Berkshire Hathaway Inc. (BRK.A)

ASM 1995 Part 1

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May 1, 1995

Morning. I'm Warren Buffett, the Chairman of Berkshire Hathaway, and on my left is Charlie Munger, the Vice Chairman of my partner. And we'll try to get him to say a few words at some point in the proceedings. The format today is going to be just slightly different. We have one item to normally we breeze through the meeting pretty fast and we'll do that. But we have one item of business on the preferred stock that I could tell caused some confusion with people. So I'll discuss that a little bit. And if before the vote on that, anybody would like to talk about the preferred issue, We'll have any comments or questions at that time, and then we'll breeze through the rest of the meeting, and then we'll open it up. And I'll have one announcement to make then, too. And then after that, we'll go for maybe close to noon. And feel free early or anybody that would like to leave, you're free to obviously at any time better form to do it while Charlie's talking, as I've mentioned. And you'll have to be quick. But then we'll have a break a little before noon for a few minutes while a more orderly retreat can be conducted. And we'll have buses outside to take you back to the hotels or to any of the commercial establishments that Berkshire is involved in. And then because so many of we have people here, at least based on the tickets reserved, from 49 of the 50 states. Only Vermont is absent. But we have Alaska. We have a delegation from every place. We have people from Australia, Israel, Sweden, France, UK, 40 some from Canada. So a lot of people have come a long way. So Charlie and I will stick around. In fact, we'll eat our lunch right up here. And we will you don't want to watch what we eat. But we'll stick around until perhaps as late as even 3 But if the crowd gets below a couple of 100, then we'll feel we can cut it off. But we do want to answer everyone's questions. You people are part owners of the Company. And any question that relates to your ownership of Berkshire, we want to be able to give you a chance to ask. And it's tough because of the numbers of people here. I don't know how many are in the other room. But there are about 3,300, I believe, in this room. And we want to get to all of you. So, that will come after the meeting. Now, we've got a little business to take care of. The meeting will come to order. And I'll first introduce the directors of Berkshire in addition to myself. They're right down here. And if you'll stand up when I give your name. Susan T. Buffet. Howard Buffet. These are names we found in the phone book. You can understand them. Malcolm Chase III. And Walter Scott Junior. Also with us today are partners in the firm of Deloitte and Touche, our auditors, Mr. Ron Burgess and Mr. Craig Christensen. They are available to respond to appropriate questions you might have concerning their firm's audit of the accounts of Berkshire. Mr. Forrest Croeter is Secretary of Berkshire. He will make a written record of the proceedings. Mr. Robert M. Fitzsimmons has been appointed Inspector of Elections at this meeting. He will certify to the count of votes cast in the election for directors. The name proxy holders for this meeting are Walter Scott, Jr. And Mark Hamburg. Proxy cards have been returned through last Friday, representing 998,200 and 58 Berkshire shares to be voted by the proxy holders as indicated on the cards. That number of shares represents a quorum and we will therefore directly proceed with the meeting. We will conduct the business of the meeting, and then during the formal meeting. After that, we will entertain questions you might have. First order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott, Jr. Will place a motion before the meeting. I move that the reading of the minutes of the last meeting of the shareholders be dispensed with. Do I hear a second? I second the motion. Do I hear a second? I second the motion. The motion has been moved and seconded. Are there any comments or questions? We vote on the motion by voice vote. All those in favor, say aye. Aye. Opposed? The motion is carried. Secretary, have a report of the number of Berkshire shares outstanding entitled to vote and represented at the meeting? Yes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent by First Class Mail to all shareholders of record on March 7, 1995 being the record date for this meeting, there were 1,177,000 750 shares of Berkshire common stock outstanding with each share entitled to one vote. A motion is considered at the meeting. Of that number, 998,258 shares are represented at this meeting by proxies returned through last Friday. Thank you. If a shareholder is present who wishes to withdraw a proxy previously sent in and vote in person on the 2 items of business provided for in the proxy statement, he or she may do so. Also, if any shareholder that's present has not turned into proxy and desires a ballot in order to vote in person on these two items, you may do so. If you wish to do this, please identify yourself to meeting officials in the aisles who will furnish 2 ballots to you, 1 for each item. With those persons desiring ballots, please identify themselves so we may distribute them. Just raise your hand and you'll get one. The first item of business of this meeting is to elect directors. I now recognize Mr. Walter Scott, Jr. To place a motion before the meeting with respect to election of directors. I move that Warren E. Buffet, Susan T. Buffet, Howard G. Buffet, Malcolm G. Chase, III, Charles T. Munger and Walter Scott, Jr. Be elected as directors. I second the motion. It's been moved and seconded that Warren E. Buffet, Susan T. Buffet, Howard G. Buffet, Malcolm G. Chase, the 3rd, Charles D. Munger and Walter Scott, Jr. Be elected as directors. Are there any other nominations? Are there any discussion? Doing fine. The nominations are ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the election for directors and allow the ballots to be delivered to the Inspector of Election. Collect those, please. Would the proxy holders please also submit to the Inspector of Elections a ballot on the election of directors voting the proxies in accordance with the instructions they've received. Mr. Fitzsimmons, when you're ready, you may give your report. My report is ready. The ballot of the proxy holders received through last Friday cast not less than 996 1,892 votes for each nominee. That number far exceeds the majority of the number of shares outstanding. The certification required by Delaware law regarding the precise count of the votes, including the votes cast in person at this meeting, will be given to the secretary to be placed with the minutes of this meeting. Thank you, Mr. Fitzsimmons. Warren E. Buffet, Susan D. Buffet, Howard G. Buffet, Malcolm G. Chase, III, Charles D. Munger and Walter Scott, Jr. Have been elected as directors. The second item of business of this meeting is to consider the recommendation of the Board of Directors to amend the company's certificate of incorporation. The proposed amendment would add a provision to the certificate of incorporation authorizing the Board of Directors to issue up to 1,000,000 shares of preferred stock in 1 or more series with such preferences, limitations and relative rights as the Board of Directors may determine. Now, we discussed this some in the annual report, but I would say and we'll find out the exact number, but I think we probably had 11 or 12, maybe 12,000 or so shares voted against the proposal. I think we had a couple of 1,000 shares that I abstained. And since there really is no downside to the proposal, that indicated to me that I had not done a very adequate job of explaining the logic of authorizing the preferred. So I'd like to discuss that for a minute now, and I'd also like anybody that would like to ask questions about it. They can do so now. We can talk about it later too, but if you'd like to do it before the vote, that would be fine. The authorization is just that. It's an authorization. It's not a command issue shares. It's not a directive. It simply gives the directors of the company the ability in a situation where it makes sense for the company to issue preferred shares to do so. Now, when we acquire businesses, and I'll tell you about one when we're through with this in a few minutes. When we acquire businesses, sometimes the seller of the business wants cash, sometimes they would like common stock, And it's certainly possible, as one potential seller did last year, that they wanted, in that case, a convertible preferred stock. Now, from our standpoint, as long as the value of the consideration that we give equates, we really don't care, aside from a question of tax basis we might obtain, but in other economic respects, we don't care what form of consideration we use because we will equate the value of cash versus a straight preferred versus a convertible preferred versus common stock, whatever it may be. So if the worry is that we will do something dumb in issuing the preferred stock, you should that's a perfectly valid worry. But you should worry just as much we'll do something dumb in terms of using cash or other common stock. I mean, if we're going to do something unintelligent, we can do it with a variety of instruments. And we will not get more licentious in our behavior or anything simply because we have the preferred stock. And the preferred stock a preferred stock may offer sellers of a business the chance to do a tax free exchange with us. And they may not want common stock, because they may have an ownership situation where they don't want to run the risk of common stock ownership. And that's why our preferred is flexible as to terms because we could give those people a straight preferred with a coupon that made it worth par at the time we issued it, and then they would know what their income would be for the next umpteen years. And that may be of paramount interest to them. We could issue them an adjustable rate preferred, which as money market conditions change, would also change its coupon, And then they would be sure of a constant principal value for the rest of their lifetimes. And one or both of those factors could be more important to one seller or another, so that we simply have more forms of currency available to make acquisitions if we have the ability to issue various forms of preferred. Because a preferred stock, if it's properly structured, allows for the possibility of a tax free transaction with the seller, and that's important to many sellers. Now in the end, many sellers will prefer cash just as in the past, and probably most of the sellers that don't want cash will want common stock. But we will have a preferred stock available. We're only authorizing 1,000,000 shares because under Delaware law, there's an annual I think there's an annual fee. I know there's an initial fee. And I think there's an annual fee that relates to the amount of shares authorized. So, if we authorized 100,000,000 shares, we would be paying a larger annual fee, which is something Mr. Munger wouldn't let me do. So, what we will do if we issue this, we will issue undoubtedly, we will issue some sub shares so that the number of shares for taxation purposes is relatively limited, but that we will issue sub shares to make it easier to make change essentially in the market. We may issue if the occasion demands, we may issue a convertible preferred. But that convertible preferred would not be worth any more at the time we issue it than a straight preferred. We would adjust in terms of the coupon and the conversion price and so on. So we can equate various forms of currency to fit the desires of the seller of the business, and this is simply one more tool to do it. There's no downside, like I say, unless we do something stupid. And if we do something stupid with us, we would do something stupid with cash or whatever. So, we probably should have done this some time ago, but we never had a case of a seller wanting that form of currency before. And so it just and we always felt we could get it authorized promptly, but there's no reason to lose a couple of months if a transaction is pending to call a meeting to get this on the books. So it's simply one more tool. And if there are anybody that has any questions or comments on the preferred, like I say, you can hold them until later, but I'd be glad to have them before we have the vote. Do we have any? Yeah, there's a question over there. If you have to wait just a second, we'll get a microphone to you. When you ask questions now or later, if you'll give your name and where you live, I'd appreciate it. My name is Doctor. Lawrence Wasser. I'm from New York. My question is this. If you want to buy a business and the people in the business want cash, You have to have cash. Cash that this kind of cash. We're familiar with it. Yeah. But it strikes me that the preferred isn't really cash. It's fiat currency. That is, it's currency that we can create. That's true. It's just like common stock in that respect. It is an alternate form of currency. But it is just in terms of common stock, for example, assuming we had enough authorized, we have an unlimited ability to create currency. Now, if we create it at the wrong price, it dilutes the value of the old currency. But go ahead. Until we vote in the affirmative, which I'm sure this group will probably do because of their confidence in you, but until we vote in the affirmative, it doesn't exist. That is correct. You are the that would be true incidentally with common stock. If we had no more authorized common stock out than we had issued, we have, I think, $1,500,000 authorized. But let's assume that we'd issued all that we had authorized. Until more was authorized by the shareholders, there would it would not be available to be issued. But if more were authorized by the shareholders, then isn't it true that the value of the shareholders' holding would be diluted? Only if we receive less in value than we give. That's the key to it. I mean, if we issue $200,000,000 worth of preferred and we receive a business that's only worth 150,000,000 dollars there's no question you're worse off than before. So are we, incidentally. But we're all worse off. And that's true if we give cash that's worth more for a business than the business is worth. If we give $200,000,000 of cash for a business that's worth $150,000,000 we are worse off. We may not have issued a share of stock, but we have diluted the value of your stock. If we do that, as long as we get value received, in terms of whether of cash, common stock or preferred stock, then you are not diluted in terms of value. It's an important point. And obviously, a number of companies, as you may have Charlie and I have commented about in reports and elsewhere, a number of companies, in our opinion, have issued common stock, particularly, which has a value greater than what they receive. And when they do that, they are running what John Medlin of the Wachovia called a chain letter in reverse. And that's cost American shareholders a lot of money. I don't think it will cost them any money at Berkshire, but it's a perfectly valid worry for shareholders to have because a management can build an empire just by issuing these little pieces of paper, which they feel don't cost them anything. I think Charlie had one story about that in the past. Don't you want to comment on that, Charlie? No names basis, of course. There was a particular bank where one of the officers wanting stock options pointed out to the management that they could issue all these shares and it didn't cost anything. Now imagine hiring a manager who thinks that way and paying them money to behave like Judas in your very midst. We have had conversations with managers where they tell us how fortunate they feel because the stock is down and they can issue options cheaper. Now, if they were issuing those to the 3rd parties, I'm not sure whether they'd have exactly the same attitude, but we have no feeling that we're getting richer when we issue shares. We have a feeling we're getting richer when we get at least as much value in a business as the shares are worth that we issue. And we don't intend to issue them under any other circumstances, but it's a perfectly valid worry. The second part of the question is that, obviously, with preferred issue, you have a situation where the common shareholder moves to the back of the line, as it were. Why should the common shareholder in this room want to step to the back of the line if he's at the front of the line now? Well, but it's also true if we buy a business for cash and let's say we borrow the money, the bank that we borrow the money from will come ahead of the common shareholder. There's no question, any time you move, you engage in transactions that involve the capital structure, you are changing the potential for each part of the capital structure. If you issue a lot of common and you've got some debt outstanding, you've generally improved the position of the debt. And the question really becomes whether you think that the position of the common shareholder is improved by issuing either preferred stock or perhaps borrowing a lot of money to make an acquisition. I mean, a couple of times in the history of Berkshire, we borrowed money to buy something, to buy a business. And when we do that, we are placing a bank or an insurance company or whomever ahead of the position of the common shareholder. We did that when we issued some debt a few years back. And there's a question of weighing whether the common shareholders are going to be better off by borrowing money. But borrowing money is not necessarily at all harmful to shareholders, although certainly if it's carried to excess, it is. And the preferred is a form of quasi borrowed money that does rank ahead of the common shareholder. But then at the same time, we're adding a business which we think is going to benefit the shareholder if we issue that. So that's the trade off. Yeah. My name is Matt Zuckerman. I'm from Miami, Florida. My question is, it seems to me that there's some requirement for shareholder votes if convertible stock preferred stock is issued beyond a certain limit? What are those limits? There are no limits on the conversion term that we might do. But for example, if we were going to issue a convertible preferred now, we have no plans to do it, but it could happen. In fact, it might well happen this year. The we would and the alternative, we'll say, was giving somebody $100,000,000 in cash for a business. If we were to issue a straight preferred, we would figure out what $100,000,000 worth of a straight preferred would sell for, what coupon would be somewhere in the area of 7% or thereabouts. And then they would have no participation in the upside of the common. If they wanted something that was sure to maintain its principal value, then you have to issue an adjustable rate preferred that will keep its value around par. That preferred might have an initial coupon of, say, 5% or something of the sort because it has the ability to go up or down based on interest rates, but it would always be worth about par. If we were to issue a convertible preferred, it might have a conversion price of, just to pick a figure, dollars 28,000 or something of the sort and a coupon well below the coupon on a straight preferred. And so whatever we did, they would equate out in our mind as to the value we were giving. We're not going to give 120 percent of X if we're only willing to pay 100 percent of X just because the form of a deal changes. But you may well see us issue at some point, you may see us issue a convertible preferred, you may see us issue a straight preferred, you may see us issue an adjustable rate preferred. I hope we do something because that's like, you know, if we do it, we'll think we're better off. Based on your past performance, I'm sure you'll get more value than you give. But in any case, it was my understanding that if the amount of shares issued for conversion of a convertible issue were greater than 20% of the total amount of shares outstanding, then it would require a vote of the stockholders under Delaware law. I may be wrong. I think it's a stock exchange rule, isn't it, Chairman? Yes. Yes, you're right about the rule, but it's a New York Stock Exchange. New York Stock Exchange rule. That would be $5,000,000,000 plus of deal. And we would love to make a $5,000,000,000 deal, but I don't think we're going to do it. So I would say that chances of any acquisition being large enough so that it requires a shareholder vote is probably slim. But it isn't because we wouldn't be interested. And if we have one, we'll be coming back to you. With the votes already in hand. Are there any other questions on the preferred? We can talk more about it later. I just want to oh, here we are. Sure. Good morning, Mr. Buffet. I'm Rayna DeCosta Loi from Chicago. Very proud to be here. And I've seen you grow so that pretty soon we're going to be out in the football field. I think your explanation was very helpful because as I read this, and I'm sure many of the other lay folk, I didn't understand what you were doing. And you mentioned the preferred stock, but in the prospectus, it's not clear whether it would be the convertible preferred, the straight preferred. And you cleared that answering a few other questions. But some of the people felt it would dilute their stock. Yeah. Well, I should have made that clear in the annual report. I'm glad I've had this chance to do it today. Anything else on the preferred? Okay. You don't have to come back to the shareholders for a vote after these shares are authorized for the terms of it. And you've discussed this in terms of buying companies. My question is you yourself through Berkshire Hathaway own the preferred shares of several companies, Solomon, U. S. Air, American Express. Did those shareholders have to vote on the terms of the preferred shares that you bought for those companies? Or was that left at the Board of Directors decision level? Could you clarify that point? Excuse me. Go ahead. Could you clarify that point, please? Yes. We bought a I think we probably bought 6 issues of preferred directly from companies. And since none of those triggered that New York Stock Exchange rule that we discussed earlier, and they could have if they'd been somewhat larger, but they didn't, none of those deals had to be approved by the shareholders. I think the only deal we've had with a company that had to be approved by the shareholders was when we bought the Cap Cities ABC stock. Well, we bought it early in 1986. I think it was approved by their shareholders in 1985. But the only situations where it would have had to have been approved is if it triggered the New York Stock Exchange rule, and our purchases were not that large that they did that. Any other questions? Yes, there's one more. My name is Dale Volkowitz. I'm from Champaign, Illinois. A recent issue of Barron's indicated that it may be possible to issue a best of all possible worlds preferred, that being one where the dividend looks like interest to the issuer and is tax deductible. And to the purchaser, it would qualify for the dividends received deduction. Do you think that structure might be possible with these shares? Well, we haven't thought about that. I know what you're talking about on that, but I don't think it would be possible. For one thing, I don't think you probably have a tax free deal that way, Charlie. Do you? We probably wouldn't try and be that cute. I've got several quips in mind, but I think I'll keep them to myself. My guess is that that form does not work for a long time. I know what you're talking about, but my guess is it doesn't. Some companies, and then we'll get on with this, but some companies care about the consideration they give in a deal, whether it's cash or preferred or so on, because they care about the accounting treatment that they get. They usually want pooling treatment rather than purchase accounting treatment. I won't get into that here. I know it's going to disappoint you, but I won't get into that here, although I may in the next annual report. And that is of absolutely no consequence to us. We care not a whit about the accounting treatment that we receive. We feel that we have a shareholder body that's intelligent enough to understand the economic reality of a transaction and that by playing various games in terms of how we try to structure it and maybe flow part of the purchase price back through the income statement or anything of that sort, which is done. That's not something that we care about at all. We would rather do whatever makes the most sense for us and for the seller and then explain to you whatever accounting peculiarities may arise out of the transaction. And that probably differentiates us from most companies, and it probably helps us make a deal occasionally. Anything else? Really? Okay. Now I can hear you fine. And I was wondering, will there be any opportunity for shareholders who may find the preferred issue preferable for any number of reasons to participate in that? Well, if we issued a preferred and it became actively traded, let's say it was a company with many shareholders instead of a few, obviously that would be something that any new or present shareholder could make a decision on whether they prefer that issue than others. We could, but we have no plans of doing it. I don't think I don't see it happening. We could offer to exchange preferred for present common. And it's conceivable a few people would have an interest, but most people have self selected in terms of the kind of security they want to own in terms of owning Berkshire Common. So it's unlikely they would want to switch into a preferred because we wouldn't have a premium of value, just be an alternative security. We could do that though. I mean, and it would probably be a tax free deal. We have no plans of doing that, but it's something that if we ever thought that enough people might want, we could offer it. But no one would be obliged to take it. It's a good question. Okay. We'll move on. Is there a motion to adopt the Board of Directors' recommendation? I move the adoption of the amendment to the 4th article, the Certificate of Corporation as set forth in Exhibit A of the Company's proxy statement for this meeting. Is there a second? I second the motion. Motion has been made and seconded to adopt the proposed amendment to the Certificate of Incorporation. Any further discussion? We are ready to act upon the motion. If there are any shareholders voting in person, they should now mark their ballot on the proposed amendment to the Certificate of Incorporation and allow the ballots to be delivered to the Inspector of Election. We're collecting a few there. Would the proxy holders please also submit to the Inspector of Elections a ballot on the proposed amendment voting the proxies in accordance with the instructions they have received? Wait just a second here. Mr. Fitzsimmons, when you are ready, you may give your report. My report is ready. The ballot of the proxy holders received through last Friday cast not less than 928,889 in favor of the proposed amendment to the certificate of incorporation. That number far exceeds the majority of the number of all shares outstanding. The certification required by Delaware Law regarding the precise count of the votes, including the votes cast in person at this meeting will be given to the secretary to be placed with the minutes of this meeting. Thank you, Mr. Fitzsimmons. The amendment to the certificate of incorporation is set forth and Exhibit A to the proxy statement for this meeting approved. After adjournment of the business meeting, I will respond to questions that you may have that relate to the businesses of Berkshire, but do not call for any action at this meeting. Does anyone have any further business to come before this meeting before we adjourn? If not, I recognize Mr. Walter Scott, Jr. To place this motion before the meeting. I move this meeting be adjourned. I second the motion. Motion to adjourn has been made and seconded. We will vote by voice. Any discussion? If not, all in favor, say aye. All opposed, say no. The meeting is adjourned. Now, I'd like to tell you about one thing that since the annual report that some of you probably read about in the papers, but maybe not all of you have heard about. Just shortly after the annual report was issued, we completed a transaction with Helzberg's Diamonds with Barnett Helzberg, who is here today. And Barnett, would you stand up, please? There he is. Give him a hand. You may be interested in how it came about because Barnett attended 2 of the last three meetings of Berkshire. He had a few shares and an IRA account, and he was here last year. And shortly after this meeting, I was back in New York City, and I was crossing the street at 58th Street, right near the Plaza Hotel on Fifth Avenue. And a woman said, Mr. Buffen. I turned around and she came up and she said she'd attended the annual meeting last year a few days ago and said that she enjoyed it. And I said, That's terrific. And And I started to cross again, and Barnett had been about 30 or 40 feet away. I didn't know him. And he had heard this woman, so he said the same thing. And I turned around and we shook hands, the first time I'd ever met him. And he said, you know, I might have a business you'd be interested in. And I get that all the time. So I said, well, why don't you write me? And a time went by, and I got a letter from Barnett, and he'd been thinking about doing something with the business. His father had started in 19 15, and based in Kansas City, called that whole time. And he had been exploring various avenues, but probably in some part because of his background as a Berkshire shareholder, he had some specific interest in the company becoming associated with Berkshire. He cared very much about the company having a permanent home. He cared very much about it having an environment in which it could grow and be run autonomously and be based in Kansas City. And he wanted to receive something in exchange that he was happy to own for the rest of his life. So we worked out a transaction shortly, just very shortly after the annual report went to press. And so now Berkshire, as of 1201, I guess yesterday morning, the deal closed. There's this waiting period because of the Hart Scott Rodino Act and a few other things. The transaction closed, and now Berkshire is the owner of Helzberg's Diamonds, which has roughly 150 stores around perhaps 26 or 27 states, I'm not sure the exact number, and mostly in malls, although some others. It's been enormously successful. Barnett brought in Jeff Comett, who formerly ran Wanamakers about 8 years ago, I guess it is. And the company has both expanded in its traditional format. It's gone with a new format recently, which has been very successful. It is in its position in the jewelry industry. It tends to compete with the Zales Accordants, but it does a far, far better job. Their sales per store on roughly equivalent square footage will be very close to double what competitors achieve. It's got a magnificent morale and organizational structure and the people. Barnett was very generous with people in making the sale. He took it out of his own pocket to treat people right because they'd done such a terrific job over the years. And I think you'll see Helzberg become a very big factor in Berkshire over time. And it just shows you what can come out of these annual meetings so the rest of you do your stuff. So anyway, that is an acquisition that was made for largely for common stock. It did not involve preferred, because Barnett preferred common. But different people have different needs. And sometimes there's a group of shareholders that can have different priorities, and that's the reason we want to have various currencies. If we had not been able to use common stock, we would not have made this transaction, because Barnett has been in no hurry to write a large check to the government, and we can help him in that respect with a common stock deal. So anyway, we're glad to have Ellsberg become part of Berkshire. I wouldn't be surprised if we have another announcement or 2 in the next year before we have the next meeting. I hope so, but there's no guarantees. Now we're going to turn the meeting open for questions. We'll do it as we've done before. We've got this room divided into 6 zones. And if you will raise your hand, the monitor in your zone will recognize you and will keep going around. We will not go to a second person in any zone until we've exhausted all those who have yet to ask their first question. We also have a zone in the overflow room, so there will be a total of 7. And we'll just keep going around if you'll identify yourself, please, and we'll be delighted to answer your questions. The more, the better. So we'll start with Zone 1. My name is Fred Ilfeld Jr. From Sacramento, California. And I wanted to ask, if you could elaborate upon the logic of adding 2 family members to the Board of Trustees. It's terrific for family harmony, just to start with. As I've talked about in the annual report, if I die tonight, my stock goes to my wife, who is a member of the Board of Directors, and she will own that stock until her death, when it will go to a foundation. So there is a desire to have as long a term and permanent ownership structure as can really be done in terms of planning and the tax laws. I mean, we have invited people like Helzbergs to join in with Berkshire into what we think is a particularly advantageous way for them to conduct a business and to know the future that they're joining. And part of knowing that they're joining involves knowing that the ownership is stable. And it will be stable for a very long period of time in Berkshire, probably about as long as you can, anybody can plan for in this world. After my death, the family would not be involved in the management of the business, but they'd be involved in the ownership of the business. And you would have a very large, concentrated ownership position going well on into the foundation that would care very much about having the best management structure in place And to, in effect, prepare for that over time, I think it's very advisable that family members who will not be involved in management, but who will have a key ownership role to play, become more and more familiar with the business and the philosophy behind it. I discussed that some in the I guess it was the 1993 annual report, because I think it's important that you understand. And anybody that wants to sell us a business, if you've built a business since 1915 and you care enormously about it, and you care about the people that you've developed, but you've got something else you want to do in life, it's more than advertising your car in the paper to sell it. It is an important, a very important transaction to you, not just in terms of how much money you receive, but in terms of who you deliver. Thousands of people that have joined you, who you deliver them to. And I think we have a structure that is about as good as you can do. Nothing is forever, but we have a structure that's about as good as you can do in terms of people knowing what they're getting into when they make a deal with us and being able to count on the conditions that prevailed at the time of the deal, continuing for a long period in the future. Many people I had a fellow tell me the other day about a business where he'd been wooed by the acquirer, and the day after the deal, they came in and fired the top half dozen people. They had a secret plan all along. Well, I don't think you run into much of that. But what you do run into is the company that's the acquiring company itself either being acquired or some new management coming along or some new management consultant coming along and saying, well, this doesn't fit our strategic plan anymore, so let's dump this division. And people to join in with Berkshire are going to be relatively, comfortable about nothing like that happening. Charlie, you want to elaborate on it? No. I was hoping Charlie would have a near life experience this morning. Keep encouraging him. Zone 2. Hello. My name is Jim Lichty from Des Moines. I'm interested in, like Chrysler. Can you make a comment on the Chrysler Corporation? No, I don't think I can make a comment on the Chrysler. I think Solomon Brothers incidentally has been retained by that. We have nothing to do with it. Charlie and I I read that in the paper, and Charlie and I are not familiar with normally with investment banking arrangements at Solomon, but it has been in the paper that Solomon is involved in that. We have no involvement. Charlie, you're not commenting on the question. No. Try him on something else. Zone 3. I'm Jim Vardaman from Jackson, Mississippi. In describing your allocation of capital to your wholly owned subsidiaries, you wrote in the annual report that, you charge managers a high rate for incremental capital they employ and credit them at an equally high rate for capital they release end quote. How do you determine this high rate? And how do they determine how much capital they can release? Well, what we try to do with those arrangements, the question is about incentive arrangements we have with managers or other situations where we either advance capital to a wholly owned subsidiary or withdraw it, usually that ties in with the compensation plan. And we want our managers to understand just how highly we do value capital, and we feel there's nothing that creates a better understanding than to charge them for it. So we have different arrangements. Sometimes it's based a little on the history of the company. It may be based a little bit on the industry. It may be based on interest rates at the time that we first draw it up. We have arrangements depending on those variables and perhaps some others and perhaps just how we felt the day we drew it up that range between 14% 20% in terms of capital advanced. And sometimes we have an arrangement where, if it's a seasonal business, where for a few months of the year when they have a seasonal requirement, we give it to them very cheap at LIBOR, but if they use more capital over beyond that, we start saying, well, that's permanent capital, so charge them considerably more. Now, if we buy a business that's using a couple 100,000,000 of capital, and we work out a bonus arrangement and the manager figures out a way to do the business with less capital, we may credit him at a very high rate, same rate we would use in charging him in terms of his bonus arrangements. So we believe in managers knowing that money costs money. And I would say that just generally, my experience in business is that most managers, when using their own money, understand that money costs money, but sometimes managers, when using other people's money, start thinking of it a little bit like free money. That's a habit we don't want to encourage around Berkshire. We, by sticking these rates on capital, we are telling the people who own our business how much capital is worth to us. And I think that's a useful guideline in terms of the decisions they're making, because we don't make very many decisions about our operating business. We make very, very few. I don't see capital budgets in most cases, from our 100 percent owned subsidiaries. And if I don't see them, no one else sees them. I mean, we have no staff at headquarters looking at this kind of thing. We give them great responsibility on them, but we do want them to know how we calibrate the use of capital. And so far, I would say it's really worked quite well. Our managers don't mind being measured. And they like getting I think they enjoy seeing a batting average posted. And a batting average that does not include a cost of capital is a phony batting average. Charlie? Well, I certainly agree. And his name isn't even Buffet. Zone 4. My name is Dave Lankes. I'm with Business Insurance Magazine. Some property casualty risk management experts are advising commercial insurance buyers to forge 5 10 year policies with their property casualty insurers to promote stronger partnerships with their insurers as well as to maintain the smooth PC market of the past 7 to 8 years. Do you believe this idea will take hold for most policyholders? And if so, what would be the implications for policyholders' costs and insurers' underwriting results? The question is about partnerships between probably commercial policyholders and their insurers. And there are a lot of ways of doing that by various retrospective plans or adjustable rates of various sorts and self insured retentions and that sort of thing. As a general matter, there are only two reasons for buying insurance. 1 is to protect yourself against a loss that you are unable or unwilling to bear yourself. And that is partly an objective decision that's partly subjective. For example, a manager that's terribly worried that his Board of Directors may second guess him if he has an uninsured loss, is going to buy a lot more protection probably than the company really needs, but he knows he's never going to have to go in front of his Board of Directors and say, We just had a $1,000,000 fire loss, and then the next question the Director asks is, was it insured? And he doesn't want to answer no. So, he may do something that's very unintelligent from the company standpoint merely to protect his own position. But the reason for buying insurance is whether it's and this is true of life insurance, it's true of property casualty, it's true of personal insurance, it's true of commercial insurance is to protect against losses that you're unwilling or unable to bury yourself. Or the second reason, which occasionally comes up, is if you think the insurance company is actually selling you a policy that's too cheap, so that you really expect to, over a period of time, do have a mathematical advantage by buying insurance. Well, we try to avoid selling the second kind, and to concentrate on selling the first kind. And we think any company we sell insurance to and of course, much of the insurance we sell is to other insurance companies. I mean, we are a reinsurer in a very large part. We are selling them insurance against a loss that they are either unable or unwilling to sustain. And a typical case might be a company that had a lot of homeowners policies in California. And if those include earthquake coverage, they may not be able to sustain the kind of loss that is possible. Even though they want to keep a distribution system in place that merchandises en masse to homeowners in California. So we will write a policy. They may take the first 5,000,000 of loss, they may take the first 50,000,000 of loss, depends on their own capabilities, but then they come to us. And we are really uniquely situated to take care of problems that no one else that the companies can't bear themselves and that they can't find anybody else to insure. But we really don't want to insure someone for a loss that they can afford themselves, because if we're doing that, it may be because they're dumb, but it may be because they also have a loss expectancy that's higher than the premium we're charging, which is not what we're trying to do in business. I think probably as compared to 30 years ago, that risk managers at corporations are probably more intelligent about the way they buy their insurance than many years ago. I think it's become a I think they're more sophisticated and they've thought it through better. But there's a lot of insurance. There's a fair amount of insurance bought that doesn't make sense, and there's a fair amount of insurance that isn't bought that should be bought. There are certain companies that are exposing themselves in this country to losses which would wipe them out. And they prefer not to buy reinsurance because it's expensive. But what they're really doing is betting on something that won't happen very often, happening not at all. And if you take a huge hurricane on Long Island or you take a major quake in California, there are a number of companies that are not that have not positioned themselves to withstand those losses. And if you're a 63 year old CEO and you figure I'm going to retire in a couple of years, the odds are pretty good that it won't happen on your watch, but it will happen on somebody's watch. And we try to sell reinsurance to those people. And usually we do, but sometimes we don't. Charlie? Nothing to add. Zone 5. He's biting himself. He'll be dynamite when he gets going. My name is Hugh Stevenson. I'm a shareholder from Atlanta, Georgia. My question involves the company's catastrophe lines of insurance. It seems that there's a relative ease of entry into that business through Bermuda based companies and others. And given the importance of that business to the overall company, I'm curious how the ease of entry into the business affects its long term competitive position and its rates of return. Well, you're very right. There is an ease of entry into the catastrophe business. And it's sort of attractive for particularly attractive for promoters because if you start an insurance company to write earthquake insurance in California, and you raise a few $100,000,000 and you'll either have essentially no losses or if you write enough of it, you'll go broke. And most years, you'll have no losses. So if your intention is to sell your stock publicly in a year or 2, the odds are very good that you will have a beautiful record for a couple of years and you can sell. And maybe one time out of 10, you'll go broke. And 9 times out of 10, you'll sell to somebody else who eventually will go broke. And there's really the ease of entry. The only thing that may restrict that is that if the buyer is sophisticated enough to question the viability of that company under really extreme conditions, which the only conditions that count when you're buying catastrophe insurance, that may restrict. But the second thing is, of course, none of the people that have started up can offer anywhere near the amount of coverage that Berkshire has. Berkshire is really one of a kind in terms of its capital strength in the business. I don't think anybody in Bermuda that I can remember, I don't think Ajit's out there, but I don't think anybody has $1,000,000,000 of net worth. And we have at present, we probably have close to $13,000,000,000 of net worth and considerably more of value. So we can sustain shocks that and we will sustain shocks, I should add, that others can't. And we try to get paid appropriately for that. But when we say we can take a $1,000,000,000 loss, we can take a $1,000,000,000 loss and we will have a $1,000,000,000 loss at some point. And anyone buying it knows we can take it or something greater. And they should know that very few other very few of our competitors can. So there's competition. We do an unusual proportion of our business with the 8 or 10 largest insurance reinsurance companies and insurance companies in the world. So we really have established with the people who understand the real risks of the business, they come to Berkshire and a lot more often than they stop in Bermuda because they know that we'll pay and they've been around long enough to know that in the end that's what really counts with an insurance company. If the rates if there were enough capacity at really ridiculous rates, I mean, in the end we wouldn't be writing that business at that time. But I don't think that will happen. It certainly hasn't happened so far. And if it happens, so be it. We will all play golf until the loss occurs. Charlie? Nothing there. Zone 6. Chairman, most company Berkshire invest at this time are not in high technology sector. What we have seen in the last few years that there seems to be a significant growth both in sales and earnings of the high technology area And also what you are shareholder believe that the times are changing from a brand name to high technology. My question is, can someone apply your investment principle, business philosophy and your discipline in life to build your portfolio of say 5 or 6 high technology company, let's call it Berkshire Hathaway Technology Fund? Well, I think it would sell. The question about Charlie and I won't be able to do it. We Charlie probably understands high-tech, but you can see how hard it is to get information out of himself. He hasn't told me yet. We try not to get into things that we don't understand. And if we're going to lose your money, we want to be able to come before you next year and tell you we lost your money because we thought this and it turned out to be that. We don't want to say somebody wrote us a report saying this is what's going to happen in some field that we don't understand and therefore we lost your money by following someone else's advice. So, we won't do it ourselves. I think that the principles I think Ben Graham's principles are perfectly valid when applied to high-tech companies. It's that we don't know how to do it, but that doesn't mean somebody else doesn't know how to do it. My guess is that if Bill Gates were thinking about some company in an arena that he understood and that I didn't understand, he would apply much the same way of thinking about the investment decision that I would. He would just understand the business. I might think I understand Coca Cola or Gillette, and he may have the ability to understand a lot of other businesses that seem as clear to him as Coke or Gillette would seem to me. I think once he identified those, he would apply pretty much the same yardsticks in deciding how to act. I think he would have a margin of safety principle. It might be a little different because there's essentially more risk in a high-tech company. But he would still have the margin of safety principle on a sort of adjusted for the mathematical risk of loss in his mind. He would have he would look at it as a business, not as a stock. He would not buy it on borrowed money. A bunch of principles would be carried through. But our circle of things we understand is really unlikely to enlarge. Maybe a tiny bit here or there. But if the capital doesn't get too large, the circle's okay. But we will not if we have trouble finding things within our circle, we will not enlarge the circle. We'll wait. That's our approach. Now how are we set up for Zone 7? Can we do it out? Yes, here we are. Are you there? Hi, I'm Susie Taylor from Lincoln, Nebraska. By way of explaining, we wrote down the value of U. S. Air reflecting our investment's current market value. You had a good explanation in your report as to why the economics of the business are unattractive. And I presume, given the choice, we wouldn't do it over again. I think that's a fair assumption. And I should mention, anybody wanted to ask about U. S. Air, we put them in the other room just so you'll know. And then the second part is better. But I'm watching you. I can see you on the monitor. And quoting from your profound statement, you don't have to make it back the way you lost it. Right. Wouldn't it be a good idea to put that $89,000,000 in something you are really behind as opposed to U. S. Air? Well, that's a very good question because it is true that a very important principle in investing is you don't have to make it the way you lost it. In fact, it's usually a mistake to try and make it back the way you lost it. When we write an investment down as we did with U. S. Air at $89,000,000 we probably think it's worth something more than that. But we tend to want to be on the conservative side, but it's worth a whole lot less than we paid. And the nature of that preferred as well as other private issues we've bought, usually makes it quite difficult to sell. That's one of the things we know going in. When we bought Preferred, some people thought that we were getting unusually favorable terms. I haven't heard from them lately on U. S. Air. But one of the considerations in that is that if you buy 100 shares of a preferred that's being offered through a securities firm from the same issuer, you can sell it tomorrow. And we are restricted in some ways legally, and in other ways simply by the way that markets work from disposing of holdings like that. And we know that there's an extra cost involved to us if we should try to sell, or it may be impossible. And that's not of great importance with us because we don't buy things to sell, but it's of some importance. And we are not in the same position owning our Series A preferred of US Air as we would be if we bought 1,000 shares or 5,000 shares of the Series B Preferred, I believe it is that trades on the New York Stock Exchange. That would be very salable. And our preferred could well even be saleable at a price modestly above what we carry it for, but it would require it would not be very easy to do. If we went about to do it, we could probably assuming we could do it at all, we could probably get a little more money for it. But it would not be easy to do, partly because of the legal restrictions. Charlie and I are on the Board. That complicates things. We always know something just by being on the Board that the public doesn't know, so that complicates things. In the end, we usually find that dealing with anything where we've got fiduciary obligations is maybe not practical at all. And if it is, it's probably more trouble than it's worth. Charlie? Well, it's certainly been an interesting experience, the U. S. Air experience. Is that it, Geraldine? No. No. I'd like to repeat that business about not having to get it back the way you lost it. That's the reason so many people are ruined by gambling. They get behind and then they feel they have to get it back the way they lost it. It's a deep part of the human nature. And it's very smart just to lick it by will. And little phrases like that are very useful. One of the important things in stocks is that the stock does not know that you own it. You have all these feelings about it. You remember what you paid. You remember who told you about it. All these little things. And it doesn't give a damn. It just sits there. And it, you know, a stock at 50. Somebody has paid 100. They feel terrible. Somebody else paid 10. They feel wonderful. All these feelings. And it has no impact whatsoever. And So it's, as Charlie says, gambling is the classic example. Someone builds a business over years. That they know how to do, and then they go out someplace and get into a mathematically disadvantageous game, start losing it, and they think they've got to make it back not only the way they lost it, but that night. And it's a great mistake. Zone 1. My name is Donald Stone. I'm from Riverside, Connecticut. This is my 2nd shareholders meeting ever at age 61. So I'm really very privileged to be here. My first was Coca Cola a week and a half ago, and there were only 200 people there. I'm trying to figure this out. I think the rule is that the number of people present is in direct proportion to the price of the shares. In that case, we won't split. Preferatory comment to my question, the November 24, 1994 issue of Fortune Magazine had an article, a featured article, entitled America's Greatest Wealth Builders, dealing with the concepts of market value added and economic value added. It was with great glee that I noticed that Coca Cola was number 2 on that list, second only to General Electric, and that Coca Cola had done twice as well as Pepsi Cola 9 on the list with 1 third as much capitalization. My question is this, whether the concept of market value added and economic value added as such or any of its variance is a concept that's applicable and useful to Berkshire Hathaway as a whole or in analyzing its line of business segments. I'd really like to hear from Charlie Munger on this first, because Charlie? I've heard that he's thought a lot about this particular subject. Right. If Warren is using economic value added exactly the way they're now teaching it in the business schools, he hasn't told me. Obviously, the concept has some merit in it, but the exact formal methods I do not believe we use. Warren, are you using this stuff secretly? No, we in a sense, they're trying to get at the same thing we do or we're trying to get at the same thing they do. But I think it's A, I think it has some flaws in it. Although I think it generally comes out with the right answers, it sort forces itself to come out with the right answers. But I really don't think you need that sort of thing. I mean, I do not think it's that complicated to figure out where it makes sense to put money. You may even make mistakes doing it, but in terms of the mental manipulations you go through, I don't think it's a very complicated subject. And I don't think that I think that the people marketing 1 or another fad in management tend to make them a little more complicated than needed so that you have to call in the High Priest. If all that really counts is the Ten Commandments, it's very tough on religious counselors and everything. It doesn't take it just doesn't make it complicated enough. And I think there's some of that, quite a bit of that in management consulting and in the books that you see and all of that that come out. It's way less silly than the capital assets pricing model. So that at least academia is improving. The capital asset pricing model, which is I don't know how much it's used now. Certainly, they have these great waves of popularity. You get that in management, you get it in investing. I mean, real estate may have been popular or international. You can read pensions and investment magazine, which is a pretty good magazine, but you can just see these fads sort of going through. Then they have seminars on them and everything. The investment bankers create product to satisfy the demand. These fads in management, I mean, obviously, listening to your customer and things like that, I mean, nothing makes more sense, but it's hard to write a 300 page book that just says, listen to your customer. And that's one of the things I liked about Graham's book. I mean, everything he wrote sort of made sense. He didn't sort of get into all the frills and try and make it more complicated than it really truly is. I really didn't need to read the November issue, 1994 issue. Fortunate to know that Coca Cola had added a lot of value. We added about $4,000,000,000 some of value to Berkshire. That's good enough for me. Zone 2. My name is Morris Spence from Omaha, Nebraska. I have a 2 part question on derivatives. Does Berkshire Hathaway currently or have they in the past engaged in strategies involving derivatives? If so, do you, as CEO, fully understand these financial instruments? Whoever suggested that crazy notion? Finally, would you or Charlie care to comment on the use of these by other financial institutions? The question about derivatives, the reason I inject that remark in a Fortune article that all of you should read, if you haven't, I suggested that the use of derivatives would be dramatically reduced if the CEO had to say in the report whether he understood them or not. The answer to your question, though, is we have 2 types, I guess it would be, of derivative transactions of a very modest size, but that doesn't mean we wouldn't if the conditions were right, we either wouldn't have them on a much greater scale now or we wouldn't have done it in the past. We have 2 types of transactions, and I do understand them. And there are times when there are things that we would want to do, not often, but there would be times when they could be best accomplished by a transaction involving a derivative security. And we wouldn't hesitate to do so. We would obviously care very much about the counterparty because that transaction is just a little piece of paper between 2 people, and it's going to cause 1 of the 2 to have to do something painful at the end of the period usually, which is to write a check to the other person. And therefore, you want to be sure that that person will be both willing and able to write the check. And so we're probably more concerned about counterparty risk than most people might be. Last year and the year before, I think I said that derivatives often combined borrowed money with ignorance and that that is a rather dangerous combination. And I think that we've seen some of that in the last year. When you can engage in sort of non physical transactions that involve 100 of 1,000,000 or 1,000,000,000 or tens of 1,000,000,000 of dollars, as long as you can get some party on the other side to accept your signature, that really has the potential for a lot of mistakes and mischief. And if you've looked at the formulas involved in some, particularly I guess, interest rate type derivative instruments, it is really hard to conceive of how any business purpose could be solved by the creation of those instruments. I mean, they essentially had a huge really gambling element to them. And I use that in the terms of engaging in a risk that doesn't even need to be created as opposed to speculative aspects. They involve the creation of risk, not the transfer of risk, not the moderation of risk, but the creation of risk on a huge scale. And it may be fortunate that in the last year, half a dozen or so, cases of people who have gotten into trouble on them have come out because that may tend to moderate the troubles of the future. The potential is huge. You can do things in the derivative markets. Well, I've used this example before. But in borrowing money on securities, the Federal Reserve and the U. S. Government decided many decades ago that society had an interest in limiting the degree to which people could use borrowed money and buying securities. They had the example of the 1920s with what was 10% margin that was regarded as contributing to the Great Crash. So the government, through the Fed, established margin Rockefeller doesn't need that. But since the And they said that maybe Mr. Rockefeller doesn't need that, but society needs that. We don't want a bunch of people on thin margins gambling, essentially in shares where the ripple effects can cause all kinds of problems for society. And that's still a law, but it means nothing anymore because various derivative instruments have made 10% margins of the 1920s look like what a small town banker in Nebraska would regard as conservative compared to what goes on. So it's been an interesting history. And like I say, perhaps the experiences of the last year, they've got everybody focused on derivatives. Nobody knows exactly what to do about them. Berkshire Hathaway will, if we think something makes sense, and Charlie and I understand it, we may find ways to use them to what we think will be our advantage. Charlie, do you want to add anything on that? Well, I disapprove even more than you do, which is hard. If I were running the world, we wouldn't have options exchanges. The derivative transactions would be about 5% of what they are and the complexity of the contracts would go way down, the clearing systems would be tougher. I think the world has gone a little bonkers and I'm very happy that I'm not so located in life that I have to be an apologist for it. A lot of these people, I feel sorry for them. They had great banks and they have to go before people, sometimes even including their children and friends, and argue that these things are wonderful. John Neutier from Kingsburg, California. And my question relates to Solomon and where I'm just asking if you could take us out the next 2 or 3 years in your vision. It started out as a good investment. You got a good return on it or your interest, and it's clearly had some problems and we have gotten in deeper and deeper as those problems have continued And it doesn't look like it's super bright. So, you must understand where it's going. But could you just give us where you see it going in the next 2 or 3 years? Well, I think it's very difficult to forecast where Solomon or really almost any major investment banktrading house will do over actually the next 2 or 3 months, let alone the next 2 or 3 years. The nature of that business is obviously far more volatile than the blade and razor business. And the tough part is assessing over a longer period of time whether because of volatility, it's much harder to assess whether what the average returns might be from a business. And the answer is, Charlie and I probably, if we were to try and write the forecast for the next 2 or 3 years, we would not have a high a feeling that we had a high probability of being able to predict what that company or other companies in that industry either would earn 3 years out or would probably have in the way of average earnings. Our own commitment is to a $700,000,000 preferred issue, which has 5 redemption dates starting in October 31st this year and then every year thereafter. On those dates, we can either take cash or stock, and that's an advantage, obviously, to have an option. Any time you have an option in this world, it's to an advantage. It's to your advantage. It may be a very small advantage, but it's giving options is generally a mistake, and accepting options is usually a good idea if it doesn't cost you anything. And we will the other thing about options is you don't make a decision on them until you have to make a decision. So we, in addition to that $700,000,000 of preferred, which in our view is 100% money good, I mean, we'd like to own more of that. But we also have about 6,000,000 odd shares of common, which we paid perhaps $48 a share for or something in that area. In any event, considerably more than the present market of $35 or $6. So we have got a we have a loss of probably $80,000,000 or $90,000,000 or some number like that at market in the common. The preferred is actually treated as fine. We've received $63,000,000 a year. Incidentally, by owning the amount of common we own, this probably isn't generally known or recognized, you own 20% of the voting power of a company, you have a somewhat different dividends received credit. You have somewhat different tax treatment than if you own less than 20%. So until we own that common, we paid somewhat more tax on our preferred dividend than we now pay. It's not a huge item, but it's not immaterial either. Charlie? Well, I certainly agree it's hard to forecast what's going to happen in the big investment banking dashtrading houses. I would like to say that Berkshire Hathaway was a large customer of Solomon long before we bought the preferred And we've had marvelous service over the years. I think Solomon's going to be around for a long time, rendering very good service to various clients, satisfied clients. We sold our first debt issue of Berkshire, I think in 1973 through Solomon. So we've had an investment banking relationship for 21 or 22 years there, and actually we've done business with them before that in various other ways. So it's a long term relationship. Now, there's no question about Solomon being around. The question and that's why our preferred is absolutely money good. But the question is what the average return on capital will be. And we knew that was difficult to predict when we went in and we found out it's even more difficult to predict than we'd thought. Zone 4. Thank you for the opportunity. Dick Jensen from Omaha, a fellow Nebraska University supporter. A rather convoluted question. I'm very interested in your recent purchase and your future intention of American Express. And as I understand the company, I know it's a rather involved and complicated and rather expensive company insofar as it has its interest in many areas. I know one of which of course is the credit card, but there is also the major part of the organization of IDS and others that I don't even know about. And I wondered what your hopes are for that investment. And I also just recently, as perhaps you have, became curious to know if you are personally acquainted with Mr. Phil Carre, I believe his name is. And how about the purchase of his firm in your future? Thank you. Dick, I think Phil Correa is here today. Phil is He's right back there. Phil, would you stand up? There he is. Give him a hand. Phil is 98. I first met him in 1952, 43 years ago. He attends every eclipse around the world, and you could run into him in some very strange places that wrote his first book on securities, I believe, in 1924. Am I right on it, Phil? Yes. And wrote an autobiography here recently. Probably the greatest long term investment record in this country's history. And but I think my impression is that Phil sold part or a good bit of Pioneer some years ago, which he managed for decades, many decades. In fact, I first learned about Phil when I was leafing through Moody's Banks and Finance Manual 40 odd years ago, and I saw this company with this great record and with some securities that looked terribly interesting. So we got in touch and he was out in Omaha and we got acquainted. So anybody that can get Phil to talk to him, listen carefully. I advise that. The question about American Express, we own just under 10% of American Express. And obviously, even though you mentioned they're in a number of businesses, the by far the key, the most important factor in American Express's future for a good many years to come, great many years to come, will be the credit card. And that is a business that has become and will forever probably become ever more competitive. I mean, I've followed it since I think I met Ralph Schneider at the Diners Club in the late 1950s. And American Express entered into the credit card business out of fear. I mean, they were worried about what the credit card was going to do to their traveler's check business. Travel's check business had been originated back in 18/90 something, I believe. And that was in turn building off of the old Express business where I think it was Henry Wells and William Fargo, they would chain themselves to the Express boxes as they delivered them through to the West, and they decided that maybe issuing Travelers checks would be a little easier than carrying all this stuff around. So the Travelers check evolved out of the Express business. And the credit card business with American Express arose out of fear of what particularly Diner's Club at the time. They were all terrified of Diner's Club, which got this got the jump on everybody. And they became enormously successful with it. And the American Express card, as you know, had a a terribly strong position in what they call the travel and entertainment part of the card business. And of course, the banks entered in on a big scale and Visa's been enormously successful. So the card has a strong franchise in certain areas like the corporate card, although people like First Bank Systems are very aggressive in going after them there. But the card has a significant franchise, but it does not have the breadth of franchise that it had many years ago. For a while, it was the card. And now it's the card in certain areas, but nothing like as broad an area as before. It has certain very important advantages and economic strengths, and it has some weaknesses. And you have to assess those and deciding where it will be in the year 2000 or 2,005. And we think that the management of American Express thinks well about the question of how you keep the card special in certain situations. And they've reacted to the merchant backlash for higher discount fees, I think, in an intelligent way. So we'll see how it all plays out. But the key IDS, which has now been renamed, but is a very big part of American Express, accounts for close to a third of their earnings. But the real key will be how the card does over time. Charlie? Nothing to add. Zone 5. Hi. My name is Philip King from San Francisco. And my question has to do with how the FASB has caved in on the stock option proposal. And the people opposed to the proposal argue that it would hurt capital formation for companies and that the cost of stock options is already reflected in shares outstanding and fully diluted calculations. And I was curious, what is your feelings about what's happened? Well, as those of you who followed this issue, the FASB didn't cave on it. They were they hated it. I mean, they knew they were right. As a matter of fact, most of the what are now, I guess, the big six auditing firms are big many years ago sided with the position. But in my opinion, the auditing firms caved to their clients in that respect. In terms of capital formation, I would argue that the most intelligent form of capital formation follows from the most accurate form of accounting. I mean, if all the companies whose names began with A through M didn't have to count depreciation, and all the ones with M through Z did or something. That might help in capital formation for companies that had names with A through M, and incidentally, they probably all changed their names. But I don't think that bad accounting is an aid to capital formation. In fact, I think probably over time, it distorts capital formation because if we were to pay all of the shareholders with I mean, all of the people who worked for Berkshire Hathaway in stock and therefore record no wage expense, we might be able to sucker in a bunch of people who thought the earnings were real, but that would not be a great step forward for capital formation in my view. I really think that I've talked privately to a number of managers about this. And they understand it, but they prefer the present situation. And they used a lot of muscle in Washington many years ago. And I think I have this authenticated now. A This fellow mathematics professor sent me some material after I'd written this. I try to get a little proof after the fact when I can. I believe it was in the Indiana legislature where a legislator introduced a bill to change the value of pi, the mathematical symbol pi, to 3, because he said that it was too difficult for the schoolchildren to work with this complicated 3.14159. And he was right. I mean, it was difficult. And Congress, in connection with the stock option question, received all kinds of pressure to, in turn, pressure FASB and the SEC to not count stock option costs as part of compensation. I've never met anybody that wanted to be compensated that felt that if he received his present salary plus an option, he was not getting compensated more than if he just received his salary. So he thought it was compensation. And I will tell you that if we've been issuing options over a period of time at Berkshire for things unrelated to the performance of the entire business that we would have had a cost, perhaps measuring in the 1,000,000,000 of dollars, whether it was recorded or not. So it goes back to Bishop Berkeley's question of whether a tree that falls in the forest and doesn't make a sound, etcetera. But I think it is I really think it makes you a bit of a cynic about American business when you see the extent to which a group has pressured even to the extent of talking financial withdrawing financial support from the Financial Accounting Standards Board, the degree to which they pressured people to make sure the value of pi stays at 3 instead of 3.14, simply because it was their own ox that was being gored a bit. In any event, it looks like it's all over now for some time. In fact, now they're pressuring them to even weaken further the standards that have been set. So self interest is alive and well in corporate America. Charlie? Yes, I think dishonor 1. And I think it is quite important for a civilization to have engineering and good accounting, and it is a very regrettable episode. Leading politicians, leading venture capitalists. I think to some extent, it's an indictment of the educational system that this thing could be so widely looked at and so wrongly. It's bad enough people want to cheat on their accounting, and they do cheat on their accounting. But to want it to be endorsed as the system is really kind of disgusting. Yeah. Corruption won. Well, put us down as undecided on that, and we'll move on to zone 6. Good morning, Mr. Buffet, Mr. Munger. Mike Leachin from Hamilton, Ontario. Could you consider availing a videotape of this meeting to us, the shareholders? No, I didn't quite get that. Would you consider availing this videotape of this particular shareholder meeting to us, the shareholders? Distributing a videotape. A transcript or a videotape? Yes. Yes. We've had that suggested a number of times. It's a good suggestion, and we've considered it. The thing we're worried about in connection with that is discouraging attendance. I mean, we'd hate to have 2 people here asking questions and then send it out to tens of 1,000. So And then If I make sales go down at the jewelry store. Yeah. Yeah. Since we were just attacking hypocrisy in American business, Charlie fella, he should add that to my But it's a close call on that because we would like everybody of course, we try to cover a great many subjects in the annual report, but we like the idea of the meeting answering a lot of shareholders' questions and getting that feedback. We don't want to discourage attendance, and it's fun to have everybody come in and ask questions. And the chances are if we had far fewer people, we would have far fewer good questions. So that the quality of the meeting is enhanced, I think, by having a lot of people come. But you've come a long way, so I can understand why you might be interested in a in a transcript. I appreciate that. Thank you. Or a no? Is that a yes or a no? It was a no. It's a no. Most everything we say is a dull, but we have various ways of getting there. Okay. Zone 7 from the other room. I can see you. Good morning, Mr. Buffet and Mr. Munger. I was wondering if you could tell us what the sales at Borsheims were yesterday and how it compared to a year ago? Well, I can tell you how it compared to a year ago. They were 15% above a year ago, and a year ago was 40 odd percent above the year before, and I forget how much that was before. So we keep setting records. But we haven't announced any numbers, but it's a pretty good sized number. You're a supportive crowd. Thank you. Zone 1. Good morning. My name is Patrick Terhune from Fort Lauderdale, Florida. And first of all, I see, per your request, there are a lot of people who wore red in honor of the Cornhuskers. Of course, my team was the or is the Miami Hurricanes. And I've got my green and orange on under my clothes. But if we were to lose, I'm glad we lost in Nebraska and Tom Osborne. I've got a request for Warren and Charlie, and that is recognizing that the value, both intrinsic and extrinsic, of Berkshire Hathaway is the result of your combined skills in acquiring growth companies and with your prudent and expert investing of the company's capital for growth. I'd like to know if you have a plan, a succession plan, to be executed in the event, God forbid, something happens to 1 or both of you, which will remove your input to the strategic decisions. I sincerely hope you're in the process of developing individuals to carry forward your collective visions and to manage the Company's resources as effectively and as profitably as is being done now. Well, I appreciate that question. And the answer is, obviously, we do care enormously about that because both Charlie and I, addition to a lot of other regions, but we both have a very significant percentage of our net worth in Berkshire, and neither one of us has figured out how to sell it all exactly 15 minutes before we get hit by a truck. So we will not have to jump on the rest of you. And therefore, our continuing interest will go financially, will go well beyond our debts. And it will in terms of foundations or something like that, will go to organizations that we care very much about having maximum resources available to. So we do have some plans. We don't name names or anything of the sort. It's not quite as tough as you might think because we have a collection of fabulous businesses. Some of them owned totally, some of them owned in part. And I don't think razor blade sales or Coca Cola sales are going to fall off dramatically the day Charlie or I die. We've got some great businesses. And same true of the wholly owned businesses. So the question is more that of allocating capital in the future. And that's a problem for Charlie and me right now. It's simply because of the size. It's not easy to find things to do that make sense with lots of money. And sometimes a year will go by and we don't find anything. And other times, a year goes by and we think we found something, but it turns out we were wrong. So it's not easy, But we think we will have some very smart people working on that, and we don't think it will be the end of the world if they don't find anything the 1st year because the businesses will run very well. We have a big advantage in that it's contrasted to virtually almost every other company. We now and in the future are willing, eager to buy parts of wonderful businesses or all of them. Most managers have a most investors are limited to buying parts of businesses and most managers psychologically are geared to owning all of something that they can run themselves. It's like I think Woody Allen said some years ago, it's the advantage of being bisexual is that it doubles your chances of a date on Saturday night. And We can go either direction in that respect. And our successors will also. So Charlie, you want to add anything? I think few business operations have ever been constructed to require so little continuing intelligence in corporate headquarters. An idiot who was willing just to sit here would have a very good record long after the present incumbents were dead. I think that's true. Yes. I think it would be a little better if Warren would keep alive in terms of allocating the new capital. I don't think we'll easily replace Warren. But you know, we don't have to keep getting rich at the same rate we have in the past. That's a tie vote. Zone 2. Hi. I'm Keith Briar from San Francisco. I time period? Well, that's a very good question. And it's the heart of investing or buying businesses, which we regard as the same thing. And it is the framework in which we operate. We are trying to look at businesses in terms of what kind of cash can they produce if we're buying all of them or will they produce if we're buying part of them, and there's a difference. And then at what discount rate do we bring it back? And I think your question was how far out do we look and all that. Despite the fact that we can define that in a very kind of simple and direct equation, you know, we've never actually sat down and written out a set of numbers that relate that equation. We do it in our heads in a way, obviously. I mean, that's what it's all about. But there is no piece of paper, and we never there never was a piece of paper that shows what our calculation on Helzberg's or See's Candy or the Buffalo News was in that respect. So it would be attaching a little more scientific quality to our analysis than there really is if I gave you some gobbledygook about why we do it for 18 years and stick a terminal value on and do all of this. We are sitting in the office thinking about that question with each business or each investment. And we have discount rates in a general way in mind, but we really like the decision to be obvious enough to us that it doesn't require making a detailed calculation. And it's the framework, but it's not applied in the sense that we actually fill in all the variables. Is that a fair way of stating it, Charlie? Yes. Berkshire is being run the way Thomas Hunt Morgan, the great Nobel Laureate, ran the biology department at Caltech. He banned the freedom calculator, which was the computer of that era. And people said, how can you do this? Every place else in Caltech, we have Frieden calculators going everywhere. And he said, well, we're picking up these great nuggets of gold just by organized common sense and resources are short and we're not going to resort to any damn placer mining as long as we can pick up these major aggregations of gold. That's the way Berkshire works. And I hope the Placer mining era will never come. Somebody once subpoenaed our staffing papers on some acquisition. And of course not only did we not have any staffing papers, we didn't have any staff. Zone 3. I'm Tom Morrow from Laguna Beach, California. And the question I have to ask pertains to the issuance of the new stock. And again, as Charles mentioned, is there some potential gold mine out there that you have specifically in mind with the some large acquisition that you have specifically in mind at this time without revealing any strategic secrets? Yes. There are things we would like to do. Whether we ever get a chance to do them or not is another question. But I will be surprised if in the next 5 years, we haven't used some preferred stock one time or another. As I mentioned in the report, we had one last year that if we'd done it, it would have involved the issue of maybe $1,000,000,000 worth of no more than that, I'm sorry, a couple of $1,000,000,000 worth of preferred. That one isn't going to happen in my view. I mean, there's one chance in 100 it could happen or something of this sort, but probably it isn't going to happen. And then we want to be prepared for it. Something will happen. That's always been our experience. We have sat through some dry spells. And this is true in both the stock market and the acquisition business. I closed up the partnership in 1969 because there was nothing that made sense to do. And I'm glad I did because that situation prevailed in 'seventy one and 'two. But in 1973 'four, there were all kinds of things to do. And that will happen from time to time. People will behave, particularly in markets, just as foolishly in the future as they have in the past. It will come at unexpected times, but we will get a chance to do something. That's more of a cash type purchase obviously in the market. But we will get a chance to use the preferred and we will try to think about big things. We may not find them, but Charlie and I the larger something is, the more interested we are. Zone 4. Jim Moss from Los Angeles. I was reading through your annual report and to me an eye popping number in there was the amount of float in 1994 at a cost of less than 0, I think it was $3,000,000,000 And I was wondering if there are any restrictions on your investment of that money or can that go into your marketable equity securities? The question relates to we have that long table we introduced about 4 years ago or so in the annual report that shows the amount of float and the cost of float. And that's a very important table. In terms of our operating businesses, that's probably the most important piece of information in the report. And that flowed, as you noted, well over $3,000,000,000 now last year because of various favorable factors, including the fact that our Super Cat business was favorable, but also because our other insurance businesses did very well, amazingly well. The cost of that float, which is money that we're holding that eventually does not belong to us, but will go to somebody else, the cost of that float was less than 0. And that is a very valuable asset. And the question is how much flexibility we have in investing that, which I think was the core of your question. The answer is we have a lot of flexibility. We are not disadvantaged by that money being in float as opposed to equity really in any significant way. Now, if we had a very limited amount of equity and a very large amount of float, we would impose a lot of restrictions on ourselves as to how we would do it because we would want to be very sure that we were in a position to distribute that float in effect to policyholders or claimants or whatever it may be at the time that was appropriate. But we have so much net worth that in effect, that float is just about as useful to us as equity money, and that means quite useful. It's a big asset of Berkshire's. Let's see. We've got zone 5. Susan Scott from Madison, Wisconsin. On a more serious note, are you beginning to feel threatened by the success of the Beardstown ladies? Which lady was that? I didn't get it. I got everything except what lady that was. The Beardstown Ladies. The Investment Group. Oh, that group. The best seller. Yes. I have not read that book. I hate to admit that to an audience of shareholders that I this is a book that's I think it's probably number, I 7 or 8 or something like that on the Times Best Seller list, and it's been up there for a couple of months now. It's a group, an investment group that apparently is sharing with the world their secrets of success. I'm always suspicious of people that are sharing with the world any great ideas on investments, but we are not threatened at the moment now. Zone 6. Mike Asail from New York City. In the Mistake Dujour section of the annual report, you mentioned a fundamental rule of economics that you missed. I'd like to know the 2 or 3 most important fundamental rules of economics you habitually get right. In other words, what are the fundamental rules of economics you used to make money for Berkshire? And I'm not talking about Ben Graham's principles here, but rather rules of economics which may be found in an economics textbook. Thank you. Yes. We try to I mean, we try to follow Ben's principles in terms of the attitude we bring toward both investing and then buying businesses. But the most important thing you can what we're trying to do is we're trying to find a business with a wide and long lasting moat around it, protecting a terrific economic castle with an honest lord in charge of the castle. And in essence, that's what business is all about. I mean, you may want to be the lord of the castle yourself, in which case, you don't worry about that last factor. But what we're trying to find is a business that for one reason or another, it can be because it's the low cost producer in some area, it can be because it has a natural franchise. It can be because of service capabilities. It can be because of its position in the consumer's mind. It can be because of a technological advantage for any kind of reason at all that it has this moat around it. And then what we have to decide is all moats are subject to attack in a capitalistic system. So everybody is going try if you've got a big castle in there, people are going to be trying to figure out how to get to it. And what we have to decide and most moats aren't worth a damn in capitalism. I mean, that's the nature of it. It's a constructive thing that that's the case. But we are trying to figure out what is keeping why is that castle still standing? And what's going to keep it standing or cause it not to be standing 5, 10, 20 years from now? What are the key factors? And how permanent are they? How much do they depend on the genius of the Lord in the castle. And then if we feel good about the moat, then we try to figure out whether the Lord is going to try and take it all for himself or whether he's likely to do something stupid with the proceeds, etcetera. But that's the way we look at businesses. Charlie, you want to add anything? Well, I think he wants to translate it into the ordinary terms of economics. The honest Lord is low agency costs. That's the word in economics. And the microeconomic business advantages are by and large advantages of scale. Scale of market dominance, which can be a retailer that just has huge advantages in terms of buying cheaper and enjoying higher sales per square foot. So by and large, you're talking economies of scale. You can have scale of intelligence. In other words, you can have a lord with enough extra intelligence that he has a big advantage. So by and large, you're talking scale advantages and low agency costs. To some extent, Charlie and I try and distinguish between businesses where you have to have been smart once and businesses where you have to stay smart. And I mean, retailing is a good case of a business where you have to stay smart. You are under attack all the time. People are in your store. If you're doing something successful, they're in your store the next day trying to figure out what it is about your success that they can transplant and maybe add a little something on in their own situation. So you cannot coast in retailing. There are other businesses where you only have to be smart once, at least for a very long time. There was once a Southern publisher who was doing very well with his newspaper. And someone asked him the secret of his success. And he said, Monopoly and nepotism. And I mean, he wasn't so dumb. He didn't have any illusions about himself. And if you had a big network of television affiliate station 30 years ago, there's still a major difference between good management and bad management. A major difference. But you could be a terrible manager and make a fortune, because the one decision to own the network TV affiliate overcame almost any deficiency that existed from that point forward. And that would not be true if you were the first one to come up with some concept in retailing or something of the sort. I mean, you would have to be out there defending it every day. Ideally, you want terrific management at a terrific business, and that's what we look for. But as we pointed out in the past, if you have to choose between the 2, get a terrific business. Charlie, anyone? Let's see. Zone 7, I believe, is next. No questions from Zone 7. Okay. How about Zone 1? Paul Miller from Kansas City. First, I'd like to comment on your purchase of Kansas City based Helzberg Jewelers. You commented about Barnett Helzberg and his what he's done retailing wise. For those of us in Kansas City, you've also picked up Barnett and Shirley Helzberg, who are the first family in philanthropy in Kansas City. And for the shareholders in this room, the Helzbergs are wonderful people, and they have them added to this group of companies, says Miles about Warren Buffett and that they pick companies based upon their management and their people. So kudos to Berkshire Hathaway for picking up the Helzbergs. And thanks to Helzbergs for everything they've done to Kansas City. Appreciate that. My question relates to value. We can look in the annual report and we can all see the purchase of a Washington Post, for instance, for $10,000,000 that has a value today of 420,000,000 dollars But discerning the value of the other consortium of non publicly traded businesses, the Nebraska Furniture Marts, the Borsheims, etcetera, the value of their purchase price over the years versus their value today, how can we understand that value and how is it reflected in the Annual Reports? Well, we try to that's a good question. We try to give you the information that we would want in answering that question in the annual report. Part of what we do in those pages where we say it's not according to GAAP accounting, but there's a lot of useful information in there. We don't stick a number on each company, but we try to give you enough information about the capital employed, the margins, and all of that sort of thing on the bigger businesses that you can make estimates that are probably just about as good as ours. Charlie and I would not need more information than is in the report to come up with a pretty good idea of what the control businesses are worth. And there's no information we're holding back that we think would be of any real importance in evaluating those businesses. But you're right, it's a lot easier with marketable securities than it is at least in terms of current numbers, than it is with the wholly owned businesses. The wholly owned businesses, generally speaking, some of them worth a whole lot more than we've carried on the books for. And we feel pretty good about essentially all of them. But they've turned out remarkably well, I would say that, over the years. And my guess is that they keep working pretty well. We have managers of a number of those businesses here. I'm not going to introduce them all because we have so many that it would take a considerable period of time. But you name the Washington Post. In the front row or close to the front row. We have Don Kiel, would you step up, of Coca Cola? And we have Kay Graham for the Post. And Tom Murphy from Cap Cities. Is Paul Hazen here, too? And I'm going to try and do well, there's a whole bunch more. I don't want to get but those 3 were sitting together, and I was struck by the fact that if those 3 combined, we have about $6,500,000,000 of profit in so far. So I would say that that's a those are 3 businesses that have been fantastic. And like I emphasized so far because we want that we'd like to be able to name a bigger number in the future. But we have a group of managers, both at the controlled companies and at the partly owned companies that had just created incredible, incredible value for Berkshire. I mean, Charlie and I sit around and read the paper every day, and a lot of magazines and things, watch O. J. Simpson or whatever it may be. And these people are out there creating a ton of value for us. So, we're not going to change it. Now, let's see. I think zone, is it zone 2 now? Or is it, yeah. Hello. I'm Tim Palmer from Dillon, Colorado. I have a question for you regarding Solomon. In the past week, there's been an article in the New York Times, the Wall Street Journal, and I believe it's Business Week that were rather unflattering as far as what's going on with the management and your selection. There seems to be somewhat of a cultural clash there. I don't know that to be a fact, but I wondered, number 1, how do you keep yourself open to bad news before it's news and what is going on in Solomon there, the compensation plan, etcetera? How do you think that culturally is going to work out? Charlie and I are always we are more interested in bad news always than good news. We figure good news takes care of itself. And one we only give a couple of instructions to people when they go to work for us. And one of them is to think like an owner, and the second one is to just tell us the bad news immediately, because good news takes care of itself. And we can take bad news, but we don't like bad news late. So I would say in connection with Solomon that there is and has been some culture clash, and there probably almost always would be a culture clash in a business where there is that amount of tension, whether it be the entertainment business or the investment banking business or the sports business, there's going to be a certain amount of tension between compensation to the people that work there and compensation to the owners. And I think there's been some that strain has existed at Solomon from the day I was first there and far before that. That was no surprise. It's understandable. You're seeing a tension actually in the airline business between the people that work there and capital. And it's produced terrible results in the airline business. And the people that work there have been able to and I'm not talking about U. S. Air specifically, although that's a case, but it goes beyond that. They have had contracts, which were, as I point out in the report, were executed in an earlier age, which essentially will not allow, in many cases, capital to receive any compensation. And that produces a lot of tension. You don't have contracts like that in the investment banking business or Wall Street generally, but you have that same sort of tension. And changing a culture around takes time and probably takes some change in people. I mean, I don't think that's a great surprise if you expect to do it. I don't think you can find 2 better people than Bob Denham and Derek Maughan. They're smart, they're high grade, they're willing to work very hard. And there will be people that buy into the arrangements they want to have and there are people that won't. Not all of the people that have left by a long shot are leaving of their own volition, but most of them are, but some aren't. Solomon lost a lot of money last year, and many of the people that have left were not responsible for some of those losses, but some of the people were. So that is not something where you announce names in the paper. But some people are leaving because they can make more money elsewhere, and some people are maybe leaving because we think we can make more money without them. Charlie? Yes. I don't think the tensions that have been commented on within Solomon are all that unusual. I think they pretty well exist everywhere on Wall Street and even in the banks which have tried to imitate Wall Street. I just think it comes with the territory. I don't know what percentage of the Goldman Sachs partners left this year, but they had tensions that were produced obviously when they had a bad year. And they're going to have a bad year from time to time. Everybody's going to have a bad year. But the partners, the general partners of Goldman Sachs in the year ended November 30, 1994, did not do well. They may not have done anything at all. And they'd made some very big money in prior years. They'll probably make some very big money in subsequent years. But in the year when they didn't make any money, there was a lot of turnover. Maybe some of that turnover also was not all at the volition of the general partners that you read about leaving. I don't know the facts in that case. But there's a certain amount of tension that exists in Wall Street under any circumstances. And when you aren't making money, there's a lot of tension. Zone 3? Yes. My name is Michael Johnson. I'm a native of Omaha. However, my family and I are Americans living abroad in Bahran, Saudi Arabia. My question is related to intrinsic value and Ben Graham security analysis. I read a book earlier this year by Janet Lowe, who said that you were more toward the 1st or second editions of security analysis and not so much toward the 4th. Yet the 4th edition seemed to move more toward growth and value being kind of joined at the hip like you've said in your last few annual reports. And so if I'm a person that's always studying security analysis like I do, I think I spend more time at that. Do you think I need to get those 1st editions or is the 4th edition kind of more what you've moved toward with your comments such as value and growth are joined at the hip? Janet Lowe is here incidentally today. She wrote a very good book on Ben Graham. I recommend that any of you that haven't read it, go out and buy a copy. I still prefer the I think the second edition is cheaper to buy than the first edition by some margin. And I think it's basically the same book. So that's the one I would recommend. It isn't because of differences on value and growth. I just think that the reasoning is better and more consistent throughout the second edition, which is really the last one that Ben was the 100%, along with Dave Dodd helping him in various ways, was responsible for writing. So I think that the book has gotten away to quite an extent from both Graham's thinking and from his way of expressing himself. But I have no quarrel with anybody who wants to read later editions at all. I do think probably the 2nd edition. If you're a real student of security analysis and you read and understand that, you should do all right. In terms of a lot of the mistakes that were made in terms of junk bonds and accounting and all of that sort of thing were covered in 1934 in that first edition and subsequently in 1940 in the second edition. There's a lot of meat in there. Later on, I must admit I didn't read the last edition as carefully as the earlier ones, but it struck me, it was what was said was not as important and it wasn't said as well. And it was more expensive. Charlie, do you have any thoughts on that? No. Zone 4? Yes. Jeff Peskin from New York City. And I have a question on the annual report where you say that, obviously going forward due to the size of Berkshire, the returns going forward probably won't match the returns of the past. And then you go on to state that one thing that may hinder that is the fact that you don't really like to sell companies that you own. And I would just like to know what the reasoning is in that if you've got a company or investment that you don't think is going to do as well as where you could put the money going forward, what really the reasoning is for holding on and not redeploying the money elsewhere? Yes. I'll just correct you just slightly. A, I didn't say we'd probably do worse than the past. I said we will do worse than the past. I mean, there's no way we could match percentage numbers of the past that we would in a period that would not take that long, we would assuming we paid out nothing, we would gobble up the whole GDP, which is something we may think about occasionally, but really expect to accomplish. But and the second point that, that relates to size. That does not relate to our unwillingness to sell businesses because that unwillingness has existed for decades. But the size has not existed for decades. The size is doubling, doubling, dollars 12,000,000,000 or so is harder than doubling $1,200,000,000 which was harder than doubling $120,000,000 I mean, there's no question about that. So eventually, well, already, it will be a drag on performance. It doesn't mean that the performance will be terrible, but it does mean that 23% is an historical figure that has no predictive value. The unwillingness to sell businesses, like I say, goes back a long way. That is not what if that hurts performance, it's peanuts. That's simply a fact, a function of the attitude Charlie and I have is that if we want to live our lives, we find it a rarity when we find people in the business that we want to associate with. When we do find that, we enjoy it, we don't see any reason to make an extra half a percent a year or 1% a year. Don't try us on higher numbers. But we don't see a reason to go around ending friendships we have with people or contact or relationships. It just doesn't make any sense to us. We don't want to get committed to that sort of activity. We know we wouldn't do it if we were a private company. Now, in Berkshire, we feel we've enunciated that position. We want to get that across to everybody who might join with us because we don't want them to expect us to do it. We want to expect us to work hard to get a decent result and to make sure that the shareholders get the same result we get and all of that sort of thing. But we don't want to enter into any implicit contract with our fellow shareholders that will cause us to have to behave in a way that we really we don't want to behave. If that's the price of making more money, it's a price we don't want to pay. There's other things we forego also. But that is the one that people might disagree with us on. So we want to be very sure that everybody understands that going in. That's part of what you buy here. And it may I don't think it will hurt performance that much anyway. But to the extent it does, it's a limitation you get with us. Charlie? I don't think there's any way to measure it exactly. But my guess is that if you could appraise something you might call the character of the people that are running the operating businesses in Berkshire, many of whom helped create the businesses in the 1st places and are leading citizens in their community like the Helzbergs. I don't think there's any other corporation in America that's done as well as we have if you measure the human quality of the people who are in it. Now you can say we've collected high grade people because we sure as hell couldn't create them. But one way or another, this is a remarkable system. And why would we tinker with it? If you want to attract high grade people, you probably ought to try and behave pretty well yourself. I mean, it's just besides, it wouldn't be any fun doing the other. I mean, I was in that position a little bit when I ran the partnership back in the '60s. And I really people were coming into partnership with me, and my job was to turn out the best return that we could. And I found that if I got into a business, that that presented certain alternatives that I didn't like. But Berkshire is much more satisfactory in that respect. Zone 5. John Rankin, Fort Collins, Colorado. Thanks for having us. In the book Warren Buffett Way, the author describes the capital growth model that you've used to evaluate intrinsic value in common stock purchases. My question is, do you also still use the formula Ben Graham described in the Intelligent Investor that uses evaluating anticipated growth but also book value? It seems to me that fair value is always a bit higher when using Mr. Graham's formula than the stream of cash discounted back to present value that is in Warren Buffett way and also that you've alluded to in annual reports? We've tried to put in the annual report pretty much how we approach securities. And book value is not a consideration, virtually not a consideration at all. And the best businesses by definition are going to be businesses that earn very high returns on capital employed over time. So by nature, if we want to own good businesses, we're going to own things that have relatively little capital employed compared to our purchase price. That would not have been Ben Graham's approach. But Ben Graham was Ben was not working with very large sums of money, and he would not have argued with this approach. He just would have said his was easier. And it is easier perhaps when you're working with small amounts of money. My friend, Walter Schloss, has hewed much more toward the kind of securities that Ben would have selected. And he's worked with smaller amounts of money. He has an absolutely sensational record. And it's not surprising to me at all. I mean, when Walter left Graham, I would have expected him to do well. But I don't look at the primary message from our standpoint of Graham really as being in anything to do with formulas. In other words, there's 3 important aspects to it. One is your attitude toward the stock market. That's covered in Chapter 8 of the Intelligent Investor. I mean, if you've got that attitude toward the market, you start ahead of 99% of all people who are operating in the market. So you have an enormous advantage. 2nd principle is the margin of safety, which again gives you an enormous edge and actually has applicability far beyond just the investment world. And then the third is just looking at stocks as businesses, which gives you an entirely different view than most people that are in the market. With those 3 sort of philosophical benchmarks, the exact evaluation technique you use is not really that important because you're not going to go way off the track, whether you use Walter's approach or Walter Schloss's or mine or whatever. Phil Carre has a slightly different approach, but it's got those three cornerstones to it, I will guarantee. And believe me, he's done very well. Charlie? Yes. To the extent that the method of estimating future cash flow requires projections, I would say that projections, while they are logically required by the circumstances, on average do more harm than good in America. Most of them are put together by people who have an interest in a particular outcome and the subconscious bias that goes into the process and its apparent precision makes it some, well, it's fatuous or dishonorable or foolish or what have you. Mark Twain used to say, a mine is a hole in the ground owned by a liar. And a projection prepared in America by anybody with a commission or an executive trying to justify a particular course of action will frequently be a lie. It's not a deliberate lie in most cases. The man has gotten to believe it himself and that's the worst kind. So I don't think we should projections are to be handled with great care, particularly when somebody has an interest in misleading you. Charlie and I, I think it's fair to say we've never looked at a projection in connection with either a security we bought or a business we bought. We've had them offered to us in great quantities. Now, the fact that we voluntarily turned them away when people tried to thrust them upon us. The very fact that they are prepared so meticulously by the people who were selling the businesses or by the executives who were presenting to their boards and all of that sort of thing. I mean, either we're wrong or they're wrong. It's a ritual that managers go through to justify doing what they wanted to do in the 1st place, in about 9 cases out of 10. I have never met an executive who wanted to buy something that said, Well, I had to turn it down because the projections didn't work. I mean, it's never happened. And there will always be somebody that will come up with the projections that will satisfy the guy who is signing his paycheck or who will sign the deal that provides the commissions, and they will pass those along to whomever else they need, the bankers or the Board to approve it. And it is total nonsense. I was recently involved in some in a situation where projections were a part of the presentation, and I asked that the record of the people who made the projections, their past projections also be presented at the same time. It was a very rude act. It was regarded as apostasy. But believe me, it proved the point. I mean, it was a joke. So we'll leave it at that. We're going to have another one more question maybe and then we'll take a break. And Charlie and I will be eating up here. The ones who want to stick around can stick around. And the ones who are in the other room, undoubtedly there will be seats in here to fill. So we'll sort of regroup in 10 or 15 minutes, and then we'll go on as long as that group lasts. So let's take one more from Zone 6, and then we'll take a break. Hello. My name is Peter Bevelein from Sweden. What is the absolutely first question you ask yourself when you look at a potential investment? And do you and Mr. Munger ask yourself the same first question? Yes. Well, I think I don't ask myself whether Charlie is going to like it because that will be a tough one. No, the first question is can I understand it? And unless it's going to be in a business that I think I can understand, there's no sense looking at it. There's no sense of getting myself into thinking that I'm going to understand some software company or some biotech company or something. What the hell am I gonna know about it? I mean, I can so that's the first threshold question. And then the second question is, does it look like it has good economics? Has it earned high returns on capital? Does it strike me as something that's likely to do that? And then I sort of go from there. How about you, Charlie? Yes. We tend to judge by the past record. By and large, if the thing has a lousy past record and a bright future, we're going to miss the opportunity. We'll take a break now, and we'll reconvene in 10 or 15 minutes. Those of you in the other room want to come in, and we'll stick around then. If you want to get some food and come back later, you're welcome to do that too. Thanks.

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