2009 年股东大会 · 上午场

Q&A sessions starts

WARREN BUFFETTGood morning. I'm Warren. The hyperkinetic fellow here is Charlie. (Laughter) And we're going to go in just a minute to a question and answer section, at least a question section, that will be a little different than last year. We have a panel — I can't see very well here — over to the right, of journalists who will ask questions and alternate with the people in the audience. And we'll go back and forth. Got a little checklist here that we'll use as we go back and forth. Here we are. And we should have a pen here someplace to check things off.

Board of directors introduced

WARREN BUFFETTBut first, even though we'll have the formal meeting later on, I would like to introduce our directors. And if they would stand as I announce them and then remain standing until the end. And if you'll just hold your applause until the end or even later if you wish — (laughter) — we'll recognize them. We'll have a meeting later on to elect them. But if you'll stand up. And like I say, you can't see very well here with the lights, but — There's me and Charlie, we start off. And then Howard Buffett, Susan Decker, Bill Gates, Sandy Gottesman, Charlotte Guyman , Don Keough, Tom Murphy, Ron Olson, and Walter Scott. Those are the directors of Berkshire Hathaway. (Applause)

Money under your mattress beats Treasurys

WARREN BUFFETTNow, we only have one slide, which actually is more than we would usually have. (Laughs) And — but it does tell you something about what happened last year. And it also acts as a commercial for our Nervous Nellie mattress with the famous night depository feature. (Laughter) Last year — and have we got that up on the slide? Last year, we wrote a ticket on December 19th. And we sold 5 million of Treasury bills. I hope you can see that. It's — we've got the December 19th circled up there. And those Treasury bills came due, or were to come due, on April 29th of this year. So they were going to come due over four months later. And the remarkable thing is, and this tells you about what an extraordinary year it was, is that we sold those $5 million of Treasury bills, which were going to pay off at $5 million on April 29th of 2009, in December of 2008 we sold them for five million and ninety dollars and seven cents. In other words, if the person who bought those from us and paid us five million and ninety dollars, instead had bought the Nervous Nellie mattress and had put their money under the mattress, they would've been $90 better off at the end of four months, than by buying Treasury bills. If the U.S. Treasury had just sold 5 trillion of these, they could've made an easy $90 million and Tim Geithner could've put the money under a Nervous Nellie mattress and we all would've been better off. Negative yields on U.S. Treasury bills are really an extraordinary thing. You've got less on — less for your money from the U.S. Treasury than you got from sticking it under a mattress. I'm not sure you'll see that again in your lifetime. But it's been a very extraordinary year.

Panel of journalists introduced

WARREN BUFFETTWe have with us, the journalists. We have Carol Loomis of Fortune. We have Becky Quick of CNBC. And we have Andrew Ross Sorkin of the New York Times. They have received questions from shareholders all over the country. Andrew told me that he received a couple hundred just this morning. And they have selected what they think are — they're all Berkshire Hathaway-related questions. We were having a problem in recent annual meetings where we sort of drifted away from Berkshire, into the realm of what people's children had done in school recently and that sort of thing. (Laughter) So we wanted to bring it back a little bit to Berkshire. So they have selected among the best of the Berkshire-related questions that they've received. And we will go from — we will start with Carol Loomis. And we will go then to the audience. We have 13 sections, 12 in this room, one in an overflow room. And we have selected the people in each of the audience sections by a raffle system, half an hour to an hour ago. And we'll go back and forth. And with that, we'll start it off with Carol.

Carol Loomis comments

CAROL LOOMISGood morning. I come first because Loomis outrakes — outranks — the others alphabetically. But this gives me a chance to just have a few sentences to tell you that — about the questions that we received. We conferred this morning. Andrew definitely got more than any, either Becky or me. We got almost 5,000 questions, which I think even will surprise Warren. Because I don't think he knew that it'd run that high. And the main thing I wanted to say is that an awfully lot of them were very good. And we had a real problem trying to get them down to the number that we're probably going to be able to ask. We don't even know what that is for sure. But we want to apologize to anybody who sent us a Berkshire-related question, because we did have to cut out some because they weren't that, and whose question we didn't get asked. And maybe in another year, it will work.

Our stock index derivatives aren't dangerous

CAROL LOOMISSo, my first question, "Warren and Charlie, Warren particularly. "You have referred to derivatives, this is famous, as weapons — financial weapons — of mass destruction. "In the 1964 movie, 'Dr. Strangelove,' Major T.J. Kong, nicknamed 'King' Kong and played by Slim Pickens, rides a weapon of mass destruction out of the bomb bay of his B-52. "As a long-term Berkshire shareholder, I'm feeling a little like Slim today. I understand that despite the dramatic decline in the stock market, there is a good probability we could make money on our derivatives, taking into account the return on our premiums. "But given the amount of accounting equity and statutory capital, and, I would argue, market value —" this is the questioner saying this — "that these derivatives have destroyed, at least temporarily, do you think these large derivative positions are appropriate for a highly-rated insurance company? "And if so, you do you think you will be adding to these positions?"

WARREN BUFFETTYeah. I would say this. The questioner to some extent answers his own question. I don't know whether he anticipates as strongly as I do that, net, these positions will make money. But over — you know, our job is to make money over time at Berkshire Hathaway. It does not impinge on capital. We have arranged them so that the collateral posting requirements, which are one of the big dangers in the derivatives field, that we have very, very minimal exposure to that. Even on March 31st, at a time when the market was down very substantially from when we entered into these transactions, we had posted collateral of a little less than 1 percent of our total marketable securities. So they have no — they pose no — they pose problems to the world, generally. And that's why I referred to them on a macro basis, in the 2002 report, as being financial weapons of mass destruction. But I also said in that report, that we use them in our own business regularly when we think they're mispriced. And we think our shareholders are intelligent enough that if we explain the transactions, as we try to do in the annual report, and explain why we think we will make money — there's no guarantee we'll make money, but our expectancy is that we will make money — we think that as long as we explain them, that the financial consequences to our shareholders far outweigh any accounting consequences. We explained in earlier reports that because of mark-to-market, that these things can swing billions of dollars as an accounting liability. But the only cash that has taken place, for example, in our equity put options, we have received $4.9 billion roughly. And we hold that money. Originally, the terms of these were 15 to 20 years. So we have the use of $4.9 billion for 15 to 20 years. And then markets have to be lower at that time than they were at the time of inception. So I personally think that the odds are extremely good that on the equity put options, we will make money. I think on the high-yield index, credit default swaps we've written, I think that we will probably lose money before figuring the value of the money we've held. Now, I told you a year ago, I thought we would make money on those. But we have run into far more bankruptcies in the last year than is normal. We've, in effect, had a financial hurricane. We insure against natural hurricanes. And we insure against a financial hurricane. And we have been in a bit of a financial hurricane. So I would expect those contracts, before investment income, would show a loss, and perhaps, after investment income. The bigger contracts are the equity put contracts. And I think the odds are very high that we make money on those. Now, it would be nice if we were writing with current prices. But we probably couldn't write them without getting into collateral posting requirements now. So we have a very favorable position on those. In fact, in the last week, we modified two equity put contracts, one that had a strike price of 1514. That has been reduced to 994 on the S&P 500. Now, we shortened it up eight years. But it still has about 10 years to run. So merely for reducing the term from 18 years to about 10 years, we still have the use of the money for 10 years, we reduced the strike price from 1514 to 994. So I think those are going to be very advantageous contracts. I think our shareholders are intelligent enough to, if they're explained properly, to realize how advantageous they are. And we'll continue to hold them. And we'll continue to explain them. And they have no impact on our financial flexibility. And we are far more than an insurance company. I mean, we have earnings coming in from many areas. We have lots of cash sitting at the parent company. We have lots of cash in the subsidiaries. We have no significant debt maturities of any kind. So we're ideally suited to hold this sort of instrument. And Charlie, what would you say?

CHARLIE MUNGERWell, I would agree with the questioner that there is some limit to the amount of those things we should do. But I think we stayed well short of the limit.

Financial literacy problem could help Berkshire

WARREN BUFFETTOK, we'll go to zone 1.

AUDIENCE MEMBERHi. My name's Scott Slaybee (PH). I'm from Denver, Colorado. First off, I'd like to thank Mr. Buffett and Mr. Munger for having us out here today. I appreciate you bringing us out here so thank you very much.

WARREN BUFFETTAnd thank you.

AUDIENCE MEMBERAnd it's great that you answer our questions. I'm a former teacher. Or I'm a teacher. I shouldn't say former. Being a former teacher yourself, I see a problem with financial literacy with our future generations. And I'm curious what you think future generations should know and if there's anything that needs to be in school curriculums to teach younger people financial literacy as we move forward?

WARREN BUFFETTYeah. I think there's a problem with financial literacy with our current generation. (Laughter) There's a — Andy Heyward, who has helped us with the cartoon, has a — will have a — he sold his company last year, but he has a new company. And he will have a program coming out that works on that question. And that I play a very small part in. ABC has a program coming up with a number of well-known personalities in it that will deal with the question of financial literacy. And it's, you know, it is a tough sell in a world of credit cards and, you know, a world that depends on calculators rather than people sitting down and doing actual arithmetic and all of that, to teach people. But in the end, I think we make progress over time. I mean, I hope our annual reports contribute to that sort of thing. But you're going to have people doing very foolish things with money. I remember on my honeymoon. I was 21 and my wife was 19. And we drove west. I'd never been west. And we went through Las Vegas. And it was 1952. And we stopped at the Flamingo. And people were better dressed in the casinos then. And there were a bunch of Omaha fellows that actually owned part of the Flamingo at that time, terribly nice to us. But I looked around at that casino and I saw all kinds of well-dressed people who had traveled thousands of miles to do something very dumb. And I thought this is a country where you're going to get very rich. (Laughter) If people are going to get on a plane in New York and fly a couple thousand miles to stand there and do things with a mathematical expectation that's negative on every action they take, that is a world of opportunity. So — (Laughter) I, you know, I recommend that you and — you work with your students. I started teaching at the University of Omaha, you know, when I was 21. And you work with your students to make them literate. And they will have a terrific advantage. Charlie?

CHARLIE MUNGERWell, a world where legalized gambling is now conducted by a great many states in the form of lotteries where people are encouraged to bet against the odds and a world where we have a vast overuse of high-cost credit card debt, it needs a lot more financial litery. I would argue — literacy. I think we've been going in the wrong direction. So I don't think you can teach people high finance who can't use a credit card — (laughter) — intelligently.

WARREN BUFFETTYeah. If you're — I talk to students about that. If you're willing to pay 18 or 21 percent on a credit card — And the credit cards companies need it, incidentally, currently, because you have losses running close to 10 percent. So with expenses, they may need that. But there's no way that you're going to financially come out borrowing money at those kind of rates. And I wouldn't know how to do it. And it's too bad. On the other hand, it's probably good for our business. I mean, one of — you know — we are looking for things that are mispriced. And the more people think that borrowing money on credit cards is intelligent, they probably will not think that doing long-term equity put contracts is intelligent. And we'll go our way and they'll go their way.

Buffett "commends" DC's response to credit crisis

WARREN BUFFETTBecky?

BECKY QUICKWarren, first of all, we've been asked to pass on a message that the attendance today is 35,000.

WARREN BUFFETTGood. (Applause) Now —

BECKY QUICKThis —

WARREN BUFFETTNow if they all just spend appropriately, it'll be a big day. (Laughter)

BECKY QUICKThis question comes from James Lewis (PH) from Logan, Ohio, who said it was OK to use his name and city. He says, "One of the substantial investments of Berkshire is Wells Fargo. The chairman of Wells Fargo supposedly indicated that he did not want to take TARP funds from the federal government. "He, furthermore, recently said that some of the programs of the federal government to reinvigorate the banks were asinine. "Mr. Munger, do you agree with the chairman of Wells Fargo? And please explain why you do or do not agree. And Mr. Buffett, do you agree with Mr. Munger?" (Laughter)

WARREN BUFFETTYes. (Laughter)

CHARLIE MUNGERWhen a government is reacting to the biggest financial crisis in 70 years, which threatens important values in the whole world, and the decisions are being made hurriedly and under pressure and with good faith, I think it's unreasonable to expect perfect agreement with all of one's own ideas. I think the government is entitled to be judged more leniently when it's doing the best it can under trouble. Of course, there's going to be some reactions that are foolish. And I happen to share one of the troubles of some of the Wells Fargo executives, in that I'm pretty blunt. I happen to think that the accounting principle that says your earnings go up as your credit is destroyed — because if you had any money left, you could buy your own debt back at a discount — I happen to think that's insane accounting. And I think the people who voted it into effect ought to be removed from the accounting board. So a man who talks like that has to have some sympathy with the people at Wells Fargo.

WARREN BUFFETTHe usually gets to hang them by their thumbs, but he held back this morning. The government, in mid-September last year, really did — they were facing a situation that was as close to a total meltdown throughout the financial system as I think you can imagine. You had a couple hundred billion dollars move out of money market funds in a couple of days. You had the commercial paper market freeze up, which meant that companies all over the country that had nothing to do with the financial world, basically, were going to have trouble meeting payrolls. We were — we really were looking into the abyss at that time. And a lot of action was taken very promptly. And overall, I commend the actions that were taken. So as Charlie says, to expect perfection out of people that are working 20-hour days and are getting hit from all sides by new information, bad information, that one weekend with Lehman going, AIG going, Merrill would've gone, in my view, unless the BofA had bought it. I mean it was — when you're getting punched from all sides and you have to make policy and you have to think about congressional reaction and the American people's reaction, you know, you're not going to do everything perfectly. But I think overall, they did a very, very good job. I'm sympathetic — that remark was made by Dick Kovacevich, who came in second last year to Charlie in the plain speaking contest around the world. (Laughter) And it's true that Dick Kovacevich was called on a Sunday at a little after noon, as I understand it, and told would be in Washington the next day at 1- or 2 o'clock, without being told what it was about. And there were 11 bankers there and some officials. And they were told that they were going to take TARP money. And they were going to take loans from the government and preferred stock. And that they only had an hour or two to sign it and they didn't get to consult with boards. But that's the nature of an emergency. You know, it — I think you — well, you're going to have some decisions that later can be looked back at and somebody will say, "I could've done it a little bit better." But, by and large, the authorities, in my view, did a very good job. And all banks aren't alike by a long shot. And in our opinion, Wells Fargo is a — among the large banks particularly — it's a fabulous bank and has some advantages that the other banks don't have. But in a time like that, you're not dealing in nuances. Incidentally, I would recommend to all of you, that you go to the internet and read Jamie Dimon's letter to his shareholders. Jamie Dimon of JPMorgan Chase. It's a fabulous letter. It talks about a point that Charlie made there. But it — Jamie did a great job of writing about what caused this and what might be done in the future. It's as good a shareholders letter that I've ever seen. So by all means, look it up. It's long, but it's worth reading.

Higher mathematics can be dangerous for investing

WARREN BUFFETTOK, we'll go to area 2.

AUDIENCE MEMBERYeah, thank you, Mr. Buffett and Mr. Munger. My name's Rick Franklin (PH). I'm from St. Louis, Missouri. I'd like to follow up on the microphone 1's question on financial literacy. And my own question from two years ago on your discount rate. But before I do that, I hope you'll indulge me. Torstol's (PH) wife, Rosemary Coons (PH), if you could come to section 222. I found your husband. (Laughter) You can come to microphone 2, if that's easier.

WARREN BUFFETTYou get a little of everything here. (Laughter)

AUDIENCE MEMBERSo my question is, free cash flow: sell-side analysts like to do a 10-year discounted cash flow analysis with a terminal value. Even some of the books written about your style — "The Warren Buffett Way", "Buffettology" — imply that you go through that exercise. But I know you're famous for not using computers or calculators. I'm wondering if those type of exercises fall into the "too hard" file, and you just do a simple free cash flow — normalized free cash flow — over a discount rate? And if you care to augment the answer with your numerical analysis of Coke, I'd appreciate that. (Laughter)

WARREN BUFFETTWell, the answer is that investing — all investing is, is laying out cash now to get more cash back at a later date. Now, the question is how much do you get back, how sure are you of getting it, when do you get it? It goes back to Aesop's fables. You know, "A bird in the hand is worth two in the bush." Now, that was said by Aesop in 600 B.C. He was a very smart man. He didn't know it was 600 B.C. But I mean, he couldn't know everything. (Laughter) But the — but that's what's being taught in the finance — you got a Ph.D. now and you do it more complicated, and you don't say, "A bird in the hand is worth two in the bush," because you can't really impress the laity with that sort of thing. But the real question is, how many birds are in the bush? You know you're laying out a bird today, the dollar. And then how many birds are in the bush? How sure are you they're in the bush? How many birds are in other bushes? What's the discount rate? In other words, if interest rates are 20 percent, you got to get those two birds faster than if interest rates are 5 percent and so on. That's what we do. I mean, we are looking at putting out cash now to get back more cash later on. You mentioned that I don't use a computer or a calculator. If you need to use a computer or a calculator to make the calculation, you shouldn't buy it. I mean, it should be so obvious that you don't have to carry it out to tenths of a percent or hundredths of the percent. It should scream at you. So if you really need a calculator to figure out that it's — the discount rate is 9.6 percent instead of 9.8 percent — forget about the whole exercise. Just go onto something that shouts at you. And essentially, we look at every business that way. But you're right, we do not make — we do not sit down with spreadsheets and do all that sort of thing. We just see something that obviously is better than anything else around, that we understand. And then we act. And Charlie, do you want to add to that?

CHARLIE MUNGERWell, I'd go further. I'd say some of the worst business decisions I've ever seen are those that are done with a lot of formal projections and discounts back. Shell Oil Company did that when they bought the Belridge Oil Company. And they had all these engineers make all these elaborate figures. And the trouble is you get to believe the figures. And it seems that the higher mathematics, with more false precision, should help you. But it doesn't. The effects, averaged out, are negative when you try and formalize it to the degree you're talking about. They do that in business schools because, well, they got to do something. (Laughter and applause)

WARREN BUFFETTThere's a lot of truth to that. I mean, if you stand up in front of a class and you say, "A bird in the hand is worth two in the bush," you know, you're not going to get tenure. (Laughter) It's very important if you're in the priesthood to look, at least, like you know a whole more lot more than the people you're preaching to. And if you come down and just — if you're a priest, and you just hand down the 10 Commandments and you say, "This is it," and we'll all go home, you know, it just isn't the way to progress in the world. So, the false precision that goes into saying that this is a two standard deviation event or this is a three standard deviation event, and therefore we can afford to take this much risk and all that, it's totally crazy. I mean, you saw it with Long-Term Capital Management in 1998. You've seen it time and time and time again. And it only happens to people with high IQs. You know, those of you who are — have 120 IQs are all safe. (Laughter) But if you have a very high IQ, and you've learned all this stuff, you know, you feel you have to use it. And the markets are not that way. The markets of mid-September last year, when people who ran huge institutions were wondering how they were going to get funding the next week, you know, that doesn't appear on a — you can't calculate the standard deviation with — that that arises at. It's going to arise much more often than people think, in markets that are made by people that get scared and get greedy. And they don't observe the laws of flipping coins, it's — in terms of the distribution of results. And it's a terrible mistake to think that mathematics will take you a long place in investing. You have to understand certain aspects of mathematics. But you don't have to understand higher mathematics. And higher mathematics may actually be dangerous and it will lead you down pathways that are better left untrod.

Moody's wasn't alone in making mistakes

WARREN BUFFETTOK. Andrew, one of those 200 questions from this morning? Or what are —

ANDREW ROSS SORKINThis one's not from this morning, but it relates to Moody's. And we've probably received about 300 questions, at least, on this topic. This question, which is representative of many, comes from Aaron Goldsmeizer (PH). And the question is the following: "Given the role of rating agencies in the current economic crisis — their conflict of interest, their reliance on, quote, 'flawed history-based models,' as you described in this year's letter to shareholders, and the likelihood that a loss of credibility and/or regulatory reforms could force drastic changes in their business models or earning streams — why do you retain such a large holding in Moody's? "And more important, why didn't you use your stake to try to do something to prevent conflicts of interest and reliance on these flawed history-based models?"

WARREN BUFFETTYeah, I don't think the conflict of interest question was the — was the biggest —by anywhere close to the major cause of the shortcomings of the rating agencies in foreseeing what would happen with CDOs and CNBSs and all sorts of instruments like that. Basically, five years ago, virtually everybody in the country had this model in their mind, formal or otherwise, that house prices could not fall significantly. They were wrong. Congress was wrong. Bankers were wrong. People that bought the instruments were wrong. Lenders — the borrowers were wrong. But people thought that if they were going to buy a house next year, they better buy it this year because it was going to be selling for more money the following year. And people who lent them money said it doesn't make any difference if they're lying on their application or they don't have the income because houses go up, and if we have to foreclose we won't lose that much money. And besides, they can probably refinance next year and pay. So there was an almost total belief — and there was always a few people that disagreed — but there was almost a total belief throughout the country that house prices would certainly not fall significantly, and that they would probably keep rising. And the people at the rating agencies, one way or another, built that into their system. And I don't — I really don't I think it was primarily the payment system that created the problem. I think they just didn't understand the various possibilities of what could happen in a market— or in a bubble, really — where people leveraged up enormously on the biggest asset that most Americans possess, their house. And so you had a $20 trillion asset class in a $50 trillion of total assets of American families that got leveraged up very high. And then once it started melting down, it had self-reinforcing aspects on the downside. So I say that they made a major mistake in terms of analyzing the instruments. But they made a mistake that a great, great, great many people made. And that probably if they had taken a different view of residential mortgages four or five years ago, they would've been answering to Congressional committees that would be saying, "How can you be so un-American as to deny all these people the right to buy houses simply because you won't rate these securities higher?" So I — they made a huge mistake. But the American people made a huge mistake. Congress made a huge mistake. Congress presided over the two largest mortgage companies. And they were their creatures. And they were supervised by them. And, you know, they're both in conservatorship now. So I don't think they were unique in their inability to spot what was coming. In terms of us influencing their behavior, I don't think I've ever made a call to Moody's. But it's also true that I haven't made it to, or made — maybe made one or two — to other companies in which we're involved. I mean, we don't tell, you know, the Burlington Northern what safety procedures to put in. We don't tell American Express who to cut off on credit cards and, you know, what they're — who they should lend to and who they shouldn't. We are — when we own stock, we are not there to try and change people. Our luck in changing them is very low, anyway. In fact, Charlie and I have been on boards of directors where we're the largest shareholders. And we've had very little luck in changing behavior. So, we think that if you buy stock in a company, you know, you better not count on the fact that you're going to change their course of action. And in terms of selling the stock, the odds are that the rating agency business is probably still a good business. It is subject to attack. And who knows where that leads? And who knows what Congress does about it? But it's a business with very few people in it. It's a business that affects a large segment of the economy. I mean, the capital markets are huge. I think there will probably be rating agencies in the future. And I think that it's a business that doesn't require capital. So it has the fundamentals of a pretty good business. It won't be doing the volume in the next — probably for a long time in certain areas of the capital markets. But capital markets are going to grow over time. We have said in this meeting in the past, many times, that Charlie and I don't pay any attention to ratings. I mean, we don't believe in outsourcing investment decisions. So we — if we buy a bond, the rating is immaterial to us, except to the extent if we think it's rated more poorly than it should, it may help us buy it at an attractive price. But we do not think that the people at Moody's, or Standard and Poor's, or Fitch, or anyplace else, should be telling us the credit rating of a company. We figure that out for ourselves. And sometimes we disagree with the market in a major way. And we've made some money that way. Charlie?

CHARLIE MUNGERYeah, I think the rating agencies, being good at doing mathematical calculations, eagerly sought stupid assumptions that enabled them to do clever mathematics. It's an example of being too smart for your own good. There's an old saying, "To a man with hammer, every problem looks pretty much like a nail." And that's — (laughter) — what happened in the rating agencies.

WARREN BUFFETTYeah, the interesting things about all those triple-As, is the people that created them ended up owning a lot of them. So they believed their own baloney, themselves. Every — the belief was enormous. So you had these people stirring up the Kool-Aid and then they drank it themselves. And they — (laughter) — you know, they paid a big penalty for it. But I don't think it was — I think it was stupidity and the fact that everybody else was doing it. I send out a letter to our managers, only every couple of years. But the one reason you can't give at Berkshire, as far as I'm concerned, for any action, is that everybody else is doing it. You know, and just — if that's the best you can come with, you know, something's wrong. But that happens in security markets all the time. And of course, it's — when Charlie and I were at Salomon or someplace like that, it's very difficult to tell a huge organization that you shouldn't be doing something that people, well-regarded competitors, are doing. And particularly when there's a lot of money in it. And so it's very hard to stop these things once you get sort of a industry acceptance of behavior. And you know, we were very unsuccessful, Charlie and I, at Salomon at saying, "Well, we just don't want to do this sort of thing." We couldn't even get them — initially, when we got in there at first, they were doing business with Marc Rich. And we said, "Let's stop doing business with Marc Rich." You know, that's like saying in the '30s, "Let's stop doing business with Al Capone," or something. And they said, "But it's good business. If he doesn't do it with us, he'll do it with somebody else." And they felt that way. And I think we won that one. But it wasn't easy. You remember that, Charlie?

CHARLIE MUNGERI certainly do.

Housing markets are beginning to improve

WARREN BUFFETTOK, we'll go to area 3. (Laughter) OK, zone 3, are we on?

AUDIENCE MEMBERI'm Laurie Gould (PH) from Berkeley, California. Where do you see the residential real estate market headed nationally, particularly in California, over the next year or two?

WARREN BUFFETTWell, we don't know what real estate is going to do. We didn't know what it was going to do a few years ago. We thought it was getting kind of dangerous in certain ways. But it's very hard to tell. I would say this. From what we're — from what I'm seeing, and I do see a lot of data — there's — and California, incidentally, is a very big — I mean, there are many markets within California. Stockton is going to be different than San Francisco and so on. But, in the last few months, you've seen a real pickup in activity, although at much lower prices. But you've seen — I think you've seen something in the medium- to lower-priced houses. And medium means a different thing in California than it does in Nebraska. But you've seen, in maybe $750,000 and under houses, you've seen a real pickup in activity, many more bidders. You haven't seen it bounce back in price. Prices are down significantly and it varies by the area. But it looks as if — you know, you had a foreclosure moratorium for a while. And so get into distortions because of that. But what it looks like, looking at our real estate brokerage data — and we have the largest real estate brokerage firm in Southern California, in Orange County, Los Angeles County, and San Diego in Prudential of California that's owned by MidAmerican — we see something close, I would say, to stability at these much-reduced prices in the medium to lower group. If you've got a $5 million or $3 million house, that still looks like a very — erratic — it's a market in which there still isn't a lot of activity. But in the lower levels, there's plenty of activity now. Houses are moving. Interest rates, of course, are down so it's much easier to make the payments. The mortgages being put on the books every day in California, are much better than, you know, the mix that you had a few years earlier. So it's improving. And I don't know what it'll do next month or three months from now. The housing situation is pretty much this way. You can look at it this way. We create about 1,300,000 or so households a year. It bounces around some. But — and it tends to — in a recession, it tends to be fewer because people postpone matrimony and so on to some extent. But if there's 1,300,000 households created in a year and you create two million housing starts annually, you are going to run into trouble. And that's what we did. We just created more houses than the demand was — the fundamental demand — was going to absorb. So we created an excess of houses. How much excess is there now? Perhaps a million and a half units. We were building two million units a year. That's down to 500,000 units a year. Now, if you create 500,000 units a year and you have a 1,300,000 households created, you are going to absorb the excess supply. It will be very uneven around the country. South Florida's going to be tough for a long, long time. So it isn't like you can move a house from one place to another if there's demand in one place and not another. But we are eating up an excess inventory now. And we're probably eating it up at the rate of 7- or 800,000 units a year. And if we have a million and a half excess, that takes a couple of years. There's no getting away from it. You have three choices. You could blow up a million and a half houses, you know. And if they do that, I hope they blow up yours and not mine, but that's a — (Laughter) We could get rid of it. We could try to create more households. We could have 14-year-olds start getting married and having kids, and — (Laughter) Or we can produce less than the natural demand increase. And that's what we're doing now. And we're going to eat up the inventory. And you can't do it in a day. And you can't do it in a week. But it will get done. And when it gets done, then you'll have a stabilization in pricings. And then you will create the demand for more housing starts. And then you go back up to a million and a quarter, and then our insulation business and our carpet business and our brick business will all get better. Exactly when that happens nobody knows. But it will happen. Charlie?

CHARLIE MUNGEROh, I think in a place like Omaha, which never had a really crazy boom in terms of housing prices, with interest rates so low if you've got good credit, that if I were a young person wanting a house in Omaha, I would buy it tomorrow. (Applause)

WARREN BUFFETTWe own the largest real estate brokerage firm in Omaha. So — (laughter) — Charlie will be — if he qualifies, we will give him a mortgage application. If is true that 4 1/2 million houses will change hands. There's about 80 million houses in the country. Twenty-five million of those do not have a mortgage. About a third of the houses in the country do not have a mortgage. You've got about 55 million, or a little less, that have a mortgage. And five or six million of those are in trouble one way or another. But we're selling 4 1/2 million houses every day. And by and large, they're going into stronger hands. The mortgages are more affordable. The down payments are higher. We're — the situation is getting corrected. But it wasn't created in a day or a week or a month. And it's not going to get solved in a day or a week or a month. We are on the road to solution.

2008 wasn't great for investment manager candidates

WARREN BUFFETTOK, Carol?

CAROL LOOMISPerhaps I should have said one other thing at the beginning. Those of you who read the annual report carefully know that Charlie and Warren were to be given no clue as to what any of the three of us were going to ask. So don't think that they have gotten a little list. They have seen nothing. This question, I got many versions of this question. This one happened to come from Jonathan Grant of New York City. It concerns the four investment managers you have said are in the wings as possible successors to you. "Can you please tell us, without naming names, but preferably in both quantitative and qualitative terms, how each of the four did in 2008 with the money they are managing — they were managing — for their clients. "You said you hoped to pick people who would be able to anticipate things that had never occurred before. While the world has seen credit crises before, there were a lot of things that happened in 2008, especially in the last few months of the year, that few were predicting and that you, yourself, have described as almost unprecedented. "How would you rate the way that these managers — these four managers — did in managing against these low-probability risks? Are all four still on the list?

WARREN BUFFETTWell, the answer is all four are still on the list. Let me just make one point first, though, because it got misreported a little bit. We have three candidates for the CEO position. And this is always a major subject of discussion at our director's meetings. All of them are internal candidates. You should know that. That's been said before. But it got misreported here once or twice. And it got confused, I think, because of the four possibilities for the investment job. And you could have all four come to work for us in that case. We won't have three CEOs or two CEOs. But we might have multiple investment managers after I'm not around. Or we might just have one. That would be up to the board at that time. They are both inside and outside the organization. And we don't preclude anything in terms of where they come from. So we could have a whole big list from outside the organization. That will not be true about the CEO position. The person that follows me will come from within Berkshire Hathaway. The four, I don't have precise figures from them, although I've got a fair amount of information on some of them. I would say they did no better than match the S&P last year, which was minus 37 after adding back dividends. So I would say that in terms of 2008, by itself, you would not say that they covered themselves with glory. But I didn't cover myself with glory, either. So I'm very tolerant of that in 2008. (Laughter) They — Charlie, you know some of the records pretty well. Wouldn't you say that's true?

CHARLIE MUNGERYeah. What's interesting to me is that practically every investment manager that I know of in America, and regard as intelligent and disciplined and with a unusual record of past success, they all got creamed last year. (Scattered laughter)

WARREN BUFFETTThe group — I don't hear a lot of laughter about that. (Laughter) I think you're hitting a nerve out there, Charlie. The four have a better-than-average record over time. If you'd asked me at the start of the year, if you'd said, "There's going to be a minus 37 percent year, will this group do better than average?" I would've said yes. But I think I would've been wrong. And like I said, I haven't got audit returns from every one of them. But I would say I would be wrong. I would say that their record over 10 years has been, in each case, has been anywhere from modestly to significantly better than average. And I'd be willing to be that would be the case over the next 10 years. But certainly, last year, you know, there were a lot of things that didn't work. And our group was not exempt from them. I have not changed the list. That doesn't mean that we're always looking with the idea of finding more people to add to it. And as opposed to the CEO job, you know, if I dropped dead tonight, the board needs to put somebody in as a CEO tomorrow morning. And they will do so. And they know who it is. And they feel very good about it. Not too good, I hope, but — (Laughter) But on the investment officers — one or more, and it could easily be more — they don't need to do something the next day or the next week. I mean, the portfolio isn't — everything doesn't stop because of that. So that can be a somewhat more leisurely decision they'll have. And it will be made, in an important way, in consultation and agreement with the new CEO. So that is something that you shouldn't expect the next day to hear an announcement on the investment managers. But you should expect to hear, you know, within a month or something like that.

CHARLIE MUNGERI don't think we would want a manager who thought he could just go to cash based on macroeconomic notions and then hop back in when it was no longer advantageous to be in cash. Since we can't do that ourselves —

WARREN BUFFETTYeah, we think it's impossible if we can't do it ourselves.

CHARLIE MUNGERYeah, right. (Laughs) So we're not looking for a type who went to cash totally.

WARREN BUFFETTYeah, that would — in fact, we would leave out anybody that did that.

CHARLIE MUNGERYeah, we would exclude them.

WARREN BUFFETTYeah. That —

CHARLIE MUNGERThey're not dumb enough for us. (Laughter)

Munger expects public/private hybrid health care system

WARREN BUFFETTOK, let's go to zone 4.

AUDIENCE MEMBERHi, Mr. Buffett, Mr. Munger. My name is Vern Cushenbery. I'm from Overland Park, Kansas. I wonder if you might share your thoughts on the likelihood of a nationalized health care system, what that might look like and the effects on your portfolio?

WARREN BUFFETTWell, I'm going to let Charlie answer that one since I don't know how to. (Laughs)

CHARLIE MUNGERPersonally, I think something more like Europe will come to the United States in due course. And I think it'll be supplemented by a private system, which is the equivalent of private school competition for public education. And, although I'm a Republican, I'm not horrified by that probable development. Personally, I wish they'd put it off for a year while we solve the economic problems. (Applause)

WARREN BUFFETTAnd I would say that in terms of its impact on Berkshire, you know, we have a broad cross section of companies — we have 246,000 people working for us — that we will adjust, like American business generally will adjust, to any developments along that line. It won't pose special problems for us. It won't offer us special opportunities. We'll see what the national sentiment is, as expressed through Congress. And we'll behave accordingly.

Why we're not training or naming our next CEO

WARREN BUFFETTBecky?

BECKY QUICKThis is a question that follows up on the succession question. This one is a, in particularly, though, addressed to the three candidates for CEO. It comes from Irving Fenster who writes: "Running Berkshire is very complex and complicated. Give us some insight for your reluctance to bring in your replacement to give him the benefit of your training, instead of his having to tackle the myriad of problems of the transition on his own. "The benefits for Berkshire, your replacement, and you, are so compelling your reluctance is puzzling. Having him on board may relieve some of the stress on you and help add many, many more years of good health for you."

WARREN BUFFETTIrving is a friend of mine in Oklahoma. Went in in my partnership 40 years ago, Irving and Irene. And he's been writing me on this for 30 or 40 years. And he's had — (laughter) — he's had no luck with me. So he decided to write Becky, apparently. (Laughter) If we had a good way to inject somebody into some role that was — would make them a better CEO of Berkshire, we would try it. But the truth is that the candidates we have are running businesses. They're making capital allocation decisions. They're doing things every day of an operating nature. And these are major businesses. And to sit around headquarters while I'm sitting in there reading and on the phone and, you know, who knows what else, they — it — there just is — there wouldn't be anything to do. I mean, we could meet every hour. You know, I could say, "Here's what I'm thinking about now. What do you think about this?" and — (Laughter) It'd be a waste of talent. It'd be ridiculous. And Irving has this notion that somehow, that they would be absorbing all these things that I'm doing. I just throw The Wall Street Journal to him after I'm done reading it, and I'd throw him The New York Times and I'd throw him the FT. (Laughs) And these are people that know how to run big businesses. They run businesses that make many, many, many millions, or even billions, of dollars. So, they are ready for the job right now. I wouldn't be happy unless we have — they are 100 percent ready. They know how to allocate capital. The biggest job they'll have is the fact that they will have to develop relationships with potential sellers of businesses, with the world, generally, with you, the shareholders, with other managers. That takes some time, not an extraordinary time. But that — you know, they will have to become acquainted with people. But — different constituencies. But that — there's, you know, that is nothing that really needs to be hastened along. It's nothing terribly important. I mean, they know how to run businesses. And they would do many things much better than I would. The biggest — probably the biggest challenge, because we have all of those talented managers that you saw during the movie. And those people have different styles. And they have different needs to some degree. They have different ways of operating. They're all successes. But you know, some of them bat left-handed. Some of them bat right-handed. Some of them stand deep in the box. You know, some of them crowd the plate. I mean, they all have a little bit of variation. But they all hit terrifically. And for the CEO of Berkshire, it does require some knowledge of the individual personalities. And which ones like to run by themselves totally and which ones like to check in occasionally and all that. But that is no reason to take a talent that's now running a business very successfully and building value and to have them sit in an office next to me and have us chew over the day's events. I mean, Charlie and I worked together now for decades. And I've learned a lot from Charlie. But I haven't done it by, you know, having him sit next door and have hourly meetings or anything of the sort. What do you think, Charlie?

CHARLIE MUNGERWell, I think, averaged out, you're more likely to be qualified to be a CEO by running a subsidiary with an enormous amount of discretion than you are to being around headquarters watching somebody else do it his way. A lot of the models that have worked well in the world, like Johnson & Johnson, are quite Berkshire-like, in that they're decentralized and they let these people pop up from the subsidiaries. They don't try and just create CEOs in a hothouse in headquarters.

WARREN BUFFETTWe have an unusual situation at Berkshire that most of the people at the top, virtually all of them, are doing what they want to do. I mean, they like running their businesses. That's what they came in expecting to do. And that's what they're doing, and we're letting them do it the way they like to do it. And so we don't have 50 people that all think they're on some pyramid to get to the top. And Irving would like me to name — he's talked to me about it. He would like to me name who it would be. But that could change in the future. It could create some possible — Well, we saw it at General Electric, I mean, when Jeff Immelt got appointed from among three, the other two left. And I don't really see any advantage in having some crowned prince around. But Irving will keep writing me, I can promise you that. (Laughter)

Buffett's business school: only two courses

WARREN BUFFETTOK, zone 5.

AUDIENCE MEMBERHi, Warren. That's a little loud, sorry. Hi. My name's Sarah. And I'm from Omaha, Nebraska. I'd like to know if you could explain your strategies, namely value investing, in regards to cultivating the next generation of investors. How will you teach this young group?

WARREN BUFFETTWell, I had 49 — mostly universities, a few colleges — that came to Omaha this year. We do them in clumps of six. And then the last one, we had an added university. So we had eight sessions, full-day sessions. And they asked me what — sometimes they asked me what I'd do if I was running a business school, teaching investments. And I'd tell them I'd only have two courses. One would be how to value a business, and the second would be how to think about markets. And there wouldn't be anything about modern portfolio theory or beta or efficient markets or anything like that. We'd get rid of that in the first 10 minutes. The — But if you know how to value a business — and you don't have to know how to value all businesses. On the New York Stock Exchange, I don't know, there's 4- or 5,000, probably, businesses and a whole lot more on NASDAQ. You don't have to be right on 4,000 or 5,000. You don't have to be right on 400. You don't have to be right on 40. You just have to stay within the circle of competence, the things that you can understand. And look for things that are selling for less than they're worth, of the ones you can value. And you can start out with a fairly small circle of competence and learn more about businesses as you go along. But you'll learn that there are a whole bunch of them that simply don't lend themselves to valuations and you forget about those. And I think if — accounting helps you in that, you need to understand accounting to know the language of business, but accounting also has enormous limitations. And you have to learn enough to know what accounting is meaningful and when you have to ignore certain aspects of accounting. You have to understand when competitive advantages are durable and when they're fleeting. I mean, you have to learn the difference between a hula hoop company, you know, and Coca-Cola. But that isn't too hard to do. And then you have to know how to think about market fluctuations and really learn that the market is there to serve you rather than to instruct you. And to a great extent, that is not a matter of IQ. If you have — if you're in the investment business and you have a IQ of 150, sell 30 points to somebody else, 'cause you don't need it. I mean, it — (laughter) — you need to be reasonably intelligent. But you do not need to be a genius, you know. At all. In fact, it can hurt. But you do have to have an emotional stability. You have to have sort of an inner peace about your decisions. Because it is a game where you get subjected to minute-by-minute stimuli, where people are offering opinions all the time. You have to be able to think for yourself. And, I don't know whether — I don't know how much of that's innate and how much can be taught. But if you have that quality, you'll do very well in investing if you spend some time at it. Learn something about valuing businesses. It's not a complicated game. As I say — said many times — it's simple, but not easy. It is not a complicated game. You don't have to understand higher math. You don't — you know, you don't have to understand law. There's all kinds of things that you don't have to be good at. There's all kinds of jobs in this world that are much tougher. But you do have to have sort of an emotional stability that will take you through almost anything. And then you'll make good investment decisions over time. Charlie?

CHARLIE MUNGERYeah, you do have the basic problem that exactly half of the future investors of the world are going to be in the bottom 50 percent. In other words — (laughter) — you're always going to have more skill at the top than you have at the bottom. And you're never going to be able to homogenize the investment expertise of the world. There is so much that's false and nutty in modern investment practice, and in modern investment banking, and in modern academia in the business schools, even in the Economics departments, that if you just reduce the nonsense, that's all I think you should reasonably hope for.

WARREN BUFFETTBeyond a certain basic level, though, of skill, wouldn't you say your emotional make-up's more important than the — than some super high degree of skill?

CHARLIE MUNGERAbsolutely. And if you think your talent — if you think your IQ is 160 and it's 150, you're a disaster. (Laughter) You know, much better a guy with a 130 that's operating well within himself.

WARREN BUFFETTI get to see the students that come by. I loved a fellow from the University of Chicago, one of the students. And the first question that was asked of me was, "What are we learning that's most wrong?" That's the kind of — I mean, I wish they'd ask that sort of thing of the panel here.

CHARLIE MUNGERHow do you handle that in one session?

WARREN BUFFETTYeah. (Laughter) But it was holy writ 25 years ago, efficient market theory. You know, I never understood how you could even teach it. I mean, if you walked in in the first five minutes, you said to the students, "Everything is priced properly," I mean, how do you kill the rest of the hour? But — (Laughter) — they did it. And they got Ph.D.s for doing it well. You know, and the more Greek symbols they could work into their, you know, their writings, you know, the more they were revered. It's astounding to me and I — that may have even given me a jaundiced view of academia generally — is the degree to which ideas that are nutty take hold and get propagated. And then I read a quote the other day that may have partially explained it. Max Planck was talking, the famous physicist. Max Planck was talking about the resistance of the human mind, even the bright human mind, to new ideas. And particularly the ones that had been developed carefully over many years, and were blessed by others of stature, and so on. And he said, "Science advances one funeral at a time." And I think there's a lot of truth to that. Certainly been true in the world of finance.

Ajit Jain's successor won't have the same broad authority

WARREN BUFFETTOK, Andrew?

ANDREW ROSS SORKINOK. We have a succession question. However, this one has a twist, coming from Ben Knoll. "You famously said, quote, 'You should invest in businesses that a fool can run, because someday a fool will.' (Laughter) "Given your reinsurance company's capacity and inclination for big financial bets, can you provide us more reassurance about the risk once Ajit is gone? "Do you have a succession plan for him?" Ben says, "The Titanic-like ending at AIG, once Greenberg was gone, has me spooked."

WARREN BUFFETTYeah, I would say that it would be impossible to replace Ajit. And we wouldn't try. And, therefore, we wouldn't give the latitude, in terms of size of risk or that sort of thing, that we give to Ajit. No, we've got a unique talent, in my view there, and I think in Charlie's. And so, when you get somebody like that, you give enormous authority to them after you firmly establish in your mind that that's who you're dealing with. But that doesn't mean that the authority goes with the position. The authority goes with the individual. And we would not — giving your pen away in insurance, as they say, is extraordinary dangerous. And we have in this town, we have Mutual of Omaha, which in the 1980s, had been built up carefully over, probably, 75 years by that time, and become the largest health and accident association in the world, I believe. And they got the idea that they should be writing property-casualty reinsurance. So they gave a pen to somebody within the place. And probably nobody had even heard the guy's name, you know. And in just signing a few contracts, they lost half their net worth in a very short period of time. And they were worried that they might have lost more than that. So you can do enormous damage in the insurance business with a pen. And you'd better — have to be very careful about who you give your pen to. And we've given our pen to Ajit in a way that we wouldn't give it to anyone else. Now, it just so happens that I enjoy hearing about the kind of things he does. So we talk daily. But we don't talk daily because he needs my approval on anything. We talk daily because I find it very interesting. When he says, "How much should we charge to insure Mike Tyson's life for a couple of years?" I mean, that's the kind of thing I can get kind of interested in. I — (Laughter) I asked him whether there was an exclusion in case he got shot by a woman that felt unhappy about her treatment or something, but — And it makes a difference in the price, but — I enjoy that sort of thing. But I'm not needed. And Ajit is needed. And we won't find a substitute for him. And you know, there's some things that have to be faced that way. Charlie?

CHARLIE MUNGERYeah. What that quotation indicates is sometimes, stated differently, you say if it won't stand a little mismanagement it's not much of a business. Of course, you prefer a business that will prosper pretty well, even if it's not managed very well. But that doesn't mean you don't like even better when you get such a business that's managed magnificently. And both factors are quite important. We're not looking for mismanagement. We like the capacity to stand it, if we stumble into it. But we're not looking for it.

WARREN BUFFETTYeah, we will not do things that we think are — we will not assign tasks to people that we think are beyond their capabilities. And it just so happens that Ajit has enormous capabilities. So he gets assigned some very unusual things. But you don't see that prevailing throughout our insurance operation. And our managers don't expect to operate that way. That's a one-off situation with Ajit. And he's in good health. And, you know, we send him all the Cherry Coke or fudge that he wants. (Laughter)

Berkshire was "cheaper" at the end of 2008

WARREN BUFFETTOK, area 6. I recommend this fudge, incidentally. It's terrific. I'm having a good time. (Laughter)

AUDIENCE MEMBERGood morning. I'm Steve Fulton (PH) from Louisville, Kentucky. I gave up box tickets to the Kentucky Derby this afternoon to come out and ask you this question. Thank you for this opportunity. My question relates to how you view, or what your view is of the market's valuation of Berkshire's shares. You commonly comment that Berkshire has two primary components of value: the investments that they own — the stocks, the bonds, and similar — and the earnings from the non-insurance operating companies that you've got. And when you compare 2007 to 2008, the investments were down about 13 percent. And the earnings were down about 4 percent. But the value that the market was placing on the shares was down about 31 percent. And I was curious as to your comments on that valuation.

WARREN BUFFETTYeah, well, I think you put your finger on something. We do think that the — we think, obviously, the investments are worth what they're carried for, or we wouldn't own them. In fact, we think they're worth more money than they're carried for at any given time because we think, on balance, they're underpriced. So we have no problem with that number. We define our earning power — we leave out insurance underwriting profit or loss, on the theory that insurance is — if it breaks even — will give us float, which we will invest. And on balance, I actually think that insurance probably will produce some underwriting profit. So I think we even understate it a little bit in that respect. But we think the earning power of those businesses was not as good last year as normal. It won't be as good this year as normal. But we think those are pretty good businesses overall. A few of them have got problems. And — but most of them will do well. And I think a few of them will do sensationally. So, I think it's perfectly reasonable to look at Berkshire as the sum of two parts. A lot of liquid marketable securities — or maybe not so liquid, but at least fairly priced, or maybe even undervalued, securities — and a lot of earning power, which we are going to try and increase over time. And if you look at it that way, you would come to the conclusion that Berkshire was cheaper in relation to its intrinsic value at the end of 2008 than it was at the end of 2007. But you would also come to the conclusion that was true of most securities. In other words, the whole level of securities. And every stock is affected by what every other stock sells for. I mean, if the value of ABC stock goes down, XYZ, absent any other variables, but XYZ is worth less. If you can buy stocks at eight times earnings, good companies, you know, or nine times earnings, you know, they — it reduces the value of Berkshire, as opposed to when stocks were selling, well, at 18 or 20 times earnings. I'm pulling those numbers out of the air. But everything is affected by everything else in the financial world. When you say a bird in the hand is worth two in the bush, you're comparing it — you've got to compare that to every other bush that's available. So, you're correct that Berkshire was cheaper in relation to intrinsic value at the end of 2008, than 2007, at least in my opinion. And that that those two variables will count. We'll report them to you regularly. And over time, we would hope that both increase. And we particularly hope the operating earnings aspect increases, because that's our major focus. We would like to move money into good operating businesses over time and build that number a lot. Charlie?

CHARLIE MUNGERWell, I would argue that last year was a bad year for a float business. It was naturally going to make the owner of the float appear, briefly, to be at a disadvantage. But long-term, having a large float, which you're getting at a cost of less than zero, is going to be a big advantage. And I wouldn't get too excited about the fact that the stock goes down. I happen to know that there was one buyer there who rather inartistically bought about 10,000 shares when Berkshire was driven to its absolute peak. And how much significance does that have in the big scheme of things over the long term? What matters are things like this: our casualty insurance business is probably the best big casualty business in the world — our utility subsidiary, well, if there's a better one, I don't know it — and if I had to bet on one carbide cutting tool business in the world, I'd bet on ISCAR against any other comer. And I could go down the list a long way. I think those things are going to matter greatly over the long term. And if you think that it's easy to get in that kind of a position, the kind of position that Berkshire occupies, you are living in a different world from the one I inhabit. (Applause)

WARREN BUFFETTYeah, our insurance business now, it is a remarkable business. And it's got some remarkable managers.

How GEICO benefited from the financial crisis

WARREN BUFFETTThere's one interesting thing that's happened. In September, when we had a financial meltdown and, really, almost the ultimate — it was almost the China Syndrome-type thing — Americans started behaving differently. Probably people around the world, but I certainly know in terms of our businesses, it was like a bell had been rung. And one manifestation of it was kind of interesting. Whereas it hurt very much our jewelry business, our carpet business, it hurt NetJets, it hurt all the businesses. Hurt American Express, for example. You know, the average ticket went down almost 10 percent. I mean, it just was like that, that people's behavior changed. But one of the things it did, was it also caused the phones to start ringing even more at GEICO. And we didn't change our advertising, particularly. Our price advantage, relative to other companies, didn't change that much. But all of a sudden, just — it was remarkable. Thousands and thousands and thousands of more people came to our website or phoned us every week. So, it — all of a sudden, saving $100 or $150 or whatever it might be, became important. Not only the people who were watching our ads that day, but just with the people that it was lurking in the back of their minds. They went to geico.com. So in the first four months of this year — last year, we added about 665,000 policy holders. That's a lot of people. It made us, by far, the fastest growing auto insurer among the big companies. First four months of this year, we've added 505,000 in four months. It's the behavioral changes. And that franchise, that competitive advantage, has been built up over decades. And Tony Nicely has nurtured it like nobody else could, just day after day, office after office, associate after associate. But then it just pays off huge when the time comes. Because we can — we are the low-cost producer among big auto insurance companies. That means we can offer the best value. And now people are value conscious. So these things are going on all the time with our subsidiaries, with those managers. And it's — it builds a lot of value over time. I mean, every GEICO policy holder is a real asset to the company. I could give you an estimated value. But I don't think it'd necessarily be smart. But they're worth real money. And, we are now the third largest auto insurer in the country. I think we'll end up the year maybe at 8 1/2 percent of the market. And it was 2 and a small fraction percent back in 1993 when Tony took charge of the business. And the fundamentals are in place — (applause) — to take us much higher.

2008 was tough, but still no plans for dividend

WARREN BUFFETTCarol?

CHARLIE MUNGER(Quietly) Can you reach that peanut brittle?

CAROL LOOMISI promise you, this question did not come from Susan Lucci. However, it does concern dividend policy. It came from Peter Sargent of Yardley, Pennsylvania. And to ask that, he quotes from principle number 9 of the "Owner's Manual." And Warren wrote there, quote: "We feel noble intentions should be checked periodically against results. We test the wisdom of retaining earnings by assessing whether retention over time delivers shareholders at least $1 of market value for each $1 retained. To date, this test has been met." Now, this was written some time ago. "We will continue to apply it on a 5-year rolling basis. As our net worth grows, it more difficult to use retained earnings wisely." So I'm now quoting the questioner here: "The recent annual report made me think about the performance of both the company and the stock price. Berkshire seems to have done quite well in the past few years. But the stock price seems to have not quite kept pace. "So I looked at the last five years of earnings per share. They're on page 26 of the annual report. And they add up, in total, to $29,207. "As you probably know, the closing price of Berkshire on December 31st, 2008 was 84,250. If you add the 29,207 per share of retained earnings to this, you come up with a, quote, 'minimum market value of 113,457.' "Since Berkshire closed on 12/31/2008 at 96,600" — oh, wait, I have read something wrong here. "The closing price of Berkshire on 12/31/2003 was 84,250. "And since Berkshire closed on 12/31/2008 at 96,600, and it's been lower than that since, and is now around that now, it would seem that the market value has not increased for each $1 retained. "Assuming my analysis is correct, it raises the question of whether or not Berkshire will pay a dividend in the coming year or not."

WARREN BUFFETTWell, we'll now have a short quiz on that program — (laughter) — on the question. The earnings, incidentally, of the 5-year period would include gains from things that were listed in unrealized appreciation at the end of the period. In other words, some of those were actually built into the asset value at the time, but then become realized. But the truth is if you take all of the money we earned in the five years, and the stocks, bonds, businesses purchased, and you sold them for cash on December 31st, 2008, we would not have — we would've had a loss on that, I mean, under the conditions that existed on December 31st, 2008. I think that's probably true of almost all capital programs that were (inaudible) — if you really measured it by what you could've sold, the businesses we bought — we love those businesses. But there was no market to speak of for many businesses at that time. And security values were down significantly. So I would say that he's absolutely right, that measured on the value on December 31st, 2008, that the reinvested earnings had not produced a dollar market value at that particular market point. Now, I would say this, that we also say we measure our business performance against the S&P. And we use book value as a conservative proxy for intrinsic business value. We think intrinsic business value is higher, but we use that as a proxy. And we've done that consistently throughout the history of Berkshire. And during that 5-year period — or during any — we've never had a 5-year period when we've under-performed the S&P, in terms of the — what I would call the intrinsic value measure of Berkshire. And, as I said a few years ago, it's — as we get larger, it's much harder to do that, and we'll settle for a couple of points better. But so far, that test has been made — been met. And it's been met while we reinvested all earnings. So I think that we still have got the burden of — we still should have to prove by the fact that Berkshire will sell above the earnings we've retained. Berkshire sells above it — every dollar that's been retained at Berkshire translates even today into more than a dollar of market value. But I would certainly say that if you took the five years and just sold all the things we bought during that period at that price, that there would be a loss. Charlie?

CHARLIE MUNGERYeah, I don't get too excited about these oddball things that happen once every 50 years. If you're reasonably prepared for them and you're dented a little on the bottom tick, and other people are suffering a lot more, and unusual opportunities are coming to you that you don't see under other conditions, I don't think we deserve any salt tears.

Wells Fargo's stock price plunge shouldn't spark selling

CHARLIE MUNGERTake Wells Fargo. I think Wells Fargo's going to come out of this mess way stronger. The fact that the stock at the bottom tick scared a lot of people, I think will prove to be a very temporary phenomenon.

WARREN BUFFETTYeah. Wells Fargo got down below — actually, ticked below $9 a share at a time when spreads on business were never better, when depositing flows were never better, when their advantage in relation of costs of funds versus other large banks had never been better. But you know, in a market that was terrified, it — literally, I had a class meeting that day, and it was the only time any of those classes have ever got me to name a stock. But they actually pushed me. And somebody there with a BlackBerry, or whatever those instruments are that they carry around these days, checked the price and it was below $9. And I said, if I had to put all my net worth in one stock, that would've been the stock. The — their business is — you know, the business model is fabulous. And it, you know, when would you get a chance to buy something like Wachovia, which had the fourth largest deposit base in the United States, and bring that in? And then start getting the spread on assets versus liabilities that Wells gets and build the relationships they have. It's a great business opportunity. Wells Fargo will be better off — unless they have to issue a lot of shares, which they shouldn't — Wells Fargo will be a lot better off a couple of years from now, than if none of this had happened. And I think that's true of some of other businesses as well. But you — you know, you have to be prepared. You can't let somebody else get you in a position where you have to sell out your position. Leverage is what causes people trouble in this world. So you don't — you never want to be in a position where somebody can pull the rug out from under you. And you also never want to be emotionally in a position where you pull the rug out from under yourself. I mean, you don't want to have other people force you to sell and you don't want to let your own fears or emotions to cause you to sell at the wrong time. I mean, why anybody sells Wells Fargo at $9 a share when they owned it at $25 and the business is better off, is one of the strange things about the way markets behave. But people do it. And they get very affected by looking at prices. If they own a farm like I do, you know, 30 miles from here, they don't get a price on it every day. You know, they — I bought that farm 25 years ago. And you look to the production of corn. You look to the production of soy beans and prices and cost of fertilizer and a few things. And you look to the asset itself to determine whether you made an intelligent investment. You have your expectations about what the asset will produce. But people in stocks tend to look at the price. So they let the price tell them how they should feel or — that's kind of crazy in our view. We think you should look at the business just like you'd look at the apartment house that you bought or the farm you want. They let the fact that a quote is available every day turn into a liability rather than an asset. And all I would say there is you better go back and read chapter 8 of "The Intelligent Investor," where it tells you how to think about the market. And it will do you more good than learning what modern portfolio theory is all about.

Big stimulus spending bound to have some "slop"

WARREN BUFFETTOK, number 7.

AUDIENCE MEMBERMy name is Jim Powers (PH). I'm from West Newton, Massachusetts. My question has to do with this stimulus bill by the federal government. I've read that only 8 percent of the money is intended to go to infrastructure. When you invest money, you normally look at the asset you're getting for the money. With the country going into so much debt, don't you think it would be better if a great percentage of the money invested by the federal government go to solid assets, as it did during the Great Depression with the Tennessee Valley Authority, Hoover Dam, other facilities, that are still making money today, and paying back the original investment by the government many times over, while putting numerous people to work?

CHARLIE MUNGERLet me answer that one. Yes. (Laughter and applause)

WARREN BUFFETTI would certainly agree. I mean the '30s — a lot of really wonderful things were done with the money that was used to then to stimulate the economy. And that should be the goal and a model. I can't evaluate perfectly what the current stimulus bill will do. I know that I — I did get a notice the other day from the Social Security Administration telling me I'm getting $250 more. That ought to last me 6 or 7 months. (Laughter) Charlie will make his last longer, I'm sure. (Laughter) But you know, that's the stimulus that the Buffett household has received at the present time. Obviously, you want to use the money as intelligently as possible. Obviously, also, anytime the federal government does anything on a massive scale — any time any big organization, a church or a business or anything, you know, throws all kinds of resources at something, usually there's a fair amount of slop. I think that the intent — but by the time it gets through Congress and everything, I can't guarantee how the result comes out — but I think the intent is to get the money into action quickly and to end up having it utilized in intelligent ways. But if the day after Pearl Harbor happened, you know, if you'd attached 5 or 6 thousand earmarks to the declaration of war, you know, it would not have been a pretty sight. I mean, it — we have a system now where — that doesn't seem to be perfectly effective, I would say, in detaching the interests of particular legislators away from the common goal. I mean, I get distressed when I look at what gets attached to some of these bills. And that certainly was a case in point. So I'll go along with Charlie on the answer. But I think the intent of the administration is the right thing. When the American public pulls back like they have, government does need to step in. It will have consequences. We are doing things on a scale — we're doing the conventional things, but we're doing them in unconventional amounts. And we will see consequences from what we are doing now. I think we should be doing it. But I don't think we should think it's a free ride.

CHARLIE MUNGERYeah, we have one big no-brainer on the list of infrastructure investments that can be made. And that is a hugely improved nationwide electricity grid. The chances that that won't help us are zero. And that, when it happens, will enormously benefit Berkshire's utility subsidiary. But that isn't the reason I'm raising it. I would be making this argument if we didn't have a utilities subsidiary.

WARREN BUFFETTWe might make it a little more strongly if we had the utilities subsidiary, however. (Laughter)

Hard to compete with government-guaranteed debt

WARREN BUFFETTBecky?

BECKY QUICKThis question comes from Rita Addison (PH), who says, "How does Berkshire's strong balance sheet and credit rating help take advantage of buying opportunities when even weak financial companies can now borrow more cheaply than Berkshire by using U.S. government guarantees of their debt?"

WARREN BUFFETTYeah, well, as I pointed out in the annual report, we are at a significant disadvantage in any financing-type business where we are competing against people who are getting their funding and their financing with a government guarantee. Our raw material costs us a lot more money. And that's particularly applicable at Clayton where we have 10- or $11 billion of, really, mortgage paper on mostly manufactured homes. And it's exceptionally good quality portfolio. Kevin Clayton and the people at Clayton Homes have done a great job in terms of lending responsibly. Our borrowers have behaved very well. But the raw material to fund that portfolio — money — costs us a whole lot more than some bank that's in trouble. And that's a real problem for us. And it's forcing us to try to come up with various other sources of funding that portfolio where, one way or another, we get people with government guarantees involved in the program. That's just a fact of life with us now. There are the blessed who have government guarantees. And there're the ones that aren't. And of course, you see that dramatically, in the case of some companies that have a government guarantee for part of their money and then sell other money — and then sell other bonds — that aren't guaranteed. I mean, just the other day, as I remember, I may be wrong on this, but I think Goldman Sachs sold something with a 400 basis point spread that wasn't guaranteed. Whereas their guaranteed paper would be hundreds of basis points underneath that. General Electric sold something earlier this year that wasn't guaranteed. And the spread between the guaranteed and the un-guaranteed was huge. We don't have anything guaranteed to sell, so we are not in that favored class in any way. And we can't become a bank holding company. So as long as the situation goes on, we have to figure out ways that we adjust. We only really use borrowed money — we use it in our utility business. But other utilities are not in this favored class. I mean, the utility industry generally. So our utility borrows money quite well, compared to most utilities. MidAmerican's credit is regarded as very good. And generally speaking, we've raised our money at a lower rate, which benefits our customers in the utility business. We don't use much money in the rest of our businesses, except for the financing at Clayton. And we won't use much money. So we get our money by float, basically. And our float is — it was $58 billion. I mentioned a little while ago, that Wells Fargo raises its money in the first quarter at, I think, 1.12 percent — 112 basis points — which is very cheap. But our money's cheaper. We can't get as much of it as Wells does. But we do have 58 billion — in fact, we have more now — that you would think will cost us less than zero over time, although there will be given periods when we have a cost to it. But we don't have an answer for going head-to-head against a government-sponsored business that gets — can raise money with a government guarantee. We do not have a way of going head-to-head with them at any business, no matter how prudently we conduct our operations. Charlie?

CHARLIE MUNGERWell, of course we're at a funding disadvantage. But on the other hand, we aren't regulated like a bank or a bank holding company. I think we'd be pretty ungrateful if we took this one disadvantage that has come to us and obsessed on it.

WARREN BUFFETTI get those kind of lectures all the time. (Laughter)

Graham would probably agree with us on derivatives

WARREN BUFFETTOK, number 8.

AUDIENCE MEMBERHi, Mr. Buffett. Hi, Mr. Munger. My name is Mary Kimble (PH) from New York City. In getting back to basics, what do you think Ben Graham would have said about derivatives?

WARREN BUFFETTHe would not have liked them. I think he probably would've said pretty much what I said back in 2002, that they pose a real risk to the system. They cause leverage to run wild. They cause counterparties to sign up for things that may be difficult to achieve under certain circumstances. That they place an already fragile economic system — added strains on them — which can pop up in unpredictable ways. But he would probably also say if he saw some that were mispriced, he would act accordingly. But he wouldn't get himself in a position where the problems of the people who didn't act prudently could cause him any problems. And I think that probably would be the answer. The — one of the — one basic problem on derivatives — well, there are several problems. I mean, back in — after 1929, Congress met — there was a Pecora committee and so on— and they decided that it was very dangerous to let people borrow a lot of money against securities and that it contributed to the Great Depression. And therefore, they said the Federal Reserve should regulate how much people could borrow against securities. And it was important for society. And the Federal Reserve started requiring margin — they had margin requirements. Those requirements still exist. You are not supposed to be able to borrow more than 50 percent against your securities. Actually, during one period, they went to where they didn't — the Federal Reserve allowed no borrowing whatsoever. They went to a hundred percent margin. But derivatives came along and just turned that into a — made those rules a laughingstock. You have what they call "total return swaps," which means you can borrow a hundred percent against what you own. That goes way beyond anything that existed in 1929. So derivatives became a way around regulation of leverage in markets, which like I say, Congress felt was important and the Federal Reserve still has a responsibility for enforcing. Derivatives also meant that settlement dates got pushed out. One of the problems in securities markets comes about when you have a trade today, if you had — didn't have to settle it for a year, you'd find it very hard sometimes to find the person on the other side. And derivatives allow these very long settlement periods. Whereas security markets demand them in three days. There's a reason they demand them in three days. As you extend out periods, you get more and more defaults. So they're a danger — they are a danger to the system. There's no question about that. We have a book in The Bookworm called "The Great Crash" by Galbraith. It's one of the great books. You really ought to buy it. It tells the story of the '29 and it gets into margin requirements, so… Ben Graham would not like a system that used derivatives heavily. But he would — I don't think he would have been above — if he saw something that looked way out of line and he knew he could handle it himself — I think he would have been quite willing to buy or sell one that was mispriced. Charlie?

CHARLIE MUNGERI think there's been a deeper problem in the derivative business. The derivative dealer takes two advantages of the customer. One, there's croupier-style mathematical advantage equivalent to the house advantage in Las Vegas. And two, the derivative dealer is playing in the same game with his own clients, with the advantage of being a better player. So —

WARREN BUFFETTAnd having knowledge of what they're doing.

CHARLIE MUNGER— and having knowledge of what the clients are doing. This is basically a dirty business. And you're really selling things to your clients who trust you, that are bad for the clients. We don't need more of this kind of thing in America. We need less. (Applause)

Bailouts shouldn't hurt senior debt holders

WARREN BUFFETTAndrew?

ANDREW ROSS SORKINWell, this question came in this morning. And it's a timely, philosophical one, given the results of the stress test that will coming out next week. And it relates to your stakes in Wells, U.S. Bancorp and Goldman Sachs. And the question is the following: "The government's proposed restructuring plans for Chrysler and GM require creditors, as well as common shareholders, to bear losses. "Yet, with the banks, the government's actions, to date, have not required concessions from holders of preferred stock and debt. The government has merely required the dilution of common stock holders. "To what extent should holders of preferred stock and debt share losses in the bank rescue plans or in the resolution of a major bank holding company? And do you expect to be diluted in any of your holdings?"

WARREN BUFFETTYeah, I would say this. That's very institution specific. With Freddy and Fannie, the preferred was gone. I mean, there was no equity. And the preferred got — in effect, it's gotten wiped out along with the common stock. With U.S. Bancorp or Wells, those are companies making lots of money. There's lots of equity there. So there's no reason to go up to senior securities and say that they should give up anything when there's lots of common equity underneath. It'd be like if I have a mortgage on my house and it's 70 percent against its current value, saying, just because other people are having trouble in the neighborhood paying their mortgages because they got much higher mortgage or something, your saying my mortgage holder with 70 percent mortgage, that he should give up something and increase my equity even further. There's lots of equity there, which there is at Goldman, U.S. Bank, Wells Fargo. There's lots of equity, lots of earning power. There's really no reason for senior debt to give up anything. You know, you could make an argument at Freddy and Fannie, about the subordinated debt, whether they should've suffered as well as the preferred stock and the common. But I don't see it as applying to earning institutions with lots of future earning power. I would love to buy all of U.S. Bancorp. You know, or I'd love to buy all of Wells if we could do it. You know, we're not allowed to do it because it'd make us a bank holding company. But those businesses, there's no reason for the creditors to suffer. Now, you get into Chrysler or something of that sort, you know, there is no — I mean, they're losing money all of time and they do not have a competitive advantage. You know, whether they've got a sustainable business model under any circumstances is open to question. Whether there's any common equity there is not open to question. You know, there isn't any common equity. Nobody would pay a dollar, you know, if they had to take on Chrysler and all its debts. Lots of people would pay billions of dollars to take on U.S. Bancorp or Goldman Sachs, you know, with all their debt. So those are different situations. I — If you get into a situation where the common equity is wiped out, then you get into a question of — then you get into the proper allocation of things within the capital structure — who gives up so much, and the senior debt may give up something, and so on. But I don't see it as applying at all to businesses that are worth a lot of money, where the equity's worth a lot money. Charlie?

CHARLIE MUNGERI have nothing to add. (Laughter)

Ignore original cost when reviewing your portfolio

WARREN BUFFETTOK, number 9.

AUDIENCE MEMBERHello, Mr. Buffett. Sorry, about that. Mr. Buffett and Mr. Munger, my name's Kelly Cardwell from Warrenville, Illinois. Guys, if either of you were starting a smaller investment fund today, let's say in Warrenville, Illinois, $26 million fund called Central Square Capital — hypothetically?

WARREN BUFFETTWhat? You'll get billed for a commercial later on. (Laughter)

AUDIENCE MEMBERWith this smaller asset base, what would you do differently, both in terms of the number of positions and frequency of turnover? For example, if you owned a portfolio of 10 stocks and five of them doubled in a short time period, would it make sense to actively manage the portfolio and take profits in the five that had doubled and redeploy the proceeds into your positions, into the ones that had not moved higher, where, presumably, more upside exists and the odds are more dramatically stacked in your favor? Or would you favor the strategy of sitting on your hands in the name of long-term investing?

WARREN BUFFETTWe would own the half of dozen or so stocks we like best. Their — and it wouldn't have anything to do with what our cost on them was. It would only have to do with our evaluation of their price versus value. It doesn't make any difference what the cost is. And incidentally, if they went down 50 percent, we would say the same thing. I — you know, and using your illustration, I don't know whether that fund has actually had something that went up or went down. So, we would — our cost basis, except in rare cases — and we actually have a situation like this at Berkshire now, which I may explain a little later. But the cost basis doesn't have anything to do the fund. When Charlie and I ran funds, we didn't worry about whether something was up or down. We worried about what it was worth compared to what it was selling for. And we tried to have most of our money in a relatively few — very few — positions which we thought we knew very well. We do the same thing now. We'd do the same thing a hundred years from now. Charlie?

CHARLIE MUNGERYes, he's tactfully suggesting that you adopt a different way of thinking. (Laughter and applause)

Berkshire's competitive advantage no longer requires us

WARREN BUFFETTCarol?

CAROL LOOMISThis question is from Michael Welter (PH) of Portland, Oregon. "You've often said that two things you look for in an investment are a sustainable competitive advantage and a simple, easy to grasp business model. Berkshire's sustainable competitive advantage is arguably you, Warren and Charlie. And that obviously is not sustainable over the long term."

WARREN BUFFETTI reject that. Defeatism. (Laughs)

CAROL LOOMISI knew you would. "While at this point, Berkshire does not have a simple, easy to grasp business model. So if the two of you were outside investors, is it possible that, no matter what combination of intrinsic value and price Berkshire offered, you would not invest in it today?"

WARREN BUFFETTNo, our sustainable competitive advantage is we have a culture and a business model, which people are going to find very, very difficult to copy, even semi-copy. We have an unusual group of shareholders. We have a business that's owned by people where the turnover on our stock, even allowing for all the double-counting and everything like that, may be something like 20 percent a year, when virtually every stock in the S&P 500 turns over a hundred percent a year. So we have a different shareholder base. We have people that understand their business differently. And we have a business that can offer, to people who own private businesses, the chance to keep running their businesses as they have in the past and get rid of the problems of lawyers and bankers and all kinds of things like that. And I don't see any other company in the United States that has the ability to do that now, or probably the ability to adopt that model in any big way. So I would say we have sort of an ultimate — and it's not peculiar to me and Charlie. We may have helped create it. But it is a deeply embedded culture which any CEOs that follow are going to be well-versed in when they come into the job, and dedicated to, and able to continue in the future. And you can't — I don't want to name names about other companies — but you can't do that elsewhere. So I think anybody wanting to copy Berkshire is going to have a very hard time. And I think the advantages we have are going to be very, very long lasting. And they're not peculiar to the fact that Charlie and are I sitting up here anymore. They may have been, originally. But no longer. Our culture, our managers join that culture. Our shareholders join that culture. It gets reinforced all the time. They see that it works. You know, it's something that I don't know how I would copy it, if I were running, you know, some other company. And it's meaningful. Because there will be businesses, just as there was with ISCAR awhile back, just as the management at GEICO felt back in the mid-'90s in terms of what they wanted to do, there will be people that want to join up with us. And they really won't have a good second choice. They'll be plenty that don't, too. But that's OK. We just need to have the right ones — some of the right ones — join us. And it can go on a long, long time. Charlie?

CHARLIE MUNGERYes. I might state that a little differently. A lot of corporations in America are run stupidly from headquarters, as they try and force the divisions to come up with profits for every quarter that are better than the profits from the same quarter in the previous year. And a lot of terrible decisions and terrible practices creep into those businesses. In the Berkshire model, that doesn't happen. So while Warren and Charlie will soon be gone — not too soon in my case, but I'm a little worried about Warren (laughter) — the stupidity of management practice in the rest of the corporate world will likely remain ample enough to give this company some comparative advantage way into the future. (Applause)

WARREN BUFFETTOK. We'll go to — it's very important isn't it, to watch what you eat, as you — (laughter) — in terms of preserving longevity. So we watch it for hours up here at a time. (Laughs)

We don't keep every stock, but we do keep every business

WARREN BUFFETTNumber 10.

AUDIENCE MEMBERHello, Mr. Buffett, and Mr. Munger. My name is Aznar Midolf (PH). I'm from (Inaudible) organization, San Francisco. And my question is from one of financial blogs. How do you justify holding stocks forever when the fundamentals have permanently changed?

WARREN BUFFETTWell, the answer is we don't. You know, and — if we lose confidence in the management, if we lose confidence in the durability of the competitive advantage, if we recognize we made a mistake when we went into it — we sell plenty of times. So it's not unheard of. On the other hand, if you really get a wonderful business with outstanding management — but mostly the wonderful business part of it — when in doubt, keep holding. But it's no inviolable rule. Now, among the businesses we own, not just securities we own, we have an attitude, which we express in our economic principles, that when we buy a business it's for keeps. And we make only two exceptions: when they promise to start losing money indefinitely or if we have major labor problems. But otherwise, we are not going to sell something just 'cause we get offered more money for it, even than it's worth. And that's a peculiarity we have. And we want our partners to know about that. We do think it probably helps us in terms of buying businesses over time. It's also the way we want to run our business. But with stocks, bonds, we sell them. But we're more reluctant to sell them than most people. I mean, if we made the right decision going on, we like to ride that a very long time. And we've owned many — we've owned some stocks for decades. But if the competitive advantage disappears, if we really lose faith in the management, if we were wrong in the original analysis — and that happens — we sell. Or if we find something more attractive — Normally we have plenty of money around. But in September of last year, late September, we had committed to put 6.6 million — billion — in Wrigley. We — and then Goldman Sachs needed 5 billion, GE needed 3 billion. I sold a couple billion dollars' worth of J&J just because I didn't like getting our cash level down below a certain point, under the circumstances that existed then. That not was a negative decision on J&J. It just — it meant that I wanted a couple billion more around. And I saw an opportunity to do something that I probably wouldn't see too much later. Whereas, I could always buy J&J back at a later date. But that's an unusual situation.

We run Berkshire as if we owned all of it

WARREN BUFFETTI'd like to go back to one point on the earlier question, too. I always — I frequently ask CEOs of companies what they would do differently if they owned the whole place themselves. You know, when I'm talking to, either companies where we've invested in, sometimes other companies, friends of mine run them. You know, "What would you do different if this was a hundred percent owned by you and your family?" And they give me a list of things. There is no list at Berkshire. You know, we basically run this place the same way we'd run if we owned a hundred percent of it. And that is a difference that — in terms of people joining in with us. They don't have to adjust their lives to a bunch of rules that are kind of self-imposed, in terms of how people think about public companies, in terms of earnings, predictions, and all of that sort of thing. And there are certain people that would prefer to be associated with an enterprise like that. And also —following through on this rule I just explained — know that they've made a one decision on where that business that they built up over decades and cherish and everything — they make one decision on where it's going to go, and they're not going to get surprised later on. They're not going to get some management consultant come in and say, "You ought to have a pure player, Wall Street's saying, so you ought to spin this off or sell it," or anything like that. And they know we're not going to leverage it up. So they know they're really going to get to do what they love the most, which is to continue to run their business, not bothered by bankers or lawyers or public expectancies or anything of the sort. And that is a — like I said earlier, that's a real advantage. Charlie?

CHARLIE MUNGERYeah, in the show business, they say the show has legs if it's going to last a long time. I think Berkshire Hathaway's system has legs.

Why the annual meeting isn't webcast

WARREN BUFFETTOK. With that, we'll go to Becky. (Laughter)

BECKY QUICKThis is a question from Humin Timadin (PH) in Seattle, Washington. He's got a two-part question. But he says, "From time to time, you purchase shares of public companies. "Presumably, you feel that those shares are a better investment than Berkshire shares at the time, since you never buy back Berkshire shares. "If Berkshire shareholders can purchase shares in the same companies for the same price as you, why shouldn't they shell — sell their Berkshire shares and buy what you are buying?" And secondly, he wants to know why, because he, "like thousands of other shareholders, is unable to attend the annual meeting, how come Berkshire does not webcast the meeting? I am aware of the irony that I will not hear your answer." (Laughter)

WARREN BUFFETTWell, our meeting does get written up, at least it gets written up a lot with various blogs and everything else. It gets written up pretty well in its entirety by Outstanding Investor Digest. And there are others that prepare extensive reports. And they pop up on the internet. So he will, in all likelihood, find out the answer. We could webcast. I get asked the same question about webcasting the meetings I have with students. You know, why not do that? It's so much easier and everything. I think there is something gained by personal contact. I certainly know that when I was studying and all of that, I gained a lot by personal contact. Even though I'd read Ben Graham's books, just going and being with him. And I follow that practice in teaching. And I think that — I like the turnout we get. I like our partners to show up and see the products we sell and all of that. This is not something where we're going to go and hide and hold our meeting, you know, in some hamlet, you know, in western Nebraska or something to discourage attendance. We've got a different attitude. And I think that that — I hope that comes across. And I think that if we webcast it, you know, it was something like turning on a television show, I don't think it would be quite the same.

No "quarrel" with copycats

WARREN BUFFETTIn terms of the first part of the question about buying the securities we buy, plenty of people do that. And some of them — but they — incidentally, they're not buying it with free float that's available from insurance. So if they have $58 billion that they can get interest-free, they will be in the same position we are in buying those securities. But they are — on the other hand, they have some tax advantages we don't have. So I don't quarrel with people who do that. We have to publicize to some extent what we own. Some things they wouldn't be able to buy because we make direct purchases. They wouldn't be able to buy into the businesses we own. But they might very well do better piggybacking us in some way. And they're certainly free to do it. Charlie?

CHARLIE MUNGERYeah, generally, I think it's quite smart to do what you're talking about — is to identify some investors you regard as very skilled, and carefully examine everything they're buying, and copy what you please. I think you have a very good idea. (Laughter)

WARREN BUFFETTYeah, I used — when I was 21 years old, I had to mail away to the SEC in those days — and you had these crummy copies about a week later and paid a lot per page to get them — but I used to get the semi-annual reports of Graham-Newman Corp before I went to work there. And I would look at every security that was listed there. And I got some of my ideas that way. So it's a — there's nothing wrong with that.

Your best inflation protection

WARREN BUFFETTNumber 11.

AUDIENCE MEMBERMy name is Sam Alter (PH). I'm 11 years old and I'm from Westminster, New Jersey. My question is, how will inflation affect my generation? And how is Berkshire investing to prepare for this time? (Applause)

WARREN BUFFETTWell, that was about inflation, right? How inflation was going to affect him?

CHARLIE MUNGERYeah. How is inflation —?

WARREN BUFFETTWell, inflation is going to affect you. You know, the — it's certain we will have inflation over time. Paul Volcker got very upset the other day and spoke out about three weeks ago, I guess, when he read that a majority of the Federal Open Market Committee had sort of targeted 2 percent inflation as the number. And Volker, who came in when inflation was raging and saw the problems of stopping it when it got a momentum of its own, said, "You know, 2 percent sounds great, but in a generation it cuts away purchasing power by 50 percent." He was — kind of a long generation, there — but he was right in that once you start thinking about a couple percent, you are on something of a slippery slope. And we are following policies in this country now to stimulate things, which — stimulate business — which are bound to have some inflationary consequences. And to the extent that we borrow money from the rest of the world, it would be very human on the part of politicians in the future to decide that they would rather pay the rest of the world back in dollars that are worth far less than the dollars they borrowed. I mean, it's the classic way of reducing the impact and cost of external debt. And we're building up a lot of external debt. I always find it interesting when politicians now talk about using the taxpayer's money to do this and the taxpayer's money to do that and how the taxpayers are paying the bonuses at AIG. We haven't raised taxes at all in this country. You know, I mean, taxpayers are paying nothing beyond what they were paying a couple years ago. Matter of fact, the federal revenues this year, which were close to 2.6 trillion a couple years ago, you know, maybe more like 2.3 trillion. So we are taking less money from the taxpayers. The people who are really paying for the things we're doing now will probably be the people who are buying fixed-dollar investments, much of it from the U.S. government, and who will find the purchasing power when they go to redeem those investments to be far less. So you can — you might say that the AIG bonus is — probably the Chinese have — are the people that are ultimately paying the most in terms of the loss of purchasing power they will have with their holdings of government bonds, U.S. government bonds, many years down the road. But it sounds better to say the taxpayer than to say the Chinese are paying for it. It's an interesting situation. I read that comment everyday about how the taxpayers are doing this and that. And, you know, I haven't had my taxes raised. You haven't had your taxes raised. They're giving me $250 bucks back here pretty soon. The taxpayers haven't paid anything so far. And my guess is that the ultimate price of much of this will be paid by a shrinkage in the value of — the real value — of fixed-dollar investments down the road. And that will be the easiest thing to do. And if it's the easiest thing to do, it's the most likely thing to have happen. So you will see plenty of inflation. Now, the best protection against inflation is your own earning power. If you're the best teacher, if you're the best surgeon, if you're the best lawyer, you know, whatever it may be, you will command a given part of other people's production of goods and services no matter what the currency is, whether it's seashells, or reichsmarks, or dollars. So your own earning power is the best, by far. If you're the best journalist, whatever it may be, you will get your share of the national economic pie, regardless of the value of whatever the currency may be, as measured against some earlier standard. The second best protection is a wonderful business. You know, if you own the Coca-Cola, trademark, Company, you will get a given portion of people's labor 20 years from now and 50 years from now for your product. And it's doesn't make any difference what's happened to the price level, generally. Because people will give up three minutes of labor, whatever it may be, to enjoy, you know, 12 ounces, you know, of a product they like. So those are the — and — those are the great assets, your own earning power first, and then the earning power of a wonderful business that does not require heavy capital investment. If it requires heavy capital investment, you get killed in inflation. And with those guidelines, I would tell you the best thing to do is invest in yourself. Charlie?

CHARLIE MUNGERYes. The young man should become a brain surgeon and invest in Coca-Cola instead of government bonds. (Laughter)

WARREN BUFFETTI get paid by the word. He doesn't. (Laughter)

Newspapers are fading but we're keeping the Buffalo News

WARREN BUFFETTAndrew?

ANDREW ROSS SORKINOK. This question comes to us from Dennis Wallace (PH) in Waldorf, Maryland. We got a lot of these. And I'm selfishly interested in the answer. Given the current economic conditions in the newspaper and publishing business, can you please provide some of your thoughts on its impact on Berkshire? Given that our investee, the Washington Post Company, has had a substantial decline in its stock value, is it still a good use of capital? And given the, quote, "cheap trading prices of newspapers in the current climate," would Berkshire considering — consider purchasing additional newspapers to add to the Buffalo News and Washington Post properties? At what price does it become compelling to invest in the newspaper business? Or is there no price at which it becomes compelling in today's environment?

WARREN BUFFETTI would say, it isn't today's environment. I mean, it's an evolutionary development. But — so the current economic environment has accentuated the problems in newspapers. But it is not the basic cause. Newspapers are, to the American public as a whole — Charlie and I — I read five a day. Charlie probably reads five a day. We'll never give them up. But we'll also be the last guys reading a newspaper while having a landline phone, you know, by our side. (Laughter) So, you don't want to judge consumer preferences by what we do. The newspaper — no. The answer is, for most newspapers in the United States, we would not buy them at any price. They have the possibility, and in certain places, they've already hit it, but they have the possibility of just going to unending losses. And they were absolutely essential to a very high percentage of the American public, you know, 20, 30, 40 years ago. They were the ultimate business. It was a business where only one person won, basically, in almost every town in the country. There were 1,700 papers in the United States. And about 50 of those, 20 years ago, existed in a city where there were multiple papers. So they were a product that had pricing power, that was essential to the customer, essential to the advertiser. And they've lost that essential nature. They were primary 30 years or 40 years ago if you wanted to learn sports scores or stock prices or even news about international affairs. And then that nature, what Walter Annenberg used to call "essentiality," I don't know whether it's in the dictionary or not, but it started eroding. And then the erosion has accelerated dramatically. And they were only essential to the advertiser as long as they were essential to the reader. And you know, nobody liked buying ads in the paper. It was just that they worked. And that has — that is changing. It's changing every day. And I do not see anything on the horizon that causes that erosion to end. We — you know, at the Buffalo News, Stan Lipsey would greet me 10 years ago. And he would say, "Warren, you should — on an economic basis — you should sell this paper." And I said, "I agree 100 percent. But we're not going to do it." And you know, we could've sold the Buffalo News for many hundreds of millions of dollars some years back. And we couldn't sell it, you know, for remotely anything like that now. And that's one of the policies. We have a union that's been very cooperative — unions, a bunch of unions — have been quite cooperative with us in recent months in trying to have an economic model that will at least keep us making a little money. And as I put in the annual report, in our economic principles, that as long as we don't think we face unending losses or have major union problems, we will stick with the businesses, even though it would be a mistake if you were acting as a trustee for, you know, a bunch of crippled children or something of the sort. And that's just our policy at Berkshire. The Post has a very good cable business. It has a very good education business. But it does not have answers on the newspaper business, as Don Graham wrote in the annual report. Nor does anyone else. Now, we all keep looking around for somebody that will find the model. But there — I think there are about 1,400 daily papers now in the United States, and nobody yet has found the model. We are as well-positioned in Buffalo, believe it or not, I think, to play out the game as anyone else. But whether we find something before the lines get so that we're inexorably in the red, whether the situation gets so we're inexorably in the red, I don't know. But we will play it out as long as we can. It's not what they teach you in business school. But it's the way we run Berkshire. Charlie?

CHARLIE MUNGERWell, I think that's all 100 percent right. And it's really a national tragedy. The — these monopoly daily newspapers have been an important sinew of our civilization. And, by and large, they were impregnable from advertiser pressure. And by and large, they were desirable editorial influences. And by and large, they kept government more honest than it would otherwise be. So as they disappear, I think what replaces it will not be as desirable as what we're losing. But this is life.

Expect weak consumer spending for "quite a bit longer"

WARREN BUFFETTNumber 12.

AUDIENCE MEMBERGood morning, Mr. Buffett and Mr. Munger. I'm Marc Rabinov, from Melbourne Australia. I'm wondering if I could ask you how retailing, manufacturing, and service businesses have been severely impacted by the recession given the way consumer spending has changed. Is it likely the results will still be 20 percent below 2007 levels in three years' time?

WARREN BUFFETTI don't know about three years' time. Certainly those areas you named, to varying degrees, have been hit very hard. Some of the manufacturing would tie in with residential construction. If we hold housing starts at 500,000 a year, you know, my guess is that in a couple of years at most, we would get something close to equilibrium in housing. Maybe quite a bit sooner. Nobody knows the figures with precision. But if you keep forming households at a million-3, or something like that, a year, and you create 500,000 new units and a few of the old ones burn down, and a few — you will reach equilibrium at a point that's not ridiculously far in the future. And that will make a big difference in our carpet business, and brick business, and insulation business, and paint business, and so on. Retailing has been hit very hard. The higher the end of it, generally speaking, the harder it's been hit. There's been a big change in consumer behavior. And I think it will last quite a bit longer. I think for years, government was telling people to save. And now that they're saving, they're unhappy about it. But I think that — I think the experience of the last couple years, I don't think will go away very fast. I think it could last quite a long time. So I would not think our retailing businesses would do great for a considerable period of time. And I would say that in retail real estate, I would think that that would be a tough field to be in for quite a period. I think the shopping centers will be seeing vacancies that will be hard to fill. I think that the retailers will be struggling in many cases. And of course, the supply of real estate doesn't go away. So, that could be — the shopping center business, which was selling at, you know, these premiere cap rates of 5 percent or even less sometimes. I think that is going to look very silly before all of this is done. In fact, it already is looking that way. So I wouldn't count — I wouldn't — The service businesses are generally the better businesses. They require less capital and they can be more specialized in the markets they serve, in general. But I would not look for any quick rebound in the retail manufacturing service businesses. We've got a ways to go on that. And we've got a ways to go on the ones that are construction related. But at least there, you can sort of see the math of when it'll work out. And you can get a lot of information on what's going on in real estate markets. South Florida, I think, will be — for example, I think that's going to be a problem for a long, long time. I hope it isn't. But I just think the math of it is pretty devastating, in terms of the number of units you have and net household formation down there. You've got a lot to wade through. Charlie?

CHARLIE MUNGERI've got nothing to add.

WARREN BUFFETTOK.

We'll never buy back Berkshire shares at a "silly" price

WARREN BUFFETTLet's go to Carol.

CAROL LOOMISI got lots of question sent in to me about the possibility of Berkshire buying its own shares. And here's what one said: "You recently described Berkshire's policy regarding share repurchase as self-defeating, because before repurchase, you said, you would write a letter to shareholders explaining why we are going to do it. "You said the letter would, by necessity, tell investors that the stock price was at a substantial discount to intrinsic value, which would cause the stock price to rise. "The letter would be, in essence, a buy recommendation, though as a matter of policy, you don't make those. "In the past, you have emphatically endorsed share repurchase by other companies and criticized managers who would not buy when the price was right. "You have said no alternative action can benefit shareholders as surely as repurchases. Your previous views suggest little patience for a manager with a self-defeating policy. "You've said when you have a manager who consistently turns his back on repurchases when these are clearly in the interest of owners, he reveals more than he knows of his motivations. So — and the market correctly discounts assets lodged with him. "Would it not be rational to conclude that the market will appropriately discount Berkshire's share price unless and until you abandon your self-defeating policy and engage in repurchases of shares?"

WARREN BUFFETTYeah, incidentally, the — and this important, actually — the comments I made about repurchasing, overwhelmingly, those go back a lot of years when stocks generally were — frequently were — cheap in relation to intrinsic value. I did not make that — You haven't seen me writing about that in the last 10 years or so. Because I would say most of the repurchasing done in recent years, I've thought has been foolish, because people have been paying too much. And companies got, in many cases — they would never acknowledge this — but they were buying because they were basically liked — they were trying to give out a buy recommendation when it wasn't justified. In the '70s and early '80s, Charlie and I would frequently urge people to repurchase shares because it was so much more attractive than other things they could do with their money. The only time we felt strongly that Berkshire should repurchase its shares was in roughly 2000, whenever it was, that we thought it was demonstrably below intrinsic business value. And we wrote we would do it, and it did become self-defeating. There's clearly a point where if we thought it was demonstrably below — conservatively estimated — intrinsic business value and we notified the stock holders we were going to do it, we would do it. I think again, it would largely be self-defeating. I don't think that situation exists now. I think — I won't give any buy or sell recommendations. But I think it ought to be quite compelling. Like I say, I don't — I think, probably 90 percent of the repurchase activity I've seen in the last five years, I did not think was serving the cause of the shareholder. I thought it was being done because management thought it was the thing to do, and their investor relations department told them it was the thing to do, and they were actually buying stock at kind of silly prices. And that was not the case when Charlie and I looked at Teledyne or the Washington Post or Cap Cities Broadcasting doing it many years ago. But I haven't seen situations like that in recent years. Charlie?

CHARLIE MUNGERI've got nothing to add to that, either.

WARREN BUFFETTNumber — it's interesting how many companies were buying in their stock at twice present prices that aren't buying it now. I mean, there are lots of those. We will never buy in our stock at a silly price. We may make a mistake by not buying it at a cheap price. But we'll never make a mistake, I don't think, by buying it at a silly price. And we think a significant percentage of corporate America has done that in recent years, including a few stocks that we've owned ourselves.

Crisis made opportunity cost calculations difficult

WARREN BUFFETTNumber 13.

AUDIENCE MEMBERJack Benben (PH) from Haworth, New Jersey. First, I'd like to thank you. This is — I've been to about a dozen meetings. This is probably the best one. So thank you very much for the new format. And thank you very much to the journalists who've really helped out a lot. (Applause)

WARREN BUFFETTYeah, thank you.

AUDIENCE MEMBERAt past meetings, you and Mr. Munger have talked at great length about opportunity cost. Excuse me. The past year has presented you with many unusual opportunities. Can you discuss some of the more important opportunity cost decisions of the past year? And were those decisions at all affected by the macroeconomic picture? Thank you.

WARREN BUFFETTWell, certainly opportunity cost has been much more in the forefront of mind in the last 18 months. When things are moving very fast, when both prices are moving, and in certain cases, intrinsic business value is moving at a pace that's far greater than we've seen for a long time, it means that in terms of calibrating A versus B, versus C, it's tougher. It's more interesting. It's more challenging. But it's — and it can be way more profitable, too. But it's a different task then when everything was moving at a more leisurely pace. And I described earlier, you know, we face that problem. And it's a good problem to have. We faced that problem in September and October. Because we want to always keep a lot of money around. We have all kinds of levels — extra levels of safety — that we follow at Berkshire. And we will never get so we're dependent on banks or other people's money or anything else. We're just not going to run the company that way. So we were seeing things happen. I mean, we got a call — we got lots of calls. But, most of them, we ignored. But the calls that we got that we ignored helped us calibrate the calls that we paid attention to, too. And if we got a call from a Goldman Sachs, I think it was on a Wednesday, maybe, you know, that was a transaction that couldn't have been done the previous Wednesday and might not be done the next Wednesday. And we're talking real sums, 5 billion in that case. And we had certain commitments outstanding. We had a $3 billion commitment out on Dow Chemical. I think at that point, I could be wrong exactly on the day when we made it. We had a $5 billion commitment out on Constellation Energy. We had 6 1/2 billion we were going to have to come up with in early October on the Wrigley-Mars deal. So we were faced with opportunity cost-type considerations. And as I said earlier, we actually sold something that under normal circumstances we wouldn't have thought about selling if it was 10 or 15 points higher, in Johnson & Johnson. But we just didn't want to get uncomfortable. So you are faced, in a chaotic market, particularly where people needs large sums — so you're not talking about buying a hundred million dollars' worth of something that, you know, one day and a hundred million the next day — but all of a sudden you're called on for billions, if you're going to play at all. We faced that opportunity cost calculation frequently during that period. I mean, when we decided to commit to buy Constellation Energy, we had to be willing to come up with $5 billion seven or eight months down the line. And you didn't know exactly when because it would be subject to public utility commission approval. But if something chaotic happened in the market next week, we would get phone calls. Or we would see stocks selling or bonds selling at prices we liked. And if the relative values, against what we held, were interesting, we might sell things. Now, it's harder to sell things in huge quantities than it is to buy things in huge quantities during a period like that. So you have to measure whether you can actually get the offsetting transaction done to move from one to another. We have a much — if we're going to move billions from one to another, it's much different than the problem you may have in moving hundreds of thousands or tens of thousands of dollars from one holding to another. We really can have big transactional costs unless we're careful. But that's the kind of calculation we go through. And we love the fact we get the opportunity to make those calculations. It's a sign of opportunity around. And you know, we'll — we haven't had the flurry of activity like we had last year for a long time. So it was the first time we really faced the question, you know, can we raise a couple billion dollars in a hurry, to be sure that we've offset the cash needs of what we're committing to on the purchase side. On the Johnson & Johnson we sold, we actually made a deal where we got — I had a floor price on what we sell that for, just because the markets were so chaotic, that we wanted to be absolutely sure that we would not end up a couple billion dollars less than comfortable when we got all through. Our definition of comfortable is really comfortable. We want to have billions and billions and billions around. And then we'll think about what we do with the surplus. Charlie?

CHARLIE MUNGERAgain, I've got nothing to add.

GEICO spends millions on advertising and will "never stop"

WARREN BUFFETTBecky?

BECKY QUICKThis is a question from someone named Yem (PH) in Columbus, Ohio. It's —

WARREN BUFFETTThat narrows it down.

BECKY QUICKYeah. Very company specific. It says, "GEICO has been spending around 400 to $600 million on media advertising a year in the last few years. What are the deciding factors into how much to spend? And how could one estimate the net return on such spending?"

WARREN BUFFETTWell, that's a question people have been asking themselves since the beginning of advertising. And, you know, I'm not sure whether it was Marshall Field or John Dorrance at Campbell Soup, or something, one of those fellows said that, you know, when asked whether they didn't waste a lot of money on advertising, he said, "Yeah, we waste half of it, but we don't know which half." (Laughter) And that is the nature of advertising. Although, we can measure it better with GEICO than most companies. We will spend about $800 million on advertising. We spend far more — even though we're the third largest company — we've spent far more than State Farm or Allstate. And we will spend more and more and more. I mean, we will never stop. We were spending $20 million a year, a little over that, when we bought control of it in 1995. But we want everybody in the world to — well, everybody in the United States. We're not going to be selling insurance in China or someplace very soon. But we want everybody in the United States to have in their mind the fact that there's a good chance they can save money by picking up the phone or going to geico.com and checking it out. And important money. And when we get that message in people's minds, you never know when it's going to pay off later down the line. Because, as I mentioned earlier, starting in — around September 30th, we saw a big difference in the propensity of people to come to us to save $100 or $200, whereas they might not have cared about saving that before. So, we want — Here's auto insurance. Everybody has to buy it. Nobody likes to buy it. But they like to drive. And if you like to drive, you need auto insurance. And so it's going to sell. And you're going to buy it from somebody. And if you care about saving money, you're going to check with us. And we want to make sure everybody understands that. And we won't — you know, we will spend more money on it, I will guarantee you, three years from now. Now, we're getting more for our money in buying advertising this year. So 800 million this year buys more than 800 million would've bought a couple of years ago. So we're getting more exposure for the money. But we love spending money on advertising at GEICO. And we want to be in everybody's mind. Coca-Cola's in everybody's mind around the world. You know, he started in 1886. And they just kept associating Coca-Cola with moments of pleasure and happiness. And billions and billions of billions of people have that in their mind. And they don't have anything in their mind about RC Cola, you know. You know, or — they just — you say RC Cola to somebody around the globe and they give you a blank stare. You say Coca-Cola and it means something. And a brand is a promise. We're getting our — we're getting that promise in people's minds that there's a good chance they can save money if they check with GEICO. And we'll never stop. Charlie?

CHARLIE MUNGERYeah, it's interesting. If GEICO would remain more or less the same size if we didn't advertise so healthy, and if the new subscribers are worth more than the $800 million we're spending advertising, then, in an important sense, GEICO is earning $800 million more pre-tax in a way that doesn't even show. That's the kind of thing we like to see within Berkshire Hathaway.

WARREN BUFFETTThe value of GEICO goes up by far more than the earnings every year, if we keep adding these people, as Charlie says. And we could maintain, I'm sure, we can maintain for a very long time our present policy holder count and probably spend $100 million a year, maybe less. But we are getting more than our money's worth for the — for what we spend. We probably waste some. But overall, we're getting at terrific return on it. And if I thought we could get anything like the same return by spending 2 billion next year, we'd spend 2 billion. I mean, it — it's a very attractive business. And I don't see how you create anything like it. I mean, we are the low-cost producer. And if you're the low-cost producer in something people have to buy and is roughly a $1,500 item, I mean, you've got a terrific, terrific business. And we have durable competitive advantage there.

Wells Fargo is better than many other banks

WARREN BUFFETTOK, we'll to go to number 1. And I think then we'll break for lunch. Number 1?

AUDIENCE MEMBEROK. Hello Warren, Charlie. Felton Jenkins from Savannah, Georgia, a long-time shareholder and partner. Just want to make a quick comment about something that was a big deal the last couple of years about PacifiCorp. There was some controversy. But I'm glad that PacifiCorp has agreed to work with the Native Americans and fishing communities on the West Coast to remove the uneconomic and harmful dams on the Klamath River. So I want to encourage PacifiCorp management to move quickly, close the deal, and open the river soon. But thanks for their improved efforts over the last year. My question is, you mentioned Wells Fargo got to $9. And that was a great deal, it looks like, at that price. But what about Washington Mutual, AIG, Wachovia, Citigroup, Fannie Mae, even some Irish banks that I think you were involved with? Those went through $9. And probably a lot of people thought they were still good deals or mispriced at $9. And now you've got very expensive toilet paper, essentially, out of those stock certificates. So I mean, how would you know on the way down? And looking at something like Bank of America, that was on the 13F sometime recently, what's a likely outcome for a Bank of America and how would you analyze what might happen? Thanks.

WARREN BUFFETTWell, there's some you can't analyze. And on the Irish banks, I couldn't have been more wrong. But it isn't a matter of whether they go through $9 or anything like that. It's really what their business model is and what kind of competitive advantage they have. I would say that Wells, among the large banks, has, by far, the best competitive position, you know, of any — of the really large banks in the country. And essentially, if you look at the four largest, they each have somewhat different models. But the model of Wells is more different from the other three than any one of the other three would be from the remaining group. But I was wrong on the Irish banks in a very big way. I simply didn't understand. And I should've understood. It was available for me to understand, the incredible exposure they'd got into in more land development-type loans — not property loans, in terms of completed properties — but all kinds of land development loans. It was extraordinary. For a country with 4 and a fraction million people, you know, they had money lent for developing properties, homes, that would extend just forever in the future. It was the terrible mistake by me. Nobody lied to me, nobody gave me any bad information. I just plain wasn't paying attention. The — If you talk about the WaMus — I don't want to go through all the names on them, because it's specific to some companies. But there were a lot of signs that they were doing things that a highly leveraged institution shouldn't be doing. And that could cause trouble if this model of ever-rising housing prices turned out to be a false model. You can get in a lot of trouble with leverage. I mean, it's — you start creating $20 of assets, or something like that. You know, for every dollar of equity, you better be right. And some of those big institutions did some very — what, in retrospect, for certain here — were foolish things, which, if they hadn't been so highly leveraged, would not have hit them as badly. And I would say most of them, if you read the 10-Ks and 10-Qs and did some checking, you could spot differences in them. Certainly, you can spot — There's no comparison, if you take Wells Fargo versus a WaMu or something like that. I mean, you don't have to have an advanced level of sophistication about banking to compare those two. They're two different kinds of businesses. It's like comparing a copper producer whose costs are $2.50 a pound with a copper producer whose costs are $1 a pound. Those are two different kinds of businesses. One is going to go broke at a buck-fifty a pound. And the other one's going to still be doing fine. And banking has real difference in it. But people don't — they don't seem to look at them. The figures are available. And — but they don't seem to look at them very carefully. When Wells reported the other day, they have an item of expense of over $600 million in a quarter for the amortization of core deposits. That it not a real expense. I mean, the core deposit figure will be up over time. And they are entitled under the tax law to put up, I don't know, $15 billion or so, and they get to amortize that, which is an advantage. But I didn't see one newspaper article or any commentator that mentioned that that $600 million charge is in there, which is entirely different than looking at any other bank. But it just — it goes unnoticed. So the figures are there. And the information's there. And I think with Freddy and Fannie, for example, I think it was pretty clear what was going to happen. Now, the interesting thing is, the government was telling them to go out and raise some more money for investors. And if those investors had put the money in, it would've been gone. It was already gone, actually, within a month or two, so —. We had calls on that, people trying to — investment bankers — trying to place billions of dollars with us on something, on those two institutions. And you just could take one look at them and you could tell they were in big, big trouble. You do have to know a little bit about — you have to know something about banking and what's going on in the various kinds of lending and everything. And I would say that generally speaking, for people that don't spend a lot of time on their investments, they're going to have trouble separating financial institutions. I think it's much easier to come to a conclusion on something like Coca-Cola or Procter & Gamble than it is for a person who is spending only a limited amount of time on investing to make a decision on whether to own bank A, or bank B, or bank C. Charlie?

CHARLIE MUNGERYeah, there's another problem. Generally accepted accounting principles allow a conservative, sensible bank to show vastly increased earnings if it changes its practices to make a lot of extremely dumb loans in large volumes. Generally accepted accounting principles should not be constructed to allow this result. It's — that what seduces so many of these bankers into this ghastly decision-making.

WARREN BUFFETTYeah, when we bought Gen Re, they had a financial products division. It was named similarly to the AIG one. It was called Gen Re Financial Products — AIG Financial Products. And it produced numbers regularly that were always satisfactory numbers. But, you know, when we looked at that, you know, it looked like all kinds of trouble to us. It cost us over 400 million to get out of. And a black box like that can produce — that's why managements love them to some degree, they can produce numbers. They don't necessarily produce cash. And they sure as hell can produce all kinds of problems if you have to start posting collateral and doing things of that sort. And I would say it is tough for, you might say, the passive investor, the one who's not spending very much time on it. I would say it's difficult for them to discern when that's going on. So I — it's not a bad area to just say, "This one's too tough," and go onto something else that's a lot easier. I think you can analyze a utility operation easier or, you know, some premier consumer company or something of the sort. I don't think I would look for the tough situations to differentiate tough industries in which to differentiate things. But there are huge differentiations. And again, I urge to read the JP Morgan Chase — Jamie Dimon's letter. Because you'll learn a lot by reading that.

CHARLIE MUNGERBut a lot of the new regulation that is coming wouldn't have even been needed if accounting had done a better job, particularly in banking. And yet, I have yet to meet an accountant from any of the big firms who has said, "I'm ashamed of my own profession." That's a mistake in accounting. If they don't have shame, they're not thinking right.

WARREN BUFFETTWell, with that happy thought, we will — (laughter) — we will go to lunch now. We'll reconvene about — let's reconvene about a quarter of one. We'll start at that time with Andrew and move onto section 2 when we come back.