Berkshire Hathaway Inc. (BRK.A)

ASM 2002 Part 1

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May 4, 2002

Here, but a seconder or anybody would like to speak that motion might now work their way over to the microphone in zone 1, because we have a spotlight on where that is? And that way, when we get to that point of the program, if anybody that would like to speak to the motion that was in the proxy statement, if you'll work your way over to the microphone there, then we'll be ready at the time. You can be ready at the time when it will be appropriate to talk about it. And so we'll get there in just a minute and if you'll all wander over there that are interested. Also with us today are partners in the firm of Deloitte and Touche, our auditors. They are available to respond to appropriate questions you might have concerning their firm's audit of the accounts of Berkshire. Mr. Forrest Crother is Secretary of Berkshire. He will make a written record of the proceedings. Ms. Becky Amick has been appointed inspector of elections at this meeting. She will certify to the count of votes cast in the election for directors. The named proxy holders for the meeting are Walter Scott, Jr. And Mark D. Hamburg. We will conduct the business of the meeting and then adjourn the formal meeting. After that, we will entertain questions that you might have. Does the secretary have a report of the number of Berkshire shares outstanding entitled to vote and represented at the meeting? Yes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent by 1st class mail to all shareholders of record on March 6, 2002 being the record date for this meeting, there were 1,323,707 shares of Class A Berkshire Hathaway common stock outstanding with each year entitled to 1 vote on motions considered at the meeting and 6,290,415 shares of Class B Berkshire Hathaway common stock outstanding with each Chairman title to onetwo hundredth of one vote on motions considered at the meeting. Of that number, 1,103,455 Class A Shares and 5,260,231 Class B Shares are represented at this meeting by proxies returned through Thursday evening, May 2. Thank you. That number represents a quorum and we will therefore directly proceed with the meeting. First order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott who will place the motion before the meeting. I move that the reading of the minutes of the last meeting of the shareholders be dispensed with and the minutes be approved. Do I hear a second? Motion has been moved and seconded. Are there any comments or questions? 3 second pause. We will vote on this motion by voice vote. All those in favor, say aye. Aye. Opposed? The motion is carried. The first item of business of this meeting is to elect directors. The shareholders present who wishes to withdraw a proxy previously sent in and vote in person on the election of directors, he or she may do so. Also, if any shareholder that is present has not turned in a proxy and desires a ballot in order to vote in person, you may do so. If you wish to do this, please identify yourself to meeting officials in the aisles who will furnish a ballot to you. Would those persons desiring ballots please identify themselves so that we may distribute these? I now recognize mister Walter Scott to place a motion before the meeting with respect to election of directors. I move that Warren E. Buffet, Charles T. Munger, Susan T. Buffet, Howard G. Buffet, Malcolm G. Chase, Ronald L. Olson and Walter Scott, Jr. Be elected as directors. Is there a second? It's been moved and seconded that Warren E. Buffet, Charles C. Munger, Susan D. Buffet, Howard G. Buffet, Malcolm D. Chase, Ronald L. Olson and Walter Scott Jr. Be elected as Directors. Sounds like a hell of a slate to me. Are there any other nominations? Is there any discussion? Nominations are ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the election of directors and allow the ballots to be delivered to the Inspector of Election. The proxy holders, please also submit the Inspector of Elections a ballot on the election of directors voting the proxies in accordance with the instructions they have received. I will have to say at this point, deviating from my script, that in the spirit of disclosure, which now permeates the corporate world, I have a tally here from yesterday as to the number of votes each director has received. And I won't give the affirmative votes, but the total, basically negative vote is a withhold vote. Charlie and I and Howie came in last by a significant margin. Susie did the best. She only had 1,000 votes against her, but Charlie and I had 16,000 some votes against us. So I really suspect that Susie voted against us that she could lead the ticket, but who knows. Ms. Amick, when you're ready, you may give your report. My report is ready. The ballot of the proxy holders in response to proxies that were received through last Thursday evening cast not less than 1,139,672 votes for each nominee. That number far exceeds a majority of the number of the total votes related to all Class A and Class B shares outstanding. The certification required by Delaware law of the precise count of the votes, including the additional votes to be cast by the proxy holders in response to proxies delivered at this meeting as well as any cast in person at this meeting will be given to the secretary to be placed with the minutes of this meeting. Thank you, Ms. Amick. Warren E. Buffet, Susan D. Buffet, Howard G. Buffet, Malcolm D. Chase, Charles D. Munger, Ronald L. Olson and Walter Scott Jr. Have been elected as Directors. The next item of business is a proposal put forth by a Berkshire shareholder, Gloria J. Patrick, the owner of 2 Class B Shares. Ms. Patrick's motion is set forth in the proxy statement and provides that the shareholders request the company to refrain from making charitable contributions. The directors have recommended that the shareholders vote against this proposal. We will now open the floor to recognize Ms. Patrick or her designee to present her proposal. And I believe we have, Mr. Mosier at the microphone in Area 1 to make the proposal and speak to it. Would you go ahead, please, sir? Thank you, Chairman Buffet. I apologize if this is a little loud. I was told I would have to really project, but I think you can hear me up there on the stage and I hope you can hear me up in the rafters. My name is Stephen Mosier. I'm the chairman of the Population Research Institute, a nonprofit organization dedicated to making the case for people as the ultimate resource, the one resource that we as investors cannot do without, and to debunking the hype about overpopulation, what the New York Times has called, and I quote, one of the myths of the 20th century. Of course, we're now living in the 21st century. I've written about the coming depopulation. That's right. I said depopulation in the Wall Street Journal and other publications. I say all this to explain why Gloria Patrick, a Berkshire Hathaway shareholder, has asked me to present her action at this meeting the following proposal. And I do have one other qualification. I have 9 children. Now when people gasp at this, I remind them that my children will be paying their social security one day. Of course, if you invest in Berkshire Hathaway stock, you won't need Social Security. I will present the proposal and then, with the chairman's indulgence, spend a couple of minutes explaining why it's necessary. Here is the resolution. Whereas charitable contributions should serve to enhance shareholder value, whereas the company has given money to groups involved in controversial activities like population control and apportion, whereas our company is dependent on people to buy the products and services of the various companies we own, whereas our company is being boycotted by Life Decisions International and investment related groups like Provita Advisors because of these contributions. Resolved, the shareholders request the company to refrain from making charitable contributions. Let me take these very quickly point by point. You all know shareholder money is entrusted to the Board of Directors to be invested in a prudent manner for the shareholders. I think you will all agree, as the resolution states, that charitable contributions should serve to enhance shareholder value. Indeed, this is already Berkshire Hathaway policy with regard to its operating subsidiaries. As chairman Buffett explained in his chairman's letter of last year, quote, we trust our managers to make gifts in a manner that delivers commensurate, tangible, or intangible benefits to the operations they manage. We did not invest money in this company so it could be given to someone else's favorite charity. I think you will also likewise agree that activities like population control and abortion are controversial. In fact, some of the charitable money has been given to Planned Parenthood, a group that is responsible for almost 200,000 abortions a year in the United States. Thank you. And in countless more through its population control programs worldwide. Now we believe abortion is the taking of a human life, but even if you disagree on this fundamental point, you must concur that these ongoing boycotts of Berkshire Hathaway Company products are not a good thing. Next, it should be self evident that Berkshire Hathaway, like the economy as a whole, is dependent upon people. It is people who produce the products and services of the various companies we own, and it is people who buy them. Now, you may think that there is a superabundance of people in the world and that we will never run short, but this is not true. Half of the countries of the world, including countries in Latin America, Africa, and Asia, now have birth rates below replacement. Europe and Japan are literally dying filling more coffins than cradles each year. Dying populations may shrink the economic pie. We already see this happening in Japan and some European countries. How much of Japan's continuing economic malaise can be directly traced to a lack of young people to power the economy? Dying populations may also make economic development nearly impossible. Russia is having trouble finding its speed economically. Why? Because of its ongoing demographic collapse, losing a 1000000 people a year. These problems will spread to many more countries in the near future. Charitable contributions to simple minded population control programs in which governments impose restrictions on childbearing are not in Berkshire Hathaway's interest. Such programs are not investing in humanity's future. They are compromising humanity's future and putting a roadblock in the way of future economic growth. There is no global share buyback in store for those who fund population control programs because such programs will rob the world of future consumers and producers and threaten to shrink the economic pie. Let me give you a concrete example of what I mean. Berkshire Hathaway owns Dairy Queen. Now, there are 103 Dairy Queens in Thailand. But Thailand, due to a massive population control campaign, now has a birth rate that is below replacement and falling. This means that its cohorts of young children are shrinking. There will be fewer and fewer families in the years to come, and its population will eventually fall. Now you may think Thailand has too many children, But is it possible for there to be too many children for Dairy Queen? According to Dairy Queen, the Dairy Queen concept especially appeals to, quote, young families. But there will be fewer young families in Thailand's future and Dairy Queen's future because of population control. So I urge you to vote yes on this resolution. Let it be resolved that this company refrain from making charitable contributions. One final point. Should you, on the other hand, vote to continue the current practice of making charitable contributions based on shareholder designations, I would urge you all to designate 501(3s) like the Population Research Institute, which are attempting to help the poor become the agents of their own development and not simply try to reduce their number through population control. Thank you, Mr. Chairman, for this opportunity to speak. Thank you. Do we have a second to the motion? Yes. Okay. And is there any further discussion? Is there anyone there at the microphone that would like to talk to? I don't have to fight anymore. Okay. If there's no further discussion, we'll have Ms. Amrick report on the votes cast on that. If anybody wishes to cast a vote in person, they can raise their hand and submit that. But we'll have a preliminary report from Ms. Amick. My report is ready. The ballot of the proxy holders in response to the proxies that were received through last Thursday evening cast 28,452 votes for the motion and 1,014,353 votes against the motion. As the number of votes against the motion exceeds a majority of the number of votes related to all Class A and Class B shares outstanding, the motion has failed. The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting. Thank you, Ms. Amick. The proposal fails. After adjournment of the business meeting, I will respond to questions that you may have that relate to the businesses of Berkshire, but do not call for any action at this meeting. Does anyone have any further business to come before this meeting before we adjourn? If not, I recognize Mr. Walter Scott to place a motion before the meeting. I move that this meeting be adjourned. Is there a second? The motion to adjourn has been made and seconded. We will vote by voice. Is there any discussion? If not, all in favor say aye. Aye. All say no. The meeting is adjourned. Thank you. Now before we get on to the questions, and when we get to the questions, we will move through various zones sequentially. There are just a few special guests that I would like to recognize. And because of the crowd, I've not had an opportunity to make sure all of these special guests are here, but we will find out here shortly. The first guest, and I hope very much he's here, he made it, he was planning to be here, it was It was, let's see, 48 years ago, this July or so. About June, I got a letter from Ben Graham, who I'd been for a job for about 3 years and getting no place. And Ben said, next time you're in New York, come in and talk to me. So I was there about 10 hours later. I didn't have a NetJets plane then, so it took a little longer. And I went in to see Ben and he offered me a job. And I took it on the spot. I didn't ask what the salary was or anything else. And a month or 2 later, the family joined me. I had my daughter was already born and Susie was pregnant with Howie. And we moved back there and I went to work for Graham Newman Corp. And one of my 3 bosses, I had 3 bosses, Ben Graham, Jerry Newman and Mickey Newman. Mickey was exactly 10 years older than I was at that time and he's exactly 10 years older now. And Mickey Mickey was a major factor in a hugely successful, he ran the place, a company that was not quite that successful yet in 1954 when I went back there, the Philadelphia Redding Coal and Iron Company, as it was called then. And after I'd been there maybe a year, Mickey was in charge of Philadelphia and Reading and a fellow named Jack Goldfarb came into the office and I really didn't know what was going on. I had a good bit of my net worth in Philadelphia and Redding, so I was interested. But Jack Goldfarb and Mickey were behind closed doors largely. But when they emerged, the Philadelphian Renting Company, which was controlled by Graham Newman, had bought union underwear, which was the manufacturer of fruit of the loom product under a license at that time. And as I told in the annual report, it was a very, very attractive buy and Mickey made a number of good buys. And when Mickey and I have talked and seen each other over the years, some not a lot, but we would see each other. And when Fruit of the Loom entered bankruptcy a few years ago, Mickey called me and sort of said, what are you going to do about it? You should do something. And he was very helpful, particularly helpful in introducing me to John Holland, who runs through the lumen, who's a tremendous asset to the company. And Mickey gave me lots of insights on that. And when I got discouraged with the bankruptcy procedure, and it is discouraging to try and buy a company out of bankruptcy, Mickey would gently prod me along. And so I believe today we have with us Mickey Newman and his son who I last saw when he was a little red headed kid, Bill. And Mickey and Bill, if you're here, if you'd stand up, it'd be great. Now let's see if they made it. There they are. Let's have a spotlight on them. I can't see very well from here whether Bill is still redheaded, but Mickey is 81 believe it or not. You won't believe it if you meet him. And he's been a tremendous help and a great friend over the years. And he accomplished much for us in the past year. I don't think we would have frugaloom if it hadn't been for Mickey, particularly nudging me along as we went through the process. I also hope we have today with us, And again, I didn't get a chance to see them before the meeting. But are Ralph and Lucy Hsieh here? Ralph and Lucy, did they were they able to make it or not? Yes, there they are. But Ralph is in the Berkshire Hathaway Hall of Fame. I mean, this is like being at Cooperstown and introducing Bob Gibson or Sandy Koufax. And Ralph, for a great many years, added tremendous value to Berkshire at Scott and Betzer. We wouldn't be able to buy some of the things like Fruit of the Loom if it hadn't been for the profits developed under Ralph's management at Scott Fetzer. So I'm delighted that he and Lucy can join us. I believe and I hope we have Larry and Dolores Brannan. Are they here? There they are. Let's have a spotlight on them. Dolores is also known as Duchy, but we call her Saint Duchy at Berkshire headquarters because she gave birth some years ago to Joe Brandon. And Joe has been doing a fabulous job for us at General Re. He took over early in September. It's really going to be our number one asset. There's been a lot happened since those days in September when Joe took over. I think you're going to see some terrific results throughout our insurance business, but particularly at General Re. I wrote Duchy a letter and I said, you know, it's terrific what you've done for us. But, you know, I was a little like the farmer that went into the hen house and I, you know, pulled out an ostrich egg and said to the hens, you know, that I don't like to complain, but this is just a sample of what the competition is doing. Well, I'd be rated her a little bit for not having twins because if she just had a twin for Joe, I mean, there's no we don't the world. But she tells me that she wrote me back and said, oh, she really done her best. I mean, she'd had 7 children, 5 of whom are in the insurance business and she has 19 grandchildren. So we have people out on the road trying to sign up these grandchildren now. And if you get a chance, you know, tell her her productive years are not over. And finally, we have with us today, the fellow who put together that terrific cartoon. Anybody that can even takes on the job of making me look like James Bond is a very brave person. And Andy Hayward has a company called, Deac Entertainment, which is a leading producer of children's programming. When you turn on the television on Saturday morning, you will be seeing his output. And Andy puts this product together. He sends people to Omaha. He does it all. It's his script. It's his production. He does it on his own time, on his own nickel. It's his contribution to the Berkshire meeting, and it's absolutely fabulous. And I have to tell you that this fall, Andy is going to have a series of 40 episodes that are called, I think it's called Liberty's Kids. It will be on public broadcasting at 4:30, 5 days a week. And it's really the story of America. It's told, charlie will like this. Charlie doesn't know about this. It will be told through the eyes of 3 young apprentices in Ben Franklin's print shop. And it will view the evolving of the American democracy and and and and, the constitution and all with Andy's creative characters, but it will use the voices of various other people. And I'm flattered. I get to be James Madison in this. And we have Sylvester Stallone, we have Billy Crystal, we have Whoopi Goldberg and Charlie will be crushed to find, I think it's Walter Cronkite is going to be Ben Franklin. I mean that I think Charlie held out for too much money or something in this. But it's going to be a fabulous series. I mean, I am looking forward to this. It will run all this year starting in the fall, and then it will run again the following year. And it will be a great, great piece for American children and American adults. I plan on watching it myself and it will just be the story of how this country came about, through the eyes of these spring young apprentices of Ben Franklin. So Andy is here with his son Michael and if Andy and Michael would stand up, I'd like to give him a hand myself. Andy, where are you? We're here someplace. We've got a lot of other special guests but they're up here in our manager sections. You saw them up on the screen. They're the people that make this place work. We have a larger and better cast this year than we've had even in the past and it'll grow in the future. This is a company of managers. And we confessed to how little we do around headquarters, as you saw in the movie. And we now have, I think, I'm not sure of the exact number, whether we had the it's 130,000 now or something like that, people working all over the world in all kinds of occupations. And I think they get a sense when they come here that they're working for real people on this side. They get to see people who are actual owners. We have some institutional owners, but we have 350,000 individual owners now. And I think, I believe it's correct to say that our stock turns over, there's less turnover in the shares of Berkshire than any other company of major size in the country, which means in effect, we have more what I would call real owners, people who want to be in partnership with the kind of managers we have. And Charlie and I are very proud of them. Now we're going to get to the questions in just one second. I thought I would give you a little update on particularly the insurance aspects of the first quarter because insurance cost us a lot of money last year. It's our main business. It's always going to be our main business. It's a very, very big business and it's going to get bigger. And there were some special events of last year and there were some mistakes of our own that made it a bad year for insurance last year. Our float last year cost us almost 13% And that's a lot of a lot to pay for money. It's not our record. We had a period in the 80s when we ran into even more difficulties. What I think there's been well, I know there's been a change in the market. There's been a change to a degree in the culture at a very important unit. And I think that barring some really mega catastrophe, and we'll talk about those later possibilities, that we are, I think we're doing pretty well. And if we could have the first chart, can I yes, the first chart, which I can't see myself here, but I think it will be the insurance underwriting results for the Q1? And you will see that 2 good things happened in the Q1. 1 is our float increased by $1,800,000,000 That's a lot of money to take in net. I don't think there's any company probably in the world that had a gain in float that was even close to that. And we actually achieved that with a small underwriting profit. So the float not only cost us nothing in the Q1, but we had a gain of $1,800,000,000 in it and all units contributed to that. Minimal or no cost. And there have been a number of years in the past when we've run an underwriting profit, which means that the use of that money is essentially free or even better than free. And, we've had one very bad year and a couple of so so years before that. But I think our costs have flowed over the next few years unless you get into the extraordinary catastrophe. I think it should be pretty satisfactory. Now you'll notice there's a note down at the bottom that's slightly technical but it's an important enough item in Berkshire and in understanding our cost of float that I thought I'd just devote a minute to you to it. If you find this uninteresting, you can live a happy life without understanding what I'm about to explain next. You may even leave a happier life if you don't understand it. As I look at the people that understand it and don't understand it, I'm not sure which group is happier. When we write, we write a good bit and have written a good bit, I should say, of retroactive insurance. Now in retroactive insurance, a company may come to us that's merging with another company and they want to put a cap on their liabilities or define them better from past, isn't it? And so they may come to us and say, we want you to pick up all the losses that are going to be paid from things that happened prior to, say, 19.90. And we think that we owe $1,000,000,000 have yet to be paid in losses from that period, but we want to protect ourselves up to, say, 2,000,000,000 or some number like that. So they write us a check and we take over, this is called retroactive insurance, we take over their losses from the past for a specific period and for a specific amount. And when we do that, the accounting it's not accounting you run into every day, we've explained it in the past, but it creates a charge which will occur over time in the future. And as you can see, in the Q1, the $20,000,000 of underwriting profit we made was after a total of $112,000,000 for the amortization of this charge that is set up. So if a company comes in and says for example, we want you to protect us up to a 1,000,000,000 and a half for losses that occurred in the past and we'll give you a $1,000,000,000 for it. We will debit cash for a $1,000,000,000 and we'll debit this and this deferred charge for a half a half a 1,000,000,000 and we'll set up a liability for a 1,000,000,000 and a half. And that 500,000,000 we set up as a deferred charge, we amortize over a period of time as we expect to pay the claims. Now there would be a lot of room for judgment. There is a lot of room for judgment in terms of how fast we amortize that. We try to be conservative. We make an estimate of when we will pay those claims and how much we will pay. And we try to amortize it over a reasonable period. I've got another slide that shows how those amortization charges will work over time. And we're going to put these slides on the internet because we feel that our shareholders should understand the impact of these charges that will come against underwriting profits. In the year 2,002, we will have a 400 1,000,000 plus charge for this. It's built into the figures now. And if we do 20,000,000,000 of premium volume, that's about a 2% charge. So to have our float be cost free we have to make 400 plus 1,000,000 on underwriting elsewhere in order to offset that. And as you can see, we did that the Q1 and we'll find out whether we do it for the full year. It's a huge not many companies do this kind of business and it's a big item with us. So I really want all the shareholders to understand it and for that reason, we'll put it on the internet. I should emphasize that in all of these contracts, we cap our liability. So a lot of these contracts apply to liabilities that primarily or not primarily, but in a significant way and often primarily arise from asbestos. But when you read about asbestos claims accelerating and all of that, the numbers are capped in our case, so in all of these contracts. So we really don't care whether we pay it on an asbestos claim or whether we play it on an old auto liability claim or whatever. The question is, is whether we've been correct in estimating the speed at which we will pay. And in some cases, we may pay even less than our maximum amount. So anyway, that's available for those of you who previously were unhappy not understanding this and now we're thrilled to know how it all works. Now the final item, which is a little easier to understand is we talked in the annual report about how we expected growth to resume at GEICO and I've put up again, I can't see whether it's up there, but I assume that we have the GEICO policies in force figure and the increase by Charlie hasn't seen these as a matter of fact, so I'll give him the slides. And as you can see, growth not at the rates of a couple of years ago, but quite a turnaround from last year. We growth has resumed at GEICO in a reasonable way. We figure each policyholder of a preferred nature is worth $1,000 to us at least. And so if we add 40,000 policyholders in a month, we've created in our view $40,000,000 of value. And of course, we have the earnings and the float and so on that goes with it. As you'll notice on the first slide, GEICO operated at a significant underwriting profit in the Q1. So all of its float was free and its float has continued to grow. We are you saw one of our little squirrel ads there, which I liked. We are not getting a whole lot more inquiries than a year ago, but we're closing a significantly higher percentage of those that call. So our growth has been picking up because our closure rate has increased quite substantially and our retention rate of old policyholders also is increasing month by month. So we've got 2 trends that are quite favorable in terms of adding business. And the third one of adding more inquiries is something that we are working on and we are delighted to spend a lot of money on it if we can figure out the way to spend it intelligently. But the increase in the retention ratio, the increase in the closure ratio is resulting in very decent growth at GEICO. And it's growth in all of our categories in the preferred class and the standard class and the non standard class of business, whereas last year the latter two fell. Well, that's enough about the formal presentation. Now we're going to go in the various zones. I promised the young shareholder in Zone 1 that he would get to ask the first question and that we're ready for Zone 1. Hello, Mr. Buffet and Mr. Munger. My name is David Klein Rodick from Lincolnshire, Illinois. Thank you for letting me ask the first question. I wanted to say I am sorry for the loss of your friend, Mrs. Graham, last year. My question is, you have said that your favorite time to own a stock is forever, yet you sold McDonald's and Disney after not owning them for long. How do you decide when to hold forever and when to sell? And also, are you and Mr. Munger wearing Fruit of Balloons? Charlie? I think I better answer the question. I can answer unequivocally, I am wearing Fruit of the Loom. And I'm not sure whether Charlie wears underwear. Do you? I haven't I haven't bought any new underwear in a long time, and therefore, I'm inappropriately attired. He's waiting for a discount. Don't let him kid you. Well, the answer it's a very good question about selling. I mean, we it's not our natural inclination to sell. And on the other hand, and we have held the Washington Post stock since 1973. I've never sold a share of Berkshire, having bought the first shares in 1962. And we've held Coke stock since 1988. We've held Gillette stock since 1989, held American Express stock since 1991. We had actually previously been an American Express in the '60s in Disney. So there are companies we're familiar with. We generally sell we would sell if we needed money for something else. But that has not been the problem in the last 10 or 15 years. That 40 years ago, my sales were all because I found something that I liked even better. I hated to sell what I sold, but I also didn't want to borrow money. So I would reluctantly sell something that I thought was terribly cheap to buy something that was even cheaper. Those were the times when I had more ideas than money. Now I've got more money than ideas and that's a different equation. So now we sell really when we think that we've when we're reevaluating the economic characteristics of the business. In other words, if you take them don't want to name names, but take a stock we've sold of some sort, we probably had one view of the long term competitive advantage of the company at the time we bought it and we may have modified that. That doesn't mean we think the company is going into some disastrous period or anything remotely like that. We think McDonald's has a fine future. We think Disney has a fine future and there are others. But we probably don't think that their competitive advantage is as strong as we might have thought as we thought it was when we initially made the decision. That may mean that we were wrong when we made the decision originally. It may mean that we're wrong now and that their strengths are every bit as what they were before. But for one reason or another, we think that the strengths may have been eroded to some degree. A classic case on that would be the newspaper industry generally, for example. I mean, in 1970, Charlie and I were looking at the newspaper business, we felt it was about as impregnable a franchise as could be found. We still think it's quite a business, but we do not think the franchise in 2000 and 2 is the same as it was in 1970. We do not think the franchise of a network television station in 2,002 is the same as it was in 1965. And those beliefs change quite gradually and who knows whether they're precise, whether they're right even. But that is the reason in general that we sell now. If we got into some terribly cheap market, we might sell some things that we thought were cheap to buy something even cheaper after we bought lots and lots of equities. But that's not the occasion right now. Charlie? Nothing to add. He's been practicing for weeks. Okay, let's go to zone 2. I'm John Bailey from Boston, Massachusetts and I hope I'm not asking you to repeat your insurance presentation, but I have a question about the growth of our float. There's an increasingly popular piece of analysis out there where people project the growth of float for a large number of years into the future in order to determine the value of our business here. But I wanted to ask more fundamentally, the existing float that we have runs off annually at a pretty considerable rate. In order to maintain that, we have to replace it through our operations. And then going the next step to achieve the growth, we have to more than replace it. And so I wanted to ask you to address the characteristics of the maybe the non GEICO insurance businesses that should give us the confidence to expect large amounts of replacement and growth float at reasonable costs going forward? Yes. In a sense, float is somewhat similar to being in the oil business. I mean, you're every day some goes out as you pay claims and the question is, did you find more oil than you produce that day? And it's very relevant. It's a good question to what is the premise of the float? What is the cost of the float? What's the likelihood of it growing? Could it actually run off? As you saw up on the slide, we have $37,000,000,000 plus afloat. I think we have more float in our property casualty business. A little bit of that float is in General Re's Life and Health business, but very small. So basically, you're looking at property casualty float when you look at that $37,000,000,000 I believe that's more than any company has in the United States, and it's possible. I haven't checked Swiss Re and Munich, but it's even possible it's larger than anybody in the world. Now if you go to 30th and Harney Street here in Omaha, you'll see National Indemnity is building. It's the same building that was there when we bought the company in 1967 from Jack Ringwalt when it had maybe $12,000,000 of float. And I had no idea that, that $12,000,000 or whatever the number was, would turn into $37,000,000,000 I mean, sometimes I can't really quite figure out how it happened. But in any event, it did. And it's we don't want people focusing on growth in our insurance business. I mean, managers to go out and grow a lot. So you can say, well, with that lack of push from the home office, how is that $37,500,000,000 going to grow? And I would say just as I would have said to you for the last 30 odd years, I don't know. But I think that well, I can tell you this, that our float would have less natural runoff than the float from just about any company in the world. I mean we have a longer duration to our float because it arises from these retro active contracts and from reinsurance, long tail reinsurance and that sort of thing. So our float has less natural erosion than any just about any that I know of in the world, but it erodes. It is a long lived oil field, but we're pumping it every day. If I had to bet my life on whether the float would be higher or lower 3 years from now or 5 years from now, I would certainly bet it would be higher. And it's turned out over the decades, it's grown at a very significant rate, but I don't want to push anybody to do it. It grew at $1,800,000,000 the first quarter. Now there are a few special transactions in that but we seem to attract special transactions. And there's nothing more important to Berkshire than to have that float at least be maintained but I would say grow and it will grow I think. And to have it be obtained at low cost because that float did us no good last year at all. That float was lost us a lot of money in the year 2001 because it cost us I think 12.8%. And we didn't have a way to make money with 12.8 percent money. We will make a lot of money if we can obtain the float at no cost as we did in the Q1. The answer to your question is that without knowing any specifics that without being able to promise you any specifics, I think the float is more likely to grow than to erode. I said last year at this meeting that there were that the flow of the American property casualty business was 300 and some 1,000,000,000 and I thought we were sneaking up on 10% of it. I was corrected later Ron Ferguson pointed out to me that he gave he sent me the figures. The flow of the American property casualty business is well over $400,000,000,000 But even at that, we are 8% or 9% or some figure like that of the float of the whole country. And obviously we can't grow at the same percentage rate starting from that kind of a pace as we could when we started back in 1967. But I still think we can grow it. Charlie? Yes, I think the questioner realizes that growing float at a good clip with very low cost is extremely difficult. It is, it's almost impossible. We intend to do it anyway. The other two variables though, the most important thing to do is to focus on getting it at a very low cost. If we get $37,000,000,000 at no cost or very low cost, then if we don't do we don't make money with that, shame on us. I mean, the troops have delivered and then it's up to Charlie and me to figure out ways to use that money. So the important thing is the cost of the float, not the size of the float, although obviously we would like it to grow and we'll do what we can to make sure that happens. Area 3. Good morning, gentlemen. My name is Hugh Stephenson. I'm a shareholder from Atlanta. My question is on asbestos liability tort cases. It seems like this is growing to be a bigger and bigger problem, including more and more companies, including a number of companies in the Dow Jones 30 Industrials. What do you see for Berkshire as the risks and opportunities in the operating and insurance businesses? And if you 2 were in charge of writing or structuring a settlement for the whole problem, how would you do it? Okay. I'm going to let Charlie tackle most of that because he's we've both done a lot of thinking on it. I think Charlie's thinking is I know it's better and it may even be more extensive. Asbestos, as I mentioned in some of these retroactive contracts, is a big part of the liability, but it really doesn't make any difference unless it's much more dependent on the speed of payment than the amount of payment. We are capped on all those type of contracts. So there's a figure in the annual report about aggregate asbestos and environmental liability and that number may look quite big compared some other insurance companies, but most of that there's a limit on. And it's a good thing because asbestos continues to explode. It's just we talked about it last year at this meeting and I said no matter how bad you thought it was, it was going to be worse. And it has been worse and it will be worse. And you make a very good point when you bring up the fact that many companies that are thought to be or have been thought to have been insulated from the asbestos litigation have now been dragged in one way or another, and that won't stop either. Ironically, it's not impossible that that asbestos litigation actually produces some opportunities for Berkshire in terms of buying companies out of bankruptcy, 3 of their asbestos liabilities. We did that although it occurred much earlier in the K. But we bought Johns Manville which was the my memory was the first major company, really big company, to go into bankruptcy and be forced there by asbestos liability. That happened back in the early '80s. And that subsequently, they were cleansed of their liability by, in effect, giving a very high percentage of the company and its debt to the plaintiffs and their lawyers, I might add. And when we came along a year ago, I mean that was all past history. But we probably wouldn't own the John's Manville company if it hadn't been for some asbestos litigation that started 20 years ago or more. We may see actually more companies that end up in Berkshire that have been forced into bankruptcy through asbestos. But it's really a cancer on the American corporate world and it's one that's growing and I think I'll let Charlie talk about it. Well, the asbestos liability situation in the country has morphed into a very disadvantageous situation where there's an enormous amount of fraud and the wrong people are getting money and there are vast profits for people who are arranging the fraud. And so it isn't a good situation. There's also real liability to people who have serious injuries. And some of those people are being deprived because the meritless claims are taking so much of the money that there isn't adequate money in many cases for the for the people who've had the worst injuries. The Supreme Court has practically invited Congress to please step in and create a solution, but deterred by the plaintiff's contingency fee bar, Congress has refused to do anything. This is not a good situation. And any of you who can do anything about it, I would encourage you to do so. What do you think it'll look like in 5 years, Charlie? I would be surprised if there were a constructive solution. I think we'll have more of them as we have now. It's huge, Stuart. I mean, you there are companies that some of you may own stock in that have huge potential liabilities. They didn't think they had those liabilities even maybe a few years ago, but they're finding ways to drag in almost anyone. And it's a concern when we buy businesses because we are a deep pocket and a tiny a smaller company may not have been worth people investing lots of hours on a speculative idea that they could create some kind of a connection with the ABC company and 100 of 1000 of people that are claimed to be sick, but it gets more interesting if Berkshire it could get more interesting if Berkshire is involved. So it's a real problem for corporate America and they have not been able in effect to come up with a solution. There was a solution as I remember and the Supreme Court didn't allow it. Isn't that right, Charlie? That's right. We will be very careful both in our insurance operations but just as importantly in our acquisitions and all that in terms of avoiding unnecessary exposure to asbestos liability. I'm not terrified at all about our insurance operation in terms of what's there from the past. I'm not saying that I know with any precision what the amounts will be, but that is not at the top of my list. But essentially you will have a plaintiff's bar that going beyond asbestos will try to turn any kind of human adversity into a claim against somebody that's got a lot of money. And that's going on with mold. I mean, you may have seen Ed McMahon is suing his insurer for $20,000,000 for the mold in his house. I just wish I could get some of that mold. I mean You probably haven't. I hope you're referring to the house. Okay. Area 4. Good morning. My name is Ted Friedman. I'm from Cincinnati, Ohio. You said in the 1996 Annual Report that most investors will find that the best way to own common stocks is in an index fund that charges minimal fees. Two questions. First, there are a lot of different index fund that hold different baskets of stocks. What criteria would you use or recommend to select an appropriate index fund? 2nd, the price to earnings ratio of the S and P 500 is significantly higher than its historical average. What benchmark should an investor use in purchasing this index? Yes, I would say that in terms of the index fund, I would just take a very broad index. I would take the S and P 500 as long as I wasn't putting all my money in at one time. If I were going to put money into a index fund in relatively equal amounts over a 20 or 30 year period, I would pick a fund. And I know Vanguard has very low cost. I'm sure there are a whole bunch of others that do. I just haven't looked at the field. But I would be very careful about the cost involved because all they're doing for you is buying that index. I think that the people who buy those index funds on average will get better results than the people that buy funds that have higher costs attached to them because it's just a matter of math. If you have a very high percentage of funds being institutionally managed and a great many institutions charge a lot of money for doing it and others charge a little. They're going to get very similar gross results but different net results. And I recommend all of you reading John. John Bouldle has written a couple of books in the last 5 years and I can't give you the titles, but they're very good books and anybody investing in funds should read those books before investing or if you've already invested, you still should read the books and it's all you need to know really about fund investing. So I would take a broad index but I wouldn't toss a chunk in at any one time. I would do it over a period of time because the very nature of index funds is that you are saying, I think America's business is going to do well over or reasonably well over a long period of time, But I don't know enough to pick the winners and I don't know enough to pick the winning times. There's nothing wrong with that. I don't know enough to pick the winning times. And I think that's a very important point. And I think that's a very important point. And I think that's a very important point. And I think that's a very important point. And the important thing to do, if you have an overall feeling that business is a reasonable place to have your money over a long period of time, is to invest over a long period of time and not make any bet implicitly by putting a big chunk in a given time. As to the criteria as to when you should or shouldn't, I don't think there are any great criteria on that. I don't think price earnings ratio determines things. I don't think price book ratios, price sales ratios. I don't think any there's no single metric I can give you or that anyone else can give you in my view that will tell you this is a great time to buy stocks or not to buy stocks or anything of the sort. Just isn't that easy. That's why you go to an index fund and that's why you buy over a period of time. It isn't that easy. You can't get it by reading a magazine. You can't get it by watching television. You can't you'd love to have something that said, you know, I mean, that's It is it doesn't work that way. It's a more complex business than that. It couldn't be that easy when you think about it. So if you are buying an index fund, you are protecting yourself against the fact that you don't know the answers to those questions. But do you think you can do well over time without knowing the answers to those questions and you intend to save a portion of your income over time, I just say just pick out a very broad index and I would probably use the S and P 500 because I think if you start getting beyond that, you start starting to think you should be in small caps this time and large caps that time or this foreign side. And as soon as you do that, you're in a game you don't know, you're not equipped to play in all candor. That would be my recommendation. And Charlie? I think his second worry is that common stocks could become so high priced that if you bought index funds, you wouldn't expect to do very well. I didn't think I'd live long enough to think that was likely to happen, but now I think that may happen. But probably what you're saying there is that they could get to a level and be they'd have to be at a sustained level like that for a long time. They could be there and stay there for a long time. In which case you might make 3% or 4%. But would there be anything way better than that around under those circumstances anyway? And pass the peanut brittle, please. Well, in Japan, where something like this happened, the return from owning a nice index over the last 13 years or so is negative. Can something as horrible as that happen here? I mean, is it conceivable? I think the answer is yes. But the option in Japan, of course, is to have deposits in a bank or own Japanese bonds at somewhere between 0% and 1% or 1.5%. So if rates on everything get very low, which means stocks sell very high, And then it just means that you live in a different world than existed 20 or 30 years ago when generally capital got paid there. I must say that we have very good packaging. Normally he does this in a less formal manner but he's on his good behavior today. We're protecting the integrity of the peanut butter. That is true. The package the nature of anything with butter in it, you know, is it, it starts going downhill, from the moment you make it. And therefore, this packaging has to be extraordinary in order to meet the quality standards that Charlie and I insist on. Okay, we'll go to Zone 5. Mr. Buffet and Mr. Munger, my name is Thomas Kamay. I'm 12 years old. I live in Kentfield, California. This is my 5th annual meeting. I know you lost a lot of money as a result of 9eleven, but I would like to know how 9eleven changed your life and your investment strategy. Well, I think in the sense of changing the life, it's a good question. And it made everybody I think in the country aware. I mean, we've you know we've gone through world wars and all of that and essentially felt quite protected within these borders and I have been quite worried about, Charlie can attest to, you know, the possibility particularly on some kind of nuclear device in this country by probably more likely by terrorists than by some some, at least declared act of war by another state. And 911 made everybody realize that, that as humans have not progressed, particularly in terms of how they behave with each other over the years, they have progressed enormously in their ability to inflict damage on those that they hate for one reason or another. And that has increased for a long time. And in the world, if you didn't like somebody, the most you could do is throw a rock at them. And that went on for millennia and then it moved into what you might characterize ironically as more advanced states. And in the last 50 years, it's increased exponentially. And so now people who are megalomaniacs, or psychotics, or religious fanatics or whatever and who hate others in some unreasonable way now have means at their disposal to to inflict a whole lot more damage, incredibly more damage than they had not too many decades ago. And nineeleven brought that home to everybody, something they probably understood subconsciously and didn't think about very often to something they thought about much more intensely and it's become more real to them. It hasn't really changed my view about I mean in the sense that I've there are millions and millions and millions of people in the world that hate us and most of them can't do anything about it. But a few have always tried to do something about it. And now the instruments they can use and the most extreme in the sense being the human bombs that have appeared in the Middle East. But there's more ability to incredibly more ability for the derange to want to inflict harm to do harm. And that's a reality. In terms of the business aspects of it, a question, obviously the area at Berkshire that it affects most significantly by miles is insurance. And prior to nineeleven, even though we recognize that there could be huge monetary damages that flowed from the activities of what I would call deranged people. We hadn't really written the contracts in such a way as to either get paid for taking that risk or to exclude the risk. In other words, we were throwing it in for nothing. We had excluded risk for war. I mean, we knew that I mean, we'd seen what had happened in England in the '40s. And so we had taken account of something that some of us had seen with our own eyes, but we didn't take account of something that we knew was possible, but we just hadn't seen. And that's the human condition to some degree. Since September 11, everybody in the insurance business recognizes that they've had exposures that they weren't charging for and they either had to exclude those exposures or they had to charge for them. We have written first thing we had to do, of course, is we had lots of policies on the books that left us exposed to this and most of those policies ran for a year starting at different points. Those have run off to a great degree, but they're not entirely run off. The other thing we did was on new policies. We have sold a fair amount, quite a large amount of terrorism insurance that excludes what we call NCB, nuclear, chemical and biological, as well as fire following nuclear. And we can take a fair amount of exposure to that sort of terrorism because it doesn't it won't aggregate. It aggregated at the twin towers in a way that World Trade Center in a way that just about was about as extreme as you could get for non NCB type activities. I mean, that was a huge amount of damage done without nuclear, chemical or biological. But we can have tens of 1,000,000,000 of dollars with NCB excluded throughout a Greater New York area or something, but we can't have 100 of 1,000,000,000 of exposure that would be exposed, say, to nuclear activities because they're an Act or 2 or 3 coordinated could cause damage that would destroy the insurance industry. And if we had coverage on that, it would destroy us as well. So we write very little. But we can't lose $50,000,000,000 or $100,000,000,000 And so we take a little bit, we take a few risks that involve nuclear, chemical or biological. But generally speaking, the terrorism insurance that we're writing and we've written a fair amount of excludes those particular risks. You can say, take biological, how could that be something significant from an insurance standpoint? Well, many people don't realize that the World Trade Center loss was by a huge margin the largest workers compensation loss in history. You think of it as property damage. But in the end, close to 3,000 people died who were working at the time they died and therefore covered by workers' compensation. If the same thing had happened at Yankee Stadium while they were all watching a baseball game or some other place, they wouldn't have been covered by workers compensation. So it was happenstance to some degree. But that was became the largest workers' compensation loss in history by a huge margin. Now if you were trying to cause huge damage in this country and you could figure out something that in the way of a biological agent and there are people working on this that would could be injected into the ventilation systems or whatever of large plants, large office buildings, you could create workers' compensation losses that would just totally boggle your mind. And anybody that was working on such a thing, you have to expect they would if they thought they had perfected it would try to do something close to simultaneously in areas where there would be thousands and thousands of people working and It could make the World Trade Center loss look like nothing. So we have to be basically vigilant in how much risk we let aggregate in something of that sort. People have always been vigilant about how many houses they'll insure along a shoreline or in terms of physical risk, they don't want too many homes or factories on the San Andreas fall or something of the sort because they recognize that as having aggregation possibilities. But now you have to think about things that man may plan in the way of catastrophes that will have aggregation possibilities. And that is something that's pretty much been introduced into the insurance world's thinking since September 11th. And I can tell you, we think a lot about it. It's I mean, the social consequences are far worse than insurance, but we have to think about how we pay our claims. Because if we ever do anything really foolish and in danger take an aggregation that would cause us to lose the net worth of Berkshire, we would not only not be able to pay the claims of the people in that disaster, but there are other people that suffered injuries 15 years ago, paraplegics and all that that we're making payments to for the rest of their lifetime and we wouldn't be able to make those payments and we're not going to run our business that way. Charlie? Yeah. To the extent that September 11 has caused us to be less weak, foolish and sloppy as we plainly were and facing some plain reality. It's a plus. We regret, of course, what happened, but we should not regret at all that we now face reality with more intelligence. This inconvenience that we all have, this tightening of immigration procedures, etcetera, should have been done years ago. The most important thing in investments is not having a high IQ, thank God. I mean, the important thing is realism and discipline. And you don't need to be extraordinarily bright to do well on investments if you were realistic and disciplined. And the same thing applies in insurance underwriting. It is not some arcane science that the ability to which to do successfully is given only to a few or which requires the ability to do mathematics have very little to do with it. As an understanding of probabilities and all that, kind of a gut understanding, it's important. But it does not require the ability to manipulate figures. It does not really you could do it without calculus, you can do it you really do it with a good understanding of arithmetic and an inherent sense of probabilities. And as Charlie says, to the extent that I think we've always from the investment standpoint, if we've had any distinguishing characteristics, it would be that in terms of realism and discipline. And generally that means defining what you don't know. In insurance underwriting, it's the same thing. You have to have you have to be realistic about what you can understand and what you can't understand and therefore what you can insure and what you can't insure. And you have to be disciplined about turning down all kinds of offerings where you're not getting paid appropriately. And September 11th drove home those lessons and probably redefined getting it paid appropriately in certain cases. Area 6. Hello. My name is Everett Puri. I'm from Atlanta. I wanted to ask you to comment on the relative PE multiples of bank stocks versus the S and P. They seem to be at 30, 35 to 50 year relative lows to the S and P. And I was wondering if that's a result of the market a change in the market's perception of the forward growth rates of banks or if the market is perceived that there's a change in risk there? You're asking about the performance of what group compared to the S and P? Banks. Banks? Well, and what was your assertion about the performance historically? Well, the relative multiple of bank stocks versus the S and P back in the 40s, 40s, 50s, 60s, they commonly traded at, say, one times an S and P multiple, and now they're maybe half that level. Yes. Harry Keefe used to have a lot of figures on this. And I don't really think about a I mean, the appropriate multiple for a business relative to the S and P will depend on what you expect that business to achieve in terms of returns on equity and incremental returns on incremental equity versus that S and P. I mean, you've got if you've got 2 types of businesses and we'll say the S and P earns Exxon Equity and can deploy an additional amount of capital at Y and then you compare that with any other business and that's how you determine which one is cheaper. I would not characterize all banks as the same. I mean, we have in this room John Forlines, who runs the Bank of Granite in Granite, North Carolina, and they've earned 2% on assets without taking any real risk for decades and it's a tremendous record. And then you have other banks that have been run by people that took them right into the ground. I mean, whether it was First Pennsylvania going back 30 years ago, I think it was John Bunting and they I mean, they they're not a homogeneous group. We own a couple of stock in a couple of banks. We own stock in M and T that has an exhibit downstairs today. We own stock in Wells Fargo. And we think those institutions are somewhat different than other businesses. So I don't think there's it goes back to that earlier question. People always want a formula. They I mean, they go to the intelligent investor and they think somewhere they're going to give me a little formula and then I can plug this in and then I'll make lots of money. And it really doesn't work that way. What you're trying to do is look at all the cash a business will produce between now and judgment day and discount it back at a rate that's appropriate and then buy it a lot cheaper than that. And whether the money comes from a bank, whether it comes from an Internet company, or whether it comes from a BRIC company, the money all spends the same. Now the question is what are the economic characteristics of the internet company or the bank of the brick company that tell you how much cash they're going to generate over long periods in the future. And I would come to very different answers on M and T Bank versus some other bank. So I wouldn't want to have a single yardstick or relative PE that I went by. I think that banks have sold, a good many banks have sold at very reasonable prices. We bought all of bank in 1969. We bought a bank in Rockford, Illinois. Charlie and I went and looked at we must have looked at a half a dozen banks at that in a 2 or 3 year period. Absolutely. We trudged around and we found some very oddball banks that we liked. And they were characterized by very little risk on the asset side and very cheap money on the deposit side. And even Charlie and I can understand that. And low prices incidentally too. And then they passed the Bank Holding Company Act in 1969 and they killed off our chances to do anything further in buying all of banks. So we look at banks. We will own bank stocks from time to time in the future. We'll probably buy stock in other banks. We've also seen all kinds of banks ruined. I think it was what was the fellow, M. A. Shapiro, who came up with the statement. He said, There are more banks than bankers. And if you think about that a bit, you'll see what I mean. There have been a, you know, there have been a lot of people that have run banks in a very injudicious manner but that's made for opportunities for other people. A lot of banks have disappeared over time. I mean, up in Buffalo where Bob Womers runs M and T, there were some other very prestigious institutions that went right down the tubes and a lot of that happened in the early '90s or late '80s. So I wouldn't look for a single metric like relative PEs to determine what how to invest money. You really want to look for things you understand and where you think you can see out for a good many years in a general way as to the cash that can be generated from a business. And then if you can buy it at a cheap enough price compared to that cash, it doesn't make any difference what the name of it attached to the cash is. Charlie? Yeah. I think, the questioner is maybe even asking the wrong people that question. I would argue that Warren and I have failed to properly diagnose banking. I think we underestimated the general good results that would happen because we were so afraid of what non bankers might do when they were in charge of banks. There are a number of banks that over the last 5 or 6 years on tangible net worth, a number of them have a lot of goodwill, but on tangible net worth have earned over 20% on equity. You would think that would be difficult for an industry to do dealing in a commodity like money. And of course, the bankers will argue it's not a commodity, but got a lot of commodity like characteristics. And you would think those kind of returns in a world of 6% long term interest rates and much lower, you think that would be very hard. Well, you would have thought it wouldn't have occurred. You think it'd be hard to sustain. We've been wrong in the sense that banks have earned a lot more money on tangible equity than Charlie and I would have thought possible. Now I think to some extent they've done it because they've stretched out equity much further than was the case 20 or 30 years ago. I mean they operate with more dollars working per dollar of equity than people thought was prudent 30 or 40 years ago. But however they've done it, they've earned a number of banks have earned very high returns on equity in recent years. And if you earn high enough returns on equity and you can keep employing more of that equity at the same rate, that's also difficult to do. The world compounds very fast. Banking as a whole has earned at rates that are well beyond on tangible equity, well beyond I think what much more glamorous businesses have earned in recent years. And Charlie, you have any further thoughts on that? Well, I say again, we've, we didn't diagnose it as it actually turned out. And even worse than that, we haven't changed. And even worse than that, we won't. No. Area 7. Good morning, Mr. Buffet and Mr. Munger. My name is Andrew Soll and I'm a shareholder from New York City. I have two questions. The first one I would like to direct to Mr. Munger. Pertaining to cash flow analysis, given the practices of the numerous corporations of deliberately fabricating cash flow numbers, which occurred in some of the telcos where they characterize like kind exchanges as a product sales. How do you ferret out this type of fraud? What do you recommend a shareholder, an individual investor to do short of obtaining a degree in forensic accounting to uncover this type of fraud? And the second question is on a lighter note, what books would either of you gentlemen recommend to shareholders that you read this year that you liked? Yeah. I think you're asking for a lot, if you want, some simple way of not being taken in by the frauds of the world. If you stop to think about it, enormously talented people deliberately go into fraud, drift gradually into it because the culture carries them there and the frauds get very sophisticated they're very slickly done. I think it's part of the business of getting wisdom in life that you avoid getting taken by the frauds. And so I think you're asking a very good question, but I don't think there is any short answer. I think there are whole fields that you can just quitclaim because it looks like there's too much fraud in it. And I think we do a lot of that, don't we Warren? Yeah. How many times have we been defrauded in the last 20 years, Ryan? Well, damn little that we can run. It's amazing how little. And I've always said that the guy who takes us is going to have a modest little office, and modest demeanor. He'll carry around Ben Franklin's autobiography. I can guarantee The kind of people who defraud us are not going to be the kind of people who are defrauding everybody else. Yeah. I mean, it's a very good question. It's tough to answer. But I will tell you that we haven't and we won't get defrauded often. Now that mean we pass up a whole lot of other opportunities too. But for example, you raised the question about cash flow. I would say the number of times we're going to buy into a company, whether it's through stocks or through the entire company, where people are talking about EBITDA is going to be about 0. I mean, we start out with if somebody's talking about EBITDA, if we take all the people in the world who have talked about EBITDA and all the people the world who haven't talked about EBITDA, there are more frauds in the 1st group, percentage wise, by a substantial margin, very substantial. I mean, it is a it's just a start. That isn't that it's very interesting to me. If you look at some enormously successful companies, Walmart, General Electric, Microsoft, I don't think that term has ever appeared in their annual reports. I mean they just so when people are talking about that sort of thing either they're trying to con you in some way or they con themselves to a great degree. I mean or both. Yeah. Well that often happens. I mean if you set out to con somebody after a while you con yourself which is why some of the people in the internet stocks stayed with them. It's if somebody is if they think you're focusing on EBITDA, they may arrange things so that that number looks bigger than it really is. It's bigger than it really is anyway. I mean, the implication of that number is that it has great meaning. You take telecoms, they're spending every dime that comes in, I mean, in many cases. And there isn't it isn't cash flow. I mean, the cash is flowing out. But it you can look at the statement and there's 1,000,000,000 of dollars supposedly in depreciation and so on. But there interest is an expense. Actually, taxes are going to be expense. Anybody that tells you that making a lot of money before taxes in terms of EBITDA is meaningful. You get depreciation by laying out money ahead of time. It's the worst kind of expense. We look for float where we get the money and then pay out later on. But depreciation occurs because you buy an asset first and then you get the deduction later on. It's the worst kind of expense there is. And you start paying taxes when you actually make money and when the depreciation runs out at some point. So it just amazes me how widespread the usage of EBITDA has become. And I would say there have been people who have tried to dress up financial statements in a way to appeal to people who were impressed by such a number. Charlie and I have found actually that at least to us, many of the crooks look like crooks. I mean, we have spotted we haven't shorted them, but we have spotted a lot of frauds over the years in public companies and years before, you know, that the roof fell then. And they usually are people that tell you things that are too good to be true, for one thing. I mean, they, you know, they tell you very mediocre businesses are wonderful businesses for one reason or another. Or they just have a smell about them, you know, and in fact, and wouldn't you that's true, Charlie. Well, sometimes it's amazingly obvious. Maxwell of England, His nickname was the bouncing check. And 3 weeks before he went under, Solomon was He went under in all kinds of things. Solomon was aggressively seeking more business from him with both Warren and I on the board. It shows how much influence outside directors often have. Yeah. Wall Street is I imagine us extending credit to a guy whose nickname is the bouncing check. You'd think if you wrote it as satire, people would say it was too extreme to be funny. We have read that I mean, Charlie, it's a hobby keeping track of the Maxwells of the world and they get there is a syndrome. I mean they give off a lot of the same same messages and I mean, Max was a classic case, but there time after time. Wall Street is no filter against them. Wall Street loves them as long as they're pushing out securities and the commissions there. Charlie and I could not have stopped Solomon from making a deal with Maxwell you know right to the last 30 seconds before he sunk you know and under the ocean. We didn't stop First Normandy with Lou Simpson and Warren Buffett and Charlie Munger on the board? Yeah. First Normandy was a case of some guy that manufactured a record out in California that he claimed was promoting a bunch of securities, including Berkshire Hathaway. And he was going to go public and Solomon was courting him and the record was, you know, it was total baloney. And I think they actually went public for a day or so and then the SEC pulled it back. Absolutely. They had the offering and then they canceled it before the money changed hands. But it was a very embarrassing episode. And when we remonstrated against this obvious insanity, they told us the underwriting committee had approved it. I don't think they change underwriting committees either. Okay, Zone 8. We're a surety group up here, aren't we, on the human condition. Greetings from Germany. My name is Norman Renthrob. I'm a shareholder for about 10 years and I want to thank you gentlemen for your long term performance. I brought you 2 of my favorite German chocolates. 1 for you Mr. Buffett, 1 for you Mr. Munger and I will give them to you tomorrow at the steak house. How much do they sell for a pound? I'm just curious. Well, by the way, this is not the chocolate company you wrote to 2 years ago. They were sold about a week ago for a very low price cigar, but this can still be picked. My question is concerning that what you were just describing as smelling. And I mean, you told us in former shareholder meetings, if management loves money, do not invest. If they love what they do, preferably if they come tap dancing to the office every day and all other things are right, then invest. That resonated to me very good with the biblical truth that not money itself but love for money is the root of all evil and the principle that once made Prussia the largest of all German kingdoms namely the ethos of doing a job for its own sake. When you tell us in this year's report that you buy a company after talking to the owners for no more than 90 minutes, I'm wondering what kind of is it the wisdom of experience just like it is granted or do you do more background work before talking to the owners for 90 minutes? What's the process like? Do you do background checks Or do you talk to competitors? Do the other people in headquarters do that work for you? How does this whole thing work? Well, it's a very good question. And all of the things you suggest might well make sense. I mean, talking to competitors, talking to ex employees, talking to current employees, talking to customers, talking to suppliers, all of those things Phil Fisher laid out in a book over 40 years ago and we have done a fair amount of that over the years. But Charlie would have behaved exactly the same way I did on the company you're referring to. I got a from Craig Ponzio in December on a Monday. It was about a company that made custom picture frames. I never heard of the company before. I'd never heard of Craig before. I didn't talk to him on the phone much more than 15 minutes. He's a very he would be here today as his wife became seriously ill or at least we hope it's not serious, but at least there was a problem last night. But Craig talked to me maybe 20 minutes and you can tell when I mean it's just all the difference in the world. And he laid out what the custom frame how other custom frame picture business works. And it's not complicated. I haven't thought about it for 10 seconds in my whole life up till that. You know, I've had some pictures framed and I get around. And but it's not hard. I mean, if you think about it for 30 seconds, the economics of the industry will sort of make themselves manifest to you. There are 18,000 or so framers in the country. It's a small business. So you're dealing with thousands of people. Now what's important to those thousands of people that you're dealing to? They're doing $250,000 or $300,000 or $400,000 of business a year and have customers who come in periodic like I might come in once every 3 months or every 6 months and say here I'd like a frame and they may ask me about what kind of frame I want or I may leave it up to them. It's a service or operation to a very great degree. And Craig built something starting with in 1980 or so with 3,000,000 of sales. He built an organization that became enormously responsive to these 18,000 or so framers. They call on those people 5 or 6 times a year. They get 85% of the frames of those people the next day when they order them. That's what counts in that kind of a business. You know, it's not an you're not supplying the big three with auto parts. You're not there's all kinds of things that give it a distinctive economic character as well. Craig told me about that, like I say, and not more than 20 minutes. And he told me the price and he told me the capital that was employed and he gave me some a few figures. I knew in talking to him that he had a deal that made sense. And I said, when can you come in? That was on a Monday. He said, I'll be there Wednesday morning. And I came with Steve McKenzie, who is here today and who I encourage you to meet. And I think they got there at 9 and they left at 10:30 and we'd shaken hands. I was hoping to see Craig today or tomorrow, but I won't because of this illness. But I haven't seen Craig since. I mean, we made he got this money. He knew he was making a deal. He had a reason why he wanted. He wanted to sell it to somebody that would be sure to close, that would be a good owner, where the people who work there wouldn't be worried because he was leaving. He was leaving with a lot of money and people, he wanted to be sure. A lot of people leave with a lot of money and they leave the employees behind and they don't care what happens. But this guy cared and I could tell that and that's a big plus with me. So I have not been to their headquarters yet. I plan to be to their headquarters. Steve, I apologize. But I understand what the business is about. And you can most good businesses, you can understand what they are about in a very few minutes, unless they're kind of business that you can never can understand what they're about. I mean, there are other businesses, if you spent years on them, you still wouldn't understand what the hell is going on. I don't know which one of which American auto company is going to do the best 10 years from now. And if I spent all year talking to dealers for Ford and Chrysler and General Motors and I talked to suppliers and I talked to people who are driving their cars, I still wouldn't know anything about what it's going to look like 5 or 10 years from now. But I know that you can't crack our custom picture frame business. I mean you cannot figure out a way to call on those 18,000 people that are in that business and figure out a way to divert their business to you when you can't offer a frame as good as ours and you can't offer service remotely like ours. So it's a good business. And then and Craig was 100% up. I mean he told me exactly what he wanted to receive for the business. He wanted cash that fits us. And there's nothing complicated about it. I mean, you can drag it out for a long time. But what would be the sense of it? I mean, it's just going to make a deal. You're going to make a deal. Charlie? Yeah. If you stop to think about it, the ordinary result when a big publicly held corporation buys another corporation is that maybe 2 thirds of the time, it's a terrible deal for the buying corporation. And yet the people have taken enormous time doing it. And we've bought all these businesses taking practically no time in doing it. On average, they've worked out wonderfully. Why is that? That's a good question. The answer is we wait for the no brainers. We're not trying to do the difficult things. We're going to work for those. And, yeah. And we have the patience to, to, wait. And then we're so peculiar that, that there actually are a good number of businesses in America where they prefer selling to us than to other people. That's very helpful. I just saw a review of a major company, made 10 acquisitions in a recent 5 year period. Every one of those 10 acquisitions was preceded by due diligence and all the bull only they go through and they probably had an investment bankers book and everything. Not one of the 10 in 2,001 lived up or was even close to the expectation of the presentation that was made at the time of purchase. In aggregate, the 10 earned one quarter of what they were projected to earn in 2,001. In other words, the projections were for 4x the actual earnings. And these were companies with strategic this is a company with a strategic acquisition department with loads of people to go over the due diligence with investment bankers quote, helping them, unquote, all along the way. And 10 out of 10 failed miserably. And you know, you have to ask yourself, how can you produce that? Because the world didn't go to hell during that period either. I mean, it was that was not a time when we went into a Great Depression or anything of the sort. It's they were getting they were buying what was getting sold to them. And it was fulfilling some things that the management missed that the management had about itself. And managements have many myths about themselves. And it isn't that complicated if you just write wait for the fat pitch. And the fat pitch doesn't have to be somebody else doing something dumb or anything like that because people don't do that. The people who come to us come for a good reason. I mean they usually want a transaction that, A, they want one they're sure to close, they want if a deal is made and they want one that will leave the people happy that are at the business. When it was announced at Johns Banville, I believe that Berkshire was the buyer. I understand it was a standing ovation. And I've seen it at whether it's Jordans or Star Furniture. People are concerned if you've been working to come for 20 years and you know that the owning family is getting older and has some problems to take care of. Believe me, they talk in the hallways about that. What's going to happen when, you know, the family sells the place and people worry about that and and to have an answer for them so that they all sleep the night that they get it's announced that the business has changed hands means some a lot to some owners and it doesn't mean anything to other owners. I don't think we've ever bought a business from a financial operator. Can you think of any, Charlie? I can't think of 1. The, somebody once defined hell in a legal system as a place with endless due process and no justice. And we're getting close. And similarly, in the corporate world, if you have endless due diligence and no horse sense, you've just described a corporate hell, at least for the people who own the business. Go back to Zone 1. Oh, I'm sorry. It should be one second. We have Mark, do we have a number of people in the music hall that pardon me? Yes. Do we have somebody at Zone 9? Yes. Okay. Mr. Buffet, my name is Luke Nosek from Palo Alto in California. The first thing I'd like is just to thank you for saving my shirt from the Internet stocks for the last few years. And actually it's not quite true. I lost my shirt, but you did save my underpants. I bought the stock in late 2000. And it's actually not just been about the stock. It's about it's been about learning from you and your investment philosophy and your character. It's been very inspiring in the beginning of my professional life to have a mentor like that. And I would love to I think it's been very inspiring for all of us for I guess it's been almost 50 years of your investment professional life that's been continuing to go over the top. I'd love that for that to continue for a long time. I'd love to see the next 50 years. And I don't know if that's possible given current medical technology, but I have some friends in biotech who have been involved in companies that do something called chronic suspension And I'm curious if you've heard of it It's the process of looked into it It's the process of freezing people as they're dying and Just don't do it too early with me. It's actually legally after they're after they pass away. But even if the risks are even if the chances of working very small and the discount rate is huge over a long period of time, I'd wonder if you'd looked into it and what if if you would consider or think about Think about that possibility And again, thank you for your service and all the lessons for the last 50 years. I want to thank you. Well, I appreciate the suggestion and probably isn't much downside to it. It takes a lot of electricity to keep you frozen for all eternity. Well, that's okay. We get our electricity wholesale at Mid American. Now Ed, we are for anything that extends our productive year. I must say at 71, I can't recall ever having any more fun than I'm having now. And I think Charlie seems to be in pretty good spirits too. So we are lucky to be in the business we're in. I mean, just imagine if we've been halfway off, I think, or anything like that where you're essentially you're limited by age, but there's really no there are no problems in this business. I mean, as long as I can kind of lift the phone up and hear Craig on the other end. Or if I can't hear him, I get him to tell to Charlie and he can relay it on to me. It's a very easy business to conduct throughout your life and we're fortunate that way. Zone 10, do we have anybody? Good morning. My name is Pamela Harrington, and I live here in Omaha, Nebraska. And my question concerns your investment in Lidivolume. Could you talk about how that investment fits in with your philosophy about turnaround situations and your preference for businesses that have barriers to entry? Thank you. Yes. Well, Frutar balloon got in trouble for two reasons. One is they borrowed too much money. They borrowed about $1,200,000,000 and actually it went something beyond that because they were engaging some other transactions that were off balance sheet and so on. So it was a company that, in a financial sense was out of control. Simultaneously, with that, they had a lot of operating problems too. But we were not going to inherit the capital structure and we were not going to inherit the management that had caused the operating problems. But much to our pleasure, we were going to inherit a management that had done an incredible job in running the business for a long time prior to the sins of the recent period. And we made a condition, I don't think there probably ever been a condition made to a bankruptcy court proposal where we said our offer is not contingent on financing. It's not contingent on them. If war breaks out, our offer is still good and everything else. But John but we did make a contingent on John Holland being available to run the business because John had done a sensational job of running the business, before the difficulties of the excess leverage and operating insanities. And he was willing to come back, which was very important to us. And Fruit of the Loom has, I don't know, between 40 45 percent of the men's and boys market. It's a product that has a deserved quality image. It's accepted in a big way by very important retailers who were disturbed by things that took place prior to and early in the bankruptcy, but who love the idea of having a product like Fruit of the Loom in their stores and it's a very low cost producer of a very basic product. So it fits us very well. And now the management can just simply worry about building the brand and running plants as efficiently as possible. And there's been some rearrangement of plants as has happened throughout many things connected with textiles. But it's an absolutely first class business. And we'd like to get a little more share in the women's market, likely a little more share in the men's and boys market too. But it's made to order for us. But it's only made to order with the present management. If we'd had to take on the management that was there for a few years, you know, we wouldn't have bought it for a dollar. It just it would have been a disaster and it was a disaster for a while. But fortunately, it's a little like GEICO in the mid-70s. I mean, GEICO was a marvelous company that got mismanaged in a big way for a while. But its fundamental advantages were there throughout the period and what you had to do was get rid of the mismanagement and get back to the basics. Charlie? Yes, I don't have anything on that subject, but I neglected to answer the question about what books would we recommend. The 2 books that I recommend this year were both sent to me by Berkshire shareholders who thought I might like them and boy were they right. The first is called Ice Age, which is a description of the past history of glaciation in the last few 100000 years and how they figured out what had happened and why it had happened. And it's I think it's the best book of scientific explanation I have ever read. It's been published in England and it's going to be published in the United States this fall. And the airport has like 20 copies, of TD Waterhouse, which they did by scrounging all of Canada. And so I recommend that book to you, but a lot of you are going to have to wait for the fall, I think. The other book was how the Scots have helped create the modern world. That's a subject that always interested me, how a tiny poor little population of Celtic people had such a huge favorable impact on the world starting from poverty. And of course, it's related to the Irish who are a similar ethnic strain with a different religion. And it was a marvelous book and I forget the author's name, but I recommend both of those books to all of you. Yeah. I'll recommend a book which may sound a little self serving, but nevertheless, I think this group, many of you would enjoy reading about the Berkshire Managers. And, Bob Miles has brought out a book and it tells about the people who are handling your capital. And I don't think you could have a I know you couldn't have a better group. And I so therefore, if you feel like reading about them, I would Bob has done a good job of interviewing him and I would encourage you to read about them. And I think you'll like your investment better after you read about the managers and you just read what Charlie and I write. Let's go back to Zone 1. We're going to break at noon incidentally and we'll probably break for 30 minutes or thereabouts and then we'll come back. Go ahead. Hello, Mr Buffen, Mr Munger. My name is Justin Fong and I am 12 years old from California. This is my 2nd consecutive year in attendance. My parents brought me here to learn from you. My question is not about money. It's about friendship. How do you remain friends and business partners for so long? And what advice do you have for young people like me in selecting true friends and future business partners? Thank you. Well, when Charlie and I met in 1959, we were introduced by the Davis family and they predicted within 30 minutes, we would either not be able to stand each other or we'd get along terrifically. And that was a fairly insightful analysis actually by the Davis's because you had 2 personalities that both had some tendencies toward dominance in certain situations. And, but we just, we hit it off. We have disagreed, but we have never had an argument that I can remember at all in 43 years. And yet, we both have strong opinions and they aren't the same strong opinions at times. But the truth is we've had enormous amount of fun together. We continue to have an enormous amount of fun and nothing will change that basically. It may have worked better because he's in California and I'm in Omaha. I don't know. I'll let Charlie comment on it. Well, that's a wonderful question you've asked because Warren and I both know some very successful businessmen who have not one true friend on earth and rightly so. That's true. That's true. And that is no way to live a life. And if by asking that question, you're asking, how do I get the right friends? You are really on to the right question. And when you get with the right friends, if you've worked hard at becoming the right sort of fellow, I think you'll recognize what you have and then all you have to do is hang on. The real question is what do you like in other people? I mean what do you want from a friend? And if you'll think about it there are certain qualities that you admire in other people that you find likable that you and cause you to want to be around certain people. And then look at those qualities and say to yourself, which of these is it physically or mentally impossible for me to have? And the answer will be none. I mean, you it's only reasonable that if certain things attract you to other people that if you possess those they will attract other people to you. And secondarily, if you find certain things repulsive in other people whether they brag or they're dishonest or whatever it may be, that turns you off. It's going to turn other people off if you possess those qualities. And those are choices, you know, very few of those things, you know, are in your DNA. They are choices and they are also habits. I mean, if you have habits that attract people, early on, you'll have them later on. And if you have habits that repel people, you're not going to cure it when you're 60 or 70. So it's it is not a complicated equation. And as I remember, Ben Franklin did something like that one time, didn't he list the qualities he admired and then just set out to acquire them? Absolutely. He went out of the way you've gone after acquiring money. They're not mutually exclusive. Area 2. Hello, Mr. Buffet and Mr. Munger. My name is Kevin Truitt and I'm a shareholder from Chicago, Illinois. This question is for you, Mr. Buffet and Mr. Munger. Mr. Buffett, I followed your career since I first read about you in the first edition of Forbes 400 that came out in 82. Reading your profile also led me to Ben Graham's book, The Intelligent Investor. Since that time, I followed the careers of I've also followed the careers of other successful investors such as Walter Slosh, Bill Royne, Richard Rainwater, Robert Bass and Edward Lampert. In following your career and the careers of these other highly successful investors, it's my observation and my firm belief that despite their obvious high level of intelligence and some of them having gone to some of the best schools in the country, none of these people, including yourself, were born great investors. Every one of these, including yourself, learned to be a great investor. Graham learned from his experience. You, Bill Ruane, Walter Sloch learned from Graham. Richard Rainwater learned from you, Phil Fisher and Charlie Allen and from Reading Graham. Robert Bass and Ed Lamper learned from Richard Rainwater and most likely from reading Graham and Fisher as well. These observations lead me to the conclusion that despite intellectual brilliance, although that probably helps, I've come to the conclusion that great investors are made, not born. Do you and Mr. Munger agree with this conclusion? If so, why? If not, why not? And if you do agree, what things would you recommend that someone do if they wanted to become a great investor? Also, what mental attributes do you think a person should have if they want to try to become a great investor? Thank you very much. Yeah. I largely agree with what you said. I would say that there I don't know to what extent an ability to detach yourself from the crowd, for example. I don't know to what extent that's innate or to what extent that's learned, but that's a quality you need. I would agree totally with you that a great IQ is not needed. I mean, you do not have to be terrifically smart to do well as an investor at all. I would say you're 100% right that I learned from Graham first in a very, very big way and I learned something additionally from Phil Fisher and I learned a lot from Charlie. And the proof is in my record actually from 2011 to 2019, I was reading Garfield Drew and Edwards and McGee and all kinds of I mean I read every book with Gerald M. Loeb. I mean I read every book there was on investments and I didn't do well at all And I had no real investment philosophy. I had a lot of things I tried. I was having a lot of fun. I wasn't making any money. And I read Ben's book in 1940 9 or 'forty nine when I was at University of Nebraska and that actually just changed my whole view of investing. And really that basically told me to think about a stock as a part of a business. Now that seems so obvious you can say that why should you regard that as the Rosetta Stone, but it is a Rosetta Stone in a sense. Once you crank into your mental apparatus that you're not looking at things that wiggle up and down on charts or that people send you little missives on saying buy this because it's going up next week or it's going to split or the dividend is going to get increased or whatever. But instead you're buying a business that you've now set a foundation for going on and thinking rationally about investing. And there's no reason why you need a high IQ to do that. There's no reason why you have to be born in some way. I do think there's certain manners of temperament that may be innate, they may be learned, they may be intensified by experiences you go on partially innate but then reinforced in various ways by your experiences you go through life. But that's enormously important. I mean you have to be realistic, you have to define your circle of competence accurately, you have to know what you don't know and not get enticed by it. You can't be you have to have an interest in money, I think, or you won't be good at investing, but I think if you're very greedy, it'll be a disaster because that will overcome rationality. But I think the same books I read and really molded what I how I thought about businesses and investing. I think that they're just as valid now. I mean I haven't seen anything in the last 25 years and I read I glanced through most of the books. I've seen nothing to improve on Graham and Fisher in terms of the basic approach of going about investing, which is to think about stocks as businesses and then think about what makes a good business. And really that's all there is to investing and having a margin of safety, which Ben talks about and so on. It's not a complicated process, but it definitely requires discipline. It requires insulating yourself from popular opinion. You just you simply cannot you can't pay any attention to it. It just doesn't mean anything. So you can't the idea of listening to lots of people tell you things and that it's just a waste of time and you'd be better off just sitting and thinking a little bit. I mean there were no analyst reports on custom frame makers. This doesn't and they wouldn't have been any good anyway. You just have to think. But you have to think about them as in terms of their business characteristics and what they can earn on capital employed and that sort of thing. I would read the Graham and the Phil Fisher books and then read lots of annual reports, think about businesses and try and think about which businesses you understand and which you don't understand. And you don't have to understand them all. Just forget about the ones that you don't understand. Charlie? Yeah. At a deeper level of generality, if you have a passionate interest in knowing why things are happening. You always are trying to figure out the world in terms of why is this happening or why is this not happening. That cast of mind kept over long periods gradually improves your ability to cope with reality. And if you don't have that cast of mind, I think you're destined probably for failure even if you've got a pretty high IQ. Yes. I would say we've seen relatively little correlation between investment results and IQ. I mean, not that there are a whole bunch of people out there with 80 IQs that are knocking the cover off the ball, but there are all kinds of people with high IQs that get no place. And yet it's probably in a sense it's more interesting to look at why people with high IQs don't succeed and then sort of cast out those factors and see if you can cast them out in yourself and leave a residual that will work because if you know it's like Charlie always says you know all I want to know is where I'm going to die so I'll never go there. So if you study the people who die financially, you know, with high IQs and say, why do they die? You know, You'll see certain overwhelming characteristics that are present in in in in in in most of the cases. And you just got to make sure that either you don't possess them or if you do possess them that you can get rid of them or control them in some manner. Area 3. Yes. Steve Patiste, shareholder from Los Angeles. Good morning, Warren and Charlie. I'd like to address the domestic Coke business. It seems to me that Coke has been pulling back from what former great CEO Robert Gazzetta often said and I paraphrase we can't control what soft drinks people buy at retail but in public venues including food service we can control that. We've all heard about the marquee losses that Coca Cola has had such as the NFL, United Airlines and emerging restaurant brands like Baja Fresh Mexican Grill. But they're also losing contracts with major or minor league baseball college and high school venues. Furthermore, it's my understanding that our competitor, PepsiCo has been the fastest growing domestic beverage company for 3 consecutive years. My question is, has Coke's vision changed and is my perception that the domestic fountain division has lost their way, correct? Yeah. No, I would not say that's correct, but I understand the reason for the question because there is the question always of the marquee type accounts. I mean, the truth is either of the 2 major colos that are going to be sold, and associated with, say, the Olympics or Disney World or whatever it is, is going to lose a lot of money, if only directly thought of in terms of those contracts. But there is that association over years. I mean, Coke wants to be where people are happy. And they want that in people's minds. And that tends to be sporting events. It's the Disneyland, Disney worlds of the world. But in the end, can you have a determination to be at every one of them at any price? And the answer obviously is no. It was sort of interesting, about 5 years ago or thereabouts, Coke took Venezuela essentially away from Pepsi. Pepsi Venezuela was one of the few countries in the world in which Pepsi was the leader. And that was because the Cisneros family had developed the business down there very early. So Pepsi had 70% or 80% of the business and in sort of a midnight raid, Coke bought the Cisneros operation, converted it all to Coke overnight, flew 747s in because they didn't want to have this they wanted to be a surprise and they just reversed the whole situation in Venezuela. And it actually whether that is going to turn out to be smart or not is another question because they paid a lot of money to do it. But in any event, Pepsi was very upset. And so the University of Nebraska pouring rights came up very shortly thereafter and these and the universities as you know bid out these things to get sort of an exclusive to a given university. And Pepsi came in and bid about twice as much for the Nebraska pouring University of Nebraska pouring rights as was the sort of the standard in terms of per student at universities throughout the country, at Penn State or something. And I like to think that they were trying to stick it in the eye of Coke by doing that in Nebraska. And I feel that the University of Nebraska really should give me credit for about 5,000,000 a year of contribution to the university because I don't think Pepsi would have done it if it hadn't been in Nebraska. Now the question is, people have called me and they said, do you want us to go up against this? And I said, no, it's nice to have everybody at University of Nebraska drinking Coke, but if we've got everybody at Penn State drinking Coke, I mean, it probably worth as much as potential Coke customers. So there is this bit where one organization or the other, particularly if they've lost 1 in the immediate past, may overbid a little for the next one. And for United Airlines, the question is how far do you let United or whomever it is drive you in terms of making that specific deal. I would say that in something like the Olympics, I think Eastman Kodak made a huge mistake when they let Fuji take away the Los Angeles Olympics 20 years ago or so because it allowed Fuji to get put on a metal parity to a degree with a Kodak whereas Kodak had always owned that and now Fuji was there with Coca Cola and IBM and a few premier companies and it was a mistake. So in the end, you end up overpaying in any kind of objective quantitative sense for most of these marquee properties, but you can't, it'd be foolish to think that you had to have them all. Coca Cola, actually Pepsi Cola, Colas have generally declined somewhat as a percentage of per capita consumption in the United States. And Pepsi Cola has lost considerably more than Coke. What has kept Pepsi doing well basically is Mountain Dew. Mountain Dew has been a very successful product for Pepsi and that has gained share in carbonated soft drinks. Carbonated soft drinks, average person in this room drinks 64 ounces of liquid a year. Carbonated soft drinks are just under 30% of that. And beer and milk are each about 11% or 12%. They're both down from 10 years ago. Carbonated soft drinks are up substantially. Bottled water is up somewhat, but the only 2 categories that are really up are carbonated soft drinks from 10 years ago and bottled water. Coffee is down significantly. I think Starbucks has done a lot, but coffee just keeps going down and down and down. If you look at Coke, almost 30% of liquids consumed in the United States, they have about 43% of the 30% in their arena. So you're talking 13% of all liquids, tap water, everything else that the American water, the American people drink is a Coca Cola product and it's off a couple tenths of 1% from the high, but it's higher than 5 years ago, it's higher than 10 years ago. And actually in the Q1, it did quite well too. So I don't I think there's been no I'm sure there's been no loss of marketing bigger. Doug Daft is a marketer at heart. He comes from the same he's put together the same way as along the same lines as Don Kiel. There'll never be another Don Kiel, but Doug is the same type of guy. He's in tune with the product. And I would if I had to bet, I would bet the market share of Coke in terms of both carbonated soft drinks and in terms of actually in terms of water. I mean the gains in the last year were like 95% in the Q1, they're about 60%. Those are huge gains And Pepsi got an earlier start with Aquafina, but Coke has almost closed that gap. Coke is a very, very powerful marketing organization. So 18, I think, 700,000,000 cases. There's nothing like it in the world. And I do not think they've lost their focus or drive in any way whatsoever. Charlie? I've got nothing to add. You might try vanilla Coke too. It will be out next month. Area 4. Good morning, Mr. Buffet, Mr. Munger. My name is Jerry McLaughlin. I'm from San Mateo, California. Which is why I'm here from half a country away. You know, you've said that great companies are those that have an economic moat. And I understand that phrase to mean a sustainable competitive advantage. Do businesses begin their lives with sustainable competitive advantages? Or must that be developed over a very long time? And then what are the fundamental bases upon which you've seen companies successfully develop sustainable competitive advantages? Of those. Which do you think is the most enduring and which is the least? Well, sometimes they can develop it very quickly. I mean, I would say that Microsoft in terms of the operating system, that was a relatively quick development. But that was an industry that was exploding and things were changing very fast. On the other hand, if you go back to See's Candy, which started in 1921, there is no way you could build a sustainable competitive advantage at least that would be recognizable in times measure shorter than decades. I mean you opened up one shop at a time and nobody heard of you originally and then a few people did. And box chocolates were something that people may have bought once or twice a year for holiday occasions or whatsoever. So you weren't going to embed yourself in the minds of Californians in 1 or 2 or 5 years just because you were turning out an outstanding box of chocolates. So it It depends on the way the industry itself is developing. No Walmart has done a fabulous job and an incredible job in a quite a short period of time. But even they took it in the small towns and they progressed along and refined their techniques as they went. But I would say that there could be things in new industries. I would say with NetJets, have a sustainable competitive advantage and that's an industry that was only originated in 1986 when Rich Santulli got the idea and it was in its I mean total infancy for a good many years after that. But what he has built is and is building and fortifying is that sustainable competitive advantage. But it depends very much on the industry you're in. And I mean, Coca Cola, 18/86, Jacobs Pharmacy Atlanta, Georgia, John Pemberton came up with a product. Did he have a sustainable competitive advantage that day? If he did, he blew it because he sold the place for $2,000 today as a camera. He did and it took decades, thousands of competitors over that time and you know, but they were painting 1 barn at a time designing 1 Saturday evening post ad at a time and all of that and pebbles, you know, around the world in World War II, General Eisenhower went to Mr. Woodruff and he said, I want to I want to I want to cope within the arms length of every American serviceman. He said I want something to remind him of home. And so he built a lot of bottling plants for for coke around the world and, you know, that that was a huge impetus, but that was what 60 years or so after the product was invented. So it takes a long time in certain kinds of products, but I could see certain areas of the world where a huge competitive advantage built in a very short period of time. I would say that probably in terms of animated feature length films for example, Walt Disney did that and after Snow White and a few more, it took him a while to cash in on it. But he became Disney and nobody else in that field for quite a while and fairly quickly. Charlie? Yes. There are a lot of different models that create a sustainable competitive advantage. And there are also some models of, where you can lose it very fast. You just ask Arthur Andersen. That was a very good name in America not very long ago. And I think it would be harder to lose the good name of Wrigley's gum than the good name of Arthur Andersen. I think there's some perfectly remarkable competitive advantages that people have gotten over time. And the great trouble with the investment process is that they're so damned obvious that the stocks sell at very high prices. Snickers has been the number one candy bar for probably 30 or 40 years now. Yeah. In Russia, that turns out everybody likes Snickers. Yeah. What how do you really knock it off? You know, I mean, we make candy. We would love to displace Snickers, but it's hard to think of ways to knock them from the number one spot. I mean, my guess is that they'll be number 1 in 10 years from now and candy bars and the list doesn't change much in that field because if you think about the nature of how you make that choice as to what candy bar, if you were chewing spearmint, spearmint chewing gum 5 years ago and you buy a pack of some chewing gum today, it's likely to be experiment. I mean there's just there's things that you experiment a lot with and there are things that you don't fool around with once you're happy. And you can understand that if you observe your own habits and people's habits around you. But there's other usually if something can gain competitive advantage very quickly, You have to worry about them losing it quickly to I mean when an industry is in flux, there are a lot of people that think they're the survivors or the ones that are going to prosper that where it turns out otherwise. Prosper that where it turns out otherwise. Area 5. Mr. Buffet, my name is Pete Banner from Boulder, Colorado. And I would also like to thank you too for what you bring to the game. I heard your response to the question regarding Coca Cola. In the annual report a few years back, you described Coca Cola and Gillette as the 2 invincibles. With Pepsi as a strong competitor today, do you still continue to view Coca Cola as the invincible. Additionally, with respect to American Express Company, with last year's financial results at American Express, how do you now view American Express? Yes. I think the term I use was inevitables actually but it's very close to the same thing. And I think when I made that statement, I said Coca Cola and soft drinks or Gillette and blades and razors. I mean, I did not extend them to the entire corporate portfolio, particularly in the case of Gillette, but to the blade and razor business. Gillette now has 71% by value of the Blade and Razor business in the world. Just think of that. I mean 71%. Here's a product that everybody knows what it does. They know how to they know where it's sold. They know that it's a high margin business. I mean, it isn't like the world or the capitalist world's unaware of the money that could be made if they could knock off Gillette, but they can't knock off Gillette and it's 71%. And that's a little higher percentage than when I wrote about it. Actually Coca Cola's worldwide market share is a little higher now than it was when I wrote that 5 years ago. And I would say that 5 or 10 years from now I would be amazed if Gillette or Coca Cola has lost market share in their respective fields. Coca Cola sells half roughly of the soft drinks in the world and soft drink consumption per capita goes up basically every year and the per capita is go up. I mean, the capital is go up every year also. So you get these gains, maybe there are 3% or 5% in units 4%. It was 5% in the Q1, but it was poor than that. So I think it was 3% last year. But when you have half the world and the world's population is growing at a little under 2% and you're getting 3% or 4% from something that's as pervasive as soft drinks, you know, you are doing all right. And it was crazy in my view for people to think that earnings can grow 15% or 18% a year in a business where units where you have half the world's business and units are going to grow fine, but they're not going to grow anything like 15% or 12% or 10%. The Coca Cola business has done fine. People went crazy in terms of valuing some of these businesses a few years back and I think we had some cautionary language in there generally about the valuations at which the business is sold. But the businesses, it was 71% in blades and razors. That is a there are some countries where it's 90. In the U. S, it's also about 70%. Those are huge market shares of something people use every day. In this country, it's a little over 8 ounces per day, more like, well, actually more like 9 and a half ounces per day, for every man, woman and child in the United States out of the 64 ounces they drink. Well, you're not going to have galloping percentage increases from that arena. But the companies made basically good progress. People got carried away from the stock and with the stock and I would argue that they may have gotten encouraged a little bit too much by not only Wall Street but even by company pronouncements in terms of attainable, possibly attainable gains. There aren't large companies there may be one someplace somehow very large now that will grow at 15% or 18% a year, but it just isn't in the cards in the world. And we don't want anybody to think Berkshire could do that either because we can't do it from a very large base. The world doesn't allow that, But it does allow making reasonable progress. And certainly Coke and Gillette in those areas where I said they were inevitable have done very well. They haven't Gillette has not done as well with acquisitions as it is clear. I mean the Duracell the Gillette acquisition of Duracell result in giving 20 odd percent of the business for another business and that business has not done nearly as well as either the management or the investment bankers bankers thought it was going to do at the time the deal was made. Charlie? Well, I would say regarding that last instance that that's the normal result. When you try and you've got a wonderful business and you issue shares on it to buy another business, I say at least 2 times out of 3, it's a terrible idea. Well, GEICO is a great example. GEICO is a wonderful business, Absolutely wonderful. It gets more wonderful by the day. It has the world's best manager, Tony, nicely running it. GEICO, in the last 20 years went into at least 3 other insurance businesses I can think of. They went into Resolute Insurance, which was a reinsurance operation started in the mid-80s. It was a disaster. They went into 2 others, Southern something or other and another one that started with an AM. They I don't know why in the hell they would go into them. I mean, they had a great, great insurance business and there aren't that many great insurance businesses. And neither one of those amounted to anything. I think there's you know, they sold them off at some point. But why would you have an absolutely wonderful business and and start one and buy 2 others that are obviously mediocre where you bring nothing to the party. But management's it's very human to want to do that. It's no it's no great sin that the GEICO management did it because we see it happen time after time after time. I can tell you this, Charlie and I have no urges like that. I mean, we want to buy easy things. We do not have to prove our manhood by doing something terribly difficult. And I think lot of management feel that necessity. They've got a wonderful business. The cigarette companies did that. Cigarette companies had these great businesses. And you know they it it irritated them that they they like to think they were business genius and said so they would go out and buy other things and those other businesses generally did not do that well. I'm not saying they should have been in the cigarette business in the 1st place, but they were not business geniuses because they could make a lot of money selling an addictive, you know, product that did not make them business geniuses. And so they wanted to prove it otherwise. And they bought businesses and fell on their face in many cases. Charlie, do you have any more to add on cigarette companies? No, but I think a lot of people rise to the top in public. We held corporations who come up in sales or organization, you know, engineering or drug development or what have you. And it's natural to assume once you're sitting in the top chair that now you know pretty much everything or at least how to get wisdom out of this wonderful staff and all these outside advisors that are now available to you. And so I think it's very natural that perfectly terrible acquisition decisions get made, I'd say more often than not. Area 6. We're going to break in about 5 minutes. In fact, we'll do this question then we'll break. Okay. My name is Paul Thomasik from Illinois. I'd like to talk about your thinking if you don't mind. In the Fortune Magazine article that you sent to all the shareholders, you referenced a practice by Darwin that when he found something that was contrary to his established conclusions, he quickly wrote it down because the mind would have pushed it out. And if you read the Origin of Species, Darwin's very careful to avoid fooling himself. He very carefully asks and answers the hard questions. It's a feedback mechanism and you've picked up on one of his feedback mechanisms to avoid fooling yourself. So the two questions are this. If you look at model how you think, Charlie thinks, how physicists thinks, how mathematicians think, You see the same pattern. You want to use logic. You're dedicated to logic, but logic's not enough. You have to avoid fooling yourself. So you build feedback mechanisms. So the first question is, do you see it that way that you're thinking just like mathematicians, physicists, and some of the other exceptional businessmen by being logical and being careful to have feedback mechanisms. And the second question is about other feedback mechanisms. Your partnership sitting next to you is a great feedback mechanism. It's hard to fool yourself when you partner with Charlie Munger. Right. This meeting is a feedback. Hard to fool him too. But that's not an accident. The meeting on one level is a feedback mechanism. The way you attack the annual report letter is a feedback mechanism. So could you comment both of you on other feedback mechanisms you developed? Thank you. Well, you've come up with 2 very good ones. I mean, there's no question that Charlie will not accept anything I say because I say it, whereas a lot of other people will. I mean, it's just the way the world works. And it's terrific to have a partner who will say you're not thinking straight. It doesn't happen very often. There's no question, the human mind that what the human being is best at doing is interpreting all new information so that their prior conclusions remain intact. I mean, that is a talent everyone seems to have mastered. And how do we guard ourselves against it? Well, we don't achieve it perfectly. I mean, Charlie and I have made big mistakes because, in effect, we have been unwilling to look afresh at something. That happens. But we do have, I think the annual report is a good feedback mechanism. I think that reporting on yourself and particularly report honestly, whether you do it through an annual report or do it through some other mechanism is very useful. But I would say a partner who is not subservient and who himself is extremely logical, you know, is probably the the best mechanism you can have. And I would say that on the contrary, to get back to looking things you have to have to be sure you don't fall into, I would say the typical corporate organization is designed so that the CEO opinions and biases and previous beliefs are reinforced in every possible way. I mean, having staffs around you that know what you want to do, you are not going to get a lot of contrary thinking. I mean, most staffs, if they know you want to buy a company, you're going to get a recommendation. Whatever your hurdle rate is, it's 15% internal rate of return, which very few deals ever work out at or 12%, you're going to they're going to come back and they're going to come back with whatever they feel that you want. And if you arrange your organization so that you basically have a bunch of, sycophants who are cloaked in other titles, you're not going to get you're going to leave your prior conclusions intact and you're going to get whatever you go in with your biases wanting and the board is not going to be much of a check on that. I've seen very, very few boards that can stand up to the CEO on something that's important to the CEO and just say you're not going to get it. So you've hit on a terribly important point. All of us in this room want to read new information and have it confirm our cherished beliefs. I mean, it is just built into the human system. And that can be very expensive in the investment and business world. And like I say, I think we've got a pretty good system. And I think that most of the systems aren't very good that exist in Corporate America to avoid falling in the trap you're talking about. Charlie? Yes. I think it also helps to be willing to reverse course even when it's quite painful. As we sit here, I think Berkshire is the only big corporation in America that is running off a derivative book. And we originally made the decision to allow the general re derivative book to continue. And it's a very unpleasant thing to do to reverse that decision, yet we're perfectly willing to do it. Nobody else is doing it. And yet it's perfectly obvious, at least to me, that to say that derivative accounting in America is a sewer is an insult to sewage. Yeah. I would second that. I might have chosen those exact words and we may not even use those words in describing why we got out of it. But yes, and in the Q1 of this year, we'll show quite a bit of income. And anything we say here we ought to put on the internet, Mark. But I think we'll show what, 100 and I don't know, dollars 60,000,000 or something like that of financial or maybe it's $140,000,000 I'll take a look here. We have 160 odd 1,000,000 of income in that funny little line we have from financials income, but that will be after an $88,000,000 loss in terms of getting the first steps of getting out of the General Re, what used to be called General Re Financial Products derivative book, those losses were there. I Some of that is a shutdown loss, dollars 30,000,000 or thereabouts is severance pay and that sort of thing. But the truth is that derivative accounting is absolutely terrible in this country and there are a lot of companies that will not want to face up to what would be involved if they actually got out. Now you're seeing derivative accounting unwound at Enron in a very major way. And believe me, it's not being unwound except to the extent that the bankruptcy court lets them disaffirm certain contracts. And I mean, it is that there was no place where there was as much potential for phoning numbers at a place like Enron than in the derivative kind of they were marking the model, they were doing all these things. You give a whole bunch of traders the ability to create income by putting little numbers down on a piece of paper that nobody can really check And it just it can get out of control and will get out of control. And so we decided finally to bite the bullet on it and we get out of it. And it would incidentally, we would not have reported $88,000,000 of loss if we'd stayed in it. Might have reported a tiny profit or something. But in the end, the loss was there. And there will be it could well be some more to come in that because once you get into derivatives, I think our longest contract may run 40 years or something like that. And then the guy who put the 40 year contract on the book probably got paid that week for putting it on virtually. And we've got a bunch of assumptions as to how it's all going to work out over 40 years. You couldn't devise a worse system. And in the end, we didn't want to be in the business when we got in it and we are now in the process of getting out. But you don't get out of fast or something like this. I mean it's a little like hell. It's easy to get into and it's hard to get very hard to get out of. Well with that we'll go off to lunch and I'll see you here in another half hour or so. Thanks.

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