2000 年股东大会 · 下午场

Most companies hide the true cost of stock options

WARREN BUFFETTOK, if area one is ready, we're ready to start answering.

AUDIENCE MEMBERHi.

WARREN BUFFETTHi.

AUDIENCE MEMBERMy name is Steve Check. I'm from Costa Mesa, California. My question is regarding stock options. I've taken your suggestion and have been attempting to subtract stock option compensation from reported income when evaluating companies. When I read annual reports, I usually find companies estimating option costs using the Black-Scholes model. However, the assumptions going into the Black-Scholes model seem quite different from company to company. These assumptions, of course, are what is used for risk-free interest rates — quote unquote, "risk-free" interest rates, expected option lives — even though options have stated lives, and expected volatility. Help me out a little bit. What is the best way to calculate option costs? Do you think Black-Scholes is appropriate? If so, how should we normalize the assumptions? And just one short follow-up: how can we possibly estimate future earnings for companies, when companies, such as even Microsoft last week, in response to a lower stock price, simply reissue a bunch of new options?

WARREN BUFFETTYeah, the — I can tell you, from some personal experience, that companies attempt to use the lowest figure they can, even though it doesn't hit the income account. So they like to make fairly short assumptions as to the life of the options, even though they're granted on a ten-year basis. Because they'll make certain assumptions about exercise date or forfeiture and so on. I think the most appropriate way, when you've got a pattern, which you have at many companies, of what they do on options, is simply to make an educated guess as to the average option issuance that they're going to incur, or they're going to elect to do over time. And, generally, what you really want to — if you were to be precise — you would try to figure out what they could've sold those options for in the open market. Because that's the opportunity cost of giving them to the employees instead of selling the same option in the market. I think you'll find, generally, that if you take a value of about a third, for a ten-year option, if you take a value of about a third — obviously, it depends on dividend rate and volatility and a whole bunch of things — but about a third of the market value, strike price, at the time they're issued, that's the expectable cost. We believe in using the expectable cost versus the actual cost. I mean, that is how we would look at it. If we were issuing options at Berkshire, and we issued options on $100 million worth of stock a year, we would figure it was costing us, probably in our case, with no dividend, at least $35 million a year to issue those options. And we would figure that if we gave people $35 million in some other form of result-oriented compensation, that it would be a wash. And that is not the way most managements, of course, figure. At least that's my experience. And we would figure we could use that 35 million in a more shareholder-oriented way and one where the employee (who) was productive would be sure of getting results, as opposed to having it be at the whims of the market. And I think you'll see a lot of option repricing. Everybody says they won't reprice their options, until they do it. And, you'll see that with a lot of schemes. It would be interesting to see whether CONSICO is willing to bankrupt all the executives who made loans to buy the stock and had those loans guaranteed by the company. And the company initially said they would enforce those loans. And we'll see whether they do it. I would say, in many cases, they won't. I don't know what CONSICO will do. But, a lot of things that are said in connection with executive option schemes and that sort of thing are what they'll do if it works in their favor. And then they'll do something else if it doesn't work in their favor. And that's not spelled out in the initial approval that's granted. Charlie, you have anything to add?

CHARLIE MUNGERWell, Warren's somewhat critical attitude is very understated compared to mine. (Laughter)

WARREN BUFFETTWe're going to leave raisins out of this particular — (laughter) — analysis. Let's go to area 2. We do believe, incidentally, if a company is going to end up giving out 10 percent of the, company over a 10-year period or 15 percent on options, that is like buying an apartment house and letting the seller keep a 10 or 15 percent interest in the upside. Or it's like buying an oil field and giving somebody a 10 or 15 percent interest-free override. It changes the value of the property. Make no mistake about it. It is a — it has a huge economic impact on the value of a property. And just go out and try and sell your house and say, "I want to keep 15 percent of the appreciation in it," and ask the buyer whether he's going to pay the same price for the house. Options subtract value the moment they are granted. And, like I say, unless companies — some companies follow a practice of making a mega-grant every three or four or five years. A lot of them just issue a fairly constant amount annually. And you can figure out the cost. And, you know, they don't want to tell the shareholders there's a cost. And that's why they fought through Congress and everything else in order to prevent it from being the truth. But, you know, Galileo had that problem many years ago and finally won out. So maybe we will, too. (Laughs)

Moody’s moat has "poisonous characters"

WARREN BUFFETTYeah, area 2.

AUDIENCE MEMBERMy name is Dennis Jean-Jacques from Chatham, New Jersey. I first would like to thank you personally for taking the time out of your busy schedule to visit MBA students throughout the country on a regular basis. In fact, I consider your visit to the Harvard Business School campus many years ago my personal rational awakening. My question is in regard to Dun & Bradstreet. Many academics would argue that two of the many factors that determine a firm's sustainable competitive advantage are the threat of new interest through imitation, and the threat of substitution through technological advances, such as, you know, the internet and things of that nature. My question is, how deep is the moat around Moody's and the operating company?

WARREN BUFFETTYeah, we don't want to go into too much detail about our marketable investments. But I would say that the moat is, just in our view, is far wider, deeper, and infested with far more poisonous characters, in the case of Moody's, than in the case of the operating company. We've had experience — just in terms of making decisions about how you either obtain credit information, in the case of the operating company, or if you want to obtain ratings on securities or something — I think you'd conclude that Moody's is a much stronger franchise than the operating company. Doesn't mean the operating company can't turn out to be a better business. It might have more upside under certain circumstances, too. But if you're really thinking of, you know, what bad can happen to you, I think that you would regard Moody's as a considerably stronger franchise than the operating company. Charlie?

CHARLIE MUNGERWell, I'd certainly agree. The — Moody's is a little like Harvard. It's a self-fulfilling prophecy. (Laughter) You know, I hate to think of how much you could mismanage Harvard now and still have it work out pretty well.

Harvard Business School isn't affected by supply and demand

WARREN BUFFETTIf you cut the price of the admission to the Harvard Business School by $10,000 a year, you would have less demand, in all probability, than an increase in demand. I mean, it's totally counterintuitive in that respect. Because the cachet of the school, in that case, is not only reinforced, it almost makes it necessary, that it be priced toward the top. So, it — you can throw away the demand and supply curves that they teach you in Economics 101 on something like that. I — frequently, I have a little fun with — when I attend business schools. Because I ask them, you know, what the definition of a wonderful business is, and we go through all this stuff. And then I say, you know, I tell them that — really — the best business I've seen is the Harvard Business School or the Stanford Business School, because the more they increase the price, the more people want to get in, and the more people think the product is worth. And that is a marvelous position to be in. (Laughter) And I thank you for your comments on the — you know, I was lucky enough to have a great, great teacher in Ben Graham at Columbia. And Ben didn't need to go up to Columbia once a week, on Thursday afternoon, to talk to a bunch of us. So it — I really feel it’s — I enjoy, sort of, passing that along. I haven't had any original ideas in this field at all. But I, you know, I had a terrific teacher. And it's fun to talk to students. If you talk to a bunch of guys my age, nothing happens. I mean, they just want to be entertained. (Laughter) But they want predictions always and that sort of thing. So I don't do any of that at all. I'd rather talk to students. And I thank you for coming.

Energy and transportation need a lot of capital

WARREN BUFFETTLet's go to number 3.

AUDIENCE MEMBERMy name's Jared Placeler (PH). I'm 15 from St. Louis. Are you considering investing in energy and transportation companies, such as ones that deal with fuel cell and environmentally friendly energy resources? And if you are, will you thus be replacing any other energy-based investments you may currently hold, such as your newly acquired holdings in MidAmerican Energy?

WARREN BUFFETTYeah. I would say that energy and transportation, in the very broad sense, are both things that we've at least got a chance of understanding. So those are the kind of areas in which, we would think about making investments. We would probably think about it less in connection with new technology. We might expect the people who run MidAmerican Energy to be thinking about that all the time. But Charlie would be better at it than I am, because he has a different background and thinks better about that, anyway, in terms of evaluating newer technologies. I wouldn't be very good at it at all. But those fields are, they're big, in terms of capital investment, for one thing. So they're very big fields. And then secondly, we would probably think we were capable of evaluating the potential, some years down the road, of many companies in energy and transportation. So those would be fields we would consider. And of course, as you mentioned, we made an investment in MidAmerican Energy. I doubt if the technology changes dramatically in any near term as to the product that they're delivering. But if there were changes on the horizon, I think we've got the management there that would be very good at spotting that ahead of time and capitalizing on it in a proper way. I wouldn't take that function on myself. Charlie?

CHARLIE MUNGERWell, historically, we've done very little in either field. And mostly, the past is a pretty good guide to the future.

WARREN BUFFETTHistorically, the transportation field, I mean, it's been a terrible place to have money, and, whether it's been in airlines or in the rails. If you — we've mentioned Value Line from here — from time to time. If you go to the rail transportation section and just run your eye across on the revenues and look at the capital investment, the amount of capital required to produce incremental revenues is just — is horrible. And on the other hand, there's not much alternative here in the game to doing that. So there — many railroads will spend hundreds and hundreds and hundreds of millions of dollars. And it will not move the top line hardly at all. The ones where the top line has changed is where there's been acquisitions or mergers. Airlines, you'll see just the opposite. You'll see this great movement in the top line, but again, a disastrous amount of capital investment and very little in the way of returns. So, it hasn't been a great field. Most fields that require heavy capital investment, most of the time, they don't turn out very well over time. There are plenty of exceptions to that. But if you find a business that has to keep adding up huge sums of money every year, there always will be a reason why they're doing it. But the net result, after five or 10 or 20 years usually isn't very good. Charlie, got anything?

Buffett defends Coca-Cola CEO Doug Ivester's big exit package

WARREN BUFFETTArea 4?

AUDIENCE MEMBERGood afternoon, Mr. Buffett and Mr. Munger. My name is Bob Odem (PH) from Seattle, Washington. I'd like to say, first of all, how nice it is to come out to Omaha, and how I am made to feel comfortable by its people. I hope you both are as enthusiastic about the meeting as you seem to be in years to come. Mr. Munger, by the way, I am looking forward to your book coming out. My question has to do with Doug Ivester's severance package and what justifies it, considering he had a very short tenure as CEO and that he took the reins from some very strong performance from Goizueta and to be relieved of his dismal performance by Doug Daft. My brother, still in the bottling and distribution business of Coke, cut this article from Bottlers' World Magazine concerning the severance package. He said he also would retire, if he were offered this — (laughter) — 97.4 million in stock, 3 million per year for 2000 to 2002, 2 million per year, 2002 to 2007, 1.4 million per year from 2007 for the rest of his life. Anyway, I don't see how — or here, car and cell phone, he gets that. That's a Mercury Grand Marquis and mobile telephones, laptop computer, and the like. I don't know why he'd need that. (Laughter) Anyway, I have been wondering how you voted on this, whether you supported it or not, or what degree, considering executive pay at Berkshire hasn't risen except, perhaps, for the CFO who last got a raise, I believe, in 1997.

WARREN BUFFETTYou asked — no, CFO's gotten a raise every year. But the — you asked whether I supported it. Yeah, I can tell you, I supported it. Because with my 35 percent interest in 8 percent of Coca-Cola, I paid almost 3 percent of it myself, personally. I probably paid more severance pay than any man in the history of the world, personally. (Laughter) I was not on the comp committee. But I will say this. Doug Ivester did all kinds of really wonderful things for the Coca-Cola Company, over time. He was — for many, many years, when Roberto was running things, Doug — working with Don Keough, too, and I had this first hand from both of them. I wasn't in Atlanta. But there was no question that he was a huge, huge asset and conceived and carried out many of the things that other people may have gotten even more credit for. Most of what you described, not the little things at the end, but most of what you described was contractually in place at the time that he left. I mean, those were deals that were made, restricted stock and all of that, that really occurred, in significant part, when Roberto was the chief executive officer and at Roberto's recommendation. Doug's devotion to Coke, his knowledge of Coke, I mean, he lived and ate and breathed Coke. But in my opinion, Doug Daft was the man for the job. And a change was made. But it was not because of any lack of attention by Doug Ivester. It was not because he hadn't done great things as CFO of the company. But I think he was not the right man at the time he took over as CEO. He took over, as you know, when Roberto died quite suddenly. And there wasn't any real option in terms of the — He was Roberto's hand-picked successor. It's almost inconceivable that somebody else would've been chosen at that time. And we made a decision, within a couple of years, that the company would move faster and better with Doug Daft in charge. And we made a deal in severance which was about 80 percent, or some very high percentage, embedded. And like I say, I paid more of it than anybody else. So it isn't like it was all academic. And I think, considering some other factors, which maybe I'll put in a book sometime, that entered into it, it was definitely the right decision for the Coca-Cola Company. Whether the computer should've been included or the car or anything, I can’t — I would not want to defend small item by small item. But I can — I think the Coca-Cola shareholders are going to be many billions of dollars ahead over time by what was done then. And it wasn't easy to do. We'll go to 5 — Charlie, do you have anything to add on that? You paid a fair amount, too.

Excessive CEO pay creates "hostility" to corporations

CHARLIE MUNGERGenerally speaking, I think it's a mistake for corporate America to create as much hostility as it does, which is based on the way it compensates principal officers of corporations. It is simply maddening to add a little clause that the corporation will scratch the guy's back for just tiny, little bits of stuff that looks terrible. To me, that is extremely stupid. And I see it where the corporation helps him prepare his tax return for 10 years after he leaves and so forth. I think that makes a terrible impression on shareholders, generally. And I think corporate America's crazy to do it. They get sold this stuff by these damn consultants. (Laughter)

WARREN BUFFETTI agree with Charlie. And what — it is true — (applause) — what Charlie says. We don't have a contract, at least that I can think of, at Berkshire. It's perfectly easy to run a company without them. We've got wonderful managers. You know, we've got things that might be called contracts. I mean, we've got deals with them, in terms of we work out compensation arrangements and all that. But I can't remember a case of anybody that's been with us that ever has called in a lawyer or anything of the sort, or where we even had to reduce things to writing, basically. And it works fine. And it is a little maddening, as Charlie says, to have a CEO, you know, show up with a lawyer with a 20-page contract. It’s become standard operating procedure. And once you get a big, public company with committees, consultants to the committees, consultants who, usually, are picked by the officers of the company, they look around at what everybody else is doing and say, "Well, that's the way the other guy does it. So I'll do it." I think you can — I think the proxy statements of the last 20 years, what that's induced in the way of behavior by people at somewhat comparable companies that look at the proxy statements of their competitors and then say to their lawyer, "Well, Joe Blow got this. Why shouldn't I have it?" It just escalates and escalates and escalates. And it ratchets. And it won't stop. I have never seen a compensation consultant come into a public company and suggest a plan that, net, reduces the cost of compensation. At — and I see all kinds of people leave companies with — who have made tremendous amounts of money. And nobody wants to hire them at half the price, or a quarter of the price, or a tenth of the price. I mean, it's not a market system. CEO compensation is not a market system. And it's not subject to market tests. And I don't know what you do about that, particularly. But I — it doesn't seem to bother shareholders very much. The ones that could change it —

CHARLIE MUNGEROh, I think it bothers them a lot, Warren. It's just they feel powerless.

WARREN BUFFETTYeah, but institutional shareholders could change that. My guess is that the top 30 institutions, probably, control — what — two-thirds of the big companies in the country. And they don't seem to care that much. They — actually, they spend their time on what I regard as peripheral issues, usually. They talk about other things. They get involved in rituals of corporate governance that, frankly, don't mean a damn in terms of how the company performs. And they seem to ignore these other issues. But, you know, there’s — we've got enough to do running Berkshire. So we can't reform the world on that. We will run Berkshire in a rational manner. And we have yet to hire a compensation consultant. And we've yet to lose an important manager.

Buffett: Economists aren't needed

WARREN BUFFETTOK, we'll go to number 5. (Applause)

AUDIENCE MEMBERHello.

WARREN BUFFETTHi.

AUDIENCE MEMBERI am Diane Ryan (PH) from Prairie Village, Kansas. This is the fourth year I've attended the stockholder meeting. And I'd like to say, every year, I feel like I've learned a little bit more. This year, my question is, do you see a deflationary trend in the global economy? And if so, what is your investment advice?

WARREN BUFFETTWell, Diane, I'm no good on the macro questions. And I've proven that by being way too worried about inflation for, probably, the last 20 years. Fortunately, it hasn't made much difference, the fact that I've been wrong on that. So I don't really think my judgment is any better than yours, at all, in terms of assessing what's going to happen to global prices over time. My opinion would be that the world is not going in a deflationary situation. But, you know, I've not earned any stars for my past economic predictions. And the good thing about my economic predictions, even if I do make them, is that I pay no attention to them myself, so. (Laughter) I really — and the way we pick our investments is we just don't get into the macro factors. I can't recall a time when Charlie and I have looked at a business, either buying it in its entirety or buying pieces of it through the stock market. I just — macro conclusions are — just never enter into the discussion. I mean, I'll pick up the phone. We've had these two in recent months. And I'll tell Charlie about it. And, you know, we talk about a few things. But we don't talk about anything remotely macro. And that's really the way it'll stay. You know, I've seen a lot of bank mergers recently. And one of the things they do, because they want to cut the costs and justify a merger, which they're dying to do, I mean, that's the reason — so they cut costs they wouldn't have cut if they weren't dying to do the merger in the first place and get bigger. But frequently — I know one in particular that I'm thinking of — you know, they'll cut out the economics department. You know, I always wondered why the hell they had it in the first place. (Laughter) You know, because what do they do? You know, I mean —the guy comes in and says, "I think GDP will be 4.6 this year instead of 4.3." So what? You know, I mean, you're still trying to make every good loan you can make. You're still trying to take in deposits as cheap as you can. And you should be trying to cut costs wherever you can. It's got nothing to do with running the business. But, you know, it's fashionable. And every bank had its economist and economics department. And when a big client would come in, they'd take him to lunch. And it just — it always has struck me as just a lot of nonsense. So if we ever get an economics department at Berkshire, sell the stock short. (Laughter)

WARREN BUFFETTNumber 6, please. Oh, Charlie, I didn't —

CHARLIE MUNGER(Inaudible)

WARREN BUFFETTOh, OK. (Laughter) He'd rather eat peanut brittle.

"Take on the qualities of other people you admire"

AUDIENCE MEMBERHello, Mr. Buffett —

WARREN BUFFETTHi. AUDIENCE MEMBER — Mr. Munger. My name is Aaron Wexler (PH). And I'm from Santa Maria, California. I have — my question has two parts. The first part is, when you and Bill Gates had a television show some time ago, you were asked about the people who were — had different role models. And you said, "Well, if I know a person's role model, I can pretty well tell the kind of a person he is and what kind of a future he has." Mr. Buffett, my role model is Warren Buffett. Do you think I have a chance? (Laughter)

WARREN BUFFETTWell, I hope you're choosing me on the basis you hope to expect to live to an advanced age. I like to think that that's what I bring to the party. It does pay to have the right models. I mean, I was very lucky, early, very early in life, that I had certain heroes — and I've continued to develop a few more, as I've gone along — and they've been terrific. And they never let me down. And it takes you through a lot. And I think that, you know, it just stands to reason that you copy, very much, the people that you do look up to, and particularly if you do it at an early enough age. So I think, if you can influence the model — the role models — of a 5-year-old or an 8-year-old or a 10-year-old, you know, it's going to have a huge impact. And of course, everybody, virtually, starts out with their initial models being their parents. So they are the ones that are going to have a huge effect on them. And if that parent turns out to be a great model, I think it's going to be a huge plus for the child. I think that it beats a whole lot of other things in life to have the right models around. And I have — like I say, even as I've gotten older, I've picked up a few more. And it influences your behavior. I'm convinced of that. And if you — you will want to be a little more, or a lot more, depending on your personality, like the person that you admire. And I tell the students in classes, I tell them, you know, "Just pick out the person you admire the most in the class and sit down and write the reasons out why you admire them. And then try and figure out why you can't have those same qualities." Because they're not the ability to throw a football 60 yards, or run the 100 in ten flat, or something like that. They're qualities of personality, character, temperament, that are — can be emulated. But you've got to start early. It's very tough to change behavior later on. And you can apply the reverse of it. Following Charlie's theory, you can find the people that you don't like — (laughter) — and say, "What don't I like about these people?" And then you can look — if, you know, it takes a little strength of character. But you can look inward and say, you know, "Have I got some of that in me?" and — It's not complicated. Ben Graham did it. Ben Franklin did it. And it's not complicated. Nothing could be more simple than to try and figure out what you find admirable and then decide, you know, that the person you really would like to admire is yourself. And the only way you're going to do it is take on the qualities of other people you admire. Anyway, that's a two-minute answer on something Bill and I did talk a little bit about. Charlie? (Applause)

CHARLIE MUNGERYeah. There is no reason, also, to look only for living models. The eminent dead are the — are, in the nature of things, some of the best models around. And, if it's a model is all you want, you're really better off not limiting yourself to the living. Some of the very best models are — have been dead for a long time. (Laughter)

WARREN BUFFETTCharlie has probably read more biography than any three people in this room put together. So he has put this into practice. And, as somebody mentioned earlier, Janet Lowe has a biography of Charlie coming out here in — later this year. So you can read all the secrets of Charlie's life. (Applause)

Buffett and Munger have no interest in running the Federal Reserve

WARREN BUFFETTOK, number 7.

AUDIENCE MEMBERGood afternoon, gentlemen. My name is Gary Bradstrom (PH) from here in Omaha, Nebraska. And my question is, if Alan Greenspan just decided to retire, and that job was offered, to either of you, would you take it?

WARREN BUFFETTWell, I can tell you my answer is no, in a hurry. (Laughter) I think Charlie will give you his answer.

CHARLIE MUNGERI would say "no" more quickly. (Laughter)

WARREN BUFFETTYou notice, we gave you very unequivocal answers. And of course, that alone would disqualify us from the job at the Fed. (Laughter) I think it was Alan that said to one senator, he said, "Since you, you know, since you've seem to have stated my remarks so accurately, you must've misunderstood them." (Laughter) I don't think you could find a job in public life that would entice either one of us. And the truth is, we're having too much fun. I mean, this — we've got the best job in the world. We get to work with people we like and admire and trust every day of the year. We get to do what we want to do the way we want to do it. We should pay, and this is true of some other CEOs, too, but we should pay to have this job. I mean, it is really interesting. I've often thought, if you could get, you know, you had a sealed envelope, and you got — and you had the compensation committee say what they would pay to have the job filled, but then you had the chief executive also say what he would do before he would leave, there would be a huge, huge gap. And I mean, it’s — there are all kinds of — I mean, it's a lot of fun to start with interesting problems you come up with, interesting things to do, something different every day. You can't beat the job. And to get paid for it is just the frosting on the cake. And I don't see any jobs like that in public life, myself. Charlie, have you got anything to add? Charlie takes on these public jobs. He runs a hospital and a few things. And he can tell you the wonders of it. Charlie?

CHARLIE MUNGEROh, yeah. There's an old saying that, "He lied like a finance minister on the eve of a devaluation." I never wanted to have a job where lying was a required part of the activity. (Laughter and applause)

Berkshire is the "Metropolitan Museum of businesses"

WARREN BUFFETTNumber 8.

AUDIENCE MEMBERMr. Buffett, Mr. Munger, my name is Norman Rentrop. I'm from Bonn, Germany. I want to thank you very much for so patiently listening and answering and sharing yesterday and today. And I'm a shareholder since 1992. And this is my first meeting. I came here being inspired by Robert Miles' book, “101 Reasons to Own Berkshire Hathaway.” And I was very careful, listening to you, the reasons how you pick good people, that it's love for the business and not so much love for the money. And I'd like to hear a little bit more on your philosophies, now that Berkshire Hathaway is more and more buying companies. On this, how you make sure that it's true love and how you pick people.

WARREN BUFFETTIt's a terrific question. I don't know exactly how to answer. Maybe Charlie will think of it while I'm stumbling around, but — I really — I think I can do that quite well. But I don't know of any way to give somebody else a set of questions to ask, or, you know — I don't know how to tell someone else how to select managers using those criteria: do they love the business or do they love the money? It's very, very important. I mean, it's crucial. Because it — well, we see it all the time. I mean, you've got people around who love the money. And you see them in public companies and doing things that we wouldn't want to have associated with us. And on the other hand, if they love the business, and we’ll tell — I'll tell an owner this. I will say to them, "You built this business lovingly for 50 years, and maybe your parents before you, maybe even your grandparents." One of these businesses we're buying is fourth generation. And the clincher, in fact, I used it with Jack Ringwalt back in 1967. I said to Jack, who had built it over a long period of time, "Do you want to sell this? You know, do you want to dispose of this, the most — you know, your creation, your painting? Or do you want some 26-year-old trust officer to do it the day after you die?" And the thought of who was going to handle this masterpiece, which he'd created himself, was important to him. And I tell him, If they want to put it in our museum, we will make sure, A, it doesn't get resold, that it gets the proper respect, and that you can keep painting it. We won't come in and tell you to use reds instead of yellows or anything like that. So even though it's a masterpiece now, you can keep adding to it. So we like to think that we're the Metropolitan Museum of businesses and that we can get really outstanding creations to reside in our museum. But it — we've got to deliver the kind of museum to these painters of businesses, in effect, that we would want, if we were doing the same sort of thing. To some people, that doesn't mean a damn thing. I mean, all they want to do is auction their business, you know. And they probably cheat on their figures a little in the last year or two before they sell it to dress it up. And they do all kinds of things. And they employ some investment banker who pretends that he's getting bids from other people to jack it up some more. And that's standard procedure for a lot of people. We have no interest in buying in with them at any price because we don't want to be on the other side of the table for the rest of our lives with somebody that's going to do that. If somebody loves their business — and I love Berkshire, I mean, you create something over a period of time — it means something to you. Some people get it out of how they decorate their home, or some people get it out of all kinds of different things, their golf game or whatever. But some of us get it out of building a business. And it has to be enormously important, what kind of a home it finds. And there comes a time, in many situations, for estate taxes, or because the kids don't get along, or whatever the hell it may be, why people need to do something with that business. But they don't want it auctioned off. And we get — we have a good home for that. I think I can tell pretty well what people's motivations are when they come in with a business. And so far, we've batted pretty well. We've made mistakes. There's no question about that. But in a sense, I think they've gotten fewer over the years. And we have — our disappointments with people have been very, very few. We've been wrong about the economics of the business sometimes. But that's our mistake, not theirs. We've seldom been wrong about the people. And I wish I could give you a checklist that you could go down, and you could say, "Well, this guy loves the money. So he's going to be gone in six months. And this one loves the business. So as long as I leave him alone to do his job and appreciate what he does, be fair with him, that he's going to stay around here as long as he can." Charlie, have you got any thoughts on how you separate these people out?

CHARLIE MUNGERI think our culture is very old fashioned. In other words, I think it's Ben Franklin and Andrew Carnegie. It's very old fashioned. And what I think is amazing about Berkshire is how well these very old-fashioned ideas still work. Can you imagine Andrew Carnegie calling in a compensation consultant or — (laughter) — an investment banker to tell him whether he should buy another steel mill? Or — We don't get imitated much. We're imitating the behavior of a period that has been gone for a long time. But, I don’t see — a lot of the businesses we buy are kind of cranky like us and old fashioned. And I hope we continue it that way.

WARREN BUFFETTThey're sitting out there, Charlie. (Laughter)

CHARLIE MUNGERYeah, yeah. Well, but I think the businesses do have standards. See’s has standards. It has its own personality. But it’s — but maintaining standards is a huge part of it.

WARREN BUFFETTCharlie hit on one thing. The idea of asking investment bankers or somebody to evaluate the businesses you're going to buy, I mean, that strikes us as idiocy. If you don't know enough about a business to decide whether to buy it yourself, you'd better forget it. It does not make sense. (Applause) You bring in somebody who's going to get a very large check if you buy it, and a very small check if you don't, that displays a faith in human nature that would strain Charlie and me. (Laughter) It's a key point, which you raise. And frankly, if I think there's anything we're good at, I think we're pretty good at what you're talking about there. It's an important part of capital allocation. Because we do not — we are not in a position to manage the businesses ourselves. And we want management as well as the business. And we've gotten it. And we've gotten it in spades from people that stay on and have done a terrific job for us. And it makes life a lot easier, too.

What Buffett means when he can't "understand" a business

WARREN BUFFETTLet's go to number 1 again.

AUDIENCE MEMBERHello, Warren. Hello, Charlie. My name is Doug Paterson. I'm from here in Omaha. I teach down the road at the University of Nebraska at Omaha. And I teach in theater, which is also the greatest job in the world. And I have to say that I enjoy the theater that you provide every year. Thanks so much.

WARREN BUFFETTThank you.

AUDIENCE MEMBERJust sitting here, there are so many questions that come to those of us who have been sitting here for three or four hours. I've got three very disconnected questions.

WARREN BUFFETTOK, we'll do them one at a time.

AUDIENCE MEMBERCool. In terms of these tech stocks, you say that you don't understand them. Can you say if you think — I can't imagine you not understanding something.

WARREN BUFFETTOh, we understand the product. We understand what it does for people. We just don't know the economics of it 10 years from now. That, I mean, you can understand all kinds — you can understand steel. You can understand home building. But if you look at a home builder and try and think where it's going to be in five or 10 years, the economics of it, that's another question. I mean, it's not a question of understanding the product they turn out or the means they use to distribute it, all of those sort of things. It's the predictability of the economics of the situation 10 years out. And that — that’s our problem.

AUDIENCE MEMBERRight, and I'm not trying to provoke you into doing it. I'm glad you haven't. Because I probably would've gone into cardiac arrest this last couple of months.

WARREN BUFFETTWell, so would we.

AUDIENCE MEMBERYeah. So your projection is that you are not going to try to make an attempt to understand it. You think it’s — is it not comprehensible? Is that it, it's not comprehensible?

WARREN BUFFETTYeah. Every business I look at, I think about its economics. It's built into me. It's built into Charlie. So it isn't like, when some — if I'm with Andy Grove, or actually, I knew Bob Noyce back at Grinnell in 1968 and '69, when they were starting Intel. I — when he talked to me about starting Intel, or anybody talks to me about a business, I think about its economics. I'll think about the economics of UNO, you know, if we talk for three or four minutes. But — I — so it isn't that we shut off the valve. It's just that we don't get anyplace. We don't know what it'll look like. And it’s, you know, there are a lot of things in life that, you can — they're just beyond comprehension for many of us. And —

AUDIENCE MEMBERSo you'd say that like, nobody, really, probably, can understand this, where it'll be in 10 years. Nobody could understand it.

WARREN BUFFETTWe would be very skeptical about it. I would say that — and incidentally, my friend, Bill Gates, would say the same thing. And actually, Bob Noyce would’ve, and Bob died some years ago, but — or Andy Grove — they would say the same thing. I've taken long walks with Andy. And they would not want to put down on paper their predictions about where 10 companies you would choose in the tech field would be in 10 years, in terms of their economics. They would say, "That's too hard."

Buffett: Berkshire will be fine if I'm hit by a truck

AUDIENCE MEMBERCool. A second question, again, not related. But I've heard this question several times today. And it comes up every year. I'd like to couch it in sort of a different phrase. Let's say that you stepped outside of this building and were hit by a bus.

WARREN BUFFETTYeah. We've got one fellow who objects to that here who's a shareholder. It’s normally a truck.

AUDIENCE MEMBERA truck, OK.

WARREN BUFFETTAnd he happened to be in the trucking business, so he —

AUDIENCE MEMBEROr, given —

WARREN BUFFETTJust so it isn't a GEICO driver. But — (Laughter)

AUDIENCE MEMBERGiven Omaha, it could be a road grader. What kind, I mean, that would be a sudden — maybe you'd come out of it with a great fastball. Maybe that's it. But you wouldn't have your facility at stocks. What kind of advice would you give people that hold Berkshire Hathaway at a moment such as that?

WARREN BUFFETTWell, it’s — I've got the ultimate test on that. Because my estate, at that point, would be 99 3/4 percent invested in Berkshire. And I feel totally comfortable, considering the arrangements that have been made, and the businesses we own, and the managers we have in place, in terms of that. But no one will be more affected, financially, let alone in other manners, by that truck than me. (Laughter) So it's a thought that's crossed my mind. And it's a more important question to me than to anybody else. And I've answered it to my satisfaction. The directors have some of my thoughts on the subject. But the world will go on. The businesses will go on. And I think you'll have terrific management in place.

AUDIENCE MEMBERThank you. I appreciate that. And thank you for taking all three of these. They're so disconnected.

WARREN BUFFETTOK, thank you.

Buffett: No interest in buying the Omaha World-Herald newspaper

AUDIENCE MEMBERGiven your comments about newspapers, may we assume that you are probably not going to buy the Omaha World-Herald?

WARREN BUFFETTI think that's a fair assumption. But that would probably be true regardless of my thoughts about newspapers. Because they're not going to sell. Charlie, have you got anything to add on any of those?

CHARLIE MUNGERWell, that story about the World-Herald is interesting. The truth of the matter is that, if Warren had been offered the Omaha World-Herald 20 or 25 years ago, he would've cheerfully bought it. And now he doesn't want it. And that isn't because of the economics.

WARREN BUFFETTThat's true. Yeah, I mean, there's no question — I have not been offered it, never will be offered it. And all — the ownership's all set. But what Charlie said is true. If it were still owned by an individual, and they offered it to me, for economic reasons, I wouldn't want to buy it. And for other reasons, I wouldn't want to buy it.

CHARLIE MUNGERBut you wouldn't want to buy it now, because your life would be less congenial afterward than before. There'd be more people after you.

WARREN BUFFETTThere'd be no plus in life to owning the World-Herald, at all. Yeah. (Laughter) And, as Charlie said, that's probably not the way we would've thought 30 years ago.

CHARLIE MUNGERNot at all.

WARREN BUFFETTI think we're right now.

Internet is good for society, bad for businesses

WARREN BUFFETTNumber 2.

AUDIENCE MEMBERHi, Howard Winston (PH) from Chicago, Illinois. I wanted to thank Charlie and you for your hospitality. My question is, Berkshire has benefitted enormously over the years from the low cost of its float. Do you think the internet will make the insurance business more competitive and, therefore, raise the cost of your float?

WARREN BUFFETTWell, that's a good question. I would say that the internet, from what I see now, is unlikely to increase the cost of Berkshire's float. It will have different effects on different aspects of our insurance business. And it will change the insurance industry in some ways, not — and I can't tell you exactly what. But I — You know that any system of distribution is going to be affected by something that changes the economics of distribution as much as the internet does. So there's no question it'll have an impact. I think in the end, the competitive advantages we have among our group of insurance companies, net, will not be hurt by the internet. But I could be wrong on that. And therefore, I don't think that our cost of float will be changed much. I don't think industry economics, in aggregate, for insurance companies, are going to be changed very much. The economics haven't been that good. I think they'll be about, you know, in that same range. And I don't think our competitive advantage will be cut. So therefore, I think our cost of float, in the future, is going to be higher than it has been in the past. But that's for reasons other than the internet. I still think we'll have an attractive cost of funds over time on float. It's a good business for us. I don't think it's necessarily a good business for the average company. Charlie?

CHARLIE MUNGERWell, there's a marvelous issue buried in your question. Will the internet, by making competition so much more efficient, make business generally harder for American corporations, meaning more competitive, lower returns on capital? And my guess would be yes.

WARREN BUFFETTYeah. My guess would be yes, too. I would say that, on balance, for society, the internet is a wonderful thing. And for capitalists, it's probably a net negative.

CHARLIE MUNGERSo all of you can be happy that the progress of the species will affect your economic futures for the worse. (Laughter)

WARREN BUFFETTA sacrifice, at which our ages, we're willing to do. But we wouldn't be at your age. (Laughter) That — incidentally, that — there's plenty to think about there. The internet, I mean, if you analyze it, you have to think it's much more likely that it will reduce the profitability of American business and improve it. It will improve the efficiency of American business. But all kinds of things improve the efficiency of American business without making it more profitable. And I think that the internet is likely to fall into that category. So far, it's improved the monetized value of American business. But that will eventually follow the underlying economics of what the internet does. And I think it's way more likely to make American business, in aggregate, worth less than compared to what it would've been otherwise.

CHARLIE MUNGERBy the way, that's perfectly obvious and very little understood. (Laughter)

WARREN BUFFETTSo there. (Laughter)

Egos and proxy statements fuel excessive CEO pay

WARREN BUFFETTOK, number 3.

AUDIENCE MEMBERYes, good afternoon. My name is Tom Gayner from Richmond, Virginia. And in the current environment, it seems that the attacks on the moats of wonderful businesses are coming from inside the castle, in the form of option-based compensation, just as much as from outside competitors. One of your role models, Ben Franklin, said, "Even a small hole can sink a great ship." It seems like the holes are getting bigger. Can you discuss what, if any, forces may cause this to change? Is it a problem that will get worse or get better? My second is specifically, in your role as directors of companies like Coke and Gillette, are you seeking to change these practices? And what kinds of success do you expect there? Do they let you on the comp committee? And three, if these compensation practices are irrational, does Berkshire benefit from this irrationality? Thank you.

WARREN BUFFETTWell, to carry the castle analogy further, we not only look for a great economic castle, but we look for a great knight in charge of that castle. Because that's important. He's the one that throws the crocodiles into the moat and widens the moat over time. And of course, the question is, you know, how much does the knight get of the castle for doing that? And I think, generally speaking, at Berkshire, you get a very fair deal in terms of the amount that — We've got a lot of castles around. And we try to pay people fairly. But I don't think that the division of — is unfair between the owners of the castle and the knights that are around there, protecting the moat. The — it's hard for me to imagine how the compensation practices — the question of how much the knight gets of the castle — how that changes in favor of the owners of the castle over time. The ratcheting effect is just unbelievable. No one, no compensation committee in America, will be listening to a consultant who walks in and says, "I think your management should have an arrangement that ends up in them being in the lower half." And if no one wants to be in the lower half, believe me, the median is going to move up. I mean, there is no way around that. I mean, these people meet yearly or more often. And they sit there with a proxy statement of every other company in their business. You know, and they pick out the ones that have the biggest numbers in them. And they say, "Well, gee, we need a management at least as good as this. And how are we going to attract people?" and all this other stuff. And it'll only ratchet upward. And I think that's a fact of life. And I think that it's important for shareholders to understand that. I've been on the board of 19 companies, not counting any Berkshire subsidiaries or anything like that. The last comp committee I was on was at Salomon. And I was chairman of the comp committee, I think. I may be wrong on that. There were three of us. And the other two guys were terrific guys. And the earnings came in one year, $100 million or so — I think it was 1990 — below the previous year. And comp was up a fair amount. And I'd found that there had been some earlier issues involved and so on. I just said, I couldn't swallow it anymore. And I voted against it. I can't remember whether I was chairman or not. But in any event, it was two to one against me. And I think it would've been two to one against me if I'd been chairman. And the other two fellows were perfectly rational. They said, "How do we keep these people? And, you know, how can we repudiate our management?" All the sort of things you get. So as a practical — I've got one friend, terribly well-regarded businessman — and he’s been — they don't throw you off the comp committee. They just don't re-nominate you. And he's been bounced from two of them simply by raising some questions that — about things you would find outrageous. I'm not on the comp committee. I've been on only one comp committee. And they saw what I did. So that was the end of it. People say, "We love your ideas,” And, you know, “You think creatively. We don't want to hear about your thoughts on compensation." And that, you know, it's understandable. You know, and every — and you run into some terrific cases of people. I mean, the fellow who runs Fastenal, for example, they are just outstanding. And there are a number of cases where people behave very well. But most of them, I think some — I don't think it's money so much, sometimes. I just think it's ego. They just can't stand to see some guy that they think is batting .280, and they're batting .300, and he's getting paid more money. And, you know, and that process is endless. And that, I, you know, that's understandable. It's like who gets top billing in a movie or something of the sort. People care about, you know, where their name is compared to somebody else's. And their name, in this case, is compensation. And it — I doubt if it reverses itself. Charlie?

CHARLIE MUNGERNo, I think we can confidently expect that the situation will get worse. And I think we can confidently expect that that is bad for Berkshire Hathaway to the extent that it's a passive shareholder in big corporations. There is one place where we get an advantage: our own culture and attitude being so different, it does attract some of these people that own wonderful businesses. I mean, we literally, on occasion, find people for whom we're the only acceptable buyer. They don't like this culture of other big corporations any better than you do. And that does give us an advantage.

WARREN BUFFETTYeah. You asked us a question, also, about the — how active we might be in saying this. We're not going to ever sit here and tell you what we say in other boardrooms, because it would reduce any effectiveness we might have. And we probably don’t have that much effectiveness anyway. But — You can only belch so many times at the dinner table and get invited back. And — (laughter) — we've probably done enough of our share of that. And you — we try to run Berkshire in a way that we find admirable. And we try to spell out our reasoning on it and everything else. And we hope that maybe somebody latches onto that as a model someplace. But going around condemning people by name does not work. And so we, you know, we hate the sin and love the sinner and all that sort of thing. And it doesn't have much effect.

Hard to predict how demographics will affect markets

WARREN BUFFETTNumber 4.

AUDIENCE MEMBERGood afternoon, Warren and Charlie. My name is Erras (PH). I'm from Winnipeg, Manitoba, Canada. And my first time in Nebraska, in Omaha, first time hearing you guys live. And there's a big ice cream man behind you.

WARREN BUFFETTHmm. There we go!

FEMALE VOICEHere you go.

CHARLIE MUNGEROh, thank you.

WARREN BUFFETTAnd you think there are no management perks at Berkshire.

AUDIENCE MEMBEROh, boy. (Laughter) All right, let's get down to business.

WARREN BUFFETTOK.

AUDIENCE MEMBERMy question is in reference to your article in Fortune magazine last November, where you talked about corporate earnings and what the market — are you guys listening? Or…

WARREN BUFFETTI'm listening. (Laughter) We can chew gum and listen at the same time.

AUDIENCE MEMBERAll right, all right, all right. As I was saying —

WARREN BUFFETTBut if we had —

AUDIENCE MEMBER— the point in your article in Fortune about corporate earnings and what the market is paying for them, painting a pretty gloomy picture for equities and market levels going forward. Now, as you may know, there exists a very strong trend in demographics. We see, in Canada and the United States, the aging of the population and, more importantly, the bulk of this population reaching their peak savings years, all at the same time.

WARREN BUFFETTYou're getting a little rude. But go ahead. (Laughter)

AUDIENCE MEMBERI can't believe this. Warren actually called me rude.

WARREN BUFFETTI wanted to prove to you I was listening. Go ahead. (Laughter)

AUDIENCE MEMBERAnyways, OK, so there's a major retirement crisis as a majority of Canadians and Americans between the ages of, especially between 22 and 55, are worried that they won't have enough money to fund their retirement or let alone, last. So for this reason, I mean, this population is expected to invest in equities, as opposed to fixed-income instruments, to get the necessary long-term rates of return to fund their nest egg for retirement. And therefore, many are calling for massive amounts of money to flow into the markets over the next five, 10, 15 years through stocks and mutual funds and, consequently, fueling market prices and market levels. Many predicting the biggest growth ever in the stock markets. So what is your opinion on this potential trend, separately or in conjunction with what you said in that article in Fortune? Thanks very much.

WARREN BUFFETTGood. To be, I'm not being rude here, but we don't think it means a thing, frankly. (Laughter) The savings rate, the private savings rate, you know, is not high now. It doesn't need to be high. What really determines how the people who are either aged or very young, because either way, the people who are in their nonproductive years depends, in aggregate, on aggregate production of goods and services, and then the division between those who are in their productive years and in their nonproductive years. And that's what Social Security argument's about and everything. The biggest single thing working for people in their nonproductive years on both ends, young and old, is the fact that the pie keeps growing. And that makes it easier to attack the problems of the nonproductive. And when I say, "nonproductive," there's obviously no — nothing derogatory about that term. It just relates to who's in the employable age and who isn't. And our society is going to do extremely well in terms of being able to take care of the people in their nonproductive years. If there — there is a shift, obviously, as people live longer. And of course, there should be a shift, perhaps, in defining — I think there should be — in defining what's productive, because 65 was decided back in the '30s. And I think that's changed. But the fact that the pie keeps growing is what makes it — it makes the problem easy. And — not easy — but it'll be easier 30 or 40 years from now, in my view, you know, than it was 30 or 40 years ago. Because there'll be so much more in the way of goods and services produced per capita that the productive can take care of the nonproductive and the — or the aged — in a way that will be easier for them to sustain than it was in the past. When — It's low amounts of output that strains society. I mean, when you get very small amounts of output, or huge disparities in the division of that, that you put real strains on a society. But a society whose output is growing 3 percent a year and whose population is growing 1 percent a year is going to have way less in the way of strains than existed 20, 30, 50, 100 years ago. The — But, you know, we will need no big boom in savings or anything of the sort. The present savings rate will do — will just do fine for the world. In the United States, I mean, I’m not speaking to the — I shouldn't speak to the whole world on that. Charlie?

CHARLIE MUNGERWell, generally, you can say that stocks are valued in two different ways. One, they're valued much the way wheat is valued, in terms of its perceived practical utility to the user of the wheat. And there's a second way that stocks are valued, which is the way Rembrandts are valued. And to some extent, Rembrandts are valued high, because in the past, they've gone up in price. And once you get a lot of Rembrandt element into the stock market, and you fuel the stock market with massive retirement system purchases, you can get stocks selling at very high prices by past historical standards. And that can go on for a long, long time. That's what makes life so interesting. It isn't at all clear how it's going to work out. It isn't even clear what the level of interest rates is going to be. And nobody in this room ever expects to see 3 percent interest rates continue for a long time again. But that could happen. That would have an enormous effect on the price of equities. You live in a world where you can't really predict these macroeconomic changes.

WARREN BUFFETTNo, you can argue that increases in savings will drive down the returns on capital. The more capital is around, that the lower the returns will be on capital. But I don't think you'll — I don't think it will help you make any decisions about businesses, you know, over your lifetime by — actually by thinking about matters like that. We're a little biased on that. But you'll find all kinds of guys that will tell you. I mean, that's what books are written about. Because everybody likes predictions and books. So, you could all — Go ahead.

CHARLIE MUNGERIn addressing this question, you can see that we have acted much as one of my old Harvard Law professors acted. He used to say, "Let me know what your problem is. And I'll try and make it more difficult for you." (Laughter)

Buffett: The best book on how I invest

WARREN BUFFETTArea 5, please.

AUDIENCE MEMBERMy name is Eric Tweedie from Shavertown, Pennsylvania. Thanks again for another great meeting. During last year's meeting, my wife picked up a copy of a book called "Buffettology" at one of the shops around town that is written by Mr. Buffett's former daughter-in-law, a very well-written book, very interesting. And it attempts to outline the Warren Buffett approach to investing. My question is, I don't know if either of you gentlemen are familiar with the content or have read it. And if so, if you could comment on if you think it is a good outline of that type of investing. My second question related to that, I wonder if you — if Mr. Buffett could comment on why you bought the original textile mill in Massachusetts, and if that represented an earlier phase, when you were more of a strictly Graham-style, value investor, versus your current investing style.

WARREN BUFFETTProbably the best, I would say, the most representative book on my views is the one that Larry Cunningham has put together, because he essentially has taken my words and rearranged them in a more orderly — he's taken from a number of years. And what he has put together there best represents my views. We've got 20 years of annual reports or so, or more, on the internet, plus articles in Fortune, all kinds of things. So it's probably a bias I have. But I would — I like to think that I laid out those views better than somebody who's rewriting them. But that’s — I'll let you make that decision. But I do think Larry's done a very good job of taking a number of those reports and rearranging them by topic in a way that makes it a lot easier to read than trying to go through year after year. And actually, you'll have this book about Charlie, pretty soon, to read, too. We've said what — we’ve said in these meetings, we've said in the annual reports, we've said exactly what we do. And some of the books, I would say, try to take that and — because people are looking for mechanistic things or formulas or whatever it may be. They try to hold — they may try to hold out that there's some secret beyond that. But I don't think there probably is. Charlie? You've read the books.

CHARLIE MUNGEROh, I skimmed that book. The — I think what we have done all these years is, it wasn't all that hard to do. And it's not that hard to explain. All that said and done, I think a lot of people just don't get it. (Laughter) As Samuel Johnson said, famously, "I can give you an argument, but I can't give you an understanding." (Laughter)

Buying Berkshire Hathaway was a "terrible mistake"

WARREN BUFFETTWhat was the second part again?

AUDIENCE MEMBERI just asked you if you could maybe comment on why you bought the original —

WARREN BUFFETTOh.

AUDIENCE MEMBER— Berkshire textile mill.

WARREN BUFFETTThat's why I didn't remember. (Laughter)

AUDIENCE MEMBERIf I could say —

WARREN BUFFETTIt was —

AUDIENCE MEMBER— one of the things, someone tapped me on the shoulder and asked me for you not to forget to give the current year's recommended books.

WARREN BUFFETTIt’s — I've got to recommend the book on Charlie. But I'll let Charlie recommend one, too. The original purchase of Berkshire was a terrible mistake and my mistake. No one pushed me into it. It was — I bought it, because it was what we used to call the cigar — It was a cigar butt approach to investing, where we would look around for something with a free puff left in it. You know, it was soggy and kind of disgusting and everything. But it was free. (Laughter) And Berkshire was selling below working capital, had a history of repurchasing shares periodically on tender offers. And it was selling, the first purchase was, I think, at $7 1/2 a share. In fact, I've got the broker's ticket up in the office, 2,000 shares. And they — it looked to me like they were going to have a tender offer periodically. And it would probably be at some figure closer to working — net working capital — which might've been 11 or $12 a share, some such number. And we would sell on the tender. And that was — we had other securities we owned that way. And we bought some that way. And then, actually, I met Seabury Stanton one time, who was running Berkshire. And he told me and made me an insider, so I couldn't do anything, but he said he was thinking of having a tender. And he wondered what price we'd tender at. And I — as I remember, I may be wrong on this, I could look back on it, but I think I said, "11 3/8." And he said again to me, "Well, if we have a tender at 11 3/8, will you tender?" And I said, "Yes, I will." And then I was frozen out, obviously, of doing anything with the stock for a little while. But then he came along with the tender offer. And as I remember, I opened the envelope, and it was 11 1/4. I may be wrong. It may have been 11 1/2, 11 3/8. But it was 1/8 below what he had said to me and what I had agreed to. So I found that kind of irritating. And I didn't tender. And then I bought a lot of stock. Kim Chace was a director. His father had some members of the family, not his direct family, but related family, that wanted to sell a block. And we bought several blocks. And before long, we controlled the company. So at an eighth of a point difference, we wouldn't have bought it, the company, if they'd actually tendered at that price. We had a somewhat similar thing happen with Blue Chip, actually, later on, too. We would've been much better off, if we hadn't bought it. Because then things like National Indemnity and all of that, instead of buying it into a public company with a great many other shareholders, we would've bought it privately in the partnership. And our partners would've had a greater interest. So Berkshire was exactly the wrong vehicle to use for buying a bunch of wonderful companies over time. But I sort of stumbled into it. And we kept moving along. And when I disbanded the partnership, I distributed out to Berkshire. Because it seemed like the easiest and best thing to do. And I followed through. And I enjoyed it enormously. I'm glad it all worked out this way. It did not work out the best way, economically, in all probability. It was the wrong base to use to build an enterprise around. But maybe, in a way, that's made it more fun. Charlie, do you have anything to add on that? You can tell them about the Blue Chip story. (Laughs)

CHARLIE MUNGERNo, one such story is enough. (Buffett laughs) But it is interesting that a wrong decision has been made to work out so well. We've done a lot of that, scrambled out of wrong decisions. I'd argue that's a big part of having a reasonable record in life. You can't avoid the wrong decisions. But if you recognize them promptly and do something about them, you can frequently turn the lemon into lemonade, which is what happened here. Warren twisted a lot of capital out of the textile business and invested it wisely. And that's why we're all here.

WARREN BUFFETTBut Berkshire comes from three companies that came together: Diversified Retailing, Blue Chip Stamps, and Berkshire. Those were the three base companies. And Diversified started when we bought a company called Hochschild Kohn in Baltimore in 1966, a department store. And that company disappeared over time. Fortunately, in 19 — I think — 70, we sold it to Supermarkets General. Blue Chip, we've told you about the record of that. So, we started out with three disasters, and put them all together. (Laughter) And it's worked out pretty well. But it was a mistake to be working from that kind of a base. Don't follow our example in that respect. Start out with a good business and then keep adding on good businesses.

CHARLIE MUNGERBut the example of quickly identifying the mistakes and taking action, there, our example is a good one.

WARREN BUFFETTYeah.

Buffett would never trade Berkshire stock for gold

WARREN BUFFETTOK, number 6.

AUDIENCE MEMBERGood afternoon, Mr. Buffett, Mr. Munger. Kathleen Lane (PH) from New York. I have a question out of left field for you. You say you like to be entertained? This question will entertain you. It's also a serious question. I know you don't like to speculate about the future. You won't do so. I appreciate that. But some people do. For example, Edgar Cayce was one. He didn't pick stocks or investments. But if he had, he would've probably gone for that farmland that you were talking about earlier this morning. Because he had a dream that in the year 2158, Omaha would be located on the west coast of the United States. And you know how beachfront property goes. So it would be a good bet.

WARREN BUFFETTIt will be good for our super catastrophe business, if that happens. (Laughter)

AUDIENCE MEMBERAs you both said earlier, we're living in an extraordinary time, financially especially. You can't help but to hear disaster scenarios concerning the impending collapse of worldwide financial markets, about major physical changes in the world as we know it, about a future when the world's resources will be better measured by their prospects for ensuring our basic survival than their value as speculative commodities. That's where that farmland would come in again. Nobody does better what you two do. But even if your investment acumen wasn't what it is, I would invest with you, because you're honest. In short, I came here to ask you, what would you tell a single mother to exchange her Berkshire share hold for gold coins? When, under what circumstances?

WARREN BUFFETTWell, I can't imagine ever exchanging any of my shares for gold coins. But — I would rather trust in the intrinsic value of a bunch of really fine businesses run by good managers selling products that people like to buy and have liked to buy for a long time, and then exchanging their future efforts, the money that comes from their wages, for See's Candy or Coca-Cola or whatever, than take some piece of metal that people dig out of the ground in South Africa and then put back in the ground at Fort Knox, you know, after transporting it and insuring it and everything else. (Laughter) I've never been able to get real excited about gold. Now, my dad was a huge enthusiast for a gold standard. So I grew up in a family where gold was revered, if not possessed. And I would — I gave it its full chance. But I've never understood what the intrinsic value of gold is. And, you know, we'll sell you some at Borsheims, but I would never exchange — The idea of exchanging a producing asset for a nonproducing asset would be pretty foreign to me.

Why Buffett ignores predictions

WARREN BUFFETTAnd I would say this: in terms of the predictions, and I know the spirit in which you asked the question, but in terms — there's a market out there all the time. And people love to hear predictions. If I said I was going to offer a bunch of predictions today, we would have a million people here. I mean, they're dying to have predictions and speeches at rotary clubs or trade associations or whatever. That’s — they just plain love it. And that's what a whole industry is built upon, you know, the people coming out of Washington to talk about political predictions and the — I don't read those in the paper at all. Because it's just — it's space fillers, basically. And, you mentioned Edgar Cayce. Ben Graham knew Edgar Cayce pretty well. But I just have never seen any utility to any of that at all. There will be some huge surprises in the world. There's no question about that. But I don't think that betting on any specific one is a very smart policy. In fact, our — we usually bet against them, in terms of super catastrophes. We know there will be a 7.0 or greater quake in California in the next 50 years. We don't know where it'll be or when it'll be or anything like that. We are willing to pay out a lot of money if it happens tomorrow. And because people do worry about catastrophes. And in this case, it's perfectly proper, with insured values. But it just isn't any way, in our view, to get through economic life. Charlie?

CHARLIE MUNGERWell, I suppose the one time when a single mother might want to own gold compared to anything else is if she faced conditions like a Jew in Vienna in 1939, or — I mean, there are conditions you can imagine where some form of transportable wealth would be useful, compared to anything else. But absent those extreme conditions, I think it's for the birds. Now, silver… (Laughter)

WARREN BUFFETTIt's hard to think of anything other than fleeing the country. And Charlie and I don't give a lot of thought to fleeing the country.

Buffett: "I'm a little crazy, I don't mind paying taxes"

WARREN BUFFETTAlthough, I must say that the one thing I really find reprehensible is the people that make a lot of money in this country and then leave to, you know, to get another tax jurisdiction or something like this. I really — I don’t — But I'm a little crazy. I don't mind paying taxes. (Applause)

WARREN BUFFETTLet's go to 7. There are plenty of reasons, I think, perfectly valid reasons — I mean, people may want to live someplace else — but the ones who carefully arrange it so that they actually live here as much as they can. I think one of them wanted to be appointed — he wanted to go to some very small entity, where there was no tax. And then he wanted to be appointed an ambassador to the United States, so that he could enjoy living here but enjoy the taxes of something else. And, you know, that is not my role model. Yup.

Costs vary for Berkshire's float

AUDIENCE MEMBERHello, Warren. Hi, Charlie. Two questions. First, was anybody dumb enough to sell you Berkshire at less than 45,000 a share?

WARREN BUFFETTWe did not repurchase any shares.

AUDIENCE MEMBERMy second question concerns float. The float has been low cost most years for Berkshire and probably zero cost in many years, except last year, possibly. When you think about float in terms of intrinsic value, do you have an idea in mind when you add new float for how much it will increase the intrinsic value of Berkshire?

WARREN BUFFETTWell we add — that's a good question — but we consciously add float sometimes at a given cost. And then we, other times, add float at no cost. So we have different layers of float, if you will, that we've entered into. We've entered in some transactions in the last month or two, where we will take on some float, which will not have zero cost. But it's acceptable to us. And we couldn't get it at zero cost, although we're also creating float which, I think, will be close to zero cost or better. So, we would be willing to take on float, obviously, at costs only modestly below the Treasury rate, if that was the only way we could get that float, and it didn't impede our ability to get other float, you know, at zero cost or something. We don't want to raise the cost overall by a single transaction that would have an effect on other transactions. But float, if you look at our historical record, and our future record can't be as good, but it's not —it’s the cost of float, and it's the amount of growth of float. I mean, if you told me I could add $50 billion of float and have a 3 percent cost to that, you know, I would take that any day over adding 10 billion at zero cost. So there are a lot of different ways, in the insurance business, that we can and will think about developing float. And usually, one doesn't preclude another. Occasionally, one bumps into another. But usually, one doesn't preclude another. And believe me, we spend a lot of time thinking about that. And we'll continue to as long as we run Berkshire. It's a big part of our strategy. Charlie?

CHARLIE MUNGERWell, I've been amazed how well we've done with the float. And I've been watching it from the inside for a long, long time. It is a very wonderful thing to generate millions and millions, and then billions and billions, of dollars of float at a cost way below the Treasury rate. There are people who would kill for such opportunities.

WARREN BUFFETTYeah. And of course, that makes it competitive. We do — we — there are plenty of other people that are thinking about it in a similar vein and probably observed what we do and all of that. So like everything else in capitalism, it's competitive. We think we've got an edge in several very important respects. And we think that edge is sustainable for quite a — as far as we can see. And we intend to push it as hard as we can. And then we'll see where it leads. I would've had no idea, 10 or 20 years ago, that we would have the present situation. But we do find, if you just show up every day, like Woody Allen said, and you answer the phone and read the paper, every now and then, you see something that makes sense to do. And we do find them occasionally. The hard part is finding them where they are material relative to our present size. If we were running a very small business, we would find plenty of things that would make good sense. We find a few things that make good sense now, relative to our size. And there's really no answer for that except to shrink dramatically, which is not a action we're contemplating.

Munger on Wesco succession

WARREN BUFFETTNumber 8.

AUDIENCE MEMBERJames Pan (PH) from New York City. I really have a question on Wesco, which is your 80 percent-held subsidiary, just a couple questions dealing with that. First question is, last time I checked, that was trading below intrinsic value. And given that most of Wesco's assets are tied up in Freddie Mac, and Freddie Mac will arguably grow intrinsic value in the low teens for the next couple of years, how are you guys going to manage the, I guess, how would you manage the gap between intrinsic value, and what — the current price, and what intrinsic value will be two or three years from now? And also, is there a succession plan at Wesco or some kind of roll-up plan at Wesco eventually?

WARREN BUFFETTCharlie is the boss at Wesco. So —

CHARLIE MUNGERYes. We have paid almost no attention to the price of Wesco stock. So the chance to make any meaningful gain for the Wesco shareholders by buying in a few shares of Wesco stock is so tiny that we don't really bother thinking about it very much. The — As to succession, we are gradually making me so useless that I won't be missed. (Laughter)

WARREN BUFFETTYeah, incidentally, you talked about Wesco being significantly undervalued compared to intrinsic value. I'm not sure that's the case. Charlie, would — you're more of an expert on that than I am.

CHARLIE MUNGERWell, there's certainly no huge gap. And, we don't spend a lot of time thinking about things that will make, practically, no money. (Laughter)

Munger: EVA valuation is "twaddle" and "medieval theology"

WARREN BUFFETTNumber 1.

AUDIENCE MEMBERHi, my name is Jason Tang (PH) from Traverse City, Michigan. Before I ask my question, I want to know that it's true that you guys are going to be here tomorrow at 9:30 to answer more questions. (Laughter) My question, I just recently read the book, “Quest for Value,” by — I think the author is Bennett Stewart, from Stern Stewart consulting firm. And I want to talk to you a bit about — just ask you about different valuation methodologies, and EVA in particular, and how that may or may not be more valid than, let's say, other benchmarks of value, like P/E, or price-to-book, or price-to-sales. Is that something closer? I noticed that the language that was used in this book was real similar to the type of language you guys use in your writings. So I'd like you to talk a little bit about EVA, if you could.

WARREN BUFFETTCharlie, why don't you take EVA?

CHARLIE MUNGERI think there's an awful lot of twaddle and bullshit. (Laughter)

WARREN BUFFETTI knew that's what he was going to say. And I thought it deserved it, so I — and I didn't want to say it myself.

CHARLIE MUNGERIn EVA, we keep stating, over and over again, that the game is to turn the retained dollars into something more than dollars. And EVA tends to incorporate cost of capital ideas that just make no sense at all. They make it sound very fashionable. And, God knows, it's correct that a corporation that earns a huge return on capital and keeps retaining it for a long time has a great record in terms of EVA. But the mental system, as a whole, does not work. It's like medieval theology. (Laughter)

WARREN BUFFETTI like that second term better than the earlier one. (Laughter)

How Buffett became friends with Bill Gates

WARREN BUFFETTNumber 2.

AUDIENCE MEMBERGood afternoon. My — excuse me — my name is Stewart Hartman from Sioux City, Iowa. First, I'd like to thank you both for allowing a couple of Berkshire employees to migrate north to Sioux City. I work with Corey Wrenn and Mark Sisley (PH). They're both great guys. You did a terrific job training them. Mr. Buffett, you've known Bill Gates for several years and probably spent more time with him than any of us in this room. Would you feel —?

WARREN BUFFETTThat isn't the case, if Jeff Raikes is here. I don't know. Is Jeff here? Anyway, go ahead. But we did have a local fellow who comes from 30 miles from here, Jeff Raikes, who's a key Microsoft employee. And I think he's in town this weekend. I thought he was in the meeting.

AUDIENCE MEMBERI didn't mean to make the broad generalization to be argumentative. (Laughter)

WARREN BUFFETTI just didn't want to think Jeff — I was trying to muscle him out.

AUDIENCE MEMBERSure, sure. That being said, I guess, here's a way I'll rephrase this. Would you feel comfortable sharing with us how your relationship began and how it evolved with Mr. Gates? And with regard to his spirit and competitive nature, how vigorous do you expect him to defend his company's position against the government and state's current antitrust suit? And then for both of you, Mr. Munger included, what, in your opinion, are the odds that the government and the states will prevail and split his company into pieces? And then since Mr. Munger mentioned, I guess I'd ask, could we have an update on the company's silver position and its future as an investment, as well? (Laughter) Thank you for opening that door.

WARREN BUFFETTOK, well, he can close them, too. (Laughter) Yeah, I really don't feel comfortable speaking for Bill at all in terms of what he's going to do. In fact, I think they've been quite outspoken, he and Steve Ballmer both, about what Microsoft will do. So I don't want to try and rephrase that or modify it or do anything else. Because they know what they're saying when they say it. And I would take them at their word. And I really shouldn't be adding anything to it. I met Bill, because a very good friend of mine, Meg Greenfield, was the editorial page editor at the Post. She called me one time, 10 or more years ago. And — she said, "Warren," — she loved the state of Washington and had grown up out there. So she said, "Can I afford to buy a second home?" She was living in Washington, D.C. now. And so she says, "Can I afford to buy a second home in Washington?" And I said — and she said, "I'll send you all my financial information." I said, "Meg, you don't need to." Anybody that asks me whether they can afford something can afford it. It's the people that don't ask me that never can afford it. So I said, "Just go do it." And, "It'll make you happy." And so she did. And, then a year or two later, she wanted to have me come out and see what she'd done with my mild encouragement. And so I went out there and visited. It was the July 4th weekend in 1991. And they had this parade on this island and everything she wanted me to see. And she had a few other people out, too. And then, she was a friend of the — of Bill's parents. And so we went down there, to the Hood Canal, to visit them when I was back there, to meet the parents. And I think Bill didn't want to come. But Kay Graham was coming. And he wanted to meet her. He didn't want to meet me. And, so he came in. And then we hit it off immediately. We had a great time. And, I mean, he had this chimpanzee, to whom he was going to try and explain this technical stuff. But it was a — I was kind of an interesting chimpanzee to him. So, we — and he's a terrific teacher. So, we spent a number of hours. And we just plain hit it off. And, I found it very interesting, what he had to say. And, we've had a good time good time ever since. And we play bridge together and golf together. So I can tell you that he's quite competitive in those games. But I, can't tell you anything about Microsoft or anything. I don't know that much about it. And it wouldn't be right, if I didn't know anything personal, to be talking about it. Charlie, you know Bill.

CHARLIE MUNGERYeah. Well, I don't want to speak for anybody else, either. I happen to be quite sympathetic to the Microsoft side of the pending antitrust case. But — (Applause) And regarding silver, all I can say is, so far, it's been a dull ride. (Laughter)

Buffett and Munger on the antitrust case against Microsoft

WARREN BUFFETTI would say this about the Microsoft case. That — and I've expressed this to a couple news organizations who asked the question earlier. Twenty years ago, this country really had sort of an inferiority complex about its place in the world economic order. And we talked about having a country of hamburger flippers. And, we thought we were going to lose our steel industry and our auto industry. And we really didn't quite see how America fit into the world where it looked like the Japanese and the Germans, to some extent, and all those, were eating our lunch. And that — there are many of you are too young to remember that. But there are many of you in this room who will remember that. And we were very depressed about our economic situation in this country. And then this, whatever you want to call it, information age or whatever, came along, fueled by technology. And we've just swept the world aside. I mean, it — we are so far number one that it's difficult to think who's number two. So here we have — And it's changed — in some way, it's contributed to a change, I should say — in the national mood. And it — whether — what part of our prosperity is accounted for by it, no one knows. But I think everybody in the room would agree that it's significant. And that age is going to get — and that development — is going to get more and more important in the years to come. It's going to be fueling much of what happens in the world and for this country to be the world leader. And like I say, you can't even see who's in second place, and moving faster, even, to increase that lead, with all the benefits that brings, you know, I think that — I think we've got something working very well that probably doesn't make a lot of sense to tinker with too much. So I would not want to go in with a meat axe into something that is pulling this country along, in my view, in a huge way. And I just, I don't like to tinker with success. And it's an important success. It's really an important success. Charlie and I may not understand how to play that, in terms of buying the companies that are going to do well 10 or 15 years from now. But we know some companies will do well. And we certainly know it'll have a huge benefit to society, even if it makes business less profitable but makes the society more efficient. I mean, that is a huge edge to have. I would love to have the most efficient industry in the world in this country, even though it might pull down returns on capital against the less-efficient system. So we — I think neither one of us would be inclined to go in there and mess around with something that's working.

CHARLIE MUNGERI think — (Applause) If you look at the big picture, in patriotic terms, having lost totally in radios, stereos, television sets, et cetera, and in many other places, and having lost position in other major industries to the Japanese and others, we finally get huge leadership in a new and wonderful field — software — that's needed all over the Earth. And somebody who's drawing a salary from the United States government gets the bright idea that they should dramatically weaken the one place where we're winning big. (Applause) And he actually goes home at night and is proud of himself. (Laughter)

GEICO benefits from smaller industry-wide profit margins

WARREN BUFFETTOK, number 3.

AUDIENCE MEMBERGood afternoon. Joe Levinson (PH) from New York. You mentioned, in this year's annual report, that the operating environment that GEICO is facing, especially with regard to pricing, is going to get even tougher this year. I'm wondering if this tough environment that GEICO's been facing over the last few years, is it something cyclical? Or is there something more structural going on here that we should be concerned about?

WARREN BUFFETTWell, actually, what has happened is that it's been unduly benign the last few years. So I would regard this as much more a return to normalcy, what's happening. The profits in auto insurance, industrywide, have been far higher than, I think, are sustainable and higher than I would've predicted, five years ago, would've occurred. So the industry got very, very lucky for a while. That wasn't necessarily good for us, incidentally. We made more money than we would've otherwise made. But there was a big umbrella over the industry, too, so that less-efficient competitors still did very well. We do not find the environment, which is going to be lower profits, we do not find that undesirable at all. We do not like having a huge umbrella over an industry. We want the most efficient to be the ones that do well and the less-efficient ones to have plenty of problems. So, we are not unhappy about the fact that margins in the auto insurance business are going down. We think they should go down. We will — as long as we feel that we are adding policyholders at a cost that's less than their net value to us over time, we will continue to do it. We'll love to do it. But we won't be making the kind of money, in the year 2000, that we made in 1999, which was not as good as 1998. But that doesn't — that's — as far as we're concerned, that's fine. Because we will be the low-cost producer, over time or will — that is our goal. And I think we've got a lot of things going in our direction to enable us to do that. The low-cost producer in a huge industry is going to do very well over time. And then question is just — is, it costs money to sign up people and bring them into our fold. Then we have to keep them in our fold. And we lose some every year. It's an hourglass problem, to a degree. But that's all part of the equation. And the GEICO equation is fundamentally good. It's not as good as it was a couple of years ago, just in terms of overall profitability, because there isn't this big umbrella over the whole industry. But that umbrella was going to go away. And it doesn't hurt us to have it go away at all. The second thing is that we are, as I pointed out in the report, it is costing us more to develop inquiries than it did a couple of years ago. We knew that would be the case. It's going to cost more three years from now than it costs now. So we believe in pouring it on. And we think that we can attract business at a lower cost and then run it at a lower cost than most of the competition, if not all. And we intend to plow ahead with that. We will write — I said, in the annual report, I ventured that the industry might write at three points worse than last year. Well, three points on 120 billion of volume is $3.6 billion difference in the profitability, if that forecast happens to be correct. That bothers us not at all. In fact, we will not only take that three points of industry worsening, but on top of that, we will spend even more money to bring in business, which will make our figures, specifically, look that much worse in the near term. But that, you know — in the end, it is so much more attractive to bring in that kind of business, we'll say, than some e-retailer, who is losing cash by the ton, bringing in customers who are spending far, far less than our customers spend with us, and where the retention rate, I would venture to say, will be lower than our kind of retention rate. We've got a very good business model. It's not as good as it was a couple of years ago. It's probably better than it will be a couple of years from now. But it's still far superior, I think, to the business model of most of the competition. We've got a great machine at GEICO. And we've got a sensational man running it in Tony Nicely. He is the best in the world at running that business. And he's been there since he was 18 years old. And he knows it every way from Sunday, in terms of how to run that business. I've known Tony for a good many years. I've never heard him say anything that didn't make sense. It's really interesting. If you take a whole bunch of people with 140 IQs, it's a very uneven performance in what they actually do. Some of them say all kinds of things that make a lot of sense about 90 percent of the time. And then 10 percent of the time, they go crazy. And Tony is — everything Tony says and does makes sense. And he is a huge, huge asset to Berkshire. And he's working with a business model that — that's very, very powerful. Charlie?

CHARLIE MUNGERNothing to add.

MidAmerican Energy: "Decent" but not "extraordinary" returns

WARREN BUFFETTOK, number 4.

AUDIENCE MEMBERGood afternoon, Mr. Buffett, Mr. Munger. My name is Andrew Sole. And I'm from New York City. I was hoping, if you wouldn't mind, turning your attention to MidAmerican Energy. You've spoken about how much you respect the management of that company. But if you could elaborate upon what you see are the long-term competitive advantages of MidAmerican Energy, where you see the company 10 years from now, and is it your hope or your intention to make MidAmerican Energy the lowest-cost provider of electricity in the United States?

WARREN BUFFETTWell, you — you're not going to do a great deal about the embedded cost that you have in generation. I mean, if you have a group of plants, they are, in the United States, they're relatively low-cost generation. But if somebody else has a hydro plant or something that has built-in advantages that are going to enable them to turn out electricity cheaper than we can do it in Iowa with coal, so be it. I mean, it — So it is relatively well positioned as a generator, but we have nothing we could do there to specifically, dramatically change the cost of generation compared to other competitors. But — and you shouldn't expect to make extraordinary profits in a business that is selling an essential, like electricity, to virtually every consumer in the country. The whole idea behind the utility industry is not to allow extraordinary profits. But we think it's a very good business. We do think that Dave Sokol has demonstrated ability, in the time he has been running that, to come up with a lot of ideas about doing various things that have made sense, various projects. Not everything works. But his batting average is very high. And a good mind like that, we will expect that he'll produce more ideas over time. But, it's not the sort of thing you get fireworks in. It's conceivable that, you know, we would get a chance to do something very big in that field at some time, just because it's a big field. It is the kind of field where you can write a $5 billion check. So it's not the jelly bean business. But whether we do or not depends on a lot of things, including regulatory restraints. Because there are a lot of rules in that business, starting with the Public Utility Holding Company Act of 1935. But there may be ways to do some very big things. And we've got the right management to do it. We've got the financial wherewithal to do it. And we'll see what happens. I think MidAmerican is a very — we’ll get, in my view, we're very likely to get a very decent return on it. But we shouldn't get an extraordinary return, because it isn't that kind of business. Charlie?

CHARLIE MUNGERNothing to add.

We can do almost anything with insurance float

WARREN BUFFETTOK, number 5.

AUDIENCE MEMBERMr. Buffett, my name is John Shayne (PH) from Nashville, Tennessee. I want to join the other shareholders and thank you for the results you've achieved, but also for the example that you've set for business, generally. My question is about float proceeds and whether they can go into common stocks. You've been asked that question before in prior years. Once, I asked you something on that. And I think at least one other shareholder has. But I'm wondering if you might go into a little more detail. If I've understood you in the past, you've said, "Yes, you can — the float's available to go into common stocks." I think it's an important question because it affects the intrinsic value of that float. If that float is locked into fixed income, it's worth one thing. If it could go into stocks at one point, it's obviously worth quite a bit more. What I've had trouble understanding is, I think you must have some way that you can guarantee that the policyholders will be protected. Obviously, you can invest everything in a low market, and the market goes even lower. Is it simply the size of the capital you've got that you think that'd be extraordinarily unlikely? Or do you use future insurance revenues, premium revenues, to pay off claims? Would you borrow to pay off claims? If you could give some detail on that, maybe we could get some comfort as to how you're thinking about that.

WARREN BUFFETTYeah. The float, in no way, is limited to fixed-income securities. The float is really available for anything that we feel is the most intelligent at any given time. And the reason we can say that, and other insurance companies can't say that, is because we have an incredible abundance of capital, plus other streams of earning power which are unrelated to the insurance business. So we could have the float entirely in equities. And we have had that, in the past, or tantamount to that. And we could have a lot of it in operating businesses. We can have it anyplace it makes the most sense. But the only reason we can do that is because we have extraordinary capital. And we don't have much debt. We run the business differently than, or think about it differently, than probably 90 percent of managements do. We look at the assets on a consolidated basis with a few little exceptions. We look at the asset and the liability side — completely absent any linkage for specific assets and liabilities. So our job at Berkshire is to get the liabilities as cheaply as possible. We want all the liabilities we can get and not have any worries about fulfilling as cheap as we can, plus a lot of capital. And then we want all the assets to be employed as intelligently as possible. And we don't match up, you know, a billion dollars of assets on the asset side against a billion of specific liabilities on the right-hand side. There's one or two exceptions to that, but that’s — where we're required to — but that's the basic approach. So, when Charlie and I think about Berkshire, we're thinking about, how do we get as much money as we can as cheap as we can without, in any way, endangering our ability, ever, to pay anybody, under any circumstances? And then, how do we put it out in a way that we feel the most comfortable on the asset side, at the best returns? And frequently, that will be equities. And it has been, over the past. Sometimes, we — it won't be. We can't find them. But that's the goal. And float is available just like — in virtually all cases — just like common equity. We don't distinguish those in our mind. And that gives us — that flexibility gives us some edge and, perhaps, quite an edge, at times, over other — over our competitors. Charlie?

CHARLIE MUNGERWell, yeah, you can see that in the results to date. We have used that edge in the past. And we hope to use it in the future.

Liz Claiborne and Jones Apparel investments

WARREN BUFFETTNumber 6.

AUDIENCE MEMBERHi, I am Kevin Pilon (PH) from Simsbury, Connecticut. Let me just say, quickly, that I'm really looking forward to Charlie's book. And I hope it expands on the talks he gave that were reported in (inaudible) with regard to having a certain number of models that you need to understand and prosper in life. I have two questions. And I'll ask them quickly, in succession. Because you may want to punt on the first one. The first question is, I'm interested in any comments you might have that would expand on your general interest in the branded apparel companies, Liz Claiborne and Jones. And the second question is, I wonder if you would comment on the future of Freddie Mac with all the current brouhaha. Every year, there's new brouhaha, as you know, with the buyback of the 30-year bond and the search for a new benchmark and the Treasury saying that, perhaps, the agency securities were not backed by the full faith and credit of the government.

WARREN BUFFETTYeah, we — we're not going to be able to help you too much on some of those. Because we may have some views, but they may be things that we don't really want to talk about. The Liz Claiborne and the Jones Apparel investments you're talking about, the Jones Apparel is a decision that was made by Lou Simpson at GEICO. Lou runs a separate portfolio of equities for Berkshire. They're held in GEICO. But obviously, they're for the account of Berkshire. And that portfolio is well over 2 billion. And to some extent, it can be expanded or contracted based on what Lou would like to do. And he runs that 100 percent on his own. And he's compensated based on how that portfolio does. He makes decisions, buying and selling, without talking to me at all, which is the way we like it. Sometimes, there's an overlap in our decisions. But when I, for example, when I first found out about Jones Apparel, I’d never read an annual report of the company. I didn't know what they did or anything. But that's Lou's baby. And he's very good at managing money. And he's a fellow that has 100 percent of my trust. So I know his general criteria for investing, which is quite similar to mine, not identical, but quite similar to mine. And he's got a familiarity with businesses that, again, is quite similar to mine but not identical. And he runs a good portfolio. And it makes life a little easier for me, not to have that two and a fraction billion added to all the rest that I'm having trouble investing. Liz Claiborne came about a little differently. I got a call one weekend, actually, on purchasing a large block that someone was going to sell. And we bought that on a Monday morning in London, as I remember. It was never reported on any exchange. I'm not quite sure even how it happened. But the broker that handled it arranged the trade over there. And, you know, they've had a very, very decent record. They buy in their shares. I like the business that they run. It's not a Coca-Cola-type business or a Gillette-type business or even an American Express business. But we were offered that stock at a very attractive price. And it's worked out fine. The Freddie question, I'd rather not get into it, frankly. Because there's a lot of political overtones to that. But Charlie?

CHARLIE MUNGERI can pass as well as you can.

WARREN BUFFETTOK. (Laughter)

Berkshire's next CEO won't be a "caretaker"

WARREN BUFFETTNumber 7.

AUDIENCE MEMBERGaresh Paku (PH) from Croton, New York. First, regarding — I just have a couple of questions. First, regarding the succession issue. I just can't imagine that you would allow someone else to paint over your picture afterwards, I guess, post-truck. So I was wondering, would the — is your — is the nature of your succession plans more of a caretaker role of the museum? Or is it more active? That’s the —

WARREN BUFFETTIt would be more active. No, the last thing in the world I would want would be a caretaker. That would be — no, that would not — I would not want that to be my legacy.

Potential impacts of inflation on GEICO

AUDIENCE MEMBERAnd the second question is regarding inflation. While I appreciate your focus on the specific businesses and your insistence that you not try to predict it, we've been very fortunate by successively lower rates of inflation. And I'm wondering, with all of the money sloshing around and between real estate and stocks and all the other places, whether you are concerned about inflation, what effect that would have on the insurance businesses at Berkshire, and what you can do to guard against those risks.

WARREN BUFFETTMy record is just terrible, in terms of predicting the inflation rate. So, it is not something that enters into our decision making. The big danger in — a speed-up of inflation would lead to more dollar volume in the insurance business. And more dollar volume is basically good for us, even though there might be a lag in pricing, that would eventually catch up and all that. So, absent the next factor I'm going to mention, inflation is not necessarily harmful at all to something like a GEICO. As you get into longer-tail liability lines, such as a General Re might have, inflation has this effect of hitting liabilities that were created four, five, 10 years earlier, maybe, and they get resettled in current dollars. And obviously, that ratchets up the cost of settling those liabilities, in kind of an unpredictable way. The danger in inflation to something like GEICO would be that people get, during inflation, they get irritated about the price of everything going up. And there are some things they can do something about. And there's others they can't. And then there are some they think they can, even though they can't. And one of those might be the cost of insurance. So the people might get very upset with the system of auto insurance, when they see a very significant part of their annual budget. Because an auto insurance policy, on average, is significant to people, and virtually every consumer in the country. And there could be a lot of pressure on legislatures to do a variety of things that might change the system in a major way. It wouldn't reduce the number of cars that crashed into each other or the injuries that were done or anything else. But it would be a way of striking out against higher rates. And people would be unhappy about those rates. And that also might reflect itself in difficulty getting the increases that were required to take care of the costs that were ratcheting up fast. So net, I think, inflation is bad for the auto insurance business. Although, you can argue that, you know, GEICO — I think when I first got interested in GEICO, they had about a — it was in 1951, I wrote it up in "Security I Like Best." I think they had about 175,000 policies. And I think they were writing about 7 million of business, which would be about 40 bucks a policy. Now, if we were getting $40 a policy now, you know, our premium volume would — the company would be a whole lot less valuable than it is. And so one way or another, it ended up going from that period of $40 an average policy to 12 — or $1,100 an average policy without the roof caving in on it. And it has been made more valuable, in dollar terms, by a combination of inflation and a great business model, without it getting destroyed in the process. Nevertheless, I would prefer a noninflationary environment. It's better for the whole world, over time. And that the way our hope goes. And then we have this, so far, unwarranted fear that the kind of conditions that have existed over the last 15 years might cause a re-ignition of inflation, which to date, it hasn't. I don't know any more about what's going to happen than you do on that. Charlie?

CHARLIE MUNGERI don't know anything, either. (Laughter)

International expansion: interesting but not easy

WARREN BUFFETTNumber 8.

AUDIENCE MEMBERGood afternoon, gentlemen. My name is Zeke Turner, and currently finishing up my senior year at Taylor University in Indiana. So four more weeks, and I'm out of there. (Buffett laughs) As someone studying finance, I do appreciate your comments as to the teaching of investment in academia. It certainly has some development it can make there. I do say that with hope that very few grad school admissions officers are listening right now. But I do want to say a special thank you quickly, if I could, to all those professors who do have the intelligence and the guts to actually teach value investing on that level and go away from efficient market theories. I do kind of wish Benjamin Graham were still teaching. Many questions have been asked as far as technology and its development into the business model. I think the greatest effect of this will probably be in the globalization of the economy. This has had, and will continue to have, a significant impact on the business model as we know it today. Now, except for certain growth opportunities, this may have a smaller effect on companies such as See's Candy or Nebraska Furniture Mart, but has had and probably will continue to have a dramatic effect on companies like Gillette, Coke, who have significant international presence. My question is, how does your approach change, if at all, in light of the international expansion? I'm particularly interested in the introduction of greater difficulty in understanding the business models, in the understanding of the economic future and the economic risk associated with the international scene. In addition, do you actively search for a global scene for investment opportunities?

WARREN BUFFETTYeah. The answer is that we obviously like businesses that are good businesses at present volume and that have the chances to expand significantly with similar economics. And with any business that's been around the United States a long time, there's probably more opportunity, potentially anyway, around the rest of the world than here. And Coke has grown faster. Oh, it's grown well here. But it's grown faster around the world than here. And that's been true at Gillette, also, just because we were a more mature market. So we love the idea of products that will travel. Some travel well. Some don't. I mean, it's an incredible world that way. Candy bars don't seem to travel so well, you know. Soft drinks travel terrifically. And razor blades travel terrifically. But the Cadbury bars sell in England. And, you know, and the Hershey bars sell here. And it's very hard, with some items, to try — In fact, within this country, it's amazing to me. We talk about having a mobile society. And people are moving all the time. And we're all watching the same television and everything else. And the supermarket share of Dr. Pepper in Dallas is 18 and a fraction percent. And in Boston, it's six-tenths of one percent. I mean, 18 to 0.6, 30 times the market share. Dr. Pepper's been around forever. You know, people move back and forth and everything. And how can you have that sort of a differential in this country? Royal Crown Cola, 3 percent in Chicago, one-tenth of a percent, you know, maybe, in Detroit, a couple hundred miles away, same kind of people, all that sort of thing. And Royal Crown's been around for 75 years or whatever it may be, 50 years, at least. And you get these incredible differences in what people do, even within this country. So it's not easy to predict how — if you can't predict how Dr. Pepper — if you can’t figure out how to make Dr. — If I owned Dr. Pepper and was selling 18 percent of the market in the supermarkets of Dallas, it would drive me crazy, you know, I was getting six-tenths of a percent in Boston. Or, I think it's five-tenths, maybe, in Detroit. That would drive me crazy, although maybe I should just be grateful that I've got 18 percent in Dallas. It just — it's very hard to predict how products will travel. With See's Candy, you know, we have this incredible penetration in the West and particularly in California. We know it's the best candy. Now, boxed chocolates just do not sell big in this country. The annual consumption is low. But it still seems that, if we can make a lot of money in California, we ought to be able to make some money in New York or Pennsylvania. But we haven't figure out how to do it. And we've tried a lot of things. So, the answer is we're always interested in geographical expansion, whether it's even in the United States or, going beyond that, into other countries. It's not as easy as it looks. But when the chance to do it comes, then you ought to just pound and pound and pound. And we occasionally have bought stocks in other countries. I wrote a fellow the other day that I read about in Germany about his business. I've never met him or anything else. But it sounded like he had a pretty good business. And it sounded like he might be my type of guy. So I just wrote him a letter. Haven't heard back, either. But I may. The odds are against it. But it sounded to me like I'd buy his business, if he chose to write back and wanted to do something. And we're very willing to do business, you know, in any country in the world, where we think we understand the nuances of the corporate governance system and taxation and that sort of thing. We don't understand all 200 countries, by a long shot. But there's plenty we'd love to be in business in. We looked at a very significant company in Japan a couple years ago. And some other fellow I know bought it and has done very well. It would've made sense for us. And we missed it. We will continue to look at things, internationally. It makes a lot of sense. And we've got a lot of capital to employ. We're more likely, by some margin, to find things here. But we may find a big one outside of this country. Charlie?

CHARLIE MUNGERNothing to add.

Spending to expand GEICO's business

WARREN BUFFETTOK. Number 1.

AUDIENCE MEMBERI'm John Bailey (PH) from Boston, Massachusetts. You commented, in the annual report, that only part of GEICO's marketing expense last year was required to maintain the business. This seems to get to the heart of owner earnings, where, in the first part, you can value the existing business very well through this observation. And you get a direct measure of the dollars invested in new business. And it seems that you should be able to make similar observations about other businesses that you may be interested in investing in. So could you use this as a jumping off point to describe examples, perhaps, of how you contemplate companies' marginal investment opportunities or their return on marginal capital? And how much weight do you give to the value of the existing business in your investment decisions or the value of the, so to speak, in-force book?

WARREN BUFFETTWell, we, as we explained earlier, are looking for ways to create more than a dollar of value per dollar we lay out. We'd love to create $3 of value or $4 of value. But we'll settle for $1.10, if that's all we can get. We don't consciously make decisions that are 90-cent decisions for a dollar laid out. None of this is that precise, when you get into the application of it. What we do know, is that there is enough of a margin at, say, a GEICO expansion effort, that it's pretty compelling that it makes sense. Part of the limitation there, as I explained in the report, too, is a question of infrastructure and all of that. So, it isn't solely a question of saying, you know, “Can we lay out another dollar?” and “Will that have a value of $1.10?” because if we strain the organization beyond its ability to service people, we may be hurting the business already on the books. I used the GEICO example in the report, because it's big enough, so it's meaningful to shareholders. I mean, we're doing things all the time that cost us money in the short run that we think will more that produce a commensurate value over time, but not on the scale that we're doing it at GEICO currently. And we may step up that scale even. So, I thought it important to lay out those figures, even though I can't be precise. When I say, you know, that it might be $50 million to maintain, I don't know that figure. It could be 70. It could be 30. Maybe I'm off even more than that. But that's my best guess. And I think the shareholders are entitled to my best guess. And they're entitled to know how much we are spending, beyond that maintenance cost, to build the business for the future, which we don't, obviously, capitalize on the balance sheet. So those — GEICO's, by far, the most dramatic. And we don't have comparable expenditures like that going on elsewhere. But we are spending significant money, for example, to take NetJets to Europe. And we'll be spending it this year and next year. And then as soon as that starts looking good, we'll be going to Asia and spending more money. I mean, all of those decisions are made that way. They're not on the scale of the GEICO decision, though, at all. We want to give you the information in the report that, related to the size of the enterprise, would be material to Charlie or me, if we were reading the report and not involved in the business, in trying to figure out what our investment was all about. That's the goal in what we write and then to keep it to a size that doesn't have to be sent UPS.

Problems with Berkshire annual report distribution

WARREN BUFFETTIncidentally, I'm glad I got wandering along on that line. Because we did have a lot of shareholders this year that got their reports even later than they received them in past years. Now, they were delivered — the reports that go to registered holders were put in the mail a few days after we go up on the internet here in Omaha. And they seem to get delivered OK. Street-name holders, which are ten times in number what the registered holders are, so we're really talking about nine out of ten shareholders, get their reports from a firm in New Jersey that is designated, by their broker, to take the reports from us and re-mail them. And we pay those people a fair amount of money to do that. We know when we deliver those reports to them, which is promptly. And we know when they tell us that they send them out. And we inquire every day, or more than once a day, to find out whether they've gone out. And we got a lot of complaints this year that people hadn't received them at a time when you would've thought they would've received them. So, we can either — we know when the designated mailer received them. We don't know for sure when they got them out. And we don't know for sure what happens at the post office. But we were — the mailing went out about the same as in previous years. But the receipt, apparently, was somewhat later. And all we can say is that we apologize, but we don't have any better system. The people that have them in their own name will always get them dropped in the mail a couple of days after the report appears on the internet. We can assure you of that. We can't assure you of when the street-name holders will get their reports, because that is a mailing that we don't handle. And no other companies handle them, to my knowledge. There is a firm that seems to do about 95 percent of that and is designated by the specific broker with whom you have your shares. Charlie, you got anything to add?

The internet's effect on GEICO and auto insurance pricing

WARREN BUFFETTOK, number 2.

AUDIENCE MEMBERHi, Mr. Buffett and Mr. Munger. My name is Will Obendorf (PH). I'm from San Francisco, California, and I'm 11 years old. I have been a shareholder for six years at Berkshire Hathaway. My questions are, what are GEICO's sustainable competitive advantages? And my other one is, what are the implications of the internet on pricing for the auto insurance industry?

WARREN BUFFETTWell, we — we're going to get your name and send it to human relations or whatever they call those departments. We want to hire you. (Laughter) The sustainable competitive advantage at GEICO is to be the low-cost producer providing very good service. And there will be a number of companies that provide good services. So that does not distinguish us from a great many competitors. Having the low cost is crucial. There are companies that specialize in given groups of policyholders, but smaller groups, such as USAA, that have very good costs. So they are very, very competitive with us in their chosen area. There's another company in Los Angeles that, geographically, called 21st Century Insurance, that has costs like ours. And so they are extremely competitive within that geographic area. I don't think anybody is any better than us who operates nationwide. We don't operate in Massachusetts or New Jersey. But in the other 48 states, we will have a quote for about anyone. So, in terms of a broad-based insurance — auto insurance competitor — our competitive advantage has to be low cost over time. Now, we also have to be as good at distinguishing among the risks posed by different kinds of drivers as other people. In other words, we have to be able to select people who are going to be better-than-average drivers. And we have to be able to understand who is likely to be a poorer-than-average driver. But — and the ability to do that, to distinguish those people, would be a competitive advantage. I think that many companies tend to be fairly equal on that point. So it's really at this cost level. And we care very much about cost, the same way that Charlie mentioned a company called Costco does, you know, in terms of retailing. They figure their expense ratios out to hundredths of a percent. And that is important. So that is the competitive advantage. Now when you get — and we have to sustain and widen that, if possible. The question of the internet, it's going to be very important. It already is important to GEICO. It will be more and more important. It will be important to the insurance industry. Because when you have the internet, you have a situation where somebody thinking about insuring a car can click to one place, find out what that rate will be. They can click to someplace else and find out what that rate will be. So, in effect, they can shop all around without going from place to place to place and driving all over town or calling lots of agencies. They can just do it right there in their den. And that makes it very important, again, that we be the low-cost company. I think it's going to be an advantage for us, over time. For one thing, I think it makes brand very important. Because we want people to be thinking of GEICO as one of the possibilities to call. And if you've got the XYZ Company that nobody's ever heard of, nobody's going to think about clicking on them. And GEICO's brand is becoming extremely familiar to people throughout the country, and we're spending a lot of money to make it even more familiar. So you've asked two very good questions. And I think we're in pretty good shape on both of them. Thank you. Charlie?

We'll do real estate deals, but only at the right price

WARREN BUFFETTNumber 3.

AUDIENCE MEMBERGood afternoon, Mr. Berkshire and Mr. Hathaway. (Laughter) My name's Anthony Priest. I'm from Washington, D.C. A couple months ago, I saw an ad in the "Wall Street Journal," where it said, "Berkshire Hathaway wants to see real estate finance opportunities in excess of $100 million." I was curious about your thoughts in this area, the real estate field, some of your goals, if you can talk about any of the deals you may have made, and if Donald Trump has given you a call yet. (Laughter)

WARREN BUFFETTI don't think Donald Trump will give us a call. We have got about, what, three deals that we've put on in the last couple of years in real estate. And they are in this $100-million-and-up category. And we're willing to put billions and billions of dollars in, if we can find the right sort of opportunities. Or nothing may happen, depending on — just depending on the market. We don’t have — Most — a lot of places have a mortgage department, or they have a real estate department. And they sort of have a budget. And they put money out based on using up the budget. And they have a whole bunch of people that don't have a job, unless they do that. That's not the way we operate at Berkshire. We’re willing — if the deals are right, you know, we'll do many billions. If the deals aren't right, we don't have anybody whose job is dependent on keeping busy in a field like that. So, we look at the deals when they come in. Mike Goldberg is in charge of that operation. And we kick things around. He's in the office right next to mine. So, if he hears about a deal, you know, we'll discuss it for three minutes. And we'll sort of know whether it passes the first threshold. And then we'll go on to the second and the third. But we don't waste a lot of time on things. And we don't care whether we make another deal or not. We'd like to, if the terms are right. And that ad produced some inquiries, not from Donald Trump. And, you know, one or — there’s one or two of — a couple of them are alive at the present time. And we'll see whether they work out. Real estate deals, by their nature, take longer to put to bed than the kind of thing we normally do. In fact, I can buy a business faster than we can make a real estate deal, usually. That's just the way they work. But we could end up with a — We're very happy with the three deals that we've got. They're good uses of money. And I hope we find a lot more. But if we don't, I won't be upset. Charlie, do you have anything to add? Charlie's our real estate expert.

CHARLIE MUNGERHardly.

WARREN BUFFETTWe are not financing Charlie's boat, incidentally, despite the rumors. (Laughter)

Berkshire is not a "fund"

WARREN BUFFETTNumber 4.

AUDIENCE MEMBERHi, my name is Joel. I'm an undergraduate student at the University of Virginia. Just — I have two questions. My first question is, how important do you think the structure of your fund is to its long-term success? And by that, I mean, in the last couple weeks, some other legendary investors, like Julian Robertson, Stanley Druckenmiller, have been forced to either close or restructure their funds as a result of a kind of vicious cycle of underperformance and subsequent redemptions and then even worse performance. Do you think that the structure of your fund, as a publically-traded company, as opposed to a private partnership, like Tiger and Quantum, has protected your business from a similar fate? Or phrased a different way, do you think that, if Tiger or Quantum were structured the way that Berkshire Hathaway is, that they might still be in business in the same way today?

WARREN BUFFETTYeah, we don't consider ourselves in remotely the same business as Tiger. I mean, they are managing a securities operation. And we aren't doing anything like what they do. So that — they have — Thirty years ago, when I had the partnership, it was much more along their lines, although still far from what they do. But it was structured much more like what they did. And I — and, although we had bought control of businesses and all that, we were functioning much more — or, focusing much more on securities. We don't care whether we own a stock or a bond. We will over the next 20 years. But that's not what we're about. We're not a fund. We are an operating business that generates a lot of capital and uses that to buy other businesses in whole or part. And we prefer in whole. But we sometimes do it in part. But I would — I don’t consider — which is a reason why I don't consider book value that important, although it — it's got the importance I attributed to it earlier. But, we could easily have 90 percent of the value of Berkshire, ten years from now, be represented by businesses that we own and 10 percent by securities. Or we could very easily have 60 or 70 percent represented by securities, depending on how markets develop. I hope it develops in the former way. But I'm perfectly willing to go the other way, too. But it just has no relationship to the kind of funds you talk about. They — We are structured poorly, from a tax standpoint, compared to those fellows, and compared to what I used to have in the '60s. But that's, you know, that's a decision we made. And we're stuck with it, more or less. It's not a great tax structure, if you're going to own securities. But we may not own that many securities over time. Charlie?

CHARLIE MUNGERWell, I do think that the people in the relative performance game, who are trying to attract so-called hot money, are living in a totally different world from ours. I mean, Soros, in the end, was not willing to have a lot of people make a lot of money in high-tech stocks and not be part of that game. And they got killed. We're perfectly willing to let something we don't understand very well rage on while a lot of other people make a lot of money we don't.

WARREN BUFFETTYeah, we — it's just not a securities operation that we have. We own a lot of securities at present. And we'll probably own a lot five or 10 years from now. But it's not what Berkshire is necessarily about. Ideally, you know, I would love it if we could move all the money in securities into businesses that we liked. But that’s — that isn't going to happen, in all probability. It's too tough, because we can't find multi-billion-dollar businesses to buy right and left. We find a few. But they tend to be small.

We wouldn't buy a company that lies to itself

WARREN BUFFETTNumber 5?

AUDIENCE MEMBERMy name is Paul Tomasik from Chicago. My question is about intellectual honesty and your incredible ability of rising intellectual honesty in organizations. In particular, you look at General Re, a large, well-managed, publically-traded firm. And if you think about it, if you raise the intellectual honesty in an organization like that, initially, you're going to have an aberration, as you called it. In particular, Berkshire Hathaway was the first company to write-down the Uni — what is it — Unicover write-down, whereas Aon pushed it on into the year 2000. Can you comment, give us some hints, on how you raise the intellectual honesty in an organization? And somebody whispered in my ear, they wanted to know Charlie's reading list. I guess they finished “Guns, Germs, and Steel.” Thank you.

WARREN BUFFETTWe really don't want to buy into any organization that we felt would be lacking that quality, in the first place. Because we really don't believe in buying into organizations to change them. We may, you know, we may change the comp system a little or something of the sort. But, I'm not going to name names, but there are a whole lot of organizations that, if we bought into them, we wouldn't move their needle one point in terms of how they operate. And we wouldn't be comfortable with how they operated. So, we try to buy into organizations that we think are very much like ours, at bedrock. And General Re would've recognized that Unicover loss just as quickly if we hadn't owned it, as we had. Now, that was not true of some other people. But they didn't need any prodding from us in order to realize something like that. We want people joining us who already are the type that face reality and that tell us, basically, tell us the truth but tell themselves the truth, which is even more important. And once you get an organization that lies to itself, and there are plenty that do, I just think you get into all kinds of problems. And people know it throughout the organization. And they adopt the norms of what they think is happening up above them. And particularly in a financial organization — really in any organization — but particularly in a financial organization, you know, that is death over time. And we wouldn't buy into something that we felt had that problem, with the idea that we would correct it. Because we wouldn't. You know, it — Charlie and I have had a little experience with some organizations that have had that sort of problem. And it's not correctable, at least, you know, based on the lifespan of humans. It's too much to commit to. Charlie?

CHARLIE MUNGERWell, I think you're totally right about General Re. We didn't improve behavior at General Re. They already had a behavior just like ours. And regarding a reading list, by the mischances of life, I didn't read one book last year that I thought was a lollapalooza. Therefore, I didn't make any recommendations to that bookstore at the airport.

WARREN BUFFETTCharlie, how many books do you think you've read, though? He reads a lot.

CHARLIE MUNGERWell, I don't count. And some of them, I skim through pretty fast. But there was no lollapalooza. A book like “Guns, Germs, and Steel” doesn't come along every year.

WARREN BUFFETTOK —

CHARLIE MUNGERAnd by the way, that guy was a little nuts in one way.

WARREN BUFFETTIt's hard to get an A from Charlie. (Laughter)

Berkshire's competitive advantages in reinsurance

WARREN BUFFETTOK, is it 6 we're going to?

AUDIENCE MEMBERHello. My name's James Armstrong (PH) from Pittsburgh, Pennsylvania. Thanks for having us. I'd like you to comment, please, on the reinsurance business and how it might look over the next 10 or 20 years. At Berkshire, we've usually bought businesses that are insulated to some degree from easy entry by new competitors and from commodity-type pricing. We want businesses that possess defensible franchises, few substitutes, resistance to cyclical factors, et cetera. The reinsurance business carries a lot of characteristics that are the opposite of what we usually look for. There's a lot of excess capacity. We're hindered by irrational and unwise pricing decisions by competitors. For GenRe to prove out as an investment for us, we need better underwriting. And we also need prices to harden. But in a world with great global liquidity, where capital moves very rapidly from place to place, why wouldn't the reinsurance business gradually evolve into a poor business, where all excess returns are competed away, where price is never firm for very long because a new entrant arises and throws capital at the business? So I'd like you to comment on how GenRe could be made to work. And also, give us a broad view of how the reinsurance business might unfold in the next 10 or 20 years. Thanks.

WARREN BUFFETTOK. You made some good points. And, I — we have been, actually, in the reinsurance business, at Berkshire Hathaway, for 30 years. So it's a business, obviously, that we've paid a lot of attention to. And we've gotten some scars from it at times. But overall, we've done extremely well. And the reason we've done extremely well is because we've had an absolutely sensational manager in Ajit Jain, who I wrote about, running that business. But Ajit is a good example of what somebody with brains and energy and discipline and the right temperament and some capital behind him can do in a business. It's not the world's most efficient business. And it never will be the world's most efficient business, because it's not strictly actuarial. It — All excess returns will not be competed away. There will be people that will earn very subnormal returns in the business. There will be people who get killed in the business. And that means there will be quite a deviation from the mean in terms of the results of individual insurers. And we think that both at National Indemnity, under Ajit, and at General Re, that we have advantages, so that our returns will be significantly better than average. But both of our businesses are subject to getting killed in any single year, will get killed in specific years, but also, in our view, will do better than average and more than satisfactory, in terms of Berkshire Hathaway's results. You know, I can't prove that to you now. I can show you what's happened over the past years. I don't think the situation in reinsurance is way different than some years back. There's always dumb competitors. There's always a lot of capital in the business. In the '85, 1985, 1986 period, people felt very poor. But it wasn't really a lack of financial capital. It was psychological capital that disappeared. People were just plain scared. And that was the best of times to be writing business, obviously. You know we like to — Prices are somewhat better now. But there are always people that misevaluate risk. And when they misevaluate risk, it's our job to let them have the business. That's easier to do with Ajit's business in National Indemnity than it is with General Re, because General Re has long-term relationships with many accounts. And the question of what you do when your competitor offers a price that's a little too low, with somebody you've been doing business with for 50 years, is a very tough decision to make. And so sometimes, they probably do some business that might be labeled as "necessarily evil." And Charlie always says that he doesn't mind an occasional transaction like that, as long as you underline evil and not necessary. The nature of people in the business, usually, particularly the frontline guy, who was calling on the account, is to underline necessary. And as owners, our tendency is to underline evil. GenRe has done a terrific job, over the years, of balancing the necessity of continuing a relationship so long with the discipline of making sure they get paid enough. That was not done perfectly last year. And the conditions were very difficult for doing it perfectly, I might add, too. But I think that, both at Ajit's operation and at General Re, we have two businesses that will do very well, in terms of what we get out of them and very well compared to their competition, but occasionally will have a very bad year. I mean, we could have something happen tomorrow, you know, a Tokyo earthquake. Or, I can name a bunch of them that would result in a very bad year. And that's what we're getting paid for. And if we price with discipline, our 20-year results can't be bad, no matter what any one year produces. And if we don't price with discipline, we'll get killed over time. Charlie?

CHARLIE MUNGERYeah. I don't think the reinsurance business is quite as much of a commodity business as might first appear. It's not like an execution transaction when you sell government bonds or something, where one broker is roughly just as good as another. There's such a huge time lag between the time the premium is paid and the time the performance is given that you’re making a — the customer is making a big prediction about the insurer's, A, willingness to pay what it really owes and, B, its ability to pay what it really owes. I think we have a huge edge in reputation and actuality, with reference to both those two factors.

WARREN BUFFETTYeah, we have a reputational advantage. And I think that, in actuality, it's even stronger than the reputational advantage. I mean, I can't think of a case where there's been any problem with having Berkshire or General Re write a check very promptly for anything it owed. I mean, we’ve, you know, we have never been subject to people suing us and getting money later on or anything like that after fighting us out in courts. It just — it’s not the nature, it's not the attitude we bring toward the reinsurance transaction. And we have a reputational advantage. But like I said, I don't think it's quite as wide as it should be in some cases, even. And then we have a huge attitudinal advantage in that we have no need, none, to write more business, or the same amount of business, or even something close to the amount of business, next year that we wrote this year. We — there is no — there are no volume goals at Berkshire Hathaway at all. And that is not true at most insurance organizations. We report the results as they come in and as we see them, which also, I think, gives us an advantage in being realistic about all aspects of our business. We have huge amounts of capital behind us. So we can take large pieces of attractive business and keep them all for our own accounts. So we have a lot of advantages in the business. And they will translate into something better than the rest of the world gets. I don't know how much better. And I don't know how much the rest of the world will get. But it's not insignificant, the advantages we have in the business.