2008 年股东大会 · 下午场

No more Klamath Dam questions

WARREN BUFFETTOK. We're going to go back to work here. We broke off at area seven last time. I have asked — just so everybody's aware of it — we've had three questions relating to the Klamath situation, and I think that's more than proportional to the interest of the crowd. (Applause) So we'll skip any more like that. I think the position is known.

"Too big to fail" banks can't have "too much risk to manage"

WARREN BUFFETTAnd we'll go onto number 8.

AUDIENCE MEMBERMy name is Ola Larson (PH). I live in Salt Lake City. And I think — on Lou Rukeyser, Wall Street Week, 1981 or something. So you must really have impressed me, Warren. What I'd like to ask you is that looking at the future, have the business practices of the investment banks become so complex that it is not possible for the head of the investment bank to be aware of the exposures to financial risks day-to-day or week-to-week?

WARREN BUFFETTYeah. That's an exceptionally good question, and I think the answer, probably, is yes, at least in some places, although there's a few investment bank heads I've got enormous respect for their ability to sort of get their minds around risk. But I decided, for example, when we bought Gen Re, it had about 23,000 derivative contracts, and I think I could have spent full time on that and not really been able to get my mind around how much risk we could — we were running — under some fairly extreme conditions that I did not think were impossible, but that the people who were running the operation might have thought were impossible, or that might not have cared about it that much because their own incentive compensation was such that if they made a lot of money one year on something, it would work 99 years out of a hundred, they would feel the chances of something going wrong big were very slim. But I don't want to have it slim. I want to have it none. So I regard myself as the Chief Risk Officer at Berkshire. If something goes wrong at Berkshire because of — in terms of risk — of the way we run the place, there's no way I can assign that to a risk committee or have some mathematicians come in and make a bunch of calculations and tell me I'm only running a risk that will happen once in the history of the universe or something of the sort. I think the big investment banks, a number of them — and big commercial banks — I think they're almost too big to manage effectively from a risk standpoint in the way they've elected to conduct their business. And it's going to work most of the time. So you don't see the risk in a way that — I mean, you don't — if you have a 1 in 50-year risk that a place will go broke, it may not be in the interest of a 62-year-old executive that's going to retire at 65 to worry too much about that. I worry about everything at Berkshire. So I would say they're too — they're very hard to manage, very hard to have your mind around. I mean, clearly, you've seen cases in the last year where very big institutions, if the CEO knew what was going on, he certainly hasn't admitted it subsequent to what's happened. It's embarrassing either way, but it's less embarrassing to say I didn't know what was going on than to acknowledge that you knew these kind of activities were going on and you let them go on. It's — I've been asked for advice on regulation sometimes, and we've seen an extraordinary example, which somehow the press really hasn't picked up on much. But you had an organization called OFHEO whose sole job was to supervise two big companies, and these big companies were Fannie Mae and Freddie Mac. And they had a large element of public purpose in them, and they were chartered by the federal government, and they had — their activities had overtones for the whole mortgage and securities markets. So Congress said, "If we're going to give you all this 'too big to fail'-type protection, in terms of the federal government stepping in and giving you special privileges, we want to keep an eye on you." So they formed OFHEO and they had 200 people going to work, I presume at 9 o'clock every morning, and going home at 5, and their sole job was to see what these two places were doing. And they turned out to be two of the biggest accounting misrepresentations in the history of the world. So they were two for two with the only things they had to examine. And I fear that if you tried to do the same thing with the biggest commercial banks or the biggest investment banks, I'm not sure you can keep track of it. What you need is somebody at the top whose DNA is very, very much programmed against risk. And he is going to have to resist the entreaties of those who work beneath him who say everybody else is doing it, and if they can do it over there and make all this money doing it, why can't we be doing it here? And that's not easy to do. When you've got a bunch of high-powered people who are used to making in seven figures every year, and they want to do things and they say, "If you don't do them here, we're going to go elsewhere," it's a very tough system to be. So I would say that, in many ways, there are firms that, in terms of risk, are simply — they are conducting themselves in a way that they're too big to manage. And if at the same time the government says they're too big to fail, that has some very interesting policy implications. Charlie?

CHARLIE MUNGERWell, I would argue that you say that very well. It does have interesting policy implications. It's crazy to have people get so big and so important that you can't allow them to fail, and allow them to be run with as much knavery and stupidity as permeated the major investment banks. It's not that Berkshire hasn't had wonderful service from investment banking all these years, because we have. It's just that, as an industry, this crazy culture of greed and overreaching and overconfidence in trading algorithms and so on creeps in. I would argue it's quite counterproductive for the country, and it ought to be reigned way back. These institutions are too big to fail, and it was demented to allow derivative trading to end up the way it's ended up and with the current risks that are embedded in the present system. And it's amazing how few people spoke against it as it was happening. There was just so much easy money to be reported. A lot of the money that was reported as being earned wasn't really being earned. It was in that wonderful category of assets that I call "good until reached for." They sit there on the balance sheet, and when you reach for it, it just fades away like — (laughter)

WARREN BUFFETTHe's not kidding.

CHARLIE MUNGER— mist.

WARREN BUFFETTHe's not kidding.

CHARLIE MUNGERWe had 400 million of that "good until reached for" assets we got with General Re.

WARREN BUFFETTAnd they were behaving honorably.

CHARLIE MUNGERYes. But at any rate, people pushed it way too far. In the drug business, they say, "Prove that this works" before they certify the drug. On Wall Street, they start believing in the tooth fairy, and if one guy is reporting a lot of money, why, everybody else is asking, "Why aren't we betting on the tooth fairy?" It's a crazy culture, and to some extent it's an evil culture, and it needs a huge reigning in. And the accounting profession utterly failed us. The worst behaving were the people who set the accounting practice standards. And they're very bureaucratic and take forever, and they don't want to do anything real difficult that displeases people. This is not a combination of wonderful qualities when your job is to set accounting standards, which ought to be dealt with sort of like engineering standards. And they don't even have the right approach. So there's a lot wrong.

WARREN BUFFETTWhen Charlie and I first got to Salomon, we noticed that they were trading with Marc Rich, who had fled the country. And we suggest — well, we told them — we wanted to quit trading with Marc. And they said, well, they were making money doing it one way or another, and they said, what the hell did we know about crude oil trading, and they wanted to keep trading with him. And only by just total directive could we stop our own employees from trading with Marc Rich. Now, if you can't stop your people trading with Marc Rich, you know, when you're focusing on it, just imagine what goes on, you know, in those trading rooms elsewhere. It's — if Bear Stearns — I think the Fed did the right thing by stepping in on Bear Stearns. If Bear Stearns had failed on Sunday night — and it would have — they would have walked over to a federal judge and handed him a bankruptcy petition, I guess, a little after 6 o'clock Midwest time, because that's when Tokyo opened. If they had failed, the next day, as I understand it, they had about 14 1/2 trillion — which isn't as bad as it sounds — but 14 1/2 trillion of derivative contracts. Now, the parties that had those contracts that had a claim against Bear Stearns would have been required, I think, almost by the contracts they signed, but they would have been required to undo those contracts very promptly to establish the damages they would have against the bankrupt estate. Just imagine thousands of counterparties around the world, you know, trying to undo contracts, everybody knowing they had to undo contracts in a very, very short period of time. The 400 million we tried to reach for and didn't find — we had the luxury of spending about four or five years unwinding those contracts. These people would have had four or five hours to do the same thing with everybody else doing it simultaneously. It would have been a spectacle that would have been of, I think, of unprecedented proportions, and, of course, it would have resulted, in my view, of another investment bank or two going down, you know, within a matter of days. Because nobody has to lend you money. In fact, that was one of the interesting things that was said at the testimony when they called them down to the Senate Finance Committee. They — I think two of the witnesses said, we didn't understand — we understood we couldn't borrow money unsecured, if people started looking at us with askance, but they said, we didn't dream we couldn't borrow money secured. Well, we'd found that out at Salomon that we were having money borrowing money secured 17 years earlier. When the world doesn't want to lend you money, ten basis points doesn't do much, you know, or 20 basis points, or 50 basis points much, or a bigger haircut on collateral. If they (don't) want to lend you money, they don't want to lend you money. And if your dependent on borrowed money every day, you have to wake up in the morning hoping the world thinks well of you. And there was a period there a few months ago when I think every investment bank in the United States was plenty worried about whether people were going to think well of them the next morning.

Why we don't do 'due diligence' for even the biggest deals

WARREN BUFFETTWell, let's go on to number 9.

AUDIENCE MEMBERHarry Beguy (PH), San Francisco. Mr. Buffett, I was reading recently in Fortune magazine that when you invested $500 million in PetroChina back in 2001 or 2002, all you did was read the annual report. Now, I was thinking that most professional investors with the kind of resources that you have would have liked to have done a lot more research and talked to management, maybe regulators, et cetera, et cetera. The question I have is, how — what is it that you look for when you're reading an annual report like that? How is it that you were able to, and did, make an investment purely on the back of reading that report?

WARREN BUFFETTYeah. Well, it was in 2002 and 2003, and the report came out in the spring, and I read it. And that's the only thing I ever did. I never contacted any management. I never got a brokerage report. I never asked for anybody's opinion. But what I did do is I came to the conclusion that the company — and it's not hard to understand crude oil production and refining and marketing and the chemical operation they have. I mean, you can do the same thing with Exxon or BP or any of them, and I do that with all — I look at them. And I came to the conclusion it was worth a hundred billion, and then I checked the price and it was selling for 35 billion, roughly. What's the sense of talking to management? I mean, basically, if you talk to management of almost every company, they'll say they think their stock is a wonderful buy, and they'll give you all the good stuff and skip over things that — it just doesn't make any difference. Now, if I thought the company was worth 40 billion and had been selling for 35 billion, then at that point you have to start trying to refine your analysis more. But there's no reason to refine your analysis. I mean, I didn't need to know whether it was worth 97 billion or 103 billion if I was buying it at 35 billion. So any further refining of analysis would be a waste of time when what I should be doing is buying the stock. So we really like things that you don't have to carry out to three decimal places, you know. If you have to carry it out to three decimal places, it's not a good idea. And, you know, it — with something like PetroChina — it's like if somebody walked in the door here and they weighed somewhere between 300 and 350 pounds. I might not know how much they weigh, but I would know they were fat. (Laughter) That's all I'm looking for, is something that's financially fat. And whether PetroChina weighed 95 billion dollars or 105 billion didn't make much difference. It was selling for 35 billion. If it had been selling for 90, it would have made a difference. So if you can't make a decision on something like PetroChina off the figures, forget about going further, and that's basically what we did. It's a straightforward report, just like reading another — just like reading Chevron's or ConocoPhillips or something like that. Just as informative. And you weren't going to learn more, you know, by going out and deciding whether you thought — they've got one huge field in China where the life of it was 13 years or 14 years or something of the sort. They should hit you between the eyes. Charlie?

CHARLIE MUNGERYeah. I would argue that we have lower due diligence expenses than anybody else in America — (laughter) — and that we have had less trouble because we had less expense. I know of an investment operation in America that pays over $200 billion a year that —

WARREN BUFFETTTwo-hundred million.

CHARLIE MUNGER200.

WARREN BUFFETTMillion.

CHARLIE MUNGERYes. 200 million. Pardon me.

WARREN BUFFETTUh-huh.

CHARLIE MUNGER— every year to its accountants, a lot to help them with due diligence. And I think our operation is safer because we think like engineers. We want these margins of reliability. And they're trying to do something really difficult, which is to have fine-grain judgments in very complex areas, and rely on other people to do it who are getting paid fees. It's a very dicey process to do that. I think it's much safer to do our way.

WARREN BUFFETTIf you think the auditors know more about making an acquisition than you do, you ought to take up auditing and let them run the business, as far as we are concerned. We are not — I mean, when we get a call on something like the Mars-Wrigley situation, if we don't know enough about Mars and Wrigley by this point so that we have to go out — I still like to go out, of course, and sample all the bars. So we have a 15 — I mean, I feel I owe that to the Berkshire shareholders (Laughter) But I'm not going to look at their labor contracts or their leases or anything like that. If the value of Wrigley depends on a specific lease someplace or a specific commitment to this or that, you know, or a given environmental problem, forget it, you know. The — there are these overriding considerations that are enormously important, and then there's a whole lot of trivia that doesn't mean anything. We have never made a — we've made plenty of big investment — I've made plenty of big investment mistakes. I've never made one, in my view, that would have been avoided by conventional due diligence. And we would have spent a lot of money, and we would have wasted a lot of time and, in some cases, we would have missed deals, simply because we wouldn't have committed fast enough. We have a significant advantage, and it gets bigger as we get bigger, because, in terms of big deals, people rely more and more often on process, in that when people want to get a deal done, they want to know it's going to be done, they will come to us. I mean, the Mars people wanted to deal — in terms of this financing aspect of the Wrigley situation — they only wanted to deal with Berkshire because they knew we didn't have any lawyers involved. I'll admit to this group we didn't even have any directors involved. We just — you know, we got a call, it made sense, and we said yes. And when we say yes, we don't say yes with a material adverse change clause. We don't say yes, if financing is available. We just say yes. So I can tell people when we make a deal that, if we're going to have 6 1/2 billion available, it's going to be available, you know, whether there's a nuclear bomb goes off in New York City, or whether there's a flu epidemic, or whether Ben Bernanke runs off to South America with Paris Hilton. (Laughter) The check is going to clear. And if you're making a deal, you know, the guy that wants the 6 1/2 billion, that assurance is worth something. And you really can't get anyplace — they say, "Well, I'll do it, but I've got to have a due diligence team check this out and do all of that." So it's a real advantage to us, and I don't think there's any disadvantage to us.

Buffett on religion: "I'm a true agnostic"

WARREN BUFFETTNumber 10.

AUDIENCE MEMBERHi, Mr. Buffett. My name is Matthew Millard (PH). I'm from Norman, Oklahoma, and —

WARREN BUFFETTWe'll forgive that as Nebraskans. (Laughter)

AUDIENCE MEMBERThat's OK. Thank you. I've been a long-time Berkshire shareholder since I was 16. Really like the company. Really like your investment style, buy and hold forever, kind of beyond the grave. But my question actually had to do with, do you know and believe in Jesus Christ and have a personal relationship with him.

WARREN BUFFETTNo. I'm an agnostic. And I grew up in a religious household. And if you'd have asked that question of my mother and father, you'd have gotten a different answer. And I'm a true agnostic. I'm not closer to either a theist or an atheist. I simply don't know, and maybe someday I'll know and maybe someday I won't, but that's the nature of being an agnostic. Charlie?

CHARLIE MUNGERI don't want to talk about my religion.

WARREN BUFFETTOK. Well — (Applause.)

WARREN BUFFETTBeing an agnostic, I don't have to talk about religion. It's very simple. (Laughter) I don't — obviously I have no opinion on anybody else's religion because that's the nature of being an agnostic. I wish everybody well on their own.

Berkshire takeover after Buffett dies is "very unlikely"

WARREN BUFFETTNumber 11.

AUDIENCE MEMBERHello. Good afternoon, Warren and Charlie. I want to thank you for hosting this annual meeting. My name is James (inaudible) from East Brunswick, New Jersey. I don't want to sound morbid, but my question is, once you two are gone and Warren's stock is placed in trust and slowly forced to be sold over the years, what safeguards are in place to prevent a hedge fund or LBO shops from joining together and acquiring Berkshire Hathaway, and putting in play and breaking up this wonderful company and endangering the culture of this company?

WARREN BUFFETTWell, my stock would be sold over about a 12-year period after my death. During the time of settling the estate, it gets disposed of in the same manner as presently, and then it gets on a time clock. So that takes a lot of time. I may live a little longer, even, than now, but even if that started now, you would be dealing, I hope, with a company that had a market value much larger than even we presently have, and you'd still have large blocks of stocks held by institutions or people that certainly had a similar philosophy. There's no guarantee that if somebody wanted to try a 6- or $700 billion takeover — and it might be, you know, a lot larger than that if you go out a ways — that it can't be done. But I think it would be about as unlikely to happen in the case of Berkshire as any company I can think of in the world. It can't happen at all, in effect, until sometime after I die. There will be a lot of votes concentrated until that period. And like Charlie says, I've told — there's this period after I die before this 10-year distribution period kicks in — so I've told my lawyer to make sure that my estate lasts for quite a while. And he says that's like telling your teenage son to have a normal sex life, when you tell a lawyer that. But it will be a long time. And like I say, if we do anything in the way of decent rates of compounding, you really are talking, you know, one of the very largest companies in the United States. And I don't think anybody's going — I don't think there's going to be an LBO of General Electric or Exxon, and I think it would be equally difficult with Berkshire. There's no 100 percent guarantee, however. Charlie?

CHARLIE MUNGERYeah. And, besides, Warren doesn't plan to leave very early. I've heard him say several times when people ask him what he wants said at his funeral. And he always gives the same answer. He says he wants people to say, "That's the oldest-looking corpse I ever saw." (Laughter)

WARREN BUFFETTAnd I'm unlikely to change my views on that subject. (Laughs) But thanks for asking. (Laughs)

It's hard to challenge a well-established, popular brand

WARREN BUFFETTNumber 12?

AUDIENCE MEMBERHello. My name is Harold Yulean (PH). I'm from Chicago, Illinois. I'd like you to describe the economic characteristics of the Kraft Corporation, why you feel this is a good business.

WARREN BUFFETTWell, I would say most of the big food companies are good businesses in that they earn good returns on tangible assets. And I don't want to get into — particularly into specifics on Kraft — but if you own important, branded products in this country, whether it's Wrigley's or Mars or Coca-Cola, or a number of the Kraft brands, or See's Candy, you have good assets. It's not easy to take on those products. Just imagine, you know, taking on — Coca-Cola will sell a billion and a half eight-ounce servings of its product around the world today. There's something in everybody person's mind virtually in the globe about Coca-Cola. It's a product of — since 1886 has been associated with happiness and good value in terms of refreshment and all that. It's just about impossible, you know, to, in my mind, anyway, to take on a product like that. It's clearly satisfies people in a huge way, you know, everywhere on the globe. And, you know, it may not be the same — Kraft, for example, has Kool-Aid in the powdered soft drink business. You know, I don't think I'd want to take on Kool-Aid. I'd rather have Coca-Cola. But it's a tough product. And to get implanted — just think of — to get implanted in people's mind RC Cola around the world. And RC Cola has been around a long, long time. You know, it isn't going to go anyplace. I mean, that is very, very difficult. And actually, Richard Branson came over to this country — you know, they say that a brand is a promise. I mean, there's a promise involved in picking up a Milky Way, or picking up a Coca-Cola, as to what it's going to deliver to you. Richard Branson came over seven or eight years ago, 10 years ago, you know, a fellow with a famous airline and all of that, and he came out with something called Virgin Cola. And I thought that was kind of an unusual promise to have in a product. (Laughter) Never could quite figure that one out, what the promise was. But whatever it was, it didn't work. And there have been — I don't know how many — Don Keough would know — but there have been hundreds of colas over the years. But in the end, who is going to, you know, buy some substitute cola for a penny a can less, or two cents a can less, than Coca-Cola, or the same thing with See's Candy, or the same thing with Kool-Aid, or whatever it may be. So we feel pretty good about branded products when they're runaway leaders in their field. And there's nothing unusual about Kraft in their position versus Kellogg or some other people like that. So there's — the specifics of which one we buy may depend a little bit how we feel about the price. It certainly will make a difference how we feel about the price, the management, and some other factors. But if you buy in with good branded products and you don't pay too much, you're probably going to do OK. On the other hand, you're not going to get super rich because the attributes that I've just laid out are pretty well recognized. Charlie?

CHARLIE MUNGERI've got nothing to add.

WARREN BUFFETTOK.

Avoid low-probability problems that could destroy the company

WARREN BUFFETTI don't — do we need to go to the other room or not? Well, let's just go to number 1. If I'm skipping the other room and there are still people in there, somebody can let me know, and we'll go back for them. Number 1.

AUDIENCE MEMBERHello, Mr. Buffett, Mr. Munger. My name is Kevin Truitt (PH) from Chicago, Illinois. My question is this: you have identified four investment professionals who will at some point in time be running the portfolio for Berkshire Hathaway. What was the criteria that you used to select the four people and what will be the criteria for evaluating them going forward?

WARREN BUFFETTYeah. The criteria for selecting, I think, we laid out pretty well in the 2006 annual report. We obviously look for people that have had pretty good records, but that criteria alone is nowhere near sufficient to come up with the candidates we want. I mean, we care enormously about human qualities, and we think we can make that judgment in some cases, and in some cases we can't. I mean — and it's no negative vote on people we skipped over. We just decided we didn't know whether they would be the right kind of person. We made an affirmative judgment on four, as to both their ability and their integrity. And I would like to — there was one other item in here, I believe, which I think achieved a little added relevance in the last year. I said, "We therefore need someone genetically programmed to recognize and avoid serious risks," and then I put in italics, "including those never before experienced." And then I said, "Certain perils that lurk in investment strategies cannot be spotted by one of the models — by use of the models — commonly employed today by financial institutions." Well, I think that proved to be somewhat prophetic of what happened last year. All of these places had models. I mean, the major banks, the major investment banks. They would meet weekly at a risk committee, probably, and go over their models, and all of the statistics would be printed in nice columns and everything. And they didn't have the faintest idea what risk they were involved. You really need, in the investment world, someone very solid, someone you trust, reasonable analytical skills. But you also need someone that actually can contemplate problems that haven't popped up yet but which are starting to become possibilities, in terms of new financial instruments or new behaviors in markets and that sort of thing. And that's a rare quality. I mean, that inability to envision something that doesn't show up in your past model, you know, can be fatal. And Charlie and I spend a lot of time thinking about things that could hit us out of the blue that other people don't include in their thinking. And we may miss some opportunities because of that, but we feel it's essential when managing other people's money or, for that matter, managing our own money. So I would say that you might go back and read the 2006 annual report again, but those are the criteria we're looking for and we have identified as being met by the four people we're thinking about. Charlie?

CHARLIE MUNGERYeah. You can see how risk averse Berkshire is. In the first place, we try and behave in a way so that no rational person is going to worry about our credit. And after we've done that, and done it for many years, we also behave in a way that, if the world suddenly didn't like our credit, we wouldn't even notice it for months, because we have such liquidity and are so unlikely to be — unable to be — pressured by anybody. That double layering of protection against risk is like breathing around Berkshire. It's just part of the culture. And the alternative culture is just the opposite. You call a man the Chief Risk Officer, but often he is functioning as a guy that makes you feel good while you do dumb things. (Laughter) So he's like the Delphic oracle that convinced the Persian king to attack somebody or other. I mean, it's — he's just a dumb soothsayer. And how can a guy be dumb when he's got a Ph.D. and he can do all this advanced math?

WARREN BUFFETTEasy.

CHARLIE MUNGERYou can — (laughter) — but you can. It's very — all you've got to do is crave system and computation so much that you torture reality into fitting some model — mathematical model — which really doesn't match, particularly, under extreme conditions. And then, because of this work that you're putting into everything and these computations about daily trading, risk, and so forth, you feel confident that you've clobbered the risk, but you haven't. You're just clobbered up your own head. (Laughter)

WARREN BUFFETTYeah. We really want to run Berkshire, you know — (Applause.)

WARREN BUFFETTI'll even applaud that one. (Laughs) We really want to run Berkshire so that if the world isn't working tomorrow the way it's working today and it's working in a way nobody expected, that we don't have a problem. We do not want to be dependent on anybody or anything else. And yet we want to keep doing things. So, we've found a way to do it — we think we found a way — to do that. It may give up some of the — well, obviously gives up earning higher returns 99 percent of the time, and maybe 99.9 percent of the time. Obviously, we could have run Berkshire with more leverage over the years than we have. But we wouldn't have slept as well, and we wouldn't feel comfortable — we'd have a lot of people in this room that have almost all their net worth in Berkshire, including me — and we wouldn't feel comfortable running a business that way. Why do it? I mean, it doesn't — it just doesn't make any sense to us to be exposed to ruin and disgrace and embarrassment and — for something that's not that meaningful. If we can earn a decent return on capital, you know, what's an extra percentage point? It just isn't that important. So we will always try to behave in a way that, A, is not dependent on anybody else evaluating the risk except for us. It cannot be farmed out. And you've seen what happened to some institutions where the management thought they were farming it out. And, you know, if that means a reasonable return instead of a slightly unreasonable return, we just accept it.

"If we can't make a decision in five minutes, we can't make it in five months"

WARREN BUFFETTNumber 2. (Applause)

AUDIENCE MEMBERHello, Mr. Buffett. Hello, Mr. Munger. My name is (inaudible) (PH), and I'm from Munich, Germany. I would like to get back to your point that, as a professional investor, one should be able to act quickly and decisively. That means being able to know what the intrinsic value is and to act within a day or within an hour if the market offers an opportunity. My question is, how large is the universe of companies which you have in your head whose intrinsic value you know, where you would be able to act within a day or two if the market offered an attractive price to you? And, secondly, how come you suddenly invest in southern Korea or China?

WARREN BUFFETTYeah. We can act — our immediate decision is whether we can figure the — what's being offered out to us or not. I mean, there's a go/no-go signal. And Charlie and I are often thought to be rude when we think we're just being polite and not wasting the other person's time. So as they start mid-sentence in their first conversation with us, we just say, "Forget it." And Charlie is pretty good at that, and I'm picking it up. (Laughter) It's — we know very, very, very early in a conversation whether somebody's talking about something that there's any chance is actionable by us. And we don't worry about the ones we miss. We want to make sure that we don't waste any time thinking about things that, when we get all through thinking about them, we're not going to know enough to make the decision on. So we just rule those out. And that rules a lot of things out. But then, if it gets through a couple of these filters and makes it into an area where it says this is something that we know enough about to make a decision on, we're ready to move right then. So we make decisions — we can make a decision in five minutes very easily. I mean, it just is not that complicated. Now, we know about a number of businesses and industries, and there's a lot of businesses and industries we don't know anything about. We know a lot of things about certain kinds of bonds, and we know — there's a variety of things we know about, and it's nice if we can expand that universe of knowledge. But the most important thing is that anything that gets through is in an area of knowledge. And the truth is, if we can't make a decision in five minutes, we can't make it in five months. You know, we're not going to learn enough in the followings five months to make up for the fact that we went in deficient in the first place. So it's just not a problem around Berkshire. If we get a call and somebody says either they've got a business for sale or — that's what we're going to get on the calls — or if I'm reading a paper, or a magazine, or an annual report, or a 10-K, and I look at a price and there's a significant differential between price and value, we move right then. And Charlie and I don't need to talk to each other about it. I mean, we both think the same way, and we have generally similar spheres of knowledge. Charlie?

CHARLIE MUNGERIt's — the answer to your question is, we could make a lot of decisions about a lot of things very fast and very easily. And the — and we're unusual in that respect. And the reason we're able to do that is there's such an enormous other lot of things that we won't allow ourselves to think about at all. It's just that simple. I mean, I have a little phrase when people make pitches to me, and about halfway through the first sentence, I say, "We don't do startups." They don't exist. Well, if you blot out startups, there's a whole layer of complexity that goes out of your life. And we've got other little blotter-out systems. And using those, we finally find out that what remains is still a pretty large territory that we can handle. You think that's fair, Warren?

WARREN BUFFETTYeah.

CHARLIE MUNGERYeah.

WARREN BUFFETTAnd an awful lot of giveaways that people, in the first sentence or two, throw out that, you know, we just know we aren't — you know, it isn't going to work. (Laughs) And we waste very — I would say — we waste a lot of time, but we waste it on things we want to waste our time on. (Laughs) We're very selective about that, and then we're good at it. We waste a lot of time. But we're not going to waste it on things we don't want to waste it on.

No thoughts on Mexican billionaire Carlos Slim

WARREN BUFFETTNumber 3.

AUDIENCE MEMBERMr. Buffett, Mr. Munger, thank you very much for this wonderful rite. Coming — my name is Jorge Garza (PH), and I'm coming from Mexico City. Coming from there, you have been occasionally compared to — or rather Carlos Slim has been occasionally compared to you, for other reasons than your love of the game of baseball. Can you please share your thoughts on him?

WARREN BUFFETTWell, I — he came up once with two of his boys, and we had lunch. But that was probably 15 years ago. So I really have no special — I mean, you probably know a lot more about Carlos Slim than what I do. I read the news stories and all of that. And we had a perfectly pleasant lunch. But that was a long time ago. And, Charlie, do you have anything?

CHARLIE MUNGERNo. I think you speak for the total knowledge of both of us about Carlos Slim. (Laughter)

WARREN BUFFETTWe'll go down the rest of the Forbes 400 for you, too, if you would like. (Laughter)

Human rights issues shouldn't keep a country out of the Olympics

WARREN BUFFETTOK. Number 4.

AUDIENCE MEMBERHello. My name is Andre Stalty (PH). I come from New York City, and I'm thrilled to be here. I'm greatly inspired by you. We follow you in our analyze business class in New York City, a small group of small investors. And my —

VOICE SHOTINGThere are human rights violations in the Klamath.

AUDIENCE MEMBERMy question is, would you, or have you, considered asking Coca-Cola to withdraw sponsorship from the Beijing Olympics in light of the immense human rights violations in Tibet, possibly inspiring a new business model that would value humanitarian interest as well as monetary interest?

WARREN BUFFETTYeah. I personally — you know, I personally think that the Olympics — and I hope they are — you know, conducted forever with everybody participating. I think that, personally, it's a mistake to start deciding whether this country should be allowed and this country shouldn't be allowed. (Applause.)

WARREN BUFFETTI think it's very hard to grade a couple hundred countries that might be participating, according to how their behavior was. I mean, we didn't let women vote in the United States, you know, until 1920. So we went 140 or so, 130 years, and I would say that was a great human rights violation, but I would have hated to see the United States banned from the Olympics, you know, in the years prior to that because of that. So I just think it's a terrible mistake to try to get into — the Olympics have a wonderful event. I think the more people participate in them, the better. And I think that, on balance, they contribute to a better world over time. So I would not start getting punitive about it. But I understand your motives on it. Thank you. Charlie?

CHARLIE MUNGERWell, Warren understates my position. (Laughter)

WARREN BUFFETTI usually understate his position. This is a man of strong opinion.

CHARLIE MUNGERAnd I would say to you people who are distressed by imperfections in China, ask yourself your question — the question — is China more, or less, imperfect as the decades have gone by? And the answer is China is moving in the right direction. And as long as that's happening, I think it's a grave mistake to just pick the worst thing about somebody you don't like and obsess about it.

WARREN BUFFETTYeah. The U.S. has moved in the right direction over years. (Applause.)

WARREN BUFFETTOur Constitution said blacks were three-fifths of a person, you know. We've moved a long way, and we're far from perfection. But I think you do better with people that you're working with to — if they're going in the right direction, largely, to encourage them. You may want to nudge them a bit, but I don't think the Olympics is the right way to do it.

We'll reduce our reliance on coal, but not soon

WARREN BUFFETTLet's go to number 5.

AUDIENCE MEMBERHi. My name is Jessica Helmers (PH), and I'm from Scottsdale, Arizona. My question is, what future trends do you see in the coal industry? Do you think its cost advantage will outweigh its environmental impact?

WARREN BUFFETTWell, I think in the short-term the world is going to use more coal, you know, and I think that there's no question that there's an environmental disadvantage to it. And as the — I think the world will slowly — maybe more rapidly than that — but we will figure out better ways to do the things that coal does, that will be more environmentally friendly over time, but it isn't going to happen fast. I mean, if you shut down the coal-generated utilities in the United States, you know, this — we would not be able to hold this meeting in a room with the lights on. So it's a very tough problem to solve, or to even make big inroads on in a short period of time. Now, we — at MidAmerican — we've put in a lot of wind capacity in the last five years or so — probably about as much as anybody has. But we are dependent a lot on coal. It's cleaner coal than it was 20 years ago, but — and we will be dependent on it for a long time. And, you know, it's a worldwide problem, obviously. The Chinese are building coal plants at a very rapid rate. It's going to require cooperation and leadership on a worldwide scale. And, frankly, the United States is not in a great position in terms of leadership because, you know, per capita, we've done as much to this planet of a negative nature as any country in the world. So we — it's a little tough for us to go around preaching to people, but we will need a leader, in my view, that can sort of transcend our record of the past and get cooperation from major countries around the world. I don't think it's going to be — but I don't think it's going to be fast. Charlie is less pessimistic on this than I am. Charlie?

CHARLIE MUNGERWell, I think the people who are very against the use of coal should reflect: which one they'd rather use up fast — the hydrocarbons, the oil and natural gas, or the coal? I would rather use up the coal because it's less desirable as a chemical feed stock for what we need to feed the world. And so I would argue that there's an environmental reason, in terms of human kind, for being very pro-coal use. Most people don't think that way, but I do. (Laughter)

WARREN BUFFETTCharlie does not find comfort in numbers.

CHARLIE MUNGERNo.

Don't lump regional banks together

WARREN BUFFETTNumber 6.

AUDIENCE MEMBERMy name is Rosat Bastar (PH). I live in Sacramento, California. The stock prices of most small, regional banks have become more attractive in the past one year. Do you have any opinions about regional banks as investments? And if you were going to purchase shares, what are the areas that you would carefully examine?

WARREN BUFFETTYeah. I don't think you should make a categorical decision about something like — however you define them — small, mid cap, whatever, regional, or national banks for that matter. So much depends on the character of the institution, which will probably be a reflection, to a great degree, of the type of CEO you have. And I — a bank can mean anything. It can — you know, it can mean an institution that's doing all kinds of crazy things. It can — there was one called the Bank of the Commonwealth up in Detroit many years ago that went to extremes, and it was very popular on Wall Street for a while. It could mean the soundest of institutions. We had one — we owned a bank — the only bank Berkshire's ever owned in its entirety — in Rockford, Illinois, run by a fellow named Gene Abegg. And, you know, it wouldn't make any difference whether it was a super-regional or a regional or a small or a mid-cap bank, there's no way Gene Abegg could run anything other than a super-sound bank. So I don't think you should — I think you should know something about the culture of the management and the institution to make a firm buy decision on a bank, and that's hard to do for 99 percent of the banks. We own stock, as you know — it's in our report — Wells Fargo and U.S. Bank and M&T up in Buffalo. And in all three cases, I think I understand quite well the DNA of the institution, in terms of how it behaves. That doesn't mean those places are immune from problems, because they'll have problems. But it means — but it does mean — they're immune, in my view, from what I would call institutional stupidity. And I would not say that all banks are immune from that. As a matter of fact, there was a very wise man named — I think it was Morris Cohen (Morris Schapiro) — that said, "There are more banks than bankers," and if you think about that awhile, you'll get my point. (Laughs) Charlie?

CHARLIE MUNGERWell, I think the questioner is onto something. So many of our very large banks, both here and in Europe, have sort of cast a pall of disgrace over the whole industry, and that is undoubtedly pounded down the stocks of some small banks that there's nothing at all wrong with. So I think you're prospecting in a likely territory.

WARREN BUFFETTYeah, but you can find a few big banks —

CHARLIE MUNGERYes. (Crosstalk)

WARREN BUFFETTAnd it — I don't know if you took the 20 smallest banks in Florida and the 20 largest banks in Florida which group would be in better shape, in terms of the Florida real estate situation.

CHARLIE MUNGERIt's a territory that has some promise. (Laughter)

WARREN BUFFETTThat is a wildly bullish statement from Charlie. (Laughter)

Nuclear proliferation is the "primary problem of mankind"

WARREN BUFFETTNumber 7. I'm going to go out and buy that stuff as soon as we get out of here. (Laughter)

AUDIENCE MEMBERGood afternoon. My name is Matt Thurman (PH), Chicago, Illinois. Mr. Buffett, Mr. Munger, what are your thoughts on preventing further nuclear proliferation, given recent events in Syria, Iran, North Korea, and other countries? Thank you.

WARREN BUFFETTYeah. Well, it's the great problem of mankind, along with proliferation or the spread of other weapons of mass destruction in the chemical and biological field. The genie is out of the bottle on nuclear knowledge, and more and more people are going to know how to do enormous damage to the rest of the human race as the years go by. You'll have a given percentage of the population that are psychotics or megalomaniacs or religious fanatics or whatever, and will wish ill on their neighbors. And the choke point will be — presumably — will be materials, and to a degree, deliverability. I think there — people generally associate weapons of mass destruction threats these days with terrorists and rogue organizations of some sort and not so much with nations. But I regard both as being enormous threats to the future of mankind, and we have not made much progress in that respect to — we should be doing everything possible to reduce access to materials — and I've even had a few thoughts on that which you can look up on the Nuclear Threat Initiative, probably on the website. And we've got a proposal, actually, that might reduce by a tiny bit the rationale, at least, for all kinds of nations having highly-enriched uranium and that sort of thing. But it's the — it is the primary problem of mankind. If you've got 6 1/2 billion people, you're probably going to have — in the world — you're probably going to have close to twice the number of people who wish ill on their neighbor than you had when you had 3 billion people. And for a long time, if you were a psychotic or something, you could pick up a stone and throw it at the guy in the next cave, and you moved onto bows and arrows and rifles and cannon. But for millennia, the ability to inflict massive damage was quite limited, no matter how crazy you were. And since 1945, when Einstein said that the atomic bomb, as they called it then, "has changed everything in the world except how men think." That was a comment made shortly after Hiroshima. We live in a world where exponentially — has experienced exponential growth — in the ability to inflict harm on somebody else, and we haven't gotten rid of the nuts or the people who want to do it. And it is — whether it's, you know, Iran or you name it, or whether it's terrorist organizations or whatever, you know, we live in a very, very, very dangerous world on that that is getting more dangerous as we go along. And we've been very lucky since 1945, you know, when the Cuban missile crisis came along in the '60s, you know, it might have been 50-50, and I think we were lucky we were dealing with Khrushchev and we were lucky that Kennedy behaved the way he did. But we were lucky, and Charlie and I talked a lot about it in the '60s at the time. But it won't go away. And you would hope, at least in the United States, that we have an administration, whether it's Republican or Democrat, where that's at the top of the agenda, trying to figure out a way to minimize that risk. You can't eliminate it. It is out of the bottle. But we've got to — it should be paramount to minimize the risk that we really get into something that involves, you know, deaths on a scale that nobody's ever contemplated before. Charlie?

CHARLIE MUNGERYeah. Well, you talk about deaths on a scale that people have never contemplated before. People have recently figured out that the population of Mexico probably had a population decline of 95 percent caused by European man bringing in his pathogens. And it was a pretty big civilization that went through that little knothole. These things can happen and have happened. And look at Mexico today. I don't think it's going to wipe out the species.

WARREN BUFFETTWell, that's —

CHARLIE MUNGERI hope that cheers you up. (Laughter)

WARREN BUFFETTThe cockroaches will survive. It's a very good question. I wish I knew a better answer.

Buffett's advice for young people

WARREN BUFFETTNumber 8.

AUDIENCE MEMBERGood afternoon. I'm (inaudible) from Apopka, Florida. I would like to thank you for this wonderful opportunity to learn so much more about finances and, at the same time, have a wonderful time. It's been fun.

WARREN BUFFETTThat's great.

AUDIENCE MEMBERI teach at Valencia Community College in Orlando, Florida. I teach office administration and business. I applaud my students for investing in themselves by enrolling in college. I also want to stress financial independence and financial freedom. I do this by telling them that slow and steady wins the race; also, good, sound financial management; and then the law of reciprocity. I have them track every expense over a period of time. Also they buy, theoretically, one stock and track that, too, over a period of time. We keep track of the current financial news, current news, and also they have research papers. (Applause.)

AUDIENCE MEMBERThank you. (Laughter) They research FICO scores, the credit reports, Clark Howard, Suze Orman, the top ten billionaires, not because — (Applause)

WARREN BUFFETTI think — Could you move onto your question, then, please? (Laughter)

AUDIENCE MEMBERYes.

WARREN BUFFETTBut thank you.

AUDIENCE MEMBEROK. What else should I be doing to lead them — (laughter) — to make sound financial decisions and to have happy, sound financial life?

WARREN BUFFETTI'm ready to hire your entire class right now. (Laughter) Well, I think you're telling — you're giving them some very good advice. I think that the most important investment you can make is in yourself. I mean, very, very, very few people get anything like their potential horsepower translated into the actual horsepower of their output in life. And potential exceeds realization to just an enormous factor with so many people. And I — one illustration you might try with your class — I tell them this when I talk to high school groups — just imagine that you're 16 and I was going to give you a car of your choice today, any car you wanted to pick, and — but there was one catch attached to it — it was the only car you were going to get in the rest of your life, so you had to make it last there. You can pick out the fanciest you want, a Maserati, whatever it might be. How would you treat it? Well, of course you would read the owner's manual about five times before you turn the key in the ignition. You'd keep it garaged. Any little rust, you would get taken care of immediately. You'd change the oil twice as often as you were supposed to, because you know it has to last a lifetime. And then I tell the students, you get one body and one mind, and it's going to have to last you a lifetime, and you better treat it the same way, and you better start treating it right now, because it doesn't do you any good to start worrying about that when you're 50 or 60 and the rust — that little speck of rust — has turned into something big. So anything your students do to invest in their mind and body — particularly your mind — we didn't work too hard on the bodies around here, but — (laughter) — you know, it pays off. It pays off in an extraordinary way. Your best asset is your own self. And you can become, to an enormous degree, the person you want to be. When I get classes in universities, I just ask them to imagine they were going to buy one of their classmates to own 10 percent of for the rest of their life. Which one would they pick? They wouldn't pick the one with the highest IQ, or necessarily the one with the highest grades. They'd pick the person that's going to be effective. And the reason people are effective is because other people want to work with them. They want to be around them. And other people they don't want to be around. And those are qualities than an individual picks up — being generous, being humorous, being on time, not claiming credit for more than you do but rather less than you do, helping out other people — all kinds of human qualities that turn other people on, and then there's things that turn other people off. And those are habits, and they're the habits that you pick up when they're the age of your students. The habits they have today will follow them throughout life, so why not have good ones? So that's the only message I would give your students. (Applause)

CHARLIE MUNGERWell, I've got a specific suggestion that answers your specific question. I would add to that extensive repertoire of yours by teaching them to avoid being manipulated to their disadvantage by vendors and by lenders using the standard tricks of the vendor and lender trade. And you couldn't start with a better book than Cialdini's "Influence," and I think Bob Cialdini, who is a shareholder, is here somewhere in this audience. And so I have a new textbook to — I suggest you add to your class — which is Cialdini's "Influence." And he's just got a new book that's coming out and for sale in Omaha today, I think, for the first time, and that's called "Yes." So here's two books that I suggest you add to your class.

WARREN BUFFETTOK. (Applause.)

Buffett on owning sports teams

WARREN BUFFETTLet's go to number 9.

AUDIENCE MEMBERI'm Andrew (inaudible) from Chicago, Illinois, and I'm nine years old, and I'm a big baseball fan. I know you like baseball, and my favorite team is the Chicago Cubs. Would you like to buy the Chicago Cubs from Sam Zell? (Laughter) And my question is, do you think buying baseball teams is a good investment? (Applause)

WARREN BUFFETTWell, it's been a good investment. It's been a good investment. It's not been a good investment necessarily because the earnings have gone up so much, although cable television multiplied the value in a big way. In effect, television expanded the stadium. Wrigley Field, I think, probably seats less than 40,000, maybe. So you had 40,000 seats available when I went there for my first major league baseball game in 1939. But then along came television, and then cable television, and pay — in effect, pay-cable television for baseball or sports networks, and that multiplied the seats in a huge way. Now, a lot of that went to the players, but some of it stuck to the owners. I am not a — when I was your age, I would have thought if I made a lot of money, I would have bought a team. But there were a lot of things I thought I would do then — (laughter) — I haven't done subsequently. So, I don't think — if the Cubs sell for 700 million, and you've got a percentage of that in your bank account — now, I don't think I would buy in at that price. There's a psychic income to many people in owning sports teams. I mean, it makes them famous. Maybe not in the way they anticipated when they bought the team, but the — you know, it is a way to instant celebrity and recognition and all that. And as long as we live in a society where people have loads and loads of money, a certain percentage of people are going to want to become known for the fact that they have done very well in life, and a sports team is certainly one way of doing it. That isn't the only reason people buy them, obviously. But I will say this, you are not the first one that's asked me about buying the Cubs. (Laughs) I've had calls — not from Sam — but from other people, and it's — I think I'll leave that to you. Charlie? You know anything about buying a sports team? He would be a tougher sell than I would. I might do something kind of stupid like that, but —

CHARLIE MUNGERWell, you've already done it once.

WARREN BUFFETTYeah. (Laughter) Touche.

U.S. may be so rich it doesn't need to save

WARREN BUFFETTNumber 10.

AUDIENCE MEMBERMr. Chairman, Mr. Vice Chairman, my name is Andy Peake (PH), and I'm from Weston, Connecticut. Americans at the individual, municipal, state, and federal levels, historically, do not save. On the other hand, Asians save approximately 40 percent of their income. Living beyond one's means is an American way that obviously cannot continue. First, why is it that Americans do not save, and, secondly, what can we do to correct this long-term problem? Thank you.

WARREN BUFFETTYeah, well certainly the savings rate in this country is — has fallen significantly and may even be negative, although it does seem to me that the value of the country, in real terms, I think, does increase quite significantly decade to decade. So I'm not sure exactly how it happens without savings, but it does seem to me that this country, as a whole, is worth considerably more than it was 10 or 20 or 30 or 40 years ago, in real terms. So something good has happened. But the propensity to save, that almost seems innate, in at least the great majority of cases. I mean, we've got our friend from Florida teaching children to save, and I think that has some impact. And I should have thanked Andy Heyward for that terrific cartoon this morning, and he's got a program that I'm participating in that we think — in cartoon form — might influence a few younger people towards saving. If you own Berkshire stock, you're automatically saving, because we retain earnings, and you're indirect interest in those retained earnings is a form of saving. So you can spend every dollar of your income that comes in the other way, and if you own Berkshire, you are, net, saving, which is a practice I have now been following for 40 years. Sometimes to my family's consternation. I don't know that the — you know, the savings rate is based on calculations made on consumption and imports and so on. We are importing $700 billion more of goods and services than we're exporting. And that means that somebody else is doing our savings for us, basically, as we export ownership and claims against America. I think that's going to have consequences over time, but we are so rich that it may not be really apparent. I think the average American's standard of living is going to improve, in real terms, although I think it may be very, very, very disproportionate, the extent to which the — particularly the super-rich — benefit compared to those in the middle class. But, net, I think the country will be — even with our present policies, the net — in net real terms, the value on a per capita basis of the country will increase from decade to decade. But nothing like it will, in places like a China or Korea percentage-wise, where the savings rate is very high. This country may not save very much because it may not need to save very much. We have $47,000 of GDP per capita. It may not be distributed very well, but we are one very, very, very rich country. And a very rich country may not need to save as much as a country that's trying to reach its potential. Charlie?

CHARLIE MUNGERI've got nothing to add to that.

Why Buffett is going to Germany

WARREN BUFFETTOK. Number 11.

AUDIENCE MEMBERMr. Buffett, Mr. Munger —

WARREN BUFFETTThis sounds serious.

AUDIENCE MEMBERMy name is — (Laughter) I'm used to that. My name is Uta Bauda (PH) from Munich. Again, a guy from Germany. We're going to meet in around about 14 days' time again in Germany, in Frankfurt at the Union Club. May I ask you a little bit ahead of the others, what your reasons for coming to Germany? Thank you.

WARREN BUFFETTYeah. It's very simple. We want more — not that there have been hardly any so far — but we would like more family owners of German businesses — in some cases in the family, maybe a hundred years, maybe 20 years, whatever it might be — we want more owners who, when they feel some need to monetize their business, think of Berkshire Hathaway. We want to be on their radar screen. We want to be in the same position — we want them to be in the same position that the Wertheimer family was or Paul Andrews' family was here not so long ago, or the Pritzker family was. When they have some reason — could be a variety of them — that they wanted to convert a — the ownership of a good — very good — company about which they care a great deal — translated into money, to think about calling us. And if they care about their business, we are their best call. And I don't think we're anywhere near as prominent on the radar screen in Germany as we are in the United States, and it's something I probably should have done more about earlier, but now I'm going to hit four countries in Europe in a few weeks. And when we leave, I think we'll be somewhat better known — what we're looking for, what we can do for those companies, why they should give us a call — I think we'll be better known a month from now than we are now. Charlie?

CHARLIE MUNGERYeah. And Germany is a particularly advanced civilization, in terms of inventiveness and engineering. You go into an American printing plant now, and the names on the machines are all German — not all, but mostly. Now, some of the German names are Germans that came over here to America and formed printing equipment businesses. But it's just amazing the influence that the Germans have had on field after field in America. It's a very logical place for us to be looking.

WARREN BUFFETTSounds like maybe Charlie should go. (Laughter)

Munger on housing: A "particularly foolish mess"

WARREN BUFFETTNumber 12.

AUDIENCE MEMBERMy name is Len Yaffe. My wife, Ruth, and I live in Tiburon, California. I was wondering if the current economic stresses remind you of any prior period in U.S., or any other nation's, history, and, if so, is there anything we can learn from the prior period that might help us manage the current period better?

WARREN BUFFETTWell, they're all a little different and they all have similarities. But this one, obviously, had more of its origins in the mortgage field and in terms of the residential real estate bubble. But the troubles that begin in one area have a way of spreading to other areas. But I would say that, in my lifetime, it's been — I can't remember one where this particular residential real estate bubble has sent out the shock waves and the exposure of other practices elsewhere to — as to their weaknesses — like this one. But I don't think there's any magic to the analysis or anything like that. I think that some stupid things were done that won't be done soon again, and they won't be done exactly the same again, but variations of them will pop up at some point. Because humans are what lead to stupidity in behavior, and there are these sort of primal urges that — in terms of getting rich and using leverage and all of that sort of thing, and wanting to believe in the tooth fairy — that pop up from time to time in human behavior, and sometimes they pop up on a very big scale. The — in terms of having any great insights on solutions or anything of the sort, I don't have them. Charlie?

CHARLIE MUNGERNo. It was a particularly foolish mess. Now, at earlier meetings we talked about some idiot that decided that a credit delivery grocery business, like the old Buffett store —

WARREN BUFFETTWebvan.

CHARLIE MUNGERYeah, Webvan. You know, internet-based delivery service for groceries. A really asinine idea. (Laughter) And, of course, it met an ignominious failure. That was smarter than what the people did in this mortgage field. (Laughter) It was a lot smarter. I just wish we had those brilliant people back that gave us Webvan. (Laughter) Which, by the way, reminds me of my general attitude toward political developments. I have a rule and it's as follows: the politicians are never so bad you don't live to want them back. (Laughter)

WARREN BUFFETTPollyanna. (Laughs)

Financial crisis-era assets should be valued at market

WARREN BUFFETTNumber 1.

AUDIENCE MEMBERI'm Bob Kline (PH) from Los Angeles. Following up on the last question, can you speak to the accuracy of the financial statements of the world's major financial institutions? What should be done to properly value their assets, like mortgages, leverage loans, CDOs, and other assets that are, as Charlie says, as good until reached for? Since the leverage at these banks and brokerage firms is generally 15 to 20 times their tangible net worth, there isn't much margin for error. So what can be done to improve the integrity of financial statements?

WARREN BUFFETTWell, it's a very tough thing. I still lean strongly — there's a lot of controversy now about whether you should use fair value, however that may be determined. In many cases, it's very hard to determine. But whether you should use that or some other figure like cost because people say that the present values are unrepresentative and so on. I think that you get into more troubles as a society when you start openly valuing things at prices that make no sense in terms of what's going on, than whether you do your best to estimate them, even though those estimates may prove, many cases, optimistic later on, and certainly inaccurate in some respects. So I would stick with financial institutions at least having to attempt to report their assets on a fair value basis. But when you get into instruments — I've used this illustration before — but when you get into a CDO-Squared, if you read a standard mortgage — residential mortgage-backed certificate — security — it may consist of thousands of mortgages backing up this instrument. And then that instrument may be traunched into 30 or so different traunches where each party has a different claim on the waterfall of funds received. Now, that instrument itself can be kind of difficult to understand. But then you take that and you create a CDO by taking some of the lower junior tranches of a bunch of these RMBSs, maybe 50 of them, and then you create a CDO out of this. So now you create, out of a whole bunch of junior — and perhaps — and very correlated — and perhaps kind of lousy instruments — and then you put them in a CDO and say that because you put them all together and diversified, in theory, you've got a lot of triple-A traunches of that — was a big error to start with. And then when you took the lower tranches of a bunch of CDOs and stuck them into a CDO-Squared, that was nuttiness squared. And if a residential mortgage-backed security had a 300 page prospectus and you had to read 50 of those to understand a CDO, you're up to 15,000 pages. And if you had to read 50 more CDO prospectuses, and the material behind that, to evaluate a CDO-Squared, you had to read 750,000 pages, presumably, to evaluate one security, and that was madness. To let people value that sort of thing, because they say the market at ten cents on the dollar is unrepresentative, so instead of using that, I'll use the hundred cents I paid, I think would be an abomination. And I think that the discipline, mild as it may be, of telling managements that you're going to have to value this stuff at market may keep them from doing things that they would otherwise do that would be very stupid if they think they can get away with valuing them at some fictitious — or at cost — which would be fictitious, in terms of markets. I lean toward the market value approach. I don't know — when you get into really complex instruments — I just don't know how you value them. Charlie was on the audit committee at Salomon, and they would spend hours and hours and hours — and I think you found one that was mismarked by 20 million or something like that, back when 20 million was real money.

CHARLIE MUNGERIt was a floating plug.

WARREN BUFFETTWell, we had the floating plug, too, yeah.

CHARLIE MUNGERNo. I — there's a lot that goes on in the bowels of American industry that is not pretty. (Laughter)

WARREN BUFFETTSo you can add sausage and laws — maybe you should add accounting practices to the things that people shouldn't have to witness the making of. (Laughs)

CHARLIE MUNGERI think that part of the trouble comes from some prominent members of my own Republican Party. Some of these people overdosed on Ayn Rand and what they learned in Economics 101, and they sort of got to thinking that if anything happened as a natural response of human nature in a free market system, even if it was an ax murder, it was a desirable development and part of a wise distribution of risk. I don't know why grown-ups get these silly ideas, but they do. And one of them headed the Federal Reserve. I think Alan Greenspan did a very good job, averaged out, but he did overdose a little on Ayn Rand, and he had this tendency to believe that, if it happened in a free market, it had to be all right. I think there's some things that should be forbidden. And I think that the world would have worked better if a lot of things that were described as follows: this is a financial innovation which will diversify risk — if that phrase had been banned from all discourse, the country would have worked better. (Applause.)

Plea from audience to read the U.S. Constitution

WARREN BUFFETTArea 2.

AUDIENCE MEMBERI'm Larry Tidrick (PH) from Elk Grove Village, Illinois. My question is really more a plea. Get out your copies of the U.S. Constitution, read over Article 1, Section 8, the enumerated powers; the Ninth Amendment; the Tenth Amendment; and give Roger Pilon a call at the Cato Institute. I think everything that's gone on today, regarding finance and economics, has to do with our Constitution, which was really based upon property rights and contract rights.

WARREN BUFFETTDo you have a question, though, or not?

AUDIENCE MEMBERYes, sir.

WARREN BUFFETTOK.

AUDIENCE MEMBERWell, no, I don't. (Laughter)

WARREN BUFFETTI sort of suspected that.

AUDIENCE MEMBERI made — yeah. I made the plea and —

WARREN BUFFETTOK.

AUDIENCE MEMBER— that's really it.

WARREN BUFFETTOK. Well, thank you.

American's distaste for mass transit won't change soon

WARREN BUFFETTWe'll go on to number 3.

AUDIENCE MEMBERYes. My name is Dan Schmidt (PH) from Burnsville, Minnesota. And I'd like your opinion on the future of mass transit and how it relates to railroads, and will these transit systems and railroads be expanding in the future?

WARREN BUFFETTIn terms of passenger traffic?

AUDIENCE MEMBERCorrect.

WARREN BUFFETTYeah. The American public, basically, doesn't like mass transit. I mean, it endures it when it needs to, but there — the American love affair with the car, which translates to aversion to mass transit, is sort of overwhelming. I used to be involved in bus companies. And, you know, you can make all kinds of rational arguments to people about the use of mass transit, but one person to a car seems to be an enormously popular method of moving around. And I think it's unlikely that we see a large expansion in mass transit in this country. I think the American public is, for one reason or another, whether they're trained to it or whether it's just something in their genetic makeup, they do not like going out and waiting for buses or whatever it may be or trams. And they want to get in their car. And even with gas at close to $4 a gallon, they want to go someplace and pay a lot of money to park, and they don't want to double up in the cars very much. And that just seems to be human nature. Maybe it will change, but I never like to bet on something that has gone in one direction for a long time reversing unless the evidence is pretty strong. Charlie?

CHARLIE MUNGERYou have a more optimistic view of it than I have. (Laughter)

Munger's in "awkward position of agreeing with Al Gore"

WARREN BUFFETTNumber 4.

AUDIENCE MEMBERHi. I'm Tom Nelson (PH) from North Oaks, Minnesota. My question is for Charlie. If you were in charge of this country, how would you handle Al Gore's alleged climate crisis?

CHARLIE MUNGERWell, of course, I'm in the awkward position of agreeing with Al Gore that we shouldn't be burning up so many hydrocarbons. (Applause) I've just got a different reason. His brain doesn't work the way mine does, and you'll have to judge for yourself which you prefer. (Laughter)

WARREN BUFFETTWe'll have a vote a little later. (Laughter)

Disagreement on danger of CDOs

WARREN BUFFETTNumber 5.

AUDIENCE MEMBERGood afternoon, Warren and Charlie. This is Frank Martin from Elkhart, Indiana.

WARREN BUFFETTNice to have you here, Frank.

AUDIENCE MEMBERThanks, Warren. One of my favorite aphorisms from you is, "To win, first you must not lose." The excerpt that you read a few moments ago from the 2006 annual report contemporized that aphorism, and I think was both prescient and prophetic. Notice I said "prophetic" and not "pathetic."

WARREN BUFFETTI noticed.

AUDIENCE MEMBERYeah, thank you. (Laughter) On several of occasions disagreeing with Alan Greenspan, you have called derivatives "weapons of financial mass destruction." We both have our own record as believing the country is currently in recession. If corporate default rates, which are currently benign, escalate — should the recession deepen and we get back to default rates common in 2002 or back in the early 1990s — will the credit default swap problem materialize as a serious threat to financial stability? I respect you as one of the all-time great pricers of risk. You and Charlie must consider selling insurance without reserves, without really understanding pricing risk, to be an abomination. Is there a chance, in your judgment, that the CDS market may eclipse the subprime mortgage market as the next element of the financial meltdown?

WARREN BUFFETTThe credit default swap market — you can see these figures — and I'm repeating them, but I'm not validating them — but the last number that came out was over 60 trillion. Now, there's lots of double counting in these things and all that sort of thing. But there's no question there's a lot of money on both sides of the credit default market. They call them credit default swaps. You can think of it as insurance against a company going bankrupt. And actually, we have written two types of derivatives on a big scale. We explained them in the annual report. We explained them again in the press release that was issued yesterday. And we have insured in the — we've written insurance that pays off to somebody else in the event of default by companies listed on given indices. There's a high-yield two, a high-yield three, and so on, through high-yield nine. And we've written various traunches of risk on those things, and I think we're going to make significant money, although we could lose money, too. It will depend on credit experience in the next few years. I think there's no question that the corporate default rate will rise. That's been cranked into the calculations I make in writing this insurance. The question of whether the credit default swap — the size of that market — will lead to any kind of chaos in the financial markets, I think probably not. Although if a Bear Stearns had failed, for example, you would have had a huge unwinding of contracts by counterparties who had to establish their claims and all that. So you would have had rather chaotic conditions. Any time — a credit default swap is merely a payment by one party to another. So it's a negative-sum item. When somebody loses money on a subprime loan, on a mortgage loan, they've lost real money. Now, somebody may be buying the house later on cheaper than they would have bought it earlier on, but there is not an equivalent swap of dollars at the time that a subprime loan goes bad. With the credit default swaps, there is a swap of dollars. So as long as the counterparties pay, if A is up a million dollars, B is down a million dollars. And the question is, is if you get a Bear Stearns-type situation that didn't get interrupted by the Fed, whether counterparties would fail and you get a lot of trip hammer effects, I don't think that's going to happen, and I think the chances of it happening were reduced significantly by what happened — by the fact that the Fed stepped in at Bear Stearns. We've had enormous payments from one party to another, in terms of credit default swaps. Just — there's a firm called Fairfax Financial that made — a relatively small firm — that made, as I remember, well over a billion dollars in credit default swaps. Well, somebody else lost the billion, but it didn't pose a threat to the system. It posed a threat to the guy that lost the billion, but he had to keep up putting up collateral, presumably, as he went along. So it wasn't like he was called overnight for the billion. So even though credit defaults — they've been the most volatile of instruments in the last 18 months. There's been nothing that's swung as much — maybe there's some subprime index that has — but virtually it's credit default swaps. And that really hasn't created a problem in the system. So I do not think — particularly if the Fed is going to step in when they see investment banks that they regard as too big to fail, or banks too big to fail — I don't think that that will probably be the cause of the problem. It may be a cause of enormous losses to some institutions, but those will be matched by enormous gains by other institutions. I do think there's that — the problem of the overnight disruption in the system, which Bear Stearns, I think, would have produced. But maybe something else could produce it — a nuclear bomb going off in Manhattan, you know, or something of the sort. That kind of thing — where there's a discontinuity, where the collateral posted the previous day was totally inadequate in terms of the kind of movement that occurred — certainly at that time something like having a large amount of CDSs out there, it could cause a — it could exacerbate — the chaos to a considerable degree. Charlie?

CHARLIE MUNGERWell, I think the answer to your question is — could we have a big-time mess out of credit default swaps — is yes, we certainly could. I think the stupidity, while it's extreme, is not as bad as sweeping bums off skid row to give them mortgages to buy houses, but it's pretty bad. One of the things that's interesting about credit default swaps, which isn't much commented on, is, let's say you're insuring against the outcome that people will lose money on a hundred million dollar bond issue. And the credit default swaps, instead of amounting to a hundred million, amount to 3 billion. Now you've got people with $3 billion worth of contracts that really have a big incentive in having somebody fail. And, of course, they may manipulate, in some fraudulent or extreme way, with the little loss in order to make the big collection. It was insane for the regulators to allow this outcome to occur in America. It used to be illegal for people who had no insurable interest just to buy life insurance on people they didn't know, because society was afraid that people would do that and then kill the person. And that happened in Los Angeles. We had sweet, little, old ladies that got bums off skid row. They'd take out life insurance on them. And when two years went past, they murdered them with fake hit-run accidents. So human nature is up to this kind of venality where you have big payoffs. And why we wanted these enormous bets to be made, in relatively unregulated markets, where the bets are 10, 20 times the size of the original bond issue, it's crazy. If I did this as a satire, you'd say I was overstating. I'm understating. We have a major nut case bunch of regulators and proprietors in this field. (Applause.)

WARREN BUFFETTCharlie, one; invisible hand, zero.

Buffett's test on when to pay a dividend

WARREN BUFFETTLet's go to number 6.

AUDIENCE MEMBERHi, Mr. Buffett and Mr. Munger. My name is Neharick Aneela (PH), and I'm from Houston, Texas. I'm a seventh grader, and I'm 12 years old. I was wondering why you do not believe in dividends, Mr. Buffett, when your mentor, Ben Graham, believed in dividends? He influenced you in so many ways, but why weren't you influenced into believing in dividends? Thank you.

WARREN BUFFETTWell, I had to show a little individuality in some respect. (Laughter) Well, the answer is I do believe in dividends in a great many situations, including many of the ones at companies in which we own stock. The test about whether to pay dividends is whether you can continue to create more than one dollar of value for every dollar you retain. And there are many businesses — take See's Candy, which we own. See's Candy has paid everything, virtually, out to us that they earn because they do not have the ability within See's Candy to use large sums, which they earn, intelligently in their business. So it would be an enormous mistake for See's Candy to retain money. So they distribute to Berkshire, and we hope that we move that around in some other area where that dollar becomes worth $1.10, or $2.10, in terms of present value terms. If we do that, the shareholder — whether they're taxable or whether they're not taxable, whether they're a foundation or whether they're living on income, even — they are better off if we retain the money. Because if they were going to get a dollar in dividends and it became worth $1.10 or $1.20 in market value immediately on a present value basis, they're better off selling a small percentage of their stock and realizing the required amount that way, and they will have more money when they get all through doing that than if we paid it in dividends. But if the time comes — and it will come someday — when the — if the time comes when we don't think we can use the money effectively to create more than a dollar of market value per dollar retained, then it should be paid out. And, like I say, we do that individually within Berkshire. But because we have this ability to redistribute money in a tax-efficient way within the company, we probably had more — we had more reason — to retain all of our earnings. If See's Candy were a standalone company, we would simply pay out a lot of the earnings, practically all of the earnings, in dividends. Just like we do now, except it goes to Berkshire. We like our — we like the companies in which we have investments to pay to us the money they can't use efficiently in their own business. In some cases that's a hundred percent of what they earn; in some cases it's 0 percent of what they earn. We own some stocks that don't pay any dividends. Costco paid a very small — did they pay any dividend for a while, Charlie, or —?

CHARLIE MUNGERThey — while they were growing very rapidly, they paid no dividend. And finally they are paying one. Berkshire's policy is much the same. Warren has always planned on paying large dividends out of Berkshire, and he does it in the mode of Saint Augustine when he said, "God give me chastity, but not yet."

WARREN BUFFETTRight. I've always admired that.

Electricity in the Southwest

WARREN BUFFETTNumber 7.

AUDIENCE MEMBERGood afternoon, Mr. Warren Buffett, Charlie Munger, shareholders. My name is Richard Meyers (PH). I'm from (inaudible), California. In respect to your opinion earlier, I will go down to southern California, Arizona, and ask a question: if you have knowledge or interest of the corridor for electricity coming in from Arizona into California, or is it going from California back into Arizona? As California is known as a sunny state, we should be able to have our own solar systems. I have one more. I have saved $20 by staying in line since 2:30 this morning, and I would like to know which one of these books that I could buy that would do me the most good and my tribe. Thank you.

WARREN BUFFETTWell, tell us about the books. You mean the whole list?

AUDIENCE MEMBERWhich one I can buy for $20. (Laughter)

WARREN BUFFETTProbably the ones that haven't sold very well today. (Laughter) Yeah, I'm not that familiar with the prices of the books. We try to have a good selection in there. I'm a little partial to Larry Cunningham's books because — Larry Cunningham's book — because it consists of a rewriting of all my own stuff. (Laughs) But, no, we — I think the whole collection is fine. I wouldn't want to recommend one over the other. And I know nothing about that first subject. Charlie, do you?

CHARLIE MUNGERWell, I know a little. You know, California did cause coal plants to be built near the Grand Canyon because California didn't want the pollution and it needed the electricity and they were nearer the coal mines. And eventually that caused huge uproar, a lot like we heard about the Klamath River. And the Grand Canyon, that started having some visibility problems. And I think those things are, maybe, decommissioned, or about to be decommissioned, so it's a very complicated subject. And I'm glad to (inaudible) it back to you.

Berkshire's international ambitions

WARREN BUFFETTOK. Number 8.

AUDIENCE MEMBERGood afternoon, Mr. Buffett and Mr. Munger. My name is Argin Row (PH). I am in the eighth grade and live in Pearland, Texas. I ask everybody to call me Tony after reading your 2006 annual report. (Buffett laughs) My question is, do you foresee Berkshire buying any businesses in either India or China in the near future?

WARREN BUFFETTWell, Tony, I — (laughter) — we would like to. The odds are somewhat against us buying in any major country except the United States, if you'd name any specific one. I would hope in the next three years that we might get a chance to buy one or two companies of size. We're always buying little companies that fit in with our present operations. Right now, MiTek has several possibilities outside the United States. But in terms of major businesses that Berkshire would buy, you know, if we get lucky, we'll buy one or two in the next three or four years that's based outside the United States. We're trying to increase our chances of doing that. Whether it turns out to be China or India or Germany or the UK or Japan, who knows? There's a lot of luck in that, just in terms of specific families thinking of us specifically. But we certainly wouldn't rule it out. We've looked into developing an insurance company in some countries. Both India and China restrict the percentage ownership that Berkshire could have in any domestic insurance company. They both have laws that would keep us — I know it's 25 percent in China, and I think it's 25 percent, but it may have been changed in the last year or so, in India. We do not probably want to go into a country to own 25 percent of a company like that. We would want the laws to allow us to do more than that to make it worth our while. But I hope we own something. You know, certainly at your age, you will see the day that Berkshire owns businesses — in my view, you'll see the day — that they own — we own — businesses in both countries. Charlie?

CHARLIE MUNGERNothing to add.

Parents, spouses, and books are the best teachers

WARREN BUFFETTOK. Number 9.

AUDIENCE MEMBERGentlemen, my name is Jim James (PH) from Minnesota, actually Minneapolis. And clearly you've inspired 38,000 people here today. Books have been written about you, not solely for your financial prowess, but because of the people you are. Could you share two or three influences on you — those kinds of people, educators, who have shaped your thinking on life and on investing? Thank you.

WARREN BUFFETTWell, I think the biggest educator — certainly in my case — initially was my father. I think probably Charlie would say the same thing. And I think— it's very, very, very important who you marry, and I've been lucky there, and those are great teachers. And, of course, I had Ben Graham. I had Dave Dodd. I've learned from all kinds of people who have written books over the years. I've just devoured those and picking up things here and there. Charlie learned a lot from Ben Franklin, obviously. (Laughter) Many people think Ben Franklin learned a lot from Charlie but — (laughter) — we both learned a few things from my grandfather at the grocery store. But your parents — I tell the students, you know, the most important job you have, you know, is being the teacher to your children. I mean, you're the ultimate teacher. You're this big — great big thing. You provide warmth and food and everything else, and they're learning about the world, and they're not going to change a lot of that when they get into graduate school or sometime. So it's — and you don't get any rewind button. You don't get to do it twice. So you have to do your best as a teacher, and you teach by what you do, not by what you say, with these young things. And by the time they've got to a place where they're entering a formal school, they probably learned more from you than they're ever going to learn from anybody else. Charlie?

CHARLIE MUNGERWell, I would argue that differing people learn in differing ways. With me, I was put together by nature to learn from reading. If some guy's talking to me, he's telling me something I don't know, I don't want to know, I already know, or he's doing it too slow or too fast. In reading, I can learn what I want at the speed that works. So, to me, reading is the — is what works for my nature. And to all of you who are at all like me, I say welcome. It's a nice fraternity.

WARREN BUFFETTYou probably learn more from your father than you learned from all the reading you did, don't you think? In terms of actually forming you?

CHARLIE MUNGERWell, yes. And my father was the type that always did more than his share of the work and took more of his share of the risk. All that kind of example was, of course, very helpful, and you learn it better from a person close to you. But in terms of the conceptual stuff, I'd say I learned it from books. Now, those are fathers in a difference sense.

WARREN BUFFETTYeah.

CHARLIE MUNGERThe people who wrote the books.

WARREN BUFFETTYeah, well, one book, obviously, changed my whole financial life when I — you know, by happenstance, probably, I picked it up. I can't even remember why I bought it back when I was in school. But if you just keep picking up enough books, you'll find some — you'll learn a lot. And I used to go through the Omaha Public Library and just go down the shelves. It's kind of an inefficient way, maybe, of doing it, but I — if you read 20 books on a subject you've got an interest in, you're going to learn one hell of a lot. You don't know which one you're going to learn it in, though. So I would take having — if you get the right parents, you're very, very lucky, and it's better than going to the right school or anything of the sort. And to get the right spouse, you've just doubled down.

Big institutional shareholders should take stand on CEO pay

WARREN BUFFETTNumber 10.

AUDIENCE MEMBERGentlemen, my name is Mark Slaybe (PH). I'm from Chicago. I probably am going to be one of the last guys speaking today or asking a question, so on behalf of 31,000 people, I'm going to thank you —

WARREN BUFFETTThank you.

AUDIENCE MEMBER— for the respect and the common courtesy that you've exhibited to the shareholders today.

WARREN BUFFETTThank you. (Applause.)

AUDIENCE MEMBERMy question is this: I work for a fairly large computer company that's a competitor of Mr. Gates up there. And I'm curious. As a common, ordinary person and a common shareholder, what can we do, 31,000-some odd folks here do, about the outrageous salaries, bonuses, perks, of these enormous corporations that we will never have a chance at, a shot at, you know, working with them and that amount of wealth? What would you advise us as common shareholders that we can do to get this country going the right way and get this issue going the right way? (Scattered applause)

WARREN BUFFETTWell, I would say that, particularly on the compensation part, you can't do much. But there are a relatively few people that could do a lot. If the half a dozen or so largest institutional owners took a position on extreme cases — I don't advise them trying to go after each one — but when they see something egregious, if they would simply withhold their votes and issue a short statement as to why they're doing it, that has an effect on — particularly on boards of directors. Big shots don't like to be embarrassed. You know, they don't — that gets their attention. The press is an enormous factor. Press is more of a factor in changing corporate behavior than regulations or Sarbanes-Oxley or that sort of thing. You want a good press. But the press needs the material, and material — the raw material — for that could be — I won't name the organizations — but if you take the half a dozen largest investment organizations, I think it would have a lot of impact if they would — if they could get together on short statements when they felt pay was really egregious. And I don't know what you individually can do about that, and I don't know how you create the incentives for the big institutions to do that. I mean, it doesn't really do that much for them personally. I don't think — I think the — a lot of the checklists that institutions use as determining whether they approve of corporate practices are asinine. I mean, they — you know, they get sort of the "issue du jure" and they get — and they get people recommending how they vote their proxies, which is kind of silly. I don't know why they can't make up their minds themselves as to what they think is proper or not proper. And Ben Graham, many years ago, bemoaned investors as a bunch of sheep. And with big institutions, I haven't seen much difference. But it wouldn't take many of them. It would take — just take a few of the biggest ones and the willingness to speak out. And the press would do the rest and boards would respond to that. But they're not going to respond to you. I mean, I have to be, you know, totally candid about that. A small shareholder can write the most persuasive arguments in the world, and I've been on the board where they've received those kind of letters. And basically they turn them over to the corporate secretary and say, "Take care of this," or something of the sort. It takes real effective pressure to change behavior where the behavior is in the self-interest of that person. People do not give up self-interest easily. Charlie?

CHARLIE MUNGERIt's an old question. In England, where they had a lot of class warfare, they at one time got the income taxes up to, like, 90 percent, so there just wasn't any possibility of having a large earned income except, you know, by not reporting it. The tax rate got that high. That was quite counterproductive for England. And so you can get a politics of envy that sort of ruins the economic system because of the natural resentments and jealousies and so forth involved in excessive compensation. I think the people taking the compensation have a moral duty not to take it. I would argue that, when you rise high enough in American business, you get a moral duty to be underpaid, not to get all you can, but to actually be underpaid. If people are going to be generals and archbishops and everything else at low pay, I don't see why leaders of great big enterprise can't take less than the last dollar. (Applause.)

WARREN BUFFETTDo you have any suggestions on how to implement those sentiments? (Laughs)

CHARLIE MUNGERIt's very difficult.

WARREN BUFFETTYeah. Charlie has always said that envy is — strikes him — as the silliest of the seven deadly sins, because when you're envious of somebody, you feel worse, and they don't feel any — they feel fine. In fact, maybe they even feel better because you're envious. So it's such a counterproductive type of thing. So we — rule out as envy as part of your repertoire. And gluttony — (laughs) — I mean, that has some upside to it. (Laughter) Maybe temporary, may have some side effects, but, you know, there's something to gluttony. And so lust, of course, I'll let Charlie speak to. (Laughter)

It's OK to buy pharmaceuticals as a group

WARREN BUFFETTNumber 11.

AUDIENCE MEMBERHello. I'm Clemmon Low (PH) from Toronto, Canada. I want to thank you for the wonderful meeting, and I think I've learned a lot more here in a few hours than many, many more hours during university days. My question is, you have invested in drug companies such as Johnson & Johnson and Sanofi. How do you evaluate the pipeline of these companies and know if their competitive advantage is, indeed, enduring?

WARREN BUFFETTWell, that's a good question. And unlike many businesses, when we invest in something like pharma, we don't know the answer on the pipeline. It will be a different pipeline anyway five years from now. So we don't know whether Pfizer or Merck, you know, or you name it — Johnson & Johnson — we don't know which of those will come up with a blockbuster commercial drug three or four years from now, and we don't try to assess it. What we do feel is, if we have a group of those companies bought at reasonable prices, that, overall, pharma will do well. Maybe not quite as well as they have in the past, but they're doing something enormously important. They're doing something that should offer chances for decent profits over time. And we do not pick one by one. I could not tell you what's the number one potential in the pipeline of a J&J or Sanofi — whatever which one you want to name. So I think in that area, actually, a group approach makes sense, which is not the way we would go at the banks or something of that sort. I do think if you buy pharma stocks at a reasonable multiple, a group of them, you know, you'll probably do OK five or 10 years from now. I would not know how to pick the specific winner. Charlie?

CHARLIE MUNGERWell, you speak from a position where you have a monopoly of our joint knowledge about pharmacology. (Laughter)

Why Berkshire sold PetroChina

WARREN BUFFETTWe will move on to number 12. (Laughter) He gets cranky later in the day. (Laughter) And we're just about to the end, but we can take a couple more.

AUDIENCE MEMBERThank you. My name is Chow (PH). I'm coming from Woshi, China. Thank you, Mr. Buffett and Mr. Munger, for your unbiased opinion on China and Olympics. To support your (inaudible), we have a group of chairmen and CEOs from Chinese public companies to come to Omaha and try to learn from the best of how public companies should be run. (Applause.)

WARREN BUFFETTThank you.

AUDIENCE MEMBERQuick question. We observed that you made a quick trade on PetroChina, not a typical buy and hold approach you do on investment. Our question is, when it's come to selling PetroChina, what comes to your mind, and what suggestions you may have to these group of executives? There are positive forces in China, and we welcome everyone to our Olympics.

WARREN BUFFETTThank you. (Applause.) And I met Dr. Guo from the China Investment Corp here a few months ago. Was very impressed by him, had lunch with him here in Omaha. The PetroChina decision, just as we made it to buy it at a valuation overall of 35 to 40 billion when we thought it was worth a hundred billion, when oil was at $70 a barrel, roughly, 75, I figured the value was about 275 or 300 billion and we could sell it at that price. And we no longer felt it was undervalued compared to other oil companies, so we sold our stock. Now, incidentally, right after we sold it, it went up dramatically because, as you know, they issued A shares in in China, and it became very popular. And at one time, PetroChina became the most valuable company in the world, measured by market value, which would have come as enormous surprise to investors seven or eight years earlier. So they've done a terrific job. And if it went down to a price that we thought was a discount — a significant discount — to its valuation, we would buy PetroChina again. The — in terms of — I'm not so sure we don't have a lot to learn from the Chinese in terms of business currently, more than they have to learn from us. I'm not sure we would want some of our practices to spread to China. It's a remarkable society, what's going on there now. And I did go to Dalian not long ago, and I must have traveled for 45 minutes from the center of town out to our plant there. And I just saw, really, hundreds of plants that — factories that had developed in recent years. The economy is — the Chinese people are starting to realize their potential. I mean, what it amounted to is you had — for centuries — you had people of lots of ability but a system that did not unleash their potential. And now it's starting to be unleashed, and that's why you're getting very substantial GDP growth per capita, and I think it will continue. I would just look for the best practices in American industry as you see them and copy them, and I would discard the rest. And I think it's — you know, it's how you learn about human behavior. You try to — if you look at an effective individual, you try to figure out why they're effective. You know, why is Don Keough, why are Tom Murphy — why are they so effective? Why do people want to be around them? Why are they leaders? Why do people love them? And you see certain human qualities, and you should copy those qualities. And when you see some guy that should have everything going for him and everybody in town hates him, you know, you want to make sure you don't have any of those qualities. Well, I would do the same thing in terms of looking at businesses in this country, and try to look for what I admire and emulate it, and make sure that — try very hard — not to let the things that you find over here that are distasteful to you creep into your own system. Charlie?

CHARLIE MUNGERWell, I hope you'll go back to China and tell them that you met at least one fellow that really approves the Confucius emphasis on reverence for elderly males. (Laughter)

WARREN BUFFETTI think you should dig yourself out of that by including females too, Charlie. (Laughs)

CHARLIE MUNGERThat wasn't Confucius's idea.

WARREN BUFFETTOh, OK. No reason why you can't modify it. (Laughs)

Future hopes for Berkshire

WARREN BUFFETTOK. We'll have one more, and then we'll take a break and come back for the business meeting in a few minutes. Number 1.

AUDIENCE MEMBERMr. Buffett and Mr. Munger, my name is Cynthia Beeman (PH), and I'm from Atherton, California. This is my question: what is your fondest hope for Berkshire Hathaway moving forward in time?

WARREN BUFFETTWell, in a general way, I hope for two things — obviously, I hope for decent performance, and I hope that the culture we have is maintained, which is both shareholder-oriented and manager-oriented, and that we are regarding as the best home in the world for large, wonderful, family businesses. And I think the performance and those two goals will be intertwined, in a way. And I not only hope, but I fully expect, that what we've tried to build into Berkshire lives far beyond, you know, my tenure as CEO. And I think it will because, A, we've got the right candidates to succeed me. And, beyond that, we have a board, we have a bunch of managers, that have all seen how well the system works. So I think that we have about as strong a culture as you could find in this country among American businesses. And if that's continued, as I'm really sure it will be for a long, long, long time, I think we will get decent results. We won't get great results, because you can't get them from our size base. But that's my hope — that people 20 years from now, if they have a fine business they've spent a couple of generations building, and they immediately think — if they have to sell it for some reason — they think Berkshire Hathaway is the place where we want the ownership of this business and we want — as managers, we want to continue working at that company for the rest of their lives. And if we can achieve that, we'll have something fine for shareholders, and we'll have something fine for managers and owners of those businesses we buy. Charlie?

CHARLIE MUNGERYeah. I would say that I would like to see Berkshire even more deserved to be an exemplar, and I would like to see it have more actual influence on changes in other corporations. I think there are things that have happened here that will be useful to others.

WARREN BUFFETTWe'd also like it to have the oldest living managers, but that's a minor point. (Applause.)

WARREN BUFFETTThank you. Thank you. Thank you. Thanks.

Break before formal business meeting

WARREN BUFFETTThe — now what we'll do is we'll just break for five or so minutes, and then we'll reconvene and have the formal business meeting. After that, at 4 o'clock, for the international visitors, those from outside of North America, we will — Charlie and I — will meet with them personally. And I thank you all for coming. I hope you come back next year and bring your friends. Thank you. (Applause)

Formal business meeting

SPEAKERWARREN BUFFETT (in progress): — appropriate questions you may have concerning their firm's audit or the accounts at Berkshire. Mr. Forrest Krutter, our secretary at Berkshire, he will make a written record of the proceedings. Miss Becki Amick has been appointed inspector of elections at this meeting. She will certify to the count of votes cast in the election for directors. The named proxy holders for this meeting are Walter Scott and Marc Hamburg. Does the secretary have a report of the number of Berkshire shares outstanding, entitled to vote, and representative at the meeting?

FORREST KRUTTERYes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 5, 2008, being the record date for this meeting, there 1,081,013 shares of Class A Berkshire Hathaway common stock outstanding with each share entitled to one vote on motions considered at the meeting, and 14,033,343 shares of Class B Berkshire Hathaway common stock outstanding with each share entitled to 1/200th of one vote on motions considered at the meeting. Of that number, 883,428 Class A shares and 10,921,716 Class B shares are represented at this meeting by proxies returned through Thursday evening, May 1.

WARREN BUFFETTThank you. That number represents a quorum, and we'll therefore directly proceed with the meeting. First order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott who will place a motion before the meeting.

WALTER SCOTTI move that the reading of the minutes of the last meeting of the shareholders be dispensed with and the minutes be approved.

WARREN BUFFETTDo I hear a second? Barely, I hear a second. The motion has been moved and seconded. Are there any comments or questions? We will vote on this motion by voice vote. All those in favor say "aye."

VOICESAye.

WARREN BUFFETTOpposed? The motion is carried.

Election of board of directors

WARREN BUFFETTFirst item of business is to elect directors. If a shareholder is present and wishes to withdraw a proxy previously sent in and vote in person on the election of directors, he or she may do so. Also, if any shareholders are present who not turned in a proxy and desires a ballot in order to vote in person, you may do so. If you wish to do this, please identify yourself to meeting officials in the aisles who will furnish a ballot to you. Would those persons desiring ballots please identify themselves so that we may distribute them. I now recognize Mr. Walter Scott to place a motion before the meeting with respect to election of directors.

WALTER SCOTTI move that Warren Buffett, Charles Munger, Howard Buffett, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Don Keough, Tom Murphy, Ron Olson, and Walter Scott be elected as directors.

WARREN BUFFETTIs there a second to the motion? Somebody second the motion.

VOICESecond.

WARREN BUFFETTOK. It has been moved and seconded that Warren Buffett, Charles Munger, Howard Buffett, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Don Keough, Thomas Murphy, Ronald Olson, Walter Scott be elected as directors. Are there any other nomination? Is there any discussion? The nominations are ready to be voted upon. If there are any shareholders voting in person, they should now mark their ballots on the election of directors and allow the ballots to be delivered to the inspector of elections. Would the proxy holders please also submit to the inspector of elections a ballot on the election of directors voting the proxies in accordance with the instructions they've received. Miss Amick, when you're ready, you may give your report.

BECKI AMICKMy report is ready. The ballot of the proxy holders in response to proxies that were received through last Thursday evening cast not less than 935,155 votes for each nominee. That number far exceeds a majority of the number of the total votes related to all Class A and Class B shares outstanding. The certification required by Delaware law of the precise count of the votes, including the additional votes to be cast by the proxy holders in response to proxies delivered at this meeting, as well as any cast in person at this meeting, will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETTThank you, Miss Amick. Warren Buffett, Charles Munger, Howard Buffett, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Donald Keogh, Tom Murphy, Ronald Olson, Walter Scott have been elected as directors.

Formal business meeting adjourns

WARREN BUFFETTDoes anyone have any further business to come before this meeting before we adjourn? If not, I recognize Mr. Scott to place a motion before the meeting.

WALTER SCOTTI move this meeting be adjourned.

WARREN BUFFETTIs there a second?

VOICESSecond.

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

VOICESAye.