Berkshire Hathaway Inc. (BRK.A)

ASM 2004 Part 2

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May 1, 2004

After reading this story on Enron, I would like to ask you the following question. How does an entry level employee in a large company find out if her employer operates with a long term perspective and with honesty and integrity? Well, that's a very good question. I'm not sure I'm going to have an equally good answer. You pick up signals or frequently, you can pick up some signals about what is going on at the top of a business if you're at a lower level. But I would say it would be very easy to be it'd be easy to be fooled on that subject. Charlie and I would tend to be looking at things that they do in public in relation to their investors and the promises they make and all of that sort of thing. But I think that might be tough for people, and it wouldn't always give you a great guide. We've been suspicious of companies, for example, that place a whole lot of emphasis on the price of their stock. I mean, when we see the price of a stock posted in the lobby of the headquarters or something, things like that make us nervous. But I'm not so sure that's, you know, that would be enormously helpful. So I guess, you just have to sort of pick up from co workers, publications, pronouncements of the leaders, the sort of culture that was being presented to them and the world. You might get suspicious about it. But I don't think I have a really good answer for that. Do you, Charlie? No. It's obviously easy when you've got a caricature of a person like Bernie Ebbers or Kenny Leigh. Lay, I think it's easy to say that you've got almost a psychopath in charge. But what fools you is a place like Royal Dutch. If I'd been asked to guess major companies with sound long term cultures and good engineering values and so forth, Royal Dutch would have been near the top of my list. And to have the oil reserves phoning for years and internal reports that people were tired of lying and but it can happen at Royal Dutch. Believe me, it can happen in a lot of other places. Charlie and I would not have spotted it at Royal Dutch by any of the means that we normally use. In fact, we as Charlie said, we might have used that as an example of some place that was almost certainly above our approach. And then you do read the emails and all that. But we don't learn because I would still expect that Exxon's figures were fair. Yeah. I think what was what transpired in the 1990s was this gradual, and later on not so gradual, embracing at the top of the feeling that anything goes. I'm not going to speculate as the motives are at the top of Shell, but there was so much going on where people saw the the fellows, in most cases, fellows, unfortunately, that were at their clubs that that they saw in at other corporate meetings or respected business leaders. They saw just one after another that we're really cutting corners in one way or another. And, you know, situational ethics can take over in that. People do, I think, they sink faster to a lower prevailing morality than they rise to a higher prevailing morality. But they they they those around those around them in many cases. And certainly, the corporate world in the late 1990s, particularly, it was extreme on that. And that leads me into I ran into a friend in the, at the lunch break who's involved in these matters, and he suggested, and I'm delighted to put in a plug to encourage all of you to write your congressmen and senators to to give your views on whether stock options should be expensed or whether in indeed, whether Congress has got any business legislating on the question of what proper accounting is. It was a disgrace some 10 years ago when the United States Senate essentially threatened the Accounting Standards Board with extinction and bludgeoned Arthur Levitt then running the SEC, at the behest, of a lot of rich contributors to declare that, to override the Accounting Standards Board's pronouncement that options should be treated as expense. And it was and I think in a very significant way, it accelerated the anything goes mentality of the 1990s. At that point, when Congress says it's more important to have stock prices go up than it is to tell the truth, And they voted 88 to 9 in order to do it, as I remember. I think that I think there was a a shift in in morality among many corporate executives. You may remember that that, the FASB then backed off, but still said that expensing was preferable. And having said it was preferable, 498 out of 500 companies in the S and P took the less preferable method. All of the big auditing firms at that time endorsed their big clients' views in order to report higher earnings. Now all 4 accounting firms say she should count them as expenses. Well, they're right now, but it just shows what was going on in that period when on a question of accounting principles and when really nothing has changed when what were then the big five have shifted 100% to where the big four are now. And now they say, options should be expensed. So if you are inclined to write your congressman or senator, tell him you really think the FASB knows more about accounting than they do. And I think you'll be right. If you want to have some fun, go to Google and type in 2 words. Type in the word Indiana and type in the word pie. That's the mathematical symbol pie. And when you do that, you'll see a number of stories come up. And they relayed how in 18/97, at the instigation of 1 legislator who was responding to a constituent, the House of Rep the House in Indiana voted almost unanimously, may have even been unanimously, it says what it was on Google, to change the value of pie. I'm I'm, you know, I'm not making this up. It's checkable. And, it seems that there was a fellow that had thought he'd discovered some new, relationship between circumference and diameter and a few area and a few things. And it came out to 3.20 if you work through his formula. And he offered to give this royalty free, as he put it, to the state of Indiana to teach its children so that they would have not only the truth, but they'd have an easier number to work with than the long decimal that heretofore had been thought of as pie. Well, that passed the Indiana legislature, and, it passed it passed the house. By the time it got to the senate, there were a few people that were still clinging to the old values who managed to shoot it down. But I would submit that in the 9 in 1993 that the the US Senate cleansed the record of the Indiana legislature by outdoing them in attempting to change the rules on something on a subject they knew nothing about. And, I think some of the excesses of the 19 nineties that followed came about through the fact that they knew 88 senators were willing to declare the world was flat if constituents who had contributed enough money to them wanted it thus. Let's pause and we'll go back to our schedule here. Number 3. Oh, Charlie, do you have anything to say about the Indiana legislature? Well, I the current members of Congress that want to retain the former abusive accounting, which are probably a majority of the House of Representatives, are way worse than the people who wanted to round pie to an even number. Those people were stupid. These people are mostly not stupid, but dishonourable. I mean, they know it's wrong and they want to do it anyway. Let's go to number 3. Hi. My name is Nate Anthony from Hinsdale, Illinois. First, I would like to venture a response to an earlier question about the future of Berkshire. I believe it is our responsibility as shareholders to think for ourselves and ensure that Berkshire is run as respectably in the future it has been until now. You both have had a lot to say both today and in the past about how mutual funds should be run. But to my knowledge, we do not directly have a fund management business. What do you think about putting your words in action and offering to have a Berkshire company manage the assets of funds where the directors are dissatisfied with present management? Yeah. The problem would be there would be too many conflicts. You know, we're managing so much of our own money at Berkshire that to take on the responsibility for managing another group of people to whom we would owe our best efforts And handling that situation of wearing 2 hats ethically, I wouldn't know how to do it. I certainly wouldn't want to start a fund management company and be prorating all purchases between Berkshire and that fund management company or the funds that it managed. We've thought about it plenty. I mean, we've had all kinds of propositions put to us. And obviously, we could sell it big time. But, when we got through selling it, then we'd have the problem of administering it fairly. And I don't know how we would do it. Charlie, you? No, that's why we don't do it. But I must say it's an attitude that doesn't seem to bother many other people. Microphone 4, please. Norman Renthrop from Bonn, Germany. Two thanks and one question. My thanks go to both of you for allowing us investors to participate on equal terms with you. No management fees, no performance fees, no transaction fees. My thanks also go to the people of Omaha for building this very fine new convention center. Our thanks too. I'll interrupt you for just one second. We wouldn't be able to hold this meeting if we'd been limited to the facilities we had last year. Last year, we had the biggest facility in town. And I was told that we have at least 19,500 people here, and that would have been many, many thousands beyond what we could have had last year. And this is this facility really does the job. Incidentally, it's known as the QUEST center. If you read about it in the paper, they have a they seem to have some unwritten rule or maybe it's a written rule that they can't use the name. And so you will not see that name in the paper, for reasons that absolutely baffle me. But this is the Quest Center and they've done a wonderful job with it And Omaha has 19,500 people here today that otherwise might have to go to Kansas City. So thank you for thanking them. And now your question, please. My question is your outlook on buying companies. You have taught us when stocks are priced high and companies are priced low, then by companies. In the 19 sixties seventies, we did see the rise of the conglomerates. Then came in the pure industry plays. Now we see a huge amount of money in private equity. And somehow private equity is competing for buying companies. So my question is, what is your outlook on the future of the buyout and the buying company industry? You're absolutely correct that the private equity funds are a form of competition with Berkshire and buying businesses. We don't really seek to buy businesses cheap because you're not going to get the chance to do that. We haven't been able to do that. We do get occasional chances to buy them at what we would regard as fair value. You'll never buy companies as cheap as stocks sometimes get. I mean, sometimes stocks sell for very low valuations compared to intrinsic value. Businesses just don't do it. I mean, the reason is that stocks are the prices of stocks like those junk bonds we talked about earlier are set in an auction market and that market can do extreme things, but businesses are sold in a negotiated transaction and that doesn't get as extreme. Nevertheless, our preference, our strong preference is that we would rather buy businesses at fair prices than stocks even a little cheaper. And the private equity funds our competition. On the other hand, we have bought a reasonable number of businesses in recent years and and we'll buy more in the future. If somebody wants what we are offering, you know, we are somewhat one of a kind in that we can we will buy a business. And the people that sold it to us, if they built that business, are really able to run it as if it's their own indefinitely in the future. So if they have a tax reason, if they have a family situation or whatever, where they want to sell some business they love and they don't want to auction it off a piece of meat and they don't want some guy buying it and then leveraging it up and then reselling it a couple of years after changing the accounting or something of the sort. They come to us and they know they'll get, the result they want. And that happens periodically. It doesn't enable us to buy super bargains or anything like that. It just doesn't work that way. But it does let us put the money to work at a sensible rate. There will be more people like that. Unfortunately, we need big businesses and, you know, they don't come every day. But as I've said, when they if you find that kind of an owner, if I owned a business that was big and that my maybe my father had started, my grandfather started and I worked a long time for, but for one reason or another, I had to monetize it. I would sell to Berkshire. It's very simple because I wouldn't regard the carving up of it to get perhaps the highest a higher price, which might or not might not be higher. But I wouldn't regard that as the ultimate goal in life. I think it's kind of crazy to spend I think it'd be kind of silly to auction off your daughter to whatever man is willing to pay the most for. And feel the same way about a business you've created lovingly over decades decades decades. And we will buy some more. It's a matter of luck whether it happens in any given quarter or even in any given year. But there is really no one else can quite make the promises that we can make. I mean the degree of ownership that I have in Berkshire and the way I've got it set up for the future where none has to be sold, my promise is we'll probably be about as good as you can get in that arena. Most big companies simply can't do that if their Board of Directors decides they want to have a pure play, as you put it, in something. What can be done about it? I tell prospective sellers basically I am the only one that can double cross you. And I can double cross them. If I, the next day, want to pull something out of them, it's not contractual, what I've said to them in all probability, but nobody else can. We're not going to get some management consultants in and say, they say, you ought to rearrange the business or we're not going to get Wall Street dictating to us. And that's, I think, a significant advantage over time. I think it will enable us to buy businesses, but we do have a lot of competition, as you point out. Charlie? Yes. It's been interesting, though, that we've had this private equity competition for a long time. And one way or another, we've managed to buy a few things. Okay. We'll go to number 5. Hello. My name is Dan Cunningham, and I'm from Boston, Massachusetts, home of the 2004 World Champion Boston Red Sox. Thank you, Warren and Charlie, for providing this forum and teaching over the years. It's much appreciated. In a recent New York Times Magazine cover story titled Up in Smoke, David Sokol, who runs Berkshire's Mid American Energy Business, was cited as a prominent CEO actively working to roll back the United States Clean Air Act, which 80% of Americans view as crucial to our public health. Mid American itself was cited as a major mercury polluter, among other things. With this in mind, could you see a role for a type of independent oversight committee charged with the purpose of auditing for shareholders the social responsibility of Berkshire's businesses. This committee would monitor costs that Berkshire's businesses incur for our society, but not show up anywhere in an income statement. Maybe in Berkshire's case, this would be a fraction of a person instead of a committee. Thank you. Is Dave here? I can't it's hard for me to see you. Do you see Dave? Mark, is David here? If we go to a yeah, he might I'd like to have David respond to that because, you know, I have seen Mid America actually lauded in many, a great many respects. I did not see that particular article, but I know that if there were anything being done that had been judged wrong, I would have heard about it. So maybe David can address that if he will. Yes. Warren, this is David. Okay. The article actually does not criticize MidAmerican for any air emissions. It criticized me for 2 years ago being a ranger in President Bush's election. For what it's worth, I'm no longer a ranger, but that was the focus of the article was energy CEOs trying to influence legislation. That's not why I was a ranger. And frankly, Mid American's environmental policies, I think, rank among the best in the industry. Thanks, David. Yes, I've never seen any criticism of Mid America. As a matter of fact, David, could you tell us what happened with that J. D. Edwards study just recently? Yes. We were ranked nationally 2 in the country for environmental reliability, availability and customer satisfaction, number 1 in the Midwest out of 55 utility companies. Thanks, Dave. And number 6, please. Good afternoon, mister Buffet and mister Munger. My name is Van Arjurakis. I'm from Omaha. Many US Multinational Corporations depend on the importation of foreign workers. What is your opinion on the current state of US immigration law as it applies to the employment of highly skilled permanent workers? Charlie, you want to comment on that? Well, of course, that's a subject on which reasonable minds disagree. My personal view is that I'm almost always glad to have very talented people come into the United States and I'm almost never pleased when the very bottom of the mental barrel comes in. We may differ just a bit on that one. This country has certainly benefited enormously over the decades, by immigration. We started out with 4,000,000 people in 17/90. China had 290,000,000 at that time, just about what we have now. Europe had well over $75,000,000 So you had 70 times as many people in China. You had probably 20 times as many people in Europe. We had the same degree of intelligence in China or in Europe as we had here. We had similar natural resources, and now this country has well over 30% of the GDP of the world. So it's a pretty remarkable story. And how to attribute or how to quantify the various components that entered into that is very, very difficult. But we've certainly been a country characterized by by, lots of immigration. And whether that whether that, is responsible in any way for the incredible record of this country, I don't know. But I suspect that it was. And I think what Charlie would like to do is perhaps be the admitting officer. And it would work pretty it would work pretty well if Charlie was. But in the absence of that, I think, I don't think net this country has been hurt by immigration over time. Number 7. Good afternoon, Mr. Buffet and Mr. Munger. I would like to thank you for being here. My question pertains to price discovery and liquidity. It is common perception that unless there is adequate liquidity, price discovery is hurt. Now if liquidity helps price discovery, then does it make sense to split the stock of a company which has a low liquidity problem? As a corollary, why do you consider stock splits and bonus issues to be bad for shareholders in the long run? Thank you. Stock splits and what else, Charlie? Bonus issues. And what's the relation? I don't get it. He didn't indicate a relation. He just asked you to describe what's wrong with both. It's 2 questions then. Well, we have explained how we think about stock splits. There's no religious view against them. We don't think companies that do them are evil or anything of the sort. We do think we've got the best group of shareholders, in the world. And I think that a meeting like this, to some extent, is evidence of it. We've got people that are more in sync, I think, with the policies of the company. We certainly have people who are more long term in their view of Berkshire or their intentions regarding Berkshire. I think we have people that understand their investment in Berkshire better than well, really better than any other large American corporation. We've got the lowest turnover of any large American corporation now. Why is that? Well, people can buy stock in any company they want to. I mean, you could have bought stock in Berkshire or something else. But there's this self selection process of who comes in. And there's a self selection process of the people that just say, that company doesn't interest me. And I would say that people who say they aren't interested in a stock that sells in the 1,000 of dollars a share simply because it sells in the 1,000 of dollars a share are not would not as a group be as intelligent and informed and long term in their outlook and is in sync with the policies of management as this group. It's not a killer of a thing, obviously, but it's a sign. It's a symptom of people with a somewhat different attitude toward the stocks they own. Now somebody is going to if we have $1,500,000 Class A equivalent shares, we have a little more than that outstanding, somebody is going to own them all. So it's just a question of who is attracted and who is repelled from your shares. And I think not splitting and some other things we do at Berkshire, a number of other things we do at Berkshire, has attracted a group of shareholders that really come the closest to an investment oriented group as is almost possible in a widely traded and widely available company. And we like the group we've got. We're not looking for the people who think it would be a more attractive stock if instead of selling it $90,000 a share, it's sold at $9 a share. Nothing wrong with those people, but they are if we were choosing partners, we would choose the group we have over the people who think a $9 stock is a wonderful thing. Charlie? Yes. And on the second part of that question, I think the notion which is taught in so much of modern academia that liquidity is this of tradable common stock is a great contributor to capitalism. I think that is mostly twaddle. The GNP of the United States grew at very good rates long before we had highly liquid markets for common stock. I don't know where people got that silly notion. I think the liquidity gives us these crazy booms, which have many problems as well as virtues. And in England, if you'll remember, after the South Sea bubble, England banned tradable common stocks for decades. It was absolutely illegal to have a company so widely held you got a liquid market in the shares and England did fine during that period when you didn't have a stock market. So if you think that liquidity is a great contributor to civilization, why, then you probably believe that all the real estate in America, which is relatively illiquid, hasn't been developed properly. Keynes actually commented on the perversions brought about by liquidity. But of course, the truth is that Berkshire trades on average $50,000,000 or so of stock a day. So very few people are going to have any problem with Berkshire, the liquidity in the stock. But we're trying to create more of them, more people who have this big liquidity problem because they own so much stock. Let's go on to number 8, please. Hello there. This is Michael Angelo from San Francisco. My general question is about how ethical concerns enter into your asset allocation decisions. So for example, I think there's some strong arguments, that can be made, that say classic Coke should never be part of anyone's diet. If such an argument could be made and you were convinced of it, would that change the way that you viewed Coca Cola Company as part of your portfolio? Well, I think that's a hypothetical that simply wouldn't happen. I mean, it I've been drinking 5 of them a day. And maybe it's the combination of that and peanut brittle that does the job, but I just feel terrific. We passed one time on the chance to buy an extraordinarily profitable company because Charlie and I met the people that ran it. And they were they were perfectly decent people too. And we went down in the lobby of the hotel that that we met them in, and we just decided that in the end we didn't want to be involved in that. On the other hand, I would have bought stock as a publicly traded stock in the same company. Charlie will give you his view on that later. So I do not have a problem buying stock in companies, marketable securities, the bonds of those of companies in the market, that engage in activities that I wouldn't probably endorse myself. I would have trouble owning outright and actually directing the activities of some of those companies. But any major retailer in this country is virtually is going to be selling cigarettes, for example. And if they're not declared illegal, it does not bother me to own it would not bother me to own those retailers outright or does not bother me to own the stock. Yes, but you wouldn't buy a company that made the tobacco and concocted the advertisements? No. And I can't tell you perfectly why that I mean, I can't tell you that that's the perfect line or I can't tell you precisely why that's where I draw it, but I will tell you that is where I draw it. We would not be in the manufacture of it. But we owned stock at one time in RJR Rentals before it had the LBO. We owned bonds in it. And I would still be doing it if I liked either the bonds or the stock. We would not buy the manufacturer. And like I say, we walked on one that and we went down to the hotel to talk about it though too. So you'd have to say that we were thinking about it, but we decided not to do it. Charlie? I didn't think very long. We don't claim to have some kind of perfect morals. You can draw these lines where you wish, But at least we've got a huge area of things, which is perfectly legal to do, that we think beneath us. So we won't do them. And we see more and more in America a culture where just anything that's unlikely to send you to prison, which looks like it'll make money, is okay. And that is a very bad development. But I think I think it's a little crazy myself to to say that it's terrible if people eat hamburgers or eat or drink Coca Cola or eat candy or anything like that because they're likely to gain weight, that is a perfectly optional decision. And and who knows whether somebody has lived a happier life that lives to 75 and their overweight condition causes them to die a little sooner, or they live to 85 and lived on carrots and broccoli, you know, has lived a better life. I know which one I prefer. Okay, number 9, please. Hi, Mr. Buffett. I'm Alan Maxwell. My wife and I are shareholders from Omaha. I'm going to keep things simple so you can understand them. Good. Alan's a friend of mine, so he can get away with that. Thank you, Colonel. Excluding the Buffett stake, I'm going to combine A and B shares. And there are approximately 1,000,000 A shares outstanding, correct? That'd be about right. Okay. About. Your salary is approximately or is $100,000 a year. It's been stuck there for a while. We'll talk about the Board. Well, you'll be happy with my question. You can make it a motion for me. In other words, we're paying you $0.10 a share to manage a $90,000 investment. That's remarkable in today's corporate culture. Thank you, Mr. Buffet. Thank you. Alan, thank you. But I have to tell you, as I did last year, I would pay to have this job. I mean, it doesn't get any better than this. Well, rather than you doing something for us, I would like to suggest that we, the shareholders, do something for you. As a shareholder, I would be willing to pay you $0.25 a share. That way, you could save a little extra money for your retirement. Would you support such an idea? Alan, I'm getting Social Security now. And that really pretty well takes care of things. My family would go crazy if I made any more money. But I appreciate the offer, however. My heart's with you. Thank you. Okay. Thanks, Al. Let's go to number 10 and see if we can get $0.50 How about a dollar? David Winters, Mountain Lakes, New Jersey. Thank you, Warren and Charlie, for a fabulous weekend and for the discussion about governance in the mutual fund industry in the shareholder letter. Specifically, have you altered the compensation potential for the insurance underwriters to make sure, as Charlie has described, the incentive caused bias creates an environment that encourages writing new policies that when the tide goes out again in the property and casualty business, Berkshire Hathaway minimizes losses, maximizes float, while compensating underwriters for not writing business. Well, thank you. That feeds into an interesting set of slides I've got, if I can find them here to tell the projector what to put up. But that's a very important a very important point you raised. I mean, we are very big in insurance. And having the wrong incentives in place could be very harmful. So let's put up a couple of slides. Let's put up slide number 1, if we would, please. Slide 1 is the situation at Berkshire. And, Charlie, I'll give you one of these. But that's the situation at Berkshire shortly before we bought National Indemnity. There's our balance sheet there. And as you'll notice, we just had a few $1,000,000 extra. We had about $20,000,000 tied up in the textile business. And then I heard that Jack Ringwalt wanted to sell his company. Some of you here in the audience know him. He for for 15 minutes every year, Jack would feel like selling his company. He would get mad at something other than it. And so my friend Charlie Hyder knew Jack pretty well and I said to Charlie, Charlie, next time Jack is in heat, have him, you know, get him over here. And so Jack, early in 1967, came by came by at 11:30, 11:45 in the morning and said he'd had it with insurance and with the insurance regulators and everything he'd like to sell, so we bought it. We bought that was made a major that's when we really embarked on what has happened subsequently. As you can see from that slide, the following year, the textile business made all of $55,000 So sticking with textiles would not have been a great idea. We spent $8,500,000 to buy national indemnity. Now, on the next slide, slide 2, you will see a record like there's never been I don't think there's another insurance company in the world that has a record like this. That's the premium volume of National Indemnity's traditional business. And you will see a company that went from $79,000,000 in that 1st year of premiums. If you go all the way back to the time we bought it, it was $16,000,000 dollars But by 1980, we're up to $79,000,000 And you will see that in what was known as the hard market of the mid-80s, we got up to $366,000,000 And then we took it down, not intentionally, but just because the business became less attractive, all the way from $366,000,000 down to $55,000,000 And now the market became more attractive in the last few years and it's soared up to almost $600,000,000 I don't think there's a public company in America that would feel they could survive a record of volume going down like that year after year after year after year. But that was the culture of national indemnity. It was the culture starting with Jack Ringwald and it was the culture all the way through several other managers, Phil Lishi and Raleigh Miller, to Don Wurster who has done a fabulous job. And we don't worry about premium volume. But if you're not going to worry about premium volume, then you have to take a look at slide 3. Because if the silent message had gone out to our employees that unless you write a lot of business, you're going to lose your job, they would have written a lot of business. You could National Indemnity could write $1,000,000,000 worth of business in any month it wanted to. All it has to do is offer silly prices. If you offer a silly price, brokers will find you in the middle of the ocean at 4 in the morning. I mean, that, you cannot afford to do that. So what we have always told people in our insurance businesses generally, specifically at National Indemnity, is that if they write no business, their job is not in jeopardy. We cannot afford to have our our unspoken message to employees that you write business or your job or the guy sitting next to you is, you know, maybe lost. So when we bulged up to 366,000,000, we employment went up modestly. And when we went all the way down, you'll see it trickle downward, but that was all by attrition. We never had a layoff during that period. Other people would have, but we didn't. And now we're going back up some and we'll go back down again at sometime in the future. Now, if you go to the next slide, you'll see that that created an expense ratio that went up dramatically, up as high as 41% in 1999 as volume shrunk back. And when we were riding a lot of business, our expense ratio was as low as 25.9. Now, some companies would feel that was intolerable, but what we feel is intolerable is writing bad business. And again, we can take an expense ratio that's out of line, but we can't afford to write bad business. For one thing, if you got a culture of writing bad business, it's almost impossible to get rid of. So, we would rather suffer from the stand of having too much overhead than we would want to teach our employees that to retain their jobs, they needed to write any damn thing that came along because that's a very hard habit to get rid of once you get hooked on it. Now, if we'll move on to Slide 5, you will see what the result has been of that policy. And it's been that we had a few years, bad years in the early '80s. That's what led to that hard market. But even with a high expense ratio, you'll see that we made money underwriting in virtually every year. You'll see the year 2,001 at 108.4, but that will in my view, that will come down. I think that will turn out to be quite a good year. These are the that year is not fully developed yet. Now you'll see in 1980, in 'eighty six, we had this incredible year when we wrote at 69.3. That's a 30% underwriting margin. And the nice thing about it is we did it with the most volume we ever had to that point, dollars 366,000,000 So we coined money when we wrote huge amounts of business. And we made a little money when we wrote small amounts of business. So it's absolutely imperative in our view. And I think we're almost the only insurance company like this, certainly public in the world, that sends the absolutely unequivocal message to the people that are associated with us that they will never be laid off because of lack of volume, and therefore, we don't want them to write one bit of bad business. And we'll make mistakes, and we'll have a high expense ratio when business is slow, but we'll win the game. And that's what National Indemnity has done over a period of time. National Indemnity was a no name company 30 years ago operating through a general agency system, which everybody said was obsolete. It had no patents, no real estate, no copyrights, no nothing that distinguished it essentially from other insurance dozens of other insurance companies could do the same thing. But they have a record almost like no one else's because they had discipline. They really knew what they were about and they've stayed with that. In fact, they've intensified it over time. And their record has left other people in the dust. It wouldn't be a record you would point to Wall Street. If you went to Wall Street with that record alone in 1990 or 1995, they'd say, what's wrong with you? But the answer is nothing's wrong with it. And you put your finger on having the incentives in place to write the right kind of business for the shareholders at Berkshire. And we try to think those things through. I mean, you can't run an auto company without having layoffs. You can't run a steel company this way. But this is the right way to run an insurance company. And that's why these cookie cutter approaches to employment practices or bonuses and all that are nonsense. You have to think through the situation that faces you in a given industry with its given competitive conditions and its own economic characteristics. Charlie, do you want to comment on that? Well, the main thing is that practically nobody else does it. And yet, to me, it's obvious it's the way to go. There's a lot in Berkshire that is like that. It's just a little different from the way other people do it. Partly the luxury of having a controlling shareholder of strong opinions that accounts for this. It would be hard for a committee, including a lot of employees, to come up with these decisions. We go to number 11. Good afternoon. My name is Andy Peek and I'm from Weston, Connecticut. As a keen China watcher, I was very interested in your Petro China investment. Could you please tell us more about your thought process on investing in a complicated, opaque country like China and PetroChina? Yes. PetroChina itself is not a complicated or opaque company. The country has obviously different characteristics in many respects than the United States. But the company is very similar to very similar to big oil companies in the world. And PetroChina may have been it may have been the 4th largest 4th most profitable oil company in the world last year. I may be wrong on that. But they produce 80% or 85% as much crude daily as Exxon does, as I remember. And it's a big, big company. And so and it's not complicated. I mean, obviously a company with a half a 1000000 employees and all of that. But a big integrated oil company, it's fairly easy to get your mind around the economic characteristics that will exist in the business. And in terms of being opaque, actually, their annual report may well tell you more about that business, you know, than you will find from reading the reports of other oil giants. And they do one thing that I particularly like, which other oil companies don't, at least to my knowledge, is that they tell you they will pay out x percent. I think it's 45% of their earnings absent some change in policy. But, I like the idea of knowing in a big enterprise like that, that 45% of what they earn is going to come to Berkshire and the remainder will be plowed back. It was bought not because it was in China, but it was bought simply because it was very, very cheap in relation to earnings, in relation to reserves, in relation to daily oil production, in relation to refining capacity. Whatever metric you want to use, it was far cheaper than Exxon or BP or Shell or companies like that. Now you can say it should be cheaper because you don't know what will happen with it 90% owned by the government of China. And that's obviously a factor that you stick in valuation. But I did not think that was a factor that accounted for the huge differential in the price at which it could be bought. And so far, it looks okay on that basis. We weren't we aren't there because it's China, but we're not avoiding it because it's China either. We just we stick in a fairly appropriate number. But if you read the annual report of PetroChina, I think that there's no you will have as good an understanding of the company as you would if you read the annual report of any of the other big oil majors. And then you would factor in your own thinking about whether there could be some huge disruption in Chinese American relationships or something of the sort where you would lose for reasons other than what happened in terms of world oil prices and that sort of thing. But we're happy with it. And Charlie? I've got nothing to add. If I think it's cheap enough, obviously, you can afford a little more country risk or regulatory risk or whatever. This is not complicated. Yes. You can, Yukos, as you know, is a very big Russian oil company. And in evaluating Russia versus China in terms of country risk, you can make your own judgments. But in our view, something like PetroChina was both cheaper and had less risk. But other people might see that differently. We'll go to number 12. Good afternoon, gentlemen. My name is Hugh Stevenson. I'm a shareholder from Atlanta, Georgia. This question is for both of you. If you would both comment on the subject of tort reform, specifically asbestos torts, and if you could construct an optimal solution, how would you construct it, balancing the interests of of legitimate plaintiffs versus the attorneys versus the opportunists? Okay. Charlie's the lawyer, so he's going to get the answer to this one. As a matter of fact, that is an easy question. What's happened in asbestos is that a given group of people get mesothelioma that came, which is a terrible form of lung cancer that kills people, really only from asbestos. And those people got it from somebody's asbestos. And that's one group of claimants. Then there's another group of claimants, and these are people who have smoked 2 packs a day of cigarettes most of their lives and they've got one little spot here or there in an elderly lung. And God knows what the spot is, but an enterprising lawyer can get an enterprising physician who just happens to find that every damn spot in any lung must be asbestos caused. And once you've got one expert witness whom you can bribe, in effect, to say that, You've got a claim that can be filed and so you get millions of claims on behalf of people who have no symptoms and who say that I'm worried about getting cancer from this spot that my attorney's doctor says was caused as asbestos. There isn't enough money in the companies that made the asbestos to pay off everybody and what happens is that a huge percentage of the money does not go to the people that got the cancer or another group of people who got terrible lung impairment that is obvious, but that's another small group relative to these people who just have one little spot on her and now say they are worried about getting cancer. And they can file those cases where they say they're worried in some state, where they've got a jury pool that just hates all big corporations. And so you've got an industry and of course the lawyers who are representing the people that aren't hurt are really stealing money from the people who are hurt and the guy who gets mesothelioma doesn't get as much as he should and all these other people are getting money they're not entitled to. It's a bonkers system. But with federalism the way it is, there's just no way to stop it. And the United States courts, United States Supreme Court, refused to enter it and just grab hold and make a decision. And so it just goes on and on and on and the claims come in. I think the Mandeville Trust had more new claims come in last year than in any year in history. That's correct. And they have mined and sold asbestos for the last time, what, 35 years ago or Yes. And it just never stops. The people who are trying to buy these people off, it's like trying to douse a fire by pouring gasoline on it because word processing machines can grind out these phony claims and the doctors can grind out these phony opinions. And so a huge proportion of all the money that's available to pay people who suffered from asbestos goes to lawyers, experts, doctors, contingent fees to lawyers, defense lawyers. I think it's something like 20%, 25% of the money is flowing through to people who were injured. So it's a total national disgrace. The only people who have the power to fix it would be either the Supreme Court or the United States or Congress. The Supreme Court, some people would say rightly, other people would say in too chicken a fashion, duck the issue. That means the only party that has the power to fix it is Congress and Congress so far, given the politics, has not fixed it. Once you get wrongdoers so rich, they get this enormous political power to prevent change in the laws that are enriching them. I mean, it means that we should all be more vigilant about stepping on these wrongs when they're small because when they get large, they're very hard to stop. But it would be easy to fix this. The right way to fix it, we're just never going to pay off these tiny claims. The Johns Ban, we own Johns Banville. They went bankrupt. They were the first, at least big one, that asbestos took into bankruptcy. And probably in the history of things they somewhat deserved it, I think, Charlie. Isn't that right? Their behavior was among the worst in the history of American corporations. They knew this stuff was causing terrible injury and they deliberately covered it up time after time and year after year to make more money. There's no doubt about the guilt of the original management at Johnson Anvil. So they went bankrupt in the early '80s. And out of that bankruptcy was formed something, as Charlie mentioned, called the Manville Personal Injury Trust. We have no connection with that. I mean, this is a new company that we bought a few years ago, and this company has no connection with that except the historical history. But the Mandeville Personal Injury Trust was established and had over time had a couple of $1,000,000,000 in it. And as Charlie said, last year it's been around for now for almost, I would say, close to 20 years. And last year, they had a record number of claims introduced. They didn't have a record number because of the incidence of asbestos compared to the ones that were prevailing at the time it was established or something of this sort. It's just that it's become a honeypot. And as a result, the Manville Personal Injury Trust is now paying out 5% because their $2,000,000,000 will only go so far. They're paying 5% of claims. So as Charlie says, the guy that's got a that has really been drastically injured by asbestos gets this tiny fraction. And the tens of thousands of claimants for whom it's a gleam in the eye or rather a gleam in their lawyer's eye perhaps also get their 5%. And it's not the right way to do it, but it's very hard to correct. We've observed the asbestos legislation over the proposed legislation over the last year. And in the end, what they came up with, we did not support because it didn't get the answer that's needed. And, Mr. Charlie, in my view, the Supreme Court, when they ducked it, I mean, they left open a can of worms, which will be around for decades decades decades and decades and the right people will not get compensated. And those of you who want to be cynical ought to look into it and see the perjury. What's happened, of course, is that all the really horrible people pretty well are broke and gone, and maybe there's some money left in a trust here or there, but by and large there isn't enough money. But now there are like 3 solvent people left and you've got some little spot or something or other. And by a strange coincidence, every one of those people can only remember three names of products that somehow saw that might have caused it. And it's an amazing coincidence the 3 that are left solvent are the only names he can remember. And so it's obvious you have a vast amount of perjury being so borne by practicing lawyers. It's not a pretty picture. Okay. Let's go to microphone 1. Hi. My name is Charlie Rice and I'm a stockholder from St. Louis, Missouri. I'd appreciate hearing your comments on publicly held companies using their cash for dividends versus stock buybacks? Well, the equation is pretty simple, but the practice doesn't necessarily follow logic. The it's obviously as long as you're telling the truth to your shareholders about what's going on so that you aren't manipulating the stock downward or something, when a stock can be bought well below its business value, that probably is the best use of cash. It's something the Washington Post did on a huge scale back in the 1970s. Teledyne may have bought 90% or something or close to it of their stock back. And that was the reason a very significant percentage of companies bought stock back in the past because they actually thought it was selling for less than it was worth. Like I say, that can be abused if you do various things to bury your stock in one way or another. But that wasn't the usual case. Stock repurchases were relatively unpopular in those days. They've become quite popular now. And to the extent that I've been around a good number of them and been able to pick up on what I thought was the underlying rationale, if not the professed rationale, I think it's often done for people that are hoping that it causes their stock price not to go down and often done at prices that don't really make a lot of sense for continuing shareholders. If we wanted to return a bunch of cash to shareholders, we would if our stock was undervalued, we would go to the shareholders and say, we think it's cheap and we think that this cash can be better used by you than by us. And we will therefore have be repurchasing at what we think is a discount intrinsic value and the people that remain will be better off and the people that get out will get out at a little bit better price than they would otherwise. In terms of dividends, you get into an expectational situation. And for most companies that follow a that pay a cash dividend, it doesn't make sense to bounce around the dividend from year to year, although private companies frequently do that. And we do it ourselves with our subsidiaries. Some subsidiary can pay us a lot of money 1 year and not so much money the next year. But with public companies, people do a lot of people do buy stocks to obtain dividends and they hope for regularity and dividend policy with a public company, you should think a long time before you change that policy in a material way. But I think the best use of cash, if you don't have a good use for it in the business, if the stock is underpriced, is to repurchase it. And if it's overpriced, you've got no business buying in a single share. But a lot of companies do it. Charlie? Yes. Dividends are a very interesting subject. If you count the unnecessary stock trading and the cost of investment advice and the cost of making a lot of errors and the trading costs in and out, I don't think it would be too extreme to say that now the total amount that's paid out in dividends is roughly equal to the amount that is wasted in all this trading and investment advice so that the net dividends that come to the shareholders are approximately 0. This is a very peculiar way to run a republic and very few people comment about it. Yeah. Actually, I did in an article some time ago in Fortune. I did the frictional cost to American shareholders in sort of changing chairs for all American business as a whole. Those frictional costs are probably not much different than the entire amount paid out by American corporations. So, but getting to the individual corporation level, a company that expects to regularly earn more than it can profitably employ in its business should be paying out dividends. Take a subsidiary of ours like See's Candy. We would love to expand See's Candy to double or triple its present size, but it doesn't work. We've tried it a lot of different ways. So it should be paying out attorneys. If it was a public company, and it was at one time, you could argue that something approaching a 100% payout would make sense there. But most management's worrying about earnings falling off at sometime in the future would rather establish a lower level and therefore ensure regularity of dividends, by going with a conservative level. I, you know, we it's obviously something we think about at Berkshire when we have $30 odd 1,000,000,000 around. If we can't figure out a way to employ that over time, it's a mistake to keep it in corporate form. But we have this expectation, and I think it's a reasonable expectation that we get to put it to work. If we ever came to a different conclusion, if our stock we thought our stock was significantly undervalued, we'd probably figure in terms of dispersing it through repurchases, particularly where now dividends and capital gains are neutral for individuals. And if our stock was not underpriced and we fell, we would probably do something by a dividend. It's not going to happen soon, however. Number 2. Good afternoon. My name is JP, as in justice of peace or jello pudding. My last name is Tan, as in Sun Tan. I flew in from the Sun Tan City of Orlando, Florida, where an elderly man told me JP 10 stands for Just Perfect 10. Mr. Buffett, allow me to give you a big thank you before I ask my question. Some time ago, I sent you my business analysis of your investment in Scott Fetzer Company. I was not sure if you were even bored to read it, Yet, you were very kind to write me that my analysis of Scott Betser Company is very much on the money. You also invited me to my first annual meeting where I had the privilege of meeting Mr. Andrew Kirkpatrick, who was kind enough to include my analysis of Scott Betzer Company in his book of permanent value, the story of Warren Buffett. I want to thank you for making this possible. Here comes my question. Mr. Buffett, you have said that the 9 most important words ever written about investing are these 9 words: Investment is most intelligent when it is most success upon these nine words: Investment is most intelligent when it is most businesslike. For this reason, I started businesslike.com, looking up to GEICO and Dell as direct marketing models since they have the lowest cost structure. Please kindly share with us in elaborate details the direct marketing methods of GEICO and your friend, Michael Dell. He wants you to analyze the marketing methods of GEICO, the direct marketing methods of GEICO and Dell? Yes. Well, I'm not as familiar with Dell as I am with GEICO. The idea of direct marketing in auto insurance at GEICO came from Leo Goodwin who and his wife, Lillian, who who had come from USAA. And USAA was set up some years GEICO was set up in 1936. USAA was set up, I believe, in the early '20s because military personnel moved around a lot and they had trouble getting auto insurance. And a great organization was established. Leo Goodwin took that idea and decided to broaden it beyond the officer ranks of of the military and first went to government employees generally. And now that's been extended dramatically over the years to the American public as a whole. It's a better system. If you go back 100 years, auto insurance, when the auto first came in, was sold by the casualty affiliates of the big fire companies. That's where in the 1800s, the major insurance companies were fire companies and casualty insurance was something that came along later. And it was sold through a system whereby the agent got large commissions, where there were sort of cartel like rates established through something called the Bureau. And that system prevailed for several decades. And then State Farm came along, formed in the early 1920s, a farmer from Myrna, Illinois in his forties, no background in insurance, no capital, but he came in with the idea of having a captive insurance agency force. And that brought down costs somewhat. And State Farm in time became the largest auto insurer in the country, and all state which followed that system became the 2nd largest. And that was a better system, a better mousetrap. And then USAA, followed by Leo Goodwin at GEICO, came along with a direct marketing operation that that, bypassed, the agent and brought down costs further. Now, every American family virtually wants to have a car. They don't want to have insurance, but they can't drive the car without insurance. So they're buying a product they really don't like very well. It costs them a significant part of their family budget and cost therefore becomes very important. It's not a luxury item. It's a mandatory item virtually. And saving significant money makes a real difference in a lot of household budgets. So the low cost is going to win. And our direct operation Progressive has a wonderful direct operation competing with us. We're the 2 that will be slugging it out over the years is a better system. And better systems win over time. Now again, I'm not familiar that familiar with Dell, but I have the impression that Dell is a very low cost operation, enormously efficient, very low amounts of inventory. And I would hate to compete with them. If they turn out a decent competitive product at the best price, that system will win. Charlie is the Director of Costco, and Costco and Walmart figured out ways to do things at lesser costs that people needed where people spent money in big quantity. And those 2 companies are winning. So we have a terrific marketing operation, a terrific insurance operation in GEICO. And in my view, it will grow very, very substantially. And we have a very tough competitor in Progressive, because they've seen how well our model works. And they, in effect, have shifted over. I mean, they're not totally shifted over, but they've moved towards a direct operation and away from an agency operation. It's always a good idea to go with a low cost producer over time. I mean, you can mess it up in other ways, but being a low cost producer of something that's essential to people is going to be a very good business usually. Charlie? Yeah. You've chosen a wonderful field and if you fail on it, it's your own fault. I should say also that those 9 words, they came from Ben Graham. They didn't come from me, but Ben said those and they are very important words, although they tie in with some others that he said, but they are very important words. Warren, I want to make an apology too because last night I said that some of our modern business tycoons, and I remembered particularly Armand Hammer, were the type that when they were talking, they were lying. And when they were quiet, they were stealing. And some people got the impression that that was my witticism. That was said a great many decades ago about one of the robber barons. Well, if we start confessing here to the number of quotations we've stolen, we'll be here all afternoon. So let's go on to microphone 3. Good afternoon. My name is Matt Lynch, and I'm from Palo Alto, California. Mr. Buffet, a couple of times today, you alluded to Google and its cofounders. I was hoping you could share with us your thoughts and reactions to the owner's manual the co founders included in Google's S-one filed last week, especially in light of the similarities and differences between it and that of Berkshire Well, that's a real softball for me. Obviously, I'm very pleased that the fellows at Google decided and they say they it was I think they used the word inspired by the Berkshire owner's manual. And it obviously pleases us enormously that other people think that it's a good idea to talk to their owners or, in their case, their prospective owners in a very straightforward manner. If you buy into Google, having read their owner's manual, you know, you will I think you'll know the kind of people you're associating with. You'll know what they will do and won't do. It's the kind of thing that one person would say to another if you were setting up a partnership and you said, I'd like you to join me in a partnership. I need your money. And here's the way we're going to do business. And I think more companies obviously, I think more companies ought to do it. It's been simple for us at Berkshire. We've had these principles in mind for a long time, and we really want people to understand those principles before they join with us. And the Google Fellows in a very straightforward manner. I like their pros. It doesn't mean I agree with every idea they have, but I do know what ideas they do have. And I hope more companies sign on for that sort of thing. Charlie? Well, you know, that most of the world does not in any way imitate Berkshire Hathaway. This is a quirky few. It may look there may be 19,500 of you that came, but it's still a quirky few by the standards of the country. And what's interesting about Google is that those 2 guys who created that are 2 of the smartest young men in the whole country. It's much more fun to be copied by people that smart than We even think they're smarter than we thought they were last week. Yeah. We now think they're a lot smarter. It's going to be a lot of fun to watch that, I would. And my guess is that their annual reports are going to make very good reading. They're actually going to alternate the 2 of them in writing the reports. And I think you'll know a lot about them and a lot about their business if you read it. Although they had an interesting as I remember, they had an interesting sentence or 2 in there, which I admired also, where they said that, you know, certain of the things that, might affect their business prospects really would be better left unsaid in terms of competition and so on? And if so, they weren't going to tell you. You've kind of enjoyed that. Number 4, please. Thanks, Warren. Thanks. My name is Chad Bliss, Lincoln, Nebraska. My question pertains to Mid America Energy in the home service division. You said earlier that you would continue buying companies in the real estate industry. Given the growth in for sale by owners, discount brokers, also maybe even banks now, Do you think the current business model of home services is sustainable, or do you think commissions need to be lowered? Yes. I really do think it's sustainable. It's a good question. In fact, I forget where I saw the article a few weeks ago. It may have been in the Sunday New York Times about Barry Dillard's interest, I think through LendingTree on the Internet. And there have been a lot of real estate sales related operations that have been on the internet. And the internet is a threat to any business, including real estate brokerage. But when I think about the process of buying a home and the degree of personal involvement involved in that. The for sale by owner, they call them FSBOs in the business. I remember talking with my friend Chuck Peterson about that 50 years ago and FSBOs were with us then and FSBOs are with us now. But my guess is that a very significant percentage of home transactions 30 years from now will be done through a pipeline and through a distribution mechanism or brokerage mechanism like exists now. I do not see it changing dramatically, although there are people that are going to try and change it dramatically. So you've got competitors. But I love the idea of expanding home services. Charlie? Well, you tried to change it once yourself dramatically right here in Omaha and you fell on your ass. His memory is better than mine. He tried to take away a good part of the home advertising business from the World Herald to your then little little favorite. Right. Very thin. Yeah. Yeah. Yeah. It didn't work worth a damn. Yeah. It's It's the last time I call on him. Let's go to number 5. Mister Buffet, mister Munger, I'm Tim Medley from Jackson, Mississippi. Recently, mister Philip Fisher died. The Intelligent Investor, the first edition of Security Analysis, and you said, Phil Fisher's first two books. And you, mister Munger, have also been complimentary to mister Fisher's writings and investment approach. I wonder if the 2 of you would tell us of your experiences with mister Fisher, the circumstances of your meeting, etcetera, and did his writings or your discussions with him start you thinking about the idea of the great business or the franchise company, or was it simply an affirmation of thoughts which you had already begun to have? And anything else you would like to say about mister Fisher? Yeah. Phil Fisher was a great man. He died maybe a month ago or thereabouts and, well into his nineties. His first book, I believe it was Common Stocks and Uncommon Profits, was written in 1958, and the second book was written a few years later. Those two books were terrific books. And as with Ben Graham, you could really get it all by reading the books. I met Phil Fisher just once and it was great. I enjoyed it. I loved it. He was nice to me. But similarly, actually to my experiences with Ben Graham, I worked for him, I took his class and everything else, it was in the books. I mean, they were such good writers and their thoughts were so clear that you didn't need to meet them personally. I enjoyed meeting them personally, obviously, but they got it across in words. And the only time I met Phil was sometime after that 1962 book or whatever it was, 'sixty 1 or 'sixty 2. And I was in San Francisco. I think it was in the Russ Building. I may be wrong on that. And I just went there. I used to do that all the time when I was younger. And I'd go to New York and I'd just drop in on all kinds of people. And I guess they thought because I was from Omaha that one time and they'd be rid of me. And I would usually get in to see him. And Phil, I did that with Phil, and it was extraordinarily nice to me. But, it wasn't that I gained new ideas, though, however, by meeting him, because I'd already read it in his books. And Charlie actually I met Charlie in 1959, and Charlie was sort of preaching the Fisher doctrine also to me, a little different form, but but his ideas paralleled those of Phil. So I was sort of getting it from from both sides. It made a lot of sense to me. I don't know what Charlie's experiences were with Phil. Well, I always like it when somebody who's attractive to me agrees with me. And therefore, I've got very fond memories of Phil Fisher. The basic idea of that it was hard to find good stocks and it was hard to find good investments and that you wanted to be in good investments and therefore you just find a few of them that you knew a lot about and concentrate on those. Seemed to me such an obviously good idea and indeed it's proved to be an obviously good idea, yet 98 percent of the investing world doesn't follow it. That's been good for us. It's been good for you. We'll go to, number 6, please. Good afternoon. My name is Stan Leppard and I'm from Menlo Park, California. I'm, very pleased to be here, Warren and Charlie. I first, heard about you, Warren, in the late eighties and began reading your writings. Fortunately, I didn't invest until the late nineties. You have shaped my business thinking and as I listen to you and as I continue to read what you write and the things you recommend to read, it continues to shape my thinking. My question's about compensation, and I've seen your writing and I heard the earlier comments today, and they still leave me as a guy who is a business owner, not quite sure how to act to design compensation for managers. For most of my career, I've been the senior manager in my businesses, but now I'm in a situation where I'm looking to own a majority interest of businesses that I don't manage every day directly and I'm very concerned with this compensation issue. I think about things like return on equity or growth or risk or like that, but if you could speak a little more towards the specific of how you approach the getting it to the right things to measure and incent, I'd appreciate that. Yes. It's a very good question. And it's you know, there is no formula that applies across all industries or businesses. If you take something like return on equity, if you pay way too much for the business that you buy, the person who runs it is going to get a lousy return on your equity. And they may get a good return on the tangible assets employed in the business, but your purchase price may defeat them terms of earning good returns. If you based it on earnings on tangible equity, There are businesses like a network television station where if you have an idiot nephew, you can put them in charge and they'll earn huge returns on equity as long as they manage to stay away from the office. So it's and there are other businesses where you have to be a genius, turn 7% or 8% returns on equities. So there is no single yardstick. To have a fair compensation system, both you and the manager have to really understand the economics of the business. In some businesses, the amount of capital employed is all important. In some businesses, the amount of capital employed doesn't mean anything. So we have certain businesses where we have charges for capital and all of that and where we have other businesses where that would just be an exercise to go preference for making them simple. Preference for making them simple. I mean, we concentrate on the variables that count to us. And then we try to put that against the backdrop of the competitive nature or the true economics of the business they're in and really reward where they're adding value, even if that value is from a very low base and a lousy business, and we make it the base very high if they're in a very easy business. It hasn't been a problem, I would say it would have been an enormous problem if we brought in some compensation consultants because they would have wanted something that was spread across the whole group and it would have had all kinds of variables and they particularly would have wanted something that they would have had to come in every year and redo in some way so that they would have had a continuing stream of income. If I knew what kind of a business you were looking at, it's easier to talk about what kind of a system to have. If you had a group of television stations, just to pick an example, let's say there were network television stations, all of a reasonable size, you would probably figure that a chimpanzee could run the place and have 35% pretax margins and you might want to pay for performance above some number like that. But it's silly to have something that starts at 10% or 15% when you do that and a lousy manager will always suggest an arrangement like that. Charlie and I have seen all kinds of compensation arrangements where basically you get paid for showing up, but they try to make it look by constructing some mathematics around it like you really had to achieve something. But in the end, if you get a great manager, you want to pay them very well. We've got great managers, for example, at a place like Mid America. And somebody mentioned that there's a big carrot out there for them if they achieve the results that we've set out. And that will be a check I'll be very happy to write. Charlie? Yes. If you want to read one book that will demonstrate really shrewd compensation systems in a whole chain of small businesses. Read the autobiography of Les Schwab, who had a bunch of tire shops, has a bunch of tire shops all over the Northwest. And he made a huge fortune in one of the world's really difficult businesses by having shrewd systems and he can tell you a lot better than we can. Yes, and he worked that out himself. I mean, it's an interesting book and, you know, selling tires, how do you make any money doing that? 100 of 1,000,000 selling tires. Yes. Yes. And people like Sam Walton. I mean, the compensation system, I will guarantee you, at Walmart or Charlie's involved in Costco, they're going to be rational because you had very rational people running them. And they wanted to get the best they wanted to attract good managers and they wanted to get the best out of them. And they had no use in paying for mediocrity. But that does require a knowledge of the business. I mean, you don't want to let if you don't understand a business, you're going to have a problem with both the manager and the consultant in terms of getting flim planned on how you pay people. Number 7. Good day. My name is Martin Crowitz. I'm a shareholder from Sydney, Australia. And thank you so much for some of your wonderful hospitality here. We've had a chance to get on some of Omaha's 65 golf courses, and it's just great being in the 2nd best country in the world. My question to you, sir, is regarding to IPOs. We had one of the authors about a book on yourself visit us in Sydney last year and apparently, you dislike IPOs. My question is, there are some really poor businesses that try and get passed off, but there are some good ones. There's some government privatizations or decentralizations. The demographics of baby boomers and we have some friends wanting to exit some really good businesses, could we as investors and Berkshire Hathaway not apply some of your disciplines to look at investing in some of these? And finally, would your answer be different in its applicability to Berkshire Hathaway as a company as opposed to us as investors? Charlie? The first question, is it entirely possible that you could use our mental models to find good things to buy among IPOs? The answer is sure. There are a zillion IPOs every year and buried in those IPOs, I'm sure there there are a few cinches that a really intelligent person could find and pounce welcome. But the average person buying IPOs is going to get creamed. So if you're talented enough, why sure, that will work. The second question, I forget about the government offering service, is it? About government spinoffs? Give him the spotlight again. Darius? What was the second question? It was just would the attitude of Berkshire Hathaway be different if it's supposed to investors? Thank you. Yes, because the IPOs are normally small enough, so that they won't work for us or they're high-tech where we couldn't understand them. And so, by and large, if Warren is looking at them, I don't know about it. Yes. I mentioned earlier how an auction market prevailing in the stock market will offer up extraordinary bargain sometimes because somebody will sell 0.5% or 1% of a company at a price that may be a quarter of what it's worth, whereas in negotiated deals, you don't get that. An IPO situation more closely approximates a negotiated deal. I mean, the seller decides when to come to market in most cases, and they don't pick a time necessarily that's good for you. So it has I think it's way less likely that in scanning a list of 100 secondurities that are trading in the auction market, Well, in the 100 IPOs, if you scan 100 IPOs, you're going to come up with something cheaper than scanning 100 companies that are already trading in the auction market. It is more of a negotiated sale. And negotiated transactions are very hard to get bargains. If you take the houses in Omaha, somebody that lives next door to somebody who sold their house for 80,000 dollars and their house is more or less comparable, they're not going to sell it for $50,000 It just doesn't happen. People are it's too important an asset and they're cognizant of what it brings, what is being brought for similar properties. That's what happens in negotiated sales. Now if on the other hand, there were some a whole bunch of entities that owned 1% of each house in Omaha and you had an auction market in those 1 percentage points, they might sell a damn near anything. And occasionally, they sell at crazy prices. So you're way in my view, you're way more likely to get incredible bargains in the in an auction market. It's just the nature of things. And the IPO is closer. Sometimes there will be IPOs in terrible markets, and they may come very cheap. But by and large, that is not when IPOs come. They come when the seller thinks that the market is ready for them. And they come with an informed seller, thinking it's a pretty good time to go public. And that you'll make better buys, in my view, in an auction market. Number 8. Good afternoon, mister Buffet, mister Munger. My name is Mark Stender from San Francisco. My question involves, if you live in California, which I understand you do some time of the year, it's almost mandatory that you shop at Whole Foods Markets. They sell a lot of organic food there, and I was wondering if anyone ever tried to feed you organic food or organic food stock? I've never been near the place, but, Charlie, Charlie, who I've never thought of as a health nut, but he may have some comment to make on this being a Californian. No. My idea of a good place to shop is Costco. Costco has these heavily marbled fillet steaks in the finest grade and the idea of eating a little whole grain whatever and washing it down with some carrot juice has just never appealed to me. We don't have a lot of arguments between the 2 of us about where to eat. Number 9. Hello. Thank you. I'm Sherman Silber from St. Louis. I'm a fertility doctor in St. Louis. We kind of view ourselves as the Berkshire Hathaway of infertility treatment. We don't know anything really about business. We're doctors and scientists. And so first, I'd just like to say, I really appreciate the people that you have on your board and would like to keep it that way because we do know a lot about character, and I'm happy to have our savings safe with you and the people of that represent the company. I just had an opportunity a couple of weeks ago. I was talking to one of the former managers of the Fidelity Magellan Fund, managed huge amounts of money, and he never really met you. And I was saying, I may have a chance to ask Warren Buffett and Charlie Munger a question. What would that question be? I wanted to have some idea of something intelligent I could ask business wise. And he thought if he had the opportunity to talk to you, the best thing is to give you what would sound like a softball question because you could maybe bring more profoundness to this than we hear usually. What in view of the Iraq war, consumer debt that's increasing declining job growth, declining pay in the jobs that are growing, prospects of increased interest rates. He has this view that the next 5 to 10 years are going to be very difficult. What would your view be about this, the investment future for the next 5 to 10 years in view of all these negative factors going on? That's too soft for me. I think Warren should take that. Well, I would say that at any given point in history, including when stocks were their cheapest, you could find, an equally impressive number of negative factors. I mean, you can you could have sat down in 1974 when stocks were screaming bargains, and you could have written down all kinds of things that would have caused you to say the future is just going to be terrible. And similarly, at the top or anytime you can write down a large list of things that would be quite on the bullish side. We don't pay we really don't pay any attention to that sort of thing. I mean, we have you might say that our underlying premise and I think it's a pretty sound underlying premise, is that this country will do very well And in particular, it will do well for business. Business has done very well. The Dow went from 66 to 10000 plus in the 100 years of 20th century and we had 2 world wars and nuclear bombs and flu epidemics and you name it, Cold War. There's always problems in the future. There are always opportunities in the future. And in this country, the opportunities have won out over the problems over time. And I think they will continue to do so, absent the weapons of mass destruction, which is another question. Business won't make much difference if anything really drastic happens along that line. So we don't I can't remember any discussions Charlie and I have had ever going back to 1959, that where we would have come to the conclusion at the end of them that we would have passed on a great business opportunity, a business to buy because of external conditions, nor did we ever buy anything that we thought was mediocre simply because we thought the world was going to be wonderful. It won't be the American economy, in my view, that does investors over a 5 or 10 or 20 year period. It will be the investors themselves. If you look at the record of the 20th century, you'd say how could anybody have missed in owning equities during that time and yet we had all kinds of people wiped out in the 'twenty nine, 'thirty two period. We had all kinds of things that were bad. But if you would just own stocks right straight through, didn't leverage them, you would have gotten a perfectly decent return. So we're unaffected in essence by the variables you mentioned. Just show us a good business tomorrow and we'll jump at the hook. Charlie? Yes. I think but it's also true that both of us have said at various times over the last three years that we wouldn't be at all surprised if professionally invested money in America had a pretty modest result over a fairly extended period of the future compared to the very dramatically high returns that it had achieved up to about 3 years ago. And so far, that's been proved out to be pretty much right. Certain stretches are easier than other stretches. Yes. Our expectations were more modest than most people's a few years ago. We didn't say the world was coming to an end or anything. We just said that people have gone crazy in certain sectors and that anybody that thought that you could sit at home and day trade and make double digit returns over time or do anything, that you were entitled to that by just sticking a little money in your 401 or something was really living in a fool's paradise. But that was never accompanied by any predictions of disaster for the American economy as a whole or for American business as a whole. It's people get crazy notions from time to time in financial markets and commented on this earlier, but they just believe things that there's it's hard to understand how they can believe now. So to some extent, they get sold that by other people. But American Business really has never let investors down as a group, but investors have done themselves in quite frequently. Number 10. Sam Kidston from Cambridge, Massachusetts. I'd like you to ask to discuss the similarities and differences between what you do in your reinsurance operations and what GenRe did in its securities division as it would seem that reinsurance is often a form of weather derivative. I would also like to ask you why you are so comfortable writing what appears to be one type of derivative and so uncomfortable writing another. Thank you. Yes. The derivatives contracts that Genre wrote and Genre Securities, I would say, bore very little bore very little relation to the insurance business as we see it. I mean, we are insuring against events that people either can't or aren't willing to take on the risks themselves. In the derivatives business, a lot of that was speculative activity of one sort or another. The more complex the arrangements were, the easier it was to claim that large profits were being made when maybe large losses really awaited you over time. They were created transactions without much economic necessity. In a great many cases, they were just facilitating speculation. Insurance deals with taking on risks that people incur in their business or personal life that they don't want to, bear themselves or that they're unable to bear themselves. There was very little connection between the business. I think that in going into the business, they dreamt up a lot of reasons for it. They said they're both in the risk business and their clients were going to demand it and everything. But when people want to go into a business, they always dream of reasons. It may no in our view, it made no sense whatsoever. And I really see very little connection between them. And you, Charlie? They're radically different. The derivatives business is chock full of clauses saying that if one party's credit gets downgraded by a rating agency, they have to start posting collateral and that's just like a margin account. And when you sign pieces of paper like that, you can go absolutely broke into default and catastrophe and having other people liquidating your positions under distressed conditions, etcetera, etcetera. So there's a lot of irresponsible mechanics. In attempting to protect themselves, they've introduced this enormous instability into the system through all these clauses about collateral posting and nobody seems to recognize what a disaster of a system they've created in an attempt to make each party feel safer, it's a demented system and you don't get properly paid in most cases for playing the game and, therefore, we're not in it. Absent the ability to raise new capital at the time, and who knows whether that would have been they've been able to or not, Jan Re, which had been rated AAA, it still is because Berkshire's involved, but it had been traded AAA, could well have run into really terrible financial difficulty post September 11, particularly if they'd fully recognize the liabilities that they'd already incurred but not fully recognized at that time because their capital would have shrunk, they would have had way more in equities, which would have shrunk further and who knows how far at the time how far it would have gone. Plus, they would have had, in my view, they would have been downgraded quite significantly and that might well have triggered things in their derivatives activities, which would have required coming up with loads of cash. It was not built to last. And it is now built to last. But I would say that, that threat exists with other financial institutions as well. But I think many of the CEOs, or some of them anyway, I should say, don't really fully comprehend that. When you get margin calls for huge amounts of money, it only has to be one day when you can't meet it. That almost happened. If you go back to October of 1987, there was a large wire transfer that didn't make it to the for a while, didn't make it to the clearinghouse at the in Chicago. And that came close to hauling the whole system at the time. And we were very close to closing the exchange, and a lot of things would have unraveled. The money finally showed up. But it's dangerous to have a system where people are depending on 1,000,000,000 of dollars coming in from other people. Well, we had that on Solomon on that Sunday in 1991, if Solomon had gone bankrupt the next day, you would have had people on the other side of $1,200,000,000,000 of notional amount of something like that of derivatives who would have had a contract with a party that where they would have been dealing with a bankruptcy court. You would have all kinds of security settlements that wouldn't necessarily have settled. You would have all kinds of confusion, and believe me, it would have been huge at that time, between what was going on in Japan, what was going on in the U. K, and what was going on in the United States because the accounts were all intermingled. As a matter of fact, Salomon was a was banking or was running a bank in Germany where which took on large amounts of deposits from individuals and just loaned it all to Solomon. So it would have had a receivable from a bankrupt company and owed money to I don't know how many German depositors. There are all kinds of things that would have come out at that time and who knows what the effect would be on the system. You don't need to put more and more of those kind of linkages and strains on an economic system that already is pretty damn leveraged. Charlie, got any further thoughts? We love talking about disasters, so don't stop us. It's simply amazing what goes on in these seemingly rational places. Solomon was at least as disciplined and honorable and rational as the other leading investment banks. And yet, toward the end of our pleasant period, Salomon was begging for a new investment banking business from Maxwell, and his nickname was the bouncing check. And of course, it wasn't very much after that that he committed suicide after massive embezzlement of pension funds in a huge collapse. You think if a guy's nickname was the bouncing check, you wouldn't be madly seeking his investment banking business. But all the leading investment banks were. Yes, I'm fuzzy on it now, but actually the morning or the day was discovered to be bobbing around in the ocean. I think at Salomon, we had transferred a bunch of money to somebody over in Germany or Switzerland and we were supposed to get some more money back that afternoon. And this is basically correct. I may be a little bit off on the details. But the money that got sent got sent, but the money that was to be received did not get received. And then we went over to England and tried to collect it from his sons and we got stiff armed in one way or another. I mean, we got what we deserved, frankly, in a transaction like that. But to the investment banker involved, his earnings that year was we're going to be affected in a significant way by whether he wrote a ticket or 2 more with Maxwell. And in the end, that carried the day. And it's very hard to control people when their income depends on bringing in dubious people into the door. They care enormously about it. And you've got this big system that doesn't quite pick up on it. And Charlie has mentioned before, and one of the underwriting clients that came forth that Solomon took on that professed to be doing wonderful things with money and it turned out to be a huge fraud. Well, it's tough to solve. You've got dozens and dozens of people running around out there all thinking about how big their bonus is going to be at the end of the year. And they are not inclined to run morality checks on who they do business with. That was a wonderful experience. Warren and I and Lou Simpson are all directors of the company and we are by far the biggest shareholder and we all said we should not be doing business with this guy. This is a very dangerous transaction. And they told us it had been approved by the underwriting committee and of course that settled matters. This guy had a neon sign that said crook on him as far as we were concerned. He was waiving it vigorously, yes. But it had been through the underwriting committee. The transaction closed but not financially. I mean, they had the underwriting, but they hadn't had the financial closing. They caught them on the way to the bank. You're right. They pulled back just from the edge of the precipice in this big fraudulent. And of course, they got egg all over their faces. That phrase reminds me of 1 of the leading lawyers of yore and he said, captain of my soul, he says, or captain of my fate, he says, hell, I don't even pull an oar. I mean, here we are, with all 3 of us on the board and we're the biggest shareholder and we can't even stop. 1 stupid little underwriting. He did go to jail, though, I think, didn't he? Yes. Yeah. He claimed, incidentally, to be a huge shareholder of Berkshire Hathaway, and made all this money. And I went to the shareholders list and admittedly, he could have had it in street name someplace, but it was a big quantity. I couldn't find any record in any place, but he did have some kind of a letter from an accounting firm that was backing him up. Didn't back him up all the way, though, it turned out. Number 11, please. Good afternoon. I'm Manuel Fernandez from Mexico City, Mexico. And I want to thank you for your valuable lessons on how to be good partners and for exporting some good ideas and principles to the world for free. My simple question is, do you think it makes sense for individual investors to invest a part of their capital in hedge funds or fund of hedge funds, somewhat like the $600,000,000 investment Berkshire made in value capital? I would say that people that are now investing in hedge funds in aggregate are going to be disappointed. You don't get smarter because you're running something called a hedge fund or something called private equity or something called anything, an LBO fund. But what you do gain periodically is the ability to merchandise those things. I mean, there are fads in Wall Street and Wall Street will sell what it can sell. Just remember that, that may be as good as what the fellow quoted up in the upper levels there. And the hedge fund, right now, is in the midst of a fad. It's distinguished not as not by the ability to make more money. It's distinguished by the extraordinary amount of fees that are collected. And believe me, if the world on $600,000,000,000 of money, is paying 2% fees and a percentage of the profits and the losers go out of existence and the winners continue for a while and take money off the table. It is not going to be a great experience in aggregate for investors. Obviously, there are a few smart, honest people out there running funds and they can they will do quite well. But if you buy them across the board, in my view, you're going to get a bad result. Charlie? Yes. Why would you want to invest with a guy whose basic thought process runs something like this? If a second layer of fees on top of a first layer of substantial fees is good for an investor, then a third layer of fees must be better yet. Why would you invest with somebody with a proposition like that? Just the idea of taking 2% plus percentages on top of that. That reflects it may be what the traffic can bear, Collis P. Huntington style, but that reflects an attitude toward people that we tend to regard as partners, investors. I think it's a basically unfair type of arrangement. And I don't like getting in in general. I think it's a mistake to get in with people who propose unfair arrangements. In effect, they're getting they're probably getting 4 times standard fees to begin with. And then on top of that, they say, we want part of the action. And I would guess in many of those cases that they don't have all of their own money in the fund themselves. Maybe they have a substantial sum outside. Charlie and I both run ran, partnerships in the 60s 50s with me and into the 70s with him that would generally be classified as hedge funds. They had the compensation arrangement somewhat similar, although not like they are now. And we did some they had some similarities. But I don't think we had quite the attitude toward the people who were trying to that were asking to join us, that the present managers have. It's as Charlie said, the fund to funds type stuff. I mean, it's really sort of unbelievable just piling on layer after layer on costs. It doesn't make the companies that are underlying these stocks they buy any better. I mean, and believe me people don't become a genius just because you walk into some office and it says hedge funds on the door. I mean they're what they may be very good at is marketing. In fact, if they're good at marketing, they don't have to be good at anything else. Number 12. My name's Arturo Brilenburg. I'm from Washington, DC. I'll be graduating from Harvard College in June and beginning a career in value investing. So I sure hope we're all right in thinking that this century will be just as good as the last for value investors. You've been doing this since you were my age, if not younger. So I'm wondering what habit or habits have contributed most to your ability to continue learning and improving your investment decisions in a changing business and financial environment? I would say that, at least in my case, I haven't been continually learning in terms of the basic principles. You always learn a little more about given techniques or we learn I learn more about some industries over time and therefore, maybe I've widened the universe in which I can operate, although more funds narrows it back down, unfortunately. But I know more about businesses than I knew 20 years ago or 40 years ago. I haven't really changed the principles. The last change, the basic principles are still Ben Graham. They were affected in a significant way by Charlie and Bill Fisher in terms of looking at the better businesses. But they but I didn't leave any of I didn't leave Graham behind on that. And I really haven't learned any new fundamental principles, but I may have learned a little bit more about how business operates over time. And there's really nothing I mean, you ought to get an investment framework that comes straight from, in my view, from The Intelligent Investor and from Phil Fisher, more from the Intelligent Investor actually. And then I think you ought to learn everything you can about industries and businesses that where you think you have the ability to get your mind around them if you work at them. And with that arsenal, you'll do very well if you've got the temperament for the business. Charlie? Yes. Well, of course, I've watched Warren all and he's learned a hell of a lot, even the last 20 or 30 years. So it's a game of continuing to learn and he can denigrate this little frou frou that enables him to pick the biggest oil company China or this or that. But those basic principles alone that he knew a long time ago wouldn't have given him the ability to make the recent investment decisions as well as he has made them. It's a lifelong game and if you don't keep learning, other people will pass you by. I would say temperament still is the most important one. You, Charlie? Yes, of course. But temperament alone won't do it. No, temperament alone won't do it. You have to have the temperament and the right basic idea and then you have to keep at it with a lot of curiosity for a long, long time. But you don't have to be blindingly and have any blinding insights or have a high IQ to look at a petro China, for example. You know, I mean, it's a when you get a company that is doing 2,500,000 barrels a day. That's 3.5% of the world or 3% of the world's oil production. And they're selling based on U. S. Prices using WTI, West Texas Intermediate as a base price and where they have a significant part of the marketing and refining in a country. The tax rate is 30%. They're going to say they're going to pay out 45% to you in dividends. Don't have unusual amounts of leverage. If you're buying something like that at well under half what maybe onethree of what comparable oil companies are selling for, That's not high level stuff. I mean, you have to read some you have to be willing to read the reports. And but I enjoy doing that. But you wouldn't say that requires any any high level insights or anything, Charlie. Well, when you were buying that block of stock, nobody else to speak of was buying. So the insights can't have been all that common. No, I think that takes a certain amount of what an old Omaha friend used to call uncommon sense. He used to say, there is no common sense. When people say common sense, they mean uncommon sense. Part of it, I think, is being able to tune out folly as distinguished from recognizing wisdom. And if you just got whole categories of things you just bat away so your brain isn't cluttered with them, then you're better able to pick up a few sensible things to do. Yes. We don't consider many stupid things. We get rid of them fast. And in fact, people get irritated with us because they'll call us. When they're in the middle of the first sentence, we'll just tell them forget it. And we don't we can see it coming. And that's the way actually the mine was. There was a great article in the New Yorker Magazine 30 years ago or so, a little more than that. It was when the Fischer Sposkie chess matches were going on. And it got into the speculation of what the humans being able to take on computers in chess. And here were these computers doing 100 of 1000 of calculations a second. And they said, how can the human mind when all you're really looking at is the future the results from various moves in the future, how can a human mind deal with a computer that's thinking at speeds that are unbelievable? And of course, they examine the subject some. And a mind like well, in fact, all mines, but some much better than others. But a Fischer or Sposky essentially was eliminating about 99.99 percent of the possibilities without even thinking about it. So it wasn't that they could out think the computer in terms of speed, but they had this ability in what you might call grouping or exclusion, where essentially they just got right down to the few possibilities out of these zillions of possibilities that really had any chance of success. And getting rid of the nonsense. I mean, just figuring that people start calling you and saying, I've got this great, wonderful idea. Don't spend 10 minutes once you know in the first sentence that it isn't a great, wonderful idea. Don't be polite. Go through the whole process. And Charlie and I are pretty good at that. We can hang up very fast. Well, there you have it. All you've got to do is go at it in the way that Vasiliy Smyslov did when he was the world champion of chess and just do the same thing in investments. Okay. Microphone 1. Good afternoon, Mr. Buffet, Mr. Munger. My name is Richard Azar. I'm from Trinidad in the West Indies. You guys have been very generous with your intellect over the years, and it's been a huge help to me in my personal and financial life. I weathered if it was appropriate for me to describe the methodology in which I'm trying to determine the range of Berkshire's intrinsic value and if you can guide me on if my methodology is flawed or is reasonably accurate? If it doesn't take too long, we'll be glad to. Although I think I know the answer already. Okay. We ended 2,003 with about €5,422,000,000 of operating earnings. I estimated our look through earnings to be approximately 915,000,000 dollars So in total, that was about $6,337,000,000 of estimated look through earnings. I knew that we spent $1,200,000,000 on CapEx and our net depreciation on tangible assets was $829,000,000 So there was a difference there of $173,000,000 and we spent more on CapEx over the appreciation over the last few years. But in extrapolating out 20 years, I thought I might be kidding myself to ascertaining the differences between CapEx and depreciation. And I'm using looks through earnings as a rough proxy for distributable earnings. And I've assumed that Berkshire can grow its look through earnings at 15% per annum from years 1 to 5 and at 10% per annum from years 6 to 20 and the business will stop growing after year 2020 resulting in a 7% coupon from year 2021 onwards. I discounted the cumulative flows in years 1 to 'twenty by 7% and I discounted the terminal value by 7%. I added the 2 together to get what I thought was the intrinsic value of Berkshire's cash stream. I knocked off $103,000,000,000 of liabilities and minority interests. I divided by 1,537,000 shares to arrive at what I thought was a conservative calculation of the range of Berkshire's intrinsic value. Am I off the mark? Or is that the sort of methodology you might use yourself? Well, you've done your homework. The line of thinking is correct. It just depends on what variables you plug in. And we might have different ideas on variables and neither one of us knows. But the approach in general the approach of trying to figure out distributable cash over a period of time. The business today is worth the present value at some number. You're using 7%, but the question is what number to use. But it's worth the present value of all the cash it can distribute between now and judgment day. And if cash can be retained and it's at a rate higher it produces at a rate higher than your discount rate, obviously, you'll get some benefit from that retention. But I would say that your assumptions about CapEx and related depreciation, I would expect CapEx to be on average a little more than depreciation unless we run into highly inflationary times. But of course, we have to keep buying businesses and using the capital in the business that we retain. If we retain those earnings, we have to use that to buy more businesses. And then the question is what kind of returns can we expect on those. I don't quarrel with the approach you're using, but everybody has to do their own equation and plug in some numbers. And I think we might settle for lower numbers on earnings gains than you've postulated because we're very large and it gets harder all the time to deploy the kind of funds that keep flowing into Omaha. Charlie? Yes. And you shouldn't necessarily get overly excited about last year. As Warren said, that is a about last year. As Warren said, that is a it was a very unusual year when everything worked together pretty darn well. Except interest rates. Yes. Well, but a lot worked together very well. The interesting thing about Berkshire's present valuation is how much cash and cash equivalents it has to do something. And that is a very interesting question. How well are we going to do with this massive amount of investable cash and cash equivalents. Yes, we should be out working now. That is the test. I mean, we've got a bunch of good businesses. We've got a lot of money that we'd like to use to buy more good businesses. We may get lucky and deploy that quite rapidly. We may wait a long time. Cash may pile up faster than we can use it, in which case we'll have to rethink the whole game. But our hope is, and so far we feel okay about what's happened in that our hope is that we can deploy the money that flows in in businesses that are come close to being as good as the ones that we've bought over the years. Number 2? Hi, Mr. Buffet, Mr. Munger, Whitney Tilson, a shareholder from New York City. It's past 3 o'clock, and we've heard almost nothing about how these great businesses are doing right now, or at least in the Q1. I recall at last year's annual meeting, you took the fairly unusual step, at least from my recollection, of putting up slides and actually giving us a preview of how phenomenally the businesses were doing. And I can imagine that if you had the wind at your back a year ago, the situation is in the Q1 of this year, you must really, really have the wind at your back. And I was wondering if you can share with us what you can. Well, we can't give you the speed of the wind. We're going to have the 10 Q out when, Mark? It's going to be out in a few days. And if we throw out any numbers now or make any commentary, we'd have to put that up on the website and perhaps even try to cover the nuances in my voice. So I think you'll just have to wait a few days and they'll go up, the figures will go up at that time. And if there are any surprises, there will be surprises, and everybody will get them at the same time. Incidentally, we're going to have a little more trouble in the next year or 2 because we like to publish everything, all the figures, or anything important if we can do it. We like to do that on Friday night after the close or Saturday morning so that everybody has an opportunity to look at them and have the maximum amount of time to digest them before trading begins. And the SEC is shortening up reporting times, so that we're going to be scrambling just to meet whatever day of the month it is that recording requirements are met. And so we may not we won't have the luxury, although we'll try to do it when we can. We won't have the luxury of picking the Saturday before the due date and being and targeting that as our release date. When we had 45 days or what was it 45 yes, 45 days to report, We could pick the Saturday before the 45 days. If that gets down to 30 days, if the 30th day is on a Tuesday, we're going to be hard put probably to get it done by that Tuesday. So we'll obviously put it out after the close so people have between 4 o'clock and the next morning to digest it. But we won't be able to follow the procedure that we followed to date, which we regard as the best procedure of all, giving people close to 2 days to digest whatever is in the figures. But I can't help you, Whitney, on how the Q1 looks. And Charlie, I don't think you'll want to add anything on that way. Okay. Number 3. Hello, Mr. Buffet and Mr. Munger. My name is Justin Fong. I'm 14 years old from California. This is my 4th consecutive meeting attendance. I read in a book that you prefer talking to young people about life and financial concepts because we still have time to implement them. Can you please share some of the concepts with us? Thank you. I didn't catch the last part. I didn't. It's something about sharing concepts. You want to repeat it? Can you please share the life and financial concepts that you prefer talking to young people about? Share. He wants to know your life concepts and financial concepts that are useful to young people. Well, that's a fairly broad question. But I think the financial concepts, you know, we've obviously spelled out in the reports. Charlie's probably better on the life concepts than I am. It is true that I do believe in spending the time that I spend giving talks or answering questions, doing it with young people. I do, I'm sure, well over a dozen a year. And I just think that obviously young people are more receptive to change or to actually even forming habits that are going to be useful in life. And I think that people underestimate, until they get older, they underestimate just how important habits are, and how difficult they are to change when you're 45 or 50 and how important it is that you form the right ones when you're young. But, Charlie, what do you have to say on that? Well, all the trite stuff is what works. I mean, you avoid doing the really dumb things, like raising, moving trains to the crossing, experimenting with cocaine, risking getting AIDS or other unfortunate ailments. There is a lot of standard things that take people down and you just give those a wide berth. And then you want to develop a good character and good mental habits and you want to learn from your mistakes, every single one as you go along, it's pretty obvious, isn't it? Yeah, we would say, even though we issue lots of credit cards, I think we'd say if probably if I had one piece of advice to give to young people, you know, across the board, it would be just don't get in debt. The game plays a lot easier if you're a little bit ahead of the game than if you're behind the game. And Ben Franklin said that long ago in better terms, which Charlie can recite. But there's a real difference. I get letters every day from people that are in all kinds of financial trouble. And often, it's health related, which is tragic. But very often, it's it's it relates to debt. I mean, they get behind the game and they're never going to catch up. And often, it may surprise you, but often, I write these people. They're very decent people. They've just made mistakes. And I just tell them the best course is bankruptcy. I mean, they are not going to catch up. And they should start all over again, and they should never look at a credit card the rest of their life. And but it would have been better if they'd gotten that advice a little earlier, but it's it's very tempting to to spend more than you earn. I mean, it's very understandable, but it's not a good idea. And of course, you particularly want to avoid evil or seriously irrational people, particularly if they are attractive members of the opposite sex. Charlie knows more about this. The expert. Yeah, the the you know, it's better to hang out with people better than you. I found that very easy to do over the years. But if you, if you're picking associates, pick out those whose behavior is somewhat better than yours and you'll drift in that direction. And similarly, if you, if you hang out with a bad bunch, you're very likely to find your own behavior worse over time. But like Charlie says, the trite advice, which Ben Franklin was handing out a few 100 years ago, really works. You know, just we've said it, but look at the people you like to associate with, you know. What qualities do they have that you can't have if you want to? Look at the people that you can't stand to be around. What qualities do you have that they have? Can you get rid of them? You can do all of that at a young age. It gets harder as you go along. It's not very complicated. And my final word of advice would be, if this gives you a little temporary unpopularity in your peer group, the hell with them. And as advice a little more applicable to me and Charlie, I was reading about a woman that was 103. And they said, what do you like about being 103? And she says, no peer pressure. We'll go to number 4. Good afternoon. My name is Mike McGowan. I'm from Pasadena, California. Everything you just said seems to apply to precious metals, specifically silver. I'm sorry, I missed that. Precious metals? Oh, sure. Specifically, silver. As I recall, Berkshire Hathaway bought 129 and a half 1,000,000 ounces of silver. And at the time, you said supply demand fundamentals were good, You saw inflation kicking back, and lots of other reasons. I'm assuming you still own at least 90,000,000 ounces of that. The problem would be the pricing mechanism. Apparently, the COMEX, or at least certain of the, managers of the silver price on the COMEX, are in debt. The New York banks and financial institutions are short 400 +1000000 ounces, and it doesn't look as if they really want the price to go anywhere. So given that Berkshire has all of this silver, do you see the price of silver actually trading in a free market at some point, or would you look at shares instead of the physical metal? And otherwise, we're kind of at the point, I guess, where John Maynard Keynes said the market can remain irrational a lot longer than we can remain solvent. We have no comment at all to make on our present position in silver, if any. We could own more, we could own the same, we could own less, we could own none. So and we won't comment. We commented one time because the Bank of England asked us to comment and since it was the only time the Bank of England had ever talked to me, I felt quite flattered. But I would say this, I would disagree very much with your thoughts that the market is in some way rigged or something of the sort. I find that most of the people that write or many of the people that write on gold and silver tend to have various theories, some of which are conspiratorial. And there's always the selling forward is doing this and that to the market or that somebody is sure. The answer is that there's plenty of silver above ground, whether there's more or less than there was a few years ago in terms of the supply demand since then, I'm not 100% sure. It's tough to figure out what goes on in China and a lot of things. But I there's nothing flawed, in my view, about the market for silver or copper or gold or really any commodity that I can think of that trades in real quantity. Charlie? Yes. I think it also should be pointed out that you're asking for the opinions of people who have not particularly distinguished themselves in this arena. He was pointing at me with good reason. We'll go to number 5. Good afternoon, Travis. Keith from Dallas, Texas. The OCC's quarterly report on bank derivatives shows that Wells Fargo has one of the largest derivatives portfolios of any U. S. Bank. In spite of your high profile criticism of derivatives, Berkshire added to its position in Wells Fargo last year. What about Wells Fargo's derivatives portfolio did you find less objectionable? And what disclosure did you examine in considering the risks of Wells Fargo's derivatives portfolio? I don't have their report here. But without looking at it, I would be willing to bet that JPMorgan Chase has a derivatives portfolio that's far, far greater than Wells. I do not think of Wells, and I may be wrong, I do not think of Wells as being a big player. Now all the big banks have various derivative positions, but I don't think of Wells as being a big player in the derivative game. And I, you can't there is no perfect measurement of the size of a derivative position. I mean, you hear all these huge numbers thrown around and they sound great, but they tend to exaggerate things in a huge in a very dramatic way in terms of 1,000,000,000,000 of this or that. But so there can be you could talk about $1,000,000,000 notional amount of one kind of derivative and it could have less danger in it than a $50,000,000 position in some other type. But I really don't think you'll find that Wells, particularly compared to a JPMorgan Chase or a Citibank or something of the sort, is a really big derivatives player. And Charlie and I at least I and I think Charlie will agree. Wells, I think, is an extraordinarily well managed bank. I disagree with them violently on expensing of stock options. I mean Dick Gwasovich, who runs that, and I would have an entirely different opinion. He's written about it in the last couple of annual reports. And much as I and I really admire the management. I think he's done a great job. But much as I admire the management, I voted the other our Berkshire stock the other way and 4 expensing options. And I noticed that 57% of the stock at this meeting just the other day voted to expense options. But even though I disagree with him on that particular accounting point, Wells has an absolutely terrific record. Dick is a terrific businessperson. And I think in terms of taking risk or handling the risk that he necessarily takes, I think that I would rank him very way up there in terms of bank managers. Charlie? I've got nothing to add to that. Okay. Well, if you're going to take one more from number 6. Thank you very much, mister Munger and mister Buffet. My question regards well, I'm Michael Stopsky from New York. My question regards financial institutions and the potential of collapses and how is Berkshire protected and how can the individual investor protect themselves against potential bank failures, stock brokerage failures, and things like that? Well, I think as a depositor with large banks or as somebody that leaves their securities with large brokerage firms, I really don't think you need to worry very much. We have a too big to fail doctrine operating in this country relative to what you might call the innocent parties in big financial institution failures. We don't have it in respect to the equity holders, nor should we have it. But I would not I don't worry about leaving my securities my personal securities or for that matter Berkshire securities With the large securities firms, I don't worry about my bank accounts at big banks. So But you're talking cash accounts? Yeah, cash accounts. And not margin. Yeah. And the but if you in terms of owning the equities of companies like that or in terms of the fallout, the big thing that will really the only way a smart person that's reasonably disciplined in how they look at investments can get in trouble is through leverage. I mean, if somebody else can pull the plug on you during the worst moment of some kind of general financial disaster, you go broke. And Charlie and I both have friends that have where that's happened to them. But absent leverage and absent just kind of going crazy in terms of valuation on things, the world The world won't hurt you over time in securities. I mean, you won't be subject to the financial cataclysms that they don't need to do you in. If you have any more money during periods like that, you buy. Berkshire, I think, is an extraordinarily strong position in respect to any kind of a financial cataclysm. I think we would be definitely the last man standing and then some. And while we don't go around like undertakers looking for a plague or anything like that, we would probably do very, very well in the end. And that's happened a couple of times actually in the past where we've had cash and we've had courage when the world was panicking. And we've done reasonably well during that period. And we've never gotten hurt by what was happening in the world around us, at least in the last 30 or 40 years. Charlie? Well, I think that's plainly right. Okay. Well, with him saying that after I've made a comment, I think we can happily disband. We'll see you next year and we'll see the international people at 4 o'clock. Thank you.

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