2013 年股东大会 · 上午场

Welcome

WARREN BUFFETTGood morning. I'm a little worn out. (Laughter) We're going to — well, first of all, I really want to thank Brad Underwood. He puts the movie together every year, does a terrific job. (Applause) Andy Heyward and Amy are responsible for the cartoon. They also produce "The Secret Millionaire’s Club," which has been a huge hit this year, and I really want to thank them for their part in this, too. (Applause) And finally, Carrie Sova who — who puts this whole affair together, she's four months pregnant. She got her MBA, I think, yesterday or — and, in addition, she is the ringmaster for all of this. Let's give Carrie a terrific hand. (Applause) We'll go through a few figures, few slides. I'll introduce the directors and make one or two more announcements, and then we'll get on to the questions.

Q1 earnings

WARREN BUFFETTNow, if we could put up the first slide, which is the earnings that were released yesterday. And as you can see, it was a good quarter. It wasn't quite as a good a quarter as it looks, which I'll explain in a second. But really all of our businesses did very well. You should focus on operating earnings. Charlie's getting a head start here on the peanut brittle and fudge, so I'll catch up later. It was a very good — it was a benign quarter in insurance, but our other businesses, particularly our big businesses, did quite well, and I don't remember whether we've ever had operating earnings of more than 3 point — almost 8 billion. But, in any event, it was quite satisfactory. Now, we'll put up slide two. The insurance earnings were helped a bit. They were still terrific without these factors, but they were helped a bit by the fact that the dollar was strong, and that reduces the liabilities we have on outstanding in foreign currencies. So if we have losses we're going to pay in the future and they're payable in pounds or euros and the dollar appreciates against those currencies, we get a small benefit from that. We also have it — it hurts us in other ways. We have so many different kinds of businesses, and then we own other earnings through Coca-Cola that operate around the world, that I really never know whether when the dollar goes up or down, whether it helps us or not. So I've never been able to figure it out. So we just sort of take it as it comes. And we do want to explain that to you, the insurance earnings. And then we had another item, which is kind of interesting. We've had a disagreement with Swiss Re about a life reinsurance contract, and that's — the disagreement's probably lasted for well over a year, and that was settled in the first quarter. And as you can see, we showed a gain of 255 million pretax from settling this disagreement, but, interestingly, Swiss Re showed a gain of 100 million also from settling the disagreement. (Laughter) So, we are working on an arrangement with Swiss Re whether we'll get in an argument every quarter (laughter), and both report higher earnings when we settle it. It's magnificent what accounting can do. (Laughter) One real high point of the first quarter was the pickup which I noticed — which I noted — in the annual report, about the gain in both the closure rate and the persistency rate at GEICO. These are hugely important factors. And if we'll put up the chart showing the gain of GEICO's auto policies, the strengths I mentioned in 2012, and not only continued in 2013, but the trend has become even stronger. And there's a lot of seasonal to policy gains. But as you can see, month by month, our gains have — and policies have very significantly improved over 2012. And, again, it's because our closure ratio, in other words, the number of people that get a quote from us and then go on to buy a policy, that rate has improved very significantly this year, and with it we also had a gain in persistency, the people that renew the policies with us, and that's pure gold. A policy has a mathematical value to us of at least $1,500, so if we had a million policies in a year — and I'm hopeful we might do that this year — that's a billion-and-a-half of value that gets built into our intrinsic value, which does not show up on the income statement or balance sheet at all, but it does increase the value of GEICO versus what we carry it for. And I can't resist a little sales pitch on that because this closure rate, which, like I say, is at incredible levels, means that when people go to our website or call us and get a quote, they find that they can save a lot of money. I mean, people love our little gecko, but they buy the policies because we save them money. And it just so happens that in the auditorium right near here, the exposition hall, we have a lot of very friendly people that will help you save money, too. So I urge you — you can walk out anytime Charlie is talking (laughter) and go and get a quote, and a very high percentage of you could save money by doing that. And, you know, that is in the Berkshire spirit, to save money at every opportunity. So I'm hoping you will check that out, and we will set a record for policies sold. And, finally, our railroad, this year, is doing very well. You saw the earnings in the first quarter report, if you've had a chance to look at that. And we've got some figures up that show our gain in car loadings in the first 17 weeks. It's been 3.8 percent, whereas the other four major Class I railroads in the United States have had a gain of four-tenths of a percent. That's significant money that — and we don't have the Canadian railroads here that operate in the United States. They both come down, the Canadian National, Canadian Pacific. But — but this is representative of what's been happening. We've been helped by the fact that, fortunately, a lot of oil has been found very, very close to our railroad tracks, and what better place to find oil? (Laughter) And so we've been moving a lot of that, and it's worth — and we'll be moving a lot more the way things are going. And the result of all this — we now will put up the next slide — we're now the fifth most valuable company in the world. (Applause) And that will change over time, but I hope it changes for the better.

Directors introduced

WARREN BUFFETTI'd like — the business part of this meeting starts at around 3:30, and at that time we'll have the election of directors. But I would like, nevertheless, for those of you who won’t stick around to the bitter end, I would like to introduce our directors, and — Charlie and I are directors. And if our directors would stand and remain standing when I call your name. And no matter how strong the urge, withhold your applause until they're all finished standing, and then you can withhold your applause then if you wish, too, but I plan to applaud. OK. Howard Buffett. Steve Burke. Susan Decker. So just stand and remain standing — there we are. OK. Bill Gates. Sandy Gottesman. Charlotte Guyman. Don Keough. Tom Murphy. Ron Olson. Walter Scott, Jr. And our soon to be new member, Meryl Witmer. OK. No more withholding. (Applause)

Table tennis champ Ariel Hsing

WARREN BUFFETTNow, we'll start the questioning in just one minute, but there were one or two announcements to make. We did not put it in the — we did not put it in the annual report because we hadn't firmed it up yet, but tomorrow at Borsheims, our friend Ariel Hsing will be available to play table tennis with any of you foolish enough to challenge her. I met Ariel when she was nine, and she became the youngest women's table tennis champion of the United States, and then last summer she went on to the Olympics. And at the Olympics, she won her first two matches, and she won more games off the woman that became the eventual Olympic champion than any other participant in that event. So Ariel will be out there tomorrow at 1 o'clock. And if you're courageous, you'll show up with your paddle and end up looking like an idiot. (Laughter))

Buffalo News publisher Stan Lipsey retires

WARREN BUFFETTOne more introduction, I don't know whether we can get a spotlight on him or not, but Stan Lipsey retired this year as publisher of The Buffalo News. And, as Charlie can attest, as well as I, back in 1978, '79, '80, we had an enormous business problem in the Buffalo News. We were locked in a competitive struggle. And we were not doing well, in part, because of we were operating under a tough judicial order for a while until it got reversed on appeal. And Stan gave up a wonderful life here in Omaha and asked no questions and for no pay came up to Buffalo, and The Buffalo News would not have turned out to be the paper that it's turned out to be or produced the profits that have been produced for Berkshire, without Stan Lipsey. So, if Stan could stand, let's give him a hand. Stan the Man. (Applause)

Berkshire buys remaining ISCAR stake

WARREN BUFFETTOne other announcement, then we'll go to the questions. It was announced a couple of days ago that we bought out the final 20 percent of ISCAR held by the family for about $2 billion. It's a transaction they're happy with, we're happy with. As a matter of fact, if you saw Eitan Wertheimer dancing at "Dancing with the Stars" there, you could have seen how happy he was. So we will now own 100 percent of ISCAR, but our relationship with the Wertheimer family will continue. It's been a sheer joy. The business has done terrifically. The people have behaved magnificently, and ISCAR will be part of Berkshire forever. So I want to thank Eitan and his family. And, Eitan, are you here? Can you stand up, and your family? Thank you. (Applause) Let's have a light here in the front row. OK. (Applause)

Q&A begins

SPEAKEROK. We'll now move on to our questions. We'll continue these until about noon. We'll take an hour break for lunch. We'll come back, and then we'll continue until about 3:30, at which time we will convene the business meeting. And we will start off — we have three journalists who have been here before on the right, and we have a distinguished panel on the left, including a short seller, perhaps the first at any annual meeting, and we will start off with Carol Loomis.

Berkshire lagging the S&P 500

CAROL LOOMISGood morning. Speaking for the three of us, I hope here, we have received into the thousands of questions. We don't even know how many. And if we didn't pick your question, it was because we just didn't get to it. I do want to tell you that Warren and Charlie have no idea of what our questions are going to be, no hints at all, and so we look forward to sending them curve balls. I'll start off here. Warren, you measure Berkshire — this is from William Bernard (PH) of Colleyville, Texas. You measure Berkshire's corporate performance based on growth and book value per share. The table on page 103 of the annual report shows book value per share has grown at less than an average 12 percent a year for 9 of the last 11 5-year periods, yet in your last annual letter, you state, quote, "The S&P 500 earns considerably more than 12 percent on net worth," and then you say, "That seems reasonable for Berkshire also." Why do you say that, given the past record showing that Berkshire has not been earning that much, or is it that you expect to earn that much, recognizing that it is not assured in the future?

WARREN BUFFETTIt certainly is not assured in the future. And the last ten or so years have not been the best for business, generally. But if the stock market continues to behave in 2013 as it has so far, this will be the first five-year period where the gain in book value per share has fallen short of the market performance, including dividends, of the Standard & Poor's. And that won't be a happy day, but it won't be — it won't totally discourage us because it will be a period where the market has gone up in every one of the five years. And as we've regularly pointed out, we're likely to be better in down years as we did in 2008, for example, which is the year that gets dropped this year. We're likely to do better in down years, relatively, than we do in up years. Charlie, how do you feel about the prospects of — I should point out, incidentally, that we use book value because it's a calculable figure, and it does serve as a reasonable proxy of the year-to-year change in the intrinsic value of Berkshire. If we could really give you a figure for intrinsic value, and back it up, that would be the important figure. As I pointed out, if we gain a million policyholders at GEICO, that actually adds a billion-and-a-half to intrinsic value, and it doesn't add a dime to book value. So, there's a significant gap, which is why we're willing to buy in stock at 120 percent of book value — a significant gap between the two. But book value is a useful tracking device. I should point out also — I did this in the annual report in respect to Marmon — when we buy the ISCAR stock, which we pay about 2 billion for, the day we buy it, we mark it down in terms of our book value by roughly a billion dollars. So a billion dollars comes off our book value for making a purchase which we regard as quite satisfactory. And so there are these distortions that occur. But in the end, we have to do better for you than you would do in an index fund. And if we don't, we aren't earning our pay. And I think we'll do that in the future, but I don't think we'll do it every year, and we've proven that in the last few years. Charlie?

CHARLIE MUNGERWell, I confidently expect that Berkshire's going to do quite well over the long term. I don't pay much attention to whether it’s five years or three years or — I think we have momentums in place that are going to do OK. Of course, we won't do as well in the future, in terms of annual gain averaged out, because our past returns were almost unbelievable. So, we're slowing down, but I think it'll still be very pleasant.

WARREN BUFFETTAt 89, Charlie is not really concerned about this stuff year-to-year. I mean, he's taking a longer-range view. (Laughter)

CHARLIE MUNGERI'm trying to take care of my old age, which might come on at any time. (Laughter)

WARREN BUFFETTI haven't noticed it.

Jonathan Brandt introduced

WARREN BUFFETTOK. Jonathan Brandt, who is a newcomer to the panel, his area is the other-than-insurance aspects of Berkshire Hathaway. And I can assure you that no one has paid more — I played Jonny in chess when he was about four years old, and, I don't know, I must have been 40 or something at the time, and he kept insisting during dinner that we play chess afterwards. And we started playing, and, of course, he got me into some impossible position in a few moves, and I told his parents to put him to bed. (Laughter) So, Jonny, I still have kind of comebacks in me, so be careful what you ask. Jon Brandt. (Laughs)

ISCAR vs Sandvik

JONATHAN BRANDTGood to see you, Warren. A question about ISCAR: what do you feel are the specific competitive advantages that ISCAR has over its primary competitor, Sandvik, and, in turn, what advantages does Sandvik have over ISCAR as the larger player?

WARREN BUFFETTYeah. Sandvik is a very good company, and ISCAR is a much better company. The advantage it has is brains and incredible passion for the business. It's interesting to reflect on ISCAR because if you go back to — what would it be? — 1951 or thereabouts, when Stef Wertheimer, who had come from Germany, was in Israel, started ISCAR, just think of the prospect that was facing him. Here was a company like Sandvik, or in this company — country — Kennametal, or different countries, well-entrenched companies, well-entrenched, well-financed. And here's this fellow in Israel, 25 years old, and the raw material for these cutting tools comes from China. It isn't that the raw material is in Israel. So everybody buys their tungsten from China, and they sell to customers that are using large machine tools throughout the world, but they're selling it to heavy industry to a significant extent. So they're selling to people like Boeing or General Motors or big industrial companies in Germany, and there's no great locational advantage, in terms of being in Israel doing this. But here's this 25-year-old fellow getting the tungsten from thousands of miles away, selling it to customers thousands of miles away, competing against people like Sandvik, and this remarkable business, ISCAR, comes from that. And there's no other answer you can give to your question when you see that result than to say that you have had some incredibly talented people who never stopped working, never stopped trying to improve the product, never stopped trying to make customers happy, and that continues to this day. Sandvik is a very good company. I can tell you that based not only on the figures, but on every other aspect of business observation that I possess, that ISCAR is one of the great companies of the world, and we feel very fortunate to own it and to be associated with their management. Charlie?

CHARLIE MUNGERWell, it's a good comparison. Sandvik is a fabulous company, and it's a particular achievement to really do a little better in the competitive market, as ISCAR has done.

WARREN BUFFETTQuite a bit better.

CHARLIE MUNGERThey've gained.

WARREN BUFFETTHave you really ever seen much — a better operation than ISCAR in the manufacturing business?

CHARLIE MUNGERIt's the only place I was ever in where I saw nothing but robots and engineers working computers.

WARREN BUFFETTIt's a —

CHARLIE MUNGERYou cannot believe how modern ISCAR is.

WARREN BUFFETTYeah. And the game's not over yet, either.

Preserving Berkshire's culture after Buffett

WARREN BUFFETTOK. Now we go to a shareholder in station number 1.

AUDIENCE MEMBERHi. Dan Lewis (PH) from Chicago. First of all, I wanted to thank you for letting us in the building early today. But let's not — (Applause) Let's not do that again next year, though. I don't want to wake up any earlier to get in line.

WARREN BUFFETTIf we had a company that sold coats, we would have left you out there. (Laughter)

AUDIENCE MEMBERAlways a comeback. When you think about Berkshire in the decade after you're gone, my question is what worries you the most? What — I know nothing keeps you up at night — but what are your big worries and, you know, what can go wrong?

WARREN BUFFETTWell, it's a good question. It's one we think about all the time. And that's why the culture is all important, the businesses we own are all important, because those trains will keep running and people will keep calling GEICO the day after I die. There's no question about that. And the key is preserving the culture and having a successor as CEO that will have more brains, more energy, and more passion for it, even than I have. And it's the number one subject that our board considers at every meeting, and we're solidly in agreement as to whom that individual should be. And I think the culture has just become intensified year after year after year. And I think Charlie would agree with that. I mean, we always knew what we were about when we first got involved with Berkshire, but making sure that everybody that joined us, that the owners, the shareholders, directors, managers, everybody that bought into this what I think very special culture. That took time, and — but it is — I think it's really one of a kind now, and I think that it will remain one of a kind. I think that anything that came in — any foreign-type behavior would be cast out because people have self-selected into this group, into the company, and it would be rejected like a foreign tissue if we got the wrong sort of person in there. We have a board that is especially devoted to Berkshire. We don't hold them by paying them huge amounts, it may be noted. And we have people who have brought their companies to Berkshire because they want to be part of it, as did ISCAR. So, I think that whoever succeeds me — and it will be a lot of newspaper stories and people — after six months, there will be a story that says, you know, it isn't the same thing. It will be the same thing. You can count on that. Charlie, what are your thoughts?

CHARLIE MUNGERWell, I — my thoughts are very simple. I want to say to the many Mungers in the audience, don't be so stupid as to sell these shares. (Laughter)

WARREN BUFFETTThat goes for the Buffetts, too. (Laughter)

Partnering with 3G Capital for $23B Heinz deal

WARREN BUFFETTOK. Becky?

BECKY QUICKThis is a question that comes from Ben Knoll, who happens to be the chief operating officer at the Greater Twin Cities United Way. And he writes in that after the Heinz deal, there was a column that was written indicating that you had gotten the better end of the Heinz deal from your Brazilian partners [3G Capital]. That column said that your return was likely to come from the preferred stock dividends, with the common equity portion being dead money. It also said that the way the deal was structured indicated your low expectations for the market overall. Is this an accurate portrayal of the deal and of your expectations for the market overall?

WARREN BUFFETTNo. It's totally inaccurate. The — it's interesting. [3G Capital co-founder] Jorge Paulo Lemann and I were in Boulder, Colorado, in early December. And I can't remember if it was — yeah, on the way to the airport or when we got in the plane. But he said that he was thinking about going to the people at Heinz and proposing a deal and would I be interested. And I, because I knew both Heinz and I knew Jorge Paulo, and I thought highly, very highly, of both, I said, "I'm in." And maybe a week later — I don't remember exactly how long — I received from Jorge Paulo, who I had known for many years starting at Gillette when we were both directors — I received a term sheet on the deal and another sheet on the governance procedures that he suggested. And he said, "If you got any thoughts about changing this, just let me know." They were just his thoughts. It was an absolutely fair deal, and it was — I didn't have to change a word in either the term sheet or the governance arrangement. Now, we actually, Charlie and I, probably paid a little more than we would have paid if we had been doing the deal ourselves, because we think that Jorge Paulo and his associates are extraordinary managers. They're both classy, and they're unusually good, and so we stretched a little because of that fact. We like the business, and the design of the deal is such that if we do quite well over time at Heinz, that their 4.1 billion will achieve higher rates of return than our overall 12 billion. We have a less-leveraged position in the capital structure than they have. We created — they wanted more leverage, and we provided that leverage on what I regard as fair terms and what they regard as fair terms. If anybody thinks that the common is dead money, you know, we think they're making a mistake. But we'll know the answer to that in five years. But the design of the deal, essentially — we have more money than operating ability at the parent company level, and they have lots of operating ability and wanted to maximize their return on 4 billion. So my guess is that five years from now or ten years from now, you will find that they've earned a higher rate of return on their investment. But because we put more dollars in, we will have received that same rate of return on our 4 billion, plus of cap common equity, but we also will have received a very fair return on the 8 billion that we put in that created more leverage for them. Charlie?

CHARLIE MUNGERWell, as you said, the report was totally wrong. (Laughter)

WARREN BUFFETTThat'll teach them. (Laughter)

Moving into commercial insurance

WARREN BUFFETTOK. We have Cliff Gallant from Nomura who will ask insurance-related questions for this meeting.

CLIFF GALLANTThank you. At Berkshire Hathaway Reinsurance group, Mr. Ajit Jain appears to be employing a new strategy recently with some high profile actions. Berkshire signed a portfolio underwriting arrangement with Aon to do business with Lloyd's. And then last week, there was the hiring of several AIG executives. It appears that Berkshire may be taking a broader share of the market. What is the goal of these moves, and won't these actions eventually produce more average results?

WARREN BUFFETTWell, you — the goal is to take a greater share of the market. There have been two important moves made by Ajit's operation in the last month or so. One is the — the first one that was announced — was this participation of 7 1/2 percent in all of the business. Originally, it was announced as applying to the Lloyd's market. I believe it's been extended to the entire London market. And, now, bear in mind that the people that are insured still have the right to pick who their insurers shall be, so it isn't totally automatic that we receive 7 1/2 percent of every slip. But we had had an arrangement for a couple of years with Marsh on a marine book and perhaps some other areas, but not across the board. And we think that — we think that the profit possibilities are reasonable for that business, or we wouldn't have entered into it. It will give us more of a cross-section of business than we've been used to having, but it doesn't mean that we give up our present business at all, either. The second item you mentioned is just in the last week or thereabouts. It was announced that four pretty well-known insurance people that had been with AIG had joined us to write, primarily, commercial insurance, initially domestically, perhaps, but around the world. And these are people that reached out to Berkshire. In the case of at least one of them, even reached out a number of times in the past. But we were ready to enter this field with these people who were very able people. We've had a number of people reach out since the announcement was made only a week or so ago. So I think you will see Berkshire, in addition to all of the other insurance businesses that has had over the years, I think you'll see us become a very significant factor, worldwide, in the commercial insurance business. I mean, it could be business that reaches into the billions. In fact, I would hope that it would — it could be — you know, a fair number of billions over time. And we've got the right people. We've got capital like nobody else has. We have the ability to sign on to coverages that other people have to spread out among others. So, I think we're ideally situated to go into this business, and I'm looking forward to it. Charlie?

CHARLIE MUNGERWell, generally speaking, I don't think the reinsurance business is a very good business for most people. And I think it's a very desirable part of Berkshire's business, the way it's run, but it's different from something like the other businesses, which would work pretty well if somebody else owned them. I think our reinsurance business under Ajit is very peculiar, and other people who think it's easy are going to find out that it isn't.

WARREN BUFFETTYeah. And I should point out, this commercial insurance business also, I mean, it will be primary insurance. The Aon arrangement is a reinsurance arrangement, but we will be in the primary business. So, it will be large commercial risks, but there's a lot of premium buy-in there, and there's a lot of chances to make mistakes. But I'd rather have the group we have overseeing that business than any other group I can think of.

GEICO vs Progressive's Snapshot

WARREN BUFFETTOK. Station 2?

AUDIENCE MEMBERHi. Mike Sorenski (PH) from New York. In regards to GEICO, Warren, last year you said the firm had no plans to adopt usage-based driving technology, similar to what competitor Progressive —

WARREN BUFFETTRight.

AUDIENCE MEMBER— called Snapshot. Is that still the case, and if so, why wouldn't that technology give GEICO better data to potentially give discounts to customers?

WARREN BUFFETTYeah. That still is the case, and Snapshot has attracted a fair amount of attention and there are other companies doing that. It's an arrangement, essentially, to tie — well, the term "Snapshot," perhaps, says it — to get a picture of how people really do drive. Insurance underwriting, you know, is an attempt to figure out the likely propensity, based on a number of variables, of a person having an accident. Now, you know, in life insurance, it's very obvious that somebody 100 is — if you don't know anything else about them — is more likely to die in the next year than somebody that's 20. When you get into auto insurance, figuring out who's likely to have an accident involves assessing a number of variables, and different companies go at it different ways. Clearly, on statistics, if you're a 16-year-old male, you're more likely to have an accident than I am. Now, that isn't because I'm a better driver. It's because the 16-year-old is probably driving about ten times as much, and he's trying to impress the girl sitting next to him. And that doesn't work with me anymore, so I've given it up. (Laughter) But the — we ask a number of questions, and our attempt, as much as possible, is to figure out the propensity of any given applicant, or the possibility, that they will have accidents. And there are a number of variables that are quite useful in predicting. And Progressive is focusing on this Snapshot arrangement, and we'll see how they do. I would say that our ability to sell insurance at a price that's considerably lower than most of our competitors, evidenced by the fact that when people call us, they shift to us, and, at the same time, earn a significant underwriting profit, indicates that our selection process is working quite well. I mean, if your selection process is wrong, if you treat a 16-year-old male and give him the same rate that you'd give a 40-year-old that's driving their car 3 or 4,000 miles a year, you know, you're going to get terrible underwriting results. So our systems, our underwriting criteria, have been developed, you know, over many decades. We have a huge number of policyholders, so that it becomes very credible, these different underwriting cells. And everybody in the business is trying to figure out ways to predict with greater accuracy the possibilities that a given individual will have an accident. And Progressive is focusing on this Snapshot approach, and we watch it with interest, but we're quite happy with the present situation. OK. Andrew Ross Sorkin? Oh, Charlie, I've got to give you a chance to comment.

CHARLIE MUNGERI have nothing to add. (Laughter)

Business Wire and new rule allowing internet disclosures

WARREN BUFFETTOK. Andrew?

ANDREW ROSS SORKINOK. Warren, we got a couple questions related to this. Warren, now that you're on Twitter and the SEC is allowing companies to make material announcements over social media, what are the implications for Business Wire, a unit of Berkshire? Do you agree with the SEC's new position on the distribution of material information, and would you consider selling Business Wire given the new rules? If not, how do you think Business Wire will have to transform itself? And, by the way, what are you doing on Twitter? (Laughter)

WARREN BUFFETTI haven't figured that last one out yet. The — no, I think it is a mistake. Some companies have announced — made important announcements — on webpages, and some, in certain cases, they've messed it up and caused a fair amount of trouble. But the key to disclosure is accuracy and simultaneity. I mean, if we own stocks, or are thinking about owning stocks, we want to be very sure that we get accurate information and we get it exactly at the same time as all other people. And Business Wire does a magnificent job of that. And I do not want, if I'm buying Wells Fargo, or selling it, or whatever it may be, I do not want to have to keep hitting up to their webpage, or something, and hoping that I'm not 10 seconds behind someone else if there's some important announcement. So, Business Wire has got a traffic record of accuracy and of getting the information to every part of the globe in a simultaneous manner, and that is the key to disclosure. And I think — I don't think that — I don't think anything has come close to doing that as well as Business Wire. So I think we will do very well. We've got a sensational manager in Cathy Baron Tamraz. I couldn't be happier with the business, so we will not be selling it. And if I could clone Cathy, I would do it. I will not — Berkshire, when it puts out its information — and we like to put it out, actually, after the market closes because we think there's so much to digest that it's a terrible mistake to have people try and figure it all out in reading a one- or two-page announcement. But anything important from Berkshire, or any of our companies, is going to come out on Business Wire so that people get accurate information at exactly at the same time. Charlie?

CHARLIE MUNGERWell, it's very hard for me to know anything about Twitter when I'm avoiding it like the plague.

WARREN BUFFETTHe sent me out to venture in it, and he's going to see if anything bad happens to me. (Laughter)

As Berkshire grows, it's paying more for bigger acquisitions

WARREN BUFFETTOK. We now have a short seller in a first, I believe, at any meeting, Doug Kass.

DOUG KASSThank you, Warren and Charlie. Thanks for this unusual invitation. I'm honored, and I look forward to playing the role of Daniel in the lion's den in front of 45,000 of your closest friends and greatest admirers.

WARREN BUFFETTYou can bring your own crowd next year. (Laughter)

DOUG KASSI would note, you have me asking the last question in the group, though. My first question is a follow-up to Carol Loomis's first question. Warren, it’s said that size matters.

WARREN BUFFETTIt does. (Laughter)

DOUG KASSIn the past, Berkshire has purchased cheap or wholesale. For example, GEICO, MidAmerican, your initial purchase of Coca-Cola. And, arguably, your company has shifted to becoming a buyer of pricier and more mature businesses, for example, IBM, Burlington Northern, Heinz, and Lubrizol. These were all done at prices, sales, earnings, book value multiples, well above your prior acquisitions and after the stock prices rose. Many of the recent buys might be great additions to Berkshire’s portfolio of companies; however, the relatively high prices paid for these investments could potentially result in a lower return on invested capital. You used to hunt gazelles. Now you're hunting elephants. As Berkshire gets bigger, it's harder to move the needle. To me, the recent buys look like preparation for your legacy, creating a more mature, slower-growing enterprise. Is Berkshire morphing into a stock that has become to resemble an index fund and that, perhaps, is more appropriate for widows and orphans, rather than past investors who sought out differentiated and superior compounded growth?

WARREN BUFFETTYeah. There's no question that we cannot do as well as we did in the past, and size is a factor. Actually, the — it depends on the nature of markets, too. We might — there will be times when we'll run into bad markets, and sometimes there our size can even be an advantage. It may well have been in 2008. But there — I would take exception to the fact that we paid fancier prices in some cases than, say — in GEICO, I think we paid 20 times earnings and a fairly-sized — good-sized — multiple of book value. So we have paid up — partly at Charlie's urging — we've paid up for good businesses more than we would have 30 or 40 years ago. But it's tougher as we get bigger, I we've always known that would be the case. But even with some diminution from returns of the past, they still can be satisfactory and we are willing — there’s companies we should of bought 30 or 40 years ago that looked higher priced then, but we now realize that paying up for an extraordinary business is not a mistake. Charlie, what would you say?

CHARLIE MUNGERWell, we've said over and over again to this group that we can't do as well in percentage terms per annum in the future as we did in our early days. But I think I can make the short seller's argument even better than he did, and I'll try and do that. If you look at the oil companies that got really big in the past history of the world, the record is not all that good. If you stop to think about it, Rockefeller’s Standard Oil is practically the only one, after it got monstrous, continued to do monstrously well. So, when we think we're going to do pretty well in spite of getting very big, we're telling you we think we'll do a little better than the giants of the past. We think we've got a better system. We don't have a better system than riding up oil, you know, but we have a better system than most other people.

WARREN BUFFETTYeah. In terms of the acquisitions we've made in the last five years, I think we feel pretty good about those and — overall — and, obviously, including the Heinz. We are buying some very good businesses. We actually, as we pointed out, we own eight different businesses that would each be on the Fortune 500 list if it was a separate company, and then in a few months, we'll own half of another one, so we'll have eight-and-a-half, in effect. Well, you haven't convinced me yet to sell the stock, Doug, but keep working. (Laughter)

Will U.S. dollar lose reserve currency status?

WARREN BUFFETTSection 3.

AUDIENCE MEMBERThank you. Jonathan Schiff, visiting from Macau, China. You briefly touched upon this. But on our side of the world, there's a lot of discussion about the U.S. dollar's status at the world's reserve currency. I'm sorry, there's some feedback. It's kind of weird. What would be the effect upon the U.S. and the world economy if the dollar loses that status as a world reserve currency?

WARREN BUFFETTWell, I don't know the answer to that, but fortunately, I don't think it's going to be relevant. I think the dollar bill will be the world's reserve currency for some decades to come. I think China and the United States will be the two supereconomic powers, but I don't see any — I think it's extremely unlikely — that any currency supplants the U.S. dollar as the world reserve currency for many decades, if ever. Charlie?

CHARLIE MUNGERWell, there are advantages to a country that has the reserve currency, and if you lose that, you lose some advantage. England had a better hand when it had the reserve currency of the world than it had later when the United States had the reserve currency of the world. If that eventually happened to the United States, it would not be, I think, all that significant. It's in the nature of things that sooner or later every great leader is no longer the leader. Over the long run, as Keynes said, we're all dead, and over the long run —

WARREN BUFFETTThis is the cheery part of the section. (Laughter)

CHARLIE MUNGERWell, if you stop and think about it, every great leading civilization of the past passed the baton.

WARREN BUFFETTWhat do you think the probabilities are that the U.S. dollar will not be the reserve currency 20 years from now?

CHARLIE MUNGEROh, I think it'll still be the reserve currency of the world 20 years from now. That doesn't mean that it's forever.

"Extraordinary" corporate profits despite tax complaints

WARREN BUFFETTOK. Carol?

CAROL LOOMISThis question comes from John Custabal (PH) of the Philadelphia area. Mr. Buffett, you have said in the past, specifically in a 1999 speech that was printed in Fortune, quote, "You —"

WARREN BUFFETTYou would bring that up, wouldn't you?

CAROL LOOMISI would bring that up, right. I'm so glad he sent this question. "You have to be" — you have said, "You have to be wildly optimistic to believe that corporate profits, as a percent of GDP can, for any sustained period, hold much above 6 percent." Corporate profits are now greater than 10 percent of GDP. How should we think about that?

WARREN BUFFETTWhat we should think is pretty unusual, and particularly considering the economic backdrop. Corporate profits are extraordinary, as a percentage of GDP, at least looking back on the history of the United States. And what's interesting about it, of course, is that American business, to a great extent, is complaining enormously — or frequently, anyway — about the level of the corporate income tax. Now, the corporate income tax is about half what it was 40 years ago, as a percentage of GDP. But yet, as you point out, corporate profits are at an all-time record, as a percentage of GDP. So I would have you take with a grain of salt the complaint that American business is noncompetitive because of our corporate income tax rate, which gets so widely complained about. American business has done extraordinarily well at a time when inequality, actually, is — has widened considerably — both measured by net worth and measured by income, if you take the top versus the people down below. And — (loud noise) — Well, we heard from one of the people here. (Laughter) And, it will be interesting to see whether these levels can be maintained. Corporate — business has come back very, very strong, in terms of profits, from the precipice that we were on in the fall of 2008, the panic. Employment has not come back, the same way. And that's going to be, I would say, a subject of a lot of public discourse. And you're seeing — you're reading more about that, currently. If I had to bet on whether corporate profits would be 10 percent of GDP — and, of course, we're talking about profits that are earned outside the United States, I believe, in that — in the figures you quote — I would say they're likely to trend downward. But I think that, of course, GDP will be growing, so that does not mean any terrible things will be happening to profits. Charlie, what do you think about the —?

CHARLIE MUNGERWell, I wouldn't be too surprised if that 6 percent figure turned out to be on the low side, in the estimate. Just because Warren thought something 20 years ago, doesn't mean it's a law of nature. (Laughter)

WARREN BUFFETTWe'll talk this over at lunchtime. (Laughter) How do you feel about 10 percent?

CHARLIE MUNGERWell, I'm a natural conservative on such items. But you've got to recognize that the stocks themselves are owned by a lot of endowments and pension funds and so on. So it — that figure doesn't mean that the world's becoming grossly more unequal. There's no automatic correlation between those two figures.

WARREN BUFFETTDo you feel the corporate tax rate is too high?

CHARLIE MUNGERWell, I think when the rest of the world is — keeps bringing the rates down, —there's some disadvantage to us if we're much higher. So I — (Applause) I rather like Warren's idea that people like us should pay more, but the corporate tax rate, I'm glad to have lower.

WARREN BUFFETTOK. He's the Republican; I'm the Democrat.

Too many subsidiaries for Buffett's successor to manage?

WARREN BUFFETTJonathan? (Laughter)

JONATHAN BRANDTThanks, Warren. You probably have a couple of dozen direct reports from the multitude of noninsurance businesses that Berkshire owns, and this arrangement seems to work wonderfully for you. But I wonder if this could potentially pose a challenge to your successors. Adding smaller units like Oriental Trading and the newspaper group, even if they are economically sound transactions individually, could arguably add to the unwieldiness of the organization. How do you weigh the benefits of adding earnings with the risk of leaving a less-focused and harder-to-manage company for even highly capable successors?

WARREN BUFFETTYeah. I think my successor will probably organize things a little differently on that, Jonathan, but not dramatically so. And we'll certainly never leave the principle of our CEOs running their businesses in virtually all important ways except, perhaps — except for capital allocation. But, I actually have delegated a few units to an assistant of mine, and my guess is that my successor will modestly organize things in a somewhat different way. I've grown up with these companies and with the people and everything, and so it's a lot easier for me to communicate with dozens of managers, sometimes very infrequently, because they don't need it. It just — sometimes it's their own preference to some degree. And somebody coming in fresh would want, obviously, to be — to understand very well — and that person will understand, in fact, understands now — very well, the major units. But you're right, when you get down to units that we have, you know, some businesses that make, you know, only 5 or $10 million a year or something like that. And my guess is that it gets rearranged a little bit, but that won't really make any difference. I mean, the real money is made by the big businesses. It will continue to be made by the big businesses, and the insurance business, and a little change in reporting arrangements, maybe one more person at headquarters if they go crazy, will really take care of things. Charlie?

CHARLIE MUNGERWell, I think, of course, it would be unwieldy to have so many businesses, a lot of them small, if we were trying to run them through an imperial headquarters that dominated all the details. But our system is totally different. If your system is decentralization, almost to the point of abdication, what difference does it make how many subsidiaries you have?

WARREN BUFFETTYeah. It's working pretty well now.

CHARLIE MUNGERYeah.

WARREN BUFFETTIt'll work pretty well afterwards, too. But my successor is not going to do things identically. It'd be a mistake. But the culture will remain unchanged. And the preeminence of the managers of the operating units will remain unchanged, and then every now and then something comes along and a change needs to be made. Sometimes it's through death or disability, or sometimes a mistake is made. But, in the end, we're now trying to acquire companies that are at least at the $75 million pretax level. Incidentally, the best acquisitions — to some extent, the best acquisitions — certainly from my standpoint makes it easier — is the one — is these bolt-ons that I talked about in the annual report, in which we did, I think, 2-and-a-half billion worth of last year, because they fall under the purview of managers that we've got terrific confidence in and they add really nothing to what happens at headquarters. And, of course, the best bolt-ons out of all are when we do buy a — buy out — a minority interest. When we buy $2 billion worth more of ISCAR, or a billion-and-a-half more of Marmon, with another billion-and-a-half to come in the next year, you know, that's adding earning power without it, you know, posing any more work. Those are the ultimate in bolt-on acquisitions, getting more of a good thing. Charlie, any more on that, or—?

CHARLIE MUNGERWell, if you stop to think about it, if it were all that difficult, what we're doing now would be impossible, and it isn't.

WARREN BUFFETTI'll have to think about that a little. (Laughter)

CHARLIE MUNGERWell, think if 50 years — 20 years ago — they said to you, can you make something this size with a staff of ten or something in a little office in Omaha? People would've thought that's ridiculous. But it's happened, and it works.

WARREN BUFFETTWell, we'll let it go at that.

Dangers when Fed reverses economic stimulus

WARREN BUFFETTStation 4? (Laughter)

AUDIENCE MEMBERThank you. Scott Moore (PH), Overland Park, Kansas. With the Fed buying 85 billion per month of mortgage securities and Treasurys, what do you think are the long-run risks to this process, and how does the Fed stop this without negative implications? Thank you.

WARREN BUFFETTCharlie, you answered that yesterday in an interview, so I'll let you lead off.

CHARLIE MUNGERMy basic answer is I don't know.

WARREN BUFFETTYeah. (Laughter) I might say I have nothing to add. (Laughter and applause) But Scott, you came from Overland, so we'll do our best.

CHARLIE MUNGERI think you’re— the questioner — is right to suspect that it's going to be difficult.

WARREN BUFFETTIt's going to be — yeah, it is really uncharted territory. And as many people have found out, whether it was the Hunt Brothers buying silver or whatever it might be, it's a lot easier to buy things, sometimes, than it is to sell them. And the Fed's balance sheet is up around 3.4 trillion now, and that's a lot — those are a lot of securities. And the bank reserve positions are incredible. I mean, Wells Fargo is sitting with $175 billion at the Fed earning a quarter of a percent, and really earning nothing, after attendant expenses. So, there's all this liquidity that's been created. It hasn't really hit the market because the banks have let it sit there. You know, in classical economics, you know, that's how you juice the economy, and you pushed it out by having the Fed buy securities and create reserves for the banks and all of those things. But, believe me, the banks want loans. I mean, they are not happy — Wells is not happy — having 175 billion at the Fed, and they're looking every place they can to get it out, with the proviso that they hope to get it back from whoever they get it out to, which can slow down a bank at times. But it— we really are in uncharted territory. I've got a lot of faith in Bernanke. I mean, he — if he's running a risk, he's running a risk he knows and understands. I don't know whether he's affected by the fact that his term expires pretty soon, so he just hands the baton off to the next guy and said, "Here. Here's this wonderful balance sheet. And all you have to do is bring it down a few trillion dollars," you know. (Laughs) And I gave a few lectures at George Washington University last year, if you care to read them, and maybe it'll help you. The — this is something we haven't seen. It certainly has the potential for being very inflationary. It hasn't been so far. In fact, my guess is that the Fed wishes it had been a little more inflationary. If you're running up a lot of debt, it gets measured in relation to nominal GDP, and the best way to run up — easiest way to run up, not the best way — the easiest way to run up nominal GDP is to inflate, and my guess is that they never would admit it but that the — that at least some Fed members — are probably disappointed that they haven't seen more inflation. It won't be when they start selling. It'll be — when the market gets a — any kind of a signal — that maybe just the buying ends, maybe that selling will take place, you know, it's likely to be the shot heard around the world. Now, that doesn't mean the world will come to an end, but it will certainly mean that everybody that owns securities and who’s felt that they've been driven into them by extremely low rates or that the assets have to go up in price because interest rates are so low, will start re-evaluating their hand, and people re-evaluate very fast in markets. So, while I've been talking, Charlie, have you got any new insights?

CHARLIE MUNGERWell, generally speaking, I think that what's happened in the realm of macroeconomics has surprised all the people who thought they knew the answers, namely the economists. Who would have guessed that interest rates could go so low and stay so low for so long? Or that Japan, a mighty, powerful nation, could have 20 years of stasis after using all the tricks in the economist's bag? So I think given this history, the economists ought to be a little more cautious in believing they know exactly how to stay out of trouble when they print money in massive amounts.

WARREN BUFFETTIt is a huge experiment.

CHARLIE MUNGERYeah. (Applause)

WARREN BUFFETTWhat do you think the probabilities are that within ten years you see inflation at a rate of 5 percent or higher a year?

CHARLIE MUNGERWell, I worry about even more than inflation. If we could get through the next century with the same results we had in the last century, which involved a lot of inflation over that long period, I think we'd all be quite satisfied. I suspect it's going to be harder, not easier, in this next century. And it wouldn't surprise me — I'm not going to be here to see it — but I would predict that we may have more trouble than we think — than we now think.

WARREN BUFFETTCharlie says he won't be here to see it, but I reject such defeatism. (Laughter)

Effects of low interest rates

WARREN BUFFETTBecky?

BECKY QUICKThis is actually a follow-up to the shareholder from Overland Park, the question that was just asked. This comes from Anthony Starace (PH) who is in Lincoln, Nebraska, and he says, "How has the Fed's zero-interest policy affected Berkshire Hathaway's various business segments? For example, has it helped or hurt their operations and profitability?"

WARREN BUFFETTWell, it's helped. You know it— interest rates are to asset prices, you know, sort of like gravity is to the apple. And when there are very low interest rates, there's a very small gravitational pull on asset prices. And we have seen that getting played out. I mean, people make different decisions when they can borrow money for practically nothing than they made back in 1981 and '2 when Volcker was trying to stem inflation and use — and the government bond rates got up to 15 percent. So, interest rates power everything in the economic universe, and they have some effect on the decisions we make. We borrowed the money on the Heinz purchase a lot cheaper than we could've borrowed it 10 or 15 years ago, so that does affect what people are willing to pay. So it's a — it's a huge factor and, of course, it will — presumably — it will change at some point, although, as Charlie was pointing out in Japan, it hasn't changed for decades. So, if you wanted to inflate asset prices, you know, bringing down interest rates and keeping them down — at first, nobody believed they'd stay down there very long, so it reflects the permanence that people feel will be attached to the lower rates. But when you get the 30-year bond down to 2.8 percent, you know, you are — you’re able to have transactions take place. It makes houses more attractive. I mean, it's been a very smart policy, but the unwind of it, you know, has got to be more difficult, by far, than buying. I mean, it is very easy if you're the Fed to buy 85 billion a month and — I don't know what would happen if they started trying to sell 85 billion. Now, when you've got the banks with loads of reserves there, it might — it'd certainly — be a lot easier than if those reserves had already been deployed out into the real economy. Then you would really be tightening things up. But I have — you know, this is like watching a good movie, as far as I'm concerned, because I do not know the end, and that's what makes for a good movie. So, we will be back here next year and I will — or maybe in two or three years — and I will tell you I told you so and hope you have a bad memory. Charlie? (Laughter)

CHARLIE MUNGERWell, I strongly suspect that interest rates aren't going to stay this low for hugely extended periods. But as I pointed out, practically everybody has been very surprised by what's happened, because what's happened would’ve seemed impossible to practically all intelligent people not very long ago. At Berkshire, of course, we've got this enormous float in the insurance business, and our incremental float, when we're carrying huge amounts of cash, is worth less than it was in the old days. And that, I suppose, should give some cheer to you people because if that changes, we may get an advantage.

WARREN BUFFETTYeah, we have 40 — at the end of the first quarter, we had, whatever it was, 48 or maybe 9 billion or something like that — in short-term securities. We’re earning basically nothing on that. We do not — we never stretch for yield in terms of commercial paper that brings ten basis points more than Treasury. Our money— we don't count on anybody else, so we keep it in Treasurys, basically, and so we're earning nothing on that. So if we get back to an environment where short-term rates are 5 percent, and we would still have the same amount, then that would be a couple billion dollars of annual earnings, pretax, that we don't have now. But of course, it would have lots of other effects in our business. We have benefited significantly, and the country has benefited significantly, by what the Fed has done in the last few years. And if they can successfully pull off a reversal of this without getting a lot of surprises, you know, we will all have been a lot better off.

Building, not buying, commercial insurance growth

WARREN BUFFETTCliff?

CLIFF GALLANTThank you.

WARREN BUFFETTCliff, incidentally, you ran a 2:40 last year, didn't you, in the marathon at Lincoln?

CLIFF GALLANTI ran the Lincoln marathon after the shareholder meeting.

WARREN BUFFETTOK. We've got incredible talent on this thing. (Laughter)

CLIFF GALLANTI wanted to ask you more about the commercial insurance business and Berkshire's interest.

WARREN BUFFETTRight.

CLIFF GALLANTIf the business is attractive, why not make an acquisition? Do you think that public company valuations are too high today?

WARREN BUFFETTYeah. There aren't too many commercial operations that we would want to acquire, big ones. It wouldn't do much — I mean, we’re acquired — when we acquired GUARD Insurance, it’s workers' compensation, but it's just — it's a small acquisition. It's a good acquisition, but that is a commercial, in effect, underwriter that we acquired late last year. But, if you look at the big ones, some of them we wouldn't want. There's a couple that we would. But the prices would be probably far higher than what we think we might be able to develop a comparable operation for. I mean, we — in effect — I think we're going to build a very large commercial operation, and essentially we’ve built it at book value. And we pick up no bad habits of other companies, at least we hope we don't. And so, it's really better to build than buy, if you can find the right people with the right mind-set, and everything, in the business. And you know, we've got a terrific manager, obviously, in Ajit, and these other people have sought him out, so I think — if there were certain commercial operations, and we could've bought them at the right price, we’d have done it. But we have not been able to do that so we will build our own. And I predict that we will have a good and significant commercial insurance operation in a relatively short time.

Munger: bitcoin won’t be "big universal currency"

WARREN BUFFETTOK. Station 5?

AUDIENCE MEMBERGood morning. My name is Benjamin. I'm from Appleton, Wisconsin, and I had a question for you regarding unregulated digital currency, such as bitcoin. I was wondering what you think the significance of something like that showing up in the last few years is, and what you think that might mean for the future? Thank you.

WARREN BUFFETTCharlie, I hope you know something about this subject because I don't know a thing. (Laughs)

CHARLIE MUNGERI know what he's talking about.

WARREN BUFFETTI know what he's talking about, but I just don't —

CHARLIE MUNGERI have no confidence whatsoever in bitcoin being any kind of a big universal currency.

WARREN BUFFETTThat would certainly be my gut reaction, but I don't — I haven't really looked into it. But I— I'll put it this way: of our 49 billion, we haven't moved any to bitcoin. (Laughter) My— well, the truth is I don't know anything about it. That doesn't always stop me from talking about things, but it will in this case.

Pampered Chef isn't a pyramid scheme

WARREN BUFFETTOK. Andrew? (Laughter)

ANDREW ROSS SORKINOK. Bill Ackman, the activist investor, who's also a Berkshire investor as well, has raised questions in recent months about the legality of the multilevel marketing company Herbalife. He called it a pyramid scheme. Berkshire owns a multilevel marketing company, too: the Pampered Chef. Will Ackman's attack on Herbalife have any impact on the Pampered Chef or Berkshire, and do you believe Ackman's concerns are legitimate? How do you think about the debate over multilevel marketing companies and decipher which ones are legitimate and which ones are not?

WARREN BUFFETTYeah. I don't know anything— I've never actually even looked at a 10-K of Herbalife, so I do not know about their operation. But, I think the key, obviously, is whether a direct marketing operation is really based on selling product to would-be distributors of one sort, and loading them up, instead of sell— in effect — selling it to end users. And Pampered Chef is a million miles away from anything where the money is made, in any way, by selling to level A, and then those people selling to level B, and all that sort of thing. It is true that certain people — lots of people — get paid on the results — the selling results — of other people that they recruit. But this business of loading up people with a couple-hundred dollar package of something that they never sell, and that being sort of the main business — and I don't know anything about Herbalife on this, I do know about Pampered Chef — and that is not Pampered Chef's business. Pampered Chef's business is based on selling to the end user. And we have thousands and thousands and thousands of parties every week where people who are actually going to use the product buy it from somebody, and we are not making it — we're not making the money — by loading up people and then having them leave the sales force and our profit coming from that. Charlie? I think that should be the distinguishing characteristic. If I were regulating the industry, I would look very hard at operations where thousands of people got their hopes as to earning a living by selling the product, invested their savings, and buying a whole bunch of product that they didn't need themselves, and then sort of being — abandoning the hope and being left with the product. And the parent company just— or the main company — just going out and selling millions and millions of people on a dream that was not fulfilled. Charlie?

CHARLIE MUNGERWell, there's likely to be more flimflam in selling magic potions than pots and pans. (Laughter)

WARREN BUFFETTAt our age, we're in the market, though, for any magic potions, if any of you have them. (Laughter) That's the extent of your comment, I assume, Charlie?

CHARLIE MUNGERYes.

"Lender of last resort" after Buffett?

WARREN BUFFETTOK. Doug?

DOUG KASSWarren —

WARREN BUFFETTDoug. (Laughs)

DOUG KASSWarren. (Laughter) Much of Berkshire's returns over the last decade have been based on your reputation and your ability to extract remarkable deals from companies in duress, as compared to the past, when you conducted yourself more as a value investor digging and conducting extensive analysis. What gives you confidence that your successor’s imprimatur will be as valuable to Berkshire as yours has been?

WARREN BUFFETTWell, the successor will probably have even more capital to work with, and they will have capital, presumably, from time to time, when markets are in distress. And at those times, very few people — few people have the capital, and a lot fewer people have the willingness, to commit. But I have no question that my successor will have unusual capital at times when — at turbulent times when — the ability to say "yes" very quickly with very large sums sets you apart from virtually anybody in the investing universe. And I would not worry about that successor being willing to deploy capital under those circumstances, and being called upon. I mean, Berkshire is the 800 number when there's really, sort of, panic in markets, and for one reason or another, people need significant capital. Now, that's not our main business. You know, it happened a couple times in 2008. It happened once in 2011. But that's not been our main business, but it's fine. And it will happen again. And I would think if you come to a day when the Dow has fallen 1,000 points a day for a few days, and the tide had gone out and we're finding out who's been swimming naked, that those naked swimmers may call Berkshire — they will call Berkshire — if they need lots of money. I mean— and Berkshire's reputation will become even more solidified, in terms of being willing to provide capital for sound deals at times when most people are frozen. And when that happens when I'm not around, it becomes even more the Berkshire brand and not anything attached to a single individual. Charlie?

CHARLIE MUNGERWell, I would argue that in the early days, Warren had huge success as a value investor in little-owned companies because his competition was so small. If he stayed in that field, he would have to be in bigger companies, and his competition would be way more intense. He's gotten into a field, being a good home for a big companies that don't want to be controlled in meticulous detail by headquarters, where there isn't much competition. So I would argue that he's done exactly the right thing, and it's ridiculous to think that the past is the thing he should have stayed in.

WARREN BUFFETTWell, we will send— I think he's probably referring to something like the Bank of America transaction or Goldman Sachs and GE — and there will come a time, in markets, where large sums — I’ve gotten calls on other things, too, but —

CHARLIE MUNGERYeah, but other people are not getting the calls.

WARREN BUFFETTWell, they don't have the money and they don't have the willingness to act immediately. And Berkshire will — those qualities will remain with Berkshire after I'm gone. In fact, in a sense, the area we occupy becomes more and more our own as we get even bigger, I would say, Charlie.

CHARLIE MUNGERThat's what I like about it. (Laughter)

We only buy from willing sellers

WARREN BUFFETTOK. Station 6?

AUDIENCE MEMBERHi. My name is Andre from Beverly Hills, California. During very key events, like the Sanborn incident, when you were buying See's, or when you were buying Berkshire stocks, you persuaded people to sell you their shares when they really didn't want to. What were your three keys to influencing people in those specific situations?

WARREN BUFFETTYeah. I don't think — you brought up Sanborn and you brought up See’s and— I don't think —the See’s family, there had been a death in the See’s family— it was Larry See, wasn’t it, that died?

CHARLIE MUNGERYeah.

WARREN BUFFETTAnd he had been the instrumental, I guess, grandson of Mary See, and the operator, and there was a— the rest of the family really didn't want to run the business. So it was put up for sale, and I didn't even hear about it until they’d had one other party— I don't know even know who it was— but that they negotiated a deal with and that it didn't go through. Charlie probably remembers this better than I do. We certainly — the See family— and Charlie persuaded me to buy it. We didn't persuade them to sell it. Charlie?

CHARLIE MUNGERYeah. We didn't buy anything from any unwilling sellers.

WARREN BUFFETTNo. And Berkshire, we started buying that in 1962 in the open market. It had quite a few shareholders. It was a — it traded fairly actively, and we bought a lot of stock, and we did buy a couple of key pieces. We bought one from Otis Stanton, who was Seabury Stanton's brother, but Otis wanted to sell. It wasn't the most attractive business in the world. I mean, here was a textile company that lost money in most of the previous years, and over a ten-year period, that had significant losses. And it was a northern textile company. So, we bought stock in the market, a lot of stock in the market. We had two big blocks from Otis Stanton and from some relatives of Malcolm Chace, but they were happy to sell. I never met — at the time I bought the stock from Otis Stanton — I had never met him, and so I delivered no personal sales talk to him. And the same thing is true of the Chase family, not Malcolm himself, but some relatives, they sold us a block of 100,000 shares. But we were not out convincing anybody to sell their stock. So there's been very little that I can remember where — we talked to Betty Peters about avoiding a transaction we thought was dumb, when Wesco was considering merging with Financial Corp of Santa Barbara. I flew out to see her in San Francisco. But she stayed with us. She did not sell her stock and remains a shareholder to this day, 30-plus years, almost 40 years later. Charlie?

CHARLIE MUNGERWell, I've got nothing to add to that at all.

Berkshire's edge for acquisitions

WARREN BUFFETTOK. Then we'll go to Carol.

CAROL LOOMISThis question comes from Mark Trautman of Crested Butte, Colorado. And you've touched on this, Warren and Charlie, on little fringes today, but this is a direct question. "Warren, both you and Charlie have described over the years how you have built Berkshire Hathaway to be sustainable for the long term. "I am having difficulty explaining to my 13-year-old daughter, and frankly, to many adults, also, in easy to understand terms, Berkshire's business model and long-term sustainable, competitive advantage. "Can you give all of us, and particularly my daughter, Katie, who is here today, the Peter Lynch two-minute monologue explaining the business of Berkshire Hathaway and its merits as a long-time investment for future decades?"

WARREN BUFFETTOK, Charlie, you talk to Katie. (Laughter) I'm going to have some fudge. (Laughter)

CHARLIE MUNGERAll right. I'll try that. We've always tried to stay sane, and other people, a lot of them, like to go crazy. That's a competitive advantage. (Laughter and applause) Number two: as we've gotten bigger, we've used this sort of golden rule that we want to treat the subsidiaries the way we would want to be treated if we were in the subsidiaries. And that, again, is a very rare attitude in corporate America, and it causes people to come to us who don't want to come to anybody else. That is a long-term competitive advantage. We've tried to be a good partner to people who come to us and need a partner with more money. That is a competitive advantage. And so, we are leaving behind a field that's very competitive and getting into a place where we're more unusual. This was a very good idea. I wish we had done it on purpose. (Laughter)

WARREN BUFFETTA few years ago, a person who's in this audience, I believe, came to me and he was in his 60s, and he said that for about a year, he'd been thinking about selling his business. And the reason he had been thinking about it was not because he wanted to retire. We're not — we very seldom buy businesses from people who want to retire. He didn't want to retire at all. He loved what he was doing. But he’d had an experience in buying a business a few years earlier from a family where he had known the fellow that built it, the fellow had died, and then just everything bad started happening in the family and the business and the employees, everything else. So he really wanted to put to bed the question of what happened with his business. It wasn't that he really cared a lot about monetizing it or having the money. He just wanted — he wanted to put his mind at ease, that what he had spent lovingly building up over 30 or 40 years was not going to get destroyed — or that his family would get destroyed — if he — if he made a — if he died. So he said he thought about it a year. And he thought about it and he thought, "Well, if I sell it to one of my competitors" — and they would be a logical buyer, they usually are. That's why we have antitrust laws. If he sold it to a competitor, they would come in and basically they would put their people in charge. They would have all these ideas about synergy, and synergy would mean that the people that had helped him build the business over 30 years would all get sacked and that the acquiring company would come in like Attila the Hun and be the conquering people, and he just didn't want to do that to the people that helped him over the years. And then he thought he could — he might — sell it to some private equity firm. And he figured that if he sold it to them, they'd load it up with debt, which he didn't like, and then they'd resell it later on. And so he would, again, have lost control and they might do the same thing that he didn't want to have happen in the first place, in terms of selling it to a competitor, or whatever it might be. So when he came to me, he said — he described this — and he said, "It really isn't because you're so attractive." But he said, "You're the only guy left standing. You know, I mean, you’re not a competitor, you're not a private equity firm, and I know I will get a permanent home with Berkshire and that the people that have stayed with me over the years will continue to get opportunities and they will continue to work for me. I'll keep to get doing what I love doing, and I won't have to worry about what will happen if something happens to me tonight." Well, that company has turned out to be a wonderful acquisition for Berkshire, and our competitive advantage is we had no competitors. And I think — well, we will see more of that. We've seen a lot of that over the years. We'll see more of it. Charlie, anything? And I don't think you mentioned the fact that developing a shareholder base, too, that's different than —we do look at shareholders as partners, and, you know, it's not something a public relations firm wrote for us, or anything of the sort. We want you to get the same result we get, and we try to demonstrate that in every way we can.

BNSF outlook for carrying coal and oil

WARREN BUFFETTJonathan?

JONATHAN BRANDTI have a — (Applause) I have a couple questions about Burlington Northern's two energy franchises, coal and crude.

WARREN BUFFETTUh-huh.

JONATHAN BRANDTGiven that coal-fired generation is in gradual structural decline, can you discuss whether the tracks, locomotives, and other assets used to deliver coal can be redeployed, equally profitable, serving other customers? Are those assets fungible? Can you also discuss whether crude by rail can continue to grow even as pipelines are built to serve the Bakken, and as the currently large geographic spreads in crude prices potentially narrow? You've talked about the flexibility of crude by rail on TV. Can you elaborate on that, please?

WARREN BUFFETTYeah. If there was no coal moving, we would not find a lot of use for some of the tracks we have, there's no question about that. So, the — I think what you're talking about would be very gradual over time. But, I mean, the outlook for coal is not the same as the outlook for oil. A lot of the coal, in terms of the year-by-year fluctuations, may depend on the price of natural gas because some of the generating capacity can go in either direction. In terms of oil, I think the view a few years ago was that there might just be a little blip in terms of rail transportation. But I've talked to some oil producers, the largest up there in the Bakken, and I think there will be a lot of rail usage for a long time, in fact, increased rail usage. Oil moves a whole lot faster, incidentally, by rail than it does by pipeline. Most people have sort of a visual conception that the oil is flowing at terrific speeds through pipelines and that the railcars are sitting on the sidelines someplace. But it's just the opposite. You can move oil a lot faster. And with change — with different market prices and different refinery situations and all that — there's a lot of flexibility in the oil transportation by rail. Matt Rose is right up front here, and if somebody would give him a microphone, I think he can probably tell you a lot more about moving coal and oil than I can. Matt? We got a spotlight someplace that can focus right on here?

MATT ROSEYes. So, Warren, the two franchises are really different. That's just the way the geographic is laid out. We expect the coal franchise to basically stay about where it is today, depending on natural gas prices as well as what happens with the EPA. Our crude by rail, right now we have about 10 loading stations in the Bakken with about 30 destination stations. We're currently in negotiation, looking at about another 30 destination stations. So it’s really an exciting time right now. We're handling about 650,000 barrels of crude a day. We think we'll be at 750 by the end of this year, and we see a pathway to a million-two to a million-four.

WARREN BUFFETTWhen you think of the whole country producing 5 million barrels a day not long ago, that is a lot of oil. And of course, it isn't just the Bakken. You know, the shale developments, they can open up a lot of things over time.

Sorry to see Harley-Davidson notes expire

WARREN BUFFETTOK. Station 7?

AUDIENCE MEMBERGood morning, Warren and Charlie. My name is Bill Hennessy (PH) and I’m from Milwaukee, Wisconsin. I have a similar question. Back in 2009, you made a substantial investment in Harley-Davidson with the five-year term at 15 percent. I noticed that note comes due in 2014. What are your plans or thoughts once that investment comes due?

WARREN BUFFETTWell, what we'd like to do is not answer the mail, and just let him keep paying his 15 percent, but that won't happen. The — no, those were — we had a few private transactions during a period when the corporate bond market was basically frozen and received unusual terms, although the best terms those companies obviously could obtain at that time. And those deals are coming due, and I wish the five-year deals had been ten-year deals. But, now those — that was a special time. And in effect, that's a depleting asset that we have that's left over from five years ago. We won't see anything like that for a while, but we'll see similar things at some point in the future. I mean, the world is given to excesses, and they have consequences, and we are always willing to act. I mean, we did not think Harley-Davidson was going to go broke. I mean, it was that simple. You know, any kind of company that gets its customers to tattoo ads on their chest can't be all bad, you know, I mean— (Laughter) But it will be a sad day when the Harley-Davidson notes mature.

Todd Combs and Ted Weschler's stock-picking independence

WARREN BUFFETTOK. Becky?

BECKY QUICKThis question comes from Andishi Tuzush (PH) who asks, "If Todd Combs and Ted Weschler, if they purchase stock in a company that you have reviewed before and did not believe to be a good investment, would you share your thoughts with them?"

WARREN BUFFETTI would probably not know they were even buying it until, maybe, a month after they started. I do not — they do not check with me before they buy something. I gave them each another billion dollars on March 31st, and I do not know whether they've spent the billion or whether — which stocks they bought or— Now, I will see it on portfolio sheets. I get them monthly, but they're in charge of their investments. They've got one or two things that they're restricted on, in terms of— things that — for example, if we own a chunk of American Express, and under the Bank Holding Company law we would not be able to buy another share. So there's a couple things like that — restrictions they have. But otherwise, they have no restrictions on what they buy. They've bought things I wouldn't buy. You know, I buy things they wouldn't buy. That part of the investment process. I do not tell them how much to diversify. They can put it all in one stock if they want to. They can put it in 50 stocks, although that's not my style. They are managing money. And when I managed money, you know, I wanted to be a free agent. If he wanted to give me — they could make the decision on whether they wanted to give me the money, but once they gave me the money, and I had the responsibility for managing it, I wanted free reign to do what I wanted. And I did not want to be held responsible for things with my hands tied. And that's exactly the position we have with Todd and Ted now. It takes a lot of — it's an unusual person that we will give that kind of responsibility to. That's not something that Charlie and I would do lightly at all. But we thought they deserved the trust when we hired them, and we believe that more than ever after watching them in action for a time. Charlie?

CHARLIE MUNGERWhat can I say in addition to that?

Why GEICO isn't copying Progressive's Snapshot

WARREN BUFFETTOK. Cliff?

CLIFF GALLANTThank you. I wanted to ask a follow-up question about Snapshot at Progressive. Now, I realize that GEICO's first quarter numbers are very good, things are going very well at the company. But Progressive is claiming that the data is profound, that they're getting from Snapshot. That they can give their best drivers 30 percent rate cuts, and those customers are still their most profitable customers. We have a lot of GEICO policyholders here today. I'm sure they're very good drivers. Why shouldn't they go try Snapshot and try to save 30 percent or more? Why isn't GEICO investing in what I think appears to be a credible underwriting tool and potential threat?

WARREN BUFFETTYeah. They — I don't think — but obviously Progressive disagrees with us — but I don't think their selection method is better than ours. And I would say that I might even feel that ours is a little bit better than theirs. But every company has a different approach to it. Peter Lewis, who runs Progressive, when he started the company— he told me this story himself. I mean, it was a tiny, tiny little company. It came out of a mutual company, as you know. And he went in the motorcycle business. And the first guy that he insured— or the first loss, I think, that was reported— came from some guy that was redheaded, and he just decided not to insure any redheads for a while. (Laughter) That — you know—when you don't have very much money, you can't afford to experiment too long. Well, Peter learned that that was not a criteria, and he knew that, but he had fun telling the story. But all we're trying to do— if I'm looking at all these people here and I'm going to issue them insurance policies for the next year, I'm going to charge different rates to different people. And, if I'm going to sell them life insurance, I'm going to charge different rates to them. If I'm going to sell them health insurance, I'm going to charge different rates. There's a different — there's a different probability attached to each individual, based on a whole lot of variables. And Progressive — before Snapshot, they had a different selection approach than GEICO. And like I say, ours has worked very well and we think it will continue to work well. And we are obtaining, under our selection system, we are obtaining a hugely disproportionate number of new policyholders compared to the growth in the market, so our rates are attractive and our underwriting results are attractive. And we continue, always, to look for further ways, obviously, to refine the selection technique. But we don't do any of it lightly because what we're doing now is working very well. And I just invite you to compare the Progressive results with the GEICO results in the next two or three years, and I will — if we're wrong — I will be here to freely admit that we were wrong, but I don't think we will be. OK, station 8? Oh, Charlie, you want to add something?

CHARLIE MUNGERWell now, obviously, we're not going to immediately copy the oddball thing that every single competitor does in the world, particularly when we've got an operation that's working so well.

WARREN BUFFETTIf I were starting in the direct auto insurance business, I think I would attempt to copy GEICO. It wouldn't work, but it would offer you the best chance, I think. It's a remarkable system. And Tony Nicely, you can't give him enough credit. I mean — you know, we will — I hope we will — gain a million policies this year. The entire industry, I don't think, will gain more than a million-and-a-half. So we will probably get two-thirds — in my view — we'll get two-thirds of all the growth and we'll do it profitably, and we'll save people a lot of money. So I think that's quite a company.

We rely on sugar and caffeine, not to-do lists

WARREN BUFFETTOK. Station 8?

AUDIENCE MEMBERHi. My name is Alex [Banayan], and I'm from Los Angeles. Mr. Buffett, I've heard that one of your ways of focusing your energy is that you write down the 25 things you want to achieve, choose the top 5, and then avoid the bottom 20. I'm really curious how you came up with this, and what other methods you have to prioritizing your desires?

WARREN BUFFETTWell, I'm actually more curious about how you came up with it, because — (laughter) — it really isn't the case. It sounds like a very good method of operating, but it's much more disciplined than I actually am. (Laughter) If they stick fudge down in front of me, I eat it, you know, I'm not thinking about 25 other choices. (Applause) So I don't mean to —you know, Charlie and I live very simple lives. We know what we do enjoy, and we now have the option of doing it, pretty much. Charlie likes to design buildings. I mean, he's not—he’s no longer a frustrated architect — he's a full-fledged architect now. And, you know — and we both like to read a lot. But we — I've never made lists. I can't recall making a list in my life, but maybe I'll start. You've given me an idea. Thank you. Charlie?

CHARLIE MUNGERWell, what's really interesting on the subject of Warren's operating methods, you can see happening here. We didn't know, when we started out, this modern psychological evidence to the effect that you shouldn't make a lot of important decisions when you're tired and that making a lot of difficult decisions is tiring. And we didn't also know, as well as we now do, how helpful it is to be consuming caffeine and sugar when you're making important decisions. (Laughter) And what happens, of course, is that both Warren and I live entirely on autopilot, in terms of the ordinary decisions in life, which is totally habitual, so we don't work — waste — any decision making industry — I mean energy — on that stuff, and we're ingesting caffeine and sugar. And, it turns out, under the modern evidence, this is an ideal way to sit where Warren sits. And he didn't know that, he just stumbled into it. (Laughter)

WARREN BUFFETTWhen we write our book on nutrition, it promises to be a huge seller. (Laughter)

CHARLIE MUNGERI cannot remember an important decision that Warren has made when he was tired. He's never tired. (Laughter) He sleeps soundly, and he doesn't waste time thinking about what he's going to eat. As you say, he just eats what he's always eaten. You know, his style turns out to be absolutely ideal for human cognition. (Laughter) It looks peculiar, but he stumbled into something very good.

WARREN BUFFETTYou can write the forward to my next book. OK. (Laughter)

Buffett defends buying newspaper companies

WARREN BUFFETTAndrew?

ANDREW ROSS SORKINThis following question comes from a shareholder who asked to remain anonymous. They write, "I'm from Omaha, and I'm thrilled you bought our newspaper as a local citizen, but not so much as an investor in Berkshire. "I read your reasons for acquiring newspapers, but it still doesn't make sense to me, economically, given the downward trends in the industry. "Don't you think there are other businesses with higher rates of return that you could buy? "Why would you buy such a small business, since you always say you want to buy elephants? "Please quantify exactly what rate of return you expect from the newspapers." (Scattered applause)

WARREN BUFFETTYeah. I would say that we will get a decent rate of return. Whether it's — most of them, incidentally, have been bought, and they were either S corporations or partnerships of some sort. So they — compared to buying a Heinz, for example, or a BNSF or something of the sort — they actually have a certain structural advantage in terms of the eventual return after tax, because we get to write off the intangibles we're purchasing. That affects the after-tax return, compared to the pretax return that would come from this. But I would say that our after-tax return, with declining earnings, which I expect, would be at least 10 percent after tax, but I think — and it could well be somewhat higher. I think it's very unlikely that it would be significantly lower. And everything we have seen to date, and it hasn't been that long, but we have a number of papers now, would indicate that we will meet or beat the 10 percent. It doesn't have — it's not going to move the needle at Berkshire. You know, the papers we have bought now, we're probably getting close to maybe having 100 million of pretax earnings, a good bit of which is — fair amount of which — we get a favorable tax treatment on, because they were bought from S corporations. You know, and 100 million is real money, but it doesn't move the needle at Berkshire. But it will end up being a very — I think it will be a perfectly decent return in relation to capital employed. Now, we wouldn't have done it in any other business. I mean, there's no question — the questioner is right about that. But, it doesn't — you know — doesn't require an extra ounce of effort by me or Charlie or people at headquarters. We will get a decent return and we like newspapers and — Although, the one thing I'll promise to do with you is I will be glad to give you figures, annually, as to how we are doing relative to investment. We are buying the papers at very, very low prices compared to current earnings, and we must do that because the earnings will go down. Now, the interesting thing is, of course, is that we see books from investment bankers on all kinds of businesses, and always the projected earnings go up in the book. A lot of times they don't — you know, in reality — they don't go up. The difference is that we expect them to go down in the newspapers, and whatever the investment salesmen expect, they certainly don't project that any business they sell will have declining earnings. Charlie?

CHARLIE MUNGERWell, I think what you're saying is that it's an exception and you like doing it. (Laughter)

WARREN BUFFETTI wish I hadn't asked. (Laughter) OK.

Follow Teledyne CEO Henry Singleton's lead

WARREN BUFFETTDoug? Sort of a lead-in to you, Doug. (Laughter)

DOUG KASSWarren, in a previous answer to a question, you suggested, I think for the first time, that when you're gone — and everyone here hopes that's not for a very long time —

WARREN BUFFETTNo one more than I. (Laughter)

DOUG KASSI thought you would say that — You're going to move — Berkshire will likely move — to a more centralized style, or approach, to management. My question is, in the past you've demonstrated a great deal of respect for Dr. Henry Singleton, the founder and longtime CEO of the diversified conglomerate Teledyne. You have written about Singleton, quote, "Henry is a manager that all investors, CEOs, would-be CEOs, and MBA students should study. "In the end, he was 100 percent rational, and there are very few CEOs about whom I can make that statement," close quotes. Prior to his death, he broke up Teledyne into three companies. Dr. Singleton told our mutual friend, Lee Cooperman, that he did it for several reasons. There was one reason in particular that Lee mentioned to me that I want to ask you about. According to Singleton, Teledyne was getting very hard to manage for one CEO. What would you say about the Berkshire situation, given your company's greater complexity, size, and the management issues that you faced in the last three years? And what is the advisability of restructuring Berkshire into separately-traded companies along business lines?

WARREN BUFFETTBerkshire, to me, seems about the easiest company to manage imaginable. And if you took an earlier answer — and I understand why you did, that implied greater centralization after my death, there will be a tiny bit more, just in terms of the small companies. But I do not anticipate any change of any real significance. Now, Charlie knew Henry Singleton, and I think it might be interesting for Charlie to give you his views on what Singleton did right and, eventually, wrong. And, I’ll answer the last part of your question, though. Breaking it up into several companies, I'm convinced, would produce a poorer result. Certainly now, and I believe in the future. Charlie?

CHARLIE MUNGERWell, Henry Singleton was a genius who could play chess blindfolded just below the grandmaster level and never got less than an 800 on any complicated math or physics exam. And, I knew him. He lived in my community. But he started as a conglomerate where he was very interested in reporting higher earnings all the time so he could keep the daisy chain going. And when he managed it on the way down, he bought in the stock relentlessly and very logically, like a great chess player should. And — but he managed those companies on a way more centralized basis than Berkshire has ever operated. And in the end, the great bulk of the enterprises, he wanted to sell to us. And by that time, he was ill and he really wanted to sell to us. And of course, he wanted Berkshire stock. And we basically said to him, "Henry, we love you and we'd love to buy your businesses, but we don't want to issue Berkshire stock." So, I don't think you should get the idea that just because he was a genius he did it better than we did. He did, in some ways, because he understood these very high-tech businesses, but —

WARREN BUFFETTHe played the public markets way better. I mean, it—

CHARLIE MUNGERYeah.

WARREN BUFFETTWe're not interested in doing that, actually.

CHARLIE MUNGERNo, we're not.

WARREN BUFFETTAnd he was incredible in that, and he made a fortune for shareholders that stayed with him. But he was — to some extent, he looked at the shareholder group as somebody to be taken advantage of, and he issued stock like crazy. I'll bet he did at least 50 acquisitions where—

CHARLIE MUNGERYes.

WARREN BUFFETTHe wanted to use a very fancy price stock. He was playing the game of the '60s, and we actually have never wanted to get in that game. I mean, he promoted the stock. And, you know, he had the Litton Industries background on it, and it was a game that worked wonderfully if you didn't care about how it ended up. And so we have not played that game. He was — in terms of wanting to get Berkshire stock — you know, he essentially was going into the third stage—(laughs) — of first issuing shares at overprice, then buying it back very underpriced, and then he was going to —

CHARLIE MUNGER— sell it to us for more than it was worth.

WARREN BUFFETTYeah, exactly.

CHARLIE MUNGERIt was the wrong stock. But he was an enormously talented man and that cool rationality was to be admired. I like our system better. We're more avuncular than Teledyne was.

WARREN BUFFETTNot the toughest test. (Laughs)

High health costs are hurting competitiveness

WARREN BUFFETTOK. Station 9?

AUDIENCE MEMBERHi. My name is Kelly Morrell (PH) from New York, and I have a question. You've been both very outspoken on corporate and personal tax rates, as well as the trade deficit. And I'm wondering if you can elaborate on what the top two or three things you think both business leaders and policy makers should be focused on to preserve U.S. competitiveness?

WARREN BUFFETTWell, I would say health care costs would be a big item. We're spending — we're a country that's spending, we'll say — you get different figures — but call it 17 1/2 percent or so of GDP. And most of our rivals in the world are paying anywhere from, probably, 9 1/2 to, maybe, 11 1/2, or thereabouts. So, you know, there are only 100 cents in the dollar, and if you give up 6 or 7 or 8 points of that dollar, I mean, it's just like having a raw material that costs you more, or something of the sort. So, that will be a major problem in American competitiveness. It is right now, and it will — all signs point to the fact that it will become more so. And it doesn't relate to the Medicare problem, which is a huge problem, obviously, but the real problem is health care costs, whether it's in the private system or whatever payer system you have. We have a big, big disadvantage in cost versus the rest of the world. People used to talk about how General Motors had $1500 a car in health care costs that Toyota didn't have. Well, if they had $1500 a car disadvantage in steel costs, I mean, you know, the management would be focused on that. If they had $150 — if they had $15 — difference in steel costs, but health care costs, which are sort of beyond the control of any one company, promise to be a huge competitive disadvantage. Overall, though, incidentally, I mean, the United States — since the crisis of 2008 — we have done very well, compared to most countries, and our system works. But if you asked me the number one problem for American business, I would say it's that health care cost disadvantage. Charlie?

CHARLIE MUNGERWell, I would add that I don't think it does our competitiveness any good to have this grossly swollen securities and derivative market — markets. (Scattered applause) And the young men from Caltech and MIT going into high finance and derivative trading, and so on, I think this is a perfectly crazy outcome in terms of its effect on the country.

WARREN BUFFETTAnything further? (Scattered applause)

CHARLIE MUNGERWell, I agree with you about the health care, but I find the other more revolting.

WARREN BUFFETTCharlie's very Old Testament. And he's right.

Obamacare's effect on Berkshire?

WARREN BUFFETTCarol?

CAROL LOOMISThis question picks up, indeed, from where you were on the previous answer. It's from John Sealme (PH). "I have never heard or read whether all of Berkshire's nearly 300,000 employees are currently receiving health benefits. "If all employees today are not receiving benefits, has Berkshire quantified the cost of complying with the Affordable Care Act? And if so, what will be the costs be? "In other words, how is the Affordable Care Act going to affect Berkshire?"

WARREN BUFFETTYeah. I don't know the answer to that. The— I'm virtually certain that — you know, we've got 70-plus subsidiaries, some of which — one of which — has over 100 itself. So, very hard to speak totally categorically. But to my knowledge, I don't know of any units that don't have health care benefits. But like I say, I mean, we just bought 27 or 28 daily newspapers, some of them are very small, so I can't really speak to every single unit. But health care costs are a huge cost for us. We're actually going to do — we do very few things with, as you know, on a centralized basis — but that is something where all of our companies will try to learn what's in store for them and try to figure out some answers. But we have not yet — we have not assessed in any way — put together — the kind of figures that that question calls for. We spent a lot of money, obviously, I mean, to get up to the kind of numbers that are coming through on health care costs. I see them at some of our — a few of our — individual units, as I look at their monthly reports. I will see costs rising 10 or 12 percent. And what happens in 2014, I don't know. But the same thing will be happening to our competitors, and we will try to figure out what makes the most sense at that time. And our individual managers are already working, particularly the larger units, are spending a lot of time on that. But it's not something we try to control out of headquarters. Charlie?

CHARLIE MUNGERYeah, it's a — we really don't want to try and control it out of headquarters. We like that kind of decision being made near the firing line.

Future of rooftop solar power

WARREN BUFFETTJonathan?

JONATHAN BRANDTHere's a question for Charlie on a subject which I consider him an expert on, and I hope I don't prove my ignorance by asking the question. The question is about capital spending plans at your regulated utilities and a potential long-term risk to realizing returns on current and future capacity. With the ongoing reduction in the cost of solar panels causing more utility customers to, at least, consider generating electricity from their own rooftops, some worry about a vicious circle of customers reducing their dependence on the grid, forcing utilities to raise rates, to maintain returns on the remaining customers who, in turn, are then incentivized to reduce their dependence on the grid, or even exit it. I understand the risks are greatest to regulated utilities in sunny places like Arizona and California, but given how much solar power is generated in cloudy places like Germany, are regulated utilities in Iowa, the Pacific Northwest, the Rocky Mountains, and the UK really immune?

CHARLIE MUNGERWell, my answer would be I don’t think anybody really knows exactly how this is going to play out. I confidently predict there will be more solar generation in deserts than there is going to be on rooftops in cloudy places — (laughter) — and there's a good reason for that. And Berkshire's big operations, as you — in solar — are in what amounts to desert. And we get very favorable terms and incentives, and I think Berkshire's going to do fine in solar. I am skeptical, myself, about trying to run the utilities of the world from a bunch of little, tiny rooftops. I suspect there's some twaddle in that — and some fancy salesmanship in that arena. And of course, the people that did it early were foolish because the price came down rapidly thereafter. So put me down as not totally charmed by rooftops in cloudy areas.

WARREN BUFFETTWe have Greg Abel here from MidAmerican Energy. If we can direct a spotlight down there, Greg can probably speak to this with a lot more intelligence than Charlie and I. I noticed that —

CHARLIE MUNGERYeah.

WARREN BUFFETTI noticed that—I noticed that Jonathan left me out of the thing entirely when he wanted to get an intelligent answer, but I'm not taking any offense at that. Greg?

GREG ABELSure. Happy to touch on it. Jonathan, I would touch on the fact you're absolutely right. We're seeing, when it comes to rooftop solar, a decline in the total cost of installing them. At the same time, when you compare it to a regional tariff, or a specific tariff in most of those states, the utility is extremely still competitive. And I would highlight that as you see more rooftops coming on, you'll see a restructuring of the tariffs, but at the same time, there's a lot of protection for the utilities. So in the regions we're supplying power, we will see some introduction of solar, but we’re absolutely comfortable our systems for the long-term are valuable both to our customers and to our shareholders — Berkshire shareholders — for the long term. Thanks.

Luck, timing, and success

WARREN BUFFETTOK. Station 10.

AUDIENCE MEMBERThank you. Marc Marzotto, Toronto, Canada. Bill Gross made recent comments that his generation of investors, yourselves included, owed a deal of their success to timing. Do you agree with Bill's comment, and do you think a similar opportunity will provide itself to today's investors? Thank you.

WARREN BUFFETTYeah, there's no question that being born in the United States was a huge, huge, huge advantage to me, and as I've pointed out in a recent article, being born male was a big advantage. I would not have had the same opportunities in the investment, or in the business world, remotely, that I've had if I’d been a female born in 1930. And the timing could have been a little better. Actually, my dad was a security salesman and, you know, I was conceived in November, 1929. And if you remember, the stocks had gone down dramatically at that time. There really wasn't anybody to call on, for my dad, and there wasn't any television at home or anything. So here I am, you know. (Laughter) So I feel myself very lucky that the crash of 1929 came along. And that also provided a decade, more than a decade, of people who were very turned off. Well, it was a decade of terrible business for quite a while, and then a decade of — more of people that were turned off on stocks, just as we sort of had a decade like that in the past decade going up to 2010 or so, people that — a lot of people — that had gotten turned off by stocks. So that was a favorable environment. But the United States itself was an incredibly favorable environment. If I’d been born five years earlier, I probably would have made more money. But if I’d been born 10 or 15 years later, I would've made, probably, less money. But, it— I envy the baby that's being born today in the United States. I mean, I think, on a probability basis, that's the luckiest individual that's ever been born. And I think that they will do very well in life in all kinds of ways, on a probability basis, better than existed when I was born. And I think they'll have opportunities to do very well in the investment field. It may not be as good a field as it was for me starting in 19-, say, '50, '51 or thereabouts, but it will be a very good field to operate in. The person that has a passion for investing, born today, coming of age 20 years from now, is likely, in my view, to do very well, and to live far better than we live today, just as we live far better than John D. Rockefeller lived many years ago. Charlie?

CHARLIE MUNGERWell, the competition was very weak in your early days, and I don't think the competition is as weak now. So I think, sure, we got advantages from timing. And I don’t think that means there's nothing to be done ahead.

WARREN BUFFETTBut Charlie, in 2008 and '9, there were all kinds of high IQ —

CHARLIE MUNGERYeah.

WARREN BUFFETT— highly experienced, investment professionals, I mean, thousands and thousands and thousands of them. And you invested at the Daily Journal Company in some equities at X that are worth, what, three X or four X now, or something like that?

CHARLIE MUNGERThat's right.

WARREN BUFFETTYeah. Well, I call that opportunity, but it may be routine to him. (Laughs)

CHARLIE MUNGERBut I sat for a lot of years before I did it.

WARREN BUFFETTBut it still became available.

CHARLIE MUNGEROh, yes. But you were drowning in opportunities when I first knew you. (Laughter) You were waiting for —

WARREN BUFFETTI wasn't drowning in money, unfortunately. (Laughs)

CHARLIE MUNGERNo, what you lacked was money.

WARREN BUFFETTYeah. Well, now we've got money and no ideas.

You have to like what you're doing

WARREN BUFFETTOK. Station—(Laughter) Station 10? Station 10? Do we have a Station 10? Let's take a look. It should be right over there.

AUDIENCE MEMBERHi.

WARREN BUFFETTHi.

AUDIENCE MEMBERMy name is Dexter Ang (PH). I'm from Stafford, Virginia. I'm 30 years old, and I'm wondering what my life will be like in a few years, let alone 50 years from now. My question for both Mr. Buffett and Mr. Munger is: how do you think you've changed over the last 50 years? And if you could communicate to yourself 50 years ago, what would you tell them, one piece of advice, business or personal, and how would you do it in a way where your former self would actually heed it? (Laughter)

WARREN BUFFETTCharlie, I'll let you answer that. (Laughter) Incidentally, I'll trade you places, so don't worry about your future.

CHARLIE MUNGERYeah, we're basically so old-fashioned that we're boringly trite. We think you ought to keep plugging along and stay rational and stay energetic and just all the old virtues still work, and—

WARREN BUFFETTBut find what turns you on.

CHARLIE MUNGERYou've got to work where you're turned on. I don't know about Warren, but I have never succeeded to any great extent in something I didn't like doing.

WARREN BUFFETTCharlie and I both started in the same grocery store, and neither one of us are in the grocery business. (Laughs)

CHARLIE MUNGERWe were not going to be promoted, either, and even though you had the family name.

WARREN BUFFETTYeah. (Laughter) My grandfather was right, too. (Laughs) It's really — I mean, if you're lucky, and Charlie and I were lucky in this respect. We — well, we were lucky to be in this country to start with — but we found things we like to do very early in life, and then we, you know, we pushed very hard in doing those things, but we were enjoying it while we did it. We have had so much fun running Berkshire, I mean, it's almost sinful. But, we were lucky to — you know, my dad happened to be in a business that he didn't find very interesting but I found very interesting. And so when I would go down on Saturday, there were a lot of books to read, and, you know, it just flowed from a very early age. And Charlie found — he found —

CHARLIE MUNGERWe found a way to atone by your — for your — sins in having so much fun. You're giving all the money back.

WARREN BUFFETTYeah, but you give it all back whether you want to or not, in the end.

CHARLIE MUNGERThat's true, too. (Laughter)

Rational insurance pricing

WARREN BUFFETTOK. Becky?

BECKY QUICKThis question comes from Laurence Endersen in Dublin, Ireland. And he asks, "What factors have enabled Berkshire's insurance pricing policy to stay so rational while also being a very sizable market participant?"

WARREN BUFFETTIn insurance, was that the —

BECKY QUICKIn insurance, yeah.

WARREN BUFFETTYeah. Well, I would say this: I really do think that Berkshire is an unusually rational place. I mean, we know what we want to accomplish. We've had the benefit of a very, very long run, and we've had the benefit of a — you can argue whether it was a benefit or not — but of controlling shareholders, so we did not have outside influences that pushed us in directions that we didn't want to go. So, you know, insurance should be conducted as a rational activity. And one of the problems that some insurers have had is that they would have a pressure for increasing premium volume every year, brought upon by Wall Street, you know— very few— We actually contracted the business written by National Indemnity, formerly our main business, its traditional business, I think we contracted it, probably, by 80 percent or something of the sort when the business became less attractive. I'm not sure any manager of a public company that was answering to quarterly earnings calls and that sort of thing, I'm not sure whether they could've really stood up to the kind of pressure that they would receive if they followed a similar policy. We have no — if we do something stupid, it's because we did something stupid. It's not — no external factors are pressing on us. And that's a great way to operate, and it'll continue to be the way we operate. Most people, if you own a half of 1 percent of the company or less, you know, and other people are doing things that Wall Street is applauding and you're not doing them, it could be very hard to resist. And you know, you respond to media criticism and all kinds of things that— We don't have — we don't have to do it. And there's no reason for us to do anything stupid in insurance. You get offered a lot of opportunities to do things that are stupid. We were major writers of catastrophe — natural catastrophe — insurance in the United States some years ago when the prices were right. We don't think the prices are right now, so we don't write it. We haven't left the market, the market left us, and — but we are not about to do something where we get paid 90 cents for running the — running a probabilistic loss of a dollar. It just doesn't make any sense and we won't do it. And we don't put any pressure on anybody to do it, and their incomes are not dependent on doing it. So it's not hard to be rational at Berkshire. Charlie?

CHARLIE MUNGERYeah. There are pressures on other people that we don't want and therefore don't have. It is very hard to shrink an insurance operation by 80 percent when the people who come in every day don't have enough to do, and it's just — it's a counter-intuitive thing to do. But it's absolutely required that you do it in a place where people go as crazy as they do in insurance.

WARREN BUFFETTWell, it's like buying Internet stocks, you know, in the late 1990s. I mean, the — all around you, you have these people that have high IQs and they're doing it and they're being successful in it. So, you know, everybody from your, you know, your spouse to your employer to the press says, you know, "How come all these other — how come you think you're so smart, you know, avoiding this when everybody else is doing it and they're making a lot of money?" And, of course, it creates this social proof where it works for a while. That's the great danger period in all of these bubbles, is that what starts out with skepticism ends up with your neighbor getting richer than you are because he went along and you didn't. And that sort of thing — the bandwagon effect and everything — those things are very hard to resist. But we don't have any pressures to do that sort of thing. I mean, we just don't give a damn, you know, and if — We don't necessarily think we're smarter than the other person on that. We just think we don't understand what it's all about. And if they can make a lot of money, you know, day trading or whatever it may be, you know, good luck to them. But we're not envious of them, but we certainly are not going to do it just because they're doing it. Charlie, any more on that?

CHARLIE MUNGEROh, I always say there's a reason why all that stuff is in the Bible. You can't covet your neighbor's ass or — (Laughter) I mean, they were having trouble with envy a long time ago. And it's a perfectly terrible thing to do, and how much fun can you have being envious? We always say it's the one sin there's no fun in.

WARREN BUFFETTYeah. (Laughter) Gluttony is a lot of fun. (Laughs) Lust has its place, too, but we won't get into that.

"Dumb" competition from hedge funds in reinsurance

WARREN BUFFETTCliff? (Laughter)

CLIFF GALLANTWe can follow that up. (Laughter) Reinsurance pricing is expected to be down at midyear renewals this year, despite the fact that we've had a lot catastrophes in recent years. The finger is being pointed towards alternative capital entering the market, new capacity entering the market. How concerned are you about this new capacity, and, you know, what is the likelihood that cheap reinsurance pricing soon leads to cheaper primary commercial pricing?

WARREN BUFFETTYeah. We hate dumb competition, and hedge fund — managed money, but particularly hedge funds — have entered the insurance, and more particularly, probably, the reinsurance business, quite aggressively in the last few years. For one thing, it gives them a chance to have a beard, in effect, to operate in Bermuda or someplace where the tax rates are low and where they defer their own income from U.S. income taxes for a long time, and it's a perfectly respectable beard. And it can be sold to investors. And people talk about it, you know, being an uncorrelated type of operation and all of that. Anything Wall Street can sell, it will sell. I mean, you can count on that. And —

CHARLIE MUNGERThey like big words, too.

WARREN BUFFETTYeah. And it's very salable now, and the money will flow in and the money will — may — bring down prices, it may do stupid things in reinsurance, but that's happened before. And in the end, you know, we know what we're willing to do, we know what we think the prices should be, and we will do insurance business where we think that the odds favor us earning an underwriting profit. And if we can't do it, we'll watch for a while. You can't afford, you know, to go along with the crowd in investment, insurance, or a whole lot of other things. And it can be irritating to have a dumb competitor. I mean, if you've got a service station on the corner and you've got a guy across the street that is willing to sell gas below cost, you know, you've got a terrible problem. That's why I got out of the gas station business a long time ago. But insurance, it's — nice thing about it is— the standby costs are not huge, so it's not like idling steel plants or something. So we were perfectly willing in the 1980s to have our expense ratio go up significantly because our volume went down so dramatically. And, you know, it was a standby cost that was real, but it wasn't back breaking, and we just waited for better days, and they came along. Charlie?

CHARLIE MUNGERWith our cranky, wait-it-out methods, we probably have ended up with the best large-scale causality insurance operation in the world.

WARREN BUFFETTYeah, I think that's true, but —

CHARLIE MUNGERSo why would we change?

WARREN BUFFETTWe never really anticipated it would happen, though, when we started in.

CHARLIE MUNGERThat's true.

WARREN BUFFETTYeah. It just sort of evolved. But the principles were useful, and then we were very lucky in getting some sensational people. You know, we've got Tad Montross at Gen Re, we've got Ajit Jain, we've got Don Wurster, we've got Tony Nicely at GEICO. I mean, we have just hit the jackpot, in terms of the people. And they like the environment of Berkshire in which to operate, because they do not get pressures to do dumb things, which they would get at many other places.

Buffett calls for more women in corporate leadership roles

WARREN BUFFETTOK. Station 11.

AUDIENCE MEMBERHi. My name is Susan Tilson, and I'm from New York City. I am a long-term shareholder, but this is my first time to Omaha. This is quite the little gathering you've got going on here. You, just a few minutes ago, Mr. Buffett, mentioned that you enjoyed a lot of advantages as a male. I have three daughters, and I would like them to be able to go as far as their aspirations and hard work take them. I've noticed and applaud the fact that you've added women to Berkshire's board, but both the board and senior management at Berkshire still reflect the reality that in 2013, there are very few women holding the top jobs in corporate America. Do you see this as a problem? And if so, what should be done about it?

WARREN BUFFETTWell, I do see it as a problem, and I — (Scattered applause) I've written an article in Fortune Magazine, which if you go to Fortune.com, I guess it's in front of the paywall. You can click on it. It's only 1150 words or so. And you'll see my views on that. But there's no question that women throughout my lifetime and, you know, for a millennia before that, have not had the same shot at many things in the world that males have. I mean, I have two sisters, as I pointed out in this article — both here today, I believe — and, you know, a couple years on each side of me, and absolutely as smart as I am. They're more personable than I am. They got along with people much better than I did when we were young. Got — their grades were the same, but they did not have the same opportunities at all. I mean, nobody really wanted to limit them. Certainly the— you know, my parents love them the same way as they felt about me, and they never would've dreamt of saying to them that, you know, Warren gets all these opportunities and you don't. But it just existed. And, you know, all my teachers in grade school, every one of them was a female. And the reason they were females is because they only had a few occupations open to them. So, as a result, I had way better teachers than I sort of deserved for the pay level that existed in it because all this talent was being compressed into a few areas. Well, a lot of improvement has been made, but there's still a ways to go. And there is a pipeline effect, so I mean, you couldn't change it all in one day if you wanted to. But on the other hand, that should not be an excuse for not changing at all. And then I also wrote about the fact that there's — that when people are placed in that position, they start believing it about themselves, so they do not set their own objectives as high as their potential would indicate. And that's — I use the example of Katharine Graham, who I knew quite well, and she was, you know, she was very, very intelligent. She was very high-grade. She had all kinds of good qualities. But she had been told by a mother, and she had been told by a husband, and she had been told by society that women couldn't run businesses as well as men. And she knew it wasn't true, but she couldn't get rid of it. And she saw herself in this funhouse mirror, and it — no matter how hard you tried, you couldn't really get rid of the funhouse mirror. It had just been there too long. And I kept saying, you know, "Look at yourself in a regular mirror, and you'll see somebody who's very smart and very high-grade and just as good as any male you'll find." Her stock went up 40-for-1 when she was CEO. She wrote a Pulitzer Prize-winning autobiography. And to her dying day, you know, she — at one level she knew she was the equal of the males around her, and at another level, she couldn't get rid of that little voice inside of her that came from her mother and came from all of society that said, you know, "You should take care of the garden and let the males do all the important work." So, both the exterior obstacles— they’re crumbling to a very significant degree and they should. I mean, it only took thousands of years. I mean, as I point out in the article, we said in the Declaration of Independence, "We hold these truths to be self-evident, that all men are created equal," but they weren't so self-evident when they got around to writing the Constitution and they used a bunch of male pronouns in describing the presidency in Article II, or when they didn't get around to putting a Supreme Court—a female Supreme Court — justice on until 1981. So, the country has come a long way on it. It continues to move. It's moving in the right direction. But you know, I hope it keeps moving and moving faster, and I hope that the females that are laboring under these beliefs that were told to them about themselves that aren't true, get rid of the funhouse mirrors and get regular mirrors. And I say all this in this article if you want to read it in Fortune.com. Thank you. (Applause)

Berkshire is not "too big to fail"

WARREN BUFFETTOK. Andrew?

ANDREW ROSS SORKINYou'll know why I'm asking this question in a second, and why I picked it. This question is the following: "Is Berkshire too big to fail? On the same topic — "

WARREN BUFFETTI think I heard of a book by that name. Who wrote it? (Laughs)

ANDREW ROSS SORKIN"On the same topic, how do you feel about Dodd-Frank? And now that it's being implemented, how is it impacting Berkshire's insurance businesses and our investments in banks like Wells Fargo and Goldman Sachs?"

WARREN BUFFETTYeah. I don't think it's affecting Berkshire’s insurance businesses, to my knowledge. I mean — we're — we've had — to my knowledge, you know, we've never had anything that impinges on our activity arising from a too-big-to-fail doctrine. The capital ratios for large banks are being established at somewhat higher levels than smaller banks, and that obviously affects return on equity. The ratios, as I understand it, for Wells are not as high as they would be for Citi or J.P. Morgan, but they're higher than they would be for a local bank in Omaha. And the higher the capital ratio, the lower the return on equity will be. I consider the banking system in the United States to be stronger than, certainly, any time in the last 25 years. Capital is dramatically higher. A lot of the — well, a very significant part — of the loans that were troublesome are gone. The loans that have been put on the last four or five years are far better. It's a — I think we've got — the Canadian banking system is very strong, but compared to Europe, I think our banks — or compared to our banks of 20 years ago — I think they're dramatically stronger than they were then. I do not worry about the banking system being the cause of the next bubble. I mean, it will be something else. I mean, we will have bubbles in capitalism. Capitalism goes to excess, and it's because of the humans that operate it. And we will have that again, but usually you don't get it the same way as you got it before. I don't think it will be a housing boom next time. But, I am — you know, I feel very good about our investment in Wells Fargo. I feel very good about our investment in U.S. Bank. I feel very good about our investment in M&T. All of those are very strong banks pursuing, in my view, sound practices, and they should result — they should be decent investments, over time. They won't earn as high a return on tangible equity, nearly as high a return as they would have seven or eight years ago, because the rules have been changed. And they have been changed to provide thicker equities, and that pulls down return on equity. Charlie has been known to express himself on this subject, and I'll give him the floor.

CHARLIE MUNGERWell, I'm a little less optimistic about the banking system, long-term, than you are. I would like to see something more extreme, in terms of limiting bank activities. I do not see why massive derivative books should be mixed up with insured — deposits that are insured — by the country.

WARREN BUFFETTI'm with Charlie on that. (Applause)

CHARLIE MUNGERThe more bankers want to be like investment bankers instead of bankers, the worse I like it. (Applause) I don't want to say more.

WARREN BUFFETTYeah. (Laughter)

CHARLIE MUNGERI get in enough trouble on the subject already.

WARREN BUFFETT(Laughs) I can—I can see the journalists just licking their chops over there waiting for Charlie to throw a thunderbolt, but he's unusually restrained.

Buffett updates his bet against hedge funds

WARREN BUFFETTWe're now very close to noon. I promised — five years ago — I wrote about five or six years ago about the inordinate costs that investors bear in — many investors bear in—getting sold various types of products. And I talked about hedge funds and private equity and all kinds — and a whole variety of things. The investment world has been very good at extracting a very significant percentage of the returns that investors get for themselves. So I offered to bet anyone that wanted to step up to the plate that a group of hedge funds would not beat an unmanaged no-load index over a ten-year period. And I promised — and then I got a taker, a very nice group of people. I like them. Ted Seides is in the group. So they took me up on this. So we each put about $350,000 or so into something where in ten years — well, we put it in zero-coupon Treasurys, which would mature and be worth a million dollars in ten years. And I promised to report on the bet every year. And what we did this year, interest rates fell so far that our original 700,000 or so investment got to be worth like 950,000 just because the five-year Treasury got so low. So there was very little appreciation left into it between now and five years from now when it matures. So, we sold the zero-coupon Treasurys and we bought Berkshire with the proceeds, and I guaranteed that it would be worth a million dollars. Currently it's worth about a million-two, so that the charities are benefiting to some extent. Now, Ted has one charity, which is a very worthwhile charity. I have Girls Inc. of Omaha, which is a charity I selected. And we'll put the — we can put the figures up on the — there as to where we stand at the moment. The hedge funds got off to a fast start, and were 13 points ahead of the index fund at the end of the first year. But the last four years — and these are funds of funds, so they really represent probably 2 or 300, maybe, hedge funds underneath. But there's two levels of fees involved. There's the standard fees of the hedge funds, which probably many times are "2 and 20," but can be other things, and then there's the fee of the fund of funds on top of it. So, we now are at the halfway point, and I'll keep reporting to you every year how we do. And if Berkshire does well, we'll have well over a million dollars to distribute to one of two charities. You might enjoy going to a website called longbets.org. That's where — they're the people that hold the money. And you will see that there are a number of propositions that people have wagered on, and the proponents and the opponent of every proposition give a short little description. Ted gave a description of why he thought he'd win. I gave a description of why I thought I'd win. But some of these are — I just can't resist a couple of — pointing out a couple of them. You can see these on the web. But one of it is that a large collider will destroy the Earth in 10 years. Now there's a $1,000 bet on that, but I'm not sure who will collect. (Laughter) I thought that was an interesting one. And there was one other, and then we'll go to lunch. But there are a number of these that are quite interesting. At least one human alive in the year 2000 will still be alive in 2150. Now, that's 148 years from when the bet was entered, there's a $2,000 bet on that. And I hope Charlie is in contention for the — being the winner of that one.