns are sustained and interest rates stayed at these levels or fell lower, that stock prices, in aggregate, are justified. And we still believe that. But those are two big ifs. And a particularly big if, in my view, is the one about returns on equity and on tangible assets. It goes against — it certainly goes against classic economic theory to believe that they can be sustained. Charlie, how do you feel about it?

CHARLIE MUNGERWell, I think a lot of the increase in return on equity has been caused by the increasing popularly of Jack Welch's idea that if you can't be a leader in a line of business, get out of it. And if you have fewer people in the business, why, returns on equity can go up. Then it's got more and more popular to buy in shares, even at very high prices per share. And if you keep the equity low enough by buying shares back, why, you could make return on equity whatever you want. It would be that, to some extent, a slow revolution in corporate attitudes. But Warren is right. You can't have massive accumulations of earnings that are retained and keep earning these rates of return on them.

WARREN BUFFETTAn interesting question is to think about, if you had 500 Jack Welches and they were running the Fortune — they're cloned — and they were running all of the Fortune 500 companies, would returns on equity for American business be higher or lower than they are presently? I mean if you have 500 sensational competitors, they can all be rational, but that doesn't — and they will be. And they'll be smart and they'll keep trying to do all the right things. But there's a self-neutralizing effect, just like having 500 expert chess players or 500 expert bridge players. You still have a lot of losers if they get together and play in a tournament. So it's not at all clear that if all American management were dramatically better, leaving out the competition against foreign enterprises, that returns on equity would be a lot better. They might very well drive things down. That's what, to some extent, can easily happen in securities markets. It's way better to be in securities markets if you have a hundred IQ and everybody else operating has an 80, than if you have 140 and all the rest of them also have 140. So the secret of life is weak competition, you know. (Laughter) Somebody said, "How do you beat Bobby Fischer?" You play him in any game except chess, well — (Laughter) That's how you beat Jack Welch. You play him in any game except business, although he's a very good golfer, I want to — (laughs) — point out. He shot a 69 a few months ago when I saw him at a very tough course. Jack manages to play 70 or 80 rounds of golf a year, and come in sub-par occasionally, while still doing what he does at GE. He's a great manager. But 500 Jack Welches, I'm not at all sure would make stocks more valuable in this country.

Book recommendations

WARREN BUFFETTZone 1.

AUDIENCE MEMBERI'm Ben Knoll and I'm from Minneapolis. And first, I just wanted to thank you for providing your past annual letters to the shareholders, and Mr. Munger for providing your speech to the graduate students at USC a couple years ago. Drawn a lot of insights from that, not only in investing but also in my day job as a business manager. And I'm wondering if you could help me with my summer reading list and provide some additional suggestions for reading in the fields of investing and management, other than the standards of Graham and Fisher and so forth.

WARREN BUFFETTCharlie?

CHARLIE MUNGERYeah. I have recently read a new book twice, which I very seldom do. And that book is "Guns, Germs and Steel" by Jared Diamond. And it's a marvelous book. And the way the guy's mind works would be useful in business. He's got a mind that is always asking why. Why, why, why. And he's very good at coming up with answers. I would say it's the best work of its kind I have ever read.

WARREN BUFFETTI read a little easier book — (laughter) — recently. I'm not even sure of the title. I don't pay much attention to titles when I get into the book, but it's something to the effect of "The Quotable Einstein." I mean it's a lot of his commentary over the years, and it's great reading. "The Fermat Theorem" was the book that — that isn't an exact title either — but it's the story of the discovery of the answer. That's a very interesting book. One of our shareholders from Sweden gave me a copy of that when I was in New York and I've enjoyed it.

Higher rates would hurt Freddie and Fannie

WARREN BUFFETTZone 2.

AUDIENCE MEMBERMarc Rabinov. I'm a shareholder from Melbourne, Austria. Gentlemen, we have large holdings in Freddie Mac and Fannie Mae, and as you both know, they were quite — well, they were hurt quite a lot when interest rates went up in the past. I'm wondering if you think there'll be hurt again when interest rates go up in the future?

WARREN BUFFETTWell, the question about Freddie Mac and Fannie Mae on interest rates, they are not as interest rate sensitive as people formerly thought they were. But it would be the pattern, and I have a feeling that if interest rates got extremely low, so that there was a huge turnover in the portfolio, and then rates went up dramatically, that even though they have various ways of protecting themselves against interest rate scenarios, that that might get very tough. I think there would be some kind of squeeze there. They may have good answers as to why that wouldn't happen, incidentally, because they certainly worry about every kind of interest rate scenario. That's their job. But I think, in a sense, very low interest rates are more of a long-term threat, because if you get a portfolio chock full of, say, 4 percent mortgages or something of the sort, and then you had a huge move upward, that would be quite painful for some period of time, no matter what you've done in the way of hedging. Charlie?

CHARLIE MUNGERI've got nothing to add.

WARREN BUFFETTYeah. That's what happened to the savings and loans, in effect, you see, 25 years ago or whenever it was. And Freddie and Fannie have other functions, and they've got a lot of advantages, but they have a savings and loan-type operation. They just do it on a very big scale and they get their money from — in a very different manner than from millions of depositors. But the basic economics have some similarly.

No worries about tough times: "It's a lot of fun"

WARREN BUFFETTZone 3.

AUDIENCE MEMBERJane Bell (PH), Des Moines. Since I became a Berkshire Hathaway shareholder I've been coming to these meetings. This is my second. (Laughter)

WARREN BUFFETTI've been coming to these meetings ever since I've been a shareholder. (Laughter)

AUDIENCE MEMBERMr. Buffett, I'm a partner and owner in a consulting business, and we tell our clients and potential clients that we design solutions for what keeps them awake at night. Mr. Buffett, from your perspective as an investor, what keeps you awake at night?

WARREN BUFFETTWell, that's a good question. And that's one I always ask the managements of our subsidiaries, as well as any new investment. I want to know what their nightmare is. Andy Grove, in his book "Only the Paranoid Survive," talks about the silver bullet for a competitor. So in terms of, if you only had one silver bullet, which competitor would you fire it at? And it's not a bad question. And your question's a little broader. If you only had one worry that you could get rid of, what would it be? I would say that, and I think I speak for Charlie — (inaudible) — but we really don't worry. You know, we will do the best we can, and when we have capital allocated, sometimes it's very easy to do. Sometimes it's almost impossible to do. But we're not going to worry about it, because, you know, the world changes. And if we had something we were worried about in the business, we would correct it. I'm not worried about any — I'm not really worried about — you know, we can lose a billion dollars on a California earthquake. But I'm not worried about it, although I have a sister who's in the audience that lives in California. I told her to call me quickly if the dogs start running in circles or anything like that. (Laughter) But there's — you know, if you're worried about something, the thing to do is get it corrected and get back to sleep. And I can't think of anything I'm worried about at Berkshire. That doesn't mean that I have any good ideas as to what we should be doing with a whole lot of money that we have around. But, you know, I can't do anything about that except keep looking for things that I might understand and do something with the money. And if they aren't there, they aren't there. And we'll see what happens tomorrow and next week and next month and next year. Charlie, what are you worried about?

CHARLIE MUNGERWell, in the 30-some years I've been watching you, I would say what it takes to make you not sleep at night is an illness in the family. Short of that, Warren likes the game. I like the game. And even in the periods that look tough to other people, it's a lot of fun.

WARREN BUFFETTIt's a lot of fun.

CHARLIE MUNGERIt's a lot of fun. (Laughter)

WARREN BUFFETTIn fact it probably is the most — (applause) — it's sort of, it is the most — I mean we define tough times differently than other people would, but our idea of tough times is like now, and our idea — we don't feel it's tough times when the market's going down a lot or anything of the sort. So we are having a good time then. I mean we don't want to sound like undertakers during a plague or anything, but — (Laughter) But there really — you know, it makes no difference to us whether the price of Berkshire is going up or down. We're trying to figure out ways to make the company worth more money years down the road, and if we figure that out, the stock will take care of itself, so — And usually when the stock is going down, it means other things are going down. And it's a better chance for us to deploy capital, and that's our business. So you will not see us worrying. Maybe we should. You know, "What, me worry?" (Laughs)

"What is important and what is knowable?"

WARREN BUFFETTZone 4.

AUDIENCE MEMBERMy name is Paul Yoon (PH) from L.A., California. Mr. Warren Buffett, Mr. Charles Munger, I am one of the persons who highly admire you both. I have two questions. Question one: your view on the world financial business environment in the next decade. Question two — (laughter) — U.S. position for economic competition in the next decade. Thank you.

WARREN BUFFETTWell, you've asked two big questions, but you're going to get very small answers, I'm afraid. (Laughter) And that's no disrespect. But we — we just — we don't have that. We don't think about those things very much. We just are looking for decent businesses. And incidentally, our views in the past wouldn't have been any good on those subjects. We try to think about two things. We try to think about things that are important and things that are knowable. Now, there are things that are important that are not knowable. In our view, those two questions that you raised fall in that. There are things that are knowable but not important. We don't want to clutter our minds up with those. So we say, "What is important and what is knowable?" And what among the things that fall within those two categories can we translate into some kind of an action that is useful for Berkshire. And we really — there are all kinds of important subjects that Charlie and I, we don't know anything about, and therefore we don't think about them. So we have — our view about what the world will look like over the next ten years in business or competitive situations, we're just no good. We do think we know something about what Coca-Cola's going to look like in ten years, or what Gillette's going to look like in ten years, or what Disney's going to look like in ten years, or what some of our operating subsidiaries are going to look like in ten years. We care a lot about that. We think a lot about that. We want to be right about that. If we're right about that, the other things get to be — you know, they're less important. And if we started focusing on those, we would miss a lot of big things. I've used this example before, but Coca-Cola went public in, I think, it was 1919. And the first year one share cost $40. The first year it went down a little over 50 percent. At the end of the year, it was down to $19. There were some problems with bottler contracts. There's problems with sugar. Various kinds of problems. If you'd had perfect foresight, you would have seen the world's greatest depression staring you in the face, when the social order even got questioned. You would have seen World War II. You would have seen atomic bombs and hydrogen bombs. You would have seen all kinds of things. And you could always find a reason to postpone why you should buy that share of Coca-Cola. But the important thing wasn't to see that. The important thing was to see they were going to be selling a billion eight-ounce servings of beverages a day this year. Or some large number. And that the person who could make people happy a billion times a day around the globe ought to make a few bucks off doing it. And so that $40, which went down to $19, I think with dividends reinvested, has to be well over $5 million now. And if you developed a view on these other subjects that in any way forestalled you acting on this more important, specific narrow view about the future of the company, you would have missed a great ride. So that's the kind of thing we focus on. Charlie?

CHARLIE MUNGERYeah, we're predicting the currents that will come, just how some things will swim in the currents, whatever they are.

Praise for Value Line's "perfect snapshot"

WARREN BUFFETTZone 5, please.

AUDIENCE MEMBERGood morning, Marc Gerstein from Value Line. Mr. Buffett, considering the large amounts of demands on your time, how do you go about reviewing the entire spectrum of choices in the equity markets?

WARREN BUFFETTGive me that last part again? I got the demands on my time and —

MARK ERSTEINHow do you and Mr. Munger manage to review the whole spectrum of choices in the equity markets?

WARREN BUFFETTA fat pitch coming up. (Laughter) But I don't mind it at all, because the truth is that we get — I don't even know what we pay for Value Line. Charlie and I both get it in our respective offices, but we get incredible value out of it because it give us the quickest way to see a huge number of the key factors that tell us whether we're basically interested in the company. And it also gives us a great way — good way — of sort of periodically keeping up-to-date. Value Line has 1,700 or so stocks they cover, and they do it every 13 weeks. So it's a good way to make sure that you haven't overlooked something if you just quickly review that. But the snapshot it presents is an enormously efficient way for us to garner information about various businesses. We don't care about the ratings. I mean that doesn't make any difference to us. We're not looking for opinions. We're looking for facts. But I have yet to see a better way, including fooling around on the internet or anything, that gives me the information as quickly. I can absorb the information on — about a company — most of the key information you can get — and probably doesn't take more than 30 seconds in glancing through Value Line, and I don't have any other system that's as good. Charlie?

CHARLIE MUNGERWell, I think the Value Line charts are a human triumph. It's hard for me to imagine a job being done any better than is done in those charts. An immense amount of information is put in very usable form. And if I were running a business school we would be teaching from Value Line charts.

WARREN BUFFETTAnd when Charlie says the charts, he does not mean just the chart of the price behavior. He means all that information that really is listed under the charts that —

CHARLIE MUNGEROh yeah.

WARREN BUFFETTThe detailed financial information. You can run your eye across that. The chart of the price action doesn't mean a thing to us, although it may catch our eye, just in terms of businesses that have done very well over time. But we — price action has nothing to do with any decision we make. Price itself is all-important, but whether a stock has gone up or down, or what the volume is, or any of that sort of thing, that is — as far as we're concerned, you know, those are chicken tracks, and we pay no attention to them. But that information that's right below the chart, in those 10 lines or so — 15 lines — if you have some understanding of business, that's a — it's a perfect snapshot to tell you very quickly what kind of a business you're looking at.

Insurance mergers haven't hurt GEICO

WARREN BUFFETTZone 6, please.

AUDIENCE MEMBERDavid Winters from Mountain Lakes, New Jersey. With the consolidation in the insurance industry, how do you think that will affect Berkshire's insurance businesses and the long-term development of the float? And if I may, not to encourage your dogma to run over your karma, but how do you think your policy of partnership and fair dealing has enhanced or detracted from your investment returns? Thank you.

WARREN BUFFETTNow, with the consolidation taking place in insurance, it's been taking place for some time. There have been some big mergers over the years. It should — there are developments in insurance. We mentioned the super-cat bonds, which are not bonds at all. But that has an effect. But I would say that there's no merger that has taken place that I regard as being detrimental, either to our GEICO business or to our reinsurance business. That has not been a factor, and I think if there were some more mergers it would not be a factor. I see no way that any entities being put together would change the competitive situation in respect to GEICO. GEICO operating just as it does, independently, is as competitive as can be, and it would not benefit by being part of any other organization. And our reinsurance business is much more opportunistic. And it's not consolidation there, it's just lack of fear, generally, by competitors who can price — particularly cat business — at a rate that could be totally inadequate, as I use in an illustration in the report. But nevertheless, it could appear to be profitable for a long time. And there's probably more of that going on now, and there'll probably be a lot more going on in that arena. We have some sensational insurance businesses, though. I have to tell you that — I don't think you really have to worry too much about how we do in insurance in the future. We have a number of GEICO people here today. I hope you got a chance to meet them. GEICO — and you saw Lorimer Davidson. I really was hoping he could be here, but Davy is 95 years old. I went to visit him a few months ago, and it just isn't easy for him to get around. But he built a sensational company and it stumbled once. Jack Byrne got it back on track and Tony Nicely's got it going down the track at about a hundred miles an hour and it's getting faster all the time. So we've got a great business there. Charlie?

CHARLIE MUNGERNothing to add.

"Wonderful companies" should buy back stock

WARREN BUFFETTZone 7.

AUDIENCE MEMBERYes. Bill Ackman from New York. Is there a price at which it's inappropriate for a company to use its capital to buy back its stock?

WARREN BUFFETTGive me that again?

AUDIENCE MEMBERExample. Coca-Cola at 40 P/E. Is that a smart place for Coke to deploy capital?

WARREN BUFFETTWell, it sounds like a very high price when you name it in terms of a P/E to buy back the stock at that sort of number. But I would say this: Coca-Cola's been around a hundred and — what, 12 years now, and there are very few times in that 112 years, if any, when it would not have been smart for Coca-Cola to be repurchasing its shares. Coca-Cola is, in my view, among businesses that I can understand, it's the best large business in the world. I mean it is a fantastic business. And we love it when Coke repurchases shares and our interest goes up. We owned 6.3 percent of Coca-Cola in 1988 when we bought in. We actually increased that a little bit a few years later. But if they had not repurchased shares, we probably would own about 6.7 percent or 6.8 percent of Coke now. As it is, we own a little over 8 percent, through repurchases. There are going to be about a billion eight-ounce servings of Coke sold around the world — Coca-Cola products — sold around the world today. Eight percent of that is 80 million and 6.8 percent is 68 million. So there are 12 million extra servings for the account of Berkshire Hathaway being sold around the world. And they're making a little over a penny a serving, so, you know, that gets me kind of excited. (Laughter) I think it — all I can tell you is, I approve of Coke repurchasing shares. I'd a lot rather have them repurchasing shares at 15 times earnings, but when I look at other ways to use capital, I still think it's a very good use of capital. And maybe the day will come when they can buy it at 20 times earnings, and if they can I hope they go out and borrow a lot of money to ton of it at those prices, and — I think we will be better off 20 years from now if Coke follows a consistent repurchase approach. I do not think that is true for many companies. I mean I think that repurchases have become en vogue and done for a lot of silly reasons. And so I don't think everybody's repurchase of shares is well reasoned at all. You know, we see companies that issue options by the ton and then they repurchase shares much higher, you know — I started reading about investments when I was six, and I think the first thing that I read was, you know, buy low, sell high. But these companies, through their options, you know, they sell low and then they buy high. And they've got a different formula than I was taught. So there are a number that we don't approve of. When we own stock in a wonderful business, we like the idea of repurchases, even at prices that may give you nose bleeds. It generally turns out to be a pretty good policy. Charlie?

CHARLIE MUNGERWell, I think the answer is that in any company the stock could get to a price so high it would be foolish for the corporation to repurchase its shares.

WARREN BUFFETTSure.

CHARLIE MUNGERAnd you can even get into gross abuse. Before the crash, the Insull utilities were madly buying their own shares as a way of promoting the stock higher. It was like a giant Ponzi scheme at the end. So there's all kinds of excess that possible, but the really great companies that buy at high price- earnings, that can be wise.

WARREN BUFFETTOur interest in GEICO went from 33 percent to 50 percent without us laying out a dime, because GEICO was repurchasing its shares. And we've benefitted substantially. But we benefitted a lot more, obviously, when prices were lower. I mean we would — our interest in The Washington Post company has gone from nine and a fraction percent, to 17 and a fraction percent over the years without us buying a single share. But The Post or Coke or any number of companies don't get the bargain in repurchasing now that they used to. We still think it's probably the best use of many in many cases.

Berkshire insurance float has a negative cost

WARREN BUFFETTZone 8.

AUDIENCE MEMBERMy name is Hutch Vernon. I'm from Baltimore, Maryland. My question has to do with float. You said in the annual, and you've said in the past, that float has had a greater value to Berkshire than an equal amount of equity. I wondered if you could clarify that statement. Is that because the float has been generated at such a low cost relative to an imputed cost for equity, or is there something else behind that statement?

WARREN BUFFETTNo, it's because the float, which is now, we'll say, 7 billion, comes to us at a negative cost. We would not make that statement if our float was costing us a couple percent a year, even though float would then be desirable. Highly desirable. But our float is even better than that, or it has been, and so it comes to us with a cost of less than zero. It comes to us with a profit attached. So if we were to replace — if we were to get out of the insurance business and give up the 7 billion of float and replace it with 7 billion of equity, we would have less going for us next year than under the present situation, even though our net worth would appear to be 7 billion higher. And I have said, if we were to make the decision — if we were offered the opportunity to go out of the insurance business, and that 7 billion liability would — as part of that decision — would evaporate from our balance sheet, so that our equity would go up 7 billion, with no tax implications, we would turn down that proposition. So obviously we think that 7 billion, which is shown as a liability, when it's part of a — viewed as part of an insurance business, is not a liability at all in terms of real economic value. And of course, the key is not what the float is today, and not what the cost is today. The key is what is the float going to be 10 or 15 years from now, and what is the cost going to be 10 or 15 years ago. And, you know, we will work very hard at both increasing the amount of float and keeping the costs down somewhere close to our present level. That makes it a very attractive business when that can be done. GEICO's a big part of doing that, but we've got other things, other insurance operations, that'll be important in that, too. And we may have others besides that in the future. Charlie?

CHARLIE MUNGERYeah. If the float keeps growing, that is a wonderful thing indeed. We really have a marvelous insurance business. In addition to having this remarkable earning power, it's way less likely to get really clobbered than most insurance businesses. So I think it's safer on the downside and has a better upside.

WARREN BUFFETTAnd it may sound strange, but we don't regard losing a billion dollars in a California quake as getting really clobbered. I mean that is —

CHARLIE MUNGERNo, no.

WARREN BUFFETT— I mean that's part of the game. There are many companies that have greater exposure than that that really aren't getting paid for it. And you don't see it specifically, but any company that has a ton of homeowners' business in Florida or Long Island or along the coast of Texas, may have exposures many times our billion, and really not even be getting paid appropriately or specifically for taking that risk.

Not worried Japan might "dump" U.S. bonds

WARREN BUFFETTZone 9.

AUDIENCE MEMBERHi, my name is Mary Semler (PH) from Seattle, Washington. Japan is a major holder of U.S. Treasurys. Given the troubled Japanese economy, do you foresee Japan cashing in their U.S. investments to bail themselves out? Why or why not?

WARREN BUFFETTProbably didn't get all that. I was busy chewing.

CHARLIE MUNGERI didn't get that, either.

WARREN BUFFETTI was busy chewing here and —

AUDIENCE MEMBERJapan is a major holder of U.S. Treasurys. Given the troubled Japanese economy, do you foresee Japan cashing in their U.S. investments to bail themselves out? Why or why not?

WARREN BUFFETTThe problems with the Japanese economy and does that mean that — are you thinking particularly about them dumping Treasurys or something of the sort?

CHARLIE MUNGERThat's exactly what she's —

WARREN BUFFETTYeah. (Laughter) Well, you know, it's very interesting. All the questions about what so-called foreigners do with investments. Let's just assume the Japanese, or any other country, decides to sell some U.S. government holdings that they have. If they sell them to U.S. corporations or citizens or anything, what do they receive in exchange? They receive U.S. dollars. What do they do with the U.S. dollars? You know, I mean they can't get out of the system. If they sell them to the French, you know, the French give them something in return. Now the French own the government securities. But really as long as we, the United States, run a deficit — a big deficit — a trade deficit — we are accepting goods and giving something in exchange to foreigners. I mean when they send us whatever it may be — and on balance they send us more of that then we send over there — we give them something in exchange. We give them — we may give them an IOU. We may give them a government bond. But we may give them an investment they make in the United States. But they have to be net investors in this country as long as we're net consumers of their goods. It's a tautology. So I don't even know quite how a foreign government dumps its government bonds without getting some other type of asset in exchange that may have an effect on a different market. The one question you always want to ask in economics is — and not a bad idea elsewhere, too — but is, "And then what?" Because there's always a second side to a transaction. And just ask yourself, if you are a Japanese bank and you sell a billion dollars' worth of government bonds — U.S. government bonds — what do you receive in exchange, and what do you do with it? And if you follow that through, I don't think you'll be worried about foreign governments selling U.S. bonds. It is not a threat. Charlie?

CHARLIE MUNGERIf I owned Japan, I would want a large holding of U.S. Treasurys. You're on an island nation without much in the way of natural resources. I think their policy is quite intelligent for Japan, and I'd be very surprised if they dumped all their Treasurys.

WARREN BUFFETTIf they're a net exporter to us, though, what choice do they have? When you think about it. If they send over more goods to us than we send to them — which has been the case — they have to get something in exchange. Now for a while they were taking movie studios in exchange, you know — (Laughter) They were taking New York real estate in exchange. I mean they've got a choice of assets, but they don't have a choice as to whether — if they send us more than they get from us — whether they get some investment asset in return. I mean it's amazing to me how little discussion there is about the fact that there's two sides to an equation. But it makes for better headlines, I guess, when read the other way.

Mild endorsement for some Social Security money in stocks

WARREN BUFFETTZone 10.

AUDIENCE MEMBERThis is John Vaughan (PH) from Detroit, Michigan. Nebraska's Senator Kerrey has proposed private investment accounts for up to two percentage points of the current payroll tax. His words were, and I quote, "People want more than just a transfer payment. They want wealth." Do you approve this proposal? And if you do, would you recommend passive investing, i.e. index, or if you recommend active investing, would you and Charlie want to give it a shot? (Laughter)

WARREN BUFFETTWell, I talked with Bob Kerrey about that, and Bob does like the idea of giving everybody some piece of the American economy and an interest in it. As you know, he's proposed, really, sort of small grants to the 3 1/2 million or so children born every year, and then some buildup of that account. Senator Moynihan has come up with something recently in conjunction with Kerry. I personally would not like to see any major amount of Social Security — and Moynihan was talking about 2 percent. And actually, I suggested the idea that maybe 2 percent out of the 12 and a fraction percent, at the option of the beneficiary — Social Security participant — could be devoted to some other system, but then they would only get 5/6ths of the basic Social Security benefit. I don't think you could drop it below that, because you wouldn't want people turning 65 — or maybe a more advanced age in the future, 70 — and not having the safety net of Social Security. So I wouldn't want to drop it below about 5/6ths of the present benefits. I don't — I think it's a perfectly reasonable topic to discuss whether you want to take that 2 percent, then, and let people build up an account, perhaps tax-free, perhaps an IRA-type account, so they would have both wealth and the safety net. But I wouldn't want to drop the safety net very far. And I think that I would not want to turn an army of salespeople loose on the American public with a mandatory 2 percent going in some direction. I don't think that would be particularly healthy. Charlie?

CHARLIE MUNGERI am much less enthusiastic than you are. (Laughter) In other words, your negative, or conservative, attitude is way more affirmative than mine. I think the idea of getting the government into promoting the value of equities — in Japan we have a taste of that now. The Japanese government has been using the postal savings system to buy equities massively year after year after year. I don't think we need to get the government into the equity market. (Applause)

Business schools "incoherent" on cost of capital

WARREN BUFFETTWe go to zone 11, please.

AUDIENCE MEMBERI'm Dale Max from University Park, Illinois. And I've got a question for each of you. A short question for Charlie, and maybe a little longer for Warren. My question for Charlie is, in a business school sense, what is the cost of capital for Berkshire Hathaway? And my question for Warren is that I've been on the internet and I look at Yahoo and they give you recommendations for companies. And when I search for Berkshire Hathaway, it shows that nobody is recommending Berkshire Hathaway — (laughter) — despite the fact that there are maybe a thousand people that are wearing signs here, "I love Berkshire Hathaway." And of course I've got mine on, too. But what seems to be the problem in lack of recommendations?

WARREN BUFFETTWell, we're not recommending Yahoo, incidentally, either. (Laughter and applause) But I'll let Charlie have that first question about the cost of capital, which has puzzled people for thousands of years. And then —

CHARLIE MUNGERThe way that is taught in most business schools now, I find incoherent. So I'm the one that asks that question and gets the incoherent answers. I don't have a good answer to a question I consider kind of a stupid question.

WARREN BUFFETTThat isn't —

CHARLIE MUNGERWhat is the cost of capital at Berkshire Hathaway when we keep drowning in this torrent of cash which we have to reinvest?

WARREN BUFFETTYeah. There's really only two questions that get to that, but you don't need a mathematical answer. The first question is, is when you have capital, is it better to keep it or return it to shareholders? It's better to return it to shareholders when you cannot create more than a dollar of value with that capital. That's test number one. And if you pass that threshold, that you think you can achieve more than a dollar of value for every dollar retained, then you simply look around for the thing that you feel the surest about, and that promises the greatest return weighted for that certainty. So our cost of capital is, in effect, is measured by the ability to create more than a dollar of value for every dollar retained. If we're keeping dollar bills that are worth more in your hands than in our hands, then we've exceeded the cost of capital, as far as I'm concerned. And once we think we can do that, then the question is, is how do we do it to the best of our ability? And frankly, all the stuff I see in business schools — and I've not found any way to improve on that formula. Now the trouble that you may have is that many managements would be reluctant to distribute money to shareholders even if they would rationalize that they would do better than they actually do. But that's — that may be a danger on it, but that won't be solved by them hiring a bunch of people to come up with some cost of capital that also justifies them keeping the money, because that's what they'll do otherwise.

We prefer individual shareholders

WARREN BUFFETTThe question about recommending the stock, we very seldom had stock recommendations over the years. As I think back to 1965, I can't think of a lot of brokerage reports that have recommended Berkshire. I'm not looking for any, you know, reports at all. We are not looking to have Berkshire sell at the highest possible price, and we're not looking to try and attract people to Berkshire who are buying stocks because somebody else recommends them to them. We prefer people who figure out for themselves why they themselves want to buy Berkshire, because they're much more likely to stick around if they enter the restaurant because they decide it's the restaurant they want to eat at, than if somebody has touted them on it. And that's our approach. So we do nothing to encourage. But I think even if we did, we probably wouldn't generate a lot of recommendations. It's not a great stock to get rich on, if you're a broker.

CHARLIE MUNGERYeah, I think the reason — (Laughter and applause) I think one of the main reasons why it's so little recommended in the institutional market is that it's perceived as hard to buy in quantity. (Laughter)

WARREN BUFFETTWe prefer — we've got some good institutions as holders, including one that's run by a very good friend of ours, but frankly it's more fun for us to have a bunch of individual shareholders. I mean you see it — it translates — if there's money made, it translates into changes in people's lives and not some change in somebody's performance figure for one quarter. And we think that individuals are much more likely to join us with the idea of staying with us for as long as we stay around. And, you know, that's the way we look at the business. Very few institutions look at investments that way, and, frankly, we think they're often less rational holders than we get with individuals.

"The earthquake doesn't know the premium you receive"

WARREN BUFFETTNumber 1.

AUDIENCE MEMBERGood morning. Good morning, gentlemen. I'm Hugh Stevenson (PH), a shareholder from Atlanta. My question involves the company's super-cat reinsurance business. You've addressed some of this, but I would like for you to expound on it, please. You've indicated that you think this is the most important business of the company. And my question is, what do you think the long-term impact of catastrophe bonds and catastrophe derivatives will be on the float and the growth in float of the company? And I understand that the mispricing of risk in these instruments doesn't really affect the way you price your business, but I'm wondering how you think it can affect the volume of the business. And I remember several years ago, Mr. Buffett, you talked about, you can never be smarter than your dumbest competitor.

WARREN BUFFETTRight.

AUDIENCE MEMBERAnd these are some potentially dumb competitors.

WARREN BUFFETTYou've got it. (Laughter) I just want to put an asterisk on one thing. We say insurance will be our most important business. We've not said the super-cat business will be our most important. Super-cat has been a significant part of our business, and may well over the years remain a significant part, but it is far less significant than GEICO. And I'll mention a word or two about that. But the super-cat business, you can price wrong, as I illustrated in my report. You can be pricing it at half what it should be priced at. I used an illustration in the report of how you could misprice a policy that you should be getting, say, a million and a half for, namely a $50 million policy on writing — on something that had one chance in 36 of happening, so you should get almost a million and a half for it. I said if you price it at a million a year, you know, you would think you were making money after ten years 70-odd percent of the time. The interesting thing about that is if you price it for a dollar a year you would have thought you made money 70-odd percent of the time, because when you are selling insurance against very infrequent events, you can totally misprice them but not know about it for a long time. Super-cat bonds open up that field wide open. I mean you've always had the problem of dumb competitors, but you have a much more chance of having dumb competitors when you have a whole bunch of people who, in the case of hedge funds who have bought some of these, where the manager gets 20 percent of the profits in a year when there are profits and there is no hurricane, and when there happens to be a hurricane or an earthquake he doesn't take the loss. His limited partners do. So it's very likely to be a competitive factor that brings our volume down a lot. It won't change our prices. You know, the thing to remember is the earthquake does not know the premium that you receive. (Laughter) I mean the earthquake happens regardless. So it doesn't say — you know, you don't have somebody out there on the San Andreas Fault that says, "Well, he only charged a 1 percent premium so we're only going to do this once every 100 years." (Laughter) Doesn't work that way. So we will probably do a whole lot less volume in the next few years in the super-cat business. We have these two policies that run for a couple more years. But in terms of new business, we will do a whole lot less. GEICO is by far the most important part of our insurance business, though. GEICO in the 12 months ended April 30th had a 16.9 percent increase in policies in force. Year-end, I told you it was 16.0. A year ago, I told you it was 10. Year before that, I think it was six and a fraction. So its growth is accelerating and it should be in a whole lot more homes around the country than it is now, you know, by a big factor. And it will be, in my view. So that will be the big part of our insurance business. But we may be in the insurance business in some other ways too as time goes along. It's a business that if you exercise discipline you should find some ways to make money, but it won't always be the same way. Charlie?

CHARLIE MUNGERI've got nothing to add.

What Buffett wants in an annual report

WARREN BUFFETTOK. Zone 2.

AUDIENCE MEMBERHello. I'm Steve Davis (PH) from San Francisco. I'd like your advice on how to understand annual reports. What you look for, what's important, what's not important, and what you've learned over the years from reading thousands of reports? Thank you.

WARREN BUFFETTWell, we've read a lot of reports, I will tell you that. And we — well, we start by looking at the reports of companies that we think we can understand. So we hope to find — we hope to be reading reports — and I do read hundreds of them every year — we hope to be reading reports of businesses that are understandable to us. And then we see from that report whether the management is telling us about the things that we would want to know about if we owned a hundred percent of the company. And when we find a management that does tell us about those things, and that is candid in the same way that a manager of a subsidiary would be candid with us, and talks in language that we can understand, it definitely improves our feeling about investing in such a business. And the reverse turns us off, to some extent. So if we read a bunch of public relations gobbledygook, you know, and we see lots of pictures and no facts, it has some effect on our attitude toward a business. We want to understand the business better when we get through with the annual report than when we picked it up. And that is not difficult for a management to do if they want to do it. If they don't want to do it, you know, we think that is a factor in whether we want to be their partners over a ten-year period or so. But we've learned a lot from annual reports. For example, I would say that the Coca-Cola annual report over the last good many years is an enormously informative document. I mean, I can't think of any way if I'd have a conversation with Roberto Goizueta, or now Doug Ivester, and they were telling me about the business, they would not be telling me more than I get from reading that annual report. We bought that stock based on an annual report. We did not buy it based on any conversation of any kind with the top management of Coca-Cola before we bought our interest. We simply bought it based on reading the annual report, plus our knowledge of how the business worked. Charlie?

CHARLIE MUNGERYeah. I do think the — if you've got a standardized bunch of popular jargon that looks like it came out of the same consulting firm, I do think it's a big turnoff. That's not to say that some of the consulting mantras aren't right. But I think there's a lot — that for a sort of candid, simple, coherent prose — a lot to be said for it.

WARREN BUFFETTAlmost every business has problems, and we'd just as soon the manager would tell us about them. We would like that in the businesses we run. In fact, one of the things, we give very little advice to our managers, but one thing we always do say is to tell us the bad news immediately. And I don't see why that isn't good advice for the manager of a public company. Over time, you know, I'm positive it's the best policy. But a lot of companies, for example, have investor relations people, and they are dying just to pump out what they think is good news all the time. And they have this attitude that, you know, you've got a bunch of animals out there to be fed. And that they're going to feed them what they want to eat all the time. And over time the animals learn. So we've tried to stay away from businesses like that.

CHARLIE MUNGERWhat you seldom see in an annual report is a sentence like this: "This is a very serious problem and we haven't quite figured out yet how to handle it." (Laughter) But believe me, that is an accurate statement much of the time.

VOICE— just a moment. (Buffett leaves the table after someone tells him something in his ear.)

Munger goes it alone on Coke vs Pepsi

CHARLIE MUNGERAll right. Zone 3. (Laughter)

AUDIENCE MEMBERI'm Leta Gurtz (PH) and I live in the area. And I would like to know what your prediction is for Coca-Cola's long-term growth versus Pepsi-Cola's recent efforts to increase the competitiveness with Coke?

CHARLIE MUNGERYeah. (Laughter) Long-term, I would expect Coke to continue to gain versus Pepsi. (Laughter and applause) (Buffett returns and sits down)

WARREN BUFFETTWhat has he been doing while I was gone? What'd you say, Charlie? (Laughter) I knew I was taking a chance. (Laughter) What was the question?

CHARLIE MUNGERI said that long-term I expected Coke to continue to gain versus Pepsi.

WARREN BUFFETTOh. Well. It's those kind of insights as to why we keep him on the job year after year. (Laughter) In a moment of particular confidence, he one time told me the same thing about RC. (Laughter) Now, that was probably zone 3 you were answering, so we'll go to 4. What have you got there? You got peanut brittle?

CHARLIE MUNGERUm-huh. (Laughter)

Ignoring asset gains at Coca-Cola

WARREN BUFFETTZone 4, please.

AUDIENCE MEMBERNat Chase (PH), Houston, Texas. My first question's on the quality of earnings and your evaluation of quality of earnings in the U.S. right now. And the second is, what multiples should be put on asset gains such as sale of bottling assets or reversal of merger reserves? Thanks.

WARREN BUFFETTYeah, well, taking the second question, for example, with Coca-Cola, the bottling transactions are incidental to a long-term strategy which, in my view, has been enormously successful to date, and which has more successes ahead of it. But in the process of rearranging and consolidating the bottling system, and expanding to relatively undeveloped markets, there have been, and there will be, a lot of bottling transactions. And some produce large gains. Some produce small gains. I ignore those in my evaluation of Coke. The two important elements in Coke are unit case sales and shares outstanding. And if the shares outstanding go down and the unit case sales advance at a good clip, you are going to make money over time in Coca-Cola. There have been transactions where people have purchased rights to various drinks. Coca-Cola's purchased some of those around the world. And when you see what is paid for a million or 100 million unit cases of a business, and then you think to yourself that maybe Coke will add a billion and a half cases a year, that's a real gain in value. It's a dramatic gain in value. And that is what counts, in terms of the Coca-Cola Company. If you think the Coca-Cola Company's going to sell some multiples of its present volume 15 or 20 years from now, and you think there'll be a lot fewer shares outstanding, you've gone about as far as you need to go. But I would pay no attention to asset gains. I would just take those out of the picture.

Stock options and inflated earnings

WARREN BUFFETTNow, as to quality of earnings, Charlie and I feel that, in several respects, but in one important respect, that the quality of earnings has gone down. Not because the policy has changed, but because it's just become more significant. And that's in the case of stock options. We have — there are certain companies that we've evaluated for possible purchase where, in our calculation of earnings, the earnings are maybe 10 percent less per year per share than reported. And that isn't necessarily the end of the world, but it is a difference in valuation that is significant and is not reported under standard accounting. So we think the quality of earnings as reported by a company with significant stock option grants every year, we think is dramatically poorer than for one where that doesn't exist. And there are a lot of companies that fall in that category. Coca-Cola's earnings are very easy to figure out. Just figure out what they're, you know, what they're earning per case from operations, and you'll see over the years the earnings per case go up. And the cases go up and the shares go down. And it doesn't get much more complicated than that. Charlie?

CHARLIE MUNGERYou've said it wonderfully. (Laughter) I just wish we had more like that.

WARREN BUFFETTYeah. GEICO, the key — I mean the same way. It's policies in force and underwriting experience per policy. And that is exactly the way, as noted in the annual report, we pay people there. We pay them, from the bottom to the very top, based on what happens with those two variables. And we don't talk about earnings per share at GEICO, and we don't talk about investment income. We don't get off the track, because there are two things that are going to determine what kind of business that GEICO is over a long period of time. And policies at GEICO are unit cases at Coca-Cola.

Benjamin Graham and how Buffett would teach investing

WARREN BUFFETTZone 5.

AUDIENCE MEMBERHello, Mr. Buffett and Mr. Munger. My name's James Claus (PH) from New York City. And I just wanted to ask you a question. Both you and Mr. Munger have repeatedly said that you don't believe that business valuation is being taught correctly at our universities, and as a Ph.D. student at Columbia Business School, that troubles me, understandably, because in a couple of years I'll be joining the ranks of those teaching business valuation. My question isn't what sources, such as Graham or Fisher or Mr. Munger's talks, you would point people that are teaching business valuation to, but do you have any counsel about the techniques of teaching business valuation?

WARREN BUFFETTWell, I was lucky. I had a sensational teacher in Ben Graham, and we had a course there, there's at least one fellow out in the audience here that attended with me. And Ben made it terribly interesting, because what we did was we walked into that class and we valued companies. And he had various little games he would play with us. Sometimes he would have us evaluate company A and company B with a whole bunch of figures, and then we would find out that A and B were the same company at different points in its history, for example. And then there were a lot of little games he played to get us to think about what were the key variables and how could we go off the track. I remember one time Ben met with Charlie and me and about nine or so other people down in San Diego in 1968 or so, when he gave all of us a little true/false test, and we all thought we were pretty smart — we all flunked. But that was his way of teaching us that a smart man playing his own game and working at fooling you could do a pretty good job at it. But I would, you know, if I were teaching a course on investments, there would be simply one valuation study after another with the students, trying to identify the key variables in that particular business, and evaluating how predictable they were first, because that is the first step. If something is not very predictable, forget it. You know, you don't have to be right about every company. You have to make a few good decisions in your lifetime. But then when you find — the important thing is to know when you find one where you really do know the key variables — which ones are important — and you do think you've got a fix on them. Where we've been — where we've done well, Charlie and I made a dozen or so very big decisions relative to net worth, but not as big as they should have been. And we've known we were right on those going in. I mean they just weren't that complicated. And we knew we were focusing on the right variables and they were dominant. And we knew that even though we couldn't take it out to five decimal places or anything like that, we knew that in a general way we were right about them. And that's what we look for. The fat pitch. And that's what I would be teaching — trying to teach students to do. And I would not try to teach them to think they could do the impossible. Charlie?

CHARLIE MUNGERYes. If you're planning to teach business valuation, and what you hope to do is teach the way people teach real estate appraising. So you can take any company, and your students, after studying your course, will be able to give you an appraisal of that company, which will indicate, really, its future prospects compared to its market price, I think you're attempting the impossible.

WARREN BUFFETTYeah, probably on the final exam I would take an internet company, and I would say the final exam, the question is, "How much is this worth?" And anybody that gave me an answer I would flunk. (Laughter)

CHARLIE MUNGERRight. Right.

WARREN BUFFETTMake grading papers easy, too. (Laughter)

Munger: Wesco is a "historical accident"

WARREN BUFFETTOK, zone 6.

AUDIENCE MEMBERGood morning. Laurence Balter (PH), Carlsbad, California. Question for the two of you. There was an article, I think about last year in The New York Times, that regarded Wesco as a Berkshire Class C share-type company, and I'd like to know your comments on that. And the second question is, if I were to write you a check for the operating businesses that Berkshire owns, how much would it have to be?

WARREN BUFFETTBig. (Laughter) Charlie is the resident expert on Wesco, so I'm going to let him address that side. He gets very eloquent on this.

CHARLIE MUNGERYeah. We always say that, per unit of book value, Wesco is worth way less than Berkshire, and indeed the market is saying the same thing. It is not a clone of Berkshire. It's a historical accident. (Audience mumbling)

WARREN BUFFETTWe want it to do well, obviously, for Wesco. We own 80 percent of it and we've got strong feelings about the people who are partners there, particular the Peters family, who, in effect, invited us in 20-odd years ago and trusted us to manage a big part of their money, in effect, by letting us buy control. So we've got strong fiduciary feelings about it. It suffers in comparison with Berkshire because for one thing, anybody that wants a tax-free merger is going to want to come to Berkshire. You know, that's just the way it is, unfortunately. And we are looking for big ideas, primarily, and the big ideas are going to fit into Berkshire. We would love to get ideas that fit into Wesco, and we had a very good one a couple years ago, thanks to Roy Dinsdale pointing me in the right direction. And we added Kansas Bankers Surety to Wesco, and it's a gem. And it's run by Don Towle, who's done a terrific job. But that's the exception, unfortunately. Because if a FlightSafety comes along, it's not going to fit Wesco. So we will do our best for Wesco, but the nature of things is that most of the opportunities that make a lot of sense are going to come to Berkshire. Charlie, do you have anything?

CHARLIE MUNGERNothing more.

Buy Berkshire or the stocks it buys?

WARREN BUFFETTOK. Zone 7.

AUDIENCE MEMBERMy name is Bob Swanson (PH) from Phoenix. And I'm wondering, what are the advantages of investing in Berkshire Hathaway as opposed to investing in the stocks that Berkshire owns?

WARREN BUFFETTWell, a lot of people do one or the other and some people do both. But you have to really make up your own mind on that. We're not going to go to great lengths to tell you about everything that Berkshire is doing as we go along, and there could be some changes, and there will be things that can happen in Berkshire that I think you would have trouble duplicating elsewhere. But on the other hand, you know, if you'd put all your money in Coca-Cola some years back, you might have done better than if you'd put it in Berkshire. So we really make no recommendations as to what people do with their money. We do not seek to become investment advisors through, in effect, our portfolio actions at Berkshire. Charlie?

CHARLIE MUNGERAmazingly, we hate it when people following us — follow us around buying what we buy. (Laughter)

WARREN BUFFETTNothing personal.

CHARLIE MUNGERNo. (Laughter)

Shareholders get info they need to value Berkshire

CHARLIE MUNGERBy the way, the questioner before this last one asked what is the market value under the hammer of all Berkshire's operating subsidiaries, and the answer is you have to figure that out yourself. (Laughter)

WARREN BUFFETTMr. Nice Guy. (Laughter) Zone — But we give you the information, incidentally, where your judgment on it should be about as good as ours. There's nothing mysterious about valuing The Buffalo News, or See's Candy, or FlightSafety, or Dairy Queen. So you really have the same information we have in that. I mean if there's material information that we aren't giving you about any important Berkshire subsidiary, we'd like to give it to you, because we think you are entitled to have the information. It enables you to value the various pieces. Because of the aggregate size of Berkshire now, in terms of market capitalization and some of the positions we own, the smaller subsidiaries really cannot have that much effect. We love them just as much. I enjoy all of the businesses we're in and I enjoy the people that run them. So, we don't make a — there's not — we don't differentiate in our attitude within the company, but in terms of the actual impact on the valuation of Berkshire, there are a number that really just don't make that much difference in terms of figuring out whether Berkshire's worth X or X minus a thousand or plus a thousand, because a thousand now is over a billion dollars, in terms of valuation. A billion is still a lot of money.

Three factors driving the bull market

WARREN BUFFETTArea 8, please.

AUDIENCE MEMBERHello, Mr. Buffett, Mr. Munger. My name is Robert McCormick, I'm from Holdrege, Nebraska. And I would like to know how much you attribute the gains enjoyed by the stock market these past years to the baby boomer generation investing for their retirement?

WARREN BUFFETTYeah, I would say that, personally, I would not think that has much to do with it. I think the two big factors are in — well, there's three big factors. One is the improved return on equity, which was a fundamental factor that pushed stock prices up. Two is a decline in interest rates that pushed stock prices up. And then finally, stock prices advancing, themselves, brings in buying. It doesn't go on forever, but it creates its own momentum, to some extent, if you have these underlying factors that started to push it along. So I would say two of the three factors are fundamental and the third is a market-type factor that bull markets do feed on themselves, and I think that you've seen some evidence of that. But I don't think that any specific — you know, the 401(k) factor or whatever it may be, was it by itself. But I do think money is pouring into mutual funds, for example, because people have had a very favorable experience with those funds. And that does bring investors along. People want to be on the train. Charlie? And I think, incidentally, many of them have very unrealistic expectations.

CHARLIE MUNGERYeah. The general investment experience in the last, what, 18 years in common stocks has been awesomely high, I think by any past standards now, isn't that right, Warren?

WARREN BUFFETTRight. Well you've had — since 1982 you've had roughly tenfold in the Dow, and probably similar in the S&P. With a huge amount of money and with more participants all the time. And there are people coming into the market every day because they feel that they've missed the boat or they're coming in heavier than they came in before, simply because they've had a pleasant experience. Past experience doesn't — does not mean much, in terms of what you should expect from your investments. You will do well in your investments because you own or bought things at the right price and the businesses behaved well from that point forward.

CHARLIE MUNGERWell, you won't have 18 more years of 17 percent or 18 percent per annum. That I think we can virtually guarantee.

Buffett and Munger about equal at "goofing off"

WARREN BUFFETTArea 9.

AUDIENCE MEMBERHello. I'm Tubby Stayman from Palm Beach, Florida. I know you enjoy bridge very much. I know you play my late husband's convention. Tell me, how often are you able to devote to this wonderful game? How many times a week do you play other than the internet?

WARREN BUFFETTI didn't get all of that, Charlie? Did you?

CHARLIE MUNGERHow much bridge are you playing?

WARREN BUFFETTUh-oh.

AUDIENCE MEMBERYes. (Laughter)

WARREN BUFFETTWell, this week — we should put this in the annual report, because it may be a material factor. (Laughter) I'm probably — at least ten hours a week. Maybe a little more. I don't get any better by doing it, either, so it's rather discouraging, but it is a lot of fun. And it has to have come out of reading time. I don't think it's hurt Berkshire yet, but that may be because we're in a slow period generally. If the market goes down a lot, I promise to cut back on my bridge. (Laughter) Charlie?

CHARLIE MUNGERYeah. Well, I probably play three or four hours a week. But I don't play on the internet.

WARREN BUFFETTHe plays a lot of golf, though. Confess Charlie.

CHARLIE MUNGEROh yes. (LAUGH)

WARREN BUFFETTYeah, we both spend about the same amount of time goofing off. I mean if you —(laughter) — want to know.

Defending Walt Disney-Capital Cities accounting

WARREN BUFFETTOK. Area 10.

AUDIENCE MEMBERYes, my name is Cary Blecker (PH), also from West Palm Beach, Florida. With all due respect to Mr. Eisner if he's in the audience, there's been some criticism levied recently at the Disney Company, mainly from an accounting professor at one of the state universities in New York, in reference to Disney's purchase of Capital Cities and the way they accounted for that purchase. Basically, what this professor is saying is that Disney somehow created a slush fund and is charging the expenses to the merger to this slush fund rather than earnings. If you're familiar with this criticism, I'm wondering what you think of it? And if you're not, are you familiar with the way Disney accounted for the purchase of Capital Cities?

WARREN BUFFETTYeah, I am familiar.

AUDIENCE MEMBERThank you.

WARREN BUFFETTAnd actually, Abe Briloff, who wrote that, is a fellow who, in general, I admire. Abe wrote me a letter not more than about three or four weeks ago and asked me to talk at a university where he teaches. And I wrote him back and I told him I wouldn't be able to do it because it's not in proximity to where I'll be. And I told him — and he asked me about the Disney thing. And I told him I disagreed with him on — I admire what Abe does in the attempt to have accounting reflect economic reality, but he and I don't see it exactly the same on some points, although we would agree on other points. I think — I don't think Disney is a very complicated enterprise to evaluate. I mean there are — when Cap Cities bought ABC, there were purchase accounting adjustments, and they tend to wash through, to some extent. I mean if you have programs that you're stuck on, you may write those down from what the previous carrying cost was. Maybe the previous management should have written them down, too, at that point. But I don't think that — I think with Disney, what you see now is what you get. Charlie?

CHARLIE MUNGERYeah. I've got no great quarrel with the accounting at Disney. I think —

WARREN BUFFETTAbe Briloff is a wonderful guy.

CHARLIE MUNGERYeah. He's got a good sense of humor and he generally fights the right demons, but I don't think you can criticize Disney's accounting.

WARREN BUFFETTWe certainly disagree with Abe, who, like I say, I agree with Charlie, he is a good guy. But he — we disagree with him on amortization of intangibles entirely. So we would say that if Disney is charging, whatever it may be, probably 400 million a year for amortization of intangibles, which is not tax deductible, we would include that as a component of earnings. So there might be some plusses and minuses that you'd make in adjustments, but I would say, by the time you add back amortization of intangibles that we would probably think the economic earnings of Disney might well be more than the reported earnings in the next few years.

Buffett wants accounting change

WARREN BUFFETTI think that the intangible amortization question — which the FASB is looking at now — I think it should be changed. I mean I think it absolutely distorts economic reality, and I think that it influences whether people go to purchase, or accounting, or pooling, and they do all kinds of acrobatics to try and get pooling accounting. And, you know, it shouldn't make that kind of difference in reported numbers, based on whether a transaction, which has exactly the same economics, is done through a purchase or pooling. But I have seen managements, some I know quite well, arrange to do things on a pooling basis that they think — where if they were private they would do it on a purchase basis. And I think that's nuts. And I think if accounting is pushing people to doing things that are nuts, that it's time for accounting to look at itself. I would say that — (applause) — net, the economic earnings of Disney, in our view, are somewhat higher than reported earnings.

I'll never know enough to buy tech stocks

WARREN BUFFETTZone 11, please.

AUDIENCE MEMBERGood morning, Mr. Munger and Mr. Buffett. My name is Prakash Puram (PH) from Minneapolis. There seem to be great values in the technology sector that meet most of your criteria and philosophy in investing, with the exception of the simplicity criterion. Names like IBM, Microsoft, HP, Intel. Would you ever consider investing in companies in this sector in the future?

WARREN BUFFETTWell, the answer is no, and it's probably pretty unfortunate, because I've been an admirer of Andy Grove and Bill Gates and, you know, I wish I had translated that admiration into backing it up with money. But the truth is, I don't know where Microsoft or Intel — I don't know what that world will look like in 10 years. And I don't want to play in a game where I think the other guys have got an advantage over me, and — I could spend all my time thinking about technology for the next year and I wouldn't be the hundredth or the thousandth or the 10,000th smartest guy in the country in looking at those businesses. So that is a seven or eight foot bar that I can't clear. There are people that can clear it, but I can't clear it. And no matter how I train, I can't clear it. So, the fact that there will be a lot of money made by somebody doesn't bother me, really. And I mean there may be a lot of money made by somebody in cocoa beans, but I don't know anything about them. And there are a whole lot of areas I don't know anything about. So, you know, more power to them. And I think it would be a very valid criticism if Charlie and I — if it were possible that Charlie and I, by spending a year working on it, could become well enough informed so that our judgment would be better than other people's, but that wouldn't happen. And it would be a waste of time. It's much better for us to swing at the easy pitches. Charlie?

CHARLIE MUNGERWhatever you think you know about technology, I think I know less. (Laughter)

WARREN BUFFETTThat's probably about true, incidentally. Charlie has a little more of — he understands some things in the physical world a lot better than I do.

We've "missed the boat" on share buybacks

WARREN BUFFETTBut anyway. We'll go to zone 1.

AUDIENCE MEMBERGood morning. I'm Murray Cass from Markham, Ontario. First off, against my dentist's advice, I'd like to thank you for the free Coke and ice cream last night. (Laughter) Earlier this morning, Mr. Buffett, you mentioned that you liked when wonderful companies like Coke purchased their shares back. Similarly, I own shares in a wonderful company, that's Berkshire. Should I be hoping that you buy your own shares back?

WARREN BUFFETTWell, it's interesting, we should have — perhaps we should have bought some shares back, but usually at the time we could have bought something else that also did very well for us. I mean maybe when we were buying Coke we could have been buying our own shares back. To some extent there hasn't been that much trading in it. But I think it's a valid criticism to say that we have missed the boat at various times in not repurchasing shares. We'll see what we do in the future on it. If it looks like the best thing to do with money, it's what we should be doing. And in the past, I've probably been not optimistic enough in respect to Berkshire compared to other things we were doing with money. Now, the money we spent buying the GEICOs and all of that has turned out to be a good use of money, too. But we've never wanted to leverage up. That's just not our game. So we've never wanted to borrow a lot of money to repurchase shares. We might advise other people to do it, but we would — it's not our style ourselves. We've got all our money in the company. We've got all of our friends' and our relatives' money virtually. So we have never felt that we wanted to leverage up this company like it was just one of a portfolio of a hundred stocks. But it's a valid criticism to say that we have not repurchased shares when we should have. And it's also a valid criticism to say that we've issued some shares we shouldn't have issued. Charlie?

CHARLIE MUNGEROh, I would agree with both comments.

"Smile train"

WARREN BUFFETTArea two.

AUDIENCE MEMBERFellow investors of Berkshire and Hathaway, Warren Buffett and Charlie Munger. I am from originally China. Now I have a company in Michigan. I want to ask questions based on facts. I want to sell Coke, GEICO, and a little book called The Wizard of Omaha: The Investment Philosophy of Warren Buffett, in China. Through all the villages, the cities, little towns, I want to make that a reality. Cheers.

WARREN BUFFETTCheers. (Applause)

CHARLIE MUNGERCheers.

WARREN BUFFETTZone three. (Laughter)

AUDIENCE MEMBERI have not asked the question.

WARREN BUFFETTOh, just warming up. OK. (Laughter)

AUDIENCE MEMBERI will.

WARREN BUFFETTThey always tell me to get off the stage while you're in good shape, but I'll say it. (Laughter)

AUDIENCE MEMBERI could (inaudible), but you missed your chance. (Laughter) I'm a owner of Berkshire and I spent 6 percent of my net worth to be engaged to Berkshire.

WARREN BUFFETTWise decision. (Laughter)

AUDIENCE MEMBERI did better than guess who? Bill Gates. I notice Bill Gates and you were traveling on a slow boat in China. I want to go home, on a fast train. You want to cut me off?

VOICEDo you have a question or —?

AUDIENCE MEMBERIf you want to cut off, fine. Up to the investors. (Applause) I'll quit if you want to do that.

VOICEDo you have a question? A question?

AUDIENCE MEMBERI come long ways.

VOICEOK. Ask your question.

AUDIENCE MEMBEROK. I know I'm a problem for you. (Laughter)

VOICENot a problem. Just ask the question.

AUDIENCE MEMBERBut I'm here for a reason. Because I made some money, I'm go on a train. A smile train. Yesterday, or the day before, at the baseball I asked Mr. Warren Buffett, "Have you heard of the smile train?" He said, "No." I'm back here to respond. This is a smile train.

WARREN BUFFETTOK, we thank you. But I think that's your question.

Why Buffett bought silver

WARREN BUFFETTWe'd better go to zone 4, I think. (Applause)

AUDIENCE MEMBERGood morning, or afternoon, actually. My name's Matt Schwab. I'm from New York. Pound Ridge, New York. I actually had a question about the silver purchase last year. When you announced it, you said that you believed that supply and demand fundamentals would only be established at a higher price — re-established at a higher price. I was just wondering if you could go into more detail about what some of those fundamentals are. I mean, we've read a lot about, like, battery technology and some other things.

WARREN BUFFETTYeah, we have no inside information about great new uses for silver or anything of the sort. But the situation — and you can get these figures and they're not precise, but I think they're in general — they're generally accurate. You can see from looking at the numbers that aggregate demand, primarily from photography, from industrial uses, and from ornamental jewelry-type uses, is close. Call it 800 million-plus ounces a year. And there are 500 million or so ounces being produced of silver, annually, although there will be more coming on in the next couple of years. There's more coming on right now. However, most of that silver is produced as a byproduct in the mining of gold or copper and lead zinc, so that since it's a byproduct, it's not responsive to — not very responsive to price changes, because obviously, if you've got a copper mine and you get a little silver out of it, you're much more interested in the price of copper than silver. So you have 500 million ounces or so of mine production, and you have 150 million ounces or so of reclaimed silver, a large part of which relates to the uses in photography. So there's been a gap in recent years of perhaps 150 million ounces — but none of these figures are precise — which has been filled by an inventory of bullion above ground, which may have been a billion-two, or more, ounces a few years back, but which has been depleted. And no one knows the exact figures on this, but there's no question that the bullion inventory has been depleted significantly. Which means that the present price for silver does not produce an equilibrium between supply, as measured by newly-mined silver plus reclaimed silver, and usage. And that — eventually something will happen to change that picture. Now, it could be reduced usage, it could be increased supply, or it could be a change in price. And that imbalance is sufficiently large, even though there is some new production coming on, and there's the threat of digital imaging that will reduce silver usage, perhaps, in the future in photography. But we think that that gap is wide enough so that it will continue to deplete inventories — bullion inventories — to the point where a new price is needed to establish equilibrium. And because of the byproduct nature, which makes the supply inelastic, and because of the nature of demand, which is relatively inelastic, that — we don't think that that price change would necessarily be minor. It's interesting, because silver has been artificially influenced for a long time. You saw that movie about — you know, it was William Jennings Bryan, who was editor of The Omaha World-Herald and a congressman from Nebraska — and his brother was governor of Nebraska — who was the big silver man. And they used to talk 16-to-1. The 16-to-1 ratio, I think, goes back to Isaac Newton, when he was master of the mint. Charlie will know all about that, because he's our Newtonian expert here. But that ratio had kind of a mystical significance for a while. Didn't really mean anything. And in 1934, the government passed an act called The Silver Purchase Act of, surprisingly, 1934, which set an artificially high price for silver at that time, when production and usage was much less. And the government, U.S. government, ended up accumulating two billion ounces of silver. Now, this was at a time when demand was a couple hundred million ounces a year, so you're talking ten years' supply. So there was an artificially high price for a while. By the early 1960s, that became an artificially low price of $1.29, and at that time I could see the inventories of the U.S. government being depleted, somewhat akin to what inventories are being depleted now. And despite the fact that Lyndon Johnson and the administration said they would not demonetize silver, they did demonetize it, and silver went up substantially. That was the last purpose we had of silver, but I've kept track of the figures ever since. The Hunt brothers caused a great amount of silver to be converted into bullion form, including a lot of silver coins. So they, again, increased the supply in a very big way by their action in pushing the price way up to the point where people started melting it down. So you had this — dislocations in silver over a 60-plus year period, which has caused the price to be affected by these huge inventory accumulations and reductions. And we think right now that — or we thought last summer when we started buying it — that the price we bought it, that that was not an equilibrium price, and that sooner or later — and we didn't think it was imminent, because we don't wait till things are imminent. You know, we were going to buy a lot of silver. We didn't want to buy so much as to really disrupt the market, however. We had no intention of replaying any Hunt scenario. So we wanted to be sure we didn't buy that much silver. But we liked it. Charlie?

CHARLIE MUNGERWell, I think this whole episode will have about as much impact on Berkshire Hathaway's future as Warren's bridge playing. (Laughter) You've got a line of activity where once every 30 or 40 years you can do something employing 2 percent of assets. This is not a big deal for —

WARREN BUFFETTNo.

CHARLIE MUNGER— Berkshire. The fact that it keeps Warren amused and — (Laughter)

WARREN BUFFETTYeah, I do like —

CHARLIE MUNGER— and not doing counterproductive things — (Laughter)

WARREN BUFFETTIt makes me feel good about — it makes me feel better about all those pictures that people take over the weekend. (Laughs) They all use a little bit of silver. (Laughter)

CHARLIE MUNGERAt least it shows something that teaches an interesting lesson. Think of the discipline it takes to think about something for three or four decades, waiting for a chance to employ — (laughter) — 2 percent of your assets. I'm afraid that's the way we are. (Laughter) It means there'll be some dull stretches.

WARREN BUFFETTRight. Yeah, it's less than a billion dollars in silver. It's $15 billion in Coke. You know, it's a —

CHARLIE MUNGERIt's a non-event.

WARREN BUFFETTIt's 5 billion in American Express. I mean it is close to a non-event, but if you see it there — you know?

CHARLIE MUNGERAt least it shows the human personality at work. (Laughter) Very peculiar personality, I might add. (Laughter)

WARREN BUFFETTReinforced by a partner.

CHARLIE MUNGERYes. (Laughter)

I only talk to students

WARREN BUFFETTOK, let's go to area five.

AUDIENCE MEMBERMy family is a Class B shareholder. Thank you for issuing those shares. I have one observation and one question. Your Class B share is creating a new phenomenon in this country. These "baby shares" are not only attracting my baby boomer generation, but also X generation and (inaudible) generation, your grandchildren. My question is, this next generation would like to hear from you your investment discipline, your lifestyle, and your philosophy of contributing the wealth back to the society in a language they can understand and communicate back to their friends when they get back to school on Tuesday. Thank you.

WARREN BUFFETTThank you. (Applause) Well, I appreciate that, and I would say the only speeches I give — I get a lot of requests, perhaps because I don't do them. But I get a lot of requests, including from a lot of our managers, in terms of trade conventions, all kinds of things. I don't do — the only groups I talk to are students. And I try to talk to college and university students, although I talk to high school students, too. Whenever it fits, in terms of travel schedules. And I just think that if you're going to spend your time with groups talking, that rather than entertain people, that it probably is better to talk to the group you talked about. Charlie and I are never reluctant to talk, so we do it. Charlie has given a couple of talks. One I sent you a few years ago from USC, but there's been another one recently that I think everybody would profit by reading. So, it was reprinted in the Outstanding Investor Digest, but if you write Charlie, I'm sure he'll send you a copy.

If forced to choose, we'd keep the operating businesses

WARREN BUFFETTArea six, please.

AUDIENCE MEMBERHi, my name is David Oosterbaan. I'm from Kalamazoo, Michigan. This is a hypothetical question about Berkshire. It's going to take a little imagination, I think. The scenario is as follows, that the U.S. Justice Department makes a ruling that Berkshire must split into two parts immediately. You and Mr. Munger must decide which part to keep. You can either choose your marketable securities, Coke, Gillette, Disney, et cetera, or you can choose your insurance and private businesses. Which one do you choose and why?

WARREN BUFFETTWell, that's an easy question for me. I would choose the operating businesses anytime, because it's more fun. And I have a good time out of the investments too, but I like being involved with real people, in terms of the businesses where they're a cohesive unit that can grow over time, and — You know, I wished we owned all of Disney or Coca-Cola or Gillette, but we aren't going to. So if I had to give up one or the other, I'd give up the marketable securities. But it's not going to happen, so we're going to be happen in both arenas, and I look forward to being in both arenas for the rest of my life. Charlie?

CHARLIE MUNGERWell, I'll be in a hell of a fix if I am not in the same arena. (Laughter)

WARREN BUFFETTWe'd both be in a hell of a fix.

CHARLIE MUNGERYeah, yeah.

We'd be fine even if our top 25 execs all dropped dead

WARREN BUFFETTArea 7.

AUDIENCE MEMBERYes, hello to Mr. Munger and Mr. Buffett. My name is Jerry Gonzalez (PH) from Plantation. My question is, what are your recommendations of Berkshire Hathaway if Charlie Munger were in charge, or your third man in charge — your third man, which I think you said, is the CEO of GEICO, what are your recommendations?

WARREN BUFFETTI missed that.

JERRY GONZALESIf Charlie Munger were to stay in charge fully, 100 percent, or your third man, the CEO of GEICO.

CHARLIE MUNGERWell, in due course this corporation will have a change in management. I'm afraid we have no way of fixing that. (Laughter) But we do not — apart from making sure we've got good options and having some system in place, we are not obsessing about a future management yet.

WARREN BUFFETTNo. The directors —

CHARLIE MUNGERWarren plans to live almost indefinitely.

WARREN BUFFETTAbsolutely. (Laughter) Although I must say, at my last birthday somebody asked me how old I was. And I said, "Well, why don't you just count the candles on the cake?" And he said he was driven back by the heat, so — (Laughter) But we're not going to leave willingly. And we do — the directors know who — they have a letter that says who we think should be the ones to succeed us at both the operating aspect and the investment allocation aspect. And those letters can change over time as we keep hanging around. But I don't worry about the fact that 99 percent-plus of my estate will be in Berkshire Hathaway stock or that a foundation will eventually receive that stock. So it doesn't bother me in the least. I can't think of a place I'd rather have it. And that includes my appraisal of the managers that we have who can step in and do what Charlie and I do. And who knows, one of them may even understand technology. (Laughter)

CHARLIE MUNGERI think this place would have very respectable prospects if the top 25 managers all dropped dead at once.

WARREN BUFFETTWell, that's not an experiment we intended to pursue. (Laughter)

CHARLIE MUNGERNo, but I see no reason to think it wouldn't continue to do quite well.

WARREN BUFFETTRight.

CHARLIE MUNGERIt's been lovingly put together to have a certain margin of safety.

WARREN BUFFETTRight. We actually — if we have a choice, it's number three through 23, though — 25 — that we're interested in. (Laughter)

"Honesty will only do so much for you"

WARREN BUFFETTOK. Area 8, please.

AUDIENCE MEMBERThis is Raul from Walnut Creek, California. Thanks Mr. Buffett, thanks Mr. Munger, thanks for your great company. I wish I had known about it 10 years ago. You are not only the greatest but the most honest. I want to commit 99 percent of what I have to Berkshire Hathaway, and I will. The question I want to ask is, how do you calculate the intrinsic value of the company? And based on intrinsic value, to me, Berkshire Hathaway looks a great bargain at these prices, especially based on look-through earnings. Is that true? And one last question I want to ask, just for fun. What do you think about telecom IPOs like Qwest, (inaudible)? They seem to pop up 50 percent at opening. Does it make any sense to invest in these? Thank you very much.

WARREN BUFFETTCharlie, you want to tackle that?

CHARLIE MUNGERI didn't follow that all. Intrinsic value, we give you the facts and you make your own conclusions. I like the fact that you think we're honest, but, you know, if you people keep bidding up the price of our stock, honesty will only do so much for you in the future. (Laughter)

WARREN BUFFETTYeah, we've never been tested. I mean we're very lucky. We've never had anything that we needed, really, that we haven't had. And, you know, who knows what the situation would be if your family was starving or something? So our intention is to continue the position where we'll never be tested, too, I might add.

Intrinsic value: "Easy to say and impossible to figure"

WARREN BUFFETTThe intrinsic value question. I mean, by definition, intrinsic value is the present value of the stream of cash that's going to be generated by any financial asset between now and doomsday. And that's easy to say and impossible to figure, but it's the kind of thing that we're looking at when we look at a Coca-Cola, where we think it's much easier to evaluate the stream of cash that comes in the future than it is in a company such as Intel, marvelous as it may be. It's easier for us. Andy Grove may be better at figuring out Intel than Coke. And in Berkshire, it is complicated by the fact that we have no business that naturally employs all of the capital that flows to us, so it is dependent, to some extent, on the opportunities available and the ingenuity used when that cash pours in, as it does. Some businesses have a natural use for the cash. Actually, Intel has a good natural use for the cash over time as they've expanded in their business. And many businesses do. But we do not have a natural use. We have some businesses that use significant amounts of cash. FlightSafety will buy a lot of — build a lot of simulators this year and they cost real money. But in relation to the resources available, we have to come up with new uses, new ways to use cash. And that makes for a more difficult valuation job than if you've got — well, the classic case used to be a water or electric utility where the cash could be deployed and the return was more or less guaranteed within a narrow range, and it was very easy to make calculations then as to the expectable returns in the future. But that's not the case at Berkshire. We've got very good businesses, both directly and partially owned. And those businesses are going to do well for a long, long time. But we do have new cash coming in all the time, and sometimes we have good ideas for that cash and sometimes we don't. And that does make your job more difficult, in terms of computing intrinsic value. We'll have — yeah, we're going to break after the next question. At that time — we break whenever Charlie and I run out of candy up here, actually. (Laughter) We're going to let everybody — you can get something to eat, if you want to stick around, and we will be here till 3:30 when we reconvene at 12:30. And those of you who have been with us this morning and had enough, we thank you for being here this weekend. We've had a terrific time with you, so I'm very appreciative of that.

"Multiple models is the game" for Munger

WARREN BUFFETTLet's have a question from zone 9 and then we'll go to lunch.

AUDIENCE MEMBERGood morning. My name's Frank Gurvich (PH). I'm a shareholder from London, Ontario in Canada. My question is for Mr. Munger, and it concerns his models. And the question specifically is related to market valuation. I know I'm not going to get a prediction. That's not your bag. What I'm curious about, is there any specific touchstone models that you reflect upon in trying to gain perspective at these markets where the historic valuations are quite high? And why do you draw on those models? And my second question is for Mr. Buffett and it relates to taxation. If you were able to trade your portion of your portfolio, at least, in a tax-exempt fashion, like 401(k) plans, or in Canada, the RSP plans, would you possibly trade more actively?

WARREN BUFFETTCharlie, you want to answer yours first?

CHARLIE MUNGERYeah. Well, the Munger system for dealing with reality is to have multiple models in the head, and then run reality against multiple models. I think it's a perfect disaster to look at reality through just one model or two. It's — There's an old proverb that says, "To the man with only a hammer, every problem looks pretty much like a nail." (Laughter) And that is not our system. So I can't sit here and run through all the models in my head, even though there aren't that many. But multiple models is the game.

Buffett: Taxes don't bother me

WARREN BUFFETTThe question about taxation. It would not — if we were running Berkshire absent a capital gains tax, I don't think it would make much difference in what we do. I don't think it would make — certainly it wouldn't make a difference in causing us to trade actively. We own the businesses we want to own. We don't own them because taxes have restrained us from selling them. And as I mentioned earlier, I'm fairly sure we'll pay at least a billion dollars in income tax this year. We might not, but it looks that way to me, that we'll pay a billion dollars. And I could do things that at least deferred, and perhaps — and I certainly could do things by doing nothing — that avoided paying that billion in tax, or a good bit of the billion, call it 800 million of the billion. But that is not a big factor with me. It's never been a big deal with me. I paid my first income tax when I was 13, so I guess I got brainwashed at the time. And it doesn't bother me a lot to be paying taxes. I think, net, personally, I'm under-taxed in relation to what the society has delivered to me, and, you know, I don't send along any voluntary payments to I.R.S., I want you to understand. (Laughter) But I really do. I mean, there's nobody I want to trade places with because their tax situation is better than mine. So it would not increase the activity.

Looking for owners who love their business more than money

WARREN BUFFETTI've been asked to take one more question from zone 10. I'm not sure why, but maybe because they see that I still have candy up here. (Laughter) So zone 10, please, and then we'll break.

AUDIENCE MEMBERMr. Buffett and Mr. Munger, my name is Sanjiv Mirchandani, shareholder from Boston. First of all, thank you to both of you for everything. I have two questions. For you, Mr. Buffett, you obviously have filters that you apply on selecting people as you do on stocks. Can you tell us a little bit about what those filters are?

WARREN BUFFETTFilters on people?

AUDIENCE MEMBERYes, in selecting — you have an ability to motivate people who have a lot of money to keep working. What do you look for to figure out who those people are?

WARREN BUFFETTWell, that's a key, key question, because when we buy businesses we don't have managers to put in them. I mean we are not buying them that way. We don't have a lot of MBAs around the office that we're —

CHARLIE MUNGERThank God.

WARREN BUFFETTYeah. (Laughter) And, you know, I have not promised that they're going to have all kinds of opportunities or anything. So as a practical matter, we need management with the businesses that we buy. And three times out of four, thereabouts, the manager is the owner and is receiving tens of millions, maybe hundreds of millions of dollars. So they don't have to work. And we have to decide in that time when we meet them whether they love the business or love money. And we're not making a moral judgment. Charlie may, but I'm not making a moral judgment about whether it's better to love the business or love money, but it's very important for me to know which of the two is the primary motivator with them. And we have had extremely good luck in identifying people who love their business. And so all we have to do is avoid anything that, on our part, that diminishes that love of the business or makes other conditions so intolerable that they overcome that love of the business. And we have a number of people working for us, they have no financial need to work at all. And they probably outwork, you know, 95 percent or more of the people in the world, and they do it because they just love smacking the ball. And we almost — we virtually had no mistakes in that respect. And we have identified a number of people, Charlie and I have, in terms of proposals to us, where we've felt that they did really — they liked the money better than the business. They were kind of tired of the business. You know? And they might promise us that they would continue on and they would do it in good faith, but something would happen six months later or a year later and they'd say to themselves, "Why am I doing this, you know, for Berkshire Hathaway when I could be doing," whatever else they want to do? I can't tell you exactly how we — what filter it is that we put them through mentally, but I can tell you that if you've been around a while, you can — I think you can have a pretty high batting average in coming to those conclusions. As you can about other aspects of human behavior. I'm not saying you can take a hundred people and take a look at them and analyze their personalities or anything of the sort. But I think when you see the extreme cases, the ones that are going to cause you nothing but trouble, or the ones that are going to bring you nothing but joy, I think you can identify those pretty well. Charlie?

CHARLIE MUNGERWell, yeah, I think it's pretty simple. You've got integrity, intelligence, and experience, and dedication. And that's what human enterprises need to run well, and we've been very lucky in getting this marvelous group of associates to work with all these years. It would be hard to do better, I think, than we've done on that respect. Look around this place. I mean, and really, you young people look around this place. And look at how much gratification can come into these lives which have been mostly spent in deferring gratification. It's a very funny group of people, you shareholders. (Laughter)