2016 年股东大会 · 上午场

Charlie Munger always "gets the girl"

WARREN BUFFETTGood morning. I'm Warren Buffett. This is Charlie Munger. (Applause) I'm the young one. (Laughter) You may notice in the movie, incidentally, that Charlie is always the one that gets the girl, and he has one explanation for that. But I think mine is more accurate. As you know, every mother in this country tells her daughter at an early age, if you're choosing between two very old and very rich guys, pick the one that's older. (Laughter)

Welcome webcast viewers

WARREN BUFFETTI'd especially — we're webcasting this for the first time, so I'd especially like to welcome our visitors from all over the world. We're having this meeting simultaneously translated into Mandarin. And that poses certain problems for me and Charlie, because I'm not sure how sensible all our comments will come out once translated into Mandarin. In fact, I'm not so sure how sensible they come out initially sometimes. (Laughter) But we're delighted to have people around the world joining us.

Meeting agenda

WARREN BUFFETTNow the drill of the day is that I'll make a couple of introductions, and we'll show a couple of slides, and then we'll go on to questions from both our two panels and from the audience, we'll rotate them. And we'll do that until about noon. Actually, about a quarter of twelve, I'll give you a rundown on a bet that was made that we report on every year. But then I'll also, in connection with that, explain, and it ties in with it, what I really think is probably the most important investment lesson in the world. So we'll have that about a quarter of twelve and I hope that keeps you around. And then we'll break at noon for an hour for lunch. We'll reconvene at one o'clock. We'll proceed until 3:30 with questions. We'll then adjourn for fifteen minutes and at 3:45 convene the formal meeting.

Introductions

WARREN BUFFETTI'd like to just make a couple of introductions. I hope Carrie Sova is here. Do we have a spotlight? Carrie puts this whole meeting together. There she is. Wonder Woman. (Applause) Carrie joined us, Carrie joined us as a receptionist about six years ago, and I just kept throwing more and more problems at her. And she'd put together the 50th anniversary book, which we've actually expanded further this year. We have a revised edition. Charlie and I autographed a hundred of them. We interspersed them among the group being sold. And Carrie, while doing that, she also had a young baby girl, her second baby, late in January. But then she's gone ahead to put on this whole annual meeting. It's a remarkable achievement and I really want to thank her, it's been terrific. (Applause) Actually, we have one surprise guest. I think my youngest great-grandchild, who will be about seven months old, is also here today and if he happens to break out crying a lot, and don't let it bother you. It's just his mother is explaining to him my views on it inherited wealth and… (Laughter) We also have our directors with us. And they're here in the front row. I'll introduce them. If they'll stand when introduced, withhold your applause, no matter how extreme the urge to applaud them individually. And when we're finished, then you can go wild. First of all, Howard Buffett. Steve Burke. Sue Decker. Bill Gates. Sandy Gottesman. Charlotte Guyman. Tom Murphy. Ron Olson. Walter Scott. And Meryl Witmer. And that's our wonderful group. (Applause)

Q1 earnings

WARREN BUFFETTNow we just have two slides to show you now. The first one is a preliminary… summary figures — for the first quarter. And you'll notice that insurance underwriting — these are after-tax figures by category — are down somewhat. The basic underwriting at GEICO is actually improving, but we had some important hailstorms in Texas toward the end of the quarter. We've actually had some since the end of the quarter, too, so there were more cat losses in the first quarter than last year. Railroad earnings are down significantly, and railroad car loadings throughout the industry, all of the major railroads, were down significantly in the first quarter, and probably will continue to be down, almost certainly will continue to be down, the balance of the year. We have two companies which we added to the manufacturing, service, and retailing field: Precision Castparts and Duracell, but they were added during the quarter, so their full earnings aren't shown in the figures. In the other category, we have, and I don't like to get too technical here, and you should read the 10-K — 10-Q — when it comes out next weekend. But, when we borrow money in other currencies, and the only currency we've done that with is the euro, but we have a fair amount of money that we borrowed in euros, and the nature of accounting is that the change in value of the foreign exchange — change in value each quarter — is actually shown in interest expense. So if the euro goes up, we have a lot of extra interest expense, they're shown that way. It's not a realized factor, but it moves from quarter to quarter. And if the euro goes down, it offsets interest expense. It's a technicality, to some extent, because we have lots of assets in Europe and they are expressed in euros when they go up. It does not go through the income account. It goes directly to other comprehensive income. So I just, that figure which looks a little unusual, that's the reason for it. And we always urge you to pay no attention to the figures below operating earnings. They will bounce around from quarter to quarter, and we make no attempt to manage earnings in any way, to have them be smoother. We could do that very easily, but it'd be ridiculous. We make investment decisions solely on the basis of what we think the best investment decision is, not on the basis of how it will affect earnings in any quarter or in any year. And in the first quarter we exchanged - we completed a transaction that was begun over a year ago — whereby we exchanged our Procter and Gamble stock for cash and for Duracell, and that accounts for the large — largely accounts — for the large capital gain in the quarter. So, those are the figures for the first quarter.

Share count and earnings

WARREN BUFFETTAnd then, to illustrate what we're sort of all about here, I put up a second slide. And I started this slide in 1999. The reason being that at the end of 1998, we affected a large merger with Gen Re, and at that point we sort of entered a different era. After 1998 merger with Gen Re, we had a little over a 1,500,000-some A-equivalent shares out. And our shares — up to that point, we'd increase the outstanding shares by more than 50 percent over the 30-some years preceding that point. Since that time, as I note here, we've only increased the number of shares, over the next 17 years, we've only increased the shares outstanding by 8.2 percent. So these figures represent a fairly unchanged share count since that point, whereas the share count had changed quite a bit before. And, as you'll note, in terms of operations, I've told you that our goal at Berkshire is to increase the normalized earnings, operating earnings, every year. And I've said sometimes it will — we hope it will only be — it'll turn out to be only a little bit — and sometimes we can get some fairly decent jumps. But that's the goal. Now, earnings will not increase every year, because there's such a thing as a business cycle, and in times of recession we're going to earn less money, obviously, than in times when things are much better overall. And on top of that, we're heavily in an insurance business, and earnings there can be quite volatile because of catastrophes. And this chart shows you what's happened to the operating earnings since that time. Again, pointing out that shares outstanding have gone up very little during that period. You'll notice in 2001, when we suffered significant insurance losses due to 9/11, we actually were in the red, in terms of operating earnings. And you'll notice the figures are very irregular, but over time, by adding new subsidiaries, by further developing the businesses we have by bolt-on acquisitions, by the reinvestment of retained earnings, the earnings have moved up, in a very irregular fashion, quite substantially. I've put in, also, the capital gains we've achieved through investments in derivatives, and they total some $32 billion after-tax, close to fifty billion pretax. Those are not important in any given year. Those numbers can go all over the place. The main advantage, from my standpoint, in that $32 billion, is it gives us money to buy other businesses. What we really want to focus on, what we hope, is that the bigger under operations, five, or ten, or twenty, years from now, grow substantially, partly because retained earnings from operations, partly because our operations improve in their own profitability, partly because they make bolt-on acquisitions, partly because we have gains from securities, which enable us to buy even more businesses. But we don't manage, as you know, we don't manage to try to get any given number from quarter to quarter. We never make a forecast on earnings. We don't give out earnings guidance. We think it's silly. We do not have budgets at the parent company level. Most of our subsidiaries have budgets, but they don't submit them, or they're not required to submit them, to headquarters. We just focus, day after day, year after year, decade after decade, on trying to add earning power, sustainable and growing earning power, to Berkshire. So that's a quick summary. Now we'll move on to the questions. I just ask, with the audience, that you limit your question to one question. The multiple questions have a way of sneaking in, occasionally, but — so let's keep them to a single question.

"One of the problems of prosperity"

WARREN BUFFETTWe'll start off with the journalist group on my right, and we'll start off with Carol Loomis.

CAROL LOOMISGood morning. I'll make my very short little speech about the fact that the journalists and the analysts, too, have given Charlie and Warren no hint of what they're going to ask, so they will be learning for the first time what that's going to be, also. This question comes from Eli Moises. "In your 1987 letter to shareholders, you commented on the kind of companies Berkshire likes to buy, those that required only small amounts of capital. You said, quote, 'Because so little capital is required to run these businesses, they can grow, while concurrently making almost all of their earnings available for deployment in new opportunities.' "Today the company has changed its strategy. It now invests in companies that need tons of capital expenditures, are overregulated, and earn lower returns on equity capital. Why did this happen?"

WARREN BUFFETTYeah. Well, it's one of the problems of prosperity. The ideal business is one that takes no capital, but yet grows, and there are a few businesses like that, and we own some. But we are not able — we'd love to find one that we could buy for $10 or $20 or $30 billion that was not capital intensive and we may, but it's harder. And that does — that does hurt us, in terms of compounding earnings growth, because, obviously, if you have a business that grows and gives you a lot of money every year and doesn't take it — it isn't required in its growth — you know, you get a double-barreled effect from the earnings growth that occurs internally without the use of capital, and then you get the capital it produces to go and buy other businesses. And See's Candy was a good example of that. I've used that. Back when the newspaper business was good, our Buffalo newspaper was, for example, was a good example of that. The Buffalo newspaper was making, at one time, $40 million a year and had no capital requirement, so we could take that whole $40 million and go and do — go buy something else with it. But capital — increasing capital — acts as an anchor on returns in many ways. And one of the ways is that it drives us into — just in terms of availability — it drives us into businesses that are much more capital intensive. You just saw a slide, for example, on Berkshire Hathaway Energy, where we just announced, just in the last couple of weeks, we announced a $3.6 billion investment coming up in wind generation. And we pledged overall to have $30 billion in renewables. Anything that Berkshire Hathaway Energy does, anything that BNSF does, takes lots of money. We get decent returns on capital, but we don't get the extraordinary returns on capital that we've been able to get in some of the businesses we acquire that are not capital intensive. As I mentioned in the annual report, we have a few businesses that actually earn 100 percent a year on true invested capital. And clearly, that's a different sort of operation than something like Berkshire Hathaway Energy, which may earn 11 or 12 percent on capital — and that's a very decent return — but it's a different sort of animal than the business that's very low capital intensive — intensity. Charlie?

CHARLIE MUNGERWell, when our circumstances changed, we changed our minds.

WARREN BUFFETTSlowly and reluctantly. (Laughs)

CHARLIE MUNGERIn the early days, quite a few times we bought a business that was soon producing 100 percent per annum on what we paid for it and didn't require much reinvestment. If we'd been able to continue doing that, we would have loved to do it, but when we couldn't, we got to plan B. And plan B is working pretty well. In many ways, I've gotten so I sort of prefer it. How about you, Warren?

WARREN BUFFETTYeah, that's true. When something's forced on you, you might as well prefer it. (Laughter) But, I mean, we knew that was going to happen. And the question is, does it lead you from what looks like a sensational result to a satisfactory result. And we don't — we're quite happy with a satisfactory result. The alternative would be to go back to working with very tiny sums of money, and that really hasn't gotten a lot of serious discussion between Charlie and me. (Laughs)

Precisions Castparts acquisition

WARREN BUFFETTOK. From the analyst group, Jonathan Brandt.

JONATHAN BRANDTHi Warren. Thanks for having me again.

WARREN BUFFETTThanks for coming.

JONATHAN BRANDTMy first question is about Precision Castparts. Besides your confidence in its talented CEO Mark Donegan, what in particular do you like about their business that gave you the confidence to pay historically high multiple? Are there ways Precision can be even more successful as, essentially, a private company? For instance, are there long-term investments to support client programs or acquisitions that Precision can make now that they couldn't realistically have done as a publicly traded entity?

WARREN BUFFETTYeah, we completed the acquisition of Precision Castparts at the end of January this year. We agreed — we made the deal last August. And you covered the most important asset in your question. Mark Donegan, who runs Precision Castparts, is an extraordinary manager. I mean we've seen very — and Charlie and I've seen a lot of managers over the years — and I would almost rank Mark as one of a kind. I mean he is doing extremely important work, in terms of making — primarily making — aircraft parts. I would say that there's certainly no disadvantages to him to be working as a — and for that company to be a subsidiary of Berkshire and not be a public company. And I think he would say, and I think Charlie and I would agree with him, that over time, there could be some significant advantages. For one thing, he can spend 100 percent of his time now on figuring out better things to do with aircraft engines. And it was always his first love to be thinking about that, and he did spend most of his time, but he also had to spend some time, you know, explaining quarterly earnings to analysts and perhaps negotiating bank lines and that sort of thing. So his time, like all of our managers, can be spent exactly on what makes the most sense to them and their business. Mark does not have to come, ever, to Omaha to put on some show for me, in terms of justifying a billion dollar acquisition or plant investment. He wastes — doesn't have to waste his time on anything that isn't productive. And running a public company, you do waste your time on quite a bit of stuff that isn't productive. So I would say we've taken the main asset of Precision Cast and made it — made him in this case — even more valuable to the company. In terms of acquisitions, Precision's always made a number of them. But, as being part of Berkshire, there's really no limitations on what can be done. And so, there again, his canvas has been broadened, in large, with the acquisition by Berkshire. I see no downside whatsoever. If he needs capital, I've got an 800 number. And, you know, he wasn't paying much of a dividend before, but he doesn't have to pay any dividend now. Precision Cast will do better under Berkshire than it would have independently, although it would have done very, very well independently. Charlie?

CHARLIE MUNGERWell, in the early days, we used to make wiseass remarks. And Warren would say we buy a business an idiot can manage, because sooner or later, an idiot will. And we did buy some businesses like that in the early days, and they were widely available. Of course we'd prefer to do that, but the world has gotten harder, and we had to learn new and more powerful ways of operating. A business like Precision Castparts requires a very superior management that's going to stay superior for a long time. And we gradually have done more and more and more of that, and it's simply amazing how well it works. I think, to some extent, we've gotten almost as good at picking the superior managers as we were in the old days at picking the no-brainer businesses.

WARREN BUFFETTYeah, we would love to find — we won't be able to find them because they're very rare birds — but we would love to find another three or four of a similar type to Precision Castparts, where they, forever, are going to be producing something that — where quality is enormously important, where the customers depend very heavily on them, when there's contracts that extend over many years, and where people don't simply just take the low bid in order to get this gadget of one sort or another. It's very important that you have somebody there that has enormous skill running the business, and their reputation, among aircraft manufacturers, engine manufacturers, you know, is absolutely unparalleled.

"Can't imagine anybody any happier"

WARREN BUFFETTOK, now we go to the audience, and we go up to section 1. And if you'll give your name and where you're from, I'd appreciate it.

AUDIENCE MEMBERHi, good morning. My name is Gaspar. I'm Spanish and I come from London. I admire you both in many ways, but I would like to know that, when looking backwards, what would you have done differently in life in your search for happiness?

WARREN BUFFETTWell, I'm 85 and I can't imagine anybody any happier than I am. So — by accident or whatever, I still — I mean, you know, I'm sitting here eating exactly what I like to eat, doing in life exactly what I love to do, with people I love. So it really doesn't get any better than that and I — (applause) I did decide, fairly early in life, that my favorite employer was myself. (Laughter) And, that — I think that presented — I've managed to avoid, really, aggravation of almost any sort. Really, you know, if you, or those around you that you love, have health problems or something, I mean, that is a real tragedy, and there's not much you can do about it but accept it. But Charlie and I have, every day, been blessed. I mean, here Charlie is, 92, and he's doing, every day, something that he finds fascinating. You know he — I think he probably finds what he is doing at 92 as interesting, as fascinating, and as rewarding, as socially productive, you know, as any period you can pick in his life. And so we've been extraordinarily lucky. We've been, you know, we're lucky it's a partnership. It's more fun doing things as a partnership. So, I've got no complaints. It would be very churlish of me to have any kind of complaint. I would say, if you're talking about business life, I don't think I would have started with a textile company. (Laughter) Charlie?

CHARLIE MUNGERWell, looking back, I don't regret that I didn't make more money, or become better known, or any of those things. I do regret that I didn't wise up as fast as I could have and — But there's a blessing in that, too. Now that I'm 92, I still have a lot of ignorance left to work on. (Laughter and applause)

Reinsurance outlook a factor in Munich Re and Swiss Re sales

WARREN BUFFETTOK, Becky Quick.

BECKY QUICKThis question comes from Solomon Ackerman, who's in Frankfurt, Germany. He wants to know why Berkshire has significantly sold down their holdings in Munich Re, which is the world's biggest reinsurance company, based in Germany, while sticking with the reinsurance operations within Berkshire, like Berkshire Hathaway Reinsurance and General Re. Would you reduce exposure to Berkshire Hathaway Reinsurance and General Re if they were listed companies? And he's hoping that this can bring out some of your insights as to what's happening in the reinsurance business right now.

WARREN BUFFETTYeah, we — I said in the annual report that I thought it was very likely that the reinsurance business would not be as good in the next ten years as it has been in the last ten years. I may be wrong on that, but that's just a judgment based on seeing the competitive dynamics of the reinsurance business now versus 10 or 20 years ago. Both Munich — we sold our entire holdings, which were substantial — of Munich Re and Swiss Re. We owned about 3 percent of Swiss Re, and we own more than 10 percent of Munich Re, and last year we sold those two holdings. They're fine companies. They're well-managed companies. I like the people that run them. I think their business — the business of the reinsurance companies generally — is less attractive for the next 10 years than it has been for the last 10 years. In part, that's because what's happened to interest rates. A significant portion of what you earn in insurance comes from investment of the float. And both of those companies, and for that matter almost all of the reinsurance industry, is somewhat more restricted in what they can do with their float, because they don't have this huge capital cushion that Berkshire has, and also because they don't have this great amount of unrelated earning power that Berkshire has. Berkshire has more leeway in what it can do simply because it does have capital that's many times what its competitors have, and it also has earning power coming from a whole variety of unrelated areas — unrelated to insurance. So it was not a negative judgment, in any way, on those two companies. It was not a negative judgment on their managements. But it was a — at least — a mildly negative judgment on the reinsurance business. Now, we have the ability at Berkshire to actually rearrange, to a degree — we are certainly affected by industry factors — but we have more flexibility in modifying business models, and we've operated that way, over the years, in insurance generally, and particularly in reinsurance. So, a Munich, a Swiss, all the major reinsurance companies, except for us, is pretty well tied to a given type of business model. They don't really have as many options, in terms of where capital gets deployed. They have to continue down the present path. And I think they'll do fine. But I don't think they will do as fine in the next 10 years as they have in the last 10. And I don't think if we played the same game as we were playing the last 10, we would do as well, but we do have considerably more flexibility — in terms of how we conduct all of our insurance operations, but particularly in reinsurance — we have an extra string to our bow that the rest of the industry doesn't have. The amount of capital that's come in to the reinsurance business — you know, it is no fun running a traditional reinsurance company and having money come in — particularly if you're in Europe — and have money come in, and look around you for investment choices and find out that a great many of the things that you were buying a few years ago now have negative yields. The whole idea of float is it's supposed to be invested at a positive rate — a fairly substantial — positive rate. And that game has been over for a while, and it looks like it will be, at least, unattractive, if not terrible, for a considerable period in the future. Charlie?

CHARLIE MUNGERYeah. But, you know, there's a lot of new capacity in reinsurance and there's a lot of very heavy competition. A lot of people from finance have come over into reinsurance, and all the old competitors remained, too. That's different from Precision Castparts, where most of the customers would be totally crazy to hire some other supplier, because Precision Castparts is so much more reliable and so much better. Of course, we like the place with more competitive advantage. We're learning.

WARREN BUFFETTThe — to put it in terms of Economics 101 — basically, in reinsurance, supply has gone up and demand has not gone up. And some of the supply is driven by investment managers who would like to establish something offshore where they don't have to pay taxes, and reinsurance is sort of the easiest beard — what you might call beard — behind which to actually engage in money management in a friendly tax jurisdiction. And you can set up a reinsurance operation with very few people, by taking large chunks of what brokers may offer. It's not the greatest reinsurance in the world, and a couple of the operations that have done that have proven that statement to be right. But nevertheless, it is a very, very easy way to have a disguised investment operation in a friendly tax jurisdiction. But that becomes supply in the reinsurance field, and supply has gone up relative to demand, and it looks to me like that will continue to be the case. And couple that with the poor returns on float, and it's not as good a business as it was.

Rise in auto death rate hurt GEICO

WARREN BUFFETTNow we'll talk to an insurance man about it, Cliff Gallant.

CLIFF GALLANTThank you. In terms of growth in profitability, GEICO really got whupped by Progressive Direct over the last year. In 2015, Progressive Direct's auto business group grew its policy count by 9.1 percent. GEICO, only 5.4. And in terms of profitability, the combined ratio at Progressive was a 95.1 and GEICO's was a 98.0. Is this evidence that Progressive's investments in technology, like Snapshot, investments that GEICO has spurned, is it making a difference in a time of difficult loss trends? Why is GEICO suddenly losing to Progressive Direct?

WARREN BUFFETTYeah, well, I would say this. Over the — over the last — well, I forget what year it was we passed Progressive and what year it was we passed Allstate, but GEICO's growth rate in the first quarter was not as high as in the past couple first quarters, but it was it was quite satisfactory. Now the first quarter is, by far, the best quarter for growth. But last year, both frequency — how often people had accidents — and severity — which is the cost per accident; in other words, just how much those accidents cost you — both of those went up quite suddenly and substantially. And Progressive's figures show that they were hit by that less than Allstate and GEICO and some others. But I don't think you'll see, necessarily, those same trends this year. It's an interesting thing. Last year, for the first time in I don't know how many years, the number of deaths in auto accidents, per 100 million miles, went up. Now, if you go back to the mid-1930s, there were almost 15 people killed per 100 million miles driven. It got down to just slightly over one — from 15 — to one. You had almost as many — you had roughly as many — people killed in auto accidents in the mid-1930s, about 30, 32,000 a year, as we had last year — or the year before — when people drove almost 15 times as many miles. Cars have gotten far, far, far, far safer. And it's a good thing, because if we'd had the same rate of deaths from auto accidents as we had in the '30s, relative to miles driven, we would have had over a half a million people die last year from auto accidents, instead of a figure closer to 40,000. But last year, for the first time, there was more driving, and I think there was more distracted driving. So you really had this uptick in frequency, and more important, in severity. GEICO has adjusted its rates. As I mentioned, my own prediction would be that the underwriting margins at GEICO will be better this year than last year, although you never know when catastrophes are coming along. March and April have had a lot of cat activity. I made a bet a long time ago on — a mental one — on the GEICO model versus the Progressive model. And, as I say, they were significantly ahead of us in volume a few years back. Then we passed them and we passed Allstate and, as I put in the annual report, I hope on my 100th birthday that the GEICO people announce to me that they passed State Farm. But I have to do my share on that, too, by getting to 100. So we'll see what happens on that particular one. (Laughs) Charlie?

CHARLIE MUNGERWell, I don't think it's a tragedy that some competitor got a little better ratio from one period. GEICO's quadrupled its market share since we bought all of it.

WARREN BUFFETTQuintupled.

CHARLIE MUNGERYeah, quintupled, all right. (Laughter) I don't think we should worry about the fact that somebody else had a good quarter.

WARREN BUFFETTYeah. (Applause) I think it's far more sure that GEICO will pass State Farm someday than that I'll make it to 100, I'll put it that way. (Laughs)

Amazon has "disrupted plenty of people"

WARREN BUFFETTOK. We'll go to the shareholder from station 2.

AUDIENCE MEMBERGreetings to all of you from the Midwest of Europe. I'm Norman Rentrop from Bonn, Germany, a shareholder since 1992. My question is about the future of salesmanship in our companies. Warren, you have always demonstrated a heart for direct selling. When we met you in the midst of a tornado warning, in the barbershop, you immediately offered to write insurance for us. (Laughter)

WARREN BUFFETTThat's true. They were all huddled down there in the barbershop. There wasn't going to be any tornadoes, so I told them they give me a dollar, I'd — they can go upstairs and if anything happened to them I'd pay them — I forget — a million dollars, or something of the sort. (Laughter)

AUDIENCE MEMBERNow we see with the rise of Amazon.com and others a shift from push marketing to pull marketing. From millions of catalogs having been sent out in the past, to now consumers searching on what they are looking for. What is your take on how this shift from push to pull marketing will affect our companies?

WARREN BUFFETTWell, Norman, the development you refer to is huge. I mean, really huge. And it isn't just Amazon, but Amazon is a huge part of it and what they've accomplished, in a fairly short period of time, and continue to accomplish, is remarkable. The number of satisfied customers they've developed and — We don't make any decision involving even the manufacturing of goods, the retailing, whatever it is, without thinking long and hard about what the world will look like in five or 10 or 20 years with that powerful trend — really hugely powerful trend — that you just described. So, we're not — we don't look at that as something where we're going to try and beat them at their own game, you know. They're better than we are at that. And so, Charlie and I are not going to out-Bezos Bezos, by a long shot. But we are going to think about that. It does not worry us, obviously, with Precision Cast — it doesn't worry us, in terms of the overwhelming majority of our businesses. But it is a huge economic trend that, 20 years ago, was not on anybody's radar screen, and lately, has been on everybody's radar screen. And many of them have not — and including us, in a few areas — have not figured the way to either participate in it or to counter it. GEICO's a good example of a company in an industry that had to adjust to change, and some people made the change better than others. We were slow on the internet. The phone had worked so well for us, you know, this traditional advertising, and the phone had worked so well, you know, there's always a resistance to think about new possibilities. When we saw what was happening on the internet, we jumped in with both feet and you know, with mobile and whatever. But — but there are — capital — the nature of capitalism is somebody's always trying to figure — if you've got some good business — they're always trying to figure out how to take it away from you and improve on it. And the effect — I would say just of Amazon, but others that are playing the same game — the effect on industry — the full effect — is far from having been seen. I mean, it is a big, big force and it will — it already — has disrupted plenty of people and it will disrupt more. I think Berkshire is quite well situated. For one thing, one big advantage we have is we didn't ever see ourselves as starting out in one industry. I mean, we didn't go into — we went into department stores — but we didn't think of ourselves as department store guys, or we didn't think of ourselves as steel guys, or tire guys, or anything of that sort. So we've thought of ourselves as having capital to allocate. If you start with a given industry focus and you spend your whole time working on a way to make a better tire, or whatever it may be, I think it's hard to have the flexibility of mind that you have if you just think you have a large — hopefully large — and growing pile of capital, and trying to figure out what is the best — next — best next move that you can make with that capital. And I think we do have a real advantage that way. But I think — I think the fellow that — I think Amazon's got a real advantage, too, in this intense focus on having, you know, hundreds of millions of, generally, very happy customers getting very quick delivery of something that they want to get promptly, and they want to shop the way they shop. And if I owned a bunch of shopping malls, or something like that, that would be — I'd be thinking plenty hard about what they might look like 10 or 20 years from now. Charlie?

CHARLIE MUNGERWell, I would say that we failed so thoroughly in retailing when we were young that we pretty well avoided the worst troubles when we were old. I think, net, Berkshire has been helped by the internet. The help at GEICO has been enormous. And it's contributed greatly to the huge increase in market share. And our biggest retailers are so strong that they're — they'll be among the last people to have troubles from Amazon.

WARREN BUFFETTI didn't get that dollar from you, Norman, actually that — after I gave you that wonderful advice.

Defending Coca-Cola from sugar health worries

WARREN BUFFETTAndrew?

ANDREW ROSS SORKINThank you, Warren. Great to see you today. Got a lot of questions on this particular topic, and this question is a particularly pointed one. "Warren, for the last several years at this meeting, you've been asked about the negative health effects of Coca-Cola products, and you've done a masterful job dodging the question, by telling us how much Coke you drink personally. (Laughter) "Statistically, you may be the exception. According to a peer-reviewed study by Tufts University, soda and sugary drinks may lead to 184,000 deaths among adults every year. "The study found that sugar-sweetened beverages contributed to 133,000 deaths from diabetes, 45,000 deaths from cardiovascular disease, 6,450 deaths from cancer." Another shareholder wrote in about Coke, noted that you declined to invest in the cigarette business on ethical grounds, despite once saying, quote, "It was a perfect business because it cost a penny to make, sell it for a dollar, it's addictive, and there's fantastic brand loyalty." "Again, removing your own beverage consumption from the equation, please explain directly why we Berkshire Hathaway shareholders should be proud to own Coke."

WARREN BUFFETTYeah, I think people confuse — (Applause) — you know, the amount of calories consumed. I mean, I happen to elect to consume about 700 calories a day from Coca-Cola. So I'm about one-quarter Coca-Cola, roughly. (Laughter) Not sure which quarter, and I'm not sure we want to pursue the question. I think if you decide that sugar, generally, is something that the human race shouldn't have — I think the average person consumes something like 150 pounds of dry weight sugar here and 125 pounds — I mean, you know, it — What's in Coca-Cola, largely, are more of the calories come from is sugar. I elect to get my 26 or 2700 calories a day from things that make me feel good when I eat them. And that's been my sole test. That wasn't a test that my mother necessarily thought was great, or my grandfather. But there are over 1.9 billion 8-ounce servings of some Coca-Cola drink. Now they have an enormous range of products, you know. I mean, you have a few that are called Coke, Diet Coke, Coke Zero and that sort of thing, but they have literally thousands of products. One-point-nine billion. That's — what is that — 693,500,000,000 8-ounce servings a year, except it's a leap year. (Laughter) That's almost 100 8-ounce servings per capita for 7 billion people in the world every year. And that's been going on since 1886. And I would find quite spurious the fact that somebody says, if you're eating 3500 or so calories a day, and you're consuming 27-or-8 hundred, and some of the 3500 is Coca-Cola, to lay it — any particular obesity-related illnesses — on the Coca-Cola you drink. You have the choice of consuming more than you use, I mean. And I make a choice to eat — or get — 700 calories from this, and I like fudge a lot, peanut brittle. And I am a very, very, very happy guy and I don't know — I think — and I'm serious about this — I think if you are happy every day, you know, it may be hard to measure, but I think you're going to live longer as well. So there may be a compensating factor. (Applause) And I really wish I'd had a twin, and that twin had eaten broccoli his entire life, and we both consume the same number of calories. I know I would have been happier. And I think the odds are fairly good I would have loved longer. I think Coca-Cola is a marvelous product, you know. I mean, if you consume 3500 or 4000 calories a day, and live a normal life, in terms of your metabolism, you know, something's going to go wrong with your body at some point. But if you keep — I think if you balance out the calories so that you don't become obese, I do — I have not seen evidence that convinces me that, you know, I'll make it — it will be more likely I reach 100 if I suddenly switch to water and broccoli. Incidentally, a friend of mine, Arjay Miller, a remarkable man — born about 100 miles from here, west — eighth child — near Shelby, Nebraska. He said Shelby's population was 596 and it never changed because every time some girl had a baby a guy had to leave town, it was a very stable. (Laughter) But Arjay went on to be president of Ford Motor Company, from this farm near Shelby, and he had his 100th birthday on March 4th of this year. So I went out to see Arjay for his birthday on March 4th, and Arjay told me that there were 10,000 men in the United States that had lived to be 100 or greater, and there were 45,000 women that were 100 or greater. So I came back and I checked that on the internet — I went to the census figures — and sure enough, that is the ratio. There's 10,000 men over 100, roughly, and 45,000 women. So if you really want to improve your longevity prospects, I mean a guy in my position, you have a sex change. (Laughter) I mean as a — you're 4 1/2 times more likely to get to be 100. That sounds like one of those studies that people put out. It's just a matter of facts, folks. I think I'll have Charlie go first, though, on that one. (Laughter) Charlie, do you have any comments?

CHARLIE MUNGERWell —

WARREN BUFFETTHave some fudge.

CHARLIE MUNGERI like the peanut brittle better than the Coke. I drink a lot of Diet Coke and — I think the people who ask questions like that one always make one ghastly error that's really inexcusable. They measure the detriment without considering the advantage. Well, that's really stupid. That's like saying we should give up air travel through airlines because 100 people die a year in air crashes or something. That would be crazy. The benefit is worth the risk. And if every person has to have about 8 or 10 glasses of water every day to stay alive, and it's pretty cheap and sensible, and it improves life to have a little extra flavor to your water, and a little stimulation, and a little calories, if you want to eat that way, there are huge benefits to humanity in that, and it's worth having some disadvantage. We ought to have, almost, a law in the editorial — I'm sounding like Donald Trump — (laughter) — where these people shouldn't be allowed to cite the defects without citing the offsetting advantage. It's immature and stupid. (Applause)

Renewable energy investments

WARREN BUFFETTOK. Gregg Warren.

GREGG WARRENWarren, with both coal fired and natural gas plants continuing to generate around two-thirds of the nation's electricity, and renewables accounting for less than 10 percent, there remains plenty of room for growth. At this point, Berkshire Energy, which has invested heavily in the segment, is one of the nation's largest producers of both wind and solar power, and yet still only generates around one-third of its overall capacity from renewables. As you noted earlier, MidAmerican recently committed another $3.6 billion to wind production, which should lift the amount of electricity it generates from wind to 85 percent by 2020. You've also had the company, overall, pledging to have around 30 billion in renewables longer term. The recent renewal of both the wind and solar energy tax credits has made this kind of investment more economically viable and should clear the path for future investments. Eliminating coal-fired plants looks to be the main priority, but natural gas-fired plants are also fossil fuel driven and are exposed to the vagaries of energy prices. Is the endgame here for Berkshire Energy to get 100 percent of its generation capacity converted over to renewables, and what are the risks and rewards associated with that effort? After all, the company operates in a highly-regulated industry, where rates are driven by an effort to keep customer costs low, while still providing adequate returns for the utilities.

WARREN BUFFETTYeah, well, I think implicit in what you say is that we do — any decision we make — including the one that we just showed on the — during the movie to — on any decision about new generation, changes in generation — has to go through what's usually called the Public Utility Commission, they may have different names in a few states. But the utility industry is overwhelmingly regulated at the state level, and we cannot make changes that are not approved by the Public Utility Commission. We've had more problems, for example, in bringing in renewables in our western utility, Pacific Corp, because it's, in effect, regulated by six states — I believe it's six states — and they don't necessarily agree on how the cost and benefits should be divided if we put in a bunch of renewables, and we have to follow their instructions. Iowa was just been marvelous about encouraging — I mean at every level — I mean the consumer groups, the governor, you name it — they have seen the benefits. And in Iowa it's literally true that we have one major competitor, called Alliant, and they have not — either been able to — I don't know the reasons — but they have not pursued renewables the way we have, so our rates are considerably lower than theirs. And, if you look at their budget projections — although they're substantially higher rates than we have now — they may well need a rate increase within a year or so. And with our latest expansion, we have said that we will not need a rate increase till 2029 at the earliest. That's thirteen years off. So there've been great benefits if you have a regulation that works with you on that, but it is a determination that is made at the state level. Now, the federal government has encouraged, in a major way, the development of renewables by this production tax credit, which currently amounts to about 2.3 cents per kilowatt hour. We would not have the renewable generation that we have if it hadn't been for the fact that that building of those projects is subsidized by the federal government, because the benefits of reducing solar emissions are — or carbon emissions — are worldwide, and therefore it's deemed proper that the citizenry as a whole should participate in subsidizing the cost of reducing those emissions. And that has encouraged — in fact, it's allowed — things like have happened in Iowa as well. But the degree to which the renewables replace, primarily coal — although there's plenty of emissions connected with natural gas if you trace it all the way through — will depend on governmental policy. And I think, so far, I think it's been quite sensible in encouraging — having the cost borne by society as a whole, in terms of reduced tax revenues, and having the benefits, which is less CO₂, into the atmosphere. They also, broadly — you know, they're not just limited to the people of Iowa when we build that. That's a benefit that accrues to the world. I think you'll see continued change. It will vary by jurisdiction. And we would hope — we've got the capital, we've got lots of taxes, federal taxes, paid in our consolidated returns — so we're in a particularly advantageous position to take advantage of massive investments that companies with limited tax appetites couldn't handle. I think you'll see us be a very big player. But governmental policy is going to be, you know, the major driver. Charlie?

CHARLIE MUNGERYeah, I think we're doing way more than our share of shifting to renewable energy, and we're charging way lower energy prices to our utility customers than other people. If the whole rest of the world were behaving the way we are, it would be a much better world. I will say this about the subject, though, and that is that I think that the people who worry about climate change as the major trouble of Earth don't have my view. I think that we — I like all this shifting to renewables, but I have a different reason. I want to conserve the hydrocarbons, because eventually, I think, we're going to use every drop, humanity, for chemical feedstocks. And so I'm in their camp, but I've got a different reason.

WARREN BUFFETTOne thing you'll find — might find — kind of interesting: Nebraska has not done much with wind power. And maybe three miles from — two miles — from where we're sitting, right across the river, people are buying their electricity cheaper, in Council Bluffs right across the river, than they are in Omaha. And yet Omaha — Nebraska is entirely a public power state, so there's no stockholders who have to have any earnings, the bonds are issued on a tax-exempt basis, and yet electricity is considerably cheaper right across the river. And, you know, the wind blowing doesn't just start at the Missouri River. I mean, it comes across Nebraska and that wind could be captured. And, so far, it really hasn't. And the real irony is that because our electricity is so much cheaper in Iowa, you have these massive server farms of people like Google. It's become a tech haven for these operations that just gobble up electricity. And Iowa has gotten plant after plant after plant and job after job after job, and increased property tax — I mean gotten more property tax revenues — and that's being done — the Google server is probably seven or eight miles from here — and it's located in Iowa because we have cheap wind-generated electricity. And it's creating jobs. It's fascinating. Nebraska has prided itself on public power. It was originated back, I believe, in the '30s when George Norris was a very powerful senator here and it's been a source of pride. But lately, it's been a source of cost, too.

Derivatives still a "danger to the system"

WARREN BUFFETTOK, shareholders section 3.

AUDIENCE MEMBERGood morning Mr. Buffett and Mr. Munger. My name's Adam Bergman. I'm with Sterling Capital in Virginia Beach. In your 2008 shareholder letter, you said, "Derivatives are dangerous… They have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks." So my question for you is: how do you analyze and value companies like Bank of America Merrill Lynch and other commercial banks that Berkshire has investments in, relative to their significant derivative exposures? Thanks.

WARREN BUFFETTYeah, derivatives do complicate the problem very dramatically. Now, they are moving away to being collateralized, which helps. But there's no question that if you asked me to describe the derivative position of the B of A, for example, I would know that they have done a conscientious job and worked hard at properly evaluating. But the great danger in derivatives is if there's a discontinuity. If there's not discontinuities, you probably don't have much of a problem, assuming they get marked to market, and collateralized, and so on. But if the system stopped for a while — the system stopped after 9/11 for three or four days. It stopped at the time of World War One. They closed the New York Stock Exchange for many months. They debated closing the stock exchange, very seriously, the day after October 19, 1987. And it was — there were a lot of people that wanted to close it. And on that Tuesday morning, it looked like it was about to stop, but it continued. But if you had a — if you have a major cyber, nuclear, chemical, biological, attack on the country — which will certainly happen at some point — if you have a major discontinuity, then you'll have a lot of problems, a lot of problems. But you will also — when things reopen — you will find there can be enormous gaps in things that you thought were fully protected by collateral, and that sort of thing, or netting arrangements, and that type of thing. So I regard very large derivative positions as dangerous. We inherited a modest- sized position at Gen Re and, in a benign market, we lost about $400 million, just in trying to unwind it, with no pressure on us whatsoever. So I do think it continues to be a danger to the system.

CHARLIE MUNGERBy the way, the accountants blessed that big derivative position as being worth a lot of money. They were only off, what, many hundreds of millions.

WARREN BUFFETTYeah, well. Charlie found one position when he was on the audit committee at Salomon. I think it was mismarked by $20 million. I actually, by happenstance, happen — I do know of one incredibly mismarked position — doesn't affect any of our operations — but it almost staggers the mind to know the way that position is marked. And you can only come to the conclusion that some trader got somehow — influenced whoever did mark it, or marked it himself, heaven forbid, and probably just influenced someone. Or they didn't know enough. Some of these things get so complicated, they are very hard to evaluate. That's the kind that have the most profit in them, usually, so they were quite enthusiastic about those when we were at Solomon. They can be extraordinary hard to mark. And, like I say, I know one that's so mismarked it would blow your mind. And, you know, the auditors, I don't think, are necessarily capable of holding that behavior in check. It's very interesting, because now there's really four big auditing firms, and obviously, they're auditing companies where there's a derivative position, and they're auditing company A that's on one side of the transaction, and they're auditing company B that's on the other side of the transaction. In some cases, it's the same auditor. And I will guarantee you that there's plenty of times when the marks on what they're attesting to are significantly different, which would be an interesting exercise to pursue, in terms of checking those numbers out. Derivatives are still dangerous, in large quantities, and we have — we would not do them, on a collateralized basis, because if there was a discontinuity, I don't know exactly where we would end up, and I'm never going to get us in a position where we could have money demanded of us and not be able to fulfill it with ease, and with me sleeping well. So we won't engage in it. We've got some in runoff, but so far we've made money and had the use of money for a decade or more, and it's been very attractive for us. But that does not entice me, at all, into doing any derivative transactions that would involve collateral, when collateral is not required. It's still a potential time bomb in the system. Anything where discontinuities — and basically that means closing up and stopping trading markets from functioning — anything where discontinuities can exist, can be real poison in markets. Kuwait, some years ago, went to a very delayed system on settlement of stock purchases, so they didn't have to settle up for six months or thereabouts. And it caused all kinds of problems, because, you know, you've got an IOU from somebody for six months and if you got zillions of those, a lot of trouble can ensue. So I agree with your general caution. I'm not in the least troubled by our Bank of America investment, nor our Wells Fargo — we added to Wells Fargo — and our Bank of America position, right now, is a preferred stock, but we're very likely to exercise the warrants on that. On the other hand, there are a great number of banks in the world. If you take the 50 largest banks in the world, we wouldn't even think about probably 45 of them. Wouldn't you say that, Charlie?

CHARLIE MUNGERWell, we're in the awkward position where I think we'll probably make about $20 billion out of derivatives, and just those few contracts that you and Ajit [Jain] did years ago. All that said, we're different from the banks. We would really prefer it if those derivatives had been illegal for us to buy. It would have been better for our country.

Float still "useful" despite low interest rates

WARREN BUFFETTCarol?

CAROL LOOMISThis questions relates to something that Warren briefly said earlier today. The question comes from Lynn Palmer, who is just finishing her freshman year at a Houston, Texas high school. "My question," she says, "concerns the float generated by Berkshire's insurance companies. In Mr. Buffett's 2015 annual letter, he said that the large amount of float that Berkshire possesses allows the company to significantly increase its investment income. "But what happens when interest rates decline? If the U.S. were to implement negative interest rates in the same way that the eurozone and Japan have done, how would Berkshire be affected?"

WARREN BUFFETTYeah, well some of our float actually exists in Europe, where we have the problem of negative interest rates on very high-grade and short-term and medium — even medium-term bonds — and obviously anything that reduces the value of having money is going to affect Berkshire, because we're always going to have a lot of money. We — because we have so much capital, and so many sources of earning power, we have the ability, quite properly, to use our float in — to a certain degree — in ways that most insurance companies can't think about. So we can find things to do, but sometimes we get, you know we — we've got fifty-odd billion of short-term government securities now, and we're going to get another $8.3 billion, in all likelihood, early in June when our Kraft Heinz preferred is called, so we'll be back over 60 billion again very soon. So we've got 60 billion out, that's out at, say, a quarter of 1 percent. Well, the difference between a quarter of 1 percent and minus a quarter of 1 percent, you know, is not that great. I mean, it's almost as painful to have 60 million out at a quarter of a percent, as to have it out at a negative rate. Float is not worth as much to insurance companies now as it was 10 years ago or 15 years ago. And that's true at Berkshire. I think it's worth considerably more to us than it is to the typical insurance company, because I think we have a broader range of options as to what to do with it. But there's no question about it, that having a lot of money around now is not just a problem for insurance companies. It's a problem for retirees. It's a problem for anybody that's stuck with fixed-dollar investments and finds that their income now is a pittance or, you know, in Europe, perhaps a negative rate. And that was not something in their calculation at all 15 years ago. We love the idea, however, of increasing our float. I mean that money has been very useful to us over time. It's useful to us today, even under present conditions, and it's likely to be very useful to us in the future. It's shown as a liability, but it's actually a huge asset. Charlie?

CHARLIE MUNGERI've got nothing to add.

WARREN BUFFETTHe's now in full swing. (Laughter)

We still love BNSF despite falling coal shipments

WARREN BUFFETTJonathan?

CHARLIE MUNGERWe can't hear you.

JONATHAN BRANDTTesting. The railroad industry seems, right now, to be suffering from exposure to some of the weakest parts of the economy, with volume declines of varying magnitudes in coal, oil, sand, and metals. Even intermodal, usually a steady source of growth, has been relatively weak of late. How much of the weakness is cyclical, how much is secular? In the last 15 months, the other western railroad's market capitalization is down by 30 — 35 percent — as projections of future growth have come down. Is your estimate of BNSF's intrinsic value down by a material amount during the same period, or is your view of the value of BNSF's irreplaceable network unaffected by these short-term wiggles?

WARREN BUFFETTWell, I would — certainly the decline in coal — which is a very important commodity — it's about 20 percent of revenues — that's secular. Now, there's other factors that may cause the line of decline to jiggle around. We had a very mild winter, and we went into the winter with utilities carrying unusual amounts of coal. And ironically, part of the reason for that was that our service the year before had been bad and they'd gotten low on coal, so then they compensated by bringing in more than they needed, just to catch up. And because the weather was mild, electricity use was poor in the winter time. And so they continue, at this point, to have considerably more coal on hand than they would like. So they are not only — they're trying to under order what they will be using, and that has a little effect. But the decline in coal, for sure, is secular. And at 20 percent of revenues, that's a significant factor. But — and it's true that the market, generally, got very enthused about railroad stocks a year or two ago, so they sold up a lot. And now that people have seen that car loadings are down and earnings are down, in some places, that equity valuations have come down. We don't — we love the fact we own BNSF. We think we bought it at an attractive price. We'd love to be able to buy a second thing exactly like it at that price. We'd do it in a second. We'd even pay a little bit more, probably. But we don't mark up, and down, our wholly-owned businesses, based on stock market valuations. Obviously, stock market valuations are some factor in our thinking, but we are not marking our wholly-owned businesses to market because we know we're going to hold them forever. And we regard BNSF as a very good business to hold forever. But it will it will lose coal volume and, you know, it may lose in other areas, but it will gain in other areas. It's a terrific and valuable asset, and it will learn a lot of money this year, but it won't earn as much money as it earned last year. Charlie?

CHARLIE MUNGERI've got nothing to add.

Don't envy people making money from risky behavior

WARREN BUFFETTOK. Station 4.

AUDIENCE MEMBERHi, Warren. Hi, Warren and Charlie. Great to see you. This is Cora and Dan Chen from Taulguard Investments of Los Angeles. This annual meeting reminds me of the magical world of Hogwarts, of Harry Potter. This arena is our Hogwarts. Warren, you are our Headmaster and Professor Dumbledore. (Laughter)

WARREN BUFFETTI haven't read Harry Potter, but I'll take it as a compliment. (Laughter)

AUDIENCE MEMBERCharlie is our Headmaster Snape, direct, and full of integrity. The magic of long-term, concentrated, value investing is real, yet similar to Harry Potter, the rest of the world doesn't believe we exist. Your letter to me has changed my life. Your "Secret Millionaire's Club" has changed my children's life. They go to class chatting about investing. My question is for my children watching at home today and the children in the audience. How should they look at stocks, when every day in the media they see companies that have never made a dime in their life go IPO? They're dilutive and they see a lot of very short-term spin. The cycle is getting shorter and shorter. How should they view stocks, and what's your message for them? Finally, Cora and I would love to thank you in person and shake your hand personally today. I'll repeat what I said last year: thank you for putting — setting — the seeds for my generation to sit in the shade, and for my children's generation to sit in the shade with the "Secret Millionaire's Club." I truly walk amongst giants. Thank you.

WARREN BUFFETTWould you mind repeating the whole thing? (Laughter) "The Secret Millionaire's Club," we want to give great credit to Andy Heyward on that. I think it has helped — I know it's helped — thousands and thousands of children and Andy — it was Andy's idea — and it grows in strength. And having young children learn good lessons, in terms of handling money, and making friendships, and just generally behaving as better citizens is a great objective, and Andy makes it easy for them to do. So, on his behalf, I accept your comments. You don't really have to worry about, you know, what's going on in IPOs, or people making money. People win lotteries every day, but there's no reason to have that effect you at all. You shouldn't be jealous about it. I mean, you know, if they want to do mathematically unsound things, and one of them occasionally gets lucky, and they put the one person on television, and the million that contributed to the winnings, with the big slice taken out for the state, you know, don't get on — it's nothing to worry about. Just, all you have to do is figure out what makes sense. And you don't — you look at buying — when you — when you buy a stock, you get yourself in the mental frame of mind that you're buying a business, and if you don't look at a quote on it for five years, that's fine. You don't get a quote on your farm every day or every week or every month. You don't get it on your apartment house, if you own one. If you own a McDonald's franchise, you don't get a quote every day. You know, you want to look at your stocks as businesses, and think about their performance as businesses. Think about what you pay for them, as you would think about buying a business. And let the rest of the world go its own way. You don't want to get into a stupid game just because it's available. And I'm going to say a little more about that close to the break. But with that, I'll turn it over to Charlie.

CHARLIE MUNGERYeah, well, I think that your children are right to look for people they can trust in dealing with stocks and bonds. Unfortunately, more than half the time, they will fail, in a conventional answer. So you — they really have to — they have a hard problem. If you just listen to your elders, they'll lie to you and make — spread — a lot of folly.

WARREN BUFFETTBut they really have an easy problem, in the sense that American business, as a whole, is going to do fine over time. So the only way they can —

CHARLIE MUNGERBut not the average client of a stock broker.

WARREN BUFFETTWell, we'll get to that later. (Laughs) The stockbroker will do fine. The — (laughter)

CHARLIE MUNGERYes, that's true.

WARREN BUFFETTBut, they don't have to do that and we can talk — I'd rather address that just a little later. But — just — you don't want to worry — you don't want to be — a lot of problems are, as Charlie would say, are caused by envy. You don't want to get envious of somebody who's won the lottery, or bought an IPO that went up. You have to figure out what makes sense and follow your own course.

Nevada utility customers shouldn't have to subsidize solar power

WARREN BUFFETTBecky?

BECKY QUICKThis question comes from a shareholder named Lisa Kang Le (PH) in Singapore. And this has to do with NV Energy's issue with solar energy in Nevada. "Can the chairman help his environmentally conscious shareholders understand why NV Energy has lobbied for new rules in Nevada that make it prohibitive for households to use solar energy? Is there a good reason that we haven't yet heard about? "And can the chairman or vice chairman share their views on whether there's a need to implement an environmental, social, and governance policy, on Berkshire investments going forward? "I understand that Berkshire Hathaway typically lets the underlying operating companies and CEOs manage their own policies autonomously, but should Berkshire's board influence better environmental protection policies going forward?"

WARREN BUFFETTWell, the public utility and the pricing policies and everything in Nevada, as well as other places, but they're determined by a public utility commission. So, there are, I believe, three commissioners that decide what's proper. The situation in Nevada is that, in terms of rooftop power, was that for the last few years, if you had a solar project on your roof, you could sell back excess power you generated to the grid at a price that was far, far, far above what we, as a utility, could buy it for elsewhere. So, you could sell it back, we'll say, at roughly 10 cents a kilowatt hour. And about 17,000 — maybe a few more now — about 17,000 people had rooftop installations. Now they get — there were federal credits involved, but those usually got sold to other people, in terms of tax credits. So they were being subsidized by the federal government, and that encouraged solar generation, as it's encouraged us to do solar generation and wind generation, as well. But the people who had these 17,000 rooftop installations were selling back to the grid at 10 cents, roughly, a kilowatt hour, energy we could purchase or produce — either — but purchase elsewhere, too — for 3 1/2 cents, or thereabouts. So, 99 percent of our consumers were being asked to subsidize the 1 percent that had solar units, by paying them a significantly — triple the market price, basically — of what we could otherwise buy electricity to sell to the 99 percent. So then it's just a question of whether you wish to have the 99 percent subsidize the 1 percent. And the public utility commission in Nevada, they had originally let this small amount of rooftop solar generation be allowed as an experiment with this 10 cent, roughly 10 cent, rebate. And they decided that they did not believe that the 99 percent should be subsidizing the 1 percent. There may — there's no question — that for solar to be competitive, just like wind, it needs subsidization. Costs are not yet at a level where it becomes competitive with natural gas, for example. And who pays the subsidy gets to be a real question, if you want to encourage people to use renewables. And, in general, the federal government has done it through tax subsidies, which means taxpayers, generally, throughout the country subsidize it. And the public utility commission in Nevada decided that after seeing this experiment, they decided that it was not right for a million — well over a million — customers to be buying electricity at a price that subsidized the 17,000 people, and therefore increase the prices of electricity for the million. And that question of who subsidizes renewables, and how much, is, you know, going to be a political question for a long time to come. And I personally think that if society is the one that's benefiting from the lack of — reduction of — greenhouse gases, that society should pick up the tab. And I don't think that somebody sitting in a house in someplace in Nevada, we'll call it Las Vegas, but it could be other cities because we serve most of Nevada, should be picking up the subsidy for their neighbor, and the public utility commission agrees with that. I think we have Greg Abel here who — NV Energy is a subsidiary of Mid-American — of Berkshire Hathaway Energy. Greg, was there anything you want to add? Can we get a spotlight down here? Maybe? It's not live.

GREG ABELI think it's on now. So, as usual Warren, you summarized it extremely well. When we think of Nevada, it's exactly as you described. I would just add a few things. One: as you've touched on earlier, we absolutely support renewables. So we start with the fundamental concept that we are for solar. But, as you highlighted, we want to purchase renewable energy at the market rate, not at a heavily subsidized rate that 1 percent of the customers will benefit from and harm the other 99 percent. And it goes back to being as fundamental as this: if you take, as you touched on, a working family in Nevada who can't afford the roof top unit and you ask him, "Do you want to subsidize your neighbor, that 1 percent?" the answer is clearly no. At the same time, we're absolutely committed to Nevada utilizing renewable resources, and absolutely proud of what our team's doing. By 2019, we will have eliminated or retired 76 percent of our coal units and be replacing it with solar energy. So we're on a great path there. Thank you. (Applause) And we're just going to encourage our team. And with the work of the commission, and obviously led by the state, we'll head down a great path. Thank you.

WARREN BUFFETTYeah, if the projectionist would put up slide 7, it will give you a view of what the situation is. This counts all of our all our Berkshire Hathaway Energy operations, and you can see, in a 20-year period we'll have a 57 percent reduction. You wouldn't want a 100 percent reduction tomorrow. Believe me, the lights would be off all over the country. But it's moving at a fast pace. But, you do — you want to be sure that you treat fairly the people involved in this, because somebody pays the cost of electric generation. And I do think that if you're doing something that's to benefit the planet — and it's important that it be done — but that you have the cost be assessed for that, not on a specific person who's having trouble, perhaps, making ends meet in their job. And obviously, if you've got over a million customers in Nevada, a lot of them are struggling. A lot of them are going fine, too. But they are not the ones, in my view, to subsidize the person who could afford to put the solar unit in.

We don't buy or sell based on commodity price predictions

WARREN BUFFETTOK. Cliff?

CLIFF GALLANTOver the past year we've learned — perhaps I've learned — that Berkshire's results are more influenced by oil markets than I previously appreciated. Revenues at the railway company and some of Berkshire's manufacturing businesses were negatively impacted. And arguably, low gas prices hurt GEICO's loss ratio. Yet during this year, Berkshire invested in Phillips 66, Kinder Morgan, and even PCP has revenues associated with the oil and gas industries. I know Berkshire wouldn't make a bet on a commodity like oil, but is Berkshire making a statement about the long-term outlook for oil?

WARREN BUFFETTMaking a statement about what?

CLIFF GALLANTOil.

WARREN BUFFETTThe price? The price of oil?

CLIFF GALLANTYes.

WARREN BUFFETTNo. We haven't the faintest idea what the long-term price of oil was and there's always a better system available. You can buy oil, as you know, for delivery a year from now, or two years from now, or three years from now. We actually did that once, Charlie, didn't we? Some years back.

CHARLIE MUNGERCashed it in too soon, too.

WARREN BUFFETTYeah. We made money but we could have made a lot more money. We don't think we can predict commodity prices. We don't hedge cocoa or sugar (inaudible). We do some forward buying of chocolate coatings or something of the sort. But basically, we are not two fellows who think we can predict the price of soybeans or corn or oil or anything else. So, anything you have seen in our investment transactions — some of those securities you mentioned there were bought by Todd or Ted, and one was bought by me — but neither they nor I bought those, or if we sell them, sell them, based on commodity price predictions. We don't know how to do it. And we're thinking about other things when we make those decisions. Charlie?

CHARLIE MUNGERI'm even more ignorant than you are.

WARREN BUFFETTThat would be hard to beat. (Laughs) OK. I think that's the first time I've heard him say that. It has a nice ring to it. (Laughter)

Don't expect efficiency in higher education

WARREN BUFFETTOK, station 5.

AUDIENCE MEMBERHi Warren. Hi Charlie.

WARREN BUFFETTHi.

AUDIENCE MEMBERI'm Ken Martin. I'm an MBA student from the Tuck School at Dartmouth. My question is about college tuition and the problem of rising student debt balances. In the past, prominent philanthropists have founded institutions that are now prominent research universities in our country. Why is this not a bigger part of today's philanthropic debate, the founding of new colleges? Would not new supply in higher education be at least part of the solution to this problem?

WARREN BUFFETTCharlie, you want to tackle that one? You're more of an expert than I am.

CHARLIE MUNGERYeah. I think that if you expect a lot of efficiency — financial efficiency — in American higher education, you're howling at the wind. (Laughter and applause)

WARREN BUFFETTWell. I think he's also talking about just more philanthropy to deliver there. Am I right? Want to give him the light back on there?

AUDIENCE MEMBERYeah, that's right.

CHARLIE MUNGERWhat's the question again?

WARREN BUFFETTThe question about is — maybe — whether more philanthropy ought to be devoted to that relatively because of the cost. But —

CHARLIE MUNGERWell, I do a lot more than Warren does in this field — (laughs) — and I am frequently disappointed but — (Laughter) Monopoly has kind of — and bureaucracy — have kind of pernicious effects everywhere, and the universities aren't exempted from it. But of course, they are the glory of civilization, and if people want to give more to it, why, I'm all for it.

WARREN BUFFETTYeah, it — you know, you've got the option of very good state schools and — we spend a lot of money on education in this country. You know, if you just take — you take kindergarten through twelve, it's interesting. People talk about entitlements in this country. They say it's terrible we have all these entitlements for Social Security and everything. We have entitlements for the young. We spend $600 billion a year educating 50 million kids in the public schools between kindergarten and twelfth grade, and just think what that is as an entitlement. Nobody ever seems to bring that up. But it's a huge — and I believe in it, obviously, but — you know, the people in their working ages, generally speaking, I think have an — in a rich society — have an obligation to both the young and the old. And based on the amount we spend, if we have problems with our school system it's not because we're cheap. No, there are other problems that contribute to it. In terms of the money we put out, we're right up there. (Applause) But I was the trustee of a college that saw the endowment go from $8 million to over a billion. And I didn't see the tuition come down. And I didn't see the number of students go up.

CHARLIE MUNGERNothing went up, except the professors' salaries.

WARREN BUFFETTYeah. From 8 million to a billion. I mean — and very, very decent people running the place. But when you read the figures on endowment of the big schools, you know, and some of them have really got up in the big numbers, the main objective of the people running the endowment is to have the endowment grow larger. And that will be ever thus. That is the way humans operate. You have any more comments on that, Charlie? You've seen a lot.

CHARLIE MUNGERI've made all the enemies I can afford at the moment.

WARREN BUFFETTOK. (Laughter.) That's never slowed him down in the past. (Laughter)

Berkshire will "do fine" if Trump or Clinton wins

WARREN BUFFETTAndrew.

ANDREW ROSS SORKINThank you, Warren. This from a shareholder who asked to remain anonymous. "If Donald Trump becomes the president of the United States, and recognizing your public criticism of him and your public support for Hillary Clinton, what specific risks, regulatory, policy, or otherwise, do you foresee for Berkshire Hathaway's portfolio of businesses?

WARREN BUFFETTThat won't be the main problem. (Laughter and applause) Well. Government, you know, is a very big factor in our business and in all businesses. I mean, there's the very broad policies that affect practically everybody, and sometimes there can be some pretty specific policies. But, I will predict that if Don — either Donald Trump or Hillary Clinton becomes president — and one of them is likely to be — very likely to be — I think Berkshire will continue to do fine. Charlie?

CHARLIE MUNGERI'm afraid to get into this area. (Laughter)

WARREN BUFFETTYeah. We've operated under all — I mean, we've operated under price controls. I mean, there — We've had 52 percent federal taxes applied to our earnings for many years. Even high — I mean, they were higher at other times — but there — you know, we've had regulations come along and, in the end, business in this country has done extraordinarily well for a couple of hundred years, and it was adapted to the society and the society has adapted to business. This is a remarkably attractive place in which to conduct a business. Imagine, in a world of practically zero interest rates, you know, American business earning terrific returns on tangible cap — equity. I mean, those are the assets that were actually employed in the business. The numbers are staggering. And, you know, people who have had their money in savings accounts or something like that get destroyed. But owners of business, if you look at returns on tangible equity, just check them out some time, and they have not suffered even as people who own fixed-interest — fixed-income — instruments have suffered enormously. And, you know, farm prices are down now. Farmer income has fallen off a lot in the last couple of years. But business has managed to take care of itself. And for a good reason, because it contributes to, and has been the engine of, our market economy that's delivered output that is staggering by the imagination of anyone that might have existed 100 years ago. In my lifetime, the GDP per capita, in real terms, of the United States, has gone up six-for-one. Can you imagine a society where in one person's lifetime, overall, people have six times the real output that they had at the beginning. It's — you know, the system works very well in terms of aggregate output. In terms of distribution of that output, sometimes it can fall very short, in my view. But, it'll keep working. You don't have to worry about that. Twenty years from now, they'll be far more output per capita in the United States, in real terms, than there is now. In 50 years, it will be far more. It'll — and the quality will get better. And no presidential candidate or president is going to end that. They can shape it in ways that are good or bad, but they can't end it. Now Charlie, give something pessimistic here to balance me out.

CHARLIE MUNGERNo, I want to say something optimistic. I think that the GDP figures greatly understate the real advantage that our system has given our citizens. It underweighs a lot of huge achievements because they don't translate right into money in a certain way that the economists can easily handle. But the real achievements over the last century, say, are way higher than are indicated by the GDP figures, and the GDP figures are good. I don't think the future is necessarily going to be quite as a good as the past. But it doesn't have to be.

WARREN BUFFETTThere's no one you'll run into, at least in my experience, that says, "With my same talents, I wish I'd lived 50 years ago instead." Born 50 years earlier. But a majority of the American public thinks that it's a bad time to be born today compared to when they were born. They think their children will not — they're wrong. I mean, it's — the pace of innovation — just think how different you're living compared to 20 years ago, in terms of what you do with your time. Now, a lot of people may condemn it, or something of the sort, but you're making free choices that were not available to you 20 years ago and you're making them in a different direction than — I'm still staying with the landline, but you people are way ahead of me. (Laughs).

BNSF CEO doesn't see rail mergers in near future

WARREN BUFFETTOK. Gregg?

GREGG WARRENWarren. Late last year we saw Canadian Pacific make a hostile bid for Norfolk Southern, a combination that would have linked Canada's second largest carrier with one of the two largest railroads in the eastern U.S. This move led to a largely negative reaction from not only Norfolk Southern, but from federal and state lawmakers, shippers, and other railroad operators, even though a formal evaluation process hadn't even begun with the U.S. Surface Transportation Board. Canadian Pacific eventually backed down. Looking back to 1999, when the Transportation Board blocked a proposed merger between BNSF and Canadian National, the attitude was that any additional mergers amongst railroads would have to be accretive to competition. What do you think they meant by this? And if one believes that the hookup of one of the two major western railroads with one of the two eastern railroads would not alter the current landscape, where most shippers have just two choices amongst the large railroads operating in the region, and could actually generate efficiencies and cost savings that could be passed along to customers, how does a combination of someone like BNSF with Norfolk Southern or CSX not satisfy their goal?

WARREN BUFFETTI — I think now there's — and is Matt Rose, is he here? He can probably answer that — some of that — better than I can — certainly. He can answer all of it better than I can. Yeah. There's Matt. Yeah.

MATT ROSEYeah. So, the statement is actually right. Back in 1999, we had a failed merger with Canadian National. New rules were put in place by our regulator, a little group called the STB, and what they said was that the public litmus test for the next merger would have to be different. And, at that point in time we didn't really think that a large merger was possible. And so, when Canadian Pacific announced their merger of the Norfolk Southern, when we think about our four constituencies, and those four are our customers, the labor groups, the communities in which we serve, and shareholders, which, our shareholder, of course, is BRK, we didn't see any interest in the final round of these mergers occurring outside of the shareholder community. And so our position was simply to say, if the rest of the shipping community believes that we ought to see this final round, that's fine, we'll participate, but we don't see it occurring right now. We do believe that when that final round occurs, there will be great efficiencies made for shippers and communities, but right now we don't see the dynamics in place. So, what are those dynamics? It will be as the country continues to grow in population from where we are today, 315 million people, to, say, 320, 330, 350, transportation becomes more scarce and the railroads will need to do more. And that's really when we think the next round will occur.

Berkshire indifferent to Wells Fargo's investment banking

WARREN BUFFETTOK. Station 6.

AUDIENCE MEMBERHi, my name is Michael Mozia. I'm from Brooklyn, New York and I'll be starting at Wharton Business School in the fall. In an interview with Bloomberg Markets recently, Jamie Dimon defended the role banks play in financial markets, saying, "Banks aren't markets. The market is amoral… You're a trade to the market… A bank is a relationship." But banks, namely investment banks, have struggled as regulators have favored market-based solutions, and many of those relationships investment banks have worked so hard for have proven to be less lucrative, especially compared to the growing fixed costs of supporting them. As it relates to our marketable securities portfolio, how do you feel about the investment banking component, particularly as Wells moves into that space? Would you feel differently if the cost basis was higher? And Warren, Charlie, thank you so much for doing this every year.

WARREN BUFFETTThank you. Charlie, I didn't totally get that, but does he feel the investment banking firms are being disadvantaged?

CHARLIE MUNGERWell, he's basically, how do we feel about — Jamie says —

AUDIENCE MEMBERHow do you feel about —?

CHARLIE MUNGERYou can't make as much money as you used to out of relationships, and it's getting tougher and so forth?

WARREN BUFFETTYeah. Well, the public policy since 2008-9 has been to, very much, toughen up capital requirements in a variety of ways for banks, but it is specifically been designed to make large banks- very large banks — less profitable relative to smaller banks. And you do that by increasing capital requirements. You can change the math of banking, and the attractiveness of banking, totally, by capital requirements. Obviously, if you said every bank had to be 100 percent equity, it would be a terrible business. You couldn't possibly earn any money that was significant on capital. And if you let people operate with 1 percent capital ratios, they can make a lot of money and they will cause the system all kinds of trouble. So, since 2009, the rules have been tilted against the larger banks by — primarily — through capital requirements. And that just means returns on equity go down, but returns on equity were awfully high prior to that. So it doesn't — it hasn't turned it into a bad business, it's turned it into a less attractive business than earlier. And that — some of the investment banks operate as bank holdings companies, still, and they've been affected by those capital requirements, too. I'm not sure I'm getting 100 percent to your question, so I invite you to give me a follow-up, if you like, on that.

AUDIENCE MEMBERIn the marketable securities portfolio, do you feel good about the going-forward prospects of the investment — of the investment banking companies — especially as Wells Fargo moves into that business?

WARREN BUFFETTWell, Wells Fargo has an investment banking aspect to it that primarily came in through Wachovia. And it's not insignificant. But our ownership of Wells Fargo, which is very large — it's our largest single marketable security — I'm not counting Kraft Heinz, which is about the same size, because in that situation we're in a control position — it's the largest non-control situation that we have, at Wells Fargo. And that's by intent. I like it extremely well compared to other securities. Not because it has the most upside, but I feel that, weighted for upside and downside, that it's —

CHARLIE MUNGERIt's not the investment banking that charms you in Wells Fargo. It's the general banking that —

WARREN BUFFETTYeah. No. We're not — it isn't that big a deal, and that's not what attracts us. We think Wells Fargo is a very well run bank. But, we didn't make any decision to buy a single share based on the fact they were going to be more in the investment banking business because of the Wachovia acquisition. They've got a lot of sources of income. They've got a huge base of very cheap money, but unfortunately, they've got it out at very cheap rates on the other side now. But, spreads will probably work in their advantage eventually. And we think it's a very well run bank. Investment banking business — Charlie and I are probably a little affected by the experience we had in running one for a short period of time — it's not been something that we invested in significantly. We, obviously, made a major investment in Goldman Sachs, and we continue to hold shares that came out of the warrants that we received when we made the investment in 2008. But I think I can't recall us making an investment banking purchase — a marketable security involving an investment bank — for a long time. Can you, Charlie?

CHARLIE MUNGERNo, I think, generally, we fear the genre more than we love it.

"Very, very unlikely" activists could break up Berkshire

WARREN BUFFETTCarol?

CAROL LOOMISIn the conclusion of the book "Dear Chairman," which you recommend in this year's annual letter — a new book you recommend- the author argues that, quote, "The life's work of great investors is inevitably reabsorbed into the industrial complex with little acknowledgement of their accomplishments." He then argues that Berkshire Hathaway will eventually be targeted by activist investors if it trades at too sharp a discount to intrinsic value. Do you agree with this assessment and have you considered installing corporate defenses that might prevent future generations of activists from trying to break up Berkshire Hathaway?

WARREN BUFFETTYeah, I used to worry more about that than I do now. Partly, size is one factor. I think the more important factor would be that Berkshire will always be in a position to repurchase very significant amounts of stock, and as long as it's willing to buy that stock at some price — and it should be — close to intrinsic value, there should not be a large margin, in terms of anybody that might come along and think there'd be a lot money to be made by breaking up. There would be money lost by breaking it up, in terms of we'd lose — there'd be certain advantages lost. MidAmerican Energy could not have done what it has done in renewables without Berkshire being the parent. I mean, if it had been split off, it would have been worth — the parts would have been worth — less than the whole. And there are other instance — I could give you significant instances of that in other cases. So, I don't think there will be a spread that will be enticing to anyone. And beyond that, I think the numbers involved would be staggering, and I think we have a shareholder base that recognizes the advantages of both the Berkshire businesses and its culture and — so I think it's very, very unlikely. But there have been periods in business history where stocks sold at — where practically all stocks — sold at dramatic discounts from what you might call intrinsic value. And it's interesting that very little activity occurred there. In the 1974 period, 1973 and '74, you know, there were company — really good companies — one of which was Cap Cities, for example, that Tom Murphy ran, that was selling at a huge discount to what it was worth. But people did not come along. And so, to some extent, when the discounts are huge, money is hard to get. It's not a huge worry with me. Actually, in my own case, because of the way my stock will get distributed to philanthropies after I die, it's very likely that my estate, for some years, will be, by far, the largest shareholder of Berkshire, in terms of votes, even with this distribution policy that occurs. So I — it's not something I worry about now. I used to worry about it some, but it's not a factor now. Charlie?

CHARLIE MUNGERWell I — I think we have almost no worries at all on this subject, and that most other people have a lot of thoroughly justifiable worry, and I think that helps us. So, I look forward on this subject with optimism.

WARREN BUFFETTYou want to explain how it helps us, Charlie?

CHARLIE MUNGERWell, if you're being attacked by people you regard as evil and destructive and so on, and you want a strong ally, how many people would you pick in preference to Berkshire?

WARREN BUFFETTMy name is Warren Buffett and I approve of that message. (Laughter)

No interest in "pure" leasing businesses

WARREN BUFFETTJonathan?

JONATHAN BRANDTLeasing has quietly become an important contributor to Berkshire's earnings with its several leasing units logging about $1 billion in combined annual pre-tax income. Could you talk about Berkshire's competitive advantages in its varying leasing businesses including containers, cranes, furniture, tank cars, and rail cars? Are there other leasing businesses you'd be interested in entering, for instance, airplanes or commercial auto fleets? Plane leasing companies, in particular, seem to sell for reasonable prices and are often available.

WARREN BUFFETTYeah. Well, we've got a very good truck leasing business in XTRA, and we've got a good, primarily tank car leasing, business at Union Tank Car and Procor. And we expanded by a billion dollars when we bought the GE fleet recently. Leasing, generally, isn't something that will — we have to bring something to the party. At XTRA , that's much more than just handing people a trailer and taking a check every month. There's important service advantages brought to that. But pure leasing — leasing of new cars, which is a huge business — the math is not that attractive for us. The banks have an advantage over us because their cost of funds is so low now. It's not quite as low as it looks, but I think Wells Fargo, I think the last figure was, you know, down around 10 basis points. And when somebody has, you know, maybe a trillion dollars or so, and they're paying 10 basis points for it, I don't feel very competitive at Berkshire in that situation. So, pure money-type leasing is not an attractive business for us when we've got other people with a lower cost of funds. I mean, they've got the edge. And we have got — railcar leasing involves a lot more than just a financial transaction. I mean, we repair — we've got huge activity in the repair field, and those cars require servicing, and the same way in our trailer business. But you will not see us get in — aircraft leasing doesn't interest me in the least. We've looked at that a lot of times, at various aircraft leasing companies offered to us. And that's a scary business. And some people have done well in it by, in recent years, by using short-term money to finance longer-term assets which have big residual risks, and that just isn't for us. Charlie?

CHARLIE MUNGERI think you've said it pretty well. We're well located now but we — I don't agree that we have huge opportunities.

"We're not targeting competitors for destruction"

WARREN BUFFETTOK. Station 7.

AUDIENCE MEMBERGood morning Warren and Charlie. I am Vandemere Se from the Philippines. Warren, my wife and I sent original paintings to your office two days ago, we hope you like them.

WARREN BUFFETTThank you.

AUDIENCE MEMBERToday — sorry — today Berkshire's size ensures that it faces competition from numerous businesses. If you had a silver bullet, which competitor would you take out and why? I'm sorry — and you can't say Donald Trump. (Laughter)

WARREN BUFFETTWhich competitor in which businesses? I mean, you're asking about which —

CHARLIE MUNGERWhich — which competitor would you kill if you could? I don't think — I don't think we have to answer this one.

WARREN BUFFETT(Laughs) Charlie's a lawyer. (Laughter) But I've thought about the question. (Laughter) We have lots of tough competitors. And in many areas, we're a pretty tough competitor ourselves. And — and the real — what we want our managers to be doing, you know, is thinking every day about how to achieve a stronger competitive position. We call it "widening the moat." But, we want to turn out better products, we want to keep our costs down to a minimum, you know, we want to be thinking about what our customer's likely to be wanting from us, you know, a month, a year, 10 years from now. And, generally, if you take care of your customer, the customer takes care of you. But there are cases where there is some force coming along that really is — you may not have the answer for it. And then, you know, you get out of that business. We had that department store in Baltimore in 1966, and if we'd kept it, we would have gone out of business. So, recognizing reality is also important. I mean, you do not want to try and fix something that's unfixable.

CHARLIE MUNGERWe're not targeting competitors for destruction. We're just trying to do the best we can everywhere.

WARREN BUFFETTSpoken like an anti-trust lawyer. (Laughter) OK. We really hope to be the ones that the other guys want to use the silver bullet on.

Sequoia Fund was "overly entranced" by Valeant

WARREN BUFFETTBecky?

BECKY QUICKThis question comes from Rom and Raji Terracod from Sugarland, Texas. He writes, "My wife and I have the vast majority of our net worth invested in Berkshire and in shares of the Sequoia Fund. Mr. Buffett, you have endorsed the Sequoia Fund on more than a few occasions. "Recently, the Sequoia Fund has been in the news because of its large position in Valeant Pharmaceuticals. Mr. Munger has termed Valeant's business model 'highly immoral.' "Mr. Buffett, do you agree with Mr. Munger's assessment? Have your views about Sequoia Fund changed? Also, as you know, Sequoia is an admirer and large holder of Berkshire stock. "

WARREN BUFFETTYeah, in a sense, I'm the father of Sequoia Fund, in that when I was closing up my partnership at the end of 1969, I was giving back a lot of money to partners, and these people had trusted me, and they wanted to know what they should do with their money. And we helped out those who wanted to put it in municipal bonds for a few months, Bill Scott and I stayed around and helped those people come up with those. But most of them were equity oriented-type investors. And we said there were two people that we admired enormously in the investment business, not simply because they were terrific investors, but they were terrific people. And they would be the kind of people that you'd make trustee of your will. So those two, one of whom is in the room — Sandy Gottesman, our director — and one was Sandy and one was Bill Ruane. They were friends themselves. So, Sandy took on a number of our clients — a number of our partners — and they became clients, and very happy clients, of his, and I'll bet some of them are still clients, or their children or their grandchildren are, to this day. Others went with Bill — a lot of them went with both of them, actually — in fact, I would be surprised if the majority who had a lot of money gave some to Sandy and gave some to Bill. But Bill — we had a lot of people whose total funds were really not of a size that made them economic individual clients. And so, Bill, who would not have otherwise set up a fund, Bill said, "I'll set up a fund." And they actually had an office in Omaha. John Harding, who used to work for me, became the employer here. And a number of our ex-partners — my ex-partners — joined Sequoia Fund as a way to find an outstanding investment manager, like I say, both for ability and for integrity, and could deploy small sums with him. And Bill ran Sequoia until, I think, roughly 2005, when he died, and did a fantastic job. And even now, if you take the record from inception to now, with the troubles they've had recently, I don't know of a mutual fund in the United States that has a better record. There probably is one, maybe, or two, But it's — it's far better than the S&P, and you won't find many records that go for 30 or 40 years that are better than the S&P. So Bill did a great job for people. And Bill died in 2005, and the record continued to be good until a year or so ago. And at that time, they — the management company — the manager, I should say — took an unusually large position in Valeant and, despite the objection of some people on the board, not only maintained that position but actually increased it, after a fair amount of doubt had been expressed by the board about the advisability of doing that. The record, like I say, to date, still, from when it started, is significantly better than average. My understanding is that the manager who made the decision on Valeant is no longer running the operation, and that other people have (inaudible) for doing so, and I have every reason to believe that they're — I know that they're very smart, decent people, who are good, probably way better than average analysts, in terms of Wall Street. So, I think it was a very unfortunate period when the manager got overly entranced with a business model, which, if you — I watched the Senate hearings a couple of days ago when Senator Collins and Senator McCaskill interrogated three people from Valeant, and it was not a pretty picture. In my view, the business model of Valeant was enormously flawed. It had been touted to us. We had several people who urged us, strongly, to buy Valeant, and wanted us to meet Pearson, and all that sort of thing. But it illustrated a principle that Pete Kiewit, I think, said many, many years ago. He said if you're looking for a manager, find somebody that's intelligent, energetic, and has integrity. And he said that if they don't have the last, be sure they don't have the first two. If you've got somebody that lacks integrity, you want them to be dumb and lazy. You know — and if you get an intelligent, energetic guy, or woman, who is pursuing a course of action which, if put on the front page, you know, would make you very unhappy, you can get in a lot of trouble. It may take a while. But Charlie and I have seen, and we're not remotely perfect at this, I don't mean that, but we've seen patterns. You get — pattern recognition gets very important in evaluating humans and businesses. And, the pattern recognition isn't 100 percent, and none of the patterns exactly repeat themselves, but there're certain things in business and securities markets that we've seen over and over, and that frequently come to a bad end, but frequently look extremely good in the short run. One, which I talked about last year — I'm not referring to Valeant in this regard — is the chain letter scheme, the disguised chain letter. You're going to see chain letters the rest of your life. Nobody calls them chain letters because that has a connotation that will scare you off. But they're disguised chain letters. And many of the schemes in Wall Street that are designed to fool people have that particular aspect to it. And there were patterns at Valeant that I think — certainly if you go and watch those Senate hearings, I think, you'll decide that there were patterns there that really should have been picked up on, and it's been very painful to the people of Sequoia. And I personally think that the people running Sequoia now are able people, and I'll get into in a second the difficulty in managing money, but first, I'll give Charlie a chance to comment on this.

CHARLIE MUNGERWell, I totally agree with you that Sequoia, as reconstituted, is a reputable investment fund and that the manager, as reconstituted, is a reputable investment adviser. I've got quite a few friends and clients that use Ruane, Cunniff, and I've advised them to stay with the place as reconstituted. I believe you've done the same thing, haven't you?

WARREN BUFFETTRight.

CHARLIE MUNGERSo we trust — we think the whole thing is fixed. Valeant, of course, was a sewer, and those who created it deserve all the opprobrium that they got. (Applause)

Buffett leads in wager against hedge funds

WARREN BUFFETTIn a few minutes we'll break, but I think it almost ties in with this last question. If we could put slide 3 up. I promised — some years ago I made a wager — and I promised to report, before the lunch, how the wager was coming out. And I've been doing that regularly, but it probably seems appropriate, since it's developed this far, to point out a rather obvious lesson, which is what I hoped to drive home, to some degree, by offering to make the wager originally. Incidentally, when I offered to make the wager, namely that somebody could pick out five hedge funds and I would take the unmanaged S&P index used by Vanguard Fund, and I would bet that over a ten-year period that the unmanaged index would beat these five funds that were all being managed, presumably — they could pick any five funds — that were managed by people who were charging incredible sums to people because of their supposed expertise. And, fortunately, there's an organization called, or at least you go — if you go to the Internet, if you put in longbets.org — it's a terribly interesting website. You can have a lot of fun with it because people take the opposite side of various propositions that have a long tail to them and make bets as to the outcome, and then they both give their — each side gives their reasons. And you can go to that website and you can find bets about, you know, whether — what population will be doing 15 years from now or — all kinds of things. And our bet became quite famous on there. They — and a fellow I like, who I didn't know before this, Ted Seides, bet that he could pick out five hedge funds — these were funds of funds. In other words, there was one hedge fund at the top and then that manager picked out who he thought were the best managers underneath, and then bought into these other funds in turn, so that the five funds of funds represent, maybe, 100 or 200 hedge funds underneath. Now bear in mind that the hedge fund — the fellow making the bet — was picking out funds where the manager on top was getting paid, perhaps, 1/2 percent a year, plus a cut of the profits, for merely picking out who he thought were the best managers underneath, who in turn were getting paid, maybe, 1 1/2 or 2 percent, plus a cut of the funds' profits. But certainly the guy at the top was incentivized to try and pick out great funds, and at the next level, those people were presumably incentivized, too. So the result is, after eight years, and several hundred hedge fund managers being involved, is that now the totally unmanaged fund by Vanguard with very, very minimal costs, is now 40-some points ahead of the group of hedge funds. Now that may sound like a terrible result for the hedge funds, but it's not a terrible result for the hedge fund managers. (Laughs) These managers — A), you've got this top-level manager that's charging probably 1/2 percent, I don't know that for sure, and down below you've got managers that are probably charging 1 1/2 to 2 percent. So if you have a couple of percentage points sliced off every year, that is a lot of money. We have two managers at Berkshire that each manage $9 billion for us. They both ran hedge funds before. If they had a 2-and-20 arrangement with Berkshire, which is not uncommon in the hedge fund world, they would be getting $180 million each, you know, merely for breathing, annually. (Laughter) That — I mean that — it's a compensation scheme that is unbelievable to me, and that's one reason I made this bet. But what I'd like you to do is for a moment imagine that in this room we have the entire — you people own all of America, all the stocks in America are owned by this group. You are the Berkshire 18,000, or whatever it is, that has someone managed to accumulate all the wealth in the country. And let's assume we just divide it down the middle, and on this side we put half the people — half of all the investment capital in the world — and that capital is what a certain presidential candidate might call "low energy." In fact, they have no energy at all. They buy half of everything that exists in the investment world, 50 percent, everyone on this side. And so now half of it is owned by these — by these no-energy people. They don't look at stock prices. They don't turn on business channels. They don't read The Wall Street Journal. They don't do anything. They just — they are a slovenly group that just sits for year after year after year owning half of the country — half of America's business. Now what's their result going to be? Their result is going to be exactly average, as how America business does, because they own half of all of it. They have no expenses, no nothing. Now what's going to happen with the other half? The other half are what we call the "hyperactives." And the hyperactives, their gross result is also going to be half, right? They can't — the whole has to be the sum of the parts here, and this group, by definition, can't change from its half of the ultimate investment results. This half is going to have the same gross results — you're going to have the same results as the low-energy — no-energy people, and they're also going to have terrific expenses, because they're all going to be moving around, hiring hedge funds, hiring consultants, paying lots of commissions and everything. And that half, as a group, has to do worse than this half. The people who don't do anything have to do better than the people that are trying to do better. It's that simple. And I hoped through making this bet to actually create a little example of that, but that offer was open to anybody. And I would make, incidentally, the same offer now except, you know, being around in 10 years to collect gets a little more problematic as we go through life. (Laughs) But it seems so elementary. But I will guarantee you that no endowment fund, no public pension fund, no extremely rich person, wants to sit in that part of the auditorium. They just can't believe that because they have billions of dollars to invest that they can't go out and hire somebody who will do better than average. I hear from them all the time. So this group over here, supposedly sophisticated people, generally richer people, hire consultants, and no consultant in the world is going to tell you, just buy an S&P index fund and sit for the next 50 years. You don't get to be a consultant that way. And you certainly don't get an annual fee that way. So the consultant's got every motivation in the world to tell you, this year I think we should concentrate more on international stocks, or this year this manager is particularly good on the short side. And so they come in and they talk for hours, and you pay them a large fee, and they always suggest something other than just sitting on your rear end and participating in American business without cost. And then those consultants, after they get their fees, they, in turn, recommend to you other people who charge fees which, as you can see over a period of time, cumulatively eat up capital like crazy. So, I would suggest that what I felt sure — I didn't feel sure because nothing — you can't tell for sure about any 10-year period — but it certainly felt very probable or I wouldn't have stuck my neck out. It just demonstrates so dramatically — I've talked to huge pension funds, and I've taken them through the math, and when I leave, they go out and hire a bunch of consultants and pay them a lot of money. And — it — just unbelievable. And the consultants always change the recommendations a little bit from year to year. They can't change them 100 percent, because then it didn't look like they knew what they were doing the year before, so they tweak them from year to year. And they come in and they have lots of charts and PowerPoint presentations, and they recommend people who, in turn, are going to charge them a lot of money. And they say, well, you can only get the best talent by paying 2-and-20, or something of the sort. And the flow of money from the hyperactive to what I call the helpers is dramatic, while this group over here sits here and absolutely gets the record of American industry. So I hope you realize that for most — for the population as a whole — American business has done wonderfully, and the net result of hiring professional management, you know, is a huge minus. And at the bookstore we have a little book called "Where Are the Customer's Yachts?" written by Fred Schwed. I read it when I was about 10-years-old. Been updated a few — well it hasn't been updated, but new editions have been put out a few times — but the basic lessons are there. That lesson is told in that book from 1940. It's so obvious, and yet all the commercial push is behind telling you that you ought to think about doing something today that's different than you did yesterday. You don't have to do that. You just have to sit back and let American industry do its job for you. Charlie, do you have anything to add to my sermon? (Applause)

CHARLIE MUNGERWell, you're talking to a bunch of people who have solved their problem by buying Berkshire Hathaway. (Laughter) That worked even better. And there have been a few of these managers, the managers —

WARREN BUFFETTSure.

CHARLIE MUNGER— who've actually succeeded. They are a few in the universities who are really good. But it's a tiny group of people. It's like looking for a needle in a haystack.

WARREN BUFFETTYeah. And when I was given the job of naming two in 1969, I knew — I knew two — I knew a couple of others. Charlie wasn't interested in managing more money then, and my friend Walter Schloss would not scale up well, although he had a fabulous record over 45 years, or thereabouts. But, you know, that was all I could come up with at that time. And fortunately, you know, I did have a couple. And the people who went with Sequoia Fund have been well-served, if they stayed for the whole period. But the — the people — there's been far, far, far more money made by Wall — by people in Wall Street — through salesmanship abilities than through investment abilities. There are a few people out there who are going to have an outstanding investment record. But there are very few of them, and the people you pay to have identify them don't know how to identify them. And — and they do know how to sell you. That's my message.